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A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,014	1	2014Q1	2014Q1	2014-02-13	2.951	2.967	3.249	3.232	4.57	17.87	17.52	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? 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 : : 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. : 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.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,014	2	2014Q2	2014Q2	2014-05-14	2.987	3.007	3.258	3.29	4.6	17.11	18.02	Executives: Alicia Rodriguez - Vice President, Investor Relations Bill Sullivan - President and Chief Executive Officer Ron Nersesian - Chief Executive Officer, Keysight Technologies Didier Hirsch - Senior Vice President and Chief Financial Officer Mike McMullen - President, Chemical Analysis Group Fred Strohmeier - President, Life Sciences and Diagnostics Group Neil Dougherty - Chief Financial Officer, Keysight Guy Séné - Senior Vice President, R&D and Sales Analysts : Jon Groberg - Macquarie Doug Schenkel - Cowen & Company Richard Eastman - Robert W. Baird Dan Leonard - Leerink Tycho Peterson - JPMorgan Bryan Kipp - Janney Capital Markets Isaac Ro - Goldman Sachs Brandon Couillard - Jefferies Operator : Good day, ladies and gentlemen and welcome to the Agilent Technologies’ Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) Please note, today’s conference is being recorded. I would like to hand the conference over to Alicia Rodriguez, Vice President of Investor Relations. Ma’am, please go ahead. Alicia Rodriguez : Thank you, Karen, and welcome everyone to Agilent’s second 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 and the separation of the electronic measurement business. 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. Lastly, as we expect the third quarter to be the final quarter before Agilent’s Electronic Measurement Group begins operating as Keysight Technologies, comments today will also refer to the Electronic Measurement Group as Keysight. And now, I’d like to turn the call over to Bill. Bill Sullivan : Thanks, Alicia, and hello everyone. Today, Agilent reported second quarter revenues and EPS in line with commitments, with solid growth in orders. Revenues of $1.73 billion were unchanged from a year ago. Q2 orders of $1.81 billion were up 7% over last year. Adjusted earnings of $0.72 per share were at the midpoint of our guidance. Operating margin was 18.2%. Keysight revenues came in at the high end of expectations. LDA revenues were slightly below the low end of our guidance. Both businesses built backlog as orders accelerated late in the quarter. Book-to-bill for Agilent was 1.05 positioning us well as we move into Q3. Our work to split the company continues to proceed smoothly. By the beginning of August, we expect Keysight to operate independently as a wholly-owned subsidiary of Agilent. We continue to expect the separation to be completed by early November. Today, I will share performance highlights for the life science, diagnostics and applied markets that will become the new Agilent. Following my remarks, Ron will discuss electronic measurement markets that will become Keysight. Finally, Didier will provide a more detailed discussion of Agilent’s overall financial results, as well as our guidance for fiscal Q3 and fiscal year. Turning to LDA, second quarter revenue of $988 million grew 2% year-over-year on both a reported and core basis. We saw good growth across pharma, clinical and diagnostics, energy and food businesses tempered by the results in academic and government and environmental markets. Orders accelerated at the end of the quarter as we built backlog. Book-to-bill for LDA was 1.04, with orders of $1.03 billion, up 4% or 5% on a core basis over last year. Operating margins, adjusted to revenue, were in line with guidance. Turning now to performance by end market, in life sciences, we saw strength in pharma/biotech, up 4% led by demand from midsized and specialized pharma customers. Diagnostics and clinical revenues were up 7% driven by record companion diagnostics growth and strong demand for CGH arrays and target enrichment solutions. Academic and government remained soft, down 6% year-over-year as government spending delays in the U.S. and China pressured results. In the applied markets Food Testing was up 10% with globalization of the food supply and brand protection continuing to drive strong demand. Energy grew 2% led by the U.S. and refinery projects in the Middle East conversely environmental and forensics were down 5% impacted by government funding. On a regional basis LDA performance was mixed. Double digit growth in Europe was broad based across markets. In the Americas revenues were down 2% on delays in U.S. government spending and softness in Latin America. Asia-Pacific was down 3% affected by slower government funding and lengthened approval cycles in China. We saw improvement in China towards the end of the quarter. Within LDA our life science and diagnostic group had Q2 revenue of $577 million, up 1% from a year ago as recurring revenues offset softness in instrumentation. Orders of $598 million were up 3% year-over-year, operating margin was 13% for the quarter. In early May LDG recently announced the latest version of chromatography data systems CDS software called OpenLAB CDS. New features include flexible data capture, improved automation and faster data analysis. We also introduced a range of new LC products during this quarter’s HPLC 2014 in New Orleans. Announcements include a new next generation UHP-LC multi-sampler which sets a new benchmark in throughput, speed and carryover. We also introduced an updated two dimensional LC system for higher resolution applications. And we are launching a series of new LC/MS and GC/MS products at ASMS next month. These solutions are differentiated by higher performance and lower cost of ownership making them ideally suited for the applications in our core markets. The chemical analysis group had Q2 revenues of $411 million, up 3% and led by strong demand for GC/MS and ICP-MS and services. Orders of $432 million grew 6% year-over-year. Operating margin was 22% for the quarter. The ultra high performance of 7200 GC/Q-TOF continues to exceed expectations with Europe leading all regions for the adaption of high-resolution, accurate GC/MS. CAG recently signed a major contract with a leading environmental company in Beijing. Agilent will supply GC/MS technology for online air monitoring systems, related to ozone and other air pollution – airborne pollutants. Looking forward, LDA’s outlook remains positive, supported by our backlog build, a robust pipeline of new products and expectations for increased flows in government spending. We remain committed to creating shareholder value by increasing our organic growth rate, delivering complete workflow solutions for our customers and growing earnings faster than revenues. Moving forward, our priorities are to continue our late-Q2 order momentum into Q3, launch a series of new products and continue to drive our manufacturing cost reduction programs. LDA revenues for the fiscal third quarter of FY ‘14 are expected to be between $1 billion and $1.02 billion, or nearly 5% core growth at the midpoint. We expect operating margins at the midpoint of 18.5%. For the full year, we now expect LDA revenues to range from $4.02 billion to $4.12 billion with operating margins at the midpoint of 19.3%. Didier will provide additional details in his commentary. Thank you for being on the call. Now I will turn it over to Ron to talk about Keysight and the Electronic Measurement business. Ron Nersesian : Thank you, Bill and hello everyone. I have three key headlines for you regarding Keysight’s performance in Q2. First, Keysight came in at the top end of its revenue and operating profit margin guidance. Second, Keysight orders returned to growth in Q2. And third, Keysight is on track with its plans to separate from Agilent. Now, moving to the specifics, revenue of $743 million declined 2% or 1% on a core basis, while orders of $782 million were up 11% year-over-year. This resulted in a book to bill ratio of 1.05. Keysight continued to not only effectively manage gross margins and spending, but also had a favorable mix profile this quarter. Keysight generated operating profit of $148 million and an operating margin of 20% for the quarter. Looking to our end market performance, aerospace and defense revenues declined 6% year-over-year. With U.S. budget approvals in place, direct government demand has improved, while prime contractor business in the U.S. remains soft. International aerospace and defense demand was mixed but steady. Industrial computers and semiconductors revenues increased 3% year-over-year, investments in next generation semiconductor process technologies continued in the second quarter, while computer markets remains soft. Communications revenue declined 6% year-over-year. We continue to see strength in 4G base station infrastructure demand, while handset device manufacturing remains moderate. On a regional basis, we saw very good growth in Asia excluding Japan, which grew over 20% with strength across most market segments. The Americas region was down double-digits year-over-year versus the strong compare. Decline – Japan declined 12% or down 4% on a core basis, which excludes the impact of currency. Europe was essentially flat year-over-year. As I discussed during our Analyst Day in March, Keysight is transforming its product portfolio with the goal of returning to market growth rates. This quarter, we began shipping both UXM wireless test set for R&D and the EXM wireless test set for manufacturing. The EXM wireless test set won 2013 Product of the Year award from the Electronic Products China. In April, Keysight expanded its performance network analyzer series with a low price model targeted at low cost RF components used in handsets and consumer products. Keysight also introduced two high performance portable oscilloscopes deploying next generation technology. One set a new standard for signal integrity and the other set a new standard for price performance. We expect Keysight to begin operating as a subsidiary of Agilent on August 1, and to complete the spin-off in early November. As part of our journey, we are announcing today that we expect Keysight common stock to trade on the New York Stock Exchange under the ticker symbol KEYS. In addition, at the end of this quarter we will implement an operational cut over of our IT systems. This transition requires tight coordination of our shipment and delivery plans. We are working with customers on the cut over which could cause some revenue to ship between the quarters. As Bill had said, it takes a lot of work to create two great companies from one. Along with all of the excellent internal work, we continue to focus on our customers and all of their measurement solutions needs. Turning to the outlook for Q3, we expect Keysight to return to revenue growth with revenues in the range of $720 million to $760 million. We project core growth at the midpoint to be 5% and operating margins at the midpoint to be 18.4%. For the full year, we expect revenues in the range of $2.86 billion to $3 billion, which represents 2% core growth at the midpoint. Operating margins for the full year are expected to be 18.9% at the midpoint. I’ll now turn it over to Didier to provide the details of Agilent’s overall financial results. Didier Hirsch : Thank you, Ron, and hello everyone. To recap the quarter, our revenue of $1,731 million, operating margin of 18.2% and earnings per share of $0.72 were all at the midpoint of our guidance. Orders exceeded our expectations, but the quarter end orders queue was also higher than usual. By business, most of the operating profit variance versus the midpoint of our guidance was due to volume and mix. Please note that Q2 core revenue growth by segment and by geography is reported on the slide deck posted on our website. This quarter, currency subtracted about 0.9 percentage points from our year-over-year revenue growth, and acquisitions had no material impact. Finally, we bought back $50 million of stock in Q2 and generated $272 million in free cash flow, slightly higher than last year. I will now turn to the guidance for our third quarter. We expect Q3 revenues of $1.74 billion to $1.76 billion and EPS of $0.72 to $0.74. At midpoint, revenue will grow 5% on a core basis. Our 18.5% projected operating margin at midpoint will be 30 basis points higher than Q2 fiscal year ‘14 and 20 basis points higher than Q3 of last year. Now, remember that we initiated a drastic cut in discretionary expenses early February of last year that resulted in significant expense reductions in the ensuing months. So, we face a tough compare. While we are maintaining our spending discipline, we are also investing in key growth initiatives. Now, to the guidance for fiscal year 2014, we are confirming the guidance we provided last quarter for both revenue and EPS. And as a reminder, we expect fiscal year ‘14 revenues to range from $6.9 billion to $7.1 billion and fiscal year ‘14 EPS to range from $2.96 to $3.16. With that, I will turn it over to Alicia for the Q&A. Alicia Rodriguez : Thank you, Didier. Karen, will you please give the instructions for the Q&A? Operator : Certainly. (Operator Instructions) Our first question comes from the line of Jon Groberg from Macquarie. Jon Groberg - Macquarie: Hey, good afternoon. Thanks for taking the questions. So maybe for both Bill and Ron, can you maybe talk a little bit more about the kind of the pacing in the quarter, I think you made some comments that orders picked up towards the end of the quarter, in particular in China that some of the delay you start to see materialize. I don’t know if that was more just an LDA comment or if that was also a Keysight comment? And then can you maybe talk a little bit about some of the other emerging markets and whether you are seeing any impact in countries like Russia or Eastern Europe given the environment over there? Bill Sullivan : Yes, I will just make a couple of comments, Jon, regarding LDA and then turn it over to Ron, because the real start of the quarter in my mind is the fantastic order performance of Keysight will maintain their operational excellence. As Didier alluded to, the orders in LDA came in late in the quarter, which is atypical given that half the business is in consumables and parts that it tends to have a more uniform order pattern than you typically see in Keysight. So, we had a back end bias, that obviously affect our revenue. Our revenue was below our own internal expectations and external guidance moving forward. The good news is the orders were there. And as we guided going forward, I think we are in solid position moving into Q3, but we really did have a surge of orders at the end that was out of typical sequence moving forward. And I will rather turn it over to Ron and talk about Keysight. And Jon, if you have any other questions, I can have Mike and Fred talk specifically in terms of what they saw in their respective businesses. Ron? Ron Nersesian : The story was a little bit different in Keysight where we saw orders that were a little bit more balanced throughout the quarter. Clearly with wireless manufacturing, the orders are lumpy. And the good news is that with the wireless manufacturing and semiconductor business that we had, we achieved more orders towards the first two-thirds of the quarter and that enabled us to exceed our revenue guidance. As far as the emerging markets, Russia is the biggest wildcard that we have given that everything of that is going on over there politically. We actually had a decent quarter, but we are cautiously watching what will happen as we look in Q3. We expect our performance in Q3 in Russia to be flat and all signs so far on a local level appear to be consistent with that. Bill Sullivan : I will just follow up, Jon. And maybe Mike, you could make some comments with the order pattern on the applied side and then Fred on the life science and diagnostics side. Mike McMullen : Yes, sure, Bill. Jon, it’s Mike McMullen. I just had some additional commentary on the quarter, very pleased with the overall order rate for the business. And I think you can see the backlog we have built and the difference between the growth rate of our segment orders versus revenue and particularly pleased by a return to really solid growth in our core instrumentation platforms. And as you know, that’s been an area of struggle in the last several quarters, where you have been looking for this churn on in the replacement market. So, what we are seeing is warming up of the replacement market and signs of return of spending on some of the government side, particularly in the U.S. and promises in China. So, very encouraged by the overall global results, in particular how we have finished the quarter in China. Fred Strohmeier : Yes, let me just add also couple of comments. If you look to the different markets we saw strength in the pharmaceutical market as Bill has pointed out on the one side even so the consolidation puts some hold on it and the growth rate was predominantly coming from smaller pharma companies. I think if you look to the geographies, I think China was a little bit behind I think with a bit suffering in the U.S. I think Europe was doing quite well and specifically to the comment on Russia, even so there is impact, I think the size of the business from an LDG perspective is rather marginal, so minor impact from that perspective. Jon Groberg - Macquarie: Okay. And maybe just kind of two quick follow-ups on, from the LDA side, just to be clear maybe what did you grow in China in the quarter and what’s your expectation for the year? And then for Ron, on the Keysight side, I think you guided to 5% core growth in the third quarter, I think in the – at your Analyst Day, you kind of commented on high single-digit growth for Keysight in the second half of the year. So, I am just curious if that guidance still stands as well? Thanks. Bill Sullivan : They give you an indication in round numbers. China’s business was down mid single-digits. The flipside orders were up mid single-digits. Ron Nersesian : And on the Keysight, our guidance from last quarter still stands and we had expected 5% in Q3 and then that accelerates in Q4. Operator : Thank you. Our next question comes from the line of Doug Schenkel from Cowen & Company. Doug Schenkel - Cowen & Company: Hi, good afternoon. So you essentially reiterated LDA revenue and you guided the July revenue quarter about in line with what we were expecting. So all-in-all, no real change in guidance or quarterly placing to revenue. However, your fiscal Q2 operating performance in LDA was much weaker than expected and you guided fiscal Q3 op margin for the group a bit below our expectations. So, this implies that fiscal Q4 operating margin I think gets up to somewhere between 21.5% and 22% assuming them doing the math right? And if so this implies an incremental above 30%, so year-over-year, this doesn’t seem Herculean, but it does arguably represent a pretty material level of improvement over the last two quarters of the year relative to what was a weak quarter this quarter. So, can you talk about how confident you are in this guidance and more specifically what makes you so confident that you can get to those levels subsequent to this performance? And I think as you are talking about this, I think to be fair, you guys didn’t spend a lot of time explaining why the margins in LDA came in, in these levels in the quarter. So maybe you can talk a little bit more about that? Didier Hirsch : So, hi Doug, this is Didier. I was talking about the numbers and then probably my colleagues will want to talk about their confidence to achieve the second half, but in terms of Q2 what happened is yes, LDA’s operating profit was below the guidance that is very much in line with our revenue mix, which again was due to orders being skewed towards the end of the quarter. And therefore, we will recover that mix into the second half. And that explains the second half patterns. So, basically nothing fundamental, nothing special in Q2, the only – the main reason by far for the operating margins performed below the guidance is volume and mix and as we are recovering because we have a high backlog go into Q3, obviously we will see that the offset in the second half. Now within the second half, there is no doubt that Q4 I mean even the second half even though there is an expectation of a significant improvement in operating margin between Q2 and Q3 for LDA, there is further improvement expected from Q3 to Q4 in line with the revenue growth. Bill Sullivan : I will just add on to Didier and it goes back, (your think) is correct Q4 is our strongest quarter of the year, very typical and at companies like ours that last quarter tends to be strong. And if you go back in 2013 LG went from Q3 to Q4 from 60% operating profit to 19% and the chemical analysis went from 21.5% to 25%. So again we are not forecasting anything that is we have not seen in the past and obviously both Mike and Fred have committed to meet this guidance. Okay. Didier Hirsch : Absolutely, Bill. I am very confident on our plans for the second half. Doug Schenkel - Cowen & Company: Alright, thank you for that. That’s helpful and if I could ask one more, I think it’s interesting that you noted challenges for LDA in China within the academic government end market due to the release of budgets, over the course of the recent earnings season, we have really heard this only from Waters, I mean we heard a little bit from others, but they didn’t really call it out as notably as you and Waters have. And I am pointing the companies like Thermo, Danaher, PKI and Bruker to name a few, so on the surface the common denominator here seems to be maybe instrument mix as a percentage of sales and possibly more exposure to LC, I am just curious if you would speak to what specifically you are seeing in terms of what’s slowing down in China within the academic government end market and what isn’t, I think it would just be helpful to sort of contextualize what is going on and why this seems to be specifically impacting some more than others? Thank you. Bill Sullivan : Yes. One of these – I will have both Fred and Mike comment on that and again the China FDA is in major reorganization and parts of the business they regulate we have very large market shares. And but I will have Fred start on the academic research and then also Mike can chime in on some of the applied and food areas where we have very strong positions. Fred Strohmeier : Yes. Thank you, Bill. Let me make one statement about the growth in China overall. If you look to the second quarter and compare that to this year’s second quarter and you compare that to the second quarter last year, I think the growth in general has slowed as such, so that’s the general observation. Secondly, I think if you look to the pharmaceutical industry, there has been quality regulation imposed to the pharmaceutical industry in the GMP space, good manufacturing practices. And this why is the part of the consolidation in India, China – in the China pharmaceutical industry which means another investment is retarded quite a bit. So China academic spending as Bill already pointed out I think this has been also a temporary slow down due to some regulations, which have been put in place in terms of anticorruption, which is also something which probably will go away over time once the process has been installed. And finally, as Bill also pointed out, China FDA is at the moment restructuring the food testing labs. And until this restructuring has been completed, I think we will see a shorter investment pattern of the food labs which probably is in the order of a couple of $10 million a quarter. And I think this will – as soon as this has been removed although it will stimulate the orders again. Mike McMullen : I am just building on Fred’s comments specific to the food market, it’s a heavy platform usage of LC in the food market where Agilent as you know has a leadership position. So where the double-edged sword where we really are affected when see budgets shift to latter part of the year, I think there is a heavy concentration of liquids base used in that market segment. And again that’s why in the early part of the call I indicated I was very delighted by our performance in Q2 from the order perspective because despite the challenges that were highlighting here in terms of timing of the food orders in China. We saw a very strong growth in the environmental side as well as expanding in the petrochemical and chemical side, in the private sector side of the marketplace. So that’s why we’re looking ahead to second half 2014 you’re getting a positive view overall about the business. Bill Sullivan : Just one final comment with regards to China I mean it’s slightly different in this space of genomics and diagnostic, this is where we saw a different pattern and we saw pronounced close beyond the instrumentation Mike and I were talking before. Operator : Thank you. Our next question comes from the line of Richard Eastman from Robert W. Baird. Richard Eastman - Robert W. Baird: Yes. Just Bill could you just kind of address I think when you were talking about LDA in total you commented about revenue out of Europe being plus double-digits with pretty much Americas and Asia-Pac softer. Could you just be a little bit more specific, is that end-markets are – what was as strong in Europe? Bill Sullivan : Well Europe is as strong as I had noted across all markets and again Fred having – living in Europe talk a little bit about it and then Mike chime in. But our Europe team just did an outstanding job across all of our products to be able to grow in the low teens growth rate in orders. Fred. Fred Strohmeier : Yes. I think Europe is as we see the recovery particularly in the academia and government royalty we’re seeing a stimulus of the autos. And if you look to the different industries and then Mike can comment on the chemical analysis side. We saw a significant pickup in the pharmaceutical industry, these are pretty successful particularly that was the LC/MS and I believe this will continue in the second half. Mike McMullen : And just to build on Fred’s comments what a difference a year makes. So Europe was a real area of strength for us in the quarter. As Bill mentioned our team is doing an outstanding job driving share in what is now a growing market for us and we started to see an uptake in the chemical energy space in terms of replacement side of the business, investments in the food area continue to be very strong in Europe as well as in the forensic area. Richard Eastman - Robert W. Baird: Okay. And then just a quick question on Keysight, when we look at the order growth the 12% order growth year-over-year, I’m curious if – Ron can you give a picture of is that order growth strengthened significantly in either any of these three pieces in particular comps or A&D and is there some recapture of market share that you could – that you can identify? Ron Nersesian : First of all, 11% order growth was driven with two main areas. As you know the wireless manufacturing business is a lumpy business and we’re very successful in that area in the base station growth as we mentioned. The second thing we talked about last quarter as well as today is in the semiconductor expansion as they move to new technologies and again that was something that also drove our business. I was pleased to see double-digit order growth in all of our major regions except Japan which is having some problems, so that is a nice point that led to our 11% growth. Richard Eastman - Robert W. Baird: Ron, one of the things that we kind of picked up in the channel in the A&D business in particular on the defense side, the Department of Defense, U.S. they I believe they’ve changed the way they are purchasing and previously they had purchased test equipment and pushed that test equipment down to the vendors stating the protocol and providing the test equipment. And our understanding is that, that has switched around now the DoD is asking the vendors to purchase the equipment and I’m curious is that changed anything in the channel for instance lease verse purchase or.. Ron Nersesian : No, we’ve always seen a mix between direct government purchases and purchases by the prime contractors. As I mentioned earlier the direct government purchases has picked up but the prime purchasing has not. And if you look at the financial results of the prime contractors in the U.S. that would sort of explain it. Internationally there was no significant change there that business was roughly consistent with where it was before. Richard Eastman - Robert W. Baird: Okay, okay, very good. Thank you. Ron Nersesian : You’re welcome. Operator : Thank you. Our next question comes from the line of Dan Leonard from Leerink. Dan Leonard - Leerink: Great. Thank you. Could you speak to the order trends in large pharma, I know you mentioned mid-size and I think specialty pharma was strong, but I’m asking because there was an increase in M&A chatter towards the end of the quarter. And I’m wondering if it has put any freeze on ordering? Bill Sullivan : Look we’re seeing in the pharmaceutical market at this point in time that the consolidation talks between the big pharmas like Pfizer and AstraZeneca is certainly putting some hold on the whole investment pattern in the pharmaceutical industry. I think as I said before the smaller pharma companies are driving the growth at this point in time and I think over time as soon as this situation has speed up I think we will see that those big companies will go to single vendor their concepts and I think our opportunity there is to be a systems provider for those big pharmaceutical companies. Dan Leonard - Leerink: That’s helpful. And Didier a follow-up on Doug’s question from earlier. Can you elaborate a bit more on the negative mix component in LDG and still trying to get my arms around since it was the lowest performance in a couple of years? Didier Hirsch : Yes, I mean I won’t go into the detail but when you do the math we have about you would expect 65% contribution margin versus the variable cost of sales. So if you do the math on the reduction in revenue versus the guidance that we provided and you still get 65% of the reduction in revenue will fold to the bottom line basically it was flat it’s like $4 million to $5 million and doing the analysis and again we have plenty, plenty of products and the markets and the product lines like that. Whatever it is not explained by peer volume which is about $4 million we could explain it mostly by mix factor. Dan Leonard - Leerink: Thank you. And then finally a really quick one. Did you notice anything in the Life Science and Diagnostic and Chemical Analysis businesses? Did you notice anything unusual about the revenue or ordering patterns from Japan in the quarter, and I ask because there has been some discussion that a tax change for one might have shipped it around some purchasing and you guys with in April and quarters should have – could have some insight into that? Fred Strohmeier : I think the one – I think it was in March, I think we saw a pretty good month because this was just before the tax rate and I think this good all the way got partially compensated by the April, by the fact that there was a higher sales tax. And but in general if you look to LDG I think you have exhibited some overall growth in Japan. Dan Leonard - Leerink: Great. That’s helpful. Thank you, Fred. Operator : Thank you. Our next question comes from the line of Tycho Peterson from JPMorgan. Tycho Peterson - JPMorgan: Hi, thanks for taking the question. EMG came in at the high end of guidance. Can you talk to maybe where you’re most surprised to the upside? And then looking ahead you did have a competitor that’s talking about in handset testing another $300 million or so coming out of that market, you maybe just talk us whether you still think flat growth to that market is the right assumption? Bill Sullivan : Sure. The semiconductor market or the semiconductor test equipment market was very hot and we have very high margins in that business and accordingly that helped us and that’s why we had such outstanding incremental above the midpoint of the guidance over 80%, but that’s not something that we expect to repeat. We had been seeing a lot of price pressure in the handset wireless manufacturing segment, that is why our strategy continues to be to move more and more to R&D, but that pressure that is there on the pricing continues to accelerate. So if you take a mix of high let’s just call it a lot of semiconductor shipments and very little or less handset manufacturing shipments you get the very, very strong incrementals. As we go to next quarter we expect to have a much more normal balance as we move from Q2 to Q3. Tycho Peterson - JPMorgan: And your view on just kind of the overall handset testing market I mean do you think that, that market remains flat or or do you see it consolidating in fact? Bill Sullivan : I think there is enough – there is significant price pressure as that market has become crowded and manufactures continue to look for simpler ways to test their products. It’s all about cost per test. The market is very competitive and it’s one of the lower margin areas or one of the lower margin businesses that are there. We are seeing competitors will be acting more desperate ways on the pricing side and we are doing the right thing for the shareholder and making sure we are going to return in everything that we invest in and where we put our effort. Tycho Peterson - JPMorgan: And then for LDA it sounds like environmental front (excludes) kind of the delta relative to the expectation, can you maybe just talk to it, it sounds like you are expecting a recovery in that business for the back half of the calendar year, is that driving the potential upside. And then you had previously called out some delays I think in pathology did those come through this quarter? Ron Nersesian : I will jump right in and my perspective here. So the environmental and forensic business was down in Q2. The story here remains the weakness in government spending particularly in the more developed countries and economies. When I look to the second half, we are expecting to see improvement in the area as some of the government budgets are released let’s say in the U.S. So we are expecting some uptick in the second half in those areas, both at the federal and state level. But I also think the bigger driver is China as the overall global food market and the growth in the chemical energy space, our major customers are now talking about and in investing in capacity in the U.S. because of the lower feedstocks making their overall operations much more profitable. So clearly there is an element of recovery building around the environmental forensics market, but I also expect strong growth in other two larger markets. Tycho Peterson - JPMorgan: And then Bill, can you just comment on that, did you have some policy orders that came through from the prior quarter? Bill Sullivan : I will let Fred, give a response again our clinical and diagnostic business grew 7% in the quarter. Fred Strohmeier : Yes. This is – it looks like you are right I think we had a really strong quarter for diagnostics and genomics. And particular the diagnostics piece was growing mid-single digits and it’s driven by the pathology business and even more so by the companion diagnostics which we believe was outstanding as Bill mentioned at his initial comments, I think genomics we see a pronounced need in the market at the moment I think its growing about mid-digit to high-mid digit range. And it’s predominantly driven by cytogenetics and the CGH race. And secondly the target enrichment business, which is going very nicely were also relative to our competitors. Tycho Peterson - JPMorgan: Okay, thank you. Operator : Thank you. Our next question comes from the line of Paul Knight from Janney Capital Markets. Bryan Kipp - Janney Capital Markets : Thanks for taking the question, actually, Bryan Kipp on behalf of Paul. Ron, I just wanted to start on EMG. I know its kind have been discussed throughout some additional question here you talked about wireless manufacturing orders and semiconductor orders starting off pretty strong and then pull through in the quarter. Where it’s some of those orders stuff you expected in the second – I guess in the third quarter. I know you said that 5% expect progress anyway and then in addition to that first quarter growth obviously has to be in that high end of prior guidance the second half alluded to 8%. What’s really driving that for I know you mentioned strength in the wireless or semiconductor demand but is it new products some existing products legacy products. Just to give more clarity on that? Ron Nersesian : Sure. First of all, there was nothing pulled up to when we look at the 5% nothing was pulled into Q3 that would make that Q3 looked weaker that’s probably this components with the 5%. We’ve always assumed an economic outlook that would pick-up towards the end of the year that’s where as a low level base line and top of that’s a government which has not been purchasing very much obviously during sequestration, they finally are getting their act together on getting money out to the people that make to decisions. So we expect the government business to accelerate towards the end of the fiscal year for the government in September in the U.S. On top that our seasonally high quarter is always Q4 so Q4 is our strongest quarter and if you look at what we did last year $705 million in Q4 was a relatively low compare. So if you take a look at the low compare you look at your 780 ish million dollars in orders in Q2 we typically see Q2 and Q4 be strong against a compare of $705 million you can do the math and get there pretty quickly with any type of economic strength or slow recovery and with some new products that are coming out. I mentioned the UXM and EXM where our competitive position is very strong, it’s as strong as it has been in years in those areas but will continue to build on those. Bryan Kipp - Janney Capital Markets : Appreciate it. And… Bill Sullivan : Sure. Bryan Kipp - Janney Capital Markets : And on the – go ahead. Bill Sullivan : No, I was just wondering if that was suitable to your – to answer your question. Bryan Kipp - Janney Capital Markets : Yes. I appreciate it. And then I guess just an additional follow-up on the chemical side. You cited (indiscernible) office a strong adoption in Europe, I think it since consecutive quarters of strong refinery demand in the Middle East. The order bookings were plus 7% on a core basis is to be driven by broader QC adoption and demand or what’s really driving that core order growth there? Bill Sullivan : Great question. So thanks for that. So, on the mass spectrometry side there continued to be demand particularly for technologies that allow you look for unknown. This has become an increasingly desired capability both in the food but also in the forensics area and that’s why I spoke earlier to some bright spots in terms of forensics coming up. So the demand from mass spectrometry is really been driven by – continuing to driven by the food market but also there is emerging requirement to identify unknown both in the food supply as well as in designer drugs for forensics. And then you hit the nail really in the head in terms of what’s going out in terms of Middle East we’re seeing infrastructure build-out, major projects coming to fruition and Agilent is very strong in this space and we’re getting the business. Bryan Kipp - Janney Capital Markets : Thanks. Bill Sullivan : I hope that answered your question. Bryan Kipp - Janney Capital Markets : Yes. Thank you. Bill Sullivan : Thanks. Operator : Thank you. Our next question comes from the line of Isaac Ro from Goldman Sachs. Isaac Ro - Goldman Sachs : Good afternoon. Thanks for taking the question. Wondering if on the LDA side just wanted to talk a little bit more into the weakness this quarter on revenue. Was there any meaningful impact from your exit last year from the high end NMR markets? I’m just trying to get a sense of whether that was a factor and just as we move to the balance of the year maybe you could put some color around that wakened your expectations just given we’ll be lapping through the exit on that business but at the same time you had a pretty healthy order dynamic this quarter? Bill Sullivan : Yes. Our shortfall in revenue in the quarter as we have said is really directed to the late orders that came in they were atypical. The NMR business was non-material to that issue at all. And as you can hear from the comments for every place that we had some good news we had some offsetting bad news. And so quite frankly it was the mixed quarter and I think the message is the orders ended up being strong and we feel comfortable with the guidance that we’ve given as we move into the second half of the year. Isaac Ro - Goldman Sachs : Got it. And I apologize if you guys gave the number, but just hoping for the overall growth rate in China, if you could speak to that, I know you guys gave a consolidated Asia Japan number, but maybe try to tease out China on the growth rate and looking what you’re expecting for the balance of the year there? Thank you. Bill Sullivan : On the LDA side the business was down mid single digits, orders were up mid single digits moving forward. And for us to be able to grow 5% in the second half we have to continue to see the order momentum in China as we move forward I think both Mike and Fred talked about where we think that there will be opportunity as the government reorganizations and focus are completed. And that was indicative of stronger orders in China at the end of the quarter. Isaac Ro - Goldman Sachs : Got it. Thanks so much. Operator : Thank you. Our next question comes from the line of Brandon Couillard from Jefferies. Brandon Couillard - Jefferies: Thanks. Good afternoon. Bill, in terms of the late 2Q order surge, was it attributable to any particular end market customer or geography or would you characterize it as more broad-based? Bill Sullivan : Mike and Fred make a comment from an aggregate it was broad-base, but Mike and Fred probably a little more insight, if there is any nuances, I am not sure statistically there is a lot of variation. We do tend to have a surge of orders at the end of every year on the LDA side as I had mentioned, it’s because only half the business at capital equipment, it tends not be as high as you typically see in Keysight, but Mike if you have some thoughts and then Fred. Mike McMullen : Yes. Just to build on Bill’s comments, geographically I think the story we have already talked about China and the strong close there. We also saw in the United States and in Europe. And I think those three geographies really drove the results for the quarter. And just to repeat some of the earlier commentary in terms of strength in the food market, which continues to globally very strong market for us, even with the government push-up in China in terms of major projects. And I said earlier, the return to growth in the chemical and energy space is really promising to see. Fred Strohmeier : Yes. Also building on the Mike’s comments, I think we talked about the pharmaceutical industry and I think you will see a slight uptick in the second half. I mean, we talked about the academia and government market, we believe there will be some relief of the budgets that we can participate. And I think Europe in general as Mike said was going quite well. So, from that perspective, I think we are positive that we can deliver the results Didier was referring to. Brandon Couillard - Jefferies: Thanks. And then Didier, I didn’t hear you mentioned our expected share count for end of the year. Should we still expect about 100 million of share repurchase activity in the back half? Didier Hirsch : We have – last time at the analyst meeting we talked about spending $400 million over the next, I mean this year – over this year and next. So far, we have got $115 million this fiscal year and we will see. In terms of the share count, you can assume for the projections 338 million shares in Q3 and 339 million shares in Q4. Brandon Couillard - Jefferies: Thank you. Operator : Thank you. (Operator Instructions) Our next question comes from the line of Patrick Newton from Stifel. Unidentified Analyst : Great, thank you. Good afternoon. Thanks for taking my call. This is Robert for Patrick this afternoon. Couple of questions. We talked a lot about China and LDA. I am just wondering, Ron, if you could perhaps decide on how EMG fared in China, any impacts from the LTE rollout? Ron Nersesian : We, as I mentioned earlier on a broad basis that we did very well in base station infrastructure build. There is a lot of manufacturing that goes on in that area, but nothing unique in China this quarter. So, we continue to be very competitive in that space, but nothing significant to report. Unidentified Analyst : Great, thank you for that. And sort of staying on the kind of EMG tales, I am wondering if you can provide any update on UXM and how – has that led to an improvement in your position in wireless or have you see any gain in share of the customers you had previously lost share in? Bill Sullivan : Yes. By adding the UXM, which is the R&D wireless test set, we have actually been involved in much more direct conversations, more bids in winning more business than we have done previously. The way it’s typically done is someone will test out the box, figure out if it has the right type of coverage or testing capability. And then it’s a like it enough with one product, they will start using it and then that gets replicated. The response on UXM has been excellent, but the R&D market is not like the manufacturing market, where someone likes it, they will go buy 2,000 of them at once that will rollout in a much slower area. So, R&D, we see a much steadier pace not as volatile, not as fast up, not as fast down, but we are very pleased with both the UXM and the EXM in their competitiveness. Unidentified Analyst : Great. Thanks for taking my questions. Bill Sullivan : Sure. Operator : Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back to Alicia Rodriguez for any closing comments. Alicia Rodriguez : Thank you, Karen. And I just wanted to thank everybody for joining us today and wish you all a good day. If you have any questions, please call us at IR and we will be happy to give them an answer. Thank you. Operator : Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone, have a good day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,014	3	2014Q3	2014Q3	2014-08-14	3.026	3.045	3.325	3.363	4.58	17.09	17.51	Executives: Alicia Rodriguez - Vice President of Investor Relations William P. Sullivan - Chief Executive Officer, President, Executive Director and Member of Executive Committee Ronald S. Nersesian - Executive Vice President, Chief Executive Officer of Electronic Measurement Group and President of Electronic Measurement Group Didier Hirsch - Chief Financial Officer and Senior Vice President Guy Sene - Senior Vice President and President Electronic Measurement Group Fred A. Strohmeier - Senior Vice President and President of Agilent's Life Sciences & Diagnostics Group Michael R. McMullen - Senior Vice President and President of the Chemical Analysis Group Neil Dougherty - Chief Financial Officer Analysts : Daniel L. Leonard - Leerink Swann LLC, Research Division Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division Patrick M. Newton - Stifel, Nicolaus & Company, Incorporated, Research Division Isaac Ro - Goldman Sachs Group Inc., Research Division S. Brandon Couillard - Jefferies LLC, Research Division Ross Muken - ISI Group Inc., Research Division Daniel Anthony Arias - Citigroup Inc, Research Division Douglas Schenkel - Cowen and Company, LLC, Research Division Jonathan P. Groberg - Macquarie Research Bryan Kipp - Janney Montgomery Scott LLC, Research Division Derik De Bruin - BofA Merrill Lynch, Research Division Tycho W. Peterson - JP Morgan Chase & Co, Research Division Operator : Good day, ladies and gentlemen, and welcome to the Agilent Technologies Inc. Fiscal Third Quarter 2014 Earnings Conference Call. [Operator Instructions] Please note, today's conference is being recorded. I would now like to hand the conference over to Alicia Rodriguez, Vice President of Investor Relations. Please go ahead. Alicia Rodriguez : Thank you, Karen, and welcome, everyone, to Agilent's Third Quarter Conference Call for Fiscal Year 2014. With me are : Bill Sullivan, Agilent President and CEO; Ron Nersesian, Keysight President and CEO; and Didier Hirsch, Agilent Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be the Presidents of Agilent's Life Sciences, Diagnostics and Applied Markets, or LDA, businesses, Mike McMullen and Fred Strohmeier. Also joining from Keysight will be Neil Dougherty, CFO; and Guy Séné, Senior Vice President of Measurement Solutions and Worldwide 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 and the separation of the Electronic Measurement business. 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. Lastly, we expect this to be the final quarter in which we conduct a joint conference call for both Agilent and Keysight. We expect the company's separation to be finalized in early November, after which Keysight will operate and report as an independent company. And now I'd like to turn the call over to Bill. William P. Sullivan: Thanks, Alicia, and hello, everyone. Today Agilent reported third quarter revenues of $1.77 billion, an increase of 7% versus last year and above the high end of guidance. Orders of $1.74 billion were up 9% over a year ago. Adjusted earnings of $0.78 per share also exceeded the high end of guidance and increased 15% over last year. Operating margin was 19.2%, up 90 basis points from the third quarter of fiscal 2013. Both Keysight and LDA delivered on revenue and earnings commitments. In most end markets, we saw continued improvement and good order growth across both businesses. Our work to split the company continues to go very well. On August 1, Keysight began operating as a wholly-owned subsidiary of Agilent. We expect the separation of the company to be completed by early November as planned. Today, I will share performance highlights of LDA, or the life science, diagnostics and applied market businesses that comprise Agilent moving forward. Following my remarks, Ron will share performance highlights for Keysight. Finally, Didier will provide a more detailed discussion of Agilent's overall financial results, as well as our guidance for the fiscal fourth quarter. Turning to LDA. Third quarter revenues came in at $1.01 billion, up 6% over a year ago or 5% on a core basis. Orders grew 10% to $1.02 billion or 9% on a core basis. Operating margin was 19%, up 50 basis points from last year. In our Diagnostics and Clinical markets, revenue grew 6%, with strength in array CGH, target enrichment, as well as demand for pathology products in the U.S. and Europe. Revenue from analytical lab markets also grew 6% in Q3. We were pleased with the growth we saw across our instruments, services and consumables portfolio fueled by new offerings to the marketplace. Within the Life Science and Applied markets that make up Analytical Laboratories, Pharma/Biotech was up 8%, led by midsized and specialized Pharma customers. Life Sciences Research was up 4%, posting the best year-over-year growth in 2 years. Results were driven by increased government spending on capital equipment in the U.S. and Europe. Government spending also was the catalyst behind 16% growth in Environmental and 12% growth in Forensics. In Food, revenues were up 4% over last year as results in the U.S. and Europe were offset by the impact of the FDA restructuring in China. Chemical and Energy revenues were relatively flat, growing 1%, largely due to softer demand from China versus a year ago. Geographically, economic recovery and government funding drove growth in the Americas and Europe, up 6% and 8%, respectively. Asia Pacific grew 4%. China continues to work through government agency reorganizations, which is resulting in a longer approval cycle. Turning to the business segments within LDA. Life Science and Diagnostics Group's revenue grew 5%. Orders grew 11%, with broad strength across LDG products. Operating margin was almost 16%, down slightly from last year and up 260 basis points from last quarter. LDG introduced a number of new products in the quarter. One highlight was the 6495 LC Triple Quad Mass Spectrometer which provides higher sensitivity, robustness and reliability. Another highlight was the introduction of the IQFISH work flow for bone marrow and custom FISH service through Sure Design. Both FISH products provide high-quality results with significantly shorter turnaround times -- from 16 hours to 2.5 hours in the case of the IQFISH. LDG also signed a development and commercialization agreement with Merck & Co. for a companion diagnostics device, using Dako's IHC solutions with Merck & Co.'s anti-PD-L1 cancer drug. In the Chemical Analysis Group, revenues and orders increased 8%. Operating margin was over 23%, up 180 basis points from a year ago. CAG announced the 5100 ICP-OES in July. The new product runs analyses 55% faster and uses 50% less gas per sample than competitive systems. The 5100 is suited to applications in Environmental, Food, Energy and Pharmaceutical markets. CAG's recently introduced 7010 GC Triple-Quad Mass Spectrometer, targeted for the Food Safety market, lowers costs and improves ease of use compared to current high-resolution mass spec systems. The 7010 significantly strengthens Agilent's market position with a range of pricing options, performance and productivity benefits. In July, the Cary 700 Universal Spectrophotometer was named a 2014 R&D 100 Award winner. The award recognizes the 100 most technically significant products introduced in the marketplace over the past year. This award marks the third consecutive year Agilent's spectrophotometers have been recognized as R&D 100 Award winners. In 2013, the Agilent 8800 Triple Quad ICP-MS won the award and the Agilent 4100 Microwave Plasma-Atomic Emission Spectrophotometer won in 2012. These awards demonstrate the benefit of our investment in spectroscopy. Looking forward to Q4, we expect mid single-digit growth across LDA as we continue to build on our order momentum, gain traction with new products and drive manufacturing cost reduction. We remain committed to creating shareholder value through : increasing our organic growth rate by leveraging Agilent's strength in the analytical lab into the fast-growing genomics and diagnostic markets; continuing to differentiate through best-in-class tools, workflow solutions and customer experience; and finally, expanding operating margins and return on invested capital consistent with our long-term operating model. Turning to guidance, LDA revenues for the fiscal fourth quarter of 2014 are expected to be between $1.07 billion to $1.09 billion or 6.2% core growth at the midpoint. We expect operating margins at the midpoint of 21.1%. For the full year, we expect LDA revenue in a range from $4.07 billion to $4.09 billion, with operating margins at the midpoint of 19%. Didier will provide additional details in his remarks. Thank you for being on the call. I will now turn it over to Ron to talk about Keysight and the Electronic Measurement business. Ronald S. Nersesian: Thank you, Bill, and hello, everyone. I'm pleased to report that Keysight had a very good quarter and we continue to focus on returning to market growth rates while meeting operating margin expectations. Turning to our performance, I will start by highlighting 3 key headlines from Keysight's third quarter. First, Q3 revenues came in at the top end of our guidance range and operating margins were above expectations. Second, our overall outlook and forecast for the second half remains unchanged despite potential disruption from geopolitical, macroeconomic and company-separation risks. And third as Bill mentioned, we began operating as Keysight Technologies on August 1 and remain on track to be fully separate from Agilent in November. Now let's move to the specifics. Keysight revenues of $757 million increased 8% year-over-year while orders of $722 million were up 7%, resulting in a book-to-bill ratio of 0.95. Keysight continues to deliver solid profit margins, generating operating profit of $149 million for the quarter, which corresponds to an operating margin of 20%. Last quarter, we highlighted the operational separation of Keysight that occurred on August 1. This was a massive step that had the potential to impact the timing of customer shipments. In fact, some customers requested early deliveries to ensure no delays during our transition, and this moved some revenue from Q4 into Q3. As we have consistently noted throughout the year, we expected our Aerospace and Defense and Communications markets to grow in the second half. These markets were the drivers of Keysight's Q3 growth, but strength in these markets were offset in the Industrial and Computer markets. Aerospace and Defense revenue grew 13% this quarter with strengths in both government and prime contractor business as well as regional strength in the Americas and Asia. Communications revenue grew 16% in Q3. Wireless basestation and component manufacturing were strong. However, handset manufacturing was weak as customer buying power and increased competition accelerated price erosion in that business. Industrial Computers and Semiconductor revenue was flat year-over-year. Continued strength in semiconductor end markets was offset by the softer computer business. On a regional basis, revenues grew year-over-year in all regions, with the exception of Japan. Europe grew 16% versus a soft compare last year; Asia Pacific excluding Japan, improved 11%, with positive growth across nearly all segments; the Americas grew 8%; while Japan declined 13% due to declines in government aerospace and defense spending. Overall, Keysight continues to invest in the transformation of our product portfolio with a focus on modular, software and certain wireless solutions. Aligned with this focus, in Q3, Keysight was awarded the Global Frost & Sullivan Award for Growth Excellence Leadership in the PXI instrumentation market. We also announced a strategic partnership to collaborate in early 5G research with China Mobile, the world's largest mobile network operator, and we announced participation in the Korea 5G Forum. Keysight introduced new products in the quarter, including our modular Bit Error Rate Tester, which provides a new level of scalability and flexibility for the fast-paced, high-speed digital markets. In addition, in July, we began volume shipments of our PXI vector signal analyzer. It is the world's fastest and most accurate microwave vector signal analyzer that significantly reduces test times across a wide range of applications and markets. As you know, Keysight began operating as a subsidiary of Agilent on August 1 and we expect to complete the spinoff in early November. Our focus throughout this journey is to make this significant transition as seamless as possible for our customers. Our successful results to date are due to the hard work of our employees, who are implementing a separation plan that includes working closely with thousands of customers to coordinate our shipments and delivery plans in this transition period. I am very pleased with their achievement so far. Turning to the outlook for the remainder of the year, we are facing several headwinds in a handful of areas, most notably Russia. Our sales to Russia have represented 3% of Keysight's total revenue. The volatile political environment, as well as new export restrictions on certain products, may halt growth in one of our fastest-growing regions. Despite the geopolitical, macroeconomic and company-separation risks, we are reiterating our second half and annual guidance. We expect the FY '14 revenues to be in the range of $2.91 billion to $2.95 billion which represents 2% core growth at the midpoint. We have tightened the range but the midpoint is the same as we have communicated last quarter. Similarly, our expectation for full year operating margin remains unchanged at 18.9% at the midpoint. This implies Q4 revenues are expected to be in the range of $740 million to $780 million with operating margins at the midpoint of 20.5%. I will now turn it over to Didier to provide the details of Agilent's overall financial results. Didier Hirsch : Thank you, Ron, and hello, everyone. To recap the quarter, orders grew 9% year-over-year, revenues grew 7%, and our revenue of $1.766 billion operating margin of 19.2% and EPS of $0.78 were all higher than the high end of our guidance. Please note that Q3 core revenue growth by segment and by geography is reported in the slide deck posted on our website. This quarter, currency added about 0.6 percentage points to our year-over-year revenue growth and acquisitions had no material impact. We bought back $50 million of stock in Q3, redeemed $500 million of debt and generated $28 million in operating cash flow. This is lower than traditional for 3 main reasons : number one, we prepaid about $60 million of supplier invoices at the end of July as we will not make any payment in the early part of August; number two, we paid $29 million for the redemption of the 2015 notes and also prepaid the current interest on that note; and number three, pre-separation expenses amounted to over $60 million. I will now turn to the guidance for our fourth quarter. We expect Q4 revenues of $1.81 billion to $1.85 billion and EPS of $0.87 to $0.91. At midpoint, revenue will grow 6.5% and EPS, 10%. Our 21% projected operating margin at midpoint will be 180 basis points higher than Q3 fiscal year '14 and 60 basis points higher than Q4 of last year. While we are maintaining our spending discipline, we're also investing in key growth initiatives. We expect to generate about -- over $300 million of operating cash flow in Q4 and incur about $60 million of pre-separation costs. Now to the fiscal year 2014. The fiscal year '14 guidance at midpoint remains the same as previously communicated, but we are narrowing the range. We expect fiscal year '14 revenues to range from $6.99 billion to $7.03 billion and fiscal year '14 EPS to range from $3.04 to $3.08. With that, I'll turn it over to Alicia for the Q&A. Alicia Rodriguez : Thank you, Didier. Karen, will you please give the instructions for the Q&A? Operator : [Operator Instructions] Our first question comes from the line of Dan Leonard from Leerink. Daniel L. Leonard - Leerink Swann LLC, Research Division : Great. I just want to clarify, it's unclear what your expectation for Russia is -- unclear to me what your expectation for Russia is in the Keysight guidance. Are you reiterating that you can deliver guidance even if Russia -- business in Russia halts? Or are you retreating the guidance while cautioning us that Russia could drive downside? Ronald S. Nersesian: We can deliver -- our plan is to deliver the guidance with the Russia halt. This quarter, we saw very good revenue growth in Russia and we saw negative order growth in Russia. But we have taken that into consideration in our guidance. Daniel L. Leonard - Leerink Swann LLC, Research Division : Got it. And my follow-up question. In the Agilent business, you have a competitor which is exiting the gas chromatography market. Is there any way you can quantify what this means to your opportunity in that market, either from a revenue or a margin perspective? William P. Sullivan: Agilent Technologies is a leader in gas chromatography, and we will do everything we can to support our existing customers and future customers as we go forward. Operator : And our next question comes from the line of Richard Eastman from Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division : Just a quick question. When you look at China in total, and maybe, Ron, I'm thinking more on the Key [ph] side of the business. Could you just kind of speak to the tone in China and in Japan as well, just Asia in general, and how that looks over the next 3 to 6 months? Ronald S. Nersesian: Sure. First, I'll start with China. We've seen hot basestation manufacturing orders as -- and we've also seen strong orders for components. On the handset side and handset manufacturing, there has been considerable price pressure and that market has undergone some real price erosion. But overall in China, our business looks pretty solid. We have seen some increases on export restrictions for China, as well as Russia, and that has affected our business a little bit. With regard to Japan, the government has not been funding any new programs that we're aware of for satellites or defense work, and that has led to a continued soft environment. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division : And just one thought is this -- as you know, Apple -- I know we don't talk customers, but the last time there were some fairly significant share shift. It was attributed to Apple basically. And as they ramp up on the iPhone 6, can you -- is the test content into that automation and production run, which they want to start in September, is the test content considerably less than it was as they ramped up on the previous generation? Or has pricing eroded to a point where it does not have as significant of an impact on the industry in general? Ronald S. Nersesian: I'm sorry, Richard, I'm not allowed to comment on particular customers' buying or test strategies. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division : Okay. And then just -- well, let me just ask, the PXI VSA that you just started shipping, that is a bench top instrument. Ronald S. Nersesian: No, it's a PXI modular instrument that could be married with other instruments in a modular form factor. It could be used on the bench or it could be used in production. Operator : Our next question comes from the line of Patrick Newton from Stifel. Patrick M. Newton - Stifel, Nicolaus & Company, Incorporated, Research Division : I guess, Ron, your 4Q op margin guidance for Keysight of 20.5% is above the high end of your market growth model that you laid out at the Analyst Day, and I'm wondering if you could discuss what dynamics are driving this upside. And I assume mix is helping and then can you talk about the sustainability of this elevated margin? Ronald S. Nersesian: Sure. Well overall, first of all, we had predicted 8% growth in the second half. We delivered 8% in Q3 and if you look at the midpoint of our guidance, it's 8% in Q4. We did have very high incrementals above the middle of our guidance during this last quarter, but we do need to still invest in this multiyear transformation to get our product line growing at market and then eventually above market. But the guidance that we just gave right now factors everything in place. Don't forget Q4 is seasonally a strong quarter which basically when you have a significant amount of fixed costs drives higher margins. Patrick M. Newton - Stifel, Nicolaus & Company, Incorporated, Research Division : Great, and then just shifting gears to basestation strength that you talked about in your prepared remarks. Can you talk about that on a geographic basis, and when we look at LTE and TD LTE markets in China, I'm curious how this market is faring relative to expectations and the kind of visibility or duration that you're expecting from these deployments. Ronald S. Nersesian: Sure. Well, first of all, the basestation build that is obviously 4G and TD LTE for China, et cetera, and FTE [ph] for the rest of the world. But we see players in Europe and in Asia that are doing this. So when you look at some of the major players that are centered out of Europe, we see strength and then we also see strength in China in Asia in the basestation market. Patrick M. Newton - Stifel, Nicolaus & Company, Incorporated, Research Division : Any comment on the visibility or duration at this point? Ronald S. Nersesian: Guy, I don't know if you want to add any comments on that at this point. Guy Sene : Well, the only other thing I could add on is the fact that especially the whole -- the 3 operators in China are now starting to deploy 4G. So that's the trend that is going to be here for probably a few years, but with ups and downs at the capacity we'll have to build. Operator : Our next question comes from the line of Isaac Ro from Goldman Sachs. Isaac Ro - Goldman Sachs Group Inc., Research Division : Bill, I wanted to start with the LDA side. It looks like the order growth in the core business there was really solid, and wanted to kind of get a little bit more color from you on the product specifics there. It really seems like you guys are taking at least a little bit of market share from your competitors just given their growth rates versus yours. It'll be helpful to see a little bit of color on where you think you're doing the best. William P. Sullivan: Yes, I'll give an overview comment and then turn it over to Mike and Fred to comment in their respective businesses. But my first warning is, I've always had, is you really have to look at the overall performance of the marketplace as a rolling 4 quarters, and again, we're very happy with the performance in Q3. I'm particularly pleased with the rebound from Fred's business from last quarter. I mean, if there is anything in the last quarter that we had is that the growth in revenue in the Life Science side was below expectations. And so that's really the story from my mind is that we've got great order momentum across all of Fred's product lines going forward, and I'll have him comment on that. And of course, Mike's business just continues to roll along. I mean, we are the leader in the applied side of the market. We have a lot of competition because people see that but his team is just doing an outstanding job of holding and if not growing position. But I'll turn it over to Fred, and I'm going to flip the order, put -- go to Fred, because it really is the biggest change sequentially, and then turn it over to Mike. Fred A. Strohmeier: Thanks, Bill. I think we are very pleased with the results we're seeing from all the platforms, I mean, almost across the board, starting on the top, I mean, the LC/MS growth rebounded quite significantly over the last 4 to 5 months after a pretty difficult fiscal year '13. And so we are confident that the new products are really pushing our business forward, starting with the new triple quad which we have introduced at ASMS. And also the single quad which we introduced is keeping up very well against the competition, by the way, really nice growth there. Secondly, we are seeing informatics as a key element. And as we have talked several times about it, increased investments there, informatics is really growing along with that and is pulling instrumentation with it. And third piece is in the classic instrumentation piece is the LCs, which are growing nicely as well from a revenue perspective. And turning to the pieces actually Mike owns but assigned to the Life Science business. Consumables and services were strong as well. So turning over to the genomics and diagnostics space, we saw really significant growth in the genomics space, predominantly driven by the target enrichment of the assembly preparation [ph] for next-generation sequencing. We saw solid growth in the space of pathology, mainly driven by the IQFISH with a few things we have introduced there, which are real significant advantage from a customer's perspective. And we also saw the companion diagnostic rolling at the rate we were expecting. And finally, the companion diagnostic. Also the contract with Merck, they have signed, but we are seeing an increasing demand on companion diagnostic, which is in line with what we are seeing in the market in general. Isaac Ro - Goldman Sachs Group Inc., Research Division : That's helpful. And just maybe one other if I may. On China, you guys mentioned some of the changes with the SFDA. And now that, that's behind us, can you maybe give us a sense of what's baked into your outlook for China both in LDA, as well as EMG for the balance of the year? William P. Sullivan: I'm going to turn it back to Mike, if you don't mind, to answer the first question, because again, he's got a great story on the applied side from a market perspective. And then our China business for LDA was flat. Again, Asia was up 4%, China down -- or Japan down a little bit, China, flat. And so we obviously had a very strong non-China Asia performance. I'm going to have Mike talk a little about his products and then comment on China because a lot of his is in China. But our China business was flat for LDA in the context of overall strong Asia that was up 4%. Obviously, China dominates that performance. And then after Mike answers, I'll have it turn it over to Ron to talk about China specifically for Keysight. Michael R. McMullen: Thanks, Isaac, for the earlier question. So first of all building on Fred's commentary about the drivers for a quarter which we're very pleased with in terms of both the revenue and the incoming order rate, we saw this strong services and consumables performance in this CAG segment space for Q3. But we're also seeing the growth being driven by the new product introductions we have been making over the last several quarters and the past year or so, from our introductions in the mass spectrometry area, on GC/MS and ICP-MS, and as you saw in the earnings call, we highlighted that we got one other what I believe to be an award-winning product in the spectroscopy area. So we saw strong growth in the mass spectrometry business both gas space and inorganic side, as well as our base of spectroscopy business. So the innovative products we're bringing to market are actually driving growth, and this was in an environment where we had a challenged market situation in China. So I think it's fairly well publicized. The food ministries, reorganizations are underway. I think it's taking longer for those to settle out and for them to get organized and really get the procurement side going in terms of the new purchases. So we were delighted with the results of these type of growth rates and in a market, as Bill described, it was relatively flat in China. Ron? Ronald S. Nersesian: As far as China, our revenue growth was a little bit over 20% for the quarter, but our order growth was 5%. Operator : And our next question comes from the line of Brandon Couillard from Jefferies. S. Brandon Couillard - Jefferies LLC, Research Division : Mike, just back on that same question. Could you give us a sense to how orders performed in China in the period if there was any delta between the revenue experience and the order experience? Michael R. McMullen: Yes, thanks, Brandon, for the question. So slightly better view, about 2% order growth in Q3. And I will again reemphasize, I think the long-term growth prospects in China remain strong. And we see some of these challenges we're seeing right now in the food market as just really, kind of a temporal kind of thing as they get their agencies organized, but a slightly better view on the order growth rate, but I'll also say that we finished the quarter very strong in China. S. Brandon Couillard - Jefferies LLC, Research Division : And then one more for Bill or Didier. Is there an opportunity for share repurchase activity to accelerate for LDA, post-spin here going forward? William P. Sullivan: Our stated strategy to date as we had talked about is to, first of all, ensure that we keep our bondholders whole and reduce the debt to ensure that we can maintain our investment grade. We're also committed to making a dividend payment of $130 million, which we believe will be roughly the same percentage dividend as what it was before under Agilent. Stating that, the new Agilent is very, very profitable and has very high cash flow. Our priority continues to be to look on ways to invest in the business. But I've been very clear that we have to digest a lot with the separation, the acquisitions that we have made, and we will continue to work with the Board of Directors to figure out the best way to return cash back to our shareholders. Operator : And our next question comes from the line of Ross Muken from the ISI Group. Ross Muken - ISI Group Inc., Research Division : Maybe, Ron, starting on the sort of basestation and more so focused on the U.S. business. It seemed like a number of peers called out weakness at a number of the large carriers here. Could you just maybe talk about sort of what you've seen from the demand base from those folks and maybe how your business differs from some of the others where they've seen weakness, like in the business you sold to JDS. Ronald S. Nersesian: Sure. Obviously, we have a major difference in what we do in communications where some of the competitors obviously look at network monitoring and features that are basically, let's say, software testing of higher levels. We're testing R&D and manufacturing processes. So that is a significant difference. But I'll let Guy add a little bit of color commentary. Guy Sene : Yes, Ross, I would add that we have a very strong position in R&D and manufacturing with all the infrastructure OEMs, basestation builders. And as this market has been strong in Q3, you'll see the results in our wireless numbers. Ross Muken - ISI Group Inc., Research Division : Great. And maybe just, Didier, quickly on the cash flow. Could you just -- I know some of the moving parts for the quarter, but could you just remind us some of the key headwinds of why this is sort of a sub-par a year on cash flow versus what we would be used to given the sort of top line and profit results. Didier Hirsch : Yes. I mean, on the year-over-year basis, most of the reduction in the cash flow from 2013 to 2014 will come from the separation cost, about $180 million, and debt redemption cost, these pluses and minuses. Also we are ending the year -- we are planning to end the year very, very strong. And even though we have best-in-class DSO of about 47, 48 days, that basically -- last year, we had a positive impact on receivables. This year we just need to -- we are building receivables, we are planning to build receivables at the end of the year to support basically, the much higher revenue growth expectation. Then again, we have best-in-class DSO so there's no deterioration of DSO just applied to a higher revenue in Q4. So those are some of the main things. Operator : Our next question comes from the line of Dan Arias from Citigroup. Daniel Anthony Arias - Citigroup Inc, Research Division : Just a question on the improvement in the academic and government spending. Was that a late quarter phenomenon or did you see pretty steady improvement during the quarter, just trying to get a feel for the pacing there a bit. William P. Sullivan: Fred, why don't you take that one, please? Fred A. Strohmeier: Yes, what we are seeing is, in general, a rebound in the different geographies. I think the business is coming back honestly on easy compare relative to last year. I mean, I just can give you a few numbers. Worldwide academic research spending is pretty much flat in Europe, according to our information. China is spending about 12% growth in government funding. However, all [ph] to the things Mike was highlighting, this picture is distorted, so that probably some of the money is spent towards the later part of the year and the U.S. is growing in about 2%. So overall I think it is a situation where we can say that it's a relief in this market overall and we are seeing that in our order pattern as well. Daniel Anthony Arias - Citigroup Inc, Research Division : Okay. Great. And then just curious what you're seeing in large pharma. You guys had called out spec and midsized companies as being strong. But I think last quarter, it sounded like order patterns had been disrupted a bit. So I guess, as the big deal speculation dies down a bit are you seeing things loosen somewhat or not really? Fred A. Strohmeier: That's a good question. We still see big pharma still not loosening their clutches completely. I mean, we are done seeing the big deals we have seen in the past. I think the growth, as Bill has outlined, is coming off of mid to small companies. I mean, the reason for that is they are still in the situation of potential consolidation going on. But there's also the patent cliff for small molecules. Even that is almost over and we are seeing a new trend in Europe, for example, that companies, traditional companies, are starting generic businesses after a lot of that business has been moved to India. And this helps, of course, the pharma market in general. But your specific question about big pharma, I would say this is not yet completely there. Operator : Our next question comes from the line of Doug Schenkel from Cowen and Company. Douglas Schenkel - Cowen and Company, LLC, Research Division : Just I guess a quick cleanup on the China dynamic. Would you be willing to quantify what percentage of total sales is exposed to this government-related, as well as the, I guess, the China FDA reorganization challenges in China. William P. Sullivan: I'll give you an opinion. The problem is, as you know, in China, is what do you define as government and what do you define as private? Because quite technically, all of the big chem companies, even though they're held as a company, are effectively owned by the government. So I think that from our perspective and where Agilent is, essentially all of the issues are related to impact of government decisions. Douglas Schenkel - Cowen and Company, LLC, Research Division : So it's really the vast majority of LDA, China sales. William P. Sullivan: And I'm again just defining anything the government effectively controls, the investment strategy is effectively government-owned. And again if you look at -- I mean, the food industry, the pharmaceutical industry and the chemical industry, it's all highly government-impacted. And so they really do make those fundamental decisions at the end of the day. And so if you take our definition, then it is essentially 100% driven by government decision. Douglas Schenkel - Cowen and Company, LLC, Research Division : Okay. And then I just want to I guess follow up on that by asking, I guess on one hand, it doesn't sound like you're expecting that to come back in Q4. On the other hand, at the end of last quarter, you talked about strong order momentum in China. You said that again I think this quarter. I believe you typically don't count something as an order unless you expect it to be fulfilled within about 6 months. So I'm just trying to reconcile these seemingly contradictory dynamics. And if my understanding is correct, are you trying to basically say that you do expect China to come back, but it may not be this quarter, it may be, say, Q1 of next year based on what you're seeing from an order standpoint? William P. Sullivan: Yes, I think that all of us are in the conventional wisdom that -- or a conventional view of thought that organizational changes are relatively straightforward. And that China continues to be the most -- the country with the greatest growth opportunities that we have. Every quarter, you're a little bit disappointed. I think as Mike said, exactly right, I mean, we're confident in the future, you just never know how the funding breaks. And you see that in the defense business, in Ron's business. So I think we're in a position of -- the guidance that we have is our best forecast of what's going to happen in China, so we're not expecting obviously any miracles, and we'll just have to play it out. The good news is, is that in Asia overall, our business is pretty good. In other parts of Asia, we've been quite successful. And we'll keep our fingers crossed and hope that Q4, the bottleneck breaks and we get stronger momentum going into '15. Douglas Schenkel - Cowen and Company, LLC, Research Division : Okay and one last one. You've been tracking a bit ahead of plan thus far this year. If we think about that in the context of what you talked about in terms of dis-synergies on the new Agilent side going back to your March Analyst Day, has the fact that you've done a little bit better than expected provided you any opportunity to maybe pull some of that required investment forward and maybe benefit you from a dis-synergy standpoint next year? William P. Sullivan: It's actually working the opposite direction. Ron and the team and our whole core of a [ph] team is doing so well for them to become independent that we have the risk of increasing the dis-synergies. As we said in -- and again, by dis-synergies, that's meaning there's more residual left over in Agilent to be able to manage through. However, and you see it based on our debt -- buying down our debt, we are still quite confident that first order dis-synergies in the new Agilent going forward will be offset by lower interest payments. Operator : Our next question comes from the line of Jon Groberg from Macquarie. Jonathan P. Groberg - Macquarie Research : Can I just spend a minute on gross margin? I'm wondering if kind of by each business, by LDG, by Chemical and by EMG. I'm just kind of looking at absolute revenues. I know for you guys, given the mix of business and the instrumentation, never occurred [ph] whether to look year-over-year or sequentially, but if I just look at absolute revenues in LDG and then EMG in particular, you're still not back to the kind of gross margins that you were at previously, and chemical doing a little bit better. So can you maybe just talk about gross margin trends by business and kind of where you're at in your journey there? William P. Sullivan: I'll have Ron start on Keysight, again obviously, a lot of mix impact depending on what type of deals he takes. And then we'll talk about the LDA going forward. Ronald S. Nersesian: Yes, exactly right. But I'll let Neil give some color commentary. Neil Dougherty : Yes, so I would echo exactly what Bill just said. So as we move from quarter-to-quarter, the mix of our products, the mix of our sales has a pretty significant impact on our gross margins. And the other point that's certainly relevant, as Ron mentioned in the script, is the price erosion that we see in certain markets, most notably in the wireless manufacturing space over the past several years, if you're looking at multiple-year trends, has impacted gross margins. William P. Sullivan: And I'll just make some high-level comments, again, Jon, if you have additional details, the guys can give an answer. But LDG is by far the most competitive market that we have. I mean, our base comes from the applied. I think we continue to make great progress in Life Science and Diagnostics. The overall gross margin is solid. I would say very, very competitive in the market. But it is the most competitive market that we have moving forward. We have to win. I'm absolutely convinced this will continue to be the long-term growth engine of the company. But this is where the investment is, this is where by far, the most competition is. Fortunately on Mike's team, on the Applied side, continues to do a superlative job. And you can really see the investment that we have made in spectroscopy and again, I alluded to it, and I'll put the plug in, we have systematically redesigned every Varian product line that we received since 2010. And so the NMR, as we said in the past, which is counted in Fred's gross margin, is behind that. We've introduced one product but we really have to turn the product line one more time. But spectroscopy, we're basically done, not only did we spend the money to do it right, secondly, the market sees it. We're winning the awards that indicate how successful we have with the Varian engineers working together with the Agilent engineers to really develop a great product. And so I think in summary, I think the differential change has been the progress we made on the spectroscopy side. Jonathan P. Groberg - Macquarie Research : I guess, just to follow up quickly on that, Bill. I guess, thinking about LDA overall as you go forward, I guess my question was around, you highlighted that there are a lot of opportunities on the gross margin side there given, in particular some of the other product lines that you just mentioned from Varian. Are we -- I guess, kind of has anything changed in terms of what you think the potential of that could be over the next 2 to 3 years, given what you're seeing rolling now? Or is it going to take a little bit longer or is everything on track? I'm just trying to understand I guess the timing of these improvements. William P. Sullivan: Everything is on track and you should assume a 1 percentage point improvement per year. Jonathan P. Groberg - Macquarie Research : Okay. And then if I can quickly, Ron, can you, on the Electronic Measurement side, I know -- the way a lot of people have reported and it's always hard as you already alluded to in earlier comments to compare one company to another depending on their mix and other pieces of business. But you guys obviously have a lot easier comps than others did in terms of what they were doing a year ago, you had some customer losses and things like that. I guess how would you just overall describe the environment and the overall test measurement market kind of putting aside all of these individual company issues? Maybe just give us a sense of how you describe the overall market. Ronald S. Nersesian: Sure. If you look at the -- sure, I'll just break down by some of the segments. The semiconductor market looks good as they moved to some 20-nanometer pitches. The industrial market looks relatively flattish. The computer market itself is not growing very rapidly from all of the tablet conversion from PCs. In communications, we are seeing a buildout of the infrastructure in basestations, and that certainly helps as people move over to 4G. But there is massive handset manufacturing test pressure on pricing. As more people have entered into the market and people have been very, very aggressive on pricing, that really affects the attractiveness of that market. In aerospace/defense as we saw a nice rebound, a 13% growth in this past quarter, that's from a free up from some of the spending that we saw last quarter and we expect to continue into Q4 with the end of the U.S. fiscal year. So overall on the markets, what we had talked about last year, we see communications a little bit better than the 2% growth that we outlined last quarter for fiscal year '14. We see also the aerospace/defense doing a little bit better than what we had outlined, but we do not see the industrial and computer segment tracking to the 5% that we outlined. So 2 segments are a little bit up, 1 segment is down and net-net, that gives us to our 8% growth for the half. William P. Sullivan: We believe the market growth for next year will be in the 2.5% to 3.5% range, and we're trying to get back to that growth rate. Operator : Our next question comes from the line of Paul Knight from Janney Capital Markets. Bryan Kipp - Janney Montgomery Scott LLC, Research Division : This is actually Bryan Kipp, on behalf of Paul. First one, I think I just want to piggyback on an earlier question on the specialty pharma growth. What's really underlying that? I mean, there's been commentary that there's been an uptick in India. And I wonder if that's kind of supporting some of the growth there. And is it additional products that you guys are seeing, is it focused in one area and one vertical for your business, or is it multiple? Just color on that will be helpful. Fred A. Strohmeier: I think we are seeing, as I said before, we are seeing pharma, in general, the big pharma probably more restrained than the smaller ones. I think the product portfolio we have at the moment is really ideally suited at this point in time to enter this market. I think with the new introductions in the LC space and in the LC/MS space, I think we have made inroads in that and the driving force is increasing productivity. These are the reasons why customers even under tight pressure are deciding to move on to purchase instruments in these times. And I think particular in India, I think we're seeing an uptick. The growth in the market overall, we are seeing there the total market is probably at double-digit market growth at this point in time. And so yes, we are hoping that and are optimistic that the big pharma spending starts continuing towards the end of this year. Bryan Kipp - Janney Montgomery Scott LLC, Research Division : Okay, and you think that the tail for the specialty pharma investment, especially I mean, the 11% you alluded to in India, do you think that has some longevity to it? And I guess in addition, I think there's a question on pacing for academic and government especially in Europe, how do you guys see that pace throughout the quarter? Do you see -- I know you said rebound overall, but did it get stronger month over month? Fred A. Strohmeier: The rates, yes, I believe even so that the spending as I said before is relatively flat, I think that the batches [ph] is released and we are seeing continuous investments being made by the institutions and just one fact, in Europe, the European Parliament has just released a fund of about $5 billion for the next 10 years for bio-related research. Bryan Kipp - Janney Montgomery Scott LLC, Research Division : Okay. And then, Mike, if I can do a quick follow-up. I know U.S. refining capacity has been pretty strong to start the year. U.S. is I think you guys have alluded to, has been not robust but it's has been steady grower for you all to start the year, hasn't been too crazy. Color around that and then I didn't see anything on the Middle East. Is that starting to fall off a little bit or be more flat, are you still seeing support there? Michael R. McMullen: Yes, great question. Thanks for the opportunity to provide additional color. So let's maybe start with the Middle East. That part of the world continues to be a very strong growth region for us. They're investing in capacity in-country, moving -- trying to move higher end of the value chain of refined products. So that area is growing nicely for us. And in the U.S., I think the commentary is still relatively the same as last quarter, which was overall, the industry has probably never been healthier in the U.S. fueled by the low-cost of the fuel stocks from shale gas. And we're seeing plans by our major customers to add infrastructure, build capacity. That hasn't yet come online and translated into new business. So the business is still a steady grower, but I think as the profit pools continue to grow and invest, I think we could look toward a healthier investment environment for us down the road. Operator : Our next question comes from the line of Derik De Bruin from Bank of America Merrill Lynch. Derik De Bruin - BofA Merrill Lynch, Research Division : Actually, I sort of have a mechanics question, and just sort of looking more in terms of how you're going to report fourth quarter. And I just want to make sure I understand. So you basically said you're just going to report the Agilent LDA business as it sort of stands and no commentary on Keysight, is that correct? William P. Sullivan: No. We will report Agilent results with Keysight in Q4. We will discuss in the earnings call the new Agilent going forward. And Ron and team will have a separate investor call afterwards to talk about the results of Q4 and their guidance for FY '15. Didier Hirsch : So for Agilent, no change except that obviously, in terms of our financial report, but obviously the focus of the presentation will solely be on LDA. And then on -- at the same time about Keysight will present their financial results and provide their report on their business separately from Agilent. Derik De Bruin - BofA Merrill Lynch, Research Division : Okay great. Just want to clarify that. So you'd mentioned some strengths in the single quad market. Is that the new 6120 that you're talking about? Didier Hirsch : Exactly. Derik De Bruin - BofA Merrill Lynch, Research Division : Yes, okay. And then I mean, that goes against -- I mean, you're targeting that for the chromatography market, and that's going against one of your competitor's product, the QDa, on that. Is that -- is that wins against gap products in that market, or just a little bit dynamics on what you're seeing since that's obviously a new sort of instrument for that sort of chromatographic researcher standpoint. Fred A. Strohmeier: I think that's actually a good question. I think we are winning against our competitors at the moment, particularly the product is refilling [ph] just by the fact that our product is more universally usable, and it's more flexible in the application space. It can be deployed and I think that's the major difference between the product, which actually is also from a price perspective, very competitive, and I think those 2 factors are driving the growth in the total single quad market, but also particular against this instrument. Derik De Bruin - BofA Merrill Lynch, Research Division : Great. And I guess is this driving new system placements for LC as well or is it just basically... Fred A. Strohmeier: I would say it's driving also new instruments in the LC space, particular where these single quads are used in more routine applications, pharma clearly. This is one of the reasons why we are seeing small -- in the small pharma space, small company pharma space, we are seeing this growth rates. Derik De Bruin - BofA Merrill Lynch, Research Division : Great. And then just one quick question. On the PDL1 ligand, the companion diagnostic. How do we -- I've had a number of questions from investors about how to sort of think about the size of that market and that opportunity for companion diagnostic. Can you give us some color around that, and I guess relate that to maybe what your experience was sort of with the [indiscernible] Fred A. Strohmeier: I mean, it is -- yes, sorry, good question as well. I think it is very difficult to say how big the market is because there is no real commercial product at the market at the moment. At the moment, Agilent is providing services, development services, for products which are not yet on the market. And I think this is the value proposition at this point in time. However, once those products -- I mean, I'm talking about the pharmaceutical products, make it through the value chain, I think, then we can talk about markets that is why it is very difficult at the moment to assess that. William P. Sullivan: And again, I think as Fred said, just look at it as a service opportunity, that we're providing services, and the big payoff is, if we're lucky enough to -- and skillful enough to partner with somebody that they will deliver a differential product in the marketplace, we will get the additional revenue from supporting those reagents and instruments. Fred A. Strohmeier: I mean just one anecdotal information, if you look to the development of new drugs at the moment, I think a big part of the drugs, and if you correlate that with the success of the drugs in the clinics, it's correlating with companion diagnostic, which is codeveloped basically with the drug itself. And I think this is the opportunity afterwards beyond the service business, as Bill just said. Operator : And our final question for today comes from the line of Tycho Peterson from JPMorgan. Tycho W. Peterson - JP Morgan Chase & Co, Research Division : Ron, I'm wondering, you mentioned revenue pull forward for Keysight ahead of the official go live date on August 1. Is there any way you can quantify that? Ronald S. Nersesian: Yes, it was approximately $15 million, which would have put us right around the midpoint of our guidance. Tycho W. Peterson - JP Morgan Chase & Co, Research Division : Okay. And then is there any chance you guys might be wanting to comment at all on '15? I mean if we look -- the Street's, I think, 5% core for LDG and 5.5% for EMG. Ron, you just talked about the market growing 2.5% to 3%. So as we think out there for next year any preliminary thoughts? William P. Sullivan: We're going to have to wait to next earnings call before we give the '15 guidance moving forward. And also I think it's important not speaking for Ron, but working with his new board to make sure that everyone's aligned for their guidance in '15, and likewise with our board. Tycho W. Peterson - JP Morgan Chase & Co, Research Division : Okay. And then lastly, you explicitly in the pathology talked about Europe being strong. Can you maybe just talk to the dynamics there and then what was going on in the U.S. and if there was a reason that wasn't called out today? William P. Sullivan: In terms of on the LDA side, you mean? Tycho W. Peterson - JP Morgan Chase & Co, Research Division : Correct. William P. Sullivan: Yes, well, Fred's clearly the expert in Europe, so I'll have Fred talk about again, the continued strength that we have in Europe both from a product standpoint and a customer standpoint. Fred A. Strohmeier: I think you see a tremendous tick-up in our sales in Europe and this is mainly driven through the product categories I have been talking about. And it's across the market, so including Mike's markets as well. And we see the academia [ph] government for the reasons I have given before also picking up. And I believe it is the pharmaceutical industry which drives growth, even though we don't see the full potential yet, so I'm optimistic that this trend really continues. Michael R. McMullen: And Fred, this is Mike. If I can maybe just build on your comments and maybe add a geographic perspective. Within Europe, we often think of Europe as being Western Europe. But if you look to what we call the IDO, the Eastern Europe part of our business, it actually is growing quite strongly as well, so there's both a economic, geographic dimension sort of under the covers if you will in our European numbers. Operator : And that concludes our question-and-answer session for today. I would like to turn the conference back to Alicia Rodriguez for any closing comments. Alicia Rodriguez : Thank you, Karen. And on behalf of the management team and myself, I'd like to thank everybody for joining us on the call today. If you have any questions, please call us at IR and we'll be happy to get back to you. Thank you. Operator : Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,014	4	2014Q4	2014Q4	2014-11-18	2.983	2.823	2.631	1.783	2.61	19.21	22.3	Executives: Alicia Rodriguez - Vice President, Investor Relations Bill Sullivan - Chief Executive Officer Mike McMullen - President and Chief Operating Officer and CEO-Elect Didier Hirsch - Senior Vice President and CFO Fred Strohmeier - President, Life Sciences and Diagnostics Group Mark Doak - Senior Vice President, Agilent CrossLab Group Analysts : Tycho Peterson - J.P. Morgan Isaac Ro - Goldman Sachs Dan Arias - Citigroup Ross Muken - Evercore ISI Tim Evans - Wells Fargo Securities Steve Beuchaw - Morgan Stanley Paul Knight - Janney Capital Miro Minkova - Stifel Richard Eastman - Robert W. Baird Rafael Tejada - Bank of America Merrill Lynch Justin Bowers - Leerink Brandon Couillard - Jefferies Operator : Good day, ladies and gentlemen. And welcome to the Agilent Technologies Fourth Quarter 2014 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. I’d now like to turn the call over to your host, Alicia Rodriguez, Vice President of Investor Relations. Please go ahead. Alicia Rodriguez : Thank you, Patrick. And welcome everyone to Agilent's fourth quarter conference call for fiscal year 2014. With me are Bill Sullivan, Agilent CEO; Mike McMullen, President, Chief Operating Officer and CEO-Elect; and Didier Hirsch, Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Fred Strohmeier, President of Agilent’s Life Sciences and Diagnostics Group; and Mark Doak, Senior Vice President of Agilent CrossLab Group. You can find the press release and information to supplement today's discussion on our website at www.investor.agilent.com. There - while there, please click on the link for Financial Results under the Financial Information tab. 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, Mike 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. And now, I'd like to turn the call over to Bill. Bill Sullivan : Thanks, Alicia, and hello, everyone. Today Agilent including Keysight Technologies reported Q4 revenues of $1.81 billion, operating margin of 20.7% and earnings per share of $0.88. Keysight Technologies discussed their performance and outlook in a separate call earlier today. Accordingly, the rest of the numbers we will share today deal exclusively with Agilent’s performance in Life Sciences, Diagnostics and Applied Markets. New Agilent reported fourth -- record fourth quarter revenues and orders. Revenue of $1.04 billion increased 3% versus last year, orders of $1.15 billion were up 5% over year ago, operating margin was 20.4%, book-to-bill was 1.1. In a moment, Mike and Didier will discuss the details of the Q4 performance and outlook for the new Agilent. However, I'd like to highlight three major accomplishments during the quarter. First, we completed the separation of the company. The Keysight and Agilent teams executed a flawless separation of the company without impacting the day-to-day business of either company. With the completion of the separation of the company, we have created two companies with greater strategic and management focus, with each company well-positioned for growth and long-term shareholder value in their respective markets. Second, during the quarter, Agilent retired an additional $500 million of debt, to maintain our leverage at a level consistent with our current investment grade rating. Third, we named a new CEO. In September, we announced that Mike McMullen had been named Agilent’s President, Chief Operating Officer and CEO-Elect. Mike will become CEO on March 18, 2015, the day of the Annual Shareholder’s Meeting. With the separation now complete, this is the perfect time to name the new CEO for the new Agilent. Mike and I are working to ensure the transition is smooth and seamless to the organization, customers and investors. I will now turn the call over to Mike. Mike McMullen : Thanks, Bill. I’d like to share some of the details behind the quarter’s results. To reiterate, LDA or new Agilent’s fourth quarter revenues came in at $1.04 billion, or 3% growth year-over-year. Unfavorable currency, lower NMR revenues and late orders drove the difference from August’s guidance of $1.08 billion at the midpoint. As a reminder, in October, we announced our exit from the NMR instrument business. We are no longer taking NMR instrument orders and our current backlog will ship in 2015. Excluding NMR and currency effects, each having a negative 1 percentage point impact on reported growth, revenues grew 5% and orders grew 8% compared to a year ago. Now, turning to results by end market and growth on a reported basis. Within the Life Sciences and Applied markets, Pharma/Biotech was up 5%, driven by equipment refreshes from large and mid-size pharma customers, and continued specialty pharma demand. Life Sciences Research or academia and government was up 4% again this quarter, driven by improved government spending in the U.S. and China. Government spending particularly in the U.S. and China contributed to growth in Forensics up 6%, Food Testing up 4% and Environmental up 2% over year ago. Chemical and Energy revenues remained relatively flat, growing 1%. Pressure from reduced crude oil and natural gas prices, and continued softness in the industrial market slowed demand. Turning to Clinical and Diagnostics, revenues grew 1%, with solid demand for genomics products related to cancer applications and Mass spec for therapeutic monitoring offset by lower Pathology revenues. Geographically, economic recovery and government spending continued to drive growth in the Americas, up 6%. Asia excluding Japan grew 5%. We saw low single-digit growth from China, led by Life Science Research, Environmental and Food Testing. Europe was flat in the quarter. Continued strength in Eastern Europe and the Middle East was offset by softness in Western Europe. Japan declined 6% due to currency, but grew modestly on a local currency basis, primarily in Applied Markets. Turning to the business segments within LDA, Life Sciences and Diagnostics Group revenues grew 2%, while orders were up 3%. Excluding NMR, revenues were up 4% and orders were up 6%, with strong growth across LDG’s portfolio except pathology. Operating margin for the quarter was 17.5%, down 170 basis points from last year, but up 180 basis points from the previous quarter. Excluding the impact of NMR and FDA incremental expenses, LDG operating margin would have been 20% in Q4. Our Life Sciences team introduced a number of key new products in the past quarter. The 1290 Infinity II LC System sets a new benchmark in analytical, instrument and laboratory efficiency. OpenLAB CDS, Chromatography Data System, will fully support 1290 Infinity II LC System and provides one of the most comprehensive software control systems in the industry. We introduced ClearSeq AML, which is the first in line of NextGen sequencing panels developed for cancer research. And our new family of Sure Select Focused Exome products provides the most comprehensive and high performance NGS solution for post natal research on high throughput and benchtop sequencers. Turning to the chemical analysis group, revenues grew 5% while orders were up 8%. Operating margin for the quarter was strong at 24.5% flat a year ago and up 120 basis points from Q3. Our chemical analysis team also had a number of key new product introductions, including a new 7010 Triple Quad GCMS and 7200 GC/Q - TOF which expands pesticide screening beyond the capabilities of any other GC/Q - TOF System. We strengthened our industry-leading atomic Spectroscopy portfolio with the launch of the Agilent’s 5100 ICP-OES. This sets a new standard for optical emission spectroscopy and has been extremely well received by the market. Among its many innovations, analysis can be run 55% faster using 50% less gas per sample than competitive systems. In addition, the design changes have led to a 20 percentage point gross margin improvement over the previous product. As we launched the new Agilent and enter the new fiscal year, we have free focus areas for the company. Grow organically at the high-end of the market, aggressively expand operating margins, deploy capital for long-term shareholder value. First, we will focus on sustaining share growth within the core analytical lab. We will continue to bring innovative new offerings to the marketplace and expand our lab-wide services and consumables with a truly differentiated customer experience. We will leverage this strength in Analytical Lab to drive growth in the fast-growing genomics, clinical research and diagnostics markets. Second, we will focus on aggressively growing our adjusted operating margins with our portfolio and order fulfillment transformation programs. We will leverage SG&A and R&D investments, and reduce cost dis-synergies resulting from the separation of Keysight. Keep in mind that fiscal 2015 is a transition year for Agilent. Year one cost dis-synergies are the highest following the company separation. And NMR and FDA remediation work will continue to weigh on our results. While we have a lot of work ahead of us, I have the highest confidence in our ability to meet Agilent’s long-term operating goals. Third, we will deploy capital for long-term shareholder value with expected return of $500 million to shareholders in fiscal year 2015. This includes a combination of cash dividends, approximately $135 million in opportunistic share buybacks. Turning to guidance, Agilent’s revenues for the fiscal first quarter of 2015 are expected to range from $1.02 billion to $1.04 billion or 2.2% reported growth or 4.9% core growth at the midpoint. We expect first quarter earnings per share from $0.39 to $0.43. For the full year, we expect revenue in the range from $4.12 billion to $4.18 billion and earnings per share from $1.68 to $1.78. Thank you for being on the call. I will now turn it over to Didier who will provide a more detailed discussion of Agilent’s financial results and guidance. Didier Hirsch : Thank you, Mike and hello, everyone. Bill and Mike have already covered Q4 orders, revenues and EPS. I will add that LDA’s 20.4% operating margin is in line with our volume-adjusted midpoint guidance. Also, please note that we spent an incremental $9 million in Q4 to address the FDA warning letter. Without this expense and assuming we had already exited the NMR related business, therefore saving $15 million on an annualized basis, LDA’s Q4 operating margin would be about 22%. Finally, we redeemed $500 million of debt in Q4 and generated $166 million in operating cash flow. This is lower than traditional for three main reasons. First, we paid $80 million for the redemption of the 2017 notes and also prepaid the current interest on the note. Second, pre-separation expenses amounted to $70 million. Third, we paid $41 million in taxes related to the spin. Also note, that we booked mostly non-cash charges related to the exit of the NMR-related business of $68 million. I’ll now turn to the guidance of fiscal year 2015. Our fiscal year ‘15 revenue guidance of $4.12 billion to $4.18 billion assumes the economy will pick up moderately in the second half of our fiscal year. At midpoint, our year-over-year growth will be 2.5% on a reported basis but 4.9% on a core basis, the difference due to currency. We project fiscal year ‘15 EPS to range from $1.68 to $1.78 with a midpoint of a $1.73 as per our October 17 guidance. As you update yours model for fiscal year ‘15, please consider the following, First, annual salary increases will be less effective December 1, 2014. Second, stock-based compensation would be about $65 million. As we frontload the recognition of stock-based compensation, the Q1 expense would be about $26 million. Third, depreciation is projected to be $100 million for the fiscal year. Fourth, net interest expense is forecasted at $63 million and other income at $29 million. About $26 million of other income comes from services billed to Keysights, $12 million for IT services in the first half and $14 million for ongoing rental income. And as we have previously communicated, the corresponding expenses are reflected in operating profit. So you will need to increase the reported operating profit with the value of those services billed to Keysight if you want to make year-over-year comparison of our operating profit. Fifth, the non-GAAP effective tax rate is projected to be 20%. Sixth, we plan to return approximately $500 million in capital to shareholders, including $135 million in dividends and $365 million in opportunistic buybacks. The buybacks will occur from time to time on the open market with consideration given to our stock price. Seventh, for purpose of our EPS guidance, we have assumed diluted share count of 340 million shares. But we could achieve lower diluted share count of about 335 million shares, would we execute the buyback program in full. Eight, we expect operating cash flow of $600 million and capital expenditures of $120 million. The operating cash flow reflects post separation expenses of $50 million and separation related taxes of $40 million, both will be pro forma. Finally, moving to the guidance for fourth quarter, we expect Q1 revenues of $1.02 billion -- of $1.02 billion to $1.04 billion and EPS of $0.39 to $0.43. At midpoint, revenue will grow 2.2% year-over-year, or 4.9% on a core basis, the difference again, as a result of currency. As customary, Q1 EPS is still negatively impacted by the December salary increase, the front-loading of stock-based compensation and the increase in payroll taxes due to the disbursement of the variable and incentive pay of the previous semester. With that, I will turn it over to Alicia for the Q&A. Alicia Rodriguez : Thank you, Didier. Patrick, will you please give the instructions for the Q&A? Operator : [Operator Instructions] The first question comes from Doug Schenkel with Cowen and Company. Your line is open. Unidentified Analyst : Hi. This is [Ryan Burke] [ph] filling in for Doug. Thanks for taking my questions. It appears as though that China pressures haven’t completely subsided despite the low single-digit growth in the quarter. From your commentary, it sounds like it outpaced your expectations, but you sounded very positive on the spending environment in China in the quarter. Can you talk about what are you seeing in the marketplace, as well as what relative growth from China is baked into your current 2015 guidance? Mike McMullen : Brian, this is Mike. I will field the question on China. So, I guess, I think your read through in the commentary is correct. We saw low single-digit revenue growth, but we are encouraged by the overall strength of the order performance in the quarter with 7%, 8% order growth for the quarter. And what we saw happening in China was a return to levels of improved, albeit still subdued government spending, which fueled our growth in life sciences research, environmental testing and food businesses. Unidentified Analyst : Okay. Thank you. And then just maybe one high-level question. So over the past few years you have invested pretty materially above your peer group in terms of R&D for the LDA segment. How should we assess the related return on investment looking forward and more specifically where do you expect to pick up share and at what pace? I know you mentioned in some presentations early in the year, you are beginning to leverage some of the R&D investments in 2015. At what point should we think about R&D starting to become maybe a lower percentage of sales? Thank you. Mike McMullen : Just a follow-up commentary and the question, again, this is Mike. Relative to the comments you saw in my narrative in my early comments, we talked about leveraging the investments we’ve made in R&D. In particular, we have invested quite heavily to build our portfolio out in the life sciences space, and we've also invested to build out a sales channel, focused on our life sciences’ customer base. So you would expect that we continue to be able to outgrow the market in these parts of the portfolio. In particular, I would tell you that we had real strong strength in our separations, our chromatography and mass spectrometry business in the fourth quarter across liquid separations, gas phase separations and the metals analysis side of the business, ICP-MS. So, I think those core product categories would continue to fuel above market growth and has been a recipient to a lot of our investments that we talked about earlier. Unidentified Analyst : Okay. Thank you. Operator : Our next question comes from Tycho Peterson with J.P. Morgan. Your line is open. Tycho Peterson-J.P. Morgan: Hey. Thanks. Maybe just a follow-up on the leverage question. As we are thinking about operating margins, either Mike or Bill, can you maybe just talk about, give little bit more color on some of the drivers of margin leverage, particular on the order fulfillment and portfolio aspect and do you in fact expect SG&A leverage in ‘15 as well? Mike McMullen : Yeah. So, I think, this is Mike. There is three drivers behind the overall operating margin improvement and as you may have seen already, we committed to a three point operating margin improvement over the next three years, hitting 22% by 17%. And as we've also indicated, FY ‘15 is a significant transition year for us in terms of working all the synergies but also significant in terms of underlying improvement to the operating performance of the company. And the three key components of our margin improvement plan. One is the portfolio transformation that I highlighted earlier in my comments. And one example of that is the new ICP-OES, which through new product design and capability has a 20 point better gross margin position than its predecessor product. So you will continue to see us coming to market and driving, not only topline growth with improved offerings, but also a better margin structure just based on the inherent design and platform design of the product. The order fulfillment transformation program is still centered on what you saw at the March Analyst Meeting last year, where Henrik is driving overall consolidation of manufacturing sites and more importantly a drive towards lower cost of our supply chain, as we have moved our manufacturing into low-cost parts of the world, such as Penang, Malaysia where the next phase of that program is to start to move our material supply chain, which as you know, represents actually a higher element of cost of the manufacture products. And the third aspect of the plan is SG&A and R&D. R&D cost structure leverage and you will start to see in FY ‘15, particularly on the SG&A line, as we leverage that and it starts to decline as percent of overall revenue, again, adjusting for the synergies will absorb in year one. Tycho Peterson-J.P. Morgan: Okay. And in the comments you called out some of the pathology headwinds, can you maybe just talk a little bit about when you think those bottom out and how much of the headwind was impacting the quarter? Mike McMullen : If you don’t mind, I think I will pass this question over to Fred. I’m so sorry. I’m going to pass this over to Fred Strohmeier and Fred, the question was related -- the question was related to the pathology business. When did you see the headwinds perhaps turning on that business, Fred? Fred Strohmeier : Yeah. Thank you for the question. I think in pathology, we are seeing at the moment a flat revenue, closer if you look through the last two quarters and I think particularly in Q4, we have a tough compare in Europe. I think we are seeing a slowdown in the U.S. and Europe and due to healthcare reforms, lower investment and also consolidation of lapse and also in AsiA - Pacific, stricter regulatory controls. And internally as Mike already mentioned, we are seeing also some reflection of our FDA program on the revenues we are seeing in Q4. But we are optimistic that we are able to turn the situation around for next year. The companion diagnostic is doing quite well, so it’s growing nicely, OEM is on plan, OEM and other reagent partnership is on plan. And what we are hearing from our customers in the fields concerning on this and our products is pretty encouraging. Tycho Peterson-J.P. Morgan: Okay. And then lastly, you left M&A out of the capital deployment discussion, any reason you wouldn’t consider tuck-ins that became available? Mike McMullen : Yeah. Our focus really in FY ‘15 is really to launch the new Agilent Technologies, really go after some of the operational opportunities. We are improving I discussed earlier. And as you heard from Didier and myself, we do have a plan to return capital to the shareholders this year. Tycho Peterson-J.P. Morgan: Okay. Thank you. Operator : The next question comes from Isaac Ro with Goldman Sachs. Your line is open. Isaac Ro- Goldman Sachs : Good afternoon. Thank you. A question for you on capital allocation. There was obviously a focus on shareholder returns, as it relates to repurchasing dividend but wondering if you can comment a little bit about your interest and appetite for M&A. if we look across the portfolio, there are some gaps. My view particularly in diagnostics and genomics where you theoretically deploy some investment dollars to round out your offering, so just curios, how are you thinking about M&A in the near to medium-term? Bill Sullivan : I will go ahead and take those questions. So, as I mentioned earlier, we’ve made a sizeable bet in our Dako acquisition and we think it has a tremendous amount of promise working through some short-term operational challenges. So our focus right now for FY15 is not to pursue large M&A but really to focus on -- realize the potential of the acquisition we have made. Isaac Ro- Goldman Sachs : Great. And then if I could just ask one question on the shorter-term basis regarding some of the regional trends. I think you mentioned some softness in, I think Europe. And then in food safety, I think it was the mid-single-digit growth rate. And curious on the latter item in particular, it seems like in China, the industry in general this quarter has seen a little bit of pressure, mostly tied to some reshuffling in the government, though hopefully be a transient issue. So I was just wondering if number one, you share that view on China, and then secondly in Europe, can you maybe give us a mark-to-market on how that trended at the end of the quarter? Thank you. Bill Sullivan : Sure, Isaac. So let me make some comment first on China. Just back about six weeks ago from visit at China and how the opportunity to kind of see firsthand and draw my own conclusions on what’s happening in the marketplace, and I think a characterization is spot on in terms of there's been a significant reshuffling of ministries within the food safety arena. And I think it's a temporal slowdown that we’ve seen in this space. And as we pointed to an earlier call, this actually had a pretty significant pull down in terms of overall order growth rate. We did see in the fourth quarter some initial signs that we maybe transitioning to some higher levels of growth in the food space in China. I would caution it is still subdued but is trending in the right direction. So I think this is clearly an area of great interest in Chinese government, but they also want to make sure that they're investing efficiently. And I think they had drawn the conclusion they had way too many ministries kind of overlapping one another in terms of jurisdictions. So they are getting themselves better organized, but I do believe you'll start to see a return to growth and investment in the food space. I would also add that the prospects for investment in the environmental testing in life science research are also bullish longer-term in China. The pull-through on Europe is continued sluggish conditions in Western Europe. But as we report the number, our European business also includes what we call the idea or Eastern Europe part of the world as well as the Middle East. And despite some of the political noise that you see in terms of what's going on in the Middle East, our business is holding up quite well there and has continued to be a area of strength for us. Isaac Ro- Goldman Sachs : Got it. Thanks a bunch. Operator : Our next question comes from Dan Arias with Citigroup. Your line is open. Dan Arias-Citigroup: Good afternoon, guys. Thanks. Didier on the warning letter for Dako manufacturing with the $9 million this quarter, is that issue now behind you from a P&L perspective or should we look for some of that to carry over into 2015? Didier Hirsch : No, we are planning in, in our guidance. We are including some further expenses throughout 2015, obviously from a lower -- going lower after Q1. Bill Sullivan : But the expenses will be flat in Q1 and potential in the Q2 from the Q4 run rate that we have. Situation in Denmark is complicated. There have been quite a few warning letters more than us inside of Denmark. And as a result of that, we've had to source resources from other parts of Europe and even from the U.S. to help out on the mitigation. And so the expenses will continue into Q1. Dan Arias-Citigroup: Okay, thanks. And just a follow-up, wondering if you can comment on manufacturing and how that factors into gross margin improvement? I guess if you look across next year to with what you have going on, how much of gross margin gain that you think you'll see is expected to come from what you might consider fix for a particular issue, whether it would be NMR or Dako versus what you just come from more opportunities to become incrementally more efficient? Mike McMullen : Yes, it’s a great question. And this is Mike. And that’s why I pointed to three aspects of the programs under operating margin, the supply chain transformation which you’re referring to, the portfolio transformation and then our rationalization and leverage of SG&A and R&D investments. I think it's probably legal spread across the three. It’s a little bit hard to quantify. Dan Arias-Citigroup: Got it, okay. Thanks very much. Operator : Our next question comes from Ross Muken with Evercore ISI. Your line is open. Ross Muken- Evercore ISI : Hi, good afternoon, guys. So can you just give a little sense on the order pacing? You talked a little bit about some late orders and such. And just give a sense for how if the NMR announcement also had any impact on any of the other legacy spectroscopy businesses? Mike McMullen : Hey, Ross, this is Mike. Thanks for the question. And to maybe address the last part of your question first. No impact at all on the other aspects of the portfolio growth rates from the NMR announcement. In fact, we had a really fantastic quarter in terms of topline order growth in our spectroscopy business fueled by introduction of the new products I mentioned to you earlier. In terms of the overall order flow through the quarter, we were actually quite pleased with how the quarter finished. Orders coming in higher than forecast, and so always bit hard to project exactly what your win loss ratios maybe in a particular deal situation, but obviously we are pleased with the win loss ratios where we’re higher than we had forecast. And new products were above targeted ramp rates. And then as I mentioned earlier, the China orders were solid at 8%. So I think there was a geographic dimension as well to our order flow. Ross Muken- Evercore ISI : Great. And maybe if you guys could just give us sort of a first flush of where the pro forma balance sheet is now, obviously a number of moving parts in the quarter in terms of debt paid out and how think about the optimized kind of leverage ratio for this business? Mike McMullen : Well, right now, as I said in my comments that the leverage in the company is consistent with our present credit rating and we feel very comfortable with where we are between BBB and BBB+. And I will remind all of the investors in the last five years, we have returned 62% of our free cash through dividends and share repurchases. So the framework of where we are is I think very, very solid and we have a proven track record of tax effectively returning excess cash to our shareholders. Ross Muken- Evercore ISI : Thanks. I was just hoping maybe because we didn’t get any pro forma balance sheet, et cetera. If you could just give us a sense of where kind of the net cash or the leverage is just on a rough dollar basis? Didier Hirsch : Absolutely. So for Newedge loans, we have about a little bit over $2.2 billion in cash and $1,650 million in that. And as Bill mentioned, our adjusted leverage is about little over 2.1, 2.2 adjusted debt to EBITDA ratio. Bill Sullivan : And the large percentage of that cash of course is trapped overseas. Didier Hirsch : Yes, 80% of the cash is trapped overseas. We have about $400 million in the U.S. The rest is trapped overseas. Ross Muken- Evercore ISI : Great. Thank you, guys. Didier Hirsch : Sure. Operator : The next question comes from Tim Evans with Wells Fargo Securities. Your line is open. Tim Evans-Wells Fargo Securities : Hi, thank you. I wanted to return to the diagnostics business for just a second. You guys have forecasted that you expect that market to grow 8% to 10%. This year you certainly didn’t get there. And obviously there are some issues happening, including the warning letter but also some things that are out of your control on a regulatory front and reimbursement front. What gives you the confidence that you can get back to that high-single-digit growth rate which I guess is kind of what it would take to get to the appropriate hurdle rates that you need on a Dako acquisition? Bill Sullivan : All right. Do you want to take that Fred? Fred Strohmeier : Thank you. I think this is a very good question. I think first of all, I believe, we will get back to the goals by the promise we had made over the last couple of quarters to automate the pathology business, I think we are really good on the consumables piece, I think the automation will be key of it -- will be key, so Omnis will be one of the element. And we have seen a couple of really good responses in the meantime. One of the biggest regions just as an example in Denmark has picked Omnis as the prime diagnostic tool in order to cancel diagnostic, number one. Number two, I think we are also making really progress with our new products we have introduces like the SureFISH, which has been growing in this quarter about over 100% really significant. We have a couple of new products on the market like the ClearSeq AML, this is leukemia cancer diagnostic tool, which is looking at cancer variations and cancer research that is the new HER2 FISH-IQ on Omnis available in the meantime, which allows another set of cancer diagnostic test. So from the product perspective, I think, we are fueling the pipeline in order to grow the business overtime. Tim Evans-Wells Fargo Securities : Okay. And then just one quick housekeeping question for Didier. When did those transitional services for Keysight and how exactly do they wind down post 2015? Didier Hirsch : So the IT services will wind down by the end of -- before the end of our fiscal year -- first half of fiscal year ’15, so by April. And then the rental services, those are about $15 million and those are ongoing. And by the way, Keysight, we are also buying from Keysight an equivalent of the $15 million also of rental services. I’ll remind you the way we want about splitting our real estate is more less balance, one of the two companies ended up being the landlord and in each side there was one of the two companies ended up being the landlord and subleasing some of the space to the other company if needed. And the two things offset each other will be receiving of about $15 million of rental income and we’ll pay about $15 million of rental expense to Keysight. Tim Evans-Wells Fargo Securities : Okay. Thanks. Operator : Our next question comes from Steve Beuchaw with Morgan Stanley. Your line is opened. Steve Beuchaw- Morgan Stanley : Hi. Good afternoon. Thanks for taking the questions. I wonder if you could build on, some of the commentary that you made here on the call, regarding some of the new product launch traction? Could you give us a sense in fiscal ’15, not necessarily byproduct, but maybe with the focus on geographies or customer types, where future product launches will be targeted most directly? Mike McMullen : Yes. Sure, Steve. So this is Mike. I’ll provide some color on some of the instrumentation around our separations and mass spectrometry offerings, and then, Fred, I’d ask you to jump in and talk little bit about some of the diagnostics and genomics products that come out. So, as I mentioned in my comments, in our core liquid chromatography, our leading platform the 1290 was replaced by an even stronger platform the 1290 Infinity II series. This allows the capture opportunities in Pharma, Biotech and across the implied markets space. So this is a broad-based tool that will go across all of our key end markets. The GC Triple Quad, the GC/Q - TOF, the mass spectrometry products that discussed are heavily focused towards food safety, pesticide analysis, environmental testing, but also increasing adoption in the Life Sciences Research arena as well. And then, finally, the new ICP-OES is targeted toward the Environmental, Pharma and Material Science space and in terms of -- that would be in terms of the end market usage. Obviously, we’re encouraged by what we saw as an uptick in growth in China because these products will play very strongly into this geography, as well as replace the market in the U.S. and Europe. And Fred, maybe some additional comments on the LDG side? Fred Strohmeier : Yeah. Maybe, I just made a couple of comments on the new products on the pathology side. I think, just what I want to mention is, once we are improving the situation around the FDA letter, that by itself will stimulate some further growth, number one. Number two, I believe it is very important that we are launching products in where we are using the synergy with other things we have in our product line, which are the genomics product. But I think putting those things in a meaningful way together that we’re creating work flows which make a difference to the customer is one of the themes for next year. But I think a couple of those things we have started launching a new PCR, qPCR instrumentation, which will be in this market. We have launched some editing tools of synthetic biology or genome editing tools for synthetic biology the CRISPR/Cas solution, which come to the markets and is introduced to the market, which will pick up next year. Steve Beuchaw- Morgan Stanley : Thanks. Very helpful. And then one for Didier on currency. Historically, the company has had a pretty effective natural hedge, so the translation from the topline into the P&L was relatively muted. Is that still true for new Agilent? And if not, are there any currencies that we should look out for as potentially having an impact on margins? Thanks so much. Didier Hirsch : Yeah. It is still true. We have only one of the smaller flow through I would say of longer peer group, about -- with the current mix about 20% to 25%, so for reduction of a dollar in the topline $0.20 to $0.25 impact on the bottomline. It is not zero, even though we are structurally heads because we have a presence, well right presence. And we also have our financial hedging, but the financial hedging doesn’t provide one full year. So it really covers 100% of the coming quarter and then 75%, 50%, 25%. But overall, we believe, we are properly hedged knowing that the hedges, the financial hedges cannot really cover you forever. And then in terms of the mix, it’s clearly -- our flow through is even smaller in Europe for example where we have a strong presence with only 10% versus Japan where we have less of the presence. And therefore, an impact on the topline will not be totally offset by an impact to OpEx and cost of sales. So there is a mix difference, but on the present mix, it's about 20% to 25% flow through. Steve Beuchaw- Morgan Stanley : Very helpful. Thanks, everyone. Operator : Our next question comes from Paul Knight with Janney Capital. Your line is open. Paul Knight- Janney Capital : Good morning. As I do the back out on the capital redeployment, you're talking maybe 5 million decline in shares outstanding, which I think implies $165 million share comp number. Is that share comp number a little high because of the spin? And what should that share comp number be? Mike McMullen : The math is a little bit complicated, but the speed is pretty much has no impact on our share count. What you have to consider every year is that the share count evolves because of grants of RSUs or long-term performance plans or exercise of stock options or the employee stock purchase plan. It also changes with the changes in valuation of our stock price or our TSR versus our peer group. And then we do buyback shares, so it’s a little bit complicated but no impact from the split. Paul Knight- Janney Capital : Didier earlier in the call, you had mentioned that you kind of were talking about a 22% pro forma operating margin net-net. Do you think you’ll be talking 22% and higher same discussion as FY ‘15 rolls out? Didier Hirsch : So no -- Mike mentioned where we are extremely committed to improving our operating margins to 23% by 2017. But this is three years plan. Q4’s operating margin is always stronger because it’s where we have to realize the highest volume and the number that I have provided excluded the impact of NMR. I assume the NMR is exited and as Mike mentioned, we want to exit NMR until the end of 2015 and also it’s assumed it’s basically backed out the expenses related to addressing the FDA issues. And as we have also talked, we all spend money in 2015 to continue to spend money to address those issues. Paul Knight- Janney Capital : And last Mike, what did you see or do at chemical analysis that you think you can do with the rest of Agilent? Mike McMullen : Thanks Paul. Appreciate the question. And I think its really -- Bill and I have talked about this as well, which is to really take a view of the focus bets that you are going to make, be very selective on the bets you make. And I try to highlight a few of those earlier. And then drive an operational excellence around those focused bets and then couple that with what we’ve done historically which was meaningful M&A in the variant deal, for example. But I really think it’s all about picking right focus bets getting the organization aligned on those focus areas then drive in operational excellence around the activities. Paul Knight- Janney Capital : Thank you. Operator : Our next question comes from Miro Minkova with Stifel. Your line is open. Miro MinkovA - Stifel: Hi Bill. Hi Mike. Hi Didier. Let me just start with the question on the academic markets. It seems like you are seeing some improvement there for the second quarter interval. I was wondering if you could comment if you’re seeing the funds flow in the second half of the year, the calendar year? And you do have unlike others in the industry, you have had the month of October in your quarter. So I am wondering if it is too early to speculate on a possible year end budget flush? Mike McMullen : Yeah, this is Mike. I’ll jump in with my perspective then Fred, feel free to add your view as well. But I think the answer to your question, Miro, I think it’s too early to call a year end budget flush, if you will. We were encouraged by the results but keep in mind the U.S. government closes off at September a lot of their spending. And we also had a closing of our own sales cycle at the end of October, which sometimes doesn't always mimic the spending patterns of our customers. So while encouraged, I think it’s too early to call a significant global recovery here in this segment. And Fred, I don’t know what you are hearing from your field teams. Fred Strohmeier : Yeah. Our field team is pretty consistent with what I'm hearing. I think academia and government markets remain soft even so we are seeing a gradual improvement. And the result we are seeing at the moment are impacted predominantly by NMR as such because this is going mainly through the academia and government market, we see a funding growth in China as Mike pointed out the results are showing that. So this is certainly impacting the growth in next year. We see a stable funding in SAPK. Japan is weak and maybe remains weak given in all of the missing stimulus from last year. You are seeing demand in HPLC, GC-MS and LCMS, what’s really hard to sub checks and this is probably driving some of the growths next year, cell biology, stem cell research and next generation sequencing. These are areas which will drive some of the growth. NaH is spending about plus 2%. This year, hopefully, we see something like that next year as well. Europe already, we heard about it, very tight. And if you look to the distribution of the countries, it’s a completely mixed bag. China reorganizing even so, I talked about the growth is reorganizing the academia of the Chinese Academy of Science, which certainly also will have some impact on the spending pattern and we talked about Japan already. Miro MinkovA - Stifel: Okay. Thank you. And secondly on the gross margin it did decline slightly year-over-year, I was wondering if you could help us understand the puts and takes? And for the neoadjuvant going forward, despite the dys-synergies that you have this coming year, can you drive margin, gross margin expansion in ‘15? Mike McMullen : Didier, why don’t I make some initial comments and then you can build on it. So if you look our year-on-year gross margin, I believe the FDA remediation work is part of our cost to sales number. I also would point to a change in our overall business model. We haven’t talked about in this call yet. But with the creation of the CrossLab services, consumer informatics group, you are going to hear me talk a lot more about what’s going on across the enterprise in our laboratories and our services business is becoming an increasingly larger part of the company. It’s got a very nice operating margin story. But as the mix changes, it does have a different gross margin structure relative to instrument business. So when you look at just at the gross margin line, you are going to see a mix effect of the increasing portion of our business coming from services. Didier, I don’t know if there is something else you would add to that? Didier Hirsch : Yeah. I mean, in terms of the gross margin, I will say, I mean, the other negatives you mentioned are the dis-synergies and as we already talked about the impact of currency on a year-over-year basis. And so that would be the main reasons why on a gross margin bases, on an adjusted operating margin basis, we are going to see some slight improvement year-over-year even with all those negative, all those headwinds. But on the gross margin, it’s going to be slightly down year-over-year. Mike McMullen : Yeah. I don’t know whether I really clearly answered the other part of your question. This is Mike again, which is we do see, we have the ability to improve our overall gross margins and move forward because obviously we are going to get the FDA remediation work behind us. We talked earlier about the new products coming out and as well as our supply chain transformation. So we do believe that we can improve our overall gross margins, but we are also working through some one-time transition challenges around NMR, the FDA industry, the separation, if you will to synergies. Didier Hirsch : Currency has a particularly big impact on gross margins because it’s offset by the lower operating expenses. So when I said, $400 million, you have net-net $20 million to $25 million impact to the bottom line. The impact to the gross margin is more significant and then this offset in OpEx. Miro MinkovA - Stifel: Okay. Sounds good. Thank you very much. Operator : The next question comes from Richard Eastman with Robert W. Baird. Your line is open. Richard Eastman-Robert W. Baird: Yes. Good afternoon. Mike, could you just talk for a minute or two about the petrochem energy chemical markets? I think you mentioned they were up 1% in the quarter and quite frankly all year, they’ve been low single-digit. But maybe, what's your assessment there as we move into ’15, are we in early innings of our commodity driven down cycle there in demand, or were orders and orders better in the fourth quarter here heading into ‘15? Mike McMullen : Yeah. Richard, thanks for the question. And this has been a -- I have to say, a segment of the market has been quite curious for me over the last several quarters because at the very macro level, you would expect to have seen stronger business here as you think about particularly United States where you’ve had lower feedstock cost coming down and some of our major customers actually taking about investment in the plant and infrastructure and new capacity in the U.S. So, I think what we saw in this most recent fiscal year, and a continuation of the quarter was continued challenges in industrial side of the Chinese economy where we haven't seen as much capacity been out of that we had seen in prior quarters. I believe the real wild card and this is why I think we’ll start to see some moderate return to growth in FY ‘15 in this segment is the replacement market in the private sector particularly in the U.S. The industry outside of the exploration side is actually finding itself much more profitable, the age of the assets and equipment has really moved up over the last several years. So we think that the combination of the aged assets plus the lot of our customers, who are going to need to move on to new data system because of the obsolescent by Microsoft of several of their core operating systems. I think this would point to an improved replacement market in FY ‘15 albeit I said it’s been much slower to develop than I had anticipated. Richard Eastman-Robert W. Baird: Okay. All right. And when I look at the CAG business and LDG business heading into ‘15 and I know the core growth is kind of -- at the midpoint is 4.9%, call it 5%. Is the LDG business expected to grow above that number and CAG kind of low single digits. So how do you see the mix by end market playing to that 5% core growth number? Bill Sullivan : Richard, a great question. I think you really picked up the insights we were trying to share on the call today which was the strength of the underlying core business you strip out such as the business such as NMR. So Fred and I haven’t compared exact growth rate assumptions between the two segments. But I would say in general, we’d expect both to enjoy growth. But we’d expect to see high levels of growth in the life sciences side of the house just given what we seem to be a stronger backdrop of pharma, biopharma, some government spending and just our overall share position in those segments. And again also keep in mind that part of the story here isn’t just instruments and technology, part of the story here is the services business. And in fact, after Fred makes a few comments, I’ll invite Mark, you’re not going to get away from this call without making some comments on your first call to talk about what’s going on the pharma space, life sciences relative to the services business. So Fred, if you would, maybe just add a little bit additional color. Fred Strohmeier : Yeah. I mean, the pharma industry is only at the moment growing in the area of around 3% to 5%. I mean we are seeing a lot of instrument refresh as Mike explained it out. That’s particular in pharma, a huge opportunity for services and consumables. The most growing segment within that is at the moment the biological -- biologics, which is growing about 18% and the overall size is about 20% of the entire pharmaceutical market. I think we are well-positioned with all products. Mike has just highlighted before our core products in LC, LC MS. So I think this is fueling the growth. The refresh in this business I think it’s not as homogeneous as ours. I mean, Americas has a difficult compare because we had a good business last year. I think Europe is picking up at this point in time also on generics. So overall, I think this is one of the drivers and academy and government you talked about before, I think this is also certainly slightly picking up. So from that perspective, this should fuel across the next year. Richard Eastman-Robert W. Baird: And Mark, just closing off this question, just your view on what's going on in the services side in pharma in particular? Mark Doak : Sure, Mike. And as you alluded to, I think we see both the areas across CAG and LDK being strong, but in the pharma area in particular continued strong demand for our enterprise services and those particularly targeted at helping customers with operational efficiencies. And to that end also, if you add the consumables side of it too, a continued focus on our biocolumns and sample prep area that I think heading into next year we will continue to service well. Richard Eastman-Robert W. Baird: Thanks. Does the op profit contribution of flow through today to Agilent’s P&L, is it north of 20% on the services side? Bill Sullivan : I don’t know whether we’ve disclosed the actual operating percentages externally, but I would just say we’re in the range of our instrument business. So it’s not a drag on company performance. You want to see us grow our business here. Richard Eastman-Robert W. Baird: Okay. And then I am sorry one last question, the NMR business year-over-year in the fourth quarter, was there a revenue delta that was meaningful fourth quarter of '14 versus fourth quarter of '13? Bill Sullivan : Do you remember the year -- Didier do you remember the year on year change? Didier Hirsch : On a year-over-year basis, it’s about -- there a 22% reduction in revenue for the full year and on the quarterly basis, it was 49%. Richard Eastman-Robert W. Baird: Was down 49% year-over-year? Didier Hirsch : Revenues, yes. Richard Eastman-Robert W. Baird: Okay. Thank you. Operator : Our next question comes from Derik De Bruin with Bank of America Merrill Lynch. Your line is open. Rafael TejadA - Bank of America Merrill Lynch : Hi. Good afternoon. It’s Rafael in for Derik and thanks for the questions. Just first on 2015 guidance, just wondering what the expectation for growth is by geography on the Americas, Europe, AsiA - Pac and China as well? Thanks. Mike McMullen : Rafael, this is Mike. Just make a few comments. I think you first of all saw in Didier’s narrative, he talked about an overall gradually improving economic environment in the second half of ’15, that’s sort of the backdrop behind my comments. What I’m just going to share with you at this general trend, I wouldn’t want to be able to present myself with being able to predict exactly the growth rates in every of the geographic markets. But the backdrop of our forecast beyond this gradually improving second half environment in ‘15 is we see an improving U.S., China and India, which we’ve not talked about today, continued weakness in Western Europe, Brazil and Japan. So what's really driving this is the overall continuation of the improvements in the U.S., China and India marketplace. Rafael TejadA - Bank of America Merrill Lynch : Okay. I appreciate that color. And just after exiting the NMR business, how should we think about the company's portfolio of review strategy and whether the company's planning on exiting on the other product lines in the near-term just thinking, I guess bigger picture of how content the company is with its existing portfolio? Thanks. Mike McMullen : Sure. Great question. As Paul asked me earlier, when we talked about the experience I had, on the chemical analysis group was, we always constantly reviewed where our portfolio was, was it meeting expectations, did we see a path for to a viable business. So that discipline that we’ve had in the prior years in the chemical analysis business that will be carried forward with the new Agilent. And I think you saw one example of that with our decision around NMR, which we really didn't see a path forward to a viable attractive business for Agilent. I’m very satisfied and happy with the portfolio we have. But what I will commit to is a continued rigorous ongoing review of our portfolio relative to our expectations. Rafael TejadA - Bank of America Merrill Lynch : Okay. Thanks. I will jump back in queue. Operator : Our next question comes from Justin Bowers with Leerink. Your line is open. Justin Bowers-Leerink: Hi. Good afternoon. Just in terms of the NMR exit, can you frame that in terms of the duration of the topline impact and then also the cost too coming out of that business? Didier Hirsch : The topline from 2015 will not be fundamentally much lower than really what we've seen in 2014 because we do have a big backlog, not just NMR business, but also the OEM business that we exited one year ago, we would say, we still have backlog to flush for big part of 2015. And then, the bottomline impact we have indicated that it is on an annualized basis its about $15 million, next year it will be about $10 million opening profit improvements because of the exit and $15 million in 2016. Justin Bowers-Leerink: And then, in terms of the topline in 2016, are you -- and maybe even ’17, are you still going to be delivering orders there or? Didier Hirsch : No, no. We are -- we will be done in 2015 with flushing the backlog and we are not taking any order. Justin Bowers-Leerink: Okay. Great. And then just… Didier Hirsch : We are seeing instruments. Bill Sullivan : Yeah. Justin Bowers-Leerink: I am sorry. Bill Sullivan : That’s an important build to Didier’s comments. We will retain the profitable NMR service business, both in terms of -- making sure we have the business continuity for our customers, as well as an attractive business segment for us as well. Justin Bowers-Leerink: Okay. Great. Thanks. I’ll take the rest offline. Operator : Thank you. We have a question from Brandon Couillard with Jefferies. Your line is open. Brandon Couillard-Jefferies: Yes. Good afternoon. Didier, just one question for you, in terms of the free cash flow guidance implies about $480 million of free cash flow? I think, going back to the Analyst Day, you kind of pointed to more like a $620 million number? Can you just walk us through what the factors are there in terms of the delta in the free cash flow outlook? Didier Hirsch : Yeah. So, the $600 million of opening cash flow that we are projecting is after paying about $50 million of post-separation expenses and also $40 million of taxes related to the separation. So there is $90 million which will be pro forma, but there will be cash outlays in 2015. So really on the sustainable basis, you are talking $690 million. Brandon Couillard-Jefferies: So, it’s fair to say that those two numbers, the $90 million wasn’t contemplated previously at the Analyst Day? Didier Hirsch : Yeah. Because it was excluding the one-time items, really it was -- the sustainable cash flow contributions and we talked about 15% of revenues on an ongoing basis of three years period, excluding those one-time separation related items. They are both separation related items. Brandon Couillard-Jefferies: Okay. And one more on the NMR business, would you -- can you quantify the operating loss incurred from that business in ’14 for us? Didier Hirsch : Well, what happens is it will be misleading because it includes a lot of costs now basically absorbed from the share allocated from the shared services, but what we have stated this -- the exit will basically improve operating profit by $10 million next year and $15 million in 2016. Brandon Couillard-Jefferies: Fair enough. Thank you. Didier Hirsch : Thanks. Operator : This ends our Q&A session. I will turn it back to Alicia Rodriguez for closing remarks. Alicia Rodriguez : Thank you, Patrick. And thank you everybody for joining us today. If you have any questions, please give us a call in IR and we'd like to wish you all a good day. Thank you. Operator : Ladies and gentlemen, thank you for participation in today's program. This concludes the program. You may all disconnect.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,015	1	2015Q1	2015Q1	2015-02-17	2.662	2.482	1.799	1.813	2.54	22.44	23.24	Executives: Alicia Rodriguez - VP, IR Bill Sullivan - CEO Mike McMullen - President, COO and CEO Elect Didier Hirsch - SVP and CFO Patrick Kaltenbach - SVP and President, Life Sciences and Applied Markets Mark Doak - SVP and President, Agilent CrossLab Group Jacob Thaysen - SVP and President, Diagnostics and Genomics Group Analysts : Dan Leonard - Leerink Paul Knight - Janney Capital Tycho Peterson - JPMorgan Ryan Blicker - Cowen and company Dan Arias - Citigroup Isaac Ro - Goldman Sachs Brandon Couillard - Jefferies Jack Meehan - Barclays Steve Beuchaw - Morgan Stanley Tim Evans - Wells Fargo Derik de Bruin - Bank of America Richard Eastman - Robert W. Baird James Clark - Evercore Miro Minkova - Stifel Operator : Good day, ladies and gentlemen. And welcome to Agilent Technologies First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I’d now like to turn the conference over to Ms. Alicia Rodriguez, Vice President of Investor Relations. Ma'am, you may begin. Alicia Rodriguez : Thank you, Siad, and welcome everyone to Agilent's first quarter conference call for fiscal year 2015. With me are Bill Sullivan, Agilent CEO; Mike McMullen, President, Chief Operating Officer and CEO-Elect and Didier Hirsch, Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Patrick Kaltenbach, President of Agilent’s Life Sciences and Applied Markets Group; Jacob Thaysen, President of Agilent’s Diagnostics and Genomics Group and Mark Doak, Senior Vice President of Agilent CrossLab Group. 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. You will find an investor presentation, along with revenue breakouts and currency impacts, 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, Mike and Didier will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our Web site. 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. And now, I'd like to turn the call over to Bill. Bill Sullivan : Thanks, Alicia, and hello, everyone. Today Agilent reported first quarter revenues of $1.03 billion, an increase of 2% versus last year. Orders of $995 million were up 2% over year ago, operating margin was 17.2%, earnings per share were $0.41. Mike and Didier will provide further details about Agilent’s Q1 performance, but before I turn it over to Mike, I would like to take a moment to thank the investor community for your ongoing support of Agilent. As most of you know, this will be my last earnings call as Agilent's CEO. I am very proud of the accomplishments the team has made over the last 10 years. In 2005 we launched a strategic initiative to focus on our core expertise of measurement science and direct investments into the life science markets. We divested our semiconductor related businesses, SPG now Avago, our semiconductor test business Verigy, now part of Advantest in our solid state illumination joint venture, Lumileds with Philips. With the Electronic Measurement business is the foundation of a Company, we embarked on a journey to turn a hardcore electronics company into a life science and diagnostics company. As a result of the enormous effort of the team, excellent organic growth and several key acquisitions, we have grown our analytical instrumentations, genomics and diagnostic business from $1.4 billion to $4 billion per year-on-year revenue gaining the number two position in the marketplace. This success led to our recently completed split of the company and the creation of Keysight Technologies. The ability of the company transform itself while spinning off or divesting businesses is a testament to the skills and dedication of its employees. Of course the work of the new Agilent is not done. We need to manage through the added cost of the separation to synergy and drive our operating margins higher. We will continue our commitment to be a leader in our market and we must capture the returns from the investment we have made in the clinical and diagnostic markets. Mike and his team are well prepared to lead the Company forward. Mike has a proven track record of building very profitable, market leading businesses. Mike's new team has all the expertise, skills and drive to move Agilent forward. I believe our investors, customers and employees are in excellent hands. And now I’ll turn it over to Mike. Mike McMullen : Thanks, Bill. I would like to take a moment to acknowledge the incredible job that Bill has done leading this Company for the past 10 years. He not only transformed Agilent into an industry leader in life sciences, but is leaving us in a very strong position for our journey ahead. And on a personal note I could not ask for better partner during the CEO transition. Thanks Bill. Now I would like to share some additional insights on the transition and the quarterly results. The transition with Agilent is full swing. At the start of Q1 we announced the most expansive reorganization in our Company’s history. Three new business groups were formed to drive expansion in the core Analytical Lab and leverage its leading position to further penetrate the connected clinical research and diagnostics markets. We launched an Agile Agilent program to streamline and create a more nimble customer focused and faster moving company. In Q1 we delivered a strong start to the year, driven by the strength of our core Analytical Lab business. We delivered 2% reported growth or 6% core growth. We have strong profitability despite currency headwinds and challenges in our diagnostics and genomics business. Our Analytical Lab business, which represents 86% of the total Company is comprised of two recently reported business segments, the Life Sciences and Applied markets group and the Agilent CrossLab group. The Life Sciences and Applied Markets group LSAG brings together Agilent’s Analytical Laboratory instrumentation and informatics. LSAG’s revenues grew 2% reported growth or 5% on a core basis. Growth was broad based across most product lines and end markets. Operating margin for the quarter was 19.6%. Our growth continues to be driven by innovative new offerings. The Agilent 1290 Infinity II LC System which we launched in Q4 has been extremely well received by the market. This system sets a new benchmark in analytical instrument and laboratory efficiency. New spectroscopy products such as recently released FTIR, imaging hardware and software enhancements are accelerating research through improved workflows and opening up imaging to a wider range of non-spectroscopy customers. The new Agilent CrossLab Group, ACG which combines our Analytical Lab services and consumables business under a new Agilent brand delivered outstanding results. ACG revenues grew 5%, up 10% on a core basis. Growth was strong across consumable supplies, columns, sample prep and services. This reflects the innovative products we are bringing to market and the customer value proposition of our CrossLab strategy. We saw exceptional growth and demand for our QuEChERS sample prep kits. The introduction of RFID Inventory Management services were also well received by the market and customers. Operating margin for ACG was 20.7%. The Diagnostics and Genomics Group, DGG is comprised of three divisions. First, former Dako Company’s focus on pathology, companion diagnostics and reagent partnerships. Second, the genomics division includes our arrays, NGS Target Enrichment and our other genomic solutions. Third, the Nucleic Acid solution division manufactured synthetic RNA to be potentially used an active pharmaceutical ingredients. DGG’s first quarter revenues declined 6% year-over-year down 1% on a core basis. We enjoyed record placements of Omnis Instruments, strong companion diagnostic business and strong SureSelect NGS Target Enrichment business. However, both of our Nucleic Acid businesses were significantly impacted by manufacturing issues that were resolved late in the quarter. Operating margin was 0.5%, impacted by the lower revenues and the remediation expenses to last year’s FDA warning letter. Those remediation efforts are going well on track with our expectation to be completed by Q4. We continue to strengthen our portfolio. In January DGG launched a new generic sure pre-screen kit. This kit provides an innovative test for abnormal number of chromosomes. At the same time DGG launched a new release of its cytogenetic software, which enables rapid analysis of samples processed with a pre-screen kit. Together this solution provides a faster turnaround on the market. Also in January we announced a strategic partnership with Cell Signaling Technology to supply antibodies for use with Dako-branded diagnostics products. We expect to return DGG to low double digit operating margins in Q2, driven by a recently announced restructuring initiative, and a return to normal manufacturing operations at our California and Colorado sites. Now let’s take a look at Agilent’s total Company performance by end markets on a reported basis. Pharma revenues were 6%. We saw strength in technology refresh deals, helping demand in mid to small sized pharma and sustaining growth in the aftermarket. We continue to see improving conditions in life science research or Academia & Government of 1% with increased funding from Europe and China. Demand for high end LCMS as well as GC, GC-MS, informatics and consumables drove results. Our Food Testing business grew 5%. We had solid growth worldwide as governments and major food manufacturers managed the challenges of a complex global food supply and public food safety demands. Environmental markets grew 4%, driven by China and the continuous focus on creating a cleaner environment. In addition to increasing enforcement of its existing environmental regulations, China is developing new monitoring methods and legislation driving growth in this space. Chemical Energy revenues were flat year-over-year as the industry responds to a greater than expected drop in oil prices. We saw a slight decline in Forensics down 2% as some U.S state and federal U.S agencies have delayed their capital purchases due to some budget uncertainty. Turning to Clinical and Diagnostics, revenues declined 4% over a year ago. Their primary driver is manufacturing capacity constraints addressed late in the quarter. Geographically Americas grew 3%, Europe 2% and Asia 1%. China revenue, including Hong Kong was a source of strength, up by double-digits on demand from Food and Environmental customers and a relatively easy compare. On the other hand revenues in Japan were down 19%. This was primarily currency related due to the weakening yen, along with a difficult year-over-year compare. Moving to the year ahead in our last call I highlighted three focus areas to drive shareholder value. One, grow organically at the high end of the market; two, aggressively expand operating margins; three, deploy capital for long-term shareholders value. Moving from our update on the strong Q1 core growth, a few highlights on our operating margin improvement initiatives and capital deployment. The exit of the NMR hardware business announced in October is proceeding as planned. In Q1 we completed the closure and sale of our Lake Forest, California chemistry manufacturing site and consolidation of production volume into an existing Ashland site. We have initiated a restructuring program as part of the Company's reorganization. We have also launched a multiyear Agile Agilent program, reengineering our Company to be a more nimble, efficient and customer focused. We expect gross savings of a minimum of $50 million in 2015 from all these actions. We will also continue to tax effectively deploy capital for a long-term shareholders value. This year as previously stated, we intend to return $500 million to shareholders in the form of dividends and buybacks. We will complete the CEO transition at the March 18th Shareholders Meeting with my new leadership team fully in place. My new team and I look forward to our May 28 Analyst Meeting in New York. At this meeting I will outline my strategic vision for the Company, our plans to outpace the market, drive EPS growth and achievement of our long-term operating model. It's a full core press within Agilent to stay in our core growth trajectory, mitigate currency headwinds and drive earnings. Thank you for being on the call today. I will now turn it over to Didier, who will provide a more detailed discussion of Agilent's financial results and guidance. Didier? Didier Hirsch : Thank you Mike and hello everyone. To summarize Q1 results, we delivered on our revenue and EPS midpoint guidance, even as currency impacted our revenue by $12 million and our EPS by $0.01. Also, adjusting for the $11 million reimbursements from key sites for Agilent IT and site services, our operating margin was 18.2%, 1 percentage point higher than the reported operating margin. Regarding our Q1 negative operating margin cash flow of $20 million, it was impacted by three factors. First, separation related expenses amounted to $33 million; second; transformation and [indiscernible] expenses amounted to $14 million; and third, we paid $42 million in taxes related to the spin. In addition we paid in December as usual the variable compensation related to the previous six months. I will now turn to the guidance for fiscal year 2015. The strengthening of the U.S dollar since our last guidance has a negative impact of $130 million on our revenue, $30 million on operating profit and $0.08 on our EPS. However thanks to the strength of our business and the initiatives underway that Mike mentioned, we anticipate offsetting about $0.05 of the currency impact. We are therefore only slightly modifying our previous guidance. We expect fiscal year '15 revenue of $4.06 billion to $4.12 billion. At the midpoint of our revenue guidance, our year-over-year growth will be 1% on a reported basis but 6.9% on a core basis, the difference due to currency. Our core growth is driven by strong order funnel, expected recovery in our DGG business, the impact of a significant number of new products and continued improvement and demand from China. We project fiscal year ’15 EPS to range from a $1.67 to $1.73 with a midpoint of a $1.70. Please note that our EPS guidance assumes 338 million shares and that our annual operating cash flow is projected at $550 million. Finally moving to the guidance for our second quarter, we expect Q2 revenues of $985 million to a $1,005 million and EPS of $0.37 to $0.41. At midpoint revenue will grow 0.7% year-over-year on a reported basis or 7.5% on a core basis, the difference again as a result of currency. At midpoint, Q2's adjusted operating margin of 18.2% will be 130 basis points higher than last year’s. With that I’ll turn it over to Alicia for the Q&A. Alicia Rodriguez : Thank you, Didier. Siad, will you please give the instructions for the Q&A. Operator : Thank you. (Operator Instructions) And our first question comes from Dan Leonard from Leerink. Your line is open. Please go ahead. Dan Leonard : I have a question on your sales to Chemical and Energy companies. Is flat performance you reported in the quarter -- is that a reasonable reflection for how you expect sales in these end markets to trend with current oil prices or is there downside to this result? Mike McMullen : This is Mike. I think I want to pass it over to one of the newcomers on the call, Patrick Kaltenbach, who manages our Life Science and Applied Markets Group for his commentary on the impact of oil prices in that segment. Patrick Kaltenbach : Thank you, Mike. And we have reported our growth in the Chemical Energy segment actually have been flat this quarter. The negative impact of the oil price will most likely be seen, more of our customers who are on the exploration side and they make up about 15% of our total Chemical and Energy segment. The stronger part of the segment is actually on the Chemical side, which actually could see some nice tailwind moving forward with lower feedstock prices. Dan Leonard : Is the balance a flat, is that a reasonable way to think about the mix? Patrick Kaltenbach : Well, as I would say, it's the current version we see. Moving forward again I think both sides probably haven’t fully appreciated the oil price yet. You might see a little down turn on the exploration side, but on the other side, there might be also an upside, moving forward on the chemical side using the lower feedstock prices. Mike McMullen : And just to close off on Patrick’s comments, as he's mentioned, only about 15% of this segment is actually impacted directly by the downward trend in terms of the less capital expenditure on the exploration side of the business, and we expect a continued re-pleasant [ph] market in this with stability in this market segment. Dan Leonard : And then my follow-up, could you elaborate on the performance in China and whether you're seeing confirmation of the improved trends that you’ve baked into your guidance? Mike McMullen : Yes, as we’ve talked in the prior calls we’ve been fairly transparent in China about some of the operational issues we had historically and also our commentary has been that we were projecting a gradually improving market environment in China and I would say that in the first quarter we saw it actually come to fruition. So under the backdrop of gradually improving market environment, we’ve seen a return for example of some food deals. Our operational issues are behind us and we believe we’re growing above market in China. It will be a source of strength for us in 2015. Operator : Thank you. Our next question comes from Paul Knight from Janney Capital. Your line is open. Please go ahead. Paul Knight : Hey Bill, thanks for being a straight shooter for 10 years and congratulations. I guess my question would be you’ve had pretty exceptional growth in Europe as well. How do you explain that dynamic win has obviously been a risk area? Mike McMullen : Paul, I’ll go ahead and take call, Bill is saying, hey Mike it's now your turn to feel the calls after 10 years of very transparent dialogue and you will find me to also be a straight shooter Paul, on these calls and our dialogues as well. I think it really comes back to the core of the strength of Agilent, which is the innovation, our go-to-market strategy. So we believe that in Europe, like other parts of world, we have been bringing to market some very innovative new offering to the customer and have a unique strategy focused on the CrossLab, both the services and consumer aspect and informatics of the laboratory. So we think the combination of our go-to-market strategy, the innovations that we’ve had in terms of the new product introductions, as well as our clear intent to go after not only the technology aspect of the lab, but the services that our consumables and informatics side of the lab has allowed us to, to outpace the market, in particular Europe performance has been really strong relative to the competition. Paul Knight : Mike, it looks like your growth rate in analytical was above market. Do you think you are taking share and one of you been – from your experience in Wilmington, what’s happening the right way for you to be doing this kind of share gain? Mike McMullen : Yes, Paul thanks for the question. And when we looked at the performance for the first quarter, we had 6% core growth and if you actually stripped out the NMR, its 7% growth for us in the first quarter. I think it’s always -- I'll leave the are we gaining market share question to my competitors. But we think that this recipe of new product innovation and really making sure our operational challenges are behind us and picking the right leaders I would add are really driving this strong growth and the growth across our portfolio is really broad based and in fact I’ll ask Patrick to make some few comments here as well. One other thing I forgot to mention Paul around our results in Europe, we had a very strong European regional manager who now is running our global sales operations and the new analytical lab sales force. So quite confident that the [indiscernible] will bring his talent to the globalization and you've seen his success already in Europe. And Patrick, maybe a little bit more comment on what you saw in the lab site for the instruments and then Mark, you can jump in on the CrossLab. Patrick Kaltenbach : Sure, thanks Mike. We definitely seen a lot of momentum based on our new regionally introduced portfolio and solutions like the Infinity II series LC that we launched in Q4, the ICP OES, the FTIR and high end MS solutions. Those products have been really well received by our customers and we actually have a very strong funnel behind these products. And that’s also why we are looking forward also to very successful Q2. Mike McMullen : Thanks Patrick and Mark, if could make a few comments on the CrossLab where the growth was really quite exceptional as we close off this question. Mark Doak : Thanks Mike and obviously with the 10% core growth rate, we had strength in a lot of areas, but I would call out we had exceptional strength in the Americas with both the LC columns and in China our small molecules in general are growing and certainly -- so on the services side we continue to see in Europe in particular, growth from our enterprise services as well as our instrument services side. Operator : Thank you. Our next question comes from Tycho Peterson from JPMorgan. Your line is open. Please go ahead. Tycho Peterson : Mike can you just talk on multi-progression for the quarter? Just trying of get a sense of how January faired versus December and the strength of the order book exiting the quarter? Mike McMullen : Thanks for that question Tycho. So we saw solid order strength through the quarter. I would say we always get little bit of bump at the end of December as lot of our customers close off their budgets and then -- but with the quarterly quota setting process in the Company, there is always incentive for the sales people to close in June and January. So really no changes from a historical seasonality patterns of business through the quarter. And as we noted in the DGG side of our business, we actually built backlog during the quarter. Tycho Peterson : And to that point when do you think Darko can get back to something resembling a market growth rate? Is that a ’16 event? How do we think about the earliest you could be back to kind of a mid-single digit growth rate potentially for that business? Mike McMullen : I’ll make some initial comments here, then introduce Jacob Thaysen, our Group President for our Diagnostics and Genomics business. So as you saw on our call notes, we think we’ll be back to low double digit profitability in the second quarter. Your question really is in terms of the overall top line return to market growth and above market growth and I think it’s -- what you’ll hear from Jacob is some really aggressive plans to continue to push the growth rate and many encouraging signs, particularly with the Omnis side of things but why don’t I not steal Jacob's thunder and induce you to the community here in this call. Jacob Thaysen : Thank you, Mike and thanks Tycho for the question. I do believe that we have an exciting opportunity also in Darko to come back and we had a record number of shipments of Omnis in this quarter. And this is actually a very good indicator for an improved position in the market. And overall the market continues to be very attractive. We -- actually I do believe we have the right solutions to regain market share. For example also on the IQ HER2 FISH site, which is a very important component in diagnosing breast cancer, we have also launched a very good product that has been able to take the turnaround time form 24 hours down to be done within the same day. And this will actually allow the laboratory to perform analysis that was not possible to do before within the same day. And we see substantial market improvement also on that. So I do believe at this point of time we have the right products, we have the right team. And we will see momentum during ’15 and into ’16 also to regain into market. Tycho Peterson : Last one just on the operational initiatives you highlighted Mike, I mean I think someone argued multiple and stocks kind of given you benefit for that, maybe some M&A expectation as well. But can you just talk about what you see as kind of the path to additional value creation from what you’ve laid out here? In other words why the reluctance to buyback more stock beyond the $365 million that you talked about and the reluctance to maybe cut a little deeper bit to try to get something north of a 22% operating margin by ’17? Mike McMullen : So I think I’ll make some initial comments here and then invite Didier into the dialog as well. As I outlined in the prior call and reemphasized today, we think that the way to drive additional appreciation of our share price is to aggressively go after improvements of our operating margin. We’ve outlined I think a fairly progressive plan, 400 basis points and we consider the synergies we're starting off with as a Company. I outlined in my call today some very quick and expansive far reaching changes in how the Company is operating. The story is an organic growth and cost reduction story to drive our margins up. So that's how we're going to do it, by working the income statement and we have fully committed this year to high use of our available cash to repurchase stock. So again, $500 million of share repurchases and dividends is a plan for 2015. And Didier, I know you've done some analysis working with external folks as well in terms of how we've modelled aspects of leverage as it relates to stock repurchases. Didier Hirsch : Yes clearly the leverage and buyback programs and dividend programs are ongoing topics of discussions with the Board. And the Board is assisted by a banker in making sure that we are making the right decisions to optimize shareholders value. So it is -- right now we are authorized to distribute $500 million which basically will put us in a zero cash position in the U.S towards end of the year. So we're utilizing 100% of the cash that we have available. And again the Board is always looking at ways to optimize shareholder value. Tycho Peterson : And this quarter you bought back 6 million. Is that right? Didier Hirsch : Tycho, can you repeat that please? Tycho Peterson : You said this quarter you bought back 6 million of stock? Didier Hirsch : Yes this quarter we bought back just a little bit. We continued buying back little bit after the end of the quarter. We have a 10b51 filing but it was minimum, yes. But we are still planning to buy back $365 million from now to the end of the year on an opportunistic basis. Mike McMullen : And Didier, if I would just add one additional comment here, when we look at our leverage versus our peers, we're right at our peer group. Operator : Thank you. Our next question comes from Doug Schenkel from Cowen and Company. Your line is open please go ahead. Ryan Blicker : This is Ryan Blicker signing in for Doug. So starting with China, can you provide more color on what you're seeing in China that's giving you increased confidence in your guidance and what level of growth from China is implied in the 2015 guidance? Mike McMullen : Sure Ryan. I'd be happy to offer some commentary on China. So in terms of the overall outlook of the market we see a gradually improving environment in China. It's not a snap back to the types of market growth rates we have seen historically, but a gradually improving market environment. They are investing very heavily -- for example in the environmental areas I outlined in my call notes. We have seen -- as you know there has been a massive consolidation and reorganization of the food ministries in 2014. A lot of that reorganization is behind and we're starting to see some bids for some projects and orders coming through. So the indication is from a total market perspective that the market is improving, albeit on a gradual basis. But I'd say the China story is -- for Agilent is not just a market improvement story, it's also the fact that the operational issues which we've been very transparent in disclosing to the investment community a while back, that is completely behind us. So we've got a very strong organization that really is aggressively going after the market in China. So I think it's a combination of both a gradual improvement in market environment and our operational challenges are behind us in China. And we're looking at high to mid-single digit kind of growth rate in China. Ryan Blicker : And then maybe one more on DGG and some of the recent companion diagnostics announcement. There have been some exciting partnership announcements over the last few months but just trying to think out how this impact 2015 results. Can you quantify what companion diagnostics are as a percent of Agilent or DGG sales now and maybe what you expect them to be as a percent of sales exiting 2015? Mike McMullen : What we can do is we can describe the rough breakdown of the three divisions that make up the DGG segments. Roughly 60% is in the pathology companion diagnostics reagent partnership space we talked about, 35% in the genomics and about 5% in the nucleic acid solution division. So in terms of additional financial breakdown, we wouldn't be providing that down to the granularity of the companion diagnostics. But what I would do is ask Jacob to share some insight in terms of what exactly is going on with Agilent's business in this space and why we're so excited about the future possibilities here. Jacob Thaysen : Yes thanks for that Mike. I think there is two elements to companion diagnostic. One is of course the fee for service with our pharma partners where we develop the next generation companion diagnostic and I'm really excited about all the partnerships that we have and we have plenty more in the pipeline and I really consider us as the leader within IC and FISH companion diagnostic. But obviously the big opportunity is with the companion diagnostic on the market and each market has its own potential. So the best way of looking at this that the usual suspect in the market today is CO2 [ph] market which has an overall market opportunity of around I think it's $80 million to $100 million and then you have the other one, the big one, the ALK that has right now a market opportunity around $20 million to $25 million. It is difficult to say what each market will do, but I would imagine that that the companion diagnostic market in the future will be a great growth opportunity, but from launching products and seeing that to be a significant impact on ’15, that I do not consider, but we see substantial up take in our partnerships, that has a great momentum as we speak. Operator : Thank you. Our next question comes from Dan Arias from Citigroup. Your line is open. Please go ahead. Dan Arias : Within DGG, just hoping you could expand it down the manufacturing issues that you ran into with the Nucleic Acid business, now I guess how much of the DGG revenue basis that piece comprised? Mike McMullen : Patrick, you want to take that question? Patrick Kaltenbach : Yes, so as Mike alluded to we have three overall businesses, the former Dako [ph], business, the pathology rating partnership and CDS and we actually saw performance according to our expectation on those businesses. So then we also have the genomics solutions division and then our nucleic acid solution division and in the nucleic acid solution division that’s where we saw the manufacturing chances. And as was alluded to before the genomics, the business is here, the nucleic acid solution business is very small business compared to others, but we have some larger customer and thereby moving the shipment from one quarter to the other actually have a significant impact on our overall performance. Mike McMullen : And Jacob as I recall, I think our genomics and NASD business is about 40% of the total of your segment. Dan Arias : And then Mike or Fred on NMR, it sounds like the wind-down is on track internally there. So I guess curious what the current outlook is like for a sale of those assets, whether you're seeing any interest there from growth in this space? Thanks. Mike McMullen : I'll ask Patrick to provide some further insight, both in terms of the wind-down from the financial perspective, but also how we’ve been able to work with our customers, who as a result of our decision here and then we’ll double back on the question about the sales of the assets. Patrick Kaltenbach : Mike, as I said we are on track to sustain our ramp-down. We still expect that we have most of our NMR shipments completed by end of Q2. However, some of the MRI and OEM, both take until the end of the year. Also regarding the savings, we are well on track with that as promised over the last conference call which is based on the fact we have ramped down R&D and marketing as planned. When you look at our service capabilities, we have of course make sure that we are capable to service our customers, we are working closely with Mark's organization to make sure we have everything in place to make sure that we can service our customers and our install base. Mike McMullen : In regards to the question about the aspect on the sale possibility, when I made the decision to exit the NMR hardware business, of course if it qualified buyer would surface and interested in taking on the full aspects and liabilities of the NMR hardware business, we will be quite open to that discussion, but we decided it was in the best interest on the Company to make a decision now to end the leading -- the implications on P&L, allows us to refocus our investment elsewhere and also to have a customer focused mitigation strategy retaining our services capabilities to support our customers. Patrick Kaltenbach : I just have one comment on the benefits of the exit. We committed to save $10 million -- to have $10 million increment operating profit in 2015 and 2016 and we are seeing much better results. So right now we’ve raised high expectations 2015 in the guidance. We expect to save $15 million and then $20 million in 2016 and that’s in our guidance. Operator : Thank you. Our next question comes from Isaac Ro from Goldman Sachs. Your line is open. Please go ahead. Isaac Ro : Want to follow-up with another question on NMR. Really you touched on some of the P&L benefits you're looking for here and of course the organization benefits, but curious if you could maybe look at it a little bit from a working capital standpoint, just given the nature of that business and the extent to which you're looking for some free cash benefits to the profile of your business ones all this is sorted out. Is there something you can quantify for us with regards to the benefits to the working capital and free cash flow? Mike McMullen : Didier, you want to handle that question? Didier Hirsch : I would say in terms of free cash flow, it's fairly similar to the increase in operating profit that as mentioned perhaps little bit higher, but -- and then for 2015 there is really not much difference in terms of working capital that we have, as Patrick alluded to, even though we'll be -- we'll have finished the production in the first-half, in the second half we’re going to do all kinds of installations and before we can [indiscernible]. Then we have time to collect the receivables. Obviously, inventories are coming down now. I can follow-up and give you the exact amount of the reduction of working capital to expect as a consequence of the closing, but I would say it's probably immaterial in the grand scheme of things. Isaac Ro : Okay. And then just a second one on tax rate. Just wondering if you could quantify some of the opportunity that you see from a long-term here, either in terms of the magnitude of tax rate you could see, and maybe the pacing around it, just the benefits you're looking for if any? Didier Hirsch : Well the situation for the new Agilent is we have a lot more very profitable manufacturing activities in the U.S. with reagents and then the chemistries and also some instrument manufacturing, then proportionally all Agilent that we used to in the past, as Keysight had most of their manufacturing offshore. So the consequence is that it puts pressure on our tax rate and the 20% I see as fairly sustainable over the course of the next two, three years. What we’ll see after that. Obviously there's all kind of debates that I'm hopeful in Congress will be to different tax regime, but at this point in time the best is to assume that we will maintain our 20% tax rate in the foreseeable future. Operator : Thank you. Our next question comes from Brandon Couillard from Jefferies. Your line is open please go ahead. Brandon Couillard : In terms of the revenue growth outlook, 200 basis points higher, I'm pretty sure you’re probably the Company on the planet raising guidance at this point in the year. What gives you the confidence? What’s changed exactly relative to three months ago, one or two most important things, whether it’s China or new product flow? Can you parse that out for us? Mike McMullen : Sure, Brandon. Thanks for the question and first of all, I’ll start with the strength of our Analytical Lab business in the first quarter. It has momentum, it grew 6% core growth, 7% without the NMR impact fueled by new product introductions. The new products that we highlighted in our call last several quarters are driving new growth and the operational challenges we have in China are behind us and that’s in a backdrop of a gradually improving overall China market. So point one would be strength in the Analytical Lab business fueled by new product innovations and the addressing of previously disclosed operations in China and the second one is cognizant recovery in our diagnostics and genomics business. As we outlined in our call today, we had some operational issues that are being addressed and we’re quite confident in our ability to right the ship and get that business in the direction we want it to be. So there's the two things I will leave you with, strength in the Analytical Lab business and the cognizant recovery of our diagnostics and genomics business. Brandon Couillard : Okay, that’s helpful. And then Didier, just on the Agilent savings plan. I think you said gross savings expected at $50 million this year. If I just think about the bridge between your prior guidance for revised outlook, can you quantify the buckets between better organic growth, currency lowers, restructuring benefits, just the moving parts? Didier Hirsch : Well, I did provide the currency impact and the rest is really way too many things. We are having good momentum on the restructuring program, the $50 million. Part of $15 million is NMR, $35 million is -- I would call the Agile Agilent programs which is ramping up nicely although there were some benefits already in Q1. There is some volume benefits also. A lot of other programs -- we are also making sure that we invest properly in our businesses to support our expectations to outgrow the market. So there is really lot of things we do and bridge that very carefully within the Company but there is a lot and lot of different factors. Mike McMullen : Didier this is Mike I would just add inclusive of guiding with continued momentum the assumption our Analytical Lab business and recovery of our diagnostics and genomics business, we are also taking other actions to offset the FX win. So this isn’t just a story of momentum on the organic growth side. It’s also true costs are coming out of our structure to drive our earnings per share and we’re pulling out all stops to address these FX wins without damaging our long term growth prospects. Operator : Thank you. Our next question comes from Jack Meehan from Barclays. Your line is open please go ahead. Jack Meehan : Just want to start with I guess the life science research business here in the U.S. It sounds like the total was a little bit more muted relative to I guess slightly more optimistic commentary from peers. I guess just curious what’s driving that and what you're expectations are for the rest of the year? Mike McMullen : Patrick, why don’t I ask you to offer your perspective on that question? Patrick Kaltenbach : So we have seen -- as Mike alluded to, the growth in license research this quarter was mainly driven and coming from China and Europe, actually where we have seen higher demand from life science research. In the U.S. I think we are careful optimistic for the second part of the year that some of the funds will get released, but right now that [indiscernible] drive is coming, the momentum is coming out of Europe and China. Jack Meehan : Got it. And is there a way to just frame within that business how much is U.S. versus ex-U.S.? Patrick Kaltenbach : That something I think we are not ready to disclose right now. Jack Meehan : Okay, and then just one more I guess in getting back to the leverage and cash that you have overseas. I was wondering if you had any thoughts just on what the optimal use of that cash is and then when you’d be able to put it to work. Mike McMullen : I think as we said earlier in our call today, we’re fully committed to tax effectively returning share to our stockholders. Agilent has a long history of doing that, over $10 billion during Bill's tenure as CEO and we're going to continue that strategy of getting cash back in a tax effective basis to our shareholders. As you heard from Didier, pretty much all of our U.S based cash will be gone by the end of this year, having returned that to our shareholders and D, I don’t know if you have anything else you want to add here? Didier Hirsch : No I'm certainly again waiting for some movement in Washington and hopeful and we'll see. If there would be an opportunity internally to repatriate cash under our new tax regime, I would be very much inclined to do so. Operator : Thank you. Our next question comes from Steve Beuchaw from Morgan Stanley. Your line is now open, please go ahead. Steve Beuchaw : I wonder if we could start with a strategic one on Pharma as an end market. The comments that you made about the growth in biotech and spec Pharma are certainly consistent with what others are saying. I wonder if you are thinking now that the growth of the submarkets in Pharma seems to have diverged. If you're thinking any differently about how to approach the biotech and spec firm segments of Pharma and if you could share with us what any of those strategies might be? Mike McMullen : So why don't I make a summary comments and then invite Patrick in on this dialogue as well as Jacob. So overall as we reported 6% reported growth and a very strong end market segment for the Company, and as we also have been highlighting the biopharma, the biotech side of that has been a real area of strength as you peel back the segments within Pharma, moving away from the traditional small molecule analytical side. So pinched [ph] in both your perspectives on how you're seeing that to respond to the question. Patrick Kaltenbach : Happy to. This is Patrick speaking. So if we look at Pharma and total NMR growth comes from, of course we see all this Joe, the strong pockets like biopharma and the midsized companies but I think it would also be fair to say that during Q1 we have seen several large deals of replacement business coming from large Pharma. And as we -- so terms of strategies, there are several things for Pharma to be important. There is a lot of replacement business loss out there in big Pharma and the way we position our instrument, it's making sure that we are 100% backwards compatible, while really deploying and offering the best solutions in the market and the most powerful solutions in the market. Like for example if we do see a [indiscernible] just recently launched this is a story that has been very well received, especially by the large Pharma companies. Now secondly when you look at biopharma, the strategy there for us is clearly working with our customers and looking at their demand, what their needs are as they develop biosimilars and other novel therapeutics, making sure we have not only the right equipment to test it, but also the right software solutions. So they have the right tools on hand to be as efficient and productive as possible. Mike McMullen : Jacob I know your portfolio goes here in the space as well. Jacob Thaysen : Yes, so it's our business is somewhat different from Patrick's business here that we have our companion diagnostic which I have already described and then we have our Nucleic Acid solution division, which are developing or manufacturing the active ingredients for pharmaceutical components and we also see very high demand for that. So within the DGG business we continue to see a high demand from the Pharma industry. Mike McMullen : Thank you, Jacob. And just to close out this question, just to remind those on the call, Mark's, earlier comments about the growth and the services in the Pharma and how he's approaching that marketplace. Steve Beuchaw : And one this – I suppose this would be for Jacob. If we could just circle back to the new genetic screening kit launches that Mike referenced in his prepared remarks for chromosomal abnormalities and cytogenetics. Where are you seeing the most notable potential demand for these new kits? Is there any expanded promotional effort tied to those launches, just a little color on where you see those products headed? Thanks. Jacob Thaysen : Well I would like to start by saying that we have a very, very attractive business within our array business within the cytogenetics space. This particular product is very much suited for the invitro fertilization [ph] business where you have precious samples obviously and what it really does -- the business here is about low cost, but also about our turnaround that you can do and our product is best in class for that. So we consider this in the range of our array technologies and this particular for the invitro fertilization [ph]. Operator : Our next question comes from Tim Evans from Wells Fargo. Your line is open. Please go ahead. Tim Evans : Didier, I wanted to ask about some of the sensitivities around the 30% incremental operating margin that you are looking for. If your growth ended up being only 3% or 4% or alternatively if it ended up being 6% or 7%, how would that incremental operating margin change? Didier Hirsch : Yes I mean we have long talked about 30% to 40% range and which to take into account, kind of reasonable low end and reasonable high end in terms of volume increase. Right now we are shooting for even higher percentage this year adjusting for the synergies. So it is sensitive but a lot of the operating margin improvement comes from hard savings and the Agile Agilent program and really kind of sneaky kind of savings. So it would have to -- we would have to face really, really bad market situation, not to deliver on this 30%, and if the market is delivering as per our expectation, if we are delivering as per our expectations, we could go on fairly significantly higher than 30%. Operator : Thank you. Our next question comes from Derik de Bruin from Bank of America. Your line is open. Please go ahead. Derik de Bruin : Hey, can you give us -- what the organic revenue growth comps are for the three different segments for the second quarter since we don’t have those on historical basis? Mike McMullen : Well, we have those. Didier, you've got a full page of numbers there. Let's hear… Didier Hirsch : The second quarter forecast, we expect currency to have an impact of -- negative impact on the year-over-year basis from about 7 points, which mostly it's around 7 points an average. And besides that we expect pretty much all the businesses to grow on a currency adjusted basis about at the same level with LSAG, perhaps one percentage point over the rest of the other two businesses. So very much in line by business with the number that we’ve provided for the Company and LSAG a little bit higher and then the currency impact being 7% impacts pretty much all the businesses of about the same way, DGG little bit more and then ACG and other two beacons. As you go into my prepared remarks, you can tease out the actual reported numbers in Q1 in terms of the corporate by segment, and obviously we would expect to see an acceleration of the growth rate in our DGG business in Q2. Derik de Bruin : Right, I'm just trying to get to the Q2 comp, just for modeling purposes on that. And I guess the -- looking short-term at the gross margin there was the big step up like 150 basis points sequentially and year-over-year and the Agilent CrossLab Group on the new breakout. Is that just simply driven by the 10% organic revenue growth is that the volume driven thing or there is something special that went on that margin? Didier Hirsch : It's mostly volume adjusted. It's -- as lot of headwinds and tailwinds, but obviously with 10% revenue growth, it is a big impact. On the negative side DGG is pretty much impacted by the, I mean the currency also, but anyway it is mostly on the volume and then the some programs that market will in place and last year we spent a lot of time and resources and money to deliver the new CRM which will provide a lot more effectiveness to the organization. Mike perhaps can talk a little bit about it, but that is also factor that is we expect to deliver incremental operating margin to have deliver overtime. Derik de Bruin : And Mark maybe you can jump in and could we talked earlier about some of the [indiscernible] even tried to do year and your compares given the synergies. I think that even gives us more positive comments around our performance Q1, but any additional color you can provide here? Mark Doak : And it is -- if you will, it's a compare that going forward it’s hard to look in the past and see how these two actually compare and what we -- as Didier has indicated we actually have made investments associated with putting a single system in place to run our business and services and that will actually bring us improvements in our operating. But as being said, the synergies is related the key element of this and we'll continue to work on those operational elements. But in addition to that, we obviously see top-line growth is the area we’ll continue to push forward on to. Operator : Thank you. Our next question comes from Richard Eastman from Robert W. Baird. Your line is open. Please go ahead. Richard Eastman : Yes, just I' wondering this a follow-up on that question, So basically when you see SG&A given the investments you’ve made, the SG&A is up here but you’ve gotten good volume leverage of the gross profit margin line? Are you explaining that? Mark Doak : Yes, I was talking about the loss of dynamics. One of the big dynamics that we have is really the way also we allocate our share of infrastructure services, the so called GIO, and because ACG is growing faster than the -- as been growing extremely fast, they got a big lump of that allocation including some of the cost synergies that we’ve talked about over and over. So…. Richard Eastman : For Mark, is there a -- for Mark, is there opportunity on the CrossLab in the CrossLab business, by that I mean either side of the consumable side? Are we under penetrated in any particular geography? Mark Doak : Well, we've performed well most geographies. I would say our opportunities -- looking our consumables and the chemistry and China is still I think great growth opportunity for us. China in general from a cross line perspective, we’re starting to see customer respond to enterprise services much that we’ve seen in the Western markets and in fact we're seen excellent growth in the pharma segment throughout Shanghai and Beijing. Richard Eastman : Okay. And then just one last question as a follow-up, you say -- have you seen any competitive disadvantage from a pricing standpoint with the strength in the dollar in particular maybe on the analytical chemical analysis side of the business where those products, food [ph] forensics, maybe there's a little more competition there? Mike McMullen : Richard, this is Mike. I’ll take that question. Actually no I think it speaks to a couple of things, first of all the strength of the portfolio, but also the fact that with one exception most of the major competitors in this space are dealing the same FX wins. So nobody has any unique pricing power and our Japanese competitor is clearly trying to work on their margins as well. Operator : Thank you. Our next question comes from Ross Muken from Evercore. Your line is open please go ahead. James Clark : This is James Clark in for Ross. Most of my questions have been answered but I guess a quick one on the 22% margin target by 2017. I'm just wondering if you guys have said anything about sort of where you need to get from a segment margin perspective and specifically on the DGG side to hit that 22% Mike McMullen : If you look at the DGG business historically, this should be a strong double digit operating margin business. We’re going to be low double digits in Q2. So clearly getting to that north of 20% kind of operating margins for that business is part of the plan. And as you’ve heard from Jacob, it’s quite doable, a lot of confidence that as we have our remediation -- we move beyond our remediation efforts, we’ll have the trajectory we need in the business to attain those goals. James Clark : Okay, and then just a quick one. No one asked but Japan down 6 during the quarter. I know funding has been constrained. We’ve heard some other peers talk about this. But just wondering when you sort of expect to see some clarity there and are you seeing the same dynamics as the peers or is there something specific to Agilent that’s going on in Japan right now? Mike McMullen : As you may know, I’ve spent 5.5 years of my life in Japan. So I'm always a little bit biased in terms of my view on Japan but if you look at what’s unique about Agilent is our position in that marketplace relative to the competition. Number two, right behind -- with obviously some other leading in that marketplace. So I think we’re seeing some of the same currency challenges that our competitors see in this space. And obviously we’re waiting for some of the -- for the budgeting discussions to conclude and get relief. Although you can’t see it in the currency results, because the currency has been such a huge impact in the most recently reported quarter. We believe we're actually making some traction in that marketplace, particularly back in the discussion around services and consumables in our CrossLab site. So we often think about markets in terms of instruments, new instruments in the capital market side or capital budget side of things. But that’s been a source of strength for us. But you just can’t see it right now in the numbers given the overwhelming impact of currency. Operator : Thank you. Our next question comes from Miro Minkova from Stifel. Your line is open please go ahead. Miro Minkova : Most questions have been answered. I just have a clarification on the Diagnostics and Genomics business. It sounds like you are assuming a rebound, including on the revenue side not just the operating margin in the quarters ahead. Can you maybe help us understand what are the actions that have been completed that give you the confidence you can do that and that its turning and what still needs to be done? I guess what are the milestones that you were looking for to see the rebound? Mike McMullen : So Jacob, why don’t you comment on some of the things that are going on, on the manufacturing side relative to the 40% and what’s going on with the technology side. Jacob Thaysen : So thanks for the question Miro and as we also alluded to before, the main reason for our challenges on the operating profit and the revenue side in Q1 was due to some manufacturing challenges we had on our nucleic acid businesses, both genomics business and the nucleic acid solution division. Those have both been dissolved within the quarter and with that we expect to see us coming back to an on-situation in 2Q again. Miro Minkova : Okay, and how big was the impact of these? Roughly any sort of magnitude? Mike McMullen : Well, if you look at the profitability we had in Q1 and then we’ve been fairly explicit in terms of our expectations for Q2 to low double digit profitability in Q2. So I think you can perhaps model off those vectors. Miro Minkova : Okay, thanks. And perhaps I missed it but maybe comment a little bit on the gross margin as well as R&D and SG&A as a percentage of sales for the new Agilent, apart from the operating margin I guess. I'm not seeing explicit breakdown in the release and how those trended for the new Agilent ex Keysight? Didier Hirsch : Yes. We did not provide the breakdown. We provide an EPS guidance and that we don’t provide the whole -- the full P&L. Clearly with the kind of growth that we expect you would think that our OpEx as a percentage of revenue will come down over time. Our gross margin are going up not just because of the revenue but also because of the actions that we are taking, many actions that are taking. But we don’t provide more granular detail for the guidance. Operator : Thank you. I'm showing no further questions at this time. I’d like to hand the conference back over to the Ms. Alicia Rodriguez for closing remarks. Alicia Rodriguez : Thank you, Siad and thank you everybody joining us today. We appreciate you joining our call and if you have any questions, please give us a call at IR. Thank you. Bye, bye. Operator : Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,015	2	2015Q2	2015Q2	2015-05-19	2.313	2.147	1.841	1.88	2.6	22.85	21.06	Executives: Alicia Rodriguez - Vice President-Investor Relations Michael R. McMullen - President and Chief Executive Officer Didier Hirsch - Chief Financial Officer & Senior Vice President Mark Doak - Senior Vice President and President-Agilent CrossLab Group Patrick Kaltenbach - Senior Vice President & President-LSAG Business Jacob Thaysen - Senior Vice President & President-DGG Business Analysts : Doug A. Schenkel - Cowen & Co. LLC Dane Leone - BTIG LLC Isaac Ro - Goldman Sachs & Co. Tycho W. Peterson - JPMorgan Securities LLC S. Brandon Couillard - Jefferies LLC Ross Jordan Muken - Evercore ISI Paul Richard Knight - Janney Montgomery Scott LLC Steve C. Beuchaw - Morgan Stanley & Co. LLC Daniel Arias - Citigroup Global Markets, Inc. (Broker) Jeff T. Elliott - Robert W. Baird & Co., Inc. (Broker) Derik De Bruin - Bank of America Merrill Lynch Miroslava Minkova - Stifel, Nicolaus & Co., Inc. Jack Meehan - Barclays Capital, Inc. Operator : Good day, ladies and gentlemen, and welcome to the Agilent Technologies Second Quarter 2015 Earnings Conference Call. And as a reminder, this conference call is being recorded. I would now like to turn the call over to Alicia Rodriguez, Vice President of Investor Relations. Please begin. Alicia Rodriguez - Vice President- Investor Relations : Thank you, Latoya, and welcome everyone to Agilent's second quarter conference call for fiscal year 2015. With me are Mike McMullen, Agilent's President and CEO, and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Patrick Kaltenbach, President of Agilent's Life Sciences and Applied Markets Group; Jacob Thaysen, President of Agilent's Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. 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. You will find an investor presentation along with revenue breakouts and currency impacts, 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 Mike and Didier will refer to non-GAAP financial measures. You'll 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. As a reminder, we will talk about core growth, which reflects growth adjusted for currency and for M&A within the past 12 months. 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. Before turning the call over to Mike, I would like to remind you that Agilent will host its annual analyst and investor meeting in New York City on May 28. Details about the meeting and webcast are available on the Agilent investor website. And now, I'd like to turn the call over to Mike. Michael R. McMullen - President and Chief Executive Officer : Thanks, Alicia. Hello everyone. Thank you for joining us today for our Q2 call, my first as CEO of the new Agilent. I will start with a summary of our Q2 operating financial performance. Next, I will cover our progress on operating margin expansion and stock repurchases. Finally, I will close an update on our current guidance. I'm pleased to report that Agilent delivered solid earnings within guidance. I'm even more pleased to share the story of our top line order growth. This growth is being driven by a continued strong market acceptance of our new offerings and the effectiveness of our new sales structure. Let me start with four major operational highlights. First, our Agile Agilent program launched last quarter. This program is successfully removing costs from the business and allowing us to aggressively build a more nimble and streamlined company. Second, we addressed manufacturing-driven backlog issues in our nucleic acid businesses. As a result, we have returned DGG to double-digit profitability. A third operational highlight is some very good news. After a lot of hard work and significant investment, our FDA warning letter was lifted six months earlier than expected. Finally, we strengthened Agilent's portfolio by divesting our XRD business. Now let me review Agilent's financials for the second fiscal quarter. Our Q2 revenue was down 3% and grew 4% on a core or currency-adjusted basis to $963 million. Reported orders grew 1% and were up 8% on a core basis to $1.04 billion. Excluding the divested businesses of NMR and XRD, core revenue growth was 5% and core order growth was 10%. Book-to-bill increased 1.08, as we were unable to convert all this order strength into revenue within the quarter. Let me provide some additional detail. First, we had a lot of orders come in later in the quarter. Second, shipping challenges at our new Americas logistics center delayed some customer shipments until Q3. The shipping issue was a start-up issue and is being addressed; however, the order timing and shipping challenges accounted for approximately $30 million of revenue that was pushed from Q2 to Q3. The strengthening dollar also had an impact, reducing reported revenue by $6 million versus our guidance. Despite the revenue recognition delay, we are quite pleased with our bottom line performance. Operating margin, adjusted for Keysight billings, was 18.3%, up 140 basis points over a year ago. Earnings per share were $0.38 with both the operating margin and EPS results matching guidance. Moving on to the results by business group. The Life Sciences Applied Markets Group, or LSAG as a reminder, brings together Agilent's analytical laboratory instruments and informatics. Core revenue growth was 1%, or 2% excluding NMR. Growth was led by LC, microfluidics, mass spec, ICP-OES, and software. Orders were strong across the group, up 6% on a core basis and up 10% excluding NMR. As an aside, the previously communicated exit of the NMR hardware business continues to proceed as planned. Operating margin for the quarter was 15.8%. We saw excellent growth in LC systems in the second quarter. The new 1290 Infinity II system, which we launched in Q4, continues to be well received by the market. This system sets new benchmarks in analytical efficiency, quality, ease of use, and integration. We expect the 1290 Infinity II product portfolio to deliver double-digit growth through fiscal year 2015. We ship the new 6545 LCMS Q-TOF with a formal launch scheduled for the ASMS Conference at the beginning of June. The 6545 addresses a core Q-TOF market with better performance, increased uptime and robustness, and improved ease of use for small molecule applications. We released OpenLAB ELN 5.0. The new electronic lab notebook adds several core feature enhancements, including an iPad mobile client. Next, the Agilent CrossLab Group, or ACG, combines our analytical laboratory services and consumables business under a new Agilent brand. ACG delivered outstanding results. Core revenues were up 7%, while core orders grew 12% in the quarter. Operating margin was 21.5%. In consumables, we expanded the Poroshell 120 family to include a new 4-micron particle size. Sales of this family have exceeded expectations and are contributing to continued growth in the Poroshell family. We released the AdvanceBIO sample prep kit, which adds to our separation and manual sample prep technologies. Our recently introduced A-Line supply portfolio is ramping well above expectations. And customers have responded very favorably to our new FRID (sic) [RFID] inventory management service solution. Finally, the Diagnostics and Genomics Group, or DGG, is comprised of three divisions : the former Dako business, genomics, and nucleic acid solutions. DGG recovered nicely in Q2, as previously guided, delivering strong core revenue growth of 10% versus a year ago. Dako and the nucleic acid businesses led DGG's results. Orders grew 5% on a core basis. DGG returned to double-digit operating margins, delivering 15% in Q2. In April, we announced that the U.S. FDA lifted its warning letter on Agilent's Dako, Denmark subsidiary earlier than expected. We're on track for the remaining remediation efforts to be completed by Q3. And our companion diagnostics engagement with Merck continues to make progress. In April, Merck submitted a biologics license application to the FDA for the treatment of lung cancer. Omnis Instruments continued to gain customer traction, setting a new quarterly record for instrument placements. And SureFISH again saw strong growth, driven by sales through the pathology channel. This is just one example of the synergy that we're able to leverage across the new Agilent. Our expertise and experience in analytical labs continues to drive further penetration into adjacent clinical and diagnostics laboratories. We expect these types of synergies to be characteristic of the new Agilent. In keeping with our strategy of executing bolt-on acquisitions of complementary growth businesses, earlier this month, we announced our acquisition of Cartagenia for €60 million. Cartagenia is a leading provider of software and services for clinical genetics and molecular pathology labs. Now, let's take a brief look at Agilent's end-market performance on a core basis. Pharmaceutical revenue grew strongly with broad-based results across customers and products. We also saw excellent demand in clinical and diagnostics, with revenue growing solidly during the quarter. Growth in food and environmental revenue was more modest, led by demand from China. Academia and government revenue decreased slightly due to some delayed budgets and order backlog build. Chemical energy saw a similar decrease from lower oil prices, as expected. The decline in oil production and exploration was partially offset by refining and chemical demand. Geographically, we saw excellent core revenue growth in the Americas, with moderate growth in Europe and Asia excluding China and Japan. Greater China orders were strong, though not yet reflected in revenue. Similarly, Japan core revenue declined but saw single-digit core growth in orders. As you know, we completed the CEO transition at the March 18th shareholder meeting, and our new leadership team is fully in place. During our Q1 call, I highlighted three focus areas where we're working as a team to drive shareholder value. As a reminder, they are : accelerate organic growth, expand operating margin, deploy capital for long-term shareholder value. Turning from the report out of the momentum in our core growth, let me update you on our operating margin improvement initiatives and Q2 capital deployment actions. We are executing our multi-year Agile Agilent program, reengineering the company to be more efficient, nimble and externally focused. Our previously announced restructuring is underway. The new sales channel and divisional structure are fully implemented. We continue to look for opportunities to streamline and rethink our legacy business models. The recent closing of our U.S. Government Affairs office is just one example. We have already delivered $24 million of the expected gross savings of $50 million in 2015 from our combined actions. We remain committed to achieving a 22% operating margin by FY 2017. As previously guided, this year we're on track to return $500 million to shareholders in the form of dividends and buybacks. In Q2, we repurchased $162 million of stock, bringing our year-to-date repurchases to $168 million. In our Q1 call, we raised our core growth guidance and commit to offset $0.05 of negative FX impact through cost controls and other actions. We are confirming this full year EPS guidance. Didier will provide further details in his remarks. As the new CEO, it gives me great pleasure to announce that Forbes has identified Agilent as one of America's best employers in its first-ever ranking. We're rated as a top employer in the healthcare equipment and services industry category. Part of my mission would make us even better. We look forward to seeing you at our May 28th analyst meeting in New York. We'll take that opportunity to discuss Agilent's businesses in more detail. I look forward to sharing more about the steps we are taking to reach the goals we have set to drive long-term shareholder value through accelerated growth, operating margin expansion, and optimal capital allocation. Thank you for joining our call today, and I'll now turn it over to Didier, who will provide a more detailed discussion of Agilent's financial results and guidance. Didier? Didier Hirsch - Chief Financial Officer & Senior Vice President : Thank you, Mike, and hello everyone. To recap the quarter, our core order and revenue growth, excluding the impact of closed and divested businesses, were respectively 10% and 5%. As Mike stated, about $30 million of revenues was carried over into Q3 due to late incoming orders and some startup issues with the transfer of our U.S. distribution center. Those issues have now been stabilized and they will be fixed this quarter. Although revenues ended up $32 million under the midpoint of our guidance, adjusted operating margin was 18.3%, 10 basis points higher than guidance, and 140 basis points higher than last year on 2.5% lower nominal revenues. This quarter, currency subtracted about 6.8 percentage points from our year-over-year revenue growth. Finally, we bought back $162 million of stock in Q2 and generated $183 million in operating cash flow. I'll now turn to the guidance for our third quarter. We expect Q3 revenues of $995 million to $1.015 billion and EPS of $0.38 to $0.42. At midpoint, revenue will grow 7% on a core basis. Our 18.3% adjusted operating margin at midpoint will be equal to this quarter's operating margin. We expect to continue our disciplined buyback program and reach the planned $365 million of repurchases by year-end. Now to the guidance for the fiscal year. Versus our previous guidance, currency is forecasted to have a $10 million negative impact on revenue. We are adjusting our revenue guidance for that impact, but we are not modifying our EPS guidance. We expect fiscal year 2015 revenues to range from $4.05 billion to $4.11 billion and fiscal year 2015 EPS to range from $1.67 to $1.73. With that, I'll turn it over to Alicia for the Q&A. Alicia Rodriguez - Vice President- Investor Relations : Thank you, Didier. Latoya, will you please give the instructions for the Q&A. Operator : Thank you. The first question is from Doug Schenkel of Cowen & Company. Your line is open. Doug A. Schenkel - Cowen & Co. LLC: Hey, good afternoon, guys, and thanks for taking the questions. My first question is really on the guidance. So you slightly reduced full-year revenue growth expectations, but not by much. I believe your second half core growth would have to exceed about 7% to get to your full year guidance. When you combine these observations with the observation that you talked about strong backlog heading into the third quarter, but then you guided revenue expectations a bit below where consensus stood, it does seem like second half growth is not only expected to accelerate but also to be a bit more back-end loaded than most of us were expecting. Could you just talk about what gives you confidence in the implied Q4 growth acceleration expectations that you seemingly built into guidance? Michael R. McMullen - President and Chief Executive Officer : Yeah, Doug, this is Mike. Thanks for the great question. And let me offer some additional commentary on our thinking about the confidence we have in the top line momentum and also our thinking about how we guided for the second half. When we look – obviously, very pleased with the top line momentum that I mentioned in my prepared remarks. And if you look at it, we've had two strong top line order quarters for the company. And what we're seeing is strong market, end-market strength in pharma, clinical and diagnostics, a strong U.S. and recovering China market. And we believe we're very well-positioned, which is reflected in the order numbers, to capture this growth with the strength with not only our portfolio but also our new sales structure. As I did mention in my remarks, though, we did have some startup issues with the logistics center. And also, we saw a late time in orders coming in the quarter. So we're becoming increasingly mindful of what seemed to be a change of customer buying behavior as we look at our revenue projections for the third quarter. But with the backlog, the ongoing strength of the top line, we remain quite confident in our ability to deliver on the top line growth forecast. Didier, anything else that you would add? Didier Hirsch - Chief Financial Officer & Senior Vice President : No, just to quantify. I mean, the $30 million that moved into Q3 is equivalent to 3 percentage points of revenue, if you would adjust the first half of that 3 percentage points, that really moved into the second half, then the growth between the first half to the second half is a lot more reasonable. Michael R. McMullen - President and Chief Executive Officer : Yeah, and Doug, it may also help you to hear directly from each of the group presidents how they look at their respective business just to give you a better feel for how we're thinking about the business in the second half. And Mark, perhaps I can start with you? Mark Doak - Senior Vice President and President-Agilent CrossLab Group : Thanks, Mike. And obviously this is another quarter where we've produced double-digit core order growth. So from the standpoint of the response we've got in the marketplace around our innovative products and services has been quite good. And I think it's a validation of our CrossLab strategy and the value we have for the customers. And looking forward, the fundamentals, as you suggest, really don't change much as we look at the end market strength in Americas and in China and some other places around the globe. And we continue to have strong demand from Europe. So long story short, it's a continuation we see of the strong fundamentals we have right now. Michael R. McMullen - President and Chief Executive Officer : Hey, Patrick, how about LSAG? Patrick Kaltenbach - Senior Vice President & President- LSAG Business : Yeah, thanks Mike. So for LSAG, we have seen continued strong performance in our core product lines like LCMS, ICP-OES throughout Q1 and Q2. There's a lot of very strong momentum behind these new products that we recently introduced. And solutions like the Infinity II LCs that you mentioned or the ICP-OES and our high-end LCMS solutions. So for the second quarter, as you stated before, we had order growth on a core base of 10% excluding RPD. I think we have a very strong pipeline. We see a strong funnel, and therefore also are committed to the second half. Michael R. McMullen - President and Chief Executive Officer : Thanks, Patrick. And maybe you can just bring us home, Jacob? Jacob Thaysen - Senior Vice President & President- DGG Business : Yes, certainly. As you have noticed, DGG had a strong Q2, definitely compensating for the challenges in Q1. And we see the improved momentum in all our divisions. Soon being out of the FDA activities and back to normal operationally, I do expect to see the pathology business continue to strengthen throughout the rest of the year together with the rest of the portfolio. So I also have very strong confidence in the second half year. Doug A. Schenkel - Cowen & Co. LLC: Great. That's really helpful, and given all the detail I will step away, get back in the queue, and let some other folks ask some questions. Thanks again. Michael R. McMullen - President and Chief Executive Officer : All right, thanks Doug. Operator : Thank you. The next question is from Dane Leone of BTIG. Your line is open. Dane Leone - BTIG LLC : Hi, thanks for taking the questions, guys. Just I guess another question in terms of the back half expectations. Clearly, the trend for the operating margin has been a bit down with some of the dissynergies coming from the spinout. But as we think about coming into the end of the year, can you help us with the pacing? I mean, it seems like the implied guidance would still have us down marginally in the back half of the year, but quite a substantial improvement versus the first half. So any thinking you can help us with on the operating expenses as they move into the back half of the year I think would be appreciated. Michael R. McMullen - President and Chief Executive Officer : Yeah, Dane, this is Mike. Thanks for the question. I'll make some initial comments and then pass it over to Didier. So as you saw in my prepared remarks, we were quite pleased with the operating margin performance for the business, particularly in that revenue came in below our initial expectations, albeit we'll pick it up in the second half. And you also saw that I went to some length to describe the costs that have been coming out of the structure already, and we're about halfway through the $50 million commitment already. So I think as the final tail-off of our restructuring starts to hit and some of the other costs and some of our other aspects of our Agile Agilent program start to hit, you'll see us continue to bring down the operating expenses in the coming quarters. And, Didier, I don't know if you want to add to that? Didier Hirsch - Chief Financial Officer & Senior Vice President : Yeah, I'll just, and you know, as you have been able to calculate, I mean our guiding midpoint for an operating margin in Q3 of 18.3%, which is at the same level as we've had in Q2 with slightly lower gross margin. Q2 had some very favorable currency hedging gains and slightly higher OpEx, mostly because of currency and some slight increase in stock-based compensation. And then for Q4, the implied operating margin for the Q4 to get to the 19% for the whole year, which we are guiding to, would be 20.9%, which would be slightly higher than what we achieved last year of 20.4%, which means that we will see then the full impact of the Agile Agilent program as with an increase in operating margin, even though we are facing still the $40 million dissynergies that we've talked about at length. Dane Leone - BTIG LLC : Okay. So yeah, I guess the overarching theme that Doug kicked off with was a pretty strong fourth quarter. Maybe you could just kind of elaborate on the comps that you have from the fourth quarter last year. Was there something particularly weak in terms of how the business is constituted last year that maybe you'd hit better overhead absorption, et cetera, in the fourth quarter this year along with some strong organic growth comps? I guess that's probably what we're kind of grasping at here is, where the confidence for the fourth quarter specifically is coming from. Michael R. McMullen - President and Chief Executive Officer : I think it's twofold, right? One is we do have some level of easy compares, I would say that, particularly as Jacob mentioned in his earlier comments, we now see our DGG business back on track, but we were seeing a retraction in terms of our growth at this time last year. So I think there is an element of, if you will, easier compares in Q4. I think Q4 historically is always our strongest quarter, and we've got this very strong order momentum and backlog going into the back half. And I would say we're trying to guide fairly conservatively for Q3 on the revenue as well. Didier Hirsch - Chief Financial Officer & Senior Vice President : Yeah so, certainly to emphasize what Mike has said, last Q4 was 1 percentage point lower core revenue growth than the average of the year. So it was kind of, I would say, a weaker quarter in terms of revenue growth that we saw throughout the year. And then as I mentioned, we are guiding for an operating margin of 20.9, which is not that far away that we achieved in Q4 of last year of 20.4%. And obviously we are, as you have noted, expecting higher revenue on an easier compare. Dane Leone - BTIG LLC : Okay. Thanks, guys. I'll yield back to the field. Operator : Thank you, and the next question is from Isaac Ro of Goldman Sachs. Your line is open. Isaac Ro - Goldman Sachs & Co.: Hey, good afternoon, guys. Thank you. First question for me was on China. It seems like for the most part this sector has seen a modest improvement, or at least stability, in that region this quarter. And there may be a couple outliers where we saw commentary that was perhaps more cautious. So, if you could talk a little bit about what you saw there across your end markets and what's baked into your expectations. Michael R. McMullen - President and Chief Executive Officer : Sure, Isaac. Thanks again for joining the call. I just got back from a week or so in China in the early part of April, and I'll share with you today in the call what I shared with our board at the time, which was I continue to see a gradually improving overall market environment in China. I think that there's a level of pessimism about the China market, which I think is not called for. When you look at where the market is growing, and we put up high single digit market growth orders in our second quarter, you see a continued strong pharma, biopharma investments in life sciences, in human health. We see that much of the reorganization of the food ministries are behind us. In fact, I had an opportunity to represent Agilent at the BOA conference where we heard President Xi talk about his Silk Road policy, and there is also a major forum on food safety, which I participated in. And there's no doubt that the food safety areas will be back on track in terms of investment. And then I think you're seeing – you can count on really strong growth in the environmental segment for I think years to come. I think the one area which was a little bit more subdued in terms of overall growth would be the chemical and energy space, but that we expect still to grow in the low-single digits. So I think that the days of those double-digit market growth in China are behind us, but I think you can expect to see solid market growth in China throughout the rest of this year. Isaac Ro - Goldman Sachs & Co.: Great. That's helpful. And just dovetailing on your last comment there about chemical and energy, it's obviously I think 25% of the business now, so perhaps maybe a little more important than we've previously appreciated. And it's no surprise obviously that the commodity price there has hurt spending. But I'd be curious, in the past you've talked about how when the commodity prices come down, there's actually a bit of an uptick that you see downstream in the markets you serve on the chemical side that are oil-price sensitive, so I'd be curious if you could talk a little bit about from a timing perspective. How we should think about that tailwind kind of helping to offset the CapEx pressure. Michael R. McMullen - President and Chief Executive Officer : Thanks, Isaac. You have a great memory on earlier conversations. So, in fact, what I think I'll do is I'll pass it over to Patrick. He can provide some insights on that end market. Patrick Kaltenbach - Senior Vice President & President- LSAG Business : Yeah, thank you, Mike. And you're right – it makes up about 25 – chemical and energy makes up about 25% of Agilent's business, and – but as a reminder, the decline is mainly driven by the impact on the falling oil prices. And we have seen most of it on the customers on the exploration side. And actually that segment is only 15% of our chemical and energy segment overall. So I think actually there is some upside still on the chemical side based on the lower feedstock prices that has not yet materialized. I think these customers are still a little cautious to start more spending. So we will continue to carefully monitor the situation. But I don't see any immediate changes or more dramatic reductions in the business overall. I think, again, there will be into 2016, probably you will see the shortfall on the exploration side, but it's positive momentum what we can expect – positive momentum on the chemical side. Isaac Ro - Goldman Sachs & Co.: Okay, thanks helpful. Thank you, guys. Operator : Thank you. The next question is from Tycho Peterson of JPMorgan. Your line is open. Tycho W. Peterson - JPMorgan Securities LLC : Hey, thanks. Mike, can you just clarify how much of the $30 million delay was self-inflicted versus – the shipping center stuff versus the customer order side? And on the customer side, was that all academic? Michael R. McMullen - President and Chief Executive Officer : Tycho, you kind of broke up a bit in the call. I think you're asking about the breakdown of the $30 million revenue? Tycho W. Peterson - JPMorgan Securities LLC : How much was the – yes, the self-inflicted, the shipping logistics... Michael R. McMullen - President and Chief Executive Officer : Oh, yeah. Got it. Got it. It's roughly 50%-50%. So, about $15 million of it was through the start-up issues with our logistics network in the United States, and the other $15 million was from very late coming in orders that we couldn't turn into revenue within the quarter. Tycho W. Peterson - JPMorgan Securities LLC : And then can you maybe touch on share dynamics? I'm sure we're all going to get the question tomorrow, given that Waters have been up 15% organic. Can you maybe just talk about how much of what you're seeing was – I mean the order book was up 6%, so that's the silver lining. But can you just talk about your ability to hold share in this environment? And any color on pricing would be helpful too. Michael R. McMullen - President and Chief Executive Officer : We're doing more than holding share, we're taking share is our view because we had 10% core order growth in the marketplace, and with the one exception of Waters, I don't think anybody's putting up numbers like this in the space. And as you may be able to dig into some of the details and remarks, some of the areas where we compete directly with Waters in LC, LC-MS and pharma and biopharma, I think, Patrick, you might want to jump on this as well. We saw very, very strong growth. So, I think there is a different composition of our portfolio and end-market play than Waters, but where we compete we're clearly holding our own. Patrick Kaltenbach - Senior Vice President & President- LSAG Business : Absolutely. And I want to speak here only to the auto side because we had these issues on the revenue side. But both in LC as well as in MS, our orders have been up double-digit, so we see a strong momentum, as I said in the beginning, behind our new Infinity II series and also behind our – mainly behind our high-end LC-MS systems like the 6495 Tripe Quad. So I would say we are competing very effectively. Tycho W. Peterson - JPMorgan Securities LLC : Okay. And one last one Michael R. McMullen - President and Chief Executive Officer : Sure. Tycho W. Peterson - JPMorgan Securities LLC : Maybe for Didier. The EPS impact to the $30 million delay given that some was orders, some was... Didier Hirsch - Chief Financial Officer & Senior Vice President : The EPS impact is your question, Tycho? Tycho W. Peterson - JPMorgan Securities LLC : Correct. Correct. Didier Hirsch - Chief Financial Officer & Senior Vice President : Well, it will be about $0.03 I would say. Tycho W. Peterson - JPMorgan Securities LLC : Okay. Thank you. Michael R. McMullen - President and Chief Executive Officer : Thanks, Tycho. Operator : Thank you. The next question is from Brandon Couillard of Jefferies. Your line is open. S. Brandon Couillard - Jefferies LLC : Thanks. Good afternoon. Michael R. McMullen - President and Chief Executive Officer : Hi, Brandon. S. Brandon Couillard - Jefferies LLC : Mike, just a question on the pharma market. I think this is the first time in a little while you've mentioned a large pharma group as being a source of strength in the period. Are you seeing a recovery from that customer base? And just kind of talk about the outlook I guess for the balance of the year in the pharma market. Michael R. McMullen - President and Chief Executive Officer : Yeah, good catch, because we've been talking before about the small and medium size in specialty pharma, so it's a broad-based recovery, and we're really starting to see the large pharma investing and really coming off their delayed technology refresh plan. So I think that's why Patrick mentioned earlier the very strong growth we're seeing in our LC and LC-MS product line. So, this is a much larger broad-based recovery across pharma than we have pointed to in the past. And then biopharma continues to be a strong segment in the industry as well. S. Brandon Couillard - Jefferies LLC : And one more for Didier. Given the Dako resolution came in about six months earlier than planned, curious why the incremental spend that's baked into the outlook isn't lower I guess relative to the prior view of about $15 million of incremental spend. Didier Hirsch - Chief Financial Officer & Senior Vice President : Good question, Brandon. It is slightly lower. We are planning to spend about $15 million. There is a lot of work that needs to be done towards – until about June, and then we will stop seeing a serious pay down of the expenses. But don't forget, I mean we are very, very serious on investing whatever we need to make sure that we comply with all the regulatory requirements. And Jacob, you probably want to add too. Jacob Thaysen - Senior Vice President & President- DGG Business : Yes. Surely, I mean first of all, we are obviously very pleased that we received the notice from FDA that the warning letter has been lifted, and as Didier's also mentioning we will finalize the activities that we've committed to, to close out with FDA. Therefore, the spending is also a little bit lower than what we have guided earlier, but we will also continue to invest in a higher compliance level going forward. S. Brandon Couillard - Jefferies LLC : Super. Thank you. Michael R. McMullen - President and Chief Executive Officer : You're welcome. Operator : Thank you. The next question is from Ross Muken of Evercore ISI. Your line is open. Ross Jordan Muken - Evercore ISI : Good afternoon, guys. So I guess as we try to put tonight's print in context, obviously, CapEx business or the backlog swings, we've seen these before. But it seems to happen here a little bit more than we've seen it at some of the other CapEx-focused players. So Mike, you've been spending a lot of time trying to reinvigorate sales and the sales organization, and obviously you've got your margin discipline you're also trying to execute against. I mean as you think about all of the various moving parts here, do you feel like pushing the organization to degree that you are, this is sort of the result? Or do you think this is purely kind of just, hey, we just didn't execute and things need to change? I'm just trying to figure out how to isolate – we heard the explanation before – kind of how to put in context all of the moving parts with kind of the outcome. Because obviously you sound excited, but I think the stock's 5% now; the shareholders aren't nearly as excited today. So I'm trying to figure out how to put that all together. Michael R. McMullen - President and Chief Executive Officer : Hey, Ross, thanks for the question and the acknowledgment of the efforts we have underway to really accelerate traction in a couple of key topics for us on a strategic nature. So, great question. So when I step back from them and look at this, which is, I went to great lengths to highlight the start-up issue we had with logistics center. But – and I think it's an evidence of the new Agilent in terms of we're going to make bold moves. We're going to drive towards changing our cost structure. When we're done here, we'll have probably $3 million or so out of our cost structure, much improved customer experience. So – and then when I found out about my team and I learned about my team is when we have issues, such as the one we discovered once we went live in the later part of March, we got all over it. What I didn't share with you was also the fact that we delivered 10% order growth in the midst of a major field reorganization. So I think that we're not pushing the team too hard. We have the ability to execute and to drive the company forward aggressively. There will be – perhaps will be some times won't go completely according to plan. But what this team will do is get all over it as a team and work very quickly to address it. So hopefully that gives you some insight in terms of how the company is running inside. We're enthusiastic, we're energized, and I don't think anybody believes that they're overly taxed yet. Ross Jordan Muken - Evercore ISI : And maybe as a follow-up, so you bought a little bit more stock this quarter, but it's still a pretty small amount relative to your overall share mix. So we just saw last week, one of your larger peers buy a separations chromotography asset for 19 times EBITDA. As you think about sort of the value of your asset, particularly relative to all of the things you're doing to hopefully augment and fix and improve the profitability of it, as you think about sort of harnessing some of those returns for Agilent shareholders, and maybe you'll cover it in more detail at the Analyst Day. But how are you guys thinking about the share buyback, just given sort of all the various data points out there in the market? Michael R. McMullen - President and Chief Executive Officer : Yes, thank you, Ross, for that question. So right now, what you heard today was that we're doing what we said we would do, which is we would buy back $365 million of stock, and we are well on our way to doing that. However, as also I've said in prior calls, we continue to look at our overall capital allocation policy, how we're deploying capital for return to shareholders. And perhaps as a teaser for the May Analyst Meeting next week, I'll say more to come. Ross Jordan Muken - Evercore ISI : All right. Thanks, Mike. Operator : Thank you. And the next question is from Paul Knight of Janney Capital. Your line is open. Michael R. McMullen - President and Chief Executive Officer : Hey, Paul, go ahead. Operator : Please check to see if your line is on mute. Paul Richard Knight - Janney Montgomery Scott LLC : Hello. Michael R. McMullen - President and Chief Executive Officer : Hello, Paul? Paul Richard Knight - Janney Montgomery Scott LLC : Yeah, sorry. Michael R. McMullen - President and Chief Executive Officer : Go ahead. No problem. Paul Richard Knight - Janney Montgomery Scott LLC : CrossLab was a little lower growth in the current quarter than the 10% or so organically in January's quarter. Was that due to this re-org you were talking about, Mike, or what was going on with CrossLab? Was it weather, et cetera? Michael R. McMullen - President and Chief Executive Officer : No, we've got a lot of our – and Mark you can jump in as well. We got a lot of our revenue hung up in the logistics center issue that I talked about earlier, because we have such a high velocity of consumables and support parts going through, not only the U.S. logistics center for U.S. customers, but also as a gateway into our global customer base as well. So you'll note in our prepared remarks, I think we had 12% organic order growth. So it really was a story on the logistics center. But Mark, anything else you want to add? Mark Doak - Senior Vice President and President-Agilent CrossLab Group : Well there's the other nuance, Mike, which in services, obviously order growth doesn't translate immediately to revenues. And this 12% growth, a lot of that came through services. And what you'll see is that becomes an annuity stream going forward for the remaining quarters. So I would say we put some money in the bank for looking out into the next year. Michael R. McMullen - President and Chief Executive Officer : Yeah and then, Paul, that's also why again there's been a lot of questions about the second half revenue outlook, and this is one of the reasons why we're confident in our outlook. Paul Richard Knight - Janney Montgomery Scott LLC : Is CrossLab one of the major reasons you think you're taking share, along with the obviously the instrument technology. But is it a reason? Michael R. McMullen - President and Chief Executive Officer : We think it's a combination of both, right. So we're driving really new innovative new solutions, so we're putting more instruments into the marketplace and taking share. But we also embrace in a strategy which I think, and we'll go through some level of detail next week, where we really believe there's a broad-based play across the whole laboratory environment, not only for services and consumables for our instrumentation, but in the broader vendor base as well. And I think it's very clear that we're picking up very good business and services in consumables, and I'm guessing it's above market. Mark Doak - Senior Vice President and President-Agilent CrossLab Group : I certainly think it is, Mike, but I would say what our intent is, obviously to ensure we differentiate all of the solutions Agilent brings to the market. I feel confident a lot of the innovation we have is driving that share gain. Paul Richard Knight - Janney Montgomery Scott LLC : And then lastly, Didier, the China organic was what in the quarter? I missed that. Didier Hirsch - Chief Financial Officer & Senior Vice President : On the revenue growth? Paul Richard Knight - Janney Montgomery Scott LLC : Yeah. Didier Hirsch - Chief Financial Officer & Senior Vice President : It was negative on the revenue side and the positive on the order side, and revenue was kind of a negative low single digit. Michael R. McMullen - President and Chief Executive Officer : Yeah, and we had high single digit order growth. We think it was a few digits. Didier Hirsch - Chief Financial Officer & Senior Vice President : Yes, exactly. And perhaps low to mid single digits on the revenue side. And again, as Patrick said, it's very difficult this quarter to talk about revenue considering the $30 million. And for example, a lot of that impacted China because although we kind of recovered some towards the end of the quarter, because of the shipment times, we were not able to recognize revenue, in particular in China. It was the region that was the most impacted by the $30 million revenue shortfall. Paul Richard Knight - Janney Montgomery Scott LLC : Is it the facility in the U.S. or China? Didier Hirsch - Chief Financial Officer & Senior Vice President : The facility is in the U.S., but it ships all over on whatever is produced in the U.S. And including, for example, it ships GCMS into China, and because of a long transit time, China was positively impacted. Paul Richard Knight - Janney Montgomery Scott LLC : Okay, thank you. Operator : Thank you. The next question is from Steve Beuchaw of Morgan Stanley. Your line is open. Steve C. Beuchaw - Morgan Stanley & Co. LLC: Hi, good afternoon everyone. Michael R. McMullen - President and Chief Executive Officer : Hey, Steve. Steve C. Beuchaw - Morgan Stanley & Co. LLC: Let's just start by rounding out the geography. You called out Japan. So subsequent to the revenue commentary, you made a comment there, much like China, that the orders were very strong. It seems like while you're certainly not the first to call out Japan as an area where there are a few moving parts, can you give us a sense for what it is that you're seeing in Japan? Number one, is this an area where some of the shipment delays are having an impact? Number two, to the extent there is any softness there, where are you seeing it? And number three, how do you see it playing out over the balance of the year? Michael R. McMullen - President and Chief Executive Officer : Yes sure. thanks, Steve, for the opportunity to talk, provide some insight into Japan. Different story from my perspective than China. Though we were pleased to see the order growth that we saw in Q2, we have to keep in mind that it was off a relatively easy compare in 2014. And I think we know the history there with the Japanese implementation, the VAT tax, and how it really changed the seasonality of orders for everybody in the early part of last year. What we're seeing going forward is a environment where we're expecting continued weakness in the academia and government segment. The quantitative easing budget money doesn't seem to be really flowing into our space. The flip side of that is, we're actually seeing improvements in the private sector. Now it's a very fragile environment right now, but we think that if it's holding together, we expect it to be subdued. It won't be the same level of growth as you're going to see in China, but we're also not seeing any kind of significant downturn. And Didier, I don't know if you have any other observations on Japan. Didier Hirsch - Chief Financial Officer & Senior Vice President : No, I mean what we are seeing and what we've started seeing in April certainly seems to tie also with the general projections from the economies that are seeing that after Q1 with a negative GDP growth, Q2, Q3 growth will accelerate and will clearly be positive during those two quarters. So we are hoping that they are right for the one. Michael R. McMullen - President and Chief Executive Officer : But again, I think you need to look at the Japan results with some caution. Steve C. Beuchaw - Morgan Stanley & Co. LLC: Okay, very helpful. And then, just one housekeeping question for Didier. With Cartagenia now in the books and the XRD transaction, can you give us a sense for how much incremental we should expect on the top line from these transactions over the balance of the year and hopefully for next fiscal year? Thanks so much. Didier Hirsch - Chief Financial Officer & Senior Vice President : Yes, let's say that for the immediate future, it's not going to move the needle, and I probably would leave it at there. Jacob, do you want to add any color? Jacob Thaysen - Senior Vice President & President- DGG Business : No, I agree, Didier. I mean first of all, most impact of Cartagenia is going to be minimal in the short-term future in the whole Agilent picture. But I do believe that Cartagenia is a very important pillar in our strategy going forward, where we want to really develop the workflows into pathology labs and focusing on – and on genetic disorder labs also. Steve C. Beuchaw - Morgan Stanley & Co. LLC: I certainly couldn't agree more, but just to put a finer point on it, between XRD and Cartagenia, can you give us any sense for what the run rate in terms of dollars was on revenue for those businesses? Thanks so much. Michael R. McMullen - President and Chief Executive Officer : Didier, I'll just jump in. On the XRD, it was a little less than $15 million or so of revenue, and then we had about 88 employees associated with that business mainly in Poland that now have joined Rigaku. Anything else you want to add, Didier? Didier Hirsch - Chief Financial Officer & Senior Vice President : No. Steve C. Beuchaw - Morgan Stanley & Co. LLC: Thanks so much. Michael R. McMullen - President and Chief Executive Officer : Thank you. Operator : Thank you. The next question is from Dan Arias of Citigroup. Your line is open. Daniel Arias - Citigroup Global Markets, Inc. (Broker): Afternoon, guys. Thanks. Mike, does the outlook for the rest of the year pretty much assume that demand from the energy customers stays where it is? Or are you assuming you maybe start to get a little bit of relief. You've gotten a slight rebound in crude prices over the last month or so. I'm not sure that's meaningful to your thinking at all. Michael R. McMullen - President and Chief Executive Officer : No, great question, Dan. Thanks for the opportunity to comment. No, we're not expecting any kind of rebound, just staying the status quo. If – I think Patrick pointed to more of a 2016 kind of up rebound on the chemical side of that. So it happened before, that would represent upside to our thinking, but we're not currently forecasting that. Daniel Arias - Citigroup Global Markets, Inc. (Broker): Okay, thanks. And then Didier, on the Agile Agilent savings, should we look for what's left on the $50 million for the year to be recognized pretty evenly in the back half? Or might that be weighted towards one quarter than the other? Didier Hirsch - Chief Financial Officer & Senior Vice President : No, I mean it's slightly obviously a little bit more in Q4, but Q3 is going to be fairly significant. So, perhaps 45/55 in the second half between Q3 and Q4. Daniel Arias - Citigroup Global Markets, Inc. (Broker): Got it. Okay. Thanks very much. Operator : Thank you. The next question is from Jeff Elliott of Robert W. Baird. Your line is open. Jeff T. Elliott - Robert W. Baird & Co., Inc. (Broker): Yes, good afternoon. Thanks for the question. Mike, do you think the customer order patterns have changed permanently, or was there something unique to the quarter that you called out? And then secondly, I guess, have you seen any change in the order cancellation rate? Michael R. McMullen - President and Chief Executive Officer : Yes, Jeff, great question. So in fact, we've really been asking ourselves all the same question, which is, we saw a different seasonality in this Q2 than last year. So all we kept coming back to was we really can't control the customer buying behavior. So I really don't have a good solid answer for you. But what we are going to do, and I think I hinted at it earlier, we're going to be adjusting our revenue forecasting models, sort of increasingly mindful of what seemed to be a changed timing of order flow within the quarter, so does seem to be customer-driven. I can't really put a logical explanation behind it. So what we want to do is we want to evolve in our forecasting models from a revenue standpoint. And in terms of order cancellation, it's not at all on our radar screen as a topic of concern. Jeff T. Elliott - Robert W. Baird & Co., Inc. (Broker): Got it, okay that's great. And just a follow-up, Didier, can you give us a segment break down for the $30 million of I guess of orders that got slipped out of the quarter? Didier Hirsch - Chief Financial Officer & Senior Vice President : It was mostly around LSAG. I mean clearly, DGG had no impact; ACG a little bit, but relatively minimum. It was mostly LSAG instruments. Mostly instruments. Michael R. McMullen - President and Chief Executive Officer : Yeah, the instrument side. Didier Hirsch - Chief Financial Officer & Senior Vice President : Mostly instruments. Jeff T. Elliott - Robert W. Baird & Co., Inc. (Broker): Got it. Okay, thank you. Didier Hirsch - Chief Financial Officer & Senior Vice President : Sure. Operator : Thank you. The next question is from Derik De Bruin of Bank of America. Your line is open. Derik De Bruin - Bank of America Merrill Lynch : Hi, good afternoon. Michael R. McMullen - President and Chief Executive Officer : Hey, Derik. Derik De Bruin - Bank of America Merrill Lynch : Hey, so sticking with Jeff's question, changes in ordering patterns, but was there any sort of pricing competition at the end of the quarter, any unusual changes from your competitors? Or is it just customers just behaving differently? Michael R. McMullen - President and Chief Executive Officer : Yeah, as I look around the conference room here, everybody is shaking their head no. No really significant changes from competitors or pricing behaviors. Derik De Bruin - Bank of America Merrill Lynch : Okay and on – you've gotten rid of NMR, XRD. Is there anything else within that old Varian business? For example, the old vacuum pump business that is no longer core to the organization? Michael R. McMullen - President and Chief Executive Officer : Yeah, no, thanks for the great question. So I think that you see, Derik, that we're continuing to look at our portfolio and we're quite happy with the status of the portfolio right now. And in fact, on the vacuum side, we're seeing – I've got a profitable business that we actually see has a fair amount of synergies in Agilent, particularly as we think about designing and developing next-generation of mass spectrometry and kind of being able to integrate the pumps in a different manner, in terms of our new systems, albeit, also the fact that we've integrated them on a sales-force perspective to also take advantage of the opportunities that exist in the analytical lab. We see it as an enabler for our CrossLab business. So, I've got a business that's making money, and I can see the synergies with the rest of the company. So it's solid right now within Agilent. Derik De Bruin - Bank of America Merrill Lynch : Great and just one final question. So you said XRD was about $15 million, and remind me what the NMR hit was to this year? Michael R. McMullen - President and Chief Executive Officer : I'll defer to Didier on that one. Didier Hirsch - Chief Financial Officer & Senior Vice President : Yes, on the year-over-year basis, it was relatively minimum. I'll give you the numbers. But it had a much bigger impact on orders, obviously, because we stopped taking orders. So last year, we had about $50 million of orders for the whole year on NMR, and this year, is even slightly negative because we canceled a few of the orders in the backlog. And in terms of revenue last year, we had about $80 million in revenue. This year, we'll have about $65 million, and we'll have some revenue even next year as we recognize revenue on the last OEM magnet that we stopped taking orders on back two years ago, but we are still shipping. Derik De Bruin - Bank of America Merrill Lynch : Great. Thank you. Didier Hirsch - Chief Financial Officer & Senior Vice President : Sure. Michael R. McMullen - President and Chief Executive Officer : Thanks, Derik. Operator : Thank you. The next question is from Miro Minkova of Stifel. Your line is open. Miroslava Minkova - Stifel, Nicolaus & Co., Inc.: Yes, good afternoon guys. Let me start with a question on the sales-force reorganization. Perhaps remind us how exactly you reorganized, other than the divisional changes that you made. Perhaps a little bit more on the things that we cannot see from the outside : incentives, territories, compensation. It sounds like you didn't think this impacted your ability to close orders. But give us a sense as to when you might see perhaps, a positive impact from the reorganization? Michael R. McMullen - President and Chief Executive Officer : Yes, thank you, Miro. I really appreciate the opportunity to comment on this. So I think we're already – I'll go in a second on the details of the reorganization, but we're already seeing the impact, which is again, I think phenomenal order results in the second quarter, building on a strong Q1. And what we've done is we've gone from five sales forces to two. We have one sales force that's focused on the diagnostic and genomics area, which is really our regulated marketplace. And then we now have one sales force that covers the entire analytical lab from pharma, chemical, environmental, food, forensics, life science research, and as I mentioned earlier, also inclusive of the vacuum. Those organizations previously were three separate organizations, and it led to a lot of extra cost. But even – perhaps even more importantly, it led to a lot of unnecessary internal interaction about accounts assigned, the territory assignments, was this a life science account or a chemical analysis account? That dialogue is completely gone now. We've integrated under one global leader, and now all of our energy is focused on optimal territory assignments, taking care of the customers, and taking share from the competitors. So I couldn't be more delighted in terms of how the integration and reorganization of our sales force has gone. And again, I think it's going to allow us to put more energy, more resources, more focus on front-line channel expansion, as opposed to internal dialogue and cost structure. Patrick, do you want to add anything? Patrick Kaltenbach - Senior Vice President & President- LSAG Business : Yes, I just want to add in terms of what you probably don't see from the outside is in terms of the divisional changes we made is we made a significant change in our MS business. We basically brought together the TCM LCMS business and 50% of all the labs organization into one new strong mass spectrometer group. And I think the result of that will basically we see more in the future, as we have now much more horsepower on the R&D side to develop new product for what we see as the fastest growing market segment for us. Michael R. McMullen - President and Chief Executive Officer : Yeah. Thanks for that, Patrick. And we talk internally and here we talk next week about One Agilent, we really are trying to leverage the full power of this company by organizing ourselves to get the maximum leverage out of the capability we have with the company Miroslava Minkova - Stifel, Nicolaus & Co., Inc.: Okay. Thank you very much for this color. And on the FDA warning resolution, congrats on getting this ahead of time. You already commented a little bit on the cost side. But do you have – does this allow you to launch new products? Do you have anything in the pipeline that you could start launching now post-remediation? Michael R. McMullen - President and Chief Executive Officer : Yeah, thanks Miro, for that comment. And I'll pass it over to Jacob for some additional commentary. Jacob Thaysen - Senior Vice President & President- DGG Business : Yeah, absolutely, and you're right on, of course having to deal with an FDA warning letter, you have a lot of operational focus on dealing with that warning letter and taking some of our focus away from new product development. Fortunately, we have more sites. We have had strong development activities on other sites like the Carpinteria side and also our genomics side. We, in particular, within our companion diagnostic, we are looking into some very, very exciting launches coming up over the next quarters. I think you heard already Mike alluding to Merck & Co. has communicated their ambitions within the PDL1 assay – PDL1 drug target, and we are together with them on coming out with a PDL1 assay. And we definitely look into over next quarters at least one launch in that area maybe even two. And on the genomics side, we have had quite a lot of exciting launches this quarter also that I could talk a long time about, but I don't think we have time for it right here. Michael R. McMullen - President and Chief Executive Officer : You have time next week. Jacob Thaysen - Senior Vice President & President- DGG Business : Yeah, I will. Miroslava Minkova - Stifel, Nicolaus & Co., Inc.: Thank you very much. Michael R. McMullen - President and Chief Executive Officer : You're quite welcome. Operator : Thank you. The last question is from Jack Meehan of Barclays. Your line is open. Jack Meehan - Barclays Capital, Inc.: Thanks and good afternoon. I just have a couple of clean-up ones. Michael R. McMullen - President and Chief Executive Officer : Sure, Jack. Jack Meehan - Barclays Capital, Inc.: In the diagnostics business, just going through the slides, the delayed Q1 shipments, is there a way to quantify what that helped in the quarter? And then as you look into the back half, just being able to press some of the better growth now that you're past the warning letter and the manufacturing issues there? Michael R. McMullen - President and Chief Executive Officer : Yes, thanks, Jack, for the question. I'll pass it over to Jacob or perhaps, Didier, you want to weigh in on this as well? Jacob Thaysen - Senior Vice President & President- DGG Business : Well, you are definitely right that our performance this quarter is a bit skewed by these orders that return to revenue into Q2. But we have an underlying business improvement, both in the pathology business with the rest of the portfolio that will start now to drive the underlying business growth. So I expect to see an improvement in our performance on all elements, especially particularly in the pathology business. We once again saw record placements of Omnis, and this is a great indicator that we will start to see strong traction in the pathology business. So I'm very comfortable – confident that we received the growth coming from the business going forward. Michael R. McMullen - President and Chief Executive Officer : Okay. Good. All right? Jack Meehan - Barclays Capital, Inc.: And then, yeah, just the last one, Didier. You mentioned the hedging cadence in the quarter. Can you just remind us how that works, and then is there a way to quantify on the earnings side what the total FX impact was? Didier Hirsch - Chief Financial Officer & Senior Vice President : Yes, absolutely. So we have, in addition to our structural hedging program, we hedge both our balance sheet and our cash flow, and the accounting treatment is different. The balance sheet hedging gains and losses show up in other income and expense below the line, whereas the cash flow hedges, the financial impact of the cash flow hedges shows up in cost of sales. And as there was the fairly dramatic, as you have noticed disconnection of changes in currency rates in the last two or three quarters, I mean we have had fairly significant currency hedging gains. In Q1 they were about $3 million to $4 million. In Q2, they were about $7 million, so this Q2. And because we settled the hedging programs always at the beginning of the quarter, we already know what our currency hedging gains will be in Q3. And they will be about $3 million. So there's a $4 million reduction in hedging gains, and that reduction shows in the cost of sales of gross margin. So that's why I was mentioning everything else being the same, gross margin would be impacted to the tune of 0.4 percentage points sequentially. Jack Meehan - Barclays Capital, Inc.: Great. Thank you. Didier Hirsch - Chief Financial Officer & Senior Vice President : Sure. Operator : Thank you. There are no further questions in queue at this time. I'll turn the call back over to Alicia Rodriguez for closing remarks. Alicia Rodriguez - Vice President- Investor Relations : Thank you everybody for joining us on the call today. If you have any questions, please give us a call, and we'd like to wish you all a good day. Thanks again. Operator : Thank you. Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,015	3	2015Q3	2015Q3	2015-08-17	1.986	1.812	1.912	1.948	2.58	20.39	18.75	Executives: Alicia Rodriguez - Vice President, Investor Relations Mike McMullen - President and CEO Didier Hirsch - Senior Vice President and CFO Patrick Kaltenbach - President, Life Sciences and Applied Markets Group Jacob Thaysen - President, Diagnostics and Genomics Group Mark Doak - President, CrossLab Group Analysts : Dan Leonard - Leerink Brandon Couillard - Jefferies Doug Schenkel - Cowen Tycho Peterson - JPMorgan Paul Knight - Janney Montgomery Isaac Ro - Goldman Sachs Dan Arias - Citigroup Ross Muken - Evercore ISI Miro Minkova - Stifel Jack Meehan - Barclays Steve Beuchaw - Morgan Stanley Dane Leone - BTIG Derik de Bruin - Bank of America Catherine Ramsey - Robert W. Baird Operator : Good day, ladies and gentlemen. And welcome to the Agilent Technologies Q3 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Alicia Rodriguez, Vice President of Investor Relations. Please go ahead. Alicia Rodriguez : Thank you, Abigail. And welcome everyone to Agilent's third quarter conference call for fiscal year 2016. With me are Mike McMullen, Agilent's President and CEO; and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Patrick Kaltenbach, President of Agilent's Life Sciences and Applied Markets Group; Jacob Thaysen, President of Agilent's Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. 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. You will find an Investor Presentation along with revenue breakouts and currency impacts, 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 Mike and Didier 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. Please note that we will refer to core order and revenue growth percentages. Core orders and revenue exclude the impact of currency, the NMR business, and acquisitions and divestitures within the past 12 months. Reconciliations between reported and core growth in dollars and percentages can be found in the Financial Results section on the IR website. 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’d like to turn the call over to Mike. Mike McMullen : Thanks, Alicia, and hello, everyone. Thank you for joining us on today’s call. I will start with a summary of our Q3 performance. Then I’ll move to an update and outlook on operating margin expansion and capital deployment plans. Finally, I will close with our full-year guidance. I am very pleased to report our Q3 results, with the Agilent team delivering revenue at the high-end of our guidance and earnings above our guidance range. Agilent’s Q3 revenue of $1.01 billion grew 1% over a year ago, up 9% on a core basis. Orders of $953 million, while down 6% compared to a year ago, were up 3% on a core basis. Our strong revenue growth was driven by continued strength in the pharma, diagnostics, environmental and forensics markets, and across all geographies. We saw strong customer acceptance of our new instrument product introductions, and strength in our CrossLab services and consumables, diagnostics and genomics offerings. We also resolved previous start-up issues in our Americas Logistics Center, which delayed $15 million of shipments last quarter. A few additional comments on the order front, our 3% core growth was against a tough compare of 9% growth in Q3 ’14. We also experienced some U.S. and state government big deal delays into Q4, and customers in the industrial markets continue to take a cautious stance, in like a weak -- in light of weak commodity prices and uncertainties in the world economies. Adjusted operating margin, including the adjustment for Keysight billings, was 19.9%, expanding 110 basis points over a year ago. Earnings per share were $0.44. This marks another quarter of significant year-over-year margin improvements, driven by our intense focus on growing our operating margin, as we seek to achieve 22% margins by fiscal 2017. Moving on to the results by business group. The Life Sciences and Applied Markets Group or LSAG as a reminder, brings together Agilent’s analytical laboratory instruments and informatics. Core revenue growth of 9% was driven by strong performance in Pharma, environmental and forensics markets. Core orders were down 1%. LSAG operating margin for the quarter was 18.7%, up 220 basis points from a year ago. The previously announced exit of the NMR hardware business continues to proceed as planned. We expect our LSAG sales funnels to continue to strengthen, given a number of recent significant new product introductions. At June’s HPLC 2015 Conference in Geneva, we further enhanced our new Infinity II LC line with the new 1290 Infinity II Vial-Sampler. This product significantly lowers the entry price to the top-line product range, offering analytical laboratories a cost-effective way to experience the advantages of ultrahigh-pressure liquid chromatography. We released the 6470 LC/MS Triple-Quad at ASMS in June. This newly engineered core platform provides attogram-level sensitivity, and accurate quantitation with up to six orders of linear dynamic range. The new product delivers significant improvements to the best-selling core LC/MS Triple-Quad, the 6460. It offers improved performance, precision, speed and robustness; and features a small footprint to preserve bench space in the lab. And in spectroscopy, the 7800 quadrupole ICP-MS, which we launched in Q2, is the latest addition to Agilent’s industry-leading ICP-MS portfolio. This new product raises the standard for routine elemental analysis. Next, the Agilent CrossLab Group, or ACG, combines our analytical laboratory services and consumables businesses under a new Agilent brand. Core revenues were up 8%, while core orders grew 6% in the quarter. Operating margin was 22.6%. Last quarter, we launched the Agilent CrossLab Brand Promise program. This program is focused on delivering a new and integrated approach that offers actionable insights to help customers. New service solutions include laboratory business intelligence reporting, RFID inventory management services, and laboratory asset utilization services. And in consumables, we expanded our AdvanceBio portfolio of solutions, which enables scientists to speed research and lower costs. Finally, turning to the Diagnostics and Genomics Group, DGG is comprised of three divisions : the former Dako business, Genomics and Nucleic Acid Solutions. DGG’s results were driven by excellent performance across all three divisions, pathology and companion diagnostics, genomics and nucleic acid businesses. DGG’s core revenue grew 10% versus a year ago. Orders grew 8% on a core basis. Operating margin of 16.8% was up 330 basis points over Q3 of fiscal year 2014. In the third quarter, DGG completed its acquisition of Cartagenia, a leading provider of software for clinical genetics and molecular pathology labs. We launched updated Gene Expression Microarray tools for researchers to better investigate expression patterns on a highly accessible platform. Adding to products for next generation sequencing, we released new Target-Enrichment Solutions for disease research, which will address current limitations in exome sequencing. Now, let’s take a brief look at Agilent’s revenue by end market performance on a core basis. Life sciences and diagnostics markets continued to see strength in pharma, a recovery with strong demand in the diagnostics and clinical market, and moderate growth in academia and government. Applied end-market performance was led by continued spending in environmental and forensics, and moderate growth in food. Chemical and energy was flat, due to reduced investments in oil exploration. We also saw cautious spending in downstream refining and chemical segments, driven by macroeconomic uncertainty concerns. Geographically, we saw healthy core revenue growth across all regions, particularly in the Americas, Europe and Asia Pacific, with strong growth in China. Major pharma spending was brisk, with large firms upgrading to the new Infinity LC platform. Turning from the report out of Agilent’s revenue and order results, let me update you on our operating margin improvement initiatives and Q3 capital deployment actions and outlook. Thanks to those of you on the call who joined us at our May Analyst and Investor Meeting. As a reminder, I highlighted three focus areas where we are working as a team to drive shareholder value : deliver above-market revenue growth, expand operating margins to historic highs and return 85% of free cash flow to shareholders. I’ve just discussed our revenue growth. Now here’s an update on our operating margin and capital deployment. Our multi-year “Agile Agilent” program is re-engineering the company to be more efficient, nimble and externally focused. As of the third fiscal quarter, we have delivered $35 million of the expected gross savings of $50 million in 2015 from our combined actions. We are committed to achieving a 22% operating margin by FY ‘17, a three point improvement over FY ‘14, while continuing to invest for long-term revenue growth. With the margin improvement results over the past two quarters, we are very confident in our ability to deliver on our margin expansion goals. Now turning to capital deployment. As previously guided, we are on track to return $500 million this year to shareholders in the form of dividends and buy backs. In Q3, we repurchased $99 million of stock, bringing our year-to-date repurchases to $267 million. With respect to guidance, we are reaffirming our previous FY 2015 EPS guidance of $1.68 to $1.72, as the operating model of the new Agilent continues to drive profitable growth and margin expansion. Thank you for being on the call today. I will now turn it over to Didier, who will provide additional details on our guidance and financial results. Didier? Didier Hirsch : Thank you, Mike, and hello, everyone. To recap the quarter, our core order and revenue growth, excluding the impact of currency, NMR, and acquisitions and divestitures were respectively 3% and 9%. This quarter, currency subtracted 6.9 percentage points from our year-over-year revenue growth. And as Mike stated, start-up issues with the transfer of U.S. distribution center were resolved in Q3, which resulted in about $15 million of additional revenue. Finally, adjusted operating margin was 19.9%, 160 basis points higher than our guidance and 110 basis points higher than last year on just 0.5% higher nominal revenues. Excluding the $40 million annual cost dis-synergies resulting from the Agilent/Keysight split, operating margin grew 210 basis points. I will now turn to the guidance for our fourth quarter. We expect Q4 revenues of $1.03 billion to $1.05 billion and EPS of $0.45 to $0.49. At midpoint, revenue will grow 6.7% on a core basis and our 20.3% adjusted operating margin at midpoint will be up 40 basis points sequentially. We expect to continue our disciplined buyback program with planned purchases of $98 million in Q4. Now to the guidance of fiscal year 2015. The Q4 guidance results in the following fiscal year guidance. At midpoint, revenue will grow 6.6% on a core basis, again, excluding the impact of currency, NMR, and acquisitions and divestitures. Fiscal year '15 revenue guidance is $37 million lower than previous guidance, of which $15 million is due to currency. Our EPS guidance of $1.70 at midpoint is unchanged from previous guidance, due to additional Agile Agilent savings that compensated for slightly lower revenues. Adjusted operating margin for the year is expected to be 19.2% or 40 basis points higher than last year. Excluding the impact of the $40 million cost dis-synergies related to the Agilent/Keysight split, our operating margin will be 140 basis points over previous year, on flat reported revenue growth. With that, I will turn it over to Alicia for the Q&A Alicia Rodriguez : Thank you, Didier. Abigail, would you please give the instructions for the Q&A. Operator : [Operator Instructions] And our first question comes from the line of Dan Leonard with Leerink. Your line is open. Dan Leonard : Thank you. I was hoping you could elaborate a bit on your book-to-bill. I think I’m calculating a 0.94, which is the lowest you’ve had in years. So I wonder if there's any additional color to be offered there. Mike McMullen : Yes. I’m looking at Didier in the conference room here. I think that number is correct. And we had very, very strong Q3 revenue. And as we look ahead to the fourth quarter, we have a lot of confidence in our ability to have our growth rate pick up as we have -- are expecting a number of areas of strength in the marketplace, such as pharma, the diagnostics, the environmental forensic space that I talked about earlier continue to be quite strong. And we've had a lot of new product introductions. Our sales funnels are building. And we’ve seen really strong win loss ratios of that new business. And sometimes orders can be a little bit lumpy. So we do see some big deals moving between quarters, which we saw here in the third quarter on the state and federal level in United States. And I would just also point out we had a tough compare when we look at kind of the results for the third quarter. Dan Leonard : Got it. So nothing you had specifically spike out as an area of concern then? Mike McMullen : No absolutely, not. I think we have a lot of reasons to be positive about the outlook. And other thing I did not mention, Dan, was that, we got off to a slow start in the third quarter in incoming orders after finishing so strong in Q2. But throughout the quarter, we saw an acceleration of incoming orders throughout the quarter and finished the quarter strong. Dan Leonard : Got it. Thanks, Mike. Operator : Thank you. Our next question comes from the line of Brandon Couillard with Jefferies. Your line is open. Brandon Couillard : Hi. Good afternoon. Mike, would be interested in getting some more granularity on just how China performed in the period, how the book-to-bill ended there? And what you perceive the implications of the currency revaluation are to your profitability there? And just remind us whether you price in local currency or in USD? Mike McMullen : Yes. Sure. I mean, great question. I figure we'd probably spend some time today talking about China, given some of the recent news. But in terms of our performance in China in the third quarter, we have very strong revenue growth with low-double digits. And we’re tracking through the first three quarters right on the plans. We've talked about with all of you at the analyst meeting the high-single digit level of growth in China. In terms of the areas of strength, we’re continuing to see strength in pharma, life science, research, the diagnostics, food, environmental. And the business really continues to develop as we had expected, albeit some of the recent changes, which in terms of how that affects our profitability in China, it's really neutral. We’re naturally hedged in China in terms of both the amount of revenues that we bring in, in China. Even though it is our second largest country in terms of revenue, we also have a very large footprint there, including local manufacturing. So we are naturally hedged in China. And in terms of your question around the mix of RMB versus dollars, about 20% of our business is in RMB and about 80% is in dollars. And in terms of the overall business, just maybe one final comment here on China, we can dig into other areas of China if you like. But when we look at the devaluation, we’re not really expecting to have that significant of an impact on the business in China itself. And then it depends also how you view to actually be successful and drive some more growth there. I think the better question is, what could it mean to the economies and currency in some of the emerging markets? But hopefully I answered your question. If not, come back with another one. Brandon Couillard : Yes. That’s helpful. And then just one question on the chemical and energy markets. Could you give us any color around what the order trends are like there and whether you’re seeing any signs of stability I guess in the sort of energy-related end market if at all? Mike McMullen : Yes. Great question. So we have seen stability, although it’s not where we hope to see coming into this year. So we’re now three quarters in a row of basically flat business in chemical and energy. And I think it's no surprise that the exploration side of that business is down fairly significantly. And we had anticipated that. And just to remind you of an exploration side, our business account for about 15% of this total segment. We are seeing growth in the downstream, chemical and refining process but not to degree that we had hoped to see early this year. So basically we get -- it’s grown enough to offset the downward pressure on the exploration side. Again that segment of the market is very profitable, but they seem to be still cautious on their spending. As you may recall from the analyst meeting we talked to you about our view that this was a 2% to 4% market growth segment and we still see it that way, but we’re just being cautious in our Q4 outlook in this segment right now. We do think it’s stabilizing. We got three quarters in a row of basically flat business in this segment for us. Brandon Couillard : Super. Thank you. Operator : Thank you. Our next question comes from the line of Doug Schenkel with Cowen. Your line is open. Doug Schenkel : Hi. Good afternoon. And thank you for taking the questions. Mike McMullen : Hi, Doug. Doug Schenkel : So I guess I want to go back to Dan's question. I mean, it was a pretty solid quarter, but again that book-to-bill of 0.94 was arguably notably light. And the revenue number while solid, it wasn't Herculean feat. So it is helpful to hear the commentary on momentum building over the course of the quarter. That said, even recognizing the commentary in the slight reduction to guidance, the Q4 bar is still pretty high. You did lower guidance, albeit by only about $20 million, excluding FX. You could have chosen to cut more. Is it fair to say that if you saw any change in ordering patterns in the early part of this quarter, in particular those attributable -- now basically those customers that are more exposed to macroeconomic concerns that you probably would have cut guidance more? Mike McMullen : Yes, Doug. Thanks for the question. And if I may humbly disagree in terms of the comments that revenue actually were quite pleased with being able to put those types of revenue numbers. But I think you’re on the right path. And question here, which is 3% constant currency order growth, what kind of converse do we have going forward? Clearly, if we have seen some of those patterns, I mean we’re having that call here today. We would reflect it in our guidance. And we have reason to be positive about the outlook. If you look at the business by our three groups, our ACG and DGG business have momentum. It’s a recurring revenue business. That business is tracking very nicely. We talked to you about -- I am actually going to ask Patrick to jump in and provide his perspective and as well. I think the obvious question is what’s the outlook for LSAG? And I think we’re one of the few companies out in the space that reports orders. So I think sometimes they get caught in these stories of lumpiness between quarters. When we look at our business here, we respect pharma, biopharma, diagnostics, clinical diagnostics, environment space to remain strong. China is on a steady trajectory, no expected hiccups there. And we just had a number of new product introductions and we’re coming off with tough year, yearly compare and a really strong Q2. So Patrick, I don’t know if you have anything else you would like to add to my comments? Patrick Kaltenbach : Sure, Mike. Thanks. Yes, of course I kind of want to restate that you said here we had. In terms of your order pattern, order for LSAG, we had a slower start based on the very, very strong Q2. We had an also tough compare against last year where several of our big platforms have been 20% plus growth. Having said that, the pattern over Q3 was definitely accelerating through -- positively accelerating through Q3. And as you stated, the outlook for Q4 is positive. We see strong positive momentum in pharma where we have seen strong double-digit growth and we have no belief that momentum will slow down over the next couple of quarters. So given the confidence in our new platforms, which have been very well received, LCMS, and also latest introduction on the ICP-MS front, we are confident that we can deliver more plan for Q4. Doug Schenkel : Okay. Thanks, Mike and Patrick. That’s all real helpful. And one quick follow-up. I apologize if I missed this. The $30 million in revenue delayed from Q2 and the Q3 or at least that you talked about on the Q2 call, does that fully come through this quarter or will some of that potentially come through in Q4? Mike McMullen : Didier has been quite today, so I think I will pass the call to have… Didier Hirsch : Yes. Back in Q2, we talked about the $30 million of being two parts. One part is the $15 million that was a clear miss from the change in the logistic center and we recovered that fully into Q3. The second part is about more of the new normal. What it means is that we have orders coming in later in the quarter and shipment terms being slightly extended versus what we’re used to. And this is really the new normal. So there was no recovery of that second $15 million and we don’t expect it to either to -- I mean, we expect the new normal to be with us for quite sometime. Doug Schenkel : Okay. Thanks, guys. Mike McMullen : Thanks. Operator : Thank you. Our next question comes from the line of Tycho Peterson with JPMorgan. Your line is open. Tycho Peterson : Hey. Thanks. I understand the forward looking commentary here, but I just, think about the quarter on LSAG? Can you actually talk about what drove the 1% decline in core order growth? Where were you most surprise, I guess, relative to your own expectations? Mike McMullen : Thanks, Tycho. This is Mike. I am going to make a few comments and then, Patrick, I think, the question was the 1% order growth, where were the areas that we might have been surprise on. What I will do is, I will lead off and actually the order results for the quarter matched our own internal forecast. So we're really weren’t surprised, business developed as we had anticipated. And I think, maybe just kind of emphasizing a few comments would be, we saw some deal push-outs on the U.S. and state governments side, saw some continued flat levels of growth in the Chemical and Energy space. But just few other comments you like to add there, Patrick? Patrick Kaltenbach : Sure, Mike. And the biggest surprise certainly for us was in the U.S. as you said, because we have seen the impact of both on the oil and chemistry side and a couple of delayed orders. On the positive side, Europe held up very nicely, as well as China was strong in growth. So in terms of platform to platform that have been affected most by the large delays, for example, LCMS, which had very tough compare compared to last year, where we had as we said plus 20% growth… Mike McMullen : Yeah. I think it was 20% like last year. Patrick Kaltenbach : Yeah. Tycho Peterson : And then, on DGG, 8% core growth is kind of at the high-end where you’ve talked about for market growth? Can you maybe just talk about the sustainability of trends and whether there is a little bit of catch up effect here now around the [omnesys] [ph]. Patrick Kaltenbach : Yeah. You are right, I mean, if you look into, I mean, that’s why we have seen a very nice quarter here also with great growth and now see orders coming in at 8%. I do believe that we are on a good traction right now. We are continued to see great performance from the DGG. But you're also right that it did little bit above what I’ve guided in our Analyst Day and clearly, we are also moving through a few quarters here, where we last year had some back order issues in the pathology business there, somewhat is an easy compare, but underlying the momentum is definitely here. Mike McMullen : Yeah. I see. Patrick had some tough compares. You have some easy compares coming. Patrick Kaltenbach : Right. Right. Tycho Peterson : Okay. Thank you. Mike McMullen : Thanks, Tycho. Operator : Thank you. Our next question comes from the line of Paul Knight with Janney Montgomery. Your line is open. Paul Knight : Good afternoon. How are you guys? Mike McMullen : Going just well. Didier Hirsch : Thanks Paul. Paul Knight : Good. On the DGG Group, are the CMS guidelines that were released late in the year, so you where, I guess, implying is it, are those new guidelines helping DGG business and is it kind of more momentum from that occurring right now within that group? Mike McMullen : For DGG, what is the, can you clarify MM for me at least? Paul Knight : Oh! I am sorry, on the center for Medicare or Medicaid services. They put out the new rules in October last year? Mike McMullen : Okay. Got it. Got it. Got it. So, why don’t you go over that, Jacob? Jacob Thaysen : Yeah. Thanks for that question. Actually, those rules are not really covering the -- our particularly business -- the pathology business and that sits outside the pathology business, so we don’t -- we didn't see any change to that and overall the pathology market continues to be healthy. So we have not been impacted by those changes in guidelines and I don't expect that we will see any changes in our performance due to those guidelines going forward either. Paul Knight : Do you think you are taking share in pathology? Jacob Thaysen : Yes. I mean, we are -- we definitely continue to see that the on this momentum installation is improving. As I have also mentioned earlier, there is sales cycle that are more than few months or maybe even few quarters. So we are still building momentum, but we continue seeing and also an improvement in taking back market share and win competitive accounts. So I am pretty optimistic around that the future also in pathology business. Paul Knight : And then lastly, Mike, on the NMR closure, are you now in the peak of cost savings there or is it part of the reason you're seeing improving margins going forward? Mike McMullen : Yeah. We are well above our run rate of cost savings, I would say, we say that initially we were actually for $50 million per year now it’s a $20 million and we are getting to pretty much our run rate there. The one thing I will signal is that, we are -- next year we still we will have about $11 million of revenue that will show on the RPD front and for the first three quarters as we make the last installations and then recognize revenue, so that will be about $50 million reduction from this year and but we will continue showing our orders and revenue on a core basis, excluding NMR so that we are comparing apple-to-apple. Paul Knight : Okay. Thank you. Didier Hirsch : Thanks Paul. Operator : Thank you. Our next question comes from line of Isaac Ro with Goldman Sachs. Your line is open. Isaac Ro : Hey. Good morning, guys. Thanks. Just want to circle back to an earlier topic in the Q&A, specifically regarding the impact of new products this year in the business? Could you maybe offer like a full-year expectation for contribution from new products to topline? Didier Hirsch : How if I pass it over to Patrick and talk about some of the new offerings in the instruments side and Jacob and Mark you comment on your groups and then I will close with answer to your question, Isaac. Patrick Kaltenbach : Definitely last few years, so this is Patrick speaking. So when you look at our new product offering this year and there is a series new products we launched, let me start with the LC business where the, actually, end of last year, startup of the Infinity II LC launch and we added this year actually at the HPLC Meeting another set of products to it that is driving definitely a lot of market share gains for us so far this year. In Q3 we had growth in orders and in revenues. We had double-digit growth on this platform driven by strong acceptance in many markets, mainly in the pharmaceutical markets where we see larger enterprises, as well as more companies making replacement and buy some new instruments, because this has -- platform has such a strong offering. Then on LC/MS we just launched the new 6470 Triple Quad system which will overtime replace our very solid performing 6460 Quad platform, again very strong interest after ASMS introduction and there is more to come during the year. So the contribution for product we don’t disclose the actual percentage, but it drives a lot of new business for us and a lot of attention in the market. Mike McMullen : And maybe I want to comment on some of the spectroscopy, I know it’s… Patrick Kaltenbach : Yes. Yeah. I will just give you an example from the spectroscopy, thanks Mike. So we launched the ICP-MS solution 7800 and on the OES side as we introduced a year ago the IC -- 5100 ICP-OES system that just an example of how we kept about 7 points in market share over 15 months based on this highly differentiated platform. So it’s really one of the means for us to capture market share and drive growth. It will make significant contribution. Mike McMullen : I think, Mark, I made a few comments in the call script about some of the recent offerings, but maybe just a few highlights for Isaac on the ACG side. Mark Doak : Thanks, Mike and hi, Isaac. Isaac Ro : Hi, Mark. Mark Doak : On the ACG side, as Mike alluded to you in his earlier comments, obviously, it’s a key driver of our ongoing growth too. So specifically for this quarter on the enterprise side a trio of services that are largely around our asset management area and also include in the advanced bio area. So it’s hard to put an exact percentage on it, but obviously, we are putting a lot of effort behind growing what we see the differentiated side of our portfolio in consumables and services and putting R&D and marketing budgets behind that. I would also add based on the Patrick's comments, when you introduce new platform it is also a great opportunity to introduce new services and consumables around that and to that end we, obviously, have chance to augment introduction whether it’s consulting services or consumables that put a whole platform. So when you tie all together there is some nice synergies between what goes on from the LSAG side, the DGG side, and obviously, our ACG team. Isaac Ro : And then maybe just bringing it home, Jacob. Jacob Thaysen : All right. Thanks and thanks Isaac for asking the question, I am -- as you can hear, we can definitely talk long time about all the new exciting products. But I will just remind you that that we have a few different dynamics going on in my business. First of all, with the pathology and diagnostics businesses and we are in partnership. This is not about bring out new product everyday, but they have -- you want to install your new instrument into the account and then get the contract and then run the rate and the new products we actually bring out there is new assay that goes on top of that. So you, of course, have a different lifecycle of the products that we have in chemical market compared to maybe in the genomics research market where we come up with some existing products also, the HaloPlex HS which actually address very low concentration of sequencing information, the [indiscernible] exome improvement also and Gene Expression arrays. Those have shorter lifetime and we see a higher percentage of our sales from this year and into next year from those products. Mike McMullen : And why they made us put a bow on this discussion, but we talk a lot about the portfolio, but I would be remiss that to remind you of the channel change you made this year. So, we’re also -- we simplified our cell structure and it’s going to allow us to invest in buildout coverage. So I think you’re going to see our growth being fueled going forward not only on the strength of the new portfolio but also the expanded channel reach and specialization, we’ve been investing in. And this is a note through the first three quarters. I think our quarter revenues were over 6% and we’re on track for our strongest revenue growth in several years. I think probably a point greater than any other growth rates we’ve put up in the last three years. But again if I could just leave that with you on the combination of both the new product offerings but also our change in channel strategy as well. Isaac Ro : All right. Hey guys, I really appreciate all the detail. I don’t want to sound too ungrateful but on that 6% number year-to-date, how much of it was on those new products? Mike McMullen : We don't know. We don’t -- we don't have that number that we've shared externally but it’s been a contributor. All I can say is significant contributor. Isaac Ro : Fair enough. Appreciate that. One last one, if I could just sneak in on China? Mike McMullen : Yeah. Isaac Ro : I think everyone is obviously trying to get a handle on what’s going on in the economy there. It seems to me maybe a simple way to break it up will be to delineate the percentage of your business in China that is maybe funded by sort of federal and in government sort of associated entities versus products that might be tied more to discretionary CapEx. Do you have a way to maybe break it down between those two buckets within, just sort of, I think, within China 17% of sales, maybe between those two end markets, how would you split it? Mike McMullen : I don’t know if we have that, Didier. I know it’s been… Didier Hirsch : No. Not at the company level, I mean, information, it’s probably tracked by some of our people. But I’m not collecting it and aggregating it. Mike McMullen : What I can share with you is because we’ve been kind of nosing around on this question ourselves internally. And the areas of strength particularly the Pharma area is a lot of private sector money. So traditionally this market has been heavily dominated by the direct investment by the government. We’re seeing a move. I think it’s still the majority but we are seeing a lot more business coming from private funded enterprises, particularly as the Chinese government also is moving a lot of its testing outside of government testing labs, for example, the food area where there's now whole new set of private testing labs that are -- they are coming online in the country. Didier Hirsch : Yeah. The other complexity we are even trying to attract that is for the companies that fewer Chinese companies that in their exporters versus the local -- I mean companies that can go after the local market, the exporters will benefit from the weakening yen. So it’s going to be that several layers of complexity, would we want to try to focus the overall impact of the weakening of the yen or the weakening of the Chinese GDP. Isaac Ro : Got it. Appreciate all the color guys. Thank you very much. Mike McMullen : Thanks. Operator : Thank your. Our next question comes from the line of Dan Arias of Citigroup. Your line is open. Dan Arias : Good afternoon guys. Thanks. Mike McMullen : Hey Dan. Dan Arias : Mike just -- hi Mike. Just following up on the China discussion, what's your take at this point on where we are with the anti-corruption investigations? Is it your sense that we kind of fully turned the corner there or is it still little early to signal all clear on that? Mike McMullen : Yeah, Dan. Great question. I think it's a new normal. I think this is -- the effort is here to stay. I think in terms of the changes where we talked about before of slowing deal velocity and a lot more conservatism in terms of the overall approval process. I think that sort of baked out now. So we’re no longer pointing to longer deal cycles in China as a result of anti-corruption. But I think the longer deal cycles are here to stay and now are now in this kind of this rhythm of really cautious approvals by the government authorities. And that's why I mentioned earlier that a lot of the areas of growth particularly in the private sector where you’ve not seen the same bureaucratic approach to approvals of deals. I think this is the new normal. Dan Arias : Got it. Okay. That's helpful. And then maybe just on LSAG, can you maybe comment on pricing in chromatography as we just sort of thinking about the new product introductions and then just the strong overall results across the space. Curious maybe to just get an updated view on how ASPs are trending relative to ….? Mike McMullen : Great. Dan. I’m going to bounce over to Patrick on this one. Patrick Kaltenbach : Happy to take this one. So as you can imagine, every new product introduction gives the opportunity to also improve your gross margins and ASPs which we actually have seen. And there is actually for us, that’s one of the reasons why we’re also confident on delivering to the bottomline over the year. So we will continue to launch these new products because they are highly differentiated and give you an opportunity to drive ASP and we will keep ASP up which otherwise would erode overtime. Mike McMullen : I think it is fair to say Patrick particular to -- specific to the Japan business, it’s not a new phenomenon. But our competitors there who don’t have the same currency challenges that we do are using that to be very aggressive at times on pricing but we have the gross margin structure to be able to compete. Dan Arias : All right. Okay. Thank you. Operator : Thank you. Our next question comes from the line of Ross Muken with Evercore ISI. Your line is open. Ross Muken : Good afternoon guys. So Mike, obviously as you sort of embarked to CEO of the new Agilent, you put forth a lot of programs to sustain sort of the superior growth and improve the margin and the cash flow generation. If you think about the various things highlighted in the call, where do you feel like you sort of outperformed kind of timing expectations and you’ve seen maybe similarly signs of the benefits in the organization and where do you feel like you need to make the most progress? Mike McMullen : Thanks Ross. Appreciate the recognition of the kind comments. I think the area that I’m mostly done is the ability to get the margin improvements. I mean, we’re basically six months into the journey since I transitioned to the role from Bill. And I can see the momentum and our ability to get our margin structure to different place. I think you’ve heard reference in the number of times in our call today. And if you were inside the company, I think everybody knows the goal that we’re trying -- we're shooting for. So I think that’s the area that I’m really -- obviously the growth, pleased with their ability to grow. And we always want more growth but we’re looking for -- we're on pace to have our highest growth year since 2011. So -- and then I think there's been a solid reaction to how we modified our approach to couple of deployment as well. Ross Muken : Great. And again there seems to be just a little confusion sort of the order versus revenue pacing. Last quarter, obviously at the short fall, you build the backlog. It looked like $30 million you called out looked about right versus the last few years. In this quarter, it looked like you flushed around $60 million of backlog based on the differential versus orders. And then as we think about and again I realized most players in the industry don’t give a book to bill. It seems like your commentary is suggestive of your orders around track, which I guess would more imply we did see that backlog flush this quarter. And so I’m just trying to reconcile that versus Didier’s comment because I thought implied we didn’t get full all of the 30 back in some. I’m trying to reconcile the delta between what the backlog is showing and kind of what you actually saw in the business because in my mind you did about 1.01 book to bill over the two quarters. And again this is the CapEx business. So looking over a longer period is usually better. Mike McMullen : Yeah. Thanks for that clarifying question, Ross. I think what Didier was trying to point out, I think we talked about $15 million of business coming in. We couldn’t ship it to the Q3. So obviously that came through this quarter. But the view is we’ve probably got another 15 in which we’ll ship and which we didn’t ship this quarter. Did that answer the question, Ross? Ross Muken : Yeah. But I guess, on the order rate side, the other point, it seems like that's more of a function of timing and revenue recognition, any sort of underlying change in the tone of the business? Mike McMullen : No. I understand your question now, so -- and again, I think we saw a good quarter momentum through the quarter. And you’ll see some new movements between quarters lot of times which we saw between Q2, Q3 and Q4. But the overall …. Ross Muken : I guess, when you look at your business, I think year-to-date, you guys are probably the fastest-growing life science company at least that we look at in terms of traditional analytical equipment. As you try to figure out in -- it's tough comparing different companies, given different product and geographic exposure but where do you feel like you're doing the best and is it really maybe -- how much of it sort of leveraged to biopharma which seems to be healthiest end market, which you guys have obviously done well in versus may be technology share or other elements, some of the other sub-sectors. We’re just -- it is just of perception here that maybe you guys are growing on average to me, I’m curious if it is to you. Looks like you’re actually probably the fastest growing. So, I’m just trying to bridge that gap. Mike McMullen : Our internal map would match your numbers or your view. Obviously, pharma, biopharma has been a key part of the growth story but it’s not the only part of the growth story. And I think it speaks to the breadth of our portfolio and businesses we are in so. As you know from -- you may recall from the analyst meeting, we talked at great length about our view of CrossLab services, consumable, informatics, how that was going to be an area of future growth outside of just the technology areas. And then you heard the DGG story already from Jacob and that’s a business that will continue to get momentum as we continue to put more and more of the [omnesys] [ph] out there. You start to close deals on the slides and then that starts to show up in revenue in the coming quarters. And then we haven’t talked about it today but Companion Diagnostics, we’ve been winning some deals there. So, I think it’s not only a story of end market strength in certain segments like pharma but also where we are playing in our view of lab-wide services and the momentum we have in our DDG business. And then finally, I think from a technology platform, it is very clear we are doing quite well in spectroscopy in the liquid phase and spectrometry areas. Ross Muken : Great. Thanks guys. Mike McMullen : Thanks, Ross. Operator : Thank you. Our next question comes from line of Miro Minkova with Stifel. Your line is open. Miro Minkova : Hi. Good afternoon, guys. Mike McMullen : Good afternoon. Miro Minkova : Quick question here. Just about the revenue guidance reductions, heard just about that. Just trying to understand, Didier, if I heard you correctly, of the $37 million reduction in the sales line, $15 million is FX. What is the remainder of the reduction, where is it coming from? Didier Hirsch : The $22 million remainder is basically a reassessment of our view on the chemical and energy markets where we are seeing now that the downstream refining and chemical markets are not picking up as fast as we expected the benefits of the low cheaper feedstock. So probably considering the fact that there is some little bit of stickiness about the world economy, we are not seeing the pickup in those downstream markets that will offset the drop in our revenues in the exploration production. So, we were hoping for again a pickup there and it’s not happening. And our business overall is about flat. Miro Minkova : Okay. Got you. So no change in the remainder of the end markets? It’s all about chemicals. Got you. Didier Hirsch : Yeah. That’s the one change, yeah. Miro Minkova : Okay. Excellent. And separately, let me ask you, the $15 million of revenue, the help that you had from the revolution of your logistics center issues, was there any impact on margin on the operating margin expansion there? Mike McMullen : Great question. So, Didier, correct me if I’ve got my math wrong here. But in terms of the topline, we got everything through. The shipments are back to normal. The customers experience is just fine. But we have seen cost overruns relative to our expectations as we work through the operational issues and I think it's probably been to the tune of about $0.01 on Q3 on reported EPS. Didier Hirsch : But besides that from the $15 million, it’s about kind of average, vouching for that piece although there is probably a little bit more of consumable for the little bit better operating margin at the average. But still that in itself, we had the operating leverage not much else. And then, this point that Mike was making that as we worked addressing the issues that we were facing logistics centers, we incurred close to $0.01 of additional cost in Q3. Miro Minkova : Got you. Thank you very much. Operator : Thank you. Our next question comes from the line of Jack Meehan with Barclays. Your line is open. Jack Meehan : Hi. Thanks and good afternoon. Mike McMullen : Good afternoon, Jack. Jack Meehan : Yes. I just want to ask about some of commentary in the deck about the U.S. and state government deals getting pushed into 4Q. I was curios if you could give a little bit more commentary around that. And then just whether you thought any of the momentum in the academic and the market around and Congress around some improved funding, maybe that with impacting out there? Mike McMullen : Patrick, you want to take that one. Patrick Kaltenbach : I can take this one, yes. Thanks Mike. So what we have seen in the first half, you’ve heard all the comments, we actually had a pretty healthy business in this market segment. In Q3, we saw kind of a pause where we have seen several of our larger accounts, actually took a pause and reassessed the budget for the remainder of the year and just delayed several deals. So, we don’t see these deals lost and we really anticipate that we will see in academic, government section, especially in U.S. that picking up again in Q4 this year. Jack Meehan : Got it. Understood. And then, just one question on the gross margins in the CrossLab business. Just curious if you had any thoughts around the pricing dynamic there just given that the consumable piece of the business was doing quite well, I thought we might see a little bit more pull through on the gross margin line? Mike McMullen : Mark, you want to take that question and then I might comment as well? Mark Doak : Sure. And Jack, in terms of the year-to-year comparable, once again it’s apples to oranges on the CrossLab business. And next year, you will be in a great position to ask me because it will be an apples-to-apples compare between the two. But the vast majority of the synergies are the spin and we did invest money to obviously take care of some logistics issues. So as Mike talked about some of the impacted earnings per share, a lot of that came through on our business. So overall though, I don't think we've seen near but frankly, we haven’t seen that much pressure on the ASPs at this point in time. Mike, I don’t know if you want to add any comments? Mike McMullen : Yeah. I think the ASPs, a really solid year and mainly and if you look at our prior year comparisons, it really been a story of the synergies and market picking up the load of the logistics center, cost overruns. And as you saw in our cost script, we are really investing heavily to bring out new chemistry products, which have some very nice margin structure associated with them. Operator : Thank you. Our next question comes from the line of Steve Beuchaw with Morgan Stanley. Your line is open. Steve Beuchaw : Hi, everyone. Thanks for taking the questions. I'll start with one, a bit of a retrospective for Mike. It has to do with sales force strategy. Mike, your several number months now into this area where you have consolidated sales forces. When you make a decision to consolidate the sales force, introduces a number of different possibilities. One is that you can be more nimble going after opportunities. Number two is of course, there can be disruptions. Can you reflect on that process, what you've seen and to the extent if you can, can you share any progress on metrics around that process? Mike McMullen : Yeah. Great, great question. And in terms of the sales force changes as you pointed out, that was one of the first major changes we’ve made in the new Agilent. And I really think it's allowed us to streamline our executive structure and we had a lot of well meaning managers but we spend a lot of time discussing things internally. And this allow us to actually move a lot faster as we really entered two business, the analytical lab marketplace across a number of end markets and then in the regulated diagnostics space in Jacob's business. I'm very, very pleased with how the overall plan has gone. We have been very -- in terms of how we look at internally, we are ahead of our cost reduction goals. I think more importantly, we're getting the growth and we're getting the coverage. They want it to be able to invest to cover, make sure we can cover all the markets and invest in specialization where we needed. Now this is a multiyear program. So, I think this really I would say is the foundation year. And I think as you go into FY ‘16 and ’17, you start to get the full benefit of our ability to have really close account relationships backed up by very, very competent sales personnel. Steve Beuchaw : Thanks Mike. And then one for Jacob. I’m not sure if you gave it earlier but if you didn’t, would you mind giving us a growth rate for the Dako business? And it would be really helpful if you could comment on where you think we are in terms of the process of Dako, what inning if you will sort of using American sports analogy? Are we in with Dako in terms of getting back to full scale and our ability to grow the business quickly? And then sorry to keep piling on here. But if you wouldn't mind, it sounds like just based on your tone and comments really that that business really is picking up. If you wouldn't give us a bit of insight into the nuts and bolts of where it is you're seeing the business pickup, is it equipment refreshes in the replacement cycle, is it more about competitor share gains, is it more about the instrumentation and the consumables that get run through the instruments? Any color there would be really helpful. Thanks again. Jacob Thaysen : All right, Steve. So, I will give you a little bit color without getting all the information about our underlying businesses here. But overall, the Dako businesses consist of few businesses. Two prime parts we have talked about is the pathology business and then our Companion Diagnostic business where the companion diagnostic is our partnering business with the pharma companies on developing new Companion Diagnostic within IHC and the FISH-based. And by the way, this is going very, very well and we will soon see the first significant launch of new Companion Diagnostic within a PLD-1 drug space. However, your questions around the pathology business and how we see that, I mean overall, we definitely see a good momentum. I will not say we are completely back in full scale yet. We did see some challenges last year on some back orders. We also have improved our performance on the Omnis over the last quarters, so we see actually all cylinders kick now. But it actually takes a few quarters to win deals in this space here. So, I would actually see continuous improvement over next few quarters. What we do see is that when we win deals, we of course win back. We win the deals that we -- in refresh of technology but we definitely also see a pickup in competitive deals as the Omnis solution is very competitive. And when you do that, when you put a new placement in, you will also get all the ranges running through that platform. So you place an instrument and then it takes another, maybe another quarter to get full loading of your consumables in there. So, I expect actually that we are in a good trajectory here. But the best remains to be seen also. Steve Beuchaw : Great. Thanks again. Operator : Thank you. Our next question comes from the line of Dane Leone with BTIG. Your line is open. Dane Leone : Hi. Thank you for taking the questions. So can we just kind of clarify some of the commentary that’s been given so far on the organic growth expectations? Given from what you’ve said on the past, the previous questions, it seems like the weaker book-to-bill in the third quarter could have been, due to some of the weakness in the energy and chemical markets and that kind of flows through into the fourth quarter, or is it a function of something else? I guess when it comes down to, it doesn’t make -- it isn't completely apparent in terms of how the delayed orders would necessarily adversely affect the book-to-bill, but then there would be an ultimate catch-up to that? So, I guess, could you just kind of help us walk through, are the expectations purely oil and gas or is there something else in there that we need to think about for the fourth quarter specifically? Mike McMullen : Sure. Dane, I appreciate the opportunity to clarify some of the earlier comments. I think the relative to what we reporting to in our U.S. government side of the business, that a situation where normally we face on last year’s deal activity, we had Q3 business last year and what we saw was, as Patrick mentioned, that business is going to go from Q3 to Q4. So that’s one of the reasons why you had a drop in the book-to-bill. I think as we mentioned earlier too, we started off slow in the third quarter coming off a very strong close to Q2. We start off flow in May. We saw the pace of orders we just didn’t chance to close all the business in the third quarter. I really wouldn’t point to the chemical and energy beyond the fact that its just a continuation of what we have been seeing, which is basically no growth, three quarters in a row and I’m not going to call a recovery like I done earlier this year. So we’re just remained cautious on the implied industrial market both, the chemical and energy, as well as mining sector of our business. Dane Leone : And then, if you -- one more question on China, I know you guys have answered a lot of them color. Mike McMullen : Sure. Dane Leone : Generally, at the end of these five-year plans there is somewhat of a spending flush. Is that -- it doesn't seem like many people contemplated that. Is that something guys have thought about or given the state of things over there? It would be too aggressive to hope for something to occur like that? Mike McMullen : Yeah. I think great question again. We’ve taken a fairly conservative view on that, if it happens great, but we’re not counting on that, because there is lot of changes recently under the new leadership in terms of how they conduct their business. So, again, if it would happen, wonderful news for the industry, but we're not counting on them in our go-forward forecast. Dane Leone : Okay. Great. And one last one for me on the gross margin line, the current guidance does seem like we get above that 54% in the fourth quarter? Is that something that you guys feel confident, we’ll see given where the FX rates and the composition of the product mix that we would expect there or should we kind of alter expectations where the operating margin uptick comes from? Mike McMullen : Yeah. I think I bounce that over to Didier if you want to. Didier Hirsch : Yeah. We don’t usually provide guidance on the gross margin level. But yes, we're expecting a slight improvement in gross margin sequentially between Q3 and Q4. Mike McMullen : That’s typically where we that kind of pattern we see historically as particularly in the services side as we finish out the year. Dane Leone : Thank you very much. Operator : Thank you. Our next question comes from the line of Derik de Bruin with Bank of America. Your line is open. Mike McMullen : Hi Derik. Derik de Bruin : Hi. Good afternoon. Sorry about that. I was on mute. Couple of question. So is your fourth quarter guidance dependent upon any large changed orders in the government? Mike McMullen : I’m looking at Patrick right now and he is shaking his head, no. Derik de Bruin : Great. So I think there is some concern the commodity prices need to fall, there is some concern the commodity prices may continue to fall. So if you do have -- if we given it like 5% to 10% decline in current level commodity price, how does that impact [Technical Difficulty] Mike McMullen : I think we’ve been carrying this free fall of commodity prices for some time. So our view is that if we continue to see downward pressure, I think it would push out your return to growth in this segment but the business is pretty subdued there already. Patrick, I don’t know if you have anything, you’d add to that. Patrick Kaltenbach : Yeah. I mean what we discussed beginning of this year was that we actually could see some upside, which flow of feedstock prices, which didn’t kick in so far but which would be a fundamental underlying economical drive if the feedstock price could go further down. So I would say we are on the exploration side. We’re definitely not further exposed than we are already today. Didier Hirsch : Yeah. On one hand we’re losing, on the other hand we saw economies with larger importers of commodities whether its oil or others, it’s a big plus, China, India, Japan so. Derik de Bruin : Great. And just one final question, can you sort of remind us on your manufacturing footprint what you do in China versus Malaysia? And I guess the question -- on the basis of that question, I think there is some concerns that there could be some currency devaluation on some of the other countries and I think people were -- I'm getting some questions from investors about company exposure. Mike McMullen : Yeah. Great question. So if you look at what we call strategic manufacturing side, so we’re fairly diversified globally but we have two major sites in Asia. One is in China for our gas chromatography, which is a major product line for us. And then in Penang, Malaysia, we have all of our spectroscopy atomic and molecular spectroscopy, as well as some of our vacuum products and some of the DGG products. So they are two major sites for us. Derik De Bruin : Great. Thank you very much. Operator : Thank you. Our next question comes from the line of Catherine Ramsey with Robert W. Baird. Your line is open. Catherine Ramsey : Hey, guys. Thanks for the questions. Mike McMullen : Sure. Catherine Ramsey : Can we get a big picture update on Europe, just kind of what you’re seeing in that market? Mike McMullen : I’m sorry. You broke up, was that Europe? Catherine Ramsey : Yes. Mike McMullen : Okay. I think our European outside of the currency offset, I mean the business there has been a really nice story for us this year and I point to Patrick. But I think we're seeing no real significant changes there. The one part of the European business that we’re keeping a close eye on is really some of the emerging economies in Africa and the Middle East, how that could play out, but Western Europe has been pretty good for us. Patrick Kaltenbach : It has been very good. In terms of end markets, pharma has been definitely very strong story. We have seen flat to healthy business in the range of life science research overall. There is actually some upside potential there with we noticed to spending of the [EZB] [ph] that should also materialize in research over time. So for us the European market although has held up very nicely and we have been positively surprised over several quarters now by the local currency growth we have seen in Europe. Mike McMullen : And it hasn’t been just a story on the instrumentation side, we’ve really -- the customers really have responded to this CrossLab promise that the Mark’s team has put together. There is a lot of big wins on the service side in particular and then you heard already what’s been going on in the Dako and DDG business. Catherine Ramsey : All right. Thank you. And one more question from me. I guess probably for Mike, how do you feel about the overall visibility in the business? You may be ignoring backlog metrics specifically and how has that changed over the past 6 to 12 months? Mike McMullen : I think your question was how do I think about overall visibility in the business? So that’s the question. Catherine Ramsey : Yes. Mike McMullen : All right. Great. You broke up a bit. I think what we've seen is the visibility is pretty good out a quarter or so and this is a reminder. We book orders. We don’t book any orders unless they can be delivered in six months. So I think our visibility of a three to six kind of months' timeframe is pretty solid because we got the funnel. And course we have deal funnels that we track that have longer deal cycles. So we have a pretty confident view three to six months out and a kind of a longer-term view beyond that through our sales funnel metrics. I would say though that and this is the point that Didier made earlier that we are seeing more and more of the business come late in the quarter. And rather than hoping for a change in historical and to this pattern, we now made this our new normal in terms of how we think and plan for business on the revenue side. Catherine Ramsey : Great. Thank you. It’s very helpful. Operator : Thank you. I’m showing no further questions at this time. I’d like to turn the call back to Alicia Rodriguez for closing remarks. Alicia Rodriguez : Thank you, Abigail. And thank you everybody for joining us on the call today. If you have any questions, please give us call on IR. And on behalf of all the management team, I’d like to wish you a good day. Thanks. Operator : Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,015	4	2015Q4	2015Q4	2015-11-17	1.744	1.765	1.945	1.94	2.62	19.37	21.36	Executives: Mike McMullen - President, Chief Executive Officer Didier Hirsch - Senior Vice President, Chief Financial Officer Patrick Kaltenbach - President, Agilent’s Life Sciences and Applied Markets Group Jacob Thaysen - President, Agilent’s Diagnostics and Genomics Group Mark Doak - President, Agilent CrossLab Group Alicia Rodriguez - Vice President of Investor Relations Analysts : Isaac Ro - Goldman Sachs Ross Muken - Evercore John Groberg - UBS Jeff Elliott - Robert W. Baird Dane Leone - BTIG Steve Beuchaw - Morgan Stanley Tim Evans - Wells Fargo Securities Tycho Peterson - JPMorgan Derik de Bruin - Bank of America Jack Meehan - Barclays Brandon Couillard - Jefferies Miroslava Minkova - Stifel Doug Schenkel - Cowen and Company Dan Arias - Citigroup Paul Knight - Janney Montgomery Dan Leonard - Leerink Operator : Good day, ladies and gentlemen, and welcome to the Agilent Technologies, Fourth Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to turn the conference over to Alicia Rodriguez, Vice President of Investor Relations. Please go ahead. Alicia Rodriguez : Thank you Sabrina and welcome everyone to Agilent’s fourth quarter conference call for Fiscal Year 2015. With me are Mike McMullen, Agilent’s President and CEO, and Didier Hirsch, Agilent Senior Vice President and CFO. Joining in the Q&A after Didier’s comments will be Patrick Kaltenbach, President of Agilent’s Life Sciences and Applied Markets Group; Jacob Thaysen, President of Agilent’s Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. 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. You will find an investor presentation along with revenue breakouts and currency impacts, 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 Mike and Didier 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. As a reminder, we are no longer reporting or commenting on orders or book-to-bill. Please note that we will refer to core revenue growth, which excludes the impact of currency, the NMR business and acquisitions and divestitures within the past 12 months. Reconciliations between reported and core growth in dollars and percentages can be found in the financial results section on the IR website. 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’d like to turn the call over to Mike. Mike McMullen : Thanks Alicia, and hello everyone. Thank you for joining us on today’s call. Our new Agilent team had a strong year. Let me start by highlighting our fourth quarter performance, focusing on three key numbers. First, revenue is up 6.2% on a core basis. Second, adjusted operating margin is up 150 basis points to 21.9%. Finally, EPS of $0.50 is above the high end of our guidance. Now I would like to talk about our full-year results. For the full-year, our core revenue is up 6.4%. It is worth noting that this is our highest annual core growth rate since 2011. Adjusted operating margin is up 80 basis points to 19.6% and EPS of $1.74 is above the midpoint of both our November 2014 and August 2015 guidance. We offset significant FX headwinds and $40 million of dis-synergies from the spin-off of our electronic measurement business. Our fourth quarter capped off a stellar performance by the team in our first year of the New Agilent. This team has not skipped a beat as we’ve navigated through a CEO transition, implemented a new strategy and dealt with changing market conditions. Both our fourth-quarter and full-year results demonstrate our commitment to drive both growth and operating margin expansion. Now let me move on to more details on what is going on within the business. Our Q4 results are driven by strength in the pharma, diagnostics, clinical and food markets. Geographically, we saw core growth across all regions, with particular strength in our liquid chromatography offerings, CrossLab services and consumables, and diagnostics and genomics products. Let me highlight the Q4 results by business group. The Life Sciences and Applied Markets Group delivered core revenue growth of 2%. Strong performance in Pharma was offset by softness in the industrial and academia & government markets. LSAG’s operating margin for the quarter was 20%, down 20 basis points from a year ago. In November, Agilent closed its acquisition of Seahorse Bioscience. Seahorse is a leader in providing instruments and assay kits for measuring cell metabolism and bioenergetics. Seahorse’s unique technology is the perfect complement to Agilent’s market-leading separations and mass spec solutions, in particular for metabolomics and disease research in pharma. The combination of these two platforms gives scientists a more comprehensive and faster path to researching some of the most challenging diseases affecting mankind. Seahorse will be incorporated into Agilent’s financials starting in the first fiscal quarter of 2016. In Q4, Agilent started shipping the new 1290 Infinity II Vialsampler, as well as the 600-bar 1260 Infinity version. At the BCEIA Conference in Beijing, we introduced the Agilent 5977B High-Efficiency Source GC/MSD System, a tandem gas chromatograph and mass spectrometer that delivers lower levels of detection than any other instrument in its class. We also introduced the 4200 TapeStation system. This fully automated instrument enables scientists to rapidly analyze up to 96 DNA samples at a time, and sets a new sample QC standard for next-gen sequencing; and we also launched several targeted solutions, such as our GC QTOF Pesticide Analysis Solution, and our LC QTOF Water Analysis System. Next, the Agilent CrossLab Group delivered another strong quarter, with core revenue growth of 11% in Q4. Both services and consumables experienced strong growth across all geographies. Operating margin was 25.1% for the quarter, up 150 basis points from a year ago. Customers are benefitting from ACG’s new brand promise to deliver insights that lead to outcomes. In Q4, Agilent University introduced an enhanced portfolio of online training courses. This enables customers from lab technicians to researchers, to develop new skills and gain insights that can improve economic, operational and scientific outcomes for their laboratories. The launch of the online training has exceeded our expectations. In consumables, we introduced a new product to help food-safety labs test high-fat samples more accurately. The Enhanced Matrix Removal-Lipid removes matrix interferences that have made test results challenging to reproduce. This gives food-safety labs a better way to address what has been one of their most challenging tasks. Finally, the Diagnostics and Genomics Group continued to build momentum in Q4, delivering 10% core revenue growth and strength across all of its businesses. Target enrichment was particularly strong, while Dako Omnis once again had record shipments and it continues to gain competitive wins. DGG’s operating margin for the quarter was 19.2%, up 430 basis points from a year ago. In the fourth quarter, two new diagnostics products from DGG received FDA approval. The first product was created in partnership with Merck & Co. This new companion diagnostic test can reveal whether a patient with advanced non-small-cell lung cancer is likely to respond to Merck’s anti-PD-1 therapy KEYTRUDA. The second product is our first complementary diagnostic developed in collaboration with Bristol-Myers Squibb. This new test can identify PD-L1 expression levels on the surface of non-small-cell lung cancer tumor cells, and provide information on the survival benefit with OPDIVO for patients with non-squamous, non-small-cell lung cancer. Now, let’s take a brief look at Agilent’s revenues by end-market performance on a core basis. Life sciences and diagnostics markets continue to see ongoing strength in the pharma, diagnostics and clinical markets, fueled by technology refresh deals, new product uptick and healthy demand across the spectrum. Spending in Academia & Government was down versus an extremely strong Q4,’14. Applied end-market performance was led by continued growth in food and environmental and chemical & energy were flat on a core basis. As we noted in our Q3 call, customers in the industrial markets continue to take a cautious stance, in light of weakening commodity prices and uncertainties in the world economy. Geographically, we saw core revenue growth across all regions led by the U.S. and Asia, excluding Japan. Now let me provide some additional insight on our operating margin improvement initiatives. Our multi-year Agile Agilent program launched in Q2 is re-engineering the company to be more nimble and efficient. In fiscal 2015 our actions delivered about $40 million in gross savings. In addition, the NMR closed resulted in $15 million in savings, and our Agilent Order fulfillment organization delivered on its $25 million committed savings. The Agile Agilent program and order fulfillment cost savings will be key drivers behind continued operating margin expansion. We remain on track to achieving a 22% operating margin by FY17, a 4 point improvement over FY14, exclusive of company split dis-synergies. At the same time we continue to invest in long-term revenue growth. Our results over the past three quarters give us confidence in our ability to deliver on this longer-term operating margin expansion commitment. We are pleased with the operational results for our first year as the New Agilent Technologies, and our ability to meet our external earnings commitments for the full year. Now I want to tell you about how we think about our guidance. We are committed to achieving our long-term financial goals. At the same time, we will be more conservative in our guidance. This is especially prudent due to macro-market concerns that have developed since I spoke with many of you at our May Analyst and Investor Day meeting. Before turning the call over to Didier, I want to recap a few highlights of our first year as the New Agilent Technologies. This was a transformational year for the company. We successfully completed the CEO transition. We formed a new executive leadership team that is deeply committed to delivering results. We have also implemented a new company strategy, restructured the company’s operations and product portfolio, and committed to new long-term financial goals. Despite all this change and moving pieces, we have delivered growth and increasing profitability over the past three quarters. Let me close with a few comments about the future. We are making acquisitions such as Cartagenia and Seahorse, expanding our presence in served life sciences and diagnostics markets. Our pipeline of new offerings has never been stronger. I am convinced we have an energized, aligned team at Agilent that will deliver on our full potential. I remain quite confident in our long-term prospects of above-market growth, increasing profitability levels, and greater shareholder value. Thank you for being on the call today. I will now turn it over to Didier, who will provide additional insights on our financial results and our FY16 guidance. Didier. Didier Hirsch : Thank you Mike and hello everyone. As Mike stated, we are very pleased with our Q4 and full-year performance. We delivered above-market core revenue growth of 6.2% and 6.4% respectively, and our operating margin adjusted for income from Keysight was 21.9% and 19.6% respectively. Excluding the $40 million annual cost dis-synergies resulting from the Keysight spinoff, our operating margin was up 240 basis points in Q4 and up 170 basis points for the full year. We are therefore well on our way to deliver on the committed 400 basis points improvement in adjusted operating margin by fiscal year ‘17. Our hedging strategy, consisting of both structural and systematic financial hedges was put to the test this year and delivered very well. Thanks to structural hedging stemming from our global footprint, flow-through was just 20% and we also gained $18 million from our systematic cash flow hedges. Turning to capital returns and cash flow for the year, we returned $400 million to shareholders in the form of dividends and buybacks and generated $491 million in operating cash flow. We did not repurchase stock in the fourth quarter, but we intend to repurchase this quarter, subject to customary conditions. I will now turn to the guidance for fiscal year 2016. Our fiscal year ‘16 revenue guidance of $4.15 billion to $4.17 billion corresponds to a core revenue growth of 4.0% to 4.5%. It is based on October 30 exchange rates and takes into account the Cartagenia and Seahorse acquisitions, as well as the XRD divestiture and NMR exit. We expect currency will have a 1.7% negative impact on revenues. Regarding XRD and NMR, fiscal year ‘15 revenues were $58 million and fiscal year ‘16 revenues are expected to be $12 million. We project fiscal year ‘16 EPS to range from $1.85 to $1.91, growing 6% to 10 %, based on an adjusted operating margin of 20.0% to 20.5%. You will notice that we are projecting a narrow revenue and EPS range at this time. We believe that 4.3% core revenue growth and 20.3% adjusted operating margin are the proper midpoints, taking into account both the present macroeconomic environment and our operating margin commitments. With those midpoints, we want to set the low end of our guidance in line with our commitments. Having set those at 4.0% core revenue growth and 20% adjusted operating margin, the high-end of the guidance naturally falls out at 4.5% core revenue growth and 20.5% adjusted operating margin. As you adjust your models for fiscal year ‘16, please consider the following nine points; first, annual salary increases will be effective December 1, 2015. Second, stock-based compensation will be about $57 million and as we front-load the recognition of stock-based compensation, the Q1 expense will be about $22 million. Depreciation is projected to be – that is the third point, depreciation is projected to be $100 million for the fiscal year. Fourth point, the non-GAAP effective tax rate is projected to be 20%. Fifth, we plan to return approximately $635 million in capital to shareholders, including $155 million in dividends and $480 million in buybacks, subject to customary conditions. Six, as communicated at the Analyst and Investor Day in May, we plan to borrow $250 million around February to fund a portion of our buyback program. Seven, net interest expense is forecasted at $68 million, and other income at $7 million, including $12 million billed to Keysight. Eight, for purpose of our EPS guidance, we have assumed a diluted share count of 328 million shares, 7 million less than the average diluted share count in fiscal year ’15. And ninth and last, we expect operating cash flow of $650 million and capital expenditures of $140 million, $42 million over fiscal year ‘15 as we embark on a two-year program to significantly increase the capacity of our nucleic acid facilities. Now, finally moving to the guidance for our first quarter. We expect Q1 revenues of $1 billion to $1.02 billion and EPS of $0.42 to $0.44. At midpoint, revenue will grow 3.5% year-over-year on a core basis, and EPS will grow 5%. As customary, Q1 EPS is negatively impacted by the December salary increase, the front-loading of stock-based compensation, and the increase in payroll taxes due to the disbursement of the variable and incentive pay of the previous semester. With that, I will turn it over to Alicia for the Q&A. Alicia Rodriguez : Thank you, Didier. Sabrina, will you please give the instructions of the Q&A. Operator : Thank you [Operator Instructions]. And our first question comes from the line of Isaac Ro with Goldman Sachs. Your line is now open. Isaac Ro : Good afternoon, thanks very much. I think you guys mentioned in the script a couple of times the fact that you are taking a more conservative approach to guidance this year. So Mike, wondering if could just put a little more color around how your process around guidance has changed this year. Just want to get a better appreciation for what you guys are doing different when it comes to planning for guidance? Mike McMullen : Yes, thanks Isaac. I appreciate the opportunity to comment on our philosophy around the thinking behind the guidance. As you know I mentioned earlier, this is the first year the New Agilent Technologies. It is also my first year in the CEO seat and I had a chance to reflect on how we have guided the company over the last year. And what I decided to do was really take a, if you will a more prudent and conservative outlook to our guidance and a couple of factors were in my thinking. One is, first the world has really changed since May when we spoke to the group about the longer term outlook for the company’s growth and the macro outlook has come a lot more challenging since then. We’ve seen IMF grow on the GDP and some of our larger chemical customers who have taken down their outlook for ’16 and I thought just bringing down the guidance of bid in terms of the top-line mid-point or half point or so was a prudent way to plan for the company. We’ll take a look at the business as it develops over the quarter or two, but really wanted to take a more prudent and conservative outlook into 2016. I will also remind you that we are not altering our commitments to achieving our 22% operating margin by 2017 and then the number of the conversations over the last several months, we’ve indicated that we can make those margin improvements even at a 4% top line revenue growth scenario. And then maybe just one final note here, as a reminder when we provide guidance, our internal plans are always higher and that’s our executives are compensated within the company. So hopefully the additional color will help in terms of understating our thinking a little bit more deeply, Isaac. Isaac Ro : Okay, thank you. And then maybe just a follow-up on a couple of details. One would be, can you disclose a growth rate in China this quarter and secondly, in DDG it looks like gross margin was down a little bit sequentially on a higher based of revenue than you had in fiscal 3Q, so I’m just wondering what's going on in that business. Thank you. Mike McMullen : Sure, how about if I go ahead and make some commentary on China, then Jacob if you can chime in on the DDG specific questions. So, the results came in China just as we expected. We exited the year in mid-single digit growth rate for the year. Finished the year very strongly in China and we do this as a source of growth for the company. I think you may really, we I think are one of the first to call an early return to growth about this time last year. For me whether it goes to mid to high single digit range, it will really be depended on what happens in the chemical and energy space. That really is the wildcard I think for our overall growth rate in China next year. But the business developed as forecasted and we are quite pleased with how we ended the year. And with that, I’ll pass it over to Jacob on the DGG question. Jacob Thaysen : Yes, hi Isaac. Yes, you’re right that our gross margin came down a little bit and it’s really due to the mix that we in Q3 had higher number of ratings and we had a little bit higher number of instruments in Q4. But that’s just the variability between the quarters and nothing you can say fundamentally has changed. Isaac Ro : Thanks so much guys. I appreciate it. Mike McMullen : Thank you. Operator : Thank you. And our next question comes from the line of Ross Muken of Evercore. Your line is now open. Ross Muken : Good afternoon guys. So I guess, as you think about sort of the key delta you started – stick on the guidance topic, but the key dealt sort of today versus the Analyst Day or even versus where you were maybe a month or two ago, where would you sort of point out the significant assumption changes were? Weather it was top line and then can you just flow that through, because it does look like still even though you are delivering on the multiyear cost, the next year operating margin targets are a bit lower. And then if you have any sense of where the delta is versus the street, because in our math based on the consensus it looks like there was a bit higher of other income assumption. So we are just trying to figure out if that was one of the deltas again versus maybe what the market was looking for? Mike McMullen : Yes, thanks Ross. I appreciate the question. So relative to how your thinking has evolved since the May, I think I would point to two things; one is the chemical and energy space. This is the fourth quarter in a row for us in terms of flat growth and now it’s still a robudence [ph] in our environmental business because we are really not getting the same volume and that was associated with the fracking in the U.S. That’s the one where we’ve kind of pushed out the timing in terms of the return of growth. The business is holding steady, but is not yet to a growth trajectory. So I think point one would be kind of a longer timeline in terms of the return to growth in the chemical and energy sector and then the other one is the impact, what we are seeing in some of the emerging economics, Brazil, Russia continue to be quite weak for us, albeit we have good strength in India and as I mentioned earlier China. And I think third was just an outlook of being a little bit more conservative and prudent on our overall guidance assumptions. And Didier, I think Ross’s math is correct on other income, but would you like to add some comments on that. Didier Hirsch : Yes Ross, we are looking at the – we also analyzed the delta versus the consensus and it seems to come from a little bit from the revenue side, probably not taking into account the reduction due to RPD, so a little bit on that. A little bit on the operating margin percentage and a quite significant number surprisingly on other income and expense. And I must say, you are the only one who nailed that number exactly, precisely and we’ve seen that in other cases quite significant differences in other income and expense. And I remind everybody that especially net interest expense this year we incurred $59 million. We say that we are going to borrow $250 million. We have modeled to borrow it at the middle of February and therefore we’ll add about $9 million of interest expense. So basically I think those were the main factors. Ross Muken : All right, great. And I guess maybe secondarily, so I feel it’s unusual you guys didn’t buy any stock in the quarter. Can you give us a sort of sense? It seems like the assumption is that will obviously occur in ’16. Give us a sense for why that was? Was it Seahorse, was it something else, and then it looked like free cash came in a little bit below or a reasonable amount below what you were looking for. Can you just walk us through sort of where that delta was versus kind of what you laid out? Mike McMullen : Hey Ross, this is Mike. Well I’ll go ahead and handle the first part of the question and then I’ll bounce it back to you Didier for the second part of the Ross’s question. So hey Ross, I do really appreciate the question, but we are not really in a position to comment on the circumstances around the stock repurchases in to Q4. But I would remind you is that are going to resume repurchase this quarter and as Didier mentioned in his remarks, I believe we are targeting $480 million of repurchases in 2016. And Didier can you address the second quarter. Didier Hirsch : Yes, on the cash flow basis your correct. When we started the year, we talked about $600 million of operating cash flow and now we are at $500 million. But already at the Analyst Day we had adjusted that number, although we provided a number excluding one-time items, but it was if I recall $555 million and since then I mean we’ve been exactly in line with the commitment. So the number is about $500 million. The reason why it’s down from the initial estimate is mostly related to currency, mostly that’s what it is. And again, we are in line with our commitment since the analysis day. Ross Muken : Great. Thank you for the candor, Mike and thanks Didier. Mike McMullen : You’re quite welcome Ross. Operator : Thank you. And our next question comes from the line of, John Groberg of UBS. Your line is now open. John Groberg : Great, thanks. Mike, on the outlook again, I know you are no longer commenting explicitly on orders and backlog like you were previously. But as you go into next year, was there anything from an orders standpoint that gives you a little bit more caution in ‘16 or is it just the dynamics you just read previously, wanted to be a little bit more conservative? Mike McMullen : Thank you John and I do really appreciate the question, but as we mentioned previously, we are no longer reporting on coming in orders. But I would say that the guidance reflects of you, of conservatism, not any concerns on the order front. John Groberg : Okay, and then last one for me, if you look at the Life Science & Applied Markets Group, I think the operating margin there was down 20 basis points. Can you maybe just dig into a little bit more detail about that business? Mike McMullen : Sure John, I think I’m going to go ahead and pass it over to Patrick to add this comments. Patrick Kaltenbach : Sure, thanks Mike. Regarding the operating margin you have to realize that we first and foremost had all sort of dis-synergies of this plate, which brought us down about a 1% compared to last year. And then if we look at the product mix that we have this quarter, it was a little bit different that the quarters before in terms of we had less cheesy, given the exposure we had in the oil industry, in the chemical and energy market and a little bit while other pieces in spectroscopy came up. So product mix had also a minor impact, but the biggest one you have seen is probably through there, because of the dis-synergies. John Groberg : Okay, great. I’ll hop back in the queue for others. Thanks. Mike McMullen : Thanks John. Operator : Thank you. And our next question comes from the line of Jeff Elliott from Robert W. Baird. Your line is now open. Jeff Elliott : Yes, thanks for the question there. First one for me is on the academic and government in the market. I guess you talked about a spending pause in the U.S. Can you give us a little more color there? I guess when did that happen and what do you see in other geographies in terms of academic and government? Mike McMullen : Patrick, why don’t you take that one. Patrick Kaltenbach : Sure, thanks, happy to take it. So as Mike alluded to first, it was tough compared to last year. This is one of the major reasons why it has been flat or slightly negative this quarter. And we had also lower spending in the US, it was softer than we had expected especially in September. For a very specific month we have seen smaller deals and our customers are a little bit more cautious given the budget uncertainties they have seen in some areas. So looking forward we actually [Audio Gap]. Jeff Elliott : Got it. And how about other geographies like Japan. I guess what do you see in the academic and government funding their? Patrick Kaltenbach : Well, on a worldwide base I would say is what we have seen is that it was more solid in Europe and in China and Japan it was also flat for the last quarter. So the biggest impact we have seen was definitely in the U.S. Jeff Elliott : Okay, and then one more from me. On the forensics side, you referenced timing of some larger deals I guess. What happened there and can you quantify how big the impact was? Patrick Kaltenbach : On forensics? Jeff Elliott : Yes. Patrick Kaltenbach : Yes, well the growth for forensic was in the low single digit for the quarter, yes. Which one do you mean it now? Mike McMullen : Jeff, would you mind repeating your question so we make sure we got the solid answer for you? Jeff Elliott : Yes, just earlier in the prepared remarks I guess in the deck you talked about forensic being muted by the timing of the larger deals. Yes, I’m just kind of curious on what happened in terms of the timing and how big those larger deals were. What was the impact? Patrick Kaltenbach : You mean, okay for the deals in the US. Again, last year given we had these double digit growth, it was based on several large deals we had. Those large deals, we haven’t seen the same magnitude this year, this is what I wanted to say. So they were smaller compared to last year. This is also brought the overall growth down in the U.S. Jeff Elliott : Okay, thanks guys. Mike McMullen : You’re welcome, Jeff. Operator : Thank you. And our next question comes from the line of Dane Leone of BTIG. Your line is now open. Dane Leone : Good afternoon guys. Thanks for taking the questions. Mike McMullen : Sure. Dane Leone : I think I’ll stick with the guidance if you wouldn’t mind. Could you maybe breakdown expectations for the three main segments next year? I mean effectively in our models right now we’re essentially having the organic growth rate that you guys reported in 2015. So if you could kind of help us source maybe where we should modify some expectations, I think that would be pretty helpful. Mike McMullen : Sure Dane, I’ll be happy to. So as we looked at the growth assumptions by end markets, I think the biggest one I think will be chemical energy, which is as you know 25% of the company and we’re assuming flat for the entire year. The applied markets low single digit growth, higher for food, but really no growth in the environmental side of that segment and then as Patrick mentioned earlier, government and academia in the low single digits, pharma high single digits and the diagnosis and the clinical markets are also high single digits. So you can see there’s quite a mix between the pharma and diagnostics market of differential versus the chemical energy space. Dane Leone : So if we flow that through the model, I think where we might have a little trouble is looking at 2016. So we give about – take everything together about 3% top-line growth to get to that $4.16 billion. To get to the operating profit line of about 20 spot to five or spot two if you wanted the brand, that’s about a 60% plus variable margin, which seems a bit high given you can kind of go back in history, and I think even in kind of coming out of a trough year in 2010 it was still about 55%. And then when we flow that through to 2017 to kind of hit the targets, you are talking about another 60% variable margin. Can you kind of help us in line with where you guys laid out your analyst day and reiterated in the presentation here, how to get to that 22% operating margin in 2017, because it’s I guess looking pretty aggressive at the moment. Didier Hirsch : Yes, I mean there’s a lot of moving parts, but nothing has fundamentally changed, except that we exceeded our first year opening margin expansion goal basically achieving 170 basis points. So we are now one year or three up, 43% of our goal. So we are a little bit ahead of what we had committed to and as stated by Mike, we certainly didn’t want to assume a second fantastic year like this one or at least provide that as a guidance at this place, at this time and decided to have a guidance that is somehow conservative. But nothing has fundamentally changed, but the moving parts are really I mean like this. I mean the salary increases, I mean all the different components, the new trends to our projections regarding the benefits from the NMR exit, from the Agile Agilent program, from the fact that we have the FDA warning there behind us, the OSS, the order fulfillment annual improvement, there’s really no chance. The only chance I would say is a positive chance we’re slightly ahead of the game at the end of Tier 1. Mike McMullen : Yes Dane, if I could just add some additional comments here too. So we’re really quite pleased with how we performed this first year. I think we’re well in that trajectory to 22% and finally we found a way to get there even if we got a little bit lower on the top line revenue. I also would say that part of our thinking was influenced by many of our major systems infrastructure programs, which I think I’ve talked to you in the past around the Agile Agilent. These are multiyear programs and a lot of them will start hitting into the end of 2016. So we started to get the real big million dollar cost savings coming out of our infrastructure in ’17. So we’re right on our plan, in fact ahead of our internal plan. So we’re quite confident in our ability to get to that 22, but there are some timing issues related to some of our major, major programs. Dane Leone : Thank you very much. Mike McMullen : Thank you. Operator : And our next question comes from the line of Steve Beuchaw of Morgan Stanley. Your line is now open. Steve Beuchaw : Hi, good afternoon and thanks for taking the questions. Mike, we focused a lot here on the impact of chem and energy. I wonder if we could think about a couple of potential catalyst to the upside; one is NIH budgets. And to what extent are you thinking about the possibility of stronger funding for the NIH and if the NIH gets something like a plus five for 2016, what does that mean for your business? Mike McMullen : Yes, let me make some general comments and then if you have anything specific to add onto that, Patrick that would be great. Clearly if the NIH funding would go up, that would be a positive for the business, albeit I think as Patrick will share, it’s not a huge part of the overall funding for our company, but that will be positive news and that’s also as I said earlier, we’ll watch the business for the next quarter or two and kind of see where things go. So if these positive developments happen, it will be reflected in our view of the outlook for the business. But what we did want to do is plan on a lot of good news now given some of the uncertainty of either budgets being finalized or where some of these end markets and economies are going. And Patrick, I can’t remember the exact percentage of our funding to NIH. So maybe you can add a little color there as well. Patrick Kaltenbach : Well, I don’t have the exact funding, but I agree with you that we didn’t bake in numbers like the ones have just been mentioned, certainly not the 5% they are going at low single digit projections on the budgets. So if there is upside, we’ll be happy to take it. Mike McMullen : Absolutely, absolutely. Steve Beuchaw : Okay, thanks for that. And then just one for Jacob. I'm sorry, if you wouldn’t mind, could you give just us a bit more granularity on the performance of Dako in the quarter. I’m not sure if I missed it in the prepared remarks, but did you give a growth rate and any additional color on the driver and dynamics, whether they are competitive or otherwise really appreciative? Thanks so much. Jacob Thaysen : Hey Steve, as you know we don’t provide insight on the individual divisions, but I can say that we continue to see strong performance in our pathology business and this continues to break records in placements and that obviously is driving the growth there. So we see great growth there in our companion diagnostic business, with all the activities around the recent launches within the PDL-1, it’s also a great growth driver. So overall I see great momentum in the businesses, but the actual number I cannot comment on. Steve Beuchaw : Got it, thanks so much. Operator : Thank you. And our next question comes from the line of Tim Evans of Wells Fargo Securities. Your line is now open. Tim Evans : Hi, thank you. I wanted to drill down on the pharma and biotech end markets a little bit, and the strongest growth for you this year last year and it sounds like next year that expectation is that it would continue to be your strongest grower. Can you talk about some of the technologies that you are seeing being the strongest drivers of that growth and how you are addressing that market and also I'd like to hear about whether this is big pharma, is it small midsize pharma, is a contract labs, what kind of clients are you seeing driving the growth? Thanks. Mike McMullen : Why don’t you take that one Patrick and I’ll have a follow-up. Patrick Kaltenbach : Yes, so these are several questions at once. So let me start with the platforms that drive the growth. Actually we had very competitive platforms for the pharmaceutical and the biopharmaceutical markets. The biggest growth driver right comes actually out of the LC business, which drives a lot of replacement business off the installed basis. You probably know we had more than [140,000 1,100] [ph] systems installed worldwide. A lot of them are in the pharma space and the offering we have today with the Infinity II series gives a seamless replacement of the systems which have a much higher performance, better efficiency, so a huge improvement from our customers. So that resonates well and it resonates actually well across the board, whether its smaller pharma or large pharma. The large deals of course come mainly out of the large pharmas and we have seen several big deals in the U.S., as well as in Europe in the last quarter. The second piece of the question was regarding biopharma. In biopharma we see actually higher growth moving forward than in small molecule pharma and we continue to address this also with more specific solutions around our LCMS portfolio and some of it also in the spectroscopy space. So I think we have a very attractive portfolio for our customers. We have a lot of good new releases. This year out with the 6470 Triple-Quad system which is well received from pharma as well and they will continue to drive growth for us in this space. Mike McMullen : And Patrick, if I can just add one final comment here. Tim, your focused on the technologies driving a lot of the growth in our reported pharma results, but also call your attention to the Agilent CrossLab group who delivered another double digit growth in the fourth quarter and we’re seeing strong demand for our services in consumables CrossLab services and consumables in the pharma as well as our technology offerings. Tim Evans : Thank you. Operator : Thank you. And our next question comes from the line of Tycho Peterson of JPMorgan. Your line is now open. Tycho Peterson : Maybe just to follow-up on the pharma. I mean you guys have been trending along the 6% to 8% growth, but the 19% growth really stands out. Was there anything one-time that you saw this quarter on the pharma business that you can call on? Mike McMullen : Tycho you broke up a bit. I think what you asked was we had put up double digit growth and was anything of a one-time nature in this most recent quarter. I just want to make sure I understand the question. Tycho Peterson : Yes, I mean you have been kind of growing pharma 6% to 8%, so 19% was certainly notable. So was there anything you can call out that was unique to the quarter? Mike McMullen : No, we had several quarters in a row where we had double digit growth in pharma, so it’s really and as Mike said, moving forward we see it continue to grow into high single digits at least. Tycho Peterson : Okay, and then for Didier, I’m just trying to understand the explanation on the free cash flow down 20% in six months relative to what you said at the end of May, currency hasn’t really moved. So I’m just trying to understand the explanation there. A - Didier Hirsch : So since in May we provided the number at the Analyst and Investor Day, just taking away all the one-time cash outflows that we had during the year, which are related to the separations deal where we had to pay a lot of invoices related to the separation and also, I think about $50 million of taxes that were related to the separation also. So my point was just the number that we have now is even better, because it is the number that includes those elements, even better than the 555 that we provided that excluded those elements. So we have a better operating cash flow than we projected in May, however it is not as good as the one as we projected back in November of the previous year and mostly related to currency. Tycho Peterson : Okay, and then last one just capital deployment. You highlighted Seahorse and Cartagenia, should we assume deals of similar magnitude going forward or do you have an appetite to potentially do something a little bit larger? Mike McMullen : Yes, we’ve talked about it at the Analyst and Investor Day of potentially two deals of the size of Seahorse per annum. Obviously it could be slightly bigger, but we were not looking at any larger deals in the short term, but we are ready to take on the two deals of that size per year perhaps, slightly bigger. Tycho Peterson : Okay, thank you. Operator : Thank you. And our next question comes from the line of Derik de Bruin of Bank of America. Your line is now open. Derik de Bruin : Hi, good afternoon. Mike McMullen : Good afternoon Derik. Derik de Bruin : So a couple of questions. First of all, could you talk about the academic? I'm a little bit surprised just given that some of your competitors like Sterno have a much bigger academic exposure, basically didn't call it anything unusual in September. So could you talk a little bit more about that and particularly what did you see in October since you guys got a little bit longer. Patrick Kaltenbach : No, I’ll take that again. Again the compare for us this quarter was mainly a difficult compare, because we had a strong Q4 last year with double digit growth with some exceptional large deals in this space. The pause or the slowdown we have seen in September, where they usually have low budget release to some extent came back in October, so we’ve seen for the year and we are on track with what we project in the low to mid single digit growth rate for academia and government. Derik de Bruin : Right, I think it’s obviously not a time to turn into revenue, yes. Patrick Kaltenbach : Yes. Derik de Bruin : Got you, but I just wanted the clarity, thank you. And could you give a little bit more color. I mean your 4.25% core growth, what are you sort of looking for core growth in each of the segment; LS, DX, at CrossLab? Mike McMullen : So yes, we are not providing the projections per segment, however I will tell you and that won’t surprise you that our instrument segment LSAG will have slightly lower than the average and our other two segments Agilent CrossLab and DGG will have higher growth rate than the average. Derik de Bruin : Great, I’ll get back in the queue, thanks. Mike McMullen : Thank you. Operator : Thank you. And our next question comes from the line of Jack Meehan of Barclays. Your line is now open. Jack Meehan : Hi, thanks, and good afternoon. I just wanted to ask, could you talk about the level of visibility in the budgets and chemical and energy end market and just do you feel like things have begun to bottom out now after a few quarters in the exploration business? Mike McMullen : Derek, why don’t you take that one. Didier Hirsch : I can take this, yes. So you’re actually right. We see currently marketing really bottoming out, so we don’t expect any major further declines on the exploration side, which gives us confidence that the growth rate that Mike projected and being in the low single digits combined chemical energy should also materialize moving forward. We are now like four to five quarters in this situation with the low oil price and we had been mainly hit in the first couple of quarters on the exploration side and now we see this really bottoming out. Mike McMullen : Yes, this is a point of clarification, we are forecasting flat for right now. Jack Meehan : Got it, that’s helpful. And then just one more on the deal environment, just curious if you had any updated thoughts on the cash that your holding overseas. Thanks. Didier Hirsch : Yes, I mean we have about $200 million of cash we had at the end of October in the U.S., plus $235 million in escrow for the Seahorse, which was put to good use on November 1. The rest of the cash is overseas. We’ve had a good year in terms of being able to repatriate some of that overseas cash into the U.S., that’s why we ended there with $435 million about and we are looking for continued support to bring back some of the cash tax effectively, but you feel most of the cash that we generate is overseas. Operator : Thank you. And our next question comes from the line of Brandon Couillard of Jefferies. Your line is now open. Brandon Couillard : Thanks. Good evening. Most of my questions have been addressed already, but Mike, just one for you on the decision to expand the capacity of the nucleic acid solutions business. You clearly speak to the drivers of that decision and exactly where capacity utilization is today and what the, I guess P&L effects in terms of growth, the implications are in 2017, around that. Mike McMullen : Brandon, thanks. I’d love to take that call. It’s a great story and I think I’ll allow Jacob the pleasure of responding to that one. Jacob Thaysen : Yes, thank you. So as you know our nuclear gases solution division is manufacturing oligos for active pharmaceutical ingredients and we have seen a significant demand for those products over the last few years and we continue to see demand that actually is beyond our current capacity, and therefore we’ve decided to invest in expanding that capacity over the next few years and this is actually what has been reflected in that buy. This activity will set in the DGG business. Mike McMullen : Brandon, this is Mike again. The beauty of this business is we will get long term customer commitments for purchase volumes and then you’ll start to see this show up in a very significant amount of revenue as you get in the outer years like ’17 and ’18 for the company. Brandon Couillard : That’s helpful, and then Didier, just one clarification. Did you say that you’ve embedded the mid to high single-digit growth outcome for China for ’16, was that right? Didier Hirsch : Yes, I think its Michael who made the comment. Mike McMullen : I think that was me. I said we were expecting mid single digit growth in China and what could happen Brandon, kind of what happened in the chemical and energy, we could see that get to high single digit growth as an overall market. Just some additional color here. We expect the pharma, the food and environmental segments to continue to be quite strong as an end market, along with continued interest in the services and consumables. Again the wildcard that will lure us between the two estimate points would be what growth rate we would see in the chemical and energy space, but it looks like a solid growth market for us year and then again what happens to chemical and energy, we could see more end market growth than what we are projecting now. Brandon Couillard : Super. Thank you. Mike McMullen : Thanks. Operator : Thank you. And our next question comes from the line of Miroslava Minkova of Stifel. Your line is now open. Miroslava Minkova : Hi, good afternoon guys. Just a follow-up on this last comment here. On China and the chemical and energy business, have you seen that deteriorate further or how are the orders tracking in that business given the macro headwinds coming out of China? Mike McMullen : Yes Miro, this is Mike, thanks for the question. Although we don’t specifically comment on orders, what I can just refer you to is your overall view of the results for the quarter in a revenue standpoint and its four quarters in a row are flat. I believe earlier Patrick used the comments that we think we bottomed out and I think that applies to China as well. Miroslava Minkova : Sounds good, thank you for that comment. Secondly, just given the sort of mixed end market environment for you. Wondering how are you prioritizing your investments for fiscal ‘16? Has anything changed in terms of your thinking there as well as the level of investment you devote to each of the end markets? Mike McMullen : Great question, and I think as you know we try to align our investments to where we see the best growth prospects. But I have to say that the market has been fairly consistent in terms of how it’s developed relative to our internal view of where to place our bets and I’d say no. I don’t think there’s any really fundamental changes to our investments and technology front or in places where we are building out our channel coverage. Miroslava Minkova : Okay, sounds good. And lastly, for Didier, the negative 1.7% of currency you see next year, what kind of flow-through should we assume on EPS? Didier Hirsch : Similar to what we have seen in 2015, so about 20%. We think that currency will have an impact of about $68 million for the year and the impact on the operating profit is about 14, 15. Miroslava Minkova : Okay, great. Thank you guys. Didier Hirsch : Welcome. Operator : Thank you. And our next question comes from the line of Doug Schenkel of Cowen and Company. Your line is now open. Doug Schenkel : Hey, good afternoon guys. A - Mike McMullen : Good afternoon Dough. Doug Schenkel : So based on what I am hearing from a lot of folks who are listening to this call, I think there is a little bit of a debate as to how to view your guidance. I think that’s a clear observation at this point. So Mike, you acknowledge previously that you maybe should have guided ‘15 to maybe slightly more conservative levels and now we have fiscal ‘16 guidance and like I just said I think a lot of folks are trying to figure out how much of this guide is you swinging to the other extreme, which seems pretty prudent for a variety of reasons, including the macro backdrop or is there something fundamental you are seeing as giving your reason for a pause. So if I could just, as we are kind of getting into the end of this call, take another shot at asking a couple of questions? The first would be your guidance implies that margin will expand, operating margin will expand by 50 to 100 basis points this year and then 150 to 200 basis points in fiscal ‘17, if I’m doing the math right. How much is that dependent on a favorable changes in revenue mix relative to recent trends? The second question would be recognizing a key focus area for you Mike has been to bring much of what you successfully did with Chemical Analysis to broader Agilent. Is the variable cost structure progressing to the point where you still feel comfortable that you can get to that 22% margin target in fiscal ’17, even if core revenue growth is, say, 4% to 4.5% the next couple of years. The third question would be getting at really the question of fundamental demand and recognizing you don’t want to get into book-to-bill’s for the reasons that your outlined previously. To be fair, a lot of your peers do comment at least on demand coming out of the quarter, heading into the end of the quarter. Given the performance and LSAG it seems like it would be helpful for you guys to at least say something about trends there. And the last one would be, Tycho asked a question about free cash flow guidance for fiscal ’16. To be more specific, at your Analyst Day you guided us to expect $620 million in free cash flow this year. Your guidance is now for $510 million. So FX has changed, but really only a little bit and I know there a lot of one timers in there. But a $110 million is a big delta. Can you just walk us through what’s going on there? Thank you. Mike McMullen : Sure Dough, these are very important questions. So I appreciate the opportunity to add some additional clarity. So if I miss anything please come back to me, but I think I’ve got the key points here. One is, let’s start with the view of 22%, how depended it is on a higher level of revenue. As I may have indicated earlier in a call its 4%, 4.5%, we will make the 22% operating profit in 2017. And I say that with a lot of confidence, because of the results we have put up over the last three quarters, plus I know we have a number of major programs that we have to deliver on their projected cost savings. You start to see those near the tail-end of ’16 going into ’17. They are completely independent of revenue. We are assuming no significant change of revenue mix beyond what we have shared at the Analyst Day and also what you saw in the results. We do expect our ACG and DGG Groups to grow faster than LSAG, but LSAG will also grow. We do expect our non-instrument product lines to grow faster. And in terms of the commentary, we saw no real change in fundamental demand coming through and existing the quarter. The comments we made about revenue I think speak directly to how we saw the quarter develop, and again back to how you made it all off a question. I mean part of it is a reflection on 2015 guidance and also the fact that we do want to be prudent out the gate and a little bit more conservative. It’s still early in the year, and there are couple of things that are trying to handicap in terms of what’s going on with chemical and energy, how will the emerging markets hold up in some of the economic concerns they have. But I would not at all take this as a lack of confidence in the business going forward or any kind of significant last quarter changes. In fact we are really, really pleased with the way the year closed, the numbers we put up and how they closed off our first year. So Didier, I’m going to let you handle the last questing of the bridge between the free cash flow of 620 to... Didier Hirsch : Well, so in the past I had talked about 2015 and the fact that we ended about high free cash flow that what I had motioned at the time, and the reason why you don’t – I mean we are not comparing apple-to-apple is just because of the one-time expenses. So if you want doing the follow-up calls and I will do that with each of you. We can go over the one-time items and the impact those have. That’s probably the best to do. Doug Schenkel : Okay. Thanks guys for taking all the questions. Mike McMullen : No problem Dough. I appreciate the opportunity to answer them. Operator : Thank you. And our next question comes from the line of Dan Arias of Citigroup. Your line is now open. Dan Arias : Hey, good afternoon. Thank you. Maybe just two quick ones for me on NMR. Mike, how removed are you at this point from that business, and from the servicing of your customers there and then Didier, can you just touch on what you are assuming for operating profit improvement in 2016 for NMR? Mike McMullen : Sure, relative to NMR, as you know we excited the NMR hardware business but have maintained the service relationship and that continues to go very well in terms of our ability to service and support our customers and it’s really a major part of our thinking when we closed down the hardware business. But we really wanted to preserve and mitigate the impact of our customers. So we are in a position to be able to handle their long term service needs. And Didier, I think you’ve got some specifics on the expectations for next year. Didier Hirsch : Yes, there is no change to the guidance that we have provided. We had about $15 million of cost reductions and expense reduction in fiscal year ’15. Next year we anticipate an additional $5 million, in line with what we had previously stated. Dan Arias : And I think you guided Didier some revenue flow through as we work-off the last part of the backlog in ’16. So there will still be some. Didier Hirsch : Should be $12 million still revenues in 2016. Dan Arias : Okay, thanks very much. Mike McMullen : You’re welcome. Operator : Thank you. And our next question comes from the line of Paul Knight from Janney Montgomery. Your line is now open. Paul Knight : Hi Mike. Only a couple of bricks to move now. Mike McMullen : Thanks Paul. Paul Knight : Geographically, I know you talked about China, where is your thought on Europe and the United States in ’16? Mike McMullen : Thanks Paul. I appreciate the opportunity to answer. Great, great question. So we see the U.S. as a real area of strength, albeit some of the commentary around what may happen in terms of the chemical energy space and how its impacting the U.S. business. So we see the market there being very robust and was a source of strength for the company for the quarter and for the year. So we are looking forward to continued strength in the U.S. And I think the same call in Europe and Europe holds as well. I think part of our European business the report has been – it includes some of the Middle East and Eastern European courtiers and would have been a little bit of a challenge for us, particularly in the chemical and energy space. But overall Western Europe and Germany in particular has been extremely strong for us and we are seeing no indication of that is changing for us in our European based business. Paul Knight : And then lastly when you look at the energy sector, I know there is a lot of pieces like gas Chromatography and Spectroscopy on the metals mining side, but weren’t you already seeing that market pretty soft in the earlier quarters of this fiscal year Mike and I guess the short question is it’s been weak already, has it not? Mike McMullen : Yes, that’s correct Paul and you hit the right categories where it really affects our gas Chromatography business where we have such a strong position in that segment. I think that was one of the mix issues that Patrick had alluded to earlier. And then in the metals and mining, that’s where we really have seen a slowdown as it relates to our Spectroscopy business. So you might look at say in 2016 that we could see some reported revenues versus easy compares, but we’ll wait till we call it in. But again, we think that it looks like to us that the market may have bottoms and that perhaps the worst is behind us. Paul Knight : Right, you have been through a few cycles yourself running that division. I mean what does the market feel like? You sense the bottom in some of these categories? Mike McMullen : Yes, I mean we think so. I mean customers are starting to talk about the new technologies and replacement, particularly as it relates to data systems and associated systems. Some of the customers are still fairly conservative. You know BASF was out with a downgrade in term of their outlook for ’16. But at the same point in time, the equipment is required to keep their facilities running at the highest levels of operational efficiency, so there is an active funnel. So we now are seeing to start closing some business. Paul Knight : Okay. Thank you. Operator : Thank you. And our final question comes from the line of Dan Leonard of Leerink. Your line is now open. Dan Leonard : Thank you; two quick ones. One Didier, is there anything you would like to call out on the quarterly cadence in 2016 as we consider our models. I mean presumably Q3 is going to be a very difficult comparison. And then secondly for Jacob, is there any effort or plan to migrate a couple of these companion diagnostic approval to the ominous system. I looked like they were approved on your older Autostainer. Thank you. Didier Hirsch : So on the first question, Dan we will have the usual higher operating margin in the second half than in the first half based on volume and also because on the actions that we are taking throughout the year, which will have a more of an impact in terms of cost and expense reduction, already in the second half because of the carry over impact. So you should see a fairly steady ramp in operating margin throughout the year, very much in line with the usual seasonality and the pattern. Mike McMullen : One Didier, one additional thought here might be looking at Q2, Q3 revenue year-over-year and that we had some logistical start up issues in our Q2 where we have some track revenue. Didier Hirsch : But basically we are forecasting higher operating margins throughout the year. Mike McMullen : Okay, got it. Patrick Kaltenbach : Hey Dan, let me address the other question also. So you asked about the right that we developed the PD-L1 for the Autostainers right now, and the reason is that these activates is ongoing for many years also, so we start off with the Autostainers packing base, where we also have the highest installed base. But your absolutely right that we are actively also moving it over to the Ominous and will clear have our full portfolio on the Ominous going forward, including our companion diagnostics, so that will happen. Dan Leonard : Got it. Thank you. Mike McMullen : Thanks Dan. Operator : Thank you. I would now like to turn the conference over to Alicia Rodriguez for closing remarks. Alicia Rodriguez : Thank you Sabrina and on behalf of the management team, I’d like to thank everybody for joining us on the call today. If you have any questions, please feel free to give us call on IR and I’d like to end by wishing everybody a good day. Thank you. Operator : Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,016	1	2016Q1	2016Q1	2016-02-16	1.781	1.79	1.966	1.977	2.64	19.42	19.72	Executives: Alicia Rodriguez - Vice President-Investor Relations Michael R. McMullen - President and Chief Executive Officer Didier Hirsch - Chief Financial Officer & Senior Vice President Jacob Thaysen - Senior Vice President, President, Diagnostics and Genomics Group Mark Doak - Senior Vice President and President-Agilent CrossLab Group Patrick Kaltenbach - Senior Vice President, President, Life Sciences and Applied Markets Group Analysts : Ryan Blicker - Cowen & Co. LLC Paul Richard Knight - Janney Montgomery Scott LLC Daniel Arias - Citigroup Global Markets, Inc. (Broker) Isaac Ro - Goldman Sachs & Co. Ross Muken - Evercore ISI Jeff T. Elliott - Robert W. Baird & Co., Inc. (Broker) Steve C. Beuchaw - Morgan Stanley & Co. LLC Tim C. Evans - Wells Fargo Securities LLC Brandon Couillard - Jefferies LLC Tycho W. Peterson - JPMorgan Securities LLC Jack Meehan - Barclays Capital, Inc. Derik De Bruin - Bank of America Merrill Lynch Dan L. Leonard - Leerink Partners LLC Dane Leone - BTIG LLC Operator : Good day, ladies and gentlemen, and welcome to the First Quarter 2016 Agilent Technologies, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Alicia Rodriguez, Vice President, Investor Relations. Please go ahead. Alicia Rodriguez - Vice President- Investor Relations : Thank you, Jonathan, and welcome, everyone, to Agilent's first quarter conference call for fiscal year 2016. With me are Mike McMullen, Agilent's President and CEO; and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Patrick Kaltenbach, President of Agilent's Life Sciences and Applied Markets Group; Jacob Thaysen, President of Agilent's Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. 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. You will find an Investor Presentation, along with revenue breakouts and currency impacts, 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 Mike and Didier 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. As a reminder, we are no longer reporting or commenting on orders or book to bill, and our guidance is based on exchange rates as of the last day of the reported quarter. And please note that we will refer to core revenue growth, which excludes the impact of currency, the NMR business and acquisitions and divestitures within the past 12 months. Reconciliations between reported and core growth in dollars and percentages can be found in the Financial Results section on the IR website. 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'd like to turn the call over to Mike. Michael R. McMullen - President and Chief Executive Officer : Thanks, Alicia, and hello, everyone. Thank you for joining us on today's call. I'm pleased to report that our team delivered a very strong start to our fiscal 2016, both revenue and earnings above the high-end of our guidance. I will now highlight three key results. First, revenue was up over 6% on a core basis. Second, we delivered an operating margin increase of 200 basis points from a year ago to 20.2% adjusted for Keysight billings. Finally, adjusted EPS of $0.46 was up 12% over last year. Our Q1 results are driven by continued strength in the pharma, clinical, and diagnostics markets with a return to growth in Academia & Government. Market demand remains strong for Liquid Chromatography, CrossLab's services and consumables, and Diagnostics and Genomics offerings. Geographically, all regions grew on a core basis with strong growth in China. Let me highlight the Q1 results by our three business groups. The Life Sciences and Applied Markets Group delivered core revenue growth of 2%. We see continued strong global pharma demand, growth return on Academia & Government markets, and China government investment in Environmental and Food markets. All this offset continued weaknesses for new equipment purchases in the Chemical & Energy market space. LSAG's operating margin for the quarter was 21.7%, up 210 basis points from a year ago. As a reminder, in November, we closed the acquisition of Seahorse Bioscience. Integration activities are in full swing with the team excited to be part of Agilent. LSAG continued to strengthen its portfolio in Q1. We released two new refracted index detectors, the 1260 and 1290 Infinity II RID. These detectors help expand the capabilities of modern UHPLC chromatography to make difficult measurements in certain chemical, biopharma and food applications. Agilent's innovation strength was recognized in the January edition of Analytical Scientist magazine. We were honored with an innovation award for our unique LC dual-needle technology. This is a breakthrough in the way samples are injected into Agilent's LC products. The unique design enables fast injection cycles, scalable injection volumes and ultra-low carryover. Next is the Agilent CrossLab Group. We continue to see consistently strong revenue results. Our core revenue growth was 10% in Q1. Strong pharma and Chemical & Energy market demand drove growth in our services and consumables offerings. Operating margin was 22.1% for the quarter. This is up 140 basis points from a year ago. We continue to bring novel new chemistries to market. For example, we've released advanced Bio SEC family of products. These innovative new products are designed for accurate and precise size-exclusion chromatography, targeted at biopharma applications. Early adopting customers are reporting significant economic and performance benefits over any current technologies offered by our competitors. Finally, the Diagnostics and Genomics Group continues to demonstrate momentum. In Q1, DGG delivered 12% core revenue growth with strength across all of its businesses. The pathology business continued a steady trajectory to market growth rates. We see strong growth for Dako Omnis reagents and growing rev for new PD-L1 diagnostics. The companion diagnostics business also continued to demonstrate momentum. Double-digit growth in nucleic acids and genomics reflected strong demand from pharma and clinical markets and the favorable compares. DGG's operating margin for the quarter was 9.6%. That's up 910 basis points from a year ago. I want to remind you that last year this business broke even in Q1 of fiscal 2015. Last year, our Dako complementary diagnostic for Bristol-Myers Squibb's, OPDIVO, was approved by the FDA for non-squamous non-small cell lung cancer. In January of this year, the FDA approved expanded use of this PD-L1 diagnostics to include patients with melanoma. Positive PD-L1 status in melanoma has been correlated with the treatment effectiveness of Bristol-Myers Squibb's drug treatment. Agilent is the first company to provide FDA-approved tests for lung cancer and melanoma for PD-L1 markers. Now I'll take a brief look at Agilent's revenues by end-market performance on a core basis. We saw strength in all our Life Sciences and Diagnostics markets. Continued robust demand drove pharma revenue up 19%. Growth was fueled by technology refresh deals, new product uptake and aftermarket demand for services and consumables. Our Clinical and Diagnostics revenue was up 7% and we experienced a return to growth in Academia & Government of 4%. This growth was significantly driven by the authorization of larger research budgets in the U.S. Applied end-market performance was generally soft except for Environmental, which was up 9% driven by strength in China. Food declined 1%. Our Food market strength in China was offset by soft demand in developed countries. Chemical & Energy declined 2% driven by the well-publicized macroeconomic concerns. Let me provide an update on our operating margin improvement initiatives. This quarter marks the fourth consecutive quarter of year-over-year operating margin improvement. This is how we are driving a sustained performance. We are building a new company portfolio. We have exited unattractive businesses and are acquiring new ones to enable our growth strategies. Our multi-year Agile Agilent program is simplifying our company, making it more nimble and lowering our costs. Finally, while we are improving our execution capabilities, transforming our culture to work as one team across the entire company, we call this One Agilent. As we enter the second year of the new Agilent, here's what you can expect as we move forward. We are building a new business, one that delivers above-market growth. We will continue to target operating margin expansion. Finally, we are driving a balanced capital allocation policy that includes increased levels of free cash flow being returned to shareholders. Going forward, we will continue to make tough decisions to ensure our long-term competitiveness. For example, we have just frozen our U.S. defined benefits retirement plan. This change is effective in the second half of fiscal 2016. I've also spoke with many of you about our multiple ERP systems and oversized IT environment. We continue to streamline our IT systems and infrastructure to reduce costs and increase effectiveness. While work remains, we are pleased with the start of the second year of the new Agilent and our progress in transforming the company. Let me share my view on the current market outlook. The principle of new Agilent is to be realistic and to closely monitor market conditions that could affect our business. Global macroeconomic concerns are pressuring some end-markets and emerging economies. The good news is that we see solid market conditions in other end-markets and geographies. I remain confident in our ability to achieve our full-year core growth and operating margin goals. I am also confident that we will make course corrections as market conditions dictate. We are strengthening our portfolio, building on our prior-year introductions, we have an exciting pipeline of compelling new offerings set to launch this year. In tandem with these new offerings, we are creating a new go-to-market capability. We have a focused, energized sales force, and we are overhauling our e-commerce environment to make it easier for customers to do business with us. And most importantly, across the company, we have the organizational capability to execute and deliver. The Agilent team is aligned and highly energized, driven to win in the marketplace. Thank you for being on the call today. I will now turn it over to Didier, who will provide additional insights on our financial results and our updated guidance. Didier? Didier Hirsch - Chief Financial Officer & Senior Vice President : Yes. Thank you, Mike, and hello, everyone. To summarize Q1 results, they are above the high-end of our revenue and EPS guidance, even as currency impacted revenue by $7 million and OP by $2 million. The EPS beat was the result of the higher revenues as well as favorable mix. Our adjusted operating margin of 20.2% and operating cash flow of $106 million was strong. We bought back $200 million or 4.9 million shares in Q1. I'll turn now to the guidance for fiscal year 2016. We are confirming the core revenue growth guidance of 4.0% to 4.5% we provided in November. However, the strengthening of the U.S. dollar since our November guidance is expected to have a negative impact of about $50 million on reported revenues, $13 million on operating profit and $0.033 on EPS. As a result, we now expect fiscal year 2016 revenues of $4.1 billion to $4.12 billion and EPS of $1.81 to $1.87. To note, in the last two weeks, we've seen the U.S. dollar weaken. If the weakening continues, we will reflect the positive impact in our May guidance. Turning to our share buyback program, we remain committed to our plan of repurchasing another $280 million of shares before our fiscal year-end. Finally, moving to the guidance for our second quarter, we're expecting Q2 revenues of $965 million to $985 million, reflecting typical second quarter seasonality versus Q1. The midpoint corresponds to a core revenue growth of 4.0%. The sequential reduction in revenues will translate into a sequential reduction in EPS. We expect Q2 EPS to range between $0.37 to $0.39. With that, I'll turn it over to Alicia for the Q&A. Alicia Rodriguez - Vice President- Investor Relations : Thank you, Didier, and, Jonathan, will you please give the instructions for the Q&A? Operator : Certainly. Our first question comes from the line of Doug Schenkel from Cowen & Company. Your question please. Ryan Blicker - Cowen & Co. LLC: Hi. This is Ryan Blicker filling in for Doug. Thanks for taking my question. Starting with operating margin guidance, it seems as though you reduced full-year guidance by about 10 basis points, but it seems as though most of that was FX. Can you confirm that that was all due to FX, or are there other changes we should be thinking about? Didier Hirsch - Chief Financial Officer & Senior Vice President : No. It was entirely due to FX, absolutely. As I mentioned, the FX impact was $13 million and that is precisely the amount of the reduction in operating profit reflected in our guidance. And we have maintained the guidance at 20.2%, which was the average of 20% to 25% that we had guided to in November. No change. Ryan Blicker - Cowen & Co. LLC: Okay. Thank you. And looking at the pharma end-market, obviously, another very strong performance in the quarter. Can you give us more details on what drove the strength and were there any one-time dynamics like a budget flush or pull-forward of revenue? And, I guess, lastly, do you still expect growth in this end-market to approximate high-single-digits for the full-year? Thank you. Michael R. McMullen - President and Chief Executive Officer : Hey, Ryan. This is Mike. Let me make a few comments on the pharma strength we saw in the first quarter. Clearly, no one-time events and we saw great pacing throughout the quarter. I just would highlight a few points here. One, we're seeing a strong growth in Liquid Chromatography both in terms of the uptake and our new products, but also the technology refresh that is underway within the segment. Also, customers are responding quite positively to our biopharma solutions. And across the board, between biopharma and pharma, we're seeing strong demand for enterprise-wide services and consumables. 19% growth for the first quarter. We don't expect that level of double-digit growth to continue all through the year, but we're quite confident in our projections of high-single-digit. We're calling for 8% overall growth for the year in pharma. So we see no signs that this market won't remain robust for us for the rest of this year. Operator : Thank you. Our next question comes from the line of Paul Knight from Janney Montgomery. Your question, please. Michael R. McMullen - President and Chief Executive Officer : Hey, Paul. Paul Richard Knight - Janney Montgomery Scott LLC : Hey, Mike. How are you? Michael R. McMullen - President and Chief Executive Officer : I'm doing just fine. Paul Richard Knight - Janney Montgomery Scott LLC : Regarding the guidance of EPS, I know when you guided last time the euro had already fallen relative to the dollar. So are you measuring the euro on today's exchange rate, last week's exchange rate? I mean, could you flush out a little bit more? Michael R. McMullen - President and Chief Executive Officer : Great question, Paul. It's the same question I ask Didier. I'm going to pass it back to Didier. Didier Hirsch - Chief Financial Officer & Senior Vice President : Yeah. Hi, Paul. So the guidance is always based on the exchange rate on the last day of the quarter we report. So the new guidance is based on the exchange rate as of January 30 of 2016. And it was between November – October 30, which was a November guidance and then January 30, which is the present guidance. The dollar strengthened, but we are seeing it weakening since November 30 a little bit vis-à-vis the euro, and certainly, vis-à-vis the yen. So if that continues, it will be reflected in our May guidance. Again, there was no change at all to our November guidance except for those that result directly from the change in exchange rates between October 30 and January 30. Michael R. McMullen - President and Chief Executive Officer : Yeah, Paul, if I can just emphasize that again, I mean, the fundamental assumptions we made that underlined our prior quarter guidance remain intact with the exception being FX. Paul Richard Knight - Janney Montgomery Scott LLC : And then, lastly, Mike, what stands out on technology is the PD-L1 approval and also the large molecule technology in CrossLab, do you sit there with those two products on your menu thinking there's a bias toward more organic? Or where are you at with those two that you mentioned? Michael R. McMullen - President and Chief Executive Officer : Paul, just to make sure I understand the question relative to -thanks for the comments and observations. Just to make sure I understand the question, this would be relative to our expectation of continued organic growth of those two new... Paul Richard Knight - Janney Montgomery Scott LLC : Yeah. Are they enough to move the needle higher than what you would have thought 90 days ago on last guide? Michael R. McMullen - President and Chief Executive Officer : Well, let me make a comment on the CrossLab services and consumables, and then I'll pass it over to Jacob on the PD-L1. When we put together our guidance for the year, we were expecting strong growth in our CrossLab services and consumables business. So that's part of the reasons why we had a lot of confidence coming into this year and still have the confidence in this year about making our organic core revenue growth targets because have you seen even in the Chemical & Energy space, which is down in terms of new instrument purchases, they continue to buy and we see strong growth of services and consumables. So what I'll leave you is we expect continued strength in that space, but we were assuming that to be the case, when we guided the company earlier this year. And, Jacob, why don't you share your thoughts on the PD-L1? Jacob Thaysen - Senior Vice President, President, Diagnostics and Genomics Group : Yeah. Thanks, Paul. And you're right that we got the indication approval also for the melanoma for the OPDIVO drug. And that's a great next step in the opportunities for PD-L1. I will not say that it really changes some needle on an Agilent level, but it definitely is a part of our growth story in DGG. But I will remind also that this drug – or this companion diagnostic has only been out now for a few months. And we're still in the early days of seeing the uptake of it. So I see good progress, but not something that really moves the needle here. Paul Richard Knight - Janney Montgomery Scott LLC : Thank you. Operator : Thank you. Our next question comes from the line of Dan Arias from Citigroup. Your question, please. Daniel Arias - Citigroup Global Markets, Inc. (Broker): Thanks for the questions. Michael R. McMullen - President and Chief Executive Officer : Hi, Dan. Daniel Arias - Citigroup Global Markets, Inc. (Broker): Mike, last quarter you mentioned that industrial weakness you were seeing spilled over into the Environmental business? I'm just wondering whether that's reversed a bit this quarter. So, I guess, is it fair to say that maybe growth in Environmental this year could be a couple of points higher than the cyclical segments? I guess, how would you just compare expectations for Environmental versus industrial for this year? Michael R. McMullen - President and Chief Executive Officer : Yeah, Dan. Thanks for the careful observation. And actually, the Environmental business was a pleasant surprise in the first quarter. We knew that China was going to be strong and we've been talking about China and our view of investments that the Chinese government's making in places such as environmental market and food safety. But I will say that we're happy to see the growth in other segments. Because, yes, the Chemical & Energy space has been under pressure, but what we're still seeing is that fracking is still going on. So the production – while prices of oil are down, the production demand is stable. And, in fact, if you look at the gasoline production in the U.S., for example, it's perhaps going up. So we're seeing a continued need to do Environmental testing. So that's been a nice reaffirmation, if you will, of our outlook for the year, which calling for low-single-digit growth in Environmental. We thought that China would carry the whole load for us, but I think we're getting a little help from the U.S. as well. Daniel Arias - Citigroup Global Markets, Inc. (Broker): Okay. And then, maybe just staying in the BRIC region, any change in the way that you're thinking about Brazil and Russia and how that might end up this year? Michael R. McMullen - President and Chief Executive Officer : Unfortunately, no. I think we're still looking for very challenged conditions in those countries. I know there's been some recent news today about Russia, and perhaps, working with some of the other oil-producing countries to change some aspects of production. Maybe they'll have some dynamics in terms of their economy, but right now, we're assuming continuation of the current challenged conditions for Brazil and Russia. Daniel Arias - Citigroup Global Markets, Inc. (Broker): Got it. Okay. Thanks, Mike. Michael R. McMullen - President and Chief Executive Officer : You're welcome. Operator : Thank you. Our next question comes from the line of Isaac Ro from Goldman Sachs. Your question, please. Isaac Ro - Goldman Sachs & Co.: Yeah. Good afternoon. Thank you. Michael R. McMullen - President and Chief Executive Officer : Good afternoon. Isaac Ro - Goldman Sachs & Co.: Yeah. Mike, first question was on gross margin. There's pretty big year-on-year improvement there, and I was wondering if you can maybe break down the key drivers of gross margin performance. The extent to which there might have been one-time benefits and the extent to which there are some items that are going to continue as the year progresses. Michael R. McMullen - President and Chief Executive Officer : Yeah. Why don't I make a few high-level comments here, then, Didier, you can jump in and augment my comments. But I think one, there were some one-time improvements. And I think we highlighted those specifically as it related to DGG, where we had some revenue that was really trapped last year in the first quarter due to production issues. But the lion's share of the improvement is resulting from our continued sustained efforts that I highlighted in my call. Both the portfolio efforts in terms of the businesses we're no longer in, the businesses we acquired are changing our gross margin profile. We're taking real cost out of our system through the Agile Agilent program. So there were some one-time events as it relates to the revenue for DGG, but the bulk of our margin improvement is from the underlying core efforts we've had over the last several quarters to fundamentally change the operating model of the company. Didier, anything else that you'd add to that? Didier Hirsch - Chief Financial Officer & Senior Vice President : Just to point that also contributed the number one – you will recall that last year we were spending heavily on remediation point to address the FDA warning letters. So that is now we're spending significant amounts to maintain our strong position now, but certainly, not in the same magnitude of what we have spent for two years in a row. And then, the second point is there was a favorable mix. We talked about how strong the pharma business is and pharma does generate higher gross margin than the rest of the businesses. So favorable mix and the pharma being just one of them, but a significant one. And then, the FDA, the reduction of FDA spend also in addition to all the points that Mike has made. Isaac Ro - Goldman Sachs & Co.: Okay. That's helpful. Thank you. And then, just a follow-up on CrossLab. You mentioned the driver there, looking like it was just healthy demand in the end-market. But I don't think of that business as necessarily having a sustainable growth rate in that double-digit range. So I'm wondering if there was an element of market share that was helpful. It's just not a market where we have a ton of quarter-to-quarter visibility, so I was wondering if you could put some color around the extent to which market share was helpful and how you'd characterize where it's coming from. Thank you. Michael R. McMullen - President and Chief Executive Officer : Yeah. Great question. I'll make a few comments, and Mark, why don't you jump in with your thoughts here? As we looked at the overall growth rate for CrossLab, you should assume that we're right in the range, where we talked about at the AID, and we think there's both market growth, but as you pointed out, market share gain opportunities for us, where we really have changed our view of what the addressable market is for our business and it's no longer the Agilent install base, but it's the entire lab. And, Mark, why don't you talk about some of the things we're doing in terms of capturing market share? Mark Doak - Senior Vice President and President-Agilent CrossLab Group : Thanks, Mike. And I think you hit on the primary piece, which is we continue to see the primary drivers in pharma, and also, China has been very strong for us. When you pull it all back to when capital spending is constrained, we continue to see customers improve the productivity of their assets through services and the chemistries we talked about earlier. But I think what's more robust than it was a year ago even is really the strength of our multi-vendor and enterprise portfolio. And that does allow you to take share, if you will, from the broader market. Isaac Ro - Goldman Sachs & Co.: Got it. Appreciate all the color, guys. Thank you. Michael R. McMullen - President and Chief Executive Officer : Quite welcome. Operator : Thank you. Our next question comes from the line of Ross Muken from Evercore ISI. Michael R. McMullen - President and Chief Executive Officer : Hey, Ross. Ross Muken - Evercore ISI : Hi. Good afternoon, guys. Michael R. McMullen - President and Chief Executive Officer : Good afternoon. Ross Muken - Evercore ISI : So I'm just trying to double-check on the guidance map here, because I think a few of us are a little bit confused. So we beat the quarter, right, by around – I don't know – call it, $0.03. We lost $0.033 on FX roughly, and the range came down $0.04. So I'm just trying to get a sense for – again, it seems like FX was the key delta, but just the simple math would have suggested to me a little less downward pressure on the full-year range. And again, I realize there's probably a few other moving parts. So I'm just trying to make sure I understand how we're doing versus the plan for the year. Michael R. McMullen - President and Chief Executive Officer : Sure. We're happy to – Didier would be happy to clarify. Didier Hirsch - Chief Financial Officer & Senior Vice President : Yeah. As I mentioned earlier, we have reduced our top line revenue from a midpoint from $4.160 billion to $4.110 billion, which is a $50 million reduction. We've reduced our operating profit from $830 million to $817 million. That's $13 million, and that's entirely due to the impact of the strengthening of the dollar and related to the $50 million. And then, I mentioned $0.033, but with rounding, we are going from the midpoint of $1.88 to the midpoint of $1.84, and that's $0.04, and that's the $0.033, which is rounded because of the – going from one to the other, you can understand that. So basically, what we felt is even though we are starting the year very strongly, we felt that with the overall macroeconomic condition, it would not be wise at this point in time to change the guidance we have provided, core revenue guidance of 4% to 4.5%. We have the same confidence as we had in the month of November, when we provided that guidance that we're in good shape to hit it and perhaps beat it, but certainly, didn't want to change it. Ross Muken - Evercore ISI : Yeah. I guess, what I'm trying to get at is sort of the comments last quarter suggested sort of conservatism, right. You obviously can't control what happens with the dollar, so that's understandable. I'm just trying to get a sense for how much conservatism there is now in the forecast and whether or not we have risk to that core growth rate, given again that the range came down, but you reiterated the top line. Just making sure that we're sort of not over-extrapolating here. Michael R. McMullen - President and Chief Executive Officer : Sure, Ross. This is Mike. I really appreciate the opportunity to comment on this. So if you go by the conservatism meter on our guidance, it's at the same level as it was last quarter. So the only real fundamental changes from our outlook is the view on FX. That's it. Didier Hirsch - Chief Financial Officer & Senior Vice President : And that we saw no reason to change our core revenue growth to offset a part of the FX, because FX can go up and down and it's too volatile nowadays to immediately – unless we see some long-term structural changes, as we have last year and we reacted accordingly. We were not going to react by what we believe are temporary changes in FX by actions on our structural spend. Ross Muken - Evercore ISI : Okay. So, sorry. I'm going to monopolize for a minute, just because I'm trying to make sure my inbox lights up. I'm getting everyone the answers they need. So all right. To be clear, we have the FX hit. I'd love to also understand what were the key currencies, because most of us can see the dollar's actually, again, we'll see if it sustains, weakened a bit. And so it seems like it's outside the euro and the yen that might have caused some of the headwinds. So I'd love to hear just a little bit of color on maybe it's the yuan or some of the other emerging market currencies. And just to be clear also on the second point, so we didn't really bake in the beat from this quarter. Is that where the conservatism comes in? And then, I'm done I promise. I'll cede the floor. Didier Hirsch - Chief Financial Officer & Senior Vice President : Yeah. I mean, in terms of the currencies we have a detailed model that takes into account obviously all the currencies. The dollar versus the euro or the dollar versus the yen had a major impact also, I think, dollar versus the British pound. And again, I mean, today's guidance is based on the January 30 exchange rate, so the euro to dollar €0.84 and the yen – and vis-à-vis the yen at the U.S. dollar is ¥121.4 and we are seeing that at today's rate if we had to provide the guidance based on just if we had to – we're able to instantly reflect the currencies as of the day of the guidance, we'd have a very different guidance. Michael R. McMullen - President and Chief Executive Officer : And I think your second statement is probably a fair one. Ross Muken - Evercore ISI : Okay. Thank you. Michael R. McMullen - President and Chief Executive Officer : Yeah. Operator : Thank you. Your next question comes from the line of Jeff Elliott from Robert W. Baird. Your question please. Jeff T. Elliott - Robert W. Baird & Co., Inc. (Broker): Yeah. Thanks for the question. So question for Mike on Chemical & Energy. You were down 2% this quarter. The last couple of quarters you were down 9% or 10%. I guess, can you give us a sense for what's happening on the E&P side? You talked about stability on the refining side, but what are you seeing on the E&P side. It seems like that's what allowed the – I guess, the improvement relative to last couple of quarters. Michael R. McMullen - President and Chief Executive Officer : Yeah. Actually, it's probably worth maybe just doing a little bridge on the last few quarters, because, in fact, we've seen relative flat performance over the last several quarters. And while instruments were down the percentage you were talking about, high-single-digits, we've seen a continuing ability to offset through services and consumables. So what I would say is that the Chemical & Energy market is sort of playing out the way we had expected for the year. So we wish we had a different story here, but the oil price is low as you know, but the product demand still remains pretty strong for our customers' products. So the refineries are running, the chemical plants are running, and then we're really trying to sell to them new equipment based on a productivity message, but at the same point in time, recognize that if they use the equipment longer, it's a good opportunity for us on the services and consumable side. One thing I would ask you to reflect on is that Q1 2015, as you dig into some of the numbers, Q1 2015 really was our best quarter for the whole year. I think we grew 3% in the first quarter of last year on a core basis. We ended up growing, I think, 1% for the whole year so that shows you were declining through the year. And so I wouldn't over-interpret the numbers. We think it's right in the range where we thought. And, Patrick, I don't know if you had any other comments you'd add to that? Patrick Kaltenbach - Senior Vice President, President, Life Sciences and Applied Markets Group : Well, no, not really. I think, as you said, it's playing out as we expected. There's continued pressure on the exploration side and production side. But for the refinery side, demand really drives. Also, replacement business for us, we try to incentivize our customers and give them opportunity to upgrade to increase their productivity and efficiency. And on the chemical side, I would say that the lower feedstock prices have not yet fully materialized. So we stay with focus for the year to – for the whole segment to stay flat. Michael R. McMullen - President and Chief Executive Officer : Okay. And, Jeff, this is Mike. I think we shared these numbers with you in the past. But the way we looked at this – we always look at our business, say, about 15% or so is in E&P, as you described, exploration and production, which will be about 3% to 4% of our total revenues. About 35% of that segment is in refining and the other 50% is in chemicals. So that's how we – it remains stable at a subdued level. Jeff T. Elliott - Robert W. Baird & Co., Inc. (Broker): Great. Thank you. Operator : Thank you. Your next question comes from the line of Steve Beuchaw from Morgan Stanley. Your question, please. Steve C. Beuchaw - Morgan Stanley & Co. LLC: Hi. Good afternoon. And thanks for taking the questions here. Michael R. McMullen - President and Chief Executive Officer : Good afternoon. Our pleasure. Steve C. Beuchaw - Morgan Stanley & Co. LLC: I'd like to follow up just a bit on the pharmaceutical space. It was really helpful to hear just how confident you guys are in the outlook for the year growing 8% in pharma. I wondered if you can maybe add a little bit to the conversation, though, and talk about what you're hearing, Mike or Patrick, in your conversations with pharma customers as they talk about their budgets for this year? I apologize for coming back to the topic, but there's a lot of interest out there in the sustainability of growth in the space. So any color you could offer on how your customers are thinking would be really helpful. Michael R. McMullen - President and Chief Executive Officer : Yeah. Absolutely. So, Patrick, why don't you take that question and I have one closing comment. Patrick Kaltenbach - Senior Vice President, President, Life Sciences and Applied Markets Group : Sure. Thanks. So what we're hearing from our customers is that actually they are holding their budgets. We don't see any significant reduction there. And this comes, by the way, across the board from small and medium-sized and large enterprises. So it's really for us, it's a good mixture between different sized companies and also between the different markets. Talking about small molecule versus biopharmaceuticals, the growth really comes from both sides. And this is why we're so confident that we will maintain to see this high-single-digit growth for pharma. Michael R. McMullen - President and Chief Executive Officer : And the other thing that we've done, so we're getting broad-based demand across all segments of the market. Then we also continue to do our own math in terms of what's out there, in terms of the install base of our products. So we have a pretty good idea of – at least on the technology refresh side how much more demand we can expect in the segment. Steve C. Beuchaw - Morgan Stanley & Co. LLC: That's extremely helpful. One corollary, one follow-up there. I wonder if you could give us a sense for, to what extent, the success that you're having in pharma and the success that you're having in CrossLab are interrelated. Are those two perhaps a little bit more overlapping than CrossLab as with some of the other customer verticals? And to what extent, is one dependent on the other? Thanks so much. Michael R. McMullen - President and Chief Executive Officer : Great question. Happy to elaborate. They are highly connected. So when we talk about pharma market demand, it's both driving new equipment purchases, which were the focus on Patrick's comments, but also, there's a demand for enterprise-wide services and consumables. But on the CrossLab side, not only are they investing in ongoing chemistries and services to maintain their operations and support their application needs, what we're also seeing is a change in the model. So what they're doing is they are taking activities that historically have been done inside the company and are creating, if you will, a new set of services for vendors in our space to handle things such as asset management. And that's creating a new set of services that are being created right now in pharma. We haven't seen that new set of services demand develop yet on the Chemical & Energy side, but we're hopeful that it will down the road. But there's a couple of dynamics going on in the pharma space, which are driving both the new instrument purchases and the consumables and services from CrossLab. Steve C. Beuchaw - Morgan Stanley & Co. LLC: That's super helpful. Thanks, everyone. Operator : Thank you. Our next question comes from the line of Tim Evans from Wells Fargo. Your question, please. Tim C. Evans - Wells Fargo Securities LLC : Thank you. Wondered if you could give us a update on market for tuck-in acquisitions. What you're thinking about these days in terms of where you might like to plug some holes. And also, are you seeing more opportunities now that some valuations have come in? Thanks. Michael R. McMullen - President and Chief Executive Officer : Yeah. Thanks, Tim. Appreciate the opportunity to provide a perspective on here. So although we remain focused on our organic growth opportunities, we've got a lot of very exciting plans and new products coming out, and working on the go-to-market capabilities I mentioned in my call comments. We're really continuing to look for acquisitions that augment our current portfolio and add to our company capabilities. And so I think you saw doing the Seahorse deal, where we added capabilities in life science, research, Cartagenia in the area of next-gen sequencing. We built out our workflow there. We'd still like to find ways to build out our workflow in next-gen sequencing. And so our stated strategies of really adding capabilities, expanding our portfolio, building on our workflow solutions with particular emphasis on life sciences, research, next-gen sequencing workflows in the overall consumables and services place, they're our priorities. Well, that being said, most people still have the memories of the 52-week highs. So we'll see how this plays out. And what I will tell you is we will continue to be very disciplined in terms of how we think about M&A and does it provide an attractive return to our shareholders, and can we do something to make the business better? If we can't make the business better, it's not something we'd be interested in. Tim C. Evans - Wells Fargo Securities LLC : Thank you. Operator : Thank you. Our next question comes from the line of Brandon Couillard from Jefferies. Your question, please. Brandon Couillard - Jefferies LLC : Thanks. Good afternoon. Michael R. McMullen - President and Chief Executive Officer : Good afternoon, Brandon. Brandon Couillard - Jefferies LLC : Mike, you pointed to strength in China in the period. Just curious, if you could elaborate on the actual growth rate in the first quarter and if there's been any deviation from the mid- to high-single-digit target for the year? Michael R. McMullen - President and Chief Executive Officer : Yeah. Thanks. I appreciate the opportunity to talk about China; one of my favorite topics. So we saw a very good demand in China, high-single-digit growth in our analytical lab business. And as I mentioned to you in the past, the markets here are really being driven by strong investments in government policy-driven initiatives around quality of life concerns, whether the environment, drug and food safety. So all the markets with the exception of Chemical & Energy really saw quite strong growth. And we're underpenetrated in DGG business compared to the rest of the company. We've talked about that in the past. And we're underpenetrated in a growing market for cancer diagnostics, for example. And I recently saw some statistics that I thought were really quite amazing. There was a report by the Cancer Hospital of the Chinese Academy of Medical Sciences said that every minute an average of six people in the country were diagnosed with cancer, and five of those six would eventually die of the disease. So unfortunately, there's going to be growing demand for cancer diagnostics as well. I'm going to wrap this all up by saying we remain quite comfortable with the mid- to high-single-digit growth expectation we laid out for China. It was strong for us in the first quarter and we expect that to continue through the year. Brandon Couillard - Jefferies LLC : Then one more for Didier. Could you split out the contribution from Seahorse relative to the headwind from the NMR in the first quarter in terms of just dollars? Didier Hirsch - Chief Financial Officer & Senior Vice President : No, no, no, we don't provide guidance or information regarding the acquisitions. We have stated and we are exactly in line that we expect Seahorse revenue to grow double-digits in 2016 versus 2015. And we expect the Seahorse operating margin to be also in the double-digits. So no change to our expectations. Michael R. McMullen - President and Chief Executive Officer : And, Patrick, maybe you can just add a few comments on how is it going so far. Patrick Kaltenbach - Senior Vice President, President, Life Sciences and Applied Markets Group : Well, the integration of Seahorse is going very well. It's giving us extended reach also into the research market, and this was the whole play. Plus, we, of course, used the opportunity to use our strength in pharma to sell these products into the pharma space in areas like disease discovery as well. And this will drive the growth in fiscal year 2016. As Didier said, we expect double-digit growth. We have the salesforce trained and we are looking forward to a very strong Q2, Q3, Q4 for this product line. Brandon Couillard - Jefferies LLC : Super. Thank you. Operator : Thank you. Our next question comes from the line of Tycho Peterson from JPMorgan. Your question, please. Michael R. McMullen - President and Chief Executive Officer : Hey, Tycho. Tycho W. Peterson - JPMorgan Securities LLC : Hey. How are you? Maybe just first on capital deployment, you did $200 million in buybacks in the quarter. You guided for $480 million for the year. I mean, it sounds like you all front-end loaded, and I mean, how do we think about a reauthorization once you get through this tranche, given your stock's probably under some pressure tomorrow? Didier Hirsch - Chief Financial Officer & Senior Vice President : Yeah. We basically decided to buy back in Q1 what we had not been able to do in Q4 of the preceding year. And then, we have filed a 10b5-1 with certain formula. But for your model, you should assume that we are buying about one-third of the remaining $280 million per quarter. Tycho W. Peterson - JPMorgan Securities LLC : And then, just to clarify on the margins, because I've had a few questions. I mean, the $13 million hit is the FX hit, but, I guess, people are having a hard time understanding why you're not seeing faster-than-expected realization of the COGS and SG&A cuts that we saw some of that this quarter. Why doesn't that carry through for the next three quarters? Didier Hirsch - Chief Financial Officer & Senior Vice President : We're not saying it's not going to carry us through. We're saying we saw no reason in the present environment to change the guidance on an operating margin basis, 20.2% that we had provided, 20% to 20.5% that we had provided previously, and again, with the same level of conservatism as we had in November. So that's basically the – that was the premise for us maintaining both the core revenue growth and the operating margin we had provided in November. Michael R. McMullen - President and Chief Executive Officer : And, Didier, I'd just add, in my call comments, I tried to highlight a few things on a longer-term nature to show you that we're not out of gas in this tank in terms of our ability to continue to move our operating margin. We have other larger-hitting programs that are coming in late 2016 and will carry on into 2017 as well. So this is not a one-time quarter where we just got a favorable mix, whatever. There's real fundamental improvements underway in the operating margin capabilities of the company. Tycho W. Peterson - JPMorgan Securities LLC : And then, I guess, speaking of running out of gas, you talked about refiners holding up. There's been news that at least two of the country's largest refiners are cutting output of gasoline. What gives you conviction that your business there holds up? Michael R. McMullen - President and Chief Executive Officer : I'm not sure exactly what you're referring to, but relative to our view is that gasoline will continue to be needed to run the economy, and there's going to be demand there. And what we've tried to share, as long as production is running and there's demand, the refineries will meet that demand. So we've seen no significant changes in the underlying demand for gas. And, in fact, Patrick, I think you were showing me some statistics the other day about what's going on in the area of refineries in the U.S. Patrick Kaltenbach - Senior Vice President, President, Life Sciences and Applied Markets Group : Yeah. I mean, what we see, as Mike said, is the continued demand for – not only in the U.S., but also in the emerging economies like China. So the refineries are basically running at capacity right now. There will be no new builds, but we see that they've replaced existing equipment, and they also go into service contracts with us. They look for opportunities to drive more efficiencies, which gives us an opportunity to upgrade the install base with automation features and other things to make sure that the customers can save money with the equipment as well. So the oil price is clearly driven by the fact that there's overcapacity on the production side. But the refinery volume has not gone down significantly over the last quarters. Tycho W. Peterson - JPMorgan Securities LLC : Okay. And then, just lastly, can you talk about linearity in the quarter? Anything notable in January? You guys have an extra month versus a lot of your comps, so just wondering if there's anything worth calling out in January trends versus November and December? Michael R. McMullen - President and Chief Executive Officer : Yeah. No, I'd just point to two things. One is in terms of our normal seasonality through the quarter. Q1 of 2016 was like prior quarters. We always see a nice strong December as we close off year-end with our customers. And followed our typical seasonality patterns through November, December and January. I think probably the only thing of note would be in the DDG side. We had, I think, one less working day, I think, this year. So that does affect the Genomics business in terms of how much revenue we get in that quarter. But really, it was business as usual, if you will, through the first quarter. Tycho W. Peterson - JPMorgan Securities LLC : All right. Thanks. Operator : Thank you. Our next question comes from the line of Jack Meehan from Barclays. Your question please. Jack Meehan - Barclays Capital, Inc.: Hi. Thanks. Good afternoon. I wanted to follow up on Tycho's last question, just around the academic end-market. I'm curious, you mentioned in the presentation around some of the modestly larger research budgets being released in the U.S. Curious on your view on the NIH and really timing-related there, because of the timing of the Congressional approvals at year-end. Patrick Kaltenbach - Senior Vice President, President, Life Sciences and Applied Markets Group : Yeah. I can take this question here. We have seen moderate growth again in Academia & Government, which was a positive surprise. And as you all have read, there are more budgets available now in the U.S. These budgets are slowly released and drove some of the growth for us in Q1. And looking at the funnel moving forward, we actually see a good funnel there as well. So we stay with the forecast of low-single-digit growth for Academia & Government, at the moment, mainly driven by the U.S., which is where we see the strongest demand. Jack Meehan - Barclays Capital, Inc.: Got it. And are your expectations for this level of growth to stay at the same rate through the end of the fiscal year? Are you assuming the budgets get released a little bit faster from here? Michael R. McMullen - President and Chief Executive Officer : If the budgets were to be released faster, I think, it would probably be upside for us. Our current view is low-single-digits for Academia & Government for the year. Jack Meehan - Barclays Capital, Inc.: Got it. And then, just one other question on the margins in DGG, definitely appreciate the year-over-year improvement. I was wondering what your thoughts were bridging through the end of the year just given how the relative margins compared to the end of 2015. Thanks. Michael R. McMullen - President and Chief Executive Officer : Great. I know Jacob's given a lot of thought to that potential question. So I'll pass it over to you, Jacob, to provide some color there. Jacob Thaysen - Senior Vice President, President, Diagnostics and Genomics Group : Yeah. Thanks for that, Jack, and first of all, I want to say that very pleased to see the improvement versus the Q1 last year, but you're also right that versus Q4 that we saw a bit of a decrease and that was actually where most expected. We sit in the DGG business with a pretty fixed cost base. So when you have a Q1 with the lower base than in Q4, you will see that our margins has also impacted economy. So you always see us coming out with a strong Q4 and a weaker Q1 and the gross margin also on our operating margin. So it's kind of by the book and really as expected. Didier Hirsch - Chief Financial Officer & Senior Vice President : Yeah. I would just add that there's no change in plan and Jacob is still absolutely committed to reaching 20% operating margin in 2017. Jacob Thaysen - Senior Vice President, President, Diagnostics and Genomics Group : Absolutely. Operator : Thank you. Our next question comes from the line of Derik De Bruin from Bank of America. Your question please. Derik De Bruin - Bank of America Merrill Lynch : Hi. Good afternoon. Michael R. McMullen - President and Chief Executive Officer : Good afternoon, Derik. Derik De Bruin - Bank of America Merrill Lynch : So I'm just curious. You're guiding to a 22% operating margin for 2017, so that's implying – assuming the 20.2% midpoint, 130 basis points to 180 basis points of margin expansion next year. I'm just curious, if you couldn't find 10 additional basis points of margin expansion in 2016 to offset the impact, what gives you confidence you're going to be able to get 130 basis points, 180 basis points next year? Michael R. McMullen - President and Chief Executive Officer : I'd just reiterate – great question this one. Again by the way, one of the things as you heard me say earlier in my comments, we continue to make sure we're realistic and we think about our business not on some hope and a prayer, but we actually have solid plans behind our long-term operating goals. And I think we have a lot of confidence for two reasons. One is we have a plan that can get us there with not all the top line, it's probably in the range of 4% ago, we can get to the margin goals. We've laid out a plan that's got 60% of this coming from the cost side. And we have multi-year programs that are going to take significant cost out of our structure. So I highlighted a field in my call, I mean, changes in terms of our benefit structure, changes in terms of our IT cost, our IT systems. It is a major company-wide initiatives that right now we're underway. You won't start to see them going through the P&L until like late 2016 going into 2017. So these are the kind of things that give us confidence to say, okay, there's a path that gets us to where we want to get to in 2017. Derik De Bruin - Bank of America Merrill Lynch : Okay. Great. It was the late 2016, early 2017 that, I think, that was the key that I was looking for in that. Michael R. McMullen - President and Chief Executive Officer : Okay. Derik De Bruin - Bank of America Merrill Lynch : Second question. Second question is given some of the turmoil going on in Europe, have you seen any changes in the academic or government spending like the governments grapple with the refugee crisis and everything that's going on? Is there any noticeable change to spending patterns in Europe? Michael R. McMullen - President and Chief Executive Officer : Patrick, you're... Patrick Kaltenbach - Senior Vice President, President, Life Sciences and Applied Markets Group : Yeah. Michael R. McMullen - President and Chief Executive Officer : You're shaking your head here right now. Patrick Kaltenbach - Senior Vice President, President, Life Sciences and Applied Markets Group : I'm shaking my head because we have not seen any significant change over the last several quarters. Derik De Bruin - Bank of America Merrill Lynch : Great. Thank you. Michael R. McMullen - President and Chief Executive Officer : You're quite welcome, Derik. Operator : Thank you. Our next question comes from the line of Dan Leonard from Leerink Partners. Your question, please. Dan L. Leonard - Leerink Partners LLC : Hey, guys. All my questions have been asked. Thank you. Michael R. McMullen - President and Chief Executive Officer : Thanks, Dan. That was fast. Thank you. Operator : Thank you. Our next question comes from the line of Dane Leone from BTIG. Your question, please. Dane Leone - BTIG LLC : Hi. Thank you for taking the questions. So on the gross margin line, can you just give us a little bit more color in terms of the product mix? As I look at the different groups really the margin leverage seem to come through the Life Sci and Applied Markets Group. You guys almost reported a 59% gross margin there. Comment on the mix, please, and why margin for that Group specifically is expected to moderate when, I guess, historically it's been pretty steady quarter-to-quarter throughout the year? Michael R. McMullen - President and Chief Executive Officer : I think there are two things I would point to and then, Didier, feel free to jump in in as well. But first of all, remember, the change we're making to our portfolio. So we've exited the NMR hardware business and we're starting to see some of those margin improvements shown on the P&L where we had revenue in the NMR business and much higher revenues in FY 2015. And then, our pharma business is pulling a lot of Liquid Chromatography, which is one of our highest gross margin products. I think it's really perhaps those are the things... Didier Hirsch - Chief Financial Officer & Senior Vice President : You said it all. Absolutely. I had mentioned earlier that the favorable mix came in part from the pharma mix. And within pharma, clearly Liquid Chromatography has the higher-than-average operating margin and gross margin. Dane Leone - BTIG LLC : So to clarify, you felt that there was either a catch-up ordering or stocking in the quarter on those products specifically that's not expected to continue for the rest of the year? Michael R. McMullen - President and Chief Executive Officer : Well, you can almost think about pharma – we had 19% pharmaceutical growth in the first quarter. What we're saying is we can't expect 19% to happen each of the next three quarters, what we do expect is continued strong demand, and right now, we're calling 8% for the entire year. So that's what you're seeing in terms of reflected in our mix column as it relates to gross margin. Dane Leone - BTIG LLC : Okay. And then, on the FX rate, so if you just use the DXY proxy, right, the last quarter was actually pretty elevated, but since then, the trend has actually come back into closer to where you guided the year. Are you expecting – is there some nuance within this on how certain currencies have moved? Or are you just assuming worst-case that the dollar goes back up here? Michael R. McMullen - President and Chief Executive Officer : It's just pure math. So we're not making any projections at all about future levels of FX. What Didier has done is, he takes the currency spot rates on the last day of the reported quarter, and that's how we guide the company. We say okay, that's what we know and we'll assume that rate stays the same the rest of the year, and then, it's just pure math from there. Didier Hirsch - Chief Financial Officer & Senior Vice President : That's been same methodology for ever. Dane Leone - BTIG LLC : Okay. So it's an extrapolation off of January 31, not what's happening in February? Didier Hirsch - Chief Financial Officer & Senior Vice President : Exactly. That's correct. Dane Leone - BTIG LLC : Okay. Got it. Didier Hirsch - Chief Financial Officer & Senior Vice President : And that's why I made a comment on my script that would we had used, for example, today's exchange rates, the guidance would have been higher, because the dollar between January 31 and today has weakened. Dane Leone - BTIG LLC : Yeah. Okay. Perfect. Thank you very much. Michael R. McMullen - President and Chief Executive Officer : Very welcome. Operator : Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Alicia Rodriguez for any further remarks. Alicia Rodriguez - Vice President- Investor Relations : All right. Thank you, everybody, for joining us on the call. And if you have any questions, please give us a call in IR. We'd like to wish you a good day, and I'm sure we'll be talking later. Thank you. Operator : Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,016	2	2016Q2	2016Q2	2016-05-16	1.818	1.853	2.032	2.097	2.76892	20.79	21.43	Executives: Alicia Rodriguez - VP-IR Michael McMullen - President and CEO Didier Hirsch - CFO and SVP Jacob Thaysen - SVP, President, Diagnostics and Genomics Group Mark Doak - SVP and President-Agilent CrossLab Group Patrick Kaltenbach - SVP, President, Life Sciences and Applied Markets Group Analysts : Dan Leonard - Leerink Partners Jonathan Groberg - UBS Tycho Peterson - JPMorgan Jack Meehan - Barclays Brandon Couillard - Jefferies Ross Muken - Evercore Paul Knight - Janney Montgomery Scott Tim Evans - Wells Fargo Securities Isaac Ro - Goldman Sachs Derik De Bruin - Bank of America Dan Arias - Citigroup Doug Shankle - Cowen and Company Mira Minkova - Stifel Steve Beuchaw - Morgan Stanley Jeff Elliott - Robert W. Baird Dane Leone - BTIG Operator : Good day, ladies and gentlemen, and welcome to the Q2 2016 Agilent Technologies, Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to Alicia Rodriguez, Vice President, Investor Relations. Please go ahead. Alicia Rodriguez : Thank you, Sabrina, and welcome, everyone, to Agilent's second quarter conference call for fiscal year 2016. With me are Mike McMullen, Agilent's President and CEO; and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Patrick Kaltenbach, President of Agilent's Life Sciences and Applied Markets Group; Jacob Thaysen, President of Agilent's Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. 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. You will find an Investor Presentation, along with revenue breakouts and currency impacts, 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 Mike and Didier will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. And please note that we will refer to core revenue growth, which excludes the impact of currency, the NMR business and acquisitions and divestitures within the past 12 months. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year. Guidance is based on exchange rates as of the last day of the reported quarter. 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. Before turning things over to Mike, I would like to remind you that Agilent will host its Analyst and Investor Meeting in New York City on May 25. Details about the meeting and webcast are available on the Agilent Investor Relations website. And now, let me turn the call over to Mike. Michael McMullen : Thanks, Alicia, and hello, everyone. Thank you for joining us on today's call. The Agilent team delivered another strong quarter for the Q2 revenue and earnings were above the high end of our guidance. Let me highlight three key results. First, revenue growth was up over 8% on a core basis. Second, we delivered adjusted operating margin of 19.4% an increase of 110 basis points from a year ago. Finally, EPS of $0.44 was up 16% over last year. Before moving on to a view of our Q2 results, I do want to address our year-over-year quarterly comparisons which reflect the unusual event from last year of 8% core growth that we're announcing today about 1.5 percentage points is due to our shift of our revenue last year from Q2 '15 into Q3 '15. In the second quarter year ago, we experienced $50million of shipment delays due to startup challenges with our new U.S. logistic center. In addition, our process improvement efforts over the past two quarters to convert our incoming orders more quickly to revenue have paid-off. We have reduced our order to revenue cycle times particularly in China. Consequently some shipments initially forecasted for Q3 of this year were delivered in Q2. Agilent's strong Q2 results were led by double digit core growth in pharma and food markets. We also experienced continued strength in Academia & Government, Environmental and Diagnostic and Clinical Markets. All end markets grew except Chemical & Energy. Growth was broad based across our most of our portfolios. Geographically all regions grew except Japan led by very strong growth in China. Let me highlight our Q2 results by business group. The Life Sciences and Applied Markets Group delivered core revenue growth of 8% led by strong demand in the pharma and food markets. About three percentage points of the 8% increase was thanks to a softer compare due to the timing issues mentioned earlier from last year's U.S. logistic centre startup. A combination of strong topline growth, expense management and growth margin improvements partially due to the NMR exit drove LSAG's operating margin to 19%, up 320 basis points from a year ago. LSAG continues to strength this portfolio in Q2 as it introduced VistaFlux software. This new software speeds up clinical research data analysis, so scientists can more quickly understand the underlying causes of diseases such as cancer. VistaFlux strengthens Agilent’s leadership decision in metabolomics. Last week we announced a new Agilent 1260, infinity-II LC at the analytical trade show. This instrument provides best-in-class lab efficiency and improves the formats of full backward compatibility. Next, the Agilent CrossLab Group continued to deliver consistently strong revenue results. Core revenue growth in Q2 was 10% led by strength in contract services, LC columns and lab supplies. Expansion and penetration in Asia continued to be the strong contributors to our growth. Operating margin was flat versus year ago at 21.5%.CrossLab represents a strategic transformation of our services and consumables business. I’m pleased to report that Agilent was recognized with 2016 Reviewers Choice award for customer service. This award is from Select Science, an independent expert led scientific review. This is the second year in a row, that scientists in North America have judged Agilent's customer service to be the best in the Laboratory products industry. Finally the Diagnostics and Genomics Group delivered 5% core growth in Q2 against a difficult compare. The pathology business continues on its steady trajectory back to market growth rates., highlighted by the strong demand for our new PD-L1companion and complimentary diagnostic tests. Genomics showed strong market performance led by our SureSelect Target Enrichment and our Array CGH offerings. DGG's operating margin was flat versus year ago at 15%. In Q2 Agilent announced an $80million investment in Lasergen, an emerging biotechnology company with innovative next-gen sequencing technology. Our two companies will collaborate on building an NGS workflow for clinical applications. In Q2, Agilent also announced the commercial availability has expanded to the EU for a new PD-L1diagnostic test for non-squamous non-small cell lung cancer. This diagnostic was developed through a collaboration with Bristol-Myers Squibb, the maker of OPDIVO. Now, I’ll provide an overview of Agilent's core revenues by end market. Life Sciences and Diagnostics markets saw a continuation of our first quarter performance with strength across all end markets. Pharma grew 14% fueled by technology research deals, new product uptick, and sustained growth in the aftermarket. This is the fifth consecutive quarter of greater than mid to high double digit growth in pharma. Academia & Government grew 7% driven by strong demand in China and an uptick in the U.S. Clinical diagnostics also grew 7% with strength in genomics led by target enrichment in Array CGH. Applied end market performance was mixed. Flu was up 25% with strong sales in China and the Americas. China also drove 6% worldwide growth in environmental forensics. Chemical energy declined 3%, reflecting continued macroeconomic concerns and the effects of lower oil prices. Now, I’d turn to an update on our operating margin improvement initiative. Q2 marks the fifth consecutive quarter of year-over-year operating margin improvement delivered by the new Agilent team. This will resolve our ability to outgrow the market while driving operational efficiency improvements. Our multi-year Agile Agilent program continues to simplify the company, making us more nimble and lowering our cost. Our execution of companywide streamline of organizations, processes, and systems continues to be on track to deliver incremental saving in 2017. For example, in Q3, we will take a major step forward in simplifying the company's system infrastructure with all of our financial systems now on SAP. On the capital deployment front, we paid $37 million in dividends, repurchased $94 million of Agilent stock and invested 80 million to enable our NGS workflow strategy. Finally, our one Agilent initiative driving was well-received cultural transformation to improve cost company collaboration and delivering of results. At last year's Analyst and Investor Day described a shareholder value creation model for Agilent to be driven by outgrowing the market, expanding operating margins and a balanced capital allocation policy. I'd like to take a minute to position the Q2 results in the context of our longer term goals. After delivering our highest annual core revenue growth in 2011 of 6.4% in 2015, we’ve now had two strong quarters to start 2016 including this quarter's 8% core revenue growth. Since the new Agilent leadership team has put in place, the team has delivered year-over-year operating margin improvements every quarter. We’ve completed the offset the initial $40 million into synergies from the Company's split. In fiscal 2015, we returned $400 million to shareholders and $370 million year-to-date in 2016 through cash dividends and share repurchase. From 2015 onto now, we’ve also invested our 400 million in new business via M&A and equity investments. Didier will share more specifics later while we are raising our full year 2016 outlook for core growth, operating margin, EPS, and cash flow. Let me now talk about our second half '16 forecast in light of what we’ve already achieved in 2016 and what we plan to deliver in 2017. We look at today's overall market environment while we face increasingly tough competitors, we expect strength and pharma are continuing the second half of 2016 and into 2017. China is also expected to remain strong in second half of 2016 and 2017. Taking a closer look at the chemical and energy market, we’ve been experiencing a more prolong and steeper slowdown than initially anticipated. We are now forecasting overall low single digit market declines for the year versus our initial flat guidance assumptions. The oil exploration segment of this market has been down significantly for some time with a recent well reported spill over into the refining segment. There are initial indications however of a bottoming with increased deal activity in the large chemical segment of the market. We have projected an improved chemical and energy market environment in 2017. We are assuming we will continue to face headwinds in this market for the remainder of 2016. We are currently modeling 2017 with an above market core revenue growth of 4.5%. This is in line with our projected full year 2016 core growth rates, but higher than our expected core growth rate in the second half of 2016. There are two reasons for this increase. First, we expect to have a very strong new product introduction in the second half of FY '16 which will drive revenue growth in FY 17. Second, on the end market front, we expect chemical energy to have bottomed out by year end, accompanied by continuing solid conditions and all of our other end markets and in China. Overall, we remain on track with your 2017 goal to outgrow the market and improve our operating margins to 22%. Looking inside the company, I can share with you today that the one Agilent team is working well together and is driven to win in the marketplace. I look forward to seeing many of you at our Analyst and Investor Day where I will share our progress versus our commitments. How we will sustain our improved performance and the longer term outlook for the company. Thank you for being on the call today. I will now turn it over to Didier who will provide additional insights on our financial results and guidance for the third quarter and full year 2016. Didier? Didier Hirsch : Thank you Mike and hello everyone. As Mike stated, we delivered a strong performance this quarter again. 8% core revenue growth, 110 basis points of operating margin expansion and $256 million in operating cash flow. After adjusting for last year’s $15 million slippage in revenue from Q2 to Q3 as we launched our new U.S. logistic center, our core revenue growth of 6.5% remained well above market. During the quarter, we bought back $94 million of stock and paid $37 million in dividends. Finally, on May 3, we successfully moved all finance applications from Oracle to SAP which is our main ERP. This will result in significant simplifications of our finance and IT operations. I’ll now turn to the guidance for our third quarter. We expect Q3 revenues of $1.03 billion to $1.05 billion and EPS of $0.45 to $0.47. At mid-point, revenue will grow 1.3% on a core basis, or close to 3% adjusting for last year’s $15 million impact from the U.S. logistics center. And turning to share repurchase, we expect to buy back $93 million this Q3. Now, to the guidance of fiscal year 2016. We are raising the mid-point of our revenue guidance by $60 million including $50 million due to currencies. As a result, we are increasing our core revenue growth guidance at mid-point from 4.25% to 4.50%. We are also raising the mid-point of our EPS guidance by $0.06 including $0.03 coming from currency and $0.03 from operational performance. And one important note. After further review, we and our auditors have concluded to account for the Lasergen investment using the cost method account. This means that we will not book our share Lasergen losses as previously communicated. Finally, we are raising our operating cash flow guidance from $650 million to $740 million and there is no change to our CapEx guidance of $140 million. With that, I’ll turn it over to Alicia for the Q&A. Alicia Rodriguez : Thank you, Didier. And Sabrina, will you please give the instructions for the Q&A. Operator : [Operator Instructions] And our first question comes from the line of Dan Leonard of Leerink Partners. Your line is now open. Dan Leonard : Thank you. Two questions. First off, can you elaborate on the business trends you're seeing in Europe? And then secondly on the pharma end market, can you talk about what gives you confidence in the fiscal '17 outlook that you have yet another strong year in pharma, following two years then of tough comps in capital markets, which have been more or less shut? Thank you. Michael McMullen : Thanks Dan. I think I’m actually going to pass that over to Patrick who is just back from a trip to Europe and maybe he can provide some insight on what’s going on in Europe and then also if he can pick up the question on pharma as well. Patrick Kaltenbach : Sure. I’m happy to do so. Let me start first giving you some insights on Europe. We have seen actually some decent growth in Central Europe, we have seen some weaknesses on what we call the idea was states Eastern Europe and that's mainly driven by the Chemical & Energy market or the Energy market of that site. In Central Europe there is deadly strengths in Germany and other states around that. We still see some issues on academia and government side is rather flat, but pharma for example is also very strong in Europe. For your pharma question, overall we are confident that we will continue to see pretty high growth in pharma. For the remainder of this year we target low double digit growth for pharma and looking into 2017 we think the pharma market will be continue to be strong for us driven by two vectors. We see a continue demand in the replacement business and as you probably know we just launched at the Analytica conference we launched our new 1216-20L series as an example together with the InfinityLab consumables and service and we think that will drive – continue to drive a lot of good replacement for us in pharma. And then we see also continue demand in the biopharma space that are looking for new solutions helping with these more complex molecules in terms of analysis and we have a very comprehensive offering for a space as well. Dan Leonard : Thank Patrick. Great, thank you. Operator : Thank you. And our next question comes from the line of Jonathan Groberg of UBS. Your line is now open. Jonathan Groberg : Congratulations on another great quarter, Mike. Can you maybe elaborate a little on - I think you said core guidance, and if I'm looking at your presentation, core revenue growth guidance in the third quarter is pretty precise at 1.3%. I think I just heard that you still expect pharma to grow low double digits. Could you give a little insight as to what you're seeing in the third quarter? Mike McMullen : Yes, what we looked at was what's our growth rate that we've had over the first half of this year and as we look into Q3 and Q4. And what I'd point to is a couple of things, Jonathan first of all tough compares and this is inclusive of a few one-time moves between quarters which actually were driven by improvements overall operation, so as Didier mentioned we had this $50 million shift in Q2 of last year into Q3 - which when we had our start up issues of the new logistics center. So we adjust for that to catch-up about 3% growth. The other thing we saw happen in Q2 was we’ve been working really hard to improve the overall cycle time from the time a customer places order to actually install and we can recognize a revenue. In Q2 we actually see their expectations and we got there a lot faster we had thought. And what that meant was, we had a significant amount of revenue probably $20 million to $25 million that came from Q3 into Q2 where initially had forecasted into the third quarter. On all of you kind of take into account those things you've got put in more of a consistent kind of a growth scenario between Q2 and Q3. I would tell you though the chemical and energy is still looking for a bottom and that's why we have that outlook for the year which basically this down it will stay down for the rest of the year. There are some signs that it could be getting better. But we have not convinced yet we've seen the bottom chemical and energy. So I think the combination of those tough compares as well as our outlook on chemical and energy is what's driving the overall guidance for the second half. Jonathan Groberg : Okay. That's helpful. And then, I guess just one more. Are there any - sometimes when we see shifts onto one platform, like Oracle to SAP, is there anything at all, any wiggle room you've left there, in terms of hiccups in the quarter, or maybe just --? Mike McMullen : What we thought to do you're exactly right Jonathan. So the wiggle room we left was we made sure we went live first month of the quarter. And Didier is in the conference room here smiling and Didier if you want to add any additional color on how it's going so far. Didier Hirsch : Yes, it's going very well the migrations and the start up of the operation there was zero disruption. Obviously we expect to have to deal with some stabilization activities throughout the quarter we'll do too close before we do the quarterly close. So everything we couldn’t be happier about how it went and you're correct, it is a very complex and one that we're pretty used to, we’ve done a few of those in the past, but still it remains a very complex interview and we are really happy how smoothly it went. Mike McMullen : And Jonathan as I pointed out in my script, this is one of the Agile Agilent initiatives which you'll start to see pay offs in our cost structure as we move into 2017. Jonathan Groberg : Great, thanks a lot. Operator : Thank you. And our next question comes from the line of Tycho Peterson of JPMorgan. Your line is now open. Tycho Peterson : Just following up on that last point on the SAP margins, can you maybe - on the margin impact. Can you maybe quantify how much that could play on margins for this year? Mike McMullen : For 2016 I think it would be very limited at best Tycho, because we’ll be running some duplicate backup systems and then the other aspects of our external spends, later on come out to 2017. So I really position that in - as you think about this more of the 2017 impact, but prove point why we think we're going to be able to improve our margins again in 2017. Tycho Peterson : And then academic, 7%, can you maybe just talk as to whether you're seeing an acceleration there? What you saw this quarter? Didier Hirsch : Yes, what we saw in the last quarter is really strong performance in China and some increased signs of life in the U.S. side of things, I think and that's will be pointing to an uptick. None a lot of significant moves on the European side is mainly a China story, and I think there'll be upside to it to become from the U.S. how we're thinking about it. Tycho Peterson : Okay. And then lastly, just in terms of pharma, obviously that's been a nice driver. Can you maybe talk about where you think we are in the LCMS upgrade cycle, and how much your growth going forward is going to be contingent on R&D budget expanding versus the upgrade cycle? Mike McMullen : Yes sure Tycho great question, I know Patrick now look at this pretty closely and what’s the update of you on that. Patrick Kaltenbach : Yes, so I think the two cycles we’re looking at, the first sight we went through was the upgrade cycle from sell HPLC to UHPLC which is still ongoing but a considerable part of that probably has been done. But when you look at the installed base of instrumentation it still deals with core LC and this is where we are targeting with the Infinity II Series right now. There's still a lot of foot placement pending out there. Just as reminder, we had probably about 150,000 systems out there based on the 1100, 1200 platform which overtime will be up for replacement and we have positioned extremely well in the pharma platforms because it's 100% bankruptcy compatible and we’re also able to for example to emulate some of our competitor systems on our platforms of a technology we called ISET intelligence system emulation technology. And that actually compels very nicely based on our customers and gives us a unique advantage in the market. A – Mike McMullen : So I think we see both those having legs in 2017. A – Patrick Kaltenbach : Absolutely. I think it goes on into 2017 combined again with the drive we see coming out of biopharma. Q – Tycho Peterson : Okay. Thank you. Operator : Thank you. And our next question comes from the line of Jack Meehan of Barclays. Your line is now open. Q – Jack Meehan : Hi thanks. Good afternoon guys. I just wanted to start, the better - at least relative to what I was looking for, looked like you had better gross margins in the LSAG segment, now two quarters in a row. Can you just talk about what some of the notable changes there are? Is there anything with product mix that's driven the improvement, or do you think this is the new norm to look for? Mike McMullen : Let me make some initial comments and then Didier or Patrick you can add – build to it. So in terms of product mix, part of what you're seeing is the fact that we are winding down through our P&L the impact of the NMR business, and I think you can see the benefit of that exit decision on the P&L because it really has been contributing to the - improved the gross margins. That's not the whole story. The other story is obviously the strong demand for the products and the volume benefits we're getting, as well as the focus on taking cost out of our material cost side of our business as well as we talk a lot about the logistics last year, we can also talk about logistics this year, which is we're doing a much better job in terms of overall logistics operations that's blowing through on the P&L as well. So Didier I'm not sure if I missed anything else. A – Didier Hirsch : No, you covered it all. Thank you. Jack Meehan : Great. And then just one more for the adoption of the companion diagnostics, now a few quarters into the launch. Are you in a position, could you maybe help us size what that business is today, or just in the market, what you think you hold in terms of market share? Thanks. Mike McMullen : Why don’t you take that Jacob? Jacob Thaysen : Yes, thanks for that question and we are definitely pleased with the pick off the PD-L1 and this continues during the last basically now three quarters. The market is still very early. We still really only in U.S. we’ve had a press releases here lately also that we are entering into Europe but we are just scratching the surface in Europe. And furthermore it’s still addressing the second line treatment and if that also goes to the first line treatment the market will become significantly larger. At this point of time it’s still small revenue in the biggest scheme of things but I do believe that the PD-L1 has an opportunity to be as big as the other two markets. However, I will also remind you that of at least four probably five different potential blocks and companion diagnostic outset has to share that market. So, still early days but a great opportunity. Operator : Thank you. And our next question comes from the line of Brandon Couillard of Jefferies. Your line is now open. Brandon Couillard : Thanks. Mike or Didier, could you give us the China growth rate, the percentage change in the quarter, and if you could speak to demand in the food area outside of China and Asia, that would be helpful? Didier Hirsch : Yes. In the China our resolve for Q2 what we've been pointing to is a strong double digit growth. It was a very, very strong quarter for us in China, I would remind you that part of the strong growth was not only the strength of the market but also the operational efficiency improvement I talked about, where we really shortened the improved cycle time from orders to install that was really dramatic in China. So, the overall business is quite strong here, you should not expect a strong double digit growth every quarter though for Q3, Q4 quarter. But, overall China is - Mr. McMullen completed the story here. When we came into this year, we thought that the overall performance for Agilent in China might be high single digits but now look a low double digit growth in China for the full year. Brandon Couillard : Thanks. One more for Didier. I notice you bumped the operating cash flow guidance of about $90 million. How much of an impact does the - I noticed the tax refund benefit. If you could quantify that, and just help us bridge the delta between prior versus new? Didier Hirsch : The over-all tax outlays forecast for this year, were I think about $10 million less than what we had anticipated in our initial guidance, $10million or $15million. And the rest is really operational performance, improvements, working capital, management, FX and then just our operating profits. Brandon Couillard : Super. Thank you. Operator : Thank you. And our next question comes from the line of Ross Muken of Evercore. Your line is now open. Ross Muken : Good afternoon, guys. Mike, since taking over it's obviously been a pretty hectic journey, and your messaging from the beginning has been pretty consistent around growth in margins and returns. Obviously, the last few quarters you started develop a cadence, last quarter results were good, but we had the challenges on FX. Do you feel like this is the first quarter where you feel like you got to deliver the full bag, where you were able to drop through the top line outperformance, which is clearly better than market, you drove the margins, you're buying stock, the returns are up, the cash flow's good, that you were finally able to show the market that the business model's working, and that feeds, I guess, into your confidence also, I would assume, on 2017? Michael McMullen : Yes. I couldn’t said have better of myself. Thanks Ross for the question, I think that we’ve been working really hard over last four, five quarters with our new leadership team and as you look at everything came together this quarter, we had strong growth, and we had improvement in our operating margin that pointed out of 2015. But all of the factors really came together nicely in the second quarter, and I was particularly pleased on the more operational activities that we are working on inside the company. And that may not always be so apparent initially on the outside world, but you're started to see the results. The fact we are doing, it’s just a logistic challenge, here I have to talk about near year compares but expects – actually is now contributing to improved results. Yes, we had a talk about the shortened cycle time for orders to revenue and burdensome revenues of what we’ve initially planned for the third quarter but we made this operational improvement the cycle times are shorter and this is now the new normal. So, I guess that was the closing comments, yes with a new normal for the company we have a lot of confidence about 2017. Perhaps, it’s been a little bit of thunder for the Analyst meeting next week but still hope everyone attends, but when you start have these prove points of quarter in and quarter out. I think it starts to show you the team is delivering and I think the results are now starting to be appreciated and believed. Ross Muken : Great. And maybe quickly just on Seahorse, can you just give us an update on how that business is performing relative to your expectations, and how it's plugged in, and where you're seeing maybe the early fruits and some cross-synergy with the existing business? Mike McMullen : Yes, we just in fact very timely question Ross, we just had our 180 day review this morning and Patrick you want to go ahead and share a couple highlights from that session. Patrick Kaltenbach : Sure absolutely, what I really would like to highlight is how seamlessly the integration of Seahorse went, so we are now at now six months in the integration and we will say the targeting full integration by June which means that you have implemented all of the systems which is a pretty fast pace. At the same time we are seeing the positioning of Seahorse regional portfolio really works out, we see nice deals and combined sales of LCMS and Seahorse and areas like disease research and disease discovery that is actually exactly where we thought it's complementing a lot of strength in metabolomics with the life style metabolism which Seahorse brings today. And this is a very nice story that wasn't really expected well before our customers. Again we on a integration side, we are very pleased with where we stand and we are looking forward to a very successful second half. Mike McMullen : Yes, Ross I’d add two things. The comment I made to the team this morning this is the fastest I've seen is doing integration. These things usually plod along for many quarters in some cases for years this one is moving along really, really fast. And we're getting some wins the fact we want an LCMS deal because Seahorse , so it’s the complementary nature the portfolio is starting to work. Ross Muken : Excellent thanks. Operator : Thank you. And our next question comes from the line of Paul Knight of Janney Montgomery Scott. Your line is now open. Paul Knight : Mike, the move you made to creates CrossLab seems to be gaining traction. Can you give us a little background on CrossLab, in terms of who do you think is taking -- it's taking share from somebody at that growth rate. Could you give us more color on CrossLab? Mike McMullen : Yes, so as you mentioned that was a major strategic move where when we some the company we established as CrossLab group. We had this division about how we could really attack and go after the enterprise wide services and consumers' opportunity. And as you see marketing team have really been delivering and we know that customers are responding to the value proposition that Agilent offers both in terms of our service capability is due and that's why I mentioned in my script about the external recognition we recently received. But they also appreciate the fact we’re able to give them insights in terms of actually helping them improve the business operation and we're seeing a real strong demand for this in the pharma and growing interest in other parts that flag markets. So we know that we're growing faster than some of our competitors in this space. We also know that there's only a few companies really trying to go after this type of business, I believe this is where the market is already going to, and I think you want to be a player here. And I'll leave it to you guys to figure out who's the losing share. But I think, I can tell you as we're growing close to double digit in the space, so that been attractive move for us. Operator : Thank you. And our next question comes from the line of Tim Evans of Wells Fargo Securities. Your line is now open. Tim Evans : Thanks, congratulations on a good quarter. I just wanted to make sure I understand the variance in the quarter relative to what you were expecting. I believe you had called last quarter for 4% core growth, and we saw 8% this quarter. I hear you, that it sounds like about half of that variance, about 200 basis points, was from the better book backlog to revenue conversion this quarter. And I know you also called out the compare relative to last year. But that compare should have already been known. So I just want to understand what's the other 200 basis points, that really surprised you in the quarter? Mike McMullen : Sure Tim, again thanks for your comment and I can give you a few dollar numbers of the revenue impact the way we look at it in. And you can do them perhaps the math on the impact on the on the growth rates, but what we saw a relative to our initial expectations for the quarter were really – well first let's start with the market right, so the overall market demand came in as we predicted, we saw good growth across entire portfolio led by pharma improve markets in China as you heard earlier. But I'd ask you to look at two things, one is this higher conversion of water to revenue than forecast so base what we’ve done as we reduce the cycle time and by our estimates it happens lot faster than we had thought, which I think is good news from the standpoint of operational efficiency did create some forecasting challenges, but probably $20 million to $25 million came from Q3 into Q2 the other thing I think you should take a look at is the FX assumptions so around $9 million or so Didier think that’s the number. Didier Hirsch : Yes, fine. Mike McMullen : FX added about another $9 million so between the cycle time improvements the FX assumptions and is the fact of the market continues to get we're getting our fair share of markets where they're growing I think those companies those three facts I think will help you bridge the difference between our guided growth and what actually occurred. Tim Evans : Okay. Just a real quick similar question on the margin side. Obviously a little bit of the margin in the quarter was the drop-through, but it looks like you probably did better than you were expecting on an absolute dollar basis on the SG&A, as well. Can you help me understand maybe what is going a little faster there than you anticipated? Mike McMullen : Yes, I think on the SG&A front I mean we got a couple of our programs inside in the agile are little bit ahead of plan. But Didier if there's anything else - Didier Hirsch : Most of the impact was volume driven and obviously the FX, but there was – versus the usual guidance. Mike McMullen : I will tell you the field structure that we put in place last year. You know it's really stable down I think it's delivering helping us on the growth side and also on the SG&A front as more efficient g to market channel. Tim Evans : Thank you. Operator : Thank you. And our next question comes from the line of Isaac Ro of Goldman Sachs. Your line is now open. Isaac Ro : Good afternoon, thank you. I had a question on margins, as well. On the gross margin side, I was curious if we should expect maybe another wave of improvement, now that you have the ERP integration done. And on the op margin side, curious how satisfied you are with the sales force realignment, and whether or not there's still more synergies to be had there as well? Mike McMullen : Yes, a couple of comments here then I’ll hand [ph] that over to Didier in a case like to add a few things here. But in terms of the sales force integration and go to market we couldn't be happier I mean that was a major move made last year where we basically went from five sales force into sales forces one focused on the analytical laboratory marketplace and other one focused on the regulated diagnostic marketplace. As the time I remember sharing with you, hey we're making a big change here and it could affect the top line in the short one that didn't happen. And in fact I submit that as we go out into 2016 and 2017 we're now putting more resources of specialization academia in biopharma, so I think you can see the changes paying off in terms of long term growth. So we're really happy with both the fact that we've got it all behind us and settle down and think it started to pay off on the initial benefits of in vision when we created that structure. Relative to gross margin ERP I just keep in mind that what we've been talking about is a financial systems which really go into the SG&A line so it really won't affect the gross margin. That being said we do think we can do more on gross margins as we move forward in 2016 and 2017. I'll talk a little bit more about in detail next week in New York but as you may know our initial 400 basis points improvement when I came on board we said half a come through OpEx and other operational costs and then others through grow in the growth piece of the a lot of the driven by our ability to capture the gross margin improvements on increase volume. So we think we still have room to improve our material cost. And we think that we've got room to continue to bring down our logistics cost. Isaac Ro : That's very helpful. Maybe just a follow-up, just to clarify on two topics, one on biopharma, and the other one on the comments you made around China. On biopharma, could you just compare the growth rates you're seeing in the QA/QC setting versus R&D, and then in China, just curious, how much of your improved outlook there is based on the visibility you have with government funding versus end markets that are more on the private industry side? Thank you. Mike McMullen : I think that on the question – we're not seeing a real significant differences in growth rates across the segment you described in pharma, I do think if you go out a couple years down the road I think we'd expect the growth rate in the biopharma be higher than a small molecule with us not that long at all the case right now and you’ve heard earlier from Patrick we expect that to continue through 2017. We're getting more clarity about what's going on in China, I think there was a lot of concerns at one point time on the private sector side of the business, but obviously as you know I think the government drives the market there to a large extent and we're getting more clarity on what's happening in funding so that's why we have increased confidence in our outlook for our business in China. Isaac Ro : Got it. Thanks Mike, see you next week. Operator : Thank you. And our next question comes from the line of Derik De Bruin of Bank of America. Your line is now open. Derik De Bruin : Hi good afternoon. Just wanted to clarify. Did I hear you correctly, that you said your initial flash for core growth guidance for FY17 was 4.5% at the midpoint? Mike McMullen : Yes. Derik De Bruin : Okay. And so can you like flank that in terms of what you're thinking for the chemical and energy market there? I mean, just what you're expecting in terms of rebound? Could you help us frame that comment a little bit more, in terms of some of the puts and takes. Mike McMullen : Sure I'd be happy to because sometimes you use colorful language it doesn't really give you the insight you need, so let me try to clarify here. So what we said was in this year we thought our performance would be flat for the entire year. Well in fact it's going to be down, we probably think in the range 2.5%, 3% for the entire year. And that is the change from our assumptions come in this year and that was the assumption be made at the time our initial guidance which makes our revenue results even much more we're really pleased with the results given the fact that the chemical energy market is not develop the way we initially had and thought. That being said in 2017 we actually will be improved which means it won't be redo it won't be declining and in fact will probably be flat or maybe low single digits and why do we believe that, if you look at how our business breaks down in that segment we often talk about the oil side, but 50% of our business historically has been in the exploration of another 35% has been in the refining the other half which is by far the biggest, I mean biggest individual segment is the chemical side and they're benefiting by lower feedstock costs they've got pent up investment demands and we're starting to see increased deal activity. So in fact Patrick and I were talking about this morning the kind reminds me of a pharma a few years ago, basically it’s going to have years of shrinking performance in this marketplace. A lot of pent up demand so long story short our growth assumption would actually assumes the low single digit chemical energy growth for the year. Again we still believe we're a surge from the bottom, so it's in still early in the year of 2016 but that's our basic assumption for 207 which is an improved environment, not dramatic, but improved from what we've seen over the last 24 months. Derik De Bruin : Just as a quick follow-up on the chemicals comment. You're not worried that some of the activity between Dow and DuPont, and looks like there may be Monsanto and some of these other companies that are dancing around, are you worried that could stymie investment, if you're using the pharma analogy of combinations of those companies, is there some potential headwinds from the chemicals market? Mike McMullen : Yes, that’s a great question and we looked at this pretty closely when announcement was first made and although Dow and DuPont are very important customers to us that particular deal activity really is immaterial to the total Company’s performance. And then we don't necessary it is the sign of an acceleration M&A and a consolidation is going on in the space. So of course there would be some pause if we would see more of that, but we're not overly concerned about that and I guess the beauty of this business has been just the broad based nature of our customer base or not overly dependent on the one single customer. Derik De Bruin : Thank you very much. I’ll be back in the queue. Operator : Thank you. And our next question comes from the line of Dan Arias of Citigroup. Your line is now open. Q – Daniel Arias : Good afternoon, thanks. Mike, can you touch on Japan and things that you saw during the quarter in terms of trends, and maybe what you're looking for at this point on the year? Mike McMullen : Yes. So Dan, there's a question in and if you know a little bit my history it's been to five years in Japan, so I always been a big support of Japan in terms of a long term view of the market. And I'd ask to take a long term view of the market in Japan, so that was the only market that actually went down for us in the second quarter and we are expecting continued some do performance in Japan, so we're not expecting much in terms of improvement in the overall market environment in Japan. We do think that it could be a market which often will respond to new technologies and innovative new products. So we do hope that we do hold out hope that we could take some share from our new intros coming out in the second part of this year of an overall market perspective, we're expecting remain some dude in our internal forecasts are not are not based on any type of material improvement on our performance in Japan. Daniel Arias : Okay. Thanks for that color. And you teased some new product introductions in the back half, that should be meaningful to growth. I'm sure you don't want to give away any secrets. Could you sort of help us with what part of the business you're anticipating seeing the boost in 2017? Mike McMullen : Yes, so thanks for the caveat on your question. So what we can point to it great confidence and clarity is the recent introduction we made in analytic. But I would say to you, you will see broad based introduction the cross the entire portfolio and who are growth essential to our business plan as you know I came in last year, we spent a lot of time, we were realizing in our R&D structure and also reallocating where we put money and I think we’re going to start to see some of that starting to pay off as we go into a later part of 2016. So we did want to put a teaser out there and but also just make sure you have confidence in terms what’s behind our view of improved Agilent performance in 2017 second half of this year, but I think you can expect to see is talking about acting to the cross all three business groups. Daniel Arias : Got it. Okay. Thanks very much. Operator : Thank you. And our next question comes from the line of Doug Shankle of Cowen and Company. Your line is now open. Doug Shankle : Hi good afternoon. Mike, I want to go back to some of the comments you made, on efforts to tighten cycle times from order to revenue, which seemed to be yielding benefits sooner than expected, particularly in China. Can you provide a bit more background on this effort, and why it was most impactful in China? And then maybe talk about similar efforts under way in other geographies? And relatedly, you positioned these, in answering some questions, as if they were temporary. At least it seems like your guidance doesn't treat these as sustainable improvements, yet everything else you said suggests that these are truly sustainable improvements. So I was just hoping you could help us understand that a little bit better. Mike McMullen : Yes, sure Doug, I really appreciate the question. And maybe may start with the last part of your question which is the takeaway here we do believe this is a sustainable improvement, so in my mind the language I use this is the new normal in terms of ability to convert orders to revenue. And so I would characterize this is new normal how we're going operate so how do we get here and why did they look so significantly different in China, so first of all starts with looking at the entire process from an end to end customer perspective from the time of order placement of shipment into custom installation occurs. And as you know when I restructure the company I was really trying to break down the silos and we had a very siloed or an approach to this end to end process from a customer respective, in the company we looked at each slice of the process, but nobody looking at the collective process and then you start doing that and you start seeing where the issues are the opportunities are so we found ways to improve our order linearity, we’ve improved the quality of booked orders and this really gets to your question about China often you're dealing with letters or credit issues and then other trade issues that in the past have delayed our ability to actually book them as clean orders and turn them into revenue. We call the delivery box, we've been working on making sure we had material availability. I think we hit one of our best quarters ever in terms of having material ready for all our shipments so we improve our ability to get in orders in a linear fashion. Make sure those orders are clean and not have lot of rework. And then we have improved our delivery performance and then spent a lot of time improving our efforts between shipment installation which sometimes can go on for several weeks. So I think it all starts with this looking at the whole process from an end to end perspective and the result has been a significant improvement in a cycle in orders turned into revenue more quickly than in the past. I do think this represents our new way of operating and again as I mentioned in my remarks it did create some, it did have implications of how we guide the company for the second and third quarter but I think we’re delighted to be able to actually have ongoing strong operational efficient improvement in place so, that we know how to predict revenue even better in the future. Doug Shankle : Okay. That's really helpful, Mike. But just to be really clear, recognizing these are well-learned sustainable improvements, it's not apparent that this is fully - these improvements, the sustainability is fully reflected in guidance? If that's the case, is that just because you want to see this play out for a couple of quarters before you start baking it in? Didier Hirsch : I think the confusion might be that what we have stated is that this quarter in Q2 we got $20 million to $25 million of revenue that we had anticipated to be recognized in Q3 as a we were bringing all those program to fruition. We had earlier results which is great from where we are now, the order to revenue cycle time is sustainable but we will not see further improvement that will bring Q4 revenue into Q3 or what already is. So the 022 to 25 that’s the one time we’ve got to the level we wanted to be at and from now on it’s just business as usual without any fundamental change in the order to revenue cycle time. Doug Shankle : All right. Thanks for that, Didier. Just one last one for you. On the change in Lasergen accounting, was there any dilution in the quarter, and based on the accounting change, should we no longer expect this to be a $0.02 to $0.03 dilutive deal for the year? Didier Hirsch : Yes, correct, you are correct. So, there was no dilution in Q2 and it will not be in a dilution in for the rest of 2016 or 2017 until we exercise our call option and then we will just fully consolidate if we do that obviously - fully consolidate the Lasergen revenue. So that’s a change that, there was a lot of I mean discussions with the auditors, they surprise us a little bit by going to national to get especially some kind of challenge kind of the accounting that we had anticipated locally among the two teams and then we agreed to the recommendation and therefore no dilution to EPS coming from Lasergen in the next two years. Michael McMullen : Right, and we were pleased where to get this closed off before we finish the quarter. Doug Shankle : Okay, great. Thanks guys. Operator : Thank you. And our next question comes from the line of Mira Minkova of Stifel. Your line is now open. Mira Minkova : Yes, hi good afternoon guys. Congratulations on the quarter. Maybe if I could focus on operating margins again for a second. Just help us, remind us, there's a lot going on there, in terms of the programs you have in place and improvements you have going on. Help us, remind us, the bridge between fiscal '16 and fiscal '17, what gets you to the 22% operating margin? A – Michael McMullen : Well, as a teaser, we are going to go through this in some details. Didier Hirsch : Slide on the topic next week. A – Michael McMullen : But what I can share with you conceptually is that we will be continuing and completing off the integration of the Darko acquisition. We have a series of operational programs we talked to about one of those already which is the implications of the ERP and the continued focus on gross margin for its specifically material cost reductions in logistics savings. So, I think that combination of those three factors plus with the overall core growth assumption that will currently model around 4.5 get us to the 22. Mira Minkova : Okay, great. And the strength in the food market, was this all China, or are you seeing strength elsewhere as well? A – Michael McMullen : Actually it was both in food market, both in China and in the United States. As you may recall from Q1 announcement this business tends to be little lumpy whereas I think that performance in food market in China has been sustained but we saw a nice rebound in the U.S. in the second quarter. Mira Minkova : Got you. Okay. And maybe finally, give us your view of the M&A pipeline. We've seen you do a couple of deals just recently here. Now that you have many of the operational initiatives for the new Agilent in place, should we expect that you're more active with the tuck-ins going forward? A – Michael McMullen : Again this is teaser number two, which is we’re going to talk about this little bit more detail on next week but I do feel that the company’s foundation has really firmly established and as I mentioned earlier, I think we’re getting lot better in terms of speed they have to integrate but what I think you inspect to us do still remain disciplined and focus in terms of finding those opportunities that makes sense for us and I would ask you to think about as been complimentary M&A in nature, we’re going to continued to look for those. So, our balance sheet is a huge asset for our shareholders in one which you like to deploy relative to M&A but it has to be the right target. Mira Minkova : Okay. Thank you very much. Operator : Thank you. And our next question comes from the line of Steve Beuchaw of Morgan Stanley. Your line is now open. Steve Beuchaw : Hi, good afternoon. Thanks for taking the questions. Just two clarifications on how you're thinking about the 2016, 2017 progression. The first is actually on the NIH. To what extent, if any, are you anticipating a pickup in the research channel from NIH funding, when we start to see that get disbursed in the second half of the year? And then second, this may be even a longer term question, but how do you think about the evolution of FSMA regulations in the food space in the US? Is it too soon to start getting incrementally optimistic about how they could contribute to the outlook? Thanks. Michael McMullen : Yes, thanks glad to adjust both of your questions. So on the NIH front I think we talked about the uptick in the sort of our improved confidence about the spends in Academia and Government in the U.S. I think we do think that the NIH stuff will start to flow through to our business. Relative to some in our space we don’t have as a higher percentage of our business tied to the NIH but it will be a positive for us and I think again one more fact pattern which points to continue to - this market will be solid for us as we move into 2017. I think I have to agree with the comment which is - I think it’s always too soon to get overall excited about this from a U.S. spending, I’ve seen this before where legislation is announced and there is a lot of fanfare about it, but we don’t obviously a backed up by investments although we did – we're seeing some looks like some may be more friendly government allocations to this agency unlikely to seem to the EPA. So, we’re not expect anything dramatic to occur differently in the market because of this but if it would that would be clearly good news for us. Steve Beuchaw : Thanks for all the perspective, Mike. Operator : Thank you. And our next question comes from the line of Jeff Elliott of Robert W. Baird. Your line is now open. Jeff Elliott : Thanks for the question. Mike, on the margins, overall a really good quarter. Then when you look at the margins in DGG and CrossLab, basically flat year-over-year. I guess, is that what you were expecting? Anything that you could call out in the quarter? I know there's some moving pieces in that topline. Michael McMullen : You want to take this one Didier. Didier Hirsch : It’s a great question and the answer is yes, preciously what we had expected one of the obviously - there is from one quarter to next that could be some one time add-ons that adds a little bit of volatility. For example last year both the ACG and DGG had very favorable hedging gains which have gone away for the whole company the hedging gain last year into two was over $7 million and this Q2 was about $1.5 million. And it was mostly in the ACG and DGG and there are other onetime items including regarding the allocation of our shared services among the different businesses which explain but both businesses are on the way to contribute to the operating margin expansion and 22% that we're committing too. A – Michael McMullen : Didier we also ask Mark too. We talked about this earlier this last week as well about spending operational efficiency improvements underline were booked to be flat margins that will field back hedging gains other things are actually some real operation stuff. Mark Doak : Thanks Mike and Didier. As Didier said, there were several things that were factors in it last year that didn’t come into play this year but we were working on lot of things in terms of improvements, the mixes is somewhat favorable in the context of what we're selling but overall when we look our plans for the first half we are up 70 basis points in the first half over last year. So, our ability to actually due to margin improvements when you pull back and look in the first half regardless of all those things is quite positive. Didier Hirsch : And is our fastest growing business he's been thinking about more of the corporate shared services. Jeff Elliott : Okay. Thanks guys. A – Mike McMullen : Hope that was helpful? Q – : Yes it was, thanks. Operator : Thank you. And our final question comes from the line of Dane Leone of BTIG. Your line is now open. Dane Leone : Thanks guys. Just had a quick clarification from earlier. So you were talking about the replacement cycle in biopharma and quoted 150,000 LC systems, based on the 1100, 1200 platform. Can you clarify if that's what you think the opportunity is ahead of you, or that's the opportunity in progress? And if so, what - how far are you into that? Patrick Kaltenbach : This is Patrick, let me answer these questions. First and foremost this is not biopharma, this is pharma and biopharma compliance. And when I talk about 150,000 systems out there, it's to installed base of LC systems in all markets. So it's not only in pharma and biopharma, but we think it is the biggest push is actually right now coming from pharma and biopharma. And I would still see we are in the midst of the replacement cycle, and we don't see that to be over in the next couple of quarters. So is a healthy demand and we are in negotiation is a lot of work for our core customers on upcoming replacements and how we place these systems and how we plan it out for them, so it works for them. Mike McMullen : And Dane if I could add just one other comment to Patrick's response, we've been focusing a lot in today's call on pharma and biopharma, but you know keep in mind that the replacements like been very, very subdued on the implied market side in the chromatography. So we have several - we have tens of thousands of systems on that side of the house as well. Again this is why we look out in 2017 and 2018 we think that our growth rates are sustainable. Q – Dane Leone : Any way you could handicap, using a baseball analogy or something like that, what inning you think you're in? A – Mike McMullen : On the pharma side probably anything five or six - I think is and my point would be that I think the ball game and this getting started. Maybe in the first inning, we hope to be in the first innings soon that cycle on the implied market side. Q – Dane Leone : Okay great. Thank you guys very much. Operator : Thank you. And I'm showing no further questions at this time. I'd now like to turn the conference back to Alicia Rodriguez for closing remarks. Alicia Rodriguez : Thank you everybody and I'd like to thank you all for joining us today on the call. If you have any questions of course please give us a call in IR and just would hope that we'll see you next week at our Analyst Day in New York City. Thanks again. Bye, bye. Operator : Ladies and gentlemen thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,016	3	2016Q3	2016Q3	2016-08-17	1.875	1.896	2.132	2.167	2.84516	21.83	20.7	Operator : Good day ladies and gentlemen, and welcome to the Third Quarter 2016 Agilent Technologies Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Alicia Rodriguez, Vice President of Investor Relations. Please go ahead. Alicia Rodriguez : Thank you, Jonathan, and welcome, everyone, to Agilent's Third Quarter Conference Call for Fiscal Year 2016. With me are Mike McMullen, Agilent's President and CEO; and Didier Hirsch, Agilent's Vice -- Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Patrick Kaltenbach, President of Agilent's Life Sciences and Applied Markets Group; Jacob Thaysen, President of Agilent's Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. 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. You will find an investor presentation along with revenue breakouts and currency impacts, 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 Mike 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 refer to core revenue growth, which excludes the impact of currency, the NMR business and acquisitions and divestitures within the past 12 months. Please note that we are reporting results for the Americas, Europe and Asia on a ship-to basis. Previously, we assigned revenue to these regions based on where the order was placed. This change aligns with individual country reporting, which has always been on a ship-to basis. Historical restatements are available on the Investor Relations website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year. Guidance is based on exchange rates as of the last day of the reported quarter. 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 let me turn the call over to Mike. Michael McMullen : Thanks, Alicia, and hello, everyone. Thank you for joining us on today's call. I'm pleased to report that the Agilent team delivered another quarter above expectations. Now let me highlight 3 key results : First, core -- Q3 core revenue growth of 3% was above the high end of our May guidance. Second, EPS of $0.49 was also above the high end of our guidance of $0.45 to $0.47. Finally, we delivered adjusted operating margin of 20.6%, an increase of 70 basis points from a year ago. As for the third quarter results echo many of the same themes that we saw last quarter, the pharma, food, clinical and diagnostics end markets remain strong. In the chemical and energy market, while demand for our services and consumables was strong, capital expenditures for new equipment purchases remain challenged. Geographically, Asia, led by China's double-digit growth, drove Agilent third quarter core growth with strength across all business segments. Let me highlight our Q3 results by business group. In line with our expectations, Life Sciences and Applied Markets Group core revenues were down 2%. Our strong growth in pharma, environmental and food markets was offset by continued weakness in chemical and energy capital expenditures. Academia and government revenues were also down across most regions. Despite this mixed market environment, LSAG's operating margin for the quarter was 19.1%, up 40 basis points from a year ago. Let me shift gears and talk about some of LSAG's new products. We are seeing very strong demand, the newly released 1260 and the 1290 Infinity II LC systems. The 1260 systems are part of the launch of the InfinityLab portfolio at Analytica in May. The InfinityLab portfolio consists of this new line of LC instruments along with columns, supplies and services. In Q3, LSAG also introduced the new -- 2 new 7000 Series Triple Quad GC/MS analyzers, one for pesticides and another for environmental pollutants. And we continue to strengthen our ICP-MS market leadership with the new Agilent 8900 Triple Quad ICP-MS system. This new system offers customers improved speed and accuracy of analysis. Turning to the Agilent CrossLab Group. The business delivered another strong quarter with 8% core revenue growth. This growth is driven by strength in the food, pharma and environmental markets. ACG's operating margin for the quarter was 22.7%, up 10 basis points from a year ago. Portfolio expansion efforts also continued in ACG. In Q3, Agilent signed a definitive agreement to acquire the assets of iLab, and we just closed the transaction in early August. iLab is the market leader in cloud-based solutions for core laboratory management and provide services to leading universities, research hospitals and independent institutions around the world. This acquisition further expands Agilent's portfolio in the academia and government market. iLab enables Agilent to deliver broader value for our customers in this market segment. We also see an opportunity to expand the iLab business both geographically and into the pharma market. Finally, we saw a continued momentum in the Diagnostics and Genomics Group where the business delivered 8% core growth in Q3. We saw strength across all DGG businesses, driven by growth in the pharma and clinical and diagnostics market. Our pathology business continues on a steady trajectory of improved growth. This was highlighted by demand for our new PD-L1 companion diagnostics. Growth in genomics reflect a strong market performance in the U.S. and China across our Array CGH, Target Enrichment and SureSelect products. We also saw healthy demand for our Nucleic Acid Solutions offering. DGG's operating margin for the quarter was 18.8%, up 200 basis points from a year ago. Q3 highlights for DGG include the announcement of an expansion of the intended use of our PD-L1 pharmDX test in Europe for patients with melanoma. This test was previously proven in the U.S. and available in Europe for patients with non-squamous, non-small-cell lung cancer and in the U.S. with patients -- for patients with melanoma. We also announced a $120 million investment over the next 3 years to expand production capacity for our Nucleic Acid Solutions business. This includes the purchase of 20 acres of land in Colorado. We plan to build our factory on this land that will double our manufacturing capacity for nucleic acid active pharmaceutical ingredients and grow our business. Now I'll provide an overview of Agilent's core revenues by end market. In our life sciences market, pharma saw its sixth consecutive quarter of double-digit growth with core revenue up 10%. Academia and government core revenues were down 5%, down across most geographies except China. Clinical and diagnostics grew 4% with strength in North America and Asia and led by growth in pathology. Applied end-market performance was mixed. Food was up 11% with strong demand in China and the Americas. These regions also drove growth in environmental market for both instruments and aftermarket products. This performance was offset by continued challenges in the chemical and energy market, down 4% globally, with only Asia posting growth on a regional basis. The overall result was due to prolonged effects of the macroeconomic concerns and lower oil prices. Now I'll turn an update on our operating margin improvement initiatives. Q3 marked a major step forward in simplifying our company's infrastructure. In May, we completed the migration of the company's financial systems onto a single SAP platform. This was a culmination of a 20-month cross-company effort and represents a major step in simplifying Agilent's systems infrastructure that will deliver incremental cost savings as planned in fiscal 2017. In summary, our multiyear Agile Agilent program continues to simplify the company's business processes. This program is designed to make us more nimble and lower our costs. It will continue to deliver incremental savings in 2017. On the capital deployment front, we purchased iLab, paid $37 million in dividends and repurchased $94 million of Agilent stock. We continue to deliver on our strategy to drive sustainable growth while expanding operating margins and balancing deployment of our capital to drive shareholder value creation. At our recent May Analyst Meeting, I described our shareholder value creation model : outgrow the market, expand operating margins, balance capital deployment. Let's look at our Q3 results in the context of these longer-term goals and shareholder value creation model. In 2015, we delivered our highest annual growth rate in 4 years while increasing adjusted operating margin 170 basis points and completely offsetting the $40 million of dissynergies from the company split. We have sustained this trajectory of improved operating results in fiscal 2016. In the first 3 quarters of 2016, the team has delivered strong growth and earnings above our initial expectation despite a challenging chemical and energy market environment and global macroeconomic concerns. We have continued to leverage our balance sheet and deployed capital in a balanced manner, buying companies that bring new capabilities to Agilent while repurchasing our stock and increasing cash dividends. The new leadership team continues to transform the business and deliver results. We continue to demonstrate our ability to deliver above-industry organic growth while expanding margins and leveraging our balance sheet strength. Our Q3 results in a challenging global economic environment reflect the strength of our team combined with Agilent's scale and broad differentiated portfolio of products and services. Looking at today's overall market environment, we expect continued strength in pharma, along with growth in the food, environmental and clinical research and diagnostics markets and in China on a regional basis. As I highlighted in our last call, we are experiencing a steeper and more prolonged slowdown in the chemical and energy market than initially projected entering fiscal 2016. We subsequently revised our forecast for this market segment last quarter to overall low single-digit market declines for the year. While there are some signs of an impending bottom in the market, we remain cautious in our outlook and expect Q4 to be in a similar range as the past quarter. Against this market drop (sic) [ backdrop ], we are well positioned to capture growth in these end-market segments and geographies where growth is expected to remain strong. The combination of our expanding our customer channel reach and continual strengthening of our portfolio positions us well to achieve our previously raised full year guidance of 2016 and our longer-term goals. Our One Agilent team continues to work well together and is energized to win in the market. Overall, we remain on track with our 2017 goal to outgrow the market and improve our operating margin to 22%. Thank you for being on the call today. I will now turn it over to Didier who will provide additional insights on our financial results and guidance for the remainder of 2016. Didier? Didier Hirsch : Thank you, Mike, and hello, everyone. As mentioned by Mike, we delivered higher core revenue growth, operating margin and earnings per share than the high end of our guidance. Earnings per share grew 11% in the quarter versus a year ago. We also generated $194 million in operating cash flow, more than double last year's amount, which gives us increased confidence that we will achieve our previously raised operating cash flow guidance for the full year. FX had a negative impact on revenue of about $10 million or 1% versus previous guidance and $7 million or 0.7% versus last year. It had a negative impact on operating profit of $3 million versus previous guidance and $1 million versus last year. I'll now turn to the guidance for our fourth quarter. We expect Q4 revenues of $1.05 billion to $1.07 billion and earnings per share of $0.50 to $0.52. At midpoint, revenue is expected to grow 1.2% on a core basis. Versus previous guidance, FX is estimated to have a negative impact of $9 million on revenue and $2 million on operating profit. Our 21.3% adjusted operating margin at midpoint will be up 70 basis points sequentially. Now to the guidance for fiscal year 2016. The Q4 guidance results in the following fiscal year guidance. At midpoint, revenue is projected to grow 4.5% on a core basis, no change from the previous guidance. Our earnings per share guidance of $1.90 at midpoint is also unchanged from previous guidance and corresponds to a 9% year-over-year increase. Adjusted operating margin for the year is expected to be 20.4 basis points or 80 basis points higher than in fiscal year '15. And finally, FX is estimated to have a negative impact on a year-over-year basis of $68 million on revenue, $10 million on operating profit related to currency translation and an additional $21 million related to currency hedging. With that, I'll turn it over to Alicia for the Q&A. Alicia Rodriguez : Thank you, Didier. Jonathan, will you please give the instructions for the Q&A? Operator : [Operator Instructions] Our first question comes from the line of Brandon Couillard from Jefferies. Our next question comes from the line of Steve Beuchaw from Morgan Stanley. Steve Beuchaw : I want to start with the one regional trend that seems to be on many people's minds, which is what's going on in Europe. I wonder if you could speak to the trends that you saw in Europe over the course of the quarter. To some extent, it's a macro question. To some extent, it's a research question. And of course, there's the -- their U.K. referendum that's still out there. So I apologize for the nebulous nature of it all, but any color on how Europe progressed over the course of the quarter would be really helpful. Michael McMullen : Yes, sure. Glad to provide some insight there, and then I'm going to actually have Patrick jump in on this conversation, given your recent travels in the region. But what we saw in the quarter was, obviously, a lot of big macro events, the Brexit, Turkey. There's a number developed [ph] in the quarter. We did not see any material impact from those events in our performance in the third quarter. What I will say, though, it is raising an increased level of uncertainty amongst our customers in Europe, and we've seen the questions around when will budgets be released. So it's more of an uncertainty question right out there. People are just sort of waiting to see how it's going to develop. Again, no material effect on the third quarter results. But as we thought about our guidance for the fourth quarter, obviously, it's influenced us to think about how will Europe develop through the quarter. And Patrick, I know you had a pretty deep conversation about this yesterday. So any additional thoughts you'd like to add? Patrick Kaltenbach : Yes. Thanks, Mike. In talking to our field, local field in Europe, you certainly get the feedback there is some uncertainty as Mike -- as you said. The Brexit had -- with some of the government in traditional [ph] deals had probably some minor impacts. I think what's concerning us here a little bit is also there are a couple of other countries standing on the sidelines and have other referendums this year. So we are cautious right now, looking at Europe and the growth scenario for Europe for the remainder of the year and also going into fiscal year '17. Michael McMullen : Thanks, Patrick. Steve Beuchaw : And then one bigger-picture question, Mike. I mean you made a pretty significant investment with a pretty long horizon -- long-term horizon on this facility in Colorado. So it speaks to your confidence in the long-term outlook for and the scale of the opportunity there. Can you just talk us through how you frame the opportunity, remind us how big that business is today, and how you think about the medium-term drivers that you're investing in the pursuit of? Michael McMullen : Great. So I'm going to handle your -- well, I'm going to handle the first part of this question. And then I'm going to turn it over to Jacob, and he'll reassure you about the long-term growth potential, which is the reason why I supported the investment. But just as a reminder, I think this is roughly about 5% or so of DGG's overall revenues in the range of maybe $16 plus million or so. We still have capacity at the current site, but we've got a -- more demand than we can handle in terms of long-term outlook from our customers. So we can't bring on this capacity fast enough to satisfy the customer demand. We think this will be a bigger part of our growth story as we talk to you about 2017 and 2018. And I think as you'll hear from Jacob, there's a high degree of confidence that the business is going to be there. And perhaps you can provide a little context of what exactly is this business and why are we so confident that the market is going to be there for us. Jacob Thaysen : Yes, let me try to provide a little more color there. So first of all, a reminder that the Nucleic Acid Solutions Division business out in Boulder is providing oligo APIs that constitute a new type of drugs with a significant potential. These drugs are primarily, right now, opportunities within orphan genetic diseases that today there has been no treatment and have devastating outcomes. And these drugs have actually the opportunity to change the expectancy of, you could say the survival and also the quality of life for such patients. We are working with the leaders in pharma within these new type of drugs, and Agilent is chosen again and again due to our deep technical experience to optimize oligos for performance and consistency, combined with our ability to scale in DNP. We have seen a significant demand accelerated over the last few years. And as Mike mentioned, we're currently expanding our current site to actually take up double capacity. But we also see that, that will run out. That opportunity is really limited and will run out in a few years from now; and thereby, the new investment in the new site will allow us to further double our capacity and even double again if we choose to do so. We have decided, and based on a deep dive into the strategy and so on, to place the site in close proximity to the other Boulder site at approximately 20 minutes' drive away so we can releverage critical mass, high -- the highly experienced staff we already have and capabilities and processes. The overall market is in the hundreds of million dollar business right now, and it's growing something between 20% to 30%. However, when you commercialize drugs -- when you get the commercialized drugs, this might be a significant step-ups, but we see a lot of demand right now just in the clinical trial studies. Operator : Our next question comes from the line of Jonathan Groberg from UBS. Jonathan Groberg : I know you have one more quarter to go here, but any initial thoughts on the puts and takes you're seeing on how we should be thinking about fiscal '17? Michael McMullen : Yes. Jonathan, I'd be happy to share my thoughts here. And in fact, I, perhaps, will build on some of the comments I made in my prepared remarks. But we're still -- we are still seeing ourselves on the same path that we talked about just a month or so ago in New York. I think it actually was 2 months ago when I think about it, but our position remains the same. We are still confident we're going to be able to achieve the overall projected core growth of 4.5%. And there's some new -- there really are some new factors that we think support this level of growth. First of all, we've -- we have a rich pipeline of new product introductions coming in Q4 and in FY '17 on top of what we've already introduced this year. We think our customers are going to be really excited about what we're bringing to market, and that's going to help drive share. So we know we got this NPI pipe going through the system right now with releases coming up in the several quarters on top of what we've done. The second thing, I -- we also have recognized the fact that the Agilent business model has really changed a lot over the last 18 months or so. We have a lot more recurring revenue. And if you look at the ACG and DGG business, which now represent over half, I think it's 52% the last time I did the math, of Agilent's revenue. These are just inherently much more predictable revenue streams, and you saw in our Q3 results how both groups delivered high single-digit growth. And they're not subject to the same types of issues we're seeing in the capital-intensive chemical and energy market, for example. And then the third thing I'd say is when you think about our LSAG instrument business, in addition to the impact of these new product introductions I mentioned, we do expect that pharma and China market is going to remain significant growth drivers, although I think they will be below these double-digit levels we've seen in 2016. And as mentioned in our last call, we still expect that the chemical and energy market will have bottomed by the end of calendar year 2017. We're not ready to... Didier Hirsch : '16. Michael McMullen : Excuse me. Sorry. Thanks, Didier. I got my ears confused there -- by the end of the calendar year 2016. We're not ready to call bottom, but we do see in 2017 that we're forecasting that we could be in low single-digits growth in a market which has had 18 to 24 months of pent-up demand for equipment that supports the production process. So they're the 3 factors that have gone into our thinking as we have thought about the 2017's growth rate. Honestly, we'll give you the official guidance at our next call. But I would just reinforce our view today is that we're still on track to what we told you in May in New York. Jonathan Groberg : Great. That's helpful. And just one quick follow-up, on the capital equipment business, I know you mentioned going into the quarter, last time when you gave guidance, you thought there'd been a little bit of pull forward and you highlighted why you thought it would be a little weaker. I'm just curious, was it in line with what you thought? Or was there anything unique in the quarter that maybe wasn't right along the lines of what you thought? Michael McMullen : Absolutely. I think the quarter was actually in line and actually a little bit better than we had anticipated coming into the quarter, so no major surprises in our Q3 results. And as you can imagine, we were delighted with the ability to deliver above our expectations, both top and bottom line. Operator : Our next question comes from the line of Jack Meehan from Barclays. Jack Meehan : So I just wanted to ask about the LSAG business and some of the moving parts there. And could you maybe just talk about the chromatography markets? A couple of your peers have had really nice results there. Just what you're seeing there would be helpful. Michael McMullen : Yes, absolutely. And then, Patrick, if you could break it out, obviously, between liquid chromatography and gas chromatography as well. Patrick Kaltenbach : Yes, absolutely. Happy to do so. As Mike mentioned earlier in his remarks, we definitely see very strong growth right now in the liquid chromatography business, which has been, for the entire year, double digits. And that is what we see, clearly, also taking market share right now. We had a very strong launch of several waves of the Infinity series starting in 2009 and 2012. And now this year with the 1260 series with another big round of instrumentation and solutions in liquid chromatography, that is very well received by the end markets. We see very healthy replacement business as well, and it's driven by the fact that these solutions are 100% backwards compatible and also compatible with some of our competitors' instrumentations, which makes method transfer very simple and seamless for our customers. So -- and we project this cycle to continue for several more quarters. We don't see yet a loss of momentum. What we see, of course, is that we're getting now into quarters with tougher compare because we have double-digit growth for several quarters now. On the gas chromatography side, again, very strong portfolio as well. The issue we're seeing there is that the core market or one of the big markets for gas chromatography is the energy space. And that, of course, pulled some of our results down at this point in time. If the market comes back, we think we are in an exceptional position to pick up this pent-up demand that we see. Michael McMullen : When the market comes back. Patrick Kaltenbach : Yes, when the market comes back. Yes, when the market comes back, sorry. So I think we are in a great situation there as well. We have an outstanding product portfolio and ability to capture the growth when it gets back. Michael McMullen : Yes. And the reason why I asked Patrick to segment his remarks in liquid chromatography from gas chromatography, we have an outsized exposure in gas chromatography. And when the -- relative to the #2 competitor space, we're at least 2x the #2 person. And so when our major market is down, it really hits us. And that's why, again, we were really quite pleased that we were able to deliver the growth we've done so far, with our #2 market actually being down below our initial expectations coming into this year. Jack Meehan : Yes, that's really helpful, and I appreciate all the details in the different segments. If I could just follow up with one more. The Americas growth, negative 1% in the quarter, I know it's on a tougher comp relative to last year. But could you maybe just talk about the mix of the end markets there and whether there was any other notable changes worth pointing out? Michael McMullen : I think the big one there is the chemical and energy market. So it's down pretty sharply, and I think that's bringing down the overall numbers as well as our academia and government business was down over last year. Although we think some of that -- the way we're thinking about our plan for the rest of this year, we think the federal money will be there in the fourth quarter for us. Patrick Kaltenbach : Yes. And in addition, if I may add, we had a very strong quarter Q3 last year in Americas. So it's a tough compare. Michael McMullen : Yes. I'm not always willing to let my guys do the tough compare argument, but thanks, Patrick. Operator : Our next question comes from the line of Tycho Peterson from JPMorgan. Tycho Peterson : Maybe first on -- just on the academic front because it is a big swing from what you reported last quarter. I understand the Europe dynamic, but frankly, what we hear from you is a little bit different than we've heard from most of the other life science peers. So can you maybe just talk a little bit about why you felt more pressure in Europe academic than maybe most of your peers? Michael McMullen : I think it's -- I think -- I'd point to 2 factors. I'm not sure exactly what all our peers are saying about Europe. I think they're probably saying the same thing, which are the European budgets are constrained and funding has not been released, and has actually been withheld in some situations. I also think you may be hearing a more positive spin on the U.S. environment because of many of our competitors have much more business coming from NIH. So there's a lot of positive view of the NIH budget, but we pick up a relatively small piece of that overall budget. The agencies where we do a lot of our business in the U.S. government, we know the money is coming in the fourth quarter. Anything else you'd add to that, Patrick? Patrick Kaltenbach : Not a lot. And as you said, there's -- a lot of our competitors definitely have also a mixed bag, on average, I would say. Tycho Peterson : And then similarly, environmental is flat after growing 6% last quarter. Can you maybe just comment on dynamics there? Michael McMullen : I think the biggest dynamic there is there's a subsegment within environmental as well where we pick up our forensics business. And we report externally just the total environmental business, but a lot of big deal activity in forensics. So last year, we had a lot of big deals at this point in time. The overall environmental market has given me big deals in the second quarter. So it's really a forensic-driven phenomena, which is where we didn't have as many big deals in the third quarter. And this business tends to be a little bit more lumpy than our base environmental business. Tycho Peterson : Okay. And then -- and last one, a little bit of an esoteric question. But on the PD-L1 data sets in frontline lung, can you maybe just talk about whether there's kind of any change in your outlook? Obviously, Bristol attempted to go without a companion and failed. Merck is doing a companion. So can you maybe just talk about whether some of those developments have changed your view of the market opportunity overall? Michael McMullen : Sure. Sure, Tycho. In fact, we just had a conversation on this yesterday. So Pat -- I mean, Jacob, why don't you share the latest thoughts from Agilent on this topic? Jacob Thaysen : Yes, I will say, first and foremost, we are very pleased with the performance we have seen on PD-L1 over the last 10 months, and we continue to see strong traction. You're right. There has been some announcement recently on some studies that has not come out as expected. It really supports our thesis about the importance here of CDx and, really, that you need to make sure you stratify your patient group the right way. So clearly, there is a short-term opportunity, at least from one of our customers that is a little less than we hoped for. But I don't think that, that overall change is really the thesis, and we continue to see a big opportunity here. Operator : Our next question comes from the line of Ross Muken from Evercore. Ross Muken : So it seems like most of the confusion we're hearing is sort of on the sequential progression of core revenues. And so I look at the last 2 years, and it looks like, sequentially, the comp is roughly, I don't know, 200 basis points easier on core. And it looks like you have a little bit heavier of an NMR headwind in 4Q than you did in 3Q. So one, can you confirm that? And then two, as we just think about the crosswalk, what are the other sort of underlying assumptions in terms of what is different sequentially versus 3Q, whether it's end markets or any of the key segments? And then where have you built in, I guess, some conservatism or some of that uncertainty? Michael McMullen : Yes. Thanks for the question, Ross. And why don't I go ahead and just share some thoughts about the Q4 guidance. And then, Didier, maybe you can dig through your notes on the NMR impact. But I think it's important for me to share with the audience here today about how we thought about our Q4 guidance. I think this may get to the root of some of your questions. As you heard on our call, first of all, we're quite pleased with the higher-than-guided core revenue growth that we delivered for Q3 after having raised last -- in last call. And I think we've got this increased confidence to achieve our previously raised core growth guidance for the year. And listen, we realize by not raising our core guidance for this year that this question could arise. But the way we looked at it, we said, listen, there's a raised level uncertainty in the markets centered around Europe. And we saw some weak European government budgets in the third quarter. Is this going to continue? We've seen some downward revisions in terms of market overall economic forecasts for Europe, so we're really not sure exactly how it's going to develop. So we just thought it's prudent to reflect some of this uncertainty by not raising again the full year guidance. So that's how we thought about the process. We really didn't look over the years sequentially. We do know that last year, though, I said I don't like the tough compare argument, we did have a blowout fourth quarter last year. But anything else, Didier, you can remember unusual or... Didier Hirsch : No. NMR is not a factor. Michael McMullen : NMR is not a factor. Didier Hirsch : You pointed out really what we intended to do is maintain the overall core revenue growth for the whole year, and that's how we derived Q4. Michael McMullen : Yes. We'd raised last quarter, and the business is developing in the third quarter actually better than we had thought as you saw in our results. And as we look to the fourth quarter, listen, we don't know how this Europe's going to play out, so let's just be cautious as opposed to raising again for the quarter. Ross Muken : So that makes total sense to me, Mike. I mean, I think given some of the uncertainty, I certainly don't want to get in front of your skis. And you guys have been beating numbers, so that's good. I guess as you think about the key product cycles for the business, how do you think about the cadence now that you've had some releases of when we could start seeing that also draw up the core growth overall? And then secondarily, when do we start to comp through? We've now, I guess, comp-ed through some easier compares on the Diagnostics business, which has been going hot for, I don't know, 4 or 6 quarters now. How long do you think we've got left on that trajectory of sort of high-single to almost double-digit growth in that business? Michael McMullen : I think longer, but I think that for the foreseeable future, we're highly confident on the growth rates in this business. And that's why I made the comment earlier about, hey, when you think about Agilent's long-term growth perspective, if you think about '17, think about that we've got over half of our revenue in markets that are going to have a steady trajectory of growth. And you heard Jacob talk about what's going on in the companion diagnostic PD-L1. We talked -- that's why I wanted to highlight the investments we're making in NASD, which is a part of the business we haven't really talked a lot about with you. So I think there are a lot of genomics, there's SureSelect next-gen sequencing. There's a lot of fundamental, very attractive markets we have a strong position in. So Jacob, I don't want to necessarily speak for you, but I guess I have that we expect that this growth rate will be sustained. Anything else you'd add to my story? Jacob Thaysen : You're absolutely right, and I'm definitely pleased with the excellent growth. Last quarter, we had 5%. So I really want to make sure that you saw that we were -- when I -- when we talked also at the Analyst Day, we believe the right -- the direction is 6% to 7%. I'm happy to beat that. But we do not see any change in trajectory right now, and we'll continue in those high single-digit growth rates going forward. Michael McMullen : And Ross, I think perhaps your earlier question was around product cycle replacement. Yes. So I think, as you may know, when I came into the role a little over 1.5 years ago, we had really spent a lot of time redirecting our R&D programs. We restructured the company. We reorganized our R&D programs, and I think you're starting to see the cadence. So you've seen some of the product come out. We highlighted earlier on the chromatography side some updates and new products around spectroscopy, ICP-MS. And we know this cadence is going to continue throughout the next quarter and into '17. So that's why when I got the earlier question about, hey, what are you thinking about in terms of '17, I know what's in our road maps, and I know what's coming to the market over the next 12 months. And I know what's already come to the market, and I know how customers are responding. That's why we have this level of confidence about our ability to continue to grow this company in what has been very mixed market conditions, to say the least. Operator : Our next question comes from the line of Doug Schenkel from Cowen. Doug Schenkel : My first question -- I guess both are going to be on guidance. So for fiscal Q4, your guidance essentially tells us that you're assuming operating margin declines year-over-year in fiscal year Q4 in spite of what seems like could be, I guess mix-wise, a pretty favorable quarter year-over-year based on your commentary. So keeping that in mind and the fact that you've actually expanded operating margin year-over-year, I believe 6 straight quarters, can you just explain why this makes sense? Michael McMullen : Yes. I think you've got the string of consecutive quarters. It's been 6 quarters in a row. And Didier, we looked at this. I think it's purely volume related, but... Didier Hirsch : Yes, absolutely. As same thing for operating margin, our approach -- as for revenue, our approach is we didn't -- we wanted to maintain our full year operating margin because, obviously, it's linked to revenue. So we maintain our core revenue growth assumption of 4.5% and our operating margin assumption of 20.4%. Now you are absolutely correct that, that would mean that 50 basis points reduction from the significant operating margin we had in Q4 of last year of 21.5%, still a significant 70 basis point sequential improvement. And you have to take into account, as Mike said, that this is based on only 1.2% top line growth. So a slight reduction in operating margin, still very significant increase sequentially, but slight reduction related to the one -- the assumption that we'd made on the top line growth of only 1.2%. Michael McMullen : Right. And if we do better on the volume, we'll do better on the margin. Doug Schenkel : So I guess that's a segue to, I guess, the second guidance question. And I don't mean to be redundant here because there's been a lot of questions on this already. But I'm going to ask anyway. I mean, your guidance is for around 1.2% core revenue growth in the quarter. If we think about this by end market, you actually have an easier compare in environmental forensics, academic government and food relative to certainly what you had in fiscal Q3. Diagnostics is a little tougher, but you have some real momentum there. So if we just, kind of to make it simple, assume all those end markets grow 3% to 5% and that chemical and energy is down mid-singles, it would imply that you guys are thinking pharma is only going to grow low single digits maybe at best in Q4. It's a tough compare in pharma in the quarter, but you've talked about continued strength in pharma in fiscal '17 in response to an earlier question. Again, recognizing the uncertainty you talked about in Europe, this is -- I guess some of this is hard to reconcile. Can you help out a little bit? And specifically again what are you assuming for pharma in the quarter? Is that because of the compare? And what's your assumption for Europe growth in the quarter? Michael McMullen : Yes, sure. Glad to walk through this, Doug. In fact, we spent a lot of time modeling our end market views for the rest of the year, anticipating that this might be a question that would arise. And as I recall, Didier, I think that we had a less optimistic view relative to academia and government than I think Doug's math was, where we were seeing -- where we were concerned about Europe. And we had -- we basically have it flat for the year, and I think we still have pharma overall double digits. So if you want to just maybe do a little walk-through? Didier Hirsch : Yes. The -- maybe, I mean, again, considering how we explained how we came up with the Q4 guidance, the makeup of the Q4 guidance by market in that academic and government and chemical and energy will show the same core revenue growth reduction year-over-year as in Q3, so minus 5% for academic and government, minus 4% for chemical and energy. So the assumption is no change between Q3 and Q4. And then for the rest, pharma, you mentioned pharma, we're assuming mid-single digit. And again, on a very tough compare and to -- in line with the way we've been very conservative on the... Michael McMullen : Yes. And just to be clear, my comment earlier about double-digit pharma, that's for the full year. Didier Hirsch : For the full year or -- yes, double digit, absolutely. Michael McMullen : Yes, Doug, maybe just one of -- as we thought about the company coming in, I think we thought that the pharma growth would be lower. We thought China would be lower, and we thought chemical and energy would be higher. And in fact, what's happened is pharma has actually been stronger, and China is stronger than initially forecasted. And you know the story on chemical and energy. Doug Schenkel : Okay. The only thing I don't think we got there was just -- and maybe I missed it. But what is the assumption for Europe in the quarter? Didier Hirsch : It's about flattish, down low-single digits, mostly on the basis of chemical and energy. Michael McMullen : Yes. And the academia and government. Didier Hirsch : And academia and government, yes. Operator : Our next question comes from the line of Tim Evans from Wells Fargo Securities. Timothy Evans : This one's for Didier. It seems like cash flow is something that's going better than expectations or better than our expectations at least. Wondered if you could talk a little bit about the remaining levers that you have to pull on that as you go into 2017. Do you think that free cash flow growth in 2017 is really just going to be a matter of earnings growth? Or is there more than you can do there to improve free cash flow faster than earnings? Didier Hirsch : Yes. There is more that we can do. Certainly, the profit before tax is going to be a factor. But Henrik, who heads our order fulfillment and the supply chain organization has also committed to a material decrease in inventories. Michael McMullen : And he's here in the room to hear that directly. Didier Hirsch : So that is also something that we are counting on that will help us continue expanding our operating cash flow as a percentage of revenue or percentage of profits. Timothy Evans : Okay. And then a quick one, going back to one of Tycho's questions on the forensics end market. Of that 12% slice of pie that's environmental and forensics, would you be willing to tell us how much is forensics? Michael McMullen : I don't think we disclose that and it's fairly small but enough to move it directly when big deals happen. Operator : Our next question comes from the line of Isaac Ro from Goldman Sachs. Isaac Ro : Just had a question on margins and then a follow-up on Europe. On the margin side, if I look at sort of the components of gross margin, it's interesting that the LSAG division is your highest gross margin segment in most quarters, but that was one where you saw a little pressure. So can you help us think a little bit about kind of the key initiatives you guys have under the hood there to continue driving better gross margin versus expectations and same goes through SG&A? Michael McMullen : The question was what are the initiatives we have? I just want to make sure I understood the question. Isaac Ro : Yes. Over the last, I don't know, 12 or 18 months, you guys talked a lot about some of the things you're doing to drive gross margin higher. This particular quarter, you had a little weakness in your most profitable segment. So I'm wondering kind of, aside from just the top line contribution, what you guys were able to achieve this quarter on the gross margin line that allowed you to put up a slightly better result. Michael McMullen : Great, great. Thanks for the question. So what we've been focusing on are really 3 dimensions around what we call our value-engineering program, our logistics model and also our strategic procurement approach with our suppliers. And as I look at the results in '16, the program that Henrik is driving across this company, I think we probably have seen the biggest impact so far in our improved logistics model. And you may recall we talked about logistics costs as being problematic in 2015. That's no longer the case. In fact, we've benchmarked ourselves, and we've got ourselves down to the best in our space. And there actually is more to come, which is the other 2 elements of the program have a little bit more longer tail in terms of payoff, which is value engineering, when you're reengineering product platforms to ensure both the continuation of the high performance but at a lower cost. And then as we also continue to transform our supplier engagement model and how we leverage the scale of Agilent. So I think those latter 2 parts of the program are going to carry us forward into '17 and '18 beyond, so I think that's how we're really working the gross margin side. And by the way, I also [indiscernible] of your comments were focused on LSAG. A lot of logistics costs and some of these other factors I mentioned, procurement, show up as impacts on the DDG and ACG business as well. And then relative to the SG&A, a couple of things that you may recall I highlighted in New York and I just reemphasize again, major focus on our systems infrastructure. So as you heard in my prepared remarks, we're now on one SAP instance, simplifying a lot of our work for our financial team and taking a lot of cost out of the system. The next big wave will be when we move the former Dako company into the Agilent environment in 2017 where we can really start to leverage the scale and take out costs and have an improved customer experience there. So there's a couple of big initiatives as well as we look at -- we're looking at other aspects of our benefit structure as we made some change, as you may know, earlier to our U.S. pension plan and the Agile Agilent program I mentioned is live. And we have a lot of initiatives underway to ensure that we can continue to take costs out while simplifying the company. Didier, anything else you would add to that? Didier Hirsch : I'd just mention the currency hedging. It had a big impact. It will have a big impact on a year-over-year basis. It's all impacts to gross margin. And ACG and DGG, because of their footprint, have been more penalized. So ACG on a year-over-year basis lost $6 million in gross margin just because of the hedging programs; and DGG, $2 million. So that also explains the difference between ACG, DGG and LSAG. LSAG has a different footprint, obviously with a stronger presence in Europe, for example. And so that can distort a little bit the percentages. Isaac Ro : That's helpful. Let me just follow-up on Europe. I want to make sure I understand kind of how -- what you're seeing now in that respect to the guidance end. So 2 items there. One is did the weakness in Europe, did that pick up in the month of July, just given you guys are off calendar versus the peer group? And secondly, does your guidance assume that the academic end market in Europe weakens further as the year progresses or that it sort of stabilizes from here? Michael McMullen : Yes. So nothing unusual in July, and I think the assumption of the Q4 is basically a continuation, not any worse but not any better. And we just thought that was a prudent way to think about the company's performance fourth quarter. I would love to be wrong, and I hope I'm wrong. But we thought from a planning and guidance standpoint, we should be prudent in terms of how we looked at the European market overall. Operator : Our next question comes from the line of Derik De Bruin from Bank of America. Derik De Bruin : So a lot of the revenue questions have been asked. And I mean, it certainly seems prudent to me your guidance, just given that Europe, even under a good -- even in a good year, this -- the calendar third quarter is always a little bit choppy anyway, so there's clearly some heightened uncertainty this year. So I think it's prudent to be a little bit conservative. But could you just talk a bit about some of the -- I noticed the share count was a little bit higher this quarter than what you previously guided to. Are you still looking at buying back 1% of the outstanding shares as we sort of go into the -- going forward? Michael McMullen : Yes. Why don't you talk a little bit about the -- our share repurchase activity in the quarter and how we're thinking about it going forward, Didier? Didier Hirsch : Yes. We filed back in, what, November 20, I think, of last year a 10b5-1 on an annual basis, and we intend to file a new one, to register a new one also in November of this year. And it's a formula-based instructions that we have provided between buying 350,000 shares a day under certain conditions to buying 0 kind of thing with a cap as you can imagine. So we don't know exactly how it's going to play out in Q4. And the only thing that we know is that if there's any kind of shortfall at all in our intended buying in Q4 because of the formula in the 10b5-1, it will all be carried over into the following year. So we intend to spend exactly what we committed to spend. Derik De Bruin : Great. That's really helpful. And could you just give us a metric on what instruments versus consumable growth was in the quarter as an overall number for the company? Michael McMullen : I think probably the best way to think about it is just look at the respective business groups. So you have the LSAG results of down 2%, and then the... Didier Hirsch : ACG up 8%; and DGG, up 8% also. Michael McMullen : And Dako. So minus 2%, plus 8%. And that's why I -- again, as you think about '17 for the company, if you really want to look at the growth rates of those 2 business units in the recurring revenue space, ACG and DGG, perhaps differently than you might think about how you model the risk profile for revenue projections for the instruments side of the company. Derik De Bruin : Great. That's really helpful. And I guess, could you -- when you sort of -- you're still feeling good about the margin target for '17, and it sounds like that your IT initiatives are well underway or finished to do like that. Are you -- do you still feel confident about getting what you're expecting for next year for the margin improvement? Michael McMullen : Yes, absolutely. So that's why I made a few comments about it earlier because as we said, if we can be in a 4.5%, 5% kind of growth range, perhaps even low 4%, it makes it a little bit more challenging. But we can see -- we see the path to 22%. It's not just around margins. I mean, especially not just around margin improvement from volume. But there are specific real programs. It's something we review once a month, then we have active programs, and the costs will continue to come out on some of these big programs. Actually, I must say I'm really pleased with the team because we've -- we went through and did the -- we call project Nunu [ph] is the finance program we just finished up. And then right on the heels of that, we're going to go live in early '17 with our integration of Dako. So the teams are still energized and working hard, and I think these are going to have a material impact on our results in '17. And that's why we have confidence about the -- assuming no major change in terms of the macro environment that we can reach what we think are pretty challenging goals, but they're -- we've got a path to get there. Operator : Our next question comes from the line of Dan Arias from Citigroup. Daniel Arias : Patrick, just going back to your comments on share gains in LC. I know you guys don't like to get too specific on winners and losers. But as was mentioned, it does look like all of the major players are doing fairly well there. So who would you say you're taking share from? Is it the small column providers or does that actually extend into some of the box companies as well? Patrick Kaltenbach : Well, I -- thanks for the question. I can give you only a general flavor here on what we think is going on in the market. I will not comment on the individual competitors, but your assumption that the smaller suppliers probably take a larger hit is also our observation. Daniel Arias : Okay. And then maybe a specific one on C&E. Mike, at the Analyst Day, you called out a Saudi Arabian refinery build-out that was getting going. Have you started to see some demand there? And is that something that you think contributes at all to the back half of the year? Michael McMullen : The major projects that were underway haven't been canceled, so -- but we're not seeing any major new projects underway. There's a lot of -- there's actually a lot of positive news by a lot of studies about where this market's going, but we're not seeing -- what we're -- just to clarify here, the major project that we knew about, whether it be the one I mentioned in Saudi or the -- there's a major project down in Texas. These programs, they're going to come online. So people aren't canceling capacity increase projects, but we're not seeing a lot of new projects. And that's why we have taken a fairly conservative -- probably be a bit pragmatic view of that marketplace. Again, I would remind everybody, too, that when we talk about chemical and energy, 50% or so is actually chemicals -- chemical processing not directly tied to the exploration and production of oil. Operator : Our next question comes from the line of Paul Knight from Janney Montgomery Scott. Paul Knight : I guess specifically what is the GC business doing? What's its growth rate? What was it doing in the July quarter? And what's the backlog or what are the -- what's July or August look like, I guess? Michael McMullen : Well, thanks, Paul, I appreciate the question. As you probably will understand, I'll give you more a high-level result because we don't actually comment specifically at a product category level, beyond, I think, I would just reemphasize the point that Patrick made when he characterized the chromatography market. That business is down relative to last year because the chemical and energy market is down. And we have seen no movement at all, downward pressure on our share position. It's really a market phenomena we're dealing with right now. And that's why when that replacement market does turn, and we've been through these cycles before, when it does turn, we'll be in a strong position to capture that growth as given the strength of our position in that market, which right now happens to be down. Paul Knight : And then last, on the applied markets in a broader sense, do you think it's still a GDP growth rate normalized or what do you think the applied markets should be for Agilent? Michael McMullen : We actually don't think about it that way because the segments that -- or big segments of the market like your food and environmental testing, we think are independent to some extent of GDP. So the only way I think that we really think about that as relative to is our chemical and energy space. So if you could just kind of think about tying GDP to that subsegment of the company, I think that's -- would be good place to start. But I would not apply it to the whole what we call Applied Markets because these are being driven by quality-of-life investments in the food and environmental area. And I think that's why -- I think this composition of our end markets is the reason why we're being able to put up these kind of growth rates even when our #2 market as a company has shrunk this year. Paul Knight : And then last on -- you had your Analyst Day, obviously. You've been talking about a 22% operating margin. Are you more or less confident in that number for FY '17 at this juncture? Michael McMullen : Yes. I think the confidence level is the same as it was back in May. And again, I'd maybe just share a few points here, which as you know, we have this confidence of delivery on that given our belief that we can get that growth rate that we're putting up growth rates right now in that territory. We've got this pipeline of new products coming out. We've got this nice recurring revenue stream with ACG and DDG that will carry this momentum into '17 and that where our instrument business is going, hey, pharma looks -- still looks good. Of course, you have these double-digit compare issues. China looks to continue to be strong. And chemical and energy has got to turn at some point in time because the market requires these tools to support production. Our thinking is when we look at chemical and energy is we know our customers are looking for productivity improvements to help improve their company profitability. We think that's a value proposition that Agilent has. We think as they go through their budget justification processes and their budgets start in calendar 2017, that this is why we can say, "Listen, the decline in this business after 18 to 24 months will start to turn," and we could see low single digits by the end of 2017 for the chemical and energy market. If that happens, which we believe it will, that will give us the confidence to get the growth and then we know we'll get the margin, given both the volume but also in terms of gross margin improvement initiatives as well as our SG&A cost. Operator : And our final question today comes from the line of Catherine Ramsey from Robert W. Baird. Catherine Ramsey : We've heard a lot of commentary from your peers on Japan; strong pharma environment, weak academic government. So I was wondering if you could walk through your exposure by end market there and what you're seeing across those customer groups. Michael McMullen : Didier, do you remember the total Japan numbers? I think were... Didier Hirsch : About 5% of overall... Michael McMullen : 5%. Yes, just to give you a sense of -- 5% of the total market. Historically, we've been stronger, and I can share this from my experience having been the country manager for Japan for a few years in the early part of my career. We tend to be much stronger in the chemical and energy segment of that marketplace. We are doing well in the life science research and in genomics, but the majority of the business sits in the chemical and energy space, which is -- which has been down. I think Japan has been part of that story. Pharma, the pharma business for us is a relatively smaller portion of the market for us. I think they're doing well in pharma but not enough to really drive significant overall growth rates for Japan. Catherine Ramsey : Okay, great. And then any color on the progress of Dako integration? What's left to do there? Had some nice op margin expansion in DGG this quarter, so are you still thinking that 20% in fiscal '17 or could there be upside to that number? Michael McMullen : Jacob happens to be sitting right next to me in this conference room. I don't think he's ready to sign up for more than 20% because it is quite a improvement from where we started. But I think he remains quite confident in the 20% achievement of that goal of an O&M perspective. You saw we had 18.8% operating margin this quarter, 200 basis points over last year. And the big next wave of integration efforts will really be starting in our Q1 '17, So we have a major program we call it project de Gaulle [ph]. We seem to like a lot of these French names, Didier. I'm not sure why that may be the case, but -- and that really will be the next big step to move the former Dako company into the Agilent environment. And it will take a little bit of while to get the cost out, but as you go -- as you think about exiting '17, you're going to have a much lower SG&A spend than you started the year. And Jacob, I don't think you'd share anything else? Jacob Thaysen : No. I think you captured it correctly. I just want to reinforce what you said, that the path to 20%, actually delivering 20% in 2017 is a significant turnaround of where we were a few years ago. So right now, that's our full aim, and I'm very happy where the team is and executing this right now. Michael McMullen : Thanks, Jacob. Operator : And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Alicia Rodriguez for any further remarks. Alicia Rodriguez : Thank you, Jonathan. And on behalf of the entire management team, I'd like to thank everybody for joining us today. If you have any questions, please give us a call at IR. Thanks again. Bye-bye. Operator : Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,016	4	2016Q4	2016Q4	2016-11-15	1.952	2.01	2.185	2.203	null	20.99	20.94	Operator : Good day, ladies and gentlemen, and welcome to the Agilent Technologies Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the floor over to Alicia Rodriguez, Vice President of Investor Relations. Please go ahead. Alicia Rodriguez : Thank you, Karen, and welcome, everyone, to Agilent's Fourth Quarter Conference Call for Fiscal Year 2016. With me are Mike McMullen, Agilent's President and CEO; and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Patrick Kaltenbach, President of Agilent's Life Sciences and Applied Markets Group; Jacob Thaysen, President of Agilent's Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. 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. You will find an investor presentation along with revenue breakouts and currency impacts, 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 Mike 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 refer to core revenue growth, which excludes the impact of currency, the NMR business and acquisitions and divestitures within the past 12 months. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year. Guidance is based on exchange rates as of the last day of the reported quarter. 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 let me turn the call over to Mike. Michael McMullen : Thanks, Alicia, and hello, everyone. I'm very pleased to announce that our Agilent team ended 2016 with another strong quarter of excellent results. I will start by looking at our key numbers from the quarter. First, we continued to deliver above-market growth. Revenues of $1.1 billion exceeded the high end of the guidance by a sizeable $41 million and were up 6.3% on a core basis. We were the first surprised by the strength of our instrument business in pharma, China and Europe, which far exceeded our expectations. Second, our adjusted EPS of $0.59 was $0.07 above the high end of our guidance. Finally, we continued our track record of improving profitability as we delivered another quarter of operating margin expansion. Adjusted operating margin of 22.5% was up 60 basis points from Q4 of fiscal 2015. Turning to our full year results. Core revenue continued to outperform the market, growing 5.9%. We increased operating margins 110 basis points to 20.7% from 2015. These results drove a 14% increase in adjusted earnings per share for the full year. We are capping off the second year of our company transformation with stellar performance by the Agilent team. Our fourth quarter and full year results demonstrate our continued ability to win in the market. We are outgrowing the market while expanding margins and fully leveraging our strong balance sheet. In the past year, we distributed $150 million in cash dividends, repurchased $434 million of our shares and invested $480 million directly into the business through M&A, strategic transactions and capital expenditures. Let me now address what's happening in our end markets and business groups. I'll start with the end markets. Our Q4 trends were similar to what we experienced last quarter with pharma and academia and government being the exceptions. We had expected continued strength in pharma, but our 16% growth on a difficult compare exceeded our expectations. Growth is being driven by strong customer acceptance of our new products and enterprise service offerings. Academia and government's decline of 2% was less than expected. European spending is holding up better than projected, while our U.S. government investments continue to lag 2015 spending levels. Clinical and diagnostics grew 8% over last year, led by continued growth in reagents. Within our applied end markets, food is up 10% with strong demand in China and Americas. China also drove growth in environmental market, up 3%. Chemical and energy declined 3% in line with expectations due to continued effect of crude oil prices and macroeconomic uncertainties. We expect this market to remain challenging for the rest of calendar year 2016 and into 2017, with no significant downward or upward movements. Geographically, Asia, led by China, and Europe were stronger than forecast. Our Asia business, excluding Japan, grew double digit, driven by greater than 25% growth in China. While the overall European market remains challenged, we delivered solid mid-single-digit growth. European pharma and food markets were strong and academia and government funding was stable with Q3. Japan and Americas were flat with growth constrained by continued chemical and energy market weakness and specific to the U.S., slow U.S. government funding. Moving on to the business groups. Life Sciences and Applied Markets Group delivered core revenue growth of 5%. Better-than-expected revenues from our analytical lab instruments business was driven by an attractive combination of introducing new products into growing markets. This applied in particular to our new lineup of chromatography and mass spectrometry products targeted at the pharma in applied food, environmental and forensics markets. LSAG's operating margin for the quarter was 22.8%, up 280 basis points from a year ago. We are building for the future. In August, we introduced the transformational Intuvo 9000 GC system. Building on our recognized GC leadership, the Intuvo system revolutionized the way users perform gas chromatography. Industry experts recognize unique innovation being delivered by Agilent with press coverage at 100% positive. Intuvo is featured this month on the cover LCGC magazine, a major trade publication. Customer response is also very positive to this introduction, confirming our undisputed market leadership in gas chromatography. We anticipate a measured uptake in revenue. Limited international shipments are expected in Q1 of fiscal 2017, with volumes expected to increase over subsequent quarters. Another industry-unique product, the Agilent 8900 Triple Quad ICP-MS system, which we just introduced in Q3, is also being well received in the market. This instrument is rapidly becoming the solution of choice in labs that demand the highest standards of performance. Next, the Agilent CrossLab Group continues to deliver strong, sustained growth with core revenue up 8%. Growth is healthy in both services and consumables. ACG's operating margin for the quarter was 22.7%, down 240 basis points from a year ago and in line with expectations. ACG results were driven by strong pharma, food, clinical and diagnostic markets, where our CrossLab customer value proposition is being well received. Unlike our instrument business, ACG also grew in the chemical and energy markets. Laboratories supporting strong production levels drove demand for consumables. There is also continued demand for services, as customers focus on keeping their older instruments operational. We are investing for the future in ACG. We just introduced a new range of innovative and differentiated supplies. These new offerings enable the Agilent Intuvo 9000 GC to be the most efficient and cost-effective premium GC to own and operate. We continue to successfully integrate the recently acquired iLab business, which brings differentiated capabilities to core lab managers. Last, but certainly not least in terms of impact, the momentum in the Diagnostics and Genomics Group continued, with delivery of 8% core growth. Our laser focus on improving the previously acquired Dako business is paying off. The pathology business continues its steady climb back to market growth rates, with strong -- with strength in reagents and companion diagnostics. Our nucleic acid solutions business, for which we recently announced a significant production capacity, grew double digits. This growth reflects the increasing demand for oligonucleotides for RNA-based drugs. DDG's operating margin for the quarter was 19.6%, up 40 basis points from a year ago. In October, there was some exciting news from Merck for lung cancer patients and for Agilent. Merck's KEYTRUDA is now approved by the FDA for first-line treatment for metastatic non-small-cell lung cancer for patients with high rates of PD-L1 expression. In conjunction, Agilent's pharmDx companion diagnostics PD-L1 test is now approved for expanded use. This is the first time an Agilent's PD-L1 companion diagnostic is approved for first-line testing. The theme of investing for our future is also evident in DDG. We launched a comprehensive offering of pooled CRISPR libraries for functional genomics. This will help accelerate research into complex diseases and drug discovery. We signed an agreement with the Burning Rock Biotech to develop cancer diagnostics in China based on Agilent SureSelect solutions. And we broke ground and initiated construction on the previously announced $120 million investment in a new factory in Colorado to expand nucleic acid production capacity. Turning now to operating margin. We remain focused on operating margin improvement. Since the new Agilent leadership team was appointed, we have delivered 7 consecutive quarters of improved operating margin and strong growth. Despite continued challenges in the chemical and energy business, we have improved adjusted operating margin by 280 basis points in the first 2 years of the company's transformation. We have completely absorbed and offset the $40 million of dis-synergy costs due to the spin-off of Keysight. On the operations front, our Agile Agilent program continues to simplify the company and lower operating costs. This program is designed to keep us nimble, improve our interaction with customers and lower our costs. It is having an impact and will continue to deliver savings in 2017 and beyond. In the coming year, we will realize cost savings from the completion of the integration of Dako in early 2017, a simplified enterprise IT systems environment and other cost-savings initiatives. Turning to our FY '17 market and company outlook. As a reminder, our shareholder value creation model for superior earnings growth is to outgrow the market and expand operating margins with a balanced deployment of our capital. Didier will go through the specifics of our Q1 '17 and full year guidance. I want to share our thinking about end markets and our initial guidance philosophy, given an environment of increased uncertainty. This is a change since our last call and the May 2016 Analyst Investor Day. In our end markets, we expect continued strength in pharma, accompanied by continued solid growth in the food, environmental and clinical research and diagnostics markets. Geographically, China and India are expected to grow at significantly higher rates than other countries. There remains considerable uncertainty about European markets. We are forecasting moderate growth in the United States with the U.S. government policies and spending and chemical and energy markets being the wildcards. Chemical and energy, while entering a period of easier compares and improved oil prices, has not yet returned to growth. We expect a continued subdued academic and government research market in the coming year until uncertainties resulting from Brexit and the U.S. elections play out. We are also keeping a watchful eye on how potential new U.S. government driven trade and currency evaluation discussions could impact our business. We finished 2016 very strongly, and we are well positioned for future growth with a pipeline of new offerings. In our initial revenue guidance for 2017, however, we want to be on the cautious side. We want to see some more clarity on U.S. and European government actions and have better indicators of when we will return to growth in our industrial end markets. Predicting end-market growth in today's uncertain political and economic environment is challenging. However, I can predict quite confidently that we will continue our track record of outgrowing the market whatever market environment we encounter. We continue to expand our customer channel reach and fortify our portfolio, which strengthens us well for the coming year and beyond. The transformation of Agilent we discussed at the May Analyst and Investor Day is in full force. The new leadership team, put in place in early 2015, continues to deliver strong operating results each and every quarter. We are building momentum for future growth. We have improved our adjusted operating margins by 200 basis points over the past 2 years and our march to improved operating margins will continue in 2017. However, in our initial operating margin and earnings per share guidance for 2017, we want to be on the cautious side. Since our May Analyst and Investor Day meeting, changes in exchange rate, pension expenses and the recent iLab acquisition are having a short-term dilutive impact on our operating margins of 0.5%. The Agilent team, however, is laser-focused on improving another 130 basis points of operating margin. We have an internal action plan aligned with achieving a 22% operating margin goal in fiscal 2017, excluding M&A impact. This is the primary goal for our executive team's compensation. We continue to hold ourselves to a higher level of performance, expectations than reflected in our initial full year earnings guidance. As you assess our future possibilities, I will leave you with a few thoughts. We are expanding our product portfolio and extending into adjacent markets. We're improving the customer experience by streamlining processes and modernizing systems, making the company more efficient and customer friendly. Our Agile Agilent program has and will continue to deliver incremental improvements in operating margin. The One Agilent team continues to work well together and is determined to win in the market. We believe we are well positioned to sustain our strong operational performance and achieve our long-term goals. The entire Agilent team is energized and committed to deliver future growth. Thank you for being on the call today. I will now turn it over to Didier, who will provide initial insights on our financial results and initial guidance for our fiscal Q1 and full year 2017. Didier? Didier Hirsch : Thank you, Mike, and hello, everyone. As Mike stated, we are very pleased with our Q4 and full year performance, both well over the high end of our guidance. We delivered above-market core revenue growth of 6.3% and 5.9%, respectively; and our operating margin, adjusted for income from Keysight, was up 60 basis points and 110 basis points, respectively. Our full year EPS at $1.98 is 14% higher than the previous year. Please note that we have reduced our pro forma tax rate by 1 percentage points, which had a $0.02 impact on our EPS. Our operating cash flow for the full year, at $793 million, reflects our strong overall performance. And turning to capital returns. For the first -- for the year, we returned $584 million to shareholders in the form of dividends and buybacks or 89% of our free cash flow. I will now turn to the guidance for fiscal year 2017. As Mike stated, our initial guidance, like last year, assumes that -- what we believe to be appropriate caution. Our fiscal year '17 revenue guidance of $4.35 billion to $4.37 billion corresponds to a core revenue growth of 4% to 4.5%. It is based on October 31 exchange rates and currency had a 0.6 percentage point impact -- negative impact on revenues. We project fiscal year '17 adjusted operating margin of 21% to 21.5% and fiscal year '17 EPS of $2.10 to $2.16, growing 8% at midpoint. As you update your models for fiscal year '17, please consider the following 10 points : First, annual salary increases will be effective December 1, 2016. Second, stock-based compensation will be about $59 million. And as we front end the recognition of stock-based compensation, the Q1 expense will be about $23 million. Third, the reduction in bond yields is negatively impacting our annual pension expenses by about $12 million. Fourth, depreciation is projected to be $104 million for the fiscal year. Fifth, the non-GAAP effective tax rate is projected to remain at 19%. Sixth, we plan to return approximately $600 million in capital to shareholders, including $170 million in dividends and $430 million in buybacks, subject to customary conditions. Seventh, we plan to borrow $250 million in the second half to fund a portion of our capital returns. Eighth, net interest expense is forecasted at $71 million and other income at $11 million. Ninth, for purpose of our EPS guidance, we have assumed a diluted share count of 324 million shares, 5 million shares less than the average diluted share count in fiscal year '16. And finally, tenth, we expect operating cash flow of $825 million and capital expenditures of $200 million, about $60 million over fiscal year '16, mostly due to the investment in the second nucleic acid facility. Now finally, moving to the guidance for our first quarter. First, please note that Lunar New Year falls in Q1 this year versus Q2 last year, meaning about $15 million of revenue shifting from Q1 to Q2. We expect Q1 revenues of $1.04 billion to $1.06 billion and EPS of $0.48 to $0.50. At midpoint, revenue will grow 2.2% on a core basis and EPS will grow 7%. And as customary, Q1 EPS is negatively impacted by the December salary increase, front loading of stock-based compensation and the increase in payroll taxes due to the disbursement of the variable and incentive pay of the previous year. With that, I'll turn it over to Alicia for the Q&A. Alicia Rodriguez : Thank you, Didier. Karen, will you please give the instructions for the Q&A. Operator : [Operator Instructions] Our first question comes from the line of Steve Beuchaw from Morgan Stanley. Steve Beuchaw : First question for me is I wonder if you could just juxtapose your results against what we've heard from others in the category over the last several weeks. I mean, it sounds like a particularly strong category by number -- quarter by number of metrics. You actually accelerated while we saw a number of others decelerate in terms of organic growth in the quarter. Can you give us, from a high level, what you think are the keys there in terms of positioning? Why it is the quarter was so good for you guys relative to the market? Michael McMullen : Yes, thanks, Steve. The headline for me was as we looked throughout the quarter, we were winning more business than we planned. So we're winning a lot of business in our core markets. I think some of the end-market strength that we planned too was actually fairly similar to what I've seen other people comment on relative to the strength of China, strength of pharma, continued subdued but kind of a stable academia and government environment. And for us, I think we were just delighted by our performance, in particular, in our analytical instrument business where we seem to be winning more business than we planned and we think that bodes well for the strength of our portfolio and some of the things we've been doing over the last year in our channels as well. Steve Beuchaw : And then so the follow-up, I guess, just to dig a little deeper would be, did you notice anything in terms of instrument trends relative to consumables trends accelerating or decelerating? And what is that telling you about end of year, I should say end of calendar year budget flush? Michael McMullen : Yes, we were talking a bit about this yesterday with the team. And if you look at our performance through the quarter, we got off to a strong start in August and it continued throughout the quarter. And sometimes, it's hard to tell over first month where things will land for the quarter. But I'd say by the end of September, we knew we are winning more business than we planned. And it's really shaping up to be a strong quarter for us and really position us well for us going into 2017. Operator : And our next question comes from the line of Tycho Peterson from JPMorgan. Tycho Peterson : Mike, just hoping for a little bit more color on some of the expectations and guidance in particular around pharma. Are you still assuming that's kind of double-digit growth next year? Or are you factoring in a moderation? And on environmental, you managed to grow that business in contrast to what we saw from one of your peers last week. So maybe talk a little bit about contributions from the GC replacement cycle for next year as well. Michael McMullen : Yes, sure. Tycho, you broke up a bit on the call. So if I don't get to the specific questions, please come back to me. But I think relative to the expectations for end market kind of thinking for growth rate, we had pharma below the double-digit growth that have been placed in '16. So as we look at our end markets, we would expect a moderation of growth, not because the spends are going to go away, but you really are going to start to get into tough compares. And, Didier, if I remember correctly, we were in the mid- to high single-digit growth for pharma? Didier Hirsch : Yes. Michael McMullen : And then I think the story -- I think, Tycho, the question was around environmental. Tycho Peterson : Yes, and the GC replacement cycle. Michael McMullen : Yes, so in environmental, the story really there is China. And we think that's got many quarters in front of us of growth in China. And we -- as you know, I'm fairly bullish on the prospects of that market. And I think we've got kind of a perfect storm here going on where we have strong products going into -- in the growing markets. Relative to the GC replacement cycle, this is really about what's going to happen in the chemical and energy market. And I'll make a few comments here, then, Patrick, you may want to provide your perspective as well. So you may have noticed in my call script, I went kind of out my way to talk about a measured ramp-up of our new Intuvo GC because we think we've got a winner product on our hands. We know there's a lot of interest from customers. But we also recognize the reality of constraints they may have in their capital budgets. I know they're working with their own management teams internally of these companies about what they may get in terms of funding in 2017. What are your thoughts, Patrick, on that as well? Patrick Kaltenbach : Yes, thanks, Mike. Looking at the GC market, we definitely are positioned very well to capture any growth opportunity there. We have launched the Intuvo, which is a strong message to all our customers that we are standing behind them when it comes to drive for lower cost of measurement, when it comes to lower cost of ownership, when it comes to increased productivity and it positions us clearly as the market leader in gas chromatography. So we are in a lot of discussions with them, not only on Intuvo, but I think what the Intuvo launch did for us, we also -- it also spread a lot of discussion again about other -- of our other part of portfolio to 7890 and other products, which are market-leading products. And again, the discussion with the customers in the suppressed market is all about how can we help them increasing their productivity, driving their cost of analysis down and this is where we are exceptionally well positioned with this portfolio. Michael McMullen : Yes, maybe just to up an exclamation point on this is that we know that the installed base is at historic levels of aging. We know the equipment is being used. And it's just a matter time for that replacement cycle is going to turn on. But as you saw in my call comments, we're not ready to call that yet. Tycho Peterson : Okay. And then just one clarification on the operating margin guidance. Half of the cut, you're down about 1% from what you talked about the Analyst Day, half of that is from iLab, pension and FX, is the rest just conservatism, given kind of the macro? Michael McMullen : Yes, actually, I think where we had was the high end of our guidance is around 21.5%, right, Didier? And... Didier Hirsch : So yes, we -- with the high end is at 21.5%, and we are losing about 50 basis points related to the 3 items that were mentioned : currency, acquisition and pension expenses. And the other thing to note is, as Mike has clearly stated, we are still being measured on achieving 22% in terms of our variable compensation. Michael McMullen : Yes, and the way Didier and I talked about this one was listen, we think we've got a path to 22%. But there's lot of higher risks than there was back at the last call and at the May AID. So we thought it was prudent for us to guide this way. But we're all out inside, all our comp is tied to the 22% number. Didier Hirsch : With the 3 elements that were clear headwinds. Operator : And our next question comes from the line of Ross Muken from Evercore ISI. Luke Sergott : This is Luke in for Ross. Just hoping you could give a little more color on your margin assumption for next year? What you guys are thinking about pacing the FX headwinds, if any, what's going to be operational, what's pricing, et cetera? Michael McMullen : I think the question, Didier, was relative to the composition of our operating margin improvements for next year. And perhaps we can start with the mix between volume and OpEx and gross margins. Didier Hirsch : Yes, I mean, the -- I mean, I'm not going to give you the full bridge. I mean, when we provided the guidance of 21% to 21.5%, we took into account obviously, the -- all the impacts that I've mentioned. So there is -- it's based on the 4.3% core revenue growth. So there is clearly an operating leverage impact. And a lot, a lot of actions that are taking place to offset inflation and other headwinds that probably I have mentioned. The guidance assumes some level of increase improvements in gross margins as well as a reduction in terms of our -- the OpEx as a percentage of revenue. So you have a pretty much on all fronts, some improvements, not as much as we had initially anticipated because of the 3 headwinds that I've mentioned. Some of it related to operating leverage and some of it related to the continuation of our Agile Agilent programs. Michael McMullen : And maybe just reminding the audience, Didier. When we first started this march almost 2 years ago to go to the 22%, we laid out a path, which is really around 60% was going to be on volume, the other 40% was going to be on OpEx improvements in gross margin. And I think we're thinking about the same kind of mix for 2017. Didier Hirsch : That's right, yes. Absolutely. Luke Sergott : Okay, great. And I guess just one more. You guys did really well on the cash flow in '16. I think $647 million and you're guiding for $625 million. Is there any timing impact on that '17 guide? And then, I guess, on the tax of '17, kind of what are you baking into that benefit down there? Didier Hirsch : So I assume when you refer to timing impact, you're referring to special -- I mean between '16 and '17, some cash outlays only that could… Luke Sergott : Yes, correct. Didier Hirsch : Yes, there's a little bit. I mean, let me just highlight 2 potentially. This -- in fiscal year '16, we disbursed $66 million for overall Agilent variable pay and pay for results. Next year, we -- but we've changed our program so that we now do a lot of the cash outlays on an annual basis instead of semi-annual. So we have the full brunt in '17 of improvements in '16 and the fact that we're going to pay in '17 something that is more than pertaining to '16. So it's going to be $91 million; going from $66 million to $91 million. So an increased capital cash outlay. And then second, we did not fund our U.S. pension plan in '16. So our overall contributions to our worldwide pension plan was $24 million. We intend to fund our U.S. pension plan more in '17 and the contribution to the pension plan will move to $45 million. So an increase from $24 million to $45 million. So that -- those are the 2 things that come to mind in terms of explaining some of the variance between '16 and 17. But even with those 2 headwinds, we are still showing, in our initial guidance, a nice increase of $30 million on a year-over-year basis. And your second question? Michael McMullen : Related to tax rates. Didier Hirsch : Yes, on the tax rates, I did mention at the May Analyst Day that we were going to work really hard on the reducing our tax rate by 2 percentage points over the course of the next 2 to 3 years. We are very happy to be able to deliver already 1 percentage point in this fiscal year '16. We still are aiming to reduce our effective tax rate by other 1 percentage points over the course of the next 24 months as committed to or as indicated, I would say, in fiscal year -- in -- at the AID. But it's prudent to assume that the reduction will come in fiscal year '18 and not in fiscal year '17. So in your models, we advise you to put a 1 percentage point's reduction in tax rate from 19% to 18% in fiscal year '18, not in fiscal year '17. Luke Sergott : Okay. And does that include the FASB 2016-09 benefit? Didier Hirsch : It includes everything. Operator : And our next question comes from the line of Doug Schenkel from Cowen and Company. Ryan Blicker : This is Ryan Blicker on for Doug. Would you be willing to provide what your LC/MS growth was in the quarter? And how that was impacted by the comparison relative to recent quarters and maybe what your annual growth was there? Michael McMullen : What I can tell you is that -- back to my earlier statement, is that we're winning more business that planned. So we're quite pleased with how we've been doing with the LC/MS portfolio. And, Patrick, you may just want to remind the audience of some of the new stuff that we've come out with. So I guess, I'm not comfortable giving the specific of the growth rate. But just giving you a sense of trend of the business and maybe a few proof points of why we believe it's going as well as it is. Patrick Kaltenbach : Sure, again, we are confident that we are outgrowing the market on many fronts. And we have a very strong LC/MS portfolio. We launched a lot of exciting products at ASMS this year. And I think the reception of the market just underlines our strength. The combination of LC and LC/MS is important, and we think both are winning platforms. We see strong adoption across all the end markets. If there was one market where we have seen some headwind, then it was probably at the pain management market segment. But that is also in line with what you probably have heard with some of our competitors. But overall, we have been very pleased with the result in Q4. Ryan Blicker : Okay, that's helpful. And then it seems like there could be a repatriation holiday of some sort in 2017. I believe over 90% of your cash is currently trapped internationally. Can you provide any initial thoughts on how you would you prioritize repatriated cash, specifically on M&A opportunities and returning capital to shareholders? Michael McMullen : Yes, sure, Ryan. So Didier, how about I make a few initial comments and then if you wanted to add anything to it. But, firstly, I think we also need to put a series of caveats on my response because we really don't know what this might look like. What strings might be attached to, how you can use it, whether you can use cash in a certain way. But obviously, we would welcome this type of development, including a move to a more permanent reduction in U.S. corporate tax rates. That being said, I think if you go beyond the theory, I assume with those caveats, I think what you'd expect us to do is handle the return to cash very much along the lines of how we're managing our current use of capital. So we would want to use it for U.S.-based M&A, and we'd like to use that in situation where we've been using debt, such as our share repurchases so we would able to finance our share repurchases. And then we might look at our debt structure. But I think what we want to do is, first of all, obviously, understand what are the restrictions that could be tied to it. Also remind the group that some of the cash does need to remain permanently investment overseas. But we were -- if that particular situation would develop, we would like -- we would bring it back and use the cash very much along the lines how we've been using cash with the exception is I won't need to borrow money like I've done in the past for U.S.-based M&A or stock repurchases. I guess you might be okay with that, Didier. You haven't said anything else. Okay. Didier Hirsch : Absolutely. Absolutely. I was just waiting for his bated breath for the fine lines on the -- any chance, but yes. Operator : And our next question comes from the line of Jonathan Groberg from UBS. Jonathan Groberg : Mike, so I was just going back and looking, you did 6% growth organically for last year, 6% this year in '16. Just at a high level, you had some pretty tough, tough businesses and some of the industrial business this year and still put up 6%. I guess I'm just wondering, as you look out to '17, are there some initial thoughts you have around the election from an end-market standpoint, outside of tax, that make you incrementally concerned? Is there -- maybe just high level of kind of what makes you think you're going to get that kind of 150 bps slowdown year-over-year. Michael McMullen : Yes. So great question, Jon, and thanks for that and obviously, we've spent a lot of time talking about this as a team and I mentioned to Alicia before the call, I think we may be the first company in our space that had to do guidance after the U.S. election. So what I'm going to tell you is the kind of factors we're thinking about. And then also give you maybe some little bit more thinking about why we guided the growth rate we did as a company. But we don't yet have a position on these issues. What we do know is there's a multitude of factors that we need to pay attention to. Regulated markets, what's going to happen to other customers in the food markets, the environmental markets, the drug -- the FDA regulatory markets? So we know there's going to be a customer impact. What's going to happen with U.S. government funding? A lot of our business is driven by U.S. government funding. What's going to happen with trade agreements? There's been a lot of noise about Chinese currency. We just talked about the tax. And will the M&A environment change in terms of -- so all I can say right now, Jonathan, is perhaps, like everybody else on this call, we kind of had a sense of the issues, but we don't know which ways these things are going to go yet, so we're not going to call them. And we're just going to -- and that's one of the reasons why we took what we believe to be a prudent, cautious initial guide to FY '17. If I look at the end markets, I mean, pharma's going to continue to be strong. But we don't believe that it can continue to grow in double digits throughout all of FY '17. So we've tapered down our expectations a bit about pharma. We also think that China has been just a -- just fantastic for us. I think our number for the year was 21% growth for the year; I'm dialing that back a bit to double digit. So what we're doing is really just trying to moderate our view of growth for next year based on what we've seen to be some pretty difficult comparisons in some markets that really have been driving the business. As I mentioned to you, the wildcard is the turn on energy. One of the things that you pointed out, Jonathan, and what I'm really delighted is, we've had 6%, close to 6% growth, 2 years in a row with our #2 market declining for 8 quarters. When that market turns, that obviously will help us in the growth. So -- but I've learned over the first 2 years in this job, it's really hard to call in terms of major markets. So I'm not going to. And we'll just kind of keep an eye on it, and we'll update you as we go through the year, but that's our thinking about how we're viewing the U.S. election and the thought behind our end-market guidance for next year. Jonathan Groberg : And if I could just -- one more on the diagnostic and clinical market? Michael McMullen : Yes, Jacob's been dying to answer a question. Jonathan Groberg : Yes, so obviously, another -- you have 8% growth there. Obviously, you're probably going to say too early to think about how hospitals may react to the potential repeal of the ACA. But how about the PD-L1 testing business, how much of your growth was driven by that market? And any -- can you size that market for us yet? Jacob Thaysen : Well, it's -- I can start by saying that we have been very pleased with the performance of the PD-L1 over the last 12 months, I think it's 13 months now. And it has growing, if not to our expectation, then above even. And we expect that to continue to grow now based on KEYTRUDA going first line. And obviously, now with our companion diagnostic, we will see a bigger demand for it here in U.S., in Europe and in other regions. The market itself is very difficult to size. As you know, there's both been the companion with 1 drug and then there has been the complementary with another drug, and those have very different sizes at this point of time. I still believe that the overall PD-L1 market might end up in the same size as the HER2 market. But the difference is that HER2 is the only one -- one -- basically, one drug, one class of drug, together with one diagnostics, where the PD-L1 will be up to 5 different drugs, maybe more and 5 different diagnostic, maybe even for a lot of indications also. So this is as close as I can get to right now. The market we place in is -- or the 2 companion diagnostics that we have today continues to grow strongly. I won't say that that's the overall arching driver for the 8%. Basically, all our businesses today have a very nice growth performance, but it's definitely contributing. Operator : And our next question comes from line of Derik De Bruin from Bank of America. Derik De Bruin : The pace in the quarter was very good. Can you talk a little bit about backlog and, I guess, did you pull -- are you worried that you pulled anything from the first quarter in? I mean, any unusual spending patterns that you thought? Michael McMullen : Yes, thanks for the question, Derik. So as I mentioned earlier, we saw strength throughout the quarter. And we were quite delighted with the results. And we're not specifically commenting about orders or backlogs. But I did say in my early comments that we're well positioned for 2017. I would ask you to think about the Q1, particularly the impact of Chinese Lunar New Year. I told Didier, I said, don't want to talk about it in the Q1 call. So let's make sure that we include it in our guide. So that is the one thing that I would ask you to think about in terms of the next 3 months of the company's performance. Because we think we'll probably push about a week's worth of revenue or so from Q1 to Q2 because customers just won't be there to take delivery, and as you saw, the growth rates have been really exceptional for us in China. Derik De Bruin : So I'm going to -- I appreciate the New Year's comment. So I'm actually going to follow that up with another question. It's like are you -- have you had any conversations with your customers that -- I mean, obviously, you're not the only ones trying to figure out what the new world order is in terms of how spending is going to be. Are you worried at all about potential in terms of lower CapEx spending, lower spending beginning of the year as people try to get their arms around what exactly the new administration has in store? Michael McMullen : No, actually, we don't have that concern. What we've been more thinking about is where's the thing going long term. So -- but in the next quarter, we don't have any real concerns about that. So -- and that's why we are doing a full year guidance here in November. And it's really hard to see what's going to happen longer term throughout the year. But in the next quarter or so, we wouldn't expect that to have any significant impact. Operator : And our next question comes from the line of Paul Knight from Janney. Unknown Analyst : This is actually Bill [ph] on behalf of Paul. Maybe just touching on China again. Could you maybe talk about what your underlying trends have been driving the outsize growth for the company. Is it biopharma? Is it food? Is it environmental? And how does that impact as you look to next year? Michael McMullen : Yes, thanks for the question. I have to say it really was across the board with one exception, which is the chemical and energy market. So all the other markets were up quite substantially for us. And I think this is consistent with what we had talked about in prior calls, which is really there's going to be a level of investment in China relative to quality of life issues and in environmental, in food, lined up directly with their 5-year plan that they're in the midst of a major improvement in their overall pharma industry and that there's a lot of money going on to research. So -- and then I think the reason Agilent has been able to do so well here is we've got this combination of we've been working the organizational structure, the -- our channel model in the country. We've had a lot of stability over the last 18 months. So we've got a really strong team there. And that combination of the team, our historical strength in China and the new products we have, it's all coming together in terms of growth. And I guess, I maybe just add one thing and, Mark, perhaps, you can comment here. We often talk about the strength of end markets and the new products going to these end markets, but I think there's something going on relative to your business there and the move to services, I think, is worth a comment on as well. Mark Doak : Thanks, Mike, and thanks, Bill [ph]. To add a little color to that is we've seen a fundamental shift in buying behaviors in China, largely shifting from the core areas and around Shanghai, Beijing, to some of the more Tier 2, Tier 3 cities, where services now is viewed as the commonplace purchasing item in China, and it's certainly driving the growth. But the breadth of services, I think, in China, as well as the consumables business now, is the rest of the story, where they have reached the size and scale that they have the same interest that we'd find in the Western markets around enterprise services and consumables all coming together. So starting, as you've mentioned, Mike, with our extraordinarily strong position to start with, the installed base of China has just allowed us to build the business and truly outgrow our expectations in the second half around this, too. Michael McMullen : Yes, I mentioned -- I ask Mark to comment on that because as you may recall, we really have changed the portfolio composition of the company, doing much more in the aftermarket. So cath lab instruments are actually less than 50% now of total company's revenue. And historically, China has been driven by new instrument purchases. We're seeing increasing growth also coming from services and consumables. Unknown Analyst : Great. And then just a follow-up for Didier on the guidance. CapEx up to about $200 million this year. Could you maybe just talk about where the incremental dollars are going and maybe what you think the maintenance CapEx is for Agilent as a whole? Didier Hirsch : Yes, the main reason for the increase, which is about $60 million, from $139 million this year to $200 million next year, is really the significant increase that we're planning in terms of our nucleic acid facilities, RNA-based therapeutics and -- in Colorado. So we had one facility. We're still expanding the capacity of that facility, but we are building and we just started a few weeks ago 20 miles away a second facility that will kind of double the capacity when it will be put in production end of 2018, 2019. So that is the main reason for the increase. And starting in 2018, we should start -- we will see a reduction in the CapEx. This is not the run rate. Our CapEx run rate is still between -- like between $100 million and $120 million per year. So this is way above our run rate. Operator : And our next question comes from the line of Jack Meehan from Barclays. Jack Meehan : I wanted to follow up on the diagnostics business. Really, I thought it was a nice quarter on a tough comp. I know you talked about the PD-L1. But just any -- I wanted to focus on the Omnis and just whether you think you're picking up steam into 2017 and anything worth watching on the reimbursement side with that? Michael McMullen : Yes, Jack, thanks for the question. I think I'll pass it over to Jacob, maybe a little bit more color on the quarter results. Jacob Thaysen : Yes, it's -- we really continue to see overall in our ratings pickup definitely by Omnis that we see the growth is coming back. It's a nice momentum we're seeing and it continues to -- basically, it has continued to increase over -- during '16. So with that momentum, we expect that we will continue to see a good performance into '17 also. From a reimbursement perspective, obviously, there are already some expectation how that will look like into '17 and '18 with the pharma and so on. But now we will have to see what happens under the new administration here whether that will change anything. But so far, we actually don't expect any significant changes into '17. Jack Meehan : Great, that's helpful. And then I just wanted to follow up on the margin again. And just from our seat, what we should be watching? And what would push you to the 22% above level for this year? What are some of the actions that you think are going to be critical for doing that? Michael McMullen : Yes, I mean, Didier, feel free to augment my response here. But I think, obviously, it's going to be volume, which is about 60% of the margin improvement comes from volume. And the things that we can control, we're on top of. So it's really -- that's the one thing I can't control is what's going to happen in the market. So obviously, there's that 60% tied to margin. And then we've got some pretty big initiatives in the gross margin area, with our water fulfillment team. I think you may have heard me speak previously about some of our work in value engineering, material cost, reductions in logistics. So I think also we keep an eye on our gross margins as we work through the year. Some of the things take a while until actually they start coming through your P&L. But once they're there, they're there for extended period of time. And, Didier, anything else you'd add to that? Didier Hirsch : No, I mean, just that, I mean, we do have stretch goals. As we mentioned, we are paid internally on achieving 22%. And that means all of us have stretch goals to make -- to achieve that -- to contribute to the 22%. And OSS, under Henrik, the order fulfillment and supply chain organization, which has delivered greatly in '16 is looking at opportunities to deliver even more in '17, which would help us bridge the gap. Michael McMullen : Yes. And thanks, Didier. I had one additional thought here is, I think it's important to remind everyone is that some of the things that are going to help in '17 have already been finished in '16. So things such as our simplification of our financial systems infrastructure. So it's done. And now the savings will show up in '17. Operator : And our next question comes from the line of Isaac Ro from Goldman Sachs. Isaac Ro : First question just quickly on the quarter. Curious if you could comment on pacing. You guys have the off-cycle calendar there with October. I'm sure everyone is curious if whether it was on the capital spending side or any particular end market you saw a meaningful acceleration or deceleration in the month of October to the extent that portends the rest of the calendar year. Michael McMullen : No, Isaac, I just mentioned that what we saw was really strong pacing throughout the quarter. So it wasn't -- we didn't see something happen all of a sudden in the last 4 or 5 weeks. We had -- we had strength all through 3 quarters of our fiscal year close. Isaac Ro : Got it. And then maybe a longer-term question, Mike, regarding management incentives. You guys have spent a lot of time over the last couple of years talking about the emphasis on hitting your margin goals and you guys have done that pretty well. So as you move pass that 22% number, I was wondering how you think about evolving inside of structure for the management team? And should we assume that the types of incentives you have in place stay in place maybe with slightly different targets? Or could the overall composition evolve a little bit here? Michael McMullen : Yes, Isaac, great, great question. And I would point back to what we discussed back at the May AID, where we really said, what this is really all about is generating superior earnings growth, right. So if you think about what we're trying to do here is we're trying to outgrow the market, extend the operation margin to keep driving up our adjusted earnings per share growth. So what we'd like to be able to do is really that should be the focus of the team as we move forward. Operating margin expansion and capital deployment and your growth and market are all ways to get there. So we'd like to really be that have become the cornerstone of our long-term focus. And we want Agilent viewed as a company who grows their earnings faster than revenue. But as I mentioned in the AID is, I really want to also make sure that we don't get so focused on continuing to drive up the operating margin year in and year out that you pass on things that are immediately, say, accretive, maybe they're dilutive on your margins, but with good M&A additions to the business. So I think the way we're going to talk about the company post '17 is very consistent with what we had talked about back in the spring in New York City. Operator : And our next question comes from the line of Brandon Couillard from Jefferies. S. Brandon Couillard : Most of my questions have been addressed. Mike, just curious what you're embedding for the government and academia market globally for next year and any color you can give us sort of regionally would be helpful. Michael McMullen : Yes, sure, Brandon. As we -- as I look through my notes here, I think we're expecting low single-digit growth. And I think it's important to kind of parse it out by academia and government. So we think that if we go by the major regions, right, China is going to be strong. And they've actually helped mitigate some of what's been happening in the U.S. and Europe. We're not expecting much in Europe. It's been down. It was down again, but not -- it was basically -- sort of almost feels like the chemical and energy market, which is kind of chugging along at a reduced rate. We're not expecting the governments there to do anything in terms of more stimulus. In fact, one of things we're watching is what are they going to do as a result of Brexit, for those of things. So we expect a strong China, academia and government. We expect a continuation of this current environment in Europe. In the United States, the academia side is not bad. It's what we've seen more has been more on the U.S. government side. The U.S. government -- our U.S. government business is down in 2016 relative to '15. And that's why in my call I mentioned, hey, we need to kind of see where this new administration goes with its budget plans and investment priorities. So right now, we're kind of standing on the sideline just saying it's going to continue to be just like it is, but -- in the United States. But we could see something different in a few months, we just don't know. Operator : And our next question comes from the line of Dan Arias from Citigroup. Daniel Arias : Mike, just sort of following up on the outlook. Kind of like how are you thinking about the pacing of growth in chemical and energy in '17? Is the assumption that you kind of see some sequential improvement through the year? Or are you basically flat lining the business across the quarter just given that we haven't seen much in the way of positive signals? Michael McMullen : I think you anticipated my answer. So we basically have a flat line for the year. And it hasn't -- it's been shrinking for the last 7 or 8 quarters 2% or 3%. I think we ended up down about 3% for the full year. And we're basically saying, it's going to be flattish for '17. If there's any good news to that story is the fundamental industries are still out there in terms of gasoline is being produced. We've seen record levels of production in the United States, for example. The plants are running. There's a lot of discussion. There's a lot of reports externally about a turn. Oil prices have been inching up. But our history here is that it's really hard to know exactly when it's going to turn. What I can say is that if you have a profitability productivity message associated with something you can bring to the laboratory, then they might listen to you. And we're hopeful that some of our new product introductions will hit the mark there. But in terms of our overall market assumption and growth assumption for the company, we're assuming flat for '17. No big movements one way or another. Daniel Arias : Got it. Okay, great. And then maybe just to go back to the M&A and the margin comments. As we sort of think about the moving parts on the op margin guidance and just what you might look to do this year, how at risk is the current op margin outlook from additional M&A? I mean, obviously, it's tough to discuss these things in the abstract. But are you open to further dilution if the right asset comes along? Or do you kind of think you hold the line with the current forecasts? Michael McMullen : Yes. No, I think what we've said, and I'm really trying to be -- have actions that are consistent with our prior communication. We said we would look at acquisitions that could be short-term dilutive in nature, and we did one the latter part of '16. And we just love having iLab part of the portfolio. It's going to be -- it's a great addition to the business. But right now, it's not at the corporate average. We'll move it up. So if we saw other opportunities like that, we would pursue them. But I think if you want to look at the type of the deals and the size and other things, just look at what we've done so far to give you kind of a sense of the things that we're looking at going forward. We like accretive deals, and we like ones that can move up -- move the margins up. Operator : And our next question comes from the line of Puneet Souda from Leerink Partners. Puneet Souda : Just a quick follow-up, if I could, on the pharma. And just wanted to understand, there's clearly a solid contribution here. If you could maybe help us parse out. Is that more coming from sort of a small molecules or macro molecules? Or is this -- are we thinking about them correctly? Or maybe we should be thinking about in terms of the service contract share that you're gaining and via the CrossLab Group? Help us, if you could parse that out a little bit. Michael McMullen : Yes, sure. So there's a couple of things going on, which is in terms of the overall fundamental end-market growth rates, we think biopharma and the small molecule side of pharma are both growing quite strongly. The small molecule side is really being driven by a conversion to the new technology, the liquid chromatography in particular. Also, an increasing interest in enterprise service, what we have to offer from ACG. So I think what's been going on here for Agilent, we've had a combination of really strong end-market growth. There's a new market that has and will continue to develop in the services side, and we're doing well there, along with our new instruments in the pharma. When I look at '17, we think that the biopharma side of that market is going to continue to go quite strongly. It's been an area of prioritization for us in terms of new solutions. But we do think that over time, that the small molecule stuff will start to move back towards more of its long-term growth rates. And, Patrick, I think what do we kind of think about our long-term growth rates in the small molecule side? Patrick Kaltenbach : Well, on the small molecule side, I think we are more in the low- to mid-single-digits range; whereas in biopharma we're more optimistic, and it continues to be double digit. That's our projection right now. Puneet Souda : All right. Great. Just one more. In terms of the chemical and energy market side, I mean, we get the view into 2017. But as you have conversation with the labs and lab directors, just help us understand how they're thinking about capital equipment in 2017 knowing these times and knowing that the progression that's been? Or are they thinking more in 2018 terms in the -- on the capital equipment? Michael McMullen : I have to say, I don't think they really know yet as well. What they're doing right now is in they're right in the midst of their capital budgeting process. So what I can tell you is I've had a couple conversations with customers over the last 2 or 3 weeks on this exact topic. And what they described for me is, hey, our end -- these are -- one customer was somebody who provides services into -- and equipment into the energy market. So listen, we're starting to get interest in quotes, but we're not sure whether it's going to hit in '17 or '18. When we had our VIP launch for the Intuvo 9000 GC, a lot our customers were in the chemical and energy space. And it's, "Listen, we love this productivity message you have here. I think there's a real economic ROI. I'm now right in the midst of my budgeting process inside the company. Maybe I'll be able to get this thing through this year or maybe the following year." Because there still seems to be the sentiment, particularly with the larger companies that they want to hold on to the equipment as long as they can before they have to replace it. So -- and again, that's why I pointed to the fact that it's not all negative because of the fact that we do have a strong service and consumables offerings into that space. But again, we just don't -- I don't think our customers know yet as well what's going to happen. We do know it's going to happen. History will repeat itself. There will be a replenishment of aged equipment. But again, we're just not confident enough right now to say when that's going to occur. Operator : And that concludes our question-and-answer session for today. I would like to turn the conference back over to Alicia Rodriguez for any closing comments. Alicia Rodriguez : Thank you, everybody. And on behalf of the management team, I wanted to thank you for joining us on the call. If you have any questions, feel free to give us a call in IR. Appreciate it very much. Bye-bye. Operator : Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,017	1	2017Q1	2017Q1	2017-02-14	2.029	2.051	2.225	2.262	3.02	22.44	23.91	Executives: Alicia Rodriguez - Agilent Technologies, Inc. Michael R. McMullen - Agilent Technologies, Inc. Didier Hirsch - Agilent Technologies, Inc. Jacob Thaysen - Agilent Technologies, Inc. Analysts: Paul Richard Knight - Janney Montgomery Scott LLC Scott Levitt - Evercore Group LLC Derik de Bruin - Bank of America Merrill Lynch Brandon Couillard - Jefferies LLC Isaac Ro - Goldman Sachs & Co. Jack Meehan - Barclays Capital, Inc. Dan Leonard - Deutsche Bank Securities, Inc. Ryan Blicker - Cowen & Co. LLC Tycho W. Peterson - JPMorgan Securities LLC Catherine Ramsey - Robert W. Baird & Co., Inc. (Broker) Puneet Souda - Leerink Partners LLC Tim C. Evans - Wells Fargo Securities LLC Bryan A. Kipp - Citigroup Global Markets, Inc. (Broker) Jonathan Groberg - UBS Securities LLC Operator : Good day, ladies and gentlemen, and welcome to the Agilent Technologies, Inc. first quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Alicia Rodriguez, Vice President of Investor Relations. Please go ahead. Alicia Rodriguez - Agilent Technologies, Inc.: Thank you, Jonathan, and welcome, everyone, to Agilent's first quarter conference call for fiscal year 2017. With me are Mike McMullen, Agilent's President and CEO; and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Jacob Thaysen, President of Agilent's Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. Patrick Kaltenbach, President of Agilent's Life Science and Applied Markets Group and a regular participant in our calls, is on a well-deserved vacation and will not be joining us today. 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. You will find an investor presentation along with revenue breakouts and currency impacts, 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 Mike 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 refer to core revenue growth, which excludes the impact of currency, the NMR business and acquisitions and divestitures within the past 12 months. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year. Guidance is based on exchange rates as of the last day of the reported quarter. 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 let me turn the call over to Mike. Michael R. McMullen - Agilent Technologies, Inc.: Thanks, Alicia, and hello, everyone. I'm pleased to announce that the Agilent team started 2017 with another strong quarter. First, we continued to deliver above-market growth. Revenues of $1.07 billion exceeded the high-end of November's guidance by $7 million and were up 4.8% on a core basis. We will dig deeper into details behind the strong performance later in the call. Second, our adjusted EPS of $0.53 for the quarter is $0.03 above the high-end of our guidance. Adjusted EPS is up 15% over the first quarter of last year. Finally, this is our eighth quarter in a row of improving profitability. Adjusted operating margin of 21.2% is up 100 basis points from Q1 of fiscal 2016. Let me now highlight the drivers behind our stronger-than-expected revenue growth. First, we are seeing some segments of the chemical & energy business growing again. Second, growth in China is a bit higher than expected. Let's take a closer look at our results by end market and business group. I'll start first with the end markets. Growth of Pharma is up 7% as expected against the top compare. Growth is being led by continued strong demand across the entire portfolio. The Pharma business is particularly strong in China and India. After seven quarters of year-over-year declines, we see chemical companies beginning to increase their purchases. However, our energy exploration refining business remains challenged. This results in overall 3% growth for our chemical & energy business. Clinical and diagnostics markets are strong with revenue up 8% year-over-year. Growth drivers include our companion diagnostics and CrossLab businesses. As expected, academia and governance is down 1% for the quarter with sustained type funding across most regions. Our food testing business is up 11% driven by China. Environmental and forensic revenue was down 1% for the quarter with strong China environmental growth being offset by weak U.S. forensic spending. Let's talk about China, a major part of the story as you heard today. Geographically, Asia, driven by China, continue to lead regional growth. Coming into 2017 we expected China to grow in the low double-digit range for the year. We expected Q1 growth rates to be lower than the full year because of the lunar new year falling in our fiscal Q1. However, we ended up delivering low double-digit growth in Q1 above our expectations. The Americas were up in mid-single digits with strength in the United States. Europe and Japan were flat. Let's turn to our business groups. The Life Sciences applied markets group delivered core revenue growth of 4% with end market strength in pharma, food and chemical & energy. Innovative new offerings such as the Infinity II LC Series and Agilent 8900 ICP-MS are driving growth. Industry trade publication, The Analytical Scientist, also recognized our innovation strength. They named the Agilent Intuvo 9000 GC system as 2016's number one innovation of the year. The Agilent CrossLab Group continued its consistently strong performance with 7% growth in the quarter. Growth has held across both services and consumables. We are focused on future growth. In November we announced the opening of a new technology center in Folsom, California. This new $14 million facility reflects our investment in new microfluidic technology. This state-of-the-art microfabrication and technology facility is for the development and manufacture of a whole new generation of unique core instrument components and consumables for our customers. The new Intuvo 9000 GC components and associate supplies are the first example of this new capability now housed within Agilent. We are relentlessly focused on our customers. We are now the first in the industry to allow customers to renew their service contracts online. Our e-renewals program was just introduced in the United States with other regions to follow. Finally, the diagnostics and genomics group continue to deliver solid growth. DGG had core revenue growth of 4% in Q1, while continuing to drive improvements in their operating margin. The group delivered operating margins of 14.3% for the quarter, up 470 basis points from the year ago. Q1 marked several key milestones for our DGG business. This quarter marked the successful integration of the former Dako business onto Agilent's system and infrastructure platform. We closed the acquisition of Multiplicom, a leading European diagnostics company with state-of-the-art genetic testing technology and products. Multiplicom's solutions enable clinical labs to identify DNA variance, associated genetic disease and help direct cancer therapy. With this acquisition, along with the Cartagenia acquisition in 2015, we continue to expend our genomics platform. We launched Cartagenia Bench Lab 5.0. This is a major software revision providing more capabilities to the platform of choice for higher throughput diagnostics labs to help them validate and automate the results. You may recall we developed in concert with Merck the PD-1 companion diagnostic from Merck's KEYTRUDA drug. The use of this companion diagnostic continues to grow as KEYTRUDA has become a first line treatment for non-small cell lung cancer in a growing number of geographies, now including Europe. Our tests help identify potential candidates for Merck's KEYTRUDA drug which targets patients with non-small cell lung cancer. Turning to our updated FY 2017 market and company outlook, we were quite pleased with how the company started 2017. While still early in the year, the Q1 results in China and some segments of the chemical & energy markets are encouraging. We do see continued challenged conditions in the academia and government market in most geographies, as well as the global energy segment of the chemical and energy market. We also anticipate continued weak economic conditions in Europe and Japan. These cautions aside, we are encouraged by the company's growth prospects and raise our full-year core revenue growth expectations. Didier will share the details. Before I turn the call over to Didier, let me close by making a few comments on where we have come from and where we are going. Our leadership team that was put in place almost 24 months ago is delivering on our promise to increase shareholder value. We are outgrowing the market in sometimes challenging economic circumstances. For eight quarters in a row, we have delivered improved profitability. We are deploying our capital in a balanced manner, with Q1 stock repurchases of $111 million, cash dividends of $42 million, and $70 million set aside for the Multiplicom acquisition. Having built momentum, we are facing the future with confidence. We have a deep commitment to customers, a strong team, and a belief that we can deliver a superior customer experience and exceptional innovative new offerings. I look forward to answering your questions later in the call, and I will now hand off to Didier. Didier will provide additional insights on our Q1 results and updated guidance. Didier? Didier Hirsch - Agilent Technologies, Inc.: Thank you, Mike, and hello, everyone. To summarize Q1 results, they were above the high end of our revenue and EPS guidance, even as currency negatively impacted revenue by $12 million and operating profit by $4 million. The EPS beat was mostly the result of the revenue beat, and EPS was 15% higher than in Q1 of fiscal year 2016. We continue to improve our adjusted operating margin at 21.2% in Q1 and up 100 basis points versus Q1 of fiscal year 2016. And finally, our operating cash flow of $116 million was $5 million higher than in Q1 of last year. I'll now turn to the guidance for fiscal year 2017. We are raising the core revenue growth guidance of 4% to 4.5% that we provided in November by 25 basis points or $11 million. The new core revenue growth guidance is therefore 4.25% to 4.75%. However, the strengthening of the U.S. dollar since our November guidance is expected to have a negative impact of about $36 million on full-year reported revenues. Finally, we expect to generate $11 million in revenue from the Multiplicom acquisition, which closed on January 20. The net impact of the increase in core revenue guidance, negative currency headwinds, acquisition of Multiplicom, and rounding is a reduction in revenue guidance of $20 million. As a result, we now expect fiscal year 2017 revenues of $4.33 billion to $4.35 billion. Turning to EPS, we are reaffirming our November guidance of $2.10 to $2.16, even as currency and acquisition have a negative impact of $0.03, most of it currency related. There is no change to our previous guidance of $825 million operating cash flow, $200 million CapEx, and buyback of $430 million for the year. Finally, moving to the guidance for our second quarter, we're expecting Q2 revenues of $1.040 billion to $1.060 billion, reflecting typical second quarter seasonality versus Q1. The midpoint corresponds to core revenue growth of 3.5%. The sequential reduction in revenues will translate into a sequential reduction in EPS, and we expect Q2 EPS to range from between $0.47 to $0.49 or a 9% year-over-year increase at midpoint. With that, I'll turn it over to Alicia for the Q&A. Alicia Rodriguez - Agilent Technologies, Inc.: Thank you, Didier. Jonathan, will you please give the instructions for the Q&A? Operator : Certainly. Our first question comes from the line of Paul Knight from Janney Montgomery. Your question, please? Paul Richard Knight - Janney Montgomery Scott LLC : Good morning, Mike, or good evening, I should say. Could you talk a little bit about FX in China specifically? Are you selling in dollars? What are the puts and takes on the currency volatility or the strength of the dollar versus the yuan there? Michael R. McMullen - Agilent Technologies, Inc.: Hey, Paul. I'm going to start off with a good afternoon from California, and I'm going to pass it over to Didier. Didier Hirsch - Agilent Technologies, Inc.: Yes, you're correct, Paul. We are selling more than 60% of our business in U.S. dollars, and less than 40% mostly around our service and consumable business and also locally produced products in renminbi. So overall, the renminbi weakened by about 7%, if I recall, on a year-over-year basis. The impact for us in terms of the top line was about a 3-point reduction. So in local currency, our growth in China would have been mid-double digit versus low double digit as it is on a reported basis. Besides that, we are perfectly hedged in terms of the bottom line in China with local manufacturing as well as a strong presence of setting our local currency revenue. Paul Richard Knight - Janney Montgomery Scott LLC : And then lastly, Mike, on the analytical instrumentation side of the business, applied market pickup more pronounced as the quarter wrapped up? Michael R. McMullen - Agilent Technologies, Inc.: No. Actually I'd say the flow – and again, I just want to clarify. I hope it came through clear in my remarks. It really was the chemical side, the chemical energy, and we saw the order flow consistent throughout the quarter. Paul Richard Knight - Janney Montgomery Scott LLC : Great, thank you. Michael R. McMullen - Agilent Technologies, Inc.: You're quite welcome, Paul. Didier Hirsch - Agilent Technologies, Inc.: Thanks, Paul. Operator : Thank you. Our next question comes from the line of Ross Muken from Evercore. Your question, please? Scott Levitt - Evercore Group LLC : Hey, guys. This is Scott Levitt in for Ross. Michael R. McMullen - Agilent Technologies, Inc.: Hi, Scott. Scott Levitt - Evercore Group LLC : So can you guys walk me through the key drivers of demand upside in China and then tease out the core momentum in industrial versus pharma and academic? Michael R. McMullen - Agilent Technologies, Inc.: I'd say in China, what we saw from an end market perspective, it was strong across all end markets with the one exception being the chemical energy. So we saw good growth across all the end markets in China. I also would want to make a comment here about the impact of lunar New Year. You may recall in our guide discussion in last call, we talked about the fact that lunar New Year fell for us here in our fiscal Q1. Well it turned out it did have an impact on reported revenue but not as much as we had predicted. It did have impact on our recurring revenue business such as DGG and service & consumables. But on the instruments side, it was fairly limited as our order fulfillment team did a great job of converting those orders into revenue much earlier in the quarter. But I'd say we really were pleased overall by the performance in China. It looks like we're off to a good start there and good solid growth across almost all the end markets. And if you wouldn't mind, could you repeat the second question for me? Scott Levitt - Evercore Group LLC : It was just to tease out the core momentum in industrial, pharma and academic. Michael R. McMullen - Agilent Technologies, Inc.: Yeah. So I'd say there's really no momentum in academia & government right now. We're still seeing fairly subdued levels and constrained levels of funding. There's almost sort of a wait-and-see kind of attitude we're seeing in some of the agencies here, for example, in the United States. Pharma continues to perform quite strongly. As you know, we talked about as we came into 2017, we expect continued strong demand in pharma, although the growth rates would come down as we ran into some tough compares. So pharma is really a development just as we thought coming into 2017. No surprises there. And then I will say the one surprise that we had in Q1 was the fact that we finally saw some signs of growth in the chemicals side of the chem & energy market in the first quarter. Scott Levitt - Evercore Group LLC : And then just as a follow up, can you walk me through how the order book has looked in developed and industrial inclusive of the chemical & energy? And then what's your level of visibility or confidence in the sustainability of momentum given the macro and commodity data that's come out? Michael R. McMullen - Agilent Technologies, Inc.: So I'm going to pass on the first question since we stopped our reporting on orders a while back. But what I can tell you is we have good visibility going forward from, I'd say the three- to six-month timeframe, so that's typically how we can see our sales funnels. And then probably two-thirds of our revenue in the coming quarter perhaps can come from the existing backlog. So we have pretty good visibility I'd say in the three- to six-month timeframe in terms of the order funnel. But as you'll hear me talk a little bit later, I'm sure it'll come up in the Q&A, is although we are pleased to see the return of growth in the chemical side of the chem & energy market, I don't think one quarter is a trend yet, so we're still going to be keeping a close eye on that one. Scott Levitt - Evercore Group LLC : Great. Thanks, guys. Michael R. McMullen - Agilent Technologies, Inc.: Yes. Operator : Thank you. Our next question comes from the line of Derik De Bruin from Bank of America-Merrill Lynch. Your question, please? Derik de Bruin - Bank of America Merrill Lynch : Hi, good afternoon. Michael R. McMullen - Agilent Technologies, Inc.: Hey, Derik. Derik de Bruin - Bank of America Merrill Lynch : Hey. I'm just a little bit curious about the adjustment to the operating margin target for this year. You took it down by 10 basis points. Could you just – it seems like maybe you've got some others to offset, so if you can talk about sort of like how you're looking at margins and a little bit more detail, what sort of drove that. Is it all FX driven? Michael R. McMullen - Agilent Technologies, Inc.: How about I repeat the question, Didier? We had a little bit of trouble hearing it and then I'll have you answer it. So I think the question from Derik is it looks like we've brought down the operating margin guide by about 0.10%, and he was wondering if that was really driven by FX or if there's any other considerations? Derik de Bruin - Bank of America Merrill Lynch : No, I mean... Didier Hirsch - Agilent Technologies, Inc.: Thanks, Mike. Derik de Bruin - Bank of America Merrill Lynch : Yeah. Didier Hirsch - Agilent Technologies, Inc.: So in terms of the – we basically have maintained the operating margins at 21.2%. Last time it was 21.25% which rounded to 21.3%. This time, it's 21.25% that rounds to 21.2%. There's no change. The idea was to maintain it. There was a little bit of currency impact which we could have offset, so consider the operating margin unchanged at 21.25% as it was in the first half. There was no intention to reduce it except the rounding ended up tight with that. Derik de Bruin - Bank of America Merrill Lynch : Great. Great. And could you talk a little bit about how the Intuvo has been doing in terms of like you're starting to see a pick-up in sort of kind of the chemical sales. Are you seeing a lot of interest in chemical customers in this new product? Just some early feedback from what you're sort of seeing would be great. Michael R. McMullen - Agilent Technologies, Inc.: Derik, I really appreciate the opportunity to talk about that. As I highlighted in my conference call, we're also getting some nice external recognition. But what's most important is what customers are saying about the product. And we've got a lot of excitement in our customer base. Now as you know, we had indicated earlier the sales cycle here is going to be a little bit longer because the customers are going to want to check out the product. So we placed a large number of demo units. The orders are starting to come in, but I'd say it's really – we're still early in the – regarding the ramp in the volume so we're really delighted by how the customers are perceiving the new offering. The surprise for us, I have to say, has been what we've been calling the halo effect which is we're also seeing a lot of interest in our other GC platforms, in particular, the 7890 where we're out talking with customers about our new Intuvo GC and they're showing some interest in our other applications to the 7890. So it's, if you will, a halo effect. I think both speak positively about the future for our prospects in gas chromatography. I would also say that in addition to the chemical customers, those customers, particularly contract testing labs in an environmental testing lab, really like the value proposition of the Intuvo tied to the mass spec for the productivity gains. So as a reminder, I think about 6% of the applications base can be covered by this platform, and it goes beyond the chemical side of this. I was just down in Australia talking with one of our contract testing labs, and they really like the productivity benefits that they see with the product. So still too early to call a material impact on our revenue, but the early interest by customers is really quite, quite good. Derik de Bruin - Bank of America Merrill Lynch : Great. Thank you very much. Operator : Thank you. Our next question comes from the line of Brandon Couillard from Jefferies. Your question, please? Brandon Couillard - Jefferies LLC : Thanks. Good afternoon. Michael R. McMullen - Agilent Technologies, Inc.: Hey, Brandon. Didier Hirsch - Agilent Technologies, Inc.: Good morning, Brandon. Brandon Couillard - Jefferies LLC : Mike, sticking on the chemical & energy business, I think the positive experience this quarter would suggest, tell me if I'm wrong, that instruments were actually up in the quarter. And can you remind us when the last time that happened? And then secondly, when should we expect that the new GC actually begins contributing to revenue; that orders actually convert to revs? Michael R. McMullen - Agilent Technologies, Inc.: Yeah. Great question, Brandon. So I have to say it's been a while. From my calendar map, it looks like seven quarters. So it was great to finally see a return to growth in management side in the chemical & energy side. And again, just one quarter so we try not to get too far ahead ourselves, but it was an encouraging side after almost two years of declines of instrument sales in this segment. I think we're really looking at the back half of this year for we're almost starting to be talking more about into though a ramping in terms of the revenue. Again, we had indicated this last year so this is going to be a slower ramp but then typically a direct replacement product because of the need to try it out. It's so different but our view is it'll start – we'll be talking more about our revenue impact probably in the second half of this year. Brandon Couillard - Jefferies LLC : Thanks. And then the question on lasers. Any update you can share with us in terms of the progress there? And what milestone should we be looking for over the next 12 months that might inform your decision to exercise the exclusive option in there now? Michael R. McMullen - Agilent Technologies, Inc.: Great. Thanks for that question. I want to make a few opening comments and I'll pass it over to Jacob for some additional detail. But as those on the call probably recall that this was an equity investment we made in a company in Houston, Texas and the idea here is to be able to complete our development of an integrated workflow for the clinical diagnostics market and part of revision is a call option which we have in front of us, and I think Jacob perhaps you can remind everybody the timing and how you think we're coming so far. Jacob Thaysen - Agilent Technologies, Inc.: Yeah. Thanks, Mike. It's approximately a year ago we made the investment, I think it was in March, and the call option is next March in 13 months from now. So there's a little bit of time. In the meantime, we have a really good relationship with Lasergen and are working together as one team. They have the primary focus on developing the box and the rest of the genomics team is highly focused on developing the rest of the workflow including automation upfront, and of course putting interpretation in place also through the Cartagenia. And with the recent acquisition of Multiplicom, we also have panel that fits very well into the clinical market. So overall we continue to be highly excited. The program is running forward according to our planned expectations, but I think that the next you can say milestone will be when and if we decide to make the call of the Lasergen. Didier Hirsch - Agilent Technologies, Inc.: When will not be any earlier than March. Jacob Thaysen - Agilent Technologies, Inc.: No. Didier Hirsch - Agilent Technologies, Inc.: Because we don't have to. Jacob Thaysen - Agilent Technologies, Inc.: No. It will be in – right. Yeah. Exactly. Michael R. McMullen - Agilent Technologies, Inc.: Everyone wants to spend money before we have to. Brandon Couillard - Jefferies LLC : Super. Thank you. Michael R. McMullen - Agilent Technologies, Inc.: You're welcome. Operator : Thank you. Our next question comes from the line of Isaac Ro from Goldman Sachs. Your question, please. Michael R. McMullen - Agilent Technologies, Inc.: Hi, Isaac. Isaac Ro - Goldman Sachs & Co.: Good afternoon, guys. Thank you. Hi. So a question for you on just your top line outlook. There's been a lot of focus around the macro environment, a lot of factors that are interesting but in a lot of ways not in your control. So I'm interested in the things you can control, specifically market share, your product cycles. I mean it sounds like your guidance is a little bit higher because of the macro but not necessarily because of the former items, new products, market share. I'm curious, is there any evidence in the quarter here where you guys see a little bit better about your ability to do better than your guidance if in fact product cycles play out of sync for any signposts here where you feel like you've got good momentum going through the rest of the year either with TC or in diagnostics, things like that? Michael R. McMullen - Agilent Technologies, Inc.: Isaac, I appreciate the opportunity to clarify remarks. So I think the reason we've been able to have this ability to continue to, from our perspective, outgrow the average of our peers is the strength of our new offerings. So it's very clear by our growth rates and as we look at some of the – all the data, particularly on the Life Sciences and Applied Markets Group side, we can see where we're picking up a couple of market share. That's why I highlighted in my remarks the value contribution, if you will, on the new offerings. So we think we're picking up shares. I think that when we look at our guide, we're above what our peers are talking about relative to core revenue growth. I would tell you, if you're thinking about upside for the company, I think it really hinges on chemical energy. And let me share with you our thinking as we've put together the guide, particularly for the second quarter. Perhaps I already tipped my hand here, but we said okay, we were encouraged by the fact that the chemical side of the market of that segment is growing, which as a reminder, is about 50% of the total. We're encouraged by the signs but said listen, one quarter is not a trend. So right now, what we're going to do, we're assuming flattish overall growth in our Q2 guide. What that means is if there's some growth there, that would represent some upside to our current guide. So I think that's one macro factor that could help us on the top line if in fact this return to growth is sustained. But I would want to reemphasize the fact that we think these new offerings are really making a difference in the marketplace and allowing us to pick up some sustained momentum. Isaac Ro - Goldman Sachs & Co.: Okay, that's helpful, and then a second question on diagnostics. You mentioned the integration there has been completed. Aside from the obvious cost savings that you'll realize, can you talk a little bit about the opportunity to execute either in terms of share or new products or channel reach, anything that you think can really help drive better growth in that business now that it's more integrated? Michael R. McMullen - Agilent Technologies, Inc.: Let me make a few comments here. And then, Jacob, if I miss anything, feel free to chime in here. But we had focused on the integration of the former Dako business on Agilent mainly as a cost integration savings and simplification of the platform. And as you know, when I came into this role, I felt we really needed to integrate the business, and we've been on a pretty aggressive path since then. But the real benefit is exactly what you described, which is the ability for us to have an integrated reach to the customers where we can have one commercial interaction with the customer. And now we're able to integrate our sales forces and have a combined sale portfolio. So without going into a lot of the details inside the company, we really weren't able to leverage the full power of our sales force, which is where we combine our genomics and diagnostics sales force until now when we have them on the same systems for revenue recognition and commission paying. So, Jacob, anything else you might want to add to that? Jacob Thaysen - Agilent Technologies, Inc.: No, Mike, I think you said it very clearly. Michael R. McMullen - Agilent Technologies, Inc.: Okay. I got it right. All right, thanks. Isaac Ro - Goldman Sachs & Co.: Okay, thank you, guys, appreciate the detail. Michael R. McMullen - Agilent Technologies, Inc.: You're quite welcome. Operator : Thank you. Our next question comes from the line of Jack Meehan from Barclays. Your question, please. Jack Meehan - Barclays Capital, Inc.: Hi, thanks. Good afternoon. Michael R. McMullen - Agilent Technologies, Inc.: Good afternoon, Jack. Jack Meehan - Barclays Capital, Inc.: Hi. So, Mike, I wanted to get your perspective on the strategy with the Multiplicom acquisition and just your desire to continue building out the diagnostics portfolio in different specialty areas. Michael R. McMullen - Agilent Technologies, Inc.: I'm going to make a little bit of comment, and then, Jacob, I'll allow you to provide the more lengthy response this time. So the overall theme here is we're continuing to try to build out our genomics portfolio, particularly as it focuses into clinical research and ultimately into the routine diagnostics segment. And why don't you just describe for the audience why we bought the company and what we're hoping to be doing. Jacob Thaysen - Agilent Technologies, Inc.: Let me do that, Mike. And again, the overarching strategy for DGG and one reason also why the integration of Dako is so important is that we see a tremendous opportunity in the cancer diagnostics space. Molecular profiling would be a key element in the cancer diagnostic going forward together with sustaining where pathology – the Dako pathology business is very strong today. So what we saw as the opportunity of Multiplicon is that with our workflow that we're building together with Lasergen and with the Cartagenia integration, we could see that our current target investment business, SureSelect, is very strong on larger panel up to Exon business, which really fits the genetic disorder space. If we go into cancer, you are looking for more targeted panels, and there we could see that the Multiplicon offering was stronger than what we have in-house. So we thought it was a very good opportunity both short term to leverage our current sales force to guard and fill a broader range of investment portfolio. And then of course, in the future integrate it into the full workflow together with the Lasergen, the Cartagenia, and use that as an opportunity to go out with a fully validated system in the future. Jack Meehan - Barclays Capital, Inc.: That makes sense, and then one follow-up just on margins. It looked like you had a really nice progression here in LSAG in the quarter. I was curious if there was anything worth flagging there. And then maybe just conversely just in CrossLab, was any of that related just to a little bit of slower growth on the consumables side, or just anything worth highlighting would be great? Thank you. Michael R. McMullen - Agilent Technologies, Inc.: Didier, do you want to take that one? Didier Hirsch - Agilent Technologies, Inc.: Yes. I would say, regarding DGG, no, we consider this as being the new normal. I'm looking at Jacob, and he agrees. And regarding ACG, a slight reduction on the gross margin. What happened is there was a little bit higher than normal inventory adjustments, and that was one factor, and then a little bit also on the currency front. And the last factor which impacted ACG but not Agilent overall is how at the beginning of the year we changed our locations among our three businesses, and Mark [Doak] in ACG was fortunate to grow faster than the other businesses, basically saw a little bit of a bigger increase in allocation of our shared services. Again, no impact to Agilent overall, but it did explain a little bit of the ACG year-over-year performance. Michael R. McMullen - Agilent Technologies, Inc.: And, Didier, maybe I can just maybe finish the story. I have a few comments on LSAG as well. Didier Hirsch - Agilent Technologies, Inc.: Yes. Michael R. McMullen - Agilent Technologies, Inc.: So on the instruments side, we obviously will benefit from the growth. But also as we've mentioned in prior calls, we have a series of initiatives underway and our order fulfillment team really focusing on improving the gross margin. I think they're starting to see somewhat of an impact of those efforts on the instrumentation side of our business. Jack Meehan - Barclays Capital, Inc.: Thanks, guys. Operator : Thank you. Our next question comes from the line of Dan Leonard from Deutsche Bank. Your question, please? Dan Leonard - Deutsche Bank Securities, Inc.: Thank you. First question... Michael R. McMullen - Agilent Technologies, Inc.: Hey, Dan. Dan Leonard - Deutsche Bank Securities, Inc.: Hello. How are you thinking about the pacing of pharma demand throughout the year? And I ask because the Q1 comparison was very difficult and I was surprised that the number came in as healthy as it did in pharma, given that comp. Michael R. McMullen - Agilent Technologies, Inc.: Yeah, we've been pretty consistent in our view. We think it's going to be mid- to high-single digits. So we would expect our ability to sustain growth rates coming in this area throughout the year. So the first quarter, you're right and I appreciate the recognition. We had really stellar growth Q1 of last year so we were pleased that's how the numbers are coming in. And I'd say, Didier will probably expect some kind of similar patterns through the year. Didier Hirsch - Agilent Technologies, Inc.: Yeah. Michael R. McMullen - Agilent Technologies, Inc.: Yeah. Didier Hirsch - Agilent Technologies, Inc.: Yeah. And it's similar to what basically the guidance we provided last November. We were talking about 6% kind of core revenue growth for pharma for the whole year and we are about at that level. Michael R. McMullen - Agilent Technologies, Inc.: Yeah. Dan Leonard - Deutsche Bank Securities, Inc.: Okay. And then a follow-up for Jacob. Jacob, I feel like you've often tried to temper expectations for the PD-L1 from a sizing perspective. But now that that assay has moved into first-line lung cancer, is that something where that by itself could cause a notable acceleration in DGG revenue growth in the back half of the year or sooner? Jacob Thaysen - Agilent Technologies, Inc.: So I will say first of all, we continue to be very pleased with the uptick off the PD-L1. Last year was really about second line and this year will be about first line so we expect a pickup again. I do believe that we will see a contribution to our performance, but I don't think that it will bring us up in the double-digit growth area as one assay is not making the whole DGG. But we continue to see a very strong contribution and I'm very pleased with what we see in PD-L1. Dan Leonard - Deutsche Bank Securities, Inc.: Okay, thank you. Operator : Thank you. Our next question comes from the line of Doug Schenkel from Cowen & Company. Your question, please? Ryan Blicker - Cowen & Co. LLC: Hi. This is Ryan Blicker on for Doug. Thank you for taking my questions. Michael R. McMullen - Agilent Technologies, Inc.: Sure, Ryan. Ryan Blicker - Cowen & Co. LLC: Can you explain a little bit more on what you're seeing from customers in Europe overall and by end market and how you're thinking about growth in Europe for the rest of the year? Michael R. McMullen - Agilent Technologies, Inc.: Yes, we remain fairly conservative on our outlook on Europe in general. I think we're basically assuming flat; not a lot of growth at all in Europe. And I think the – it varies a bit by end market. I think the most subdued are those that are the recipients of government funding. So the government funding side of the European market is really, really, quite soft as well as the chemical and energy market. And I haven't really talked about this yet in the call, but the U.S. and European refineries are really under a lot of margin pressure and they're getting new competition coming in from the U.S. shale gas producers who now can produce alternatives with ethane to the naphtha products that come off of crude refineries. So I think the chem & energy guys are still quite cautious. I think the bright spots are probably the pharma and food testing side. Those areas of investment ties directly to the human health investments that those parts of the world want to make. Ryan Blicker - Cowen & Co. LLC: Okay. Michael R. McMullen - Agilent Technologies, Inc.: But overall, we're fairly subdued on Europe as of now. Ryan Blicker - Cowen & Co. LLC: Okay. Thank you for that. And I know there's been a lot of questions here, so hopefully not to beat a dead horse but can you expand a little bit more on what you're seeing specifically from refining and E&P customers outside of the revenue performance in the quarter? And I guess given the stabilization of oil prices as well as the early interest you're seeing for the new GC and what seems to be some early indications of CapEx spending for at least U.S. E&P companies next year, maybe why your guidance there isn't a little bit overly conservative? Thank you. Michael R. McMullen - Agilent Technologies, Inc.: Thanks for the question. I really appreciate the opportunity to talk a bit more about this. So this again for the audience, when we talk about our chemical energy business, we talk about it in three primary segments : 15% in exploration related; 35% in refining related, so about half in what I would say energy; and then about 50% on the chemical side. So that 50% on the chemical side grew in the first quarter, energy did not. And I think it's pretty well-publicized that the exploration side still remains fairly subdued. Again, there's interest coming from customers in the exploration side but we haven't seen it yet turn into revenue. I think the real interesting thing is what's going on with the refinery side because it's sort of a mixed story here because the U.S. and European refiners, their profits continue to be quite slim and I think in 2016 they're about the half of the level of 2015. And what's going on here really are a flat demand, and as I mentioned earlier, increased competition for natural gas alternatives. These guys continue to relentlessly manage CapEx and OpEx expending. So hopefully, that will translate into an interest in our new offerings which gives them a cost advantage so that's why we talk a lot about the Intuvo GC and what it might do in this segment. The Asia refining site is a little bit different which is they're actually adding capacity so there's a number of projects that are still set to come online in 2017 and 2018 which could lead to some new demand. I wouldn't use the word conservative. I would use the word perhaps prudent so what we're saying is one quarter is not yet a trend but I would be very forthright to say this would represent upside to our guide if this growth rate continues in this segment. Hopefully that's helpful insight. Ryan Blicker - Cowen & Co. LLC: Very helpful, and it makes sense given the point you made. Thank you very much. Operator : Thank you. Our next question comes from the line of Tycho Peterson from JPMorgan. Your question, please. Tycho W. Peterson - JPMorgan Securities LLC : Hey. Thanks. Apologies, I'm going to ask another one on Intuvo. Michael R. McMullen - Agilent Technologies, Inc.: No problem. Tycho W. Peterson - JPMorgan Securities LLC : But when we think about the upgrade cycle here, you've got 150,000 or so GC systems out there, it's been a while since we've had a product refresh, how do you think about the duration of the upgrade cycle? Is it kind of a four-year cycle or could be a little bit longer? Obviously some caution in the near-term is warranted but I'm just trying to think about the out years. Michael R. McMullen - Agilent Technologies, Inc.: Yes, that's a great question and you have the numbers right. So when we look at the install base instrumentation, it's well in excess of 150,000 so a huge addressable market for us so that's why we've had a lot of excited about the offering. I think this is a multiyear upgrade cycle, and I think I'd put three to five years, four to five years is probably a good number given our experience in the LC side, so. Tycho W. Peterson - JPMorgan Securities LLC : Okay. And then just one follow-up around the question earlier on Europe. It was up mid-single digit last quarter. You're flat this quarter. Did something change in the market share from quarter to quarter? Michael R. McMullen - Agilent Technologies, Inc.: No. Not really, Tycho. The numbers can bounce around a bit depending on quarter to quarter, but we really didn't see anything significantly different in terms of our competitive position. I think it's just been a bit a matter of timing of business closing. So Didier, I don't know if we really saw anything unusual? Didier Hirsch - Agilent Technologies, Inc.: Nothing unusual, yeah. Tycho W. Peterson - JPMorgan Securities LLC : Okay. Thanks. Michael R. McMullen - Agilent Technologies, Inc.: You're quite welcome. Operator : Thank you. Our next question comes from the line a Catherine Ramsey from Robert W. Baird. Your question, please. Catherine Ramsey - Robert W. Baird & Co., Inc. (Broker): Hey, guys. Thanks for the questions. Michael R. McMullen - Agilent Technologies, Inc.: You're welcome. Catherine Ramsey - Robert W. Baird & Co., Inc. (Broker): First, just given that you guys have an extra month that you're reporting out today versus most of your peers, and I know you touched on chemical energy being pretty consistent throughout the quarter but anything you saw in January in other end markets that was different from the first two months of the quarter? Michael R. McMullen - Agilent Technologies, Inc.: No. No, not really. The seasonality of our business in Q1 was very consistent with historical patterns so nothing really unusual. Now typically we see a lot of activity from shipment and order bookings in December for the calendar year end money and patterns are what we've seen in prior years. Catherine Ramsey - Robert W. Baird & Co., Inc. (Broker): Okay, and then one clarification on margin. I thought I heard you say that DGG is at the new normal. I think you talked in the past about driving that to be more of a 20% margin business. Didier Hirsch - Agilent Technologies, Inc.: Yes, I would say it's the new normal for Q1. Michael R. McMullen - Agilent Technologies, Inc.: An improvement. Didier Hirsch - Agilent Technologies, Inc.: An improvement. I was comparing to obviously last time. So what we are – I should say we are migrating towards the new normal. And thanks for asking for a clarification, because we – Jacob is still very, very, very – I mean, he's going after the 20%. Michael R. McMullen - Agilent Technologies, Inc.: Yeah. He's not off the hook. Catherine Ramsey - Robert W. Baird & Co., Inc. (Broker): Okay, perfect. Thank you. Michael R. McMullen - Agilent Technologies, Inc.: You're welcome. Operator : Thank you. Our next question comes from the line of Puneet Souda from Leerink Partners. Your question, please? Puneet Souda - Leerink Partners LLC : Hi, Mike, Didier. Thanks for taking my questions. Just briefly on China, could you parse out for me in terms of the spending there? The instrument spending, was it more driven by the CFDA changes, or was it more on the food and environmental? And what's specifically benefiting there in terms of applications-wise? Michael R. McMullen - Agilent Technologies, Inc.: Thanks for the opportunity to provide some more insight here. So I think there's a macro statement above all three of those market segments, which are specific government policies that are driving sustained growth in China. So the CFDA is focusing on really changing the fundamentals of the Chinese pharma industry, and the Chinese pharma companies are investing aggressively to adhere to the new rules. Lots going on in terms of the environmental cleanup efforts consistent with the China five-year plan. There's been a lot more publicized work around lead in water, for example. So I'd say the focus in China environmentally, both in terms of water, soil, and air analysis is really going well. I think I may have mentioned this in the prior call, but the real step up has been in the area of soil analysis for remediation of construction areas. And then finally, the growth in food safety continues. So I really think the government policies across those three segments are really driving very strong growth for us in China. Puneet Souda - Leerink Partners LLC : Got it, thanks. And just a quick follow-up, in terms of U.S., you pointed out forensic funding somewhat being weak. Could you parse that out a little bit in terms of what's driving in terms of regulation there, or how should we think about the rest of the year? Michael R. McMullen - Agilent Technologies, Inc.: I think you should just think about this as the nature of the beast. This space, and particularly in the United States, tends to be very lumpy with lots of big deals. So it just so happened we had some big deals last year, we didn't have them this year. So we're not seeing anything fundamentally different in terms of the funding levels in the United States beyond there does seem to be some level of wait-and-see to figure out – people are trying to figure out where all the new government policies might land here in 2017. But I wouldn't read too much into the first quarter number. Our view was just a by-product of the timing of deal activity. Puneet Souda - Leerink Partners LLC : Great, thanks for taking my questions. Michael R. McMullen - Agilent Technologies, Inc.: You're quite welcome. Operator : Thank you. Our next question comes from the line of Tim Evans from Wells Fargo. Your question, please? Tim C. Evans - Wells Fargo Securities LLC : Thanks. I think I'll take the obligatory tax reform question this quarter. Michael R. McMullen - Agilent Technologies, Inc.: Okay, Tim. We've been waiting for that one. Tim C. Evans - Wells Fargo Securities LLC : Yeah, right? I know that the repatriation issue would be a positive for you, but if you could, just speak beyond that to particularly the border tax adjustment issues to help us understand some of the nuance there. Michael R. McMullen - Agilent Technologies, Inc.: Sure, Tim. I'm going to pass it over to Didier. He's done some high-level analysis on how we think about it. Didier Hirsch - Agilent Technologies, Inc.: Firstly, in terms of the cash repatriation, you're absolutely right, it would be a positive, not just when it's effective but also on an ongoing basis as we continue to generate the lion's share of our cash offshore. And so on an ongoing basis, we'd have access to that cash, which is great. Then regarding the border tax adjustment, yes, we looked at our imports and exports like everybody else, and we are fairly balanced. We are very balanced. So the level of imports and level of exports are about similar. And we export about 70% of the production in the U.S. and we import in the U.S. about 70% of what is manufactured outside. So net-net, it will be very neutral. Michael R. McMullen - Agilent Technologies, Inc.: Yeah. Didier Hirsch - Agilent Technologies, Inc.: So the effects of the tax reform that we are eager to understand to know more about and read all the details. But at this point in time, it's speculation. Tim C. Evans - Wells Fargo Securities LLC : All right, thanks for that. Didier Hirsch - Agilent Technologies, Inc.: Sure. Operator : Thank you. Our next question comes from the line of Dan Arias from Citi. Your question, please? Bryan A. Kipp - Citigroup Global Markets, Inc. (Broker): Hi, guys. This is actually Bryan Kipp on behalf of Dan. Michael R. McMullen - Agilent Technologies, Inc.: Hi, Bryan. Bryan A. Kipp - Citigroup Global Markets, Inc. (Broker): Hi. How are you doing? Michael R. McMullen - Agilent Technologies, Inc.: All right. Bryan A. Kipp - Citigroup Global Markets, Inc. (Broker): It's been about three years since we saw the consolidation of the Chinese food safety. I think it was the FDA but they were restructuring food safety standards around there. You saw strong year-over-year uptick in food, with China being cited as a driver there. How much of that was food safety, one? And two, what inning would you say we are in the whole investment cycle around food safety in China? Michael R. McMullen - Agilent Technologies, Inc.: You have a great recollection of the progression of the agencies in China because, as you know, a couple years ago we were pointing to a slowdown in this area because of the reorganization. So I'd say we're probably still in the early innings of this. If you follow the typical five-year plan, this is an area of focus, so I think we're probably still in the early innings of the growth in the food area. I think it's primarily food safety, but I will tell you what is growing very quickly is the food authenticity. We're looking for various forms of counterfeiting of products that may be trying to find their way into the market. So it's still being driven by food safety, but the authenticity side of things is really growing quite strongly. Both from a government customs perspective, but also our private sector clients also want to ensure some testing is done. Bryan A. Kipp - Citigroup Global Markets, Inc. (Broker): Helpful. And just to pivot. Didier, you cited some inventory write downs as a headwind for gross margins in the quarter, but there's been a lot of reference to new product launches over the last call it year or year and a half that really accelerated organic growth. How should we think about the progression of gross margin throughout the year and how much pricing should we think will flow through in 2017? Didier Hirsch - Agilent Technologies, Inc.: Yeah. We are overall – I mean certainly ACG was not impacted per se on the new product and things like that. But you are absolutely correct that whenever we introduce new products it's an opportunity to increase our gross margin for two reasons. Number one is we know the design our products using the latest and greatest of value engineering kind of techniques. And then second, because we introduce products that are truly differentiated, we're able to price them into – it's a great example. So we do – you will see the gross margins going up over time and throughout the year. I cannot quantify precisely the impact of pricing, new product introduction and a few other things. And again, Q1 was a little bit special, especially for ATG because of the fact that I noted. Bryan A. Kipp - Citigroup Global Markets, Inc. (Broker): Thank you. Michael R. McMullen - Agilent Technologies, Inc.: Okay. Didier Hirsch - Agilent Technologies, Inc.: Thanks. Operator : Thank you. Our next question comes from the line of Jonathan Groberg from UBS. Your question please. Jonathan Groberg - UBS Securities LLC : Hey, guys. Mike, can you just remind us how big your target enrichment business is today? Michael R. McMullen - Agilent Technologies, Inc.: Excuse me Jonathan, I had a little bit difficulty hearing the question. Jonathan Groberg - UBS Securities LLC : Can you just remind us how big your target enrichment business is today? Michael R. McMullen - Agilent Technologies, Inc.: It's an important part of Jacob's Genomics business but we don't provide a level of detail outside the company, sorry. But it's a nice business for us. I'll just leave it at that. Jonathan Groberg - UBS Securities LLC : Okay. And then I just had one other one on genomics, I think you guys had an investment in Gen9 which just got bought by a company called Gingko. Does that have kind of – I guess, how are you thinking about genomics and the like at the moment? Michael R. McMullen - Agilent Technologies, Inc.: Yes. I think you're referring to Gen9 investment. And Gen 9has been purchased by Ginkgo and Agilent was a shareholder in Gen9. Overall, we think there's aspects of the synthetic biology markets that are going to be quite strong in terms of growth. A lot of tools just out there with some of our customers in the Bay Area, for example, as well as Ginkgo. So they're using our tools. Not clear to me though whether companies will be able to build a sustainable business around R&D services in SimBio, and that's why we went in a different direction in terms of our view of Gen9. And Jacob, anything else you'll add to that? Jacob Thaysen - Agilent Technologies, Inc.: I'll just add that we continue to be a vendor to the new Ginkgo... Michael R. McMullen - Agilent Technologies, Inc.: That's right, thanks for that. Jonathan Groberg - UBS Securities LLC : Okay. Thanks. Michael R. McMullen - Agilent Technologies, Inc.: All right. Thanks a lot, Jon. Operator : Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Alicia Rodriguez for any further remarks. Alicia Rodriguez - Agilent Technologies, Inc.: Thank you, Jonathan. So on behalf of the management team, I wanted to thank everybody for joining us on the call. And if you have any questions, please give us a call in IR, and we'd like to wish you a good rest of the day. Thank you. Bye-bye. Operator : Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,017	2	2017Q2	2017Q2	2017-05-22	2.085	2.147	2.322	2.423	3.28	23.79	24.5	Executives: Alicia Rodriguez - VP, IR Michael McMullen - CEO, President and Director Didier Hirsch - CFO and SVP Mark Doak - SVP and President, Agilent CrossLab Group Jacob Thaysen - SVP and President, Diagnostics & Genomics Group Patrick Kaltenbach - SVP and President, Life Sciences & Applied Markets Group (LSAG) Business Unit Analysts : Joel Kaufman - Goldman Sachs Group Mike Sarcone - Deutsche Bank Tycho Peterson - JPMorgan Chase Stephen Beuchaw - Morgan Stanley Samuel Couillard - Jefferies Douglas Schenkel - Cowen and Company Luke Sergott - Evercore ISI Derik De Bruin - Bank of America Merrill Lynch Puneet Souda - Leerink Partners Jack Meehan - Barclays Daniel Arias - Citigroup Sara Silverman - Wells Fargo Securities William March - Janney Montgomery Scott Catherine Schulte - Robert W. Baird Operator : Good day, ladies and gentlemen, and welcome to the Agilent Technologies Second Quarter 2017 Earnings Conference Call. [Operator Instructions]. I would now like to turn the floor over to Alicia Rodriguez, Vice President of Investor Relations. Please go ahead. Alicia Rodriguez : Thank you, Karen, and welcome, everyone, to Agilent's second quarter conference call for fiscal year 2017. With me are Mike McMullen, Agilent's President and CEO; and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Patrick Kaltenbach, President of Agilent's Life Science and Applied Markets Group; Jacob Thaysen, President of Agilent's Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. 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. You will find an investor presentation along with revenue breakouts and currency impacts, 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 Mike 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 refer to core growth -- core revenue growth, which excludes the impact of currency, the NMR business and acquisitions and divestitures within the past 12 months. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year. Guidance is based on exchange rates as of the last business day of the reported quarter. 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 let me turn the call over to Mike. Michael McMullen : Thanks, Alicia, and hello, everyone. I'm very pleased to announce that the Agilent team delivered another excellent quarter with both revenue and earnings well above the high end of our guidance. We continue to deliver above market growth. Revenues of $1.10 billion exceeded the high end of our February guidance by $42 million and are up 9% on a core basis. Our adjusted EPS of $0.58 is $0.09 above the high end of our guidance. Adjusted EPS is up 32% over the second quarter of last year. We delivered an adjusted operating margin of 22.1%, up 270 basis points from a year ago. This is our ninth quarter in a row of improving operating margins. Let's now take a closer look at the better-than-expected Q2 performance. The story for the quarter are growth well above expectations in the chemical and energy, pharma and European markets, while our Asia business remains strong. The lead story was the stronger-than-expected pickup in the chemical and energy market with 14% core growth. This comes on the heels of return to modest growth last quarter after 7 consecutive prior quarters of decline. What's driving this higher-than-expected growth in our chemical and energy business? While the exploration segment remains challenged, the growth is broad-based across all geographies and product categories, particularly gas chromatography, spectroscopy and aftermarket services and consumables. Chemical and refining customers are increasing their CapEx purchases. Our customers in material and mining segments have also started reinvesting after a prolonged period of declining sales. Core growth in pharma, 12% against a difficult compare, also exceeded expectations. Demand continues across our pharma spectrum with highest growth in the biopharma segments and our NASD business. We are seeing strong customer interest in our new offerings and across our portfolio. Our broad and differentiated opportunities in chromatography, spectroscopy, mass spectrometry, services and chemistries well position us to capitalize on a strong pharma demand. A few other end market comments. Our food business was up 1% against a difficult compare of 25% core growth last year. Food market fundamentals remained sound. Environmental and forensics were up 7% on the strength in the Americas and Europe. As expected, academia and government market funding conditions remained weak, with our business down 2% for the quarter. Geographically, Europe exceeded our expectations with 10% core growth. Except for academia and government, European growth was across all market segments with particular strength in the applied markets. Asia growth remains strong at 10%, with China delivering high single-digit growth against last year's growth of nearly 40% and in line with our expectations. Let's now turn to specifics for our business group. The Life Sciences and Applied Markets Group delivered core revenue growth of 6%. Growth was led by higher-than-expected strength in chemical energy, pharma and environmental. From a product perspective, performance were broad-based across the portfolio with strength in chromatography, mass spectrometry, spectroscopy and cell analysis. We continue to strengthen our instrumentation solutions portfolio. In large, we introduced the 6495B Triple Quadrupole LC/MS system. This new offering provides greater sensitivity and accuracy for applications such as food safety and environmental testing. We also added to our portfolio of solutions in biopharma with the introduction of the Agilent 6545XT AdvanceBio LC/Q-TOF MS system. This system optimizes results for scientists seeking to characterize biomolecules that could be the basis for new therapies. As we continue to see the external recognition of innovation and market leadership, at Pittcon 2017, Agilent won 2 prestigious Scientist Choice Awards, including Best New Separation Product of 2016 for the 1260 Infinity II LC system and Best Webinar Series of 2016 for our series on solutions and biopharmaceutical discovery and development. At the Annual Conference of China Scientific Instruments, the gasoline Intuvo 9000 Gas Chromatograph System was selected as the Green Product of the Year and the Agilent 5977B GC/MS system won for the Most Popular Scientific Instrument. At this same China conference for the second year in a row, Agilent was recognized as the most influential foreign manufacturer. Our pipeline of new products are strong, and we're looking forward to the upcoming ASMS Conference on their latest innovations from Agilent. The Agilent CrossLab's group's strong performance continues with core revenue growth of 10%, well distributed across most regions and end markets. Our enterprise services and consumables growth was standout for the quarter. Finally, the Diagnostics and Genomics group delivered core revenue growth of 13% while driving improvements in our operating margin. Growth was broad-based across pathology, companion diagnostics with particularly strong growth through our nucleic acid, CDMO business. We continue to bring compelling new offerings to our customers. We introduced a new Target Enrichment Solution for next-generation DNA sequencing, Agilent SureSelect Clinical Research Exome V2. This solution delivers more than 1,000 additional disease-relevant targets compared to earlier version. We introduced Agilent's first CGH assay for diagnostic use, the GenetiSure Dx Postnatal Assay. This assay will enable to detect genetic anomalies earlier and more accurately than traditional methods. In a significant win, Agilent was named the primary IHC and special stains vendor for Quest Diagnostics. This is a testament to the advantage of our standing workflow solution. As a reminder, the integration of the former Dako business under Agilent's systems was completed in Q1, and we're starting to see the bottom line benefits of more streamlined cost structure. We are in the early phase of integrating the Multiplicom acquisition into Agilent and even more excited to have the Agilent Multiplicom team to be part of Agilent. Coming off the strong start to 2017 in the past 2 quarters, how are we thinking about the coming quarters? Let's start with our lead story for the quarter, the chemical and energy market. We are pleased to see two consecutive quarters now of growth in the chemical and energy market. However, it is early, and we're not yet ready to call a cyclical recovery. We do remain confident in our ability to capture market share in this market segment irrespective of market conditions. We are the recognized leader in this space with an increasingly strong value proposition for our customers. Looking ahead at our other end markets, with the exception of the academia and government markets, we see solid market conditions for the pharma, food, environmental and clinical and diagnostics market. Specific to Parma, investment levels remained strong, but we do expect some declining growth rates due to increasingly difficult compares. And a few additional comments on academia and government. We are expecting a continued weak funding environment across most geographies with the exception of China. In the United States, recent approval of the U.S. Federal budgets through September is an encouraging sign, but we've not set -- we have not yet seen funds being released. Geographically, we expect the U.S. and China to grow consistent with prior expectations, while the growth trajectory in Europe is uncertain. The outlook for Europe is highly dependent on the macroeconomic environment continuing to improve. We do not expect European government and academia spending to improve, and we are taking a wait-and-see approach on the European chemical and energy market, both major contributors to overall European performance. These cautions aside, we are excited about the company's growth prospects and the steps we are taking to position the company for future growth. We are raising our full year core revenue growth and earnings expectations. Didier will share the details later in our call. Before I turn the call over to Didier, let me close with a few comments. Q2 '17 marked the 2-year anniversary of this Agilent leadership team being put in place and the full initiation of our company-wide transformation initiatives. Over 2 years ago, we outlined a path to increase shareholder value that was focused on outgrowing the market, expanding operating margins on an organic basis and deploying capital in a balanced manner. We have delivered on our shareholder commitments every quarter since then. We have continue to outgrow the market and increase profitability each quarter often in challenging and economic circumstances. We have improved operating margins by 300 basis points during this period with a company-wide drive for continued profitability improvements. During the same period, we deployed our capital in a balanced manner with acquisitions and strategic investments of $547 million, cash dividends of $334 million and share repurchase of $889 million. Behind these results are an energized Agilent team with a relentless commitment to customers. In our Agilent DNA is our team's ability to drive customer-focused innovation coupled with operational excellence. It is this powerful combination that will continue to fuel our future growth and earnings expansion. I look forward to answering your questions later in the call and will now hand off to Didier. Didier will provide additional insights on our Q2 results and updated guidance. Didier? Didier Hirsch : Thank you, Mike, and hello, everyone. As Mike stated, we delivered another strong performance this quarter, 9% core revenue growth, 270 basis points of operating margin expansion, 32% EPS growth and $257 million in operating cash flow even after contributing $25 million to our U.S. pension plan. The revenue performance drove most of the operating margin and EPS performance. During the quarter, we bought back 1.64 million shares of Agilent stock at an average price of $50.60 and paid $43 million in dividends. I will now turn to the guidance for our third quarter. We expect Q3 revenues of $1.06 billion to $1.08 billion and EPS of $0.49 to $0.51. At midpoint, revenue will grow 4% on a core basis. As Mike stated, at this stage, we are not ready yet to call a cyclical recovery that assumes the sustainability of Q2's strong chemical and energy and European markets. Now to the guidance of fiscal year 2017. We are raising the midpoint of our revenue guidance by $30 million, including $10 million due to currency. Thus, we're increasing our core revenue growth guidance at midpoint from 4.5% to 5%. We're also raising the midpoint of our EPS guidance by $0.05 including about $0.005 coming from FX. There is no chance to operating cash flow guidance of $825 million and CapEx guidance of $200 million. With that, I'll turn it over to Alicia for the Q&A. Alicia Rodriguez : Thank you, Didier. Karen, will you please give the instructions for the Q&A? Operator : [Operator Instructions]. Our first question comes from the line of Isaac Ro with Goldman Sachs. Joel Kaufman : It's actually Joel in for Isaac. Appreciate all the chemical and energy end market color you guys provided. But just from a company-specific perspective, could you maybe quantify how much the Intuvo 9000 product cycle contributed to the organic growth this quarter? Michael McMullen : How about I make a few comments about our gas chromatography business and I'll turn it over on to some specifics on the Intuvo GC launch? So in -- we know the very strong performance in the chemical and energy as well as environmental market for the company in Q2, and a contributor of that was the performance of our gas chromatography business, high single-digit growth we saw in gas chromatography mainly through our 7890 core product line. As you know, we've indicated in previous calls that Intuvo will take some time to ramp and that we were expecting to be a more material impact on the company's P&L as we went into the latter parts of this year into FY '18. So perhaps, you can give a little color, though, Patrick, on how the Intuvo launch has actually come along and how customers respond to the offering. Patrick Kaltenbach : Okay, yes. Thank you, Mike. And so we are very happy with the launch. We have seen exciting feedback from our first customers out there. That said, we are still in the ramp phase with the product. We are still placing a lot of demo units out there. The product is quite different into use -- user interface, et cetera, in used model compared to our standard product of 7890. We have put a lot of emphasis on usability, ease-of-use. So customers really want to touch and see it first before they make a buying decision. And as I said, the feedback is very positive so far from the customers we have seen. We are ramping the product. It has not been a significant contributor to revenues this quarter yet, but we are very confident that we have a real winning product in our hands here, and it will make a more significant impact in the quarters to come. So we are, I would say, bullish on the outlook. But for this quarter, it was not a very significant contributor yet. Joel Kaufman : Very helpful. And then in the context of the revenue and earnings upside we've seen throughout the first half of the year, are there any R&D programs or maybe channel investments that you guys are accelerating into the back half of the year? Michael McMullen : I'd say we've been really pretty much staying on our plan on record so -- which, as you know, has been to invest at a higher level on the average in the industry and R&D. And I think I've been pretty transparent in some prior calls that we also were building a lot -- adding a lot more a channel coverage and specialization, particularly in such areas such as biopharma. So I think we're just tracking to the plan. And as we said, we were delighted by the Q2 revenue results. Operator : And our next question comes from the line of Dan Leonard with Deutsche Bank. Mike Sarcone : This is Mike Sarcone in for Dan Leonard. So another question on the chemical and energy end market. I think you mentioned that exploration remains challenged. So does that mean you did see an improvement on the refining side in the energy segment? And can you just elaborate on that and as well as the chemical performance? Michael McMullen : Sure, happy to. So now just as a reminder for the audience, when we look at our chemical and energy market segmentation, historically, about 15% of our business has been in exploration. And I'd say that continues to be down very strongly, so no signs of real life there at all. The other 35% of the total is in the refining area, and we have started to see some levels of reinvestment in the refining. And then also in the chemical side, which makes up the other 50%, we've seen investments starting up there again. Inconclusive in the space, we also report our sales into the mining and materials segments. So I'd say the 85% of the segment shows signs of life, though not yet ready to call a full cyclical recovery. The other 15% in exploration remains down. Mike Sarcone : And if I could just pivot to biopharma. It seemed like through the quarter, end market performance diverged geographically for some of your peers or other tools players with exposure to the end market. And by that, I mean, there's also some underperformance in North America. Did you see any of that in your biopharma business? Michael McMullen : No, no. Not at all. We saw a strong performance across all geographies, and one of the things that -- and no real notable difference in terms of relative to our expectations. One thing I did try to note in the earnings call was the broad-based nature of our portfolio, which allows us to really capture a lot of the demand there beyond, say, liquid chromatography or mass spectrometry. Operator : And our next question comes from the line of Tycho Peterson with JPMorgan. Tycho Peterson : Mike, just trying to get our arms around the guidance here. You're calling for 4% core in 3Q against an easier comp after doing 9% this quarter. Is there something that would lead to maybe some extra conservatism in the quarter ahead? Michael McMullen : Thanks, Tycho. So I'll leave the characterization to our guidance to you. But what I can do share with you is this thinking. I think there really are just 2 major watch areas for us, and why we're not -- and it really is the chemical energy, which, as you know, we put up a 14% growth after low single digits first quarter. So we'd like to see another quarter or 2 of that to see whether or not it's sustained. And then on Europe, Europe was 10% growth for us, which, as you know, coming this year, we were quite concerned. Again, we want to see if the economic environment continues to improve there. But we're just sort of taking a watch and see in both these areas as opposed to calling in type of sustained double-digit growth in these areas. What I would say is there's no hidden kind of concerns behind our guidance that we haven't been already discussing. Tycho Peterson : Okay. And then for a follow-up on DDG. Obviously, good quarter there. We saw good standing numbers out of Roche as well. Is there something going on in the end market in terms of improvement there? And can you also talk on the operating margin increase? That was certainly notable. Michael McMullen : I'm sitting right next to Jacob here in the conference room. I know he's delighted to talk about his double-digit growth and his 20-plus percent operating profit performance. So how do I pass it over to you, Jacob? Jacob Thaysen : Yes, thanks, Mike. And certainly, we had a great quarter. And you're also right that our portfolio business continues to provide momentum. And you're also right that we see competitive -- the competition also have good performance. From our perspective, we continue to see good momentum from both our Omnis business, so advance same portfolio, but also including the PD-L1, which continues to drive momentum. I don't think we see a shift in the industry right now. One quarter is not making the business. We see more over a longer period of time. But I don't think that we see that because 2 competitors have strong quarter that this is a change in the market environment. But we continue to see overall pathology is a strong market to be in. Operator : And our next question comes from the line of Steve Beuchaw from Morgan Stanley. Stephen Beuchaw : So I'll actually start picking up on a point, I think, Tycho was alluding to, which is on margins. Didier, could you just give us a sense for what the drop-through looks like on incremental revenue in a quarter like this so we can think about how to fine tune our models best? And then as a follow-up, and it's somewhat related. Mike, you had some experience now of seeing the performance of the commercial team since you integrated the sales force, and you've had a chance to take advantage of the breadth that you have in a refined service offering. I mean, how are you thinking about deploying those learnings as you see the results coming through, putting the gas pedal down maybe a little bit more? How does that make you think about the rate of OpEx growth for this business as you see the returns on these investments? Michael McMullen : Yes. And how about I start there? Didier, you can go back to the margin question. Thanks for the question, Steve. And Didier and I have been talking a bit about the future modeling of the company, and obviously, we'll share more details with you later on in the year as we move into FY '18. But as you know, we've been really working down our SG&A levels when we first started the company. I mean, we had a lot of restructuring and consolidation, and we had a significant amount of cost savings. We have been -- and then what we tried to do from there was take the cost out and then invest based on the revenue growth. So we would expect to see the SG&A grow lower than -- and then revenue as we move forward. We've done a lot of build outs in the lot of the channel. I would tell you, though, there are some things we still like to continue to build out. The academia and government for one is one of the area where we're not yet at a leadership position. So we do have some things on the drawing board where we like to have some additional incremental investments relative to today's level of resourcing. But I think you'll kind of see us stay with the same fundamental model of not cranking up these numbers as a percentage of revenue. Didier Hirsch : And on your other question, Steve. The -- so we continue having exceptional drop-through operating margin incrementals. We've enjoyed 56% for the whole year last year. I think we had a 47% in Q1. And this quarter, we had 56% similar to what we've basically enjoyed in the last 6 quarters. So excellent drop-through., obviously, in part leading to the 9% core revenue growth. Michael McMullen : And I think it's worth adding here, Didier, which is how we manage the company, right? So listen, we're not going to shortchange investments, which we think we can do relative to R&D and channels for future growth. But at the same point in time, we are going to be disciplined with our spending. And I think you'll see that's how we've been managing the company, and that's why we've been able to get some of these margins up for the overall company performance. Stephen Beuchaw : I appreciate all the color there. Just one detail point for me, and then I'll let others jump in. It has to do with the expansion of the plant in Colorado, the oligonucleotide capacity expansion. I wonder if we could get an update there on how that process is going and how we might think about the timing on when that incremental capacity could be a driver, contribution at the topline. Michael McMullen : Yes, it's actually a very timely question because Didier and I just review with Jacob and the team the progress on the construction. And if you happen to find yourself on Frederick County, we can give you the address. You can drive by and wave to the construction crew there. But construction is proceeding as planned, right on target. And we got through the winter months without a lot of any kind of major disruptions to our construction. And from a -- as you know, this is a pretty complex manufacturing facility. In fact, this will be sort of a one-of-a-kind in the industry given the amount of capacity that we're adding. And then it also requires a level of validation required on the site. So long story. Short of it, I think you should think about this as being an FY '19 revenue impact for the company. We do believe that we can continue to get strong growth in our current facility. But as you know, we're going to run out of capacity, so we're looking to bring that online in early FY '19. Operator : And our next question comes from line of Brandon Couillard from Jefferies. Samuel Couillard : Mike, a question for you. I mean, with 85% of the chemical and energy business trending positively, I mean, what do you want to see before feeling more comfortable calling a bottom there? And any chance you could give us an update on what's embedded in your full year outlook for core growth for that segment? Michael McMullen : Sure. So part of it is tied to the macro view of a cyclical industrial recovery, and I don't think I'd add comments to there yet as well, so it'd be nice to have some external validation. And then from an Agilent perspective, I like to see another quarter or 2. My first year in the job, I can remember getting a little overly enthusiastic about a turn in the chemical and energy, and I was only off by 6 or 7 quarters when we first started seeing growth again. So having sort of learned my lesson, I'm a little bit more cautious about when to call the downturn -- I mean, the upturn, excuse me. Listen, we'll take the business, but I think I'll need another quarter or 2, and then give me a little bit of the external validation from some of the economists. And I think we're looking at, Alicia, for... Didier Hirsch : 5%. Michael McMullen : About 5%, right? About 5% for the year. Samuel Couillard : Okay. Super. And then one more 2-part question, though. You hired a new SVP of Strategy and Corporate Development in March, I believe. Anything to comment there in terms of your near-term M&A appetite? And then one for Didier. It looks like you took buybacks out of the second half of the year. Any signal or messaging you're trying to share with us there? Michael McMullen : Yes. So first of all, Brandon, thanks a lot for the close watching of the company, and we're delighted to have Sam Raha on the Agilent executive team. Sam is actually here in the conference room with us as well. And in terms of the M&A appetite, I think you're seeing that we are quite interested in adding new capabilities to the company in fast-growing spaces, and we've done 4 M&A deals already. One was a strategic investment in Lasergen. We feel a lot of interesting assets out there, particularly in the private space. And given Sam's experience in analyzing industry, we think this allow us to perhaps have an increased level of velocity working through targets. So I think our appetite remains the same, but what we're doing is bringing on additional strong capability to help us through that process. And then I'll pass this over to you, Didier. Didier Hirsch : Yes, Brandon, on the buyback, you have a good eye. We have a very disciplined approach to our buyback program. Once a year in November, we register a 10b5-1, and the approach is both formulaic and opportunistic, which means that we are able to flex our buybacks according, obviously, to market conditions. And the one thing that I would also mention is that this is not a program where you don't use it, you lose it. Any amount that is below what we plan to spend in a quarter is carried over to the next quarter and on and on if needs be. So with that -- last -- we felt it was more cautious with the valuations of the market that we do not forecast the buyback because there is a cap. There is no doubt. The cap was raised 13%. Last time, we raised 8% in November, and we will certainly raise it again as we register the next buyback in a few months' time. But we don't know what we don't know, and based on the potential market valuations in that, we decided that for the second half, it was better not to assume any buyback. And obviously, we don't -- we will see what happens. Operator : And our next question comes from the line of Doug Schenkel with Cowen and Company. Douglas Schenkel : My first question is on China. Just some clean-up there. What was growth in the quarter? Anything interesting to call out by end market? And did the timing of Lunar New Year play any role it and strength in the quarter in China? Michael McMullen : Great. Always happy to share some insights on the -- on China. In terms of our overall growth, high single digits for the quarter. I think the most thing -- most important thing to note is the compare against the 40%, almost a 40% growth rate, on the prior year. The end market demand continues to be quite healthy there, and we're still on our view that this can be -- this will be a low double-digit growth country for us in 2017. So no change at all in terms of the fundamentals, which remains strong. And to your point about Lunar New Year, really no impact. So it's nice not to be talking about that in an earnings call as a reason for difference in performance. So things are really looking good in China. The market fundamentals are intact there, and we're really quite pleased with the performance of the company, and we're right on our earlier start of the year expectations of growth for China. Douglas Schenkel : Okay. And not to beat a dead horse here, but I just want to push you a bit more on guidance. What -- you're guiding the third quarter, as it's been noted, to a moderation against the most favorable comps of the year. And then when you look ahead to Q4, your guidance implies the lowest growth rates since, I think, the first half of 2014. I mean, that just doesn't make a ton of sense based on what we're hearing from you across the board. Either something isn't going as well as it seems, which sure doesn't seem to be the case, or it seems like, at this point after 6 quarters of guiding the levels that are well below what you actually put up that, if we're going to be kind of intellectually honest about what's going on with the business that we should be modeling something a lot higher than what you're guiding to. So with all that in mind, I just want to make sure, they were -- there was nothing in terms of the cadence in the quarter or any timing dynamics that came into play that shaped how you're guiding with the second half of the year. Michael McMullen : So let me make two comments here then, Didier, feel free to add anything to that. But first of all, relative to anything that -- I forget exactly the terminology is. But anything that could be negative or significantly going wrong with the business, that's, by no means, the case here. So the fundamentals of this company are very sound as well as the end markets. The point I, perhaps, will belabor if you don't mind is with my experience holding a turn 2 years ago in the chemical and energy market. I called it too early, and it never happened. In fact, we drove along for 5 or 6 quarters. We also know that the European market, particularly in the summer months, is not always the strongest. So those are two things that we were watching, and that's the reason why we've guided the way we want -- we've done for the second half. By the way, I think our core growth guidance guide for the year is, I think, perhaps at the upper end or higher than any of our peers. So we're already moving out our core growth rate for the year higher than everybody else in our space. But based on our product experience in watching Europe and calling for a turn, a sustained turn in the chemical energy, I was wrong before, so I want to make sure I got it right this time, so we'll give it a few more quarters. Didier, anything else you'd add to that? Didier Hirsch : Well, maybe two things. Number one, on chemical and energy, basically, our revenue this quarter was a lot based on the year-end budget flush that -- in terms of orders that we saw among our customers and, perhaps, the beginning of the year. So we don't know how to really read it and if it is sustainable or not for that reason. It's very much related to the end of last year's budget and beginning of this year's budget, and they might not be totally relevant data points. We'll see. And maybe the other thing is that a testament to the great work that our teams have done in terms of converting orders into revenue. I mean, we've done a fantastic job. The patent order and also -- of orders also has improved tremendously with a lot more orders coming into the first month of the quarter. All that has a positive impact also this quarter among many, many other things. Obviously, what was more important is the great order performance. And we don't -- we are not able to operate with a smaller backlog than we used to back 2 years ago before we put in place this tremendous operational improvements in our managing of the orders. And so there, we have bit less visibility potentially than we used to 2 years ago, but it was not very good visibility. Now, it's better in some way. Operator : And our next question comes from the line of Ross Muken from Evercore ISI. Luke Sergott : It's Luke in for Ross. So I guess, if -- we're talking a lot about the Intuvo and your new product pipeline. I guess, can you break out how much of this quarter's growth was due to the new product pipeline? And I guess, more importantly, how has this -- how is your product pipeline that exists now, how does that compare to, say, 3, 4 years ago before Mike took over the helm? Michael McMullen : So I'll take that last one as well. So in terms of the contribution to this quarter's revenue from new products, we don't actually go through any of those internal calculations. But I'd have to say it's been a significant contributor to the growth. So as you know -- and this is a phenomenon that has been growing for several quarters, right, because for the last 2 years, we bring into the market a number of products. We're talking about the Intuvo right now, but we have the whole infinity two series, a bunch of new spectrometry products. So we've been coming to market. Jacob's team has been inducing a new genomics offering. So I have to say our business model is based on the ability to get to market new solutions that are differentiated and really do make a difference for our customers. That's our business model, and I think that's what's been part of the reason combined with our extended channel, which we've been able to grow the way we've been growing. And -- but it may seem like not the most objective view of our performance. In fact, coming in as I put myself in the back a bit, I think our pipelines are much improved. One -- and if you recall from our earlier discussions, my first [indiscernible] in this role I described for you a massive restructuring of our R&D teams and how we set up our business units and how we put more of our instrumentation, for example, all under Patrick. And we consolidate from 3 different aspect divisions into one. I think now you're starting to see those -- the impact of those because we now have our monies allocated on the biggest bet, and I think we're able to get to decisions more quickly, and we're able to get to market more quickly. So I believe that our product lines -- I mean, our pipelines are most robust they've ever been, and I would say to all of you on the call is we're not done yet. So we have a lot of great ideas, very strong team. And I think our -- but our pipeline and portfolio has never been in better shape. Luke Sergott : Great. And I guess, turning to the gross margins. They're really strong in the quarter. Can you just dig in a little bit more there? Like, what was leading that strength in the business [indiscernible] going forward? Michael McMullen : Yes, I'll make some high-level comments, and I think -- then I'll pass it on to Didier. So obviously, topline growth at 9% core growth helps a lot. But we also have a number of initiatives underway in order fulfillment team, our global manufacturing footprint under Henrik. And we're getting a lot of cost out of our materials, optimizing overhead costs as well as driving down logistics. But anything else you'd add? It's probably a mix impact there, I think, as well. Didier Hirsch : Nothing to add. Obviously, I chose -- 30 years ago, you started as a -- in the controllership organization, Mike. Michael McMullen : Yes, yes. Didier Hirsch : Nothing to add. Operator : And our next question comes from the line of Derik De Bruin from Bank of America Merrill Lynch. Derik De Bruin : I guess, I got a couple of short ones since a lot of what I've wanted to know was asked. Can you just break out the instrument versus consumable organic growth for the quarter? Michael McMullen : Well, I guess, you're probably referring to the analytical side of the house. I think the best way to look at that is just go to the performance of the LSAG and ACG groups. So I believe Patrick was up 6% and -- on a core basis. And Mark and the CrossLab Group was double digit at 10%. Derik De Bruin : Great. Just on the -- you called out this winning this order in Quest for staining. Can you give us an idea sort of the magnitude on how that sort of works in the numbers going forward? Michael McMullen : Yes, so we were pretty excited by this, as you imagine. It's a pretty significant win. I think it really is a testament to what we believe is a -- it is an excellent product that the Omnis Autostainer was introduced. It's a real validation of how strong that product offering is. But Jacob, perhaps, you want to add a few comments in terms of the deal parameters, at least, perhaps, described for Derik how the rollout looks, the multiyear deal. Jacob Thaysen : Yes, Thanks. And as you can imagine, we are quite happy with -- that we won this account. And as you know, Quest is one of the biggest reference laboratories in the U.S., so this is a substantial deal for us. I cannot go into the actual numbers, but we are looking at a multiple site rollout over the next 6 to 9 months, where we will install on this in all of the Quest sites here in the U.S. And we look at many, many on this and many, many hundred thousands of slides test that will be run on those instruments within a year time frame. Derik De Bruin : And sort of a follow-up. I remember when you bought Dako back in 2012, the business was sort of underperforming and sort of lagging peers. Can you sort of talk about where we are sort of with Dako these days? And I guess, how are -- are you sort of going back at the market or the consumable is sort of back where it's going? I mean, is that tracking on where you thought it would be? Jacob Thaysen : Yes, I mean, so I've been part of that journey for quite a while now, and I'm very pleased where we are today. Omnis is definitely a driver of that. And then, we played instrument to drive consumables. So what is we -- the key indicator for us internally is how our consumables, our test volume, is increasing. And we can see a very, very strong momentum in the test volume, not only from our PD -L1, but also from our broad portfolio of assays. So I see both strong win over of new accounts and also current accounts driving more and more slides out there. So I will say that we have turned that business around, and there's still a lot we can do. But I feel like we're now working on an market growth level, and there's more and more to do and much more to come. Operator : And our next question comes from line of Puneet Souda from Leerink Partners. Puneet Souda : So just if I could touch briefly on just the GCM. A couple of other questions have already been answered, so maybe if I could ask on the -- overall, in the LC/MS business, seems like that continues to grow. Could you maybe give us a sense of -- if you're taking share with Q-TOF? And appreciate the comments in Q-TOF and triple quads there. Are you taking share in that market with Q-TOF versus the high-resolution competitors in the market? Or is it more of the biomolecules growth that you continue to see in that market that's propelling the numbers forward? Michael McMullen : First of all, thank you very much for the congratulatory comments, and I think I'll pass it over to Patrick and give you -- share some more insights in terms of what's going on with LC/MS. Patrick Kaltenbach : Yes. Thank you, Mike. And you're right, Puneet, it's not only the triple quad market that's strong. When you look at the opportunity in Q-TOF, it's playing in the biomolecule market. As Mike said, we just launched a new bio Q-TOF that drives healthy growth on the biopharma. And with that along -- and along that also, we've put the Q-TOF itself. We also deploy, as you know, the Q-TOF in applied markets like environmental when you do pesticide screening and environmental fluid, et cetera. We have very differentiated solutions from our side, so I think that we have a great opportunity with this platform. We don't disclose market shares and market share gains. But I would say with what we have launched and also what we're launching at the upcoming ASMS, we are looking very much forward to continue growth in the LC/MS market. Puneet Souda : Okay. Got that. Just a brief one, if I could, on the expectations for the pharmDx PD-L1 test that you have in place. There are competitors that have been entering that market with our label expansion. So has that changed your opportunity overall in that market? What's your thoughts there? Michael McMullen : You want to take that, Jacob? Jacob Thaysen : Yes, I can take that also, and you're absolutely right that we see competitors entering to the market. That is not unexpected once you get in a CDx business and when you are departments with a pharma company that you enter and you get a first move advantage, meaning that many accounts have already implemented our test and trained the pathologies in reading out as a slide. So even as a new competitor coming in there, that is, of course, increased competition. But we believe we are in a very strong position to continue with our leadership position. Operator : And our next question comes from the line of Jack Meehan from Barclays. Jack Meehan : I wanted to follow up on the back of the Intuvo launch. Do you think you're seeing more pull through across selling opportunities across the rest of the portfolio? Maybe any intangible signs at CrossLab or elsewhere? Michael McMullen : Yes, absolutely. So we've been calling this the inside to cover the halo effect. So as you may know in this space, gas chromatography is often viewed as a very mature technology. So customers aren't anxious to have a sales rep come out and talk about the gas chromatography. Different story when you're -- you've got a product like Intuvo, which is it's so different. And customers now recognize that there's really something special here with this offering. So what we're finding is that our account manager was able to go out and get appointments, meet with a customer. And then that allows us to have a broader discussion around the productivity improvements and enhancements on, for example, our 7890 or we can talk about our enterprise services and consumables. You may have noted -- and I'll ask Mark to chime in on this since he's been the -- probably quiet on call so far on the consumables and services side. But what we've seen is we get into a different conversation with a customer, and that's why you noticed in my earnings call script, I talked a lot about the broad-based growth in chemical and energy. I think this Intuvo GC has been great to help us get into a different set of conversations with customers. And, Mark, I don't know if you'd add anything on what you're seeing on the consumables and services side because you had double-digit growth in that space as well. Mark Doak : Well, I have just a couple of things, Mike, and we've talked before about how we've seen the market over the last couple of years. As customers continued to use their assets, improve the performance of the asset itself, keep their -- obviously, their operations going, and when we see the tailwind, if you will, from now more purchase in the marketplace, it's really more just a surge of new installation that provides some additional revenues in the space. So overall, though, the differentiation in the market, it comes back to some work we're doing and inside of our chemistries division around new technologies associated with the Intuvo, also advancing some of the chemistries we've done in very traditional space, in GC columns and seeing some nice market gains there. So all in all, it's just -- it's been proved to be a case where customers continue to buy based on keeping it going, but also on top of that, look towards the additional revenues from the expansion in the energy space. Michael McMullen : Yes. Thanks, Mark. And just to kind of close it off, Jack, which I think what we're able to do is actually go out and talk about the whole portfolio with the customer including some of the new capabilities and marketing that's brought on board as well. Jack Meehan : That's great. And then I have the follow-up on the margins and DGG. I think it's the best ever on record that we have, at least our model has. Maybe could you just talk about the scalability of the business as you see it now? And was there anything onetime in the quarter? Just you called out the Quest win again. Just any other color. Michael McMullen : I mentioned earlier, we're -- the management team is in the conference together taking this call, and there's a big smile on Jacob's face that somebody noticed. And he's well on his task to hitting that -- he's driving for 20% this year. Obviously, the strong revenue performance helped a lot in terms of the operating margin. But perhaps, you want to build on that? Jacob Thaysen : Yes, you're absolutely right that we -- the topline drives our bottom line also, so the margin really has driven the 24% margin. Operating margin, we have up 900 basis points, is certainly something I'm very pleased with. What I want to remind also is that if you look into Q1, we come from a lower margin perspective there. So the 2 quarters, the first half of the year here is really around the 20%, where I believe we have committed to delivering on this business for the full year. So we are still on that track, and that's what we're aiming for. Michael McMullen : Maybe I'll just add to that. I mentioned it in my call script, but the early part of this year marked a major milestone for us, which was the integration of the former Dako business into the Agilent infrastructure and systems. And I think that is part of your story. I mean, that was always part of the plant, but that's also why we think that some of these improvements all being, let's say, a 24% operating margin every quarter. But that's also why I believe some of these improvements are sustainable because we are fundamentally changing the underlying cost structure that support this business. Operator : And our next question comes from the line of Dan Arias from Citigroup. Daniel Arias : Mike, again, it doesn't look like we're getting together -- Mike, it doesn't look like we're getting together for Analyst Day this spring, so maybe just one on strategy. Wondering if you can offer anything on how interested you are in M&A at this point. And to the extent that you're looking around at assets, what might you be willing to deploy? And then where might the focus be? Michael McMullen : Yes, I think, first of all, you correctly noted. We're not holding an Analyst Day this year. It's not to say that we won't do it again, but we felt like the first year was important for the management team to come out and tell the new story. I thought it was important a year later to tell you how it's going. And then a lot of the coaching and obviously [indiscernible] hey, Mike, we really prefer you to have you spend a lot of time just run the business and focus on customers. So that's our plan. But we'll probably back out at some point in time with Analyst Day as we move into '18. Relative to M&A, I would just leave it as I think what the communication we've had for the prior quarters remain the same, which is we like assets that are in parts of the marketplace, which we see inherently growing faster, whether it be the acquisition we made of Seahorse Bioscience. And I hope you notice that we called out cell analysis as a driver for growth in our LSAG business. We acquired most recently Multiplicom, which is in a faster-growing molecular diagnostics space. So we like assets that -- where the end markets are growing faster than, perhaps, the corporate average. We're bringing a new capability to the company, and we love they're accretive short term. And what we realized is that a lot of the deals actually is going to incur, we believe, in the private space. And we have a pretty active funnel. We like the bolt-on acquisitions. We will do every once in a while technology deal, like we did with Lasergen. We see something that's not out there we don't have. But in general, we want companies with existing customers and revenue that will make a nice run to the company's portfolio. Daniel Arias : Got it. Okay. That's helpful. And then, Didier, on the margin outlook. When you guys brought the 22% op margin target in for the year, it's still kind of sell. I think that was a number that you thought you were capable of doing if things went well. So I guess just given the top line momentum and the progress in terms of the operational stuff, is it right to think about that now? I mean, do you see upside of the 21.5% midpoint for the year just given the trajectory? Didier Hirsch : Yes, we had -- I had explained back in November the reasons why we had reduced kind of the guidance from 22% to 21.5%. It was related to 3 factors. But I also pointed out that, internally, we set our performance metric -- internal performance metric be at risk at the same 22% that we had long talked about. So we do feel that there is a -- we have a shot at it and we were willing to basically put our be at risk there. And since then, we have had some good momentum. And -- but we are absolutely -- it's not yet ready to obviously declare the victory there. Michael McMullen : That was interesting, I think. But reflecting back at our first Analyst Day, we put out 3-year goals of 5% core growth and 22% operating profits. We're at the 5% core growth, and we're hoping to find a way to get to 22%. And as Didier mentioned, that's a standard where we're holding ourselves to inside of the company. Operator : And our next question comes from the line of Sara Silverman with Wells Fargo. Sara Silverman : I just have a quick one on your free cash flow guidance. It looks like you guys left that unchanged. And given the guidance raise on revenue's quarter, do you think that may go up? Could you talk about why there's really anything not unchanged? And what's going on with the cash flow? Didier Hirsch : Yes, it's a fair question. Obviously, the operating profit is only one of the manufacturers that we look at in the operating cash flow or free cash flow. Similar to, I guess, the answer to the previous question, we do see a path for a higher operating cash flow than what we have guided at, but we're not yet ready to commit to it. Operator : And our next question comes from the line of Paul Knight with Janney. William March : This is actually Bill on for Paul. Just one question for you guys. CrossLabs for the past 4 to 8 quarters has been growing high single digit organically. Can you maybe just talk about how much of that is coming from customers looking to outsource or services for new products? And maybe some -- what are some opportunities to maybe continue to grow that? And then are you seeing some gains in market share as well? Michael McMullen : Yes, so thanks for the question. I'm going to make a few initial reminder comments of how we set up the company, and I'm going to pass it over to Mark for some specifics. But I've been going back to this trip down memory lane a bit, if you will. And 2 years ago, when we set up the company, we formed CrossLab Group. It really did change our view of the addressable market for the company. We said not only do we want the Agilent install base, but we should view the whole lab ecosystem as the opportunity for Agilent to provide value to our customers. And we also thought there's some -- starting see some fundamental changes in terms of demand that there'll be some outsourcing from companies such as Big Pharma that were looking for new -- for somebody to take on some of their internal activities. And I think that's happened. It is happening. So Mark, why don't you kind of build on the story and also talk about how we're doing relative to our wins in the market? Mark Doak : Thanks, Mike, and thanks for the question. I'll try to be as specific as I can. You asked the question about how much of this is based on outsourcing, it's difficult to say. But I think if you look at the trends in pharma and even some of the recent studies down there, there's an increasing work to outsourcing as I go for with the area for optimization. I don't think it's accelerated necessarily, but it's still out there. I would say in our case, we've had a broad focus on the lab operations side and bringing all our components together as complete solutions. And I think that's what's really driving a lot of our growth, is how we're coming together as more of a partner and consulting on how to get the most out of those lab operations. And competitively, looking at this is at a growing market, are we gaining share? The answer, I think, simply is both. And -- or executing well on the ground in terms of our sales teams across the globe. We're also seeing just our increasing portfolio that goes towards this multivendor area. Hopefully, that helps. William March : That does. And Mike, maybe just one quick one on capital allocation. As you think about share buybacks, dividends and with $1.80 net cash, how do you think about what's the optimal strategy for Agilent in terms of leverage or lack thereof? Michael McMullen : Well, we think that we've been describing it as a balanced capital allocation policy, where our primary use of cash is to invest in the business. We talked about M&A a bit already today, but also the investment in our new facility in Colorado. So we're going to use our cash for -- primarily for investing in the business, but we also want to increasingly grow our cash dividends. So you see every year, we've been bringing up our cash dividend, and we're also using our leverage capability to actually buy back shares. So the share repurchase program that was announced when I came in as CEO actually was financed through debt. So -- and we like to keep some -- our debt capacity available for M&A as we would see, and we're quite conscious of maintaining the investment grade level rating on our debt. So I guess, long -- or short of it is no change from the strategy we've been pursuing for the last 2 years. Operator : And our next question comes from line of Catherine Schulte from Robert W. Baird. Catherine Schulte : Within pharma, you've talked about small molecule customers going to a replacement cycle, any updated thoughts on how much longer that has left? And then can you break out what you saw from small molecule versus biopharma in the quarter? Michael McMullen : Yes. So I think, Patrick, your opinions. I won't go into a baseball analogy, but I think we're -- I won't ask you for the innings. But I think we've always believed we've had at least another 18 months or so of higher demand. By the way, there's always a replacement cycle going on. We have just been in the accelerated one going on in pharma as it relates to chromatography. We think that we may be seeing the earlier signs of that same thing happening in gas chromatography, but we'll still wait and see on the sidelines for that. Relative to the -- to mix between small and large molecule, I think it's fair to say that the -- both have been growing quite strongly, but the growth in biopharma is at a higher rate than the small molecule, albeit, a smaller part of our mix. Historically, we've been about 85-15, I guess, between small molecule and large molecule. Patrick Kaltenbach : About 80-20. Michael McMullen : About 80-20, sorry. Yes, 80-20. And we're putting a lot of investment and focus on the biopharma space. So we talked a lot in my call about some of the new solutions, and it's also been a major area of emphasis in terms of investment in our channel as well. Catherine Schulte : Okay. And then looking at the economic end market. Can you quantify what growth was across the different geographies and remind us of your exposure by geography in that end market? Michael McMullen : So while Didier is looking for his notes, I'll just say this is the one part of the end market where the pitcher has continued to be quite challenged. The funding level share globally, with perhaps the exception of China, have been fairly weak. But why don't you provide some of the breakout? Didier Hirsch : No, I'll just say it was throughout the world, we saw year-over-year kind of a reduction with the exception mostly of us -- Japan but on the small base, and that surprised us. And there is not much we can wriggle of that because it's on the small base, and parts of -- other parts of Asia Pacific. But the big markets, Americas and Europe, were weak. Michael McMullen : Yes. And my comment's kind of specifically -- specific to the outlook, not the quarter's numbers, right, right? Didier Hirsch : Yes. Operator : And that concludes our question-and-answer session for today. I would like to turn the floor back over to Alicia Rodriguez for any closing comments. Alicia Rodriguez : All right. Thank you, Karen. And on behalf of the management team, I'd like to thank everybody for joining us on the call today. If you have any questions, feel free to give us a call on Investor Relations, and thanks again. Operator : Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,017	3	2017Q3	2017Q3	2017-08-15	2.213	2.292	2.494	2.568	3.48237	24.84	25.49	Operator : Good day, ladies and gentlemen, and welcome to the Q3 2017 Agilent Technologies Incorporated Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now look to introduce your host for today's conference, Miss. Alicia Rodriguez, Vice President of Investor Relations. You may begin. Alicia Rodriguez : Thank you, Crystal, and welcome, everyone, to Agilent's Third Quarter Conference Call for Fiscal Year 2017. With me are Mike McMullen, Agilent's President and CEO; and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A, after Didier's comments, will be Patrick Kaltenbach, President of Agilent's Life Science and Applied Markets Group; Jacob Thaysen, President of Agilent's Diagnostics and Genomics Groups, and Mark Doak, President of the Agilent CrossLab Group. 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. You will find an investor presentation, along with revenue breakouts and currency impacts, 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 Mike and Didier 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, the NMR business and acquisitions and divestitures within the past 12 months. Guidance is based on exchange rates as of the last business day of the reported quarter. 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 let me turn the call over to Mike. Michael McMullen : Thanks, Alicia. Hello, everyone, and thank you for joining us today. Q3 marked on a strong quarter for the Agilent team. We exceeded our own expectation of both the top and bottom line. We continue to deliver above-market growth. Our revenues of $1.11 billion grew by 7.5% on a core basis. Adjusted EPS of $0.59 is up 20% over last year's third quarter. Our focus on operational excellence continues to pay off. We delivered an adjusted operating margin of 21.5%, up 90 basis points from a year ago. I can remember when I became Agilent's CEO, you asked me a very good question : could Agilent make the adjustments to improve our operating margin while outgrowing the market? Well, we have. This is the 10th consecutive quarter of improving core operating margins while outgrowing the market. So where is our strong Q3 growth coming from? From an end-market perspective, both the chemical -- global Chemical & Energy and Pharma markets grew by 10%. And geographically, China continues to be strong, while we experienced better-than-expected growth in Europe. Let's take a closer look at what's happening in our end markets. Our pharma revenue is up 10%. We are well positioned to capture growing customer demand with our broad and differentiated offering of instruments, services and consumables. Demand was also strong for our API offerings. Chemical & Energy is up 10%. This is the second consecutive quarter of double-digit growth. Similar to last quarter, growth was broad-based across regions and products. Our customers are beginning to upgrade their labs and are investing in equipment replacements. While some uncertainty remains on the pace of recovery, we are encourage by the reinvestment. After 4 consecutive quarters of decline, we had a nice surprise with the low single-digit core growth in Academia and Government. Strength in Europe and double-digit growth in cell analysis, spectroscopy and services drove our results. Food grew 2% against a difficult compare in Q3 last year. Food market fundamentals remain sound with strength this quarter in Europe. Environmental and Forensics grew a healthy 7%. Our strong growth was driven by Asia-Pacific and the Americas. Concerns about the health of our environment continue to drive the Asia market. Diagnostic and Clinical grew by 6%, led by pathology and companion diagnostics, and geographically, strength in Europe. Now turning to look at our different regions. Geographic performance was driven by double-digit growth in Europe, and continued China performance. The Americas grew by mid-single digits, while Japan was flat. And now let's turn to the highlights from our business groups. The Life Sciences and Applied Markets Group delivered core revenue growth of 7%. From an end-market perspective, strength in Chemical & Energy, Pharma and Environmental continued to drive the performance. Looking at our product portfolio, growth is broad-based across all our products, and we continue to strengthen our lineup. We recently introduced 7 new additions to our InfinityLab LC series. At ASMS, we unveiled our newest LC/MS Triple Quad, the Ultivo. It's not an exaggeration to say it's revolutionary. The Ultivo is 70% smaller than previous instruments, yet it still delivers the same or better performance than its predecessor. Our customers tell us that the Triple Quad is the workhorse of the lab. The Ultivo allows our customer to maximize their lab space and increase capacity without compromising performance or uptime. This revolutionary new instrument is a great example of Agilent's market expertise and commitment to customer-centric innovation. We also strengthened our GC/MS lineup with the introduction of a new high-resolution, accurate-mass system. This new product will help our customers address the growing demand for identification of unknown chemical samples. We look to buy businesses in fast-growing, adjacent market segments with differentiated offerings and strong teams. In July, we completed the acquisition of Cobalt Light Systems, adding Raman spectroscopy to our spectroscopy lineup. Cobalt Light Systems has developed ground-breaking technology that is integrated into an innovated suite of bench-top and handheld instruments. We are now directly participating in this fast-growing spectroscopy market segment. There are strong synergies between the 2 companies. We are scaling the operations at Cobalt Light Systems and will be offering our current customers these groundbreaking solutions. CrossLab, a key strategic move of a new Agilent, continues to pay off. The Agilent CrossLab Group maintained a strong performance again this quarter, with core revenue growth of 8%. Growth was robust for both services and consumables. The Diagnostics and Genomics Group also delivered strong core revenue growth of 8%. Results were driven by strong demand for our pathology products and companion diagnostic services. We see particular strength for our PD-L1 and molecular products. As I mentioned earlier, our Nucleic Acid Solutions business, which can be lumpy, performed well, and is up by very strong double digits. The growth we saw in our Pathology business is a strong sign that we are regaining market share, with our automation system, Omnis, and the new products we are continuing to introduce, from special stains to ready-to-use anti-body offerings, our Pathology division is creating a lot of momentum. We also introduced our newest next-generation sequencing library prep solution, Agilent SureSelectXT HS. This research solution benefits our customers by streamlining the entire NGS workflow. On the M&A front, we acquired the molecular and sample barcoding patent portfolios of Population Genetics Technologies. This expansion of our IP portfolio bolsters our target enrichment leadership position, enabling the future integration of new solutions to our customers. Rapid integration of the Multiplicom business continues to proceed according to plan. Let me close out my portion of the call recapping the journey of the new Agilent, and with some comments on our Q4 outlook. In May of 2015, at our first Analyst and Investor Day of the new Agilent, we laid out an ambitious 3-year plan to create shareholder value. We made 3 commitments : We committed to outgrow the market. We committed to improve adjusted operating margins over 400 basis points. We committed to take a balanced approach in deploying our capital. Over the past 10 quarters, we have been delivering on our commitments. I'm so proud of this team. We are on the cusp of achieving the goals that we set for ourselves. And we first shared with you over 2 years ago. We are a team that delivers on its commitments. I think it's now time retire the description "New Agilent." We have put in a new foundation for the company to grow, and we are firmly focused on the future. The achievement of these goals is just the beginning. Our story is a forward-looking story, with a laser focus on delivering superior earnings growth and creating shareholder value. Looking at the more immediate future, I want to close with a few comments about Q4, '17. First, we remain somewhat cautious about the potential for a cyclical recovery. We also know we're heading into period of tough compares for our global Pharma and China businesses. Yet, the overall market environment for Agilent is stronger than forecasted coming into this year. Given these considerations, we are once again raising our full year core growth and earnings expectations. I look forward to answering your questions later in the call, and will now hand off to Didier. Didier will provide additional insights on our Q3 results and updated guidance. Didier? Didier Hirsch : Thank you, Mike. And hello, everyone. As mentioned by Mike, we delivered strong top and bottom line results, both on a year-over-year basis and versus our guidance. Currency had a positive impact on revenue and operating profits of, respectively, $7 million and $1 million versus previous guidance. Please also note that we have reduced our pro forma tax rate by 1 percentage points, which had a $0.02 impact on our Q3 EPS. I'll now turn to the guidance for our fourth quarter. We expect Q4 revenues of $1.15 billion to $1.17 billion, and EPS of $0.60 to $0.62. At midpoint, revenue is expected to grow 3.5% on a core basis. As a reminder, our core revenue growth last Q4 was a strong 6.3%, so Q4 is a tough compare, coming after an easier Q3 compare. Versus previous guidance, currency is estimated to have a positive impact of $24 million on revenue and $4 million on operating profit. Finally, our 22.4% adjusted operating margin at midpoint will be 90 basis points -- will be up 90 basis points sequentially. Now to the guidance of fiscal year 2017. The Q4 guidance is expected to result in the following fiscal year guidance. First, at midpoint, revenue is projected to grow 6.0% on a core basis or 1 percentage point over the previous guidance. The revenue guidance or $4.445 billion is $75 million over the previous guidance, including $31 million due to currency and $1 million due to M&A. Second, our EPS guidance at $2.30 at midpoint is up $0.12 from previous guidance, and corresponds to a 16% year-over-year increase. Currency contributed $0.01, and the reduction in pro forma tax rate contributed $0.03. Third, adjusted operating margin for the year is expected to be 21.8% or 110 basis points higher than in fiscal year '16. And last but not the least, we have raised our operating cash flow guidance from $825 million to $850 million. And we have -- we are reducing our CapEx guidance from $200 million to $185 million. This leads to an increase in free cash flow guidance of $40 million. With that, I'll turn it over to Alicia for the Q&A. Alicia Rodriguez : Thank you, Didier. Crystal, will you please give the instructions for the Q&A? Operator : [Operator Instructions] And our first question comes from Dan Arias from Citigroup. Daniel Arias : Didier, in the DGG business, a bit of quarterly variation on the op margin line. Where do you think the op margin settle in if we just look out a bit maybe past the current year? Is there a range that you can kind of help us with there? Didier Hirsch : Yes, you're right. The DDG business can be little a bit lumpy on an operating margin basis for many, many reasons. What's important is that we came from -- we're coming from 13% operating margin in 2015 to 16% in 2016. And we are aiming still, as we have basically announced back 2 years ago, to close to 20% in 2017. So the ranch, I would say, after we complete this fiscal year, will be around the 20% that we've talked about. And Jacob, I don't know if you want to add anything. Jacob Thaysen : No, I think that's absolutely correct. Daniel Arias : Okay. And then, Mike, maybe just on Chemical & Energy, could you just put a little color to what you're seeing inside that business? Out of city unit as a whole is doing better. Just curious what the commentary on exploration sounds like at this point. Are you expecting to finish the year sort of on a similar note? Or are we seeing some pickup towards the fourth quarter? Michael McMullen : Yes, sure. Dan. So maybe first of all, I want to reground maybe some of the segments, because I think probably last 5 or 6, 7 -- maybe 7 quarters, I would describe a certain breakdown of the Chemical & Energy along the lines of energy refining and in chemical. And as you know, we've been under -- the energy sector has been under a lot of pressure last 2 quarters. So right now, our estimates are that energy represents about 10% of the -- excuse me. Thank you, Patrick. Exploration, that got me mixed up here. Exploration represented about 10% of the total, while refining is about 30% and the chemical side is about 60%. So just to kind of ground yourself, there is less of our business now in the exploration side of the business. We actually expect that to continue to be down for the remainder of this year. So we're not really seeing much going on there. What we are seeing, that's why I put it into in my script, is that there's been a high emphasis on cash management and cash control in prior years. We're starting to see a little bit of money being freed up to focus on reinvestments. And really to drive productivity. In fact, I saw a recent article on Wall Street Journal talking about the importance of customers, companies driving towards increased earnings. So what that tells us is that energy, the exploration side of the segment, is going to continue to go down. We expect replacement to continue in the chemical side. We are still cautious on the refining side of the business. In fact, we have recently seen that the next 12 months EPS forecast for large cap refining, companies have declined since May. So it's not all going well in this segment. Overall, we're encouraged by the results. It's only 2 quarters of strong growth, so we're not yet ready to call a cyclical turnaround. But I would remind you that for the year, we're forecasting overall 8% growth for this Chemical & Energy segment. A much different result than we've seen in the prior 2 years. So hopefully that helps get answer to your question. Operator : Our next question comes from Tim Evans from Wells Fargo Securities. Timothy Evans : Mike, what's your general sense for how much of the strength you saw this quarter was overall in-market strength versus strength of some of the new products that you've launched? Michael McMullen : Tim, thanks for the question. As you know, our whole model is built around outgrowing the market based on a real focus on innovation that matters to customers, tied to really a solid go-to-market channel. So I think what you've got going on [ for that ] is sort of a perfect storm, if you will, from a standpoint of, we're able to put up these very strong growth results because we have a highly competitive and differentiated portfolio. So we know we're gaining market share in a growing market. And that really leads to the kind of results that we're having here. So I know all CEOs claim to be gaining market share, but we look at the numbers. It seems to prove out for us. Timothy Evans : Okay. And then, could you maybe just comment on the runway for CrossLab? Is that something where you still feel like there is multiple years of above-market growth? Michael McMullen : Yes, I'll make some of initial opening comments here, Tim. Then I'll invite Mark to take a bow in terms of the results we've been pushing up here and talk about the future. So, as I commented in my script, this was a major strategic initiative for us to really go after this, what we see to be, a new market for us in CrossLab, to really think much broader about our offering in the lab and really to focus on enterprise services. And we think about the entire lab as our opportunity. We've had a number of quarters of very strong growth. And our view is that we can expect to see this growth continue. And I'd point out to you some of the markets, which historically haven't been big purchase of service, for example, really driving a lot of growth. For example, we had stellar results once again in China. So Mark, why don't you give your thoughts about the future of the CrossLab Group? And can you sustain this run here on? Mark Doak : Thanks, Mike. But let me elaborate a little bit on Mike's comments. And a lot of tension comes around our Enterprise Solutions (sic) [Enterprise Services] business. And that is a big factor behind our growth. However, want to peel that back a little bit. The Instrument service business is much larger, been growing at high-single digits, that's enabling workflows and certainly complementing a lot of the new product technologies we're bringing to market. And the consumables business is routinely growing in the mid- to high single-digit range, too. If I look ahead though, we see a very robust market for the enterprise business, in particular, in Pharma and increasingly inside the commercial labs that serve across multiple end markets, that can be environmental, food, et cetera. And I don't think there's any end in sight when it comes to the challenge of improving the productivity of the lab operations. And that's really where our value proposition is, is built upon versus single sourcing. Can we truly help you get the efficiency the lab going out? So very bullish about our runway in this business going forward. And I'd say it's more than just an enterprise service story. It's really about our instrument service business and our consumables rounding out the entire picture. Operator : Our next question comes from Jack Meehan from Barclays. Jack Meehan : Mike, I was hoping you can elaborate a little bit on the performance in biopharma in this quarter? Specifically, the trends you're seeing at U.S. Pharma? And then maybe just elaborate a little bit more on the commentary related to API and the offering there? Michael McMullen : Let's start with -- the second question was? I'm sorry I missed that one. Jack Meehan : Related to the commentary around the API offering. Michael McMullen : Sorry about that, Jack. They say your hearing is one of the first things to go when you get older. Let me start with the biopharma comment, and then, Patrick, I'm going to have you jump in and give your view on the dimension by geography. But we're really pleased. Although we don't report externally the absolute results in the biopharma segment of the pharma market, we're really pleased with how this business is performing. As you may recall, this is a major strategic initiative that we launched probably about 2.5 years ago to really go after the biopharma market segment in a much different manner. We've been bringing to market a number of new novel solutions. We've changed our go-to-market strategy, and it's paying off. So what I can tell you is we grew double-digit in biopharma in the third quarter. We think we're outpacing the overall market. And perhaps, your view of mix by geography and then anything else you want to add, Patrick. Patrick Kaltenbach : Yes, sure. Thanks, Mike. So we have seen a strong -- very, very strong growth in China. We have seen reasonable growth in EMEA, in Europe, and also would say single-digit growth in [ AFO ]. So that's the distribution on a regional level. And it's heavily driven, of course, by biopharma, as Mike mentioned because that is growing ahead of the [ biopharma ] space. But I would say if you look at the different segments in Pharma, it's on the R&D side, as well as manufacturing QA, QC, we are very well-represented there. And we don't see a real slowdown right now in the biopharma space. So looking forward, given the new portfolio we have. Also the focus on complete workflows that we launched over the last couple of months, we are pretty confident that we will continue to grow strong in this market and capture more share. Michael McMullen : Thanks, Patrick. And Jacob, perhaps you can address Jack's question on the API? Didier Hirsch : Yes, so on the API side, the -- our Nucleic Acid Solutions division, we see a lot of great momentum in the business. And we continue to really be in a situation where capacity is our main constraint. So that's also why we, right now, as we explained before, we are building this new capacity -- manufacturing capacity out in Colorado in Boulder, to really make sure we can expand versus the demand that's out there. We have seen -- as it goes in this business, we did see a few quarters ago, that one of our customers did not meet the endpoint in a Phase III clinical trial. And that has led us to rebuild the pipeline. We have seen very strong demand, and we are really back in full swing again. Jack Meehan : That's great. And then clearly a lot of new product launches coming on the mass spec side. I was wondering if you had any thoughts related to pushing mass spec into the clinical setting. A couple of your peers are pretty active there. I was wondering if that was a future target for Agilent as well. Michael McMullen : Why don't you take that, Patrick...? Patrick Kaltenbach : I'll take that one, Mike. Thank you. So we -- as you know, we are currently present in the LDG space. We launched Class 1 product several years ago. And this is a, what we see, as a sweet spot right now for LC/MS and clinical. It's really all about pain management, Vitamin D testing and all those applications, immunosuppressants, And we are pretty well represented in that space right now, whether it will be able to replace immunoassays, some of our competitors might think, we have some question marks there, we think we're pretty strong in LDG market that might continue. We see actually probably more promise on the more sophisticated assays that are related to metabolomics, and that are more related to space of cancer diagnostics and more complex diseases like Alzheimer's, a couple of years out. So this is where we see the focus for this business, because getting into a clinical workflow, where the [ riser-based ] assays are established and trying to blaze -- replace those will be quite difficult, I would say. Operator : Our next question comes from Tycho Peterson from JPMorgan. Tycho Peterson : My question on maybe just a longer-term outlook on margins. Wondering if you could comment a little bit as we think about the framework for next year, could you get a similar level of margin improvement and are there levers whether it's pricing or improving R&D efficiency that you could kind of point to as we think about the margin setup for next year? Michael McMullen : Thanks, Tyco. Appreciate the question. What I'll do is I'll refer you back to the messaging that we provided at our last AID. So what we committed to was greater than 22, as we move forward. And we think we've got a model which allows us to continue to improve our operating margin. But -- and it's going to be a combination of a number of things you mentioned already, which is innovation focus, making sure that we're pricing for value, they're managing our discounts correctly. So we have initiative underway we call the PDQ, a pricing and discounting quote initiative to really make sure that we're managing the price envelope correctly. The other thing I would point to is also the great work that our order fulfillment team has been doing. So when we formed the new company, we centralized all the manufacturing logistics and material procurement in one organization. And they've been doing a very nice job. And we think that the transformation that's underway in our supply chain [ could ] allow us to have some cost reductions in the future. So we won't commit today in the call to a specific number, but we like improving operating margins without sacrificing growth. That was my -- one of the key parts of my script, which says, hey, we're going to outgrow the market while improving operating margin. So that will continue to be our model. And as we look forward, and you can expect us to try to sustain levels of success we've enjoyed so far. Tycho Peterson : Okay. And then question on Intuvo, I understand you're generally not calling for cyclical Chemical & Energy recovery, but if we think about just the sales cycle, can you maybe talk as to how it's tracked versus initial expectations? How long are we going to have trialing systems? What would be the update? Michael McMullen : Sure. Yes, glad to -- always happy to talk about Intuvo. And we also have the Ultivo. So it is getting a little -- can be a tongue twister at times. But, Patrick, why don't you update the callers on what's going on with Intuvo? Patrick Kaltenbach : Yes, absolutely. So we're happy with the feedback that we received from the installed base. So of the instruments we have shipped so far, customers are really excited about the performance, robustness and ease of use of this product. That said, we are not still and not yet shipping any really big bulk orders. As we said in the calls in the last quarter and the quarter before is, we think it will happen more in fiscal year '18 when customers had enough time to test the instruments and also assign a budget to these instruments moving forward. Michael McMullen : Yes, I think that was learning for us, Patrick, which was, we thought we had -- we were in sort of the window with a September launch. But we really -- what we found out from our customers, they really didn't have time to plan for this in their 2017 budget. Patrick Kaltenbach : Absolutely. Actually, as you know, we launched in September last year, and the feedback we got from several large accounts was, well, very nice instruments. We have not yet -- we didn't have the time to really plan for the budget for fiscal year '17. But we are now getting feedback from those that's it's definitely in the budget for fiscal year '18. Again, the feedback is very positive. It is still early, in the ramp to volume of this product. But yes, really excited about the excitement it drives. Also, across the other cheesy products they have out there. We're clearly seen as the market leader in the gas chromatography and the go-to company. Tycho Peterson : Okay. And then just one last one on academics, you flagged Europe as being the driver there. Any comments on the U.S. market? Are budgets freeing up a little bit here from what you're seeing? Michael McMullen : Yes, Tycho, when we looked at some of the numbers and talked about it as a team, we said, listen, what we're really seeing is, our growth, which was a nice surprise for us in the third quarter, really was a market share gain story. So we're still not seeing a lot of active funding going on in the marketplace. And I think U.S. still seems to be fairly subdued. And Patrick, I don't know what your thoughts on that, but I think we're not that bullish on the overall market environment. We do think we're able to pick up some growth here, given that historically we've been underrepresented in terms of share. But the market is still not very robust. Patrick Kaltenbach : Agreed. Yes. Definitely, in the U.S. is not very robust. We have seen some upticks in Europe in the last quarter, which helped to drive growth. And we think we are very well positioned with our portfolio. We also have a dedicated program within the company to really look at our [indiscernible] model for Academia and Government. And as Mike said, it's all about taking market share from our competitors. And this is what we're after. Michael McMullen : Yes, I think that's maybe something that I should have mentioned earlier, Tycho, as part of our channel strategy, changes were made when I came in as CEO, we really catered a dedicated focus on Academia and Government. So I think perhaps we're starting to see some payoff of those early investments now. Operator : Our next question comes from Paul Knight from Janney Montgomery. Paul Knight : Can you talk about some of your initiatives that are developing like your oligo expansion? And also, my follow-up would be your thoughts on is Asia getting better or the same? Specifically, China. Michael McMullen : Yes, thanks for that, Paul. Appreciate the congratulatory comments. I'll make sure that the team hears that. And relative to the oligo expansion, in fact, a few of us are heading out there tomorrow to see firsthand are we're seeing pictures of the building, but there's nothing like seeing it firsthand. So we have a -- going out and spend some time with the team. We're expanding into Frederick. The construction schedule is going right according to plan. I think, Jacob, we're looking probably look like more still FY '19 revenue. Jacob Thaysen : That's correct. Michael McMullen : 2018, the factory will be done. But there'll be a validation process required. And the reason why I asked Jacob to talk about some of the customer activity is because we still see an incredible amount of demand for customers. And it's been a capacity constraint kind of growth challenge for us. But we're fully committed. We'll see firsthand, and maybe I'll have some more in-depth comments when I talk to you next. But the construction schedule and the go-to market is still on -- per plan. And then relative to China, and overall Asia, so I think about China, China continues to develop, just as we have forecasted. I think we're a little bit over double-digit through the first 3 quarters. We thought it would be a double-digit grower for us in 2017. We're seeing no signs of slowdown there. I think what has been a nice surprise is the other countries in Southeast Asia has been a very fast growing -- faster growing market for us. You may recall about a year ago, a lot of concerns about the impact of the currency outside of those countries. And inside Agilent, we call it SAPK, which is South Asia, Pacific and Korea, and we've been putting good growth up in that part of the sector, much higher than we had in prior years. I would say that Japan is the one where the market is still sluggish. Although, we've been able to have about a 6% growth rate over the last 2 quarters. But it's -- that's probably the most challenging of all the Asian markets we play in. I don't know whether you count India and Asia or not. It's managed in Agilent by our European team. But India market also continues to be quite strong. So I think Asia is going to continue to be a growth story. Not only for 2017, but into '18 as well. Paul Knight : What's your primary, most important element do you think behind your market share gains? Is it CrossLab? Or is it tuck-in potential situations like Cobalt? Michael McMullen : I think it's really -- we are kind of -- if I step back from it, I think it's both a combination of how we've been able to broaden our portfolio, tied with a true customer focus. I know you hear it all the time. But we really try to think about what matters to our customers and then align our business strategies behind it. So we're not only doing great science and driving innovation with some of the new instrumentation that we've been inducing. But as we mentioned earlier, we're really helping our customers with, what we call, the economics of lab. And that's really the CrossLab. So I think it's -- we're getting share in both places. And I think it's been the combination of how we architected -- architected, if you will, our portfolio strategies. And I can't also overemphasize enough the importance of having the right go-to-customer sales model. We made some pretty big changes the first year, the new Agilent. And we're now, I think, starting to see the benefits of that, which is how it really tight set of customer relationships tied with a broadening portfolio with a much clearer economic value proposition via CrossLab. Paul Knight : And lastly, were there share repurchases in the quarter, Mike? Michael McMullen : No, no. Operator : Our next question comes from Puneet Souda from Leerink Partners. Puneet Souda : Just -- on Dako, if I could ask. You know with the Omnis rollout happening here, and you mentioned Quest contract earlier in [indiscernible] Chemistry. Was that a contribution in the quarter? And how should we think about this pull-through from these boxes in the back half of the year once they start getting out there? Michael McMullen : Yes, Puneet. Thanks a lot for the congratulatory comments. And I know Jacob would love to talk about the overall pathology results for the quarter. And then maybe, go in specifically to the question around of the impact of Quest and timing that we have on our business. Jacob Thaysen : Yes, thanks for that. And we are very pleased with where we are with our Dako portfolio business today, where we really see a very strong momentum or continuous momentum with the business. Clearly, we were very pleased with the win of Quest being the primary vendor here. Which we announced, I think, it was last time. We are in the progress of installing our solutions on several Quest sites. So we haven't seen any contribution from Quest in this quarter. And we'll start to see it come in here next quarter. But it's primarily a fiscal '18 view or situation that we'll start to see Quest coming in. So right now, our pathology business is really driven by everything else we're doing out there. And Quest is just a part of the story. It's a great part of the story, but we do see strengthening in all parts of geographies right now. Puneet Souda : Okay. Got it. And then, second one just the Pharma and growth. Obviously, it's strong in the quarter. So if you look at the Pharma CRO and the CDMO accounts, what's your sense of sustainability here? And what's it driving? Is it the biomolecules? I mean, I suppose they're using a number of products through the LSAG segment. What gives you the sense that these customers are continuing to see growth in biomolecules here, as we've heard from other -- few other competitors, there was lumpiness in that segment. Michael McMullen : I know that some of our competitors reported that, but that's not what we experienced. And Patrick, you want to share your thoughts here? Patrick Kaltenbach : No, I agree. This is not what we are seeing right now. And part of it is, again, the solutions we brought out. The new solutions that helped drive the business there that are really focused on the biopharma space. On monoclonal antibodies, there's also new software solutions out of there for biosimilars like our BioConfirm Software. So I think we're addressing the needs of this market space better and better, and that will drive for us more business moving forward. Especially, I think also the biosimilars is a market space that will continue to grow. And I don't expect a big slowdown in that area. Puneet Souda : And just last quickly on China, are you still seeing benefit from the CFDA changes or this contribution? I mean, obviously, you have tougher comps coming up and your base is significantly larger in China. So what's your sense of CFDA changes continuing to benefit versus the food and environmental business? Michael McMullen : Yes, thanks for that question. So we expect the food market to continue to be strong in China. We explicitly called that out. I think we used the word food market fundamentals remain strong. Growth rates actually are a little bit lower for China in Q3, just because we're coming out with 20-some percent compare from a prior year. But the money is there and the emphasis is there. It's a critical government policy to continue to improve the safety of their food supply. A lot of work it still to be done. So we're expecting the growth to be still be there. Operator : Our next question comes from Dan Leonard from Deutsche Bank. Daniel Leonard : One question, I just want to dive into a little bit on detail on what you're seeing from one specific customer base within Pharma. So it seems like the generic industry is getting weaker and the challenges are worsening there, at least for some of the public companies. Are you seeing any of that in your customer base yet? Or any of that in the purchasing patterns? Michael McMullen : What do you think, Patrick? Patrick Kaltenbach : No. I mean, it's definitely not growing at the same pace as biopharma, as we outlined here. But it's still growing for us. And we don't see any material changes in the next couple of quarters. Yes, we will see tough compares because we have been growing so strong over the last 8 or 6 quarters or 7 quarters in Pharma. But the fundamental business in small molecule is also there. Michael McMullen : Yes, and you have -- if you can show a return on investment, right? So I think that's been one of the selling propositions for the new portfolio. Patrick Kaltenbach : Absolutely, absolutely. Michael McMullen : When they're under pressure, generics guys, they're willing to invest because they can see it helps their earnings profile. Patrick Kaltenbach : The whole messaging is around productivity and efficiency gains and the cost of ownership for resolutions and it resonates very well with this customer base. Mark Doak : I'll just add on. This is Mark. Obviously, with the Enterprise Solutions (sic) [Enterprise Services] business, I'd echo the same comments that Patrick and Mike have. We've seen the value proposition around the economics of the lab continue to resonate as they have more challenges. Daniel Leonard : That's helpful color. And then from my follow-up, as I think about the 3.5% core growth rate for the fourth quarter, that would be the lightest core growth in I think it's 4 or 5 quarters. And how much of that would you attribute to a tough comp versus maybe some caution on the end market versus just plain old conservatism? Michael McMullen : So let me maybe add some color, then you can add your comments as well, Didier. So when we look at the comps, they're real. I haven't done the math in terms of the x percentage, but pharma is our largest market. It grew 16%, Q4 last year. China, which is our second largest geography, grew 27%. So the comp -- the tough compares are real and that's a part of our guiding philosophy all this year. We've been calling that business remains robust, but we know we're going into a period of tough compares. I would say, relative to the Chemical, Energy, what we're saying here is businesses going to be better than we initially thought it was going to be coming into this year. We're glad to see the strong growth in the last 2 quarters, but there's still some signs that say, let's not get too far ahead of ourselves here. We've had 40% of this segment is still under pressure. The company's earnings forecast are projected to be down. So we just think that it's right thing to be doing to not call for cyclical turnaround just yet. And Didier, I don't know if you would add anything else to our approach to looking at the quarter. Didier Hirsch : Maybe just that Europe, we had double-digit growth 2 quarters in a row. And we also want to be a little bit cautious about extrapolating that number. If last quarter we had told you where we are forecasting Europe to go 12% in Q3, I think, you have crucified us. So it's tough to just -- we don't want to extrapolate those kind of superb results for 2 quarters. Operator : Our next question comes from Catherine Schulte from Robert W. Baird. Catherine Ramsey : Can you elaborate a little bit more on the initial feedback on an uptick of Ultivo Triple Quad, and then just comment on your performance in LC/MS in general? Michael McMullen : Yes, Catherine, be happy to. It's a great a question. And when your question came through, there was a smile on Patrick's face. So I know he's anxious to share a little more about what's going on with Ultivo. Patrick Kaltenbach : Absolutely. So first, I mean, on the Ultivo question and then general view on LC/MS and GC/MS as well. We think Ultivo was really to star this year at ASMS. When we introduce the product, it creates a lot of excitement among our customers base. They cannot wait to get their hands on the prototype. That said, we will not ship anything before end of this quarter. So I don't expect any revenue contribution in Q4 by -- from coming from the Ultivo product itself. I think it would be very well positioned to ramp that product in fiscal year '18 and capture the market opportunity specifically in the environmental and food application space where this product is really front and center in terms of the specifications and the application domain. So lots of excitement around there, but it's not the only product we have launched at ASMS. We launched a new Infinity single-quad solution. We have the biopharma Q-TOF solution and we launched a new GC/Q-TOF solution that will all again drive the momentum behind our mass spectroscopy solutions. Very strong showing, and we are very optimistic about the future of this product line, the technologies and the focus we have and customer applications, as it creates a lot of excitement. And we see that also in the growth rates already in Q3. Catherine Ramsey : All right. Great. And then I wanted to spend a little time on the Cobalt acquisition. Can you just walk us through your thought process there, revenue run rate and then what kind of growth you think you could get out of that business? Michael McMullen : Sure, Catherine. So as I mentioned in the call, we really have been trying to find companies, which in adjacent markets would fill gaps in our current offerings, but also have a differentiated offering and a very strong team. And we've been trying to build out our spectroscopy business, with a lot of success over the last several years. The one hole was Raman spectroscopy, which is arguably one of the fastest-growing segments in spectroscopy. So we engage the Cobalt Light Systems team early. In fact, it's had a chance to spend some time with the leadership team here earlier today. And I don't think they're yet ready to move the next phase, but we got to them early, talk to them about joining the company, being part of Agilent, and they really saw advantages to scale and the innovation focus that Agilent has. It's a 50-person-plus company, about $10 million-plus run rate and we think that -- I think double-digit growth Patrick? Patrick Kaltenbach : Yes. Given where the market is and the differentiated technology is, I think, we're definitely look for double-digit growth. Operator : Our next question comes from Steve Beuchaw from Morgan Stanley. Steve Beuchaw : I've got 2 for Jacob. One is as a follow-up on the SureSelect commentary, I wonder has the discussion around that product portfolio has become bigger from Agilent over the last couple of years, if you can give us a little bit more granularity. Can you give us a sense for maybe how big that business is? How fast it's growing? Are you taking share? Is it accelerating? Can you just talk about how the portfolio, including SureSelect and around SureSelect in library perhaps [ sample prep ] is contributing to the growth in DGG? Jacob Thaysen : Yes, Steve, thanks, for that. And I'm very pleased with the new announcement of the SureSelectXT HS, which I think is going to really drive the business going forward. First of all, it would work very well with FFPE. And with the molecular barcodes, you would also see that we would be able to really get very certain in results on low leading frequencies. So I think this is exactly what the market is looking for. Overall, the SureSelect and I'll talk on this, investment business has been a success story for DGG and for genomics over last many years. It is a substantial part of genomics business, and it continues to grow in the double-digit regime. I think we have seen industry over last few quarters that the market has at least taken a little bit of a pause, but we still see double-digit growth of our business. So it is -- I think we still are definitely keeping our market share out in the business. I'm not sure right now whether we're taking market share, but we're certainly keeping it. And with the new SureSelectXT HS, I'm very convinced that we will start to see even stronger momentum again. I will say that SureSelect and where we're going with all this right now is our strategy is to become a whole workflow provider, where SureSelect is going to be a key part of that, and SureSelect is our entry into that market. So clearly it's very important for us going forward, but we are going to expand out both with the ELISA platform, our bioinformatics platform. But also with our Lasergen investments, we hope to be full workflow provider in the future. Steve Beuchaw : That super helpful. The second thing I was hoping to get just a little color on is the Nucleic Acid Solutions market, the environment surrounding the investment in Colorado. On the last call, Mike, gave us an update on the progress there, we talked about the potential for that to be a more material contributor, the capacity expansion, for fiscal '19. Could you give us a sense for how big you think the relative opportunity is as compared to how much business you're doing out today and how much business are you just having to pass on because of that capacity constraint? And how fast does it ramp? Jacob Thaysen : Yes, thanks, again, Stephen and I appreciate the interest in the NASD business, which is very exciting. Most of our customers today are still doing clinical trials. So there's a lot of investment and we continue to track the investment going into this market right now with this new type of drugs. And there is a continued increase investments and we are hopeful to see some of those clinical trials coming out into commercial products over the next few years here. And that will create a substantial step up in the -- both in the expectations and also the requirements to our capacity. So I see that this could take it quite far over next 10 years. I would say Pharma does not go as fast as diagnostic, but you would see some step-ups every time we see some products going out and be commercial. So related to our current business, I think they certainly have an opportunity to substantially have -- see a substantial growth going forward over the next 5 years and probably also next 10 years. Do you want to say more? Patrick Kaltenbach : Yes, I'll just add one thing, Steve. Right now, the business is about $70 million, $80 million and we are capped. We are operating at maximum capacity. And as Mike and Jacob mentioned, the new capacity only comes on board in 2019. And will add about $100 million after it's full running state. So the ramp will be throughout fiscal year '19. So fiscal year '20, we're talking about $100 million, just with that additional business, but 2018 will be relatively flat with 2017 because we are already at capacity of existing facility. Operator : Our next question comes from Brandon Couillard from Jefferies. S. Brandon Couillard : Mike, just a question on the M&A high-level, how you see the pipeline? And if you could sort of elaborate on exactly what the Population Genetics deal does for you strategically and economically? Michael McMullen : Sure, Brandon. I'm happy to address both questions. And then relative to M&A, we still see that there's a pretty robust pipeline of targets out there, but not in the historic places where people have focused on in the U.S. public sector. There's a lot of very, very strong companies in Europe in the private sector as well as in the U.S. And you may recall that in May, we had a new head of strategy and business development joined Agilent. And one of the priorities there is related to continue to find ways to make M&A more of a growth platform within the overall operating model. We have to continue to describe [ for us ] in terms of how we want to use our cash and our balance sheet strength. I would say valuations are a little rich. So we have to be -- make sure you don't get too far ahead of yourself in terms of what you're willing to pay. But I think that there are viable targets out there, particularly for a company of Agilent's size, where we can acquire companies and they really can make a meaningful impact possibly in terms of our ability to grow. The recent IP that we purchased -- why don't you talk a little bit about the strategic thought process, Jacob, and the financials around it? Jacob Thaysen : Yes, absolutely. And the Population Genetics, Pop Gen, is, as Mike was mentioning, an IP consideration. And we're very pleased to have that which creates a very strong IP situation within molecular barcodes. But we see a very strong interest for molecular barcodes where we think this is going to be very important is, first and foremost, in liquid biopsies. But secondly also for what we'll call eliminating false-positive that you see in NGS right now and especially going into the Dx, the diagnostic markets where you need to make sure that what you measure is actually fully related to or correlated to actually the sample you have in there and using those molecular barcodes ensures that you are very certain of what you measure is actually also there. So I believe actually that molecular barcodes is going to be required to really have a play in the diagnostic setting going forward. And so I think we will be in a very strong position to really drive that market. S. Brandon Couillard : One more for Didier. In terms of the CapEx outlook, the $15 million reduction, was that a pushout into '19 or, excuse me, '18. And as far as next year goes, should we still expect a return to a normal level of CapEx, call it, around $110 million, $120 million for next year? Didier Hirsch : Yes, it is indeed a pushout into '18, but you will see '18 will be lower than the number that we've just quoted for '17. So we are returning to a more normal stage in '18, but mostly it will be in '19. Operator : Our next question comes from Doug Schenkel from Cowen. Doug Schenkel : I want to touch on 2 topics, 2 loose ends. The first is tax. You reduce your full year tax rate guidance. You're on track to get to an 18% non-GAAP tax rate level, well ahead of your prior expectations. Should we expect further tax rate reductions towards your -- something like your much lower cash tax rate moving forward, and if you could quantify anything there, it would be helpful? The second topic is on end markets and guidance. I was hoping that you'd be willing to share your assumptions for growth by end market and geography at least as they're embedded into your Q4 revenue growth guidance. Michael McMullen : Want to take the first? Didier Hirsch : Sure. Yes, Doug -- yes, I mean, you rightly pointed out that our -- a new pro forma tax rate of 18% is way above our cash tax rate, which is less than 10%. So we do have -- see opportunities basically. It's hard work. I'm not ready to commit now to like Mike did not commit to a precise operating margin expansion number. I'm not ready to commit yet to precise path. But yes, there's more opportunities. And we're working hard to identify ways to reduce our reserves, so that we can move closer to -- I mean, move our pro forma tax rate down. And it's a -- stay posted. Michael McMullen : You want me take the next one? Didier Hirsch : Yes, please. Michael McMullen : Yes. So I think if you look at our full year guidance, Doug, a 6% core growth for the overall enterprise, we expect China to be right around 10% or so for the year. Overall, Asia around double-digit with mid-single-digit growth in Europe as well as Americas. So again, the Europe -- the Asia side of the business is expected to be the growth engine, although all geographies are expected to grow for us this year. And then when I look at the -- finally, I know it's relative to the -- there you can help me. Thanks, Alicia. When you look at the end market, again, the same 6% core growth. Here, what we're seeing is, Chemical & Energy, I think 7%, 8% range, I think, is what we've been talking, about 8% for the year. As I mentioned earlier, some caveats, still there are some segments, which still have some question marks. We've been very consistent with our view that the pharma with the -- would go from it's a double-digit grower that we had in '16 to more high single digits. So you're probably looking at 8-ish for Pharma for the full year, flat for Academia and Government, and then high single digits for Diagnostic and Clinical and then food, Environmental, Forensics, low single digits. So the story here is... Operator : Our next question comes from Derik De Bruin from Bank of America Merrill Lynch. Derik De Bruin : All right. So Doug just took my questions. So I now got to be creative. So... Michael McMullen : You think fast on your feet, Derik, so whatever you say is fine. Derik De Bruin : So can we talk a little bit about pacing during the quarter? I mean, you do have an extra month relative to some of your peers on this. Was July any different than May or June? I mean, you notice any signs of potential unusual seasonality showing in the quarter? Michael McMullen : I think you know, Derik, we don't explicitly talk about our incoming orders in terms of where we finish, but what I can tell is Q3 was like any other Q3 we've seen. So nothing really special about it, besides the fact that it was an excellent quarter for the company. Derik De Bruin : Okay. And when you look at your Pharma business, I mean, we've had a lot of questions about generic exposure, and how much of your business is actually tied to the generics manufacturers in your Pharma segment? Michael McMullen : I don't have a good number on my head on that one, Patrick. Patrick Kaltenbach : Generics is probably difficult to answer. I would say small molecule overall raises biopharma... Michael McMullen : 85-15, right? Patrick Kaltenbach : 80-20, you could say. Michael McMullen : 80-20? Patrick Kaltenbach : Yes. Derik De Bruin : 80-20 small molecule or 80-20 biopharma? Michael McMullen : 80% small molecule and 20% bio -- biomolecule. Derik De Bruin : Great. And just -- I'm just sort of looking at the numbers... Michael McMullen : I thought 3 questions. You're already on your third question. "I have no questions. Derik De Bruin : I'm not as dumb as I look. So -- the -- I'll leave it at that. So you did 6% core growth in '15, 6% in '16, you're tracking to 6% this year, given a conservative Q4 guide, is -- and we sort of look at the business and just sort of given where the segments are, I mean, are there -- is a mid-single-digit sort of [ core ] growth rate on the business for next year is certainly a reasonable number to sort of think about as we started thinking about expectations? Michael McMullen : So I'm going to kind of give a little kind of a teaser for our November call. So I'll hold the guide for November call. Didier is giving me hand signals on that one right now. But I think what you can see a consistent message is our ability -- our model is all about outgrowing the market. So I think that's what you look for us to do and like I said earlier, we really -- we're retiring "The New Agilent", the name. We arrived, we got a foundation and the model that's gotten us here, we're going to stay with that model, but if you can just wait a few more months, I'll have much more clear answer to your question. Operator : Our next question comes from Isaac Ro from Goldman Sachs. Isaac Ro : I wanted to come back to the industrial portion of the business and I think you covered some of the backdrop on Energy, but interested in what went on in Chemical this quarter. Just talk a little bit about not just the growth rate but also kind of your outlook for the rest of the fiscal year, obviously, the commodity dynamic here remains a little volatile. So I'm interested in the Chemical side of your business and how you're managing through that. Michael McMullen : Happy to, Isaac. Just a reminder, we're now going to be talking about a different ratio of the 3 segments that make up the Chemical & Energy space, given the climb we've seen over the last 2 years in exploration side. So exploration is about 10%, refining is about 30%. So, if you will, the Energy sector is about 40%. The other 60% is, in what we call, chemicals and materials. And that's really been what the growth we're seeing has been coming from. Some reinvestment in refining side, but mostly growth has been on the chemical and material side. What we're seeing is for the year, we're forecasting, as I mentioned earlier to Doug's question -- or say, listen, we think we'll probably do 8% or so for the year in Chemical & Energy, which is remarkable turnaround, given the fact that the prior 2 years actually had shrunk for us. But I can't emphasize enough that there still are signs of caution. You may want to use the word conservatism, but I'll just say I'm just trying to be very pragmatic and think about what's going on here. And we're saying, listen, 2 good quarters of growth. Okay, great. Let's see how the next quarter shapes up and I keep coming get back to 40% of that segment is still under pressure and our major customers here, those companies themselves have seen a downgrade in their earnings forecast for the next 12 months. So all in all, a much better picture than we thought coming into the year, but still some reason to be a little bit pragmatic in terms of how we view the future growth in Q4 and beyond. Isaac Ro : Okay. And maybe just second question would be on the DGG segment, since you guys didn't do your annual investor meeting this year, I was hoping for a bit of a long-term refresh on the strategy, obviously you've had good success with the Dako asset, you spent some time talking about SureSelect, and you've got obviously a lot of other investments and irons in the fire for NGS. But putting that altogether, how should we think about your appetite to invest strategically and organically in DGG relative to the rest of the company? I mean, it seems like there's good opportunity to add into -- to fill into the more whitespace, and I'm curious how high a priority that is? Michael McMullen : Yes, it's -- we have a very large appetite in the space. And a number of things have been happening. So if you look, Jacob has done a really excellent job in terms of addressing the fundamentals of the business, pathology business was double-digit growth for us. When I first came on this role, a lot of questions about the future of the Dako acquisition. We've got that on. [Audio Gap] We're in the solid growth there. And we are making a number of significant investments, both organically and inorganically. So a lot of our M&A has been focused in this area. So whether it'd be the Cartagenia acquisition, the Multiplicom acquisition, Lasergen, equity investment, the recent Pop Gen, so we have a lot of interest in this space. And as I mentioned earlier, not to put any pressure on Sam, who happens to be in the room with me, but we brought in a new Head of Strategy and Corporate Development, and really from the space, so we're very interested in finding new ways for Agilent to grow in the space. We'd like the fundamentals of the market, and we like our ability to take a bigger piece of that market. Isaac Ro : Got it. And just last question there, just given the -- it's your smallest segment and the end market opportunities there are pretty vast. Should we assume that will remain the highest growth segment in the company for the foreseeable future? And I'm just trying to put that all in context on the numbers. Michael McMullen : Well, I think all 3 group presidents are fighting now to see who can grow the fastest. So we think all of our business groups can grow, I think that the rest of them really unique fundamentals going on in DGG space, which perhaps has a higher long-term inherent growth rate than some of our other markets. So we think we're all going to be winners, and maybe perhaps a little bit higher growth ultimately in DGG. Operator : And I'm showing no further questions from our phone lines. I would now like to turn the conference back over to Alicia Rodriguez for any closing remarks. Alicia Rodriguez : Thank you, Crystal. On behalf of the management team, I'd like to thank everybody for joining us today. If you have any questions, please give us a call in Investor Relations, and I'd like to wish you a good rest of the day and thank you again. Bye-bye. Operator : Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,017	4	2017Q4	2017Q4	2017-11-20	2.335	2.397	2.602	2.627	3.65	25.57	25.39	Executives: Alicia Rodriguez - VP, IR Mike McMullen - President and CEO Didier Hirsch - SVP and CFO Patrick Kaltenbach - President, Life Sciences and Applied Markets Group Jacob Thaysen - President, Diagnostics and Genomics Group Mark Doak - President, CrossLab Group Analysts : Derik de Bruin - Bank of America Merrill Lynch Tycho Peterson - JP Morgan Steve Beuchaw - Morgan Stanley Brandon Couillard - Jefferies Doug Schenkel - Cowen Dan Arias - Citi Catherine Schulte - Baird Tim Evans - Wells Fargo Securities Jack Meehan - Barclays Paul Knight - Janney Montgomery Puneet Souda - Leerink Partners Steve Willoughby - Cleveland Research Patrick Donnelly - Goldman Sachs Dan Leonard - Deutsche Bank Operator : Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 Agilent Technologies, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s program is being recorded. I would now look to introduce your host for today’s program, Alicia Rodriguez, Vice President of Investor Relations. Please go ahead. Alicia Rodriguez : Thank you, Jonathan, and welcome everyone to Agilent’s fourth quarter conference call for fiscal year 2017. With me are Mike McMullen, Agilent’s President and CEO; and Didier Hirsch, Agilent’s Senior Vice President and CFO. Joining in the Q&A after Didier’s comments will be Patrick Kaltenbach, President of Agilent’s Life Sciences and Applied Markets Group; Jacob Thaysen, President of Agilent’s Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. 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. You will find an investor presentation along with revenue breakouts and currency impacts, 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 Mike and Didier 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, the NMR business, and acquisitions and divestitures within the past 12 months. Guidance is based on exchange rates as of October 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, let me turn the call over to Mike. Mike McMullen : Thanks, Alicia. Hello, everyone. Thanks for being on today’s call. I’m pleased to have an opportunity to continue to tell the Agilent story, a story of strong revenue and profit growth that we’ve been telling for the past three years. The Agilent team closed out 2017 with another strong quarter, capping off a tremendous year of revenue and profit growth. We again exceeded our growth expectations. Q4 revenues of $1.19 billion are up almost 6% on a core basis. Reflecting our commitment to improve as Agilent’s operating margins, our Q4 adjusted operating margin of 23.3% is up 80 basis points. This is our 11th consecutive quarter of improving operating margins. The strong revenue growth and margin improvements resulted in Q4 adjusted EPS of $0.67, an increase of 14%. Looking at the full year, we delivered a highest growth rate since the 2014 launch of the New Agilent. Our 2017 revenues of $4.47 billion are up 6.7% on the core basis. We have strong momentum going into 2018. Adjusted operating margin for the year is up 130 basis points over last year. And as you know, in 2015, I committed to increasing Agilent’s adjusted operating margin by 410 basis points over FY14’s adjusted operating margin to 22% by 2017. I’m pleased to announce that we’ve made this commitment and accomplished our goal. We are not done yet of course, but this is significant achievement by the Agilent team. We will continue to focus on making improvements in our operating results. The momentum in our business combined with our operational excellence drove a 19% increase in adjusted earnings per share for the full year to $2.36 per share. Let me now take a minute or two to look closer what’s driving our stellar results. From an end market perspective, our chemical and energy revenue grew 15%. This was third consecutive quarter of double-digit revenue growth. Growth was broad-based across the spectrum of exploration, refining and chemicals. We are encouraged by the uptake and reinvestment by our customers as they’re upgrading their labs and investing in next generation equipment. A return to growth accelerated in academia and government with 12% growth, which was above our expectations. Growth was broad based across product lines with particular strength in Europe and Americas. Our higher than expected growth has resulted in improved funding environment and market share gains. Food revenue grew 10% against the difficult compare of 10% in Q4 of last year. From a product perspective, the strength was broad based, led by services, consumables, mass spectrometry. Regionally, Europe and Asia drove the gains. Pharma revenue declined 5% against the difficult compare of 16% growth in Q4 of last year, which itself came on top of a 19% growth to Q4. We had been anticipating continued strong pharma investment levels with difficult compares slowing our reported market growth rates to mid-single digits. Some additional specifics of our Q4 results. As expected, the LC replacement cycle continues in this small molecule market segment, but at a slowing rate. NASD revenue also is down, as we expected. We noted in our Q3 call that NASD revenues are batch based which makes them vary from quarter-to-quarter, depending on the timing of customer acceptance. Market demand however for the NASD API offering remains strong. Our product and geographic mix also contributed to the results. We experienced strong order demand from Europe and for higher end mass spectrometry technologies. The order to revenues cycle is longer for Europe in these types of products. We expect these revenues materialize in Q1 and Q2 of FY18. The biopharma segment of our pharma business remained strong along with services and consumables across the entire pharma end market. Diagnostics and clinical grew by 9% led by pathology and companion diagnostics. Continued strong end-market demand and market share gains are driving performance. Environmental and forensics grew 4%, in line with expectations. Concerns about the health of our environment continued to drive the market in Asia. Geographically, our Company results are driven by higher single digit growth in Europe and China. The Americas grew by mid single digits, and Asia excluding China and Japan grew by low single-digits. And finally, let’s turn to highlights from our business groups. The Life Sciences and Applied Markets Group delivered core revenue growth of 4%. Market revenue was led by strength in chemical and energy, academia and government, and food, partially offset by declines in pharma. Double-digit growth in several platforms including mass spectrometry, microfluidics and cell analysis were key driver to reported growth. LSAG had a tremendous year on the innovation front, launching several new high-impact products such as the Ultivo LC-MS triple quad with a 70% smaller footprint than its predecessor. The Ultivo, which began shipping this November and other recent new product introductions are being well-received by the market. This gives us momentum going into 2018. The integration with recent acquisition of Cobalt Light Systems is going very well. Agilent’s CrossLab Group’s strong performance continued this quarter with 8% core revenue growth. Growth was healthy across services and consumables, most regions and end markets. Our CrossLab’s Service and Support organization hit a significant milestone, $1 billion in annual service orders for the first time in a single fiscal year. This milestone was accomplished ahead of our initial expectations. It validates our strategic focus on developing a service business for the entire lab. In a rather short period of time, our team has turned its services business into a key differentiated offering for Agilent. Through these services, we can as a strategic partner with our customers, helping them achieve greater lab efficiencies and outcomes. The customer response to our service offerings is overwhelmingly positive. Our chemistry business and ACG also continue to be awarded for technical innovation with double-digit growth in the AdvanceBio column portfolio for the fiscal year. The Diagnostics and Genomics Group also delivered strong revenue growth of 7%. Demand is increasing for our pathology products and companion diagnostic services. We are seeing continued strength of our PD-L1 and molecular products. As expected, our new Nucleic Acid Solutions business was down for the quarter, given the product driven nature of the business. As previously mentioned, market demand for APIs for RNA-based therapeutics remains strong. DGG achieved a major milestone this year, delivering a 20% operating margin exclusive of acquisitions for the first time. Three years ago, this business had a 13% operating margin; we have increased that to 20%, a tremendous achievement made possible by integrating and driving improvements in the former Dako business, bringing to the market compelling new offerings and executing on gross margin improvement initiatives. DGG continues to expand its market reach. We received several significant FDA approvals this quarter for offerings that help our customers in their efforts to fight cancer. We received FDA approval for expanded use of our PD-L1 cancer diagnostics for Merck’s Keytruda and Bristol-Myers Squibb, Opdivo. We have been closely collaborating with both companies. Our GenetiSure Dx Postnatal Assay received 510(k) clearance. This is our first comparative genomic hybridization assay approved by the FDA for diagnostic use. Our R&D advancements continue to yield differentiated and new products. At the American Society for Human Genetics Conference, we introduced our first expansion of the SureGuide pooled CRISPR libraries for functional genomics. This new offering will help accelerate research in the complex diseases and drug discovery. Agilent received the 2017 Scientists’ Choice Award for Best New Clinical Laboratory Product for the IQFISH Panel for Lung Cancer from the American Association for Clinical Chemistry. This award is elected through online nomination and voting by scientists around the world. This demonstrates how we’re meeting our customers’ needs of products that win their trusts. Before touching on the 2018 outlook, I want to provide you with a perspective about our guidance philosophy and the market environment assumptions underlying our initial outlook. Later in the call, Didier will provide additional guidance specific. We entered 2017 thinking that China and the pharma market would be strong. We also pointed out at that time that we moved into a period of increasingly difficult quarterly compares for these markets. At the same time, we were uncertain about the outlook for Europe and the chemical and energy market. We closed out 2017 with China and the pharma market developing generally as expected; Europe and the chemical and energy market another hand exceeded our initial expectations growing 8% and 11% on a core basis respectively. We enter 2018 with a strong backlog and good visibility for the next one to two quarters. For the full year, we expect pharma to moderate down slightly from a 6% growth rate delivered in 2017. We expect China to maintain a high-single-digit growth rate. For Europe and the chemical and energy markets, while we experienced unexpectedly strong 2017 growth, we will cautiously guide to lower growth in FY18. A level of political and economic uncertainty persists across the globe, providing less visibility into second half 2018. We are taking a wait-and-see outlook for the European and chemical and energy markets. A few final comments about the next chapter in the Agilent story. 2017 was a stellar year for Agilent. We delivered our highest growth rate since the lunch of the new Agilent. We raised our operating margins 410 basis points in three years to 22%. We grew adjusted earnings per share by 19%. While we’re busy improving our operating results, we’ve also been building the Company for the future. Our Agile Agilent program continues to streamline the Company as we upgrade our systems and infrastructure, and drive continued process improvements. We continue to build an even stronger portfolio through our revamped R&D programs and execution of our M&A strategy. We are delivering to the market truly differentiated offerings and augmenting our internal investments with acquisitions. These acquisitions are bringing to Agilent new capabilities and unique new offerings. We then leverage our Company scale to drive revenue and create cost synergies. Our one Agilent cultural transformation is changing the way we work, improving the customer experience; it’s a key driver of our excellent results. We’ve just completed the third year of our Company transformation. We now have a solid foundation in place, a proven track record of doing what we say we will do, and of executing winning a growth strategy. I often tell the Agilent team that the best is yet to come. We have momentum and I believe Agilent’s prospects have never been stronger. Thank you for being on the call and I look forward to answering your questions. I will now hand off the call to Didier. Didier? Didier Hirsch : Thank you, Mike, and hello, everyone. As Mike stated, we are very pleased with our Q4 and full year performance, both well over the high-end of our guidance. We delivered core revenue growth of 5.8% and 6.7% ,respectively; and our operating margin was up 80 basis points and 130 basis points, respectively. Just as importantly, we reached the goal set in March 2014 to achieve 22% operating margin adjusted for income from Keysight in fiscal year 2017. Our full year EPS at $2.36 is 19% higher than the previous year. Our operating cash flow for the full year at $889 million is $39 million above the increased guidance provided last quarter and $96 million or 12% higher than fiscal year 2016, reflecting a strong overall performance. CapEx spending was $176 million, lower than our initial guidance of $200 million as some CapEx related to our new Nucleic Acid facility was pushed into fiscal year 2018. Turning to capital returns for the year, we paid $170 million in dividends and repurchased $194 million worth of shares. I’ll now turn to the guidance for fiscal year 2018. Although we are comfortable with the present revenue and EPS consensus estimate, we believe as we did in fiscal year 2016 and fiscal year 2017 that it is appropriate to have a cautious first guidance of the year. Our fiscal year 2018 revenue guidance of $4.72 billion to $4.74 billion corresponds to a core revenue growth of 4% to 4.5%. It is based on the October 31st exchange rates, and currency has a 1.3% positive impact on revenues. We project fiscal year 2018 adjusted operating margin of 22.2% to 22.7% and fiscal year 2018 EPS of $2.50 to $2.56, growing 7% at midpoint. If market conditions and our performance continue as strong as we are presently seeing, we stand ready to reflect the ongoing strength as we set quarterly guidance in the future. As you update your models for fiscal year 2018, please consider the following 10 points. First, annual salary increases will be effective December 31, 2017. Second, stock-based compensation will be about $72 million. As we frontload the recognition of stock-based compensation, the Q1 expense will be about $31 million. Third, depreciation is projected to be $101 million for the fiscal year. Fourth, the non-GAAP effective tax rate is projected to remain at 18%. Fifth, we plan to pay $192 million in dividends, as the Board just approved a dividend increase of 13%. Over the last three years, we will have increased our dividend by nearly 50%. Sixth, as for buybacks, we registered 10b5-1 in September that includes two tranches with the maximum overall spend of $380 million. The first tranche is to ensure the repurchase of 2.7 million shares with daily execution throughout the year, to maintain our diluted share count at about 326 million shares on average for the year. The second tranche as in the previous years is opportunistic. Seventh, for purpose of our EPS guidance, we have assumed the diluted share count of 326 million, i.e. we have assumed that the opportunistic tranche does not get triggered. Eighth, net interest expense is forecasted at $59 million, and other income at $14 million. Ninth, we expect operating cash flow of $970 million and capital expenditures of $200 million, which includes about $110 million to complete the new nucleic acid factory that will be operational in 2019. And tenth, the projected tax rate and cash flow exclude any impact from the potential U.S. tax reform. Finally, moving to the guidance for our first quarter. We expect Q1 revenues of $1.145 billion to $1.165 billion, and EPS of $0.55 to $0.57. At midpoint, revenue will grow 5.25% year-over-year on the core basis and EPS will grow 6%. At customary, Q1 EPS is negatively impacted by the December salary increase, the strong loading of stock-based compensation, and the increase in payroll taxes due to the disbursement of the variable and incentive pay of the previous year. With that, I will turn it over to Alicia for the Q&A. Alicia Rodriguez : Thank you, Didier. Jonathan, will you please give the instructions for the Q&A? Operator : Certainly. [Operator Instructions] Our first question comes from the line of Derik de Bruin from Bank of America Merrill Lynch. Your question, please? Derik de Bruin : So, can we you talk a little bit about the pharma results in the quarter. Just can you parse out the contribution or the lack of contribution from the NASD versus the European rev rec for us? And then, I’ve got a couple of follow-ups on that. Mike McMullen : Sure. Happy to do so, Derik. So, I’d point you to three comments on our Q4 results in pharma. The first, the one that we’ve been signaling for most of the year which is tough compares. We came off 16% growth in Q4 last year then we had 19% Q4 the prior year. Second piece is the revenue recognition timing, and I think there’s two aspects of that. One is the NASD business which we described in the call as really being a batch based business, kind of depends on when the customer wants to finish up the batch. But the overall market demand looks really good for these products. And then, as you are indicating, we had really strong results in mass spec and in Europe. And typically, we don’t -- they will be order results. Typically, we don’t talk about order, but we wanted to give you a sense of the strength of our pharma business in these areas and how it translates into revenue going into the first half of next year. The third piece would be that we are seeing expected slowing of the LC replacement cycle in small molecule side. So, those are three major drivers of our -- behind our Q4 performance in pharma. Just to remind, we ended up right on our full year guide. So, we came in at 6%, right where we thought we would in terms of pharma. To your specific question, I would say the bulk of the downward trend in the quarter had related to the LC replacement cycle and the shift in European business, probably less than 15%, 20% was NASD, right? Didier Hirsch : Correct, NASD accounted for about 1 percentage point. Mike McMullen : Yes, 1 percentage point. Derik de Bruin : And just following up on this. I mean, last quarter, people were sort of having questions about inventory destocking in the biotech and pharma just because there were some mix results. It seems like also a little bit of that this quarter, but not as pronounced. So, you are still not seeing anything other than tough comps that’s making nervous in terms of the pharma, biotech markets? Mike McMullen : No. In fact, that’s why we went on our way to give you some additional detail in this call, because fundamentals in pharma are still very strong. And then, the biopharma segment in particular has been a continued area of really strong growth for us, and we called that out in our script as well. Operator : Our next question comes from the line of Tycho Peterson from JP Morgan. Your question, please? Tycho Peterson : The guidance for next year of 40 bps of operating margin expansion; you guys have obviously been trending above that; we have been modeling about 100 bps for next year. Just, is that all the offset in the API investment or are there other areas your reinvesting? Mike McMullen : So, I think the question related -- good afternoon, Tycho. And the question of Tycho was we’ve got about 40 basis points of improvement in our guide, he’d been modeling more like 100. Is the API, investments that are causing the gap? Didier Hirsch : No, API had no -- the Nucleic Acid facility had no impact there. No, we just -- as we did last year at the same time, are cautious overall and have an operating margin that ties with our cautious revenue growth for the guidance. So, it’s consistent and hopefully we did the way, we did last year. Mike McMullen : And I guess also that Tycho very much like last year, I made the comment that the management team continues to have a goal on operating margin that is higher than the guide that we just gave you. Tycho Peterson : And then, can you maybe comment on chemical and energy, where you are incrementally more positive? I think you said exploration is now growing; there are some nuances there you can call out. And as we think about a year ahead, how should we think about chemical and energy? Didier Hirsch : Yes. Sure, happy to do. And then, I’ll let Patrick in the Q&A, if I missed anything. But, we actually -- we now have seen a much more broader based growth scenario across entire spectrum of the chemical and energy market. In prior calls, we only had been focusing on that 60%, which is the chemical side of that space. We’re now seeing reinvestment occurring also in refining as well as exploration. Anything to add to that, Patrick? Patrick Kaltenbach : You’re absolutely right. We see now really the pent-up demand is kicking in and we see the replacement, we see replacement coming as expected. Didier Hirsch : Yes. So, we’re guiding to try probably mid-single-digit growth or 5ish next year for chemical, as I mentioned in my -- in energy, as I mentioned in my call script. We’re pretty confident about the first half and on a wait and see for the second half. Tycho Peterson : And then last, when you increased the dividend, it was a small increase, small dividend. But, anything to read in that in terms of capital allocation, particularly as we think about the M&A landscape, your price are still pretty high? Didier Hirsch : I think our strategy all along has been a balanced capital allocation policy, and part of that has been to continue to find ways to return cash to our shareholders and part of that formula for us has been increase in the cash dividends, up almost 50% over the last three. So, no read through on the M&A.. I think this is as more, I think a validation of our doing what we say we’re going to do. Operator : Our next question comes from the line of Steve Beuchaw from Morgan Stanley. Your question, please? Steve Beuchaw : My question is actually on costs takeout and incremental margins. If we go back to the financial plan, introduce subsequent to the introduction of Agile Agilent program, introduce a series of plans, taking out some number of tens of millions of dollars cost per year. Some of those plans, going into 2018, 2019, and then more recently heard more about shared services savings. So, I wondered if you could give us a sense for relative to those objectives, how you’re thinking about, within the context of the guidance for 2018 and 2019, just succeeding on hitting those objectives where they would have an 2018, 2019 impact, are we assuming that those targets get hit, are we assuming that they don’t hit and we’re taking wait and see approach on execution? Mike McMullen : No, I think we’re really quite pleased with our ability to execute. I think three years ago when we laid out -- I think it was pretty audacious goal at the time to do 410 basis points. And you saw us through -- those following three years, how we through a constant drumbeat of execution were able to deliver on that 410 basis points. We have had same operational discipline today, it still exists and exists going forward. So, we have a whole series of plans inside the Company continue to sustain this ability to improve the operating margins. As you know, we’ve indicated at our prior AID that would be greater than 22 and this guide is consistent with that. But we’re quite confident in ability to hit the guide that Didier just gave you. Didier Hirsch : Yes. And just, if -- we are very consistent, as Mike said, with what we stated last year. In fact, it’s amazing, because last year we provided our first guidance with 4 to 4.5%, exactly like this year in core revenue growth, and 50 basis points improvement in operating margin, which is same thing as this year. We ended by beating our operating margin first guidance by 80 basis points to 22%. And obviously… Steve Beuchaw : Okay. Thank you for that. And then, my other question relates to the buyback. You mentioned there are two tranches to the buyback; one, more maintenance, one, more as you say opportunistic. I wondered if you could spend a little bit more time on thinking around the buyback, the scale of the buyback. Balance sheet is obviously very strong. How you make the decision about whether you allocate more to the buyback or not or potentially expand it? Thanks. Didier Hirsch : Yes. As Mike stated, we do want to have a very balanced capital deployment policy, which we presented to the Board, both to support organic growth via CapEx to support inorganic growth, so to support business as well as dividends and buybacks. So, $380 million with the big chunk of that being automatic since -- in line with our balanced capital deployment policy. Mike McMullen : Yes. We’ve been talking on the rate scenario, about a percent of the outstanding shares, and that clearly would represent that. And then, as we mentioned earlier, our continued primary focus for the use of the cash and the strength of our balance sheet is invest in the business, either through M&A we think that makes sense, the right valuation; and then, as you know, we are investing fairly heavily on the CapEx side right now. Didier Hirsch : Yes. And if they would be more opportunistic as part of the U.S. tax reform to repatriate more cash, our intent would be to allocate it under the similar fashion and to maintain our present policy. Operator : Thank you. Our next question comes from the line of Brandon Couillard from Jefferies. Your question, please? Brandon Couillard : Thanks, good afternoon. Didier, maybe start-up one for you. Could you walk us through your core growth assumptions for 2018 by segment as well as the SBUs, so sort of end market and between LSAG, CrossLab and DGG? Didier Hirsch : Yes. Overall, we had our slowest growth, I would say for ‘18 which would be along academic and government, and environmental and forensics around 3%, and then the most important growth would be in diagnostics and clinical, not exactly the DGG, 6%; and the rest is in between so, you have chemical and energy… Mike McMullen : And pharma is 4% to 5% range. Didier Hirsch : Yes. And guidance by group, obviously DGG has a lot of overlap but not only with diagnostics and clinical. Brandon Couillard : Okay. That’s helpful. And one for Mike. Curious to hear your thoughts on how you would characterize the quality of the R&D pipeline right now? And I think of late, you started implementing what you kind of referred to as a product cycle management system. Can you sort of walk us through exactly what is and whether there any P&L benefits associated with that kind of over time that we should expect? Mike McMullen : Yes, happy to answer both questions. I am going to invite again Patrick on the second as well he is the executive sponsor on our PLM program. But, we’re super excited by the strength of our R&D pipeline. And you may have noticed in my earnings call script, I talked about how we’ve revamped our R&D programs a few years ago. Now, you are seeing some great things come to market. And as I tell my team all time, we are not done yet. So, we have a nice rhythm of continued introductions we are planning over the next few years across all three groups. So, we are really pleased with how our teams -- the ideas we have but also our teams are actually executing on delivering to the market. And you are exactly right, I think we called this out in our last call, but we’re investing pretty heavily right now in a new -- it’s actually I think our first ever product lifecycle management system which really will give -- a new one, been a while I think Patrick. And this is really going to drive a lot of efficiencies in the R&D process as well as it’s going to drive continued reductions in cost of sales because of -- why don’t you share some of the details, Patrick? Patrick Kaltenbach : Thanks Mike and thanks for the positive comment on the new product. So, the focus of this program is really on improving R&D efficiency and new product introduction. The efficiencies that we will implement a new product lifecycle management tool, which takes really a lot of the manual processes we still have today, make sure that we’re in full compliance also on medical device side as we bring more and more products from neonatal [ph] business into clinical environment. And with this, focus on improving the tools and processes, we are really shooting for much higher throughput from our R&D program that we have potential [ph]. We are really pleased with the work we have and I would say we are definitely positioned well to continue capture market share by bringing more of these breakthrough products to the market like we did last year, as we did [ph], Ultivo product, [indiscernible], you name it. There is a whole suite of new products out there. We have a strong pipeline and I think it was time for us to update tools and processes in R&D as well and new product introduction, make sure that we get the best efficiency possible out of our engineering group. Mike McMullen : 2018 will be a year of investment. But, as you go out in the next few years, you can see reasons why we think we can continue to improve the effectiveness of our R&D investments as well as continue to lower our cost of sales. We are investing to make it happen. It’s not just hope and a prayer. Operator : Our next question comes from the line of Doug Schenkel from Cowen. Doug Schenkel from Cowen. Your question, please? Doug Schenkel : Didier, based on your cash flow guidance, it seems like after backing out CapEx, dividends and the first tranche of buybacks to counter share creep that you’d still have over $350 million of cash flow to be deployed. And this is assuming you don’t beat your guidance which you characterized as conservative. Should we view the other $350 million plus in cash flow is being there for M&A and the opportunistic buyback you describe, what we should think of as at least the initial budget for those sources of cash? Didier Hirsch : No. We look at the M&A on the standalone basis, so based on how much value we can create through those programs. We clearly are not limited by, for example, how much cash flow we will have left over from what we generate during the year. In any case, if it is U.S. M&A and there is a tax reform, we’ll have to borrow to fund the acquisitions. But, we have much larger financial capabilities in terms of M&A, and the number that you are quoting. And we have a very, very significant pipeline, all three presidents on a regular basis, present to Mike and me whole set of potential acquisitions. And that’s beyond the number that -- in terms of the number that you’re quoting -- you have quoted. Doug Schenkel : Okay. And then, I guess, just as further clarification, if $350 million is isn’t towards M&A and you have the additional budget and additional sources for M&A as you described, where does that 350 go? Is that largely towards those opportunistic buybacks? Didier Hirsch : It goes into outside of the U.S. The issue that we have dealt with on an ongoing basis is that we -- most of the cash that we generate, we generate outside of the U.S. So, if we intend to spend it in the U.S. -- and it is true that if we only spend “$380 million” this year and buy back, we still have opportunities the Board gave us back in May of 2015, larger allowance to use our three years. So, we do have an opportunity there to spend more money on buyback. But if we do that, it will have, it will be funded through increasing U.S. debt. Doug Schenkel : And I just want to go back to -- I think it was Derik’s first question on pharma growth. Would you be willing to specifically quantify what pharma growth would have been excluding the NASD impact? And based on your comments on mass spec and European order results recognizing your commentary in your prepared remarks, is the expectation in guidance that those European and mass spec orders that you called out, turn into revenue in Q1 and Q2? Mike McMullen : Yes, happy to provide additional insights, Doug. So, the first piece is that of the 5% decline, we saw in Q4 2017 over Q3 2016, 1 percentage point of that came from NASD. The second piece of it is, will we expect to have the revenue show up in Q1 and Q2, yes, absolutely. So, these tend to have a three to four-month cycle from order to revenue. And like I said earlier, we don’t typically talk about orders, but we wanted to make sure that we make clear that the pharma business remains quite solid for Agilent and we have a nice backlog. Operator : Thank you. Our next question comes from Dan Arias from Citi. Your question, please? Dan Arias : Just maybe going back to the new product discussion. Obviously, a lot of focus on the Intuvo replacement cycle. Can you just maybe talk to how material you think contributions there are likely to be next year? Mike McMullen : I think it’s a very similar kind of story you’ve heard from us in the past. I think you’ll start to see increasing levels of direct contribution of that product to our top-line revenues. As you know, in the past, we’ve also talked about the halo effect it’s had on all the aspects, or I guess from a targeted portfolio as our product is just reinforced, who is the leader by far in this space. So, a lot of the growth in the chemical and energy space is being fueled by gas chromatography sales. So, we expect it to be a continually larger contributor to our growth. And as you know, that’s -- we’ve got our guide outside of the clinical diagnostics market. We have chemical and energy as our second strongest market next year in terms of our initial thinking for overall growth rate. And Intuvo is expected to be a contributor there. Dan Arias : Okay, thanks. Maybe just a follow-up for you or Didier, just on the outlook. I believe the comment there was that you were comfortable with the consensus number for 2018. I mean, I guess if we were to think about you’re getting to core growth, it’s more like 6 and 4 next year. What businesses seem like most likely you’ve gotten in there, which -- where do you feel the segments are most conservative in the outlook? Thanks. Mike McMullen : Yes. I would just reemphasize a few points I made in my call script. By the way, I talked about in my narrative, kind of remind everyone that last year things turned out -- we’re just super pleased with how this year progressed, but there was some uncertainty last year. And things don’t always turn out exactly how you think, that’s why we’re taking a sort of wait and see, as it relates to the second half of the year for the Company. I think the two areas to keep an eye on, a little bit growth rates in Europe sustain at these unexpected levels we’ve seen over the last quarters and the other one is chemical and energy. So, I think those are the two watch ones for you to keep an eye on in terms of where the upside could be, if those growth rates continue at the same rate we’ve seen the past few quarters. Dan Arias : Okay. Very helpful. Thank you. Operator : Thank you. Our next question comes from the line of Catherine Schulte from Baird. Your question please? Catherine Schulte : I was just wondering if you could walk through some focus areas for DGG next year, be it expanding multiple comps offerings more globally or any new product launches to call out? Mike McMullen : Yes, absolutely. I’m delighted to give Jacob a question on this call. So, this is -- and again, we were just so pleased with the results for DGG this year. Team really hit a major milestone of achieving significant improvement in operating margin for the business and really think we’re seeing the benefits of how we’ve turned the former Dako business around. So with that, Jacob, let’s move away from the past and talk about the future? Jacob Thaysen : Yes. Thank you for that. And I see, as 2017 was strong, I continue to see also that 2018 is going to be strong, actually across all our five divisions, and you start out with Multiplicom. We have now integrated Multiplicom into Agilent infrastructure. So, we can now really take the full advantage of Agilent’s reach. So, I’m pretty pleased and I’m expecting a lot out of Multiplicom in 2018. But I see that also very much in a combination with our old technologies. We will of course continue to invest into the [indiscernible] which is the former [indiscernible] platform, combining our bioinformatics pipeline with our strong presence in target enrichment, Multiplicom being one but clearly also SureSelect and HaloPlex, that we speak a lot to the genomics. And our whole strategy will continue to be to move into the clinic and build a full workflow around our offering here. We continue to see strong growth in the pathology business where PD-L1 has been a great success story. But, really, also on this platform, it’s having a lot of momentum. So, I also continue to see a lot of traction in that space. And then, obviously, the NASD business, we see a lot of tailwind there. We are -- we will continue to be really limited by our capacities. Really pleased to see that announcements coming out in the market about the RNAi drugs getting close to commercialization and we start to see a lot of interest by lot of other pharma companies out there. So, I see a lot of opportunities in the space and good future productivity. Catherine Schulte : And then, any hurricane impact on the quarter to call out? Mike McMullen : Catherine, nothing of materiality for the Company. Operator : Our next question comes from the line of Tim Evans from Wells Fargo Securities. Your question, please? Tim Evans : Just wanted to take a step back and look at the pharma issue from more of a macro level. It does seem like the comments you’ve made all basically amount to a fairly material deceleration in pharma end market growth in 2018. And if I kind of think about the elements that you’ve called out, it sounds like maybe the replacement cycle in LC might be the driver of that. I guess, first question is that, is that the right way of thinking about it? And then, if so, what are kind of the macro things happening in the pharma end market right now that you might draw line to as the major factors there? Mike McMullen : Sure, Tim, happy to provide perspectives. First of all, I would actually characterize a little bit differently. I wouldn’t characterize it as a pharma issue. For the last 12 to 18 months, we have been calling this. We have been saying that when we think about the pharma market, think about two segments, small molecule and large molecule. Large molecule biopharma, very, very strong, continue to be very strong. There are still investments going on in the small molecule side but we’ve been saying that there is going to be a slowing of a growth rate because you get to the difficult compares and investment levels aren’t going to keep increasing at those 15%, 19% kind of growth rates. So, we actually don’t see it as a pharma issue at all. This is actually developing exactly as we had bought. That’s why I mentioned earlier that our full year guide last year had us 6%. And Didier I think we ended up pretty much close on 6% for the year. And then, there is some good fundamentals. I mean, there is the NASD business, which you know is batch based. We know that the demand is there for 2018. We’ve got very good demand for mass spec products in the pharma space. And then, if you look at the numbers, our ACG business continues to be strong, both on the services and consumables side. So, we actually don’t see pharma as an issue. We see it as continued area of strength for the Company. But we’ve been signaling for some time that there will be some moderation of overall growth rates in this segment, primarily because obviously of large numbers and difficult compares. Operator : Our next question comes from the line of Jack Meehan from Barclays. Your question, please? Jack Meehan : So, one in terms of cash, I think you’re coming up on the decision related to the final Lasergen payment. Is that something we should embed in the 2018 forecast? And then, just any updates on development of a clinical NGS workflow? Mike McMullen : So, what I’ll do is provide you some comments around the guidance, inclusion or exclusion and then maybe Didier, you can just provide a few voiceover on how things are going with Lasergen. So, as a reminder, we have the ability to make a call option -- calling option in 2018. Just like any other M&A possibility, it’s not included in our guides at this point in time. So, Jacob, if you comment on how things are going? Jacob Thaysen : Yes. I would say, we have a very good relationship with Lasergen, and I I’m very pleased to see the Lasergen team and our Agilent come together. And as you might recall, we are not only get to develop an instrument but full workflow. So, what’s very important is that the teams work together, both for the instrument, but also for the full solution. So, the whole workflow works together. And I see that -- that we have very good momentum here and things are moving forward according to our expectations. Jack Meehan : And then maybe one more for Jacob, while we’re on it, the margin expansion in DGG. Obviously, another great year there. Just help us, what do you think the long-term opportunity is here, how far do you think you can push margins over time? Mike McMullen : I’m quite interested in this answer too, Jacob. Jacob Thaysen : I’d say that I am very proud of the team of what we delivered over the three years, of 700 basis points improvements with the CAGR of 8% over last three years growth. That is a very impressive turnaround of a business. We will continue to look at expansions. But, I can tell you that we don’t want to go with the same rate we have done over the last few years. We think -- we are out there with industry, with the average of industry and obviously we’ll continue to improve. But we will also make sure that we invest into the business going forward. Operator : Our next question comes from the line of Paul Knight from Janney Montgomery. Your question, please? Paul Knight : Hi, Mike. Is the Nucleic Acid facility on schedule or where are you with the timing on that? Mike McMullen : Yes. Good afternoon, Paul. Right on schedule. So, just as a reminder, the plan has been to complete the construction in our 2018 and then move into validation process, which is probably 9 to 12 months, we think Jacob. But then, we’re looking at maybe second half 2019 back half is when we start to see some revenue coming out of that facility. And just as a reminder, the first, a full year capacity would add approximately $100 million of revenue to the Company. It’s really quite an impressive new facility we’re building, I had a chance to visit. And the construction is moving on quite well and we’re now into the final phases. So, we have a much better view of -- and confidence if you will in terms of the timeline. So, it’s a very unique facility, but we’re getting pretty close to the end. So, we have a high degree of confidence on the timeline. Paul Knight : And then, also, you’d mentioned on the diagnostic side, your FISH panel won award. Now, are you getting traction in your FISH panel for PD-L1 due to automation accuracy? But I know automation had been issue in the past years, I guess that’s solve or what’s the color around that? Mike McMullen : Yes. What I’d like to -- let me make some additional comments and Jacob, please jump in here. But as Jacob pointed out, he used the word attraction of the Omnis platform and I think that’s where historically the former Dako organization had some gaps in its offering, relative to automation. We came out with the new platform almost like a three years ago and really it’s been well accepted in the market. You’ve seen us talk about from big wins like the Quest win here in the U.S. And I think that’s been on the -- part of this been on the strength of the new automation platform. Anything else, you’d add there, Jacob? Jacob Thaysen : I will say that all our IHC and PD-L1 is automated on one platform or the other. And we obviously have the strategy of having PD-L1 automated on both of our platforms going forward. The same on FISH, the Omnis platform was built primarily IHC but also for the FISH assays. And it’s actually automated on -- the FISH is automated on Omnis today. So, you can actually do that already today. Paul Knight : Okay. And then, Mike, just to refresh, on pharma you were talking 6% growth this year, but a little lower in your guidance. Is that what you had mentioned? Mike McMullen : Yes, absolutely, Paul. So, what we had said was a slight moderation I think in the 4% to 5% for next year. Paul Knight : European Linked? Mike McMullen : I’m not sure I understand the last comment, Paul? Paul Knight : Due to European budget is uncertain? Mike McMullen : No. The main reason there is a slight downward movement in terms of the outlook is really just based on the small molecule side of that segment that we’ve always felt that that’s what will continue, but not at the high double digit rate. So, this is more a question of really tough compares. The overall fundamentals are really solid. The comments around Europe really had to do with the timing of why we believe that we’ll have the kind of numbers we talked about in pharma next year, because there could be some questions raised, right, which is minus 5% Q4, 2017, there; is there something fundamentally a concern there. And we’ve gone out of our way in this call and really tried indicate no. And in fact, the order backlog is quite solid in the number of product categories which we’ve not yet seen revenues for, and that we’ve been thinking this is exactly how the market would develop. So, this is not at all surprise to us. Operator : Thank you. Our next question comes from the line of Puneet Souda from Leerink Partners. Your question please? Puneet Souda : Hi, Mike, thanks for that. Just a quick question on the GST. Was there impact from that in the quarter from India? Mike McMullen : Go ahead, Didier. Didier Hirsch : Yes. There was a little bit of an impact. And I think as everyone who -- each of our competitors who is operating in India has also identified a slowdown due to the fact that customers and companies are just linked to the new agreement. And we think over the next few months, it will build -- the business will return to normal. Mike McMullen : It did have some impact on the pharma reported numbers, because we’re heavily weighted towards pharma in India. But we didn’t want to give you a whole -- of all kinds of details. But that did have some impact on our Q4 pharma results, although the business is coming. Puneet Souda : Okay, thanks for that. And if I could ask a bit of a strategy question on the LSAG business. I mean, traditionally, the LCMS instruments competed more on the sense of the end resolution, and now you have successfully kept those with Ultivo and brought about a smaller size and potential greater ease of use here. Could you maybe elaborate how that’s translating to it? I know this is early, so the instruments are starting getting out. Are those the same customers that are appreciating the same product or are you getting new customers into the mix? Mike McMullen : Why don’t you take that, Patrick? Patrick Kaltenbach : Thanks. Actually very good question. When we launched the Ultivo, we really launched it with a perspective that we want to dominate what we call the routine applications out there. And we are going first for food and environmental spaces, given the mass range the product has. It is a product that is really tailored towards ease of use and meeting the sensitivity needs that you mentioned as well for the targeted applications. I think this product will display a lot of strength in other areas as well. So, we will extend the range around Ultivo going forward. But when you talk about the overall strategy for LCMS, we are not entirely focused just on the routine markets. As you know, we have launched a bio[ph] solution very successfully which drives a lot of growth in the biopharma market as well. So, with both playing in triple quad as well as top [ph] space where we think there we have plenty of opportunity to still gain market share. And to Mike’s comment on strong R&D pipeline, LCMS is clearly one of the big bets we have in the Company, very heavily investing in R&D. Operator : Thank you. Our next question comes from the line of Steve Willoughby from Cleveland Research. Your question, please? Steve Willoughby : Two questions for you. First, just following up on the Ultivo. It just started shipping this month. I was wondering if you could comment on what your capacity looks like for that system. And I guess with that, what kind of contribution can new products contribute in 2018? And then, I have a follow up. Mike McMullen : Yes. So, I think relative to the question about capacity is from a manufacturing standpoint, no issue at all. So, we’ve -- in fact, we are right now our launch plan with our manufacture lease have incurred at schedule. And you may have noticed in my call, we actually have begun shipping the product. And I think we don’t call out specifically, the revenue impact on new products. But, I would say this is just part of our formula. So, over the last three years, we have been out going to market, and we just put up our biggest growth rate in the history of the new Agilent, although I think I officially retired this, I had to stop using that new Agilent. But I think that’s part of our formula of success and I think that’s why I used the word momentum a few times in my script because we really feel like both in terms of the products that we’ve released over the 12 to 18 months plus the products we know that come out in ‘18 will continue to have momentum because each of our three business groups have a pretty robust set of R&D development activities and commercialization plans for next year as well. So, should we go on to your next question? Steve Willoughby : Sure, thank you. I just was wondering if you could comment on the competitive environment within the CrossLab of lab service business. One of your competitors made a comment a week or two ago regarding some wins and just if there’s any changes going on in the competitive environment for lab service outsourcing? Mike McMullen : Yes. I’m actually going to pass this right over to Mark Doak who runs that group for us. Mark? Mark Doak : Well, thanks, Steve. And as far as the business is concerned we continue to see very robust demand for our services. And as you look at the deals, they come and go; there is nothing particularly material that we have in play that would actually change our trajectory for growth. So, for us, we continue to see, not only opportunity for the services in pharma but we are seeing stretch now into the broader aspect of commercial laboratories. And as Mike had said, we continue to bring to market robust set of capabilities into next year. So, from a broader market perspective around services, lab wide, demand is still there and we expect good demand going forward? Mike McMullen : Yes. Steve, I’m glad you asked that question, because as you know the creation of the Agilent CrossLab Group was on the major initiatives that came out with three years ago. And I can remember the time when we got off to a really good start, is it sustainable. And I think you’ve seen Mark and the team have been able to deliver high single digit growth for quarter in, quarter out. I think it really speaks to the power of the value prop to the customers. Operator : Our next question comes from the line of Patrick Donnelly from Goldman Sachs. Your question, please? Patrick Donnelly : Sorry to harp on this, but in terms of revenue order push out on the pharma side. Is that what’s driving? I know you’re talking about recognize it early in fiscal 2018. Is that what’s driving the 1Q growth higher than rest of the year, calling for 5.25 in 1Q, the rest of the year close to 3.5. So, just wondering, does that make up that delta -- is it adding as much as 1% or 2%? Mike McMullen : Patrick, thanks for the questions. I’m glad you noticed that our Q1 revenue guide is higher than our full year guide at this point in time. And clearly, the pharma order to revenue conversion is part of the story. But I think just a greater story here, which is momentum in all three of the businesses. And that’s why we wanted to reflect it in our Q1 guides. Listen, we don’t know right now how the second half of the year will play out. But, we’ve got a good feel for the first -- next quarter too. And that’s why you’ve seen us guide higher than our full year core growth guide. So, Didier, I think this is departure from last year where when we actually guided lower in Q1 2017. So, pharma is part of that, but is not the exclusive part. I mean, this European mass spec story is part of that, but not the exclusive story for strength of our Q1 guide. Patrick Donnelly : And then, on China, high-single-digit a bit on the low-end of the recent range and it’s been more of double-digit grower for you guys. Anything to call out in the environment there or is it just purely a comp story? Mike McMullen : Thanks for this question as well. So, you may recall, last year, Q4 2017, we had 27% growth in China and 27% growth in what is our second largest market. We had been calling for a 10% growth for the full year, for China. And that’s exactly where we landed. So, we’re super pleased again with how the China business has developed over the year, right according to plan. Key contributor to growth and 10% growth this year for the full year off a very difficult compare, we are really quite pleased with result. So going into 2018, we’re expecting us to be in that – continue to be in that high-single-digit growth rate for China. So, continue to be an important contributor to the Company’s growth. Operator : Our next question comes from the line of Dan Leonard from Deutsche Bank. Your question, please? Dan Leonard : Now that the transformation is complete, there is no more new Agilent, you’ve hit your targets, how should investors think about the operating model, going forward in a normalized year? Is the 2018 guidance the right way to think about it, a mid single digit core revenue growth rate and high single digit EPS growth rate? Mike McMullen : I think -- first, I’d say, the transformation is probably never done. What we’ve done is we hit some milestones for the Company, because we put out some three-year goals for the company. I think what I’d ask you to think about is, we believe that we will continue to grow earnings above revenue. We believe that we will continue to outgrow the market and our operating margin expansion track will continue. We’ve been very deliberate in terms of how we’ve improved our operating margins. And I think as Jacob kind of hit on this as well, which is we haven’t done anything that will compromise our ability to grow long-term. And I think that’s served us well. So, we’ve been taking cost out and improving our operations over the last several years. And we’ve been doing it in such a manner that has allowed us to really continue to sustain our growth. And then, I think the foundation of this company is set for continued outperformance. So, I would just say that way I ask you think about the Company is a company that can generate earnings growth faster than revenue growth and that whatever market environment that we encounter, we’ll be able to outgrow the competition. And we have this whole constant improvement we call our Agile Agilent program inside the Company, which is a mindset of continued process improvement. So, we think we are going to continue to be able streamline the Company and improve operating margin. We haven’t however put out as you know three-year long-term goals beyond the fact that we’re going to do better each year. Dan Leonard : And then, my follow-up, I’m trying to understand what some of the levers are in the second half revenue guidance of low single digit core. And specifically, how sensitive is that in your minds or even in your customers’ mind to the price of oil? Does that assume that oil goes back down to 45? And if it stays at 55, you would do better than those numbers or anything you can speak to on that front? Mike McMullen : No, I think, if you look at comments, we’re all kind of looking -- try to say that’s probably not the biggest driver, I would look at PMI. And I think, PMI is a better indicator of the overall growth in our chemical and energy business. Clearly, price of oil has some impact, but PMI is a major driver; there is a very high correlation. So if the trends will continue, then we’re probably in good shape in the second half, but we’ll have to see. Operator : Thank you. And this does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Alicia Rodriguez for any further remarks. Alicia Rodriguez : Thank you, Jonathan. And on behalf of all of the Agilent management team, thank you for joining us today. If you have any questions, please give us a call in IR. And I’d like to wish you a good rest of the day and a happy holiday season for those of who will be celebrating it. Thank you very much. Operator : Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,018	1	2018Q1	2018Q1	2018-02-14	2.442	2.493	2.713	2.805	3.83	25.77	24.93	Executives: Alicia Rodriguez - Agilent Technologies, Inc. Michael R. McMullen - Agilent Technologies, Inc. Didier Hirsch - Agilent Technologies, Inc. Jacob Thaysen - Agilent Technologies, Inc. Patrick Kaltenbach - Agilent Technologies, Inc. Mark Doak - Agilent Technologies, Inc. Analysts: Ross Muken - Evercore Group LLC Tycho W. Peterson - JPMorgan Securities LLC Jack Meehan - Barclays Capital, Inc. Steve Barr Willoughby - Cleveland Research Co. LLC Puneet Souda - Leerink Partners LLC Paul Richard Knight - Janney Montgomery Scott LLC Derik de Bruin - Bank of America Merrill Lynch Patrick Donnelly - Goldman Sachs & Co. LLC Brandon Couillard - Jefferies LLC Ryan Blicker - Cowen & Co. LLC Emily G. Stent - Robert W. Baird & Co., Inc. Daniel Arias - Citigroup Global Markets, Inc. Operator : Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Agilent Technologies Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, today's program is being recorded. And now, I'd like to introduce your host for today's program, Alicia Rodriguez, Vice President of Investor Relations. Please go ahead. Alicia Rodriguez - Agilent Technologies, Inc.: Thank you, Jonathan, and welcome, everyone, to Agilent's first quarter conference call for fiscal year 2018. With me are Mike McMullen, Agilent's President and CEO; and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Patrick Kaltenbach, President of Agilent's Life Sciences and Applied Markets Group; Jacob Thaysen, President of Agilent's Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. 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. You'll find an investor presentation along with revenue breakouts and currency impact, 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 Mike and Didier 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 acquisitions and divestitures within the past 12 months. Guidance is based on exchange rates as of January 31. 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, let me turn the call over to Mike. Michael R. McMullen - Agilent Technologies, Inc.: Thanks, Alicia. Hello, everyone. Thank you for joining us. In today's call, I want to cover our Q1 business results and talk about Agilent's business momentum. Let's start with the business results. I'm happy to report that the Agilent team delivered an outstanding start to 2018. We exceeded our own growth and earnings expectations. We continue to outgrow the market. Q1 revenues of $1.21 billion grew 10% on a core basis, and we continue to improve our operating margins. Adjusted operating margin of 22.5% is up 130 basis points from Q1 of last year. I'm proud to report that this is our 12th consecutive quarter of improving operating margins. The combination of strong revenue growth and continued margin improvements drove an adjusted EPS of $0.66 for the quarter, well above our expectations. Adjusted EPS is up 25% over the first quarter of last year. Now on to Agilent's business momentum. When I use the term momentum, I'm describing strong, broad-based growth for all our businesses as we outgrow the market. In this context, our momentum remains very strong. First, our chemical and energy revenue grew 13% with broad strength in all product categories. Customers are investing across the spectrum of exploration, refining and chemicals. This is the fourth consecutive quarter of double-digit revenue growth in this market segment. After a long period of deferred investment, we are now seeing increased capital expenditures. Pharma is our largest business and had a strong showing of 8% growth. Growth is very solid across instruments, services and consumables in both the biopharma and small molecule market segments. We remain very confident in achieving our 2018 pharma growth objectives. Academia and government sustained its recent trajectory with 11% growth. Growth was driven by strength in China and Europe. Food revenue grew 8% against a difficult compare of 11% in Q1 2017. Europe growth led our strong results with broad-based strength across instruments, services and consumables. Diagnostic and clinical revenue grew 5% as expected, led by strong demand for companion diagnostics and pathology products. Environmental forensics grew 14%. Our forensic business was particularly robust driven by U.S. government purchases. Environmental growth remained healthy with solid demand for GC, GC/MS and ICP/MS. Geographically, China led the gains with strong high teens growth. Europe and the Americas delivered healthy high single-digit growth. Looking at the highlights from our business groups, the Life Sciences and Applied Markets Group delivered core revenue growth of 11%, fueled by double-digit growth in major platforms led by mass spectrometry and cell analysis, demand in Europe and China and broad strength across end markets. On the M&A front, we announced the acquisition of Luxcel Biosciences. Luxcel has developed a portfolio of cell-based assay kits that allow researchers to evaluate cell metabolism and function on standard fluorescent plate readers. This technology is highly complementary to our Seahorse Bioscience offerings and further enhances our position in the fast-growing cell analysis space. Our internal focus on innovation continues to receive external recognition. The Ultivo Triple Quadrupole LC/MS system was recognized as one of the top 2017 innovations by The Analytical Scientist. And, (sic) Instrument Business Outlook recognized Agilent as the Company of the Year in the Life Sciences tools market for our innovation across the company. Agilent's CrossLab Group continued the strong performance with 9% core revenue growth. The Agilent CrossLab strategy, launched three years ago, continues to yield exceptional results. Our services business is focused on supporting customers to deliver greater lab efficiencies. As a result, services growth was strong across all regions and markets. We continue to introduce new capabilities for our customers. For example, we launched Agilent Care which extends and expands solution support beyond the traditional first 90 days of solution ownership. We also expanded the CrossLab Service Guarantee to our multi-vendor service business. If an Agilent instrument under contract cannot be repaired, it'll be replaced with the Agilent equivalent. This improves confidence in Agilent as a customer focused service provider for multivendor instruments. This guarantee differentiates Agilent from our competitors and in the eyes of our customers. Fueled by our innovation investment, our consumables business was strong across both chemistries and supplies. Recently introduced new products and biopharma applications are making a difference in our reported growth. Agilent's Captiva Enhanced Matrix Removal-Lipid technology is one example. The Analytical Scientist also recognized it as a top 2017 innovation. Our digital investments are delivering new capability to our customers. We have deployed groundbreaking e-commerce initiatives such as e-renewal of support contracts, making it easier for customers to do business with Agilent. The Diagnostics and Genomics Group also delivered strong core revenue growth of 8%. Demand continued to be healthy for our pathology products and companion diagnostic services. We continue to bring compelling new offerings to our customers. We shipped our first comparative genomic hybridization assay for diagnostic use in the U.S., GenetiSure Dx Postnatal Assay this quarter. We also made available to customers CRISPR activation and interference libraries. Targeted at the research community, these libraries use state-of-the-art validated gene targets that enable easy and a flexible implementation of targeted functional assays for the entire genome. Now, looking ahead, a few comments on our updated outlook for the rest of the year. We continue to take a quarter-by-quarter look at the business and stand ready to raise our full-year guidance as business conditions remain favorable. As such, we are now raising our full-year growth and earnings guidance with our strong Q1 in the books. Didier will share the specifics of the updated guidance, inclusive of the forecasted impact from the new U.S. tax law. While future market conditions are often difficult to predict, I can confidently predict that Agilent will outgrow the market in any encountered market conditions. A few closing comments before I hand off the call to Didier. First, I'm very pleased with our start to 2018. Following our stellar year in 2017, the Agilent team continued to deliver a differentiated customer experience, a great product portfolio and excellent operating results. The transformational strategies initiated we launched three years ago continue to work. We are maintaining our momentum. We are delivering on our measures of success to outgrow the market, improve operating margins and deploy capital in a balanced manner. Our One Agilent culture is built on a foundation of core values that puts the customer at the center of everything we do. Agilent's collaborative work environment enables the leveraging of the full power of our team. As a result, our team provides a superior customer experience while focused on operational excellence, a combination that allows us to produce results. We continue our commitment to our Agile Agilent program. This transformational initiative continues to streamline the company's operations and drive efficiencies. Our portfolio transformation and innovation engine continues to provide our customers with truly differentiated technology and solutions. Our innovation efforts are complemented by a focused M&A strategy. Our portfolio of offerings is second to none and will continue to strengthen. As evidenced in our track record of impressive results, Agilent has started 2018 with strength. The results speak for themselves. It's what gives me the confidence to tell our team the best is yet to come. Thank you for being on the call. And I look forward to answering your questions. I will now hand over the call to Didier. Didier? Didier Hirsch - Agilent Technologies, Inc.: Thank you, Mike, and hello, everyone. As Mike stated, we are very pleased with our Q1 performance, well over the high end of our guidance. We delivered a core revenue growth of 9.7% versus a core revenue growth of 4.8% in Q1 of last year, and our adjusted operating margin at 22.5% was up 130 basis points versus Q1 of last year. Our EPS at $0.66 was $0.10 above the midpoint of our guidance and up 25% on a year-over-year basis. Currency had a favorable impact on revenues of $32 million and $6 million versus last year in guidance respectively and an impact on operating profit of $8 million and $0 million versus last year and guidance respectively. Our operating cash flow of $215 million was 85% higher than in Q1 of last year. And finally, we bought back $47 million worth of shares and paid $48 million in dividends. I will now turn to the guidance for fiscal year 2018. We are significantly raising the core revenue growth guidance of 4% to 4.5%. The new core revenue growth guidance is 5.25% to 5.75%. Also, the weakening of the U.S. dollar since our November guidance is expected to have a positive impact of $108 million on full year reported revenue. The total impact of the increase in core revenue guidance and of the currency tailwind is an increase in midpoint revenue guidance of $165 million. As a result, we now expect fiscal year 2018 revenues of $4.885 billion to $4.905 billion. Turning to EPS. We are also significantly increasing our November guidance of $2.50 to $2.56. The new guidance is $2.62 to $2.68 with $0.04 of the $0.12 increase due to currency. We're also raising our operating cash flow guidance from $970 million to $1.050 billion. There's no change to our expectation to buy back 2.7 million shares and to maintain our diluted share count at 326 million shares. Lastly, I'll provide some insights on the impact of the U.S. tax reform. Because our fiscal year started before the enactment of the new law, we will enjoy the reduction in the U.S. corporate tax rate effective January 1, 2018. However, the negative effects, mostly the so-called guilty tax of the tax reform will not impact us until fiscal year 2019. However, because these benefits, net benefit of 2 to 3 points would only be temporary, we have decided not to reflect it in our fiscal year 2018 pro forma tax rate and now therefore maintaining the rate at 18%, as we expect this will be our tax rate in fiscal year 2019 and onwards. Finally, moving to the guidance for our second quarter. We're expecting Q2 revenues of $1.2 billion to $1.22 billion. The midpoint corresponds to core revenue growth of 4.25% on a difficult compare as Q2 of last year saw core revenue growth of 8.7%. Comparing guidance to the just finished Q1, Q1 fiscal year 2018's 9.7% core revenue growth benefited from an easier compare, in part due to the date of the 2017 Lunar New Year and a $20 million to $25 million carryover from Q4 2017 when we saw extended order to revenue conversions related to higher European and mass spec demand. Conversely, Q2 fiscal year 2018 projected 4.25% reflects the expected impact of the 2018 Lunar New Year in addition to a tough compare. As for EPS, we expect Q2 EPS to range between $0.61 to $0.63, a 7% year-over-year increase at midpoint. With that, I'll turn it over to Alicia for the Q&A. Alicia Rodriguez - Agilent Technologies, Inc.: Thank you, Didier. Jonathan, will you please give the instructions for the Q&A? Operator : Certainly. Our first question comes from the line of Ross Muken from Evercore ISI. Your question, please. Ross Muken - Evercore Group LLC : Happy Valentine's Day, guys, and congrats. Michael R. McMullen - Agilent Technologies, Inc.: Thank you, Ross and welcome back. Ross Muken - Evercore Group LLC : Thank you. So, Mike, as you sort of look at the pacing, particularly in chemical and energy, and maybe some of the cyclically sensitive markets and how things have kind of played out so far and the momentum maybe you saw in January, I guess how are you thinking about the duration of some of this upswing? And how do you tease out kind of what's underlying cyclical and what maybe is, you either via product cycle or share or renewed focus kind of growing just above market? Michael R. McMullen - Agilent Technologies, Inc.: Yeah. So, thanks, Ross. Great question. I can see you're still on your game after being away for a bit. So, let me start with the latter part of your question, which is I think what you've got going on here is a really nice situation in terms of both improving market conditions at the same point in time where we've been introducing some pretty compelling new offerings, whether being gas chromatography, liquid chromatography and then spectroscopy portfolio as well, and ACG. All these products are playing into an improved market environment for our chemical and energy. So, I don't think we're just keeping pace with the market in terms of our performance in the chemical and energy with these double-digit growth rates we've seen. I think we're also obviously picking up some share as well. But it is a nice situation to be in in terms of both strength of portfolio and improved market conditions. Ross, I've kind of given up the idea of any kind of long-term view of these markets having been burned in the past on that. So, what we've been saying is, the positive momentum is there. I have a hard time, sometimes, with that word. But for next quarter or two, we have pretty good line of sight in that business. We would expect to maintain the momentum we have been seeing in the chemical and energy space. And I think what's been different over the last quarter is, we're seeing the growth across all three segments now that are investing in CapEx both on the expiration now in addition to what have been growth in the chemical side as well as refining. So, again, I think the outlook we kind of thought about relative to our guidance is in the next quarter or so. And we'll kind of keep an eye on it as we go forward. Ross Muken - Evercore Group LLC : And maybe just on the balance sheet, obviously, with the tax reform formalized, you now have quite a bit of access to some of that trapped cash historically. So, how should we think about your willingness to maybe do something slightly larger on the deal size? I mean, you've obviously executed fantastically well. You've kind of earned the right to maybe do something bigger or what you want. So, I guess, one, how should we think about that improved access to cash and your priorities there? And then secondarily, do you think the business can sort of take on maybe a larger and then very small tuck-in or technology deal, which is what you've done maybe over the last 12, 24 months? Michael R. McMullen - Agilent Technologies, Inc.: Yeah, happy to answer that question, Ross. I'll leave the timing of when we think we may be able to get access to the overseas cash. I think we're still working through that right now. But what I can share with you fairly confidently is both are thinking about these, the cash and then I'll get into your question specifically relative to M&A. So, when we think about, as you probably gather from Didier's remarks that the tax reform is a positive for Agilent in terms of the access to overseas cash both on, if you will, the one-time repatriation of the cash that has been trapped, but also just an ongoing cash flow advantage back to Agilent in the U.S., but we're in no rush here. We're going to be disciplined with how we use the cash. The priority will remain M&A and capital expenditures, which is really to invest in the business. And as you've heard me talk before, we remain committed to this balanced capital allocation policy. Now, specific to the questions around M&A, I do really appreciate your feedback. I actually believe that we have built up the capability and have now a track record of delivering on the yields we have done. So, I appreciate that feedback. And our primary focus has been on bolt-ons as you know, where the prices for the deal for Agilent have been in the several million to several hundred million dollar range. But right now, as I had mentioned before, we're open to larger acquisitions but they still have to align with our long-term strategic intent, gaining more growth and earnings expansion for the company. And so, while we don't have a predetermined number, we're going to continue to be disciplined and selective. But I do believe the company is in a position that it could consider something larger than we have done in the past, both in terms of based on the operational results we've delivered as a company, but with inside the company we have really grown these muscles and really know how to make these things work with inside the company. Ross Muken - Evercore Group LLC : Great. Thanks, Mike, and congrats. Michael R. McMullen - Agilent Technologies, Inc.: Thanks. Operator : Thank you. Our next question comes from the line of Tycho Peterson from JPMorgan. Your question, please. Tycho W. Peterson - JPMorgan Securities LLC : Hey, thanks. Mike, I want to dig into the pharma numbers here. Nice recovery. Obviously, there was a fair amount of noise coming out of last quarter around some of the deferred revenues in Europe and the replacement cycle, and the NASD lumpiness. So, can you maybe just talk a little bit about the pickup in pharma, how much of that you think is just catch-up from last quarter versus sustainable acceleration here? Michael R. McMullen - Agilent Technologies, Inc.: Yeah. So, thanks, Tycho. And as you may recall from our last earnings announcement, there's one area of concern I'd picked up in the call was, hey, is there something going on with Agilent's pharma business? And at that point in time, we described the situation where we had a very strong incoming order rate, but there many of them were longer lead-time products from an order to a revenue standpoint. And that's exactly what happened. We guided for growth in pharma. I think there was a lot of questions about whether or not that actually would occur after coming off a 5% decline in Q4 2017. And the quarter developed exactly as we had thought. So, what I would tell you is that we have roughly $20 million to $25 million of revenue that was basically in backlog in Q4 that we shipped them, most of it, in this first quarter. So, I think we're right on our view of the overall growth for pharma for us, which is in the mid single-digit. So, I wouldn't want to imply that there's an acceleration of growth, but I think we continue to be very confident in our ability to make the numbers we committed to. And we saw both strength in biopharma and the small molecule side of pharma for us. So, we really were pleased with the numbers we put up in the first quarter in pharma. Tycho W. Peterson - JPMorgan Securities LLC : Okay. And then on DGG, I know you had a tough comp there. It did decelerate a little bit sequentially. Anything to call out there? Still up year-over-year, but just wondering if there's anything from an end-market perspective you can call out for DGG. Michael R. McMullen - Agilent Technologies, Inc.: You want to take that one, Jacob? Jacob Thaysen - Agilent Technologies, Inc.: Yes. So, yeah, you're right, Tycho, that we had another strong quarter on the top line growth with 8% growth. And we're very pleased with that. We saw very strong growth from our pathology and our companion diagnostics business from a margin perspective. We have five divisions, and the mix continues from (23:49) quarter-to-quarter. So, the long-term view is still intact and we were actually expecting to be in this level. So, there's nothing from the market perspective that impacted our performance. Tycho W. Peterson - JPMorgan Securities LLC : Okay. And if I could just ask one last one on Lasergen, that's coming up in terms of you guys making a decision. Anything you can tell us at this point or do we have to wait couple of weeks here? Jacob Thaysen - Agilent Technologies, Inc.: Yeah. So, what I would share with the audience – thanks for the question, Tycho. We continue to be very pleased with the progress that Lasergen is making on the program. And as you may know that we have a pre-negotiated deal structure, which would allow us to exercise a call option in March. And I think that's probably all I'm going to say at this point in time beyond the fact that the time of the exercise does fall in the period covered by our 10-Q. And if there would be an exercise, you would note that it'd be in the 10-Q. And just as a reminder, we're thinking about Lasergen along the lines of any other acquisition. So, it's not been considered in how we guided for the rest of the year. But, again, we continue to be quite pleased with how the program has been progressing. Tycho W. Peterson - JPMorgan Securities LLC : Okay. Thank you. Operator : Thank you. Our next question comes from the line of Jack Meehan from Barclays. Your question, please. Jack Meehan - Barclays Capital, Inc.: Good afternoon, and Happy Valentine's Day, as well. Michael R. McMullen - Agilent Technologies, Inc.: Same to you, Jack. Jack Meehan - Barclays Capital, Inc.: So, you have a great cadence of new products coming to market. I was wondering if you could just give us a sense for how much that was contributing to growth in the quarter and within that, maybe an update on the Ultivo cycle and how things are going. Michael R. McMullen - Agilent Technologies, Inc.: So, I'll take the first part of that and then I know Patrick would just love to talk about what's going on with Ultivo. That's really a tough question for us to answer, and I'm not trying to dodge the question. We don't really have a quantitation along those lines. I would just say it's part of the story. We know that – if you've been noticing the growth rates of Agilent over the last three-plus years, the growth rates are accelerating. And what's been going on at the same point in time is our cadence of new product introductions has also been accelerating, because in the earlier phases of what we were calling then the new Agilent, we're basically redoing a lot of our product roadmaps. And now, we've got them redone and we're actually executing and delivering. So, I'd say it's a major contributor, but I really can't provide a level of quantitation on that. Patrick, would you like to share some insights on what's going on with Ultivo? Patrick Kaltenbach - Agilent Technologies, Inc.: Sure. Thanks, Mike. Yeah. So, on the Ultivo product, and to what Mike said, all these new products drive a lot of good momentum for us in our end markets. And if you take Ultivo, for example, which we started shipping last quarter, and I'm happy to report that it's well ahead of our own plan in terms of ramped volumes, and we're really pleased with the acceptance that we own in our own field by the customers. We get excellent feedback from the first installations out there, and it's driving a lot of excitement about our product portfolio. So, it's not only driving the Ultivo volume itself, it's also driving a lot of collateral business for us in the LC/MS business. And I think this pipeline of new products that we have launched over the last two years is a major contribution for us, in our trajectory right now, we're taking market share. Michael R. McMullen - Agilent Technologies, Inc.: And, Patrick, if I remember our conversation from this morning, it's both in our expectations relative to unit growth as well as price per unit. So... Patrick Kaltenbach - Agilent Technologies, Inc.: Absolutely. Michael R. McMullen - Agilent Technologies, Inc.: ...it's been a nice initial story. Jack Meehan - Barclays Capital, Inc.: Great. And then in chemical and energy, I was wondering if you could just give us an update in terms of what's built in the guidance for 2018. Obviously, the macro picture continues to be robust. In 2Q, is there anything Lunar New Year-wise that we need to consider there? Just, thanks, any feedback would be great. Michael R. McMullen - Agilent Technologies, Inc.: Yeah. Let me make a few comments here. So, there is somewhat of a Lunar New Year. And I told Didier earlier, so I'd hope at one point in time one quarter I won't have to talk. Every year, we seem to talk about Lunar New Year, but this is a reminder for the audience. What happened here is the way the Lunar New Year fell this year, many customers actually wanted shipments of products before they left for the holiday. So, we had some revenues that we thought were going to be in the second quarter that actually showed up in China in the first quarter. On the chemical energy, I wouldn't say that's material at the company level, however, but there's a portion of the business that's impacted. We think about the overall guide for the year, I think we're probably – if you think about our guide, the midpoint of 5.5%, I think you could probably put us 6%, 6-plus-percent, 6%, 6.5% for chemical and energy. And, again, we're expecting a continuation of the momentum, albeit we're starting to go into a period of tough compares, because, as I mentioned in my call, it's now been four quarters in a row of double-digit growth. And now I have to compare my growth against those hot numbers. But, again, the market environment continues to be positive in chemical and energy, and we're kind of in the 6-ish range for the year. Jack Meehan - Barclays Capital, Inc.: Thanks, Mike. Operator : Thank you. Our next question comes from the line of Steve Willoughby from Cleveland Research. Your question, please. Michael R. McMullen - Agilent Technologies, Inc.: Hi, Steve. Operator : You might have your phone on mute. Steve Barr Willoughby - Cleveland Research Co. LLC: Yeah. Can you hear me now? Michael R. McMullen - Agilent Technologies, Inc.: Yeah, we sure can. Go ahead, Steve. Steve Barr Willoughby - Cleveland Research Co. LLC: Hey, guys. Two questions for you. First, Mike, just was wondering if you could comment at all about the kind of pricing and promotional environment of late in some of your analytical instruments. Are you seeing any changes as it relates to pricing either from some raw material inflation or just from a competitive standpoint? And then I guess secondly, it kind of goes along with that. You made the comment that you feel like you're outgrowing the overall market. Just was wondering, is there any particular areas of notable strength that you feel like you're really outgrowing the market as it relates to the different product categories you're in? Michael R. McMullen - Agilent Technologies, Inc.: Yeah, sure. Happy to address both questions. So, there's been a lot of talk about the inflation, inflationary concerns. And it's put a drag on the market, as you know, at the time of release, introduced a level of volatility in the market we haven't seen for a while, but we're not seeing that in our market. So, of course, the markets are very competitive. There're certain competitors who tend to focus more on price than we do. But, Patrick, I think it's pretty fair to say that we're really not seeing a lot of real changes in discounting practices or pricing structures in the marketplace. And that's why I'd actually asked – I pointed out earlier, for example, in our new product category that we just introduced, we're actually doing better on the ASP side than we had actually anticipated. So, we're feeling pretty comfortable about where the price points are. (30:47) Michael R. McMullen - Agilent Technologies, Inc.: And, yes, yes, sorry. Yeah. So, in terms of market share, we look at the macro numbers and said okay, we know our growth rate's higher than our peers, and then we kind of peer into the different product categories. I think we have a good handle, particularly on our LSAG instrument side because we're able to compare ourselves through and externally, if you will, an independent source of data, ALDA. And we can see where our market shares are really picking up. And I think it kind of spilled out a bit in my narrative, but mass spec was strong double-digit growth; chromatography, spectroscopy, these are places where really we can say confidently we're picking up share relative to the competition. But at the same point in time, even though we don't have the same stats, we know in DGG, on the pathology side we continue to pick up share growing there. So, it's been a sort of a broad-based story, but in particular we can talk with a lot of confidence because we have external data around our instruments. Steve Barr Willoughby - Cleveland Research Co. LLC: Okay. Thanks very much, Mike. I appreciate it. Michael R. McMullen - Agilent Technologies, Inc.: Thanks, Steve. Thanks for participating on the call. Operator : Thank you. Our next question comes from the line of Puneet Souda from Leerink. Your question, please. Puneet Souda - Leerink Partners LLC : Thanks for taking my question. So, first one is maybe for Patrick or Mike. Just trying to understand what was the really strong in mass spec area in LSAG? So, what sort of products that are driving the growth here and what end markets? And if Patrick could give those details. And if you could also help me understand how much of that was revenue recognition from the last quarter and how much of that was the contribution into this quarter. And then I've a follow up. Michael R. McMullen - Agilent Technologies, Inc.: Yeah, Puneet. Thanks for that question. And Patrick, if you don't mind, would you mind taking that one? Patrick Kaltenbach - Agilent Technologies, Inc.: Yeah, I'll kick it off. So, when you look at the LC/MS space, we definitely have seen the strongest growth in the Quadrupole space, meaning single-quarter and triple-quarter. And a lot of that was driven by the product launches we made last year at ASMS. We introduced the Ultivo, we also introduced a new single-quad product, both drive healthy growth for us in LC/MS. And in terms of growth that drove in revenues in Q1, yes, some of it was driven by the strong order growth we had in Q4 last year, but we see a continued momentum behind these products. So, I'm not concerned on the outlook of these products. The funnel looks pretty healthy. When you look at the end-market space, as Mike mentioned that pharma is doing very well for us in the LC/MS, but we also see it in Applied Markets like in food analysis where this product is heavily used. Puneet Souda - Leerink Partners LLC : Okay. That's very helpful. Thanks. And then a second question that I have is, we saw a large set of promotions that were running on both instruments and consumables in the LC business. The consumables are no surprise to me, but instrument discounts were intriguing at the end of first quarter where it seemed like the benefit looks to land in fiscal second quarter. Hoping to see if you can elaborate something on that. And essentially if there are drivers, what were the drivers of those promotions? And if there was any benefit in 1Q from that and how should we think about the second quarter fiscal in light of those promotions? Michael R. McMullen - Agilent Technologies, Inc.: Yeah, Puneet. Thanks for that insightful question. And this is a general statement. We tend to run promotions on a regular basis. And this is part of our mix when we're trying to target certain areas or certain geographies or certain market segments. And then, we have gone down a path of promoting, if you will, the entire solution and not just picking an element of a particular purchase that a customer would be interested in. So, I think it may be a specific question about, maybe you can comment specifically, Patrick, about what's going on in the liquid chromatography area between you and Mark on the column side. Patrick Kaltenbach - Agilent Technologies, Inc.: Yes. Yeah, I think what we're really doing here is, we are leveraging the strength of both instrument and the aftermarket business in the consumables. When we launched last year the Infinity brand LC consumables as well, we thought it's also now a product that really put some stronger campaigns behind it, again, as Mike said, this is nothing unusual. We do this really to extend our market region, we try to reach customers which potentially have not considered Agilent in the past, like at the lower end of the portfolio is what you have seen there. So, it's not a strong discounting account across the entire portfolio. We're really trying to target also entry-level systems and customers who want to benefit from the Agilent performance and quality of our instruments and aftermarket solutions that have not considered us today. And this was part of that promotion you probably referred to. Michael R. McMullen - Agilent Technologies, Inc.: Yeah, I mean, the strategy here is really to get new incremental growth, new customers, not sell to existing customers at a lower price point. Puneet Souda - Leerink Partners LLC : That's great. It looks like you guys are winning there. So, thanks again. Thanks for taking my question. Michael R. McMullen - Agilent Technologies, Inc.: You're quite welcome. Operator : Thank you. Our next question comes from the line of Paul Knight from Janney Montgomery. Your question, please. Paul Richard Knight - Janney Montgomery Scott LLC : Hi, Mike. Can you talk about... Michael R. McMullen - Agilent Technologies, Inc.: Hey, Paul. Paul Richard Knight - Janney Montgomery Scott LLC : Hey, congratulations on the quarter. Michael R. McMullen - Agilent Technologies, Inc.: Thank you. Paul Richard Knight - Janney Montgomery Scott LLC : I want to save Valentine's Day for other people, but regarding where you are in the stage of your operating margin expansion, can you detail some of the efforts ahead and are you in inning one or two or three of that margin expansion program? And then secondly, regarding I know CrossLab has been part of your strategy to take share. What's your visibility? Is this the multiyear share gain still ahead for you? Michael R. McMullen - Agilent Technologies, Inc.: Yeah, what I'm going to do is, I'll take – by the way, thanks for the comments, Paul. I'm going to go ahead and take the first question. And Mark, if you could pick up the second question on ACG's longer term outlook. So, in terms of the margin expansion, we were really just delighted to see the 130 basis points of improvement in Q1. And as you may recall, we had a bogey we had put out last year to hit 22%. And I told us, listen, that's just a milestone along a longer journey of continued margin improvement. So, fundamentally, we think that we can continue to improve operating margins about a 35% incremental moving forward. And then to your question, we have some real specific programs lined up. So, I mentioned in my remarks about our Agile Agilent program and we're still finding ways to simplify the company, streamline the company. A lot of the focus now is in our back office operations as well as how we handle the incoming orders from customers. We have still a very manual process. And we think that we can really automate that, and we have what we call a touchless transaction initiative inside the company. And, again, I think it leads to more seamless customer experience and increases our velocity of transactions we handle. And we don't have to continue to add people at the same rate as revenue. So that's one area of focus for example. The second area, and I think is actually much more significant in terms of P&L impact is the initiatives that we have underway in our order fulfillment organization. So, the evolution of that was phase one was really about moving products into lower cost geographies . And now phase two is really heavily focused on three aspects, which is, one, is focusing on the material costs for the company which last time I looked was well over $900 million of purchases. We're in the midst of a major transformation of our procurement organization and how we engage and work with suppliers. And it's already starting to translate into some lower costs, while maintaining – or in some cases, even improving quality. We have a major initiative of value engineering, where we basically use our engineering prowess to reengineer certain components for lower cost while sustaining improvement of performance of the product. And the last area is logistics where we continue to find ways to lower cost. And you may have caught a recent announcement, if you follow the local news in Tennessee where we have made a major move to insource logistics from FedEx in Tennessee. So that will also be one more example of things we're doing in the supply chain to lower cost. And then the third thing I would just say is, in general, across the entire company we have this continuous process improvement mindset where we continue to find ways to streamline what we do to make it more efficient and make people's work inside the company more enjoyable while also having the great benefit of doing a better job for our customers, and obviously the P&L. So, I think those things are sustainable. I think we're still in middle innings, if you will, on this. We haven't run out of ideas and we think we continue to sustain this performance. Mark, in terms of sustaining performance, perhaps you can share with Paul and the audience your thoughts about the long-term growth prospects for ACG. Mark Doak - Agilent Technologies, Inc.: Thanks, Mike, and thanks Paul for the question. Obviously, we're very pleased with our ongoing very consistent high single-digit growth performance. And we're confident in our ability to grow. And it's not just from a market share gain perspective, it's also bigger account penetration into our current accounts and also portfolio expansion. And Mike alluded to this at the beginning of the call, what's fundamentally been a growth driver for us. And we saw accelerating growth throughout the remainder of 2017 and now into 2018 has been our consumables portfolio. This started well over a couple years back. And there's never going to be a single big product area inside our consumables business that that'll drive top line, but over the course of FY 2017 we added over 1,000 new products into our portfolio. And as you probably can guess, those then get pushed through our channels, our expanded e-channel reach and then ultimately they have long-term annuity streams that in many cases last over a decade. So, I'd say across the board, if we look at it from our enterprise business, our instruments service business and our consumables business, we continue to see great opportunity to continue to grow across those dimensions that I just mentioned. Michael R. McMullen - Agilent Technologies, Inc.: And we're by no means done yet, right? Mark Doak - Agilent Technologies, Inc.: By no means. Yes, by no means. Paul Richard Knight - Janney Montgomery Scott LLC : Great color. Thank you. Michael R. McMullen - Agilent Technologies, Inc.: Thanks, Paul. And Happy Valentine's Day. Operator : Thank you. Our next question comes from the line of Derik de Bruin from Bank of America Merrill Lynch. Your question, please. Derik de Bruin - Bank of America Merrill Lynch : Hi, good afternoon. I jumped on a little bit late. So, my apologies if I'm... Michael R. McMullen - Agilent Technologies, Inc.: Hey, Derik. No problem. Derik de Bruin - Bank of America Merrill Lynch : Hey, I'm not going to wish you a Happy Valentine's Day, though. Michael R. McMullen - Agilent Technologies, Inc.: Okay. I'm hurt, I'm crushed, Derik. Derik de Bruin - Bank of America Merrill Lynch : You can be mine. There you go. So, I'm just curious about sort of like the pacing. I mean, obviously you gave guidance in mid-November, and then I think we all were sort of feeling a little bit conservative on – I think we all assume are being a little bit conservative, but I think the quarter's results were a little bit above and beyond certainly what even the most bullish people were thinking. So, what was sort of happening in the pacing in December/January? Was it bigger budget flush than normal, just better order trends? I mean, was there any sort of inflection that you saw in terms of the outlook? Michael R. McMullen - Agilent Technologies, Inc.: Yeah. Great question, Derik. And I think what we saw was, overall, if you look at the strength which really surprised us was, we saw stronger than forecast growth in academia and government. We weren't expecting that kind of number, 11%. Chemical engineering we knew was going to be good, but we didn't think it was going to be that good. And in Europe, we knew it would be good, but not that good. So, I think things just came in stronger than we forecast. The year-end budgets were there. So, we had a lot of order strength coming into the calendar year. And we were able to turn a lot of that into revenue in the first quarter. The one that we hadn't anticipated in addition to those points I just made relative to the market environment was, customer behavior in China, which is, what we had was a timing issue or we had some Q2 revenue pull in from the Lunar New Year because typically customers want their products, says, ah, Lunar New Year, we'll deal with this after we come back. But for some reason, this year, which I can't really explain, they were looking for products to be taken earlier. So, we actually had more revenue in China. I mean, we had upper teens growth in China for the quarter. We think China's still going to be a source of growth, high single digits, maybe 10-ish for the year, but it won't grow upper teens like it did in Q1. So, I think of all the things that one I think we hadn't anticipated from a standpoint of different customer behavior in China, although we didn't think the budget would be as strong as well in certain market segments. So, it was a quarter where everything came together very, very nicely. And we're happy with the numbers. Derik de Bruin - Bank of America Merrill Lynch : Okay. So then China pull forward, and then maybe a little bit from the Easter holiday, although and for the timing of that that's sort of the basis for the 4.25% core guide for the next quarter? Michael R. McMullen - Agilent Technologies, Inc.: Yeah. And Didier, I forget as to how much we had estimated might have been pulled in from the China? Didier Hirsch - Agilent Technologies, Inc.: About $10 million. Michael R. McMullen - Agilent Technologies, Inc.: About $10 million. And then – oh, sorry. Let me try that again. Didier Hirsch - Agilent Technologies, Inc.: So, yeah, about $10 million we have pulled in and then we'll have another $10 million feed because of the Chinese New Year in Q2. Michael R. McMullen - Agilent Technologies, Inc.: Right. Derik de Bruin - Bank of America Merrill Lynch : Okay. Thank you. That's very helpful. Just one other follow-up question. This is actually another China question. I noticed on your slide deck you launched this Value line of consumables for China. And just can you talk a little bit more about that? Maybe I just missed it. I wasn't familiar with that as something going on and sort of talk about that and is that something that's applicable more globally? Michael R. McMullen - Agilent Technologies, Inc.: Yeah, I think I'll have Mark make some comments here. So, this is relatively your closed study of the company, because it's relatively new introduction for the company. So, Mark, why don't you share with Derik your thoughts about what's going on in China and whether or not this model may play out in other geographies. Mark Doak - Agilent Technologies, Inc.: Hi, Derik, Mark. As far as China is concerned, we've gone on record that we wanted to look specifically at China's marketplace, look at a portfolio that's fine-tuned to China. And our Value line offering in China was to address customers who are still looking for higher quality, but not quite as much capability in our supplies in chemistries business. And we're obviously very pleased with the initial results of this and extending that portfolio. At this juncture, we certainly see the opportunity to move this to other areas where we could see the same value proposition, whether it be parts of Southeast Asia or India. We're not ready quite to pull the trigger on that, but our primary focus is China, just because of the enormous market opportunity there. But that was the intent with this Value line is, same quality they expect from Agilent that at a performance that's relative to the tests they're trying to accomplish there. Michael R. McMullen - Agilent Technologies, Inc.: And, Derik, I would just add. We don't see this as cannibalizing our current business, we actually see it as an addition. I think there was some concern, oh, we've introduced new product, are we going to cannibalize our own business? This is type of segment we're not able to address right now. So, we're pretty excited about this. Derik de Bruin - Bank of America Merrill Lynch : Great. Thank you, Mike. Mark Doak - Agilent Technologies, Inc.: Mike, just go ahead and reiterate that comment, it really has been a bolt-on to our current business in China. Operator : Thank you. Our next question comes from the line of Patrick Donnelly from Goldman Sachs. Your question, please. Patrick Donnelly - Goldman Sachs & Co. LLC: Great, thanks. Maybe one for you Mike. On Intuvo, has your view changed at all on that adoption curve trending, probably the sharpest acceleration hitting maybe three years into the launch? And then, now that we're 18 months into the launch, are you seeing more customers come back with multisystem orders? Michael R. McMullen - Agilent Technologies, Inc.: Yeah, absolutely. So, speaking for Patrick, I'll jump right on this one, which was, we are starting to see repeat orders and multiunit purchases of Intuvo GC, particularly in high throughput applications where they're also using mass spec. So, it's playing out just as we thought it would. But I will tell you it takes the customer some time to understand exactly what it is we've delivered to the marketplace. I can just share with you firsthand, last week I was in India and I sat in on a seminar with some of our key VIP customers who are very knowledgeable in gas chromatography and they had a lot of questions and there had been some hesitation because it was so new, but once they had opportunity to really understand it and see it, really see how unique the innovation here is. And, in fact, one of the customers said, listen, gas chromatography has been sort of the same way for decades, this is really quite something different and you really have changed the thinking about innovation. It really is easy to use. So, customers who have it have been really pleased, and we're now starting to see repeat buys and multi buys, so, that ramp rate is starting to occur. Patrick Donnelly - Goldman Sachs & Co. LLC: Okay. And then how should we be thinking about potential larger scale pharma M&As impacting? I mean, I assume there would be a pause in the instrument purchases, but could that actually be an opportunity on ACG to accelerate growth just with the operations in productivity side? Michael R. McMullen - Agilent Technologies, Inc.: That's exactly the answer. You've got it. So, we've been through these kind of cycles before, but we're actually – if, in fact, they would occur, but the company is in such a different position than it was during some of the other bigger consolidations we've seen in the past. So, yeah, you would have a pause on new instrument purchases. At the same point in time, it'll create new opportunities for us in the ACG business as it relates to both enterprise services, relocation, also refurbished business units. We'll probably get very actively involved in taking some of the excess equipment that customers may have and taking it back into Agilent and redeploy in other set market segments. So, we're not overly concerned about this. And we've also found historically when there's been merger and acquisition where they tend to want to consolidate or put more spends on to a fewer vendors, it plays to our strength, really reliable equipment that has high performance and really has a cost of ownership advantage to them. So, I think the ACG story is one thing that really allows us to say, if this would occur, it'll be mitigated by some of the change we've made in terms of the company's portfolio and capabilities we offer to the marketplace. Patrick Donnelly - Goldman Sachs & Co. LLC: Helpful. Thank you. Operator : Thank you. Our next question comes from the line of Brandon Couillard from Jefferies. Your question, please. Brandon Couillard - Jefferies LLC : Thanks. Good afternoon. Michael R. McMullen - Agilent Technologies, Inc.: Hi, Brandon. Brandon Couillard - Jefferies LLC : Mike, a question about the government and academic segment. I mean, two straight quarters of double-digit growth. Could you give us a sense of how that looks geographically and what areas you think you're gaining share and if it's something you changed commercially that might be contributing to that? Michael R. McMullen - Agilent Technologies, Inc.: Yeah. So, the funding environment has been improved in Europe and has remained strong in China. So, geographically, we're pointing to Europe and China as the source of strength for academia and government. But your intuition was spot-on, which is we've really fundamentally changed the commercial approach to this marketplace. And that's why it is always hard to predict market share gains when you're doing your guide and your forecasts. But I think that's one of the reasons why we're seeing such strong growth because what we've done is we fundamentally have – we reorganized our academia and government channel. And I think that would be in quotes because a couple years ago, it was a very fragmented approach to these university and government market. Now we have one focus channel backed up by a company-wide academia program supported by a number of initiatives such as our Thought Leader Awards and other access programs we had with our Agilent Labs. So, this combination of a new go to customer model in academia and government backed up by some new company level programs I think is starting to yield dividends. Brandon Couillard - Jefferies LLC : Super. And then one more. In terms of the Nucleic Acid Solutions facility expansion, just want to check and see if there's many change in the timeline. And when do you plan to start the validation process? And how long does that take? Michael R. McMullen - Agilent Technologies, Inc.: Great question. It's actually very timely, as we just had a review on that just a few hours ago. So, Jacob, if you can remember the details perhaps you can handle that question. Jacob Thaysen - Agilent Technologies, Inc.: Yeah, absolutely. And we are pleased to report that we continued to move forward according to our expectations meaning that our validation efforts will start in early next year and then continue. We actually believe it will take quite a while. This is a unique setup we have. So, validation will take a while to get through. It's not something that happens within a few months, but over a period of time. And we do believe that would be all done by end of next fiscal year. And then start to see revenue into 2020, sometime in 2020. Hopefully a little bit in 2019 too. Michael R. McMullen - Agilent Technologies, Inc.: A little bit of 2019, I was just checking our notes. Jacob Thaysen - Agilent Technologies, Inc.: That's right. I'm buffering my expectations, but yeah, right into 2019, we would start to see revenue. Michael R. McMullen - Agilent Technologies, Inc.: But we're really feeling happy about where we are. We just had a very detailed review of the production progress. We're pretty much almost done the construction side of the production. Capabilities are bringing on and then we'll start moving into, as Jacob mentioned, validation. Brandon Couillard - Jefferies LLC : Very good. Thank you. Operator : Thank you. Our next question comes from the line of Doug Schenkel from Cowen. Your question, please? Ryan Blicker - Cowen & Co. LLC: Hi. This is Ryan on for Doug. Thanks for taking my questions. Michael R. McMullen - Agilent Technologies, Inc.: Very well. Ryan Blicker - Cowen & Co. LLC: Really strong Q1 in bumping up guidance pretty significantly for the full year, despite comps getting a bit tougher as you talked about. Can you confirm that your overall guidance philosophy hasn't changed? I guess, what I'm getting at is, if end markets continue to hold up as expected, do you still feel there's plenty of room for you to do better than your revised guidance as has been the case for the past couple Q1s? Michael R. McMullen - Agilent Technologies, Inc.: Yeah. Thanks for the recap of the guide. And you're exactly right. There's been no change in our thinking about how we guide the company. And I tried to call that out in my script, and I think I used the word we'll continue to take a quarter-by-quarter look. And we stand ready to raise our full-year guidance as business conditions remain favorable. And that's what we'd said for example the Q4 of 2017. And that's exactly what we've done here in this first quarter. Ryan Blicker - Cowen & Co. LLC: Excellent. And then maybe one on cell analysis. You've called out cell analysis as a key growth driver over at least the past few quarters. Michael R. McMullen - Agilent Technologies, Inc.: Yeah. You noticed. You noticed. Ryan Blicker - Cowen & Co. LLC: How much annual revenue do you have in this area now including the recent Luxcel acquisition? And is this business still growing 15% to 20%, which I think is what you called out around the acquisition of Seahorse? Michael R. McMullen - Agilent Technologies, Inc.: Yeah. We don't report directly the specific numbers around the vision of the company. But I think you can probably gauge the relative size if you can go back and look at what we said at the time of the acquisition of Seahorse Bioscience. And it is growing in the ranges you just described. Patrick Kaltenbach - Agilent Technologies, Inc.: Absolutely, yeah. Michael R. McMullen - Agilent Technologies, Inc.: Yeah. And Patrick thinks it'll grow faster with Luxcel now? I guess, we can tell them, right? Patrick Kaltenbach - Agilent Technologies, Inc.: Well, that's the plan, yes. Michael R. McMullen - Agilent Technologies, Inc.: Okay. Ryan Blicker - Cowen & Co. LLC: Excellent. Thank you. Operator : Thank you. Our next question comes from the line of Emily Stent from Robert W. Baird. Your question, please. Emily G. Stent - Robert W. Baird & Co., Inc.: Hey, guys. Thanks for taking the question. Michael R. McMullen - Agilent Technologies, Inc.: Sure, Emily. Emily G. Stent - Robert W. Baird & Co., Inc.: Looking at the final market, we've heard about massive job cuts at Teva. What's your opinion on the overall help of generics market? And what's your revenue exposure to these customers, and Teva, specifically? And then could you break out what you saw in recurring pharma revenue versus instrument? Michael R. McMullen - Agilent Technologies, Inc.: Yeah, sure. Happy to address a number of points that you've asked about. So, first of all, I can just share with you, I think Teva is a company-specific challenge, not an indication of what's happening in the macro market environment. And I mentioned earlier that I'd been in India, and, of course, the generic industry is quite important in the Indian marketplace. And I was with a number of executives from generic pharma companies, and they're really excited about where things are going. I think there's something like $50 billion worth of new drugs coming off of patents in the next two years, on the small molecule side. They're making a lot of investments in biosimilar. So, that marketplace is very healthy. And I think Teva is going through some of its own internal challenges, but I wouldn't say that's indicative of the overall marketplace. They are a customer of ours, but I think it's not material at the company level in terms of the business volume there. And then I believe the instrument aftermarket ratios are fairly dissimilar in pharma as they are in the rest of the company, maybe – yeah, yeah, which is probably in the range of 55% or so aftermarket, 45% upfront. Hope that helps. Emily G. Stent - Robert W. Baird & Co., Inc.: Great. Yeah. Thank you very much. Michael R. McMullen - Agilent Technologies, Inc.: Hmm-mm. Operator : Thank you. Our next question comes from the line of Dan Arias from Citigroup. Your question, please. Daniel Arias - Citigroup Global Markets, Inc.: Good afternoon, guys. Thanks. Michael R. McMullen - Agilent Technologies, Inc.: Hey, Dan. Daniel Arias - Citigroup Global Markets, Inc.: Hey, Mike. I think you guys got the high points here, so, maybe just one for me on the segment margins. LSAG was up pretty nicely in the quarter. Do you think you'll continue to stay at that 100 bps to 200 bps range, just given what seems like there's some good leverage potential there. And then, I guess on the flipside, where do we think about DGG margins going, just given the step down for the quarter? Michael R. McMullen - Agilent Technologies, Inc.: Yeah. So, I'll make some initial comments and then invite Patrick and Jacob into the discussion. So, I just saw exceptional performance in LSAG with 11% growth. That really shows you when we get to top line, we get a lot of leverage in the margins there. And as we mentioned earlier, we think the pricing is holding up. So, we're pretty confident about the margin going forward. I don't think we can expect that level of improvement every quarter, would be my guess, Patrick. Patrick Kaltenbach - Agilent Technologies, Inc.: You'll not see the same level of improvement for sure. But, again, to your point, is what we definitely see is that the new products have better gross margins. They are very competitive in pricing, which is, again, driving a lot of it. And when the volume picks up, as we have seen the last quarter, then you get these exceptional results. Michael R. McMullen - Agilent Technologies, Inc.: Right. I think it also shows our business model side of the company. Hey, when volume picks up, we don't go on a spending spree here. And that's how we can get the margin expansion. And I think it's important, maybe as we shift over to DGG, is, there's a lot of puts and takes each quarter in DGG given just the nature of the business. And so, again, we've had a great run in terms of margin expansion and we think we're going to be in a solid position as we begin exit 2018. But perhaps maybe just a little bit more insight in terms of how you think about where you are on the margins, Jacob. Jacob Thaysen - Agilent Technologies, Inc.: Yeah. Thanks, Mike. And as mentioned before, we came in low. We always do that in Q1 since we have a strong run rate business and very dependent on the number of days in the quarter. But at the same time, we have a relatively high fixed cost space. This is the impact you will have in Q1. And we have that basically every year. And then there is, on top of that, some mix that can move from one quarter to the other. And that is really what you have seen in this quarter, but overall came in as expected. Michael R. McMullen - Agilent Technologies, Inc.: Yeah. Thanks, Jacob. Daniel Arias - Citigroup Global Markets, Inc.: Okay. Very good, guys. Thank you. Michael R. McMullen - Agilent Technologies, Inc.: All right. Thanks, Dan. Operator : Thank you. This does conclude the question-and-answer session of today's program. I'd like to happen the program back to Alicia Rodriguez for any further remarks. Alicia Rodriguez - Agilent Technologies, Inc.: Thank you, Jonathan. And on behalf of the management team here in Agilent, we'd like to thank you all for joining us today. If you have any questions, please give us a call in IR. Thanks, again. Operator : Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,018	2	2018Q2	2018Q2	2018-05-14	2.533	2.567	2.834	2.85	3.75	23.53	23.25	Executives: Alicia Rodriguez - VP of IR Didier Hirsch - Senior VP & CFO Jacob Thaysen - Senior VP and President of Life Sciences & Applied Markets Group Mark Doak - Senior VP & President of Agilent CrossLab Group Michael McMullen - CEO, President & Director Samraat Raha - Senior VP and President of Diagnostics & Genomics Group Analysts : Derik De Bruin - Bank of America Tycho Peterson - JPMorgan Dan Leonard - Deutsche Bank Ross Muken - Evercore Steve Beuchaw - Morgan Stanley Brandon Couillard - Jefferies Doug Schenkel - Cowen Dan Arias - Citigroup Jack Meehan - Barclays Catherine Schulte - Baird Paul Knight - Janney Montgomery Steve Willoughby - Cleveland Research Puneet Souda - Leerink Partners Patrick Donnelly - Goldman Sachs Operator : Good day, ladies and gentlemen, and welcome to the Q2 Agilent Technologies Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] And as a reminder, today's program is being recorded. I would now like to hand the call over to Alicia Rodriguez, Investor Relations. Ma'am, you may begin. Alicia Rodriguez : Thank you, Amanda, and welcome, everyone, to Agilent's second quarter conference call for fiscal year 2018. With me are Mike McMullen, Agilent's President and CEO; and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Jacob Thaysen, President of Agilent's Life Sciences and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. 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. You will find an investor presentation along with revenue breakouts and currency impacts, 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 Mike and Didier 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 acquisitions and divestitures within the past 12 months. Guidance is based on exchange rates as of April 30. 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. Before turning the call over to Mike, I would like to remind you that Agilent will host its Analyst and Investor Meeting in New York City on June 6. Details about the meeting and webcast will be available on the Agilent investor website. And now I'd like to turn the call over to Mike. Michael McMullen : Thanks, Alicia. Hello, everyone. Thank you for joining us on today's call. Before I discuss the Q2 financial highlights with you, I'd like to first welcome Jacob Thaysen and Sam Raha to the first earnings call in their new roles. Most of you know Jacob from his former role as the President of Agilent Diagnostics and Genomics Group. He now is transitioned into a new role as the President of our Life Sciences and Applied Markets Group. Sam is replacing Jacob as the new President of Agilent's Diagnostics and Genomics Group. Sam, as you may recall, rejoined Agilent a year ago as Senior Vice President of Corporate Strategy and Business Development. Both Jacob and Sam have extensive backgrounds in life sciences, wide industry knowledge and connections. Both are highly experienced at building and leading large organizations. Agilent is fortunate to have a deep leadership bench to draw upon to fill these two roles. Now let me turn to our Q2 financial performance. I can report that the Agilent team delivered another strong quarter. Our momentum continues. Our core revenue growth of 4.3% is at the midpoint of our guidance. Our adjusted EPS of $0.65 exceeded our expectations and is above the high end of our guidance. Our adjusted EPS is up 12% from a year ago. We delivered adjusted operating margin of 21.9%. On a currency adjusted basis, this is our 13th quarter in a row of improving operating margins. After two strong quarters to start the year, our core growth now stands at 7% with adjusted operating margin of 22.2% and adjusted EPS of 19%. I'm making some references to our first half results as Lunar New Year had a material impact on the timing of our reported revenues. In Q1, our Chinese customers requested deliveries earlier than anticipated. As a reminder, this pulled in approximately $10 million of revenue from Q2 into our first quarter. In Q2, we also estimate that the reduced number of selling days due to Lunar New Year had a negative impact of close to $10 million on our ACG annuity business. These two factors reduced Q2's reported company growth by 2 percentage points. Back to our Q2 results and turning to our end markets. Pharma, our largest business, continued a strong showing with 8% growth. Strength in mass spectrometry, consumables, services and genomics led the results. Growth was strong in both the biopharma and small molecule market segments. We remain very confident in achieving our 2018 pharma growth objectives. Our chemical and energy market revenues grew 5%, in line with our expectations and against a difficult compare of 14% growth last year. The global chemical and energy market environment remains favorable although we noted a slight pause among our U.S. customer base, which may be attributable to some concerns about trade policies. We grew 2% in academia and government, driven primarily by strength in LC/MS, cell analysis and our CrossLab services and consumables business. Diagnostics and clinical grew 3%, led by strength on our reagent partnership and genomics business and offset continued weakness in the U.S. pain management market. Food revenue was down 1%, reflecting initial impact of the Chinese government reorganization of the food safety ministries. On March 21, the Chinese government announced the creation of the National Market Supervision Administration, NMSA, consolidating many previously independent agencies, such as AQSIQ, SFDA and SAIC into one market supervisory agency. This has resulted in a temporary slowing of new instrument purchases as ministries are being consolidated and decision makers are being clarified. We expect the reorganization will take as long as 1 year to be completely finished, with expected slowdown of six to nine months in new instrument purchases. Environmental and forensics grew 2%, driven by strong gains in our global forensics business. In March, the Chinese government also announced some changes to the structure of the environmental ministries. These changes, however, are not as large as those for the food market ministries. While we did see some slowdown in new instrument purchases, we expect business to return to higher levels of growth in the next quarter or 2. Geographically, the Americas and Europe grew strongly with high single-digit growth. China was flat in Q2 due to the timing impact of Lunar New Year and the recently announced changes to the government food and environmental ministry agencies. For the half, our China team delivered a strong 9% core growth. Now I'll cover some of the highlights from our business groups. The Life Sciences and Applied Markets Group delivered core revenue growth of 3%. Growth in chemical and energy remained robust, offset in the weakness in the food testing market. From a product perspective, we saw strength in LC/MS, cell analysis and ICP-MS. Our new LC/MS, Ultivo, continues to be well received by the market and performed ahead of our targets. On the M&A front, we announced the acquisition of Advanced Analytical Technologies, Inc. Agilent is known as an innovator in capillary-electrophoresis-based instrumentation, and this acquisition will add complementary technologies to our portfolio. The regulatory review is underway. After the quarter end, we also now plan to acquire Genohm, which closed today. Genohm is a developer of highly differentiated, on-premise and cloud-based software solution for laboratory management. The Genohm team would join Agilent as part of our LSAG group. Customers are looking to do more with their data. By integrating Genohm's platform into our OpenLAB portfolio, Agilent and its OpenLAB value proposition encompass the management of all the context and content in the lab. We continue to build out our cell analysis business. In collaboration with BioTek Instruments, we announced a new integrated solution that combines cellular metabolic balances and imaging technologies. This collaboration provides new capabilities to our Agilent Seahorse analyzers, which help biologists measure cell activity in real time. Agilent CrossLab Group continued its consistent, outstanding performance with 7% core revenue growth, gains across our major end markets led by double-digit growth in pharma and academia and government. Performance was balanced across consumables and services. China delivered double-digit growth, and all other geographies grew in mid- to high single digits. During the quarter, we made progress on our mission to prove both the science and the economics of our customers' laboratories. We introduced an innovative and extremely stable new GC column that is receiving a very positive response from customers. ACG service has expanded to Agilent-enabled services pilot to include additional platforms across Agilent. The pilot is aimed at improving the customer onboarding experience by shortening their time to value after they purchase our solutions. We also opened a new Global Solution Development Center in Singapore to meet the increasing demand for integrated end-to-end solutions. Our online capabilities continue to gain momentum. Our China online business has seen double-digit growth since the beginning of the year. And our China WeChat services program has attracted more than 13,000 active customers since its roll-out at the end of last year. The Diagnostics and Genomics Group delivered core revenue growth of 4%, as expected, led by strength in our genomics business. On the innovation front, we introduced several new products this quarter. Our launch of HRP Magenta for the Dako Omnis, Agilent's flagship instrument for immunohistochemistry and in situ hybridization, allows pathologists to more easily visualize cancer in skin and lung tissues. We continue to expand our portfolio of in situ hybridization probes with the release of 7 new probes for Omnis to maximize our differentiation in automated ISH staining. On the genomics side, we announced -- we enhanced our industry-leading target enrichment portfolio for next-gen sequencing. Our recent introduction of the SureSelect All Exon V7 is being well received by customers as it improves both performance and cost effectiveness. On the genomics informatics front, we released a new module for the Alissa Clinical Informatics Platform. This new module further simplifies informatics processes and accelerate timed results for our customers. We continue to invest for future growth. We signed a definitive agreement to acquire the remaining shares of Lasergen and close the acquisition on May 7. As many of you may recall, we made an initial investment in Lasergen in 2016 for a 48% ownership stake. This acquisition brings into Agilent a powerful sequencing chemistry and a world-class group of scientists and engineers dedicated to bringing our integrated clinical workflow solution for molecular diagnostics to the market. We are very excited to have the Lasergen scientists and engineers on the One Agilent team. We expect to invest about $35 million per year to deliver our molecular clinical workflow solution to the market in 2020. Now let me provide a few remarks on where we are in our journey at Agilent and our outlook for the rest of the year. The Agilent team continues to execute, and our momentum remains. We are right where we want to be for the first six months of the year. We delivered strong growth while improving operating margins and deploying our capital on a balanced manner. Once again, our EPS growth is in the double digits. Our R&D innovation engine continues to strengthen our portfolio. We're all excited of the new capabilities through M&A. We believe this combination of organic growth-driven investments and complementary M&A, together with our execution capabilities, will deliver continued strong growth relative to the market. For the past three years, our focus has been on building the company's foundation, a foundation that will leverage the One Agilent company culture, innovation and execution capabilities to generate above-market growth and earnings expansion. Our platform for top line and earnings growth is now in place. We are delivering. When we're rebuilding the company, I also want to focus on making the company more agile and responsive to our market environment. Looking forward, we continue to proactively assess market forces and moving the agile manager to capture most promising opportunities. As you know, our two largest end markets are pharma and chemical and energy. Through the first half this year, our pharma performance has been above our expectations and we are raising our full year pharma outlook. Our full year guide for the chemical and energy market business remains unchanged. We expect a strong mid to high single digit growth. Geographically, we are bringing down our expected full year growth rates in China to about 7% as a result of the expected pause in businesses from the realignment -- realignments of the government agencies. At the same time, we remain confident in the strength of our European and Americas business and have raised our full year outlook for these geographies from the Q1 guide assumptions. While there are some end market and geographic give-and-take, our overall model remains intact. Following the significantly raised guidance last quarter, we are reaffirming our full year core growth guidance and earnings guidance, inclusive of currency headwinds and increase in our molecular clinical workflow offering. The Agilent team is confident, energized and excited about our future, our next phase of growth and delivery of results. We are looking forward to sharing more about what is behind this outlook in our upcoming Analyst and Investor Day. Thanks for being on the call and we look forward to answering your questions and seeing you in June. I will now hand off the call to Didier, who will share more insights on our Q2 financials and updated outlook. Didier? Didier Hirsch : Thank you, Mike, and hello, everyone. As Mike stated, we delivered another strong performance this quarter and year-to-date. For the quarter, our core revenue growth of 4.3% was in line with our guidance, and we over delivered on operating margin and earnings per share. Our core revenue growth would have been more than 1 percentage point higher if not for ICP-MS shipment delays and the recently announced reorganization of Chinese government ministries. Our adjusted operating margin of 21.9% was 40 basis points above the implied guidance, and EPS of $0.65 was $0.03 above. Further adjusting for currency, the operating margin was 22.4%, i.e. 30 basis points above last year and as highlighted by Mike, represented our 13th quarter of increased year-over-year operating margin. We delivered $303 million in operating cash flow. During the quarter, we bought back 674,000 shares of Agilent stock for a total of $46 million and paid $48 million in dividends. I'll now cover the guidance of fiscal year 2018. We are maintaining our core revenue growth guidance of 5.5% even as we anticipate that the reorganization of Chinese government ministries may push out about $20 million of revenues into fiscal year '19. We are also maintaining our EPS guidance of $2.65 while absorbing $22 million or $0.06 for FX and our technology investments in Lasergen and Genohm. Regarding Lasergen, we forecast to spend $15 million this second half and about $35 million in both fiscal year '19 and fiscal year '20 when we plan to commercialize our solution. There is no change to our operating cash flow guidance of $1.05 billion and CapEx guidance of $200 million. I'll now turn to the guidance for our third quarter. We expect Q3 revenues of $1.185 billion to $1.205 billion and EPS of $0.61 to $0.63. At midpoint, revenue will grow 4.3% on a core basis. With that, I'll turn it over to Alicia for the Q&A. Alicia Rodriguez : Thank you, Didier. Amanda, will you please give the instructions for the Q&A session? Operator : Absolutely. [Operator Instructions] Our first question comes from the line of Derik De Bruin of Bank of America. Your line is open. Derik De Bruin : Hi, good afternoon. Michael McMullen : Hey, Derik. Derik De Bruin : The operating margin guide, it's - for the year, it's down about 20 bps. Is that FX and the diluted impact of the acquisitions, is that what's going on there? Didier Hirsch : There's a little bit of the, certainly, FX and the rest is on the acquisition front. You're absolutely right. Derik De Bruin : Got it. And I think you already answered my question about what you're going absorb in terms of Lasergen. But what are these other deals, the ATT, the - I'm sorry, the Advanced Analytical and the Genohm, going to add in terms of the top line for M&A contribution? Do they have significant revenues? Didier Hirsch : Yes. Well, the -- so Lasergen doesn't bring... Michael McMullen : It isn't about the AATI. It hasn't closed. Didier Hirsch : AATI and Genohm. Michael McMullen : Yes, yes. Didier Hirsch : Yes. Because it hasn't closed, we have not included it at all in our guidance projections. We will only do that once it closes. Michael McMullen : And then Genohm was a few million on the top end... Didier Hirsch : Exactly… Michael McMullen : A few million on the top end, about 40 people coming in. It's primarily a technology acquisition. Derik De Bruin : Got it. And so I'm a little bit curious on the China comments. It's -- none of the -- just having -- you guys are at the end of earnings season and none of your elder life sciences peers sort of commented, and it sounds like this happened late in March about the Chinese food reorg. I'm just sort of wondering, can you talk a little bit more about that and exactly what's going on and why you think it's going to take a year to sort of wind through the system? Michael McMullen : Yes, sure. As you may know, they have these two big annual sessions they call -- I won't read out the full abbreviation, but the NPC, the National People's Congress, and the CPPCC, which they had these two annual events. And after those events occurred, on March 21, they announced the reorganization of the ministries. And where we came of the estimate of about a year was based on our experience in 2014 and '15 when there was a similar reorganization within the CFDA and we saw a pause of six to nine months of business during that period of time. And we're using that as a similar rule of thumb. It's very consistent with the estimates on our teams. So - and I can remember we, on the earnings call at that time, are saying, listen, the businesses are not going away, but we know that there will be a pause at least on new instrument purchases as they work through all the changes. So that's our - that's a guideline. Of course, legacy will be shorter, but we wanted to be somewhat cautious on our outlook given our prior experience with the major, major changes such as this. The change on the environmental side is much less significant and should have a shorter-term impact. Derik De Bruin : Great. I’ll get back in the queue. Thanks. Michael McMullen : Sure. Operator : Thank you. Our next question is from the line of Tycho Peterson of JPMorgan. Your line is open. Tycho Peterson : Hey, thanks. Maybe I'll start with academic. You had a similar comp this quarter and the last quarter, obviously the results a little bit later. Is that just the timing dynamic? Or is there something else going on? Michael McMullen : Yes, Tycho, you hit it right on the head. It's just the timing. That business can be a little bit more lumpy, but we're actually positive on the overall funding of academia and government. So I wouldn't over-read into that quarterly result. And of course, we also had the shortened period of business in China, which also affected that a bit as well in academia and government. Tycho Peterson : And then chemical and energy, you called out the slight pause in the U.S. Can you maybe just talk about that dynamic and if trends have proved at all in May? Michael McMullen : Yes, thanks, Tycho. I mean, the numbers were solid. I mean, we had 5% growth off of a really difficult compare, but there's some kind of noise in the system particularly in the U.S. Business is good, but it could have even been more robust. And I think there's this -- as you know, business doesn't like uncertainty. And there's lots of uncertainty, what's going to happen in terms of trade policies and tariffs. And so I just -- we thought it's prudent to mention that it didn't affect materially the results, but the noise is out there although we, as you can see in our guide, we still remain very confident of our ability to grow this year in chemical and energy. And I know we're going to talk a bit about China today as well, but that's one segment of the China market that is really, really strong. And we can expect goodwill there for years to come. But again, we just thought it was good to share with the audience what we've been hearing from some of our customers. Tycho Peterson : And is it fair to say you're not yet seeing meaningful benefits from Intuvo at this point in chemical and energy? Michael McMullen : Yes, it's ramping, as we said. It's part of the story there, but we still have a lot more runway with that product. Tycho Peterson : Okay. And then last one on Lasergen. Are there milestones we should be thinking about on the development pathway here in terms of placing additional beta units? Or how do we think about the road map here for commercialization? Michael McMullen : Look, for some of the visibility [ph] in the market in 2020, I'll wait later on for that, Sam, right? Okay. Tycho Peterson : All right. Thanks. Operator : Thank you. Our next question is from the line of Dan Leonard of Deutsche Bank. Your line is open. Dan Leonard : Thank you. So just a quick follow-up on Lasergen there. Mike, is the $35 million in annual spend, is that all incremental or is some of that in the base? Michael McMullen : It's incremental. Dan Leonard : And then how does that impact how you're thinking about the margin expansion trajectory for corporate Agilent in fiscal 2019 and 2020? Because that's a material amount of spend versus what we would think of as a normal operating margin improvement cadence for the total company. Michael McMullen : Yes. We'll give you some more detailed information in the analyst meeting in June. But I think it has been that our core business will continue to follow the incremental growth in terms of margin expansion you've seen over the prior years. So this is a dilutive acquisition for us, but we think we can carry this forward. And we'll share all the details with you when we meet in June but -- and again, our core model of continuing to expand the operating margins with incrementals is intact. Dan Leonard : And then finally, just trying to think about how to size the China food safety exposure. Is it fair to think about your business in China being a mid-single digit grower until this normalizes? Or is it lower than that over the next, call it, six to nine month time frame? Michael McMullen : You mean the outlook? I just want to… Dan Leonard : Yes, for total China. Didier Hirsch : We've provided the outlook. The guidance is for 7%. We used to have 10% in the previous quarter guidance. So we are now at 7%. Dan Leonard : Okay. I can do the math. Thank you. Michael McMullen : That's for total China, right? Didier Hirsch : Yes. Michael McMullen : Yes, absolutely. Operator : Thank you. Our next question is from the line of Ross Muken of Evercore. Your line is open. Ross Muken : Good afternoon, guys. I just want to be clear on sort of the sequential headwinds, Q1 to Q2, and then sort of the jump-off from there because I think you said a couple of different things. So we had, obviously, the New Year shift. We had the day shift in the quarter, and then it seems like there was also something you said on ICP-MS. So just help us. Versus the original plan, what were the actual components of the delta that affected this Q? And it seems like the only thing coming out of this Q that's updated new, other than maybe the developed markets are better, is sort of China net worse because of food. I just want to make sure I get the cadence and the components right. Didier Hirsch : Yes, let me take that one, Ross. It's -- you are absolutely correct. The Lunar New Year was -- impact was obviously already reflected in our guidance as well as the very tough compare. Remember that last year, we had 9% core revenue growth; and the year before, 8%; and also the fact that last year, we had $7 million of settlement with our -- within our DGG organization. What is new versus the previous guidance are the shipment delays on ICP-MS and the reorganization of the Chinese government ministries. So only those 2 factors, which take away about 1 percentage point of our growth, we have not included in our previous guidance. Ross Muken : Got it. And in terms of risk factors both positive or negative to the 2H guide, I mean, where do you think there's the biggest potential either for up or down side from a segment perspective or end markets? Michael McMullen : Sure, I'll take that one. So I think the chemical and energy market continues to offer the biggest upside for the business. So we've already raised the outlook in pharma, and maybe we could do that again. But I think both the big end markets for the -- for Agilent are very solid with potential upside in chemical and energy. And that's why I mentioned the -- some of the noise. So as soon as we can get some clarity on trade policy, I think that will -- really will calm things down. And if that happens fairly soon, I think it would be really good news for us in this space. So I think the chemical and energy market offers the biggest upside for us. And then although we're trying to take a very objective outlook on China, maybe the -- it's always hard to predict how quickly these things happen. We painted what we think as sort of, if you will, a longer tail scenario, but we could actually find a move through the process much more quickly. So I think that might be an area where you could see some upside relative to our guide assumptions. Ross Muken : Yes. And just maybe, Mike, sorry, on that. The ICP-MS comment, is that decoupled from the China food comment in that... Michael McMullen : Well, no, it's actually part of the China story. So it's actually about -- what, about $10 million, I think, or so? About $10 million. So we... Didier Hirsch : $7 million, $8 million. Michael McMullen : $7 million, $8 million, close to $10 million. So I would like to round up a bit, as you can tell. But that was just a byproduct of the product is hot right now. So we're -- we just had a really, really high backlog. And as you may know -- I think you know this already, Ross. Particularly in China, you have to get an IVL license to get the products through the approval [Technical Difficulty] government. So that took a little bit longer. And I think, Didier, we've already shipped those this quarter. Didier Hirsch : Yes, absolutely. Michael McMullen : So it would have been nice -- I mean, for this, recall it would been nice we got them in last quarter but I think it is... Didier Hirsch : In bag for this quarter. Michael McMullen : Yes, it's in the bag for the quarter. It's already been shipped and booked. But again, it was this more of a backlog issue because we've been seeing such strong growth particularly in China for ICP-MS. Ross Muken : Got it. Thanks, Mike. Michael McMullen : You’re welcome. Operator : Thank you. Our next question comes from the line of Steve Beuchaw from Morgan Stanley. Your line is open. Steve Beuchaw : Hi, good afternoon and thanks for the time here. My first question is actually on margins. I appreciate the commentary that you have a good degree of confidence that the underlying margin expansion trend is intact. But as I look at the last few quarters or the last three quarters at the incremental margins, they've been tracking below the 30% target level. I wonder if you might help us understand why the trend is evolving along those lines. Are there any operational items to call out? And when could we see - a return back to the 30% plus level? Didier Hirsch : Yes, I'll take that question. Michael McMullen : Sure, Didier. Didier Hirsch : And yes, it's interesting. The impact of mostly currency on both the top line and the gross margin is fairly significant. So you are absolutely right. When you look at our unadjusted operating margins, reported operating margins incremental in Q1 and Q2, they were, respectively, 32% and 20%. If you adjust for currency and a little bit -- but that's very minor for acquisition. But on a core basis, you get to 36% for Q1 and 34% for Q2, so very much in line with our model. So it is mostly the impact of currency. And what happens there is that with the weakening of the dollar, it increases the numerator -- the denominator, sorry, which is the revenue. And it has negative impact because of the hedging policy on the numerator, which is the margin. So all in all, if you adjust for that, you get back to our model regarding core operating margin incremental. We have some data in our annex, I think, we've published. Or anyway, if you want, I can take you through the details, but that's basically the impact. Steve Beuchaw : Okay. And then two quick ones for the DGG line. One is, I wonder if you could give us an update on the time lines for the capacity ramp in Colorado. And then, two, could you speak to the trends that you're seeing on immunotherapy assays, PD-1, PD-L1 assays, given all the enthusiasm out there now for TMB testing as a diagnostic approach for IO? And I'll get back in queue. Michael McMullen : Thanks. I'm glad we had a chance to be able to point to other members of the team for a couple of questions. I'm actually going to pass this over to Jacob in your old role. And what I would just say, to start things off, is we just completed recently a review of the factory build-out in February. And I think we have the latest information. So Jacob, if you wouldn't mind taking those two questions. Jacob Thaysen : Yes, absolutely. So thanks for that. And again, a reminder that we see a very strong market in the NASD business, the nucleic acid solutions for API business. And so we're very confident that we will have a -- continue to have strong growth. And as you also reminded ourselves about this, Steve, is that we are in a situation where we have more demand than we have capacity. So we are now building out and we've done that for a few quarters now but building, and it's very impressive to see the site coming along out in Frederick out -- close to the Boulder site. And we're still progressing according to our plan, and we'll expect to have products coming out here in basically a year from now. Michael McMullen : And then how about the assays, the PD-L1? Jacob Thaysen : The PD-L1. So PD-L1 on the IHC platform and the question is how is that going to compete against the tumor mutation burden and other genomic assays. And what we see and what we believe is this will be complementary. First of all, most IHC continues to have a growth trajectory. We had a very, very strong penetration over the last 18 months, and we continue to see the growth here. What we believe is that -- and what we can see in the market is that immuno-oncology is just much more complex than probably one marker is giving you information about. So what we believe is and what we can see out there, we can see our customers are using that, the ones that start with TMB, is that they are using both and they will continue to use both markers. So we don't see a business cannibalization. We actually think there's a lot of synergies between the markers. Steve Beuchaw : Okay. Operator : Our next question comes from the line of Brandon Couillard of Jefferies. Your line is open. Brandon Couillard : Thanks, good afternoon. Michael McMullen : Hi, Brandon. How are you? Brandon Couillard : Great. Mike, I'm curious if you could give us a sense of how chemical and energy orders progressed through the quarter? And as we look at this business today, is it any less cyclical today, especially given the new product cycle than perhaps it was 3 to 5 years ago? Michael McMullen : Great question. So the first one, I think we saw nothing out of the ordinary in chemical and energy. The only thing I would contact, I mean, in terms -- I mean, comment on would be, again, chemical and energy grew in China but not as much as it normally would grow just given the shorter period of time. But chemical and energy looks fine to the whole quarter, nothing out of the ordinary. And I think there's probably a case in May that it's a little less cyclical just because of the fact that there's a lot more pent-up in aged equipment than it was when we started the cycle three or five years ago. So I think it is the more -- a more cyclical business for us, but I think to some degree, I can't handicap it. But directionally, I would say it is a little bit less cyclical than it has been in the past. Brandon Couillard : And a couple for Didier. Number one, on the pharma outlook for the year, maybe I missed that, what the new outlook is for core growth from pharma. And then secondly, would you mind walking through the hedge and the translation impact? I see $6 million in the supplement -- in the back of the supplement packet, but curious if that includes both the hedge and the translation effect on OP. Didier Hirsch : Yes. So in terms of pharma, Mike mentioned that we are raising our full year pharma outlook and we are raising it from 5% to 6%, so slightly raising it. And in terms of the impact of currency, you're mentioning the $6 million and that's the impact for the full year. Precise number is $5.4 million. And it's a negative headwind that comes from mostly translation impact offset by some gains due to our hedging. So it's the net of the two and continues to basically offset whatever direct impact you have from the translation. Brandon Couillard : Thanks. Operator : Thank you. Our next question comes from the line of Doug Schenkel of Cowen. Your line is open. Doug Schenkel : Hey. Good afternoon, guys. Michael McMullen : Good afternoon, Doug. Doug Schenkel : Maybe just starting with another question on China, just a cleanup question. You mentioned that you believe the days effect related to Lunar New Year resulted in a $10 million headwind. I think you said specifically within CrossLab's. Did Lunar New Year have a broader impact on the quarter? And if it did -- I may have missed it, if you quantify that. Michael McMullen : No, no, no. We were just trying to show kind of like a normalized growth rate, what it looked like, for the quarter. And you're exactly right, the $10 million, just because the customers weren't in the office or in the lab for that day. Clearly, the business will come back. And I think that makes the CrossLab number that we report even more impressive because we delivered double-digit growth with that effect. So in a normal quarter, we've had a much higher reported growth. And Doug, if you don't mind, while we're on China, there's -- I think there's a report -- I know we're going to spend -- there's a lot of focus, rightfully so, in the call about what's happened in the food segment and the market in China. I think it's important though, the overall dynamics of the China market where we play, for example, pharma, academia and government, chemical and energy. I was just in China two weeks ago speaking firsthand to our customers at Sinopec. So those markets are still very robust, and we can expect a lot of growth from them in the coming years. So again, I think it's also important to kind of think about the overall context of the China market. We know there's been a lot of puts and takes this quarter with Lunar New Year and this reorganization of the ministries. So happy to answer any additional question you might have on China as well. Doug Schenkel : Yes -- no, that's really helpful, Mike. And I guess kind of what I was getting at is there's that $10 million impact on CrossLab and what was, even with that, a really strong quarter for that part of the business. There's presumably a broader days effect on the business, which may be harder to quantify but certainly have an impact on overall growth. Is that a fair statement? Michael McMullen : I'm not sure I understand the question. Doug Schenkel : Lunar New Year -- the day’s effect of Lunar New Year, it's easier to quantify within CrossLab, but presumably, it has some impact on the broader business, which you didn't quantify. Michael McMullen : Yes, that's a little bit tougher for us. So that's why we were hesitant to put something out. We count the days... Didier Hirsch : By instrument, they would have bought instrument in - with one week less in a quarter but - whereas for service consumables, we are really - those are lost days. Michael McMullen : Yes, lost days. Doug Schenkel : Yes, okay. So then a broader guidance question. Your reaffirmed guidance assumes you maintained a 4% to 4.5% year-over-year growth rate for the remainder of the year. If we look at 1-year comparisons in the two year stacks, it seems like you're assuming that growth moderates a bit relative to recent trend. In spite of actually sounding pretty good on most fronts, are you baking in a little more cushion than you have recently to account for unforeseen surprises just given all the incremental uncertainty in a couple of areas that you described in your prepared remarks? Michael McMullen : That's probably somewhat of a fair assumption. I think that what Didier and I are trying to do is we try to guide in a way that will accommodate if we have a surprise or two. And look at what happened this quarter. We were able to beat our EPS guide and the consensus on the EPS side, but we hadn't seen the ICP-MS shipment delays or the reorganization of the Chinese food ministries. So we're able to accommodate those within the guide. So that's our philosophy. And I think we're hoping to be able to set up the second half so, if something else would happen to occur that we hadn't seen coming, that there's room in there for us to absorb it. Doug Schenkel : Okay. That's great. And maybe one last one. There were a lot of timing dynamics in the quarter. Oil prices may be working in your favor. Trade policy uncertainty may be causing things to take a little longer than maybe before. With all that in mind, any chance you'd provide some directional commentary on order trends, book-to-bill, anything like that? Michael McMullen : Beyond the fact that we can tell you that the pacing of the orders was nothing unusual beyond, I think, maybe discussing specific to chemical and energy, Doug, but I think your comment about some of the orders taking a little bit longer in the U.S. because, okay, let's see where this thing -- where lands. So I think that's -- I could comment on cycle time to order close in the U.S. Doug Schenkel : Okay. But nothing out of the usual across the business? Okay. Michael McMullen : No, no, no. And the earlier question was, "Hey, Mike, where do you think your upside could be to your plan?" I think it is chemical and energy. So... Doug Schenkel : Okay. Got it. Thank you very much. Operator : Thank you. Our next question is from the line of Dan Arias of Citigroup. Your line is open. Dan Arias : Hi, good afternoon. Thanks. A question maybe for Jacob, hi Mike, a question for Jacob in his new role, if he's willing. A lot of discussion on the mass spec market... Michael McMullen : He's ready. He's ready. Dan Arias : Okay, good. We'll put him to the test then. In -- just in the mass spec market, you guys have been pretty active on the development side. I think you called that out as a strength this quarter. Can you just maybe talk about the growth that you're seeing? If you separate out the high-end research side from the more routine, applied market products, how does growth compare there? Michael McMullen : So I know Jacob would love to jump in on this question, but I think he just had about a few weeks to get close to the business. So I know you've been digging in a bit but why don't I take this one, which is -- the routine market is really where we've been focusing a lot of our new portfolio moves. The Ultivo LC/MS is doing very well relative to our targets, and that's really -- it's really focused in the places where you have the highest volume in the routine market. So that's where we've been doing really quite well with the most recent introduction. That being said, some of the enhancements we made to our portfolio, particularly on the bio LC/MS side, have really enhanced our position on research side. So we've seen growth, strong growth in both segments of the mass spec market. But I think just given the volume in our businesses in the routine segment, that's been the driver for the overall revenue for the -- for LSAG, but really quite pleased with both portfolio moves we made there. Jacob, anything you'd like to add to that? Jacob Thaysen : I'll just say thanks for helping out, Mike. Dan Arias : Yes, okay. Well, my second question is actually on DGG sort of a similar tack. I mean, you did specifically call out the way the demand was shaping up for tissue and staining products. Can you do the same on the genomics side? I mean, what are you seeing as far as the contribution from sample prep [and then arrays] especially given that there are some new products there as well? Michael McMullen : By the way, I'll pass that to you, Jacob, as well. But just a reminder or 2, when we look -- I think called out in my script, but when we look at the growth rates of our DGG business relative to the Q2 last year, it's probably about a 3-point effect given we had order cancellation that was booked all in -- around NASD business in Q2 and that -- on a normalized basis, DGG growth would have been 7% in Q2. So with that, Jacob, if you could just add some thoughts on the genomics side. Jacob Thaysen : Yes, absolutely. I'm certainly more comfortable in taking that question. But we've actually seen quite a good performance in genomics recently. I think you have seen the overall market perform very well, and we have certainly benefited from that. So we have seen very strong growth in our SureSelect business, especially with the XT HS that came out. I think it's six or nine months ago. And we see very high demand, adoption of that. Now the V7, as Mike mentioned here, just came out some weeks ago. And the good news here is that it's -- we have seen very good feedback from our customers, but we won't -- we haven't really seen it in our numbers yet. So I think actually, that's a good opportunity in front of us with that product also. Dan Arias : Okay. Maybe just one follow-up. Is growth on the Target Enrichment side kind of in line with NGS growth overall? Michael McMullen : Yes. Sam, I know you've been looking on that site. I'm dying to get you on the -- get your voice on the call as well. So why don't you take that one? Samraat Raha : Yes, happy to take that. And absolutely, what we're finding is good growth returning for our Target Enrichment portfolio consistent with what you'd expect in the NGS market if you look at the others that are participating there. We're seeing that both with our larger accounts or national accounts and global accounts, if you will, as well as the broader marketplace, so very happy with the growth that we've seen. And based on what we are seeing directionally, we expect that to continue in the coming quarters. Michael McMullen : Thanks, Sam. Dan Arias : Okay. Thank you. Operator : Thank you. Our next question is from the line of Jack Meehan of Barclays. Your line is open. Jack Meehan : Thank you. And good afternoon. Michael McMullen : Hey, Jack. Jack Meehan : I wanted to follow up on Dan's first question related to mass spec. Have you seen any changes in the competitive environment recently? Can you provide an update just on how the Ultivo is resonating in the market versus your plan? Michael McMullen : Yes, Jacob, if you don't mind, I'll take this one as well. So actually, the market has been fairly stable. We haven't really seen any major moves of significance by any of the competitors. And then for us, this is such an important new offering for us because we're not yet the leader in this space. So it's not an installed base replacement marketplace. This is actually a market expansion play for us. And again, we're playing to -- one of our strength is really to provide tools to the routine market where they want robust, reliable instrumentation that gets the job done. And that's really what we're -- we do quite well in addition to providing leading-edge technologies for the research side of the business. Jack Meehan : Great. Thanks, Mike. And you've -- on M&A, I just want to follow up on that. You've certainly been active in terms of a string of tuck-in deals now. Are there any additional pieces of the puzzle that you need to put together at the clinical NGS workflow? And can you talk about where the investment is going in terms of either content or informatics or the platform itself? Where are you investing there? Michael McMullen : Yes, some great questions. And again, some teasers for our June Analyst Day. We'll spend a little bit more time going through our thinking around M&A. But as you know, we like M&A in markets where we know the customers, where we know that we have a channel and really can leverage the scale of Agilent. And that's the kind of opportunities we've been pursuing. Relative to the NGS workflow, we're continuing to build that out. We've brought in the sequencing chemistry, as we just mentioned. And then we're in pretty good shape right now, but there's always things we can do perhaps on the informatics and content side. And Sam, anything else you'd add to that? Samraat Raha : I think, Mike, you're exactly right. Just to further detail out, we feel very good about the fact that we have a number of gold standard elements of the NGS workflow, be it ours or the NGS workflow that's being used broadly. But there, definitely, is opportunity for partnership or adding content inorganically -- elements, sorry, such as content at some point. Jack Meehan : Great. Thank you. Operator : Our next question is from the line of Catherine Schulte of Baird. Your line is open. Catherine Schulte : Hey, guys. Thanks for the question. First, on Dako, can you give some commentary on how the Quest rule-out has gone and any opportunities for incremental wins in that space? Michael McMullen : So Jacob, you'd like to comment on the former Dako business, which we've been referring to as our pathology business. I know that amidst of the roll-out, that's been a point of major dialogue in the company to move us into -- Dako into Agilent. So how are things going with Quest? Jacob Thaysen : Well, things are going very well. And it's been a while since we announced that deal, but usually, these things take actually some time to implement fully. But we have a very good traction and more of -- half of the instruments has been installed in the sites. And we also start to see the -- a good uptake in the revenue. So we're very pleased with where we are. We're very pleased with the partnership with Quest. We have also seen that business resonated in the market and there are other types -- similar types of accounts that is interested to look into the opportunity. Catherine Schulte : Right, great. And then can you just remind us what percent of your China revenue is food? Is it similar to the breakout of the total company or more heavily weighted in China? Michael McMullen : Let's check that. Didier Hirsch : I can give it to you. It's - I need the 12C. Michael McMullen : Catherine, if you don't mind, hold on for a second. Didier is pulling out his calculator. My guess is -- I think it's probably a little bit heavier weighted relative to the global average in Asia. Didier Hirsch : In Q2, it was 41%. Michael McMullen : 21%. Didier Hirsch : 41%. Michael McMullen : 41% Didier Hirsch : Of the worldwide food market that is in China. Catherine Schulte : Great. Thank you. Operator : Thank you. Our next question comes from the line of Paul Knight of Janney Montgomery. Your line is open. Paul Knight : Hey Mike, could you talk a little more in granularity about where you're heading with this operating margin, like specific actions? I think your COGS program, you've been working on that, what, the last year or is it longer? What other initiatives do you -- are you working on? And then I guess layering on that, Didier, are you leveraging your manufacturing to stay at that 30% incremental operating margin as well? Michael McMullen : Yes. Thanks for the question, Paul. And Didier and I are going to go through this in a fairly high-level detail when we see all of you, hopefully, in June. But conceptually, we'll be doing -- this has been a multiyear phase program with different areas of prioritization and focus. And the message that we're going to deliver in June and I'll share right now is there is still more programs behind the numbers. So when we talk about the margin expansion, it's not just a hope and a dream. There actually is something behind it. And the something behind it, to your question, Paul, would be really very heavy work in the -- or the fulfillment area, manufacturing, particularly focused on material costs, supply chain, value engineering will be big movers for us in terms of reducing our ongoing material costs. We also have initiatives around how we manage our pricing and discounting. If you -- we think we've got room there in terms of how we think about the pricing and discounting. And then we're also making some major investments in our R&D systems that we think will allow us to come to market more quickly. And then from a cost standpoint, take a lot of costs out of our platform cost because we're going to force the sharing of common components across all our divisions where historically, our divisions have operated fairly independently on an R&D side. Didier, anything else I missed there? Didier Hirsch : Lots of other things but you'll have to wait for specific... Michael McMullen : Okay, okay. It's our teaser for the June Analyst Day movie. Paul Knight : And then last, Mike. On academia at plus 2%, where do you think it will shake out for the year? 2% seems kind of below market right now. Michael McMullen : Yes, for that quarter, I think that's fair. I think when we look at our guide for the full year - where were we on that, Didier? I think we were at about 5%, right? About mid-single digits? Didier Hirsch : Yes. Michael McMullen : 5%, 5-ish plus, so mid-singles. So - and we're actually quite bullish on academia and government, Paul. The Agilent team -- and we've gotten sort of our active owner, if you will, a couple of years ago really refocusing on how we sell into academia. We have a company-wide academia program. And like I said earlier, the funding conditions we see are more favorable than they were a year ago. So we think this combination of improved Agilent capabilities and funding environment bode well for continued strength throughout the year. And again, I wouldn't over-interpret the Q2 result. Paul Knight : Okay. Thanks. Operator : Thank you. Our next question is from the line of Steve Willoughby of Cleveland Research. Your line is open. Steve Willoughby : Hi. Thanks for taking my question, guys. I guess first, for Didier, I was noticing your expected interest expense for the year is now down, I think, maybe $12 million or so versus last quarter, just wondering if there are any initial comments on that. And then secondly just -- if there is any additional color on the Ultivo and the feedback you might be hearing from customers on why that's being adopted so well so far now that's been out there for 6 months. Michael McMullen : Why don't you take... Didier Hirsch : So I'll take the first question, yes. You are absolutely correct, Steve. And part of that is the higher interest -- higher yields, higher interest income, more cash available. But I must say that part of it is also that our previous forecast was extremely conservative. Michael McMullen : And then relative to, Steve, your question on the Ultivo. So if you remember, the initial value proposition, which was the [power of the tiger], this high-performance instrument in a very small footprint and easy-to-use instrumentation, rugged. So -- and it's stackable. So that value proposition, which we thought would resonate with customers but you're never 100% sure until you actually get product out in the market. So -- and as you can imagine, very much like we've seen with the Intuvo, which is -- it's so different that often, customers are saying this really works as advertised. And yes, it's working as advertised. So I think what's been happening here is the value proposition we thought around the new workflow for the customer, now we've been able to prove that it actually performs as intended. We've really been getting a nice uptake. And again, I think this goes to our ability to really understand what it is that customers want and really how to help them with their -- both their science but also the business operation side of their lab. Steve Willoughby : Okay. Then if you don't mind, if I could squeeze in one more follow-up. The Chinese ministry-related delays or, I guess, cutbacks, did that have any impact here in 2Q? Or is that -- the $20 million of push out is that just a second half phenomenon? Michael McMullen : No. We think about $5 million or so is what we estimated in Q2 and then the other $15 million in the second half. Steve Willoughby : Okay. So you've got $5 million from that and then another $7 million to $10 million of ICP-MS delays as well in China? Michael McMullen : That's the right number, yes. Steve Willoughby : Okay, perfect. Thank you. Operator : Thank you. Our next question is from the line of Puneet Souda of Leerink Partners. Your line is open. Puneet Souda : Yeah. Thanks, Mike. I had a question -- I was just trying to understand -- not sure if it was covered. In terms of weakness in pain management, my understanding was the reimbursement was already lowered here some time ago. Was there another downtrend? Or what's driving this weakness here? And could you size that business for us? Michael McMullen : I think it's this working out the excess capacity that was in that space. So we saw one of the customers went [indiscernible] customer went bankrupt in the space last quarter, and it's primarily associated with our refurbished LC/MS business. It's probably the biggest piece, right? Didier Hirsch : A little bit of everything really. I mean, it's really when you sort out the part that comes from DGG, that's a positive and it's offset by about two points related to everything else, so the refurbished business but even a little bit of service and consumables, a little bit of instruments, a little bit of everything, [indiscernible] has any significance. But altogether, it took away two points of growth in clinical and diagnostics. Michael McMullen : And we highlighted in the call just because there hasn't been any new market development. I think what's been going on, though, is just the capacity is coming out of the system. Puneet Souda : Got it. So two points on DGG was the impact, okay. And I just wanted to clarify just one last thing on China. I mean, last call, you highlighted a number of efforts targeted to enter into the entry level in China in terms of instrumentation, somewhat of a value line. So my assumption was those were targeted towards food given that these labs are more independent and food labs are somewhat cost-conscious to begin with. So after this regulation is set and done in six to nine months, what's your expectation? Do you think that line would be more in demand? Or would you think more premium offerings on the market are likely to fare better here? So I just wanted to understand that and maybe just around overall impact to the rest of the peer group as well. Michael McMullen : Yes. Puneet, thanks for the great question. And I think what you may have been referring to was the value line of new consumables and chemistry products we introduced specifically for China. What I'm going to do is have Mark maybe make a few comments to that, and I'll double back and provide you some commentary on instrumentation as well. Mark Doak : Sure, and I'll just voice what you had said, Mike. It's a value line that we'd introduced well over a year ago in China, been very well accepted. That being said, it wasn't necessarily targeted. The food market targets anybody in the general space across broad sets of markets. So we intend to obviously continue to build out that value line as time goes on and we'll find market-specific offerings but that wasn't -- the intent is to go specifically after food. It just turned out, as you know, 40% of the business is derived from there. Michael McMullen : But to your question about the -- thanks, Mark. The question around the composition of instrumentation, I think you still expect to be very heavily focused on mass spec, which is the tool of choice in food safety analysis and also food authorization. So whether it be GC/MS, ICP-MS, LC/MS, there is a growing market for routine instrumentation, still high-quality instrumentation but less features. And that's what we've been doing with our -- primarily our chromatography portfolio on the GC and LC and molecular and spectroscopy [indiscernible] spectroscopy side to build out that for routine. But relative to food safety, we think there's going to be a very heavy demand for mass spec. But again, it has to be -- what we're seeing, as the business starts to migrate into the Tier 3, 2 -- Tier 2 and Tier 3 cities, you really need to make sure you have an instrument that's robust and easy to use, which has been our design back there. By the way, I think we -- I should have commented earlier, too, which was the dynamics of the food market are changing in China as well as who buys. So we've been focusing a lot on the government agencies, but we're also starting to see more and more testing push to third-party contract testing labs, where the Chinese government say, listen, we're not going to pay for everything ourselves and fund and build all the labs. So that also could be -- I talked earlier about the give and takes in the market and potential upside, which is dependent on how quickly these -- the volume shift from some of the centralized labs into the contract testing labs. That could bode well for us because we're a really strong player in these areas. Again, we want to see how things shape -- shake out here over the next few months before we actually call that's what's happening. But I think it's important to understand that dynamic as well because even though we've been through a major ministry reorganization like this a couple of years ago, the trend towards more testing done in third-party private labs is new. Puneet Souda : Thanks, Mike. That’s very helpful. Michael McMullen : You’re welcome. Operator : Thank you. Our next question is from the line of Patrick Donnelly of Goldman Sachs. Your line is open. Patrick Donnelly : Great. Thanks. Maybe one for Mike. Just on the capital deployment front. Can you talk through an update on the larger-sized deal pipeline? How large are you comfortable going with the improved balance sheet post repatriation? And then would you do a larger scale earnings diluted deal? Or should we think of that as not on the table? Michael McMullen : You mean earnings? If I think -- I'm going to go to the second question. If I understood correctly, if we were to do an acquisition larger than we've done so far, we would do an accretive deal. So we would not be doing large technology -- or acquisitions of companies that weren't profitable or marginally profitable. So my model works and I can bring in like a technology acquisition, and we'll go through some of the details with you in a few weeks. But the model works. I could bring in a technology acquisition on Lasergen, but don't assume that's sort of our norm. We actually -- we prefer to do bolt-on that have revenues and profit. And the -- we're going to -- we're open to larger bolt-ons. I would just leave it at this. We want to make sure that we want to -- we're still, I think, quite disciplined with our -- with the use of our cash, and we use the standard financial metrics on how we look at returns. But I think the biggest thing -- the biggest takeaway I'd like to share with you is that we really want to do deals that are in the areas that we know. So don't look for us to do what I would consider transformational deals where we're often in a space where we don't know the customer base, we don't know the markets and we don't -- really don't know the business as well as we should. So we want to stay in a place in the markets where we know quite well. Patrick Donnelly : Okay. That's helpful. And then I know exploration is only 10% of the chemical and energy segment. But given the move higher in oil, can you just talk to how sensitive that business is to higher oil prices and if you're baking any improvement related to improved conditions there? Michael McMullen : Usually, it's a -- great question. Usually, it's fairly sensitive to movements in prices, and we've seen in the past where we're completely shut off. I'd say that that's why -- that's sort of behind my earlier question. You may have teased it out of my response, which was -- you would have expected this exploration piece to pop even faster in the U.S. than it has been. It's not down like it was before but -- and that's why we're saying, okay, there's some noise for some of our customers. Matter of fact, I was just reading an article today in a journal about some of the -- some of our customers in the -- in this area, they're trying to figure out what is all this hire. I get my stuff. My aluminum pipe comes in from a country in Europe, and I've got to fill all these forms with the U.S. government. I'm not really sure what's going on. So that's what -- that's the kind of stuff that I was talking about earlier. So long story short, he should -- they should respond pretty quickly to changes in oil prices when the changes are dramatic. We haven't seen it as robustly as we would have thought in the United States given the movements in oil prices, and we're trading to the best of our ability to what's the noise in the market right now around trade. Patrick Donnelly : That’s helpful. Thank you. Operator : Thank you. And at this time, I'm showing no further questions. I'd like to turn the conference back over to Alicia Rodriguez for the closing remarks. Alicia Rodriguez : Thank you, Amanda, and to everybody on behalf of the management team for joining us today. If you have any questions, please give us a call in IR. And I'd like to wish you a good day. Thank you. Operator : Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,018	3	2018Q3	2018Q3	2018-08-15	2.624	2.69	2.897	2.94	3.95	22.45	23.66	Executives: Alicia Rodriguez - Vice President-Investor Relations Michael McMullen - President, Chief Executive Officer Alicia Rodrigue - Vice President-Investor Relations Didier Hirsch - Senior VP & CFO Analysts : Steve Beuchaw - Morgan Stanley Tycho Peterson - JPMorgan. Doug Schenkel - Cowen Brandon Couillard - Jefferies Dan Leonard - Deutsche Bank Ross Muken - Evercore ISI Steve Willoughby - Cleveland Research. Puneet Souda - Leerink Partners Jack Meehan - Barclays Derik De Bruin - Bank of America Dan Arias - Citigroup Operator : Good day, ladies and gentlemen, and welcome to the Q3 2018, Agilent Technologies Inc Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to hand the conference over Ms. Alicia Rodriguez, Vice President Investor Relations. Ma’am, you may begin. Alicia Rodriguez : Thank you, Brian, and welcome, everyone, to Agilent’s third quarter conference call for fiscal year 2018. With me are Mike McMullen, Agilent’s President and CEO; and Didier Hirsch, Agilent’s Senior Vice President and CFO. Joining in the Q&A after Didier’s comments will be Jacob Thaysen, President of Agilent’s Life Sciences and Applied Markets Group; Sam Raha, President of Agilent’s Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. I’m also please to announce that Bob MacMahon is joining us on the call today as well. As you know, he will be taking on the role as Agilent’s CFO in September due to Dider’s retirement at the end of October. 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. You will find an investor presentation along with revenue breakouts and currency impacts, 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 Mike and Didier 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 acquisitions and divestitures within the past 12 months. Guidance is based on exchange rates as of July 31. 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’d like to turn the call over to Mike. Michael McMullen : Thanks, Alicia. Hello, everyone. Thanks for joining us on today's call. Before I discuss the Q3 financial highlights and our updated outlook I'm pleased to have Bob McMahon join the call. Bob is an excellent choice for Agilent’s next CFO and a very capable successor to Didier. Bob brings a strong track record of leadership to our team. Many of you already know Bob from his previous role as CFO of Hologic. He officially assumes the CFO role beginning September 1. As Didier hands of the baton, he will serve in an advisory capacity until his retirement at the end of October. Bob and Didier are working together to ensure a smooth transition. I first met Bob over a coffee in Palo Alto where we shared our perspectives on business and company culture. We had an important conversation about values and their importance in business. I knew immediately that Bob would be a great fit for the Agilent culture and of course his management style and business acumen are a perfect match for our approach to creating shareholder value. Bob has joined Agilent at an exciting time. I'm confident he'll help us lead the next phase of Agilent growth. While I'm very excited to have Bob join the Agilent team I will greatly miss Didier's partnership and counsel. He has played a key role in the transformation of the company and our excellent business results. It's important for the CEO to have a very capable CFO. I couldn't have asked for a better partner. So thank you Didier. You will be missed by me and our Agilent team. Now, let me turn to our Q3 financial performance. The Agilent team delivered another strong quarter with both growth and earnings exceeding our expectations. Our core revenue grew 6% and is above the high-end of our guidance. Our adjusted EPS of $0.67 is $0.04 above the high-end of our guidance despite currency headwinds since our last guide. This is a 14% increase from a year-ago. We delivered an adjusted operating margin of 22.6%, which is an increase of 110 basis points from a year-ago. This marks our 14th consecutive quarter of improving our core operating margins. Let's take a closer look at our results by our end-markets. We continue our strong Pharma performance with 8% core growth. This is against a tough compare as we grew 10% in Q3 '17. We see strength across all our business groups with particularly strong performance in mass spectrometry, Cell Analysis, CrossLabs consumables and services and genomics. Growth remains robust in both the biopharma and small molecule market segments. Our Chemical Energy market revenue grew 12%. We are quite pleased with this strong growth, again against a difficult prior-year compare of 10%. Ongoing market investment remains positive. This is in spite of tariff rhetoric and retaliatory policies you'll be hearing in the news. From a product perspective, strength in spectroscopy, GC, CrossLabs consumables and services is driving this result. Geographically strong gains in China and Europe are leading the overall global growth. Revenue grew 3% in academia and government in line with expectations, strong performance from Cell Analysis, molecular spectroscopy, ICP/MS and CrossLabs services and consumables are driving the results. China and the rest of Asia are delivering double-digit growth in this end-market. Diagnostics and clinical revenue grew 5% led by strength in genomics and our reagent partnership business. This offset continued challenges in the U.S. Pain Management market. Food revenue declined 1%, strength in the Americas is being offset by declines in Europe versus a tough compare of 35% growth rate last year, and as expected, China instrument sales were also down this quarter. Environmental forensics is flat this quarter. Forensics growth was offset by the expected temporary slowing of instrument sales in China environmental. Geographically, let me first start with an overview of China. Our overall China business remains strong, growing 10% this quarter. Strength in China is being driven by double-digit growth in our two largest end-markets, Pharma and Chemical and Energy. Our CrossLab and DGG businesses also grew by double-digits. We continue to expect healthy overall market conditions. This is more than offsetting any temporary slowing of instrument sales in the food and environmental markets. The business is also strong in the Americas and the rest of Asia outside of China, with these two regions delivering healthy, high-single-digit growth. Europe was flat on a tough compare of 12%. In summary, we delivered a strong quarter with broad-based strength and stand out performances in the Pharma, Chemical & Energy, and China markets. Now, let's discuss results from our three business groups. The Life Sciences and Applied Markets Group delivered core revenue growth of 5%. This result is being driven by robust growth in the Pharma and Chemical Energy markets. From a product perspective, LC/MS, Cell Analysis and ICP/MS are leading the results. Ultivo our game-changing LC/MS triple quad continues to be well received. Geographically demand in America and China are leading the results. Let me share a few examples of how we’re executing our strategy to increase the depth and breadth of LSAG solutions portfolio. On the M&A front, we closed on the acquisition of Genohm in early May. Genohm complements Agilent informatics capabilities by adding laboratory management services. By integrating Genohm's LIMS platform into our OpenLAB portfolio, we can provide complete and integrated informatics solutions to our customers. Customers are very focused on informatics as a way to create insight and drive lab efficiencies. We are determined to lead in lab informatics. For example, last week Agilent released the first software supporting the new standardized data format called the Allotrope Data Format or ADF for short. This format was created by a consortium of pharmaceutical companies for the pharmaceutical industry. By standardizing the collection, exchange, and storage of analytical data captured in laboratory workflows, labs will be able to transfer and share data across platforms. We are proud to be the first company to develop and launch a commercial product to support this standard. We believe the adoption of standards like ADF will both shape the future of Lab Informatics and drive the adoption of our solutions. In addition, our internal LSAG innovation engine continues to deliver. We just released the Agilent Seahorse XF Real-Time ATP Rate Assay kit. This new and unmatched product will enable biologists to enhance their understanding of how live cells functions in real time. We are a leader in live cell analysis and continue to expand our offerings in this fast growing market. The Agilent CrossLab group continues outstanding performance with 8% core revenue growth. Gains across our major end markets led by double digit growth in chemical energy and strong results in pharma and Food. Performance was balanced across consumables and services. China led growth in all regions with mid teens growth. CrossLab is a key growth driver of the new Agilent. We are delivering on a mission to improve both the science and the academics of our customers labs. As we expand the strength in the CrossLab platform, we are creating more value for our customers and Agilent. For example, during the quarter, we announced two acquisitions to further expand our consumables portfolio. We acquired the business assets of Ultra Scientific, a provider of chemical standards and certified reference materials. On August 1, we also acquired ProZyme a provider of biopharma consumables for glycan analysis. As you know, glycan analysis is essential to development of biotherapeutic drugs and we will now directly participate in this fast growing biopharma market segment. We continue to invest and build on our leadership position in China. We recently opened a new logistic hub in Shanghai. This hub will enable faster delivery of parts supplies and consumables to laboratories. This is the first of five forward stocking locations we are establishing. This allows us to improve our service and the speed at which we support our customers. Our focus on digital investment is also delivering results in gaining traction. Our digital channel is growing at a record pace. For the first time ever over 50% of our consumables orders are now digital. China is leading the charge on this front. We are improving the customer buying experience, expand our customer reach and driving growth. The diagnostic and genomics group delivered core revenue growth of 5%. Excluding our NASD business, which declined as expected in the quarter the DGG group delivered core revenue growth of 7% against a tough compare. Let me further explain. As we've mentioned previously NASD revenues are batch based, which can make the revenue vary from quarter-to-quarter depending on timing of customer acceptance. As expected, the business declined in the quarter as is going up against a 45% growth rate in Q3 of last year. We expect the business to return to growth in Q4. As I mentioned, without this variability of reported revenue effect, this quarter, our core DGG business grew 7%. A few additional comments on our NASD business, I just returned from a visit with our team in Colorado. The capacity expansion underway will allow us to meet the growing demands for GMP grade oligonucleotide and CRISPR offerings. I'm pleased with our progress on our new facility and the strong market environment. For example, just last week, one of our customers, Alnylam Pharmaceuticals received FDA approval for Onpattro, a first-of-its-kind targeted RNA-based therapy to treat a rare disease. This is wonderful news for Alnylam and most importantly their patients. NASD remains a long-term growth play for Agilent and I'm excited about the future. Back to the overall DDG results. Strong results are driven by double-digit growth in genomics and strength in our reagent partnership business. Geographically outstanding growth in China and Japan drove the results. We continue to strengthen our ability to support the fight against cancer and other diseases. Burning Rock Dx received China FDA approval for their human lung cancer NGS detection kit. Agilent SureSelect reagents are used as part of this panel and our own PD-L1 companion diagnostics product received expanded USDA approval in cervical cancer. During the quarter, we completed the acquisition of AATI, Advanced Analytical Technologies Incorporated. AATI provides capillary electrophoresis base solutions for fully automated analysis of a range of molecules. This acquisition builds on Agilent's existing expertise for providing customers with a more comprehensive set of solutions, for NGS workflows and other applications. NGS's driving and will continue to drive strong growth of this new business to Agilent. With the addition of the AATI team, we create a new biomolecular analysis division with DGG. This new division now also includes our complementary microfluidics business, previously part of LSAG group. Didier's team has reflected this change in our current financials along with the company financial restatements. Now, let me provide a few remarks on where we are in the Agilent journey and our near-term outlook before turning the call over to Didier. Let me start with a few comments on tariffs. On the customer side, we are not seeing changes in customer buying behavior. On the duty front, we have planned for and have taken actions to partly offset the impact of expected increases in tariff-related duties. This proactive approach resulted in a small 500k impact on our Q3 results. In Q4, we expect an impact of approximately 3.5 million of incremental duty costs or approximately $0.01 of EPS which has been incorporated into our latest guidance. Looking into 2019, if the tariffs remain in place, we plan to aggressively reduce the remaining effect via potential changes in our prices and further adjustments to our Supply Chain. For some time, we've been on a path to increase shareholder value. We've been focused on delivering strong growth, while expanding core operating margins and putting our strong cash flow and balance sheet to work in a more impactful manner. Q3 results demonstrated our continued commitment to creating value for our shareholders and customers. We delivered another quarter of strong operating results while deploying our capital as committed. We returned $291 million in capital to shareholders through repurchasing $243 million of our own shares and paying out $48 million in dividends. We're also investing in the business. We closed four acquisitions, paying out $430 million in the quarter and announced two more acquisitions. This is a record number for Agilent and will further strengthen our company's foundation for growth. As we continue to aggressively strengthen our portfolio via the Agilent innovation engine and M&A, we are also continuing to execute on our agile Agilent customer experience and efficiency improvement initiatives. The twin drivers of our success continue to be a strong portfolio and a customer focused way of doing business. Now a few words about our outlook going forward. The Agilent team continues to capitalize on healthy end markets. We remain confident in our outlook. We are increasing our full year core growth and earnings guidance. Didier will walk you through the details, but we're raising our guidance for core revenue growth, operating margin and EPS. The Agilent team remains committed, confident and energized about our future. In our Agilent DNA is our team's ability to drive customer focus innovation coupled with operational excellence. It is this powerful combination that would continue to fuel our future growth and earnings expansion. Thank you for being on the call and I look forward to answering your questions. I will now hand off the call to Didier who will share more insights on our Q3 financials and guidance. Didier? <> Thank you, Mike, and hello, everyone. First, let me express my appreciation for Agilent employees' passion and professionalism in accomplishing the mission, creating shareholder value and finally for their support for all the years. With Mike's continuing leadership and Bob's contribution I'm convinced that the best is yet to come for Agilent. As mentioned by Mike, we delivered strong top and bottom line results, both on a year-over-year basis and versus our guidance. On the revenue front, we did our midpoint guidance by $40 million, after excluding currency headwinds of $11 million and contributions from our two recent acquisitions ATI and ULTRA Scientific of $5 million. Our core revenue growth of 5.9% was well over the midpoint guidance of 4.25%. Our adjusted operating margin of 22.6% was 110 basis points over last year's and 120 basis points over guidance and we delivered a core operating margin incremental of 55%. EPS were $0.05 about the midpoint of our guidance. During the quarter we bought back 3.76 million shares for a total of $243 million and paid $48 million in dividends. Finally, we repatriated $1.5 billion of our offshore cash. I'll now turn to the guidance for fourth quarter. We expect Q4 revenues of $1.24 billion to $1.26 billion and EPS of $0.72 to $0.74. At midpoint, revenue is expected to grow 4.7% on a core basis. Versus previous guidance, FX is projected to have a negative impact of $21 million on revenue and $2 million on the operating profit. Our 23.6% adjusted operating margin at midpoint will be up 100 basis points sequentially and up 30 basis points on a year-over-year basis even after funding the Lasergen R&D. The increase in tariffs effective early July is expected to have a negative impact of $3.5 million, as we have initiated actions to our supply chain. And those actions are complete mid-2019, we expect the net annualized impact to be approximately $9 million excluding potential pricing actions. Now to the guidance of fiscal year 2018. The Q4 guidance is expected to result in the following fiscal year guidance. First, at midpoint, revenue is projected to grow 6.1% on a core basis or 60 basis points over the previous guidance. The revenue guidance of $4.87 billion is $10 million over previous guidance including $22 million due to the acquisition of AATI, Ultra Scientific, and ProZyme, with currency having a negative impact of $32 million. Second, our EPS guidance of $2.70 at midpoint is up $0.05 on previous guidance and corresponds to a 14% year-on-year increase. Third, adjusted operating margin for the year is expected to be 22.6% or 60 basis points higher than in fiscal year '17. And fourth, our core operating margin incremental is expected to be 39% for the fiscal year, at the high-end of our operating model. With that, I'll turn it over to Alicia for the Q&A. Thank you, Didier. Brian will you please give the instructions for the Q&A? Thank you. Operator : My pleasure, ma'am, thank you. [Operator Instructions] And our first question will come from the line of Steve Beuchaw with Morgan Stanley. Your line is now open. Steve Beuchaw : Hi guys. Thanks for all the help here and thanks for the time. I'd say first it's hard not to echo some of Mike's comments. Didier, really appreciate everything you've done being such a great partner for us, so I hate to see you go and Bob, welcome aboard. Didier Hirsch : Thank you very much, Steve much appreciated. Michael McMullen : There's a big smile in the room Steve thanks for those comments. Steve Beuchaw : Bob, I have to say Didier is a pretty unique guy, as someone who shared some of his lineage, it's going to be hard for you to match that. The questions I'd like to focus on I'd say first are very high-level for Mike. When you made the decision to raise the guidance at core, it would be really helpful for you to just kind of talk us through; here is what after a good quarter, maybe confident in saying look we're going to beat the expectations that we had set earlier in the year. What really jumped out to you in terms of things going better? Michael McMullen : Great question Steve, appreciate the opportunity to share that with you. So, obviously we have a good view of our order funnel so that gives me one level of confidence which is the strength of the orders, but what really gives me a lot of confidence moving forward is two dimensions of the story here. One will be the end-market strength, both Chemical and Energy and Pharma continue to be very strong. And as you know, coming into this year, we had positioned Chemical and Energy as sort of the upside of the plan that was sort of the wildcard to our business, and there were some concerns that perhaps all the rhetoric around tariffs and other things a few months ago might actually be quite detrimental to this marketplace which in fact has not at all occurred, so I think that it's the continued strength in both of those two end-markets, and I think geographically Asia led by China, we posted a really strong China number and then the Americas was also quite strong for us. I think the fact that our two largest geographies in terms of countries in China and the United States are really doing quite well, gives us a lot of confidence about the outlook from a market perspective. And I think we're really positioned well to win. Our portfolio continues to become much more competitive and as you know we have unique value proposition with this CrossLab platform which really allows us to capture a lot of the growth that's out there as well. Steve Beuchaw : And then just a couple of quick follow-ups before I jump back in the queue. One is Mike, you made a comment about customer behavior on tariffs and I appreciate the follow-up there. But it will be really helpful if you could spend another minute on it. It sounds like your perspective is that the tariff headlines aren't changing the way people really think about doing what they do. I wonder if you could give us even just some anecdotes on what you've done on that point? And then Didier it was a really good quarter in terms of core margin expansion, the incremental is really good. Any color on what it is that you've seen that made the quarter so strong on that front? And how should we think about seasonality there would be great. Really appreciate it. Michael Mcmullen : Let me take on the first question. So, when I have been out talking to the customer base, we talk to people in the pharmaceutical industry, we talk to people in the research space, whether it be in academia and in the private sector, they plan on -- they're taking a long term view of investments on purchasing our equipment, purchasing our solutions are absolutely critical for their enabling their growth plans if you will and research plans. So they're not at all distracted by the tariff discussion. As I mentioned on my last call, we have seen some cautiousness in certain aspects of the chemical energy market where they were a little bit slower to approve the deals, but still getting the deals approved. It's the same kind of situation we had last quarter, so no new changes in customer buying behavior. So this is coming directly from conversations I had with customers. So again, that gives us a lot of confidence about our outlook because despite all the noise and rhetoric out there, it really hasn't yet affected any of the actual buying behavior of customers. Obviously it's creating some work for us relative to adjusting our supply chain and production locations to mitigate the duty impact side of things, but in terms of customer buying behavior have not seen any real changes. Didier Hirsch : And then Steve, on your question on the core operating margin incremental you're right. It's been impressive at 57%. The reasons are multiple, we started off with last year's compare that was a little bit of a soft compare. We had the operating margin down a little bit sequentially from Q2. Then there was good operating leverage, good mix certainly the impact of all the Agile Agilent programs and we certainly don't expect to maintain such a high level of operating margin. Michael Mcmullen : Part of your parting gift --. Didier Hirsch : Well, I certainly appreciate the send off gift from the Agilent team that's for sure. Michael Mcmullen : But in all seriousness, I think going back to few some of the things that Didier outlined at the AID meeting in New York, where he said listen, our pipeline and our programs are as robust as ever in terms of really allowing us to work on the operating margin incrementals. Steve Beuchaw : Thanks so much, guys. Operator : Thank you. And our next question will come from the line of Tycho Peterson with JPMorgan. Your line is now open. Tycho Peterson : Hey. Thanks. Mike I want to follow-up in some of the strength in China. Can you maybe talk about some of the puts and takes there? I think you called out environmental weakness in the slide, so maybe if you could talk maybe where there some softness. And then on the supply chain dynamics, can you maybe flush that out a little bit? I think you do some of the TC production there as well as in Delaware. So can you may be just talk about how you are thinking about potentially moving Supply Chain if you need to? Michael Mcmullen : Sure so happy to do so Tycho. So let's start with China. Again very important market for us and we were just delighted by the strength in the business, so if you look at the six end-markets we had strong growth in all but two and then we actually had foreshadowed this coming in our last call saying, hey we know there's some things happening relative to some realization -- ministries in the country nothing happened to us relative to the competitive side of the business. So we saw really strong, continued strong demand in Pharma, in Chemical and Energy, investments in Academia and Government hints back to some of the comments I made around tariffs. And as you may recall in our AID presentation, we talked about the opportunities we had with our CrossLab business and our DGG business, and you saw us starting to deliver on those promises with really strong double-digit growth in both of those businesses, and then relative to food and environmental we think it's a temporary situation as related to the instrument purchases. You have to keep in mind though that they will continue to buy consumables and services from us and we're just waiting to have the reorganization complete, the budgets finalized and then we know-how to follow the money where it's going to go because two things are really happening here. You've got the consolidation going on where new budgets are created, being created in a new consolidated set of ministries and then part of that money is also getting deployed to what they call tier 3 and 4 cities so we're following the money and we'll be ready to capture once it's there. Tycho Peterson : And then on the Supply Chain? Michael Mcmullen : Oh, yeah I forgot about that so relative to the Supply Chain, as I mentioned in my script, we took some actions actually in advance of the formal announcement of the tariffs, so we've already relocated our production for China-made products into our site in Wilmington Delaware and now we're in the process of moving aspects of the Supply Chain which is also subject to the tariffs, but we've already moved the production in some of the Supply Chain. Tycho Peterson : Okay. And then two quick follow-ups, for NASD you highlighted kind of just the inherent lumpiness in that business and the fact it'll return to growth in the fourth quarter. Can you maybe just talk about how we should think of the ramp there next year ahead of the capacity coming online? Michael Mcmullen : So we'll be able to, we're going to try to get as much growth out of our current facility as possible and then the growth, the expansion will start to come on line in the second-half of next year. The current plan is the second-half of '19, you start to see some initial revenue is starting to ramp through the quarters, and Didier I think we put out a number of… Alicia Rodrigue : Next year, like about $20 million is what we said at AID. Michael Mcmullen : So it really gets started next year and then when you get into 20s when you get the real full year ramp and Bob and I and Didier were just in Colorado as I mentioned and had a chance to also review the progress of the facility construction and capability expansion, but also what's going on relative to perspective demand from customers, so the pipeline looks really encouraging. Tycho Peterson : Last one, can you just comment on how much Ultivo is contributing to C&E growth at this point? Michael Mcmullen : I think its part of the mix, growing with the average. I think that's it. I wouldn't say it's an outside contribution, but solidly delivering. Tycho Peterson : Okay, thank you. Michael Mcmullen : Welcome. Operator : Thank you. And our next question will come from Doug Schenkel with Cowen. Your line is now open. Doug Schenkel : Hi, good afternoon. And before I get to the questions another Harvey thanks to Didier you've been a great leader at Agilent and I know I can't speak for many of us and saying we really appreciate your help over the years and I look forward to grabbing another glass of wine at some point soon as always it will be your choice. Didier Hirsch : Okay. Thanks, Doug. Doug Schenkel : And Bob while Agilent has big shoes to fill, it's great to know they made such great choice, so congrats through and the company. So now for the questions. On Q4 guidance, can you talk a bit more about the rational behind 4.7% core growth. This would be a deceleration versus what we saw this quarter and that's in spite of comparisons that don't appear much different. I didn't hear anything in your prepared remarks regarding timing dynamics or changes in momentum relative to what you generated year-to-date. Is it fair to assume you're baking in some conservatism here? I've admittedly having a hard time figuring out why growth wouldn't continue at around 6%, the underlying rate for most of this year. So am I missing something on end markets or timing dynamics or something else? Michael Mcmullen : I think we decided to stay true to the guide for last year we had and even though as Didier retire. So as Didier has mentioned in prior calls, we don't assume everything's going to be perfect in the quarter. And again, the one that could go one way or another always has been chemical energy. So if that business holds up and it has been holding up, we should be in a good position to beat that number. Doug Schenkel : >: Great. And then sort of related from a buyback standpoint, the stock was in the low-60s for much of the quarter. I think you still have about $240 million in the buyback authorized and if I'm not doing that math right there's certainly enough dry powder there to put in place another authorization. I'm just wondering why you weren't a little bit more active in buying shares during the quarter ? Michael Mcmullen : : Yes. Thanks for that Doug. I think we've -- I think the numbers are right about 240, 270 from a... Didier Hirsch : ye Michael Mcmullen : So you're in the right range. And we actually -- Bob we're fairly aggressive because we went outright after what we saw was a dislocation in the stock price after the Q2 announcement and bought the $200 million right away and then continued anti dilutive. We obviously continue to look at that during the upcoming quarter. Doug Schenkel : Okay. And one last one. You guided us to expect China food revenue growth would start to rebound in early fiscal 2019. Based on what you've seen over the past few months, anything that would tell us or tell you that this is aggressive or maybe things start to thaw a little more quickly than anticipated? Michael Mcmullen : I think I want to stay with those initial estimates. So we signaled that in the last call and released our experience. It takes a good six months or so to kind of work for these things. And I think I want to hear from my team, it's tracking along the same lines. Doug Schenkel : Okay. All right. Thanks again. Thank you. And our next question will come from the line of Patrick Donnelly with Goldman Sachs. Your line is now open. Patrick Donnelly : Great. Thanks. Just expanding on Tycho's question on supply chain given the tariffs and focused, could you just walk us through the import export dynamic in China, just looking explicitly kind of how much of the China revenues is being imported from the U.S. and may be where the majority of those revenues is being manufactured? And then kind of the same thing on U.S. revenues anything being imported from China there. Michael Mcmullen : Patrick after you're looking at both the incoming to China and from China to the U.S.? Patrick Donnelly : Yeah, exactly. Michael Mcmullen : So from China to the U.S., it's a relatively small amount of Agilent's business. It's primarily the gas chromatography product line and related support parts. So it's about $100 million and that's why the 25% gives us about $25 million gross impact. And then as we mentioned, we're going to reduce that amount over time to even before pricing adjustments $9 million on an annualized basis. And then going the other direction, basically, China, we import from the U.S. the GCMS and many reagents in the chemistry that is made in the U.S. but there's no tariff at this stage. There might be in the future and we'll update you on the potential impact that it's not significant really at the end of the day. So it's about $100 million and that's why the 25% gives us about $25 million gross impact. And then as we mentioned, we're going to reduce that amount over time to even before pricing adjustments $9 million on an annualized basis. And then going the other direction, basically, China, we import from the U.S. the GCMS and many reagents in the chemistry that is made in the U.S. but there's no tariff at this stage. There might be in the future and we'll update you on the potential impact that it's not significant really at the end of the day. But that's not subject to retaliation. So basically we have a lot of our business outside of this tariff discussion. Q - Patrick Donnell : That's helpful. And then just staying in China, given the soft July data points out this morning including China industrial production coming in light of expectations, can you just kind of talk through the cadence of results in China this quarter? How are trends in July in particular given that data and then also the tariff rhetoric was kind of increasing during the month so just curious as you went through the quarter how you guys were feeling. Michael McMullen : Great question, I saw that same article as well, and I have based on what we saw it was having no impact so we saw no hesitancy in customers or any signals from our field that things were different. Q - Patrick Donnell : Great. Thank you. Operator : Thank you. And our next question will come from the line of Brandon Couillard with Jefferies. Your line is now open. :: As a compliment as you know we're only firing up Train A in the facility and as for Train B which we doubled capacity, we are certainly not ready yet to push on the button the around is still an orphan drug. It's not high volume we are waiting their confirmation that our customers will move into a commercial space and then we'll fire up Train B. So it's there. It's obviously at a much cheaper cost than the whole facility built up and we're certainly ready when we see that's this confirmation that a lot of our customers are bringing commercial products onto the market.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,018	4	2018Q4	2018Q4	2018-11-19	2.735	2.832	2.985	3.095	4.43	22.19	21.59	Executives: Alicia Rodriguez - Vice President of Investor Relations Mike McMullen - President and Chief Executive Officer, Agilent Robert McMahon - Senior Vice President, Agilent Chief Financial Officer Jacob Thaysen - Senior Vice President and President of Life Sciences & Applied Markets Group Mark Doak - Senior Vice President, Agilent President, Agilent CrossLab Group Sam Raha - Senior Vice President, Agilent President, Diagnostics and Genomics Group Analysts : Tycho Peterson - JPMorgan Ross Muken - Evercore ISI Jack Meehan - Barclays Steve Willoughby - Cleveland Research Paul Knight - Janney Montgomery Patrick Donnelly - Goldman Sachs Dan Arias - Citigroup Dan Leonard - Deutsche Bank Derik De Bruin - Bank of America Merrill Lynch Steve Beuchaw - Morgan Stanley Catherine Schulte - Baird Brandon Couillard - Jefferies Doug Schenkel - Cowen and Company Puneet Souda - Leerink Partners Operator : Good day, ladies and gentlemen, and welcome to Agilent Technologies Fourth Quarter 2018 Earnings Conference Call. At this time all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be provided at that time. [Operator Instructions] And as a reminder, today's program is being recorded for replay purposes. I would now like to hand the conference over to Alicia Rodriguez, Vice President of Investor Relations. Please go ahead. Alicia Rodriguez : Thank you, James, and welcome, everyone, to Agilent's fourth quarter conference call for fiscal year 2018. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon Agilent’s Senior Vice President and CFO. Joining in the Q&A after Bob’s comments will be Jacob Thaysen, 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 the Agilent CrossLab Group. 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. You will find an investor presentation along with revenue breakouts and currency impacts, 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 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 acquisitions and divestitures within the past 12 months. Guidance is based on exchange rates as of October 31. 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. Before turning the call over to Mike, I would also like to share my plans to retire at the end of January making this my last conference call as Agilent’s Vice President of Investor Relations. I have enjoyed working with many of you over the years, but as Mike says, the best is yet to come and so it is also true for IR. And now I'd like to turn the call over to Mike. Mike McMullen : Well, thanks, Alicia. Hello, everyone. Thank you for joining us today. Before I cover our financial results, I want to thank Alicia for her years of service, and wish her the best in her retirement. Alicia superbly led Agilent’s IR team for the past eight years. She has set a high standard for her professionalism, integrity, and transparency in her engagement with the investment community. Thank you, Alicia. You are the best and you will be missed by me. You can see this has been an emotional day for all of us and our Agilent team, and I am sure by the audience on today’s call. This quarter we are reporting our strongest quarterly results since the 2015 launch of the new Agilent. We are ending the year with a terrific quarter. Our revenues, profitability, and earnings per share are significantly ahead of expectations. Now, some of the specifics. Q4 revenues grew 9% on a core basis to $1.29 billion. This exceeded the high end of our guidance by more than $30 million. Double-digit, end-market growth in Pharma, environmental forensics, along with the continued strength in our chemical energy business are driving the results. Geographically, our China business is up sharply with 16% growth for the quarter. For the year, the Agilent China team delivered double-digit growth and achieved a major milestone crossing over $1 billion in business for the first time. Q4 adjusted operating margin is 25.2%, up 190 basis points from last year. This is our 15th consecutive quarter of the Agilent team improving year-over-year operating margins. Q4 adjusted EPS of $0.81 is $0.07 above the high end of our guidance. Compared to last year, this is an increase of 21%. In addition, we took advantage of marketing conditions to purchase $86 million in stock during the quarter. For the full year, stock repurchases stand at $422 million underscoring the confidence we have in our future performance. I am also pleased to report that the Agilent Board has just approved a new $1.75 billion share repurchase plan. This quarter, performance caps off an excellent 2018. Our strongest quarterly performance translates into full year core growth of 7.1%, our highest annual growth rate since the launch of the new Agilent. Total reported revenues grew to $4.9 billion. We continue to deliver improved profitability while investing for growth. For the year, adjusted operating margin is 23.1%, up 110 basis points over last year. Our earnings per share are up 18% for the year to $2.79. The numbers tell the story, a strong team delivering yet another stellar annual performance. Let’s now look at the quarter by business groups. Core revenue grew a healthy 9% for LSAG, our Life Science Applied Markets Group. Product strength is broad based, driven by mass spec, chromatography, and cell analysis. We continue to introduce innovative new products. We are strengthening the molecular spectroscopy portfolio with the launch of the Agilent 8700 Laser Direct Infrared Chemical Imaging System. This is a breakthrough in both chemical imaging and spectral analysis. We also introduced the Cary 3500 UV-Vis system, the first significant advancement in UV-Vis architecture in decades. We continued to build out our cell analysis business. We just closed the acquisition of ACEA Biosciences. ACEA is a provider of cutting-edge cell analysis instruments and will expand our cell analysis portfolio. The Agilent CrossLab Group delivered strong 9% core revenue growth. Demand was excellent across both services and consumables. We continue to invest in our portfolio and extending our customer reach. We completed the acquisition of ProZyme, expanding our offering in the biopharma marketplace. We also acquired our South Korean distributor. This acquisition expands our direct customer engagement and it further builds out ACG’s service business in the market. The Diagnostics and Genomics Group grew 5% on a core basis. Strength in our NASD and Genomics businesses drove the quarterly results. In a significant win, Agilent has been selected by Unilabs to be a Preferred Partner for their pathology business. Unilabs is one of the largest European diagnostic testing lab providers. This announcement is another strong testament to the advantages of Agilent’s expanding workflow solutions. Before I leave DGG, I want to provide an update on the construction of our new NASD API production facility. We remain on track for the initial production of GMP-grade APIs by the end of fiscal year 2019 with material revenue contributions in FY 2020. Overall, it was a great quarter capping off an excellent year delivered by the Agilent team. A few final comments before I turn the call over to Bob. Agilent’s shareholder value creation model is fully activated. First, we are executing on an innovation-driven growth strategy that is delivering. Second, we continue to focus on improving profitability with our “Agile Agilent” Initiatives. Finally, we are actively leveraging our balance sheet to drive acquisitions of fast-growing innovative companies while also returning cash directly to shareholders. We have transformed Agilent into a growth company and are focused on delivering superior earnings growth. We just delivered our highest growth and profitability since the launch of the new Agilent. Since then, our adjusted CAGR EPS is up 17%. Our business is also less cyclical today with non-instrument sales making up over 56% of our total company revenue. If economical challenges would arise, our business is now less dependent on capital equipment purchases. Looking ahead to 2019, while acknowledging current trade discussions, we are expecting market conditions to remain solid. The Agilent team is laser-focused on sustaining our strong growth into 2019 and beyond. We have momentum. I keep telling the Agilent team the best is yet to come. Thanks for being on the call, and I look forward to answering your questions. I will now hand off the call to Bob. Bob? Robert McMahon : Thank you, Mike, and good afternoon everyone. I am very pleased to be talking with you today on my first earnings call as Agilent’s CFO. Before I get started, I want to echo the comments Mike made and say thank you to Alicia. In my time here, she has been a great partner to me, and I truly wish her the best in retirement. She will be missed. Now moving on to the financials. In my remarks, I am going to provide some additional detail on revenue, walk through the fourth quarter income statement, touch on a few other key financial metrics, and then I’ll finish with our financial guidance for 2019. Unless otherwise noted, my remarks will focus on non-GAAP results and percentage changes will be on a year-over-year basis. As Mike mentioned, we delivered a very strong fourth quarter to finish an excellent fiscal year. Revenue for the quarter was $1.29 billion with core revenue growth of 9% exceeding both our guidance and expectations. For the full fiscal year, our core revenue growth was 7.1%, a very strong performance. As Mike spoke to the Group’s performance for the quarter, I will provide some additional details around our end-market and regional performance. Overall, the market environment is positive and based on our channel reach and product offerings, we saw broad strength across most end-markets. Pharma, our largest end-market was up 14% with double-digit contribution from all business groups. Both the small molecule and biopharma segments performed well. Traditional areas of strength, as well as newer areas of strategic focus such as cell analysis and a strong performance at NASD contributed to the results. Chemical and energy grew an impressive 7% against a very strong comparison of 15% core growth last year. We continue to see positive ongoing market investment in this area. Balanced gains in both LSAG and ACG were driven by strength in spectroscopy, LC-MS, supplies and services. Demand for our materials characterization applications continue to drive robust ICP-MS growth. Environmental and forensics grew 17% ahead of expectations with good demand across major regions. Growth was balanced across both end-markets. Forensic saw notable demand for Cobalt Raman spectroscopy and environmental for LC-MS and ICP-MS. Academia and Government reported 10% growth as funding environment stabilized, while diagnostics and clinical grew 1% and food was flat as expected against a tough 10% comparison. Geographically, we also saw broad based strength. China grew by 16% accelerating from the 10% core growth we saw in Q3 and as Mike mentioned, passed the $1 billion mark in sales for the year in the fourth quarter. Other Asia and Japan grew by 12% and Europe and the Americas had solid mid-single-digit growth. In addition, we continue to be pleased with the revenue contribution as non-instrument revenue contributed 56% of the total in Q4. Looking forward, we see non-instrument revenue growth outpacing instrumentation driving an increasingly recurring revenue stream. Now turning to the rest of the P&L. Q4 gross margin of 57.8% increased 170 basis points compared to the prior year. This was due to product mix and volume, as well as our order fulfillment and supply chain organization continuing to do an outstanding job driving cost savings using our “Agile Agilent” approach. Operating margin including adjusting for the Keysight billings was 25.2%, up 190 basis points due to higher gross margins and top-line leverage on operating expenses even as we invested more in R&D. This led to non-GAAP earnings per share of $0.81 in the fourth quarter, an increase of 21% compared to the prior year and more than double the rate of revenue growth. Now before moving to FY 2019 guidance, I want to touch on a few additional financial metrics. We continue to generate very strong cash flows. This quarter, free cash flow was $336 million and for the year, we generated over $900 million in free cash exceeding our commitment. In Q4, we returned $133 million to shareholders buying back 1.3 million shares for $86 million and paying out $47 million in dividends. We also completed the ProZyme and Young In acquisitions. With Young In, we expanded our direct sales and service capabilities in South Korea. For the fiscal year, we’ve returned $613 million to shareholders, buying back 6.4 million shares for $422 million and paying out $191 million in dividends. As Mike mentioned, we closed a record number of acquisitions in 2018 deploying $516 million. We ended the year with $2.2 billion in cash, and $1.8 billion in debt and we just closed on ACEA Biosciences last week. So we are starting 2019 where we left off in 2018. All in all, we entered 2019 with health end-markets, good momentum in the business, and a very strong balance sheet. Now let’s turn to our non-GAAP financial results guidance for the full year and first quarter of 2019 beginning with our full year guidance. We expect 2019 to be a strong year overall, but before I get into the actual numbers, let me mention a few important points. First, we anticipate currency will be a headwind in 2019. Based on exchange rates as of the end of October, we expect currency will reduce reported sales growth in 2019 by roughly 220 basis points translating into roughly $110 million negative impact for the full year. For comparison, our 2018 reported sales growth benefited by 210 basis points from currencies. Now partially offsetting the currency impact will be a larger contribution from recent M&A including the recently closed ACEA Biosciences acquisition. And in addition, starting in fiscal 2019, we adopt a new accounting standard which changes how we present pension expenses and benefits on the income statement, in effect, reclassifying certain amounts to other income and expense. While this has no impact to net income, we do expect this will reduce forecasted operating margins in FY 2019 by roughly 40 basis points. As we move through the year, we will provide a restated 2018 to provide an apples-to-apples comparison. And lastly, we are taking a different approach in setting guidance ranges that include both upsides and downsides. So I would encourage you to model to the midpoint of guidance at this stage. Now for the full year, we are expecting revenue to range from $5.13 billion to $5.17 billion in fiscal 2019 representing core growth of 5% to 5.5% and associated reported growth of 4.4% to 5.2%. Currency is estimated to negatively impact growth by 2.2 percentage points with M&A contributing roughly 1.6 percentage points to 1.9 percentage points of growth for the full year. Now on to our EPS guidance. For the full year, we are forecasting a range of $3 to $3.5 per share adjusting for the negative currency, this translates to 9% to 11% growth in EPS and a 7.5% to 9.3% on a reported basis. Included in this guidance is roughly $4 million per quarter in tariffs. This is slightly higher than the estimate we provided last quarter and is related to List 3. A few other metrics as you build your models. Embedded in our forecast is modest operating leverage after accounting for the pension adjustment. We are also expecting the total of interest income, interest expense, and OI&E to be $10 million to $15 million in net expense inclusive of pension and Keysight billings. Guidance is based on a full year tax rate of 17%, down a point from 2018 and diluted shares outstanding of approximately $322 million, flat to Q4 of this year. We expect operating cash flow of between $1.1 billion to $1.15 billion and capital expenditures of roughly $175 million. As previously mentioned, the Agilent Board has authorized a $1.75 billion repurchase program and we plan at a minimum to offset dilution throughout the year. We also continue to look for M&A like ACEA and other recent tuck-ins and have the financial flexibility to be opportunistic in share buybacks as well. And finally, we have announced raising our dividend by 10% continuing a streak of double-digit increases providing another source of value to our shareholders. Now turning to Q1 guidance. For Q1, we are expecting revenue to range from $1.265 billion to $1.28 billion representing reported growth of 4.4% to 5.7% and core growth of 4.5% to 5.5%. Please remember that we are going up against a very tough Q1 comp last year where we grew 10% core. First quarter 2019 non-GAAP earnings are expected to be in the range of $0.71 to $0.73 per share which is roughly 9% to 12% ex currency and 7.6% to 10.6% reported growth. Now before opening the call for questions, let me conclude by saying, we are very pleased with the financial results and the continued hard work and focus of the Agilent team laying the ground work for future growth and as we enter 2019 with strong momentum. With that, I will turn it back to Alicia for Q&A. Alicia Rodriguez : Thank you, Bob. James, will you now open the phone lines for the Q&A and provide the instructions? Operator : Of course. [Operator Instructions] Our first question comes from Tycho Peterson with JP Morgan. Your line is now open. Tycho Peterson : Hey, thanks. I’ll be the first to congratulate Alicia. It’s been great working with you. I guess for, either Mike or Bob, I am wondering if you can maybe help us put some parameters around the guidance for next year either by end market or segment. Can you maybe just talk to whether, like, for example, food can get back to growth post the China restructuring? And how should we think about C&E, it moderated a bit against tougher comps, how do you set up for that next year? Mike McMullen : Hi, Tycho. I am in the room. This is Mike and Alicia really appreciates your remarks. And Bob, I think maybe you can provide a little color on Tycho’s questions. Robert McMahon : Yes, I think, - thanks, Tycho, and I am pleasured to speak with you. In terms of the end markets, I think we still see nice end-market growth across all the markets. When we think about the various markets, pharma, we would expect leads the way, probably faster than the overall company growth, but we are expecting growth throughout all of the end-markets. So, we expect a return to growth in food for sure, but also continued performance across all of the businesses or all the end markets. And really, we expect kind of broad based growth across the end-markets as well as our divisions. Tycho Peterson : And is there any implications on your lab deal on DGG for next year? How does that flow through? Robert McMahon : Yes, Tycho, I think there’s this one more proof point that we think we can continue to grow the business both in terms of winning some big deals but also as the PD-L1 expands in terms of various cancer types being able to be treated by the Keytrudas and Opdivos of the world. So, it was just more of a proof point, say, this is why we have confidence. We can continue that growth trajectory. Tycho Peterson : Okay. And then just lastly, can you comment on the cell analysis portfolio today with ACEA and Seahorse. I am just wondering whether there are revenue synergy opportunities here or how do we think about the portfolio and the ability to kind of penetrate the single cell market a little bit further? Mike McMullen : Yes, Tycho, I am going to make a few opening comments here and then pass it over to Jacob. But, as you know, we made our first foray into cell analysis with the Seahorse acquisition and we really were attracted by the growth in this space as well as what Agilent can bring to really accelerate the growth of acquired assets in this space, and we are super pleased to have ACEA and the ACEA team as part of Agilent, but I am going to turn it over to Jacob and you can share your perspective as well. Jacob Thaysen : Yes, absolutely, Mike, and I am as excited as you are, perhaps even more even since it’s hitting my business. And so, I should say, we started into the cell analysis business with the Seahorse acquisition followed by Luxcel and now here recently with ACEA. And all acquisitions gives us a very differentiated position in the cell analysis business where Seahorse is really a technology that allows for measuring the up and down regulation of metabolism based on oxygen consumption. We now have ACEA Flow, the flow cytometry which is a great way and a very easy way of doing cell characterization, identification based on the genotype and what – where this would position a market is that it is very ease of use and re-allow many different labs that today feel it’s very difficult to work with flow spectrometry to really start to get their hands around that. And finally, the ACEA has the xCELLigence platform, which is a great way of measuring cell survival viability through impedance measurement, so those three different modalities really gives us a strong position, especially in the immuno-oncology and CAR-T where they basically bring the ability to measure live cells and how they operate under different conditions is going to be key for the entailing in [indiscernible] and immuno-oncology. So, you will see us continue to invest into this business, but I am very pleased where we are today. Mike McMullen : Yes, Tycho, you can see the excitement we have on this product expanding on the cell analysis business and I think this is a perfect example of how a company coming into Agilent with this great innovative new product and really benefit by the scale of Agilent. Tycho Peterson : Okay. Thank you. Operator : Thank you. Our next question comes from Ross Muken with Evercore. Your line is now open. Mike McMullen : Hey, Ross. Ross Muken : Good afternoon and congrats guys. And Alicia, it’s always been a pleasure. Maybe let’s talk China. So, if I look at some of the color you gave on a segment basis, it seems like, not only did the segment outperformed, but it was pretty broad based. And when you called that, I think in the presentation, Academic as well, and some P&B, more traditional pieces of what we think your China business being. So, maybe just give us a feel for the cadence in that business for next year and sort of the underlying assumptions and how you are thinking through some of the macro noise in whether or not tariff or anything else will impact the sort of demand curve on maybe the non-life science business next year. Mike McMullen : Yes, happy to do so, Ross. So, I think you anticipated some of my response which really was broad based. I mean, we were delighted with the numbers, 16% double-digit for the entire year, but we saw a strong growth in Pharma, Academia, which really the China government is really focused on doubling the number of their – what they call the first-class university, and so very robust funding environment. You saw the overall numbers for Environmental and Forensics and lot of that was being driven by investments in the Environmental space by the Chinese government. We are seeing a strong growth in the aftermarket, continued strength in chemical energy and returned to growth in the food segment. So, the overall view of China was very positive for the quarter. And as we look at next year, I think, Bob and I were talking about this earlier, we are guiding - embedded in our guidance assumptions is high-single-digit growth in China for next year and despite all the noise that’s out there, what’s really happened on the ground is a lot different. Chinese customers want to buy the most innovative tools for their work. They want to support the government-led initiatives and areas such as investments relative to healthcare for the citizen are getting funding and we are one of the preferred choices for those customers. So, despite the noise in the environment, the environment remains very solid. Ross Muken : And maybe on the margin side, obviously, all of the volume absorption in the quarter just giving how much you need the revenue piece by obviously whole, but it feels like still underlying a lot of what you’ve been doing across the business is flowing through on both the gross margin and OpEx line. And so, maybe give us a feel for how much you think of sort of the margin outperformance kind of came from, maybe just the underlying revenue stream, versus maybe some of the other actions you are doing that in the context of some of the investments obviously you are going to making next year into Lasergen? Mike McMullen : Yes, Ross, as you know, it’s more than just volume that drove the margin expenses as you noted. And I just lean it over to Bob, my guess is, probably two-thirds volume, one-thirds OpEx and specific gross margin initiatives. So, as I noted in my cost script, we have a – whole series, we call “Agile Agilent” initiatives which continue to drive efficiency and much more effectives inside the company. A lot has been focused on the gross margins of late, but also we are going to play a lot of this and we’ve been aligned this to our OpEx as well. And again, I would underlie the importance of our digital transformation are under really is going to continue to allow us to drive improvements here. So, when I came to the role a couple of years ago, I wanted my margin expansion not to come just from volume and that’s been our mantra and our formula since we started the new Agilent four years ago and it will continue to be our approach as we move forward. Bob anything else you’d add? Maybe what to hit your mic here? Robert McMahon : Yes, I was going to say, I think the other thing is, if you look at the various group, each one of the group has actually improved their profitability in the quarter which is nice broad based performance and so, it’s not just one business or one product that’s driving the profitability. It really is across Agilent. Mike McMullen : That’s a great build, Bob and one of the things that we noted to our Board last week when the Board Meeting was, what we’ve been doing on the gross margins of our service business as well, which is you often think about the margins are being relatively stable and flat there, since in such a high labor content in terms of delivery. But Mark and his team are really been driving efficiency with new tools and approaches. So, it really is broad based improvement across all three groups. Ross Muken : Awesome. Thanks guys. Mike McMullen : Thank you. Operator : Thank you. Our next question comes from Jack Meehan with Barclays. Your line is now open. Jack Meehan : Thanks. Good afternoon and I would reiterate as well, good luck Alicia. I enjoyed working together. Just as my first question, I want to dig in a little bit more on the LSAG performance. I know on the product that was flagged out was LC-MS. I was curious if you could give us an update on the Ultivo launch there and just where you think you are seeing that resonate in the market? Mike McMullen : Jack, I think I’ll let you answer this question since for one of those good news answers, so let me pass it over to you Jacob. Jacob Thaysen : Yes, absolutely, thanks for that question and I mean, it’s kind of an very straight-forward story that Ultivo continues to outperform our expectations. We see our customers, especially where we started Ultivo by building applications in the Food and Environmental. And they have been very happy with what they see. In the end, you can actually, with the size of it and the performance, you can actually place three in the – three Ultivos in the same place as you previously could do with one mass spec which gives a lot of opportunities in many of the labs that actually are lacking space. On top of that, we have done a lot to simplify and improve this software and also the usability as such. We start to see now also the some accounts are really interested in taking on Ultivo. But the mass spec story and the performance is beyond Ultivo and we see a lot also in our 6545XT bioconfirm where we now see on the biopharma side that we start to see a very strong uptake on that. So, it’s really broad based that we see that our robust reliable instrumentation is picking up in the market. Very excited about the mass spec. But there is a lot of other elements into the overall LSAG business. The ICP-MS is also doing strong. LC continues to come back with great momentum. So, overall, we are really right now firing on all cylinders. Jack Meehan : Great. Appreciate all that feedback. Just as a follow-up, I want to get a status update on the Colorado facility. Just help if you could parse out some of the language from the prepared remarks a little bit more. Are you assuming the revenue that starts more in fiscal 2020 at this point? And then, just on the CapEx side, how much is within the $175 million guide is being attributed to the facility there? Thanks. Mike McMullen : Jack, having the answered the question, I’ll take the first one and then perhaps the second one to Bob. So, the language in the script was just to reaffirm to the audience that we are on track as planned. And the construction is actually complete. We are now in the process of validation. We just had a review late last week on the status and we will get revenue in 2019, but what we were just showing was the big pop up when you get the full year is going to be 2020. Robert McMahon : Yes, hey, Jack. Good afternoon. This is Bob on the capital side and to just build on what Mike was saying. Yes, that’s – we do expect some revenue contribution here. But as we’ve said consistently the big revenue uptick is in 2020. And in terms of the capital, of the 175, most of the capital has been spent at the Fredrick site already. There is some additional, but most of that has come down and the 175 is the majority of that is still actually the base business. Now recall, that higher than perhaps it would have been earlier because of the acquisitions that we’ve acquired. So, we’ve acquired some capital associated and planned, expansion plans there. Mike McMullen : By the way, Bob, probably also as I mentioned specific to our second site or our original site which is Boulder, we actually have found some ways to work the efficiency of efforts here and we are actually planning to get more volume out of there in 2019 than 2018. Robert McMahon : That’s right. Mike McMullen : So, our growth in NASD is not only – does not only solely dependent on the Fredrick site. Robert McMahon : That’s right. Jack Meehan : Great. Thanks for all the color guys. Operator : Thank you. Our next question comes from Steve Willoughby with Cleveland Research. Your line is now open. Steve Willoughby : Hi, good afternoon. Thanks for taking my question. I guess a couple of things. First, just on tariffs, Mike. You made a comment about the $4 million a quarter, just being up slightly, just wondering is that including any impacts from pricing or supply chain as you doing as a potential offset? And then I have one follow-up. Mike McMullen : Oh, yes. Thanks, Steve, thanks for the clarifying question and Bob I am going to go ahead and take a shot on this and if you need of course correct me and please go ahead. But what we are planning to quantify was the actual impact of incremental duties thereafter all the mitigation efforts. That does not include anything else. We may be doing relative to pricing. So, that’s not a complete drag on the P&L. It’s all baked into the guide for next year, but we’ve also instituted some other broad based actions to mitigate that as well. But that was just trying to isolate the specific amount of the net incremental duties to the company. Robert McMahon : You got it. Mike McMullen : Right Bob? Robert McMahon : You got it right. Mike McMullen : Sorry. Robert McMahon : Thanks. Steve Willoughby : Sure. And then, just, Bob, just a quick follow-up question. I guess, I just had a clarification. I guess, two things really. Within the 5% to 5.5% core growth guidance you are providing, what is your assumption for the incremental revenue from the NASD business in Colorado? And then, just making sure I heard you correctly in terms of operating margins including the pension accounting change, what is your assumption for operating margin expansion next year, ex this 40 basis point headwind? Robert McMahon : Yes, so, on the NASD, what I would look at – what I would think about that is, looking at NASD in total and the total growth rate is still there. So, rather than looking at as a sweep, because we’ve actually found incremental volume out of the existing plan. So we are expecting growth in NASD next year consistent with what we shared back in the summer. And in terms of margins, what I would say, that’s also I think very customer-driven, because customers have one batch at the one site would for us to kind of finish the work there as opposed to going mid-term into the other sites. Steve Willoughby : That’s right. Robert McMahon : And in terms of the operating margin expansion, what I would say is, after adjusting for the 40 basis point reduction, we are still expecting some modest improvement in operating margins. So, what that would tell you is it’s greater than 40 basis points. Steve Willoughby : Sure, thank you. Operator : Thank you. Our next question is from Paul Knight with Janney. Your line is now open. Mike McMullen : Hey, Paul. Paul Knight : Hi, Mike. Mike McMullen : Hey, how are you? Paul Knight : Good. Could you talk about - as we – would you think about that January Lunar New Year and the – with the effects you expect out of the way holidays are rolling out, how we should think about the first quarter specifically? I know there is usually been a little bit of noise around how calendars lay out. Mike McMullen : Paul, thanks for the question. So, it’s my hope, one year as CEO of not to be talking about the Chinese Lunar New Year. And 2019 may actually be that year. So, as you know in 2018, it caused a lot of seasonality swings between the quarters and also prior year compares. The way it’s playing out this year it’s happened in the same period of time as it happened in 2018. So, Bob, I think we are not really expecting anything unusual this year from the time of the Chinese Lunar New Year. Robert McMahon : That is correct. Paul Knight : And then, lastly, I don’t know of this question was put in, but how should we think about tax this year and also going forward even beyond FY 2019? Mike McMullen : I think, Bob has got a really good story here. So, why don't you talk to him about what's going to happen in 2019, already we know. Robert McMahon : Yes. Thanks, Paul. And so, this year in FY 2018, we ended the year at roughly at 18% effective tax rate. We are guiding to 17% in FY 2019 and we are working on plans to continue to improve that going forward. Paul Knight : Okay. Thank you. Operator : Thank you. Our next question comes from Patrick Donelly with Goldman Sachs. Your line is now open. Patrick Donelly : Great, thanks. Mike, maybe one for you. We are seeing continued news flow in some of the bigger build outs chemical companies in China. Can you just talk through the market demand there? I know chemical and energy are the areas you’ve been pretty bullish on historically in that region. So, where are we in the process of some of those bigger projects building out capacity in GC, some of the other areas you act as a supplier in? Mike McMullen : Yes, Patrick. I am happy to share my insights here. So, I have been bullish on the growth prospects of China as it relates to the chemical energy markets for I think a good reason, because we have some pretty good insight in terms of the projects that are underway. And as I mentioned, I think in a prior call, a lot of this not only to support their economic growth, but also is, what they view as a element of national security as we continue to invest in the colder chemical plants to really reduce their dependency on natural – import of natural gas for example. So we’ve seen the projects they have a multi-year program. I think we are probably in the third or fourth inning of what those could be a multi-year build out of plant capacity. And this is really important for our GC business as you mentioned, Patrick that that’s actually is the tool of choice. And Jacob, I know you just got back from a trip to China and are you hearing the same things from the teams? Jacob Thaysen : Yes, certainly, Mike. It’s really just a repeat that there are plenty of opportunity in China right now with the larger SPI installations coming in here also in 2019 and 2020. So I think, there are great opportunities in front of us also in that space. Mike McMullen : So, I guess, the message here, Patrick, it’s not over yet. So, we think we got to go few more years of really solid growth in this segment of the market in China. Robert McMahon : And I think – hey Patrick, this is Bob, maybe just to build on that, obviously, as Jacob and team lay that ground work for putting in the instrumentation, I think, Mark and his team around the chemistries and supplies business also continue to drive very strong growth in China. So I think it’s a multi-phased opportunity for us as we go forward. And so we are really excited about that. Patrick Donelly : Great, thanks. And then, Bob, maybe, I know that you’ve been on the seat for a few months. Can you just talk through kind of initial impressions, maybe a particular focus on the margin side, obviously came into nice clean balance sheet. We’ve seen some activity there between the dividend increase and the bigger share repo is a historical trend. But maybe just on the margin side, given some cost saving initiatives that’s been in place for a few years, what opportunities have you seen confidence level and continued expansion opportunities going years out? Robert McMahon : Yes, thanks, Patrick. I think one of the things that I’ve been very pleasantly surprised with this is the amount of rigor and discipline the organization actually comes through. We probably undermarket the Agilent approach externally. But I think the teams are very operationally focused, not just on cost savings at the gross margin line, but really through increasing productivity and efficiency across the organization. What I would say is that there are still several big opportunities as we go forward. Obviously, still focused on gross margin, but Mike mentioned the digital aspect to this and this has a multi-faceted approach. Not only does it enable us to actually do business easier with our customers and actually drive some stickiness, it also is going to be driving efficiencies in our customer service – cost per order dollar activities and so forth. And so, as we think about that driving, I would see multiple layers – levers there. I think there is opportunity continue to do that, as well as continue to reinvest some of those proceeds in R&D. So, very excited about the things going forward. Patrick Donelly : Great, thank you. Operator : Thank you. Our next question comes from Dan Arias with Citigroup. Your line is now open. Dan Arias : Afternoon guys. Thanks. Mike McMullen : Hi, Dan. Dan Arias : Mike, just wanted to – hey, Mike. I wanted to follow-up on the expectations for growth in food this year. How far along are you at this point in working through the government reorganization headwind in China? Have you fully come through on the other side there? Or are you still working through some things? Mike McMullen : I think you are talking specifically to China, yes. So, by the way one of the things also when you look at our food numbers, Europe was relatively flat against the double-digit compare. So, I know we are going to – I know your question was focused on China. But that’s – we also saw some other geographic dynamics in the fourth quarter. Albeit said, we think the business will be growing again in 2019. We think, you may recall, I think it was the second quarter I talked about two sets of reorganizations. One, we thought what happened faster which was the environmental one, which was done and you can see that the pop in some of the growth rates we had. And relative to the food ministries, we expect that that to take longer to get that side of the reorganization done. I think that’s still holding through the form, which is we are anticipating that kind of taken through the rest of this calendar year. That being said, we also know some of the money is got to move to the tier-3 and tier-4 cities and we’ve been actively building up our channel there over the last several quarters to ensure we can capture the growth. So I guess, the message here is, still developing as we thought a few quarters ago. Not done yet. Robert McMahon : Yes, I would agree with that, Mike and what I would also point to is, if you look at the performance of our China business it’s accelerated quarter-on-quarter, so. And I don’t want that to be lost after just posting a 60% year-on-year growth rate for the total company. Mike McMullen : Thanks for the reminder, Bob. Dan Arias : Yes, that’s helpful. Okay. And then, if I could, just go back to the guidance range just to make sure that I had it correct. It looks like, you have tightened things up relative to where you were at the Analyst Day. So I am curious if you can just sort of hone in, where you feel like you are, maybe 50 BPS better at the low-end and then it seems like things are going pretty well. So I guess, and you called 6% prudent at the Analyst Day. So, why trim that 50 BPS at the top of the range? Mike McMullen : So, just as a reminder, at the Analyst Day, we actually didn’t guide for 2019. We are really just trying to illustrate, that’s really about what our margin expansion might look like at different revenue levels. But I think, relative to our guide, Bob, I think we are actually feeling very, very positive about it. I think, we came out stronger this year than we did last year. So, Bob, anything else you'd add to that? Robert McMahon : No, I think that’s right. I think when we think about core growth of 5% to 5.5%, that’s faster than what we are expecting the overall market growth to be. So we are feeling bullish about our ability to continue to gain share not only through launch of the new products that we talked a little bit about. But also continued market execution across our businesses and as we mentioned, it will probably led by the pharma in China areas. But we are expecting solid growth across all of our end-markets as well as geographies. Dan Arias : Okay, thanks a bunch. Robert McMahon : Were those helpful? Dan Arias : Sure it was. Operator : Thank you. Our next question comes from Dan Leonard with Deutsche Bank. Your line is now open. Mike McMullen : Hi, Dan. Dan Leonard : Hello. So, first question. Can you elaborate more on timeline for the share repurchase? And any target capital structure you have in mind? Robert McMahon : Yes, hey, Dan. This is Bob. I’ll take that. We are thinking about it in two ways. One is, obviously, as I mentioned doing something throughout the course of the year to maintain our share count at roughly 322 million shares and then we will be opportunistic similar to what we had done in the fourth quarter. Still little early for me to actually come out and give a target in terms of capital structure. But what I can tell you is, I’d expect us to continue to be very active in the M&A market and I think we have an opportunity to optimize the strong balance sheet more effectively going forward. Dan Leonard : Okay. And then, just a follow-up on your forward-looking commentary on end-markets. So, how should we think about – in regards to pharma, where you expect strength in 2019, how should we think about the sensitivity of capital markets were to climb up here? If at all, would Agilent be sensitive to that or just walk us through your thinking on that front? Robert McMahon : Yes, great question. My view is that, what’s powering the investments in pharma, it’s really about investments improve the human condition. It’s all about investing in new classes of drugs, new therapies. Whether it be the biopharma, whether it be cell therapies, various gene approaches that are going on there. We see a new class of drugs such as the RNA-based therapeutics. So, we think they are fairly resilient if you will to those kind of headwinds, economic headwinds into the fact they would occur. And then also just to remind you particularly in our pharma space, how much of our business is non-instrument related. So, we had a very large recurring revenue business really centered around our ACG business. Dan Leonard : Okay. Thank you. Mike McMullen : Happy. Operator : Thank you. Our next question comes from Derik De Bruin with Bank of America. Your line is now open. Derik De Bruin : Hi, good afternoon. Mike McMullen : Good afternoon, Derik. Derik De Bruin : Alicia is one of the only other New Mexican on Wall Street that I know, going to miss you. So, a couple of questions. So, when you look at your segments for 2019, the implied sort of organic core growth rates looking forward is something around 3% to 4% for, I would say, mid-single-digits for diagnostic and then, 7% to 8% for ACG, is that a good way to sort of look at it? Mike McMullen : Yes, what I would say is, you are in the ballpark. Derik De Bruin : Got it. And one of the key questions we are getting from investors is, obviously is the macro has been choppy. There is a lot of angst about how business has performed during the – during a downturn. I mean, obviously, you are a heck of a lot less cyclical than you once were. But I guess, could you sort of think about that how different the portfolio performed during a steeper recession. Do you sort of like lab test it what you got now and sort of think about where we have grown in a tougher time? Mike McMullen : Yes, sure, Derik. I think, you point out, one very good point which is the portfolio of business is a lot different than it was few years ago and in fact I would sort of anticipate I might get this question. That’s why I saw a comment I made in my script if economic headwinds would occur. It’s a different company. By the way we are not at all predicating that, in fact going to be the case. And, I would say that it would probably follow a fairly similar pattern you saw a few years ago mainly reflecting – impacting the replacement cycle in certain industries, most likely the chemical market. But while the areas where the money being spent on research, I am would think it’s going to be fairly resilient. I don’t remember the exact numbers, but that would kind of like top of mind thinking on that. Robert McMahon : Yes, maybe to build on that point, Mike. As I look at the business and the characterization obviously the product portfolio that we have today is very different than what we had before and I think it’s actually more focused on what customers need in terms of solving their problems. And so, whether that be open lab, where we are actually helping productivity and so forth for the cross labs group just in general. I actually, you could envision where you may have some impact on the instrumentation. But that potentially could be offset, because you would actually have more consumable usage going through as they are looking to keep their instruments longer and so forth or want them serviced. And so, I think we are in better position now than we’ve ever been and as we think about where our growth is coming from, it’s coming from the fastest part of our business – I should say, is growing, is in fast-growing markets like cell analysis that we talked about before which is going to be less impacted, I think and that’s just because of research and in the pace of innovation. Our ACG business and then obviously our diagnostics and genomics group as well. Derik De Bruin : Rob, I mean, just sort of I have been sort of- what I’ve been talking about the segment growth, I'm just noticing that. Back in 2015 and 2016 when oil was softer, you basically were growing LSAG in the 3% to 4% range. So I am just assuming that, you are already building some sort of – some conservatism in the numbers, just given historically how that’s what the condition of the business at that time and the business growing was growing at the time. Thanks. Mike McMullen : Don’t you think Bob? Robert McMahon : Yes. Derik De Bruin : Great. Thanks. Mike McMullen : Thanks Derik. Operator : Thank you. Our next question comes from Steve Beuchaw with Morgan Stanley. Your line is now open. Steve Beuchaw : Hi, thanks for taking the questions. Just a couple trying to have a leap around a point that have been raised. I think, first, maybe on margins. Bob, there have been some questions asked about some of the specific points on the margin progression from 2018 to 2019. But to take a step there are actually a lot of moving parts, when I think about Lasergen spending, the impact of M&A, spending on NASD, the accounting change you’ve flagged in FX, I mean, any chance you have a view on what core operating margin expansion is next year to give you – what a jumping off point might be for fiscal 2020, because I’d say, it’s never too soon to start thinking about 202, right? Robert McMahon : Yes, gee, we haven’t even finished a call for the initial FY 2019. But I will give it a shot. What I would say is, there are a number of moving pieces. Obviously, we’ve got a full year of Lasergen built into the plan. That being said, we are still guiding full year operating margins to grow despite that important investment. And then, we’ve got NASD as well and some of the headwinds around the FX. But when I look at operating margin incremental, so this is not necessarily core, but this would be just looking at the incremental. In FY 2019, they are very consistent with kind of how we exited FY 2018 and what I would say is, we are focused on continuing to drive operating margins, but also most importantly earnings growth. Steve Beuchaw : Okay. And then, the second thing I wanted to see if I could get both of you, Mike and Bob to talk a little bit about was guidance policy, guidance practice. You alluded in the prepared remarks to – I hope that people would model at the middle of the guidance range. And I got a sense from the prepared remarks that you thought that there might have been a change or at least the need for there to be a perception of change the way you guys went about constructing the guidance for the year would be really helpful to hear you talk about how you went through that? And why you think the middle of the range is the right thing? And then, before I lose the podium here, I will echo the thanks for Alicia, thanks for being so helpful for us as we ramped up on the story over the last few years. Robert McMahon : Thanks, Steve. And I know Alicia has been enjoying all the great feedbacks from you and others today. So, as you heard in my opening comments, it’s a bit of mixed feelings about her moving on to her new role in terms of seeing her retired and so next again used to work on Wall Street. Mike McMullen : I still have to answer the question. That’s right. So, think about, as you can see in our script, we were leaving the witness a little bit. I think you picked up on it. So I am going to make some initial comments and turn it over to Bob. So I think it's important to go back in time when we started the new Agilent and I would dare to say, we only lacked credibility in terms of a company that consistently delivered results relative to expectations. So, Didier and I really set forth a philosophy that really ensured that we are being reasonable in terms of our outlook, but also that you could count on us to deliver it. And we now have a track record of almost four years of doing that. And I would – but if we do think it’s time for evolution of approach, because and I think that’s what Bob has brought to Agilent and perhaps wanted to share your thinking there, Bob. Robert McMahon : Yes, thanks, Mike. And I would agree. I mean, I think one of the things that we want to do is obviously continue to be and feel comfortable about our forecast, but also recognize some of the potential upsides that we have, as well as acknowledging potential downsides and try to shrink the gap. And that’s what we’ve attempted to do here is to actually provide a little more color in terms of where we think the business is going in terms of our performance, particularly when we just come off of some very strong business and we are forecasting strong end-markets. And so, as Mike said, it’s not a revolution, it’s more of a evolution of the guidance to help – and we’ve got a track record that gives us more confidence in our ability. Operator : Thank you. Our next question comes from Catherine Schulte with Baird. Your line is now open. Catherine Schulte : Hey guys. Thanks for the questions and congratulations and thank you to Alicia. You will certainly be missed. First for Mike and maybe Jacob can comment on this as well. As you think about your innovation pipeline for fiscal 2019, what gets you most excited? Should we be expecting to see the technology used in Ultivo prior to some of your other platforms as well? Mike McMullen : I think we are – just like any parent would be, we are excited by all the members of our family. So we’ve got a lot of great new things coming on. I made a few announcements already on things that are happening in the molecular side. But I think we got more coming, right without sharing the specifics. So, what would you say there, Jacob? Jacob Thaysen : Yes, I think I will not go out and destroy Christmas by go out and tell all the presents we have for you over the next year here. So I am not going to speak directly to what is coming out. But what I can say is that, I am very proud and I am very excited about the 2019 on the NPIs that will come out there. I think, we’re already started strong with three NPIs that came out the first few weeks in the year here between the LDIR and the Cary 3500 and also the ICP-MS Water Analysis System and the ESI. So that was actually four. And there is much more to come. So I am pretty pleased, but I won't speak to the specifics yet as you'll be positively surprised when you see it. Mike McMullen : I would add Kevin to your comment about the technology leverage across the platforms. In fact, that is the intent both for the Intuvo and the Ultivo. In fact, we haven't really had an Intuvo question today, but I would just mention that I think we've posted 14% unit growth in the Intuvo this past year as well. Catherine Schulte : Very helpful. And then, Bob you mentioned remaining active on the M&A front. So, can you and Mike just comment on your appetite for potentially a larger acquisition? And then, what your key areas of focus would be? Mike McMullen : Yeah, Catherine happy to do so. I don't think there's really a new story here, because what we've been saying for probably the better part of last year or so is that, we've developed our own internal capabilities and then, I think we have just augmented our capability here with the addition of Eric Gerber coming over to us from the from Danaher. We believe that we have ability to really deliver for our shareholders’ value on the M&A we do. And so I'm much more confident in our ability to tackle M&A and really make it part of the Agilent growth story. So we would be willing to take on larger acquisitions. As Bob mentioned in his early comments, there is plenty of room on the balance sheet. I think it really is more about having the right opportunities and we will continue to be - remain very disciplined in terms of what we look at. But I think it's really limited – our actions will be limited by availability of active targets as opposed to our willingness to engage. Robert McMahon : Yeah and Catherine what I would add to what Mike is saying is, when we think about M&A, I think we're focused mostly on the three groups in the channels and the strength that we have to be able to leverage as opposed to creating a new level. Mike McMullen : Yeah. That's correct. Catherine Schulte : Great. Thank you. Operator : Thank you. Our next question comes from Brandon Couillard with Jefferies. Your line is now open. Brandon Couillard : Thanks. Good afternoon. Mike McMullen : Hey, Brandon. Brandon Couillard : Alicia, I'd echo that sort of you will be missed. Quick one for Samraat, if you can give us an update as to whether you've finished with the Dako rollout at Quest yet. Whether those instruments have been fully transitioned and started scaling? And then secondly, if there is a plan to port the PD-L1 assays over to the Omnis platform anytime soon? Mike McMullen : I am going to pass. So why don't you Sam? Sam Raha : Yes, thank you very much for the question. We are, as you know, very pleased to have earned the business of Quest and we are continuing to ramp. We have a significant percentage of that business where we've made conversions. But there is still work in progress which is actually good news, that means increased opportunity for us. And in terms of your second question, absolutely we are. It is in our roadmap to continue expanding the menu on Omnis and having PD-L1 available on this is absolutely something that is within our plans. It's something that will happen in 2019. Brandon Couillard : Super. And then, two quick ones for Bob. The operating cash flow growth implies only about 3% growth in fiscal 2019, any one-timers to point out there? And then, secondly, I think there was an asset impairment in the fourth quarter. Could you elaborate on where that was? Thank you. Robert McMahon : Yes. Thank you. Thanks Brandon. In terms of cash flow, yes, I mean I think it's a prudent forecast right now at the beginning of the year. There were no one-timers really in the - in FY2018 or the fourth quarter other than the tremendous performance that we had not only on the revenue coming in early and early part of the quarter and then also – which enabled us to generate tremendous cash flows with our accounts receivable teams and so forth. So I think it will evolve as we go forward. In terms of the asset impairment that's a small business within our DGG business and we are still expecting it to grow, but not at the level that we had forecasted. Brandon Couillard : Again, thank you. Robert McMahon : Thank you. Operator : Thank you. Our next question comes from Doug Schenkel with Cowen. Your line is now open. Doug Schenkel : All right. Good afternoon and first off, I know it's been said a bunch of times already but thanks again to Alicia, we'll miss you. I want to start with a follow up on an earlier chemical and energy question. Broadly, not just in China, what are you seeing among chemical and energy customers given the recent decline in oil prices. And a bit more of an uncertain macroeconomic backdrop and relatedly, what are you assuming for growth within fiscal 2019 guidance across the chemical and energy sub-segments, meaning breaking it down by chemical refining and E&P? Mike McMullen : Hey Doug, thanks. Happy to provide a perspective on that. And, as we’ve mentioned earlier, the oil price gets a lot of attention, but it really is the view of global growth that often drives a lot of this market. But we are seeing a couple of things going on here. Well, first of all, we're not seeing any change in customer buying behavior. In fact, we continue to see a lot of demand for replacement products. So, the new generation of equipment tied to our Open Lab informatics portfolio really drives productivity. So the customers are seeing an economic benefit of the investments. So even in situations where perhaps the – there is s some uncertainty about oil prices and economic growth, they won't invest, because it helps the P&L by taking cost out of the structure. So, we've seen no changes in the buying behavior and really the growth in chemical energy has been really broad based. We talked a bit about China already, but we saw and again, I am talking about the CapEx side of things. It's been really broad based across all regions. And then again I would just say that the – our ACG business continues to do quite well here as well. And Bob, anything else you would add there, I think? Robert McMahon : Yes, the only thing I would add, Doug is, in terms of your question around FY2019, I can't give that level of specificity into the sub-markets within the chemical and energy market. But what I would tell you is, if we look at chemical and energy, we are expecting that that business to grow slightly lower than what our core guidance. Robert McMahon : Okay. That's great. And Bob may be, if I can just as a follow-up sneak in a couple guidance clarification questions. First on the buybacks which have come up a couple times. Your stock seems pretty depressed relative to your strong operational performance relative to peers on a valuation basis and your balance sheet is very pristine. Your guidance assumes a flat share count in spite of the fact that you have plenty of cash on the balance sheet to get more aggressive with buybacks and still have room to do more and bigger M&A. I guess, it's still unclear to me why you're not getting more aggressive with the pace and size of buybacks? Is this really a function of it just being pretty early in your tenure? And then, I guess the second guidance clarification question would be just regarding the tax rate, your cash tax rate is still a lot lower than 17%. I am just wondering if there's any opportunity or chance that ultimately the tax rate goes a lot lower than what your guidance incorporates. Thank you. Robert McMahon : Yes, thanks. Thanks Doug. You hit the nail on the head. I mean, it's still relatively early in my tenure as I am trying to figure out all the other various pieces. But what I would tell you is, I think there is opportunity now. Our primary use of cash is actually to do M&A after investing in the business and growth. And I think we've seen that starting with the work that we did in FY2018 and then just starting here in FY 2019, with closing ACEA and so forth. But I do think we were opportunistic in Q4 and I think that there will be opportunities that we will – if there are opportunities, I should say we will capitalize on them in FY2019. And then, in regards to - what was the second one Jacob Thaysen : The second point is cash rate. I love this one which is yes, Doug there sure is a difference between our cash tax rate and our non-GAAP tax rate and I think Bob and the team have brought down a point so far. But I think you're still looking at some things. Robert McMahon : Yes, stay tuned. Jacob Thaysen : We're not ready to commit. So we are… Robert McMahon : I would tell you stay tuned on this. Jacob Thaysen : We have not done our work yet. Robert McMahon : Yes. Robert McMahon : Great. Thank you. Operator : Thank you. Our next question comes from Puneet Souda with Leerink Partners. Your line is now open. Puneet Souda : Yes. Hi, Mike. Mike McMullen : Hey, Puneet. Puneet Souda : Thanks for taking the question. Obviously, Alicia, thanks for all of the help and really great working with you. So, if I could touch first on, just wanted to clarify how much of a contribution was USP regulation and LSAG if you could quantify that? It seemed like in past quarters, we had seen some significant contribution from ICP-MS. I just want to make sure we have that number for this quarter too? Mike McMullen : Yes, I don't think we have that level of granularity in terms of specific numbers. What I can tell you is that it's been part of the story of a former growth and I think that's a trough. Actually a massive double-digit dollar growth. Robert McMahon : Yes, it was well in excess of – it was greater than 20%. Jacob Thaysen : Yes, we got a lot of tailwind from that regulation. So, yes, that was good. Puneet Souda : And then what's your expectation there of how long of a tail that could be for USP, longer term? Could you give us a sense of how many quarters or may be years that this could last? Mike McMullen : Yes. This would be just my guess. But I think it’s probably, we're not done yet. I think we expect that to continue into 2019. Jacob Thaysen : Yes. I think we saw a lot of great performance based on that regulation in 2018 and we would also see it sail into 2019. But we have a lot of other things going on in ICP-MS and we really see that technology being applied in more spaces now with the water regulations coming up where we have really made a nice workflow. I think that we can see a lot of opportunities there. But generally speaking, ICP-MS is just being a tool that will be picked up from many other opportunities. So, I don't think that we are dependent on one part and one workflow. But we will see these great opportunities in 2019. Puneet Souda : Got it. And then, Mike on Intuvo, you pointed out the 14% growth – unit growth here. Just wanted to get a sense of – do you want to address broader applications here? My question is, would Intuvo evolve into another set of product? Or should we expect, may be potentially a next-gen 7890 here along the lines of what you have produced in past to address then the full market, compared to the GCs that you have had in the past? Thank you. Mike McMullen : Hey, Puneet. Thanks, thanks for the question. So, I was trying to preempt the audience about it. But we are really quite pleased with the pick up or really that the double-digit growth if you will of the Intuvo product, because as we said for – since the launch, we knew it would be a measured adoption by customers, because they really want to put the equipment through the paces and really be convinced that it actually does work as advertised and guess what it does. And now we are starting to see some really nice multiple unit orders coming in particularly as it relates to Mass Spec and at the risk of being Santa Claus or destroying Christmas or ever held, Jacob said earlier, what I can tell you is that our plan is to leverage a lot of the core technologies that were developed in the Intuvo product for potential new versions of gas chromatographs and we work really hard to keep the overall complete portfolio as competitive as possible and as you know the Intuvo covers only about 60% of the application space. So there is work to do on the rest of the portfolio as well. Puneet Souda : Okay. Got it. Thanks so much. Operator : Thank you. I show no further questions in queue. So I'd like to turn the conference back over to Ms. Rodriguez for closing remarks. Alicia Rodriguez : Thank you, James. And on behalf of myself and the management team, I'd like to thank everybody for joining us today. If you have any questions, feel free to give us a call in IR. Thanks a lot. Bye-bye. Operator : Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,019	1	2019Q1	2019Q1	2019-02-20	2.865	2.907	3.141	3.203	null	23.41	25.01	Operator : Good day, ladies and gentlemen, and welcome to Agilent Technologies First Quarter 2019 Earnings Conference Call. At this time all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be provided at that time. [Operator Instructions] And as a reminder, today's conference is being recorded. And now I'll hand the conference over to Ankur Dhingra, Vice President of Investor Relations. Please go ahead. Ankur Dhingra : Thank you, and welcome, everyone to Agilent's first quarter conference call for fiscal year 2019. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon Agilent’s Senior Vice President and CFO. Joining in the Q&A after Bob’s comments will be Jacob Thaysen, 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 the Agilent CrossLab Group. You can find the press release, investor presentation and information to supplement today's discussion on our website at www.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-on-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 January 31. 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. Mike McMullen : Thanks Ankur and thanks for joining us on our call today. I'd like to start by welcoming Ankur to his first earnings call as our Vice President of Investor Relations. While Ankur is new to this role, he is not new to Agilent. Excelling in senior leader level finance roles for over 16 years, I believe many of you on this call have already met Ankur, but in case you have not, I want to reiterate key theme he is sharing, we remain committed to sustaining excellence in our IR team and maintaining a strong relation with you the investment community. We miss Alicia, but are very pleased to have such a capable successor in Ankur. Now, on to the Q1 results, 2019 is off to a strong start. The Agilent team continues to deliver excellent results with both revenues and earnings exceeding our guidance. Q1 revenues totaled $1.28 billion. This represents 6.1% core growth against a tough Q1 2018 compare. Our performance is highlighted by double-digit growth in both our Agilent CrossLab and Diagnostics and Genomics Group. From an end market perspective, our results led by double-digit growth in the Pharma, clinical and diagnostics, and the environmental forensics markets. Our Q1 operating margin is 23.1% an increase of 120 basis points from last year. Our agile Agilent programs are driving process and productivity improvements while we also continue to invest for the future. This is our 16th consecutive quarter of the Agilent team improving year-over-year operating margins. Our Q1 adjusted EPS of $0.76 is up 15%. This is $0.03 above the high end of our guidance. The combination of strong topline growth and increased margins is driving continued double-digit growth in our EPS. Now looking at results across our businesses, our Life Sciences & Applied Markets Group grew 1% on a core basis against a very touch compare of 11% growth last year. Demand remained strong in the pharma and environmental forensics markets. We continue bringing to the market innovative new offerings to fuel future growth. Earlier this month in Japan we strengthened our leadership position in gas chromatography with the global launch of two innovative new instruments, our new 8890 GC replacing our flagship 7890 GC offering and an all-new midrange 8860 GC. In addition to leading analytic performance, reliability and robustness, these two smart connected instruments offer several compelling new digital capabilities, including remote connectivity. Customers can now remotely control the instrument, monitor status and perform diagnostic tests, provide a new level of convenience for busy lab managers and chemists. With our intelligent predictive technology, we can also provide our customers with system health alerts or autonomous monitoring of instrument performance, allowing them to avoid unscheduled downtime and maximize laboratory productivity. These are just great examples of our digital lab strategy in action. Complimenting the introduction of Intovo GC in 2016, we now have the most complete and compelling gas chromatography portfolio in the industry. While early in the global launch of these two new offerings, customer response is very positive. We continue to strengthen our fast growing cell analysis business. Building from our beachhead [ph] acquisition of Seahorse Bioscience in 2015 we acquired Luxcel Biosciences last year adding new cell assay capability. We continue to invest in the fast growing cell analysis market space. Earlier this quarter, we opened a state-of-the-art cell assay development facility in Cork, Ireland. We also acquired ACEA Biosciences in Q1 adding highly complementary new products to our cell analysis portfolio. The acquisition of ACEA Biosciences increases the relevance and impact we could have with our customers in this quickly evolving space. LSAG's innovation leadership again received external recognition as we drive for increased market share in molecular spectroscopy. The Analytical Scientist ranked the Agilent 8700 LDIR system as a 2018 top innovation. This groundbreaking imaging spectroscopy system takes a new approach of chemical imaging to our customers in the pharmaceutical, biomedical, food and material science markets. The system delivers greater speed and clarity enabling faster, more informed decisions for customers. These new products from our LSAG team further strengthened an already impressive line of instrumentation software. We are very well positioned for continued market share gains. Our Agilent CrossLab Group delivered excellent results growing 10% on a core base of the Q1. Demand was broad based across all end markets and regions which speaks to the strength of our customer value proposition. Our ACG team continues to expand our digital capabilities for lab and improve the customer experience. We introduced e-subscriptions and a lot of customers set up recurring to consumable orders online. This provides customer the ease and convenience of not having to place repeated orders. We also launched a smart alert subscription service for the GC installed base to provide lab managers with alerts on instrument maintenance needs based on actual applications and sample volume. Over the past several years ACG has worked diligently on the expanse of our portfolio of building outcome oriented solutions and enabling our online business. Our Q1 results are reflective of all the ACG team work today to bring these capabilities to market and set us up well for continued growth in the future. The Diagnostics and Genomics Group delivered exceptionally strong results this quarter with 12% core revenue growth. Demand was strong across all businesses and regions. Our pathology related businesses which comprise roughly half the Diagnostics and Genomics business [excuse us for one second] grew low double-digits in the quarter. Importantly, we continue to partner with our customers in efforts to fight cancer. This quarter we expanded our portfolio in high-volume cancer diagnostic testing. In Europe, we launched the first PD-L1 pharmDx kit on the Dako OMNIS automated platform. We are also working on bringing this PD-L1 assay and OMNIS to the U.S. and other markets. Our NGS related business again grew double-digits this quarter. The NASD business is also very strong. Our plan is to bring the second facility online to expand production remain on track. We anticipate the initial production of GMP grade APIs by the end of fiscal 2019 with material revenue contributions in FY 2020. Looking at Agilent's performance on a geographic basis the Americas led with high single-digit growth and with low single-digit growth in Europe and China. As we expected, China's Q1 growth rate is lower than our expectations for full year growth. This is owing to an extremely tough compare versus a 19% core growth last year. As you know, there has been a lot of conversation about the China market. While there are some puts and takes within the markets we serve, our view is that the overall market demand remains solid. Now turning to the company outlook, the total company outlook, our Q1 results coupled with our current view of market conditions and Agilent's strong execution capabilities set us up to deliver a strong 2019. As a result, we have increased our full year guidance. Bob will share the specifics, but before I hand over the call to Bob, let me close with a few summary comments. Looking ahead, I remain cautiously optimistic, cautious as we observe the overall macro conversations about the ongoing U.S.-China trade discussion and questions about the health of the China and European economies and optimistic as we continue to see solid demand in both end markets and geographies as we continue to successfully build a high growth, high margin recurring revenue business across our ACG and DGG Groups, and as we continue to strengthen and expand our LSAG instrument and software portfolio. The Agilent team is delivering on its commitments to drive superior revenue and earnings growth. Our company has never been stronger. The guidance increase reflects our confidence in the strength of the Agilent business our One Agilent team. Thank you for being on the call today. Thank you for the indulgence of our transmission difficulties and I look forward to addressing your questions later in the call. I will now hand off the call to Bob. Bob? Robert McMahon : Thank you, Mike and good afternoon everyone. In my remarks today I will provide some revenue detail, walk through the first quarter income statement and some other key financial metrics and then I'll finish up with our updated guidance for Q2 and the full year. Unless otherwise noted, my remarks will focus on non-GAAP results and percentage changes will be on a year-over-year basis. As Mike mentioned, we delivered a strong Q1, so a good start to the fiscal year. Revenue for the quarter was $1.28 billion with core revenue growth of 6.1% exceeding our guidance. Reported growth was also 6% as currently negatively impacted growth by 220 basis points and was offset by M&A contributing 210 basis points of growth. Mike spoke to the business group's performance for the quarter, so I will provide some additional details around our end markets and regional performance. Pharma, our largest end market delivered 10% core growth. Growth was broad based across all business groups. We are seeing traditional strength in biopharma but also in newer strategic focus areas such as cell analysis. We are excited about the addition of ACEA Biosciences, which expands our portfolio in this fast growing segment of the market. In addition, a strong performance at NASD contributed to the results. Chemical and energy core growth was 2% against a very strong comparison of 13% last year and was in line with expectations. Instrument sales were effectively flat versus mid-teen gains last year while services and consumables delivered solid mid-single-digit growth. Environmental and forensics was up 10% even as we faced a top low teens compare last year. Double-digit growth in ACG and high single-digit growth LSAG were driven by strength in GCMS, GC, atomic spectroscopy, consumables and services. And wrapping up our end markets, diagnostics and clinical core revenue grew 11% while both academia and government and food were effectively flat. Geographically as Mike mentioned, we saw growth in all markets. The Americas region delivered high single-digit core growth as our commercial team continues to execute at a high level while Asia outside of China grew low double digits. Both Europe and China grew low single-digits against difficult comparison of 9% and 19% respectively. Now before I leave revenue, I want to mention we continue to be pleased with our evolving revenue mix as non-instrument revenue contributed 57% of total sales in the quarter. This revenue has been higher growth and historically less cyclical revenue. Its contribution this quarter is more than 1 percentage point higher than Q1 of last year. We expect this trend to continue as we leverage our large and growing installed base and provide value-added services and solutions for our customers. Now let's turn to the rest of the P&L. Q1 gross margin was 56.9% and increased 10 basis points compared to the prior year. Our teams have been able to offset the higher cost of tariffs with productivity improvements. Operating margin was 23.1% up 120 basis points mainly due to topline leverage on operating expenses even as we invested more in R&D. Now before I leave operating margins, I want to remind you this fiscal year we adopted the new pension accounting standard and have restated prior years for comparison purposes. As a reminder, there is no net impact to our non-GAAP earnings per share. Consistent with our guidance, our Q1 tax rate was 17%, down a point versus a year ago and average diluted shares were 322 million. All of this led to non-GAAP earnings per share of $0.76 in the first quarter, an increase of 15% compared to the prior year. Now before moving on to FY '19 guidance, I want to touch on a few additional metrics on cash flow and the balance sheet. Our free cash flow for the quarter was $174 million up 12% from $155 million last year. We deployed $375 million in capital with $248 million in M&A associated with ACEA we returned $52 million to shareholders in dividends and purchased 1.1 million shares for $75 million. Lastly, we ended the quarter with $2.1 billion in cash and $1.8 billion in debt. Now let's turn to our non-GAAP financial guidance for the second quarter of 2019. For Q2 we are expecting revenue to range from $1.255 billion to $1.27 billion representing reported growth of 4.1% to 5.3% and core growth of 5% to 6%. Currency is estimated to be a headwind of 290 basis points partially offset by M&A contributing roughly 200 to 220 basis points of growth. Second quarter 2019 non-GAAP earnings are expected to be in the range of $0.70 to $.72 per share which is 7.7% to 10.8% reported growth. And based on a strong quarter and updated exchange rates we are also updating our full-year guidance in both revenue and EPS. We are updating our full-year revenue guidance to a range of $5.15 billion to $5.19 billion up $20 million on both low-end and high-end of the range and representing 4.8% to 5.6% reported growth. This reflects our Q1 performance as well as the benefit from our prior guidance associated with currency although it is still roughly 180 basis point headwind for the year. As a result, we're still expecting core revenue growth in line with 5% to 5.5%. In addition, we are raising our full-year earnings per share guidance to a range of $3.03 to $3.07 representing growth excluding currency of roughly 10% to 11% and reported growth of 8.6% to 10% up a full point from previous guidance. Consistent with Q1 this is based on a 17% tax rate for the full year and full year average diluted shares of $322 million. As we mentioned at the beginning of the year, this guidance includes both upsides and downsides, so I would encourage you to model at the midpoint of the guidance at this stage. Before opening the call for questions, let me conclude by saying, we are very pleased with our Q1 results. Our start to the year and our continued hard work and focus of the Agilent team puts us in a strong position to achieve our goals for the year. With that, I will turn it back to Ankur for the Q&A. Ankur Dhingra : Thank you, Bob. James, will you now open the lines for Q&A and provide the instructions please? Operator : Of course. [Operator Instructions] Our first question comes from the line of Patrick Donnelly with Goldman Sachs. Your line is now open. Patrick Donnelly : Great, thanks guys. Maybe just to start on the LSAG growth, it came in a little below where we were expecting, I certainly understand the tough comp from last year. Can you just talk to how that tracked relative to your internal expectations and also the go forward, clearly the comp in 2Q quite a bit easier in that segment, so maybe just help us think about the quarter and then the go forward there? Mike McMullen : Yes Patrick, a great question and before I go to the answer I just want to extend my apologies to all on the phone and I understand we had some transmission difficulties earlier on the call, so hopefully it is now coming through loud and clear, but we will make sure that we address all your questions in case we weren’t clear throughout the call. Yes, relative to the LSAG growth, I think you hit on one of themes right off the bat which is the top compare. So we were expecting growth to moderate to low single digits versus this touch compare and I would point out that we had good pockets of strength in Pharma and environmental forensics. I would say there was some noise in the quarter particularly in January with the U.S. shutdown and some China trade rhetoric. There was probably some transitory impact really hard to tell exactly how much. But I think the look forward is probably is perhaps the most interesting thing which is we see good underlying business demand. The hope that came through in the scratching this up my narrative, we're expecting our growth rates to rebound in Q2 not only because of the comps get easier but you've got this underlying strong business demand and we have a number of very new exciting launches underway and these launches will be delivering the revenue in the second quarter. Patrick Donnelly : Okay, that's helpful. And then maybe just staying on the 2Q guide, maybe one for Bob, just given that the comp eases by I think 500 bps quarter-over-quarter relative to 1Q, the guidance calling for only 5% to 6% growth, can you maybe just talk through some of the moving pieces there and why we shouldn’t see an uptick in growth, just some conservatism baked in on your part? Robert McMahon : Yes, hey Patrick, thanks for the question. I think you hit the nail on the head in terms of as Mike mentioned we're kind of cautiously optimistic. We do have an easier comp in Q2 and we've also reflected a higher guide at the midpoint for Q2 relative to what we had guided to in Q1. As we think about it, we are still expecting performance in ACG and DGG. LSAG we do expect to improve in Q2, but we're being cautious a bit on some of the forecast and when we think about things like chemical and energy those are areas that we potentially have upside going into not only Q2 but Q3 and Q4 as well. Mike McMullen : Yes, Bob I think this is probably the highest quarterly Q2 growth that we've ever given in our history, so while it may be an element of conservatism relative to historical guide this is the highest we've ever guided. Robert McMahon : Yes. Patrick Donnelly : That's helpful, thanks guys. Operator : Thank you. Our next question comes from the line of Ross Muken with Evercore. Your line is now open. Ross Muken : Hey Mike. Mike McMullen : Hey Ross. Ross Muken : Thanks for the color, good to hear your voice not in sort of funny tone, so maybe just ticking off your comment on China, obviously there is a lot of things at stake in sort of getting this trade deal done and it seems like it is heading in the right directions, but maybe it is a bit later than what they had foreshadowed. I guess how are you thinking in general about what parts of the business could see maybe on the cap equipment side is the negativity and help explain maybe a little bit more tease out what you saw in January? So it is tough with you guys because it is sort of a non-traditional quarter end sort of extrapolate. But help us understand sort of what you are expecting over the next quarter and then against that sort of the underlying strength that still seems to sort of exist in most parts of the business in that region given sort of the commitments they have made on the environmental side, et cetera? And then lastly, remind us of where we are in sort of recovery in the food business? Mike McMullen : Yes, absolutely Ross a great question and I'm glad to hear we're coming through much more clearer and do appreciate the recognition of the kind of unusual timing of when we report relative to others in the industry. But specific to China and then maybe I'll just give you kind of an overall narrative on China and get to your specific question. So when we were guiding for this quarter we expect our growth moderate to low digits really given the tough compares and a 19% growth last year and we continue to see really strong demand in Pharma and environmental. I think that environment demand really speaks to your commentary about the continued funding that exist in China relative to their priorities and this as mentioned here I will cover in a minute C&E, but last year our C&E business grew I think 34% just I think one. Relative to food, I would say, you know puts and takes of thinking in my narrative, but we are seeing a slower rebound than anticipated in the food market, but we do expect our food business to return to growth later this year and we can dig around in some more detail later if you like on that one. But I think really kind of the outlook is really the most important point here again which is, we're expecting a stronger Q2 growth rate which are some small all long in terms of our guide because the good underlying demand is there. And as the comps easily move into Q2 you may recall Q2 results last year and then and that’s the narrative around was a fundamental change in our business in China which turned out not to be the case within over a double-digit growth last year. But I think if you look in Q2 you got the comp easing. You've got this continued strong underlying demand and we have new product launches that might turn into revenue in Q2. I do think that the continued to drag out if you will of the China tariff discussions between the U.S. and China, put the level of uncertainty in the marketplace and may be perhaps those customers who have more export driven activity which is relatively the only part of business might be holding back a bit. I think that – eliminating that cloud of uncertainty would certainly help but despite that, we still see really good demand in China. Robert McMahon : I think on that and Ross, just to add, I think both on the ACG side as well as the DGG side, those businesses continue to remain robust really leveraging that installed based and so I think when we think about China we think that long term the growth is certainly there. We're continuing to invest in China and expect growth in excess of the total company average over the course of the year. Mike McMullen : Yes, hey Bob, thanks for jumping on the answer as well, because you may recall in some of our earlier discussions we've statistically highlighted the underrepresentation we have in our ACG and DGG businesses in China and the view that they were really poised to have a lot of long flung, just sort of long runway with all terms of exceptional growth and we've seen that through this year so far. Ross Muken : That's helpful. And maybe just tease out for us kind of how to think about DGG over the course of the year obviously LSAG very late in the year did ramp, but it feels like underlying given some of the acquisitions you've done there, given some share that feels like is going in new direction, that business could remain elevated, maybe not at this exact level every quarter, but certainly for a lot of the year, just help us sort of understand kind of your expectations for how that business will trend and how it did versus your internal plan, because this feels like a very good trend for the DGG folks? Mike McMullen : Yes, and Ross you are spot on. Your characterization of what's going on is I'd have to wholeheartedly agreed to that we've got good momentum in our core pathology business and we could see some of the momentum building in the latter part of 2018 across the three dimensions of Sam's business and we see the good momentum and our pathology piece, we've been highlighting to the audience our continued strength in our NGS business which and then consistently have been bringing in the pieces to complement that through acquisition plus also to continue organic investments we have in our genomic business and then I think the legitimate business. And then I think the NASD story is fairly well known already, but you can see why we were so anxious to continue in our [indiscernible] business and we're seeing growth now and we're feeling pretty good about where this business is going. So anything perhaps I missed? Robert McMahon : No Mike, I think you hit the nail on the head. We have a positive momentum going and the inorganic parts are well known, but I think I also would share that last year's Analyst Investor Day and excited that upcoming next week at the AGBT conference we'll be formally unveiling the Magnus NGS Library Prep, sample prep system so there's a number of good things happening in DGG. Mike McMullen : So we are talking about that. Robert McMahon : Yes, well we are taking about that. Mike McMullen : Okay, Ross did that get to your question? Ross Muken : That was also got, thank you so much. Mike McMullen : All right, thanks. Operator : Thank you. Our next question comes from Tycho Peterson with JP Morgan. Your line is now open. Tycho Peterson : Hey, thanks. Maybe just a followup on a couple of those on China, you know the C&E strength you've talked about for a while there, how much of the strength in China for C&E do you think kind of offset broader C&E softness? And then can you kind of quantify that the food ministry catch up you are expecting this year from the issues last year? Mike McMullen : Yes, Tycho it is good to hear from you and happy to address the question. So just to clarify, the C&E business for Q1, actually China was not a very strong contributor to the growth in Q1 that we saw in C&E. What we're referring to was a strong growth rate last year of 34%. That being said as you know we remain very bullish on the prospects of the chemical and energy business in China and I would just say they are just all about the comps. And perhaps waiting for this new product to hit the market, so as you know the 8890 GC and perhaps we will have you share a few comments about that in a minute Jacob, but the 8890 GC is primarily targeted at the chemical and energy space. So we expect in the latter part of this year the China chemical and energy business we think is really a [indiscernible] going on here to be fundamentally strong. So I would not have reacted during the first quarter actually a story of tough comps. And the story in the food market, as you may recall last year we had talked about, hey we think this reorganization is going to take probably nine months or so to kind of go through the system, I think we got that part of it right which was they were going through process of consolidating into one set of industry, from multiple agencies into one single agency. So that has happened pretty much that's essentially complete with most but not all the leaders in place. What I think is taking a little bit longer is the internal review of elimination of redundancies across our modern labs, so that's really leading to slower to new instrument purchases in the – if you will the central government segment of that market. So this is really affecting the China central lab purchases while the private sector piece of it, the contract testing lab throughout the market continues to grow and we do expect the entire food business inclusive of the central agencies to be back growing again lateral this year. And Jacob maybe just a little bit color on the 8890 since I mentioned it or just GC launch? Jacob Thaysen : Yes, certainly, and back on to the chemical and energy you are absolutely right Mike that we continue to see lot of programs in place and projects in place for – in China. So we expect a lot of opportunities in that space also going forward as I also mentioned last time. But we are of course very excited about the new 88 series, not only is it what we call the smart connect and really we've put a new class in of smart connected instrument and which is a key component in our digital lab strategy. But what also gives us now is a great opportunity for the huge installed base we have out there with the 7080s we have a very strong start throughout and refresh the installed base. Now everybody would like to upgrade to an even better solution. It is well known technology, so you can very easily transfer your methods from the 7080 over to the 8080, but there is a lot of new features we have added into this. All the technology we have invested in Intuvo is now coming to full effects here and all the units smart connect what we talked about, first of all you can have the remote monitoring, but yes, really we have built in a dual core processor and what it does really is that it allows you to continuously having one processor continues to monitor the health of the instrument which allows you to really understand what is going on, get the smart alerts so you can really upfront understand what's happening. You can reduce your unscheduled downtime and this is a huge opportunity for the labs out there. So we are really excited and I can tell you our customer is at least as excited as we are right now, we see a lot of demand for it. Mike McMullen : Yes, and Tycho the discussion we're having inside the company is this has been a decade in the making. Yours truly actually was the GM when we came out with the 7890 product which hit the market in 2007. So you can see the amount of advancement made since that time and how we're leveraging the initial investments we made in Intuvo GC platform. Tycho Peterson : Okay and then if we think about the current quarter, I appreciate the color you've provided on guidance, any impact from Chinese Lunar New Year? And then you mentioned the government shutdown, we've heard one of our peers talk about ICP-MS impact there, any impact on your business there? Mike McMullen : Sure, happy to talk about also, for the first time in a number of years we're not talking about Chinese New Year in our earnings call so nothing unusual happened this year relative to the dates moved around between quarters and obviously it moves the numbers around for compare, so nothing unusual happened relative to the business flow if you will as a result of the Chinese New Year. And I mentioned some of the noise around the U.S. Government shutdown. I'd mention two things. First of all just a reminder, when you look collectively at the entirety of all the U.S. Government agencies, U.S. Government is our largest customer and they were basically out of pocket for months. And I think what you may be pointing to Tycho, with some of the products require an export license from the U.S. Government, so obviously that didn't happen. And some of that product didn't find its way into China into Q1 because we didn't have the export license. That's just a transitory thing. We'll see that flow through and overall it is really, really immaterial to the company's quarterly results. Tycho Peterson : Okay, I appreciate it. Thanks. Operator : Thank you. Our next question comes from Dan Leonard with Deutsche Bank. Your line is now open. Dan Leonard : Thank you. Another question on geography, can you comment on how the results in Europe arrived versus your internal expectations? Mike McMullen : Yes, Dan. It was good to hear from you, right where we thought it would be as we came in to this year we were expecting low single digit growth in Europe and I think it's really been on that pace as well. So I don't think really anything unusual there. Obviously, we'd love to see some resolution on some of the political uncertainty, but I think the numbers basically came in as planned. Bob? Robert McMahon : Well that's right. That's right. It was low single digit stand and that's kind of what we were expecting. Dan Leonard : Okay. And then for my followup, I appreciate all the color on the new gas chromatography launches, can you help us understand the anticipated adoption curve there? Is this something similar to the Intuvo where it's very slow and steady at the outset bell curve shaped or is this something where we could see a more immediate impact within the scope of 2019? Thank you. Mike McMullen : Dan, I'm so glad you asked that question. So this is actually a much different scenario. We can expect a quicker ramp of orders here and in fact but Jacob I think we're actually starting to ship right? Jacob Thaysen : Yes, we did sponsorship this week here, so this is happening. We, as I mentioned before it's based on our proven technology and so it's very easy to transfer methods. Actually you don't have to do anything, so you would actually expect most customers, that was looking for 70, 80 probably pretty quickly move over to 88. We do see some customers that are conservative that is a production that want to wait maybe a few months, but this… Mike McMullen : Yes and we still have a lot of conviction on the game changer Intuvo GC, but we do see the adoption rate to be here much more quickly than the Intuvo ramp because there's really a direct replacement with new capabilities for our 1790 and 7820 offerings. Dan Leonard : I appreciate the color. Mike McMullen : Thank you. Operator : Thank you. Our next question comes from Brandon Couillard with Jefferies. Your line is now open. Brandon Couillard : Thanks. Good afternoon. Mike, can you speak to the services growth in the first quarter and perhaps some of the tractions you might be seeing with the multi vendor services in China? Mike McMullen : Yes, so I'm going to make a few comments here, then I'm going to invite Mark to join in on the call to sort of take a bow in front of the investment community. So we're seeing great traction in the overall ICG business and services and in China in particular. So I think it is all regions and across the entire portfolio. So this has been the results of a lot of work over the last several years really to provide to the marketplace a set of offerings that really helps them with running their operations of the lab and also with the great science they're doing, so we think we've got momentum. We think this wasn't just a one quarter phenomena and our outlook is pretty positive here. So Mark, anything else you'd add to that? Mark Doak : Thanks Mike and I'll add a couple of things. As you suggested we've seen strong growth not just in what we've talked about in our enterprise or multi vendor arena, but in our instrument services business. Both of them were double-digit growers in this particular quarter and maybe a bit nuanced about the portfolio expansion. So as Mike talked the value-added services that now are more formulated around specific end markets and in Jacobs business in particular and the extension of a lot of the capabilities we actually talked to an aide in terms of how we're going to introduce an expanding portfolio around our CrossLab Connect and asset monitoring utilization services. As far as China is concerned, I'm extremely bullish about China still. I think we're - I know you'd like to talk about which innings we're in, I still think we're in the early innings in China in the enterprise space. And it's really ripe in the sense that they're looking for many of the same things we've seen across our global accounts and they have the size and scale of the assets in the lab now to do things with it. So very encouraging in China and I think we'll see in the foreseeable future will be strong growth there. Mike McMullen : Thanks Mark. Brandon Couillard : And then a quick follow up for Bob, can you just help us bridge the core incremental operating margin year-over-year in the first quarter in terms of the impact of FX, M&A, tariffs on the incremental year-over-year? Thank you. Robert McMahon : Yes. So yes let me give you a couple of data points there. So the majority of the operating margin expansion was through our operating expense. The tariffs were about roughly $4 million in the quarter which was in line with what we had expected. So year-over -year that's a $4 million kind of headwind. M&A, if you include the Lasergen was also about $3 million or $4 million all in a reduction year-over-year as well. And then the tariffs were offset by productivity enhancements and gross margin and you saw that. And then the R&D we actually spent more in R&D, but we're able to offset that through productivity savings and our SG&A through our Agilent programs. And so, that hopefully gives you kind of a sense for the 120 basis points improvement. It was really on top - on the strength of the top line driving leverage in our core operating expenses as well as being able to offset that tariffs and the investments that we're making in R&D and the new businesses really driving more efficiencies in the G&A areas. Brandon Couillard : Super, thank you. Operator : Thank you. Our next question comes from Derik de Bruin with Bank of America. Your line is now open. Derik de Bruin : Hey, good afternoon. Mike McMullen : Good afternoon, Derik. Derik de Bruin : Hey Bob, you did a little bit of share buyback activity in the quarter. Just sort of some commentary on maybe being a little bit more aggressive on that given your strong cash position and just sort of some general thoughts on capital deployment at this moment in time? Robert McMahon : Yes, so I've been with the company now for about six months and you know as I think about that we were active in the quarter. I can see us between M&A which is our primary focus of utilization of capital in the back half of the year between M&A and/or share repurchase I would expect us to be probably a little more active. That's not built into the guide Derik. We prefer to use that cash and the strong balance sheet that we have on growth assets as we did over the course of the last 18 months, but we do not see ourselves continuing to hold a significant cash balance. Derik de Bruin : And I guess along those lines, I mean you've done a number of deals in the genomic space recently in the cell biology space. I guess when you look at the portfolio are there any other target areas, things or I mean I've asked this question in the past and I'll ask another version of it, but it's like you are relatively underweight versus some of your peers in the academic and government market and just wondering if that's a primary focus of your M&A activity? Mike McMullen : Yes, Derik, I'll jump in on this one. So actually some of the deals we've done have been really targeted academic, whether it be Seahorse Biosciences, the iLab. So we like that space, but I'd say it's more from a collective end market, market view. And so, I think you hit on a couple of areas that we're interested in, the genomics and the cell analysis. Cell engineering is an area of interest for us. We also think there is things we can do on the ACG consumables portfolio and also remain very interested in informatics as well. So we think there's a lot to be, luster out there that kind of fits our model of companies that are primarily in the private space that really would welcome being part of the Agilent culture. Robert McMahon : Let me just add something real quick there. I think the beauty of it is, I think as we look at our portfolio of funnel of opportunities it's really across all three of our business groups, not just focused either on the genomic side or other places. And I think you've seen that through what we've been able to do really leveraging the strength of Agilent as you said and I guess your next question is around Lasergen. Derik de Bruin : Yes, I got to say with AGBT coming up and just while thinking about the sequencing space can you give us an update on what's going on at Lasergen and when can we expect to see some first data? Mike McMullen : Yes sure. I mean just I'll start with a reminder Lasergen is important to us but it's one of many R&D programs both within Agilent even within DGG. We are on track. We're meeting our internal expectations. We're really pleased with the progress that the team is making. You won't hear anything specific that we'll talk about at AGBT. We're tracking along and more to come in the course of the coming years. Derik de Bruin : Thank you very much. Mike McMullen : Thanks Derik. Operator : Our next question comes from Jack Meehan with Barclays. Your line is now open. Jack Meehan : Hi. Good afternoon. Mike McMullen : Hey, Jack. Jack Meehan : I want to keep it going on DGG the growth there in the quarter which is great. The first factor you laid out was that NASD was the largest year-over-year contributor. So I'm curious where you're finding incremental capacity at the old site and just update us on the timing related to the new capacity of the new site? Mike McMullen : Yes, so I might just go ahead and handle this one, you can jump in on it, but we brought in a new general manager probably about 24 months ago and really came in and looked at our existing facility and saw opportunities from we call our agile Agilent program, but from our process improvement we said, hey there is more that we can garner in terms of growth out of the existing facility by really changing some of the aspects of how we conducted the manufacture. I think we've been able to actually if you will squeeze more out of the existing sites than we had thought. And then relative to the status which is the same I think we're still on track for bringing this on online by the end of this fiscal year in terms of producing GMP grade material. The site construction is essentially finished. We're now in the midst of validation which is really quite a task given the scale of what we've constructed here, but still doing good. Robert McMahon : Yes, and Mike you said it all. We, operational excellence was in I think full order in Q1 and we're making really good progress for opening of our second facility. Jack Meehan : Great. And just to followup I guess on the second factor which was the pathology business the double digit growth seems like a nice acceleration there. Can you talk about, what you're seeing on the competitive environment and utilization of the instruments that are around in the field and maybe just finally, where do you think you stand with the question all out to that help in the quarter? Mike McMullen : I'm going to pass, this is directed to you, Sam. Sam Raha : You got it Mike. Overall the combination of our pathology related businesses, our core business that we have which is our systems are consumables to go along with it, including companion diagnostics, including we call reagent partnership, altogether a very, very strong quarter that we had. To answer some more of your specifics, we're seeing you know really good performance related to our advanced staining portfolio. And as you indicated a lot of that we are seeing increased pull through and our core systems are on this platform is doing well. And you alluded to that we have seen the adoption and growing utilization at Quest, but there's also a similar effect that we're seeing at other major centers and we continue to see goodness from PD-L 1 and 2 in partnership that we have with a number the pharma partners that you're aware of including Merck and BMS. So it's not just one thing but there's general strength across our pathology business that we're pleased with. Jack Meehan : Great. Robert McMahon : Jack, I think that was the thing that was probably one of the most gratifying, it was really across all of the business lines within DGG. It wasn't being driven by one or just a handful, it was really across, it was a nice performance. Jack Meehan : Thank you, Bob. Operator : Thank you. Our next question comes from Catherine Schulte with Baird. Your line is now open. Catherine Schulte : Hey guys. Thanks for the questions. Just curious what did China grow excluding the food headwinds and then what are you expecting for China growth for the rest of the year? Robert McMahon : So I think the growth for - outlook for total China is the same as it was at the beginning the year which was above the overall corporate average I think high single digits is what we've been probably looking at. Mike McMullen : Yes and I would say you will get the exact number but it would have been mid single digits ex food. Catherine Schulte : Okay and then as we approach the Brexit deadline and given you uniquely have a month of that impact in your second quarter if the timeline holds. Can you just remind us of your exposure to the UK and any areas of your business that could be impacted by the exit? Mike McMullen : I think Bob, I recall it is about 4% of our total businesses in the UK from I discussed in the last year and the main flow through would be getting product into my main major impact I'll be getting product into the UK for - to our UK based customers and we actually have a series of contingency plans, we're actually already executing on which assumes a hard Brexit. So we're planning for worst case scenario which means making sure we have in country stocks and other things to help our customers with potential challenges getting in product through customs. We do have a relatively small factory in the UK for our Raman spectroscopy business, but we're in the midst of transforming that product into Malaysia. So I think from the outbound export side of things probably would be not a good start right Jacob? Jacob Thaysen : Yes, you are right, yes. Mike McMullen : So I think the bottom line there is, I think we've got good plans in place. We're not expecting that to have a material impact in the quarter. Catherine Schulte : Okay. Thanks. Operator : Thank you. Our next question comes from Steve Willoughby with Cleveland Research. Your line is now open. Steve Willoughby : Hi, good afternoon. Two questions for you. First I guess just as it relates to tariffs, I heard you say you saw a $4 million impact in the quarter. I was just wondering if you were assuming the tariff to step up to 25% in your initial guidance there or what are you thinking about tariffs as of right now over the remainder of the year? And then I have a followup question related to some products. Mike McMullen : Yes Steven I'll pass it up to you, Bob. Robert McMahon : Yes, great, thanks Steve. Yes, so we are assuming that it will ramp back up to 25% at the end of March and then for the rest of the year. And so, we built that into to our guidance. So if something happens there this - such a trade either gets delayed, that would be potential upside for us. I think more importantly just removing the uncertainty of what that looks like I think we'll free the market just in general and it's probably less about the dollars associated with the tariffs and more associated with just kind of clarity about what path we're going to be going forward. Steve Willoughby : Sure. That's helpful. And then secondly just on products, could you provide a little bit more color on kind of your GC portfolio now and with these new 88 systems kind of where the Intuvo offsets versus these newer systems. And then also just with this new Magnus system maybe how that fits into your existing genomic portfolio and what you're expecting out of that product over the rest of the year? Mike McMullen : Sure, Steve, happy to do so. Jacob, why don’t you take the GC question and Sam, Magnus? Jacob Thaysen : Yes, that's a good question and now we have - we really have three main solutions in the GC space. We have the Intuvo which really goes after the ultimate ease of use with hyperactivity especially combined with mass spec, so that's that great area for the routine use with Intuvo. Then we have the 8860 which is focusing more on a routine application which are more of the standard ones, but also demands some type of ease of use and allow us also to play in the midrange space. And then the 8890 which is the high - where we have customers requiring high flexibility and performance that needs very high requirements and performance in the space which is really HPI space and other elements that's where its more complex. So these are really the three areas we play it's all now based on the same core technology with smart connectivity and remote access and all those built-in health monitoring capabilities, so it fits very well together. And the same ease of use platform. Mike McMullen : Sam? Sam Raha : Yes, with respect to the Magnus, thank you for the question. Well, first of all what we're going to be providing the system is something that we don't have and actually there's very few solutions like it on the market specifically the customer is going to be able to start with a shared DNA and that's what they put into our automated prep system and what they get on the other end is a fully prepared library that's ready to go that they can load. And so, what that means specifically is we're doing both the library preparation and the target enrichment fully in an automated fashion in our Magnus system. Like I mentioned before, we're going to formally launch this next week at the AGBT conference and then we'll start taking orders immediately thereafter. But our shipments will be in a deliberate fashion starting in the June, July timeframe, making sure for our first set of customers we really get a lot of care to ensure the success that they would expect that we'd expect. So it is targeted to clinical labs and other NDS testing labs and I think we'll definitely see some impact of installs by the end of this year, but really a bigger impact in 2020. Steve Willoughby : Okay, thanks very much. Mike McMullen : No problem, Steve. Operator : Thank you. Our next question comes from Puneet Souda with SVB Leerink. Your line is now open. Puneet Souda : Yes, hi Mike. Thanks for squeezing me in and so… Mike McMullen : Sure Puneet, no problem. Puneet Souda : The question I have is, I get the strong compare on chemical energy, but I just wanted to get a sense, I'm wondering if you saw any impact from customers waiting and knowing about 8890 and 8860 and holding back those purchases and having any impact in the quarter? And then also I have a followup for Bob on margins, thank you. Mike McMullen : So Puneet, I think you must have been listening very carefully to my comments, the slight, the scratching is coming through. So I kind of alluded to that which is and it's hard to put a quantitative number on it, but we clear things that happened which is, this product has been 10 years in the making, a decade in making I'd like to say and of course our customers knew it was coming and I think some may choose, as Jacob mentioned, to go with the 7890 right now because they are there they still want to see the new product, but we think that there was a quick uptake in 8090. So that may, I think that is part of the story, can't quantitate [ph] it, but also again one of the reasons why we were optimistic about our ability to get some good growth and back to growth in the chemical energy beyond what we saw in Q1. So I think there's more to the story than the tough compares. Robert McMahon : And just for respect for our R&D team it didn't take 10 years to build it. Mike McMullen : Yes. Puneet Souda : Thanks, so we should expect this to come, I mean come in into the next quarter now that you're shipping this out? Mike McMullen : Yes, yes, yes, that in fact Jacob just dropped me a note the other day and we started shipping this week. Puneet Souda : Okay great. And then Bob, just some I wanted to get a sense from you on, you commented about 57% being consumables recurring moving up by a point and sort of gross margin contribution there. I wanted to understand, now that you have had some time to look at the overall portfolio and the new products and Intuvos and 8890s and what's your sort of gross margin expectations sort of longer term, obviously these are, they have improving margin profiles, so I'm just trying to get a sort of a high level corporate view that you're seeing in gross margin improvement longer term? Thank you. Robert McMahon : Yes, I mean I think if you look over the course of the last couple of years we've had significant gross margin improvement really through the great work that the operations team has been able to drive. And then also the pricing discipline that the commercial teams have been able to do as well as positive mix. This quarter you saw that moderate really because of the tariffs and if it weren't for tariffs we would've had I think some very good gross margin improvement. I think once we anniversary gross margin, the tariffs this year which would be in Q4 you'll start to see gross margins go back up for the things that you talked about as well as just the ongoing operational improvements that we have. We had guided to call it modest, call it 50 to 70 bps on a restated basis operating margin improvement, a combination of both gross margin and an operating expense improvement for the full year. In Q1, we were ahead of the game which is good news and a lot of that came through the operating expenses, but I would expect us to probably be about this range and probably be a little stronger in the back half of the year as we anniversary the tariffs on gross margin. But going forward, I would see us really focus on growth driving margin expansion in that 50 to 70 basis points being kind of evenly split between the gross margins and operating expense line. Puneet Souda : Got it. Thanks so much, guys. Mike McMullen : You're quite welcome. Operator : Thank you. Our next question comes from Doug Schenkel with Cowen. Your line is now open. Doug Schenkel : Hi, this is Ryan out for Doug. Thanks for taking my questions. Another great Pharma quarter. Can you remind us what proportion of your Pharma revenues are now to large molecule customers? And contrary to recent quarters you didn't call out small molecule growth within Pharma. Can you talk about what you're seeing from those customers and is healthy growth within the small molecule segment finally slowing down a bit or is that a little premature? Mike McMullen : Yes, Ryan so great observation. So the ratios have changed somewhat over last three years. I think it speaks to the strength of not only the biopharma space, but how we've been picking up share. But to answer your question, it's 80/20 mix about 80% small molecule 20% is the biopharma space and the slowdown in LC that's already happened, we saw that in 2018 and as you know, we've been talking about the breadth of our portfolio and how a lot of our analysis has moved. It's not the driven demand for LCs but it's not the double digit growth we thought for a while with strong demand on the mass spec side. You may recall that was one of the reasons why we had such a blow after Q1 last year when we had a strong finish the prior year in LC/MS. So I think the breadth of the interim portfolio what's going on in the in the ACG business in terms of our enterprise business as well as this is where a lot of our NASD growth shows up. And by the way I think you also have some new solutions coming out in this space as well Jacob right? Jacob Thaysen : Yes, what came out here recently was more for the small molecule, Mike and Q-TOF. So what we came out a year ago was the Q-TOF for the last molecule, we had advanced bio and we've had a lot of success with that coming out with a full solution. We're now taking that technology and have focused that into to also address small molecules, within specifically within the food environmental market but also in the academia research. So the success we had where we started out in the biopharma and one of the first early movers into the biopharma space, particularly focused on discovery and R&D. We now, we of course will continue to invest into the biopharma space also going forward. Mike McMullen : Right. And that was perhaps more of an oversight in terms of calling out the [indiscernible] narrative with a 10% overall growth in pharma, small molecule also was healthy. Doug Schenkel : Yes, very helpful. Thank you. And Bob you noted earlier in the call that you don't expect to maintain a significant cash balance over time. Can you give us a sense for what significant means, how do you think about the minimum cash balance for the business and when should we expect to hear more on your plans to deploy your current excess cash? Thank you. Robert McMahon : Yes, I would say later on this year as I get through kind of the rhythms of the business in terms of as we get a better feel for that. What I would say right now is we're in a net cash position. We actually used more cash than we generated in Q1. I would expect that to continue over time. I don't see us using it all in one quarter, but we will continue to deploy our capital in a growth oriented way. We continue to drive dividend growth, but I think just as importantly and probably more importantly investments in faster growing areas to augment our strong portfolio already and then couple that with share buybacks. Doug Schenkel : Okay. Operator : Thank you. Our next question comes from Paul Knight with Janney. Your line is now open. Paul Knight : Hey, Mike how are you. Mike McMullen : All right Paul, how are yourself? Paul Knight : Good, you seem to be doing more M&A. Is that a change in philosophy? Is it a change in markets that you are perceiving? What's behind this activity? Mike McMullen : Yes. Thanks for the question. So this is a conscious decision I made and we started sort of laying the foundation with Sam coming into that role and continuing now with a new hire in Eric Gerber. And what my view was when I first came into this role I really had to get the foundation this company established and I think we've got our core operations under control, we've got our pipelines, our R&D roadmaps redone. We've got a whole new way of operating the company or running this company. And you've seen it in the early years in terms of the results we delivered, but we also have this opportunity to use this great balance sheet we have to, as Bob described it to acquire growth assets. So I think the company from a foundational standpoint is in the position to be more acquisitive. I also believe that we have been building the muscles in terms of actually making the acquisitions work for the company. And we continue to work to get better at this and are very active in the market. I think we did a record number of acquisitions last year and you can start to see that it's paying off in terms of material impact to our growth rate. Again our model doesn't require M&A, but is a nice adder. And as Bob mentioned, I'll just re-emphasize this, we're looking to go into markets and acquire businesses where they can leverage the One Agilent model of innovation and where the acquired companies have something of a difference in nature, have a differential team and are in the segments of the market that are growing faster than the overall company. We passed on opportunities where assets were available and we didn't really see a path to grow. We are a growth company and that's the type of assets that we want to acquire. So it was a conscious decision and I think we plan on continuing to be active in the market. Paul Knight : And lastly, could you give us a refresh on Lasergen. Is that going after the diagnostics market, what will be their position? Thanks so much for the questions. Mike McMullen : Yes, I think I know this one sort of go ahead and handle this one, but our strategy here is that right now we're a component supplier into the NGS workflows of some of our major competitors and have built a business in excess of $250 million. Our view is that ultimately we see a view where you need routine market that you are going to need to have a turnkey easy to use workflow solution. We have a lot of the components of that already and you may recall that from Sam's overview at our Analyst Day back last year. The missing piece was to actually have a sequencer. So our thoughts are not to compete box-to-box in the sequencer business, but really try to build the best workflow for that cancer diagnostics marketplace. Paul Knight : Thank you very much. Mike McMullen : You’re quite welcome. Operator : Thank you. Our last question comes from Dan Arias with Citigroup. Your line is now open. Daniel Arias : Good afternoon guys, thanks. Mike McMullen : Hi Dan. Daniel Arias : Hey Mike. On chemical and energy, just honing in on your comments on instrumentation, I'm curious where you would put penetration or replacement for the Intuvo at this point and if you'd be willing, what do you think could be the contribution either at the segment level or for the overall business? Mike McMullen : Yes, so I think when you think about the chemical and energy market I think we want to primarily think around the 8890 and 8860 portfolio, because that really is the target market for this product and that's why I went to great length in my narrative which probably nobody was able to hear because of our transmission difficulties, but that this really is right after the mainstream chemical and energy market, the Intuvo is really geared towards those high volume routine labs in food and environmental really a mass spec based analysis where the chemical and energy market tends to be more gas GC only kind of marketplace. So we're really excited about the product. I won't give you a specific number, but I can say this is one of I believe the proof points why we believe there perhaps is some upside to our current outlook on chemical and energy which believe, I think Bob we've got a low single digit for the year. Robert McMahon : Yes, and I think, Dan to your question, none of these individually is going to move the needle on the total company, but collectively the portfolio of new products that are being introduced, not only in LSAG, but across our portfolio is really what's helping us sustain and feel confident that our growth is going to continue above market levels just because of the value proposition that these are able to provide in the marketplace. Daniel Arias : Yes. Okay. Thank you. And then Bob, if I could on the out margin forecast, it sounds like you're on track operationally for the NASD build out. I'm just curious if you think the $12 million or so in investment that you've targeted last year as the 2019 spend holds? Robert McMahon : Yes. In general that is - that's consistent with, we haven't changed the forecast there relative to what we had said at the beginning of the year. Daniel Arias : Okay. Thanks a bunch. Robert McMahon : Thanks Dan. Operator : Thank you. That's our final question, so I'd like to turn the call back for closing remarks. Ankur Dhingra : All right. That wraps up the call for today. Thank you for joining. If you couldn't get to something because of the transmission issues or have any of questions, please reach out to us in the Investor Relations. Thanks very much. Operator : Thank you. Ladies and gentlemen that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Everyone have a wonderful day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,019	2	2019Q2	2019Q2	2019-05-14	2.936	2.97	3.243	3.287	4.56	22.55	22.1	Operator : Good day, ladies and gentlemen. And welcome to Agilent Technology Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode [Operator instructions]. Later we will conduct a question-and-answer session and instructions will follow at that time. And as a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference, Mr. Ankur Dhingra, Vice President of Investor Relations. Please go ahead. Ankur Dhingra : Thank you, Liz. And welcome, everyone to Agilent's second quarter conference call for fiscal year 2019. With me are Mike McMullen, Agilent's President and CEO and Bob McMahon Agilent’s Senior Vice President and CFO. Joining in the Q&A after Bob’s comments, will be Jacob Thaysen, 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 the Agilent CrossLab Group. You can find the press release, investor presentation and information to supplement today's discussion on our website at www.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-on-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 April 30th. 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. Mike McMullen : Thanks, Ankur, and thanks for joining our call today. Our Q2 results are mixed. On one hand, we continue to deliver strong growth in two of our three businesses. On the other hand, our LSAG business is experiencing unexpectedly soft market conditions. Despite revenue below our expectations, the Agilent team delivered solid earnings with EPS of $0.71 at the midpoint of our guidance. This represents 9% EPS growth over last year. We also delivered our 17th consecutive quarter of adjusted operating margin expansion. For the quarter, total revenues were $1.24 billion, representing 4% core growth. Let me break that down; performance was led by our Agilent CrossLab Group with core growth of 9%; our Diagnostics and Genomics Group delivered 6% core growth, while our LSAG business declined 1%. There were two key market factors observed in the latter part of the quarter that contributed to the LSAG revenue shortfall; first, we experienced a slowing of internal orders in China; the second factor is tied to more general slowdown in orders from big pharma. I'd point out that this slowdown became apparent to us at the beginning of April. Let me explain this in little more detail. In China, our overall business grew 3%, driven by double-digit growth in ACG. However, our LSAG business declined by 1% during the quarter. There are two major factors impacting our China LSAG business. First, the recovery in the food market has not yet materialized. Government labs have not yet resumed purchasing at the levels we have previously seen. Second, the Chinese government's 4 + 7 initiative to lower generic drug prices is having a greater than expected impact on small molecule pharma. Consequently, we're lowering our revenue expectations in China this year. China does, however, remain an important long-term growth market for us. The other factor affecting LSAG growth is moderating global demand in small molecule pharma. We've seen several large accounts delay and replace in purchases. In contrast, the small molecule pharma would continue to see strong global bio-pharma demand. While overall growth declined 1% there are positive signs in other LSAG end markets, demand remained strong in environment forensics and biopharma markets with solid results in chemical and energy. You'll recall we strengthened our leadership in gas chromatography with the recent launch of the new 8860, 8890GCs. Since the launch, we were very pleased with the stronger than expected customer demand we've seen. We also have some other very exciting new products. In April, we introduced the new Agilent 6546 LC/MS Q-TOF system. This system is tailored to environmental, metabolomics research in food testing laboratories, providing ability to acquire high-resolution data across an unprecedented dynamic range. Customers can simply see more compounds and analyze them more correctly with this new offering. In addition during the quarter, we also introduced a unified purpose-built portfolio of SONOS products, targeting cancer immunotherapy with the addition of ACEA Biosciences. This offering enables research in this fast-growing segment. Our SONOS business continues to deliver double digit growth. While we're facing soft market demand in our LSAG business, we remain confident in the strength of our portfolio and believe we are well positioned to continue wining in the market. Now, I would like to share more detail about the other two businesses. The Agilent CrossLab Group continues to deliver excellent results, growing 9% on a core basis. Demand is broad-based across all regions. This reflects the market-leading value of our portfolio and differentiated customer experience. In China, the ACG business grew in the mid-teens. The team continues to execute our strategy of leveraging Agilent's large instrument installed base. We also continue to expand our services footprint in emerging cities, and tailor our consumer's portfolio to local markets. The Diagnostics and Genomics Group delivered a solid quarter with 6% core revenue growth. Regional demand is led by strength in the Americas. Our pathology related businesses grew high single-digits. Previously announced large competitive wins along with continued strong demand for our antibodies and our companion diagnostic services are driving our growth in that segment. Agilent also received expanded FDA approval for our PDL1 IHC companion diagnostic for metastic non-small cell lung cancer. This companion diagnostic would now be used to identify a broader range of patients who may qualify for first-line treatment with Keytruda. The NASD business continued delivering strong performance with mid-teens growth. We are on track to bring our second facility online. We anticipate the initial production of GMP grade APIs by the end of fiscal 2019. Material revenue contributions are expected in fiscal year 2020. Looking ahead to the second half of the year, we're confident that the momentum will continue in ACG and DGG businesses. For our LSAG business, our outlook for the second half is tempered by our view of continued soft market conditions. As a result, we have revised our outlook for the full year, reaffirming our prior EPS commitment while lowering revenue growth. Bob will describe this in more detail but first, just a few summary comments. We now expect to deliver core growth for the year between 4% and 5%. While we're facing market headwinds in our LSAG business, our full year earnings guidance remains intact. The Agilent team remains firmly committed to meeting our current guidance for earnings growth. Our guidance reflects confidence in the strength of the overall Agilent business model and our ability to drive solid earnings results. Thank you for being on the call today and look forward to answering your questions. I will now hand the call to Bob. Bob McMahon : Thank you, Mike and good afternoon everyone. In my remarks today, I will provide some additional detail on revenue, walk through the second quarter income statement and some other key financial metrics. And then I'll finish up with our updated guidance for Q3 and the full year. Unless otherwise noted, my remarks will focus on non-GAAP results. And percentage changes will be on a year-over-year basis. As Mike mentioned, we delivered solid Q2 earnings despite slower than anticipated top-line growth, underscoring the strength of Agilent's financial model and our ability to respond quickly to changing market conditions. Revenue for the quarter was $1.24 billion with core quarter revenue growth of 4%. Reported growth was 3% as currency negatively impacted growth by 320 basis points, slightly higher than expected. This was partially offset by M&A contributing 190 basis points of growth. As Mike spoke to the business group's performance for the quarter, I will provide some additional details around our end markets and regional performance. Pharma, our largest end market, delivered 2% core growth. We continue to see strength in biopharma and aftermarket services and consumables, and in our NASD business. However, the slowing of the instrument replacement cycle for small molecule applications led to a softer than expected result. Chemical and energy core growth was a strong 6%, above expectations and driven by strong low-teens growth in services and consumables. All regions grew led by strength in the Americas. Environmental and forensics was up 7%. Strength in forensics is linked to the ongoing global opioid crisis, which is driving demand for expanded forensic laboratory capabilities, more samples and broader screening requirements. The environmental market grew mid single-digits, and continues to be driven by an ongoing expansion of testing and oversight in China. Now wrapping up our end market discussion, core revenue for both diagnostics and clinical and academia and government, both grew 5%, while food declined 3% due to the softness in the China market. Geographically, we saw growth in all regions, led by the Americas with 6% growth as conditions in the U.S. continue to be healthy. Europe, with 4% growth, performed better than anticipated, driven by pharma outsourcing trends and continued strong biopharma investments. China grew 3%. And while we had strong mid-teens growth in the ACG business, softer instrument sales in the food market and small molecule pharma led to lower than expected overall results. Now before I leave revenue, the core growth of our combined LSAG and ACG businesses, while below our expectations, was 4% in the quarter. And we believe compares favorably to the overall analytical lab market growth. Now turning to the rest of the P&L. Q2 gross margin was 56% and increased 70 basis points compared to the prior year. We continue to achieve good gross margin improvements through our productivity initiatives, and driving continued economies of scale in our ACG services business. Operating margin was 21.9%, up 60 basis points, mainly due to discipline cost management as shifting market conditions became increasingly apparent in the latter part of the quarter. Additionally, the tax rate was down marginally and average diluted shares were $321 million. This led to non-GAAP earnings per share of $0.71 in the second quarter, an increase of 9% compared to the prior year and at the midpoint of our guidance. Now, before moving to Q3 guidance and full year guidance, I want to touch on a few additional financial metrics on cash flow and on the balance sheet. Our free cash flow for the quarter was $213 million. We deployed $102 million in the quarter, consisting of $52 million in dividends and $50 million in share purchases, representing roughly 635,000 shares. Lastly, we ended the quarter with $2.2 billion in cash and $1.8 billion in debt. And during the quarter, we also renewed our revolving credit line of $1 billion, which remains undrawn. With our strong balance sheet position, we will be more active in the second half of the year deploying capital. Specifically, we intend to deploy $500 million for share repurchases with the majority of that to come in the third quarter. This underscores not only our balance sheet strength, but also our confidence in the future. In addition, we still have plenty of capacity for M&A and we have an active business development funnel. Although, we will continue to remain disciplined in our approach. Now, let's turn to our non-GAAP financial guidance for the fiscal year. As Mike indicated, we're reducing our core revenue growth outlook for the year. While our expectations for ACG and DDG aren't changing, our forecasts for the second half is tempered by softening market condition in certain segments on the instrument side of the business. The developments in China, coupled with continued uncertainty on trade is creating a more challenging macro environment. As a result, we are updating our full year revenue guidance to a range of $5.085 billion to $5.125 billion representing 3.5% to 4.3% reported growth. Currency is expected to be a headwind of 210 basis points, partially offset by M&A. And as a result, we're now expecting core revenue growth in the range of roughly 4% to 5%. Now despite reducing revenue guidance, we feel confident in holding to our full year earnings per share guidance range of $3.03 to $3.07, representing growth excluding currency of roughly 10% to 11% and reported growth of 8.6 to 10%. As Mike mentioned, our EPS guidance reflects confidence in the strength of Agilent's business and our ability to drive earnings through multiple levers. These include disciplined expense management and the use of our balance sheet. Based on deploying the additional $500 million toward share repurchase, we are updating our average diluted share count down to $319 million for the year. Now finally, turning to the third quarter, we're expecting revenue in the range of $1.225 billion to $1.245 billion, representing reported growth of 1.8% to 3.5% and core growth of 2.7% to 4.1%. Currency is estimated to be a headwind of 210 basis points, partially offset by M&A contributing roughly 120 basis points to 250 basis points growth. Third quarter 2019 non-GAAP earnings are expected to be in the range of $0.71 to $0.73 a share, which is 6% to 9% reported growth versus a year ago. The share count for Q3 is expected to be $317 million. Let me conclude by saying we are pleased with the team's ability to preserve earnings performance despite shifting market conditions. We are confident in the strength of Agilent's business and our ability to navigate softness in certain markets. With that, before opening up for questions, I will turn it back to Mike for some closing comments. Mike McMullen : Thanks Bob. I just want to add a few closing words before we move into Q&A. Great companies do not just react to market conditions, they see market opportunity. At Agilent, we will continue to drive productivity and double down our efforts to be a more agile company. We have marginal levers to drive earnings, including disciplined expense management and use of our balance sheet. However, we are not going to expense to cut our way to grow. We will continue to bring innovative new products to market and aggressively compete for market share. Now, Ankur, back to you for the Q&A. Ankur Dhingra : Thank you, Mike. Liz, if you can please provide instructions for the Q&A. Operator : [Operator instructions] Our first question comes from the line of Dan Leonard with Deutsche Bank. Your line is now open. Dan Leonard : So first question, trying to make sure I understand the issues in small molecule pharma. Is that an LC comment specifically, or more broadly customers you're labeling as small molecule pharma? And can you comment on the trends between ethical pharma and in generics? Mike McMullen : So I will make a few comments and then, Jacob, feel free to jump on this. I think it's primarily LC related, and it’s a situation we're seeing actually globally. I called out specifically the government initiative in China. We also saw in our large pharma accounts in U.S. and Europe this delays in purchasing. In fact, I remember talking with our European field manager. We had an order that was supposed to close in January with big European pharma company it was pushed out, we thought it was going to close at the end of March and now this closed in May. And perhaps you can add your thoughts here as well, Jacob. Jacob Thaysen : No, you're absolutely, Mike, that that is primarily the LC business. However, many of those pharma companies also have investment into some other areas and when they now see some chances in the generics, they might put back also in other areas. So LC is a prime focus, but it certainly also expands into mass spec. Mike McMullen : And I think just to close this off. Dan, I think the comments for China were specific to generics. I think globally, we saw both in ethical and generic drugs in small molecule side. Dan Leonard : And then, Mike, my follow up. Can you elaborate just further on the actions you're taking to respond to the market softness? And I ask because the detrimental margins in LSAG were pretty high. So can you elaborate a bit on what you're doing to react? Thank you. Mike McMullen : So as Bob mentioned in his call notes, we're actually quite pleased by the action of the team to really rapidly adjust the cost structure in a phenomena developed probably over the last four to six weeks of the quarter. And the actions are just double downing on the agile Agilent programs that we had already in flight, but also really making sure that we looked at the expenses that weren't directly related to growth and really able to call to action to pull back on things that really don't drive growth, like internal travel, for example. So we pulled all the levers we could. But while maintaining intact our coverage model in the field, as well as our MPI programs. And Bob, I don't know if you have anything to add? Bob McMahon : I would just add, Dan. While the LSAG business did show a decline year-over-year, I would remind you to look at the total company, which actually did improve margins for year-over-year and for the 17%. So we operate this as a full company its part of the One Agilent approach. And so we're taking a number of initiatives. But as Mike said, we're also doubling down on areas, such as the new products in the areas where we think we can drive. We did see pockets of strength in LSAG and Jacob and team are really focusing on those areas; areas such as cell analysis and chemical and energy, and some of the other areas as well. So it's not just an expense, it is really ensuring that we're focused on the areas that we have the fastest opportunities for growth. Operator : Our next question comes from the line of Tycho Peterson with JP Morgan. Your line is open. Tycho Peterson : So I'm going to follow up on some of the pharma questions. When we did the CEO call back in early April, you did call out the China generic headwinds. We didn't really hear about the pharma delays at that point. So obviously, it seems like it came up later in the quarter. And you mentioned it was several accounts. So can you maybe just talk on how widespread it is? And is this a transitory issue in your mind, or how you're thinking about pharma for the remainder of the year? Mike McMullen : Thanks for the excellent question, Tycho. And I do recall our conversations. I think it was in early April. And I had just come back from China and we were first hearing about the four by seven initiatives in China. And to your question, I think that we saw it fairly broad based, this is outside of China. So I think China's got some specific things happening relative to the government actions around for 4 plus 7, which I think are fairly publicized, but we saw that both our U.S. and European customers. And we just had a major account review and all of our major accounts were down year-over-year. And there's just a level of caution relative to replacing investments in the small molecule side of businesses, The same companies, however, are investing quite heavily in the biopharma side. So it's a sort of a tale of two cities from the standpoint of what's really going well inside some of our larger accounts versus where there's been a pause. And Bob, I know you've looked at this quite closely as well. I don’t know if you have anything else to add to that? A - Bob McMahon : No, I think you're right, Mike. And Tycho, as we're thinking about the guidance going forward in the second half of the year, we are looking at probably a more moderated growth for pharma going forward. But still not at the rate at that we saw in Q2 but probably in the mid single digit where we were expecting probably high single digits globally. So I think we're taking a prudent approach there as we are thinking about the outlook for the year. I would say that we're continuing to, as Mike said, grow our biopharma business. But we still have the proportion, a large proportion of our pharma business being in the small molecule side. Tycho Peterson : And it was somewhat surprising -- go ahead… Mike McMullen : I would just add, Tycho, one thing we have seen though is on the small molecule side, there still is very high demand for chemistries and services. And I think you've seen that reflected in the strong ACG results. Tycho Peterson : And it was a little surprising to see food down, now that you've anniversaried it. Can you maybe just -- and I know it's not recovering, but is it getting worse? Mike McMullen : This has surprised us well. It's not getting any worse; it's just not getting any better. And we had anticipated coming on the anniversary that the central government will start reinvesting at the previous level and the spends just are not there. Now we're seeing in other parts of the end markets, so the spends and investments in environmental are quite strong. But they've not yet returned to the spending levels that we had seen prior in the food market. But again, I would say the same story here relative to the aftermarket flows. We are still seeing strong growth on the aftermarket flows in food; it's just the instrument purchases aren’t there. So it's not getting any worse but it's not getting better as we had thought. Tycho Peterson : And then one just last clarification on the cost side. Are you taking any additional tariff remediation efforts given round three, just curios? Bob McMahon : We continue to be focused on additional remediation to minimize that, the increase between the round three from the 10% up to the 25% is incorporated into our guidance. It was a -- I've talked about this before, it's roughly about $750,000 to $1 million in the second half of the year, net of the efforts that we're taking. Operator : Our next question comes from the line of Patrick Donnelly with Goldman Sachs. Your line is now open. Patrick Donnelly : Just some clarity around some of the slowing you saw beginning in April. In the last call you talked about January being slow. So maybe just talk us through the cadence of the quarter, particularly in China? Were February and March trending okay and then you've got the signs of four plus seven, and April really slowed, because again one of your peers who didn’t have April in their quarter had some real softness there, which obviously was in March. So maybe just talk us through month-by-month how things trended there? Mike McMullen : We really want to make sure it's clear to the investment community what we saw during the quarter. So what I'd say is if we've been having this discussion at the end of February we're feeling really good about the quarter. In fact, we got off to a very good start. And as we looked at our forecast for the remainder of the quarter, it looked pretty solid. But as we increasingly went through the month of March, we were expecting in the last seven to 10 days our normal push of orders to close this. And I'd say normal pushes across all the regions, because often we have lot of customers who have quarter end date. So typically, March is a pretty strong month for us. And when we closed the last week or so, the orders in March, it just wasn’t there. We just didn’t get normal month end surge. And then perhaps maybe some order didn’t get booked at the end of March, we didn’t see anything unusual in the beginning of the April. So I think it was that timeframe that we knew we're in the midst of something that we hadn't expected. I would say, again, I think it caught our teams by surprise. I had been in China at the latter part of March, and we just reviewed the forecast. And then we could see that they were caught unexpectedly by customer delays in China. We also saw the same thing in Europe and in the U.S. as well. Patrick Donnelly : Okay, that's really helpful color. And then maybe just… Mike McMullen : Patrick, if I could just add one more thing. What I would tell you is and just to reinforce the confidence we have in regards to the second half outlook. April did come in relative to our expectations on orders, our recast orders on the LSAG front, obviously, too late for revenue. But that gives us confidence that we have a handle on where the market is right now. Patrick Donnelly : So the orders trended a little better in late April? Mike McMullen : We came in relative to our forecast, yes. But again, we're still saying that it's going to be subdued the second half. I really wanted to -- it's not a situation where we see a continuing worsening of the end market environment, but we're also not seeing a dramatic improvement either. But we do believe we've gotten a level of predictability back in the business based on what we saw in April. Patrick Donnelly : And then maybe just one housekeeping item. Could you just help us frame how much of your business is small molecule? I know 30% is under that biopharma umbrella. But maybe just help us think about how much is specific to the… Mike McMullen : In fact, Bob and I were just talking about this right before the start of this call. And I think right now we characterize it as 80-20, which is about 80% is small molecule -- was about was about 85% two or three years ago. We think there will be a shift to more biopharma naturally in 2020, given just the continued strong growth we're having with today's portfolio. But back to my comments on NASD, once that additional revenue flows, you will see the benefits of our broader biopharma play that Agilent has. But right now, I'd characterize it at about 20% of our -- 20% or 30% is in biopharma. Operator : Our next question comes from the line of Ross Muken with Evercore ISI. Your line is now open. Ross Muken : I guess just going back to China. I mean how much did you debate what to do with the assumption there, even though April came in seems like, or at least overall for the book in line. Obviously, the last couple days have been quite a lot just in terms of some of the trade tensions and the uncertainty. It's possible some of the four plus seven pieces get worse just in terms of China's restrictions. I guess, how confident are you that you titrated this correctly, not just for what you saw in April but the current macro relative to the last week or so where obviously we had a pretty disappointing outcome on trade? Mike McMullen : Ross, great question, I almost feel like you may have been inside the hall here at the Agilent offices. So this was a big point of discussion with the team. And where we landed was our team had brought down their forecast in China relative to where we were before. And what we said is we're going to take a very conservative view. We're going to assume that the strain on the overall pharma market continues in China, as well as food there is no recovery. So basically, we're assuming that the softness that we had experienced already through much of to the back half of the quarter will continue in the second half. So I think we've tried to be prudent relative to taking a very conservative and bringing our forecast down. And as you know, we had a high single digit forecast for the full year for China, but I think we're probably at about 3% for the whole year. Again, I would remind the group too that lot of the call is focused on LSAG, which has really been the center of our weakness for the quarter on the top line. But one of the reasons why we have confidence in the overall growth forecast for China is that we have very predictable results coming through on the ACG side, which is mid-teens growth. And I think it's been fairly well-publicized that we're underpenetrated on DDG So we have expectations of good solid growth in both of those businesses. So it feels like tail of two cities, we expected the continued strength on the ACG and DDG side in China, while bringing down our expectations on the LSAG side. And Bob, I know we have lot of debate on this one. So maybe you have something else you'd like to add there. Bob McMahon : Ross, maybe to put some dimensions to that when we think about how we've taken our guidance down for the second half of the year, really about two thirds to 70% of that reduction is really reflective of China and the other third $10 million to $15 million is probably the broader pharma. So the majority of it is the lower expectation or tempered expectations in the China market. Ross Muken : And maybe ACG margins were pretty impressive. The pull-through there continues to be north of 50%. I guess what's driving the massive step up in that business this year? Because the expansion even relative to what you saw in the first quarter accelerated, and so trying to get a feel for the underlying. Mike McMullen : So Ross, I'm glad you noticed that, because we really were quite pleased with the overall margin performance in ACG. And I think I made the comment inside the company and said, listen we've proven that we can scale our service business and make good margins. What I would like to do is maybe turn the call over to Mark Doak to let him take a little bit of a bow here with the audience and maybe share, Mark, what specifically has been going on within your team? Mark Doak : Thanks Mike. And on the margins front, obviously, we have seen a nice expansion through the first half along that. I'd just add to a couple of things I think Mike and Bob has alluded to. First of all, on the agile Agilent programs, many of these are shared services across the company, which certainly help the broader gross margins for the business. But inside of the business, particularly services, there has been two major themes. One is we've used advanced analytics to really look at how we can improve various aspects of our operations and using the analytics pretty widely over the course of the last year to help drive that. And now the second component of that, I have talked many times about our drive to put our business online and use things like mobile apps that fundamentally facilitate faster and more complete work flows for team on the ground. So you can put all those pieces together, it's turned up to be actually a quite positive development but this is after a lot of years of investment to really build a platform across our services business that’s scalable. Operator : Our next question comes from the line of Doug Schenkel with Cowen. Your line is now open. Doug Schenkel : I’m going to have a couple more questions on pharma in a second, but I actually want to start on DDG. If pathology grew high single digits and NASD grew mid-teens, it would seem hard for DDG to only grow 5.3% core given those businesses account for about 60% of DGG sales, unless you have some weakness in genomics. How did genomics go in the quarter in the quarter? And how are competitive dynamics evolving in target enrichment? Or maybe I'm just stop off course here and if so maybe, you can point me in the right direction? Mike McMullen : I don't know the exact math at about 6% overall for the DGG. But I think the answer would be genomics business came in exactly as we had forecasted overall. Clearly, there's some competitive wins out there on the target enrichment side. But the main challenge that we've seen have been more on our legacy genomics. And Sam, anything you might want to comment on there? Sam Raha : Mike, you said it right. There are puts and takes in any business. I mean, overall we performed as we expected. We had some -- we're continuing to see some really good strength related to our QC part of the portfolio. And so really nothing more to add it's… Mike McMullen : And the reason why I mentioned, recall our non-NGS part of genomics -- on NGS side, which is inclusive of target enrichment, which was close to double digits. So it's been more of some of the older products… Sam Raha : Exactly, yes. Doug Schenkel : So on LSAG, it looks to us like LSAG would have to decline to get to the midpoint of fiscal Q3 guidance. We get to the high end with it actually flat year-over-year. And that's not changing our DGG or ACG assumptions, which we don't think we're being too aggressive there and basically being consistent with what you guys have been talking about all year. So are you assuming LASG core growth declines in the third quarter? And if so, how do we reconcile that with your comment on instrument orders improving in April? Does that tell us something about May order trends, or is this just conservatism coming off of a weaker than expected quarter? Bob McMahon : As we think about the various pieces, obviously, there's some variation there. But we're assuming roughly flat for LSAG in Q3. Hopefully, that proves to be conservative. But given that we saw this late in the quarter, I think we're taking a prudent approach for Q3. As Mike said, our April orders hit our revised forecast but that's also one month. So, hopefully, it proves to be conservative but I think it's the appropriate level of forecast right now. Mike McMullen : And I think, Bob, the way that Doug's thinking about the modeling of ACG and DGG, that's just how we've been thinking about as well. Bob McMahon : That’s right. We expect them -- they continue to perform as expected, and we would have continue to see the growth rates that they've experienced in the first half be similar in second half of the year. Doug Schenkel : And last one, the slowdown in small molecule demand is something you've been talking about for a while. And clearly things were and are worse than you expected. So I think all of that's clear. But I want to make sure on the large molecule side that growth met your expectations? Mike McMullen : So that's, like I said earlier, it's a tail of two cities. The biopharma continues to do quite well, both in the instrumentation side but also we've been investing very heavily on the chemistry side, inclusive of one of our recent acquisitions. ProZyme was really targeted in the in the biopharma side. And then also we have the NASD story as well. So the biopharma is right where we thought it would be. Bob McMahon : Doug, I would say the other thing is and that we're talking a lot about pharma and certainly it didn't meet our expectations. I would say the biggest variable in the quarter though was because we were expecting the anniversary of the reorganization and to have a much better performance and it was still down. Operator : Our next question comes from Derik de Bruin with Bank of America. Your line is now open. Derik de Bruin : So following up on the two question, just looking and this is -- obviously, your waters has issue as well. I mean, is it some business just go to Shimadzu, or some business go to Dionex or some of the other companies that are out there. I mean can you just talk about that’s it's not just business shifting around rather than things not coming back? Mike McMullen : In fact, I think it was almost a year ago in my Q2 '18 call that we first started talking about the organization of the whole foods, safety and structure in China. And we're really confident the business isn’t going anywhere else, it's just not there. And when I talk about the business, think about it along two dynamics; one, which is the business that’s been shifted to contract testing labs, which we're well positioned. What we're focusing on the central agencies where Agilent has historically had a strong position. They were just not investing right now beyond supporting their ongoing operations with the chemistries and services. So we're confident that the business isn’t going anywhere else, it's just not there. Derik de Bruin : And did you -- I mean, I think we're all surprised by the strength in the first fiscal quarter. I men, did you -- is some of the weakness just potentially as you saw the recent stockpiling you didn't see happening in Q1 that… Mike McMullen : No, in fact I think as I said earlier, we were sitting here at the end of February thinking that this quarter wasn’t developed just as it was. And what we didn’t anticipate was just how quickly the pharma business slowed down in China and then as well as the lack of recovery on the food side. And then there seem to be this whole small molecule side in U.S. and Europe. So really, it was a tail of the latter part of the quarter. We saw nothing unusual about our -- we can't point anything usual relative to our Q1 results. Derik de Bruin : And the U.S. and European pharma slowdown. Was this just capital not being -- I mean, I know there is always a little bit of slowness when we release the capital fund at the beginning of the year. Is it that? Or just people -- I mean, you mentioned some order delays. And I guess is because that the company is just nervous on their small molecule businesses? I mean, are they -- once again you've certainly been asked the question that they've asked to extending the life on their current instruments, or going along those lines just trying to figure out what's driving that? Bob McMahon : I think it's a little of both, Derek. I do think that there -- we haven't seen -- we obviously have a backlog, but we haven't seen orders being canceled, or people saying they are not purchasing. It's actually being delayed. And so the question for us was, is it transitory and we'll catch up, we are taking the approach that is probably not going to catch up and it's just going to continue to push. But I also do think that there is probably some element of trying to get more mileage, so to speak, out of your existing instrumentation, particularly as they are looking at capacity. Jacob Thaysen : Bob, I think it's very clear out there that we see that there's certainly a conservative procurement tactics happening right now, and people are stalling a little bit. But at the same time, we have to see that our fund is quite rich. So we still see a lot of business, but it goes much slower these days. So we actually do believe that it's a great opportunity out there, but we can't call it right now. Operator : Our next question comes from the line of Brandon Couillard with Jefferies. Your line is now open. Brandon Couillard : Mike, I'd like to step back a little bit, I've realized it's early. But could you speak to -- as we look at fiscal '20? Could you speak to the relevancy of the 4.5% to 6% mid-term range that you talked about at the June Analyst Day last year relative to the 4% to 4.5% you're going to put up this year? And what specifically needs to get better to achieve that? Mike McMullen : I think it's probably a little early to talk about 2020. But there's really isn’t anything developing that we can see that takes away from our long term view of still to grow this company. And we've got -- as I mentioned in my opening comments, we have two or three businesses, are performing very well. And we have some incremental stuff that’s going to be coming in those businesses in 2020. And then I think what we need to see is really focused on the soft points that we saw in the LSAG business, which is a return to positive growth, a higher level of growth in China, which I called out of my remarks and listen, the quarter obviously not developed as we had forecasted. But we believe that as things -- eventually things will get settled down, issues will get resolved and we'll get clarity on even in generics, which are currently under lot of pressure. When that industry gets through that knot and the survivors are going to be in a reinvestment mode and who need to drive productivity, we think there's going to be business there. So I think that part of the story for 2020 is it would turn to an improved China market environment takeover. Jacob, I think you'd like to jump in on this as well? Jacob Thaysen : Yes, I think overall we over the past few quarters, we have also delivered some very nice NPIs new products introduction here in the market, and we still have a very strong funnel. So as Mike is saying, when the market is coming back, we are absolutely in very strong position to take our share of the market. Mike McMullen : In addition too, as Bob noted in his call, the chemical energy business, which I had positioned earlier on is the wild card for Agilent. On the upside, we actually had really, really solid growth in Q2. And we're pretty optimistic about that for the rest of the year. Brandon Couillard : And then secondly would love to get an update on how some of the more recent acquired assets are performing relative to your deal models, like a CN and AATI. Looks like the M&A contribution expected for the year came down a bit. So would love to get an update on how some of those assets are performing? Thanks. Mike McMullen : Overall, I think that they continue to do -- is early but in fact we just had to review on this yesterday afternoon, I mean it delivered strong double digit growth ahead of expectations. So while that is not yet in revenue so it's tracking very nicely. AATI was still very pleased with the performance to-date. The growth rates are probably a little bit slower, tied to if you look at the number of new instrument placements that Alumina had in the first quarter. So to some extent that business growth rate is tied to the growth rate of the NovoCyte and some other parts of the portfolio in Alumina. We're expecting I think, Sam, in the back half is probably looking a little bit better for that as Alumina gets one of those instruments placed. Sam Raha : Yes, that’s absolutely right, Mike. And looking at overall NGS QC, we're still tracking with the market absolutely. Mike McMullen : And I think we also got a fair number tied to PacBio, so that gets resolved. But you're close to the numbers but overall, there's still double digit growth out of the companies we acquired. And I've pointed to the cell analysis business overall has been a double digit grower for us in the quarter. As being the double-digit growth for us in the quarter. Operator : Our next question comes from the line of Jack Meehan with Barclays. Your line is now open. Jack Meehan : I wanted to follow up and was hoping you could just elaborate a little bit more, contrasting some of the weakness on the capital side versus the strength you're seeing in ACG. I guess, just what’s embedded in the outlook for CrossLab through the end of the year? And just the level of comfort that some of the slower replacement cycle in the instrument side that the recurring piece can hold up as you look out over the next year? Mike McMullen : Yes, we're really confident about the outlook on the ECG business. And often we find that if you have a slowing capital replacement that actually is an upside to the services, in particular where they'll often be extending the life of equipment. So, Bob, I think we're pretty -- this is an area of high confidence for us. Bob McMahon : And Jack, we're expecting the continued performance into the second half of the year like we have in the first half. And quite honestly, the way we had in '18 as well, which is high single digit growth there, really behind both services as well as the consumables. We aren’t seeing testing volumes decline, whether that'd be in pharma or any of the other end markets that are actually quite strong. And so we feel pretty good about that. Our forecast remains unchanged there. Jack Meehan : And then just wanted to follow up on some of the comments related to the NASD business, obviously growth came in a little better again in the quarter than we're expecting. But just the pacing of when the new line is going to open up and just that fourth quarter step up you're expecting, just to confirm that. A - Mike McMullen : In fact, we decide a review very timely call. So, we’re expecting most likely the fourth quarter is where we start to see some initial revenue coming out of the new site. We're still in the final phases of validation. So we don’t want to say we're done yet, but we're getting close. And we have our first customer lined up to for those initial batches out of our Frederick site. And we're planning and opening in mid June, but that’s just a ceremonial opening. We won't be yet producing a product that we're forecasting inside the company in the fourth quarter of this year. And so that’s some initial revenue then with the largest step up coming in 2020. I'd also just complement Sam and his team, because we continue to find ways to get more revenue out of our existing voter site. So I would also tell you that our full year revenue projections on NASD are well intact. Bob McMahon : And Jack, just to maybe build-on that. I wouldn’t build any incremental revenue in Q4 for your model, because as we ramp up the facility, it's really going to be a material contribution in 2020. Operator : Our next question comes from the line of Puneet Souda with SBD Leerink. Your line is now open. Puneet Souda : So maybe my first question is just wanted to clarify on USP regulation. I know USP has been helping you in the past in terms of ICP-MS. Was there a step down in that application as well across the pharma channel worldwide or was it just weak in China? And what's your outlook in that business aligned with ICP-MS? I mean, I’m asking this because it's levered to small molecules and your customers are using it for analyzing the small molecule coatings. Mike McMullen : I'll make a few summary comments, and then I'll have Jacob jump in on this. But I believe we think that was actually been declining in the pharma space. But overall, we expect really good growth in our spectroscopy business as we look out with some of the other applications given the stronger PMIs in U.S. and demand for product and other end markets outside of the USP. But, Jacob, why don't -- you're closer to than I am? Jacob Thaysen : Yes, you're absolutely right that we still have very nice opportunity last year in USP, but now it's moved on both to water analysis but also the STM business. And generally speaking, we see that the ICP-MS growth, particularly in U.S. is very strong this year. So we actually see that data, plenty of opportunity with ICP-MS. Obviously, when new regulations come in place, then there is a certain opportunity but it looks like we jumped in for opportunity in that space. And I think it will continue to grow. Puneet Souda : And my second question is around -- I appreciate that you're getting challenging quarter in LSAG here. But just help us understand the -- I mean, you talked about the magnitude of benefit that you received in 8890 and 8860. I don't know if you quantified that in the quarter. And I'm asking that because in last call you’ve mentioned you started shipping that instrument, I think, in the second week of February. And just wanted to get a sense of how that instrument is contributing and what's your expectation for the rest of the year? Mike McMullen : Puneet, thanks so much for asking about this, because this is a real bright spot in the overall LSAG performance in Q2, and it speaks to our view of the future. We didn't quantified and probably won't quantify the exact contribution but we did start shipping. But I'd say right now we have more orders in backlog than we shipped. And I think we're 150%, 200% of our forecast. I mean it's pretty significant. Jacob Thaysen : It has been very significant. Obviously, it is also some customers decided to move from the 78 into the 88 faster than we anticipated. But at the same time, we're also seeing that that with the 8860 going for the mid range that that combination with the mass spec has actually been quite successful also. So overall, we see good momentum but we haven't quantified the incremental. Puneet Souda : And just last one if I could squeeze in around food again, just wanted to understand. Again, is that business largely all LC there, or how much is the comp -- I mean, how do you look at that business in terms of the types of customers that are actually there, and how do you expect this improvement? Thank you. Mike McMullen : So when we think about the food safety marketplace, in particular, which is where we've been focusing on comments relatively China. It really is primarily a mass spec place. You're talking about GC/MS, LC/MS, ICP-MS and some standalone LCs. And I think this is one of the reasons why we've done so well in this place historically is just the breadth of the portfolio we have across all those technology platforms. So it is broader than -- for Agilent, it's broader than LC. Operator : Our next question comes from Catherine Schulte with Baird. Your line is now open. Catherine Schulte : Just going to your guidance commentary, two thirds of the reductions from China. How much of that is four plus seven versus food? Bob McMahon : I would say of that, roughly two thirds of it is food and about a third of it is four plus seven. Mike McMullen : But I think we did some rough math on the overall generic pharma there's probably two-ish. Bob McMahon : Overall, when we think about China, the small molecule business in China is roughly 2% to 3% of the overall Agilent revenue just to frame in the size. Catherine Schulte : And then on the four plus seven program, what's the incremental risk if that moves beyond the initial 11 pilot cities? And how long do you think it takes the market to work through these changes? Bob McMahon : I actually think the way we're thinking about that, Catherine, is actually because while it's only in 11 cities, I think it's created a pause throughout the provinces to understand what the impact is. So it's actually got greater. We think we're seeing that impact now as opposed to further impact down the road. I think actually what you'll see it's once this determined, it will actually create clarity about what's going to happen throughout the course. And we think we've seen the impact broader than just those 11 cities. Mike McMullen : In fact, that was the taking behind the calculation we did. Catherine Schulte : And then just last one, we saw your SPMI drop below 53 in April, and your spends below 50 for a couple of months now. It sounds like you're pretty optimistic on chemical energy outlook. So maybe talk about what you're expecting in the back half for chemical energy and the puts and takes there? Bob McMahon : Our chemical and energy business in the back half is, we've talked about when we gave initial guidance at the beginning of the year low single-digit, and that’s what we're thinking about. We're positively surprised in Q2. For reference, Q1 was roughly 2% grew to 6% in Q2. We're assuming low single digits in the back half of the year consistent with our early guide. Mike McMullen : And I think just on the overall, European outlook is… Bob McMahon : And for Europe as well across the businesses we're thinking low single digits, again consistent with our estimates at the beginning of the year. We're positively surprised in Q2 but we're expecting it to be consistent with what our initial expectations were. Operator : Our next question comes from the line of Steve Willoughby with Cleveland Research. Your line is now open. Steve Willoughby : Two things for you, Mike. I guess, first, as it relates to the China food business. Have you thought it all -- is it possible that the softness continues for quite a while here even though we've started anniversary it as that volume moved to these more efficient commercial labs versus the previous government run lab? And then I just have one quick follow up. Mike McMullen : What's happened also the charter of what these organizations do has changed. So a lot of the volume activities has been to the contract special labs and these guys are all now developing methods and the new reg. So we think they are going to require ultimately the next generation technologies equivalent to stay on leading the edge of research and development of new applications. If that being said, we're not assuming any recovery in the second half of this year. So we've become much more cautious about the outlook for food in the second half. I think that’s fair… Bob McMahon : Yes, I mean, to be honest, we've assumed recovery and it's taken a little longer than we expected. So we're going to temper our growth until we're wrong to the upside. Steve Willoughby : And then, Bob just one quick follow up for you. And I know you're not going to provide any 2020 guidance. But just give us some perspective on the new Frederick NASD site. It sounds like minimal revenue here in fiscal '19. Where do we get in fiscal '20 as it relates to the $100 million revenue potential capacity? Bob McMahon : Steve, you're correct. We're not going to give a forward looking. What I would say though is we're generally on track with what we said back in June of last year in terms of the ramp up and so forth. So how that ramps across the quarters and across the year is still -- we haven't gone through our planning cycle. But what I will tell you is that we feel very good, we have a very robust funnel for products that are going into that site. We've already had some customers toward the site. Obviously, it's not operational yet, because we're still doing the validation, as Mike talked about. But it's moving along as we expected. Operator : Our next question comes from the line of Dan Brennan with UBS. Your line is now open. Dan Brennan : I wanted to ask a question maybe back to, Jacob. I was hoping you can provide a little bit more color about what you're hearing from customers on the pharma side in U.S. and Europe to account for the more restrictive budgets and if it's related to anything with global macro, maybe for Mike. Have you seen any such impact to other businesses as well? Mike McMullen : Actually, what don’t I start off, Dan. And thanks for the question. And then I'll pass it down to -- over to Jacob for specifics on pharma. We haven't seen that in the other segments of the marketplace. And there's a lot of noise out there, so uncertainty is never good. But we really can't point to anything specific. And I think if you look at our results, I mean, you saw two, three businesses continue to perform as expected and do quite well. And then we had some isolated but obviously impactful slowdowns in aspects of the LSAG business, albeit the chemical energy, academic government, environmental forensics, and biopharma, were continued sources of strength. So I think it's really been isolated to the factors you mentioned. And I know, Jacob, you've been trying to do a little bit more diligence around this. And we have some theories but I'm not sure we have 100% specific answer of what's driving the customers and delay the purchases on the small molecule side. Jacob Thaysen : No, clearly, we are seeing that conservative procurement tactics that they are they using. And obviously, we've been out doing our own digging to understand what is really going on there. And first of all, we don't see any change in competitive dynamics. This is not -- this is truly a market situation we're in right now. So this is where it's -- people are the procurement organizations and customers and they only are just more cautious in their decision on capital equipment expenditure right now. Mike McMullen : So I think just more speculation on our part, but we -- some of the things where, hey, there's still some question about where prices are in land in certain parts of the world in terms of unused prices, some questions about growth. And then again, as we mentioned earlier in the call, prioritization that when push comes to shove, privatization of biopharma over small molecule. Again, we just think it's a push out delay business has not been canceled. Dan Brennan : And then the related to a question, I know that was asked earlier, just want your clarification. So I think you gave us what pharma has baked in for Q3. Can you just let us know what assume pharma and food for Q3 and Q4 and just remind us, how big is your China food business? Bob McMahon : So on the on the guidance -- Dan, this is Bob. We're assuming, as I mentioned before, for pharma mid single digit growth for the full year, and that's consistent with where we are for Q3 as well on a global basis. So better than the 2% that we had in Q2. In food, we’re expecting for Q3 probably a slight decline as well. As I mentioned, hopefully that proves to be conservative but we're assuming that overall for the full-year, food will be flat to slightly down. Mike McMullen : And I think historically, Bob, it's run about 15% to 18% of our China business has been in food. Obviously, with the decline is probably close to that 15% number. Dan Brennan : And then if I can ask one more since that seems to be the trend here, just on the cap deployment, obviously, more towards the buyback in Q3. But how are you thinking about M&A? Obviously, you have a lot of balance sheet optionality. Just wondering what the pipeline looks at and how we think about over the next say six to 12 months? Thanks. Mike McMullen : In fact, the pipeline looks very robust. And as I signaled I believe in the last call, we're very active right now and don’t have anything announce, but we want to deploy the capital. We want to leverage the strength on the balance sheet. Bob is very explicit to how we're going to use one aspect of that relative to the buy back side, but we have plenty of firepower to execute on targets. And as you can see based on my earlier comments and some of the numbers we’re putting up with the companies we have acquired, we're increasingly confident in our ability to deliver on SOVs, if you will, for our shareholders when we deploy that capital. Bob McMahon : Sources of value… Operator : And that concludes today's question and answer session. I would like to turn the call back to Mr. Dhingra for closing remarks. Ankur Dhingra : So with that, we will close today's earnings call. Thanks a lot for joining. Operator : Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,019	3	2019Q3	2019Q3	2019-08-14	3.011	3.056	3.338	3.401	null	20.87	22.81	Operator : Good afternoon, and welcome to the Agilent Technologies third quarter earnings conference call. [Operator Instructions]. 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. Ankur Dhingra : 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 McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Bob's comments will be Jacob Thaysen, 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 31. 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. Michael McMullen : Thanks, Ankur, and thanks, everyone, for joining our call today. Our Q3 results exceeded our expectations. The Agilent team delivered total revenues of $1.27 billion, up 6% on a core basis. Our EPS of $0.76 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 BioTek, 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 CrossLab and Diagnostic and Genomics Group. Let's take a closer look at the performance of all 3 of our business groups. I will start with ACG, our Agilent CrossLab 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 and address important customer challenges and a significantly improved user experience, especially in high-growth markets like biopharma. I'm very pleased with the continuing positive impact on total company results from the Agilent's CrossLab 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 Diagnostics and Genomics Group 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 continued 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 2 facilities enable Agilent 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 energy declining against a very tough 12% compare and expected weakness in the China food market. As you know, in Q2, we discussed 3 areas that impacted LSAG's growth rates. Let me give you an update. First, starting with the 4+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+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 drive 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 BioTek. As I mentioned earlier, this quarter, we announced our intent to acquire BioTek, a global leader in the design, manufacture, and distribution of innovative cell analysis instrumentation. I'm very excited by the significant step forward in strengthening our leadership position in the fast-growing cell analysis space. Our strategic focuses there began with the purchase of Seahorse Bioscience in 2015 and was followed by the acquisitions of Luxcel Biosciences and ACEA Biosciences in 2018. By combining BioTek's offering with Agilent, we will create a business with revenues 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 in our One Agilent culture. The culture and portfolio fit with BioTek 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 BioTek 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 a 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 Ultivo LC Triple Quad core technology platform. We also launched a brand-new Agilent 6546 LC/Q-TOF system that provides analyst ability to simultaneously acquire high-resolute data across unprecedented dynamic range. In addition, during the quarter, we introduced a new Agilent 6495 C Triple Quad LC/MS system that provides industry-leading precision in complex major Cs. And finally, we introduced a new Agilent Bravo sample prep system for metabolic 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 a newly combined Agilent and ACEA teams. At the CYTO 2019 conference, we introduced the NovoCyte Advanteon flow cytometer. This new offering addresses today's high end and increasingly sophisticated multi-color flow cytometry assays. It provides unsurpassed sensitivity, resolution, detection speed, and the flexibility of resin channel. In addition, the number of indications from our PD-L1 diagnostic assay continue to expand. In Q3, we received FDA approval for 2 new indications. Our PD-L1 diagnostic may now be used as an aid in identifying patients for treatment with KEYTRUDA in a total of 6 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 Agilent 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 in 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, and 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. Thanks for being on the call, and I look forward to answering your questions. I'll now hand off the call to Bob. Bob? Robert McMahon : Thanks, Mike. And good afternoon, everyone. In my remarks today, I'll provide some additional detail in revenue, walk through the third quarter income statement and some other key financial metrics, and to discuss our capital deployment during the quarter. I'll then finish up with our updated guidance for Q4 and full year. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike said, our third quarter results were very good as we had strong execution across a number of fronts. Revenue for the quarter was $1.27 billion, with core revenue growth of 6.2%. Reported growth was 5.8%, with currency negatively impacting revenue by 1.9 points and acquisitions adding 1.5 points to growth. In terms of end markets, pharma, diagnostics and clinical, and environmental and forensics, led the way for us in the third quarter. Pharma, our largest market, grew 13%. Strength was broad-based across instruments, services and consumables as well as NASD, our biopharma business continues to grow at double-digit rates, and we saw good growth in the small molecule business as well, both in instruments and recurring revenues. Our Environmental and forensics business grew 15% on a core basis in the third quarter, albeit on an easier compare. As with the second quarter, our forensic strength is tied to demand for expanded lab capabilities. This is a result of the ongoing global opioid crisis, which is driving increased sample testing and broader screening requirements. Our environmental business grew high single digits. Again, driven by the ongoing expansion of testing in China. Diagnostics and clinical, core revenue grew 7% during the quarter, driven by strength of our pathology and genomics businesses. Chemical and energy revenue grew 1% against a very tough compare of 12% growth from Q3 of last year. Results were driven by continued strength in services and consumables. Academia and government declined 5%, largely due to order timing and rounding out the discussion of end markets, food revenue declined 3%, driven by China coming in as we expected, and as Mike discussed. On a geographic basis, we again saw growth in all regions, led by the U.S., growing at double-digit rates, with strength across all 3 businesses. China grew 1%, generally in line with our expectations, primarily due to the weakness in food. If you exclude food, growth in China was 6%; Asia, outside of China, also grew at a double-digit rate, driven by growth in Japan and South Korea. Europe grew 3%, in line with our expectations as the market environment remains subdued. Now turning to the rest of the P&L. Third quarter gross margin was 56.4%, essentially flat year-over-year, with tariffs impacting gross margin adversely by 30 basis points. We've been able to mitigate the impact to tariffs through discipline and cost management, and the ongoing focus on efficiency. Our operating margin was 22.8%, up 90 basis points as revenue growth outpaced growth in operating expenses. Year-to-date, our margins continue to expand as our teams have executed strong expense discipline. And as a result, non-GAAP EPS for the quarter came in at $0.76, $0.03 higher than the top end of our guidance and representing 13% growth. In addition to our operating performance, we were very active in deploying capital during the quarter. In Q3, we returned $600 million to shareholders. We bought back shares worth $549 million, totaling 8 million shares, and paid $51 million in dividends. As Mike mentioned, we also signed a definitive agreement to acquire BioTek Instruments and expect the deal to close by the end of our current fiscal fourth quarter. So year-to-date, including BioTek, we've committed to deploying over $2.2 billion in capital this year. Of that, $1.4 billion was spent in growth acquisitions with ACEA and BioTek, expanding our cell analysis franchise. We have also returned over $800 million through dividends and share buybacks. Our balance sheet today remains healthy and we continue to look for opportunities to add growth assets to our portfolio. Now turning to the cash flow. We generated $242 million in operating cash flow and ended the quarter in an effectively cash neutral position. Now let's turn to our non-GAAP financial guidance for the year -- fiscal year. As Mike mentioned, with the strong results in Q3 and our outlook for the fourth quarter, we are raising our full year revenue and EPS guidance. Please note that our guidance does not include any impact from the expected BioTek acquisition. For the full year revenue guidance, we're increasing the lower end of our range. Thereby, increasing the midpoint, resulting in a new range of $5.105 billion to $5.125 billion, representing 3.9% to 4.3% reported growth. Currency is expected to be a headwind of roughly 200 basis points, partially offset by M&A contributing 150 basis points. As a result, we're now expecting core revenue growth in the range of 4.4% to 4.8% for the full year. With the strong execution we've seen in terms of our business strategies, we're raising our full year earnings per share guidance to a range of $3.07 to $3.09. This represents growth of 10% to 10.8% for the year. And now turning to the fourth quarter. We're expecting revenue in the range of $1.31 billion to $1.33 billion, representing reported growth of 1.2% to 2.8% and core growth of 1.5% to 3%. Currency is estimated to be a headwind of roughly 100 basis points partially offset by M&A contributing roughly 70 to 80 basis points of growth. Fourth quarter non-GAAP earnings are expected to be in the range of $0.84 to $0.86 per share, which is 3.7% to 6.2% reported growth versus a year ago. Also of note, the newly announced tariffs on the additional $300 billion of U.S. imports from China is not expected to be material for us. And the share count for Q4 is expected to be 313 million shares. Now before opening up the call for questions, I'd like to conclude by saying that Agilent's resilient business model is built for the long term. We believe we are focused on the right strategies that will continue to serve us well and ensure solid shareholder value long into the future. And with that, Ankur, back to you for the Q&A. Ankur Dhingra : Thank you, Bob. Mike, if you can please provide instructions for Q&A. Operator : [Operator Instructions]. Your first question comes from Derik De Bruin from Bank of America Merrill Lynch. Derik De Bruin : Mike and team, can you talk a little bit more, obviously, the China number, the 4+7 tailwind -- hit, seemed to be a little less in the quarter. Can you talk a little bit more? You mentioned spending. And I guess, it's like how are you sort of thinking about spending patterns now that the second wave kicks in. Just a little bit more color in what you're seeing there. And then, as a correlated question, there's obviously a lot of changes going on in the drug manufacturing space right now with some consolidation going on. Obviously, some M&A into the ones that's like -- how are you sort of thinking about some of the changes going on in terms of the bigger generic players, some of the consolidation in the space? And I guess, how are you positioned in those markets? Robert McMahon : Yes. Sure. Let me -- I'll take the first one, and Jacob, he can pass the second one to you. So, first of all, as we talked in the last call, we had seen a pause in our second quarter as it related to the rollout of the 4+7 initiative. But at the time, we said, listen, we've actually did a good thing, a long term and eventually will lead to increased divestments once we start to sort out who the winners are. So -- and that actually is how the quarter developed for us where we actually saw the winners starting to invest. And we think that level investment relative to Wave 1 will continue through our fiscal year. As it relates to the core of your question, which is how about Round 2? Our view is that they're going through a process of doing the bidding and sorting out the winners over the latter part of this year, and the impact on the business is more an FY '20 kind of impact in terms of what we're going to see in China. But again, I'd just point to -- we think these are good long-term developments for our business here because of the strength of our relationships and their real emphasis on productivity and compliance. And Jacob, your thoughts around the -- questions about the industry consolidations and generics? Jacob Thaysen : Yes. I think that's a really relevant question. And clearly, with some of the winners coming out now in China, I think we will see some consolidation. I think Agilent will be in a very good position in this space, both in China and in general as we have very strong relationship with many of the larger end winners in the generic space. So, when this happens, which is part of the normal pharma cycle, we are ready to support them and make them successful. Robert McMahon : And Derik, I just meant to put a period of this one, which is whether the generic consolidations are happening in China or in other parts of the world, we think overall, the productivity message and real value we can deliver to this segment of market really, really resonates with them. Operator : Your next question comes from Ross Muken from Evercore ISI. Ross Muken : I guess maybe just digging in a bit on DGG, Rob. I think the performance there was kind of notably strong, and so you called out a couple things, including an NASD [ph], which seems like it's starting to ramp, but also a bit on opioids, and then on the sort of array side. But academic was weak. Just give us a little bit of a picture kind of the magnitude, maybe, of some of the outperformance in some of these pieces. And then, sort of how to think about that cadence maybe in the context of sort of the fourth quarter guide. Robert McMahon : Sure, Ross. I'll make some initial comments here, then Sam, you can jump in and correct me if I'm off target here. But one of the messages that we were trying to convey in our earnings call, which is while the NASD growth was very strong in the quarter, that wasn't the only bright spot in DGG. It really was across the board whether it be in our pathology business, and we think we're putting up numbers that are growing faster than the market whether it be because of the increased acceptance for automation platform with the Omnis, the continued utilization and expansion of the PD-L1 assay on the genomics side. We saw good growth in our NGS related business, Sam. I think that was probably double-digit for us for the quarter... Samraat Raha : It was. Robert McMahon : And then lead for the NASD strength, which we think is here to stay. Looking into the fourth quarter, we're kind of thinking something like high-single digits, I think, for this business. And Sam, anything else you want to add there? Because the only message I want to get across was broad-based strength. Samraat Raha : Now I think, Mike, you really outlined where the business is. And pathology, it's a business that's built over time, right? It's not just about a single quarter, but it is the combination of the assays that we have, the increasing number of indications, PD-L1 related that we announced 2 of them, approval from the FDA, but it's also the ongoing growth in our installed base, be it of Omnis, be it of other platforms. And our Companion Diagnostic business, which a lot of it feeds into that, is also -- it's performing in a really healthy way. The genomics business, also, as you said, it performed well, but that's broad-based around the world. So, we're pleased to see that both in terms of genomics-related instruments like the platforms that we have for TapeStation, Bioanalyzer, the AATI product category. So, we feel good about the performance in the coming quarter or two. Robert McMahon : Thanks, Sam. Ross Muken : And then, maybe, just on the C&E side, I mean, obviously, you called out a tough comp, but a lot of macro volatility in the last few weeks, a lot of things happening on the trade side. I guess, how are you trying to interpret sort of all the key leads in that subsegment as you've had some good underlying product cycle. But obviously, there's some instability just broadly. And so, how do you feel like, aside from sort of competing well in whatever market there is about sort of what that actual end market environment is going to look like for the next quarter or 2? Michael McMullen : Yes. Great question, Ross. It's something we've spent a lot of time here inside the company talking about. And kind of entering into this year, we had some concerns about the chemical energy market just in terms of -- there's macro noise even coming into our physical year. So I think we got it, like kind of low singles coming into the year. But as you may recall, in our first guide, after we raised the guidance, hey, this could be a source of upside. Well, clearly, that is not happening. So we're still assuming kind of low single digits, but probably negative growth in instruments because even though the product cycles are really strong, I think we're well positioned to win when money's there. But we're still going to assume for the -- at least the rest of this fiscal year that there will be growth in chemical energy. But overall, that will be driven by the strength of our ACG business, and we expect the demand to be pretty, pretty muted, if you will, in the C&E. And Bob, maybe you can take a quick look at this -- deep look at this, and maybe have some quick comments. Robert McMahon : Yes. I think that's right, Mike. And Ross, thanks for the question. If you look at our Q4, I think we're trying to be prudent in our forecast certainly with continued strength in our ACG and DGG businesses. But yes, LSAG or the capital business is continuing to have slow growth and capital in the C&E areas, one of those markets that we're looking at. And certainly with PMIs, the way that they are and as you say, the uncertainty in the market certainly isn't helping. And so we think we've tried to take that into account for our fourth quarter. The new products that Mike mentioned didn't have a material impact on the quarter. But the ones that we've launched, the gas chromatographs and so forth, continued to have very positive uptake. But it's -- the market is slower, kind of as -- and it's kind of playing out the way we expected at the very beginning of the year. Michael McMullen : I guess if there's one silver lining in terms of -- which is the, again, back to this productivity message and the fact that we now have a fleet of really great new products and there's a real productivity benefit to the customer, they're in a stronger position to go to their management and get support for their investment because it does really help their P&L. Operator : Your next question comes from Tycho Peterson from JPMorgan. Tycho Peterson : Mike, can you talk a little bit about the global pharma picture? You said it delays last quarter. Now you're saying kind of budget's freed up. So how much of the 13% growth you saw was just kind of catch up from last quarter? And how you're feeling about sustainability of that going forward? Michael McMullen : So I'll let Bob do a little math on the catch-up. But let me make some macro comments while you're doing your mental math. But as we pointed out in Q2, we said, hey, in Q2, biopharma really is quite strong. By the way, it was strong and even stronger this quarter. But we said, hey, we saw a pause in the small molecule side outside of China and we talked a lot already about the 4+7 but it really was kind of curious or something, what was going on with our large accounts in U.S. and Europe. And I think they were just being prudent in their budgeting process, and we saw a release of funds in the -- in our third quarter. And we're expecting that to continue. So we don't see that as being a one-quarter phenomena, albeit that that's why we try to use the words in some end markets we're expecting some pretty challenging market conditions. So pharma, actually, we think is continuing to be a source of growth on the LSAG instrument side, while we expect some markets to actually be down year-over-year. And Bob, I don't know how we can parse out the catch-up? Robert McMahon : Yes. I think, Tycho, the way I would talk about it is, as I mentioned, the pharma business grew 13% in the quarter. And if you look at small molecule, it was mid-single digits. So there was probably some catch-up, but I wouldn't say it was material that, that mid single-digits is kind of where it has been historically over the last several quarters. So I think it -- what we have said and kind of the hypothesis has been that's primarily a replacement cycle. They can hold off for a number of quarters but they can't do that forever if they want to keep their manufacturing processes in place. And so we think we are in that. It wasn't a snapback. So there wasn't more in Q3 than what we saw. But I think it was now they're getting further in the fiscal year and they're actually spending that money. Michael McMullen : Yes. Sort of back to historical run rates, wouldn't you agree, Jacob? Or... Jacob Thaysen : Yes. I think that's correct. But we do see that the larger accounts are still very conservative in the procurement, while some smaller pharma actually is investing these days. So that's where we actually see some of the growth coming from also. And we are taking good share there. Michael McMullen : Yes. Thanks for the build there because in my narrative, I talked about the business coming not only from existing customers, but new customers. And we've been very aggressive in that regards as well. Tycho Peterson : And can you provide a little more color on the academic order signing that drove the decline in academic? Michael McMullen : Bob, I'm not sure we have much more insight. And that business tends to be lumpy for us, right? And... Robert McMahon : Yes. As you know, it's a relatively -- it's the smallest piece of our business and it goes up and down. And so we're not going to call out any one particular order or orders across the business. But we feel good about our position there going forward. And we're expecting that to return to growth in the fourth quarter. I will also say, back on the pharma business, when we look at our ability, I think one of the things that speaks well to our value proposition with our customers is when you look year-over-year, our pricing actually has held up pretty well. Our pricing is roughly -- it's slightly above on the LSAG business. So I think that speaks to the value that we are able to bring from a productivity standpoint to customers. Michael McMullen : Hey, Bob, back on academia and government, maybe just to share a discussion we were having inside the company, which was we're not a little bit concerned about this because we still see the funding environment. It's actually being quite strong and stable. So it's just a timing issue. So we don't see anything happening materially different in the marketplace. Robert McMahon : That's right. Tycho Peterson : Okay. If I could ask one last clarification before hopping off. On China, 4+7, do you expect the impact to be the same magnitude next year as it is this year, given that it's different rules for Round 2? I wasn't sure from your comments earlier if you... Michael McMullen : So Tycho, I'm going to resist the temptation to do an FY '20 guide. But I would say, directionally, it's going to be an increase. Operator : You next question comes from Brandon Couillard from Jefferies. Brandon Couillard : Mike, just starting with the China food business. Can you just sort of give us an update on where you stand as far as building out some of your commercial teams to go after that private lab channel in China? Sort of your general visibility now today relative to maybe where you were three months ago. Michael McMullen : Yes. Happy to do so. So we're fully built out. So we've been working this probably well over 1-year, 15 months. Because I think the first time I started talking about this was Q2 '18 call. So from a channel reach, channel perspective, we're there both in terms of our direct reach, but also through some of our digital enablement of customers. So we feel really good about our channel reach and relationships with the commercial accounts. And we're seeing it in the numbers. So we're seeing really -- it's really a tale of two cities. And Jacob, I'll have you jumping on this one as well in a second, because I know you've been digging into this, but sort of tale of two cities. We're getting good growth on the commercial. There's just no real new investment happening on the government lab side of things. So... Jacob Thaysen : Yes. That's true, Mike. And we do see double-digit growth on the contract labs these days, but coming from a smaller base. And while -- so we have our very large market share in the government account. So clearly, when the catch up is happening, I actually believe we will see a very strong growth in this business again. Michael McMullen : Yes. If there's any silver lining, it would be as Q3 was as we expected. So we weren't surprised by the number, albeit down. Robert McMahon : Yes. And as we're thinking about Q4, we're expecting Q4 to be -- kind of play out the way Q2 and Q3 did in terms of roughly flat at that $40-ish million revenue run rate. Michael McMullen : Right. Which, looking at our -- I think we clocked a 16% growth overall in China Q4 last year. So I would say up against a tough compare. Brandon Couillard : And then, maybe one more for Mark Doak. The gross margins in the CrossLab business are pretty substantially year-over-year. I think the new high at 52%. Sort of speak to the drivers of that gross margin improvement and sort of what you see is the midterm runway, midterm opportunity for gross margins. Mark Doak : Sure. I'll be glad to. And if you pull us back, it's several things contributing to it. Over time, mix has been a play in terms of our consumables business being from a margin perspective, north of the company average. But also, a lot of work we're doing is relative to some of the Agile Agilent programs, but specifically looking at delivery efficiencies and our services team. We've been able to add a lot more revenue without a lot of proportional cost to that. And that comes to really what we're seeing increasing as a big factor in our margin expansion is scale. And we're in that position now where we can invest. Mike had talked about some of our digital capabilities, both in the channel, but also in the back office areas. And it starts to fuel these efficiencies. We can reinvest some of those profits to build even more strength in the area. So it's really eating off itself as you will. And when you pull it all together, between portfolio mix, continued move towards scale, and driving efficiencies through these digital capabilities. So those probably the big drivers behind it. Operator : Your next question comes from Puneet Souda from SVB Leerink. Puneet Souda : So first one on the cell analysis market. I mean with your recent acquisition of BioTek, and obviously, you've added Seahorse and ACEA before, do you think you have enough pieces here to sort of ultimately serve this growing and expected to be even further growing cell therapy developed in the market? And -- or do see more room for further capital deployment here? And I should say that this did increase your biologics exposure in some ways and it's likely to increase that. So just wanted to get a sense of what you have currently, and should we expect more here? Michael McMullen : Yes. So let me start this off, and then, Jacob, feel free to chime in as well. So we think now at $250 million, we have a business with scale. And I think that's really important to say. We think we really compete. And really, we are really bullish on this space. And I think our investments dreams started several years ago. So whilst we are still in the process of digesting what we've just recently acquired, and then we have to bring the Agilent -- into the Agilent family, the new BioTek team. So we think we have a lot of really good scale once we close with the BioTek acquisition. But that being said, I think we have further aspirations to continue to build-out in that space as well. Jacob Thaysen : Yes. And building on that, I think, first of all, we clearly have scale today. But what is very important here is that the strategy we started out some years ago, 4 years ago now, was not just to build scale in the cell analysis business, but build differentiated components that could build together into workflows that would really do differentiate -- really provide differentiating information for our customers. So not only have flow -- up against flow and some plate with [indiscernible] against paid, we will combine them together with a particularly important immuno-oncology space, and especially here in the CAR-T space. We've seen that already happening. So before actually the acquisition of BioTek, we used the Seahorse and the BioTek and collaborated between the two companies to provide a workflow that combine those two technologies together in the same software and the same micro type of plate, and we saw that, that actually grew the market opportunity significantly. So now combining the Seahorse, ACEA, the BioTek and Luxcel together, I think we have a really, really strong differentiated position, but it also allows us to add more workflows into that space going forward. But our main priority right now is to integrate and be successful with BioTek. Michael McMullen : And Puneet, I'd just say, that with revenue synergies often theoretical, when you do an acquisition, we've actually have real proof points already with customers and markets that we can do this, and there's real value to customers. Puneet Souda : Okay. Great. And if I could touch on the NASD business. Just wanted to get a sense of if you could quantify how much was that and sort of in the quarter. And the current run rate that you have in sort of what -- what's your expectation longer term here? Has that changed from the sort of the earlier expectation in the comments that you gave around customers demanding the RNAi product and the overall long-term view of the business? Michael McMullen : Yes. Much like avoiding the temptation of talking about FY '20 guide, I'll also avoid the temptation to talk about specific details on a product line level. But what I can do is give you a directional number. So I think we've been talking about this business hitting probably $100 million or so this year. And then, as we look into FY '20, we've added at least that much in terms of capacity. So we hope to be up to a larger number in the -- by the end of next year at the sort of a run rate level, at a higher number. We're not ready to kind of commit to what the number actually is, but it's going to be a pretty -- a nice step up for us. And Bob, I know you've been doing some modeling in this area as well already. Robert McMahon : Yes. I think Puneet, I mean, nothing has changed. We had a very good quarter. We're expecting another very good quarter next year -- or next quarter, excuse me, largely in the back of our existing capacity. And the team has just done a fantastic job. As Mike said, we're on pace to delivering that $100 million consistent with what we said, really, since the beginning of the year. And we're excited about the new facility coming online. And as Mike mentioned, it's bringing on manufacturing capacity right now and look forward to '20 and beyond serving our customers Michael McMullen : And by the way, don't interpret my comments as being any less bullish in this space. We just know that as we bring on the new facility, you have to time when you actually can start the batches up, but a lot of that is being driven by customers timing when they're doing the clinical trials. So we're much more specific when we do our FY '20 guide because we'll have a much better handle on the timing when these new customers will be coming into our new facility. I can tell you we've sold a good percentage of that capacity already. Samraat Raha : Mike, maybe if I could just add one thing... Michael McMullen : Of course, Sam, it's your baby. Samraat Raha : One thing that we've already stated is the basis of this as the number of clinical trials and work being done here. We see the supplier opportunity for us going from $0.5 billion market to over $750 million over the next several years. So we're going to grow with that. And it is a fact, too, that we are doubling our overall capacity for manufacturing. But I just want to reemphasize what both Mike and Bob said that there is a ramp up process over a number of years. So just because we're doubling our capacity, doesn't mean we're going to be double our revenue there. Just to be explicit about that again. But we'll be very... Michael McMullen : So it's not in year one. Samraat Raha : Exactly, in year one. Operator : Your next question comes from Catherine Schulte from Baird. Catherine Schulte : First, I was just wondering, can you go into a bit more detail on your strong results in environmental and forensics? I think this is the fourth quarter in a row of high single-digit or double-digit growth there. So I'd just be curious to hear more details on the drivers in that end market. Michael McMullen : I think I'm actually going to pass this to Jacob, who's here. Jacob Thaysen : Yes. And again, it speaks to the portfolio we build up here over the past years on really robust reliable instrumentation that allow us to really go into -- of course, opioid is a big crisis here in U.S. So we have actually quite a large growth in that area. We also seen soil and water. Here in U.S, which have actually driven a lot of business. And the same token, China has actually continued to have strong growth in both those areas, specifically the environmental, which is heavily regulated. So we are doing very well in regulated spaces, and this has driven also the momentum and forensic this quarter. Michael McMullen : Yes. And I think it's fair to say with specific I know there's -- go ahead, Mark. Mark Doak : I was just going to say, if I could add to that too, in concert with Jacob, we've been working a lot on the environmental side in terms of the end market workflows and complementary consumables and services to go along with it. So that's clearly another driver of this end market for us. Catherine Schulte : Okay. And then, we heard one of your peers talk about starting to see a bias against U.S. companies in some China tenders. Are you seeing signs of that dynamic as well? Michael McMullen : Catherine, thanks for asking that question. Not at all. So that's always been the risk of the heightened tensions between U.S. and China as it relates to trade. We have not at all seen that in our business. Operator : Your next question comes from Doug Schenkel from Cowen. Doug Schenkel : I only have one question, but it has three or four parts. So I know -- I don't want to disappoint. So I know you're up against a tough comp in Q4, and I'm guessing there's some desire to be a bit more conservative in the current environment. That said, given the strength of really, ACG and DGG in Q3 and really the past few quarters, we would have expected Q4 revenue growth guidance to be a bit higher. So one, were there any timing dynamics that benefited Q3 at the expense of Q4? Two, did you see any end market conditions weaken over the course of Q3? And if so, are you baking in an assumption into guidance that this continues in the fourth quarter? Three, are you assuming that LSAG growth is lower in Q4 versus the flat performance in Q3? Because it seems like you'd have to unless you're expecting ACG and/or DGG to moderate. And four, kind of building up on the last one, I'm just wondering if NASD is not expected to be as strong in Q4 as Q3, maybe just because things have to pause a little bit as you bring new capacity on. Michael McMullen : Yes. So Doug, we've been waiting for these questions. So thanks for putting it out there. And I'll start off, and then have Bob share some of our guide velocity. So I really want to be really clear on this. We saw nothing unusual relative to pulling in from the fourth quarter. So our book-to-bill is solid. And so there's nothing unusual we have in terms of changing the seasonality business by pulling in from Q4 into Q3. When we look at our LSAG business, we actually expected a decline in Q4 off that tough compare. I think you're off 9% last year. And now there's two other parts. I only got two of the four parts. Robert McMahon : Yes. I wrote some of them down. So Doug, I'll try to tag team with Mike. As Mike said, we didn't see any pull forward or any dynamic that took orders out of Q4 into Q3. And as you said, our backlog actually did not deteriorate. But that being said, you're seeing it. We saw it today, right, in the market. There's a tremendous amount of uncertainty. The trade resolution is nowhere -- it's no closer now than it was when we had our call back in Q2. And so we're de-risking Q4 a little bit relative to where we were. It is a tough comp. And there is a little more uncertainty in the marketplace today than it was even 3 months ago, and we're trying to be prudent there. That being said, we raised the full year on the top line and certainly on the bottom line, and feel good about that. To your question about NASD, we are expecting that growth to moderate. It had a very strong Q4 of last year. But when you look at the run rate, we still feel very good about the run rate. So it's less about level loading and manufacturing and it's more about just comparables there. And we are expecting continued performance in both ACG and DGG, not necessarily at the double-digit rate. That would be good, but that's not built into our guide. And as Mike said, we are expecting a flattish to slightly down in LSAG just given the strong 9% compare that we had in Q4 of last year. Operator : Your next question comes from Patrick Donnelly from Goldman Sachs. Patrick Donnelly : Maybe one on ACG for you, Mike, and I'm sure Mark can chime in. It was right in there with the best growth you guys have ever put up in that segment, even while facing a high single-digit comp. So how are you guys continuing to drive that segment to these levels of growth? I mean, it's been years since you had that initial refocus. How are we still seeing follow through? What's really driving the reacceleration demand? Michael McMullen : Yes. So I'll take the congratulations on behalf of Mark, but then pass it on to Mark. But you're exactly right. I can remember the early days. We were getting questions about when was this going to stop? And we said why would it stop? Because there's a number of things doing and there's also an expanding market underway. And as Mark pointed out, the strength was broad based across consumer services. I mean, we really think we're playing into -- and I tried to highlight this into my script, that really playing into some real changing customer needs. They really want something that's going to help drive their productivity and they are also looking for at times vendors to take on some of the work they've been doing inside. And then, on the consumables front, they really want these integrated workflows. But I can't do the strategy justice. So Mark, why don't you fill in the pieces that I've missed. Mark Doak : Thanks, Mike. And Patrick, I guess, maybe it's a little bit of the past, but also the future, and we're still very bullish about our potential to grow. But some of the drivers made really significant investments in the expansion of our portfolios. And from services, we've got breadth to now in more of our value-added services. And the enterprise capabilities that will not only have a rollout over the continuation this year and in the consumables business, it's an intentional drive to drive for more complete workflows for targeted end markets. And we called out biopharma in particular, a high-growth market, where we've really been focused around grabbing that. So portfolio is a big driver. We're really getting some great results from expanding our reach and our ability to wallet share growth inside of our current accounts to reach and lease subscriptions, still a lot of opportunity there. We still have a significant opportunity to improve our attachment rates to the Agilent instruments. But I always like to come back and remind everyone, we view our market not only as the Agilent installed base, but also the competitions. And that adds a significant size and scale to the market opportunity. And not only we can take market share from our competitions on a multi-vendor perspective, we are. So to kind to sum it up. A lot of work that's been done over the past, build a lot of capabilities from the standpoint of portfolio, digital, working on some fundamental basics around what we can do in the attachment rate from the sales channel and our big market opportunity out there. So hope that gives you a sense of where we've been, a little bit of where we're going too. Patrick Donnelly : Yes. That's helpful color. And then maybe just a quick one for Bob, on the share repurchase front. It was encouraging to see you guys step in and be opportunistic with the $550 million this quarter. How should we think about it going forward. Obviously, the market has pulled back a decent amount, your stock along with it. So maybe just provide some perspective on that front. Robert McMahon : Yes. Thanks, Patrick, and appreciate you acknowledging that. And we'll continue to evaluate the market. Obviously, our focus is first on growth, and we'll be closing the BioTek acquisition this quarter. And our M&A funnel continues to be strong, and we will be looking at that, but not afraid to go into the market if the price is right, so to speak. So I think the way that we are looking at that is first on M&A, and then looking to continue to deploy capital, where as I mentioned before, cash neutral right now with the acquisition of the BioTek, we'll probably be at net debt of roughly onetime. And so we still have plenty of capacity there. Operator : Your next question comes from Steve Willoughby from Cleveland Research. Stephen Willoughby : Most of my questions have been asked. Just 2 things, for you, I guess. First, Mike, I was just wondering if you could comment a little bit more and provide any more color on some of the new products you recently launched and how they're being accepted into the market, particularly the new GCs as well as the new iQ system. And then, I guess, secondly, for Bob or Mike if you want to take it, are you able to quantify how much you're expecting in terms of revenue in the fourth quarter from the new NASD facility you're starting up here? Michael McMullen : Yes. So if you don't mind, I'll make some summary comments, then Jacob, you can just fill in some of the details. But last number, that's our view on our new GC family launch was actually ahead of where we thought we'd be. And I think we're doing well on the iQ as well. But -- and maybe you can kind of fill in some details there. Jacob Thaysen : Yes. Certainly, I think we are -- despite some challenging market conditions, we're actually doing extremely well with the 88 series and in front of our -- on our own ramped volume. So I think that is working very well, and it's really the combination of what we call the smart instrument combined with our already proven -- well proven technology, GC technology. And that really resonates with our customers. The same can actually be said with our iQ, which of course, a little -- only was introduced a few weeks ago out at the ASMS and we start to ship here very soon. We have received the first orders. But what I can say there is that it has been very well received where we have been out introducing it and presenting it to customers. I think they very much like the ease-of-use intuitiveness of the detector itself. And also, all the self awareness that it have. So it really helps the customer to be successful, not only successful, but also allow them to be -- you have much more uptime in a laboratory. And this really addresses the QA QC labs, where it's all about being uptime and of course, get things with the laboratory. So it's been really well-received, but it's still early days for the iQ. So we have received orders, but we are shipping in this quarter here. Michael McMullen : And Bob, you want to take the NASD question? Robert McMahon : Steve, just on NASD, it's going to be, as we've said earlier in the year, it's not going to be material to the overall numbers. So it's going to be low single millions. Operator : And we have time for one more question. The last question comes from Dan Brennan from UBS. Daniel Brennan : Congrats on the quarter guys. I was hoping to ask a question back to China. Can you just provide some color on, like, what the actual generic business did in the quarter, like what the level of revenues was year-over-year? And then, while I appreciate, I think, to Tycho's question you don't want to give a specific number for 2020. But just given, I think, the investors in ourselves who are just trying to get some frame of reference, like directionally. Is there any help you can provide? Just as we go to 2020, I know you made a comment to Tycho, but just a little more help, if you could, directionally, on the food and the China generic side, how to think about that? Michael McMullen : Yes. So happy to, let me take the second part of that question first, which is when you think about the outlook for '20 again, well you know I'm going to stay way from percentage changes in growth rates. But I think we have a lot more confidence around where the generic side of that marketplace is going because we only have some proof points. We've already seen, which is -- the thesis was in the second quarter, hey, we think this is going to lead to, ultimately, more business. But there was a pause in business. We actually saw that play out in the third quarter. And we think it will play out in the fourth quarter, where the winners are going to be buying the equipment. We think the same thing is going to happen in Q2 -- I mean, excuse me, FY '20. It will be more an FY '20 event in terms of what impacts the P&L because we know what the process, we know what's going to happen. We know the winners who we have deep relationships with are going to invest. So I think we have a level of confidence about where that market is going. I don't think the same thing can be said about the food market because that's why I used the word foreseeable future. What we do now is the commercial side of that segment will continue to grow. That will continue to grow. It's unclear right now what's going to be happening relative to China's desire to invest in the government labs. As you heard from Jacob earlier, right now, they're prioritizing, for example, investments in environmental, and that's why we're seeing strong environmental growth. And Bob, maybe it's worth just kind of parsing out. I was just thinking how our business is in -- I can't give a specific number relative to generics. But just in terms of size of our pharma business in China, and then roughly how much of it is in the non-biopharma side. Robert McMahon : Yes. So our -- maybe just to comment on the food, Dan, on the -- on Q4, as I said earlier, we're expecting it to be roughly that $40 million, which will be down year-on-year, pretty consistent with how we -- our results in Q2 and Q3. And the question is, over time, we do think that, that business will come back, not at the levels that had been in the past, just given the different dynamics. But the question is when and we're not ready to call that yet. On the pharma side, the business actually did better in Q3 than it did in Q2. And of roughly China is roughly 20% of the overall business and pharma is about 30% of that -- 20%. So it's about 6% overall. And it's roughly 50-50 in terms of consumables and instruments. So it's roughly 2% to 3% of our overall company. And in Q3, it grew. As Mike mentioned, really on the back of the winners of the 4+7 and just kind of clarity on what this pilot meant going forward. So that's probably as much detail as we're going to get into relative to this. And we'll have another quarter under our belt for Q4 and then be better prepared to talk about it as things unfold for the fiscal year next, in November. Daniel Brennan : Great. And if I could, since it is the last question. Just one more. Mike, obviously, a very strong quarter. You mentioned kind of similar to what you've been talking about. Obviously, we could see what's going on, with continued uncertainty out in the marketplace, especially for, I think, for cap equipment. And Bob, you talked about PMIs, but you also talked about good book-to-bills and you had a good quarter. So any way to help us think about, like, as we try to tease out all the noise that's out there in the marketplace, kind of what it means for Agilent on a go-forward basis, like PMIs, do we want that? Do we pay a lot to influence that? Or just any more color about the customer conversations you're having, and kind of how it relates back to these comments. Michael McMullen : Sure. Yes. Happy to do so. So first thing I would do is I would set aside 60% of the business of Agilent, which is in the recurring revenue side of the business. And we talked a lot about the DGG business, the ACG business, and our view that we're going to have continued strength there. And then, what we've been trying to do is position the business. Hey, listen, there is this 40% of the business, which is instruments. And that does -- it's predicted by PMI. I think you may recall you and I have our conversation, but I think still some of the models still hold, which is the PMI trends do drive, to some extent, what's going to happen ultimately in the capital goods side. I think we've already seen it. PMI started dropping earlier this year. Albeit there are some areas of Jacob's business, which are still somewhat independent of that whether it will be the 4+7 initiatives, some policy changes, some of the things that happen in environmental, forensics. So I think its sort of a -- it's a mixed model. So -- the first thing I'd do is start off by just saying, let's set aside 60% of the business over here, and then start talking about the 40%, and then parse out the cell analysis piece, which is by itself is a high growing business driven by certain dynamics there. And then parse out some of the policy driven stuff, then you're left with, primarily, chemical energy exposure. Bob how would you think about that? Robert McMahon : No. Maybe I'd just leave it here. I mean, I think we feel very good about our portfolio. Obviously, we can't time the markets from the standpoint of market growth. But we think that we're able to gain share in any market, and I think this quarter proves that. Our portfolio is strong. We continued to invest in areas that are faster growing than the overall company, things like cell analysis and then also our biopharma businesses across all three business groups. So I think Mike mentioned it in the prepared remarks that the business is a lot different than it was five years ago. And I think we continue to invest in fast-growing areas, continuing to transform it and make it a much more resilient model. And I think we feel good about that certainly for not only Q4, but going forward. Ankur Dhingra : All right. Thank you. With that, we will conclude today's earnings call. Thank you, everyone, for joining. Operator : This concludes today's conference call. You may now disconnect.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,019	4	2019Q4	2019Q4	2019-11-26	3.102	3.162	3.452	3.483	4.86	22.45	23.95	Operator : Good afternoon, and welcome to the Agilent Technologies Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session. [Operator Instructions] 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. Ankur Dhingra : Thank you, Mike, and welcome, everyone, to Agilent’s fourth quarter and full-year conference call for fiscal year 2019. With me are Mike McMullen, Agilent’s President and CEO; and Bob McMahon, Agilent’s Senior Vice President and CFO. Joining in the Q&A after Bob’s comments will be Jacob Thaysen, 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 the 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 October 31. 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. Mike McMullen : Thanks, Ankur, and thanks, everyone, for joining us on our call today. When I became CEO, I knew we had the opportunity to become a growth company. We would do this by investing in fast-growing markets with a building and buying approach. We also set out to create a more resilient company business model, capable of delivering strong earnings in a variety of market conditions. To accomplish this, we developed a roader base of growth and a more flexible and efficient cost structure. As you know, transforming a decades-old company is not an easy task, but I believed in the strength and determination of the Agilent team. The fourth quarter and full-year results I will share today are a testament to the commitment of the Agilent team and their ability to step up to meet this challenge. We strongly closed our fiscal 2019, with fourth quarter results exceeding our expectations. Agilent’s Q4 revenue of $1.37 billion is up 4% on a core basis against a 9% compare. And we have momentum going into 2020 as orders outpaced revenue. EPS of $0.89 is up 10% for the quarter. Both our top line revenue and EPS are above the high-end of our fourth quarter guidance. Operating margin of 25.1% is up 50 basis points over last year. Q4 marks the 19th consecutive quarter of adjusted operating margin expansion delivered by the Agilent team. Our higher than expected top line is led by 10% core growth from our Agilent CrossLab Group. Business is also strong for our Diagnostics and Genomics Group, delivering 7% core growth. Our Life Sciences and Applied Markets revenues are in line with expectations, down 2% against a 9% growth compare. The pharma, diagnostics and clinical, and the environmental and forensics markets continue to lead our growth. High single-digit U.S. growth is stronger than forecasted with other regions coming in as expected. Growth in China declined low single digits as expected. Agilent’s growth strategy of building and buying in fast-growing markets is on full display in Q4. During the quarter, we closed the acquisition of BioTek. This is our largest acquisition since the launch of the new Agilent in 2015. BioTek brings a superb team and an excellent high-growth, highly profitable business to Agilent. The acquisition of BioTek complements our earlier acquisition this year of ACEA BioSciences. Both acquisitions are part of our growing cell analysis business serving biopharma and academic research customers. Agilent’s cell analysis business is now generating more than $250 million in annual revenue, about 5% of company revenues, and is growing at a double-digit rate. We are also continuing to invest internally to drive new organic growth. In Q4, we recognized the first revenue from our new oligo API manufacturing site in Frederick, Colorado. The high-quality, GMP grade oligos produced at this site are key to a new class of drugs being developed by our biopharma customers. Investing in this facility is part of our overall strategy to build a larger biopharma business. We are expecting continued strong growth in this business as we ramp volume throughout the coming year. Finally, in October, I traveled to the UK to open a new state-of-the-art facility at the Harwell Science and Innovation Campus. The site will be a major R&D hub for laser spectroscopy and will also incorporate Agilent’s Raman spectroscopy business. Our recent acquisitions and these capital investments in Colorado and the UK are very visible examples of our continued and relentless focus on investing for growth. Hey, let’s now shift gears and look at our full-year fiscal 2019 results. We had a very solid year, generating $5.2 billion in revenue, representing 5% core growth. Strength in the pharma, clinical and diagnostics, and environmental and forensics markets led the way. Regionally, the U.S. set the pace, growing in the high single digits. The U.S. was followed by mid single-digit growth in Asia outside of China. Europe and China grew at low single digits for the year. Full-year earnings per share grew 11% to $3.11. The result is another year of double-digit earnings per share growth. The full-year operating margin of 23.3% is up 80 basis points over 2018, despite a full-year of tariff related duties. Our investments in ACG continue to yield dividends. ACG grew a stellar 10% for the year. We are helping customers transform their analytical lab operations by anticipating and meeting their evolving needs. DGG is also delivering very strong results, with 9% core growth for the year. We’re capturing market share in our pathology business, expanding our presence in next-gen sequencing and further building our oligo API business. During the year, DGG crossed the billion-dollar revenue threshold and now represents approximately 20% of Agilent’s business. LSAG revenues declined 1% on a core basis as we faced some market headwinds. We remain committed to investing for future LSAG growth and market share gains. Our new product development pipeline remains full. During the year, we introduced a number of innovative new products, including the launch of a new family of groundbreaking gas chromatographs and molecular spectroscopy instruments. At this year’s ASMS Conference, we introduced several new differentiated LC/MS offerings, including the 6546 LC-QTOF and 6495C LC triple-quad systems. As we head in 2020, our LSAG product portfolio and go-to-customer field team have never been stronger. Agilent continues to operate from a position of strength. We are well-positioned to capture market share. Before I turn the call over to Bob, I want to remind you of the Agilent shareholder value creation model : deliver above market growth, while expanding operating margins, along with a balanced deployment of capital with a priority on investing for growth. The result, delivery of superior earnings per share growth. In driving value creation, we’ve built a broader base of growth and a more resilient business model. We were tested this year with economic and political uncertainties leading to subdued demand for new instrument purchases. Yet, we delivered 5% core growth, operating margins improved 80 basis points and delivered another year of double-digit EPS growth. We deployed more than $1.5 billion in M&A and growth-focused capital investments. On the M&A front, we’re very pleased with the performance to date of BioTek and ACEA BioSciences. We remain on the hunt for similar types of growth opportunities. I’m increasingly confident in the Agilent team’s ability to pursue larger-scale acquisitions and deliver on value creation synergies. We continue to review potential acquisitions as part of our building and buying growth strategy. Now more than ever, I’m convinced we’re in an exceptionally strong position for the future. This is particularly relevant as we move into 2020, a milestone for us at Agilent as we celebrate 20 years as an independent company. While uncertainties persist in some end-markets as we start fiscal year 2020, we’re operating from a position of strength. We have built and will sustain our track record of delivering results, working as a One Agilent on behalf of our customers and shareholders. I’m very proud of the results the Agilent team delivered in the fourth quarter and throughout the year. I know you’ve heard me say this before, but I truly believe the best is yet to come for Agilent, our customers and our investors. Thank you for being on the call today and I look forward to your questions. I will now hand the call off to Bob. I mean, that was a Freudian [ph] slip. I’ll now hand the call off to Bob. We don’t have a new CEO – CFO. Bob, you want to take it from here? Robert McMahon : Thanks, Mike, and good afternoon, everyone. In my remarks today, I’ll provide some additional revenue detail and take you through the fourth quarter income statement and some other key financial metrics. I’ll then finish up with our guidance for 2020 and the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike indicated, our fourth quarter results were very good with strong execution throughout the P&L. For the quarter, revenue was $1.37 billion, reflecting core revenue growth of 4%. Reported growth was stronger at 6%. Currency negatively impacted revenue by roughly 2 points, while acquisitions added 4 points to overall revenue, reflecting the impact of a partial quarter of revenue from the BioTek acquisition in addition to earlier acquisitions. From an end market perspective, pharma, our largest market, had 7% core growth in the quarter, especially impressive off of a tough 14% comparison from last year. Our large molecule biopharma business and CrossLab strength continue to drive strong results. Geographically, all regions grew with the strongest growth in Americas and China. In speaking of China, despite the debate regarding the pharma market and the 4+7 program, our pharma business in China grew double digits for the year. Continuing revenue in the environmental and forensics market grew 9% in the quarter. This is against a very tough compare of 17% growth last year. Growth was balanced between LSAG and ACG and continues to be driven by evolving regulations, especially concerning opioids. Diagnostics and clinical revenue grew 7% during Q4, led by strength in our pathology and companion diagnostics businesses. Within pathology, continued expansion of our PD-L1 business was a key highlight. Revenue from the chemical and energy end market came in as expected, with 1% growth. Decline in instruments were offset by strength in the CrossLab’s business. Academia and government declined 4% against the tough compare of 10% growth last year. We still see the funding environments in academia and government remaining stable though. And finally, consistent with expectations, food revenue declines about 5% due to the China food market. Despite the year-over-year declines, we were encouraged that for the third quarter in a row, the run rate in China continues to be stable. On a geographic basis, the Americas came in stronger than expected with 9% growth during the quarter, led by strong results in the pharma, diagnostics and environmental markets. Europe modestly exceeded our expectations, delivering a 4% growth rate with balance strength across most markets and groups. China came in as expected, declining in the low single digits against a very strong compare of 16% growth last year. Excluding food, China was up slightly. In wrapping up, Asia ex-China declined low single digits. Now turning to the rest of the P&L, fourth quarter gross margin was 56.5%. This was down 120 basis points year-over-year, primarily driven by product mix in LSAG, the start-up costs at our Frederick, Colorado site and a higher revenue mix from ACG. It’s reporting to remember that, while ACG’s gross margin is lower than the company average due to the services component, the ACG business has done a fantastic job of driving strong operating margin leverage. In fact, ACG’s operating margin led the company for the quarter and the year. So ACG is not only helping drive our recurring revenues, it’s doing so at a very accretive pace. In terms of operating margin, our fourth quarter margin was 25.1%, up 50 basis points, driven by operating expense leverage and strong expense management. The quarter also capped off full-year operating margin of 23.3%, an increase of 80 basis points over the prior year. Now wrapping up the income statement, our non-GAAP EPS for the quarter came in at $0.89, up 10% versus last year and $0.03 higher than the top-end of our guidance. And as Mike mentioned, our full-year earnings per share of $3.11 increased 11% versus last year. Now turning to some other financial metrics. For the quarter, we generated $314 million in operating cash flow. We acquired BioTek for $1.165 billion and returned $100 million to shareholders via dividends and share repurchases. Lastly in the quarter, we took advantage of market conditions and refinanced $500 million of senior notes early, producing our future interest costs. All in all, a very active quarter. Now before moving to next year’s guidance, I want to recap how we have deployed capital this year. As we mentioned at the beginning of the year, we plan to focus our capital deployment towards growth-oriented assets and driving returns to our shareholders. To that end, we’ve deployed over $2.3 billion this year : $1.4 billion in M&A for BioTek and ACEA and more than $900 million in share repurchases and dividends. And we ended the year with a very healthy balance sheet, allowing plenty of capacity for further capital deployment. Now let’s turn to our non-GAAP financial guidance for the 2020 fiscal year, beginning with the full-year guidance. For the full-year, we’re expecting revenue to range from $5.50 billion to $5.55 billion, representing core growth of 4% to 5% and reported growth of 6.5% to 7.5%. Currency is estimated to negatively impact growth by 0.3 percentage points with M&A contributing roughly 2.7 to 2.9 percentage points of growth for the full-year. From a group perspective, we expect ACG to sustain the momentum and deliver high single-digit growth, driven by broad-based strength. The DGG business is expected to grow at a high single-digit to low double-digit rate with our NASD Frederick facility ramping throughout the year, and we anticipate a modest recovery for LSAG roughly flat on a core basis. Now moving down the P&L, we expect modest operating leverage. And also embedded in our forecast is we expect the other income and expense line to be roughly $40 million to $45 million in net expense, with year-over-year change driven largely by the interest expense as we enter the year in a net debt position. We expect our tax rate to improve by 50 basis points to slightly above 16% and our full-year diluted shares outstanding to be approximately $312 million, essentially flat to Q4 of this year and reflecting only anti-dilutive share repurchases throughout the year. All this translates to non-GAAP EPS expected to be between $3.38 and $3.43 per share, resulting in 9% to 10% growth on a reported basis. Finally, we expect operating cash flow of approximately $775 million to $800 million. This includes a one-time tax outflow of roughly $230 million in the first quarter to transfer certain intangibles related to prior acquisitions. This tax will reduce our U.S. transition tax dollar-for-dollar and will provide us with operational and tax benefits in the future. We’ve also announced raising our dividend by 10%, continuing a streak of double-digit increases and providing another source of value to our shareholders. Now turning into Q1 guidance. For Q1, we’re expecting revenue to range from $1.34 billion to $1.355 billion, representing reported growth of 4.3% to 5.5% and core growth of 2.5% to 3.5%. The lower organic growth in Q1 reflects the impact of the timing of the Lunar New Year, which this year falls into our fiscal first quarter. We anticipate this adversely affecting the growth rate in the first quarter by roughly 1 point. In addition, the growth rate takes into account the Frederick site ramp that will occur over the year. First Quarter 2020 non-GAAP earnings are expected to be in the range of $0.80 to $0.81 per share, representing reported growth of 5% to 7%. EPS growth in Q1 is lower than the full-year based on the revenue growth, the Frederick start-up costs and certain share-based compensation costs that are expensed in the first quarter. Now before opening the call for questions, let me conclude by saying we are very pleased with the results our Agilent team was able to achieve this past year, while continuing to take focus on taking full advantage of the opportunities in front of us. We are positioning our business towards stronger secular growth markets and driving higher recurring revenue streams. We clearly saw the results of this in 2019 and we entered 2020 with a strong portfolio and with momentum. With that, Ankur, back to you for the Q&A. Ankur Dhingra : Thank you, Bob. Mike, if you can please provide instructions for the Q&A. Operator : [Operator Instructions] Your first question comes from the line of Doug Schenkel from Cowen. Doug Schenkel : Hey, good afternoon, guys…. Mike McMullen : Hey, Doug. Doug Schenkel : …and thank you for taking my questions. So maybe first with just a cleanup question. Did fiscal 2019 NASD revenue come in around $100 million as expected? And can you give us more detail on what you’re assuming for NASD revenue in 2020? I know you said you expect it to ramp over the course of the year. But if you actually gave a number, I might have missed that. Mike McMullen : So I’ll pass that to Bob. Doug Schenkel : Okay Mike McMullen : Bob? Doug Schenkel : Yes. Robert McMahon : Thanks, Doug. Yes, it came in generally in line a little better than that and we’re expecting very significant growth in FY 2020. Doug Schenkel : Okay. So recognizing it, we don’t have a specific number, but just talking about it qualitatively and maybe taking everything up a level. You set the low-end of 2020 core revenue growth guidance at 4%. And this would be the – I think, the lowest core growth rate since at least 2011. And whatever that tailwind is from NASD, it makes the setting guidance at those levels even more notable. Based on what you guys just did in the quarter and the way you sound, that – it seems like you’re really just setting the bar at a level that embed some pretty conservative assumptions on the low-end. So I guess, specifically, would you guys be willing to talk about what conditions would need to exist for this scenario to become reality? Things like – at 4%, what are you assuming for China food? What are you assuming for 4+7 in terms of the downside risk there? And is there something you’re factoring in that would suggest there’s a scenario where things actually get worse in terms of overall global capital equipment demand? Mike McMullen : Yes. Thanks, Doug. Let me start and then Bob will jump in on this. So I think we don’t want to overthink this one. So this is our initial guide for the year. And you’re right, it would represent, if, in fact, that was an actual growth number – our loss growth rate in a number of years. But it’s just an initial guide, as you heard earlier, you heard a lot of words as expected with upside. So, we’re going to position our initial guide with the room for upside on the plan for the year. And… Robert McMahon : Yes, I would say, Doug, to build on what Mike was saying. I think we were taking a kind of a prudent approach to guidance. Obviously, if we were at that level, we’d be disappointed and something would happen in the macro economic environment that we’re not expecting. We’re not seeing anything right now that would suggest that the market conditions are getting any worse. This – that would suggest that market conditions probably would get worse and LSAG would not come back and it would continue to decline. But we’re, again, we’re at the beginning of the year there. Our – I think, we’re prudent here, but we like to believe that there’s a lot of opportunities for growth going forward. Doug Schenkel : Okay, that’s super helpful. Thanks for taking my questions. Mike McMullen : Thank you, Doug. Operator : Your next question comes from the line of Tycho Peterson from JPMorgan. Tycho Peterson : Hey, thanks. Question on the small molecule business. I’m… Mike McMullen : Hi, good afternoon. Tycho Peterson : …hey, good afternoon. I’m wondering if you could talk on small molecule performance in the quarter. I know earlier in the year, you talked about a slowing global pharma business. Just curious how you’re thinking about the replacement cycle and was any of the instruments slowdown on the pharma side? Mike McMullen : In fact, Tycho, I think you’re – hey, Tycho, happy to jump in on this one and feel free Jacob to add your comments as well. But in Q2, we called out what seemed to be a slowing replacement cycle – replacement level in the generic side or small molecule side of the Pharma segment. We really haven’t seen any evidence of that in the third and fourth quarter. And as Bob mentioned in the script, we had double-digit growth in pharma, 4+7 initiative, which is heavily focused on small molecule is not impacting our business. We put a really solid numbers. And I think we’re seeing the growth in small molecule fairly healthy, along with higher levels in the biopharma side. But really the pressure on the instrument side really on a growth rate perspective has really come in the food segment, primarily in China as well as the global chemical energy market. And, Jacob, I don’t know if you have anything else you’d like to add there? Jacob Thaysen : Mike, I think you have covered a lot of it. The only thing to add there is that, we, as you mentioned, but – that we do see the growth in the QA/QC environment, maybe less in the discovery from small molecules. But we continue to expect that volume will be there and continue to increase in the small molecules going forward also. Tycho Peterson : Okay. And then, Mike, for your commentary on C&E, for instruments, are you assuming any recovery next year on the instrument side? Mike McMullen : No. That’s basically flat, kind of basically flat conditions. So – and back to the question, Doug, you asked earlier, if we would see some improvement in the chemical energy that would really represent upside to our our initial guide. So we’re assuming kind of continued conditions. They’ve been challenged this year. So we’re assuming they continue into FY 2020, no change there. But if it would change the positive that would be upside to our current plan. Tycho Peterson : Gotcha. Mike McMullen : And I think the resilience of our model really showed in this past quarter and the full-year, which is, while chemical industry is down on the instrument side, we actually had some modest growth there when – with the aftermarket side of our business. Tycho Peterson : Okay. And then one quick one for Bob, just to close on the M&A comments. Can you just remind us your framework? Are you still assuming $1 billion-ish type deal would be the ceiling where we’re obviously getting the question a lot as other analysts? Mike McMullen : No, no, let me take that one. If it wasn’t clear in the script, I actually explicitly said that we’re increasingly confident on our ability to take on larger-scale acquisitions and deliver on value creation and synergies. I would not put a ceiling like that on our appetite for deals. Tycho Peterson : Are you able to talk about ceiling on leverage, or where you would go? Mike McMullen : Yes. Go ahead, Bob. Robert McMahon : Yes. Yes, we are still committed to being investment grade. Obviously, being ending the year at roughly a little less than one-time net debt levered. That gives us a lot of opportunity to – if the right deal were there to kind of lever up with the commitment to kind of paying back down. Now, again, we’re going to be remained financially disciplined and focused on returns, but we do have a fair amount of room there. Tycho Peterson : Okay. Thank you. Mike McMullen : You’re welcome. Operator : Your next question comes from the line of Brandon Couillard from Jefferies. Brandon Couillard : Okay, thanks. Good afternoon. Mike McMullen : Good afternoon, Brandon. Brandon Couillard : Mike or Bob, could you give us any color in terms of what you’ve penciled in for China for fiscal 2020? And to sort of speak to your level of visibility in the food business and perhaps some early traction that you might be getting with some of those private labs? Robert McMahon : Yes. Yes, I’ll start and then Mike, or perhaps, Jake, if you wanted to add anything. We are expecting a modest recovery in China next year. We ended this year at roughly 1%, a large part of that being the headwinds that we’re seeing in food. We’re expecting that China to become kind of low single digits to mid high, or mid single digits, depending on kind of that food recovery. We have some – the good news is, over the last three quarters, we’ve been roughly averaging this $40 million per quarter that we talked about. So we’re on this trajectory of – in China being $160 million kind of run rate. And our expectation is that, we’ll continue to – we’re not going to speculate growth there, but be at that level next year, which will help the rest of the business grow. So we will – because we won’t have that headwind. Mike McMullen : Yes, I think it’s really important that we define what do we mean by recovery, which mainly means continue at the flat level it’s been running for the last three quarters, about $40 million a quarter. And just to put a number on this, I believe, Bob, about 4 points of our growth in China this year was impacted by the food market. Robert McMahon : That’s correct. Mike McMullen : So we fast forward, you could do the math and said, okay, it would just stays flat with what we’ve seen for the last three quarters. You’d expect that we would grow above what we’ve grown this year in China. And then to your question about the contract testing side, Jacob, I think it’s high single-digit growth there. So… Jacob Thaysen : Yes. Mike McMullen : …really, we’re doing quite well there. Jacob Thaysen : Yes. We – I was actually recently here in China. And clearly, the private labs are doing quite well. We see strong growth now from a different base than where we are on the government labs. But even with the government labs and certain types are – there are certain some investments going in, but not to the level that we’ve seen before. So that’s why we don’t see a lot of movements right now. We won’t. Brandon Couillard : Thanks. And a follow-up for Bob. Could you just elaborate a little more color on the tax hit, the one-time tax hit on the cash full on you expect in the first quarter? And kind of the mechanics of what it relates to in terms of the intangibles, reclassification, and any implications it might have for the tax rate beyond next year? Thanks. Robert McMahon : Yes. So it is a one-time opportunity that we have afforded ourselves. We’re moving some intangible property out of one of our acquisitions into our tax model. It’s going to require us to pay the $230 million upfront in taxes, but that’s going to be creditable to our already existing liability for our U.S. transition tax. And so it’s effectively a one-for-one kind of credit there. So it’s not an incremental cost to us over time. And what it allows us to do by putting this – it’s related to the Dako acquisition. It allows us to streamline our operational activities, as well as overtime, generate some tax benefits. That will likely happen in 2021 and beyond, so it’s part of our kind of multi-year tax planning initiatives that we’ve been talking about. Brandon Couillard : Very good. Thank you. Operator : Your next question comes from the line of Vijay Kumar from Evercore ISI. Vijay Kumar : Hey, guys, thanks for taking my question. And… Mike McMullen : Hey, Vijay. Vijay Kumar : …Mike, maybe a big picture question. I just – if I think about where PMIs are, I think, PMIs are bottoming out. But from your commentary, I guess, what you’re saying is, you’re still expecting whatever trends we saw for 2019 as a base case, you’re assuming those trends continue into next year. I’m just curious PMIs are bottoming out, why is that a reasonable assumption going forward? Mike McMullen : I want to see the orders first. So – and back – getting back to the earlier question about guide, that’s why we went into level we did, which was, if you go back and look at Agilent’s overall results for 2019, they really were quite strong. But the growth came from different parts of the businesses than we expected. And we’re sitting in Q2 and Q1 last year, PMIs started dropping, and you see – saw a level of conservatism in our customer-buying behavior. So we said, okay, there’s reason to believe to your point that it could actually be a different environment in 2020. Let’s not guide assuming that. Let’s just – let’s see it happen and then we’ll take up the guide appropriately and take the orders of business. Robert McMahon : Yes. I think, Vijay, this is Bob. Just to add on to what Mike is saying. I mean, what we’re trying to do like everyone else is kind of read the tea leaves. And our best view is that, until we start seeing something different that it’s going to remain the same as it is today. And if it does rebound, that would be good. We would like that. Yes. Vijay Kumar : That – that’s helpful, guys. And then, Bob, one quick question on operating leverage. It looks like the guide is contemplating modest operating leverage, maybe 30, 35 basis points for next year. I’m just – I mean, that Q4 performance, this is really impressive what you guys did on the OpEx side. Any thoughts on why maybe leverage for next year, Rob, moderates a little bit? Is that maybe a little bit more spend to – on the growth initiatives you guys have? Robert McMahon : Yes, some of it is that and we have a full-year of the Frederick costs that are going to be built into the results in 2020 that we didn’t have. We really just had that in Q4. And obviously, Q4 is one of our strongest years of – our strongest quarter. So we get a lot of leverage there. But we feel pretty good about that. And I think we’ve demonstrated this year an ability to manage our operating expenses to continue to drive double-digit growth on the earnings side and continue to drive operating margin leverage. So I think, you should feel confident that we’ll continue to do that going forward. Vijay Kumar : Thanks, guys. Mike McMullen : You’re welcome. Operator : Your next question comes from the line of Steve Beuchaw from Wolfe Research. Steve Beuchaw : Hi, good afternoon, and thanks for the time here. Mike McMullen : Hi, Steve. Steve Beuchaw : Hi, Mike, thanks for the time here, again. A few things I’d like to tie up. I mean, Mike, I wonder if first, you might elaborate a little bit on a point that you made in your prepared remarks. When you said that orders in the quarter actually grew, I believe faster than revenue. I wonder if you could talk about where you’re seeing acceleration? And to what extent, if any particular region, maybe Japan was a driver there knowing there are some tax incentives in Japan? Mike McMullen : Thanks. Thanks for doing that. We thought it was really important to give the audience a view of the order activity in the quarter. We typically don’t like to plan – we typically don’t comment on that. But given the Q1 guide and some of the nuances around Lunar New Year and such, I want to let you – let the audience know that we ended the year in a strong backlog position, but the orders really exceeding the amount of revenue for the quarter. And I’d say, the quarter in orders was very similar to the quarter in terms of the revenues that you saw, which was strength in the Americas, strengthen in pharma from an end market, very strong results in ACG, DGG, cell analysis. So – and then the environmental side continues to put up really great numbers off of double-digit compares. So I think the Q4 order book was very similar in terms of pattern and areas of strength that we saw on the revenue side that I commented in my script. Robert McMahon : Yes. The only thing I’m going to say, I was just going to be… Mike McMullen : …built new. Mike McMullen : Yes. Steve, to more specifically to your question on Japan, we did not see any one-time build there, that was at the end of the fiscal year. Our fiscal quarter actually was across that, that timeframe. So we saw normal growth in Japan, which actually speaks to kind of the broad-based strength that Mike was just talking about. Steve Beuchaw : Okay, great. Very helpful. And then just, let’s say, two very quick points to tie up with the model. I guess one on NASD. I know you don’t want to give a specific number as it relates to what the contribution on revenues might be for fiscal 2020. But could you spend a minute just on how close you are to getting capacity there booked up? And when you think it – whether it’s 2021 or 2022, we might see the Frederick location running closer to that incremental capacity and then actually, I’ll tie it up right there? Thanks, again, for all the help. Mike McMullen : Bob, I think you’ve been joining in the same questions with Sam. So… Robert McMahon : Yes, yes, yes. Mike McMullen : So you and I both want to… Robert McMahon : Yes. Why don’t I start it. Mike McMullen : …and I’ll jump in. Robert McMahon : …from the question earlier, in the Q&A, we felt very good about kind of where we ended up the year. We had very strong growth. And we ended up, as I mentioned, slightly above the $100 million. And as we had talked about before, there was $100 million of capacity that would be ramping up over the course of the year. Many folks have modeled kind of a $50 million number and that’s in the ballpark. And in the ramp is really dependent upon how the clinical trials go and so forth. And so, maybe I’ll turn it over to Sam, to talk about kind of some of the dynamics, but obviously, some very positive things that have happened in the market just recently. Sam Raha : Yes, Bob, I think you you’ve already laid the groundwork. Steve, how are you? We continue to be excited about the NASD business. And Boulder, just to remind you, is an ongoing important part of our NASD capacity capability there. And there have been some announcements recently, you might have seen that they just really reaffirmed what’s in our plan, the ability to grow and support the growing demand in the market for our customers. So Bob, really, I don’t have a lot to add to what you already said. We expect by the time we exit the year and you’re running… Robert McMahon : I think, it’s fair to say, we’re not running into challenges to fill up the site. Sam Raha : That’s right. Robert McMahon : I mean, we’ll just kind of leave it at that. Sam Raha : Yes. Operator : Your next question comes from the line of Dan Brennan from UBS. Mike McMullen : Hey, Dan. Robert McMahon : Hey, Dan. Dan Brennan : So, Mike, maybe just on China, if you don’t mind. China, you said pharma grew double digits in the quarter in China. But could you just spike out the generic issue there? And kind of how did generics specifically do in the quarter? And maybe kind of what’s assumed in 2020 versus what you achieved in 2019 with generics there? Mike McMullen : Yes. How about if I used the word 4+7 in that whole segment, excuse me, that whole segment of small molecule, I think it was up double-digit for us. Jacob Thaysen : Yes. I mean, as Mike mentioned, we after the first 4+7 around and the winners were announced, we certainly also see we are market leader in that space and that by we have access to many of those customers out there. So we, of course, in demand from those customers also. That would be more 4+7 or more activities in that space. But generally, speaking, we feel that we have a quite good predictability in that market now. Mike McMullen : Yes. Dan, I think that actually played out the way we had thought during the year. Once the initial announcements were done and tendering process started, the whole market pause for us to release a good quarter. And then as we had thought would happen is the – once the winners were announced and we were actually over-indexed in those accounts, so we had already preexisting strong relationship with those customers. Then we would see this return to growth we saw it in Q3 and we saw it in Q4, and we think the – that momentum is with us as we move into 2020. Robert McMahon : Yes. I think Dan, this is Bob. Just to build on what Mike and Jake were saying. I think what we’ve seen is kind of the notion of the higher quality, higher volumes and our ability to provide not only instrumentation, but the consumables and the software associated with that to keep up time in the lab is really resonating with our customers. And so I think the combination of both the LSAG business and the ACG business is a true, what we think is a competitive differentiator across this, and this is a proof point for us. Dan Brennan : Great. Thank you for that. And then maybe back on C&E, I know, I think the Tycho’s question, Bob – Mike, excuse me, I think, you discussed instruments, maybe flat is the way to think about the outlook from here conservatively? Can you just maybe speak to kind of what the interest level is like from the Intuvo and then the two larger instrument platforms today? And kind of what are the guideposts towards when maybe we could see that instrument demand pickup? Because I assume there has to be some good latent demand for the new instruments. Mike McMullen : Yes. In fact, we’re already seeing that. So it’s actually when you dig into the details on the order book and the revenue results, in fact, we just had a review last week with Jacob on his ramp to volume. And he knew, the new 8890 and 8860 GCs are actually – it’s – on the dashboard, it shows green being head of our internal ramp to volume forecast. So we think that it’s already happening. And then other parts of the instrument portfolio, so the chemical energy aren’t seeing the same type of demand. But this shows you when you come out with a new set of offerings, the marketplaces have a clear value proposition to customers that drives productivity even in a market environment, where capital is a little bit tighter, you can get the order. And, Jacob, I know you’ve been out with some customers recently, but if you could anything else you’d like to add to that? Jacob Thaysen : Yes, absolutely. I think the 88 series really resonate with the customer base. And even though, it is a muted environment, we do see that there is interest and we do see, as you know, that we have a really strong ramp to volume. But the customer really like about it is that, we continue with the highest quality and highest performance in the market, but now also with a lot of what we call smart performance in the instruments – a lot of intelligence. So with instrument actually knows what it’s doing and it can put predictive maintenance in. In fact, we put out something that’s called smart alerts now that customers are really excited about that they can get an overview over their labs and get access to what’s actually happening instruments, so they can be predictive in their expectations. Mike McMullen : And it also creates an ongoing revenue stream for us as well. Jacob Thaysen : Absolutely. Dan Brennan : Great. Excellent. Thanks a lot and congrats. Mike McMullen : Thank you. Operator : Your next question comes from Derik de Bruin from Bank of America. Derik de Bruin : Hi, good afternoon. Mike McMullen : Good afternoon, Derik. Robert McMahon : Hi, Derik. Derik de Bruin : Hey. So actually, I wanted to follow on with that question thinking about the GC cycle and the upgrade. How much – can you estimate about how much the installed base was upgraded over the last few years. Now you’ve got a very big GC platform installed globally. Just curious in terms of where we are in the cycles once it picks up again? Mike McMullen : I think, Jacob is raising his hand. He’d love to answer this question. So… Jacob Thaysen : Yes. We have – generally speaking, when we look into our refresh cycle, we do see that the market is looking at approximately 10% per year of refresh. So that also means that our instruments is out there for quite a long time. We are actively looking into that. We we do see – we actually believe that we are in the middle of a refresh cycle. It has been challenged with the overall market conditions. So we do believe actually when the market is coming back to when the PMI are starting to turn that that we would see an acceleration in that refresh cycle. Mike McMullen : I think it’s fair to say to Jacob, there’s always, if you will, a replacement going on. Just – how much has actually been replaced. And I think we continue to see fairly high levels of aging in the installed base, which would point to perhaps somewhat of an acceleration of the replacement rate, assuming the market environment would improve. Yes. Robert McMahon : Yes. Hey, Derik, one other thing that I think is probably pertinent here, it’s still early days. But when – if you recall, the launch is both at the high-end and the mid range. And what we really excited about was the potential to have a really compelling offering at the mid range, where we had not as much penetration as we did at the high-end. And while Mike was talking about our ramp to volume, Mike and Jake were talking about a ramp to volume being green for the business if you kind of parse them out. I would say the mid price or the mid value range is dark green. Mike McMullen : Which is a good thing, I think. Jacob Thaysen : Which was a good thing. Derik de Bruin : And so, once the China food business starts to snap back or come to pick up, again, I guess, can you – how should we think about that business? I mean, is there going to be a V-shaped curve since rebound is the latent demand there or is it going to be – is that market going to be a little bit less than we had grown in the past just given some new organizations in that market? Mike McMullen : Yes. I think we won’t see the type of double-digit declines we saw this year. As Jacob mentioned on the actual volume side, the number of samples being run is up double-digit. The money has been down sharply at the central government level. We don’t expect that’s going to be the long-term situation. So right now for 2020, again, we’re just saying it’s going to be flat with the level we’ve seen for the last three quarters. That being said, our internal view is that this is kind of a mid single-digit kind of grower. It’s going to – I mean, the China market itself is going to be least 6% to 8% growth rate and this is probably about where this business could be. It won’t be at the toward double-digit growth that is seen for the past decade. That being said, you won’t see these double-digit declines that we experienced in 2019. That’s why when we talk about a modest recovery in China really is, we’re just talking about lapping the compare on the food – from the food business. Derik de Bruin : One final question. I mean, you’ve done a lot of acquisitions in the cell biology space recently. And admittedly, I’m a molecular biologist by training, I’m a cell biologist. So can you help me understand what you’re offering that’s novel in terms of how you put all these pieces together? And just sort of what are you bringing to market to customers that hasn’t been brought there before? I’m just trying to get a better understanding of sort of like the opportunity here. And along those lines, like do you need a broader molecular biology portfolio to continue to drive into that market? Thank you. Mike McMullen : Yes, happy to do that, Derik. So I want to make some initial comments and Jacob is knee deep into this business, and he can share with you some of the things that really differentiate ourselves here. So, I think we first got started down this journey with the acquisition of Seahorse Bioscience. We really felt that was a really good first point with a differentiated offering with novel, unique technology that nobody had. But we also felt that we needed to have some more scale to be much more formal in the space. After the recent acquisition of ACEA Biosciences and the acquisition of BioTek, the $250 million-plus, we think we’ve got the scale. And we’re also very selective in terms of the types of companies we look at, the teams, the profile of the portfolio, so I think we’ve got something really especially that it differentiated. And Jacob, why don’t you talk about what we’re doing about the workflows and some other things? Jacob Thaysen : Yes, absolutely. So I’m certainly excited about our opportunity in the cell analysis space. And what I think is that two dynamics going on. First of all, with the recent rise of immune-oncology that we first play out in [indiscernible] now in the cell analysis also. And then, of course, generally speaking, immunology, that there’s a lot of interest in that space right now. And it really requires technologies that allow for life cell analysis, both from an imaging perspective, but also measuring the activity in the life cells. And those are the technologies that we’re providing between the BioTek, the Seahorse, the ACEA and the lots of technologies. So where we really differentiate is, first of all, the seahorse and ACEA Technologies are very differentiated understanding on their own, while BioTek have a very broad portfolio, including some very excited imaging technologies. But we have not bring them together in workflow settings, where you can use basically the multi techniques to look at cell from many different angles and provide much deeper insight based on one informatics platform that nobody else can do in the market. So that I think that’s really where we differentiate versus competition. Jacob Thaysen : And one of the things, Derik, we looked at was, we had already been working, for example, between the BioTek team and the CRS team actually have been working together prior to the acquisition. And we had proof points based on incremental business we had, which was customers really didn’t want to have independent instrumentation and data systems that really haven’t integrated software, integrating these workflows and really was – really had a differentiated value to customers, and they saw that was very important to them and they were willing to give us the business as a result. Operator : Your next question comes from Bill Quirk from Piper Jaffray. William Quirk : Great, thanks. Good afternoon, everybody. Mike McMullen : Hey, Bill. William Quirk : First question is Mike and Bob, you guys have touched on China several times already. But maybe we can talk a little bit about assumptions concerning other geographies in 2020? Are they any different than what you’re currently seeing in terms of both current business, as well as wall to your order book? Thanks. Mike McMullen : Do you want to take that, Bob? Robert McMahon : Yes, yes. No, that’s a great question, Bill. So let me kind of walk you through kind of how we’re thinking about the various markets. So we would expect that the Americas would continue to kind of lead the pace with kind of high single-digit growth. Europe, probably low single-digit growth going forward, pretty consistent with kind of how we’ve seen this year kind of play out. And the rest of Asia, excluding China being in kind of in that low to mid single-digit growth. And so that’s kind of how we’re thinking about China. And China would be low to mid, yes. Mike McMullen : Okay. William Quirk : Got it. And then, Mike, to elaborate on an earlier comment that you made about tighter capital, can you just talk about how broadly you’re seeing that? Mike McMullen : Oh, I think that comment was related to conditions we saw in 2019, that – and my comment really was, even when there’s tighter capital, which is what we saw with lower PMIs throughout this year, customers are still willing to invest when you have a solution that helps them with their bottom line, their productivity, as well as their scientific results. So what I’m saying is, there’s a path forward to getting more business, even when capital is tight. William Quirk : Okay. So you’re not suggesting obviously then that there’s some sort of lack of availability, it really has to do with, if you have the right product, you can find it? Mike McMullen : Yes, correct. Jacob Thaysen : Yes, absolutely. William Quirk : Okay, got it. Thank you. Operator : Your next question comes from the line of Paul Knight from Janney Montgomery. Paul Knight : Hey, Mike. Could you talk about… Mike McMullen : Hi, Paul. Paul Knight : …the – your position in biopharma, specifically a large molecule is what portion do you think of the business today? And where would you like that to be, I guess, would be a good color? Thank you. Mike McMullen : Yes, happy to do so, Paul. And as Bob mentioned, we’ve been having – we have strong pharma results, again, this quarter. This has been kind of consistent story for Agilent over the last several years. During that period of time, we’ve been consistently growing our biopharma portion, our large molecule portion of that business double-digit. I think, a couple years ago was probably maybe about 15% of our pharma business. Now it’s up to probably north of 20% and we think that rate will continue. It’s not because the other side has been shrinking, it’s because we think we’ve been obviously investing very heavily, either through new instrument platforms, marked on some acquisitions in this area. So while we don’t have a specific percentage in mind, I would expect every time I start talking you through the coming years, you’re going to see a higher part of the – of our business in biopharma. In fact, when we come out to – at the conference again this year, we’ll probably talk more specifically about the entirety of our biopharma business. I dropped a lot of comments today about NASD and some cell analysis. So a lot of stuff ultimately comes in into a lot of us into the biopharma end market. We often think about biopharma business just being associated with LC and LCMS, but there’s a lot more to the story. Paul Knight : Okay. And on the academic side, it was soft. What was specifically did do you see going on in the U.S. market in the quarter? Mike McMullen : We dug into this, honestly, it’s probably worth calling. And as best we can see really was just about the strength of the business we had last year, I think it was about over 10% growth last year. So nothing really is really changing in that environment and continue to see very solid and stable funding environment. Sometimes there’s seasonality a bit with that business, but I think that’s really all we could really saw them. Jacob Thaysen : That’s right. I mean, that business is one of our smaller businesses, and it can be kind of lumpy and so forth and had a very strong Q4. Paul Knight : Okay. Thank you. Operator : Your next question comes from the line of Puneet Souda from SVB Leerink. Puneet Souda : Hi, Mike, thanks for the question. Mike McMullen : Hi, Puneet. Puneet Souda : So this appears to be another quarter of growth in CrossLab. So wondering what continues to be the strength there. What’s your confidence there longer-term? And it’s consistently about 8% growth for the – I mean, now, last three years. And so should we expect similar expectation here going forward into – and despite LSAG instruments being flat for the year, as you pointed out in your remarks, should we expect CrossLab’s longer-term to continue to do well, knowing that some of the instrumentation is being flat and with the consumables and service contracts will continue to grow? Mike McMullen : I’m happy to comment on this. This is a real success story, I think of the new ads and we architect this strategy a couple of years ago. And we – I can recall, getting this question almost every year when we had an 8% or 9% print, hey, when’s it going to end? And we would say, it’s not going to end. We think that what’s going on here is really you have changing customer needs and you need to anticipate what’s going to happen and provide a new set of services and capabilities. really help them with the economics on the lab in addition to the scientific results. So today, I think this – and I hope it came through in the call script, which was we said, we really have demonstrated this new business model this year, where we can have strong growth in ACG, irrespective of whether or not the business in our new instrument side is as strong as we’d like it to be. So, as Bob said, the guide for next year, we’re quite confident in our ability to continue this high single-digit kind of growth. The services proposition we have and what we offer is really what we’re resonating with customers. You heard, Jacob commenting a little bit on some of the work that goes on between Mark’s team and Jacob’s team to develop new capabilities around our instrument platforms, which leads into a set of new revenue streams on our services side. And on the consumer side, it’s been both a story of organic growth, but also continuing to add more to the portfolio through acquisitions. So I think we’re really quite confident about our ability to continue this high single-digit growth rate really tied in also to how we’re enabling business differently on a digital perspective. So I hope it’s coming through that we’re highly confident about our – what we build and where this business is going to go in the future. Robert McMahon : Yes. I think, Puneet, hey, this is Bob. Puneet Souda : Okay. Robert McMahon : …just one other thing is, we’re talking about this. If you looked at just the attach rates, we’ve got a number of programs that are driving increased attach rates. We have – we think we have a lot of room to continue to grow there. And I think the one thing that we’ve seen this year is actually, as Mark and team have offered more services and more solutions, we’re actually seeing for the instruments that we are placing actually higher value… Mike McMullen : Yes. Robert McMahon : ...tied to the service offerings. So we’re actually being able to create more value on a per box basis, given the portfolio that we’ve been able to derive. So there’s a lot of opportunity there. Jacob talked about some of the smart alerts and so forth, but we’re building this intelligence in. But in addition, we’re actually creating more value when an instrument is sold and actually increasing the service component. Puneet Souda : Okay, thanks. And if I could check on Dako, could you elaborate the contribution there on the quarter? I don’t know if you provided that and what’s your expectation that you’re breaking there for 2020? Mike McMullen : Yes. I think we didn’t provide a specific number for me. But if you saw my comments, we talked about gaining market share in pathology and we’ve got a high single-digit growing business in DGG. And though a lot of today’s call has been focused on the growth rate from NASD. Pathology is the largest business in that group and it’s doing well. Puneet Souda : Okay. And if I could squeeze in the last question on, Mike. When we look at the last couple of years, pulling back a little bit higher level. In terms of instrument launches, you had Intuvo, Ultivo, 8800 series, a number of launches. And this would be about the time we would be seeing a benefit from those. So is the message here that those instruments continue to gain strong traction in the market? And it’s just the end markets that are sort of challenging you and the government dynamics in China, or is there any – anything more to that we should be looking into in terms of the instrumentation? And just give us, if you could take a moment and give us a sort of a view into the new instrument sort of outlook longer-term and how should we think about Agilent in that framework? Thank you. Mike McMullen : Thanks, Puneet. I couldn’t have said it better myself, which is our product portfolio has never been stronger. We have had a continuing cadence of products, whether it’d be liquid chromatography, gas chromatography, LCMS, GCMS, molecular spectroscopy, the story just continues. So if there has been any softness relative to expectations in LSAG results, it’s all been some of the market environment conditions that you’ve described. And the fact that we’ve been able to continue to invest. We have invested in our field team, as well as I know, some of my competitors are pulling back their reins a bit, where we think we’re capturing share, we think we’re well positioned for – when some of these end markets start to turn to back to back to growth. We’ve seen some of these cycles before in the past. So I think the – and then I made a comment in my script about the product pipeline being full, which is what that was an indication of it. We have other projects. So we’re not going to introduce a bunch of instruments and then disappear for half a decade, you’re going to have a continuing cadence of products, new products, upgrades. So we feel like our NPI process is really humming right now. Operator : Your last question comes from the line of Jack Meehan from Barclays. Jack Meehan : Thank you. Good afternoon. Mike McMullen : Hi, Jack. Jack Meehan : Hey, so I can’t believe I got this far in the call. But I wanted to ask how is the early integration of the BioTek acquisition going? And maybe can you also elaborate on the pacing of the revenue contribution? When I look at the fourth quarter, the acquired growth was about a point better than I was looking for in terms of the incremental growth and the first quarter is about a point shy of what I was looking for, was there any movement there? Robert McMahon : Yes. So… Jacob Thaysen : I’ll take the last one and then I’ll turn it over to Jacob for the integration piece. So yes, we – in simple terms, we had talked about $20 million to $25 million worth of revenue. It was slightly better – it was better than that in the quarter. Going into Q1, the ACEA Biosciences acquisition moves into core. So that’s why it looks a little lower. It shows up as part of our core growth. In Q4, both ACEA and BioTek were in the M&A number. Mike McMullen : And as I mentioned in my script, we’re very pleased with how the – we are on the early days in BioTek and Jacob, maybe just want to add a few comments. We just – we’ve had a big meeting with the field team few weeks ago, so… Jacob Thaysen : Yes, exactly. I think the integration couldn’t have been better so far. I think we are really spending time on learning, of course, BioTek and they spend time learning us both from what processes we’re using, but also from a cultural perspective, we continue to be very excited about the team that we’re getting on board and how they fit well with the Agilent culture. So I’m very excited. Obviously, over the next year, we’re going to integrate them. But – and – but I’m continuing to see a lot of momentum in the combined cell analysis business. Robert McMahon : Yes. Our expectations is that business is going to grow double-digit. Mike McMullen : Yes. Jack Meehan : Okay, thank you. And then I was hoping just to wrap up getting mark-to-market… Operator : One moment please. Jack Meehan, your line is open. Jack Meehan : Okay, thank you. I was talking to myself for a second. Just follow-up I was hoping if you could give us a mark-to-market on Lasergen, I think you’re expecting first placements in the second-half of this year at the last Analyst Day. Just how is the progress going there? Mike McMullen : Yes. So technically, Sam, I think we’ve really been quite pleased with the progress and we’re not ready to call out intro date for the RUO unit yet? Sam Raha : That’s right, Mike. We are making good technical progress in terms of the specifications that are pushing technology. And we are executing on our development roadmap and we’re not ready to share specifics on the launch date just yet. Robert McMahon : I would say, Jack, this is Bob. Our guidance doesn’t comprehend any revenue there. And even back in the original guidance, there was no material revenue in 2020. Mike McMullen : Okay, Jack? Jack Meehan : Yep. Thank you, guys. Operator : And that was our last question at this time. I will turn the call back over to the presenters. Ankur Dhingra : All right. Thank you, everyone. With that, we will wrap up today’s call. Thanks. Operator : Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,020	1	2020Q1	2020Q1	2020-02-18	3.197	3.231	3.526	3.563	4.35	23.83	19.33	Operator : Good afternoon and welcome to the Agilent Technologies first quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. And now, I would like to introduce you to the host for today's conference, Ankur Dhingra, Vice President of Investor Relations. Sir, please go ahead. Thanks. Ankur Dhingra : Thank you Julianne. Welcome everyone to Agilent's conference call for the first quarter of fiscal year 2020. With me are Mike McMullen, Agilent's President and CEO and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Bob's comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group and Sam Raha, President of Agilent's Diagnostics and Genomics Group. Due to certain personal engagements, Mark Doak, President of the Agilent's CrossLab Group, is unavailable to join us today. 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. Revenue growth will be referred to on either reported or 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 January 31. 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. Mike McMullen : Thanks Ankur and thanks everyone, for joining us on our call today. I would like to start today's call with a reminder that Mark Doak, ACG Group President, will be retiring on May 1. While Mark and his wife are currently enjoying a long planned location and is not able join us today, I would be remiss in not taking the opportunity to recognize the outstanding accomplishments Mark has made in his stellar 38-year. His track record of results speak for itself. Thank you, Mark. We have a very strong bench at Agilent and have already named Mark's successor, Padraig McDonnell. Padraig knows the business well. He has been on Mark's staff for several years and is currently running out chemistries and supplies division. Padraig and Mark are already working on transition activities as Padraig prepares to take the helm of the ACG business at the start of fiscal Q3. Our congratulations to both Mark and Padraig. And now on to the quarterly results. The Agilent team delivered a strong start to 2020. Q1 revenues are above our expectations as business grew in all regions and markets. Total revenues of $1.36 billion are up 5.7% year-over-year on a reported basis and 2.4% on a core basis. We continue to translate our topline growth into strong bottomline earnings. Our EPS of $0.81 is up 7% and is at the high-end of our guidance. Before going into business units and market details of our quarterly results, I want to speak about two specific areas that highlight how our building and buying strategy of investing in fast-growing markets continues to deliver growth and help us create a more resilient business. First, I want to talk about our most recent acquisition, BioTek. This was the first quarter with the BioTek team onboard and the business is off to a very strong start with revenue growth above our expectations. We continue to be very enthusiastic about the cell analysis space and BioTek continues the strong momentum that originally got us interested in bring them into Agilent. The BioTek leadership team was just in Santa Clara for a few days of planned meetings and they are very energized and excited about the future possibilities to make it a great business even stronger as part of the Agilent. Second, the resiliency of our business model is on full display this quarter as Agilent delivered strong growth and earnings in the face of a negative Q1 impact from the Coronavirus outbreak in China. As this has dominated headlines, let me add a few additional comments regarding the Coronavirus and its impact on Agilent. Most importantly, our thoughts go out to all those affected by the Coronavirus. On the Agilent front, our team fortunately has not had any direct health impact and many returned to work last week. We are remotely supporting our customers as a number of them gradually resume operations. We have also restarted our in-country production activities and they are shipping products to customers within China and internationally, albeit at a reduced rate. On the business side, given that our first quarter ended January 31, we are seeing business impact across both fiscal quarters, Q1 and Q2. In Q1, our revenues are running ahead of expectations right up to Lunar New Year Holiday. However, the extensive Lunar New Year Holiday affects our customers' ability to transact and accept shipments during the last days of the quarter. This reduced our reported revenue by approximately $10 million in total for the quarter, primarily in our LSAG instrument business. We have since recognized the bulk of this revenue now in Q2. Looking ahead, we are projecting that Coronavirus will continue to impact our China business throughout Q2. Bob will share additional details, but we are anticipating delays in new equipment purchases and a slower uptake of consumables and services. The slower uptake is due to reduced number of selling days resulting from the extension of Lunar New Year, along with customer and logistics operations that are ramping, but not yet fully operational. It's important to note, while we are forecasting the impact to our Q2 business, our full year outlook for total Agilent revenues and EPS remains unchanged. Our business outside of China remains on a solid footing and we believe a large portion of our China business that is currently being impacted by the Coronavirus is not lost but rather is delayed. As you know, the Coronavirus outbreak is unfortunately impacting the health and safety of tens of thousands of people. I am very proud of how the Agilent team has responded to do our part to help. Our Agilent China team is now actually supporting those customers during crucial research into the virus. We have donated instruments and supplies to four clinical and research institutions based in China to support these research and drug development efforts. We continue to closely monitor events in China and are prepared to act quickly to help wherever possible. Now on to additional details of our quarterly results. Agilent's growth is broad-based as our business grew across all regions and end markets. Regional performance was led by the Americas posting 5% core growth with America coming in with low single digit results and Asia holding steady. Despite the timing of the Lunar New Year and the Coronavirus impact late in the quarter, our China business grew low single digits. While all end markets grew, our results were led by strong growth in the biopharma and environmental forensics markets. Now taking a closer look at how the individual business units performed. LSAG revenues grew 5% on a reported basis driven my strong performance in our biopharma and cell analysis business. On a core basis, LSAG's revenues were down 2% against a tough compare and inclusive of the unexpected Q1 impact from the Coronavirus. With the exception of China, all regions and end markets performed in line with expectations. The ACG business continues to deliver strong results, posting 7% core growth even with reduced selling days in China. This growth was broad-based across all major market segments and regions. These results continue to demonstrate the strength of our ACG CrossLab strategy and how we are leading the transformation of the analytical lab. DGG has also posted 7% growth in the quarter against a difficult 12% growth compare. We have experienced a continuation of positive trends winning share on our core pathology business and seeing strength our NGS QA/QC franchise. We continue to be pleased with the revenue ramp at our new oligo manufacturing facility in Frederick, Colorado. In addition to driving strong finance results, I want to highlight some other notable events that took place during the quarter. We continue to bring different and new product to the market, meaning strong customer and external recognition. We just introduced the Agilent SureSelect XT HS2 DNA kit. This, along with our recently launched automated sample prep platform, Magnis, further strengthens our leadership position in the NGS sample prep market. In addition, two industry publication honored the Agilent InfinityLab LC/MSD iQ system with 2019 innovation awards. The award-winning mass spectrometer introduced last June incorporates intelligent design and innovations such as embedded sensors that monitor instrument health. And finally, earlier this month, Barron's name Agilent number one in the list of the 2019 Most Sustainable Companies in America. We are very proud of this recognition. Sustainability is a critical topic that is gaining increased interest from customers, employees and investors. More importantly, we believe focusing on sustainability is simply the right thing to do. Before I pass the call on to Bob, I would like to close with a reminder of Agilent's resilience and our shareholder value creation model, delivering above market growth, expanding operating margins and a balanced deployment of capital. We are able to thrive by focusing on platforms with multiple large end markets and long term growth opportunities. We are also driving growth in the aftermarket, increasing our focus on faster growing end markets, streamlining our infrastructure and operations and investing in the future of Agilent, both organically and inorganically. We do all this while maintaining acute focus on delivering EPS growth with superior quality of earnings and driving shareholder value creation. Despite the temporary business uncertainty created by the Coronavirus in China, I remain confident about the longer term growth prospects of the China market, our China growth strategy and most importantly our team. I am very proud and confident in the strength and resiliency of our China team and their ability to overcome any near term challenges that come our way. When I look at our global team in our business, our growth prospects and team have never been stronger. We are laser focused on driving revenue and earnings growth. I am pleased to tell you that all these facts allow us to maintain our growth and earnings outlook for the year. Thank you for being on the call and I look forward to answering your questions. I will now hand off the call to Bob. Bob? Bob McMahon : Thank you Mike and good afternoon everyone. In my remarks today, I will provide some additional detail on revenue, walk through the first quarter income statement and some other key financial metrics and then finish up with our updated guidance for Q2 and the full year. Unless otherwise noted, my remarks will focus on non-GAAP results. Our first quarter results were very good as we had strong execution across all regions and markets. Revenue for the quarter was $1.36 billion with reported revenue growth of 5.7%. Currency negatively impacted revenue by 0.4 percentage points and acquisitions added 3.7 percentage points to growth. Our core growth was 2.4% in the quarter. As Mike indicated, our performance was impacted by the extension of the Lunar New Year Holiday due to the Coronavirus. This reduced the number of shipping days in China and we estimate it shifted $10 million in revenue out of Q1. If not for the reduced shipping days in Q1, our performance would have been stronger with the shift affecting our core revenue growth by roughly 70 basis points. In terms of end markets, we saw growth across all of our six end market segments. Pharma, environmental and forensics and diagnostics and clinical led the way for us in the first quarter. During the quarter, pharma grew 3%, double digit growth in DGG and high single digit growth in ACG, offset a mid single digit decline for LSAG. Within pharma, our biopharma or large molecule segment grew high single digits. And on a geographic basis, our pharma business experienced high single-digit growth in the Americas and mid single digit growth in Europe. This was partially offset by mid single digit decline in China, largely associated with the timing of the Lunar New Year and to a lesser extent the execution of the 4+7 program. The 4+7 program is playing out as we expected with the third round completed in January and multiple winners per drug. We continue to believe that this is a long-term positive for the industry as drug quality improves and access to healthcare increases. Our environmental and forensics business grew 4% against a very tough compare last year of 10%. During the quarter, we saw balanced growth between instruments and aftermarket sales. And diagnostics and clinical revenue grew 3% against a strong 11% compare last year. Mid single digit growth in DGG, driven by continued share gains in our pathology business, were partially offset by declines in LSAG and ACG with both only having small businesses in this segment. Chemical and energy revenue grew 2%. Services and consumables grew mid single digits offset by flat instrument sales. Academia and government grew 1% with services and consumables growing mid single digits, partially offset by flat instrument sales. Mid single digit growth in the Americas was partially offset by flat to low single digit declines in the other regions. And finally, food returned a modest growth, up 1%. Low teens growth in services and consumables was partially offset by declines in instrumentation. While one quarter does not make a trend, we are pleased with the continual progress in this market. On a geographic basis, we saw growth in all regions, led by Americas growing mid single digits. Europe grew 2%, in line with our expectations. And as Mike mentioned, our business in China was running ahead of expectations through the first two months of fiscal 2020. As mentioned earlier, despite the shift of the $10 million, China still grew 1%. If not for the extension of the Lunar New Year, our core growth in China would have been solidly mid single digits. Now let's turn to the rest of the P&L. Gross margin was 55.7%, down 120 basis points versus the prior year. This is a result of the planned startup costs for our new NASD facility as well as product mix and some negative pricing effects on our instrumentation business. We offset 90 basis points as we leveraged our cost basis in operating expenses. And as a result, our operating margin was 22.9%, down slightly from 23.1% in the first quarter of last year. Adjusting for the $10 million Coronavirus impact on revenue, operating margins would have increased versus the prior year and so we feel good about our continued opportunity to expand operating margins. We were also able to lower our tax rate slightly to 15.5% and expect that rate to continue for the rest of the year. This resulted a non-GAAP EPS for the quarter coming in at $0.81, at the top end of our guidance and representing 7% growth. Before turning to second quarter guidance, I want to touch on a few other financial metrics. Our operating cash flow was an outflow of $59 million, in line with expectations as we incurred the one-time tax outflow of $226 million related to the transfer of intangibles as noted last quarter. We also paid out $56 million in dividends and purchased 726,000 shares for $60 million. We ended the quarter in a net debt position and a net leverage ratio of 0.9 times. Now let's turn to our non-GAAP financial guidance for Q2. We are anticipating revenues in the range of $1.28 billion to $1.32 billion in the second quarter. This range is larger than we have traditionally provided as we have been tempted to estimate an impact of the Coronavirus on our business in the second quarter. As this is a fluid situation, we thought it would be helpful to detail all our assumptions, particularly as we have seen impact across both Q1 and Q2. Our guidance contemplates a $25 million to $50 million impact in our first half of our fiscal year, which translates to roughly to a 1.5 to three week impact on China revenues. Of this, we saw $10 million in Q1 and we are estimating a net $15 million to $40 million incremental impact in Q2. The Q2 revenue range of $1.28 billion to $1.32 billion translates into reported growth of 3.4% to 6.6% with core growth of 1% to 4%. Currency is expected to have a negative 1.1% impact while M&A is expected to contribute 3.5% to 3.7% in the quarter. We are estimating the Coronavirus to negatively impact our Q2 core growth by one to three points. Our revenue outlook translates Q2 earnings in the range of $0.72 to $0.76 per share, 1.4% to 7% growth versus last year. Importantly, as Mike mentioned, we believe the majority of this business is not lost, rather delayed as customers and the government ramp and recover. In addition, our business outside of China remains strong. As such, we expect a larger second half of the year and are not changing our full year guidance for revenue or EPS. So before starting up the call for questions, I want to conclude by saying we have a very solid start to the year that shows the strength and breadth of our portfolio. It is that portfolio, coupled with the strength of the Agilent team that, despite the uncertainty caused by the Coronavirus, we are maintaining our full year outlook. With that, Ankur, back to you for the Q&A. Ankur Dhingra : Thanks Bob. For Q&A, I would like to request to limit to one question and maybe one quick follow-up. Julianne, if you can please provide instructions for Q&A. Operator : [Operator Instructions]. Your first question comes from Tycho Peterson from JPMorgan. Your line is open. Tycho Peterson : Hi. Thanks. I appreciate you guys quantifying the corona impact. I guess, a couple of things. I mean you have previously talked about mid single digit China expectations for the full year. So should we assume that's still the case, just more back-end loaded? And then, Mike, as we think about collateral damage within China, how should we think about the C&E market, just given that the broader economic activity in China is slowing? So should we think about some impact on C&E as well? Mike McMullen : Sure, Tycho. I think I will handle both questions. And Bob, correct me if I go off script here. But I think we still think that the mid single digit number is doable for the year in China. What we are seeing already on ground from our team, I was just on the phone today with our team in China, we are still able to transact and orders are actually coming in as forecast. I think that we think a lot of the procurement is going to occur a little bit later in the year. We think a lot of it's recoverable with the exception of probably some aspects of our service business where customers really are looking for service people to arrive on the sites. I think we feel pretty good about how we are thinking about China throughout the rest of the year, albeit it being a very fluid situation. And you know, we really haven't seen any kind of transitory or connected impact on C&E. In fact, C&E actually did better than we were thinking in the first quarter. It's too early to call it a trend but some of the PMIs are actually inching up which would maybe give an indication of perhaps a better outlook and some initial noise in some of our major accounts about thinking on procurement. But we still remain cautious in terms of the outlook for C&E but I am f encouraged by the Q1 results. And again, we are not really seeing significant movements around in that area on a global basis. And we think back to the first comment on China, we weren't expecting a lot in C&E this year in China anyway. So I think we are in pretty solid shape relative to the outlook there as well. Tycho Peterson : And then a follow-up on biopharma. You grew 3% on a 10% comp. Last quarter, it was 7% on a 14% comp. So you know, was that a pull forward last quarter? And if so, can you maybe just talk to that dynamic? Mike McMullen : You know, I think the big story there is China, right. Bob McMahon : Yes. That's exactly right, Mike. There's two elements there. One is the shifting of the Lunar New Year from Q2 into Q1 as well as the extension of the Lunar New Year Holiday. So those are the two primary pieces. Mike McMullen : Yes. And then within the pharma numbers, Tycho, the biopharma segment really was strong for us again this quarter as well. And then we think as the 4+7 initiative rolls out in the latter part of this year, then we will see the growth in the small molecule side of that space. And then, we have really strong growth in NASD and the ACG business is strong in pharma. So we are feeling pretty good about pharma. Tycho Peterson : Okay. Thank you. Mike McMullen : Thank you Tycho. Operator : Your next question comes from Doug Schenkel from Cowen. Your line is open. Mike McMullen : Hi Doug. Ryan Blicker : Hi. This is Ryan, on for Doug. Thanks for taking my question. Mike McMullen : How are you, Ryan? Ryan Blicker : Maybe just to round out the China dynamic quickly, can you provide some more color on your supply chain exposure? Within China, it sounds like the operating environment is improving. But how should we think about your direct and indirect supply chain exposure? And do you see any risk to your ability to fulfill demand within and outside of China over the course of this year? Mike McMullen : Yes. Sure, Ryan. Thanks for that question. So as I touched briefly on my call script, we actually have resumed production and are in a really solid position now to not only ship the product to our customers in China, but also products that are manufactured in China to have them exported into the global market environment. And as we have a very diversified global footprint in terms of supply chain and manufacturing capabilities, we think the near term, we are in pretty solid shape relative to ability to meet our commitments from a he shipment perspective. And then you also may recall that starting with the initiation of the U.S. based tariffs, we actually had initiated a movement of a lot of our supply chain out of China. So it actually has mitigated our risk here as well. Bob McMahon : Yes. Ryan, this is Bob. Just to follow-up, we have twice weekly calls with our team in China, inclusive of logistics as well as our supply chain. And obviously, it's quite dynamic but as it currently stands today, we feel like we have the ability to be able to procure not only raw materials but also produce the finished goods and ship not only within China but also get product into China and vice versa. Ryan Blicker : Great. And then maybe just following up with a brief two-parter. Number one, on the food market. It sounds like things were improving a bit prior to this Coronavirus dynamic. Can you talk a little bit more about what you are seeing in the market and if you think that the China portion of that market specifically could be poised to return to growth as we get past this Coronavirus dynamic? And then specifically for gross margin, can you talk about what the timing headwind was for the quarter versus the other dynamics that you called out? Thank you. Mike McMullen : You want to take this, Bob. Bob McMahon : Yes. So on food, as I mentioned, we certainly are pleased with the progress we have had several quarters of kind of very predictable performance there. And actually Q1, despite the Coronavirus, it probably had more impact on the pharma side then in food. It grew 1% on a global basis. It was down slightly in China, but certainly not to the level that it had been in the past. So we feel good about that. It's probably too early to call that it's going to return to growth. Long term, we do believe it will return to growth, but not ready to call that in this fiscal year. In terms of the timing of the Coronavirus, that $10 million, that was quite a large incremental because we had all the costs. So that was probably a higher than normal kind of incremental drop to the bottomline. And that was probably a little over $0.01 of impact on the full quarter. Ryan Blicker : Very helpful. Thank you. Operator : Your next question comes from Jack Meehan from Barclays. Your line is open. Jack Meehan : Hi. Good afternoon. Mike McMullen : Good afternoon Jack. Jack Meehan : Hi. I was hoping could you give us an update on the NASD rollout at the new site and how much that contributed to the quarter in both DGG and the pharma end market? Mike McMullen : So as I imagine, you maybe getting a little tired of hearing this from Bob and myself. I am going to pull Sam into this conversation. But as we highlighted in the call script, the NASD business continues to ramp as we would expect. We are really pleased with the progress and how we are starting to fill out that factory. Still not yet at full capacity, operating at full capacity yet but it was a contributor to our growth in the first quarter, no doubt. And Sam, anything else you would like to add there? Sam Raha : No. Mike, you hit the nail the head. The business is performing as we have expected. We continue to see interest in all the customers, the pharma customers that we have given tours to. We are doing work now there for a number of customers. Not to be boring, nothing new to report. It is progressing as per plan. Mike McMullen : So all good news right now. Bob McMahon : Yes. I would just add, Jack. You know, as we have talked about, this will ramp up and be a more material impact in the second half of the year. It's progressing as we expected it. It had a slight impact to the DGG and a slight impact to the overall Agilent organic core growth and we are very pleased with the progress. Mike McMullen : Yes. And Bob, I think I will just make this one more point too, while we look at the second half outlook for the business, it's not all about China recovery. The other elements of the business, including NASD, which we know we are going to have a strong second half. Bob McMahon : That's right. Jack Meehan : Great. One follow-up on DGG. You know, the core growth of 7%, not to nitpick it too much but was there any thing that was a little softer in the quarter in that segment, just knowing some of the other growth drivers relative to how the segment was growing last year? Mike McMullen : I think it was really -- this is Mike, Jack and Sam feel free to jump in on this. We had 12% growth last year, so tough compares. We had solid growth across all elements of that business. And outside of again may be a China impact for an element of the business, things are firing on all cylinders also across the businesses is how I recall. Sam Raha : Yes. That's right, Mike. We continue to have good growth, you know, with market, above market with our overall NGS portfolio. So we feel good about that. And the low double digits, our pathology business, as you heard on Mike's opening comments and Bob's as well, we believe we will continue to gain share there growing in the mid single digits. And you just heard about NASD. So you look at the major parts of DGG, we had I think a really well-balanced good quarter. Mike McMullen : It mainly is a comparison story. Jack Meehan : Great. Thank you guys. Mike McMullen : No problem. Operator : Your next question comes from Dan Leonard from Wells Fargo. Your line is open. Dan Leonard : Hi. Thank you. So just a couple of things to circle back to. One, what decelerated in the Americas in the quarter? Your growth rate in that region had been trending higher than 5% for quite some time. Bob McMahon : Yes. Hi. Dan. Welcome back and appreciate the question. It was really a combination of a very tough compare. I would say probably the area that was a little softer was the instrumentation business. They had the most difficult compare in the first quarter and we would expect that to improve in Q2 through Q4 as we get to easier compares. Mike McMullen : Yes. I know, Jacob you were looking into this. Jacob Thaysen : Yes. And I think the continued depressed PMI certainly impacts C&E business, chemical and energy business. So we continue to see that in U.S. being performing at least flat and we would like to see improvement. But I think it's going to still take some time for that to happen. Mike McMullen : And I would add that you know, it ended where we expected it to be. Jacob Thaysen : Yes, sure. Dan Leonard : And then a related question. Bob you mentioned when discussing the gross margin dynamics that there were some negative pricing effects on the instrument business. Can you elaborate on that? Are you pulling maybe the pricing lever to drive more demand in the instrument business after four quarters in a row of very soft demanded at LSAG? Mike McMullen : Hi Dan, I just can't help but to jump in on this one. And I think that question should be posed to our competitors because we saw particularly as we finished the calendar year, we saw some very aggressive pricing by some of our competitors, particularly in the liquid chromatography and mass spectrometry platforms. And I don't know if you are adding to that, Jacob. Jacob Thaysen : No. I think it's fair to say that we continue to be premium priced but there is certainly some competition in the market space right now. And yes, so there is a price pressure. Mike McMullen : But we don't play the price game here. I mean that's not how we want to win. Dan Leonard : Okay. I appreciate the color. Thank you. Operator : Your next question comes from Patrick Donnelly from Citi. Your line is open. Jesse Klink : Hi. Thanks. This is Jesse, on for Patrick. First, I just wanted to touch on the China impact. I mean you guys have laid out a 1% impact to core growth from that. I just wanted to understand how that compares to your expectations of Coronavirus made at a lower than anticipated? Mike McMullen : Yes. Maybe just to be crystal clear here. We saw roughly a 70 basis point impact in Q1. We had product that was getting ready. It was staged and getting ready to ship. Bob McMahon : In-country. Mike McMullen : And on the last couple of days of January and with the extension of the formal holiday, there was no one there to pick that up. So we know that was clearly an impact in Q1. In terms of Q2, what we are expecting between the first half of our year, it's roughly 1.5 to three week impact as we are ramping up. And most of that's happening in Q2. We are expecting in Q2 that the Coronavirus has roughly a one to three point impact to our growth in Q2, roughly $15 million to $40 million. In the first half, it's $25 million to $50 million. And we will expect to get that back in the second half of our fiscal year. Jesse Klink : Okay. That's helpful. And then just maybe one on the BioTek acquisition. Just wondering how that business performed relative to expectations and just kind of how the customer reception has been so far as you have broadened the portfolio offering there? Mike McMullen : Yes. Jesse, happy to hit that right up. And relative to expectations, it's ahead of our expectations. It really has been just a tremendous addition to the company. And we are talking about this the other day inside the company. Typically, when you put together a deal scenario, it's often out of the gate, you don't see a team beating the revenue numbers all the time. And that is actually what we saw in the case of BioTek in the first full quarter as part of Agilent. And Jacob, I know you have been talking to customers and how are they thinking about BioTek being part of Agilent? Jacob Thaysen : Yes. Again, I just want to underscore once again that we have been very pleased with the performance of BioTek while it's been here in Agilent. But not only BioTek, the whole cell analysis business is doing very well and are we posting double digit growth for the whole business. So we are very pleased with that and we actually believe it is going to continue for quite a long time. We see cell analysis is going to be a key driver for understanding the immune system and immune oncology. And with now the Seahorse, ACEA and BioTek and Luxcel combined, we have a very unique value proposition. And that that is really what excites us and what also is very exciting for customs is that when we combine those technologies, these techniques together, we can create more insight for the researchers and the biopharma customers that nobody else in the industry can do. So this is very exciting and we are just getting started. Operator : Your next question comes from Puneet Souda from SVB Leerink. Your line is open. Puneet Souda : Yes. Hi. Thanks Mike. So first question on Europe. You pointed 2% growth there. I was hoping to get a view from you on outlook and what you are baking in the guidance here? Thanks. Mike McMullen : Thanks. Bob, why don't I just talk about our performance and you can maybe comment on the outlook. So it came in right as expected. And I think you know that Europe is in a difficult economic environment and we think our team is really doing well there relative to what's going on in the market environment. So we were actually quite pleased with how Q1 came out for us in Europe. And Bob in terms of the outlook? Bob McMahon : Yes. So Puneet, good afternoon. As Mike said, we were pleased with the outlook of being 2% and that's kind of what we are forecasting in Q2 and the rest of the year. And so certainly the is doing a really great job of being able to deliver in a tough environment. But it kind of hit where we expected and that's kind of what we are expecting for the rest of the year as well. Puneet Souda : Okay. That's very helpful. So if I could touch back on China. Mike McMullen : Sure. Puneet Souda : I know it's been covered quite a bit. But I would really appreciate your thought there, given one of the strongest legacy positions in that country for Agilent. As the recovery happens here, are there certain segments which you think where you will see more acceleration, more faster recovery, certain product lines or certain segments where you would see a recovery faster versus others? And then I was sort of also surprised with growth you are seeing in ACG. CrossLab continues to deliver. I was trying to understand what sort of exposure you had there in China? And given the travel restrictions and everything, are you still able to ship products and service instruments seeing the growth in CrossLab here? Or how much was the impact in CrossLab, if you could quantify? Thank you. Bob McMahon : Puneet, let me take, there is a lot into that question. So let me try to hit them. In terms of recovery, we would expect that obviously, the instrumentation portion would recover and within that probably pharma first. And so we would expect that to be prioritized over some of the other markets. In terms of ACG, we continue to be pleased by the broad-based strength there. Actually even in China, despite kind of the reduced selling days, it grew 11%. We do expect probably a slower ramp up there, less on the consumable side as the factories are getting back to production, but more on the services side, as you can imagine having our folks getting into labs right now is fairly difficult and there is a portion of that would be on demand for servicing equipment. And so we would see that probably ramp up a little slower in Q2 but then ramp back up to normal, latter half of Q2 and into Q3 and Q4. At least, that's our current assumption. As Mike mentioned, we have been in close contact with our teams in China and have been watching the order flow. And the order flow to-date is, across both ACG and LSAG as well as our DGG business which is a smaller piece, tracking to our expectations. Puneet Souda : Okay. And any sense in terms of the exposure that you have in China and could that mix change in the next quarter or so? Mike McMullen : No. I don't anticipate a major shift. We have largely got a instrument heavy business in China relative to the rest of the business anyway. But our opportunity really lies in the consumables and service over time. So I don't see a dramatic change in Q2 or in the back half of the year. Bob McMahon : Yes. Puneet Souda : Great. Thank you. Mike McMullen : Very welcome, Puneet. Operator : Your next question comes from Dan Arias from Stifel. Your line is open. Dan Arias : Good afternoon guys. Thanks. Mike McMullen : Hi Dan. Dan Arias : Mike, just back to Tycho's biopharma question. Hi Mike. Next quarter, I think the comp goes way down to low singles for that customer segment. So where are you feeling like biopharma growth heads in 2Q as we just think about the momentum in the favorable comparison, but also China? Can that be more mid singles when we net out the moving parts there? Mike McMullen : Hi Dan. I think that's a reasonable expectation. So when I was asked earlier about the pharma, we remain confident about our ability to grow in pharma. You know, part of it's going to be the pickup and continued growth that we are going to have in our NASD business. We also know that we are getting to some of the easier compares relative to the LSAG instrument business, because as you may all recall that's in the Q2 is when we starting seeing the slowdown as China went through this whole looking at their procurement practices around the generics. So we think there is a lot of good reason to be positive about the ability to have a higher growth rate in the outer quarters than we did in Q1 in our pharma business. Bob McMahon : Yes. And we are expecting a faster growth in Q2. Mike McMullen : Yes. Dan Arias : Okay. And then maybe one again for you, Mike or maybe even Sam. It feels like 1Q is always a good time to ask this question, just given that most are heading down to AGBT. Any update you can give us on Lasergen product development? How much of a focus is that at this point? And then maybe what are you looking at in terms of the change in total investment there if we compare 2020 to 2019? Mike McMullen : So I think, Sam, you are getting our bags packed, maybe at least now your team is getting their bags packed to head to that. You are staying home. That's right. Okay. Maybe just a few comments on this. Sam Raha : Yes. Overall, thanks for the question, Dan, if you would have heard my comments already from JPMorgan, we are making progress on a number of fronts related to the development work we are doing on the Lasergen sequencer, particularly as it comes to the technical specs on our read length, on our quality and so forth. So we are continuing to make that progress. When you think about AGBT, of course, it's not just about sequencers, it's about the overall NGS workflow, it's about really looking at beyond NGS, the overall genomics. So we are excited about Magnis, which we introduced not too long ago. We are seeing, sorry to remind you, Magnis is this really walkaway automation for taking DNA libraries or actually putting DNA in and being able to come back and just load that directly onto your NGS sequencer. We have seen some really good interest in that in Europe, in America and in China. So we are going to continue sharing the message there and sharing some data from a number of customers. We also, as you would have heard us talk about, we have launched a new SureSelect XT HS2 DNA reagent kit which allows us to look at even lower starting amounts, down to 10 nanograms of DNA for FFPE which is very important for cancer. It also allows on Illumina sequencers. It's very important to be able to use molecular barcodes. We have that going on as well. And then we have a number of partnerships that we are working on with a number of customers and collaborators. So stay tuned. I think it's going to be an exciting AGBT. Bob McMahon : Yes. And Dan, the other part of your question was -- Mike McMullen : Investment outlook. Bob McMahon : Yes. So just quickly, our spending forecast in 2020 is the same as 2019. So we are not expecting any ramp up. Dan Arias : Okay. I appreciate it. Thank you. Operator : Your next question comes from Derek de Bruin from Bank of America. Your line is open. Derek de Bruin : Hi. Good morning or good afternoon. I have got a number of questions. Mike McMullen : Sure. Derek de Bruin : First one is, I guess just on the gross margin outlook for 2020. Can you sort of walk it through the next couple of quarters in terms of how that looks? Bob McMahon : Yes. We talked about at the beginning of the year, our guide was contemplating roughly a flattish gross margin across the company and that hasn't changed. So we have always said that the first half of the year, with Q1 being the hardest of comparison because of the startup costs in NASD and you can see that kind of in our numbers. We also were affected a little less, as we mentioned before, in LSAG. We would expect that to recover as we get through the course of the year. So at a high level, Derek, I would expect our gross margins still to be within that range, roughly flat year-over-year. And where we are getting our operating leverage is really in the OpEx expense line. Mike McMullen : And Bob, I think we are also looking to see maybe more favorable mix in our instrument business as we move forward. And I made some comments about the pricing pressure that we saw more of a calendar year end kind of phenomenon with pricing more stabilizing as we started the 2020. Bob McMahon : Yes. Derek de Bruin : Well, great. That segues into my next question on instruments. And so I think you had said last quarter, you were expecting may be flattish instruments for the full year. Is that still sort of your expectation? And that leads into, any idea of sort of what pent-up demand could be? I mean do you sense from customers, particularly in C&E, if there's people waiting on the sidelines to buy when the budget gets better? I am just trying to get a sense of what the instrument dynamic looks like. Bob McMahon : Yes. Hi Derek. This Bob. I think the short answer on your first question is, yes. We are still in that range of roughly flat. Actually if you looked at Q1, we were down 2% core, but if you adjust it for the Coronavirus, it would been down about 1% on the most difficult comp that we had. To your point around C&E, there have been chutes of life and some of our customers looking at things. Now what I would say is the Coronavirus kind of froze some of that into question. But I would say, that's still intact right now. I don't know. Jacob, if you have anything? Jacob Thaysen : No. Overall, I do think that there is some pushed out pent-up demand here. And eventually, there will be a tech refresh. And we have invested over the past period quite a lot into our instrument portfolio and really refreshed across the whole portfolio. So when that pent-up demand is coming forward, we are ready. But we just can't call it right now exactly when that's going to happen. Mike McMullen : Yes. Jacob, I will just add one thing. Early on in my tenure, we had a similar kind of slowdown in the C&E. The difference here is that, at that time, a lot of our platforms were rather aged. This time, we have a completely refreshed platform. So it also is a great productivity message there to customers. And our lab managers also have the ability to go to their management and say, listen, there is something new out there. I am not buying this, I am replacing like-for-like. Derek de Bruin : Great. And then just one, maybe I missed something, but you did 3.7% contribution from M&A in the first quarter, 3.5% to 3.7% in the second quarter and then the guide for the full year is 2.85 to 2.9%. Is it something else in the first half besides BioTek? And if not, why are you expecting a step down? Bob McMahon : So you have get very good math and we are not expecting a step down. The only thing that's in the numbers and that could be an area of potential opportunity. Derek de Bruin : Great. Thank you. Operator : Your next question comes from Brandon Couillard from Jefferies. Your line is open. Mike McMullen : Hi Brandon. Brandon Couillard : Mike, just on a separate topic. Mike McMullen : Sure. Brandon Couillard : Can you sort of speak to the Twist settlement last week? Why only $25 million? And should we expect any legal savings from having that case out of the way now to reinvest those dollars? Mike McMullen : Yes. So first of all, just a few comments on the settlement. So we are very pleased with the agreement that was reached with Twist. As you know, we think it's in the best interest of our shareholders to rigorously protect our IP. And not only in addition to receiving a payment from Twist, they also had to procure a license from us for certain aspects of our oligo synthesis technology. And we are really a company that's committed to doing innovation in the right way. So we are really pleased with how the settlement goes. And Bob relative to the treatment of the legal expenses and outlook for the rest of the year? I think we have that in pro forma, right? Bob McMahon : Yes. We will pro forma that. Mike McMullen : Yes. So you will see both the settlement come in, Brandon, as well as the costs associated with that, I guess, in our Q2 results. Bob McMahon : That's right. Brandon Couillard : Thanks. And maybe one more higher-level question for you, Mike. Mike McMullen : Sure. Brandon Couillard : I mean you mentioned sustainability, that recognition. Clearly, that's becoming a much bigger focus I think for the investment community. Can you just help us contextualize that focus may help contribute to your growth or cash flow or differentiate you in terms of the customer base? Mike McMullen : Yes. It's a great question. So as I mentioned in my call script, we have been doing these things because we thought it was the right thing to do and now people are really paying attention to it. So I think it helps on multiple aspects of the business. So first of all, relative to our new products which have a very favorable environmental impact, there is real compelling reason for customers because a lot of our most important customers have their own sustainability initiatives and they are very interested. I have several European customers I am visiting next month and they want to hear about our sustainability plans. So when you talk to them about how we are reducing the footprint, the electrical consumption, that some of our products don't even use gases and that we have eliminated the use of gases and gas chromatography in the case the NPIs and we are reducing the size of the packaging. And by the way, that also comes with the benefit to Agilent's P&L. So it really helps in terms of our customer relationships and our ability to drive sales into those accounts. And also it is really quite helpful for recruiting of new employees into the company. New employees when they are looking at potentially joining the company really want to know what Agilent stands for when we talk to them about our culture and what we do as a company in the local community, what we do for the environment, our views on diversity and inclusion. I think it really is a powerful message to attract new employees to Agilent, but also for those who are part of the Agilent team to really be proud of the company they work for and be energized about where the company is going forward. I think we have talked before, I am a big fan of sports and if you build a great team, you get great things happen in the marketplace or on the field. And I think that really is really one of the major benefits you get here which is what it does for your team. So it really is a multitude of impact for the customers, I mean for the company and something we really believe in. Brandon Couillard : Okay. Thank you. Operator : Your next question comes from Vijay Kumar from Evercore ISI. Your line is open. Vijay Kumar : Hi guys. Thanks for squeezing me in. Mike McMullen : Hi Vijay. Vijay Kumar : One, maybe on China, Mike. We have heard some chatter of possibly the government initiating some sort of stimulus here to kick-start the economy. If that were to be the case, where would that impact fall? Is that in C&E and food? Is that where we would see your China numbers coming up? Mike McMullen : Well, I have to say I have heard some rumblings of stimulus, but I haven't seen anything around the specifics of what a stimulus would be. I don't know Bob or whether you have anything to add. Bob McMahon : No. I think you are getting -- Mike McMullen : That's a likely area. Bob McMahon : Yes. Exactly, I think that's a likely area. That and pharma. Mike McMullen : And also, I would also expect environmental as well. So that would be my guess, because these are major quality of life initiatives that the Chinese government has been behind. So my guess is that's where they would put the stimulus. But again, we don't have any specifics. That would just be pure speculation on my part at this point in time. Vijay Kumar : Understood. And Bob, a quick one on the EPS guidance here. I see that the tax rate ticked down sequentially on the guidance front. Did anything change on the margins at all because it looks like the revenue range remains unchanged? So I am wondering if this is below the line or margins some sort of impact here? Bob McMahon : Yes. Nothing material, Vijay. Vijay Kumar : All right. Thanks guys. Mike McMullen : You are welcome. Operator : Your next question comes from Steve Beuchaw from Wolfe Research. Your line is open. Steve Beuchaw : Hi and thanks for the time everybody. Mike McMullen : Sure, Steve. Steve Beuchaw : I guess first I wanted to start with Bob with just a question about one of the underpinnings of the outlook for the year that hasn't been touched on so much just yet and it's NASD, maybe a two-parter on NASD. One is, do you think we feel good about getting to a few dozen millions of dollars of contribution from NASD? And then can you give us any perspective and I guess maybe this is a Sam question, as to how much of the capacity on the new facility in Fredrick is now contracted? And then I have one for Mike. Bob McMahon : Sure. Yes. Let me make sure I answer your question correctly. What I would say is, Q1 came in slightly better than what we expected on the ramp. So we feel very good about that trajectory. Obviously, you know the second half of the year is going to be significantly greater than the first half of the year as we ramp up that business. And I would say that the order book, we feel very good about. Sam Raha : Yes. And maybe Steve, to build on what Bob said. We have said that there is a ramp rate that we have been planning all along. That's what we are seeing. So as you really get into Q4, we will be much more in the run rate, if you will, of what to expect going into financial year 2021 in terms of the Frederick site in particular. So it's ramping as planned. It is being utilized. We were happy to produce good product and good revenue from that in this quarter again after starting last quarter. And further to what Bob said, a lot of these programs and projects are long lead, both working with our customers to really lay the groundwork and do the work. So though I can't tell you exactly what percentage, I do feel good about the percentage of programs and projects that we are already lining up going into next year. Mike McMullen : And Steve, if I could just amplify one of the points that Sam made. It was absolutely crucial that those first batches we produce for customers met their expectations. And as you know, we are very cautious in terms of how we started positioning the ramp here because we just had to get it right and we have gotten it right for those first few customers. I think that really positions us well when we look at the outlook for the rest of the year. Steve Beuchaw : Okay. That makes a ton of sense. Thank you for all the color there. And then Mike, I wonder if we could just do the zoom-out thing, if you will, where we think about the full year. I mean there are so many moving parts, right. And the Coronavirus certainly makes it more complicated. But if I rewind to 90 days ago or so, there was a perspective, not necessarily from Agilent, but certainly in investor conversations that the outlook for fiscal 2020 was really conservative or significantly conservative. And I think we have, of course, heard from you guys over the years, outlook that started at one point and you pretty consistently do better than the outlook. I wonder if you could just give us your perspective on the outlook and guidance philosophy now that you know 90 days more than you did at the time you gave the outlook at the beginning of the year, to what extent is this middle of the fairway, to what extent is this conservative? And as you talk to your customers and you think about the outlook, I mean, how are you feeling and how has that evolved, just again really zooming out? Thanks so much. Mike McMullen : Yes. Steve, so I am in the conference room zooming out right now and great question. And I think that that's how we thought about the full year guide, which I will leave it to you to prescribe the first adjective. I mean there were proper adjectives, but we started this year with a guide that we thought was relatively the floor of what we could do and talked about areas of potential upside for the business. And we were actually tracking well in the first quarter where it would have been a beat, both on the revenue and EPS side of the quarter, albeit the impact of the much talked about today the impact of the Coronavirus. So that's why we felt pretty confident about our ability to say, listen, there are still a lot of puts and takes relative to China in the near term, but there are other aspects of the business are doing extremely well outside of China, whether it be NASD or ACG business. The compares and the strength of our LASG instrument portfolio, that's gone on NGS. So we have a lot and then back to cell analysis. So we have a lot of confidence and whether we call it a middle of fairway right now, but we feel pretty good about -- Bob McMahon : Yes. I would say, Steve, one thing. Obviously 90 days ago, we didn't have the epidemic that we are seeing right now which is unprecedented. And so what we are trying to do is we are seeing, hey, in the first half of the year, we are expecting a $25 million to $50 million impact that we are going to make up in the second half of the year. Now the question is, how fast. And we hope for everyone's sake that that will ramp up fast and we will get this behind us. But that's certainly puts a lot more variability in our forecast. We feel good about where our forecast is. But we certainly didn't anticipate that at the beginning of the year. Steve Beuchaw : Okay. I really appreciate the color there. Thanks for bearing with me. I appreciate it. Mike McMullen : Sure, Steve. Great question. Operator : Your next question comes from Bill Quirk from Piper Sandler. Your line is open. Bill Quirk : Great. Thanks. Good afternoon everybody. Mike McMullen : Good afternoon Bill. Bob McMahon : Hi Bill. Bill Quirk : So I guess Bob or Mike, just update on M&A. You had mentioned on the last call that you would be considering looking at larger deals in and around $1 billion. Just curious what the update is? Mike McMullen : Yes. I think the statement I made in last quarterly call remains which is, we think that deploying our capital towards growth and earnings drivers on the M&A front makes a lot of sense for our shareholders in deals that makes sense for us, in markets that we know where we can really leverage the scale of the company. And we did our largest deal, BioTek, the past quarter. And as you heard earlier, that's off to a really good start. I think we often get the question, well, how large you are willing to go? And the way, Bob and I have described it is, listen, we could go maybe multiples of that. But we are looking to stay in our lane here and not do anything that's magnitude larger than a BioTek. So I am not saying that BioTek is the max level. But probably multiples of that as opposed to something that's of a magnitude size. Bob McMahon : Yes. And Bill, as you can appreciate, timing there is always very difficult to understand and we are going to remain disciplined. And if there isn't anything out there that would meet our financial criteria, we are not going to do it. We don't need to do M&A to make our model work. But certainly, you see in the first quarter the benefit that we have seen with BioTek and really building scale in cell analysis, which we think has a long term growth opportunity for us, not only in LSAG but across the business. Bill Quirk : Understood. And then just secondly, I guess kind of a bigger picture question about the pacing of CrossLab. Over the course of the year, we are going to be heading into slightly more difficult comps for the next couple of quarters? Bob McMahon : Yes. The beauty of ACG has been it's predictability across the business and we are not expecting any dramatic change in the back half of the year with the possible exception of slightly an elevated ramp in China. But that business that Mark and team have built has been just phenomenal in terms of providing stable high growth and profitable growth over the course of the last several years. And I think that that, quite honestly, is a great legacy to what Mark has been able to accomplish. And not only that, it really speaks to what our customers are looking for in terms of productivity in the labs and so forth. So we would expect that to continue to kind of chug along as we have talked about in the past. Bill Quirk : Got it. Thank you very much. Mike McMullen : You are welcome. Ankur Dhingra : All right. Thanks everyone. With that, we would like to wrap up the call for today. Have a great rest of your day. Operator : Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,020	2	2020Q2	2020Q2	2020-05-21	3.129	3.103	3.412	3.413	4.72	23.01	25.76	Operator : Good afternoon, and welcome to the Agilent Technologies Second Quarter Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] 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. Ankur Dhingra : Thank you, Jody, and welcome, everyone, to Agilent’s conference call for the second quarter of fiscal year 2020. I hope that all of you and your families are safe and healthy. On the webcast today are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining for the Q&A after prepared remarks will be Jacob Thaysen, President of Agilent's Life Sciences & Applied Markets Group; and Sam Raha, President of Agilent's Diagnostics and Genomics Group; along with Padraig McDonnell, President of Agilent 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, and revenue growth will be referred to on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. 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. Mike McMullen : Thanks, Ankur, and thanks, everyone, for joining our call today. I want to add my best wishes as well and hope that you and your families are safe and healthy. I'm pleased to have Padraig McDonnell, our President of the Agilent CrossLab Group, joining us for the first time today. As I mentioned last quarter, Mark Doak has retired from the company and Padraig is now leading the ACG. I know you’ll enjoy getting to know Padraig better in his new role. I'm glad he could be here with us on the call. Last quarter, Agilent was among the first to discuss the business impacts of COVID-19. Since then, much has changed as COVID-19 is now a global pandemic. The world is a very different place than it was back in February. But what hasn't changed is the attitude and execution of the Agilent team and our unwavering focus in four key areas. Let me first talk about how we are protecting our people. Our top priority is ensuring the health and safety of the Agilent team. Early on, we entered the global work-from-home policy and severely restricted travel. We implemented new work practices and safety protocols for our manufacturing teams and service engineers visiting customer laboratories. The team is really stepping up. True to the Agilent mission, our response to COVID-19 is driven by our commitment to our people and our customers. It should be no surprise then that our second area of focus is unwavering commitment to our customers. We are and have been open for business. From the early stage of the pandemic, we took decisive action to secure our global business operations. We are using innovative and more efficient ways to support our customers, from leveraging our digital capabilities, promote technical assistance to urgently delivering Bravo liquid handler systems for their COVID-19 test or providing live online guidance to keep labs functioning. We're doubling down on our efforts to support our customers. This is especially true as their needs change and evolve. Our third focus area is taking quick and decisive action to preserve a strong P&L and balance sheet. When we experienced significant disruption to business activity in late March, we made change in our supply chain, logistics and business operations. This ensured [indiscernible] order intake and our ability to deliver products and services to our customers. We also didn't shy away from taking swift action to reduce expenses. We quickly put in place a cost management program while reprioritize and sustained our growth investments. As we continue to sharpen our plans, we will not put our future growth opportunities at risk. Bob will share more details, but the top priority is monitoring our liquidity and cash flow. We have taken actions to ensure a strong balance sheet and financial flexibility. The positive impact of our approach shows in our Q2 results. In the midst of the spread of the global pandemic, the Agilent team delivered Q2 revenues of $1.24 billion. This is flat on a reported basis and down a little less than 2% on a core basis. Our Q2 operating margin of 22.4% are up 50 basis points. We posted earnings per share of $0.71 during the quarter, flat versus our results a year ago. Before covering additional Q2 detail, a few comments on our fourth key area of focus, our continued prioritization on growth. Our building and buying growth strategy remains firmly in place while we are taking decisive action on our cost structure to respond to the COVID-19 impact. We are continuing to prioritize investments in fast-growing markets such as biopharma that deliver incremental growth and help us create a more resilient business. When we all come out of this on the other side, Agilent will be poised for growth. Our Q2 pharma growth is being driven by the strength of our biopharma business. This is a direct result of our building and buying strategy in action. Our approach to investing for growth continue to serve us well and will be a major factor and help us emerge in the current environment stronger than ever. An example of our approach to continually assessing our growth investments is the decision we made regarding our cancer diagnostics strategy and the Lasergen sequencer development program. Given change in the marketplace, we believe we can now capture future growth in the NGS diagnostics space without the need our own sequencer platform. As a result, we made a decision to shutter our sequencer development program. We are redirecting our investments with the valuable intellectual property we’ve created into areas of higher interest. Despite this program change, we remain optimistic about continued growth in NGS cancer diagnostics. Let’s now take a closer look at the quarter as well as the future outlook in today’s COVID-19 world. Last quarter, our attention and revised outlook was focused on our China team, customers and business, as COVID-19 spread to other parts of the world in the second quarter, the situation changed. During February and March, our overall business was up about 1%, however, in late March, we faced significant disruption in business activity as Europe and the Americas restricted access to facilities. Our China business is recovering better than forecasted. We posted 4% core growth in China with increasing strength throughout the quarter. In fact, in April, China posted strong growth, while all other geographies experienced declines. We expect that China growth recovery to continue throughout the year as lab operations and investments continue to resume. The near-term outlook in Europe and the U.S., however, remains challenging, particularly for new equipment parts across most end markets and non-COVID-19 diagnostic testing. Some quick highlights across our businesses, both DGG and ACG delivered core growth. DGG’s 5% growth is driven by NASD, up 35% as the ramp of that business continues as planned. ACG was up 1%. Our LSAG business declined 7% as customers curtailed equipment purchases, although we did have pockets of growth in biopharma, cell analysis and COVID-19 testing and research. From an end market perspective, pharma grew 5% in the quarter, followed by 4% growth in diagnostics and clinical. The food market continues its recovery with a modest 1% growth driven by China. Our environmental and forensics business is down 1% for the quarter. In Q2, academia and chemical and energy are the end markets that are most impacted, down 16% and 10%, respectively. We expect continued pressure in these markets throughout the rest of the year, although we are seeing some pockets of growth in chemical production regionally as some customers shift supply chains. Looking forward, we expect Q3 to be the most challenging quarter of the year, with gradual improvement during the course of the quarter and continuing into Q4. As a key player in the life science industry, Agilent also has an important role to play in the fight against COVID-19. Before closing, I’d like to share a few thoughts on our COVID-19 offerings. While the COVID-19 virus is negatively affecting our overall growth at this time, Agilent is supporting several aspects of COVID-19 research and testing, along with therapeutic and vaccine development. In Q2, this resulted in a one-point tailwind of growth, primarily in providing instrumentation. There is potential that this will become a more meaningful tailwind in future quarters. To address this, we have mobilized across Agilent team to maximize support to customers around the globe fighting the virus. These offerings range from instrumentation, such as automation, PCR and marketplace testing to consumables and components necessary for testing as well as lab support to these customers. As we enter Q3, I want you to know that the global Agilent team is energized and remains focused on supporting our customers and driving growth. We have taken swift and decisive actions to ensure a continued strong P&L and balance sheet. We remain a diversified, resilient company with a bias for speed, execution and growth. Thank you for being on the call. I will have a few closing comments after Bob speaks, and then we look forward to taking your questions. And now, Bob, you’re up. Bob McMahon : Thank you, Mike, and good afternoon, everyone. Before I begin, I want to repeat what Mike and Ankur said and hoping that you are doing well and staying safe. Looking forward, I, for one, am confident we will get through this and look forward to the day when we can follow up these calls with face-to-face meetings again. In my remarks today, I’ll provide some additional detail on revenue, walk through the second quarter income statement and some other key financial metrics, and then finish up with a framework for thinking about Q3. Given the current volatility and uncertainty that exists, we’re not going to be providing specific forward-looking guidance today. That said, in the spirit of trying to be helpful and transparent, we will provide a glimpse into the evolution of our business during the second quarter and our thought process and how things may play out in the coming quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. Reported revenue for the quarter was $1.24 billion, which was flat versus last year on a reported basis. Currency negatively impacted revenue by 1.6 percentage points and acquisitions added 3.3 percentage points to growth. On a core basis, revenue declined 1.7% in the quarter. The pacing of revenue during the quarter varies significantly by region driven by where each region was in the cycle of precautionary measures, being taken to slow their spread of the virus. As we previously disclosed, we saw overall business activity slow in late March, driven by the U.S. and Europe. The stay-at-home measures in those regions reduce lab operations and limited lab access and our ability to install equipment. This lower level of business activity carry through the month of April resulting in double digit declines for the month in those regions. On the other hand, and as we had anticipated business activity picked up throughout the quarter in China, as restrictions were slowly lifted. We saw strong growth in China in April, partially due to catch up from lower business volumes in February and March. Overall, China grew 4% for the quarter, exceeding our initial expectations at the start of Q2. In total for Q2, quarter-to-date results through March were up 1%, while April was down roughly 6.5%, resulting in the 1.7% core decline. Before getting into some additional group details, it’s also important to note while we have seen some order push outs, we have not seen increased order cancellations. While there are always some level of cancellations in both March and April cancellations were actually lower than the previous year. Our resilient business model was extremely important to us as we navigated the effects of a challenging environment. As Mike mentioned, DGG and ACG both grew on a core basis, while LSAG instrument business declined. LSAG declined 7% core in the quarter, but did see some bright spots with growth in large molecule pharma, cell analysis and COVID-19 testing and research. In addition as Mike mentioned, we had modest growth in the food market. For LSAG the impact of COVID-19 related closures was most pronounced in the Academia and government and chemical and energy markets. ACG grew 1% with China growing in the high single digits. Our ACG results were negatively affected by delays and installations and lab closures in Europe and the Americas during the quarter. And I’m pleased to say that our DDG business delivered 5% growth during Q2, and it was on track for double digit growth prior to the slowdown in U.S. and Europe. We saw sequential growth in genomics, boosted by products used to develop testing capabilities and for vaccine research into COVID-19. And as Mike mentioned, our NASD ramp remains on track and delivered excellent growth this quarter as well. The pathology business grew in all regions except for the U.S. where the affects of delayed and non-COVID-19 related medical procedures was more pronounced in April. On a geographic basis, all regions ranged from flat to down 4% for the quarter with Europe down 4%, Americas down 1% and Asia Pacific flat. And within Asia, as we mentioned, China grew 4%. Now let’s turn to the rest of the P&L. As the expanded impact of the pandemic became apparent, we moved quickly and decisively to adjust our cost trucker through targeted discretionary spending program reductions. We continue to invest in our key growth opportunities and important capabilities, such as digital. For example, we leverage digital and virtual reality investments for our field service engineers to continue to support our customers where we did not have physical lab access. While we took actions across the P&L, we focus most of our effort on SG&A. R&D investments as a percentage of revenue were largely unchanged from the prior year. As a result operating margins of 22.4% improved 50 basis points over last year on flat revenue. Gross margin at 55.4% was down 60 basis points versus the prior year, mostly due to volume and the revenue mix shifting more towards services. In addition, we saw higher logistics costs as moving goods internationally became more expensive. This combination of factors resulted in non-GAAP EPS for the quarter coming in at $0.71 per share flat with the number we posted a year ago. Now in terms of the balance sheet, we were in the market early in the quarter, repurchasing 1.66 million shares for $126 million. In late March, however, we suspended all our share repurchases to maximize our liquidity and financial position. While not in our current plans for Q3, we continue to monitor and evaluate when repurchases will resume. We generated $313 in operating cash flow during the quarter, which is a $61 million improvement over last year, despite building some raw material inventory to assure supply. Additionally, we've taken steps to reduce our capital spending by roughly one-third for the rest of the year. In addition, we ended the quarter in a strong position with $2.1 billion in available liquidity, including $1.3 billion in cash and roughly $800 million available under our revolving credit facility. Our net leverage ratio as defined by net debt to EBITDA was 0.9 times. Given our cash flows and our strong financial position, there is no change to our dividend. As you may recall, we withdrew our 2020 guidance in mid-April due to the uncertainty surrounding the duration and severity of the global COVID-19 pandemic and the impact on the global economic environment. While various countries have started working towards reopening, the pace and effect of global reopening efforts is still unknown. So we won't be providing guidance for Q3 or the full year. However, we did want to provide a framework and a range of possibilities for how our business could unfold in the coming quarter. When we look at Q3, we expect May to be very similar and the business activity is very similar to April and the business activity we've seen in the first few weeks of the month confirmed that. We anticipate that China will remain ahead of the curve in terms of economic recovery, relative to the rest of the world. We expect pharma and our services, particularly contracted services, which make up the majority of our service revenue to remain resilient. And we will be following the consumables business very closely to monitor early signs of recovery and demand patterns. A combination of these factors could result in our revenues being down between 5% and 15% on a core basis. At the lower end of the decline, we assume activity in June and July will continue to improve, with the COVID-19 offerings Mike mentioned having a more significant impact than the 1$ contribution in Q2. On the higher end of the decline, we’re building in the assumption that there would be no significant improvement throughout the course of the quarter in the U.S., and Europe, that non-COVID-19 testing would not recover, and China would plateau. While this is a wide range, there is still significant uncertainty in the pace of recovery as the U.S., and Europe are currently lifting restrictions. We hope that the 15% decline proves very conservative but wanted to provide you with some of the assumptions we are using to manage going forward. In Q3, we expect a two-point headwind due to exchange rates, and M&A should be a three-point tailwind. Again, this is not formal guidance, but should give you a sense for some of the variables we are looking at within the business and believe this is the best way to view the third quarter given the uncertainties that exist. As Mike said, we also believe that fiscal year as the world works through reopening the economy. Overall, I feel we are very well positioned to deal with this challenging environment, accelerate market share gains and come out even stronger as the global economy recovers. Before I turn the call back over to Mike, I want to conclude by saying Agilent’s performance for the first two quarters truly shows the resiliency of our company. I also want to thank the Agilent team for remaining focused on supporting our customers during this time. And, I’d be remiss without a shout out to the finance team for being able to close the books in such a professional manner with everyone working from home. We’ve taken the actions that will serve us incredibly well through the rest of 2020 and into the future. And with that, I believe Mike would like to share some final thoughts before we move on to the Q&A. Mike? Mike McMullen : Yes, thanks, Bob. Before we take your questions, I want to close by saying that I couldn’t be more proud of our Agilent team. The idea that difficult situations provide the opportunity for organizations and individuals to step up and exhibit strength, leadership and resiliency has never been more true at Agilent. The Agilent team has been tested during this crisis like no other time and they have not shied away from it. Instead, we have answered the call with world class execution, an even stronger focus on customer service and an inspired creativity that is second to none. I am absolutely convinced we will emerge from this pandemic as an even stronger force in the marketplace. And, with that, I will turn things over to Ankur so we can take your questions. Thank you. Ankur Dhingra : Thank you. Jody, if you can open the line for Q&A, please. Operator : [Operator Instructions] And our first question comes from the line of Tycho Peterson of JPMorgan. Please go ahead. Your line is open. Tycho Peterson : Thanks. I'm going to start by asking about the guide. You said China is plateauing. So what I guess sequentially is getting worse here since you captured April in the prior quarter. Why should things be deteriorating for the upcoming quarter? And then, on the COVID tailwinds did the 35% growth you called out in NASD, does that capture anything around COVID manufacturing? Or can you maybe just touch on what drove the strength there too? Mike McMullen : Do you want to take that one? Bob McMahon : Yes. Thank you, Tycho. And this is Bob, I'll take the question. I'll actually take the second question first around NASD. The NASD growth is on the ramp that we had talked about previously. It actually had nothing to do with COVID-19 testing or research. It's mostly the activities that have continued in our pipeline of products and clinical testing that has happened. And we're very pleased with the progress there. So that has nothing to do with the COVID-19 testing. On the first question that you had, again, this isn't guidance it's kind of a range of scenarios that we're planning. And we hope that the bottom end of that or the minus 15% would be very conservative. If you look at, we are expecting May to be very similar to April, which would hopefully be the bottom and then improvement in June and July. And but if there are relapses, if China does relapse, or there is a slowdown in that growth that would be the bottom end of the range. So it's a wider range than we would normally have. But there's obviously very much a lot of uncertainty around the forecast. Tycho Peterson : And on the uncertainty, chemical and energy, you mentioned customer shifting supply chains. Can you maybe just talk about how much of the sequential step down here at C&E and given the volatility in oil purchase, how much of a factor that is? Mike McMullen : Sure. Yes, Bob, I'll take that one. So I think for C&E for Q3, basically, we assume than it kind of looks like Q2 and with the potential that the investments that we're starting to see inclinations of a regional approach to this pandemic is really cause many parts of world to rethink their supply chain. So we're seeing early indications of moving of on shoring ensuring certain types of critical chemical components in certain geographies. So that could represent some upside I think. But basically, we're assuming kind of current situation continues into Q3. Bob McMahon : Yes, Tyco, if you look – if we took our chemical and energy end market and looked at the first two months versus April, they were roughly the same. So we said it was down 10% in the quarter. It didn't have a material change in April. One of the businesses that did was academia and government. So academia and government with the lab closures and so forth was worse in April than it was in other markets. But chemical and energy was pretty steady throughout the quarter now albeit down. Tycho Peterson : Okay. And then one clarification point… Mike McMullen : Okay. Sorry, I was going to add to that. I think when we talk about chemical and energy, it's important to keep in mind that about 70% of that segment is actually chemicals, including material testing. Tycho Peterson : And then just one clarification before I hop off on Lasergen, again, it sounds like, this is a full write down, is that correct? You're kind of abandoning your project. That seems a little bit different than what you talked about back at our conference in January. So can you clarify, what changed there? Mike McMullen : Yes. Well, actually you reference your conference a lot changed after the conference where we saw a number of new announcements indicating there were some changes in terms of how certain competitors in the space were thinking about access to the platform. So that caused us to rethink our current investments and we had an opportunity to really move our program forward without needing to invest directly in a sequencer platform of our own. And Bob, I'll let you comment on the financial side of that. Bob McMahon : Yes. It is a full shut down and we will have a write-off in Q2. Tycho Peterson : Thank you. Operator : And our next question comes from the line of Steve Beuchaw of Wolfe Research. Please go ahead. Your line is open. Steve Beuchaw : Thanks for your time here. I wanted to ask, first of all, on the strategic activity in this space. One thing that we've seen across tools and devices is this upwelling of interest in capital raise in part with a view that there is an opportunity for accelerated capital deployment, given potential for opportunity here. You guys have a uniquely strong balance sheet comparatively, certainly plenty of liquidity. I wonder if you could speak to how you think about capital deployment and the intensity of capital deployment in the next year. And then I have two follow-ups. Thanks. Mike McMullen : Yes. I think from an Agilent perspective, our overall thesis of building and buying still stays intact where we'd like to deploy capital in M&A, that makes sense for the company. And we've talked about our criteria around end markets that we know, where companies that we've acquired and have higher levels of growth in the overall company average accretive. So that formula remains relatively unchanged. But we have noticed as some of these moves as well. So I think that speaks to a continued robust interest in the M&A pipeline across the industry. I'd also tell you the valuations haven't moved much. So this is not a buyer's market and you can buy things on the cheap, so you really have to be think through what you're looking at and does it make sense for the company? Anything else you'd add to that, Bob? Steve, do you have a follow-up or… Steve Beuchaw : Yes. Sorry. I thought Bob might chime in there. But I have two follow-ups. One is, I wonder if you could speak to activity on a month-to-month basis and the extent to which you think there might've been any sort of April snapback. You commented on it specifically in China, but any snapback activity in other parts of the world and the extent to which people might be trying to ramp quickly and how that might reflect, not just in China, but on – growth as a trend line prospectively for non-China regions. And then one just quick one, I am curious how you guys are thinking about planning for growth in CrossLab given that CrossLab historically been a very strong grower and some component of the CrossLab growth story has been penetration into new categories, is that penetration story still active in the current environment. Thanks so much. Bob McMahon : Yes. I'll take the first question in terms of the pacing, Steve and you're right. What we have seen is that the pacing by region really follows kind of how the pandemic spread and then how the countries are coming back. And so what we saw was a more pronounced, obviously in China that has – I wouldn't call it a snapback, but it's a recovery. And we're actually seeing the same thing in Europe, where Europe, we felt more of the pain, and that it's actually coming back faster. And then the U.S., and now we're starting to see some of the U.S., it’s still very early days in the U.S., but you are seeing kind of that – that kind of wave of recovery happening throughout the course of each one of the regions. And I'll turn it over to Padraig to give a chance to talk about the CrossLab’s business, but we remain incredibly bullish about that business. And I think even more so now, given some of the proof points that we have in terms of being able to support our customers, both directly and through our digital means. Padraig? Padraig McDonnell : Yes. Thanks, Bob. And I think yes, very, very strong demand. We're seeing, for example, in our service business, a lot of strong tracks which really help our customers be productive and help with startup services and actually achieve a critical component in the services. On the consumable side, we certainly saw a strong demand in China, a big snapback up on in terms of a demand for our products that are really supporting workflows. And we see this continue especially around a lot of the digital capabilities that we've developed and our way of interacting with customers. The last thing, I would mention is that also our productivity story in CrossLab about our lab enterprise business is doing extremely well. And also we really shows that the customer need for productivity in these times on beyond going forward is going to be very strong. Bob McMahon : And Steve, let me add just one other thing. In the case, obviously ACG grew 1%, it would have been stronger – several points stronger. We did have some deferrals because we couldn't install the equipment and we recognize a portion of the price for the service, the training and installation and so forth. And so that is revenue that is on the balance sheet today and it will come back to us in the course of Q3 and Q4. Steve Beuchaw : Okay. In Q2, this particular quarter was not a good indicator. Much appreciate it. Thank you very much. Operator : Our next question comes from the line of Patrick Donnelly of Citi. Please go ahead. Your line is open. Patrick Donnelly : Great. Thanks guys. Mike, maybe one for you on the C&E segment, certainly encouraging to hear there was no real deterioration in April. Can you just talk through the exposure there? Obviously, E&P pretty correlated to oil prices. Maybe on the refining side, how has that reacting to the oil decline? I know typically low oil could actually be a positive if it's over supply. It feels like at least part of what's going on now is low demand, but maybe just talk through what you're seeing there and the expectations going forward. Mike McMullen : Yes. That’s a great question. And what we also try to think through, what’s really behind the lower oil price. And I think this time, you’ve got two things going on, right, which was oversupply and then really driven by, obviously, the COVID-19 and the slower growth in the economy and demand for those services. But I’m really glad to get a chance to comment on the mix of our business because that segment is pretty subdued right now. But over the years, we’ve continued to have more and more of our business move into the chemical side of that. So roughly about 70% of our business in C&E is in the chemical side and really saw much different dynamics in April, actually, almost all through all Q2, where the energy segment was pretty subdued where limited investment there, mainly business was carried forward through our ACG business, but really not a lot of demand on instruments, different kind of scenario on the chemical side. Patrick Donnelly : Okay. And then maybe on the other side of COVID, obviously, academic labs closing during this understandable that they should snapback quickly. I guess, how do you feel about the C&E segment? Does it feel different where, again, labs reopening, demand comes back quickly, do you think this will linger because of the oil prices? What’s your outlook, maybe again? Not asking for guidance by any means, but over the next 6 months to 12 months, does this have the potential to linger versus some of the other ones that should snapback? Mike McMullen : In my prepared remarks, we basically said we expect this segment to be subdued for the foreseeable future. So it’s really just tied to events that I’m just not smart enough to figure out myself, which is when does global growth start to get solidified and when does it start to turn. I think what we wanted to point out, there actually are some little glimmers of positive aspects of C&E business, particularly the COVID-19 has exposed the fragility of the world’s supply chain. And we’re seeing many customers and many governments, they want certain critical components made in their country and made in their region. So we are seeing indications across multiple industries of onshoring initiatives actually starting, which would speak to some longer-term growth prospects in this space. But don’t get too excited. This – I would just say, let’s assume that it’s going to stay subdued for a while as we’re thinking about it right now. Hence, the reason why we went through the guidance in Q2, because some of these are just too difficult to predict the timing of transition. Bob McMahon : Yes. And I would say, Patrick, just on that, obviously, the more subdued piece is the instrumentation… Mike McMullen : Yes, yes, yes, absolutely. Bob McMahon : And we will see the snapback or the improvement first in the ACG business. Mike McMullen : Absolutely. Patrick Donnelly : That’s really helpful. And then a very quick cleanup on NASD, following up Tycho’s question there. Do you guys have capacity to increase the address demand from COVID? Or are you already kind of maxed out in terms of the build out and just as you build out capacity, it’s kind of addressing? Mike McMullen : We are not capacity constrained. And now, we continue to build out the new facility in Frederick as well as optimizing our Boulder facility. And while I can’t share specific names, I can tell you that there are programs underway that aren’t in the revenue yet right now that are related to COVID-19 work. Patrick Donnelly : Great. Thanks a lot, Mike. Mike McMullen : You are quite welcome. Operator : Our next question comes from the line of Derik de Bruin of Bank of America. Please go ahead. Your line is open. Mike McMullen : Hey, Derik. Derik de Bruin : Hello, good afternoon. Hi. Couple of questions, just a couple of cleanups. The NASD base now in 2Q, what’s that – where are we in terms of revenues? That was up 35%. I’m just curious on the base. Mike McMullen : Yes. It’s tracking well to the number that we talked about at the – or what people have estimated, ramping up to $150 million kind of run rate. It’s tracking well to that. Derik de Bruin : Great. And what are you going to do with the – are you reinvesting the Lasergen money into the business? Or is that going to drop through? Are you going to – and can you remind us on what you were spending on that I think it was around $50-ish million. Mike McMullen : Yes. No, it was about $30 million a year. That was what was kind of forecasted this year. We’ve spent basically half of that. So the second half of the year, that’ll be a combination of reinvesting where appropriate and also managing the dynamic situation that we’re in, in terms of COVID-19. Hey, Bob, I think we had the full cost of the program in our Q2 results, in our next quarter results. Bob McMahon : That’s correct. Mike McMullen : And there’s some real talent in that team, and there’s some really great intellectual property that we think we can really deploy in other programs. So we’re looking to go forward that combo approach, as Bob mentioned. Derik de Bruin : So you mentioned that you’re seeing some of your chemical customers think about their supply chains and move around. What about the pharmaceutical customers? I mean, obviously, there’s a push looking about bringing API manufacturing back, and you’re a big player there. And this also sort of dovetails with another question on geopolitical tensions. And are you worried about the longer-term impacts of what’s happening now between the U.S. and China in terms of your China business? Bob McMahon : Yes. I’ll – hey Derik, this is Bob. Yes. I’ll take the first one, and I’ll leave the second one to Mike. I think on the pharmaceutical one, we’re actually watching that very closely. It’s different than the chemical side because I think the chemical side will probably move a little faster than this. Obviously, there’s regulations, but you are seeing discussions about that even as recently as earlier this week about the U.S. providing a contract here in the U.S. for some APIs and so forth. So we actually think – we’re watching that closely, and we think that, that could be an opportunity for us as those new labs or capacity come out, because our offering here is, I think, second to none, and so more to come there. It’s probably not as fast-moving, but we certainly is on our radar screen. Mike McMullen : And without waiting in too deeply on the political dimension of things today, what I can tell you is we’re actively scenario planning. We – under potential scenarios around changes in trade policies and supply chain. So we don’t want to be caught in the reactive mode that we were when tariffs were first announced a few years ago. So our teams are really working through a number of different strategies right now. Derik de Bruin : And if I can squeeze one more in. Mike McMullen : Sure, sure. Derik de Bruin : While Agilent doesn’t do – you don’t supply testing products for COVID-19. I mean, obviously, how are you thinking about testing and deploying testing for your employees? And I’m sort of curious about, are your customers demanding that you get tested or people come in? Because there’s some very large numbers being thrown around in terms of the size of the testing market. And so I’m just curious in terms of what you’re thinking. Mike McMullen : Yes, a couple of things right now. So first of all, although we don’t provide kits directly ourselves, we provide a lot of the components and ingredients, antibodies and other enzymes, that go into testing kits. So we’ve – I’ve personally involved in a number of calls where customers and governments are looking for us to assure to supply to them. So I think we’ve got a good feel for the demand that we’re seeing out there. Relative to our own employees, right now, we’re not requiring employees to be tested for – return in the office. Just a reminder, about 85% of the employees now are, for Agilent, are working from home, and we’re going to be very, very careful on phasing in the return to office. So we’re thinking this through. Once more routine testing does become available, that’s probably something we would look at pretty closely. But we’re in no hurry right now because our teams are working from home right now. Relative – it’s funny. We keep asking that question of our – particularly our service teams, and that has not come up yet. So we’re continuing to monitor. But right now, we’re not seeing requests from our customers to have any type of testing done prior to our employees coming onto the site. Clearly, we have to follow that our safety protocols, and we offered our team with the right PPE and the right training. But on the testing side, we’ve not yet seen that. Derik de Bruin : Thank you very much. Operator : Our next question comes from the line of Dan Leonard of Wells Fargo. Please go ahead. Your line is open. Dan Leonard : Thank you. So hate to overanalyze one month, but I want to circle back to the month of April. So 6.5% down is not so bad for all of the news we’ve seen. Can you – you mentioned strength in China. Can you quantify China? I mean I was doing some back of the envelope, but it looks like it might have been greater than 20% growth in April in China. Is that in the right ballpark? Bob McMahon : Yes. You’re in the ballpark. Mike McMullen : You’re pretty at good math, Dan. Dan Leonard : Okay. And then maybe separately follow-up. Mike, it does seem like you don’t trust the trend in China. And how much of that is just uncertainty around the virus trajectory versus the maybe geopolitical or any other things? Mike McMullen : Dan, thanks for the follow-up question. I do trust the trend in China. So I hope that didn’t come through that way in my remarks. So actually… Dan Leonard : Okay. There’s the plateau earlier. I wasn’t sure. Mike McMullen : No, no. That was sort of the worst-case scenario that Bob was trying to put together this framework, said, well, we could be wrong. And if it’s wrong, we – this is what the implications would be. We don’t think we’re wrong. But if in case we were wrong, this is – you see that far end of the framework that Bob described. But in fact, Q2 China growth was better than we had expected, and we believe it’s going to continue to return to higher levels of growth throughout the quarter. And I hope a few of you noticed that the China food also grew in Q2. Dan Leonard : Great. Thank you for that clarification. Mike McMullen : Absolutely. Operator : Our next question comes from the line of Doug Schenkel of Cowen. Please go ahead, your line is open. Doug Schenkel : Hey, good afternoon, guys. Mike McMullen : Hey, Doug. How are you doing? Doug Schenkel : I’m doing well, thank you. So maybe a quick follow-up to Dan’s question, cutting it in a different way. Bob, you said May is going to be similar to April, but you acknowledged, again, in answering the last question that China continues to get better. Logically, I think that means something or somewhere still must be getting worse coming out of April into May. Maybe I’m just being a bit too forensic with how you position this. But I’m just wondering, are there areas where you saw and continue to see continued deterioration as we sit here in mid to late May? Bob McMahon : Yes, we haven’t seen any continue – again, these are one point out of the month, right, but – or one point out of a year. But May is trending the way April trended in total. And so we’re not seeing anything that is dramatically off pace. Mike McMullen : And I think Bob, it’s – maybe this is worth mentioning that we don’t go in a lot of details on the order front, our order forecast have been tracking well for both April and through this point in time through May. So, yes. Doug Schenkel : That’s great. Helpful color. Regarding ACG trends, specifically on the consumable side, what did you see in April and then what was that trend into May. Consumable use picking up would be a really great sign that more people are getting into labs, and as you noted, a good leading indicator for future demands. So I’m just wondering, recognizing it’s an unusual time, if you’d be willing to go to that level just because it’s important for you in the group. And if so, if you’d say anything about specific end markets and geographies? Bob McMahon : Yes. I would say, generally speaking, our consumables business has started to pick up. And I’ll just leave it at that. Doug Schenkel : And it’s tied directly to the opening a facility. Mike McMullen : You can draw a parallel, where things are opening up. You see the consumables recovering. It’s recovering much faster than the instrumentation. And that’s really – that’s why we keep using word uncertainty, because we can’t project exactly how certain facilities will open up. But we know when they opened up in China, we’ve gotten the business. We know as they’ve been opening up in Europe, we’re getting the business. And then when they’ve slowly been opened up in the U.S. but getting the business, with the exception being universities, which aren’t opening up right now, unless you’re doing COVID-19 research. Bob McMahon : Correct. Doug Schenkel : Okay. Super, helpful. Last one, cell analysis. Can you talk a bit more about trends in this business in the quarter? You had a good quarter. The business grew year-over-year. I think on the surface, that’s a bit surprising just because of the heavy mix of heavy, the exposure to academic research. How are you able to pull that off? Mike McMullen : Yes, Doug. Thanks for the observations there, because there is a big footprint of the business in academia, but the overall business did grow. And I think I’d like to give the opportunity to Jacob to crow a little about what’s going on there. Jacob Thaysen : Yes, absolutely. Thank you very much. And it is actually a good story. I mean, as you say, Doug, it is a tale of two cities that clearly academia and government has been challenged during this period of time. While our exposure in biopharma has really picked up here. And furthermore, we have also seen quite some interest for the BioTek ELISA and [indiscernible] in for the theology testing. So with that, that’s actually quite good demand. We also see a flow, will have a tremendous growth. We see a lot of the flow instruments being used in the research sector right now to better understand the cytokine that is happening in – relates to the COVID-19. So overall, both the biopharma space is seeing strong demand. We’ve seen demand into the diagnostic testing on the COVID-19. And then obviously, academia and government overall is challenging, but we do see pocket of interest still there. So overall, great performance. Mike McMullen : Thanks, Jacob. Doug Schenkel : Okay, great. Thanks, again. Mike McMullen : Thanks. Operator : And our next question comes from the line of Puneet Souda of SVB Leerink. Please go ahead, your line is open. Puneet Souda : Yes, thanks. Hi, Mike. First one on NASD. Mike McMullen : Hi, Puneet. How are you doing. Puneet Souda : Great, great. Thanks, Mike. So the first one on NASD. Great to see the growth there, but just wondering, was there any element of stocking from the biopharma or biotech customers there just given heading into COVID? Mike McMullen : Sam, I think the answer is no, but I’m going to – you haven’t had a chance to talk today. So why don’t you confirm or deny this room or around. Sam Raha : Yes, yes. Thank you. No, the answer is no, Mike. And Puneet, that business, it’s a long lead business where we both contract with customers usually several months, sometimes quarters out the work because there’s a lot of a proprietary work that has to be done in conjunction with them, scheduling all the pre-validation work. So no, there was no stocking work. We’ve got things scheduled out for months ahead already. So, no stocking effect. Bob McMahon : Hey, Puneet, this is Bob. Just to add on to what Sam said, because there’s been a lot of news about clinical trials being put on hold and so forth. We haven’t seen any of that in our demand for NASD. Puneet Souda : Okay. That’s great to hear. So Sam, if I could and Mike, you as well, if I could ask on cancer diagnostics, obviously a high growth area and expansion into liquid biopsies and other significant market opportunities there. Now with the decision on Lasergen, how are you thinking about the long-term focus for your genomics portfolio and overall market position longer term? Mike McMullen : Yes, I’ll make some initial comments, and I’ll invite Sam to join in here as well. So I guess, first of all, important just to remind the audience we actually do have a cancer diagnosis business with day from an NGS perspective. So we provide a lot of components and sample prep and other instrumentation into these workflows today. We’re overall very – we continue to be very, very bullish about the cancer diagnostics market for NGS-based – cancer-based diagnostics. And we think there’s a path forward for incremental growth on top of what we’re doing that doesn’t require a – or having our own sequencer, because of some change in the external marketplace. And Sam, maybe you have some building comments on that. Sam Raha : Yes, yes. Absolutely, Mike. As you said, we are – we remain the leading provider for library preparation, particularly target enrichment kits that are used as part of NGS-based cancer diagnostics. We have some of the leading workflow elements as it relates to NGS-quality control and so forth. And also our combination of our access to clinical diagnostic labs through our pathology franchise, our CDX business where we work with pharma partners to develop companion diagnostics from – we believe, together with what we have in genomics, it still gives us a unique capability set, which we are looking to deploy that capability set by bringing that together and there’s partnering opportunities. So Puneet, we haven’t really changed our thesis. And as Mike said earlier, we just don’t believe we need to directly develop the sequencer ourselves. But our commitment to genomics, including arrays, including NGS continues, and we feel good about it. Puneet Souda : Okay. That’s very helpful. And if I could squeeze last one then on the Bravo Liquid Handling robots that you have obviously are being used widely among the COVID testing community as well and genomics community. So trying to see if that was a meaningful number of this quarter. And is that something you expect to continue? And if you can – if there’s something you can quantify for along those lines. And I wasn’t sure, this is in Sam’s bucket or it’s actually in the LSAG bucket. Bob McMahon : Yes. Hey, Puneet. This is Bob. I’ll tell you it’s in the LSAG bucket. And that was the majority of the instrument of the COVID-19 testing that Mike talked about one-point tailwind in Q2 and growing. So… Mike McMullen : So that demand has not peaked, and it comes not only with instrumentation, but an ongoing supply of consumables associated with an instrumentation. Puneet Souda : Okay. That’s great. All right, thank you. Operator : And our next question comes from the line of Vijay Kumar of Evercore ISI. Please go ahead. Your line is open. Vijay Kumar : Thanks guys for squeezing me in here. Mike McMullen : Sure, Vijay. No problem. Vijay Kumar : Mike, so I think I just want to make sure I heard this correctly. You guys say April was down 7%, because I’m trying to figure it out, If May is in line with April 6.5%. So if May is, I guess, in line with April or even I guess, if the next – forward two months are in line with April. Like how do we get to minus 15%? Maybe just help us understand the range? Bob McMahon : It wouldn’t – Vijay, you wouldn’t, that would be kind of the – towards the lower end, right? So what we’re saying is, if things kind of backtracked, we didn’t get any better in the U.S. and Europe and we didn’t really have – there was a sort of a backtrack in China. So again, we’re saying we don’t expect that. We hope that that’s very conservative. But things are just now opening up in U.S. and Europe. But if you do the math that you’re saying, you don’t get there, you get a lot better. You get towards the minus 5%. Vijay Kumar : Understood. That’s helpful, Bob. And then I guess, on that China topic, I know in the past you guys have or I guess, some of your peers have spoken about the stimulus – China stimulus. Any details around or thoughts around a potential for stimulus? And perhaps how that could benefit you guys? Bob McMahon : Yes. We haven’t heard any specifics on that. So that clearly would be a boost to our view of market demand the latter part of this year, but that’s not at all in our calculus right now when we talk about a recovering China marketplace for us. Vijay Kumar : Perfect. Thanks guys. Operator : And our next question comes from the line of Brandon Couillard of Jefferies. Please go ahead. Your line is open. Brandon Couillard : Thanks. Mike, I was hoping you could just touch on the small molecule pharma trends in the quarter and around capital equipments. Any disruption in places like India or other geographies? Mike McMullen : No, significant disruption, but it’s relatively flattish I think for the quarter, that’s about 70% of our pharma business, about 30% it was growing quite strongly in biopharma, small molecule is relatively flattish on the instrumentation side. Bob McMahon : Yes. We – our business in India is fairly small today. Brandon Couillard : Okay. Then just one follow-up for you, Bob, just around the P&L. Can you sort of speak to the cost structure breakdown through fixed and variable? And maybe how we should think about OpEx trends into the third quarter? Bob McMahon : Yes. I would say, I mean, we’ve been – we were very pleased with our ability to kind of manage the kind of the cost structure here. If you looked at it kind of on a sequential basis, there was about a $35 million kind of reduction, about a third of that quite honestly was travel related. As we put the brakes on and I would expect that to be probably even more significant in Q3. Obviously variable and then discretionary spend and then we do have some element of our variable comps that reduces with performance. But what I would say is, Q3 is going to be more challenging because we are protecting those growth investments. But we are very pleased with our ability to kind of manage our costs. Mike McMullen : Yes, Bob I could just jump in there. I mean, the fact that we were able to increase margins in the quarter in the midst of a pandemic, we’re really quite pleased with that. And we didn’t take shortcuts here. So we – there was no COVID-19 layoffs within Agilent. And we’ve got a team that is not worried about their future employment. They are all worried about winning the marketplace and taking care of our customers. Brandon Couillard : Okay. Thank you. Mike McMullen : Thanks. Operator : And our next question comes from the line of Dan Brennan of UBS. Please go ahead. Your line is open. Dan Brennan : Great. Thanks for taking the question guys. Mike McMullen : Sure, Dan. Dan Brennan : I was hoping maybe to – hey, Mike, maybe to go back to China for a moment. Mike McMullen : Sure. Dan Brennan : Can you break it down a little bit more, kind of what you’re seeing in China? I know you kind of highlighted in the deck that food grew and I think you’ve given some other tidbits. But maybe just give us a little flavor for your segments in China and then specifically if you could also just address maybe an update on food and generics, which had been two big drags for you guys. Bob McMahon : Yes, I’ll take it Dan. What I would say is, in the quarter we were very pleased with the performance. All three business groups grew with DGG, albeit, the smallest one growing the fastest followed by ACG and LSAG was up a modest percentage, which is a great testament to the team there. Across the groups all, but I think Academia and government grew to varying levels. And food as we talked about was up in China and it helped drive the global food being up. So again, very good recovery there. And we’ve been very pleased with our performance in China. Dan Brennan : And we throw, Bob, and thank you for that. The generic issue obviously maybe gets a little lost right now during COVID and did major… Bob McMahon : Yes. From a generic perspective, pharma was up it’s really driven by the biopharma business. But our small molecule was not significantly impacted. As Mike said, our small molecule business was roughly flat globally and it was not that far off in China as well. Again, we’ve got the view that now COVID-19 kind of throws some variables in here, but we’ve continued to have the view that this ultimately is a good thing long-term for the industry and ultimately for us because we continue to see the customers who win are disproportionally our customers. And nothing really changed in Q2 from that standpoint. Dan Brennan : Got it. Jacob Thaysen : Well, I can add to that. The conservation just continued with the generics, but according to our expectations. Dan Brennan : Yes. Got it. And I know there was already a question I think – thanks, Jacob. And then I know plenty to ask the question on the diagnostics business, but if you think about DGG ex-NASD business, obviously that business should be a lot less sensitive towards discretionary visits given the nature of what you’re selling there. But can you just give us a little flavor for what you are seeing since there is such a focus on the ability for hospitals to open back up and patient visits? So what do we track there? Mike McMullen : Yes. I think actually, hospital access for – and patients willingness to go to the hospital, medical care outside of COVID-19 has put a damper on the U.S. business in pathology. So that’s one of the areas of “uncertainty” we’re looking at is when will those – when will patients start to return to hospital to get those procedures done. We saw that resume, I believe Bob in Europe. But we’ve not yet seen it in the pathology U.S. business and that puts somewhat of a – that’s put a drag on our Q2 results. We were quite pleased to post a 5% core growth in that business, despite this drag in the U.S., which we think eventually is going to come back. But again, this is when. Bob McMahon : Yes. And Dan, that’s one of the variables that we were taking to account with the framework that we were talking about. If in fact, the large labs continue to focus on COVID-19 testing or there’s not any resumption of non-COVID-19 medical procedures, then that will impact our pathology business because right now, biopsies aren’t being done. Cancer screening is being deferred. And then if you have cancer, then you go for a biopsy and so forth. We’re hoping that that will resume throughout the course of this quarter. But it’s still very early days. Ultimately we see that as bad for the healthcare of the world, quite honestly. And so we hope not just as manufacturers, but as brothers and sisters and mothers and fathers that happens. But that’s one of the things that is still in front of us. Dan Brennan : Terrific. Thank you, guys. Bob McMahon : Welcome. Operator : Thank you. And that’s all the time that we have for questions. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,020	3	2020Q3	2020Q3	2020-08-18	3.149	3.211	3.516	3.632	4.88	26.91	27.51	Operator : 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 speakers' remarks, there will be a question-and-answer session. [Operator Instructions] 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. Ankur Dhingra : Thank you, Robert, and welcome, everyone, to Agilent's conference call for the third quarter of fiscal year 2020. I hope that all of you and your families are safe and healthy. On the webcast today are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining for the Q&A after Bob's comments will be Jacob Thaysen, President of Agilent's Life Sciences & Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of Agilent 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, and revenue growth will be referred to on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. 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. Mike McMullen : Thanks, Ankur, and thanks, everyone, for joining us on our call today. The Agilent team delivered excellent results in the third quarter in the midst of a historic global pandemic. Against this backdrop, Agilent's performance once again highlights the strength and resiliency of our team and our business. Agilent's Q3 revenues are $1.26 billion. Our revenues are down just 1% on a reported basis, despite COVID-19 headwinds in what we expect to be the year's most challenging quarter. On a core basis, revenues are down 3%. These results demonstrate the strong resilience we have built into our business over the past several years. EPS is $0.78 per share. This is a 3% year-over-year increase. Operating margin grew 90 basis points over last year to 23.7%. Our Q3 results are further evidence of the success of our profitable build-and-by growth strategy. We continue to build a more resilient growth oriented business. Last quarter, I talked to you about the four key priorities we're focused on during the COVID- 19 pandemic : Protecting our people; being open for business for our customers; taking decisive action to deliver our P&L and balance sheet; and unwavering commitment to growth. Staying focused on these priorities has helped us navigate through the COVID-19 effects on our team, customers and business. Our customers continue to respond very favorably to our team's engagement and enhanced digital capabilities. In fact, Q3 customer satisfaction rankings are at all-time highs. In all regions, we're seeing improvement in lab access for our customers and increase non-COVID-19 testing volumes. There are, however, regional and end-market differences in the pacing of improvement. Labs access improved through the quarter, although still not at pre-COVID-19 levels. Globally, lab access remains limited in academia, non-COVID-19 research and testing labs. We're also seeing continued limited access at some private sector research labs in Europe and United States. Similarly, non-COVID-19 diagnostic testing volumes improved throughout the quarter, but remained down from prior levels. Hospital access in Europe and the U.S. is improving, although disrupted at times by virus flare up. While there are indications of improvement in economic growth at varying degrees across the globe, caution remains at customer capital expenditure decisions. Consistent with our thinking coming into the quarter, the pace of recovery varied by region. As expected, China led the way for us and exceeded our expectations with revenues up 11%. China's growth in the quarter is broad-based across all end market and for all business groups. While improving the rate of recovery in Europe, and the Americas lags China, given the timing when these reasons first felt the brunt of the pandemic, European revenues are down 5%. Americas market conditions trailed both China and Europe with revenues declining 10%. However, as we exited the quarter, we are seeing signs of improvement in service activity, consumables and diagnostic testing volumes. On a total Company basis, we exited July with modest growth across all major markets. Now, let's talk about our performance by business groups. Our Life Sciences and Applied Markets Group grew 2% on a reported basis and declined 4%. Our team is focused and determined to gain market share despite a constrained capital environment. The strength of our portfolio coupled with an energized and stable sales team is paying dividends. I'm also very proud of contributions are selling our cell analysis technologies are making in COVID-19 virus research. Our M&A strategy is working and making a difference in the pandemic fight. Our CrossLab Group revenues grew 1%. Increase in customer activity led to increased sales of consumables and an uptake of on-demand services. The CrossLab team continues to win large, multiyear contracts for enterprise laboratory management that will benefit us moving forward. We will continue to increase our competitiveness in this space. Our Diagnostics and Genomics Group revenues declined 8%. While our overall pathology and genomics businesses are down for the quarter, we did see gradual improvement in diagnostic testing volumes and non-COVID-19 lab openings. Partially offsetting this, our nucleic acid solution business delivered another strong quarter, growing almost 25%. We are very excited about the future of our NASD business. As we announced earlier today, we plan to more than double oligo manufacturing capacity and our new Frederick, Colorado site. This expansion helps us meet significantly increasing customer demand. We are growing double-digit and expect to continue this rate of growth in the coming years. We continue to advance in our portfolio across all our businesses. Highlights during the quarter included LSAG launching two new LC/MS products in Agilent 6470B Triple Quad and the Agilent RapidFire 400 systems. Both products are in high throughput labs, driving productivity and superior resolution. We launched our CrossLab Asset Monitoring service, which is a new subscription service using instrument sensor technologies to provide data driven usage insights. This helps drive improved customer economics and lab productivity. While early, we are seeing strong interest from customers in this service. During the quarter, our PD-L1 assay was approved by the FDA for expanded use of non-small cell lung cancer, helping guide physicians in selecting treatments using specific immunotherapies. Our team is very proud of the role their company is playing in the global COVID-19 play. We are supporting COVID-19 research, testing and therapeutic of vaccine development. Our efforts in the global fight against the virus delivered 2 percentage points of reported growth. We are accelerating efforts to make a difference in the battle against COVID-19 and have mobilized across Agilent team to maximize customer support. Let me close with few comments on our outlook in the coming quarter. While there's still significant uncertainty regarding the continued pace of recovery, we expect the July trend of gradual improvement in our business to continue into Q4. By region, China will continue to be a positive story for us and lead return to growth. Europe is starting to trend upward. The Americas are also expected to improve but at lower rate than China and Europe. Globally, improved lab access, increasing non-COVID-19 testing and a slowly recovering global economy are all positive signs. I remain absolutely convinced Agilent will emerge from this pandemic with a stronger position in the marketplace. Our continued focus action on four priorities, protect the team; support our customers; preserve our P&L and balance sheet; and our unwavering investment in growth are delivering. Entering Q4, we are operating from a position of strength and with momentum. Yes, this pandemic remains unpredictable. However, I am cautiously optimistic about our continued gradual recovery and return to growth. Before I hand the call over to Bob, I'd like to pause and share my hope that you and your loved ones are staying safe and healthy. Thanks for being on the call. I look forward to taking your question after Bob's remarks. And now, Bob, over to you. Bob McMahon : Thank you, Mike, and good afternoon, everyone. Today, I'll provide some additional detail on revenue, walk through the third quarter income statement and some other key financial metrics. And then, I'll finish up with a framework for thinking about Q4. As with last quarter, there are still too many unknowns. So, we're not going to provide formal forward-looking guidance today. However, we will provide a framework for how we see things potentially playing out in Q4. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike mentioned, our revenue for the quarter was $1.26 billion, down 1% on a reported basis. On a core basis, revenue declined 3.1% in the quarter, currency negatively affected revenue by 1.3 percentage points, while acquisitions added 3.4 percentage points to growth. As Mike talked about the regional performance, I'll speak to the end-market performance. In terms of our end markets, pharma grew 2% in Q3 against a very strong comparison of 13% from last year. Both, small and large molecule applications grew and biopharma improved throughout the quarter as drug development labs increased production and access. We experienced softness in diagnostics and clinical, as anticipated. Revenues declined 10%, primarily due to conditions in the U.S., driven by COVID-19-related disruptions to patient visits and diagnostic lab opportunities. Encouragingly, we did see an improvement in routine testing throughout the quarter, especially in China and Europe, while the U.S. lagged. Chemical and energy was down 10%, consistent with our thinking. Revenues were generally flat sequentially with conditions largely similar to what we saw in Q2. As we've talked about previously, we expect this segment to ramp more slowly than others. The food segment was a bright spot, up 8%. We're seeing ongoing signals that the market in China has stabilized with the transition of more testing by commercial labs. The food market was just one of several bright spots that contributed to double-digit growth in China, including growth in the low-teens for our pharma business. Our environmental and forensics business declined mid-single-digits against the double-digit compare and the academic and government segments declined mid-single-digits, while improving on a sequential basis in Q3. Strength in cell analysis and liquid handling for viral research partially offset the widespread impact of the ongoing academic lab closes. Now, let's turn to the rest of the P&L. I'm extremely proud of how the Agilent team has responded to the challenging environment. During the quarter, we continued our focus on managing expenses, while ensuring we continue to invest in our key growth opportunities. These expense management actions we initiated last quarter were on full display in Q3. In addition, our customer engagement model using digital tools continued to gain traction, while also delivering savings in SG&A. As a result, operating margins of 23.7% improved 90 basis points over last year on declining revenues. Gross margin at 55.1% was down 130 basis points versus the prior year, largely due to mix, and higher logistics costs. However, strong cost management and operating expenses more than offset the decline in gross margin. This combination of factors resulted in non-GAAP EPS for the quarter coming in at $0.78 per share, up nearly 3% from the number we posted a year ago. From a balance sheet perspective, we generated $290 million in operating cash flow during the quarter, which is $48 million improvement over last year. In terms of capital spending, we spent $25 million, lower than last year and in line with our revised look in Q2. We ended the quarter in a strong position with $2.3 billion in available liquidity, including $1.36 billion in cash. Also during the quarter, we took advantage of low interest rates and refinanced $0.5 billion in short-term debt with a 10-year bond and a 2.1% coupon, the lowest coupon in our portfolio. As you know, we paused share buybacks in Q2, pending improvement in business conditions. In Q3, our visibility into business trends and cash flow improved, and we resumed anti-dilutive share repurchases late in the quarter. In the quarter, in total, we repurchase 360,000 shares for $33 million. Going forward, we intend to resume our normal pattern of regular anti-dilutive repurchases, along with additional opportunistic buying. Our overall capital deployment approach remains balanced with the primary focus on growth M&A opportunities, while also returning the cash to shareholders via dividends and buybacks. As we look to Q4, business and trends have gradually improved, but significant uncertainty remains around the evolution of this pandemic. However, let me provide a framework for how we see a range of possible revenue growth scenarios in the coming quarter. We generally expected trajectory of gradual improvement in business results to continue across all regions. Areas where we see a broader range of scenarios include research spending, both in academia and other markets, non-COVID diagnostic testing, especially in the U.S., and the general CapEx environment. The combination of these factors could result in scenarios where our revenue performance could range from a 4% decline to 1% core growth. Also, as a reminder, the BioTek acquisition closed midway through Q4 of last year. So, the M&A impact in Q4 will be smaller than in previous quarters, roughly 1 point growth and currency is forecasted to be positive in the quarter. The low end of this range envisions COVID-19 flare-ups occurring in the fall in various geographies, limiting and in some cases, reversing the recovery gains we've seen in a period of time. In this scenario, one might expect to see slower or stalled improvements in research, academia and other markets as continued tight cash management leading to lower CapEx spending in the U.S. and Europe. We hope this bottom end of the range is overly conservative, but we wanted to let you know, we have plans in place in case this happens. The higher end of the range assumes continued recovery by region, building on what we have seen in July, with the biggest impact coming from the U.S. This would include a continual increase in elective medical procedures such as cancer screenings, as well as continued lab openings. This view would also include continued China momentum, along with the continued improvement in Europe and other areas in the Americas. Again, this is not guidance, but should provide a sense for some of the variables we see for Q4. Overall, I feel we are very well positioned to deal with this challenging environment, accelerate market share gains and come out even stronger as the global economy continues its path to recovery. With that, I'll turn over things to Ankur to direct the Q&A. Ankur? Ankur Dhingra : Thanks, Bob. Robert, if you can provide the instructions for the Q&A, please? Operator : Certainly. [Operator Instructions] Your first question comes from the line of Doug Schenkel with Cowen. Your line is open. Doug Schenkel : Hey. Good afternoon, guys. Mike McMullen : Hey, Doug. How are you doing? Doug Schenkel : I’m doing well. Nice work in a tough environment. Can we maybe just start with a clean-up question right off the bat which is just about the prepared remarks. I don't think you quantified COVID-19 tailwinds in the quarter. Again, I may have missed that. But, it just would be helpful to get that so we could try to normalize there? Mike McMullen : Yes. Sure, Doug. I touched on it briefly in my comments. So, there's two points of reported growth in Q3. Doug Schenkel : Okay. That’s great. And then, on China, just a couple, I'm just curious if you would share the exit rate. And as we look ahead, I know you're not guiding, I'm just wondering if you think based on what you're seeing, if you think that double-digit growth can be sustained, from here, at least a term. And then, specific on food, it’s great to see it return to solid quarter first time [Technical Difficulty] seeing some stabilization last quarter. Can the high-single-digit growth rate you saw this quarter be sustained moving forward, given favorable multiyear comparisons? Thank you. Mike McMullen : Hey Doug. Thanks for those questions. So, just to make sure it came through the audience. The question was about our view on the growth rate of China for the rest of the year as well as can that high-single-digit growth rate in food be sustained. We think the answer is yes on both. We're really pleased with our performance in China. It was broad based. I tried to really accentuate that in my comments. We saw basically double-digit growth across all end markets in China. And we think that a double-digit growth rate is within the realm of possibility for Q4 in China. And I have to say, Doug, it's wonderful we talking about China food from a different vector. We've been talking about it probably last 18, 24 months of one that will return to growth. We saw some early indications in Q2, we saw strong Q3, and we think that are all numbers probably sustainable for the rest of this year. Want to say something, Bob? Bob McMahon : Yes. I would just say, Doug, to add, I mean, one of the things that was very positive about China was it was pretty consistent across the quarter, and in fact exited slightly higher than that overall 11%, but we saw solid growth all three months. Operator : Your next question comes from the line of Vijay Kumar with Evercore ISI. Your line is open. Vijay Kumar : Mike or Bob, just maybe on the guidance here. If I step back, the third quarter guidance, down mid-single to down mid-teens, this down low-single was up, came well above expectations I would say, perhaps not surprising than peers, but nonetheless solid execution. Maybe Q4, down 4 to plus 1 implies declines. What’s the cause of declines, just given in light of performance? Is that that the minus 4 at the low end, is that assuming that Life Sciences [Technical Difficulty]? Bob McMahon : Yes. Vijay, this is Bob. I'll take that. And as I mentioned in the prepared remarks, we hope that that is overly conservative. What that would imply is actually a retrenchment -- and in COVID-19 flare-ups here in the U.S. as we go back -- as we move into the fall, and you start seeing some elements of shutdown. So, we certainly would hope that we would do better than that. But, we wanted to provide, hey, that's within the realm of kind of how we're thinking about our spending and so forth. Our July results -- or our exit rate of the quarter was much higher than that. And so, we're aiming to do better. But there's still uncertainty in the world with the pandemic, people going back to school and so forth, so. Mike McMullen : And Bob, I think it’s probably fair to say, the wildcard is United States, right? Bob McMahon : Yes, absolutely. Mike McMullen : And we were encouraged by the movement in PMIs. You probably noticed that. But, let's see how that translates into business in the coming quarter. And again, we have to keep in mind ourselves, as pleased as we are with the result we just delivered, there's still a lot of uncertainty out there because the virus is unpredictable at times. Bob McMahon : Yes. That's right, Mike. I mean, if you looked at each one of the major markets, each one of the major markets got better in Q3 versus Q2 with the exception of the U.S., which we expected given kind of the state of affairs with the pandemic. Vijay Kumar : That helpful perspective. So, the minus 4 implies that things get worse. Was July flattish or positive? And I'm curious Mike that you mentioned NASD doubling up a while ago. I know, if you turn back the page, we were doubling capacity. So, is this now versus six months of a quadrupling capacity versus where we were last year? Is that the right way to think about the revenues going from 100, 200 to perhaps, is that the math here? Bob McMahon : No, it's slightly different math. I think, we've been consistent with our view of needing to double our capacity. What we ended up doing is actually triggering the decision to initiate expansion earlier than we thought, just given the robust nature of the end market. And as well as we have worked our way to be able to -- in the same space, we challenged ourselves to find ways to drive as much revenue in the same physical space. So, we are investing a little bit more capital than we initially thought. But, we're also building something slightly different than our first train, which is going to give us actually more volume than our current train A. So, it's a really -- we thought it was really positive signal. And that’s why sent out the press release this morning, because we're super excited about our prospects here. Mike McMullen : Yes. And Vijay, let me kind of frame into kind of the numbers. What we were talking about is the Frederick site has the potential of roughly $100 million worth of revenue. And we added capacity that more than doubles that $100 million to give you a frame of the numbers. So, it's not 100, 200, 400, it's 100, 200 and more than 300 to kind of give you a sense. And in terms of July, we actually came in with growth across all three groups in exiting in July. Operator : Your next question comes from the line of Tycho Peterson with JP Morgan. Your line is open. Tycho Peterson : I’ll start with the COVID commentary. I guess, if I go back to last quarter, there was some talk about launching the serology test. You guys obviously have an installed base of real-time PCR instruments. We've got the questions that why you haven’t launched a PCR test. So, can you just talk a little bit about, how you think about those tailwinds going forward and how you think about your capabilities on diagnostics side? Mike McMullen : Yes. Tycho, I'll make some initial comments and then the group presidents are kind of quiet today. So, I’ll pull Sam in here as well, to provide his perspective. But, we think that there's still tailwinds in front of us and now two points of growth, and we think we can sustain that at a minimum. That's why I tried to put fairly bullish comments about our stepped up efforts across the Company. Some of these things are going to take a little bit longer. We think there's still room for our own test of quality tests with some different features. But, I think maybe a few comments there, Sam, from your perspective? Sam Raha : Yes. Sure, Mike. Hi, Tycho. As you -- I think you’d have seen a good pickup in terms of our qPCR instruments, which are our Aria systems, as well as our bioreagents related to qPCR both reverse transcriptase master mixes. On the antibody side, we’ve definitely also seen an increase in IgA, IgG and those antibodies. In terms of our own tests, we are very actively exploring the possibilities of developing those. So, more to share in due course. Mike McMullen : And Tycho, I guess, what I’d just close off here is a broad-based nature of our portfolio is allowing us to play in multiple aspects of this COVID-19. Some of these things may take a little bit longer to actually turn into revenue, right? So, if you're working with, say, a pharma partner or something in the therapeutic area, it may take a while for that to come to market. So, we think these tailwinds are here to stay for some time. And we're stepping up our efforts here because it plays right into the broad nature of our portfolio. Tycho Peterson : I guess, that's a good segue on the NASD expansion. Could you maybe draw to what degree that's tied to the COVID vaccine, and any updates from your add-on capabilities on APIs for mRNA or siRNA vaccines? Mike McMullen : Do you want to take that one, Sam? Sam Raha : Yes, sure. No problem. Tycho, I'd start by reiterating a little bit of what Mike and Bob were talking about. It's interesting that it was just last June that we did a ribbon cutting and starting of the new Frederick, Colorado facility. And quite frankly, we've seen demand that exceeded our expectations, just 12 months ago. So, building really -- sorry, the new manufacturing line that we're building, you can consider it, as we call it, training on steroids as our general. But, it is very-differentiated, both in throughput and the molecules it can do, which is a segue to your -- a little bit of your question that we're able to do multiple iterations or types of siRNA or RNA. We're also actively looking at other different versions of molecules that are oligo based. Though I can't reveal the details, we have had a lot of interest related to COVID-19, all of those used for either COVID-19-related therapeutics or even for vaccines. So, I can say that we have started to work on some of those programs now. Bob McMahon : Yes. And maybe Sam to add. That being said, the capacity expansion isn't tied to COVID-19. We have plenty of demand outside of COVID-19 therapeutics and vaccines. And so, this is a broad-based capacity expansion. Tycho Peterson : And then, just last one, I know we don't have official guidance, but there's a framework for the quarter -- for the fourth quarter. As we think about C&E and then also pharma biotech, should we expect any kind of material change in either of those end markets for the coming quarter? I know, you talked about restoring activities for C&E. I wasn't sure if that was maybe a positive improvement in trajectory there? Bob McMahon : Yes. Probably -- C&E is probably the one that's -- I would expect it to be pretty stable and that down 10ish percent -- 8% to 10% in that range. We do expect pharma to continue to improve. So that 2% certainly even in the low scenario would stay there and then on the high scenario would accelerate, which is consistent with the trends we've seen throughout the quarter of Q3. Mike McMullen : And Tycho, the supply chain consideration and discussions still happen and it gets added a level of stability, albeit down to this -- into the space. And, again, as you look ahead for the future, this is an area where eventually it'll come back, and again, too early to call. But, I'd say we're pretty confident about the improvement rate in pharma. Bob McMahon : Yes. The way to think about those reshoring is those are opportunities and discussions that could happen through the order book, and then will happen actually in '21 and beyond in terms of investments are being made. So, that's more future looking. Operator : Your next question comes from the line of Puneet Souda with Leerink. Your line is open. Puneet Souda : So, first question is just on NASD, [ph] it’s obviously strong in the quarter, but that would imply Dako and clinical business, obviously you pointed that out, it was down in the quarter. But that's a significant decline. Maybe just could you parse that out for us? What is -- it's the COVID impact, for sure, but is there anything beyond that in terms of the way market is fundamentally potentially shifting here to NGS maybe? And if you could just maybe elaborate a little bit of that, clarify? Thanks. Mike McMullen : Yes. Happy to do so. So, it's all market, it’s all access to labs and patients going for the diagnostic test. So, it's real all market. I think, we're seeing different pace of pacing throughout the quarter. All of our geographies in the diagnostic testing front ended up with positive growth in July, but it was down sharply in May and June, particularly in the U.S. And keep in mind also, we -- part of our business in our genomics front is so select into NGS-based diagnostic labs and for genetic disorders, for example, those tests aren't getting done either. So, it's really all market. Bob McMahon : Yes. I was going to say, Puneet, actually if you bifurcate those two and look at our performance, actually, pathology performed better than NGS testing volumes, given what Mike was just talking about, as well as some of the academic institutions. Mike McMullen : That's good point, Bob. Thanks. Puneet Souda : Yes. Thanks for that. And if you could, I know you quantified it last quarter, Bravo contribution. I was wondering if you can provide that for Bravo Magnis liquid handling system, sort of how much of that contribution happened in the quarter? Mike McMullen : Yes. That's part of the story for our COVID-19 tailwinds. And I think probably the biggest contribution this quarter actually came from BioTek, Bob, if I remember correctly? Bob McMahon : Yes. Between BioTek and Bravo. Mike McMullen : Bravo. So, it's kind of like, now we like a one-two punch kind of going there on the core instrumentation. I’d also remind you, with the Bravo platform comes an ongoing revenue stream associated with the tips that go with those liquid handlers. Puneet Souda : Okay. And last one on just ACG. I mean, could you just elaborate on -- in these times, you mentioned, there are some larger contracts -- service contracts and likes that you’re getting into. Sort of what are those sort of COVID-driven, what's behind those and maybe if you can elaborate on geography there? Mike McMullen : Yes. Puneet, happy to have Padraig jumping on here and provide his perspective on that. So, Padraig, in the call script I talk a bit about the large enterprise deals you guys won. So, why don’t you talk about that a little more detail? Padraig McDonnell : Yes. So, thanks, Mike. We launched our CrossLab Asset Monitoring service, which has seen a big uptick. And what we're seeing from customers is a large demand for sourcing from one vendor. And because of our capabilities in terms of the asset monitoring capability, relocation services and our core delivery services, which are extremely in strong demand. We're seeing a big uptick from large customers, and we expect that to continue as we go through the quarter, next quarter. Mike McMullen : Yes. And I was going to say that I think the geography Puneet is largely in the U.S., but there are some global opportunities as well. It’s really non-COVID-19 related. I mean, this is part of the core growth strategy for Padraig’s business to continue to expand our market share on the Enterprise Services front. And we're really delighted that we made some big pharma deals. Operator : Your next question comes from the line of Derik de Bruin with Bank of America. Your line is open. Derik de Bruin : So, a couple of questions. Very impressive margin expansion in the third quarter. How should we think about the operating margin into Q4? And then, I guess, how much of these costs are permanent removals versus what has to come back in '21? Bob McMahon : Let me take that, Derik. It's great question and we certainly are very pleased with how the team has responded, as I mentioned before. As we talked about, a large amount of the cost, we have not done things like furloughs. We stabilized the team. We have not reduced base pay and things like that. So, these are discretionary expenses that a lot of them we think had the opportunity to stay away, be travel and things like that, which our digital tools have enabled us to really continue to support our customers. And so, there aren't any kind of one time things that happened in the quarter. In terms of going forward to Q4, we are looking at probably less of a margin -- incremental margin improvement because we are looking for ways to continue to invest to drive growth as the economy recovers. We also have some startup costs in the NASD new facility as well. So, it's probably less than what we've had historically had, which is call it 30% to 40% incremental. But it's really to drive growth. Mike McMullen : Hey Bob, if I could maybe add a comment on your -- on the first remark. So, this is really, Derik, all about a new way of working in Agilent. So, I'm preparing for a manager's call later this week. And what we're talking to our team about is more digital, less travel. And we're really going to make sure that when we get on the other side of COVID-19 pandemic that we don't revert to our old ways of traveling. And we know from our customer satisfaction scores, they love the responses we have now with our digital platforms. Derik de Bruin : And two questions on LASG (sic) [LSAG]. I guess, the first question is, if you look at your numbers in China versus some of your major peers in that area, I mean, you really outshone in China. Can you just talk about just share dynamics there that are going on? I mean, as I said, there was a pretty stark comparison between you and your main LC competitor there. And I guess, also along those lines, can you talk about potentially any sign of a budget -- any sign of a budget flush into sort of thinking about 4Q trends? What are you hearing in terms of people with budgets? And are they going to be allowed to roll things over and to -- or are they going to have to use it or lose it? Just some dynamics in terms of growth on the fourth quarter and just sort of to your general thoughts on what customer spending habits are? Mike McMullen : I'm going to have Jacob handle the first question. And Jacob, you can pass it back to Bob and I for the second question. And I know Jacob would be just delighted to talk about the share dynamics in China, which we think are very positive for Agilent? Jacob Thaysen : Yes. Thanks for that. And the number speaks for itself. It's clear that both in China but I think actually globally that we right now will be taking care. And this doesn’t come like coincidence. We have been executing our strategy to make a deal over the past year. And the customers are really buying into our value proposition. We are playing a game where we are leveraging our whole portfolio, not going after one product line versus each other and the customer really likes that we’re outcome based. So that's what is happening right now. And we see here in the crisis that not only are they excited about the investments we have done over the past year, but also, as Mike talked about, in the digital world, into the work world, we have been very optimistic and super responsive they have taken off the digital, we take challenge variable very, very good and the customers responded very, very positive to it. They know that when they work with Agilent that we are there for them in this crisis. Mike McMullen : And then, on the other question, Derek, what we're hearing from our customers, particularly in the public sector and we’re seeing it in our order book, and while I'll offer my perspective here, and feel free to build on my comments here. But, there's a real sense of making sure they commit to the budgets. So, we're seeing it both in our order book as well as order activity, where there is a lot of uncertainty what's going to happen post elections as we go into 2021. So, they want to commit those funds. And it's actually quite amazing the amount of deal activity that's going to occur without visiting a customer face to face. So Bob, I don’t know what you're hearing from field… Bob McMahon : The only thing I would add is just reiterate what Jacob was saying, because it's not just China. I think, when you look at our LSAG portfolio, I think what people don't fully appreciate is, is how we've actually changed the portfolio to technology platforms, they're probably the best -- in the best shape they have been in probably five years in terms of new products and so forth. And I think you're seeing that across the globe. And when we think about where we ended up in Q3, LSAG was certainly the standout relative to where we thought they were going to be. In a capital constrained environment only down 4% on a core basically speaks to our responsiveness to customers. Operator : Your next question comes from the line of Brandon Couillard with Jefferies. Please go ahead. Brandon Couillard : Bob, on the gross margin line, you mentioned higher logistics cost in the third quarter. Is that a new trend? And then, could you help us just think through some of the puts and takes, whether it's logistics costs or mix and how those puts and takes might evolve in the fourth quarter? Bob McMahon : Yes. Sure. We’re hoping that's not a trend that's going to be around for a while, but it certainly was exacerbated in the Q3. That being said, I would say three quarters of that was probably mix, when you look at the various businesses across each one of the groups. But, where we saw logistics, challenges are, it's lower capacity and freight and air capacity. But we would expect that -- and we actually saw that through the quarter to kind of relax. And I think as you’re starting to see more intercontinental travel, both from a passenger standpoint as well as freight standpoint we would expect that to kind of relax over time. Brandon Couillard : Okay. And then, Bob or Mike, you're not quite giving formal forward-looking guidance yet, but you do feel comfortable enough to restart the buyback program. Just what are your latest thoughts just around comfort as far as capital deployment goes and maybe your appetite for M&A right now and what the funnel might look like there? Mike McMullen : Yes. Sure, Brandon. And I'll start off here, and Bob, feel free to jump in. But, we felt quite comfortable resuming our share repurchase program on the non-dilutive perspective, and we'll be looking at opportunistic as well. And cash flow remains strong. We felt for some time that the third quarter of this year would be the toughest quarter for us for the year. We’re through that now. And the third quarter actually was significantly better than we had thought. And we saw positive growth across all the businesses in July. So, we think, okay, barring some kind of major flare-up, we should be able to continue to see this gradual improvement of growth in the fourth quarter, sort of our message. So, we have the comp. We also narrowed the framework that we provided, it’s more narrower than it was in Q3. But again, I think we need to keep in mind ourselves that we still -- there's still a lot of uncertainty associated with the pandemic. I think, our capital deployment approach remains unchanged, which is, we certainly wanted a balanced approach to capital deployment across dividends, cash, share repos and with the prioritization of investment in business, we just made a significant commitment in capital with our new NASD expansion. And we're still on the hunt for deals that make sense for Agilent. So, our approach to capital deployment really fundamentally remains unchanged. We paused a bit in the second quarter just because -- on the share repo because of the -- in the early part of the third quarter, given what was going on in the environment outside of Agilent. So, we feel pretty good about where we are right now and have a reasonable level of confidence, and there is decent level of stability about the business. Operator : Your next question comes from the line of Dan Leonard with Wells Fargo. Your line is open. Dan Leonard : So, maybe just to circle back… Mike McMullen : Hey Dan. Dan Leonard : Hi Mike. So, maybe this is a question for Bob, talking again about the Q4 framework. So, if your business grew in July and the world improves month to month through October, what does that imply then the high end should be above that 1% organic growth number? Bob McMahon : It could be. I'll just leave it at that. There's still a lot of uncertainty and so forth. But certainly, we wouldn't complain if it was better than that. Dan Leonard : Okay. And then, my follow-up, whoever wants to take it, on the NASD business. Can you elaborate on, what's the lead time for that announced expansion? Is it something that would take a year or multiple years to put in the new line, or is it a quicker turn? And can you comment on your willingness to commit capital inorganically in that business in addition to your organic commitments? Bob McMahon : I'll take the first one just real quick. And then, Mike, if you want to add something on the second one. We announced that we would make that $150 million investment and we would expect it to go live towards the end of 2022. So, it's taking a little longer than just a regular train. Sam mentioned train A on steroids. So, it's bigger, and probably take a little more capital. And obviously with COVID-19 there's some activity there in terms of little long lead time. But, we feel like we have the capacity to be able to manage us through that time, and then that will come online at the end of 2020. Mike McMullen : Yes. I think, it’s perhaps end of '22. And don’t specifically talk about specific targets or areas of focus, certainly, but it's not out of the realm of reason that I would say, why wouldn’t we want to further expand this business inorganically as well? So, that's not out of the realm. I'm not singling anything near-term happening. But we think we're operating from a position of strength here in this business. We had a first -- get our new factory up and running and build for that. So, we now think we have a, if you will, a beachhead to build from both, organically and inorganically. Operator : Your next question comes from the line of Catherine Schulte with Baird. Your line is open. Catherine Schulte : I guess, first, despite the relatively good LSAG results in the quarter, it sounds like the outlook on the capital equipment side is still a bit uncertain. Can you just talk to how the services and consumable side of the business trended in July, and what your expectations are for instrumentation trends in the coming quarters? Bob McMahon : Yes. I think -- Catherine, this is Bob, all three of our businesses actually performed better in July than they did in May and June, which was very positive. The ACG business actually led the charge in terms of that, as you would expect, given the resumption of activities. There's some catch up there, in terms of -- we saw that kind of phenomenon actually in China, in April. But ultimately ACG was there. I think, LSAG capital is going to continue to be constrained. But I think what we've seen in our business is we've talked about this in the past kind of this flight to quality. And with our instrumentation and the reputation that we have, I think in a capital constrained environment, those dollars are precious. And we think our positioning is very good vis-à-vis the market. Mike McMullen : Yes. I tried to hit that in my remarks, which as I really say, hey listen, we know we're picking up share in a tight market. And I think you saw that on C&E, right, which is if a C&E capital purchase is going down, it's coming Agilent’s way. And that's why -- and the market is still cautious, but you see PMI starting to creep up a bit, so. Bob McMahon : Yes, Catherine, just one last thing, to give you maybe a little more color. If we look across the groups, we would expect LSAG to still be negative in Q4. I mean, it's probably going to lag, given the [Multiple Speakers] big fourth quarter last year as well. Catherine Schulte : And then, Mike, you mentioned seeing growth in all regions for the non-COVID diagnostics business exiting the quarter. Can you just give us a sense of where those activity levels are in the U.S. versus China and where they bottomed out across the different regions? Mike McMullen : Sure. So, I think, I’d say China is in lead position in terms of if you -- almost full recovery. Europe is second and the U.S. is trailing. So for the first -- throughout the quarter, if I look at Sam's business in the U.S., for example, the first two months were negative of diagnostic testing values in pathology. But we saw actually improvement to growth in July. So, I think that's sort of the pattern of how the pandemic has flowed around the world. China is back. Europe's on its way. And I'd say, U.S. is still in the early stages of recovery. Bob McMahon : Yes. And I would say, in the U.S. it’s probably -- and keep me honest, Sam it’s -- we're probably still at about 80% pre-COVID levels from a diagnostics perspective, but improving where it was. It was below that at the beginning of the quarter, so. Does that sound, Sam? Sam Raha : It does. Operator : Your next question comes from the line of Steve Willoughby with Cleveland Research. Your line is open. Steve Willoughby : Just one question for you. A lot of my other questions have already been answered. 90 days ago, you made a brief comment about potential onshoring back in the U.S. Just was wondering if there's any update on that at all? Mike McMullen : Thanks, Steve. Happy to comment on that. I think, that's still going to happen. And these things take time. But, there's active discussion. And, by the way, I wouldn't say it's just confined I the United States. I mean, many geographies are now looking at the security of their supply chain, both in the pharma side as well as in the chemical marketplace where they're providing precursors into the APIs for the pharma chains. So, there's nothing significant to announce relative to the impact on business, but there does seem to be an overall trend in this regard. And I can say also from an Agilent perspective, we're working hard to make sure that our supply chain is secure as well. So, I think that the COVID-19 pandemic is a real wake up call to really some vulnerabilities in some aspects of supply chain. So, we're kind of working both sides of it, which are to ensure our own ability to deliver product under multiple scenarios, as well as we do see some market trends underway. Bob, I know you take a look at this pretty… Bob McMahon : Yes. Just to build on that, we talked a little bit about earlier in the call. We would expect that to see some of that opportunity show in our order book. And that's probably more a ‘21 timeframe for revenue. I wouldn't expect any of that to happen in Q4, just given the kind of timing. But you're seeing it in multiple end markets in multiple regions. We think this is a trend that will continue. Operator : Your next question comes from the line of Dan Brennan with UBS. Your line is open. Dan Brennan : Maybe first question just on chemical and energy, obviously, you've already highlighted a few comments throughout the call. But just wondering if you can kind of walk through a little more color separate trends within that segment by customer in chemical and if it's worth seeing if there's going to be divergence here between chemical and A&P and R&M? And then secondarily, maybe just remind us of how much of that business is tied towards like QA/QC versus R&D and kind of what are we looking for to determine whether or not this down 10% begins to improve more reliably, or if it's going to save the slow steady progress that you believe? Mike McMullen : Hey, Bob, why don't I make some initial comments, and then we can check our notes to see if I missed anything. But, I think unlike the last quarter, the mix here -- and I think both the chemical and the energy later side had about the same dynamics where both were down about the same, primarily on the instrument side. And on one hand, the chemical side of the business was really benefiting -- continues benefit from the low oil prices. But, some of their end markets are weak, whether be automotive or some of the other markets that they service are weak. Some of them are getting a little bit of help on COVID-19 related products. But overall, I'd say both, the chemical side, as well as the energy side of that are down about the same, but stable. And I have to say that Bob and I had talked to at some length about this in our last call. And our prediction at the time was we thought we were going to be in a stable situation relative to this. That wasn’t going to get any worse. That was sort of the question we were getting last call. So, I think we're really pleased to see that that came through this quarter. And we expect that eventually this thing will start to move back to grow. I think it's probably a 70-30 mix, where most of it’s in QA/QC. And that's why these facilities are running, albeit maybe not at full volume. So, QA/QC equipment will be needed as well as consumer services that go with it. So, they can only hold off the depots on that side for so long. There is an element of research. But I think in the chemical and energy space, the biggest driver for that is the QA/QC side of the business. Bob McMahon : Yes. And the only thing I’d add, Dan is we would expect this, as you said, kind of steady slow progress going forward. Dan Brennan : Okay. And then, maybe one different follow-up, I know -- a couple of questions on China. But maybe could you just go a little bit more into detail on what you saw in food and generics? Obviously COVID is impacting the globe and the recovery. But, you've got some pretty unique issues with food and generics that are maybe a little different. So, dependent upon the improvement or lack thereof, that could drive notable changes in China. So, what did you see there? And what's the outlook as we look forward to those segments? Bob McMahon : Yes. I was going to say, Dan, one of the things we were incredibly proud of in China was all three of the business groups grew and all of our end markets grew, really led by food, which was up over 20%. It's been a while since we've been able to say that. And so, we think that -- we talked about kind of the moves away from the government labs or the central labs into the commercial labs, and we think that that's stabilized, and team has really been able to garner share, or our view of capacity in that space. And then, in pharma, it continues to perform very well. Actually, pharma was up roughly 10% in China, and that's a combination of both, large and small molecule. And I think that our thesis around that continues to play out, which is that the winners of the 4 plus 7 or the tendering process are -- customers that where we are over indexed, and we continue to see that positive momentum, we actually saw acceleration from Q2 to Q3 in both, food and pharma, and the rest of the businesses were positive as well. So, I think, it’s broad-based. Operator : Your next question comes from the line of Patrick Donnelly with Citigroup. Your line is open. Patrick Donnelly : Mike, maybe just one for you on -- I know, there’s been a few questions in July obviously. But with all the businesses returning to growth, I guess, is it safe to assume you guys didn't see too much of a pullback around the second wave here in the U.S., even the first few weeks of August? It sounds like you're a little more cautious on Americas versus other geographies. But, just wondering, any surprises on an end market basis in the U.S., as you went through July and even early August, given the reoccurrence of virus? Mike McMullen : No, I'll jump in on this. But from our perspective, I don't know real surprises. Maybe we're -- like all of us are watching what was happening with the pandemic as it worked its way across throughout the U.S. and we saw the case numbers go up and lab access was down really sharply April, May, June and we started seeing some recovery. So, I think no real surprises versus what we thought. Bob McMahon : Yes. I would agree. I mean, Patrick, this is Bob. The Americas, as Mike said earlier, is in fact the biggest variable because it's further along in its recovery than both Europe and China. And I think, the thing that we're watching is those COVID flare-ups and the potential impact on elective procedures, which would impact our diagnostics business. That's probably got the biggest variability going into Q4 relative to LSAG and ACG. But, to Mike's point, we did not see any significant change with these flare-ups in August -- or excuse me in July and early August. Patrick Donnelly : And then, bunch of that good commentary on the chemical and energy and industrial side. Just want to and just clarify, I mean it certainly seems like the industrial sentiment feels like it might have bottomed. It seems like your tone is little bit better from three months ago. Even though, again, chemical and energy is probably going to be down similar this quarter and again next quarter. But, I guess what you're hearing from customers there on spend plans? Again, it sounds like you're a little more optimistic and talking a little more bullishly about '21. So, I'm just wondering, I guess, as we enter into the end of this fiscal year into '21, are you seeing things improve a little bit? Obviously, you’ll come up against very easy comps, but it does seem like the tone is a little more positive. So, are you hearing from customers, things that are trending a little bit better into '21? Mike McMullen : Yes. I think that's a fair assessment of what I was trying to communicate today. First of all, the fact that we do think it's bottomed. And that was our thesis when things started going directly down and the pandemic hit. So, we do see that. Again, I don't want to get too far out and describe some big dramatic increase in growth in this space. But, customers are working on the plans. Chevron actually is making some big investments in Iraq. So capital -- these are ongoing concerns, and they can hold back their capital for a while, but they're going to want to maintain their operations at the highest capabilities. So, we're hopeful that the budget environment will be a little bit different in '21. I think once we get a little bit more clarity, once our customers feeling more clarity in their view where the economy's gone, then they can make their decisions with a lot more confidence. So, the PMIs are good view of how some of them may be changing. So, again, don't over interpret this for fourth quarter, but it does point to '21 being perhaps a better environment. Operator : And your last question comes from the line of Jack Meehan with Nephron Research. Your line is open. Jack Meehan : So, I wanted to go back to the NASD business and just get a little bit more color. Are you working on any of the mRNA-based COVID-19 vaccine? I guess, curious because the trials are going so quickly. I was curious to get your take if one [indiscernible] and into commercial within the next six months, how would you manage the business to deliver on the capacity that customer might need for that? Mike McMullen : Hey, Sam, I’m going to pass that to you. Sam Raha : Yes. no problem, Mike. So, I can't comment specifically on the molecule or the molecule of the projects that we're doing related to COVID-19. But, two things I will point out. As Bob indicated earlier, this is business separate for or different than the business we're already doing or it's not taking the place of business, if you will. And we believe, we have the capacity and that's -- if the demand is there related to certain things playing out related to COVID-19 and the molecule that we happen to be working on, we believe we will be in a position to be able to supply that material as the volume required. Jack Meehan : And then, one more follow-up on LSAG. I'm just curious, as you're looking at the research labs around the globe, kind of in this conversation around deferral versus cancellation, what are customers telling you? Is it still mostly deferrals versus cancellations? And on the deferral side, when do you expect these, how far out is it getting pushed something that you think it hits before the end of the year or probably more likely in calendar '21? Mike McMullen : Hey Jack. Happy to answer this question. This is something we've been monitoring pretty closely, deferrals versus cancellations. And we've really been pleased, our cancellations are actually lower than last year. And our thesis is they’re being pushed and actually funds will be deployed this calendar year. Bob McMahon : Yes. That's what we actually -- we saw that -- Jack, some of that actually happened in Q3. And as people are going back into the labs physically there, then they can install the instrumentation. But to Mike's point, we've seen no cancellation or lower cancellations than what we would have last year. There's always some level of it. I would say that we've been extraordinarily pleased. And I would expect it to happen this calendar year. Operator : This concludes the allotted time for our question-and-answer session. I'd now like to turn the call back over to Ankur for any closing remarks. Ankur Dhingra : Yes. So, that concludes the call for today. Thanks, everyone for joining us. Operator : Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,020	4	2020Q4	2020Q4	2020-11-23	3.258	3.348	3.696	3.767	8.14	28.83	31.13	Operator : Good afternoon, and welcome to the Agilent Technologies Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] 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. Ankur Dhingra : Thank you, and welcome everyone to Agilent's fourth quarter and full-year conference call for fiscal year 2020. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Bob's comments will be : Jacob Thaysen, President of Agilent's Life Sciences & Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of Agilent CrossLab Group. This presentation is being webcast live. The news release, Investor presentation, and information to supplement today's discussion along with the recording of this webcast are made available on our Web site 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 Web site. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and 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 October 31, 2020. 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. Also, as announced, we will hold our virtual investor day in a few weeks, on December 9. The event with include presentations from our CEO, CFO, and the three group Presidents, followed by a Q&A. We look forward to having you join us on December 9. And now, I would like to turn the call over to Mike. Mike McMullen : Thanks, Ankur, and thanks to everyone for joining us on our call today. Today, I want to get straight to our quarterly results, because they tell a very compelling story. The Agilent team delivered a very strong close to 2020. We posted revenues of $1.48 billion during the quarter. Revenues are up 8% on a reported basis, and up 6% core. Operating margins are a healthy 24.9%. EPS of $0.98 is up 10% year-over-year. These numbers tell the story of a strong resilient company that's built for continued growth. Our better than expected results are due to the strength of our core business, along with signs of recovery in our end markets. Geographically, China continues to lead the way with double-digit growth. From an end-market view, both our pharmaceutical and food businesses grew double-digits. In addition, our chemical and energy business grew after two quarters of declines, exceeding our expectations. We also saw a rebound in U.S. sales during the quarter. Overall, COVID-19 tailwinds contributed just over two points of core growth. Achieving these results in the face of a global pandemic is a tribute to our team and the company we've built over the last five years. I couldn't be more pleased with the way the Agilent team has performed over the last quarter and throughout 2020. We have again proven our ability to work together and step up to meet any challenge that comes our way. During the quarter, all three of our business groups grew high single-digits on a reported basis. Our Life Sciences and Applied Markets Group generated $671 million in revenue, up 8% on a reported basis, and up 4% core. LSAG growth is broad-based. The cell analysis and mass spec businesses both grew at double-digit rates. In terms of end markets, chemical and energy returned to growth, food grew double-digits, and pharma high single-digits. LSAG remains extremely well-positioned and is outperforming the market. The Agilent CrossLab Group came in with revenues at $518 million. This is up a reported 9% and up 7% core. ACG's growth is also broad-based across end markets and geographies. Our focus on on-demand service is paying off as activities in our customer's labs continues to increase. The ACG team continues to build on it's already deep connections with our customers, helping them operate through the pandemic, and continue to drive improved efficiencies in lab operations. In the Diagnostics and Genomics Group, revenues were $294 million, up 9% reported, and up 7% core. Growth was broad-based, with NASD oligo manufacturing revenues up roughly 40%. The Genomics and pathology businesses continue to improve during the quarter. I'm also very proud of our NASD team for successfully ramping production at our new Frederick site this year. We have built a very strong position in this attractive market, with excellent long-term prospects for high growth. Let's now shift gears and look at our full-year fiscal 2020 results. Despite the disruption, uncertainty, and economic turmoil dealing with a global pandemic, the Agilent team delivered solid results. We generated $5.34 billion in revenue, up 3% on a reported basis, and up nearly 1% core. To put this in perspective, it's helpful to recall the progression of our growth. In Q1, we delivered 2% core growth, as you saw the first impact of COVID-19 in our business in China. Both Q2 and Q3 declined low single-digits as the pandemic spread across the globe and governments instituted broad shutdowns. With 6% core growth, 8% reported in Q4, we're seeing business and economies start to recover. As a result, we are clearly exiting 2020 with solid momentum. Our recurring types of businesses, represented by ACG and DGG prove resilient, growing low to mid single-digits for the year. In a very tough CapEx market, our LSAG instrument business declined only 2% for the year, and returned to growth in the final quarter. China led the way for our recovery with accelerating growth as the year progressed. In our end markets, pharma remained the most resilient, and food markets recovered most quickly. Full-year earnings per share grew 5% during fiscal 2020, to $3.28. The full-year operating margin of 23.5% is up 20 basis points over fiscal 2019. As we head into 2021 we do so with tremendous advantage. Our diverse industry-leading product portfolio has never been stronger. Our building and buying growth strategy, with the focus of high growth markets continues to deliver. Our ability to respond quickly to rapidly changing conditions is also serving us well. The way our sales and service teams have been able to quickly pivot to meet customer requirements during the pandemic has been nothing short of remarkable. You know, last year this time, I used this call to remind you of the Agilent shareholder value creation model. Our approach is focused on delivering above market growth, while expanding operating margin, along with a balanced deployment of capital. We prioritized the plan of our capital both internally and externally on additional growth. A few proof points on our growth-oriented capital deployment strategy. A year ago, we spoke about recently closing the BioTek acquisition and the promise of growth that BioTek represented. Today, BioTek is no longer a promise, but a driver of growth. In total, the cell analysis business generated more than $300 million in revenue for us during the year, with double-digit growth in Q4, and continued strong growth prospects. Similar to last year, I was talking about ramping up our new Frederick site facility, a $185 million capital investment. In addition to successfully ramping Frederick as we planned, we did so with an expanding book of business. We also recently announced additional $150 million investment to add future manufacturing capacity. We are aggressively adding capacity to capture future growth opportunities in this high-growth market. Even in the face of a pandemic, we stayed true to our build and buy strategy. We have clearly seen the advantages of our approach. I'm confident our strategy will continue to produce strong results for us. The strength of our team and resilience of our business model has served us well, and as you can see from the numbers, our growth strategy is producing outstanding results for our customers, employees, and shareholders. While uncertainty remains as we being fiscal 2021, we're operating from a position of strength. Because of this, we're cautiously optimistic about the future. We have built and will sustain our track record of delivering results, and working as a one Agilent team on behalf of our customers and shareholders. As I noted earlier, I couldn't be more pleased with the results the Agilent team delivered in the fourth quarter and throughout the year. Thank you for being on the call today, and I look forward to your questions. I will now hand the call off to Bob. Bob, you're up. Bob McMahon : Thanks, Mike, and good afternoon, everyone. In my remarks today, I'll provide some additional revenue detail, and take you through the fourth quarter income statement, and some other key financial metrics. I'll then finish up with our outlook for 2021, and the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. We are very pleased with our fourth quarter results as we saw strong growth exceeding our expectations, especially considering the ongoing challenges associated with COVID-19. For the quarter, revenue was $1.48 billion, reflecting core revenue growth of 5.6%. Reported growth was stronger, at 8.5%, currency contributed 1.7%, while M&A added 1.2 points of growth. From an end market perspective, pharma, our largest market, showed strength across all regions, and delivered 12% growth in the quarter. Both small and large molecule businesses grew, with large molecule posting strong double-digit growth. We continue to invest and build capabilities in faster growth biopharma markets, and offer leading solutions across both small and large molecule applications. The food market also experienced double-digit growth during the quarter, positing a 16% increase in revenue. While our growth in food business was broad-based, China led the way. And as Mike noted earlier, our chemical and energy market exceeded our expectations growing 3% after two quarters of double-digit declines. Well, one quarter does not a trend make, we are certainly pleased with this result, and the growth came primarily from the chemical and materials segment. Diagnostics and clinical revenue grew 1% during Q4 led by recovery in the U.S. and Europe. We continue to see recovery in non-COVID '19 testing as expected, although the levels that are still slightly below pre-COVID levels. Academia and government was flat to last year, continuing the steady improvement in this market, and revenue in the environmental and forensics market declined mid single-digits against a strong comparison to last year. On a geographic basis, all regions returned to growth. China continues to lead our results with broad based growth across most end markets. For the quarter, China finished with 13% growth, and ended the full-year up 7% just a great result from our team in China. The Americas delivered a strong performance during the quarter, growing 5% with results driven by large pharma food and chemical and energy, and in Europe, we grew 2% as we saw lab activity improved sequentially benefiting from our on-demand service business in ACG, as well as from a rebound in pathology and genomics as elective procedures and screening started to resume. However, while improving CapEx demand still lags are servicing consumables business. Now turning to the rest of the P&L, fourth quarter gross margin was 55%. This was down 150 basis points year-over-year, primarily by a shift in revenue mix and an unfavorable impact of FX on margin. In terms of operating margin, our fourth quarter margin was 24.9%. This is down 20 basis points from Q4 of last year. As we made some incremental growth focused investments in marketing and R&D, which we expect to benefit us in the coming year. The quarter also capped off with full-year operating margin of 23.5%, an increase of 20 basis points over fiscal 2019. Now wrapping up the income statement, our non-GAAP EPS for the quarter came in at $0.98, up 10% versus last year. Our full-year earnings per share of $3.28 increased 5%. In addition, our operating cash flow continues to be strong. In Q4, we had operating cash flow of $377 million, but more than $60 million over last year, and in Q4, we continued our balanced capital approach to repurchasing $2.48 million shares for $250 million. For the year, we repurchased just over 5.2 million shares for $469 million, and ended the fiscal year in a strong financial position with $1.4 billion in cash and just under $2.4 billion in debt; all-in-all, a very good end to the year. Now let's move on to our outlook for the 2021 fiscal year. We and our customers have been dealing with COVID-19 for nearly a full-year and are seeing our end markets recover. Visibility into the business cadence is improving, and as a result, we're initiating guidance for 2021. There is still a greater than usual level of uncertainty in the marketplace across most regions and so while we're providing guidance, we're doing so with a wider range than we have provided historically. It is with this perspective that we're taking a positive, but prudent view of Q1 in the coming year. For the full-year, we're expecting revenue to range between $5.6 billion and $5.7 billion, representing reported growth of 5% to 7% in core growth of 4% to 6%. This range takes into account the steady macro environment we're seeing. It does not contemplate any business disruptions caused by extended shutdowns like we saw in the first half of this year. In addition, we're expecting all three of our businesses to grow led by DGG. We expect DDG to grow high single-digits with the continued contribution of NASD ramp and the recovery in cancer diagnostics. We believe ACG will return to its historical high single-digit growth, while LSAG is expected to grow low to mid single-digits. We expect operating margin expansion of 50 to 70 basis points for the year, as we absorbed the build-out costs of the second line and our Frederick Colorado NASD site, and then helping you build out your models, we're planning for a tax rate of 14.75%, which is based on current tax policies, and 309 million of fully diluted shares outstanding, and this includes only anti-dilutive share buybacks. All this translates to a fiscal year 2021 non-GAAP earnings per share expected to be between $3.57, and $3.67 per share, resulting in double-digit growth at the midpoint. Finally, we expect operating cash flow of approximately $1 billion to $1.05 billion and an increase in capital expenditures to $200 million, driven by our NASD expansion. We have also announced raising our dividend by 8%, continuing an important streak of dividend increases, providing another source of value to our shareholders. Now, let's finish with our first quarter guidance, but before we get into the specifics, some additional context. Many places around the world are currently seeing renewed spikes in COVID-19 that could cause some additional economic uncertainty, and while we're extremely pleased with the momentum we have built during Q4, we are taking a prudent approach to our outlook for Q1 because of the current situation with the pandemic. For Q1, we're expecting revenue to range from $1.42 billion to $1.43 billion, representing recorded growth of 4.5% to 5.5%, and core growth of 3.5% to 4.5% and first quarter 2021 non-GAAP earnings are expected to be in the range of $0.85 to $0.88 per share. Before opening the call for questions, I want to conclude by echoing Mike's comments about the amazing work the Agilent team performed during fiscal 2020. To be where we are now, after knowing where we stood in March, is truly remarkable. Add to this the strong momentum we saw in Q4, I truly believe we are well-positioned to accelerate our growth in fiscal 2021. With that, Ankur, back to you for Q&A. Ankur Dhingra : Thanks, Bob. David, let's provide the instructions for Q&A. Operator : Certainly. [Operator Instructions] Your first question comes from the line of Vijay Kumar with Evercore ISI. Your line is open. Vijay Kumar : Hey, guys, congrats on the good prints here, and a couple of questions for me. Mike McMullen : Hey, Vijay. Vijay Kumar : Mike, maybe first on the guidance part here, I guess with a Q1 guidance of 4.5% to 5.5% core, does it have -- does it assume any core tailwinds because, I guess you look at Q4, I mean 6% core, any reason why the core should slow down sequentially? Mike McMullen : Yes, let me start with, Bob. So again, thanks for the earlier comments, Vijay. So how to characterize our Q1 guide is positive, but we're using a very prudent approach, and that we got a lot of confidence in that in terms of we're reinstating the guidance, and we had very good momentum in Q4, and we looked at the backlog, we feel very confident about reinstating guidance, but the virus is still out there, and we still think there's still a higher level of uncertainty that calls for a prudent approach, so hence the positive but prudent approach. If it turns out better we'd be -- we'd love to be in a position of being able to raise our outlook for the year, but we thought for the first guide for the year, including Q1, and we should take a positive and prudent approach, this is recognizing that the virus is still out there. Bob, I don't know if you'd like to add anything to that. Bob McMahon : Yes, Vijay, I think a couple of things, you know, the thing that I would say is we didn't end the year with emptying the tank out, and feel really good about that, but that being said, we do have some business that is somewhat susceptible to some of these areas, and so we probably have greater visibility or variability in some of our diagnostics businesses. So, as Mike said, we're taking kind of prudent approach there, and the other area is we want to see more than just one quarter in the chemical and energy business. I think that's one of the areas where I think -- we think we're biased to the upside and the way we're kind of thinking about the business, but it's certainly with a recovery. We do expect some COVID tailwinds, to your point. It's probably on the order of roughly about one-and-a-half to two points, kind of consistent with what we've seen in the last -- the last several quarters. So that's kind of how we're thinking about it. Vijay Kumar : That's helpful, Bob; and Mike, one bigger picture question for you. I think you mentioned NASD was up 40% in the quarter. Did that business accelerate NASD, and I'm curious, the longer-term opportunity here when you think about it, how -- can this end up being a $500 million product for Agilent as you look at four or five years out? I'm curious to know your thoughts, and Bob, I think you mentioned the 50 to 70 basis points of margin expansion inclusive of investments in Frederick facility. What do you think the impact was of those investments on the margins, or I guess what I'm asking is what should margin expansion have been without those investments? Thank you. Mike McMullen : Hey, Bob -- thanks for the questions, Vijay. How about I take the first part, and then you can take the second part. So that's not out of the realm of reason, your first question in terms of the longer-term potential total revenue for Agilent. We kind of put a teaser out there earlier about our December analyst and investor day, so we'll talk a bit more about NASD when we meet, but as you know, we are really pleased with -- and we've talked about in the past in terms of getting to that exit rate of over $200 million business, and while our capacity in terms of the physical capacity is built, we're now just finishing up the first year of operations, so we're -- just like we did with our Boulder site continue to find ways to drive more productivity and efficiency out of that asset, and we just announced another expansion of another production line within that existing facility. So I hope what you're hearing is a very bullish tone, both in terms of the market growth but also our ability to get our -- more of our unfair share, if you will, to the capital share in a growing market. Bob McMahon : Yes, Vijay, this is Bob. Just to build on that, what Mike talked about, the beauty of that business is it continues to accelerate throughout the year, and that 40% -- that roughly 40% in Q4 was the highest it was all year, and that team has done just a fantastic job of scaling that business, and we're not done, and as Mike said, we're making incremental investments in building out that capacity, which we'll continue to make throughout the course of next year. That is probably about a 20 basis point headwind next year and in the operating margin just rough numbers there, Vijay, but extremely pleased with the work that that team has been able to do, and continuing to drive that growth, and so we feel very good about that business. Vijay Kumar : Thank you, guys. Mike McMullen : You're welcome. Operator : Your next question comes from the line of Puneet Souda with SVB Leerink. Your line is open. Puneet Souda : Yes, hi, Bob and Mike. Thanks for taking the question. So, Bob, actually on one of the question on guidance, and this is probably a favorite topic for you, the Chinese Lunar New Year. Mike McMullen : Oh yes. That's the New Year again, isn't it? Puneet Souda : That time of the year. So, this time, obviously, you are seeing how the troops are acting on the ground, how things are there, and I would suspect it would be a lesser impact this year, lesser travel, but correct me if I'm wrong on that, and then in light of that, I mean the guidance again appears conservative. Is there anything that we ought to keep in mind for a market that is growing double-digit for you already, and is a sizable portion of your revenue? So just walk us through how are you thinking about the Lunar New Year impact here. Bob McMahon : Yes, that's a great question, Puneet, and as you accurately state, our expectation is the impact is going to be much less this year than it was last year for all the things that you just talked about, less travel, timing of when it is, and so forth, relative to Q1, and what we're seeing is actually very strong continued recovery and performance in our China business, and I would say that there's -- Q1 is no different, and so, the story there certainly remains in tact, and I would expect it to be very strong performance in Q1. I think what we're trying to do is there's nothing in particular, but I think we're just probably taking a little more prudent approach in Europe, and as we're seeing some of the shutdowns, particularly in some of these areas. And I think as we look at where are the things that could potentially be upsides or downsides, I think that continued recovery in chemical and energy across the business, also continued performance in Americas. We're expecting kind of an average budget flush, so to speak. That's another question that's probably -- if people are thinking about by -- for the end of the year and both of those things could be better than expected. Mike McMullen : Yes, Bob, I could just jump into that, just amplify the point, Puneet, that Bob made. We're very, very happy with our China business, and we exited the year with momentum, and that's carrying forward into 2021. We're positioning ourselves with a wait-and-see moment on C&E, and that could be a source of upside for the year, and like I said earlier, we're fully prepared to reflect that in a revised outlook, and I would just use the word, maybe, prudent as a way to describe as the adjective Bob and I have been using to describe our guide. Puneet Souda : Okay, that's -- no, that's very helpful, thanks, and if I could get a sense on the -- in the cell analysis business, that business continues to be really strong for you, BioTek, [indiscernible] horse, other products in that product line, just wanted to get a sense of what are some of the key drivers there, is it largely the cell and gene therapy, the cellular product and drug product market, or is there something in the academic end that is driving that growth or specifically in China? Would appreciate and helping frame what's exactly happening there, and the opportunity there longer-term. Mike McMullen : Yes, Puneet, thanks for the question, and as I mentioned in my call script, we're really pleased with how we've been able to integrate the BioTek team, make them part of the Agilent family, and then how that collective has lead to having us have a very healthy cell analysis, just north of $300 million, growing nicely for us, and I know that Jacob would love to be able to have an opportunity to talk a little bit more about the cell analysis, back to Jacob, your thoughts on the specific questions that Puneet put forward? Jacob Thaysen : First of all, let me just echo that I think it's very impressive what Agilent has been doing here the past year, and the growth actually stems from many multiple dimensions here. First of all, we have seen, so first of all, with the testing that a lot of our BioTek portfolio has been using for that for the ELISA testing, and -- but we also see, generally speaking, imaging being very relevant in the academic markets, but also in the biopharma markets, and the [CS] [ph] portfolio with the flow of tachometry is also seeing quite a lot of interest. So it's really broad across both academic and biopharma and COVID-related that we see interest. Lifestyle analysis was where we felt a few years ago that this was an area that would continue to see in our growth. Particularly that point about immune-oncology, we're pleased that has moved into a broader understanding on the immune system, right now on COVID, but generally speaking I think would be a focus for many years to come. So very pleased, and we continue to expect good growth in that business. Mike McMullen : Yes, and hey, Puneet, just one thing because you mentioned China, and we see really China as a huge opportunity for us going forward. The real growth has been primarily in the U.S. and Europe. I mean it's growing in China as well, but it's off a very small base. So when we think about the opportunities going forward, leveraging the large infrastructure that Agilent has is really a big opportunity for us for many, many years to come in the cell analysis space. Puneet Souda : Great. Okay, thank you. Operator : The next question comes from the line of Tycho Peterson with J.P. Morgan. Your line is open. Tycho Peterson : Hey, good afternoon. Mike, I wondering if you could talk a little more on the biopharma strength, 12% on a 7% comp is obviously phenomenal. I know you had 2% from NASD, and you just talked about cell analysis, but can you maybe just talk more broadly on the strength in biopharma. Was any of this a catch-up from slower setting in the first-half of the year? And how do you think about the sustainability of demand. I know you mentioned you're thinking about an average budget flush, but can you just talk to the broader strength in biopharma? Mike McMullen : Yes, sure, happy to do so, Tycho, and without giving away too many of the tidbits that I want to talk about more -- in more depth in a few weeks. There was no catch-up here. This is part of this continued strength in the biopharma area. It's an area of focus, and we'll go into some more detail with you in a few weeks, but it's an area of focus in terms of increased investments relative to our biopharma tools, but the instrumentation along with chemistry platform, a real workflow focus there across the whole value chain, but we're getting growth, as you mentioned earlier, NASD, but that's -- the story is much bigger, and bigger, and that's to be honest with you. And then, obviously, we're picking up some growth here in the cell analysis. So I think it's really a multifaceted strategy that really driving this growth. We think it's sustainable. We think a double-digit outlook on the biopharma portion of Agilent's business is quite reasonable. We're really excited, and it's an investment priority for us. Bob McMahon : Yes, and Tycho, maybe if I can add to Mike's point, in terms of -- because it's not only the platforms in the portfolio that we have on the instrument basis, which we've been making some heavy investments in, but it's also been the informatics and the software piece, which is has allowed us to be able to kind of plug in to the labs, the analytical labs, and then you bring in the ACG services portfolio that helped them manage the labs, and particularly with everything that's going on right now, the last thing they want is their scientists to be managing the instrumentation. They want them to be doing the science, and so, we think we've got a very compelling software and tools offering, and I think it's showing up in the marketplace across multiple technology platforms really. Tycho Peterson : Great, and then Mike, you used the phrase, wait and see mode for C&E a couple minutes ago, and it's good to see that back to growth, can you maybe just talk on some of the data points you're watching in your customer base and how you're thinking about the recovery curve there? Mike McMullen : Yes, thanks Tycho. So, my comments come back from my first year as a CEO when I tried to call the trend of the C&E business, and eventually it turned out I think it was all by several quarters. So I learned my lesson, so to speak. So as Bob mentioned, one quarter trend does not make but we're very encouraged by that, because it's the first time we've seen some growth after those two double-digit declines earlier this year. And we look at a couple of things, Tycho one is the PMIs and the positive moves in the PMIs are indicative of improved end market strength, particularly in C&E, we also look at what we estimate to be the age of the installed base, because a lot of aged equipment out there, and that's been probably at very high levels, and then we look at the deal flow. So, kind of all those factors, the macro outlook from PMIs what we know to be the current environment for customers in terms of the age of their installed base, and then also overseen in our funnels, and you know, Agilent has a real strength in this market. So I think we will benefit from returned to growth, again we're not ready yet to put it into numbers for Q1 in the full-year, but we're hopeful that that trend will continue. There're some indications that it could, but let's give it another quarter or so. Tycho Peterson : Okay, and then lastly before I hop off, one quick one on China, one of your coolest companies, Mettler, talked about pent-up demand kind of suggested that what they saw may not be sustainable. Have you seen anything in your order book that would suggest what you're seeing in China? Mike McMullen : Yes, no, Tycho really appreciate you asking that question because not at all, I mean, this has been a continuing steady flow of business. We think the end markets are really strong here. We see a lot of strength in China Government funding to make sure they stimulate the economy, and then we talked earlier about just overall their investments in improving the quality of life, you noticed the strong growth in the food market, continued strength in pharma. So no, we've seen this. Now, I think we really look closely at the pacing and it's all nothing unusual. Bob McMahon : Yes, Tycho, I think we've been extraordinarily pleased with the way our China businesses performed throughout the course of this year, and when you think about kind of our cadence through Q1, Q2, Q3, and Q4, we've seen accelerated growth. So we saw our lowest growth in the first quarter where we saw the impact of COVID-19, but then what we've seen is improvements as opposed to this real huge increase, and then kind of a drop-off. So, we're not expecting any drop-off, and we haven't seen that in our order book or any of the conversations that we've had with our customers that there was sort of a material catch-up. Tycho Peterson : Okay, thank you. Mike McMullen : You're quite welcome, Tycho. Operator : Your next question comes from the line of Brandon Couillard with Jefferies. Your line is open. Brandon Couillard : Hi, thanks. Good afternoon; Mike, a couple of questions on LSAG. Mike McMullen : Sure. Brandon Couillard : I'm curious, if you could speak to the order book in the fourth quarter, and to the extent that you may have built some backlog there, and curious to speak to perhaps the margin compression in the fourth quarter, but that was mostly mix or is today's dynamics there? Mike McMullen : Happy to see you, Brandon. So, one of the reasons why we were able to reinstate guidance this year was what we saw in the LSAG order book, and as you know, we stopped a few years ago talking about specifics around orders, but I think in today's call, it's really prudent for us to give you a sense of why Bob and I have this confidence around the outlook. So we didn't guessed as we ran across the finish line for 2020, order book was strong in LSAG and as continued into the fairly few weeks of this year. So again, all the other caveats aside being prudent and recognition of the virus, we feel pretty good about our ability to reinstate guideline because as we mentioned earlier reinstate guidance as mentioned earlier, LSAG was one where we hit the most early on the year, and I think we're feeling pretty good about that. And Bob, as I recall, most of the gross margin is really just a mix of the various instrument platforms. Bob McMahon : Yes, that's right. I mean, I think Brandon, to read what Mike is saying, I mean we feel very good, orders exceeded revenue and exceeded our expectations, and so, it was a bit of a mix shift that is impacting that, but we would expect that to kind of normalize out throughout the course of next year, and so, we feel very good about kind of where that business is going into 2021. Mike McMullen : Yes, Brandon, just one additional thought here which is, we've seen a real change in the price environment. So, that's why we can say pretty common that has happened to be the mix product this quarter. Brandon Couillard : Super, and one more for Bob, you mentioned currency with the drag to margins in the fourth quarter, could you quantify that, the magnitude of the operating line, and then what you penciled in for impact of FX to operating margins in '21? Bob McMahon : Yes, it was roughly about 40-ish, 45-ish on the COGS line, and some of that was offset through the bottom line, and for next year less impactful, much less impactful than that, probably less than about 10 points, 10 basis points. Brandon Couillard : Super, thanks. Mike McMullen : You're welcome. Operator : Your next question comes from the line of Dan Leonard with Wells Fargo. Your line is open. Dan Leonard : Thank you. So, to start off, on the guidance, a question for probably you Bob, you've touched on this in pieces, but can you give us at a high level what your key assumptions are, by region and by end-markets? Bob McMahon : Yes, so by at the highest level, we're expecting steady improvement throughout the course of the year from the standpoint of the economic perspective, if I think about it from a geography first, China's going to lead the way with high single-digit growth continuing the momentum that we've seen, we ended this year FY '20 about 7%, and we're expecting that or better into next year, and then what you would see as a recovery in the Americas getting back to kind of mid to high single-digits, and then followed by Europe, which would be kind of the low to mid single-digits. So that's kind of on an end market perspective, how we would think about it, it's predicated on that continued recovery, and that we would as I mentioned before, not have any extended periods of shutdown that would disrupt business. I think the good thing is what we're seeing not only ourselves, but our customers are being able to operate in a different environment than they had the first time these were shut down. So we're not expecting any material impact there, and from an end-market perspective, the strength is really going to be the continued strength that we've seen in the last several years really driven behind our pharma business, which is probably high single-digits with biopharma as one of the earlier questions came out, probably growing double-digits going forward. And then food, we'll probably expect maybe a little tempering, where it'd be great to have 16% every quarter, but we're not ready to put that into our plan, but I would expect continued recovery there probably in the mid-single-digits and also recovery in our diagnostics and clinical business, particularly in that same kind of mid-single-digits, and probably ramping throughout the course of the year, probably more muted on the academia, and government probably flattish to low, and as we talked about before chemical and energy flattish, but that's really one where we're hoping that we're biased, and there's more upside than downside here, but certainly given the momentum, but one quarter is too early to put a forecast on there, and so, we're assuming roughly flat and then probably recovery in the environmental and forensics market low-single-digits. Dan Leonard : Okay, thanks for that overview, and that's my follow-up, you touched on there being a wider range of outcomes in '21 and typical and mentioned at the bottom end doesn't capture any threats around reestablishment of lockdowns or whatnot. Do you feel the high-end of guidance really captures all the benefits from easy comparisons, any potential upside there might be or how would you frame, what you're capturing in the high-end there? Bob McMahon : Yes, I'd say it's continued momentum, but I think that there's probably more upsides and downsides in the way that we're trying to capture that certainly exiting at a 6% growth rate, there are we're probably the biggest areas are around chemical and energy and the pace of recovery in academia and government, and if those continue, I would say - let me put it this way, if chemical and energy continued at 3% and growing, we'll be that number. Dan Leonard : Yes, absolutely. Thank you. Mike McMullen : Thanks, Dan. Operator : Your next question comes from the line of Douglas Schenkel with Cowen. Your line is open. Douglas Schenkel : Hi, good afternoon guys. Mike McMullen : Good evening, Doug. Douglas Schenkel : Maybe I have a few cleanup guidance questions, but before I get to that one, I just wanted to talk about your performance specific to your mass spec product line. You talked about another quarter of double-digit growth. I'm just wondering if you'd be willing to unpack that a bit more and just talk about what's driving this, and specifically is China and more specifically China food, a major driver, I guess I'm just trying to get at which segments of the portfolio or specific end markets or geographies that really stand out within a pretty robust and impressive growth rate there? Mike McMullen : Hi, Doug really appreciate the opportunity to have Jacob comment more deeply on that, but as you know, I highlighted that in my script, we were able to call out that double-digit growth. We're extremely proud of that. And Jacob, I think you've got some additional insights that you could share with Doug. Jacob Thaysen : Yes, that's a great question, and I'm certainly proud of what the team has been doing over the past years, because this is not only a quarterly effect here, but we have done a quiet and overhaul of our master portfolio, particularly the LC/MS portfolio over the last few years, both on the high-end triple quad, but also the single quad, and [indiscernible] the team applications, and this is really what the customer is looking for right now. So, you can really see that the investments we have done really resonates with our customer base, and right now, I would say in most geographies and in most end markets, but if you look into it's biopharma and China is definitely a big part of this story, but -- and the other element into it is that we pivoted very quickly to remote customer engagement during this beginning of this year, and when the customer has to shut down the laboratories, we were there for them. We did support them when the tough times, and you can see that pay dividends today that they also continue with the partnership with accidents. So, I actually believe that we are in a quite good momentum here with the mass aide business. Douglas Schenkel : Yes, all right. Douglas Schenkel : Yes, that sure does. Thank you for that, and then maybe just a few guidance questions, yes, so this'll be kind of a speed round in a way, because you have got some questions about these already, but on China, did you expect double-digit growth in fiscal '21? On gross margin, you talked about some of the headwinds you saw in Q4 becoming less pronounced moving forward. So, do you expect gross margin overall to get back up to the 56 plus level? And then on COVID-19, I think you talked about just over two points of COVID tailwinds in the quarter. I'm just wondering if looking forward either fiscal Q1 or for the full-year, if you could see a scenario where this would accelerate over time if serology volumes began to inflect in a positive way and same thing on the antibody business, could those in combination drive more of a tailwind moving forward, so China gross margin and COVID-19? Bob McMahon : Yes, so China, high single-digits, maybe low double-digits based on the range that we gave you in terms of COVID what I would say is, we are expecting less incremental the growth, but certainly the things that you talked about are baked into our guidance. So more serology our antigen based testing or even vaccine driven volume is not fully baked into the numbers that we are -- it's just too early to tell, but those are certainly be things that are potential upsides, and then the last one, I know which was your second question around gross margin, I would expect it to stabilize and not see this the same level of decline. Now, what I would say is you will have some mix shifts, right, because our ACG business, which is lower gross margin than the instrument business, but much higher operating margin helps us with that. So, you do see a dampening effect on the gross margin side, but you will more than make up for it on the operating margin side. Douglas Schenkel : Okay, Bob. Sorry. Bob McMahon : Doug specific to COVID-19 we'll hit a little bit more of that when we have our Analyst Day, but we are planning to launch in early 2021 our serology test, and there are some things that we're working on that aren't baked into the guide. We'll see how that they play out. Douglas Schenkel : Okay, that's great. Thank you guys for all the time and happy Thanksgiving everybody. Bob McMahon : Same to you. Douglas Schenkel : Thank you. Operator : Your next question comes from the line of Derik de Bruin with Bank of America. Your line is open. Derik de Bruin : Hi, good afternoon. Mike McMullen : Hi, Derik. Bob McMahon : Hi, Derik. Derik de Bruin : Hi, so I'm going to do this similar to Doug. I've got a couple of focus questions. I got one guidance cleanup. So I guess specifically, Bob, you mentioned some software pushes in business between the pharma business. Can you be a little bit more specific on that? I mean, is OpenLab taking share against Empower, you winning have be replaced Empower and some of the accounts there, I'm just sort of curious on what the dynamics are in the CDS market? Mike McMullen : Yes. What I would say Doug, excuse me, Derik, is that we feel very good about our competitive positioning with OpenLab and the rest of our products. Derik de Bruin : Okay. Now I'll live with that I guess. Yes, and by the way, I'm better looking than Doug. On the Core Genomics business, I mean, we don't really have talk about that. I mean, you talk about the NASD and some other things here, but what is going on in your Core Genomics business, you've got SureSelect, I mean, you've had some pressures and some of that end market there. What is that underlying business growing? Bob McMahon : Yes, actually a great question because we didn't highlight that, but actually when you look at sequential performance, that was one of the things that was very, very positive in the DDG business. It recovered very nicely into Q4, and maybe I'll let Sam talk about some of the details there. Sam Raha : Yes, sure. Thanks, Bob. As you said, as we went into the heavy part of the pandemic, if you will, late Q2, Q3, some of the Genomics business also serves clinical diagnostic customers be it for SureSelect being the backbone and some of the leading cancer diagnostic and US-based tests as well as other inherited diseases. So we definitely saw the effect of that, but coming into Q4, we've seen a steady stream of increase there, and we've also seen a positive effect in parts of our portfolio that are related to qPCR be it instruments, be it our consumables that are used and also we have the leading Genomics QC portfolio as you're probably aware of, and we see a number of those products, including our fragment analyzer being used increasingly for picking up conventional or sorry, would the pickup of conventional clinical testing, but also being used for example for some siRNA vaccines that are in development. So, all-in-all, the trend is looking encouraging for our Core Genomics business. Derik de Bruin : Great, and then just one housekeeping question. For '21, the other income expense line, how should we think about that for '21? Bob do you want to handle that or you want to take that? Bob McMahon : Yes, that'd be slightly better than where it is this year. Derik de Bruin : Thank you. Operator : Your next question comes from the line of Jack Meehan with Nephron Research. Your line is open. Mike McMullen : Hello, Jack. Jack Meehan : Thanks. Hi, good afternoon. Let me go back to biopharm, Mike, I was curious if you're seeing any change in terms of customer spending patterns at all, because of COVID-19, there is just been such a focus on bioprocessing, the support vaccines and therapeutics. What's that doing in small molecule if you can call out any trends? Mike McMullen : Jack, great question. So, to our delight, it really hasn't seen them cause any kind of material shift. I mean, we're seeing -- in fact, I think Bob in his script, where we saw strength across small molecule and bio -- large molecule. Now the small molecule is not growing as fast as large molecules, it was growing, and… Bob McMahon : Yes, Jack to give you some numbers, I mean for Q4 small molecule grew high single-digits, and for the year it grew low single-digits. So despite all the hoopla, small molecule is not dead. Jack Meehan : Yes. Great, and maybe just to build on that, so the high teens ACG growth in China, could you just parse out for us? How did food do versus how did maybe generics do in terms of some of that consolidation there? Mike McMullen : Bob, as I recall, and I'd like Padraig on this, I think it was broad-based across all end-markets. Everything was in that double-digit range, and Padraig anything you could add to that? Padraig McDonnell : No, I think you said it well, Mike, I think across both sides of the business, both the chemistries serves as very strong demand in all markets, and we see certainly a strong demand for our installation familiarization and startup services. So I'm really strong across the board in China. Jack Meehan : Great, thank you, guys. Operator : Your next question comes from the line of Patrick Donnelly with Citi. Your line is open. Patrick Donnelly : Hey guys, thanks for taking the questions. Let me follow-up on the -- Mike McMullen : Hi, Patrick. Patrick Donnelly : Hey, Mike, just on the chemical and energy side, it certainly sounds like that's the biggest area of upside, maybe the biggest variable for next year. Sounds like chemicals and material things are improving, can you just give a bit more detail around the customer tone there, and then is energy the bigger variable for '21 maybe just talk through kind of the scenario analysis as you guys think about it certainly seems like there's upside, but maybe just kind of what parts of the business you feel like are the biggest variable there? Mike McMullen : Yes, I think that sort of all the kind of this always helpful reminder, but in a kind of our mix, so it' s 70 :30, 70:30 in chemicals and materials, and 30% energy. Actually the upside on the chemical and material, energy lags, and we aren't really seeing a lot of indications of why that would, that would pick up, but you have to remember some of the chemical companies are actually providing products and such into end markets that support COVID-19. They're feeling, what drives this marketplace? Yes, we talked about PMIs, but really all the PMIs are really related to the view of global growth, and I think that customer base is feeling more confident about where the economy is going and things this shut really slowed down earlier this year just for a must kind of purchases, but I think it's a prove view of the overall economic outlook for the chemical and materials side plus the fact that they have some kind of COVID-19 tailwind to help out. I wouldn't say that's the entire story is just the element of it. I think the biggest part here is just the fact that there's much more common in the customer base about the growth environment from an economic standpoint, Bob anything you would add to that? Bob McMahon : Thank you, Mike. I don't. Patrick Donnelly : Okay, yes, that's very helpful, and then maybe just on a capital deployment side. You guys always take the balanced approach, and I'm sure we'll hear more about it in a couple of weeks, but how are things trending in the pipeline on the M&A side, your cash flow has actually been pretty strong? How active should we expect you guys to be on that front? Any changes and thoughts around the size of deals you want to pursue, and any metrics you can throw out there would be helpful? Thanks. Mike McMullen : No, no we continue to be very interested in deploying capital for growth standpoint along all the dimensions we talked about earlier. We said that the BioTek size deal, which we were really quite happy with that, that was largest deal we've done to-date. That doesn't mean that would be the largest deal we would do. We've always said, I think it was not magnitudes of delta, and although we didn't closed any deals this year, I think that really was somewhat tied into some of the COVID-19 challenges of doing due diligence and working with potential targets, but we still see this as a key part of our, what we call, our build and buy growth strategy, and think that M&A can be a nice attitude to our core growth businesses. So you guessed right, so we'll talk more about it in a few weeks. We still have aspirations in the space, but really sticking to the model, the framework that we've been using before, which is M&A in markets at a higher growth investor company that aligns strategically with us where they can benefit by our scale and are accretive to the P&L. Bob McMahon : Yes, I would say Patrick, just to build on what Mike was saying. I mean, we feel very good about the acquisitions that we made, the last two which was BioTek and ACEA were probably the fastest growing parts of our business, if you take out NASD, and so, I think it validates the space that we're looking at, and we don't see a reason to need to change our M&A framework. Patrick Donnelly : Okay, thanks guys. Operator : Your final question comes from the line of Steve Beuchaw with Wolfe Research. Your line is open. Steve Beuchaw : Hi, thanks for sneaking me in here. I'll just ask one maybe I guess it's a two-parter; one part for Mike, one part for Bob, and… Mike McMullen : Okay, I'll be giving easy one. Steve Beuchaw : I think you're going to like it. I think you are going to like it. Mike McMullen : Okay. Steve Beuchaw : Mike, so last call, you raised this concept, you called it a flight to quality, and you talked about how the team with the execution has been able to drive share gains, I wonder if you could talk about whether you think that as the pandemic subsided in some ways and labs are opening up again, if you think that dynamic has become any more or less acute, and if you think it's sticky, I'm going to go ahead and ask the second part of my -- I guess I'll call it COVID discovery question for Bob; Bob, like a lot of CFOs, you've had a chance to see how much you can save within operating expenses, as we're all working remotely and being more digital. Have you thought about putting any numbers around how much of the savings that you've discovered here could end up being permanent? Thanks a bunch, everybody. Mike McMullen : Yes, thanks, Steve. So, in regards to the first one, we probably talked about the flight to quality when money is tight, but we also think tied it to stability, and how we protected our overall field team and our ability to support our customers during the pandemic. So, I think those two things are going to carry us forward. So we think that the stickiness will remain there, and I don't think that the quality will fall out of fashion, and I think as you continue to grow your position in the installed base, it just gives you an upper hand in terms of next buy when they get around to making the next capital purchasing decision. Bob McMahon : Yes, I would agree with that, Mike, and I think that, you know, I think two things; one is, we were there when the customers needed us the most, and our team particularly in the field, helping support critical operations and so forth, and that flight to quality on the instrumentation side only pays dividends going forward. So, I think there is no -- there will be no follow-up there, I truly believe that. On the cost side, we're still working through some of those things, a big thing, probably the biggest variable here, and it's got a couple of different tentacles to it would be around travel, and I think we had talked about before at one point in time we're spending roughly $10 million a month in travel, and that that is down, I would say substantially, and our goal is that will be back to $10 million a month, and so, that doesn't say that we're going to necessarily drop it all to the bottom line, but reinvest in some areas that will drive growth going forward, but certainly those, and then there will be more efficient ways of doing things like marketing outreach to our customers, and even operating, one of the things is we still operated and launched new products, despite not having been in the labs for the most part for nine months out of the year, and so, our teams are finding innovative ways to continue to actually move things around without having to spend incremental dollars, so more to come on that. Mike McMullen : We think [some things] [ph] are going to stick. Particularly, as it relates to your digital engagement with customers, because there's a huge element of being responsive, and we think that digital cable is a big part of that story, and yes, it has been accelerated by COVID, but we don't think there's any going back either. Steve Beuchaw : Got it. Thank you for all the color, guys. Mike McMullen : You're quite welcome. Operator : Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,021	1	2021Q1	2021Q1	2021-02-16	3.43	3.534	3.909	4.082	6.62448	32.23	30.02	Operator : Good afternoon, and welcome to the Agilent Technologies First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. 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. Ankur Dhingra : Thank you, Jason, and welcome, everyone, to Agilent's first quarter conference call for fiscal year 2021. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Bob's comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of Agilent CrossLab Group. This presentation is being webcast live. The news release, investor presentation and information to supplement today's discussion, along with the recording of this webcast, are made available 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, and 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 January 31. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are 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. Mike? Mike McMullen : Thanks, Ankur, and thank you to everyone for joining us today on our call. I'm very pleased to be on the call with you today. We are off to an excellent start to our fiscal year. The Agilent team delivered outstanding results in the first quarter. The momentum in our business continues. Revenues for the quarter are $1.55 billion. This is up 14% on a reported basis and 11% core, exceeding our mid-January revised expectations. Also, as expected, COVID-19 tailwinds added roughly 2.5 points to our overall growth. Operating margins are healthy, 25.5%. EPS of $1.06 is up 31% year-over-year. Overall, a very impressive start to 2021. Our growth is broad-based. All 3 of our business groups delivered double-digit growth. All regions grew, with the 2 largest leading the way. China grew 25%, and the Americas posted 13% growth. We continue to see strength in most of our end markets, led by pharma growing 20%. These results are a testament to our build and buy growth strategy and the Agilent team's relentless customer focus. Demand remains strong for the full breadth of our offerings. We have been gaining market share in key areas. We are clearly keeping our foot on the gas. Now, let's take a look at our performance by business group. The Life Sciences and Applied Markets Group generated $722 million in revenue, up 13% on a reported basis and up 11% core. LSAG's growth is broad-based across end markets and geographies. We are particularly pleased with our cell analysis business. Cell analysis grew in the high teens, led by BioTek, which grew 26%. Growth is also strong at liquid chromatography and mass spec product lines, with both growing in the teens. Overall, our LSAG business saw very strong demand as many customers utilized their end-of-year CapEx budgets and our market share gains continued. From an end market perspective, food and pharma led the way for LSAG. Continuing our biopharma investment focus, we introduced new updates to our MassHunter LC/MS software. This new software enables data integrity consisting important regulatory requirements for our biopharma customers. As we continue to build our digital lab, we introduced the Agilent 7850 ICP-MS System, which provides new smart digital tools to improve workflows. LSAG's broad and continually strengthening portfolio is well positioned and continues to outperform the industry. The Agilent CrossLab Group posted revenues of $532 million. This is up a reported 13% and up 10% core. ACG's growth is also broad-based across end markets and geographies. Growth is strong in both services and consumables. Our digital investments and scale are adding significant value. We continue to drive improved attach rates to Agilent's large installed base of instruments. Annual service contract renewal rates and growth were strong in the quarter as we continue to build a more resilient and higher growth business. The Diagnostic and Genomics Group, revenues are $294 million, up 18% reported and up 15% core. Growth is broad-based, led by our NASD oligo business. Our genomics product portfolio grew double-digit, aided by COVID-19-related qPCR demand. We also achieved strong growth in our core NGS sample prep business. As mentioned earlier, overall company growth is broad-based across most of our end markets. The pharmaceutical food businesses led the way, both growing strong double-digits. We also posted 10% growth in the environmental and forensics market. Chemical and energy grew 2%, and we've seen increased business activity in the C&E space. The academia end market is down 1%, with many university labs still operating in a constrained environment. We are also continuing our efforts in the battle against COVID-19. We have completed our development and clinical validation for a serology assay to detect COVID-19 antibodies. We plan to submit to the U.S. FDA for Emergency Use Authorization within the next month. In addition, we're making progress on our qPCR-based test for COVID-19 detection and plan to launch in Europe in the next couple of months and submit for Emergency Use Authorization in the U.S. within the same time frame. I'm also pleased to share that Barron's again recently named Agilent One of America's Most Sustainable Companies. This marks the third year in a row we have been included among the top 3 companies in this ranking. We've also been a leader in our industry all 4 years that Barron's list has been published. We're very proud of this honor. Sustainability is a key priority for our company. When I look back on the uncertainty we faced this time last year, I'm so proud of what the Agilent team accomplished, all-time high customer satisfaction ratings, building momentum in all our businesses and delivering excellent results. Our first quarter results are another compelling proof point that we’re building an even stronger company and market position during the pandemic. As we discussed at our December investor event, our diverse industry-leading product portfolio has never been stronger. Our building and buying growth strategy with a focus on high-growth markets continues to deliver. Our M&A funnel is robust and remains focused on growth-accretive M&A opportunities. We are targeting companies in markets where we see potential for significant long-term growth, and Agilent is in a strong position to win. As we look ahead, we have a sense of realistic optimism. We have solid momentum. We're winning in the market, and we have the right team to continue to succeed. As a result, we are raising our core growth guidance range to 6.5% to 8% for the year. As you may recall, we recently guided to a long-term core growth rate of between 5% and 7%, so we are certainly off to a good start in 2021, and we have no intention of slowing down. We have also raised our earnings guidance for the year. In December, I shared Agilent's long-range plan of margin expansion at 50 basis points to 100 basis points a year. We are now guiding towards the top end of that range for 2021. Bob will share more details on this in his remarks. I couldn't be more pleased with how we have started the year. We have momentum. Our team is strong and energized. We are gaining market share in key areas, and we have an even more promising outlook for the full year. Thanks for being on the call today, and I look forward to your questions. I will now hand the call off to Bob. Bob? Bob McMahon : Thanks, Mike, and good afternoon, everyone. In my remarks today, I'll provide some additional details on Q1 revenue and take you through the first quarter income statement and some other key financial metrics. I'll then finish up with our outlook for 2021 and the second quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. We are very pleased with our first quarter results as we saw strong broad-based growth exceeding our revised expectations. Revenue for the first quarter was $1.55 billion, reflecting reported growth of 14.1%. Core revenue growth was 11.3%, while currency contributed 2.8 points of growth. Now before I get into the end markets, Mike's earlier comments bear repeating. All 3 business groups delivered double-digit growth -- core growth in the quarter. Our superior value proposition continues to resonate with our customers and our team executed well, capitalizing on recovering demand in our end markets. Pharma, our largest market, was strong across all regions, delivering 20% growth. Growth was led by NASD, which experienced significant growth in the quarter, albeit against the easiest comp of the year. NASD contributed 4 points to the overall pharma growth rate. We continue to be very pleased about the ramp of the Frederick oligo facility, and the recently announced capacity expansion in Frederick is on track. Small molecule grew mid-teens, while biopharma, excluding NASD, delivered 20% growth driven in part by strong demand for LC and mass spec instrumentation. We saw strong year-end demand from pharma customers. We're also seeing increased business related to the characterization of oligo-based therapies and vaccines. The food market also experienced strong double-digit growth during the quarter, posting a 22% increase in revenue. Our business grew in all geographies driven by increased demand for food safety and quality testing. China is leading the way, driven by investments in both commercial and government entities. Environmental and forensics grew double-digits, coming in at 10% core growth. Broad regional growth reflected strong tech refresh or replacement demand from contract labs. Our diagnostics and clinical revenue grew 9% during the quarter and has benefited from growth in COVID-related applications, primarily in the Americas and Europe. Our pathology business grew slightly as non-COVID testing continues to improve but has not yet recovered to pre-pandemic levels globally. While our diagnostics and clinical end market in China is still small, it experienced strong growth due to improvements in non-COVID testing and the uptake of our clinical LC/MS. The chemical and energy end market continued the recovery we saw last quarter and grew 2% in Q1. We continue to see signs of increased business activity, particularly in specialty chemicals and engineered materials along with encouraging improvements in the macro environment. And while we are optimistic, we are not yet reflecting a change in our forecast for the rest of the year. And as expected, the academia and government market recovery has lagged the other end markets, down 1% year-on-year as research labs are still not operating at full capacity. We continue to expect a slow but steady recovery throughout 2021. On a geographic basis, all regions grew. China grew 25%, leading all geographies, led by the food and pharma markets. The Americas delivered a strong double-digit performance during the quarter with 13% growth, while Europe was up 6%, both also led by pharma and food. Now turning to the rest of the P&L. The first quarter gross margin was 55.8%, up 10 basis points year-on-year. Adjusting for the exchange rates, gross margins improved 50 basis points. Our operating margin for the first quarter came in at 25.5%. This is up an impressive 260 basis points from last year, driven by volume and spending discipline. And this result includes the impact of increased strategic investments we started last quarter. Our top-line growth, coupled with our operating leverage, helped deliver EPS of $1.06 per share, up 31% versus last year. Our tax rate was 14.75%, and our share count was [309 million] shares, as expected. Now onto the cash flow and the balance sheet. Our operating cash flow continues to be very strong. In Q1, we had operating cash flow of $238 million, a 43% increase over last year after adjusting for last year's 1 year -- one-time tax payment. This performance shows the strength of our business model and provides financial flexibility going forward. We continued the balanced capital deployment strategy we highlighted at our Annual Investor Event in December. In the quarter, we invested $41 million in capital expenditures, paid out $59 million in dividends and repurchased 2.9 million shares for $344 million. And as we announced earlier today, our Board of Directors authorized a new $2 billion share repurchase program replacing the current program. We ended the quarter in a strong financial position with $1.3 billion in cash and $2.5 billion in debt. Now moving on to the outlook. We have had a strong start to the year. And while there are still uncertainties in front of us and the business environment remains fluid, we have solid momentum, and we see continued recovery in our end markets, albeit at different rates. And as a result, we're increasing our full year projections for both revenue and earnings per share. For revenue, we are increasing our full year to a range of $5.825 billion to $5.9 billion, up over $200 million at the midpoint and representing reported growth of 9% to 11% and core growth of 6.5% to 8%. This increase reflects strong Q1 results and some improvement in our outlook for the remainder of the year. The increased guide assumes stronger performance in most of our end markets. The academia market continues to track as expected in our initial plans. And while business activity in the chemical and energy has picked up, we have not yet included any improvement in that market in this updated outlook. In addition, we have not included any revenue associated with either the serology or qPCR COVID assay in the outlook. As Mike mentioned, we also feel very good about expanding our margins. During the Investor Event in December, we provided long-range plan of annual margin expansion in the range of 50 basis points to 100 basis points. Given the volatility in results during 2020, our margin expansion profile will vary each quarter. However, we feel confident about our full year margin expansion being towards the top end of that range while also investing for future growth. The higher sales and margin expansion coupled with maintaining our tax rate at 14.75% and a lower share count of roughly 307 million shares, increases our fiscal 2021 non-GAAP EPS to a range of $3.80 to $3.90 per share. This is growth of 16% to 19% for the year. Now for the second fiscal quarter, we're expecting revenue to range from $1.37 billion to $1.39 billion, representing reported growth of 11% to 12% and core growth of 7% to 9%. We expect second quarter 2021 non-GAAP earnings to be in the range of $0.78 to $0.80 per share, with growth of 10% to 13% as we approach the 1-year anniversary of the significant reduction in expenses in Q2 of last year. Now before opening the call for questions, I want to say I couldn't be more proud of the Agilent team in driving such strong performance. We have gotten off to a great start this year, and I'm personally very excited to know what this company is capable of moving forward. We have very strong momentum, the right approach that leads me believe that we're on a very solid path for Q2 and the rest of 2021. With that, Ankur, back to you for the Q&A. Ankur Dhingra : Thanks, Bob. Jason, if you can provide the instructions for Q&A, please. Operator : [Operator Instructions]. Your first question comes from the line of Tycho Peterson from JPMorgan. Tycho Peterson : Congratulation here on the preannouncement. On that note, Mike, actually, I'm wondering if you could talk a little bit about what drove the delta to the preannouncement. And then importantly, on sustainability, it sounds like you're not really calling out any kind of pull forward here. Curious as we think about it, and particularly that biopharma strength and the mid-teens growth you’ve had in LC/MS, how are you thinking about the sustainability there? Mike McMullen : Well, first of all, Tycho, thanks for the recognition. Really proud of the performance to even top our earlier revised expectations for the quarter. And I'd say that as we got into January, business in January was stronger than we had anticipated. And I think it was -- from a geographic perspective, we saw the strength in China. Obviously, that was higher than we had. We're thinking as long as very -- really good strength in the Americas, led by pharma and the food market. I'm sure we'll dial in today on the call about the food market, which is both growth in China as well as in Americas. And then no pull forwards. So it was a clean quarter with January being stronger than we had anticipated, when we already had announced an increase in our revenue outlook for the quarter. Bob, I don't know if I missed anything on the... Bob McMahon : No. You got it. Tycho Peterson : And on the LC/MS strength, up mid-teens, certainly better numbers than we're seeing from a lot of your peers. Can you just talk to that? Mike McMullen : Yes, I think that it's a continuation of story that's been underway for several quarters. We've continued to innovate and provide value to the customers really see in our offerings, coupled with our approach to our field engagement and really maintaining our field force when our customer needs us most. We're getting the business. And it's very clear that not only is it a -- was there -- we saw, particularly in some of the pharma and non-COVID areas where they were basically making sure that they spent the capital had allocated for 2020, we got all that business, but it's more than that. It was a market share gain story as well for us. So I think it was a combination of a backtrack of investment by the pharma world but also our ability to gain share. And Bob, I know you've taken a close look at this and... Bob McMahon : Yes, I think, Tycho, to Mike's point, I think one of the things we feel really good about is just our portfolio and our offerings to our customers. I think one things that we've seen is our responsiveness continues to improve, and that's been evidenced by the increased customer satisfaction that we've seen. And as Mike said, as the year-end CapEx spending happened, we were there, and I think we took more than our fair share. And we do think that this is an area that we continue to invest behind. Mike talked about the investment in the MassHunter software, which I think is going to really help continue this momentum that we have going forward from a compliance standpoint, and it's an area of focus, and we're very excited about the biopharma business going forward. Mike McMullen : Yes. And there's a real holistic story here as well. You know the story already Tycho with our ACG business complementing, on the services and consumables complementing what we can do on leading innovative instrument solutions. Tycho Peterson : And before I hop off, just one on ACG, you grew mid-20s in China off a low-teens comp. So it's not like the bar was low. Are you doing anything there structurally to kind of drive that acceleration? Mike McMullen : What -- I'm going to let Padraig talk a little bit about that. Padraig, why don't you share your thoughts on that? Padraig McDonnell : Yes. Thanks, Mike. I think it's a combination of our scale on our service business in China and our connection with customers. And also, we've been investing in a number of years in our digital capabilities in China, which is really seeing a lot of pull-through from the customers and all markets are really driving the business forward, and we see it sustaining over the next period. Bob McMahon : Yes, Tycho, just to build on what Padraig is saying, I mean, this is an area where we've also increased our investments in people on the street. And as we think about, Mike mentioned this in his script, actually our focus on actually turning ongoing revenue into service contracts, this is an area where we've had a specific focus in China there, and it's really helped us. And so we're -- that productivity aspect continues to play out in China. Operator : Your next question comes from the line of Brandon Couillard from Jefferies. Brandon Couillard : Maybe, Mike, could you elaborate on your comment as far as beginning to see some improved activity in the C&E market? And maybe, Bob, could you give us some color on instruments versus aftermarket growth in the first quarter? Mike McMullen : Yes, we're really talking about order activity, right? So we're seeing a lot of discussion with our field teams, particularly in the area what I would call high-value chemicals, specialty chemicals. So there's a lot more discussion going on with our field teams right now. And I think our customers are feeling more confident about the economic outlook and the end market demand that they can anticipate in the coming quarters. And as you know, this is against a backdrop of a lot of pent-up demand where investments have been deferred. And we're seeing -- continue to see strong PMIs. But as you heard me share the story forward, Brandon, I'm always reluctant to call a turn until we actually see a couple of quarters. So while we're optimistic about what we're seeing so far, we're not ready to yet to put it into the formal guide for the year. Bob McMahon : Yes. And just on the second part of your question, Brandon, our instrumentation was roughly flat, and ACG was up mid-single-digits. Brandon Couillard : Then one follow-up for you, Bob. Gross margins in the first quarter were better. Do we expect that -- are you still thinking that the full year is still relatively flat to down? And any chance you could quantify the impact of the NASD capacity built on gross margin in the first quarter? Bob McMahon : Yes. It was a little lower than what -- we would expect that to be higher in the back half of the year as we continue to ramp up. So it didn't really have a material impact on the first quarter. If you recall, we talked about that being roughly about 20 basis points for the full year, and that really didn't have an impact in the first quarter. And in terms of the overall year, I would say we're slightly more optimistic, kind of given where, certainly, the first quarter came in. And that's part of the increasing our top end, I would say, the margin expansion. It's a combination of a little more in gross margin, but most of it actually will be in the operating expenses. Operator : Your next question comes from the line of Vijay Kumar from Evercore ISI. Vijay Kumar : I guess for my first one, Mike, the guidance here, I guess Q2, your comps are pretty easy. You just did 11 in Q1. Could you perhaps comment on the Q2 and why that should step down? And when you look at the annual from an end market perspective, if C&E didn't change, I guess, is this biopharma that's changing for the annual outlook? Bob McMahon : Yes, let me take a shot at it, and then I'll turn it over to Mike, Vijay. Thanks for the acknowledgment. Yes, I'll take the second question first and then go back to the first -- second quarter. If we think about where the full year is, it's mainly in that pharma and food markets across all of the regions that we see the uptake. And we are optimistic about chemical and energy, but we're not yet putting it into the forecast. It's still at the end of the quarter. As Mike said, we're seeing a lot of business activity. We're seeing the order funnel build and so forth, but we want to actually see those translate into orders and then ultimately into revenue. So everything there is moving in the right direction, and we would expect that to continue to play out throughout the course of the year. If I look at Q2, we did have a higher-than-expected budget -- year-end budget dynamic that helped, obviously, the 11%. That doesn't repeat itself in Q2. And -- but if you looked at -- we feel very confident about the continued momentum of the business going forward. Mike McMullen : And that was probably a couple of points of growth maybe. Bob McMahon : Yes. It's hard to estimate, but that's the best guess that we have, yes. Vijay Kumar : Understood. And then I guess, just for my follow-up. Is the guide assuming, this COVID tailwinds that you mentioned 200 basis points in Q1, is that going to sustain? And I'm curious, what is driving the margin strength here, I guess, relative to your prior guide? Mike McMullen : Yes. So I'll take the first one. Yes. So we're still in that 2 percentage kind of revenue range for COVID. So that's a good number to lock into. Bob McMahon : Yes. And I think the growth on the margin expansion has been just really the strength in our volume. And I think that, that -- when we have that strong growth, you actually see it going to the bottom-line. When you look at last year, our spending profile changed pretty dramatically quarter-on-quarter as we were reflecting the pandemic and so forth. If we think about Q1 to Q2 this year, our spending, think about it as roughly flat sequentially. Mike McMullen : Yes. And Vijay, I'm sure you had a chance to look at Jacob's margins for the first quarter, but LSAG had very strong margins. And that's -- when you have double-digit growth in LC, the strength in the cell analysis business, we had indicated when we acquired BioTek that we are buying not only high growth but also a high-margin company, I think you're seeing it in the numbers. Operator : Your next question comes from the line of Puneet Souda from SVBL. Puneet Souda : So my first question is on China, which you alluded to a little bit before. Obviously, a strong quarter, but just walk us through where do we stand today in China food and where the products are resonating? What's your outlook here? Obviously, this has been a market that has been improving for you after some disruptions a while ago. And just want to get a sense of where it stands and how should we think about it going forward? Mike McMullen : Yes, Puneet, thanks for your kind comments. And I'll make some initial introduction comments here about China food, and I'll invite Jacob into this conversation as his solutions are a big part of the story here. So this is a quick remind to the audience. You may recall that we saw a slowdown for the better part of over 2 years in the China food market as a result of the reorganization of the China food ministries, and we always have been pointing to the fact that there had been really deferred investment at the national level. And now that situation has completely changed, which are -- there's reinvestment going into new technologies at the national level. In addition too, the testing volumes continue to grow for the contract testing lab side, picking up that volume. And Jacob, I think we've got a pretty good position here in the marketplace with our mass spec portfolio. Jacob Thaysen : Yes, certainly, Mike. So you're right that we are seeing a broad-based interest from our portfolio. But particularly, what stands out is our triple quad, both the LC/MS and the GC/MS, which is sought after, especially for pesticide testing where both technologies are used. And what we have developed here is one workflow, one sample press that can be used for both technologies. So that is very much better performance versus many others where you have to have 2 different kinds of setups. So we see a lot of interest in that. And so the triple quad is really paving the way right now. Mike McMullen : And Jacob invested in a China solution center as well. So we actually, again, based on these leading technology platforms, are able to tailor our solutions for that China food market. So we're really excited about the change in the business volume there, as you can imagine. Puneet Souda : That's great. And if I could also ask in terms of pharma in China, could you maybe just elaborate your positioning there? You had really strong growth here in terms of both small molecules and biomolecules as well. Maybe just if you could characterize that, is that biomarker growth largely coming from NASD? Is that what's driving that part of the component? And the small molecules, you had really strong growth, too, so maybe if you could parse that out. Mike McMullen : Yes. Specific to China, there's no NASD volume at all. It's zero in China. So that's purely on the -- on what we call the LSS side, which is ACG and LSAG business. Bob McMahon : Yes. And I was going to say, Puneet, as we said in the call, our -- if you stripped out NASD, biopharma in total, so this would be our ACG and LSAG businesses together along with some contribution at DGG, grew 20%. And that was really broad-based across all regions. Actually, it was faster than that in China. But if you look across, they were all kind of neck and neck in terms of the performance across the regions. Mike McMullen : Hey, Bob, I'd just add one thing. Although we don't have direct NASD business in China, as Bob highlighted in his script, we're seeing a lot of demand for LC/MS-based solution for oligo-based R&D research. And the fact that we're in this business ourselves with our own API business and that we have a state-of-the-art facility in our Frederick, Colorado site really helps us be able to sell solutions to our customers doing research in this area as well. So I do think there's a linkage of the oligo business into China, albeit on what we're seen on the research side. Bob McMahon : Yes. And that small molecule in China was very strong. Mike McMullen : Oh, yes, sorry about that. I missed that one. Yes. How can I miss that one? Operator : Your next question comes from the line of Dan Leonard from Wells Fargo. Dan Leonard : So first question, still trying to think of how to interpret your chemical and energy comments. The comps get pretty easy for that end market. And it doesn't sound like the 2% you reported in the quarter reflects what you're currently seeing on the order side. Are you still expecting kind of flattish chemical and energy performance through the balance of the year? Or could you help me with that? Mike McMullen : I think the headline here is potential upside to our guide. And then, Bob, maybe you can answer the... Bob McMahon : Yes. Mike mentioned the headline quite well. As we think about the chemical and energy, we've built in some slight improvement in Q1 and Q2, but have not made any changes to the back half. Mike McMullen : And by the way, Dan, I'm not trying to be coy here or cute. We've just seen this market can easily can turn on the dime. And I've had experience where I've called it too soon. So once we feel confident about the book of business we have inside Agilent, we will be sure to give you an updated view of the outlook for the year. Padraig McDonnell : Mike, I think it's worth mentioning again that our competitive positioning is very strong here. And as you know, we have invested very heavily into our portfolio, both from an instrumentation, but also from an informatics point of view. So when the market comes back, we will certainly see a lion's share of that. Mike McMullen : Yes. It should have been part 2 of my headline. When the business is there, we're going to get it. Dan Leonard : Okay. And I appreciate that. And Mike, you've seen a lot of budget cycles. Could you maybe -- what we just saw in the quarter in context, you had a strong quarter, and I know share gain is part of that. All your peers had a really strong quarter. Are we going to look back at this period a couple of years from flush, particularly in pharma? Was this 1 for the history books? Or was this just a good flush? Like how would you characterize that? Mike McMullen : I sure hope that's for the history books because it had a backdrop of a pandemic, and what we saw was some deferred capital investment that had been -- normally would have maybe been invested in the -- our Q2, Q3 because of COVID-19 concerns. And just the fact that customers weren't working, deferred the capital. But again, I would have to say there's more to the story in our Q1 than just that budget flush. So -- and -- but... Bob McMahon : Yes, I was going to say, I would say it certainly was bigger than the last several years. I don't know -- and -- but I think as we think about the momentum that we've seen, when you look at where we were in Q4 as well, we started seeing the turnaround. And we saw it continue through Q1, and we're expecting that to continue into the rest of this year as well. So it's not just a one-quarter phenomenon. Certainly, it was stronger than we anticipated. But we have higher expectations going forward for growth in pharma. Operator : Our next question comes from the line of Doug Schenkel from Cowen. Doug Schenkel : So my first question is on share gains. In your prepared remarks, and actually, I think in -- even in the press release, you highlighted market share several times in the context of the strong revenue growth you delivered in the fiscal first quarter. I'm curious if you could opine on where you think you're taking the most share and how sustainable this is? So that's the first topic. The second is on M&A. And the balance sheet is clean. You're re-upping on the share buybacks. I'm just wondering how you're thinking about M&A, and more specifically, the parameters that you are using to evaluate potential acquisitions moving forward? Mike McMullen : Yes, Doug, thanks a lot for that. Happy to opine both questions. So yes, we really wanted to make sure the story came through that we had this a great start to 2021, and it wasn't just about a year-end budget flush. There's some really good things that have been going in for several quarters, and this continued in the first quarter. And we very specifically chose the language in key areas. So we're gaining share in some of our biggest product line areas. I would point to liquid chromatography. I’d point to mass spectrometry, both gas phase, liquid phase and the inorganic side. I'd point to our services business. And -- what else might you add to that? I mean, I think it's pretty much broad-based. Bob McMahon : Yes, and in our oligos business. Mike McMullen : Yes, oligos because it always comes in 3, the oligos, I mean we had outstanding growth in Q1. So we're getting market share gains in the product lines where they really are collectively needle movers for the entire company. And then relative to the M&A, yes, we were in the market repurchasing shares this quarter, this past quarter, I should say, being anti-dilutive. But our priority remains, as we communicated, our December Investor and Analyst Day, which is we want to invest in the business, not only in terms of capital expansion building down NASD, for example, but also growth accretive M&A. And that remains our priority. You may have picked up in my comments, prepared comments that the discussions with potential targets, the deal activity is picking up. And I think -- and we've seen a number of other deals announced in our space. But I'd say the volume of discussion has much increased over the last quarter or 2. So nothing to announce, but that remains our area of focus for utilization of our strong balance sheet. And Bob, anything else you want to add? Bob McMahon : Yes, the only thing I would say is, Doug, as we think about the markets that we compete in, our framework really hasn't changed. We're looking at markets that are faster-growing than the markets that we are in or sub-segments of those markets. We think the last couple of acquisitions have really borne that out with ACEA as well as BioTek in the cell analysis space, and it's really helped continue that shift to higher-growth markets, and that's the area that I would think -- and there's really opportunities across all of our -- both in instrumentation as well as in kind of consumables area or that recurring revenue stream as well. So that's the way I would think about it. Mike McMullen : Yes. And Doug, we continue to look for companies also not only to meet that criteria, but also we think there are strong cultural fit that really would be part -- could really be a key part of the overall Agilent family, so to speak, and also a business where we think we can make that business even better. Operator : Your next question comes from the line of Matt Sykes from Goldman Sachs. Matt Sykes : Nice solid quarter, guys. I just wanted to focus on, if you -- when you look at the DGG operating margin in the fourth quarter, it was obviously very strong. Just in terms of sustainability for that, what was driving that? And what should we expect as we go forward in '21? Mike McMullen : Hey, Bob, do you and Sam want to tag team on this? Bob McMahon : Yes, I'll start and then turn it over to Sam. I mean you see the strength really was volume-driven here -- and when we look at it. And as we ramp up that NASD facility, that's generated a very nice incremental growth on the bottom-line. As we mentioned in an earlier call, we haven't had the start-up costs really start showing up yet there. But I think that -- and then some of the qPCR activities and related have really helped drive this. Sam? Sam Raha : Yes, Bob, great lead-in. I'll just add as you said, NASD, that business, we are in a place where we are getting -- using more and more our capacity. And that's a good thing as it relates to margin. On the genomics and pathology side as well, we have high-value products, such as our SureSelect NGS target enrichment platform, which had a good quarter, and we anticipate that continuing to grow. That's high margin. We have leadership in NGS quality control. And it's not just instruments there, there's ongoing consumables that go along with standards. So we expect our leadership position for that to grow. And we haven't talked about in a little while. But this past quarter, we also announced our seventh indication for PD-L1 to go along with KEYTRUDA for triple-negative breast cancer, and that's another place where we have leadership and drives good margin for us. Matt Sykes : Great. And just one quick follow-up. Just more of a high level. As you continue to grow your ACG franchise, could you just talk about how that impacts some of the divisions? And as you expand your reach, does that really help drive the LSG division and other types of segments that you have, just given that it just continues your reach within the market and deeper customer penetration? Mike McMullen : Yes, Matt, you're on the right theme here. So in fact, when I talked about this most recently inside Agilent, I talked about this is where our LSAG and ACG businesses come together. And there really is a very symbiotic relationship here, which is both businesses help one another, right? So I pointed earlier to some of the strength we saw in the pharmaceutical industry in LC, LC/MS in Q1, but also was tied to the enterprise services story we've been talking about for a number of years. And when you start to get yourself into a different relationship with customers, they truly see you as that valued partner. And for example, when they've had several years of an enterprise service arrangement with you, and you show them collectively -- or I should say, actually, objectively, what's been going on the lab with various different vendors in terms of equipment, it will point to, for our case, a decision to let's move more of our business to Agilent instrument side. Also, I think as Bob mentioned, we were there on a responsiveness standpoint. On our services, digital capabilities, we were able to respond to customers even in the midst of the pandemic, and they remember that, that we were there for them. And that translates into instrument business when they're doing their next round of capital purchase. So I think there really is a very close symbiotic relationship. And although we run them as we show the outside world, 2 separate business group results, they work very, very closely together, not only inside the company, but most importantly, with customers. Operator : Your next question comes from the line of Mike Ryskin from Bank of America. Mike Ryskin : This is Mike on for Derik. I want to follow-up on one thing you touched on it earlier. I mean, we've already hit on LC and just broader pharma markets a little bit. You had a comment of higher growth and pharma expected going forward. I just wanted to go a little deeper and try to get a sense for what are the key drivers here because there's so many moving pieces. You've got the end of your flush and maybe some catch-up in COVID early in the year. NASD obviously doing very well. Selling out is becoming a bigger part of the picture. You've got the share gains. So I'm just wondering, as you strip some of those out, are we seeing broader, higher levels of spend in pharma? Are we at to start of another LC replacement cycle? If you pay off some of those individual drivers, are we just seeing a better environment in pharma going forward for the next couple of years that would give you confidence that that's a little more sustainable? I got a follow-up to that. Mike McMullen : Yes. So maybe just kind of parse out a couple of thoughts here, and then Bob we welcome your commentary here as well. So some of the things that you mentioned are clearly areas of higher growth today and expected to be higher growth for years to come. And that was part of our story back at the December Analyst Day, where we talked about, hey, we think RNA-based therapeutics are an area of very, very strong growth for years to come. And that's why you're seeing this growth in NASD happening right now as well as our continued investments to capture more of that future growth. Immuno-oncology is an area of major investment right now, and that's why we went after the cell analysis business several years ago. So we expect those segments of the market to be really strong double-digit growers for many years to come. So I think that's part of the story there, which is to really have focused our investments and our portfolio towards those segments of the marketplace, which we expect to have even higher growth in the overall pharma market space. I think in general, we expect the biopharma R&D investments to continue the move to large molecule. When I get the question around LC replacements, the replacement cycle is always going on. And -- but what I do think is going to happen is, it's going to be stable, strong funding environment for pharma. So we're very optimistic about the long-term outlook for pharma. And I think it's a market I know we're betting on right now at Agilent. Mike Ryskin : And then my follow-up on that is, by our math, if you take the magnitude of the 1Q beat and then also the stronger FX tailwind for the rest of the year, that accounts for roughly $175 million of the raised fiscal year guide. And maybe you have these other items coming in. You mentioned the COVID test. You've got the -- all your comments on the strength in the current market. So where exactly is the downside risk? I mean, especially given the comps over the next couple of quarters, what are the areas we should be keeping an eye on that would keep you from doing something closer to 10%-plus quarterly? Bob McMahon : Yes, it's a great question. And I think one of the things, we still are in the midst of the pandemic, right? There's still the variance out there. We haven't seen any impact of that to date, but those are some things that we're watching. And we haven't built any of the COVID testing that you just talked about into the numbers. So that would definitely be something that when we get those approved, that would be upside to this. And that's not all within our control. The development and those timings are within our control. But ultimately, that's a bet that both on the serology side as well as the qPCR side that we feel confident about, and that would be on top of these. And then as we talked about before, the variability potentially in the C&E market is more biased towards the upside as we think about the forecast going forward. And so we feel good about where we are. We're early in the year and... Mike McMullen : We’re just one quarter in. Bob McMahon : But we don't expect the momentum to abate. Operator : Your next question comes from the line of Daniel Brennan from UBS. Daniel Brennan : I guess first question is maybe on China first, just I don't know if I missed it. Did you give what number or what growth rate you're assuming for the full year? And then within that, could you just discuss a bit more detail on the components of that, in particular, food, obviously, very strong this quarter. But how much more catch up potential is there in food, given how weak that business is then? Bob McMahon : Yes. Let me take -- I'll take the first one, and then we can jump on and we can tag team, Mike, on the second one. Mike McMullen : Yes, absolutely. Bob McMahon : In China, we had forecasted roughly high single-digits at the beginning of the year. It certainly started much stronger than that. So we're expecting it be double-digits for the full year, really driven by both pharma and food. Those would be the two -- the upside drivers to our initial guide. And then I think on food, we've seen -- we saw stabilization really in the first half of 2020, saw an improvement in Q4. And that improvement continued here into Q1. And we would expect that to continue, given kind of the overall environment and sensitivity around food testing and so forth. But we're not quantifying how long or how much is left to catch up, so to speak. Mike McMullen : Yes. I think also with food, I'm not sure I would really would use catch up describe this because, clearly, where you had some of the pharma companies just weren't having the research in and didn't work, had deferred investment, I think this has been part of the coming together of the new 5-year plan for China, and that's what's really driving this. So we would expect to see sustained investments, albeit not at this double-digit level. I think it's hard to know, Dan -- we've always felt this thing was not a market that was shrinking, wouldn't shrink long-term, which it had been for a few years, but it's more like a high single-digit longer term. And I think that's probably where we'd land, on your question, although I think we'll do double-digit for sure this year in '21. Bob McMahon : Yes. We -- Mike, to your point, in our initial guide, we assume kind of a mid-single-digit as the recovery, and it's probably high single-digit to double-digit for the range for the full year. Daniel Brennan : Great. And then maybe just one follow-up on the NASD? What was the dollar contribution this quarter? What's kind of assumed in the full year? I don't know if you've changed that at all. And I know you've touched upon this, but in terms of other modalities besides interference, I guess, is that still -- it sounds like it's something that could possibly come, but we're still going to wait to hear from you guys on that. Bob McMahon : Yes. What I would say, Dan, is we're at our full run rate capacity, which is, as we've talked in the past, $200 million a year. We hit that kind of where we expected to in Q1. Mike McMullen : We're really happy with how that business is ramping. Bob McMahon : And we're not done yet. Jacob Thaysen : Hey, Bob, I would just add to that, that as I mentioned before, RNAi interference is our primary focus, but we are doing programs on Guide RNA for CRISPR, and we are at full tilt with that. But we are always looking to be in tune with new modalities. And if they're relevant, if they're sufficiently meaningful, we're definitely apprised of that as well. Operator : Your next question comes from the line of Patrick Donnelly from Citi. Patrick Donnelly : Mike, maybe one for you. Just on the chemical and energy side, certainly appreciate the conservatism baked in here. Can you just talk a little bit -- I know in the past, you've talked about kind of the shift from insourcing to outsourcing from customers and how that should play nicely into your strengths. Can you just talk about, I guess, where we are in that process and how big of an opportunity that is for you guys? . Mike McMullen : Yes, I think we're still early days on that. I think it's -- that's part of the discussion. I think the investments that are going to happen this year, if they drop, are going to be more tied to deferred tech refresh. But I think it's probably more of a 2023 kind of -- excuse me, '22 event from the onshore and insourcing that we've been talking about. And I think this probably points to us being able to be able to sustain a mid-single-digit kind of end market. So it's -- I mean, it points to the fact that chemical and energy with these kind of longer-term outlooks coming from our customers will not be a drag on the overall growth rate, any material extended off. So I think it's an adder to the thesis that there is growth in the C&E market as well, albeit it can be a little bit -- it can move a little bit, depending on what's happening in the overall economy. Patrick Donnelly : Okay. Now it's going to be the year of durability at least. And then maybe just one... Mike McMullen : I like what you said, I should have used durability. How was the short to answer your question. Patrick Donnelly : All good. I appreciate that. And then maybe just one on the academic side. Obviously, that's been lingering a little bit on the soft side, not only for you guys, but for much of the industry. I guess, where do you think we are there in terms of whatever metrics you guys look at, whether it's customers in the labs or whatever it may be? Maybe just kind of dive in that a little bit. Mike McMullen : Yes. Great question. So when we’re talking to our team and our customers, here's our view of it right now. We think about -- if you think about 30% of the research labs are fully operational now, we think about 60% are working at reduced capacity. We think about 10% are closed. And we really think it's going to be -- all this is really tied to ability to get the infection rates down, to get the vaccinations out. I think until that changes significantly, we're expecting kind of more of the same, I'd say, Bob, for the -- until we actually see a change in the overall… Bob McMahon : Yes, I think the real catalyst for us, Patrick, to Mike's point, is what's going to happen in the fall semester for classes? Mike McMullen : Yes. Bob McMahon : Are people -- are students going to be back full? Or is it still going to be at kind of reduced rates and so forth. Mike McMullen : Yes. Bob McMahon : So we're expecting continued recovery, albeit slow, really, and that's what we're looking at in addition to some of the kind of the macro levels. Mike McMullen : I would say, though, that the conversation with customers is very robust right now. So it's just a matter of things opening up. Operator : Your next question comes from the line of Steve Willoughby from Cleveland Research. Steve Willoughby : I had a follow-up question to Mike Ryskin's question as it relates to guidance, Bob. Maybe trying to ask it a different way. Have you really changed your organic or core growth assumptions over the remainder of the year? Because even in the first quarter here, you back out a couple of hundred basis points from sort of end-of-year budget spending. The first quarter still did basically twice what you were initially expecting for growth in the first quarter. And just looking to your guidance and doing some math, it looks like you really haven't made too much of a change for the organic growth over the remainder of the year. Is that fair to assume? Bob McMahon : Yes. I would say we took Q1. We also upgraded Q2 and made some modest changes to the back half of the year, but most of that would be in the areas -- once we get further into the year, that would be an opportunity to revisit the forecast going forward. So I think bottom-line, you're in the ballpark. Steve Willoughby : Okay. And then just a follow-up question on diagnostics. So I guess 2 things to it. One, do you think we return to 2019 or normal levels in your non-COVID Diagnostics business this year? And then also, could you just provide a reminder on where you see your PCR test potentially fitting once it does come to market? Mike McMullen : You want to take the first one and Sam the second one? Bob McMahon : Yes. The short answer is yes, we expect it to get back, but again, latter half of this year. We're starting to see improvement. If you look at it by region, China is back. Certain pockets in Europe are back and certain places in the U.S. are back as well. But I think overall, it's probably going to be a few more months at least before it gets back to pre-COVID levels. Sam Raha : Yes. With regards to your second question on qPCR, for COVID-19, our master mixes, our instruments are already being leveraged as part of other testing systems by customers around the world. When our own test comes to market, we see the opportunity. There's still a dearth of robust testing solutions that are available. So we'll have the right performance going after the right fragments or looking at the right elements of COVID-19. And it's really about our broad ability to distribute, make it available and also something that could be automatable on multiple platforms. So we think we'll have a play. Operator : Our final question today comes from the line of Paul Knight from KeyBanc. Paul Knight : So obviously, you've got a full array of products in the analytical instrument marketplace. And it goes back to, I think, Doug's question in terms of M&A, an opportunity. Where do you think you are in the full solution in cell analysis? Is there a lot to build? Is there a lot to buy in that particular market? Mike McMullen : We think so. In fact, thanks for the question, Paul. You may recall -- and Jacob, feel free to jump in on this question as well. We teed up a fairly large -- although we're fully really proud of the business we've built so far, we think we have scale at a $300 million-plus business. We're playing in a much larger SAM. And we think there's both opportunities to further build out but also buy here as well. Jacob, your thoughts there? Jacob Thaysen : Yes, certainly. We've been very intentional about how we build out our portfolio. Firstly, it’s with instrument platforms that we ensure we can get some footprint and a scale in the market. And the next thing that would be the -- logic next step is to look at content, how do we actually get content on our instrument portfolio. So that's clearly an area we're looking into. But I actually think with the footprint, there's also opportunity to add other technique modalities into that. So we are -- we have open eyes. We follow what we call the tale of strains -- strain for all. And -- but -- and we wait to put another firm on that strain. And so we are -- keep our eyes open and then see what happens. Paul Knight : And then the last question would be you had mentioned your cost-cutting program that had started in the second quarter of last year, where you are -- where are you in that process? And what happens to cost-cutting when travel and entertainment might come back kind of post-COVID? Bob McMahon : Yes. We're seeing some of that. And some of that is lapping this quarter because we saw a significant drop, and so you're not seeing the year-over-year changes. We're not seeing it go back. And our goal is to not have it go back. So we think we're at a new watermark here in terms of spending, particularly in travel and some of these other areas. Now we are increasing investments in places like digital and some of these other places that are driving demand as well as some of the capacity that we talked about before. But certainly, in those types of things, travel and so forth, we're not looking for that to go back. It will go back some, but certainly not back to the way we have been doing business before. Customers don't want it, and we are not going to let it happen. Mike McMullen : Absolutely. To Bob's point, as I spoke the other day to our global field team, and we were talking about embracing our new ways of working. And of course, a lot of people drove and love to be back on the road. But not everybody feels that way. And the customers certainly don't feel that way because we're much more responsive and attentive to their needs by using digital platforms, there is a place for face-to-face, but it has to be based on the customer need, not because we want to be in the road to be out there doing things in a very traditional way. So we're keenly aware of the question you posed, Paul, really challenged ourselves to make sure that we really continue forward with these new ways of working. And this allows us to put money into areas that really do matter to customers. So I'd rather invest there rather than travel and entertainment. Operator : That concludes Q&A, and it also concludes today's Agilent Technologies First Quarter 2021 Earnings Conference Call. Thank you, everybody, for joining. You may now disconnect.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,021	2	2021Q2	2021Q2	2021-05-25	3.638	3.853	4.184	4.453	6.09828	31.48	32.24	Operator : Good afternoon, and welcome to the Agilent Technologies Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] And now I'd like to introduce you to the host for today's conference, Ruben DiRado, Director of Investor Relations. Please go ahead, sir. Ruben DiRado : Thank you, [Gabriel], and welcome, everyone, to Agilent's second quarter conference call for fiscal year 2021. With me are Mike McMullen, Agilent’s President and CEO; and Bob McMahon, Agilent’s Senior Vice President and CFO. Joining in the Q&A after Bob and Mike’s comments will be Jacob Thaysen, President of Agilent’s Life Science and Applied Markets Group; Sam Raha, President of Agilent’s Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release, investor presentation, and information to supplement today’s discussion, along with a recording of this webcast, are made available on our website at www.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 and 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 April 30. 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’d like to turn the call over to Mike. Mike? Mike McMullen : Thanks, Ruben, and thanks to everyone for joining our call today. Before I get into the quarterly details, I want to start by recognizing our Agilent India team. Despite the challenging COVID-19 situation, our India team is working closely with our customers to do what we can to help in this time of extreme need. In addition, our Agilent India customer support, finance, and IT teams have worked tirelessly to help us close out the second quarter and keep us moving forward. I could not be more proud of how the team has worked together in true ‘One Agilent’ fashion. Our thoughts go out to the entire Agilent India team and their families during this difficult time. In Q2, the strong momentum in our business continues against the backdrop of a recovering market. The Agilent team delivered another outstanding quarter exceeding our expectations. Both revenue and earnings are up sharply versus a solid Q2 last year, when revenues and earnings per share were relatively flat. Our growth is broad-based across all business groups, markets, and geographies. We also expanded margins, driving faster earnings per share growth. Revenues for the quarter are $1.525 billion. This is up 23% on a reported basis and up 19% core. COVID-19 related revenues account for roughly 2% of overall revenues as expected and contributed about a point to our overall growth. Our revenue growth is not a one quarter or easy compare story, but one of sustained above market growth. For example, our Q2 revenues are up more than 17% core from two years ago. Q2 operating margins are 23.9%. This is up 150 basis points. EPS of $0.97 is up 37% year-over-year. Late in the quarter, we also welcomed the Resolution Bioscience team to Agilent, continuing our investments in high-growth markets and bringing outstanding talent into Agilent. Like our recent acquisitions in cell analysis, Resolution Bioscience is an example of our build and buy growth strategy in action. The Agilent story remains the same. It is a story of one team outpacing the market to deliver strong, broad based growth in an environment of a continuing market recovery. Moving on to our end-market highlights, we grew strongly in all markets. Our growth is led by 29% growth in pharma and 22% in food. We are seeing improving growth in the chemical and energy market with 14% growth. We also posted low teens growth in diagnostics and over 20% growth in academia and government. Lastly, environmental and forensics grew 8%. Bob will provide more end-market detail later in his comments. Geographically, the Americas led the way with 27% growth. Strength in China, Europe and the rest of Asia continues with all growing in the mid-teens. The 13% growth in China is on top of 4% growth last year when the business started to recover from the pandemic. As we look at our performance by business group, the Life Sciences and Applied Markets Group generated revenue of $674 million during the quarter. LSAG is up 28% on a reported basis and up 25% core, off a 7% decline last year. LSAG’s growth is broad-based, across all end-markets and geographies. Our focus and investments in fast growing end markets continues to pay off. The LSAG pharma business is very strong, growing 41% with strength in both biopharma and small molecule. From a product perspective, we saw strength in liquid chromatography and LCMS along with continued growth in cell analysis. During the quarter, cell analysis grew 34%, with our BioTek business growing close to 40%. During the quarter, the LSAG team also contributed to our long-term company-wide focus on sustainability in advancing important ESG initiatives. LSAG announced several new products that have earned the highly respected Accountability, Consistency, and Transparency, ACT Label from My Green Lab. My Green Lab is a non-profit organization dedicated to improving the sustainability of scientific research. LSAG products also received two Scientists' Choice Awards announced at the SelectScience Virtual Analytical Summit. In our cell analysis business during the quarter, we launched our Cytation 10 Confocal Imaging Reader, a multi-functional automated system focused on research labs and core facilities looking for increased productivity. This product builds on the BioTek cell imaging leadership with the Cytation multi-mode reader and expands our reach in this strategic business. While still early, customer feedback has been extremely positive. We are also very pleased with the progress and trajectory of our cell analysis business overall and see a very positive future for this space. The Agilent CrossLab Group posted revenues of $536 million. This is up a reported 19% and up 15% on a core basis versus a 1% increase last year. ACG’s growth is driven by demand for consumables and services across the portfolio as lab activity continues to increase for our customers. This is leading to more on-demand services and parts consumption. Revenues from our contract business continue to drive strong growth due to the high level of contract renewals seen in the previous quarter. Our strong instrument placements and the increasing installed base will benefit the ACG business going forward. At the same time, our digital investments continue to pay off with continued strong customer uptake in consumables and our digitally enabled service offerings. Our LSAG and ACG business has come together in the analytical lab. This is where we believe we are well-positioned to continue driving above market growth as we build on our market leading portfolio, strong service organization, and outstanding customer service. For the Diagnostics and Genomics Group, revenues were $315 million, up 20% reported and up 16% core versus a 5% increase last year. Growth is broad-based, led by our NASD oligo and genomics businesses. Demand for our NASD offerings remains strong and our capacity expansion plans for our high-growth NASD business remain on-track. We’re very pleased with our acquisition of Resolution Bioscience during the quarter. With their liquid biopsy technology, Resolution Bioscience is a key player in a very exciting area of cancer diagnostics. We are very glad to have them on the Agilent team. I’m confident that as time goes on, you will be hearing more and more from us on this business and its contributions. I would now like to recap the second quarter and take a look forward. The strong momentum in our business continues. This is being driven by our relentless customer focus, the strength of our portfolio and the execution capability of the One Agilent team. Our build and buy growth strategy is delivering, as intended, with above-market growth. Over the last year, I have often said that Agilent is focused on coming out of the pandemic even stronger as a company. I believe you’re seeing the impact of this approach in our current results. As we look ahead, we do so with a sense of both optimism and confidence. We are optimistic because of the continued market recovery and the strength of our portfolio. We are confident because we have the right team, customer focused, operationally excellent and driven to win. As a result, we are once again raising our full-year revenue and earnings guidance. Bob will share more details, but we are expecting a continuation of our excellent top line growth. We also expect to convert this strong top line into excellent earnings growth and cash generation. During our investor event in December, we discussed our shareholder value creation model and our goals for increasing long-term growth and expanding margins. Six months into fiscal 2021, we are well on our way to achieving those objectives. Our build and buy growth strategy is delivering. The One Agilent team continues to demonstrate its execution prowess and strong drive to win. We’ve raised the bar on customer service and continue to exceed customer expectations in providing industry-leading products and services. While we have yet to fully emerge from the global pandemic, we are looking forward to the future with both optimism and confidence. Thank you for being on the call today and I look forward to your questions. I will now hand the call off to Bob. Bob? Bob McMahon : Thanks Mike and good afternoon everyone. In my remarks today, I’ll provide some additional details on Q2 revenue and take you through the income statement and some other key financial metrics. I’ll then finish up with our updated outlook for 2021 and the third quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. Revenue for the second quarter was $1.525 billion, reflecting reported growth of 23%. Core revenue growth was 19%, while currency contributed just under 4 points of growth. We are very pleased with our second quarter results as we saw strong, broad based growth with all three business groups posting mid-teens growth or higher, and all end markets growing strongly. From an end-market perspective, our focus on fast growing markets is paying off. Pharma, our largest market, again led the way, delivering 29% growth. This is on top of growing 5% last year. Growth was led by cell analysis, LC, and Mass Spec. These tools are delivering critical capabilities to our Bio-Pharma customers as they continue to make investments to develop new therapies and vaccines. Our biopharma business grew roughly 40% and represented over 35% of our pharma business in the quarter. Our small molecule segment also has momentum, growing in the mid-20s in the quarter. Overall, we are well-positioned within pharma and expect the pharma market to continue being the strongest end-market as we enter the second half of the year. The food market continued its strong performance, growing 22%. We experienced strong growth across all regions and segments as we continue to see global investments across the entire food supply-chain. We were very pleased to see the non-COVID diagnostics businesses continue to improve throughout the quarter growing 13% as routine doctor visits returned closer to pre-pandemic levels. We posted a very strong month in the diagnostics and clinical market as we came to anniversary the weak April we experienced in our large markets at the onset of the pandemic last year. And we exited the quarter with testing volumes at a run rate slightly higher than pre-pandemic levels. The chemical and energy end-market continues to recover as we grew 14% off a decline of 10% last year. Our results were primarily driven by continued strength in the chemicals and materials markets. And in a positive sign, our order growth rates were ahead of revenues and finished the quarter strong, leading us to believe this trend will continue. We also saw a nice recovery in the academia and government market as non-COVID-related labs resume operations in a strong funding environment. With the increase in activity, our business grew 21% against the weakest comparison of the year. We would expect the academia and government market to continue to recover throughout the rest of the year. Lastly, the environmental and forensics market saw high single-digit growth driven by the Americas, services and consumables, and atomic spectroscopy. On a geographic basis, all regions grew, led by the Americas at 27%. The pharma and academia and government markets in Americas grew in the low 30% range and all markets grew at least 20%. Europe experienced 16% growth led by food, academia, and government, and C&E. Those three markets all grew more than 20%. And as Mike noted, China grew 13% after growing 4% last year. This was driven by pharma growth in the high 30s. Our growth in orders outpaced revenue growth by mid-single digits during the quarter. Now turning to the rest of the P&L, second quarter gross margin was 55.4%, flat year-on-year despite a headwind of more than 30 basis points from currency. Our operating margin for the second quarter came in at 23.9%. Driven by volume, this is up a solid 150 basis points from last year even as we saw increased spending as activity ramped and we invest in the future. Strong top line growth coupled with our operating leverage helped deliver EPS of $0.97, up 37% versus last year. Our tax rate was 14.75% and share count was 307 million shares. Now, on to cash flow and the balance sheet. Our performance translated into very strong cash flows. We delivered $472 million in operating cash flow during the quarter, up more than 50% from last year. This strong cash flow has continued to help drive our balanced capital deployment strategy. During the quarter, we retuned $254 million to our shareholders, paying out $59 million in dividends, and repurchasing 1.55 million shares for $195 million. And as Mike mentioned, we also continue to strategically invest in the business. We spent a net of $547 million to purchase Resolution Bioscience and invested $31 million in capital expenditures. Year to-date, we’ve returned $657 million to shareholders in the form of dividends and share repurchases, while re-investing in the business by spending $619 million on M&A and capital expenditures. We ended the quarter with a strong balance sheet, which enables us to enjoy financial flexibility going forward. During the quarter, we raised $850 million in long term debt at very favorable terms, redeemed $300 million that was maturing next year and reduced our ongoing interest expense. We ended the quarter with $1.4 billion in cash, $2.9 billion in outstanding debt and a net leverage ratio of 1X. Now, turning to the outlook for the full-year and the third quarter, we see great opportunity to build on our strong first half results. Looking forward, while the pandemic is still with us, we continue to see recovery in our end-markets and have solid momentum in all our businesses. As a result, we’re again increasing our full-year projections for both revenue and earnings per share. This reflects our strong Q2 results and increasing expectations for the second half of the year. We are also incorporating the Resolution Bioscience into our new guidance. For revenue, we are increasing our full-year to a range of $6.15 billion to $6.21 billion, up nearly $320 million at the midpoint and representing reported growth of 15% to 16% and core growth of 12% to 13%. Included is roughly 3 points of currency and about a half-point attributable to M&A. This increased outlook also reflects continued growth in our end-markets. We see sustained momentum in the second half of the year in the pharma, food, and environmental and forensic markets. End markets that we expect will continue to recover in the second half include diagnostics and clinical, academic and government, and C&E. As Mike mentioned during our investor event in December, we provided a long-range plan of annual margin expansion in the range of 50 basis points to 100 basis points. Our updated guidance for the year exceeds the top end of that range. In addition, we are increasing our fiscal 2021 non-GAAP EPS to a range of $4.09 to $4.14 per share. This is growth of 25% to 26% for the year. Now for the third fiscal quarter, we are expecting revenue to range from $1.51 million to $1.54 billion, representing reported growth of 20% to 22% and core growth of 15% to 17.5%. And we expect third quarter non-GAAP EPS to be in the range of $0.97 to $0.99 per share with growth of 24% to 27%. Now, before opening the call for questions, I want to say, we’re extremely pleased with how we’ve started the first half of the year. We believe our strategies and our execution are driving the strong results we’ve achieved and put us in a great position to continue to drive strong results for the remainder of the year. With that, Ruben back to you for Q&A. Ruben DiRado : Thanks Bob. Gabriel, if you could please provide instruction for the Q&A. Operator : Absolutely. [Operator Instructions] Our first question will come from Vijay Kumar of Evercore ISI. Please go ahead. Vijay Kumar : Hey guys, thanks for taking my question and congrats on a pretty impressive [half year]. I did want to start on pharma BioTek. It accelerated sequentially the number, it's really impressive, 35 on large molecule plus 28 in small molecule, so maybe talk about what is driving this maybe at a high level, if you can talk about what is your end-market growing? Is this a market acceleration? Are you guys gaining share and how much of this is incremental contribution for NASD? I think the prior assumption was $200 million in the fiscal coming in about? Mike McMullen : Yes, there was a lot to unpack there Vijay. I'll take the congratulations Vijay and I'll pass the [indiscernible] to Bob. No. Yes, we're extremely pleased with the results that we've seen in the pharma business really across all three of our end business groups. I think it shows the investments in the great execution by the team that has been paying off over the last several years and I think what you're seeing is not only a market recovery for sure, but I think the relevance of our portfolio across all three of our business groups in that business, and certainly we are benefiting from the investments to expand capacity and new therapeutics across various end markets. But I also think the number of new products that we have launched in this space are really seeing a nice uptake. And on NASD to your point, I mean, we saw nice growth in NASD was in the high 30s and we are still on track for that $200 million that you talked about. And feel very good about that business going forward. Bob McMahon : And my perspective, I think we're capturing share in a faster growing market. So, I think there is a combination of both above expectations on market growth, but we're also getting more than our fair share of that market. Vijay Kumar : That's helpful comments there Mike. One question on perhaps a more medium-term question and I'm not asking for guidance, but I think the question on the Group has been, the comps are going to be pretty hard for some of these companies. Certainly COVID diagnostics has been [Technical Difficulty] I think you guys are one of the cleanest stories here in the group. But again, if I'm looking at this guide of high teens, perhaps talk about maybe broad strokes what is sustainable, it looks like some of these trends, Biopharma share gains etcetera should be sustainable? Maybe some product line on that, how to think about the plus and the minuses? Mike McMullen : Hey Bob, maybe if I can start with some comments? So, I think if there has been a positive on COVID, I think it's actually stimulating to some increased levels of investments in some of these end markets. So, we think that that some of these growth rates we've seen from the markets perspective are sustainable for a while. And we mentioned earlier, our story is a core business story. We've been very pleased that our team has been able to participate and have a role here to play in the fight against COVID-19, but our story really is all about what we're doing in terms of driving the core business. Vijay Kumar : Understood. Thanks guys. Operator : Your next question will come from Tycho Peterson of JPMorgan. Please go ahead. Tycho Peterson : Hey, good afternoon. I wanted to actually start with the M&A question just on resolution. Their obviously a CLIA lab, but have a distributed model as well. Can you just talk about those two businesses? I know the overall revenue contribution this year is like $50 million, $55 million, but how do you think about leveraging both the CLIA lab and the distributed model across your portfolio going forward? Mike McMullen : Yes. Tycho thanks for the question and good afternoon. I'll make a few comments here and I'll pass it over to Sam. So, my comments are going to be, we're very excited about having Resolution Bioscience team as part of Agilent. And Sam, I think we were even becoming even more excited now that we've had even a deeper look about what's been going on with the company and I think you've just come back from a visit from with the team. So you've had a chance of our – because maybe perhaps your first face to face business trip in well over a year, but with that lead in, why don't I pass over to you and answer Tycho's question. Sam Raha : Yes. Thanks Mike. Thanks for the question, Tycho. Yes, it was very exciting to finally get out and see real human beings again and very exciting to see the enthusiasm of the team there. And first-hand what is now part of our company. And Tycho the specific answer is, both parts are important. The primary business today that we have in Resolution Bio is related to pharma services, very much akin to what we do in our traditional CDx business here at Agilent, it's working with pharma to better understand biomarkers and then to develop companion diagnostics, which will [ultimately block] the market. There is some testing that's done in the CLIA lab as you mentioned, there is a relationship with LabCorp, and that is something that we expect over time to ramp, both because of the testing for LabCorp and also testing that will result from actual companion diagnostics that are approved as part of the former work that we're doing, but both are important, but the substantial part of our revenue today in this year, and even in the coming 18 months, 24 months will continue to be some pharma services revenue. Mike McMullen : Yeah. That's the focus. Tycho Peterson : Okay. And then on the quarter – two quick follow-ups, Mike, food up 22%. I know you talked about all regions and segments strong and sustained momentum. But we don't think about that market being 20% plus growth sustainably. So, can you just talk about whether there is stockpiling? How much of this is China coming out of the overhaul there? And then totally unrelated question on ACG operating margins, they were down about 90 bps. I'm just curious is that reinvestment there? Mike McMullen : Yes, sure. You're close study on the numbers, I can see it Tycho, so thanks for two good questions. So, while we're super pleased with the overall growth rate of food, it's been a story here for a number of quarters. We don't expect it to be a 20% growth rate in 2022 and years beyond, but we are expecting continued strength throughout this year, probably not at that same level. And Bob, I think it's really a – clinically China is part of that story, but in fact, when we look across the globe, it's been a – we also saw strength in other geographies as well. And I don't have exact... Bob McMahon : Yes, that's right. Mike McMullen : Geographic split, but it was a broad-based kind of story, with China leading the way, being the key part but not the only part of the story. Bob McMahon : Yes, absolutely, Tycho to Mike's point I think we see this kind of reverting back over time, but certainly what we're seeing is increased investment and increased testing here really around the globe. And China was actually slightly lower than the overall core business, you saw a strong recovery both in Americas and Europe and the Rest of Asia. And I think we're seeing some halo effect of COVID testing kind of a surveillance testing in various aspects of China or of food testing. And so, I think we feel very good about the business there. And then I think on your question... Mike McMullen : Bob I just want to add one thing. Additional thought in the Americas, historically that's been a lower growth rate for us in food. But with the inclusion of the cannabis testing market we're getting a bit of a bump there as well. Bob McMahon : Yes, thanks. Thanks Mike. And I think what you're seeing in the ACG business Tycho, is a combination of two things. One is some reinvestment, we continue to double down in areas like the digital investments to continue to increase our capabilities there and then you did see some increased activity, and so as we actually see this is a good thing. Our sales and field service engineers are traveling to more customers. And so, we're seeing some increases there associated with just increased activity, which we saw on the on-demand side, but it also comes with some incremental cost. But long-term, we feel very good about our ACG business and continued ability to scale that business going forward. Mike McMullen : Absolutely. Tycho Peterson : Okay, thank you. Mike McMullen : You're welcome. Operator : And your next question will come from Doug Schenkel with Cowen. Please go ahead. Doug Schenkel : Good afternoon, guys. Thanks for taking my questions. I'm just doing some math here, and Bob I'm trying to make us a little more sense of your guidance. On one hand, you guided fiscal Q3 revenue expectations well above consensus. On the other hand your guidance assumes essentially that revenue is going to move sideways, maybe even move I think down sequentially in a quarter, which I think is normally a little bit better relative to fiscal Q2, if for no other reason than in China, one of your bigger markets, you don't have a Lunar New Year in that period. And then we're kind of back into the Q4 implied number, you know there is I think something like 4% sequential growth and a pretty big implied moderation in year-over-year growth in the fourth quarter relative to the rest of the year even accounting for comps. So, there’s all that, you've got more M&A in there. And then, I listened to what you're seeing in your prepared remarks, and look at the numbers and it sure seems like you're crushing it with no slowdown. So, am I missing anything here? Bob McMahon : No, I think you are reading the numbers very well, Doug. And what I would say is, certainly, we feel very good about Q3 and that's where we have most of our visibility. We still are in a pandemic, but we feel good about the recovery and our – I think still a little prudent in terms of our forecast going forward. We want to see how the continued rollout of the vaccines are around the world and I think there isn't anything that in the near term that we see is going to stop us from our momentum. Doug Schenkel : Okay, all right, that's helpful. And then again doing math on the fly, so hopefully, I'm not messing up anything. Bob McMahon : But your math on the fly is pretty good Doug. Doug Schenkel : I am doing okay so far. Thank you. So, it seems like you're assuming operating investment growth 15% year-over-year in the second half or something like that, just backing into that from the top and bottom line. And that seems to be a couple of points higher than the revenue growth rate you're guiding to for the second half. So, assuming I'm still doing this right, could you just talk about what some of the key areas of investment focus are? It seems like you're planning on maybe opportunistically pulling forward some investment even separate from the M&A? And then building off of that, if you are in a position to drive revenue upside relative to guidance, do you think it's possible we could see flow through to the operating line and the bottom line along the lines of what we saw in the second – in the first half of the year? Bob McMahon : Yes, the short answer on that, let me take the question around investment. The biggest investment that we have going forward is really the addition of the Resolution Bioscience business and continuing to invest behind the capabilities there both from an R&D and development perspective, as well as the channel. And so that that does have an outsized investment relative to the second half versus the first half where we didn't really have that in here, but we are continuing to invest in demand driving activities. Some of those things like we just talked about an ACG around the digital aspects, but also building capabilities to continue the momentum going forward, whether it'd be marketing programs and other activities within our R&D pipeline. And I think the last question that you had is, if we do have upside, will it drive the same kind of level of incrementals? And I would say the answer is yes. Doug Schenkel : Okay, super helpful. Thanks guys. Bob McMahon : Yes, thanks Doug. Appreciate the comments. Operator : Your next question will come from Dan Leonard of Wells Fargo. Please go ahead. Dan Leonard : Thank you. So first off, on the core analytical business, do you think you've seen any benefits from on-shoring through the order book or the revenue line as of yet? Mike McMullen : Dan. Hey, thanks for the question. Not yet. We've talked about it with you in prior quarters and we still think it's a area of interest of our customers in terms of future investment, but nothing material yet. This is the core kind of reinvestment happening in the chemical and materials side of C&E and as you heard in our prepared remarks, the order book actually was stronger than the revenue book. So, pointing to a recovery of this segment which, you know in passive and fairly cautious about in terms of calling it, but the trends are positive now. Dan Leonard : Okay. And Mike, I want to ask a follow-up on Resolution Bio, you kind of assume this a build the future positive updates to come there. Can you talk about your [indiscernible] to invest in that business? And the reason I ask is, it does seem like a driver of success in that space is a willingness to absorb losses for long periods of time. So, can you talk about how you plan to invest in the business and how that fits your overall operating model? Thank you. Mike McMullen : Yeah, I'm not sure I accept the premise that do you need to have huge operating losses to have the business depend on the type of play you're trying to make here. And Bob and Sam you guys, keep me honest here as well, but pharma services business model we have where we can leverage a lot of investments that we've already made around our IHC base CDx business, we're not in the same position increment there perhaps maybe start up some of it brand new entering the space. So, we have something to build from. So, I think our expense structure may look perhaps look different than others in this space. We do plan to invest aggressively on the R&D side as well, building out additional commercial relationships. But we think our plan has been to absorb within the overall operating model. So, there wasn't any asterisk when we put our long-term goals out and said well without Res Bio, so I think we believe that we can manage within our overall operating model and I think given where we're starting from, which is we're not starting from zero in this business. We have something to build from our acquisition, a number of years ago from Darko. I think that puts us in a different perhaps a different place. Anything else add to that... Dan Leonard : I appreciate the color. Okay, thank you. Mike McMullen : You're welcome. Operator : Next question comes from Derik de Bruin of Bank of America. Please go ahead. Derik de Bruin : Hi, sorry, had the mute on, sorry about that. So, can you talk a little bit more about the LCMS growth and the service going on there. And a couple of questions on that one. First of all, I've asked this question about are you seeing an accelerated replacement cycle in that market or any of your markets. Basically, are people feeling good about budgets. You're spending a little bit more than they had so that general question. And I guess one of your competitors has been talking about new LC platforms, particularly targeting the biologics area. I'm just sort of wondering what your sort of competitive response and product offerings are that will going against that? And then I've got one follow-up. Mike McMullen : It's maybe there are competitive response. But I'm going to pass over to Jacob, because we're in the conference room here and I'm looking at him on the screen and he is finally loved to be able to answer your question. Derik. So, I'm going to pass it over to you, Jacob. Jacob Thaysen : Yes. Thanks Mike. And, Derik this is great question. So thanks for that. First of all the – what the growth you're seeing both in our LC and LC/MS space is certainly not a coincidence, it is something we have invested in for quite some years. If you really think about our mass spec portfolio, we have really invested and innovated around the lines of robust reliable on the team and we really see our customers especially on our single and triple quads have really taken off here in the last period of time. I think even before in the food space, where we see a lot of upgrades into triple quads, but clearly in the pharma and biopharma space, we have doubled and tripled down on that, really, we can see that there's great opportunities there. So, when you move from small molecule things, the last molecule, we are also seeing that the customer base is changing and the customers or the users of the mass spec is changing and hence, they are looking for a different experience and we have invested quite a lot into our software platforms. First of all, to live up to the expectation from a regulatory perspective, but also from a usability. So that's a big part of our success in what we see and I truly believe there is a lot more to come in that area. If you look at the LC, investing into bio is a part of the game. We have had out at bio LC high end high LC for quite a while now and it is doing very well. We can compete about against everyone in this space and you will see us come out – continuously come out with new products in that space. So, we feel very good where we are, and we'll continue to invest to continue to keep tech market standards very important market for us. Mike McMullen : And Derik, if I could just add on to that, I think it's fair to say Jacob, we're seeing both market expansion but also some acceleration of replacement market as well, particularly in pharma molecule. Jacob Thaysen : Absolutely. Derik de Bruin : Great, thanks. And then I'm going to ask you an unfair question, but what the hell. And part of it goes like it is – this is like all the tools companies that put up really strong results, they're coming off of easier comps and that's great. But I think that everyone sort of focuses on the next fiscal year and the ability to grow earnings. I just sort of thought, can you sort of generally share any thoughts on sort of earnings growth next year and will it be in the double-digit range? Just your general thoughts right now as people are going to start worrying about the tough comps. Not the COVID tough comps and then other core tough comps. Mike McMullen : So Bob and I haven't actually compared notes on this. I'll start with a few comments. And then I think we'll probably end been in the line. That said, potential U.S. tax reformer side, our model has been to be able to deliver double-digit EPS growth and I'm not seeing a need to deviate from that in 2022. Bob McMahon : Agreed. Derik de Bruin : Okay. I appreciate it. Have a great day. Operator : Your next question will come from Matt Sykes of Goldman Sachs. Please go ahead. Matt Sykes : Hey, thanks for taking my questions. Just maybe in the category of too early, but just look at the growth rate that you guys have been showing in cell analysis. I'm just wondering if you can kind of give us an idea of contribution from that, just given – it's been integrated and growing at a pretty good clip. And then also, just sort of what you're seeing in terms of customer is largely new customers deepening relationships with existing customers. Just put more color on cell analysis? Thanks. Mike McMullen : Sure, Matt, I think Bob kind of give a view on the overall size of the business and maybe pass it to you Jacob for some more insight on the customer side. Bob McMahon : Yeah, I was going to say, Matt, we're extremely pleased with the performance really across all three of the major business groups within cell analysis really driving strong growth. And we are well on our way to continue to drive accelerated growth in those areas. And I would say the margin profile of that business is above the Agilent average. And so, I'll let Jacob actually talk about some of the areas where we continue to invest in new products such as the Cytation C10, but also some of the areas around customer acquisition and what we're doing in the marketplace. Jacob Thaysen : Yes, thanks. It's another great question. And as you can hear we are super excited about the cell analysis business, particularly I'll focus on live cell analysis by immuno-oncology and immunology as a whole. And as Bob has also mentioned, we have made some quite some good investments into that space, particularly in also the imaging space where we have recently come out with the Cytation C10. I think Bob also talked about that, which is a new confocal microscope and what it really does is that it allows we have build it and build it out this way that you can get a relatively good entry level microscope that will compete based on the market and then you can upgrade it and use all the other automation platform and configurations that we already have established in BioTek. So, it is a really mixed unmatched stat that our customers are really delighted about. And our customer base, of course, we enjoy a very strong installed base from the BioTek acquisition, which we are now leveraging also for [our Seahorse]. But we also see a much stronger push into the biopharma space where some of our businesses have been very exposed to the academia government and we had a very clear focus areas to move in that, and that works very well. So, we are very excited where we are but I would say that the main growth comes from the biopharma space, but clearly now with the academia government coming back that of course also across the growth. Bob McMahon : Yes, Matt, just one other thing to add to what Jacob is saying. I mean this is an area that if you look at over the last several years, we continue to invest both organically and inorganically. And I would say, given our success in the strength in that marketplace and the strength of our portfolio, those are areas where we continue to look to invest further. Matt Sykes : Great. Thanks for that. That's very helpful. And then just on Diagnostics. Your comment that you exit the quarter is stronger run rate. I'm sure some of that sort of catch-up demand from the COVID period, but just can you talk about the sustainability and your views on diagnostics throughout the rest of the year? Sam Raha : Yes, that's one where we are – if we think about the opportunities, we're very, very pleased with kind of the progression of that business recovery throughout the course of the year. If you recall last year, we actually grew in that business and then saw a strong fall off when the pandemic really hit and we're expecting accelerated growth in Q3, but this is an area where we're watching to say, is there going to be sustained – how fast is that sustained recovery going. But all signs right now are very positive from the standpoint of the recovery, not only in our business, but if you look at just the overall testing environment continues to be very positive on non-COVID testing. So, I think people are getting back into the doctors' for wellness tests, certainly diagnostic tests like cancer diagnostics and so forth, and I think we're seeing the benefit of that going forward. And then couple that with the addition of the Res Bio business and I think we've got a very compelling portfolio of opportunities to provide to our customers going forward. Matt Sykes : Great, thank you very much. Operator : [Operator Instructions] Your next question comes from Puneet Souda of SVBL. Please go ahead. Puneet Souda : Yes, hi. Thanks, Mike and Bob. Bob question for you first. What are you baking in for pricing expectations for the year? And I think the bigger question here is, your ability to take pricing in the market in case there is a rise in raw material prices and in-line with the expectations? And then I have a follow-up for Jacob and Sam. Bob McMahon : That's a great question, Puneet, and what I would say is, first of all, just a shout out to our OFS team, our supply chain organization, who've just done a fantastic job of being able to manage the increased demands on a increasingly fragile supply chain or logistics, I would say. And so they've just done a fantastic job of supporting our customers. And as you say, we are starting to see inflationary pressures in these areas, but I would say, you know our contracts are more long-term in nature and the teams have been able to drive with the volume, as well as continued discussions, good cost controls there at least in the near term. And on pricing, our pricing hasn't changed. We felt that we had modest price built into our plan. That's what we've seen through this first half of the year and that's what we're assuming in the second half of the year. It depends on what group, but overall, we hadn't built any expectation of significant price increase or decreases into our business. Puneet Souda : Okay, that's helpful. And then a quick one for Sam first and then other one for Jacob. Sam, if you could characterize what are your expectations with the pipeline in terms of MRD, beyond therapy management for Resolution Biosciences, and if you could also talk a little bit about the regulatory framework? In past you followed PDL1 pharmDx assays into FDA approvals. How should we think about the new product launches? Are they going to follow a similar path? And then for Jacob briefly, could you update us briefly on the Open Lab efforts and your position in pharma there, obviously with your competitor now being focused again on the – very much on the core LC position. I'm wondering if you're seeing any changes in the market and I totally appreciate your 1,100 and 1,200 LCs has done well, but I just want to get a sense of Open Lab. Thank you very much and congrats again on the quarter. Bob McMahon : Yeah, thank you for the question on the Resolution Bio, I think … Mike McMullen : How many questions in there. Sam Raha : Quick response for you. Our primary focus remains therapy selection and that's where the programs that we have contracted and the continued significant interest we're seeing both from our existing pharma partners on the Agilent side, as well as the Resolution clientele that are coming into our pipeline as well. Now the fundamental technology is, we do believe the minimal to more applications including minimum residual disease and monitoring, but once again our primary focus remains therapy selection. Now, in terms of the model, I think you asked about that. It is what we can do before, which is we believe as Agilent, we've got a capability set, which we've used for PDL1 where we work, specifically with pharma partners to work on companion diagnostics meaning to develop register and then commercialize those companion diagnostics as they come to market and are approved, tied to a specific indication specific drugs. So that is our model and ultimately our vision is to have IVD kitted NGS solutions that are near to patients that are distributable, but of course as you heard even earlier we've got a CLIA lab and there's diagnostic testing that will happen along the way, and that's a little bit different than the PDL1 model that we have today, because that's the nature of NGS based diagnostic testing, but our interest and long-term focus remains an IVD kitted diagnostic test. Jacob, over to you. Jacob Thaysen : Yeah. Thank you and let me just start by saying that Informatics and Open Lab is key to our strategy. So, though we like to talk about our instrument, it's always connected – most of the time connected within a very strong position in Informatics, and we continue to invest in Open Lab, in fact, we believe that is the lab, where we connect all our instruments into an ecosystem in a cloud setup where you can also track your samples and in the end also connect into an e-commerce set up is going to be the future, and with Agilent's broad portfolio we can very quickly, we can very well do this. So, I'm very excited about that and we continue to invest, in fact we have over the last few months decided to further invest into these areas to further accelerate our presence here. Puneet Souda : That's great. I appreciate you guys taking that extra questions. Thanks guys. Mike McMullen : Sure not a problem. Operator : Your next question will come from Brandon Couillard of Jefferies. Please go ahead. Brandon Couillard : Thanks, good afternoon. Bob or Mike in terms of the chemical energy business, could you break out instruments versus aftermarket in the quarter? I suspect it's probably the first quarter in a while that you've seen solid instrument growth. Just wanted to confirm that's the case. And then what's embedded in terms of the updated full-year guide for that end markets specifically? Mike McMullen : Bob, I know that the instrument business was strong for us in C&E. I can't remember the actual relative ratios of [indiscernible]. We're looking though our notes here right now to answer your question. And going into the Q3 is probably our easiest compare in C&E. We're still looking for that stack growth to kind of move up bit on us, but Bob? Bob McMahon : Yes, I was going to say, Brandon to your point of that [14%] LSAG or the instrument business is slightly higher than that and LSAG was slightly lower than that, but both double-digit growth. And as we think about where we are going forward in terms of the guide for the third quarter and it kind of going forward, our assumption for Q3 is somewhat similar to Q2 in terms of continued recovery of a weak base. It was down 10% again last Q3 and then we started seeing recovery. And so I think about it – we're thinking about it in roughly the same kind of terms in Q3 that we saw in Q2. Mike McMullen : I think right now we're taking it quarter-by-quarter, Bob. But I think overall we see this trending being more upside than downside. Bob McMahon : That's right. Brandon Couillard : Got you. And then just one more, it doesn't sound like, based on your prepared remarks today, but to what extent if at all are you seeing any supply constraints, printed circuit boards or other marked materials? Mike McMullen : Brandon, I just would echo what Bob mentioned earlier, our office team that is on a spectacular job, so in our remarks you heard we talked about some strong orders, order growth higher in China and C&E, but that was not at all tied to any supply chain constraints. So, we've been able to get product. We've been able to ship product and listen, it's not easy, but the teams find a way to make it happen. So, I think Bob is relatively material at all to the quarter and we think it's manageable moving forward as well. Bob McMahon : That's right. Brandon Couillard : Great, thanks. Operator : And your next question will come from Patrick Donnelly of Citi. Please go ahead. Patrick Donnelly : Great, thanks for taking the questions guys. Maybe following-up on Brandon's question on C&E there, can you just talk through what you're seeing in there a bit more? Obviously, the order book growth is encouraging coming in higher than revenue. You know, was that enough to give you confidence that this won't kind of turn quickly on you? I know you've noted historically it's been a bit hesitant to bake in too much growth there. I mean this is among the most positive [indiscernible] I’ve heard from you guys over the past couple of years. So, can you just talk through that and then I guess was that segment the biggest piece [recovering the back half] guidance raise doing a bit more comfortable about the sustainability there? Mike McMullen : Yes. Thanks, Patrick. And I'm glad you remember my earlier comments, because I always said once the orders here in my book I'll start to talk a little bit differently about it and that's why you're getting more positive tone. I would say that we're still in the early phases of the transition. We feel really good about where things are on the chemical materials side of C&E. I would say we're starting to see quoting and some initial order activity on the refining side still relatively light compared to the Materials and Chemicals segments. As you know, the larger part of that business for us, but yes we are – I am much more positive. I think it's probably the first time in a long time that we've had this kind of view on the trends we're seeing in the C&E space. And yes, we had in prior quarters seamless PMIs, but I wanted to see in the order book and I started to see it this quarter. Bob McMahon : And I would say, Patrick to build on what Mike is saying, we still have – we're taking it as he said, kind of, one quarter at a time. We've built in some of that into Q3 and I would still say there is a bias to the upside in Q4. Patrick Donnelly : Okay, that's helpful. And then just maybe on the M&A landscape. Bob, you mentioned the balance sheet helped, obviously we saw the Resolution deal you guys touched on that a few times. Should we expect more deals of that nature? Are you still on the hunt for something a bit larger? Mike, maybe if you could talk a little bit about the pipeline activity and the segments you're focused on and then Bob, if you want to talk about where the leverage could go, that will certainly be appreciated. Mike McMullen : Yes. So I think our view on M&A remains the same. We see that as a key part of our – we've been terming our build and buy growth strategy. We've signaled that we would be willing to do deals in the multiples of BioTek, which to date is our largest deal. And that's still an area of interest for us. We like to, kind of a growth accretive deals that you're seeing. We're bringing in great new teams like Res Bio team, like the BioTek, ACEA, so we are maintaining our focus on higher growth segments. We like the areas we're going, we've been gone after. We like cell analysis, we like the genomics look at biopsy space, I think Informatics others. We have a number of areas that we were continuing to look for growth opportunities. Again, we don't have to do deals to make our model work. But if we can find great new teams and great businesses to bring into the company we're quite willing to do that. You just have to remain disciplined in terms of valuation expectations. There's a lot of frothiness in certain segments of the market, but we're going to stay where we've been successful in the private space, where company founders often looked at and say listen, this will be a great home for my company my team. We like how you guys run your company, we like your culture, we like to just for in terms of growing the business for the long-term. So, we're going to stick to our model. It’s been working for us Bob and I think we can adjust the question... Bob McMahon : Just quickly, we're not going to give a specific target around that other than to say that our intent is to maintain an investment grade and we ended the quarter at, kind of 1 times net leverage and that gives us plenty of flexibility to continue to invest in deals growth accretive deals as Mike just talked about. Patrick Donnelly : Okay. Thanks, Mike and Bob, really appreciate it. Mike McMullen : You're very welcome. Operator : And your last question today will come from Dan Brennan of UBS. Please go ahead. Unidentified Analyst : Hi this is [Nathan] on for Dan. Just a quick question. To what extent has your upgrade cycle been impacted by the pandemic, and now that we're kind of coming out of the pandemic, are you seeing any traction, any acceleration in the upgrade cycle in any of your instruments or end market? Mike McMullen : Yes, I think to answer your question, I think when the pandemic hit, it really slowed down any kind of replacement cycle. Particularly I would say in the C&E side of our business. And as we just commented, we're seeing positive indications that that actually is now turning to different direction. So, I'd say it's been even in the C&E space that are tied to chromatography spectroscopy platforms. Bob McMahon : I would say, Nathan as Mike said, still early days, but all the trends are looking positive. Unidentified Analyst : Great. And just, if I can switch [pharma], you did mention that you're seeing share gains on top end market grow. Can you just elaborate what is driving share gains for you? Mike McMullen : If you think about our – the combination of our LSAG and ACG businesses where we come in the analytical lab, as Jacob mentioned earlier and I haven't had a chance to have [indiscernible] jump into the call yet, but you know they’ve been working very well together for multiple years. And you're seeing it by bringing innovative solutions to the market that have a differentiated value proposition from the competition. A superior service experience and I think it's – we continue to build out our commercial reach as well. So, I think it's been the combination of portfolio and the workflow focus within that portfolio, building the service capability and then building out further commercial reach. I think it's been a combination of all those factors helping us to do really well in our LSAG and ACG groups, and then obviously we talked earlier about the play in cell analysis, which is a new addition to the company in biopharma, and then our NASD play in Sam's business. I think it's been a combination of all those factors. So, that's why we keep using the word broad-based growth because you see it in all parts of the businesses. So, we feel really good about the results from the size we were working on for a while. Unidentified Analyst : Great, thanks. Operator : And this concludes today’s conference call. Thank you everyone for joining us. You may now disconnect.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,021	3	2021Q3	2021Q3	2021-08-17	4.021	4.224	4.586	4.75	6.53079	34.07	36.59	Operator : 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. [Operator Instructions] And now I'd like to introduce you to the host for today's conference. [Indiscernible], Vice President of Investor Relations. Sir, please go ahead. Ruben DiRador : Thank you, Paul. And welcome everyone to Agilent's Third Quarter Conference Call for the Fiscal Year 2021. With me are Mike McMullen, Agilent's president and CEO, and Bob McMahon, Agilent's Senior Vice President and CFO. Joining the Q&A after Bob and Mike's comments will be Jacob Thaysen. President of Agilent's Life Science and Applied Markets Group; Sam Raha, president of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release, investor presentation, and information to supplement today's discussion, along with the recording of this webcast is made available on our website at www.investor.agilent.com. Today's comments by Mike and Bob were [Indiscernible] from non-GAAP financial measures. We 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 and references to revenue growth are on a core basis. Core revenue growth, excluding the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of July 31. 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'd like to turn the call over to Mike. Mike McMullen : Thanks, Barney, and welcome to your first Agilent's earnings call as our new Vice President of Investor Relations. And thanks to everyone for joining our call today. Before covering our Third Quarter financial results, I want to acknowledge the recent passing of Dr. Tachi Yamada, a giant in our industry, and a former Agilent board member. Tachi was much more than a knowledgeable, deeply involved Agilent board member for nine years. As many of you on the call already know, Tachi lived a very full life as a doctor, a scientist, as a humanitarian who was driven to help others. I know that the Agilent team is not alone in recognizing that Tachi Yamada will be greatly missed. And we extend our deepest sympathies to Tachi's family. Now, on the Third Quarter Review and our updated outlook for the year. In Q3, the very strong, broad-based momentum in our business continues. The Agilent team delivered another outstanding quarter, exceeding our expectations. Q3 revenue of 1.59 billion is up a reported 26% and is up 21% core. This is against a modest decline of 3% in Q3 of last year. So, we are well above the Fiscal Year 2019 pre-pandemic levels. In addition, like other positive signs of continued momentum, orders outpaced revenue during the quarter. Our growth is broad-based across all business groups, markets, and geographies. The combination of strong top-line performance and execution translated to excellent growth and profitability and earnings per share. Our Q3 operating margin is 26%. This is up 230 basis points from last year. EPS is $1.10, up 41% year-over-year. Agilent success continues to be driven by our build and buy growth strategy and execution prowess. We're developing market-leading products and services, investing in fast-growing businesses, while delivering outstanding customer service, and continue to drive profitability. Since the onset of the pandemic, we have taken actions to ensure Agilent emerges even stronger as a Company. While we have yet to leave COVID -19 in the rearview mirror, our Q3 results are another indicator our actions are delivering the intended results. Bob will provide more details on end markets and geographies, But I want to briefly highlight our performance in our two largest end markets, Pharma and Chemical & Energy. We continue to perform extremely well in Pharma, our largest market, growing 27% with strength in both small and large molecule segments. Our large molecule business grew roughly 52% in the quarter and now represents 36% of our overall Pharma revenue, up from the mid-20s, just a few years ago. In chemical energy, our business is recovering faster than expected, expanding 23% in the quarter. This is an acceleration of the momentum we achieved in the first half, and our order funnel continues to strengthen. Looking at our performance by business unit, the Life Science Applied Markets Group generated revenue of 680 million. LSAG is up 22% on a reported basis, this is up 18% core of just a 4% decline last year. LSAG 's growth is broad-based across all end markets. Our performance was led by strength in Pharma, which is up 22%, and chemical energy up 31%. All businesses delivered strong growth led by cell analysis at 38% growth, and our LC and LCMS businesses, which grew 22%. We continue to strengthen our position in the fast-growing Large Molecule market segment. During the quarter, the LSAG team launched 3 InfinityLab Bio - LC Systems at the well-attended InfinityLab LC Virtual Conference in June. These new products further extend our LC leadership position. In addition, building on our already strong Pharma offerings, we launched new compliance-ready LC/Q - TOF and LC - TOF solutions to our portfolio in the quarter. The Agilent CrossLab Group posted a revenue of 560 million. This is up a reported 21% and up 15% on a core basis. These results are on top of 1% growth last year. The business is benefiting from increased activity in [Indiscernible] labs and instrument connect rates. This led to more contractive services, on-demand services, and consumables consumption across all end markets. All end markets grew mid-teens or higher, with exception of environmental [Indiscernible] which still grew 9%, The pandemic has shown ACG to be our most durable business with ACG growing each quarter since COVID-19 first emerged. Our customer-focused approach and digital investments continue to pay dividends. Looking forward, instrument placements and demand as well, [Indiscernible] strong performance by ACG, as we drive attractive rates and increased costs for lifetime value. The diagnostic genomics group produced revenue of 346 million up 44% reported, and up 37% poor, compared to an 8% decline last year. The growth was broad-based across product lines and regions and was led by our NASD GMP Alago business. The ramp of our facility in Frederick, Colorado continues to go very well. The quarterly results exceeded our expectations, easily, surpassing the $50 million revenue milestone. While one quarter does not make a trend, our team has done a tremendous job increasing output in a high-quality manner. This gives us increased confidence in our ability to exceed the $200 million annual run rate in revenue with existing capacity. In addition, the trained manufacturing line expense is well underway and on schedule. Our Genomics Instrumentation and Consumables businesses rebounded strongly in the quarter, as did our pathology-related businesses. For the first time in several quarters, we saw diagnostic testing above pre-pandemic levels. While we are watching the Delta variant very closely, to date, we have not seen a meaningful negative impact in testing volumes. I also want to highlight our performance in China. While still less than 10% of DGG revenue, our China business grew 50% in the quarter. We continue to see tangible progress in building a stronger China market position. In Q3, we signed our first ever companion diagnostic development services agreement with a China-based BioPharma Company. Earlier this month, we also announced the initiation of in-country manufacturing for our SureSelect product line. We are very bullish about long-term growth prospects in China for our DGG Product and Services offerings. In addition, the integration of the Resolution Bioscience team is going well. And we are very pleased to enter and expand our participation in the fast-growing NGS-based cancer diagnostic market. It was a busy quarter at Agilent, so I have a few other achievements I'd like to share with you. Last month we published Agilent's 21st Annual Corporate Social Responsibility report. At a time when some are just starting to look at issues like sustainability and societal impact, this has always been a key part of who we are as a Company. We've been addressing these issues since our founding more than 2 decades ago. I would encourage you to review our report on the Agilent website. We're also very pleased to receive recognition as a great place to work in the U.S. by the Great Place to Work Institute. This resulted from just one more example of us when having a highly engaged and energized team. And as you know, teams with high engagement win in the market. Looking ahead, building on another excellent quarter and the momentum we're seeing, we expect the business to continue to perform well as we close out what we believe will be the outstanding fiscal year 2021. As a result, we are once again raising our full-year revenue and earnings guidance. Bob (ph) will share more details, but we're expecting a continuation of our excellent top-line growth and earnings generation. While the world has yet to fully emerge from a global pandemic, Agilent is well-positioned to deliver excellent results again in the fourth quarter. I remain very proud of the Agilent team's ability to consistently deliver for our customers and shareholders. Thank you for being on the call today, and I look forward to your questions. I will now hand the call off to Bob. Bob? Bob McMahon : Thanks, Mike. And good afternoon, everyone. In my remarks today, I will provide some additional details on Q3 revenue, and take you through the income statement and some other key financial metrics. I'll then finish up with our updated outlook for the fourth quarter and the full year. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike mentioned, we had an excellent result in the Third Quarter. Revenue was 1.59 billion, reflecting reported growth of 26%. Core revenue growth was 21%. Currency added, 4.5% for the quarter, and M&A added 0.5. In addition, COVID-related revenues were in line with the prior year. All end markets performed well with Pharma and Chemical & Energy as standouts versus [Indiscernible] expectations. Our largest market Pharma, grew 27% during the quarter, after growing 2% last year. The performance was led by the continued strength in our large molecule business, growing 52%, while our Small Molecule business grew mid-teens. And all regions in the pharma market grew double-digits. Our Large Molecule business was driven by our NASD division and demand for LC and Mass Spec instrumentation and solutions. While our Small Molecule business was primarily driven by QA/QC refresh. Chemical & Energy also performed well this quarter, with 23% growth. Even after accounting for the comparison against the 10% decline last year, this was clearly our best quarter since the onset of the pandemic. This result was driven by increasing momentum and demand for advanced materials and the general global economic growth. Our view is that the Chemical and Energy market still has additional room to grow moving forward. The diagnostics and clinical, we're very encouraged with the continued recovery in the market as our genomics and pathology businesses saw very good growth. On a regional basis, all regions grew with China up 41% and America is delivering 38% growth. In academia, in the government market, we delivered 12% growth as most research labs continue to open globally and expand capacity. On a regional basis, Europe led the way. The Food market continued its double-digit performance, growing 12% on top of growing 1% last year. Food manufacturers continue to invest in increased testing to ensure quality and authenticity. A developing cannabis testing market, primarily in the U.S. also contributed to the growth in this market. And regionally, the food market was led by the Americas and Europe. Rounding out our key markets, environmental and forensics came in with 5% growth. On a geographic basis, all regions demonstrated solid growth led by the Americas at 32% and Europe at 23%, both exceeding our expectations. The performance was broad-based across all markets. And as expected, China was up 8% on top of 11% growth last year. All 3 business groups grew in China during the quarter. Pharma, Chemical & Energy, and Diagnostics were the key drivers. Now, turning to the rest of the P&L. Third Quarter gross margin was 55.9% up 80 basis points from a year ago, despite roughly 40 basis points of headwind from currency. Our strong top-line, some positive product mix, coupled with the strong execution from our operations team, drove the year-over-year improvement. And our supply chain team is doing a tremendous job getting our products to customers despite the increase in demand. Gross margin improvement in performance, along with continued operating expense leverage, resulted in operating margin for the third quarter of 26%, improving 230 basis points over last year. Putting it all together, we delivered EPS of $1.10 up 41% versus last year. Our tax rate was 14.75% and the share count was 306 million shares as expected. We delivered $334 million in operating cash flow during the quarter, showing a strong conversion from net income and up more than 15% from last year. During the quarter, we returned $172 million to our shareholders, paying out $59 million in dividends, and repurchasing roughly 800,000 shares for $113 million. Year-to-date, we've returned $829 million to shareholders in the forms of dividends and share repurchases, a leverage ratio of 0.8. Accounting for our Q3 performance and improved outlook in the fourth quarter, we are again raising our full-year projections for both revenue and earnings per share. We are increasing our full-year revenue projection to a range of 6.29 to 6.32 billion, up to $125 million at the midpoint from previous guidance. and representing reported growth of 17.8% to 18.4%. in core growth of 14.5% to 15%. Included is roughly three points of impact from currency and a small amount from M&A. In addition, we're on track to deliver, roughly $100 million in COVID-related revenue in fiscal 2021, in line with our expectations from the beginning of the year and flat to last year. We expect to continue our strong operating leverage, and so we are increasing our fiscal 2021 non-GAAP EPS to a range of $4.28 to $4.31 per share, up 30% to 31% for the year. This translates to fourth-quarter revenue ranging from 1.63 billion to 1.66 billion. This represents reported growth of 10% to 12%, and core growth of 8.5% to 10%, on top of the 6% growth in Q4 of last year, when we started to see early signs of recovery from the strict lockdowns. In addition, while COVID revenue was roughly flat year-on-year for the full year, last year's fiscal fourth quarter represented the high-water mark in our COVID-related revenue. And as a result, we expect to see roughly a 1-point headwind due to COVID revenue in the quarter. So, our core growth, excluding COVID, would be comparable to 9.5% to 11%. We are forecasting higher expenses in the fourth quarter as we invest to maintain our strong momentum, but expect continued operating leverage in excess of 100 basis points. non-GAAP EPS is expected to be between 1.15 and 1.18 with a growth of 17% to 20%. Now before opening the call for questions, I want to reiterate that we continue to see good demand in our end markets, have solid momentum in all our businesses, and expect to close the year extremely well. We believe our strategies are the right ones for Agilent, but we couldn't achieve these results, we [Indiscernible] without the excellent execution by the team. With that Barney (ph) back to you for Q&A. Barney: Thanks, Bob (ph). Paul (ph), if you could please provide instructions for the Q&A now. Operator : Definitely, sir. We will now begin the question-and-answer session. [Operator Instructions]. However, if your question has been answered and you wish to remove yourself from the queue [Operator Instructions]. Please stand by while we compile the Q&A roster. Your first question is from Tycho Peterson with JPMorgan. Tycho Peterson : Hey, good afternoon. Congrats on the quarter. Mike, I want to start with the -- Mike McMullen : Thanks, Tycho. Tycho Peterson : -- China outlook. I know in China, there's been a fair amount of noise about companies being able to do products in-country -- [Indiscernible] shutdown -- internal shutdown. So, can you maybe just talk to some of the near-term dynamics in China? And it sounds like trade tension's also getting worse with the buy China policy. How do you think about that over the next couple of quarters? Mike McMullen : Sure. Thanks for the congratulatory comments, Tycho, and we really, actually, continue to feel quite good about our performance in China, as Bob and I mentioned in the call script, I think 8% up on 11% last year, and I think our stack growth is around 19% Q2. It's actually up over our stack growth of 17 Q2. We're seeing this good, strong, Pharma and C&E demand in China. Now, the funnels really remain quite robust. And I think, now getting to your specific question, we're not seeing any significant changes in terms of ability to get the product in. I mean, there's been a lot of noise for years, I have to say, between the U.S and China, yet the business seems to somehow get transacted. So, Bob, I think we're not really overly concerned about those dynamics. We did have somewhat of a little bit of shipment interruption as some of our Academia government customers were – had [Indiscernible] our VAP tax exemption change. But I think that was a relatively minor impact on the P&L. But clearly, we're monitoring those developments and you have to continue to work to make sure you've got the logistics of flowing through the country, but we've always been able to find a way and are not overly concerned about it at this point. Bob McMahon : Yes. I would say, Tycho. We continue to invest in China as we mentioned in the call. And there are always bumps here and there, but long-term we feel very good about the business in China. Mike McMullen : Yes, that's having one other thought here, Tycho (ph.), is relative logistics. We have divested into a number of forward-looking stocking locations over the last few years, not really has paid us dividend, because we are less dependent on stuff coming directly into the port because we have a lot of in-country inventory. Tycho Peterson : Okay. That's helpful. And then it sounds like you've got a lot of underlying momentum. I know you don't like to talk about the order book, but any preliminary comments you can make on '22 at this point, you know, Street has you are up about 6.5%, curious if you think that's a reasonable bar and any comments on where you think margins may go next year? Mike McMullen : Yes. Thanks. Those specifics, but what I can tell you is that we feel really good about the momentum of the business, the order book is continuing to be strong and that's as of today, where we got the latest view of the early orders through August, so all the momentum remains there. As I mentioned on our prior earnings call, we feel a really good ability to meet and exceed those long-term growth goals we put out, and the margin goals. I think that's where we stand right now, is we'll get to that in November, but we're feeling good about the trajectory of the business momentum we built here. Tycho Peterson : Okay. Thanks a lot [Indiscernible] Operator : Your next question is from Brandon Couillard with Jefferies. Brandon Couillard : Many thanks. Good afternoon. Mike McMullen : Good afternoon, Brandon. Brandon Couillard : Maybe to start with the Biopharma business. I mean, 50% growth in Large Molecules is pretty impressive. Used to elaborate, given the sources of growth there, and what that would look like if you back out the NASD contribution. Mike McMullen : Yes. Sure. And then I'm actually going to invite Bob and I will also want to have Jacob make a few comments on some of those new introductions here. I think I used the word broad-based, at least 5 or 6 times, maybe 10 times in my prepared remarks and we're seeing that in the biopharma. So, we've got across the board, double-digit growth happening here. Cell Analysis LC, LCMS, other platforms that go into Biopharma, along with our consumables and services. And then to your point, really outstanding growth in NASD. But while NASD was a big contributor, it was an Agilent-wide life story. And Bob, maybe you can just answer the specifics on the numbers? Bob McMahon : Yeah. And Brandon, to your point, the total in Large Molecules was 52% as I mentioned before. But even if you back out the NASD businesses still grew in excess of 40%. So very strong business on NASD, but it shows that the rest of the business, both instrumentations, as well as the consumables pieces and the other elements on the Pharma associated revenue in Diagnostics and Genomics also, very strong business in it. Mike McMullen : And Brandon (ph.), I just wanted to maybe have Jacob (ph.) jump in very quickly because we have a continued drumbeat of new introductions into this space as well, which has been the focus and prioritization of our R&D pipeline. Jacob (ph.), I know we had 2 big introductions in Q3 as well. Jacob Thaysen : Yeah, thanks for that, Mike (ph.). And that's -- you know, at the analyst said, I think we've talked about in [Indiscernible] that about 70% of our portfolio above that was really focused on Biopharma a so I'm really happy to see that momentum we have right now. And as you also mentioned in the prepared remarks, you know, I'm very pleased with the bio-LC portfolio. In fact, we had and -- and, one of the [Indiscernible] of our momentum is that with that Bio-LC that we introduced here a few months ago. And we had a virtual conference with more than 1,000 customers participating, and we had more than 25 external scientific speakers, which I would actually say I know it's the best in history by far. So that introduction is actually creating quite a lot of momentum and it allows us to play for all the [Indiscernible] biocompatible space to the 2D-LC, but clearly, also into the Mass Spec, with the Mass Spec at the end of it. And we also mentioned compliance. The FDA [Indiscernible] informatics compliances and all that very important part that most of the Biopharma see as the requirement to do business with them. And we have invested in this for quite a while, so we ensure that data integrity, audit readiness, and storage of data is the level of security. And right now, we have the offering both supporting our LC, but also all our major marketable Mass Spec instruments. And also, in spectroscopy, with the recent announcement here off the top in the Q2 informatics solutions. So right now, we are -- we have a very strong portfolio and that truly drives our growth. Well, I can continue talking about the cell analysis, but I will -- Mike McMullen : I'm going to bounce it back to Brandon. Hey Brandon, thanks for allowing us to do an advertisement on the Agilent portfolio strength. But, back do you. Do you have any additional questions? Brandon Couillard : Yeah, I think just touched on maybe if we could just elaborate on the Small Molecule market. You mentioned QA/QC refresh, curious [Indiscernible] we might be in there and what you think the market is kind of growing for Small Molecule relative to your big team. Mike McMullen : It's our view that there is always a replacement market going on in the Small Molecule space, and sometimes, it picks up a bit more. But then -- and I think we're in that phase right now. I wouldn't say it's a huge acceleration, it's just the solid and probably high changes. Jacob Thaysen : Yeah, I was going to say, Brandon as we think about this prior to the pandemic, we were probably slower growth than normal were some of the QA, QC refresh was probably elongated. And now we're starting to see that pick back up, and that typically is an 18 to 24 months kind of cycle. And I would say we're still at the beginning of that. And so, feel good about the continued performance of the refresh cycle going forward. Brandon Couillard : Great. Thank you. Operator : Your next question is from Vijay Kumar with Evercore ISI. Vijay Kumar : Hey guys, congrats on the strong print this afternoon. Mike McMullen : Thanks, Vijay. Vijay Kumar : Mike, maybe on my first question here, Resolution Bio, that deal that you guys did, did that come in line with expectations? I'm just curious. The 50-basis points contribution seems a little light. Is there some ramp-up phase here that's in log and not? Maybe just talk about what the deal does to you and how it adds to the corporate growth rates here. Mike McMullen : So, you do some very good math. So, it's about half-a-point of reported growth rate, Bob. And I'd say relative to Q3, probably a little bit behind the revenue as we learn more about this business or some elements of this global lumpiness, so we're feeling pretty good about how our business will finish, but we're expecting a lot in the Fourth Quarter. I think this is a story of continued acceleration of growth in '22 and beyond and we're just super delighted by the early days of how the teams feel about being part of Agilent. And then we're really building scale around this business. So, I think it's still a relatively small part of the overall revenue picture today for Agilent, and we knew that going in, I think is roughly [Indiscernible] million, but we would expect really strong growth rates in the coming years and again, we really feel like we're off to a great start with this team. Just interacting with Mark Li, who is the founder -- co-founder of Resolution Bio. He is really happy about the capabilities that we're bringing to his business to further scale it. So early days, but feeling good -- pretty good about things and [Indiscernible] I don't know if you're saying [Indiscernible] Bob McMahon : Yeah, I was just going to say the other thing is, obviously, we're just now having more and more conversations with our existing CDx customers and the power of being able to have our established CDx business on the [Indiscernible] side coupled with NGS-based technology, I think is going to be a real significant competitive advantage for us going forward. So very excited about this business going forward. Vijay Kumar : That's helpful, Mike. And Bob, one for you on expenses. In the year-to-date operating expense as a percentage of revenues, you guys [Indiscernible] a low 30s sub 31%, that's well below your historical level. I guess my question is, is this all just associated with the volume leverage rate given the strong organic performance year-to-date, or are there some timing elements on expenses, that [Indiscernible], and how should we -- if there are how should we think about those factors coming back in '22? Bob McMahon : Yeah, Vijay, it's a great question. And I think if you remember, maybe a year ago we talked about some of these expenses that were going down, and our goal was not to have them come back to the same levels that they had. And these would be in areas around travel, but also leveraging our digital capabilities, and what we've been able to do is be very successful. Certainly, volume is our friend. And the leverage that we've been able to drive across all three of our business groups has really helped. But if you look at our year-over-year elements around travel and costs associated with marketing programs and digital investments. Our digitals investments have gone up, but the actual return on those investments has actually gone up. And in fact, Jacob just highlighted one of the programs that we had. And so those are -- our goals are for those to continue -- they will continue to ramp next year to come back, but not near the level that they had come prior to the pandemic. So, we do think that there's a fundamental margin improvement associated with these expenses. And that's why Mike talked about our long-term margin expansion story is intact. It's not going to be 200+ basis points like it were this last quarter, but certainly feel good about our continued ability to drive margin expansion. Mike McMullen : And Vijay (ph.), this is Mike, if I can just add one additional comment too, and I hopefully came out in my prepared remarks, but we're not holding back on investing for growth. So, we're quite pleased with the margin performance, but it didn't come at the expense of our ability to grow down the road. Vijay Kumar : That's extremely helpful, Mike (ph.). Congrats again. Thank you. Mike McMullen : Thank you. Operator : Your next question is from Doug Schenkel with Cowen. Your line is open. Doug Schenkel : Hey, guys. Good afternoon. Could I -- actually could I just build off of that last question with a quick follow-up. Again, acknowledging and recognizing you're not going to guide on 2022 today. I'm just wondering though at high levels, should we assume that incremental margin is going to be a little bit lower than normal next year? If we're assuming a normalization of activity in the post-pandemic world? I heard what you said about areas where you're not going to need to invest as much, but at the same time, you are investing in growth. Just mathematically, does the incremental need to be a little bit lower than normal next year? Mike McMullen : Yes. We're still building our plan. But our intent is to still be able to drive that margin expansion. I will say that we are having our new Train B in NASD come online, which will add a little pressure to it. But, I think, we've been very good about being able to do 30% to 40% incremental and sometimes even higher than that when the margin comes in. And I don't see any reason why we shouldn't be able to continue to do that, Doug. Doug Schenkel : Okay, super helpful. Bob McMahon : Maybe what's -- yes, maybe what's underlying your question is inflationary pressures and activities around that I would say that we didn't see any material impact. Obviously, there is some but we're planning to manage that going forward. Doug Schenkel : Yeah, that's in audits. It's supply constraints, it's inflation or refreshers. It's the hope that we're traveling a little bit more and there are real conferences and real site visits, things like that. So that's the spirit of the question. Just making sure that the capture of those dynamics, we don't have to think about something other than that 30 to 40 traditional [Indiscernible] range. So that's helpful, Bob (ph.). Mike McMullen : I would just add. [Indiscernible] we're under 22 now. Sorry to interrupt there, but I'd just say that some of our programs, and -- and such are really geared towards making sure we can manage our way through this in '22, so we're on this already. Doug Schenkel : Got it. Okay. In terms of full-year guidance, as it's been noted a few times, you increased the outlook by more than the magnitude of the Q3 B. I guess I'm just wondering what gives you confidence in this change. Is it backlog data? Is it pacing across the quarter? Is it activity through the first month of the quarter? Maybe it's all the above and maybe more importantly -- Mike McMullen : [Indiscernible] Doug Schenkel : You just checked everyone? Okay. Perfect. Mike McMullen : I know. Bob and I are smiling in the room here, and, I think, we can probably put a checkmark on all -- first of those 3 things you mentioned. Doug Schenkel : Okay. And then throughout the year, you've consistently beaten your own targets pretty maturely, and it definitely makes sense to skew the error bars a bit more conservatively when you set your targets, given the state of the world. That said, given how well you performed relative to those targets, and recognizing we're not out of the pandemic, but we've got a little more experience with it at this point. Is it fair to say that you're at the point where you could adjust the philosophy a little bit and maybe change the positioning of those error bars as you set guidance moving ahead? Mike McMullen : Yeah, I think that that's fair. I think -- what we've tried to do is set prudent guidance as we've talked about in the past. But certainly, as we've and our customers, more importantly, the market is getting used to dealing in a COVID world, there are fewer variables to be able to understand. And I would look at just what we did in Q2 to Q3, we dramatically increased our Q3 guidance and then did the same thing here for Q4. So, I think our visibility is improving. You should take that away for all the things so you rattled off. Certainly, Bob McMahon : the momentum that we're seeing, the general economic improvements, and so forth. But as you mentioned, there's still a Delta variant out there, and so well, as Mike mentioned, we haven't seen any impact of that yet. We also recognize that that could change during the course of the quarter. So, we're trying to take all those factors into account, but also try to provide some realistic guidance going forward. Doug Schenkel : Okay. Thanks again, guys. Bob McMahon : You're welcome, Doug. Operator : Your next question is from Derik de Bruin with Bank of America. Derik de Bruin : Hello, and good afternoon. Mike McMullen : Hey, Derik. Derik de Bruin : Hey. Can we talk a little about environmental and [Indiscernible] and I wanted Doug to tell that question too? I know it's probably a little bit early, but any signs of how we should think about the GC portfolio picking up, or you just replaced -- is it just sort of like catch-up spending right now in the industrial or any initial indications that the replacement cycle that you were going -- you were in the midst of prior to the pandemic is likely to restart. Mike McMullen : Hey, Derik. Hey, how do I take the first one in Bob -- I mean, Bob and Jacob, you may want to add additional comments here. But let me talk about the question around gas chromatography. We are seeing that. And that's really behind a lot of the fairly bullish comments, if you will, around C&E space. So, we're seeing it in our GC revenue, and we're also seeing it in our GC order book. And I've been very reluctant to call that hey, we think this business is now in a situation of returning to growth. That reluctance has now passed. I think we're now into what looks to be the start of some really good potential business on our GC side, as that replacement cycle turns back on. And Jacob, I know you're a lot closer to the detail’s alignments, anything else you could add to that? Jacob Thaysen : Yeah, Mike (ph.). You're absolutely right. I think first of all of them -- I think Bob (ph.) mentioned that also the chemicals and engineered materials market certainly on fire right now, [Indiscernible] in Semicon and in the mining industry, including lease term for batteries. But we also see the traditional Petrochem markets really start to see some momentum now. And there's a lot of talk about the future of Petrochem but this market is going to pay for quite along. And I think that all the analysis shows that there'll be [Indiscernible], so we see investments coming into this market right now. And the new market that's also coming along is Renewable Energy, which will also use many of our technologies. And we see a great opportunity there also in the future. They're still in a development phase, but as you know, there's a lot of investments going in here, so we are participating in that also. So, we see a lot of opportunities in GC and the GC is actually seeing momentum both first in the chemical markets, but now into the energy markets. Derik de Bruin : Okay, so following up on that. So, you're feeling good about your more industrial [Indiscernible] experiments, even with some of the choppiness in the Chinese market, the data there. So, are you seeing -- is it the U.S. and Europe [Indiscernible] anymore or is it just that you're seeing turn on that one? And then where were we -- what remind me in annoying baseball analogies where we were in [Indiscernible] on the GC replacement cycle? Bob McMahon : Yes. So, Bob, I think it's fair to say that there really is no difference across the regions. I mean, China actually was the area of strength for us in C&E, and I think we're seeing good -- good strength globally, which I think points to the importance of global economic outlook for this segment. And I'd say we're probably earlier middle innings on the -- paused there for a while because we got rate run going with the new portfolio, but a pause. I'd say we're early innings, middle innings. Mike McMullen : Yeah. I would say too, Derik, just to give you a frame, China was more than twice the -- China C&E market was in line with the overall C&E growth rate that we saw. Derik de Bruin : Thanks for answering the question. Operator : Your next question is from Dan Leonard with Wells Fargo. Your line is open. Dan Leonard : Thank you. And good afternoon. Mike McMullen : Good afternoon. Dan Leonard : I was hoping you could -- Mike (ph.), I was hoping you could address the 5% to 7% core revenue growth model that you've introduced in December. Is that still relevant? Do you think something has fundamentally changed in the markets from that time period? Mike McMullen : I'd say it's relevant till we change it. So, I'm not ready to, on the fly here, revise our long-term growth. But as you may recall, in our December outlook, we said, think about us being more of the high range in that area. And I think [Indiscernible] a little tougher so I put a 7 out there in any type of long-term growth guidance. I think what's changing is the nature of our portfolio, which is we continue to build very quickly, much bigger positions in faster-growing segments. And I think it's probably fair to say that the Pharma market, in particular, the Biopharma market is -- remains very robust, but again, we're sticking with those long-term growth goals at this point in time. Bob McMahon : I would say, Dan, to build on what Mike is saying, particularly the pharma market. We do feel that that market, and in fact, Mike talked about it in his prepared remarks that we're emerging as a stronger Company. We do think that the Pharma market, really driven by that Large Molecule area, is a faster-growing market coming out of the pandemic than going into it. And I think if we look at where our investments are and the performance that we've had in particularly the Large Molecule. Now again, Small Molecule has been doing very well. That, in and of itself, would elevate that overall long-term growth rate to be faster than what we saw going in, which certainly helps us, given that is -- that's our largest market. So, I'll leave it at that. Dan Leonard : Okay. That's a helpful clarification. And just a follow-up on China, could you elaborate further on the drivers of that 50% growth rate you called out for DGG in China? Mike McMullen : Yes, I'm going to invite Sam on this call. He hasn't had a chance to work today in this call. So, Sam, your thoughts of what's been going on in China, I was doing a little bragging on your growth rate there. Sam Raha : Yeah. Mike, happy to give more perspective on China. We actually had a good quarter across the board for all of our business groups within DGG. Specifically, we continue to see real momentum in clinical diagnostic testing, led in pathology. We've seen really good pick up of our PD - L1, and our diagnostic -- or companion diagnostic there, as we've continued to train more pathologists there in the use and so forth. Genomics also had a really, really, good quarter, both on the consumable side. And we've also just recently announced within the quarter, the launch of our new V8 Xome, which is being well received in China and globally. And I will tell you one of our absolute strengths in China as it is elsewhere, remain our core NGS and Genomics QC portfolio. So, all of those elements, along with Mike, as you mentioned now, the signing of our first companion diagnostic development agreement with the Biopharma there, I think foretell a continued story of strength in China for DGG. Mike McMullen : And just to build on Sam's comments, I mean, we've been working really hard the last several years putting in the right foundational capabilities, building the right commercial channel, the right ability to handle diagnostics products ourselves, and it's really great to actually see those investment starting to pay off in year term growth. Dan Leonard : Appreciate all that color. Thanks, everyone. Operator : Your next question is from Patrick Donnelly with Citi. Your line is open. Patrick Donnelly : Hey, thanks for taking the question, guys. Mike McMullen : Sure. Patrick Donnelly : Mike, maybe one on the Chemical & Energy side to follow up on some of the earlier questions. I know that's one where you pretty closely keep an eye on the order book and your confidence goes with that. Are you getting more visibility as the order book builds there? I'm just trying to compare it to pre-pandemic mid-pandemic, I know you guys had a pretty short leash on in terms of how you would guide for that segment, how comfortable you would allow yourselves to get. Just wondering how the order book is looking there relative to some of the past quarters and how you're feeling about that segment. Certainly, seems like the tone is pretty positive here. Mike McMullen : Yes. Now I'm glad you picked up on that. We really want that to come through in the call. And I think the confidence is coming from not only the revenues that we've reported, but as Bob (ph.) mentioned in general, and I think it also holds for C&E, we just have much better visibility into our funnel. And you may have recalled I was talking a lot of -- in prior calls, I talk a lot about a conversation we're having with customers and we knew there was activity. But now that conversation is turning into orders. So, we're feeling much better about the trajectory of the C&E space. Historically I've been very cautious to give any real kind of positive trends in this area. But I think we've seen enough over the last few quarters and what we're seeing with our customers and the order book is really the basis for this confidence. And again, it's tied to not only the pent-up demand they've had in terms of even replacing aged equipment in their laboratories, but they are also -- what we hear from our customers, there are much more confident about where the global economy is going. So, they're willing to make investments. A couple of positives here and there and there will be some ups and downs because of outbreaks here and there of COVID, but in general, the [Indiscernible] remains very positive, I think as Bob mentioned earlier, our customers have learned to deal with this. So, Bob, I know this is -- we've talked a lot about this, anything I missed there? Bob McMahon : No. Mike McMullen : Okay. Patrick Donnelly : That's helpful. I appreciate it, Mike. And then on the diagnostic side and just given commentary that you guys are above pre-pandemic levels, can you just talk about the pace of the recovery in the quarter and then expectations for the further ramp from here. And I just want to clarify and make sure you haven't seen any impact in Delta up until I guess this week. I just want to make sure I have that clear. Thank you. Bob McMahon : Yeah. I mean, we saw continued recovery. I think we mentioned at the beginning -- at the end of Q2 that we were at pre-pandemic. We exited there. The average was still below. And that steady improvement across our business, across really across all of the regions continued into Q3. And by the end of Q3, we were above. And Patrick, to your specific question about Delta, we have not seen any impact to date associated with that. Patrick Donnelly : Great. Thanks, Bob. Bob McMahon : Yeah. Operator : Your next question is from Matt Sykes with Goldman Sachs. Your line is open. Matt Sykes : Hello. Hey guys, thanks for taking my questions, congrats on the quarter. Bob McMahon : Sure. Mike McMullen : Thank you. Matt Sykes : Just on ACG, you guys had a pretty impressive operating margin, over 29% for the quarter. I'm just wondering what you feel about the sustainability of those margins and then any progress that you've made on attachment rates in that business? I know you mentioned a little bit in your prepared remarks, but any additional color on that would be helpful. Mike McMullen : I think I'll pass it on to Borick (ph.), who can provide some additional color to the ACG and answer your questions. Go ahead, Borick. Padraig McDonnell : Yeah. Great. Thanks -- thanks, Mike. And we're getting back to more normalized service support with our customers, which is more cost associated, of course, with travel, but we're starting to see an accretive margin in Q3 and we're seeing that come through to improve in Q4. So very, very strong in that. In terms of touch rate, we're seeing increased touch on our services and consumables and of course, with the larger install base, this bodes really well for the future, as more attach rates for services and consumers will be available to a very strong outlook. Mike McMullen : Yes, hey, and Matt, maybe just to build on what Borick(ph.) is saying in terms of sustainability, we feel very good about the ability to continue to sustain those levels of margin. It gets back to the work that our service engineers do in servicing our customers. It's mission-critical for our customers, keeping those labs and those instruments up. And our ability to continue to invest in digital, as well as, be there on-site on the labs or with the labs is really important. A one piece that I would add is we continue to invest in that digital as I mentioned before, and our online orders actually grew faster -- our revenue grew faster than the overall ACG business, which actually speaks to our continued relevance in that space. And obviously, that's good for our customers in terms of either doing business with Agilent, but it also helps from that margin perspective as well. Matt Sykes : Great. Thanks for that color, it's very helpful. And then just one more on C&E. I know you've answered a lot of questions already, but I'm just wondering how the competitive landscape might have changed. Obviously, it had a challenging time during COVID. It took a while for it to recover, and now, it's certainly in recovery mode. I'm just wondering, as you look out of the competitive landscape, have you seen some competitor's slow investment; and therefore, there are some share gain opportunities in that growth that you're seeing? Mike McMullen : I don't know where they slowed. I'm not sure they're investing for that segment. So, and we're not seeing much happen on the competitive side. We're by far this is -- we're the clear leader in this space, we've continued to invest in our core portfolio pre and throughout the pandemic. So, as you can tell, I'm pretty bullish about our ability to outgrow the competition in this space. Bob McMahon : Yeah, let me add. It seems like a long time ago, but we launched 2 new GCs back in 2019, both at the high end and a mid-range GC. And we talked about one of the reasons that we did that is we've got a leadership position in the GC market. But when you look at it, we're over-index to the high-end, and so the ability for us to be able to have this mid -- mid-range, I think was really critical, and we're starting to see that benefit. And maybe Jacob wants to jump in that conversation. Yeah. Jacob Thaysen : Yes. Exactly. You're actually right on the GT and our strength in our GT, but I think we should also mention our spectroscopy business and the ITPMS, where we have done a lot of work also ITP, OES, and MS, where you're doing a lot of work that is -- that has a very strong market share for the material science. And we continue to take market share in that space also. So, I think you'll see us being very strong here. And we have also a site that we will continue to invest in this market going forward. So that's [Indiscernible] therefore the costumers going forward. Matt Sykes : Thanks very much. Operator : Your next question is from Joshua Waldman with Cleveland Research, your line is open. Joshua Waldman : Hi, thanks for taking my questions, just two for you. Mike, you mentioned overall orders outpaced sales in the quarter, and it sounds like book-to-bill in the LSAG business was slightly positive. Just wondered if you could provide us with your assumptions for core growth in the LSAG business in the fourth quarter. And then as we look beyond FY21, given the broad-based strength you've spoken about on the call today, I guess, is it fair to assume that as we look to FY '22, this business should likely grow something above a low to mid-single-digit longer-term average? Mike McMullen : Yeah. Let me talk about the fourth quarter and I'm not sure we're going to answer the last one just yet as we're going through our plan, but --. Joshua Waldman : I had to try. Mike McMullen : Yes, yes, that was a good try. But I would say for Q4, you're accurate in the belief that our book-to-bill was positive for the quarter, and if you think about Q4, our guidance comprehends high single-digit, low double-digit growth for the LSAG business core growth. And so, I'll leave it at that. Joshua Waldman : Got it. And then it seems like here today, Pharma has outperformed what you expected coming into the year. I just wondered if you could comment on any current thoughts you have around the potential magnitude of any year-end budget flush, I guess, given -- it seems like investments from these customers have -- have been fairly consistent -- consistent, and strong throughout the year. Does that deflate any year-end spending? Mike McMullen : Yeah. We'll address that in the Q1 call. But to your point, we've been pleasantly surprised, and it has continued to be stronger than what we've anticipated throughout the first 3 quarters, and what I would say is we don't expect that to slow down any in Q4 either. Joshua Waldman : Got it. Thank you. Operator : And your last question is from Jack Meehan with Nephron Research. Your line is open. Jack Meehan : Thanks. Good afternoon. You talked about the job that your team is doing, managing the supply chain. Was wondering if you can elaborate on a hotspot you're seeing in terms of inputs, shipping, or labor. And when you look at the fourth-quarter guidance, is that -- are you taking any more prudent or conservative type approach based on what's going on in the supply chains? Mike McMullen : Yes, I mean, this has been a lot of discussion on that. I think everybody is talking about the supply chain constraints on a global basis. It's been a challenge for us, but as Bob noted in this call script, our team has just done a tremendous job getting the Agilent products to our customers. And we're really good at this about managing situations. So, we will work on a number of commodity areas for some time. And we also have done things as identifying a changing alternatives source, supply. So, we've been able to do that. We've had a last-minute changes notification from logistics suppliers that they won't pick up our boxes, and so we switched to another supplier. So, we've been able to manage our way through that. And it was conspicuous, it was absent in our cost script a lot of details because while we continue to monitor it, we don't believe that's a material risk to the Company at this time, and we still likely -- we factored all that into our guide for the fourth quarter. And Bob (ph.), I know that you've done a close study of this as well, anything else you'd add to that? Bob McMahon : Yeah. The only thing I would say is it's the usual suspects that other folks have called out, things like [Indiscernible] and our team has done, to date, an outstanding job of being able to continue to satisfy demand here. And our expectation is that that's going to continue to happen into Q4. And we've got a continuous improvement program that continues to drive productivity and efficiency gains. And we're expecting that, and to combat some of these inflationary pressures as well as continuing to deliver to our customers. And we will continue to do that into '22 as well. Jack Meehan : Great. And then one other follow-up is on COVID. Mike McMullen : Sure. Jack Meehan : So, the fourth-quarter guidance assumes it's a 1-point headwind, though we're obviously in the middle of another Delta wave here. So, I was curious what you're seeing on the ground or whether your products are just starting to wane in general and any preliminary thoughts around how, you have 100 million this year, just how you're going to guide as you go into 2022 related to that? Bob McMahon : What I would say, Jack, it's a good question, and our products aren't directly tied to the testing. We didn't see the dramatic increase but also didn't see the dramatic decline with the testing there. Ours is more around expanding capacity both in testing and over the course of this last year. We've actually seen it migrate to more therapeutic capacity or excuse me, vaccine capacity in demand there. And so, we don't see it spiking up or not building that into Q4. I think it's a little too early to tell for -- for FY22. It's been -- it's been reasonably steady the last couple of quarters. And we do expect contribution in '22 and we'll provide more color as we get through our planning process, but we don't see it dramatically dropping off. Jack Meehan : Sounds good. Thanks, Bob (ph.). Operator : I do apologize but we do have an additional question. The last question is from Dan Arias with Stifel. Your line is open. Dan Arias : Yeah. Hi, guys. Thanks for getting me in here at the end. Hi, Mike? Mike McMullen : Sure. No problems. Dan Arias : Just one for me. Just Bob, maybe a high-level question. Just to the idea of getting to a post-COVID world, whenever that might be. I'm wondering which of the 3 segments you think might stand the best chance of maybe rebasing at a higher level of the up-margin line, just by virtue of some of the success that you're having, and then to your point, some of the fundamental changes that might come to the expense structure. Is that something you think is possible? And if so, would you be willing to help us with which one is looking most promising there? Mike McMullen : I do think it's possible. I'm not going to call out because I'm not going to let -- if I call out one, I'm not going to let the other two Division Presidents off the hook. They must have paid you. I think we could continue to do it across the board. Certainly, we are making investments across all three of the businesses to continue to grow. But we certainly feel like we have opportunities to continue to drive margin enhancement across all 3 of our business groups. Sorry guys. Dan Arias : Okay. Thanks so much. Mike McMullen : Thanks, Dan. Operator : And that concludes the question-and-answer session for this conference call. I will now turn the conference back to Puneet Souda for closing remarks. Puneet Souda : Thanks, Paul. And thanks, everyone. With that, we would like to wrap up the call for today. Have a great rest of your day. Operator : Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect. Stay safe and well.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,021	4	2021Q4	2021Q4	2021-11-22	4.284	4.423	4.794	4.92	null	32.89	31.36	Operator : Good afternoon and welcome to the Agilent Technologies Fourth Quarter Earnings Conference Call. My name is Bethany, and I will be the operator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] And now I'd like to introduce you to the host for today's call, Parmeet Ahuja, Vice President of Investor Relations. Sir, please go ahead. Parmeet Ahuja : Thank you, Bethany, and welcome everyone to Agilent's Fourth Quarter Conference Call for Fiscal Year 2021. With me are Mike McMullen, Agilent's president and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob’s comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release, investor presentation, and information to supplement today's discussion, along with the recording of this webcast are made available on our website at www.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 and 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 October 31. 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'd like to turn the call over to Mike. Mike McMullen : Thanks, Parmeet, and thanks everyone for joining our call today. The Agilent team delivered another excellent quarter to close out an outstanding, record-setting 2021. At $6.32 billion for fiscal 2021, revenues are almost $1 billion higher than last year. Full year, core growth is up 15% on top of growing 1% last year. The strength is broad-based with our three business units all growing more than 10% core for the year. Our full year operating margins are up 200 basis points. Earnings per share of $4.34 are up 32%. Let’s now take a closer look at our strong finish to 2021 and review Q4 results. Our momentum continues as orders increased faster than revenue in Q4 and at the same time, we delivered our fourth straight quarter of double-digit revenue growth. At $1.66 billion, revenues are up 12% on a reported basis. Our core revenues grew 11%, exceeding our expectations. This is on top of 6% core growth last year. Our Q4 operating margin is 26.5%. This is up 160 basis points from last year. EPS is $1.21, up 23% year-over-year. Our earnings growth also exceeded our expectations. We continue to perform extremely well in pharma, our largest market growing 21%, driven by our biopharma business. Total pharma now represents 36% of our overall revenue. This compares to 31% of our revenues just two years ago. The strong growth in our chemical and energy business continues, as we delivered 11% growth in the quarter. This is on top of growing 3% in Q4 of last year. PMI numbers are positive and we expect that chemical and energy will continue its strong growth trajectory into fiscal 2022. In diagnostics and clinical, revenues grew 11% on top of growing 1% last year, as testing volumes started to recover. On a geographic basis, our results were led by a strong performance in the Americas and China. Our business in the Americas grew 15% on top of 5% last year. China grew 8% core on top of strong 13% growth in Q4 of last year. China order growth outpaced revenue growth for the third quarter in a row. Now, looking at our performance by business unit, the Life Sciences and Applied Markets Group generated revenue of $747 million. LSAG is up 11% on both a reported and a core basis. LSAG’s growth was broad-based and led by strength in liquid chromatography and cell analysis. The pharma and chemical and energy markets were particularly strong for new instrument purchases. Our cell analysis business crossed the $100 million revenue mark in the quarter for the first time. During the quarter, the LSAG team announced a new Ion Mobility LC/Q-TOF and enhancements to our VWorks automation software suite. These new, well-received offerings are used to improve the analysis of proteins and peptides to speed development of new protein-based therapeutics. The Agilent CrossLab Group posted revenue of $572 million. This is up a reported 10% and 9% core. Growth is broad-based driven by strength in service contracts and on-demand services, as well as for chemistries and supplies. Our focus on increasing connect rates continues to pay off for us. The strong expansion of our installed base in 2021 and increasing connect rates bodes well for continued strength in our ACG business moving forward. Our ability to drive growth and leverage our scale produced operating margins of roughly 30%, up more than 200 basis points from the prior year. The Diagnostics and Genomics Group delivered revenue of $341 million, up 16% reported and up 13% core. Our NASD oligo business led the way with robust double-digit growth in the quarter and achieved full-year revenues exceeding $225 million. We expect another year of strong double-digit growth as the team continues to do a great job of increasing throughput with the existing capacity. The additional expansion of our “Train B” oligo manufacturing facility in Frederick, Colorado is proceeding as planned. We expect this additional capacity to come online by the end of calendar year2022. Moving on from our other business group updates, there were several other significant developments for Agilent this quarter. We announced our commitment to achieving net zero greenhouse gas emissions by 2050. We believe our approach delivers the same rigor to sustainability that we apply to everything else we do. We also believe these actions are not only the right thing to do, but fundamental to achieving long-term success. Our sustainability leadership continues to be prominently recognized, as well. You may have seen that Investors’ Business Daily recently named Agilent to its Top 100 ESG Companies list. We are also a company where diversity and inclusion represent a company priority and is a core element of our culture. During the quarter, we achieved recognition by Forbes as one of the World’s Best Employers, and as a Best Workplace for Women. While the Agilent team has a strong track record of delivering above market growth and leading customer satisfaction, we are always looking to do more. To further accelerate growth and strengthen our focus on customers, we are implementing a new One Agilent Commercial organization, combining, for the first-time, all customer-facing activities under one leader. The new organization brings together and strengthens our sales, marketing, digital channel, and services team. The new enterprise-level commercial organization is led by Padraig McDonnell. Padraig will continue to lead the Agilent CrossLab Group as Business Group President, as well as serve as Agilent’s first-ever Chief Commercial Officer. The way I like to characterize this move is to say we are “doubling-down” on the success we’ve achieved with ACG applying a holistic, customer-focused approach to all aspects of our business. We are also moving the Chemistries and Supplies Division to LSAG. This closer organizational alignment between instrument and chemistries development will further accelerate our progress on instrument connect rates for chemistries and consumables. We believe that “structure follows strategy” and that this new organizational structure will further enhance our customer focus and the execution of our growth strategies. Looking ahead to the coming year, we are in a strong position to continue to deliver on our “build and buy” growth strategy. Agilent’s business remains strong. We enter the New Year with a robust backlog and have multiple growth drivers, coupled with the proven execution excellence of the Agilent team. A year ago, during our Agilent Investor Day, we raised our long-term annual growth outlook to the 5% to 7% range, while reaffirming our commitment to annual operating margin improvement and double-digit EPS growth. We are now one year in and well on our way to achieving these long-term goals. Bob will provide more details, but for fiscal 2022 our initial full-year guide calls for core growth in a range of 5.5% to 7%. We expect to continue our top-line growth as we launch market-leading products and services, invest in fast-growing businesses, and deliver outstanding customer service. My confidence in the unstoppable One Agilent team and our ability to execute and deliver remains firmly intact. This is our formula for delivering solid financial results, outstanding shareholder returns and continued strong growth. We are very pleased with our performance in 2021, but not satisfied. As I tell the Agilent team : The best is yet to come, for our customers, our team, and our shareholders. Thank you for being on the call today and I look forward to your questions. I will now hand the call off to Bob. Bob? Bob McMahon : Thanks Mike, and good afternoon everyone. In my remarks today, I will provide some additional details on revenue and take you through the income statement and some other key financial metrics. I’ll then finish up with our initial outlook for the upcoming year and for the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike mentioned, we had very strong results in the fourth quarter. Revenue was $1.66 billion, reflecting reported growth of 12%. Before I get into the details, I want to acknowledge our supply chain team, which has been doing a great job managing in a very challenging global environment. Core revenue growth at 11% was a point above our top end guidance range. Currency accounted for 0.8% of growth, while M&A contributed 0.5% of growth during Q4. And as expected, COVID-19 related revenues were roughly flat sequentially and resulted in just over a point headwind to the quarterly core growth. Late in the quarter, we did see transit times that were in certain cases greater than anticipated resulting in some revenues being deferred into Q1. Our results were driven by a continuation of outstanding momentum in pharma, and in biopharma in particular, while chemical and energy and diagnostics and clinical also delivered strong results for us. Our largest market, pharma grew 21% during the quarter against a tough compare of 12% last year. The small molecule segment delivered mid-teens growth, while large molecule grew 31%. Pharma was a standout all year, growing 24% for the full year after growing 6% in 2020. And in FY22, we expect our pharma business to grow in the high-single digits. Chemical and energy continued to show strength, growing 11% with instrument growth in the mid-teens during the quarter. This impressive performance was against a 3% increase last year. The C&E business grew 12% for the year, after declining 3% in 2020. Growth was driven by continued momentum in chemicals and engineered materials and we expect our C&E business to continue to grow solidly next year in the high-single-digits. Diagnostics and clinical grew 11% with all three groups growing nicely during the quarter. While the largest dollar contributor to this market is DGG driven by our pathology-related businesses, the LSAG business continues to penetrate the clinical market and drive growth with strong performances by cell analysis and mass spec. We saw mid-teens growth in the Americas and strong growth in China, albeit off a small base. For the year, the diagnostics and clinical business grew 15% for the year after declining slightly by 1% in 2020. And we expect to continue to grow in the mid- to high-single-digits in 2022. Academia and government, which can be lumpy and represents less than 10% of our business was up 1% in Q4 versus a flat growth last year. Most research labs continue to remain open globally and increase capacity to pre-pandemic levels. China came in at low-single-digits, while the Americas and Europe were roughly flat. For the year, we grew 7% after declining 4% last year. We expect this market will continue to improve slightly in fiscal year 2022 and expect growth of low to mid-single-digits. Food was flat during the quarter against a very tough 16% compare. Europe and the Americas grew while China declined. For the year, food grew 13% after growing 7% in 2020. Looking forward, we expect food to return to historical growth rates in the low-single-digits. And rounding out the markets, environmental and forensics declined 2% in the fourth quarter, off a 5% decline last year, as growth in environmental was overshadowed by a decline in forensics. For the year, we grew 5% off a 2% decline in 2020. And looking forward, like food, we expect environmental and forensics to grow in the low-single-digits in the coming year. For Agilent overall, on a geographic basis, all regions again grew in Q4 led by the Americas at 15%. China grew 8%, and Europe grew 4%. And for the year, Americas led the way with 21% growth, followed by China at 13% and Europe at 12%. Now let’s turn to the rest of the P&L, fourth quarter gross margin was 55.9%, up 90 basis points from a year ago. Gross margin performance, along with continued operating expense leverage, resulted in an operating margin for the fourth quarter of 26.5%, improving 160 basis points over last year. Putting it all together, we delivered EPS of $1.21, up 23% versus last year. And during the quarter, we benefitted from some additional tax savings resulting in a quarterly tax rate of 13% and our full-year tax rate was 14.25%. Our share count was 305 million shares, as expected. And for the year, EPS came in at $4.34, an increase of 32% from 2020. We continued our strong cash flow generation, resulting in $441 million for the quarter, an increase of 17% versus last year. For all of 2021, we generated almost $1.5 billion in operating cash and invested $188 million in capital expenditures. During the quarter, we returned $195 million to our shareholders paying out $59 million in dividends and repurchasing roughly 830,000 shares for $136 million. And for the year, we returned over a $1 billion to shareholders in the forms of dividends and share repurchases. And we ended the year with $1.5 billion in cash and $2.7 billion in outstanding debt and a net leverage ratio of 0.7. All in all, a great end to an outstanding year. Now let’s move on to our outlook for the fiscal 2022. While we are still dealing with the pandemic and we have the additional challenges around logistics and inflationary pressures, we enter the year with strong backlog and momentum. For the full year, we are expecting revenue to range between $6.65 billion and $6.73 billion, representing reported growth of 5% to 6.5% and core growth of 5.5% to 7% consistent with our long range goals. And this incorporates absorbing roughly a half a point headwind associated with COVID-related revenues, with the majority of that impact coming in Q1. We are expecting all three of our businesses to grow, led by DGG. We expect DGG to grow high-single-digits with the continued contribution of NASD and cancer diagnostics. We expect ACG to grow at high-single-digits with both services and our chemistries and supplies businesses growing comparably, while LSAG is expected to grow in mid-single-digits. We expect operating margin expansion of 60 to 80 basis points for the year as we absorb the build out costs of Train B at our Frederick, Colorado NASD site. And in helping you build out your models, we are planning for a tax rate of 14.25%, consistent with current tax policies, and 305 million fully diluted shares outstanding. All this translates to a fiscal 2022 non-GAAP EPS expected to be between $4.76 to $4.86 per share resulting in double-digit growth. And finally, we expect operating cash flow of approximately $1.4 billion to $1.5 billion and capital expenditures of $300 million. This capital investment represents an increase over 2021 as we continue our focus on growth, bringing our NASD Train B expansion online and expanding consumables manufacturing capacity for our cell analysis and genomics businesses. We have also announced raising our dividend by 8% continuing an important streak of dividend increases and providing another source of value to our shareholders. Now, let’s move on to our first quarter guidance, but before I get into the specifics, some additional context. Lunar New Year is February 1st this year, a shift from last year when it was in mid-February. As a result, we expect some Q1 revenue to shift to the second quarter this year as customers shut down ahead of the holiday. In addition, as I mentioned, we do expect to see the largest impact of COVID-related revenue headwinds in the first quarter. We estimate these two factors will impact our base business growth by 2 to 3 points and are roughly equal in impact. For Q1, we are expecting revenue to range from $1.64 billion to $1.66 billion, representing reported and core growth of 5.9% to 7.2%. Adjusting for the timing of Lunar New Year and COVID-related headwinds, core growth would be roughly 8% to 10% in the quarter. First quarter 2022 non-GAAP earnings are expected to be in the range of $1.16 to $1.18. And a couple additional points before opening the call for questions. In conjunction with new One Agilent Commercial organization Mike talked about, we will be reporting under the new structure starting in Q1. In addition, we will be providing a recast of certain LSAG and ACG historical financials to account for the segment changes after the filing of our Annual Report on Form 10-K in December. I am extremely proud of what the Agilent team achieved in 2021 and look forward to another strong performance in 2022. With that, Parmeet, back to you for Q&A. Parmeet Ahuja : Thanks, Bob. Bethany, if you could please provide instructions for the Q&A now? Operator : [Operator Instructions] The first question comes from the line of Vijay Kumar with Evercore. You may proceed. Vijay Kumar : Hey guys. Congrats on a nice print here and thanks for taking my question. Maybe as to my first one on… Mike McMullen : Thanks, Vijay. Vijay Kumar : Mike, maybe my first one on the guidance here. A lot of questions around supply chain inflationary environment. The guide of 5.5% to 7% core growth for fiscal 2022, what is that assuming for pricing versus volume? And does it assume any contribution from interest run? Bob McMahon : Hey, Vijay, this is Bob. I did get the last part of your question, maybe. Yes, so, on the price, we do have built in roughly a point of price into our plan which is slightly higher than what we had this year, Vijay. And in terms of inclusion, we won’t get into individual customer products, but what I would say is NASD is expecting another year of very strong growth. Vijay Kumar : And just on that last point, Bob, and maybe, Mike for you, Mike McMullen : Sure. Vijay Kumar : I think the Analyst Day outlook had NASD ramping up quite meaningfully. Has anything changed on NASD it did capacity ramp up by timing change at all and I am curious on just around on anything changed – your response letter to no orders? Mike McMullen : Not at all. What I would say, the one big change is the business is doing even better than we had communicated at December of last year. So really appreciate the question. As you know, in my – we’ve been talking about the new capacity coming online and that’s still gone right per schedule, in fact, we distributed earlier last week and that’s still to come on online by the end of calendar 2022. But I think the team has just done a fabulous job, which is we are going to be able to grow double-digit in 2022 even without the new capacity, because they are able to continue to drive process improvements of broader book of business and larger batches. So the business is really on fire. I mean we are very, very happy with it. Bob McMahon : Yes. Vijay, if we looked at our order backlog, we are taking orders for 2023 already. Mike McMullen : Yes. I have met Bob the other day, Vijay that a year ago we are talking about could we fill out the factory? Could it ramp and we’ve blown right through that. Vijay Kumar : Yes. That’s fantastic, Mike. And just sorry to clarify post the complete response letter to Nord, there is no change in interest around assumptions for you guys, correct? Mike McMullen : No. No. Vijay Kumar : Fantastic. Thank you, guys. Mike McMullen : You are welcome. Appreciate the feedback. Operator : Thank you, Mr. Kumar. The next question comes from the line of Tycho Peterson with JPMorgan. You may proceed. Mike McMullen : Tycho? Tycho, I think you are on. Operator : Your line is now open. Mike McMullen : Moving to the next in the queue. Operator : Okay. The next question comes from the line – excuse me, of Brandon Couillard with Jefferies. You may proceed. Brandon Couillard : Hi. Thanks. Good afternoon. Mike McMullen : Hey, Brandon. Brandon Couillard : Mike, maybe just – Mike, maybe just starting with the guide for next year. You just kind of talked through some of the variable upside, downside that you considered when building the outlook. I’d be curious what you’ve embedded for China specifically, as well? Mike McMullen : Yes, when I talk about the – what we see is the potential upside in the guide and Bob, maybe you can talk about the – our China assumptions. And by the way, we are – hope we came through, so we are very happy with the momentum we have in China. I think the upside fits with our two largest end-markets, pharma and chemical energy. And as Bob indicated in his script, we are assuming high-singles, I believe, Bob, for the pharma market really coming off just toward growth here in 2021. That high-level growth continues, that would represent upside in our biggest market. And we’ve got a lot of early positive things happened in the pharma side of things. Pharma, let’s say, C&E as well, right, Bob. So we’ve always – I think this is the most bullish language that I’ve had in a call for sometime about the C&E. So you can imagine there has been even some caution about not over plan or too much. But I’d say the two – our two largest end-markets represent the highest – where we think we may have some upside relative to our initial first guide for the year. Bob, can you remind what we had assumed for China? Bob McMahon : Yes, Brandon, it’s a good question on China and we continue to be very positive on China. If we look at our backlog, our order growth rate has increased higher than our revenue for the last three quarters. We exited 2021 with a record backlog going into 2022 for China. And our guidance comprehends high-single-digit growth in China. So, both being led by – from a geographic basis, growth will be led by Americas and China going forward. Brandon Couillard : Okay. And then, Mike, in terms of the new organization structure, why need the COO role now? And then, correct me if I am wrong, are you planning to collapse ACG into the LSAG segment entirely? Mike McMullen : Yes, no, thanks for that clarifying question. So, let me handle the second part of your question first, which is the ACG group will be 100% services in 2022 and then we are moving over the CSD, the chemistry and supplies portion of that business over to Jacob, for two reasons. One is, just the breadth of responsibility that product would have as we had made that change. But we think that’s going to be a driver of growth and I ask Jacob to make a comment on that here in a second, because I think they have these teams even closer together. We are going to be able to even further accelerate our connect rates on instruments for our chemistry products. Why the change? Hey, it’s best to make, when things are going really well, it’s really time to put down the hammer and really go as hard as you can and that’s what we are doing here. So, as you may know, when I first came in as CEO, I had five sales forces. I collapsed those into two. This is next evolution of that overall transformation of the company with this One Agilent culture behind it. The real belief is that the segmentation of our markets really calls for a much more of a customer orientation as opposed to product-centric view of how we want to sell and reach our customers. And you think about the scale as you get with the digital platforms, digital infrastructure, our services organization, this makes sense to do this volume on top of your game. So, all things are going well, we thought it was really time to pit the seller down even further. And Jacob, you wouldn’t mind just to comment to what you are thinking about your new responsibilities? Jacob Thaysen : Yes. Thanks for that, Mike and I am sure that things got with now that you see the consumables product where it is, so we can truly build out end-to-end solutions that will really drive customer expectations and I think Padraig and the team have over the past few years in fact shown that the design end consumables can really drive a tremendous connect rates. So I think that already shown the path forward and now all being completely into LSAG, we can really accelerate that. Brandon Couillard : And, hey, thanks for that Jacob. And then, maybe just to close off this line of response, any thoughts about your additional new responsibilities? Padraig McDonnell : Yes. Thanks, Mike. First of all, really excited about the new role and I think the unified commercial strategy and organization will really continue to strengthen Agilent’s customer focus and help us to align capabilities for the future where we are going to kind of maximize the connect rate and customer lifetime value. And also, I think accelerate execution of our digital ambitions for both delivering near-term growth and strategically invest for the future. So, very excited and already building on what is a great capability in the company. Brandon Couillard : Okay. That’s helpful. Thank you. Mike McMullen : Thanks, Brandon, appreciate the questions. Operator : Thank you, Mr. Couillard. The next question comes from the line of Derik de Bruin with Bank of America. You may proceed. Derik de Bruin : Hi. Good afternoon. Mike McMullen : Hey, Derik. Derik de Bruin : Hey. Just maybe – so, a couple of questions. I guess, can you talk a little bit about the market expansion 68 at this point is and just repeat that out. You got some inflationary pressures. You got some FX. You’ve got some COVID headwinds coming off. Can you just provide what’s the underlying market expansion is just sort of normalizes, you have obviously the capacity coming on car rails. Just how should we think about the margins and just the different pieces? Mike McMullen : Bob, do you want to take that? Bob McMahon : Yes. Yes. Thanks, Derik. It’s a great question. And what we’ve been able to do even in this last quarter in the phase of inflationary pressures is be able to drive pretty significant margin expansion across our businesses. And so, as we think about the 60 to 80 basis points to put kind of as perspective, we are anticipating roughly 15 basis point headwind associated with that train B build up and that’s hiring the people and getting the product coming online and so forth. And so, if we think about that, that’s closer to 75 to close to that 100 basis points. A lot of that’s going to come through SG&A operating leverage and the activities associated with just not growing our business expenses as fast as the top-line. And we are going to be looking to cover some of the inflationary pressures on the top-line with that price that I talked about before which we didn’t really have any significant price in 2021. We have started to see that. We took quick action earlier this year to reflect that and so a combination of it. Most if it being in OpEx leverage, but there will be some small operating leverage at the top-line as well, if you take out the – excuse me, at the gross margin, if you take out the NASD expenses as a result of covering our cost through pricing increases. Derik de Bruin : Thanks. And then just a couple of quick follow-ups. Any evidence of stocking transportation supply chains degree on the consumable side and just an update on ResBio, that looks like it so lagging its largest rotations? Thank you. Mike McMullen : Hey, Derik, a follow-up on those two questions and so, and I have Sam coming on the second question. So, we’ve not seen any real evidence of stocking on the consumables. So, I think that’s pretty interesting, right, Bob? Bob McMahon : That’s great. Mike McMullen : Yes. Yes. And then, what you are going to hear from Sam in a minute he will provide a little bit of color, we remain very, very bullish about the long-term prospects with ResBio and a lot of the work has been done to develop new opportunities with our pharma partners. But we are already on the short-term as well. Sam? Sam Raha : Yes. Hey. Thanks, Mike. In terms of Q4, whereas the revenue came in a little bit below expectations and that’s driven in part by COVID-19 related delays in clinical trial enrollment. Overall, the interest that we are seeing both from our existing customers on the pharma side that we’ve been doing I see work with, as well as new customers that’s very, very real. In fact, we’ve now signed an agreement which is our first with a large existing customer giving evidence to the interest that’s there in terms of the work that we are doing on the PMAs. These are approvals related to existing agreements with our Resolution Bioscience business. We are making good progress on that. And so, lot of the momentum in a number of areas. So, very pleased to have them as part of our business to really bring together the strategy we’ve had which is to be the companion diagnostic development and commercialization partner leveraging multiple modalities including immunohistochemistry and next-generation sequencing. Derik de Bruin : Thanks, Sam. Operator : Thank you, Mr. de Bruin. The next question comes from the line of Tycho Peterson. I do apologize. The next question comes from the line of Dan Leonard with Wells Fargo. You may proceed. Dan Leonard : Hi, good afternoon. Mike McMullen : Good afternoon, Dan. Bob McMahon : Hey, Dan. Dan Leonard : So my first question relates to the 2022 guide. What are some of the factors that might pull performance back down to the mid-single digit range, specifically, something that would start with the five handle? Mike McMullen : Yes. I think, what I would say is, first of all, I think our guidance is prudent given the beginning of the year. If we saw continued, greater than expected disruptions in the supply chain that may impact demand, particularly in some of the applied markets that could do it. Although we haven’t seen that, to be very clear, Dan. We feel very good about where we are given our forecast and backlog. So we are – I would say are, we have bias towards the upside in our forecast as opposed to bias towards the downside. Dan Leonard : Appreciate that. And then, a follow-up on the shift in chemicals and supplies from ACG to LSAG. Is the logic behind the move is to increase the connect rate? Can you remind me where is the connect rate today and where you want it to be over some period of time? Mike McMullen : Yes. It’s a great question and the team continues to do a great job under Padraig’s leadership here to do that both at the purchase and then on the ongoing aftermarket. What I would say is, right now, if you look at the overall attach rate, it’s probably in the mid-20s right now. And if you look at the attach rates year-on-year, we saw very nice growth on the new placements. So, all the new instruments that Jacob and team have been able to sell, that’s why we feel very good about the ACG business going forward. So, we still have a long way to go there in terms of opportunity across both the services as well as the consumables. Some of our competitors are higher than that and so we’ve got aspirations that are well above that mid 20s. And Dan, I just like to make sure this clear, we are not making this change because we were dissatisfied with the improvements in that connect rates. This is icing on top of the cake before that accelerated as we look to balance span of control and business responsibilities with the real driver was the one commercial – creation of the one commercial organization. And I think this is a nice secondary benefit that we are actually going to get, we think even more focus and header alignment between our product development groups on the CSD side and instrument side. Dan Leonard : Helpful clarification, Mike. Thank you. Mike McMullen : You are welcome. Operator : Thank you, Mr. Leonard. The next question comes from the line of Puneet Souda with SVB Leerink. You may proceed. Puneet Souda : Yes. Hi, Mike. Thanks for taking the question. Mike McMullen : Sure, Puneet. Puneet Souda : Bob, thanks. So, first one is on environmental. I mean, you have a leading position there with a number of products across the LSAG product line. Maybe just could you elaborate a bit more for us what’s going on there? Specifically, related to China, the timing in China, is that just Lunar New Year? Is there something more that we need to consider? Mike McMullen : Yes. I think this is – let me start, Bob, you can jump in on this. So, I think when we talk about environmental and forensics, I think it’s a tale of two cities. So, buried in that number is a decline in forensics and I think that’s probably really tied to governments prioritizing other investments in this COVID-19 world. The demand is not there. I think relative to China, it’s been more about priorities. Right now, they are shifting some of their priorities towards the pharma and other COVID-19 related type investments. So, I think that’s probably, I mean… Bob McMahon : Yes, the only thing I would add on that Mike is, there is some shift, but it’s also timing. Mike McMullen : Yes. Yes. Bob McMahon : There are some… Mike McMullen : Something… Bob McMahon : Yes, yes, there is some budget that we’ve seen that has shifted into our fiscal first quarter and into FY 2022 in particular in China. I think long-term, we still see the importance of the environmental testing in China and around the world remains to be seen or is still intact, Puneet. And it’s more a function of timing than anything. Mike McMullen : And thanks for jumping in on that, Bob, because we still are very, very confident about our ability to grow environment builds in China I think it’s well known the government’s real emphasis on continuing to make improvements in the quality of life of citizens. Puneet Souda : Got it. And then, just on the liquid chromatography, just staying on that point, I’d really appreciate your comments on the chemistry columns and consumables now being part of LSAG, but when we look at the business overall today, you obviously have a strong 1200 series offering. We are also seeing pickup from another competitor in the market space that had lost some share over the last few years and there seems like they are gaining some back. But just wondering what you are seeing in the field and in terms of further competition in this side of the market, we’ll appreciate any thoughts. Thank you. Mike McMullen : Yes, hey Jacob. I lead off on here and I mean, I first want to say is the key competitors in the LC market remain unchanged. Nobody new in the market and what I can tell you is that, we are very, very happy with where we are in liquid chromatography. So we are not playing any kind of catch-up game at all here. We delivered high-teens growth in the quarter and exited the year with record backlog and our growth rate in orders were significantly higher than our revenue growth rate. And I think, Jacob, it’s fair to say that the strength is both on the large and small molecule size with the real standout of China geographically. And I think you exited the year, but we see as record backlog. So we are really bullish on our LC business and maybe you want to have some additional comments? Jacob Thaysen : Yes. Thanks, Mike. It’s something to be proud of and I am – I feel really good where we are right now. As you said, we are growing very strongly. As I can see, when I look into the market, we are in a very strong position versus our competition also. And just a reminder, we - a few quarters ago, we did announced that we have expanded our Bio LC portfolio substantially. So we really have the full range of Bio LCs out there. But we also have 2D-LCs and also online LCs to really drive growth in that area. So a Bio LC really came timely with all the investment that goes into large molecules right now. So I truly believe we have momentum and we’ll continue with that over the next period of time. Puneet Souda : Great. Thanks, guys. Mike McMullen : Thanks, Jacob. Operator : Thank you, Mr. Souda. The next question comes from the line of Patrick Donnelly with Citi. You may proceed. Patrick Donnelly : Hey, guys. Thanks for taking the questions. Mike McMullen : Hello, Patrick. Patrick Donnelly : Bob, maybe one for you to start, just on the margin side. I know you talked about 60 to 80 BPS of expansion. It sounds like the NASD facility might be a little bit of a headwind. Can you just talk through the moving pieces there? I know you called out price a little bit, as well. Can you just talk about the levers and how much of an offset the facility is, as we can kind of think about the underlying number as well? Bob McMahon : Yes. So, I would say, maybe on NASD, if I look at it and I break it into two components. If I look at it with the existing capacity, that team not only has driven top-line growth, but if we looked at the margin, it actually is accretive to the overall Agilent margin. So that team has done a fabulous job ramping up. Mike McMullen : It’s accretive, right? Bob McMahon : Accretive, yes, very nicely. And so, we are making the investment on Train B. It’s roughly 15 basis points. That’s inclusive of that 60 to 80. So it’s a roughly $10 million to $15 million of incremental cost associated with the training and investments as the lines come on board. And so, we are seeing that and take that to a side because those are kind of discrete. And if I look at the business, what we are seeing is the faster growing areas. We actually are seeing a benefit of mix. And so, we talked a little bit about cell analysis but also cell analysis in LSAG has been very accretive both on the gross margin, as well as the operating profit side. And so, we’ve got these faster growing businesses that are helping with mix and then we are adding on the incremental price to cover the inflationary pressures that we are seeing and so forth. But we’ve also got productivity measures in place and this is where I think the One Agilent approach to our systems and our infrastructure really pays dividends, because we are able to leverage those costs across a larger base and because a lot of that is internal, we don’t have that same level of pressure on cost as we are seeing in some other areas. And so, it’s a combination of product mix, that price. I talked about 1% price and then leverage in the operating expense side. Patrick Donnelly : That’s helpful. Thanks, Bob. And then, Mike maybe one for you on C&E. I know, in the script, you kind of called out maybe having the most positive tone you’ve had in a little while here on that segment. Obviously the end-market health seems pretty high from the customers. And can you just talk about, I guess, the conversations you’re having there, visibility, again, guiding to high single for next year off a pretty strong 2021 is encouraging. So maybe just your confidence and then again, it sounds like maybe there’s even some upside to that number? Mike McMullen : Yes. Sure, Patrick. So, yes, so we are seeing really good end market demand for and I think Bob highlighted a lot of those like the advanced materials or chemicals. It really speaks to the overall recovery economically on a global basis and the fact that this in particular, this customer base had deferred a lot of investments for some period of time. So, they are in a reinvestment mode and we have pretty good visibility to the funnel. So, I think we probably got at least a six month lead view on what’s coming down on instrument purchases. So, we are feeling really good about the C&E business as well as there is the ACG story here as well of where we are continuing to increase services in this segment, which has historically been more of a self-maintainer kind of market, as well as the chemistries and consumables side. So, I think we’ve got pretty good visibility, given our confidence and be able to put this kind of number out there in a full year guide at this point in time. Bob, anything else you’d add to that? I know we spend a lot of time talking about this. Bob McMahon : No, I think you got it. You said it well. Patrick Donnelly : Great. Thanks, Mike. Bob McMahon : You are quite welcome. Operator : Thank you, Mr. Donnelly. The next question comes from the line of Josh Waldman with Cleveland Research. You may proceed. Josh Waldman : Hi. Thanks for taking my questions. Wanted to start with a quick follow-up on supply chain. Bob McMahon : Sure, sure. Josh Waldman : Yes. Hey, Bob. Wanted to start with a quick follow-up on supply chain. I wondered if you could give us the magnitude of the push-outs you referenced and is this all LSAG? Mike McMullen : Well, I am going to pass it to Bob here in a second, but let me really clear in terms of our language. When I use supply chain, that means material constraints and then we have logistics. I think, of the issues that Bob, the transit times was really logistics issue. In terms of our ability to get product to customers and get the raw materials, we feel pretty good about what’s been going on there so. Bob McMahon : Yes, exactly. So it was more just longer delivery times and Josh, it was in the LSAG business, as you would expect. It was roughly a point in the quarter. Josh Waldman : Okay. And given the transient nature, it sounds like you are assuming this all hits in the first quarter. Is that kind of what’s embedded in your guide? Bob McMahon : We are assuming that it will get better over the course of the first half of next year or first half of the fiscal year. So not all of it will come back in Q1. Josh Waldman : Got it, okay. And then, I wanted to follow-up on your comments within the LC/MS franchise. I believe, in your prepared remarks, you highlighted stronger install rates in this franchise in the fourth quarter. Just wondered if you could provide any additional color on that, maybe what’s driving it? Is it higher or faster kind of accelerated refresh levels at legacy accounts? Or maybe you’re seeing kind of increased win rates at new accounts? Mike McMullen : I am going to – great question. I am going to pass that to our expert on this topic. Jacob, maybe you want to talk about what’s going on in the LC/MS front. Jacob Thaysen : Yes. Certainly, Mike and as you mentioned, we had great success with our new Ion Mobility, 6560C that we launched here at ASMS and we had a fantastic worker and user meeting also that was rally all subscribed. But as you also speak to, we had tremendous traction on our triple core and single cord businesses. And particularly in the biopharma space, we see a lot of smaller accounts also coming live, small mid-sized accounts that are starting to build up their capabilities within the analytical instruments business. So we see a lot of tremendous momentum there. But obviously, also the big accounts that is more in the refresh mode. Mike McMullen : Yes. So, I think part of the story, Josh, is new customers, right, particularly on the biopharma side and also doing very well on the refresh side with existing customers. Josh Waldman : Got it. Yes. Really appreciate it guys. Mike McMullen : You are quite welcome. Operator : Thank you, Mr. Waldman. [Operator Instructions] Our next question comes from the line of Michael Gokay with KeyBanc Capital Markets. Paul Knight : Hey, Mike. It’s Paul Knight. Thanks for the time. Mike McMullen : Hey, Paul. How are you doing? Paul Knight : Good, good. On the Avantor agreement, is there any way you can talk about - does that give you another 5% of addressable market? What are your thoughts around that deal? Mike McMullen : Yes. Hey, thanks for noticing that we had worked with Michael’s team and have a real agreement we are really excited about. And I’m actually going to pass it over to Agilent’s new Commercial Officer to his view on that question. Go ahead, Padraig. Padraig McDonnell : Yes. I think, yes, thanks, Mike. I think we see that it’s a really mutual beneficial arrangement that we are going to see not only different customers, but at different spaces within customers and it also helps with overall the addressable market and coverage. So, the Agilent team and the Avantor team will be able to share leads and so on so we’ll be able to cover the market better. We’ll also be able to use our digital capabilities to be able to find new customers and also increase the wallet share and customer side. So all around, a very positive development. Mike McMullen : And Paul, it’s hard to put an exact percentage on the question. But we wouldn’t be doing it if it was on the margin. Bob McMahon : Yeah. And I was going to say, Paul, this is Bob. Just to add, I mean, we didn’t really see any revenue. That’s all future opportunity for us. And I think one of the areas that Avantor is strong is in the research area, Academia and Government, and this will help us even cover that market even broader than we do today. Mike McMullen : Yes. Absolutely. Paul Knight : Thank you. Operator : Thank you. The next question comes from the line of Dan Brennan with Cowen. You may proceed. Dan Brennan : Hey, Mike. Hey, Bob. How are you guys doing? Mike McMullen : All right, Dan. How about yourself? Dan Brennan : Thank you. Thank you. Doing well, doing well. Maybe first question on NASD, maybe I missed it. Did you guys give a number for 2022, what’s implied? Bob McMahon : We did not, but what we did say is, we would expect strong double-digit growth. I’ll leave it at that. Yes, what I can tell you is we exited at a run rate that was higher than the - if you took our $225 million that we talked about and divided by four, our runrate was higher than that. Mike McMullen : Right. Bob McMahon : So we continue to ramp. Mike McMullen : Yes, thanks for that question. It was hard to explain it in the call narrative. But as Bob mentioned, our Q4 exit rate is higher than the full year number. Dan Brennan : And maybe could you give a little color there. I think, Bob, you mentioned in the prepared remarks or in Q&A that you’re taking in orders to 2023. Could you just give us a sense like what the utilization is today of your capacity that’s available and any color about demand trends book of business things of that nature? Bob McMahon : Yes. In short, we are running 24/7 at both our Frederick facility, as well as our Boulder facility, which was a legacy facility. And we are – I feel very good about our ability to continue to expand capacity. What Brian and team have been able to do is increase both throughput, as well as yield. And so, that’s really helped us drive additional capacity with the existing footprint or the existing manufacturing facility. And the Train B, as we talked about has the opportunity to add more than $100 million of incremental volume coming online starting at the end of this - our fiscal - our calendar 2022. Dan Brennan : Got it. And then, maybe on the One Agilent, Mike, could you just give us, I know, Mike, when you got there, you made some changes to the sales force that have made under your predecessor, now you are going further. So how should we see this manifest from the outside over the next, I don’t know, one to two years? Does this – could this lead to stronger growth? Is it going to lead to more better margins, more durable growth? Just obviously the customers are going to see something, but how will that manifest in reported results, do you think? Mike McMullen : I think it’s a check for each one of the things you listed there. But the number one reason why we are doing is to drive more growth. And it’s just a natural evolution of the transformation in the sales force. I started a number of years ago. And it really points to the fact that we have this broad-based portfolio that’s selling into the same customer base. And why have two separate sales forces and have to go do the coordination between across sales forces, and then the big push that we made over the last several years in terms of digital, this allow us, I believe, to even go faster on realizing our digital ambitions. And then you’ve got the voice of the customer will be right in the CEO’s staff and on Padraig’s table, the Head of the service delivery organization. So, everything relative to the customer facing that we do in this company will be under one leader. We just think it’s going to find ways to accelerate our growth, increase our customer satisfaction, and I think as we push more and more of our business because customers want to buy that way through digital, it will have a natural knock-on effect of efficiency gains in the P&L. Dan Brennan : Great. And then, maybe one more, obviously, balance sheet is in great shape. So, the proverbial question about M&A, just wondering what does the funnel look like? Any update on the strategy? I know you’ve been pretty cognizant of not wanting to go too big here and kind of not disrupt what you built there. But just give us a sense of what the needs are today? And what is the outlook for M&A in 2022? Bob McMahon : Yes. Sure, Dan. So I’ve used - been using this order the last several years of the build and buy growth strategy. So, we are still very interested on the buy element of fueling future growth and for example, in this past year, we did the Res Bio acquisition really got us into liquid biopsy and really allows us to play to our strengths that we already have from our CDx and IHC business. So, we are going to look for continued opportunities such as those where you are in higher growth markets than the total company average, where they can really benefit by being part of Agilent and where they have differentiated technology and differentiated teams. We will stay in our lane, so to speak, on valuations. Let’s - I’d say, the - you know that’s better than I do, perhaps, Dan. The market is still very robust. We are very active. And we just want to make sure that the deal works for our shareholders. But deploying capital for M&A is part of our story going forward and it’s all upgrade. Dan Brennan : Thanks, guys. Excellent. Great. Thank you. Operator : Thank you, Mr. Brennan. The next question comes from the line of Jack Meehan with Nephron Research. You may proceed. Jack Meehan : Thanks. Good afternoon. Hey. I want to dig in a little bit more on Cell Analysis. So, heard cleared $100 million in the quarter. What was the 2021 contribution? And similar to the line of questioning on ASP, what’s the target there for 2022 growth? Bob McMahon : Yes. So, I’ll start with the cell analysis business and I’ll bring in Jacob here, because it has just done a fantastic job and it’s really continued the momentum that we saw at the beginning - throughout 2020. So, it ended just short of $400 million for the full year and it grew in the mid-20s. And I would expect us to looking forward if we think about where the market is headed and the fundamental demand there, that will be growing double-digits for sure going forward. And as I mentioned before, the beauty of that business is, it’s right ingrained with where the research and technologies are going and where a lot of money is being put in. But it’s also an extremely well run and profitable business for us. Mike McMullen : And Jacob, maybe you can give some insights in terms of where are the end-markets you think that are driving - been driving the growth and where we think it’s going to come from in the future? Jacob Thaysen : Yes, thanks for that. It’s a really good question. Obviously it’s something I’d really like talk about. The cell analysis business has been super successful in the past years and our focus on the immuno-oncology space has really paid off. We continue to see opportunities there and we continue to see that our portfolio of being able to measure live cells is required to really drive the research forward. So where we really see the opportunities is, is in the - between biopharma and also the academic markets there, that’s where we see the biggest and the biggest momentum going forward. While we have seen here in the past period of time also that the diagnostic business, particularly with our flow cytometry is picking up good speed, but, I would say, the main opportunity sits in the biopharma space. Mike McMullen : And did you ask a question about NASD? Jack Meehan : No. Mike McMullen : Okay. Jack Meehan : Can you down that line just from the comparison? Mike McMullen : Okay. All right. You are right, Bob. Jack Meehan : My follow-up was going to be, a lot of discussion obviously around driving growth. I was hoping to just get your philosophy on CapEx. So, I think the guidance implies about 4.5% of sales for 2022. That’d be higher than you’ve done in the last few years. Do you expect this is going to remain elevated more kind of in the medium-term? Or is this just kind of some of the near-term opportunities coming through? Bob McMahon : Yes. Jack, that’s a great question and what I would say is, if we look at where our there is different kinds of CapEx, and it’s not all created equal. But the reason that it’s being increased is really to fund that growth and capacity expansion, whether that be Train B and NASD or the capacity expansions in places like genomics and cell analysis and I would say, given our growth trajectory in those areas, I would expect us to continue at probably an elevated level to incorporate that growth. As Mike said, we’ve got this buy and build strategy and that’s part of the build strategy and it has paid off in spades with NASD. And what I would say is, we are not – there is more letters in the alphabet than B. It doesn’t end at B. But what I would say is, there is - we are going to be prudent about it, but also be aggressive about going forward. Jack Meehan : Thank you. Operator : Thank you, Mr. Meehan. The last question is from the line of Catherine Schulte with Baird. You may proceed. Catherine Schulte : Hey, guys. Thanks for the questions. Mike McMullen : Hey, Catherine. Catherine Schulte : First - first on the LSAG guide for mid-single-digits. I think on the last call, you talked about the GC replacement cycle coming back on, maybe being in the midst of an LC replacement cycle on small molecule. And you’ll now have chemistries in there as well. So, should we think about this as being more towards upper-end of that mid-single-digit range for 2022 or was there some sort of catch-up spend in 2021 that maybe is a headwind as we get into 2022? Bob McMahon : Yes. I think you’re spot on, Catherine. It’s the former, not the latter. Think about it as a higher end and that’s where, I would say, if we think about where our opportunities for upside are, are in the instrumentation business and continuing the strong momentum that we’ve seen. Now we are also going up against, I think, a 15% core growth rate year-on-year. But we feel very good about the momentum in that business, particularly in the areas that you just talked about in Chemical and Energy and in Pharma. We continue to believe that the pharma business coming out of COVID is structurally a higher growth market and as we continue to place our focus on the biopharma or the large molecule, if you look at that throughout 2021, that was a much - growing much faster than the overall pharma business. And so, we would expect that - we feel very good about that business going forward. Catherine Schulte : Okay. And then, maybe one more, you had a lot of success on NASD. Do you have any interest in entering other areas as manufacturing components for biopharma, whether it’s GMP reagents or DNA plasmas or other areas? And is that’s something that you might get into in 2022? Mike McMullen : Well, Catherine, we are always looking for new drivers of growth that would make sense for Agilent to be directly involved in. So, nothing to report for 2022. We’ve got a handful of adding different additional letters, if you will to the all that we serve in NASD. But never say never to the thesis of your question. Catherine Schulte : Okay. Great. Thank you. Mike McMullen : Quite welcome. Operator : Thank you, Ms. Schulte. And the last question is from the line of Noah Baron with JPMorgan. You may proceed. Tycho Peterson : Can you guys hear me? Mike McMullen : Yes. Bob McMahon : Hey, Tycho. Tycho Peterson : It’s Tycho. Sorry about the phone issues. Mike McMullen : No problem. No problem at all. Sure. Tycho Peterson : So, Dako, I appreciate the China color. Obviously people are focused on China tenders at the moment. It doesn’t sound like you’re flagging any issues there, specifically for Dako, but can you talk about what you’re kind of seeing on the ground there for China? And then, how big is the CDx business? You mentioned that earlier, Mike, and you obviously had a bunch of press releases during the quarter about new approvals for CDx? Mike McMullen : Yes. So, Sam, I know this is something you’ve been talking to your team about relative specifically about what maybe happened in the China diagnostics market and what’s going on there. So, we think we’ve got a pretty good protective position. But why don’t you elaborate a bit more? Sam Raha : Yes, happy to, Mike. Tycho, thanks for the question. We’ve had another, just overall for our pathology business, the former Dako business, if you will, a really good quarter, including in China. And you may be referring, Tycho, to the buy China requirements that we are all aware of that are happening specifically to our former Dako business, if you will. The relative unique position, particularly with PD-L1 and having a minimal number of local competitors really differentiates us. So, we haven’t felt really pressure from the buy China impacting our business. But we have continued to see really good interest not only in PD-L1 companion diagnostics that brought more broadly speaking in China for our diagnostic products. Mike McMullen : And Sam, if I recall, you’ve got your PD-L1 registered in China, right? Sam Raha : Yes, we do. I mean, we registered that almost exactly two years ago, becoming the first-ever companion diagnostic in China. And it’s doing well for us there in China. We’ve actually now trained over 400 different pathologists throughout China to utilize our companion diagnostics. Mike McMullen : Yes. Hey, and Tycho, maybe just a follow-up, if I looked at our business in China for DGG for the year, it grew in the 30s, and it was actually in excess of that for Q4. So, it had very positive momentum and CDx is roughly $100 million, ex the Res Bio acquisition. Tycho Peterson : Great. And then, on Cell Analysis, Mike, I know one of the priorities you’ve talked about is moving that portfolio downstream. Can you talk about those efforts how actively you’re looking at kind of pushing that into QA/QC and further downstream? Mike McMullen : Yes. So, Jacob, why don’t you follow-up with some thoughts here? Jacob Thaysen : So, Tycho, when you said downstream, can you tell a little more? Tycho Peterson : More in the bioproduction versus R&D, yes. Jacob Thaysen : On the bioprocessing, yes, we see a big opportunity in the bioprocessing space, both for our Cell Analysis business, but also for our Analytical Instrument business. So, I think that’s something we will continue to invest in going forward. Bob McMahon : Yes. I think what we are seeing right now, Tycho, is moving from truly research into the development area. And then, that will then lead into the QA/QC. So, I think you see a multi-step process here and so, as Jacob said, it’s just early days here from that standpoint. And - but making great progress across all three of those kind of sub-businesses and have high hopes for that to continue. Mike McMullen : A similar flow that we’ve seen in pharma for years, right, which is starting in our R&D then works its way into QA/QC. Bob McMahon : Yes. Mike McMullen : And, Tycho, I think we’ve built this great business through a series of acquisitions and the way we integrate into it making one business. And this would be an area of obviously future focus for us on the M&A front, as well. Tycho Peterson : Great. And just one last one on the new Agilent and I know you’ve got a number of questions on the rollouts there. Mike McMullen : Sure. Tycho Peterson : Are there new services you’re introducing in conjunction with that? Are you broadening the service portfolio? Mike McMullen : Not yet, but stay tuned. It’s only just a few weeks old. Tycho Peterson : Fair enough. Alright. Thanks. Mike McMullen : Okay. Thanks a lot, Tycho. Glad you get on the call. Operator : Thank you, Mr. Peterson. There are no additional questions waiting at this time. I would like to pass the conference back to Parmeet Ahuja for any closing remarks. Parmeet Ahuja : Thanks, Bethany, and thanks, everyone. With that, we would like to wrap up the call for today. Have a great rest of your day. Operator : That concludes the Agilent Technologies fourth quarter earnings conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,022	1	2022Q1	2022Q1	2022-02-22	4.486	4.561	4.988	5.074	null	28.22	26.61	Operator : Hello. And welcome to the Q1 2022 Agilent Technologies Earnings Conference Call. My name is Emily, and I will be coordinating the call today. During the presentation you will have the opportunity to ask a question [Audio Gap] [Operator Instructions] I now have the pleasure [Technical Difficulty] Parmeet Ahuja : [Technical Difficulty] Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A after Mike and Bob’s comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our Q1 financial results, investor presentation and information to supplement today’s discussion, along with a recording of this webcast are available on our website at www.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 and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of January 31. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our company’s consolidated financial statements. 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’d like to turn the call over to Mike. Mike McMullen : Thanks, Parmeet, and thanks everyone for joining our call today. Our momentum continues. The Agilent team delivered a strong start to 2022 in Q1, exceeding the expectation of both the top and bottomline. Our Q1 revenues are $1.67 billion. This is up 9% core and up 8% reported. This is on top of growing 11% core in Q1 a year ago. Excluding COVID-19-related revenues, our core growth is even better at 10% this quarter. We continue to see strength in our order book with robust order intake throughout the quarter. In fact, Q1 orders grew roughly twice as fast as revenues. Q1 operating margins are a healthy 26.3%, up 80 basis points from last year. Earnings per share of $1.21 are up 14%. The EPS increases versus a tough comparison of 31% growth in the first quarter of 2021. These strong results have been achieved in a very dynamic environment. I could not be more proud of the Agilent team’s ability to execute and deliver. Let’s take a closer look at some of what’s driving our strong results. Bob will go into more details later in the call, but our two largest markets continued strong double-digit growth. Our Pharma business, Agilent’s largest market, continues to lead the way for us, growing 17%. Global end market demand for our products and services remains very strong. Biopharma grew 32% while small molecule growth came in about at a robust 9%. The momentum in our Chemical and Energy business also continues, delivering 15% growth in the quarter. This was driven by mid-teens revenue increases in Chemicals and Advanced Materials. PMIs remain positive, along with our overall outlook in the Chemicals, Energy and Advanced Materials markets. On a geographic basis, our results led by 13% growth in the Americas. This is on top of 13% growth in Q1 a year ago. China grew 3% on top of 25% growth in Q1 of last year and was impacted by the timing of Lunar New Year, as noted in our November call. Demand in China remained strong as orders grew high-teens in the first quarter. We continue to invest in China for China to further strengthen our ability to serve our customers. We recently announced a $20 million expansion of our Shanghai manufacturing center to meet growing demand for our locally made liquor chromatography, spectroscopy and mass spec systems. Looking at our performance by business unit, the Life Science and Applied Markets Group generated revenue of $976 million, an increase of 7% on a core basis. This is versus a 10% core growth in Q1 of 2021. LSAG’s growth was led by strength in the Pharma and Chemical and Energy markets. From a platform perspective, customer interest and purchases of our chromatography systems and mass spec offerings are very robust. Our chemistries and supplies business, which moved over from ACG this year, continue to do very well, delivering double-digit growth. We also continue to invest and strategically partner for future growth. Late last week, we announced the acquisition of very exciting artificial intelligence technology that will be integrated into our industry-leading chromatography businesses. This technology has the potential to significantly improve lab growth productivity and accuracy by automating manual interpretational chromatography data. We believe that this capability will be very well received by the high throughput labs Agilent serves around the world. This acquisition is an example of our build and buy growth strategy, as a complement to work, our internal R&D teams are going to develop these types of capabilities for other Agilent platforms. During the quarter, we also announced a partnership with Lonza to integrate Agilent’s analytics technologies and techniques into Lonza’s Cocoon Platform cell therapy manufacturing workflow. The collaboration has the potential to transform the way personalized cell therapies are manufactured. In addition, to ensure we can meet the strong and growing demand for our cell analysis offerings, we also recently announced plans to invest more than $30 million for the construction of a new manufacturing site in Chicopee, Massachusetts. The Agilent CrossLab Group posted services revenue of $359 million. This is up 10% core against a 11% Q1 2021 core growth compare. This growth is broad-based with strength in service contracts, preventive maintenance, compliance, education and informatic enterprise services. Our focus on providing a differentiated customer experience that leverages our large-scale and talented customer support team continues to pay off. Our connect rates continue to improve and our installed base continues to expand, both boding well for continued strength in our services business. The Diagnostics and Genomics Group delivered revenue of $339 million, up 14% core versus Q1 2021 core growth of 15%. Our excellent growth is broad-based across pathology, genomics and NASD. Our Pathology business grew roughly 10% with strength across all regions. Our core genomics business grew low-teens, with strength in target enrichment and our genomics quality control product lines. The NASD team continues to deliver, driving 45% plus growth in the quarter. Meanwhile, the additional capacity expansion at our Frederick GMP oligo manufacturing facility continues to proceed as planned. We continue to expect this capacity to come on line by the end of calendar year 2022. Our Resolution Bioscience team achieved a major milestone in the first quarter by completing the pre-market approval submission for the Resolution ctDx FIRST liquid biopsy assay as a companion diagnostic. This was done in conjunction with Mirati Therapeutics for non-small cell lung cancer and is currently under review by the FDA. It is the first of what we hope will be several indications for liquid biopsy assays. I am pleased with how we have started the year. Building on our Q1 results, continued order strength and execution prowess, we are increasing our full year financial guidance. We are raising our core growth guidance to a range of 7% to 8%, up 125 basis points at the mid-point from our prior guidance. Fiscal year 2022 non-GAAP EPS guidance is increased to a range of $4.80 per share to 4.90 per share, growing 11% to 13% over last year. Bob will be providing the Q2 outlook along with more detail on our improved full year guidance. We are very pleased with our Q1 results and looking forward to another strong quarter and year ahead. I am also very confident in our team and our ability to execute and deliver for our customers and shareholders, no matter what the challenge. Thank you for being on the call today and I look forward to taking your questions later. However, for right now, I will now hand the call off to Bob. Bob? Bob McMahon : Thanks, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue, take you through the income statement and some other key financial metrics. I will then finish up with our improved outlook for the full year and our guidance for the second quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike described, we posted very strong results in Q1 and exceeded expectations. Revenue was $1.6 billion -- $1.67 billion, up a reported 8.1%. Core growth was even better at 8.9% as we overcame a greater than expected negative exchange rate impact of 1.3 points, while M&A added 0.5 point to growth. Q1 core growth was 170 basis points higher than the top end of our guidance. In addition, after adjusting for the 1-point headwind due to COVID-19 revenues, our core growth outside of COVID was roughly 10%, and as Mike said, order growth was even better. Again, a very strong start to the year. Now moving to our end-market performance, our results were driven by a continuation of strong growth in Pharma, led by Biopharma, while momentum in Chemical and Energy and strong results in Diagnostics and Clinical also led the way for us in Q1. Our largest market, Pharma grew 17% during the quarter, on top of 20% growth last year. The small molecule subsegment delivered high single-digit growth, while large molecule continued its strong performance growing 32%. We are seeing our ongoing investments in biopharma paying off as demand was strong throughout the quarter. We continue to believe in the long-term growth potential of the Pharma market and that our business will drive above market growth. Chemical and Energy continued to show strength, growing 15% during the quarter. Growth in Chemicals and Advanced Materials led the way, and we expect continued growth in this business. Diagnostics and Clinical grew 11% on top of 9% growth last year, with all three business groups again expanding revenues nicely during the quarter. Our expansion of LC/MS equipment into the clinical space continues to do well. And our growth in China was particularly strong, increasing more than 30% as we continue to penetrate this market. The academia and government market was flat in Q1. The business remained resilient despite omicron impacts in the U.S. as some universities delayed in-person learning in the period following the holiday break in December and reduced lab activity in January. We have seen lab activity improve into February and believe the funding environment remains positive. The Food segment declined low-single digits against a very strong 22% growth comparison from last year. The Americas were a bright spot for us, growing in the mid-teens, while Europe was flat and China down due to difficult comparisons and Lunar New Year timing. Closing out on the performance of the markets, environmental and forensics, our smallest market was down 11%. For Agilent overall on a geographic basis, all regions again grew in Q1, led by the Americas at 13% and Europe at 6%. China grew 3% on top of 25% in Q1 last year, in addition to the effect of Lunar New Year timing, which should benefit us in Q2. Now turning to the rest of the P&L, first quarter gross margin was 56.1%, up 30 basis points from a year ago. Our team has done a good job increasing productivity and pricing has helped offset higher input and logistics costs. Operating margins of 26.3% increased 80 basis points even as we have increased our R&D investments. Our investments in digital technology for our internal operations also continue to pay off as we leverage our infrastructure across the company using our One Agilent approach. Our tax rate of 14.25% came in as expected and we had 303 million diluted shares outstanding, slightly lower than projected. Putting it all together, we delivered EPS of $1.21, up 14% versus last year after growing 31% in Q1 of fiscal 2021. We continued to produce strong operating cash flow, generating $255 million in the quarter, beating our forecast, while we also invested $75 million in capital expenditures during Q1. And during the quarter, we took advantage of market volatility to repurchase $447 million worth of shares. We also paid out $63 million in dividends, returning a combined total of $510 million to shareholders. Our balance sheet remains very healthy with a net leverage ratio of 0.9 times and given current market conditions, we expect to continue to be aggressive in deploying capital. Now, let’s move on to our improved full year guidance and our outlook for the second quarter. As Mike indicated, we are raising our full year core revenue growth to an expected range of 7% to 8%, up from our initial guide in November of 5.5% to 7%. Excluding the COVID related 0.5-point headwind this year, this results in core growth of 7.5% to 8.5%. The new guidance takes into account our strong Q1 results and an improved outlook for the rest of the year on a core basis. While we have increased our core growth expectations, the dollar has strengthened considerably, doubling the estimated exchange rate headwinds from our initial guide to $110 million for the year, while the M&A impact remains relatively unchanged. Putting it all together, we are expecting full year revenues to be between $6.67 billion and $6.73 billion. In addition, we have increased our EPS guidance for the full year to $4.80 per share to $4.90 per share, up from the previous range of $4.76 per share to $4.86 per share and representing 11% to 13% growth versus fiscal year 2021. For Q2, we are expecting revenue to range from $1.595 billion to $1.625 billion. This represents core growth between 7% and 9% after adjusting for an expected 0.5-point impact related to COVID year-on-year and we expect reported growth in the range of 4.6% to 6.6%. Exchange rates are expected to have a negative impact of about 2.3% in the quarter while M&A is expected to contribute 0.3 points to growth. And closing out our Q2 guidance, non-GAAP EPS is expected to be in the range of $1.10 to $1.12, up 13% to 15% versus the prior year. This is based on a 14.25% tax rate and 303 million diluted shares outstanding. Again, the Agilent team performed extremely well in Q1 and with the solid growth we are seeing in orders and the team’s willingness and ability to take on every challenge that comes their way, I am confident that Q2 and our full year results will also be strong. With that, Parmeet, back to you for Q&A. Parmeet Ahuja : Thanks, Bob. Emily, if you could please provide instructions for the Q&A now. Operator : Of course. [Operator Instructions] Our first question for the call today comes from Tycho Peterson from JPMorgan. Tycho, your line is open. Rachel Vatnsdal : Great. Hi. This is Rachel on for Tycho. Thanks for taking the question. So, first off, great to hear the… Mike McMullen : Hi, Rachel. Rachel Vatnsdal : … about companion diagnostic package for FDA review. So can you just give us the expected time line for when you think you will get that back and if anything is expected in contribution for this guide for 2022? Mike McMullen : Rachel, thanks for that question. I am going to pass it over to Sam. Sam Raha : Yeah. Rachel, thank you very much for the question. We are very excited about having completed all the modules and made the submission for the companion diagnostic related to Mirati’s adagrasib. As you know now, we have done what we need to and we will engage with the FDA as they come back with questions. We can’t -- we don’t exactly are able to control the time line, and as you likely know, the actual approval would be very much tied to the approval of the drug itself, which of course, we have no control over either. But we are very excited about the progress. Bob McMahon : Yeah. I would say, Rachel… Rachel Vatnsdal : Okay. And then… Bob McMahon : …to the following question. Mike McMullen : Rachel, I think, Bob had to build on that. Bob McMahon : Yeah. Just to build on that as… Rachel Vatnsdal : Yeah. Bob McMahon : As was recently disclosed, the PDUFA date is scheduled for the end of this fiscal -- calendar year. So there’s not any material revenue associated with this built into our fiscal year guide, but we are very excited about the opportunity in 2023 and beyond. Rachel Vatnsdal : Noted. And then, for the updated guide, can you just give us a rundown on the updated outlook by end market for what’s assumed in the new guide? Mike McMullen : For the full year or second quarter, Rachel? Rachel Vatnsdal : Both would actually be great. Mike McMullen : Yeah. I am going to let the witness, Bob. Bob McMahon : Yeah. So, I think very similar to what we had talked about at the very beginning of the year. The two strongest markets will continue to be our Pharma and Chemical and Energy market. I think, as we look at those, certainly, both of them performed better than we expected in Q1 and our expectation is that, those will continue to be the driver of growth for the full year, with Pharma probably at a roughly double-digit growth and Chemical and Energy about that high single-digit, double-digit growth as well, and then, followed very closely by Diagnostics in -- at high single-digits. And then food, environmental and academia and government are probably in the low-to-mid single digits, which is pretty consistent with our expectations at the beginning of the year. And it’s slightly different, but same directional for Q2 with Pharma probably being a little stronger. Rachel Vatnsdal : Got it. And then, for Chemical and Energy, can you just talk about if you see any risk coming from Russia and Ukraine, and then also, if you could just touch on that decline 11% this quarter in environmental. How much of a headwind with COVID for that segment or is there anything else underlying in that market that’s really changed relative to your prior expectation? Mike McMullen : Yeah. I would say, for Chemical and Energy, as you know, I mean, our business is really globally based. And so as of right now, we don’t see any material impact to the Chemical and Energy market or our forecast going forward. Obviously, we are watching that closely. And then, I think for environmental and forensics, it’s our smallest market and can be lumpy. There was some impact associated with Chinese Lunar or Lunar New Year in China. But we haven’t seen any impact there. What I would say is we are starting to see some of the disbursements more in our order funnel than in revenue associated with the Infrastructure Initial Bill here in the United States. So I wouldn’t read anything into it in terms of changing in fundamental demand. Rachel Vatnsdal : Great. Thanks for taking my questions. Mike McMullen : You are very welcome. Operator : Our next question today comes from Matthew Sykes from Goldman Sachs. Matthew, your line is open. Unidentified Analyst : Hey guys. This is Dave on for Matt. It was great to see the strength in biopharma end market. It’s impressive given the challenging funding market for these biotech firms. Any additional color you can give on what you are seeing in the biotech end market and productivity there? Mike McMullen : Yeah. Dave, first of all, thanks for the recognition. We are really pleased with that 32% growth print and we see the underlying demand remaining strong. And Bob, I think, it’s fair to say, we haven’t release any impact at all from … Bob McMahon : No. Mike McMullen : …what maybe happened in the biotech funding arena. Bob McMahon : Yeah. We are very excited about our portfolio and how it plays into that space and are believing that that strong growth will continue going forward. Unidentified Analyst : Fantastic. And any additional color on the drivers of the strong margin expansion in LSAG and how sustainable is this margin expansion over the rest of the year? Bob McMahon : Yeah. I will jump in there. it -- yeah, the team has done a fantastic job really driving margin and if we look at it, it’s a combination of being able to cover our costs from the standpoint of the increased logistics and material costs, as well as very strong management discipline in the operating expenses. So it’s a combination of being successful in our price, which we had talked about before and covering those costs, as well as being able to leverage kind of our infrastructure across all three of the groups. Mike McMullen : And Bob, I think, you also called out the digital investments we are making. So that’s in particular showing up through the SG&A line as we leverage digital investments. Unidentified Analyst : Fantastic. Congrats on the quarter, guys. Mike McMullen : Thanks, Dave. Most appreciated. Operator : Our next question comes from Vijay Kumar from Evercore ISI. Vijay, please go ahead. Vijay Kumar : Hey, guys. Congrats on a nice quarter here. Mike McMullen : Hey, Vijay. Vijay Kumar : And thanks for taking my question. Mike McMullen : Thank you. Vijay Kumar : Bob, maybe one near-term question here on the second quarter guide. The 200 basis points range, that’s wider than your normal -- typical range, your annual guidance range is 100 basis points, any reason for a wider branch and it comes to it really hard in 2Q. So I am curious, what’s giving you the confidence to get to that upper end of 8.5%, which would imply sequentially flattish with 1Q trends? Bob McMahon : Yeah. So let me take the second part first. As Mike mentioned in the call, our demand continues to be very strong and we actually had order growth that exceeded revenue growth almost 2x and that gives us confidence around the order book going into Q2 really across multiple end markets. And so that gives us the ability to deliver the -- or expected to deliver the high growth in Q2. In regards to the range, there are still uncertainties out there, as Omicron continues to impact, mainly Asia right now and then some other uncertainties. So I think that’s just taking a little wider lens, but we still feel good about the business for the full year. Mike McMullen : Yeah. I appreciate the recognition, I think, Bob, what we posted 19% core last year. Bob McMahon : Yeah. Mike McMullen : So I appreciate that recognition, Vijay. And as Bob mentioned, the book of business is really quite strong, plus also our services business is really strong Diagnostics. So the recurring revenue side of the house is quite strong. Vijay Kumar : That’s helpful, Mike. And maybe on the comment on the acquisition contribution here in the second quarter, it seems to be sequentially down. Is there any seasonality to that business and what is the guide assuming for -- you didn’t note the strong order book for 2Q? Is the guide assuming perhaps the order book momentum tapers down in the back half? Bob McMahon : Yeah. No. It doesn’t. There is an element of getting tougher comps, but the momentum continues. I would say for Q2, it’s more timing than anything else relative to the M&A. It is down slightly sequentially, but I would say, in the overall scheme of things, not material. Vijay Kumar : Got it. Thanks, guys. Mike McMullen : You are very welcome. Operator : Up next we have a question from Brandon Couillard from Jefferies. Brandon, your line is open. Brandon Couillard : Hey. Good afternoon. Mike, on the… Mike McMullen : Hi, Brandon. Brandon Couillard : …AI acquisition, it sounds interesting. It’s definitely a buzzword. Would you expect to be making incremental investments with this deal and could you just comment on how and why the AI tools are kind of used in the instrumentation today and when you sort of expect this to be, I guess, more of a reality of feature? Mike McMullen : Yeah. Brandon, happy to do so. I am going to actually invite Jacob on the response here, because, yeah, we hear a lot about the buzzwords and when the team first came to be and started talking about this opportunity, we said, well, in actuality, there’s a lot more than buzzwords here. We actually have some lighthouse customers using this capability already. And as you hear from Jacob, it really drives productivity for those high volume labs. So we think for certain segments market, this is actually going to be a reality. And Jacob, why don’t you, why don’t you build on my comments there, if you don’t mind? Jacob Thaysen : Yeah. Sure. Thanks for the question, Brandon. I am very excited about this also on bringing the best control team here into Agilent. It might be a buzzword, but we have really seen that it really makes a difference. And first of all, it fits very well into an informatic strategy, where we are all about digitalizing the lab and create that deal inside both scientifically and productivity wise for our customers. Here, the first product realization, which has already been prototype, we are aiming to what a part of the -- that is very prone for AI right now and that is really the manual interpretation of commercial graft, as Mike also mentioned. Usually, labs are spending a highly trained chemist to go out and do manual peak integration, which is tedious process. And you can imagine if you have a high volume lab, there’s a lot of investment going into this area. And active virtual control here have already proven with the customers that they can take a substantial part of that work and actually automate that. So we are very glad about that. We are going after the PCMs business first. We have a substantial installed base and we actually believe that we can implement this here in the second part of fiscal 2022. Now long-term, we do believe there’s a great opportunity to provide those algorithms also across our analytical platforms and also for other applications like QC release and predictive maintenance and all things. So even though it’s the buzzword, there is a lot of real products behind this and I am very excited about it. Mike? Mike McMullen : Thanks, Jacob. Brandon Couillard : Thanks. Just one follow-up for Bob. Just if you could just elaborate a little bit more about the book-to-bill in the first quarter and then a couple just housekeeping, was the Lunar New Year impact kind of in line with the plan, and I think, last quarter you talked about… Bob McMahon : Yes. Brandon Couillard : … $15 million of kind of delayed orders, were all those recouped in the first quarter, just kind of an update on that? Bob McMahon : Brandon, as usual, your notes are quite accurate and so let me address a couple of those things. So the Lunar New Year impact came in kind of as we anticipated, which should come back into Q2. That transit time or that $15 million that came in, but we haven’t seen really the improvement. So that’s still opportunities in the second half of this year. Our end of the quarter coincided with the large snowstorm in the U.S., but the shipments were out and we still were able to deliver. In terms of the first question was about Lunar. Mike McMullen : I think on both. Bob McMahon : Yeah. Okay. I think on both. Brandon, we missed something? Brandon Couillard : No. Just if you quantify the book-to-bill, if you are really? Bob McMahon : Oh! Yeah. Yeah. Quantify the book-to-bill. Yeah. Mike McMullen : You are right. Bob McMahon : I knew that there was something else. I was trying to avoid that one on purpose, because we are not going to provide that. But what I can tell you is that, the growth rate of our orders was twice as much as the revenue growth, and I would say, our backlog is the highest it’s ever been. Mike McMullen : And Brandon, this is Mike. I would just add one comment. There is one word in my script. I really want to make sure that I emphasize here throughout the quarter. So this wasn’t just a calendar December year end kind of story. We saw this order strength throughout the entirety of our fiscal Q1. Brandon Couillard : Got it. Thank you. Operator : Our next question comes from Puneet Souda from SVB Leerink. Puneet, your line is open. Puneet Souda : Yes. Hi, Mike and Bob. Thanks for taking the question. So, the first one is just a follow-up on the order book. I am wondering if you can quantify that, obviously, that’s been growing strongly. And maybe just help us understand, once said, you have the strong order book, you have confidence in the rest of, I mean, the guide throughout the year based on what you are providing. But maybe just talk to us about the sort of the cadence wise in terms of supply chains. Obviously, we are hearing -- we have a number of questions that we get on supply chains frequently. So just wondering what’s your level of confidence on the supply chain and turning those order books into orders? Mike McMullen : Yeah. So, first of all, I’d say, that the supply chain environment continues to be quite challenging. On the other hand, I remain quite confident, because our team has found ways to continue to navigate through those and meeting the expectations of customers terms to delivery times. In fact, if I recall correctly, our order cancellation was actually lower this year than prior year. So while I don’t want to imply that it’s all sunny out there in terms of the supply chain, we have been working on this thing for a while. I mean many quarters ago, we were working on this quarter and the second half of this year. So while the environment remains challenged externally, I remain confident in our ability to actually get product to customers when they need it. Bob McMahon : Yeah. Puneet to your first question on the quantification, we are not going to provide that other than what I had answered… Mike McMullen : Yeah. That one, Bob. But we did find the 2x order growth rate versus revenue. Puneet Souda : Got it. Fair. And in terms of cell analysis, Mike, I mean, that franchise has been growing. You highlighted Lonza, the Cocoon platform, a couple of other capabilities. Maybe can you -- I know at one point, you had sort of quantified that business. I am wondering if you can do that again and what sort of growth rates you are seeing there and what’s the expectation this year given the acceleration you are seeing in overall in biomolecules? Thank you. Mike McMullen : Yeah. Thanks for that question. We love to talk about the cell analysis. It’s been a really great addition to the company over the years and we continue to grow and expand that. So, first of all, I’d say, that business remains to be very healthy. We are seeing really good strong end market demand. And Bob I think for the year, we are expecting the double-digit growth out of the cell analysis business. And really excited and the fact that, in addition to the manufacturing expansion we had in Chicopee, that kind of gives you an indication of our confidence in future growth. And I believe we are close to, Bob and Jacob, close a north of $400 million for this business? Bob McMahon : This year. Mike McMullen : This year. Yeah. Bob McMahon : Forecast for this year. Mike McMullen : Yeah. Bob McMahon : Yeah. Puneet Souda : Got it. Super helpful guys. All right. Thank you. Mike McMullen : You are very welcome. Operator : Our next question comes from Patrick Donnelly from Citi. Patrick, your line is open. Patrick Donnelly : Hey. Thanks for the questions guys. Mike McMullen : Hey, Patrick. Patrick Donnelly : Mike, maybe one on China, between the tough comp… Mike McMullen : Sure. Patrick Donnelly : … Lunar New Year, obviously, a few layers there. Can you just talk about, I guess, the core performance is going to stripping that out a little bit, what you are seeing there, what you saw through… Mike McMullen : Got it. Patrick Donnelly : … to your point there throughout the quarter, I guess, the cadence and then the expectations going forward there as well, just between the different markets there. Just curious what’s going on? Mike McMullen : Yeah. It’s interesting. Sometimes you can get kind of diverted on the headlines out of China, because our business remains quite strong and we are seeing good strength in pharma has really been a key driver for us, which Bob highlighted in the script. But also our Diagnostics business, DDG grew, I think, over 40% in the first quarter, services growth in the mid-teens. So other things that I have talked to you about, which is, in addition to continuing to grow and strengthen our instrumentation portfolio market share in China. We have also been talking about our ability to grow our ACG business in China with that large installed base and the fact that we have historically viewed ourselves of being underpenetrated in Diagnostic and Genomics, and we are really starting to see traction on both of those growth factors. So, again, we feel really confident about the state of the China business, because we don’t have the order book we have, but also these other areas of recurring revenue are really growing, growing well for us and we continue to invest for our customers in China, as I mentioned in my call script. So I think there’s a lot to like about the opportunities in our business in China. Bob McMahon : Yeah. Patrick, just one other thing, we -- while we grew 3% as we mentioned, if we add back in kind of the Lunar New Year estimate, it was high-single digits, which was in our -- in line with what we had expected and our expectation is that, that’s going to be for the full year as well. Now Q2 will be stronger than that, obviously, as it comes back and we also saw mid-teen -- mid-to-high-teens growth in orders in Q1. Patrick Donnelly : Okay. That’s helpful. And then maybe just on the academic government market. You are not alone, obviously, calling that out as being a little sluggish to come back. Maybe just what you saw there in January, Mike, I know you called out the remote learning maybe caused a little more of a pause even as we go into 2022? And then just expectations there going forward, you expect the market to kind of normalize a little bit and what are you hearing from customers on that front? Mike McMullen : Yeah. Thanks for that, Patrick. We saw -- we see the Omicron impact is transitory. We saw that in the U.S., for example, and we would expect to, I think, Bob, you called out in the script back to normal kind of levels in February. So we actually expect the environment to improve over the year. I think we are flattish for Q1. But, Bob, I think, we are calling for mid-singles or so growth for the full year. So that would imply a pickup in growth in this segment later on this year. Bob McMahon : Yeah. I mean, for everything that we see, Patrick, funding levels continue in activity within our order book continues to be strong. So it not as strong obviously as the Pharma and C&E areas, which are leading the growth in the Diagnostics, but we are not seeing any fundamentally different performance in that market going forward. Patrick Donnelly : That’s helpful. Thank you, guys. Mike McMullen : You are very welcome. Operator : Up next we have a question from Jack Meehan from Nephron Research. Jack, your line is open. Jack Meehan : Thank you. Good afternoon, guys. Mike McMullen : Good afternoon, Jack. Jack Meehan : I was hoping you could elaborate on the pricing actions you are taking in the market? How do they compare to kind of normal periods and what areas of the portfolio have you had success when it comes to pricing? Bob McMahon : Yeah. I will take that, Jack. And I think we mentioned at the beginning of the year that we were estimating roughly a point of growth associated with that was about half of what we had seen normally to cover the increased costs, and what I would say is, through Q1 we are ahead of schedule, which is good. Jack Meehan : Okay. And then, the other area I was hoping you had an update on is NASD, so over 45% growth in the quarter. Maybe just any update to what your guidance is for the full year? It seems like you are tracking ahead of schedule here and just when the new line opens up, just what sort of pace you expect to be able to take advantage of that capacity? Bob McMahon : Yeah. I was going to say, we -- the team continues to do a fantastic job and continues to drive even more revenue and product out of the existing capacity and it was a great first quarter and slightly ahead of our expectations. We had expected double-digit growth and that continues to be our expectation before the new train, Train B comes online at the end of this calendar year. And the order book continues to be strong. That team continues to actually build the order book for 2023 and building that demand for that train. So we are extremely excited about that business and are looking forward to not only bringing that up, but also looking for other ways to expand our capacity. Mike McMullen : Absolutely. Jack Meehan : Thank you, Bob. Bob McMahon : Thank you. Operator : Our next question comes from Derik de Bruin from Bank of America. Derik, please go ahead. Mike Ryskin : Hi. Thanks for taking the questions. This is Mike on for Derik. Mike McMullen : Hi, Mike. Mike Ryskin : I want to ask a little bit on the -- hey -- I want to ask a little bit on the Diagnostics and the Clinical end markets. In particular, you called out sort of the expansion of our CNS [ph] into some of the applications here and you are seeing a new vector of clinical growth here. I was wondering if you could elaborate on that. Just sort of what are the specific drivers you are seeing there and where some of that uptick happening. Mike McMullen : Yeah. I am going to pass it over to Jacob for some more details here. But also I would also just remind, we also had a very good print on the pathology side of our Diagnostics business. But I think you will hear from, Jacob, LC/MS is an indication of some future traction, we are already getting some good growth. So, Jacob, your thoughts there? Jacob Thaysen : Yeah. Absolutely. We have closed the year have a good LC/MS Clinical business in U.S. But over the past year, we have also expanded ourselves into China, really good tractions. We both have our own product line there, our direct sales, but we also have an OEM partner. So in that sense we are both addressing the customers that we know, but also a lot of customers that we want to get access to. And that’s been quite successful and hence we are right now looking to expand the portfolio even further. We have the Ultivo, of course, with our LC connected and we are looking to other parts of our portfolio, both within LC/MS, but also beyond LC/MS here over the next period of time. But we do see China as a great opportunity, but here over the next over time, we will also enter into other areas like Europe and other places. Mike McMullen : And Jacob, on the Ultivo, what I think the customers love the combination of performance and the size of the footprint really fits nicely into the diagnostic lab. Jacob Thaysen : Yeah. Exactly. We spent a lot of energy of both making it a size that fits very well into the LC stack. But more than that we also made it more easy to work with. So it’s actually an ease-of-use solution. So we are very excited about that and even better the customers are also super excited about that. I do want to mention also that we also have a strong Clinical business within the flow cytometry. With the Ultivo business that continues to drive growth and particularly China, where we see a lot of demand there also. As you might recall, the flow cytometry from the LC business is really focused on decentralized lab also again with ease-of-use and we see a lot of interest in that. And I do expect also that U.S. will be a future market for us here. Mike Ryskin : Great. I appreciate that. Any color you can give us just real quick on sort of how meaningful LC/MS is within that 15% of your exposure? Is it just to give us a sense of the scale of that relative to genomics and cancer diagnostics and pathology things like that? Mike McMullen : Bob, do you want to take it or do you want me to? Bob McMahon : Yeah. Yeah. I will take it. It is still relatively small but growing very fast, which the market itself is quite large and so the opportunity here is really in front of us going forward. Mike Ryskin : Great. And if I could ask a quick follow-up on -- just on the capital deployment side… Mike McMullen : Sure. Mike Ryskin : … and on M&A. Obviously, you have done some smaller deals in the last couple of years and you continue to invest in new technologies and you have got some, you have had M&A deployed into sort of Life Science Solutions and cell analysis. You have had things in liquid biopsy and now artificial intelligence. So it’s kind of showcase that you can deploy capital in a variety of different markets. But just looking at where the balance sheet is now, any thought on larger acquisitions and sort of scaling up to do a bigger deal? And what excites you, what markets would you be looking to? What’s -- so how would you go about starting to deploy that capital? Mike McMullen : Yeah. Sure. Happy to address that, Mike. So I appreciate, by the way, the recognition of the variety of where we deploy capital. But there’s a consistent theme across where we deploy capital, which is high growth end markets, which will drive increase to the overall core growth of the company in places where we can leverage the scale and the capabilities we have in the company to really make those businesses even more successful. So I think there’s a timing kind of an underlying theme behind all those acquisitions. So that would continue to be our thesis and our approach, as well as staying focused in the private sector, which we think there’s -- really fits well the Agilent model and often the potential acquired companies and leadership teams really find the Agilent culture, a good place to be and they also see how well we have done with previous acquisitions. So we have got a track record as well that they can point to. And I am on record saying that, we wanted to deploy our balance sheet as part of our overall growth story. It’s part of what we have been calling our build and buy growth strategy. And as you may know, the largest deal that we have done to date has been -- was the acquisition of BioTek, but we believe we can do multiples of that deal and be willing to deploy capital if the right opportunity comes along for us. Mike Ryskin : Okay. Thanks. Operator : Our next question comes from Thomas Peterson from Baird. Thomas, your line is open. Thomas Peterson : Hi, guys. Thanks for taking my questions. Mike McMullen : Sure. Thomas Peterson : Just wanted to circle back on Pharma and just wanted to know if you had seen any benefit within Pharma from both onshoring activities and manufacturing redundancies and kind of, if so, where has this tailwind been and what are your expectations for any potential durability here? Mike McMullen : Great question. So I think this is actually a story both for the Pharma, as well as elements of our Chemical and Energy business. And I’d say right now, not yet material in terms of order book or revenue, but we believe it’s coming. There’s a lot of discussions with customers that are building new capacity. I would say it’s probably more of a 2023 kind of event. But I think it speaks to the durability of growth that we think we have in Agilent’s two largest end markets. So we are hearing lots of discussions about dual sources of critical components, onshoring of previously offshore critical supply chain elements. So I think the continued supply chain challenges that the world is seeing is only putting more emphasis on that direction. So I’d say right now, it’s in the longer term planning phase. As you know, the analytical laboratory instrumentation is often the last thing that’s added when they bring on new capacity, but we believe it’s coming, but it’s not been material yet to the company’s performance. Thomas Peterson : Great. That’s super helpful. And maybe just to finish for me, just any updated thoughts on the One Agilent commercial organization transition? Anything that surprised you relative to expectations, sort of how is that incorporation gone internally? Mike McMullen : Yeah. So I am going to have Padraig jump in here with some additional specifics. As you know, I have asked Padraig to take on this role in addition to his leading the overall Agilent Services business. But we are just delighted with the start of this new structure and I think I always say the proofs in the results and we are off to a good start with the fact that we had such a strong Q1 order book throughout the quarter. And Padraig, I know it’s been just a few months where you have been pulling your team together and but I think you are already starting to work with customers differently and maybe you could share some of your thoughts here. Padraig McDonnell : Yeah. Thanks, Mike. I think we are starting to see the benefit of an enterprise approach to both sales and service, and the associated functions, and of course, selling the complete Agilent solution to customers, which includes instruments, services and consumers with aligned sales approach is really giving us a lot of scale with customers. We are also seeing a doubling down on our investment in our digital interaction with customers and we continue to see strong momentum with accelerating digital growth of about 25%. So great start, Mike, and more to come. Thomas Peterson : Okay. Operator : Our next question comes from Dan Brennan from Cowen. Dan, your line is open. Dan Brennan : Hey, Mike and Bob, thanks for taking the questions. Congrats. Mike McMullen : Sure, Dan. Dan Brennan : I was hoping to go back to C&E, Mike, could you or Bob... Mike McMullen : Sure. Dan Brennan : …unpack -- kind of unpack the customers there, Chemical R&M, can you just kind of give us a flavor for what you are seeing? I know the question was asked earlier about the impact of what’s going on. But just wondering, as oil price spikes in the past, kind of what kind of impact have you seen if the oil price spike is sustained? Mike McMullen : Yeah. I’d say if you look at the three sub-segments of the C&E marketplace, we often talk about the Chemicals, Energy and Advanced Materials market. I think it’s the Chemicals and Advanced Materials market segments that are driving the growth here. Now theoretically, when -- although, be it now much -- it’s a very small part of the total number these days, higher oil prices would tend to lead to more investment in that Energy segment portion of the whole market segment. But I can’t remember the exact percentage. I know it’s evolved a bit over time. But I think what’s most interest to us is how does the world view global growth were PMI. So, yes, I think, the highest correlation of growth in this segment relate to PMI and the global growth outlook. But we would -- there could be some more money to invest in exploration, perhaps, if oil prices stay high, but it’s really also really driven by the PMI view. That’s why they still remain positive and that’s why we are optimistic about our ability to grow this overall market throughout the rest of this year. Bob McMahon : Yeah. Dan, to build on what Mike was saying, if we looked at those three big areas, over 90% or roughly 90% of our C&E business is actually Chemicals and Advanced Materials. And so the Energy piece is an important component, but that demand around new types of Chemicals, Advanced Materials and so forth is really what’s driving it… Mike McMullen : Yeah. Bob McMahon : And so whether it be batteries and other areas around these is the growth driver today. Dan Brennan : Got it. Thanks guys. And then, just related to the Oligo business the MAC business, just can you remind us, at least from the perspective of like basin within your high single-digit growth for Pharma, kind of how many points of growth should we be thinking that business is contributing? Bob McMahon : From Pharma, it grew -- it was roughly 2 points to 3 points of growth for pharma in Q1. Dan Brennan : And then, for the year, sorry? Yeah. Yeah. Sorry about that, I misspoke. So for the year, I think you are talking low double now for Pharma. So what’s assumed from the Oligo business… Bob McMahon : Yeah. Dan Brennan : …within that [inaudible] demo? Bob McMahon : A point or two. Mike McMullen : Yeah. I think the… Dan Brennan : Very clear. Mike McMullen : … message here is the, yeah, the Pharma growth was strong for the biopharma, NASD, but also across the rest of the company’s portfolio as well. Dan Brennan : Yeah. Mike McMullen : So it’s an Agilent wide story. Dan Brennan : Yeah. Great. And then maybe just one final one to sneak in just the LC market, Mike, it’s always entering here, what’s going on… Mike McMullen : Yeah. Dan Brennan : … and that’s a big part of your business, what the competitive trends there like in LC? Mike McMullen : All I can tell you about is what’s going on in my business, which is its doing very well. So we have got -- we had -- we continue to see very strong business momentum. The market demand is very robust. You may have recall in my script, I tried to call out demand in our chromatography systems remains very robust. We saw double-digit growth again in Q2 -- Q1 2022 off double-digit or the prior year, backlog strong, orders growing faster than revenue. So there’s a lot to like about what’s going on with the LC business. Dan Brennan : Great. Thank you guys. Mike McMullen : You are very welcome. Operator : Our next question comes from Paul Knight from KeyBanc. Paul, please go ahead. Paul Knight : It’s always tough to ask a good question late in the day, Mike. Mike McMullen : Come on, Paul. I know you are up to it. I know you are up to it. Paul Knight : As I look at the 32% biotechnology growth, which seems extraordinarily good, would you attribute this to the cell and gene therapy market, and what specifically biotech instruments? What’s behind that really high growth rate? Mike McMullen : Bob, why don’t we tag team on this, but I’d say, it’s really being driven by not only the NASD business we talked about earlier, but our core LC/MS business. I mean there is some contribution from cell and gene therapy, but it really is coming from the LC/MS business along with really strong growth of services and consumables as well. So, I’d say, it’s really a broad-based story, but really around our core instrumentation platforms along with services and consumables. Bob McMahon : Yeah. Spot on. Mike McMullen : I mean, goes for that. Paul Knight : Okay. Sorry, Bob. Bob McMahon : Go ahead, Paul. Sorry. Paul Knight : You have mentioned LC/MS more than, I think, is typical. Is this a result of -- are you seeing a result of benefit yet from the Avantor JV. And in addition, I know CrossLab, you mentioned higher connectivity. I think you are implying you continue to gain some share there, if you can talk to those two topics? Mike McMullen : Yeah. Sure. Happy to do. ACG has been what we are doing has been near and dear to our overall growth strategy for a number of years and we are very excited about the new relationship we have with Avantor. I’d say it’s still very early days, so not yet a material contributor to the topline revenue and that really was all according -- so it’s proceeding according to plan. So I’d say there’s more to come in that regard. And then on the connect rate, yeah, in fact, we called that out on purpose to say, we continue to see higher connect rates with our consumables and services business, and we think that bodes well for future growth. And Padraig, maybe you want to just comment a bit on what you are seeing on the services side and the connect rate. Padraig McDonnell : Yeah. Well, overall, the attach rate for both service and consumables in the high 20s, but we believe and we have significant headroom for growth going forward as we target into higher technology spaces. And on the services side, in particular, we have a strong demand for contracts and that’s driving a lot of connect rate with new instruments as well, Mike. Mike McMullen : Yeah. I think we had double-digit contract growth and probably more than 10% of Agilent’s revenues now in -- under service contracts. Paul Knight : Okay. Thank you. Operator : Those are all the questions we have time for today. So I will now hand back to Parmeet to conclude today’s call. Parmeet Ahuja : Thanks, Emily, and thanks everyone for joining. With that, we would like to wrap up the call for today. Have a great rest of the day everyone. Operator : Thank you everyone for joining our call today. This now concludes our call. Please disconnect your lines.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,022	2	2022Q2	2022Q2	2022-05-24	4.633	4.713	5.147	5.227	null	24.28	22.28	Operator : Good afternoon and thank you for attending today's Agilent Technologies Inc. Q2 2022 Earnings Conference Call. My name is Selena, and I will be your moderator. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Parmeet Ahuja, Vice President of Investor Relations. Please go ahead. Parmeet Ahuja : Thank you, Selena, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2022. With me are Mike McMullen, Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Sciences and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second quarter financial results, investor presentation and information to supplement today's discussion along with a recording of this webcast are available on our website at www.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 and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of April 30th. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our Company's consolidated financial statements. 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'd like to turn the call over to Mike. Mike McMullen : Thanks Parmeet, and thanks to everyone for joining our call today. In Q2, the Agilent team again demonstrated the resilience and strength of our business model. We delivered core revenue growth in line with our forecast, expanded operating margins, and exceeded our EPS expectations. We did this while navigating a dynamic macro environment, including the conflict in Ukraine and COVID-related lockdowns in China. Our Q2 revenues are $1.61 billion. This is up 7% core and is on top of growing 19% in Q2 a year ago. Order performance was even stronger growing double digits on a core basis. Second quarter operating margins at 25.3% continued to expand, up 140 basis points from last year. Earnings per share of $1.13 are up 16%. We achieved these results despite the COVID-related lockdowns that closed our operations in Shanghai, starting in late March and continuing through the entire month of April. We estimate that this is roughly a 350-basis point headwind to our core revenue growth for the quarter. As Bob will indicate when he takes you through the details, this business is not lost and is expected to be recovered through the rest of the calendar year. Most importantly, our team in China is safe, and we restarted limited operations in May at our GC factory and logistics center in Shanghai. From an end-market perspective, the pharma and chemical and energy markets again led the way for us. Our pharma business, Agilent’s largest market, grew 13%, led by biopharma growing high 20s. This represents our seventh consecutive quarter of double-digit growth in the pharma market. It also builds on top of a stellar 29% growth rate last year. The momentum in our chemical and energy business also continued this quarter, delivering 9% growth in line with expectations and overcoming the shutdown of our primary GC production facility in Shanghai and the conflict in Ukraine. Growth was driven by advanced materials and chemicals. On a geographic basis, the Americas again led the way with 13% growth built on top of 27% growth a year ago. Europe also performed well with growth coming in at 7% following 16% growth last year. China revenues were on track with our expectations through March, but we exited the quarter down 3% given the COVID-related lockdowns. While revenues were affected by the temporary shutdowns in the quarter, overall demand in China remains very robust. In fact, China was the fastest growing region in Q2 from an order perspective, up about 20%. We remain very confident about the ongoing strength of our business in China. Looking at performance by business unit, the Life Sciences and Applied Markets Group generated revenue of $896 million, an increase of 4% on a core basis. Given our manufacturing footprint and relative strength in China, LSAG was disproportionately impacted by the COVID-related shutdowns there. To provide some additional perspective, all major product lines, excluding GC related products, grew solidly in the quarter, led by strong performance in our cell analysis business growing in the mid-teens. Orders for LC and LC/MS continued to be strong. Orders grew mid-20’s globally with particularly high adoption of our two new Bio-LC products. On the LC/MS front, we look forward to announcing several exciting new offerings at the upcoming ASMS conference that will expand our portfolio. Our value proposition continues to resonate with our customers and LSAG exited the quarter with record backlog. The Agilent CrossLab Group posted services revenues of $353 million. This is up 10% core. Growth in services was again broad-based across services contracts, preventive maintenance, compliance, education, and informatic enterprise services. The scale of our ACG business and breadth of portfolio continued to drive growth and margin expansion even in the face of inflationary pressures. Q2 marked the sixth straight quarter we’ve delivered growth across all markets and regions. The Diagnostics and Genomics Group delivered revenue of $358 million, up 15% core versus 16% last year. Our excellent growth was led by NASD and genomics. The NASD team delivered yet another strong quarter, generating record revenue and profitability. During the quarter, I had a chance to visit our team in Colorado and see first-hand the excellent progress that’s being made meeting current customer needs and also the work underway in continuing to build for future growth with our Train B expansion. We remain extremely bullish about NASD’s future and with Train B coming online in 2023, we’re adding yet another $150 million plus in capacity. Looking across the company, our One Agilent approach and focus on our customers has never been stronger. During the quarter, we were ranked number one in our industry and number two overall in customer satisfaction in The Management 250 ranking, developed by the Drucker Institute. In addition, the new Agilent Commercial organization is already resonating well and delivering successfully for our customers. Agilent’s Q2 results are yet another proof point for how we build a resilient company that can quickly adjust to a changing environment and still post strong results. Given our results to date, along with our backlog and continued order strength, we are again raising our full year core revenue growth and EPS guidance. For the year, we are now expecting 8% to 9% core revenue growth and EPS of $4.86 to $4.93. Bob will provide more detail on our Q3 outlook along with more information on what we expect for the rest of the year. After Bob’s comments and before we take your questions, I will be rejoining the call for some concluding remarks. Thank you for being on the call today, and now I will hand the call off to Bob. Bob? Bob McMahon : Thanks Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue and take you through the income statement and some other key financial metrics. I’ll then finish up with our guidance for the third quarter and the fiscal year. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike described, we posted solid topline results in Q2 while overcoming some difficult macro challenges in the business environment. Revenue was $1.61 billion, up a reported 5.4%. In the current quarter, currency was a headwind of 2.1 points while M&A added 20 basis points of growth. Core growth was up 7.3%, in line with expectations despite the COVID-related lockdowns in China, which primarily affected us in April. We estimate the lockdowns deferred $50 million to $55 million of revenue into future quarters, impacting growth in Q2 by roughly 350 basis points. In addition, COVID testing-related revenues were roughly a one-point headwind in the quarter. Our largest market, pharma, grew 13% during the quarter, on top of 29% growth last year. Biopharma continued to be the main driver of results, growing 27% year-on-year, led by NASD. Investments in R&D programs and demand for instrumentation, consumables and critical components remained strong. Pharma represented 37% of our overall revenues this quarter. To put that in perspective, in Q2 2019, effectively one year before the pandemic started, pharma represented just 30% of our business. This not only highlights the strength and resilience of this market, but it also demonstrates how our innovation and investments in higher growth markets continues to pay off. Chemical and energy continued its strong trend of positive results, growing 9% during the quarter despite the impact of the COVID-related lockdowns in China and the conflict in Ukraine. Results were led by strong double-digit growth in advanced materials and specialty chemicals. We expect strong demand to continue in these areas, particularly in semiconductors and battery and clean energy technologies as industry-wide capacity expands. Diagnostics and clinical grew 5% on top of 13% growth last year as year-on-year declines in COVID-related revenues and the temporary shutdowns in China muted our results. The academia and government market was a nice surprise for us, growing 5% in Q2 on top of 21% growth last year. We saw an increase in spending in this market as more university labs opened up and students returned to on-campus learning. In addition, sales activity and the funding environment continues to be healthy. In the food segment, we saw growth across all regions except for China due to the shutdowns. The higher concentration of food business in China drove the food segment to decline low single digits against a very strong comparison of 22% growth last year. And rounding out our end-markets, environmental and forensics grew 1% versus an 8% growth last year. On a geographic basis, the Americas grew 13%, Europe grew 7%, Asia, excluding China grew 8%, while China declined 3% in the quarter as the lockdowns affected our manufacturing and logistics operations for over a month. Regarding China, I’d like to provide some additional detail on how the quarter evolved and how we expect to see the recovery progress. First, as Mike said, demand remains strong with the order growth of about 20%, despite the temporary COVID lockdowns. Second, our business in China was tracking very well with our expectations through late March when production and our main logistics hub in Shanghai were shut down and remained closed throughout April. We were able to partially reduce the impact of the lockdown by shifting production to other factories where possible and adjusting the shipping routes into and out of China. We expect the $50 million to $55 million in revenue to be recovered throughout the rest of the calendar year, so it is deferred, not lost. In terms of phasing, we expect to continue to ramp our operations and anticipate modest recovery of the Q2 impact in Q3. We expect the majority of the recovery to occur in fiscal Q4 with some spillover into November and December, which is our first fiscal quarter of 2023. This phasing is baked into our updated guidance. Now turning to the P&L. The team continues to execute at a very high level. Second quarter gross margin was 55.7%, up 30 basis points from a year ago as pricing actions and productivity helped offset inflationary pressures tied to ongoing supply chain constraints and higher logistics costs. Operating expense leverage and strong cost management helped drive very healthy incremental improvements as we delivered an operating margin of 25.3%, up 140 basis points from last year. Our tax rate for the quarter was 50 basis points better than forecast, helping us deliver earnings per share of $1.13, up 16% versus last year, and exceeding our expectations. Looking at cash flow and our balance sheet, we generated operating cash flow of $283 million in the quarter while investing in $64 million in capital expenditures during Q2, with the year-on-year increase primarily related to the NASD expansion. Cash flow in the quarter was impacted by the transitory impact of COVID-related lockdowns in China as well as increased inventory to fulfill strong demand in a challenging supply chain and logistics environment, as expected. We are still on track to deliver our cash flow forecast for the year. During the quarter, we again took advantage of market volatility to repurchase $234 million worth of shares. We also paid out $63 million in dividends, returning a combined total of $297 million to shareholders. Our balance sheet continues to be healthy with a net leverage ratio of 0.9 times. And earlier this month, we refinanced $600 million in senior notes opportunistically, and now have no long-term debt maturing until 2025. As we stated last quarter, our approach given current market conditions is to continue to be aggressive in deploying our capital. Given our strong balance sheet and confidence in the future, we intend to deploy another $250 million in opportunistic share repurchases in Q3 while continuing to actively look at M&A opportunities. Now, let’s move to our improved full year guidance and our outlook for the third quarter. Given the strong business performance in the first half of the year and order backlog, we are raising our full year core revenue growth to an expected range of 8% to 9%, up a full point from our previous guide. This core revenue takes into account the recovery phasing in China, as well as a $35 million, or 55 basis-point headwind due to the conflict in Ukraine. While we’ve increased our core growth expectations, the dollar has again strengthened considerably since our last guide, resulting in estimated currency headwinds of $170 million for the year, up $60 million since our last guide. And the impact of M&A remains unchanged. This results in us maintaining our full year reported revenue guidance range of $6.67 billion to $6.73 billion for the full year. We have also increased our EPS guidance for the full year to $4.86 to $4.93 per share. This is up from the previous range of $4.80 to $4.90 per share, and now represents 12% to 14% growth versus fiscal year 2021. For Q3, we’re expecting revenue to range from $1.625 billion to $1.650 billion. This represents core growth between 7% and 9%. We expect operations in China to ramp and be fully operational before the end of the quarter and continue to accelerate into Q4. Given the strengthening of the dollar, exchange rates are expected to have a negative impact of about 4.7 points on the reported growth in the quarter. Closing out our guidance, in Q3 non-GAAP EPS is expected to be in the range of $1.20 to $1.22, up 9% to 11% versus the prior year. This is based on a 14% tax rate and 300 million diluted shares outstanding. The Agilent team once again performed extremely well in Q2 under some very challenging circumstances. At the same time, our business remains strong, and I’m confident we will continue to deliver strong results in Q3 and through the rest of the year. With that, Mike, I will turn it over to you for some concluding comments. Mike McMullen : Thanks Bob. Before we take your questions, I would like to share some thoughts with you on the current environment. As you know, we’re living in very dynamic times. However, our end markets remain strong. Our build and buy growth strategy is working. What is also very clear is the ability of the Agilent team to continue to deliver in a challenging external environment. We have built a resourceful, quick moving team and a resilient business model that has shown again-and-again, time-after-time, that we can successfully address any challenges or obstacles that come our way. We delivered inline growth, increased margins by 140 basis points and exceeded our EPS expectations during a time of rapidly growing inflation, continued supply chain challenges and the effects of a COVID-related lockdown in a key market. In times like this, our customers want to work with people and companies they can rely on. This works to our advantage, and I remain confident in our growth strategy continuing to deliver, and in the power of the unstoppable One Agilent team. Our growth drivers remain intact, and our business prospects remain strong now, and into the future. Thank you. And now, back to Parmeet as we take your questions. Parmeet? Parmeet Ahuja : Thanks, Mike. Selena, please provide instructions for Q&A now. Operator : [Operator Instructions] The first question comes from Vijay Kumar with Evercore ISI. Vijay Kumar : Hey, guys. Thanks for taking my question. Mike, certainly, you did mention this is an impressive performance given the relative fears on the Street on impact from China lockdowns. So, I guess, one, when you look at your peers, very strong instrument growth across LC and mass spec. Maybe could you talk about how did Agilent's portfolio within that instruments segment perform? What were the trends within the Q? Were there any lockdown impact for instruments and maybe order trends specific to instruments, please? Mike McMullen : Yes. Vijay, thanks for the comments. We're really pleased with the performance given all the teams we're dealing with in the external environment. So, we're going to tag team the response here with myself and Jacob. So, the story is the -- our instrument business is doing very well. And in the call, we highlighted a few areas where we received an outstanding order growth. We talked about the cell analysis business, LC and LC/MS, particularly on the bio side, and I'll have Jacob add some specifics. And absolutely, as I tried to pull out in remarks, I think Jacob's business was disproportionately impacted by the shutdowns that we experienced of a COVID nature in China. So, we're very bullish about the strength of our LSAG business, exiting the quarter with record, record backlog. And Jacob, why don't you talk about what's been going on and why you're excited about the future? Jacob Thaysen : Yes. Absolutely. Of course, the quarter was challenging with the Shanghai lockdown. But overall, we continue to see very strong growth in orders coming in, particularly in our LC, LC/MS business, which I think Mike alluded to also some of the NPIs we came out with approximately a year ago in the LC business. And with that connected with our very strong positioning in the mass spec, we continue to see very strong growth in that aspect. Clearly, with GC and GC/MS was challenged in China this year -- or this quarter due to the situation. But overall, the orders continue to be very strong. So, I'm not concerned about that. And besides that, I think we have seen also for the spectroscopy business that the material science is really a strength for us right now. So overall, very strong performance across the portfolio. Bob McMahon : Yes. And hey, Vijay, this is Bob. Just to kind of dimensionalize that impact when we talk about disproportionate, roughly 80 to 85% of the impact due to the COVID lockdowns was instrument -- LSAG-related. Vijay Kumar : That's helpful, Bob. And maybe one on the top -- lockdown impact in China. The guidance is assuming that $50 million to $75 million comes back in the second half. What gives you the confidence that this is coming back in second half? And where are we in China? Have the markets reopened? Like is your production facility up and running? Because I know you have a GC manufacturing facility, and there have been some questions on perhaps there could be an impact in GC shipments out of China. Mike McMullen : Vijay, how would I lead off the response here? So -- and this ties into why we have confidence about the outlook. So, we are back up and running in Shanghai, albeit on limited capacity. Both our logistics and production facilities are now up to 25% operating capacity. And we've actually started some limited international and in-country shipments. So product is starting to move. And we expect to have -- our view is that the lockdown controls will start to ease over the coming weeks and that we'll be fully operational by the end of the quarter, but we don't want to get too far ahead of ourselves here, and that's why I think Bob will describe a fairly modest recovery assumption in Q2. I'd also like to take this opportunity to call just to do a shout out to our team in Shanghai, who are actually camped out, living at the factory and not being asked and volunteering to do that. So, I've also got confidence in the outlook because I know what this team can do. Bob McMahon : Yes. And to build on that point, Vijay, a couple of thoughts. I mean, we've watched the order backlog very closely. We haven't seen any cancellations associated with this. And as we're ramping up the factory in Shanghai, we also have dual manufacturing capabilities, and we continue to ramp up the factory here in the United States to be able to also provide GC and GC/MS. So, we are expecting, as Mike said, a very modest recovery of that $50 million to $55 million in Q3, the majority of it being in Q4 and then spilling over a little into November and December, but given the backlog and the fact that we haven't seen any of those orders cancelled, we feel like we definitely will get the product back. And if we go back to what happened in the initial phases of COVID, China dropped down pretty substantially and then came back fairly quickly, so. Operator : The next question comes from Matt Sykes with Goldman Sachs. Matt Sykes : Congrats on a quarter in a tough environment. Maybe kind of following up on the instrument question, just dig a little bit more into C&E. Another good quarter there. And a couple of things you called out in terms of advanced materials, battery, semis. I mean, I think traditionally this has been looked at as sort of a highly cyclical sector, but when you're seeing sort of the secular growth drivers within those subsegments, it just seems less cyclical. Could you maybe kind of help us size that sort of cyclicality versus non-cyclicality within C&E? And what could be actually far more durable from an instrument growth standpoint in that segment over the course of this year and into next year? Mike McMullen : So, I'm going to lead off with this and then tag team again with Jacob and Bob. But we completely agree with the premise of your question. In fact, you may recall some of our earlier presentations where we talked about there's elements of the C&E segment that aren't fully appreciated. They're being driven by capacity expansion for supply chain concerns, move to new materials, investments in semiconductor batteries. All you have to do is see what's happening in the whole automobile industry. We're a part of that. And I think it's important to just remind the audience here of the three segments that we have. And advanced materials grew, I think, mid-20s for us. The chemical side grew high teens. We were down in the energy segment. And I think that's been historically the more cyclical element of the business. But I think you need to keep in mind that that's less than 3% -- and energy side, less than 3% of Agilent's total revenues. And perhaps I'll pass it over to you, Bob and Jacob, to -- some commentary on the relative size of those buckets, if you will. Jacob Thaysen : Yes. I can also mention that Agilent has actually historically been very strong in material science. So, we have a very strong market presence both in the semicon industry, especially with our IC-PMS portfolio, but also with the GC, and generally speaking, in materials, in batteries and other renewable energy with our GC business. So I think we see a great potential in that. Bob? Bob McMahon : Yes. Just one other thing. I think on the -- just a couple of things. Energy was down. That is one area that was disproportionately impacted in China as well. So, we also had that impact. So, it wasn't -- it was a temporary phenomenon there. And then you can speak to -- it was -- China was also impacting the chemicals and advanced materials, and they still grew. So, that kind of speaks to the strength of those markets. And these are areas -- I mean it's our second-largest market. We have a leadership presence in these areas. And I would say it's just starting. When you think about the amount of capacity that's needed just for lithium-ion batteries as an example, we're only at a fraction of the capacity that needs to be there. So, these are probably $100 million-plus markets today that are having a long runway, if you just look at the cars and the opportunities here to continue to develop those. And that's just on the battery side. If you look at that, this is a very significant opportunity for us going forward, and we are definitely the leader. Matt Sykes : Great. Thanks very much. I appreciate the color. And then just secondly, on the pricing side. Bob, you mentioned that some of the offsets on the gross margin pressure coming from pricing. Can you just kind of remind us of what your expectations are for pricing this year? And then, in terms of some of the actions you did last year, how quickly are you realizing some of those higher prices that you put in place? Bob McMahon : Yes. It's a really good question. And we continue to be pleased by the ability for our value proposition to be recognized in the marketplace and actually having higher price than what we had initially had at the beginning of the year. If you recall, we had talked about roughly a 1-point year-on-year price realization. Q1, we were ahead of that. In Q2, we actually accelerated beyond that. And I would say most of the pricing that we're realizing today were for actions that we took most in the fall of last year and just starting to see some of the actions that we took in January of this year just given the strength of our backlog. So, it was above that. I would say in our new guide that we actually feel more optimistic about being able to be higher than that 1%. It was higher than that, certainly in Q2, which we needed because we -- our costs have been higher as well in terms of being able to have higher logistics costs given the price of oil and the cost of shipping. But we feel very good about our ability to continue to manage that across our entire portfolio. Mike McMullen : Bob, I think it's also very well. We feel really pleased about the net price realization that's occurred. We also continue to drive productivity as well. So, it's a combination of pricing and productivity improvements we're having across the Company. Bob McMahon : That's right. That's right, Mike. Operator : The next question comes from Brandon Couillard with Jefferies. Brandon Couillard : Mike, biotech end market, very strong again in the second quarter. Just talk about sustainability of trends there and perhaps the impact of NASD specifically on the biotech segment growth. Mike McMullen : Yes. So, I'll have you call that out, Bob. I know that's in our notes. And I think what you'll hear from Bob is it's a broad-based biopharma story with really strong growth in both sides of the market, the analytical lab and NASD. We remain quite bullish on the outlook in biopharma. In fact, we continue to actually gain new business. And actually, I'll have Padraig talk about in a second. We've actually expanded the number of accounts we're serving in the biopharma space. So we're feeling really good about the long-term growth aspects of biopharma as well as the impact it's having on the business right now. You heard me crone about a few of our growth numbers in the prepared remarks. And Bob, before I pass it over to Padraig for some comments, can you remind me what it was? Bob McMahon : Yes. Our biopharma continues to -- first of all, Brandon, continues to be a greater proportion of the overall pharma market. So we're not only disproportionately growing in pharma, but the fastest-growing market continues to be bigger and bigger. It grew 27%. If you took out NASD, that number was still 19%. So, it still says that we have very strong growth there, and we grew backlog. And so, I feel very good about our offerings across both the instrumentation but then also across the entire portfolio of products and solutions that we have. Mike McMullen : Yes. Thanks, Bob. And I thought given the start of this fiscal year of our one commercial organization, maybe Padraig, you think some comments of how us helping to gain further penetration in the biopharma space. Padraig McDonnell : Yes. Mike, we're absolutely seeing that we have a bigger focus on the longer tail of accounts or smaller biopharma accounts as well as the large players. And of course, our strong focus in biopharma was with application support and so on, really helps us with attach rate in that business. And it really helps the instrument trend with that attach rate. So overall, I think we see both services and consumer has been a very strong play and very strong enabler within -- in the biopharma accounts, which we're, of course, getting a lot more access to. Brandon Couillard : Got you. That's helpful. And then, the DGG gross margin at 56% are quite strong. Is that a mix dynamic or pricing? And should we think about mid-50s as sustainable for this business going forward now? Mike McMullen : I'll let you and Sam hash that one out, Bob. Go ahead. Bob McMahon : Yes. I think we certainly benefited from an extremely strong performance there. And Sam and team have continued to drive productivity in the business there. We did benefit from mix, but it -- I wouldn't necessarily put that number in for Q3 and Q4 because if you recall, one of the things that we are starting to do in the second half of the year is ramp up the start-up costs for Train B in our NASD facility and so forth. So -- and that hits our gross margin. But obviously, that has a great payoff in '23 with that $150 million-plus capacity. So, I would say the team had a benefit of mix. They're working on that productivity and activities. But I would say in the second half of the year, we probably will see some pressure because of some of that start-up costs. Sam Raha : Bob, it's -- completely agree with everything you said. So, it is mix, it is volume. By the way, just also affirm we benefited from price. We have some leadership positions in the market, which we are absolutely able to go after. And continued good performance expected, though. As you said, the expectation is going to be a little tougher with NASD Train B coming on board. Operator : The next question comes from Puneet Souda with SVB Securities. Puneet Souda : So, first one, strong pharma, obviously. But just focusing on North America and pharma. Any reason why you shouldn't continue to see that in the second half, too? I mean, the question is more around instrumentation, and it's really around -- we're seeing your peers deliver very strong growth rate in U.S. pharma. So, wondering if there is any element of pull-forward you're seeing here. And should we see a sustained sort of growth rate when we think about North America and U.S. pharma? Mike McMullen : Puneet, happy to answer that question. We're seeing the same phenomena. Pharma remains very, very strong in the U.S., and our outlook remains very bullish for the remainder of this year. Bob McMahon : Yes. To give you perspective, I mean, our Americas business in pharma grew twice as fast as the overall pharma business. And we do -- we will have some comps in NASD that we won't be continuing to post a great -- the strong performance there -- as strong a performance, I should say, because we're ramping up against the capacity, which is what Train B is going to help us provide. But we're still seeing that very strong performance, particularly in the instrumentation that you were just asking about. That has been a standout. Puneet Souda : Okay, great. And then just briefly on another smaller segment, academic and government for you, that was strong in the quarter. Maybe could you just elaborate a little bit there what's driving that? And what sort of -- what are some of the elements of growth that we should continue to expect through the year? Thank you. Mike McMullen : Yes. And as Bob mentioned -- this is Mike. That was a nice surprise for us. I think we came off a 21% compare and still grew 5%. So, we're seeing some positive developments. The funding environment seems to be quite healthy. And even though we had some COVID-related headwinds in the academia segment in China, even that area was strong. So, we think it's continuing to be a healthy funding environment. I think perhaps some of the COVID challenges we had as the society over the last several years has reinforced the importance of funding in those areas. As well, we're seeing return to labs or access for students and others in the lab activity as well. So, I think it's that combination of a healthy funding environment as well as lab access. Bob McMahon : Yes. I think, Puneet, just to build on what Mike was talking about, if you go back to our first quarter results, we had January in our first quarter, and that was just coming off of Omicron -- the wave of Omicron. And we were talking about seeing increased activity starting in February as -- late in January, early February as kids were going back to school. We saw that continue throughout the course of our second quarter and really across the board. So, I think, it's pretty broad-based, particularly in our cell analysis business was one of the -- probably the strongest in that area and saw a really nice recovery after that first wave of Omicron there. And I think it continues to speak to kind of the value proposition that we have in cell analysis. Operator : The next question comes from Derik De Bruin with Bank of America. Derik De Bruin : Hey. It's Derik. Thanks for taking the questions. Just sort of follow-up on some things Puneet asked. So, we've been getting a lot of questions from investors basically asking if what the instrumentation sector is seeing is sort of like a pull-forward of the budget flush earlier in the year because customers are worried about delays in products, supply chains or anything like this. I mean, are you seeing any sort of like unusual order patterns? Or anything that's still suggesting it could be still catch-up orders from 2022 that didn't get -- sorry, for 2021 that didn't get shipped this year? Just like to because the instrumentation numbers have been just so strong across the group. Mike McMullen : No. We haven't seen any indication of that. And I think the supply chain challenges, if you will, are no better, no worse. So, there's nothing that would be -- from a supply chain standpoint that would be encouraging customers. I got to get my order book now or I won't get a product. So we're not seeing that. We do think that some of the markets have seen an increase in their overall inherent long-term growth rate, particularly pharma, biopharma. We actually think some of the COVID challenges we had that I mentioned earlier have actually led to a more positive funding environment in some aspects of our marketplace. And Bob, I don't know if you have thoughts on this as well or... Bob McMahon : Yes. I think from the standpoint of order growth, from a budget perspective, it only counts if they actually get the product, right? And so, if you look at -- the order growth continues to grow faster than revenue, which says, hey, from our standpoint, there's not necessarily pull-forward and it's just robust demand. Derik De Bruin : Got it. So, no sign of over-ordering, for example, that you can see? Okay. And I guess another question... Bob McMahon : Derik, just one other thing, I think, just real quick on that. Yes, because we continue to look at -- we talked about it relative to China, but we look at it on a on a regional and global basis. And again, the order cancellations are at -- year-on-year, they're lower than they were last year. And last year, they were lower than the prior year. So, they continue to be at a very de minimis amount. It's something that we haven't seen more -- somebody is placing orders with multiple vendors and whoever can deliver gets the product first. I think it is consistent across the industry where we just are seeing very strong demand. Derik De Bruin : Got it. Thanks. That's really helpful. And just in terms of some of the competitive dynamics, I mean, it -- some of the other companies in the space have been talking about share shifts and changes going on in the markets and customers going on. I mean, it sounds like your order book is still -- I mean, did I hear you correctly you said mid-20s order growth in China? It doesn't sound like there's any sort of like change in the competitive dynamics going on in that region? Mike McMullen : At least not with us. Bob McMahon : Yes. I was going to say for some of our core technologies, it's mid-20s globally. Mike McMullen : Yes. And we have included analytics on this, Derik, with win-loss ratio. So, we know what's going on with the business, and we can kind of parse through the rhetoric. Operator : The next question comes from Patrick Donnelly with Citi. Patrick Donnelly : Bob, maybe following up on that. Just looking at the guidance -- in terms of the guidance, obviously, you guys are typically pretty conservative. So, it's encouraging to see that 100 bp bump for the year. Can you just talk about, I guess, what gave you the confidence? It obviously implies a decent 4Q ramp. Is that just coming from exactly what you talked about there, the order growth, obviously, China coming back, visibility into that? Maybe just talk to the confidence level. Again, historically pretty conservative. So, that 100-bp bump off an in line quarter, maybe just talk through that a little bit. Thank you. Bob McMahon : Yes. No, you're spot on, Patrick. You hit on the two key points. One is the continued strength in our order book globally, where our orders continue to outpace our revenue. And then you build on that fact we have a strong conviction that the revenue deferred from China we will recover. And so, you see that in both, Q3 and really Q4. You see that step-up because of the strength. I would say our visibility remains high, particularly in the instrument side of the business with record backlogs across all of our technology stacks. Patrick Donnelly : Okay, great. And then, Mike, maybe following up on one of the earlier questions on cyclicality. Mike McMullen : Sure. Patrick Donnelly : We get a lot of questions about recession sensitivity and thoughts about if there is a recession where the companies look like. You guys have obviously transformed the portfolio quite a bit since the last time we saw a real pullback. Can you just talk about the resiliency of the portfolio broadly, how you would think about, what this would look like into a recession? And then again, maybe just expand a little bit on what's cyclical, what's not across the entire portfolio there. And then similarly, Bob, just the levers on the cost side, if things were to slow. Mike McMullen : So I'm going to make a few opening comments here. Then Bob has been doing a nice little set of model here. He has a few slides to reference, so he can give an even more precise answer. But I must use the word resiliency or resilient in my script comments at least 5 or 10 times because -- really to drive the point home that the Agilent business model, business portfolio, is significantly different than the last time that we've seen some type of recessionary pressure on the business. And at this point, for example, to a service business that just posted another 10% core revenue growth where I've got over 10% of my total company revenues under a service contract, whole consumables business, our NASD business, what we've been doing to really change the nature of our business and also deeper penetration in markets such as pharma, biopharma, which tend not to be as affected by a recessionary pressure if that was to occur. And Bob, I know this is something you're a keen student of, and I think we'd be happy to share some more insights here. Bob McMahon : Yes. Thanks, Mike, and you're telling all my secrets with my secret pages here. But I think, Patrick, to your point, this is something -- as Mike was talking about, the portfolio really has dramatically changed. So, if you went back to probably '08, '09, the great financial crisis, our business was much more capital-intense, much more instrument-oriented than it is today. It was probably in the mid-30s in terms of services and consumables. And today, it's closer to 60%. And then, if you also look at it, the pharma and clinical businesses, which are probably more recession-resistant, they're now 50% -- greater than 50% of the entire company. And so, back then, we were pretty close to GDP. And if you just look at what happened in COVID 2020, one of the greatest shocks we had, actually, we still grew 1%. And so, you can see that we've got a much more resilient business model because of the higher concentration, not only in faster and more resilient markets like diagnostics and the pharma business. But then when you look at the types of products that we have, the greater element of services, a lot of them on contract, as Mike just talked about, but then the consumables piece and then the consumables and services a greater proportion of the business than we had before. And then, even in some of those areas that we talked about, the more -- we're traditionally viewed as cyclical, there's some longer-term growth drivers. I think that people are going to still transition from gas-powered cars to electrical cars. There's still going to be a regionalization of investments and capacity around semiconductors and so forth to bring them closer to the markets, whether that be here in the U.S., Europe and other places to diversify that supply chain. Those are things that weren't there in 2020 -- or in 2008-2009. So I think we've got some tailwinds from a market perspective, and the business composition looks very different. Operator : The next question comes from Rachel Vatnsdal with JP Morgan. Rachel Vatnsdal : So, another question around biopharma. Biotech funding slowdowns have obviously been an area of concern. So, could you just talk about if you've seen any slowdown from customers related to funding concerns at all? And then, have you had any concern amongst challenging therapy customers? Or is that business really operating as expected as well? Mike McMullen : Yes. So, let me leave with some thoughts on the biopharma, and maybe you want to jump in on the cell and gene therapy, Jacob. But no, we haven't seen it. We've seen some of the publicized concerns, but it's not showing up in our discussions with customers or in our order book or order funnel. In fact, that's why I pulled Padraig into the conversation earlier because we're actually expanding our penetration in there. So, the funding environment still remains strong for the products and services looking from Agilent. And then, I know that you've got something going on with Lonza right now already on the cell... Jacob Thaysen : Yes. Actually, the -- overall the cell analysis business is doing really well, and we are -- we have a high penetration into biopharma. Actually, one of the areas we didn't have that high was in the Seahorse, where we were very balanced towards academia. And here over the last a period of time, we have launched a new product which is really penetrating into biopharma, really doubled our penetration into the biopharma for the -- especially for the gene and cell therapy area. Also the same for the our LC/MS business where we have a strong presence in the oligo, and we will further improve that over the next period of time here. So, we actually see a lot of strength still in that area. And as Mike mentioned, we also are committed to partnerships. Lonza, where they have built a new platform that can be a bioreactor that can actually -- that could be used out in the in the hospital settings. And we are working with them to improve that to put QC methodologies in there based on our cell analysis technology. So we are -- continue to be very bullish in this space. Bob McMahon : Yes. Hey Rachel, one other thing, it's a question that's come up a number of times. So, we've done a fair amount of analysis. And as Mike and Jacob talked about, we haven't really -- we haven't seen any slowdown in the order book or any -- even in the elongation, any material elongation, in kind of the order conversion cycle, so to speak, in terms of getting from proposal to order. The other piece that I think is probably underappreciated is the penetration that we have actually into this market from a services and consumables base. And so, we have probably some of the highest attach rates in our biopharma businesses just because of the types of instruments that they buy and the amount of service uptime that they require. And as long as those customers don't go bankrupt, we'll still have that. And we haven't seen any material write-offs in any of those things. So, I think people think about it and go right to instrument, but there's a big component of services and consumables there, too, that will continue to be kind of the gift that keeps on giving. Rachel Vatnsdal : Great. Thanks. That's really helpful. And then two more questions from me on C&E. So, last quarter, you listed the C&E guide for the year at high single digits to low double-digit growth. So, can you give us an update on if that outlook has changed at all given the 9% growth this quarter? And then, kind of diving deeper into C&E. So, you and your peers have touched on battery testing being an opportunity in that segment, and it's really starting to get some increasing traction. So can you walk us through that market opportunity and how meaningful that could be over time? Bob McMahon : Yes. So,, our guidance for C&E hasn't changed. We were in line with the expectations for Q3 despite kind of the pushout of some of the China-related business. If you can -- GC and GC/MS have probably a higher concentration into the chemical and energy business. And actually, we still grew 9%. So, we're expecting to see a nice rebound into Q3 and Q4, primarily Q4 as that business comes back, and they're still on track to that double digit. Mike McMullen : And Bob, I think it's fair to say it wasn't just C&E in China. It also was C&E globally where our product is provided by China for those customers. Bob McMahon : And I think in terms of the areas around battery and technology and clean energy technology, and I would throw in kind of semiconductor in that and some of the capacity expansion. So on the battery technology, those are emerging areas that we've talked about for the last several quarters here. It's still an emerging technology. There's only a handful of battery manufacturers right now, but they are significantly increasing capacity around the world. And so, it's a several hundred million dollar kind of market opportunity today and growing quite substantially. Operator : The next question comes from Josh Waldman with Cleveland Research. Josh Waldman : I think one for you, Mike, and then one for Bob. Mike, just want to expand on the instrument backlog questions. I mean, curious if you could provide a bit more context on the backlog strength. Just trying to get a sense on how much of this is a reflection of stronger orders versus potentially a function of tighter supply, maybe even the China GC facility shutdown in fact. You talked on biopharma strength. Are you seeing order -- instrument orders from more cyclical accounts like applied and industrial also run ahead of expectations? Mike McMullen : Yes. I think the story -- the headline story here is transitory impact on backlog build for an element of a COVID-19 lockdowns in China. But the big story -- the big macro story is orders continue to outpace revenue, so strong instrument demand across our two largest markets. And I can recall some of the questions we got earlier this year about, hey, what's the upside in your plan. We said, we think it sits in our two largest markets, pharma and C&E. And that's actually what's happening. So -- and I think we've probably got a little bit larger backlog build right now in C&E just because of the need to be able to deliver GCs from our Shanghai factory, albeit we were able to shift some of our production to our site in the U.S., and that's continuing to ramp. But again, I think the macro story here is really strong overall market environment for orders. And we're feeling really good about our ability to meet our customers' expectations on deliveries. We see customers continue to be satisfied with their relationship with Agilent. I think you saw me try to hit that in my closing comments. And then as Bob mentioned, we monitor very closely the level of order cancellations and continue to be delighted with where that stands. Bob McMahon : Yes. Hey Josh, this is Bob to kind of build on that. If we kind of peeled the onion back and looked at the backlog for LSAG, it's significantly above where it was last year. It's hard to peel out. There have been some longer delivery times because of logistics, but I would say the majority of it is demand-driven. It is not because it's longer delivery times. I mean, even if you took the $50 million to $55 million out -- yes. Even if you took the $50 million to $55 million out, it's still significantly higher than what it would be historically. It's a record backlog even if you take the kind of the onetime $50 million to $55 million China deferral out. Josh Waldman : Okay. And then, Bob, can you bridge us to the new EPS outlook? I mean you beat Q2 guide by $0.01 at the high-end raise, the full year by $0.03. Just curious how strong organic growth and other variables like share repo, FX and margin are being accounted for in the new guide. Bob McMahon : Yes. It's a good question. So, it's $0.01 for Q2 beat and basically $0.01 for Q3 and Q4 with the share repurchase helping us by a couple of points, offset by FX. I would say, it's a prudent guide. Josh Waldman : Oh, prudent guide. Okay. Mike McMullen : We had to get that prudent in today. Didn't we, Bob? Operator : The next question comes from Jack Meehan with Nephron Research. Jack Meehan : I just wanted to keep going on chemical and energy. Just first, how much of the manufacturing headwind was in this end market, maybe versus food or environmental or elsewhere? I'm just guessing the underlying was a lot stronger than the 9% headline for the end market. Bob McMahon : Yes. Your intuition, Jack, is spot on. We didn't -- for purposes of looking at this, we looked at it more on a technology stand rather than kind of end market. But if you look at most of it actually being in China, that's where most of the impact was. And that is a market that's over-indexed to food, chemical and energy and pharma. Those were the 3 biggest markets. Environmental and forensics does have an impact there as well, but it's probably less so than the other three that I just talked about. Mike McMullen : I do recall we had some larger European orders in C&E that will be filled later because we couldn't get GCs to them this quarter -- this past quarter. Jack Meehan : Got it. That's helpful. And then, just following up on NASD. Just the expectations in the back half of the year. You guys are the masters of eking out additional capacity and what you have today with Train A and the Frederick site. But is the expectation kind of revenue is more flattish from here for the remainder of the year? And then, just a quick clarification for Train B, talked about 2023. I think previously, you said end of this year, just don't know if there's any -- I'm reading too much into that, but just any comment on the time line would be great. Mike McMullen : Bob, do you want to take the first one? Bob McMahon : I'll take the first one, yes. So I think if we look at what we have been able to do in Q2, it was very strong growth. it is slightly better than flattish as we've kind of tapped out -- as we're maxed out right now in capacity. But as you point out, the team continues to do a fantastic job to bring out new capacity. I will say that we do have a shutdown -- a planned shutdown in Q3 as we're doing some of the installation of Train B, which will temporarily depress the revenue there. That's built into the guide. And so, there may be a slight sequential downturn, but that's all part of the overall plan. Mike McMullen : And Jack, as I mentioned in my prepared remarks, we had a chance -- actually, Bob and I and Sam had a chance to actually go down and spend time with the team to see firsthand does a great job there to thank them for their work. And they've really done a great job both winning new business as we looked into '23 but also meeting -- also supporting a major expansion of our production, which we've been referring to as Train B. And to answer your question, I would say is, first of all, there's no changes to our outlook in terms of 2023 revenue. We do think it's not likely that we'll start production this calendar year. So, it's most likely early calendar 2023. We've had some great support from the construction teams are supporting our effort here, but also have experienced some COVID-related to supply chain issues. But as you can imagine, Jack, we also were prudent in our initial outlook for 2023. So, don't read into that anything beyond the fact that it may take us a little bit longer to get the plant up and running, the new capacity up and running, but our revenue outlook for 2023 remains unchanged. Jack Meehan : Super. And Mike, you said prudent now a couple of times but was just wondering, could you confirm, is the best still yet to come? Mike McMullen : Absolutely. Thank you, Jack. The best is yet to come. We’re Agilent. Right after this call, I'll be doing an earnings call video for the Agilent team and that might close. So -- and thank you very much for that, Jack. Operator : The next question comes from Daniel Arias with Stifel. Daniel Arias : Bob, I just wanted to maybe follow up on that pricing question and ask if there are areas in the portfolio where the backlog or the lead times are long enough to where you sort of need to go back and requote pricing for the current environment. Or is that not something that you really have in play? And if it is, how successful might you be in doing that? Bob McMahon : Yes. I'll look to my colleague and Jacob, but we don't requote when we price. So we commit to the pricing at the time that the quote was valid or the order. And so, what we're seeing here is, if we take pricing in January, we just started seeing some of that flow through in the late second quarter just given the backlog. So, if we take pricing now, it's really in terms of anticipating you'll expect to see it sometime in late Q4, really into 2023. Mike McMullen : You can write, Jacob? Daniel Arias : And then, maybe just on NAS -- oh, sorry, Jacob. Yes. Mike McMullen : No, no, I was -- just sorry about that. Daniel Arias : I was just going to ask one about NASD and just sort of the way that the order book is building out for 2023. Is that more a reflection of where backlog is for NASD or just the acceptance time lines that you have customers talking about at this point? Mike McMullen : Sam, why don't you speak to that? I know you spent time with Brian on the exact question. Sam Raha : Yes. Happy to. Well, listen, I mean, the backdrop of the market continues to be a strong demand. And we're seeing that both, from existing clients that we have for materials we're making for them right now but as well as new programs. And we are seeing a lot of interest from new pharma clients as well. So, when you look at 2023, it's very healthy demand. In fact, we've already sold a very significant part of our capacity for 2023 and already working on opportunities for 2024 and beyond. And that's just the cycle and the maturity and I think the positive outlook for this segment and our leadership in it. Bob McMahon : I was going to say, hey, Dan, just to build on what Sam is saying, I mean, this is really a class effect. I mean when we think about kind of the therapeutic areas and the proof of now several new products that are on the market, this is really -- you're seeing multiple big pharma and mid-cap pharma looking at therapeutic areas with this technology. And so it is really something that we're a leader in. We're building capacity aggressively. And it is really more a function of the market demand as opposed to anything from our standpoint of capacity. If we add more capacity, we'd have more revenue. Daniel Arias : So, just to maybe put a bow on that, incremental orders that are coming in now, is it possible for those to be delivered in 2022? Or are those 2023 deliveries just by virtue of what you're saying on capacity? Bob McMahon : Yes. We're pretty much capped on 2022. We have all the business we're able to process this year. So it's really about 2023 and beyond at this point. Operator : The next question comes from Catherine Schulte with Baird. Catherine Schulte : I guess, first one on NASD, and then I have a follow-up on M&A. But with NASD, clearly, a lot of interest there, a lot of demand from customers. I think one of your main customers has a PDUFA date coming up in July. How do you think about evaluating capacity expansions even beyond Train B? And what should we be expecting to hear from you guys on that front? Mike McMullen : Yes. We're actively working on the answer to that question right now. So nothing yet to share, but I can assure you there'll be more -- there's more letters in the alphabet than A and B. So you can expect us to continue to invest and expand this business. Catherine Schulte : All right. Perfect. And then, you mentioned in your comments -- yes. You mentioned your comments continuing to actively look at M&A opportunities. Can you just give us your latest thoughts there in terms of appetite and of size and substantial hurdles that you would be applying? Mike McMullen : Yes. I think our appetite remains the same in terms of as part of our Build and Buy growth strategy. We've indicated previously that we have an appetite to do a larger M&A that we done historically. We've talked about it being multiples of the BioTek acquisition. It's really just a matter of making sure we find the targets that make the most sense for us strategically, and of course, making sure they create value for our shareholders. And we have remained disciplined through all the hype of the -- of what we experienced last year with the SPACs and IPOs coming out, et cetera. I think the market is still -- is now becoming a little more rational in terms of -- and I say a little bit more rational in terms of price expectations, albeit not everybody has forgotten what they thought they once were or were 6 or 7 months ago, Bob. So we remain very active nothing to announce, but this remains a priority for the Company. But we're not going to do deals just to do deals. We have to do deals that makes sense for our shareholders. Operator : There are no further questions registered at this time. And that concludes the Q&A session. I'll pass the conference back to Parmeet to conclude the call. Parmeet Ahuja : Thanks, Selena. And thanks, everyone, for joining. With that, we would like to wrap up the call for today. Have a great rest of the day. Operator : That concludes the Agilent Technologies Inc. Q2 2022 earnings conference call. Thank you for your participation. You may now disconnect your line.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,022	3	2022Q3	2022Q3	2022-08-16	4.836	5.009	5.316	5.446	null	24.09	24.47	Operator : Good afternoon. Thank you for attending today’s Agilent Technologies Q3 ‘22 Earnings Call. My name is Tina, and I will be your moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to our host, Parmeet Ahuja with Agilent. Please go ahead. Parmeet Ahuja : Thank you, Hannah and welcome everyone to Agilent’s conference call for the third quarter of fiscal year 2022. With me are Mike McMullen, Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A after Mike and Bob’s comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our third quarter financial results, investor presentation and information to supplement today’s discussion along with a recording of this webcast are available on our website at www.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, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of July 31. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our company’s consolidated financial statements. 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’d like to turn the call over to Mike. Mike McMullen : Thanks, Parmeet and thanks everyone for joining our call today. In the third quarter, we once again demonstrated the strength of our diversified business and the unstoppable One Agilent team. We delivered an excellent quarter, significantly exceeding our revenue and earnings expectations. Revenues of $1.72 billion are up 13% core. This is on top of 21% core growth in Q3 of 2021. Third quarter operating margin of 27.5%. Operating margins continue to expand and are up 150 basis points from last year. Earnings per share of $1.34, up 22%. Our strong results in Q3, coupled with orders continuing to outpace revenues, highlight the ongoing strength of our diversified business. The momentum in our business continues, and we once again raised our outlook for the year. Let’s take a closer look at our Q3 results. From an end-market perspective, our results were once again led by strength in our two largest markets, pharma and chemical energy. Our largest market, pharma, grew 16% versus 27% a year ago. Within pharma, both the biopharma and small molecule segments grew double-digits. The momentum in our C&E market segment continues with Q3 growth of 22%. This is on top of 23% growth a year ago. The C&E market is being fueled by demand in chemicals, along with strong secular demand and ongoing investment within the advanced materials space. We are also very pleased to achieve double-digit growth in the food and environmental and forensic markets with both markets growing 11%. In our last call, I shared our belief that the business impact of the Shanghai COVID-19 lockdown would be transitory. I also expressed that we remain confident about the ongoing strength of our business in China. In Q3, the China delivered 29% growth. These stellar results were driven by continued strong end-market demand, coupled with the faster-than-expected recovery of production and shipment activity following the end of the Shanghai area lockdown. We are also very pleased with its results, which highlights the customer focus, drive and outstanding execution of the Agilent China team. Strength in Americas continued as we posted another quarter of double-digit growth on top of 32% growth last year. Our European business grew 6% against 23% last year despite a 2 point headwind for the curtailment of our operations in Russia. In terms of business unit performance, the Life Science and Applied [Technical Difficulty] revenues of $1.02 billion, up 18% on a core basis. Growth was broad-based but continued strong demand for our LC and LC/MS offerings, where we posted high 20s growth. Our spectroscopy business grew low 30s driven by strength in the advanced materials market. Chemistries and consumables, cell analysis and our GC business each delivered double-digit growth in the quarter. LSAG’s end-market growth is broad-based with particular strength in the pharma and chemical and energy markets. Our pharma results were driven by strength in the biopharma segment, which grew more than 20%. We had an excellent showing at the recent ASMS conference, introducing several important LC/MS and GC/MS instruments and biopharma workflow solutions. These innovative and intelligent LC/MS and GC/MS systems have been designed to make the lives of our customers easier. To build an instrument intelligence and a higher level instrument diagnostics helped maximize system uptime and improve lab productivity by allowing operators to focus on their analysis rather than their instruments. In addition, we introduced an industry-first hydro in net source for GC single-quad and GC Triple-Quad instruments, enabling customers to seamlessly migrate from helium as a supplier gas to lower-cost hydrogen. And rounding out the list of new products announced at ASMS, we introduced the mass Hunter BioConfirm 12.0 software, an integrated compliant workflow, targeted at the fast growing oligo-based therapy development market. These new products have already been well received by customers and represent the latest addition to Agilent history of leadership in mass spectrometry. Our LSAG business also won some important awards during the quarter, including the 6560c i-Mobility LCT system, winning the Scientist Choice Award for Best New Spectroscopy product. Earlier this month, we also strengthened and broadened our advanced materials and biopharma portfolio with the acquisition of PSS, Polymer Standard Service, a leader in polymer characterization. We are extremely pleased to welcome the PSS team and their technology to the Agilent family. The Agilent CrossLab Group posted services revenue of $359 million. This is up 10% core. We grew 10% core even as lab activity continues to ramp in China. Growth in services was again broad-based across services contracts, preventive maintenance, compliance, education and informatic enterprise services. Strong instrument placements and increased connect rates continue to be a driver for our service business as customers continue to see value in our ACG offerings. Another critical important factor on our results is the scale and execution capability of Agilent’s world-class global service delivery organization in service of customers to meet their needs. Agilent was seen as the trusted company to work with among our global customers. The Diagnostic and Genomics Group delivered revenue of $340 million, up 3% core. This is diverse compare a 37% growth last year. The solid results in our clinical cancer testing and NGS businesses were partially offset by COVID testing headwinds in a Q PCR portfolio. In addition, the DGG business in China continues to ramp from the COVID-related shutdowns there. NASD revenues were up modestly in line with expectations. As we noted last quarter, Q3 included the impact of a planned shutdown, our oligo manufacturing line in Frederick, Colorado. The shutdown of Frederick was for both routine maintenance and development of key elements of our Train B. Our new manufacturing line have increased our capacity $150 million plus when fully ramped. While we continue to make good progress in the construction of Train B, we have seen some supply chain-related delays and are now targeted a midyear 2023 go-live, a slight delay. We see continued strong demand for oligo-based therapies as the number of approved drugs continues to increase and the pipeline of drugs in development are targeting disease states with larger patient populations. We are more confident than ever in the long-term trajectory of the market and our business. In addition to these highlights, I’d like to also point the recent release of Agilent’s 2021 ESG report. While we’ve always published our progress in sustainability and addressing societal needs, this year, we’ve taken our approach to the next level. We address these issues a new format that for the first time that looks specifically at our progress in the areas of environmental, social and governance issues. We hope you have a chance to review our progress in ESG by checking out the report on the Agilent website, learning more about how we’re executing our mission to advance the quality of life. Agilent’s Q3 results again point to the strength of our diversified business and the outstanding execution ability of the Agilent team. We continue to bring innovative, differentiated new offerings in the marketplace. Acceleration in digital orders growth continues as well as new customer acquisition. In addition, as we started 2022, we undertook a bold move to create One Agilent commercial organization to further drive customer focus and growth. The strength in our portfolio and the continued strong execution by our One Agilent commercial organization make a powerful combination, and you see it in the results we’re delivering. Customer satisfaction hit another all-time high this quarter. We continue to outgrow the market. As a result of our strong Q3 performance and continued momentum, we’re once again raising our full year revenue and EPS guidance. Bob will share more of the specifics. It’s an exciting time at Agilent with the best yet to come. Thank you for being on the call today. And now I will hand the call off to Bob. Bob? Bob McMahon : Thanks Mike and good afternoon everyone. In my remarks today, I will provide some additional details on revenue in the quarter and take you through the income statement and other key financial metrics. I will then finish up with our guidance for the fourth quarter and fiscal year. Unless otherwise noted, my remarks will focus on non-GAAP results. We are extremely pleased with our Q3 performance. Results were above expectations, and we expect that strength to continue in the fourth quarter. Q3 revenues were $1.72 billion, up 8.4% on a reported basis and up 13.2% core. FX was a 4 point headwind to growth or $76 million. Pricing for the quarter contributed over 3 points of growth year-on-year and improved sequentially. The performance was broad-based as all end markets and regions grew during the quarter. As we mentioned last quarter, the COVID-related lockdowns in China deferred an estimated $50 million to $55 million in revenue from Q2, and we forecasted that revenue would be recovered during the rest of the calendar year. Our team in China did a fantastic job ramping production and shipments faster than expected following the shutdowns. We estimate over half of that deferred total was delivered in Q3, exceeding our expectations. Given the strong performance, we now expect the remainder will be delivered in Q4, which is an acceleration from our thinking from last quarter. The acceleration of the COVID-related shutdown recovery in China contributed to an already strong Q3 for the company. For perspective, we estimate the total business grew double digits, excluding the accelerated recovery. As Mike mentioned, earnings per share of $1.34 were up 22% from a year ago, representing strong incremental flow-through of the better-than-expected revenue growth. This performance is against our most difficult comparison of the year as EPS grew 41% in Q3 of last year. Now let me dive a little deeper into the end markets. Our largest market, pharma, was up 16%, exceeding our expectations. Biopharma grew 18% and small molecule was up 14%. Biopharma is a focus area for us and now represents 38% of our overall pharma business. We expect that ratio to continue to climb over time. In addition, all 3 business groups grew double digits in the pharma segment. And our LC portfolio continues to perform very well, growing 25% in this important market for us. Chemical and energy continued to show strength, growing 22% during the quarter, driven by the chemicals and advanced materials segment of this market. We saw strength in plastics and packaging for chemicals and ongoing demand in advanced materials coming from the markets for semiconductors and batteries. In the food segment, we achieved growth of 11% on top of 12% growth a year ago. Strength in the food market was led by the Americas and China. Our environmental and forensics market also grew 11% during the quarter, driven by the Americas and China. In the Americas, we saw increased funding to support PFAS testing, while China experienced faster-than-expected recovery post the Shanghai shutdowns for GC and GC/MS. The academia and government market grew 5% on top of a 12% comparison last year, in line with expectations. And rounding out the review of our end markets, our business in the diagnostics and clinical market grew 2% against a very strong 28% compare versus last year. While not material at the Agilent level, this market did experience some headwinds associated with COVID-related revenues being lower than last year. Excluding this, the growth would have been mid-single digits in this quarter. On a geographic basis, China led the way with 29% growth driven by underlying demand and a faster-than-expected recovery following the COVID-related lockdowns. And looking forward, demand in China continues to be very strong. The Americas grew 11%, another strong showing, and Europe grew 6%, which exceeded expectations. Now turning to the rest of the P&L. Our team continues to execute at a very high level. Third quarter gross margin was 56.4%, up 50 basis points from a year ago as pricing actions, volume and productivity helped to offset inflationary pressures tied to ongoing supply chain challenges and higher logistics costs. Operating expense leverage, driven by the strong top line and continued attention to cost management, helped to deliver very healthy margin improvements. Our operating margin was 27.5%, up 150 basis points from last year. Below the line, our tax rate was 14% for the quarter as expected, and we had 299 million diluted shares outstanding. Looking at cash flow and our balance sheet. We generated operating cash flow of $326 million in the quarter while investing $82 million in capital expenditures during Q3, driven by our NASD expansion. During the quarter, we also repurchased $323 million worth of shares. We paid out $62 million in dividends in Q3, returning a combined total of $385 million to shareholders in the quarter. Year-to-date, we have purchased over $1 billion of shares. Given the ongoing strength of the business, we believe this is a very good investment. Our balance sheet continues to remain healthy with a net leverage ratio of 1. Now let’s move to our outlook for the full year and the fourth quarter. We now expect revenues for the full year to be in the range of $6.75 billion to $6.775 billion. This takes into account our Q3 results and an improved outlook in Q4, partially offset by an additional $40 million headwind associated with the strengthening of the dollar. This represents core revenue growth of between 9.9% and 10.3%. We are also raising our EPS guidance for the year to a range of $5.06 to $5.08, representing 17% growth year-on-year. This translates to Q4 revenue in the range of $1.75 billion to $1.775 billion. Core growth is expected to be in the range of 10.3% to 11.8%, while exchange rates will be a 5-point headwind, and M&A will contribute 0.1 points. In closing out our Q4 guidance, non-GAAP EPS is expected to be in the range of $1.38 to $1.40, up 14% to 16% versus the prior year. This is based on a 14% tax rate and 299 million diluted shares outstanding. The Agilent team once again performed extremely well in Q3, delivering strong results, driving excellent execution and building a strong foundation for the future. Our diversified business and most importantly, our team have put us in an excellent position to again deliver strong results in Q4. And now back to Parmeet, as we take your questions. Parmeet? Parmeet Ahuja : Thanks Bob. Hannah, if you could please provide instructions for the Q&A now? Operator : [Operator Instructions] The first question is from the line of Matt Sykes with Goldman Sachs. Please proceed. Matt Sykes : Hey, good afternoon, Mike and Bob. Congrats on the quarter. Thanks for taking the questions. Mike McMullen : Good afternoon, Matt. Matt Sykes : Maybe just starting on LSAG, where you had a really good quarter, just interested to know, one, what drove the operating margin expansion in the quarter relative to your expectations last year? And then specifically, I know it was broad-based strength across instrument categories, but was there one or two areas that really surprised you to the upside where you feel is either underappreciated or could see continued momentum in the back half of the calendar year? Mike McMullen : Yes. So I will take the first part of that and we will jump in and have Bob and Jacob add their thoughts here as well. So, I think relative to the strength and why the operating margin was so high is one is, I think we have been – we rightly benefited from the leverage impact of having those higher-than-expected revenues. But more importantly, we have been working on the pricing side and really ensuring that we are receiving the value for our offerings. And Bob, I think we are well over 3 points of price appreciation overall for the portfolio in LSAG, I believe. Bob McMahon : That’s correct. That’s correct. Mike McMullen : And we are – as you may have picked up in my script, it was across the board a great quarter for LSAG and across all product categories. But Jacob, I think a couple really stood out for you, didn’t they? Jacob Thaysen : Yes. I think, as we know, we continue to do really well in the LC/MS space, but this quarter is really a spectroscopy that was standing out. We have – especially in our atomic spectroscopy field we have really seen a lot of momentum based, of course, on the dynamics in the markets, but also the innovation that has been created over the past years. And I think we really see the impact of that these days. Mike McMullen : Yes. I think it was a real race to see who had the highest growth, right, spectroscopy or LC/MS. They both did extremely well. Matt Sykes : Great. And then maybe just as a follow-up, I know Europe – yes, I just say for a follow-up. Can you hear me? Mike McMullen : Yes, yes, yes. Matt Sykes : Yes, sorry. Just for a follow-up on Europe, 6% growth. I think getting a lot of questions on just the spend environment in that region. What are you seeing there? And are there any kind of concerns you might have in terms of demand either from the currency fluctuations or just overall demand in certain end-markets within Europe? Mike McMullen : Yes. Sure, Matt. So we posted a 6% growth rate – core growth in the third quarter, albeit there was actually 2 points of headwind for the containment of our Russian operations. So really it was high single-digit, 8%, on a restated basis. And Europe clearly is a watch area for us, but we haven’t seen any significant signals of movement to the downside. Bob McMahon : Yes. I think, Matt, to build on what Mike is saying, I think in particular we continue to see very strong growth in our pharma business and that really is a global phenomenon. And – but we also saw very nice growth in our chemical and energy businesses as well. And so as Mike mentioned, it is a watch area, but the demand – from what we are seeing in the health of the order funnel continues to be there. Matt Sykes : Great. Thanks very much. Operator : Thank you. The next question is from the line of Brandon Couillard with Jefferies. Please proceed. Brandon Couillard : Hey, thanks. Good afternoon. Mike, could you elaborate just on the core order growth that you saw in the third quarter? And given the strength of order momentum over the last several periods, how does that inform kind of your initial thoughts on ‘23? I mean, should we still think about 5% to 7% still being relevant? And then Bob, should we expect normal 30% to 40% incrementals next year, any headwinds to consider, maybe the new ASP line? Mike McMullen : Brandon, we are probably not ready to talk about ‘23, but what I’ll leave you with is a couple of thoughts here, which is very clearly the business has momentum and/or even though we had the highest revenue quarter ever for Agilent in this recent third quarter, we still build backlog both globally and also in China. So, our orders that exceeded our revenues in those. So, it sets us up nicely, I think for ‘23, but we’ll get to ‘23 guide when we get there. Bob McMahon : Yes. And I think, Brandon, on your core incrementals, I mean, I think that if you look at historically, that’s where we have been. Obviously, we do have some startup costs in ‘23 for NASD and we will spell those out when we get to the numbers. But I don’t think that there is going to be anything fundamentally different on an incremental basis going forward. Brandon Couillard : Okay. That’s helpful. And then on the NASD Train B line, Mike, you said it was pushed out a little bit in terms of the launch timeline. Is that like 1 or 2 months? I thought the plan was already mid next year. And could you elaborate a little more specifically on kind of where the supply chain issues exactly what those are that are kind of pushing the delay? Mike McMullen : I think you got the right timeframe in there, which is a month or two. It’s really been sort of specialized steel that’s required. So, I actually had a chance to see it myself, where you go into a room or you are – the steel pipe fitters are working and they are getting the area ready. They can’t close things off, because they are missing one valve or something. So we have had bits and pieces that have been missing that actually caused us certain delays. I mean, the team has been all over. I think the global supply chains are pretty well publicized, but we thought it was – we thought we should in the spirit of transparency let you know we are still on track for revenue coming out of the facility in ‘23, but maybe a month or two later than you thought initially. Bob McMahon : Yes. And I think, Brandon, there is one more important piece. I think based on what we know today, we still expect to be at capacity at the exit of FY ‘23 as well in terms of the ramp up. Brandon Couillard : Great. Thank you. Operator : The next question is from the line of Vijay Kumar with Evercore ISI. Please proceed. Vijay Kumar : Hey, guys. Congrats on a really strong quarter here. Hi, Mike. Thank you. Congrats on the print. And one maybe on the guidance here, Q4 at the midpoint is 11% organic. You guys just said 15%. The comps will get easier for Q4. I am curious sequentially, when you think about it, is the change just because of the cadence of how the China deferred revenues were recognized more in 3Q versus Q4? Can you just talk about the sequential assumptions here for the 4Q guidance? Mike McMullen : Sure, Vijay. And again, we are very, very pleased with the print. So thanks for the feedback. And Bob, we didn’t use it in our script, but I think the word prudent may apply to our Q4 guide as well. Bob McMahon : That’s right. Yes. I think, Vijay, if you think about kind of the moving pieces within China, what we did was we pulled forward some of the revenue that was deferred into Q3, but we also pulled Q1 revenue into Q4. So, Q4, I would say we didn’t have a material change one way or another. We actually feel very good that we are going to realize that full $50 million to $55 million here in the fiscal year versus having it bleed a little into Q1. And as Mike said, I mean we are not out of the woods, certainly in supply chain challenges and COVID situations. And so we thought at this point in time, a double-digit core growth is very good but also prudent, as Mike said. Vijay Kumar : I love that word prudent. Maybe one on some of the moving parts for ‘23, Mike and I am not asking for a guidance, but if I look at pricing contribution, I think we started the year at 100 basis points. We are running at 300 basis points. I think that pricing should continue until it annualizes until mid of next year. You did mention orders coming in about revenues. What is the backlog conversion? Is that a 3-month or a 6-month or a 12-month visibility that you have from backlog, any impact from NASD? And sorry, on C&E very strong, but obviously, with the macro, should we perhaps be prudent for ‘23? Mike McMullen : Yes. So, great question, Vijay. So I think I’d like to – the headline here was as way Bob closed off his prepared remarks, we are building a strong foundation for the future. So, we have got – we had record revenues in Q3 yet we still build backlog. And some of that backlog obviously will carry into ‘23. And we – it’s probably a 3 to 6-month visibility for sure on the revenue coming from the backlog. And Bob, I don’t see that. And we agree with your thesis around pricing and the impact it will have on our ‘23 business as well. And Bob, maybe you want to add to... Bob McMahon : Yes. The only thing – I think you are spot on, Vijay. I would say there is not a material change right now in terms of how we are thinking about NASD. And if I think about the various pieces there, they certainly set us up for a good momentum going into FY ‘23. Now there is still some unknowns in terms of kind of the macro environment, but we are expecting to have a stronger than normal backlog. We certainly have that right now and are expecting to continue that into ‘23. And then obviously, pricing is continuing to anniversary and I would expect it to be a higher contributor to growth next year, all things being equal. Vijay Kumar : Understood. Thank you, guys. Mike McMullen : Thanks, Vijay. Operator : Thank you. The next question is from the line of Puneet Souda with SVB. Please proceed. Puneet Souda : Hi, Mike and Bob. Thanks for taking the questions. So, first one just LSAG, obviously, a very strong quarter and I mean, obviously, congrats on the quarter here. When you look at the 25% growth that you are seeing in LC overall, the order book being strong, can you maybe just characterize sort of from an end-market perspective, it seems like biopharma continues to do well. But geographically, can you just characterize – is this contribution from biopharma China in the quarter and how should we think about the sort of order book? Can you maybe characterize the order book more geographically? And do you expect this – again in line with sort of some of the other questions as sort of how should we think about this order book flow through – flowing through into 2023? Bob McMahon : Puneet, you packed in a lot in that one question. But we’ll try to address it. Sorry, Mike. Mike McMullen : I was just saying, maybe you want to take that, Bob. But I think the answer was really across the board. I mean both – I mean clearly, biopharma and pharma, our portfolio is doing really, really well there. And as I mentioned to the team the other day, we just got the most recent auto report, which shows market share movements. And as my Danish colleagues like to say, it was green as a Danish forest. Did I get that right, Jacob? So... Jacob Thaysen : That’s right. That’s right, Mike. Mike McMullen : It was across the board, but I think it’s the same story holds geographically well. So it really is a nice global story. But I think it’s more than just pharma. I know you’re getting some good C&E growth, right, for – in the advanced materials, LC/MS. We posted some really good numbers in food and the environmental market, which also are big users of LC and LC/MS. So I think it was really a broad-based story there, if I remember correctly, Jacob. Jacob Thaysen : Yes. Correct, Mike. I think we’ve really seen good performance across the board, as you’re saying, Mike. And we are also seeing that the customers are really interested in our full solutions. I think PFAS is a good example of where we see a lot of interest right now both right now, but also where we see some of the big builds that is coming through in U.S. where PFAS have a prominent exposure. So we expect to continue to see momentum in that space. Bob McMahon : I think, Puneet, just to build on what Mike and Jacob were saying, I think one of the things you’re really seeing come out in Q3 is just the strength and breadth of our portfolio. And why we haven’t talked about spectroscopy a lot in the past, it continues to be a very important part of our portfolio and solution set. And I think it fits nicely across multiple end markets. And the LC and LC/MS get a lot of headlines, but we’re more than just an LC and LC/MS business. Puneet Souda : Got it. Thanks for that. And then just – I’ll keep it simple for my follow-up. Polymer Standards acquisition, can you characterize sort of what’s the contribution this year? And how does that enhance your offering for columns and sort of biomolecules? And should – how should we think about that overall – acquisition overall fitting into the LSAG group? Mike McMullen : You want to take the first piece of that? Bob McMahon : Yes. Yes, I’ll – it’s not a material business. We estimate that’s less than $10 million annualized today. That’s the 0.1% that we built into our guide for Q4. But more importantly, I think strategically, I’ll let Jacob talk about the merits of the portfolio and how we think it’s going to continue to drive growth for us. Jacob Thaysen : Yes. Thanks for that. And we have a long-standing relationship with PFS, so we knew exactly their strength. And we’ve been very impressed with what they have done in the polymer business for the – for a long period of time. And particularly, our interest was intrigued when we also see polymer science going from advanced material into biopharma, where we see a lot of opportunities. And PFS have done a wonderful job using our instrumentation together with their columns and also an informatics pack they have built to really go after a segment of the market and also the expertise in the field. They have more than 500 application nodes within this field. So we can really leverage that with the strong presence we have across the globe to really accelerate that business opportunity that has been up over the past decades, really. Puneet Souda : Got it. Okay, great. Thanks, guys. Congrats again. Mike McMullen : Thank you. Appreciate it. Operator : Thank you. The next question is from the line of Rachel Vatnsdal with JPMorgan. Please proceed. Rachel Vatnsdal : Hi, thanks for taking the questions and congrats on the nice quarter. Mike McMullen : Hi, Rachel. Thank you. Rachel Vatnsdal : The first up on China – thank you, Mike. Yes. Great to hear that some of that catch-up in China was pulled forward there. And then you also pointed to double-digit growth in the region for that ex acceleration recovery. So first off, can you just walk us through specifically what drove that pull-forward on the catch-up from lockdown? And are you seeing an acceleration of demand catch up in China? And then second, how are you thinking about that longer-term growth within China because that we source of upside for the year? Mike McMullen : Great. So I’ll start, Bob, here. So I’d have to say it was an extraordinary effort of our team in China. I mean people sacrificed and worked tremendously hard. We had people coming into our factories and living at the factories. They slept and worked at the factories for the entire period of when before you couldn’t really get out beyond – back to your local community. So they did that for several weeks both in our logistics operations as well as our factories. And that allowed us to get our global GC production going as well as the import/export of our products as well. So I have to say it really was extraordinary effort of the team that made that happen. And we’re very optimistic about our ability to continue to grow well in China. In Q2, I think we talked about a greater than 20% order rate. We posted a number of 29% growth in Q3. Yes, we still built backlog in the third quarter in China. So I think we’re well positioned for the fourth quarter. And Bob, I said that probably does represent a level of upside potentially with things continuing to develop as we hope. The wildcards from my perspective are how much money could come into the segment from government stimulus. I know they’re talking about some of the things we haven’t seen any specifics. So that would be something that would be there on a positive. But again, our demand really is coming from the core private sector, commercial sector around pharma and C&E. We think those things are sustainable. Bob McMahon : Yes. Exactly, Mike. I think you mentioned Q2 kind of order growth rate, and Q3 was in that same range. And so we’re seeing very strong demand and been able to do a fantastic job of ramping up that capacity, and we expect that to continue into Q4. Rachel Vatnsdal : Great to hear. And then last one for me, just on the C&E segment. So 22% growth is quite impressive, and that growth has really continued to accelerate in recent quarters in that end market. So how should we be thinking about that longer-term outlook for C&E, especially given some of the macro dependence on that portfolio? Mike McMullen : Well, we think that the structure of this marketplace has changed over the last few years. And yes, that’s still a segment that’s tied directly to what happens to the global GDP situation. But we had – it in my comments, there’s secular demand happening here, particularly in advanced materials when there’s investments being made in battery technology, more sustainable materials, semiconductors, onshoring of production. So we think those trends are here for a number of years. I think our view is the sector has probably got a higher growth rate than we viewed it having a couple of years ago because of the secular aspect of growth in C&E. And Bob, what else might you add there? Bob McMahon : I think – as you said, I think one of the things that I think is really important, don’t take ‘22 and take – build it into your model because we don’t think that, that growth rate is going to continue. We certainly are pleased with it. But I think the other more important piece is we have a very strong right to win in the C&E business. We’re a leader in this space and feel good about our portfolio. And as Mike said, this is an area that we are seeing kind of a renewed sense in some of these areas that we do think that has many years to come in terms of investment. Mike McMullen : I’m going to use an undisputed leader in the space. Bob McMahon : I won’t disagree. Mike McMullen : Thanks for the question, Rachel. Rachel Vatnsdal : Great, thank you. Operator : Thank you. The next question is from the line of Derik De Bruin with Bank of America. Please proceed. Mike Ryskin : Great. Thanks for taking the question. This is Mike Ryskin on for Derik. I want to follow-up on your comments on price. Mike McMullen : Hi, Mike. Mike Ryskin : Hi, guys. You sort of indicated that price continues to sort of grow as you go through the year. Is that a factor of the timing of when orders are converted to revenues and when you’re recognizing those revenues? So it’s just more of a dynamic of that? Or is this an incremental price increase that you’re building in as you go through the year? And just alongside that, any comments you could take in terms of reception to price? Any pushback or any particular areas where are you able to take more versus last? Just sort of give us an update on the pricing dynamic as you go through the year. Bob McMahon : Yes. Hi, Mike, this is Bob. I’ll take that ear. It’s the former. And so when we take price, it takes some time to get through the backlog. And so we’re seeing the price realization from the orders that – the price increase that we took back in the beginning of the calendar year. And really, what we’re trying to do is cover our costs. And we’re seeing increased logistics costs and increased material costs. And so we’ve taken it across the board, but also recognizing where the costs are higher, we’ve taken those prices up higher. We haven’t really heard any pushback, I think, as evidenced by our strong order growth. And then also we look very closely at cancellations or – within our order book, and that continues to be very low. And so I think our customers understand why we’re having to raise prices because of the inflationary environment. And I think to date, we’ve been able to actually generate more price than I think we anticipated at the beginning of the year. Mike Ryskin : Okay. Great. And then a follow-up. You’ve commented on the balance sheet that you’re getting the leverage lower and lower. I’ve done a couple of deals here and there in the past couple of years with the defended to be on the much smaller side. So could you talk about your willingness to lever up a little bit to put a little bit more of that capital to work? And if so, what are the types of assets you’re looking for? Sort of are sellers willing to engage in this market? Or is the – how are things proceeding on that front – on the BD front? Thanks. Bob McMahon : Yes. I think we’ve been public about being willing to take on bigger deals than what we have had historically. I think we’re still – we have the benefit of having a very strong balance sheet. We’re going to first invest in our business. We think that that’s the greatest opportunity, but we’re always out on the lookout for M&A. And as you said – I would say the pipeline continues to be healthy. The dynamic has certainly changed in the last 9 months, particularly on the public market side, and I think there’s some good assets out there. It’s probably taken a little longer on the private market side, which is where we tend to focus our efforts. But I can tell you that we have – the beauty of our model is that we have organic growth first and M&A as kind of an adder on top of that. And so it is something that we’re continuing to look at and would be not uncomfortable levering up a little higher than where we are today for the right deal and if the economics work. Mike McMullen : Absolutely, Bob. Mike Ryskin : Is that 3x to 4x lever or... Bob McMahon : I’m not – that’s pretty rich. But I think it all depends on what the right asset and what it looks like. Mike Ryskin : Got it. Thanks. Operator : Thank you. Next question is from the line of Josh Waldman with Cleveland Research. Please proceed. Josh Waldman : Thanks for taking my questions. Just two for you guys. First, Mike, wondered if you could provide more context on the supply chain situation, how supply and cost to track versus your expectations over the last 90 days. Have you seen any relief on supply? And then it sounds like you built backlog in Q3. Curious whether your fourth quarter guide assumes any work-down in the backlog given recent order rates? Mike McMullen : Yes. So I’ll let Bob handle the second question, and I’ll start with the first one. So supply chain challenges are still out there, but our team continues to do an excellent job navigating them, getting the material that we need for our customers. We continue to have very, very low order cancellation rates is something we watch like a hawk. And I think we’re managing the price changes. So I think in the early days of things, we were kind of surprised at what things would cost on the market for chips and others, but I think we’ve now found ways to work that and then offset that with some of the pricing actions that we mentioned earlier. So I think if anything, it’s probably trending in a more positive direction, albeit is still challenging out there. Bob McMahon : Yes. And I would say – on the second question, Josh, I would say, first and foremost, demand continues to be very strong in our marketplace. And so we’re expecting order growth to continue in our fourth quarter. As you know, that typically is one of the larger quarters that we have for our sales organization and certainly for our customers as well. That being said, I would expect maybe some slight degradation in backlog just given, again, the deferral that we’re talking about within China. But don’t interpret that as us seeing anything slowing in the marketplace. Josh Waldman : Got it. And then kind of along those lines, wondered if the group has any initial thoughts on pharma budget flushing this year given the strength in orders from these accounts. Curious at this point if you’re getting any indication that maybe the strength in the order book is reflecting pull-forward or just not seeing that yet? Mike McMullen : Yes. Josh, I’m going to pass this call over to Padraig. He’s the closest to what’s going on. As you know, he heads up our one commercialization addition to running our ACG services business. So Padraig what’s your thoughts on that? Padraig McDonnell : Yes. No, I think it’s pretty steady, Mike. We’re not seeing any pull-forward at this point. And of course, the team are very focused on key end-market workflows where we have the best chance to meet the customer needs. So we’re seeing a very steady-state order rate with not much pull-forward. Josh Waldman : Got it. Appreciate it. Mike McMullen : Welcome. Operator : Thank you. Next question is from the line of Jack Meehan with Nephron Research. Please proceed. Jack Meehan : Thank you. Good afternoon. Mike McMullen : Good afternoon. Jack Meehan : I wanted to ask about the chemical and energy – good afternoon. So the chemical and energy acceleration, my first question is on the chemicals customers. So your commentary sounds pretty bullish. There has certainly been some headlines from some of the big European chemical players that have been a little bit more mixed though. So it would just be great to get your perspective on how you feel about the durability of that customer class and kind of squaring your view versus what we might be hearing from others in the market? Mike McMullen : Yes. That maybe more regionally specific to Europe, where we did see a level of growth a little bit slower than we’ve seen in the Americas and China. So I’d say that’s probably more regionally specific. And as we mentioned earlier on the call, Europe remains sort of a watch area for us because of, obviously, obvious challenges in that region right now. But I think we think it’s pretty durable right now. I mean, I think – remember, the chemical piece is going into some of these supply chains as fabs go up and other things. So it’s fueling some of the efforts in the advanced materials area. Bob, I know that you and Jacob looked at this a little more closely. I don’t know if there’s anything else you’d add to that? Bob McMahon : No. I think you’re spot on, Mike. I mean if we looked across the – all regions grew in C&E as, Mike, you were saying, but Europe was below the average. And so – but I think over time, that investment in some of these areas, we think, is ongoing demand. Jack Meehan : Great. And then it was only a week ago, the CHIPS and Science Act got signed into law. I’m not sure if you have any early perspectives as to what this might mean for Agilent. If you could call out kind of the businesses that you think could benefit from some of the funding that’s going in? And can you just maybe call out what did the advanced materials business grow this quarter? Thanks. Mike McMullen : Yes. So I’m going to – I’ll let Bob handle the second question. He’s got more numbers on the pages than I do in front of him. But relative to the recent enactment by Congress, we see some real upside for us. And we actually were just talking about that before this call. I think the big debate is when is it actually going to release. But Jacob mentioned earlier PFAS. There’s – what we can see there’s some funding in there for PFAS, which will help our LC/MS and GC/MS business and then tied to the chips, both the upstream and downstream side, the semiconductor fabs that play right into spectroscopy strength that that we mentioned as well. And Jacob, perhaps you want to add a few other things. Jacob Thaysen : Yes. I think, I mean, actually, even though spectroscopy and GC are the big winners in the – related to the CHIPS Act, we actually see across the board. It’s both the mass spec business, also the LC/MS that Mike was mentioning and then, of course, a lot of our consumables also. And so we see a lot of opportunities here. I think both the CHIP Act, but also the other bill, the – what’s it called, the... Mike McMullen : Inflation. Jacob Thaysen : And the Inflation Bill here, all of them are driving some of our technologies. So we see a lot of opportunities in that. Now it all comes down to timing here. Mike McMullen : Yes. Bob McMahon : And the answer to your last question, it was above 30%. Jack Meehan : Thanks. Super. Thank you, guys. Operator : Thank you. The next question is from the line of Elizabeth Garcia with UBS. Please proceed. Elizabeth Garcia : Hey, guys. Thanks so much for taking the question. Congrats. Mike McMullen : Sure, Elizabeth. No problem. Thank you very much. Elizabeth Garcia : Yes. Great. So maybe I just didn’t catch it, but I know there was the planned shutdown this quarter for NASD. But just thinking about kind of how we should think about kind of close this quarter and then maybe sequentially as we head into the next quarter, in 4Q? Mike McMullen : Bob, you and Sam want to tag team on this one? Bob McMahon : Yes. So we had a planned shutdown this quarter, expect return to strong growth in Q4 for NASD. Mike McMullen : And Sam, I don’t know if you want to add some comments about what you’re seeing on the market as well? Sam Raha : Yes. Yes. Thanks, Mike, and thanks for the question. I mean, listen, it was a good quarter. We had the planned shutdown you already heard about. But I want to note that we are very pleased with the trend that we’re seeing that increasingly these very therapeutic oligos that we’re working on that the treatment modalities beyond the more rare indications are expanding into diseases for larger populations. For example, you might have seen just the recent news from Alnylam that reported favorable results on their Phase 3 study for patisiran. And this is for patients with ATTR for cardiomyopathy. And as Alnylam’s supplier for the API and patisiran, we’re of course, excited. We also think this is indicative of just generally the trend that we’re starting to see in the promise of therapeutic oligos. And our book of business remains strong as we go into the quarter and as we will go into next year. Mike McMullen : Thanks, Sam. I probably should elaborate a little more, Elizabeth, on the routine. I think it’s also important understand why we were shutting down, right? It’s both for routine maintenance but also a critical milestone in the construction of Train B. So we tied the infrastructure together. So that’s why we’re speaking with confidence about our ability to get revenue in ‘23. Elizabeth Garcia : Great. Great news. And I guess just one more for me thing on the theme of kind of biopharma. So you kind of – you’ve announced the collaboration with APC for real-time process monitoring. We also had announcement Merck around downstream PAT. It would be great to kind of get your thoughts around the space and kind of the work you’re doing here. Mike McMullen : Yes. Yes. I’ll make some high-level comments, and then maybe, Jacob, you want to provide some specific as well. So we love this space. And we’ve been putting a lot of our investments over the last several years targeted at the biopharma space. And you see it reflected now in the growth rates and actually how we’re shifting the mix of our pharma business both in the lab but also plays outside the lab. And Jacob, I know you’ve got a lot of interesting things happening there. Jacob Thaysen : Yes. Thanks for that, Mike. And we are very interesting in the bioprocessing space, especially from the unlatent perspective, where we truly believe that the – that instruments will start to move into the manufacturing. Historically, we have had in the small molecule space, the QA/QC sitting in a different lab. And now we see the opportunity to bring adline online LC and LC/MS technologies into the bioprocessing space itself or manufacturing space itself. And hence, we have decided and we have made collaborations with leaders in that space, Merck being one of them, where we’re developing, of course, based on our individual strength new solutions to address that. But we’re looking at the multiple partnerships in this space here, and we’re really bullish around that. Elizabeth Garcia : Thanks so much. Mike McMullen : Welcome. Operator : Thank you. The next question is from the line of Patrick Donnelly with Citi. Please proceed. Patrick Donnelly : Hey, guys. Thanks for taking the question. Mike McMullen : Hi, Patrick. Sure. Patrick Donnelly : Mike, maybe one for you – hey, how are you? Maybe one for you just on China specifically in terms of the linearity of the quarter. Can you just talk about – I mean it sounds like things clearly picked up as we went, obviously, on the supply side and you guys kind of got back online. Can you talk about the demand environment as well? Obviously, you guys are the only ones who have kind of a full July in the quarter. So just curious what kind of ramp you saw throughout the quarter. And then again, as we work our way through August here, I mean, it certainly seems like the order growth has been encouraging. But maybe just talk about how things trended there throughout the quarter kind of going into this quarter. Mike McMullen : Great question. Yes, sure. Happy to do so. I think it’s a great question. And I’ll pass my response into two areas : orders and revenue. So I think I would say the order intake throughout the quarter was there. It was linear, smooth, no, no big lumpiness and the fact that what we saw in the second quarter as well. So now as you know, the revenue side has been a different story because the ability to get product in and out of China as well as produced in China was affected by the COVID-19 shutdowns. And that’s where we saw maybe a slower start first few weeks of Q3, but then the team’s efforts really started paying off when we were able to get back into our facilities. So I think the ramp rate of revenue had looked at a little different profile throughout the quarter. And Bob, I don’t know if you’d add anything? Bob McMahon : Yes. No, that’s exactly right. I mean if you think about the months in our quarters, May was very light. As we talked about, we were ramping up, and I think we exited May at like 25% capacity. And then the teams really started kicking in in gear as the COVID restrictions started to ease. And July was very strong as they not only got the production up to full capacity, but then were able to not only satisfy existing demand, but also some of that deferral bring it in. Mike McMullen : And they were really focused on meeting the expectations of our customers who wanted the product. And as I mentioned earlier in my earlier comments, we had teams working a lot of overtime, working in the factories over the weekend. So really some heroics that got us back on track. Patrick Donnelly : Yes. It’s encouraging to hear. And then, Bob, maybe one for you just on the margin side. You talked about pricing a few times on the call. Can you just talk about, I guess, the flow-through to the margin side? You basically said it’s offsetting some of the increase in costs. Maybe just talk about the give and take on that front in terms of pricing increases, the cost increases and how we should think about kind of that algorithm going forward on the margin piece. Bob McMahon : Yes. I think if you looked at our 150 basis points year-on-year, it was roughly 50 basis points in gross margin and then 100 basis points of leverage on the SG&A OpEx side. And I think if you looked at that, there was some productivity. As I mentioned, price probably would have kept things flat. And then the other 50 basis points were a benefit of some productivity that the OFS team did and then the volume. That’s the thing that really – I think really helped drive a benefit in gross margin is just the amount of product that was able to be produced through the factories. And so that I think – think about pricing as covering our costs. And then if those incrementals around better-than-expected revenues drove the margin improvement on the gross margin side. What I would say is we continue to leverage the OpEx side to drive our productivity as a company overall. Patrick Donnelly : Helpful. Thank you, guys. Mike McMullen : Welcome. Operator : Thank you. The last question is from the line of Tim Daley with Wells Fargo. Please proceed. Tim Daley : Hi, everyone. Thanks for the time. Mike McMullen : Sure, Tim. Tim Daley : Quickly, wanted to touch back on NASD here. So if we’re just thinking about when we’re past the Train B build-out, things have kind of normalized a bit, you’re starting to leverage those investments and upfront costs here, what’s the clean run rate margin profile to think about in that business, I guess, initially when we get past that capacity build-out here? Mike McMullen : And Tim, that question brought a smile to Bob’s face. I’ll let him answer that. Bob McMahon : I would say very good. I’ll leave it at that. Mike McMullen : The company average, right? Bob McMahon : Yes. Yes. Tim Daley : Alright. I can work with that. And then a quick one here on capital allocation. So another strong quarter of buybacks. Just thinking about the go-forward outlook, how should we be sizing this in our heads? The $1 billion, you’ve already hit in ‘22 with a quarter left to go. Is that a good base for the out-years? Just kind of – just general thoughts on the capital allocation hierarchy as some assets are probably getting a bit cheaper and more attractive here. Bob McMahon : Yes. I mean, I think our methodology really hasn’t changed. I think what we do is invest for growth first internally, and then we look for value-accreting M&A. But if there isn’t anything imminent, we’re also not going to keep cash on the books. And if I looked at historically, we’ve generated roughly 2% of earnings per share growth kind of below the line through share repurchase. And I think that that’s probably a fair way to look at it going forward. But in terms of – to be very clear, our priorities are investing for growth internally and then M&A before we would do share repurchases. And we’re also committed to continuing to grow our dividend as well. Tim Daley : Alright. Great. That’s it from my end. Thank you. Bob McMahon : You quite welcome. Operator : There are no additional questions waiting at this time, so I will turn the call back over to Parmeet for closing remarks. Parmeet Ahuja : Thanks, Hannah, and thanks, everyone, for joining. With that, we would like to wrap up the call for today. Have a great rest of the day. Operator : That concludes today’s call. Thank you for your participation. You may now disconnect your lines.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,022	4	2022Q4	2022Q4	2022-11-21	5.092	5.293	5.541	5.763	null	25.28	26.86	Operator : Ladies and gentlemen, welcome to the Agilent Technologies Q4 2022 Earnings Conference Call. My name is Bo and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, Vice President of Investor Relations. Mr. Ahuja, please go ahead. Parmeet Ahuja : Thank you, Bo, and welcome, everyone, to Agilent's conference call for the fourth quarter of fiscal year 2022. With me are Mike McMullen, Agilent President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group, and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our fourth quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.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 and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of October 31. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. Please note that we have changed the name of the Chemical & Energy end market to the Chemicals & Advanced Materials end market. This change better reflects the mix of business in this market. It does not affect financial reporting in this quarter or prior quarters. 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'd like to turn the call over to Mike. Mike McMullen : Thanks, Parmeet. And thanks, everyone, for joining our call today. In the fourth quarter, the Agilent team continued its strong performance. We delivered an excellent quarter, significantly exceeding our revenue and earnings expectations. Revenue of $1.85 billion is up more than 17% core. Our strong top line performance helped deliver fourth quarter operating margins of 29.1%. The operating margins continue to expand despite the inflationary environment and the strengthening dollar and are up 260 basis points from last year. Earnings per share of $1.53 were up 26%. These Q4 results mark an outstanding finish to another strong year for Agilent’s fiscal 2022. The full year revenue of $6.85 billion, we delivered core revenue growth of 12%. This is on top of core revenue growth of 15% in 2021. Our operating margin continued to increase and a 27.1% for the year, up 160 basis points. Earnings per share of $5.22 per share, up 20% for the year. Rx result this year highlight the ongoing strength of our diversified business and shine a light on the multiple growth drivers we put in place over the years. They also continue to demonstrate the outstanding execution capabilities of the Agilent team. Throughout the year, we navigated market uncertainties, inflation, COVID-related shutdowns and supply chain and logistics constraints. Our strength is broad-based with all three business groups growing double digits for the year. All major geographies and regions grew double digits in FY '22 after adjusting from our exit from Russia. This was highlighted by China leading the way, growing 18%. From an end market perspective, all markets expanded led by excellent growth in our two largest markets, Pharma and Chemical & Advanced Materials. All in all, it was an extremely good year for Agilent. Let's now take a closer look at our fourth quarter performance, starting with end market highlights. During Q4, our performance led by 20%-plus growth in three of our six end markets. Pharma, our largest market, posted 20% growth on top of 21% in Q4 last year. The Chemicals & Advanced Materials business grew 27%. We saw robust demand in chemicals, along with secular growth in semiconductors, batteries and other advanced materials. The food market also grew 20% on a strong end-of-year demand in China that have been previously delayed by COVID-related shutdowns. On a regional basis, China led the way for us with stellar 44% growth as demand remains strong. Business activity continued to recover and the Agilent team worked quickly and effectively to start working down the backlog including delivering remaining shipments deferred due to the Shanghai COVID related shutdown in Q2. Europe also exceeded expectations by delivering double-digit growth in the quarter, coming in 14% higher than a year ago, with broad strength across our markets, highlighted by low 20s growth in pharma. Looking at our performance by business unit, the Life Science and Applied Markets Group continued its outstanding performance and posted revenue of $1.12 billion. This represents growth of 22% with the instrument business growing 24% and our Consumers and Applied business growing 15%. We also saw excellent low 30s growth in our LC/MS instruments business as our solutions continue to resonate with customers. LSAG was able to build our leadership implied markets with spectroscopy growing in the low 20s and the GC and GC/MS business growing in the low 30s. In addition, Agilent is doing its part to help customers monitor and manage microplastic in the environment as we released the latest version of the 8700 LDIR chemical imaging system. This unique system has been optimized specifically for the analysis of microplastics in environmental samples. The ads on Agilent CrossLab Group posted revenue of $381 million in Q4. This is up 14% core with broad-based strength across our entire portfolio of offerings. Pharma and Chemicals & Advanced Materials both grew mid-teens for ACG. On a regional basis, China led the way with high 20s growth as business continued to recover. ACG also delivered double-digit growth in the Americas. ACG has delivered double-digit growth for us every quarter this year, and our engagement large enterprise customers continues to accelerate. Through its deep understanding and insights into lab operations, the ACG team continues to build strategic partnerships and long-term relationships that maximize customer value and provide ongoing demand for services and support. The Diagnostics and Genomics Group delivered revenue of $352 million, up 8% core. DGG's results were led by strong growth in the low 20s for NASD. As expected, our NASD business delivered high quarterly revenue on a sequential basis given the plant shutdown last quarter. Our genomics portfolio also posted solid results, growing low teens and pathology grew mid-single digits. On a regional basis, DGG also delivered mid-20s growth in China. In addition to these business group highlights, during Q4, Agilent was recognized by the World Economic Forum Global Lighthouse Network as a world leader in advanced manufacturing. Agilent's manufacturing facility in Singapore received this recognition for deploying innovative technologies at scale in the manufacture of scientific instruments, driving productivity, while advancing sustainability. Also, we are extremely pleased to announce a new multimillion-dollar partnership with Delaware State University, a leading historically black university. The work we will do together with DSU is geared towards increasing the number of underrepresented students entering stem fields. In addition, Agilent is certified as a great place to work by the Great Place to Work Institute in more than 20 countries and regions around the world during the quarter. This recognition distinguishes Agilent as a top employer based on an independent survey of its global workforce. Recap in 2022, we had another very successful year, not only on delivering excellent financial results, but building for the future. We continue to drive innovation focused on supporting our customers and executing our Build and Buy strategy to outgrow the market. The Agilent team continues to deliver. We have built a resilient company with multiple drivers for growth and target investments focused on high-growth areas. We have an unstoppable One Agilent team that can take on any challenge and execute at an extremely high level. As we look ahead to 2023, we believe these qualities are a winning formula for continuing to deliver in an increasingly uncertain economic environment. Bob will now share more detail on the quarter and the year along with our initial view on expectations for fiscal year 2023. After his remarks, I will rejoin to add some final comments and perspective. Thank you for joining us today. And now, Bob, over to you. Robert McMahon : Thanks, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter and the year as well as take you through the income statement and other key financial metrics. I'll then finish up with our guidance for fiscal year 2023 and the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. We are extremely pleased with our Q4 performance and finished the year on a very strong note, exceeding our expectations on both revenue and earnings per share. Q4 revenue was $1.85 billion, up 17.5% core and 11.4% on a reported basis. During the quarter, we saw the dollar continue to strengthen. Currency exchange rates were a 6.2 point headwind to growth or $103 million. The contribution from M&A was as expected, adding 0.1 point to reported growth. Our performance was again broad-based as all end markets and regions grew during the quarter. Orders also grew again during the quarter, while outstanding execution from our order fulfillment and supply chain teams enabled us to start working down our record backlog. As we enter FY '23, our backlog is still elevated and helps provide good visibility and confidence in our outlook going forward. Now I'd like to share additional details on our end markets. Results in our largest market pharma were very strong. This market represents 37% of Agilent's revenue and grew 20% in the quarter. Biopharma grew 18% and small molecule was up 21%. Looking forward, we expect the pharma end market to grow high single digits in FY '23. Chemicals and Advanced Materials led growth for us during the quarter at 27%. This compares with 11% growth in Q4 of last year. All three submarkets, Chemicals, Advanced Materials and Energy had strong growth in the quarter. All regions grew as well, led by China. Demand continues to be driven by investments in advanced materials, driving secular growth opportunities in batteries, alternative energy and semiconductors. While not immune to macro uncertainties, we believe these secular drivers in Advanced Materials will continue, helping to drive mid-single-digit growth for this market next year. We delivered growth of 20% in the food market led by China as our results continue to benefit from the recovery of revenue delays due to COVID-related shutdowns in Q2. During FY '23, we expect the food market to normalize and grow in the low single digits after two years of very strong growth. The Environmental & Forensics market posted 18% growth with particular strength in the Americas. This result was driven by increased governmental spending helping to drive technology refresh for newer applications like PFAS testing. Europe and China also posted impressive double-digit growth in the quarter. We see PFAS-related funding and demand continuing to be a driver for this end market and expect mid-single-digit growth next year. Our business in the diagnostics and clinical market grew 6% against an 11% compare last year. Growth was led by Europe and China, while Americas grew low single digits. We also expect to see mid-single-digit growth in this market in FY '23. The Academia & Government market grew 3%, led by continued strength in our service business. This market grew 3% overall for the year as well; and looking forward, we expect similar growth in 2023. On a geographic basis, China led the way with phenomenal 44% growth in Q4, driven by underlying demand across multiple end markets and our continued ability to quickly recover deferred revenue from Q2. As we have discussed the last two quarters, the COVID-related lockdowns in China earlier this year deferred an estimated $50 million to $55 million in revenue from Q2 into future quarters. This recovery started last quarter, and our team in China continued their outstanding work to ramp production and shipments quickly in Q4. We've now fully worked through this deferred revenue a full quarter earlier than originally anticipated back in Q2, a true testament to the entire team. We estimate this recovery had a mid-single-digit positive impact to China's Q4 growth. So even excluding this, our business performance in Q4 was very strong. Now looking ahead to next year, we expect China will continue to be a key growth driver for us. And as Mike mentioned, Europe grew a very solid 14%, which exceeded our expectations. We also posted 8% growth in the Americas, driven by Pharma, Chemicals & Advanced Materials and strong growth in the Environmental & Forensics market, partially offset by Academia & Government. And lastly, the rest of Asia grew 12%. Now turning to the rest of the P&L. Our team continues to execute at a very high level. Fourth quarter gross margin was 56.3%, up 40 basis points from a year ago. Volume leverage, along with pricing, helped overcome continued inflationary pressures and higher logistics costs. Our operating margin was 29.1% in Q4, up 260 basis points from last year. Below the line, our tax rate was 14% for the quarter as expected, and we had 298 million diluted shares outstanding. Putting it all together, earnings per share were $1.53 for the quarter, up 26% from a year ago, as Mike mentioned. So in summary, Q4 ended with 17% core top line growth and 26% EPS growth, a very strong finish to the year, where we had revenue growth of 12% and EPS growth of 20%. Now some metrics on our cash flow and balance sheet. In Q4, we generated operating cash flow of $448 million, while investing $70 million in capital expenditures. The CapEx spending is driven by our continued scale-up of Train B for our NASD expansion. And in the quarter, we also paid out $62 million in dividends and repurchased shares valued at $135 million. For the year, we returned almost $1.4 billion to shareholders through $250 million in dividends and a bit more than $1.1 billion in share repurchases. And as we've indicated before, given the ongoing strength of the business, we believe these share repurchases represent a very good long-term investment. Our balance sheet continues to remain healthy as we end the fiscal year with a net leverage ratio of 0.8. Now let's move to our outlook for the upcoming fiscal year and first quarter. Now looking forward to 2023, we entered the year with business momentum and a very healthy backlog. We also acknowledge the increasingly uncertain macro environment, rising interest rates and currency headwinds and have reflected that in our thinking based on what we know today. For fiscal year 2023, we expect revenue in the range of $6.9 billion to $7 billion as we have significantly greater currency headwinds since the last we spoke. Core growth is expected to be in the range of 5% to 6.5%, in line with our long-range goals. Currency will negatively affect reported growth by 430 basis points or roughly $295 million during the year based on fiscal year-end rates. And to help with your modeling at a business group level, this revenue guidance assumes mid-single-digit core growth for LSAG, mid- to high single-digit growth for DGG and high single-digit growth for ACG. And despite the ongoing currency headwinds and a continued inflationary environment, we are expecting operating margin expansion for FY '23. Now below the line, we expect $40 million to $50 million of net expense, a tax rate of 13.75%, which is slightly below this year and 297 million shares outstanding. Fiscal 2023 non-GAAP EPS is expected to be in the range of $5.61 to $5.69. This range represents a growth rate of 7.5% to 9% versus the prior year and incorporates an estimated 4 percentage point headwind due to currency net of our hedging activities. We are also expecting $1.4 billion to $1.5 billion in operating cash next year and CapEx of roughly $300 million based on currently approved expansion projects, primarily Train B for NASD. We have also announced raising our dividend 7%, providing our shareholders with another source of value. And finally, for Q1 2023, we expect revenue in the range of $1.68 billion to $1.70 billion. Core growth is expected to be in the range of 6.8% to 8%, while currency will be a 6.6 point headwind to reported growth. This outlook for the quarter incorporates the impact of the timing of Lunar New Year this year. First quarter 2023 non-GAAP earnings per share expected to be between $1.29 and $1.31. Mike will speak to this further in just a minute, but our diversified business model and the strength of our team are key assets for Agilent. These two elements produced an outstanding Q4 and a full year 2022 and they have put us in an excellent position to again deliver strong results in the coming year. And now I will turn the floor back over to Mike for some closing comments. Mike? Mike McMullen : Thanks, Bob. Today's results are a strong indication that Agilent has the right growth strategies, the right team and right culture to continue delivering strong results. Our customers know we are reliable, resilient and extremely quick in reacting to meet their needs. The Agilent team continues to work hard to earn their trust. Looking ahead, we are all seeing increasing economic uncertainty. However, this company and team have built to successfully navigate any economic challenges we may encounter. Throughout the pandemic, we have stated that Agilent will emerge as a stronger company. Today's results are yet another proof point that we are well on our way in this journey, and we're not done yet. We continue to prioritize investments in growth. We are a resilient company with multiple growth drivers and unmatched execution capabilities. I'm quite confident we will continue to react quickly to changing conditions and deliver at a high level. Thanks for being on the call. And now I will turn things back over to Parmeet as we take your questions. Parmeet? Parmeet Ahuja : Thanks, Mike. Bo, if you could please provide instructions for the Q&A now? Operator : [Operator Instructions] And we'll take our first question this afternoon from Vijay Kumar of Evercore ISI. Vijay Kumar : Congratulations on a really impressive finish to the year here. Mike or Bob, maybe if I could start with the high-level fiscal '23 guidance question. 5% to 6.5% organic for the year, that's coming off of some tough comps. Maybe just talk about your assumptions for end markets which you're expecting for forma chemicals and advanced materials, et cetera. Just given your commentary on orders and backlog, it looks like the start 5% to 6.5%, it seems reasonably conservative. Mike McMullen : Why don't you take that? Robert McMahon : Yes, Vijay, yes, I appreciate the comments on the end of the year. And as we mentioned, we're moving into FY '23 with momentum. And really, what we've seen across our business in FY '22, we are expecting to continue into FY '23. Broad-based business results really led by our two largest markets, Pharma and Chemicals & Advanced Materials. And when we think about those, those are both in the mid- to high single-digit growth range and with growth in the other areas as well. We're expecting all of our markets to grow and really given some of the secular drivers that we've seen this year and continued strength in the pharma business. Mike McMullen : Hey, Bob, I would just add, too. This is our initial guide for the year. We're at the top end of our long growth model in terms of the long-term growth aspirations we laid out at our last [AID] coming off two straight years of double-digit growth. And its initial guide of the year, Vijay. And you probably hear a few times they were being prudent given the increasing economic uncertainty out there. But I would point out that if you look at the core growth rate assumptions, the Q1 '22 guide is actually higher than the full year number. Vijay Kumar : Mike, I appreciate the prudent comment. And if I could just have one follow-up on. On margins, that EPS guide came in about Street models despite FX headwinds, it looks like coming in about Street models. What are you assuming for pricing inflation? And what's implied from margin expansion in the guide? Mike McMullen : You want to take that, Bob? Robert McMahon : Yes. Yes. So we ended Q4 in a very good position here with a little over 4% and that has ramped throughout the year, and we're forecasting roughly about a little over 3% in price next year across our book of business. And we are assuming margin expansion, Vijay, next year. And when we look at that 7.5% to 9%, what we are seeing is kind of unprecedented strength in currency. And we do hedge, but our hedges become less effective over time. And we're -- that's absorbing a 4-point headwind. So if you added that back in, it would be closer to 11.5% to 13% EPS growth. Operator : We'll go next now to Matt Life with Goldman Sachs. Matt Sykes : Appreciate it. Maybe I just want to dig a little bit more into the margins. You guys mentioned operating margin expansion expectations for next year. But maybe talk a little bit about where you see those drivers coming from, maybe on a segment basis or an end market basis? Where do you feel there's more upside to expand those margins at the group level and where the impact will be felt? Robert McMahon : Yes, I think what you would see is a continuation of what we've been able to do this year. And what we've been able to do is cover the increase in costs associated with the inflation through the pricing activities, but then really leveraging our operating expenses. And you saw that in full display here in where we did have operating -- gross margin expansion, but you also saw a majority of the margin expansion in the operating expense. And I think that that's 1 of the benefits that we have through the investments that we've been making in digital over time, as Mike mentioned, as well as the continued effort around the One Agilent focus. So I would expect us to continue to see that I do think that the scale that we have across our businesses will continue to provide benefits next year, certainly, as we drive more business into our service organization. I do think that we will continue to be able to leverage that footprint. And then if you look at the higher growth areas that we've been investing in, in the instrumentation side of the business, those are our more profitable businesses. And we are also looking to continue to attach -- increase our attach rates both on the services but then also consumables, which are 1 of our highest profit. And I would say in Diagnostics, the DGG business, we are facing kind of some of the start-up costs with our Train B next year. But if you peel the onion, I would say, fundamentally, our business is performing very well there as well in '23. And I would expect margin improvement outside of kind of some onetime start-up costs that we would have in bringing that train up and running in the second half of the year. Matt Sykes : Got it. Then maybe a question on the Chemicals & Advanced Materials. You guys made a comment in the slide deck about increased demand in the energy business during Q4. Could you talk about the drivers behind that? And what your expectations are, specifically for the energy market as we move through '23? Mike McMullen : Yes. So we really wanted to make sure that it was clear that across all three segments of the CAM segment, we saw growth. And what you're seeing going on here is a lot of investments in the HPI industry given the strength of their businesses. So -- and I'll have Jacob jump on this as well, I think their businesses with the ability to invest and they have a lot of deferred investments over the years, but also a lot of new money going into renewable and green energy initiatives as well. Jacob Thaysen : Yes, I think you're right, Mike. I think we're seeing, as you mentioned, there has been some pause in the capital equipment investment over the years, and we're definitely seeing that coming back. So -- and both in the HPI, but also in the renewable energy, we continue to see a lot of strength, and we believe that will continue forward. Mike McMullen : Yes, we're expecting that trend to continue into '23. Operator : Ladies and gentlemen, we'll go next now to Puneet Souda of SVB Securities. Puneet Souda : Mike, Bob, thanks for taking the question. I mean to say this is impressive as a quarter is an understatement in the sort of uncertain times. So first of all, congrats on the quarter. Mike, so on China, impressive results there. Can you just parse that out a bit? I know you talked about gas chromatography delays were there, and those are -- it looks like they're fully booked in this quarter and the revenues booked or food is also impressive. Could you maybe talk about the order book visibility you have in China and your growth expectations there going forward despite the Lunar Year? And also, what is the longer-term expectation for overall growth in China, just given the multiple end markets that are working so well for you in the quarter? Mike McMullen : Yes, sure, Puneet. Happy to respond and Bob and I probably can have tag team on this. But again, thanks for your earlier comments, brought a lot of smiles in the room here. Yes, we were quite pleased with the results for China, not only in the quarter but for the year. And I think it's important to know the 44% print we had in Q4 wasn't just about catch-up from deferred revenue due to the COVID; and again, shutdowns. And again, it points to the fact that when you do see those types of things happen, eventually, the business does materialize. We didn't lose any business. I think the strength of the business continues to be there across multiple end markets, really been led by pharma, chemical. And then we think that the food market will probably normalize to kind of the traditional growth rates in China. But expecting pharma and the CAM marketplace to be strong, in particular, a lot of -- we expect a lot of business on the renewable energy and HPI side in China as well. So that Advanced Materials segment, we've been talking a lot about, we think is going to sustain the growth in China in '23. But I think we're kind of looking at maybe high singles for China for next year. Is our initial thinking? Robert McMahon : Yes, that's right. And Puneet, I would say the strength that we saw in Q4 in China was really across the board across all the major technology platforms within the instrument business. The consumables business was incredibly strong as well. And then the services business, if you recall back in Q3, we said that activity hadn't fully come back, was fully back in Q4. And so we saw very strong there. And not to forget, DGG. We had double-digit growth in our Diagnostics and Genomics business as well. So it was really broad-based. And you talked about visibility, orders continue to grow in China. And we have very good visibility in -- certainly into the first half of this year. And as we think about the secular growth drivers, those are still in place. If you think about the investments that are made in technologies around the biotechnology areas, but increasingly actually in advanced materials and some of the secular drivers around batteries and lithium-ion production and so forth. And we would expect that to continue into next year for sure. Mike McMullen : Bob, I just have to think to your comment about the DGG business. Just a reminder, Puneet as we came into this year, we created a unique structure as part of our one commercialization to have all of our China businesses we put into one single leader. Really, the idea was to add scale to the parts of our business, which we felt underrepresented, and you saw the payoff already starting to happen with the growth rate in DGG, for example. Puneet Souda : That's great. Just quick one on pharma. I mean this was the first quarter in a long time when I saw small molecules growing faster than biomolecules. Can you elaborate a bit what's behind that dynamic? Mike McMullen : I thought it was really good newsprint because we've been talking lately about that while we still continue to believe that biopharma large molecules will have the inherently higher growth rate, we've also been pointing the fact that the small molecule will continue to have growth. And I think it speaks to some of the strength of particularly our LC and LC/MS business in small molecule. And Jacob, I'll have you add a few comments here in a second. I wouldn't overread too much in that particular quarter. It's just one quarter. I think we would expect to continue to see over time a differentiation in the growth rates between biopharma and small molecule, but small molecule by no means is dead and it's an opportunity for growth. And I think we've got a great portfolio there, Jacob. Jacob Thaysen : Yes. Right, Mike. Oh, sorry, I was on mute here. So sorry, this was Jacob coming with some comments. But you're absolutely right, Mike. We continue to see the small molecule being -- while it's still the largest part of our business, of course, we see biopharma as a great opportunity, but we take the small molecule business very seriously and continue to build full workflow solutions for that, particularly for the LC and LC/MS space, and that's where the growth is coming from. Mike McMullen : Thanks, Jacobs. Operator : We go next to now to Brandon Couillard from Jefferies. Brandon Couillard : Mike or Bob, I can't remember. You mentioned the PFAS market several times in the prepared remarks. Can you just give us a ballpark size of how big that market is right now, maybe relative growth rates and whether it's primarily a U.S.-centric market or if it's developing in other parts of the world as well? Mike McMullen : So Jacob, how if you and I tag team on this? We're viewing this, I think, about a $200 million market, growing double digit. We think while there's -- a lot of the growth is centered in the U.S., there's also going to be very strong growth in the U.S. and perhaps some in China. So we actually see this as a sort of a global story with initial big legs in U.S. and Europe and the growing interest in China. But let me see if I got that right, Jacob? Jacob Thaysen : Yes, you're absolutely right, Mike. It's a huge market. And in fact, there was more than 4 billion put aside in the infrastructure build for PFAS testing, not only for analytical instrument, obviously, but overall for PFAS testing. So this is a great opportunity. And it's particularly a great opportunity for us as this requires -- it's very high-sensitivity instruments you need and you have run very easily into issues in your sample, perhaps you don't take that very seriously. So really building out the flow solutions and have something that works every time. We spend a lot of energy on that. And in fact, we have a solution now that lives up to all the EPA regulations and our customers just love it because it's just plug and play, and it works very well for them for very sophisticated ways of doing business here. And on top of that, while most of the opportunity sits in the LC/MS space. We're also starting to see the GC/MS as an opportunity to look at testing of PFAS molecules in the year and all the volatile, so which speaks extremely well to our opportunity. Mike McMullen : Yes. Thanks, Jacob, for those build. And this is the first time in my tenure where that we've seen this kind of money coming in, in the U.S. marketplace with the government support. So it's a very encouraging trend, and we think that trend is going to be with us into '23. Brandon Couillard : That's great. Then a couple for Bob. Just number one, can you just quantify the Lunar New Year impact in the first quarter on a year-over-year basis. And then with supply chain loosening, which it sounds like they are, what are the implications for that in terms of working capital as you move through the balance of the year? Robert McMahon : Yes. Brandon, thanks for the questions. Yes, the Lunar New Year is roughly a little over 0.5 point impact year-on-year for headwind had in our first quarter. It starts in mid-January this year versus the first of February last year. And so -- and for those that will come back to us in the second quarter. And then I think in terms of supply chain, -- it is -- we think it is improving, but it's not back to kind of pre-COVID levels, both on the standpoint of being able to get products to customers, but also procuring raw materials and the costs associated with that. We do think that that's going to improve over time. I would say I wouldn't expect any changes -- any material changes certainly in the first half of the year and then maybe some slight changes as we get into the back half of the year. But -- we do think it is improving, but we've increased our stocks of critical supplies. And I don't think it will go back to pre-COVID levels in terms of how we're running that just to ensure that we have the ability to flex when we need to if there were challenges around logistics across the world. Operator : We'll go next now to Daniel Brennan of Cowen. Daniel Brennan : Congrats on the quarter. Maybe just the first one, just on LSAG. Another really impressive quarter with 24% growth on the instruments. So the mid-single-digit guide, obviously, you're up against tough comps, but it does reflect the notable slowdown from what you guys have been doing. And maybe just walk through a little bit of what kind of drove the strength this quarter kind of end market versus Agilent specific? And then is there just a healthy degree of conservatism baked in for the guide? Or is it really just tough comps? Robert McMahon : Yes. I would say at the beginning, Dan, we're at the beginning of the year, there are uncertainties out there, as I'd repeat what Mike said, it's beginning of the year and that's a prudent guide. I would say that there's an element of tough comps, particularly in the second half of the year as we have been building -- taking down the backlog certainly in China, which was China just a deferral from Q2 into the second half of the year. But I would say, fundamentally, the demand is still strong. And I think across the end markets, our expectation is that the Pharma and Chemical & Advanced Materials markets will continue to lead the way for us with faster-than-expected growth, I think, in Environmental & Forensics for that PFAS testing. Mike McMullen : Maybe just a couple of additional comments here, Bob, maybe Jacob, you have thoughts as well. But we continue to see improving market share. So the latest industry stats from -- showed us all green across all platforms. So that should bring to -- and any kind of debate on whether or not we're picking up share. But I also think it's kind of also recognize we've been in kind of an unprecedented environment here for a number of quarters in a row where we've seen instrument growth rates in 20s plus, 30 plus. A lot of it -- and we've been very transparent about this in all our calls that an element of that it's tied to an accelerated replacement cycle in some end markets, in some technologies. So we're thinking though, as we set up the guide for '23, we should assume some return to more normalized replacement rates in certain end markets but there's going to be growth there, but perhaps not at the same rate we've seen. And I don't know if you have any additional thoughts there, Jacob. Jacob Thaysen : No, I think we’re good, Mike. Mike McMullen : Okay. Cool. I got it right. I'm 2 for 2 today. Daniel Brennan : And then maybe just a follow-up. I know you've already discussed in the Chemical & Advanced Materials, a really strong quarter. And then on the outlook. I'm just wondering for the mid-single-digit guide obviously, the Advanced Material portion is like 1/3 of that business. It sounds like that's expected to grow really strong. Maybe just give us a flavor for how you're thinking about the three subcomponents in the '23. And like is there anything baked in on the chemical side of the energy side that would reflect some kind of impact from a selling economy? Or just kind of how should we think about that mid-single digit. Mike McMullen : I'm going to invite Padraig on this too because he's working with his team very closely on this. But we're taking a cautious outlook as it relates to the chemical industry in Europe, particularly -- and I want to separate that from what maybe happened relative to the HPI and renewable energies. But in the base chemical business, our large customers are having to work through higher input costs to their production. So we're assuming a cautious outlook from that particular segment in Europe. And Padraig I know you are from that part of the world, and I know that you've been talking to our team about this as well. Anything you'd add? Padraig McDonnell : Yes. No, I think it's cautious, Mike. And I think what we're seeing is that there's additional scrutiny being played on converting quotes to orders that we're seeing across, particularly in Europe. And of course, there's quite a lot of macroeconomic pressures there as well. So I think you're spot-on on that one. Robert McMahon : The only thing I would say, Dan, this is Bob, to add is this is an area -- sometimes people ask us, this would be an area of potential upside? If things continue the way that they are, there would be an opportunity for upside in this end market, given the strength that we're seeing. Mike McMullen : Absolutely, Bob. Operator : And we'll go next now to Rachel Vatnsdal at JPMorgan. Rachel Vatnsdal : So first up on Train B. Last quarter, you guys said that there were some supply chain delays as you guys were building up that manufacturing line. So can you just give us the latest on timing if you're still on track for that to come online mid fiscal year.? And then thinking about beyond Train B, you guys have hinted at potential capacity expansions beyond this. So can you give us the latest on your thinking on those capacity expansions and when we could hear an update there? Mike McMullen : Yes. So Sam, why don't you take the first part, and I'll close with the second part? Sam Raha : Yes. It sounds good. Rachel, thank you for the question, and happy to report there haven't been any changes since we last spoke about Train B and timing. We're on track to go live in the middle of the calendar year coming up in 2023. Mike McMullen : And at the risk of being repetitive, Rachel, we're on record saying that there's more letters than the alphabets in A&B. So we're focused on getting Train B up and running and have it generating revenue in '23. But at the same time, we continue to explore possible expansion plans, and nothing yet to announce yet, but stay tuned. Rachel Vatnsdal : Great. And then just one more follow-up on food. So food grew 20% this quarter. It sounds like some of that was from that China recovery and pull forward there. But all in, you're guiding to low single digits next year off of that two year stacked tough comps. So can you just walk us through how should we be thinking about the food market going forward? Do you think in 2024, it's going to normalize more at a low single digit? Or is this market really accelerated and the guide this year is just more on that typical comp. Robert McMahon : Yes, it's a good question. And this is Bob. And I would say it wasn't pull forward, it was catch up in terms of the growth rate here because it was -- as you know, Rachel, China has got a bigger proportion of the food market. And I would say it is a function of having two years of very strong performance there and so difficult comps. And I do think it is trending up with some of the investments that are being made there. But this still is a low to mid-single-digit grower. Mike McMullen : I think just to kind of reinforce our ability to hit that mid-single or low to mid-single-digit growth rates, we also see continued strength in the U.S., for example, where our cannabis testing business is part of what we reported, so, right Jacob? Jacob Thaysen : Yes, correct. And the cannabis business continues to do very well, and we see a lot of lab owners that is looking for us to come in and help them to equip the full laboratories. So that's a big opportunity for us. But also the alternative protein space is really picking up, both here in U.S., but particularly also in in Asia. So I do believe that is going to continue to be a secular growth driver for us in food. Mike McMullen : Right. And I really wanted to make sure that we highlight those new secular growth drivers because a lot of growth historically has come from China. We're seeing actually a much more diversified mix of business as we move forward. Operator : We go next now to Derik De Bruin of Bank of America. Derik De Bruin : So Mike, you said it’s an unprecedented environment for instrument demand and such. We've been covering these markets a long time, you and I and looking at these, and these are just numbers, which are really just amazing instrumentation numbers. So what's embedded for instrument growth in your 2023 guide? And how much of this is already covered by your backlog versus what's going to be new or have to get in through the year? Mike McMullen : Yes. So yes, thanks, Derik. And you and I have been in this business for a while and eye-popping growth rates, that's why we love -- we've really been joining these growth rates. I do think there's elements in the market that actually have increased the long-term growth rates relative what we've seen in the past. But I think it's also fair to assume that some of these accelerated replacement cycle seen will start to moderate over time. That being said, Bob, I think we're looking at LSAG, what, in the mid-singles? Robert McMahon : Mid-single. That's correct. Mike McMullen : And I'll let you pick the second part of the question there. Robert McMahon : Yes, yes. So it is mid-single digits. What I would say, Derik, is we're not going to disclose the amount of contribution for our backlog in there. But you can imagine that, that healthy backlog that we just talked about is primarily on the instrument side. It's just the way that we book business. And we have pretty good visibility into the first half of the year just given the way our order trends happened. Derik De Bruin : Got it. Can we talk a little bit about the academic market and what you're seeing there? Low single digits there in the quarter, low single-digit demand. How is that sort of like tracking relative to your expectations? I mean, I know you don't have a huge academic footprint, but I know your genomics business was actually doing -- they actually did -- was actually quite strong in the quarter. So I'm just wondering if you could sort of talk through what's going on in that market and sort of are you seeing any pressures there? Mike McMullen : Yes. So Bob, maybe we can tag team on this, and I'll start. So first of all, this is the one market that we always coming out of COVID said will be the slowest to recover, and that's still proven to be the case. We saw really, really good demand in China in Academia & Government and also good demand for certain aspects of our portfolio. But at the same point in time, a level of caution is around CapEx. NIH funding is not as robust as people had hoped. So we've tempered our outlook for '23 as kind of just a continuation of more and more of the same. Robert McMahon : Yes. And I would say, Derik, the growth that we had met our expectations right down the line; and as Mike said, stronger in places like China, and less so in the U.S. but it met our overall expectations. And that's kind of how we're expecting it in FY '23 as well. Derik De Bruin : And I have to ask the obligatory M&A question. Your share is obviously a good choice right now, but anything peaking your interest, valuation starting to come in on some of the stragglers in the market? Mike McMullen : Yes. So thanks for that, Derik. And as you know, we've got this Build and Buy growth strategy and one aspect of it is to look for opportunities for us to add great new businesses and team to Agilent through the use of our balance sheet. And as you may recall, some of our calls in the early part of '22, wow, these -- and finished out when these valuations were really out of site. And we saw that both in the public, but also in the private space. And things are starting to actually moderate down. So nothing at all to announce, but I'd say that the activities are -- we are very active here, and we're getting to places where you can see deals happening that would work for shareholders. Operator : We'll go next now to Jack Meehan of Nephron. Jack Meehan : I wanted to keep going on the instrument side. I was wondering if you could comment on cancellation trends. So just in context of the broader macro uncertainty, is that showing up anywhere in your instrument backlog? Mike McMullen : Yes, Jack, thanks for that question because one of the reasons why we have the confidence we have with the outlook we've guided to -- and when Bob talks about elevated backlogs, it's a healthy backlog. In that we have no significant change. There's no significant order cancellations, remain very low. So the orders we have in backlog will ship and we feel really good about the -- if you will, the quality of our backlog. Robert McMahon : Yes, Jack, just to build on that, the other piece -- the first piece of that would be our orders being pushed out, and we're not even seeing that either. So we're not seeing any push out of orders as well as any cancellations. Jack Meehan : Awesome. Okay. And then kind of the other pressure area we've been monitoring is more in the bioprocessing side, just stocking trends at customers. I know you compete sort of adjacent to some of these markets on large molecule. Are you seeing any destocking activity in any of the markets that you serve? Mike McMullen : No, no. Thanks for that question, Jack, because we've been reading some of the print as well, and we're saying, well, that's really not what we all were seeing with our business. So you saw -- and Jacob, we posted what double-digit 15% growth in CSD. We saw low teens growth in the genomics area, which would be the area you might see those things. And so it's not a concern for our ongoing business. Operator : We'll go next now to Patrick Donnelly of Citi. Patrick Donnelly : Maybe following up another one on the instrument side. I know you aren't going to give a hard number on the backlog. You did mention it was still elevated, Mike, and obviously gives us some good visibility into next year. I mean, any way you can frame kind of what it looks like today going into kind of a year compared to historicals? And then just on the order growth, what did that look like in the quarter? Obviously, the past few quarters, you called out outgrew revenue nicely. I'm just trying to get a feel for that, maybe if you have it on a geographic basis as well, that would be helpful? Mike McMullen : Yes, sure. So I think backlog remains up over historic exit levels. And that's why we very carefully chose the word elevated in our text to make sure that that you know there's more gas to left in the tank. While we won't give you a specific growth rate, I will tell you that we again grew our orders in Q4 off a prior year double-digit compare. I do think it's also worth pointing out, though, we did see a different trend within the quarter. So -- and I think this speaks to our confidence around the year-end revenues because customers were ordering earlier in the quarter in like August and through September, really to make sure they got product by the fiscal year. So that was probably the only thing that we saw a little bit different than historical patterns, if I remember correctly, Bob? And then I think the story was pretty much across the board geographically. Robert McMahon : Yes. Correct. Correct. Mike McMullen : Yes. Same story. Patrick Donnelly : That's helpful. And then maybe sticking on the geographic point. Can you just talk about Europe, what you're seeing there? I mean, there's been concerns about tightening capital spend just given the geopolitical environment, the energy side. Maybe what you're seeing there? And then maybe a second one on the order side. Just the budget flush, you guys tend to have a decent look at it at this point. I know it's still a little bit away, but any early indications there would be helpful? Mike McMullen : Yes. So relative to Europe, I think I'd just remind you, we had a 14% print in the quarter. So we really feel good about our performance relative to the competition in that part of the world. But this area is a watch out for us. The -- a lot of the economic -- future economic concerns are really sending around what may happen to the European economy, particularly with the energy prices that they're having to deal with and what does it mean for demand and the ability for our customers to have the profitable revenue streams they want for their business. So that's an area that we're watching, and that's why we've taken this prudent guide in for example, assuming what will happen on the chemical side of Europe. Robert McMahon : Yes, I was going to say there's really nothing -- it's an area -- as Mike, you said, it's an area that we're watching. We haven't seen any material change in the way things are operating there. Just to add on that 14% was against a year ago that we did have revenue in Russia. And so that 14% was even higher than that if you looked at it on a pro forma basis. So… Derik De Bruin : Great. And any quick thoughts on the budget flush would be helpful. I appreciate. Robert McMahon : Yes, stay tuned. What I would say is, I mean, we have -- as Mike said, I think we did see some of that in our order book in Q4 given some of the extended delivery times that are still out there between us and the rest of the market. But we're not assuming any greater than kind of normal budget flush for the end of the year. Robert McMahon : Correct. Operator : We will go next to Josh Waldman at Cleveland Research. Joshua Waldman : A couple for you. First, Mike, a lot of questions on instrumentation, so I'll ask on CrossLab. A nice quarter here. I wondered if you could talk through the drivers to the acceleration? Anything beyond just the comps? I mean are you guys seeing signs of higher adoption of contracted service, share benefit. Is this a category where maybe price is just now starting to come into the mix? Mike McMullen : Yes, absolutely. So I'm going to tag team with Padraig on this one, but I think all those factors are hitting, and we're going to talk about services, but I think it's important to know that between services and consumables, we actually crossed over the 30% connect rate for the first time in the fourth quarter. So we've been talking about the importance of connect rates going forward. And on the services side, which is where your question is centered is, we've seen an acceleration of growth. We hinted at some of the places we're doing really well at the big enterprise level. But Padraig, why don't you add some your thoughts on here? Because this is your business and a lot of good things happening here. Padraig McDonnell : Yes. I think, Mike, as you said, touch rates continue to be very strong, and it's much more than a break/fix business and we see our contract rates actually growing at double digits, which is incredibly sticky with customers. And all key offering categories right from enterprise down to some of the preventive maintenance services we do are all very, very strong. We also see that, of course, we have a large installed base and being able to provide different solutions and services for that have been really great. I will close by saying that we had some very big wins in the enterprise service business, and that's where we really look about productivity of labs and how we help customers with their outcomes, and we're seeing that increase as we go through the quarter and through the year. Joshua Waldman : Then Bob or Mike, curious to get your updated thoughts on supply chain and what you're seeing from a component availability and cost perspective entering '23? And I guess, whether or not your guide assumes improvements in either of these or maybe if supply chain improvement could represent upside to the guide? Robert McMahon : Yes. I would say we have seen in the second half of this year, incremental improvements as we went through Q3 and Q4 that helped us allow us to increase our revenue here in Q4. I would expect that incremental improvement to continue into next year. But it's by no means back to kind of normal I think if it happens to improve, I do think that, that would be a good thing for us. And -- but we're not -- we're assuming kind of the same level of improvement that we've seen in the back half of this year moving into FY '23. I do think that some of the costs have come down but there we're still having to purchase things in the aftermarket to be able to ensure supply and deliver to customers. Mike McMullen : Yes, to Josh's question, if we get to a point where we don't have to go into that aspect of the market, that would be upside for us. Robert McMahon : That's right. Operator : We'll go next now to Dan Leonard of Credit Suisse. Dan Leonard : Mike, I have a follow-up on Europe. So when you're framing the possibilities for 2023, I hear you on the conservatism for the chemical industry. But what about other end markets? Does the macro uncertainty in Europe bleed into pharma or aca, gov or anywhere else? Mike McMullen : We think there's an element that will also be in pharma as well. So you're right. I was focusing specifically on the Chemical segment of Europe, but that's also part of the storyboard as well. You can manage large pharma accounts who are dealing with increased costs, trying to figure out what they want to do in 2023. So that's a watch area for us as well. But I will say, some of the other secular drivers that we talked about earlier, such as investments in renewable energy, there's a big push to make hydrogen more of a source of energy. So this plays right in the sweet spot of Agilent. So -- but we are cautious about the large accounts in Europe and what they may do in '23 in those two end markets. Dan Leonard : And then I have an unrelated follow-up. On the NASD business, can you be specific about what is your outlook for that business in 2023? And what might be your opportunity to expand the service offerings in that business beyond your traditional product offering? Mike McMullen : Yes. Sam you know might obviously take a lead on that just to kind of -- and then have Bob jump in here as well. I mean we're assuming that our new capacity for Train B comes online, mid-year calendar year, it starts and will reach I believe full capacity by the end of the year. And we do think there's further expansion opportunities both in terms of what we do already, but broadening the portfolio. But Bob, maybe you want to walk through some of the thoughts on the financial expectations. Robert McMahon : Yes. I mean we ended this year touching on roughly $300 million for that business, and we've talked about this Train B being $150 million plus of capacity when Mike says we're going to be at capacity at that run rate by the end of the fiscal year. And you could imagine that probably less than half of that is a ramp-up, but we would expect a strong growth here. And I would say Train B is primarily siRNA, although we do have early -- some growing business in CRISPR Therapeutics out of our existing facilities, and we expect that to continue to grow as well. Operator : We go next now to Dan Arias of Stifel. Daniel Arias : Hey, Mike, just a question on GC/MS. 30% growth for the quarter is pretty robust. For '23, would you expect a little bit of a decoupling from LC/MS there just given that it feels like there's more -- a little bit more cyclicality on the GC side, maybe a little bit more pharma on the LC side? Or do you think those portfolios track similarly again? Mike McMullen : I think we've always felt -- and Jacob, feel free to jump in this. We've always felt that long term, we expected LC/MS to have higher growth rates than GC/MS. And I think we'd expect that to play out in the long run. I'm not sure about '23 because GC/MS plays really well in the advanced materials space. We've been talking about some of the secular drivers there. But also, as Jacob mentioned, PFAS is an area, too. So I don't know if we're going to see that much divergence in '23, but it's a great question. I haven't thought about it. Jacob Thaysen : Yes. Thanks, Mike. And we came out with some very nice innovations here at the ASMS on the GC/MS side, including the way that you can use hydrogen to measure or to as your carrier gas and set up the helium, which has been really nice pickup in the GC/MS space. And as Mike also alluded to, I think we are seeing a lot of opportunity in the Advanced Materials side, particularly in the lithium battery side, where we both see our spectroscopy portfolio combined with the GC, GC/MS is completely or really addressing some of the challenges there. And actually on top of that, you have LC that is a part of that equation as you also want to look at electrolytes in batteries. So I think we continue to see a lot of opportunities in Advanced Materials, but particularly for the GC, GC/MS side. Daniel Arias : Yes. Okay. Interesting. And then, Bob, maybe just thinking about investments next year in the context of the growth that you're seeing this year, are there areas where you might add resources beyond what might just be expected given the uncertainty that's floating around? Seems like there's an opportunity to sort of improve your positioning at a time of strength, not sure if you're seeing it that way, though. Robert McMahon : Yes. No, we agree. And I would say it's -- we've been doing that over the course of this last year. And I would say one of the areas, obviously, we're building out the capacity in NASD that we've talked about extensively. But we're also significantly investing in places like digital and software. And we think that that's an area of increasing strength for us and would look to continue to invest incrementally there as we go into FY '23. Operator : Ladies and gentlemen, we have no further questions this afternoon. Mr. Ahuja, I'll turn things back to you for closing comments. Parmeet Ahuja : Thanks, Bo, and thanks, everyone, for joining. With that, we would like to wrap up the call for today. Have a great rest of the day. Operator : Thank you. Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,023	1	2023Q1	2023Q1	2023-02-28	5.348	5.416	5.846	5.948	8.01	25.64	22.53	Operator : Ladies and gentlemen, welcome to the Agilent Technologies Q1 2023 Earnings Call. My name is Bill and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, to begin the conference. Parmeet, please go ahead. Parmeet Ahuja : Thank you, Bill and welcome, everyone, to Agilent's conference call for the first quarter of fiscal year 2023. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our first quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.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 and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Our guidance is based on forecasted currency exchange rates. During this call, 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'd like to turn the call over to Mike. Mike McMullen : Thanks, Parmeet. And thanks, everyone, for joining our call today. The Agent team delivered an excellent start to 2023, exceeding both top and bottom line expectations. Q1 revenues of $1.76 billion or up 10% core. Agilent's broad-based portfolio and resilient growth model are on a full display during the quarter with growth across all end markets and geographic regions. Operating margin in the quarter are 27.1%, up 80 basis points. Earnings per share of $1.37 were up 13%. Let's now take a closer look at our first quarter performance, starting with end market highlights. Chemicals and Advanced materials led the way for us with another outstanding quarter, delivering 14% core growth with strength across all geographies. The strength in our pharma business continues and is up 11%, with both large and small molecule growing nicely. This is on top of 17% growth last year. Our environmental friend business grew 12%, while the academia government and the food markets both grew 8%. On a geographic basis, China once again led the way. Our China team continued their record of strong execution overcoming any disruption associated with COVID and delivered 13% growth during the quarter, exceeding our expectations. In Europe, we also delivered stronger-than-expected results, growing 10%. The Americas shows a solid results with 8% growth. Looking at our performance by business unit. The Life Sciences and Applied Markets Group delivered revenues of $1.03 billion, up 11% core. LSAG delivered growth across all end markets and regions. Our LC and LC/MS platforms continued their strong performance during the quarter, growing faster than the market at 16%. Demand in the chemicals and advanced materials end market continues to be strong. particularly for materials used in manufacturing semiconductors and batteries. Our Spectra business grew more than 20% in the quarter and we continue to strengthen our base in spectroscopy across multiple end markets. In Q1, we announced an appointment at the Insight200M. This system is used at checkpoints throughout the London Heathrow Airport to officially provide enhanced security and ensure passenger safety. The Asian Crosse group posted revenue of $381 million in Q1. This is up 13% core as the team continues to take advantage of record instrument placements over the past 2 years along with continued growth and attach rates. Across our team's deep knowledge of customer lab operations continues to drive consistently high levels of customer satisfaction. The breadth and diversity of our product offerings is driving record renewals for support contracts. At the same time, our Enterprise Services business continued its strong momentum, driving growth and converting competitive accounts. The Diagnostics and Genomics Group delivered revenues of $342 million, up 5% core. Our pathology-related business performed well with double-digit growth led by the Americas and Europe. NASD posted another strong quarter, growing 22%. Our Train B manufacturing expansion remains on track to come online mid-calendar year. In January, we announced an additional $725 million expansion of our NASD facility that will double our oligo manufacturing capacity. And 2 weeks ago, we are pleased to have the Governor of Colorado join us in our groundbreaking ceremony at the Frederick site. In addition to organic investments, we continue to invest externally in new technologies and partnerships. In the quarter, we welcomed the Avida Biomed team into Agilent, further enhancing our genomics capabilities. Avida is early-stage life sciences company designed to assist clinical researchers using NGS approach in the study of cancer. We also continue to partner with new technology platform companies to drive our solutions in the marketplace. This quarter, we announced a partnership with the Akoya Biosciences to combine our companion diagnostic and IHC workload expertise with their solution to drive multiplex tissue assay development for biopharma. In addition to these business group highlights, Agilent was again recognized among the top 100 most just companies in the U.S. by Just Capital and CNBC. As part of this announcement, we are very proud to be the leader in the medical equipment and services industry for our treatment of employees and focus on customer relations. The Agilent team navigated challenging market uncertainties in Q1 and yet once again produced excellent results. It was a great start to the year. Q1 was another outstanding example of the work we've done to build a resilient company with multiple growth drivers. Those growth drivers create through targeted investments that aim to expand and enhance our business in high-growth areas are the heart of our Build and Buy growth strategy. As we look ahead to Q2, we remain confident in the strength and resilience of our business. We have an unstoppable One Agilent team that continues to execute at an extremely high level and is well prepared to deal with any challenges they face. Given the strong start to the year, we are raising our full year core revenue and EPS guidance while also keeping a close eye on macroeconomic conditions. I will provide the detail on our overall outlook but overall, we remain convinced our strategic focus and unmatched execution capabilities will continue to drive strong results. Thank you for joining us today. And now, Bob, over to you. Robert McMahon : Thanks, Mike and good afternoon, everyone. In my remarks today, I'll provide some additional details on revenue in the quarter as well as take you through the income statement and other key financial metrics. I'll then finish up with our updated full year guidance and initial guidance for the second quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. We are extremely pleased with our Q1 performance. It was a very solid start to the year. Q1 revenue was $1.76 billion, exceeding our expectations. Revenues were up 10% core and 5% on a reported basis. Currency was a 5-point headwind which was an improvement from the beginning of the quarter, while the M&A contribution was as we expected. Pricing for the quarter was higher than the full year forecast also as we expected. Now I'd like to share some additional detail on our end markets. Results in our largest market, pharma were again very strong. Pharma grew 11% following 17% growth of last year. Performance was solid across both small and large molecules. Small molecule grew 12%, while large molecule grew 9%. And as Mike mentioned, Chemicals and Advanced Materials also continued to be very strong, growing 14% during the quarter on top of 15% growth last year. The chemical and energy subsegments of the market are doing well while the advanced materials market continues to deliver outsized growth. Semiconductors and batteries are driving demand, helped by government investment in this area. The food market grew 8% during the quarter, driven by double-digit growth in China. The environmental and forensics business grew 12%, led by the Americas as increased testing for PFAS chemicals drives customer investment in this area and recently approved U.S. legislation leads to broad spending in the environmental market. Our business in the diagnostics and clinical market grew 4% versus 11% growth last year. Pathology led the way for us here, partially offset by industry-wide challenges in the genomics market. And the academia and government market was up 8%, led by LCs and services. Regionally, Europe and Asia showed strong results. On a geographic basis, the China team delivered 13% growth and Europe grew 10%, both exceeding expectations. The Americas had another solid quarter coming in at 8%, in line with our expectations. Now let's turn to the rest of the P&L. First quarter gross margin was 56.5%, up 40 basis points from a year ago. The gross margin performance, coupled with good cost discipline and SG&A helped drive our operating margin to 27.1%, up 80 basis points from last year. Below the line, our tax rate was 13.75% for the quarter and we had 297 million diluted shares outstanding, both as expected. And putting it all together, earnings per share were $1.37, up 13% from a year ago. In summary, Q1 ended with 10% core top line growth and 13% earnings per share growth, a very good start to the year. Now some metrics on cash flow and our balance sheet. In Q1, we generated $296 million in operating cash flow, up 16% versus last year, while investing $76 million in CapEx. CapEx spending continues to be driven by our scale-up of our Train B manufacturing line and other capacity expansion projects. In the quarter, we returned $142 million to shareholders through $67 million in dividends and by repurchasing shares worth $75 million. We also announced we're increasing our dividend by 7%, along with a new $2 billion share repurchase authorization continuing our successful balanced approach to capital deployment. Our balance sheet continues to remain healthy as we ended the quarter with a net leverage ratio of 0.8. Now let's move to our revised outlook for the year and the upcoming quarter. The macroeconomic environment remains dynamic and interest rates and currencies continue to be volatile. However, given the good start to the year, we are increasing our full year revenue to a range of $7.03 billion to $7.10 billion. This increase updates our full year core revenue guidance to a range of 5.5% to 6.5%, increasing the midpoint of our guidance to 6%. We've also seen the dollar weaken against major currencies in the first quarter although it has rebounded somewhat in February. And as a result, the full year guide reflects $100 million of favorable currency movements since our initial guide in November. And for the full year, we still expect currency to be an almost 300 basis point headwind to reported growth. In addition, we're also raising our full year EPS guidance to a new range of $5.65 to $5.70 per share. And lastly, given the recently announced NASD expansion to double our oligo manufacturing capacity -- we are updating our forecasted capital spending for the year to $500 million, up $200 million from our guidance at the beginning of the year. Now turning to Q2, we expect revenue in the range of $1.655 billion to $1.680 billion. This represents core growth of 6% to 7.5% and reported growth of 3% to 4.5%. Currency is expected to be a headwind of 3.1 points, while M&A will contribute 0.1 points of growth in Q2 which is consistent with Q1. Second quarter non-GAAP earnings per share are expected to be between $1.24 and $1.27, representing growth of 10% to 12% versus the prior year. I'm pleased with how the team has delivered in the first quarter. We are focused on the things we can control. Our team is driving strong execution in the marketplace and coupled with our broad portfolio of products and services, we expect to continue to grow faster than the market as we go through the year. Thanks for being on the call. And now I'll turn over things back to Parmeet as we take your questions. Parmeet? Parmeet Ahuja : Thanks, Bob. Bill, if you could please provide instructions for the Q&A now. Operator : [Operator Instructions] We take our first question this afternoon from Matt Sykes of Goldman Sachs. Matt Sykes : Mike and Bob, maybe we'll start on ACG, just given the quarter that it had and the comp it was facing last year, you've talked in the past about areas of underpenetration. I think China was a region you called out. Could you just maybe kind of give us a mark-to-market on where you feel from sort of an end market and regional standpoint, there's still a lot of room for that growth in ACG if we see it continue throughout this year and into next? Mike McMullen : Yes. Thanks, Matt. First of all, I appreciate the recognition of the numbers we posted and we think there's still a lot more opportunity in front of us. And I want to actually have provide a little bit more color on where those opportunities may lie. Padraig McDonnell : Yes. So look, I think the broad product offering across the hardware platforms where we've had a value to -- where we add a lot of value to customer operations has been broad-based. We certainly see a lot of our offerings, particularly around asset utilization and so on, being able to be used outside pharma in different industries and we see that as an opportunity to grow. I think also given our big installed base and our ability to attach in different markets and sectors is going to continue as we go through the year. Mike McMullen : Yes, I think we see a lot of opportunity, obviously, in China. That's when we flagged in the past. The other one that we're pointing to is a lot of the growth has historically been centered in the pharma space. We're seeing growing interest in the CAM space as well. So I think from an end market perspective, that's an area we would expect to see some more growth. And geographically, the China story still hasn't fully played out yet. And then again, I would just remind you, Matt, some of the points we made in the call, record renewals for support contracts and also clearly taking share on the enterprise level. Those attach rates we keep talking about are going up as well. So a lot to like here. Matt Sykes : Great. And then maybe just kind of refresh us on your outlook for instruments. I mean you've kind of guided to a mid-single-digit growth for the full year. Given that we're a little ways into this year, you probably have a little more visibility on that backlog. How are you thinking about sort of the back half for instruments overall? Mike McMullen : Yes. So first of all, let me -- I'm taking a bit on this with Bob but let's -- I'll talk about the backlog, first of all, I think it's very important to just to remind the audience that the quality of our backlog remains extremely high. So -- and you can see the great work of our team at to work down the backlog but we're not seeing any cancellations or anything pulling out of backlog. So that gives us level of confidence around the revenues we can forecast. I think there really isn't anything new to talk about today relative to new news relative to the second half, we still remain -- we still want to acknowledge the uncertainty about the back half of the year. So really no new news here. It's very consistent to what we talked about in November. I think you're going to hear a lot of us talking about normalization of growth rates -- normalization of deal cycle times. So the funnels remain healthy. The deal cycle times are I think we've already more towards historical levels. And Bob, I don't know if you'd add anything to that? Robert McMahon : No, I think you're right. I mean, I think, obviously, we had a very strong start to the year with double-digit growth from LSAG we will go up against very tough comps in the back half of the year with the recovery of the business. But as Mike said, pleased with the very good start but not anything material change. Operator : The next to Brandon Couillard of Jefferies. Brandon Couillard : Mike, I think you said China was up 13% in the quarter. That's a lot better than we've heard from some of the other counterparts. Could you unpack that a little bit for us? Could it perhaps have been due to the fact that you're 1 month later maybe talk about linearity in China through the quarter and if your outlook for the full year. So I think it was high single digits has changed at all. Mike McMullen : Well, I'm glad you noticed, Brandon and if you were in the conference room here, you see there's a lot of smiling in the room here because really proud of what the team has done here. So I don't think it's all a timing issue. It's about execution and its ability of this team to execute because our teams were hit with waves of COVID during the quarter. But we know how to execute. We've also enabled the -- our ability to interact with customers digitally. So while people maybe couldn't go to the office or couldn't go to customer sites, they were able to support the customers. So we were just -- we were just delighted with the performance out of China in Q3. And Bob, I think it was a broad-based story. We had growth and double-digit growth in pharma, chem, food. So it was really pleased with the results. I know our narrative is different than others are saying but I also think my team in China capability is also different. Brandon Couillard : Got it. And then on the NASD Train C, I guess, expansion. Can you just talk about time line for that build-out. And as I remember back to Train B, I think a good amount of that was already kind of earmarked for customer demand. In the same case this time around with the current expansion. Mike McMullen : Yes. I want to tag team a bit with this with Sam and myself and Bob. So we evenly refer to Train B. That's the latest expansion that's coming online this year. In fact, we had a chance to see that firsthand when we went to the groundbreaking ceremony for what we call Project endeavor or as you're referring to [indiscernible]; it looks really good. We're on track for that mid-calendar year go live and we have a full book of business for that just a matter of ramp. And again, project up. And then I'm going to pass it over to Sam and maybe you want to remind, Brandon, what our plans are with the new expansion, when we expect to see some of that first revenue coming into Agilent. Sam Raha : Yes. Yes, happy to do so. And as you mentioned, Mike, first of all, we're tracking right on plan for Train B, right, midpoint -- midyear coming on. And it was great to see first-hand, Bob joined me really the progress that we're making, the facility is looking really, really nice. A lot of validation work happening miles and miles of stainless steel piping and other infrastructure that's been put in place. As you also noted, we did at the end of February, the middle of February, pardon me, the groundbreaking for trains, C and D. And these projects will take some time but we've started the process and the first revenue from that would be coming online in 2025. And remember, there's 2 trains, Train C and Train D, both dedicated to siRNA, antisense capabilities as well as expanding our ability to serve customers with single guide RNA or CRISPR. So excited about the progress in the NASD team under Brian Crude's leadership is firing in all cylinders. Mike McMullen : Sam, unless you're going to commit to me for earlier to go live. I think you meant to say '26, right? Sam Raha : Did I say '25? Thank you, Mike, for catching. Usually, you're the one that accelerates me instead of the other way. Indeed, it's '26. Thanks for catching that. Robert McMahon : Yes. And Brandon, to your point around the question of purchase orders and so forth. We have good visibility into the pipeline in the funnel but we haven't started taking orders given the time frame there. So we have high confidence that we wouldn't be putting in $725 million into the expansion. Operator : We're going next now to Vijay Kumar of Evercore ISI. Vijay Kumar : Congrats on a good print here, Mike. My first question here on the second quarter guidance, 6% to 7.5% organic. That's a sequential step down of 250 basis points at the high end. I guess the comps get easier. Is there anything in the second quarter? Was there any timing of revenues that got to fall to Q1? Or any China impact, anything that can explain here at the sequential guide for 2Q? Mike McMullen : Yes. I'll pass this over to Bob for additional detail but I think the answer is no, not the unusual about movements between the quarters. And Bob, I think what we're going to do is we want to set up another guide in Q2 that was above our full year guide. So that was the process there. Robert McMahon : That's exactly right. I mean, I think as we look at this, we just came off a 10%, still 6% to 7.5% is still significantly above where we're forecasting the full year and I think we feel good and I think it's consistent with how we have guided in the past. Mike McMullen : I have missed we're very prudent yet today, Bob? Vijay Kumar : I was waiting for that, Mike. So have to say the second quarter is a prudent guide. Is that a fair comment? Mike McMullen : That is correct. Vijay Kumar : Fantastic. And then I did have one on this NASD, Mike -- at Novartis. I think they're pulling their API manufacturing in-house. And I know you're starting to train to see maybe provide some context and how big is Novartis as a customer? What's the pipeline looking in ASD and uses at risk? Mike McMullen : Yes. I'll tag team on this. I'll lead and Sam, if you want to add some additional color. But first of all, the announcement from Novartis is no new news. We -- that has always been part of the plan and we actually have contractual agreements relative to how much of the on market demand we get. So that's all well known. But relative to the Novartis is one of the many customers we have in this business and we really have worked hard to build a diversified book of business. And we talk a lot about Novartis great customer. I talk a lot about Anylam because we're allowed to talk about those programs but we have a much broader base book of business. And I think that gives us a lot of confidence as we move forward because we have a number of programs that we're supporting. We know not everyone is going to hit but we know that there's going to be a lot of success rates there as well. And Bob? Robert McMahon : Yes, let me just add something. I mean I would say this means nothing to our expansion. I mean or I want to be very clear about that. I mean I think we feel very good about -- we've continued to be capacity constrained. We've had more orders than we can satisfy. And I think that continues to be the case and we feel extremely good about the overall technology and our position in the marketplace. Mike McMullen : Thanks, Bob. I appreciate that build. Sam Raha : Mike, if I can just add just a couple of quick things, right? We've stated this before. We think the therapeutic oligo market for the suppliers that we are $1 billion today, growing to $2.4 billion by 2027. And what's really encouraging about the market is the number of molecules that are advancing, right? Just to give you a little bit more color, we're doing work with over 30 pharma partners today and on dozens of programs at various stages. So the pipeline of programs are working on, some of which have the potential of being molecules also broad populations is absolutely there and something that we're excited about. Operator : We go next now to Puneet Souda of SVB. Puneet Souda : So first one, Bob, I don't know if I heard it on the call, contribution sort of from pricing in the quarter and for the full year. If I'm correct, you are still expecting 3% pricing contribution this year and that would imply a 3% volume contribution which it appears below historical levels for what Agilent has grown. So just maybe just -- we're trying to understand, given the tailwinds you're seeing in China, NASD and the other areas and obviously, congrats on the strong growth in the quarter. So is there anything you're seeing beyond sort of tougher compares that are emerging in the sort of the second half? Robert McMahon : No, it's a great question. So I did make a quick reference in the prepared remarks. Actually, Q1 was higher than the overall 3% as expected. We are still planning and forecasting that 3% price contribution for the full year of FY '23. And you're right, that would speak to roughly a 3-point volume. What I would say is we're taking it 1 quarter at a time. As we've said, we're dealing with -- looking forward, there's still some uncertainties around macro. And that's where I think our forecast and our guidance is prudent to use that word again. But I wouldn't say anything has materially changed since the beginning of the year from that standpoint. And I've been very pleased with our ability to continue to maintain that pricing throughout the course of the last several quarters and I would expect that to continue going forward. Puneet Souda : Okay. That's helpful. And then on the Lunar New Year, is that part of -- is that baked into the guide as well? And I just wanted to clarify on China. I mean obviously, you have heard about the stimulus, your -- actually Agilent is listed -- one of the companies listed within the document that was put out for the loan stimulus for China. This is sizable. How are you thinking about it? You obviously have the longest and one of the most legacy positions in China. So just trying to understand what does that mean for China growth in 2023 and '24. Mike McMullen : You want to take the first part of the question. Robert McMahon : Sure. Yes. But the impact of Lunar New Year was not only in Q1 but it's also been reflected in our Q2. It was roughly 0.5 point headwind in Q1 and that's come back to us in Q2. So it was kind of as planned. And in regards to the stimulus, the way we're looking at this is Sims got kicked off in the calendar Q4. There is a section in there that's focused on equipment for universities and hospitals. But from our perspective, it's still early. So we're kind of waiting right now to see how it plays out. And but I think at this point, we really haven't put anything assumed in our guide or China growth relative to the stimulus. So if it does get deployed and comes to our way, then that will be an upside to our current forecast. Mike McMullen : And I think Puneet, you said it well. I mean, our business in China continues to be very, very strong and I couldn't be prouder of the team, how they delivered in Q1 and that's continuing strong momentum throughout the second half of last year and we would expect that to continue here in Q2 as well. Operator : We go next now to Rachel Vatnsdal at JPM. Rachel Vatnsdal : Congrats on the quarter. So first up on semiconductors, one of your peers have flagged that they were expecting the semiconductor market to be soft throughout 2023, just as semiconductors or semi customers were facing a reset just given a macro environment. So you mentioned strength in semi-dry prepared. So can you just walk us through, first off which part of the market do you guys really play in, in semis? And then are you seeing any of the softness that one of your peers have flagged? Mike McMullen : Yes, I'll start and then we'll turn it over to Jacob to give some additional color about where we play and so forth. But I would say the short answer is no. I mean, our spectroscopy business grew over 20% in the quarter and we're still seeing strong demand. And Jacob, you want to provide a little more color? Jacob Thaysen : Yes, absolutely. We have -- I would say we have the strongest portfolio in atomic recopy for this market in semi but generally speaking, in material science. And we continue to see demand from the semicon industry, both in the fabs but also in the upstream for all the fine chemicals that goes into the fabs, they require the same level of QC testing like they do in the labs and hence, they are using the same instruments. So we see a lot of benefits. Those were the new fabs built but also for the continuous operation in the labs. So we expect this to continue for a while. We, of course, see a lot of news around investments into this in other parts of the world, also particularly in the U.S. Obviously, that will take some time before it comes into play. But we are -- we expect the whole semicon market to continue to be an upside for us. But as I mentioned also, we also see a lot of interest in the rest of the materials market, particularly in lithium batteries, where we see a lot of demand, not only for our spectroscopy business but really across our broad portfolio where lithium battery needs both the LCs, the GC, the spectroscopies and the CMS. So we are very excited about that space and see a lot of continued growth there. Mike McMullen : And Jack, I think the point you made earlier, too, about some of the funding environment, we're seeing some government funding coming in from different parts of the world as part of the semiconductor industry which has benefited us. Rachel Vatnsdal : Great. And then maybe just shifting over more towards pharma biotech. The small molecule grew faster than large molecule this quarter. You've talked in the past about some of that outpaced strength in small molecule being driven from spending related to instrument purchases that were delayed back in 2018, 2019 time frame. Can you walk us through really what inning are we in, in terms of that catch-up spend? And how long can you sustain an outpaced growth in small molecule before it kind of resets back to that normalized level? And then just update on large molecule as well. Mike McMullen : Sure, Rachel, do I dare pass this question to the Danish member of the staff over that baseball analogy but I think, Jacob, got a great print on LC and LC/MS 17% growth, clearly outpacing the market. And I think we saw some really good strength in small molecule in particular this quarter. Jacob Thaysen : Yes, absolutely. I will start by saying, I don't think this is a baseball game. I think there is a continuous opportunity on indicate space. So -- and we see both opportunities and we continue to believe that there is a big market in small molecules. And I think the current performance is a reflection of the investments we have done into -- we made into our portfolio over the past years both for the LC and the CMS. So it's really, really focused very much on where we have gone strategically on a lot of investment into making robust reliable and routine instruments and instrument solutions. We continue to spend significant time to truly understand our customers' pain point that is not only about the overall performance but also about how you can ease of use, a lot of smarts we put into the instruments and of course, also continues on focus on uptime of instruments. And our commercial organization is brilliantly going out and connect both our consumables and also the service contracts to it. So this just continues to be a great business for Agilent. Robert McMahon : Yes, Rachel, maybe -- this is Bob, maybe I can add a few points because we talked at the beginning of the year, about this strong performance kind of normalizing this year. We also said if it continues, we're going to take it. And I think what you're seeing is some of that as well. But we still do think that this will normalize over time. And the portfolio that Jacob and team have I think speaks very well to us growing faster than the market. And I think you talked about the biopharma, the beauty of our business is we've got that nice diversification across both small -- and small and large molecule and certainly starting up the year very nicely. Operator : We'll go next now to Derik DeBruin [ph] of Bank of America. Unidentified Analyst : This is Peter [ph] on for Derik. Could you just dive a bit more into the latest on what you're seeing in Europe? You've expressed in bending some caution, particularly in Chem on the last call. So if you can touch on that as well, that would be great. Mike McMullen : Yes. So I hope it came through in the call remarks and I'll make a few comments here, then invite organ here as well but we were delighted with the print in Europe in the first quarter exceeded our expectations. Actually, the strength across the marketplace was pretty good. I think 5 of our 6 end markets were growing high single digits or better. I think the standouts for us were actually the chem markets along with diagnostics. But I have to say we continue to watch closely the investment plans particularly for our large accounts in the chemical space as well as pharma space. But we're off to a really good start but that's -- that remains a watch area for us. But again, we're delighted with the broad-based growth we had. And I don't know if you... Padraig McDonnell : I think you said it all, Mike, I think it's broad-based in 5 out of 6 markets, growing high single digits. And I think what the team has been able to do has been able to really work together to take share in a lot of areas on all the markets and our focus, of course, on attach rates in both services and consumables has really benefited as well. Mike McMullen : I think we don't talk about weather but I think the more favorable weather environment in Europe actually has put less pressure on customers relative to energy cost and energy demand. So that's been net positive but we're still keeping an eye on things. Unidentified Analyst : Okay. And then could you just discuss your margin outlook and then pacing across '23? What's kind of -- and then further ahead, kind of what's the level of expansion potential going forward? How much gas is left in the tank there, looking out in the out years? Mike McMullen : You want to take that, Bob? Robert McMahon : Yes. I still have gas in the tank, yes. I mean I think, obviously, despite the inflationary environment that we're in, we're still able to manage growing our margins. You saw both a nice balance here this quarter with about half of it coming through gross margin as well as half of it coming through OpEx. I think as we think about it going forward, I think that 50 to 100 basis points over the course of the next several years is still a reasonable way to think about it. That's how we're thinking about the rest of this year as well. Operator : And we'll go next now to Dan Brennan of Cowen. Dan Brennan : On the quarter -- maybe just the first maybe the first one, another a few questions asked on the Chemical and Advanced Materials segment. But obviously, great growth in the quarter. Just wondering, with your new higher guide for the year, are you assuming something above the mid-single-digit outlook that you previously guided to for the year? And would love if you can give us any color on kind of how the growth broke out this quarter between advanced material and then chemical and energy. Robert McMahon : Yes. That's -- it's a great question, Dan. I'll take that. And so with our revised guide, we have ticked it up a bit, given the strong performance that we had in Q1. And we continue to be surprised to the upside. When we talked about it at the beginning of the year, what was a source of upside. This would have been one of the markets that we would have talked about. And what we're seeing is actually good growth across all of the submarkets in our chem market. If I think about the chemical and energy markets, those were up high single digits and the growth was really outsized in that advanced materials that we've been talking about. So that semiconductor in batteries area grew in excess in the high 20s. And so this is a continued strength really given not only the investment there but really the power and strength of our portfolio to be able to supply critical tools and instrumentation into markets that are really continuing to expand. So we're expecting that don't book high single digits and the high 20s for the rest of the quarter, so we'll take it. But we're expecting a slight uptick there, given the strong performance that we had in Q1. Dan Brennan : Great. And maybe just one on the balance sheet. Obviously, the -- it's in great shape, leverage is very low. Just wondering what you're seeing from the M&A environment. Obviously, Waters had a deal in the quarter. I'm wondering what you're seeing in terms of -- have you identified any interesting opportunities like what's the appetite like for sellers to kind of move forward? Just wondering what we could expect for management while it's always hard at time. I'm just kind of wondering about your appetite potential to do something bigger since you guys have been looking for the right fit. Mike McMullen : Yes. No, I think you're closing -- happy to comment on the day your closing comments exactly where our head is at which is the right fit. So we think the environment is much more favorable than it was a year ago. We think it's now much more of a buyer's market, so to speak. Most people are willing to come off at a view of last round. There's still some dialogue around there. So we're -- we have obviously nothing to announce but we remain very interested in looking for opportunities that can augment our core organic business and this is at the heart of our build and buy growth strategy. As I've said a number of times, the buy side is all optionality for us. We'll do just fine with all the bets we have right now. But if we see the right thing, we will move on it. And we just have also just wanted to make sure we stuck with our framework and we don't ever want to have buyers remorse. So we've been very happy with all the deals we've done to date and we'll continue to use that framework moving forward. I think that fit piece that you described is really a key criteria for us. Operator : Our next question comes from Patrick Donnelly of Citi. Patrick Donnelly : Maybe one on just the order side. I know you guys talked a little bit about the backlog remaining pretty healthy. Can you just give a little bit of color in terms of what the order growth looked like in the quarter? I know last quarter, you guys started eating into the backlog a little bit which is natural, just given the supply chain is normalizing a little bit. Can you just talk about, I guess, order growth versus revenue growth, what you saw in the quarter? And any color there would be helpful. Mike McMullen : Yes. Let me make some summary comments and then Bob, feel free to jump in here. But as you mentioned, we don't specifically provide book-to-bill ratios. But what I can tell you is that orders for the quarter were greater than revenue. So -- and so we continue to grow orders with particular strength in our ASD and the services business. On the instrument side, we continue to bring down this record backlog we had as we really are focused on meeting those customer shipment requirements and really thanks to the great work of the order fulfillment team, we've really been able to get back to a normal flow of shipment times and delivery commitments. Again, I would just say that the funnels remain healthy, the backlog is still a very high quality. I think we have pretty much next to no cancellations. So the quality is good. It gives Bob and I that level of predictability around revenue from that backlog. Robert McMahon : Yes. I would say, as Mike said, I mean, the backlog continues to be healthy and we haven't seen anyone back out of any cancellations or anything like that, that would be beyond kind of the normal activity. Mike McMullen : But I would emphasize one point I made earlier, the deal cycles are reverting towards the historic norms in this space. Again, this whole construct that we see of a normalization of particularly the analytical instrumentation marketplace evolving. Patrick Donnelly : Yes, that's helpful. I appreciate that. And maybe just on kind of the environmental spend, PFAS testing. You've called out the last couple of quarters, Mike, I know you're excited to see some actual infrastructure dollars coming through in the U.S. here. Can you just talk about what you're seeing there, kind of where we are? I mean, it seems really early but just your perspective on kind of how that's tracking, what impact you guys are seeing from that and obviously, the durability as well. Mike McMullen : Sure. Happy to talk about that. And I actually happen to have Jacob talk about it because I think you've just spent some time in front of the Board recently and talking about the PFAS opportunity. I don't want to educate the Board on what it's all about but the durability of growth we're seeing, we see here. Jacob Thaysen : Yes, absolutely. And we continue to see a lot of opportunities in the PFAS where at the beginning was really all about looking for PFAS in the water supply and now it's moving into food and other types of areas. So I think you are right, we are still in the early phases of the growth opportunity. As you know, the U.S. infrastructure build, there was a $4 billion set aside to PFAS testing. And so we have one of the leading solutions here. I mean PFAS is very difficult to measure. So you need high-end instrumentation but also very specified sample prep and consumables to really make sure that you don't contaminate why you measure. So we have spent a lot of energy of putting a high-quality solutions out there and we continue to see a lot of opportunities and we will continue to invest in this space beyond PFAS. I think environmental is really a place that there will be a lot of investment going in over the next decade. So really excited about that area also besides the Advanced Materials. Operator : And we'll go next now to Jack Meehan at Nephron Research. Jack Meehan : Wanted to spend a little time on DGG. Maybe start with the pathology business. So double-digit growth was stronger than, I guess, what we've seen in the last few quarters. Was there anything you noticed in terms of the uptick in the quarter? Mike McMullen : Yes. Jack, I'm going to actually pass that over to Sam because Sam actually is calling in from Denmark. He's actually with the pathology team right now. So you can get it latest and greatest on the ground from Glostrup. Go ahead, Sam. Sam Raha : Yes. Thanks, Mike. Jack, thanks for the question. I'd offer you a couple of things that we've observed in the quarter and I think are also promising going forward. First of all, we continue to see the trend of hospitals and health care systems being able to work through COVID and start to reprioritize cancer diagnostics. So overall, I think that's been something that's positive. We've continued to see strength in our IHC solutions, be it our companion diagnostic solutions that are in the market. But more broadly speaking, including for the antibodies that we have, that we sell as ready-to-use reagents. We're also continuing to see good traction for our advanced staining system, the Dakotas. So all of that, you look at that geographically, we've had some good success, particularly in Europe but the Americas as well. Jack Meehan : Great. And then sticking with DGG, either for you, Sam, or for Mike. Just on the genomics side, I was backing into sort of like a high-teens decline in the quarter, if that sounds right. I'm just curious, different companies have called out different issues in this end market. If you could talk about just maybe what exactly you're seeing, that would be great. Mike McMullen : Bob, I don't remember the exact number but it was down but not to that extent. Robert McMahon : Yes, it was down close to double digits but not high teens. Mike McMullen : Okay. And I'm going to have Sam talk about this but we're seeing some what we think is a transitory disruption in the diagnostics side of genomics that there's a lot going on with a lot of the diagnostic firms where we provide our solutions into their assays. So Sam, your perspective on the think would be really good. Sam Raha : Yes, happy to provide that. And building on what you said, Mike, right, there's a lot of public information now that I'm sure, Jack, that you're aware of, it restructuring or other sort of operational challenges at a number of customers from research into technology-driven genomics companies and diagnostic testing companies are going through. Based on that, we've definitely seen conservatism from customers that they've pulled back on purchasing levels. They're working down excess safety stock that they perhaps have built up. And we've just seen a little bit of hesitation in purchase patterns. Now that being said, just recently, earlier in February, I had the chance to attend AGBT which is one of the most important technology and science conferences. And there, we definitely saw good interest for our early access that we've been doing for our SureSelect cancer CGP which is a comprehensive cancer panel 679 genes. We continue to see really good interest in our Magnus automation system which is the walk away for our SureSelect platform and our broad-based market leadership and genomics and NGS QC remains intact. So I think this is some market headwinds that we're seeing but it's just, I think, a transitory thing, as Mike mentioned. Operator : We take our next question now from Josh Waldman of Cleveland Research. Josh Waldman : For you -- two for you, if I may. First, on the core growth guide, I wondered if you could provide a bit more color on the considerations that went into reiterating the top end of the core growth outlook for the year. I guess, maybe a bit surprised, we didn't see more of the Q1 upside flow through to the full year. I'm wondering if maybe this is backlog work down benefit here in the quarter that starts to abate as we get into the second half for some, I guess, something else? Mike McMullen : Yes. Bob, I'll let -- I think the headline is more just the recognition of the continued uncertainty about the back half but... Robert McMahon : Yes, I think the way to think about that, Josh, is we raised the midpoint of the guidance delivered 10% in Q1. We're saying that Q2 is going to be higher than the full year. And we're going to take this 1 quarter at a time, given some of the uncertainty that we're seeing. Obviously, we did talk about having great visibility into Q1 with some of the backlog activities and so forth. But I wouldn't say it was just that. I mean, I think what I would characterize it as a prudent guide given kind of what we're seeing and taking it 1 quarter at a time. Josh Waldman : Got it. Okay. And then, Mike, following up on pharma, I think these accounts typically start to get better clarity on their full year budgets this time of year. Wondered if you could update us on what you're hearing from key pharma accounts with respect to instrument budgets and purchasing plans here in '23? Mike McMullen : Yes. Sure, Josh. In fact, Padraig, I think you've just done recently around with some of the large pharma accounts and... Padraig McDonnell : Yes. So I think what we're seeing is our funnels are very, very stable on it. And of course, you're correct, the pharma budgets are set around this time of the year. And I think we're watching closely on how that moves to the second half but for now, no change. Mike McMullen : So I think we probably haven't seen any surprises on those like themselves but they're not aggressively releasing yet either. I think that's -- that's why I made a few times on this call comments around normalization of deal cycle times. Operator : And we'll take our next question now from Lisa Garcia of UBS. Lisa Garcia : Congrats on the quarter. I wanted to talk about sell analysis if we could. Obviously, it's like a $400 million business over for you at this point. I'd love to hear about performance. And then I think in a recent presentation, kind of indicated that it's pharma that's like maybe the largest customer set followed by research. So it would be great to get a sense of kind of the different customer groups and what you're seeing there? Mike McMullen : It's hard to get all the good news in but I think we had a good start to the year at cell analysis, Jacob, as I recall? Jacob Thaysen : Yes. We had another good quarter in sale analysis. Actually, we're really proud of what we build up of the business over the past years here in cell analysis in the M&A and the acquisitions we have done. And you're absolutely right that the main opportunities are within the biopharma academia and we've actually done a really good job in diversifying where we had some of the business we acquired was very exposed to academia and we've been able to really penetrate into the biopharma over the past years. So we continue to see opportunities and especially actually in the high end of the business that there's still a lot of opportunities in the biopharma space and especially in understanding the immune system, immuno-oncology, CAR-T and others is areas that we have put a lot of investments into and we see that pays off. So I believe there is still a lot of opportunities in front of us here. There is a strong correlation there in the biopharma academia space. There's a lot of collaborations where especially if you look into the CAR-T where you see a lot of the big university hospitals that is investing into this. So it's kind of a crossover between the academia and biopharma right now. So we see opportunities in both those areas right now. Lisa Garcia : Awesome. And then I guess... Robert McMahon : Just one other comment. Just you had asked about kind of growth rates. What I would say is it grew faster than the overall company faster than LSAG. Lisa Garcia : Awesome. Super helpful. I guess if I could just squeeze in one last one on the attachment rate. You're just crossed over the 30% line. I think I'm more thinking about kind of -- how do we think about kind of the incremental, particularly I'm thinking about services, ACG did pretty well this quarter. The revenue progression as we're looking at a larger installed base that's been put out over the past couple of years? Mike McMullen : Yes. And I'll have you make some cost or part. But I think we're expecting the continued step-up in that attach rate. Padraig McDonnell : Yes. I think there's significant opportunity to drive growth for our business and it's about at 1 point of attach rate is about $30 million annually. And we know our customers have adopted workflow solutions that a tight integration on the instruments. And that allows us, of course, with the 1 commercial organization to demonstrate the value and of course, attach more services and consumables. I will say if you think about what Jacob said about PFAS and biopharma, our focus on solution selling has really paid off. That's really driven attach rates. And I think our overall attach rate in both services and consumers are now in the low 30s and that represents a 2% increase and we expect that to grow as we move forward. Mike McMullen : And as your question focused on the attach rate on services. But I'd be remiss not to have Jacob talked about what's going on in attach rate to consumers that ties in this workflow solutions because we did make some changes organizationally but the ACG strategy of driving connect rates and services and consumables remains intact. Jacob Thaysen : Yes, exactly. And I think along what Padraig mentioned is that there's been a lot of investment from both the businesses and in commercial about driving connect rate also with consumables. And it's more about selling the full solution and hence, going out not only present an instrument but percent, the instrument is the consumables, informatics to go after as Padraig was mentioning, PFAS, other workflows in the biopharmas and really addressing -- we're starting to addressing the high-end parts of the market. And we've seen a significant uptake in our attach rates in our consumables and -- and I would say we are -- we will continue to see growth. We still have a long -- a lot of opportunities but I've been really impressed with the team to take it from the 20s up way beyond the 30s now. Operator : We'll go next now to Paul Knight of KeyBanc. Paul Knight : On the RNA or the oligo production business, it looks like we've had, I guess, 4 or 5 here in the last 4 years or so dominated by Alnylam and Novartis. I'm assuming that this customer count you talk to and project count is expanding well beyond that group of that customer. So my question really is what's your position in the market? Do you think you're the dominant vendor? And two, does this number of partners suggest you're going way beyond Novartis and Alnylam? Mike McMullen : Paul, I'm really glad you hung on and got your question because very enthusiastic to answer that question. We have a much broader base of business beyond 2 very good customers but the programs go much, much, much broader than that. Robert McMahon : And we are the market leader. Mike McMullen : Yes. We crossed over on the siRNA piece. We are clearly the market leader. We are going to be going after more aggressively the CRISPR space where we can't yet claim leadership. But overall, we've really -- with the capacity expansion, the continued great work of our team. We continue to gain market share. And from the math we're doing, we've now crossed over in the leader in the space. Paul Knight : So in fact, what you're really building out is the kind of market or the technological I guess, threshold we've now achieved. Is that fair to say? Mike McMullen : I'm not sure I understand completely the question. But I think what we're doing is, I think I got it which is we're actually expanding our portfolio which is we're the leader in siRNA. We've got a broad base of business broad-based set of number of pharma customers. Over time, you hear more about those when their therapeutics come to market. but also we're expanding into the CRISPR area. We've got a small business there right now. We do really well. We just don't have all the capacity we need and that's part of the storyboard what we're doing, what we call Project Endeavor. Robert McMahon : Yes. And Paul, to build on what Mike was saying is not only are we expanding but I think just as importantly, the market is expanding. And so the Alnylams of the world were the pioneers of this technology or one of the pioneers. But if you look at the number of products that are in the clinic or compounds that are in the clinic, it goes well beyond the 2 customers that you just talked about. Sam Raha : Rob, maybe just to add just a twitch color to that. The actual number of programs that are in various stages has literally doubled over the last 4 years. And then in terms of pharma partners, we're not in a position today to share anything publicly. But I already said we're working with more than 30 pharma partners. And I think what's encouraging for us is even within pharma, the caliber of the companies that have now entered and advancing molecules at various stages. So this is a market that is maturing the number of FDA approvals that have happened, European approvals that have happened. So there's momentum in the market. And we are -- we've worked hard to be the leaders in siRNA but there's momentum that's there for us to ride as well. Operator : Thank you. And gentlemen, it appears we have no further questions today. Parmeet, I'll hand things back to you for any closing comments. Parmeet Ahuja : Thanks, Bill and thanks, everyone, for joining. With that, we would like to end the call for today. Have a great rest of the day, everyone. Operator : Thank you, Parmeet. And ladies and gentlemen, this concludes today's call. Thank you again for joining and you may now disconnect your lines.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,023	2	2023Q2	2023Q2	2023-05-23	5.462	5.48	5.99	5.95	7.79	21.86	20.07	Operator : Ladies and gentlemen, welcome to the Agilent Technologies' Q2 2023 Earnings Call. My name is Sarah, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead. Parmeet Ahuja : Thank you, Sarah, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2023. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.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 and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Our guidance is based on forecasted currency exchange rates. During this call, 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'd like to turn the call over to Mike. Mike McMullen : Thanks, Parmeet, and thanks, everyone, for joining our call. In our call today, I'd like to first cover our second quarter results. I'll then provide some insight into the recent market dynamics that we are seeing and how this has translated into lower expectations for the second half of this year. I'll then turn things over to Bob for more detail on the quarter and outlook before returning for some brief closing comments. In an increasingly challenging market environment, the Agilent team delivered very solid results in the second quarter. Revenues of $1.72 billion are up 9.5% core above our expectations with growth across all end markets and regions. Our results are driven by an innovative and broad portfolio, a differentiated customer experience and outstanding execution by the Agilent team. Operating margin for the quarter 25.6%, up 30 basis points. Earnings per share of $1.27 are up 12%. Highlights from an end market perspective include our two largest markets, pharma and chemicals and advanced materials performing very well in the quarter. Our pharma business grew 6% on top of 13% growth last year. Pharma was led by biopharma, which grew 16% driven by lab services, consumables and our NASD business, while small molecule declined 1%. In previous calls, we talked about the small molecule replacement cycle and that the exceptional double-digit growth rates we've seen in the past two years would eventually moderate, which is what we started to see this quarter. Our chemicals and advanced materials business delivered strong results once again growing 16%. The advanced materials segment grew more than 20% and the chemical and energy segment grew double digits. On a geographic basis, 32% growth in China exceeded our high expectations. While the compare was an easier one, even adjusting for the COVID lockdowns in Shanghai a year ago, we still achieved double-digit growth in China. In addition, Europe delivered 5% core growth, while Americas grew 3%, albeit against a tough compare of 13% a year ago. Looking at our performance by business unit. The Life Sciences and Applied Markets group delivered revenues of $968 million, up 10% core. Our strong results were aided by backlog conversion across our instrument platforms. Our LC and LCMS products continued to lead the way with 16% growth in the quarter with strength across all end markets. Continued demand for lab consumables led to 13% growth in that business as well. During the quarter, we added additional strength to our LCMS product line by acquiring e-MSion and their innovative electron capture technology. e-MSion technology allows researchers to develop biotherapeutic products more quickly for treating disease. Agilent's LSAG team continued to bring several innovative new products to market, including enhancements to our Bravo NGS automation, Cary UV-Vis and the cell analysis NovoCyte systems. Many of these enhancements are specifically focused on serving our customers in the biopharma market. The Agilent CrossLab Group posted revenues of $387 million. This is up 13% core driven by strong revenues from service contracts. ACG's growth was broad-based, representing ongoing resilient demand for our services. We continue to see many opportunities for future growth given our services portfolio. In particular, the benefits of our service offerings as they help customers drive productivity in lab are even more relevant in today's challenging environment. Our strong and trusted customer support is also helping us to drive share gains and acquire new enterprise customers. The Diagnostics and Genomics Group delivered revenues of $362 million, up 3% core. Strength in our pathology and NASD businesses drove growth, partially offset by general industry-wide weakness in genomics. NASD posted another strong quarter growing in the high 20s. Our Train B manufacturing expansion remains on track to come online later this quarter, while construction has already started on the next phase of expansion. Overall, we wrapped up Agilent's first half of fiscal 2023 with double-digit core growth in both revenue and earnings per share. However, continued macroeconomic uncertainty, coupled with stresses in the banking system have accelerated a more conservative approach from our customers across the globe. This has primarily affected CapEx-related instrument spending across most end markets but are centered mainly in the pharma markets in the U.S. and China. Early stage biotech customers, while a small part of our revenues, dramatically scaled back purchases as funding and liquidity challenges drove cash conservation. Outside of these early-stage biotechs, the order funnel continues to be healthy, but it has taken a longer time for order to be approved, slowing deal velocity and generation of new orders. We expect this constrained capital environment to remain in place throughout the course of our fiscal year. Because of these factors, we are taking a more cautious approach to the second half and have revised our forecast downward. As a result, we now expect core revenue growth to be in the range of 3% to 4.5%, with EPS growing faster than revenue at 7% to 8%. Our operating margin increased in the first half of the year and we're doubling down on delivering cost efficiencies and increasing productivity to drive more leveraged earnings growth in the second half. As we've done in the past, we will generate additional cost savings so we can continue to invest in innovative new solutions and support for our customers as we enable future profitable growth. We have an unstoppable One Agilent team that is battle-tested. They consistently execute at extremely high level and are well prepared to deal with any challenges they may face. Bob will provide the details on our outlook for Q3 and the full year, but overall, we remain convinced our strategic focus, customer service and unmatched execution of the Agilent team remain the keys to our continued success. After Bob delivers his comments, I'll be back to provide some closing remarks. And now, Bob, over to you. Robert McMahon : Thanks, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter as well as take you through the income statement and other key financial metrics. I'll then finish up with our updated guidance for the year and our third quarter outlook. Unless otherwise noted, my remarks will focus on non-GAAP results. Q2 revenue was $1.72 billion, exceeding our expectations. Revenues were up 9.5% core and up 6.8% on a reported basis. Currency was a 2.8 point headwind, while the M&A contribution was minor as expected. In Q2, we continued to leverage our backlog and exited the quarter with our backlog at a normalized level. As Mike mentioned, our two largest end markets performed well in the quarter. Pharma, our largest end market, posted 6% growth led by biopharma, while small molecule declined slightly. Chemicals and advanced materials continued to drive strong secular growth of 16% during the quarter on top of 9% growth last year. The chemical and energy subsegments of the market are doing well, with the advanced materials market continuing to lead the way. As in past quarters, semiconductors and batteries are driving demand in this space. And looking at the rest of the end markets, the food market grew an impressive 21% during the quarter driven by very strong growth in China. We also saw strong results in the Americas and in Europe. The academia and government market was up 11%, led by China and Europe as the funding environment continues to be constructive. Our business in the diagnostics and clinical market grew 6% on top of 5% growth last year. Pathology again led the way for us here, partially offset by genomics. And the environmental and forensics business grew 2%, led by China and the Americas, while Europe declined. The Americas slowed after a very strong Q1, but still delivered mid-single-digit growth. On a geographic basis, the China team exceeded our expectations, delivering 32% growth following last year's COVID lockdowns in Shanghai. As we mentioned last year, the COVID-related lockdowns deferred roughly $55 million in Q2 from last year into third and fourth quarters. So while Q2 is an easier compare, we will have much tougher compares in China going forward. Taking out the effects of the lockdown this quarter, we estimate China still grew double digits, so very solid results by our China team. And the rest of Asia grew high single digits, better than expected. The Americas grew 3% with growth across all end markets. From a group perspective, both ACG and DGG grew, while LSAG unexpectedly declined low single digits as we started to see the accelerated effects of the slowing CapEx environment. Europe grew 5%, in line with expectations led by pharma and CAM. Now moving down the P&L. Second quarter gross margin was 55.3%, down 40 basis points from a year ago, largely due to an unfavorable product mix. The benefit of pricing was as expected. Below gross margin, we had good cost discipline in SG&A, which drove our operating margin to 25.6%, up 30 basis points from last year. Below the line, we benefited from higher-than-planned interest income due to higher interest rates and strong cash flow. Our tax rate was 13.75% for the quarter and we had 297 million diluted shares outstanding, both as expected. Now putting it all together, Q2 earnings per share were $1.27, up 12% from a year ago, a very good result, combined with our 9.5% core topline growth. During the quarter, operating cash flow was very strong, generating $398 million. This result was helped in part by deferring estimated U.S. tax payments of roughly $60 million to our fiscal fourth quarter. This is due to the payment deferral relief made available by the IRS to taxpayers in designated counties affected by the winter storms in California. We returned $151 million to shareholders, $66 million through dividends and repurchased shares worth $85 million, while also investing $57 million in CapEx, continuing our successful balanced approach to capital deployment. Our strong balance sheet is even more of an asset in this market environment and remains very healthy as we ended the quarter with a net leverage ratio of 0.7x. And earlier this month, Moody's upgraded Agilent's investment-grade rating on our corporate long-term debt to Baa1. This action is an important recognition of Agilent's financial strength. Now on to the revised outlook for the year and guidance for Q3. For the year, we now expect revenue to be in the range of $6.93 billion to $7.03 billion. This represents reported growth of 1.2% to 2.7% and core growth of 3% to 4.5%. Currency is expected to be a headwind of 1.9 points while M&A will contribute 0.1 points of growth. In addition to revising our guidance, we've increased the guidance range for the second half of the year to reflect a wider range of possible outcomes. For modeling purposes, I would encourage you to use the midpoint of our guide. Our updated guidance reflects a more constrained capital market, primarily impacting our instrument business. The outlook for our recurring revenue businesses remains largely unchanged. From an end market perspective, the market most impacted is pharma where we are now expecting full year growth of low single digits, down from high single digits. And from a geographic perspective, we see impacts focused in the U.S. and China. With the change in revenue, we now expect full year fiscal 2023 non-GAAP earnings per share to be between $5.60 and $5.65, representing growth of 7% to 8%. As with revenue, I encourage you to model at the midpoint of our guidance. Now turning to Q3. We expect revenue in the range of $1.64 billion to $1.675 billion. This represents a decline of 4.5% to a decline of 2.5% for both reported and core revenue. This is on top of a tough compare of 13% growth last year. Adjusting for the China deferral in Q3 of last year would add roughly 200 basis points to both reported and core growth in the quarter. Currency and M&A impact in Q3 are minimal, and are expected to offset each other. Third quarter non-GAAP earnings per share are expected to be between $1.36 and $1.38, representing growth of 1.5% to 3% versus the prior year. We are pleased with the first half performance, and while we are facing a more difficult market environment than we were estimating a quarter ago, I am confident that our team will continue to deliver for our customers. Thanks for being on the call. And now I'll turn over things back to Mike for some closing comments before we take your questions. Mike? Mike McMullen : Thanks, Bob. During Q4 '22 call in November, I shared with you that I believe Agilent has the right growth strategies, the right team and right culture to continue delivering strong above-market results. My belief remains unchanged. Our customers know we are reliable, resilient and extremely quick in reacting to meet their needs. The Agilent team continues to work hard to earn their trust. While the near-term outlook points to continuing challenges in the market, we remain confident in the long-term growth prospects in our end markets and our ability to continue to grow faster than the market. As a trusted partner that our customers know they can rely on, despite the current market environment, I remain confident in our ability to deliver on our shareholder value creation model. Our core values and approach haven't changed. Our focus on investing for growth, providing the industry's best customer support, our innovation prowess and being a great place for our team to work with a differentiated company culture are here to stay. They remain Agilent's formula for long-term success. Thank you. And now to you, Parmeet, to lead the question-and-answer session. Parmeet? Parmeet Ahuja : Thanks, Mike. Sarah, if you could please provide instructions for the Q&A now. Operator : [Operator Instructions] Your first question comes from the line of Brandon Couillard with Jefferies. Please go ahead. Brandon Couillard : Hi, thanks. Good afternoon. Mike McMullen : Good afternoon, Brandon. Brandon Couillard : Mike, it would be helpful if you kind of unpack what you're seeing in terms of instrument demand between, let's say, mid to large pharma relative to smaller biotech. Some of your peers have talked about maybe that large pharma budget just being delayed coming back later in the year. Curious what you're embedding in kind of your outlook and how you're bringing those two customer bases? Mike McMullen : Sure. Happy to do so, Brandon. So I think there are differences between the two sectors. The small biotech is pretty much shut down. We've seen real efforts on cash conservation as they've been dealing with the financing challenges of less venture capital money out there, banking crises and limited access to the IPO market. But on the medium-sized and large pharma companies, we still see a very -- actually, an increasing level of conservatism coming from new capital investments, particularly as it relates to our business in instruments. You can make a case that perhaps, there'll be a year-end budget flush, if customers go to try to spend their year-end money that they're not spending now. We're not assuming that because all we can really comment on right now is what we're seeing today. We're not giving any indications that that situation will change. And I think what remains to be seen is, I think it's going to be a CEO/CFO decision at our larger pharma companies about how they'll handle their full year budgets. And again, that relates primarily to the instrument side of our business. As we commented in our prepared remarks, consumables and services continued -- demand continued quite strong in these marketplaces. Anything else to add to that? Robert McMahon : Brandon, this is Bob. Just to kind of frame in, if we think about these businesses, this emerging biotech, which is the one that has really changed during the course of Q2. That represents roughly about 10% of our pharma business, and we were projecting that at roughly low double digits. And now we're expecting that to decline. And as Mike was saying, the rest of the business was high single digits, and now we're assuming kind of low double digits, given this more conservative capital. I would also say the funnels are healthy from the standpoint of working with them. It's just taking longer for them to translate that deal velocity into orders. Mike McMullen : Bob, one thing I forgot to mention as well is we aren't hearing the budgets are being cut. But the timeline, as Bob mentioned, are extended, and we're often here -- often at higher levels of approval as well within our customer base. Brandon Couillard : That's helpful. Lastly, if you could unpack kind of what you're seeing in Europe. Overnight, we got pretty weak manufacturing PMIs. I was just curious if you see any slowdown in terms of the more cyclical, let's say, industrial odds in the geography. Mike McMullen : Yes. Sure, Brandon. No, you may recall earlier this year, we really were pointing to Europe as a watch area, particularly Western Europe. I have to say, we continue to point to it as a watch area, but we've been pleased with the results to date. We are seeing signs of increased cautiousness on the chemical side of our customer base in Europe, but advanced materials continues to be -- demand there. And we're pleased with how the business is holding up right now. Brandon Couillard : Thanks. Operator : Your next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead. Vijay Kumar : Hi guys, thanks for taking my question. Mike McMullen : Sure. Vijay Kumar : Mike, can you just frame sort of what April trends were? How it may progress because I'm just trying to make sense of the guidance. You guys did double digits in the first half. And we went from double digits to low single-digit declines. Just frame us this pace of slowdown. Is there any historical analogies when you see these kinds of slowdowns? Do these things last like a couple of quarters or is this like four quarters? And I'm assuming this guide change so far, it's only pharma, correct? Like we're not reflecting any other end market changes? Mike McMullen : So there's a lot to unpack there. Bob, so you and I maybe can tag team on this. But let's first of all talk about the pace of business. So as you're right, Vijay, it really is a tale of two cities. I mean, look at how we performed for the first half, double-digit core growth, double-digit EPS growth, continued margin expansion. But we saw -- and we have been signaling a level of cautiousness in our customer base, and we talked about the uncertainty that was assumed in our second half guide. We've been talking about that for a few quarters. But what I would tell you is that we actually started and it's really a late quarter phenomena. We started to see a little bit maybe the last week or so of March, really centered in April, where the level of caution from our customers increased. Deal cycles were continuing to get further pushed out, deals weren't closing. And that really was the reason for the push in terms of downward guide for the second half. What I can tell you, what we're seeing so far through May, I think that was also one of your questions, is mid-May today orders, if you will, are tracking towards our revised order expectation. We haven't -- we've been through these cycles before in terms of downturns. These are always hard to predict because it's always hard to know exactly when the cycle started. But our experience is at least 12-month kind of cycles, 12 to 18 months. So -- and I think that's really the question that we need to work through here in the next few quarters. And again, as Bob and I have said in the past, we take one quarter at a time. And what we're trying to do here is comment to you today is what we're seeing today in the marketplace, and it's a level of increased cautiousness on capital deployment. Robert McMahon : Vijay, maybe just to add a couple of other comments to what Mike was saying. In the second quarter, we talked about revenue exceeding our orders, and that was really at the -- towards the back end. And we came into Q2, we'd say, still greater than normal backlog. And so we were able to -- our OFS team was able to actually drive down our backlog and leverage that. And if you took the backlog impact out of our numbers, we would have been at mid-single digits for transparency in Q2. And we had built some of that into our forecast. We just didn't refill the funnel as much as we thought we were going to coming into Q2, which means resulted in a lower expectation for the second half of the year. Vijay Kumar : That's extremely helpful, Bob and Mike. Sorry, go ahead, Mike. Mike McMullen : I was just going to say too, Bob, I think it's fair to say relative to our guide assumptions, we're mainly looking at the pharma market. Although this level of cautiousness -- the increased level of cautiousness we're seeing is really across all end market segments, but really centered in pharma. Robert McMahon : Yes. Vijay Kumar : That's helpful, Mike. And just one quick one. This back half EPS and margins up, I think 2Q operating margins missed and just rough math here suggests back half operating margins need to be up 300 basis points from 2Q levels. With revenues coming down, can you just walk us through what gets us to that? What drives that margin expansion? Robert McMahon : Yes, you're right. In Q2, we did -- we had higher revenues than expected. And we did have some negative mix effect that resulted in a lower-than-expected margin. Now we did expand. We just didn't expand as much as we had anticipated. And as a result of the lower guidance, as Mike talked about doubling down on cost efficiencies, so we've taken a number of actions to streamline our spending profile in the second half of the year in order to drive greater margin expansion in the second half to drive the EPS. Mike McMullen : And Vijay, I'd also point out there is a level of variability in our pay plans tied directly to adjust for the company's performance that are assumed in our guide for second half. Vijay Kumar : Thanks guys. Robert McMahon : All right. Operator : Your next question comes from the line of Puneet Souda with SVB Securities. Please go ahead. Puneet Souda : Yes, hi Mike, Bob, thanks for taking the question. Thanks Mike. So first one is really on, obviously, China, very strong in the quarter. Can you elaborate a bit on sort of the stimulus contribution that happened this quarter? And what are you -- obviously, you're expecting moderation in the second half. Also, if you could talk about if you're seeing anything relevant to the new COVID wave that's emerging there. Is that something baked into your guide and overall just expectations for China for the full year? Mike McMullen : Yes. Why don't I start out with answering the last question first, and then I'll probably mention to you, Bob, to our guide assumptions. But in terms of -- I think you mentioned the new COVID wave, we've not considered that into our second half guide, and I don't believe we would because we have experienced pretty significant COVID waves throughout the years. And as we've shown each quarter, we can very easily -- not easily, but we can navigate through that. In fact, that was a storyboard that you may recall from Q1 of this year. Relative to stimulus, we've been on record and the story remains the same as we've seen no material impact from China stimulus, which, in fact, we understand was closed off at the end of -- in February. And that initial stimulus program from our understanding was really focused on more on the high-end research space, things such as NMRs and SEMs, products where we don't have an offering or compete. So we're not seeing much happening at all on our front relative to stimulus. Now there is some discussion in the marketplace that maybe there's another one coming. If that would occur, that would be upside to our forecast for the year as we're assuming really no change in the current environment and no stimulus is assumed in our second half guide. And Bob, I know we've made some adjustments to the outlook for China for the year? Robert McMahon : Yes. Puneet, if we look at Q2, we always assumed that Q2 was going to be a very strong, given what we were facing on an easier comp, and we talked about that in our prepared remarks, where Shanghai was shut down for roughly six weeks. That deferred roughly $50 million to $55 million of revenue that's now showing up in Q3 and Q4 of last year, which will make it much tougher comps. And to give you a perspective, last year, we went minus 3% in Q2, 29% growth and then 44% growth. So we're always expecting moderated growth expectations in the back half of the year just given that tough comp. Now what we've seen is not a pickup in the performance in the marketplace, particularly in pharma, which we were expecting coming out of kind of the first quarter after the elimination of the zero COVID. And we're assuming that this current performance will maintain through the second half of the year. We're not going to see a recovery. Puneet Souda : Got it. That's super helpful. And then if I could touch on the early-stage biotech customers. Can you just remind us for the overall company, I know you provided pharma. But for the overall company, what's the mix there? And then also, is there any impact that you saw -- expect there in the NASD business or your cell therapy offerings as a result of that? And just given the number of questions we're getting here, just at a high level, Mike, instrumentation, very strong over the last two years, one of the remarkable cycle of instrumentation placements that we have seen over the last few decades. When do you think we get back to sort of a normalized order pattern for instrumentation? Mike McMullen : So maybe we start with the biotech and NASD business questions first. So no impact at all in our NASD business. I think, Sam, we can say that pretty equivocally, right? Robert McMahon : And to give you a perspective, emerging biotech, Puneet, is roughly -- it's less than 5% of the total company. It's roughly closer to 3% for the full company in terms of revenue. Mike McMullen : And your last question is the toughest question, which is, sort of, if you will, your crystal ball question. We've typically seen 12- to 18-month kind of cycles historically. And as Jacob and I and Bob have talked in the past, we've always felt that this is more of a mid-single-digit kind of growth market with -- for instruments, which is still very healthy end market growth rate and particularly when you build around at the service and consumables piece. We're not calling for that yet to occur for this year. So I think the only other thing I would say is for a large majority of our instrument business it is a replacement cycle. We've talked about that time and time again. And so these products are in the installed base. They will have to be replaced. The question is when. And again, interest and demand remains high. I mean, our backlog is strong. As we mentioned in prior calls, and I just -- we emphasized that again today. Quality backlog remains high, no significant order cancellations and as Padraig likes to say, we're adding fresh funnel to the backlog. So it points to future demand, but we're just not seeing indications of when their buying behaviors are going to change. Puneet Souda : All right, thanks. Thanks guys. I appreciate it. Operator : Your next question comes from the line of Matt Sykes with Goldman Sachs. Please go ahead. Matt Sykes : Hi. Good afternoon, Mike and Bob. Thanks for taking my questions. My first question is just clearly the -- it seems to be the delta in the changing full year guide is largely concentrated in pharma, both large and small. But given the sort of resilience you've seen in the strength in the chemical and advanced materials space with that 16% growth, what is your kind of outlook on that end market? I mean should we expect a level of durability of demand certainly relative to what you're seeing in pharma over the course of this year, which could help offset some of the growth impact you're seeing in outside? Mike McMullen : It's a great question. And Bob, I think that's actually what we've assumed in our full year guide. So maybe you want to share some of the specifics? Robert McMahon : Yes, Matt. What we've built into the -- if you looked at where we were at the beginning of the year, the largest changes in pharma, where we were at high single digits, and as I mentioned, going to low single digits. Our chemical and advanced materials, we're still assuming a mid- to high single-digit growth for the full year. Certainly front-end loaded given kind of the challenges that we see in terms of the comps with China. But we are seeing -- we are expecting that to be more resilient given some of the fundamental secular drivers of semicon and batteries. So it continues to be strong and are expected to stay strong in the second half of the year as well. Matt Sykes : Got it. It's really helpful. And then just a second question for you guys, maybe Padraig. Just on ACG, just given if we do have this sort of 12- to 18-month cycle, you've talked in the past about the ability for ACG on the services side, whether it's extended warranties or others in terms of kind of helping to offset some of the weakness you might see in sort of capital equipment purchases by extending those services or increasing the services revenues. I realize it's a smaller portion of revenue relative to LSAG. But I'm just wondering if this is sort of a 12- to 18-month cycle, could you see some level of acceleration or at least durable sort of low double, high single-digit growth in ACG over the course of that time period? Padraig McDonnell : Yes. Look, I think the breadth of product offerings across many of the hardware platforms enables us to add all types of customer -- all types of customer operations. And what we're seeing is extremely strong demand for our services as utilization of the installed base happens. And in particular, we're seeing lab-wide enterprise service offerings, a big demand for that where we're helping customers with their efficiency, their asset management and so on. So I think it's a very durable business, and I think it's going to continue to be durable over that time frame. Mike McMullen : Yes. I think durability is the right word to use here, Padraig and Matt. And this is a resilient part of our company's portfolio. We've talked about these recurring revenue businesses. And I think the story here is even bigger, Padraig, than extension of instrument life as people are deferring replacement purchases. We also believe we've been picking up share and particularly been doing really nicely job on the enterprise level. Padraig McDonnell : I would also say, Mike, we still have a big opportunity to attach our service contracts onto the business. And of course, as we go through this cycle, we continue to accelerate that. Matt Sykes : Great. Thanks very much. Operator : Your next question comes from the line of Rachel Vatnsdal with JPMorgan. Please go ahead. Rachel Vatnsdal : Okay, thank you for taking the questions. So first, just maybe some questions on backlog. You noted that you worked on your backlog this quarter. So could you just tell us how many months of backlog do you have on that instrument portfolio today? And then last quarter, you noted that you'd worked on the backlog on the instrument portfolio, but for the total business, orders can grew faster than revenues. So can you kind of give us some of that context as well in terms of order book and backlog trends between instruments versus the rest of the business as well? Mike McMullen : Rachel, thanks for the question. As you know, we don't report on book-to-bill, but what we can use is how to qualitatively describe the backlog and I think we used the word normalized backlog from the elevated levels we have seen in the quarter. So we're at a normal level of backlog in terms of month supply. So -- and we've been talking about this movement towards normalization in terms of the backlog, and we're there now. Yes. Robert McMahon : And Rachel, you're right. Our orders grew greater than revenue in Q1. And as I mentioned earlier in the call, Q2, it reversed where revenue was greater than orders. And we did eat into backlog both in Q1 and Q2 in the instrument side and supply. As to the delivery times declined, we thought that that was a healthy thing. And we're back at normalized delivery times as well as a normalized backlog. Mike McMullen : Bob, I think we did have some pretty tough compares in terms of our prior year order growth. But -- and I think ACG and DGG continued to grow in the quarter. Robert McMahon : That's right. Yes. Rachel Vatnsdal : Great. And then a question on the LC market here. You guys grew 16% in the quarter. So we've heard some varying comments on this market. So can you just walk us through what are you exactly seeing? And what do you expect for the full year for LC growth? And then finally, you've said some comments today about share gains. You talked about that in some recent weeks as well or recent months as well. So can you just talk to us about share gains and kind of what parts of the market, whether that's geographic basis or customer segment wise, that you're doing in LC? Mike McMullen : Yes, I'm going to pull Jacob into this call, but he has had an opportunity to join in the conversation. But I think the storyboard here for LC is very consistent with the overall macro environment we described, which is an increasingly cautious set of decisions being made by customers relative to new instrument purchases. And as you know, we've been talking for some quarters about the moderation we were expecting to see in small molecule LC placements, that the 20-plus growth rates that the industry have been seeing for a number of quarters, would actually see a level of moderation start to occur. And that's what we saw in this recent quarter, and we would expect to see that continue throughout this year. And perhaps, you want to add some of your thoughts here as well, Jacob, and then take on the question about market share as well. Jacob Thaysen : Yes, absolutely, and thanks for the question. I mean, first of all, we continue to see good market share gain in the LC business. And we see that, as Mike was mentioning also, over the last year, we have really seen a high growth in the LC business over many of our end markets. Obviously, being fueled significantly in the pharma, both small and large molecules. And as both Mike and Bob was talking about, these markets are changing right now. So while we will see a change in the market dynamics and thereby also some of the growth rates, the strategy have been in place from LCMS and pretty much the whole portfolio has been to build these workflows that is based on robust reliable instruments and really solution-oriented. And we expect and we see that this is what our customers are looking for. And hence, I'm expecting that while the markets are down, we will continue to see market share gain in this business and also in the LCMS business. Operator : Your next question comes from the line of Dan Leonard with Credit Suisse. Please go ahead. Dan Leonard : Hi, thank you. Going back to the, Mike, so your comment on large pharma, mid and large pharma, the 90% of the business is not the emerging biotech within your reported pharma segment. Do you have any sense or any theory from your field team on why that customer base has gotten more cautious and why deal cycles have lengthened? I wouldn't think it would be very GDP, PMI-tethered and I wouldn't think that Silicon Valley Bank or what have you would be that material for that customer set. Mike McMullen : Yes. I don't think you can point to Silicon Valley, but you can point to the pressure that the pharma companies run relative to their P&Ls, and they're cautious. They're really cautious about deploying new capital. And it's... Padraig McDonnell : Yes. And I would add, Mike, the approval levels that we're seeing are going up and up and at the highest levels within pharma accounts are making decisions on capital purchase. So a lot of caution is around that. Mike McMullen : Yes. And Dan, I have to say in all transparency, it's a little bit hard to figure out, right, because we had a similar thesis, which was the markets would be more resilient. Although we expect with some level of pressure as we assumed in our second half guide, a little more resilient in the face of slowing GDP. But things have -- obviously, things have moved more quickly than we had anticipated. And this level of increased costs was something we've seen in the last probably four to six weeks. And it's difficult to figure out from the standpoint is there's no obvious external catalyst. We just know we're seeing it across a broad section of our customer base. Dan Leonard : Appreciate that. And a separate question. Can you comment a bit more on what's going on in the genomics market within your DGG business? Do you think there's any share shift happen? Is it all the pressure is market related? And when would you expect that that could improve? Mike McMullen : Yes. So I'm going to invite Sam on to this, but I think what you'll hear from him is he'll talk to you about it's a U.S.-centric phenomenon, not a market share issue. And there is that level of CapEx there that's on the instrument side that we're feeling a bit as well. Sam Raha : Yes. Absolutely, Mike. And thank you for the question. What we found is that when you think about translational research, we've already talked about pharma here also as it's used in genomics and diagnostic testing too. There's just become a slowness in decision making, not only in instruments, but even in the usage of consumables particularly on the instruments. I will tell you that even within the quarter, our NGS QC backlog for consumables related to NGS QC, that's actually grown and our orders have grown. So we're doing well there. But there has been a slowness that we're seeing that's broad-based. And to answer your question about share, we don't believe that we're losing share. Similar to what you've heard about the instrument, it's not that we're losing orders at the time in which the orders are being placed. It is just being lengthened. And in U.S. in particular, a little bit in China is where we're seeing the impact. Mike McMullen : We are assuming a level of improvement in our genomics business in the second half in our guidance I'll recall, Bob, and not full recovery, but improvement. Robert McMahon : Yes. I would say, Dan, some of our end customers have had a really challenging time and shut down sites, and that has affected our volumes. We saw that in Q1, and it continued into Q2. As Mike, you're saying, we start anniversary-ing some of those in the back half of the year and expect it to perform better. But some of those are customer-specific. Dan Leonard : Thank you for all the color. Operator : Your next question comes from the line of Derik De Bruin with Bank of America. Please go ahead. Mike Ryskin : Hi, thanks for taking the question. This is Mike Ryskin on for Derik. Just following up on the previous point on pharma -- big pharma slowing down. You used a lot of comments in a slower deal velocity taking longer to close the deals, et cetera. But as you just said, you're not seeing an obvious catalyst. Is there any risk you're going to see slower deal velocity elsewhere as you go through the year? I mean, academic and government, applied materials, these are sectors that also had, I would say, above trend growth in recent years and in the fiscal first half. So -- but you're not building in any conservatism in those areas for the rest of the year. So how would you characterize the risk there just given how quickly pharma turned? Mike McMullen : Sure. Bob and I think we've got a realistic forecast here. And that's why we're asking to think about guidance in the midpoint. We had already assumed some level of slower capital investment in those end markets in our previous guide. So there really is no change to that. We think that outside of maybe the chemical side of CAM, those other end markets will hold up relative to our guide expectations. And listen, we've had experience in these cycles before. And Mike, one of the things I wanted to mention earlier to a previous caller's question was, we know when the market is low. This is actually when the Agilent team even shines further. We always gain market share in down markets. So I'm absolutely convinced you heard in my prepared remarks that we're going to come out of this thing stronger. I think the only debate is how long the cycle is going to be. Mike Ryskin : Right, right. Yes. And then kind of to that point, for the fiscal second half, I mean, you're pointing to a 3.5% decline core growth, core sales growth in 3Q, but then it implies roughly flat in 4Q. You touched a little bit on comps at China moving around and things like that. But still sequentially, that's a pretty big reacceleration in the fourth quarter regardless of how you look at it even in absolute dollar terms. So are you assuming any reaccel in the 4Q? Are you -- any indication of that happening in terms of orders? I guess, just why is it really fiscal 3Q that's being hammered here? Robert McMahon : Yes. I mean, we typically do have some seasonality built into our results. If you not just looked at last year, but historically, our Q4 does have a typical ramp-up from Q3. And we're looking at it. If you look historically kind of how we're looking at the seasonality, that's kind of how we built it in. We are expecting stronger both revenue and order performance, Q4 relative to Q3, based on what we know today. Mike Ryskin : Okay, all right, thanks. Operator : Your next question comes from the line of Dan Brennan with TD Cowen. Please go ahead. Dan Brennan : Great, thanks. Thanks guys for the questions. Mike and Bob, maybe just a question just kind of clarifying some of the numbers here on emerging biopharma. What did that business do in the quarter itself? I don't think I caught that. I know, Bob, you said it's going to decline as part of your guidance. So if you just flush out like what you're assuming for the rest of the year for emerging biopharma and then kind of what does that imply for the commercial biopharma? And I didn't hear any as well for LSAG. Like did you guys talk about what you're expecting LSAG to do in the back half of the year? Robert McMahon : Yes, I would say -- let me take the last one first. Our LSAG business, where we were assuming for the full year kind of mid-single-digit growth with it front-end loaded, we're now expecting low single digits, just above 0. So we're actually expecting a decline in both the second -- third quarter and fourth quarter for LSAG driven in part by the emerging biotech and the small molecule. In terms of the biopharma, biopharma actually in total grew 16% in the Q2 results, and that was benefited obviously from NASD. If you took NASD out, it was 11%. So what we saw was this change in the quarter, and we're assuming that change will stay pretty consistent in the back half of the year. Dan Brennan : Got it. Okay. And then -- and maybe just one on NASD since you brought it up. Another terrific quarter. Can you just unpack a little bit on kind of what the funnel looks like there? Is the same level of growth kind of persist in the second half? And now that you're bringing on -- kind of working on the new Train, kind of what's the durability of that growth as you look out beyond year-end? Mike McMullen : Of course, you will take that one. Robert McMahon : Yes, super pleased with the performance of NASD. And as we look out to the second half of the year, we feel good about the performance and are excited about Train B coming online. And we're having conversations with customers as we look to fill that Train up. And what I would say is kind of stay tuned from that standpoint. But what I would say long term, we're extremely excited about this. That's why we're investing another $700 million in adding Train C and D as well. So we think that we're in the early stage of therapeutic discovery here in terms of RNA, siRNA-based therapies and there will just be more larger indications as those move through the clinic. Mike McMullen : Absolutely. Dan Brennan : Great, thanks guys. Mike McMullen : You're welcome. Operator : Your next question comes from the line of Jack Meehan with Nephron. Please go ahead. Jack Meehan : Thank you. Good afternoon. So I have one more question on China. Obviously, great quarter even if you exclude the comps. But you're talking about some incremental caution here. Can you talk about like what customers in the China region you're seeing. Some of this incremental caution, is CDMOs one of those? Just any color on specific customers in the region would be great. Mike McMullen : Yes, sure. Maybe I'll tag team with you, Padraig, on this one. So as Bob mentioned, even adjusting for the Shanghai shutdown last year, we did 10% core in China in Q2. We are bumping up some pretty hefty comparisons, 29% and 44%, if I remember the numbers correctly, for Q3 and Q4. But I would say that the China market is really reflective of what we're seeing in the United States as well. So it's our pharma customers in China. It's our chemical customers in China, albeit the advanced materials piece of the China market continues to hold up quite nicely. And Padraig, I know you've been in conversations with our China sales leader. What are you hearing from them? Padraig McDonnell : Yes. No, I think you said it well, Mike. It's a very similar dynamics in China from what we're seeing in the rest of the world, which is quite simply customers have become more conservative CapEx budgets and spending decisions, albeit on the EV markets and so on, that's a particular strength that we're going to continue to see. But I think that's what we're seeing. Yes. Jack Meehan : Great. And then one market you didn't call out in CAM was the PFAS testing. I was wondering if you could give us an update on that and just how you're -- if there's been a change in terms of the market dynamics there? Mike McMullen : I think we remain very positive on that, Jacob, right? Jacob Thaysen : Yes, absolutely. I think that we are still in the -- to use the baseball term, the early innings. Mike McMullen : Yes, American baseball terms. Jacob Thaysen : I think I am, but we certainly are early innings here. We have been -- we've seen a lot of growth last year, and we continue to see it. Obviously, right now, since there's also a lot of funding through the government, it's a little bit lumpy. But if you look at for the long horizon, this is a huge opportunity for us, and we have a very strong position with our LCMS business here. And we're also seeing it expanding into new areas with the DCMS business. So I'm still very bullish on that, and we continue to see a lot of business here. Mike McMullen : And Jack, I think it's also fair to say it's primarily a U.S. and a little bit European phenomena. We've got to see really new ranks being deployed and implemented in China and Japan, which down the road could be a source of continued growth on a global basis. Jacob Thaysen : Yes, you're absolutely right, Mike. I mean there's a lot of things going on here in U.S., and there's been regulation in certain states right now, but it's driven by regulation. So when regulations go onboard and online in different countries, you see a step-up in that. So there's definitely more to come here. Jack Meehan : Got it. Thank you, guys. Operator : Your next question comes from the line of Patrick Donnelly with Citi. Please go ahead. Patrick Donnelly : Hi guys, thanks for taking the question. Mike, just a quick one. Just following up on the LSAG piece. Getting a good amount of inbounds on that. I know you don't want to talk about the book-to-bill, Mike, but just given the level of focus and the visibility here, I know you mentioned the backlog, back down to normal. It seemed like that was adding to it a little bit this quarter. Can you give us a sense on the orders? I mean, were they down double digits? And Bob, maybe just the magnitude of what that decline could look like in 3Q in terms of LSAG revs would be helpful. Mike McMullen : Yes, sure. We want to give you some additional insights, Bob, so I think you've got some? Robert McMahon : Yes. So if you looked at our overall orders, they were down low single digits. As Mike mentioned, ACG and DDG grew and LSAG was down mid- to high single digits in the quarter. And as I mentioned before, our guide contemplates a decline for LSAG in both Q3 and Q4. Patrick Donnelly : Okay. Got it. And then maybe just a margin piece. I know you talked a little bit about the second half. And Mike, I think you flagged maybe some additional cost savings in the second half. Can you just talk about, I guess, where you guys are pulling some costs from? How nimble you can be, and how aggressive you want to be as well. Mike, you obviously sound good on the long term. You're kind of dealing with this pullback here. Looks like it's transitory. So how do you think about just the expense management in the near term and that second half margin ramp? Mike McMullen : Yes. Thanks for the question. I'm really glad to address this head on. So because you hit one of the key messages, we still are very positive on the long-term growth opportunities in these markets we serve. We think we're in a pause in certain segments of our market, but we remain very bullish on the long-term end markets. And the trick here is to make sure you're doing the right thing to manage the business in the short run in terms of being able to deliver leveraged earnings growth for our shareholders, and that's why I talked about the confidence we have in our shareholder value creation model. But at the same point in time, make sure that we don't cut off things that are going to get in the way of our long-term growth. And we know how to do this. We've done this before. We've got some variable pay programs. We have things we look at relative to travel and other things that are associated with expense, things that aren't necessarily immediately near-term revenue generating. And then what we'll do is we'll prioritize. We'll make sure that we're focusing on the sustaining our ability to realize the growth opportunities in a lot of these businesses, which are growing right now. One thing that came out today is it's a story of the multiple growth drivers across Agilent. Clearly, we're having some near-term challenges right now in analytical instrumentation business, yet pathology is growing well. NSE is growing well, services, consumables. So we've got a pretty rigorous program. And what I can assure you is that we will make the reductions in areas that we don't think will get in the way of our ability to continue to sustain what we believe to be out market growth. And Bob, I know you put a lot of thought and time on this, but we've already been activating a lot of the software already. So we didn't wait to the earnings call to get started on this, but I know that we think there's a path forward here for us. Robert McMahon : Yes. Just to build on what Mike is saying. Obviously, we've got -- we've been looking at discretionary spend, things like travel but also demand related. If there's not demand, we're not going to spend the same level of marketing funds as an example. And we continue to really drive productivity. We talked about that at the very beginning of the year around productivity in our workforce, and we'll continue to do that, making sure that we don't get ahead of ourselves in terms of adding more people relative to the business. Patrick Donnelly : Understood. Thank you, guys. Robert McMahon : Sure. Operator : Your next question comes from the line of Josh Waldman with Cleveland Research. Please go ahead. Josh Waldman : Mike, curious what year-over-year orders were in LC and mass spec? Were orders there down kind of in the mid-teens range? And then within large pharma, I think you mentioned the funnel remains healthy, but it's just taking longer to close deals. I guess based on conversations with key accounts recently, anything you can point to that gives you confidence that the slower orders here are more reflecting delays in the purchasing process as opposed to just tighter budgets and maybe lapse reprioritize the capital to other instrument categories, maybe outside of LCMS? Mike McMullen : Yes, I want to tag team with Padraig on this, and then I'll go back to the order question to Bob. But yes, I mean, what we're hearing or I heard directly is customers aren't cutting their budgets. And I happened to be in Europe last month at our demo facility in Vauban, Germany. It's fully booked for the next three months. I mean -- so there's a lot of interest, a lot of interest in Agilent solutions. We just can't get the PEOs through their approval process inside their companies. And that's why we think it's transitory, although we have to acknowledge what we're seeing today, and that's reflective of the revised guide for the second half. Padraig McDonnell : Yes. No. Look, I think you're right, Mike. I think the customer activity remains high. I think one thing that we've really seen is no uptick in cancellations whatsoever. Funnels remain intact. And actually, we're adding fresh funnel in certain cases. So I think it's really a case of slower deal velocity. Robert McMahon : And on orders, Josh, we won't disclose individual product lines. But as I mentioned, the order growth for LSAG was down mid to high, and they were higher than that. The decline was greater than the average. Josh Waldman : Okay. And then just a follow-up, I think, on Jack's question. Can you provide more context on what within pharma in China has been softer than expected? Any examples of customers -- any examples that customers have provided on why they're pulling back? And then curious if the softness has been pocketed within a few large accounts there or if it's been fairly systemic? Mike McMullen : I think there's no real significant difference between some segments of the overall pharma market. And I think the -- and Padraig, correct me if I'm wrong, I think the overall sentiment is economic uncertainty and just being cautious. It's a -- it's like I said earlier, it's a hard one to initially figure out because there's no obvious external catalysts because we deal with this. But -- this is what we're seeing, and we just thought it was important to share that directly on the call today. Robert McMahon : Yes. I think, Josh, the one thing that we did see, and we talked about this at the beginning of the year because there was a lot of talk about the stimulus. That stimulus was targeted at higher-end applications and instrumentation that we don't necessarily have the product portfolio or compete in. And so I don't think that has moved budgets, but it created a stimulus for potentially areas that we're not as exposed to as maybe some other players in the marketplace. Josh Waldman : Okay. I appreciate all the detail. Mike McMullen : You're quite welcome. Operator : Your final question comes from the line of Liza Garcia with UBS. Please go ahead. Liza Garcia : Thanks for squeezing me in. Really appreciate it. I guess coming back to the margin progression in the guidance and just kind of -- I appreciate all the clarity on kind of the cost potential. But also with the second train line kind of ramping and thinking about NAV, I know that you've talked about how those should be accretive -- train line should be accretive to the overall margins. But just as we think about it ramping, can you just give us some context to how to think about that train line coming on and its impact in the back half? Mike McMullen : Bob, do you want to take that? . Robert McMahon : Yes, sure. So Liza, if you looked at that in isolation, actually, there is margin compression, given the Train B startup. But we've taken that into account. We had that in our initial guide, and that's money. That's good money to spend because we've got a lot of opportunity there. And so the cost savings that we've been talking about is really not in that area. It's in the other parts of the business. Liza Garcia : Great. And I just don't think I caught this, but I'm assuming pricing is still tracking to -- is 300 bps still kind of what we should be thinking about in the guidance? Robert McMahon : That's correct. That's correct. It was actually a little over 4% for Q2. Liza Garcia : Great. Thank you so much guys. Robert McMahon : You're quite welcome. Parmeet Ahuja : Thanks, Sarah, and thanks, everyone, for joining. With that, we would like to end the call for today. Have a great rest of the day, everyone. Operator : Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,023	3	2023Q3	2023Q3	2023-08-15	5.401	5.403	5.764	5.677	7.48	20.84	19.98	Operator : Ladies and gentlemen, welcome to the Agilent Technologies Q3 2023 Earnings Conference Call. My name is Bo and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja. Parmeet, please go ahead. Parmeet Ahuja : Thank you, Bo, and welcome, everyone, to Agilent's conference call for the third quarter of fiscal year 2023. With me are Mike McMullen, Agilent President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our third quarter financial results, investor presentation and information to supplement today's discussion along with a recording of this webcast are available on our website at www.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 and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted currency exchange rates. During this call, 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'd like to turn the call over to Mike. Mike McMullen : Thanks, Parmeet, and thanks, everyone, for joining our call. In today's call, I'll walk you through our Q3 results, share what we're now seeing in the market and provide context for our revised full year outlook. I'll then turn things over to Bob for more detail on the quarter and outlook before returning for some brief closing comments. The Agilent team continues to execute well as we navigate our way through ongoing challenges of the current market environment. Our Q3 revenue was $1.67 billion at the top end of our expectations. This is a decline of 2% on a core basis against a tough compare of 13% in Q3 of last year. We continue to be proactive and are taking steps to help us deliver on our leveraged earnings model. Operating margins are 29.3%, up 180 basis points. Quarterly earnings per share of $1.43 are up 7% and above our expectations. The major drive behind our Q3 year-on-year decline in revenue is our China business. Excluding China, the rest of Agilent grew 2%, which was better than expected. We knew we're up against a difficult compare in China and had previously guided for lower China revenues in Q3. However, the economy in China continued to weaken during the quarter, translated into a more challenging market environment than we had anticipated. With the softer market conditions in China and continued global macroeconomic challenges, we have lower growth expectations for the remainder of the fiscal year. We now expect core growth for the full year to be around 1%, down from our previous guide. Based on what we're seeing at this time, we're not assuming any improvement in the China market for the remainder of the year. We, however, view the near-term challenges we're experiencing as transitory and remain confident about the long-term growth prospects of our end markets. Before turning now to our third quarter results, I'd like to touch on our two largest end markets. Our total pharma business is down 8%, driven by the pharma market in China being down 30%. Within pharma, our biopharma business grew 5%, while small molecule was down 16%. The Chemical Advanced Materials market declined 3% versus a 22% increase last year. While we did see the chemical energy space being weighed down by macro concerns, slowing growth in Advanced Materials was more a function of a difficult compare as the volumes have remained steady and robust. Looking at our performance by business unit. The Life Science and Applied Markets have delivered revenues of $927 million. This was a decline of 9% of a very tough compare of 18% growth. Last year's growth was helped by the benefit of recovery from the Q2 2022 Shanghai shutdown. LSAG's performance continues to be affected by the market environment in China across all end markets and pharma globally. Our sales funnel remains healthy and are up year-on-year, but deal velocity continues to slow as customers remain cautious in making capital purchases. We expect this market environment for new instrument purchases to continue for the rest of the year. At this time, we are not assuming any benefit from a year-end budget flush or incremental stimulus in China. As we said before, we are continuing to prioritize invest in innovation. As an example, in June, Agilent's investment innovation were on full display at the Annual ASMS Conference. The LSAG team introduced new products and comprehensive workflows to enhance data quality and productivity for our customers. These include two new LC/MS systems, a new PFAS workflow solution and an AI software for data analysis, among others. The Agilent CrossLab Group posted revenues of $396 million. This is up an impressive 11% core with growth in all regions and end markets, as customers continue to embrace our value proposition. We continue to see strong demand for our services as we help customers drive productivity in the lab. The Diagnostics and Genomics Group delivered revenues of $349 million, up 3% core. Pathology grew high single digits as demand for our diagnostic test continues to grow. Our NASD business grew high teens. This growth was partially offset as we are continuing to see market weakness for our Genomics and Resolution Bioscience businesses. Regarding resolution Bioscience, the market for kidded NGS-based companion diagnostics has not developed as we expected. Furthermore, we don't see a realistic path to profitability. As a result, we've made a difficult decision to shut down the business. However, our investments in future growth continue. For example, we achieved an important milestone during the quarter when our NASD business generated the first revenues from our Train B investment in Frederick, Colorado. Now looking forward for the company, as we navigate this challenging macroeconomic environment, we remain confident in the Agilent team and our ability to continue driving leverage earnings growth, use our agile Agilent framework. We faced challenges before, and we're taking actions now that will make us stronger and position us well for the future. As we stated last quarter, we are doubling down on delivering cost efficiencies and increasing productivity. The goal is to generate additional cost savings so we can continue to invest in innovative new solutions and support for our customers as we enable future profitable growth. We are on track to achieve the cost savings we've targeted for the second half of this year. We are in attractive markets that will produce long-term growth. Our innovation engine remains strong and the battle test at One Agilent team is driving outstanding execution. Bob and I will provide the details on our results as well as our outlook for the remainder of the year. After Bob delivers his comments, I will be back to provide some closing remarks. And now, Bob, over to you. Robert McMahon : Thanks, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter as well as take you through the income statement and other key financial metrics. I'll then finish up with our updated guidance for the full year and our fourth quarter outlook. Unless otherwise noted, my remarks will focus on non-GAAP results. Q3 revenue was $1.67 billion, a decline of 2.3% core and down 2.7% on a reported basis. This compares with 13.2% core growth last year. Currency was a 0.5 point headwind while M&A contribution was minimal. As you may recall, Q3 of last year benefited from roughly $35 million in revenue deferred from the second quarter as we ramp back up from the Shanghai shutdown in China. Accounting for this, our Q3 core growth would be roughly flat versus a year ago. As Mike mentioned, Pharma, our largest end market, declined 8%. This is in line with our reduced expectations coming out of Q2 with underperformance in China, offset by better performance in the rest of the world. The Chemicals and Advanced Materials market was down 3% off a very tough 22% compare, but dollar-wise was flat sequentially. The academia and government market was up 5% and with all regions showing growth except the Americas, which was flat. Our business in the diagnostics and clinical market grew 3%, driven by high single-digit growth in pathology, partially offset by genomics weakness. The environmental and forensics business grew 2%, driven by double-digit growth in the Americas and Europe. The growth was generated by the build-out of water infrastructure projects and an expansion of funding for PFAS-related activities. The food market grew 1% based on strength in Asia outside of China and mid-single-digit growth in Europe, driven by new food testing regulations. On a geographic basis, while China underperformed, the Americas and the rest of Asia were better than expected, while Europe was in line with our expectations. Moving down the P&L. Third quarter gross margin was 56.3%, down 10 basis points from a year ago. Like last quarter, this was largely due to the product and services mix, and pricing was slightly better than our expectations. Below gross margin, the expense reduction actions we initiated in the second quarter helped strengthen operating margins. We also benefited from a reduction in variable pay expenses. As Mike mentioned, margins were 29.3%, up 180 basis points from last year. Below the line, our interest income was higher than planned, while our tax rate was 13.75% and we had 295 million diluted shares outstanding. Putting it all together, Q3 earnings per share were $1.43, up 7% from a year ago, a very good result given declining revenue. Now let me turn to cash flow and the balance sheet. I continue to be pleased with our cash flow generation this year. Cash flow from operations was $562 million in the quarter, and is $1.3 billion year-to-date. In Q3, we invested $81 million in capital expenditures, totaling $214 million year-to-date, effectively flat year-on-year as we continue to optimize our CapEx spending. Given the strong year-to-date results, we are increasing our free cash flow forecast for the year to $1.2 billion, comprised of operating cash flow of $1.5 billion and CapEx of $300 million. This is an increase of $250 million from the midpoint of our previous guidance. Despite the challenging macroeconomic conditions, our balanced capital allocation strategy is intact. During the quarter, we returned $401 million to shareholders. $66 million through dividends and repurchase shares worth $335 million. This ongoing balanced approach to capital deployment is another example of the confidence we have in our team and our belief in the long-term strength of our markets. Before getting into the revised full year outlook, I want to mention we have taken a $291 million pretax charge in Q3 associated with the decision to shut down the Resolution Bioscience business. This charge, which is excluded from non-GAAP results, includes an impairment write-down along with charges associated with the wind-down and exit of the business. We expect the wind down to continue through Q4 and into early FY '24. Now to the revised outlook for the year in Q4. Given the more challenging macroeconomic environment we are seeing, particularly in China, we now expect full year revenue to be in the range of $6.80 billion to $6.85 billion. This represents a decline of 0.7% to flat on a reported basis and core growth of 0.8% to 1.5%. This is a core growth reduction of 260 basis points from the midpoint of our last guide. Roughly 85% of the change is related to reduced expectations in China while the remainder is due to some incremental cautiousness from our customers on CapEx spend as well as softness in genomics and the shutdown of Resolution Bioscience. As Mike said earlier, we are not assuming any incremental stimulus in China or any material year-end budget flush in these revised projections. Given the large change in China, I wanted to provide some additional perspective on how we are forecasting the rest of the year, recognizing that the market continues to be very dynamic. To provide some context, in Q3 through June, our business in China was tracking to a mid-single-digit decline in revenue, which was in line with our expectations. However, in July, we saw a further deterioration in China, resulting in the 17% decline for the quarter. And while the Q3 decline in China was centered in pharma, which was down 30%, we did see weakness in the other end markets as well. We expect the conditions we've seen in July to persist in China for Q4. In addition, we are facing our most difficult quarterly compare in China, where we grew 44% in Q4 of last year. We are now expecting Q4 to decline in the mid-30s year-on-year. For the full year, we are expecting China to decline mid-single digits versus growing mid-single digits. With the change in revenue, we now expect full year fiscal 2023 non-GAAP earnings per share to be between $5.40 and $5.43, representing leveraged earnings growth of 3% to 4% and roughly 6% to 7% growth net of currency. The change in full year guide results in Q4 revenue being in the range of $1.655 billion to $1.705 billion. This represents a decline of 8% to 10.5% on a reported basis and a decline of 9.5% to 12% on a core basis. The recovery last year in Q4 of the remaining revenue deferred from the Shanghai Q2 shutdown negatively impacts the year-on-year results by roughly 1 point. In fourth quarter, non-GAAP earnings per share are expected to be between $1.33 and $1.36. Thanks for being on the call. And now I will turn things back over to Mike for some closing comments before taking your questions. Mike? Mike McMullen : Thanks, Bob. While today's macroenvironment is challenged for new instrument purchases, we remain confident in the long-term growth prospects of our end markets, the diversification of our business and in our proven ability to grow faster than the market. I'd like to share a few examples why my confidence remains intact despite near-term challenges. In Pharma, our largest end market, innovation and advance of medicines continue with new therapeutics flowing into the market. The demographic drivers of this market are on our side, a growing global population that expects access to health care and extending life expectancy to be key priorities from their governments. Our market-leading solutions are critical to innovation behind new therapeutics and ensuring the safety and quality of on-market drugs. In the applied markets, growing PFAS testing and the electrical vehicle transition are here to stay, action in new opportunities for growth. Everyone wants to have a safer water to drink, food to eat and air to breathe and the search for and production of more sustainable materials and energy sources remains a global priority. Agilent is a diversified leader in a unique position to help our customers drive their solutions. We remain a trusted partner, our customers though they can rely on in both good and challenging times. Our combination of leading instrumentation and world-class customer support is a long-term competitive advantage. At the heart of this long-term competitive advantage is the Agilent team and the One Agilent culture. You see this reflected in a recent recognition on Glassdoor and in being named A Great Place to Work in all 27 countries and territories around the world where we qualify for certification. We have a company mission focused on advancing the quality of life. To learn more about this, I would encourage you to review the latest addition of the ESG report that we issued last month. We have proactively managed the company through the short term, always with an eye towards our customers and in the long term. We have been proactive in managing our business to drive leveraged earnings but not at the expense of customer satisfaction and future growth. Yes, these are challenging times, but we have the team, the strategy and the right culture that would deliver long-term success. Thank you for joining us today. And now over to you, Parmeet, to lead the question-and-answer session. Parmeet? Parmeet Ahuja : Thanks, Mike. Bo, if you could please provide instructions for the Q&A now. Operator : Thank you, Parmeet. [Operator Instructions] We'll go first this afternoon to Matt Sykes at Goldman Sachs. Matt Sykes : Hi. Good afternoon. Thanks for taking my questions. I thought maybe I'd start just with China, sort of a high-level question. You guys talked about sort of the transitory impact of the current environment. You mentioned pharma. Could you kind of extend those comments to China? Do you think it's more cyclical versus structural? Are there competitive issues that you're facing or just your outlook on that region? Thanks. Mike McMullen : Yes, Matt, thanks for the question. So let me start with the last part of your question. This is a macro story, not a competitive story. So market shares continue to be very, very strong. I know there's a lot of discussion about increased local competition, but we've moved pretty aggressively on our made in China strategy. So we don't see that all as a competitive issue. Transitory, the comment there is really about the fact that the China market is not going away. It's going to be a big market for years to come. It clearly is challenged right now. And we're not -- we're taking a sort of one quarter at a time, actually month by month. And as Bob mentioned in his comments, I think July, we actually saw the weakest performance within the quarter, and we're still seeing weakness in the pharmaceutical industry, for example, the level of manufacturing declined pretty specifically in the month of July. So we think the market is going to be there, but it's going to take a while for it to get back to growth. And I guess probably the other thing to point here is - and again, I'm talking specifically around the instrument side of the China market. As you know, we have a very large, in fact, the largest installed base of instrumentation in the marketplace. So very positive on the ability to grow the aftermarket in our diagnostics business. Probably anything you add to that? Okay. Matt Sykes : Maybe just for my follow-up, just on ACG. So a good quarter in that business. And I know you guys talked about a year or two ago about sort of a goal of 30% plus margins obviously achieved this quarter. Can you maybe talk about sort of where you see the durability of that growth is sort of high single, low double, 30%-plus margins, how we should be thinking about the business? Or were there some one-offs in the quarter that you'd want to call out to kind of measure expectations there? Mike McMullen : Yes. We've consistently communicated that we think this is a high single digit, low double-digit kind of growth business for us. It's been that way since pretty much most of my tenure as CEO, and we don't see that changing as we go forward. Of course, there'll be puts and takes by quarter. But we're continuing to see good growth in our connect rates, which we've talked a lot about. And we're also doing very well on winning the enterprise business as well to complement the other aspects of our portfolio offerings. I would say that the profitability was probably a little bit higher in Q3 than - but we do think that the high double-digit number you quote about is pretty manageable for that business, but not at the level we saw in Q3, right, Bob? Robert McMahon : Yes. Matt, this is Bob. And just maybe to further what Mike is saying, when we think about the components of that business, the fastest-growing component is actually the contracted business, which is that connect rate. And it was in the mid-teens this last quarter and continues to be faster growing than the overall business. And as long as we continue to be able to drive that increased attach rate, we feel very good about that. And that comes with - with that growth comes scale and being able to leverage our team with the work that the digital initiatives that we've had as well. And so as Mike said, don't book, I think it was 32% going forward because there were some variable pay true-ups. But certainly, what you've seen quarter in, quarter out is a nice, steady cadence of margin improvement there. Matt Sykes : Got it. Thanks guys. Operator : Thank you. We'll go next now to Jack Meehan at Nephron Research. Jack Meehan : Thank you. Good afternoon. Mike McMullen : Good afternoon, Jack. Jack Meehan : Mike, I was hoping you could talk a little bit more about some of the more cyclical areas of the business in the CAM segment. Just what are you seeing from some of your chemicals customers. You've heard some conversation of budget cuts there. Are you starting to see that? Just how is your visibility into some of these cyclical areas? Mike McMullen : Yes. So as we've talked earlier - thanks for the question and Jack and comments and then have Jacob jump in on this one as well. But we look across the CAM, I'd say the Advanced Materials segment of that market, which we've communicated is more driven by secular trends and cyclical trends continues to hold up quite well. And by the way, also, I just want to point out we had a really tough compare, I think we grew 22% last year in Q3 in CAM. If we look at the chemicals and energy side of it, the energy side actually popped up a bit, particularly driven by the U.S. where we are seeing some weakness is in the chemical side where customers are looking at the macroeconomic environment and are slowing their capital investment there. So I'd say that kind of puts and takes. But I think in terms of the quarter, Bob, I think we came in right about where we thought we'd be in CAM and I'd say it's a mixed story in terms of different segments growing at different rates. Robert McMahon : Yes. Before Jacob, maybe you can jump in. I think the one thing that I think is important is you really have story in China, which is its own and then the rest of the business. And so if you think about where Americas and Europe is, it's performed extremely well. And if you actually look - we mentioned this in the call, sequentially, the dollars actually were very stable. And so we are expecting a challenging Q4, mainly because we grew 70% in China. Mike McMullen : 43% in Q3. Robert McMahon : Yes. So it's a compare situation. But this business continues to be very strong. Mike McMullen : Do you want to make the comments on the Advanced Materials side of the house there, Jacob? Jacob Thaysen : Yes, I can say that. And Mike, I think you also started with that saying that we continue to see a lot of activities in that space, especially in the battery space, where, of course, there are also compares we are against, but there's still a lot of interest in that space, and we are doing very, very well. Semicon is also cycling down right now, but we are - we continue to see business in that space, but not as strong as we did last year. Jack Meehan : Thanks Jacob. And my follow-up, I wanted to ask about margins. Just how you're thinking about some of the puts and takes for 2024. I think some of the cost savings you've talked about should extend to next year, should get some leverage out of NASD. But at the same time, some of the performance comp comes back and would think some of these top line pressures extend as well. I don't know, can you just talk about maybe relative to the LRP, how you're thinking about margins for next year? Mike McMullen : Bob, do you want to lead that one? Yes. By the way, one thing I'd add to that before Bob's, the specifics, Jack, is our decision on the Resolution Bioscience business so as part of the story for us next year in terms of margin expansion. So Bob? Robert McMahon : Yes. I would say that our view of leveraged earnings growth continues into '24. And so while we do have some things coming back to us, some of the actions that we've taken will continue to move into a full year for 2024. And quite honestly, that's kind of what we expect our job to be is to be able to drive that leveraged earnings growth. Jack Meehan : Thank you, guys. Mike McMullen : Welcome. Operator : Thank you. We go next now to Vijay Kumar at Evercore ISI. Vijay Kumar : Hi, guys. Thanks for taking my question. Good job on the margin execution here, Mike. Mike, maybe I missed some of the comments here. Can you talk about the phasing in the quarter here in China? I think I heard when you start off down mid-singles and was July off like minus 25%, minus 30%, is that the exit rate? Mike McMullen : Yes. We take a change within the quarter. Robert McMahon : Yes, Vijay, this is Bob. Your math is in the ballpark. Yes. So we were down mid-single digits through June. So May and June kind of tracking as we expected, and then we saw incremental weakness in July, and we ended up for the full quarter down 17%. And what we're assuming going into Q4 is that, that performance will continue into Q4. And given the tough comp that we have because I think we grew 44% in Q4 of last year, we're estimating roughly a 35-ish percent drop in Q4 in China. Vijay Kumar : Sorry. That's helpful, Bob. And just -- sorry, where I was going with that question was, can you talk about capital versus recurring? And I think when I look at your Americas in Europe, America is just flattish. Do you see a similar sort of phasing in ex-China, maybe talk about exit rates in July? Robert McMahon : So actually, if you think about the ACG business, actually ACG grew in all regions and all end markets, inclusive of China. So there wasn't a change there. And I would say both in the Americas and Europe, we didn't see that same effect. Mike McMullen : Yes. And overall, outside of China, the geographic performance was better than expected. Robert McMahon : Correct. Mike McMullen : We saw no trends like the China trend in our other geographies. Vijay Kumar : That's helpful, Mike. And Mike, maybe one that you mentioned a couple of times on transitory. I think that's a new firm that you're using -- what have you heard - Mike McMullen : I think I move away from prudent to transitory. Vijay Kumar : Yes. What have you guys heard on the ground on China stimulus, maybe some positive commentary, but nothing is concrete and why use the word transitory is the implication here fiscal '24 should be a more normalized year when we look at the comps? Robert McMahon : Yes. So, a couple of thoughts here, I think relative to the China business, we're hearing similar things, but nothing really significant and there's not enough to go onto assume we have kind of material impact on our outlook for the rest of the year. When we talk about transitory, we talked about the fact that these markets are driven by investments to improve the human condition as I mentioned. They're not going to go away. And neither while we're not going to get into the specifics of an actual number, we actually see a path to growth next year for full year for Agilent. And of course, we have the tough compare the first half of next year, we did coming off a double-digit print for first half this year, but as we looked at our business keep in mind, we're - what's behind my thought process here which is - we're instrument company, yes, we have big instrument business around 60%, we have a 40% of those in recurring revenue business. I don't know if you caught it in Mike call script, but our sales funnel for instruments are actually growing. So that would say that at some point in time those budgets are going to be released and the orders will close, when I've seen deals come out of - the funnel. We're not seeing order cancellations, we're not seeing changes to our one loss ratio. And we're encouraged by the growth we're seeing in biopharma. On the small molecule side, we know that different rates of replacements during the cycles, but we think this will follow historical cycle. I think the real wildcard for us, we look forward into '24, is really what do we assume around the China market. We're not assuming any kind of major further degradation, but at the same point in time, it's the path to return to kind of historic growth rates. That's the open question right now. Vijay Kumar : Understood. Thanks, guys. Operator : We'll go next now to Dan Leonard at Credit Suisse. Mike McMullen : Hi, Dan. Dan Leonard : Thank you. Hi, Mike. I wanted to follow-up on that last part. You've seen a lot of cycles in China over 30 plus years. What would you compare this to and how do we get out of it? Mike McMullen : I am as old as the dirt and have been working in this marketplace since the mid-90s. I haven't seen a cycle like this before. And we've not seen a situation where the - there's really seem to be a lack of confidence right now in the macro economy. Now, look I'm not sharing - anything that the audience here doesn't fully understand already. So, the way we get out of this, I think is China led by the government. We'll get back to focusing on its long-term goals of making China an innovation driven economy, which will require continued investments in R&D. It's going to also get back to focusing on improving the health of - the population, addressing some of environment issue, so we think it's getting back to fundamentals. Yes, we think that eventually will occur, but there's a lot of issues that we may be work through within the China right now. But - it's a very large market, the market is not going to disappear. And I think there'll be investments. I think there's also needs to be a level of confidence in the private sector in China, that it's a good time to reinvest and maybe I shouldn't wait on the sidelines hope for its stimulus, but get back to work and get my business going. So there's a lot of dynamics. I really have to say though, I don't know if I have a comparable situation that we've been through for this long. I think Bob and I were talking earlier today. The change in the food ministry, a number of years ago is - was the biggest thing we've seen or 24 plus seven some of the biggest things we've seen a change, but this is much more of a macro economic issue in China, which is different than what we've seen before. Obviously, we have an impact on life sciences tool, but it's a much bigger macro story is really driving the softness right now in our markets. Robert McMahon : Yes. The only thing I would say, Dan to build on what Mike was saying is, as he mentioned, the demographics are with us when you think about the aging population, the need to actually access healthcare more important therapeutics, and the importance of ensuring the water and food supply. They are the world's leaders today in electric and clean energy. It's hard to believe when everyone thinks about that. But they are the leader, and they have more electric cars than any other region. And so, I think that investment is going to be key as Mike talking about from the government, but unless they changed their strategic priorities, I think that's the benefit for life sciences in general. Dan Leonard : I appreciate all that perspective. And just a follow-up. I was hoping you could elaborate on your decision to shut down Res Bio. I was surprised by that, given that you acquired the company only a couple of years ago? Mike McMullen : Yes, sure Dan. Happy to do so. So obviously, a very difficult decision, then I'll have Sam jump in on this conversation, but our fundamental belief was that our differentiation will be all around what we called the kitted strategy to have a distributed on market companion diagnostics for our pharma partners, and that market really hasn't developed as we had anticipated. Sam? Sam Raha : Yes, Mike. Building on what you said, while NGS and cancer diagnostics is here and we serve that market in a number of ways, right, for just to be clear, too. We absolutely continue to serve cancer research translational research and diagnostic, test developer customers. But our core to our thesis, our differentiation is really the ability to develop and distribute these kitted tests in the market, the pharma market and the testing market just as evolve that way. And we also looked at our recent analysis and concluded that even with more additional investment, this is going to be a business that's going to be undergoing significant losses for some foreseeable future, so. It was a difficult, as Mike said, that the right decision to make this move now. But again to be clear, we continue to serve cancer research and diagnostics in a number of ways. Mike McMullen : Yes. I think - Sam, when we've talked about this in the past. So, we think we're still going be able to participate in what we believe the strong growth of liquid biopsy market. But to really providing a lot of the - if you will, ingredients for the test developers for themselves. Sam Raha : Here and Mike. I'm going to take this opportunity to also just to say beyond our core SureSelect Target Enrichment portfolio which is used broadly for liquid biopsy testing today. Early next year, we'll be launching solutions from Avida BioMed, an acquisition that we announced earlier this year, which we think is really going to be a differentiated way to look at methylation, as well as classic mutation analysis. Robert McMahon : Yes. Maybe just one add, Dan, is obviously a difficult decision for us, but I also think it also looks - it shows the discipline that we have in terms of our portfolio rationalization, and we felt we had better returns in other places to invest in so. Dan Leonard : Understood. Thanks for the time. Mike McMullen : You're welcome. Operator : We'll go next now to Brandon Couillard at Jefferies. Brandon Couillard : Hi, guys. Good afternoon. Mike McMullen : Good afternoon, Brandon. Brandon Couillard : Mike would you just find packing mass spec versus LC trends in the quarter? And then based on your revised guide, what is the four-year CAGR from 2019 for LSAG instruments exiting the year? How does that compare to historical average over the cycle? Mike McMullen : Hi Brandon, I'm going to start with the response to your question. I'll let Bob dig through his notes to find the actual number. But first of all, I just started to say, is that we believe what we're dealing with here in our core instrument portfolio, inclusive of LC and LCMS continues to be a macro market story. Our market shares are holding up really well. We're seeing in our one loss data. We're seeing it in the external reports from order. And I think when we look at our performance in those core platforms versus our peers, we're reporting some numbers and kind of adjust for the timing of when we report. I think we're putting up similar kind of numbers. And Jacob, I know you looked at this thing pretty closely and I'm trying to buy some time for Bob to check down the... Jacob Thaysen : We're trying to find the CAGR the last three years, which I don't have in front of me here, but you're right Mike, we follow this very accurately. And we're doing - we continue to do very well in this marketplace. We continue to innovate into it. And we have seen - actually, we have taken share over the last period of time. And if you actually compare our calendar two versus competition, would actually see that we are approximately flat in the LC, LCMS space. And I think that stacks up very well versus competition. Robert McMahon : Yes, hi Brandon, we can get that to you afterwards. Brandon Couillard : Okay. Robert McMahon : I can tell you though, if you looked at the LSAG business over the last three years, it's been averaging 5% CAGR, despite being forecasted to be down this year. And obviously, those are two large businesses. Brandon Couillard : Okay. And then I guess, two housekeeping questions for you, Bob. You talked about NASD growth in the third quarter? I imagine it might have been up sequentially with Train B coming online and on the CapEx line. You pushed out $200 million you spend in that. Just roll into '24? There are some projects maybe you decided to defer from the time being - the environment? Robert McMahon : Yes, it's a great question. So NASD, we continue to be very pleased with that. We had our first revenue in Q3 from Train B, the first of many more revenues to come from that standpoint, and expect it to continue, and we're still on track for the numbers that we've been talking about through 50-plus for the full year. And in terms of the CapEx, some of that will roll forward, but it's not - we're not going to spend that $200 million in '24 as well. This would be - we have deferred projects being very rational, really focused on revenue-generating programs. And so, I do expect some of that will flow into '24, but I don't expect '24 to have an incremental $200 million show up in the forecast. Brandon Couillard : Got it. Thank you. Operator : We'll go next now to Puneet Souda at Leerink Partners. Puneet Souda : Hi Mike, Bob. Thanks for taking the questions. Mike McMullen : Sure. Puneet Souda : The first one, thanks. So maybe, Bob, could you elaborate a bit on pricing here? I know pricing was a meaningful contributor initially this year. We're seeing China, obviously, you talked quite a bit about it, and we're seeing the headline for China deflation. So wondering if you are expecting pricing to maintain there, or do you expect pricing pressure in China continuing? And also, we're seeing some of the peer sort of bioprocessing companies talking about local competition rising on the less high tech product. And so wondering if you're seeing that on any of - sort of your product lines as well? Robert McMahon : Yes. Let me take the second question first. We can compete against the Chinese local competitors each and every day. And nothing has changed from that standpoint. We continue to feel very good about our portfolio, and continue to drive that growth. In regards to pricing across the board, we were slightly better than what we had expected. It was roughly over - a little over 4% for the quarter. And that was driven across all three of the groups. So we continue to drive - positive price across not only our DGG and ACG business, but also our instrumentation and that's globally. And we expect to be able to continue to demonstrate the value of our instrumentation across the globe. Obviously, in a deflationary environment, that will put a little more pressure on the instrumentation business, particularly in China but we've incorporated that into, our forecast and are still on track for positive price contributions, for the full year in excess of 3%. Mike McMullen : Hi Bob, maybe Bob or Padraig and also going to maybe comment on some discounting trends he may have been seeing? Padraig McDonnell : Yes. No, I think - no, I think it's the pricing holds discounts has really held stable as well. We haven't seen any - increase in that rate of it, and we continue to monitor that, but it's been very stable, Mike. Puneet Souda : Got it. Thanks for that. And then if I could ask an academic and government here, smaller segment for you, but it did solid in the quarter. Maybe could you talk a little bit about what you're seeing across the globe in different geographies for academic and government and your expectations here going forward? Thank you. Mike McMullen : Yes, Bob, I think this is an end market that is holding up reasonably well. I mean we're seeing that on a global basis, in most cases, with the exception being China, where the funding is there, the funding is stable. And it's been a positive surprise for us so far through this year. And I don't... Robert McMahon : No, it's really across many of our instrument platforms as well as the service business. And from what we're seeing, Puneet, is funding continue to be available, and it's flowing from governments. I think they're seeing the strategic nature of many of the investments that they're making. And our expectation is that, that funding will continue. Puneet Souda : Got it. Super. Thank you. Mike McMullen : You're welcome. Operator : We'll go next now to Rachel Vatnsdal at JPMorgan. Rachel Vatnsdal : Good afternoon. And thank you for taking the question. So first off, one of your peers have flagged that they were actually seeing some early signs of pharma spending recovery I appreciate that most of the incremental this quarter, is really related to the China weakness. So maybe ex-China, can you walk us through if you're seeing any signs of recovery of spending with biopharma customers. And then you've previously flagged for us that historically, when pharma spending slows down, like we're seeing today that it can take 12 to 24 months to recover. So how are you thinking about the timing, and recovery given the incremental weakness this quarter? Mike McMullen : Sure, Rachel. So while we saw signs of stabilization in our European and U.S. business stabilization relative to expectations. We're not hearing anything along those lines yet in terms of recovery or desire to increase spending, the fact we're hearing the exact opposite right now from our large major pharma companies. So, I hope that commentary from others in this space is correct. And there's going to be a big recovery here from year-end, but we're not seeing any kind of indications of that. If it does happen, great. It would be upside relative to our current outlook, and we know we do well in these markets. But Padraig, I don't think we're seeing and hearing anything like along those lines. Padraig McDonnell : No, I think it's spot on, Mike. Robert McMahon : The only thing I would say, Rachel, is if we look at our funnels, they continue to be growing. So it's a question of when, not if, and particularly in pharma. And as Mike and Padraig just mentioned, we're not assuming a budget flush into our Q4. And if it happens, that would likely happen in our Q1 in any event, from a revenue perspective. But what we see at least from our funnels, is they continue to be helping. And let me just answer Brandon's question from a couple of times ago. If I look at LC and LCMS on a three-year CAGR, they're between 7% and 9%, so higher than the overall LSAG average. Mike McMullen : Right. Thanks for that and Bob. And Rachel, I think the second question relative to - I think you're referring to the small molecule replacement cycle. And as you know, coming probably at least for the last 12 to 18 months, we had been indicating that we were expecting to see a slowdown in the rate of replacement. And in fact, we've seen that occur this year. Actually, given the weakness in China even beyond our expectations with a minus 16% number overall in the quarter. That being said, we do stay with our view that these tend to be 18 to 24 months, 12 to 18-month cycles, and we'd expect that they'll start to see movement back towards a higher growth rate. And that's one of the reasons as we look into '24, we're saying some of these markets will start to turn as - the base cycle gets back to more of a growth phase in that cycle. And as we've mentioned earlier, we see that particularly in liquid chromatography is probably about a five percentage kind of growth market long-term. Rachel Vatnsdal : Great. Thank you for all that color. Maybe just following up on your small molecule comments there. So small molecule declined 16% this quarter. So can you talk to us about how much of your China exposure is really tied to those small molecule workflows? And then what else is really driving incremental weakness on the small molecule side? We've heard of IRA pressuring some pharma decisions and potentially leading to them reprioritizing the pipeline. So is there any risk that you won't see a recovery? Or could the growth rate for small molecule really be reset in? What are your conversations with customers on that trend? Thank you. Mike McMullen : Okay. So you got it. So relative to China, I would say it's probably the same ratio as the global business, right? That's probably what 60%, 65%? Robert McMahon : Yes. Mike McMullen : Is probably related to a small molecule. And relative to what's happened in large pharma, what we're seeing is in medium-sized pharma is, again, a continuation of this cautious about deferring capital. I'm sure they're thinking through implications of iRNA also other expenses are running hotter in their P&Ls where they need to make some offsets with capital purchases. That being said, if you believe, and I know pharma believes the importance of having safe on-market drugs. You have to have the instrumentation QA/QC environment to support that. That requires you to have modern liquid chromatography fleets. So, I don't think it's a question that they can - that this market is going to go away and won't be an area that the pharma will need to invest in. You can defer for a period of time, but then only last for so long. Operator : Thank you. We'll go next now to Patrick Donnelly at Citi. Patrick Donnelly : Hi guys. Thanks for taking the questions. Mike, maybe just given that commentary around the instrument cycle, you're not really seeing much improvement yet. Obviously, the China piece transitory, but certainly seems like it's going to linger. You only a couple of months in '24 for you guys here. How do you think about some of these impacts lingering in? I think you said there's still plans for growth next year, but it certainly sounds like some of the headwinds at least will linger into the first half, given some of those costs. I just wanted to talk through that top line setup given some of these headwinds lingering into next year? Mike McMullen : Yes. We still have a few more months so we finish off the fiscal year, and we'll give you our guide in November. And I think we'll know a lot more by then. But I do think we know that we'll be able to grow this company in '24. That said, I was very careful in my comments to make sure that there's a full year growth rate. We do expect the first half of the year to be a challenging year just from a comp standpoint to begin with, but also some of the things that we've been talking about today in the call, we don't expect a quick snapback to be occurring in the next quarter or 2. Patrick Donnelly : Okay. That's helpful. And then I know you mentioned budget flush is still a little bit away from that at the calendar year event for pharma and other areas. Do you have any view at this point? It sounds like you guys are expecting to be a more subdued budget flush, but whatever you're hearing from customers would be helpful just to pull back a little bit more on that. Mike McMullen : Yes, sure, Patrick, happy to do so, and then I'll invite Padraig to this conversation. I know he's been talking a lot to his team about this. But as I mentioned earlier, we're not really seeing any kind of indication of customers saying, hey, listen, I'm going to have money. I'm planning to spend it this way. In fact, we've seen the opposite where sometimes orders that we thought were closed to actually keep deferring and require more purchases. In fact, I think one story we heard was we probably 3x. Fondo CFO, approved it on the third go-around and the CEO overruled it. So we know eventually going to get that business. But this is kind of dynamics ever seen. So we're not seeing a lot of indications of a strong year-end budget flush. Again, we'd love to see the opposite happen, but we're not going to indication of that. And I don't if you have something to add there. Padraig McDonnell : What we're hearing from the customers is that we're not planning on a budget flow through the end of the year, but we're - we will take the upside of corsa.com. I think I think one thing is really clear that the funnels are very strong, and it's there, but we're not seeing them to be released through a big push at the end of the year. Mike McMullen : I think this comment, Patrick, on the funnel being strong and these funnels are actually growing is really important because this is one of the reasons why we think about full year outlook in '24. We know the business is there. It's just a question of when it's going to get - Padraig McDonnell : Yes. We watch very closely our win loss rates. And we haven't - we've seen them very, very stable -- we had a strong funnel, which is very positive over time. Patrick Donnelly : Understood. Thank you, guys. Operator : We'll go next now to Derik De Bruin at Bank of America. Derik De Bruin : Hi. Good afternoon. Mike McMullen : Good afternoon, Derik. Derik De Bruin : A lot of what I wanted to ask has been asked, so I've got some cleanups here. Just did you give a specific instrument core growth number in consumables growth or number for 3Q and then sort of your all-in number for this year, what you're expecting? Robert McMahon : Yes. We didn't. LSAG for Q3 was down roughly 9% core. Consumables was up slightly. Derik De Bruin : Got it. Thank you. So what's the revenue contribution for Res Bio in 4Q? And what do we need to pull out for 2024? Robert McMahon : Yes. So we've got a minimal number in Q4 as we wind down the business. And I would say it was roughly 1 point to a little over 1 point to the headwind to DGG going forward in FY '24. Derik De Bruin : Got it. Okay. And so staying on the topic of M&A. I mean, you've done a couple of genomics deals, which haven't gone your way. And I'm just sort of wondering what's your thinking about deployment going forward? I mean valuations have obviously come in, industry is consolidating, you would say, but we have -- it's been relatively quiet across the space for the last 18 months. And so like how are you sort of thinking about capital deployment? And at what point do you decide you maybe want to buy -- start maybe doing even with the share prices, maybe doing some share buybacks. You sort of talk about your general capital deployment strategy at this moment? Mike McMullen : Yes. I think Bob alluded to it a bit in his prepared remarks, but we still are staying with our balanced capital allocation strategy, and you saw us in the market opportunistically on share repurchases given where we saw the share price setting that. In terms of our - an appetite for M&A, it remains unchanged given - despite the Resolution Bioscience decision. We knew that was a higher risk acquisition for us, early-stage company in hot area based on a really differentiating strategy that didn't want this to play out. But we've had some success in other aspects of our genomics acquisitions, including the AAT acquisition on the instrumentation side. So we're still out there looking. But as Bob mentioned, we take a disciplined approach to not only to how we view our internal choices and our internal business performance in terms of what's in the portfolio, but we'll also take that same lens, if you will, on how we look at M&A. So really, nothing has changed beyond the fact that this is more of a buyer's market. And companies with a strong balance sheet like Agilent, I think they're in a good favorable position to work on opportunities, but we're going to stay disciplined and not get caught up in what once was a value of a company, either in the private or public space. Derik De Bruin : Just one more follow-up, if I may. What are your orders in liquid chromatography? How is your order book? Are you seeing orders increasing? Robert McMahon : Our order book was down, largely a function of China, but they were down year-on-year. Derik De Bruin : Thanks. Operator : Thank you. We'll go next now to Josh Waldman at Cleveland Research. Josh Waldman : Hi. Thanks for taking my questions. A couple for you. First, Bob, can you provide more context on the puts and takes within the fourth quarter core organic growth guide? I guess maybe the assumptions by business unit. And then curious what areas or in markets outside of China seem to be like slowing real time that you're trying to reflect in the guide versus areas that maybe have stabilized or improving over the last few days. Robert McMahon : Yes. So Josh, just real quick. When we think about kind of the Q4 implied guide, the big driver is China. As I mentioned, down roughly mid-30s and that really impacts a number of markets you can imagine, both AR and chemical and energy, which are - or chemical and advanced materials, which are the two largest markets in China. I would also say that the diagnostics and clinical is also down. We've seen that softness in genomics. And then obviously, the shutdown of Res Bio also impacts that business, and that's primarily a U.S. phenomenon. So we did see an impact in U.S. on that side. And then there's some puts and takes in other places, but those are the two big pieces for Q4. Mike McMullen : But as I recall, I think 85% of the change was really China driven and bleeds over into pharma in CAM. Josh Waldman : Got it. Okay. Then Mike, I guess, staying on China and a follow-up there. Can you unpack a bit more of what you're seeing by end market? I mean, like where demand is holding in versus like areas that you've seen come in lighter as the quarter progressed again. I guess, outside of China - sorry, outside of pharma. And then I guess, a follow-up on Dan's question. I believe it was earlier. What are the variables within China, Mike that you're trying to account for as you forecast the medium term? I mean, maybe beyond just the next couple of months. And I guess any risk that we need to kind of rethink, the underlying growth rate in the industry if China remains light here in the medium term? Mike McMullen : Yes. So let me start with the view by end market. I think the academia and government market was - grew for us in the third quarter. But everything else was pretty much down. The big change really were in the pharma space. And as Bob commented earlier about how we exited the quarter, the July performance. Some weakness in chemicals, but I'd say the down there was really just a byproduct of - we're going off of 43% compared last year. And we're looking at a 70% growth compare in the fourth quarter. But I'd say the concerns or the cost of this in the China marketplace is really across the board. And with varying degrees, but I think it's really most reflected in the pharma outlook. I think that's a $64,000 question. I think there's a case to be made that this market will get back to its longer-term growth rates, but it will take a period of years to get there. It's not going to be a snapback in 12 months. But again, that's work to be done. The factors that we're looking at, I think are the same factors that everybody else is staring at, which is what's going to happen to the macro in China. Storyboard here is a macro story and is bleeding over into life science tools, but we need to see the China economy get moving again. We need to see consumer confidence coming back. We need to see investment commerce is coming back in China. I think those things will take some time. But I do think there are priorities of the government, and they'll find a way to make that happen. But we're not calling for a quick snapback here either. Josh Waldman : Got it. Appreciate guys. Operator : Thank you. We'll go next now to Dan Brennan at TD Cowen. Dan Brennan : Great guys. Thanks for taking the questions. Maybe just one on instruments, Bob, I think you talked earlier, I think to Derik's question maybe you gave the L segment, but I know there's consumables within that. Could you just break out what the instrument number is? I know we've got on the Q. Just wondering how instrument did and as we look ahead, I think given your instrument exposure, it's always a key question, I know there's been various times asked throughout, but just how would we think about kind of the outlook for instrument, whether it be fourth quarter, if you want to point to go out a little further? Robert McMahon : Yes. So to maybe add a little more flavor and clarity to my answer previously, LSAG was down 9% core. It was down 9% in instruments as well. So the consumables business was up basically a point. Dan Brennan : And as we look out there, I'm just wondering. I guess it's really depends upon that - the type of product, which you guys already discussed, it sounds like you're optimistic on LSAG given the funnel is going to get back towards that excuse me LCMS is going to get back to that 5% growth. I guess, would you assume instruments as a starting point growth in fiscal '24 for what you see today? Mike McMullen : Based on what we see today, yes. Dan Brennan : Got it. I mean one more, quick one just on - yes… Robert McMahon : There's no reason to believe when we think about kind of the level of investment over-time. And the importance of our instruments in the Discovery of new therapeutic areas or food testing, we think about as Mike was talking about these new areas around Applied Markets, there's no reason to think that there is something fundamentally has changed, that they don't need instrumentation. And so, I think we feel very good about our market-share and our good about our market-share, and our competitiveness and do expect our LSAG business to be a growth driver for us going forward. Yes, no completely. No, is this more just on the comp basis, after making… Dan Brennan : That sounds great. Bob and just one quick one, just on - the applied versus the chemical, you mentioned some chemical weakening just that were concerned during the quarter, but the applied obviously powering through. Can you just maybe unpack a little bit more how you're thinking about like how we exit the year across your different buckets within the chemical and applied segment? Robert McMahon : Yes. I mean, I think if you look at Q4, it will be really an impact of China. So we're actually looking at chemical and advanced materials declining in Q4, because of that 70% increase that Mike mentioned in Q4 of last year. That was across-the-board. I would say the advanced materials will be much stronger than that down high or down double-digits. And the chemical side, probably we will have a bigger impact. If you recall, the Shanghai shutdown impact was centered in the chemical and advanced materials market, because that's where our GC manufacturing was and that's a Workhorse for some of those products. So, we do see it down in Q4, but up for the full-year. I think that's a really important to make sure that people understand. Dan Brennan : Great, thank you. Operator : Thank you. And we have time for one more question this afternoon, we'll take that now from Luke Sergott at Barclays. Luke Sergott : Great. Thanks for squeezing me in. Mike McMullen : Hi Luke. Luke Sergott : Just real quick on the - thanks. So real quick on NASD. But are you guys seeing any pressure from the market, seeing any in-sourcing from the market? I know Novartis has talked about doing some of this as well. And then lastly additionally, with that with the CapEx guide down. Are you guys still investing in additional lines there for the year? Or is that really on pause is that have anything to do with that kind of CapEx stepped down? Mike McMullen : Let me leave it there. And then have Bob jump-in and Sam as well, but from in-sourcing standpoint. No, we're not seeing any material moves in this direction. And in fact as we head into '24, we continue to broaden our book of business and we're going to have more customers overhead in terms of breadth of customers as we go into '24. And yes, it's called Project Endeavor. So Train B we went live, which we had a different code-named. And that's live, but we continue to move forward with our expansion plans on the other front, siRNA front, along with what we like to do on the CRISPR side as well And antisense. So, we're going to broaden that. So our stated investment plans remain unchanged. Robert McMahon : Yes, to be very clear, Luke, to add what Mike said, we are not slowing that down at all. That investment is one of the highest priorities, we've trimmed back spending in another less more infrastructure kind of oriented projects as opposed to kind of revenue-generating. I think what you're seeing actually is it's actually coming in better-than-expected, because the pricing is better-than-expected and you probably have seen that in other places. And so, the availability of parts and the key materials is better than what we had initially planned as well. Sam Raha : Yes, I only add to what you guys said that Mike along with having more customers and actually more diversified set of customers, we're going to be we're contracted to do more programs next year than in the history of NASD. So it's a yes, all full-speed ahead. Luke Sergott : Got you. Got you. And then I didn't - hear anybody asked about the ACG margin, maybe they did I missed it, but you guys had a material step-up there, can you talk about really what went on there, is that - is there any benefit that you saw from Mike lack of incentive comp just kind of break-out, where the drivers there and really how we should think about that in Q4, and as a jump-off point? Mike McMullen : Yes, we did mention that there was a benefit, Luke, of the variable pay comp, obviously, that's got a big component of people in it, but it's also a reflection of the scale and - continued growth of that business. We didn't say take that 32% I believe it was in Q3 and kind of book that as the new starting point. Because it had outsized growth. But we continue to be pleased and expect continued margin expansion for ACG going-forward. Luke Sergott : All right, great. Thank you. Operator : Thank you. Ladies and gentlemen, at this time I would like to turn things back to Parmeet Ahuja for any closing comments. Parmeet Ahuja : Thanks Bo, and thanks everyone for joining the call today. With that, we'd like to end the call. Have a good day everyone. Operator : Thank you, Parmeet. Ladies and gentlemen, this does conclude today's call. Thank you for joining. We wish you all a great day. Goodbye.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,023	4	2023Q4	2023Q4	2023-11-20	5.424	5.445	5.668	5.567	null	20.44	24.03	Operator : Ladies and gentlemen, welcome to the Agilent Technologies Q4 2023 Earnings Conference Call. My name is Bo and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, Vice President, Investor Relations. Please go ahead, sir. Parmeet Ahuja : Thank you, Bo, and welcome, everyone, to Agilent's conference call for the fourth quarter of fiscal year 2023. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. This presentation is being webcast live. The news release for our fourth quarter financial results investor presentation and information to supplement today's discussion along with a recording of this webcast are available on our website at www.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 year-over-year, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rates. 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'd like to turn the call over to Mike. Mike McMullen : Thanks, Parmeet, and thanks, everyone, for joining our call today. Before we get into discussing our results and outlook, I want to mention that we're joined today by Padraig McDonnell, President of the Agilent CrossLab Group; and Sam Raha, President of the Agilent Diagnostics and Genomics Group. We're also joined on this call for the first time by Phil Binns, President of the Agilent Life Sciences and Applied Markets Group. Phil’s name may be new to some of you, but he's well-known at Agilent and in the industry. Phil has been with us for more than 13 years, coming over with the Varian acquisition and overseeing our market leading spectroscopy business. We’re extremely pleased to have someone with Phil’s knowledge, experience and proven leadership strength heading up our LSAG business. In his short time in the role, we’ve already seen Phil add tremendous value as a member of our senior leadership team. Welcome, Phil. Now onto our fourth quarter results. The Agilent team once again continued to perform well under challenging market conditions. Revenue of $1.69 billion declined 9.7% core after increasing 17.5% last year. This is at the high end of our guidance. Our proactive approach to managing our cost structure in this market environment helped us deliver healthy fourth quarter operating margins of 27.8%. Q4 earnings per share of $1.38 exceeded our guidance. While this was a decline of 10%, it comes against a tough compare last year when EPS grew 26%. While the market continues to be challenging, we believe we are starting to see signs of stabilization. As an encouraging data point, for the quarter our book-to-bill ratio was 1 for the company and greater than 1 for our LSAG instruments. Let’s take a closer look at our Q4 performance, starting with our regional results. During the quarter, while down year-on-year, we delivered sequential growth except for China, as expected. In China, our business declined 31% year-on-year after growing 44% in Q4 last year. While China was down sequentially, these results were very much in line with our expectations. And the year-on-year monthly performance improved slightly as the quarter progressed. In addition, orders were slightly higher than revenue for the quarter. While it is too early to call these two data points a trend, we see this as an encouraging sign of potential stabilization. In late September, I traveled to China for the first time since the COVID outbreak to meet with the Agilent team, key customers, and government officials. I was reminded of both the sheer size of the Chinese economy and our market there. I saw first-hand the work being done to bolster economic activity in the near-term and create an environment that will support continued growth into the future. I remain convinced China will continue to play an important role in life sciences and I’m confident that the China market will return to growth. In looking at our largest end market, pharma declined 14% driven by continued caution among customers on capital expenditures for new instruments. Within pharma, biopharma performed better than small molecule. Geographically, our biopharma business outside of China grew high-single digits. Looking at our performance by business unit, the Life Sciences and Applied Markets Group delivered revenue of $928 million, down 18% core versus a tough compare last year of up 22%. Customers continue to hold off on capital expenditures, particularly in the pharma segment of LSAG’s business, which declined in the high 20% range. This is against growth in the low 20s last year. On the other hand, we continue to see strong customer demand and growth in our PFAS solutions, as well as continued strength in the advanced materials segment. These are two secular trends we’ve highlighted before and we remain optimistic about future growth in these market segments. While the market environment remains challenged, we continue to innovate and provide unique solutions for our customers. The new products we launched in June at ASMS, in particular the 6595 LC triple quad, which is focused on key applications like PFAS, continue to generate positive customer interest and new orders. We’re also bringing innovative new solutions for customers across the biopharma value chain. We have installed a number of our online UHPLC systems with large biopharma companies. The systems are easy-to-use, reliable, and deliver significant value by providing fully automated analysis of critical quality attributes and allowing real time decision making outside the lab. The Agilent CrossLab Group posted revenue of $404 million, up 4% core and 6% on a reported basis. ACG delivered growth across all end-markets, and in all regions except China. The contract services business was up double-digits, offset by the services associated with new instrument placements. Our strategy of increasing the connect rate continues to pay off. In the quarter, the contract services business represented 65% of ACG revenue, a number that has grown nicely over the years. The Diagnostics and Genomics Group delivered revenue of $356 million, flat on a core basis and up 1% reported. DGG’s results were led by the pathology and NASD businesses, which both delivered low double-digit growth. These strong results were offset by the continued market challenges in genomics in both consumables and instruments. Our NASD portfolio and capacity expansion are continuing as planned. We’re confident in the long-term growth prospects for the markets we serve. Before I finish covering DGG, I want to thank Sam Raha for his contributions over the years and for helping us build a strong foundation for the DGG business. I wish Sam well. In addition to these business group highlights, during the quarter we were recognized for our commitment to sustainability. Agilent’s near and long-term targets for reaching net-zero greenhouse gas emissions have been approved by the highly regarded Science Based Targets initiative. A year ago, we entered 2023 sharing a view of economic and industry uncertainty, as we guided for moderating growth in the second half of 2023. We had not anticipated, however, the significance of the market headwinds the industry eventually faced, particularly in the pharma market and China. Despite the challenging market conditions, we delivered full year revenue of $6.83 billion, growing 1.5% core. While our full-year growth was lower than initially expected, we met or exceeded every quarterly guidance range we provided, a solid testament to the team’s execution ability. Including FY23 results, our 4-year compound annual growth rate is 7%. This is at the high end of our long-term growth guidance. In FY23, we delivered operating margins of 27.4%. This is up 30 basis points this year and up more than 400 basis points in the last four years. Earnings per share of $5.44 are up 4%, delivering leveraged earnings growth for the year. Our 4-year compound annual growth rate for EPS is 15%. Looking back, 2023 was a challenging year. What I’m particularly proud of is the Agilent team’s ability to quickly pivot and take action to address these challenges while staying relentlessly focused on our customers. While we’ve worked to significantly reduce expenses, Agilent’s customer satisfaction ratings remain at all-time highs. At the same time, our employee engagement continues to be excellent as we achieved a number of best employer awards over the last year. All of this helped us deliver another year of leveraged earnings in an extremely difficult market environment. Before turning it over to Bob for more details, I want to provide some high-level perspective on FY24 and beyond. For 2024, we anticipate a slow, but steady recovery, throughout the year. In our initial outlook, at the high end of our guidance we expect revenues to return to growth. At the same time, our range for EPS in the year ahead has us again delivering leveraged EPS growth. As we look ahead, we remain convinced the market challenges being faced by the industry today are transient. Our end markets are powered by investments in improving the human condition. The pace of science, innovation and discovery continues to increase, which will fuel further growth. We remain focused on winning in the marketplace. Our differentiated products, services and most importantly our One Agilent team, are all essential to the success of our customers. We are well-positioned for long-term growth. Bob will now share more detail on the quarter and the year, along with more specifics on our initial view for fiscal 2024 and Q1. Thank you for joining us today. And now, Bob, over to you. Robert McMahon : Thanks Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter and the year, as well as take you through the income statement and other key financial metrics. I’ll then finish up with our guidance for fiscal year 2024 and the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. Agilent finished the fourth quarter with core growth at the top end of guidance and EPS exceeding our expectations as we executed well against challenging macroeconomic conditions. Q4 revenue was $1.69 billion, down 9.7% core and 8.7% on a reported basis. This is after growing 17.5% in Q4 last year, when we benefitted from the recovery from the Shanghai shutdown in Q2 of last year. This created an estimated 1 point of headwind in the year-on-year results this quarter. As expected, we saw weakness in capital purchases in LSAG with the biggest impact in our China business. Now, I’d like to share additional detail on our end markets for the quarter. Revenue in our largest market pharma, declined 14%, versus 20% growth in Q4 last year. BioPharma declined 2% while small molecule was down 23%. However, biopharma ex-China was up 7% in the quarter and grew solidly for the year. And while small molecule was down, the decline was most pronounced in China. And outside China, small molecule was up sequentially in the quarter. Chemicals and advanced materials declined 11% versus growth of 27% last year, while flat sequentially. Our chemicals and energy subsegments were down 15% while advanced materials were down roughly 2% globally and up 4% in the Americas and Europe combined. The food market was down low double digits against a tough 20% growth comparison last year. High single digit growth in the Americas was offset by declines in all other regions. In the Americas, PFAS testing is emerging as an important growth area in food testing, helping drive the high single digit growth. We expect testing for PFAS chemicals will continue to be a growth driver across multiple end markets over time. The environmental and forensics market declined 3% versus 18% growth last year. Similar to the food market, the Americas region continues to experience strong growth, up double digits driven by PFAS. This strong performance was primarily offset by softness in China, which was down year-on-year, but up slightly on a sequential basis. Our business in the diagnostics and clinical market declined 4%. While we delivered low double-digit growth in our pathology-related businesses, it was more than offset by continued weakness in genomics. The academia and government market was down low single digits with strength in the Americas driven by government funding offset by weakness in China and Europe. Results were pressured across all geographies in the quarter. As Mike mentioned, China was down 31% year-on-year after growing 44% in Q4 of last year, in line with our expectations coming into the quarter. The rest of Asia was down mid-single digits and both the Americas and Europe declined low single digits in the quarter. Before turning to the rest of the P&L, I’d like to quickly summarize some full year highlights by end market and geography. From an end market perspective, all markets grew low to mid-single digits for the year except for pharma, which was down 2% globally. In addition, all geographies grew, except China which was down 5%. Back to the P&L for the quarter. Despite the revenue declines, our team continues to execute at a very high level. Fourth quarter gross margin was 55.8%, and our operating margin was a healthy 27.8% in Q4, which was slightly better than our internal expectations. Below the line, we benefitted from stronger than expected cash flow generating incremental interest income in the quarter. Our tax rate was 13.75% and we had 293 million diluted shares outstanding, both as expected. Putting it all together, earnings per share were $1.38 for the quarter, exceeding our expectations, albeit down 10% from a year ago when EPS grew 26%. As Mike mentioned, our Q4 results capped a year where we grew 1.5% core on the topline, increased operating margins by 30 basis points and grew EPS by 4%, while overcoming a couple of points of currency headwinds. This is a real statement on the team’s ability to quickly adapt to market changes while still delivering leveraged earnings growth. Turning to cash flow and the balance sheet, I’m incredibly proud of the Agilent team as Q4 continued a string of very strong quarterly cash flow results. In Q4, we generated operating cash flow of $516 million, well over 100% of adjusted net income, and invested $84 million in capital expenditures. CapEx spending is driven by our ongoing NASD capacity expansion, which remains on track. For the year, we delivered $1.5 billion in free cash flow, an increase of 44% over last year. Our balance sheet continues to remain healthy as we end the fiscal year with a net leverage ratio of 0.6 times. With the current challenges in the market, it is great to be a company with a fortress balance sheet and strong cash flow. In the quarter, we paid out $66 million in dividends and spent $80 million to repurchase shares. And for the year, we returned $840 million to shareholders through $265 million in dividends and $575 million in share repurchases. Looking forward, you may have also seen that we recently announced a 5% increase in our quarterly dividend providing another source of value to our shareholders. It’s worth noting that we have increased our dividend every year since we first began issuing them in 2012. Now, let’s move on to our outlook for the upcoming fiscal year and first quarter. As Mike stated, we expect to see a slow but steady recovery throughout fiscal 2024. However, we also acknowledge the continued market uncertainty, high interest rates, volatile exchange rates and depressed capital spending. Like several of our peers, we expect the markets to be down slightly for the year, while we expect to perform better. Given the expected slower market conditions, we have taken additional steps to adjust our cost structure. Incorporated into our guidance is roughly $175 million of cost savings. Given the significance, I want to provide a little more detail on these actions. Roughly 30% of the savings are related to portfolio optimization decisions we have taken in DGG, the largest of which was the exit of the Resolution Biosciences business. Another 25% is related to materials and logistics cost savings as well as optimizing our real estate footprint, with the remaining savings tied to continued reductions in discretionary spend and optimizing our workforce. Along with these actions, we have taken a $46 million charge for restructuring and other related costs in our Q4 GAAP results. These reductions, while difficult, are necessary to ensure we continue to fund our most critical investments as well as fund the variable compensation resets from this year. These actions help ensure the company delivers leveraged earnings growth in FY24 and will enable us to emerge even stronger when our markets inevitably return to their long-term growth rates. As Mike noted earlier, we exited Q4 with some potential signs of stabilization with a book to bill ratio of 1 for the company and greater than 1 for LSAG instruments. While this is positive, we are going to be prudent in our initial guidance. For the full year guide, we expect revenue in the range of $6.71 billion to $6.81 billion. This represents a core growth range from a slight decline of 0.5% at the low end to 1 point of growth at the high end. Currency is a headwind of 1.2 points while M&A is also a slight headwind of 10 basis points related to Resolution Bioscience. On a reported basis, we are expecting a decline in the range of 1.8% to 0.3% year-on-year. From a geographic perspective, we expect modest growth in the Americas and Europe. While we expect to see recovery during the year in China, our initial view is it will still decline for the full year. From a business group perspective, we expect growth in both DGG and ACG, while LSAG instruments will still be pressured. In terms of phasing, we expect the first half of FY24 to look similar to the second half of FY23, with growth in the second half of next year. We are projecting modest operating margin expansion for the year. Below the line, we expect interest income and expense to offset each other, a tax rate of 13.5%, and 293 million shares outstanding. Fiscal 2024 non-GAAP EPS is expected to be in the range of $5.44 to $5.55. This range represents flat to 2% growth versus FY23. From a cash flow perspective, we expect another robust year. We are expecting roughly $1.6 billion in operating cash flow and $400 million in CapEx as spending increases on NASD’s Train C and D expansions. Looking to Q1 2024, we expect revenue in the range of $1.555 billion to $1.605 billion. This represents a core decline of 11.3% to 8.5% with currency and M&A having a minimal impact. At the midpoint, we are expecting growth that resembles what we just delivered in Q4 and assumes no significant budget flush during the end of this calendar year. This is against another difficult comp of 10% growth in Q1 of last year. First quarter 2024 non-GAAP earnings per share are expected to be between $1.20 and $1.23 as the cost savings fully ramp through the quarter. As Mike indicated, while we are expecting low growth in 2024, we remain optimistic about the future of our markets and our long-term prospects. Our business remains very profitable and healthy, and I know we will come out stronger as a company when market growth returns. And now I will turn the floor back over to Parmeet for your questions. Parmeet? Parmeet Ahuja : Thanks, Bob. Bo, if you could please provide instructions for the Q&A now? Operator : [Operator Instructions] We'll go first this afternoon to Vijay Kumar at Evercore ISI. Vijay Kumar : And some helpful comments here. Mike, maybe starting with those book-to-bill comments here. Overall company 1 turn LSAG instrumentation looks like it's turned. Curious what those book-to-bill numbers for ex-China? And if instrumentation has turned, that Q1 guidance, comps get easier. Why is Q1 assuming no benefit from this turn in instrumentation? Robert McMahon : Yes, Vijay. Let me take that. I think if you look at the book-to-bill ratio, it's -- for LSAG instruments, it's actually very similar to both including China and excluding China. China was actually slightly positive as well. So that's a good sign. And as we mentioned in the prepared remarks, we're taking a prudent approach to our first quarter. And certainly, we see this as a positive. We did have some -- we typically do have seasonality from our Q4 to Q1, but we're taking it kind of one quarter at a time. Mike McMullen : Yes, I think part of the big story, too, Vijay, is the 10% comp from last year as well. But as we said it in the call, we were -- it was encouraging to see some initial signs of stabilization with that kind of book-to-bill on the instrument side. Vijay Kumar : Understood. I'm glad to hear prudency and right off the bat here. Mike McMullen : We got that into the script, Vijay. Vijay Kumar : On -- just one more related on guidance here. What are you assuming for NASD in China for fiscal '24? Robert McMahon : Yes. So for China, we are thinking mid-single-digit decline for the full year. So very similar to this year. And then for NASD, right now, we're expecting low single-digit -- mid-single-digit growth. Mike McMullen : Mid-singles. Yes. Operator : We go next now to Patrick Donnelly at Citi. Patrick Donnelly : Maybe kind of a follow-up on the 1Q guide. It seems like, again, the order's encouraging. Maybe a little bit prudent on the guide, as you said, I guess when you think about just the implication for the ramp 2Q to 4Q, is it optimism in the market based on some of those order trends is that obviously the comps get easier in the second half as you work through it. And can you just talk about the visibility into the recovery and kind of what gives you the confidence in the ramp as the year progresses here? Mike McMullen : Yes, sure, Patrick. I want in lead off, Bob, and then you can add any additional comments you'd like to make here. But when we think about these comps around what we described as a gradual recovery and grow. I think is, first of all, important to remind the audience that we do expect the first half of the year to be very much like what we saw in the second half of '23. But looking forward, why do we think that things are going to be different in the second half which is though it's initial and still early, there are some early signs of potential stabilization that you see in our order book. The fact that book-to-bill for the company was above 1, the fact that we had the same result in our instrument business, which has been the most pressured part of the company. And listen, while it's too early for customers to be confirming their 2024 budgets with us, let's go back to the sales phone, which is a predictor of potential growth, right? So our sales funnels continue to show a lot of interest from customers. And we know that at some point in time of things will start to release. The funnels remain healthy. And listen, an environment like this, we've seen these things before, which was healthy capital spending has been constrained. So some release can be expected. And we hear -- I don't want to get too down my skies on this, but we hear customers talk about some new focused investments. And I think we're not calling for a big broad-based market recovery, but certain segments of the market are going to be better. We're talking about some investments in R&D tools, what's going to PFAS testing capacity expansion plan we're hearing from our customers, Advanced Materials. And then as you mentioned earlier, Patrick, there's an easier compare in second half '24 as well. So we do expect this return to growth. And I think as -- it's not simply a hope. We've got some information to be kind of back up our thinking there. Again, we'll know a lot better about how things look when we get to the budgeting phase of our customers in early 2024. Again, right now, the markets for capital -- instrument still remain quite challenged. And as I mentioned, we are seeing encouraging signs of potential stabilization, but it's going to be a journey for our return into growth. And I think our guide reflects that. And again, I think we're -- we've got a high degree of confidence this is what the back half of the year will look like. Robert McMahon : Yes. And Patrick, you asked about Q1, as I mentioned in the prepared remarks, I think we're taking a prudent approach here. but we're also going up against last year where we did have a budget flush and happened earlier in the year but for delivery in November and December, and we're assuming that we're not seeing that or building that into our into our estimates. So that happens, then it would be -- that would be a nice thing for all of us. Mike McMullen : Yes, absolutely, Bob. Patrick Donnelly : That's helpful. Bob. And maybe, Bob, just on the margin side, helpful to hear you talk through a few of the different moving pieces. It sounds like some cost savings in DGG, among others. I guess can you just give a bit more color on kind of the moving pieces, where you're pulling levers, the ability to take out some additional costs to hit these margin numbers. Obviously, you talked about margins being up a bit. I think there are some headwinds like incentive comp, things like that. So maybe just talk about the gives and takes there and confidence in terms of some of the cost outs. Robert McMahon : Yes, that's a great insight there, Patrick. Yes, because we do have some add backs, I would say that -- so don't take that $175 million and drop it to the bottom line because we have some resets, I would say roughly half of that is kind of a reset between our sales comp and variable pay. If we think about it is really across the P&L, the biggest piece actually is in DGG with the exit of the Res Bio business, but we've also taken some tough decisions in other product lines to streamline the portfolio there. And I would say roughly a little over 30% of that is associated with that. The other 25% is really within our COGS. Our OFS team has done a phenomenal job of really kind of leaning into reducing our costs around logistics and material costs. And then I talked about the site consolidation as well, which will show up and down the P&L. So we've taken a look at our real estate footprint and have actually closed several smaller sites between -- around the world really. And then the final piece is really kind of infrastructure optimization, which would be discretionary spend but then also headcount reductions that would be focused on areas where we've rightsized it to the demand. Mike McMullen : And Patrick, this is Mike, I stated about the confidence about the growth recovery. I think when it comes to hitting the $175 million, high degree of confidence, we control this 100%, and we'll deliver on this. Operator : We'll go next now to Matt Sykes at Goldman Sachs. Matt Sykes : Maybe just on NASD, I noticed just over the past, call it 1.5 years, we've kind of gone from high double digits, low double digits next year, mid-single digits, which it's probably just some level of normalization as you ramp capacity. But just given the step up in CapEx you're guiding to next year, is there some wiggle room in terms of how you guys lay that capacity out? Or is the confidence in that market growth enough to keep investing in that area next year? Mike McMullen : I'll jump right into that one. So I tried to make that come out in the script. But our plans to continue to invest for the future long-term growth this business remains high. We're going full steam ahead on the capital expansion and they're tracking according to plan. In fact, I think we'll probably do a little bit better on the cost side when all said and done relative to the CapEx that's involved. And Bob, maybe you can talk a little bit about some of the things we're seeing relative -- I think we commented on this before, but what have we seen in the marketplace relative to 2024 relative to NASD. Robert McMahon : Yes. I think, Matt, it's a great question. And so if we look at the details of kind of the mix, actually, I would say we have the most healthy mix of portfolio in NASD and '24 than we've had. So a significant increase in the number of programs that we are going to have been going through. Now it's a bigger component of clinical volume versus commercial volume, which I actually think bodes very well for the future going forward. We have seen some, I would say, some pausing of certain customers as associated with IRA but we think that, that's transitory. So as Mike said, we're not at all concerned about the long-term growth prospects of this market. And in fact, many of the programs that we're seeing come into our portfolio are actually as what we had talked about in previous calls, much larger targeted patient populations, which really speaks well to the volume. And then as Mike mentioned, we're actually expanding our portfolio, our technologies. And so it's not just siRNA, but we're having the ability to continue to grow our CRISPR -- GMP grade CRISPR business as well as antisense. So we're continuing to do that as well. Mike McMullen : Sam, I know this will be your last call, would have thought it might be interesting for you to jump in here for a second. As part of your transition, you've been talking to a lot of our key customers. And I think we're hearing the same story from them about long-term growth continued investment here. Sam Raha : Yes. Absolutely, Mike. I'll just add a couple of things to your and Bob's comments. One, we are now on contract with more major pharma than we ever have been. And it's very promising. If you look at publicly the percentage of their overall R&D budgets that they're now spending on therapeutic oligos, and we are in the driver's seat to win those opportunities. And just in the last couple of weeks alone, I've spoken with a number of our lead pharma partners, and they've reaffirmed. So there is a slight navigation through the IRA, as Bob mentioned, the conviction on their end of the market potential remains unchanged and in the leadership position to pursue that. Matt Sykes : Got it. That's a great amount of detail. Maybe just, Bob, for you, just on pricing. Kind of what's embedded for next year as you think about pricing? And how has pricing kind of trended over the course of this year? Are we back to sort of normalized levels of pricing that you guys have historically achieved? Or is there still some pricing gains to see sort of as we move into next year in certain areas of your business? Robert McMahon : Yes. Matt, that's a great question. And we ended the Q4 at just a little under 3% and actually for the full year was greater than that. So it actually continues to be hold up very well. What we're building into our plan for next year is roughly 2 percentage points of price, which, as you know, is greater than our historical kind of pre-COVID levels. And so what we've been able to do, I think, is -- really speaks to the value proposition that we have as well as the emerging mix of our businesses as well. Operator : We go next now to Rachel Vatnsdal at JPMorgan. Rachel Vatnsdal : So first off, I just want to ask on China. You mentioned that the region is down 30% this quarter. That was in line with your expectations. You're expecting it to decline mid-singles again next year. So I guess, just how much of a function is that really due to some of the comps and starting to lap the easier comp late into next year versus is there anything structurally wrong with that market? And how do you expect China to continue to grow on that medium to long term? Mike McMullen : Do you want to take the first part, Bob, I think it's... Robert McMahon : Yes, yes. So well, I think from the standpoint of the comps, what we would see is, obviously, if you looked at what we did in the first half of this year, we had very strong growth, and then we're going up against, extremely difficult comparisons this year. I mean, as I mentioned, we were down -- up 44% in Q4 of last year, so down 31% this year, we're still up over the 2 years. And as we think about this similar to the rest of the kind of the guide, we're expecting kind of declines in the mid-20s in Q1 and getting better from there. And some of that, it will be an easier comp. And I'm sure Mike will talk a little bit more about this, but we don't see anything structurally changing in the Chinese marketplace for life science tools. Mike McMullen : Absolutely, Bob. Why don't pick up from there. So I made a few comments about this in the prepared remarks, but I may first trip to China since October 2019 when we're there for the [BCIA] show. And what did I see, first of all, I'll just remind how quickly things can happen in China. Electric vehicles everywhere, a lot more green, digital adoption was just amazing. I don't think anybody uses cash there anymore. And then you also remind as you travel around the country, just how big a country is, how big the economy is and how big the markets are for Life Sciences. But to your specific question, here's what I was hearing from customers and my team when I have seen as well, which was why do we think this market eventually will return to growth, all the things that have been driving this market over the years, which is primarily the Chinese government's 14th 5-year plan. They're still on it. They're pointing to long-term growth, improving the quality of life in China. We're hearing stories of new environmental regs coming from PFAS. The anticorruption impacts that we've seen in the health and the pharma space look to may have peaked, with a lot of the actions occurring, which could ultimately long term, lead to more R&D investments because there'll be less money being spent in the SG&A area. But I don't want to be too short-term optimistic about this expansion of growth because the business is bouncing along at a certain level. And that's why we call it stabilization in our prepared remarks. So what we're seeing, what we're forecasting, what we're hearing is from our teams and our customers don't expect any significant near-term improvements but don't expect any significant near-term deterioration either. And I think that's why when you look at the year-to-year numbers in terms of growth rate, Bob, was probably a comp -- payer issue. But we've had a couple of months now just run at a certain level, and that gives us the sense that what -- I think we used were potential signs of stabilization. So I hope that helps. Rachel Vatnsdal : Yes. No, that's helpful color. And then I just want to dig a little bit more on your comments around next year. So you mentioned that you expect the first half to be similar to what you're seeing in the back half of this year. So I guess, can you just walk us through in a little bit more detail what exactly you mean by that? Should we be expecting similarities from an organic growth perspective? Or are you really talking about more from a revenue dollar standpoint. And then same type of question on the trajectory of the rebound on margins and EPS next year. Should we expect kind of that similar ramp given the cost dynamic as well? Robert McMahon : Yes. I think if -- I'll try to answer all that in short order, Rachel. As we think about the first half of the year, yes, we think that we -- as we look at our business and look at that kind of book-to-bill, we've kind of troughed in Q2. Q3, I think we mentioned actually was a little better. It was less than -- still less than 1 and then Q4 continue to improve. And our expectation is that, that kind of performance will continue. Now we're going up against difficult comps when we were actually bleeding down our inventory. And that particularly happened in Q1 and Q2 of last year as we were talking about it. And so I would expect us to have the trough of '24 be in Q1, Q2 being a little better and then growing out of that as we benefit from the easier compares. And I would expect our P&L and the EPS to look very similar to that. Q1, we are -- we've taken most of the actions they will have all been taken in the first quarter, but they won't have a full quarter. And so we'll have full quarters of the cost savings in Q2 through Q4. And so as that business kind of improves as the business improves, we'll get more and more leverage on the bottom line. Operator : Moving on now to Derik De Bruin at Bank of America. Derik De Bruin : So can we talk a little bit about pharma? That market was up and down all year, not a lot of visibility. Are you seeing some of the orders that were sort of stuck in the funnel starting to come loose, right? I mean, how are you sort of looking at the pharma market going forward? Mike McMullen : Yes, I think the answer is the deal funnel still remain elongated. So… Padraig McDonnell : So yes, I think what we see from our funnels is that they're growing, but the velocity in closing deals from the point of funnel to order is still static on that side -- elongated. Robert McMahon : Yes. And Derik, I think if we think about the pharma end market, we're assuming very low single-digit growth for next year. And some of that is actually getting past the tougher comps in China. If we looked at actually our pharma business ex China, we grew in FY23. And actually, our biopharma business grew in total. And we think about small molecule was the area that was dragging the pharma business down as you know very well, that typically has a replacement cycle. We are well into that replacement cycle. We were up very high. We kept calling it. And we've seen that be very depressed, and our expectation is that will start coming back in earnest in '24, but probably in the back half of '24. Derik De Bruin : So this goes -- sorry to beat this up, but your China got going down. Pharma, you just basically said you've got -- not -- you don't have a ton of visibility, hope things have come back. I'm just not -- I'm curious why you can put a little bit more cushion in the guide, like that. It just seems like -- it still feels like it's a little bit -- it still feels like it's a little back end. Well, it's not a little a lot back-end heavy, given where we are soaring in the cycle? Mike McMullen : Yes. I think as we said earlier, Derik, there's reason to believe that you have the comps working in our favor for the second half, there’s real. And we know that customers want there's interest in the products. And I think they've got a step -- and by the way, we're not calling for this miracle snapback in 2024. But we're also saying that small markets continue to decline 20%, 30% on the numbers we're seeing this year, particularly, that's where the pressure has been. But we know that biopharma, they need some tools for R&D. We know that those replacement cycles only last -- can only be held up for so long. So there's confidence relative to what we see in the funnel. Deals aren't coming out of the funnel. And then although we are focusing here on pharma right now in his commentary, there's a lot of other strength in some of the other secular markets and applied markets, in particular, which is a nice diversification we have on the instrument side as well. And Bob, I don't know if there's any additional thoughts on the pharma story. Robert McMahon : No. Derik De Bruin : And just one final one. Just what were bookings. I mean, I know you said the book-to-bill was greater than 1, but I'm just curious in terms of bookings. And do you often see a spike in bookings in Q4 Basically, I'm just trying to get the sense of like what you saw as a head fake or you've got -- where you think you've got real demand here? Robert McMahon : Yes. So we don't give the absolute dollars rather than to say it was greater than 1. It was -- roughly 1 for the total company and then instruments were higher. Typically, we do see a where it is higher. So this kind of goes back to kind of our historical performance where orders are a little higher, particularly because we have October in our results. And so last year was actually an aberration, so to speak, as we're working down the backlog and this kind of gets back to our normal process. Mike McMullen : Yes. And through the quarter, Derik, we saw a normal seasonality. So there wasn't anything unusual about the order pattern to kind of say, is this a head fake or not. So I think that also is one of the reasons why we say, okay, early signs of some stabilization here. Again, not huge growth. We're seeing stabilization. Operator : We'll go next now to Jack Meehan at Nephron Research. Jack Meehan : So I wanted to dig a little bit more into LSAG in the quarter. Can you break down the growth between instruments and consumables and just any commentary across product lines. Robert McMahon : Everything I would say for the quarter was pressured, although consumables performed better than the instrumentation. Our consumables business was down kind of low single digits and against a very tough comp of almost 9%, 10%. And if you looked at it ex-China, that was largely influenced by China, we grew low single digits in consumables. Jack Meehan : Okay. And so does that imply instruments may be down over 20% in the quarter? Robert McMahon : They were down, yes. Jack Meehan : Okay. Yes. And I guess maybe just a follow up on Derik's question. I think everybody is trying to think about the right way to interpret this book-to-bill commentary, but just is there any additional color you can share on the magnitude were orders down in the quarter? Or I guess, just trying to understand because there was an easy or a difficult comp on revenue like are orders kind of more -- don't have a similar level of volatility. It should have mathematically been over 1, right? Robert McMahon : Yes. So the orders were down year-on-year, but obviously down not as much as revenue down year-on-year. And so when we look at it, I think that kind of shows though, the stabilization because we had some pretty significant revenue last year because of the recovery in the first thing Shanghai shutdown. So I don't think that, that -- we actually think that this is the best way to kind of look at it on a go-forward basis because we don't have the play of the backlog happening much anymore. And so actually, as we look at it on a quarterly basis, we've seen a nice, steady progression up back to historical numbers. Mike McMullen : And Jack, I think it's fair to say, Bob, that one of the things we were conscious was a lot of commentary about how significantly things we're getting in terms of being worse. And as you know, we've been out for some time, calling for no year-end budget flush, constrained capital environment. We came into the year actually guiding for a slower growth in the second half. So what we're trying to intimate in the call today is what we've been saying for the last several quarters is exactly what we're seeing right now. And I thought -- we thought a proof point was the book-to-bill -- listen, it's not great out there in terms of robust growth, but the sky is also not falling either. Operator : The next now to Puneet Souda at Leerink Partners. Puneet Souda : First one on CrossLab. Bob, with 65% of your business being a service contracts, could you elaborate on what sort of growth contribution we should expect here for full year? And also, I don't know if you provided the LSAG expectation contribution for 2024 as well? Robert McMahon : Yes. For ACG, we're expecting kind of mid-single-digit growth as we are -- with the contracted services piece being double digit, but then being pressured by the instrumentation. So that will be moderated. And for the LSAG business, right now, we're looking at kind of low single-digit decline. Again, with a greater decline in the first half of the year and the return to better performance in the second half of the year. Puneet Souda : Got it. Okay. And then on -- if I could ask a little bit on am I onshoring that's point that you're pointing -- that's not something we are focused on in prior calls. And I hear you that you're growing on the PFAS side, but just wondered -- could you elaborate a little bit on both some onshoring as well as the environmental gains that you're having? And why shouldn't that contribute more to your instrumentation growth in 2024. Robert McMahon : Yes. It has the potential to do that. And as we talked about it, we're at the beginning of the year, and so we want to be prudent there. But there's nothing out there that doesn't say that, that should continue given the macro economic environment and the incentives that governments are providing to continue to invest. And actually, what we're seeing is nice business in Southeast Asia as well as India. And I would expect that to continue. That's where we're placing incremental investments to continue to drive and capture that demand. I would expect the same thing in the environmental area as well. But we're not going to build all of that in right now at the beginning of the year. Mike McMullen : But I think we saw some trends too that we're starting to see, PFAS is also now driving some testing in the food marketplace as well as every country that we talk to is in the process of further enhancing their own reg. So we wanted to have some other areas of potential growth for the company beyond the story around pharma. Operator : We'll go next now to Josh Waldman at Cleveland Research. Josh Waldman : Maybe one for Bob and then one for Mike. Bob, maybe circling back on Derik's question, I wondered if you could provide more context on the forecasting process this round or the puts and takes that went into the organic guide. Could you take a step back, were there segments in the business that were like decelerating or slowing as you went into the guide or maybe areas where you're still trying to find bottom? And if so, how did you expect that in the guide? Robert McMahon : Yes. Obviously, this year has been one for the ages in terms of being able to try to manage the forecasting. And so we've taken a number of different angles at it to look at it. So not only growth rates, which I think is the focus here, but also actually if you looked at it on a sequential basis and look at the actual dollars, I think that that's probably more instructive, particularly as we were looking at the bleeding of the inventory. I would say what we've seen over the last couple of quarters is that signs of stabilization. There are always puts and takes across the various businesses. And we think that we've tried to do that. We've built in feedback based on the field's projections, the funnel that Mike and Padraig talked about and then an assumption around the conversion of those funnels. And we haven't seen the funnels slow down. There's still modest growth, and we're starting to see the slowing of the elongation. I'm not saying that it's stopped or accelerated in terms of the purchase but we are starting to see that slowing and you're actually seeing that in that book to bill. And when we look at the orders on a sequential basis, we're starting to see that kind of stabilization as well. And so that's kind of how we're looking at continuing to go forward. if you kind of just built that going into next year, you would start seeing a challenging first half and then better performance in the second half. Hopefully, that gives you some flavor. Josh Waldman : Yes, that's helpful. And that was actually going to be my follow-up. And maybe I don't know, Bob or Mike, if you want to take it. I was curious if you could maybe quantify where the funnel stands entering '24 versus maybe where it typically is entering the year? And just how correlative or how much do you think it is a predictor of near-term demand? I mean is that -- is better funnel conversion at all kind of part of what drives the improvement as you progress through the year? Mike McMullen : I think pursuant to Padraig and Bob, kind of the same rates, right, no significant improvement. Robert McMahon : Correct. We're going up against -- the first half of this year, actually, what you saw was the elongation of those cycle times. And so what we're seeing right now is kind of -- like I said, it's not necessarily fully stable, but it's not decline -- or increasing at the rate that we saw in the first and second quarters of last year. And so you're starting to see that. And so all things being equal, that conversion is actually improving slightly versus a year ago. It's still not back to historical numbers. And that's what we're trying to handicap here as we look at our forecast going forward. Operator : We'll go next now to Daniel Brennan at Cowen. Daniel Brennan : Great. Maybe just on China. I know you mentioned, I think, in the prepared remarks like month-to-month pacing had improved in the quarter. Just any more color or anything on exit rates in China. And if you could, I'd be entered to get like some more color on the end market trends in China. I know you gave some color on biopharma, but could you discuss pharma overall and any other interesting color from an end market basis? Mike McMullen : Sure. Bob, maybe we'll tag team on this, which was -- I think the -- relative to the order book, I think we were slightly above revenue for the quarter. No really unusual pacing through the quarter from China. We've been calling -- I know a lot of our conversation today has been about pharma, but we've been saying for some quarters overall for China, it's been a broad-based slowdown. And that's what the business has been, and that's how we ended the year in terms of the end market performance. I will say that we were pleased that we were in line with our expectations for the business. So again, we described earlier that the business was moving along at a certain overall level. I think we do have a view of China that we will still be down in terms of the revenue for the year. But reflective of where we are, where we're seeing the business right now. So… Robert McMahon : Dan, and to build on Mike's point, just a couple of other additional data points. we were down pretty significantly in all end markets in Q4, as you would expect because we were up 44% in Q4 of '22. And so that's probably not as relevant because we were catching up relative to some of the catch-up of the Shanghai shutdown. Another data point, though, is if we looked at kind of year-on-year growth actually, we exited October, the year-on-year performance. It was still a decline, but it was much better than what we saw at the beginning of the quarter. And so we actually saw a sequential improvement. I think Mike mentioned that in his prepared remarks. And then if we looked at kind of absolute dollars, they've been pretty steady month-on-month. Daniel Brennan : Got it. And then Chemical and Advanced Material was like a tale of 2 cities. It looks like C&E was down 15% in the quarter, you said and you talked a lot about PFAS. And so is there any more color like what you're seeing on kind of both sides of coin there? What's kind of baked in on the core chemical and energy side for the year and just anything on trends there? And then obviously, it sounds like you guys still remain really constructive on the Applied Materials side or Advanced Material side. Mike McMullen : So how about Bob lead here a few comments. And then I've been dying to pull Phil in on here as well. And maybe talk about some of the things he's seen on the Advanced Materials side, which is a real area of expertise for him, so. But I think your word of tail of 2 cities is really quite appropriate, both in terms of breakout by segment, also by geography. I think we posted 70% growth, if I remember correctly, in China last year. So I mean that's a tough comp. I don't care who you are. But we're seeing continued slowness on the C&E side. Our major customers here are really conservative in terms of their deployment of capital. Many of our largest customers are on cost control. So that's been -- that's what you're seeing reflected in the numbers, and that's why we expect a constrained outlook on that side of the business for a while. The different story on the Advanced Materials, and I think Bob, you pointed to good growth geographically globally outside of China. And then Phil, I know you and the team got a whole bunch of initiatives around the applied markets, particularly not only PFAS but Advanced Materials. And I thought a good opportunity for me to introduce you to the audience and have you share your perspective on what we're doing on the applied on the Advanced Materials side. Phil Binns : Yes. Thanks, Mike. Yes, certainly, we've mentioned you've talked around the activity within labs being ex-China, at least being reasonably robust. But on the applied market side and certainly around Advanced Materials. We're certainly relatively strong in those markets, and we're seeing good really good generation around the batteries market. And of course, we've spoken about the onshoring process around there in the Advanced Materials area. So globally, that obviously comes into the onshoring. And globally, we're in strong positions in those markets and have been historically and continue to innovate strongly around those markets and stay close to those customers. Operator : We go next now to Dan Leonard at UBS. Dan Leonard : I wanted to circle back for a moment on the Q1 guide. You spoke about a challenging year-on-year comp a couple of times. But as you're thinking about the Q4 to Q1 sequential ramp in dollars, how much of that decline forecasted is what you chalk up to seasonality versus prudent if you could give us a flavor. Mike McMullen : Great question, Bob. Robert McMahon : Yes, Dan, that's a great question. If you look at last year and our revenue went down roughly $90 million; $90 million, $95 million from an extremely strong Q4 to also a very strong -- if you look at the midpoint of the guide, it's a little over $105 million, $110 million. So there is an element of looking at what we did last year, again, not assuming a strong budget. I don't want to kind of parse it out to give you a percent, but that kind of at least gives you kind of how we were thinking about the Q1 guide relative to what we saw in Q1 of last year. Dan Leonard : Appreciate that. And then as a follow-up, can you remind me in 2024, when do we lap the headwinds on the genomics side? And what is your appetite continued investment in genomics as part of the DGG portfolio. Robert McMahon : Yes, I would expect us to -- we will have a difficult Q1 and then starting to get better from Q2 and beyond, not dissimilar from the rest of some of the businesses. And then I'll let Mike talk about the kind of the investment. Mike McMullen : Yes, I think first of all, just to remind the audience, when we talk about the genomics mix business, what are we talking about? We got a $500 million business, probably 50% of it is in QA/QC instrumentation, where we are the undisputed leader here, a lot of appetite to invest here. Our TapeStation product, particularly the consumables business is on fire right now. Capital side is constrained as we've seen across the marketplace. And then I think we all believe in the view that NGS will continue to be a growth market for us. And for the industry, I think that people are dying on back their expectations about how robust it is for a period of time. And I think we're seeing that in our business. So why do we make some of the structure changes we made in the portfolio because we want to ensure that we've got the ability to have a healthy P&L while at the same point in time invest in growth. So there's a reallocation of R&D dollars happening as a result of some of the changes we made that we talked about over the call. So answer the story is we have a lot of appetite for focused investments in areas where we think we can win in genomics. Operator : And ladies and gentlemen, that is all the time we have for questions this afternoon. I'd like to turn things back to you Mr. Ahuja for any closing comments. Parmeet Ahuja : Thanks, Bob, and thanks, everyone, for joining the call today. With that, we would like to end the call. Have a good day, everyone. Operator : Thank you. Again, ladies and gentlemen, that will conclude the Agilent Technologies Q4 2023 Earnings Call. Again, thanks for joining us, and we wish you all a great evening. Goodbye.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,024	1	2024Q1	2024Q1	2024-02-27	5.455	5.473	5.651	5.762	7.72	23.73	25.66	Operator : Ladies and gentlemen, welcome to the Agilent Technologies Q1 2024 Earnings Call. My name is Regina and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead. Parmeet Ahuja : Thank you, Regina and welcome, everyone, to Agilent's conference call for the first quarter of fiscal year 2024. With me are Mike McMullen, Agilent's President and CEO; Padraig McDonnell, Agilent Chief Operating Officer and CEO-elect; and Bob McMahon, Agilent's Senior Vice President and CFO and acting President of the Diagnostics and Genomics Group. Joining in the Q&A will be Phil Binns, President of the Agilent Life Science and Applied Markets Group; and Angelica Riemann, our newly named President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our first quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.investor.agilent.com. Today's comments 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 and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rates. As previously announced, beginning in the first quarter of fiscal 2024, we implemented certain changes to our segment reporting structure related to the move of our cell analysis business from LSAG into DGG. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. During this call, 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'd like to turn the call over to Mike. Mike McMullen : Thanks, Parmeet and thanks, everyone, for joining our call. Before I review our first quarter results, I want to first acknowledge our news last week that I will be retiring at the end of the fiscal year and that Padraig McDonnell is Agilent's new Chief Operating Officer and will become CEO on May 1. It was a difficult decision to retire after almost 40 great years with this special company and in the role that I love, I will miss working with the One Agilent team. However, I must say it's a great feeling and quite gratifying to be handing over the CEO reins to a tremendously capable successor in Padraig. With Agilent operating from a position of strength and with a very promising long-term outlook. I have known Padraig for more than 20 years. I've worked closely with him during that time. He has always been completely committed to our customers and Agilent's success. He is a product of our culture, knows our company, team and markets and those have developed compelling business strategies, build winning teams and deliver exceptional results. Padraig has a strong track record result at every position he has held during his 26-year career at Agilent. I know he has the knowledge, leadership skills and customer focus that will be key to Agilent's success moving forward. I look forward to all of you seeing first-hand what a capable result driven leader we have in Padraig. Padraig would you like to say a few words? Padraig McDonnell : Thank you, Mike. I'm honored to be able to follow you as Agilent's next CEO and I'm grateful for your support throughout my career and during this transition. You have made a significant impact on Agilent, our customers and our team. I'd also like to welcome Angelica Riemann to this call. After leading our services division for the last 2.5 years, I can tell you she has the experience and the skill set to continue evolving ACG to align with the growing opportunities that the business has demonstrated in supporting the broad installed base and our enterprise customers. Expect to see continued great things ahead from Angelica and ACG. I've had the pleasure of meeting some of you on this call and I look forward to meeting and working with you all in the future. Agilent has a compelling story to tell and I'm excited by the possibilities that lie in front of us as we help our customers bring great signs to life. Mike McMullen : Thanks, Padraig. For today's call, I will take lead, covering the overview of our financial results, while next quarter, Padraig will take on these duties as the new CEO. Now, on to the Q1 results. We are pleased with the start of the year. The Agilent team continues its strong execution in a challenging market environment. The first quarter provided further evidence of our team's capabilities with revenue coming in better than expected at $1.66 billion. This represents a decline of 6.4% against a tough compare of 10% growth in Q1 of last year. The better-than-expected top line results and disciplined cost management drove higher-than-expected earnings per share of $1.29 down 6% from Q1 last year. Given the solid Q1 results and our continued view is slow but steady recovery throughout the year, we are maintaining our full year outlook that we shared with you in November. Key to our Q1 performance was the ongoing sequential stabilization we experienced in China and secular growth drivers in applied markets globally. From an end market perspective, our total pharma business is down 12% which was in line with our expectations. This falls 11% increase in the first quarter last year. While declining overall against a very strong Q1 of last year, our applied end markets were more resilient than expected and show sequential growth from the fourth quarter. In these markets, PFAS Solutions and Advanced Materials, including batteries and semiconductors were high bits for us. Geographically, both China and Europe finished Q1 better than expected, while revenue for the Americas was in line with expectations. Looking at performance by business unit, the Life Sciences and Applied Markets Group delivered revenues of $846 million and down 11%. This is against a difficult compare of 10% growth last year. While still too early to call an overall market recovery, results were better than expected. Our diversified portfolio and broad end market coverage helped drive the performance. We continue to experience a conservative environment for capital spending. But are better than expected, Q1 results were driven by consumables which grew mid-single digits, China and a better-than-expected performance in applied markets. During the quarter, we also completed the expansion of our Shanghai manufacturing facility as we continue to take steps to ensure our long-term leadership in China. We also made our first customer shipments for Agilent's newly released LC/MS offerings. Our latest highest sensitivity triple quad, the 6495D enables expanded and enhanced workflows, including for PFAS. This, in addition to Revident, the first of a new generation of LC/Q-TOF systems that combine a new architecture with enhanced instrument intelligence for maximize operation time and productivity. The Agilent CrossLab Group posted revenue of $405 million. This is up 5% with growth across all regions except China. Our contracts business led the way with double-digit growth overall, led by strength in enterprise service contracts. This performance highlights the continued strength and resiliency of our business. Connect rates for both services and consumables continue to improve. This is a result of our focused strategy to deliver end-to-end customer value while also building a larger recurring revenue business. The Diagnostics and Genomics Group delivered revenue of $407 million, down 6% core. Our pathology-related businesses and our NGS QC portfolio grew mid-single digits which was more than offset by declines in NGS chemistries and NASD. NASD declined low double digits as expected. This is because a very tough compare of 22% growth driven by significant volume last year from a single commercial program. We continue to be encouraged with our long-term prospects due to the increasing number of programs across a range of indications many of them target large patient populations. The DGG team continues to innovate and deliver differentiated solutions for our customers. In the quarter, we induced a new ProteoAnalyzer system. The new platform simplifies and improves the efficiency of analyzing complex protein mixtures. And processes that are central to analytical workflows across the pharma, biotech, food analysis and academia sectors. From an overall Agilent perspective, we recently achieved World Economic Forum recognition for operations of Waldbronn, Germany. This site was named a Global Lighthouse for implementing innovation that boost productivity, output and quality. This marks the second Global Lighthouse award for us after seeing the recognition for our Singapore facility two years ago. Agilent is the only life science tools company to be recognized as a Global Lighthouse. Agilent recently achieved a top 5 ranking in the Barron's list of 100 most sustainable companies. In addition, we are included in the Dow Jones Sustainability Index globally and in North America for the ninth year in a row. Looking ahead, we expect the current market environment to persist through the first half, we expect a slow and steady improvement in the second half of the year. We will continue taking actions that will make us stronger and position us well for the future. We will maintain our approach to prioritize investing for growth with a focus on execution and driving productivity. Our better-than-expected Q1 results and my confidence the Agilent team reinforced our view for the full year. Bob will now provide the details on our results as well as our outlook for Q2. After Bob's comments, I will rejoin for some closing remarks. And now, Bob, over to you. Robert McMahon : Thanks, Mike and good afternoon, everyone. In my remarks today, I'll provide some additional details on revenue in the quarter, as well as take you through the income statement and other key financial metrics. I'll then finish up with our second quarter guidance. Q1 revenue was $1.66 billion, a decline of 6.4% core. On a reported basis, currency added 0.9 percentage points, while M&A had a negative impact of 0.1%, resulting in a reported decline of 5.6%. And overall, orders were greater than revenue in Q1 as expected. As Mike mentioned, pharma, our largest end market declined 12%. Within pharma, biopharma declined low single digits but grew low single digits outside China, bolstered by strength in services and consumables. Small molecule was down high teens in the quarter with softness globally. The chemical and advanced materials market was down 4% off a very tough comparison of 14% growth last year. We saw broad resilience in advanced materials with a low single-digit increase year-on-year as well as growth sequentially. Given the extremely tough compare of high 20s growth last year, these are impressive results. As expected, the chemical side saw a decline. The academia and government market was up 2%. The growth in this market reflects the stability of academic funding and lab activity. Our business in the diagnostics and clinical market declined 5%, mid-single-digit growth in pathology was more than offset by continued headwinds in genomics, cell analysis and LC and LC/MS. The environmental and forensics market declined 1% after growing 12% in Q1 of last year. We continue to see new regulations around the world driving PFAS testing. Europe grew mid-single digits, while China and the Americas were down low single digits. Americas faced a difficult compare of low 30s growth last year. The food market declined 3% but was up low single digits, excluding China. On a geographic basis, as Mike mentioned, both China and Europe exceeded our expectations while the Americas were in line with our expectations. China was down 9% and showed a sequential increase over last quarter which was much better than expectations. China benefited from continued stabilization and a bigger-than-expected Lunar New Year impact as some customers pulled forward incremental demand from Q2. We estimate the pull-forward impact to be roughly $15 million or 5% of China's revenue in the quarter. Even adjusting for this impact, China outperformed. Europe was down 4% year-on-year after growing 10% last year and was up mid-single digits sequentially. This was driven by continued strong demand for our ACG services, offset by muted demand in pharma and expected softness in chemicals. In the Americas, revenue was down 8% due to declines in pharma and the softness in NASD and NGS chemistries. Moving down the P&L. First quarter gross margin was 56.0% down 50 basis points from a year ago as productivity and cost savings were offset by lower demand and mix. Our operating margin of 25.8% was down year-over-year as expected. Our ongoing cost savings initiatives are delivering as planned. Below the line, we benefited from greater-than-expected interest income in the quarter, driven by nice work from our treasury team, coupled with very strong cash flow. Our tax rate was 13.5% and we had 294 million diluted shares outstanding. Putting it all together, Q1 earnings per share were $1.29, down 6% from a year ago and ahead of our expectations. Now, let me turn to cash flow and the balance sheet. I continue to be very pleased with our cash flow generation. Operating cash flow was $485 million in the quarter, significantly above last year. In Q1, we invested $90 million in capital expenditures as we continue our planned NASD expansion. And during the quarter, we returned $69 million to shareholders through dividends. Although no shares were repurchased during the quarter, we expect to catch up on our anti-dilutive share repurchasing for the remainder of the year. In Q2, we expect a minimum of $180 million to be repurchased. All in all, we had a good start to the year. And as Mike mentioned, it reinforces our confidence in the full year guide we provided in November. Now, to our guidance for the second quarter. We expect Q2 revenue will be in the range of $1.56 billion to $1.59 billion. This represents a decline of 9.1% to 7.4% on a reported basis and a decline of 8.4% to 6.7% on a core basis against 9% growth last year. Currency and M&A combined are a headwind of 70 basis points. Our Q2 guidance also reflects the $15 million impact of the Q1 pull forward in China I mentioned earlier. Second quarter non-GAAP earnings per share expected to be between $1.17 and $1.20. Before turning back over to Mike, I just want to express my thanks to Mike and to congratulate Padraig. Mike, it has been a real pleasure to work with you. While there have been many ups and downs in the markets these past few years, one thing I knew I could always count on is your steady leadership and strong partnership. And Padraig, congratulations again. I'm really looking forward to working with you. And now, I'll turn things back over to Mike. Mike? Mike McMullen : Thanks, Bob. Today marks my 37th and final earnings call with all of you. Time does truly fly by. I want to first thank you for your support and engagement over the years. I have to say it has been a tremendous honor serving as Agilent's CEO and represent the achievements of the One Agilent team to all of you and the broader investor community. In 2015, we launched the then new Agilent with a goal to transform Agilent into a leading life science and diagnostics company. We had ambitious goals to drive long-term shareholder value creation with significantly stepped up financial results delivered by an unmatched One Agilent team working together in a truly differentiated and compelling company culture. I couldn't be proud of the Agilent team and what we've accomplished together over the last 9 years. While current market conditions remain challenging, the long-term promise of growth remains with end markets power buying investments to improve the human condition. On the Agilent front, we've never been in a stronger position to continue to capitalize on opportunities to serve our customers within the market and deliver differentiated financial results. It's been a pleasure to work with all of you over the years. I will miss it. While at the same time, I know that you will enjoy working with Padraig in the years ahead. Like me, I know you'll be impressed with Padraig's knowledge of our industry and our business. As I noted earlier, he knows how to develop compelling business strategies, build winning teams and deliver exceptional results. His track record of success during his Agilent leadership journey speaks for itself and have no doubt, it will continue in his new role. While this is my last earnings call with you, I'm certain that the best is yet to come for Agilent. Thank you. And now over to you, Parmeet for the Q&A. Parmeet Ahuja : Thanks, Mike. Regina, if you could please provide instructions for Q&A now. Operator : [Operator Instructions] Our first question comes from the line of Derik De Bruin with Bank of America. Derik De Bruin : Congratulations, Mike. And good luck. So first question, we've been getting a lot of incomings on the NASD business. And just because the growth trajectory is not doing what I think what people had thought it was going to do this year. I assume there's a couple of questions. It's like, look, there's been some pushouts in some clinical readouts from Alnylam with their HELIOS-B trial, there's been some other sort of like developments in the market. I guess the question is like, are you still confident that, that segment can grow this year, NASD can grow this year? And I just -- is there any risk at all that there's like an overcapacity situation because as the market -- is it just taking longer for things to catch up? Just sort of your thoughts on that, please? Mike McMullen : I'll tag team with Bob on this. So as you saw in our prepared remarks, Q1 came in as expected for the NASD business. And we are in a situation where we've had, I think, the broadest number of clinical programs and such. So we're very active. The volume is less commercial this year as we pointed out in the script as well versus clinical. And Bob, I know we've been talking a lot with the team about the outlook for the year, particularly with some of our customers who are resequencing some of the clinical programs into '25. Robert McMahon : Yes. Derik. And as you're talking about, we remain very optimistic about the future of NASD, our forecast for Train C and D remains intact in terms of building out the expansion. I would say that as we're talking about things, you mentioned one of the clinical trials. That's an important element of one of our customers. We are seeing some potential pushouts into FY '25. And as they are looking at revisiting the clinical trial programs and time lines and it's probably closer to flat this year based on that, although we're not giving up hope but that's built into kind of keeping our guide the way it is. But I think if you look at the number of commercial programs -- or excuse me, clinical programs that we have, we're very excited about the future. Mike McMullen : And Bob, I think it's also fair to say that this is not a byproduct of overcapacity in the industry or a significant change in in-sourcing. It's really how some of our customers are reacting to really the IRAC. Robert McMahon : That's right. Derik De Bruin : Well, that takes me -- that's a great segue into my next question which is what's sort of the latest on pharma? It doesn't sound like you're ready to call an inflection point but it does sound like things sounded a little bit better. Can you just sort of give your thoughts on what budget releases are sort of timing around that? Any sort of like notable developments? I mean, when do you -- are you seeing any sort of like signs of life that -- or the signs of budgets could start to be released in the second quarter? Mike McMullen : Yes. Great question, Derik. Obviously, top of mind, within Agilent, as we mentioned, Q1 came in where we thought it would. But what's the outlook? And Padraig, I know you've just spending a lot of time with your team and customers talking about this exact question. Padraig McDonnell : Yes. Thanks, Mike. And I think customers continue to be cautious globally. I think as we're stable -- what we're seeing a stability but no material improvement versus what we saw in the last half of last year. And in terms of the capital budget cycle in '24, this is the time we see it. It's pretty early in that cycle. But we've heard move in both directions, positive and negative but fewer customers expecting negative budgets. So we're watching and seeing how that goes. Mike McMullen : Yes. I think what you shared with me earlier, Padraig, was the tone was more negative at this time last year. It's still not super positive yet and still a lot of caution but we're not seeing anything to cause us to change our outlook for the year. I think Bob -- thank you very much. I think, Bob, you had one. Robert McMahon : Yes, I was just going to say one of the things that we see is very strong performance in our services and our consumables business in the pharma sector which actually speaks to lab activity. And so while we've seen a depressed capital cycle here and we're optimistic about that turning around in the second half of the year. Operator : Our next question will come from the line of Matt Sykes with Goldman Sachs. Matt Sykes : Maybe just to start out, maybe bigger picture in China. It sounded like you made some comments about sequential improvement. It sounds like it's informing some of your confidence for back half. What are the risks that China just simply doesn't get worse and just kind of bounce along the bottom. And what kind of catalysts are you looking for in China for the back half for some level of improvement? I know it's not necessarily baked in your guide but you did make some comments about some sort of nascent optimism there potentially? Mike McMullen : Yes, sure. Thanks for the question, Matt. And as we had a really, I think, a nice print to start off the year. A big part of that was the performance in China. Yes, we had a bit of a pull-in from Q2 from Lunar New Year but the business overall was better than expected. And to answer your question, we now have several quarters real orders, real revenue and the sequential growth, the numbers are real. So we're not seeing anything on the macro world that would also dramatically change what has continued to be a very challenging economic market in China. So what gives us confidence is the fact that we've had a number of quarters now, our predictability in the business. The numbers are coming in slightly better than we had anticipated. But again, I think it's more just the fact that there's ongoing run rate of business that gives us confidence on the outlook. And Bob, I know that you want to jump in on this one Padraig? Padraig McDonnell : Yes. And I think if, Matt, as you just mentioned, we aren't assuming any inflection in our guide. That's been consistent. Actually, Q1 ended up being a little better than we anticipated. We kind of putting that money in the bank, so to speak. And if you look at it, we'll have now quarters of numbers that are relatively stable which is a very positive sign. And I think when we look at our funnel, it's also stable as well as the order funnel -- order forecast is what Mike just talked about as well. Matt Sykes : And then maybe just on ACG which had a good quarter. You talked about the contract revenue and specifically enterprise services. With that growth, maybe could you just help kind of size that contract business within ACG? And then maybe talk about what is driving that growth? And what kind of contribution can that make to the ACG segment over the course of this year? Mike McMullen : Matt, thanks for your support of the ACG business over the years. And I want to use this opportunity to introduce our new ACG Group President. But first, I'd like to maybe have a two-part response probably and Bob, I think it's roughly about 65% just to make sure. So roughly about 65% of our total services business is in the contracts arena. And Angelica, maybe you could share your thoughts on really what's been driving the growth we're seeing in that contract business. Angelica Riemann : Yes. Thanks, Mike. As you mentioned, it's about 65% of the total business. And a part of that demand has really been driven by the lab-wide enterprise services offerings, where we're able to help customers as they're navigating their own economic situation really helping them optimize their entire lab operation. And our portfolio offerings in this stage have allowed us to really facilitate that improvement in lab operations, lab efficiency and that's particularly important to those enterprise customers. Mike McMullen : And in times of tough economic times, the market times, the productivity help and driving productivity in the labs as a well-received offering we have. Robert McMahon : Matt, just one other quick thing on that. One of the great things that Angelica and team have been doing and you heard us talk about this a lot is about the increasing of the attach rate and that continues to grow at roughly 1 point again year-on-year this year. And that kind of locks in that resiliency of that stability in that business. And if you think about a 2/3 of that business growing double digits, it really helped power the business and when we see the inevitable turnaround of the instrument business, that will be a nice tailwind as well. Mike McMullen : So, absolutely, Bob. Operator : Your next question comes from the line of Brandon Couillard with Jefferies. Brandon Couillard : So the chemical and advanced materials business, we actually performed a little better than we were expecting. Obviously, you're still seeing some headwinds in the chemical side. Just give us your state of the union there, what you're seeing from a macro's perspective and kind of outlook for that business moving into the second half look like? Mike McMullen : Yes. So I'll do a tag team on this with Padraig. So as you may recall, we've talked earlier this year about these secular growth drivers in the applied markets. And we saw that pretty much across the globe. And I think what we're seeing again is the investments being made in advanced materials relative to the semiconductor supply chain and also the fab is driving productivity. We're seeing continued investment relative to battery, battery development, QA/QC. And I think we continue to see some real nice growth in the PFAS side of our environmental business. Started in the U.S., I think all those applied market secular drivers that we've been pointing to for, for some time, delivered in Q1. And I think our outlook remains the same that we're expecting there'll be a source of positivity for us in the overall CAM [ph] market space, albeit the chemical market is expected to remain subdued. Padraig McDonnell : Yes. That's right, Mike. I think it's really a tale of two submarkets. We saw broad resilience in the advanced materials with sequential growth. And given the extremely tough compare and high 20s we had last year, it was truly a very impressive result from the teams. The chemical and energy side was -- we saw a decline but on a very tough compare of 10% but we did see a sequential improvement versus Q4 '23. Overall, I think our portfolio is extremely strong in this area. We have ability to cross and upsell across that. And of course, our strong services offerings have that value proposition. Brandon Couillard : And then, Bob, in terms of the guide for the year, I mean, you're sticking with the organic growth range for the year, you beat the first quarter. This China pull forward, then explain all of the upside in the first quarter what the NASD outlook is lower, what other moving parts by end market or geography kind of gets you to the same midpoint? Robert McMahon : Yes. That's a great question, Brandon. And you talked about a couple of them. We feel really good about where we started the year. It's still at the beginning of the year, though, so we're kind of banking some of that. What I would say is if you looked across the moving pieces, with the NASD being slightly lower, that would be offset by a little better results in the LSAG side of the business. And really, that chemical and advanced materials and academia are two areas that are probably slightly better than what we had forecasted. But overall, we're maintaining the guide and as we are looking here felt good about really at the start to the year. Operator : Your next question comes from the line of Puneet Souda with Leerink Partners. Puneet Souda : So my first question is really around maybe, I think Bob, you talked a little bit about the book-to-bill orders growing faster than revenue. But maybe could you elaborate a bit on more on the instrumentation side, what you're seeing and what you're seeing with the respect to book-to-bill in China? And a quick question, a clarifying question on the 2Q guide. It does look a slight step down versus Q1. And I just want to make sure beyond the Lunar New Year? What else are you baking in there? Robert McMahon : Yes. I'll take that. There are a lot of questions in that one question. But so true to form, Puneet and one of the things -- I'll start with the last one. I mean, we typically do have seasonality. There is that $15 million that gets pushed from one quarter to another; that's strictly timing in China because of the Lunar New Year. But Q2 is typically a lower revenue number. So we're building in that normal seasonality. In terms of book-to-bill in China, actually book-to-bill was greater than 1 in China; so continued stabilization. And in terms of book-to-bill for our instruments, it was below 1, are kind of expected. Now some of that was a result of the China pull forward where the orders came in and we were expecting that revenue to be shipped in Q2; so there's some element of timing there. But all in all, a positive start to the year. Mike McMullen : Bob, if I cover headline on that, too, I'd just say that Q2 seasonality is as normal and the Q1 book-to-bill results are as our normal pattern. So again, we've been talking a lot about normalization of business flow. And I think we're seeing it in terms of the seasonal patterns and book-to-revenue situations. Puneet Souda : And then just a high-level question, or a simple question. Could you maybe elaborate a bit on the pharma side, where you're seeing more traction, more growth? Is it the large pharma, small biotechs, CROs, CDMOs. Maybe just talk a little bit about that. Robert McMahon : Yes, I'll take that, Puneet. If we look at across our business, the relative strength was actually in our biopharma. So a large molecule. And our business is skewed to the larger midsize and large cap companies. The standout has been the ACG business and our consumables on that. So it actually speaks to activity in the labs. We are starting to see -- I don't want to call it a trend but certainly a stabilization on the emerging biotech side of it. The instruments were still down but that is where we're starting to see the relative strength in the pharma business. And that speaks to kind of the long-term growth drivers, I think, in that market. And I would expect that to continue throughout the course of the year as our business gets stronger and the markets get stronger. And quite honestly, we have more favorable comps. Mike McMullen : Bob, I think I recall correctly, outside of China, our biopharma business actually grew in the quarter. Robert McMahon : That's right. Operator : Your next question comes from the line of Rachel Vatnsdal with JPMorgan. Rachel Vatnsdal : So first up, I just want to follow up there on a comments around book-to-bill. So you mentioned the book-to-bill for instrumentation was below 1 for the quarter and some of that was really timing related. So I guess, can you just break that down for us a little bit further. What trends are you seeing in liquid chromatography versus mass spectro for example? And then is there any dynamics or trends to call out from geography on the instrumentation business as well? Mike McMullen : I don't think there's any new trends here. I think without going into the details of our product line, the small molecule side has really been in an area where we've talked about the year-on-year challenges there from the LC side. But Phil, I don't know if you want to jump in with any thoughts here but I don't think there's any real outstanding new trends here with perhaps the better-than-expected trends we saw in applied markets, particularly on advanced materials but maybe you have something else you want to add? Phil Binns : Yes, sure, Mike. I think that's pretty much the case similar to Q1 around how the markets are performing. We're seeing some bright spots around some of the secular areas in the applied markets, in the instrumentation which is driving the business forward but just support your comments there. Robert McMahon : Rachel, just one other thing to build on what Mike and Phil were just talking about. When we look at our LSAG business, it was down 11% which was better than what we expected. The piece that's really been driving that down is the pharma market which is what we've been expecting. If we looked at the rest of the markets, they were much better than the down 11% with the exception of the diagnostics and clinical which is a small number. Mike McMullen : Right. And to your question, Rachel, that dynamic in the pharma really speaks to pressure on the LC business. Rachel Vatnsdal : And then I just wanted to ask about monthly trends. Some of your peers have talked about how spending a bit, a little bit slow out of the gate in January and then into early February. So I guess, since you guys have a few more weeks of visibility here. Can you walk us through where you seeing similar trends on just slower spending to start the year? And has any of that started to come back? Any color there as we enter fiscal 2Q would be helpful. Mike McMullen : Well, I've been in this business for a while and it's always slow in January. And that's why we have the seasonality we talked about relative to Q2. So I don't think we're seeing any significantly different trends that we've seen historically. Padraig, I know that you're closer than I am but [indiscernible]. Padraig McDonnell : Yes. No, I think that's right, Mike. I think on the ACG side, we see a number of service -- our service contract business comes in strong under the ACG side but on the capital side, we're not seeing much. Robert McMahon : Yes. And Bill, just a final -- put a finer point on that, January came in as we expected. Operator : Our next question will come from the line of Vijay Kumar with Evercore ISI. Unidentified Analyst : This is Jordan [ph] on for Vijay. Maybe one follow-up on the China side. Have you seen any hints of stimulus to start the year? And if we do see a stimulus, do you have any foresight to what implications that will have on Agilent? Mike McMullen : Both Padraig and I are in the conference and we're shaking our head, no. We've not heard anything about any potential stimulus. And what I can tell you is if it does happen, it's upside to our outlook. Unidentified Analyst : Understood. And then maybe one more for me. Can you talk about how pricing has trended in the quarter? And any updates to your expectations for the remainder of the year? Mike McMullen : Bob, do you want to take that one? Robert McMahon : Yes. We were pleased with the results. It was between 1% and 2%. So but in line with kind of the seasonality and the mix that we saw, we would expect to see in Q1. So right now, it's on track. As we've talked about, our consumables business and ACG business have the greatest price realization followed by generally speaking, actually, we had a very good result in diagnostics and genomics in the quarter. And then we did see some mix but not anything out of the ordinary instrumentation side. So all in, we're on track for what we expected for the full year. Operator : Your next question comes from the line of Patrick Donnelly with Citi. Patrick Donnelly : Bob, maybe one for you first. Just in terms of the EPS guide. It looks like you guys got an additional $20 million on the kind of net interest other income. Can you just kind of flag if that's rolling through, did that core earnings number move a little lower? Is any moving pieces there? And then secondarily, just on the margin piece, you guys have that cost savings plan. Can you just talk about how that paces as the year goes, would be helpful. Robert McMahon : Yes. Thanks, Patrick. Great question. And what I would say is a couple of things. We are on track to have more interest income than what we anticipated at the beginning of the year that $20 million and some of that in the first quarter as well and that's really a result of actually having better-than-expected cash flow in the first quarter and great work by the treasury team. I would say that the savings -- we're on track for the savings targets for the full year. And as I think about the year, it's still very early in the year and this provides us what I would say is more confidence in the guide. Patrick Donnelly : And then, maybe just on kind of the book-to-bill. How are you guys thinking about -- I think last quarter, you said the book-to-bill for the year would be above 1 but you'd have quarters kind of in and out on the instrument side which obviously we're seeing this quarter. How are you thinking about just the order trends and the book-to-bill trends on the instrument side as we work our way through the year given what you're seeing today? Robert McMahon : Yes, no change to what we said back in November. Q1 is a proof point for what we said. Operator : Your next question comes from the line of Dan Brennan with TD Cowen. Daniel Brennan : Maybe just going to beat the dead horse but just for the instruments, did you guys say -- I know in the Q, you usually put out what the instrument number actually was. So what did actually instruments do in the quarter? And then given how much easier comps go as we get through the year? Can you just kind of give us a sense of pacing like what should we expect on Q2 in instruments and then we can kind of have at the back half of the year? Mike McMullen : I know the team did a calculation on that because LSAG was down 11% but that includes our consumables business which was up. Robert McMahon : Yes, I would say we typically don't give all that information but it was down -- we were down 11%. It was down, puts 20%, in the quarter but that was better than expected, offset by 6% growth in our consumables business. If we look at the LSAG thinking for Q2, it's down low teens. So -- and a lot of that has to do with some of the timing associated with that $15 million shift. That's almost all capital equipment from Q1 -- from Q2 back into Q1. So if you look at it, it is in line with where we expect it to be. Mike McMullen : And then, we go into more favorable compares in Q3 and Q4. Robert McMahon : Correct, correct. Daniel Brennan : Got it. Okay. And then I know there's been a handful of questions running on China. But can you just -- would you mind spending a bit more color on kind of what maybe by segment, pharma, applied? Any color you can give us kind of what you're seeing within the different businesses in China? And is down mid-single still the expectation for China for the full year? Or is there a chance you can kind of see some upside for that number. Mike McMullen : I think we've have raised it up a bit. It's still down... Robert McMahon : Yes, yes. I think we're cautiously optimistic there. I'd say it's still within a range that we had before, so I don't want to call an inflection. But if you looked at the markets we were down that 9% was roughly down 20%-ish [ph] in pharma. So that continues to be the area of really around the globe but China is no different. The great thing is many of the other markets performed much better. So even when you think about like academia and government, that grew, so did our chem and advanced material business now grew very low single digits. And then our forensics in environmental was down low single digits. So you're actually starting to see the continued stabilization and then you'll get into very much easier compares in the back half of the year in China because that down 22% was down compared to up 12% last year. We had another strong compare in Q2 and then we actually started seeing the pretty significant declines year-on-year. And so there's reasons to be optimistic about that continued stabilization that Mike talked about but we're not ready yet to call an inflection. But when it happens, we'll take it. Mike McMullen : And Padraig, I know you want to jump in this as well. Padraig McDonnell : Yes. And I think what we see is as also consumables and services continue to outperform expectations in China, so that's kind of we expect that to continue. Mike McMullen : Yes, I think the story is a great. I think the story really was in pharma, Q1, the instrument and the CapEx side of things. But we're pleased with the start there. Operator : Your next question comes from the line of Catherine Schulte with Baird. Catherine Schulte : Maybe first, when pharma was down 12% in the quarter. I think you said biopharma was up 2% ex China. What was small molecule performance ex China. And maybe the outlook for biopharma versus a small molecule for the rest of the year? Robert McMahon : So small molecule on a global basis was down roughly 18%. And it was ex China, it was down 20% and down roughly 14% for China. So pretty consistent across the globe. I would say, in China, the big area in China that has been impacted is on the small molecule side, where we'll start to see better comps going forward after Q2. Catherine Schulte : Okay. And then maybe on consumables, it's great to see a return to growth there this quarter. Can you talk through what you saw outside of China on the consumables side? Robert McMahon : Our consumables business was pretty consistent across the globe in terms of growth. Mike McMullen : So I don't know if you have anything you want to add to that on the -- or we've seen the consumables, I think we're really pleased to see that because it really speaks to the lab activity being robust. So anything else you want to jump in on with? Phil Binns : Yes. Probably just one item there, Mike. I think we are seeing really good traction around our workflow development. So end-to-end solutions which obviously is also drives our services business as well. But around the consumables, the -- in most of our end markets, we've been pretty heavily focused on developing workflows and making our customers' lives easier and more integrated in our labs and that's showing some really good traction and that's reflected in solid connected attach rates in the consumable space. Mike McMullen : Thanks, Phil. I'm really glad you close with the comments about connect rates. We talked about that relative to our services business, we're also seeing a very strong positive trend on consumables as well which bodes well to our future in terms of recurring revenue business growth. Operator : Your next question comes from the line of Jack Meehan with Nephron Research. Jack Meehan : Just had a couple of follow-ups. The first one was, could you just talk about what you're seeing in the genomics business within DGG. I know it's still been a bit of a drag. Just when do you think that's going to start to turn? Mike McMullen : I think I'll invite Bob in on this one but I think it's been sort of a tale of two cities. When we talk about our genomics business, there's really two pieces to it. The half of it's in QA/QC activities for NGS workflows and we're seeing really solid growth in the consumables on that side of things as well as you're starting to see signs of life on the CapEx, not the current because the call churn there yet but that's in a reasonably good shape. I think we've seen really in our U.S.-based genomics business, some really market challenges have been hitting us. And Bob, maybe you can elaborate on that? Robert McMahon : That's right. Thanks, Mike. And as you said, our NGS QC portfolio from an instrument and consumable side actually grew mid-single digits in the quarter which was very nice. The genomics chemistry side that we referenced in the prepared remarks was down. We faced some very difficult comps. We had a couple of companies that reorganized and exited some businesses. They had some lifetime buys at the end of Q1. I would expect that the performance of that to improve starting in the second half of the year. Jack Meehan : Great. And I also wanted to ask about the academic end market. I know that's been very stable for you guys. But just what you're seeing in the U.S. here with the continuing resolution for the NIH, just thoughts on the durability moving forward. Mike McMullen : Yes, Jack, thanks for noticing that. That was a real bright spot for us. We actually grew, I think, 2% in the quarter. And this is -- we've been working on this thing for some time to really build out our portfolio and really change our market position in academia research and I think it's starting to show up in the numbers. I think stabilization really is what we're seeing which is the funding is there. And NIH is a relatively really small part of Agilent's business, so really is immaterial. But we're seeing universities have increasingly been funded through private sector. So the money is there. And even so, we saw money in China as well. So it was really a nice global story for us and we're fairly optimistic that, that kind of stabilization can be there for us for the rest of the year. Operator : Your next question will come from the line of Doug Schenkel with Wolfe Research. Doug Schenkel : I want to ask a question on guidance and then a question on capital deployment. Mike McMullen : Surely, absolutely. Go ahead, Doug. Doug Schenkel : So for the year, on one hand, around 48% of sales is in the first half, at least that's how you've guided, I believe. Yes, that's lower than last year but it's not outside the norm for the last several years. On the other hand, just given some math, your guidance for the first half embeds the assumption that revenue declines around 7% organically and then improves 7% to 9% positive organic in the second half. Can you could do that just as a function of the comps? Or do you actually really need to see improvement in certain geographies or certain end markets or categories? And then again, just a math question. Does guidance assume Q4 revenue kind of exiting around like $1.8 billion? Robert McMahon : Doug, this is Bob. I'll take that last one. We'll tell you when we get to Q4 and what I would say but your math is -- in all seriousness, your math is spot on as usual. I think one of the things that we look at is, we look at it a couple of different ways. I think the way to look at it is that first half, second half kind of looking at seasonality, that's probably more instructive given kind of the changes in the growth rates. And when you look at it, as you noticed -- as you mentioned, it is in line with our historical seasonality. And when you look at the growth rates, you're right, we are expecting growth in the back half of the year. A lot of that is, in fact, the easier the compares. And when we actually look at -- what I would ask you to take a look at also is a 2-year stack basis relative to implied Q1 and first half and second half. And what you would see there is a much more smooth number that we also looked at as well. So as usual, you're spot on there. Mike McMullen : And Bob, I think that's why we really emphasized in the script, the word stabilization because as things, as we have kind of a stabilization, we're going to get a lift in the growth rate just by the comps as they go. Doug Schenkel : Yes, I know there's a lot of focus on how much improvement is necessary to get there. So if a lot of this is stability is just math that I think obviously makes people more comfortable. I know I've taken up a lot of air time already. Real quick. Capital deployment, the cash flow remains robust. The balance sheet is super clean. Can you just talk about your thinking right now on capital deployment and what the environment looks like right now? Mike McMullen : Yes. I think we remain very interested in deploying capital in a balanced way which is inclusive of investing for in the business. And that speaks directly to we are interested in M&A. It's our build and buy growth strategy. I just have to say that the funnel pipeline is more robust than I've seen in a number of years and nothing to obviously announce but we're very much engaged. Operator : Your next question comes from the line of Josh Waldman with Cleveland Research. Josh Waldman : Yes. Just a couple on my end and maybe Bob, starting with you first, a follow-up on the guide. Can you comment a bit more on how Q2 guide moved versus the framework and the initial outlook? I assume core outlook came down a bit but just wanted to confirm the moving pieces there. And then, does the core guide reflect any changes in Q3 or Q4? Or is it really just reflecting an update on H1? Robert McMahon : Yes, that's a good question. It's a little of both, Josh. So Q2 is relatively intact for what we had originally thought with the exception of that small movement of the China business, that's roughly a point of core growth from Q1 and Q2 switching. What I would say is Q1 also had a beat into it and what we're taking is some of that out of the second half of the year. And so the takeaway is Q2 is spot on from where we expected it to be, absent that kind of shifting the timing shift of China and then the Q2 or the rest of Q1 kind of the beat really helps us in the second half of the year. Josh Waldman : And then, Mike, can you talk about how visibility in the business as you've covered the last three months? Has there been any improvement in the ability of the funnel to predict near-term sales or still seeing an elongation of kind of opportunity and quoting, flipping to orders. Curious, total company and then also what you're seeing in pharma specifically. Mike McMullen : Yes. No, I'll have Padraig jump in as well. I think the business remains the same. I don't think it's any better or any worse. And so I think it's the normal kind of cadence of business. And that's why, as Bob just mentioned, when we're talking about the second half, we bank some of the beat to put again the second half because we've yet to see the second half materialize in terms of the order book which is typical at this time of the year. Padraig McDonnell : I think that's right, Mike. And I think as far as the quality of orders remains -- that remain in our backlog, nothing has changed. We've not seen any increase in cancellations and ex China the funnel continues to grow and that's led by the aftermarket business. I will say as a continuing theme, the deal closure times remain at an elevated levels but it's definitely stable and deal win rates have been consistent. Mike McMullen : Yes. I think there's been an important point made here, elevated but we're not seeing the elongation. So they're stable but they're longer than they have been in the past. Operator : Your next question comes from the line of Dan Leonard with UBS. Dan Leonard : My first question, just a bit more on China. Are you expecting sequential growth in Q2 in China similar to Q1? Robert McMahon : No, if you looked at the sequential number, it's going to be roughly the same as what we had in Q1. Dan Leonard : And Mike, congrats on your retirement. I was wondering if you could elaborate on timing. I was surprised, others were surprised. I've gotten the question a number of times and we would just love to hear your thoughts. Mike McMullen : Yes. Thanks for that. So while it's maybe a surprise to many on the call and it was a surprise when I shared the news across the company because the Agilent team just knows how much I love working for this company and work with them. And it really was a hard-wall, really difficult decision for me but not been contemplating this for a while. And I pulled the Board into the discussion sort of communicating with them because we really wanted to make sure that they had enough time to really run a thorough and thoughtful selection process in which they were able to do. And in my mind, they came out with the best possible choice in selecting Padraig. But yes but this is something that I've been contemplating for a while and then try to engage in the Board about my timing and then I really want to make sure they had enough time to really pick the right successor and that's what they did. Dan Leonard : You always seem to be having a lot of fun. So congrats again it's been good. Mike McMullen : Thank you. It's going to be hard to step away. But I have to say, the [indiscernible] family was just too strong. We have a 6-month old -- 18-month old grandson and he will soon have a brother and sister so there's a lot going on, on the family side. And there's only one way I could make more time. So again, it's been a real pleasure to work with all of you on the call. Operator : Your next question comes from the line of Luke Sergott with Barclays. Luke Sergott : I just want to talk about the margins on the quarter and kind of the step down in DGG and LSAG and I assume, obviously, it's probably driven by the volume declines there on the instrument side. But how do you guys view the recovery in the margins between DGG and LSAG throughout the year to hit your guide? Robert McMahon : Luke, this is Bob. Just real quick. You're right. If I look at DGG, it actually was improvement year-over-year but it was down and it was really a result of that margin or the volume. I would say also there was an element of mix in LSAG and I would expect that to continue to improve. The cost actions that we took weren't fully actualized all and as expected in Q1. So we'll have the full impact of those as well in Q2 throughout. So I would expect an improvement over the course of the year as volumes grow up in both LSAG and DGG. Luke Sergott : And then, just a follow-up here from the 2Q guide. Can you just help frame what you guys are embedded there by the different segments? Robert McMahon : Yes, if I look at Q2 guide, we're still expecting, if I looked at the end market pharma down double-digits academia and government down low single digits really as a result of some of that timing shift, diagnostics and clinical down mid-singles and chemical and advanced materials, down high single digits and food about the same. Both of those are, as a result of some of the shift also in the China business from Q2 back into Q1 and then environmental and forensics kind of mid-single-digit decline. Operator : Our final question will come from the line of Paul Knight with KeyBanc. Paul Knight : Mike, really super to see you love doing what you're doing and I knew you, I don't know, 15 years before you became CEO. So I guess, concluding question I would have, at least professionally, would be what do you see in terms of two things. Number one, why do you think the kind of market growth rate is for the markets that Agilent participates in? And then geographically, where do you see the surprise over the next 5 years? Like will Japan reinvigorate its growth? Will Europe see more in-sourcing? I would love to have your perspective on those things. Mike McMullen : Thanks, Paul. Yes, we do go way back to don't we and it's been great to work with you over those years, going way back to the CAG days in my prior role, I think we think this is a 4% to 6% kind of growth market, mid-singles. So we think that the kind of market growth that we're not experienced in the industry right now is the anomalies and this will be back to that 4% to 6% kind of long-term growth rate. Obviously, certain segments within that overall macro number, that big TAM will be growing faster than that and that's always a challenge to make sure that you pick those segments so you can actually beat that number. I think there's going to be some geographic mix. I mean, we've evolved our view of long-term growth into China because we actually expect some of the supply chain moves and other things that have been going on that you'll see a growth, more growth in Europe which has been more of a slower grower for us geographically. But we've been -- continue to be surprised how well we do. Our team does in Europe. I think you're going to expect to see Japan rejuvenate it, particularly, I think you can make the case of the semi industry which is going to return to some strength in Japan. But that's the beauty of this business is just the diversified nature of both the end markets and geographies. So that would be my last -- I guess, my final projection of long-term growth for the market in this role. But thanks, Paul. I appreciate the comments and looking forward to staying in touch. Operator : I will now turn the call back over to Parmeet Ahuja for closing remarks. Parmeet Ahuja : Thank you, Regina and thanks everyone for being on the call today. With that, we'd like to close the call. Have a good day, everyone. Operator : Ladies and gentlemen, this concludes today's call. Thank you all for joining.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,024	2	2024Q2	2024Q2	2024-05-29	5.453	5.287	5.782	5.557	7.32	25.03	24.28	Operator : Ladies and gentlemen, welcome to the Agilent Technologies Q2 2024 Earnings Call. My name is Regina, and I will be coordinating your call today. [Operator Instructions]. I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead. Parmeet Ahuja : Thank you, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2024. With me are Padraig McDonnell, Agilent President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A will be Phil Binns, President of the Agilent Life Sciences and Applied Markets Group; Simon May, our newly named President of the Agilent Diagnostics and Genomics Group; and Angelica Riemann, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.investor.agilent.com. Today's comments 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 and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rates. As previously announced, beginning in the first quarter of fiscal 2024, we implemented certain changes to our segment reporting structure related to the move of our cell analysis business from LSAG into DGG. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. During this call, 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'd like to turn the call over to Padraig. Padraig McDonnell : Thanks, Parmeet. Good afternoon, everyone, and thank you for joining today's call. I want to begin by saying I'm incredibly honored to serve as CEO of this great company, and I'm thankful for the opportunity to lead such a talented team. I truly believe the Agilent team is second to none, and I'm energized about the future possibilities that lie ahead of us. I also want to take this time to welcome our new DGG President, Simon May to the Agilent team. Simon's diversified experience, strong technical skills and growth mindset will be a key asset in this role. Since starting earlier this month, Simon has hit the ground running, and I am really looking forward to him helping move DGG and Agilent forward. Before I talk about the quarterly results, I'd like to tell you how I spent my time since the announcement in February that I will become Agilent's CEO. I've been meeting and connecting with employees, customers and shareholders around the world to listen to their perspectives and how we should build on our strengths and evolve Agilent. What they have told me is clear, Agilent must become even more customer focused and even more nimble to continue to win in the marketplace and add value to customers and shareholders. This has really resonated with our employees and customers. As an energized Agilent team, we will evolve our strategy, adapting quickly to market trends and changes while accelerating our pace of innovation in areas of greatest return for long-term growth. We will double down on our customer first culture, deepening our relationship to further enhance our market-leading customer experience that is already the best in the industry. Now let's talk about the Q2 results and outlook moving forward. In a challenging market environment, the Agilent team delivered on expectations. In the second quarter, we reported revenue of $1.573 billion, a 7.4% decline. This was against a tough compare of 9.5% growth in Q2 of last year. While revenues declined in the quarter, our book-to-bill was greater than one, and orders grew year-over-year for the first time in seven quarters. Earnings per share of $1.22 beat our expectations and represented a 4% decline from the second quarter of 2023. Now looking forward, the market environment continues to be challenging, but we are seeing early signs of recovery. However, as we announced in our press release, this market recovery is not at the pace we anticipated when we provided guidance earlier in the year. As a result, we are reducing our market growth expectations and revising our full year core revenue to be in the range of $6.42 billion to $6.5 billion and growth to decline between 4.3% and 5.4%. We now expect earnings per share to be between $5.15 and $5.25 for the year. We have responded quickly to the lower market growth expectations and are taking difficult, but necessary actions to streamline our cost structure. These actions will allow us to invest in our most promising growth opportunities while also delivering incremental annualized savings of $100 million by the end of the fiscal year. We are sharpening our focus on key growth vectors such as Biopharma, PFAS and Advanced Materials, while also investing in our digital ecosystem, and accelerating our innovation to drive even faster execution. And we are leveraging our strong balance sheet and plan to repurchase $750 million of our common stock across the third and four quarters, over and above our normal anti-dilutive repurchases. Bob will provide more details on our results and latest outlook in his remarks. Getting back to Q2 results. As expected, all end markets saw a declining revenue in Q2. Geographically, the Americas and Europe came in slightly ahead of expectations, while China lagged. Despite the challenging market conditions, our Agilent team stay close to our customers and continue to leverage our strong relationships with them to execute remarkably well while maintaining strong cost discipline. When we look at our performance by business unit, the Life Sciences and Applied Markets Group reported $754 million in revenue, down 13%. The group saw a decline across all end markets and regions, with consumables being a bright spot. Consumables grew in the low single digits, driven by Chemical and Advanced Materials, Food, and Environmental and Forensics. Also, while relatively small, we continue to see strong growth in our pre-owned instrument business. The LSAG team continues to innovate, introducing two new instruments this quarter that extend our applied markets leadership. First, our 7010D GC/Triple Quad instrument delivers exceptional sensitivity for customers in the environmental PFAS and Advanced Materials markets. Designed for analysis that demand the lowest limit of detection. And second is our 8850 GC, a distinguished new member of our market-leading GC portfolio. The 8850 is ultrafast in separation and colon speeds with design innovations that enable customers to run tests up to twice as fast as regular benchtop GC. And it's the smallest high-performance benchtop GC on the market. Plus, it's sustainable, using up to 30% less electricity power compared with a traditional benchtop GC. Now moving on to the Agilent CrossLab Group, which delivered revenue of $402 million for the quarter, up 5%. ACG grew across all end markets in every region except China. The business delivered double-digit growth in services contracts which now represent almost 70% of the total business, offset by declines in new instrument installation revenues. The ongoing strength in our contracted business speaks to our strategy of increasing the connect rates on our instruments and the ongoing value we are providing to our customers. The Diagnostics and Genomics Group posted $417 million in revenue, representing an 8% decline. Pathology was up mid-single digits globally and was more than offset by declines in the mid-20s in cell analysis due to the constrained capital environment for instrumentation. NASD declined low teens as expected, driven by more clinical products being produced this year versus Q2 of last year. Europe was a bright spot for DGG, growing low single digits in the quarter, while Americas and China declined. Despite the subdued market environment, we continue to innovate in our cell analysis business. We recently introduced the Agilent Spectrum Flow Cytometer, which allows our customers to perform sophisticated experiments that expand the range of the research on the same easy-to-use NovoCyte platform. Bob will now provide details on our results as well as our outlook for the remainder of the year. After Bob delivers his comments, I will be back for some closing remarks. Over to you, Bob. Bob McMahon : Thanks, Padraig, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter as well as take you through the income statement and other key financial metrics. I'll then cover our updated full year and third quarter guidance. Q2 revenue was $1.573 billion. a decline of 7.4% core. On a reported basis, currency had a negative impact of 0.8 percentage points, while M&A had a negative impact of 0.2%, resulting in a reported decline of 8.4%. As Padraig mentioned, Pharma, our largest end market, declined 11%, with both Biopharma and Small Molecule declining roughly the same percentage. Instrument demand continues to be constrained, while services delivered mid-single-digit growth. Looking forward, while we have seen sentiment improve, instrument purchases are still constrained and we are expecting that to continue for the rest of the year. In addition, we have reduced our expectations for NASD as several clinical programs have pushed out into next year and some commercial products have not ramped at the pace as expected. As a result, we have reduced our full year growth outlook for the Pharma end market from roughly flat to down low double digits, similar to our Q2 performance. Our revised expectation for the Pharma end market is the largest change in our outlook. The Chemical and Advanced Materials market was better than expected, declining 3% after coming off a very tough comparison of 16% growth last year. The academia and government market declined 12% against a tough compare of 11% growth last year. While soft globally, the decline was driven by China, which was down mid-30s. Our business in the Diagnostics and Clinical market declined 2%. Our pathology business continues to show resilience in this market, growing mid-single digits, while our NGS QC instrumentation business also grew slightly. These were offset by softness in our NGS chemistries business. The Environmental and Forensics market declined 2%. The business grew mid-single digits ex China, highlighted by continued strength in serving the rapidly expanding PFAS opportunity. The Food market declined 13% on a very tough compare of 21% growth last year, heavily impacted by the low 30s decline in China. On a geographic basis, all regions declined. The Americas region was down 5%. Europe was down 3%, while Asia Pacific ex China was down slightly. China was down 21%, missing our expectations of a mid-teens decline. We saw demand weakness expand beyond Pharma. As a result, we have revised our full year expectations for China for a mid-single-digit decline to a double-digit decline. We have seen funnel activity increase because of the recently announced stimulus program, but we are not assuming any revenue impact in our fiscal year. Moving down to P&L. Our second quarter gross margin was 55.6%, up 30 basis points from a year ago as productivity and cost savings were offset by lower demand and mix. Our operating margin of 25.1% was down year-over-year as expected. Below the line, we benefited from greater-than-expected interest income and a lower tax rate. Our tax rate was 12.5%, and we had 293 million diluted shares outstanding. Putting it all together, Q2 earnings per share were $1.22, down 4% from a year ago, less than the decline in revenue and ahead of our expectations. Now let me turn to cash flow and the balance sheet. Operating cash flow was $333 million in the quarter and we invested $103 million in capital expenditures as we continue our planned NASD expansion. We returned $299 million to shareholders in the quarter, $69 million through dividends and $230 million through repurchase shares, catching up on our anti-dilutive buying year-to-date. In summary, we met our expectations for the quarter our markets are recovering but at a slower pace than we anticipated. We are directing our energy towards high-growth opportunities and are committed to delivering value to our customers and our shareholders. Now on to our revised outlook for the year and our third quarter guidance. We now expect full year revenue to be in the range of $6.42 billion to $6.50 billion. This represents a decline of 6.0% to 4.9% on a reported basis and a decline of 5.4% to 4.3% on a core basis. Currency and M&A combined are a headwind of 60 basis points. This is a $300 million reduction at the midpoint and is primarily related to changes in two areas : China overall in the Pharma end market outside of China. For China, we have reduced our expectations to a double-digit decline from mid-single digits with all end markets being reduced. This represents roughly $70 million of the guidance reduction. The remainder of the change in the Pharma end market globally outside of China is due to two factors. The first and largest factor is continued caution in budget releases and extended approval times for instrumentation purchases in both Small and Large Molecules. This is roughly $175 million of the change. The second factor is related to NASD due to the reasons I mentioned earlier, and represents the remaining $55 million reduction. While down from our previous guidance, we are expecting growth in the second half of the year to be roughly 400 basis points better than the first half of the year and plan to exit the year roughly flat year-on-year at the midpoint of the new guidance. Full year non-GAAP earnings per share are now expected to be between $5.15 and $5.25, representing a decline of 5.3% to 3.5%. This incorporates a roughly $35 million expense reduction due to the actions Padraig mentioned. The majority hit in Q4 in order to help mitigate the bottom-line impact of the change to our revenue guidance. It also assumes a 13% tax rate and 292 million fully diluted shares outstanding. We will leverage our strong balance sheet and plan to repurchase $750 million of our shares in the second half of the year in addition to our anti-dilutive repurchases. We expect these repurchases to be weighted towards Q3. All told, we expect to return roughly $1.4 billion to shareholders this year between dividends and share repurchases. In addition, the Board authorized a new $2 billion share repurchase program that will go into effect August 1 and replace the existing authorization. Now for our Q3 guidance, we expect revenue will be in the range of $1.535 billion to $1.575 billion. This represents a decline of 8.2% to 5.8% on a reported basis and a decline of 6.9% to 4.5% on a core basis. Currency and M&A combined were a headwind of 130 basis points. Third quarter non-GAAP earnings per share are expected to be between $1.25 and $1.28, representing a decline of 12.6% to 10.5%. Looking forward, we remain disciplined. We're focusing on what we can control and driving strong execution in a challenging market, and we are optimistic about the long-term future. Now back to Padraig. Padraig McDonnell : When I joined you last quarter as CEO-elect, I said Agilent has a compelling story to tell, and I was excited by the possibilities that lie before us as we help our customers bring great science to life. That excitement has only grown. I spent 26 years at Agilent, first starting as a field employee before moving to sales and then leading some of our businesses. I know Agilent's strengths and its opportunities very well. We are in great long-term growth markets. And while the markets are recovering slower than anticipated, they are recovering. This company is a leader across key platforms, making us uniquely qualified to support our customers and their missions to solve some of the world's most important problems. And our customers value their relationships with us because we offer them an unparalleled experience. And as I said earlier, that is a competitive differentiator in the market. The actions we are now taking, while difficult, will enable us to quickly capitalize on growth opportunities as the markets fully recover. I know the future is bright, and we will forge an enduring company that sets the standard for excellence with our customers and create value for our shareholders. Thank you again for joining today's call. I look forward to continued dialogue with all of you. Parmeet, over to you for Q&A. Parmeet Ahuja : Thanks, Padraig. Regina, if you could please provide instructions for the Q&A now. Operator : [Operator Instructions] Our first question will come from the line of Matt Sykes with Goldman Sachs. Please go ahead. Matt Sykes : Maybe just the first one is more of a timing question on China. I mean we've been through a lot of quarterly results this season and the stabilization theme in China has been pretty consistent and you guys have talked about sequential stabilization over the last number of quarters. So, was this really an April impact that you saw in China? And if so, what was sort of the deceleration that you saw there? And what were some of the causes of it? Padraig McDonnell : Yes. Thanks, Matt. I think while Q2 was relatively soft to guidance, we adjusted the H2 outlook, what we're seeing in China is we saw a -- stability over a number of quarters. What we really believe is that this is not a material deterioration from that. But what we've seen is that we've seen the stimulus have some effect and the stimulus has been much larger than previous stimulus. It's over multi-years. And of course, customers are looking about what are the components of that and they're looking at some of the areas and where it's going to help them. So that has had a material effect. We don't see the stimulus having an impact in H2, but we do think it's going to have an impact in '25. I think there's kind of a direct and indirect side of the stimulus. I think on the direct side, you see this delay, which is normal, but you see also the indirect side where, the government is investing in technology and sciences going forward, which creates a lot of, I would say, future momentum. Matt Sykes : Got it. And then just for my follow-up, you guys have often talked about sort of 18- to 24-month down cycle in the LC replacement cycle. And I'm just wondering just given some of the comments you made around Biopharma, given that's an important customer segment for that, have you kind of changed those views in terms of what the LC replacement cycle will look like and what the potential recovery in the replacement cycle will look like? I think some were thinking sort of towards the end of this year, but is this more now into 2025, is that replacement cycle been extended in terms of recovery? Padraig McDonnell : Yes, we don't see any material change. But Bob, I don't know if you want to add some color on that. Bob McMahon : Yes. I think, Matt, as you said, we're still expecting improvement in the back half of this year, just not at the pace that we had expected. And so, we're not seeing any material extension of kind of the use case for LC or an LC/MS in the marketplace and are still expecting recovery in '25. Operator : Our next question will from the line of Jack Meehan with Nephron Research. Please go ahead. Jack Meehan : I was wondering if you could share what's the new sales outlook for an ASP this year? And can you talk about like bridging from kind of the second half to some of the longer-term targets you've had previously. Like what are you assuming in terms of kind of progression after this year? Padraig McDonnell : Yes. I mean the NASD business, we talked before about the business being about 50% commercial and 50% clinical that's changed a bit to be more like 75% clinical and 25% commercial. We've seen the IRA inflation Reduction Act having an impact on the price provisioning. So, what you see with Pharma partners, they are looking for larger indications instead of smaller indications. So, what we've seen is, I would call it, an air pocket in Q3. And our clinical business is actually growing. Orders are growing about 50%. So, we're -- we have a good order book on that side. So, it's a readjustment and we see that readjustment go through H2 and beyond. I don't know if you want to add anything to that, Bob. Bob McMahon : Yes, I think Jack to add some numbers to what Padraig was saying here. Originally, we were expecting it to be roughly flat, which would have said roughly a $350 million business. We're now seeing roughly $300 million this year. As Padraig is mentioning, we're expecting to build back from there as these clinical programs move through the clinical pathway and are expecting to have more volume in '25. And I would say our long-term perspective on NASD remains unchanged. We're still very excited about that opportunity and are still building out the capacity in our Colorado site. Padraig McDonnell : Second question, I think the second part of the question was about '25. We'll grow next year. And as you can see in our guidance that we really are anticipating improving conditions across the second half, but it's too early to talk about specific ranges for next year. We want to wait to see how pacing an improvement plans out in the second half. Jack Meehan : And then on the cost savings program, I think I heard talk about $100 million. I just wanted to clarify, is that incremental to the $175 million you previously talked about? And where are those -- any color on where the savings is coming from? Bob McMahon : Yes, it is incremental to the savings that we've already built into the plan, and we're expecting to get that annualized savings by the end of the year. It's primarily headcount-related, Jack. Operator : Our next question comes from the line of Patrick Donnelly with Citi. Please go ahead. Patrick Donnelly : Maybe one on the instrument side, I guess it will be China and then just broadly, I know a few quarters ago, you guys felt like orders were picking up, the funnel looked okay, but it was really that I think, Bob, you said it was the velocity of conversion of those orders in that funnel to revenue. Is that what you're seeing is just that continues to stretch out the visibility into that normalizing. It's just proving to be a little trickier. I just want to talk through, I guess, that instrument piece because again, you sound okay on the orders in the funnel and the conversation, but that converting over rim, I guess that I just want to talk through again, the conversion piece and the velocity of the conversion. Padraig McDonnell : Yes. Yes. No, I think at an at level, as we talked about, our book-to-bill was greater than one, which is a positive sign and where orders grew year-over-year. On the instrument side, the orders grew low single digits, excluding China, but declined low single digits overall. So, what we're really seeing is that our funnel is really stable, but we're seeing those extended purchasing decisions being continuing to extend out through the second half. Bob McMahon : Yes. I think, Patrick, to build on what Padraig is saying at the beginning of the year, we were expecting when we were talking primarily to our Pharma customers, budgets weren't being materially cut outside of a specific number of well-publicized customers. And we were expecting to see by our second quarter, some of these budgets being released. And what we're seeing now is still a very cautious environment. And so, the funnel is still there. We are seeing our book-to-bill as Padraig mentioned, to be greater than one. We just haven't seen that inflection, which we would have expected to see at least in our order book. One of the things that we do see and it primarily happened late in the quarter is our teams are paid on first half versus second half quota. And so, our April numbers are usually quite large, which prepares us for the -- for Q3 and we just didn't see that inflection in late April, which we normally would see. Patrick Donnelly : Okay. That's helpful color. And then maybe to follow up on Jack's question on NASD there. You understand the revenue change. How are you guys thinking about the capital investment on that front? Obviously, it's been sizable in the past years, you've often talked about the continued expansion of the trains. How do you think about the CapEx devoted to this over the next few years? Has there been any change in terms of push out of that capital? Or how you're thinking about the potential investment and the expansion on this front just given the shift in revenue here. Padraig McDonnell : Yes. No, absolutely not. I think despite some near-term headwinds that we have, the medium, long-term story for NSAD is really holds firm. And as I said before, we're seeing our clinical business grow more than 50% this year, and we really remain excited about the expansion of customers. And getting back to the therapeutic class that we're involved in with siRNAs drugs, we're seeing those approvals for drugs increase substantially in 2023. And being an integral part of the manufacturers of several of these on market therapeutics, the future is extremely bright in this area. So, no change in our capital investment. Bob McMahon : Yes. Patrick, just one other thing to add on to that as I'm sure you're aware, as part of that expansion, not only are we expanding capacity, we're also expanding our therapeutic options. So, not only siRNA but also anti-sense and also CRISPR opportunity. So, it also provides us with more capabilities to support our existing and new client base. Operator : Our next question will come from the line of Vijay Kumar with Evercore ISI. Please go ahead. Vijay Kumar : I guess Padraig or Bob, thanks for laying out the changes in the guidance assumptions here, right. I think part of it was China, part of it was NASD. But more than half, I think, it's coming from Pharma cautiousness that's outside of China, ex-NASD, which I think that the market. I thought we were expecting stabilization. Is this a funding environment kind of question or is elections or what changed because second quarter, it feels like revenues were roughly in line -- was it the exit rate? Can you just talk about what the exit rate trends were and what customers are telling you? Padraig McDonnell : Yes. I mean on the Pharma instrumentation side, in terms of guidance, we see an impact of about $175 million and it really simply Pharma's willingness to spend in capital equipment remains challenged over time. And again, customers are focusing on lab efficiency and productivity. But based on what we're hearing from customers, these trends will continue to impact the second half. And that's why we're lowering our expectations around that instrument piece. What I will say that the formulas are holding very strong. The conversations are very robust with customers, so we do expect it to improve going into next year. Bob McMahon : Vijay, to build on what Padraig is saying, the guidance that we're building out right now is based on what we're seeing today. It doesn't assume any meaningful inflection. That certainly -- I'd characterize this as a prudent guide given what we know today. Certainly, we're not assuming any of that inflection. You bring up a number of variables, which are hard to quantify around the upcoming election and so forth. But we don't think it's a funding issue. We do feel like we are seeing biotech funding coming up. Obviously, on the Small Molecule side, those are they're well-capitalized companies. It's just a very -- it's still cautious in terms of them getting through their approval processes. Vijay Kumar : And just maybe related to that Padraig, Bob. I think is this just a few handful of customers or across the Board? Because obviously, the next question is, is this a share loss? Or is this more of -- what gives you the confidence that this is just a pushout and not a share shift on the savings or cost savings, Bob, that 35 is in Q4. So the expectations is the incremental 65 is for fiscal '25. Bob McMahon : Let me answer the last question first. So that is a cumulative number for the second half of the year. We'll see some of that happen here in Q3 and roughly be at that $100 million run rate in Q4. So roughly about a $25 million run rate and then we'll get the full incremental 65, obviously, next year as we go into the business. Do you want to comment? Padraig McDonnell : Yes. Yes, look, when we look across our Pharma customers, we see generally, it's across the board. We do have some customers that are a little bit more positive than negative this year. But overall, I would say it's a market effect. What I would say -- on the other question, this is definitely a macro story, not a market share story. And in fact, when we look at our objective market share data, we're holding or even gaining in some areas. And I will remind you not to comment on our peers in this area, but we have a month ahead in what we're seeing on it, but we're seeing very robust market share numbers coming in. Operator : Our next question comes from the line of Dan Brennan with TD Cowen. Please go ahead. Dan Brennan : Maybe first one, just on China. You talked about in response to an earlier question about the stimulus is delaying demand this year. Could you just speak through that a little bit? Like what's your visibility on that? Any way to get a sense of how much of what you should be seeing in China's customers waiting to see the final details of the stimulus. And I know you also alluded to like this could be a big impact in '25. Can you just speak through that a little bit? Padraig McDonnell : Yes. Look, I think having worked with China for many years. It's a multiyear program as opposed to the last one, which I think was a year program in the shorter term. So, it's very encouraging to see it. We've seen some proposals from customers, but they're still, quite frankly, trying to work out what are the mechanisms for the funding as we go forward. So, we're seeing a lot of activity around that. And I would say in terms of the confidence boost, we do really see that in '25, we're going to get some benefit from this, but really too early to tell on it. So, we're taking down our guidance in the second half primarily related to this. Bob McMahon : Dan, this is Bob. To build on that, I had mentioned in our prepared remarks that bid activity has actually improved. And so, we're seeing a number of proposals working with our customers to actually get a piece of the stimulus. What's not yet clear is the timing of the release of that budget comes from the provincial -- or from the state down to the provincial and then to the local government. And so, we've taken a, what I would say, is a conservative approach to assuming none of that stimulus money will actually -- we'll see any of that in the second half of the year. But it will come, it will come. And so -- if it comes earlier, that would be a benefit to what we're forecasting right now. But we're -- what we did see, particularly in April is a little slowing down of normal bid process waiting to get access to that money. And so, we think that, that's just a transitory change, not a structural change. Dan Brennan : Got it. And then -- and maybe just one more on Pharma, if you don't mind. So, the instrument growth was so powerful for yourselves and some of your peers coming out of COVID. Is there any chance that like the slowdown you're seeing now maybe just some miscalculation, maybe there was such instrument demand and purchase is done in the last couple of years that customers at work just kind of working through that all those purchases versus like an exceptional slowdown right now given the macro? Just maybe speak a little bit to that, if you could about the overhang for maybe the strength in the past couple of years versus what you're seeing real time now? Padraig McDonnell : Yes, no doubt about it. We've -- tremendous growth rates during the post-COVID period. But we don't see anything fundamentally changing with the cycle on instrument replacement cycles. We don't see it's a kind of a rundown of available instruments or anything like that because lab activity is very, very high. We see that across the board. We actually see activity on the sales side, but also on the support side, very, very high. So we think it's primarily actually on the macro situation. Bob McMahon : Yes. And Dan, just to kind of build on what Padraig had said. We looked at ACG and our CSD or our consumables business outside of China, both of those grew mid- to high single digits in the quarter. So, it does speak to lab activity. They're not having instruments just sitting idle. And in ACG, our contracted services business continues to perform extraordinarily well, up double digits. So, the demand is there outside of China right now. Operator : Our next question will come from the line of Rachel Vatnsdal with JPMorgan. Please go ahead. Rachel Vatnsdal : So first up, I just wanted to ask on China. We've seen some of the headlines from BIOSECURE Act. So, I was wondering if you could break down your exposure to large CDMOs in the region? And if that contributed to any of the weakness there just given me some of the commentary from an RFP standpoint? And then just on China stimulus and some of the dynamics there, how should we think about local competition competing for some of these dollars on the stimulus dynamic and you talked about some of these proposals that you're working on. So, can you detail what sectors, what types of customers are you really seeing that proposal work be done right now? Padraig McDonnell : Yes. Look, I think on the BIOSECURE Act, we see normal -- people are looking at their supply chains, and that's positives and negatives around the globe. As you see that one of the areas that we've seen from that is actually we see a benefit on our service business as we relocate laboratories in some cases and get them up and running quickly with our services on that one. So, definitely some exposure to CDMO, but I would say not the overall macro side on it. And then I think the second part, Bob, I don't know if you want to take that one? Bob McMahon : Yes. I would say just a building on that point on our questions around CDMO, most of our business in China is local. So, it's not multinational and so wouldn't necessarily fall under the BIOSECURE Act. There are certain large companies that are on that list that are customers of ours, but that is that business has been pretty muted for a while, and that's not the cause of the incremental weakness here. I would say on the bid activity, it's about -- it's across the board. It's not in one region of the country or one end market or customers and obviously, Chinese local competitors are going to be buying for that business like we are. But I think we've shown time and time again our ability to provide very strong and robust instrumentation, coupled with very good service. And so, I don't think that we're in any disadvantage from a local perspective from that standpoint. Padraig McDonnell : In fact, Bob, I would say our scale and service there really makes it a differentiator where we can scale with customers and get them up and running very, very quickly. We take the competition very seriously. But we've always had competition in China, and we continue to keep a focus on that. Rachel Vatnsdal : Great. And then for my follow-up, just given some of the moving pieces on this fiscal 3Q guide, could you walk us through your expectations by segment for 3Q? Bob McMahon : Sure. I'll take that real quick. By business group, we're expecting LSAG to be down double-digits DGG down mid-single and ACG growing at mid-single digits. If we looked at by end market, Pharma, as I mentioned in the prepared remarks, would be down very similar to Q2, so down low double digits. And with academia and diagnostics markets being roughly flat, Chemical and Advanced Materials being very similar to Q2 results. And then Food being down roughly the same, maybe a little better than where we saw Q2 as well. And then Environmental and Forensics similar performance as Q2. Operator : Our next question will come from the line of Doug Schenkel with Wolfe Research. Please go ahead. Doug Schenkel : I guess, I have too high level, but I think important questions. One is Yes. Simply put, I want to get your thoughts as we sit here today about the Company's long-term growth outlook. And essentially, to what top line growth rate are you managing the business as you think about the next few years? In Pharma and Biotech, you have less exposure as a percentage of sales to some of the higher growth areas of that end market and the outlook for one of your higher growth areas, NASD within Biopharma it's certainly in question amongst investors given how things have been going recently. And while there is hope that China stimulus will help across many end markets, as we kind of think past that, ultimately, many believe the durable growth rate in China where you're overexposed will be materially lower than what we've seen in years past. And then as we think of other discrete differentiating growth drivers for the Company, when we look at CrossLabs and DGG, the growth rates have moderated there in part because of the market, but also in part because you did have above-average concentration with one high-growth diagnostic companies as an example. So, there's a lot of bad guys here right now. Obviously, in the long term, there's a lot of belief in Agilent in how you run the business. But I think there are a lot of questions when you kind of pull all this together about what is the inherent growth rate of this business. Can you share any thoughts on that? Padraig McDonnell : Maybe I'll kick it off a bit at a high level. I think, first of all, we participate in excellent markets with multiple long-term growth drivers. You look at the characterization that's going to be needed in biotherapeutics in time, improving human health. Quality of our Food is really going to be a continued growth driver for the Company. I would say there's a lot of growth factors within the business that in adjacent markets where we continue to invest in those opportunities. You've seen part of Biopharma, PFAS. And I do believe NASD long term is going to continue to grow. In our service business, we expect that to grow high single digits over the long term as we increase our attach rate, which is not a small point because every percentage increase in attach rate is about $30 million incremental on that side. So overall, I think we're in extremely durable long-term markets. On the China story, we're going to see probably getting down to more mature level growth rates in China, but I would remind everybody that there are secular drivers in China that continue to come up and the government continues to invest in science and technology, but also the scale of the country being so large, we benefit tremendously from the aftermarket element consumable and service around that and being able to kind of drive attachment to some of the emerging workflows. So, Bob, I don't know if you have anything to add on that? Bob McMahon : Yes, I would just say, as we think about kind of our long-term algorithm that we've been talking about, that 5% to 7%, we're not ready to walk away from that. I think we still feel good about that. And I think while you talked about some of the bad guys, we still believe in Biopharma and are continuing to invest there. In addition, Padraig mentioned a few things on the applied side where we are the undisputed leader. So, things like PFAS, the electrification, semiconductors, those things weren't there five years ago to the extent that they're going to be there in the next five years. So certainly, the markets are a bit challenging right now, but we are seeing them recover, and we would expect to be able to get back to those rates in the near term. Doug Schenkel : Okay. And Bob, maybe sticking with you. If we go back to the beginning of the year when you set guidance for the fiscal year. Yes, I think it's fair to say there were a number of questions from the investment community about how you were setting guidance for the year. Specifically, there was concern about the plausibility of what you assumed for the second half. In hindsight, obviously, these questions and concern to be well-founded. What went wrong? Does this tell you something about your visibility for the business? If so, is it a transitory issue? And if that's the case, can you help us explain why? And if it's not visibility, what do you need to do in terms of changing your guidance philosophy moving forward? Bob McMahon : Yes. Thanks, Doug. And I think it is visibility. I think if you looked across the last seven years, the two most volatile years have been the last two. And so, I think we were expecting based on the feedback that we got from our customers that they would be releasing budgets much more quickly than what they have or at least what we're seeing and while we did have an expectation that we were going to see an inflection in the back half of this year, when we're talking to our customers, it just hasn't happened. And so, I think the visibility is something that I think will we will get back, particularly as we have more recurring revenue and continue to have the connect rate on to the services business. And we're disappointed as everyone else is, but you can rest assured that we're going to come out of this stronger going forward. Operator : Our next question comes from the line of Dan Leonard with UBS. Please go ahead. Dan, your line might be on mute. Our next question will come from the line of Michael Ryskin with Bank of America. Please go ahead. Michael Ryskin : I want to pick things up exactly where you just ended on the last answer with Doug on visibility. So, I mean you kind of talked about how you had a certain set of expectations going into the year based on conversations with customers that didn't play out. I mean, is that -- is there any reason to think that visibility is better now, I guess, is my question, if we look at the guide change and specifically focusing on Pharma with or without an NASD, if you want to just talk about Pharma, the CapEx of Pharma and NASD, it seems like visibility there is still really, really challenged. So, on the one hand, a lot of your prepared remarks are markets are improving. But on the other hand, you're not expecting in 3Q because you just talked about low double digits. It doesn't seem that you're expecting for the rest of the year. So just exiting the year, entering next year, how do we know we're not going to be having the same conversation again about another push out and then another push out? Just talk about that visibility going forward. Bob McMahon : Yes. I think if we look at just first half, second half and look at where our core guidance is, it's not assuming any inflection in the back half. I mean you could make an argument that typically, we have a higher weighting towards the back half of the year, just part of normal seasonality, and we're not assuming that in our guide. And so, if you look at also Pharma, we're assuming it's down roughly the same as it's been in the first half of the year, but we'll get easier compares. And so, we're not expecting "a big inflection in the back half of the year." I would say also on NASD, which we are assuming a reduction in the second half of the year relative to the first half of the year, we have all those orders in-house. And so, we've got a plan, a production plan and both for Q3 and Q4. And while something could happen, it's not like we're looking for orders to guide us on those. And those are the two big areas that made the biggest change when I think about where we were back in November, giving guidance to where we are today. Michael Ryskin : Okay. And Bob, since you touched on 3Q, 4Q ramp, I'm going to follow up on that as well, actually. I mean, you normally do see some seasonality third quarter, the fourth quarter, depending on the year, depending on the comp, let's call it about $100 million, maybe $100 million plus. You're something that your guide for 3Q and fiscal year implies about $120 million repeat to 4Q for this year. So again, not excessive, but still some step-up and it seems like 2Q and 3Q certainly are below trend. So, is there any risk to that 4Q number? I mean is there anything else we should be thinking about in terms of what makes that achievable besides just comp and seasonality? Bob McMahon : Yes. The biggest change there is our NASD business, which we will see a low water point here in Q3 if we -- what we ended up seeing is some of these clinical programs getting pushed out. They've got pushed out from Q3 into Q4. And so, there's a $30 million incremental step-up from Q3 to Q4. So, if you took that out, we did get back to a more historical kind of level. Operator : Our next question will come from the line of Dan Arias with Stifel. Please go ahead. Dan Arias : Bob or Padraig, on the capital equipment portfolio and the order book and the sales funnel that you have there, maybe just in simplistic terms, how would you describe the average time to deal close that it feels like you're going to be working with in the back half of the year versus what you've seen as a historical average? And embedded in that is just this question on instrument demand that you have a line of sight on via the sales funnel, but that just hasn't been booked yet versus what's not materialized at all yet? And then how the outlook change reflects those two things. Padraig McDonnell : Yes. Look at it, I think it's hard to put a number on the extended deal time. It depends actually on the platform and portfolio. So, there's quite a big difference between, for example, GC and LCMS on that. But what I would say, in general, the deal time is prolonged. The win rates, of course, haven't changed. They're still very, very strong, but that deal time is prolonged. And I think if you look at it in the second half when we're looking at the visibility of what we're seeing in the funnel, the best thing and we're doing is staying close to customers on this one, making sure we're there to help them, of course, with their decisions and help them get up and running when they make the decision to purchase on it. So, we're going to see this continued extended deal time, I think, through the end -- through the second half. Bob McMahon : Yes. Dan, I wish I could say we have all the orders in-house for the second half for instruments. It just doesn't work that way. So, we have much better visibility into Q3, but we will need continued performance in Q3. Now we've had several quarters here of book-to-bills being greater than one in our instrumentation portfolio, which is a positive thing. I would say, hey, we're building some backlog. And as Padraig mentioned earlier in the call, particularly in LSAG. LSAG orders grew ex-China. And that is the first time that's happened in several quarters. So, we are seeing some positives and if you look at the second half of the year, our performance relative to last year should improve just because of the benefit of easier compares. And so -- we're not, again, looking for that huge inflection. And we're not expecting also as Padraig was saying, a constriction, so to speak, or an acceleration of those deal funnels. We're expecting them to stay very similar to the way they are right now. Padraig McDonnell : Yes. I think just to close off, Bob, I think the deal closure time lines remain at an elevated but very stable level. They're not deteriorating further, which I think is a really good sign. And in terms of the funnel is stable, no cancellations within that, which, of course, is very important to see. Dan Arias : Okay. And then maybe on -- as a follow-up on Biopharma. I'm just curious about the extent to which the IRA is part of the conversation there these days. It sounded like last year, the industry kind of contemplated an adjustment as the idea was coming into the picture. So, do you think spending expectations got rightsized for a period of time? Are you finding that that's sort of a continual evolving conversation? Padraig McDonnell : Yes, I would say it's a continuing evolving conversation. Clearly, on the NASD side, we've seen an impact from the IRA something we're watching closely, but I think this will evolve over time. What we're seeing in terms of programs-based around pricing provisions, there definitely has been an impact on that side. Operator : Our next question will come from the line of Josh Waldman with Cleeland Research. Please go ahead. Josh Waldman : A couple for you. Padraig or Bob, I wondered if you could talk a bit more on how instrument orders progressed sequentially. I mean did orders deteriorate over the last 90 days or really just a function of orders not improving as you expected? And then I wondered if you could comment on what you're seeing from new orders, new order perspective across the key product categories within LSAG categories like LC/MS, GC, ICP. I guess is it fair to assume LC/MS is driving the majority of the softness just given the comments on Pharma. Padraig McDonnell : I don't know if you want to take that one, Bob. Bob McMahon : Yes, I'll take it. So, I wouldn't characterize it, Josh, is a deterioration. It actually just wasn't the inflection or the acceleration that we were expecting. We did -- as we were saying here, we did have a positive book-to-bill and ex China orders grew. They just didn't grow to the extent that we expected them to, particularly in April, which we would typically have higher acceleration just kind of given the end of the quarter. In terms of the platform, what you're seeing is the platforms that are more focused on Pharma being the areas that are the weakest. So, LC and LC/MS are weaker than the applied markets. And you can kind of see that in our end markets as well. And so, we were expecting those to kind of perform better this year, and we're just still seeing that, I'd say, lower-than-expected performance from the standpoint of order velocity. Josh Waldman : Got it. Okay. Then a follow-up on China. I wondered if you could comment a bit more on where we’re seeing… Bob McMahon : I would say -- sorry, just one quick -- so one thing I would say, though, is if I looked at the performance, the revenue performance versus the order performance, the order performance was significantly better in Q2 on those two main platforms than the revenue. So again, these are points that says we are getting out of it, maybe not at the pace that we were expecting. So -- and so those are some positive points that would suggest that we're going to continue to -- it's not going to deteriorate coming out in Q2 -- or excuse me, in second half. Sorry. Josh Waldman : Is it -- what were the two platforms? Bob McMahon : LC and LC/MS. So yes. Yes. Josh Waldman : Okay. Okay. Got it. Got it. And then a follow-up on China. I just wondered if you could comment a bit more on where all you're seeing demand coming softer than expected from a new booking’s perspective and then a bit more detail on how you're contemplating the stimulus. I mean, it sounds like you saw improved bidding and funnel activity on the prospects of stimulus, but just wondered if you could provide what's giving you the confidence that, that stimulus related funnel ends up converting to orders and sales at some point in the future? Padraig McDonnell : Yes. Maybe starting on the stimulus. This is an extremely large program, a multiyear program. It's very real. We've seen some of the customers with activity is asking us to bid and some of the things, even though they're not sure exactly yet how the mechanisms would work. So that gives us great confidence for '25 just from that. But I said earlier, also the indirect impact of confidence in science and technology in China. It's a real photo confidence by the government in making sure we -- making sure to get the market going again. So, I think in -- we saw meaningful softness extend to all markets because remember, the stimulus is not only academia and government, it's across all markets. And that has really come at once. And we did see at the end of the quarter, we also started to see customers postpone purchasing decisions have told us, right, sort of said we're going to postpone and they try to gauge if there's any benefit of the stimulus-related funding, and that's normal. I think that's expected. If you didn't see that, then the stimulus would have different questions. And why we believe that a stimulus program will ultimately be long-term positive, we really don't see any benefit in H2, and that's why we're roughly reducing by $70 million. Josh Waldman : Got it. Did you see stimulus-related postponing and Pharma and CDMO as well or more just government accounts? Bob McMahon : Yes, it was both government and non-government accounts across the board. So, I would say it was pretty broad beyond Pharma. Operator : Our next question comes from the line of Catherine Schulte with Baird. Please go ahead. Catherine Schulte : Maybe just sticking on China stimulus to start off. Is there any way to quantify the increase in the funnel activity that you've seen there just as we try to think about potential opportunity in future years? Padraig McDonnell : Yes. What we're seeing is a postponement, and I think it's really too early to tell on the funnel side on -- if the customers are still working out the mechanisms about how it works, we're still waiting to see on the impact on the panel, particularly for '25, it's too early to tell. Catherine Schulte : Okay. And then on LSAG, what was performance in the quarter, excluding China? And then any commentary on the Pharma end market specifically for that business outside of China in the quarter? Padraig McDonnell : Bob, do you want to take this one? Bob McMahon : Yes. So, our LSAG business declined 13% globally, ex-China, it was down 8%. Operator : Our next question will come from the line of Paul Knight with KeyBanc. Please go ahead. Paul Knight : Within the 34% of business that's Pharma, what portion is Biopharma or Large Molecule, Bob? Bob McMahon : It's roughly 45%. Paul Knight : And what's the overall growth rate of that piece, do you think? Bob McMahon : Long term or in the quarter? Paul Knight : In the quarter and long term. Bob McMahon : Yes. So, if we looked at our Biopharma business, it was down roughly 12%, Small Molecule was down roughly 10%. Total Pharma was down 11%. So, it kind of gives you a sense. I think. Padraig McDonnell : Yes, I would say before we get on to the long term, Bob, for Biopharma, really tough compare was mid-teens, plus mid-teens last year on that side. But what we're seeing is the long-term prospect for this market is very strong. Paul Knight : Yes. And then I know that you've got -- you have always been very aggressive and innovative on your M&A for biologics. Are you seeing that market open up on the M&A side of that marketplace? Padraig McDonnell : You mean in the space itself. Paul Knight : Is pricing becoming more realistic as you think about your acquisition strategy? Padraig McDonnell : Yes. Well, I think there's long memories. So, people don't forget the elevated pricing for assets, but we're going to remain very disciplined. It's going to become an increasingly bigger part of the puzzle for us M&A, but we're going to make sure that we do it in a very disciplined way, link to strategy and of course, looking at areas of where we can double down and growth factors. So we're very focused on that going forward. But I would say, while pricing maybe has come down in little areas across the board, people have long memories. Operator : I will now turn the call back over to Parmeet Ahuja for closing remarks. Parmeet Ahuja : Thanks, Regina, and thanks, everyone, for joining the call today. With that, we would like to end the call. Have a good rest of the day, everyone. Operator : Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,024	3	2024Q3	2024Q3	2024-08-21	5.257	5.257	5.599	5.625	7.35	24.18	24.71	Operator : Ladies and gentlemen, welcome to the Agilent Technologies Q3 2024 Earnings Call. My name is Regina and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead. Parmeet Ahuja : Thank you and welcome, everyone, to Agilent's conference call for the Third Quarter of Fiscal Year 2024. With me are Padraig McDonnell, Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A will be Phil Binns, President of the Agilent Life Sciences and Applied Markets Group; Simon May, President of the Agilent Diagnostics and Genomics Group; and Angelica Riemann, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our third quarter financial results, investor presentation and information to supplement today's discussion, along with a recording of this webcast are available on our website at www.investor.agilent.com. Today's comments 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 and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rate. As a reminder, beginning in the first quarter of fiscal 2024, we implemented certain changes to our segment reporting structure related to the move of our Cell Analysis business from LSAG into DGG. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risk 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 risk and other factors. And now, I'd like to turn the call over to Padraig. Padraig McDonnell : Thanks, Parmeet. Good afternoon, everyone and thank you for joining today's call. The Agilent team executed well in the third quarter and posted solid results, delivering better-than-expected revenue and earnings. Revenue of $1.578 billion, declined 4.4%, an improvement of 300 basis points from Q2, reflecting the steady improvement in the market. Operating margin of 27.4% improved sequentially, as the actions we announced last quarter start to deliver. And we remain on-track to deliver the incremental annualized savings of $100 million by the end of the fiscal year. Earnings per share of $1.32 is $0.04 above the high end of guidance. As a result of our strong Q3 performance, we are raising our guidance at the midpoint for both revenue and EPS and we continue to make investments in our most promising growth opportunities that I referenced in our Q2 call. We are investing in our digital ecosystem to further enhance our differentiated customer experience, plus we are mobilizing the organization to accelerate value creation through strategic transformation initiatives, driving margin expansion and growth and increasing our execution capabilities. Separately in the quarter, we were excited to announce two acquisitions that demonstrate our focus on biopharma and our digital ecosystem, which I'll talk about in a moment. As you know well, the pace of change is faster than ever. Our markets, customers and competitors are not standing still, neither are we. We are accelerating our pace of innovation and execution, so we can add to and capitalize on opportunities in front of us. We are sharply focused on key growth vectors, including biopharma, PFAS and Advanced Materials. I continue to meet and connect with employees, customers and shareholders around the globe to listen to their perspectives on how we should build on our strengths and move Agilent forward. The entire Agilent team is clear on what is vital to the company's future, becoming even more customer focused and even more nimble to continue to win in the marketplace and add value to customers and shareholders. We are evolving our strategy, adapting quickly to market trends and changes, while accelerating our pace of innovation in areas of greatest return for long-term growth. We're excited to announce that you'll hear more about these topics and our transformation at our Investor Day we have planned in New York on December 17th. Now, let's talk further about our Q3 results. All our end markets except academia and government, which is our smallest, ended the quarter better-than-expected. Our largest market pharma declined high-single-digits, slightly better than our expectations and while biopharma continues to be pressured, we are seeing relatively better performance in small molecule. Our leadership in providing workflow solutions for PFAS continued to show strong performance in the environmental markets. Geographically, Europe exceeded expectations led by small-molecule pharma, as well as continued strength in environmental. Our other regions performed roughly in-line with expectations. While capital equipment budgets remain constrained, we continue to see good lab activity in Q3 with services plus consumables growing mid-single digits. When looking at our performance by business unit, the Life Sciences and Applied Markets Group reported $782 million in revenue, down 7%, while the instrument side of the business remains constrained, it was encouraging that our instrument book-to-bill was again greater than one. The group saw a decline across all regions and most end-markets with low single-digit growth in Environmental & Forensics. The Consumables continue to be a bright spot, growing by mid-single digit. The LSAG team also was busy innovating with the introduction of the 8850 GC that helps customers reach their sustainability goals by delivering answers efficiently, while using up to 30% less power than other GC's and has a much smaller footprint. Moving on to the Agilent CrossLab Group, the business delivered revenue of $411 million for the quarter, up mid-single digit. ACG grew in every region except China, where we were down modestly year-on-year, but showed meaningful improvement versus last quarter. Once again, we drove double-digit growth in service contracts, which represented nearly 70% of the total business. And beyond another quarter of solid revenue growth, ACG also delivered a record operating margin of 34%, demonstrating that the resiliency and strength of the recurring revenue business continues despite the constrained capital equipment environment. The continued strength of our business is a testament to our strategy of increasing the connect rates on our instruments and the ongoing value we are providing to our customers in helping them reach their productivity goals. The Diagnostics and Genomics Group posted $385 million in revenue, representing an 8% decline. Pathology grew mid-single digits globally and was offset by declines in Cell Analysis, NASD and genomics. NASD stepped down sequentially in Q3 as expected and we are on track for NASD's revenues to step-up sequentially in Q4. In the face of a constrained CapEx environment, the Agilent team has remained consistent in putting our customers first and fostering deeper relationships with them. We continue to execute well and be disciplined, while investing in high-growth opportunities. As I mentioned earlier, we were thrilled to announce two acquisitions, that speak to our focus on biopharma and increasing recurring revenue, as well as on strengthening the digital ecosystem for Agilent customers. In late July, we signed a definitive agreement to acquire BIOVECTRA, a leading specialized contract development and manufacturing organization. The Canada-based company builds on Agilent's capabilities in oligonucleotides and CRISPR therapeutics by expanding our portfolio of services. BIOVECTRA adds rapidly growing modalities in microbial fermentation, antibody-drug conjugates and high-potency active pharmaceutical ingredients. It also brings world-class capabilities that when combined with NASD enables us to deliver customers a complete gene editing solution. The company delivered more than $110 million in revenue during the calendar year 2023 and expects double-digit revenue growth this year. The BIOVECTRA acquisition remains on-track to be closed by the end of the year and we're looking-forward to welcoming the BIOVECTRA team to Agilent. At the end of the quarter, we also announced the acquisition of California-based Sigsense, a start-up that uses artificial intelligence and power monitoring to help customers optimize their lab operations. Sigsense Technology already is available to our customers through CrossLab Connect, a suite of digital applications that improve lab performance. A hearty welcome to the Sigsense team who already is part of Agilent. During the quarter, we released our annual ESG report, which showcases a large and growing portfolio of products that help our customers reach their sustainability goals. Instruments certified with the My GreenLab ACT label now accounts for 40% of all instrument revenue and we continue to regularly release products like the new 8850 GC with environmental benefits. We are also proud that we have recently ranked in the top 20 of Time Magazine's 500 Most Sustainable companies in the world. Bob will now provide the details on our results, as well as our outlook for the remainder of the year. After Bob delivers his comments, I will be back for some closing remarks. Over to you, Bob. Bob McMahon : Thanks, Padraig and good afternoon, everyone. In my remarks today, I'll provide some additional details on revenue in the quarter, as well as take you through the income statement and other key financial metrics. I'll then cover our updated full-year and fourth quarter guidance. Q3 revenue was $1.578 billion, a decline of 4.4% core, but a 300 basis-point sequential improvement as Padraig noted. Excluding China, revenue declined low-single digits in the quarter. On a reported basis, currency had a negative impact of 1.1 percentage points, while M&A had a negative impact of 10 basis points, resulting in a reported decline of 5.6%. Our largest end market pharma declined 8%. Biopharma was down low double-digits or down mid-single digits, excluding NASD. Small molecule performed better, down mid-single digits and was led by growth in Europe. Services and pharma continues to perform well, growing high single-digit. In Chemical & Advanced Materials, revenue declined 5%, with growth in Americas offset by softness in China. Our Advanced Materials sub-segment performed better, driven by our business in the semiconductor market. Academia and government, our smallest market, can be lumpy from quarter-to-quarter. We saw a decline of 11% as Europe and China both saw double-digit declines, partially offset by better performance in the Americas region. Our business in the diagnostics and clinical end-market grew 2%, including continued mid-single digit growth in pathology, offset by ongoing softness in genomics. In Environmental & Forensics, we grew 4%, another great quarter for our PFAS testing business. We saw robust business in Europe, led by the new EU Water Directive and in China due to the nationwide emerging pollutants program. Now wrapping up our end-markets, food was down 3% versus last year, but grew sequentially and was led by Asia, ex-China. Moving on to our regional performance, Europe was flat overall, beating our expectations, while we declined 6% in the Americas and declined 1% in Asia, ex-China. China revenue declined 11% with quarterly revenue improving sequentially, driven by growth in services and consumables. This speaks to some increase in lab activity, which is encouraging. Now, let's move on to the rest of the P&L. Gross margin was 56.0% in the quarter, down slightly versus a year-ago, but up 40 basis points sequentially. Our operating margin of 27.4% improved sequentially and was better-than-expected. Despite the dampened demand, we continue to make good progress in driving our productivity initiatives and continuing to manage the cost structure very well, while investing for growth. As Padraig mentioned, we are on track to deliver the $100 million in incremental annualized cost-savings by the end of the fiscal year. Below the line, our net interest income was in line as was our tax rate of 13% and we had $291 million diluted shares outstanding in the quarter. Putting it all together, Q3 earnings per share were $1.32. That was ahead of our expectations, but down 7.7% from a year ago as we went up against a difficult compare due to the variable pay reset in Q3 of last year. Now, let me turn to cash flow and the balance sheet. We continue to enjoy a very strong balance sheet and healthy cash flows. Operating cash flow was $452 million in the quarter and we invested $92 million in capital expenditures. As we committed in Q2, we ramped-up our share repurchases starting here in Q3. We purchased $585 million in shares and paid out $68 million through dividends, for a total of $653 million returned to shareholders in the quarter. This includes $500 million of the previously announced $750 million opportunistic share repurchase and we expect to complete the additional $250 million repurchase in Q4. We ended the quarter with a net leverage ratio of $0.6 and even with the upcoming BIOVECTRA acquisition, our balance sheet and leverage ratios will still be in a very strong position. In summary, we performed well and continue to see a steady improvement in the market and expect that to continue into FY 2025. Because of our Q3 results, we are increasing the midpoint of our revenue and earnings per share guidance for the year. We now expect full-year revenue to be in the range of $6.450 billion to $6.500 billion. This represents a decline of 5.6% to 4.9% on a reported basis and a decline of 5.0% to 4.3% on a core basis. Currency and M&A combined are a headwind of 60 basis points. Full-year non-GAAP earnings per share are now expected to be between $5.21 and $5.25, representing a decline of 4.2% to 3.5%. This assumes net interest income of $38 million, a 13% tax rate and $292 million fully diluted shares outstanding. We have not included any impact of the BIOVECTRA acquisition in our updated guidance and $0.06 does not have a material financial impact to the year or Q4. This full-year guidance translates into Q4 revenue in the range of $1.641 billion to $1.691 billion. This represents a decline of 1.9% to 1.1% growth on a core basis and a decline of 2.8% to 0.2% growth on a reported basis. Currency and M&A are a combined headwind of 90 basis-points. Fourth quarter non-GAAP earnings per share are expected to be between $1.38 and $1.42, marking a return to growth at the midpoint. We expect a 13% tax rate, a decrease in net interest income to $5 million due to the lower cash balance and $287 million diluted shares outstanding for the quarter. Now, I'd like to turn the call back to Padraig for some closing comments. Padraig? Padraig McDonnell : These are exciting times at Agilent, with a team that is second to known, we are doubling down on our customer force culture and deepening our relationships to further enhance our market leading customer experience that is already the best in the industry. We are evolving our strategy to aggressively pursue our ambition to grow in markets where we have a right to win through both organic and inorganic growth and we will continue to accelerate value creation through strategic transformation initiatives. We remain a leader across key platforms and we're in great long-term growth markets that are beginning to show evidence of recovery. And best of all, our team is engaged, leading to Newsweek including Agilent on its America's Greatest Workplaces 2024 list. Again, thank you for joining today's call. I'm energized by how we are evolving Agilent. Each data team gains momentum in building an enduring company that sets the standard for excellence with our customers and creates value for our shareholders. We are fueled by the future possibilities and I look forward to continuing to share our progress. Parmeet, over to you for Q&A. Parmeet Ahuja : Thanks, Padraig. Regina, if you could please provide instructions for Q&A now? Operator : [Operator Instructions] Our first question will come from the line of Matt Sykes with Goldman Sachs. Please go ahead. Matt Sykes : Hi, good afternoon. Thanks for taking my questions. Maybe the first one, just digging in a little bit on the LSAG where you had a pretty solid beat. It looks like that was driven primarily by consumables and services. So, I'm curious if you can give any more color on what instruments did? I know you had a book-to-bill above one, but just how does that inform your view as we go into 2025 on the replacement cycle, specifically large biopharma demand and how that might impact your view on when that replacement cycle starts kicking-in? Padraig McDonnell : Yes. Thanks a lot, Matt, maybe I'll kick it off and give it to Bob. I think, first of all, you're correct, we saw very, very promising growth in both Consumables & Services, which shows lab activity is actually improving or is very stable. We're still very challenged on the instrument side, but what we're seeing is, we're seeing a lot of activity around conversations with lab managers. Our funnel is extremely stable. We haven't seen any -- any cancellations. But what I would say is that, deal closure times are still elevated. So we're not at this point seeing any budget towards the end of the year and which of course for us ends at the end of October, but we're watching that closely. I don't know if you want to add anything, Bob? Bob McMahon : Yes. Thanks, Matt, for that question and maybe just to fill in and add some additional commentary to what Padraig was saying. When we looked at the quarter, we were very pleased actually both our Consumables business, as well as our Instrument business performed better-than-expected in the quarter. We were down 7% in total. Our Consumables business was actually up mid-single digits towards the high-end there. And our Instruments business was down low-double-digits, but that was better than what we expected. And as Padraig mentioned, we had a book-to-bill that was greater than one on the instrument side again this quarter, which was very encouraging. Matt Sykes : Got it. Thanks for that. Very helpful. And then just on Academic & Government, I know you've talked about it and you've talked about it for a while, how volatile that can be, but just given sort of the two quarters in a row of sort of negative performance there and you called out Europe and China specifically. Are there any kind of durable trends you're seeing either in funding or in demand that you think might be more persistent in that specific end-market as we go through Q4 and then as we look into 2025? Padraig McDonnell : No, I think, look, we saw a decline of about 11% and that was really against the comparative feature, the stimulus in EMEA and strong results in APAC and China. And so it was a really tough compare. And I think what we're seeing is funding remains stable in most regions and except I would say Europe where we're seeing a reallocation of funding towards defense, but I would say no major changes in that market. Matt Sykes : Got it. Thank you very much. Operator : Our next question will come from the line of Rachel Vatnsdal with JP Morgan. Please go ahead. Rachel Vatnsdal : Perfect. Good afternoon. Thanks for taking the questions you guys. I wanted to dig into NASD a little bit. Obviously, we had some positive announcements intra quarter with the Helios-B readout. You mentioned that NASD stepped down sequentially as expected and then you said you're expecting that to then step up into fiscal 4Q. So could you unpack all that for us a little bit? How should we think about the magnitude of the step-up into 4Q? And then given some of the updated data readouts that we got intra quarter, how does that underpin your assumptions on NASD next year and then also long-term? Padraig McDonnell : Yes. Look, I'll start off and maybe I'll hand it over to Simon, who is on the call here as well. We've seen, with clinical batches, of course, there can be changes with customers progress in those batches. We're not seeing any changes in what we're saying for Q4, so we're fairly certain of Q4 on that. What we're seeing as well is that we've grown our clinical business over 50% this year, which is very promising. The long range view of the market is very strong with the drugs and the modalities that are being used. But I think what you're seeing is a normal kind of up and down between quarters with that business. But I don't know if you want to add any more color, Simon? Simon May : Yes, I'd just echo what Padraig said, I think the Q3 performance that we saw in NASD was largely in line with expectations. And in that business, we always see a natural lag between order booking activity and revenue recognition because of the length of time that these programs take. And towards the end of last year, we were really seeing the effects of the IRA impacts and that's still not completely waned, but what we saw in Q3 was pretty strong bookings activity. So as we look to Q4 and into 2025, I think we're cautiously optimistic about seeing a return to growth there. So I'd really just characterize Q3 as in line with expectations and part and parcel of the lumpiness you see in this business. You also mentioned Helios, I think it's just worth mentioning that we were very happy to see that development, but still very early days in terms of how that's going to ramp up and play out and too soon to say where that's concerned. There's certainly no impact in the remainder of 2024 and unlikely in 2025 as well. Bob McMahon : Yes. Hey, Rachel, this is Bob. Just to add-on a little more to answer your last part of your question in terms of the sequential step-up where we had talked -- as Simon and Padraig had said, we've done a little better actually in Q3 than we expected and we're expecting a roughly $20 million step-up from Q3 to Q4. Those orders are all in-house and we're still on-track for the long -- the full-year estimate for NASD and that's incorporated into our guidance. Rachel Vatnsdal : Great. That's helpful. Then for my follow-up, I just wanted to dig a little bit more into 4Q guidance and what that means in terms of an exit-rate into 2025. So appreciate some of your comments earlier, you highlighted in Matt's question that you're not really assuming a budget flush for your fiscal year end in October. But I guess, how should investors look at this 4Q number on an organic growth basis of that down 2% to up 1% on the range. And how do we look at that translating into 2025? If I look at consensus right now, consensus is just shy of 5% organic on 2025, Street is also nearing that double digit EPS growth. So I appreciate it's still a little bit early for you guys to formally give us 2025 expectation, but what do you think about exit rate and where sell-side numbers are right now? Bob McMahon : Yes, you were reading my mind, Rachel. This is Bob and it is a little too early to talk about FY 2025. But I think what it does show is our expectation of this continued steady improvement. We improved here in Q3, 300 basis-points sequentially. We're expecting another improvement here going into Q4. And I would expect that improvement to continue into FY 2025. So -- and we do expect -- while it's too early to give you a specific number, we do expect to grow next year. These markets will return and we've been below the long-term trend, but there's nothing to suggest that the or the long-term growth rates of these markets, there's nothing to suggest that these markets have changed and so we're optimistic about continued recovery going into FY 2025. Rachel Vatnsdal : Understood. Thanks, guys. Operator : Our next question comes from the line of Patrick Donnelly with Citi. Please go ahead. Patrick Donnelly : Hey, guys. Thank you for taking the questions. Bob, maybe one for me, just on China, how you guys are thinking about the region there? It sounds like it was down 11%, that got a little bit better on the revenue side sequentially. It sounds like again, lab activity maybe look a little bit better. Could you just talk about expectations into year-end? Some of your peers have suggested you could see a bit of a pause on the capital side into calendar year-end as we wait for a little clarity on the stimulus. Just how you guys are thinking about China, again, not only into your fiscal year, but just into the year-end on the calendar side and what's your view in terms of do we see a little bit of an air pocket here until the good news dollars get firmed up? Padraig McDonnell : Yes, Patrick. It's a great question and we had actually seen a little of that in our Q2 of last -- just a quarter ago here really on the bid activity, primarily for instrumentation. We are optimistic about the mid-term here in terms of the stimulus. That's probably more FY 2025 event probably. But what we are seeing is more activity there and I think what's encouraging and maybe I can turn it over to Angelica as well, our services business has seen an increase in a pickup in activity and certainly we saw consumables as well. So it still dampened demand and we did see that impact in Academia & Government, that was the biggest impact in China, but we are seeing some pockets of green shoot in terms of recovery. Angelica Riemann : Yes, Bob, I'll just add. In China, we are encouraged from a services perspective on the nice sequential growth that we saw from Q2 to Q3, which is indicative of continued and somewhat increasing lab activity in China. Patrick Donnelly : Okay. That sounds encouraging. And then maybe another one for you, Bob. Just as we think about the margin construct as we work our way into year end and into 2025, maybe just remind us some of the moving pieces to think about high-level as we look ahead to next year, obviously, the cost out program seems to be progressing well to your point, the margins came in nicely here in 3Q. But yeah, maybe just the moving pieces as we go ahead to next year without talking too much about the top line, obviously, the volume matters there. But just kind of down the P&L, how to think about some of the margin algo for next year would be helpful. Bob McMahon : Yes, I think as we talked about, Patrick, it's a great question and we're committed to continuing to drive efficiencies across all of the P&L line items and I think you've seen that across the actions that we've taken. We're on track to delivering that $100 million of incremental annualized savings by the end of 2024. So there will still be a tailwind, obviously going into 2025 for that benefit. Offsetting that will be some resets of our variable pay and activities like that, but we are committed to covering that. If I think about it at the highest level, what I would expect us to continue to be able to do is drive leveraged earnings next year. And I think you're seeing that the scale benefit that we're seeing in certainly our ACG business here this last quarter, just phenomenal profit contribution and I think with volume coming back into the instrument business as well, that will set us up nicely for next year. So think about a nice incremental tailwind associated with the continued actions or the annualization of that actions that come in FY 2025, partially offset by merit in some of the activities and then we'll have our ongoing productivity measures and some -- we'll actually share some of the more detail around this probably in our Analyst Day in December. So stay-tuned on that as well. Patrick Donnelly : Thanks. Okay. That's great. Thank you, guys. Operator : Our next question comes from the line of Jack Meehan with Nephron Research. Please go ahead. Jack Meehan : Thank you. Good afternoon. I wanted to dig into some of these instrument trends a little bit more. I was wondering, if you could talk about just what you're seeing across some of the big categories like LC, LCMS, GC, spectroscopy, any color on how those performed? Padraig McDonnell : Yes, I mean in general terms, Jack, I think you know the customers are very, very cautious. But what I will say is that lab manager remain very engaged with our sales teams about future projects, that is true. We see a lot of stability in that. So it's still very challenged and I would say that, you know our deal close rate is still elevated, but our funnels are very stable with low cancellations. So I think that goes across most of the markets. And as you see going-forward, you know our results in CST and services growing mid-single digits and bodes very, very well in terms of lab activity increasing. So we're seeing slow, but steady improvement. Bob McMahon : Yes. Hey, Jack, just to follow-on to that. I think one of the things as we mentioned in the call, the book-to-bill being at one for instruments is a positive sign. It was slightly better than what we expected. Overall, LSAG instruments were down low-double-digit. Jack Meehan : Yes. Yeah. Were all the categories kind of right around there? Padraig McDonnell : I would say if you looked at the LC and LCMS business, they were in the mid-teens, our spectroscopy business better than that. Jack Meehan : Okay. And then just as one end-market follow-up, I was curious in CAM in the third quarter, so it was down 5%, it was a little bit below what I was thinking. Is there anything just within the different categories within that end-market that softened a little bit relative to what you were thinking a few months ago? Padraig McDonnell : Yes. So, you're correct, it was declined by 5% and it was really due to the impact of overproduction in China, which negatively impacted market investments globally. But we did see increases in service and consumables, both combined at 7% increase, but there was a decrease of about 14% in instruments and I think CapEx spending remains slightly challenged there. Jack Meehan : Yes. That makes sense. Thank you, guys. Operator : Our next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead. Vijay Kumar : Hey, guys. Thanks for taking my question. One, I guess, Padraig or Bob, if you look at the guidance change over the last three months, NASD, China, biopharma, those have been the big categories, right? I think the guide assumes NASD doubled -- down double digits in fiscal 2024, China down high singles, double-digits, biopharma down, which of these is expected to get better next year? What is getting better or worse? And is there a first-half versus second-half dynamic that we should be aware of? Padraig McDonnell : Yes, Vijay, thanks for the question. I think in terms of what we expect getting better, we expect all of them to improve next year. We raised the midpoint of guidance, $15 million on revenue and $0.03 in EPS and we see across all those areas, markets improving slowly and that's reflected in the sequential increase that we're guiding in Q4. So while we had a kind of a solid Q3, the end market environment for capital remains constrained and visibility while improving is still difficult. Vijay Kumar : Understood. And maybe on that Q4 commentary for guidance implies I think up 6% or 7%, which seems generally in line with your historical sequential step-up from 3Q. And is the bookings trends that we saw and NASE trends we saw, does it support that historical, I guess, seasonality because I think where the Street is debating upon is that historical seasonality, does it bake in some year-end budget flush or what is baked into that sequential step-up? Padraig McDonnell : Yes. So I think what we're seeing is that it's -- we normally see the step-up, that's what we're expecting this time. We're not including the budget flush in that. If we see a budget flush, it's on top and that will be in our Q1 numbers as we go forward. Bob McMahon : Yes. Hey, Vijay, this is Bob and just to build-on what Padraig is saying, I mean you're absolutely right. When we look at the sequential, it is in-line with our historical in our order book based on what we've seen today. Obviously, we have to book orders in Q4, but our order book trends would support that. Vijay Kumar : Fantastic. Thank you, guys. Operator : Our next question will come from the line of Tycho Peterson with Jefferies. Please go ahead. Tycho Peterson : Hey, guys. Question on BIOVECTRA and maybe just synergies with the rest of the NASD business. How do you think about -- does that change views on capacity? And maybe just talk a little bit about how much of their BIOVECTRA business is clinical versus commercial and any kind of emerging modalities that you're adding here? Padraig McDonnell : Yes. I'll start, Tycho and I'll bring in Simon in a minute. So we are absolutely delighted with BIOVECTRA. We think it's a great asset that enhances our offerings and it really allows us to deepen our relationships with our key pharma customers. And what we're really excited about is that it builds on our capabilities on the current NASD modalities around anti-sense and particularly gene editing with microbial fermentation and ADC capability. And so we're very happy with that. So there's a lot of synergies as we bring that forward. So I'll hand over to Simon to talk maybe about capacity in the main business. Simon May : Yes, I think Padraig hit many of the high notes already in terms of the synergies. We already mentioned the complete solution offering in gene editing, which we see as a really significant competitive advantage going forward. Sterile fill finish is another synergy that we're excited about. We've had a lot of request from our customers over the past few years for that capability. And from the diligence we've done with BIOVECTRA, we think they've got truly world-class capabilities there. And as Padraig also mentioned with microbial fermentation, high potency APIs, there's an existing footprint there in GLP-1 manufacturing. So I think we've got a slightly higher clinical mix in BIOVECTRA than we have in NASD. So I think we're just killing several birds with one stone with this acquisition. From a capacity perspective, I'd say BIOVECTRA has been ahead of the curve with capacity CapEx and we've got some skin to grow into there over the next few years Tycho Peterson : Okay. That's helpful. And then a follow-up on China. You had the pull-forward dynamic in the first quarter, $15 million. If that were back in 2Q, I think you were effectively flat, maybe down a little bit. First, is that the right assumption? What are you actually embedding in 4Q for China in guidance? And then how do you think about the return to growth in 2025? Could you see that in the first half of the year? Padraig McDonnell : Yes. Hey, Tycho, that's -- your recollection is correct. And as we think about implied fourth quarter down mid-single digits in China, we're going up quite honestly against some easier compares in-full disclosure. And we would expect a slight sequential step-up from a revenue perspective as well. And so that reflects this steady improvement. We do expect, again, not a lot of that stimulus to come in our Q4, basically none, but more into Q5, but the bidding activity that we're seeing has ramped-up. And then I think the activity that we're seeing in services and consumables, we're expecting that to continue. It's probably too early to tell next year for China, but I would expect it to continue to improve and not be down the way it is. We're expecting a low double-digit decline this year, we would expect to improve from that and it will probably be improvement throughout the year as opposed to an immediate improvement. Certainly, the stimulus will help us with that. But again, that will be in our first and second quarters most likely, but we're not expecting a huge step-up right there. It will be overtime because this stimulus is over a three-year period. Tycho Peterson : Understood. Thanks. Operator : Our next question comes from the line of Puneet Souda with Leerink Partners. Please go ahead. Puneet Souda : Yes. Hi, guys. Thanks for the questions here. Instrumentation growth, obviously, an important question. You know, last quarter, you lowered expectations meaningfully, but again, book-to-bill was a strong more than one. Again, this quarter it is more than one and I think you said that, that last quarter was the first time you saw growth in the market after seven quarters. So that looks like it's continued again into the quarter. So just maybe help us understand instrument where we sit on instrumentation and what sort of recovery are you seeing here in August and what gives you sort of confidence that the instrumentation should bounce -- continue to bounce back into 2025 as well? Padraig McDonnell : Yes, look at the indications from the team, we have a strategic account team that does a lot of citations with our major accounts. There's -- we're seeing that more positive than negative in terms of customer sentiment, which is a very good sign. We see a lot of activity in our testing labs, as well as focusing on PFAS and so on. So there is drivers within the markets that are positive. But overall, I would say it's slow and steady and we're trading it as that. And the teams have really good visibility. Our commercial teams, which we've transformed in the last few years are really, really close to our customers. We have really good visibility into that. So it's slow, but steady. I don't know if you want to add anything, Bob, to that? Bob McMahon : Yes. No, I think you're spot-on and we're not building any budget flush into our Q4, Puneet. So if that does in fact happen, that would be a benefit to our current estimate. Puneet Souda : Okay. Thanks. And then recent drug pricing negotiation with Medicare on the first drugs are out. Obviously, IRA is having an impact, but over the next three years annually, 15 drugs will be negotiated and that probably leads to another set of impacts. So what are you hearing from your large pharma customers and overall, how are they thinking about the R&D spend and the spend that they're -- that they currently have on Agilent? Padraig McDonnell : Yes. Look, I think in general, they're very cautious, of course, with some of the impacts, the macro impacts that are facing. They're not -- there's a lot of M&A activity going on within pharma, a lot of consolidation, which of course takes time and energy for these companies to focus on. And I think what you're going to see overtime is it probably even out in terms of impact. What isn't going down, by the way, is the number of R&D programs. We see that increasing in a number of key modality areas, particularly around GLP-1, etc. So we need to wait and see, but having said that, people kind of forget in the last few years the enormous amount of spend that has happened and we're seeing that normalize now, of course in the installed-base and coming out of that in 2025. Puneet Souda : Okay, fair. Okay. Thank you. Operator : Our next question comes from the line of Michael Ryskin with Bank of America. Please go ahead. Michael Ryskin : Hey, guys. Thanks for taking the questions. I want to follow-up on maybe this is what Puneet was just getting at, but you called out in your prepared remarks a couple of times that with biopharma, small molecule held up a little bit better or small molecule did a little bit better than large molecule, I assume. Just wondering if you could delve into that a little bit more, was that a particular instrument class or modality that drove that? Was that -- does that have to do with budget cycles, just what you're seeing there and why there's such a difference in molecule type? Bob McMahon : Yes. Hey, Mike, this is Bob. You're right, I mean, our small molecule business was down mid-single digits in the quarter, which was better-than-expected actually. And then in Europe, it grew, which was a very positive sign. And this does speak to -- you can only hold-on to your old instruments for so long before the replacements need to happen. We're not calling replacement cycle inflection just yet, but every quarter these instruments get older. And one of the things that I think is important here is, pill counts and volumes continue to grow. And back to the question around the IRA and the pricing, I think it was generally, you know, not the worst case scenario, maybe a little better than people expected. And where our strength is, is in the development moving into production and that continues to be long-term positive trend. So that would be our core LC franchise and then the biopharma, some of that was impacted by our NASD business, which was kind of the air pocket. Actually, if you take our biopharma business, which was down double digits and you take NASD out, we are at mid-single digits as well. Not as -- it was down a little more than small molecule, but generally still in that same range. So both of them are actually when you take out the kind of the one-time unique aspect of NASD performing better quarter-on-quarter, which is a positive sign. Padraig McDonnell : So I would say, just adding to that, Bob, we saw services growing double-digits in biopharma and mid-single digits in small molecules. So that's a big component of what we see in those different modalities. Michael Ryskin : Okay. Both of those answers really helpful. And then for my follow-up, I want to lean in a little bit more on BIOVECTRA. I mean, everything you kind of laid out there for the rationale and the financials of the deal certainly makes sense. But I'm just curious, you know, you've had a presence in some CDMO type capabilities in the past. Just wondering how hard are you going to lean into this? And what I'm alluding to is obviously, one of your large traditional tools vendors has a CDMO business has been in that business for a number of years now and there's a lot of talk of the benefits of having both the instrument, the consumables and the services business on the tail-end. Is this something you're going to continue to grow overtime? Is it BIOVECTRA like a beachhead acquisition? I mean we should expect more investment down the road? Padraig McDonnell : Yes, I'll start and then maybe hand it over to Simon. When we look at our M&A ambition, first of all, we're -- it's going to be -- it's going to be really centered around where our strategy is, what's the strategic fit in faster-growing markets and of course, value creation. BIOVECTRA takes all of those boxes and it's an area of where we're building out more capabilities for customers. So we see that continuing. And so we're really excited about it, but we do see that this business has a lot of runway. It's a business that's growing well, very well-run, of course and has had a lot of capital investment over a number of years. And I think this is only the start of our ambition in continuing to grow BIOVECTRA and NASD. But Simon? Simon May : Not much to add really, only beyond that, we've got a very strong existing position in the RNA modality. I'd say up until this point, it's been a relatively narrow capability position and BIOVECTRA builds on that quite nicely as we look at future optionality around complementary capabilities and modalities, we think it's a rich space and that's probably all we can say at this point. Michael Ryskin : Great. Thank you. Operator : Our next question comes from the line of Dan Brennan with TD Cowen. Please go ahead. Dan Brennan : Great. Thanks. Thanks for taking the questions. Maybe just back to China, the down 11% was a bit better than we were looking for. Can you just unpack what specifically got better in the quarter given the guidance cut that you made last quarter, maybe either by customer type or by product type? And then just to clear up, like so your guidance for China, I know it was down double digit. Has that changed at all? Have you improved that? So that's my first question. Bob McMahon : Yes. Hey, Dan. Thanks for the question. China is still in line with our full-year end guidance down low-double-digits. If I look at where we actually performed slightly better than what we anticipated, it was actually in pharma and it gets back to what we were talking about before, the activity both on the services side performing sequentially better, as well as our consumables business actually growing. And so we were down you know close to 30% in Q2 of last year, we were down low double-digits in pharma year-on-year. And so that was the big sequential improvement in Q3 and I would expect that to continue into Q4. Dan Brennan : Okay. Thanks, Bob. And then sorry to go back to NASD, but there's just been a lot of questions from investors after the turn of events year-to-date in terms of that business really slowing a lot. Can you -- did you say what it did actually in the quarter? I didn't hear the number kind of year-over-year, what did NSD do in the quarter and then kind of if we take your guidance full-year, I know you said step-up, could you just give us some clarity on the quarter? And then any additional color on clinical versus commercial? It sounds like your bookings are improving, so that portends well for the outlook, but just trying to unpack like what's going on right now in the quarter? Thank you. Bob McMahon : Yes. Hey, Dan. What I would say is, we typically don't give a specific number for NASD, but it actually performed in line or slightly better than what we expected. So we had been signaling a step down in Q3 and we actually did better than what we were expecting there. The full-year is still in line with where we were, which is roughly a $300 million business. As Simon was saying, the bookings continue to be positive in terms of activity and we're starting to see some of our customers, the readouts of some of the activities, which is more a harbinger of long-term opportunity versus short-term. But you know, if anything, it was a little better than we expected. So I don't want anyone to takeaway that it wasn't -- even though it was down in the quarter, we expected that and communicated that as part of our guidance and we're still on-track for the full-year estimate that we had coming into the quarter. Dan Brennan : Got it. Thank you. Operator : Our next question will come from the line of Catherine Schulte with Baird. Please go ahead. Catherine Schulte : Hey, guys, thanks for the questions. Maybe first, just could you talk about growth rates by segment for the fiscal fourth quarter and maybe your assumptions for instrumentation versus consumables and services in the fourth quarter? Padraig McDonnell : Bob? Bob McMahon : Yes, I'll -- hey, Catherine, it's Bob. What I would say is, if I look at our Q4, all groups, we would expect to do better and if I went by group, LSAG would be -- we're expecting kind of low single digits off of a down 7% this year. Consumables being better than that overall and with the instrument side, still probably down slightly or would be down slightly. DGD down mid-single digits and ACG up mid-single digits towards the high-end. That's what we've embedded in our guidance. So all three of those actually performing better than where we were in Q3. Catherine Schulte : Yes, perfect. And then maybe going back to Small Molecule, nice to see the improvement there. I think what was just Small Molecule performance excluding China? I know you said Europe grew, but just curious to get more color on what you're seeing elsewhere? Padraig McDonnell : Yes, I think what we're seeing is Europe was a standout in Small Molecule, a lot of activity there, but probably stable across the different markets on us. And what we did see from the Small Molecule side, we did see pretty good growth in services that as well as has had that number, but I think overall Europe ahead, but everywhere else stable. Bob McMahon : Yes. What -- and so we were down mid-single digits and as Padraig said, if you took China out, we were down low-single digits everywhere else. Operator : Our next question will come from the line of Josh Waldman with Cleveland Research. Please go ahead. Josh Waldman : Hey, good afternoon. Thanks for taking my questions. A couple for you. Padraig or Bob, maybe first a follow-up. On your assumption for no budget flushing impact on pharma instrumentation, is that just a function of the timing of your quarter relative to calendar year-end buying from these customers? Or are there other things you're seeing that are leaving you on the sidelines as it relates to end of your pharma spending? And then a related question was, curious any high-level thoughts you had on 2025 based on planning conversations you're having with pharma accounts, are you thinking next year should be a return to normal growth type year in pharma instrument budget as budgets are reset or is it more of a gradual recovery or return to normal over a couple of year period. Any feedback you're getting from accounts on that? Padraig McDonnell : Yes, I'll take the first one and maybe hand-off to Bob for the second one. I think it's a year ago and we were -- people were talking about budget flushes. We didn't expect it and we didn't see it. We saw a little bit, but not much. We're expecting the same this time, of course, our year-end at the end of October. So if we do see any activity will be in Q1 2025. Why do we see this is because we're very close to our customers. We know exactly when, where the funnel is, where the deals are and where installed base, we have a lot of installed base information. So we're not expecting it anything substantial at the end-of-the year. But what we are seeing is a lot more conversations about next year, slow, steady recovery and we're hearing that across the board. I don't know if you want to take the second question, Bob? Bob McMahon : Yes. Josh, on 2025 as we were saying, it's probably too early to say. But what I -- our current indication is that it's not going to snap back November 1st to be back to normal. I do think that you'll continue to see a recovery throughout FY 2025 and get back to that long-term growth rate sometime in 2025, that's the way we kind of think about it. But I don't think it's another two to three year estimate either or based on our conversations with our customers right now. So it's probably in between. Josh Waldman : Got it. Okay. And then just had a follow-up on ACG. I was curious if you could provide a bit more context on the dynamics you're seeing there, especially interested in what you're seeing from an RFP and win rate dynamic in the contracted business? And then you mentioned, I think in the slide decks, benefiting from mix. I was wondering if you could flush that out a bit? Padraig McDonnell : Yes, I'll take the first part of that question and hand it over to Angelica. Extremely pleased with ACG's performance and that's years of investment in a broad product offerings in key markets, that are really being received by customers in this environment where they want to get more productivity out of their systems, they want to use their assets in different ways. And we've seen the flow through to our results in spite of the CapEx challenges all year. So the business performs extremely well and the margins are extremely good. So I'll ask Angelica to provide more color on the contract business. But I think what's really interesting is our enterprise service business as well. Angelica? Angelica Riemann : Yes, so to really dive in on the contracts, right? It's nearly 70% of our business in Q3 and it's continuing to grow double-digit. As we continue to see that strong demand in our enterprise service offerings, which are in the high -- the mid-teens, it's really about being there to help customers optimize their lab operations, improve their productivity and our offers really facilitate our customers improving the lab operations, the efficiencies and the waste reduction. So we're continuing to see some very strong and sticky behavior within our contracts franchise. Bob McMahon : Yes. And Josh, just on the comment on mix is, when we have business on-contract, that generally is good for us and good for our customers as well. Josh Waldman : Got it. Okay. Appreciate all the detail. Operator : Our final question will come from the line of Doug Schenkel with Wolfe Research. Please go ahead. Doug Schenkel : Hey, guys. Thanks for fitting me in. I know it's late in the call, that being said, I got three lightning round questions, which I'm going to rattle through and then listen to the answers. The first is on math. If recurring revenue growth was up mid-single digits in the quarter, it seems like instruments has to be down around 20%, maybe more based on the numbers you reported in the 10-Q in Q3 of last year. Bob, I think you said in response to Matt Sykes' question, it was down low-double digits. What are we missing? Just not trying to be too picky here, but it just seems important in the context of assessing trends and what way to put on your book-to-bill commentary. So that's the first question. The second is on China stimulus. Any change in dynamics regarding stalling either in terms of conversions or even cancellations? There's some skeletal that that there's been some recent changes as the shape of stimulus becomes a bit more clear? And then the third question is on 2025. If you exit 2024 with flattish core growth in Q4, that would obviously be a positive trend relative to what we've seen over the last few quarters. That said, it would seem like if you draw a straight line that you'd be on track to exit 2025 at around, call it 5%, maybe 6% growth rather than growing mid-single digits for the year. So I think you need a fundamental improvement in overall market conditions and/or a real impact from China stimulus to get to mid-singles for the year. I just want to see if any of my logic is flawed there? Thank you and have a good night. Padraig McDonnell : That's certainly a lightning round, Doug, but we'll try and we'll answer it. I think, Bob, you can take the first and the last one, I'll take China. Bob McMahon : Yes. The comment that I had on Instruments was specifically related to LSAG instruments and they were down low double-digit. Consumables was up mid-single digits for the total being down minus 7%. So that is. We do have some instrumentation in DGG as well that was down roughly the same as where LSAG was. So down 20% is way too negative. I'll turn it over to Padraig for the second one and then I can jump back into last one. Padraig McDonnell : Yes. Look, I think, we're very close to our China team and the local team has seen an increased activity. We're seeing that improve from last quarter and for clarity, of course, we're not building any benefit from the stimulus into our Q4 guide. But what we're seeing is, we're seeing in early days, what we're hearing that the stimulus is broader in terms of its reach over a three-year period. Having said that, we are hearing that the first tranche will likely be focused on Academic & Government accounts. But again, it's early days, as it trickles down through provinces, as the mechanism of the funding goes, we'll be sure to update as we know that. Bob McMahon : Yes. And I think just the last one real quick. It's too early. We're not going to get into what we're looking at for FY 2025 other than to say that we expect improvement throughout the year. Operator : And I'll now turn the call back over to Parmeet Ahuja for any closing remarks. Parmeet Ahuja : Thanks, Regina and thanks everyone for joining the call today. With that, we'd like to end the call. Have a good rest of the day, everyone. Operator : Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect.
A	Agilent Technologies	1,090,872	Health Care	Life Sciences Tools & Services	Santa Clara, California	1999	2000-06-05	2,024	4	2024Q4	2024Q4	2024-11-25	5.269	5.337	5.664	5.662	8.05	24.09	23.49	Operator : Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Agilent Technologies Inc. Fourth Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to withdraw your question, again, press star one. Thank you. Parmeet Ahuja, you may begin your conference. Parmeet Ahuja : Thank you, and welcome everyone to Agilent's conference call for the fourth quarter of fiscal year 2024. I am sure you have seen our press release earlier today regarding our new market-focused organizational structure, which we will talk about in more detail. These changes have no impact on our company's consolidated financial statements. All financial metrics and guidance during this call will be shared under our historical structure. We will provide recast historical segment information to reflect these changes ahead of our upcoming investor day. Now onto our quarterly results. With me are Padraig McDonnell, Agilent President and CEO, and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A will be Phil Binns, President of the former Life Sciences and Applied Markets Group, Simon May, President of the newly formed Life Sciences and Diagnostic Markets Group, and Angelica Riemann, President of the expanded Agilent CrossLab Group. Also joining the call is Mike Zhang, President of the newly formed Applied Markets Group. This presentation is being webcast live. The news release for our fourth quarter financial results, investor presentation, and information to supplement today's discussion, along with the recording of this webcast, are available on our website at investors.agilent.com. Today's comments 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, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past twelve months. Guidance is based on forecasted exchange rates. During this call, 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 risk and other factors. And now I would like to turn the call over to Padraig. Padraig McDonnell : Great. Thank you, Parmeet. Hello, everyone, and thank you for joining today's call. Before I begin, I would like to welcome new AMG President, Mike Zhang. While Mike is new to this role, he is not new to Agilent. Mike joined Agilent more than twenty years ago as a manufacturing engineer in China and most recently was Vice President and General Manager of the GC and GCMS business. Within our former Life Sciences and Applied Markets Group, with his broad experience in both manufacturing and into the business, Mike will be an incredible asset in this role. Very much looking forward to him moving AMG and Agilent forward. I also want to take a moment to wish Phil Binns a wonderful retirement in advance of him leaving Agilent. Phil joined Agilent with the Varian acquisition in 2010. All told, Phil is celebrating just over forty years of service with Agilent and Varian. Although Phil is retiring from the business president role, he has graciously agreed to serve as a special adviser through April 2025. All of us at Agilent wish Phil the very best and look forward to working with him during the last five months at Agilent. Now onto our high-level Q4 results. I am happy to share not only our solid fourth quarter results that point to continued steady market recovery, but also our outlook and drivers for the 2025 fiscal year. I am especially excited to talk about Agilent's customer-first strategy evolution and our aggressive transformation ambition that led to the news you read ahead of the call. The new market-focused organizational structure to become a nimbler, even more customer-centric company to accelerate our performance. In the fourth quarter, the Agilent team delivered revenue of $1.701 billion, roughly one percent reported growth with a flat core growth. This represents a sequential improvement of over four hundred basis points from Q3. In addition, our total company book-to-bill was greater than one. This points to a steady market improvement we are seeing and we expect it to continue in 2025. We also gained share in all our geographies. Evidence that even in challenging CapEx environment, customers trust Agilent. As we evolve, we are confident this will only accelerate. Bob will provide deeper details on our Q4 results and our outlook for Q1 and FY 2025. Now I would like to spend some time talking about our new organization structure we announced earlier today. Our new market-focused organization structure is a result of our customer-centric market force strategy and an important step in our organizational transformation work, which we have named Ignite. This is a product of our enterprise focus strategy that drives our evolution to become a nimbler, even more customer-centric company to accelerate our performance. The new market-focused organization structure is one of the most significant changes Agilent has seen in a decade and continues the work we did creating our commercial organization three years ago. The commercial organization doubled down on our customer-first approach in the field and it's a critical competitive advantage in supporting our customers. At that time, we started by creating a singular commercial leadership structure. We then created a foundational infrastructure and intensified our focus on digital capabilities, accelerated and end-to-end customer experience, and ensured sales channels were customer and market-centric. So changes you see today are part of the successful journey we started three years ago. With the new structure, we are aligning business units to our markets facilitating close collaboration among the businesses like never before and enabling better execution and cross-division customer-first priorities. We are combining the strength of our three businesses as well as our portfolios so that we can offer end-to-end solutions and workflows revolve around our customers and markets. The Life Sciences and Diagnostics Markets Group's or LDG represents $2.5 billion in annual revenue and is primarily focused on our pharma, biopharma, and clinical diagnostic end markets. LDG provides a comprehensive portfolio of leading technology platforms and solutions to serve Agilent's customers' value chain, including research and discovery, development and scale-up, production of therapeutics, and development of critical cancer diagnostics. LDG includes LC and LCMS, cell analysis as well as CDMO capabilities which include NESD and BioVectra. The business also includes pathology, companion diagnostics, and genomics. Simon May will serve as president of LDG prior to joining Agilent earlier this year at Bio-Rad Laboratories. Simon was Executive Vice President and President of Life Science Group. The Applied Markets Group or AMG represents $1.3 billion in annual revenue and is focused on food, environmental, forensics, chemicals, and advanced materials markets. AMG includes GC and GCMS spectroscopy, vacuum technology platforms, and certified pre-owned business. AMG will focus on growing its agile and strong leadership in these markets and accelerating growth in new areas of the market. Mike Zhang, a twenty-two-year veteran of Agilent, has been promoted to president of AMG. Most recently, Mike was Vice President and General Manager of our GC and GCMS product lines. The Agilent CrossLab Group or ACG represents $2.7 billion in annual revenue and is focused on supporting our customers in all our end markets. The group is uniquely positioned to leverage its comprehensive portfolio and capabilities to further enhance the installed base of instruments with targeted workflows and applications that drive critical outcomes and productivity in labs. ACG includes services, software and informatics, automation, and consumables. This business will accelerate and strengthen customer relationships across all end markets. Angelica Riemann, a twenty-five-year veteran of Agilent, will continue to serve as president of ACG. Prior to her current role, she served as Vice President and General Manager of the ACG services business. This change is one of the many that demonstrate how we are becoming nimbler and accelerating the pace of innovation. And you can see that with the Q4 launch of the exciting Agilent Infinity 3 LC series that harnesses our fifty years of LC expertise and leadership. The Infinity 3 series has advanced automation that simplifies our customers' daily routines and is compatible with previous generation, which allows for seamless upgrades and technology refreshes. And Agilent Infinity Lab LC solutions are certified by MyGreenLab. These instruments optimize lab space, and they reduce water, solvent, and energy consumption while also minimizing waste. While just launched in October, early traction from customers has been very positive. Also in Q4, we closed our acquisition of BioVectra, demonstrating our commitment to providing customers the most advanced capabilities to accelerate our therapeutic programs. With BioVectra now being part of Agilent, we expand our portfolio of CDMO services beyond our market-leading oligonucleotide production at NASD. Adding more rapidly growing therapeutic modalities like peptide synthesis, a market expected to continue to expand rapidly over the coming years. And bringing world-class capability to support gene editing therapies. Just last month, my leadership team and I visited BioVectra to welcome our new team members to Agilent, and we became even more accelerated by the capabilities we would be able to harness. Plus both Agilent and BioVectra's focus on putting customer first and accelerating the pace of innovation so we can add to and capitalize on opportunities was abundantly clear as I spoke to dozens of BioVectra employees. Separately, during the quarter, we hit another important milestone. For the full year, we passed the $1 billion mark in digital orders, for the first time across the company. This is a result of our investment in our digital ecosystem to ensure our customers can do business with us in ways that meet their needs. To reinforce what I have stated in previous calls, we are sharply focused on key growth factors such as BioPharma, PFAS, and advanced materials. And the Agilent team has mobilized to accelerate value creation through our Ignite transformation program. The objective of Ignite is to drive revenue growth and margin expansion by increasing our execution capabilities. Operator : The world is moving faster than ever, Padraig McDonnell : and so are we. That is exactly why we introduced our new market-focused organization structure. We are laser-focused on winning in the marketplace and adding value to our customers and shareholders. We will dive more deeply into these details including our evolved strategy and the Ignite transformation, that will help us execute on that strategy. At our investor day on December seventeenth in New York. Bob McMahon : We Padraig McDonnell : Bob would now provide the details of the results as well as our outlook for the fiscal year of 2025 and the first quarter. After Bob delivers his comments, I will be back for some closing remarks. Over to you, Bob. Bob McMahon : Thank you, Padraig, and good afternoon, everyone. In my remarks today, I will provide some additional details on fourth quarter revenue and take you through the income statement and other key financial metrics. I will then cover our guidance for fiscal year 2025 and the first quarter of 2025. Unless otherwise noted, my remarks will focus on non-GAAP results. As Padraig said, we are pleased with our Q4 results. Agilent finished the fourth quarter, with core growth in line with our expectations while EPS exceeded our expectations as we executed well against a challenging albeit improving market. Q4 revenue was $1.701 billion, a decline of 0.3% core but a sequential improvement of over four hundred basis points. On a reported basis, our revenues were up 0.8% as we benefited from fifty basis points of currency and BioVectra contributed sixty basis points. Looking at our Q4 performance by business unit, the Life Sciences and Applied Markets Group reported $833 million in revenue. That represents a 1% decline as instrument volumes continue to be constrained, by conservative customer CapEx spending while consumables grew mid-single digits. Having said that, for our instruments business, our orders grew year on year and for the third consecutive quarter, our book-to-bill was once again greater than one. We see this as positive evidence of an ongoing steady instrument recovery. Moving on to Agilent CrossLab Group, the business delivered revenue of $426 million for the quarter, 5%. ACG grew in every market and in every region except China, where it was flat year over year but up sequentially. The contracts business including our fast-growing enterprise services business, double digits again in Q4 as it has every quarter this year. Our largest customers continue to maximize utilization of their assets, right-size their operations, and leverage OpEx budgets to deliver on their productivity goals and outcomes. We recently received a top supplier award from one of our largest strategic customers in the applied markets as a recognition of our long-standing and beneficial partnership throughout the years. The Diagnostics and Genomics Group posted $442 million in revenue, representing a 3% decline that was slightly above expectations. Pathology saw solid growth globally, and was offset by expected softness in NESD and cell analysis instruments. Now looking at our end markets and geographies, our largest end market, pharma, declined 1%, slightly better than what we expected. Within pharma, biopharma declined mid-single digits while small molecule grew low single digits. Encouragingly, all regions except for the Americas, grew in the quarter. The Americas region was pressured by the expected decline of NASD. We expect both the Americas region and NASD to return to growth in fiscal year 2025. In chemicals and advanced materials, revenue grew 1% with our advanced materials submarket growing mid-single digits driven by our business in the semiconductor market. Our business in the diagnostics and clinical end market performed strongly growing 7% driven by pathology, and improved performance in genomics. Operator : In environmental and forensics, Bob McMahon : we declined 6% although dollars were roughly flat sequentially. All regions grew except for the US, related to timing of orders. That being said, we continue to see very strong growth in PFAS solutions. With our business growing more than 40% in Q4 across multiple end markets. Now wrapping up our end markets, food was down 3% versus last year. While our academia and government market was down 1%. Geographically, Asia ex-China high single digits and Europe grew low single digits in the quarter while the Americas and China declined as expected. China was down only 3% and exceeded our expectations. We also booked our first China stimulus orders in October and anticipate much more in fiscal year 2025. Now let's move to the rest of the P&L. Gross margin was 55.1% in the quarter, down seventy basis points versus last year driven by lower volume and mix. Our operating margin was 27.4% as our productivity initiatives and the cost actions we took earlier in the year were fully recognized this quarter. The annualization of these savings coupled with the market recovery and the initial returns from the Ignite transformation, give us confidence in driving EPS growth in fiscal year 2025. In addition, we continue to look for ways to drive EPS growth below the line. Our net interest income was in line while we benefited from a lower tax rate in the quarter and our share count was 287 million diluted shares outstanding. Now putting it all together, Q4 earnings per share was $1.46, that was ahead of our expectations and up 6% from a year ago. Now let me turn to cash flow and the balance sheet. We continue to enjoy a very strong balance sheet and healthy cash flows. Operating cash flow was $481 million in the quarter, and we invested $93 million in capital expenditures. For the year, we well exceeded our operating cash flow expectations. With operating cash flow of $1.75 billion during the quarter, we returned over $400 million to shareholders, consisting of $335 million in share repurchases, and $68 million in dividends. For the year, we returned over $1.4 billion to shareholders, through repurchasing shares and dividends. Looking forward, you may have also seen recently we announced a 5% increase in our quarterly dividend. Marking another year of increases advancing our industry-leading dividend. We ended the quarter with a net leverage ratio of 1.1, a very strong number even as we acquired BioVectra in the quarter. Our strong cash flow and healthy balance sheet provide us with plenty of opportunity to invest in the business going forward. In summary, we performed well and saw steady market improvement in the quarter. We are executing well, staying disciplined, and investing in high-growth opportunities. Now let's move on to our outlook for the upcoming fiscal year and first quarter. We expect the recovery that we have seen the past few quarters to continue throughout fiscal 2025. While we expect the market to grow slower than historical rates for the full year, we expect improvement throughout the year with the second half of the year returning to more traditional levels of growth. We expect our results to mirror that cadence of improvement on a core basis. As Padraig noted earlier, we exited Q4 with a book-to-bill ratio over one for the company, and greater than one for instruments. In addition, Q4 was the first quarter in 2024 that instrument orders grew year on year. While one quarter does not a trend make, it is certainly encouraging. For the full year guide, we expect revenue in the range of $6.79 to $6.87 billion. This represents a reported growth range of 4.3% to 5.5%. Currency is a slight headwind of 0.2 points while M&A related to BioVectra contributes 2% at the low end and 2.2% at the high end. This translates to a core growth of 2.5% to 3.5%. To start the year, we think this is a prudent way to plan given the near-term dynamics in the US. From a geographic perspective, we expect modest growth in the Americas and Europe. While we see funnel activity increasing in China, we are taking a conservative approach on the timing of revenue associated with the stimulus. We expect to see recovery over the course of the year in China, resulting in slightly positive growth for the full year. From a business group perspective, we expect to return to growth in all three groups led by ACG. As a note, this statement is true under the new structure as well. As Parmeet mentioned earlier, we will provide recast historical segment information to reflect these changes ahead of our upcoming investor day. In terms of phasing, we expect improvement throughout the year with more normalized growth expected in the second half of the year. We are projecting roughly fifty to seventy basis points of operating margin expansion for the year. Below the line, we expect net interest expense of $25 million due to the financing of BioVectra versus the net interest income this year. In addition, we expect a tax rate of 13% and 286 million shares outstanding. Fiscal 2025 non-GAAP EPS is expected to be in the range of $5.54 to $5.61 and incorporates the planned five cents year one dilution from BioVectra. This range represents a 5% to 6% growth rate if excluding the BioVectra dilution, a growth rate of 6% to 7% year on year. We expect cash flow to remain strong in fiscal year 2025. We are expecting roughly $1.65 billion in operating cash flow and $450 million in CapEx as 2025 is the peak spending year for the NASD expansion. Looking to Q1, we expect revenue in the range of $1.65 billion to $1.68 billion. Our forecast assumes no significant budget flush during the end of this calendar year. This represents a reported decline of 0.5% to growth of 1.3%. Currency is a thirty basis point headwind while M&A is expected to contribute 1.8 points of growth. We are expecting core growth between a decline of 2% to flat at the upper end. It's important to note that we estimate our projected Q1 year-over-year results will be negatively impacted this year by roughly two percentage points due to timing of the Lunar New Year which occurs in late January, versus February of last year. This includes the additional $15 million in revenue pull forward we communicated in Q1 of last year. Adjusting for the Lunar New Year impact, we are expecting continued sequential growth improvement. First quarter 2025 non-GAAP earnings per share are expected to be between $1.25 and $1.28. Lower than the full year growth rate due to the Lunar New Year timing. Looking into 2025 and beyond, we remain incredibly optimistic about the future of our markets and our long-term prospects. We are confident in our new market-focused approach and the Ignite transformation will propel us to accelerated growth and we will become a stronger company. With that, I'll turn it back over to Padraig for some closing comments. Padraig McDonnell : I've said it before and I want to say it again. These are exciting times at Agilent. Over the last several months, we've been focused on evolving our strategy, transforming our processes, and empowering our people while continuing to win in the marketplace. Already we've made bold moves that have created momentum. We've developed our future strategy, we've kicked off our Ignite transformation to help execute on that strategy. And along the way, we've made moves to create new growth vectors. We are making acquisitions that will contribute to our growth and we are strengthening our capability to efficiently and effectively integrate those acquisitions that will lay the foundation for future M&A. These initial actions position us well for the journey ahead. Bob McMahon : They ensure we are building the capability Padraig McDonnell : strength, and speed to reinvigorate our culture and enable us to thrive while delivering outstanding results for our customers and for our shareholders. And amid all this change, Fortune magazine this month named Agilent number eleven among the world's best workplaces 2024, a list that only includes twenty-five companies. This is yet another recognition of what we already know internally. The Agilent team is the best in the industry. This is not only a recognition of our outstanding company culture, of the talented professionals we have. Bob McMahon : Ones who are ambitious, Padraig McDonnell : resilient, and high performing. This is exactly the team we need to evolve Agilent. To build an enduring company that sets the standard for excellence with our customers, and creates value for our shareholders. Thank you again for joining today's call. I couldn't be more energized by the momentum we have, the opportunities we will seize, and the history we will make. Now I look forward to answering your questions. Parmeet? Parmeet Ahuja : Thanks, Padraig. Operator, if you could please provide instructions for Q&A now. Operator : And your first question today comes from the line of Patrick Donnelly from Citi. Your line is open. Patrick Donnelly : Hey, guys. Thanks so much for taking the questions. Padraig, maybe one for you. Just on the instrument side, and I know you guys touched on the book-to-bill over one for three quarters now, a little bit of improved growth on the order side year over year. Can you talk about where we are in the cycle, what your expectations are? As you guys know, there's a debate in the market about what the cycle looks like. Does it overcorrect to the upside as we work our way through the next year or so? Are you guys framing that up? What's the right way to think about this replacement cycle, where we are, and the size of it as we go forward here? Padraig McDonnell : Yeah. Thanks, Patrick. Great question. So, you know, clearly, we're seeing a steady recovery in instruments and, you know, our book-to-bill was greater than one, which is really great to see. In terms of replacement cycle, what you would see across the industry is that it's not uniform. It's across different vendors at different speeds and, of course, at different times. But what we do see is that we have we're probably midway through the expected timing on where we expect that replacement cycle to be. We see competitors are probably benefiting from refresh of their own install base with some new systems. But what you would see from our side is our Infinity 3 that we announced last month. We expect to start seeing an increased demand for our solutions, and we're seeing a lot of excitement with our customer base. And we've already seen tens of millions of dollars in orders there. So what we expect in that replacement cycle is to be slow and steady, but really kicking off in Q1. Patrick Donnelly : Okay. And that's helpful. And then maybe on China, you know, always a focus with you guys. It sounds like slight growth for 2025 is the right way to think about it. Can you just talk about what you guys are seeing there and hearing there? You know, Bob, helpful to hear that you guys got your first orders there in October. What's the expectation as we move forward here? It sounds like a steady recovery. Are you still seeing I know you guys were kinda hovering around that $300 million revenue a quarter stability. It sounds like continued and maybe a little bit of improvements as we work our way through the year. Are there different segments that are maybe picking up a little bit? Would be helpful to talk through. Thank you, guys. Padraig McDonnell : Yeah. Thanks, Patrick. So performance was a bit better than expected, and it was also really encouraging to see lab activity to continue to improve across our services and consumables. So we actually have seen quite dramatic share gains within China, which is also a really good point. So what I would say is it's steadily improving. You know, talking to the teams. And I would say on the stimulus side, you know, we talked in the call about we've already have some stimulus orders in. We expect much more in Q1. That will, of course, translate to revenue. And this is a really, really good sign as we see momentum both from the direct input of more confidence in the market and, of course, getting the dollars in. So steadily improving, and we expect that through the year, Patrick. We expect as we go through the stimulus orders and we go forward, expect that to improve. One area that was really standout for us was PFAS in China. It was the fastest-growing business for us across the globe or region across the globe, and that just goes to show the durable nature of some of these growth factors that are happening where you have the emergent pollutants act moving. And what we've seen in China is that our great technical expertise coupled with our great solutions are already there to pick up the business. So that was one real clear standout. Bob McMahon : Yeah. Hey, Patrick. Just want to add on to what Padraig is saying. Yeah. You're absolutely right. We ended the quarter with roughly $310 million, $312 to be precise, in China. Which was a nice sequential increase from Q3 and, you know, it was down 3% as I mentioned. In addition to the PFAS, both chemical and advanced materials actually grew in the quarter. We're, you know, we have a leadership position and pharma was flat, which was actually a very nice thing. And we're taking a kind of a conservative approach, as I mentioned, in terms of the stimulus orders, but we've seen quite active funnel from the standpoint of bidding activity here in the first half of this quarter as well as and expect that to continue throughout the course of 2025. Patrick Donnelly : Okay. That's helpful. Thanks, Bob and Padraig. I appreciate it. Padraig McDonnell : Thanks, Patrick. Operator : Next question comes from the line of Matt Sykes from Goldman Sachs. Your line is open. Matt Sykes : Hi, good afternoon. Thanks for taking my questions. Maybe the first one just on DGG, which has been sort of weighing on growth over the course of the year, but noticeably strong quarter. You had called out CancerDx as well as genomics. Could you just provide a little bit more color on what's driving that growth? And how sustainable do you think that growth is, particularly in genomics as we move through 2025? Padraig McDonnell : Yeah. I just said start off, and I'll kick it over to Simon. You know, as we really are seeing nice growth in our pathology business, which grew high single digits in Q4 and is slightly ahead of expectations. A highly durable business in any markets. What we're seeing in genomics, while it's a still challenging market, we posted low single-digit growth, which was also ahead of expectations. But, Simon, I don't know if you want to add some color. Simon May : Yeah. Just a quick couple of quick points to add. As Padraig mentioned, we were pretty pleased with the high single-digit growth that we saw in pathology in the quarter. And in particular, the blend and the mix between instruments and consumables there, we continue to be really healthy. With our instrument placements, and we think that sees us quite nicely going into 2025. On the genomic side, it was really notable because it's the first time that we've seen growth in genomics for quite a while now. I'd say we've had a bit of a pivot in our strategy there to really double down on the growth drivers that we see in genomics, where we've got clearly differentiated value propositions and in particular, our Magnus automated NGS library prep continues to see fantastic traction. We're also very encouraged by the pipeline that we're seeing for our Aveda NGS chemistry. And, again, this gives us a lot of hope going into FY 2025. And as I think about pathology and genomics and these growth factors that we see here, we do believe that they're durable given the macro conditions and the competitive position that we enjoy. Matt Sykes : Great. Thanks. And maybe just for my follow-up, a high-level question for you, Padraig. On the resegmentation, it makes sense from a go-to-market strategy for some of these segments to put them together. I'm wondering from an R&D development and new product innovation, how this might help. I mean, you referenced the LC replacement cycle accelerating faster for competitors as they refresh their installed base. Should we start to see a faster cycle of new product introductions due to the resegmentation, or is it gonna be similar to the pace that we've seen in the past and resegmentation really doesn't necessarily inform R&D direction? Padraig McDonnell : Yeah. Well, look, I think we're refocusing the groups really for a few reasons. We want to be closer to customers, but also understanding where do we want to make our biggest investment or most asymmetric that are going to accelerate innovation in key areas. And when I talk about focus, it's really three things. You know, it's the energy to time, but also the capital allocation. And what you will see from this refocusing of our segments, we're gonna be able to do that. You're gonna see programs accelerate. But also, we don't want to be two inches deep across the company. We want to be focused on our key growth factors and making sure we accelerate. We have a huge amount of product lines and, of course, we can have incremental additions to product lines across the board. But from this new structure, you're gonna see an acceleration of R&D. No doubt about it. Matt Sykes : Thank you. Operator : Your next question comes from the line of Rachael Raycroft with Your line is open. Rachael Raycroft : Perfect. Thank you for taking the questions, you guys, and good afternoon. So I wanted to follow-up on Patrick's question on China. Appreciate that it's early days, but how are you guys thinking about the risk of potential tariffs on Agilent's business at this point in China and in the rest of the world? Is there anything embedded in guidance currently from a tariff standpoint? And then can you remind us what was the tariff impact on Agilent in the first Trump administration? Bob McMahon : Yeah. Hey, Rachael. This is Bob. I'll take that question. As you can imagine, there's been a fair amount of work that we've been doing on this exact question. What I would take it if I took it into two chunks, actually, we've been working on diversifying our supply chain particularly within China, you know, China, back in eighteen, nineteen when the first tariffs came and then, obviously, double down on that resiliency with COVID. And so it is ten to fifteen million dollars existing today. And we think that the future potential magnitude of this is certainly manageable with us with additional mitigation activities. Obviously, with something that would be more broad-based than that, it would be more material. But to just give you a frame of reference, roughly two-thirds of our business in the US comes from product that's sourced in the US. Rachael Raycroft : Great. That's helpful. And then just for my follow-up, you mentioned that chemical and advanced materials grew 1% this quarter. Was wondering, could you just break down some of the trends that you saw within? You mentioned that semiconductors drove some of the performance that you saw on the advanced materials side. We actually had one of your peers call out some weakness in semi this quarter. So just talk to us about what you're seeing from an underlying perspective on that side. And then again, just tell me business as well. Thanks. Padraig McDonnell : Yeah. So in the chemical advance materials, we grew 1% and we sold 4% of materials, and that's driven, you know, a lot by our battery business that we have and, of course, semiconductor. We saw a slight decline in chemical and energy. But overall, we're very happy with the growth that we've seen in Asia ex-China, by the way, was driven and also low single digits in China. So the one thing that I would note about this industry is that we've got the broadest platform and solutions around it. And it's the CAM is returning to positive year on year growth for the first time since Q2 in 2023, so that really bodes well for the future. Bob McMahon : Yeah. Hey, Rachael. And maybe just for the benefit of you and the rest of the folks on the call, I talked about guidance. If you look at it by end market, just to kinda give everyone a frame, you know, for the full year FY 2025, we're expecting pharma to return to growth. So low to mid-single-digit growth there. Academia government roughly flat. Actually, expect the diagnosis and clinical that Simon just talked about to continue and be the highest growth end market, at least to start off the year here in FY 2025 at mid-single digits. CAM also low to mid, given the work and the discussion that Padraig just gave. And then food and environmental, both low single digits with pockets of very strong growth. And really, you know, food, there was a potential where the actually could accelerate throughout the course of the year given some of the potential changes in the administration coming up. Operator : Your next question comes from the line of Vijay Kumar from Evercore ISI. Your line is open. Vijay Kumar : Hey, guys. Thanks for taking my question. Maybe building off of the last question here on the drivers of fiscal 2025. When you look at the first half versus second half, it does assume a back half step up. We're just curious. Is that being driven by end markets normalizing? Maybe if you could just walk us through from first half versus back half dynamics in fiscal 2025? Bob McMahon : Yeah, Vijay. That's exactly right. So, you know, obviously, our first quarter is what I would call artificially depressed just because of the way of the nature of our timing of our fiscal year relative to Lunar New Year. But if you looked at first half versus second half, we're expecting this continued recovery throughout the course of the year. And with a more normalized growth in the back half of the year. And so where does that show up? It shows up in a couple of areas. Obviously, with the potential for China getting better throughout the course of the year. As Padraig mentioned, certainly, stimulus can help that. We've taken a conservative approach on that and not fully baked in with all the activity that we talked about. We'll see how that plays out, but certainly early days are very positive from that standpoint. And then also from a pharma perspective, we're also expecting to see that recovery particularly on the back of Infinity 3 as Padraig just mentioned, and that replacement cycle accelerating. So you're actually seeing those that would be the two biggest and then, you know, continued biotech recovery on the small biotech side as well throughout the course of next year. Vijay Kumar : Understood. And then one on that maybe margins, we cash. Pretty impressive free cash execution in fiscal 2024. Just wanna make sure I have the numbers right. Is the guide assuming free cash flow down above it, there's a timing element and on the margin sort of similar cadence question, what is Q1 assuming and what drives the back half step up in margins? Thank you. Bob McMahon : Yeah. So Q1, so let me answer your question around free cash flow. Yeah. We are expecting a slight slip down really a result of a step up in CapEx spending this year versus last year. As we, you know, finished the heavy levels of spending for the NASD expansion for Trane CND. I don't expect that to continue into 2026 and 2027, so you would see that then step back down. So that free cash flow is really a timing issue. In terms of Q1, profitability with the lower revenue, we typically have higher expenses in Q1 as some of the merit resets. We've got our sales meetings and kickoffs meetings there, and then you've got, you know, some January typically is a very light month, but we have a full amount of expenses in there. And then you then also look at the Ignite transformation that Padraig talked about, many of those activities that we've been kicking off will come into play in the second half of the year, which will generate incremental savings both on the top line and the bottom line. And what you'll hear more about that, some of those details at the Investor Day in mid-December. Vijay Kumar : And so thank you. Operator : Next question comes from the line of Jack Meehan from Nephron Research. Your line is open. Jack Meehan : Thank you. Good afternoon. I was wondering if you could just walk us through for the 2025 guide what this assumes for each of the segments. Not sure if you can provide it under the old method or just the new method, but any color would be great. Bob McMahon : Yeah. I could do that. So if you think about this at, I'll call it legacy number. So LSAG kinda low single digits with the consumables business being kind of mid-single-digit and slower on the instrument throughout the course of the year. That's probably our area where we've taken a prudent approach as we go through the course of the year. It could be more than that, depending on the uptake of the replacement cycle INFINITY 3, but low single digits there. ACG continued to be very strong with mid to high single digits as the instrumentation recovery and then continued double-digit on the services business. Just continues to be a real stalwart of growth, and we still have a lot of opportunity there around rate. And then for DGG, kind of low to mid-single-digit growth. Going forward, which is a recovery, you know, the continued performance of pathology in the genomics businesses, as Simon mentioned, and then a return to growth really for NESD. Jack Meehan : Right. Okay. And then wondering if you could just talk a little bit more just what your expectations are for LC, LCMS. I think everybody's trying to benchmark expectations for next year and one of your peers sounds a little bit more bullish as it pertains to the cycle. So I don't know if you have any thoughts as we try and compare and contrast some of these results. Any color would be great. And maybe just off of that, any comments you can share around GLP one contribution I think that might be a factor, but any color would be great. Thank you. Padraig McDonnell : Yeah. So, you know, there's a lot of dynamism in terms of replacement cycle. You know, it doesn't happen at any time, as I said before, any one time, but it's across the board in different industries and different times. From our perspective, you know, our LC and LCMS orders are improving. There's no doubt about that. And we have a huge amount of excitement around our Infinity 3. We have a lot of focus programs with our customers around that. So what you will see next year is I think it's a steady increase in cadence of that replacement cycle. You know, it's a little bit too early to call. Will that be gradual over a number of quarters or a bolus in one quarter or maybe then a slowdown and again on the next quarter? But we're really watching that as we go forward. I think we're being very conservative around what we're seeing on that because of a lot of turbulences everybody has seen in the last few years in the market. But I would say customer sentiment is steadily improving. And on the GLP One side, you know, we had a really fantastic year. We grew 30% in GLP one this year. We're involved in a lot of new site build-outs in QAQC departments and actual getting closer to production as well with systems. So a very, very strong year. And actually one thing that's really interesting is through the acquisition of BioVectra, we, of course, have a healthy pipeline of GLP-one and synthetic peptides within their CDMO capability. We're seeing a lot of requests from both sides of the business about how we can help customers both on the analytical side and on the CDMO side. So we're seeing a huge amount of synergies there. So this is a market that's going to continue very strongly and we're going to be really there to take the business. Bob McMahon : Hey, Jack. Just to build on what Padraig is saying on the LC replacement cycle, I think one of the things is, you know, we're taking a more conservative approach as Padraig mentioned. And I think if that happens, we will get that business rest assured. I would also say, if we look at the age of our installed base, it is continuing to get old. It is well beyond the median now. And throughout the course of next year. So we would expect that to continue to be able to be replaced. Because when we look at the instrumentation through our consumables business and our services business, the activity continues to be high. So these instruments are being used, and so it's only a matter of time to be able to do that replacement. Jack Meehan : Awesome. Thank you, guys. Operator : Your next question comes from the line of Dan Leonard from UBS. Hi. Thank you. Just to clarify on instruments one last time, is your expectation that instrument growth is flat in 2025? Bob McMahon : In aggregate across all platforms, our expectation is that it will grow. Low single digits. Dan Leonard : Okay. And then my follow-up. You mentioned, I think, something about the administration and changes in your food forecast. Are there any other areas where you think the change in US administration could impact your business? Any other areas that you were sensitive to putting together your forecast for 2025? Padraig McDonnell : Yeah. Look, there's a lot of changes that can happen at this time. You know, there's a lot of people expecting a lot of change. We have yet to see what those changes will be. Of course, you can see maybe some changes in the NIH funding, which is very low for us as a percentage of the business. We actually expect the PFAS spending will actually increase as it goes forward on it. The area to watch, I would say, is, of course, tariffs, which Bob talked about. We're ready for that. Ready for any scenario on that side. But also on biopharma, I think, is the IRA is also continues to move forward, the International Pricing Index seeing what happens on biopharma is gonna be really important. So that's why we're taking a kind of conservative and prudent approach. So lots going on. But what I would say is from the strategy work, I would imagine, we're ready for all outcomes. Dan Leonard : Okay. Thank you. Operator : Your next question comes from the line of Puneet Souda from Leerink Partners. Your line is open. Puneet Souda : Yeah. Hi, Padraig, Bob, thanks for taking my questions. First one, just wanted to clarify on the tariff side. I mean, if there were any retaliatory tariffs could you elaborate on your manufacturing and final assembly positions just globally so we can understand sort of how much of the product is sort of China for China, made in China versus made in other Asian countries and not coming from the US. Padraig McDonnell : Yeah. Maybe I can start off by talking about our, you know, our US supply chain in there. About 60%, as Bob said, is produced in the United States. About 35% is the rest of the world. So it's actually a small percentage that's produced in China. But, of course, we have mitigations and steps there. We have many supply chain areas across the globe that we can move around, and we've done that before since 2018. We expect the impact probably in the quarter of $4 million to $5 million we can probably mitigate that within a few months. So I would say we're waiting to see how that all plays out. But we're already taking steps across potential tariffs. The big question for everybody is that will it be on will it be beyond China? I think everybody's waiting to see what that is, but even in that case, we're ready with mitigations. Bob McMahon : Yeah. Hey, Puneet. To build on what Padraig is saying, particularly for retaliatory tariffs in China, very little of our revenue now is produced in the US that goes into China. We spent a lot of time and effort building in China for China, and we have a full portfolio of capabilities there. Which is actually really important for us to be able to take full advantage of the stimulus products today. So, and, you know, I think that number will be relatively small. From the standpoint of retaliatory impact from China exports from the US. Puneet Souda : That's helpful. Thanks. And then, I have a question on Infinity 3 series. Just wondering, given the launch timing, was there any pause that you saw in on the instrumentation? And what is the order book telling you? Do you think this is what's driving, you know, is it a major driver of instrumentation orders in the quarter being positive as you pointed out? Padraig McDonnell : Yeah. You know, we had a minimal effect to be honest. We really planned around that and of course, we are very careful with our customers to make sure we bring them through the cycle of replacement. So minimal impact. You know, we're very extremely excited about it. You know, it's a system that not only will be best in class in terms of performance, but also in terms of productivity. And that's what we're hearing loud and clear from our customers. It's about productivity and how it lends their labs to be more productive going forward. We're extremely pleased with the order book that we've seen so far. And we expect that that will continue to ramp and, you know, customers are really voting with their orders on that. So we're excited about that ramp for next year. Puneet Souda : Okay. Thank you. Look forward to the investor day. Operator : Your next question comes from the line of Tycho Peterson from Jefferies. Your line is open. Tycho Peterson : Hey, thanks. Wanted to probe in a little bit. Are you able to delineate what LC did and what mass spec did in the quarter? And then just thinking a little bit about the new administration, I know you're not guiding for any budget flush here, but is there any risk of kind of pause in spending given all the moving pieces around pharma? What are you hearing from customers at this point? Padraig McDonnell : Yeah. Maybe I can start with the second part, Tycho. We're not seeing a pause from pharma validating. We're actually seeing a little bit more activity. So we're not seeing that across the board, and that's about the US and globally. And, of course, that's something we really want to watch with the new administration coming in. And what transpires over the next few weeks. But in terms of the LC and LCMS, Bob, I don't know if you got any color on those. Bob McMahon : Yeah. Hey, Tycho. Just to give you a couple of different pieces of data. If I look at our pharma business overall, it was down low single digits. Pharma, small molecule was actually up 3% overall with biotech or biopharma being down. If we look at specifically LC, LCMS, within pharma, it was up low single digits. Tycho Peterson : Okay. That's helpful. And then the follow-up on NASD, I know I think you're talking back to growth in 2025. Can you maybe just talk a little bit about your ability to cross-sell with BioVectra and then how are you thinking about clinical versus commercial customers? Padraig McDonnell : Yeah. I'll start off, Tycho, and I'll hand it over to Simon. You know, first of all, we are extremely pleased on the cross-selling ability between the two businesses. It was one of the key sources of value about why we did the BioVectra acquisition that customers were asking us for this capability, a broader range of capability, and we've seen that actually accelerate from both sides. Simon, I don't know if you want to add more color on NESD. Simon May : Yeah. Just to build on what Padraig said with BioVectra and the NASD cross-pollination, there's been really strong engagement between the teams. In fact, they spent several days together in our Boulder facility last week, and I'd say they came away really energized that the portfolio complementarity fit between businesses is exactly as we expected. In fact, maybe a little bit more so. Then as we think about NASD going into FY 2025, I think as Bob mentioned earlier, we're projecting high single-digit growth for the business. The order book looks really strong in NASD, but it's important to understand the nuances of the mix in that order book. We've got a number of commercialization qualifications going on right now. So in terms of FY 2025 revenue, there's a lot of energy going into that with relatively limited revenue upside, and a lot of that's gonna actually hit towards FY 2026. But, again, the order book overall is very healthy. And as we think about twelve, eighteen, twenty-four months view, we're really bullish about what we're seeing. But once again, high single-digit growth, maybe we'll nudge double-digit in NASD in FY 2025? Tycho Peterson : Thank you. Operator : Your next question comes from the line of Brandon Couillard from Wells Fargo. Your line is open. Brandon Couillard : Hey, thanks. Good afternoon. Just on the Infinity 3 launch, can you remind us, you know, when the Infinity 2 I think it's the 1290 system rolled out. And what's the is there an ASP premium? Is there an ASP kicker to this replacement cycle this time as well to the three versus the legacy two system. Thanks. Padraig McDonnell : Yeah. We don't talk about a difference in pricing on it, you know, but I think we've had a number of years, of course, very, very successful years with the Infinity 2 and this builds on success. I will say that the installed base for Agilent is way broader than the Infinity 2. You know, we have 1100s that are very, very prominent out there. We have a lot of labs with 1100s and those are the labs for us, I think, that are gonna be talking about replacement. But we also have seen significant interest from Infinity 2 customers because the CDXTR productivity capability is really going to help them in the lab. So I would say it's not just, you know, one series to the next. It's a broad install base replenishment we're gonna see. Bob McMahon : Yeah. All I would say is pricing has held up very nicely. Early days. Brandon Couillard : Okay. And then Bob, how much of the CapEx is in Nexter is tied to the train B and build out for NASD, we expect those to come online, and what does maintenance CapEx look like? In fiscal 2026? Thanks. Bob McMahon : Yeah. That's a great question. So roughly half is NASD between the continued build-out and the validation activities of that $450 million. If I look at, kinda maintenance CapEx, think about it in, you know, kinda two and a half to three times sales. Range on a go-forward basis. Brandon Couillard : That's total cover. Thank you. Operator : Your next question comes from the line of Doug Schenkel from Wolfe Research. Your line is open. Doug Schenkel : Good afternoon, guys. Thanks for taking my questions. Just want to start first with a question on guidance philosophy. Just to be clear, it sounds like you're trying to factor in a degree of conservatism on China stimulus, the impact of uncertainty as it relates to the new administration, and conservatism on a potential LC replacement cycle. Hopefully, I'm not missing anything there. But is it fair to say that the error bar around your assumptions are wider than normal heading into a new fiscal year and your intent across the board was to make assumptions that were consistently on the lower end of those error bars? Padraig McDonnell : I think you said it well. You know, we were very conservative in that because of those reasons, you know, what is the expected LC replacement cycle recovery? Is it faster? Is it, you know, is it a little bit less than that? The China stimulus, you know, which is very early days, you know, I think we want to make sure that we continue to monitor that. And, of course, whether we see improved conditions or not in terms of sentiment in the US. So all of these things are factoring into this. So it is conservative in what we're guiding, but also I'd say here, the bars are wider than normal. Doug Schenkel : Okay. Thank you for that. And just as always, correct me if I'm wrong, but I believe in your prepared remarks, you indicated that small molecule was up low single digits while biopharma was down mid-singles. If I have that right, is that comp effect, or are you seeing more of a recovery in demand amongst, you know, small versus large molecule applications, and I guess, finally, if so, why? That seems to be a little contradicting just curious if you could give us a little more there. Bob McMahon : Yeah, Doug. You know, you heard it right. Our small molecule business was up low single digits across both instruments. You know, it was the combination of instruments and services. And our biotech, our large molecule was down mid-singles. Now if you took out NASD, which shows up in the large molecule, it was down low single digits. So better recovery than the mid-single digits. And it actually speaks to, I think, that continuation of volume in small molecule. You know, if you look at pill count, it continues to go up. And these are, you know, well-capitalized companies. They have probably the older fleet you just think about kind of the replacement versus kind of the biotechs of the world, and so we're expecting that to continue and, it was the first to kind of go down. And so we're, you know, in the cycle, and I think we're expecting it to be the first, you know, moving positive. Now we think there's more upside in biotech than there is in small molecule, but it certainly is a nice leading indicator around the idea around this replacement cycle. Doug Schenkel : Okay. Thanks very much. Operator : Your next question comes from the line of Michael Ryskin from Bank of America. Line is open. Michael Ryskin : Great. Thanks for taking the question, guys. First, I want to ask a quick follow-up on China stimulus. I know you kinda touched on them in a couple of different questions. But early in the prepared remarks, you did make some comments of, you know, seeing some initial China stimulus orders come in. I think China in the quarter exceeded your expectations. I know there's not a lot embedded directly into the guide. But could you just walk us through sort of, like, how China's stimulus could play out next year? And I'm asking this from a perspective of, you know, gradual ramp as you go through the year. Is it gonna be a trickle? Is it could it be very back-end loaded? It's just trying to think through the various scenarios and what you're looking for there. Once the initial order is clear. Padraig McDonnell : Yeah. Look. I think what we've seen is that it's much broader. The stimulus in terms of range. We spoke about that before. We see it, you know, both on commercial and government accounts. Our first orders have actually come in from government accounts. We've been highly successful in those overall tenders, and we're in the low millions range, low single-digit millions range of orders to bring. We're expecting to close much more this quarter. And one thing that's really playing into our favor is our broad platform capabilities. Including the technical capabilities of our teams up and running. And you couple that with our Made in China initiatives that we really invested over the last year, it puts us in a very, very strong position to capitalize, but it'll be interesting to see how that's launched. Past the first quarter, we don't have great visibility yet, but, of course, a lot of deal activity. But the first quarter is looking very strong in terms of orders. Bob McMahon : Yeah. Hey, Mike. And just to kind of frame it, kind of how we're thinking about China to your point. If we took Q4 and just divide it by or multiply it by four, that would get you to that low single-digit growth. Now we're expecting a recovery throughout the course of the year, but that kind of gives you a sense for what we put in the initial guide and we'll know a lot more about those timing of the stimulus revenues going forward. You know, once we actually get those awarded and then the delivery dates and so forth. But we do think that that'll occur throughout the course of the year. Michael Ryskin : Okay. That's helpful. And then, Bob, maybe for you, just on the margin guide for next year, fifty to seventy bps. So really impressive starting point honestly better than I think a lot expected. Especially given, you know, still a little bit of a subdued top-line environment. How much of that can you attribute to Ignite and sort of, you know, maybe some of the transformation or one-time cost savings, how much is just the underlying strength of the business, maybe beside the price or some mix shift next year? Just a little bit of what's going into that margin expansion for next year? Bob McMahon : Yeah. What I would say, Mike, is it's a little of all those things. So maybe stay tuned, and we'll give you a little more meat on the bones here come mid-December. But we certainly have some incremental opportunities both in price and, you know, cost efficiencies associated with the Ignite transformation. And those things will start to feather into the second half of this year, as I mentioned before. If you recall, the first half of this year also has the annualization of the savings of the actions that we had to take in the June, July time frame as well. So we're benefiting and then you also have the merit increases and so forth that gets reset. And so you'll actually see this throughout the course of the year through a series of initiatives that have already been kicked off. Padraig McDonnell : And I would say just following up on that, Bob, we're very excited to meet everybody in December in New York to talk about it. It's an extremely well-thought-out program. It's across the board. It's ultimately gonna help us to invest for growth in key areas as well as margin expansion. Michael Ryskin : Okay. Thanks a lot, guys. Operator : And your final question comes from the line of Dan Brennan from TD Cowen. Your line is open. Dan Brennan : Great. Thanks for taking the questions here. Maybe the first one just on pharma. In the Americas. I think you called that in the prepared remarks Americas Pharma XMASD was kind of maybe a weaker spot. You just unpack a little bit what's happening in, you know, US versus, say, Europe, rest of the world and kind of, you know, what's kind of assumed from what happened in 4Q in 2025? Padraig McDonnell : Yeah. I mean, look, we saw a lot of strength in Europe in terms of pharma. I wouldn't read too much into the American numbers. You know, I think there is, of course, companies wondering about their CapEx budgets and that comes at different phases. But we expect, we expect Pharma to continue. Dan Brennan : Okay. That's helpful. And then maybe just one on if I can just go into the broader market. I know you talked about the period in Mark's, Bob, and a few times it came up like you're expecting a below-trend market. At least it sounds like for the first half of the year, can you just remind us in terms of your kind of growth algorithm maybe, like, what would what is your assumptions based upon for a market growth typically? Kinda what are you assuming? And kind of specifically, is it just pharma that's weaker? Or are there other spots that you're pointing to that are below trend? And, you know, any color on that would be helpful. Thank you. Bob McMahon : Yeah, Dan, if we looked at the long-term growth rates of our markets, we believe those are mid-single digits, you know, four to when you look at the aggregate across. We're obviously not expecting that for the full year here. We are expecting that we're doing better than the market. If you look at kinda how we exited here roughly flat on a core basis, you know, if you adjust for the timing of Lunar New Year, you know, you had the midpoint one percent, you know, and expect that kind of performance to continue that cadence. And so you would have the second half of the year a more normalized kind of growth rates. And so it's really across the board. We're seeing, you know, some of the industrial or applied markets things like CAM being a little ahead of the curve and certainly our diagnostics and clinical business continues to be strong. It has been throughout the course of this year. Exiting at a very healthy rate, and I would expect that to continue. The big ones are pharma coming in and then, you know, some of the other applied markets as well. Operator : And this concludes the question and answer session. Mr. Ahuja, I turn the call back over to you. Parmeet Ahuja : Thanks, Rob, and thanks everyone for joining the call today. Before we sign off, I'd like to wish everyone a happy Thanksgiving. Have a good rest of the day and week everyone. Operator : This concludes today's conference call. You may now disconnect.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,014	1	2014Q1	2014Q1	2014-01-27	1.465	1.475	1.597	1.595	null	12.23	11.89	Executives: Tim Cook - CEO Peter Oppenheimer - SVP, CFO Luca Maestri - Vice President and Corporate Controller Nancy Paxton - Senior Director, Investor Relations Analysts : Katy Huberty - Morgan Stanley Bill Shope - Goldman Sachs Shannon Cross - Cross Research Toni Sacconaghi - Sanford Bernstein Ben Reitzes - Barclays Steve Milunovich - UBS Brian Marshall - ISI Group Keith Bachman - BMO Capital Markets Andy Hargreaves - Pacific Crest Securities Mark Moskowitz - JPMorgan Gene Munster - Piper Jaffray Operator : Good day, everyone, and welcome to the Apple Incorporated First Quarter Fiscal Year 2014 Earnings Release Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma’am. Nancy Paxton : Thank you. Good afternoon, and thanks to everyone for joining us. Speaking first today is Apple CFO Peter Oppenheimer. And he’ll be joined by CEO Tim Cook, and Vice Vice President and Corporate Controller Luca Maestri for a Q&A session with analysts. Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margins, operating expenses, other income and expense, stock-based compensation expense, taxes, and future products. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s Form 10-K for 2013 and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I’d now like to turn the call over to Peter Oppenheimer for introductory remarks. Peter Oppenheimer : Thank you, Nancy. We’re very pleased to report the results of the first quarter of Apple’s fiscal year ’14. We established new all-time quarterly records for iPhone and iPad sales and had one of our best Mac quarters ever, driving the highest quarterly revenue and operating profit in Apple’s history. We were also very pleased with our results in emerging markets around the world. Revenue for the quarter was $57.6 billion, up $3.1 billion, or 6%, from the year ago quarter and near the high end of our guidance range. No technology company has ever generated that much revenue in a single quarter, and we’re especially pleased to have generated that record despite foreign exchange headwinds, the year over year decline in iPod sales, and the higher revenue deferral rates from iOS devices and Macs that we discussed last quarter. These three factors negatively impacted revenue by about $2.5 billion, and without them, our year over year revenue growth would have been about 10%. Gross margin was 37.9%, above the high end of our guidance range, and operating margin was an all-time record of $17.5 billion, representing 30.3% of revenue. Net income was $13.1 billion, translating to diluted earnings per share of $14.50, a new record. As for the details of the quarter, I’d like to begin with iPhone. Despite supply constraints on iPhone 5S, we sold 51 million iPhones compared to 47.8 million in the year ago quarter. That’s an increase of over 3 million phones, or 7%, and a new quarterly record. iPhone sales growth was very strong year over year in Japan, thanks to the addition of NTT Docomo in September and our continued partnership with Softbank and KDDI. In fact, based on the latest data published by Kantar, iPhone accounts for 69% share of the smartphone market in Japan. We also generated strong year over year iPhone growth in greater China, Latin America, the Middle East, and Russia. In the U.S. market, Apple remains the leading smartphone manufacturer, with iPhone accounting for 41% of smartphone subscribers in the three-month period ending in November, according to ComScore. We’re very pleased to have reached a multiyear agreement with China Mobile, the largest network in the world, with over 750 million customers, and to be selling iPhones through their expansive network of stores, beginning on January 17. China is an incredibly important market to Apple, and iOS devices already account for 57% of all mobile web browsing in China. iPhone customers are loving their phones, and continue to produce the highest loyalty rates in the industry. A December survey of U.S. customers by ChangeWave indicated a 96% customer satisfaction rate for iPhone. And based on the latest data provided by Kantar, iPhone customers have a 90% loyalty rate, significantly higher than the competition. We exited the quarter with about 15.3 million total iPhones in channel inventory, which represented a sequential increase of less than 1 million units from the September quarter, and left us within our target range of 4 to 6 weeks of iPhone channel inventory. The release of new iPhones with iOS 7 introduced powerful new security and management features for business and enterprise customers. And iOS 7 has received FIPS 140-2 certification from the U.S. federal government. These features, coupled with ease of developing custom enterprise apps, continue to make iPhone the device of choice for large organizations. Many companies, including Accenture, Cisco, and American Airlines, have tens of thousands of employees using iPhones for work. In fact, some, including Deloitte and GE, have over 50,000 iPhones each on their networks around the world. And based on the latest data published by IDC, combining business, government, and education institutions, iPhone has a 59% share of the U.S. commercial smartphone market. Turning to iPad, despite supply constraints, we sold over 26 million iPads during the quarter, compared to 22.9 million in the year ago quarter. That’s an increase of over 3 million iPads, or 14%, and represents a new all-time quarterly sales record. iPad sales were very robust in Mainland China, where sales more than doubled year over year. We also experienced strong iPad sales growth in the Middle East, Latin America, Russia, and parts of Western Europe. Customers are loving the new iPad Air and iPad Mini, with Retina Display, introduced in October, and response to the more affordable iPad Mini has been very strong. In fact, a November ChangeWave survey of customers planning to buy a tablet within 90 days found that 72% plan to purchase an iPad. And among customers who already owned an iPad, the survey measured a 97% satisfaction rate. We exited the quarter with 6.2 million units of iPad channel inventory, a sequential increase of about 2.1 million units, which placed us within our target range of 4 to 6 weeks of iPad channel inventory. Based on the latest data published by IDC, iPad has a 78% share of the U.S. commercial tablet market, and iPad continues to spark innovation for businesses around the world. Leveraging custom developed and App Store apps, progressive IT organizations have embraced mobility, armed employees with iPad, and fundamentally changed the way people do their jobs. British Airways has deployed thousands of iPads to their employees across the business, including senior cabin staff, engineers, check-in staff, pilots, and ground crew. At Kindred Healthcare, iPads are now being used by the sales team, executives, and thousands of therapists nationwide, resulting in millions of dollars of estimated savings and productivity gains for Kindred and their customers. And this football season, nearly every team in the NFL use iPads as playbooks, replacing their traditional three-ring paper binders. In the education market, schools continue to choose iPad and the great content available across apps, books, and courses. To date, U.S. educational institutions have purchased over 7 million iPads. In fact, we’ve sold over 750,000 iPads to K-12 schools in the state of Texas alone, including 7,000 iPads rolling out to all K-12 students in the Midway Independent School District. We have expanded the availability of iBook textbooks in four countries to over 50 countries, so that students and teachers around the world can experience the power of what a textbook can be. We continue to add new titles from key education publishers like Oxford University Press and Cambridge University Press. In addition, nearly 25,000 books have been created and published by individual educators using iBooks Author, bringing lessons to life in exciting new ways. And over 1,000 institutions are delivering courses and content through iTunes U. At the Ohio State University, where there are over 20,000 iPads on campus, faculty have developed over 70 iTunes U courses in less than one school year. We remain very focused on providing a great user experience for our iPhone and iPad customers, and we’re extremely pleased that the iOS platform continues to lead the industry in user engagement. According to IBM’s Digital Analytics Benchmark, iOS devices accounted for more than twice the online traffic and more than five times the online sales compared to Android devices on both Black Friday and Christmas Day. IBM reported that iOS devices represented 32.6% of online traffic on December 25, and more than double the 14.8% for Android. While iOS devices drove 23% of online sales that day, 5x the 4.6% for Android. And, according to the latest reports by TechInsights, iPhone accounted for 54% of North American smartphone web traffic, while iPad accounted for 78% of tablet traffic. These usage percentages are far greater than the share of the smartphone and tablet markets represented by our devices, and they underscore just how engaging and important our iPhones and iPads are to the people who own them. We’re also very pleased with our customers’ adoption of iOS 7. As of this month, 80% of iOS devices are running iOS 7. That dwarfs the single-digit adoption percentage measured for the latest version of the Android operating system, and makes iOS 7 the most popular operating system in the world. The rapid transition to the latest version of iOS provides a more advanced and secure experience for our customers, and a more streamlined opportunity for our developers. Turning to Mac, we sold 4.8 million Macs, compared to 4.1 million in the year ago quarter, an increase of 19%, making this among our best Mac quarters ever. The growth was driven by significantly increased sales of iMac and Macbook Air, while sales of Macbook Pro also remained strong. Mac sales grew in each of our operating segments, led by Europe and greater China. We were also very pleased to have generated such strong results for our Mac products, particularly given IDC’s most recently published estimate of a 6% year over year contraction in worldwide personal computer sales. Macs have now gained global market share for 30 of the last 31 quarters. We were happy to begin selling the all-new Mac Pro last month, manufactured in the U.S., and we had great customer response to OS X Mavericks, now available for free and running on millions of Macs around the world. And we were also delighted to be providing our groundbreaking iWork productivity apps for free of charge to our Mac, iPhone, and iPad customers. We ended the quarter with Mac channel inventory that was within our 4-5 week target range. 30 years ago this week, Apple launched the Macintosh. Not only was the Macintosh a breakthrough for the personal computer, it was also a promise that the power of technology taken from the few and put in the hands of everyone could change the world. Over the past 30 years, people have done extraordinary things with the Mac, and with the Apple products it inspired. To coincide with the 30 year mark, we’ve taken a look at what people have accomplished on a special website that showcases their Mac stories. Their achievements are a result of Apple’s continued commitment to create and deliver the best technology to people all over the world, every day. Happy Birthday, Mac. Imagine what we can accomplish in the next 30 years. We continue to be very pleased with the growth of iTunes software and services and the strength of the Apple ecosystem. Total revenue from iTunes software and services was $4.4 billion, an increase of 19% year over year. Our iTunes stores generated record billings of $4.7 billion in the December quarter, thanks primarily to strong growth in App Store sales. The quarter of iTunes billings translated to quarterly iTunes revenue of over $2.4 billion, up 14% from the year ago quarter, and a new all-time record. Software and services revenue was about $2 billion, up 26% from the year ago quarter, and also a new record. We achieved these records despite the fact we are now making iPhoto, iMovie, Pages, Numbers, and Keynote free with new iOS device purchases, and we’re also making Mavericks, iLife, and iWork free to our Mac customers. As we mentioned last quarter, we are now deferring a greater amount of revenue for each new iOS device and Mac sold as a result of the free software and associated upgrade rights. At the end of the quarter, our total deferred revenue from all sources was $11.4 billion, and we expect to realize $8.4 billion of it in the next four quarters. The App Store now offers 1 million apps in 24 categories and cumulative downloads have surpassed 65 billion. Our app developers earned 2 billion from sales in the App Store in the December quarter. That translates to $15 billion in cumulative App Store earnings for our developers, about half of which was generated in the last four quarters, and we are thrilled with the success that they have achieved. In China specifically, we have an incredibly vibrant iOS and Mac developer community. Developers in China have created over 130,000 apps on the App Store to date. A recent study by Business Insider Intelligence indicated that iOS has a 5x advantage over Android when it comes to developer revenue per app download, a 4x advantage in revenue from in-app purchases, and a 2x advantage in revenue from paid downloads plus in-app purchases. And according to a recent report from Distimo, the App Store has a 63% to 37% market share advantage over Google Play in global revenue from apps. Top developers continue to launch their apps first, or exclusively, on the App Store. Examples of highly successful launches from 2013 include Temple Run 2 and Cut The Rope 2, which generated millions of downloads in multiweek periods of App Store exclusivity. NaturalMotion recently launched Clumsy Ninja exclusively on iOS and saw 10 million downloads in the first week. And Plants Versus Zombies 2 resulted in the biggest game title launch ever for Electronic Arts’ Pop Cap, with 16 million downloads from the App Store in the first five days alone. With the introduction of iOS 7, developers are able to create stunning apps to take advantage of the redesigned user interface and more than 200 new features and APIs. And many of the App Store’s biggest recent successes, including Candy Crush Saga, Puzzle & Dragons, Minecraft, QuizUp, and Clumsy Ninja, were created by international developers. The seamless integration of the iOS platform, the global reach of our ecosystem, our thoughtful app review process, and our highly engaged customers continue to make the App Store a superior marketplace for our extremely talented developer community. I’d now like to turn to the Apple retail stores. Revenue for the quarter was $7 billion, a new quarterly record, and in increase of 9% from the year ago quarter. The growth was fueled by record iPhone and iPad sales through the stores as well as strong Mac sales. We completed the remodel of six stores and opened four new stores during the quarter, ending with a total of 420 stores, including 166 outside the United States. With an average of 418 stores open during the December quarter, average revenue per store was $16.7 million, compared to $16.3 million in the year ago quarter. Retail segment income was $1.7 billion. We hosted 114 million visitors to our stores during the quarter, which translates to almost 21,000 visitors per store, per week. We were excited to roll out iBeacon technology at our stores in the U.S. during the quarter, enabling shoppers to receive iPhone notifications about products and services via the Apple Store app. iBeacon transmitters use Bluetooth wireless technology to sense a shopper’s exact location inside an Apple Store and send messages based on the aisle or product the customer is near. For example, customers walking by an iPhone table could receive a message offering to help them check their upgrade eligibility or trade-in value of an existing phone. We expect to see many innovative uses of iBeacon technology from other businesses and developers in the coming months, including retailers and professional sports. Total company operating expenses were $4.4 billion, and included $572 million in stock based compensation expense, aligning with $246 million, and the tax rate for the quarter was 26.2%. And turning to our cash, we ended the quarter with $158.8 billion in cash or short term and long term marketable securities, a sequential increase of $12 billion from the September quarter. Our domestic cash was $34.4 billion at the end of the December quarter, a sequential decline of $1.1 billion. $124.4 billion, or 78%, of our total cash was offshore at the end of the December quarter, and cash flow from operations was $22.7 billion. We paid $2.7 billion in dividends in the quarter, and we executed an additional $5 billion in repurchases of 9.6 million shares of Apple stock during the quarter. This brings us to a cumulative total of over $43 billion in payments for dividends and share repurchases over the last six quarters, of which share buybacks were $28 billion. This has resulted in Q1 retirement of 56.5 million shares and represents 6% of the total shares outstanding prior to the launch of the repurchase program. Our board of directors has declared a dividend of $3.05 per common share, payable on February 13, 2014, to shareholders of record as of the close of business on February 10, 2014. Now, as we move ahead in the March quarter, I’d like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $42 billion and $44 billion, compared to $43.6 billion in the year ago quarter. We expect gross margin to be between 37% and 38%, reflecting approximately $110 million related to stock based compensation expense. We expect opex to be between $4.3 billion and $4.4 billion, including about $590 million related to stock based compensation. We are continuing to invest heavily in R&D, in both current revenue generating categories as well as future products and services. We expect OI&E to be about $200 million, and we expect the tax rate to be about 26.2%. In closing, we are very pleased with our record iPhone and iPad sales, the strong performance of our Mac products, and the growth of iTunes software and services revenue. We are thrilled to have the most satisfied, loyal, and engaged customers in our industry, and we are confidently working to make the user experience even better for them. We are continuing to invest heavily in our future, and remain very confident in our new product pipeline. With that, I’d like to open the call to questions. Nancy Paxton : Thank you, Peter. We ask that you limit yourself to one question and one follow up. Operator, may we have the first question, please? Operator : [Operator instructions.] First, we’ll go to Katy Huberty with Morgan Stanley. Katy Huberty - Morgan Stanley : Peter, revenue guidance embeds a sequential decline that’s bigger than what you experienced in the March 2013 quarter, and I think implies iPhone units may not grow in the March quarter year on year. So can you just talk about what’s driving the cautious view on the top line for March? Peter Oppenheimer : The biggest reason for the larger sequential decline in revenue this year relates to changes in channel inventory between the years. And I’ll go through some detail, but let me actually do it on a year over year basis. I’d like to go through some things about the guidance, and I think you’ll see that the underlying performance of our business is stronger than what the guidance might imply. We expect four factors to negatively impact the year over year revenue comparison by over $2 billion. These are channel inventory increases in the year ago quarter that we don’t expect to repeat, lower iPod sales, a stronger U.S. dollar against a number of currencies, particularly the yen and the Australian dollar, and the higher per unit deferral for Mac and iOS devices that I talked about in my prepared remarks. Let me go through these a little more. First, beginning with channel inventory, in the March quarter last year, we increased channel inventory for both iPhone and iPad, whereas this year we increased the channel inventory for both product families in the December quarter, and we exited within our target range of channel inventory. For iPhone, specifically last year, the supply of iPhone 5 was short for the entire December quarter, and we were not able to achieve supply and demand balance for iPhone 5 until the March quarter. As a result, we increased the iPhone inventory last year by about 1.1 million units. In contrast, this year we executed the fastest rollout for our new iPhones, and we included China in wave one, in the launch in September, and we were able to exit the quarter in supply and demand balance. For iPad, we introduced the Mini in the December quarter last year, and we were not able to meet demand in any week of the quarter. We didn’t reach supply and demand balance for the iPad Mini until the March quarter last year, and we increased inventory in the March quarter by 1.4 million units. In contrast, this year we exited the December quarter near supply and demand balance. So looking past the inventory changes year-to-year, we expect the value of the underlying sell through to grow year over year, and we’re very confident in what we’re shipping. Turning to iPod, sales declined by 52% year over year in the December quarter, and we would expect them to continue to decline year over year in the March quarter. And FX is a headwind for us with the strengthening dollar against a number of currencies. So when you consider these factors, we’re very pleased with the underlying performance of the business and the revenue growth is stronger than what the guidance might imply. Katy Huberty - Morgan Stanley : And Peter, you’re guiding OpEx flattish sequentially, despite the big revenue downtick. Are there any one-time items in SG&A and R&D in the March quarter? Or is the run rate reflective of investments for future opportunities? Peter Oppenheimer : It’s definitely the latter, and let me have Luca take you through some details. Luca Maestri : Yes, at the midpoint of the range of our guidance, we are expecting a minor decrease of $50 million. This is largely due to the lower variable expenses that we’re going to have, in line with the seasonal sequential decline in revenue. But one thing that Peter already mentioned in his remarks is that we continue to invest very heavily in R&D. We make investments in areas that are visible to all of you today, but also in areas that are not visible, which we’re very excited about. And for the things that are not visible to you, obviously were impacting ahead of the revenue that these products and services will generate in the future. So there is nothing that is one-off in nature in our guidance. Operator : From Goldman Sachs, we’ll go to Bill Shope. Bill Shope - Goldman Sachs : I have a question on the revenue guidance as well. The ramp of China Mobile would presumably act as a tailwind to the March quarter, yet that’s not apparent in the numbers. Can you comment on how you’re thinking about demand trends for China Mobile and perhaps how it compares to prior large carrier ramps? Peter Oppenheimer : Let me start, then Tim may want to have some comments. We’re thrilled to be working with China Mobile, and Docomo also. We had a great launch with both carriers, Docomo in the December quarter and China Mobile just in the last couple of weeks. These carrier additions will have a positive impact on our iPhone sales year over year. China Mobile’s 4G service is only available in 16 cities today, and they plan to complete the rollout of more than 500,000 4G base stations, which will cover more than 340 cities by year-end. With the addition of Docomo last quarter, we were able to achieve 69% smartphone market share in Japan, which we’re thrilled with. However, the benefit of these two carrier additions this quarter is being partially offset by a couple of things : first of all, the comparison last year from our late launch of the iPhone 5 and the new iPad in Mainland China, achieving supply and demand balance for the Mini and the iMac in the March quarter, and the impact of currency, particularly the yen. And we’re also deferring more revenue on the iOS devices and Mac. And so to summarize, we’re very, very pleased with what we’re seeing from both carriers. We expect to continue to do well, but we’ve got some things that are offsetting it, that we factored into the guidance. Tim Cook : I would add, as a further update, we’ve been selling with China Mobile now for about a week, and last week was the best week for activations we’ve ever had in China. So it’s been an incredible start, and at this moment, we’re just selling in 16 cities with China Mobile, and as Peter alluded to, this number is projected to be over 300 cities by the end of this year. And so we’ve got quite the ramp in front of us, and we’re incredibly excited. This comes after a new high water mark in China for us last quarter. We grew revenues including our retail stores at 31%, and we had some very, very strong sales on iPad. iPads in greater China were up 64% year over year, Macs were up 28%. This compares to a tablet market in China that’s growing at 21% per IDC, and a PC market that is contracting by 7%. And so in addition to the great iPhone news with China Mobile and how we’re looking there, we really turned in a stellar quarter in greater China overall, and we are very proud of it. Bill Shope - Goldman Sachs : Can you comment on your progress so far in getting down the cost curve for the iPhone/iPad? And would you say you’re in line with the types of improvements you’ve seen in cycles prior to the iPhone 5? Tim Cook : You can see that we projected in the guidance, gross margins between 37% and 38%, and that’s despite going from a holiday quarter to a non-holiday quarter, which we lose quite a bit of leverage from doing that. And so one of the primary things that’s going on there is cost. So yeah, we’re happy with how we’re doing. Operator : And next we’ll hear from Shannon Cross with Cross Research. Shannon Cross - Cross Research : Can you talk a bit more about opportunities in the mobile payment market? And maybe talk about what you’re seeing with regard to use of the touch sensor for mobile payments in your iTunes store, and then how you sort of think about this as an opportunity, whether over time it’s revenue or margin? Tim Cook : Let me sort of avoid the last part of your question, but in general, we’re seeing that people love being able to buy content, whether it’s music or movies or books, from their iPhone, using Touch ID. It’s incredibly simple and easy and elegant, and it’s clear that there’s a lot of opportunity there. The mobile payments area in general is one that we’ve been intrigued with, and that was one of the thoughts behind Touch ID. But we’re not limiting ourselves just to that. So I don’t have anything specific to announce today, but you can tell by looking at the demographics of our customers and the amount of commerce that goes through iOS devices versus the competition that it’s a big opportunity on the platform. Operator : And we’ll hear from Toni Sacconaghi with Sanford Bernstein. Toni Sacconaghi - Sanford Bernstein : I have one for Tim, and then a follow up, please. Tim, I wanted to just step back and talk a little bit about iPhone market share. The market data isn’t out for Q1, but if we look at your prior four quarters, fiscal ’13, Apple grew its iPhone units about 20%. The market grew in the 40s. I think this quarter, even with a new product and having China front loaded, the iPhone is going to grow at a fraction of ultimately what the market is likely to grow at. And I know your belief and philosophy historically has been that you want to make the best product, and that’s the most important thing, but in Macs, you’ve actually succeeded in making the best product and being able to gain share. You cited again how you’ve gained share in 30 out of the last 31 quarters in Mac. But in iPhone, that is not happening. And so my question is, what is different about the smartphone market that is not allowing you to hold or gain unit share despite apparently having the best product, and do you propose to do anything differently going forward, because I think it’s great to have an aspiration to make the best products, but I think that’s in the spirit of ultimately growing at least in line with or faster than the market. And that doesn’t appear to be happening. Tim Cook : As I’ve said before, our objective has always been to make the best, not the most. And we feel we’re doing that. If you look at what we did this year, we announced two iPhones for the first time, rather than one. And looking at last quarter, if you looked at our sell through - so not sell in, but the sell through - of what I’ll just call our entry phone, or mid phone, and our top phone, with the 5S, all of those grew year over year versus the phones that were in those categories previously. If you look at the emerging markets, which is one of the things that I’ve alluded to that we have to grow in these areas and grow at reasonable amounts, in Latin America we grew at 76% year over year. In the Middle East and Africa, we grew at 65%. In central and eastern Europe, we grew 115%. In China, we grew at 20%. However, as you know, we just added China Mobile, the largest carrier there, in this quarter, and did not have channel load in China Mobile last quarter. We just started selling those in January. Also, in Japan, as we’ve added Docomo, iPhone units were up 40%. Now, when you translate that performance into revenue in Japan, and we have the issue with the yen that Peter spoke about earlier, and so the revenue growth looks much less than that, because of the strength of the dollar there. In North America, we did not do as well, and this weighed our results. Our North American business contracted somewhat year over year. And if you look at the reason for this, one was that as we entered the quarter, and forecasted our iPhone sales, where we achieved what we thought, we actually sold more iPhone 5Ss than we projected. And so the mix was stronger to the 5S, and it took us some amount of time in order to build the mix that customers were demanding. And as a result, we lost some sort of units for part of the quarter in North America and relative to the world, it took us the bulk of the quarter, almost all the quarter, to get the iPhone 5S into proper supply. The other thing that happened in North America specifically was that some carriers changed their upgrade policies. And this affected last quarter, and will have some effect on the current quarter. This restricted customers who are used to upgrading earlier than the 24 months that they’re allowed and sort of stretched the time out to be a hard and fast 24 months. And so that’s a major factor playing into the North American results. So as I back up and sort of zoom out on this, and look at it, one of the most important things for us in the iPhone business was to do really well in emerging markets, and we had the best quarter ever from that respect. Another was to grow in China, because I think you can’t be in the business that we’re in and not have a reasonable China business. And you can see how we did last quarter, and we’ve now followed that up with a deal with China Mobile. And so I feel great about that. I think part of what’s happening in North America is a short term effect because of these upgrade policy changes. This affects the period of time, three to six months, I would think, and then it washes through. So as I look at it, I feel very good about where we are, and I would guess that the market numbers, some of the stuff that you’ve been seeing, will actually be decreased as the revisions come out, given what you’re hearing and what everyone is saying. Toni Sacconaghi - Sanford Bernstein : I’d like to follow that up, just on your comments on China. You’ve characterized the agreement with China Mobile as huge. Could you tell me what would define success for you in China Mobile one and three years out? What ultimately should we be looking at to measure and ultimately determine whether this was huge? Tim Cook : I’m not going to give you a forecast for it. I think if you just back up and look at it from a common sense point of view, China Mobile has more subscribers than anyone in the world. They have three quarters of a billion, and so I do see it as a watershed moment for Apple, and have a very strong belief in the ability of those two companies to do great things together. Operator : Ben Reitzes with Barclays. Ben Reitzes - Barclays: My question is for Tim. You’re at the midpoint of your guidance. It obviously implies a decline in revenue in the quarter coming up, and you haven’t done that forever. You came pretty close a couple of quarters ago, but you had some growth. And my question is, are you still a growth company? And should we expect the growth rate to accelerate as we go throughout the year? And why, if that’s the case? Tim Cook : I think it’s important to listen to what Peter said about the guidance, and about the compares year over year, and the point that he made that the underlying sell through, that we’re very confident of growth year over year. And that is the way we look at it. Some people just look at the numbers on a piece of paper, but the way I’d look at the business is our business from a sell through point of view less iPod, because I think all of us have known for some time that iPod is a declining business. And when you do that, the numbers from last quarter, and the deferral, which we’ve just increased, as Peter went through, when you look at that, and look at the numbers from last quarter, it comes up to a double digit growth. And we’re proud of that. I think that’s a pretty good result. We’ll see how we do in the March quarter, but I do think it’s important in the March quarter to take into consideration sell through versus just a view of sell in. Ben Reitzes - Barclays : And I guess there’s been a lot of things in the media about your potential to buy back more stock, and shares are around $500 tonight. I was wondering if you thought this was a good level, and whether it was time to accelerate the buyback from current levels. You obviously generated a ton of cash in the quarter, and what are your latest thoughts there? Tim Cook : We’ve been buying back stock. As you know, last year we increased the program overall, our cash return, doubling it to $100 billion. And $60 billion of that is buyback, and we’ve been progressing on that. Luca can give you the precise numbers of it. So we’re a big believer in buying back the stock, and that doesn’t change today, whether the stock goes up or down. Operator : From UBS, we’ll go to Steve Milunovich. Steve Milunovich - UBS: : Could you talk a bit more about the gross margin? It did provide an upside surprise to your guidance in the quarter. What were the factors? And then looking forward, what are some of the gives and takes for the March quarter? Luca Maestri : Let me answer that one. Let me start with the quarter. We were above the guidance range. It was primarily for two factors. We had favorable product mix, and we had favorable commodity pricing. And so those were the two things that actually helped us come in above the guidance range. For the quarter, for Q2, we’re guiding 37% to 38%, compared to 37.9% in the December quarter. We’re going to have some loss of leverage, as you can imagine, because of the usual seasonal decline in revenue. But we expect that loss of leverage to be largely offset by cost improvements and also by less deferred revenue that we’re going to have in Q2. Steve Milunovich - UBS : And then regarding overall demand, one thing you didn’t mention, Tim, is maturity of the particularly high end smartphone market. I know in our surveys we’re finding, relative to a year ago, a lot higher percentage or Apple buyers already have an Apple handset. So I’m curious if you think the Western world can show decent unit growth over the next year or two. And I was also wondering, the 5C generally is viewed as having turned out to be pretty light in the mix. What are you going to do with that product going forward? Tim Cook : Well, I’ll sidestep the last question, of course, because it’s about future products. But to your question about the 5S in particular, if I look at the sell through year over year, there was growth in that portion of the line, despite adding an entirely new phone underneath it. And so I think that’s a good sign, and that’s despite it being in short supply for the bulk or virtually all of the quarter. And so I do believe that that category of product can grow in those markets, if you’re thinking about the U.S. and western Europe, for example, and Japan. In Japan, we grew 40% last quarter. That’s fairly good. Operator : Brian Marshall with ISI Group. Brian Marshall - ISI Group : Obviously the iPhone business grew about 7% year over year, $200 million in [unintelligible] unit sales now. And that’s with two new [unintelligible] being launched in the quarter. Can you help us think about how you guys view the iPhone new user growth out there in the marketplace versus simply a solid replacement cycle that the company has in its installed base? Tim Cook : We saw a significant new to iPhone number. It’s not a number that we throw out, but we particularly saw that on the 5C, which is what we wanted to see. So it’s clearly not just upgraders. As a matter of fact, the upgraders, particularly in North America, would have been less than we thought, because of the changes in the upgrade policy that I talked about earlier. Brian Marshall - ISI Group : And then with respect to innovation at the company, obviously iPhone came out in 2007, iPad came out in 2010. 2013 came around, we’ve got some new products, obviously, but nothing really from our new product category. Do you care to comment on the innovation cycle of the company and the cadence there? Tim Cook : It’s never been stronger. I’m very confident with the work that’s going on, and I think our customers are going to love what we’re going to do. Operator : We’ll go to Keith Bachman with Bank of Montreal. Keith Bachman - BMO Capital Markets : I had a question and a follow up. And Tim, for you, the first one, to follow up from Brian’s question, you’re growing iPhones about 7%. I think the market is going to end up looking up to be 14%. Are you happy with the pricing umbrella that you currently have? When you originally brought out iPhones, in subsequent periods you talked about wanting to push some pricing umbrellas. But are you happy with the pricing umbrellas that you have? In particular, as you think about the 5C, I think most of the industry views have panned the product as not being enough features for that price point. But if you could just talk about the positioning of your broader product portfolio on iPhones. Are you happy where you are? Tim Cook : I think last quarter we did a tremendous job, particularly given the mix was something very different than we thought. It was the first time we’d ever run that particular play before, and demand percentage turned out to be different than we thought. We obviously always look at our results, and conclude what to change moving forward. And if we decide it’s in our best interest to make a change, then we’ll make one. Obviously I’m not going to predict price changes on the earnings call. Keith Bachman - BMO Capital Markets : Sorry, not price changes, but at least product position. Are you willing to expand the product portfolio into new categories within the phone family? Tim Cook : We’re willing to make any product that’s a great product. Where our line in the sand is, it’s making something that’s not fantastic. Keith Bachman - BMO Capital Markets : Okay. Then my follow up for you Peter is, you mentioned four factors that influenced guidance. In particular, you talked about inventory. I think most investors would conclude then December wasn’t as good as it looked, if you had increases in channel inventory. So I was hoping you could peel off a little bit and talk about the foreign exchange impact and the higher deferrals. Is there a way to quantify that impact on the guidance in March in particular? Peter Oppenheimer : : Operator : From Pacific Crest Securities, we’ll go to Andy Hargreaves. Andy Hargreaves - Pacific Crest Securities : Just a quick follow up to some of your comments about demand mix being significantly different, or different than what you thought, in the quarter. Do you have any thoughts on why it was so much different than what you expected it to be? Tim Cook : I think the 5S, people are really intrigued with Touch ID. It’s a major feature that has excited people. And I think that, associated with the other things that are unique to the 5S, got the 5S to have a significant amount more attention and a higher mix of sales. Andy Hargreaves - Pacific Crest Securities : : Tim Cook : What Luca is saying is that we’re working on things that are things that you see that we’re shipping today but that we’re working on things that you can’t see today. Operator : The next question will come from Mark Moskowitz with JPMorgan. Mark Moskowitz - JPMorgan: What’s your user data kind of telling you right now in terms of the replacement cycle? Are you starting to see a lot of heritage Apple users now refresh their iPhone every three years plus, or their iPad every two years plus, versus previous? Are you seeing any major changes there? Tim Cook : We don’t have great data yet from last quarter. And so I don’t know the answer to your question. Mark Moskowitz - JPMorgan : And then the follow up is around this opex being flat relative to the revenue guidance. Is there something around the vertical in terms of maybe increasing focus on the enterprise vertical that you see an opportunity to take advantage of, maybe hiring more folks to service that industry? Tim Cook : It’s clear that the enterprise area has huge potential, and we’re doing well from a percentage of companies that are using iPhone and iPad. It’s up to unbelievable numbers. The iPhone is used in 97% of the Fortune 500, and 91% of the Global 500, and iPad is used in 98% of the Fortune 500 and 93% of the Global 500. And we have a number of accounts, some of which Peter reviewed in the opening remarks, that have tens of thousands of iOS devices working. And also, as I think was mentioned earlier, 90% of tablet activations in corporations are iPads. And 95% of total app activations were on iOS. And I think that’s an incredible measure of ultimately how sticky the products are, because you can get so much productivity out of an iPad and an iPhone. And so I think the road in enterprise is a longer one. The arc is longer than in consumer, which can immediately go out and buy things, etc. And I think we’ve done a lot of the groundwork as you can tell from these numbers that I’ve given you, and I would expect that it would have more and more payback in the future. Operator : And the next question will come from Gene Munster with Piper Jaffray. Gene Munster - Piper Jaffray : Just a follow up to some of the previous questions. Tim, I’ve got to ask it. In the previous quarters, you’ve talked about specifically product categories multiple, and that’s different than variations of existing products. And that would be by the end of 2014. I just want to be clear that’s still on track, and consistent with some of the expenses that we talked about earlier in the call? Tim Cook : Yes, absolutely. No change. Gene Munster - Piper Jaffray : And then second, and this goes back to some of the other themes on the call here too, but you’re obviously going to have a big year in terms of new product categories. And maybe even thinking beyond 2014, when the new products come out and they kind of ramp in 2015, how do you think about the trajectory of the platform, or what would you say to investors to say this is just a product cycle story? Tim Cook : I would just say, innovation is deeply embedded in everybody here, and there’s still so much of the world that is full of very complex products, etc. We have zero issue coming up with things we want to do that we think we can disrupt in a major way. The challenge is always to focus to the very few that deserve all of our energy. And we’ve always done that, and we’re continuing to do that. Nancy Paxton : A replay of today’s call will be available for two weeks as a podcast on the iTunes store, as a webcast on Apple.com/investor, and via telephone. And the numbers for the telephone replay are 888-203-1112 or 719-457-0820. And please enter confirmation code 9268358. These replays will be available by approximately 5 p.m. Pacific time today. And members of the press with additional questions can contact Steve Dowling at 408-974-1896, and financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570, and I’m at 408-974-5420. Thanks again for joining us.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,014	2	2014Q2	2014Q2	2014-04-23	1.504	1.54	1.636	1.685	null	12.34	13.68	Executives: Nancy Paxton –Senior Director-Investor Relations Timothy D. Cook – Chief Executive Officer Luca Maestri – Vice President of Finance and Corporate Controller Analysts : Katy Huberty – Morgan Stanley & Co. LLC Bill C. Shope – Goldman Sachs & Co. Toni Sacconaghi – Sanford Bernstein Steven M. Milunovich – UBS Securities LLC Shannon S. Cross – Cross Research LLC Gene Munster – Piper Jaffray Operator : Good day, everyone, and welcome to the Apple Incorporated Second Quarter Fiscal Year 2014 Earnings Release Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma’am. Nancy Paxton : Thank you. Good afternoon, and thanks to everyone for joining us today. Speaking first today are Apple CEO, Tim Cook, and Vice President and Corporate Controller, Luca Maestri, and they will be joined by CFO, Peter Oppenheimer for the Q&A session with the analysts. Please note that some of the information you’ll hear during our discussion today will consists of forward-looking statements, including without limitation, those regarding revenue, gross margins, operating expenses, other income and expense, stock-based compensation expense, taxes, future products and capital allocation plans. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s Form 10-K for 2013, the Form 10-Q for the first quarter of fiscal 2014, and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I’d now like to turn the call over to Tim for introductory remarks. Timothy D. Cook: Thanks, Nancy. Good afternoon, everyone. We have a lot to share with you over the next hour, and I’d like to start right away with the very strong results we’re reporting for the March quarter. We generated $45.6 billion in revenue, which was ahead of our expectations and represents a new March quarter record, and is our strongest non-holiday quarter ever. Our underlying business performance was even stronger than our reported results imply. When you take into account changes in channel inventory this year versus last year and foreign exchange had wins that we faced in several of our international markets. Setting foreign exchange and inventory changes aside, our underlying growth rate would have been close to double digits. These strong revenue results combined with our best gross margin percentage since September of 2012 resulted in earnings per share growth of 15%, which is our highest earnings growth rate in the last six quarters. iPhone was key in driving our stronger-than-expected results. We sold almost 44 million iPhones, setting a new March quarter record. These stronger results were broad-based both from a product point of view with demand for each of our three iPhone stronger than its predecessor and from a geographic standpoint. We gained smartphone share in many developed and emerging markets including the U.S., the UK, Japan, Canada, Germany, France, Vietnam and Greater China, just to mention a few. In fact, we established a new all-time record for total iPhone sales in the BRIC countries. iTunes software and services revenue continue to grow at a double-digit rate, thanks to an incredible ecosystem and our very large, loyal and engaged customer base. With its strong momentum in growing profitability, iTunes is a very important driver of our business not only here in the United States, but around the world. We now have an almost 800 million iTunes accounts, most of these with credit cards. This is a staggering number. We continue to gain share in the personal computer market as well. We defied industry trends again by growing while the market contracted. Our bold decision to make OS X free has resulted in the largest ever percentage of the Mac installed base running on the latest version of the operating system just months after its release. iPad sales came in at the high end of our expectations, but we realized they were below analyst estimates, and I would like to proactively address, why we think there was a difference. We believe almost all of the difference can be explained by two factors. First, in the March quarter last year, we significantly increased iPad channel inventory, while this year we significantly reduced it. Luca will go into more detail about this later. Second, we ended the December quarter last year with a substantial backlog with iPad mini that was subsequently shipped in the March quarter, whereas we ended the December quarter this year near supply demand balance. We continue to believe that the tablet market will surpass the PC market in size within the next few years and we believe that Apple will be a major beneficiary of this trend. When we look at our company performance on a geographic basis, we’re especially proud of our very strong results in Greater China, where we established an all time quarterly revenue record of almost $10 billion including the results from our retail stores. And in Japan, where revenue was up 26% in spite of the foreign exchange headwinds and where our smartphone market share reached an incredible 55%. We are continuing to invest in our retail stores and since our last call, we had opened our first stores in Brazil and Turkey and we now have retail stores in 15 countries around the world. I’m looking forward to welcoming our new retail and online leader, Angela Ahrendts, who will be joining Apple’s Executive Team next week. Stepping back, we are now just passed the halfway mark for fiscal 2014. Our strong March quarter results bring us to total revenues of over $103 billion for the first six months of the year and earnings per share growth close to double-digits. We estimate that over the last six months, we’ve added over $60 million new registered users of our four product categories. Additionally, over two-third’s of people registering an iPad in the last six months, were new to iPad, while over half of the people registering iPhones were new to iPhone. It is wonderful to add tens of millions of first time Apple product users, especially considering the strong halo effect, we’ve seen over and over again in our history. Customers who have a great experience with their first Apple products, often become loyal and happy owners of the multiple Apple products overtime. As always, I’d like to thank our talented employees who make these results possible through their creativity and passion they bring to their work everyday. And I’d like to thank our hundreds of millions of customers for their loyalty and enthusiasm and for continually inspiring us to surprise and delight them. In addition to our quarterly results, we are also announcing an update to our capital return program today, and I’d like to share a few thoughts about our guiding principles for capital allocation and our conclusion on the changes we are making for this year. Apple has created tremendous value for shareholders by developing great products that enrich people’s lives and that will always be our top priority and driving force. We’ll continue to innovate by investing in research and development and capitalizing on our strengths in hardware, software and services. We’ll keep investing in our supply chains promote scale and efficiencies, expanding our global presence by building retail stores, investing in marketing and distribution and extending our reach into new markets. We are expanding Apple’s products and services into new categories and we are not going to under invest in this business. We are also investing through acquisitions and we’ve acquired 24 companies in the past 18 months. To invest organically and to make acquisition strategically, we need to maintain financial flexibility. With this framework in mind, Apple’s Board and management team, will do capital allocation regularly and we solicit input on our program from a broad base of shareholders. We very much appreciate all of the input that so many of our shareholders have provided us on how the best to deploy our cash. We’ve continued to seek investor input going forward and we’ll update you on our conclusions around this time each year. This regular process allows us to continually evaluate return of capital in light of the most current information available and it enables us to be thoughtful about the size, mix and pace of the program. We continue to be in the fortunate position of being able to return significant capital to shareholders. We started doing so two years ago when we announced our first program of $45 billion and we more than doubled the program last April to $100 billion. Today, we are announcing that we are increasing the size of our program once again with an addition of over $30 billion for a total program size of over $130 billion. The size and pace of our program is unprecedented and we still expect to complete it by December of 2015 as we announced last year. We think very deliberately about how much and in which way to return cash to our shareholders. We decided to continue to allocate the vast majority of the incremental capital return to share repurchases because we believe our current stock price does not reflect the full value of the company. The size of the share back increases the signal of the Board and the management team’s strong confidence in the future of Apple. We also understand the importance of the dividend to many of our investors and we are increasing it for the second time in less than two years. We believe this is a meaningful increase for those shareholders who value income and we are planning for annual dividend increases going forward. Now, I would like to turn the call over to Luca for the details of our quarterly results as well as more information about our capital return program. Luca Maestri : Thank you Tim and good afternoon everyone. As Tim said revenue for the March quarter was $45.6 billion, up $2 billion or 5% from a year ago and above our guidance range. Sales in each of our major product categories were at the high end of our expectations or better and the vast majority of the revenue upside came from strong sales of iPhone. Gross margin was 39.3%, also above our guidance range and operating margin was $15.6 billion, representing 29.8% of revenue. Net income was $10.2 billion translating to diluted earnings per share of $11.62. For details by product, I’d like to start with iPhone. We sold 43.7 million iPhones which was a March quarter record. That’s an increase of 6.3 million iPhones over last year that represents 17% growth. The addition of China Mobile coupled with great response to our more affordably priced iPhone 4S led to an all time quarterly record for iPhone sales in Greater China. We look forward to broadening our relationship with China Mobile as they expand points of sale and continue to build out their 4G network. In Japan, iPhone sales were up over 50% year-over-year resulting in significant market share gains, as Tim mentioned we’ll try strong growth and share gains in many other major developed markets based on IDCs latest estimates for the March quarter. iPhone also continued to perform exceptionally well in many developing markets. In Greater China, Brazil, Indonesia, Poland and Turkey. iPhone sales grew by strong double-digits year-over-year, and in India and Vietnam sales more than doubled. We exited the quarter with 15.4 million total iPhones in channel inventory, which represents a sequential increase of about 100,000 from the December quarter and left us within our target range of four to six weeks. In the enterprise market progressive organizations are leading the charge to replace legacy devices and systems, and are using iPhone and iOS to drive innovation at their companies. Deutsche Bank has nearly 20,000 iPhones running on its network and has created 40 internal apps that extend the capabilities of its mobile workforce. Siemens have 30,000 iPhones on its network and has deployed over 50 internal apps for field service teams, sales associates and corporate executives for solution that are only possible with iOS and iPhone. We are really happy with the continued growth and strength of the Apple ecosystem. Total revenue from iTunes software and services was $4.6 billion, an increase of 11% year-over-year at an all time quarterly record. Our iTunes stores generated record billings of $5.2 billion in the March quarter, up 24% year-over-year driven by very strong growth in App Store sales. These iTunes billings translated to quarterly iTunes revenue of over $2.6 billion, up 9% from the year ago quarter, and also a new all-time record. Software and services revenue was over $1.9 billion, up 14% from a year ago. App Store momentum is incredibly strong as cumulative app downloads at 70 billion, 87% of iOS devices are now running iOS 7 and our highly engaged users are a great audience for developers. According to App Annie, the App Store generated 85% more global revenue than Google Play in the March quarter despite the differences in unit market share between iOS and Android devices. Now, I’d like to talk about the Mac. We saw 4.1 million Macs compared to just under 4 million in the year ago quarter. Thanks to strong performance from MacBook Pro and MacBook Air and Macs have now gained global market share for 31 of the last 32 quarters. Response to Mavericks has been great, and we are very proud of the fact that so many of our Mac customers are taking advantage of the most advanced and secured experience possible. We ended the quarter with Mac channel inventory slightly below our four to five week target range. Turning to iPad, we saw 16.4 million units. As Tim explained earlier, our iPad results and the comparison to the March quarter last year were heavily influenced by channel inventory changes. Specifically, this year we saw 16.4 million iPads into our channels and sold through almost 17.5 million reducing our channel inventory by 1.1 million units. Last year we sold over 19.4 million iPads into our channels and sold through 18 million and therefore increased channel inventory by 1.4 million units. As a result, the year-over-year sell through decline was only 3% compared to the sell in decline of 16%. We exit the March quarter with 5.1 million units of iPad channel inventory, which left us within our target range of four to six weeks. iPad continues to lead all other tablets by far in terms of user engagement, size of ecosystem, customer satisfaction and e-commerce. A recent study by Chitika Insights found that iPad users in North America generate almost four times the web traffic of all Android tablet users combined. In a February survey, ChangeWave measured a 98% customer satisfaction rate for both iPad Air and iPad Mini with Retina display. And also found that among people planning to purchase a tablet within 90 days two-thirds plan to buy an iPad. iPad continues to allow companies around the world to reimagine the way they use technology to drive efficiency and improve employee satisfaction. Thousands of iPads are used at FedEx everyday. In an industry where efficiency is critical FedEx pilots and maintenance crews around the world use iPad to transform operational processes and save the company millions of dollars. Eli Lilly has deployed over 20,000 iPads and 50 internal apps as part of a laptop replacement program that dramatically increased the productivity and capabilities of its employees. The U.S. Department of Veterans Affairs is on its way to deploying iPads to 11,000 providers to transform the way doctors and patients interact. As part of this initiative, a suite of applications is being developed to allow quick access to real-time secure medical information. In education, according to the latest data published by IDC, iPad has over 95% share of the U.S. education tablet market as teachers and students increasingly benefit from the growing range of engaging iBooks, textbooks and solutions that are helping to transform the education experience. Let me now turn to our cash position. We ended the quarter with $150.6 billion in cash plus marketable securities, a sequential decline of $8.3 billion. Our domestic cash was $18.4 billion at the end of the March quarter, a sequential decline of $16 billion and $132.2 billion or 88% of our total cash was offshore. Cash flow from operations was very strong at $13.5 billion for the quarter. In total, we executed almost $21 billion worth of capital return activities during the March quarter. First, we launched our third accelerated share repurchase program in late January through which we will acquire an additional $12 billion of Apple stock. We received an initial delivery of 19.2 million shares under this ASR and we received a balance of shares due when the program concludes by December of this year. Second, we paid $2.7 billion in dividends in February. And finally, we spent $6 billion on open market purchases of 11.4 million shares throughout the March quarter. At the end of March, we also settled our second ASR program, which was launched in April of last year, resulting in the retirement of an additional 1.1 million shares. I would like now to go into more detail about the expansion of our capital return program that we’re announcing today. Let me start by summarizing the progress that we’ve made on the program we updated a year ago. By the end of March 2014, we’ve already taken action of $46 billion of the current $60 billion share repurchase authorization, over 75% of the program with seven quarters remaining to its completion. We have acted aggressively and opportunistically and have delivered on our intention to return capital to shareholders at a fast pace. Including dividends and net-share-settlements, we’ve taken action on $66 billion of total $100 billion program announced last year. Today we’ve taken additional steps that will increase the overall size of the program from $100 billion to over $130 billion within the same timeframe of December 2015 as before. There are two elements to the expansion of the program. First, we’re increasing the size of our share repurchase authorization from $60 billion to $90 billion. We are very confident in Apple’s future, and we believe our current stock price does not reflect the full value of the Company. That’s why the vast majority of our capital program continues to be allocated to share repurchases. We will also continue to net-share-settle, restricted stock units and expect to utilize about $1 billion of cash annually for that purpose. Second, our Board has declared a dividend of $3.29 per common share payable on May 15, 2014 to shareholders of record as of May 12, 2014. That represents an increase of about 8% in our quarterly dividend. We understand the importance of dividend increases to many of our investors, and we’re increasing the dividend for the second time in less than two years. We are planning for continued annual increases and we’re very proud that Apple is one of the largest dividend payers in the world, with annual payments of $11 billion. All our capital return activities must be funded by domestic cash which as I mentioned was about $18 billion as we exited the March quarter, and down from $39 billion in the quarter that we paid our first dividend. We would maintain sufficient domestic liquidity to grow the business and execute capital expenditures and acquisitions. Thanks to Apple’s strong growth in international expansion in recent years. We have built substantial offshore cash balances to repatriate our fall in cash on the current U.S. tax law, we will incur significant cash tax consequences and we don’t believe this would be in the best interest of our shareholders. We continue to advocate for comprehensive corporate tax reform and streamlining the tax code which we believe would be of great benefit to the U.S. economy. To execute our updated capital return program in a tax efficient manner and leverage our very strong balance sheet, we intend to access the debt markets again. We plan to be active in both the domestic and international bond markets during 2014 for an amount of term debt financing similar to what we issued in 2015, with a break down between markets currencies and tenures to be determined over the course of the year and subject to prevailing conditions in each market. We have also prepared ourselves to access the commercial paper market given the substantial short term liquidity and flexibility that this channel can provide. Now, as we move ahead into the June quarter, I’d like to review our outlook which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $36 billion and $38 billion compared to $35.3 billion in the year ago quarter. We expect gross margins to be between 37% and 38%. We expect OpEx to be between $4.4 billion and $4.5 billion. We are continuing to invest heavily in R&D for current revenue generating categories as well as future products and services. We expect OI&E to be about $200 million and we expect the tax rate to be about 26.1%. And now, I’d like to turn it back to Tim. Timothy D. Cook: : Finally, before we start the Q&A, I would like to take a minute to talk about my dear friend and colleague Peter Oppenheimer. As you know, Peter will be transitioning from the CFO role in June. Peter has been Apple’s CFO for 10 years and the list of his accomplishments is immense. Apple is now more than 20 times the size it was when Peter became our CFO and his expertise, leadership and incredibly hard work had been instrumental to the company’s success. I’d like to thank him very publicly for his contributions to Apple, from the very bottom of my heart and wish him all the best in his approaching retirement at the end of September. And I’d also like to recognize him that he has never missed guidance in the 10 years as CFO which must be an all-time record for CFOs. We’re really happy and fortunate to have someone with Luca’s talent on Board to replace Peter. He has over 25 years of experience, building and leading finance teams in global companies and has an exceptionally broad international background, which you might be able to detect from his accent. He’s been managing most of Apple’s financial functions since coming on Board last year and has done an outstanding job. I’m looking forward to working with Luca even closer as Apple’s next CFO. With that, I’d like to open the call for questions. Nancy Paxton : Thank you, Tim. We’d like to ask that you limit yourself to one question and one follow-up please. Operator, may we have the first question. Operator : (Operator Instructions) Your first question will come from Katy Huberty with Morgan Stanley. Katy Huberty – Morgan Stanley & Co. LLC: Thanks. Congrats on the great quarter. Tim, if I heard you right that $800 million account is a staggering jump from the last time you reported that number and yet iTunes, software and services growth decelerated again this quarter. Can you just talk a little bit about your view on the importance of better monetizing the installed base in the future? And then I have a follow-up. Timothy D. Cook: Keep in mind, in that category there’s several things, not just the App Store kind of revenues and so if you looked at App Store only, it would look a little different than what you’re seeing. But in terms of your question about monetization, I do believe that we can monetize more than we owe from a services point of view in existing areas and in new areas. And I’m particularly encouraged that when I look at the App Store and how it’s doing the strength was broad based. And in fact in China the growth was in the triple digits. Katy Huberty – Morgan Stanley & Co. LLC: Okay. And then question the around iPhone ASPs, just looking at the trend iPhone 5s, demand has surprised to the upside over this cycle. Does that give you any confidence that Apple could actually charge more for highly innovative products in the future or does the strategy remain to add innovation at the same price as previous versions of a product? Timothy D. Cook: We price things that we think – are priced in such a way that we think it’s a fair price for the value that we’re delivering and we make those on each thing as it gets closer time to come to market. Katy Huberty – Morgan Stanley & Co. LLC: Okay. Thank you. Peter, much luck to you. Peter Oppenheimer : Thanks, Katy. Nancy Paxton : Thank you, Katy. Could we have the next question please? Operator : From Goldman Sachs we’ll hear from Bill Shope. Bill C. Shope – Goldman Sachs & Co.: Okay, great. Thanks. Can you walk through the key drivers of the June quarter gross margin guidance off of what was admittedly very sharp upside for the March quarter. Luca Maestri : Sure. Bill, I’ll take that. So March quarter was very good as you said. There were three seasons for it. We had obviously better volume as you’ve seen from our revenue results. We had better cost than anticipated, and we had some favorable mix of both products and services. As we get into Q3, obviously as you’ve seen from our revenue guidance we are expecting some loss of leverage, which would come from the sequential decline in revenue. It’s about 19% at the midpoint of the range, and we’re also expecting less favorable mix. This is something very typical that happens to us as we move farther away from the quarter when we launched the new products. To offset that, it's only going to be a partial offset. We will have some cost improvements. Bill C. Shope – Goldman Sachs & Co.: Then looking at the iPhone upside for the March quarter, obviously, it looks like China was a key driver here, but within the U.S., did you see as much pressure from the changes in U.S. carrier upgrade policy that you had discussed last quarter, and was demand I guess just strong enough to completely counter that? And then is this headwind behind us now, and potentially a tailwind in the U.S. as we head into the June quarter? Timothy D. Cook: We saw some pressure in the quarter because of the stricter enforcement of upgrade policies. So this was primarily in the U.S. as I mentioned last time. But if you really look at iPhone, the strength of iPhone was very broad-based and as I've mentioned, we gained share in a whole host of markets, from developing markets like the U.S., U.K., France, Germany to more of the emerging markets like China, Vietnam, and had the largest total sales of iPhone in the BRIC countries that we've ever seen in our history. And so we feel very good about that the strength was broad-based. Bill C. Shope – Goldman Sachs & Co.: Great thank you. Nancy Paxton : Thanks Bill. Could we have the next question please. Operator : We’ll hear from Toni Sacconaghi with Sanford Bernstein. Toni Sacconaghi – Sanford Bernstein : Yes. Thank you. Peter best wishes going forward. I have one question for Luca and a follow-up for Tim please. Luca, on the iPhone ASPs this quarter, they were down a little over $40. I think that was the largest sequential decline that we've seen in history. I was wondering if you could help us understand what drove that. Was it entirely mix? You mentioned good growth in each of the three models, but were you seeing particularly strong growth in the 4s? I think you mentioned that in China. And how significant if any was selling older generation for iPhone 4? Luca Maestri : Yes, Toni. When you look at the $41 of decline, I would say about half of that was driven by the fact that we have continued to do very well in emerging markets with the 4s. I have mentioned that there is a lot of markets where we've grown very strongly in Latin America, in Asia-Pacific, in Eastern Europe. So, about half of that decline came from the stronger sales of the 4s. And then the rest was primarily the fact that, again as we move away from the quarter where we launched a product, we tend to have lower capacity mix in our numbers. Toni Sacconaghi – Sanford Bernstein : Okay. Tim, I was wondering if you could talk about how you think about replacement cycles generally for the iPhone over the longer term. Clearly U.S. carriers have started introducing plans that may ultimately encourage people to keep their phone longer than two years, because their total price paid is less. And so one could argue and I'd like your opinion on whether you think that could push out replacement cycles. I guess, the other consideration is the imperative for Apple to continue to introduce really great products to want to have people upgrade at the same frequency. And I guess, the dilemma in doing that is as we've seen with the 5 and with the 4 is introducing really great products, typically puts pressure on your BOM and pressures margin. So perhaps you could just tell us how you think conceptually about where you think replacement cycles go over time and why? And then secondly, how do you address this dilemma of well in order to make a great phone it typically costs more to do so and managing their potential margin pressure. Timothy D. Cook: There is a lot there, let me see if I can address it quickly and I want to just add one thing to the point that you asked Luca. Just to be clear on the iPhone 4 question, we sold a very, very low single-digit percentage of those and so it had extremely minimal impact of results on the quarter. In terms of the general upgrade or the installed base, some of the programs that the carriers are running may serve to increase the upgrade cycle because there are some areas where customers can pay a bit more in the beginning and have the ability to essentially upgrade each year. So I think there is some that work that way. I think there is some that work the way that more of the way that you're leaning, and how these balanced are very difficult currently to conclude. But regardless of how those balance, what I see as the bigger opportunity for Apple is that the smartphone market is still only 1 billion or so units and it will eventually take over the entire mobile phone market. We've seen our ability to attract new users to iPhone to be very significant in the emerging markets. We were seeing new to iPhone numbers on the iPhone 4s sales in the 80 percentages in certain large geos. So, this to us give us a great comfort that we can continue to grow and we may not be able to attract some of those buyers to our top phone because of the price point. But if we can get them in on the entry iPhone, it gives them a great product, at a great value and gets them into the ecosystem. And as you know from following us for a while, our ability to keep customers is very good and our ability to show other products that Apple produces to a family that's buying Apple product is also very good. And so, at the macro level, I see the opportunity of the market and getting more people into the Apple ecosystem much larger than any of the noise around the different carrier plans, some of which I think helped, and some of which I think worked the opposite way and it's completely unclear to me how those net. It's probably also important to know that the bulk of the things you're seeing in the U.S. are not occurring in many of the other geos in terms of the upgrade policies and so forth. I mean, each country has its own kind of cadence associated with this, and the U.S. is – it’s in the 30% of our business, not 100%. So it’s important to weigh it with a proper perspective. Toni Sacconaghi – Sanford Bernstein : Okay. And any comments on the latter part of that around, sort of the imperative to continue to come out with really great products that ensure people have an incentive to upgrade, yet when we’ve seen you really revolutionize phones between iterations we’ve seen margin pressure? Timothy D. Cook: The most important thing, Toni, that we do is to make great products that really get our users excited to want the next one and that will always be the case. And you can bet that that’s where the vast majority of all of our attention is on doing this thing. In terms of the BOM pressure of any new product, you have seen in the past that exists. I think you’ve also seen that we have a way of working down the cost curve. That was certainly very key in achieving the 39.3% gross margin from this past quarter. And as I said before, we price things at a level that is fair for the value that we are providing, and so we’re certainly not stuck on certain price points. We price that values that are fair for the value that we are delivering. Toni Sacconaghi – Sanford Bernstein : Thank you. Nancy Paxton : Thank you, Tony. Could we have the next question please? Operator : And from UBS we’ll hear from Steve Milunovich. Steven M. Milunovich – UBS Securities LLC : Thank you. Tim, I understand that the iPad is not as weak as it appears on a sell-through basis, but still it’s relatively flat over the last year in terms of sell-through. What are your thoughts in terms of why that is and can that accelerate with Office on the iPad going forward? Timothy D. Cook: It’s a good question. Let’s talk about iPad a little more than we did in the comments. When I backup from iPad, here’s what I see. It absolutely has been the fastest growing product in Apple’s history and it’s been the only product that we’ve ever made that was instantly a hit in three of our key markets, from consumer to business including the enterprise and education. And so, if you really look at it in just four years after we launched the very first iPad, we’ve sold over 210 million, which is more than we or I think anyone thought was possible at that period of time. And it’s interesting to note that that’s almost twice as many iPhones that we’ve sold in a comparable period of time, and over seven times as many iPods as we’ve sold in the period of time. So, I think it’s important to kind of to put that in perspective. We’ve come a long way very, very quickly. Looking at it by market a bit, which I think is important. I think Luca mentioned a little bit of this in his comments. In the education market in the U.S., we have a 95% share. And so the focus in education is on penetration, is on getting more schools to buy and my belief is the match has been lit, and it’s very clear to the educators that have studied this is that student achievement is higher with iPad in the classroom than without it. And so I’m confident we’ve got a really great start in education far beyond the U.S. now. This is happening in many, many parts of the world. In the enterprise market, we’re seeing virtually all, 98% of the Fortune 500 that using iPad. And we’re seeing, according to Good Technology who looks at activations of tablets, the latest data we have from them is that 91% of the activation of tablets in enterprise were iPads. And so this is also an astonishing number and many of those enterprises are writing apps that are key proprietary apps for running that business, and this is great for that company because they’re more productive as a result of that. And so once again, just like in education in a way, what we have to do in enterprise is focus on penetration. It has to be deeper and broader. But in terms of having people begin the process, beginning writing apps, we’re doing a pretty good job of that. In the retail market, if you look at the U.S. as a proxy, the NPD numbers for March just came out a few days ago and we had 46% share and embedded in that 46%, there’s a lot of things in there that I personally wouldn’t put in the same category as iPad and that are weighing the share down. It’s certainly a market we wouldn’t play in and a type of product you would never see an Apple brand on. So we feel like we’re doing well there. Office, I believe does help. It’s very unclear to say how much. I believe if it would have been done earlier, it would have been even better for Microsoft frankly. There is a lots of alternatives out there from a productivity point of view, some of which we brought to the market, some of which many, many innovative companies have brought. But I do see that Office is still a very key franchise in the enterprise, in particular. And I think having it on iPad is good, and I wholeheartedly welcome Microsoft to the App Store to sell Office. Our customers are clearly responding in a good way that it’s available. So, I do think it helps us particularly in the enterprise area. The other things you look at on iPad that are just blow away as customer sat is 98. There is almost nothing in the world with a 98% customer sat and the intention to buy numbers look good with two-thirds of the people planning to buy a tablet or planning to buy an iPad. The usage numbers are off the chart, far and exceeding Android tablets, four times the web traffic of all Android tablets combined. And so, when I backup from all of these, I feel great. That doesn’t mean that every quarter, every 90 days is going to be a number that everybody is thrilled with. But what it means to me is that the trend over the arc of time that things look very, very good, that iPad has a great future. And of course the thing that drives us more than any of this are the next iPads if you will, the things that are in the pipeline, the things that we can do to make the product even better and there is no shortage of work going in on that nor any shortage of ideas. And so when I backup from all of this, I can’t help but still be extremely excited about where we are. I think we did a reasonable job of explaining what we think the disconnect was between what we had expected, which we hit it at the high end of our expectation and the street's view of this one. I believe the vast majority of it is that first thing was just channel inventory that maybe we should have been even clearer on last quarter to take into account. But I'm very bullish on iPad. Steven M. Milunovich – UBS Securities LLC : Okay, very complete thank you. One other question, when you look at Google and Amazon and Facebook, they've very much diversified their business over time in a way that one has rarely seen. Apple, sort of the opposite. People say you ought to buy this or that and you'll do acquisitions, but you're obviously very focused. Is that because it's just a management philosophy of wanting to be more focused than some of these other companies? Or is there something about Apple's products that particularly being more hardware oriented that kind of prevents you from saying, yes, let's go make TV shows or let's go often do something else, even though you probably have the money and the technical capability to do all these things? Timothy D. Cook: The key thing for us, Steve, is to stay focused on things that we can do best and that we can perform at a really high-level of quality that our customers have come to expect. And so we currently feel comfortable in expanding the number of things we're working on. So we've been doing that in the background and we're not ready yet to pull the string on the curtain. But we've got some great things there. We're working on them. Very, very proud of and very, very excited about. But for us, we care about every detail and when you care about every detail and getting it right, it takes a bit longer to do that and that's always been the case, that's not something that just occur. As you probably know from following us for a long time, we didn't ship the first MP3 player, nor the first smartphone, nor the first tablet. In fact, there were tablets being shipped a decade or so before then, but arguably, we shipped the first successful modern tablet and the first successful modern smartphone and the first successful modern MP3 player. And so it means much more to us to get it right than to be first. I think you can see so many examples out in the marketplace, where it's clear that the objective has been to be first. But customers at the end of the day don't care about that. That's not what they look for from Apple. They want great, insanely great and that's what we want to deliver, and so that's the way we look at it. From an acquisition point of view, we have done 24 in 18 months. That shows that we're on the prowl, I suppose you could say. We look for companies that have great people and great technology and that fit culturally. And we don't have a rule that says we can't spend a lot or whatever. We'll spend what we think is a fair price. What's important to us is that strategically it makes sense and that it winds up adding value to our shareholders over the long haul. We are not in a race to spend the most or acquire the most. We're in a race to make the worlds' best product that really enrich people's lives. So, to the tune that acquisitions can help us do that and they've done that and continue to do that, then we will acquire it. And so you can bet that you will continue to see acquisitions and some of which we'll try to keep quiet and some of which seems to be impossible to keep quiet. Nancy Paxton : Thank you, Steve. Could we have the next question please? Operator : From Cross Research, we’ll hear from Shannon Cross. Shannon S. Cross – Cross Research LLC : Thank you. First I just want to tell Peter, thank you very much, we've really enjoyed working with you over the past 10 years. But then secondly, in terms of a question for Tim, can you talk a bit about the competitive landscape for smartphone? If you look at some of your competitors seem to be have cut prices fairly quickly in the most recent product cycle, perhaps faster than before. You've got Microsoft about to close on Nokia. Lenovo is buying Motorola, there is a lot going on from a sort of competitive standpoint. So I'm curious as to how you're seeing the market? Timothy D. Cook: Yes, there is a lot of moving parts, a lot of acquisitions, a lot of people giving up to some degree and deciding to do other things. But at the end of the day we see it much like we've always seen it, as the part of the market that we're interested in is the market of people that really want the best smartphone and that doesn't mean that they're all at the high end of the price stand. I mean, we have smartphones that go down to a very affordable price with the 4S because we're proud to ship that product. I think that this quarter, if you were unsure, hopefully this quarter demonstrates to you that we can do well in a number of geographies from emerging markets to develop markets. Some of the numbers that we've experienced just to quote some of the more historic prepaid market through the first half of 2014; Brazil was up 61%, Russia was up 97%, Turkey was up 56%, India was up 55%, Vietnam was up 262%. I could go on, but the point is that there's a number of markets out there where we are beginning to really catch on to a number of customers, and I am particularly proud of the results in these markets because these have not been historic strong points for Apple. We've been working at China for a while and have learned a lot and I'm very proud of what we've done there. But I think some of these other numbers I just read demonstrates that we're beginning to have really nice success outside of there as well. Shannon S. Cross – Cross Research LLC : Great and then, if you can just, actually as a follow-up on the China side, I think it grew at 13% year-over-year, and you mentioned obviously China Mobile has been the driver of that. But can you talk about some of the other categories as well, and perhaps some of the other carriers in terms of where you're seeing demand out of China? Timothy D. Cook: Yes, really great question. We did have an all-time revenue record in Greater China, just under $10 billion at $9.8 billion. iPhone sales were up 28%, that's versus the IDCs market forecast of 20% growth. So we gained share. Mac units were up double-digit, in particular they were up 13%, and that's far outpacing IDCs PC market forecast of a negative 8%. So we gained share there as well. If you look at the iTunes software and services revenue in China, we more than doubled it. Year-over-year, we were in the triple digits percentages. And if you look at iPad and you take out the channel inventories, ins and outs and look at demand instead of sell in, we grew by 6% and that compares to IDC’s forecast of a flat tablet market in China for last quarter. And so we literally did well in every single area in China. It wasn’t just because we were able to come to an agreement with the world’s largest carrier. That was certainly key, but as you can tell from the rest of these numbers there are other things going on. Also, I’d mentioned this briefly with Steve, but I think it’s important to point out that if you look at some of the numbers we’re seeing on first-time iPhone buyers, people that bought the iPhone 4s, 85% were first-time iPhone buyers, and the 5c, 69% first-time iPhone buyers. So these are extraordinary, and as you would expect, these are also heavily Android switchers. 62% of the people that bought the 4s switched from Android. 60% of the people that bought the 5c switched from Android. And so we’re incredibly pleased with this. For the first half, including our retail stores, Greater China revenue topped $19 billion. So this is a 21% year-over-year, and is our fastest growing region. So, we’re looking at this data and deciding to continue investing in a big way. We plan to triple the number of Apple Retail Stores over the next two years. We’re continuing to expand in online. We’re continuing to build out channels. We’re up to 40,000 points of sales now in iPhone, but we’re not nearly where we need to be on the rest of our product line and even the 40,000 is a low number in considering the broad landmass and the number of folks in China. And so, I feel like there’s still loads of opportunity there, and feel really, really good about how we’re doing. Shannon S. Cross – Cross Research LLC : Thank you. Nancy Paxton : Thanks, Shannon. Could we have the next question please? Operator : And from Piper Jaffray we got Gene Munster. Gene Munster – Piper Jaffray : Hey, good afternoon and I’ll add congratulations to Peter on itinerary for the record there. And Tim, I want to talk a little bit about some of your comments at the recent shareholder meeting. You mentioned that Apple TV is no longer a hobby. Wanted to hear a little bit about why you made that distinction? And separately, it would be interesting to hear your feedback on the HBO Amazon announcement today and what you think that means, if anything, in terms of some content partners being a little more – work with some more players like yourself? Thanks. Timothy D. Cook: Good questions, Gene. The reason that I stripped off the hobby label is that when you look at the sales of the Apple TV box itself, and you look at a content that was bought directly off of Apple TV for 2013, that number was over $1 billion. And so, it didn’t feel right to me to refer to something that’s over $1 billion as a hobby. Also from an investment point of view, we continue to make the product better and better. And so it doesn’t feel right from that point of view either. We had HBO GO already on Apple TV and you have to authenticate in order to use it, but you have to do that with Amazon service as well from my brief read of their announcement. I think they in addition to that got some older content from HBO to put on there. I haven't had a chance to evaluate exactly what it is and don't have a personal point of view on that yet. But if I look broadly at the content on Apple TV, I think it compares extremely favorable to the content that is on the Amazon box. We've sold now, Gene, about 20 million of the Apple TV, and so we've got a pretty large installed base there. And I'm feeling quite good about that business and where it can go. Gene Munster – Piper Jaffray : Excellent, thank you. Timothy D. Cook: You bet. Nancy Paxton : Thank you, Gene. A replay of today's call will be available for two weeks as a podcast on the iTunes Store, as a webcast on apple.com/investor and via telephone and numbers for the telephone replay are 888-203-1112 or 719-457-0820 and please enter confirmation code 5206019. And these replays will be available by approximately 5.00 PM Pacific Time today. Members of the press with additional questions can contact Steve Dowling at 408-974-1896 and financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570, and I'm at 408-974-5420. Thanks again for joining us. Operator : And with that ladies and gentlemen, that does conclude today’s presentation. We do thank everyone for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,014	3	2014Q3	2014Q3	2014-07-22	1.56	1.58	1.731	1.79	null	13.89	14.19	Executives: Nancy Paxton - Senior Director of Investor Relations Tim Cook - CEO Luca Maestri - SVP and CFO Analysts : Katy Huberty - Morgan Stanley Bill Shope - Goldman Sachs Toni Sacconaghi - Sanford Bernstein Steve Milunovich - UBS Kulbinder Garcha - Credit Suisse Ben Reitzes - Barclays Ben Schachter - Macquarie Presentation : Operator : Good day, everyone, and welcome to the Apple Incorporated Third Quarter Fiscal Year 2014 Earnings Release Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead. Nancy Paxton : Thank you. Good afternoon, and thanks everyone for joining us today. Speaking first is Apple CEO, Tim Cook; and he will be followed by CFO, Luca Maestri, and then we'll open the call for questions from analysts. Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margins, operating expenses, other income and expense, taxes, future products. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s Form 10-K for 2013, the Form 10-Q for the first two quarters of fiscal 2014, and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I’d now like to turn the call over to Tim for introductory remarks. Tim Cook : Thanks, Nancy. Good afternoon, everyone. It’s been a very busy and exciting time at Apple and I'd like to review some of the highlights of our June quarter. We hosted our best ever Worldwide Developer’s Conference last month with over 20 million people from around the world watching our keynote session, which is the a record. We've had overwhelming response from customers and developers to the new features we previewed in OS X Yosemite and iOS 8. Yosemite has been redesigned with a fresh look and powerful new apps and iOS 8 is the biggest release since the launch of the App Store. With powerful continuity features, these upcoming releases will allow Macs and iOS devices to work together in even smarter ways. Customers can start on activity like writing an email on one device and pass it to another, picking up where they left off without missing a beat. They will even be able to make and receive iPhone calls on their Mac with just a click. These are features that only Apple can deliver. With iOS 8, we have opened over 4000 APIs providing more flexibility and opportunity for developers than ever before. iOS 8 provides developers with amazing new frameworks, enables wide use of Touch ID to securely authenticate users within apps and lets developers further customize the user experience with major extensibility features such as third-party keyboards. We have also introduced Swift, an innovative new programming language for both iOS and OS X. Swift is the result of the latest research on programming languages, combined with decades of experience within building Apple platforms. It makes writing code interactive and fun, eliminates entire classes of unsafe code and generates apps that run lightning fast. It's easy to learn, allowing even more people to dream big and create whole new categories of apps. We believe our new OS releases, combined with Swift will result in a huge leap forward for the Apple ecosystem and we can’t wait to what developers will create with Yosemite, iOS 8 and Swift. When we introduced iOS 7 years ago, it was a revolutionary operating system for iPhone. Over the years we've extended it to the iPod family with iPod Touch and later to a tablet form factor with iPad. An explosion of apps, accessories and services for these devices has created an incredibly vibrant ecosystem. We’re extending iOS in even more dimensions as customers around the world make iPhones and iPads an essential part of their lives, at home, at school, at work and on the go. We’re putting a huge effort into delivering the best experience to our customers wherever they use iOS. That includes a safe and intuitive user interface for driving, called CarPlay, which is being integrated by 29 major car brands including Audi, BMW, Ford, General Motors, Honda, Hyundai, Mercedes, Toyota and Volvo; and after-market systems like Pioneer and Alpine. We’ve created a new tool for developers called HealthKit, which allows health and fitness apps work to together and empowers customers to choose what health data they share. We're taking the first steps in this area in collaboration with the Mayo clinic, whose new apps can automatically receive data from a blood pressure app, for example and share it with a physician, or a nutrition app can inform fitness apps how many calories are being consumed each day. Our ARM health app will provide an easy to read dashboard of all health and fitness data. We're enabling new ways to control light and doors and thermostats and other connected devices around the house using Siri with the HomeKit feature of iOS 8. And in the Enterprise, we are including new security, productivity and device management features in iOS 8. We forged a relationship with IBM to deliver a new class of mobile business solutions to enterprise customers around the world. We are working together to provide companies access to the power of Big Data analytics, right on every employee's iPhone or iPad. Using Swift, we will collaborate to bring over 100 Mobile First apps to enterprise clients, each addressing a specific industry need or opportunity. This is a radical step for Enterprise and opens up a large market opportunity for Apple but more importantly, it’s great for productivity and creativity of our enterprise customers. From the pocket to the car, to the workplace, home and gym, we have a very large vision of what iOS can be and we're incredibly excited about our plans. Turning to our financial results, today we are reporting record June quarter revenue, thanks to the very strong performance of iPhone, Mac and the continued growth of revenue from the Apple ecosystem. Our teams executed brilliantly during the quarter with earnings per share up 20% year-over-year, our highest growth rate in seven quarters. We sold over 35 million iPhones, setting a new third quarter record. We generated healthy growth in our entry priced, mid-tier and lead iPhone categories. I'm especially happy about our progress in the BRIC countries, where iPhone sales were up a very strong 55% year-over-year. We also had a record June quarter for Mac sales, with growth of 18% year-over-year in a market that is shrinking by 2% according to IDC’s latest estimate. Demand has been very strong for our portables in particular and we've have had a great customer response to the new higher performance, lower priced MacBook Air. It was another strong performance for the App Store and the other services contributing to the thriving Apple ecosystem. In fact for the first nine months of this fiscal year, the line item that we call iTunes software and services has been the fastest growing part of our business. iTunes billings grew 25% year-over-year in the June quarter and reached an all-time quarterly high, thanks to the very strong results from the App Store. We're continuing to invest in our incredible ecosystem, which is a huge asset for Apple and a very important differentiator of our customer experience. iPad sales met our expectations but we realized they didn’t meet many of yours. Our sales were gated in-part by a reduction in channel inventory and in-part by market softness in certain parts of the world. For example IDC’s latest estimate indicates a 5% overall decline in the U.S. tablet market, as well as a decline in the Western European tablet market in the June quarter. But what’s most important to us is that customers are enjoying their iPads and using them heavily. In a survey conducted in May by ChangeWave, iPad Air registered a 98% customer satisfaction rate, while iPad Mini with retina display received an astonishing 100% customer satisfaction rate. The survey also found that among people planning to purchase a tablet within 90 days, 63% plan to buy an iPad and our own data indicates that more than half of customers purchasing an iPad are buying their very first iPad. Another recent study by Custora found that iPad accounts for 80% of all U.S. tablet based e-commerce purchases. We're very bullish about the future of the tablet market and we're confident that we can continue to bring significant innovation to this category through hardware, software and services. We think our partnership with IBM, providing a new generation of mobile enterprise applications, designed with iPad’s legendary ease of use and backed by IBM’s cloud services and data analytics will be one such catalyst for future iPad growth. Looking ahead, we are very excited about our agreement to purchase Beats Electronics and Beats Music. We think its part of Apple’s DNA and we think the addition of Beats team will be great for music lovers. Beats provides Apple with a fantastic subscription music service, access to rare talent and a fast growing line up of products that we can build upon. Not counting Beats, we've completed 29 acquisitions since the beginning of fiscal year 2013 including five since the end of the March quarter and we have brought some incredible technology and more importantly some incredible talent into Apple in the process. We are hard at work and investing heavily on exciting opportunities across our business and we have an incredible pipeline of new products and services that we can’t wait to show you. With that I would like to turn the call over to Luca to discuss our Q3 results in more detail. Luca Maestri : Thank you, Tim and good afternoon everyone. We set a new June quarter record for revenue at $37.4 billion, up $2.1 billion or 6% year-over-year. This result was towards the high end of our guidance range, despite a reduction in channel inventory for both iPhone and iPad. The revenue growth was driven by strong sales of iPhones and Macs, as well as the continued great performance of iTunes softwares and services. Gross margin was 39.4%, above our guidance range and operating margin was $10.3 billion, representing 27.5% of revenue. Net income was $7.7 billion, translating to diluted earnings per share of $1.28, a 20% year-over-year increase. For details by product, I'd like to start with iPhone. We sold 35.2 million iPhones, an increase of 4 million over last year, representing 13% growth. As Tim mentioned, iPhone sales grew well across all three of our entry-price, mid-tier and lead product categories. In the U.S., iPhone accounts for 41.9% of the smartphone subscriber base according to the latest data from ComScore, up from 41.3% in the previous measurement period. Also based on the latest survey by ChangeWave, iPhone earned a 97% customer satisfaction rate and among responders planning purchase a smartphone within 90 days, 50% planned to purchase an iPhone, up from 42% in the March quarter and 44% a year ago. iPhone sales were at the high end of our expectations, despite new product rumors that we believe resulted in purchase delay. In addition, tax increases and the regulatory environment in Japan affected smartphone sales in what has been one of iPhone’s fastest growing markets in recent quarters. Considering these factors, the performance of iPhone was even more impressive in the June quarter and it boosts our confidence for the future. We reduced iPhone channel inventory by about 150,000 from the end of the March quarter, leaving us within our target range of four to six weeks. Apple continues to innovate through hardware, software and services to make iPhone the best smartphone for business. Today, companies have equipped millions of employees with iPhones and they are seeing tremendous benefits in productivity, employee satisfaction and profitability. For instance medical device leader Medtronic has developed over 175 internal iOS apps for over 16,500 iPhones used by its employees to facilitate sales, improve productivity and ensure that essential marketing materials are up to date. Throughout the global offices of Nestle, the largest food company in the world, over 25,000 iPhones are accessing corporate networks, improving communication and connecting employees to critical internal resources. And at NASA over 26,000 iPhones are in use by scientists, flight crew members, technicians and researchers. Turning to iPad, we sold 13.3 million units, compared to 14.6 million in the June quarter last year. iPad sales grew overall in the developing markets with particularly strong year-over-year growth in the Middle-East, where iPad sales were up 64%, in China where they grew 51%, and in India, where they were up 45%. This growth was more than offset by lower sales in more mature markets. We reduced iPad channel inventory by 500,000 from the end of the March quarter, which left us within our target range of four to six weeks. In the Enterprise, global companies are using iPad to improve customer service, boost work and productivity and enhance critical processes. iPad continues to be the standard for teams across the airline industry. Qantas Airlines has over 15,000 iPads deployed to pilots as well as cabin, customer service and ground crews to enhance key processes across the daily operations and governments are deploying thousands of iPads worldwide. One of the largest examples is Sweden, where over 100,000 iPads are being used by local government offices across the country. In education, iPad remains the tablet of choice with 85% share of the U.S. education tablet market according to the latest published estimate from IDC. We’ve now sold 13 million iPads to education customers globally. We’re bringing teachers and students great new tools to build an experience educational count into an iPad. As of this month, teachers using the free iTunes U app can create, edit and manage entire courses that are on iPad for the first time and students can discover new ways to collaborate, including the ability to start class discussions and ask questions right from their iPad. Next, I'd like to talk about the Mac. We sold 4.4 million Macs, compared to under 3.8 million in the year ago quarter, an increase of 18% year-over-year and a new June quarter record. The increase was driven by portables, thanks to very strong growth of MacBook Air. We achieved strong double digit Mac growth across many countries, including the U.S. Canada, Mexico, the UK, Germany, France, Australia, China, India and the Middle-East. This growth is particularly impressive, given the contraction of the overall PC market. Macs have now gained global market share for 32 of the last 33 quarters. Macs performed well in the U.S. education buying season with double-digit growth in the K to 12 market, driven primarily by large deployments of MacBook Air. The Shawnee Mission School District in Kansas chose Apple to provide an entire solution that will equip every teacher with a MacBook Air and an iPad Air, every high school student with a MacBook Air and every middle school and elementary student with an iPad. The Rowan-Salisbury School System in North Carolina is deploying thousands of MacBook Airs to students and teachers in grades 9 to 12 as part of the district's digital learning initiatives. We ended the quarter with Mac channel inventory slightly below our four to five week target range. The Apple ecosystem continues to grow and thrive. Total revenue from iTunes software and services was $4.5 billion, an increase of 12% year-over-year. Our iTunes stores generated all time record billings of $5.4 billion in the June quarter, up 25% year-over-year, driven by very strong growth in App Store sales. These items billings translated to quarterly iTunes revenue of almost $2.6 billion, up 8% from the year ago quarter. Software and services revenue was $1.9 billion, up 19% from a year ago. App Store momentum remains very strong and cumulative app downloads has topped 75 billion. We continue be amazed by our vibrant and diverse developer community and we are extremely proud that our developers have now earned over 20 billion for sales of their apps through the App Store, nearly half of which have been earned in the past 12 months. This number truly stands out among our competition as our developers continue to benefit from the broad reach and powerful design of the App Store, coupled with Apple’s large, loyal and very engaged customer base. Let me now turn to our cash position. We ended the quarter with $164.5 billion in cash plus marketable securities, a sequential increase of $13.9 billion. Our domestic cash was $26.8 billion at the end of the June quarter, a sequential increase of $8.3 billion and $137.7 billion or 84% of our total cash was offshore. Cash flow from operations was $10.3 billion. We executed another very successful debt offering in April, issuing a total of 12 billion in notes across 3, 5, 7, 10 and 30 year maturities. In addition, during the quarter, we entered the commercial paper market for the first time with $2 billion in short-term obligations outstanding as of the end of June. We also continued to execute our shareholder return program with $8.3 billion of capital returned to inventors during the June quarter. We spent $5 billion to repurchase 59 million Apple shares to open market transactions. We paid almost $2.9 billion in dividends and equivalents and utilized over $400 million to net share settle vesting employee RSUs. We've now taken action on over $74 billion of our $130 billion capital return program, including $51 billion in share repurchases with six quarters remaining to its completion. And finally our Board has declared a dividend of $0.47 per common share payable on August 14, 2014 to shareholders of record as of record as of August 11, 2014. Now as we move ahead into September quarter, I’d like to review our outlook which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $37 billion and $40 billion, compared to $37.5 billion in the year ago quarter. We expect gross margin to between 37% and 38%. We expect OpEx to be between $4.75 billion and $4.85 billion. We expect OI&E to be about $250 million and we expect the tax rate to be about 26.1%. Finally, we expect the Beats transaction to close this quarter and we expect the acquisition to be accreted to our earnings in our fiscal 2015. With that, let me open the call to questions. Nancy Paxton : Thank you, Luca. And we ask that you limit yourself to one question and one follow-up please. Operator, may we have the first question. Operator : (Operator Instructions). And your first question will come from Katy Huberty with Morgan Stanley. Katy Huberty - Morgan Stanley : Luca, this is the third quarter in a row that gross margin came in above your guidance. Can you talk about what’s driving that gap and why you expect the margin to come down sequentially in the September quarter? Luca Maestri : Yes, Katy, it was obviously a surprise also to us. We were expecting obviously a loss in leverage from the sequential declining revenue which obviously happened. We also expect that some unfavorable mix, which also happens -- it's typical as we move away from the launch quarter. And we were expecting some cost improvements. These cost improvements came in. They came in stronger than we were anticipating. The commodity markets continue to be favorable, the product quality continues to be excellent, our teams executed really, really well. And all these things came together at the same time and it was a very nice surprise for us. As we look forward into Q4, yes, we’ve guided to 37% to 38%. Again, the mix is the normal mix that we see as we continue to move through the product cycle. And obviously in Q4, we got some transition costs because we’re expecting a very busy fall. We're bit excited about what we've got in the pipeline. And that’s the reason why we guided to that range. Katy Huberty - Morgan Stanley : And then just a follow-up on that last point, because in the press release you referenced the excitement about new products and services. Can you remind us of your guidance philosophy as it relates to product cycles? Do you embed assumptions around the contribution from new products? And if so, do those tend to be more conservative than for products that’s already shipped today? Luca Maestri : So our guidance, Katy is that -- we put our numbers that we believe at this point in time with all the information that is available to us, we're going to land within. So we take into account the fact that we’ve seen some purchase delays for executing Q3, but we have seen some safe trends in certain geographies. That continues to happen. And what you see this quarter is that our guidance range is $3 billion, as opposed to $2 billion during the third quarter, just to take into account the fact that we got many moving pieces. Nancy Paxton : Thank you Katy. Can we have the next question please? Operator : From Goldman Sachs, we will hear from Bill Shope. Bill Shope - Goldman Sachs : With the pockets of market we just noted for tablets, could you give us some more detail on how you are thinking about the category longer term, and in particular in the context of your usage comments, how are you thinking about the competitive landscape now and how that may evolve? And then I guess, related to that, what do you think to be the next driver of renewed growth for the category? Tim Cook : It’s Tim. If you sort of back up from this, the category that we created, which has just been a little over four years, we have now sold 225 million iPads, which is I think probably a larger number than anyone would have predicted at the time and including ourselves, quite frankly. We still feel that category as a whole is in its early days and that there is also significant innovation that can be brought to the iPad and we plan on doing that. When I look at the top level numbers, I get really excited when I see that more than 50% of the iPads that we're selling are going to someone who is a first time tablet buyer. I get excited when I see that our retail share according to the MPD in the month of June was 59% of UNIX and over 70% in terms of dollars. And of course, Luca has mentioned in his preamble that our education share is 85%. We also are in the -- virtually all Fortune 500 companies, we are in 99% of them to be exact and 93% of the Global 500. However, when we dig into the business market deeper, though our market share in the U.S., in the commercial sector is good at 76% -- this is according to IDC; the penetration in business is low. It’s only 20%. And to put that in some kind of context, if you looked at penetration of notebooks in business, it would be over 60%. And so we think that there is a substantial upside in business. And this was one of the thinkings behind the partnership with IBM that we announced last week. We think that the core thing that unleashes this is a better go to market, which IBM clearly brings to the table, but even more importantly apps that are written with Mobile First in mind. Not all but many of the enterprises apps that have been written for iPad have been essentially ports from a desktop arrangement and haven’t taken full advantage of mobile. And so we're excited about bringing that to business along with partnering with IBM, which we think is a first class company. And seeing what that can do to sales of business, which I honestly believe the opportunity is huge. The market is still predicted in 2018 -- I think these are Gartner numbers -- to be about 350 million in size and put that in some context, I think the PC market right now is about 315 million. And so I think our theory that has been there honestly since the first time that we shipped iPad, that the tablet market would eventually surpass the PC market, that theory is still intact. I just think we have to do some more things to get the business side of it moving in a faster trajectory and I think we're now on to something that can really do that. So as I look at it and sort of back up from the 90 day clock kind of thing, I'm incredibly excited. I'm excited about the plans that we have on the product side and also on the go to market side, and in particular the IBM announcement. One other point I might add on this, because I think this is interesting. I don’t think it came out in our commentary so far as; the market's very bifurcated on iPad. In the BRIC countries, iPad did extremely well. The growth was very high. Like in the China it was in the 50%s, in the Middle East it was in the 60%s. Luca may have mentioned those numbers. In the developed countries like the U.S., the market is clearly weaker there. It’s interesting to note however that the U.S. as an example, we had a very, very strong Macintosh market in the U.S. and so there is probably a bit of higher add kind of stuff beginning to play out too, where higher add is clearly still very much notebook oriented. K12 on the other hand, we sell 2.5 iPads for every Mac in the K12. And so we're clearly headed into that season now and it typically starts in graduation time prime in fiscal Q3 for us. And so I think that’s probably another thing that we're seeing. Bill Shope - Goldman Sachs : One more question if I could. You've had obviously great performance in the BRIC countries and you've touched on China for few categories. Can you talk about the overall demand environment you saw for China in the quarter? Obviously there's some seasonal factors to consider but how should we think about your performance versus your expectations and how you are thinking about it for the rest of the calendar year? Tim Cook : China, honestly was surprising to us that it was -- we thought it would be strong but it well went past what we thought. We came in at 26% of revenue growth, including retail and if you look at the units, the unit growth was really off the charts across the board. I found 48% off that compares to a market estimate of 24%. So growing it two times the market. iPad was up as well, as I've mentioned before. The Mac was up 39% and that’s versus a market in China that’s also contracting along with markets in most parts of the world and China was projected to contract by 5%. And so we're seeing some substantial strength there and the thing that’s actually growing the most is the iTunes software and services category, which has the App Store and et cetera and that area is almost doubling year-over-year. And so it’s very, very exciting what we're seeing there. We are still in the process of rolling out along with our partner China Mobile, the TD-LTE into more cities and we're still in early going on that. That just started in January as you know. And my understanding is that later this year there will be a license for the other operators to begin shipping FDD-LTE, which I think is another big opportunity in China. Nancy Paxton : Thank you, Bill. Could we have the next question please? Operator : Next we'll go to Toni Sacconaghi with Sanford Bernstein. Toni Sacconaghi - Sanford Bernstein : I have one for Luca and one for Tim please. Luca, I wanted to revisit the gross margin question. You talked about guidance for next quarter, that the drivers of the sequential decline being a normal mix through the cycle on transition cost. Your guidance to the midpoint is down 190 basis points in gross margin, last year in Q4 gross margins were up 10 basis points sequentially in fiscal Q4 and the product transition issues or cycle issues that you alluded to seem essentially identical. So I'd like to try and understand what might make this Q4 different let’s say than last Q4? Luca Maestri : If I understand the question, also when you look at it in terms of absolute levels of gross margin, last year it was 37%. So our range is above that level. There is obviously many, many things that affect us in different ways from one year to the other. Foreign exchange is a case where a lot of the emerging market currencies and the yen and the Australian dollar, the Canadian dollar, they have been weaker against the U.S. dollar. That has an impact on margin. And also when you think our product cycle, I think we don’t get into the specifics but this is not exactly the same cycle as we've had a year ago. Toni Sacconaghi - Sanford Bernstein : I mean is it better? If we look back two years to the iPhone 5, your product margins were down 260 basis points sequentially. So is the reference there that we should be thinking in terms of changes that are more akin to what we saw two years ago rather than to this year? Luca Maestri : I wouldn’t necessarily draw that analogy. I think we need to start thinking from the fact that we had a very, very strong Q3. A lot of things came together extremely well. 37% to 38% is a range that is -- we think is very good, and that’s where we are right now and we still have several weeks in the quarter. Toni Sacconaghi - Sanford Bernstein : Tim, I wanted to get your input on the impact of trade-in programs for the iPhone, particularly in mature markets where they are most prevalent. As best I can tell, if I look at the last four quarters, they're not hyper-focused on 90 days. It looks like the iPhone has been about flat in unit terms in the Americas and up low single digits in Europe and I think Europe includes India, which is obviously very fast growing. So perhaps low single digits in Europe. So if we look at those western geographies, we've seen relatively flattish iPhone unit sales over the last year. I know you don’t report it but just sort of based on overall revenue reporting, I'm wondering if you can comment on what you're seeing in terms of iPhone trade-in programs and this is four quarters, still over a complete cycle. Whether you think they are elongating or shrinking and what impact is very prevalent, increasingly prevalent trade-in programs might be having on them and what impact your pricing of older generation devices might be having on them. Tim Cook : Yes, the theory that you have Toni is not precisely correct. Like if I look at Europe, the operating segment of Europe for quarter or year-to-date for 2014 versus the same period last year, iPhone units were actually up 10%. Your more macro question; what I understand to be your macro question of do I think there is some sort of cannibalization going on trade-in programs on new product sales? What I think is happening in the aggregate if you look across the world is that trade-ins are actually hugely beneficial for our ecosystem because people wind up -- we have more people that are able to join the party when we have a trade-in, because in essence, it winds up being used by -- probably the prime example someone else within the family or in the example that has become more common in the last year, someone trades it in and then that goes to either somebody else in that country that is very price sensitive or somebody in a different country and I see all of this as good. In looking at how much of it cannibalizes, it is very hard to answer that question with any degree of preciseness. But my gut is that the cannibalization factor is low, because you wind up having -- you wind up attracting people that are much more price sensitive in there. I think the great thing is that our products command a much higher resale value than others do. And so that leads to a larger trade-in and from my perspective, that being the larger ecosystem, more people that wind up getting on iPhone, and as you know from following us for quite some time, if we get somebody to try an Apple product and then buy an Apple product, the likelihood that they begin buying other Apple products that may be in different categories or upgrading to one in that category and the future is very high. And so net-net, I view it to be positive. It’s very difficult to quantify with certainty. Nancy Paxton : Thank you, Toni. Could we have the next question please? Operator : From UBS, we will hear from Steve Milunovich. Steve Milunovich - UBS: Tim you mentioned that Japan was fairly flat due to regulations and taxes. Could you elaborate on that and what kind of comparisons perhaps you see going forward? Tim Cook : Yes, it was actually Luca, but I can comment on it. VAT was increased from 5% to 8% close to the beginning of the quarter. I think it was actually April 1 or so. That was the first planned VAT increase. There are other or at least one additional planned VAT increase in the future. This was a part of the overall tax reform package in Japan. Secondly, the carriers received some guidance from the regulators to essentially stop incenting people to transfer from another carrier at a higher amount than they were incenting their -- retaining their own customers. And so it appears that the combination of these two things dampened the whole market for smartphones in Japan. We haven’t been able to get very detailed data on share but my expectation is we're not going to see very much of a share change. And we are beginning to see some coming back of that market as we step into this quarter, may be not back to the level that it was previously but you can begin to see the market growing again which we view as very positive. In the past when we've seen these type of things, tax changes et cetera, there is usually a rush to buy before the tax increase, a pause that happens thereafter and then the market eventually goes back to some kind of steady state that may not be exactly where it was but it nears it. And so I think that’s likely our guts or that’s what happens on the VAT side. The other piece is a little harder to conclude what will happen in terms of that guidance and how long that might be employed. I don’t know that part. Steve Milunovich - UBS: Okay, that’s very helpful. And then you talked about your three tiers of iPhones. I wonder if you would be willing to breakout in any more detail the growth and particularly how to defend the 5C in the mid-tier. I know our surveys continue to find in the U.S. that it's falling little bit as a percentage of business but you seem to believe it’s doing exactly what you expected it to do. Tim Cook : I can tell you this. That if you look at the growth rates, we don’t divide out each one but if you look at year-over-year growth rates and so this would be comparing the 5C to last year. It would be comparing the 4S, which was in the mid-tier. The growth in that sector was the highest growth during the quarter we just finished. Steve Milunovich - UBS: Of the three tiers? Tim Cook : Of the three tiers. And so we are extremely happy with how it performed last quarter. Nancy Paxton : Thanks Steve. Can we have the next question please? Operator : Kulbinder Garcha with Credit Suisse. Kulbinder Garcha - Credit Suisse : Thanks. I have just one question for Luca and one for Tim. And for Luca, you mentioned that commodity pricing, I guess the environment was good for you. Is it your working assumption in your guidance that continued to be favorable and a tailwind for you? And then my question for Tim is, with the installment plans that are being introduced in the U.S., I imagine that given the increases in flexibility for people to operate faster, would you expect that to happen? Are you seeing any evidence as these contests come up because we've had them out now for several months? And how do you see that impacting your business because obviously the U.S. iPhone part of your business is still very significant and it can be quite a big catalyst to your iPhone business going forward I would imagine or would you be more tensed in how these are playing out? Tim Cook : I will take both of these. This is Tim. On the component question, what we saw in the June quarter was that NAND, mobile DRAM and LCD, the pricing on all of those declined, while PC DRAM increased, despite the market for PCs contracting. In the September quarter, what is factored in our guidance is that LCDs and mobile DRAM continue to decline, that NAND pricing remains essentially flat last quarter and that PC DRAM has a slight price increase. And in terms of other commodities that I didn’t talk about, we've assumed that they would decline at historical rates and so that’s factored into the gross margin guidance that Luca gave you. In terms of the installment plans that you mentioned in the U.S. relative to iPhone, there is a lot of different models that are being tried in the U.S. and throughout the world. And actually last quarter, as we estimated and this is subject to estimating but we're estimating that less than one out of four iPhones were sold on a traditional subsidy plan. And so that number is markedly different than it would have been two years ago. The installment plan that you're speaking about which gives the customer the right to upgrade SAP or faster than a usual two year cycle, we think that plays to our customer base in a large way. And so that makes us incredibly bullish that customers on those plans would be very likely to upgrade when we announce a new product. Nancy Paxton : Thank you, Kulbinder. May we have a next question please? Operator : Next we'll hear from Ben Reitzes with Barclays. Ben Reitzes - Barclays: Thanks a lot. Tim, questions for you. I guess during the quarter you did two very big things in our opinion, obviously buying Beats, biggest acquisition in your history and you also did this IBM deal, which obviously was in this quarter, but since the last call, and that was very interesting, obviously really collaborating with another huge company to get further into the enterprise. And I was just wondering, what are you seeing in Apple that’s changing? These seem like big deals that change your direction a bit, something that you wouldn’t have done in the past. And do you see a lot more partnerships and larger acquisitions on the horizon to grow your TAM in various markets? Tim Cook : Well, I think we have a lot of really great people and I think we have the capability. As I've said before, I think we have the capability to acquire a sizable company and manage it. And relative to IBM, I feel the same way. I think you can only do so many partnerships well, and so it is unusual that we enter into a partnership. But in this particular case, I think arguably the companies are so complementary, and I've gotten to know Gini fairly well over the last couple of years and I think we see the importance of the customer, a lot of the same way and both feel that Mobile and Enterprise is just an enormous opportunity. And we’re not competing with each other. And so I think a partnership in that case is particularly great. Would we do more of either of the things we did? We’re always looking in the acquisition space, but we don’t let our money burn a hole in our pocket and we don’t do things that aren’t strategic. And so with Beats we felt we were getting an incredible subscription service, a very rare set of talent that we think can do great things in Apple and access to a very fast growing businesses in their headphone and earphone space. And culturally we felt there was a match and music has been deeply embedded in Apple’s DNA for many, many years. And so it was a great marriage and I think the partnership with IBM is a great marriage as well. It’s more like that, presented themselves -- or I think we can manage more things. I think that we have a very, very strong executive team and can do that. But it’s not my goal to acquire certain number of companies or spend a certain amount of money. We want to do things that help us make great products that are great for our customers and so forth. Ben Reitzes - Barclays: I am sorry, just really quick on the IBM. Does this say something about Apple doing more in Big Data, and taking a cut maybe of some of the analytics opportunities as well? Tim Cook : Yes, we didn’t talk about how the business model is going to work. But generally speaking, I think that each of us have revenue streams in the enterprise and each of us went from having those revenue streams. So that’s how I look at that. And we win if we can drive that penetration number I spoke about from 20% to 60%. That would be incredibly exciting here. The walls would shake. And so that’s what I hope for. Nancy Paxton : Thank you Ben. Could we have the next question please? Operator : We will hear from Ben Schachter with Macquarie. Ben Schachter - Macquarie: Tim, I just wanted to talk about the app market for Enterprise. Right now I believe that app developers can sell to the enterprise directly and therefore that they can bypass sharing revenue from these app sales with Apple. Is Apple going to allow that to continue, and can you also just more broadly discuss how Apple thinks about the opportunity to sell apps directly to the enterprise? Tim Cook : We have no plans to change the rules with Enterprise. Some enterprises like proprietary apps that they do not want to offer to others and so we obviously have a way for them to distribute those into their enterprise or just the employees that they want to and so I'm not worried about changing that. We’re also taking friction out of the system and not adding it. Again, the big thing for us is getting the penetration number, I think getting our product, iPhones and iPads and Macs in more people hands and we think there is a huge opportunity in Enterprise to do that. Nancy Paxton : Thank you Ben. A replay of today's call will be available for two weeks as podcast on the iTunes Store, as a webcast on apple.com/investor and via telephone and the numbers for the telephone replay are 888-203-1112888-203-1112 or 719-457-0820719-457-0820 and please enter confirmation code 76136258 [ph]. These replays will be available by approximately 5.00 PM Pacific Time today. Members of the press with additional questions can contact Steve Dowling at 408-974-1896408-974-1896 and financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570408-974-4570 and I'm at 408-974-5420408-974-5420. And thanks again to everyone for joining us. Operator : And ladies and gentlemen, that does conclude today’s presentation. We do thank everyone for your participation. Call Send SMS Add to Skype You'll need Skype CreditFree via Skype
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,014	4	2014Q4	2014Q4	2014-10-20	1.631	1.694	1.895	1.99	null	13.87	13.74	Executives: Nancy Paxton - Senior Director of Investor Relations Tim Cook - CEO Luca Maestri - SVP and CFO Analysts : Shannon Cross - Cross Research Bill Shope - Goldman Sachs Katy Huberty - Morgan Stanley Toni Sacconaghi - Sanford Bernstein Steven Milunovich - UBS Ben Reitzes - Barclays Gene Munster - Piper Jaffray Keith Buckman - Bank of Montreal Presentation : Operator : Good day, everyone, and welcome to the Apple Incorporated Fourth Quarter Fiscal Year 2014 Earnings Release Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead. Nancy Paxton : Thank you. Good afternoon, and thanks everyone for joining us today. Speaking first today is Apple's CEO, Tim Cook; and he will be followed by CFO, Luca Maestri, and after some final remarks we'll open the call for questions from analysts. Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margins, operating expenses, other income and expense, taxes and future products. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s Form 10-K for 2013, the Form 10-Q for the first three quarters of fiscal 2014, and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. And I’d now like to turn the call over to Tim for introductory remarks. Tim Cook : Thanks, Nancy. Good afternoon, everyone and thanks for joining us. Since we spoke in July, it's been an exciting and very busy time, so we have lots of great things to talk about today. Just last month, we launched the biggest advancements in iPhone's history with iPhone 6 and iPhone 6 Plus. These iPhones are the best we have ever created and customers absolutely love them. Our operational team has done an extraordinary job executing the manufacturing ramp throughout the entire supply chain. Today we've launched in 32 countries including China and our new iPhones will be shifting in 69 countries and territories by the end of this month, making this our fastest and most successful iPhone launch ever. Demand for the new iPhones has been staggering and geographically broad-based markedly higher in every single country where we've launched compared to the iPhone 5s a year ago. We're working hard to fill orders as fast as possible and we're on track to be in more than 115 countries by the end of December. Last month we introduced two new categories; the first is Apple Pay, an entirely new way to pay for things in stores and in apps. It makes mobile payments easier, more secure and more private. Apple Pay went live today and now making purchases and participating stores happens with just a touch of a finger. Paying within apps is as easy as selecting Apple Pay and placing a finger on Touch ID. Today Apple Pay supports credit and debit cards from the three major payment networks and the top U.S. banks and over 500 additional banks have signed on and will be supporting Apple Pay beginning this year and early next year. Apple Pay is being supported by many of the nation's top retailers and we continue to sign more retailers. The second new category is Apple Watch, our most personal device ever and one that has already captured the world's imagination. We can't wait to get Apple Watch to customers beginning in early calendar 2015. We'll be providing more details on Apple Watch as we get closer to the shipment day. Last week we launched the new iPad Air 2 and iPad Mini 3 with innovations that make them dramatically better than previous generation and the stunning new iMac with a Retina 5K display. We released iOS 8 last month and our customers are enjoying new ways to use their iPhone, iPad or iPod Touch with intuitive new features and groundbreaking security. Last week, we also released OS X Yosemite, with an all new design and continuity features that deliver an even more fluid experience across all of our iOS devices and Mac. These introductions reflect years of innovation and hard work by teams all across Apple and they demonstrate the seamless integration of hardware, software and services that provides unparallel user experiences for our customers. These are things that only Apple can do. We've also communicated and demonstrated our commitment to respecting and protecting users' privacy with strong encryption and strict policies that govern how our data is handled. Today we're also reporting very strong results for Apple's fourth fiscal quarter. We generated our strongest revenue growth rate in seven quarters far surpassing our expectations we communicated in July and establishing a new record for Apple's September quarter revenue. We're also reporting gross margin of 38% compared to 37% last year, leading to a very strong EPS growth of 20%. Fueled by the launch of iPhone 6 and 6 Plus and strong demand for our previous iPhone models, we set a new September quarter record for iPhone with revenue growth of 21% year-over-year. Demand for iPhone was strong across all geographies with global unit sell-through growth of 26% and we exited the quarter with significant backlog for both iPhone 6 and 6 Plus. We established an all-time quarterly record for Mac sales with revenue growing 18% year-over-year, thanks in particular to the very strong performance of our portables. We're especially proud of our Mac results considering the overall contraction of the global PC market this year and we achieved our highest quarterly market share since 1995. We also set an all-time record for the App Store revenue, thanks to the tremendous momentum and ongoing success of our developer community. App Store revenue grew 36% over last year and cumulative app downloads have now topped 85 billion. These results bring to a close a record breaking fiscal 2014. Over the last four quarters, our products and services have generated a $183 billion in revenues, an increase of $12 billion over last year. We sold 243 million iOS devices and 19 million Macs, both all-time highs. Our revenue from iTunes software and services reached $18 billion, which was more than the annual sales of two thirds of the companies in the Fortune 500 and we generated $6.45 in earnings per share, which is 14% higher than last year and also set a new record. We made big investments in our business and have continued to expand our global footprint. Today we have 437 Apple retail stores in 15 countries and our partners are selling Apple products in hundreds of thousands of locations around the world. We're continuing to invest in developing markets where revenues approached $50 million in fiscal year '14, up 16% over last year and twice the rate of growth of the company overall. We [forged] (ph) a landmark partnership with IBM to provide a new generation of mobile enterprise application designed with our products legendary ease of use and backed by IBM's cloud services and data analytics. Our partnership aims to redefine the way work is done, address key industry mobility challenges and sparked true mobile-led business change. Developer teams have been working closely to develop the first wave of Mobile First solutions and these solutions will be ready for customers beginning next month across six sectors; banking, government, insurance, retail, travel and transportation and telecommunication. We brought tremendous new talent and technology into Apple through 20 acquisitions in fiscal '14 including seven alone in the September quarter. We closed the Beats transition in July and we're off to a great start with some wonderful plans we'll share with you in the future. Our strong results continue to generate significant cash and we're extremely happy that this has enabled us to make substantial investments in Apple's future, while retaining -- while returning cash to our shareholders. We had executed aggressively against our share repurchase program, spending $17 billion in the September quarter alone and $45 billion in the last year. In addition to Apple's strong business performance over the past four quarters, I am incredibly proud of all of our work to protect the environment, to advance human rights, to improve working conditions in the supply chain and to change the way teachers teach and students learn. I'd like to thank all of our customers, employees, developers and business partners for making fiscal 2014 Apple's best year yet and I'd like to thank all of our shareholders for their continued support. I could not be more excited about the road ahead in fiscal 2015. With that, I'd like to turn the call over to Luca to discuss our September quarter results in more detail. Luca Maestri : Thank you, Tim, and good afternoon, everyone. During the September quarter we generated record revenue of $42.1 billion, an increase $4.7 billion or 12% year-over-year. These results exceeded our guidance range due to better than expected sales of iPhones and Macs for which customer demand grew strongly year-over-year in all our segments. Gross margin was 38% at the high end of the guidance range, operating margin was $11.2 billion representing 26.5% of revenue. Net income was $8.5 billion, a new September quarter record translating to diluted earnings per share of $1.42, a 20% year-over-year increase. Cash flow from operations was very strong, a $13.3 billion, also a new Q4 record. For details by product, I will start with iPhone. We sold 39.3 million iPhones, an increase of 5.5 million over last year or 16% growth. Underlying demand was even stronger with sell-through growth of 26%. iPhone sales grew across both developed and emerging markets. Unit sales in the U.S. grew 17% year-over-year, and in Western Europe they were up 20%. We saw even stronger growth in Latin America and the Middle East with sales up more than 50% and in Central and Eastern Europe where sales more than doubled. We increased iPhone channel inventory by just under one million units during the September quarter this year, significantly less than the 3.3 million unit increase in the September quarter a year ago. Based on the very strong demand for our new iPhones, this left us below our target range of four to six weeks for channel inventory on a look forward basis. iPhone momentum in enterprise market remains very strong. The latest data published by IDC indicates that iPhone have 69% share of the U.S. commercial smartphone market. Also, In August ChangeWave survey of U.S. corporate IT buyers found that among those planning to purchase smartphones in the December quarter 75% plan to purchase iPhones. An iPhone continues to fuel innovation of companies around the world. Schindler, a leading global escalator and elevator manufacturer has deployed over 20,000 iPhones and 20 customer apps to improve customer engagements for safety and to allow service technicians to access vital documentation, repair and safety functions when they are in the field. Baidu, China's top search provider currently has over 20,000 employees using iPhones and the company has developed over 30 in-house iOS apps to help its employees work more efficiently, track sales leads and manage internal IT infrastructure and processes. Next, I would like to talk about the Mac. We sold 5.5 million Macs, an increase of almost a million over last year. That represents 21% growth year-over-year and an all-time quarterly record. We saw great demand in the back-to-school season for both desktops and portables with especially strong growth for MacBook Pro and MacBook Air. We achieved double-digit Mac growth across most markets around the world, with particularly impressive performance in emerging markets where Mac sales were up 46%. These results are truly remarkable given the contraction in the global PC market and we now gain market share for 33 of the last 34 quarters. We ended the quarter with Mac channel inventory slightly below our four to five week target range. Turning to iPad, we sold 12.3 million units compared to 14.1 million in the September quarter last year. In anticipation of our October new product announcement we reduced iPad channel inventory by 500,000 from the end of the June quarter, which left us within our target range of channel inventory on a look-back basis. iPad sales were consistent with our expectations and we experienced very strong results in Japan where iPad sales were up 46% year-over-year. Customers continue to love their iPads. In an August survey by ChangeWave iPad Mini with retina display earned an incredible 100% satisfaction rate, and among consumers planning to purchase a tablet within 90 days, the survey indicated a 55% plan to buy an iPad. We continue to see some momentum in enterprise for iPad. Progressive IT organizations around the world continue to deploy, manage and develop amazing in-house apps for iPad. Healthcare leader Sanofi has over 25,000 iPads and over 450 in-house apps for sales teams and corporate employees to get their products and information into the hands of doctors and other healthcare providers. Premium eyewear designer Luxottica has deployed over 10,000 iPads to improve how customers experience the size, fit and overall look of eyewear in a retail environment. Importantly, since the announcement of the partnership with IBM hundreds of corporations around the world have expressed interest in MobileFirst solutions and we are actively working with over 50 of them to become foundational client for MobileFirst solutions in their industries. iPad continues to lead the U.S. education tablet market with 90% share based on the latest data from IDC. In the September quarter the St. Paul public school in Minnesota purchased over 22,000 iPad Airs and over 5,000 iPad Minis in the first race of the district's personalized learning through technology plan that will ultimately equip every student with an iPad. We are fully consistent and continue to strive. Our item store generated all time record billings of $5.4 billion in the September quarter, up 22% year-over-year, thanks to the tremendous momentum of the app store. Developers around the world have embraced the iOS platform and keep broadening the appeal of our thoughtfully designed app store to a large, loyal and engaged customer base. Across all of our programs the number of registered app developers has grown by 22% in the last year and we are rapidly approaching 10 million. We are seeing especially strong interest in the enterprise with a number of registered developers is up 39% over a year ago. Our retail stores also generated strong results. Revenue for the quarter was $5.1 billion, up 15% from a year ago and a new September quarter record. We opened 10 new stores and completed the remodels of three stores during the quarter ending with a total of 437 stores, 41% of which are outside the United States. We are projecting a total of approximately 25 new store openings in fiscal '15, about three quarters of which will be outside the U.S. We also plan to remodel about five stores over the course of the year. With an average of 432 stores opened in the September quarter average revenue per store was $11.9 million compared to $10.9 million in the year ago quarter. We hosted 102 million visitors to our stores during the quarter, which translates to over 18,000 visitors per store per week. Let me now turn to our cash position. We ended the quarter with $155.2 billion in cash plus marketable securities, a sequential decline of $9.3 billion. We are continue to execute our capital return program aggressively with the total spend of over $20 billion in just the September quarter. We launched our fourth accelerated share repurchase program at the end of August spending $9 billion. We also spent $8 billion to repurchase $81 million Apple's shares to open market transactions, paid $2.8 billion in dividends and equivalence and utilized over $300 million to net share sell vesting employee RSUs. So, we've already taken action on over $94 billion of our $130 billion capital return program including $68 billion in share repurchases with five quarters remaining to its completion. We remained firmly committed to our objective of delivering attractive returns to shareholders through both business performance and return of capital. As we said before, we review our capital allocation regularly. We have solicited feedback on our capital return program from shareholders in the past and we will continue to do so. We plan to report on our conclusions in a timeframe similar to last year. Now, as we move ahead into the December quarter, I'd like to review our outlook which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $63.5 billion and $66.5 billion compared to $57.6 billion in the year ago quarter. This represents a double-digit revenue increase despite significant foreign exchange headwinds from the recent strengthening of the U.S. dollar against most currencies. We expect gross margin to be between 37.5% and 38.5%. We expect OpEx to be between $5.4 billion and $5.5 billion. We expect OI&E to be about $325 million and we expect the tax rate to be about 26.5%. Also today our Board has declared a dividend of $0.47 per common share payable on November 13, 2014, to shareholders of record as of November 10, 2014. With that, I will hand it over to Nancy for some final remarks. Nancy Paxton : Thanks, Luca. We'd like to let you know about some reporting changes that we'll be making beginning with the release of our Q1 '15 results. First, to better serve our customers and optimize our results around the world we are collaborating like never before across our direct and indirect channels. Accordingly, beginning in Q1 '15, we'll be including the results of our retail stores in the geographic segments where the stores are located providing a consolidated view of regional performance that is consistent with the way our executive team measures the business. This means that going forward our reportable segment will be Americas, Europe, Greater China, Japan and the rest of Asia-Pacific with the retail no longer classified as a segment. Second, to better reflect our evolving products and services, we'll be making some changes to our product summary reporting. We will continue to report iPhone, iPad and Macs as separate line items and we'll also have a category that we refer to as services and this will encompass everything we report under the heading of iTunes software and services today including content, apps, licensing and other services and beginning this month it will also include Apple Pay. We'll be creating a new reporting category called other products. This will encompass everything we report in the accessories category today including Beats headphones and speakers, Apple TV and peripherals and accessories for iPhone, iPad, Mac and iPod. In addition, we will begin to include iPod sales in the other products category and we will also reflect sales of Apple Watch in this line item once it begins shipping in early calendar 2015. So to recap, beginning in Q1 '15. our products reporting categories will be iPhone, iPad, Mac, services and other products. We wanted to give analysts and investors a heads up on these plans so you can reflect them in your models accordingly. We'll also reclassify historical results to be consistent with these newer groupings and we'll provide that information on our Investor Relations website when we release Q1 results. And finally, our distribution channels have evolved and expanded significantly in the last couple of years including traditional resellers, consumer electronic stores, mass retailers, distributors and carriers, and each of these channels have the different distribution model. Today, iPhone is sold in over 200,000 locations around the world and iPad is sold in more than 100,000. In addition, revenue from emerging markets has increased considerably over the last few years and now accounts for over quarter of our sales. And channel inventory requirements in those markets tend to be much longer. So, due to the size, complexity and different needs of our channels around the world we've determined that a five to seven week average range for both iPhone and iPad channel inventory is more appropriate and that will be our target range going forward. However, given the backlog for our new products, we expect to exit the December quarter within our old four to six weeks target range. So with that let's open the call to questions and we ask that you please limit yourself to one one-part question and one follow-up. Operator : (Operator Instructions) Your first question will come from Shannon Cross with Cross Research. Shannon Cross - Cross Research : Thank you very much. Good afternoon. My first question is with regard to Apple Pay, which we actually used this afternoon and where it was rolled out it actually worked pretty well which was nice, but could you provide some more color, Tim and Luca, on how you see the business model for Apple? And maybe from a high level perspective, if you see there's more over time becoming a standalone business like you look at iTunes, or is this more just a way to sell incremental product? Tim Cook : Shannon, hi, it's Tim. The -- what we wanted to achieve with Apple Pay was first and foremost to have an incredible consumer experience. And so we focused very much on making it elegant and simple and hopefully your trails have proven them. I know I used it over the weekend and it worked fantastically. We also wanted to focus on security and privacy, and so we see huge issues with the security of the traditional credit card system. And many people that have entered mobile payments are doing still in a way that they want to monetize the data that they collect from the customers and we think customers in general do not want this that they'd like to keep their data private. And so, we wanted to have ease of use, security and privacy and maximize all three. By doing so, we think we will sell more devices because we think it's a killer feature. It's far better than reaching in your pocket book and trying to find the card that you're looking for and half the time it's not working. There -- we do not charge the customer for the benefit. We do not charge the merchant for the benefit. However, there are commercial terms between Apple and the issuing banks, but we're not disclosing what they are, like any other contractual arrangement those are private things. And so as Nancy was saying in her closing comments, we'll be reporting Apple Pay in the services line item on the data sheet. And so, we see it as an incredible service that is the most customer-centric mobile payment system that there is. And we are very proud of it and can't wait to sign up more retailers and also extend it around the world. Shannon Cross - Cross Research : Thank you. And then, Luca, if you could talk a little bit about the impact of currency. In IBM's results this morning they talked substantially about potential pressure going forward from currency. So could you walk us through how your hedges work, how we should think about currency and how you reflected in at least the current quarter guidance? Luca Maestri : Yeah. Definitely, Shannon. As you know, the U.S. dollar has strengthened quite significantly against most currencies in recent weeks. When we looked at our Q4 results actually the impact was fairly limited combination of the hedging program and the fact that the dollar really strengthened towards the very end of the quarter. Not much impact in Q4. It is becoming a significant headwind in Q1 both on a year-over-year basis and on a sequential basis. As I said before, we have reflected the new FX situation at current levels into our guidance that we provided for both revenue and gross margins. And it's a fact of life if the U.S. dollar strengthens, that creates a headwind for us both in revenue and margins for our business outside the United States. As you know, we have a comprehensive hedging program in place that mitigates the impact of foreign exchange. Over time, of course, these hedges roll off and get replaced by new hedges at new spot levels, and so the protection that you get from hedging program is temporary. But again, the guidance that we provided fully reflects that current situation in the FX markets. Shannon Cross - Cross Research : Thank you. Nancy Paxton : Thanks Shannon, can we have the next question please? Operator : And from Goldman Sachs we'll hear from Bill Shope. Bill Shope - Goldman Sachs : Okay. Thank you. Could you comment on how we should think about the key swing factors for gross margins in the December quarter, obviously outside the FX impact you just mentioned, Luca? And more broadly, I know it's still early, but how should we think about the gross margin path as the iPhone 6 family ramps versus what we saw with the 5S and 5C cycle. I guess you can answer that specifically. I'm trying to figure out if you characterize this as a fairly normal cycle in terms of expected cost improvements over the life of the product. Luca Maestri : Yes, Bill let me start with put and takes of margins for Q1. I would say that on the positive we are so pleased with the launch of new phones you might have seen phenomenal. So we think we're going to be getting favorable impact from iPhone mix. Of course, we're also going to be getting some positive leverage from the higher revenues that we guided to and we continue to see fairly favorable commodity environment. So these are the things that are on the positive side. On the negative side I've talked about FX. Obviously we have launched a lot of new products even in the last six weeks and we've got transition costs as we move from current products to new products and that tends to be a headwind. And every time we launch new products, we make them better and what that means is that our cost structures tend to go up when we produce new products. We have a very good track record of taking those cost structures down over time and so when you take the positives and negatives that I have just mentioned that is what gives us the guidance that we just provided. Bill Shope - Goldman Sachs : Okay great. And then my second question is, looking at that current supply constraints of the iPhone, could you confirm that your guidance is assuming you will reach supply demand balance before the end of the quarter, I think that's what was implied by your commentary on channel inventory? And related to that, could you give us some more color on what you see as the key bottlenecks at this point for supply on the iPhone side? Tim Cook : Bill its Tim. The ramp itself is going great. The chances are ever in our history, so I couldn’t be happier with it. That said, today demand is far obstructing supply. It is unclear looking at the data when supply will catch up with demand. And so I don’t want to leave you with a view that we know that we're going to get to a supply-demand balance on both of the new products this quarter because I don’t know that at this point. It's very difficult to gauge demand without first achieving finding the balance and it's clear that as of today, and certainly as of the end of the quarter where you're looking at the data, we're not nearly, we're not close, we're not on the same plan. And -- but that said, I am really confident that supply is going to be great and that's the reason you see incredibly strong guidance that we're giving from $63.5 billion to $66.5 billion. At -- but at this point, it's just very difficult to gauge what the true demand is. When you see it's very unusual to see every country having a marked improvement over the previous year and that's what we're seeing on iPhone. And so, I couldn’t be happier with the way the demand looks. Nancy's comment at the end was meant to tell you that we do not envision as of today being able to achieve the extra inventory in the channel that we believe is needed when you think about the long food chains in some of the emerging markets where the distribution channels are not as official, so that's the purpose of that comment. Bill Shope - Goldman Sachs : Okay, that's helpful, thank you. Tim Cook : Yes. Nancy Paxton : Thanks Bill. Can we have the next question please? Operator : We'll hear from Katy Huberty with Morgan Stanley. Katy Huberty - Morgan Stanley : Thanks. Luca I wonder if you can quantify the currency headwind on gross margin in the December quarter, just because there is a big focus on currency across tech right now and should we expect price harmonization if the dollar remained strong? And then I have a follow-up. Luca Maestri : Katy, it's you know I said that there's headwinds from foreign exchange are going to be significant. So -- and I would tell you that they are more significant when you look at it from a year-over-year basis that it is on a sequential basis because clearly the dollar has been strengthening for quite a while particularly against certain currencies like the Yen or the Canadian dollar a lot of the emerging market currencies. So it's again impact and that's the reason why we wanted to call it out. Katy Huberty – Morgan Stanley : Will you do any price harmonization if the dollar remained strong? Luca Maestri : No, we price our products in a way that is in general reflective of pricing here in the United States and it's a pricing that we want to keep in place for reasonable periods of time. We do not like to make sudden changes to our pricing. Katy Huberty – Morgan Stanley : Okay, then as a follow up, I wonder if you can comment on the how NAND capacity and SKU mix is tracking versus your expectations for iPhone 6? Tim Cook : Yeah Katy, it's Tim. At this point, we're selling everything we made. And so it's difficult to say that we've been -- that we've absolutely made it well on the SKU mix and the split between the iPhone 6 and the 6 Plus. From everything we can tell, we've done a pretty good job on that. But I'll stop short of saying there is no issue at all, because it's hard to tell when you are at a point where you are selling everything you are making. It is a good problem to have. Katy Huberty – Morgan Stanley : Got it, congrats on the quarter. Tim Cook : Thank you, very much, thank you. Nancy Paxton : Thanks Katy. Can we have the next question please? Operator : From Sanford Bernstein we'll hear from Toni Sacconaghi. And Toni you may want to check your mute button. Toni Sacconaghi – Sanford Bernstein : Yes, sorry about that. I have one for Luca and one for Tim please. Luca the question for you is a bit of a follow up from the last one which is that we saw a pretty robust sequential increase in ASPs this quarter in the iPhone and I was wondering if you could qualitatively help us understand whether that was a higher mix of new phones than you typically see in the September quarter or was it really a function of the new phones having a richer ASP? And if we look forward to calendar fiscal Q1, last year you had a very substantial ASP increase, should we be thinking about a similar kind of ASP increase this quarter given I think a widespread belief that availability on the 6 Plus has been even more constrained and that we could see a much higher percentage of 6 Plus as a percentage of total iPhones shipped in the quarter and next quarter? Luca Maestri : Yes Toni. So, on a sequential basis our ASPs for iPhone were up $42. And as you said correctly the reason for the increase was a higher mix of the new iPhone 6 and 6 Plus. There was a partial offset in the quarter from the transition cost that we incurred typically when we moved to a new product. Going forward obviously, the percentage of new iPhone 6 and 6 Plus will increase sequentially as we are going to have the full quarter available to us and it's correct that iPhone 6 Plus is supply constrained right now. Toni Sacconaghi – Sanford Bernstein : Okay and then Tim for you, I was wondering again qualitatively if you could help us understand what you think the mix of repeat buyers is for iPhone 6 let's say over the next year versus first time iPhone customers. And you know the question in that is, do you believe that because the iPhone 6 is so compelling that that traditional replacement cycle might be accelerated over the next several quarters? And if that’s ultimately the case, do you in the future run reversion back towards in the elongating of that replacement cycle in future generations? Tim Cook : It is difficult to answer exactly, but let me sort of back up and give you some data, maybe that will help frame the topic. So if you look at some of our top countries and how they did in the mid year of selling a customer the first iPhone they had ever bought. What you would see is that in countries like China over 80% of the people that we were selling the 4s2 were buying the first iPhone ever in the U.S. it was over 60%. And so those kind of give you some goalpost of large countries in terms of first time ownership at our entry level. As you step across and look at the 5s, which was at that time the top end phone, in China still almost half the people were buying their first iPhone ever buying try this and about a quarter of the U.S. population buying a 5s or buying their first one. So that kind of gives you some goalpost and so, the way I look at those numbers are, that on a forward basis what would I expect, obviously we don’t give guidance on this kind of stuff is that I still see a fairly large opportunity in people buying their first iPhone ever and I think with these products that we just announced with 6 and 6 Plus that opportunity increases not decreases. I also believe that the upgrade market for people that were waiting for 6, for iPhone 6 or 6 Plus, as we can see from our order backlog that number is huge. And so I would expect that to go on for some period of time because you have people that time out of contract at different time, no everybody does that at launch time. And so I see both the first time buyer being a great opportunity and the up-grader. Some of the first time buyers are people that have never owned a smartphone before and some of them are switchers from android. And so, right now, everything, all of those look very good to us, but we're in the early going and we're selling everything we're making and so it's going to take some period of time before we have a better handle on what those numbers will look like in steady state. But I've never felt so great after a launch before, maybe that's the best way to summarized it all. Toni Sacconaghi – Sanford Bernstein : Thank you. Nancy Paxton : Thanks Toni. Can we have the next question please? Operator : From UBS we'll hear from Steven Milunovich. Steven Milunovich - UBS: Thanks. Is there more color you can give us on the mix of 6 and 6 Plus, particularly to the degree you see it in the order book? Our book suggests it's maybe 2.5 to 1, 6 to 6 Plus in the U.S., but and maybe that geographically it's quite different. Asia may be going for the bigger screen is there any color you can give us? Tim Cook : Steve, there's not a lot of color that I can give that I feel is terribly accurate because as I said before, we're selling everything we're making and so essentially what our current sell through looks like is our current supply. And so in the long arc of time, once there is enough supply to meet demand that mix might look differently. Digits clear or at least I think that we will see a difference by geography in terms of preference and we thought that going into the launch of -- and there's no data that we perceived to date that would suggest that, that's not the case and so that's all about all I can say at this point. Steven Milunovich - UBS: Okay. And then regarding the strength in Mac and the weakness in iPad I guess, what's the message from the market that you take away from that and does that perhaps at all affect your view of doing a convertible type product which in the past has not kind of an Apple's approach, you tend to like to do very focused products there might be that there is something in between that could be quite successful? Tim Cook : Let me comment on both the Mac and the iPad. On the Mac it was just absolutely blow-away order. Our best ever, it will result in our highest market share since 1995. It's just absolutely stunning. Get back-to-school season voted and the Mac 1 and carried the day and we're really proud of that. I'm proud of the Mac team. It's clear that the -- all the work that we've put into our Notebooks, on the hardware and the software side is resonating with our customers and I think if you went out to college campuses about now, you will see a lot of Mac and there are lot of new Mac Notebooks there based on the sales. And so that feels fantastic being up 21% in that market that's shrinking it just -- it doesn’t get better than that. For iPad, if I take a step back on iPad, and I know that there is a lot of negative commentary in the market on this, but I have a little different perspective on it. Here's sort of my simple perspective. If you look at, instead of looking at this thing each 90 days, if you back up and look at it, we've sold 237 million in just over four years. That's about twice the number of iPhones that we sold over the first four years of iPhone. If you look at the last 12 months of iPad, we sold 68 million in '13, in fiscal year '13 we sold 71 million. So we were down, but we were down 4% on sell in and the sell-through was a bit better than the negative 4 because we took down channel inventories. And so, to me I view it as a speed bob, not a huge issue. That's said, we want to grow. We don’t like negative numbers on these things and so, looking further in the data, I know that there is a popular view that the market is saturated, but we don’t see that. I can't speak to other people but I do look at our data deeply. And in the last market research data we have is in the June quarter, and let me give you some of this -- the real data that we've got. is that if you look at our top six revenue countries, in the country that’s sold the lowest percentage of iPads to people who had never bought an iPad before that number is 50%. And the range goes from 50 to over 70. And so when I look at number, our first time buyer rates in that area, it is saturated, that's not a saturated market. You never have first time buyer rates at 50% and 70%. What you do see is that people hold on to iPad longer than they do a phone. And because we've only been in this business four years, we don’t really know what the upgrade cycle will be for people. And so that's a difficult thing to call. What we do know is that people always respond for us doing great products and we feel really great about what we introduced last week. We also know that the deeper the Apps go in the enterprise, the more it opens up avenues in enterprise and that's a key part of the IBM partnership and what I think customers will get out of that, which is more important than our selling is changing the right people who work. And so I see catalyst going forward. There are obvious cannibalization; things that are occurring. I'm sure that some people looked at the Mac and iPad and decided on a Mac. I don’t have research to demonstrate that, but I am sure that will be just looking at the numbers and I am fine with that by the way. I am sure that some people will look at an iPad and an iPhone and decide just to get an iPhone and I'm fine with that as well. But over the long arc of time, my own judgment is that iPad has a great future, healthy individual 90-day clicks workout, I don’t know, But I'm very bullish on where we can take iPad over time and so we're continuing to invest in the product pipeline. We're continuing to invest in distribution. If you look at how we did in emerging markets like BRIC countries as an example, we were up 20% for the full year of '14. And so these numbers are impressive and obviously the BRIC countries are growing as a percentage of our total as is developing markets. And so, it looks a bit different geography to geography, and so that’s a long answer to your question, but I thought it was important for you to at least share my perspective and you can judge it as you will. Steven Milunovich - UBS: Thanks. Nancy Paxton : Thanks Steve. Can we have the next question please? Operator : And we'll hear from Ben Reitzes from Barclays. Ben Reitzes - Barclays: Hey, thanks a lot. Tim, I was wondering what we were to make out of your new segments with the Apple Watch being in the other category. We were just a little surprised to hear that because it seems like such a substantial new category and you could sell may be even tens of millions of unit. So by putting it lumped in the other with iPods and a lot of other things, does that say something about your expectations for that product or do you think that you'll just break it out after a little while? Tim Cook : Probably it says nothing about our expectation for the product. We didn't form those categories based on expectations. We looked at current revenue, today revenue, and decided that we would love everything that wasn’t a Mac, an iPad, or an iPhone or a service in one kind of category. In the future, we might decide something different, but for now, in Q1 we're not shipping any iPhone or excuse me, Apple Watches and so it seems appropriate to start it that way. And also to be also straight is I am not very anxious in reporting a lot of numbers on Apple Watch because of the -- and giving a lot of detail on it because our competitors are looking for it and so aggregating it is helpful from that point of view as well. Ben Reitzes - Barclays: Okay. Got it. And then with regard to my next question is you put out a lot of products and we obviously everybody gives you a lot of credit for the great new product lineup that we have, but everybody talks about what's next. You said in an interview recently on TV that you were working on products that people didn't even speculate on yet and that's pretty hard with Apple considering how many people watch your company and write about it. So I was just wondering if you could elaborate on that may be in terms of your excitement around new products and what did you mean by that comment and how do you feel about the future in light of that comment you made? Thanks a lot. Tim Cook : I am incredibly optimistic about the future. We've already announced two new categories in the last 60 days or so or less than 60 days with Apple Pay and Apple Watch. So shipping the watch early next year and obviously we're working on other things as well and to the degree that I can keep that in the cone of silence, I am going to do it and so I am not sure what to say. I am not going to give any answer or anything. We look at a lot of different things and we're fortunate to have a lot of creative people here that want to change the world and have a lot of great ideas. Ben Reitzes - Barclays: All right. Thanks Tim. Nancy Paxton : Thanks. And could we have the next question please? Operator : We'll go to Gene Munster with Piper Jaffray. Gene Munster - Piper Jaffray : Hey, good afternoon. A follow-up to Ben's question in terms of the last year you had higher expectations in terms of new product categories and the iPhone 6 launch but there are some investors who think about Apple and a products type of story. So Tim, I'd be interested in how you think about the story broadly in 2015 and kind of exciting things to be focused on as an investor and then I have a follow-up to Luca. Tim Cook : Well for Apple if as an investor I would hope that people would look at what we've done and what we've delivered and the power and strength of the product line that we've announced and maybe more importantly then all the stuff that you see, is to look at the skills within this company. And the fact that I think it's the only company on the planet that has the ability to integrate hardware and software and services at a world-class level and that in itself allows Apple to play in so many different areas and so the challenge becomes one of deciding which ones to say no to and which ones to say yes to and want to focus not once -- not once do we have any great ideas and we always had more ideas than we have resources to deal with. And so I would look at that. I would look at what we talked about last week. Things like continuity and if you use your imagination and think about where that goes, there is no other company that can do this. Apple is the only one and I think this becomes so incredibly important moving forward for customers living in an environment where they're using multiple devices. And so I would look at the skills, the capabilities, the passion of the company and the creative engine has never been stronger. And I think you can see that from the Apple Watch, you can see that with Apple Pay. Apple Pay is a classic app for taking something that is incredibly old, outdated, kludgy. Everybody is focused on everything except for the customer and putting the customer at the center of the experience and making something very elegant. And so I would look at those things and when I look at those things, I would as an investor, I feel great, as a personal investor I feel great. Gene Munster - Piper Jaffray : No. That's helpful. And a follow-up for Luca, you mentioned that you have typical transition costs that involve in new products you're rolling out. Do those costs start to ease in the March quarter and would that presumably have a positive impact on gross margins in March versus December. Thanks. Luca Maestri : Yes, and you know pretty much what our product cadence is and what it's been in the past and you know that the holiday season is a period where we have significant product events and we're not providing any guidance for the March quarter. And also keep in mind Gene if you're trying to extrapolate gross margins into the future, there are so many factors that affect gross margin over time and it's not only transition cost, but its product mix, its foreign exchange, its commodity markets. Gene Munster - Piper Jaffray : Okay. Great. Thanks. Congratulations. Luca Maestri : Thank you. Nancy Paxton : Thanks Gene. Could we have the next question please? Operator : And from Bank of Montreal, we'll go to Keith Buckman. Keith Buckman - Bank of Montreal : Hi, Tim, I was wondering if you could characterize China a little bit. The numbers I understand weren't as good as the rest of the company this quarter but presumably that was all the delay of the iPhone. So I'm really asking if you talk about the last few weeks and more importantly as you look at December quarter in particular related to some of the political backdrop including the carriers have been mandated not to spend the same level of subsidies. Do you see any of that impacting your opportunities for Apple broadly speaking but more specifically for iPhones as it relates to subsidy levels? Tim Cook : That's a good question. If you -- if you just -- if you look at Greater China Q4 of '14 compared to Q4 of '13, the obvious difference is that we launched the 5s in Q4 of '13 and in this year, we didn't have a new product launch. We were launching in this quarter in Q1 of '15. The second thing that's not as apparent probably, but is more related to that is that last year we increased our channel inventory by $1.3 million. This year, we actually decreased it slightly. And so you have a compounded effect of their launch and a huge change in channel inventory on a year-over-year basis. So the way that I assess the strength of the market is I look at unit sell-through and to share with you what it was in Greater China, iPhone unit sell through despite no launch in Q4 was up 32% year-over-year. The market was projected by IDC to only grow 13%. So we feel incredibly great about that. Macs were up 54% year-over-year and that's against the IDC's estimate of the market contraction in China of 7% and so those are two stalwarts that were really driving results and so the underlying results look totally different than the reported results because of the channel inventory kind of differences. The App Store in China is also doing great. The growth there is phenomenal. iPad concreted some during the quarter, but for the full year we did grow -- we were up 9% year-over-year for the full year and so I see lots of positives. As you know China is on the early stages of their huge 4G rollout. Keith Buckman - Bank of Montreal : Yes. Tim Cook : And this weekend -- this past weekend we launched it with China Mobile, China Unicom and China Telecom. This was the first time we've launched a new iPhone with all three carriers and we've done it at the early stages of the 4G rollout and so I am incredibly bullish over it. In terms of subsidies there are regulatory pressures on subsidies. We have -- we've seen that. However, only 20% of the iPhones that we've been selling in China have had a traditional subsidy applied to it and so the vast majority don't. And so will it make a difference with that 20%, I don't know yet. Intuitively you were thinking, it would, but it's at least a percentage of a 20% instead of a percentage of 100%. And so when I look at China, I see an enormous market where there are more people graduating into the middle class than any nation on earth in history and just an incredible market where people brought the latest technology and products that we were providing. And so we're investing like crazy in the market. We're more than doubling our stores. We've got 15 in Greater China today. We're going to be close to 40 in the next couple of years. We've expanded our online store to cover now 315 cities in China. The revenue results for Q4 were up more than double the previous year. The App Store is growing. Chinese developers have now created a 150,000 apps -- of the apps on the App Store and so I see lots of very, very positive factors there and I couldn’t be more excited. Keith Buckman - Bank of Montreal : Okay. And then as my follow-up if I could, Tim, you mentioned before on a previous comment on iPad where you saw I think 50% to 70% in the top six countries were new buyers and related to a previous question, wondered if you could give that same range. I understand it's probably a pretty wide range for iPhones and that was to the June quarter I think. And broadly speaking, how does that number change at least your guess as you look out over the next couple quarters given the launch of the 6 and the 6 Plus. Tim Cook : For iPhone I really have it by model from the June quarter and as I had mentioned before, the highest percentage is the 4s buyer in China over 80% of the people were buying their first iPhone. And for a 5s in China, 50% were and so I think what that says. Those numbers are so high, the 80 that I think are great -- my gut tells me, a great percentage of 6 and 6 Plus buyers will eventually -- a great percentage of those will be new to iPhone. That's what I would predict. Keith Buckman - Bank of Montreal : Okay. That's it for me guys. Thank you. Tim Cook : Thank you, Keith. Nancy Paxton : Thank Keith. A replay of today's call will be available for two weeks as a podcast on the iTunes Store, as a webcast on apple.com/investor and via telephone and the numbers for the telephone replay are 888-203-1112 or 719-457-0820 and please enter a confirmation code 1997837. And these replays will be available by approximately 5.00 PM Pacific Time today. Members of the press can contact Kristin Fugate and financial analysts can contact Joan Hoover or me with additional questions. Thanks again for joining us. Operator : And ladies and gentlemen, that does conclude today’s presentation. We do thank everyone for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,015	1	2015Q1	2015Q1	2015-01-27	1.777	1.881	2.104	2.24	null	14.03	14.34	Executives: Nancy Paxton - Senior Director, IR Tim Cook - CEO Luca Maestri - SVP and CFO Analysts : Shannon Cross - Cross Research Steve Milunovich - UBS Katy Huberty - Morgan Stanley Benjamin Reitzes - Barclays Toni Sacconaghi - Bernstein Gene Munster - Piper Jaffray Rod Hall - JPMorgan Amit Daryanani - RBC Capital Markets Sherri Scribner - Deutsche Bank Bill Shope - Goldman Sachs Operator : Good day ladies and gentlemen and welcome to this Apple Incorporated First Quarter Fiscal Year 2015 Earnings Release Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead ma’am. Nancy Paxton : Thank you. Good afternoon, and thanks to everyone for joining us. Speaking first today is Apple's CEO, Tim Cook; and he will be followed by CFO, Luca Maestri, and after that we’ll open the call to questions from analysts. Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margins, operating expenses, other income and expense, taxes and future products. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s Form 10-K for 2014 and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. And I’d also just like to remind you that as we indicated in our last quarterly call, we’re now including the results of our retail stores in the geographic segments where the stores are located and retail is no longer classified as an operating segment. We’ve also updated our product summary reporting and we’re now reflecting five categories of results; iPhone, iPad, Mac, Services and Other Products. We’ve prepared schedules showing reclassifications of historical operating segment and product results for each of the last 12 quarters to conform to these new groupings and they are available now on our Web site at apple.com/investor. So I’d now like to turn the call over to Tim for introductory remarks. Tim Cook : Thanks, Nancy. Good afternoon, everyone and thank you for joining us. Today we’re reporting on a historic quarter and I'm incredibly proud of everyone who contributed to the amazing results you’re about to hear. Interest in Apple products is at an all time high, with over 0.5 billion customer visits to our physical and online stores during the quarter. Demand for iPhone has been staggering, shattering our high expectations with sales of over 74 million units, driven by the unprecedented popularity of iPhone 6 and iPhone 6 Plus. This volume is hard to comprehend. On average we sold over 34,000 iPhones every hour, 24 hours a day, everyday of the quarter. The execution by all of our teams to achieve these results was spectacular. By the end of the quarter, our new iPhones were available in 130 countries around the world, making this our fastest and most successful roll out ever. Additionally, the App Store and the Mac each set new records for quarterly revenues. Mac units were up 14% to 5.5 million, while the rest of the PC market continued to decline. App Store revenues was up a remarkable 41%. Demand was strong around the world. Flurry estimated that Apple products accounted for over half of all mobile device activations globally from December 19th to December 25th. It was truly a momentous quarter for iOS. On November 22nd we shipped our 1 billionth iOS device. It was a Space Gray 64 gigabyte iPhone 6 Plus, which we’ve saved here at Apple. 1 billion devices is an almost unfathomable milestone, and we are all incredibly proud to be a part of it. Apple’s mission is to make the greatest products on earth and enrich the lives of others. Through the success of iOS we have provided hundreds and millions of people with powerful personal technology that is simple and fun to use. Our customers are using Apple products to transform education, discover new ideas for business and express their creativity in ways that no one could have imagined when we sold the first iPhone less than eight years ago. It’s amazing to watch and it reminds that people and great ideas are the reasons we make the things we make. Our strong overall performance in the December quarter resulted in total company revenue of $74.6 billion, and earnings of $18 billion. Both of these numbers are all-time records for us, with revenues up 30% and earnings up 38% over last year. And due to our very large capital return activities, earnings per share were up even more at 48% to $3.06, also an all-time quarterly record. Our results would have been even stronger, absent fierce foreign exchange volatility. We’ve also made great progress on a number of very exciting new initiatives to further strengthen our ecosystem. We’ve been blown away by the reaction to Swift, our new programing language. Inventing a new programing language is something very few companies can do, and we believe it will have a profound effect on our ecosystem. Swift became available in September as part of the Xcode tools and in the first month those tools were downloaded over 11 million times. A recent report from Redmonk showed that Swift has had unprecedented growth and is quickly climbing the list of the most popular programing languages. We’ve seen many of our developers choosing Swift as they build significant new projects, and we are seeing fantastic work with Swift going on in education. Very recently, Stanford University released their Developing iOS 8 Apps with Swift course, which was posted to iTunes University making this amazing resource available to everyone in the world. There has also been incredible interest in HealthKit with over 600 developers now integrating it into their apps. Consumers can now choose to securely share their health and wellness metrics with these apps and this has led to some great, new and innovative experiences in fitness and wellness, food and nutrition and healthcare. For example, with apps such as an American Well, users can securely share data such as blood pressure, weight or activity directly with physicians, and leading hospitals such as Duke Medicine, Stanford Children and Penn Medicine are integrating data from HealthKit into their electronic medical record so that physicians can reach out to patients proactively when they see a problem that needs attention. With HealthKit and the iOS health app, we believe we’re just at the beginning of amazing new health and wellness solutions for our customers. Our extensions of iOS in the home with HomeKit and in the car with CarPlay also continue to progress and this year we are looking forward to amazing HomeKit enabled products from several companies, and CarPlay enabled vehicles from over 30 automotive brands. Also as you know, we introduced two new categories in the fall and we’re making great progress on both of them. Apple Pay is off to a very strong start and the feedback that we are getting from both individuals and institutions is extremely positive. Today about 750 banks and credit unions have signed on to bring Apple Pay to their customers, and in just three months after launch, Apple Pay makes up more than $2 out of $3 spent on purchases using contactless payment across the three major U.S. card networks. In merchants who already accept Apple Pay, the rates are even higher. Panera Bread tells us Apple Pay represents nearly 80% of their mobile payment transactions, and since the launch of Apple Pay, Whole Foods Market had seen mobile payments increased by more than 400%. You can use Apple Pay up and down Mainstreet, to pick up a prescription at Walgreens at Duane Reade, get office or school supplies at Office Depot and Staples and shop for groceries at national and regional stores from coast-to-coast, including BI-LO, Harvey’s, Save Mart, Wegmans Food Markets, Whole Foods and Winn-Dixie among others. More merchants are excited to bring Apple Pay to their customers and adoption is strong. Just today USA Technologies announced they made Apple Pay available at about 200,000 places where everyday payments happen, including vending machines and businesses, airports and schools, commercial laundry machines and colleges, universities and laundromats and parking meters and payment kiosks in lots across the country. Point-of-sale suppliers tell us they are seeing unprecedented demand from merchants, and all of our partners and customers simply love this new service. With all of this momentum in the early days, we are more convinced than ever that 2015 will be the year of Apple Pay. Development for Apple Watch is right on schedule and we expect to begin shipping in April. Developers are hard at work on apps, notifications and information summaries that we call Glances, all designed specifically for the Watch's user interface. The creativity and software innovation going on around Apple Watch is incredibly exciting and we can’t wait for our customers to experience them when Apple Watch becomes available. We’re also making great progress in our partnership with IBM and our collaboration is winning over new customers. In December, we delivered the first 10 MobileFirst for iOS apps for banking, retail, insurance, financial services, telecommunications, governments and airlines, making iPhone and iPad even more productive for enterprises by providing [Apple] [ph] Cloud services with IBM's Big Data and analytics capabilities. Another 12 apps will be released this quarter, including three new industries, healthcare, energy and utilities, and industrial products. This will bring us to a total of 22 apps and we’re on track to have over 100 by the end of 2015. In just over a month, more than a dozen enterprise customers have signed on as foundation clients to transform their companies with iPhone, iPad and IBM MobileFirst solutions including Miami Dade County, the seventh largest county in the United States by population, and American Eagle Outfitters, which operates more than 1,000 retail stores and ships to over 80 countries worldwide. And the list of new customers is expanding rapidly. IBM is engaged with more than 130 additional companies looking to empower their employees with MobileFirst for iOS solutions and the list keeps growing. We couldn’t be more pleased with this partnership. In addition to all these initiatives, we have a robust product and services pipeline that we are very excited about, and we look forward to sharing more about them with you throughout the year. In addition to the contributions we make to humanity through our products, we made great progress on imported projects during the quarter including ConnectED and (PRODUCT)RED. With ConnectED we’re focused on making a difference for students in communities who need it the most. We recently chose 114 schools across 29 states to receive an Apple ConnectED grant. Despite their economic challenges, all of these schools share a vision of what their students' lives would be like with Apple technology and we’re proud to help them bring that to life. And in December, we undertook our largest ever initiative to help (PRODUCT)RED achieve the goal of an AIDS free generation. To commemorate World AIDS Day, we worked with some of our developer partners to create and donate the proceeds from 25 special apps and we also contributed a portion of sales at our retail and online stores on two of the year’s busiest shopping days. As a result, Apple’s donation set a new record. Delivering the results we’re reporting today reflects months and years of focus and determination from teams across Apple as well as our amazing developers and business partners. I’d like to thank all of them for their commitment and performance and I’d also like to thank our incredible customers for their ongoing loyalty and enthusiasm. With that, I’d like to turn the call over to Luca to discuss our December quarter results in more detail. Luca Maestri : Thank you, Tim and good afternoon everyone. In the December quarter we generated all time record revenue of $74.6 billion, an increase of $17 billion, or 30% year-over-year. We achieved this exceptional performance despite significant foreign exchange headwinds from many currencies. Our growth was broad based across the world, with revenue from developed countries up 20% and revenue from emerging countries up 58%. The performance of our Greater China segment was particularly impressive, with revenue up 70%. Sales were well ahead of our expectations in a number of areas. The unprecedented demand for iPhone 6 and 6 Plus combined with our tremendously successful production ramp allowed us to build and ship several million more iPhones than we had expected when we provided guidance back in October. And also Mac revenue and services revenue reached all-time highs. Gross margin was 39.9% above our guidance range and operating margin was $24.2 billion, representing 32.5% of revenue, and our highest operating margin percentage in 10 quarters. Net income was $18 billion, surpassing our previous all-time record by almost $5 billion. This translated to diluted earnings per share of $3.06, a 48% year-over-year increase. Cash flow from operations was exceptional at $33.7 billion, also a new all-time record. For details by product I will start with iPhone. We sold 74.5 million iPhones, an increase of 23.4 million over last year, representing 46% growth. iPhone sales grew strongly in both developed and emerging markets. Among many great results around the world, unit sales were up 44% in the U.S. and up 97% in the BRIC countries. Sales doubled year-over-year in China, our second largest iPhone market, as well as in Brazil and in Singapore. Thanks to the popularity of iPhone 6 Plus, and the increased value customers saw in our higher storage capacity offerings, iPhone ASPs were $687, an increase of $50 over the year ago quarter. This led to iPhone revenue growth of 57% year-over-year, with quarterly sales exceeding $50 billion for the first time ever. We had a 200,000 unit decline in iPhone channel inventory during December quarter this year, compared to an increase of about 1 million iPhones during the year ago period, and we were not able to reach supply demand balance until this month. This left us below our target range of five to seven weeks of channel inventory on a look forward basis. We’re now working with about 375 carriers, representing 72% of the world’s mobile phone subscriber base, and we have over 210,000 points of sale for iPhone across the globe. Our customers love their iPhones. A December ChangeWave survey measured a 97% customer satisfaction rating for iPhone. A study published by Chitika Insights last month indicated that iPhone accounts for 53% of North America smartphone web traffic, almost twice the level of the next closest brand. And in the corporate market ChangeWave found that among IT buyers planning to purchase smartphones in the March quarter this year, 77% intend to purchase iPhones. Next I’d like to talk about the Mac. We sold 5.5 million Macs, an increase of almost 700,000 units over last year, a 14% growth rate. Thanks for the popularity of our stunning new iMac with Retina 5K display, Mac ASPs increased by $58 sequentially, driving all time record revenue for Mac of 6.9 billion. We achieved double-digit year-over-year unit growth in both desktops and portables. These results are truly remarkable, given the contraction in the global PC market which IDC estimates declined by 3% in the quarter. We have now gained market share for 34 of the last 35 quarters. We ended the quarter with Mac channel inventory slightly below our four to five week target range. Turning to iPad, we sold 21.4 million units compared to 26 million in the December quarter last year. Given the introduction of new iPads in October, we increased iPad channel inventory by 1.1 million units during the quarter, compared to an increase of about 2.1 million in the December quarter last year. This left us within our five to seven week target range of channel inventory on a look forward basis. Customer experience and usage data for iPad continue to be excellent. In our November survey, ChangeWave measured a 98% customer satisfaction rate for iPad Air, and also found that among people to finding a purchase a tabled within 90 days, 60% plan to purchase an iPad. And among businesses planning to purchase tablets, the intent was even stronger at 78%. Chitika Insights' most recent report indicated that iPad users in North America generate over 70% of tablet based web traffic, more than six times the web traffic of the next closest competitor and Custora’s latest e-commerce report indicates that iPad accounts for 82% of all U.S. e-commerce transactions from tablets. All these results are consistent with usage data from the holiday shopping season. IBM’s digital analytics benchmark service found that iOS devices accounted for more than twice the online traffic and almost four times the e-commerce sales on Android devices during November and December. The Apple ecosystem continues to thrive. Combining all of our services, revenue grew to 4.8 billion in the December quarter, a new all-time high and an increase of 9% year-over-year. This record performance was driven primarily by the tremendous momentum of the App Store, with revenue growing 41% in the December quarter. Our iOS developers have earned over $25 billion from the App Store to date, and we’re thrilled with their success. Total sales of media and software from iTunes were $2.6 billion, compared to $2.4 billion in the year ago quarter. Our direct China performance was also outstanding. We welcomed more visitors than ever before and generated record revenue in both our physical and online stores. We opened 10 new retail stores during the quarter, bringing us to a total of 447, 182 of which are outside the United States. We’ve opened two new stores this month in Greater China and we’re on track towards 40 stores in Greater China by mid-2016. Let me now turn to our cash position. We ended the quarter with $178 billion in cash plus marketable securities, a sequential increase of $22.7 billion. We completed our first international debt offering, issuing 2.8 billion euro denominated notes at very attractive interest rates and greatly diversifying our debt investor base. We spent 5 billion to repurchase 45 million Apple shares through open market transactions, paid 2.8 billion in dividends and equivalents, and utilized over 500 million to net share settle vesting employee RSUs. We also retired an additional 8 million shares in connection with our accelerated share repurchase programs. We have now taken action on almost $103 billion of our $130 billion capital return program, including $73 billion in share repurchases, with four quarters remaining to its completion. In the last 12 months alone, we have returned over $57 billion to our investors. We review our capital return program on an ongoing basis. We continue to solicit feedback from a broad base of investors and we're on track to announce an update to the program in April when we report our second quarter results. Now as we move ahead into the March quarter, I’d like to review our outlook, which includes the types of forward looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $52 billion and $55 billion, compared to $45.6 billion in the year ago quarter, and this represents a very significant revenue increase, despite growing foreign exchange headwinds from the continued strengthening of the U.S. dollar against most currencies. We expect gross margin to be between 38.5% and 39.5%, we expect OpEx to be between $5.4 billion and $5.5 billion and we expect OI&E to be about $350 million and we expect the tax rate to be about 26.3%. Also today our Board has declared dividend of $0.47 per common share payable on February 12, 2015 to shareholders of record as of February 9, 2015. With that let's open the call to questions. Nancy Paxton : And we ask that you limit yourself to one part question and one follow-up. Operator may we have the first question please. Operator : [Operator Instructions] First we’ll hear from Shannon Cross with Cross Research. Shannon Cross : Thank you very much and nice iPhone numbers. Can you talk about Luca about currency? How you are thinking about it? What it did this quarter? What it does to gross margin? And what’s it’s going to do during the year? Because that’s clearly a big topic of conversation? Luca Maestri : Yes, Shannon I’ll do that now. I’ll talk about Q1. I’ll talk about what we are looking for Q2 and possibly even further. Obviously, what we’ve seen during Q1 has been unprecedented movements in currencies. I would say during the course of the quarter the biggest impact came from the Japanese yen, the Russian rubel, but also from euro, Australian dollar, Canadian dollar. Our revenue growth during Q1 would have been four percentage points higher on a constant currency basis. On a profitability standpoint, our hedging program partially mitigated the impact from the volatility in currencies. As we look forward, and we look into particularly the March quarter, the foreign exchange headwinds will be stronger in Q2 than they were in Q1 for two main reasons. The first one is the fact that the U.S. dollar has continued to appreciate against foreign currencies during the last few weeks. And the other one is the fact that our existing hedges expire. They get replace by new contracts at current levels and therefore the protection that is provided to us by our hedging program diminishes over time. What that means to us going forward for the March quarter is that revenue growth on a year-over-year basis in constant currency would be five point higher than what we are guiding to, if it wasn’t for the FX movements. In terms of gross margins, and you know that we look our gross margins on a sequential basis, the gross margin percentage after the offset that we're getting from the hedging program will be impacted by over 100 basis points. Now having said that, we have factored the impact that I just described into the guidance that we provided to you. So that’s where we are right now. Of course, as you look further out, you know we do not provide guidance past the March quarter, but it goes without saying that at current levels, again those headwinds will continue to become stronger for the reason I explained earlier, that our hedges continue to expire, they get replaced by new hedging contracts at current levels and so -- and there is the impact that we would see during the course of the year. It goes without saying strong U.S. dollar has negative impact on our international business. Having said all that, we have provided what we believe is very strong guidance for the March quarter. We remain very, very confident about the portfolio of products and services that we have in the market today and we remain very, very confident in the pipeline of products and services that we have. Shannon Cross : And as a follow-up to that, can you talk a little bit about pricing power? Basically as you think about currency and euro movements and that -- and then the contracts you have with the carriers, can you talk about maybe the opportunities to raise prices, because I know it's something that a lot of companies are balancing right now? Luca Maestri : I think as you know, we prefer to adjust local pricing at the time of new product launches. That will be obviously our preference. That’s what we do in normal times. When currencies move as much as they have been in places like Russia for example, sometimes we need to take mid-cycle action to realign pricing. So we’ll see what happens. As you know currency markets tend to be very volatile. So we just want to understand a bit better what is happening. Operator : From UBS we’ll hear from Steve Milunovich. Steve Milunovich : I wonder if you could address the mix of the iPhone 6 line. Specifically, how did the 6 Plus do? I don’t know if you can give us a sense relative to total units, maybe geographic view, and also availability? Are you calling up on the 6 Plus? Tim Cook : Steve, its Tim. We don’t report out the precise mix. But what I can tell you is that iPhone 6 was the most popular iPhone last quarter, but I just believe to sell 74.5 million they were really all popular. And all did well. There is clearly a geographic difference where some geos would skew much higher on their preference to iPhone 6 Plus than other geos. And so it’s something that is not consistent around the world. But both did incredibly well, and we’re really proud of them, along with the iPhone 5S and 5C as well, which continues to in the lineup. Steve Milunovich : Okay. And then could you update us in terms of the sell through relative to the reported numbers for the Phone, the Pad and your biggest plans to increase by roughly a week of channel inventory? Tim Cook : From an iPhone point of view, as I think Luca covered, our channel inventory decreased from the beginning of the quarter by 200,000 units, and that left us outside of our target range on the low -- outside the low end of the range to be specific. Just recently we became in supply demand balance on the 6 and 6 Plus in January. We were not able to reach a balanced state during our fiscal Q1. On iPad, we increased channel inventory by 1.1 million units from beginning of the quarter to end of the quarter. That compares to the previous year where we're increased to 2.1 million. Obviously, that inventory was required because of all the new products that we announced on iPad with the iPad Air 2 and the iPad Mini 3 in the October timeframe during the quarter. At the end of the quarter, we were within the target range of channel inventory on iPad. In terms of growing channel inventory, in particular on iPhone where we’re outside of it, we wouldn’t expect to see a large step function increase. We would expect it to occur more gradually over time than sort of all at once type of thing. But we don’t guide to channel inventory specifically as you know. Nancy Paxton : Thank you, Steve. Can we have the next question please? Operator : From Morgan Stanley we’ll go to Katy Huberty. Katy Huberty : So not to dilute the fantastic performance in December, but can you talk a little bit about how you think about the sustainability of this very strong iPhone demand into 2015, particularly given that most carriers had access to that product during the quarter? And then I have a follow up on margin? Tim Cook : Sure Katy. It’s Tim. You can see from the March guidance that we’ve given, that we are incredibly bullish about iPhone going forward. We believe that it’s the best smartphone in the world. Our customers are telling us that. The market is telling us that. We’re doing well in virtually every corner of the world. And so we’re very bullish that it does have legs. I would point out that only a small fraction of the installed base has upgraded. And so there is a lot more people within the installed base. But I would also point out that we had the highest number of customers new to iPhone last quarter than in any prior launch. And also that the current iPhone line up experienced the highest Android switcher rate in any of the last three launches in the three previous years. And we didn’t look back to the other years. So I don’t know about those. And so we see that we’re appealing to new customers, both new to smartphone and new to iPhone and people switching. We’re very bullish on the product and getting great feedback about the quality of the products we’re shipping. And so we’re very, very bullish. The emerging markets which has been a source to great questions over time, the growth was absolutely stunning, in Brazil and Mainland China more than doubling year-over-year which is 3x to 4x what those markets were doing according to IDC. And so we enter the quarter with quite a bit of momentum. Katy Huberty : And Luca as you know, you typically enjoy component cost downs and yield improvements as you move through a product cycle. Is there anything other than currency that keeps you from potentially locking the gross margins higher over the course of the year? Thank you. Luca Maestri : Katy, you’re right. I mean on both fronts. We certainly expect more favorable cost in the March quarter than we’ve seen in the December quarter. It goes with our product cycle. The foreign exchange headwinds as I was explaining to Shannon, they will be on a sequential basis a headwind of more than 100 basis points. So if you were to exclude that foreign exchange impact, we would actually be guiding to sequential increase in margins. The other element that is there and it’s very seasonal, it’s always there, it’s the loss of leverage that we got from Q1 to Q2. When you look at our revenue guidance, we are guiding to a sequential decline between 26% and 30%. So you obviously have that loss of leverage, but without a doubt the biggest headwind that we got right now is foreign exchange. Having said all that guiding 38.5% to 39.5%, we feel slightly very good about where we are right now in the cycle. Nancy Paxton : Katie could we have the next question please? Operator : We’ll go to Benjamin Reitzes, Barclays. Benjamin Reitzes : And Tim obviously a lot of good questions about the great iPhone number but I wanted to ask about the Apple Watch. Shifting in April, month or two later than I think you said originally obviously, probably not that big a deal, but what’s going on with that product in a little more detail in terms of the timing and your excitement for it and maybe a little more color on other apps that could be available at launch? And any expectations you have for it would be great. Tim Cook : My expectations are very high on it. I'm using it every day and love it and I can’t live without it. So I see that we’re making great progress on the development of it. The number of developers that are writing apps more for it are impressive and we’re seeing some incredible innovation coming out there. And just to clarify, what we had been saying was early 2015, and we sort of look at the year and think of early as the first four months, mid is the next four months and late is the final four months. And so to us it's sort of within the range and it’s basically when we thought. We’re going to -- but most importantly we’re going to be thrilled to start shipping it, because we got a lot of customers that are wanting to get one. Benjamin Reitzes : And then just a follow-up in terms of China. How do you feel the momentum there is in terms of sustainability versus some of the local competition, and as you navigate that market specifically going forward? Tim Cook : The local competition was obviously there this quarter and has been there for many quarters before. And so the local competition is not new. I think we did really well there. I'm very proud of how we’re doing. I was there right after the launch in October. And the excitement around the iPhone 6, iPhone 6 Plus were absolutely phenomenal. And you can see that in the results with Mainland China being up 100% year-on-year, despite not having a full quarter of sales since we launched in the second half of October. You can tell by that we’re a big believer in China. We’re looking at our investment. We’re growing the number of stores. We’ll hit 20 soon and we’re doubling that by mid-2016 as Angela has said earlier and Luca said in his prepared comments as well. We’re also growing the channel there. Our online store has expanded to over 350 cities now, and in fact our online revenues in China last quarter were more than the sum of the previous five years. And so it’s an incredible market. I think people love Apple products and we are going to do our best to serve the market. Nancy Paxton : Could we have the next question please? Operator : From Bernstein we’ll hear from Toni Sacconaghi. Toni Sacconaghi : I was wondering if you could comment on your revenue guidance. Luca you mentioned the range as down 26% to 30% sequentially. I think if you look back over the last three or four Q1 to Q2s, revenues declined more in the 15% to 20% range. As you noted, your iPhone channel inventory is below your target range as well. So if anything, that might be going up. So I'm wondering if you could just discuss a little bit what factors are contributing to this steeper than normal decline this quarter, particularly given your ongoing enthusiasm for the phone. Luca Maestri : First of all, it’s a 20% year-over-year growth that we’re guiding at the top end of the range. So we obviously feel good about a 20% growth. As we look at it on a sequential basis, there's a couple of things that I think is important to point out. I mentioned the foreign exchange headwinds. They are there. We need to deal with them, but they obviously are a negative to revenue. Those are headwinds that we had this year and were not there a year ago. So that’s one factor. We’ve also said the manufacturing ramp that we’ve had this year in the December quarter has been the fastest that we’ve ever had. And so that’s also a factor that impacts the sequential compare. And then there's a couple of specific events that happened last year in the March quarter which are not going to repeat this year. One of them is the fact that last year in January we launched China Mobile and we had the subsequent channel sale for China Mobile. That of course is not going to repeat this year. And we also had a very, very strong quarter in Japan in the March quarter a year ago, which was driven by very significant carrier promotional activities, and a pull forward of sales into the March quarter in anticipation of a consumption tax increase that took place on April 1, and again that is not going to repeat. So when you take those factors into account, I think that explains the sequential decline that we see this year. Again I want to point out to the 20% year-over-year growth. Toni Sacconaghi : Luca just to confirm, sequentially my math is saying it's about two point incremental revenue headwind. Is that the right way to think about it? Luca Maestri : From FX? Toni Sacconaghi : Yes. Currency. Luca Maestri : Right. Toni Sacconaghi : Sequentially, okay. Tim, I was wondering if I could have my -- direct my follow-up to you, which is the iPad. You’ve spoken on prior calls about your enthusiasm for the product on a go forward basis. Over the last year it's down double-digits from a unit perspective and ASP has also been declining. So I was wondering if you could comment on whether your bullishness about the iPad persists and is it really -- do you believe it's a replacement cycle, that we will ultimately see that will start to drive growth or is there really innovation in product that is both necessary and forthcoming that’s going to drive that growth? Tim Cook : Toni, I am still very optimistic and bullish on iPad over the long run, as I’ve indicated before. When you measure it in these 90-day clips, as we do in the short run, I don’t think you're going to see a miraculous change in the -- or an improvement in the year-over-year. But here is what I see when I look at it and the reason that I'm so optimistic. I see that the first time buyer rates are very high. And so by very high, I mean that if you look in some of the developed market like the U.S., Japan, the UK, you would find that 50% of the people are buying an iPad for the first time. If you look in China, it's over 70%. And so that -- when you have that kind of first time buyer rates, you don’t have a saturated market. When I look at the customer stat on iPad, it's literally off the charts, in some cases a 100%, which is unheard of in surveys to get these kind of customer stat ratings. When I look at the usage, the usage is six times our nearest competitor. The usage is defined as measured in web browsing is like 71% of total tablets, as I think Luca covered earlier. Also the commerce taking place across the iPad is enormous. Essentially over 80% of the commerce on tablets are taking place on iPad. And so when I back up and look at all of these, and I believe that over the long arc of time that the iPad is the great business, I also have visibility obviously of what’s in the pipeline and feel very, very good about that. That said, I'm not projecting -- to be clear with everyone, I'm not projecting something very different next quarter or the next. I'm thinking over the long run. In terms of what I think is going on, I think what you said is absolutely true, that the upgrade cycle is longer. It's longer than an iPhone, probably between an iPhone and a PC. We haven’t been in the business long enough to say that with certainty, but that’s what we think. There is probably some level of cannibalization that's going on with the Mac on one side and the Phone on the other. And so you probably have a little bit of that that is shaking out. How much, very hard to tell on the early going, particularly since we just shipped the new phones a few months ago. And so I think there's some things like that are going on. On the other side I think the partnership with IBM and the work that we have going on in the Enterprise is profound. I think we’re really going to change the way people work. I'm really excited about the apps that are coming out and how fast the partnership is getting up and running. And so I think that can move the dial there. And so I'm not predicting the 90-day clips and so forth, but over long arc of time I really believe that iPad is a great space, a great product and with -- also coupled with the product innovation we’ve got, I think there is a very, very bright future for it. Operator : We'll go to Gene Munster with Piper Jaffray. Gene Munster : A couple of questions for Tim. First, any updates on Apple TV or your broader biz in the living room? And second a high level question about Apple Pay and some of the successes at point-of-sales. Can you talk a little bit about if in app is important or how important that is? And potentially how the product could evolve over time? Could you see this becoming more consumer to consumer or more just kind of a broader payment platform? Thank you. Tim Cook : Gene, on Apple TV, we had a solid quarter with existing product. We’ve sold 25 million Apple TVs now which at the sake of repeating myself, it’s something that we continue to look at and work on and find a way that we can make even greater contribution than what we’re doing. On Apple Pay, both the contactless payment and the in app are both important. I think they are both huge opportunities. I think they’ll play out differently in different geographic regions as to which one is larger than the other and well likely -- the mix of those things will change over time as more and more commerce flows across apps and so forth. In terms of how it evolves, I think we're in the first inning on it. I'm not -- we haven’t even completed the first inning yet. There's tons of things on our roadmap of adding functionality to it. We’re obviously -- we're just in the U.S. right now and so there's tons of countries to go to and there is not a day that goes by that I don’t get notes from many businesses outside U.S. running Apple Pay and banks and merchants. And of course we still have a lot of merchants left in the U.S. But I have to tell you that given that we’ve launched in October, I'm actually unbelievably shocked, positively shocked at how many merchants were able to implement Apple Pay in the heart of their holiday season, because generally most people sort of lock down and don’t do very much. But we were able to get this in a lot of different merchants and I give them a lot of credit for that. But I think we’re just on the front end. And I think that this is the year of Apple Pay. And some of the things you mentioned and others are all things that we’re looking at and in many cases working on in terms of where it can take us. Nancy Paxton : Thank you, Gene. Could we have the next question please? Operator : From JPMorgan we’ll go to Rod Hall. Rod Hall : So I wanted to start off Tim. You talked about the smaller of the user base who have upgraded to iPhone 6 or 6 Plus. And I wonder if you could give us a little bit more color on that, maybe even go as far as quantifying how many of the base you think have upgraded and also talk a little bit about the pattern of upgrades? Are they all tending to be over iPhones or is there are good spread? Can you give us any further color on that? Thanks. Tim Cook : It’s a small fraction. It’s a number that's in the mid-teens or barely in the teens. And so when I look at that I say that there is an enormous amount left. And given there are fair amount of Android units out there, there is also an enormous amount of Android customers that could switch. And I’d also remind you that there is a lot of people that have not yet bought a smartphone. And I know it doesn’t feel like that when you’re sitting in the United States, but from a worldwide point of view there's still lots of them. And so I see all three of those groups there and I'm very excited about all of them, and serving all of them. Rod Hall : And then my follow up I’d like to direct at Luca. Luca, I wonder, could you talk a little bit about the duration of the hedge contracts and the renewal pattern that we should expect to see this year? Just kind of remind us what your typical renewal pattern is and will you be accelerating that this year given all the currency movement? Luca Maestri : Yes Rod. Typically, I think, we have clearly active hedging programs of winning the market almost every day, but we tend to hedge three to 12 months out. There are cases where maybe we’ve had to go a bit longer, if we feel that we have a strong conviction about certain currencies. Otherwise again the typical period is three to 12 months. And as hedges roll off, we replace them with new hedges. We take into account the exposures that we have around the world, taking into account our most recent forecast and we hedge accordingly. We feel very good about our hedging position and the decisions that we’ve made particularly during the summer when we felt that maybe we needed to hedge a bit more than we have done historically. Tim Cook : It’s probably worth pointing out too that there is some markets where we can’t economically hedge. Luca Maestri : Yes. There are some exposures where the cost of hedging is prohibitive or the financial instruments are not there to hedge. And in those cases of course that’s where you get the full impact of the volatility. Nancy Paxton : Thanks Rod. Could we have the next question please? Operator : From RBC Capital Markets we’ll go to Amit Daryanani. Amit Daryanani : I just have two questions. One maybe just on the gross margin side. I want to understand, the 100 basis points of headwind that you're talking about in the March quarter, is that sort of is -- there is some still protection on the hedges or is that a raw number with no hedges in place? Luca Maestri : That’s correct. I think its good clarification. I was talking about the net impact after the hedges. The impact without hedges would be higher. And again this is sequentially right. Because on a year-over-year basis actually the impact is larger, given the fact that currencies have moved during the last 12 months. But the 100 basis points that I quoted includes the mitigating impact of the hedging program. Amit Daryanani : And just, when you think about the iPad and you talked about the IBM partnership where you're seeing some traction. Could you just talk about what sort of penetration do you guys think iPads have on an enterprise side right now and how do you see that improve over the next few quarters as you roll out the MobileFirst modules with IBM. Tim Cook : We think that what we know, that if you look at the Fortune 500 as an example, we’re in essentially all of the Fortune 500 companies. So the issue is not that, and it’s not a market share number, because our market share is extremely high. The issue is that enterprises, generally speaking are only deploying iPads to a small percentage of their workforce. And so the real opportunity is to bring mobility into the enterprises and change how people work. In order to do that, you obviously need apps that are written to specific jobs, not just apps that are general productivity apps like work processors and spreadsheets and presentation tools et cetera. And so that’s one of the things that working with IBM provides us, is both that and the knowledge of the verticals, which they bring a significant amount of knowledge on all of the verticals that I mentioned earlier. And so where can we take that to? I think if we can really change the way people work, I think the opportunity is enormous. We’re not hanging numbers out there to be measured on at this point, but we don’t do a lot of big partnerships as you probably know. And so when we do one, it is significant and it’s because we really believe in it, and we really believe in this one and what it can do for customers. Nancy Paxton : Thank you Amit. Can we have the next question please? Operator : From Deutsche Bank we’ll hear from Sherri Scribner. Sherri Scribner : Luca, I was hoping you can give us some detail on your expectations for operating expenses going forward. I know you’ve been investing pretty significantly in new products, but wanted to see how we should think about those trending over the next couple of quarters? Luca Maestri : Sherry, as you know, we provide guidance just for the upcoming quarter. And from what you’ve seen from our guidance for the March quarter, we’re guiding to a growth in OpEx on a year-over-year basis that is similar to what we’ve experienced during the course of the December quarter. We obviously feel good about the business during the December quarter. Our revenue exceeded in terms of growth, our growth in operating expenses. There's going to be quarters where the opposite is going to happen. Our expense to revenue ratio during the December quarter was that 7.4%. It was the lowest that we’ve had in two years. It’s among the lowest ratios that we’ve ever had. But obviously we are investing in the business and we will never under invest in the business. The majority of the increase will continue to come from R&D, given the fact that we’ve expanded our product portfolio and we’re making investments all the time ahead of the revenue that would be generated in the future. We also expect to continue to invest in marketing and advertising. We’re expanding distribution all over the world. We’ve taken our brand to more places and we continue to open new retail stores around the world. And so the idea for us is to continue to invest in the business, making the right trade-offs and the results from the December quarter give us very good confidence for the future. Nancy Paxton : Could we have the next question please? Operator : We’ll go to Bill Shope with Goldman Sachs. Bill Shope : I wanted to follow up on your previous comments on the iPhone and the customer composition for the quarter. Considering the iPhone 6 Plus brought you into entirely new segment of smartphone market, can you give us a bit more color on that customer composition for this device? Specifically you mentioned the differences in geographic adoption, but how about on the Android switcher comments you made earlier, and first time adopters relative to the traditional iPhone 6 and your other iPhone models in the past. And I guess related to that, what do you think this tells you about your ASP and unit opportunity for growth in 2015? Tim Cook : Bill, at this point, just shortly after the quarter, we don’t have all of our research in from all of the people that bought last quarter. But in the aggregate, as I've mentioned before, we saw more new customers to iPhone than we had ever seen before. And we had a higher rate of Android switchers than we had in the three previous launches. And it’s not that we had more in the fourth one, and I don’t what those numbers are, and whether it's something we're looking at. And so between the switchers and the people that are just new to smartphones and selected an iPhone, and our upgrades, which we’re very happy with, but represent a small fraction of our installed base, we feel really great about what’s in front of us. Bill Shope : Makes sense. And then a follow up on your Apple Pay commentary. When we look at the opportunity outside of the U.S. are there unique hurdles we should consider as we think about the timing of the rollouts in Europe and Asia, or is it really just about following partnerships together? Tim Cook : Each has a different implementation. And so in some ways, like there is a different set of carriers in every country, there is a different set of banks. In a lot of the countries, some of the processes with the merchants are different. And so it’s an area where there is quite a bit of difference country to country to country and so there's clearly heavy lifting involved to scale. However it’s not something that scares us or that’s preventing us from viewing it as a big opportunity. Nancy Paxton : Thank you, Bill. A replay of today's call will be available for two weeks as a podcast on the iTunes Store, as a webcast on apple.com/investor and via telephone and the numbers for the telephone replay are 888-203-1112 or 719-457-0820 and please enter a confirmation code 8259681. And these replays will be available by approximately 5.00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Fugate at 408-974-2414 and financial analysts can contact Joan Hoover or me with additional questions. Joan’s at 408-974-4570 and I am at 408-974-5420. Thanks again for joining us.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,015	2	2015Q2	2015Q2	2015-04-27	1.988	2.091	2.314	2.385	null	13.71	13.35	Executives: Nancy Paxton - Senior Director, IR Tim Cook - CEO Luca Maestri - SVP and CFO Analysts : Bill Schultz - Goldman Sachs Katie Huberty - Morgan Stanley Gene Munster - Piper Jaffray Tony Sacconaghi - Sanford Bernstein Shannon Cross - Cross Research Steve Milunovich - UBS Kulbinder Garcha - Credit Suisse Keith Bachman - BMO Capital Markets Operator : Good day everyone, and welcome to this Apple Incorporated second quarter fiscal year 2015 earnings release conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma’am. Nancy Paxton : Thank you. Good afternoon, and thanks to everyone for joining us. Speaking first today is Apple's CEO Tim Cook, and he will be followed by CFO, Luca Maestri. After that, we’ll open the call to questions from analysts. Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements including, without limitation, those regarding revenue, gross margins, operating expenses, other income and expense, taxes, future business outlook, and plans for dividends, share repurchases, and public debt issuance. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s Form 10-K for 2014, the Form 10-Q for the first quarter of 2015, and the Form 8-K filed with the SEC today, along with the associated press releases. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I’d now like to turn the call over to Tim for introductory remarks. Tim Cook : Good afternoon everyone, and thanks for joining us. We have a lot of great news to talk about, so I’ll jump right in. Today, we’re reporting our strongest March quarter ever, with 27% revenue growth and 40% earnings per share growth year over year. We’re seeing fantastic results for iPhone, with revenue growth of 55% year on year, and we’re seeing a higher rate of switchers than we’ve experienced in previous iPhone cycles. The success of iPhone has been extremely strong in emerging markets, where unit sales were up 63% year on year. The App Store had its best quarter ever, with a record number of customers making purchases, driving a new record for revenue and 29% year on year growth. We also reached an all-time quarterly record of $5 billion in total services revenue. We also continue to defy the trend of declining global PC sales, with double digit Mac unit growth in a market that IVC estimates contracted by 7%. We’re now halfway through fiscal 2015 and our year to date results have been simply staggering. We sold over 135 million iPhones, 34 million iPads, and 10 million Macs in the first six months of the year. Our revenue has grown by 28% to over $132 billion, net income has increased 36% to over $31 billion, and EPS has grown by 44%. We’re making many strategic investments in Apple’s future, in research and development, in our supply chain, and in our infrastructure, and we’ve made 27 acquisitions in the last six quarters. We’re in the very fortunate position of generating more cash than we need to run our business, and keep making these important investments. So today, we’re announcing another significant update to our capital return program, expanding its size to $200 billion through March of 2017 to reflect our strong confidence in what lies ahead for Apple. Luca will go into this in more detail in a moment. We’re also making great progress in many other areas. The Apple ecosystem continues to expand in exciting ways. We’re seeing great momentum with Apple Pay. Discover announced today that its cardmembers in the United States will be able to make contactless payments in participating stores through Apple Pay beginning this fall. And last month, we said that the number of locations accepting Apple Pay has tripled, and we continue to see great progress with merchants. Best Buy, which has been a longtime, strong partner of ours, has just announced that it’s now offering Apple Pay in-app and later this year will offer Apple Pay in all of their U.S. stores. And merchants aren’t the only ones jumping onboard. Earlier this month, a leading healthcare payment network announced acceptance of Apple Pay for its clients, so over 50 major hospitals across the country, including Stanford Healthcare and Aspen Valley, will accept Apple Pay this year for copays and bill payments at registration and check in. We’re also incredibly inspired by the momentum we’re seeing in health-related solutions. Since we released HealthKit with iOS 8 last September, over 1,000 apps have been developed to transform how people track, manage, and interact with their health and they’re now available on the App Store. Just this past weekend, Cedars-Sinai in Los Angeles turned on the largest HealthKit integration to date, giving more than 87,000 patients the ability to share their health and fitness data seamlessly with their MyCS link app, which syncs with their electronic medical record. And last month we announced ResearchKit, an open source software framework that helps doctors and scientists gather data from medical research participants more efficiently and accurately using iPhone applications. The response so far has been simply amazing, far exceeding our expectations. The first research apps developed using ResearchKit study asthma, breast cancer, cardiovascular disease, diabetes, and Parkinson’s disease, and have enrolled over 60,000 iPhone users in just the first few weeks of being available on the App Store. Over 1,000 researchers have contacted us expressing interest in performing studies through ResearchKit. We think these types of solutions have the potential to revolutionize medical studies in life-changing ways, and we’re proud that Apple is helping make this possible. Last quarter, we also announced a major economic investment in Europe, where we will spend $2 billion to build data centers in Ireland and Denmark. These will be our largest data centers in the world. Apple is now responsible for creating over 670,000 jobs across the European continent. Most of them have grown out of the success of the App Store, which has generated more than $7.5 billion for European developers since just 2008. We feel great about the economic contribution we’ve been able to make in Europe. The two data centers we’re building will run on 100% renewable energy from day one. This is just part of the work we’re doing to protect the environment and leave the world better than we found it. Today, 100% of Apple’s U.S. operations and 87% of global operations are powered by renewable energy. Just before Earth Day, we announced our plan to move to renewables in China. We’re undertaking a groundbreaking partnership with several companies to build a 40 megawatt solar farm in Szechuan Province that will generate far more than the amount of energy used by all of our offices and retail stores in China combined. We also announced an innovative new partnership with the Conservation Fund to permanently protect more than 36,000 acres of working forest in Maine and North Carolina to help offset the impact our packaging has on the world’s supply of sustainable virgin fiber. Apple is deeply committed to these initiatives and will continue to make them a priority. The June quarter is off to an exciting start with great new products and services. Three of them in particular are giving our customers a glimpse of the future and we are very happy with the reception that each of them is receiving. First, the all-new MacBook began shipping just over two weeks ago, and we are very happy with the response we’re getting from customers. The new MacBook is our lightest, most compact Mac notebook ever, and you really have to see it to believe it. It features a stunning 12 inch retina display, a new force touch trackpad, all day battery life, and a revolutionary new keyboard. We believe, and I think most everyone agrees, this is the future of the notebook. Second is the new streaming service from HBO, which is available on Apple TV and iOS. We teamed up with HBO last month to help launch HBO Now, a standalone service that lets customers stream the content they love from HBO on the devices they love from Apple, all without requiring a subscription to cable. HBO now has been incredibly popular with Apple TV users since its debut, and it has been one of the top downloaded apps on the U.S. App Store as well. And third, of course, is Apple Watch. It’s been really great to see the reaction of customers since their watches began arriving on Friday morning. All around the world, we’ve seen the excitement on social networks as people start using their Apple Watch. The response has been overwhelmingly positive. Adding to the surprise and delight of Apple Watch are the more than 3,500 apps that are already available. Our developer community has already seen the potential in this new category and put some of their best thinking into what wearable technology can do. We can’t wait to see more of the inspiring apps developers dream up for Apple Watch as we head into our Worldwide Developer Conference six weeks from now. I’d like to thank all of those developers and our hundreds of millions of customers for their loyalty and support. I’d also like to thank all of the Apple employees around the world for their creativity, tireless effort, and passion for delivering the very best products in the world. With that, I’ll turn the call over to Luca. Luca Maestri : Thank you, Tim. Good afternoon everyone. As Tim mentioned, we just completed another outstanding quarter. Revenue for the March quarter was $58 billion, an increase of $12.4 billion or 27% year over year. Growth was driven primarily by the very strong performance of iPhone and the continued strength of the App Store and Mac sales. We achieved these terrific results despite growing foreign exchange headwinds. Our performance was particularly impressive in our Greater China and rest of Asia Pacific segments. In Greater China, we established an all-time quarterly record for revenue, which grew 71% year over year, to $16.8 billion. Gross margin was 40.8%, ahead of our expectations, mainly due to stronger than expected iPhone results. Operating margin was 31.5% of revenue and net income was $13.6 billion, a new Q2 record. Diluted earnings per share were $2.33, a 40% year over year increase, and cash flow from operations was $19.1 billion, also a new March quarter record. For details by product, I will start with iPhone. We sold 61.2 million iPhones in the quarter, representing 40% year over year growth and demand for iPhone 6 and 6 plus has remained incredibly strong. IPhone sales more than doubled in Korea, Singapore, Taiwan, and Vietnam, and they were up 80% or more in several other markets including Canada, Mexico, Germany, and Turkey. The strong mix of iPhone 6 and 6 plus combined with the popularity of higher capacity offerings led to iPhone ASPs of $659, an increase of $62 year over year, despite the very significant foreign exchange headwinds I already mentioned. We increased iPhone channel inventory by 1 million units during the quarter, which allowed us to get into the low end of our target range of 5 to 7 weeks of channel inventory. Next, I’d like to talk about the Mac. We sold 4.6 million Macs, representing 10% year over year growth, which is particularly impressive in the context of IDC’s latest estimate of a 7% global PC market contraction. The growth was led by portables and spurred by the updates to MacBook Air and MacBook Pro in March. We ended the quarter within our 4 to 5 week target range for Mac channel inventory. Turning to iPad, we sold 12.6 million, compared to 16.4 million in the year ago quarter. iPad sellthrough was 13.7 million, as we reduced channel inventory by about 1.1 million units, coming off the holiday quarter. This left us within our 5 to 7 week target range of iPad channel inventory. We set a new March quarter record for iPad sales in Japan, and an all-time record for iPad sales in China, but performance in other markets was more muted during the quarter. iPad turns five years old this month, and in every year since its introduction, it has been the number one tablet in sales, in quantity and quality of tablet apps, in usage, and most importantly, in customer satisfaction. And based on the latest data from NPD, iPad maintains a very strong leadership share in all the price bands where we compete. iPad has also consistently been the number one tablet in enterprise. A recent Changewave survey found that among corporate buyers planning to buy tablets in the next six months, 77% plan to purchase iPads. In fact, we are seeing very high interest from companies who want to use iPads to transform how work gets done. The vast majority of the app opportunities that have been identified as part of the Apple and IBM partnership are specifically for iPad. In addition to IBM, we working closely with more than two dozen other leading business software and solution providers including Box, Docusign, Microstrategy, Revel, and ServiceMax to bring a broad range of innovative mobile solutions to more customers on iPad. Turning to services, revenue grew to a new all-time record of $5 billion, an increase of 9% year over year. The growth was led by the App Store, which remains incredibly popular with our customers around the world, with revenue up 29% in the March quarter. According to App Annie, the App Store generated 70% more global revenue in the March quarter than Google Play, up from a 60% lead in the September quarter. Traffic to our retail and online stores was excellent, with a 22% year over year increase in customer visits. We’re progressing well with our plans for retail store expansion in Greater China, where we added six new stores in the past quarter alone, bringing us to 21 stores in 11 cities. We’re on track to have 40 stores open in Greater China by the middle of next year. Let me now turn to our cash position. We ended the quarter with $193.5 billion in cash, plus marketable securities, a sequential increase of $15.6 billion. Over $171 billion of this cash was offshore. In the March quarter, we issued 6.5 billion U.S. dollar denominated notes and 1.3 billion Swiss franc denominated notes as we continue to diversify our global debt investor base. We’ve now raised a total of $40 billion of term debt at very attractive rates. We spent $7 billion to repurchase 56.4 million Apple shares through open market transactions, paid $2.7 billion in dividends and equivalents, and utilized about $100 million to [net share] settle vesting employee RSUs. We also retired an additional 13.3 million shares during the quarter, with the conclusion of the accelerated share repurchase program we launched last August. We have executed our capital return program aggressively, and we’ve now taken action on over $112 billion of our $130 billion program, including $80 billion in share repurchases at an average price of $85. As we’ve said consistently, creating value for shareholders by developing great products that enrich people’s lives will always be our top priority and the key factor driving our investments and our capital allocation decisions. With this framework in mind, Apple’s board and management team continue to review capital allocation regularly, and we solicit input on our program from a broad base of shareholders. This process allows us to be thoughtful about the size, the mix, and the pace of the program. We very much appreciate all the input that many shareholders have provided us. We continue to be in the fortunate position of being able to return significant capital to shareholders. We first announced our capital return program three years ago with an initial size of $45 billion, and we’ve increased it annually since then. Today, we’re announcing the third update to our program, expanding its size by the largest amount yet and extending its duration. The existing program was set to conclude at the end of this calendar year, and we’re now extending the program by five quarters to the end of March 2017. Once again, with this update we’re allocating the majority of the expansion of the program to share repurchases, given our strong confidence in the future of Apple and the value we see in our stock. The board has increased the share repurchase authorization by $50 billion, raising it from the current $90 billion to $140 billion. We will also continue to net share settle vesting employee restricted stock units. We also understand that the dividend is very important to many of our investors and we’re raising it for the third time in less than three years. The quarterly dividend will grow from $0.47 per share to $0.52 per share, an increase of 11%. This effective with our next dividend, which the board has declared today and is payable on May 14, 2015 to shareholders of record as of May 11, 2015. We believe this is a meaningful increase for those shareholders who value income, and we continue to plan for annual dividend increases going forward. With over $11 billion in annual dividend payments, we’re proud to be one of the largest dividend payers in the world. In total, the size of our revised capital return program will increase by over 50%, from approximately $130 billion to $200 billion. As we’ve done in the past, we expect to fund our capital return program with U.S. cash, future U.S. cash flow generation, and borrowing from both domestic and international debt markets. And we plan to provide the next update on our program at about this time next year. Now, as we move ahead into the June quarter, I’d like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $46 billion and $48 billion, compared to $37.4 billion in the year ago quarter. We expect gross margin to be between 38.5% and 39.5%. We expect opex to be between $5.65 billion and $5.75 billion. We expect YNE to be about $350 million and we expect the tax rate to be about 26.3%. With that, let’s open the call to questions. Nancy Paxton : Thank you, and we ask that you limit yourself to one one-part question and one follow up. Operator, may we have the first question, please? Operator : [Operator instructions.] Your first question will come from Bill Schultz, Goldman Sachs. Q – Bill Schultz : When we look at the effect of currency on your gross profit, which I think was far less than anyone anticipated, have you be able to reduce some of the pressure by adjusting the terms of your suppliers? Or is that something we should expect to see more of as you progress through the year? A – Luca Maestri : I’m gonna give you some numbers on the currency, because I know it’s a topic that is top of mind. You’re asking about gross margin, and you know, we look at this on a sequential basis. And I mentioned during the call in January that we were expecting FX to have a negative impact on a sequential basis of about 100 basis points after the effect of the hedges. And that is exactly what happened in our actual results. So that was pretty much in line with what we were anticipating. Of course, we expect this headwind to continue. And on a sequential basis, when we look into the June quarter, we expect to see another 40 basis points of negative impact from currency. We’re dealing with these headwinds. They’re part of business, and so we’re dealing with them in many ways. We are looking at, in some cases, at the potential to increase prices in certain markets. We’re looking of course at our cost structure, and we try to remain as competitive as possible. So we feel very good about the gross margins that we’ve generated in the March quarter, and we feel very good about the guidance that we provided, given the severity of the impact. Q – Bill Schultz : And then as a follow up, obviously, I guess one of the incremental tailwinds to gross margin continues to be the iPhone upside relative to expectations. Can you give us a bit more color on the dynamics of the customer mix for the iPhone? You had mentioned you’re very excited about the new iPhone rate so far, but if you could just give us a bit more color, as we had last quarter, on folks that are new to iPhone, Android switchers, versus replacements? A – Tim Cook : Bill, we continue to see a higher rate of switchers than we have seen in previous cycles, and so we’re extremely excited about that. We also continue to see a reasonable percentage of first time buyers, particularly in some of the emerging markets. And if you look at emerging markets in general, I think Luca covered some of this, the revenue from emerging markets, just for the March quarter, was up 58% year on year. And a big piece of what is driving that is iPhone. Obviously, those results would have been higher without some of the FX headwinds that Luca mentioned earlier. Operator : We’ll hear from Katie Huberty with Morgan Stanley. Q – Katie Huberty : You’ve said in the past that the watch may take longer to ramp given the new category and new interface to customers. Is that in fact playing out? Is the watch ramping slower than past product categories? A – Tim Cook : Katie, when you use the word “ramp,” I assume you’re talking about supply? Q – Katie Huberty : Yeah, preorders and first week in sales, and any other data points that you track in terms of interest versus, say, when the iPad launched in 2010. A – Tim Cook : Let me talk about supply and demand and sort of separate those two. Right now, demand is greater than supply. And so we’re working hard to remedy that. We’ve made progress over the last week or so, and we were able to deliver more customers an Apple Watch over the weekend than we had initially anticipated. We’re going to keep doing that, and so we’ve already sent some notes out today, moving the customers and versus what we had communicated to them previously. So I’m generally happy that we’re moving on with the ramp. It is a new product for us, and with any kind of new product, you wind up taking some time to fully ramp. Having said that, I think we’re in a good position and by sometime in late June, we currently anticipate being in a position that we could begin to sell the Apple Watch in additional countries. And so that’s our current plan. From a demand point of view, it’s hard to gauge when you don’t have product in stores and so forth. So we’re filling orders completely online at the moment. The customer response from people that have gotten theirs over the weekend have been overwhelmingly positive, and we’re far ahead of where we expected to be from an application point of view. To give you a comparison, when we launched the iPhone, we had about 500 apps that were ready. When we launched iPad, we had about a thousand. And so our internal goal was to be able to beat the thousand level, and we thought it would be great if we were able to do that by a little bit. And as I mentioned before, we now have over 3,500 apps in the App Store for the watch. And so we couldn’t be happier about how things are going from that point of view. We are learning quickly about customer preferences between the different configurations. There’s a much larger breadth of possibilities here for customers than in our other products. And in some cases, we called that well. In some cases, we’re making adjustments to get in line with demand. But I’m really confident that this is something we really understand how to do and will do. And so I’m really happy where we are currently, and happy enough that we’re looking forward to expanding into more countries in late June. Q – Katie Huberty : And then as a follow up, research and development spend continues to track well ahead of revenue growth. And that has happened for many quarters now. Can you talk about what’s driving that? Is there a broader set of projects that you’re working on? Are you making bigger bets, entering bigger markets? What’s driving such a long period of elevated R&D spend? A – Luca Maestri : Of course, we’ve said this several times now. When you look at our current product portfolio, it is much broader than it used to be. We’ve now developed two new iPhones over the year. We were not doing that a few years ago. Developed two iPads. And of course now we have the Apple Watch. We’re also developing some core foundational technologies more in house now than we were in the past. And of course we’re also spending ahead of some of the products that will generate revenues in the future. So when you combined all these factors, that is the reason why you see these research and development increases year over year. Research and development is the core of the company. Innovation is the core of the company. And we’re very proud of the fact, when you look, for example, at the last two quarters, the first half of 2015, our revenue growth has been higher than our opex growth. And when you look at our expense to revenue ratio, which, for the first half of the year, has been 8.2%, it’s lower than it was a year ago, and it’s definitely something that we consider extremely competitive, and we’re very proud of. Operator : From Piper Jaffray, we’ll hear from Gene Munster. Q – Gene Munster : Tim, you mentioned there’s more switchers versus previous cycles. Any thoughts on what that would mean or could mean for market share over the next few quarters, and kind of I guess the sustainability of the 6 cycle? And then second question, for Luca, in terms of any thoughts on what the margin impact from the watch is that ramps over the next couple of years? Tim Cook : Gene, if you look at the overall worldwide, we grew iPhone 40%. And IDC’s estimate of the market for last quarter is a 16%, so we grew two and a half times. And if you kind of look through at the different countries, in almost every country, we grew at a multiple of the market. And as I mentioned before, in emerging markets, we did extremely well. And so I feel really good about where we are, and you can hopefully tell with the strong guidance that we provided, that we’re very bullish on the current quarter as well. And so I think things look very, very good. We’re also pleased, in addition to the switcher number, that we’re doing fairly well with first time buyers, which is also a key metric for us. And so it’s tough to find something in the numbers not to like. Luca Maestri : And Gene, let me take your question on margins. I’ll talk about Q3, because you know, this is the period that we provide guidance for. And we guided to 38.5% to 39.5%, which is slightly down versus our performance in Q2. And this is driven by a number of things. First of all, it’s the loss of leverage from the sequential decline in revenue. This is typical of our seasonality. There’s a foreign exchange element, and I mentioned before the negative impact on a sequential basis about 40 basis points. And also, we’re launching the Apple Watch. Apple Watch is not only a new product, but it’s a brand new category with a lot of new features, a lot of new, innovative technologies. And Apple Watch margins will be lower than company average. Gene Munster : One maybe quick follow up, Tim, in terms of the base of iPhones that have upgraded. I think you provided a number last quarter on that. Is there any update to that metric? Tim Cook : Yeah, sure. Our current estimate is that about 20% of the active installed base has upgraded to a 6 or 6 plus. And so as I look at that number, that suggests there’s plenty of upgrade headroom in addition to we want to keep inviting over as many switchers as we can. So between both of those and the first time buyers as well, it seems really, really good right now. Operator : And that will come from Tony Sacconaghi with Sanford Bernstein. Tony Sacconaghi : I just wanted to revisit the watch. Tim, I think you’ve said, when you were talking about your new products, you said we’re “very happy with the reception” and in response to a previous answer, you said, “relative to demand, it’s hard to gauge with no product in the stores.” I would say relative to other product launches, where your commentary around demand was characterized by superlative after superlative, that assessment feels very modest. And part of the reason that I ask is A) are we reading you right in terms of that, but if we look at consensus, consensus is expecting that Apple will ship more watches in its first two quarters than it did iPad, despite, as you said, very limited distribution in terms of only selling through your store. So I’m wondering if you could talk a little bit about putting those demand comments in context given that they do seem different from how you’ve characterized product demand for other products, and how, if at all, we should think about modeling demand in the context, perhaps, of the iPad, which was your most recent significant new category. Tim Cook : I’m thrilled with it, Tony, so I don’t want you to read anything I’m saying any way other than that. So I’m not sure how to say that any clearer than that. And in any situation, whether it’s the watch or in the past on iPad or on iPhone, when demand is much greater than supply, it’s difficult to gauge exactly what it is. And so as you know, we don’t make long term forecasts on here. We make forecasts for the current quarter. And so I don’t want to make any comment about the consensus numbers. Honestly, I haven’t even studied those. We’ve got enough to think about here. I feel really great about it. The customer response, literally, from what I’ve seen, is close to 100% positive. And so it’s hard to imagine it being better. Tony Sacconaghi : You talked about the watch having lower margins in the third quarter, which is surprising A) I think in the context of price points that many people thought were higher, B) in the context of what luxury watches sell for, C) I think in terms of what estimated margins might be installed on accessories like your watch band. So I’m wondering if you believe that the watch’s gross margins are being burdened by lower volumes and startup costs, and that you believe that as a category, watch margins will be, in total, including everything else that you sell with it, on a sustained basis, lower than the company average. Tim Cook : Tony, we’re not going to guide to or give projections of gross margin outside of the current quarter. And so what we have right now, which is a situation, it’s not surprising to us, we knew we would be here, is that the watch gross margins for the current quarter that we’ve included in the guidance that Luca’s provided in the aggregate, are lower than the company average. And so that to us is intuitive that they would be. And so I think we must be just looking at it through a different lens than you are. Tony Sacconaghi : I guess the question is is there anything unique about it being in its first quarter that it’s providing that margin profile? Tim Cook : In the first quarter with any new kind of product, you would always have learning and these sorts of things. We’ve had this with every product we’ve ever done. And so again, we’re not guiding to what it will be over time. We’re talking about what it is now. But you know, I would keep in mind that the functionality of the product that we’re making is absolutely incredible, the power of it. And I haven’t even seen this, but generally, there’s cost breakdowns that come out around our products that are much different than the reality. I’ve never seen one that is anywhere close to being accurate. And so if that’s the basis for your comment, I’d really dig on the data if I were you. Operator : We’ll go to Shannon Cross with Cross Research. Shannon Cross : Tim, can you talk a bit about what you’re seeing in China with 70% year over year growth in the Greater China revenue, and clearly very strong iPhone. If you can talk a bit about what consumers are saying, what the carriers are saying, in terms of demand and opportunity. Just any color, because clearly it’s quite strong. Tim Cook : Yeah, it was an incredible quarter. We were up 71% year over year. We set a record in China for revenues. We did that now in a quarter that included Chinese New Year, and so we have the help of a strong holiday season, much like the U.S. has a strong season in December. China’s is obviously in the March quarter. iPhone led the way. It was up over 70% year on year. And the current estimates from Kantar are that that would mean that we would gain more than 9 points of share on a year over year basis. And so by everything I can see, we did extremely well. The Mac also had an unbelievable quarter in China, and I’m particularly very happy with this, that Mac unit sales were up 31%. And like the rest of the world, or most of the rest of the world, IDC is projecting that PC sales in China contracted by 5% last quarter. And so once again bucking the tide. Also, in China, consistent with the company but at a much different rate, the App Store had a record quarter and grew over 100% year over year. And so you can see the iPhone, the Mac, and the App Store adding, and with the iPad in PRC, not in Greater China, but in the PRC, iPad had its best quarter ever, higher than all the others, and also grew in a market that contracted for the overall market. And so really and truly, it’s sort of everything you look at in China was extremely good. We have been working significantly on expanding our ecosystem there, and so we added Union Pay as a payment option for customers. We increased the iPhone point of sales to over 40,000 during the quarter. That’s up about 9% year on year. And more importantly than the total number, we are in many more cities than we were before. We worked significantly on our online store. Our online store revenue was up over three times year over year. As you probably heard us say before, we’ve opened several stores in China recently. We’re now at 21 in Greater China and we’re on track still to achieve 40 stores by the middle of next year. The online store will also be expanding from around 319 cities to where they can hit two day delivery to 365 cities. So adding about 50 new cities by the end of this quarter. And so the net is we’re investing a lot across the board in our infrastructure, in our products, on partnering with different companies. The Chinese developers are coming on in significant numbers. We’ve now made payments to developers in Greater China of almost $5 billion over half of which was in the last 12 months. And so you can see this enormous momentum building in the developer community there as well. And so lots of positive things, and you know, as you probably heard me say before, I’ve never seen as many people coming into the middle class as they are in China. And that’s where the bulk of our sales are going. And so we’re really proud of the results there and continue to invest in the country. Shannon Cross : And just sort of a follow up on the iPad side. What do you think it’s going to take to reaccelerate iPads? The sellthrough was better than the sell in this quarter, but are we seeing cannibalization from the iPhone 6 plus and how are you sort of thinking about the IBM partnership as it relates to iPad? Tim Cook : Number one, we have to stop having the situations where we sell through more than we sell in, where we don’t have to have an inventory correction. That was over a million units. Two, have we had cannibalization? The answer is yes. We’re clearly seeing cannibalization from iPhone and on the other side, from the Mac. And of course, as I’ve said before, we’ve never worried about that. It is what it is. That will play out, and at some point, it will stabilize. I’m not sure precisely when, but I’m pretty confident that it will. The IBM partnership, I think, is in its early stages in terms of bearing fruit here, but everything I see I like on it. I’m a big believer in the ability for iPad to play in a major way in enterprise. And so I’m looking forward to seeing that play out as we move forward. If you look at the underlying data, it makes you feel a lot better than the sales do. And so things like first time buyer rates, the latest numbers from the U.S. are somewhere around 40%. And if you look at China, they’re almost 70%. And so these numbers are not numbers that you would get if the market were saturated. And so I continue to believe, even though I’ve seen people write that, that I think that theory is not correct, and do not see that. We also see usage numbers that are off the charts, so far above competition it’s not even in the same planet. And we see customer satisfaction at or near 100%. And so these kind of numbers, along with intent to buy numbers, everything looks fantastic, the ecommerce numbers. And so my belief is that as the inventory plays out, as we make some continued investments in our product pipeline, which we’re doing, that we already have planned and have had planned for some time, between that, the inventory playing out, the enterprise starting to take over, I think still I believe the iPad is an extremely good business over the long term. When precisely it begins to grow again I wouldn’t want to predict, but I strongly believe that it will. Operator : From UBS, we’ll go to Steve Milunovich. Steve Milunovich : Luca, could you comment a bit about the factors that went into your decision on the capital return program, particularly the share repurchase part? For example, I would think you’re pretty well done in terms of taking U.S. cash down. So you are dependent upon cash flow in the U.S. as well as debt. And regarding debt, do you have a debt to EBITDA ratio in mind that you don’t want to go over? Do you want to keep your AA rating? Is that important? Just other factors like capital spending needs, just curious what your thinking was. Luca Maestri : The logic has not changed over the years. We look at our business plans, we look at what we want to accomplish from product perspective. We look at the capital needs that we have to run the business and to grow the business. And then we see that we’re in this great position that we can return cash to shareholders. We know Apple very well. We are very excited by the level of customer response that we’ve got for our current portfolio. We’re super confident about the pipeline of products and services that we have, and therefore, we believe that there is great value in our stock. And that is the reason why, again this year, we’re allocating the majority of the increase, which is the largest increase that we’ve ever done, we’re increasing the program by $70 billion. And the vast majority of that we’re allocating to the share repurchase, because again, we believe there’s great value in the stock. We also know, and understand, that we have several investors that value income. And so that’s important for us to increase the dividend. And as we’ve said in the past, we plan to continue to increase the dividend every year. And as we’ve said in the past, we will come back at about this time next year and give you another update to the program, because we will have better information, and we’ll be able to be very thoughtful about the size and the mix and the pace of the program. From a funding standpoint, of course we have a very strong balance sheet. We do have some cash in the U.S. We will continue to generate cash in the U.S., but definitely a good portion of the program will be funded through debt. We will raise debt both in the U.S. and outside of the United States. And you know, of course we’ve got a very, very strong balance sheet. We’ve got a very open dialog with the rating agencies. And so we feel we have a lot of room for us to fund the program. So from a balance sheet standpoint, we feel very, very comfortable with the program that we’ve announced today. Operator : Next we’ll go to Kulbinder Garcha with Credit Suisse. Kulbinder Garcha : My first question is for Tim. Tim, on the point you made about the 20% of the [unintelligible] being on 6 or 6 plus, are we right in interpreting the comment that that’s a substantially lower number than at this point in previous cycles? And that would, I guess, argue for just a longer period of growth as the [unintelligible] upgrades? And then also, linked to that, just by the points you’re making on [unintelligible] iPhone users and [unintelligible] being higher, that number year on year, in the first six months, is really growing significantly year on year. Is that the right way to interpret that comment? Tim Cook : I missed the second part of your question totally. Can you get a little closer to your phone? Kulbinder Garcha : Oh, sorry, yes. My second part of my question is, in the first six months of the 6 plus, is the gross number of new users to Apple, whether it’s new users or switches from Android, significantly growing year on year? Tim Cook : I don’t have the comparisons in front of me, about the answers to either one of your questions. My understanding of what you asked was is the 20% number that I’d mentioned in the question from Gene, how does it compare year over year, is it a lot different? I don’t know the answer to that off the top of my head. As I look at the number, my point from bringing it up is that there’s a lot of people that haven’t upgraded to a 6 and 6 plus. And so as I look at that, it screams that there’s significant opportunity there. And that’s before thinking about switchers and first time buyers. Kulbinder Garcha : Okay great, and then Luca, just on the gross margin decline from the March quarter to June, I understand the currency point. I understand the iPhone’s a little bit older. I guess of the iPhone and the watch impact, is the decline equally attributed to both those reasons, or is there something different going on? Luca Maestri : Let me tell you, there are a number of reasons why our guidance for gross margins is lower than the actual for the second quarter. The first one is the loss of leverage, because of the sequential decline in revenue. We got the foreign exchange, we got as you said, a lower iPhone mix. And we got the Apple Watch. I think we’ll leave it at that, and we’re not gonna get into more specifics. But those are the four reasons that drive the sequential decline. Operator : And next we’ll go to Keith Bachman with Bank of Montreal. Keith Bachman : Tim, this is for you. You mentioned something in your past comment that you thought a lot of the iPhone sales were going into the middle class in China. And I’m just wondering if you could elaborate on that and open it up more broadly speaking, to the emerging geographies. If you have demographics that you could talk about for your iPhone specifically, and where you think those phones are ending up. Because I think it does raise the question, as you look out over the next year or so, do you have the right price points for the demographic you’re hitting? Tim Cook : Here’s what I would share with you, Keith, is that if you look in the emerging markets, our revenues were up 58% year on year. And this accounted for just slightly less than 40% of the company’s revenue. If you look at BRIC within the emerging markets, BRIC countries were up 64% year over year. And so as I look at that, without having market research data on the demographics that you’re asking, it’s clear to me that it has to be coming from the middle class, because the upper income earners, there’s only so many of those. And you can’t grow those kind of numbers without getting significantly into the middle class. And so I think that’s where we are. I hope we’re also beyond the middle class, but I don’t have the data to suggest that that’s the case or not the case. But it’s clear to me that the middle class statement has to be true. Keith Bachman : My follow up, Tim, I’m gonna stay with you for a second, it sounds like HBO Now is a great opportunity today, and as you look out. If you could just speak more specifically, how we should be thinking about Apple as a conduit for something like HBO Now and other products. Is that a meaningful revenue opportunity without getting specific, and/or is it more about selling incremental devices, or is it about expanding the revenue pie as you look at opportunities like HBO Now? Tim Cook : First of all, I think it’s about giving the customer something they want and giving to them in Apples classic ease of use and in the product environments and the user interface that they’re used to working in, in this case Apple TV. And so I think HBO in particular has some incredibly great content. And so we’re marrying their great content, our great product and ecosystem, and it’s clear from looking at the early returns - you know, we’ve only been at this for a couple of weeks or so - that there’s a lot of traction in there. And so where could it go? I don’t want to speculate, but you can speculate probably as good as I can about where that can go. I think we’re on the early stages of just major, major changes in media that are going to be really great for consumers, and I think Apple could be a part of that. Nancy Paxton : Thank you, Keith. A replay of today's call will be available for two weeks as a podcast on the iTunes Store, as a webcast on apple.com/investor, and via telephone. And the numbers for the telephone replay are 888-203-1112 or 719-457-0820, and please enter a confirmation code 8627838. And these replays will be available by approximately 5.00 PM Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-974-2414. Financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570, and I am at 408-974-5420. Thanks again for joining us.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,015	3	2015Q3	2015Q3	2015-07-21	2.186	2.28	2.416	2.44	null	12.6	11.93	Executives: Nancy Paxton - Senior Director, Investor Relations and Treasury Timothy D. Cook - Chief Executive Officer & Director Luca Maestri - Senior Vice President and Chief Financial Officer Analysts : Kathryn L. Huberty - Morgan Stanley & Co. LLC William C. Shope - Goldman Sachs & Co. Eugene C. Munster - Piper Jaffray & Co (Broker) Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC James D. Suva - Citigroup Global Markets, Inc. (Broker) Steven M. Milunovich - UBS Securities LLC Shannon S. Cross - Cross Research LLC Operator : Good day everyone, and welcome to the Apple Incorporated Third Quarter Fiscal Year 2015 Earnings Release Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thank you. Good afternoon, and thanks to everyone for joining us. Speaking first today is Apple CEO Tim Cook, and he'll be followed by CFO Luca Maestri, and after that we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2014, the Form 10-Q for the first two quarters of fiscal 2015 and the form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Timothy D. Cook - Chief Executive Officer & Director: Thanks, Nancy. Good afternoon everyone, and thanks for joining us. It's been a busy and exciting quarter and I'm delighted to talk to you about the highlights. Today, we're proud to report record June quarter results with revenues of $49.6 billion and earnings of $10.7 billion. Our year-over-year growth rate in the fiscal third quarter accelerated over the first half of fiscal 2015. Revenues were up 33%, our fastest growth rate in over three years, and earnings per share were up 45%. We achieved these incredibly strong results despite reducing channel inventories across our product lines by over 1 million units and despite the challenging FX environment. Revenue exceeded the high end of our guidance by $1.6 billion as we topped our internal expectations for sales of iPhone, iPad, Mac and Apple Watch. We had another stellar quarter for iPhone, establishing a new June quarter record. iPhone unit sales grew 35%, which is almost three times the rate of growth of the smartphone market overall and we gained share in all of our geographic segments. iPhone revenue grew even more strongly, up 59%. The strong iPhone results were broad-based in both developed and emerging markets and we experienced the highest switcher rate from Android that we've ever measured. Most importantly, iPhone customer metrics are tremendous. ChangeWave's most recent survey of US customers found that iPhone has the highest customer satisfaction rate of any smartphone brand by a wide margin, and that among iPhone owners planning to purchase a new phone, 86% plan to purchase another iPhone. That compares to 50% repurchase intent for the next highest brand measured. We also had a tremendous record quarter for Mac, continuing to defy the industry trend with unit growth of 9% in a market that IDC estimates contracted by 12%. Growth was fueled by great response to our new MacBook and we're working hard to catch up with customer demand. We generated over $5 billion in services revenue, setting a new all-time record. Within services, the App Store produced its best quarter ever with revenue growing 24%. Our results from Greater China were outstanding with revenue growth of 112% and iPhone unit growth of 87%. This is particularly impressive given IDC's estimate of only 5% growth for the Greater China smartphone market. We also achieved our highest ever PC market share in the segment with Mac sales growing 33% over last year. And our ecosystem in China continues to grow at a very fast pace, with App Store revenue more than doubling in the quarter. Luca will go into more detail on our product and financial results in a moment. A major highlight of the past quarter for all of us here at Apple was the launch of Apple Watch in April. As you know, we've been very excited to get this revolutionary product to customers. We started taking preorders in nine countries on April 10, and demand immediately exceeded supply by a wide margin. To prioritize those first orders and to deliver the best experience for our customers, we delayed the availability of Apple Watch in our own retail stores until mid June. We made huge progress with the production ramp across the quarter and near the end of the quarter expanded into six additional countries. And in just the past few days, we've been able to catch up with demand, enabling us to expand Apple Watch availability to a total of 19 countries currently with three more countries to be added at the end of this month. The feedback from Apple Watch customers is incredibly positive and we've been very happy with customer satisfaction and usage statistics. Market research from Wristly measured a 97% customer satisfaction rate for Apple Watch and we hear from people every day about the impact it's having on their health, their daily routines, and how they communicate. Our own market research shows that 94% of Apple Watch owners wear and use it regularly, if not every day. Messaging and activity features are among the most popular and social networking apps including Twitter, WeChat and LINE are seeing the most usage among third party apps. We believe that the possibilities for Apple Watch are enormous and that's been reinforced in just the first few weeks since it became available to customers. For example, doctors and researchers at leading hospitals in the US and Europe are already putting Apple Watch to work in improving patients' lives. Nebraska Medicine, the latest hospital to adopt Apple Watch, has rolled out new apps that facilitate communication between patients and doctors and provide quick access to important chart and dosage information. Ochsner Health System of Louisiana is using Apple Watch with hypertension patients to gather important information like daily activity and blood pressure level, and leading cancer centers like London King's College Hospital are incorporating Apple Watch into trials for ongoing care and monitoring of cancer patients. Great Apple Watch solutions go well beyond healthcare. Users are tracking their fitness, getting breaking news alerts, following their investments, connecting with friends, and living a healthier day. The user experience for Apple Pay and Siri is nothing short of incredible and customers are enjoying countless other features through the over 8,500 third-party apps available for Apple Watch. This is just the beginning of what this new platform can deliver. With Apple watchOS 2, developers now have the ability to build richer and more powerful native apps for Apple Watch, taking advantage of the heart rate sensor, the Digital Crown, accelerometer and more, ushering in a whole new class of apps designed specifically for the wrist. It's a rare and special privilege to launch a new platform with such promise and potential, and I know I speak for everyone at Apple when I say that we can't wait to see what our developers and customers do with it. We hosted a fantastic developers' conference in June with thousands of attendees from 70 countries coming together with Apple engineers to share in the excitement of our three operating systems, OS X, iOS, and watchOS. We've been working hard to make our products even more intelligent, more powerful and more meaningful in all aspects of our customers' lives, while adding new continuity features to make the experience across our devices more seamless than ever and preserving the security and privacy that our customers deserve. Public betas of OS X El Capitan and iOS 9 are available now and customer versions of all three updated OSs are on schedule and will be delivered in the fall. We're very excited about our news app coming to iPhone and iPad with iOS 9. We believe it will be the best news reading experience on any mobile device, combining a beautiful magazine layout with real-time customized digital media content. News will follow over a million topics and pull relevant stories based on the user's specific interests without compromising their privacy. We've already signed 25 leading publishers, representing more than 75 of the world's most influential news, sports, business and magazine titles, including CNN, the New York Times, the Financial Times, ESPN, Bloomberg Business, Condé Nast, Hearst, Reuters, Time, Inc. and The Daily Telegraph. The September quarter is off to an exciting start. We're thrilled by the response to Apple Music, which launched in over 100 countries on June 30. Apple Music is a single immersive app that combines the best ways to enjoy music all in one place. It's an incredible streaming music service, a pioneering worldwide live radio station broadcasting 24 hours a day, and a great place for music fans to connect with their favorite artist. Customers and reviewers love the human curation features of Apple Music and the way it's helping people discover new music. Millions and millions of customers are already experiencing the new service using the three-month trial period, and the numbers are growing substantially every day. Over 15,000 artists have signed up to post on Connect, where we are already seeing great original content, including a world premiere video by Drake. Millions of listeners around the world are tuning in to Beats 1, the first of its kind worldwide radio station featuring some of the most talented and passionate music lovers on the planet. This all adds up to a renewed sense of excitement around music, which we love and expect to continue as Apple Music gets traction with customers. Last week we launched Apple Pay in the UK, bringing customers our easy, secure and private way to pay. On day one, we had an incredible roster of over 250,000 locations and major credit and debit cards from many of the UK's most established banks supporting Apple Pay. Customers are using Apple Pay to ride the London Underground as well as the over ground systems of Transport for London and we hope this will be a model for other public transportation systems around the world. In the US, we've seen fantastic support from merchants of all sizes. We are excited to see this momentum continue with the new Square reader coming this fall. It will bring Apple Pay to even more neighborhood businesses where you pay every day, from your corner coffee shop to your local farmer's market, bolstering the 80,000 small- and medium-size businesses we're already adding every month. American Express will add Apple Pay support for its robust portfolio of corporate cards next month, offering businesses and their employees a new way to make easy and secure payments. And as we head into the school year, 700 universities and colleges across the US will accept Apple Pay such as Auburn University, the University of California Irvine, Colorado State University, the University of Kentucky and the University of Oklahoma, among many others. We're on track for Apple Pay acceptance at over 1.5 million US locations by the end of 2015. I'd like to thank our customers, developers, business partners and employees for another record breaking quarter. We're very hard at work on our exciting pipeline of new hardware, software and services, and we're continuing to expand our global reach into new markets. And we're passionately committed to leaving the world better than we found it. With that, I'll turn the call over to Luca. Luca Maestri - Senior Vice President and Chief Financial Officer : Thank you, Tim. Good afternoon, everyone. As we have done for the first half of our fiscal 2015, we are reporting another record quarter today. Revenue for the June quarter was $49.6 billion, an increase of $12.2 billion or 33% year over year. Our growth was driven by the tremendous performance of iPhone, the introduction of Apple Watch and the continued strength of Mac and App Store sales. We achieved these great results in the context of a very challenging foreign exchange environment around the world and a reduction in channel inventory of over 1 million units across our product lines, which makes our growth performance even more remarkable. As Tim mentioned, our results were especially impressive in Greater China, where revenue more than doubled year over year to over $13 billion. Emerging markets overall grew 79% to almost $18 billion and represented 35% of our total company revenue. Company gross margin was 39.7%, better than our expectations, mainly due to strong iPhone sales. Operating margin was 28.4% of revenue and net income was $10.7 billion, a new June quarter record. Diluted earnings per share were $1.85, a 45% year-over-year increase and cash flow from operations was $15 billion, also a new third quarter record. For details by product I'll start with iPhone. We sold 47.5 million iPhones in the quarter, representing 35% year over year growth and demand for iPhone 6 and 6 Plus has continued to be terrific all around the world. iPhone sales more than doubled in Germany, Korea, Malaysia, and Vietnam. We're up over 85% in Greater China and in India, and increased more than 45% in several countries including Italy, Spain, the Netherlands and Turkey. The strong mix of iPhone 6 and 6 Plus led to an iPhone ASP of $660, an increase of $99 year over year, despite the significant negative foreign exchange impact I referred to earlier. We reduced iPhone channel inventory by about 600,000 units during the quarter, which left us at the low end of our target range of 5 to 7 weeks of channel inventory. Next I'd like to talk about the Mac. We sold 4.8 million Macs, representing 9% year-over-year growth. As we have done for several years in a row, we continued to gain significant market share based on IDC's latest estimate of a 12% global PC market contraction. Mac growth was driven by portables and we are delighted with the very strong customer reception of our new MacBook. We ended the quarter slightly below our 4 to 5 week target range for Mac channel inventory. Turning to iPad. We sold 10.9 million compared to 13.3 million in the year-ago quarter. iPad sell-through was 11.2 million as we reduced channel inventory by about 300,000 units. This left us within our 5 to 7 week target range of iPad channel inventory. iPad customer metrics continue to be extremely positive. ChangeWave recently measured a 97% customer satisfaction rate for iPad Air 2 and among consumers planning to purchase a tablet within 90 days, over half plan to purchase an iPad. For corporate buyers, the purchase intent was even stronger at over 70%. We do not participate in the low end of the tablet market, but we are extremely successful where we do compete. NPD recently indicated that iPad has 76% share of the US market for tablets priced above $200. We're very excited about the advances in the iPad experience coming in iOS 9 in the fall, including the slide over and split view features for retail multitasking, picture-in-picture for FaceTime and video, and enhanced QuickType for composing text even faster. We're also seeing great momentum in the enterprise market. For instance, riding on the success of iPad use by its pilots, United Airlines has not only renewed its iPad program with more than 10,000 iPad Air 2s, but has also made a strategic decision to provide iPhones to over 20,000 flight attendants. In the near future, United plans to introduce new apps to transform the customer experience and improve integration with flight operations. We're also very happy with the progress of our IBM partnership. IBM released 13 new MobileFirst for iOS apps in the June quarter, including new apps in retail banking and healthcare, as well as new horizontal apps for HR and sales. There are now 35 apps in IBM's MobileFirst for iOS catalog that connect users to big data and analytics right on their iPads or iPhones. And we expect a total of 100 apps to be available by the end of 2015. Active customer engagements have also grown to over 500 and recent notable customer wins include Air Canada, National Grid in the UK and Banorte in Mexico. In April, Apple, IBM and Japan Post announced a joint initiative to deliver iPads with IBM developed apps and analytics to connect Japanese senior citizens with services, healthcare, community and family. Japan Post hopes to reach 4 million to 5 million Japanese customers with these solutions by 2020. Since announcing this initiative less than three months ago, we've already seen strong interest from other countries looking for innovative ways to support an aging population. Importantly, we also continue to work closely with leading business software and solution providers to help businesses of all sizes transform work with iPad and iPhone. The number of these mobility partners has expanded rapidly to over 40. They're developing new and differentiated solutions on iOS across many industries, and attracting very significant customer interest. Turning to services. We generated over $5 billion in revenue, a new all-time record, and an increase of 12% over last year thanks primarily to strong growth from apps. The revenue from the App Store increased 24% and the number of transacting customers grew 19%, also setting an all-time record. Services growth was particularly strong in China, where the App Store revenue more than doubled year over year. China based developers have created 250,000 apps for our China App Store and the response from our customers has been tremendous. The revenue from other products grew sharply, up 49% over last year. The contribution from Apple Watch accounted for well over 100% of the growth of the category, and more than offset the decline of iPod and accessory sales. As we've said in the past, we do not plan to disclose Apple Watch metrics because we don't intend to provide insight that could help our competitors. Our retail and online stores had a very busy quarter, with customer visits up 49% year-over-year, driven especially by the very strong interest in Apple Watch. Thanks to our very popular Apple Store app, mobile traffic to our online stores during the quarter equaled desktop traffic for the first time ever. We opened three new stores, our second store in Brazil, our sixth store in Manhattan, and our twenty-second store in Greater China. That brought us to a global store count of 456, of which 190 are outside the United States, and we are on track to have 40 stores open in Greater China by the middle of next year. Let me now turn to our cash position. We ended the quarter with $202.8 billion in cash plus marketable securities, a sequential increase of $9.3 billion. $181 billion of this cash, or 89% of the total, was offshore. In the June quarter, we issued a total of $10 billion of term debt, consisting of $8 billion US dollar denominated notes and ¥250 billion denominated notes as we continue to diversify our global debt investor base. This left us with $50 billion of term debt outstanding at the end of the quarter. During the quarter, we turned over $13 billion to our investors. We paid $3.1 billion in dividends and equivalents and we spent $4 billion to repurchase 31.2 million Apple shares to open market transactions. We also launched a $6 billion accelerated share repurchase program in May and received an initial delivery of 38.3 million shares. The purchase period for the new ASR will end in or before November of 2015. We have continued to execute our capital return program at a fast pace and we now take an action on over $126 billion of our $200 billion program, including $90 billion in share repurchases. The weighted average price for all open market purchases and completed ASR programs to date is $86. Now as we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $49 billion and $51 billion compared to $42.1 billion in the year-ago quarter. We expect gross margin to be between 38.5% and 39.5%. We expect OpEx to be between $5.850 billion and $5.950 billion. We expect OI&E to be about $400 million and we expect the tax rate to be about 26.3%. Also today our Board of Directors has declared a cash dividend of $0.52 per share of common stock payable on August 15, 2015 to shareholders of record as of August 10, 2015. With that, let's open the call to questions. Nancy Paxton - Senior Director, Investor Relations and Treasury : We ask that you limit yourself to one, one-part question and one follow-up. Operator, may we have the first question, please? Operator : [Operation Instructions] First we will hear from Katy Huberty with Morgan Stanley. Kathryn L. Huberty - Morgan Stanley & Co. LLC: Yes, thanks. Good afternoon. While the year on year iPhone growth was very attractive, the sequential unit decline in the June quarter was worse than the past two years. Why do you think that was, and in particular, why drain channel inventory when iPhone 6 is selling so well? And then I have a follow-up. Timothy D. Cook - Chief Executive Officer & Director: Katy, it's Tim. As Luca mentioned, the channel inventory did go down by 600,000. We sold more units than we thought we would and so that was a part of that. The other part of it is that we always run with just the amount of inventory that we think we need. And so to the degree that sales are distributed in the countries with disproportionally with shorter supply chains, or the standard deviation demand is less, we would always choose to have less. And so in this particular quarter, we were able to end basically right at the bottom end of our range and we view that as a good thing, not a bad thing. Obviously the revenues could have been much higher if we would have expanded the channel, but if you don't need to do that, that's not how we think about the business. We run the business for the long term, not the 90-day clock. In terms of what's going on with iPhone, the 35% growth is almost three times the market. And if you look at it at a little narrower regional level, Western Europe grew 30% versus a market of 7%, so four times market. Japan grew over five times market. We doubled in Korea versus a market that was shrinking. And India we grew at 93% and this is on top of the Greater China numbers that we've already covered that grew 87% during the quarter against a market of 5%. And so we did exceptionally well I think in any way that you look at it. In terms of the percentage of customers that have upgraded to a 6 and 6 Plus versus that have not upgraded, it's 73%, or meaning that 27% of the installed base of customers prior to the launch of 6 and 6 Plus have now upgraded. And so we view that as a very bullish sign on the future, that there's a lot of headroom left for upgraders. We also are incredibly happy to see the highest Android switcher rate that we've observed. And so from our point of view, the iPhone is doing outstanding. Kathryn L. Huberty - Morgan Stanley & Co. LLC: So Tim, just to extend that conversation to the longer term, as I'm sure you're aware, you're lapping some pretty significant comps as it relates to the upgrades that you're talking about as well as significant growth in China. What is the framework that you use to convince yourselves that iPhone units can continue to grow over the longer term? Timothy D. Cook - Chief Executive Officer & Director: Well you know, Katy, we purposely just give guidance for the current quarter and we've done that. And obviously the kind of numbers that we have indicated growth in the revenue means that iPhone would have another stellar quarter. And so we're very confident that this quarter is going to be great. How the future looks, we'll take it one quarter at a time. But as I back up from it and look at it more from a macro point of view, the things that makes me very bullish is the 27% number I just quoted, the fact that we are seeing the highest Android switcher rate, the customer satisfaction that we have on the iPhone versus the competition. It's a huge margin. The loyalty rate that we have versus competition, an enormous gap there. I also look at the first time iPhone buyers and we're still seeing very, very large numbers in the countries that you would want to see those in, like China and Russia and Brazil and so forth. I also see a market that over a five-year horizon, if you look at the IDC numbers, is projected to grow from 1.3 million in 2014 to over 1.9 billion – this is billion, rather, billion in 2019. And so it's an incredible market. I think everybody's going to own a smartphone, and I think we've proven that we can compete for a fair number of those, as you can see from our results. Kathryn L. Huberty - Morgan Stanley & Co. LLC: Great. Thank you very much. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thank you, Katy. Could we have the next question, please? Operator : That will come from Bill Shope with Goldman Sachs. William C. Shope - Goldman Sachs & Co.: Okay, great. Thank you. Could you walk us through the key factors behind your gross margin range for the September quarter and in particular how we should think about the sequential ForEx impact this quarter and the impact of a potential product transition cost? Luca Maestri - Senior Vice President and Chief Financial Officer : Definitely. This is Luca. So we got into 38.5% to 39.5%, and so just keep in mind last year in Q4, our gross margin declined by 140 basis points sequentially. So this year we're expecting a sequential decline of 220 basis points. I would point to three main factors for the decline. First of all, to your point around foreign exchange, it continues to be a challenging environment given the strengthening of the US dollar. In our case, the impact on margin after the hedges is going to be about 30 basis points for Q4. Also, I want to point to a different mix, which is typical of our seasonality as we enter the back-to-school season during Q4. And thirdly, the transition cost that you've mentioned as we prepare for a busy fall. And so those are the three factors that will have an impact on gross margin sequentially. I would point that in general costs continue to be, particularly commodity costs continue to be favorable and so there would be a partial offset to the factors that I mentioned. William C. Shope - Goldman Sachs & Co.: Okay, thanks. And then could you give us a bit more color on the mix dynamics for the iPhone in the June quarter and how this compares to prior generations and your expectations? Obviously there continues to be an upward bias helping the ASPs as you mentioned, but could you give us a bit more detail on what exactly you're seeing here? Particularly I think it's interesting in the context of a continued tilt towards the emerging regions obviously. Luca Maestri - Senior Vice President and Chief Financial Officer : Yeah, so as we mentioned, the ASP for iPhone was up $99, 18% increase year-over-year and this is really driven by the mix, by the fact that we've added iPhone 6 Plus to a new price point and in general, iPhone 6 and 6 Plus are doing extremely well as a percentage of the portfolio. And keep in mind that this $99 was partially offset by $24 of unfavorable foreign exchange. So the number would have been even better. So yes, clearly 6 and 6 Plus. And I think we talked about it in prior calls, the 6 Plus is doing particularly well in the markets that you would expect, Greater China, other Asian markets. Those are markets where our growth rates are particularly strong and the 6 Plus, because of the screen size, is doing extremely well. William C. Shope - Goldman Sachs & Co.: All right. Thank you. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thanks, Bill. Could we have the next question, please? Operator : That will come from Gene Munster with Piper Jaffray. Eugene C. Munster - Piper Jaffray & Co (Broker): Hi, good afternoon. Luca, you talked a little bit about gross margins in the previous question. But could you talk about how we should think about the trends in the gross margin? In other words is, should the margin trends that we've seen in other cycles continue into next year? And then a follow-up or another question for Tim here, is that the Watch has been under a lot of interest from investors and some may have wanted a little bit more. You outlined some of the opportunities and some of the progress you've had. But any thoughts that you have for investors who may say that the category is just not taking off as fast as they would have hoped? Luca Maestri - Senior Vice President and Chief Financial Officer : Okay Gene, let me start with gross margin. As Tim said before, obviously we guide to the current quarter. You know, as we look at it at a macro level. I think there are, you know every cycle is different for a variety of reasons. There are also things that are not necessarily within our control. So for example, currency markets can be very different one year to the next. We know that the next year is going to represent an additional challenge given where the dollar has moved. Commodity markets may be very different from one year to the other. There are things that remain relatively similar as we launch new products. For example, we innovate the products. We want to make them better all the time, and that typically requires additional cost and so the cost structures of our products, new products, tend to be higher than the products that they replace. Having said that, as you know we've got a very, very good track record to reduce those cost factors over the lifecycle of the products. I think this should give you a bit of color. Of course maybe the one thing that I want to point out again as we get into the following year, is that of course currency will be an issue. Eugene C. Munster - Piper Jaffray & Co (Broker): Okay. Thank you. Timothy D. Cook - Chief Executive Officer & Director: Yeah Gene, this is Tim. Let me talk about the Watch some. As you know, we made a decision back in September, quite several months ago not to disclose the shipments on the Watch and that was not a matter of not being transparent, it was a matter of not giving our competition insight that's a product that we've worked really hard on. However, let me give you some color so to avoid reaching sort of a wrong conclusion. If you look at the other products category and look at the revenue in this category, it would not be an accurate thing to just look at the sequential change or the year over year change and assume that were the total Watch revenue because the aggregate balance of that category, both sequentially and year over year, is shrinking. Obviously iPod is a part of that, but there are other things in there, accessories and so forth, that are shrinking. Secondly to provide a bit more color, sales of the Watch did exceed our expectations and they did so despite supply still trailing demand at the end of the quarter. And to give you a little additional insight, through the end of the quarter, in fact the Apple Watch sell-through was higher than the comparable launch periods of the original iPhone or the original iPad. And we were able to do that with having only 680 points of sale. And as you probably know, as I had reviewed earlier, the online sales were so great at the beginning, we were not able to feed inventory to our stores until mid-June. And so those points of sale pretty much, the overwhelming majority of the low numbers of sales were not there until the last two weeks of the quarter. And so as I look at all of these things, we feel really great about how we did. Now our objective for the quarter wasn't primarily sales. Beyond the very good news on sales, we're more excited about how the product is positioned for the long term because we're starting a new category. And as I back up and look at this, we have 8,500 apps. We've already announced the next operating system, watchOS 2. It will bring native apps which are going to be killer to the Watch. Even though the store layout was delayed, we've learned a lot about the buying experience. Based on that experience, we're now planning to expand our channel before the holiday because we're convinced that the Watch is going to be one of the top gifts of the holiday season. Now most importantly of all of this is that customer sat is off the charts because we've constantly seen if you can get the customer sat off the charts you can wind up doing fairly well over time. We've also learned a lot about managing quite an assortment and so forth. And so I sort of back up and look at this and I feel fantastic about what the team has done and delivered and I know I never go anywhere without the Watch and it's not because I'm the CEO of Apple. I'm that attached to it and I get lots of notes from a lot of people that feel the same way. And so that's how I look at the Watch. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thanks, Gene. Could we have the next question, please? Operator : From Bernstein we'll hear from Toni Sacconaghi. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Yes, thank you. Luca, I think in your prepared remarks you talked a little bit about your market share of iPad in the US above $200 being 78%. And I'm wondering if you think about the iPhone and your market share in the premium category, how do you think about it? So I've seen market data that says 60% market share for phones above $300 or you have actually 90% market share for phones above $600. And I'm wondering if, Tim or Luca, you could maybe talk about how you think about your market share, where you play given that your ASP is comfortably above $600? What do you think your market share is above $500 or $600 in smartphones? And how do we think about that, that market share going forward? Timothy D. Cook - Chief Executive Officer & Director: Toni, it's Tim. We look at it a bit differently than you do. We look at it as our job is to grow our products regardless of the price, which means that we need to convince in some cases people to move from one price band to the other. And that we think if we do a great job with the product that people will be willing to spend more because they get so much more out of it. And I think you can look at the results on the iPhone and see that in action. I mean, we grew 87% in China. We grew 90%-plus in India. Emerging markets are growing 65%. These numbers are unbelievable and they're done in an environment where it's not the best of conditions. So that's how we look at. We don't do the MBA analysis of there's only X people buying in a price band and therefore we can only get X minus Y percent. That's not the way we've ever looked at it. If we did, we wouldn't be shipping any products. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Tim, I'm asking in part because you talked about the highest ever Android switcher. So I'm wondering if indeed your goal of expanding the category is happening or whether you are taking share and how do you measure the relative contribution of each of those in your success. So is the strength and the dramatically above market growth because you're taking share in that high-end category and how far along are you there? Or can you point to proof points that you've actually expanded the size of the market for products of your price point? Timothy D. Cook - Chief Executive Officer & Director: Oh, I think there's no doubt if you look at it we are expanding the market size in those areas. It's also true that there's some people that are switching from comparable price points to the iPhone, and that's great too. But I think the answer is that both of those things are happening and it's key that we do both, not just one. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Okay. And then if I could just ask you to comment on how you think about replacement cycles with the current iPhone 6 cycle. So when you look at replacement cycles over the last three quarters, are they similar to what you saw one and two years ago when you think about replacement? And one of the things that also sort of struck me was I think you cited market research having repurchase intention of 86% versus your competitors at 50%. Quite frankly, the 86% sounds low to me. Is that actually consistent with what you see in the marketplace, about 86% of iPhone buyers ultimately buy another iPhone? So perhaps we can think about replacement cycle. Timothy D. Cook - Chief Executive Officer & Director: Yes. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: And how that's changed and the percentage number and how that jives with reality? Timothy D. Cook - Chief Executive Officer & Director: The 86% also seems low to me but I was quoting a third-party source and not our own data. Our own data would look better than that. But the numbers are only comparable if I quote the third-party source for both and so that's what I'm doing. On the upgrade cycle and what we're seeing, it's not remarkably different. However, there's a number of plans that people began signing up for in the last year that could change it. These are upgrade any time kind of plans. They may be one year leases that could actually help the upgrade rate. And I think it'll be interesting to see how that plays out over the next horizon. But generally speaking, I see positive vectors there, not negative, in the aggregate. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thank you, Toni. Can we have the next question, please? Operator : We'll go to Jim Suva with Citi. James D. Suva - Citigroup Global Markets, Inc. (Broker): Thank you very much. As you look at many of your products have been absolutely fantastic and at different phases in their life, they've seen tremendous high growth, whether it's iPad, iPhone, iPod, and iPhone looks like it's facing some very challenging comps here in the next few quarters. Does this make you shift even more strategic focus into broadening the reliance on a couple products such as you mentioned Apple Radio. There's a lot more content on the Apple Watch and apps and then also Apple Pay. Are you increasingly focusing on hiring and kind of non hardware things (45:32)? Or are these kind of more peripheral activities and still the focus is kind of right now on the phone? Timothy D. Cook - Chief Executive Officer & Director: Jim, it's Tim. We think the phone has a lot of legs to it. I mean, many, many, many years. There's tons of innovation left at the phone. I think we're in the early innings of it, not in the late innings, and I think the market rate of growth over the long haul will also be impressive. And so there will be multiple winners here. And so that's how I see it. In terms of the other things that we're doing, we have some great capability and great teams in Apple. And so we can do more than one thing, and so we have other things that we're working on as well. But at the aggregate level, we still remain very focused because if you look at our size versus the number of projects we have going, it's much smaller compared to most. But that's how we do things and that's how we get the level of quality that we want out of each one of those. And so the other things that you named, whether it be Apple Music or Apple Pay, both of these are very important to us. And things that you didn't mention, the Mac continues to perform very well. I am still bullish on iPad. We've gotten with iOS 9, there's some incredible productivity enhancements coming in with split view and slide over and picture-in-picture. These things are incredible features. The enterprise business is clearly picking up and more and more companies are either contracting for or writing apps themselves. I think and I believe that the iPad consumer upgrade cycle will eventually occur because as we look at the usage statistics on iPad, it remains unbelievably great. I mean, the next closest usage of the next competitor, we're six times greater. And so these are extraordinary numbers. It's not like people have forgotten iPad or anything. It's a fantastic product. So I see a lot of runway. And as I look geographically, where we've been doing really good in the emerging markets, our share is still not high in any of them, and so there's a lot of headroom there as well, as there is in most developed markets as well. And so I look around, I see opportunity left and right. And that's what we're focused on. James D. Suva - Citigroup Global Markets, Inc. (Broker): Great. Thank you so much. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thanks, Jim. Could we have the next question please? Operator : We'll hear from Steve Milunovich with UBS. Steven M. Milunovich - UBS Securities LLC : Thank you. Tim, there's some concern about what's going on in China with the stock market and economically. How do you think that plays out for Apple? On one hand you've got more stores, broader distribution, the 4G infrastructure is playing out. On the other hand, the economy might be weakening. Is a phone a discretionary purchase or not? How do you think about going forward in China? Timothy D. Cook - Chief Executive Officer & Director: Yeah, it's a very good question, and we remain extremely bullish on China and we're continuing to invest. Nothing that's happened has changed our fundamental view that China will be Apple's largest market at some point in the future. It's true, as you point out, that the equity markets have recently been volatile. This could create some speed bumps in the near term. But to put it in context, which I think is important, despite that volatility in the Chinese market, they're still up 90% over the last year, and they're up 20% year-to-date, and so these kind of numbers are numbers I think all of us would love. Also, the stock market participation among Chinese household is fairly narrow. And the stock ownership is very concentrated in a few people who put what appears to be a smaller portion of their wealth in the market than we might. And so I think generally this has been, at least as we see it, maybe it's not true for other businesses, that this worry is probably overstated. And so we're not changing anything. We have the pedal to the metal on getting to 40 stores mid next year. As we had talked about before, we're continuing to expand the indirect channel as well. As you point out, and I think this is a major point that many people miss, the LTE penetration in China is only at 12%. And China doesn't possess the level of fiber that some other countries do, and so in order to get the great video performance, et cetera, raising that penetration is really great. I think that really plays to an incredible smartphone future there. Also, and I can't underestimate – I can't overstate this. The rise of the middle class there is continuing, and it is transforming China. McKinsey, I saw a recent study from McKinsey that's projecting the upper middle class to grow from 14% to 54% of households over the ten-year period from 2012 to 2022. So we're within that period at this moment, and you can see for all of us that travel there so much, with every trip you can see this occurring. And so I think we would be foolish to change our plans. I think China is a fantastic geography with an incredible unprecedented level of opportunity there. And we're going to be there. Steven M. Milunovich - UBS Securities LLC : I also wanted to ask, can you give us any more detail on the switching rate, how much is it up? And I noticed in your advertising there's the shift to the, if it's not an iPhone, it's not an iPhone. And I assume that while you're not as involved as Jobs was, you're approving these ads. So it seems like you're really focused on market share gain right now. Timothy D. Cook - Chief Executive Officer & Director: Yeah, I'm very familiar with the ads. In certain geographies, the way that we win is to get switchers. In other geographies, the way that we win is to get people to buy their first smartphone. In other geographies, the way that we win is to get people to upgrade from their current iPhone. And all of those are very important for us. In many geographies, it's two of those or in some geographies it's all three of those. And so all of those are important. We are very focused on growing iPhone around the world, not just in one geography and getting our message out there through ads is one way to do that. Steven M. Milunovich - UBS Securities LLC : Thank you. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thank you, Steve. Could we have the next question, please? Operator : And that'll come from Shannon Cross with Cross Research. Shannon S. Cross - Cross Research LLC : Thank you very much. I wanted to talk about FX but not necessarily from a direct impact. But what are you seeing in terms of demand as you've raised prices in various geographies and how are you thinking about it as you go into sort of the next iPhone cycle in terms of having to sort of normalize the pricing for what some of the currencies have done over the past year? Luca Maestri - Senior Vice President and Chief Financial Officer : Yes, Shannon. So obviously FX has been a significant hit in many ways, of course. I mean it reduces our growth rate. We would be 800 basis points higher this quarter from the 33% that we've reported if it wasn't for the movement in currencies around the world. And really when you look around the world, it's really if you exclude China, essentially every single currency has weakened against the dollar. We are pretty careful and thoughtful about where we increase prices and when and by how much during mid-cycle because it's not something that we particularly like to do. We've had circumstances around the world this year where frankly we didn't have many options because the currency movement was so large and so we've had to reprice. I have to say that it's been remarkable. Look, in the long run a strong US dollar is not a positive for our international business. It's normal to see a drop in demand when prices go up. That goes without saying. It has been remarkable so far to see that we did take prices in a few markets. But really remarkable to see how resilient iPhone sales have been, because we have increased, in spite of these price increases, we've increased sales and we've increased market share in all our geographies around the world, without exception. Shannon S. Cross - Cross Research LLC : Great. And then can you talk a bit about linearity during the quarter on a geographic basis? Somewhat going back to the China question, I mean did you see it slow down toward the end of the quarter? Or was it solid through it? And just any other color you can give geographically with Europe and some of the other macro events that are going on. Timothy D. Cook - Chief Executive Officer & Director: Yeah, Shannon, it's Tim. Maybe the best way to talk about this is sort of at the product level. On the Watch, our June sales were higher than April or May. I realize that's very different than what some of the, is being written, but the June sales were the highest. And so the Watch had a more of a back-ended kind of a skewing. The phone itself followed what I would call a normal seasonal kind of pattern. And if you look at the – it sounds like you're honing in on the Greater China results themselves. There is no obvious impact from the last quarter in the Greater China numbers. And obviously with the aggregate or the consolidated number being 112%, it's hard to find a lot of bad things in the numbers. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thank you, Shannon. Nancy Paxton - Senior Director, Investor Relations and Treasury : A replay of today's call will be available for two weeks as a podcast on the iTunes store, as a webcast on apple.com/investor, and via telephone. And the numbers for the telephone replay are 888-203-1112 or 719-457-0820 and please enter confirmation code 9957771. And these replays will be available by approximately 5 :00 p.m. Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414 and financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570 and I'm at 408-974-5420. Thanks again for joining us. Operator : And ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,015	4	2015Q4	2015Q4	2015-10-27	2.311	2.339	2.48	2.5	null	11.44	11.13	Executives: Nancy Paxton - Senior Director, Investor Relations Tim Cook - Chief Executive Officer Luca Maestri – SVP and Chief Financial Officer Analysts : Katy Huberty - Morgan Stanley Gene Munster - Piper Jaffray Toni Sacconaghi - Bernstein Shannon Cross - Cross Research Steve Milunovich - UBS Simona Jankowski - Goldman Sachs Amit Daryanani - RBC Capital Markets Rod Hall - JPMorgan Operator : Good day ladies and gentlemen, and welcome to the Apple Incorporated Fourth Quarter Fiscal Year 2015 Earnings Release Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am. Nancy Paxton : Thank you. Good afternoon, and thanks to everyone for joining us. Speaking first is Apple CEO Tim Cook, and he'll be followed by CFO Luca Maestri, after that we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2014, the Form 10-Q for the first three quarters of fiscal 2015 and the form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speaks as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thanks, Nancy. Good afternoon everyone, and thanks for joining us. Today, we are reporting a very strong finish to a record breaking year and I’d like to reflect on some of the highlights. We completed our fiscal year in September, and we are proud to report revenue of $234 billion, an increase of 28% and $51 billion over 2014. This is our largest absolute revenue growth ever. To put that into some context, our growth in one year was greater than the full year revenue of almost 90% of the companies in the Fortune 500. We made huge inroads into emerging markets generating over $79 billion in revenue and growing 63% despite very strong headwinds from foreign exchange rates. These results are made possible by Apple’s commitment to innovation and creating the best products on earth. In the past 12 months around the world we’ve sold over 300 million devices including 231 million iPhones, 55 million iPads and 21 million Macs setting new unit records and increasing our global market share for both iPhone and Mac. We crossed 100 billion cumulative downloads from the App Store and we added powerful new services to our ecosystem, including Apple Pay in the United States, in the United Kingdom, Apple Music in over a 100 countries, and Apple News in the U.S. We also entered an entirely new category with Apple Watch and we are in the very early innings of this promising new part of our business. We generated over $53 billion dollars in net income and grew earnings per share by 43%. We returned almost $50 billion to shareholders through dividends and share repurchases while continuing to invest confidently in research and development, marketing and distribution, our retail and online stores, our supply chain and our infrastructure. We also completed 15 acquisitions to enhance and accelerate our roadmap for products and services. We accomplished all of these things while intensifying our efforts to protect the environment to promote equality and human rights and to ensure the security and privacy we know our customers deserve. We are ending the year on a high note with a record breaking September quarter including sales of 48 million iPhones beating our expectations and up 22% year-over-year. Momentum for iPhone 6 and iPhone 6 Plus remained very strong across the quarter and we established a new launch record for iPhone 6s and iPhone 6s Plus near the end of the quarter. We are seeing strong interest around the world and we’ve been getting great feedback from customers who love the iPhone’s new features including 3D touch, live photos, the new iSight camera, and the powerful new A-9 processor in the iPhone 6s and 6s Plus. We exited the quarter with demand for our new iPhones exceeding supply but we’ve made good progress with our manufacturing ramp in the initial weeks of October. We sold an all time record 5.7 million Macs continuing to defy the negative trend in the global personal computer market which IDC estimates contracted by 11%. The App Store set new all-time quarterly records for both the number of transacting customers and overall revenue. The strong performance of the App Store helped fuel $5.1 billion in services revenue also an all-time record. Sales of Apple Watch were also up sequentially and were ahead of our expectations. This quarter we introduced beautiful new Apple Watch cases and bands including new Gold and Rose Gold aluminum Apple Watch Sport models. We released Watch OS 2 in September paving the way for a whole new class of native apps that are faster and can take advantage of the hardware capabilities of Apple Watch such as the microphone, speaker and the heart rate sensor. Today, there are over 13,000 apps in the Watch App Store including over 1300 native apps such as Facebook messenger, MLB At Bat and Runkeeper and the number is growing rapidly. Apple Watch has already had a tremendous effect on customers’ health and fitness and the stories we’re hearing about its impact are truly inspirational. I personally heard from people who credit Apple Watch with saving their lives and customers are finding new applications all the time in their day to day activities. Revenue in Greater China nearly doubled year-over-year and we continue to focus and invest heavily there. I just returned from a four day visit to Hangzhou and Beijing where we announced major new initiatives to provide renewable energy for our supply chain. I also visited our retail stores in China which are among the busiest in the world. On Saturday we opened a new store, our 25th in Greater China to a very enthusiastic crowd and we are on track to achieve our goal of 40 stores by the middle of next year. Yesterday, we started taking orders for the all new Apple TV and it was a huge first day for this exciting new product. We want to provide the same innovation in the living room that we delivered in our iOS devices. People are already watching more TV through apps today and we think apps represent the future of TV. We’ve built a new foundation around this vision with a new operating system called tvOS innovative ways to connect with your screen and a smart use of Siri to search for what to watch. Next month, we’ll begin shipping iPad Pro, the most powerful iPad we’ve ever made. iPad Pro will enable a new generation of apps for entertainment and productivity, design and illustration, engineering and medical and much more, and with the Apple Pencil and Smart keyboards users can customize their experience making iPad Pro an even more powerful tool for everyone from students to artists, to business professionals. iOS 9 has hit the ground running on track to be downloaded by more users than any software release in Apple’s history with 61% of active iOS devices already running at less than six weeks after its September the 16th release. In late September, we also launched OS X El Capitan which has made the world most advanced desktop operating system more refined and powerful than ever before. Apple Music has set a completely new standard, redefining and combining the best ways to enjoy music in a single immersive app. Over 15 million individual and family accounts are experiencing Apple music including over 6.5 million paying customers. We are thrilled to bring Apple Music to China beginning this quarter along with iTunes, movies and iBooks and we are especially happy to offer such great new and diverse content to our large highly engaged and rapidly growing customer base in China. We are also looking forward to bringing Apple Music to the new Apple TV beginning this week. Apple Pay is seeing double digit growth in transaction month after month and we continue to add major businesses including Starbucks which will roll out Apple Pay support to all its U.S. stores in 2016. Apple Pay now supports merchant rewards programs as well and popular retailers that will be coming online in the next few weeks. We are thrilled to announce today that we are partnering with American Express to bring Apple Pay to eligible customers in key global markets so even more people can experience the easy, secure and private way to pay. Apple Pay will be available to eligible American Express customers in Australia, in Canada this year and is expected to expand to Spain, Singapore and Hong Kong in 2016. The reach of our ecosystem continues to grow and iOS is changing more and more aspects of our customer’s lives in very meaningful ways from their health, to their homes, to their cars. In Health, there are now more than 1,600 health kit enabled solutions that are helping us live a healthier day. In the home there are over 50 brands working on home kit enabled accessories that can be privately and securely controlled from your iPad and iPhone, and in the car more than 50 automobile models have been announced with CarPlay support which provides a smarter, safer and more fun way to use iPhone in the car. And we will continue to work to make the iOS experience even more meaningful across more touch points of our daily lives. The impact of research kit also continues to build. We recently announced new studies on autism, epilepsy and melanoma adding to the important studies already underway on conditions from asthma to diabetes to Parkinson’s disease. Our iOS news app is off to a great start. Nearly 40 million people are reading Apple news and we’ve been getting very positive feedback from the publishers. We have now signed more than 70 publishers representing hundreds of titles and we’re happy to announce that news just launched in the United Kingdom and Australia with partners such as the BBC, NewsCorp, The Telegraph, The Guardian, Financial Times, Daily Mail and the Australian Broadcasting Service. And finally, we are making great strides in the enterprise market, announcing a new strategic partnership with Cisco in September while furthering our progress with IBM in building our mobility partners program. We estimate that enterprise markets accounted for about $25 billion in annual Apple revenue in the last 12 months, up 40% over the prior year and they represent a major growth vector for the future. I’d like to thank our talented and incredibly hardworking employees, our developers and our business partners around the world and of course our very loyal customers for making 2015 Apples’ most successful year yet. With that, I’ll turn the call over to Luca to go over the September quarter results in more detail. Luca Maestri : Thank you, Tim. Good afternoon, everyone. It’s great to conclude our record fiscal 2015 with our strongest September quarter ever. Revenue for the quarter was $51.5 billion, an increase of $9.4 billion or 22% year over year. Our growth was driven by the tremendous performance of iPhone, the expanded availability of Apple Watch and all time high services revenue and Mac sales. We achieved these outstanding results despite severe and persisting weakness in foreign exchange rates around the world that affected all our geographic segments and this makes our year-over-year growth rates even more remarkable. In constant currency, our growth during the fourth quarter would have been 800 basis points higher. We once again reported very strong numbers in Greater China with revenue growing 99% year-over-year to $12.5 billion. Emerging markets performance was strong overall up 65% year-over-year and representing 31% of total company revenue for the quarter. Company gross margin was 39.9%, up sequentially better than our expectations, mainly due to lower than expected costs. Operating margin was 28.4% of revenue and net income was $11.1 billion, a new September quarter record. Diluted earnings per share were $1.96, a 38% year-over-year increase and cash flow from operations was $13.5 billion, also a new fourth quarter record. For details by product I'll start with iPhone. We sold 48 million iPhones in the quarter, up 22% year over year with strong performance around the world throughout the quarter. Total iPhone sales were up 120% in Mainland China and grew over 35% in South Asia and increased by over 20% in several markets around the world including Germany and Italy. iPhone ASP was $670, an increase of $67 year-over-year, thanks to more favorable mix and in spite of the very significant negative impact from foreign exchange that I referred to earlier. We increased iPhone channel inventory by less than 2 million units in order to support our new product launch at the very end of September quarter. We exited the quarter with demand exceeding supply and channel inventory below our target range of 5 to 7 weeks. Next I'd like to talk about the Mac. We sold 5.7 million Macs, which is an all time quarterly record and represents 3% year-over-year growth. We extended our very long running trend of PC market share gains based on IDC's latest estimate of a 11% global market contraction. Mac growth was driven primarily by the great customer response to our new MacBook and sales of MacBook Pro also remained strong. We ended the quarter below our 4 to 5 week target range for Mac channel inventory. Turning to iPad. We sold 9.9 million compared to 12.3 million in the year-ago quarter. iPad sell-through was 10.4 million as we reduced channel inventory by about 500,000 units. We exited the quarter below our 5 to 7 week target range of iPad channel inventory. iPad customer metrics remain extremely positive. In August, ChangeWave measured a 97% consumer satisfaction rate for iPad Air 2 and among consumers planning to purchase a tablet within 90 days, 70% planned to purchase an iPad. Corporate buyers reported a 95% satisfaction rate for iPad and a 90 day purchase intent of 73%. In the segments of the tablet market where we compete, we continue to be very successful. Recent data from NPD indicates that iPad has 73% share of the U.S. market for tablets priced above $200. And the latest data published by IDC indicates that iPad has 74% share of the U.S. Commercial Tablet market. As Tim mentioned our enterprise initiatives continue to expand. In September we announced a new strategic partnership with Cisco to optimize their networks for iOS devices with a goal of providing iOS mobile users with great performance advantage over other mobile platforms. Also, during the September quarter, IBM released new mobile first for iOS apps in healthcare, financial services, travel and transportation and industrial sectors, including new apps leveraging iOS 9 and Watch OS 2. There are now 55 apps in the IBM mobile first for iOS catalogue and the list of projects signings is growing rapidly. Inside IBM, Macs are gaining tremendous traction. There are currently over 30,000 Macs deployed within the company with 1,900 more being added each week. IBM tells us that each Mac is saving $270 compared to a traditional PC, thanks to the much reduced support cost and better residual value. This is a terrific example of the kind of opportunity our devices offer to improve user experience and create value in the enterprise world. Our mobility partner program also continues to grow with more than 25 new partners added in the September quarter bringing the total to over 65 and we are already seeing some great success stories with this program. We are also very excited about the potential of iPad Pro and the enterprise. For example, with the Bloomberg professional app, more than 325,000 financial professionals will be able to use iPad Pro to gain instant global access to finance and business news, market data and portfolio tracking and trading tools. Turning to services. We generated $5.1 billion in revenue, a new all-time record, and an increase of 10% over last year mainly due to strong growth from apps. The revenue from the App Store increased 25% and the number of transacting customers grew 18%, also setting an all-time record. Services growth was particularly impressive in China, where Apple App Store revenue grew by 127% year-over-year. The momentum behind the App Store in China has been tremendous with huge interest from developers and customers alike. Our developer program in China has grown dramatically in the last year with over 1 million members in our program today. Revenue from other products grew strongly up 61% over last year, thanks to the growing contribution from Apple Watch. We expanded Apple Watch distribution significantly over the course of the quarter and it was available at almost 5000 locations in 32 countries at quarter end. Our retail and online stores had a very busy quarter. We opened 7 new stores, including our first store in Belgium. That brought us to a global store count of 463 of which 195 are in 15 countries outside the United States. In fiscal 2016, we expect to open or replace between 40 and 50 stores and we continue to place particular emphasis on Greater China where we plan to have 40 stores opened by the middle of next year. Customers have been very interested in the iPhone upgrade program offered in our U.S. retail stores. The iPhone upgrade program gives customer purchasing a connected device an easy convenient way to get a new phone every year with low monthly payments to a third party lender along with the security and protection of AppleCare Plus. After making 12 or more installment payments, customers can upgrade to a new iPhone. Let me also quickly discuss three accounting matters. First, relative to the iPhone upgrade program that I just mentioned, we will be reducing revenue at the time of sale for the cost associated with the program and deferring the portion of revenue related to AppleCare software upgrade rights and non software services for each iPhone sold. Second, in September based on an analysis of market offerings we reduced the estimated selling price of future software upgrade rights and non software services that we defer for each iOS device and Mac sold, the reduction is between $5 and $10 per unit. Third, also in September we lengthened the time period over which the deferred revenue associated to iPads will be recognized from two years to three years. Let me now turn to our cash position. We ended the quarter with $205.7 billion in cash plus marketable securities, a sequential increase of $2.8 billion. $187 billion of this cash, or 91% of the total, was outside of the United States. In the September quarter, we issued a total of $5.8 billion of term debt, consisting of 1.25 billion British pound denominated notes, 2.25 billion Australian dollar denominated notes and 2 billion euro denominated notes. This left us with $56 billion of term debt outstanding at the end of the quarter. We were very active in the market during the quarter and returned over $17 billion to our investors. We paid $3 billion in dividends and equivalents and we spent $14 billion to repurchase almost 122 million Apple shares through open market transactions. We also completed our fifth accelerated share repurchase program in July and retired an additional 10 million shares at settlement. We have now completed over $143 billion of our $200 billion program including $104 billion in share repurchases of which $36 billion was repurchased in fiscal 2015 alone. Now, as we move ahead into December quarter, I like to review our outlook which includes the types of forward looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $75.5 and $77.5 billion compared to $74.6 billion in the year ago quarter. We expect gross margin to be between 39% and 40%. We expect OpEx to be between $6.3 billion and $6.4 billion. We expect OI&E to be about $400 million and we expect the tax rate to be about 26.2%. Also today our Board of Directors has declared a cash dividend of $0.52 per share of common stock payable on November 12, 2015 to shareholders of record as of November 09, 2015. With that, let's open the call to questions. Nancy Paxton : Thank you, Luca. And we ask that you limit yourself to one, one-part question and one follow-up. May we have the first question, please? Operator : [Operation Instructions] Your first question will come from Katy Huberty with Morgan Stanley. Katy Huberty : Yes, thanks, good afternoon. In light of December quarter revenue guidance, firmly low single digit revenue growth and what looks like increasingly tough comps heading into the March quarter, how do you get comfortable that Apple isn’t on the verge of [ex] [ph] growth for the first time in a decade? And then I have a follow up. Tim Cook : Katy, it’s Tim. You have to consider the constant currency growth rates. And so if you do that, our guidance is actually 8% to 11% because we have about a 700 basis point FX headwind in Q1. And so the growth is actually quite good underneath that and that’s obviously a problem with everyone struggling with it. Zooming out to the more macro question about growth, here’s what I see currently. We believe that iPhone will grow in Q1 and we base that on what we are seeing from a switcher point of view, we recorded the highest rate on record for Android switches last quarter at 30%. We also look at the number of people that have upgraded, that were in the installed base prior to iPhone 6 and 6 Plus. And that number is in the low 30 percentages. So we feel like we have a very open field in front of us. Our performance in emerging markets although it’s quite good and our revenue was good our market share is low and the LTE penetration in these markets is quite low. Also, if I zoom out and look at China, as I have said before and just to make the point once again is we see an enormous change in China over the next several years. The latest study I have seen from Mackenzie indicates if you look back five years China’s middle class had about 50 million people in it. If you look ahead five years, it will have ten times that number in it. And so -- and I feel like we are reasonably well positioned in China, I’m sure we can do better, but I think we are doing fairly well there. It’s not the only market that we are working on obviously. I was really impressed last quarter with our progress in Vietnam and Indonesia and India among others. Also, from the currency point of view and the weak global economies, we don’t overly focus on this. It’s - my view is that it’s sort of a transitional kind of thing and we invest for the long term, so we are continuing to invest for Apple’s future. In addition to those Apple TV is off to a great start. Apple Watch is just getting going. The app store hit a new record again last quarter and the growth seems to be really great there. I’m really happy with the early days of Apple Music and the people moving from the free trial to the music business. And finally, the enterprise business is not to be underestimated, I doubt very many people knew that we had $25 billion enterprise business that we quietly built in not too many years, but our penetration is low, but we have significant actions going on to really deepen that. So sort of everywhere I look I see significant opportunity. Long answer but I thought you might be interested. Katy Huberty : No. I appreciate that. Just as a follow-up on growth, if you look at large services companies, Facebook, Amazon, Google, they're all growing over 20% and it's largely driven by activity of Apple users on iOS devices. Do you feel like there is more that Apple can do to participate in that services growth or you relegated to fundamentals that are tied to device upgrade cycles? Tim Cook : Well, the App Store is growing over 20%, it grew 25% last quarter, and so we feel very good about that. That's become a sizeable business. I would also point out that some of these upgrade programs that are in the market, they sort of began to look more like a subscription business in terms of the way they operate. And so we think that in the aggregate that they may reduce upgrade cycles and also the iPhone that has been sold to someone else hits the price point that we're not hitting today largely which could help further fuel the services revenue which we did quite well on last quarter. Katy Huberty : Thank you very much. Tim Cook : Yep. Nancy Paxton : Thank you, Katy. May we have the next question, please? Operator : From Piper Jaffray, we'll hear from Gene Munster. Gene Munster : Good afternoon and congratulations. Tim, you just briefly touched on as reducing the time between upgrades, but how do you think about the iPhone upgrade cycle compressing over the next few years, obviously the impact from carrier’s changes in the iPhone upgrade program. Can you talk a little bit about when that's going to be rolled out internationally? And then lastly, Luca you mentioned some of the accounting changes related to the iPhone upgrade program. Any sense in terms of what percentage of the Plus – the s upgrades were associated with the upgrade program? Thanks. Tim Cook : Gene, in terms of the upgrade program it's early, but here's what we believe our current view is that we do think that the broader upgrade program, so I'm not just talking about our program that in retail, I mean, that is relatively small compared to our total iPhone sales of the company, but the broader thing obviously is that many of the carriers are offering these plans. And that, if you look at them in the aggregate, we think that it would have a positive impact in replacement cycles. We do like the fact that it creates a market for an iPhone at a different price point as well that is a better product than that customer maybe currently buying which would further help from an ecosystem point of view and that's not to be underestimated. It also seems like that from a rollout point of view there's a -- you will see these plans offered in a significant way in the United States already, but in fact these plans are being offered in some derivation in over dozen countries in the world. They're not as pervasive as they are in the U.S. but it seems like we’re on the front end of fairly major trends in the industry. Luca Maestri : From a financial perspective, Gene, the transaction on our iPhone upgrade program is a purchase, it’s not a lease and so we recognize our revenue upfront, of course we deduct also upfront the cost associated with the program essentially to provide interest free financing and we need to estimate deferred value of the upgrade option for the customer, but as Tim said, it’s a popular program in our U.S store, in the scheme of things, it’s a small percentage of our worldwide iPhone sales and so we'll have really a negligible impact for example, on ASPs for the phone. Gene Munster : And Tim, if we put it all together is it something that has more measurable impact on the business two, three quarters down the road, is that the right way to generally think about it? Tim Cook : Yes, we think about it as being – there were some clearly that were offered in the market prior to this cycle. But they became much more pervasive and much communicated, I think much wider with the September announcements. And so, I would sort of expect to begin seeing this somewhere around a year from now. Gene Munster : Thank you. Nancy Paxton : Thank you, Gene. May we have the next question, please? Operator : Moving on, we'll hear from Toni Sacconaghi with Bernstein. Toni Sacconaghi : Yes. Thank you. Tim, I appreciated the color that you provided on the drivers of iPhone growth in Q1. I think the investor concern is that Q1 will benefit at least on a year over year basis from three extra weeks of availability in China. And it will also benefit from more of those initial launch days that only two of them were in the September quarter and the remainder will be in the December quarter. And so I guess the investor concern is December is a structurally advantaged quarter in the sense of benefiting from both of those tailwinds on a year-over-year basis. But if we look out beyond December, wouldn't that point to notably lower seasonal growth than the March quarter. And how do we think about the factors affecting unit growth beyond the December quarter? And then I have a follow-up, please. Tim Cook : We don't guide beyond December, as you know Toni. I do think that the sort of the macro things that I spoke about earlier, the upgrade programs, the Android Switcher rate, the iPhone momentum in the emerging markets and the LTE penetration in these markets these trends are not one quarter things. These are longer term things. The same – my same response applies and I think we'll do quite good in iPhone. I do believe we'll grow this quarter as we put in our guidance that when you start with a number in the low 30s in terms of the percentage of the installed base that’s upgraded that had a phone pre the iPhone 6 and 6 Plus, that number still likely to leave a lot of headroom beyond December. So that's how I look at that. In terms of your first comment, you didn't asked me to comment on that, but just to be clear, our forecasting doesn't work like you articulated it. I recognize that people can have their own models and so forth, but just to make it clear that I'm not agreeing with your point. Toni Sacconaghi : Okay. And then just on the follow-up, the reported gains from currency hedging in fiscal year 2015 were significant, several billion dollar contribution to the company. And again, this is not an Apple's specific issue, Luca as you pointed out several times, but how do we think about this notion of currency hedges effectively rolling off and being replaced with hedges that are likely have less of an impact. How do we think about that impact the P&L on a go forward basis, perhaps starting with Q1, but then qualitatively or directionally over the course of the year? And what is some of kinds of things that you've undertaken or planning to undertake that could mitigate some of those concerns? Luca Maestri : Yes. I think, Toni, it’s a very good point, I mean, what's going to happen in practice is that we got this portfolio of hedge comp such that over time provides protection to our margins and to our results, but that protection diminishes as we go through the year and so we should expect that in over time during the course of fiscal 2016 that protection will come off assuming that the dollar stays at current levels. Keep in mind, there are some currencies around the world that where we cannot economically hedge and so those currencies are bit excluded from what we're talking about right now. I think my conclusion is that the guidance that we're providing for the first quarter that 39% to 40% it actually an incredible level of guidance given the foreign exchange headwinds that we're dealing with. How do we deal with that? We continue to hedge, so our program continues on an ongoing basis and we will continue to provide some level of protection to foreign exchange movement. In some cases we have realign prices particularly when we launch new products. We tend to do that in a number of countries where the foreign exchange moves have been particularly extreme, and so we tend to recover that through pricing. And then finally, of course we are putting in place a number of cost initiatives that would allow us to deal with the foreign exchange situation. So, overall we feel very strong guidance for the first quarter. And beyond the first quarter as you know we're not guiding and so we'll see over the course of the year. Toni Sacconaghi : Thank you. Nancy Paxton : Thanks, Toni. Could we have the next question, please? Operator : We'll go to Shannon Cross with Cross Research. Shannon Cross : Thank you very much. Tim, I wanted to go back to your commentary on the enterprise business, $25 billion I think you said, it was up 40% year-over-year. I know you have a relatively small sales force internally and obviously you utilizing the joint ventures, but as you noted you see that's an important driver of growth. So, how do you attack that market going forward? Will there be changes? Is there something that you need to shift or focus product in a little bit of different directions to make sure you can adequately attack it. Just in general how you're thinking about it? Tim Cook : From a product point of view, we'd actually been continuing to change and improve IOS for some time. With every release they are more enterprise features and so, I would describe it as sort of continuation of that cadence perhaps with little more intensity. From a go to market point of view, we will be working with or are working with IBM. With Cisco. We're already working with 75 mobility partners that are principally in the U.S. but that's expanding quickly to international as well. And so, many of these companies have -- in some cases very large sales forces, in many cases the reasonable seize sales force. And in addition to a direct sales force there is a huge worldwide indirect channel that many customers buy from and count on buying some services from. And so I do not envision Apple's having a large enterprise sales force will certainly make – we continue adding some people more on the engineering side, but I don't envision having a large direct sales force. Shannon Cross : Okay, great. Thank you. And can you give us some more color on China, 120% year-over-year growth in iPhones, but can you talk in general about what you're seeing in the marketplace and perhaps where you think you in terms of penetration from a smartphone standpoint especially with a China Mobile which has a substantial opportunity to grow given the LTE penetration? Tim Cook : Yes. If you look at China, we grew from an iPhone point of view, Greater China, we grew 87% the market grew for. If you take iPhone out of the market number, the certain market x iPhone actually contracted slightly. And so, we've been able to grow without the market growing. iPhone 6 was the number one selling smartphone in Mainland, China last quarter and iPhone 6 Plus was number three. And so, we did fairly well. The sort of the economic question which I know there's a bit lot of attention on, frankly, if I were to shut off my web and shut off the TV and just look how many customers are coming in our stores regardless to whether they're buying, how many people are coming online, and in addition looking at our sales trend, I wouldn't know if there was any economic issue at all in China. And so I don't know how unusual we are with that. I think that there's a misunderstanding probably particularly in the Western world about China's economy, which contributes to the confusion. That said, I don't think it’s growing as fast as it was, but I also don't think that Apple's results are largely dependent on minor changes than growth. I think it’s much more of contributing – I think other things contribute to that much more. That does say, you'll never had problem there, because the economy, I'm not saying, I'm dumb enough to think that. But I just think that the area that it's currently operating within, it's hard to tell the difference of the consumer level for us. I mean, you really can't tell the difference, if you look at sort of our daily and weekly numbers. So, we're very bullish on it, and I would point out that we're investing in China not for next or the quarter after, or the quarter after, we're investing for the decades ahead and as we look at it our own views is that China will be Apple's top market in the world. And that's not just for sales, that's also developer community is growing faster than any other country in the world. And so, the ecosystem there is very, very strong. I was very impressed with the number the developers I met last week and of course, the customers in stores are enthusiastically contagious. Nancy Paxton : Thank you, Shannon. Can we have next question, please? Operator : We'll go to Steve Milunovich with UBS Steve Milunovich : Thank you. Tim, I wanted to talk about the two sources of your iPhone demand selling to current customers and selling to new customers. In terms of selling to current customers you indicated about a third of the base is moved to the sixth line. As much as people talk about that been a huge upgrade cycle and what is the six has have incrementally, 33% not that a bigger number, I would have thought it would be bigger than that. Does this suggest that there is maybe more of a consistency to upgrading than the street perceives. And then on the other side in terms of new customers, just wanted clarity on the switcher number, are you saying that 30% of iPhone shipments in the quarter went to android switchers to IOS. And do you believe that you could actually have more new customers to Apple in fiscal 2016 than you had fiscal 2015. Tim Cook : There's a lot there. Let me start with the Android Switcher. What this means is that for customers to purchase an iPhone last quarter and replace the smartphone that 30% of those switched from an android device. And so there would have been some switchers on top of that from other operating systems, but obviously android is the largest one by far. And so that's what that means, and that number is the largest that we've ever recorded since we began measuring it three or so years ago. And so, it’s a huge number, we're very, very proud of that number. In terms of 2016 versus 2015 new customers, it's hard to predict. I'm very happy with how we're doing. We're doing better than we've ever been doing. People -- I know there's a fixation on the upgrade rate. When I look at the upgrade rate, Steve, what I see is I feel good that it’s a low number because that's low number means that there is 69% of the people that are out there prior to the iPhone 6 and 6 plus that haven't bother to upgrade this year. That's a large number. And so, I'd see that is opportunity. Do I think it has anything, does to length to consistency? I think part of it is and I believe that the iPhone upgrade plans that are out there as I've mentioned before it seems to me on the future. We'll tell it’s true or not, but it seems to me it’s going to act as a catalyst to accelerate some of this upgrades. And I think that's not something that we're going to see this quarter or next quarter, but it seems like it’s going to happen beginning a year for now or so. It have begins to be – you've seen the plan. They look more and active like a subscription than they do like a purchase. And that's great for the customer because many of them want to upgrade on a frequent basis and they can do this very, very simply. In terms of new, I don't know, whether we'll more new or not. I can tell you that that's always our objective. We want to add a lot more people to the ecosystem and certainly if you look in the emerging markets, even like, nobody is asking about iPad on the call. But if you look at iPad as just an example, in China, 68% of the people that purchased an iPad it was the first tablet they've owned and 40% of those have never owned any Apple product. Just to go through one product with one set of number. I don't want to get through a bunch of numbers because it does contain the data than I don't want to share. But these are things that we're very focused on. And the first time buyer number is surprisingly strong. And keep in mind that we have a good history of bunch of people buy one Apple product, they have a great experience. They begin to look at other Apple products. And of course we makes they all work well together. Steve Milunovich : Thank you. Nancy Paxton : Thank you, Steve. Could we have next question, please? Operator : From Goldman Sachs, we'll go to Simona Jankowski. Simona Jankowski : Hi. Thank you very much. Just is a follow-up to that last question and to put that in context, roughly what percent of the iPhone shipments come from shipments for the installed based versus from your user shipment? Tim Cook : I don't know the answer of your question. Simona Jankowski : Okay. And then just a follow-up, as Luca mentioned, you had to make some adjustments to the pricing in various regions given the currency move we've had. What had been the response in terms of demand, I guess both in terms of units and revenues in some of these regions like Japan or India, parts of Europe where the local prices has to go up? Luca Maestri : Simona, we've made a number of price changes during the course of fiscal 2015. What we've seen in a normal of these markets, we've seen that iPhone sales have been very resilient and that shown in our growth rates. Most recently we've adjusted some prices around the world for the launch of iPhone 6s and 6s Plus. We are very positive about the safest trends around the world. It’s a bit early to tell, because the phones have out there just for four weeks, so its bit early to tell there. Obviously when we increase prices around the world, it's normal to see some impact on sales rates, but so far we were encouraged by the response. Tim Cook : Let me go back to your question. And this is an exactly what you're asking that what your view, I think some color is. The reason I can't answer this is, we don't look at any aggregate, we actually look at the detailed because it's much more important for to us to look at, buy iPhone model by country, what percentage going to our first iPhone buyers. Somebody that's never owned an iPhone before. And so if you look at China as an example, it's over 50% of people that bought 6 and 6 Plus were buying their first iPhone. As you move down the line, that numbers goes up. And so a 5s generally speaking is higher in most countries. And so, that gives a feel for very important market and we cannot where the numbers are. Simona Jankowski : Great. Thank you very much. Nancy Paxton : Thank you, Simona. Can we have the next question, please? Operator : Next we'll go to Amit Daryanani with RBC Capital Markets. Amit Daryanani : Thanks a lot. Good afternoon guys. Two questions from me as well. I guess, first could you talk about the gross margin dynamic as you go from September to December, the midpoint implies on 20 basis points. I think the last five years that's only happen once the gross margin is going down in fiscal Q1. Can you just talk about what the FX dynamic or what area the other headwinds that you think that implies gross margins being done in December? Tim Cook : Yes. Let me give you puts and takes for margins for the December quarter. On the positive side, of course as you mentioned that we would have positive leverage from the higher seasonal volumes. Also what we've seen over the last several quarters is a commodity environment that has been quite favorable and we expect it to remain favorable during the December quarter. On the other hand, of course we are launching a lot of new products. We’ve launched some during September. We are launching some now and everything we launch new products, we make them better. We had features and new technology and these products when we launch and tend to have higher cost structures than the products what they replaced. We have a very good track record overtime to reduce those cost structures, but every time we introduce a new product that is a headwind at the beginning of the cycle for gross margin. While it’s different from a year ago very significantly with the foreign exchange impact that we have mentioned before it remains a very significant headwind as I mentioned earlier to Tony I believe we are dealing with that to a combination of hedging, price realignments [ph] cost initiatives, but on a net basis foreign exchange we will clearly by a sequential headwind. Amit Daryanani : Got it. And then Tim when you talk about seeing iPhone growth in fiscal Q1, I’m curious is that statement more reflective of iPhone units or iPhone revenues so that the ASPs could hardly get growth even if units are not there. And then would you expect to exit within the 5 to 7 week optimal inventory range in fiscal Q1? Tim Cook : I don’t know that we will exit. We make that call late in the quarter as we see what the demand is because we are actually trying to position the inventory for the following quarter instead of the current quarter. And it’s very difficult to predict. What was your other question? Amit Daryanani : I was just curious to your statement on iPhone growth in fiscal Q1, is that a reflection of…. Tim Cook : Is it revenue? I was making a revenue statement but units are also, yes we expect units to be up as well. Amit Daryanani : Thank you. Tim Cook : Yes. Nancy Paxton : Thank you, Amit. Can we have the next question please? Operator : From JPMorgan we’ll go to Rod Hall. Rod Hall : Yes thanks for taking my question. I just wanted to ask Tim maybe if you could comment on the mix between iPhone 6 and iPhone 6s. And whether the mix of demand is any different than what you say for instance that the iPhone 5, 5s point whether there is more say iPhone 6, I know you highlighted that the iPhone 6 is a number one phone in China for example and then I have a follow up? Tim Cook : The statement I made in China was about Q4 and the 6s was only available in China for two days last quarter. The iPhone 6s is the most popular iPhone that we currently sell. In terms of has there been a change. If you look at iPhone 6 today, and add iPhone 6 Plus and compare that to last year’s 5s we are doing better, at that price point than we were previously. Rod Hall : Okay, thank you. And then there’s follow up for what you were doing on the upgrade program. I am wondering if can you envision a time ever made in the U.S. or elsewhere where you would not have to come into an Apple store to activate it or to take advantage of the upgrade you might be able to do that somewhere else, do you start now what your…. Tim Cook : That’s a really good question. We actually solved that problem back in 2007. But then quickly had to change it in order to scale in a major way. And so that is something that we would always -- sort of always in our mind that one day from a customer experience point of view we would like to make things as easy as possible for the customer. And to some degree you can already do that with buying online. But there are many different plans and search what the people buy, that they have to come in for several times we would love to have that automated and working with our partners, with service providers. Rod Hall : Great. Thank you very much. Tim Cook : Yes. A - Nancy Paxton : Thank you, Rod. A replay of today's call will be available for two weeks as a podcast on the iTunes store, as a webcast on apple.com/investor, and via telephone. And the numbers for the telephone replay are 888-203-1112 or 719-457-0820 and please enter confirmation code 795707. And these replays will be available by approximately 5 :00 p.m. Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414 and financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570 and at 408-974-5420. Thanks again for joining us. Operator : Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,016	1	2016Q1	2016Q1	2016-01-26	2.312	2.283	2.426	2.38	null	10.41	11.13	Executives: Nancy Paxton - Senior Director, IR Tim Cook - CEO Luca Maestri - CFO Analysts : Simona Jankowski - Goldman Sachs Gene Munster - Piper Jaffray Katy Huberty - Morgan Stanley Toni Sacconaghi - Sanford C. Bernstein Shannon Cross - Cross Research Brian White - Drexel Hamilton Kulbinder Garcha - Credit Suisse Mark Moskowitz - JPMorgan Jim Suva - Citi Operator : Good day, ladies and gentlemen, and welcome to this Apple Incorporated First Quarter Fiscal Year 2016 Earnings Release Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am. Nancy Paxton : Thank you. Good afternoon and thanks for joining us. Before we begin, we want you to know that in addition to our press release and summary data schedule, we've published some supplemental material that we'll be referring to in our remarks today and you can find a link to this supplemental material on our Investor Relations' website, at apple.com/investor. And it's also included as an exhibit in the Form 8-K we filed with the SEC earlier today. Speaking first today is Apple CEO, Tim Cook, and he will be followed by CFO, Luca Maestri and after that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes and future business outlook. Actual results or trends could differ materially from our forecasts. For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2015 and the Form 8-K filed with the SEC today that I mentioned earlier, along with today's press release. Apple assumes no obligation to update any forward-looking statements or information which speaks as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thanks, Nancy, and good afternoon, everyone, and thank you very much for joining us. Today, we're reporting Apple's strongest financial results ever. We generated all-time record quarterly revenue of $75.9 billion in the December quarter, in line with our expectations and up 2% over last year's blockbuster results. This is a huge accomplishment for our company, especially given the turbulent world around us. In constant currency, our growth rate would have been 8%. Our record revenue and continued strong operating performance also led to an all-time record quarterly net income of $18.4 billion. We sold 74.8 million iPhones in the December quarter, an all-time high. To put that volume into perspective, it's an average of over 34,000 iPhones an hour, 24 hours a day, seven days a week for 13 straight weeks. It's almost 50% more than our Q1 volume just two years ago and more than four times our volume five years ago. 74.8 million iPhones is an incredible number and it speaks to both the immense popularity of iPhone and the phenomenal execution of our teams to deliver a massive number of devices in such a short period of time. Our results are particularly impressive, given the challenging global macroeconomic environment. We're seeing extreme conditions unlike anything we've experienced before just about everywhere we look. Major markets, including Brazil, Russia, Japan, Canada, Southeast Asia, Australia, Turkey and the eurozone, have been impacted by slowing economic growth, falling commodity prices and weakening currencies. Since the end of fiscal 2014, for instance, the euro and British pound are down double-digits, and major currencies such as the Canadian dollar, Australian dollar, Mexican peso, and Turkish lira have declined 20% or more. The Brazilian real is down more than 40% and the Russian ruble has declined more than 50%. 66% of Apple's revenue is now generated outside the United States, so foreign currency fluctuations have a very meaningful impact on our results. Page one of our supplemental material illustrates this point. $100 of Apple's non-U.S. dollar revenue in Q4 of 2014 translated to only $85 last quarter due to the weakening currencies in our international markets. As you can see, the movement has been dramatic. Last quarter alone, the currency impact has been very large. Page two of our supplemental material illustrates our Q1 revenue and growth rates expressed in constant currency. The 8% growth rate I spoke about earlier translates to $80.8 billion in constant currency revenue, which is $5 billion more than our reported revenue. For perspective, that difference is about the size of the annual revenue of a Fortune 500 company. We know the conditions in China have been a source of concern for many investors. Last summer, while many companies were experiencing weakness in their China-based results, we were seeing just the opposite, with incredible momentum for iPhone, Mac and the App Store, in particular. In the December quarter, despite the turbulent environment, we produced our best results ever in Greater China, with revenue growing 14% over last year, 47% sequentially, and 17% year-over-year in constant currency. These great results were fueled by our highest ever quarterly iPhone sales and record App Store performance. Notwithstanding these record results, we began to see some signs of economic softness in Greater China earlier this month, most notably in Hong Kong. Beyond the short-term volatility, we remain very confident about the long-term potential of the China market and the large opportunities ahead of us and we are maintaining our investment plans. Despite the economic challenges all over the world, Apple remains incredibly strong. We have a very satisfied and loyal customer base. We saw a greater number of switchers from Android to iPhone than ever in Q1, and we are very optimistic about our business over the long-term. Innovation has always been the reason behind our success and we remain committed to making the best products in the world and expanding the Apple experience to change our customer's lives in better and more meaningful ways. We've invested through economic uncertainty in the past and we've always come out stronger on the other side. In fact, some of the most important breakthrough products in Apple's history were born as a result of investing through the downturn. We've also seen these times as opportunities to invest in new markets, just as we're doing now in areas such as India and other emerging markets. Getting back to our record Q1 performance, let me give you some highlights of what we've accomplished since our last quarterly call together. We shipped the amazing new iPad Pro, which has been extremely well received by customers along with a new smart keyboard and revolutionary Apple Pencil. We launched the all-new Apple TV with its own App Store, laying the foundation for the future of television. We had our best quarter by far for Apple TV sales and the number of apps developed for Apple TV is growing rapidly. Today there are over 3,600 apps delivering everything from games to entertainment to educational programming. We expanded distribution of Apple Watch to almost 12,000 locations in 48 countries during the quarter. As we expected, we set a new quarterly record for Apple Watch sales, with especially strong sales in the month of December. We released OS X El Capitan, refining the experience and improving performance for our Mac customers. We also updated the entire iMac family with stunning new retina displays and introduced a new line up of wireless accessories. We launched Apple Pay in Canada and Australia with American Express and announced plans to bring this amazingly convenient, private, and secure mobile payment experience to China, Hong Kong, Spain and Singapore in the coming year. Consumers have spent billions of dollars with Apple Pay. In the second half of 2015, we saw a significant acceleration in usage, with a growth rate 10 times higher than in the first half of the year. There are now over 5 million contactless payment ready locations in the countries where Apple Pay is live today and it's soon to be accepted at thousands of Exxon and Mobil branded stations across the U.S. via their Speedpass+ app. Finally, we also shared the incredible Apple Music experience with even more listeners, with over 10 million paying subscribers less than four months since customers began paying for the service. Our financial position has never been stronger. We had the mother of all balance sheets, with almost $216 billion in cash, which translates to nearly $39 per diluted share of Apple stock. We continue to invest confidently in our future and we also continue to return capital to our shareholders at a rapid pace. Our investors have been asking for a while about the recurring nature of our business. Especially during a period of economic uncertainty, we believe it is important to appreciate that a significant portion of Apple's revenue recurs over time. First and foremost, our customer satisfaction and retention rates are second to none and provide us with a long lasting foundation. For example, recent consumer surveys by 451 Research, formerly known as ChangeWave, measured an incredible 99% customer satisfaction rate for iPhone 6S and 6S Plus and an equally impressive 97% rate for the iPad Air 2. They also indicate that our iPhone loyalty rate is almost twice as strong as the next highest brand. In addition, a growing portion of our revenue is directly driven by our existing install base. Because our customers are very satisfied and engaged, they spend a lot of time on their devices and purchase apps, content, and other services. They also are very likely to buy other Apple products or replace the one that they own. And because of the enduring value of the device, their replacing is likely higher to be given or sold to someone who will also love and use it often. So, as a result, our install base has been growing very fast and has recently reached a major milestone, crossing 1 billion active devices for the first time. This is an unbelievable asset for us. Because our install base has grown quickly, we have also seen an acceleration in the growth of our services business, another large and important source of recurring revenues. Now that we have reached this milestone of 1 billion active devices, we felt this would be a great opportunity to share more information on what has become one of the largest service businesses in the world. So now, I'd like to turn the call to Luca, who will provide more insight into how our platform has grown, followed by details on our record quarterly results. Luca Maestri : Thank you, Tim, and good afternoon, everyone. Each quarter, we report results for our Services category, which includes revenue from iTunes, the App Store, AppleCare, iCloud, Apple Pay, licensing, and some other items. Today, we would like to highlight the major drivers of growth in this category, which we have summarized on page three of our supplemental material. The vast majority of the services we provide to our customers, for instance, apps, movies and TV shows, are tied to our installed base of devices, rather than to current quarter sales. For some of these services, such as content, we recognize revenue based on transaction value. For some of the services, such as the App Store, we share a portion of the value of each transaction with the app developer and only recognize revenue on the portion that we keep. To fully comprehend the scale of the services that we are delivering to our installed base and how fast this business is growing, we look at purchases in addition to revenue. When we aggregate the purchase value of services tied to our installed base during fiscal 2015, it adds up to more than $31 billion. That's an increase of 23% over fiscal 2014. In the recent December quarter, purchases of installed base services reached $8.9 billion, which is a growth rate of 24% year-over-year. The size and growth of these services tied to our installed base compare favorably to other services companies you're familiar with. Our installed base services are also quite profitable, with gross margins that, on a purchase value basis, are similar to our company average. Also, we're very excited by the scale and growth of our active installed base, as we indicate on page four. We define an active device as one that has been engaged with our services within the past 90 days. Our active installed base has recently past 1 billion devices with year-over-year growth of more than 25%. Apple is in a unique position of strength. We have world class scales in hardware, software and services all under one roof, which lets us innovate in ways that other companies can't. We have built a huge installed base around four platforms, iOS, Mac OS, watchOS and tvOS. We have tremendously satisfied and loyal customers who are engaged with our services at a fast growing rate. All of this provides us with an unparalleled foundation for the future of Apple business. Let me now turn to the details of our record breaking December quarter. As Tim said, revenue was $75.9 billion, an increase of $1.3 billion or 2% year-over-year. Our growth was driven by all-time record iPhone sales, all-time record revenue from services, the expanded availability of Apple Watch, and the successful launch of the new Apple TV. We achieved this record revenue performance despite a very large negative impact from the weakness of foreign currency and in constant currency; our revenue growth rate was 8%. We once again achieved very impressive results in Greater China, with revenue growing 14% year-over-year and 47% sequentially to an all-time record of $18.4 billion. Emerging markets performance was strong overall, up 11% year-over-year and representing 34% of total company revenue for the quarter. Company gross margin was 40.1%, up sequentially and better than our expectations, mainly due to favorable commodity costs and product mix. Operating margin was 31.9% of revenue and net income was $18.4 billion, a new all-time record. Diluted earnings per share was $3.28, a 7% year-over-year increase over our previous all-time record and cash flow from operations was very strong, at $27.5 billion. For details by product, I will start with iPhone. We sold 74.8 million iPhones in the quarter, an increase of 300,000 compared to last December quarter's sensational results. Total iPhone sales grew 76% in India and more than 45% in Korea, Middle East and Africa. Sales were also up 20% or more in many western European countries and grew 18% in Mainland China. iPhone ASP was $691 compared to $687 in the year ago quarter, in spite of a very unfavorable foreign exchange impact. We continue to see very strong interest in iPhone not only with consumers but also with business users. Among corporate buyers planning to purchase smartphones in the March quarter, 451 Research found that 79% planned to purchase iPhones. That is the highest iPhone purchase intent in the eight-year history of the survey. We started the quarter below our channel inventory target range and thanks to an extremely successful manufacturing ramp; we were able to exit the quarter slightly above the low end of our target range of five to seven weeks of iPhone channel inventory. Next, I'd like to talk about the Mac. We sold 5.3 million Macs compared to 5.5 million last year, a decline of 4%. We continued our long running trend of PC market share gains, based on IDC's latest estimate of an 11% global market contraction, and we were especially happy with 27% year-over-year Mac sales growth in Mainland China. We ended the quarter within our four to five-week target range for Mac channel inventory. Turning to iPad, we sold 16.1 million, compared to 21.4 million in the year ago quarter, and we exited the quarter within our five to seven-week target range of iPad channel inventory. In the segments of the tablet market where we compete, we continue to be highly successful. Recent data from NPD indicates that iPad has 85% share of the U.S. market for tablets priced above $200. And the latest data published by IDC indicates that iPad accounts for 67% of the U.S. commercial tablet market comprising enterprise, government, and education. iPad customer metrics are also extremely positive. In November, 451 Research measured a 97% consumer satisfaction rate for iPad Air 2 and among consumers planning to purchase a tablet within the next six months, 65% plan to purchase an iPad. Corporate buyers reported a 95% satisfaction rate for iPad and a March quarter purchase intent of 73%. Our enterprise initiatives continue to expand. IBM released 48 new IBM MobileFirst for iOS apps in the December quarter and there are now over 100 apps in the IBM MobileFirst for iOS catalog for iPhone, iPad and Apple Watch. Our partnership with Cisco has gained significant momentum since we announced it at the end of August. Our engineering teams are on track to deliver exciting new capabilities that create a fast lane for iOS business users by optimizing Cisco networks for iOS devices and apps, integrate iPhone with Cisco enterprise environments and provide unique collaboration opportunities on iPhone and iPad. We are also continuing to grow our mobility partner program. We added more than 25 partners in the December quarter, bringing the total to over 90. One great example of our progress in the enterprise is Eli Lilly, who boosted sales productivity by equipping 15,000 field based personnel across the world with iPad. A leader in mobile technology, Lilly has eliminated laptops in the field and is upgrading its U.S. field sales teams to iPad Pro. Turning to services, we generated almost $6.1 billion in revenue, including $548 million we received from a patent infringement dispute. Excluding that amount, our services revenue was $5.5 billion, a new all-time record and an increase of 15% over last year, thanks in large part to strong growth from apps. Revenue from the App Store increased 27% and the number of transacting customers grew 18%, also setting an all-time record. Among our customers who purchased apps and content from our iTunes stores, the average amount spent per customer reached an all-time high in the December quarter. Revenue from other products grew strongly, up 62% over last year, thanks to the growing contribution from Apple Watch, as well as the successful launch of the new Apple TV, both of which established new all-time quarterly records. We expanded Apple Watch distribution significantly over the course of the quarter and we experienced especially strong results during the holiday buying season. Let me now turn to our cash position. We ended the quarter with $215.7 billion in cash plus marketable securities, a sequential increase of $10.1 billion. $200 billion of this cash or 93% of the total was outside the United States. We returned over $9 billion to investors during the quarter. We paid $3 billion in dividends and equivalents and we spent $3 billion to repurchase 26 million Apple shares through open market transactions. We also launched our sixth accelerated share repurchase program, spending $3 billion and receiving an initial delivery of 20.4 million shares. We have now completed over $153 billion of our $200 billion program, including $110 billion in share repurchases. As we have done in the past, we plan to provide an update on our capital return program when we report our second quarter results in April. We also plan to be very active in the U.S. and international debt markets in 2016, in order to fund our capital return activities. Also today, our Board of Directors has declared a cash dividend of $0.52 per share of common stock payable on February 11, 2016, to shareholders of record as of February 8, 2016. As we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $50 billion and $53 billion. We are providing a wider range for revenue than usual for the second quarter because of the volatility we are seeing in the economy and in the financial and currency markets. We expect gross margin to be between 39% and 39.5%. We believe these are extremely strong margins in light of the headwinds we face from foreign exchange and the sequential loss of leverage. We expect OpEx to be between $6 billion and $6.1 billion, we expect OI&E to be about $325 million, and we expect the tax rate to be about 25.5%. As you know, we don't provide guidance beyond the current quarter and it's difficult for us to forecast economic and foreign exchange factors; however, at this point, we believe the March quarter faces the most difficult year-over-year compare relative to the rest of the year. With that, I'd like to open the call to questions. Nancy Paxton : Thank you, Luca. And we ask that you limit yourself to one one-part question and one follow-up. May we have the first question please? Operator : [Operator Instructions] Your first question will come from Simona Jankowski with Goldman Sachs. Simona Jankowski : Hi, thank you very much. Just in terms of your March quarter guidance, it does imply a double-digit decline at the midpoint. Maybe if you can just clarify, first of all, what FX headwind is embedded in that? And then just going to the fundamental underpinning reasons for that, how much of it do you think has to do with international markets in terms of weakening demand and how much of that do you think is comps versus any other factors you might identify, such as a response to higher prices for the iPhone in certain overseas markets? Luca Maestri : Thank you, Simona. Let me take this one. In constant currency, when you look at it for the March quarter, revenue would be down between 5% and 10%. So, we are looking at a 400 basis point impact from foreign exchange for the March quarter. You talked about a number of issues that are, in fact, included in this guidance. In addition to lapping, of course, a very strong year ago quarter -- just remind you that revenue growth a year ago was up 27%, there's a number of things that we're facing. The macroeconomic environment is weakening. When you think about all the -- particularly all the commodity-driven economies, Brazil and Russia and emerging markets, but also Canada, Australia in developed markets, clearly the economy is significantly weaker than a year ago. We talked about the unfavorable FX, which again is 400 basis points. One of the things that we've done to respond to the foreign exchange situation has been to increase the price of some of our products in certain international markets. That has had the effect of protecting our margins, which you've seen have been very strong, both in the December quarter and in the guidance that we provide for the March quarter. But inevitably over time, higher prices affect demand and so we're capturing that in our guidance. So, I would say these are the major reasons and the drivers for the guidance on revenue. Simona Jankowski : Thank you. Nancy Paxton : Thank you, Simona. Could we have the next question please? Operator : And next from Piper Jaffray, we'll hear from Gene Munster. Gene Munster : Good afternoon. Tim, could you talk a little bit about the iPhone upgrade program and the theme of iPhone as a subscription? In particular, do you believe that this could have a measurable impact on the December quarter once we anniversary this? And then any thoughts on rolled outside the U.S. when that program would. And I guess my follow-up question would be I know you can't talk about new products, but any high level thoughts on the virtual reality theme. Do you think this is more of a geeky niche or something that could go mainstream? Tim Cook : On your first question about iPhone, I think the most important thing, Gene, as you know for us, will always be the product and the experience. And so that's first and foremost. Secondly, I would say we were blown away by the level of Android switchers that we had last quarter. It was the highest ever by far. And so we see that as a huge opportunity. Thirdly, the markets, sort of the emerging markets broader than BRIC, but including all of emerging, when I look at our share in these markets and the LTE penetration, I see huge opportunities. In terms of the upgrade program itself, I think over time, it will be meaningful as customers get into a different pattern. How much of that plays out in the Q1 of 2017 range is difficult to say. My own sense would be that the other items I've mentioned are probably more important but I am optimistic about the upgrade program as well. Gene Munster : And then virtual reality? Tim Cook : Yeah. In terms of virtual reality, no, I don't think it's a niche. I think it can be -- it's really cool and has some interesting applications. Nancy Paxton : Thank you, Gene. Gene Munster : Thank you. Nancy Paxton : Could we have the next question please? Operator : From Morgan Stanley, Katy Huberty. Katy Huberty : Yes, thanks. I appreciate the macro comments as it relates to guidance, but can you talk a little bit about how you're thinking consumers might react from an ASP perspective? Do you expect consumers to move down the product line, given the macro environment? And then also, how is channel inventory influencing guidance? Do you feel like channel inventory needs to come down, given the demand trends? And then I have a follow-up. Luca Maestri : Couple of points here, Katy. Our iPhone ASP was $691 during the December quarter. We couldn't be happier with the level of ASP that we generated in the December quarter. Keep in mind that the foreign exchange impact on that number was $49. So, obviously, the mix of products was very strong. We had great reception for the new iPhones that we launched at the end of September. Of course, we have a very strong mid-tier this year in the portfolio, with 6 and 6 Plus. But overall, when you look at the outcome during the December quarter, it was very, very strong. So, we feel very good about that and we feel that we have a very, very strong portfolio for iPhone. On the question around channel inventory, we entered the quarter, the December quarter -- and we mentioned it back in October below our target range of five to seven weeks. We have built a bit of inventory during the course of the December quarter. But we have exited at the low end of the five to seven weeks. So, we feel that we are in good shape there. And we've exited the quarter also on iPad and Mac well within the ranges that we want to have. Katy Huberty : And then as a follow-up, back in October you guided fiscal 2016 CapEx up over 30%. What's driving that growth? Can you sort of rank it between equipment purchases, data center, and real estate? And given the slowdown that you started to see in December, are you still comfortable with that level of investment growth? Thanks. Luca Maestri : Yes. So that is kind of the ranking, Katy. It starts always for us with our tooling and manufacturing process equipment and that is up a bit year-over-year. Then we've got data centers and data centers is a growing expenditure for us, because, as we mentioned in our prepared remarks, our installed base of customers and devices is growing, and is growing very significantly. And the data center capacity that we put in place is to provide the services that are tied to the installed base. So, that type of expenditure goes together with the installed base. And then around facilities, you probably know that we are nearing completion of our new campus here in Cupertino, and so this is the year where we've got our peak requirements in terms of capital. Nancy Paxton : Thank you, Katy. Could we have the next question please? Operator : From Bernstein, we'll hear from Toni Sacconaghi. Toni Sacconaghi : Yes. Thank you. I have a question, a follow-up, please. To start, just on iPhones, it looks like your guidance implies about a 15% to 20% unit decline in iPhones for fiscal Q2, which I think, unless you really see a change in demand profile in the second half, suggests that iPhone units will decline year-over-year for fiscal 2016. And I'd like you to address that question, because the obvious follow-up questions are is that because you believe the smartphone market won't grow or because Apple may be reaching saturation in the market? Is that because Apple's replacement cycle accelerated last year and is decelerating this year and that's why we'll see a decline in units? Or is there something about Apple's ability to gain share in a market where the market is moving to much lower price points? But I'm wondering, and Tim, maybe you're best to answer it, if you can address what appears likely to be a decline in iPhone units and how we put that in the context of how we should think about that, given some healthy data around switchers that you highlighted. Tim Cook : Toni, we do think that iPhone units will decline in the quarter. We don't think that they will decline to the levels that you're talking about. We aren't projecting beyond the quarter, as Luca mentioned earlier. But at this point in time, we see that Q2 is the toughest compare. We believe it's the toughest compare because of the year ago quarter also had catch up in it from Q1. If you recall, we were heavily supply constrained throughout the whole of Q1 and so some of that demand moved into Q2. Plus we're in an environment now that is dramatically different from a macroeconomic point of view than last Q2, from a currency point of view, from the level of which we've had to adjust pricing in several of these markets, and sort pf the overall [Indiscernible] in virtually every country in the world. And so it's really all of those factors that play in there and it's difficult to sort out how much is due to which one. Toni Sacconaghi : Right. I mean can you speak to any of the points around your expectation for the smartphone market or whether you think your replacement cycle has changed or whether your ability to gain share has changed? Tim Cook : The market itself, we don't spend a lot of time on predicting. Our view has always been that if we do -- if we make a great product and have a great experience that we ought to be able to convince enough people to move over. And so as I look at sort of your -- maybe your broader umbrella point about a question on saturation, the metrics I see would strongly suggest otherwise. For example, almost half of the iPhones that we sold in China last quarter were to people who were buying their first iPhone. And certainly if you go outside of China into the other emerging markets, our share is much lower and the LTE penetration is so low, I mean in some cases, it's zero, that it indicates to me that there's still a lot of people, a tremendous number of people in the world, that will buy smartphones and we ought to be able to win over our fair share of those. Toni Sacconaghi : Okay. And I just have clarifications; I don't really have a follow-up question. Luca you had talked about channel inventory increasing, it was 18.4 million for iPhone last quarter. Can you tell us how many more units you had this quarter? And then I'm not sure if I misheard you, but I think you said your total installed base grew 25% year-over-year. Can you confirm that? Because if services grew at 13% and your installed base grew at 25%, it almost implies your penetration of your installed base, in terms of your ability to sell services, is going down. Luca Maestri : So, -- maybe I'm going to start with services, Toni. The reason why we added this -- I think it's page three of our supplemental material, is to try and explain that a couple of steps. The first one is that of the services that we report, there's a portion, about 85% of all of the services that we report is directly tied to the installed base. There is a smaller portion of our services business that is not related to installed base and more related to when we sell a device. A perfect example would be an Apple Care agreement that you purchase at the time of the sale of the device. And then we are showing that on that portion of installed base driven services business, there is a part that is related to -- where we recognize revenue in terms of the full transaction value. And then there are transactions, like for example, App Store sales, where a portion of the transaction does not get recognized by Apple, but it goes to the developer. So, when you look at it from a purchase value standpoint, actually in the December quarter, we grew 24%, and for the fiscal 2015, we grew at 23%. So, we are growing at very, very healthy levels okay. And to reconfirm the growth of the installed base, yes, it was over 25%. To the question around the channel inventory for iPhone, we grew channel inventory by 3.3 million units during the course of the December quarter. Keep in mind; we started in acquisition where we were below our targeted range. We were significantly short at the beginning of the quarter. Toni Sacconaghi : Thank you. Nancy Paxton : Thank you, Toni. Could we have the next question please? Operator : From Cross Research, Shannon Cross. Shannon Cross : Thank you very much. I had a question about gross margin. Luca, you got gross margins of 39% to 39.5% in your guidance and that includes hedging. So, I'm curious about the puts or takes in there. And then can you clarify if within the gross margin this quarter that had the IP licensing contribution, as well? Any color you can give, both on this quarter's gross margin puts and takes, and then also the March quarter. And then I have a follow-up. Luca Maestri : Yes. So, -- certainly Shannon, let me start with Q1. I think when you say IP licensing; you mean this patent dispute that was resolved. Yes, it was included in the gross margins and it was worth 40 basis points in the 40.1% that we reported for Q1. For the second quarter, the puts and takes are actually quite simple. From an FX standpoint, the negative impact on a sequential basis from the December quarter is 50 basis points. Then of course, I would say by far the largest impact on margins for the quarter is the loss of leverage, because that's part of our seasonal pattern, which gets offset by a favorable commodity environment that we've seen for a number of quarters now. And in a way, it's the other side of the coin of the foreign exchange situation. Shannon Cross : Okay. Thanks. And then Tim, can you talk a bit about -- and I apologize, I sort of lost my voice here. Can you talk a bit about leverage within the model? I know you said you want to invest while there's great opportunity in China and all of that. But given some of the pressures you're seeing, how do you think about where you spend that incremental SG&A dollar and that R&D dollar? And how should we think about it, given you're running $6 billion a quarter? Tim Cook : Yeah, on the R&D, Shannon, we're continuing to invest without pause. We have some great things in the pipeline and we very much believe strongly in investing through downturns, such as the one that everyone is going through. In terms of SG&A, we obviously seek to throttle expenditures in SG&A to the business level, with the exception of where we're investing in new stores and, for example, our expansion plans in China have not changed. We are maintaining our investment profile and plans there. We are also continuing to invest in markets where we believe they are great places for Apple for the long-term, like India, as an example of that one. And finally, even in the markets where today, grandly, it looks fairly bleak, from Russia and Brazil and some of the other economies that are very much tied to our oil-based economies. We do believe that this, too, shall pass and that these countries will be great places and we want to serve customers in there and so we're not retrenching. That's not -- we don't believe in that. We fortunately are strong enough to continue investing and we think it's in Apple's best long-term interest to do so. Obviously, from a cost point of view, the downside of economic stress is that some asset prices get cheaper, commodity prices get cheaper, and that sort of thing. And so I think this is exactly the period that you want to invest and do so confidently. Shannon Cross : Thank you. Nancy Paxton : Thank you, Shannon. Could we have the next question please? Operator : We'll hear from Steve Milunovich with UBS. Nancy Paxton : Steve, are you there? Tim Cook : Steve? Nancy Paxton : Let's go on to the next question please. Operator : And we'll hear from Brian White with Drexel. Brian White : Tim, could you talk a little bit about the next leg of growth in China? Obviously, Apple has done a phenomenal job there, but where do we see the next leg coming from? And also, you mentioned investing in India. Where do you see that over the next two to three years? I think there's 1 billion mobile subscribers there, almost the size of China. Thank you. Tim Cook : Yeah. Brian, good question. In terms of China, the LTE penetration as of the end of last October, which is the last data I've got, was in the mid-20s. And so there's an enormous upgrade cycle there for people that are still running on 3G handsets. Also, I've talked about this before, but I think it's worth mentioning again, because it's easy to lose perspective with some of the things you read every day, is that the middle-class in China was less than 50 million people in 2010, and by 2020, it's projected to be about half a billion. And so there's just an enormous number of people moving into the middle-class. And we think this provides us a great opportunity to win over some of those customers into the Apple ecosystem. And so I think the demographics are great. We're continuing to invest in retail stores. Angela and her team have been on this very aggressive rollout plan. We now have 28 stores in Greater China and we're on target to have 40 in the summertime of this year. And so we're continuing on distribution. Obviously, we've got product things in mind and are crafting our products and services with China heavily in mind. We remain very bullish on China and don't subscribe to the doom and gloom kind of predictions frankly. In India, India is also incredibly exciting. India's growth, as you know, is very good. It's quickly becoming the fastest growing BRIC country. It's the third largest smartphone market in the world, behind China and the United States. The population of India is incredibly young. The median age there is 27. I think of the China age being young, at 36, 37 and so 27 is unbelievable. Almost half the people in India are below 25. And so I see the demographics there also being incredibly great for a consumer brand and for people that really want the best products. And as you know, we've been putting increasingly more energy in India. India revenue for us in Q1 was up 38%. We also had currency issues in India, as everybody else did. Constant currency growth was 48%. And so it's a very rapidly expanding country. And I think the government there is very interested economic reforms and so forth that I think all speak to a really good business environment for the future. Brian White : Okay, great. Thank you. Tim Cook : Yeah. Nancy Paxton : Thank you, Brian. Could we have the next question please? Operator : We'll hear from Kulbinder Garcha with Credit Suisse. Kulbinder Garcha : Thank you. My question's for Tim on the iPhone business. You talk a lot about the macroeconomic weakness weighing on units, but is some of the issue just that last year replacement got accelerated and this year it's kind of normalizing, and that's kind of a one-time headwind in terms of the unit growth that you see in that business. Is any of that going on, or is that not material, in your view? And the other follow-up I had was that you've mentioned in recent calls, helpfully, the percent of the base, prior to when the 6 came out, that were now on the larger screen phones. Can you give us an update on what that number is? I think the last time it was in the low 30s. Thanks. Tim Cook : Yeah. So, last question first. The number of people who had an iPhone prior to the iPhone 6 and 6 Plus announcements -- and so this was in September of 2014 that have not yet upgraded to a 6, 6 Plus or 6s or 6s Plus is now 60%. So, another way to think about that is 40% have, 60% have not. In terms of your initial question about is there some of the compare issue that are people that ran out quickly to buy a 6 and 6 Plus and sort of accelerated? There is no doubt that we had a unbelievable year last year and the Q2 was particularly really, really strong because of the pent-up demand that left from Q1 in addition to Q2. And so there's no doubt about that. However, I think you can tell from the numbers that Luca is talking about just on the currency side and that's before thinking through the affect that price increases can sometimes have on the business over a period of time, it's clear that the economic piece is large. Kulbinder Garcha : Thank you. Nancy Paxton : Thank you, Kulbinder. Could we have the next question please? Operator : And next we'll hear from Steve Milunovich with UBS. Mr. Milunovich, you may want to check your mute button. Tim Cook : Steve, are you there? Nancy Paxton : Okay. Let's try the next question please. Operator : And we'll hear from Mark Moskowitz with Barclays. Mark Moskowitz : Yes. Thank you. Good afternoon. A question and a follow-up. As far as the question, Tim, I wanted to get a better sense from you in terms of what is the overarching message of introducing a little more details here around services. Is this really to just reinforce the power of the franchise or the platform at Apple in terms of to really navigate tougher macro times in terms of the higher level recurring revenue, or is it a stepping stone to much more in terms of Apple service, i.e. I think of all the stuff you do on the data center side. Could we eventually have seen, with the help of IBM and Cisco that you eventually move more into the cloud services for the enterprise? Tim Cook : So, good question. We started breaking out services, as you know, in the beginning of fiscal year 2015. And as that business has grown and as it became clear to us that the investors wanted -- investors and analysts wanted more visibility into that business, we've now elected to break it out and show the full size, scope, growth, and make comments on the profitability of it from a transparency point of view. I do think that the assets that we have in this area are huge and I do think that it's probably something that the investment community would want to and should focus more on. In terms of our future plans, I wouldn't want to comment about any particular thing, but obviously, with breaking this out, we wouldn't be breaking it out if it wasn't an area that was very important to us in the future. Mark Moskowitz : Okay. Thank you. Tim Cook : Thank you. Mark Moskowitz : And I wanted to follow-up on the upgrade advance program dynamics. Can you talk a little more about what you're seeing in terms of in-store at the Apple Stores? Are you seeing any sort of dislocation in terms of folks who are moving to the upgrade or finance program, are they moving more toward Apple versus maybe the in-store percentage that used to be related to the carriers? In other words, are folks just going with Apple now, instead of the carriers, when they buy their phone, as part of these upgrade programs? Tim Cook : No, I don't -- honestly, this has nothing to do with wanting to move customers from one person to another. This has to do with wanting to provide customers a very simple way to upgrade. Because we serve a significant number of customers in the Apple Store who want the iPhone when it's new and when it comes out, and so we've designed a program that made it simple and easy to do that. I have no idea over time how the percentage of the sales will vary between carriers and the Apple retail store, but that's not our overriding objective. Mark Moskowitz : Okay. Thank you. Good afternoon. Nancy Paxton : Thank you, Mark. We have time for one more question. Operator : And your final question will come from Jim Suva with Citi. Jim Suva : Thank you very much. A question for Tim and then a detail follow-up for Luca. Tim, with the macro situation changing, a lot of CEOs view that and their strategy is very different go-to-market strategy, some change the way they go to market, some change their products. In the past, Apple's been very known in always having a premium product. With the slowdown in the macro FX and also GDP revision, is Apple's strategy go-to-market still always at premium product, or is there a need to go to more also a middle market or lower price point to attract more customers? Just because it seems like growing that installed base and services, as you pointed out, really economically could really help out Apple in the long-term. And then the financial question for Luca is on that patent litigation, Luca, when you gave guidance three months ago, did you have a view that that was coming in? And if so, was that included in the guidance or not, or was that post the quarter guidance? And I assume it's all one-time this quarter you recorded it, it's all gross margin, and then we don't cause that to reoccur again going forward. Thank you very much. Tim Cook : Our strategy is always to make the best products. And that -- for the smartphone market, that we are able to provide though several different price points for our customers. We have the premium part of our line is the 6s and the 6s Plus. We also have a mid-price point, with the iPhone 6 and the iPhone 6 Plus. And we continue to offer the iPhone 5s in the market and it continues to do quite well. And so we offer all of those and I don't see us deviating from that approach. We always want to offer somebody the -- not -- we don't design to a certain price point. We design a great product and we make it priced at a great value. And today, we're able to offer all three of those different iPhone options. Luca Maestri : And Jim, on the patent question, yes, obviously this is a one-off item that affected the December quarter. As I said earlier, it's worth 40 basis points. So, without it, our gross margin would have been 39.7%. It will not repeat going forward. To your question around was it included in the guidance, yes, the probability of receiving the amount was incorporated in the development of the guidance range. If you remember, we guided to 39% to 40%, and that number was included within the range. Jim Suva : Thank you very much gentlemen. Nancy Paxton : Thank you, Jim. A replay of today's call will be available for two weeks, podcast on the iTunes store, webcast on apple.com/investor, and via telephone. And the numbers for the telephone replay are 888-203-1112 or 719-457-0820 and please enter confirmation code 7349088. These replays will be available by approximately 5 :00 PM Pacific Time today. And members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570, and I'm at 408-974-5420. Thanks again for joining us. Operator : Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,016	2	2016Q2	2016Q2	2016-04-26	2.214	2.129	2.31	2.22	null	11.16	10.94	Executives: Nancy Paxton - Senior Director, Investor Relations and Treasury Timothy Donald Cook - Chief Executive Officer & Director Luca Maestri - Chief Financial Officer & Senior Vice President Analysts : Simona K. Jankowski - Goldman Sachs & Co. Eugene Charles Munster - Piper Jaffray & Co (Broker) Kathryn Lynn Huberty - Morgan Stanley & Co. LLC A.M. Sacconaghi, Jr. - Sanford C. Bernstein & Co. LLC Shannon S. Cross - Cross Research LLC Steven M. Milunovich - UBS Securities LLC Rod B. Hall - JPMorgan Securities LLC Operator : Good day, everyone, and welcome to the Apple Incorporated second quarter fiscal year 2016 earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thank you. Good afternoon and thanks to everyone for joining us today. Speaking first is Apple CEO Tim Cook, and he'll be followed by CFO Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margins, operating expenses, other income and expense, taxes, future business outlook, and plans for capital return and debt issuance. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2015, the Form 10-Q for the first quarter of fiscal 2016, and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. In addition, today's comments will refer to a metric we describe as the purchase value of services tied to our installed base. This is a non-GAAP measure, and a reconciliation to the corresponding GAAP measure can be found on our Investor Relations website at Apple.com/investor. I'd now like to turn the call over to Tim for introductory remarks. Timothy Donald Cook - Chief Executive Officer & Director: Thanks, Nancy. Good afternoon, everyone, and thank you for joining us. Today we're reporting the results of a very busy and challenging quarter, and we're also announcing an update to our capital return program. Revenue for the quarter was $50.6 billion, which was within our guidance range. Despite the pause in our growth, our results reflect excellent execution by our team in the face of ongoing macroeconomic headwinds in much of the world and difficult year-over-year comparisons. We saw continued currency weakness in the vast majority of our international markets. In constant currency, our revenue declined by 9% from last year, 400 basis points less than the reported decline of 13%. For the first half of the fiscal year, our revenue in constant currency was up 1% year on year. Despite challenges, there were a number of encouraging signs during the quarter. Our installed base of over 1 billion active devices continued to grow strongly. We added a huge number of Android switchers and new-to-Mac customers, and we generated very strong growth from Services. We sold 51.2 million iPhones in the quarter, consistent with the range of our own expectations but lower than the exceptional year-ago quarter when we saw an acceleration in iPhone upgrades and 40% iPhone sales growth over the previous year. To provide some additional color, iPhone sales come from three sources : customers who upgrade from previous iPhone models; customers who switch from Android and other operating systems; and customers who purchase a smartphone for the first time. As we look at each of these three sources of iPhone sales, we see a business that is healthy and strong. First, from an upgrade perspective, during the first half of this year the upgrade rate for the iPhone 6s cycle has been slightly higher than what we experienced in the iPhone 5s cycle two years ago, but it is lower than the accelerated upgrade rate that we saw with iPhone 6, which as you know was a big contributor to our phenomenal revenue growth a year ago. Most importantly, our customers are incredibly loyal. A recent Kantar survey of U.S. smartphone purchasers indicated a 95% iPhone loyalty rate, the highest ever measured for any smartphone. Second, we continue to see a very high level of customers switching to iPhone from Android and other operating systems. In fact, we added more switchers from Android and other platforms in the first half of this year than any other six-month period ever. And third, with only 42% smartphone penetration of the global handset market today, iPhone is still attracting millions of first-time smartphone buyers each quarter, especially from emerging markets. For example, in India our iPhone sales were up 56% from a year ago. Next I'd like to talk about Services, which was our second largest revenue-generating category during the quarter. Setting aside the amount we received from a patent settlement in the December quarter, the March quarter Services revenue was our highest ever. Services revenue jumped 20% to $6 billion. App Store revenue was up 35% to beat last quarter's all-time record. And Apple Music continues to grow in popularity, with over 13 million paying subscribers today. We feel really great about the early success of Apple's first subscription business, and our Music revenue has now hit an inflection point after many quarters of decline. The Services business is powered by our huge installed base of active devices, which crossed 1 billion units earlier this year. As we discussed on this call in January, those 1 billion-plus active devices are a source of recurring revenue that is growing independent of the unit shipments we report every three months. In fact, the purchase value of services tied to our installed base was a record $9.9 billion in the March quarter, up 27% over last year, accelerating from the 24% growth rate we reported in the December quarter. The reach of Apple Pay also continues to expand following a very successful launch in China in the March quarter and last week's rollout in Singapore. Apple Pay is growing at a tremendous rate, with more than five times the transaction volume of a year ago and 1 million new users per week. There are more than 10 million contactless-ready locations in the countries where Apple Pay has launched to date, including over 2.5 million locations now accepting Apple Pay in the United States, and more expansion of Apple Pay is coming soon. Turning to the Mac, we met our sell-in expectations in addition to reducing channel inventory by about 100,000 units. Overall, the Mac continues to attract a large percentage of new customers. In our latest survey of major markets, over half of buyers were new to the Mac. And in some countries, the percentage is extremely high, like in China, where over 80% of customers were purchasing a Mac for the first time. We're confident in our Mac business and our ability to continue to innovate and gain share in that area. Turning to the Apple Watch, unit sales met our expectations in the quarter. For some color on how we think about Apple Watch sales, we expect its seasonality to be similar to the historical seasonality of iPod, which typically generated 40% or more of its annual unit sell-through in the December quarter. We started shipping Apple Watch just one year ago, and it has quickly become the best-selling and most loved smartwatch in the world. In fact, unit sales of Apple Watch during its first year exceeded sales of iPhone in its first year. Last month, we refreshed the lineup for the spring with new bands and a new starting price point, and the response from customers has been great. Apple Watch is an increasingly essential part of users' lives, from responding to messages, managing calendars and navigating with maps, to helping them be more fit. And in some cases, the heart rate sensor has even helped save lives. We're really excited about the first year with Apple Watch. We have learned a lot, and we believe it has an exciting future head. We announced some fantastic new products during the March quarter. IPhone SE became available on March 31, so none of its sales were reflected in our second quarter results. But so far this quarter we're seeing terrific customer response. IPhone SE is the most powerful four-inch phone ever, and it's a great option for customers all over the world who want a compact phone with advanced features and a great price without compromising performance. Demand has been very strong and exceeds supply at this point, but we're working hard to get the iPhone SE into the hands of every customer who wants one as quickly as possible. The addition of the iPhone SE in the iPhone lineup places us in a better strategic position to attract even more customers into our ecosystem. We also unveiled the stunning 9.7-inch iPad Pro with cutting-edge performance and our most advanced display yet. The reviews of our new iPad Pros have been great, and we're hearing from customers that the features and capabilities in the new Pros make them both the ultimate upgrade for iPad owners and a great PC replacement. In the June quarter, we expect to see our best iPad revenue compare in over two years. IPad is the best selling, best reviewed, and most used tablet on the market. Customers tell us that they love iPad for its unique mix of portability, capability, and versatility, with over 1 million iPad apps in the App Store to help them work, play, learn, and create. We also announced CareKit, a new software framework that developers can use to help people take a more active role in their health by keeping track of their care plans, monitoring their symptoms and medication, and delivering the insights they need to make smart decisions about their health. We're very excited about the ways iPhone and Apple Watch are helping people lead healthier lives. We believe there's great promise here for the future, and we are very interested in where this can take us. As always, we're contributing to society beyond our products, promoting the use of renewable energy across our facilities and inside our supply chain and developing cutting-edge technologies to revolutionize recycling of the materials we use. We are unwavering in our commitment to protect the security and privacy of our customers and their data, and we're actively promoting inclusion and equality across our business. As we continue through the June quarter, I'd like to remind you that we measure the health of customer demand based on sell-through. Despite ending Q2 within our channel inventory targets, in light of the macroeconomic environment, we plan to lower our channel inventories in the June quarter. This will impact our reported revenue in Q3. Luca will provide more details on this in his commentary. But before I turn over the call to him, I'll summarize by saying that the future of Apple is very bright. Our product pipeline has amazing innovations in store. We're very excited about bringing together developers for our four major platforms at our Worldwide Developers Conference in June. We are forging ahead with important investments in research and development, in our infrastructure, and in our supply chain. We've made 15 acquisitions in the last four quarters to accelerate our product and Services roadmaps, and we're always on the lookout for companies with great technology, talent, and strategic fit. Creating value for shareholders by developing great products and services that enrich people's lives will always be our top priority and the key factor driving our investment and capital allocation decisions. As our business continues to generate high levels of free cash flow, we are in the fortunate position to expand our capital return program again this year, as we have done each year since we started the program four years ago. Today we're announcing an extension of the timeframe of the program by four quarters through March of 2018, and we are expanding the total program size from $200 billion to $250 billion. Luca has more details on this announcement and our results for the March quarter. Luca? Luca Maestri - Chief Financial Officer & Senior Vice President : Thank you, Tim, and good afternoon, everyone. Let me start with the March quarter results. Revenue for the quarter landed within our guidance range of $50.6 billion compared to $58 billion in the year-ago quarter, a decline of 13%. As we had expected, our comparisons to last year were influenced by the continued strength of the U.S. dollar against foreign currencies. As Tim said, in constant currency, our revenue declined by 9%. On a geographic basis, in Asia, our revenue grew strongly in Japan, but it declined in greater China and the rest of Asia-Pacific. However, our business in these two regions is faring better than the numbers might suggest. We had significant channel inventory reductions and currency weakness, which affected our reported revenue for both these segments. In Mainland China, revenue was down 11%, and the decline was 7% in constant currency terms. Keep in mind that we were up against an extremely difficult year-ago compare when our Mainland China revenue grew 81%. We remain very optimistic about the China market over the long term, and we are committed to investing there for the long run. Gross margin was 39.4%, near the high end of our guidance range, thanks to strong cost performance. Operating margin was 27.7% of revenue, and net income was $10.5 billion. Diluted earnings per share were $1.90, and cash flow from operations was strong at $11.6 billion. For details by product, I'll start with iPhone. We sold 51.2 million iPhones in the quarter compared to 61.2 million in the year-ago quarter, a decline of 16%. It was a particularly challenging comparison to the record quarter a year ago, when iPhone sales grew 40%, as we entered last March quarter in supply/demand imbalance, which was recovered during the quarter. Also, this year we reduced channel inventory by 450,000 units while we increased inventory by 1 million units a year ago. We have exited the quarter within our five-week to seven-week target range for channel inventory. iPhone ASP was $642 compared to $659 in the year-ago quarter, with weak international currencies and very popular mid-tier and entry offerings contributing to the difference year over year. iPhone's momentum in business markets continues to be very impressive. A recent survey by 451 Research, formerly known as ChangeWave, found that among U.S. corporate buyers planning to purchase smartphones in the June quarter, 78% plan to purchase iPhones. That's the highest June quarter iPhone purchase intent ever measured by the survey and five points higher than a year ago. Turning to Services, we generated $6 billion in revenue, an increase of 20% over the March quarter last year, thanks primarily to the continued strong performance of the App Store, with revenue growing 35% to a new all-time high. According to App Annie, the App Store generated 90% more global revenue than Google Play in the March quarter, up from a 75% lead in 2015. Among our customers who purchased apps and content from our iTunes Store's, the average amount spent per customer reached a new all-time record in the March quarter. Next, I'd like to talk about the Mac. We sold 4 million Macs compared to 4.6 million last year, a decline of 12%. It was a challenging quarter for personal computer sales across the industry, but we believe we gained market share. Despite the overall market slowdown, we generated double-digit Mac growth in a number of markets, including Russia, Korea, Singapore, Taiwan, and the UAE. And just last week we updated the MacBook, our thinnest and lightest Mac, with the latest processors, faster graphics, faster flash storage, and longer battery life. We think our customers are going to love this update. We ended the quarter within our four-week to five-week target range for Mac channel inventory. Turning to iPad, we sold 10.3 million units compared to 12.6 million units in the year-ago quarter. We also reduced channel inventory by about 200,000 units, and we exited the quarter within our five-week to seven-week target range. In the segments of the tablet market where we compete, we continue to be highly successful. Recent data from NPD indicates that iPad has 78% share of the U.S. market for tablets priced above $200. And the latest data published by IDC indicates that iPad accounts for 72% of the U.S. commercial tablet market, comprising business, government, and education. iPad customer metrics are also extremely positive. In February, 451 Research measured a 97% consumer satisfaction rate for iPad Air 2. And among consumers planning to purchase a tablet within the next six months, 59% plan to purchase an iPad, more than three times the purchase intention rate of the next highest brand measured. Corporate buyers reported a 94% satisfaction rate for iPad, and the June quarter purchase intent of 71%. Revenue from other products grew 30% over last year thanks to Apple Watch. We have expanded distribution to 60 countries and introduced bands in beautiful new colors for spring, so customers can personalize their watches in more ways with a range of colors, styles, and materials. Our customers are very happy with Apple Watch, with 451 Research measuring 94% customer satisfaction. We're also making great progress with our enterprise initiatives. IBM now has engagements for more than 200 deployments of native iOS apps for large enterprise customers to accelerate mobile transformation. Our Mobility Partner program also continues to grow, with 108 partners across 20 countries. We see continued broad industry adoption of native iOS apps to transform how professionals do their work and serve their customers. For example, retail bankers are using iOS apps on iPads to greet and onboard customers, reduce queue times, and improve the customer experience. And in hospitals, doctors and nurses are using iOS apps on iPhone and iPad to share and communicate more effectively so that they can spend more time with patients and less time on administrative tasks. Let me now turn to our cash position. We ended the quarter with $232.9 billion in cash plus marketable securities, a sequential increase of $17.2 billion. $208.9 billion of this cash, or 90% of the total, was outside the United States. We issued $15.5 billion in U.S. dollar denominated notes during the quarter, including our first green bond tranche to fund initiatives such as renewable energy and environmental design projects. We exited the March quarter with $72 billion in term debt. We returned $10 billion to investors during the quarter, including $2.9 billion in dividends and equivalents and $7 billion on repurchases of 71.8 million Apple shares through open market transactions. We have now completed over $163 billion of the current $200 billion capital return program, including $117 billion in share repurchases. As Tim mentioned, today we are announcing the latest update to our program, which we are increasing to a total of $250 billion. Once again, we're allocating the majority of the expansion of the program to share repurchases. Given our strong confidence in Apple's future and the value we see in our stock, the board has increased the share repurchase authorization by $35 billion, raising it from the current $140 billion level to $175 billion. We will also continue to net share settle vesting employee restricted stock units. We also know that the dividend is very important to many of our investors who value income, and we are raising it for the fourth time in less than four years. The quarterly dividend will grow from $0.52 per share to $0.57 per share, an increase of about 10%. This is effective with our next dividend, which the board has declared today and is payable on May 12, 2016 to shareholders of record as of May 9, 2016. We continue to plan for annual dividend increases going forward. With $12 billion in annual dividend payments, we are proud to be one of the largest dividend payers in the world. In total, with this updated program, during the next eight quarters we expect to return $87 billion to our investors, which represents about 15% of our market cap at the current stock price. As in the past, we expect to fund our capital return program with U.S. cash, future U.S. cash flow generation, and borrowing from both domestic and international debt markets. We will continue to review capital allocation regularly and solicit input on our program from a broad base of shareholders. This allows us to be thoughtful about the size, the mix, and the pace of the program. As we move ahead into the June quarter, I'd like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $41 billion and $43 billion. The revenue guidance implies a year-over-year decline as we lap an incredibly strong June quarter last year where revenue grew 33%, due in part to accelerated iPhone upgrade purchases. This tough compare is compounded by the continued weak macro environment this year and the strong U.S. dollar, which affects our revenue growth in international markets. Embedded in this guidance is a planned channel inventory reduction worth over $2 billion, as we have elected to be prudent about our channel inventory position given the current macro environment. The guidance also reflects a range of possible scenarios related to how quickly we can get into supply/demand balance for iPhone SE. Due to these factors, our expected demand is greater than the revenue range implies. Sequentially, our guidance implies a revenue decline of 15% to 19%, which is comparable to the 17% sequential decline that we've averaged from the March to June quarter for the last three years, despite the anticipated channel inventory adjustments I just described. We expect seasonal sequential declines in iPhone and iPad sales and a sequential increase in Mac sales. We also expect iPhone ASPs to decline sequentially as we get farther from the launch of iPhone 6s and iPhone 6s Plus and as iPhone SE enters the mix. We know that our revenue guidance falls short of market estimates for the third quarter. We believe the difference comes primarily from three areas : first, the $2 billion-plus channel inventory reduction I just mentioned; second, the effect of the channel inventory reduction and the launch of iPhone SE on iPhone ASPs, as well as the current constrained supply of iPhone SE; and third, different estimates for Mac, which we expect to grow sequentially at a rate similar to what we have experienced in the past June quarters. We expect gross margins to be between 37.5% and 38%. We expect continued cost improvements to be more than offset by the sequential loss of leverage from lower revenue and a different mix of products. We expect OpEx to be between $6 billion and $6.1 billion. We expect OI&E to be about $300 million, and we expect the tax rate to be about 25.5%. With that, I'd like to open the call to questions. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thank you, Luca. And we ask that you limit yourself to one one-part question and one follow-up. Operator, may we have the first question, please? Operator : First we'll hear with Simona Jankowski with Goldman Sachs. Simona K. Jankowski - Goldman Sachs & Co.: Hi, thank you so much. My first question was actually just a clarification in terms of putting in context that $2 billion in channel inventory reduction. What was that last year, just to help us make the comparison on a year-over-year basis? And then the bigger question, Tim, was with the smartphone market now reaching a pretty mature growth phase, how does Apple think of itself going forward? Is it as a growth company, or is it a more mature tech company? And if it's still the former, how does that change how you think about M&A, especially given the position you're in with your balance sheet strategically? Luca Maestri - Chief Financial Officer & Senior Vice President : Simona, let me give you the data points on the sell-through, and then I'll let Tim answer the strategic question. We had a channel inventory reduction that was worth a bit less than $800 million a year ago. Timothy Donald Cook - Chief Executive Officer & Director: Simona, hi, it's Tim. In terms of do I think the smartphone market is mature, I think that the market, as you know, is currently not growing. However, my view of that is that's an overhang of the macroeconomic environment in many different places in the world. And we're very optimistic that this too shall pass and that the market and particularly us will grow again. The reason that we're optimistic is we look at the three places that iPhone sales come from. And from an upgrade point of view as I mentioned in my comments, we compare favorably, slightly better than the upgrade cycle that we saw on the iPhone 5s. We're lower than the iPhone 6, but I think all of us know that that was an extraordinary cycle that accelerated upgrades from 2016 into 2015. And so that comparable will be tough for this year, but that's a transitory thing. As we look at switchers, we're extremely excited that for the first half we set a record from switchers from other platforms, the largest we've ever seen in any six-month period before, so we've got traction there. And then on emerging markets, if you take a look at India, we grew by 56%, and we're placing increasing emphasis in these areas, where it's clear there will be disproportionate growth versus the more developed areas. The next thing is with the iPhone SE, we have seen our ability to attract even more customers into the platform with an incredible product that is at a new price point for us with the latest technology, and so we're optimistic about attracting even more customers with that. We also look at our pipeline, and we're very excited about what's in our pipeline. And so all of those things make me optimistic. Your other question was on M&A. Regardless of the first, we're always looking in the market about things that could complement things that we do today, become features in something we do, or allow us to accelerate entry into a category that we're excited about. And so as I said before, our test is not on the size. We would definitely buy something larger than we've bought thus far. It's more about the strategic fit and whether it's a great technology and great people. And so we continue to look and we stay very active in the M&A market. Simona K. Jankowski - Goldman Sachs & Co.: Thank you. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thank you, Simona. Can we have the next question, please? Operator : From Piper Jaffray, we'll hear from Gene Munster. Eugene Charles Munster - Piper Jaffray & Co (Broker): Good afternoon. Tim, could you talk a little bit about the iPhone ASP trends? And specifically, you mentioned that the iPhone SE is going to impact it. But how are you thinking about the aspirational market share that's out there and your actual market share and using price to close that gap? Is it just the iPhone SE, or could there be other iPhone models that will be discounted to try to be more aggressive in emerging markets? And one for Luca, can you talk a little bit about the Services segment in terms of what piece of the services is driving growth, and maybe a little bit about the profitability on a net basis versus a gross basis that you've referred to in the past? Thanks. Timothy Donald Cook - Chief Executive Officer & Director: Gene, I think the iPhone SE is attracting two types of customers. One is customers that wanted the latest technology but wanted it in a more compact package, and we clearly see even more people than we thought in that category. And then secondly, it's attracting people who aspire to own an iPhone but couldn't quite stretch to the entry price of the iPhone, and we've established a new entry. And so I think both of these markets are very, very important to us, and we're really excited about where it can take us. I do think that we will be really happy with the new-to-iPhone customers that we see from here because of the early returns we've had. We are currently supply constrained, but we'll be able to work our way out of this at some point. But it's great to see the overwhelming demand for it. I'll let Luca comment on the ASPs. Luca Maestri - Chief Financial Officer & Senior Vice President : So on the ASPs, Gene, we mentioned that we're going to be down sequentially. And this is really the combination of two factors when we go from the March quarter to the June quarter. It's the fact that we are having the iPhone SE entering the mix, and that obviously is going to have a downward pressure on ASP. And also this channel inventory reduction that we've talked about, obviously the channel inventory reduction will come from higher-end models, and that is also affecting the sequential trend on ASPs. The question on Services, when we look at our Services business, it's obviously growing very well across the board. The biggest element and the part of the Services business that is growing very well, we mentioned 35%, is the App Store. It's interesting for us that our Music business, which had been declining for a number of quarters, now that we have both a download model and a streaming model, we have now hit an inflection point. And we really believe that this will be the bottom and we can start growing from there over time. We have many other Services businesses that are doing very well. We have an iCloud business that is growing very quickly, faster than the App Store from a much lower base, but I think it's important for us as we continue to develop these businesses. Tim has talked about Apple Pay. It doesn't provide a meaningful financial contribution at this point, but as we look at the amount of transactions that are going through Apple Pay right now and we think ahead for the long term, that could be an interesting business for us as well. From a profitability standpoint, we had mentioned last time that when you look at it on a gross basis, so in terms of purchase value of these services, the profitability of the business is similar to company average. Of course, when you net out the amount that is paid to developers and you look at it in terms of what is reported in our P&L, obviously that business has a profitability that is higher than company average. We don't get into the specifics of specific products or services, but it's very clear it's significantly higher than company average. Eugene Charles Munster - Piper Jaffray & Co (Broker): Thank you. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thanks, Gene. Can we have the next question, please? Operator : Katy Huberty with Morgan Stanley. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Yes, thank you. First for Luca, this is the worst gross margin guide in a year and a half or so. And over the last couple of quarters, you've talked about a number of tailwinds, including component cost, the lower accounting deferrals that went into effect in September. You just mentioned the Services margins are above corporate average. So the question is, are some of those tailwinds winding down, or is the significant guide down in gross margins for the June quarter entirely related to volume and the iPhone 5 SE? And then I have a follow-up for Tim. Luca Maestri - Chief Financial Officer & Senior Vice President : Katy, clearly the commodity environment remains quite favorable, and we continue to expect cost improvements. The other dynamics that you've mentioned are still there. Obviously, what is different and particularly as we look at it on a sequential basis coming out of the March quarter, we will have lots of leverage, and that obviously is going to have a negative impact on margins. And the other factor that's important to keep in mind is this different mix of products. And particularly when you look at iPhone, what I was mentioning to Gene earlier, I think we've got a couple of things that are affecting not only ASPs, but obviously they also affect margins. And it's the fact that we had a channel inventory reduction at the top end of the range, and we've got the introduction of the iPhone SE at the entry level of the range. And so when you take into account those factors, those are the big elements that drive our guidance range right now. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Okay, thank you, and then a question for Tim. I appreciate the optimism around longer-term iPhone unit growth, but with developed market penetration in the – anywhere from 60% to 80%, the growth is going to have to come from new markets. You've talked about India. Can you just spend a little bit more time on that market? What are some of the hurdles you have to overcome for that to be a larger part of the business? When should we expect Apple to have more distribution and specifically your own stores in that country? Thanks. Timothy Donald Cook - Chief Executive Officer & Director: Katy, in the short term, let me just make a couple of comments on the developed markets just to make sure this is clear. If you look at our installed base of iPhone today versus two years ago, it's increased by 80%. And so when you think about upgrade cycles, upgrade cycles would have varying rates on it. As I talked about it in the comments, the iPhone 6s upgrade rate is slightly higher than the iPhone 5s but lower than the iPhone 6. But the other multiplier in that equation is obviously the size of the installed base. And so the nut of the idea is that I think there's still really, really good business in the developed markets, so I wouldn't want to write those off. And it's our jobs to come up with great products that people desire, and also to continue to attract over Android switchers. With our worldwide share, there's still quite a bit of room in the developed markets as well. And from an India point of view, if you look at India, and each country has a different story a bit, but the things that have held not only us back perhaps but some others as well is that the LTE rollout with India just really began this year, and so we'll begin to see some really good networks coming on in India. That will unleash the power and capability of the iPhone in a way that an older network, a 2.5G or even some 3G networks, would not do. And so the infrastructure is one key. The second one is building the channel out. Unlike the U.S., as an example, where the carriers in the U.S. sell the vast majority of phones that are sold in the United States, in India the carriers in general sell virtually no phones. And so it's out in retail, and retail is many, many different small shops. And so we've been in the process – it's not something that we just started in the last few weeks. We've been working in India now for a couple of years or more, but we've been working with great energy over the last 18 months or so, and I'm encouraged by the results that we're beginning to see there, and believe there's a lot, lot more there. It is already the third largest smartphone market in the world. But because the smartphones that are working there are low end, primarily because of the network and the economics, the market potential has not been as great there. But I view India as where China was maybe seven to ten years ago from that point of view, and I think there's a really great opportunity there. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thank you, Katy. Can we have the next question, please? Operator : We'll go to Toni Sacconaghi with Bernstein. A.M. Sacconaghi, Jr. - Sanford C. Bernstein & Co. LLC: Yes, thank you. I have one and then a follow-up as well. My sense is that you talked about adjusting for the changes in channel inventory, that you're guiding for relatively normal sequential growth. And I think if you do the math, it's probably the same or perhaps a touch worse in terms of iPhone unit growth sequentially relative to normal seasonality between fiscal Q2 and Q3. I guess the question is, given that you should be entering new markets and you should see pronounced elasticity from the iPhone SE device, why wouldn't we be seeing something that was dramatically above normal seasonal in terms of iPhone revenues and units for this quarter? Maybe you could push back on me, but I can't help thinking that when Apple introduced the iPad mini in a similar move to move down-market, there was great growth for one quarter, and the iPad never grew again, and margins and ASPs went down. And it looks like you're introducing the SE, and at least on a sequential basis, you're not calling for any uplift even adjusting for channel inventory. And ASPs I presume will go down and certainly it's impacting gross margins, as you've guided to. So could you respond to, A), why you're not seeing the elasticity? And, B), is the analogy with the iPad mini completely misplaced? Timothy Donald Cook - Chief Executive Officer & Director: Toni, it's Tim. Let me see if I can address your question. The channel inventory reduction that Luca referred to, the vast, vast majority of that is in iPhone, and so that would affect the unit compare that you may be thinking about. The iPhone SE, we are thrilled with the response that we've seen on it. It is clear that there is a demand there even much beyond what we thought. And so that is really why we have the constraint that we have. And so do I think it will be like the iPad mini? No, I don't think so. I don't see that. I think that the tablet market in general, one of the challenges with the tablet market is that the replacement cycle is materially different than in the smartphone market. And so as you probably know, we haven't had an issue in customer satisfaction on the iPad. It's incredibly high. And we haven't had an issue with usage of the iPad. The usage is incredibly high. But the consumer behavior there is you tend to hold on for a very long period of time before an upgrade. We continue to be very optimistic on the iPad business. And as I had said in my remarks, we believe we're going to have the best compare for iPad revenue this quarter that we have had in quite some time. And so we'll report back in July on that one. But I think iPhone has a particularly different kind of cycle to it than the tablet market. A.M. Sacconaghi, Jr. - Sanford C. Bernstein & Co. LLC: Okay. And if I can follow up, Tim, you alluded to replacement cycles and differences between the iPad and the iPhone. My sense was when you were going through the iPhone 6 cycle was that you had commented that the upgrade cycle was not materially different. I think your characterization was that it accelerated a bit in the U.S. but international had grown to be a bigger part of your business, and replacement cycles there were typically a little bit longer. And so I'm wondering. If there was only a modest difference between the iPhone 5s and the iPhone 6, how big a difference are we really seeing in terms of replacement cycles across the last three generations? And maybe you can help us. If the replacement cycle was flat this year relative to what you saw last year, how different would your results have been this quarter and the first half? Timothy Donald Cook - Chief Executive Officer & Director: There's a lot there. Let me just say I don't recall saying the things that you said I said about the upgrade cycle. Let me get that out of the way. Now let me describe without the specific numbers. The iPhone 6s upgrade cycle that we've measured for the first half of this year, so the first six months of our fiscal year to be precise, is slightly better than the rate that we saw with the iPhone 5s two years ago, but it's lower than the iPhone 6. I don't mean just a hair lower. It's a lot lower. And so without giving you exact numbers, if we would have the same rate on iPhone 6s that we did iPhone 6, it would be time for a huge party. It would be a huge difference. Now the good news is – the great news from my point of view is I think we're strategically positioned very well because we've announced the iPhone SE. We are attracting customers that we previously didn't attract. That's really great. And this tough compare eventually isn't the benchmark. And the installed base is up 80% over the last two years. And so all of those I think bode well. And the switcher comments I made earlier, I wouldn't underestimate that because that's very important for us in every geography. So thanks for the question. A.M. Sacconaghi, Jr. - Sanford C. Bernstein & Co. LLC: Thank you. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thanks, Toni. Can we have the next question, please? Operator : From Cross Research Group, we'll hear from Shannon Cross. Shannon S. Cross - Cross Research LLC : Thank you very much. I have a couple questions. One, Tim, can you talk a bit about what's going on in China? I know the Greater China revenue I think was down 26%. You did talk about Mainland China. But just if you could, talk about some of the trends you're seeing there and how you think it's playing out, and maybe your thoughts on iPhone SE adoption within China as well. Timothy Donald Cook - Chief Executive Officer & Director: Shannon, thanks for the question. If you take Greater China, we include Taiwan, Hong Kong, and Mainland China in the Greater China segment that you see reported on your data sheet. The vast majority of the weakness in the Greater China region sits in Hong Kong. And our perspective on that is it's a combination of the Hong Kong dollar being pegged to the U.S. dollar, and therefore it carries the burden of the strength of the U.S. dollar. And that has driven tourism, international shopping, and trading down significantly compared to what it was in the year ago. If you look at Mainland China, which is one that I am personally very focused on, we are down 11% in Mainland China on a reported basis. On a constant currency basis, we're only down 7%. And the way that we really look at the health or underlying demand is look at sell-through. And if you look at it there, we were down 5%. And keep in mind that that's down 5% on a comp a year ago that was up 81%. And so as I back up from this and look at the larger picture, I think China is not weak as has been talked about. I see China as may not have the wind at our backs that we once did, but it's a lot more stable than what I think is the common view of it. And so we remain really optimistic on China. We opened seven stores there during the quarter. We now are at 35. We'll open five more this quarter to achieve 40, which we had talked about before. And the LTE adoption continues to rise there, but it's got a long way ahead of it. And so we continue to be really optimistic about it and just would ask folks to look underneath the numbers at the details of them before concluding anything. Thanks for the question. Shannon S. Cross - Cross Research LLC : Okay, thanks. And then my second question is with regard to OpEx leverage or thinking about when I look at the revenue, your revenue is below our expectations, but OpEx is pretty much in line. So how are you thinking about potential for leverage, I don't know, cost containment maybe when macro is bad and revenue is under pressure? And how are you juggling that versus the required investment you need to go forward? Luca Maestri - Chief Financial Officer & Senior Vice President : Shannon, it's Luca. Of course we think about it. We think about it a lot. And so when you look at our results, for example, our OpEx for the quarter, for the March quarter was up 10%, which is the lowest rate that you've seen in years. And when you look within OpEx, you actually see two different dynamics. You see continued significant investments in research and development because we really believe that's the future of the company. We continue to invest in initiatives and projects ahead of revenue. We have a much broader portfolio than we used to have. We do much more in-house technology development than we used to do a few years ago, which we think is a great investment for us to make. And so that part we really need to protect and we want to continue to invest in the business. And then when you look at our SG&A portion of OpEx for the March quarter, it was actually down slightly. So obviously, we think about it, and of course we look at our revenue trend and we take measures accordingly. And when you look at the guidance that we provided for the June quarter, that 10% year-over-year increase that I mentioned to you for the March quarter goes down to a range of 7% to 9% up. And again, the focus is on making investments in R&D and continuing to run SG&A extremely tightly and in a very disciplined way. As you know, our E-to-R, expense-to-revenue ratio, is around 10%. It's something that we're very proud of. It's a number that is incredibly competitive in our industry, and we want to continue to keep it that way. At the same time, we don't want to underinvest in the business. Shannon S. Cross - Cross Research LLC : Thank you. Nancy Paxton - Senior Director, Investor Relations and Treasury : Than you, Shannon. Could we have the next question, please? Operator : From UBS, we'll hear from Steve Milunovich. Steven M. Milunovich - UBS Securities LLC : Thank you. Tim, I first wanted to ask you about Services, and how do you view Services? You've obviously highlighted it the last two quarters. Do you view it going forward as a primary driver of earnings, or do you view it – you mentioned platforms in terms of your operating systems, which I would agree with. And in that scenario, I would argue it's more a supporter of the ecosystem and a supporter of the hardware margins over time and therefore somewhat subservient to hardware. So it's great that it's growing, but longer term, I would view its role as more creating ecosystem that supports the high margins on hardware as opposed to independently driving earnings. How do you think about it? Timothy Donald Cook - Chief Executive Officer & Director: The most important thing for us, Steve, is that we want to have a great customer experience. So overwhelmingly, the thing that drives us are to embark on services that help that and become a part of the ecosystem. The reality is that in doing so, we have developed a very large and profitable business in the Services area. And so we felt last quarter and working up to that that we should pull back the curtain so that people could – our investors could see the Services business both in terms of the scale of it and the growth of it. As we said earlier, the purchase value of the installed base services grew by 27% during the quarter, which was an acceleration over the previous quarter. And the value of it hit just – or was just shy of $10 billion. And so it's huge, and we felt it was important to spell that out. Steven M. Milunovich - UBS Securities LLC : Okay. And then going back to the upgrades of the installed base, you clearly mentioned that you've pulled forward some demand, which makes sense. But there does seem to be a lengthening of the upgrade cycle, particularly in the U.S. AT&T and Verizon have talked about that. Investors I think perceive that maybe the marginal improvements on the phone might be less currently and could be less going forward. At the same time, I think you just announced that you can get the upgrade program online, which I guess potentially could shorten it. Do you believe that upgrade cycles are currently lengthening and can continue to do so? Timothy Donald Cook - Chief Executive Officer & Director: What we've seen is that it depends on what you compare it to. If you compare to the iPhone 5s, what we're seeing is the upgrade rate today is slightly higher or that there are more people upgrading, if you will, in a similar time period in terms of rate than the iPhone 5s. But if you compare to iPhone 6, you would clearly arrive at the opposite conclusion. And so I think it depends on people's reference points. And we thought it very important in this call to be very clear and transparent about what we are seeing. And so I think in retrospect, you can look at it and say, well maybe the appropriate measure is more to the iPhone 5s, and I think everybody intuitively thought that the upgrades were accelerated with the iPhone 6. In retrospect, when you look at the periods, they clearly were. Steven M. Milunovich - UBS Securities LLC : Thank you. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thanks, Steve. Can we have the next question, please? Operator : We'll go to Rod Hall with JPMorgan. Rod B. Hall - JPMorgan Securities LLC : Thanks, guys, for fitting me in. I wanted to start with a more general question. I guess. Tim, this one is aimed at you. As you think about where you thought things were going to head last quarter when you reported to us and how it's changed this quarter, obviously this kind of a disappointing demand environment. Can you just help us understand what maybe the top two or three things are that have changed, so as we walk away from this we understand what the differences are and what the direction of change is? And I've got a follow up. Timothy Donald Cook - Chief Executive Officer & Director: I think, Rod, you're probably indirectly asking about our trough comment, if you will, from last quarter. And when we made that, we did not contemplate or comprehend that we were going to make a $2 billion-plus reduction in channel inventory during this quarter. And so if you factor that in and look at true customer demand, which is the way that we look at it internally, I think you'll find a much more reasonable comparison. Rod B. Hall - JPMorgan Securities LLC : Okay, great. Thank you. And then for my follow-up, I wanted to ask you about the tax situation a little bit. Treasury obviously has made some rule changes, and I wonder maybe if, Luca, you could comment on what the impact to Apple from those is, if anything; and, Tim, maybe more broadly, how you guys see the tax situation for Apple looking forward? Thanks. Luca Maestri - Chief Financial Officer & Senior Vice President : Yes. Rod, these are new regulations. We are in the process of assessing them. Frankly, from first read, we don't anticipate that they're going to have any material impact on our tax situation. Some of them relate to inversion transactions, so obviously that's not an issue for us. Some of them are around internal debt financing, which is not something that we use, so we don't expect any issue there. As you know, we are the largest U.S. taxpayer by a wide margin, and we already pay full U.S. tax on all the profits from the sales that we make in the United States. So we don't expect them to have any impact on us. On tax reform, maybe I can continue, and I'll let Tim provide more color, but we've been strong advocates for comprehensive corporate tax reform in this country. We continue to do that. We think a reform of the tax code would have significant benefits for the entire U.S. economy, and we remain optimistic that we're going to get to a point where we can see that tax reform enacted. At that point in time, of course, we would have much more flexibility around optimizing our capital structure and around providing more return of capital to our investors. Timothy Donald Cook - Chief Executive Officer & Director: The only thing I would add, Rod, is I think there are a growing number of people in both parties that would like to see comprehensive reform, and so I'm optimistic that it will occur. It's just a matter of when. And that's difficult to say, but I think most people do recognize that it's in the U.S.'s interest to do this. Rod B. Hall - JPMorgan Securities LLC : Great. Thanks, guys. Nancy Paxton - Senior Director, Investor Relations and Treasury : Thank you, Rod. A replay of today's call will be available for two weeks as a podcast on the iTunes Store and webcast on Apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820, and please enter confirmation code 7495552. And these replays will be available by approximately 5 :00 PM Pacific time today. Members of the press with additional questions can contact Kristen Huguet at 408-974-2414, and financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570, and I'm at 408-974-5420. Thanks again for joining us. Operator : Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,016	3	2016Q3	2016Q3	2016-07-26	2.096	2.07	2.214	2.23	null	11.67	12.53	Executives: Nancy Paxton - Apple, Inc. Timothy Donald Cook - Apple, Inc. Luca Maestri - Apple, Inc. Analysts: Shannon S. Cross - Cross Research LLC Steven M. Milunovich - UBS Securities LLC Kathryn Lynn Huberty - Morgan Stanley & Co. LLC Toni Sacconaghi - Bernstein Research Simona K. Jankowski - Goldman Sachs & Co. Gene Munster - Piper Jaffray & Co. Mark Moskowitz - Barclays Capital, Inc. Kulbinder S. Garcha - Credit Suisse Securities (USA) LLC (Broker) Operator : Good day, everyone, and welcome to this Apple, Incorporated third quarter fiscal year 2016 earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am. Nancy Paxton - Apple, Inc.: Thank you, good afternoon and thanks to everyone for joining us. Speaking first today is Apple CEO Tim Cook, and he'll be followed by CFO, Luca Maestri. And after that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenues, gross margin, operating expenses, other income and expense, taxes, and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2015, the Forms 10-Q for the first two quarters of fiscal 2016, and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. In addition, today's comments will refer to a metric we describe as installed base related purchases. This is a non-GAAP measure, and a reconciliation to the corresponding GAAP measure can be found on our Investor Relations website at Apple.com/investor. I'd now like to turn the call over to Tim for introductory remarks. Timothy Donald Cook - Apple, Inc.: Thanks, Nancy. Good afternoon and thank you for joining us. Today we're pleased to report third quarter results that reflect stronger customer demand and business performance than we anticipated just 90 days ago and include several encouraging signs. Revenue of $42.4 billion was near the high end of our guidance range and gross margin of 38% was at the top of our guidance range. We achieved these results while reducing channel inventory by about $3.6 billion, significantly more than the $2 billion inventory reduction we had expected. So our sell-through was markedly greater than our sell-in. iPhone accounted for the vast majority of the channel inventory reduction. iPhone unit sell-through was down just 8% year on year, an even greater improvement over the March quarter than we predicted, and we expect the September quarter sell-through comparison to improve further. We feel good about our channel inventory levels and believe they position us well for the months ahead. We had a very successful global launch of iPhone SE, and demand outstripped supply throughout the quarter. We brought on additional capacity and were able to achieve supply/demand balance as we entered the September quarter. At its launch, we said that the addition of the iPhone SE to the iPhone lineup placed us in a better position to meet the needs of customers who love a four-inch phone and to attract even more customers into our ecosystem. In both cases, that strategy is working. Our initial sales data tells us that the iPhone SE is popular in both developed and emerging markets, and the percentage of iPhone SE sales going to customers who are new to iPhone is greater than we've seen in the first weeks of availability for other iPhones launched in the last several years. Overall, we added millions of first-time smartphone buyers in the June quarter, and switchers accounted for the highest percentage of quarterly iPhone sales we've ever measured. In absolute terms, our year-to-date iPhone sales to switchers are the greatest we've seen in any nine-month period, and our active installed base of iPhones is up strong double-digits year over year. We saw tremendous performance from our Services businesses, which grew 19% to a June quarter record of $6 billion. The growth was broad-based, with App Store revenue up 37% to a new all-time high, in addition to strong increases in Music, iCloud, and AppleCare. In the last 12 months, our Services revenue is up almost $4 billion year on year to $23.1 billion, and we expect it to be the size of a Fortune 100 company next year. Most of our terrific Services performance during the quarter was fueled by our active installed base of devices, with installed base-related purchases of $10.3 billion accelerating to 29% growth year on year. We had our best iPad compare in 10 quarters, with revenue growing 7% thanks to the rollout of the 9.7-inch iPad Pro. We're proud to have the most exciting lineup of tablets and accessories in the world and exceptionally high customer satisfaction and engagement. Our surveys also show that about half of iPad Pro purchases are buying them for work. iPad Pro is the ultimate upgrade for existing iPad users and the ultimate replacement device for customers switching from PC notebooks. Apple Watch continues to be the best-selling smartwatch in the world. And just this month, J.D. Power ranked it highest in customer satisfaction among all smartwatches. With watchOS 3 coming this fall, customers will be able to update their Apple Watches with an enhanced user interface, significantly improved performance and all-new fitness and health capabilities, including activity sharing. We're just getting started with the Apple Watch, and we look forward to even more exciting announcements in this space. On a personal note, during the past quarter I visited China and India, and I am very encouraged about our growth prospects in those countries. We remain very optimistic about the long-term opportunities in Greater China and we continue to invest there. We opened our 41st Greater China retail store during the quarter, and we also made a $1 billion investment in Didi Chuxing. Switchers and first-time smartphone buyers represented the lion's share of our iPhone sales in the quarter, and our installed base of iPhones in China has grown by 34% over the last year alone. According to China Mobile, there are more iPhones on their network than any other brand, with iPhone users ranking first in terms of customer loyalty, data usage and ARPU. By far, the largest portion of our global channel inventory reduction was in Greater China, so our underlying business there is stronger than our results imply. We face some challenges in Greater China, as the economic environment has slowed down since the beginning of the year. This is reflected in consumer confidence and retail spending, and the Chinese yuan has depreciated by 7% relative to the U.S. dollar since August of last year. Hong Kong's tourism and retail businesses also continue to be significantly impacted by the stronger Hong Kong dollar relative to other Asian currencies. Combining this backdrop with the tough comparison to last year, when revenue grew 112%, and the channel inventory reduction this year, we're reporting a decline in revenue in the June quarter. But to keep things in perspective, when we look back on our accomplishments in this segment over the last couple of years, they are truly remarkable. In the first three quarters of this fiscal year, our total revenue from Greater China was almost $40 billion, up 55% from the same timeframe just two years ago, while iPhone units were up 47%. India is now one of our fastest growing markets. In the first three quarters of this fiscal year, our iPhone sales in India were up 51% year on year. We just announced a first of its kind design and development accelerator to support Indian developers creating innovative applications for iOS, and we opened a new office in Hyderabad to accelerate maps development. We're looking forward to opening retail stores in India down the road, and we see huge potential for that vibrant country. As we look forward to the fall, we are thrilled by customers' response to the software and services we previewed at our Worldwide Developers Conference last month. This was our biggest WWDC ever. And for the first time, we have four innovative Apple platforms for our developers' apps, iOS, macOS, watchOS, and tvOS. In fact, iOS 10 will be the biggest release ever for iOS. The momentum of all four platforms shows the strong relationship Apple enjoys with customers throughout their day and wherever they go, whether it's at home, in their car, at work, or everywhere in between. The Apple ecosystem is thriving and growing, and our new OS releases this fall will take these great experiences to a new level. Customers can look forward to more expressive ways to communicate with messages now with its own App Store, allowing users to create and share content, make payments, add stickers and more, all without leaving messages, which is now one of the largest messaging services in the world. Customers can also look forward to a broader and more intelligent role for Siri, which will work with your favorite apps from the App Store, so you can ask Siri to book a ride with your favorite ride sharing app or send money to someone with Square. There are also beautifully redesigned apps for music, maps and news, significant enhancements to HomeKit, CarPlay, and the Health app, building on our strategy to give users a seamless experience in all aspects of their lives. There's also a major update with macOS Sierra, with new features like Siri and Apple Pay that make the Mac smarter and more helpful than ever, and even stronger continuity features across all the Apple devices. These experiences become more powerful and intuitive as we continue our long history of enriching our products through advanced artificial intelligence. We have focused our AI efforts on the features that best enhance the customer experience. For example, machine learning enables Siri to understand words as well as the intent behind them. That means Siri does a better job understanding and even predicting what you want, then delivering the right responses to requests. To make Siri an even smarter assistant, we're opening the service to developers, and this fall Siri will be available across our entire product line. We're also using machine learning in many other ways across our products and services, including recommending songs, apps, and news. Machine learning is improving facial and image recognition in photos, predicting word choice while typing in messages and mail, and providing context awareness in maps for better directions. Deep learning within our products even enables them to recognize usage patterns and improve their own battery life. And most importantly, we deliver these intelligent services while protecting users' privacy. Most of the AI processing takes place on the device rather than being sent to the cloud. And starting this fall, we'll be using sophisticated technology called differential privacy, enhancing our ability to deliver the kinds of services we dream of and customers love without compromising on the individual privacy our customers have come to expect from us. This fall we'll also bring Apple Pay to Safari so users can easily make secure and private purchases when shopping on participating websites. Tens of millions of users around the world are enjoying Apple Pay today at stores and in app, with estimated monthly active users up more than 450% year on year last month. Leading financial partners tell us that three out of four contactless payments in the U.S. are made with Apple Pay. This is amazing. There are more than 11 million contactless-ready locations in the countries where Apple Pay is available today, including 3 million locations now accepting Apple Pay in the United States. With the launch of France, Switzerland, and Hong Kong this month, Apple Pay is now live in nine markets, including six of our top 10. Adoption outside the U.S. has been explosive, with over half of transaction volume now coming from non-U.S. markets. With our latest OS releases, the unparalleled continuity across Apple devices will become even more powerful. For example, macOS Sierra will sense other devices and use secure protocols to communicate. With an authenticated Apple Watch, I can auto-unlock my Mac when I open it without typing a password. With Universal Clipboard, I can copy and paste text, images, and even video between my iOS devices and my Mac. And I can automatically access the files on my Mac desktop and documents folder from another Mac, iOS device, or even a PC. Innovations like these are the kinds of things that only Apple can do. We have an incredible lineup of products in our pipeline, and I'm very bullish about our long-term opportunity. Now I'd like to hand it over to Luca to share more details with you on the June quarter. Luca Maestri - Apple, Inc.: Thank you, Tim. Good afternoon, everyone. Revenue for the June quarter was $42.4 billion, near the high end of our guidance range, compared to $49.6 billion in the year-ago quarter. Customer demand for our products and services was stronger than we had anticipated at the beginning of the quarter. As Tim mentioned, we reduced overall channel inventories by roughly $3.6 billion. On a geographic basis, our revenue grew strongly in Japan to a new June quarter record, and we experienced healthy growth in a number of other important markets, including Russia, Brazil, Turkey, India, and Canada. Gross margin was 38%, at the top of our guidance range. Operating margin was 23.9% of revenue, and net income was $7.8 billion. Diluted earnings per share were $1.42, and cash flow from operations was strong at $10.6 billion. For details by product, I will start with the iPhone. We sold 40.4 million iPhones in the quarter. We also reduced channel inventory by over 4 million units compared to about 0.5 million units a year ago, so sell-through was down by 8%. We exited the quarter near the low end of our five-week to seven-week target range for channel inventory. The rollout of our new entry-level iPhone SE concurrent with the channel reduction of more than 4 million higher-end iPhones resulted in a lower than usual iPhone ASP of $595. Therefore, we expect ASPs to improve this quarter. We experienced strong iPhone growth in many markets, with sales in Russia more than doubling year over year, and double-digit growth in many other key countries, including Japan, Turkey, Brazil, India, Canada, and Sweden. iPhone continues to show great momentum in business markets. A recent survey by 451 Research found that among U.S. corporate buyers planning to purchase smartphones in the September quarter, 75% plan to purchase iPhones. This is the highest corporate purchase intent ever measured by the survey for the September quarter. Turning to Services, we generated $6 billion in revenue, an increase of 19% over the June quarter last year. We set a new record for customers transacting on our iTunes Stores. And among our customers who purchase apps and content, the average amount spent per customer was the highest that we've ever measured. The App Store's growth rate has now accelerated for four consecutive quarters, reaching 37% in Q3. The App Store is overwhelmingly the preferred destination for both customers and developers. According to App Annie, we generated 100% more global revenue than Google Play in the June quarter, widening our lead from the March quarter. Because of this continued growth, for the first nine months of our fiscal year, Services increased from 8% of our total revenue a year ago to 11% this year, and it represents an even higher percentage of our profitability. Next I'd like to talk about the Mac. We sold 4.3 million Macs compared to 4.8 million last year. It was a challenging quarter for personal computer sales across the industry, with IDC estimating a 4% global contraction. In addition to the overall market slowdown, we faced a very difficult compare to the year-ago quarter, when we introduced a new MacBook Pro and a new iMac. Despite these challenges, Mac continues to gain a high percentage of new customers, and our Mac installed base has grown to a new all-time high at the end of the June quarter. We ended the quarter below our four-week to five-week target range for Mac channel inventory. Now turning to iPad, revenue grew 7%. iPad ASP was $490 compared to $415 in the year-ago quarter, with the increase driven by iPad Pro, and we sold 10 million iPads compared to 10.9 million in the year-ago quarter. We also reduced channel inventory by about 500,000 units and exited the quarter within our five-week to seven-week target range. In the segments of the tablet market where we compete, we continue to be highly successful both in terms of market share and customer metrics. Recent data from NPD indicates that iPad gained share in the overall U.S. tablet market in the June quarter and has 84% share of tablets priced above $200. And in May, 451 Research measured a 96% consumer satisfaction rate for iPad mini and a 95% rate for iPad Air. Among U.S. consumers planning to purchase a tablet within the next six months, 63% plan to purchase an iPad, almost four times the purchase intention rate of the next highest brand measured, with iPad Pro the top choice for planned purchases. Corporate buyers report a 94% satisfaction rate for iPad and a purchase intent of 71% for the September quarter. One recent example of iPad business adoption is Sberbank, Russia's largest bank, which is adding 22,000 iPads to more than 10,000 purchased last year to deploy corporate mobility solutions across the organization and enable its consultants to serve customers in a more engaging and more efficient way. More broadly, we're making great progress with our enterprise initiatives and we see strong growth opportunities ahead of us. In May, we announced a global strategic partnership with SAP to reimagine business processes with native iOS apps. SAP is the world's largest enterprise software provider, with more than 130 million potential users among its 300,000 global customers. In fact, it's estimated that 76% of global business transactions touch an SAP system. Our partnership will deliver an SDK to fast-track iOS projects for SAP environments, an iOS academy to enable the 2.5 million SAP developers around the world to build great native iOS apps, and a portfolio of industry-specific apps to accelerate mobile transformation in the enterprise. Last month, we announced the first three solutions from our Cisco partnership, two that will dramatically improve the network performance of iOS traffic running on Cisco networks, and one that will bring the desk phone to the 21st century by integrating iPhone Wi-Fi calling into Cisco Spark. Let me now turn to our cash position. We ended the quarter with $231.5 billion in cash plus marketable securities, a sequential decrease of $1.4 billion. $214.8 billion of this cash, or 93% of the total, was outside the United States. We issued a total $2.4 billion of debt in Taiwan and in Australia, while retiring $2.5 billion in U.S. debt, leaving us with $72 billion in term debt at the end of the quarter, essentially unchanged from last quarter. We returned a total of over $13 billion to investors during the June quarter as follows. We paid $3.2 billion in dividends and equivalent. We spent $4 billion on repurchases of 41.2 million Apple shares through open-market transactions. And we launched a new $6 billion ASR, resulting in initial delivery and retirement of 48.2 million shares. We also completed our sixth accelerated share repurchase program, retiring an additional 8.7 million shares. We've now completed almost $177 billion of our current $250 billion capital return program, including $127 billion in share repurchases. During the quarter, we also spent $1 billion on a minority investment in Didi Chuxing in China, completed three acquisitions and incurred $4.2 billion in capital expenditures. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $45.5 billion and $47.5 billion. We expect gross margin to be between 37.5% and 38%. We expect OpEx to be between $6.050 billion and $6.150 billion. We expect OI&E to be about $350 million, and we expect the tax rate to be about 25.5%. Also today, our Board of Directors has declared a cash dividend of $0.57 per share of common stock, payable on August 11, 2016 to shareholders of record as of August 8, 2016. With that, I'd like to open the call to questions. Nancy Paxton - Apple, Inc.: Thank you, Luca. And we ask that you limit yourself to one one-part question and one follow-up. Operator, may we have the first question, please? Operator : Your first question will come from Shannon Cross with Cross Research. Shannon S. Cross - Cross Research LLC : Thank you very much for the question. Tim, can you talk a little bit about your thoughts on investments? You made the Didi investment this quarter. Obviously, you continue to make acquisitions over time. We just saw I guess you invested in buying some of Carpool Karaoke. I'm just curious as to how you're thinking about where you're putting your investment dollars for more of an acquisition or a potential equity stake standpoint as you look at overall capital allocation. Timothy Donald Cook - Apple, Inc.: Shannon, we obviously invest a ton of capital in our business itself to support research and development and the production of our products. And that's the main source of our capital. However, we're constantly looking on the outside for great talent and great intellectual property. And we have been buying companies on average every three to four weeks or so, and we continue to do that. And we think we've made some really great choices there. In terms of the investment in Didi, it was an unusual investment in that, as you know, we don't have a long history of doing a lot of these, but we have done some before. We invested in ARM in the early days. We invested in Akamai and a few other companies. So it wasn't the first. From a Didi point of view, we see that as, one, a great financial investment. Two, we think that there are some strategic things that the companies can do together over time. And three, we think that we'll learn a lot about the business and the Chinese market even beyond what we currently know, and Didi has an incredible team there. And so that's the rationale for why we did that. Would we do more investments? Yes, but it's not something that you'll see a whole string of from us. But we will constantly look for things that are smart to do. Shannon S. Cross - Cross Research LLC : Great. Thank you. And then just as a follow-up for Luca. If you could, talk a little bit about the gross margin puts and takes for guidance, 37% to 38%. How are you thinking about commodity pricing and mix of the new products and that just as you look to how you guided gross margin? Luca Maestri - Apple, Inc.: Yes, Shannon. Let me correct you. It's 37.5% to 38%... Shannon S. Cross - Cross Research LLC : Sorry. I had that written down, but I said the wrong thing. Luca Maestri - Apple, Inc.: ...for the September quarter. So essentially, we're guiding GM flat to slightly down sequentially. On the positive side, we're going to have leverage because we are guiding to a sequential increase in revenue, and we expect to have positive mix as we get into the September quarter, and these positives being offset more or less by what we call product transition costs, which are typical at this time of the year for us. Shannon S. Cross - Cross Research LLC : Great. Thank you. Timothy Donald Cook - Apple, Inc.: Shannon, on the commodity side and for the September quarter, we see NAND being pretty much in balance while DRAM and LCDs and other major commodities remain in an oversupply situation. And so overall commodity prices we expect to decline at at-least historical rates. Nancy Paxton - Apple, Inc.: Thank you, Shannon. Could we have the next question, please? Operator : From UBS, we'll hear from Steve Milunovich. Steven M. Milunovich - UBS Securities LLC : Great, thank you very much. Regarding your revenue guidance for September, it's up about 10% sequentially, which is clearly at the high end historically. So what can you tell us about the timing of the new iPhone model? Is that affecting this? You mentioned that 451 Research is finding business interest in phones, but their survey on consumers actually finds the lowest level of expectation for purchases in the next three months since 2008. You've seen the upgrade numbers from the carriers are quite low. So it seems like it's still a very tough demand environment. So where is the strength coming from in the September quarter? Timothy Donald Cook - Apple, Inc.: Steve, we're not going to get into products or product transition. However, we've taken what we've learned from last quarter, and we did see a number of encouraging signs. Luca talked about the number of countries that we saw double-digit growth in during the quarter, from Japan to Brazil to India, some even stronger numbers than that in Russia. So there's a number of countries that we saw strong signals from that perspective. We also are very happy with the switcher rate that we saw, our highest ever recorded. And the number of switchers through the nine months are the highest absolute numbers that we've ever had. And so when we look at that and then we look at the things going on, on our other products and services, and we think Services will continue to grow very briskly. We've made our best estimate of where we think we'll come in, and that's $45.5 billion to $47.5 billion. Steven M. Milunovich - UBS Securities LLC : Okay, fair enough. And as a follow-up, I wanted to ask you about your platform strategy. You talk about the four operating systems essentially as platforms, which I agree with. And it's just interesting to me because Apple has such a control over the vertical integration of your products, and yet you've somehow been able to grasp the openness that's required for platforms. And I think that's reflected in WWDC, as you pointed out, opening up APIs and so forth on messaging. And you made the case there for apps versus messaging and the anti-bot argument. I'm just curious. Is that the way – am I characterizing this roughly correctly in terms about how you think about the business? And how are you managing that internally in terms of having this vertically integrated somewhat closed view of the hardware and yet this pretty open platform where the value is created externally? Timothy Donald Cook - Apple, Inc.: We think to have a great platform you have to have a really healthy ecosystem. And so we're really proud of the developer community and the fact that developers are earning a lot more money in writing for iOS than other apps. We think that the best experience for users include apps, and so we want to do everything that we can do to continue building that. We now have over 2 million apps in the App Store and are more focused these days on discovery and other things to bring more great apps to the service because there are so many out there. And so that's what we're doing. The TV, and you didn't mention CarPlay, but these are trying to provide our users a seamless experience across all the different things that they do in their lives. And so that's the rationale for CarPlay. It's the rationale for why we're putting a huge investment in the home, making – really bringing home automation to life for people in a very simple and elegant way. It's the reason for Apple TV and what we're doing in the living room. And so all these things, all these things together are all about the user experience and making people's daily lives better. Steven M. Milunovich - UBS Securities LLC : Thank you. Nancy Paxton - Apple, Inc.: Thank you, Steve. Could we have the next question please? Operator : We'll go to Katy Huberty with Morgan Stanley. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thank you. Luca, as it relates to gross margin, the guidance today is very similar to what you've provided over the last five years in terms of gross margin guidance in September versus June. And the variances that you walked through in response to Shannon's questions are very similar to the dynamics that you see in any September quarter. But there's an added factor this time around, which is you don't have the 4 million units of high-ASP, high-margin inventory drain in September like you did in the June quarter. So I guess I'd just push back and ask why gross margin guidance wouldn't be even better? Is it the more balanced NAND environment that Tim spoke to, or is there something else impacting the guidance? Luca Maestri - Apple, Inc.: Katy, I've talked about these elements at a broad level. Of course, there are degrees of positive impact. We for example on the mix front, every cycle is slightly different on our product mix, and so that clearly has an impact on gross margins. And the other thing that we need to keep in mind as we step back for a second and now we've gone through a couple of cycles where the U.S. dollar has strengthened. And as you know, we work with our hedging program where we get protection from FX fluctuations in the short term. When these hedges roll off over time, we end up replacing them with new hedging contracts at spot rates. And so versus September of 2014, for example, the U.S. dollar has now strengthened on average against international currencies by about 15%. And I think we need to accept that now we're living in this stronger U.S. dollar environment. We've taken a lot of actions on the cost side, on the pricing side, and obviously with hedges. But we need to deal with this situation, and that's where we are right now. We feel that 37.5% to 38% given the new FX environment I think says a lot about all the work that we've done on the cost side to get there. Just to give you a sense, on a year-over-year basis, when I look at foreign exchange, that has an impact of almost 300 basis points on our margins. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Okay, thank you. And, Tim, can you speak to how you envision the upgrade rate of the iPhone installed base to play out over the next quarter or the next year? Somebody mentioned that U.S. carriers have reported really weak upgrade rates, not necessarily for iPhone, but across their installed base. The press is discussing only modest technology upgrades in your next iPhone cycle. And so those data points would lead investors to believe that the upgrade rate will be low, but curious if you have a different view. Thank you. Timothy Donald Cook - Apple, Inc.: I don't want to talk about phones that aren't announced. And so that aside, what we have seen in the past tense or current tense on the upgrade rate is that the iPhone upgrade rate for the iPhone 6S is very similar to the iPhone 5S. And I guess in retrospect, maybe that was a predictable thing, although we didn't predict it in the beginning. It took us a little time to realize that. The iPhone 6 was significantly higher than that, and so it likely accelerated upgrades that would have been in the current year ahead of those. And so what the future holds, we'll see. But I'm very optimistic about the future because I see so many signs that are positive. I see an installed base that has gotten incredibly large. I see a switcher rate that is the highest ever. I see the smartphone itself, led by iPhone, becoming even more instrumental and important to people's lives. It's becoming essential. And all of the things that are coming both in the fall, the things that we've announced that you can see with iOS 10, hopefully you're running by now with the beta, those and other things make it even more instrumental. And AI even makes it even more and more. As the phone becomes more and more your assistant, it's one of those that you're not going to leave without it. And so I see all of those things as vectors that are incredibly positive. I also really like what I've seen with the iPhone SE and the fact that it's opening the door to customers that we weren't reaching before and likely convincing some people to upgrade that wanted a smaller form factor but wanted to stay with iPhone, and so they were waiting for the iPhone SE. And so I see lots of positive things, and so that's how I look at it. Nancy Paxton - Apple, Inc.: Thank you, Katy. Could we have the next question please? Operator : We'll go to Toni Sacconaghi with Bernstein. Toni Sacconaghi - Bernstein Research : Yes, thank you. You commented about the significant inventory drawdown in the quarter, $3.6 billion on the revenue side. So sell-through was $46 billion effectively, over 4 million iPhones, suggesting that sell-through iPhone sales were 45 million. When I look to your guidance for Q4, I actually have the opposite question of a previous question, which is in light of the true sell-through rate, which seems to reflect better than normal seasonality in Q3, likely some contribution and elasticity from the SE, when I look at Q4, it looks like you're guiding for iPhone unit on a sell-through basis to be flat or potentially down and for total company revenues to be only fractionally up and below the seasonality we see in Q4. So I guess my question is, are you expecting any drawdowns in channel inventory in fiscal Q4? Are my inferences around sell-through rate incorrect? Or given the business momentum that you spoke about in response to an earlier question and the hopefulness that you expressed in your prepared remarks, Tim, I'm actually surprised that the guidance isn't a bit stronger on the top line. Luca Maestri - Apple, Inc.: Toni, let me take it. Starting with your comments on the June quarter, I just want to point out that when we talk about a $3.6 billion channel inventory reduction, that is not entirely related to iPhone. iPhone is the vast majority of that, but we did reduce channel inventory on all other products as well. So that probably leads you to different conclusions to the math that you have just expressed. On the September quarter, when I look at the sequential increase for iPhone units that we are expecting, I would say that it is, even with the sell-through adjustments that you've talked about, it's still pretty much in line with what we've seen in the past. As you know, we do not provide guidance for channel inventory. But I would say, in general, I think it's important to keep in mind that if we look around the world, we do see a lot of positive signs, but we also know that the macroeconomic environment is slowing down in a number of places around the world. And that needs to be taken into account in our guidance. Toni Sacconaghi - Bernstein Research : Okay. Luca, I did understand the $3.6 billion, but you said over 4 million iPhones were drawn down. I added that to the 40.4 million, so that would suggest close to 45 million on a sell-through basis. So that was the basis for my observation. I was wondering if I could direct one at Tim. You talked about the upgrade cycle and how it elongated relative to the iPhone 6 and that it's similar to what you saw with the iPhone 5S. And my belief is that one of the bigger longer-term concerns for Apple is that the replacement cycle could just structurally elongate over time, particularly as your installed base of customers becomes less affluent and more international. So I guess my question is, you have a mechanism, which is the Apple Upgrade Program, which takes replacement cycle out of the equation and puts people on buying the phone as a service. And so I'd welcome any comments on how that program is doing. And then just more broadly, is Apple thinking about ways to sell not only the iPhone, but more of its products on a monthly type subscription basis, perhaps in a more bundled fashion so that you can add more predictability to what is now largely a transactional revenue model? Timothy Donald Cook - Apple, Inc.: The iPhone demand is made up, as you know, of upgraders, switchers and new to smartphone. And so if you take it in reverse order for a minute and look at a new smartphone, smartphone penetration right now around the world at the end of December was 42%. And so there's quite a bit of room there. It is true that a lot of those are in emerging markets, but we have done – we've had reasonable business success in several emerging markets. And so we don't enter into those with no experience, although we will enter into them humbly. On the switcher side, we really like what we're seeing. And we think that from a user point of view, as the smartphone itself becomes more and more essential to people's daily lives, which is a part of what I had talked about before, a part of bringing it into the home in a bigger way and in the car and at work and so forth, we think people will put more and more focus on what they're buying and the thing that Apple does best, which is provide this killer experience. A killer user experience that's integrated across their lives I think becomes more important and I think that really plays to our advantage. I also think that the deployment of AI technology is something that we will excel at because of our focus on user experience, and so I like that. From an upgrade point of view, there are pluses and minuses as I see it. A plus is that more and more people have already joined upgrade programs. Some of these programs, like the one that you referenced that we've done, replaces the iPhone every year. There are also carriers that have similar kind of plans, where they also replace or change out the iPhone every year. Others have an 18-month clock. Some have a 24-month clock, and there are even some that have a 30-month clock. And so there's various time schedules there. And so, as of today, there are obviously a lot more people on those programs than ever before because they just started. It really got underway in a big way last year, in a smaller way two years ago. And so we'll see more of those this coming fall. The minus side is that the bifurcation of the smartphone from the service itself has a plus and a minus into it. The subsidy, the lack of that – and this is more of a U.S. phenomenon than the rest of the world, some of that can be a shock for people that were used to paying $199 for their smartphone. They come back in and they pay less for the service but they pay more for their smartphone. And so there's lots of pluses and minuses on this. But overall, as I look at this for Apple, and this is not a statement on the industry itself, but for Apple, I'm very optimistic. Nancy Paxton - Apple, Inc.: Thank you, Toni. Could we have the next question, please? Operator : From Goldman Sachs, Simona Jankowski. Simona K. Jankowski - Goldman Sachs & Co.: Thank you. Tim, as you mentioned, you traveled to China during the quarter. And while you certainly sound encouraged on China and highlighted the Didi investment, there are some of the key services for Apple like iBooks and iTunes Movies that are still banned, and some of the local vendors appear to be gaining share. So can you just give us your perspective on the market, your expectations around getting those services back up, and also regaining share? Timothy Donald Cook - Apple, Inc.: Yes, for books and movies, we currently have those stores off, as you mentioned. To put this in some context, those two stores for the months that we had them operational, which was several months, the revenue was less than $1 million. And so it's not a revenue-related issue. From our point of view, this is a service we want to provide our customers. And so we're working very closely with the appropriate government agencies, and we hope to make books and movies available again to our customers there. And so we'll see how that goes, but we're optimistic there. Simona K. Jankowski - Goldman Sachs & Co.: And in terms of just regaining share in that market more broadly? Timothy Donald Cook - Apple, Inc.: I think we've always had – if you look at our share over time, our share in China tends to peak during launch windows. There's a higher high and a lower low there. There's a bigger difference between those two. And so what we have to do and what we're doing is innovating like crazy and delivering the best smartphone to our customers there. And if we do a really great job of that, which we will, then I'm confident that we'll do well. Nancy Paxton - Apple, Inc.: Thank you, Simona. Could we have the next question, please? Operator : Gene Munster with Piper Jaffray. Gene Munster - Piper Jaffray & Co.: Good afternoon. Tim, you gave some nice data points around Apple Pay. Can you remind us? Is this a business that ultimately impacts the Services line in any measurable way, or is Apple Pay generally about selling iPhones? And separately, when you just take a step back and look at the proof point that the augmented reality [AR] theme has had with this whole Pokémon phenomenon, how does it impact how you think about the future? I assume you think about it. I'm just curious what goes on in your mind when you see all that. Thanks. Timothy Donald Cook - Apple, Inc.: On the Apple Pay side, the revenues from Apple Pay are in the Services line. The growth is astronomical, but the base is very small. And so for today, Apple Pay is very much about a great feature for our customers so that they can pay in a very simple, private, and secure way. In terms of AR and the Pokémon phenomenon, it's incredible what has happened there. I think it's a testament to what happens with innovative apps and the whole ecosystem and the power of being a developer being able to press a button, so to speak, and offer their product around the world. And just a certain developer has elected not to go worldwide yet because of the pressure on their servers, et cetera, because of the demand. But I'm sure that they will over time. It also does show, as you point out, that AR can be really great. And we have been and continue to invest a lot in this. We are high on AR for the long run. We think there are great things for customers and a great commercial opportunity. And so we're investing, and the number one thing is to make sure our products work well with other developers' products like Pokémon. And so that's the reason why you see so many iPhones out in the wild right now chasing Pokémons. Gene Munster - Piper Jaffray & Co.: Would you say there's going to be a computing shift to AR longer term? Timothy Donald Cook - Apple, Inc.: I notice there are people that want to call it a new computer platform, and we'll see. I think there's a tendency in this industry to call everything new the next computer platform. However, that said, I think AR can be huge. So we'll see whether it's the next platform. But regardless, it will be huge. Gene Munster - Piper Jaffray & Co.: Thank you. Nancy Paxton - Apple, Inc.: Thanks, Gene. Can we have the next question, please? Operator : We'll go to Mark Moskowitz with Barclays. Mark Moskowitz - Barclays Capital, Inc.: Yes, thank you. Good afternoon. I just want to follow up, Tim, if I could, related to the R&D pace of growth, clearly a lot of momentum there over the last couple years. But we're just trying to figure out how much of that is dedicated to existing products and services versus what's next? Can you give us a sense in terms of when investors should think about the ROI coming back to them from the R&D perspective? And a corollary to that, is it really restricted just to products and services currently, or can we see more of a cloud services apparatus evolve over time where you do more and more in the enterprise just given the core trips with SAP and Cisco and IBM? And then my follow-up for Luca is around ASPs for the iPhone. We keep getting a lot of questions around iPhone SE in terms of how cannibalistic could it be to the core iPhone franchise. Are you seeing any moderation in terms of the ASP pressures here? Timothy Donald Cook - Apple, Inc.: On R&D growth, we do continue to invest significantly in R&D. The growth rates are still large on a year-over-year basis, and Luca can share the exact ones. But I think the recent quarter was in the mid-20% for R&D. The balance of the company we're managing more flattish from a year-over-year point of view. The products that are in R&D, there is quite a bit of investment in there for products and services that are not currently shipping or derivations of what is currently shipping. And so I don't want to talk about the exact split of it. But you can look at the growth rate and conclude that there's a lot of stuff that we're doing beyond the current products. Luca Maestri - Apple, Inc.: Mark, on the ASP question, I talked about the $595 in Q3. It's down $65 on a year-over-year basis. Keep in mind, about $20 of that $65 is foreign exchange. So during the quarter, we had this combination of starting with no iPhone SE units in channel inventory, so we had to do an at least a partial channel fill that obviously had an impact on ASPs. And then the other element was the fact that we've reduced more than 4 million units of channel inventory on the high end. So the combination of these two things obviously had an impact on ASPs. But I think as I said or Tim said during the prepared remarks, we do expect iPhone ASP to improve sequentially as we move into the September quarter because these two factors that I just mentioned are not going to repeat. On cannibalization, of course we've got limited experience because the phone has been in the market just for a few weeks. But when we look at our survey data on iPhone SE, as Tim was saying, we believe that the iPhone SE is doing exactly what it was intended, which is we are seeing a higher rate of new to iPhone customers, which is obviously very important to us because we bring new people into the iOS ecosystem. And we see a higher rate of previous iPhone owners that really prefer the four-inch form factor. We have not seen clear evidence of cannibalization from iPhone 6S or iPhone 6S Plus. Of course, there's always going to be some level of cannibalization. But really to us what is much more relevant is the much bigger opportunity to bring more people into the iOS ecosystem. Nancy Paxton - Apple, Inc.: Thanks, Mark. Could we have the next question, please? Operator : From Credit Suisse, we'll hear from Kulbinder Garcha. Kulbinder S. Garcha - Credit Suisse Securities (USA) LLC (Broker): Thanks, just a couple questions for me. Luca, I just want to clarify that last point on ASPs on iPhone because last quarter it seemed that you were quite clear that that was a negative driver to the gross margin of the company. So I understand there are other drivers going into the September quarter. But just to be clear, the phone units you didn't sell through that were depleted in channel inventory, those are relatively high gross margin as well. That's the clarification. And then for Tim, on the Services side, as Apple has spoken more and more loudly I guess in the last three or four quarters, I just think about some of the comments you've made about the TV market and how it's been stuck I think in the 1960s and the 1970s and the experience hasn't changed. I understand you've got the Apple TV box out. But in terms of driving actual video-on-demand services, is that something that Apple wants to do themselves? Do you want a partner? Could you even build content? How do you think about that as an actual business opportunity as opposed to here's an Apple box and we sell some units, but it's not that meaningful to the overall company in terms of size? I'm just curious given the installed base and users you have. Thanks. Luca Maestri - Apple, Inc.: Kulbinder, on your question on iPhone ASP, I'm not sure if I understood it correctly. But clearly the iPhone SE has a downward impact on iPhone ASP, of course, because it comes at the low end of the range. From a gross margin perspective, it is slightly dilutive to company margins, but the impact is not particularly large. Kulbinder S. Garcha - Credit Suisse Securities (USA) LLC (Broker): Okay, okay. Timothy Donald Cook - Apple, Inc.: On the Apple TV question, the introduction of Apple TV and tvOS last October and the subsequent OS releases and what's coming out this fall, think of that as building the foundation for what we believe can be a broader business over time. And so I don't want to be more precise than that. But you shouldn't look at what's there today and think we've done what we want to do. We've built a foundation that we can do something bigger off of. Kulbinder S. Garcha - Credit Suisse Securities (USA) LLC (Broker): Okay, thank you. Timothy Donald Cook - Apple, Inc.: Thank you for the question. Nancy Paxton - Apple, Inc.: Thank you, Kulbinder. A replay of today's call will be available for two weeks as a podcast on the iTunes Store, as a webcast on Apple/investor, and via telephone. And the numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 4944387. These replays will be available by approximately 5 PM Pacific Time today. And members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570, and I'm at 408-974-5420. Thanks again for joining us. Operator : Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,016	4	2016Q4	2016Q4	2016-10-25	2.095	2.121	2.279	2.315	null	12.46	12.44	Executives: Nancy Paxton - Apple, Inc. Timothy Donald Cook - Apple, Inc. Luca Maestri - Apple, Inc. Analysts: Eugene Charles Munster - Piper Jaffray & Co. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC Shannon S. Cross - Cross Research LLC Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC Simona K. Jankowski - Goldman Sachs & Co. Steven M. Milunovich - UBS Securities LLC Wamsi Mohan - Bank of America Merrill Lynch James D. Suva - Citigroup Global Markets, Inc. (Broker) Rod B. Hall - JPMorgan Securities LLC Operator : Good day everyone and welcome to this Apple, Incorporated Fourth Quarter Fiscal Year 2016 Earnings Release Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am. Nancy Paxton - Apple, Inc.: Thank you. Good afternoon and thanks to everyone for joining us. Speaking first today is Apple CEO Tim Cook, and he will be followed by CFO Luca Maestri. And after that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2015, the forms 10-Q for the first three quarters of fiscal 2016, and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Timothy Donald Cook - Apple, Inc.: Thanks, Nancy. Good afternoon, and thank you for joining us. We're in the middle of a very busy season for Apple, and on Thursday of this week, we're holding another event here on the Apple campus. All of us are excited and we think our customers are going to love these latest innovations. Our results for the September quarter were very strong. We generated $46.9 billion in revenue in the quarter, toward the high end of our guidance range. Gross margin was 38%, at the very top of our range. We sold 45.5 million iPhones, reflecting continued improvement in year-over-year performance compared to the last two quarters, as we forecasted in January. iPhone sales were up year-over-year in 33 of our top 40 markets. As you know, iPhone customers are the most satisfied and loyal customers in the world, and fiscal 2016 saw more customers switch from Android to iPhone than ever before. This is due to the superior customer experience we deliver with our products, and it's something no other company can match. We had a record-setting quarter for Services, with revenue growth accelerating to 24%, reaching $6.3 billion. App Store revenue continued to skyrocket, while Music revenue grew by 22% thanks to the growing popularity of Apple Music. In fact, J.D. Power recently announced that Apple Music enjoys the highest customer satisfaction rating in the streaming music market. Earlier this month I visited Japan, where Apple Pay went live yesterday. Japanese customers are already in the habit of making contactless payments where they commute, dine and shop, so we expect a strong response and rapid adoption of Apple Pay. Around the world, we're seeing very strong growth in transaction volume through Apple Pay, which also launched in Russia and New Zealand this month and is coming to Spain in the next few months. Apple Pay transactions were up nearly 500% year-on-year for the September quarter. In fact, we completed more transactions in the month of September than we did across all of fiscal 2015. And with Apple Pay support now built into Safari, hundreds of thousands of websites are bringing Apple Pay to their customers. Our major partners tell us that Apple Pay shows the highest conversion rate of any digital wallet. We remain very confident about the future of our Services business given the unmatched level of engagement, satisfaction and loyalty of our growing installed base. We have almost doubled the size of our Services revenue in the last four years, and as we've said before, we expect it to be the size of a Fortune 100 company in fiscal 2017. As for our newest products, we're thrilled with the customer response to iPhone 7 and iPhone 7 Plus. These are the best iPhones we've ever made, with breakthrough camera systems, immersive stereo speakers, and the best iPhone performance in battery life ever, thanks to the custom-designed Apple A10 Fusion chip. They feature the brightest, most colorful iPhone displays to date and come in gorgeous new finishes. Demand continues to outstrip supply, but we're working very hard to get them into customers' hands as quickly as possible. We're also off to a great start with Apple Watch Series 2, the next generation of the world's most popular smartwatch, packed with new features including built-in GPS, water resistance, a dramatically brighter display and a powerful dual-core processor. Individuals and businesses alike are recognizing the potential of Apple Watch to help people stay healthy, motivated and connected. One recent example is Aetna, which has announced a new initiative to revolutionize its members' health experience by subsidizing Apple Watch for individual customers and select large employers. In addition, Aetna is also providing Apple Watch to nearly 50,000 of its own employees to encourage them to live a healthier day. We've just rolled out new versions of iOS, macOS and watchOS and customers are loving the many great new features including Siri on the Mac, enhanced health and fitness capabilities for Apple Watch and a delightful new way to experience your photos on iOS with a feature we call memories. We've made massive advances in messages, making them more expressive and fun than ever with powerful animations, invisible ink and handwritten notes. We're seeing great offerings from developers in the all new App Store for Messages, and there has been a marked increase in our monthly active users. One of the great new features of iOS 10 is the Home app, which is making home automation easy to set up and intuitive to use. Customers can easily set up and securely control all their HomeKit accessories, from lights and cameras to the garage doors and air conditioners, all from their favorite iOS devices. We expect over 100 HomeKit-compatible products to be on the market by the end of this year, all reviewed and approved by Apple to help ensure customer security when using them. Our Apple stores are wonderful places to discover and learn about these great products for the connected home. With our latest operating systems, machine learning is making our products and services smarter, more intuitive and even more personal. We've been using these technologies for years to create better user experiences, and we've also been investing heavily both through R&D and acquisitions. Today, machine learning drives improvements in countless features across our products. It enables the proactive features in iOS 10, which offers suggestions on which app you might want to use or which context you might want to include in an email. Our camera and photo software uses advanced face recognition to help you take better pictures and object and scene recognition to make them easier to sort and find. Machine learning makes the fitness features of Apple Watch more accurate and even helps extend battery life across our products. Machine learning continually helps Siri get even smarter in areas such as understanding natural language. We've extended Siri to work in many new ways by opening it to developers and most recently by making Siri available to Mac users in Mac OS Sierra. We're already seeing great momentum in just the first few weeks from developers leveraging the Siri and speech APIs and we're very happy with the engagement it's driving with Siri. Looking ahead, we're seeing some very exciting developments in India. Reliance Jio is rolling out a a first of its kind all-IP network in India with 4G coverage in 18,000 cities and 200,000 villages across the country. They're offering a free year of service to purchasers of new iPhones and we're partnering with them to ensure great iPhone performance on their network. Our iPhone sales in India were up over 50% in fiscal 2016 compared to the prior year, and we believe we're just beginning to scratch the surface of this large and growing market opportunity. We're also very happy with the progress of our enterprise market initiatives, which continue to expand. Just last month, we announced a partnership with Deloitte to help companies quickly and easily transform the way they work by maximizing the power, ease of use, and security of the iOS platform. Deloitte is creating a unique Apple practice with over 5,000 strategic advisors focused on helping businesses transform work in functions across the enterprise. We're also collaborating on the development of Enterprise Next, a new Deloitte consulting service designed to help clients across more than 20 industries take full advantage of the iOS ecosystem and quickly develop custom solutions through rapid prototyping. As we close the books on another incredible year, I'd like to thank our talented employees for their hard work and passion for making the best products in the world, our amazing developer community for their relentless creativity and our wonderful customers, business partners and shareholders for their loyalty and support. Now I'll hand it over to Luca to share more details on the September quarter. Luca Maestri - Apple, Inc.: Thank you, Tim. Good afternoon, everyone. Revenue for the September quarter was $46.9 billion, towards the high end of our guidance range. Our revenue grew very strongly in many emerging markets, including Russia, Turkey, the Middle East, Thailand and Vietnam, and we continue to see solid growth in Japan and in Latin America. Gross margin was 38%, at the top of our guidance range, thanks to favorable cost performance. Operating margin was 25.1% of revenue and net income was $9 billion. Diluted earnings per share were $1.67 and cash flow from operations was $16.1 billion, which is a new record for the September quarter. For details by product, I will start with iPhone. We sold 45.5 million iPhones in the quarter, thanks to the very successful launch of iPhone 7 and iPhone 7 Plus and continued strong demand for other iPhones. Including 2.7 million iPhones that were in transit at the end of the quarter, we increased iPhone channel inventory by 2.5 million units, and we exited the quarter well below our five to seven week target range of channel inventory. We experienced strong iPhone growth in many markets around the world, including Canada, Latin America, Western Europe, Central and Eastern Europe, the Middle East, India and South Asia. iPhone sales in Greater China declined during the quarter, but the initial customer response to iPhone 7 and 7 Plus gives us confidence that our December quarter performance in China will be significantly better on a year-over-year basis than our September quarter results, even as we lap the all-time record period from a year ago. Worldwide demand for iPhone 7 and 7 Plus has significantly outpaced supply, particularly on iPhone 7 Plus, and we're working very hard to get the new iPhones into the hands of our customers as quickly as possible. iPhone ASP increased to $619 in the September quarter, which was above our expectations. That's up from $595 in the June quarter when we launched iPhone SE and we had a significant channel inventory reduction. We expect iPhone ASP to increase markedly on a sequential basis to a level similar to our ASP in the December quarter last year. Customer interest and satisfaction with iPhone remains extremely strong. In the U.S. for instance, the latest survey fielded by 451 Research found that among consumers planning to purchase a smartphone within 90 days, 65% plan to purchase iPhone, with the current iPhone owners reporting a 97% customer satisfaction rating. Among corporate smartphone buyers, the latest survey measured a 95% iPhone customer satisfaction rating and found that of those planning to purchase smartphones in the December quarter, 79% planned to purchase iPhone. Turning to Services, we generated an all-time record $6.3 billion in revenue with an increase of 24% over a year ago. The App Store growth rate has now accelerated for five consecutive quarters, reaching 43% in the September quarter. The App Store remains the preferred destination for both customers and developers. According to App Annie, it generated 100% more global revenue than Google Play in the September quarter. In addition to the great performance from apps, we saw strong double-digit revenue growth in several other service categories and Apple Pay transaction volume has grown dramatically, as Tim mentioned. Next I'd like to talk about the Mac. We sold 4.9 million Macs, facing a difficult year-over-year compare, given the launch of new Macs in the spring of 2015. Despite this, our Mac installed base reached a new all-time high at the end of the September quarter and we'll have some exciting news to share with current and future Mac owners very soon. We ended the quarter below our four to five week target range for Mac channel inventory. Turning to iPad, revenue was flat compared to last year. iPad ASP was $459, $26 higher than a year ago, with increase driven by the new iPad Pro line. We sold 9.3 million iPads, and we reduced channel inventory by about 80,000 units, exiting the quarter below our five to seven-week target range. We continue to be highly successful both in terms of market share and customer metrics in the segments of the tablet market where we compete. Recent data from NPD indicates that iPad gained share in the U.S. tablet market in the September quarter and had 82% share of tablets priced above $200. And in August, 451 Research measured a 96% consumer satisfaction rate for iPad mini, 95% rate for iPad Air, and a 93% rate for iPad Pro. Among U.S. consumers planning to purchase a tablet within the next six months, 73% plan to purchase an iPad, more than eight times the purchase intention rate of the next highest brand measured, with iPad Pro once again the top choice for planned purchases. Corporate buyers reported a 94% satisfaction rate for iPad and a purchase intent of 68% for the December quarter. In the enterprise market, we are seeing some great examples of iPad and Mac deployment. Our Mobility Partner Program continues to grow stronger, with over 120 partners around the world offering tailored solutions to businesses of all sizes. Revel Systems, a leading iPad point-of-sale solution partner, recently announced a global agreement with Shell retail to implement Revel's iPad based POS system services at 34,000 Shell locations worldwide, including support for Apple Pay in countries where Apple Pay is available. IBM has just released new data on the great results of its Mac rollout. With more employees choosing Mac than ever before, there are now more than 90,000 Macs across the organization in addition to 48,000 iPads and 81,000 iPhones. IBM reports that PCs have three times the cost to manage, drive twice the number of support calls and are 5 times more likely to require a follow-up appointment to resolve an issue than Macs. Thanks to much lower support cost and significantly higher residual value, the company is saving as much as $535 per computer when comparing the total cost of Mac ownership to a PC over a full-year lifecycle. Let me now turn to our cash position. We ended the quarter with $237.6 billion in cash plus marketable securities, a sequential increase of $6.1 billion. $216 billion of this cash or 91% of the total was outside the United States. We issued $7 billion of debt in July, leaving us with $79 billion in term debt at the end of the quarter. We returned over $9 billion to investors during the September quarter as follows. We paid $3.1 billion in dividends and equivalents. We spent $3 billion on repurchases of 28.6 million Apple shares through open market transactions, and we launched a new $3 billion ASR, resulting in initial delivery and retirement of 22.5 million shares. We also completed our seventh accelerated share repurchase program, with adding an additional 12.3 million shares. So total buyback activity during the quarter reduced our share count by 1.5%. We have now completed $186 billion of our current $250 billion capital return program, including $133 billion in share repurchases. During the September quarter, we also completed four acquisitions and incurred $3.6 billion in capital expenditures. Our total CapEx for the year was $12.8 billion. Our effective tax rate for the quarter was 26%, slightly higher than the 25.5% we guided to because of a differential graphic mix of earnings relative to our regional expectations. Our tax rate for the full fiscal year was 25.6% As we move ahead into the December quarter, I would like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $76 billion and $78 billion. This represents a return to growth over the all-time revenue record set in the December quarter a year ago. We expect gross margin to be between 38% and 38.5%. We expect OpEx to be between $6.9 billion and $7 billion. We expect OI&E to be about $400 million, and we expect the tax rate to be about 26%. Also today, our Board of Directors has declared a cash dividend of $0.57 per share of common stock, payable on November 10, 2016, to shareholders of record as of November 7, 2016. With that, I would like to open the call to questions. Nancy Paxton - Apple, Inc.: And we ask that you limit yourself to one one-part question and one follow up. May we have the first question, please? Operator : First we'll hear from Gene Munster with Piper Jaffray. Eugene Charles Munster - Piper Jaffray & Co.: Hey, good afternoon and congratulations. And Tim, now that we're a month in the iPhone 7, are you seeing anything measurable in terms of the growing trend of annual upgrades? And second is, historically in terms of new product categories, you guys have always looked for unique advantage before getting into a segment. And I'm curious about the car. There are a lot of rumors out there, and would like your perspective on how you think about an advantage that Apple could add in the auto space? Timothy Donald Cook - Apple, Inc.: In terms of iPhone 7, Gene, the carriers that had upgrade plans, the information that we have from them is that demand is very robust. But from a worldwide point of view, the truth is that demand is outstripping supply in the vast majority of places, particularly on the iPhone 7 Plus. And so it's sort of we are in a situation at the moment, it's difficult in the early weeks to be able to differentiate. But on an anecdotal basis, it's clear the upgrade programs are a win. I can't speak about rumors, but as you know, we look for ways that we can improve the experience and the customers' experience on different sets of products. And we are always looking at new things, and the car space in general is an area that it's clear that there is a lot of technologies that will either become available or will be able to revolutionize the car experience. And so it's interesting from that point of view, but nothing to, certainly nothing to announce today. Eugene Charles Munster - Piper Jaffray & Co.: Just one quick follow up in terms of the supply. Do you think we'll be at equilibrium by the end of the quarter for iPhone supplies? Timothy Donald Cook - Apple, Inc.: It's hard to say. I believe that on iPhone 7 we will. On iPhone 7 Plus, I'm not sure. I wouldn't say yes at this point, because the underlying demand looks extremely strong on both products but particularly on the iPhone 7 Plus versus our forecast going into the product launch. Eugene Charles Munster - Piper Jaffray & Co.: Thank you. Nancy Paxton - Apple, Inc.: Thanks, Gene. Can we have the next question, please? Operator : Katy Huberty with Morgan Stanley. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thanks. Good afternoon. Luca, can you help us understand what's embedded in revenue guidance for the extra week as well as any rebuilding of channel inventory given all the major products are running below target? Just trying to get at whether you see revenue and in particular iPhone growth year on year on more of a sellout basis when you adjust for those two factors? And then I have a follow up. Luca Maestri - Apple, Inc.: Yes Katy, sure. Let me say a few things on the 14th week and revenue up for the December quarter. Keep in mind that December quarter a year ago for us was an all-time quarterly revenue record. We think we can grow this year. As Tim said, the interest from customers on iPhone 7 and 7 Plus is very strong. The strength of our Services business, you've seen we've grown 24% in September. We think we can continue to grow very well into the December quarter. You mentioned the 14th week, and the few extra days do help us this quarter. But I think it's important to keep in mind that there are other factors that go and offset these extra few days. As you know, the launch timing of the new iPhone is different this year. We had the first 90 days of sales this year hit Q4. There were only two days last year, so the cadence has moved more towards the Q4 this year versus Q1 last year. As you know, we increased iPhone channel inventory by 3.3 million units in the first quarter of 2016. As Tim said, we are very supply constrained on iPhone 7 Plus this year. We're simply more supply constrained this year than we were a year ago. And then keep in mind that there were a couple of things that affect the compare as well, which is the fact that a year ago, we had an award for a patent infringement of $548 million, which is obviously a one-off item that is not going to repeat this year. And also the foreign exchange environment remains difficult, and we expect FX to be about $650 million headwind on a year-over-year basis into the December quarter. So I hope that gives you a bit of a sense that when you take into account all these factors, we believe that this is a good guidance for the December quarter. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: That's great color. Thank you for that. A follow up for Tim. What should we read into the fact that R&D has more than doubled over the past three years while sales growth was sort of a fifth of that? Are R&D investments just less efficient than they were in the company's history, or should we think about that as incremental spend for products that haven't yet come to market? Timothy Donald Cook - Apple, Inc.: There's clearly some amount of R&D that are on products that today are in the development phase that have not reached the market, and so that's a part of it. And we feel really great about the things that we've got. We've also put a lot of emphasis on our Services business as well and on making the ecosystem even better. And so we're very much, we're confidently investing in the future, and that's the reason you see the R&D spend increasing. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thank you. Nancy Paxton - Apple, Inc.: Thank you, Katy. Could we have the next question, please? Operator : From Cross Research, Shannon Cross. Shannon S. Cross - Cross Research LLC : Thank you very much. A couple of questions. The first, Tim, can you talk a bit more about China, just how you're thinking about it, where you're seeing pressure? I know you mentioned that you expect to see a significant rebound during the first quarter, but what are your customers telling you about the demand in China? Timothy Donald Cook - Apple, Inc.: Yeah, it's a good question, Shannon. So to sort of back up from our results for the quarter, the 90-day clock, and look at the full year of 2016, we were down 17% compared to the fiscal year 2015 which was up 84% from the previous year. So if you look at 2014 to 2016, the revenue grew 52% and the CAGR was 23%, which is really a pretty good result. Also as you probably know, the fiscal year 2016 performance was hurt by the devaluation of the currency which affected it about 3%, so the underlying business performance was 14% down. And so, why was it down? There's lots of reasons, but the largest one in our view is that when you look at what happened in 2015 in China, we had a surge of upgraders that came into the market for the iPhone 6 or iPhone 6 Plus, and the upgrade rate increased relatively more in Greater China than elsewhere around the world. And so when that upgrade rate in fiscal year 2016 returned to a more normal upgrade rate, which would be akin to what we saw with the iPhone 5S as a point, it had further to fall. And so that's the main reason in our view that you see a difference. Now that spun or created another issue for us, because we didn't forecast that accurately. So in Q1 of last year, we put in too much channel inventory and had been resetting the channel inventory over the few quarters that came beyond it or came after it. And so those two issues, which really the main one is really the first one and the second one was a symptom of it, are in our views the main issue. Now looking forward, the response to the iPhone 7 and 7 Plus has been very positive. It's very hard to gauge demand, as you know, when you're selling everything you're making. And so we'll find out more through the quarter, but we're confident enough to give you guys guidance that we're returning to growth this quarter, which obviously feels very good for us. And from a longer-term point of view, out of the 90-day clocks and so forth, we are very bullish on China. We continue to see a middle class that is booming there. There might be some sort of a new normal in the economy, but a new normal there is still a good growth rate. And so with the number of middle class – people growing into the middle class and the LTE adoption rate being still fairly low, around 45%, 50% or so, then I think we continue to have a really good opportunity there, and so we continue to focus significantly in China. Shannon S. Cross - Cross Research LLC : Great. Thank you. Timothy Donald Cook - Apple, Inc.: Yes. Shannon S. Cross - Cross Research LLC : And then can you talk a bit about acquisitions? And I don't mean like the smaller ones that you've done sort of at a normal cadence, but there was clearly a fairly large one announced at least this week in the content world. And especially if you find a way to have repatriation of some of the cash at a low tax rate possibly with the next administration. So I just, if you can give sort of an overall view of how you think about acquisitions that might be a little bit larger than normal. Timothy Donald Cook - Apple, Inc.: We are open to acquisitions of any size that are of strategic value where we can deliver better products to our customers and innovate more. And so we look at a whole variety of companies, and based on that, we choose whether to move forward or not. But we're definitely open and we definitely look. Shannon S. Cross - Cross Research LLC : Thank you. Timothy Donald Cook - Apple, Inc.: Yes. Nancy Paxton - Apple, Inc.: Thank you, Shannon. Could we have the next question, please? Operator : We'll go to Toni Sacconaghi with Bernstein. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Yes. Thank you. I have a question and a follow-up, please. I guess a cynic could say Apple is benefiting from an extra week this quarter and is benefiting from Samsung being in complete disarray. And yet from your guidance, it's unclear that iPhone unit growth will be up or certainly not up more than low single-digits implied from your guidance. And I appreciate some of the issues around channel inventory build and the timing of the launch, but if I just stand back from that and say you have terrific new products, your major competitor's laying down, you have an enormous, you have a significant contribution from an extra week, arguably 7% or 8%, and yet the iPhone growth is sort of flattish, what does that really say about how investors should think about iPhone on a sustained basis growing forward? And is it reasonable to think that this is an ongoing growing business for the company? Luca Maestri - Apple, Inc.: Toni, let me take this one. I think you mentioned a number of the things that are affecting us in the December quarter, and I went through them with Katy just a few minutes ago. You're right, we've got an extra few days. You know very well the launch timing is different. You know that we increased iPhone channel inventory by 3.3 million units a year ago. I mentioned two issues that affect us, the one-timer from a year ago that you obviously need to exclude from the compare and the FX that is the reality of our business right now. But maybe the most important element of this is the fact that we are supply constrained on 7 and 7 Plus. And so when you talk about other competitors, it's not particularly relevant to us right now because we are selling everything that we can produce. And so when we look at all these things in its totality, we think that for the total company of course, we believe that revenue's going to grow. You know that we don't get into specific product from a unit standpoint giving guidance, and so we feel very confident about the trajectory for the company and for iPhone going forward. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Okay. Tim, if I could ask you one, please. You've talked in the past about television being an area of intense interest. I was wondering if you could reaffirm that statement. Is that still the case? And then additionally, given what's happening with acquisitions, how broadly you think about the role of content. Apple has started creating on a very limited scale some of its own content and whether you think content creation and ownership is important to Apple, or whether Apple ultimately sees its place in the value chain as being more around the ecosystem and distribution. Timothy Donald Cook - Apple, Inc.: I would confirm that television has intense interest with me and many other people here. In terms of owning content and creating content, we have started with focusing on some original content, as you point out. We've got a few things going there that we've talked about. And I think it's a great opportunity for us both from a creation point of view and an ownership point of view. and so it's is an area that we're focused on. Nancy Paxton - Apple, Inc.: Thank you, Toni. Could we have the next question, please? Operator : From Goldman Sachs, Simona Jankowski. Simona K. Jankowski - Goldman Sachs & Co.: Thank you. I have a question for Luca and then one for Tim as well. Luca, I wanted to dig into the Services business a bit more. As you pointed out, it accelerated again to 24%. How does that compare to the pace of growth of the installed base, just to help us decouple how much of it is consumption driven on a per user basis versus the base as a whole? Luca Maestri - Apple, Inc.: Simona, the installed base number is something that we talk about periodically. The last time we talked about it, it was in the January call. It is growing. Our installed base is growing very well, which is very important for us. It's growing on all major products and it's growing of course in total. When you look at our Services revenue, the growth of the Services revenue has been accelerating during the course of the year during a period when, as you know, our revenue came down slightly. So what that means in practice is that what we are seeing with our customers that consume our services is that the people that are actually taking advantage of our services over time tend spend more and more on our services. We've got customers that are very engaged with our products. They're very loyal, and so you see this upward trajectory of our Services business. It's not only with the App Store but there's several categories that are growing very well for us. Tim mentioned Apple Music, but we got other parts of the business that continue to do well, even as I said during a period of time when our sales have come down a bit. Simona K. Jankowski - Goldman Sachs & Co.: Thank you. And then Tim, we've seen an increasing focus on artificial intelligence, both in smartphones like the new Pixel from Google but also in some of the home assistance, like the Amazon Echo. And you guys have obviously had Siri for a while as well. But I just am curious how you think about balancing AI with your focus on privacy. And then also how important it is to have a dedicated home assistant versus just having the phone as the home assistant? Timothy Donald Cook - Apple, Inc.: I think to answer your second question first, I think that most people would like an assistant with them all the time. And we live in a mobile society. People are constantly moving from home to work and to other things that they may be doing. And so the advantage of having a assistant on your phone is it's with you all the time. That doesn't say that there is not a nice market for a home one. I'm not making that point. I'm just saying on a balance point of view, I think the usage of one on the phone will likely be much greater. In fact, you can just look at Siri today and this is now accelerating with iOS 10 and the Mac, but we've been getting 2 billion requests a week for Siri. And so it's very large and to the best of our knowledge, we've shipped more assistant enabled devices than probably anyone out there. Our focus is on this worldwide, and so it's not only a U.S. focus, but we want to deliver a great experience around the world and deliver it globally, and so we've put a lot of the energy into doing that. In terms of the balance between privacy and AI, this is a long conversation, but at a high level, I think it's a false trade-off that people would like you to believe that you have to give up privacy in order to have AI do something for you. We don't buy that. It may take a different kind of work. It might take more thinking, but I don't think we should throw our privacy away. It's sort of like the age-old argument about privacy versus security. We should have both. It shouldn't be making a choice. And so that at a high level is how we see it. Simona K. Jankowski - Goldman Sachs & Co.: Thank you. Timothy Donald Cook - Apple, Inc.: Yes. Nancy Paxton - Apple, Inc.: Thank you, Simona. Could we have the next question, please? Operator : We'll go to Steve Milunovich with UBS. Steven M. Milunovich - UBS Securities LLC : Thank you very much. Luca, I wanted ask you about the total deferred revenue which was down about $1.3 billion in June and I think down another $400 million in September. Those are rather large declines, even given the fact that your units are coming down and you had the accounting change back in September. Could you talk about some of the drivers of that and what you might expect going forward? Luca Maestri - Apple, Inc.: Steve, you mentioned by far the largest driver. The largest driver is the fact that we made the change, an accounting change to our ESPs exactly a year ago. So we are lapping the year where you see the effect. I think you're not going to see the same thing going forward. And then we tend to defer some revenue on some other categories, like for example gift cards or some AppleCare, but in general by far the largest element is the change in ESPs. And again, I don't think you're going to see the same impact going forward. Steven M. Milunovich - UBS Securities LLC : Okay. Thank you. And then, Tim, some investors are antsy that Apple has not acquired new profit pools or introduced a financially material new product in recent years. The question is, A, does Apple today have a grand strategy for what you want to do? I know you won't tell us what it us, but do you know what you want to do over the next three to maybe five years? Or is it more a read the market and quickly react? And B, do you have any sense that we're kind of in a gap period where the technology and arguably what we'd call the next job to be done haven't yet aligned? And so maybe in a couple years, we will see this flurry of new products and it'll sort of match what people want to do, but it's not quite here yet? Timothy Donald Cook - Apple, Inc.: We have the strongest pipeline that we've ever had and we're really confident about the things in it. But as usual, we're not going to talk about what's ahead. Steven M. Milunovich - UBS Securities LLC : But in terms of your approach I guess to new products, do you have a strong sense of where technology is going and where you're going to play? Or is it still enough up the year that you are willing to react fairly quickly, which arguably your organization allows you to do for the size of company you are? Timothy Donald Cook - Apple, Inc.: We have a strong sense of where things go and we're very agile to shift as we need to. Steven M. Milunovich - UBS Securities LLC : Okay. Thank you. Nancy Paxton - Apple, Inc.: Thanks, Steve. Could we have the next question, please? Operator : From Bank of America, Wamsi Mohan. Wamsi Mohan - Bank of America Merrill Lynch : Yes. Thank you. So, Tim and Luca, you saw that you could raise the ASP on the iPhone 7 Plus by $20 and you're completely sold out. So clearly this device plays a central role in our lives, so much that owners probably look at that incremental cost as a great trade-off to get the best device out there. So as you see more and more features being added into iPhones, do you conceptually expect that you are anywhere close to the point where raising ASPs further would be net disruptive to demand? Or do you see more rooms to raise ASPs over time as you add incremental features? And I have a follow up. Timothy Donald Cook - Apple, Inc.: With the iPhone 7 Plus, we put an incredible amount of innovation into the camera and the overall photo experience, and customers are obviously using that and have discovered that they love it. And so we're getting an incredible amount of feedback there. We also get incredible feedback on the iPhone 7. And, but the mix that we projected on iPhone 7 Plus is short of what the reality is and so we are chasing supply there. In terms of the ASP, the way we think about it is we want to charge a fair price and so we don't want to charge more than that, and we think it's worth being fair. And so that's how we look at it. Luca Maestri - Apple, Inc.: If I can add, Wamsi, keep in mind that in a lot of countries around the world, the reality is that our customers have seen some significant price increases because of the FX situation, right. And that's something that we need to keep in mind as well. Wamsi Mohan - Bank of America Merrill Lynch : Great. Thanks. Thanks for the clarification. And Tim, this year we saw carrier incentives come back to force post the launch of the iPhone 7, 7 Plus. Two years ago there was a giant upgrade to iPhone from the iPhone 6, 6 Plus. Do you think every couple of years we are likely to see carrier incentives come back into play given worries around customer churn, thereby making the phone even more affordable? Thanks. Timothy Donald Cook - Apple, Inc.: We clearly saw that this year. There's a lot of competition for customers in the U.S. which I think is the market that you're talking about. Whether that'll happen every two years, I don't know. But I suspect that any time there are large numbers of customers that have a phone that's in that two year kind of range that it tends to be a sweet spot, and I think you probably will see a lot of people trying to recruit those customers. Wamsi Mohan - Bank of America Merrill Lynch : Thanks, Tim. Timothy Donald Cook - Apple, Inc.: Yeah. Thank you. Nancy Paxton - Apple, Inc.: Thank you, Wamsi. Could we have the next question, please? Operator : Jim Suva with Citi. James D. Suva - Citigroup Global Markets, Inc. (Broker): Thank you very much. A strategy question for Tim and then more of a financial question for Luca. Tim, you'd mentioned in your prepared comments a little bit about India and we've been doing a lot of work talking about the opportunity in India. And we get a lot of pushback talking about disposable income metrics and lots of things like that, yet the population being so large, can you talk a little bit about, do you see that India could at some point be as big of an opportunity as China? And it appears that the legal rules have kind of prevented you from going in a lot, but it looks like that's changing. Can you just kind of give us a little more clarity on India? And then, Tim, for the clarification questions, is it fair to say that the OpEx has a disproportionate more expense side with the 14th week that we should kind of think of maybe as we go forward, that we shouldn't expect the OpEx to kind of be chugging along at that high rate? Or is it just kind of the rate of investing that you're going? Thank you very much, gentlemen. Timothy Donald Cook - Apple, Inc.: Yeah, thanks for the question. I'll let Luca talk about the OpEx piece of it. On India, I think it's important to look not only at per capita income, which may be what you're looking at, but sort of look at the number of people that are or will move into the middle class sort of over the next decade. And the age of the population, if you look at India, almost 50% of the population is under 25. And so you have a very, very young population. The smartphone has not done as well in India in general. However, one of the key reasons for that is the infrastructure hasn't been there. But this year or this year and next year, there are enormous investments going in on 4G and we couldn't be more excited about that because it really takes a great network working with iPhone to produce that great experience for people. And so I see a lot of the factors moving in the right direction there. I also think the government is much more focused on the infrastructure and on creating jobs, which is fantastic, because you really need the kind of infrastructure and the technology to do that. Will it be as big as China? I think it's clear that the population of India will exceed China sometime in probably the next decade or so, maybe less than that. I think it will take longer for the GDP to rival it, but that's not critical for us to have a great success there. The truth is, there's going to be a lot of people there and a lot of people in the middle class that will really want a smartphone, and I think we can compete well for some percentage of those. And given our starting point, even though we've been growing a lot, there is a lot of headroom there in our mind, and so we are working very hard to realize that opportunity. Luca Maestri - Apple, Inc.: And, Jim, on OpEx, our approach to OpEx is quite clear and quite simple. We want to continue to invest in the business in all the areas where we think is critical for us to invest. So you see that we make significant investments in R&D. You've seen the growth rates over the last couple of years. We are making important investments in data centers because we want to support our services business. We continue to open retail stores around the world. We continue to invest in marketing and advertising. At the same time, we want to continue to be efficient and lean. It's something that we've done very well over the years and want to continue to do that. So what you've seen, for example in fiscal 2016, you've seen investments in R&D growing at 25% and then our SG&A expenses to be about flat. And this is kind of the approach that we want to take and continue to take going forward. If you step back for a second and you look at our implied guidance for the December quarter, we got an expense to revenue ratio of 9%. This is extremely competitive in our industry and I would say in general. And so we want to continue to have this balance, make the right investments and remain efficient. James D. Suva - Citigroup Global Markets, Inc. (Broker): Thank you, and congratulations and thanks for the details, gentleman. Nancy Paxton - Apple, Inc.: Thank you, Jim. Can we have the next question, please? Operator : We'll go to Rod Hall with JPMorgan. Rod B. Hall - JPMorgan Securities LLC : Yeah, hi, guys. Thanks for the question. I had one for Luca and then a follow-up for Tim. So, Luca, I wanted to ask about the gross margin guidance. I think that the Street and we were expecting something a little bit higher. And again, that's about 50 basis points lower and the Street it was I think 70 basis points lower. And I'm just curious, do you think that people are mis-modeling that or is there something going on with pricing or mix there that you could provide us more color on? So that's my first question. Luca Maestri - Apple, Inc.: Yeah, Rod, let me give you some detail both on a sequential basis and I'll give you also something on a year-over-year basis because maybe that's where the disconnect comes from, looking at the last year's gross margins in the December quarter. On a sequential basis, we are essentially guiding to some improvement in gross margins. We had 38% both in the June quarter and in the September quarter. We're guiding slightly higher for the December quarter because on the positive, we're going to have of course better leverage and the mix in the December quarter tends to be better. But we need to keep into account the fact that these positives are going to be partially offset by the cost structures of the new products that we are launching now and we've launched already a few during the September quarter and that will have an impact on our December quarter results. On a year-over-year basis, keep in mind that last year we did, in Q1, we did 40%, around 40%, 40%, 41%, but there's a couple of things that I think need to be considered before doing a year-over-year compare. And it's the fact that last year we had this award for a patent infringement of $548 million. That is, at the gross margin level, is 40 bps. And then we've got the FX situation, which I mentioned before, which is worth another 60 bps, 70 bps. And so you're left with less than 100 basis points deterioration on a year-over-year basis where again, we have the reality of new cost structures into our products. It is very, very important I think for investors to understand that what's happened during the last two years. During the last two years, the U.S. dollar has appreciated by 15% over the basket of currencies where we do business. And we're a company that generates two thirds of our revenues outside the United States, 15% appreciation of the U.S. dollar. So on a year-over-year basis, just 2016 over 2015 was 340 bps impact from foreign exchange. This is something that we have offset almost entirely through a number of initiatives going from pricing actions to cost initiatives to our hedging program, but at some point, the strong dollar becomes the new normal and we need to work with that. And I think over the years, we made very good trade-offs and our gross margins have been quite stable over time. Rod B. Hall - JPMorgan Securities LLC : Okay. Great. Thanks, Luca. And then, Tim, I wanted you to ask you, this question comes up once in a while, but I just wanted to ask you if you could talk to us a little bit about the arguments on both sides of the dividend question. I mean, Apple seems to be perpetually undervalued. It's a very large company. It's getting harder and harder to grow. Your payout ratio is significantly below the S&P 500. I know you can't tell us what your intentions are here, but if you could help us understand how that thinking around the dividend works, it would be great. Timothy Donald Cook - Apple, Inc.: We review the capital return annually, and we've established a cadence now to announce our thinking on that every April. And so we have a robust discussion around the dividend and the buyback. We very much believe that Apple is very undervalued, and so we're investing with confidence in the company that we know really well. And so that thinking has I think proven out over time and I think been very good for our shareholders. And in addition to that, we know that some shareholders really like a dividend and some ongoing income, and so we've provided a amount that we think is a good amount and have a good track record of raising it annually. And so we'll be able to say more on that I'm sure in April of next year. Nancy Paxton - Apple, Inc.: Thank you, Rod. Rod B. Hall - JPMorgan Securities LLC : Great. Okay, thank you. Nancy Paxton - Apple, Inc.: A replay of today's call will be available for two weeks as podcast on the iTunes Store, as a webcast on apple.com/investor and via telephone, and your numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please note the confirmation code 2017273. These replays will be available by approximately 5 :00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414, and financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-574-4570 and I'm at 408-974-5420. Thanks again for joining us. Operator : And that does conclude today's presentation. We do thank everyone for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,017	1	2017Q1	2017Q1	2017-01-31	2.136	2.154	2.346	2.385	null	13.59	14.73	Executives: Nancy Paxton - Apple, Inc. Timothy Donald Cook - Apple, Inc. Luca Maestri - Apple, Inc. Analysts: Kathryn Lynn Huberty - Morgan Stanley & Co. LLC Amit Daryanani - RBC Capital Markets LLC Shannon S. Cross - Cross Research LLC Brian J. White - Drexel Hamilton LLC Simona K. Jankowski - Goldman Sachs & Co. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC Steven M. Milunovich - UBS Securities LLC Operator : Good day, everyone, and welcome to this Apple Incorporated first quarter fiscal year 2017 earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am. Nancy Paxton - Apple, Inc.: Thank you. Good afternoon and thanks to everyone for joining us today. Speaking first is Apple CEO Tim Cook, and he'll be followed by CFO Luca Maestri. And after that, we will open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2016 and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Timothy Donald Cook - Apple, Inc.: Thank you, Nancy, and good afternoon everyone, and thanks very much for joining us. I'm very happy to share with you the outstanding results of Apple's December quarter. We generated the highest quarterly revenue in Apple's history along with all-time unit and revenue records for iPhone and Apple Watch, all-time revenue records for Services and Mac, and all-time revenue records for four out of our five geographic segments. The strong performance of our business also produced all-time record earnings per share. Revenue in the quarter was $78.4 billion, which was above the top of our guidance range. iPhone had a tremendous quarter thanks to exceptional demand that beat our own internal expectations. While iPhone 7 is our most popular model, we saw especially strong demand for iPhone 7 Plus, which was a higher portion of the new product mix than we've ever seen with Plus models in the past. Demand for iPhone 7 Plus exceeded supply throughout the quarter, and we came into supply/demand balance in January. iPhone 7 Plus has earned rave reviews for its advanced new features, especially the dual camera system, which produces stunning portraits and high-quality zoom. This is a uniquely Apple feature that is surprising and delighting our users. Both iPhone 7 and iPhone 7 Plus are empowering our customers to be more productive, more engaged, and more expressive than ever by integrating hardware, software, and services to create experiences that only Apple can deliver. It was our best quarter ever for Services, with almost $7.2 billion in revenue. App Store customers broke all-time records during the holiday quarter, including $3 billion in purchases in December alone, making it the App Store's single best month ever. Our innovative and vibrant developer community has created over 2.2 million apps for doing almost anything that you can imagine. Apple's developer community has now earned over $60 billion, including over $20 billion in 2016 alone. Revenue from our music business grew for the third quarter in a row, and our AppleCare and iPlus storage services had all-time record results. Apple Pay continued its strong momentum, with the number of users more than tripling over the past year and hundreds of millions of transactions and billions of dollars in purchases in the December quarter alone. Transaction volume was up over 500% year over year as we expanded to four new countries, including Japan, Russia, New Zealand, and Spain, bringing us into a total of 13 markets. Apple Pay on the Web is delivering our partners great results. Nearly 2 million small businesses are accepting invoice payments with Apply Pay through Intuit QuickBooks Online, FreshBooks, and other billing partners. And beginning this quarter, Comcast customers can pay their monthly bill in a single touch with Apple Pay. Services are becoming a larger part of our business, and we expect the revenues to be the size of a Fortune 100 company this year. Our Services offerings are now driving over 150 million paid customer subscriptions. This includes our own services and third-party content that we offer on our stores. We feel great about this momentum, and our goal is to double the size of our Services business in the next four years. The Mac not only returned to growth but generated its highest quarterly revenue ever. Our latest data shows that most Mac customers are buying their first Mac, with the vast majority of them coming from a Windows PC. The new MacBook Touch with Touch Bar is an outstanding example of the innovation made possible by integrating world-class hardware and software. We were supply constrained for the new MacBook Pro throughout the December quarter and are just now coming into supply/demand balance. It was also our best quarter ever for Apple Watch, both units and revenues, with holiday demand so strong that we couldn't make enough. Apple Watch is the best-selling smartwatch in the world and also the most loved, with the highest customer satisfaction in its category by a wide margin. Apple Watch is the ultimate device for a healthy life, and it is the gold standard for smartwatches. We couldn't be more excited about Apple Watch. We're also thrilled with the response to AirPods. Customers love the magical experience AirPods are delivering. And if you haven't tried them yet, you'll be delighted when you do. They're far ahead of anything else on the market today, and we're working hard to catch up with the incredible demand. With AirPods off to a fantastic start, a strong full first year for Apple Watch, and Beats headphones offering a great wireless experience using the Apple-designed W1 chip, we now have a rich lineup of wearable products. Their design, elegance, and ease of use make us very excited about the huge growth potential for wearables going forward. Our ecosystem is broadening to more and more of the areas where people spend their time, at the gym, on the go, in the home, and on the job. For example, every major automaker is committed to supporting CarPlay with over 200 different models announced, including five of the top 10 selling models in the United States. There are well over 1 million people using CarPlay now, and this continues to grow rapidly. And we are leading the industry by being the first to integrate home automation into a major platform with iOS 10. With Siri and a new Home app in iOS 10, everywhere you go, you can easily and securely control all of your home accessories with your iPhone, iPad, or your Apple Watch. The number of HomeKit-compatible accessories continues to grow rapidly, with many exciting solutions announced just this month, including video cameras, motion detectors, and sensors for doors, windows, and even water leaks. Perhaps even more importantly, we are unmatched when it comes to securing your home with HomeKit-enabled door locks, garage doors, and alarm systems. I'm personally using HomeKit accessories and the Home app to integrate iOS into my home routine. Now when I say good morning to Siri, my house lights come on and my coffee starts brewing. When I go to the living room to relax in the evening, I use Siri to adjust the lighting and turn on the fireplace. And when I leave the house, a simple tap on my iPhone turns the lights off, adjusts the thermostat down, and locks the doors. When I return to my house in the evening, as I near my home, the house prepares itself for my arrival automatically by using a simple geofence. This level of home automation was unimaginable just a few years ago, and it's here today with iOS and HomeKit. We're making great progress in the enterprise market alongside our major partners. The combination of iOS and Cisco technology is giving companies everywhere the opportunity to vastly improve the user experience for their mobile employees. With enhanced networking performance, up to eight times faster roaming, better reliability for apps, and native voice experience, we're excited about how much more productive the workforce will be with these great capabilities. In fact, the total number of joint customer opportunities has grown over 70% since last quarter. Enterprises are using IBM's new Mobile at Scale design and development model to deploy multiple iOS apps with speed and efficiency. For example, Finnair is transforming aircraft maintenance, and CEMEX is revamping activities from attracting new clients to invoicing to after-sales support. And later this spring, SAP will be rolling out its SDK for iOS, providing its community of more than 2.5 million developers the tools to build powerful native iOS apps that leverage the SAP HANA cloud platform. We're delighted with how these partnerships are making it even easier for enterprise customers to transform how work gets done with iOS. As we reflect on a record-breaking December quarter, I'd like to thank our developers, our business partners, and our employees for their incredible contributions and commitment. And I'd like to thank all of our customers around the world for their excitement and loyalty, which ultimately drive these results. Now I'd like to turn it over to Luca to talk about the quarter in more detail. Luca Maestri - Apple, Inc.: Thank you, Tim. Good afternoon everyone. Revenue for the December quarter was $78.4 billion, the highest quarterly revenue in the history of Apple and above our guidance range. As Tim mentioned, the strength of our results was very broad-based, as we set new revenue records for iPhone, for Services, for Mac, and for Apple Watch. We also established new all-time revenue records in most developed and emerging markets, with strong growth rates in many countries, including the U.S., Japan, Canada, France, Australia, Brazil, India, Turkey, and Russia. We accomplished all this despite a very challenging foreign exchange environment due to the continued strength of the U.S. dollar. As we had expected, our year-over-year performance in Greater China improved significantly relative to the September quarter. Total Greater China segment revenue was down 12%, but revenue from Mainland China was even with the all-time record results from a year ago and grew in constant currency terms. In all other geographic segments, we generated all-time quarterly record results. We had the benefit of a 14th week during the quarter this year, but this was offset by four factors. First, this year we grew China inventory significantly less than a year ago. Second, iPhone 7 launched earlier in the September quarter compared to the iPhone 6s launch the previous year, creating a more difficult comparison for the December quarter this year. Third, the stronger U.S. dollar affected total revenue growth this year by 100 basis points. And fourth, our year-ago revenue included the benefit of a one-off $548 million patent infringement payment. Also, strong customer interest left us in supply/demand imbalance for several of our products throughout the quarter this year. Gross margin was 38.5%, at the high end of our guidance range. Operating margin was 29.8% of revenue, and net income was $17.9 billion. Diluted earnings per share were $3.36, a new all-time record, and cash flow from operations was $27.1 billion. We had a terrific quarter for iPhone as we sold 78.3 million units, a new all-time record and an increase of 5% over last year. Customer demand was even higher than our reported results, as iPhone unit sell-through was up 8%. We saw double-digit iPhone growth in the U.S., in Canada, Western Europe, Japan, and Australia, and even stronger growth in many emerging markets, including Brazil, Turkey, Russia, Central and Eastern Europe, and Vietnam. iPhone ASP increased to $695 in the December quarter from $619 in the September quarter, driven by the very strong product mix and the amazing success of iPhone 7 Plus. Despite stronger demand than last year, we added only 1.2 million units of iPhone channel inventory across the quarter, significantly less than the increase of 3.3 million units a year ago. And we exited the quarter near the low end of our 5 to 7-week target channel inventory range. Customer interest and satisfaction with iPhone are exceptional, not only with consumers, but also with business users. In the U.S., for instance, the latest data from 451 Research on consumers indicates a 97% customer satisfaction rating among all iPhone owners and a 99% satisfaction rating for owners of iPhone 7 Plus. Among corporate smartphone buyers, the iPhone customer satisfaction rating was 94%. And of those planning to purchase smartphones in the March quarter, 78% plan to purchase an iPhone. Turning to Services, we generated an all-time record $7.2 billion in revenue, an increase of 18% year over year. Our run rate growth was actually higher when taking into account two discrete items. On one hand, the 14th week added to Services revenue this December quarter. On the other hand, that benefit was more than offset by the comparison to the one-off $548 million patent infringement payment included in Services revenue a year ago. The App Store continued its impressive run, breaking all previous revenue records. Year-over-year App Store revenue growth was 43% through the first 13 weeks of the quarter. It's great to see that both average revenue per paying account and the number of paying accounts grew strongly during the quarter. And according to App Annie's latest report, App Store revenue continues to outpace the industry overall, with more than double the revenue of Google Play in calendar 2016. Next I would like to talk about the Mac. We sold 5.4 million Macs and generated our highest-ever quarterly Mac revenue. We were very happy to report double-digit unit growth in several countries, including Japan, Mainland China, India, the Netherlands, and Sweden, as well as in the U.S. education market. We ended the quarter at the low end of our 4 to 5-week target range for Mac channel inventory. Turning to iPad, we sold 13.1 million units, which was ahead of our expectations. And we posted double-digit growth in both Mainland China and India, as we've expanded distribution channels in those countries and we continue to attract a very high percentage of first-time tablet buyers. We also reduced channel inventory by about 700,000 units as opposed to an increase of 900,000 units last year, and we exited the quarter near the low end of our five to seven-week target range. iPad is incredibly successful in the segments of the tablet market where we compete, both in terms of market share and customer metrics. Recent data from NPD indicates that iPad had 85% share of the U.S. market for tablets priced above $200. And in November, 451 Research measured a 94% consumer satisfaction rate for iPad Mini, a 97% rate for iPad Air, and 96% for iPad Pro. Among U.S. consumers planning to purchase a tablet within the next six months, purchase intention for iPad is more than four times higher than any other brand measured, with iPad Pro once again the top choice for planned purchases. Corporate buyers reported a 96% satisfaction rate and a purchase intent of 66% for the March quarter. In fact, businesses of all sizes are choosing iPad and iPhone to have them reimagine their everyday activities. We're seeing strong momentum in sectors such as retail, where iOS solutions are being deployed for everything from product development to logistics to mobile point-of-sale. Companies like Toys "R" Us, Coach, and Kate Spade are using iOS and our mobility partner solutions to dramatically transform their customer and employee experiences. Our retail stores experienced strong double-digit growth in visitors and revenue in the December quarter. And we continued to expand our global presence, with plans to open our first store in Singapore and our second store in Dubai soon. We are continually updating our stores and adding new and exciting outreach programs to educate kids on our products, entertain the community with fresh live music, teach future Swift developers to code, and empower entrepreneurs to start, grow, and evolve their businesses. Let me now turn to our cash position. We ended the quarter with $246.1 billion in cash plus marketable securities, a sequential increase of $8.5 billion. $230.2 billion of this cash or 94% of the total was outside the United States. We also had $77.1 billion in term debt and $10.5 billion in commercial paper outstanding at quarter end. We returned almost $15 billion to investors during a very busy December quarter for our capital return activities. We paid $3.1 billion in dividends and equivalents. We spent $5 billion on repurchases of 44.3 million Apple shares through open market transactions. And we launched a new $6 billion ASR, resulting in an initial delivery and retirement of 44.8 million shares. We also completed our eighth accelerated share repurchase program, retiring an additional 4.4 million shares. This led to a net diluted share count reduction of 65.3 million shares during the quarter. We've now completed $201 billion of our current $250 billion capital return program, including $144 billion in share repurchases. And we plan to provide investors with our annual update on the capital return program in the spring. Our effective tax rate for the quarter was 26%, as expected. And as we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $51.5 billion and $53.5 billion. This guidance range includes a $1.2 billion year-over-year headwind from foreign exchange. We expect gross margin to be between 38% and 39%. This guidance range includes an 80 basis points sequential headwind from foreign exchange. We expect OpEx to be between $6.5 billion and $6.6 billion. We expect OI&E to be about $400 million, and we expect the tax rate to be about 26%. Also today, our Board of Directors has declared a cash dividend up $0.57 per share of common stock, payable on February 16, 2017 to shareholders of record as of February 13, 2017. With that, I'd like to open the call to questions. Nancy Paxton - Apple, Inc.: And we ask that you limit yourself to one one-part question and one follow-up. Operator, may we have the first question, please? Operator : Your first question will come from Katy Huberty with Morgan Stanley. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Yes, thank you. First, Luca, what are the factors that caused you to widen the gross margin guidance for the March quarter? And what are the one or two factors that put you at the low end versus the tailwinds that might put you at the high end of that range? And then I have a follow-up, thank you. Luca Maestri - Apple, Inc.: Sure, Katy. If you look back at our history, 100 basis points range for gross margin is not unusual. Clearly during a period when foreign exchange is very volatile, we think it's more prudent to broaden the range a bit. I've mentioned that we expect – assuming that rates don't move too much, we expect foreign exchange to be a major negative as we move from the December to the March quarter. You know that the dollar has appreciated significantly toward the end of the December quarter, and so we've got 80 basis points of sequential headwind from foreign exchange. We also have the sequential loss of leverage, which is typical of our seasonality, but we expect to offset these two impacts with cost efficiencies and also with our mix of products and services. So obviously if the dollar is a little less strong than it is today, we could do a bit better on gross margins. Obviously, we continue to work very hard on our cost efficiency, so we'll see where we land. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thank you. And, Tim, there's a reasonable probability that you may get access to the $200 billion-plus of cash that's been locked overseas. So I think it would be helpful to just get an update on your views around potentially larger M&A and some of the areas of interest that you've noted in the past like owning more original content to penetrate more of the TV opportunity that the company has long talked about addressing. Thank you. Timothy Donald Cook - Apple, Inc.: Katy, I am optimistic given what I'm hearing that there would likely be some sort of tax reform this year, and it does seem like there are people in both parties that would favor repatriation as a part of that. So I think that's very good for the country and good for Apple. What we would do with it, let's wait and see exactly what it is. But as I said before, we are always looking at acquisitions. We acquired 15 to 20 companies per year for the last four years. And we look for companies of all sizes, and there's not a size that we would not do based on just the size of it. It's more about the strategic value of it. In terms of original content, we have put our toe in the water with doing some original content for Apple Music, and that will be rolling out through the year. We are learning from that, and we'll go from there. The way that we participate in the changes that are going on in the media industry that I fully expect to accelerate from the cable bundle beginning to break down is, one, we started the new Apple TV a year ago, and we're pleased with how that platform has come along. We have more things planned for it but it's come a long way in a year, and it gives us a clear platform to build off of. Two, embedded in the 150 million paid subscriptions that I mentioned in my opening comments, there are a number of third-party services that are a part of that, where we participate economically in some of that by offering our platform in selling and distributing. And then thirdly, we are obviously, with our toe in the water, we're learning a lot about the original content business and thinking about ways that we could play at that. Thanks for the question. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thank you. Nancy Paxton - Apple, Inc.: Thanks, Katy. Could we have the next question, please? Operator : We'll go to Amit Daryanani with RBC Capital Markets. Amit Daryanani - RBC Capital Markets LLC : Thanks a lot. Good afternoon guys. I guess the first question, I really appreciate the information you guys are providing around your Services business, which is up 18% year over year. Can you just talk about? How much of that do you think is growth in your installed base versus increased monetization on a per iOS to iOS basis? And so we are to think about those in two separate tranches? Luca Maestri - Apple, Inc.: I think you're absolutely right, Amit. We look at it that those are the two key elements for us. And what is particularly interesting to us is to see that the number of people that are transacting on our stores is increasing strong double-digits, and we're also seeing that the ARPU per paying customer is increasing double digits, right. So it's a combination of the two. Obviously, the quality and the quantity of content that we make available in our services improves all the time. And we also see that as people getting to the platform and start transacting on the platform, and we keep track of their behavior over time, we actually see that they tend to spend more and more over time. And that's why we are excited about the future of the Services business. And that's why, as Tim said, we have a goal that – it's already become a very large business. It's going to be a Fortune 100 company this year, but we have a goal to double it over the next four years. Amit Daryanani - RBC Capital Markets LLC : Perfect. And if I could just switch gears on a follow-up, there has been a fair amount of discussions around your market share in China and what's happening over there. Your numbers actually look fairly impressive in Greater China, China specifically. So could you just talk about what are the demand trends you're seeing there on the ground, and how do you see that transpire through the year? Timothy Donald Cook - Apple, Inc.: Yeah, I'll take this one. If you look at how we did in the quarter, as I think Luca shared, our Greater China revenue was down 12%, and about 4 points of that was currency related, so it's an 8 point decline in constant currency. And then within Greater China, if you look at the PRC, our revenue was flat year over year, and that was against the all-time record quarter. And if you look at that on a constant currency basis, it was actually up 6%. So it's a significantly better performance on every way you look at it versus what we had experienced the prior three quarters. Underneath that, what we've seen is that iPhone 7 was the best-selling smartphone in China during the quarter, according to Kantar. Singles Day, which is a huge day in China, as you know, we were the most popular U.S. brand on Alibaba. We set a new record for Services in China, as the company did. And Mac revenue was up double digit year over year. iPad units were also up double digit in Mainland China, which was obviously different than the trend that we saw in the balance of the world. We also saw 50% of our iPhone sales in China were to switchers and first-time buyers, which is a very high number that we're pleased with. And obviously, our total installed base continues to grow there in the strong double digits. That said, the challenges that are there are, one, the currency has devalued 6% year over year. And two, Hong Kong remains a very, very difficult market. And so I look at it in – I'm encouraged with the significant improvement, but we're not without challenges there. And I wouldn't want to imply that, although I do like many, many things that I've seen and how broad-based the pluses were across our product line. Nancy Paxton - Apple, Inc.: Thank you, Amit. Could we have the next question, please? Operator : From Cross Research, Shannon Cross. Shannon S. Cross - Cross Research LLC : Thank you very much for taking my question. Can you talk a bit more about the Services business? And what I'm trying to figure out is I think the number was you're going to be doubling within the next four years, at least that's your expectation. So what gets you there? I don't know, maybe if you talk about geographies and how penetrated you are in certain geographies. And then, as you grow your Services business, is there anything we should keep in mind from a margin perspective? Would these be lower margin services or similar, just so we can think about the trajectory and the contribution to the bottom line. Luca Maestri - Apple, Inc.: Yeah, Shannon, I'll take it. Obviously, within the Services business, we have a number of categories. The App Store is the one that is driving significant growth right now. I said in my opening comments that we grew 43% 13 weeks over 13 weeks, a little even more for the quarter, right. And what we like about the App Store is that it's truly a global platform. So we are seeing significant growth not only in the developed markets, where you expect to see a lot of transaction volume, but we see great growth in places like China, for example. And we know that there are parts of the world where we can do better. We can grow, for example, our developer community in a number of emerging markets. And so as we look, as I was explaining earlier, as we look at the number of people that transact growing double digits, we see the amount spent per paid account growing so well, we think that the App Store is going to be a significant driver of growth. On the music front, we are the market leader in digital music. Obviously now, by having the combination of the download business with the streaming service, which we didn't have until recently, we've been able to bring our music business back to growth. We've grown over the last three quarters, and we feel very good about that. Tim has talked about original content. We've had very good success with exclusives. So we know that it's another business that we can grow. Our iCloud storage business is growing very quickly, and so that is a business that also at a geographic level we can continue to grow significantly. Our AppleCare business is growing very well. A lot of it comes from the fact that our install base of devices around the world continues to grow very well, strong double digits. And as we've explained in the past, the vast majority of the services that we provide is not driven by what we sell during the last 90 days. It's much more driven by the install base, and that gives us a tailwind. We're also opening up several new markets because we are accepting new forms of payment. And therefore, it's easier particularly for international customers to take advantage of our services. You were asking about the margin profile. We said many times, in aggregate our Services business tends to have margins that are above company average. They are accretive, so they help us quite a bit from a margin standpoint. Within the Services business, we have very different margin profiles, also because, as you know, we account for some of these services in different ways. In some cases, we transact on a buy/sell basis. In other cases, we perform as agents, for example, to our developers, and that drives different margin percentages. Shannon S. Cross - Cross Research LLC : Thank you. And then my follow-up is just in terms of the elasticity of demand and some of the moves from a currency perspective. I think in the past there was some concern in some of the emerging markets the you were basically not able to – you weren't you're getting the volumes because you had to raise ASPs given the currency. But you talked about a lot of the emerging markets actually doing pretty well this quarter. So I'm just curious. You raised the price on the iPhone 7 Plus and that. What are you seeing, and what are your customers saying in terms of willingness to pay up? Luca Maestri - Apple, Inc.: Shannon, I was looking back. Since June of 2014, so we're talking about 2.5 years ago, the dollar has strengthened 25% against the basket of currencies where we do business. And so obviously, it is a difficult situation for us. I've mentioned that foreign exchange is a significant headwind for us, both at the revenue level and at the gross margin level. In emerging markets, it's incredible. The level of interest for our products continues to be phenomenal. The brand continues to be very aspirational. There are more and more people that can afford our products around the world. The middle class is growing in places like China, India, Brazil, but certainly the strong dollar doesn't help us. And therefore, when we make pricing decisions, we need to be very careful. We always want to find the optimal balance between units, revenue, and margin, and it becomes more difficult as the dollar appreciates. Nancy Paxton - Apple, Inc.: Thank you, Shannon. Could we have the next question, please? Operator : Moving on, we'll hear from Brian White with Drexel. Brian J. White - Drexel Hamilton LLC : Luca, I'm wondering if you could talk a little bit about gross margins. Sales obviously beat the high end of your revenue range. It looks like gross margin was dead down the middle. Can you talk about the puts and takes in gross margins in the quarter, please? Luca Maestri - Apple, Inc.: Sure. We were actually at the high end of the range for gross margins. We had guided 38% to 38.5%, and we came in at 38.5% exactly. And really, the slight improvement over the midpoint of the guidance range was due to the fact that our revenue was ahead of our expectations, and so we got a bit more leverage out of the increased revenue levels. We felt very good about the gross margins for the quarter. Again, keep in mind the strong dollar doesn't help us on that front. Brian J. White - Drexel Hamilton LLC : Okay. And, Tim, I didn't hear much mentioned about India. How did India perform with the iPhone? And how should we think about it for 2017, especially with the 4G network going up? Timothy Donald Cook - Apple, Inc.: That's a really good question. Despite the demonetization move in India that created lots of economic pressure there last quarter, despite that, we had all-time record revenue results, and so we were very happy about that. The demonetization impact has not worked its way through yet. It's still definitely having some overhang. But I think in the longer term, it's a great move, and I feel really good about how we're doing there. We are in discussions on a number of things, including retail stores, and fully intend to invest significantly in the country and believe it's a great place to be. Nancy Paxton - Apple, Inc.: Thank you, Brian. Could we have the next question, please? Operator : From Goldman Sachs, we'll hear from Simona Jankowski. Simona K. Jankowski - Goldman Sachs & Co.: Hi, thank you. I wanted to dig in a little bit more into the iPhone upside in the quarter with record revenues in every region except for Greater China. I think you touched on the percent of switchers in China. But can you give a little more color on the split of upgrades and switchers in some of the other regions and overall as well? Timothy Donald Cook - Apple, Inc.: Simona, it's Tim. We did have an exceptional quarter with iPhone, and that was with the backdrop of not predicting the demand very well on the iPhone 7 Plus and therefore being in constraint on it through the quarter. If you look at the absolute number of upgraders, it was the highest that we've seen in any quarter. And if you look at the switcher number, it's the highest that we've seen in any quarter. If you look at the upgrade rate, it's similar to last year. However, I think the big asterisk – I share all this with you for transparency's sake. I would tell you that the way we look at this is in a quarter where you have a supply constraint, it's difficult to draw too many conclusions from it. But I wanted to share that with you anyway so you have the backdrop. Simona K. Jankowski - Goldman Sachs & Co.: Thank you, and then just one follow-up on China specifically. As your comps get easier this year, I was curious if you think you're going to be returning to growth in that region. And then just to give us the context, I know you talked about the 6% constant currency increase in revenue in Mainland China. But curious if you strip out the double-digit increase in iPad and MacBook and potentially the mix shift to the iPhone 7 Plus, I'm curious what underlying iPhone units did in Mainland China. Timothy Donald Cook - Apple, Inc.: That's a big question, and I don't have the answer in front of me. If you look at iPhone 7 Plus, it was the most popular Plus model that we've ever had. It set a unit record, so that I can share. In terms of how are we going to do, we don't provide guidance at the segment level. But sitting here today, for Q2, I wouldn't expect the year-over-year performance to be dramatically different than the year-over-year performance in Q1. The real comp really begins in the following quarter to a more significant degree, and we'll have to see how that plays out as we get closer to it. Simona K. Jankowski - Goldman Sachs & Co.: Thank you. Timothy Donald Cook - Apple, Inc.: Yes. Nancy Paxton - Apple, Inc.: Thank you, Simona. Could we have the next question, please? Operator : From Bernstein, Toni Sacconaghi. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Yes, thank you. I just wanted to better understand the upgrade rate dynamics. So I think iPhone units on a sell-through basis were up about 8%. You had an extra week, which gave you about 8%. I understand there were differences of the timing of the launch. So making all those adjustments, it looks like iPhone units were probably up low single digits. But, Luca, you alluded to the fact that your install base was growing double digits. So that would suggest to me that the upgrade rate, the upgrade percentage is actually declining. And more specifically, I'd just like your broader perspective on how investors should think about upgrade rates. It looked like they peaked in the iPhone 6 cycle, and it looks like they've been extending – going lower. Replacement cycles have been extending over the last couple years. I think some of the U.S. carriers alluded to that as well. So I'm wondering if you could step back and just talk a little bit more broadly about how investors should think about or what the trajectory has been over the last two years and how investors should think going forward. Do you believe there are opportunities for that upgrade rate to improve or replacement cycles to accelerate going forward? And what are some of the considerations we should think about? Luca Maestri - Apple, Inc.: I think it's a good question, a number of points that I want to make. Starting with the growth in the install base of iPhones, yes, it's growing strong double digits, and that's very good for us for a number of reasons, including the fact that it's a big driver for our Services business. When we look at it geographically, I think we see different developments. For example, we felt very, very good about the unit growth that we had in many markets around the world. You've been quoting an overall total company growth rate. But when we look at a country-specific level, there were a lot of countries, I would say the majority of the countries, where iPhone units grew strong double digits, starting here in the United States, where for example, the fact that annual upgrade programs are becoming more and more popular is proving to be a positive for us. Same happened in a number of countries around the world, starting with Canada and Australia but also many places in Western Europe as well. Japan grew double digits in terms of units. So I think geographically we are seeing very, very good performance. The point that I think I need to make when you think about upgrade rates, clearly, this issue of the strong dollar doesn't help us. Could we sell significantly more and significantly faster from an upgrade cycle standpoint in places outside the United States, where we've been forced to increase prices by up to 20%, 30%, 40% in certain countries? And you think about the impact that this is having on local demand, obviously that doesn't help us. But overall, I would say as Tim said, when we look at the upgrade rate for and we look at it from the standpoint of the new phones, right, the new generation phones, the upgrade rate, the percentage of people that have upgraded to the new phone has been very similar to what we've seen last year. The 6 cycle was certainly a phenomenal cycle. There was pent-up demand for the larger screen phones. And certainly as we look ahead, we have a role to play. The more we're able to innovate with new generations of products, clearly that plays a role in the upgrade rate. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Okay, thank you. Tim, I have a question for you. Back in April 2012, you said on one of these earnings calls that I've always hated litigation and I continue to hate it, and I highly prefer to settle versus battle. Yet you recently decided to initiate a lawsuit against Qualcomm. I'm wondering if you can comment on the ostensible change or departure from this viewpoint, and what would be a successful end result of this litigation, and whether you can confirm whether there's any potential gross margin risk in the future as a result of this litigation. Timothy Donald Cook - Apple, Inc.: I feel the same way I did in April of 2012. I don't like litigation and view it as a last resort. And so you should take from our filing that we viewed it as we didn't see another way forward. They were insisting on charging royalties for technologies that they had nothing to do with. And so we were in a situation where the more we innovated with unique features like Touch ID or advanced displays or cameras, just to name a few, the more money Qualcomm would collect for no reason and the more expensive it would be therefore for us to innovate. And so it's somewhat like buying a sofa, and you charge somebody a different price depending upon the price of the house that it goes into. Just from our point of view, this doesn't make sense, and we don't believe it will pass muster in the courts. In addition to that, as a part of their increasingly radical steps they were taking to try to hold up that model, they withheld $1 billion in payments that they owed us. And so we felt like we had no choice was the net of it. In terms of where it goes, we'll see. I don't like litigation. And so if there's another way, then that would be great, but at this point I don't see it. I fully expect at this point in time that it will take some time, but in the end I think common sense will prevail and the courts will see it for what it is. And so that's the way I see it. Thanks for your question. Nancy Paxton - Apple, Inc.: Thank you, Toni. Could we have the next question, please? Operator : We'll go to Steve Milunovich with UBS. Steven M. Milunovich - UBS Securities LLC : Thank you. First, I wanted to ask about the iPad. It looked like it was about to turn possibly even positive. You said it was above your plan, but I think it was pretty well below the Street's expectations. And the ASP deteriorated pretty significantly. I don't know if it's a mix shift. But maybe you can talk about the iPad and what you see going forward. Timothy Donald Cook - Apple, Inc.: The iPad, Steve, we had a 1.6 million-unit swing on channel inventory between the years. In the year-ago quarter we increased by 900,000. In this quarter we decreased by 700,000. On top of that and from an ASP point of view, in the year-ago quarter we launched the iPad Pro 13 Edge. That would be the iPad with obviously the highest price on it. We would have done the channel fill plus the launch of the product, and so that would have bolstered the ASPs in that particular quarter. In addition to all of that, we did under-call the number of iPads that would be in demand for the quarter, and that compounded a shortage issue that we had with one of our suppliers. And so all in all, there were quite a few things going on there. If I zoom out of the 90-day clock and look at it, we've got some exciting things coming on iPad. I still feel very optimistic about where we can take the product. When we look at the number of people buying iPads for the first time, which is a good thing to look at from a point of view of whether things are reaching a penetration point or not, the numbers indicate that it's not close to that kind of thing. The customer sat numbers are through the roof. Literally, the customer sat for the iPad Pro is 99%. It's stunning. And so I see a lot of good things and hope for better results, but we are still currently in this shortage issue now, and I'm not projecting to get out of that totally during the quarter. And so it will damper this quarter somewhat. But again, beyond the 90-day clock, I'm very bullish on iPad. Steven M. Milunovich - UBS Securities LLC : Okay, that's great, thank you. And then, Tim, investors tend to think of the iPhone as mature and technology improvements as incremental, yet I believe you said there's plenty of runway left in terms of appealing new features. Do you think there are future enhancements coming that will be viewed as material by users, and particularly changes beyond form factor, beyond the way the phone looks? Are there functional things coming over time that you think could surprise people? Timothy Donald Cook - Apple, Inc.: I think the smartphone is still in the early innings of the game. I think there's lots more to do. I think it's become – every year it becomes more important to people's lives and there are more things people are doing with it. I talked a little bit about home automation, but I could have talked about health. I could have talked more about CarPlay. The use of it in the enterprise is growing significantly. And so when I look at all of these things, usage going up, app developers still innovating, we've got some exciting things in the pipeline, I feel really, really good about it. So this is one that we think different about a bunch of things, but maybe this is just one more. Steven M. Milunovich - UBS Securities LLC : Thank you. Timothy Donald Cook - Apple, Inc.: Yes. Nancy Paxton - Apple, Inc.: Thank you, Steve. A replay of today's call will be available for two weeks as a podcast on the iTunes Store, with a webcast on apple.com/investor, and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 3378275. And these replays will be available by approximately 5 :00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. And financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570, and I'm at 408-974-5420. Thanks again for joining us. Operator : Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,017	2	2017Q2	2017Q2	2017-05-02	2.174	2.192	2.457	2.53	null	14.7	14.34	Executives: Nancy Paxton - Apple, Inc. Timothy Donald Cook - Apple, Inc. Luca Maestri - Apple, Inc. Analysts: Kathryn Lynn Huberty - Morgan Stanley & Co. LLC Shannon S. Cross - Cross Research LLC Rod Hall - JPMorgan Securities LLC Steven M. Milunovich - UBS Securities LLC A.M. Sacconaghi, Jr. - Sanford C. Bernstein & Co. LLC Simona K. Jankowski - Goldman Sachs & Co. Jim Suva - Citigroup Global Markets, Inc. Operator : Good day, everyone, and welcome to this Apple Incorporated second quarter fiscal year 2017 earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am. Nancy Paxton - Apple, Inc.: Thank you. Good afternoon and thanks to everyone for joining us. Speaking first today is Apple CEO Tim Cook, and he'll be followed by CFO Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, future business outlook, and plans for capital return and debt issuance. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2016, the Form 10-Q for the first quarter of 2017, and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Timothy Donald Cook - Apple, Inc.: Thanks, Nancy. Good afternoon and thank you for joining us. Today we are reporting strong March quarter results, with accelerating revenue growth and earnings per share up 10% over last year. We feel great about this performance. Revenue was $52.9 billion, near the high end of our guidance range. Global revenue was up 5% year on year, with growth accelerating from our December quarter performance. That's despite a $1 billion year-over-year revenue headwind from foreign exchange in the March quarter and a larger iPhone channel inventory reduction this year versus last year. iPhone sales were line in line with our expectations, and we're thrilled to see the continued strong demand for iPhone 7 Plus with its beautiful large display and dual-camera system. Our active installed base of iPhones grew by double digits year over year. And based on the latest data from IDC, we gained market share in nearly every country we track. Late in the quarter, we released the stunning (PRODUCT)RED Special Edition versions of iPhone 7 and iPhone 7 Plus in recognition of 10 years of our partnership with RED. This relationship has given our customers an unprecedented way to contribute to the global fund and bring the world a step closer to an AIDS-free generation. We've seen wonderful customer response to these eye-popping new iPhones. For the second quarter in a row, our Services revenue topped $7 billion, and it's well on the way to being the size of a Fortune 100 company. We're very happy to see the deep level of customer engagement with the Apple ecosystem across all of our services. App Store momentum is terrific, with revenue growing 40% year over year to an all-time quarterly record. The number of developers offering apps for sale on our store was up 26% over last year, and we're thrilled to see their success. We also saw double-digit revenue growth from Apple Music subscriptions and iCloud storage and overall very strong growth in the total number of paid subscriptions for our own services and the third-party content we offer on our stores. Paid subscriptions now exceed 165 million. Apple Pay is experiencing phenomenal traction. With the launch of Taiwan and Ireland in the March quarter, Apple Pay is now live in 15 markets with more than 20 million contactless-ready locations, including more than 4.5 million locations accepting Apple Pay in the U.S. alone. We're seeing strong growing usage as points of acceptance expand, with transaction volume up 450% over the last 12 months. In the UK, for example, points of acceptance have grown by 44% in the last year, while monthly Apple Pay transactions have grown by nearly 300%. In Japan, where Apple Pay launched last October, more than 0.5 million transit users are completing 20 million Apple Pay transactions per month. And we're always excited to see our partners bring their customers new ways to use Apple Pay. You can now even send a Starbucks gift card via iMessage with just a touch. We're seeing great momentum from our powerful advances in Messages. In fact, at one point during the Super Bowl in February, customers were sending 380,000 Messages per second, more than double the previous year. A few weeks ago, we introduced Clips, a new app that's another great example of how we're continually making our products even more engaging, and it's off to a great start. With Clips, it's fun and easy to combine video, photos, and music on an iPhone or an iPad into great-looking expressive videos with great visual effects and titles just using your voice, then share your clips with friends through the Messages app or on social media. We had great Mac results during the quarter. Revenue grew 14% to a new March quarter record and gained market share thanks to strong demand for our new MacBook Pros. Our Mac business has generated over $25 billion in revenue over the past four quarters. We're investing aggressively in its future, and we are very excited about the innovation we can bring to the platform. We also updated our most popular sized iPad with a brighter Retina display and best-in-class performance at its most affordable price ever, and customer response to date has been very strong. iPad results were ahead of our expectations, and we believe we gained share during the March quarter in a number of major markets, including the U.S., Japan, and Australia. iPad remains the world's most popular tablet, and it's the primary computing device for millions of customers across the globe. Building on the momentum from the holiday quarter, Apple Watch sales nearly doubled year over year. Apple Watch is the best-selling and most loved smartwatch in the world, and we hear wonderful stories from our customers about its impact on their fitness and health. We're also seeing great response to AirPods, with a 98% customer satisfaction rating based on a recent Creative Strategy survey. Demand for AirPods significantly exceeds supply, and growth in Beats products has also been very strong. In fact, when we combine Apple Watch, AirPods, and Beats headphones, our revenue from wearable products in the last four quarters was the size of a Fortune 500 company. In Greater China, we were very pleased to see strong double-digit revenue growth from both Mac and Services during the March quarter. We also had great results from our retail stores in mainland China, with total store revenue up 27% over last year and comp store revenue up 7%. These results contributed to our improving performance in Greater China. Through the first two quarters of fiscal 2017, our year-over-year comparisons improved significantly over the last two quarters of fiscal 2016. First half revenue was down 13% year over year, about a third of which was attributable to FX. That's in contrast to a 32% revenue decline in the second half of last year. Our March quarter results were in line with our expectations, and similar to the year-over-year performance we experienced in the December quarter. We continue to be very enthusiastic about our opportunity in China. We set a new March quarter record for India, where revenue grew by strong double digits. We continue to strengthen our local presence across the entire ecosystem, and we're very optimistic about our future in this remarkable country with its very large, young, and tech-savvy population, fast-growing economy, and improving 4G network infrastructure. Apple Retail is entering an exciting chapter with new experiences for customers and breathtaking new store designs. With the opening of our newest store in Dubai this past weekend, we now have 495 retail locations worldwide. The new Apple Dubai Mall is a truly international store, with employees who collectively speak 45 languages, and are already welcoming customers from around the world. As Luca will discuss in a moment, today we're also providing an update to our capital return program. Given our strong confidence in our future, we're increasing the program size by $50 billion, bringing the total to $300 billion, and we're extending the timeframe through March of 2019. We're adding to our share repurchase authorization and increasing our dividend for the fifth time in less than five years. We're very excited about our upcoming Worldwide Developers Conference taking place in San Jose next month. The conference is significantly oversubscribed, and we'll be welcoming thousands of attendees. We look forward to helping them learn about breakthrough technologies across all four of our software platforms – iOS, macOS, watchOS and tvOS – that enable developers to create incredible experiences for every aspect of customers' lives and improve the way they manage their homes, cars, health, and more. I'm very proud to mention that we recently released our 10th annual Environmental Responsibility Report, reflecting our amazing progress. In 2016, 96% of the electricity used at Apple's global facilities came from renewable sources of energy, reducing our carbon emissions by nearly 585,000 metric tons. We're now 100% renewable in 24 countries, including all of Apple's data centers. There's much more work to be done, but we're committed to leaving the world better than we found it. Closer to home, we're excited about moving into our new corporate headquarters, Apple Park, our new center for innovation. The main building on Apple Park is designed to house 13,000 employees under one roof in an environment that fosters even greater collaboration among our incredibly talented teams. We have many more ongoing investments in the United States economy, since Apple is a company that could only have been created in America. Through our innovative products and the success of our business, we're incredibly proud to support more than 2 million jobs in all 50 states, and we expect to create even more. Last fiscal year, we spent more than $50 billion in the United States with American suppliers, developers, and partners, and we continue to invest confidently in our future. Now for more details on the March quarter results, I'd like to turn the call over to Luca. Luca Maestri - Apple, Inc.: Thank you, Tim. Good afternoon, everyone. Revenue for the March quarter was $52.9 billion, and we achieved double-digit growth in the U.S., Canada, Australia, Germany, the Netherlands, Turkey, Russia and Mexico. Our growth rates were even higher, over 20% in many other markets, including Brazil, Scandinavia, the Middle East, Central and Eastern Europe, India, Korea and Thailand. Gross margin was 38.9%, at the high end of our guidance range. That's a sequential increase from 38.5% in the December quarter, which is particularly impressive given the seasonal loss of leverage, sequential foreign exchange headwinds of 100 basis points, and cost pressures on certain commodities. Operating margin was 26.7% of revenue and net income was $11 billion. Diluted earnings per share were $2.10, an increase of 10% over last year, and cash flow from operations was strong at $12.5 billion. For details by product, I'll start with iPhone. We sold 50.8 million iPhones, and we reduced iPhone channel inventory by 1.2 million units in the quarter, compared to a reduction of about 450,000 a year ago. So our iPhone performance was slightly better than last year on a sell-through basis. We had very solid iPhone growth in four of our five operating segments and experienced especially strong results in Western Europe, the Middle East, and our Rest of Asia-Pacific segment, all areas of the world where iPhone sales were up double digits. iPhone ASP was $655, up from $642 a year ago, thanks to a strong mix of iPhone 7 Plus and in spite of unfavorable foreign exchange rates. We exited the March quarter within our five to seven-week target channel inventory range. Customer interest and satisfaction with iPhone are very strong, not only with consumers but also with business users. In the U.S., the latest data from 451 Research on consumers indicates a 96% customer satisfaction rating among iPhone 7 owners and 98% for iPhone 7 Plus. Among corporate smartphone buyers, iPhone customer satisfaction was 95%. And of those planning to purchase smartphones in the June quarter, 79% plan to purchase iPhone. Turning to Services, we generated $7 billion in revenue, an increase of 18% year over year and our best results ever for a 13-week quarter. We're very happy with the strong level of growth, especially given the tough compare to last year, as the busy week between Christmas and New Year's fell within the March fiscal quarter a year ago but was included in the December fiscal quarter this year. As we said last quarter, our goal is to double the size of our Services business by 2020. The App Store established a new all-time revenue record and grew 40% year over year. We continue to see growth in average revenue per paying account as well as the number of paying accounts across our content stores during the quarter. In fact, the quarterly increase in the number of paying accounts was the largest that we've ever experienced. And according to App Annie's latest report, the App Store continues to be the preferred destination for customer purchases, generating twice the revenue of Google Play during the March quarter. Next I'd like to talk about the Mac. Revenue was up 14% year over year and set a new March quarter record. We sold 4.2 million Macs, up 4% over last year, compared to zero growth in the PC market according to IDC's latest forecast. Demand for MacBook Pro was very strong, helping to drive overall portables growth of 10%, twice the growth of the portables market. We ended the quarter at the low end of our four to five-week target range for Mac channel inventory. Turning to iPad, we sold 8.9 million units, which was ahead of our expectations despite supply constraints throughout the quarter. We are very pleased to see iPad growth in the U.S. during the March quarter and revenue growth worldwide for our 9.7-inch and larger iPads over the last four quarters. iPad channel inventory was essentially flat from the beginning to the end of the quarter, and we exited just below our five to seven-week target range. iPad remains very successful in the segments of the tablet market where we compete. Recent data from NPD indicates that iPad had 81% share of the U.S. market for tablets priced above $200. And in February, 451 Research measured consumer satisfaction rates for iPad that range from 95% for the 9.7-inch iPad Pro to 100% for the 12.9-inch version. Among U.S. consumers planning to purchase a tablet within the next six months, purchase intention for iPad was 69%. Corporate buyers reported a 96% satisfaction rate and a purchase intent of 68% for the June quarter. All our products continue to be extremely popular and drive more buying transformation in the enterprise market. We set a new enterprise revenue record for the March quarter, and we expect this momentum to continue for the remainder of the year. Recently, Volkswagen selected iPhone as their corporate standard smartphone, so 620,000 employees around the world have the opportunity to enjoy the best-in-class mobile experience that iPhone offers. And Capital One has reimagined the customer banking experience by empowering their associates with Mac and Apple Watch and over 40 native iOS applications now running on nearly 30,000 iPhones and iPads. We're also seeing strong momentum with our enterprise partners, who are helping us deliver long-lasting innovation and differentiation for iOS versus competing platforms. The Deloitte partnership is off to a great start, with more than 115 customer opportunities in the pipeline across 15 different industries. SAP released the SAP Cloud Platform SDK for iOS at the end of March, and over 3 million SAP developers now have an even better means to develop powerful iOS-native apps for the enterprise. The partnership with Cisco enables optimized performance of iOS devices over their networks and is generating a large and growing pipeline of sales opportunities across multiple verticals, including healthcare and financial services. And our partnership with IBM continues to drive greater productivity and innovation, with IBM Mobile First for iOS apps now in more than 3,300 client engagements. And with its Mobile at Scale offering, IBM recently closed an agreement to deploy 11,000 iOS devices at Santander Bank to drive digital transformation. Our retail and online stores produced great results, with strong revenue growth in all our geographic segments and 18% growth overall. Visitors to our retail and online stores were up 16% over last year, and we added four new stores during the March quarter. And with the opening of our store in Dubai last week, we're now at 495 stores in 18 countries. Let me now turn to our cash position. We ended the quarter with $256.8 billion in cash plus marketable securities, a sequential increase of $10.8 billion. $239.6 billion of this cash, or 93% of the total, was outside the United States. We issued $11 billion in debt during the quarter, bringing us to $88.5 billion in term debt and $10 billion in commercial paper outstanding. We returned over $10 billion to investors during the quarter. We paid $3 billion in dividends and equivalents, and we spent $4 billion on repurchases of 31.1 million Apple shares through open market transactions. We also launched a new $3 billion ASR, resulting in initial delivery and retirement of 17.5 million shares. And we retired 6.3 million shares upon the completion of our ninth accelerated share repurchase program in February. All these activities contributed to a net diluted share count reduction of 66.3 million shares in the quarter. We have now completed $211.2 billion of our $250 billion capital return program, including $151 billion in share repurchases. As Tim mentioned, today we're announcing an update to our program, which we are extending by four quarters through March of 2019, and increasing in size to a total of $300 billion. Once again, given our strong confidence in Apple's future and the value we see in our stock, we are allocating the majority of the program expansion to share repurchases. Our board has increased the share repurchase authorization by $35 billion, raising it from the current $175 billion level to $210 billion. We will also continue to net share settle vesting employees' restricted stock units. In addition, we're raising our dividend for the fifth time in less than five years. As we know, this is very important to many of our investors who value income. The quarterly dividend will grow from $0.57 to $0.63 per share, an increase of 10.5%. This is effective with our next dividend, which the board has declared today, payable on May 18, 2017 to shareholders of record as of May 15, 2017. With over $12 billion in annual dividend payments, we're proud to be one of the largest dividend payers in the world, and we continue to plan for annual dividend increases going forward. In total, with this updated program, during the next eight quarters we expect to return $89 billion to our investors, which represents about 12% of our market cap at the current stock price. We expect to continue to fund our capital return program with current U.S. cash, future U.S. cash generation and borrowing from both domestic and international debt markets. We will continue to review capital allocation regularly, taking into account the needs of our business, investment opportunities, and our financial outlook. We'll also continue to solicit input on our program from a broad base of shareholders. This approach will allow us to be flexible and thoughtful about the size, the mix, and the pace of our program. As we move ahead into the June quarter, I'd like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $43.5 billion and $45.5 billion. We expect gross margin to be between 37.5% and 38.5%. We expect OpEx to be between $6.6 billion and $6.7 billion. We expect OI&E to be about $450 million, and we expect the tax rate to be about 25.5%. With that, I'd like to open the call to questions. Nancy Paxton - Apple, Inc.: Thank you, Luca, and we ask that you limit yourself to one one-part question and one follow-up. Rebecca, may we have the first question, please? Operator : First we'll hear from Katy Huberty with Morgan Stanley. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Yes, thanks. My first question is for Luca around gross margins. How were you able to expand gross margins sequentially and guide rather seasonally for the June quarter in light of what's going on in the memory market. And maybe if you can, comment in particular whether the hold back of payments to Qualcomm is benefiting you at all on gross margins year on year, and also whether your contracts around commodity prices is likely to hit gross margins by more in the back half of this calendar year. Luca Maestri - Apple, Inc.: Thank you, Katy, a lot of questions. Let me take them one by one. Let me start with our performance for the March quarter, which we were very happy with. As you said, we were up 40 basis points sequentially. And this is in spite of the fact, as you know, that we lose leverage as we go from the December quarter to the March quarter. The foreign exchange headwind on a sequential basis was 100 basis points. Obviously, that was also a negative. And as you said, we started to experience some level of cost pressure on the memory side, particularly on NAND and DRAM. To offset that, and actually do better than that, we had very good cost performance on other commodities. And the fact that our Services mix increases as we go through the year, that is of course also helping, given the profile of our gross margin for Services. So that answers the question around Q2. As we move into the June quarter, as you know, we tend to have some level of gross margin compression as we go from the March quarter to the June quarter. Again, the majority of that comes from the sequential loss of leverage. We also have a different mix of products as we move into the June quarter, and the cost pressures on memory will remain. We expect to offset partially these impacts with other cost efficiencies, and again, with a mix shift towards Services. The impact on NAND and DRAM will continue to be there, and we expect it to be there. You know we don't guide past the June quarter, but we expect it to be there for the time being. On Qualcomm, I just want to make it very, very clear that we are accruing. We do not expect to be paying more than what we are accruing right now. So we didn't get any benefit in our P&L, in our margins, during the March quarter, and we're not getting any benefit during the June quarter either. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Okay, thank you. And just a follow-up for Tim, as you noted in your remarks, the iPhone 7 Plus demand, it's selling incredibly well. And this was a product that was pretty severely supply-constrained in the December quarter. And I just wonder whether there are any lessons learned as you go forward into future product launches around how you manage the timing of announcing a product when there are supply constraints, and how you might work with the supply chain differently around ramping some of these components that have particular difficulties around the yields early on. Timothy Donald Cook - Apple, Inc.: Katy, one of the things that we did not get right was the mix between the iPhone 7 and the iPhone 7 Plus. There was – wound up that demand was much stronger to the iPhone 7 Plus than we had predicted. And so it took us a little while to adjust all the way back through the supply chain and to bring iPhone 7 Plus into balance, which occurred early this past quarter. What did we learn from it? Every time we go through a launch, we learn something. And you can bet that we're brushing up our models, and we'll apply everything we learn to the next time. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thank you. Nancy Paxton - Apple, Inc.: Thank you, Katy. Could we have the next question, please? Operator : We'll go to Shannon Cross with Cross Research. Shannon S. Cross - Cross Research LLC : Thank you very much. Tim, can you talk a bit about what's going on in China and give us some more color, especially as you're going through the year? And then obviously you won't talk about the next product launch, but just are there any shifts in demand with Greater China down 14%? Was it all iPhone, or a mix? Anything you can provide, and then I have a follow-up. Timothy Donald Cook - Apple, Inc.: Yes, thanks for the question, Shannon. We saw in Q2 a performance that combined with Q1 to form the first half of the year was much better than what we experienced in the second half of last year. And if you look at what was driving that, iPhone 7 Plus, we sold the highest number of Plus models in the first half than ever before, compared to 6s Plus or compared to the 6 Plus. Also, the Mac business did extremely well. The Mac revenue growth was up 20% in China, and we had extremely strong Services growth during the quarter in China. As I mentioned in my comments, our retail and online stores did well overall and in China. They grew by 21%, which is an acceleration from what we had seen in the previous quarter. And traffic – which for us is incredibly important in the retail stores because we do a lot more than sell – traffic was up 27% year on year. And now seven of our top ten highest traffic stores in the world are in Greater China. And so that's the set of things that went in our direction, so to speak. On the flip side, currency devalued by 5%, and so that's not an insignificant headwind. And our performance continued to be weak in Hong Kong, which has been hit a bit harder as the tourism market continues to slump. Also, where the iPhone 7 Plus did well, we didn't perform as well on some of the previous generation iPhones. And so that's the set of things on the plus and minus side. We did perform about where I thought we would. At least I thought it would be similar to the previous quarter, and it was. What I now believe is that we'll improve a bit more during this current quarter, not back to growth, but improve – but make more progress. And we continue to believe that there's an enormous opportunity there. And in the scheme of things, our business is pretty large there. Shannon S. Cross - Cross Research LLC : Great, thank you. And then I don't know if Luca wants to take this, but thoughts on cash usage. You increased your program, but you still have I think $160 billion of net cash and obviously continue to generate cash. So I'm curious as to, given some of the commentary that's come out of the administration, which I think most companies were expecting some sort of return, how do you generally think about what you need to run the business from a cash perspective, how you think about the balance sheet from a strength perspective as we look forward to what hopefully will come through? Luca Maestri - Apple, Inc.: Shannon, you know how we run our capital return program. We've been pretty consistent during the last five years. Essentially for the last five years, the way we've run the company is essentially to return our free cash flow to our investors. That's what we've done with the program until now, and the expansion of the program that we've announced today goes in the same direction. We know how much we need to invest in the business. We will never underinvest in the business. We're in a very fortunate position that we generate cash beyond the needs that we have. And given the current capital structure that we have, we decided that until now we return about 100% of the free cash flow to investors. It's difficult for us to speculate about what might or might not happen. The program that we're announcing today reflects the current tax legislation in this country, and there's a lot that still needs to happen there, and we'll see. Obviously, we will reassess our situation if things change. Nancy Paxton - Apple, Inc.: Thank you, Shannon. Can we have the next question, please? Operator : From JPMorgan, Rod Hall. Rod Hall - JPMorgan Securities LLC : Hi, guys. Thanks for taking my questions. I wanted to start off just going back to the 165 million subscriptions and ask Tim or Luca if you could comment on the unique number of users there. And I think you had made a comment, Tim, in your prepared remarks that the average revenue per user was up, or maybe that was you, Luca. But if you guys could just talk about any more color around that average revenue per user, it would be interesting to us. And then I have one follow-up to that. Thanks. Luca Maestri - Apple, Inc.: Yes, I'll take it, Rod. We don't disclose into the number of subscriptions. Of course, we're just giving you the total count of subscriptions that are out there. Of course, there are several customers that subscribe to more than one of our services. There is some level of overlap, but the total number of subscribers is very, very large, obviously less than 165 million. But it's very good for us to see the breadth of subscriptions that we offer and that customers are interested in. It's a large number. And if you remember, we quoted the same number a quarter ago and we talked about 150 million. So when you think about a sequential increase of 15 million subscriptions from the December quarter to the March quarter, it really gives you a sense for the momentum that we have on our content stores. It's quite impressive to add 15 million subscriptions in 90 days. As we look at the dynamics that are happening on our content stores, particularly on the App Store, which is the largest, we see fairly consistently two things. We see that the number of paying accounts is growing a lot. And I mentioned the increase in number of paying accounts that we value in this last 90 days is the largest that we've ever had. So this very large number of people coming into the ecosystem, experiencing the ecosystem, which is obviously improving all the time in quality and quantity, and then start paying and transacting on our stores, and that number is growing very, very strongly, strong double digits. What we're also seeing as we look at people that start paying on our stores, we see a pretty common trend over time. And we keep track of that across cohorts of customers, that as people come into the ecosystem and start paying on the ecosystem, we see a spending profile that is very similar around the world. People start at a certain level and then they tend to spend more over time. And so obviously, the combination of people spending more over time and adding more people that are now actually spending on the stores contributes to this 40% growth that Tim mentioned for the App Store on a year-over-year basis. Rod Hall - JPMorgan Securities LLC : Okay, thanks, Luca, and then I had a follow-up for Tim. Tim, I wanted to just ask. The Services revenue keeps growing, and of course the profit contribution from that is growing. And we've also at the same time I think seen you maybe a little more aggressive than Apple has been historically in pricing certain key technologies, let's call them, that maybe you want to penetrate the market with. I just wonder if you could just comment a little bit on your strategy there in terms of the usage of that extra profit contribution from that Services business, how you intend to apply it to the rest of the business. Thank you. Timothy Donald Cook - Apple, Inc.: Rod, the way that we think about pricing is we come up with a price that we think is a good value for the product that we're delivering, and we do that on the hardware side as well as on the Services side. And so that's how we think about it. We're really not thinking about taking profits from one to subsidize the other or vice-versa. Rod Hall - JPMorgan Securities LLC : Great, thank you very much. Timothy Donald Cook - Apple, Inc.: Yes. Nancy Paxton - Apple, Inc.: Thanks, Rod. Could we have the next question, please? Operator : From UBS, Steve Milunovich. Steven M. Milunovich - UBS Securities LLC : Thank you. Tim, could you comment on the opportunity in wearables? The watch, some people consider disappointing, had what seems to be a very good quarter, and ironically the competition almost seems to be fading in that part of the market right now. The AirPods of course are doing well. Do you see wearables : A), expanding over time into a broader product line; and B), increasingly being independent of the iPhone longer term? Timothy Donald Cook - Apple, Inc.: Thanks for the question. We have seen the watch as a really key product category for us since before we launched it. We took our time to get it right, and we've made it even better with the Series 2 offering. And we're really proud of the growth of the business. The watch units more than doubled in six of our top ten markets, which is phenomenal growth, particularly in a non-holiday quarter. And so we couldn't be more satisfied with it. As some people are doing when you begin to combine the watch revenues with the revenues for AirPods, and as you know, this was the first full quarter of shipments for AirPods. It's still very much in the ramping mode, and we're not coming close to satisfying the demand. And then add the Beats products that a group of our customers really enjoy as well, and look on the trailing 12 months – so this is not a forecast – that business was well into the Fortune 500. And so as I look at that, that's pretty fast to come that far. The watch hasn't out very long and AirPods has been out there for three, four months, and so we feel really great about it. Where does it go? I wouldn't want to comment on that, but we do have a really great pipeline here. And I think in terms of competition falling out and so forth, the watch area is really hard. It in essence from an engineering point of view is similar to a phone in terms of the intricacies and so forth. And so I'm not very surprised that some people are falling out of it. But we're very committed to it and believe that – it's already a big business and believe over time it will be even larger. Thanks for the question. Steven M. Milunovich - UBS Securities LLC : Thank you. And then there was a – you mentioned the 451 Research survey. They did have a couple findings that were interesting. One is a nine-year low in iPhone purchase intent, and that might just be where you are in the cycle. And the other was a declining retention rate in the U.S. toward 80%. Any comment on either of those and whether you're concerned? Timothy Donald Cook - Apple, Inc.: I only glanced at it, and so I haven't had time to study it. But in general, what we are seeing, we're seeing what we believe to be a pause in purchases on iPhone, which we believe are due to the earlier and much more frequent reports about future iPhones. And so that part is clearly going on, and it could be what's behind the data. I don't know, but we are seeing that in full transparency. Steven M. Milunovich - UBS Securities LLC : Thank you. Timothy Donald Cook - Apple, Inc.: Thanks for the question. Nancy Paxton - Apple, Inc.: Thank you, Steve. Can we have the next question, please? Operator : From Bernstein, we'll go to Toni Sacconaghi. A.M. Sacconaghi, Jr. - Sanford C. Bernstein & Co. LLC: Yes, thank you. I have two as well. First, Tim, I'm wondering if you can comment on your recent decision and the rationale for withholding royalty payments to Qualcomm. And really specifically, I wonder what you believe is the risk that Qualcomm could have a detrimental response, such as withholding modem chip sales or potentially even getting an injunction on iPhones in select geographies around the world. And I'd like to understand your perspective on whether either of those are real risk to any degree. And why would Apple potentially take on those risks just in advance of what will arguably be your most significant and largest product launch in history? Timothy Donald Cook - Apple, Inc.: Anyone that has a standards-essential patent has a responsibility to offer it to everyone that would like it under what are called FRAND terms. FRAND stands for fair, reasonable, and non-discriminatory terms. That's both the price and the business terms. Qualcomm has not made such an offer to Apple. And so I don't believe that a – I don't believe anyone is going to decide to enjoin the iPhone based on that. I think that there's plenty of case law around that subject, but we shall see. In terms of why we're withholding royalties, you can't pay something when there's a dispute about the amount. You don't know how much to pay. And so they think we owe some amount, we think we owe a different amount, and there hasn't been a meeting of the minds there. And so at this point, we need the courts to decide that. Unless we are able to, over time, settle between us on some amount, but right now we're depending upon the courts to do that. And so that is the thinking. The reason that we're pursuing this is that Qualcomm's trying to charge Apple a percentage of the total iPhone value. And they do some really great work around standards-essential patents, but it's one small part of what an iPhone is. It's not – it has nothing do with the display or the Touch ID or a gazillion other innovations that Apple has done. And so we don't think that's right, and so we're taking a principled stand on it. And we strongly believe we're in the right, and I'm sure they believe that they are. And that's what courts are for. And so we'll let it go with that. A.M. Sacconaghi, Jr. - Sanford C. Bernstein & Co. LLC: Thank you. I was wondering if I could just follow up a little bit on iPhone demand. If I try and adjust for the drawdown in inventory and the extra week last quarter, I think sequentially iPhones declined about 27% if I make those adjustments. And that's actually quite a bit lower than the normal seasonality we would see from Q1 to Q2, which is typically closer to 20%. I understand your comments around China, but your comparison was 40 points easier this quarter relative to last quarter. And the growth rate improved only marginally, I think, when you adjust for the extra week. And then you made a final comment around a pause on iPhones. So I'm wondering if you could maybe elaborate on, was the below sequential, at least by my calculation, growth rate in Q2 attributable to a pause? And can you characterize what you think upgrade rates are doing, perhaps broadly by geography, to help us better understand what might be happening, or whether there are competitive dynamics that also are at play here that, again, might be contributing to that pause and that sequential decline that I referenced? Thank you. Timothy Donald Cook - Apple, Inc.: There are a lot of questions there. Let me give you some color as I see it. In this quarter, we reduced channel inventory by 1.2 million units. And so if you look on a year-over-year basis, which is primarily what we look at from a unit point of view because it would have the seasonality embedded in that, we grew sell-through on a year-over-year basis. Last quarter, I'm sure other folks remember, was a 14-week quarter, and so you have to adjust the rates last quarter to get at what the underlying sell-through growth was. And so I think that when you do that, you're going to find that actually the year-over-year performance is similar between the quarters. In terms of upgraders, we saw the largest absolute number of upgraders ever in any six-month period in the first half of this year, first half of this fiscal year to be precise. And we saw the largest absolute number of switchers outside of Greater China in the same period that we've ever seen. And so in four of the five operating segments, as I think Luca mentioned in his comments, we had very good growth. And it was really propelled by the demand for iPhone 7 Plus, which is growing incredibly fast around the world. And so that's kind of the color I would add there, and hopefully some of that is useful for you. Nancy Paxton - Apple, Inc.: Thank you, Toni. Could we have the next question, please? Operator : We'll go to Simona Jankowski with Goldman Sachs. Simona K. Jankowski - Goldman Sachs & Co.: Hi, thank you. I had a question for Luca first. Last year, you had a 4 million-unit channel inventory reduction for the iPhone in the June quarter. So just curious what you're expecting for this year just so we have an apples-to-apples comparison as we think about your guidance. Luca Maestri - Apple, Inc.: As you know, Simona, we do not provide guidance around units and around channel inventory reduction, but our goal is always to have the right amount of weeks of inventory in the channel. And if you look at our history over the last several years, we have fairly consistently reduced channel inventory in the June quarter, so I think it's a fair expectation to have. Simona K. Jankowski - Goldman Sachs & Co.: Thank you, and then just for Tim. Tim, you've been excited about the India market for some time and have made strides in establishing a retail, manufacturing, and R&D presence there. So just curious as you look at that market and the rollout of 4G there, is it reasonable for us to assume that Apple can sell something on the order of 10 million to 20 million iPhones there next year and then grow from there? Timothy Donald Cook - Apple, Inc.: We make it a point not to forecast by geo. We just provide a current quarter forecast. But as hopefully you've seen as we began to give you more information about India, we've been investing quite a bit. We have a ton of energy going into the country on a number of fronts, and it is the third largest smartphone market in the world today behind China and the United States. And so we believe, particularly now that the 4G infrastructure is going in the country and is continuing to be expanded, that there is a huge opportunity for Apple there. And so that and the demographics of the country is why we're putting so much energy there. Simona K. Jankowski - Goldman Sachs & Co.: Thank you. Nancy Paxton - Apple, Inc.: Thank you, Simona. Could we have the next question, please? Operator : Jim Suva with Citigroup. Jim Suva - Citigroup Global Markets, Inc.: Thank you very much and congratulations on returning to growth consistently. That's great. I believe, Tim, in your prepared comments you mentioned India was growing double digit, which is great. But I believe if you look at geographic information, India is really underpenetrated from an Apple reception perceptive, but yet they have LTE, you have the iPhone SE, a lower priced iPhone. Do you think that say this next 12 – 18 months is going be a turning point, or is it more you need to work with the government to have Apple-owned stores or production there? Or what's it really going to take to get India going along because we think it's just truly a great opportunity? Timothy Donald Cook - Apple, Inc.: We think it's a great opportunity too, and so we're bringing all the things that we brought to bear in other markets that we've eventually done well in, and that's from channel to stores to our ecosystem and so forth. Phil [Schiller] was just over there opening a developer center last quarter, and so there are a ton of things going on there. And we agree that we are underpenetrated there. Our growth rates are good, really good by most people's expectations, maybe not mine as much. And so we're putting a lot of energy in, just like we have in other geos that eventually wound up producing more and more. So I'm very excited about it. The 4G network investment really began rolling in in a significant way toward the last quarter of last year, as you know. But they are moving fast. They're moving at a speed that I have not seen in any other country in the world once they were started, and it is truly impressive. Jim Suva - Citigroup Global Markets, Inc.: Great, thanks so much for the detail. That's greatly appreciated. Timothy Donald Cook - Apple, Inc.: Yes. Nancy Paxton - Apple, Inc.: Thank you, Jim. A replay of today's call will be available for two weeks as a podcast on the iTunes Store, as a webcast on apple.com/investor, and via telephone, and the numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 3540172. And these replays will be available by approximately 5 :00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. And financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570, and I am at 408-974-5420. And thank you again for joining us. Operator : Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,017	3	2017Q3	2017Q3	2017-08-01	2.217	2.25	2.624	2.74	null	14.72	14.57	Executives: Nancy Paxton - Apple, Inc. Timothy Donald Cook - Apple, Inc. Luca Maestri - Apple, Inc. Analysts: Kathryn Lynn Huberty - Morgan Stanley & Co. LLC Shannon S. Cross - Cross Research LLC Steven Milunovich - UBS Securities LLC Kulbinder S. Garcha - Credit Suisse Securities (USA) LLC Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC Michael J. Olson - Piper Jaffray & Co. Amit Daryanani - RBC Capital Markets LLC Brian J. White - Drexel Hamilton LLC Operator : Good day, everyone, and welcome to this Apple Incorporated Third Quarter Fiscal Year 2017 Earnings Release Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am. Nancy Paxton - Apple, Inc.: Thank you. Good afternoon and thanks to everyone for joining us. Speaking first today is Apple CEO Tim Cook, and he'll be followed by CFO Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2016, the Form 10-Q for the first two quarters of 2017, and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Timothy Donald Cook - Apple, Inc.: Thank you, Nancy, and good afternoon and thanks, everyone, for joining us. Today we're proud to announce very strong results for our fiscal third quarter, with unit and revenue growth in all of our product categories. We'll review our financial performance in detail, and I'd also like to talk about some of the major announcements we made in June at our Worldwide Developers Conference. It was our biggest and best WWDC ever, and the advances we introduced across hardware, software, and services will help us to delight our customers and extend our competitive lead this fall and well into the future. For the quarter, total revenue was at the high end of our guidance range at $45.4 billion. That's an increase of 7% over last year, so our growth rate has accelerated in three successive quarters this fiscal year. Gross margin was also at the high end of our guidance, and we generated a 17% increase in earnings per share. iPhone results were impressive, with especially strong demand at the high end of our lineup. iPhone 7 was our most popular iPhone, and sales of iPhone 7 Plus were up dramatically compared to iPhone 6s Plus in the June quarter of last year. The combined iPhone 7 and iPhone 7 Plus family was up strong double digits year over year. One decade after the initial iPhone launch, we have now surpassed 1.2 billion cumulative iPhones sold. Services revenue hit an all-time quarterly record of $7.3 billion, representing 22% growth over last year. We continue to see great performance all around the world, with double-digit growth in each of our geographic segments. Over the last 12 months, our Services business has become the size of a Fortune 100 company, a milestone we've reached even sooner than we had expected. We had very positive results for iPad, with broad-based growth in units, revenue, and market share. iPad sales were up 15% year over year and grew across all of our geographic segments. We achieved our highest global market share in over four years based on IDC's latest estimate of tablet market results for the June quarter. And in markets like China and Japan, over half of iPads sold were to people buying their very first iPad. Our iPad product lineup is stronger than ever. The new iPad we launched in March offers great value and performance. And the all-new 10.5-inch iPad Pro, launched in June, features the world's most advanced display with ProMotion technology and is more powerful than most PC desktops. iPad is the perfect tool for teaching in new and compelling ways, and our iPad results were especially strong in the U.S. education market, where sales were up 32% year over year to over 1 million units. We believe that coding is an essential skill that all students should learn. We're thrilled that over 1.2 million students of all ages are now using iPad and Swift Playgrounds to learn the fundamentals of coding. And over 1,000 K-12 schools across the United States plan to use Apple's Everyone Can Code in their curricula this fall. And for high school and community college students who want to pursue careers in the fast-growing app economy, we announced app development with Swift, an innovative full-year curriculum designed by Apple engineers and educators and provided free to schools to teach students to code and design fully functional apps, gaining critical job skills in software development and information technology. I'd like to turn now to Mac, which gained global unit market share and reached new June quarter unit sales records in mainland China and Japan. Mac revenue grew 7% year over year, driven by the strength of the MacBook Pro and iMac despite IDC's latest estimate of a 4% unit contraction in the global PC market. And with the refresh of almost our entire Mac lineup in June, we're off to a great start for the back-to-school season. Sales of Apple Watch were up over 50% in the June quarter, and it's the number one selling smartwatch in the world by a very wide margin. Apple Watch is having a positive impact on people's health and daily lives and motivating them to sit less and move more. With features like built-in GPS and waterproofing, Apple Watch Series 2 is the perfect companion for hiking, running, and swimming. We're also seeing incredible enthusiasm for AirPod, with 98% customer satisfaction based on Creative Strategy's survey. We have increased production capacity for AirPods and are working very hard to get them to customers as quickly as we can, but we are still not able to meet the strong level of demand. We made some big announcements during the June quarter that I'd like to quickly review. We launched a new investment in the future through our Advanced Manufacturing Fund. We've earmarked at least $1 billion for this program, aimed at helping our manufacturing partners develop innovative production capabilities and create high-skill jobs in the United States. We believe this can lay the foundation for a new era of technology-driven manufacturing in the U.S. The first $200 million from the fund has been committed to Corning to support R&D, capital equipment needs, and state-of-the-art glass processing. And as we announced at WWDC, we have a very exciting fall ahead, with stunning advances in iOS 11, macOS High Sierra, and watchOS4. iOS 11 will make iPhones better than ever with Apple Pay peer-to peer payments, an even more intelligent and natural Siri, new expressive messages with full screen effects, richer and more powerful maps, enhanced live photos and memories and portrait mode effects, and much, much more. iOS 11 will also take the iPad experience to a whole new level, with features such as a customizable dock, Multi-Touch drag and drop, powerful new multitasking, more efficient QuickTime, and great new markup and scanning capabilities. One of the most exciting and most promising announcements from WWDC was the introduction of ARKit, a new set of tools for developers to create augmented reality apps. It's still early in the beta period, but it's clear that ARKit has captured the imagination of our developer community. We think ARKit will help the most creative minds in the industry tap into the latest computer vision technologies to build engaging content. We believe AR has broad mainstream applicability across education, entertainment, interactive gaming, enterprise, and categories we probably haven't even thought of. With hundreds of millions of people actively using iPhone and iPad today, iOS will become the world's biggest augmented reality platform as soon as iOS 11 ships. With iOS 11, we're also bringing the power of machine learning to all Apple developers with Core ML, enabling capabilities like face detection, object tracking, and natural language interpretation. Core ML lets developers incorporate machine learning technologies into their apps with all the processing done right on device, so it respects our customers' data and privacy. For Mac, we provided a peek at the immersive gaming, 3D, and virtual reality experiences made possible with the upcoming release of macOS High Sierra and the amazingly powerful new iMac Pro. We're proud to make the best personal computers in the industry and are very excited to deliver even more innovation in the months to come. Apple Watch will become more intelligent than ever this fall with watchOS4, featuring a proactive Siri watch face, personalized activity coaching, and an entirely new music experience. watchOS4 also introduces GymKit, a groundbreaking technology program to connect workouts with cardio equipment. We also previewed HomePod, a breakthrough wireless speaker for the home that delivers amazing audio quality and uses spatial awareness to sense its location in the room and adjust the audio automatically. Visitors to our listening room at WWDC were blown away by the HomePod's incredible sound, which is unlike any other wireless home speaker on the market. With deep knowledge of music, HomePod is designed to work with your Apple Music subscription to help you enjoy the music you already love as well as to discover great new music, based on your personal preferences. As an intelligent home assistant, HomePod is a great way to send messages, set a timer, get updates on news, sports, and weather, or control smart home kit devices by simply asking Siri to turn on the lights, close the shades, or activate a theme. We can't wait to deliver all of these powerful innovations in the months to come. And we might even have some others to share with you later in the year. Now for more details on the June quarter results, I'd like to turn the call over to Luca. Luca Maestri - Apple, Inc.: Thank you, Tim. Good afternoon, everyone. Revenue for the June quarter was $45.4 billion, up 7% over last year, an acceleration to the growth rate we reported during the first half of our fiscal year. We achieved these results despite a 200 basis point negative impact from foreign exchange on a year-over-year basis, as currency movements, especially in Europe and China, affected our reported results. Our performance was very strong across the board with growth in all our product categories and almost every market around the world. We achieved double-digit revenue growth in many developed markets, including the U.S., Canada, Germany, Spain, Australia, and Korea, and emerging markets outside of Greater China grew 19% over a year ago. Gross margin was 38.5%, at the high end of our guidance range. Operating margin was 23.7% of revenue and net income was $8.7 billion. Diluted earnings per share were $1.67, up 17% over last year, and cash flow from operations was $8.4 billion. During the quarter we sold 41 million iPhones and reduced iPhone channel inventory by 3.3 million units, leaving us with our lowest level of channel inventory in 2.5 years and well within our five-week to seven-week target inventory range. iPhone sales were up year-over-year in most markets we track, with many markets in Asia, Latin America, and the Middle East growing unit sales by more than 25%. We are very pleased with these iPhone results, especially considering the tough comparison to the June quarter last year when we launched iPhone SE. iPhone ASP was $606, up from $595 a year ago, thanks to strong demand for iPhone 7 Plus, which represented a higher percentage of the iPhone mix compared to the Plus model a year ago. The impact of the stronger mix on ASP was partially offset by negative foreign exchange year over year and the reduction in channel inventory, which took place entirely at the high end of the portfolio. Customer interest and satisfaction with iPhone are very strong with both consumers and business uses. In the U.S., the latest data from 451 Research on consumers indicates a 95% customer satisfaction rating for iPhone 7 and 99% for iPhone 7 Plus. Among consumers planning to buy a smartphone, purchase intention for iPhone was nearly three times the rate of our closest competitor. Among corporate smartphone buyers, iOS customer satisfaction was 94%. And of those planning to purchase smartphones in the September quarter, 78% plan to purchase an iPhone. Turning to Services, we set an all-time quarterly record of $7.3 billion, up 22% year over year. The App Store was a major driver of this performance. And according to App Annie's latest report, it continues to be by a wide margin the preferred destination for customer purchases, generating nearly twice the revenue of Google Play. Revenue from our Apple Music streaming service and from iCloud storage also grew very strongly. And across all of our Services offerings, the number of paid subscriptions reached over 185 million, an increase of almost 20 million in the last 90 days alone. The reach, usage, and functionality of Apple Pay continue to grow. We launched Apple Pay in Italy in May. And the UAE, Denmark, Finland, and Sweden are scheduled to go live before the end of this calendar year. Apple Pay is by far the number one NFC payment service on mobile devices, with nearly 90% of all transactions globally. Momentum is strongest in international markets, where the infrastructure for mobile payments has developed faster than in the U.S. In fact, three out of four Apple Pay transactions happen outside the U.S. And with the launch of iOS 11 this fall, our users in the U.S. will be able to make and receive person-to-person payments quickly, easily, and securely. Next, I'd like to talk about the Mac. Thanks to great performance from the new MacBook Pro, we generated 7% revenue growth over last year and gained share in the global PC market based on the latest data from IDC. Customer satisfaction for Mac is very strong at 97% in the most recent survey from 451 Research, and our active installed base of Mac has grown double digits over a year ago. We ended the quarter within our four to five-week target range for Mac channel inventory, and we have a great lineup of Macs for our customers heading into the busy back-to-school season. Turning to iPad, we sold 11.4 million units, up 15% over last year. We were happy to see iPad growth in each of our geographic segments, with strong double-digit increases in key markets such as the U.S., Japan, Germany, France, and Greater China. We exited the quarter within our five to seven-week target range for iPad channel inventory. NPD indicates that iPad had 55% share of the U.S. tablet market in the month of June, including 8 of the 10 best-selling tablets. That's up from 46% share a year ago. And among tablets priced over $200, iPad's share was 89%. In addition, the most recent survey from 451 Research measured business and consumer satisfaction rates ranging from 95% to 99% across iPad models. And among those planning to buy tablets, purchase intent for iPad was over 70%. Our enterprise business continues to expand, and our customers are transforming the way work gets done with iOS and iPad. Walmart will be deploying more than 19,000 iPads for employee training across 50 states, with projections of over 225,000 associates trained on iPad by the end of the year. Initial response from businesses to iOS 11 and the new iPad Pro has been amazing. And companies including Bank of America, Medtronic, and Panera tell us that they will be rolling out the 10.5-inch iPad Pro throughout key areas of their organizations. We're also seeing real traction with our enterprise partners. Just last month, we unveiled the next set of technology announcements in our partnership with Cisco. This new wave adds a whole new category of security features designed to help enterprises and employees defend against growing cyber threats. We believe this investment in our joint security solutions for iOS will make cyber insurance even more attainable for businesses. SAP is making great strides since launching the SAP cloud platform SDK for iOS in March, with a pipeline of hundreds of global opportunities. SAP has also released SuccessFactors Mobile, its first native iOS app for human resources, which will support 47 million iPhone and iPad users worldwide across multiple industries. And our partnership with Deloitte has recently expanded to several more European countries. We're helping clients transform their businesses with iOS. We jointly developed programs such as the Connected Store, a pop-up version of a retail environment, demonstrating iOS tools for sales and demand generation, as well as tailored apps for safe associates, store management, and customers. We also had a tremendous quarter for iPad in education, up 32% year over year. Following the launch of our new iPad in March, an update to our popular Classroom app, and continued enhancements to iOS that make managing iPads in the classroom even easier. The St. Paul Public School District in Minnesota is renewing its One to One program by deploying over 40,000 iPads across every student and teacher in the district. iPad was chosen because of its power and durability, ease of use, multimedia and accessibility features, and the extensive catalog of iOS apps designed specifically for education. The Shawnee Mission School District outside Kansas City recently purchased 19,000 iPads, extending its One to One program started in 2014 thanks to iPad's intuitive interface, superior reliability, and expansive ecosystem of iOS tools for education. It was a very busy quarter for our retail and online stores, which collectively welcomed over 300 million visitors. In addition to our spectacular new store at the Dubai Mall, we opened our first stores in Singapore and in Taiwan during the quarter, expanding our total store footprint to 497 stores. In May, we kicked off Today at Apple, with new in-store programming from music to photography to art and coding. And our stores collectively hosted 87,000 sessions during the quarter. As Tim mentioned last quarter, we have entered a new chapter in retail with unique and rewarding experiences for our customers and some stunning new stores coming in the near future. Let me now turn to our cash position. We ended the quarter with $261.5 billion in cash plus marketable securities, a sequential increase of $4.7 billion. $246 billion of this cash, 94% of the total, was outside the United States. We retired $3.5 billion of debt and issued the equivalent of $10.8 billion in new euro and U.S. dollar-denominated debt during the quarter, including our second green bond, bringing us to $96.4 billion in term debt and $12 billion in commercial paper outstanding. We also returned $11.7 billion to investors during the quarter. We paid $3.4 billion in dividends and equivalents and spent $4.5 billion on repurchases of 30.4 million Apple shares through open market transactions. We launched a new $3 billion ASR program, resulting in initial delivery and retirement of 15.6 million shares, and we retired 3.4 million shares upon the completion of our 10th ASR during the quarter. We have now completed $222.9 billion of our $300 billion capital return program, including $158.5 billion in share repurchases. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $49 billion and $52 billion. We expect gross margin to be between 37.5% and 38%. We expect OpEx to be between $6.7 billion and $6.8 billion. We expect OI&E to be about $500 million. And we expect the tax rate to be about 25.5%. Also today, our Board of Directors has declared a cash dividend of $0.63 per share of common stock, payable on August 17, 2017 to shareholders of record as of August 14, 2017. With that, I would like to open the call to questions. Nancy Paxton - Apple, Inc.: Thank you, Luca, and we ask that you limit yourself to one one-part question and one follow-up. Rebecca, may we have the first question, please? Operator : And that question will come from Katy Huberty with Morgan Stanley. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Yes, thanks. Good afternoon. Luca, first question for you, gross margin guidance is strong, but it did tick down from your June quarter guidance, and you also narrowed the range to 50 basis points. I wonder if you can just address. What is the driver of the sequential downtick, and what gives you confidence that you have more visibility than you did three months ago? Luca Maestri - Apple, Inc.: Katy, sequentially from 38.5% that we just reported, typically we have product transition costs during the September quarter. That's the primary driver. This happens fairly regularly for us. We also have a more difficult memory pricing environment this year than a year ago. And we think that we're going to be able to partially offset this with the positive leverage. As you've seen, we guided up sequentially in revenue. So those are the major puts and takes. In terms of the range that we use for gross margins, we have a fairly good understanding on where we are with our hedging program, and that allows us to mitigate some of the volatility there. So we felt we could guide to a slightly narrower range, which we've done occasionally in the past. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thank you, and maybe a question for both Tim and Luca. As you outlined on this call and at the Developer Conference in June, there is an unprecedented number of products that either ramped volume or launched in the back half of this year. So appreciating you only formally guide a quarter out, I wonder if there's any qualitative commentary you can provide to help us think about the back half of this calendar year and how all those new products that come into the model could impact either revenue seasonality versus past years or could impact just the costs associated with ramping that many products all at once. Thanks. Timothy Donald Cook - Apple, Inc.: Katy, as Luca mentioned, we did assume some transitional costs in our guidance for the quarter, as is typically the case. And we're looking very much forward to the product rollouts. Nancy Paxton - Apple, Inc.: Thank you, Katy. Could we have the next question, please? Operator : We'll go to Shannon Cross with Cross Research. Shannon S. Cross - Cross Research LLC : Thank you very much for taking my question. Tim, could you talk a bit about what you're seeing in China? I think obviously, there continues to be strong demand for smartphones. But perhaps mix shift, I think you brought back the iPhone 6 this quarter to be a bit more price aggressive. And then can you just talk a bit about how you see that market developing with the growth of WeChat and some of the other developments that are happening there? Thank you. Timothy Donald Cook - Apple, Inc.: Yeah. Thanks, Shannon. We were very encouraged by the results this quarter. We improved as we thought we would from the previous quarters a little more than I thought we would. If you look underneath the numbers, mainland China was actually flat year-over-year during Q3. And in constant currency terms, we were actually up 6% in mainland China. And so we're very encouraged about that. iPad grew dramatically more than the market. The Mac grew much more than the market. iPhone was relatively flat year-on-year, similar as the market was. And so we see all of those as very encouraging signs. On top of that, Services grew extremely strongly during the quarter. Hong Kong continued to drag down the total Greater China segment. But on a sequential basis, we're probably at the trough of that, which is nice. With the peg to the dollar there from a currency point of view and tourism being what it is, I don't really know when that market will come back. But what we see on the mainland is definitely much more encouraging. It's interesting to note that upgraders both for the quarter and actually for the full fiscal year to-date was our highest ever, and so that we felt very good about. In terms of WeChat, the way that I look at this is because our share – because iOS share is not nearly a majority of the market in China, the fact that a lot of people use that, it makes the switching opportunity even greater. And I think that's more the case than the risk that a lot of folks have pointed out. And so I see Tencent as one of our biggest and best developers. They've done a great job of implementing a lot of iOS features in their apps and we're looking forward to working with them even more to build even greater experiences for our mutual users in China. Shannon S. Cross - Cross Research LLC : Great. Thank you. And then can you talk a bit about the composition of the installed base of iPhones at this point, as obviously we're getting close to a refresh? Just you brought in the iPhone SE. You've obviously had strength at the high end. I'm just trying to think about what percent do you think have upgraded in the prior generation, any color you can give us on that? Timothy Donald Cook - Apple, Inc.: From an absolute quantity point of view, the upgrades for this fiscal year are the highest that we've seen. And so we feel good about that. However, if you look at it from an upgrade rate point of view instead of the absolute number, the rate is similar to what we saw with the previous iPhones, except for iPhone 6, which as we called out in the past had an abnormally high upgrade rate. We do think that based on the amount of rumors and the volume of them that there is some pause in our current numbers. And so where that affects us in the short-term, even though we had great results, it probably bodes well later on. Nancy Paxton - Apple, Inc.: Thank you, Shannon. Could we have the next question, please? Operator : Steve Milunovich with UBS. Steven Milunovich - UBS Securities LLC : Thank you. I wonder if you wanted to make any comments about switching this quarter. Timothy Donald Cook - Apple, Inc.: Sure. Switching outside of China was up year-on-year, and so we're happy with that. We continue to see people moving over to iOS and it helped with us making the results that Luca announced earlier, including the channel inventory reduction. Steven Milunovich - UBS Securities LLC : Okay, and then a government question. First of all, the President suggested that you may build three big beautiful plants. I wonder if you can comment on if that's a possibility either directly or indirectly. And then in China, I think, we all understand that you have to work within the regulations, but maybe you could comment a bit on how you feel your working relationship is with the government and if there is certain lines that you can't cross. Timothy Donald Cook - Apple, Inc.: Sure. Starting with the U.S., let me just take this question from what are we doing to increase jobs, which I think is probably where it's rooted. We've created 2 million jobs in the U.S., and we're incredibly proud of that. We do view that we have a responsibility in the U.S. to increase economic activity, including increasing jobs, because Apple could have only been created here. And so as we look at that 2 million, there are three main categories of that, and we have actions going on in each of them to further build on that momentum. The first category is app development. About three-quarters of the 2 million are app developers. And we're doing an enormous amount of things to deliver curriculum to both K-12 with Swift Playgrounds in the K-to-6 area, other curriculum as you proceed beyond grade 6 under the Everyone Can Code area. And just a couple months ago, we announced a new curriculum that's focused on community schools and community colleges, junior colleges, technical colleges, for kids that did not have coding in their elementary and high school years. And so we're excited about that because we think it could increase the diversity of the developer community and the quantity. And I think this area in general and all the things we do for the developer community will be the largest contribution that Apple can make because this is the fastest growing job segment in the country, and I think will be for quite some time. If you look at the second area, we have purchased – or we purchased last year about $50 billion worth of goods and services from U.S.-based suppliers. Some significant portion of those are manufacturing-related, and so we've asked ourselves what can we do to increase this. And you may have seen that at the beginning of the quarter, sometime in April I believe, we announced a fund, an Advanced Manufacturing Fund, that we're initially placing $1 billion in. And we've already deployed $200 million of that. And the first recipient is Corning in Kentucky, and they'll be using that money to expand the plant to make very innovative glass. And we purchase that glass and essentially export it to the world with iPhones and iPads. We think there's more of these that we can do. I think there are probably several plants that can benefit from having some investment to grow or expand or even maybe set up shop in the U.S. for the first time, so we're very excited about that. And then the third area is we have about two-thirds or so of our total employee base is in the U.S. despite only a third of our revenues being here, and we'll have some things that we'll say about that later in the year. And so that's what we're doing from a job growth point of view, and we're very, very proud of that. Now turning to China, let me comment on what I assumed is at the root of your question about this VPN issue. Let me just address that head on. The central government in China back in 2015 started tightening the regulations associated with VPN apps, and we have a number of those on our store. Essentially, as a requirement for someone to operate a VPN, they have to have a license from the government there. Earlier this year, they began a renewed effort to enforce that policy, and we were required by the government to remove some of the VPN apps from the App Store that don't meet these new regulations. We understand that those same requirements are on other app stores, and as we checked through that, that is the case. Today there are actually still hundreds of VPN apps on the App Store, including hundreds by developers that are outside China, and so there continues to be VPN apps available. We would obviously rather not remove the apps, but like we do in other countries, we follow the law wherever we do business. And we strongly believe that participating in markets and bringing benefits to customers is in the best interest of the folks there and in other countries as well. And so we believe in engaging with governments even when we disagree. And in this particular case, now back to commenting on this one, we're hopeful that over time the restrictions that we're seeing are loosened because innovation really requires freedom to collaborate and communicate, and I know that that is a major focus there. And so that's what we're seeing from that point of view. Some folks have tried to link it to the U.S. situation last year, and they're very different. In the case of the U.S., the law in the U.S. supported us, which was very clear. In the case of China, the law is also very clear there. And like we would if the U.S. changed the law here, we'd have to abide by them in both cases, that doesn't mean that we don't state our point of view in the appropriate way. We always do that. And so hopefully that's a little bit probably more than you wanted to know, but I wanted to tell you. Steven Milunovich - UBS Securities LLC : Thank you. Nancy Paxton - Apple, Inc.: Thank you, Steve. Could we have the next question, please? Operator : We'll hear from Kulbinder Garcha with Credit Suisse. Kulbinder S. Garcha - Credit Suisse Securities (USA) LLC: Thank you, a question for Tim maybe on the iPhone install base. At various points in the past you've told us the rate at which that was growing. At the end of the first half, what is that up year on year? At what rate is it growing? Can you give us some sense of that? And on upgrade rates over the longer term, there are lots of moving parts, and I get that there's I guess geographic mix shift of your base. There's many new phones that you may or may not bring out. There's how carriers promote your products. But do you think this upgrade rate is sustainable? Do you think it gets faster all the time? How should we think about the major drivers that you want to see for it? Many thanks. Timothy Donald Cook - Apple, Inc.: I think the upgrade rate is a function of many, many different things, from the size of the installed base, the age of the installed base, the product that is new at the time, the regional distribution, the upgrade plans that are in various markets around the world. And so I think there are many, many factors in that. It's not a simple thing that you can apply a set formula to or one variable or a couple of variable formula in my opinion. But I think in general, because our installed base was up strong double digit once again, there's a lot of factors that are very positive for us. And between the upgraders and the switchers that we see, and the first-time buyer category is still out there too in several countries, including some that you may not think there is, there's still a sizable base in some. Between those three areas, I think we have a lot of opportunity. Kulbinder S. Garcha - Credit Suisse Securities (USA) LLC: Thank you. Timothy Donald Cook - Apple, Inc.: Yes. Nancy Paxton - Apple, Inc.: Thank you, Kulbinder. Could we have the next question, please? Operator : Toni Sacconaghi with Bernstein. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Yes, thank you. I have one for Luca and one for Tim, please. Luca, typically in the fiscal Q4, Apple builds considerable iPhone channel inventory, like 2 million or 3 million units. You're starting from a very low point at the end of fiscal Q3, as you mentioned on the call, with the drawdown. As we think about what's embedded in your guidance for fiscal Q4 for channel inventory for iPhone, should we be expecting a normal seasonal build, or is it likely to be significantly higher given the very low starting point? Luca Maestri - Apple, Inc.: As you know, Toni, we do not guide on channel inventory. We've never done that. We are providing a fairly wide range from a revenue standpoint, so obviously that also has an impact on potential channel inventory levels. One thing that I would tell you is that we feel very good about the performance of the business right now. We think that our Services business will continue to grow well. We've got a lot of momentum on iPad and Mac because we refreshed the lineups of those products. Watch and AirPods are doing incredibly well. We're getting a lot of positive customer feedback. And I think in general, even the performance in China, Tim has mentioned it. We think that the performance will continue to improve. So those are the drivers of our guidance range for the quarter. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Okay, thanks. Tim, I was wondering if you could maybe talk a little bit about two things that you mentioned in public before. One is television, which you have described as an area of intense interest, but I don't even think there was an update on Apple TV on this call. So perhaps you can talk to us about how you're thinking about content. I know you're doing some original content creation, and how that area is evolving in your thinking. And then recently you talked about how Apple is focusing on autonomous systems for automobiles. And there has been press reports that Apple has been testing autonomous vehicles for potentially up to a year. I was wondering if you could talk a little bit more about Apple's interest in autonomous vehicles and whether self-driving is really likely to be Apple's principal focus in the near to medium-term. Timothy Donald Cook - Apple, Inc.: On the first part of your question about original content, we have done some original content. It's focused on Apple Music. Currently, we have some more that's launching in a week or so that will be made available on Apple Music. The objective of this is really twofold. One is for our own learning, given that we're new in the video space in terms of creation. And two is to give the Apple Music subscriber some exclusive content and hopefully grow our subscriber base. And we've recently hired two great folks with lots of experience in creating content like Breaking Bad and The Crown and some really top-notch content. And so we'll see how this area goes, but it is still an area of great interest. In terms of autonomous systems, what we've said is that we are very focused on autonomous systems from a core technology point of view. We do have a large project going and are making a big investment in this. From our point of view, autonomy is the mother of all AI projects. And the autonomous systems can be used in a variety of ways and a vehicle is only one. But there are many different areas of it and I don't want to go any further with that. But thank you for the question. Nancy Paxton - Apple, Inc.: Thank you, Toni. Could we have the next question, please? Operator : That comes from Mike Olson with Piper Jaffray. Michael J. Olson - Piper Jaffray & Co.: Good afternoon. I just have one question for Tim. This may be a hard question to answer in a condensed way, but how would you describe what you expect the most near-term applications will be for developers to target using ARKit? Will it be consumer iPhone and iPad applications, enterprise applications, or I guess some combination of the two? And basically, how does this come to market in the most significant way in the next few quarters as Apple becomes the largest global platform for AR as you've talked about? Thanks. Timothy Donald Cook - Apple, Inc.: Mike, that is a great question. And I could not be more excited about AR and what we're seeing with ARKit in the early going. And to answer your question about what category it starts in, just take a look at what's already on the web in terms of what people are doing and it is all over the place. From entertainment to gaming, I've seen what I would call more small business solutions. I've seen consumer solutions. I've seen enterprise solutions. I think AR is big and profound and this is one of those huge things that we'll look back at and marvel on the start of it. So I think that customers are going to see it in a variety of ways. Enterprise takes a little longer sometimes to get going. But I can already tell you there's lots of excitement in there. And I think we'll start to see some applications there as well. And it feels great to get this thing going at a level that can get all of the developers behind it, so I couldn't be more excited about it. Michael J. Olson - Piper Jaffray & Co.: Thank you. Nancy Paxton - Apple, Inc.: Thanks, Mike. Could we have the next question, please? Operator : We'll go to Amit Daryanani. Amit Daryanani - RBC Capital Markets LLC : Thanks a lot. Good afternoon, guys. I guess to start off with, on your Services segment, revenues actually I think accelerated by 400 basis points to worse than what you guys had in the first half of this year. Could you just help us understand what's driving this? Is there a way to think about ARPU in a traditional manner within that Services business versus the installed base growing? Luca Maestri - Apple, Inc.: Amit, Luca. Our Services business is very broad. We've got multiple categories in the Services business, so it's difficult to talk about ARPU in general. It doesn't make a lot of sense. The reason for the acceleration also here is multiple factors. One that is very, very important for us is the fact that the App Store, which is the largest of our Services categories, is seeing an increasingly larger amount of paying accounts. On a year-over-year basis, the number of accounts that are actually transacting and paying on the App Store is growing very, very well. It is happening for a variety of reasons. One of them, for example, is the fact that we are making it easier for customers to pay on the App Store. Outside the United States, in many markets, not every form of payment is accepted. We are making it easier all the time. We launched on Alipay, for example, in China during the December quarter. That has obviously helped a lot with the growth in the number of paid accounts. And we continue to bring more and more forms of payment in the App Store around the world. That's a big reason for that. The other reason why the number of paying accounts is growing is the fact that the quality and the quantity of content continues to improve. And so there's many more ways of experiencing games and entertainment and other apps on the store. We have other businesses like the Apple Music streaming service, which is growing very fast because we just started it a couple of years ago, so we are getting a lot of new subscribers there. Our iCloud storage business continues to grow very, very fast. So it's multiple services. The number of people transacting on our stores continues to grow. In terms of ARPU, maybe I can make a comment on ARPU specifically related to the App Store. What we're seeing and we've seen over a long period of time as we keep track of these cohorts of customers, we see that as customers get on the App Store and start spending on it, we see the spending profile is very similar across generations of customers. People tend to spend more over time. Obviously, you have different spending profiles in different geographies around the world, but in general you see that trend across the board. Amit Daryanani - RBC Capital Markets LLC : Got it, that's really helpful. And if I could just follow up, on the iPhone side, there's been a large amount of discussion in blogs and among your component suppliers that the timing this time may be somewhat different and delayed versus past. Your guide almost seems you're more excited about this iPhone launch versus historically because the sequential growth is better. So I guess beyond the fact we probably shouldn't read every blog and believe every blog, what do you think is different with this product launch or product availability through the cycle versus what you've seen historically? Timothy Donald Cook - Apple, Inc.: We have no comment on anything that's unannounced. Amit Daryanani - RBC Capital Markets LLC : Fair enough, I figured it was worth a shot. Thank you. Nancy Paxton - Apple, Inc.: Thank you, Amit. Could we have the next question, please? Operator : That will come from Brian White with Drexel. Brian J. White - Drexel Hamilton LLC : Yes. Tim, growth in the smartphone market is now crawling along at about a low single digit percentage. I know iPhone grew about 2% year over year this quarter, and it looks like you had about a mid-teens market share in units in 2016. So as we look forward maybe three to four years, do you think Apple can expand its unit market share? And if so, what will be the drivers be? And my second question is just about India, general thoughts about India in the quarter. Thank you. Timothy Donald Cook - Apple, Inc.: The answer to your first question is yes. I do think that we can grow both in units and market share. We don't predict those things, but yes, if you ask me what I think, that's what I think. And so what are the drivers? The installed base is growing. It's still growing very strongly. That will generate more upgrades over time. I feel good about our ability to convince people to switch. And where the developed markets the first-time buyer rates are down other than places like Japan perhaps, the emerging markets, we haven't even gotten started yet, really. From a revenue point of view, we had very strong growth there. Emerging markets ex-China were up 18% year on year. It was a record for us, so we see a lot of opportunity in these markets. We are investing in India. As you mentioned in your second point, we've already launched an app accelerator center. That's on top of working with the channel and looking at expanding our go-to-market in general. And we began to produce the iPhone SE there during the quarter, and we're really happy with how that's going. And so we're bringing all of our energies to bear there. I see a lot of similarities to where China was several years ago. And so I'm very, very bullish and very, very optimistic about India. Brian J. White - Drexel Hamilton LLC : Great, thank you. Nancy Paxton - Apple, Inc.: Thanks very much, Brian. A replay of today's call will be available for two weeks as a podcast on the iTunes Store, as a webcast on apple.com/investor, and via telephone. And the numbers to the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 6376964. And these replays will be available by approximately 5 :00 PM Pacific Time today. Members of the press with additional questions can contact Kristen Huguet at 408-974-2414. And financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570 and I'm at 408-974-5420. Thanks again for joining us. Operator : Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,017	4	2017Q4	2017Q4	2017-11-02	2.344	2.444	2.829	2.915	null	14.57	14.78	Executives: Nancy Paxton - Apple, Inc. Timothy D. Cook - Apple, Inc. Luca Maestri - Apple, Inc. Analysts: Kathryn Lynn Huberty - Morgan Stanley & Co. LLC Michael J. Olson - Piper Jaffray & Co. Shannon S. Cross - Cross Research LLC Steven Milunovich - UBS Securities LLC Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC Jim Suva - Citigroup Global Markets, Inc. Amit Daryanani - RBC Capital Markets LLC Brian J. White - Drexel Hamilton LLC Operator : Good day everyone and welcome to this Apple Inc. Fourth Quarter Fiscal Year 2017 Earnings Release Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am. Nancy Paxton - Apple, Inc.: Thank you, good afternoon, and thanks everyone for joining us. Speaking first today is Apple CEO Tim Cook and he'll be followed by CFO Luca Maestri, and after that we'll open the call to questions from analysts. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed periodic reports on Form 10-K and Form 10-Q, and the form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Timothy D. Cook - Apple, Inc.: Good afternoon, and thanks to everyone for joining us. As we closed the books on a very successful fiscal 2017, I have to say I couldn't be more excited about Apple's future. This was our biggest year ever in most parts of the world with all-time record revenue in the United States, Western Europe, Japan, Korea, the Middle East, Africa, Central and Eastern Europe and Asia. We had particularly strong finish this year, generating our highest September quarter revenue ever as year-over-year growth accelerated for the fourth consecutive quarter. Revenue was $52.6 billion, above the high end of our guidance range, and up 12% over last year. We generated revenue growth across all of our product categories and showed all-time record results for our Services business. As we expected, we returned to growth in greater China, with unit growth and market share gains for iPhone, iPad, and Mac. In fact, it was an all-time record quarter for Mac sales in mainland China as well as an all-time high for Services revenue. And revenue from emerging markets outside of greater China was up 40%, with great momentum in India, where revenue doubled year over year. We also had great results in enterprise and education with double digit growth in worldwide customer purchases of iPad and Mac in both markets. Gross margin for the September quarter was at the high end of our guidance range, and thanks to exceptional work by our teams, we generated record fourth quarter earnings per share of $2.07, up 24% from a year ago. iPhone sales exceeded our expectations. In the last week and a half of September, we began shipping iPhone 8 and iPhone 8 Plus to customers in more than 50 countries. They instantly became our two most popular iPhone models and have been every week since then. As we speak, the launch of iPhone X is now underway as stores open across Australia and Asia. iPhone X is packed with innovative new technologies that chart our path for the next decade, technologies like the TrueDepth camera system, Super Retina Display, and A11 Bionic chip with neural engine, which has been in development for years with a focus on deep machine learning. iPhone X enables totally new experiences like unlocking your iPhone with Face ID, taking photos with studio-quality lighting effects, or playing immersive augmented reality games. We can't wait for people to experience our vision of the future. Orders have already been very strong, and we're working to get iPhone X into customers' hands as quickly as possible. Turning to Services. Revenue reached an all-time quarterly record of $8.5 billion in the September quarter. A few quarters ago, we established a goal of doubling our fiscal 2016 services revenue of $24 billion by the year 2020, and we are well on our way to meeting that goal. In fiscal 2017, we reached $30 billion, making our Services business already the size of a Fortune 100 company. We're also delighted to report our second consecutive quarter of double-digit unit growth for iPad. Customers have responded very positively to the new iPad lineup. And with the launch of iOS 11, the iPad experience has become more powerful than ever, with great new features for getting things done like the new dock, Files app, drag and drop, multitasking and more power than most PC notebooks. The launch of iOS 11 also made iOS the world's largest platform for augmented reality. There are already over 1,000 apps with powerful AR features in our App Store today, with developers creating amazing new experiences in virtually every category of apps aimed at consumers, students and business users alike. Put simply, we believe AR is going to change the way we use technology forever. We're already seeing things that will transform the way you work, play, connect and learn. For example, there are AR apps that let you interact with virtual models of everything you can imagine, from the human body to the solar system. And of course, you experience them like they're really there. Instantly, education becomes much more powerful when every subject comes to life in 3D. And imagine shopping when you can place an object in your living room before you make a purchase, or attending live sporting events when you can see the stats on the field. AR is going to change everything. iOS 11 is also allowing developers to integrate machine learning models into their apps with Core ML. Pinterest is already using Core ML to deliver fast and powerful visual search. PadMapper uses Core ML to provide intelligent features that make it easy to find or rent your apartment. And VisualDx is even pioneering new health diagnostics with Core ML, automating skin image analysis to assist dermatologists with their diagnoses. These are just a few examples. There's so much more to come. Next, I'd like to talk about the Mac, which had its best year ever, with the highest annual Mac revenue in Apple's history. It was also the best September quarter ever, with Mac revenue growth of 25% driven by the notebook refreshes we launched in June and a strong back-to-school season. The Mac experience has become even better since the September launch of macOS High Sierra, with new technologies to make Mac more reliable, capable and responsive and lay the foundation for future innovation. Moving on now to Apple Watch. With unit growth of over 50% for the third consecutive quarter, it continues to be the best selling and most loved smartwatch in the world. We began shipping Apple Watch Series 3 just six weeks ago and customers love the new freedom of cellular. The ability to go for a run with just your Apple Watch or go for a quick errand without your phone while staying connected is a game changer. Now more than ever, Apple Watch is the ultimate device for a healthy life and is already making a big difference in our customers' lives. We're very excited about the upcoming launch of the Apple Heart Study, which will use data from Apple Watch to identify irregular heart rhythms and notify users when unusual patterns are detected. Earlier this week, we introduced watchOS 4.1, bringing 40 million songs to your wrist through Apple Music. The combination of music streaming on Apple Watch and AirPods is truly a magical experience for people on the go. We're thrilled with the momentum of these products. In fact, our entire wearables business was up 75% year over year in the fourth quarter and in fiscal 2017, already generated the annual revenue of a Fortune 400 company. Late in the September quarter, we also launched Apple TV 4K, delivering a stunning cinematic experience at home. So now users around the world can watch movies and shows in 4K HDR quality and stream live sports and news on the Apple TV app. There's already a great selection of 4K HDR titles available through iTunes and other popular video services with many more movies and shows on the way. We're also very excited about the opening of Apple Michigan Avenue two weeks ago on Chicago's riverfront. This is the first store that brings together our complete vision for the future of Apple retail, providing a welcoming place for everyone to experience our products, services and inspiring educational programs right in the heart of their city. In addition to our very popular Today at Apple programming, which is available in all Apple Stores around the world, offering daily sessions in photography, music creation, art and design, coding and entrepreneurship, Apple Michigan Avenue is partnering with local nonprofits and creative organizations to make an ongoing positive impact in that community. Also this quarter, we expanded our free App Development with Swift curriculum to more than 30 community colleges across the country. We're very excited about this initiative, and we're thrilled by the momentum we're seeing. The schools we've launched with this summer are just the beginning. Community colleges have a powerful reach into communities where education is the great equalizer, and the colleges adopting our curriculum this academic year are providing opportunity to millions of students to build apps that will prepare them for careers in software development and information technology and much more. We're incredibly enthusiastic about what our teams have accomplished this year and all the amazing products in our lineup. As we approach the holiday season, we expect it to be our biggest quarter ever. I'd like to thank all of our teams, our partners and our customers for their passion, commitment and loyalty. You've helped us make 2017 a sensational year. Now for more details on the September quarter results, I'd like to turn over the call to Luca. Luca Maestri - Apple, Inc.: Thank you, Tim. Good afternoon everyone. Revenue for the September quarter was a record $52.6 billion, up 12% over last year, and it has been great to see our growth rate accelerate in every quarter of fiscal 2017. Our terrific performance this quarter was very broad based, with revenue growth in all our product categories for the second quarter in a row and new September quarter revenue records in the Americas, in Europe and in the rest of Asia-Pacific segments. We grew double digits in the U.S., Canada, Germany, France, Italy, Spain, Korea and several other developed markets. We were especially happy to return to growth in greater China, where revenue was up 12% from a year ago and with our momentum in India, where revenue doubled year-over-year. We grew more than 30% in Mexico, the Middle East, Turkey and Central and Eastern Europe. These results have fueled overall growth of over 20% from emerging markets. Gross margin was 37.9%, at the high end of our guidance range. Operating margin was 25% of revenue and net income was $10.7 billion. Diluted earnings per share were $2.07, up 24% over last year to a new September quarter record and cash flow from operations was strong at $15.7 billion. During the quarter, we sold 46.7 million iPhones, up 3% over last year. We were very pleased to see double digit iPhone growth in many emerging markets including mainland China, the Middle East, Central and Eastern Europe, India and Mexico. We gained share not only in those markets but also in Canada, Germany, France, Italy, Spain, Sweden and Singapore, based on the latest estimates from IDC. iPhone channel inventory increased by 1.3 million units sequentially to support the launch of iPhone 8 and 8 Plus, significantly less than the increase in the September quarter a year ago. Customer interest and satisfaction with iPhone are very strong with both consumers and business users. In the U.S., the latest data from 451 Research on consumers indicates a customer satisfaction rating of 97% or higher across all iPhone models. Among consumers planning to buy a smartphone in the next 90 days, purchase intention for iPhone was 69%, more than 5 times the rate of the closest competitor with a loyalty rate for current iPhone owners of 95% compared to 53% for the next highest brand. For corporate smartphone buyers, iOS customer satisfaction was 95% and of those planning to purchase smartphones in the December quarter, 80% planned to purchase iPhone. That is the highest score for iPhone in the history of the survey. Turning to Services, we set an all-time quarterly record of $8.5 billion, up 34% year over year. Our results included a favorable one-time revenue adjustment of $640 million. On a run rate basis, excluding this adjustment, services growth of 24% was terrific and the highest that we have experienced this year. The App Store set a new all-time record, and according to App Annie's latest report, it continues to be the preferred destination for customer purchases by a wide and growing margin, generating nearly twice the revenue of Google Play. We're getting great response to the App Store's new design in iOS 11 from both customers and developers. We're seeing increases in the frequency of customer visits, the amount of time they spend in the store and the number of apps they download. The success of Apple Music also continues to build and we're seeing our highest conversion rates from customers trying the service. Revenue grew strongly once again in the September quarter and the number of paid subscribers was up over 75% year-over-year. We also saw great performance from our iCloud business with very strong double-digit growth in both monthly average users and revenue. Across all of our Services offerings, the number of paid subscriptions reached over 210 million at the end of September quarter, an increase of 25 million in the last 90 days. Apple Pay expanded to Denmark, Finland, Sweden and the UAE last month and continues to grow rapidly. Over the past year, active users have more than doubled and annual transactions are up 330%. In the U.S., 70% of leading grocery chains are now accepting Apple Pay with the recent launch of Safeway and over 5 million U.S. merchant locations will be Apple Pay enabled by the end of this year. Next, I would like to talk about the Mac, which for fiscal 2017 set a new all-time revenue record of $25.8 billion. We sold 5.4 million Macs during the September quarter, up 10% over last year and gained significant market share as the global market contracted by 1% based on IDC's latest estimate. This performance was fueled primarily by great demand for MacBook Pro and Mac revenue grew 25% to a new September quarter record. We had outstanding results all around the world with each of our geographic segments growing Mac revenue by 20% or more. We were also very happy with the success of Mac in the education market where customer purchases grew double digits year over year. It was also another great quarter for iPad. We sold 10.3 million units, up 11% over last year with strong demand for both iPad and iPad Pro and revenue grew 14%. It was great to see iPad unit and revenue growth in all of our geographic segments and particularly strong results in emerging markets, including greater China, where iPad units sales were up 25% year-over-year and India, which grew 39%. NPD indicates that iPad had 54% share of the U.S. tablet market in the September quarter, including seven of the 10 best-selling tablets. That's up from 47% share a year ago. Also, the most recent surveys from 451 Research measured customer satisfaction rates of 97% across iPad models. And among people planning to buy tablets, purchase intent for iPad was over 70% for both consumers and businesses. We are seeing great momentum with our enterprise initiatives. During the September quarter, we announced a new partnership with Accenture, who is creating a dedicated iOS practice in select locations around the world. Experts from Apple are co-locating with this team and together they'll be launching new tools and services that help enterprise clients transform how they engage with customers using iPhone and iPad. Examples include services to build new customer experiences and to facilitate iOS integration with enterprise systems to help businesses take greater advantage of data from Internet of Things platforms and to enable the smooth transfer of existing legacy applications and data to modern iOS apps. And last month, we announced a partnership with GE to reinvent the way industrial companies work by bringing GE's industrial IoT platform to iOS. The (20:37) SDK for iOS will enable developers to build native apps to drive industrial operations with more efficiency and speed than ever before. GE is also standardizing on iPhone and iPad for its global workforce of more than 330,000 employees and working with Apple, GE is developing iOS apps for both its internal and external audiences to bring predictive data and analytics to workers across a broad range of industries. Beyond our iOS devices, we are also seeing great traction for Mac in the enterprise market with all-time record customer purchases in fiscal year 2017. The September quarter was very strong for our retail and online stores, which welcomed 418 million visitors. Traffic was particularly heavy during the week of our new product announcements, up 19% over last year. Retail ran a very successful back-to-school promotion in the Americas, Europe, China and Singapore, with sales of Mac and iPad Pro up strong double digits compared to last year's program. And around the world, our stores conducted over 200,000 Today at Apple sessions during the quarter. Let me now turn to our cash position. We ended the quarter with $268.9 billion in cash plus marketable securities, a sequential increase of $7.4 billion. $252.3 billion of this cash, 94% of the total, was outside the United States. We issued $7 billion in new Canadian and U.S. dollar denominated debt during the quarter, bringing us to $104 billion in term debt and $12 billion in commercial paper outstanding. We also returned $11 billion to investors during the quarter. We paid $3.3 billion in dividends and equivalents and spent $4.5 billion on repurchases of 29.1 million Apple shares through open market transactions. We also launched a new $3 billion ASR program, resulting in initial delivery and retirement of 15.1 million shares and we retire 4.5 million shares upon the completion of our 11th ASR during the quarter. We have now completed almost $234 billion of our $300 billion capital return program, including $166 billion in share repurchases. As we move ahead into the December quarter, I'd like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. As a reminder, the December quarter in fiscal 2017 spanned 14 weeks, whereas the December quarter this year will include the usual 13 weeks. We expect revenue to be between $84 billion and $87 billion. We expect gross margin to be between 38% and 38.5%. We expect OpEx to be between $7.65 billion and $7.75 billion. We expect OI&E to be about $600 million and we expect the tax rate to be about 25.5%. Also, today our Board of Directors has declared a cash dividend of $0.63 per share of common stock, payable on November 16, 2017, to shareholders of record as of November 13, 2017. With that, I'd like to open the call to questions. Nancy Paxton - Apple, Inc.: And we ask that you limit yourself to one one-part question and one follow up. May we have the first question, please? Operator : First we'll hear from Katy Huberty with Morgan Stanley. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thank you. Congrats on the quarter. Luca, when do you expect to catch up with iPhone X demand? And given it's likely to be not in the December quarter, should we think about March as a better than seasonal revenue quarter because of that iPhone X ramp? And then I have a follow-up. Timothy D. Cook - Apple, Inc.: I'll take that, Katy. It's Tim. The ramp for iPhone X is going well, especially considering that iPhone X is the most advanced iPhone we've ever created and it has lots of new technologies in it. And so we're really happy that we were able to increase week by week what we're outputting and we're going to get as many of them as possible to the customers as soon as possible. I can't predict, at this point, when that balance will happen. And in terms of March, we obviously don't give guidance beyond the current quarter. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Okay. And then China growth returned to strong double digits, 12% up. You've talked historically about that region being more sensitive than others to form factor changes and the new iPhone X form factor was not available in September. And so should we assume that growth in that region only accelerates from here as that new product gets pushed into the market. Timothy D. Cook - Apple, Inc.: Let me talk a little bit about Q4 in China to give you a little bit of color on the results. We increased market share for iPhone, Mac and iPad during the quarter. We hit all-time revenue records for Services and for Mac for the PRC during the quarter. We've had very strong iPad revenue growth. We had double digit unit growth in iPhone and both the upgraders and Android switchers were both up on a year over year basis during the quarter, and so the results were broad based. They were pretty much across the board, as I indicated. The other thing that's happened is that the decline that we've been experiencing in Hong Kong moderated. And so it's still down year over year but less so than it was and part of that is the compare is an easier compare. And then finally, in terms of another headwind that is a little less than it was, currency has been affecting us more significantly. Last quarter in China, it affected us 1 percentage point. And so the sum of all that, I feel great about the results. We don't obviously provide geographic-specific guidance but you can see from our overall guidance, we think we're going to have a really strong quarter. Nancy Paxton - Apple, Inc.: Thank you, Katy. Could we have the next question, please? Operator : From Piper Jaffray, Mike Olson. Michael J. Olson - Piper Jaffray & Co.: Good afternoon and congrats on a strong quarter. Is there any information you can provide on how iPhone X pre-orders compared to what you saw with iPhone 8 pre-orders? And then I have a follow-up as well. Timothy D. Cook - Apple, Inc.: Michael, we never go through mix, but I would share with you that the iPhone X orders are very strong for both direct customers and for our channel partners, which as you know, are lots of carriers throughout the world. And we couldn't be more excited to get underway. And I think as of a few minutes ago, the first sales started in Australia. And I'm told we had several hundred people waiting at the store in Sydney and I'm getting similar reports from across that region. Michael J. Olson - Piper Jaffray & Co.: All right. Thanks. And we're excited about augmented reality and from your perspective, and maybe from our perspective on the outside looking in, how do we gauge the success of AR and what are some of the applications of the technology that you're most excited about today? Thanks. Timothy D. Cook - Apple, Inc.: Yes, it's a great question. The reason I'm so excited about AR is I view that it amplifies human performance instead of isolates humans. And so as you know, it's the mix of the virtual and the physical world and so it should be a help for humanity, not an isolation kind of thing for humanity. As I go through different countries as I've been traveling lately, and looking at some things in the market, other things that are coming, the very cool thing is they're all over the place. I see things that the consumer's going to love because it's going to change shopping. I see things that consumers will love on the gaming side and the entertainment side. I see business-related AR apps as well. They're going to be great for productivity and between small and large business. And I see apps that makes me want to go back to K-12 again and repeat my schooling because I think it changes the game in the classroom a lot. And so the real beauty here is that it's mainstream. And of course, Apple is the only company that could have brought this because it requires both hardware and software integration, and it requires sort of making a lot of – or giving the operating system update to many people at once. And the software team worked really hard to make that go back several versions of iPhone so that we sort of have hundreds of millions of enabled devices overnight. And so there's 1,000-plus in the App Store right now. I think this is very much like in 2008, when we fired the gun in the overall App Store. And so that's what it feels like to me, and I think it will just get bigger from here. Nancy Paxton - Apple, Inc.: Thanks, Mike. Can we have the next question, please? Operator : From Cross Research, Shannon Cross. Shannon S. Cross - Cross Research LLC : Thank you very much. A couple questions. The first, Tim, can you talk a bit about how you're thinking in terms of the lineup? You go from $340 – this is for iPhone – you go from $349 to above $1,000. And it appears that you probably sold a fair amount at the lower end. Perhaps that was just some of the switchers in China and maybe drove some of the growth in China in terms of market share. But how are you sort of thinking about what went into the guidance for the December quarter? Are you seeing really strong demand at the low end and obviously expected benefit from the X at the high end? I'm just trying to understand because you have such a broader lineup than you've had in prior years. Timothy D. Cook - Apple, Inc.: Yes. In terms of what we saw in Q4, you can probably tell from the ASP we had good success, I would say, through the different iPhones. And we've tried hard to have an iPhone that is as affordable as possible for people that really want an iPhone but may have a more limited budget. And we've got some iPhones that are really great for that market. And then we've got three new iPhones and people will look at these and decide which one they want. And this is the first time we've ever been in the position that we've had three new iPhones at once like this at the top end of the line. And it's the first time we've had a staggered launch. And so we're going to see what happens, but we put our absolutely best thinking that we have here in the guidance that Luca presented, and you can tell from that, that we're bullish. Shannon S. Cross - Cross Research LLC : Great. Thank you. And then in terms of Services, $8.5 billion, up 34%, can you talk about some of the portions of that that outperformed, how sustainable? You mentioned China in terms of significant growth in Services, but I'm just curious. That's a pretty remarkable number, so I'm curious what the drivers were. Thank you. Luca Maestri - Apple, Inc.: Yes, Shannon. It's Luca. As I mentioned in the prepared remarks, there was a $640 million adjustment and there was a one-off change. And it's important to call it out because of course it's a one-off. And so the underlying growth rate for service in the quarter was fantastic. It was 24%. It's the highest growth rate that we've had for services during fiscal 2017. So the business is going incredibly well. I would highlight maybe three of these businesses within Services at the App Store set a new all-time record. It's going incredibly well. The number of paying accounts continues to grow very strongly, and that's very, very important to us for the App Store business. Apple Music was up, subscriptions were up 75% year over year. We're getting the highest conversion rates that we've had since the launch of the service. And so we turned the corner in Music. You remember that a few years ago, we were actually declining in Music; now with the streaming service in addition to the download business, the business is growing again. And that really helps the growth rate for the entire Services business. iCloud is a service that continues to grow very strong double digits, and that's also helping. So we already become the size of a Fortune 100 company. We set a goal for ourselves to double what we did in fiscal 2016, and the trajectory is actually quite positive. Nancy Paxton - Apple, Inc.: Thank you, Shannon. Could we have the next question, please? Operator : Steve Milunovich with UBS. Steven Milunovich - UBS Securities LLC : Thank you. I wanted to try to push a little bit more on the mix. Could you comment whether the 8 Plus outsold the 8 in the quarter? There seems to be some data that suggests that. And the 451 Research survey that you're alluding to also finds that over the next 90 days, those buying an iPhone, 43% are planning on buying the X. Could you comment upon your expectations in terms of the mix going forward? And if you won't do that, perhaps you could comment a bit about your thinking in terms of pushing price elasticity. I think a couple years ago, nobody would've imagined selling a phone at this price and obviously, you're pretty confident that you can do it. Timothy D. Cook - Apple, Inc.: Obviously, I'm not going to talk about mix. That's something that we've done in the past. If you look at the 8 and 8 Plus, when we launched them, they instantly became our top two selling products. If you look at 8 Plus in particular, to provide a little color there, 8 Plus for the period of time that we can measure to date, has gotten off to the fastest start of any Plus model. That for us was a bit of a surprise, and a positive surprise, obviously. And so we'll see what happens next. As I've mentioned before, we've never had three products and it's only today that the first customers can sort of look at all three of those and I'm sure there's been some people that wanted to do that before deciding even which one. And so we'll see what happens there. But in terms of price elasticity, I think it's important to remember that a large number of people pay for the phone by month. And so if you were to go out on just the U.S., since that tends to be more of the focus of this call, you look at the U.S. carriers, I think you would find you could buy an iPhone X for $33 a month. And so if you think about that, that's a few coffees a week. It's let's say less than a coffee a day at one of these nice coffee places. The other thing to keep in mind is that many people are now trading in their current iPhone on the next iPhone. And the residual value for iPhone tends to be the highest in the industry and many people pick up $300, $350 or so for their iPhone and so that even reduces the monthly payment less. And then obviously, some carriers also have promotional things going on. And so I do think it's important to try to place it in that context. In terms of the way we price, we price to sort of the value that we're providing. We're not trying to charge the highest price we could get or anything like that. We're just trying to price it for what we're delivering. And iPhone X has a lot of great new technologies in there that are leading the industry, and it is a fabulous product and we can't wait for people to start getting it in their hands. Steven Milunovich - UBS Securities LLC : And then I wanted ask, the Street historically has been a little skeptical about continued innovation and you've suggested there is more to go. Historically, you weren't first to large screens, you weren't first to OLED. Now though, you're leading in AR, you're leading with face ID, which the all-in a year ago, as some of your guys have suggested, was kind of very reminiscent of the aggressive Apple. Is it possible going forward that you could accelerate share gains from Android because you're now in a stronger competitive position? Timothy D. Cook - Apple, Inc.: I think, Steve, we've been in a competitive position. And so I probably maybe have a different view than you do or the folks that you're quoting. There's always doubting Thomases out there. And I've been hearing those for the 20 years I've been here and suspect I'll hear about them until I retire, right. So I don't really listen to that too much. There's lots of fantastic people here and they're doing unbelievable things. And yes, I view AR as profound. Not today, not the app that you'll see on the App Store today, but what it will be, what it can be. I think it's profound and I think Apple is in a really unique position to lead in this area. Nancy Paxton - Apple, Inc.: Thank you, Steve. Could we have the next question, please? Operator : We'll go to Toni Sacconaghi with Bernstein. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Yes. Thank you. Just following up a little bit on that question, Tim. You talked a bit about providing a lot of value and that Apple sets its prices according to value. And I think given the uniqueness of the product you have with the iPhone X in particular, that makes a lot of sense. I guess the question is given the uniqueness of the value that you have in the marketplace, why shouldn't we – should we, or why shouldn't we expect gross margins to improve this cycle versus previous ones? And perhaps you can talk a little bit about how you think about pricing in the context of gross margin. And I have a follow-up, please. Luca Maestri - Apple, Inc.: Toni, I'll take that one. When – you said we price our products for the value that we deliver. We also said that every time we launch new products, the cost structures of the new products tend to be higher than the products that they replace. It's inevitable. We are adding new technologies, new features, and therefore the cost structures go up. We have a very good track record of taking those cost structures and over the life cycle of the product, we are able to bring them down. There are a lot of elements in the gross margin line that we have good control over and there are also elements that we don't control. Take for example foreign exchange, which has been a significant headwind for the company for the last three years now. Also, the mix of products that we sell into the market tends to change over time, and that also has an impact on the overall gross margin for the company. There are situations where the commodities markets are in good shape. There are situations where commodity markets can be a bit out of balance. We have a case right now around memory pricing, which is a headwind for the time being. So there's many puts and takes. The fact that our Services business is growing, it should be a positive because our Services margins tend to be accretive to company margins. So there's many puts and takes. We tend to think about maximizing gross margin dollars because we think that's the most important thing for investors at the end of the day. When we look at our track record over years, I think we've found a good balance between unit grow and gross margins and revenue, and we will continue to do that as we go forward. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Okay. Thank you for that. And then I wanted to revisit this notion of supply and demand, and I realize it's very early and you can't make predictions. I think a common investor question is, the iPhone X was made available for sale. It quickly had pushed out availability levels to unprecedented levels versus history. And so I think the really significant question is, is that initial push-out really a function of uniquely strong demand versus history or is that push-out in availability really a function of much weaker supply versus history? So it'd be really helpful. You have in the past commented on first 24-hour orders, for which there were 4 million plus for the iPhone 6 and 6 Plus. You have very often on this call talked about targeting when you think you could reach supply/demand balance. So it'd be really helpful if you could provide some context in terms of what you know, either about initial orders or about a supplies versus history that can help investors try and better understand the little data points that they're seeing in terms of availability of the device. Thank you. Timothy D. Cook - Apple, Inc.: The truth is we don't know. We've put our best estimate into the guidance, and you can see from the guidance that we are very bullish. And so, and we feel really great about the product lineup. We just sold the first units minutes ago. And so we'll see how things go. Until you get all of them out there where customers have the ability to demo and support, I think any kind of mix discussion is very much estimating. And so we put our best estimates in, but grantedly, we've never done this before. So there's no comparison here, with either the three iPhones nor the staggered launch. So we're going to learn something. Nancy Paxton - Apple, Inc.: Thank you, Toni. Could we have the next question, please? Operator : That is Jim Suva with Citigroup. Jim Suva - Citigroup Global Markets, Inc.: Thanks very much. And I'll ask my original question and follow-up at the same time because they're slightly different topics. But you'd mentioned great success in India. I believe, Tim, in your prepared comments you mentioned, I think, India doubled year over year. Based upon market analysis, it looks like Apple's still just a relatively small sliver of the pie there. So Tim, what would it take be even more successful in India? Is it a manufacturing footprint there? Is it partners? Is it more physical stores? Is it lower price points? Is it the bandwidth that has now caught up to many other countries, or how should we think about that? And then the follow-up question is on the AR/VR, where will it really show up in your income statement? Are you hoping more for hardware sales or services through the apps or where the excitement will then monetize it within Apple? Thank you. Timothy D. Cook - Apple, Inc.: In terms of India, many of the things that you mentioned are correct. Growing a market like India is a result of all of those things and doing them all well. And so it's analogous to the many years that we put into China. It's building stores. It's building channels. It's building markets. It's building the developer ecosystem. It's having the right product lineup for the market. And I feel like we're making good progress there and are gaining understanding of the market, but we still have a long way to go, which I sort of see as an opportunity instead of a problem. And I do feel great about the growth rate. And so that's India. I think it's all of those things. As you know, as I think we talked about before, we started manufacturing the iPhone SE there six, nine months ago so. And the majority of the iPhone SEs that we sold in the domestic market last quarter were manufactured there. And so we also have that going and are hoping that that winds up saving some amount of money over time and avoiding some of the compounding of taxes, et cetera. The bandwidth issue has also been an issue, but as you point out, it is being addressed and between the large carriers there with Bharti and now Jio investing the way they are, the service in India is materially better than it was just 12 months ago. So there's been a sea change there in a short period of time. So I feel good about all that, but we have a long way to go. In terms of the monetization question on AR/VR, we tend to focus first and foremost on customer experience. And so we're all about making sure the experience is great. And we think that if we get the experience right, that revenues and profits will be a result of getting that right. And so we're very much focused on the experience right now. Nancy Paxton - Apple, Inc.: Thank you, Jim. Jim Suva - Citigroup Global Markets, Inc.: Thank you so much for your details. Thank you. Nancy Paxton - Apple, Inc.: Can we have the next question, please? Operator : That will come from Amit Daryanani with RBC Capital Markets, Amit Daryanani - RBC Capital Markets LLC : Thanks a lot for taking my question, guys. I have two as well. I guess maybe to start with on gross margins. Luca, year over year revenues are going to be up high single digits at the midpoint, gross margin will be down a little. Could you just tell us what are the puts and takes on that? And are yield inefficiencies broadly much more severe this time versus what you've seen historically? Luca Maestri - Apple, Inc.: Yes. Amit, so we're guiding 38% to 38.5%. That's up 35 bps sequentially. Obviously we're getting the leverage from the larger volumes. As I mentioned, I think to Toni, we have higher cost structures every time we launch new products. So that is going to be the offset, and I mentioned particularly the impact from the memory pricing environment which is a headwind at this point. Just to size it for you, the impact of memory on our gross margin is 40 bps sequentially and 110 bps on a year over year basis. So they are meaningful impacts, and I think that is what I think probably you're referring to. Amit Daryanani - RBC Capital Markets LLC : Got it. That's really helpful. And I guess if I could just follow up on the Services line. I mean you guys talked about it a fair amount earlier, but even if you exclude the one-time gain, it looks like the back half of 2017 accelerated by 500 basis points in fiscal 2017 versus the first half of 2017. Qualitatively or quantitatively, is there a way to think about how much of this is from expanding of the installed base, which is one of the three things you mentioned I think, versus more dollar per iOS device that you see? Luca Maestri - Apple, Inc.: Yes. I think it's both. As I mentioned, particularly on the App Store, which is very important to us, the number of paying accounts has grown a lot. It's grown a lot because, as you said, the installed base has grown, but also because we have made a number of changes that have made it easier for our customers around the world to participate on the App Store and be able to transact on the App Store. We are accepting, for example, more forms of payment today than we were 12 months ago or even 6 months ago. So that's been very important. We also see that there is a typical spending curve for our customers. When they start transacting on the Store, they start at a certain level and they tend over time to get more familiar with the Store and they start to spend more. We're also now, very recently, made some changes, as you probably have seen, to the design of the App Store. And I was mentioning to you in the prepared remarks that these changes have been received very favorably. And so people now are spending more time on the Store, they download more apps, and that over time translates into monetization. But we also have other businesses that are growing very, very fast and actually accelerating. I mentioned Music. I mentioned iCloud, and so it all adds up. And as you correctly point out, our growth rate is accelerating. Nancy Paxton - Apple, Inc.: Thank you, Amit. Could we have the next question please? Operator : From Drexel Hamilton, Brian White. Brian J. White - Drexel Hamilton LLC : Yeah, Tim, I'm wondering if we take a look at mainland China and we think about iPhone 8 and iPhone 8 Plus, they've been on sale for a while now. What has been the just general response to those two new iPhones and also preorders around the iPhone X in mainland China? Timothy D. Cook - Apple, Inc.: Brian, I hate to repeat this, but we don't really disclose mix. We view it as competitive information that we want to hold tightly ourselves. In terms of the way the preorder process works in China in the channel, so not in our direct channel, but in the broader carrier channel and channel, they generally take indications of interest versus something that I would label a preorder. And so I would hesitate to even quote a number for fear it could be misconstrued. And we'll find out what the demand and where the supply and demand meet sometime in the future. I don't know when yet, but we're really excited to get going to find out. Brian J. White - Drexel Hamilton LLC : And, Tim, it's interesting that sales grew 16% sequentially. If you look at the past five years, sales were up 7% in the September quarter, so that's an average. Yet you didn't have all your iPhones in the market. So if you had to, what would you attribute that to? It's a pretty big disconnect, 16% versus an average of 7%. Timothy D. Cook - Apple, Inc.: Our emerging market performance during the quarter was very strong. And if you take China out, it's even stronger. But you can see that China rebounded. And as I'd indicated before, the China rebound was broad based across the products. And so we just had a phenomenal quarter on iPad, on the Mac, on Services, on Apple Watch, on iPhone. I mean we're literally, we're firing on all cylinders. And so that's what, that and our new products give us great confidence headed into this holiday season that this is going to be the best holiday season yet. Nancy Paxton - Apple, Inc.: Thank you, Brian. Brian J. White - Drexel Hamilton LLC : And, Tim - Nancy Paxton - Apple, Inc.: A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. And the numbers for the telephone replay are 888-203-1112 or 719-457-0820, and please enter confirmation code 2484260. These replays will be available by approximate 5 :00 p.m. Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414, and financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570, and I'm at 408-974-5420. Thank you again for joining us. Operator : Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,018	1	2018Q1	2018Q1	2018-02-01	2.517	2.586	2.997	3.085	null	14.53	14.46	Executives: Nancy Paxton - Senior Director of Investor Relations Tim Cook - Chief Executive Officer Luca Maestri - Chief Financial Officer Analysts : Shannon Cross - Cross Research Katy Huberty - Morgan Stanley Mike Olson - Piper Jaffray Toni Sacconaghi - Bernstein Laura Martin - Needham and Company Steve Milunovich - UBS Amit Daryanani - RBC Capital Markets Operator : Good day. And welcome to this Apple Incorporated First Quarter Fiscal Year 2018 Earnings Release Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead. Nancy Paxton : Thank you. Good afternoon, and thanks to everyone for joining us. Speaking first today is Apple CEO, Tim Cook and he’ll be followed by CFO, Luca Maestri. After that, we’ll open the call to questions from analysts. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocations and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed periodic reports on Form 10-K and Form 10-Q and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. And I'd like to remind that the quarter we’re reporting today included 13-weeks, whereas the quarter we reported a year ago included 14-weeks. And I’d now like to turn the call over to Tim for introductory remarks. Tim Cook : Thanks, Nancy and thanks everyone on the call, and welcome to everyone today. Before we dive into the quarter, I'd like to take a moment to talk about a significant milestone we recently crossed. Apple's active installed base reached 1.3 billion devices in January and is at an all-time high for all of our major products. 1.3 billion devices represents an astonishing 30% growth in just two years. It speaks to the strength and reliability of our products and our ecosystem, as well as the loyalty, satisfaction and engagement of our customers. It's also fueling tremendous growth in our services business, which I’ll talk about a little later in the call. Turning to the December quarter. We're thrilled to report Apple's biggest quarter ever, which set new all-time records in both revenue and earnings. We generated revenue of $88.3 billion, which is above the high-end of our guidance range, and it is up almost $10 billion or 13% over the previous all-time record we set a year ago. It's also our fifth consecutive quarter of accelerating revenue growth with double digit growth in each of our geographic segments around the world. What makes us even more remarkable is that the quarter we're reporting today was 13-weeks long, while the year ago quarter was 14-weeks. When we look at the average revenue per week in the December quarter this year compared to last year, our growth was a stunning 21%. Our growth was broad-based and a key driver was iPhone, which generated its highest revenue ever. iPhone X was the best-selling smartphone in the world in the December quarter according to Canalys, and it has been our top selling phone every week since it launched. iPhone 8 and iPhone 8 Plus rounded out the top three iPhones in the quarter. In fact, revenue for our newly launched iPhones was the highest of any lineup in our history, driving total Apple revenue above our guidance range. I want to take a moment to recognize the tremendous amount of work that went into creating iPhone X. Our teams carried out an extremely complex launch from both an engineering and operations perspective, executing an outstanding product ramp that required years of research and development; one that introduced innovative features like an edge-to-edge Super Retina Display and the TrueDepth Camera, which enables Face ID. Our customers love these new features and the new gestures like simply swiping up from the bottom, which make using iPhone even more intuitive and enjoyable. Our team has put the technology of tomorrow in our customers’ hands today, set a standard for the next decade of smartphones and we are very proud of their achievements. It was another very strong quarter for services with revenue of $8.5 billion, up 18% over last year, and we’re on pace to achieve our goal of doubling our 2016 services revenue by 2020. The number of paid subscriptions across our services offerings passed 240 million by the end of the December quarter, that’s an increase of 30 million in the last 90 days alone, which is the largest quarterly growth ever. We had an all-time record quarter for the App Store with our best holiday season ever. We’re seeing great excitement around augmented reality with customers now enjoying over 2,000 ARKit enabled app, spanning every category in the App Store. In December, when Pokémon GO released its new augmented reality features built with ARKit, it jumped the top of the App Store charts. Last week, on a stop in Toronto, I met developers who are hard at work on creative applications using ARKit from art appreciation to ecommerce, and I was very impressed with what I saw. Just four months after ARKit launched to the public, we’ve already released ARKit 1.5 in beta to developers around the world, and the response has been tremendous. Augmented reality is going to revolutionize many of the experiences we have with mobile devices. And with ARKit, we’re giving developers the most advanced tools on the market to create apps for the most advanced operating system running on the most advanced hardware. This is something only Apple can do. In addition to the App Store, several other services had a biggest quarter ever, including Apple Music, iCloud and Apple Pay, all of which saw growth in both active users and revenue. Apple Pay has reached an important milestone in the U.S. As a result of 50% year-over-year growth in merchant adoption, it’s now accepted at more than half of all American retail locations, which includes more than two-thirds of the country’s top 100 retailers. Now available in 20 markets, global Apple Pay purchase volume more than tripled year-over-year and we’re delighted to be expanding to Brazil in the coming months. Today, you can use Apple Pay to take a subway in Guangzhou, China, see a concert at London’s Wembley Stadium or buy a souvenir in Yosemite National Park. In the U.S., we launched Apple Pay Cash in December, and it’s off to a terrific start. Millions of people are already using it to send and receive money with friends and family quickly, easily and securely; to split a bill, pay someone back, or send last minute gift right from the messages app. It was our best quarter ever for the Apple Watch with over 50% growth in revenue and units for the fourth quarter in a row and strong double-digit growth in every geographic segment. Sales of Apple Watch Series 3 models were also more than twice the volume of Series 2 a year ago. Apple Watch is the most popular, smart watch in the world and gained market share during the quarter based on the latest estimates from IDC. It was the third consecutive quarter of growth for iPad revenue, thanks to the strength of both iPad and iPad Pro. Based on the latest data from IDC, we gained share in nearly every market we track with strong outperformance in emerging markets. Worldwide, almost half of our iPad sales were the first-time tablet buyers or those switching to Apple, and that’s true in some of our most developed markets, including Japan and France. In China, new and switching users made up over 70% of all iPad sales. For Mac, we launched the all new, iMac Pro in mid-December. It’s an entirely new product line designed for our Pro users who love the all-in-one design of iMac and require workstation class performance. It's the fastest, most powerful Mac ever, delivering incredible computational power, for simulation and real time 3D rendering, immersive VR and complex photography audio and video projects. Worldwide, 60% of our Mac sales were to first time buyers and switchers and in China, that number was almost 90%. We're looking forward to getting HomePod in customers’ hands beginning next week. HomePod is an innovative wireless speaker, which delivers stunning audio quality wherever its placed in the home, thanks to the advanced Apple engineered hardware and software. Together with Apple Music, HomePod gives you instant access to one of the world's largest music catalogs. And with the intelligence of Siri, it’s a powerful assistant you control through natural voice interaction. We're very happy with the initial response from reviewers who've experienced HomePod ahead of its launch, and we think our customers are going to love this new product. We believe one of the key issues of the 21st century is education. And because of that, we've strengthened our commitment and investment into initiatives like everyone can code. To find the innovators of the future, we need to nurture the students of today. Our App Development with Swift curriculum, which is available free on iBooks, has been downloaded more than 1.2 million times worldwide with almost half of those coming from here in the United States. It’s also being taught in dozens of community colleges across the country, putting practical skills in the hands of today’s jobs seekers. I was in London two weeks ago as we announced that the program was expanding to more than 70 colleges and universities in Europe. Millions of students around the world will have the opportunity to add Swift to their coding vocabulary and gain skills that are essential for today’s economy. This is an exciting time at Apple and with the best lineup of products and services we've ever had and a set of initiatives that show how business can be a force for good in the world. We could not be more excited about our future. Now, for more details on the December quarter results, I'd like to turn over the call to Luca. Luca Maestri : Thank you, Tim. Good afternoon, everyone. Our business and financial performance in the December quarter were exceptional, as we set new all-time records for revenue, operating income, net income and earnings per share. Starting with revenue, we’re reporting an all-time record, $88.3 billion, up nearly $10 billion or 13% over the prior record set last year. It is our fifth consecutive quarter of accelerating revenue growth. As you know, the December quarter a year ago spanned 14-weeks compared to 13-weeks this year, which is important to consider as we assess the underlying performance of our business this year. When we look at average revenue per week, our growth rate was even higher at 21% with growth across all product categories for the third consecutive quarter. Our results were terrific all around the world with double digit revenue growth in all our geographic segments, an all-time quarterly record in the vast majority of markets we track, including the U.S., Western Europe, Japan, Canada Australia and Korea, as well as Mainland China, Latin America, The Middle East, Central and Eastern Europe, and India. In Greater China, we were very happy to generate double digit revenue growth for the second quarter in a row and in emerging markets outside of Greater China, we saw 25% year-over-year growth. Gross margin was 38.4% at the high end of our guidance range. Operating margin was 29.8% of revenue. Our net income was $20.1 billion an all-time record, and up $2.2 billion over the last year. Diluted earnings per share were $3.89 also an all-time record and cash flow from operations was very strong of $28.3 billion. During the quarter, we sold 77.3 million iPhones, the highest number ever for a 13-week quarter. Average weekly iPhone sales were up 6% compared to December quarter last year with growth in every region of the world despite the staggered launch of iPhone X. We established all-time iPhone revenue record in nearly every market we track with double-digit growth in all of our geographic segments. iPhone ASP increased to $796 from $695 a year ago, driven primarily by the launch of iPhone X and the success of iPhone 8 and 8 Plus. We exited the December quarter towards the lower end of our target range of five to seven weeks of iPhone channel inventory with less than 1 million more iPhones in the channel compared to the December quarter a year ago, in line with our growth in average weekly unit sales. Customer interest and satisfaction with iPhone are very, very strong for both consumers and business users. The latest data from 451 Research indicates U.S. customer satisfaction ratings of 96% or higher across iPhone models. In fact, combining iPhone 8, iPhone 8 Plus and iPhone X, consumers reported an amazing 99% satisfaction rating. And among business customers planning to purchase smartphones in the next quarter, 77% planned to purchase iPhone. Our customers are also incredibly loyal with Comcast latest U.S. research, reflecting a 96% iPhone loyalty rate, the highest ever measured. Turning to services. We had a terrific quarter with revenue of $8.5 billion, up 18% year-over-year and up 27% in terms of average revenue per week; that is an acceleration to the 24% services growth run rate that we experienced in the September quarter. The App Store set a new all-time revenue record. The Store’s all-new design is off to a fantastic start with quarterly store visitors, transacting accounts and paying accounts, reaching new all-time highs. During the week beginning December 24th, a record number of customers made purchases or downloaded Apps from the App Store, spending over $890 million in that seven-day period, followed by $300 million in purchases on New Year’s day alone. And according to App Annie’s latest report, the App Store continues to be the preferred destination for customer purchases by a very wide margin, generating nearly twice the revenue of Google Play. Across all our services offerings, paid subscriptions reached $240 million with growth of 58% over last year and they were a major contributor to the overall strong growth in services revenue. As Tim mentioned, it was our best quarter ever for Apple Watch. And when we add the results from Beats and AirPods, our total revenue from wearables was up almost 70% year-over-year. In fact, wearables were the second largest contributor to revenue growth after iPhone, which is impressive for a business that started only three years ago. In total, our other products category set a new all-time record with quarterly revenue exceeding $5 billion for the first time. Next, I’d like to talk about the Mac. We sold 5.1 million Macs during the December quarter, which translates to 2% year-over-year increase in average sales per week. Mac performance was particularly strong in emerging markets with unit sales up 13% year-over-year and with all-time records in Latin America, in India, Turkey and Central and Eastern Europe. On a worldwide basis, the active install base of Macs was up double-digits year-over-year to a new record. It was also another growth quarter for iPad. We sold 13.2 million units with average iPad sales per week up 8% over last year’s December quarter. iPad sales grew strong double-digits in many emerging markets, including Latin America, the Middle East, Central and Eastern Europe and India, as well as developed markets, including Japan, Australia and Korea. The active install base of iPad has grown every quarter since its launch in 2010, and it reached a new all-time high in December, thanks to extremely high customer loyalty and large numbers of first-time iPad users. NPD indicates that iPad had 46% share of the U.S. tablet market in the December quarter, up from 36% share a year ago. And the most recent surveys from 451 Research found that among customers planning to purchase tablets within 90 days, 72% of consumers and 68% of business users planned to purchase iPads. Customer satisfaction is also very high with businesses reporting a 99% satisfaction rating for iPad. We are seeing great traction in enterprise as businesses across industries and around the world standardize on iOS. For example, Intesa Sanpaolo, one of Europe’s leading banks, has chosen iOS as the mobile standard for its entire 70,000 employee base in Italy; choosing iOS for its security, user interface, accessibility and reliability, Intesa Sanpaolo will deploy native apps to improve employee productivity in customer support, human resources, and marketing across the company. And LensCrafters, one of the largest optical retail brands in North America, will be using over 7,000 iPad Pros to enable digital eye exams and digital optical measurements in a personalized and interactive experience. We’re also rolling out a new initiative, called Apple at Work to help businesses implement employee choice programs more easily and offer Apple products company-wide. Resources from both Apple and our channel partners will enable enterprise IT and procurement teams to buy or lease Apple products more efficiently, streamline the setup of iPhone, iPad, and Mac, and deliver a seamless onboarding experience for employees. We launched the program with CDW in the U.S. last week, and we would be expanding to more channels and regions later this year. The December quarter was extremely busy for our retail and online stores, which welcomed 538 million visitors. Traffic was particularly strong during the four-weeks following the launch of iPhone X, up 46% over last year. And across the quarter, our stores conducted over 200,000 Today at Apple sessions, covering topics including photography, music, gaming, and app development, and art and design. Just last weekend, we opened our first store in Seoul, Korea and we’re looking forward to opening our first store in Austria in a few weeks. These newest openings will mark the expansion of our retail store presence to 21 countries. Let me now turn to our cash position. We ended the quarter with $285.1 billion in cash plus marketable securities, a sequential increase of $16.2 billion. $269 billion of this cash, or 94% of the total, was outside the United States. We issued $7 billion in debt during the quarter, bringing us to $110 billion in term-debt and $12 billion in commercial paper outstanding, for a total net cash position of $163 billion at the end of the quarter. We also returned $14.5 billion to investors during the quarter. We paid $3.3 billion in dividends and equivalents, and spent $5.1 billion on repurchases of 30.2 million Apple shares through open market transactions. We launched a new $5 billion ASR program, resulting in initial delivery and retirement of 23.6 million shares and we retired 3.8 million shares upon the completion of our 12th ASR during the quarter. We’ve now completed over $248 billion of our $300 billion capital return program, including $176 billion in share repurchases against our announced $210 billion buyback program with $34 billion remaining under our current authorization. Turning to taxes. Due to the recently enacted legislation in the U.S., we estimate making a corporate income tax payment of approximately $38 billion to the U.S. government on our cumulative past foreign earnings. This amount is very similar to what we had been accruing on those earnings in our financial results through fiscal year 2017. Including the $38 billion payment, we will have paid over $110 billion of corporate income tax on our total domestic and foreign earnings during the last 10 years for a cash tax rate of about 26%. Our tax rate of 25.8% for the December quarter was close to our guidance of 25.5% as the lower U.S. statutory rate from the new legislation was effectively offset by the remeasurement of deferred tax balances. As we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward looking information that Nancy referred to at the beginning of the call; we expect revenue to be between $60 billion and $62 billion; we expect gross margin to be between 38% and 38.5%; we expect OpEx to be between $7.6 billion and $7.7 billion; we expect OI&E to be about $300 million; and we expect the tax rate to be about 15%. Tax reform will allow us to pursue a more optimal capital structure for our company. Our current net cash position is $163 billion. And given the increased financial and operational flexibility from the access to our foreign cash, we are targeting to become approximately net cash neutral over time. We will provide an update to our specific capital allocation plans when we report results for our second fiscal quarter, consistent with the timing of updates that we have provided in the past. Finally, today our Board of Directors has declared a cash dividend of $0.63 per share of common stock, payable on February 15, 2018, to shareholders of record as of February 12, 2018. With that, I’d like to open the call to questions. Nancy Paxton : Thank you, Luca. And we ask that you limit yourself to one one-part question and one follow-up. May we have the first question please? Operator : Thank you. Our first question will come from Shannon Cross with Cross Research. Shannon Cross : Luca, I wanted to talk a little bit about, more about your comments on capital structure. I realize you don't want to give any specifics about what you're actually going to return in the timing. But just maybe if you can talk about how much cash you think you need to have here on the business? And then in terms of ongoing cash flow, since toe overseas cash flow no longer be encumbered, does that change your thought process, in general? And then I have a follow up. Thank you. Luca Maestri : Of course, we've been talking about the importance of tax reform over the years, because we believe it's really beneficial to the U.S. economy. What it means to us as a company of course is that, we have additional flexibility right now from the access to the foreign cash. And in the past, we've been addressing this issue by having to raise debt as the cash was overseas; the majority of the cash was overseas. And so we are now in a position where we have $285 billion of cash, we've got $122 billion of debt for a net cash of $163 billion. We have now the flexibility to deploy this capital. We will do that overtime, because the amount is very large. As I said earlier, we will be discussing capital allocation plans when we review our March quarter results. And when you look at our track record of what we’ve done over the last several years, you’ve seen that effectively we were returning to our investors essentially about 100% of our free cash flow. And so that is the approach that we’re going to be taking. We’re going to be very thoughtful and deliberate about it. Obviously, we want to make the right decisions in the best interest of our long-term shareholders. Shannon Cross : And then, Tim, maybe could you talk a little bit more about what you’re hearing from customers in terms of the iPhone demand. How you’re thinking about the potential decay rate, for lack of a better term, with the high-end phones and over $1,000 phone versus balancing that with now your ability to ship phones down below $400, because you’ve expanded the product line so much when you launched your phones in 2017? Thank you. TimCook: The revenue growth from iPhone across all the geographic segments was in the double-digits. And I think as Luca said earlier, when you change that for an average weekly sales basis, it’s actually 22%. And so it was a stellar quarter for iPhone. The iPhone X was the most popular and that’s particularly noteworthy given that we didn’t start shipping until early November, and we’re constrained for a while. The team did a great job of getting into supply demand balance there in December. But since the launch of iPhone X, it has been the most popular iPhone every week, every week sales. And that is even through today, actually through January. And so we feel fantastic about the results. The most important thing for us is that really the number, it’s customer satisfaction. And customer satisfaction is literally off the charts on iPhone X. We think about the advances in technology that were a part of the iPhone X from -- we went from Touch ID to Face ID; Face ID has been incredibly well received; the wireless charging, the edge to edge super retina display; and totally new gestures, the user experience is different. And so it’s great to get that kind of feedback. If you look at the the overall iPhone line to get to the essence of the question, I think. I looked -- I reviewed the top many markets, I’ll talk briefly about the top four. In Urban China and the U.S., the top five smartphones last quarter were all iPhones. And in Japan and the UK, six of the top seven were iPhones. And so in a market that is as large as the smartphone market is, people want some level of choice and they’re deciding which ones to buy. But we feel fantastic, particularly as it pertains to iPhone X. Operator : Next, we’ll go Katy Huberty with Morgan Stanley. Katy Huberty : Growing double-digits of such a large revenue base is impressive in itself. But if I look at March quarter guidance, it does assume a slower average weekly growth in total revenue, as well as, I think on my math, iPhone shipments when you compare it to the December quarter. So just how should we read into a modest slowdown in average weekly growth as it relates to the last question around the decay of demand around the higher priced products? Or any impact that you might be seeing from the lower-priced battery replacements or anything else in the market? And then I have a follow-up. Luca Maestri : We are guiding to $62 billion. It's a strong double-digit growth, 13% to 17%. In context, it's $7 billion to $9 billion above last year. So when you put things in perspective and you add the $10 billion of growth that we had in the first quarter and the $7 billion to $9 billion that we're guiding to for the second quarter, you're talking about $17 billion to $19 billion of growth in six months. This is at the macro level. We typically don't go into this level of detail, but think it's important this quarter to give you additional color. And maybe the two most important messages are that we believe iPhone revenue will grow double digits as compared to last year, during the March quarter. And also and importantly that iPhone sell-through growth on a year-over-year basis will be actually accelerating during the March quarter as compared to the December quarter. Let me explain the factors that we took into consideration as we came up with our iPhone units and ASP that are embedded in our guidance. Historically, because the channel fill and the holiday season, our selling volume during the December quarter is generally higher than sell-through. This year, the difference was further magnified, because we shipped iPhone X in November rather than the September quarter. We had a very successful product ramp. We were able to reach supply/demand balance in December, which placed the entirety of our channel fill for iPhone X in Q1 and this will have an effect on both units and ASP in Q2. Now, for units, there is a second point to consider. We typically reduced channel inventory for our newest iPhones in Q2, because they enjoy very large demand in the initial weeks of sales, which are compounded by the holiday season in Q1. So we anticipate doing that in Q2 this year as well. For ASPs, there's also another element that we need to consider. As you know, our newest products this year have a higher ASP than they had in the past. And so as a result, as we reduce inventories of these newest products, the overall ASPs for iPhone in Q2 will naturally decline sequentially by a higher percentage than we have experienced historically. So in summary, our guidance for iPhone; we got double digit year-over-year growth and acceleration of sell-through growth on a year-over-year basis. For the balance of the Company, in the aggregate, we expect to grow strong double-digits year-over-year and particularly very strong performance in service and in wearables like we’ve seen during the December quarter. I hope this helps. Katy Huberty : Yes, that's great color. Just a follow-up on gross margin. Guidance for flat gross margin in March is pretty seasonal, but you do have the tailwind from currency. And so if you can just comment on how you think that flows into the model over the next couple of quarters, the weaker dollar. And what your outlook might be around component costs in the near future. Thank you. Luca Maestri : Let me walk you through the sequential first. So we’re guiding about flat sequentially in spite of the loss of leverage. That is the largest element that we need to take into account because of our typical seasonality. And we expect to offset the seasonality impact with cost improvements and with mix. FX on a sequential basis is fairly muted, because as you know, we've got a hedging program that protects us from the volatility of currencies in the short term. Certainly, weaker dollar in the long term, if it holds, will be a positive but it's not something that you're going to be seeing translating to gross margin tailwind quickly. And so I think we need to keep that in mind. We also need to keep in mind that we continue to experience a difficult memory pricing environment, which we think is going to start improving as we move into the second half of our fiscal year. But it still has a negative impact in the March quarter. Operator : Mike Olson from Piper Jaffray has our next question. Mike Olson : I know you don't talk about future products, which is often presses to questions about future products and I'll give it a shot. When you think conceptually about the path for iPhone X Style devices going forward. Is there any reason the roadmap wouldn’t consists of multiple devices as we’ve seen with past iPhone upgrades? In other words, the 10 was unique amongst recent iPhone launches, because it's a singular device, potentially limiting the shots on go for upgrades given limited options. How do you think about that, going forward? And then I have a follow up. TimCook: Mike, you did a good job of answering your question. I think at the beginning, we don’t really comment on future products. But I would tell you that we’re thrilled with the reception of iPhone X. And as we said when we launched it, we were setting up the next decade. And that is how we look at it. And so that's the reason it's chockfull of incredible innovation. And so you can bet that we're pulling that string. Mike Olson : And then how you're think about AR beyond iPhone? You've created the world's largest AR platform. You've got developers generating a wide variety of apps. I realized it's still early days. But do you see Apple as a provider of a larger ecosystem of AR-enabled device beyond iPhone and iPad in the coming years? Or should investors focus on the opportunity within your existing device portfolio for at least the foreseeable future? Thanks. TimCook: I see AR as being profound. I think, AR has the ability to amplify human performance instead of isolating humans. And so I am a huge, huge believer in AR. We put a lot of energy on AR removing very fast. We've gone from ARkit 1.0 to 1.5 in just a matter of months. I couldn't be happier with the rate and face of the developer community, how faster developing these things. And I don’t want to say what we may do. But I could not be happier with how things are going right now. Operator : And next we’ll go to Toni Sacconaghi from Bernstein. Toni Sacconaghi : I have a question and follow-up. You commented on how your install based over the last couple of years has grown 30%. And iPhone is clearly the largest component of that, and so iPhone install base is probably growing close to that number perhaps last, call it 20% through 25%. Yet, if we look at iPhone unit growth for fiscal ’18 what’s implied with your guidance fiscal ’17 and fiscal ’16, it’s been relatively flat. So you have an install base that’s 20% plus higher, and a unit growth that relatively flat, which would suggest that your upgrade rate is going down or your replacement cycle is elongating. And I’m wondering whether you agree with that and whether investors should be worried about that. And maybe if I could just add one other wrinkle to potentially get your response on is. Given consumers’ heightened awareness of their ability to replace batteries going forward as opposed to upgrades. Isn’t that also something that investors should potentially be concerned about in terms of its impact on upgrade rate going forward? And then believe or not, I have a follow-up. TimCook: This is up to investors as to what things they would like to focus on, so I don’t want to put myself in the position of that. The way that I look at this and the numbers you’ve quoted have a different view of them. But generally what we see with iPhone is the reliability of iPhone is fantastic. The second or the previously owned market has expanded in units over the years. And you see in many cases, carriers and retailers having very vibrant programs around trading an iPhone in. And because iPhone has the largest residual rate on it, it acts as a buffer for the customer to buy new one and it lines up with another customer somewhere else that is perfectly fine with having a previously owned iPhone. And so I view all of that to be incredibly positive. It’s more people on iPhones the better. I would like to point out that the ever year major product hit a high on the active install base. And so that’s iPad, it’s Mac and those are huge numbers as well. And so as we’ve always said, there is a large part of the -- or the vast majority of the services are mapped to the install base instead of the quarterly sales. And this quarter is no different on that. On the battery, Toni, we did not consider in any way, shape, or form, what it would do to upgrade rates. We did it because we thought it was the right thing to do for our customers. And sitting here today, I don't know what effect it will have. And again, it’s not -- was not in our thought process of deciding to do what we've done. Toni Sacconaghi : And just a follow-up, maybe I could clarify two little things. One, Luca, on tax rate, you talked about 15% for Q2. Is that how we should think about the tax rate on an ongoing basis? And then just back to you on your response, Tim, I guess maybe you could just comment on whether you believe the upgrade rate has decreased over the last couple of years, because again, just mechanically install base is growing 20 and units are relatively flat over that period. Isn't that telling the install base is -- upgrade rate is going down, or am I not thinking about other considerations? Thank you. Luca Maestri : Toni, on the tax rate, I will make two comments. First of all, the new tax law in the United States is complex. And I think we, as many other companies, are really trying to absorb what this all means. And I think we're going to be receiving, over the next few months, implementation guidance. So we've taken some provisional estimates in coming up with our tax entries for the quarter, and we will have to do that as we go forward here during the year. So it may be a bit bumpy in the short-term as we understand the law in full, and it actually gets explained in full. But I would say that for the current fiscal year, the guidance that we provided for Q2 should be approximately what you should be seeing. As we get into new fiscal year, so many things change and we need to take that into account, the geographic mix of our products and so on. But I would say for the remainder of the year, it's what we’re guide to. Tim Cook : I think on the replacement cycle, Toni, the answer is, probably looks different by geography. In those geographies that had, in the early days of the smartphone market, had very traditional subsidies where you paid $199 out the door or $99 or whatever. I think it's accurate to save those type of markets. The replacement cycle is likely longer. Where that isn't the case, I am not nearly as sure on that. I would point out that that happened some time ago and so it's very difficult currently to ever get a real time handle on replacement rate, because you obviously not -- you don't know the replacement rate for the products you're currently selling, you only know that in an historical sense. So it's not something that we are overly fixate on. Operator : Next question comes from Laura Martin from Needham. Laura Martin : I love the 1.3 billion devices you gave us, updating from two years ago. And I’d love the onramp as you spread out the pricing. Do you get a sense that we have more unique users in that 1.3 billion than we had unique users back there in 2016? Tim Cook : Laura, I missed the first part of that, you broke up on the phone. Laura Martin : So we have 1.3 billion [technical difficulty] unique users or I mean fewer products, so we have a higher percentage of unique [users] in the 1.3 devices and more in the billion devices. Is it a [technical difficulty] are they…. Tim Cook : Laura, you're cutting in and out. But I'm going to take a swing at what I think you're asking. I think you're asking, are there more active users today than there were two years ago when we had 1 billion active devices. And the answer is absolutely, there are many, many more. Laura Martin : Yes, I was asking as a percent, the ownership. You see 1.4 billion devices owned per person. Do you think it's now 1.2 billion or 1.6 billion? Tim Cook : Well, that 1.4 billion, I don't know where that came from. It did not come from Apple. And so that's one of the things that kind of flowed out there. And I want to divorce Apple from that number. We’re not releasing a user number, because we think that the proper way to look at it is to look at active devices. It's also the one that is the most accurate for us to measure. And so that's our thinking behind there. Laura Martin : Switchers in the quarter, you often give us switchers. Tim Cook : It is so early on this product cycle, particularly with the iPhone X only starting in November that we do not feel we have data at this point that would be very meaningful to share. And so I'll pump that question until next time around. Operator : Next we'll go to Steve Milunovich from UBS. Steve Milunovich : Tim, you said you don't want to tell investors what to do. But the first point you made was talking about the size of the install base. Later you've talked about the importance of customer satisfaction. Given that this doesn't look like a super-cycle in terms of unit growth, are you nudging us to focus on the size of the install base, the annuity opportunity here? And do you have confidence that you can monetize that install base through additional hardware and services? Tim Cook : What I said on the investor part is that I think every investor has to look at their own situation and conclude the things that they think are important. What I think is important, I think the active devices are hugely important and that's the reason that we released the number two years ago, and the reason that we’re releasing that again today. That number speaks to the strength of the product the loyalty of the customer, the strength of the ecosystem. And so we do put a lot of weight behind that. And it obviously also fuels the services business. So I have long believed that on 90 day clock on unit sales is a very surface way to view Apple. I think that the far bigger thing is to look over a longer period of time. And customer satisfaction and engagement and number of active devices are all part of that. Steve Milunovich : And could you address the positioning of HomePod? What category is it in, is it a music speaker, is it a home system, since people seem to be trying to position it versus Amazon and Google’s offerings? And is the target market primarily Apple Music users? Tim Cook : HomePod is an incredible product that is a unbelievable audio experience in a very small form factor with a super digital assistant in Siri that knows an enormous amount of music. But also can handle request to like home automation to close your garage door, open your door, turn the light on, turn the fireplace on, change the thermostat, all of the things that you would like to do in home automation. But takes it further, because we think do it right from the home app instead of seeing. So you can see, hey Siri, I’m reading and your room will change to the things you would like happening in that particular room for when you read, maybe it’s a particular light, maybe it’s a type of light, maybe it’s the fireplace, so on and so forth. It also, obviously, you can also do things with HomePod like use it as a speaker phone. And so if you’re talking to your parents or they’re talking to their grand kids, its unbelievable audio quality for speaker phone. You can also have Siri call for you, you can send messages, you can get a Uber car or a Lyft car. And so there is just a whole variety of things. And so I think the use cases on this much like our phones will be broad based. Some people will use it significantly for music and others may use it significantly for as a digital assistance; and I think the majority of people will likely use all of it and use all of the functionality of it. Operator : Our next question comes from Amit Daryanani from RBC Capital Markets. Amit Daryanani : I have two questions as well. I guess first one. Could you just touch on what you’re seeing in China in terms of underlying trends, right now? I think growth was up double-digit year-over-year but essentially in line to what you saw in September. I would have thought that would have accelerated a little bit with iPhone X. Just the puts and takes in China will be great. Tim Cook : It’s a good question. Keep in mind that this year had 13 weeks, last year had 14 weeks. And so even though we were reporting a similar year-over-year growth for Greater China, if you change that reporting to an average weekly sales, which probably is much better way to look at it, there was actually a really nice acceleration. And specifically the numbers this quarter as reported are 11% increase for Greater China year-over-year but on an average weekly revenue basis, we were up 19%. Also Mainland China, we had an all-time record for revenue in Mainland China. And of course a key part of that was iPhone. And as I’ve mentioned before, Kantar reported that the top five selling smartphones in urban China were all iPhones. And so we could not be more pleased with how we're doing. And if you look at the other -- we obviously grew share for iPhone in the quarter, but we also grew share in iPad and Mac during the quarter and wearables were extremely strong there in the quarter. And so everywhere I look, I feel really good about how we're doing in China. Amit Daryanani : Luca, maybe a question for you. When you talked about reducing Apple's net cash levels to zero effectively over time, I think that implies -- the number goes from $163 billion today to something like zero. What does over time mean for Apple? Is that one year, three years, 10 years, or how do you define over time? And does this change your thoughts around M&A at all, and is that one reason to get that number from $163 billion to zero. Does it change your M&A thought process? Luca Maestri : Let me answer, Amit, starting with M&A. Our thought process around M&A has always been the same, and really doesn't change. We've been acquiring companies over the years. In calendar 2017, we've acquired 19 companies. And the thought process is always to acquire something that allows us to either accelerate our product roadmaps, filling gap in our portfolio, providing a new experience to customers. So it's always with the customer experience in mind that we make acquisitions. We look at all sizes, and we will continue to do so. We have plenty of financial flexibility, of course. We had that even prior to tax reform. And as I said, we will talk about capital allocation plans when we report at the March quarter and that will include talking about timeframes and pace and so on. And so we’ll try to be to be very thoughtful. As we said, $163 billion is a large amount and there are even practical considerations around it. So we'll see. Tim Cook : And just for clarity, let me add one thing. What Luca is saying is not cash equals zero. He's saying there's an equal amount cash and debt, and that they balance to zero. Just for clarity. Nancy Paxton : Thank you, Amit. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. And the numbers for the telephone replay are 888-203-1112 or 719-457-0820, and please enter confirmation code 4783460. These replays will be available by approximately 5 :00 p.m. Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414, and financial analysts can contact Matt Blake or me with additional questions. Matt is at 408-974-7406, and I'm at 408-974-5420. And thanks again for joining us. Operator : That does conclude our conference for today. Thank you for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,018	2	2018Q2	2018Q2	2018-05-01	2.654	2.728	3.137	3.2	3.5675	14.62	14.9	Executives: Nancy Paxton - Apple, Inc. Timothy Donald Cook - Apple, Inc. Luca Maestri - Apple, Inc. Analysts: Shannon S. Cross - Cross Research LLC Kathryn Lynn Huberty - Morgan Stanley & Co. LLC Michael J. Olson - Piper Jaffray & Co. Amit Daryanani - RBC Capital Markets LLC Steven Milunovich - UBS Securities LLC Brian J. White - Monness, Crespi, Hardt & Co., Inc. Wamsi Mohan - Bank of America Merrill Lynch Jim Suva - Citigroup Global Markets, Inc. Operator : Good day everyone, and welcome to the Apple Incorporated Second Quarter Fiscal Year 2018 Earnings Release Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am. Nancy Paxton - Apple, Inc.: Thank you. Good afternoon, and thanks to everyone for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO Luca Maestri. After that we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, share repurchases, dividends and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed periodic reports on Form 10-K and Form 10-Q and the Form 8-K filed with the SEC today, along with the Associated Press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Timothy Donald Cook - Apple, Inc.: Thank you, Nancy, and to everyone joining us, welcome. We're proud to announce the results of a very successful quarter today, setting new March quarter records for both revenue and earnings. We generated $61.1 billion of revenue. That's up 16% from last year, making it our sixth consecutive quarter of accelerating revenue growth. Our performance was broad-based, with iPhone revenue up 14%, services up 31% and wearables up almost 50%. We grew in each of our geographic segments, and in Greater China and Japan, revenue was up more than 20%. iPhone's second quarter performance capped a tremendous fiscal first half with $100 billion in iPhone revenue, an increase of $12 billion over last year, setting a new first half record and achieving our highest first half growth rate in three years. iPhone gained share during the quarter based on IDC's latest estimates for the global smartphone market. And customers chose iPhone X more than any other iPhone each week in the March quarter, just as they did following its launch in the December quarter. Since we split the line with the launch of iPhone 6 and 6 Plus in 2014, this is the first cycle in which the top of the line iPhone model has also been the most popular. Q2 was our best quarter ever for services and momentum there continues to be incredibly strong. Revenue topped $9 billion for the first time, up more than $2 billion over last year's March quarter. We had all-time record revenue from the App Store, from Apple Music, from iCloud, from Apple Pay and more, all of which are a powerful illustration of the importance of our huge active installed base of devices and the loyalty and engagement of our customers. Across all our services, paid subscriptions surpassed 270 million, up over 100 million from a year ago and up $30 million in the last 90 days alone, contributing to the overall increase in services revenue. Apple Pay continues its strong growth with active users more than doubling and transactions tripling year-over-year. We believe the availability of Apple Pay at major transit systems have been a key driver of adoption among commuters and in March, we launched Express Transit with Apple Pay in Beijing and Shanghai, the second and third largest transit systems in the world. Apple Pay is already the most successful mobile transit payment system in Tokyo, which has the busiest transit system of all. With the launch of Brazil in April, Apple Pay is now available in 21 markets and we expect Norway, Poland and Ukraine to launch in the next several months. This was another outstanding quarter for our wearables business, which includes Apple Watch, Beats and AirPods with combined revenue of almost 50% year-over-year. Looking at its revenue over the last four quarters, our wearables business is now the size of a Fortune 300 company. Apple Watch had another great quarter with revenue growing by strong double digits year-over-year to a new March quarter record. Millions of customers are using Apple Watch to help them stay active, healthy and connected and they have made it the top selling watch in the world. We launched carrier support for Series 3 with cellular in Mainland China, Hong Kong and Thailand during the quarter with more markets on the way. And now with Watch OS 4.2, there are more features than ever before. For example, in addition to tracking your workouts and heart rate, skiers and snowboarders can record runs, see vertical descent and calculate speed, as well as contribute data directly to the Apple Watch activity app. AirPods are incredibly popular and we're seeing them in more and more places, in the gym, in coffee shops, wherever people are enjoying music on their Apple devices. This product is a runaway hit, and we're working hard to meet the incredible demand. We started shipping HomePod in February, and it's widely recognized as having the best audio quality for its size and class. HomePod is a breakthrough speaker that delivers amazing sound, and we believe it will change the way people listen to music at home. It's currently available in the United States, the United Kingdom and Australia, and we're looking forward to adding new features to HomePod and introducing it to more markets around the world soon. In March, we announced new products for the education community, including updating our most popular iPad with support for Apple Pencil. It empowers students to be even more creative and productive, from learning to code to sketching ideas and jotting down handwritten notes to marking up screenshots. And the new iPad's gorgeous retina display, advanced chip and enhanced cameras and sensors are designed to support the next generation of apps for immersive augmented reality experiences in the classroom. In addition to our successful Everyone Can Code initiative, we've launched Everyone Can Create. It's a new free curriculum that makes it fun and easy for teachers to integrate drawing, music, film making or photography into their existing lesson plans for any subject. We believe education is the great equalizer. And whether it's through our coding programs, our unrivaled augmented reality platform, or the creativity both can unleash, we're proud to help students everywhere reach new frontiers of learning with Apple technology. In March, we also released iOS 11.3, a major update offering new immersive augmented reality experiences, access to personal health records in the Health app and more. Apps can now deliver AR experiences that use vertical walls and doors in addition to tables and chairs and can make – more accurately map irregular shaped surfaces. The update to ARKit that made this possible came just six months after we launched the world's largest AR platform. Also in iOS 11.3, patients in nearly 40 health systems representing hundreds of hospitals and clinics can now consolidate their medical records from multiple sources and view them all in one place, right from their iPhone. This data is encrypted and protected with the user's iPhone passcode, and it can help them better understand their health history, have informed conversations with doctors and family members, and make future health care decisions. Consistent with our long-term focus, privacy is a key element of these initiatives for education and personal health. We're relentless about making the best products and experiences in the world, while fiercely protecting our users' privacy, because we believe privacy is a fundamental human right. Our environmental initiatives recently passed an important milestone. All of our global facilities across 43 countries are now powered with 100% clean energy. We work with communities around the world to build clean power sources. Apple now has 25 renewable energy projects operational and 15 more under construction. We're also driving our supply chain to use clean energy. As of last month, 23 of our suppliers are committed to operating on 100% renewable energy. We're now halfway through our fiscal 2018 with nearly $150 billion in revenue and double digit growth in all of our geographic segments. We generated almost $34 billion in earnings in six months, and we're very bullish on Apple's future. We have the best pipeline of products and services we've ever had. We have a huge installed base of active devices that is growing across all products, and we have the highest customer loyalty and satisfaction in the industry. Our services business is growing dramatically. Our balance sheet and our cash flow generation are strong and that allows us to invest significantly in our product roadmap and still return a very meaningful amount of capital to our shareholders. Recent corporate tax reform enables us to deploy our global cash more efficiently. In the United States, we expect our direct investment in the economy to exceed $350 billion over the next five years, including $30 billion in capital expenditures. And we expect to create over 20,000 U.S. jobs at Apple over that timeframe. We're narrowing the site selection for a new U.S. campus, and we look forward to sharing more information on that later this year. Consistent with our annual cadence, today we're providing an update on our capital return program. Tax reform makes it possible for us to execute our program more efficiently, both through share repurchases and payment of dividend to the tens of millions of investors who own Apple stock either directly or indirectly from large pension funds to individuals with retirement accounts. So today, given our strong confidence in Apple's future, we're announcing a significant update to our capital return program. Our Board of Directors has approved a new $100 billion share repurchase authorization as well as a 16% increase in our quarterly dividend, effective with our next dividend payable later this month. Luca will provide more details about our program as well as a more in-depth discussion of the quarter's results. So I'll now turn the call over to him. Luca? Luca Maestri - Apple, Inc.: Thank you, Tim. Good afternoon everyone. We're very pleased to report record financial results for our March quarter with revenue growth of 16%, EPS up 30%. Starting with revenue, we generated $61.1 billion, our highest ever for a March quarter. Revenue grew in all of our geographic segments, setting new Q2 records in most countries we track. Performance was very strong in emerging markets where revenue was up 20% and we were especially pleased to see 21% year-over-year growth in Greater China, our strongest growth rate from that segment in 10 quarters. We also set Q2 revenue records in the Americas, in Europe and in Japan. Gross margin was 38.3%, essentially flat sequentially, as we offset the seasonal loss of leverage with cost improvements and a shift in mix toward services. Operating margin was 26% of revenue. Net income was $13.8 billion, up $2.8 billion over last year and a March quarter record. Diluted earnings per share were $2.73, up 30% to a new record for Q2, and cash flow from operations was very strong at $15.1 billion. iPhone revenue grew 14% year-over-year, with iPhone ASP increasing to $728 from $655 a year ago, driven primarily by the performance of iPhone X, iPhone 8 and iPhone 8 Plus. During the quarter we sold 52.2 million iPhones, up 3% over last year, and we grew iPhone units by double digits in several markets including Japan, Canada, Switzerland, Turkey, Central and Eastern Europe, Mexico and Vietnam. Our performance from a customer demand standpoint was even stronger than our reported results, as we reduced iPhone channel inventory by 1.8 million units, 600,000 units more than the March quarter reduction last year. We exited the March quarter within our target range of five to seven weeks of iPhone channel inventory. Our customers are extremely happy with their iPhones. The latest survey of U.S. consumers from 451 Research indicates that across all iPhone models, the customer satisfaction rating was 95%, and combining iPhone 8, 8 Plus and iPhone X, customer satisfaction was even higher, at 99%. And among business buyers who plan to purchase smartphones in the June quarter, 78% plan to purchase iPhones. Turning to services. We had a sensational quarter with all-time record revenue of $9.2 billion, and that's up more than $2 billion from last year, an increase of 31% and double the services revenue we generated in the March quarter just four years ago. Our services business is growing at a very fast pace all around the world, with revenue up more than 25% year-over-year in each of our five geographic segments. The App Store set a new all-time revenue record in the March quarter and Apple Music reached a new record for both revenue and paid subscribers, which have now passed 40 million. iCloud storage revenue was up by over 50% year-over-year to a new all-time record, and AppleCare revenue grew at its highest rate in five quarters, setting a new March quarter record. Our other product category also set a new record for the March quarter with revenue of almost $4 billion. We began shipping HomePod in February and unit sales of both Apple Watch and AirPods reached a new high for the March quarter. When we combine all our wearables and home products, they accounted for over 90% of the total growth in the other products category. Next, I'd like to talk about the Mac which set a new March quarter revenue record including new records in both the Americas and Greater China. We sold 4.1 million Macs, generating year-over-year growth in many emerging markets including Latin America, the Middle East and Africa, Central and Eastern Europe and India. We were happy to see double digit growth in our active installed base of Macs to a new all-time high, with almost 60% of March quarter purchases coming from customers who are new to Mac. iPad grew both units and revenue for the fourth consecutive quarter. We sold 9.1 million iPads and about half of purchases were by customers new to iPad. Growth was particularly strong in Japan, in Latin America, Middle East and Africa and Central and Eastern Europe. All markets where iPad sales were up double digits compared to a year ago. We gained share of the global tablet market based on the latest estimates from IDC and our active installed base of iPads reached an all-time high. NPD indicates that iPad has 53% of the U.S. tablet market in the March quarter, up from 40% share a year ago. And the most recent customer survey from 451 Research measured iPad customer satisfaction ratings of 95% and among business customers who plan to purchase tablets in the June quarter, 73% plan to purchase iPads. We continue to make great strides in the enterprise market. In February, we announced a new cyber risk management solution for businesses with Cisco, Aon and Allianz. This combined approach is an industry first that integrates the most secure technology from Apple and Cisco, cyber resilience evaluation services from Aon and options for enhanced cyber insurance coverage from Allianz. Organizations will now be able to better manage and protect themselves from cyber risks associated with ransomware and other malware-related threats. We are thrilled that insurance industry leaders recognize that Apple products provide superior security. In March, we announced two new services with IBM to bring more dynamic and intelligent insights into apps. IBM Watson services for Core ML and IBM Cloud Developer Console for Apple will enable developers to more easily build native iOS apps that bring together machine learning with artificial intelligence and cloud services. In healthcare, iPhones are being used across leading health systems including Cedars-Sinai, the Mayo Clinic and HCA Healthcare with iOS apps to support clinical workflows, communications and care delivery. In fact, HCA Healthcare recently announced they plan to deploy 100,000 iPhones across their hospital sites within the next three years. We had great performance from our retail and online stores which produced their highest March quarter revenue ever. Year-over-year growth was led by iPhone as well as strong performance from AirPods and introduction of HomePod. Our stores hosted more than 250,000 of our very popular Today at Apple sessions with a particular emphasis on coding and app design. During the quarter, we opened beautiful new stores in South Korea and in Austria, our first in both countries, and three weeks ago we opened our newest store in Tokyo, bringing us to 502 stores across the world today. Let me now turn to our cash position. We ended the quarter with $267.2 billion in cash plus marketable securities, and we had $110 billion in term debt and $12 billion in commercial paper outstanding for a net cash position of $145 billion. We returned nearly $27 billion to investors during the quarter. We paid $3.2 billion in dividends and equivalents and spent $23.5 billion on repurchases of 137 million Apple shares through open market transactions. We also retired 5.7 million shares upon the completion of our 13 ASR during the quarter. We have now completed over $275 billion of our current $300 billion capital return program, including $200 billion in share repurchases against our cumulative $210 million buyback program. We will complete the $210 billion program during the June quarter, three full quarters sooner than initially planned. The biggest priorities for our cash have not changed over the years. We want to maintain the cash we need to fund our day-to-day operations, to invest in our future, and to provide flexibility so that we can respond effectively to the strategic opportunities we encounter along the way. As we said 90 days ago, the new tax legislation enacted in December gives us increased financial and operational flexibility from the access to our global cash. It allows us to invest for growth in the United States more efficiently and it also provides us the opportunity to work towards a more optimal capital structure. As we said in February, our goal is to become approximately net cash neutral over time. Given our strong confidence in Apple's future and the value that we see in our stock, our board has authorized a new $100 billion share repurchase program which we will start executing during the June quarter. Considering the unprecedented size of this new authorization, we want to be particularly thoughtful and flexible in our approach to repurchasing shares. Our intention is to execute our program efficiently and at a fast pace. As in the past, we will provide regular updates on our capital return activities at the end of every quarter. We're also raising our dividend for the sixth time in less than six years. As we know, it is very important for our investors who value income. The quarterly dividend will grow from $0.63 to $0.73 per share, an increase of 16%. This is effective with our next dividend which the board has declared today, payable on May 17, 2018, to shareholders of record as of May 14, 2018. With over $13 billion in annual dividend payments, we are proud to be among the largest dividend payers in the world and we continue to plan for annual dividend increases going forward. We will continue to review our capital allocation regularly, taking into account the needs of our business, our investment opportunities, and our financial outlook. We will also continue to solicit input on our program from a broad base of shareholders. This approach will allow us to be flexible and thoughtful about the size, the mix and the pace of our program. We expect to provide a new update to our capital allocation plans approximately 12 months from now. As we move ahead into the June quarter, I'd like to review our outlook which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $51.5 billion and $53.5 billion. We expect gross margin to be between 38% and 38.5%. We expect OpEx to be between $7.7 billion and $7.8 billion. We expect OI&E to be about $400 million. And we expect our tax rate to be about 14.5%. With that, I'd like to open the call to questions. Nancy Paxton - Apple, Inc.: Thank you, Luca. And we ask that you limit yourself to one one-part question and one follow up. May we have the first question, please? Operator : Your first question will come from Shannon Cross with Cross Research. Shannon S. Cross - Cross Research LLC : Thank you very much. I wanted to ask about your thoughts on sort of iPhone and positioning now that we're a couple of quarters out from the launch of the iPhone X. Given the $1,000 price point, and it's clearly selling but there's been a lot of questions in the market about sustainability of that price point and how you're thinking about it as you look out sort of holistically across your lineup. So if you could talk a bit about what you're hearing from your customers and then I have a follow up. Thank you. Timothy Donald Cook - Apple, Inc.: Sure. Shannon, it's Tim. As Luca mentioned earlier, our revenues are up 14% year-over-year on iPhone and that's a combination of single digit unit growth and ASP growth that is mainly driven by iPhone X. I think that our iPhone line shows that there's a variety of different customers in a market that is as large as a smartphone market and so we're going to continue to provide different iPhones for folks to meet their needs. On iPhone X specifically, I think it's important to maybe emphasize again one of the things I mentioned in my opening comments, that customers chose iPhone X more than any other iPhone each and every week in the March quarter, just as they did following its launch in the December quarter. Also, since we split the line with the launch of iPhone 6 and 6 Plus back in 2014, this is the first cycle that we've ever had where the top of the line iPhone model has also been the most popular. And so with the customer set that Luca referenced as well, the 99%, the iPhone X is a beloved product. And so I think that it's one of those things where like a team wins the Super Bowl, maybe you want them to win by a few more points but it's a Super Bowl winner and that's how we feel about it. I could not be prouder of the product. Shannon S. Cross - Cross Research LLC : Okay. Thank you. And then, Luca, can you talk a bit about working capital, specifically inventory which went up pretty significantly quarter-over-quarter? What's driving that and how are you thinking about, I mean, it's one of the uses of cash obviously, so how are you thinking about inventory and maybe working capital in general as you're going forward? Luca Maestri - Apple, Inc.: Yeah, Shannon, you know that we've always generated significant amount of cash through working capital. We've got a negative cash conversion cycle and we plan to continue to have that. Our inventory level has gone up. It's just a temporary event. We have decided to make some purchasing decision, given current market conditions, and that should unwind over time. Shannon S. Cross - Cross Research LLC : So that was essentially component purchases? Luca Maestri - Apple, Inc.: Correct. Nancy Paxton - Apple, Inc.: Thank you. Shannon. Shannon S. Cross - Cross Research LLC : Okay. Thank you very much. Nancy Paxton - Apple, Inc.: Can we have the next question, please? Operator : From Morgan Stanley, Katy Huberty. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thank you. Good afternoon. The services growth acceleration is really the highlight this quarter in my mind. Can you talk about what the biggest drivers, whether it be products or regions that drove the acceleration and do you think that we can continue to see growth north of 30%? And then I have a follow-up. Timothy Donald Cook - Apple, Inc.: Hi, Katy. It's Tim. The services grew 31%. We hit an all-time record at $9.2 billion, first time we cleared $9 billion. The great news about it is, it's not a single geo or a single service. If you look at it, each of the geos, the minimum was at 25%. So each of the geos did extremely well and we set records from the App Store to the Apple Music to iCloud to Apple Pay and more. And underneath that, if you look at the subscriptions, the number of subscriptions, I think I mentioned this in my comments, paid subscriptions had moved up over 100 million on a year-over-year basis to over 270 million by the end of the quarter. And so it's very broad-based in terms of type of service and geographic region. It's sort of exactly what we would like to see. In terms of forecasting moving forward, we've obviously made assumption for our guidance that Luca provided earlier and in terms of longer term, we're on target to our 2020 goal of doubling the services revenue of 2016 as we had talked about previously. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: And it doesn't look like the threat of a trade war with China slowed down that business. In fact, growth accelerated. But anything anecdotally that you see in the business in recent weeks that would suggest that that is having an impact on demand and any actions that Apple is taking as a company to preempt any risk of tariffs going forward? Timothy Donald Cook - Apple, Inc.: Yeah, I think my own view is that China and the U.S. have this unavoidable mutuality where China only wins if the U.S. wins and the U.S. only wins if China wins and the world only wins if China and the U.S. win. And so I think there's lots of things that bind the countries together and I'm actually very optimistic. I think history shows us that countries that embrace openness and diversity do much, much better than the ones that are closed. And so I'm a big believer that the two countries together can both win and grow the pie, not just allocate it differently. And so that's our focus, and I'm optimistic that – I don't know every play by play that will happen, but over time, I think that view will prevail. Nancy Paxton - Apple, Inc.: Thank you, Katy. Could we have the next question, please? Operator : And that will come from Mike Olson with Piper Jaffray. Michael J. Olson - Piper Jaffray & Co.: Hey. Good afternoon, and thank you for taking my question. Just following on the services question, I'd be curious what the next drivers of services revenue are. Will it be continued penetration of Music and Pay that you see as kind of the largest future categories of incremental growth? Or maybe when could augmented reality become a material part of services? And then I have a follow up. Timothy Donald Cook - Apple, Inc.: Well, Mike, it's Tim. Again, the great thing about services is there are several services that make up the total that are growing nicely. And I think the other good news is that because our active installed base is at such a level, that last quarter we said that we had exceeded 1.3 billion. This year – we're not going to release this number every quarter, but we've obviously grown again. And it's growing at a double digit number on a year-over-year basis. And so with that kind of change in the installed base and with the services that we have now and others that we are working on, I think this is just a huge opportunity for us and feel very good about the track that we're on. Michael J. Olson - Piper Jaffray & Co.: Okay. And then any potential tariff issues aside, what's working for Apple in China right now? You talked about it being the strongest year-over-year growth in 10 quarters. I guess, what's driving that? Is it iPhone X specifically, or something else that's behind that improvement? Thank you. Timothy Donald Cook - Apple, Inc.: It's a good question. iPhone X was the most popular smartphone in all of China last quarter. And so iPhone X has done well there. In order to hit a number like 21% on the growth that you see on your data sheet there, there has to be several things working well. And the things that have huge growth rates there are the other products category, which is our wearables business in China and the services business, which you and I just spoke about. The iPhone obviously had to do extremely well to get a 21% number. And we gained share in the market for the Mac as well. And so there's actually several vectors there that are working well for us. We also – more broadly on the iPhone, the iPhone was the top three selling phones in China. And so it's iPhone X was number one, but we had several in the top. Nancy Paxton - Apple, Inc.: Thanks, Mike. Could we have the next question, please? Operator : From RBC Capital Markets, Amit Daryanani. Amit Daryanani - RBC Capital Markets LLC : Thanks a lot. Two questions from me as well. I guess first one, just touching on the gross margin dynamics, if I look at the guidance for June on a year-over-year basis, I think sales are up double digit but gross margins are still flat at the high end, maybe down 20 basis points at the midpoint. Can you just talk about what's driving the lack of leverage on a gross margin basis on a year-over-year basis for June? Luca Maestri - Apple, Inc.: Yeah, Amit, it's Luca. We tend to look at our gross margin dynamics on a sequential basis, and essentially we're guiding to about flat on a sequential basis. On a year-over-year basis, it's less relevant for our business. But in general, I would say that this year we are seeing a more difficult cost environment, particularly we're still dealing with about 70 basis points of impact from the memory pricing environment that we're working through. Amit Daryanani - RBC Capital Markets LLC : Got it. And if I could just follow up. Tim, you've been fairly vocal I think talking about the need for better privacy protection and well-crafted regulation over time. Could you just maybe help us understand, how does Apple protect consumer data? And how does this ongoing debate around data protection translate into a positive for Apple over time? Timothy Donald Cook - Apple, Inc.: We protect it by encrypting it, and we keep the bulk of information or a significant amount of information on the device so that the user is in control of it. We also collect much less overall than others do. Because if you look at our model, if we can convince you to buy an iPhone or an iPad, we'll make a little bit of money. You're not our product. And so that's how we look at that. In terms of benefit, we don't really view it like that. We view that privacy is a fundamental human right and that it's an extremely complex situation if you're a user to understand a lot of the user agreements and so forth. And we've always viewed that part of our role was to sort of make things as simple as possible for the user and provide them a level of privacy and security. And so that's how we look at it. Nancy Paxton - Apple, Inc.: Thank you, Amit. Could we have the next question, please? Operator : We'll go to Steve Milunovich with UBS. Steven Milunovich - UBS Securities LLC : Great. Thank you. Luca, could you talk a bit more about the capital allocation? The dividend increase of 16% was relatively low relative to what you could have done, so are you really thinking the stock price is attractive here? And you said you would execute the buyback at a fast pace. Can you give us any timeframe of that $100 billion and how much debt do you think about in terms of net cash zero? Luca Maestri - Apple, Inc.: Yes. Let's start with the dividend. We're increasing it by 16%. This is the largest increase that we've done since we've reintroduced the dividend back in August of 2012. So we think it's a very meaningful increase for all the investors that value income. Obviously, when we come down to capital allocation decisions, we obviously also keep in mind that the opportunity for us to do some M&A activities which we do in an ongoing basis. But when it comes down between dividends and buyback, our view is that for a variety of reasons we see a lot of value in the stock. We believe the stock is undervalued and so we have a bias towards the buyback. So the dividend is a very large component of capital return because we're going to be returning more than $13 billion a year to investors through dividends but we believe that given where we are with the valuation of the stock, we think that we continue to do the buyback primarily. We are not giving an end date to the program this time because the amount is very, very large and so we will try to execute it. As you've seen from our track record during the last five years, we will do it at a very fast pace but we also want to do it efficiently. We want to make sure that we buy back the stock at the right time. And so with that in mind, we have done $23.5 billion of repurchases during the March quarter. We will give you an update to our activities at the end of every quarter and then 12 months from now we will actually talk about an update to the entire program. So you will be able to keep track of our progress every 90 days. Steven Milunovich - UBS Securities LLC : Thank you. And, Tim, could you talk a bit about your healthcare opportunity? Is it merely selling watches over time or do you think more broadly about it? Is there a services play? You're doing some things for your employees. Could that potentially broaden out? How do you think about the opportunity there? Timothy Donald Cook - Apple, Inc.: We think about it very broadly and you can tell that a bit by some of the things that we've had going with ResearchKit and CareKit and most recently the health records that I had referenced in my initial comments and those all came out of getting significantly engaged in the Apple Watch and sort of pulling the strings, so to speak. And we also have a heart study that is going on currently, and so I don't want to give too much away. But it's an area of great interest where we think we can make a big difference in. And so it's a major strategic thrust of ours. Nancy Paxton - Apple, Inc.: Thanks, Steve. Could we have the next question, please? Operator : We'll go to Brian White with Monness, Crespi. Brian J. White - Monness, Crespi, Hardt & Co., Inc.: Yes, Tim, I think there is China numbers are actually phenomenal in the quarter and third consecutive quarter of growth. I think there's been a lot of concerns just Apple in China and maybe misinformation out there. But what do you see as the drivers for Apple in both Mainland China and Greater China over the next few years? And also if you could just give us an update on what you're seeing in India. Timothy Donald Cook - Apple, Inc.: Yeah, good question. Let me start with India, and then I'll talk more about China. India, we set a new first-half record. So we continue to put great energy there and try to – our objective over time is to go in there with all of our different initiatives from retail and everything else. And so we're working toward those things. It's a huge market and it's clear that many people will be moving into the middle class over time, as we've seen in other countries. China, I continue to believe is a phenomenal country with lots of opportunity from a market point of view, but also lots of opportunity from a app developer point of view. We have almost 2 million application developers in China that are writing apps for iOS and the App Store, and they're doing unbelievably creative work and innovative work. So we look at China holistically, not only as a market. On the market side, we've seen iPhone X, as I had mentioned before, as being the top selling smartphone during the quarter. We gained share during the quarter. I read some notes here and there about the market itself not being good. I think on any kind of, on a 90-day clock, lots of different things can happen. But my own personal view of China is that it's a great market, and we are certainly looking far beyond 90 days and feel very bullish on the opportunity and the environment there. I would say that the market for us is more than iPhone. The Mac gained share there as well. The Watch is getting some traction there. Services is doing extremely well. And so it has several catalysts and I'm very pleased with the results that we were able to show during the quarter. Brian J. White - Monness, Crespi, Hardt & Co., Inc.: Great. Thank you. Nancy Paxton - Apple, Inc.: Thanks, Brian. Could we have the next question, please? Operator : Next we'll hear from Wamsi Mohan with Bank of America Merrill Lynch. Wamsi Mohan - Bank of America Merrill Lynch : Thank you. Good afternoon. Tim, can you comment on the price elasticity of demand at the high end for iPhones, if that was in line with your expectations? Do you have a preference for unit growth versus ASP growth when it comes to maximizing that gross profit dollar growth? And I have a follow-up for Luca, please. Timothy Donald Cook - Apple, Inc.: We price for the value that we're delivering, and iPhone X is the most innovative product on the market. And I've said a few times, we have there sort of jam-packed with technologies that really set up the smartphone for the next decade. And so that's how we priced it. We were surprised somewhat that through all of this period of time that the iPhone X winds up at the most selling, most popular for every week of the time since the launch. And so that's I think a powerful point. And it's number one in China, which is another powerful point. And so obviously at some point if those technologies move to lower price points and that there's probably more unit demand. But the way we think about it is trying to price a reasonable price for the value that we deliver and I feel that we did that. Wamsi Mohan - Bank of America Merrill Lynch : Thank you, Tim. And, Luca, your gross margins have been very robust despite the headwinds that you absorbed on commodities, which you quantified, and frankly, also from the FX hedges that are limiting somewhat the FX upside that a lot of other companies are seeing. So as you, one, when do you expect these to turn into tailwinds? And when they do turn into tailwinds, would you consider reinvesting some of those into pricing or should we think about you flowing those through to the bottom line? Luca Maestri - Apple, Inc.: Well, Wamsi, I think, let me start with where we are right now. I think you're right. I think we've been able to navigate a difficult foreign exchange environment for a number of years and now, as you know, because we have this hedging program as the dollar has weakened a bit in recent months, although during the last week it's actually started to turn the other way again, we've got the hedging program that works both ways. And also on the memory front, we feel that for NAND, we're going to be turning the corner very soon. For DRAM, we also think that we are near the peak, possibly at the end of this year. And so that should provide some level of stability. As I said earlier this year, I think we are experiencing in total a more difficult cost environment and so hopefully that can turn into a positive for us. At the same time, it's very difficult for me to give you an indication of what is going to happen in the future because every product cycle is different, and as you know, we don't provide guidance past the current quarter. There are some elements that we understand quite well and we tend to manage well over the course of the cycle. For example, our cost structures that we are able to manage throughout the year. But there are also elements that are not entirely under our control like foreign exchange. And the mix of products and services that we sell to our customers also has an impact on the overall gross margin. Our primary consideration is always around maximizing gross margin dollars, and that is the approach that we take around for example pricing decisions. Nancy Paxton - Apple, Inc.: Thank you, Wamsi. Could we have the next question, please? Operator : From Citi, we'll hear from Jim Suva. Jim Suva - Citigroup Global Markets, Inc.: Thank you very much. And I'll ask actually both my questions at the same time, one for Tim and one for Luca. Tim, strategically when we talk to investors they often say, oh, iPhone market is saturated. There's not much room for growth. Yet when we do our analysis, we kind of still see emerging markets like India and all those still are growth. When you think about India and those markets, do you kind of believe that some of those markets could get to much higher or a more normalized market share that you have in some of the developing countries over time? And can you talk a little bit about some of those efforts you may be doing? And then, Luca, on the question for you, is about the gross margin. When we think about if component prices start to stabilize, seeing how Apple services have been so successful and accretive to margins, should we start to look for some potential margin, gross margin upside, again should components stabilize? Thank you, gentlemen. Timothy Donald Cook - Apple, Inc.: Yeah, Jim, thanks for the question. In terms of the – let me address the smartphone market a bit and then I'll mention iPhone. In terms of the market in general, if you look at last year, which is the last data point we have on the full market, there were still 0.5 billion feature phones sold in the world. And so many of those were sold into emerging markets, not all of them, but many of them. And we still believe that over time every phone sold will be a smartphone. And so it seems to us that with that many feature phones being sold, that's a pretty big opportunity. In terms of the iPhone itself, even though we sell quite a few phones across the course of a year, our market share globally is low compared to the – our sales are low compared to the full market of smartphones. And so our task is to convince people that currently – or have another type of phone to switch, while really taking care of people that have an iPhone so that they choose – when they elect to buy another phone, that they buy another iPhone. And so we've spent quite a bit of time on that, as you might guess. I do think that India, India is the third largest smartphone market in the world. There's obviously huge opportunities there for us, and we have extremely low share in that market overall. And so we're putting a lot of energy there and working with the carriers in that market, and they're investing enormously on the LTE networks. And the infrastructure has come quite a ways since we began to put a lot of energy in there because of their leadership and so forth. And so I do think – I don't buy the view that market's saturated. I don't see that from a market point of view or – and certainly not from an iPhone point of view. I think the smartphone market is sort of like the best market for a consumer product company in the history of the world and – but that's how I feel about it. It's a terrific market, and we're very happy to be a part of it. Luca Maestri - Apple, Inc.: Jim, on the gross margin side, I think I'll repeat what I said earlier, but you're right. Our services business, and I've said it in the past, is accretive to company margins. And so as we are able to grow the services business, that should provide a positive, a tailwind. At the same time, within the services portfolio that we have, we have services that have different levels of profitability, so we also need to take into account the mix of services that we're going to be selling. At a macro level, because about two-thirds of our company is outside the United States, a weak dollar is a positive for our gross margins; a strong dollar, as it's been during the last four years, has been a bit of a headwind for the company. We try to make it more stable through the hedging program. And in general, when we look at our process to innovate our products, typically when we launch a new product, that product tends to have a higher cost structure than the product it replaces. And so that is something that we need to work through every time we launch a new product and we have a pretty good track record and history of taking those cost structures down over time. So we need to balance all these different elements. I think we've done a pretty remarkable job during the last several years at managing all these different variables and coming out with a level of gross margins that we think is really good for investors and certainly it is our plan to continue to manage them that way. But it's very difficult for me to give you a prediction of where gross margins are going to be six months or 12 months from now. Nancy Paxton - Apple, Inc.: Thank you, Jim. Jim Suva - Citigroup Global Markets, Inc.: Thank you for the details and congratulations. Timothy Donald Cook - Apple, Inc.: Thank you. Nancy Paxton - Apple, Inc.: A replay of today's call will be available for two weeks on Apple Podcast, as a webcast on apple.com/investor and via telephone. And the numbers for the telephone replay are 888-203-1112 or 719-457-0820 and please enter confirmation code 5253762. These replays will be available by approximately 5 :00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact Matt Blake or me with additional questions. Matt is at 408-974-7406, and I'm at 408-974-5420. Thanks again for joining us. Operator : Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation, and you may now disconnect.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,018	3	2018Q3	2018Q3	2018-07-31	2.827	2.94	3.296	3.42	4.08154	15.24	15.96	Executives: Nancy Paxton - Apple, Inc. Timothy Donald Cook - Apple, Inc. Luca Maestri - Apple, Inc. Analysts: Kathryn Lynn Huberty - Morgan Stanley & Co. LLC Shannon S. Cross - Cross Research LLC Brian White - Monness, Crespi, Hardt & Co., Inc. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC Laura Martin - Needham & Co. LLC Operator : Good day and welcome to the Apple Incorporated Third Quarter Fiscal Year 2018 Earnings Conference Call. Today's call is being recorded. At this time for opening remarks and introductions I'd like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead. Nancy Paxton - Apple, Inc.: Thank you. Good afternoon and thanks to everyone for joining us. Speaking first today is Apple CEO Tim Cook and he'll be followed by CFO Luca Maestri. After that we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, share repurchases, dividends and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently-filed periodic reports on form 10-K and form 10-Q and the form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective date. I'd now like to turn the call over to Tim for introductory remarks. Timothy Donald Cook - Apple, Inc.: Thank you, Nancy, and thanks to everyone for joining us. Today we're proud to report our best June quarter revenue and earnings ever thanks to the strong performance of iPhone, services and wearables. We generated $53.3 billion in revenue, a new Q3 record. That's an increase of 17% over last year's result, making it our seventh consecutive quarter of accelerating growth, our fourth consecutive quarter of double-digit growth and our strongest rate of growth in the past 11 quarters. Our team generated record Q3 earnings per share of $2.34, an increase of 40% over last year. We're extremely proud of these results and I'd like to share some highlights with you. First, iPhone had a very strong quarter. Revenue was up 20% year-over-year and our active installed base grew by double-digits, driven by switchers, first time smartphone buyers and our existing customers whose loyalty we greatly appreciate. iPhone X was the most popular iPhone in the quarter once again, with a customer satisfaction score of 98% according to 451 Research. Based on the latest data from IDC, iPhone grew faster than the global smartphone market, gaining share in many markets including the U.S., Greater China, Canada, Germany, Australia, Russia, Mexico and the Middle East and Africa. Second, we had a stellar quarter in services which generated all-time record revenue of $9.5 billion fueled in part by double-digit growth in our overall active installed base. We feel great about the momentum of our services business and we're on target to reach our goal of doubling our fiscal 2016 services revenue by 2020. Our record services results were driven by strong performance in a number of areas and I'd like to briefly mention just some of these. Paid subscriptions from Apple and third parties have now surpassed $300 million, an increase of more than 60% in the past year alone. Revenue from subscriptions accounts for a significant and increasing percentage of our overall services business. What's more, the number of apps offering subscriptions also continue to grow. There are almost 30,000 available in the App Store today. The App Store turned 10 years old this month and we set a new June quarter revenue record. The App Store has exceeded our wildest expectations, igniting a cultural and economic phenomenon that has changed how people work, learn and play. Customers around the world are visiting the App Store more often and downloading more apps than ever before. And based on third party research estimates, the App Store generated nearly twice the revenue of Google Play so far in 2018. The app economy is thriving and thanks to the App Store, it's generating jobs for tens of millions of people around the world. Our developers have earned over $100 billion from the App Store since its launch and we couldn't be more proud of them and what they've accomplished. We're hearing lots of developer excitement around our upcoming OS releases, which I'll talk about more in a moment, and can't wait to see what they can come up with next. We've experienced rapid growth in our App Store search ad service and as we announced earlier this month, we are expanding our geographic coverage to Japan, South Korea, France, Germany, Italy and Spain. We're also seeing strong growth in many of the other services as well. Just a few examples, Apple Music grew by over 50% on a year-over-year basis. AppleCare revenue grew at its highest rate in 18 quarters, partly due to our expanded distribution initiative. Cloud services revenue was also up over 50% year-over-year. Our communications services are experiencing record usage. We've hit all-time highs for both the number of monthly active users of Messages and the number of FaceTime calls made with growth accelerating from the March to June quarters. Siri requests have already exceeded 100 billion so far this fiscal year, and the number of articles read on Apple News more than doubled year-over-year. Apple Pay continues to expand with well over 1 billion transactions last quarter, triple the amount from just a year ago, with growth accelerating from the March quarter. To put that tremendous growth into perspective, this past quarter, we completed more total transactions than great companies like Square and more mobile transactions than PayPal. Apple Pay is now live in 24 markets worldwide with over 4,900 bank partners and we look forward to adding Germany later this year. We're excited to share that in the U.S., eBay is beginning to enable its sellers to accept Apple Pay and CVS Pharmacy and 7-Eleven will roll out Apple Pay acceptance in locations nationwide this fall. Transit is another important area of growth and Apple Pay can be used with iPhone and Apple Watch to quickly and conveniently ride public transit in 12 metropolitan areas. Apple Pay Cash, our peer-to-peer payment service, is already serving millions of customers across the U.S. less than eight months following its launch. Our third highlight of the quarter is the outstanding results in wearables which comprises Apple Watch, AirPods and Beats and was up over 60% year-over-year with growth accelerating from the March quarter. Our wearables revenue exceeded $10 billion over the last four quarters, a truly remarkable accomplishment for a set of products that has only been in the market for a few years. Apple Watch delivered record June quarter performance with growth in the mid 40% range, and we're thrilled to see so many customers enjoying AirPods. It reminds me of the early days of iPod when I started noticing white earbuds everywhere I went. A number of other notable events in the quarter, we expanded distribution of HomePod to three additional markets and we added new immersive listening features with support for HomePod stereo pairs and a new multi-room audio system. In June, we hosted an extremely successful developers' conference that previewed many major advances coming this fall to our four operating systems, iOS, macOS, watchOS and tvOS. Developer and customer reaction has been very positive and we have over 4 million users participating in our new OS beta programs. Starting with iOS 12, Siri will take a major step forward with Siri Shortcuts, which deliver a new, much faster way to get things done and allow any app to work with Siri. We believe this will make Siri even more useful and significantly expand its adoption. We've also designed performance improvements across iOS 12 to make everyday tasks faster and more responsive. Camera launches up to 70% faster. The keyboard appears up to 50% faster and apps can launch up to twice as fast. We've always been about empowering users to get the most from our product, but not about spending all of their time using them and so we're adding tools to iOS 12 to help our customers understand and take control of the time both they and their families spend interacting with their iOS devices. Activity reports will provide information on the amount and nature of time spent on iPhones and iPads and screen time will enable parents to monitor and limit their children's activity from their own iOS devices using Family Sharing in iCloud. Developers will be able to build even more intelligent apps with just a few lines of code using the power of machine learning with Core ML 2 and Create ML. We've also included our third release of ARKit in only one year. With ARKit 2, iOS 12 will provide an even more powerful platform to make dynamic AR apps, integrating shared and persistent AR experiences, object detection and image tracking. We believe AR can enable profound experiences and Apple is uniquely positioned to provide the best AR experience because of the seamless integration of our hardware and software. The new capabilities of ARKit 2 will build on the potential of the thousands of AR apps already available in the App Store that are changing the way iPhone and iPad users see and experience the world. Turning to Mac, we want to empower our developers to bring their innovative apps from the iOS ecosystem to the Mac with minimal effort. Though iOS and macOS are different, they've shared common foundations from the very beginning, so we've taken key frameworks from iOS and adapted them to specific Mac behaviors like using a mouse or track pad, resizing windows, copy and paste and drag and drop. We've started with some of our own apps, so this fall, News, Stocks, Voice Memos and Home will be available on the Mac for the first time with macOS Mojave and we'll be bringing these great new tools to our developers next year. We believe this will dramatically broaden the ecosystem to benefit all Mac users, creating even more great reasons to choose Mac. Also this fall, the Mac App Store is getting a full redesign with rich editorial content to help customers discover great Mac apps from our developers. We believe privacy is one of the most important issues of the 21st century and we're always working to make our products more private and more secure for our users. As we announced at WWDC, beginning this fall, Safari will prevent share buttons and comment widgets on webpages from tracking users without their permission. Safari already protects personal data as users browse the web so they won't be re-targeted by ads. For Apple Watch, users will see a significant expansion of features and functionality in watchOS 5. Apple Watch will become an even stronger companion for fitness, communication and quick access to information with features including new workouts, activity sharing competitions, auto workout detection, advanced running features, walkie-talkie, podcast and third party apps on the Siri watch face. For Apple TV, we've seen major growth in sales since the introduction of Apple TV 4K last fall as video providers around the world choose Apple TV 4K to deliver their subscription services. Later this year, Charter Communications will begin offering Apple TV 4K to its customers in nearly 50 million U.S. households, providing access to live channels and tens of thousands of on-demand programs via the Spectrum TV app on Apple TV 4K, iPhone and iPad. And tvOS will take the cinematic experience of Apple TV 4K to the next level this fall with support for Dolby Atmos audio and new features to easily find popular shows and movies. Apple TV 4K already offers customers the largest collection of 4K HDR movies and this fall, iTunes will be the home to the largest collection of Dolby Atmos-supported movies anywhere. I'm proud that our team's hard work has an impact even beyond these innovative industry-leading products and services. We're always working to leave the world better than we found it and as part of our commitment to address climate change and increase the use of renewable energy in our supply chain, we recently announced a first of its kind investment fund in China. Initially, 10 suppliers will join us in investing nearly $300 million over the next four years into the China Clean Energy Fund. The fund will invest in and develop clean energy projects totaling more than 1 gigawatt of renewable energy in China, the equivalent of powering nearly 1 million homes. We're seeing great momentum in our Everyone Can Code and Everyone Can Create initiatives. More than 5,000 schools and community colleges are now teaching Everyone Can Code and more than 350 schools have committed to incorporating Everyone Can Create into their curricula for the upcoming school year. Coding skills are opening doors for students and job seekers around the world as tremendous growth in the app economy creates opportunity everywhere we look. We're also teaming up with leading educators for blind and deaf communities across the United States who will start teaching Everyone Can Code this Fall. Looking ahead, we couldn't be more excited about the products and services in our pipeline as well as limitless applications for augmented reality and machine learning technology. We're working with key partners in the enterprise to change the way work gets done with iOS and Mac. We're welcoming communities and offering learning opportunities at our retail locations through hundreds of thousands of Today at Apple sessions each quarter. We're expanding our reach into emerging markets and seeing strong double-digit growth in revenue and we're making great progress toward our goal of significantly expanding our services business. And now, for more details on the record June quarter results, I'd like to turn the call over to Luca. Luca Maestri - Apple, Inc.: Thank you, Tim. Good afternoon everyone. We're very pleased to report the financial results of our best June quarter ever. As we have done in every quarter this fiscal year, we set new quarterly records for both revenue and earnings per share, with revenue up 17% year-over-year and EPS up 40%. We generated $53.3 billion of revenue with year-over-year growth in all of our geographic segments and new June quarter records in the Americas, Europe, Japan and rest of Asia Pacific. We grew in each of our top 15 markets, with especially strong performance in the U.S., Hong Kong, Russia, Mexico, the Middle East and Africa, all places where revenue was up by more than 20%. Gross margin was 38.3%, flat sequentially, as cost improvements and foreign exchange offset the seasonal loss of leverage. Net income was $11.5 billion, up $2.8 billion or 32% over last year and it was also a new June quarter record. Diluted earnings per share were $2.34, up 40% and also a new record for the June quarter and cash flow from operations was very strong at $14.5 billion. iPhone revenue grew 20% year-over-year with iPhone ASP increasing to $724 from $606 a year ago, driven by the strong performance of iPhone X, iPhone 8, iPhone 8 Plus across the world. During the quarter, we sold 41.3 million iPhones, with double-digit unit growth in several markets including the U.S., Canada, Germany, Switzerland, Mexico, Hong Kong, Russia, the Middle East and Africa. Our performance from a customer demand standpoint was stronger than our reported results as we reduced iPhone channel inventory by 3.5 million units during the quarter. We exited the June quarter towards the lower end of our target range of 5 to 7 weeks of iPhone channel inventory. Customer satisfaction with iPhone continues to be outstanding and is the highest in the industry. The latest survey of U.S. consumers from 451 Research indicates that across all iPhone models, customer satisfaction was 96% and combining iPhone 8, 8 Plus and iPhone X, it was even higher at 98%. And among business buyers who plan to purchase smartphones in the September quarter, 81% plan to purchase iPhones, up 3 points from the last survey. Turning to services, we had our best results ever with all-time record revenue of $9.5 billion. Services revenue included a favorable $236 million one-time item in connection with the final resolution of various lawsuits. Excluding this amount, services revenue was still an all-time record and the underlying growth rate of our services business was a terrific 28% over last year. We generated double-digit services growth in all our geographic segments and the App Store, AppleCare, Apple Music, cloud services and Apple Pay all set new June quarter records. Our other product category also set a new record for the June quarter with revenue of over $3.7 billion. That's up 37% from last year with great sales momentum for both Apple Watch and AirPods. Apple Watch continues to be the best selling smartwatch by a wide margin and units and revenue grew dramatically during the quarter. AirPods continue to be a runaway success and we've been selling them as fast as we can make them since their launch a year and a half ago. Next, I'd like to talk about the Mac. We were very happy to see double digit year-over-year growth in our active installed base of Macs to a new all-time high with nearly 60% of purchases during the quarter coming from customers who are new to Mac. Our year-over-year sales performance was impacted by the different timing of the MacBook Pro launch which did not occur until early Q4 this year as opposed to June last year, with the subsequent channel fill during the June quarter. Even with a difficult launch comparison, we saw great momentum in many emerging markets, with growth well into double digits and we established new June quarter records for Mac sales in India, Turkey, Chile and Central and Eastern Europe. iPad unit sales grew for the fifth consecutive quarter and we gained significant share of the global tablet market based on the latest estimates from IDC. We recorded double digit iPad unit growth in both our Greater China and rest of Asia Pacific segments with a new June quarter record for iPad sales in Mainland China. Almost half of iPad purchases in the quarter were by customers new to iPad and our active installed base of iPads reached a new all-time high. Our overall performance compared to last year was impacted by the introduction of new iPad Pro models in June of last year which resulted in both a different mix with higher ASPs and channel sale a year ago. NPD indicates that iPad has 60% share of the U.S. tablet market in the June quarter, up from 51% share a year ago. And the most recent consumer survey from 451 Research measured iPad customer satisfaction ratings of 94%, and among business customers who plan to purchase tablets in the September quarter, 75% plan to purchase iPads. We continue to make great strides with enterprise customers across multiple industries. For example, financial services institutions are increasingly using iPads to deploy digital signature solutions for customer consent, compliance requirements, new account openings and services transactions. In the railway industry, businesses around the world are using iPhone and iPad to support operations, training, passenger engagement and maintenance activities. And leading global automotive companies are deploying iPads in dealerships for sales enablement and end-to-end customer service management and are choosing iPhone as the standard mobile device for their employees around the world. More and more companies are giving their teams a choice when it comes to the devices they use at work and enterprises including Salesforce and Capital One are deploying Macs based on employee preference. In fact, at Salesforce, the majority of their 35,000 employees are using Macs and companies tell us that Mac has been instrumental in helping them attract and retain talent while providing strong security, streamlined deployment, workflow and significantly lower total cost of ownership. We're also seeing great interest in Business Chat, our powerful new way for organizations to connect with customers. Business Chat lets customers get answers to questions, resolve issues and complete transactions directly from within Messages by starting a conversation on their iPhone or iPad and even continue the conversation on their Mac or Apple Watch. DISH Network is making Business Chat available to customers across the U.S. to enhance the customer service experience for pay TV. Customers can instantly reach a live agent with their questions, make account changes, schedule an appointment, or order a pay-per-view movie or sporting event, all without leaving the Messages conversation. And Citizens Bank Park, home of the Philadelphia Phillies, is testing Business Chat with Aramark to handle beverage holders during games. Fans simply use their iPhone camera to scan a QR code on the back of their seats taking them directly to a Business Chat conversation in Messages. From there, they can order drinks, pay quickly and securely with Apple Pay and have them delivered directly to their seats without missing a moment of on-field play. Our retail and online stores had a great quarter thanks to very strong growth from iPhone, AirPods and Apple Watch and the expansion of HomePod to Canada, France and Germany. Our stores hosted more than 250,000 of our very successful Today at Apple sessions. We continue to add content across all Today at Apple topics including popular new sessions on music and photography. We opened our 50th retail store in Greater China during the quarter and we just opened a beautiful new store in Milan this month, bringing the number of stores located outside the U.S. to 46% of the total. Let me now turn to our cash position. We ended the quarter with $243.7 billion in cash plus marketable securities. We retired $6 billion of debt during the quarter, leaving us with $102.6 billion in term debt and $12 billion in commercial paper outstanding for a net cash position of $129.1 billion. As we explained in February, we plan to reach a net cash neutral position over time. We returned almost $25 billion to investors during the quarter, including $3.7 billion in dividends and equivalents. We repurchased $20 billion worth of Apple shares of which $10 billion related to the completion of our previous $210 billion buyback program and $10 billion to the beginning of the new $100 billion authorization we announced three months ago for a total of 112.8 million shares repurchased through open market transactions during the quarter. As we move ahead into the September quarter, I'd like to review our outlook which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $60 billion and $62 billion. As you will recall, our September quarter results last year included a one-time favorable adjustment of $640 million to our services revenue. Taking that adjustment into account, our revenue guidance implies year-over-year growth of about 16% to 19%. We expect gross margin to be between 38% and 38.5%. We expect OpEx to be between $7.95 billion and $8.05 billion. We expect OI&E to be about $300 million and we expect the tax rate to be about 15% before discrete items. Also today, our Board of Directors has declared a cash dividend of $0.73 per share of common stock payable on August 16, 2018 to shareholders of record as of August 13, 2018. With that, I'd like to open the call to questions. Nancy Paxton - Apple, Inc.: Thank you, Luca. And we ask that you limit yourself to one one-part question and one follow-up. Operator may we have the first question, please? Operator : Thank you. Our first question comes from Katy Huberty with Morgan Stanley. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thank you and congrats on the quarter. I'll ask both my questions up front. First, for Tim. You're on track to hit your services revenue target even earlier than planned, so how are you thinking about the next legs of services growth as you move into the next three to five years? And then for you, Luca, NAND prices are falling this year. Services mix is rising. Those should both positively influence gross margins and yet we're seeing gross margin sort of hang out here at 38%. What are the offsetting headwinds and is it possible that we could see the tailwinds start to overpower those headwinds in the next couple of quarters and see gross margins drift higher? Thank you. Timothy Donald Cook - Apple, Inc.: Yeah, Katy, thanks for your question. This is Tim. On the services side, we're thrilled with the results. They were very broad based. We had double digit services growth in all of the geographic segments and the App Store, AppleCare, Apple Music, cloud services, Apple Pay all set new June quarter records and of course subscriptions have now passed the 300 million, as I'd mentioned before, and so we couldn't be happier with how things are going. In terms of the next leg of this, given the momentum that we're seeing across the board, we feel great about our current services, but obviously we're also thrilled about our pipeline that have some new services in it as well. And so with the combination of these, we feel great about hitting our objectives and maybe even doing a little better. Luca Maestri - Apple, Inc.: Katy, for margins, let me tell you about the puts and takes for the June quarter, then I'll talk about the guidance for Q4 and make some general observations for the future. Starting with the June quarter, typically we see a decline in gross margin going from the March quarter to the June quarter. Last year, we were down 40 bps. Two years ago we were down 140 bps. This year, we were able to keep GM flat sequentially. During the quarter, we always have some loss of leverage because of our typical seasonality. This year we were able to offset that with some cost improvements and also we had some favorability in foreign exchange on a sequential basis. Unfortunately, as you know, the U.S. dollar has already appreciated again recently, so we do not expect to see that favorability to repeat during the September quarter. So those are the puts and takes for June and we're very happy to see gross margin sequentially flat for June. For September, we're also guiding about flat sequentially at the midpoint. As you know, we typically have what we call product transition costs during the September quarter, and this year we also have about 30 bps of headwind from foreign exchange again because the dollar has appreciated recently. We expect those two factors to be offset by positive leverage, because you've seen the revenue guidance that we provided and the mix to services that you've actually mentioned during your question. So we feel pretty good about also the guidance for the fourth quarter. Looking forward, you know we don't provide guidance beyond the current quarter, but I think we have a pretty good record over the last several years to make good business decisions, balancing units, revenue and margins. As you know, foreign exchange has been a very significant headwind over the last three-plus years, but we've been able to manage that. On the memory front, it is true that prices have started to decline. It has been a significant headwind for the last 12, 18 months and still in the June quarter was a negative. We believe that we're going to start seeing some improvement from here on. Nancy Paxton - Apple, Inc.: Thank you, Katy. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thank you for that color. Nancy Paxton - Apple, Inc.: Can we have the next question please? Can we have the next question please? Operator : Certainly. Our next question will come from Shannon Cross with Cross Research. Shannon S. Cross - Cross Research LLC : Thank you very much for taking my question. Tim, can you talk a bit about trends within your iPhone sales? ASPs were above expectations and now that you've had – and that's clearly better than some of the comments from some of your competitors. Now that you've had about nine months of experience with a high-end fully featured phone, can you talk a bit about what you think customers want, what the elasticity of demand is and how you're sort of thinking about your competitive position? And then I have a follow-up. Timothy Donald Cook - Apple, Inc.: Yeah, Shannon, we feel great about the results on iPhone, up 20%, and if you look for the cycle, by the cycle, I mean Q1, Q2 and Q3, we've had on an average weekly basis, growth in units of sort of mid single digit and ASP growth of double digit. And so if you, and look at iPhone X in particular, it's the most innovative smartphone on the market. We priced it at a level that represented the value of it and we could not be happier that it has been the top selling iPhone since the launch, and so we feel terrific about iPhone X. If you look at the sort of the top of our line together, and by that I mean the iPhone X, the 8 and the 8 Plus, they are growing very nicely, as you can probably tell from looking at the ASP and we couldn't be happier with how that's gone. And so I think in this cycle, we've learned that customers want innovative products and we sort of already knew that in other cycles and other points in times, but it just puts an exclamation point by that I believe with looking at the results. At the unit level, the iPhone SE had a difficult comp to the year-ago quarter and so, when we changed some of the configurations, memory configurations in the year-ago quarter. If you look at it on a geographic basis, the top three selling phones in urban China were iPhone, where iPhone X was number one and has been for a couple of quarters, and iPhones make up three of the top five smartphones in the U.S., UK and Japan. And so it's difficult sometimes to get a read over exactly what's happening in the market, but given the industry numbers that we've seen, it's clear that we picked up global market share and picked up market share in several countries, not only iPhone, but iPad as well. Shannon S. Cross - Cross Research LLC : Great. Thank you. And then can you talk a bit about China, Greater China up 19% year-over-year during the quarter, I believe? Obviously iPhone doing well, but some concern that maybe some of what's going on in the trade world might have impacted. Doesn't seem like that, so I'm just curious as to what you're seeing in China and how you're thinking about it as you look forward. Thank you. Timothy Donald Cook - Apple, Inc.: Yeah, it's a good question. Thank you. This is the fourth consecutive quarter that we've had double digit growth in Greater China. I mentioned how iPhone X and the iPhones are selling. We did pick up share in iPhone and iPad, but if you look more holistically at our complete line, we had double digit growth from services to iPad to iPhone and to our other product category which the watch did extremely well, and so there are lots of good things happening there. In terms of the tariffs themselves, maybe I could sort of take a step back because I'm sure some people have questions on this. And our view on tariffs is that they show up as a tax on the consumer and wind up resulting in lower economic growth and sometimes can bring about significant risk of unintended consequences. That said, the trade relationships and agreements that the U.S. has between the U.S. and other major economies are very complex and it's clear that several are in need of modernizing, but we think that in the vast majority of situations that tariffs are not the approach to doing that and so we're sort of encouraging dialogue and so forth. In terms of the tariffs that have been imposed or have exited the comment period – I think there's one that's exiting today – there have been three of those and maybe I can walk through those briefly just to make sure everybody is on the same page. The first was the U.S. imposed a tariff on steel and aluminum. That was many, many different countries. That started I believe at the beginning of June. There have been two other tariffs that have totaled about $50 billion of goods from China that have either been implemented or exiting the comment period in this month. I think the latest one is today. If you look at those three tariffs, none of our products were directly affected by the tariffs. There is a fourth tariff which includes goods valued at $200 billion, also focused on goods that are imported from China. That one is out for public comment. Probably like everyone else, we're evaluating that one and we'll be sharing our views of it with the administration and so forth before the comment period for that one ends. It's actually a tedious process in going through it because you not only have to analyze the revenue products, which are a bit more straightforward to analyze, but you also have to analyze the purchases that you're making through other companies that are not related to revenue. Maybe they're related to data centers and this sort of thing and so we're going through that now and we'll be sharing our results later on those and feeding back public comment. Of course the risk associated with more of a macroeconomic issue such as an economic slowdown in one or more countries or currency fluctuations that are related to tariffs is very difficult to quantify. And so that, and we're not even trying to quantify that, to be clear about it. All of this said, we're optimistic, as I've been the whole time, that this will get sorted out because there is an inescapable mutuality between the U.S. and China that sort of serves as a magnet to bring both countries together, that each country can only prosper if the other does and of course the world needs both U.S. and China to prosper for the world to do well. That said, I can't predict the future, but I am optimistic that the countries will get through this and we are hoping that calm heads prevail. Nancy Paxton - Apple, Inc.: Thank you, Shannon. Could we have the next question, please? Operator : And that'll come from Brian White with Monness, Crespi. And Brian your line is open. Please go ahead. Brian White - Monness, Crespi, Hardt & Co., Inc.: Yes, Tim. I'm wondering if you could talk a little bit about the multi-year partnership with Oprah Winfrey and what that says about your original content strategy and also Apple Music. If you can give us a little more colors or an update maybe around paid subscribers or total subscribers around Apple Music and how you feel that's rolled out. Timothy Donald Cook - Apple, Inc.: Yeah sure, Brian. Thanks for the question. We're very excited to work with Oprah. We think that her incomparable ability and talent to connect with audiences around the world, that there's sort of no match and we think that we can do some great original content together and so we could not be happier in working with Oprah. As you know, we hired two highly respected television executives last year and they have been here now for several months and have been working on a project that we're not really ready to share all the details of it yet, but I couldn't be more excited about what's going on there and we've got great talent in the area that we've sourced from different places and feel really good about what we will eventually offer. In terms of the sort of the key catalysts and the changes, the cord cutting in our view is only going to accelerate and probably accelerate at a much faster rate than is widely thought. We're seeing the things that we have on the periphery of this like Apple TV, units and revenue grew by very strong double digits, very, very strong double digits in Q3. As I mentioned in my opening comments, we're seeing different providers pick up the Apple TV and use it as their box to go to market with their subscription service. There are, within the 300 million-plus paid subscriptions, some of these are third party video subscriptions and we see the growth that is going on there. It's like 100% year-over-year. And so all the things from a – all the forcing functions here from the outside all point to dramatic changes speeding up in the content industry, and so we're really happy to be working on some of them, but we're just not ready to talk about it in depth today. In terms of Apple Music, we're well over 50 million listeners now when you add our paid subscribers and the folks in the trial, and so we're moving along at a very, very good rate. It appears to us or in what we've been told is that we took the leadership position in North America during the quarter and we have the leadership position in Japan, and so in some of the markets that we've been in for a long period of time. We're doing quite well, but really, the key thing in music is not the competition between companies that are providing music. It's the real challenge is to grow the market, because if you add everyone up that's providing subscription music today or streaming music, it's, outside of China, it's less than 200 million probably around the world. And so it does seem to me there's an extraordinary opportunity in that business to grow the market well and I think if we put our emphasis there, which we're doing, that will be a beneficiary of that as other people will as well. But I like where we are. Our revenues on Apple Music grew over 50% as I'd mentioned earlier during the quarter, and so some really, really strong results. Thanks for the question. Brian White - Monness, Crespi, Hardt & Co., Inc.: Great. Thank you. Nancy Paxton - Apple, Inc.: Thank you, Brian. Could we have the next question, please? Operator : Toni Sacconaghi with Bernstein has our next question. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Yes. Thank you. I have one for Luca and one for Tim please. Luca, I'm wondering as we think about modeling Q4, iPhone ASPs are typically up sequentially about 2% to 4%, sort of low single digits. Perhaps you can help us think through how we should be thinking about Q4. I know you provided some commentary last quarter on how we should be thinking about Q3 ASPs. Luca Maestri - Apple, Inc.: Toni, as you know, we do not provide guidance for either units or ASPs for any product category, but of course we provided guidance on revenue and that the guidance range implies growth of 16% to 19%. We expect the growth to come from strong growth from iPhone, from services and from wearables, which has been a bit of our pattern during the course of the year. On iPhone ASP, the only thing that I would point out is that obviously we're exiting the June quarter at a significantly higher level than in the past and so that I think is important to keep in mind as we move into the September quarter. It's important to keep in mind the type of revenue growth that we've implied in our guidance. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Okay. Thank you. Tim, I was wondering if you could just comment a little bit about the health of the smartphone market. Apple's smartphone iPhone units have been relatively flat for four years and I think you've probably been a share gainer during the period which would suggest at least at the high end of the market, that it's perhaps flat-to-down and I'm wondering if you can comment on, A, whether you believe that and what you think might be happening with replacement cycles. And specifically, also what impact if any you've seen from wider availability and less expensive replacement batteries for iPhones. Timothy Donald Cook - Apple, Inc.: I think the smartphone market is very healthy. I think it's actually the best market in the world to be in for someone that is in the business that we're in. It's an enormous sized market and whether it grows, from our point of view, whether it grows 1% or 2% or 5% or 6% or 10% or shrinks 1% or 2%, it's a great market because it's just huge. And so that's kind of the way that I view that. iPhone revenues are up 20% for the quarter over last year. We're really pleased with that and if you look at the sort of the cycle, which I'll define as Q1, Q2, Q3 for ease, you'll see that we've grown like mid single digits and on an average weekly sales point of view, and of course double digit on the ASP and so I think it's really healthy. In terms of replacement cycles, as I'd mentioned I think on a previous call, some replacement cycles are lengthening. I think that the major catalyst for that was probably the subsidy plans becoming a much smaller percentage of total sales around the world than they were at one time and so I think that some are lengthening. And, but I think for us, the thing that we always have to do is come out with a really great innovative product, and I think that iPhone X shows that when you deliver a great innovative product, there's enough people there that would like that and it can be a really good business, and so that's how to look at that. In terms of our installed base, which is something very important for us as it is one of the key drivers of services, our active installed base on iPhone grew double digits over last year during the quarter and so we're thrilled with that and you can see that carrying through to the services line and the growth that we had there. In terms of batteries, we have never done an analysis internally about how many people decided to get a lower-priced battery than buy another phone because it was never about that for us. It was always about doing something great for the user and I think if you treat the users and the customers well, then you have a good business over time and so that's how we'd look at that. Nancy Paxton - Apple, Inc.: Thank you, Toni. Antonio M. Sacconaghi - Sanford C. Bernstein & Co. LLC: Thank you. Nancy Paxton - Apple, Inc.: Could we have the next question, please? Operator : Next we'll take a question from Laura Martin from Needham. Laura Martin - Needham & Co. LLC: Yeah, can you hear me okay? Nancy Paxton - Apple, Inc.: Yes. Luca Maestri - Apple, Inc.: Yes. Laura Martin - Needham & Co. LLC: Great. Okay. Super. So I'd like to focus on product roadmap and strategy. There is a war going on for the home, the connected home, over the Internet of Things. And with two products, the HomePod and Apple TV in the home, my question is strategically, how do you feel about the importance of being in the home and whether it threatens your dominance outside the home with your core business in the mobile devices if you sort of lose that battle? I'm just trying to figure out strategically when you think about where the puck is going, how important is it for you to have a beachhead in the home as well as out of home? Timothy Donald Cook - Apple, Inc.: I think the home business, Laura, is bigger than the HomePod and Apple TV. They're both important products clearly, but everybody has their iPhone at home as well and everybody has their Mac at home and everyone has their iPad at home. And so in terms of the Siri access point, as you can tell from the 100 billion number I quoted in the script, there's an extraordinary amount of usage of these products that are used to perform home-related functions. I do that every day with controlling all my home automation and so on and so forth. Part of that is on HomePod but part of it is with the Apple Watch and the iPhone and the iPad, and so I think home is important. Home is important. Work is important. The movement between the two are important. Health is important. So the smartphone has become the repository that goes across the whole of your life, not something that is just meant for a portion of it and so I think all of those are important and we're focused on all of them. Laura Martin - Needham & Co. LLC: Okay. That's helpful, actually. Okay. Timothy Donald Cook - Apple, Inc.: Thanks for your question. Laura Martin - Needham & Co. LLC: Yeah. Sort of. I mean I'll watch your product roadmap and be able to tell what the answer is. The other thing, the thing I get in fights with investors about the most is this and I'd love your insight on this. I love the expansion of the new products. The question I have is are they actually on-ramps into the Apple ecosystem, the Beats, the Watch, the AirPods, subscriptions, are they on-ramps into the ecosystem or is the on-ramp to the ecosystem the iPhone and then these new products add revenue per member once you get somebody into the ecosystem via the iPhone? Timothy Donald Cook - Apple, Inc.: A lot of people that buy Apple products buy for the whole ecosystem, even though they might not currently use all the different products. And so the way that I think about those products are they're products within the ecosystem itself. And there's the AirPods have really gone through the roof and the Apple Watch has hit an air pocket and has gone to a whole different level as I'd mentioned earlier with our overall wearables revenue. And so in my view, this is a part of the – they are a core part of the ecosystem. Nancy Paxton - Apple, Inc.: Thank you, Laura. Laura Martin - Needham & Co. LLC: But do they attract people to the ecosystem or does the person have to have an iPhone first? Timothy Donald Cook - Apple, Inc.: It is, well, but on your point though, it is clear from communications I've had with users that some of them were attracted to iPhone because of the Apple Watch. Laura Martin - Needham & Co. LLC: Oh, I see. Timothy Donald Cook - Apple, Inc.: So the Apple Watch led them to the iPhone. The reverse of that is also true, is that somebody got the iPhone and then decided I really want something to coach me in fitness and to curate some of the communications and so forth like the watch does so well and so it's not always a linear path. I see these things as being somewhat fluid and different for each user. Nancy Paxton - Apple, Inc.: Thank you, Laura. Laura Martin - Needham & Co. LLC: So they're complementary and self-reinforcing? Okay. That makes sense. All right. Thanks very much. Timothy Donald Cook - Apple, Inc.: That's exactly right. Thank you for the question. Laura Martin - Needham & Co. LLC: Thank you. Nancy Paxton - Apple, Inc.: Thank you, Laura. Nancy Paxton - Apple, Inc.: A replay of today's call will be available for two weeks on Apple Podcast, as a webcast on apple.com/investor and via telephone and the numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 5838188 and these replays will be available by approximately 5 PM Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142 and financial analysts can contact Matt Blake or me with additional questions. Matt is at 408-974-7406 and I'm at 408-974-5420. Thanks again for joining us. Operator : That does conclude our conference for today. Thank you for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,018	4	2018Q4	2018Q4	2018-11-01	3.007	3.063	3.436	3.405	3.8025	14.57	11.81	Executives: Nancy Paxton - Apple, Inc. Timothy Donald Cook - Apple, Inc. Luca Maestri - Apple, Inc. Analysts: Wamsi Mohan - Bank of America Merrill Lynch Shannon S. Cross - Cross Research LLC Mike J. Olson - Piper Jaffray & Co. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC Jim Suva - Citigroup Global Markets, Inc. Operator : Good day and welcome to the Apple Incorporated fourth quarter fiscal year 2018 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead. Nancy Paxton - Apple, Inc.: Thank you. Good afternoon and thanks to everyone for joining us. Speaking first today is Apple CEO Tim Cook and he'll be followed by CFO Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consistent of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the Risk Factors discussed in Apple's most recently filed periodic reports on Form 10-K and Form 10-Q, and the form 8-K filed with the SEC today, along with the Associated Press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Timothy Donald Cook - Apple, Inc.: Thank you, Nancy. Good afternoon everyone, and thanks for joining us. I just got back from Brooklyn, where we marked our fourth major launch event of the year. In addition to being a great time, it put an exclamation point at the end of a remarkable fiscal 2018. This year, we shipped our 2 billionth iOS device, celebrated the 10th anniversary of the App Store, and achieved the strongest revenue and earnings in Apple's history. In fiscal year 2018, our revenue grew by $36.4 billion. That's the equivalent of a Fortune 100 company in a single year, and we're capping all that off with our best September quarter ever. Revenue was $62.9 billion, ahead of our expectations. That's an increase of 20% over last year and our highest growth rate in three years. We also generated record Q4 earnings with 41% year-over-year growth in EPS. Record results from iPhone, services, and wearables drove our momentum and we produced strong double-digit revenue growth in all of our geographic segments. It was a big year and a big quarter for iPhone. Q4 revenue was up 29% over last year, an increase of over $8 billion to a new September quarter record fueled by continued momentum for iPhone 8, 8 Plus and X, and the very successful launch of iPhone XS and iPhone XS Max. These latest devices are our most advanced iPhones ever with the industry's first 7-nanometer A12 Bionic chip with an Apple designed 8-core Neural Engine capable of executing an astounding 5 trillion operations per second. The A12 Bionic is many years in the making and a huge technological leap forward. It sets the iPhone experience far apart from the competition, using real-time machine learning to transform the way we experience photos, gaming, augmented reality and more. It makes full use of the dual camera system that shoots portrait mode photos with Smart HDR and dynamic depth of field and Face ID is even faster. The response has been powerful. As one reviewer put it, iPhone XS and XS Max are the perfect blend of design and craftsmanship, as well as seamlessly intuitive user experience. We're not done yet. Just last week, we began shipping iPhone XR, bringing the latest iPhone breakthroughs to even more users. With an all-screen glass and aluminum design and the most advanced LCD in a smartphone, the product reviews have been overwhelmingly positive. iOS 12 has gotten off to an incredible start. It's been installed on more systems in its first month than any version of iOS ever. iOS 12 is delivering system-wide performance enhancements, Siri Shortcuts, and new tools to help people reduce interruptions and manage screen time for themselves and their kids. Siri Shortcuts in particular is already deeply integrated with some of the most popular apps out there. Whether you're tracking your workouts or rushing to catch a flight, you can be sure all of your most relevant apps are working together with Siri in the driver seat. iOS 12 also features ARKit 2, a major upgrade to our augmented reality engine. ARKit 2 makes possible simultaneous multi-user experiences and real-world object incorporation. Our developer community is really running with this technology. From gaming to shopping, we're seeing great new use cases emerge. iOS devices deliver the best AR experiences of any products in the market today and with the announcement of our new iPad Pro this week, we've made that gap even wider. More powerful than the vast majority of PC laptops, the new iPad Pro is unrivalled in its versatility and performance. When paired with the beautifully refined Apple Pencil and a new streamlined full-size Smart Keyboard, iPad Pro will extend its lead as the ultimate creativity and productivity device. And finally, just this week, we delivered the highly anticipated Group FaceTime functionality to all FaceTime-enabled devices. For services, it was our best quarter ever with revenue at $10 billion. Excluding the impact of a favorable one-time accounting adjustment of $640 million a year ago, our services growth was 27%. We set new Q4 records in all of our geographic segments and new all-time revenue records for the App Store, cloud services, AppleCare, Apple Music and Apple Pay. We also continued to see strong growth in paid subscriptions reaching over 330 million in our ecosystem. I want to spotlight the exceptional performance at Apple Pay, which is by far the number one mobile contactless payment service worldwide. Transaction volume tripled year-over-year. And to put that into perspective, Apple Pay generated significantly more transactions than even PayPal Mobile with over 4 times the growth rate. As a testament to accelerating U.S. growth, Costco completed the rollout of Apple Pay to over 500 U.S. warehouses last quarter, while Neiman Marcus is now accepting Apple Pay at over 40 stores across the country. With these additions, 71 of the top 100 merchants and 60% of all U.S. retail locations support Apple Pay. We continue to invest in our strategy to replace the wallet with the recent launch of student ID passes at several major U.S. universities. And 10 months following its launch, Apple Pay Cash is the highest-rated mobile peer-to-peer service by Consumer Reports, based on exceptional payment authentication and data privacy. We set an all-time quarterly record for Mac revenue, thanks to strong performance in MacBook Pro and the impact of the back-to-school season. In September, we delivered macOS Mojave, bringing powerful new features to Mac like Dark Mode, Stacks and a completely redesigned Mac App Store. Consider alongside the release of iOS 12, WatchOS 5 and a new tvOS, macOS Mojave tells a powerful story of the seamless integration of world-class hardware, software and services that define the Apple ecosystem. As I mentioned at the beginning of the call, earlier this week we announced exciting updates to the Mac lineup. The all-new MacBook Air brings a stunning Retina display, Touch ID, the latest processors and an even more portable design to the world's most beloved notebook. We also unveiled the biggest update ever to Mac mini, the small yet muscular desktop that powers everything from the music and sound effects at Broadway shows to the developers who build some of the most popular apps in the App Store. The new Mac mini boasts an amazing 5 times faster performance than before. With revenue growth over 50%, it was another record quarter for wearables, which includes Apple Watch, AirPods and Beats products. With the highest customer satisfaction in the industry, Apple Watch has become an essential part of people's lives. The customer response to the Apple Watch Series 4 has been overwhelmingly positive, driven by its all-new design, larger display, faster performance, fall detection, enhanced cellular reception and electrical heart sensor. Later this year, the ECG App will be available to Apple Watch Series 4 customers in the U.S., giving them the ability to take an electrocardiogram any time, right from their wrist. And for U.S. customers with Apple Watch Series 1 and later, WatchOS will soon enable periodic checks for irregular heart rhythms that may be suggestive of AFib. These are unprecedented and potentially life-changing features, showing how Apple Watch is not only an indispensable communication and fitness companion but also an intelligent guardian for your health. More broadly, we see this as just one further example of the kind of contribution we can make in the health space and we look forward to making more in the future. We are proud to bring HomePod to new customers. I was in Spain last week as HomePod became available there and in Mexico. HomePod delivers the highest fidelity audio quality, working together with an Apple Music subscription to stream over 50 million songs into any room of your home. Our retail team posted record Q4 results to conclude their biggest year ever. They are transforming our stores into places where customers come to connect, learn, and be inspired together with people from their community. Our Today at Apple sessions are a terrific example of what that looks like in practice. We hosted over 250,000 Today at Apple sessions this quarter, connecting aspiring creators with local photographers, illustrators, and other experts who can help them get the most out of their devices. Apple Stores also hosted 74,000 kids at Apple Camp. The relationship Apple has with our customers is about more than just making a purchase. With the recent addition of beautiful new stores in Italy, Japan, China, and in just a few weeks, Thailand, we will have 506 stores where we can further those relationships, almost half of which are outside the United States. Before I turn the call over to Luca, I'd like to touch on two items that may not show up in our financial statement but are just as integral to Apple's mission and our commitment to making the world a better place. First education, more than 5,000 schools, community colleges, and technical colleges worldwide are now using Everyone Can Code, our free coding curriculum. Ideas, creativity, and passion for technology's potential aren't limited by zip code or country, and we don't think opportunity should be either. We're also excited that educators in more than 350 schools around the world have started working with Everyone Can Create, the free collection of tools and project guides we introduced this spring, designed to help unleash kids' creativity throughout their school day with the help of iPad. Next is the environment. This was a milestone year for Apple's commitment to our planet. In April, we announced that 100% of our global operations are powered by renewable energy. We also made progress in doing the same in our supply chain. And just this week, we announced that the enclosures of new products like MacBook Air and iPad Pro will be made from 100% recycled aluminum, a strong, durable, and beautiful new alloy designed by Apple. This is a great example of how a commitment to do right on the issues that matter can drive once unimaginable innovation, new ways of approaching old problems, and beautiful solutions that set us apart. I'd like to thank all of our employees, customers, developers, and business partners for helping us deliver outstanding results across our fiscal 2018. We are headed into the holidays with our strongest product lineup ever, and we could not be more bullish about Apple's future. And now, Luca has more details to share with you on the September quarter. Luca? Luca Maestri - Apple, Inc.: Thank you, Tim. Good afternoon everyone. We are extremely pleased to report record results for our September quarter, which capped a tremendously successful fiscal 2018, a year in which we saw double-digit revenue growth in every geographic segment and established new revenue and earnings records in every single quarter. Revenue in the fourth quarter was $62.9 billion, up 20% and more than $10 billion over last year, with strong double-digit growth in each of our geographic segments and record Q4 revenue in the Americas, in Europe, Japan, and the rest of Asia-Pacific. In fact, we set new revenue records in almost every market we track, with especially strong growth in Germany, Italy, Sweden, Switzerland, Japan, and Korea, all major markets where revenue growth was 25% or higher. We also set new fourth quarter revenue records for iPhone and wearables and new all-time records for services and Mac. Gross margin was 38.3%, flat sequentially, in line with our expectations, as leverage from higher revenue offset seasonal transition costs. We set new September quarter records for net income, EPS, and cash flow from operations. Net income was $14.1 billion, up $3.4 billion or 32% over last year. Diluted earnings per share were $2.91, up 41%. Cash flow from operations was $19.5 billion, up $3.8 billion from a year ago. iPhone revenue grew 29% with growth of more than 20% in every geographic segment. iPhone ASP was $793 compared to $618 a year ago, driven by strong performance of iPhone X, 8 and 8 Plus, as well as the successful launch of iPhone XS and XS Max in the September quarter this year, while we launched iPhone X in the December quarter last year. We sold 46.9 million iPhones during the quarter, with growth of 20% or more in several markets, including Japan, Australia, New Zealand, Sweden, Norway, Chile, and Vietnam. Customer satisfaction with iPhone continues to be outstanding and is the highest in the industry. The latest survey of U.S. consumers from 451 Research indicates customer satisfaction of 98% for iPhone X, 8, and 8 Plus combined. And among business buyers who plan to purchase smartphones in the December quarter, 80% plan to purchase iPhones. Turning to services, it was our best quarter ever in total and virtually in every market around the world, with revenue of $10 billion. A year ago, we had a one-time $640 million favorable impact to services revenue due to an accounting adjustment. And taking that into account, our services growth in Q4 this year was 27%. As Tim mentioned, we reached new all-time quarterly revenue records for many services categories, and we are well on our way to achieve our goal to double our fiscal 2016 services revenue by 2020. We now have over 330 million paid subscriptions on our platform, an increase of over 50% versus a year ago. We are very pleased not only with the growth but also with the breadth of our subscription business. In fact, 30,000 third-party subscription apps are available on the App Store today, and the largest of them all represents less than 0.3% of our total services revenue. Next, I'd like to talk about the Mac. We saw great response to our new MacBook Pro models that we launched in July, with strong double-digit revenue growth driving an all time quarterly record for Mac revenue. We were especially pleased with Mac momentum in emerging markets, with strong growth in Latin America, in India, the Middle East and Africa, and Central and Eastern Europe. At over 100 million units, our active installed base of Macs is at an all-time high, and the majority of customers purchasing Macs in the September quarter were new to Mac. We sold 9.7 million iPads during the quarter, gaining share in nearly every market we track, based on the latest estimates from IDC. We generated iPad growth in a number of key regions around the world, including Latin America, Europe, Japan, India, and South Asia. Among customers around the world purchasing iPads during the quarter, nearly half were new to iPad, and our active installed base of iPads reached a new all-time high. NPD indicates that iPad had 58% share of the U.S. tablet market in the September quarter, up from 54% share a year ago. And the most recent consumer survey from 451 Research measured iPad customer satisfaction ratings of 96% for both iPad and iPad Pro. And among business customers who plan to purchase tablets in the December quarter, 74% plan to purchase iPads. Other products revenue grew 31% to a new September quarter record with an increase of over $1 billion compared to a year ago thanks to wearables growth of over 50% and the strong performance of Apple TV, in addition to the introduction of HomePod earlier this year. As we look back across fiscal 2018, we've made great progress in the enterprise market, where iOS is transforming how business gets done across multiple industries. In fact, over 450 airlines and 47 of the top 50 around the world have adopted iOS to help pilots fly saver, more efficient flights and many airlines are also using iOS to support better customer experiences and improve maintenance operations. We're also making great strides in the retail sector, where 9 of the top 10 global retailers use iOS devices to transform their customer and employee experiences. We're seeing industry-wide adoption of iOS at thousands of retailers from neighborhood boutiques to many of the best-known retailers in the world. Deployment of iOS devices is growing steadily as retailers replace their traditional point-of-sale systems and use custom iOS apps on iPhones and iPads to provide highly personalized shopping experiences. Our success in enterprise is supported by our key partnerships. Since launching our first strategic partnership with IBM, 240 large customers have signed MobileFirst for iOS deals. Additionally, earlier in the year we introduced two new technology offerings. IBM Watson services for Core ML, and the IBM Cloud Developer Console for Apple that are enabling businesses to combine machine learning and cloud for a new generation of dynamic smart apps made for iOS. Over 60 new signings across numerous industries have been added since launching these new tools. In our new partnership with Salesforce, we're excited to bring together the number one customer relationship management platform and iOS. Together with Apple, Salesforce is redesigning its apps to embrace a native mobile platform with exclusive new features on iOS. The companies will also provide tools and resources for millions of Salesforce developers to build their own native apps with a new Salesforce mobile SDK for iOS. And finally, we recently announced Apple Business Manager, a new way for IT teams to deploy Apple devices at scale. The response from companies around the world has been tremendous with over 40,000 companies currently enrolled. Let me now turn to our cash position. We ended the quarter with $237.1 billion in cash plus marketable securities. We also had $102.5 billion in term debt and $12 billion in commercial paper outstanding for a net cash position of $122.6 billion. As explained earlier this year, it is our plan to reach a net cash neutral position over time. As part of this plan, we returned over $23 billion to investors during quarter. We repurchased 92.5 million Apple shares for $19.4 billion through open market transactions and we paid $3.5 billion in dividends and equivalents. For our fiscal year 2018, revenue grew over $36 billion to $265.6 billion, an all-time record. Every geographic segment grew double digits with new records in the Americas, Europe, Japan and rest of Asia-Pacific. We also set new all-time records for net income, up 23% versus last year, and EPS up 29%. And we returned a total of almost $90 billion to our investors during the year, including almost $14 billion in dividends and equivalents and over $73 billion in share repurchases. Before we discuss our December quarter outlook, I'd like to describe a number of changes in our financial reporting that we're implementing as we enter our new fiscal year. First, given the increasing importance of our services business and in order to provide additional transparency to our financial results, we will start reporting revenue as well as cost of sales for both total products and total services beginning this December quarter. Second, also beginning in this December quarter, we're adopting the FASB's new standard for revenue recognition. This will not result in any change to our total revenue, but it will impact the way we report the classification of revenue between products and services. In particular, the revenue corresponding to the amortization of the deferred value of bundled services such as Maps, Siri, and free iCloud services was previously reported in product revenue. After adopting the new standard, this revenue will now be reported in services revenue. The change in classification between products and services will also apply to the costs that are associated with the delivery of such bundled services. After we file our 10-K, we will post a schedule to our Investor Relations website showing the reclassification of fiscal 2018 revenue from products to services in connection with the adoption of the new standard. The size of this reclassification amounts to less than 1% of total company revenue. And for clarity, this reclassification was not contemplated in our previously stated goal of doubling our fiscal 2016 services revenue by 2020. That goal remains unchanged and excludes the revenue that is now shifting from products to services over that timeframe. Third, starting with the December quarter, we will no longer be providing unit sales data for iPhone, iPad and Mac. As we have stated many times, our objective is to make great products and services that enrich people's lives, and to provide an unparalleled customer experience so that our users are highly satisfied, loyal and engaged. As we accomplish these objectives, strong financial results follow. As demonstrated by our financial performance in recent years, the number of units sold in any 90-day period is not necessarily representative of the underlying strength of our business. Furthermore, a unit of sale is less relevant for us today than it was in the past, given the breadth of our portfolio and the wider sales price dispersion within any given product line. Fourth, starting with the December quarter, we will be renaming the other products category to wearables, home, and accessories to provide a more accurate description of the items that are included in this product category. As we move ahead into the December quarter, I'd like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We have the strongest lineup ever as we enter the holiday season and we expect revenue to be between $89 billion and $93 billion, a new all-time record. This range reflects a number of factors to be considered. First, we considered the effect on Q4 and Q1 of the launch timing of our new iPhones this year versus last year. Second, we expect almost $2 billion of foreign exchange headwinds. Third, we have an unprecedented number of products ramping, and while our ramps are going fairly well, we have uncertainty around supply and demand balance. And fourth, we also face some macroeconomic uncertainty, particularly in emerging markets. We expect gross margin to be between 38% and 38.5%. We expect OpEx to be between $8.7 billion and $8.8 billion. We expect OI&E to be about $300 million, and we expect the tax rate to be about 16.5% before discrete items. Also today, our board of directors has declared a cash dividend of $0.73 per share of common stock payable on November 15, 2018 to shareholders of record as of November 12, 2018. With that, I'd like to open the call to questions. Nancy Paxton - Apple, Inc.: Thank you, Luca, and we'd like to ask that you limit yourself to two questions. Operator, may we have the first question please? Operator : Certainly. Our first question will come from Wamsi Mohan with Bank of America Merrill Lynch. Wamsi Mohan - Bank of America Merrill Lynch : Yes. Thank you. Tim, there has been some real deceleration in some of these emerging markets, partly driven by some concerns around some of the rules the administration is contemplating and partly driven by things that are more specific to China, for instance, like some of the regulations around gaming. So can you talk about how you see the trajectory there for the business and what you think of the initiatives of some companies like Netflix and Fortnite trying to bypass the App Store around subscriptions and I have a follow-up. Timothy Donald Cook - Apple, Inc.: Sure. Great question. Starting with emerging markets. The emerging markets that we're seeing pressure in are markets like Turkey, India, Brazil, Russia. These are markets where currencies have weakened over the recent period. In some cases, that resulted in us raising prices and those markets are not growing the way we would like to see. To give you a perspective in of some detail, our business in India in Q4 was flat. Obviously, we would like to see that be a huge growth. Brazil was down somewhat compared to the previous year. And so I think, or at least the way that I see these, is each one of the emerging markets has a bit of a different story, and I don't see it as some sort of issue that is common between those for the most part. In relation to China specifically, I would not put China in that category. Our business in China was very strong last quarter. We grew 16%, which we're very happy with. iPhone in particular was very strong, very strong double-digit growth there. Our other products category was also stronger, in fact, a bit stronger than even the overall company number. The App Store in China, we have seen a slowdown or a moratorium, to be more accurate, on new game approvals. There is a new regulatory setup in China, and there things are not moving the way they were moving previously. We did see a few games approved recently, but it's very far below the historic pace. And as you've probably seen, some of the larger companies there that are public have talked about this as they've announced their earnings as well. We don't know exactly when this will – the approvals will return to a normal pace, so I would not want to predict that. I do not view – just for avoidance of doubt here, I don't view that that issue has anything to do with the trade-related discussions between the countries. I think that is strictly a domestic issue in China. In terms of larger developers, if you step back and look at the value proposition for people from the App Store, there are two key constituencies in that equation. There's the user and there's the developer. If you start with the user, what the App Store provides people is the best and safest place for users to get apps. And we have a tremendous process and infrastructure around achieving that. And where it is not perfect, we wind up reviewing over 100,000 apps per week between new apps and updates for existing apps, and then work with developers quickly to fix the issues. And we also provide the user a one-payment model for purchasing apps and subscriptions and in-app purchases, et cetera, so that they are not in a position that they have to share their private information across many companies. And so that's the proposition for the user. For the developer, we obviously provide the developers a tremendous amount of developer tools, programs, compilers, languages, of course the operating system, APIs, SDKs, and have a huge developer relations team. And we do a tremendous amount of marketing for developers, including the new Today Editorial that we just started in the past few months, personal recommendations, search tools, and so on and so forth. And so there will be – there's no doubt in my mind there have already been some large developers that concluded that they could do something on their own. We're fine with that. I think Luca mentioned in his comments that the largest – if I look at the largest developer, they make up less than 0.3% of the services revenue, so it's probably good to think about that in that context, and there are millions of apps on the store obviously, and 30,000 or so subscription apps. And so the subscription business itself is nearly as broad as the App Store itself is, and so that's the value proposition. I think that the vast majority of people are very happy with it, including the most important people at all, which is the user. Wamsi Mohan - Bank of America Merrill Lynch : Thank you, Tim. I appreciate the response. Timothy Donald Cook - Apple, Inc.: Yeah. Wamsi Mohan - Bank of America Merrill Lynch : If I could just ask you really quick on Apple's role in healthcare, it's been growing significantly since the early introduction in the Watch and then the various kits for developers, including HealthKit, CareKit, et cetera. And when you combine that with your very staunch advocacy for privacy, I see Apple could become a really large disintermediating force in all the friction in the healthcare industry today in the way medical information is shared and distributed. Is this the way that you see the future for Apple in healthcare? And do you see a means to also grow your services business through the healthcare offerings that could become subscriptions to your customers? Thank you. Timothy Donald Cook - Apple, Inc.: I think Apple has a huge opportunity in health. And you can see from our past several years that we have an intense interest in the space and are adding products and services, non-monetized services, so far to that. And I don't want to talk about the future because I don't want to give away what we're doing, but this is an area of major interest to us. Thank you. Nancy Paxton - Apple, Inc.: Thank you, Wamsi. Could we have the next question, please? Operator : Shannon Cross from Cross Research has the next question. Shannon S. Cross - Cross Research LLC : Thank you very much for taking the question. Given the $4 billion range in revenue that you're giving for the quarter and all the things that are going on in the world right now, can you maybe give a little detail about the variables that you took into account when you were coming up with this? Geopolitical trade, macro, component costs, I don't know if you can just give us some ideas of what the puts and takes were. Thank you. Luca Maestri - Apple, Inc.: Yes, Shannon, I'll take this one. At the revenue level, we started from the fact that we are very, very excited about the lineup of products and services that we have getting into the holiday season. It's the strongest lineup that we've ever had. And our guidance range, by the way, represents a new all-time quarterly revenue record. As I explained in my prepared remarks, there are a number of things that need to be considered as part of this guidance range. The first one is the fact that the launch timing of the new iPhones this year is essentially in reverse order versus last year, and that has had an effect on Q4 and will have an effect on Q1. Last year, we launched the top end of our iPhone lineup, which was iPhone X, during Q1 and placed the entirety of the channel fill for iPhone X in Q1. This year, we launched the top end of the lineup, which is the XS and the XS Max during Q4. Obviously, this resulted in more pronounced ASP growth in Q4 of 2018 and obviously a tougher compare for Q1. So I think it's important to keep that in mind as you look at the revenue guidance that we provided. The second point that needs to be kept in mind, it is a fact of life and we dealt with it for a number of years now, is the fact that when I look at currencies around the world, virtually every foreign currency has depreciated against the U.S. dollar in the last 12 months. And when we look at the impact of foreign exchange on our revenue for the December quarter, we're looking at 200 basis points of headwinds which translates, given our the size of our business, to almost $2 billion of headwind to our revenue. The third point that I think it's important to keep in mind, and Tim has talked about this, we are launching, in the last six weeks, we've launched an unprecedented number of new products. They're all ramping right now. The ramps are going fairly well, but obviously we have some uncertainty around supply/demand balance for some of these products. And then finally, the last point that we've taken into account is what Tim's talked about in terms of some level of uncertainty at the macroeconomic level in some emerging markets where clearly consumer confidence is not as high as it was 12 months ago. So take that into account and that's how we got to the range. Shannon S. Cross - Cross Research LLC : Okay. Thank you. And then, I just want to talk a little bit about the pullback in terms of guidance from a unit perspective. I understand you don't want to give guidance because of 90 days is a short period of time and it can fluctuate, but what kind of qualitative commentary do you think you'll be able to provide? Because it's obviously investors have spent the last however many years going P times Q. So, how should we think about what we can expect and sort of how are you going to manage this process as we go through? I know it's all our job to forecast, but. Luca Maestri - Apple, Inc.: Yes. Let me walk you through the rationale that we've used and then I'll talk about this qualitative commentary that you were mentioning. As I said, right, our objective is to make great products, provide the best customer experience, and get our customer satisfied, engaged and loyal to our ecosystem. When you look at our financial performance in recent years, take the last three years, for example, the number of units sold during any quarter has not been necessarily representative of the underlying strength of our business. If you look at our revenue, given the last three years, if you look at our net income during the last three years, if you look at our stock price here in the last three years, there's no correlation to the units sold in any given period. As you know very well, in addition, our product ranges for all the major product categories have become wider over time and therefore, a unit of sale is less relevant for us at this point compared to the past, because we got this much wider sales price dispersion, so unit of sale per se becomes less relevant. As I know you're aware, by the way, our top competitors in smartphones, in tablets, in computers, do not provide quarterly unit sales information either. But of course we understand that this is something of interest and when we believe that providing qualitative commentary on unit sales offers additional relevant information to investors, we will do so. Timothy Donald Cook - Apple, Inc.: Looking at one additional point there just for clarity is, Shannon, our intention is to continue to give revenue guidance at the company level and gross margin guidance in the other categories that we've been providing and so that our guidance isn't changing. It's the actual report that changes. Nancy Paxton - Apple, Inc.: Thank you, Shannon. Could we have the next question please? Operator : Our next question comes from Mike Olson with Piper Jaffray. Mike J. Olson - Piper Jaffray & Co.: Thanks very much and good afternoon. With the staggered iPhone launch, were you able to discern any impact on the XS and XS Max from buyers potentially waiting for the XR, and what if anything can we take away from the December quarter guidance related to what you're seeing for early demand of the XR? And then I have a follow-up, thanks. Timothy Donald Cook - Apple, Inc.: Mike, it's Tim. The XS and XS Max got off to a really great start and we've only been selling for a few weeks. The XR, we've only had out there for I guess five days or so at this point, and so we have very, very little data there. Usually there is some amount of wait until another product shows up and look, but in looking at the data, on the sales data for XS and XS Max, there's not obvious evidence of that in the data, as I see it. Mike J. Olson - Piper Jaffray & Co.: Got it, and you mentioned record levels for various components of the services business. As we look forward, if growth of services is to maintain something close to the recent pace, what are the components of services that you're particularly excited about that could drive that and be the strongest drivers? And maybe an offshoot to that, it seems like the news flow around augmented reality has slowed a little bit in recent months. Is that potentially a materially contributor to services in the near future? Thanks. Luca Maestri - Apple, Inc.: Mike, as we said, during the September quarter, we set new records for many, many services categories, right, from Apple Music to cloud services to the App Store to AppleCare and Apple Pay really has an exponential trajectory right now. When we look at our services business, we think about the fact that we have a very large and growing installed base. The installed base of all our major product categories is at an all-time high and has been growing over the last several quarters, so the opportunity for us to monetize our services business continues to grow over time. Of course, we're also improving the quality of the services that we provide and if you look back during the last three years, we've added new services to our portfolio. We added Apple Pay, we added Apple Music. We added this advertising business on our App Store. And clearly, we will want to continue to offer new services over time, so there are a number of vectors that allow us to continue to grow the business over time. We have stated that we want to double the size of the services business from the level that we had in fiscal 2016 by 2020. We are well on pace to achieve that, and we feel very, very confident about the future and the opportunities that we have in the services space. Timothy Donald Cook - Apple, Inc.: Mike, in terms of your question on AR, I have a different view than you do on this one. Just a year ago, practically a year ago, we came out with ARKit 1. Six months or so after that we came out with 1.5. We then recently came out with ARKit 2. The number of things that you can do are growing significantly. The number of developers that either have done something, or even more the case, that are working on things that I've seen are growing tremendously. There's a lot of interest out there and the number of categories that I'm seeing from gaming to shopping, to I was in China a few weeks ago and saw AR in an art sense, in an art exhibit. I was in Berlin last week and saw it being used in a historical educational kind of sense. I'm seeing it sort of everywhere I go now, and so I think we are in the early days, and it'll keep getting better and better, but I'm really happy with where things are at the moment. Nancy Paxton - Apple, Inc.: Thank you, Mike. Can we have the next question please? Operator : Next we'll go to Katy Huberty with Morgan Stanley. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Thank you. Tim, given the current trade negotiations and broader geopolitical risk, do you have any plans to consider diversifying the supply chain? And if you were to do that, either on your own or sort of forced, do you think it would have significant impact on the business or profitability? Timothy Donald Cook - Apple, Inc.: Katy, if you look at the products that we have created and are manufacturing, they're really manufactured everywhere. We have significant content from the U.S. market. We have content from Japan to Korea to many countries, and we have great content from China as well, and so there are many hands in the products. The vast majority or almost all of the R&D is in the United States, as well as a lot of the support organizations. And so, I think that that basic model where you look around the world and find the best in different areas, I don't expect that model to go out of style, so to speak. I think there's a reason why things have developed in that way and I think it's great for all countries and citizens of countries that are involved in that. And I'm still of the mindset that I feel very optimistic and positive that the discussions that are going will be fruitful. These relationships, these trade relationships are big and complex, and they clearly do need a level of focus and a level of updating and modernization. And so I'm optimistic that the countries, the U.S. and China and the U.S. and Europe and so forth, can work these things out and work for the benefit of everyone. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: That's helpful color. And, Luca, as a follow-up, NAND prices fell significantly during the September quarter. Why aren't we seeing that flow through to margin expansion for the overall company? Luca Maestri - Apple, Inc.: You're referring to the guidance that we provided for Q1, I imagine. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC: Yes. Luca Maestri - Apple, Inc.: Let me give you the puts and takes, Katy. You're correct. We are going to be getting some benefits from commodities in general and memory in particular. Memory on a sequential basis is about 30 basis points favorable for us going into the December quarter. And obviously, we're going to be benefiting from the leverage, which is typical of our seasonality in the December quarter. On the other hand, as I mentioned before, currencies have weakened against the U.S. dollar, and the impact that we expect at the gross margin level from foreign exchange is a 90 basis points headwind sequentially. And of course, at this point in the cycle, we also have higher cost structures because, as I said, we've launched so many new products in the last six weeks. So those are the puts and takes, leverage and commodity savings on one side and FX and the new products on the other side. Nancy Paxton - Apple, Inc.: Thank you, Katy. Could we have the next question, please? Operator : Next, we'll go to Jim Suva with Citigroup. Jim Suva - Citigroup Global Markets, Inc.: Thank you very much, a question for Tim and a question for Luca, and I'll ask them at the same time, so you can decide who wants to go first or second. But operationally, Tim, I think your company is at a disadvantage relative to others in India, giving where items are produced versus shipped versus taxed versus installed as well as ability to own stores. So can you help us address that? Is India going to potentially be a big area, as I think you got about only about 1% market share, but it sounded like things may be softer there? And then for Luca, there will probably be a lot of pushback about not giving iPhone unit data. It sounds like you're still going to give revenue data, if I heard that correctly, but some people may fear that this now means that the iPhone units are going to start going negative year over year because it's easier to talk about great things and not show the details of things that aren't so great. So thank you very much, gentlemen. Timothy Donald Cook - Apple, Inc.: Okay, I'll start with India. We've had really great productive discussions with the Indian government, and I fully expect that at some point, they will agree to allow us to bring our stores into the country. We've been in discussions with them, and the discussions are going quite well. As you point out, there are import duties in some or most of the product categories that we're in. In some cases, they compound, and this is an area that we're giving lots of feedback on. We do manufacture some of the entry iPhones in India, and that project has gone well. I am a big believer in India. I am very bullish on the country and the people and our ability to do well there. The currency weakness has been part of our challenge there, as you can tell from just looking at the currency trends, but I view these as speed bumps along a very long journey, though. And the long term I think is very, very strong there. There's a huge number of people that will move into the middle class. The government has really focused on reform in a major way and made some very bold moves. And I applaud them for doing that and I can't wait for the future there. Luca Maestri - Apple, Inc.: And, Jim, let me take the question on units. First of all, as Tim said, our approach to guidance, providing guidance doesn't change at all. We continue to provide the same metrics that we were providing before. In terms of reporting results, one of the things that we are doing, and it's new and it's in addition to the information that we provide to investors because we've heard some significant level of interest around this, is starting with the December quarter, for the first time we're going to be providing information on revenue and cost of sales, and therefore gross margins for both products and services. And this will be the first time that we're going to provide gross margin information for our services business, which we believe is an important metric for our investors to follow. Given the rationale on why we do not believe that providing unit sales is particularly relevant for our company at this point, I can reassure you that it is our objective to grow unit sales for every product category that we have. But as I said earlier, a unit of sale is less relevant today than it was in the past. To give you an example, the unit sales of iPhone at the top end of the line have been very strong during the September quarter, and that's very important because we're attracting customers to the most recent technologies and features and innovation that we bring into the lineup, but you don't necessarily see that in the number that is reported. And so therefore, we will, as I said, we'll provide qualitative commentary when it is important and relevant. But at the end of the day, we make our decisions from a financial standpoint to try and optimize our revenue and our gross margin dollars, and that we think is the focus that is in the best interest of our investors. Timothy Donald Cook - Apple, Inc.: Jim, let me just add a couple things to that for color. Our installed base is growing at double digit, and that's probably a much more significant metric for us from an ecosystem point of view and the customer loyalty, et cetera. The second thing is this is a little bit like if you go to the market and you push your cart up to the cashier and she says, or he says how many units you have in there? It doesn't matter a lot how many units there are in there in terms of the overall value of what's in the cart. Nancy Paxton - Apple, Inc.: Thank you, Jim. A replay of today's call will be available for two weeks on Apple Podcast, as a webcast on apple.com/investor and via telephone and the numbers for the telephone replay are 888-203-1112 or 719-457-0820 and please enter confirmation code 3699080. These replays will be available by approximately 5 :00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414 and financial analysts can contact Matt Blake or me with additional questions. Matt is at 408-974-7406 and I'm at 408-974-5420. Thanks again for joining us. Operator : That does conclude our conference for today. Thank you for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,019	1	2019Q1	2019Q1	2019-01-29	2.973	2.914	3.128	3.02	3.245	13.31	15.04	Operator : Good day and welcome to the Apple Incorporated First Quarter Fiscal Year 2019 Earnings Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please, go ahead. Nancy Paxton : Thank you. Good afternoon and thanks to everyone for joining us. Speaking first today is Apple CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the Risk Factors discussed in Apple's most recently filed periodic reports on Form 10-K and Form 10-Q, and the Form 8-K filed with the SEC today, along with the Associated Press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you, Nancy and thanks to everyone for joining us today. This isn't the first time you've heard from us regarding the December quarter, so the first thing I want to do is provide some final results and connect those back to the letter we shared at the beginning of the month. As you know, our December quarter revenue was below our original expectations, coming in at $84.3 billion. That's down 5% from a year ago, or down 3% adjusting for foreign exchange. We noted four factors that would impact our results when we provided guidance in November : different iPhone launch timing from a year ago, FX headwinds, supply constraints on certain products and macroeconomic conditions in emerging markets. One of those factors, weak macro conditions in some emerging markets was significantly more severe than we originally foresaw, especially in Greater China. As our letter noted, that challenge was compounded by quarterly iPhone upgrades that were lower than we anticipated. We'll return to upgrades in a moment, but I'd first want to say a bit more about our business in Greater China. Our revenue there was down by $4.8 billion from last year with declines across iPhone, Mac and iPad. Most of the shortfall relative to our original guidance and over 100% of our worldwide year-over-year revenue decline was driven by our performance in Greater China. Despite iPhone upgrades being lower than we anticipated, our business grew outside of China, including new records in the Americas, Western Europe, Central and Eastern Europe and our rest of Asia Pacific segment. We had record performance in large markets, including the United States, Canada, Mexico, Germany, Italy, Spain and Korea. In the letter we shared earlier this month, we said we are proud to participate in the Chinese marketplace and that we believe our business has a bright future there over time. But I think some of that got lost, so I want to share a bit more detail on the positives we see in China. We generated record December quarter services revenue in Greater China, fueled by an amazing ecosystem with over 2.5 million registered iOS developers. We saw very strong results from our wearables business there with revenues up over 50%. We also continued to grow our total active installed base by adding new customers. In fact, more than two-thirds of all customers in China who bought a Mac or an iPad during the December quarter were purchasing that product for the first time. Finally, for perspective, despite the challenging December quarter, our revenue from China grew slightly for the full calendar year. Macroeconomic factors will come and go, but we see great upside in continuing to focus on the things that we can control. Returning to iPhone, I'd like to talk about our results in the context of those lower than expected upgrades. iPhone XR, iPhone Xs, and iPhone Xs Max are by far the best iPhones we've ever shipped. They share advanced technologies including the A12 Bionic, the most powerful chip ever in a smartphone with our next-generation Neural Engine capable of 5 trillion operations per second. These are also completely modern iPhones with stunning large full screen displays and Face ID, the most secure authentication of any kind available in a smartphone. And the cameras are simply amazing with portrait mode and depth control to allow users to create studio quality photos as well as stunning 4K video, opening a whole new era of photography. We couldn't be more proud of our iPhone lineup and our industry-leading customer satisfaction. We wouldn't change our position for anyone. Now, our customers are holding on to their older iPhones a bit longer than in the past. When you pair this with the macroeconomic factors, particularly in emerging markets, it resulted in iPhone revenue that was down 15% from last year. Our iPhone results accounted for significantly more than our entire year-over-year revenue decline. In fact, outside of iPhone, our business grew strongly by 19%. So, what's behind this? It's important to understand what's going on from the customer perspective at the point of purchase. We believe that it's the sum of several factors. First, foreign exchange. The relative strength of the U.S. dollar has made our products more expensive in many parts of the world. In Turkey, for example, the lira depreciated by 33% over the course of calendar 2018 and in the December quarter, our revenue there was down by almost $700 million from the previous year. Second; subsidies. For various reasons, iPhone subsidies are becoming increasingly less common. In Japan, for example, iPhone purchases were traditionally subsidized by carriers and bundled with service contracts. Competitive promotional activity frequently increase the amount of subsidy during key periods. Today, local regulations have significantly restricted those subsidies as well as related competition. As a result, we estimate that less than half of iPhones sold in Japan in Q1 of this year were subsidized compared to about three quarters a year ago and that the total value of those subsidies had come down as well. Third, our battery replacement program. For millions of customers, we made it inexpensive and efficient to replace the battery and hold onto their existing iPhones a bit longer. Some people have suggested that we shouldn't have done this because of the potential impact on upgrades, but we strongly believe it was the right thing to do for our customers. What's very important, however, is that in spite of these factors, our total active installed base of devices has grown from 1.3 billion at the end of January of 2018 to 1.4 billion by the end of December reaching a new all-time high for each of the main product categories and for all five of our geographic segments. Not only is our large and growing installed base a powerful testament to the satisfaction and loyalty of our customers, but it's also fueling our fast-growing Services business. In fact Services revenue set an all-time record at $10.9 billion in the December quarter growing 19%. We not only generated our highest global Services revenue ever, but we also had all-time records across multiple categories of Services including the App Store, Apple Pay, cloud services and our App Store search ad business and we had a December quarter record for AppleCare. And I'm very proud to say that nearly 16 years after launching the iTunes Store, we generated our highest quarterly music revenue ever thanks to the great popularity of Apple Music now with over 50 million paid subscribers. The App Store wrapped up its best year ever with record holiday period results propelled by the biggest Christmas Day and Christmas week ever. Customers also spent over $322 million on New Year's Day alone setting us new single-day record for both the number of customers and purchase volume. It was also a great holiday season for Apple Pay with over 1.8 billion transactions in the quarter well over twice the volume of the year-ago quarter. Merchant adoption continues to reach new milestones. Customers can now use Apple Pay with iPhone and Apple Watch at nearly 3,000 Speedway locations, while all Target Taco Bell and Jack-in-the-Box stores will be accepting Apple Pay soon. We launched Apple Pay in three new countries in the December quarter Germany, Belgium and Kazakhstan and is now live in 27 markets around the world. The rollout in Germany has been a huge success with Deutsche Bank reporting more activations for Apple Pay in one week than for Android in an entire year. This is yet another example of what's possible when you bring together Apple's world-class hardware, software and ecosystem with our engaged and active user base. Shoppers around the world love Apple Pay and it has increasingly become an indispensable part of daily life. Revenue from cloud services continues to grow rapidly with year-over-year revenue up over 40% in the December quarter. And readership of Apple News set a new record with over 85 million monthly active users in the three countries where we've launched the United States, the U.K., and Australia. Here in the U.S., the latest data from Comscore shows that Apple News has the largest audience of all news apps. And the international audience will continue to grow with our first-ever bilingual launch in Canada available to customers later this quarter. In summary, we're very happy not only with the growth, but also the breadth of our Services portfolio. Our revenue from Services has grown from less than $8 billion in calendar 2010 to over $41 billion in calendar 2018. The largest category represents less than 30% of total Services revenue and the new services we've launched in the last few years are all experiencing tremendous growth. We had our best quarter ever for Mac revenue which was up 9% fueled by our new MacBook Air and Mac Mini introduced in October. The MacBook Air includes a beautiful new Retina display, Touch ID and Force Touch Trackpad while the new Mac mini provides a powerful, flexible solution for everything from home automation to giant render forms. iPad revenue was up 17%, its highest growth rate in almost six years powered by the new iPad Pro released in November with its edge-to-edge Liquid Retina display, Face ID and A12X Bionic chip, the new iPad Pro has been described by reviewers as a tablet with no equal and the most powerful mobile device ever made. We also had our best quarter ever for Wearables Home and Accessories with 33% growth in total and almost 50% growth from Wearables, thanks to strong sales of both Apple Watch and AirPods. We don't measure our success in 90-day increments. We manage Apple for the long term and when we consider the keys to our success over time there are three that stand out, our highly satisfied and loyal customers, our large and growing active installed base and at the heart of it all, our deeply ingrained culture of innovation. Thanks to all this our ecosystem is stronger than ever before. We have an amazingly talented team creating hardware, software and services, optimizing each of them to create an unparalleled user experience. Apple Watch is a powerful example of that. It's humbling to read e-mails from customers around the world telling us how Apple Watch has dramatically changed their lives by motivating them to be more fit and active, by alerting them to potentially serious health conditions such as AFib and by helping them in times of crisis with features like fall detection and emergency SOS. We believe we are just beginning to see the impact we can make to improving health and are deeply inspired by the possibilities. Another example is the work we're doing with silicon. We've embedded machine learning directly into the silicon with our A12 Bionic chip. Our custom Neural Engine not only provides power efficiency and incredible performance in a very small package, but it also enables processing of data and transactions directly on the device. This means iPhone can recognize patterns make predictions and learn from experience and it does all this while keeping personal information private. This is a powerful example of how innovation and privacy can go hand-in-hand at a time when these issues are increasingly important to our users. We are undertaking and accelerating a number of initiatives to improve our results. It's not in our DNA to just stand around and wait for macroeconomic conditions to improve. One such initiative is making it simple to trade in an iPhone in our stores and raising awareness of this opportunity. Because of the quality and durability of iPhones, they maintain significant residual value making trade-ins a great opportunity. It's not only great for the environment, it's great for the customer as their existing phone acts as a subsidy for their new phone and it's great for developers as a phone that is traded in and redistributed can help grow our active installed base. Beginning last week, we started making it easier for people to pay for their phones over time with installed payments and we're working on rolling out this program to more geographies as soon as we can. We are as confident as ever in the fundamental strength of our business and we have a very strong pipeline of products and services with some exciting announcements coming later this year. Apple innovates like no other company on earth and we are not taking our foot off the gas. We'll continue to invest through near-term headwinds just as we always have and we'll emerge stronger as a result. Now for more details on our December quarter results, I'd like to turn the call over to Luca. Luca Maestri : Thank you, Tim. Good afternoon, everyone. As Tim said, revenue for the December quarter was $84.3 billion. This result was below our expectations, but we were able to set new all-time revenue records in the U.S., Canada, Latin America, Western Europe, Central and Eastern Europe and Korea. Our results were especially strong in the U.S. where revenue was up by more than $1.5 billion compared to a year ago and in several markets where revenue grew by double digits including among others Germany, Spain, Poland, Mexico, Malaysia and Vietnam. Looking at product categories. iPhone revenue declined 15% from a year ago while revenue from the rest of our business grew 19% to an all-time record, including our best results ever for Services, for Wearables and for Mac. Company gross margin was 38%. This quarter for the first time, we're making an important new disclosure to our investors as we believe it will foster a better understanding of our business. We are now reporting on a quarterly basis, gross margin for products in aggregate and for Services in aggregate. Products gross margin was 34.3% and Services gross margin was 62.8%. On a sequential basis, products gross margin increased 60 basis points due to positive leverage from the holiday quarter, partially offset by higher cost structures as we launched several new products and by headwinds from foreign exchange. Services gross margin also increased 170 basis points sequentially due to favorable mix and leverage, partially offset by foreign exchange. While both products and services gross margins improved sequentially, total company gross margin was down 30 basis points due to a different mix between products and services. Net income was $20 billion about flat to last year and diluted earnings per share were an all-time record at $4.18, an increase of 7.5% over last year. Operating cash flow was also very strong at $26.7 billion. Let me provide more color for the various products categories. iPhone revenue was $52 billion. On a geographic basis, most of the decline from last year came from Greater China and other emerging markets with difficult macro and foreign exchange conditions affected our results. We also believe that the reduction of carrier subsidies and our battery replacement program had an impact in a number of countries around the world. And as Tim mentioned we had a lower number of upgrades than we had anticipated at the beginning of the quarter. However, our global active installed base of iPhones continues to grow and has reached an all-time high at the end of December. We are disclosing that number now for the first time. And it has surpassed 900 million devices, up year-over-year in each of our five geographic segments and growing almost 75 million in the last 12 months alone. We plan to provide information on the iPhone installed base as well as total installed base on a periodic basis. Customer satisfaction and loyalty for iPhone continue to be outstanding and are the highest in the industry. The latest survey of U.S. consumers from 451 Research indicates customer satisfaction of 99% for iPhone XR, XS and XS Max combined. And among business buyers who plan to purchase smartphones in the March quarter 81% plan to purchase iPhones. Based on the latest information from Kantar, iPhone experienced a 90% customer loyalty rating for iPhone customers in the U.S. 23 points above the next highest brand measured. Turning to Services. It was our best quarter ever with revenue of $10.9 billion, up 19% year-over-year with new December quarter records in all five of our geographic segments. Many Services categories set new all-time revenue records and we are on track to achieve our goal of doubling our fiscal 2016 Services revenue by 2020. To be clear and as we've already explained 90 days ago, our 2020 goal remains unchanged and it excludes the impact of the revenue reclassification between products and services we recorded in connection with ASC 606, the new revenue recognition accounting standard that we adopted at the beginning of fiscal 2019. The level of engagement of our customers in our ecosystem continues to grow. The number of transacting accounts on our digital stores reached a new all-time high during the quarter with the number of paid accounts growing by strong double digits over last year. And we now have over 360 million paid subscriptions across our Services portfolio, an increase of 120 million versus a year ago. Given the continued strength and momentum in this part of the business, we now expect the number of paid subscriptions to surpass 0.5 billion during 2020. Our subscription business has become very large and diversified covering many different categories from entertainment to health and fitness to lifestyle. In fact, more than 30,000 third-party subscription apps are available today on the App Store and the largest of them accounts for only 0.3% of our total Services revenue. Next, I'd like to talk about the Mac. We saw great response to the new MacBook Air and Mac mini that we introduced in October, which helped drive a 9% increase in Mac revenue over last year to a new all-time record. Mac revenue was up in the vast majority of countries we track with double-digit growth in many large markets such as the U.S., Western Europe, Central and Eastern Europe, Japan, Korea and South Asia. Our active installed base of Macs reached a new all-time high and half of all the customers purchasing Macs in the December quarter were new to Mac. We also had great results for iPad with revenue up 17% from a year ago. A strong performance of both iPad and iPad Pro and generated double-digit growth in four of our five geographic segments. Similar to the Mac, our installed base of iPads reached a new all-time high and among customers purchasing iPad during the quarter half were new to iPad. The most recent consumer survey from 451 Research measured a 94% customer satisfaction rating for iPad overall, with iPad Pro models scoring as high as 100%. Among business customers who plan to purchase tablets in the March quarter, 68% plan to purchase iPads. Wearables, home and accessories revenue grew 33% to a new all-time record in each of our geographic segments. Revenue from this category was up over $1.8 billion compared to a year ago, thanks to the amazing popularity of Apple Watch and AirPods both of which were supply constrained as we exited the quarter. Based on revenue over the past four quarters, our Wearables business is approaching the size of a Fortune 200 company. Our retail and online stores generated strong results for Mac and iPad and all-time record performance from Services and from Wearables. Following the launch of the new iPhone trade-in campaign, our stores more than doubled the volume of iPhones traded in compared to last year, reaching an all-time high in Q1. We added Thailand to our footprint with a beautiful store in Bangkok and we opened a stunning new store on Champs-Elysees in Paris exiting the quarter with 506 physical stores in 22 countries. In enterprise, across multiple industries our technology continues to enable businesses to do their best work. In healthcare, iPhones and iOS apps continue to streamline and support clinical workflows, communications and care delivery across leading health systems including Johns Hopkins Medicine, Massachusetts General Hospital, Stanford Health Care and Saint Jude Children's Research Hospital. In manufacturing, SKF the world’s largest producers of bearings and seals, has transformed their manufacturing processes on iOS and iPhone with incredible success. With custom iOS apps available to production operators across their worldwide locations, SKF has reduced production errors from 20 percent to zero while saving 70% in system-related time. Apple technology has made possible a simplified user experience integrating the SAP cloud platform, yielding better accuracy, efficiency, and employee experiences across the board. We’re also seeing great innovation in the construction industry, with iPad and new third-party apps made for iOS. For instance, Procore Technologies has introduced an app to help decrease building errors on the job site. By using Metal in Split View with the iPad camera, construction workers can compare building plants and 3D models to what is actually being built in real time. This new iOS app reduces wasted raw materials and helps keep building projects on time and on budget. Let me now turn to our cash position. We ended the quarter with $245 billion in cash plus marketable securities. We also had $102.8 billion in term debt and $12 billion in commercial paper outstanding, for a net cash position of $130 billion. As we explained in the past, it is our plan to reach a net cash neutral position over time. As part of this plan, we returned over $13 billion to our investors during the December quarter. We repurchased 38 million Apple shares for $8.2 billion through open market transactions and we paid $3.6 billion in dividends and equivalents. Consistent with our historical cadence, we plan to provide an update on our overall capital return program when we report our March quarter results. As we move ahead into the March quarter, I’d like to review our outlook, which includes the types of forward looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $55 billion and $59 billion. This range reflects a negative year-over-year impact of $1.3 billion from foreign exchange, which represents about 210 basis points of last year's revenue and a more uncertain macroeconomic environment than a year ago, especially in emerging markets. We expect gross margin to be between 37% and 38%. On a sequential basis, this range reflects seasonal loss of leverage and a 60 basis point unfavorable impact from foreign exchange, partially offset by commodity cost savings. We expect OpEx to be between $8.5 billion and $8.6 billion. We expect OI&E to be about $300 million and we expect the tax rate to be about 17%. Also today, our Board of Directors has declared a cash dividend of $0.73 per share of common stock, payable on February 14, 2019 to shareholders of record as of February 11, 2019. With that, I'd like to open the call to questions. Nancy Paxton : Thank you, Luca. And we ask that you limit yourselves to two questions. And may we have the first question please? Operator : Certainly. Our first question will come from Katy Huberty with Morgan Stanley. Katy Huberty : Thank you. Good afternoon. Services growth did decelerate from the growth rates in recent quarters, so can you talk about the factors that played into that slower growth? And then, appreciate the new disclosure around paid subscribers. But if you compare what you added in 2018 versus what you expect to add over the next two years, that implies a slowdown in annual net new subscribers. So should we be thinking about services as a lower growth segment than what you experienced in 2018? And then I have a follow-up. Luca Maestri : Yes, Katy, let me take that one. First of all, when we talk about the services business, it's very important to start from the momentum that we have. As you know, we have set an ambitious target for ourselves to double the size of our business from fiscal 2016 to 2020, which implied at the time a 19% CAGR. So far, we've been able to grow about 20%. In fiscal 2018, we grew 22%. So we are on track to achieve our objective. And it's important to understand what is driving the growth of the business. First of all, it's our installed base. As we just told you, the installed base continues to grow very nicely. It has reached 1.4 billion active devices at the end of December and really very little of our services revenue is driven by what we sell in the last 90 days. The second factor for the growth of the services business is that within this installed base the percentage of users who are paying for at least one service is growing very strongly. This is due to several factors. First of all, we're offering more and more services. During the last few years, as you know, we launched Apple Music, Apple Pay and advertising service for our developers on the App Store. All these businesses are growing very strongly. Second, we are making it easier for our customers to transact on our digital stores. We accept many more payment methods today which are very common in certain countries around the world. We've also increased the distribution coverage for many of these services. We're bringing AppleCare to more points of sale around the world. We are launching Apple Pay in more and more markets and so on. Thirdly, as you mentioned, our subscriptions are becoming a very large portion of our business and they're growing very well above services average. And the fact that we are saying that we will surpass 0.5 billion during 2020, we're not putting a specific date during 2020, but I think you've seen over recent quarters that we've been adding about 120 million on a year-over-year basis for a number of quarters now. And this is an incredible staggering number, right, when you think about it. We are also broadening the scope of many of these services. If you take Apple Pay as an example, it started off as the most convenient, most private and most secure way to make a payment in a store or in an app. Then we took Apple Pay to Safari, then we started a peer-to-peer service and we're launching it in new markets across the world every quarter, so we are broadening that scope. And of course, similar to what we've done in the past in the last three years, we launched several new services, we're also looking to launch new services going forward that we believe will provide great value to our users and we're really very excited about the opportunities that we see in front of us. I think you're referring to the deceleration in the growth rate that we've seen in the December quarter. And I think you're referring back to the growth that we reported in September. I think an important point I need to make, and I think it's helpful that you asked the question, is that a portion of this deceleration is truly just a reclassification of the amortization of free services that we've made in connection with the adoption of the new revenue recognition standard. And as we explained 90 days ago, this amortization of free services in the past was reported under Products and now gets reported under Services. The reclassification is actually dilutive to our growth rate because the amortization of free services is a relatively stable number, which gets applied to a growing base. So this reclassification reduces our growth rate versus the previous classification. This factor by itself represents roughly one-third of the deceleration that you're seeing. We talked about 27% growth in the September quarter. With the reclassification that growth rate was about 24.5%. So that explains about a third of that deceleration. There are, I would say three factors that explain this difference between the 24.5% to the 19%. The first one is that foreign exchange plays a role. Roughly 60% of our Services business is outside the United States. And as you know the U.S. dollar has appreciated in recent months. And in general, we tend not to reprice our services for foreign exchange on a very frequent basis. The second factor is a well-known issue around the App Store in China. The App Store in China is a large business for us. We believe this issue around the approval of new game titles is temporary in nature, but clearly is affecting our business right now. And then thirdly, we are seeing some level of deceleration in AppleCare, which has had very, very strong growth during fiscal 2018, where we're starting to lap some of the increase in distribution coverage that we put in place recently and the channel fill of Apple components that happened when we increase the distribution coverage. But in general, we are very, very pleased with 19% growth and we think that the business will continue to grow nicely going forward. Katy Huberty : Thank you for that color. Just a quick follow-up, Luca. Share repurchases in the December quarter were well below the run rate from the June and September quarters. How much did the weaker quarter play into your ability to carry out the buyback at the same level? And what should we think about is the right run rate going forward? Luca Maestri : Well, we've always said that we're very committed to executing our program. We have done almost $250 billion of repurchases from the beginning of the program. But we've also said that we want to execute the program in an efficient, effective, I will say, disciplined manner. And that takes into account also overall market conditions. So, that's what we did during the course of the December quarter. We -- our fundamental view remains the same. We are optimistic about our future and we think there is great value in our stock. And so we will continue to execute the program. We will continue to report at the end of every quarter. And by the way, when we report our March quarter results, we will also talk about the next step in our capital return program which is something that we do traditionally in the spring. Nancy Paxton : Thank you, Katy. Can we have the next question, please? Operator : The next question will come from Steve Milunovich with Wolfe Research. Steve Milunovich : Great. Thank you very much. Some have the perception that you priced the new products, the new iPhones too high, what have you learned about price elasticity? And do you feel that perhaps you pushed the envelope a little bit too far and might have to bring that down in the future? Tim Cook : Steve, it's Tim. If you look at what we did this past year, we priced the iPhone Xs in the U.S. the same as we priced the iPhone X a year ago. The iPhone Xs Max which was new was $100 more than the Xs. And then we priced the XR right in the middle of where the entry iPhone 8 and entry iPhone 8 Plus have been priced. So, it's actually a pretty small difference in the United States compared to last year. However, the foreign exchange issue that Luca spoke of in the call and -- made that difference or amplified that difference in international markets, in particular the emerging markets which tended to move much more significantly versus the dollar. And so what we have done in January and in some locations and some products is essentially absorbed part or all of the foreign currency move as compared to last year and therefore get close or perhaps right on the local price from a year ago. So, yes, I do think that price is a factor. I think part of it is that, the FX piece. And then secondly in some markets as I had talked about in my prepared remarks, the subsidy is probably the bigger of the issues in the developed markets. I had mentioned Japan, but also even in this country even though the subsidy has gone away for a period of time. If you're a customer that your last purchase was a 6s or 6 or in some cases even a 7, you may have paid $199 for – and now in an unbundled world it's obviously much more than that. And so we are working through those and we've got a number of actions to address that including the trade-in and the installment payments which I had mentioned as well. Steve Milunovich : I know that you're not giving units going forward, but you said you might make qualitative comments. I was wondering, if you have a comment particularly on the ASP on a year-over-year basis? Luca Maestri : Well Steve, we did mention on the call last quarter that the different timing of our phone launches would affect the year-over-year compares. If you remember, our top models the Xs and Xs Max shipped during the September quarter, which plays the channel fill and the initial sales in that quarter. While last year the iPhone X shipped in Q1 in the December quarter, plays in the channel fill and initial sales in the December quarter. So we knew that this would create a difficult compare for Q1 of 2019 and this is essentially what happened. It was pretty much in line with our expectations. To give you more color I would say that, the XR is our most popular model and it's followed by Xs Max and then the Xs. Nancy Paxton : Thank you, Steve. Could we have the next question, please? Operator : The next question will come from Toni Sacconaghi with Bernstein. Toni Sacconaghi : Yes. Thank you. I have one for Luca and one for Tim. Luca, looks like the midpoint of your Q2 revenue guidance implies the steepest Q1 to Q2 sequential decline in iPhone revenues in history. It also implies a year-over-year deceleration in iPhone revenues. And I'm wondering, if you can comment about whether that's conservatism, whether you're entering the quarter with a high level of channel inventory and maybe you can comment explicitly on that, or whether you actually think the macroeconomic conditions are getting worse? Luca Maestri : Yeah. I mean three questions there. The first one is a question around conservatism. As we always do when we provide a range, it's a range that we believe we're going to fall within. We've done pretty well with that up until the December quarter, right? I mean, we've been – we didn't miss in years and years. So that's the idea. There isn't a specific level of conservatism. We believe that this is the range where we're going to fall within. On channel inventory, as you know our historical pattern for iPhone channel inventory is that typically we increase inventory in Q1 and we decrease in Q2. And we think this year will be similar and we've exited the December quarter with levels of inventory that we are comfortable with. So that leaves us with the reality that our iPhone performance in Q1 from a revenue standpoint was minus 15%. And we expect that the key factors that Tim mentioned during the call affecting iPhone performance in Q1 will also have an effect on Q2 starting with the strong U.S. dollar environment. On a year-over-year basis, the negative impact from currency is going to be about $1.3 billion, so that's about a bit more than two points versus last year's revenue and so that obviously plays a role. And the macroeconomic environment particularly in emerging markets will continue to be there. On the positive side, we expect that we will continue to grow revenue nicely from the rest of the business which is not iPhone. Toni Sacconaghi : Okay. Tim, at your September event Lisa Jackson, an Apple VP, stated the company needed to quote design products to last as long as possible. And Apple's clearly doing that by helping with the battery replacement program, iOS working on an older range of products et cetera. But I guess the question is why doesn't that mean that replacement or upgrade cycles for iPhones should continue to extend going forward in part because that's almost one of your objectives? And maybe to that end, maybe you can help us understand what iPhones' average replacement cycle might be today, and how that may have changed over the last three to five years. And again, why wouldn't you expect it to elongate over time given some of the aforementioned things? Thank you. Tim Cook : We do design our products to last as long as possible. Some people hold onto those for the life of the product and some people trade them in. And then that phone is then redistributed to someone else. And so it doesn't necessarily follow that one leads to the other. The cycles -- the average cycle has extended. There's no doubt about that. We've said several times I think on this call and before, that the upgrades for the quarter were less than we anticipated due to the -- all the reasons that we had mentioned. So, where it goes in the future, I don't know, but I'm convinced that making a great product that is high quality, that is the best thing for the customer and we work for the user. And so that's the way that we look at it. Nancy Paxton : Thank you, Toni. Could we have the next question, please? Operator : Next question will come from Shannon Cross with Cross Research. Shannon Cross : Thank you very much. I wanted to ask about the trajectory of Services gross margin, up about 500 basis points it appears year-over-year. You talked a little bit about sequential. But what's driving the improvement or will it be volatile as we go through the year depending on quarters and mix? Just whatever color you can give us as we start to forecast this? Thank you. Luca Maestri : Yes, Shannon. I think you've seen that Services gross margins increased on a year-over-year basis by a significant amount. Let me start with sequential because I think it's probably most relevant for us. Sequentially, we increased 170 basis points. It's a business that is growing nicely, so we get good support from our scale. Some of these services are scaling quickly and so we tend to expand gross margins there. And also, we had favorable mix. As you probably know, we have a very broad portfolio of Services. Some of them tend to be accretive to the average gross margin for services, also because of the way we account for them. For example, you know that on the App Store, we book revenue on a net basis and therefore the gross margins tend to be accretive. But we also have services that are very successful, that are below the average for the services business. And so depending on how these separate businesses do in the marketplace, we're going to be seeing some level of movement going forward on services margins. But you've seen that for the last 12 months they've gone up nicely 450 basis points and sequentially they've gone up 170 basis points. But I wouldn't draw necessarily a conclusion on how this services gross margin is going to move over time. We will report of course at the end of every quarter. But important to keep in mind, it's a broad portfolio with very different gross margin profiles within the portfolio. It is important for us to grow gross margin dollars. And if at times we grow services that are at a level of gross margins, which is below average, as long as this is good for the customer and as long as we generate gross margin dollars we're going to be very pleased. Shannon Cross : Okay, thank you. And then Tim, can you talk a bit about video? You've signed a myriad of deals. There was announcement about -- there are TV app directly on Samsung. So perhaps when this comes out you'll be multi-platform. I'm just curious how you view the opportunity in video. And I guess assuming, you can just leverage the costs that you've made already, it should be accretive to margin I would think? Tim Cook : Yeah, Shannon, we see huge changes in customer behavior taking place now. And we think that it will accelerate as the year goes by to sort of the breakdown of the cable bundle that's been talked about for years. And I think that it'll likely take place at a much faster pace this year. And so we're going to participate in that in a variety of ways. One of those is through Apple TV and you're well familiar with that product. The second way is AirPlay 2, which we have as just pointed out we have support on a number of different third-party TVs. And we're excited about that. It makes the experience in the living room with people using our products even better. We think that people are really going to like that. Another way is, of course, all the third-party video subscriptions that are on the store. We are participating in this today. And I would guess that that's going to accelerate into the future as the bundle breaks down and people begin to buy likely multiple services in place of their current cable bundle. And then finally, original content where we will participate in the original content world. We have signed a multiyear partnership with Oprah. But today I'm not really ready to extend that conversation beyond that point. We've hired some great people that I have a super amount of confidence in and they're working really hard and we'll have something to say more on that later. Nancy Paxton : Thank you, Shannon. Could we have the next question, please? Operator : The next question will come from Walter Piecyk with BTIG. Walter Piecyk : Great, thanks. I just have a question on the free services. Can you just describe how the math works on that? Is it that the free services are non cash revenue that's getting booked in the Services revenue with no cost and then the costs come out of products? Can you just run us through what the current status versus how you were accounting for that before? Luca Maestri : Yes in essence when we sell a product at a certain price, we make an assumption. We estimate the value that can be associated to providing free services. In our case, it's providing Maps services, providing Siri and providing free iCloud to all the customers that purchase our product. And so we calculate an estimated value. That value gets deferred and gets amortized over the estimated period of time that we deliver the free services. In the past that deferral and the subsequent amortization was reported under products. Now in connection with the new revenue recognition standard, we are reclassifying essentially that amortization from products revenue to services revenue. So total revenue has not changed, we just report that estimated value under the Services category. We also reclassify the cost that we need to incur to provide those services. So the gross margin rate of these services is clearly significantly dilutive to the overall Services margin. I hope I've... Walter Piecyk : So it did make services gross margin, got it. And then my other -- my second question is just, when you think about growth in Services, you have selling more to existing paid subscription customers or it's the 300 million going to 0.5 billion. If you can just talk at a high level as far as when you look at growth going forward, is it about -- what is the mix in terms of selling more to existing users, getting new users or -- and maybe some of the individual services that you see the biggest growth opportunity? Thank you. Luca Maestri : Yes. I mean as I said I mean essentially what -- services -- I said services too is our installed base. So the first driver is growing the installed base. Installed base has grown nicely over the last several years. We've added 100 million in the last 12 months alone. So that's the first step. Then within that installed base, of course we want to make sure that there are more people that are so interested in our services that in addition to transacting on those services on a free basis, they also are interested in paying for those services. And I mentioned that the percentage of paid accounts has increased strong double-digits. So we want to continue to do that. We want to make it easier for our customers to actually use our services and so we are accepting more and more payment methods around the world. And clearly, as you said the idea of adding new services is very important to us. During the last three years, we've added Apple Pay, which has been incredibly successful and is a wonderful customer experience. We've added Apple Music, where we now have more than 50 million paid subscribers and continues to grow very nicely. And we've added a very useful service to our developers. We provide an advertising service for developers in the App Store. The way we've added these services in the past, obviously, we're also very interested in adding new services that can provide great value to our customers in the future. Now we don't want to get into product announcements here, but obviously that is part of our strategy. Nancy Paxton : Thank you all. A replay of today's call will be available for two weeks on Apple Podcast, as a webcast on apple.com/investor and via telephone. And the numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 2358120. These replays will be available by approximately 5 :00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact Matt Blake or me with additional questions. Matt is at 408-974-7406, and I'm at 408-974-5420. And thanks again for joining us. Operator : That does conclude our conference for today. Thank you for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,019	2	2019Q2	2019Q2	2019-04-30	2.905	2.889	3.065	3.077	3.0725	15.79	16.07	Operator : Good day, and welcome to the Apple Incorporated Second Quarter Fiscal Year 2019 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead. Nancy Paxton : Thank you. Good afternoon, and thanks to everyone for joining us today. Speaking first is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook. Actual results or trends could differ materially from our forecast. For more information please refer to the Risk Factors discussed in Apple's most recently filed periodic reports on Form 10-K and Form 10-Q, and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thanks, Nancy. Good afternoon and thanks to all of you for joining us today. This has been an exciting and productive quarter for Apple. In my letter to investors at the beginning of January, I wrote that one of Apple's great strengths is our culture of flexibility, adaptability, and creativity. This quarter featured some important announcements that speak to the power of our commitment to innovation and long-term thinking. I'd like to start with some top-line highlights and then move into greater detail with you. I'll get started with financial results. Our revenue was $58 billion toward the high end of our guidance range. We see this result as a positive outcome in light of ongoing headwinds from weaker foreign currencies relative to the U.S. dollar. In constant currency, our year-over-year revenue performance would have been 200 basis points better than our reported results indicate. We had great results in a number of areas across our business. It was our best quarter ever for Services with revenue reaching $11.5 billion. We had a blockbuster quarter for iPad, with revenue up 22% from a year ago. This is our highest iPad revenue growth rate in six years. And it was another sensational quarter for Wearables with growth near 50%. This business is now about the size of a Fortune 200 company, an amazing statistic when you consider it's only been four years since we delivered the very first Apple Watch. I'll talk more about these categories later. While we grew year-over-year in developed markets, and while we had record March quarter results in a number of major markets including the United States, Canada, the United Kingdom, and Japan, we did experience a revenue decline in emerging markets. But we feel positive about our trajectory. Our year-over-year revenue performance in Greater China improved relative to the December quarter, and we've seen very positive customer response to the pricing actions we've taken in that market, our trade-in and financing programs in our retail stores, the effects of government measures to stimulate the economy, and improved trade dialog between the United States and China. Our App Store results are still reflecting the impact of the slowdown in regulatory approval in gaming apps in China, but we're encouraged by the recent increase in the pace of approvals. We believe strongly in our long-term opportunity in China, thanks to our robust ecosystem, our talented developer community, and the country's growing population of tech-savvy consumers who value the very best products and services. For iPhone, while our worldwide revenue was down 17% from a year ago, declines were significantly smaller in the final weeks of the March quarter. Looking back at the past five months, November and December were the most challenging, so this is an encouraging trend. We like the direction we're headed with iPhone and our goal now is to pick up the pace. Importantly, our active installed base of devices continues to grow in each of our geographic segments, and set a new all-time record for all major product categories. That growing installed base is a reflection of the satisfaction and loyalty of our customers, and it's driving our Services business to new heights. In fact, we had our best quarter ever for the App Store, Apple Music cloud services, and our App Store search ad business, and we set new March quarter revenue records for AppleCare and Apple Pay. Apple Pay transaction volume more than doubled year-over-year, and we're on track to reach 10 billion transactions this calendar year. Apple Pay is now available in 30 markets, and we expect to be live in 40 markets by the end of the year. More and more transit systems are accepting Apple Pay and New York's MTA system will begin the rollout in early summer. As we've seen in places like London, Tokyo, and Shanghai, contactless entry into transit systems helps to spur broader Apple Pay adoption, and we believe this will get even more people using Apple Pay in the United States. And Ticketmaster has just announced that they will be accepting Apple Pay for ticket purchases on the web and through the Ticketmaster app, and over 50 of their entertainment and sporting event venues are launching contactless tickets this year, including the vast majority of NFL stadiums. Subscriptions are a powerful driver of our Services business. We reached a new high of over 390 million paid subscriptions at the end of March, an increase of 30 million in the last quarter alone. This was also an incredibly important quarter for our Services moving forward. In March, we previewed a game-changing array of new services, each of them rooted in principles that are fundamentally Apple. They're easy to use. They feature unmatched attention to detail. They put a premium on user privacy and security. They're expertly curated, personalized, and ready to be shared by everyone in your family. These features aren't just nice to have. They actually help to eliminate the boundary between hardware, software, and service, creating a singularly exceptional experience for our users. First, building on the great momentum of Apple News, which is already the number one news app in the United States and the United Kingdom, we launched Apple News+. It will bring together over 30 popular magazines, leading newspapers, and digital publishers into a beautiful, convenient, and curated experience within the Apple News app. Apple News+ builds on our commitment to supporting quality journalism from trusted sources, while providing the best magazine and news reading experience ever for mobile devices. Advancing our vision to replace the wallet, we announced Apple Card built on principles Apple stands for like transparency, simplicity, and privacy. Apple Card is integrated into the Wallet app and delivers all new experiences that only Apple can provide integrating our hardware, software and services in an elegant solution that places the customer at the center. It's the first card to encourage you to pay less interest, eliminate fees, and give you daily cash on all your purchases and customer interest to date has been terrific. We also previewed Apple Arcade, the world's first game subscription service for mobile, desktop, and the living room. With over 100 new games, all with no ads or ad tracking, no additional purchases, and respect for user privacy, we've created a service for players of all ages, kids to teens to adults and one that families can enjoy together. The App Store is already the world's biggest gaming platform and we think Apple Arcade is a great way to unleash the creativity of the game developer community with a collection of new games not available on any other mobile platform or in any other subscription service. We can't wait for our customers to experience it for themselves beginning this fall. We were thrilled to provide a peek at what's new for TV. Beginning in mid-May, the all-new Apple TV app will bring together the different ways to discover and watch shows, movies, sports news, and more in one app across iPhone, iPad, Apple TV, Mac, smart TVs, and streaming devices. And users can subscribe to and watch new Apple TV channels like HBO Showtime and Starz paying only for services they want all on-demand available on and offline. And coming this fall, Apple TV+ will be the new home for the world's most creative storytellers featuring exclusive original shows, movies, and documentaries. We also had several major product introductions during the quarter. We launched a new, more powerful iMac with dramatic increases in both compute and graphics performance, making it a great update for consumers and pros alike. For our Mac business overall, we faced some processor constraints in the March quarter leading to a 5% revenue decline compared to last year, but we believe that our Mac revenue would have been up compared to last year without those constraints and don't believe this challenge will have a significant impact on our Q3 results. For iPad, we were very happy to return to growth in Greater China while generating strong double-digit growth in each of our other geographic segments. Our great iPad results were driven primarily by strong customer response to iPad Pro. Late in the quarter, we launched an all-new iPad Air with an ultra-thin design, Apple Pencil support, and high-end performance powered by Apple's A12 Bionic chip. In addition, we introduced a new iPad Mini, a major upgrade for iPad fans who love an ultra-portable design and like the new iPad Air, it delivers the power of the A12 Bionic and support for Apple Pencil. Last month, we introduced new AirPods, the second generation of the world's most popular wireless headphones and demand has been incredible. This is nothing less than a cultural phenomenon. With the new Apple-designed H1 chip, the new AirPods deliver faster connect times, more talk time, and the convenience of hands-free Hey Siri. Our retail and online stores continue to be a key point of innovation. As we mentioned in January, we've been working on an initiative to make it simple to trade in a phone in our store, finance the purchase over time, and get help transferring data from the old phone to the new phone. As part of this initiative, we rolled out new trade-in and financing programs in the U.S., China, the U.K., Spain, Italy, and Australia. The results have been striking. Across our stores, we had an all-time record response to our trade-in programs and with more than 4 times the trade-in volume of our March quarter a year ago. With each passing quarter, we're more inspired by the impact our products are having on people's fitness and health. This quarter, we brought the ECG app on Apple Watch Series 4 to Hong Kong and 19 European countries including France, Germany, Italy, Spain, and the U.K. Just like when the ECG app launched in the United States, there's hardly a day that goes by that I don't get a letter or an e-mail from a customer in one of these countries talking about how this feature has significantly changed their life. We believe we're really just beginning to tap into what we can do to help our users actively manage their health and well-being. For example, last month Stanford Medicine reported results of the Apple Heart Study, the largest study ever of its kind, which enrolled over 400,000 participants from all 50 states in a span of only eight months. And hundreds of institutions are now supporting health records on iPhone with recent additions including Michigan Medicine and UT Health Austin. In February, we announced that we are working with the U.S. Department of Veterans Affairs to make health records on iPhone available to veterans. This will be the first record sharing platform of its kind available to the VA, which is the largest medical system in the U.S. providing service to more than nine million veterans across more than 1,200 facilities. Apple's innovation extends beyond the impact we have in the lives of our customers to the impact we leave on the world around us. We recently marked Earth Day with several major announcements about our efforts to leave the world better than we found it. We've completed the allocation of our $2.5 billion green bond proceeds across 40 environmental initiatives around the world to projects ranging from solar power generation to water conservation to development of custom alloys for our products made from 100% recycled aluminum. We've announced a major expansion of our recycling programs, including quadrupling the number of locations where U.S. customers can send their iPhones to be disassembled by Daisy, our recycling robot. Each Daisy can now disassemble 1.2 million devices per year, allowing recovered materials to be recycled into the manufacturing process. And we partnered with a record number of our suppliers to follow our lead and transition to 100% clean energy. With the help of these 44 suppliers, we will exceed our goal of bringing four gigawatts of renewable energy into our supply chain by 2020 with over one additional gigawatt projected within that time frame. In the last calendar year alone, the partners that have joined this effort have generated enough clean energy to power over 600,000 homes in the United States. We're very proud of the progress that we and our partners are making, and hope our actions will inspire other businesses to do what they can to protect the world that we share. We are as excited as ever about our great pipeline of hardware, software and services and we're looking forward to sharing more information about the future of our four software platforms at our Worldwide Developer Conference now less than five weeks from now. Everyone here is hard at work to prepare for WWDC, and it's always a privilege to get to share the future of our platforms with the community of world changing developers who bring it to life. You are not going to want to miss this one. We're in the fortunate position of generating more cash than we need to run our business and invest confidently in our future, so today we're announcing the latest update to our capital return program including an increase to our share repurchase authorization and our quarterly dividend. For more details on that and our March quarter results, I'll turn the call over to Luca. Luca Maestri : Thank you, Tim. Good afternoon, everyone. Revenue in the March quarter was $58 billion near the high end of the guidance range that we provided 90 days ago and down 5% from last year. Our revenue decline reflects 200 basis points of negative foreign exchange, due to the strength of the U.S. dollar. Overall, products revenue declined 9% driven primarily by iPhone, while Services revenue grew 16% to a new all-time record. We also set a new March quarter record for Wearables Home and Accessories, and we recorded our best iPad growth rate in six years. Company gross margin was 37.6% in line with our guidance. Products gross margin was 31.2% down about 310 basis points sequentially due to the seasonal loss of leverage and headwinds from foreign exchange. Services gross margin was 63.8%, up 100 basis points sequentially due to a different mix and leverage from higher revenue. Net income was $11.6 billion. Diluted earnings per share were $2.46 and operating cash flow was $11.2 billion. Let me provide more color for our various revenue categories. iPhone revenue was $31.1 billion. We're seeing positive customer response to recent pricing actions in certain emerging markets, as well as enhancements to our trade-in and financing programs. And our year-over-year performance improved relative to our December quarter results in Greater China, in the Americas and in Japan. Our active installed base of iPhone reached a new all-time high at the end of March. This growing installed base reflects the industry leading satisfaction and loyalty of our customers. The latest survey of U.S. consumers from 451 Research indicates customer satisfaction of 99% for iPhone XR, XS and XS Max combined. And among business buyers, who plan to purchase smartphones in the June quarter, 81% plan to purchase iPhones. Turning to Services. As Tim said, it was our best quarter ever with $11.5 billion in revenue, an increase of 16% from last year. We generated double-digit revenue growth across the App Store, Apple Music, cloud services, AppleCare, Apple Pay and our App Store search ad business. And we set all-time services revenue records in four of our five geographic segments. We're very happy with this performance. As you can see from our new disclosures, Services accounted for 20% of our March quarter revenue and about one-third of our gross profit dollars. Customer engagement in our ecosystem continues to grow. The number of transacting accounts on our digital content stores reached another new all-time high during the quarter with the number of paid accounts, also setting a new all-time record and growing by strong double-digits over last year. And we now have over 390 million paid subscriptions across our Services portfolio, an increase of 120 million versus just 12 months ago. All subscription categories are growing strong double-digits and as we mentioned a quarter ago, we expect the number of paid subscriptions to surpass 0.5 billion during 2020. On the App Store, our subscription business is extremely diversified and is growing strongly around the world. In fact, the number of paid third-party subscriptions increased by over 40% compared to last year in each of our geographic segments. And across all third-party subscription apps, the largest accounted for only 0.3% of our total Services revenue. Next, I'd like to talk about the Mac. Revenue was $5.5 billion compared to $5.8 billion a year ago with the decline driven primarily by processor constraint on certain popular models. In spite of this challenge, we generated double-digit Mac revenue growth in Japan and Korea setting new all-time Mac revenue records in both markets. On a global basis, nearly half of the customers purchasing Macs during the quarter were new to Mac and the active installed base of Macs reached a new all-time high. We had great results for iPad with $4.9 billion in revenue and growth accelerating from the December quarter to 22%. iPad revenue grew in all five of our geographic segments, with a return to growth in Greater China and strong double-digit growth in all other segments. We had our best March quarter ever for iPad in Japan, and we were especially pleased by performance in Korea, Thailand and Mexico where revenue more than doubled over last year. In total, over half of the customers purchasing iPads during the March quarter were new to iPad and the iPad active installed base also reached a new all-time high. iPad revenue growth has been fueled primarily by the great customer response to our new iPad Pros. These completely redesigned iPads with full-screen Liquid Retina display, Face ID, powerful A12X Bionic chip with Neural Engine and support for the new Apple Pencil and Smart Keyboard make iPad Pro the perfect PC laptop replacement for both consumers and professionals. The most recent surveys from 451 Research measured a 93% customer satisfaction rating for iPad overall. Among customers who plan to purchase tablets 77% of consumers and 75% of businesses plan to purchase iPads. Wearables Home and Accessories revenue set a new March quarter revenue record of $5.1 billion fueled primarily by the strong performance of our Wearables business, which grew close to 50%. Within this category, Apple Watch is the best-selling and most loved smartwatch in the world and produced its best results ever for a non-holiday quarter. It's reaching many new customers with three quarters of purchases going to customers who have never owned an Apple Watch before. Interest in AirPods has been off the charts and we're working hard to catch up with the incredible customer demand. Turning to our retail and online stores. We generated very strong double-digit revenue growth from Apple Watch and iPad. We also announced 50 new Today at Apple sessions during the quarter in three new and expanded formats Skills, Walks and Labs free at our stores around the world. We're making important progress in the enterprise market, helping transform major industries. We're building on Apple's leading position in key functional areas to expand our reach and share within large accounts. Aviation is a strong example of this strategy at work. Across 450 airlines, iPad is overwhelmingly the preferred solution for the pilot's electronic flight bag. We've been making great progress expanding Apple's footprint beyond the cockpit into the cabin, where more than half of the top 50 airlines have now implemented iOS to enhance the guest experience as well as enable a new use case with mobile point-of-sale. We're also seeing traction with other mission-critical airline functions in ground operations and flight maintenance. For example, one of the largest airlines in the world tells us that the adoption of iPad has cut maintenance delays in half. Apple services are also making their way onboard, including growing adoption of Apple Pay for food and beverage purchases and in-flight access to Apple Music. We're also seeing significant iOS traction with large enterprise platforms which are the face of complex back-end systems to tens of millions of employees around the world. The end user employee experience is vital to engagement and productivity and with increasing mobility of today's modern workforce, those experiences are best on native iOS applications. We see great momentum through the growing number of iOS SDKs being delivered by the world's largest enterprise platforms. For instance, SAP's SDK for iOS continues to gain strong traction with their customers, growing by more than 40% in the last six months. And this past quarter Salesforce released its SDK enabling developers to build native iOS applications directly on top of the Salesforce platform. And finally, our enterprise channels continue to build momentum. In February, our Apple at Work initiative was launched with AT&T. This extension to our ongoing collaboration with AT&T will make it easy for more customers to choose the best Apple products for their needs in the enterprise and modernize their business. AT&T will enable business services for Apple products to help companies with their IT strategy, including device management, security, productivity and collaboration. Let me now turn to our cash position. We ended the quarter with $225 billion in cash, plus marketable securities. We also had $101 billion in term debt and $12 billion in commercial paper outstanding, for a net cash position of almost $113 billion. As a result, we are in a very strong position that allows us to invest confidently in all areas of the business, while continuing to return value to our shareholders. Just last year, we announced a commitment to contribute more than $350 billion to the U.S. economy over the next five years, including the creation of 20,000 jobs. More recently, we've announced a major expansion in Austin Texas and in other cities across the country. All these efforts are essential investments to make sure that we're incorporating innovative ideas and top talent wherever they emerge. As we execute those initiatives, we are also able to return over $27 billion to investors during the March quarter. We began a $12 billion accelerated share repurchase program in February, resulting in the initial delivery and retirement of 55.1 million shares. We also repurchased 71.7 million Apple shares for $12 billion through open market transactions and we paid $3.4 billion in dividends and equivalents. Our priorities for cash have not changed over the years. Most importantly, we always want to maintain the cash we need to run our business, maintain strategic flexibility, and invest in our future. We're well on our way towards meeting the investment projections we laid out early last year. We also want to work towards a more optimal capital structure and as we said before, it is our plan to reach a net cash neutral position over time. Given our confidence in Apple's future and the value we see in our stock, our Board has authorized an additional $75 billion for share repurchases. And because we know many of our investors value income, we're also raising our quarterly dividend for the seventh time in less than seven years to $0.77, an increase of about 5% from the previous amount. We paid over $14 billion in dividends and equivalents over the last four quarters alone, making us one of the largest dividend payers in the world. Going forward, we continue to plan for annual increases in dividends per share. As we move ahead into the June quarter, I'd like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $52.5 billion and $54.5 billion. This guidance range comprehends 300 basis points of negative foreign exchange impact year-over-year. Also as a reminder, in the June quarter last year, our Services revenue included a favorable $236 million one-time item in connection with the final resolution of various lawsuits. We expect gross margin to be between 37% and 38%. We expect OpEx to be between $8.7 billion and $8.8 billion. We expect OI&E to be about $250 million, and we expect the tax rate to be about 16.5%. Also reflecting the approved increase, today our Board of Directors has declared a cash dividend of $0.77 per share of common stock, payable on May 16, 2019 to shareholders of record as of May 15, 2019. With that, I would like to open the call to questions. Nancy Paxton : Thank you, Luca. And we ask that you limit yourselves to two questions. Operator, may we have the first question please? Operator : Certainly. Our first question will come from Shannon Cross with Cross Research. Shannon Cross : Thank you very much for taking my question. Tim, can you talk a bit more about what you're seeing in China? Clearly, it looks like things are improving sequentially. You also mentioned that last few weeks of the quarter, were stabilizing in emerging markets, I believe. So what are customers saying there and what are your partners saying in China? And then I have a follow-up. Tim Cook : Yeah. Thanks for the question, Shannon. We're seeing -- in the iPhone space, we saw a better year-over-year performance in the last weeks of the quarter as compared to the full quarter or November and December, which was sort of a -- it appears to be the trough. I think there's a set of reasons for this. One, we made some price adjustments essentially backing out the weaker currency effect and then some. There's stimulus programs that the government has executed including -- and this happened in early April, VAT being reduced from 16% to 13%, so they've been aggressive in the stimulus side. Three, our trade-in and financing programs that we’ve implemented in our retail stores have been very well received there, and I'm happy with the results to date there. And then four, there's an improved trade dialog between the U.S. and China. And from our point of view, this has affected consumer confidence on the ground there in a positive way. And so, I think it's a set of all of these things and we certainly feel a lot better than we did 90 days ago. Shannon Cross : Great. Thank you. And then, I'm sure you're probably expecting a question on Qualcomm settlement. So what would you like to say on this settlement? How are you thinking about your component providers going forward? And how should we think about this with regard to -- I don't know your development plans in the future because I'm sure you're not going to talk about when you're going to do 5G, but clearly it helps that path. Thank you. Tim Cook : Yeah. Thank you, Shannon. We're glad to put the litigation behind us, and all the litigation around the world has been dismissed and settled. We're very happy to have a multi-year supply agreement, and we're happy that we have a direct license arrangement with Qualcomm, which was I know important for both companies, and so we feel good about the resolution. Nancy Paxton : Thank you, Shannon. Can we have the next question, please? Operator : The next question will come from Samik Chatterjee with JPMorgan. Samik Chatterjee : Hi. Thanks for taking the question. Tim, you talked about China responding well to these pricing actions that you've taken in that market. Do any of those learnings kind of carry through into how you decide pricing in the remaining emerging markets, like India, et cetera as you get ready for the next product cycle? Tim Cook : We have made some adjustments in India, and we've seen preliminarily some better results there. Everything that we do does advise everything we do in the future, so we try to learn the best we can and hold [ph] that into our thinking, and we'll obviously do that with this as well. Samik Chatterjee : Thank you. I just had a quick follow-up for Luca on the Services side. Luca, we see that you're guiding to higher operating expenses quarter-on-quarter. How much of that incremental is going in to support the new services that you're planning to launch later in the year? Luca Maestri : Yeah. Of course, we are supporting both our products and services business and you can see the trajectory of our OpEx over the different quarters. Clearly as we add new services, we will need to make the necessary investments to support them. Our Services business has multiple streams. In total, it is accretive to company gross margins. You've seen the latest -- we're running services margins at over 60%. So, it's a very important business for us in many ways for our ecosystem and for our ability to monetize it. And so, clearly we will make all the necessary investments to ensure that the new services are successful, and we're really encouraged by the level of customer response that we received so far in anticipation for the launch of these services. Nancy Paxton : Thank you, Samik. Can we have the next question please. Operator : The next question will come from Katy Huberty with Morgan Stanley. Katy Huberty : Thank you. Luca, if I look back over the past five years, June quarter revenue typically declines about 15% from the March quarter. You're guiding to an 8% drop this year. So can you just talk about, which regions or product segments you think can outperform that typical seasonality? Luca Maestri : Yes, Katy. And keep in mind by the way, we are reporting this guidance including a 300 basis point negative impact from foreign exchange, so actually in constant currency the numbers would be even stronger. At the product category level, we expect that we will continue to have strong revenue growth from the non-iPhone categories as we've had for the first half of our fiscal year. We're also expecting a relative improvement in our iPhone performance on a year-over-year basis in Q3 versus the first half. As Tim said, March was the strongest month of the quarter on a year-over-year basis and so this has given the confidence to provide the guidance that you've seen. Geographically, of course, as you've seen from our results for the March quarter, China is the geo where we found some challenges, but we believe the trajectory should improve over time. Katy Huberty : Thank you. And then just as a follow-up, Shannon said you're not going to talk specifics around the timing of the 5G phone, but Tim maybe you can talk about how the company approaches a new technology like this given the higher cost but also potentially significant benefit, how you think about the right timing for coming to market with a product, with those characteristics? And then just generally how meaningful you think 5G is as a demand driver for upgrades in your iPhone installed base? Thank you. Tim Cook : Katy, this is one that I'm going to largely punt on as you would probably guess. We look at a lot of things on the different technologies and try to look at the -- and select the right time that things come together and get those into products as soon as we can. And the -- certainly from a cost point of view there has been -- the technologies have had cost pressure over the last couple of years or so. On the flip side of that there's a number of things in the commodity markets going in the other direction at the moment like DRAM and NAND. And so it's difficult to project what happens next, but it's the aggregate of all of it that really matters from a price point of view. Nancy Paxton : Thank you, Katy. So we have the next question, please. Operator : Jim Suva from Citi has our next question. Jim Suva : Thank you very much. A topic that's probably split or shared by both Tim and Luca on a response, but I'll ask the question and you can decide how to divide it up. In your opening remarks, Tim, you'd mentioned about pricing adjustments that you made in some of the markets and then Luca talked also about the strength of the trade-in program or maybe it was Tim also. Can you help us understand about what type of lessons or elasticity you've learned about pricing and the trade-in programs of how it impacts like revenues and COGS and margins and things? Thank you. Tim Cook : Yeah. Jim, in the opening remarks I was really talking about China specifically. And I mentioned four things that I believe are responsible for the better year-over-year performance in the Q2 relative to Q1 and also the final weeks of March being better than the Q2 average. And those four are the price reductions, but that's one of them. But there are three others and one of the others is the trade-in and financing programs that we instituted in our retail stores. Clearly, what we've learned here and it's not a surprise really is that the -- many, many people do want to trade-in their current phone. It does -- from a customer user point of view the trade-in looks like a subsidy, and so it is a way to offset the device cost itself. And many people in literally every market that we've tried this in, there is a reasonable number of people that want to take and pay for something on installments instead of all at once. And so, it's a little different in each market in terms of what the elasticity is, but you can bet that we're learning quickly on all of those. The other two items that are not insignificant in China that I don't want to lose here is that the stimulus programs, I believe, are having an effect on the consumer. And the one that I got much visibility in -- that happened in early April was the VAT reduction from 16% to 13%, so it's a very aggressive move. But there are other stimulus programs as well that likely have an effect to the consumer level. And then finally -- and this is not to be under weighted either -- I think the improved trade dialogue between the countries affects consumer confidence in a positive way. And so, I think it's sort of the sum of all of those things. Luca Maestri : And Jim, if I may add on the gross margin level as we look at pricing actions, of course, anytime you do a pricing action it is gross margin percentage diluted. But what really matters to us and what we look at -- when we look at the elasticity of these programs is to see the impact on our gross margin dollars. And what -- the experience that we've had in a few of these emerging markets has been positive in that respect and so that's what we think matters the most really. Jim Suva : Thank you so much, gentlemen. Nancy Paxton : Thank you, Jim. We have the next question, please. Operator : The next question will come from Wamsi Mohan with Bank of America Merrill Lynch. Wamsi Mohan : Hi. Yes. Thank you. Tim, you shared a lot of color around trade-ins, but I was also hoping maybe you can characterize what sort of dynamics you're seeing across your installed base on these trade-ins. What type of devices are being traded in? Is the profile of someone who has a really old iPhone? Or are you seeing folks that have newer iPhones trading in? And what sort of incentives are you providing beyond sort of the financing to drive that? And do you see this as something that can accelerate replacement cycles here over the next year or so? And I have a follow-up. Tim Cook : We're -- actually the product that's being traded in is all over the place, to be honest. It's 6, 6 Plus, 6S, 6S Plus, 7, 7 Plus and then fewer 8 and 8 Plus. But there's some of each of those and so you get customers that are on the two-year cycle and customers -- some customers on the one-year cycle and then customers as well on the three and four-year cycles. And so it's really all over the place. In terms of the incentives we're offering currently in our retail stores a trade-in value that has -- that is more than the sort of the blue book of the device if you will for lack of a better description. And so we have topped those up to provide an extra benefit to the user. The installments are different in each geography. I would say that at the moment the geography that is doing the best in installments would be China. And we have a bit of a unique offering there I think versus the -- versus what you can get in the regular market and so that probably further helps there. And so you can bet that we're learning on each of these finding the parts that the user likes the most. I think the key is we're trying to build a -- build something into the consumer mindset that it's good for the environment and good for them to trade in their current device on a new device. And we do our best of getting the current device to someone else that can use that or in some cases if the product is at an end of life we are recycling the parts on it to make sure that it can carry on in another form. Wamsi Mohan : Thanks for the color Tim. And as my follow-up Luca can you just clarify if the settlement with Qualcomm is creating either a headwind or a tailwind to your gross margins in the near-term? And does your guidance contemplate incremental pricing actions that could be creating some gross margin headwinds? Thank you. Luca Maestri : As Tim has explained we've reach this comprehensive agreement with Qualcomm. As part of this we have agreed that we're not going to share the financial terms of the agreement, so we plan to honor that. What you see in our gross margin guidance for the June quarter we guided 37% to 38% fully comprehends the outcome of the agreement with Qualcomm. Nancy Paxton : Thank you, Wamsi. Could we have the next question please? Operator : Mike Olson from Piper Jaffray has our next question. Mike Olson : Thanks for taking my question. So, you have more than 1.4 billion active devices and at your event you announced services that leverage that installed base. And you have obviously a remarkable position with kind of this Trojan horse of devices out in so many households. So, I guess, the question is and I know some of these services aren't even live yet but should we expect a continuation of the building out of new services categories like what we saw at the March event? Is there a pipeline of new services in the works? Or have we kind of seen what we're likely to see on that front for the near to intermediate term? And then I have a follow-up. Tim Cook : Yes, I wouldn't want to get into announcing things on the call, but obviously, we're always working on new things. And -- but we're right now we're really focused on getting these four out there. We have the News+ in the market today. We'll have the Apple Arcade and the Apple TV+ products in the market in the fall and Apple Card will go out in the summer timeframe. And so we've got lots in front of us and we're very excited about getting these out there. Mike Olson : Right. And then you mentioned the App Store search ad business a couple of times in the prepared remarks. Is that reaching a point where it's become material and maybe moving the needle for overall services revenue? Or is there anything you can quantify related to that? I also imagine that this is a high-margin business at least maybe higher than the overall Services margin but wondering if you can confirm if that's the case or not. Thanks. Tim Cook : It's growing very, very fast Mike. I think it was up around 70% over the previous year. We're expanding into new geographies as well and we still have more geographies out there that we think can move the dial further. So, it is a -- it's definitely a business that is big and getting bigger. A – Nancy Paxton : Thank you, Mike. Can we have the next question, please? Operator : Our next question comes from Louis Miscioscia with Daiwa Capital Markets. Q – Louis Miscioscia : Okay and thank you for taking my question. Tim, when you look at the four things that you have announced. And I realize they have different dates when they're coming out but, which ones would you say over the next 12 months has the most potential to help your Services line? And then maybe, which one has the best long-term potential? And then, I have a quick follow-up. A – Tim Cook : We're going to wait until we get these things out. And what I can tell you right now is that the -- we're taking sort of consumer interest on the Apple Card and there's been a significant level of interest on that and we're excited. As you know the -- gaming is the top category on the App Store. And so the Apple Arcade will serve some of that market. And it serves it with a different kind of game, which we think will be great for developers and great for users. The TV+ product plays in a market where it's -- there's a huge move from the cable bundle to over the top. We think that most users are going to get multiple over-the-top products. And we're going to do our best to convince them that the Apple TV+ product should be one of them. And then, we're working very hard to get everyone to give Apple News+ a look. Because we think it's a very unique product. And I love magazines. And we have really wanted to support the publishers. And so, we're working very hard to -- at the -- but at the very beginning of the ramp there. We wouldn't do a service… Q – Louis Miscioscia : Okay, great. A – Tim Cook : …that we didn't think could be meaningful. So that's sort of the way I look at it. Q – Louis Miscioscia : Great. A – Tim Cook : Yeah, these aren't hobbies. Q – Louis Miscioscia : Okay. A quick follow-up on India, obviously market share there is well below China. I believe you're looking to start manufacturing there. But what's the -- obviously the potential could be huge but the market already seems to be pretty dominated on the Android side, so maybe if you could just talk about trying to really aggressively ramp up share there. Thank you. A – Tim Cook : I think India is a very important market in the long-term. It's a challenging market in the short-term. But we're learning a lot. We have started manufacturing there which is very important to be able to serve the market in a reasonable way. And we're growing that capability there. And we would like to place retail stores there. And we're working with the government to seek approval to do that. And so, we plan on going in there with sort of all of our might. We've opened a developer, accelerator there, which we're very happy with some of the things coming out of there. It's a long-term play. It's not something that's going to be on overnight huge business. But I think the growth potential is phenomenal. It doesn't bother me that it's primarily Android business at the moment because that just means there's a lot of opportunity there. Nancy Paxton : Thank you, Lou. A replay of today's call will be available for two weeks on Apple Podcasts as a webcast on Apple.com/investor and via telephone. And the numbers to the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 7060604. And these replays will be available by approximately 5 :00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. And financial analysts can contact Matt Blake or me with additional questions. Matt is at 408-974-7406, and I'm at 408-974-5420. And thanks again for joining us. Operator : That does conclude our conference for today. Thank you for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,019	3	2019Q3	2019Q3	2019-07-30	2.899	2.91	3.138	3.18	3.4425	16.28	17.51	Operator : Good day, and welcome to the Apple Incorporated Third Quarter Fiscal Year 2019 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead. Nancy Paxton : Thank you. Good afternoon, and thanks to everyone for joining us today. Speaking first is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook. Actual results or trends could differ materially from our forecast. For more information please refer to the Risk Factors discussed in Apple's most recently filed periodic reports on Form 10-K and Form 10-Q, and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you, Nancy. Good afternoon and thanks to all of you for joining us today. We're thrilled to report a return to growth and new June quarter revenue record of $53.8 billion. We saw significant improvement in year-over-year iPhone performance compared to last quarter, very strong performances for both Mac and iPad and absolutely blowout quarter for Wearables, but we had accelerating growth of well over 50% and a new high watermark for services, where we set an all time revenue record of $11.5 billion. When you step back and consider Wearables and services together two areas where we have strategically invested in last several years, they now approach the size of a Fortune 50 company. Geographically, we are happy with our performance across the board including a return to growth in Mainland China. We accomplished these results despite strong headwinds from foreign exchange which impacted our top-line growth rate by 300 basis points compared to a year ago that's equivalent to about $1.5 billion of revenue. Importantly, in constant currency, our revenue grew in all five of our geographic segments. For iPhone, we generated $26 billion in revenue, while this is down 12% from last year's June quarter, it is a significant improvement to the 17% year-over-year decline in Q2. We are encouraged by the results we are seeing from the initiatives that we spoke about in January including strong customer response to our in-store trade-in and financing programs. In fact, iPhone our retail and online stores returned to growth on a year-over-year basis in the month of June. Our active installed base of iPhone reached a new all time high and was up year-over-year in each of our top 20 markets underscoring the quality of our products and the satisfaction and loyalty of iPhone customers around the world. Revenue excluding iPhone was up 17% from last year with growth across all categories. Starting with services, we generated all time record revenue of $11.5 billion that's up 13% year-over-year and if we exclude the $236 million favorable one-time item from the June quarter last year, services growth was 15% or 18% in constant currency which is consistent with our Q2 performance. Our strong services performance was broad based, we set new all-time records for AppleCare, music, cloud services and our app store search ad business and we achieved a new third quarter revenue record for the app store. What's more, we had double-digit services revenue growth in all five of our geographic segments. We surpassed 420 million paid subscriptions to services across our platform and we remain on track to double our fiscal year '16 services revenue in 2020. In May, we launched our all new Apple TV app in over 100 countries bringing together all the ways to watch TV in a single app across iPhone, iPad, Apple TV and select smart TV's. Monthly viewers in the Apple TV app in the United States are up over 40% year-over-year. We've seen our success being driven here by several factors. First, the fact that we have been able to integrate content from over 150 leading content providers all in one place. Second, the same ease-of-use and unmatched user interface that sets Apple apart in other categories sets us apart in TV as well. And third, we're benefiting from a broader secular move to over-the-top services. We're engaging with this third trend in five ways. Our Apple TV hardware, Apple TV channels where customers can choose to pay only for the channels they want. Our massive library of over 100,000 iTunes movies and TV shows, the app store where users can find their favorite streaming services and later this year, our original programming service Apple TV+. Apple Pay is now completing nearly 1 billion transactions per month more than twice the volume of a year ago. Apple Pay launched in 17 countries in the June quarter completing our coverage in the European Union and bringing us to a total of 47 markets currently. Based on June quarter performance, Apple Pay is now adding more new users than PayPal and monthly transaction volume is growing 4x as fast. In the United States, in addition to a successful integration into Portland's transit system in May, we're beginning to rollout of New York City transit and will launch in Chicago later this year. In China, Apple Pay launched the payment card for Didi the world's largest ride hailing provider. As I've said before, transit integration is a major driver of a broader digital wallet adoption, and we're going to keep up this push to help users leave their wallet at home in more and more instances. On a related note, thousands of Apple employees are using Apple Card every day in our beta test, and we plan to begin the rollout of Apple Card in August. As I mentioned at the outset, it was another sensational quarter for Wearables, with growth accelerating to well over 50%. We had great results for Apple Watch, which set a new June quarter revenue record and is reaching millions of new users. Over 75% of customers buying Apple Watch in the June quarter were buying their first Apple Watch. We continue to see phenomenal demand for AirPods. And when you tally up the last four quarters, our wearables business is now bigger than 60% of the companies in the Fortune 500. We had great performance from iPad, with revenue of over $5 billion, and growth driven by iPad Pro and by strong customer response to the new iPad Mini and iPad Air. This was our third consecutive quarter of growth, and with revenue up 15% year-to-date, we feel great about where we're headed with iPad. With our current lineup of iPad, iPad Mini, iPad Air, and iPad Pro, we've got the perfect device for everyone from young learners to professionals. We were also very happy with double-digit revenue growth from Mac, fueled by a strong performance of MacBook Air and MacBook Pro. Looking forward, there's an enormous amount to be excited about for Mac. On the heels of our Mac mini and iMac updates earlier in the fiscal year, we brought significant updates to the bulk of our notebook lineup in the last couple of months. We now have a $999 MacBook Air that is killer for college students. And for our pro users, who push the limits of what a Mac can do, we were thrilled to unveil the most powerful Mac ever, the new Mac Pro and the all new Pro Display XDR, which will be available this fall. They're designed for maximum performance, expansion and configurability and at breakthrough pricing and they're the most powerful tools Apple has ever put in the hands of pro customers. What's more, the Mac ecosystem as a whole is about to get a big boost. At our recent Worldwide Developers Conference, we announced a game-changing tool to help developers easily adapt their iOS and iPadOS apps for the Mac. I'll have a bit more to say on that in a moment. I'd like to provide some color on our performance in Greater China, where we saw significant improvement compared to the first half of fiscal 2019 and return to growth in constant currency. We experienced noticeably better year-over-year comparisons for our iPhone business there than we saw in the last two quarters and we had sequential improvement in the performance of every category. The combined effects of government stimulus, consumer response to trade-in programs, financing offers, and other sales initiatives and growing engagement with the broader Apple ecosystem had a positive effect. We were especially pleased with a double-digit increase in services driven by strong growth from the App Store in China. Turning to the future. Last week we announced an agreement with Intel to acquire the majority of its smartphone modem business. This is our second-largest acquisition by dollars and our largest ever in terms of staff. We're looking forward to welcoming all of them to Apple. We see this as a great opportunity to work with some of the leading talents in this field, to grow our portfolio of wireless technology patents to over 17,000, to expedite our development of our future products and to further our long-term strategy of owning and controlling the primary technologies behind the products that we make. We also had our best WWDC ever last month, packed with announcements of great new features coming this fall across our four software platforms making them more powerful, more personal and more private. For iPhone users, iOS 13 will take on a dramatic new look with Dark Mode, while delivering major updates to the apps you use every day, including photos, camera and maps. iOS 13 offers great new ways to help you manage your privacy and security, including Sign On with Apple, which uses Face ID or Touch ID to quickly sign into apps and Web sites without sharing your personal information. And improvements across the entire system will make iPhone even faster and more delightful to use than ever before. For the first time, iPad is getting its own version of iOS, called iPadOS, a strategic step forward that takes the iPad experience to a whole new level. The redesigned home screen, powerful new multitasking tools and deeper integration with Apple Pencil take productivity and creativity further, including using your iPad as an extended and interactive second monitor for your Mac. For Apple TV, tvOS 13 will make the big-screen experience even more personal. With a redesigned home screen and multi-user support, everyone in the family can get a more engaging and tailored experience with their favorite TV shows, movies, sports and news, along with Apple Music, photos and videos in iCloud, and an App Store with thousands of great games and apps. watchOS 6 is a major step forward in helping Apple Watch users stay healthy, active and connected. Apple Watch now has a dedicated App Store that users can access directly from the device and new watch faces, Siri enhancements, and music and audio features make Apple Watch more useful than ever. And of course, we continue to innovate on Apple Watch's promise to be an intelligent guardian for your health. watchOS 6 includes powerful new features like notifications that warn about high decibel noise to protect your hearing and cycle tracking to aid in women's health care decisions. In the June quarter, we expanded the availability of the ECG app and a regular rhythm notifications to five additional European countries and added Canada and Singapore just last week, making them available in 31 countries and regions around the world, with more to come later this year. We're very proud of the muscle we've built in bringing regulated products like these to market. This is an important competency that creates exciting opportunities for us moving forward. As I noted earlier, we believe macOS Catalina will be a breakthrough in the Mac ecosystem. A new tool included in macOS Catalina called Mac Catalyst gives developers a major head start in bringing their iOS apps to the Mac. Thousands of developers are already using it to bring their apps to the Mac ecosystem and we expect to see a wave of popular apps arriving for the Mac as early as this fall. Again, it's worth taking a step back and digesting the bigger picture here. These updates are the latest steps in a broader strategic effort to make the user experience across iOS, macOS, iPadOS, watchOS and tvOS more effortless and more intuitive. Apple is alone in offering this kind of value and ecosystem to its customers. And these devices and their platforms are unmatched in their ease-of-use, their seamlessness and their privacy and security. And while providing these things, we've created a dynamic environment where developers benefit greatly from creating for and distributing on these platforms. And our customers, of course, benefit greatly from access to all this creativity and innovation. We also unveiled other exciting technologies to make it easier and faster for developers to create powerful new apps. SwiftUI provides an intuitive new framework for building sophisticated user interfaces across our software platforms using simple easy-to-use code. Core ML 3 supports the acceleration of more types of advanced real-time machine learning models, and Create ML lets developers build machine learning models without writing code. We have the world's largest augmented reality enabled platform and thousands of they ARKit-enabled applications in the App Store. Building on this strategy, and our momentum in this area, we introduced three new AR-based technologies. ARKit 3 uses on device, real-time machine learning to recognize the human form and integrates people seamlessly into AR experiences. RealityKit is a new developer framework built from the ground up to provide all the tools and technologies required to make AR objects virtually lifelike. And Reality Composer brings AR content creation to tens of millions of developers who have no 3D experience. Our developers are already running with these new technologies and we think our customers are going to love some of the apps that these creators have in store in the months ahead. On so many fronts there's an enormous amount to look forward to over the next few months, including the launch of new services like Apple Arcade, Apple TV+, and Apple Card. And without giving too much away, we have several new products that we can't wait to share with you. Until then, thanks for joining us today. And for more details on the June quarter results, I'll turn the call over to Luca. Luca Maestri : Thank you, Tim. Good afternoon everyone. We're happy to report a June quarter revenue record of $53.8 billion, up 1% year-over-year. We return to growth in spite of a difficult foreign exchange environment around the world, which impacted our year-over-year growth rate by 300 basis points. We set June quarter revenue records in the Americas, in Japan and the rest of Asia Pacific and as Tim mentioned earlier all our geographic segments grew in constant currency. Overall, products revenue was $42.4 billion, down 2% year-over-year, which is significantly better than the 8% decline in products revenue that we experienced during the first half of the fiscal year. Product categories outside of iPhone grew 20%, with strong results in Wearables, Mac and iPad. Services revenue grew 13% to a new all-time record of $11.5 billion. Excluding the one-time item, we highlighted a year ago in connection with the final resolution of various lawsuits, services revenue growth was 15% and 18% in constant currency terms. On a geographic basis, we saw marked improvement in our year-over-year comparisons from emerging markets relative to the first half of this fiscal year, particularly in the BRIC countries, where year-over-year performance went from a 25% revenue decline in the first half to 3% growth in the June quarter. We set June quarter revenue records in several major developed markets, including the U.S., Canada, Germany, France, Japan, Australia and Korea. In emerging markets, we returned to growth in Mainland China, grew strong double digits in India and Brazil and we set new Q3 records in Thailand, Vietnam and the Philippines. Company gross margin was 37.6%, flat sequentially and in line with our guidance. Products gross margin was 30.4% down about 80 basis points sequentially due to seasonal loss of leverage and product mix partially offset by favorable cost. Services gross margin was 64.1%, up 30 basis points sequentially, primarily due to a favorable mix. Net income was $10 billion, diluted earnings per share were $2.18 and operating cash flow was $11,600,000,000. Let me get into more detail for each of our revenue categories. iPhone revenue was $26 billion, down 12% compared to a year ago. This was significantly better year-over-year performance than last quarter's 17% decline, with sequential improvement in year-over-year comparisons in 15 of our top 20 markets. Our active installed base of iPhone continued to grow to a new all time high in each of our geographic segments and in the U.S., the latest survey of consumers from 451 Research, indicates iPhone customer satisfaction of 99% for iPhone 10R, iPhone 10S and 10S Max combined. Among business buyers who plan to purchase smartphones in the September quarter, 83% plan to purchase iPhones. Turning to services, we reached an all-time revenue record in spite of foreign exchange headwinds with double-digit growth from the App Store, Apple Music, cloud services, and AppleCare, and triple digit growth from Apple Pay and our App Store search ad business. All geographic segments had double-digit growth in services revenue and set new June quarter records with all-time records in the Americas and Rest of Asia Pacific. In total, services accounted for 21% of Apple revenue and 36% of gross margin dollars. Customer engagement in our ecosystem continues to grow. The number of transacting accounts on our digital content stores reached a new all time high in the June quarter and the number of paid accounts grew strong double digits compared to last year. We now have over 420 million paid subscriptions across the services on our platforms and we are well on our way to our goal of surpassing the 500 million mark during 2020. On the App Store, our growth accelerated sequentially. Our subscription business continues to grow strongly and is extremely diversified across many categories such as entertainment, lifestyle, photo and video and music. Third-party subscription revenue grew by over 40% and across all third-party subscription apps, the largest accounted for only 0.25% of total services revenue. Among our many services records, it was our best quarter ever for AppleCare. We are seeing an increase in service contract attach rates and are expanding distribution of AppleCare through our partners. We also recently expanded our authorized service provider network and nearly 1000 Best Buy stores across the U.S. are now offering expert service and repairs for Apple products. This expansion provides customers with an even more convenient access to repairs using parts certified for safety, quality and reliability. In addition to Apple retail stores there are over 1800 third-party Apple authorized service providers in the U.S., which is 3x as many locations as three years ago. Next, I'd like to talk about the Mac. Revenue was $5.8 billion, up 11% compared to last year. Mac revenue grew in 4 of our 5 geographic segments and set June quarter records in the U.S., Europe and Japan, as our overall market performance significantly outpaced the global PC industry. Nearly half of the customers purchasing Macs during the quarter were new to Mac, with revenue growing in both developed and emerging markets and the active installed base of Macs again reached a new all time high. We also had great results for iPad, with $5 billion in revenue, up 8%. iPad revenue grew in all 5 of our geographic segments, with a Q3 revenue record in Mainland China and double-digit growth in emerging markets. In total, over half of the customers purchasing iPads during the June quarter were new to iPad and the iPad active installed base also reached a new all time high. The most recent surveys from 451 Research measured a 94% customer satisfaction rating for iPad from consumers and among business customers who plan to purchase tablets in the September quarter, 75% plan to purchase iPads. Wearables, home and accessories revenue accelerated across all our geographic segments, growing 48% to over $5.5 billion and setting a June quarter record. This growth was fueled primarily by the strong performance of our wearables business, which was up well over 50% and has become the size of a Fortune 200 company over the last 12 months. In addition, we generated double-digit revenue growth from Apple TV and accessories during the quarter. Our retail and online stores produce their best June quarter revenue ever, with double-digit revenue growth across Apple Watch, iPad, Mac and accessories. Our trade-in program is showing great momentum, with more than 5x the number of iPhones traded in compared to a year ago. We opened stunning new stores in the Carnegie Library in Washington D.C. and the busy Shinji District in Taipei as well as a beautiful new location in the Dallas Galleria. We ended the quarter with 506 physical stores in 22 countries alongside our online store presence in 35 countries. In the enterprise market, we are gaining traction with our strategy of transforming major industries by expanding our leading positions in key functional areas to grow our reach and modernize customer and employee experiences. In the financial services industry, 90 of the largest 100 banks by assets size are deploying Apple products to improve efficiency and effectiveness across their organizations. iPhone and iPad are overwhelmingly the preferred mobile devices for bankers on the go. For example, 60% of the biggest banks are supporting iPads for wealth managers. In retail banking, two-thirds of top banks are deploying iPad for branch transformation and modernizing legacy interfaces with a unified iPad experience. One of the world's largest banks created an iPad suite that reduced customer on-boarding time from more than an hour to just 12 minutes. Bank branch employees are also using Apple Watch for communication and notifications and Apple TV for customer presentations from iPads using AirPlay. Financial institutions also tell us that they receive positive feedback from leveraging Apple solutions for direct customer engagement. American Express, Credit Suisse, Discover and T.D. Ameritrade have launched Apple Business Chat as a dynamic way to support and interact with customers. The intuitive interface of messages on iOS enables rich communication between customers and contact center staff. T.D. Ameritrade has also become the first brokerage in the world to enable immediate funding of accounts using Apple Pay, eliminating the 2 to 3 business days it used to take to fund accounts by wire transfer. Let me now turn to our cash position. We ended the quarter with almost $211 billion in cash plus marketable securities. We retired $3 billion of term debt and reduced commercial paper by $2 billion during the quarter, leaving us with total debt of $108 billion. As a result, net cash was $102 billion at the end of the quarter and we continue on our path to reaching a net cash neutral position over time. We returned over $21 billion to shareholders during the quarter, including $17 billion through open-market repurchases of almost 88 million Apple shares and $3.6 billion in dividends and equivalents. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $61 million and $64 billion. This guidance includes almost $1 billion of year-over-year negative impact from foreign exchange. We expect gross margin to be between 37.5% and 38.5%. We expect OpEx to be between $8.7 billion and $8.8 billion. We expect OINE to be about 200 million and we expect our tax rate to be about 16.5%. Also, today our Board of Directors has declared a cash dividend of $0.77 per share of common stock payable on August 15, 2019 to shareholders of record as of August 12, 2019. With that, I'd like to open the call to questions. Nancy Paxton : Thank you, Luca. And we ask that you limit yourself to two questions. Operator, may we have the first question, please. Operator : The first question will come from Amit Daryanani from Evercore. Amit Daryanani : Thanks a lot. Thanks for taking my question guys. I guess, two from me. First off, could you just talk about, when I think about the September quarter guide, it's implied I think up 16% or so sequentially. Historically, at least, in that guide has been in the 10% low double-digit kind of range. Just can you help us understand, what gives you the confidence for a better than seasonal guide in September, either from a geo or product basis would be helpful. Luca Maestri : Amit, it's Luca. Of course, this is our best estimate of where we think we will land. Clearly, we expect to have continued strong growth from the non-iPhone categories. We have great momentum in wearables. We mentioned that we were up almost 50% in the June quarter, or actually over 50% in the June quarter. Our services business, we set an all-time record in June. And so, these two categories have become really important and really large for us. And so, as we continue to grow, quickly that is going to help us as we go through the year. Keep in mind that the guidance includes an estimated almost $1 billion of foreign exchange headwind for the quarter. Amit Daryanani : Fair enough. That's really helpful. And I guess if I just follow-up on China, impressed to see the continued recovery you guys are seeing that despite all the headlines that are out there. Just curious, what are the few things that are driving the success in China, and how sustainable do you think those changes are for Apple as you go forward. Tim Cook : Yes, Amit, Hi. It's Tim, and I apologize for my voice, I'm suffering from an allergy. But what happened last quarter in China was a confluence of things. The government stimulus, this came in terms of a VAT reduction, a very bold one. We took some pricing action, we instituted our trade-in and financing programs in our retail stores and worked with certain channel partners on that as well. And we're seeing a growing engagement with the broader Apple ecosystem during the quarter. And so, when you look at it, each of our categories, iPhone, iPad, Mac, wearables, services, everything improved sequentially. So, we couldn't be happier with the progress. I would point out, I think I mentioned in my comments, that we actually grew in constant currency for Greater China and we grew in Mainland China on a reported basis. So, there's several things going on there that are quite positive. Nancy Paxton : Thank you, Amit. Could we have the next question please. Operator : The next question will come from Shannon Cross with Cross Research. Shannon Cross : Thank you very much. Can you talk a bit about what's going on within services, some of the puts and takes? Luca, you gave us some color in terms of the growth rates in that, but I'm just curious and I know you won't talk about future products, but as you think about the opportunity, you think about what you've got now and in the future and then some of what’s been going on with China and that, is this something that could reaccelerate, or again, the 18% on a constant currency basis is obviously quite strong. But, how are you thinking about it? Luca Maestri : Yes. I think it's important to start with that 18% in constant currencies, Shannon. Our reported results are on a normalized basis, removing the one-time item from last year, was 15%. Clearly FX, plays a role around the world, 300 basis points of FX impact during the June quarter. In spite of that, it was an all-time record revenue. Our installed base continues to grow. It's growing in every geography and it's growing across all our major product categories, and that is very, very important for the services business. I would say, I'll give you a bit more color around two offsetting factors around this performance during the June quarter. On one side, the App Store, I mentioned in my prepared remarks that growth accelerated sequentially. We had double-digit growth on the App Store in every geography. In China, we saw significant acceleration. As you know, we tend to monetize in China on the App Store through game titles and the government has approved a few key game titles during the quarter. That has helped our performance there. On the other side, AppleCare, I mentioned AppleCare was an all-time record in June, so really strong performance, but our growth has decelerated in AppleCare due to factors that we fully expected, because we are comping this expansion of our coverage for AppleCare that we've had significant success during the last 18 to 24 months in really broadening our coverage of AppleCare around the world with some key partners, carriers and resellers. And obviously, as we go through the year those comps become a bit more difficult. Having said all that, that we've given ourselves a couple of targets and we feel very confident about reaching those targets. The first one is that, we wanted to double the size of the services business from our fiscal 2016 to 2020. We are on our way there. Paid subscriptions is another target, is important to us. It's an important way for us to monetize our ecosystem. We set a target of surpassing 0.5 billion paid subscriptions on the ecosystem during 2020. We’re already at 420 million now. So, we feel confident there. And of course, as you mentioned, we're very excited about the fact that we're going to be launching new services soon. As Tim said, we're starting the rollout of Apple Card in August, and there's two more very important services that we’re going to be adding to our portfolio during the fall. One is Apple Arcade, which is our gaming subscription service, and then of course Apple TV+, which is our video streaming service. So obviously these services will help us carry on with the momentum that we had in services. Shannon Cross : Great. Thank you. And this is probably for you too as well, Luca. Can you talk about gross margin? The guidance was pretty solid. Obviously, there are various things that are at play here. I know you mentioned $1 billion worth of top-line impact, I think from, currency last quarter. Then maybe if you can kind of talk about what went into your gross margin guidance. Luca Maestri : Yes. So of course, Shannon, as you've seen, our guidance for margin is 50 basis points higher than the guidance that we had given for June. I would say on the positive, we expect to benefit from leverage. As you've seen from our revenue guidance, and from cost savings, because as you know the commodity environment is fairly favorable right now. On the negative side, the headwind on gross margins on a year-over-year basis from foreign exchange is about 100 basis points. And so, we need to keep that in mind. But we feel pretty good about the guidance we provided. Nancy Paxton : Thanks Shannon. Could we have the next question please. Operator : Our next question will come from Katy Huberty with Morgan Stanley. Katy Huberty : Yes. Thank you. I'd like to go back to the discussion around strength in China in the quarter and understand what linearity looked like. I ask because there was some industry data around the smartphone market in China that seemed to deteriorate in the month of June, the App Store data deteriorated a little bit in June, and just curious if that’s something you saw in the business and if it at all informs your outlook around the pace of the China business as you go into September. Tim Cook : Katy, it's Tim. We obviously took into account all of the information that we had and coming out with the guidance including linearity across last quarter and how this quarter has started. And so, we obviously look at that in quite much detail. Katy Huberty : And then just on the App Store, appreciate there's not a lot of detail out around exact timing and even some pricing of the new services, but how should we think about the new services that launched in March impacting the overall services growth. Does that start to benefit the model in the back half of this calendar year, or will the impact be more longer term in nature and really show up in 2020? Luca Maestri : Katy, let me just talk about the new services that we've announced in March, and then also about the timing of how we get to revenue, right? We've announced Apple News+, and this is the service that is available for consumers right now. We've announced our channel service, which has also become available a few weeks ago. The other three services, the card is launching in August, the gaming service and the video service are starting in the fall. Keep in mind for all these services, there's a trial period up front, there's going to be different trial periods, we'll see what that what they look like. So, the road to monetization takes some time. Obviously, all of them will add to our base and will help us with growth rates as we get into next year. Nancy Paxton : Thank you, Katy. Could we have the next question please? Operator : The next question will come from Krish Sankar with Cowen & Company. Krish Sankar : Hi. Thanks for taking my question. I have two of them. First one, on the iPhone trade-in program, how effective was it and what percentage of the iPhone sales came from the trade-ins and are there any other geographies where you are left to rule it out? Then, I have a follow-up. Tim Cook : Hi, it's Tim. In retail, it was quite successful. We got going in a larger way during that quarter, we were pretty much just ramping in the previous quarter. And trade-in as a percentage of their total sales is significant and financing is a key element of it. Those two things in the aggregate led the combination of retail and online, just short form that is retail Apple Store let to growth in June trajectory. We are obviously taking those programs and advocating those more widely and that is at different levels of implementation throughout different geographies. Because we're working with our carrier partners on those and retail partners. Krish Sankar : Got it. Got it. That's pretty helpful, Tim. And then, a follow-up for you, a much longer-term question. I understand we're in the very early innings of the services growth story. Is there a way to think about it down the road, 3 or 5 years down the road, would the services growth still be tethered to the hardware of the iPhone, or do you think at some point down the road services would be independent by itself and not really tied to your hardware installed base? Tim Cook : Well, there are elements today that are not necessarily tethered to iPhone, right? We have other products where people are both purchasing things, they're watching Apple TV. We offer Apple Music on Android, and so there's a series of things that are outside of that. And so we'll see what we do in the future. I don't want to really get into that. But, more broadly, to answer your question about growth as we go forward, the way I see it is, we have the strongest hardware portfolio ever, we've got new products on the way, the pipeline is full of great new stuff both on the product and the services side. We're very fortunate and work very hard to have loyal customers and to continue attracting an impressive number of switchers. The installed base is growing, hit a new record, that's obviously good. And it hit a new record across all geographies and across all categories. And so, this is a really good thing. And we've got the Wearables area that is doing extremely well. We stuck with that when others perhaps didn't and really put a lot of energy into this and a lot of R&D and are in a very good position today to keep playing out what's next there. At the same time, on the market side, we have emerging markets where we have low penetration. And during the quarter tactically the emerging markets had a bit of a rebound. And in fact, on a constant currency basis, we actually grew slightly in emerging markets. We still declined on a reported basis. India bounced back. During the quarter, we returned to growth there. We're very happy with that. We grew in Brazil as well. We're also continuing to focus on the enterprise market. Luca mentioned some of this in his comments and we think that continues to be a big opportunity for us. And then, we've got lots of what I would call core technology kinds of things like augmented reality, where we're placing big bets and bet that we have a big future, in addition to the health kinds of things that may fall out of the watch. And so hopefully that kind of gives you a view over the total. And so, we're focusing on products and services and there will be some services that aren't hooked and some that are hooked not on current period sales mostly, very much services are rarely connected on that today or at least not a high percentage by any means there. They're more correlated to the active installed base and also the level of transacting customers that are there and the amount per customer, which relates also to the offering that we have. Nancy Paxton : Thank you, Krish. Could we have the next question, please? Operator : Next, we will go to Wamsi Mohan with Bank of America Merrill Lynch. Wamsi Mohan : Yes. Thank you. Tim, the China trade situation remains sort of fluid over here and more recently you asked for some tariff exceptions were not granted those. How are you thinking about the longer-term footprint for manufacturing and can you talk about any potential alternatives that you've looked at and considered in moving parts of production potentially out of China. And I have a follow-up. Tim Cook : Yes. I know there's been a lot of speculation around the topic of different moves and so forth. I wouldn't put a lot of stock into those, if I were you. The way I view this is, the vast majority of our products are kind of made everywhere. There's a significant level of content from the United States and a lot from Japan to Korea to China and the European Union also contributes a fair amount. And so, that's the nature of a global supply chain. Largely, I think that will carry the day in the future as well. In terms of the exclusions, we've been making the Mac Pro in the U.S., we want to continue doing that. And so, we're working and investing currently in capacity to do so, because we want to continue to be here. And so that's what's behind the exclusions. And so, we're explaining that and hope for a positive outcome. Wamsi Mohan : Okay. Thanks, Tim. And there is, Luca, maybe for you, there's been some significant destocking of inventory in the first calendar half of this year in iPhone. Can you comment about the broader channel inventory levels where you are in your typical ranges, especially given the comment around June iPhone sales being quite strong and do you expect anything atypical in channel inventory dynamics in the September quarter? Thank you. Luca Maestri : Yes, Wamsi, as you know we're not getting into this topic very much. But, I think I can give you some color here. You know that in general, we decrease our inventory during the March quarter and the June quarter. That has been traditionally what we've done. This year, we reduced channel inventory for iPhone slightly more than last year and that is true in total and it's true for Greater China as well. So, we feel very good about our channel inventory ranges as we get into the September quarter. Hope that helps you with that. Nancy Paxton : Thank you, Wamsi. Could we have the next question, please? Operator : Our next question comes from Jim Suva with Citigroup. Jim Suva : Thanks very much. The first question is probably to Tim and second one for Luca. I will ask them at the same time, so you can continue which other one you want to answer, first or second. While the first one is for Tim, regarding the installed base comment you've made, which is quite encouraging, but yet when you look at the iPhone revenue year-over-year the past several quarters have been down. Can you help us bridge the gap of, how is the installed base growing? Is it mostly because secondary users are the new ones coming into the system as people are holding more phones longer? And what does that user typically bring in with them or something unique relative to what we historically know? And then for Luca, you've been investing a lot, a lot, lot and a lot of these services are now coming to pass whether it be AppleCare, Apple Cloud, all these wearables and soon Apple Pay and Arcade. Are we at a point where now a lot of harvesting is going to happen or do you kind of continue this relatively same investment that you've been doing for the future strategy. Thank you. Tim Cook : Hey, Jim, it's Tim, I'll start with your installed base question. Installed base is a function of upgrades and the time between those. It's a function of the number of switchers coming into the to the iOS, macOS and so forth [indiscernible]. It's a function of the robustness of the secondary market, which we think overwhelmingly hits an incremental customer. And it's a function still in the emerging markets and somewhat developed markets to a lesser degree of people knew that they’re buying their first smartphone. There are still quite a few people in the world in that category. And so, the reason that the installed base doesn't correlate to the 90-day clock is that what's happening underneath the numbers is, switchers are still a very key piece of what's going on. The secondary market is very key, and we're doing programs et cetera to try to increase that, because we think we wind up hitting a cost number that we don't hit in another way. And the upgrades where people are holding onto their device a bit longer than they were, they're staying in the ecosystem. And then, you have the people in the new category as well. And so, that's sort of the equation. I don't want to go into the specific numbers, but I think you can see readily, mathematically, how the installed base is growing in an environment where the iPhone revenue is declining within a 90-day kind of window. Luca Maestri : And Jim, on OpEx, obviously is very important for us to continue to invest in the business, particularly on the R&D side, because we will always want to bring more innovation into the market. We want to improve the user experience and differentiate our products and services in the marketplace. So, we will continue to do that. There are some types of investments, of course, that are very strategic for us and they will have long-term implications. You've seen the announcement that we made around the Intel acquisition. Very important strategically for us. It requires upfront investment, of course. As you've seen from this quarter and also from the past, we will continue to run our SG&A portion of OpEx tightly. Of course, we'll continue to invest in marketing and advertising. We talked about a lot of new services that we are launching during the fall and Apple Card next month, obviously they will require the appropriate level of marketing and advertising as we launch them to the general public. When you look in total, where we are in terms of our expense to revenue ratio for operating expenses, you know, quite well that we are extremely competitive relative to other tech companies. So, we want to continue to be competitive and at the same time we will not under-invest in the business. Nancy Paxton : Thank you, Jim. Could we have the next question, please? Operator : The next question will come from Samik Chatterjee with JPMorgan. Samik Chatterjee : Hi. Thanks for taking the question. I just wanted to start-off with the announcement at WWDC around the independent App Stores for the Watch and the iPad. What level of interest have you seen from developers and how are they thinking about the ability to monetize services independently on those App Stores? And how does that help you position wearables more firmly into the health and fitness category? Tim Cook : We're seeing good interest across virtually everything that we announced at WWDC. I couldn't be happier with it. The developer tools around ARKit and AR in general that I went through earlier, lots of interest there, lots of interest from the Watch App Store, to the Catalyst that will be released with macOS Catalina, which allows developers quickly to port a iOS app to the Mac. We think this is huge and so great for the user experience. And so, you look at all of these and all the things that I talked about earlier and I couldn't be happier with the reception that we're getting and the work that is going on behind the scenes right now for the developers readying their apps for the fall. Samik Chatterjee : Got it. If I can just follow-up on the China market, one of the things that we're looking at is going into the New Year into 2020 there'll be a lot of 5G phones launching in that market from the Android players. How do you think about the competitive landscape there as you enter next year? Tim Cook : We don't comment on future products. With respect to 5G, I think most people would tell you, we're in sort of the extremely early innings of it. And even more so on a global basis. So, we couldn't be more proud of what our lineup is and we're excited about the great pipeline of both hardware and software and we wouldn't trade our position for anyone's. Nancy Paxton : Thank you, Samik. A replay of today's call will be available for two weeks on Apple Podcasts as webcast on apple.com/investor and via telephone. And the numbers of the telephone replay are 888-203-1112 or 719-457-0820, please enter confirmation code 3057347. These replays will be available by approximately 5 Pm Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. And financial analysts can contact Tejas Gala or me with additional questions. Tejas is at 669-227-2402, and I'm at 408-974-5420. Thanks again for joining us. Operator : That does conclude our conference for today. Thank you for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,019	4	2019Q4	2019Q4	2019-10-30	2.98	3.047	3.278	3.385	3.7175	19.03	20.66	Operator : Good day, everyone. Welcome to the Apple Incorporated Fourth Quarter Fiscal Year 2019 Earnings Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I’d like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead. Nancy Paxton : Thank you. Good afternoon, and thanks to everyone for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. And after that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed periodic reports on Form 10-K and Form 10-Q and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you, Nancy. Good afternoon, and thanks to all of you for joining us, especially those of you listening in on our new noise-cancelling AirPods Pro which are available beginning today. This was Apple's highest revenue in a September quarter ever, and I want to take you through some of the highlights before we get into greater detail on the conclusion of a remarkable fiscal 2019 for Apple. We achieved revenue of $64 billion in the quarter at the high end of our expectations, even in spite of a predicted foreign exchange drag of almost $1 billion. Geographically, we set new Q4 revenue records in the Americas and rest of Asia-Pacific and saw further improvement in our revenue trends in Greater China. In iPhone, where customers have only begun to get their hands on the strongly popular and unmatched iPhone 11 and iPhone 11 Pro models, our year-over-year performance continue to improve, more on that in a moment. Outside of iPhone, our September quarter revenue was up 17%. We reached a new all-time high for services with growth accelerating to 18%. We generated well over 50% revenue growth from Wearables, and I am thrilled to say that we set Q4 records for Wearables in each and every market we track. We’ve got a lot to cover, so let's dive right into the details. iPhone revenue in the September quarter was $33 billion. This 9% decline over last year is a significant improvement over the 15% decline we saw across the first three quarters. The significant upswing in demand in the final part of the quarter is mirrored in the overwhelmingly positive reviews, customer feedback and in-store response we've seen for this new generation of devices, not to mention a wave of the best photos you've seen from a smartphone. iPhone 11 features the Apple-designed A13 Bionic the fastest most powerful chip ever in a smartphone plus an all new dual camera system and even longer all day battery life all wrapped in six great new colors. Since its launch, the iPhone 11 has quickly become our best-selling iPhone. iPhone 11 Pro and iPhone 11 Pro Max deliver even more advanced performance for users who want the very best out of their smartphone. The new Super Retina XDR display is the brightest ever in an iPhone, and the new triple camera system provides a pro level photography experience with an ultra-wide, wide and telephoto camera. All three of our new iPhones feature night mode delivering huge improvements to photo capture in low light environments either indoors or outdoors. They also produce the highest quality video in a smartphone supporting 4K video with extended dynamic range for more highlight detail and cinematic video stabilization. iOS 13 is driving user experience forward across the iPhone family with a bold new look in dark mode, major updates to the apps our customers use every day, such as photos and maps, new ways to help protect their privacy with sign-in with Apple and performance improvements across the entire system. For Services, revenue was $12.5 billion, that's up 18% over last year and it beats the previous record set in the June quarter by more than $1 billion. This isn't a local phenomenon. We saw double-digit services revenue growth and all-time records in all five of our geographic segments, and it wasn't a narrow success either. We established new all-time highs for multiple services categories including the App Store, AppleCare, Music, cloud services and our App Store search ad business. We are well on our way to accomplishing our goal of doubling our fiscal year '16 Services revenue during 2020. I want to touch on a number of services in brief. We had all-time record revenues from payment services. For Apple Pay, revenue and transactions more than doubled year-over-year with over 3 billion transactions in the September quarter exceeding PayPal's number of transactions and growing four times as fast. Apple Pay is now live in 49 markets around the world with over 6,000 issuers on the platform. We believe that Apple Pay offers the best possible mobile payment experience and the safest, most secure solution on the market. We're glad that 1000s of banks around the world participate. Apple Card launched in the US in August, and we've been thrilled by the positive reception we've seen. Users can apply for Apple Card through the wallet app on iPhone in minutes and start using it right away in stores, in apps and on websites. They've told us they love Apple Card's simplicity, privacy, security and transparency, which has helped them make healthier financial choices. Apple Card has absolutely no fees and major apps and retailers like Uber, Uber Eats, Walgreens, Duane Reade, and T-Mobile have already joined to offer 3% daily cash back on Apple Card transactions. And I am very pleased to announce today that later this year, we are adding another great feature to Apple Card. Customers will be able to purchase their new iPhone and pay for it over it over 24 months with zero interest. And they will continue to enjoy all the benefits of Apple Card, including 3% cash back on the total cost of their iPhone with absolutely no fees and the ability to simply manage their payments right in the Apple Wallet app on iPhone. We think these features appeal broadly to all iPhone customers, and we believe this has been the most successful launch of a credit card in United States ever. Last month, we launched Apple Arcade, our groundbreaking game subscription service offering an all new way for the whole family to enjoy games online or offline. Apple Arcade's subscribers get unlimited access to a curated selection of games from many of the most innovative developers in the world with almost 100 new titles playable across iPhone, iPad, iPod touch, Mac and Apple TV today and more are being added all the time. Customer feedback to date has been overwhelmingly positive, and we're very excited for the future of the service. We're also thrilled to be working with Oprah Winfrey to bring Oprah's Book Club to Apple Books connecting a community of readers worldwide to important stories by today's most thought-provoking authors. Together, we envision a vibrant global book club that has the power to bring the world together through reading. We've also expanded the reach of Apple News+ beyond the United States and Canada to readers in Australia and the United Kingdom, bringing together popular publications, such as the Times of London, the Australian and Hello Magazine, in addition to major publications like The Wall Street Journal, The LA Times, The New Yorker, People, GQ and much more. And rounding at our newest services just two days from now, we're launching the hotly anticipated Apple TV+ in over 100 countries and regions. It's the first all original video subscription service, which shows from the best, most ambitious and most creative minds in the industry. One of the great parts of this jobs is that I've gotten to binge-watch almost all of them, and while I won't spoil anything, there is so much to look forward to here for lovers of great storytelling. We premiered shows like See and The Morning Show in LA and New York over the past couple of weeks, and the stage is set for a truly exciting debut. And we're pleased that customers who have purchased qualifying Apple devices starting September 10 can opt into 12 free months of Apple TV+. Turning to Wearables, we had amazing results, thanks to the phenomenal popularity of Apple Watch, AirPods and Beats products. As I said at the outset, we set Q4 revenue records for Wearables in every single market that we track around the world. In September, we launched Apple Watch Series 5 with the Always-On Retina display, that means you never have to pause a workout or task to raise or tap the display. New location features help users better navigate their day while international emergency calling allows them to call emergency services directly from Apple Watch in over 150 countries even without an iPhone nearby. And combined with the power of watchOS 6, users are empowered to take charge of their health and fitness with new features like Cycle Tracking, the Noise app, Activity Trends. The ECG app now available in 32 markets including India has become a widely celebrated illustration of Apple's commitment to your health giving users the ability to document and monitor the functioning of their heart and provide critical data to their doctors. We're deepening Apple's commitment to medical research. We announced a new Research app paired with three unprecedented medical studies spanning Hearing, Heart and Movement and Women's Health. We are collaborating with leading health institutions to reach more participants than has ever been possible enabling them to contribute to potential medical discoveries and help create the next generation of innovative health products. Leveraging the devices customers use every day and world-class security and privacy, we hope to democratize medical research and bring everyone to the table to make the next big breakthroughs possible. Turning to iPad, we generated 17% growth driven by iPad Pro in the ongoing momentum of our wider line-up. In September, we introduced the seventh-generation iPad bringing more screen area and support for the full-sized Smart Keyboard to our most popular, most affordable iPad. For the first time, we also released iPadOS built on the same foundation as iOS but with powerful apps designed for iPads large multi-touch display, letting users multitask with intuitive gestures and drag and drop of file with the fingertip. For Mac, we generated $7 billion in revenue. We had a tough comparison to last year's fourth quarter when we updated both models of MacBook Pro, but for fiscal 2019 overall, we generated the highest annual revenue ever from our Mac business. In July, we updated our Mac portables with great pricing for students and MacBook Air in particular has been a hit in the back-to-school season. Earlier this month, we released macOS Catalina with all new entertainment apps, the innovative sidecar feature that uses iPad to expand the Mac workspace and new accessibility tools that enable users to control their Mac entirely with their voice. Catalina also brings the Apple Arcade experience to the Mac and we have already seen some amazing third-party developers bring their iPad apps to the Mac App Store with Mac Catalyst including Twitter, Post-it and more. And for our pro customers who push the limits of what Mac can do, we're very excited about the upcoming launch of our newly redesigned Mac Pro this fall, which we are proud to be manufacturing in Austin, Texas. Pulling back the lens from a single quarter, we are incredibly proud of our accomplishments over the course of a remarkable fiscal 2019, a year where we crossed $100 billion in revenue in the United States for the first time. We introduce new services from Apple Card to Apple TV+ and generated over $46 billion in total services revenue, setting new yearly services records in all five of our geographic segments and driving our Services business to the size of a Fortune 70 company. We delivered incredible new hardware in all our device categories. Our Wearables business showed explosive growth and generated more annual revenue than two-thirds of the companies in the Fortune 500. And we set a yearly revenue record for Mac. All told, outside of iPhone, our revenue grew by $17 billion to almost a $118 billion. Our overall success was achieved widely across our markets with annual revenue records in the U.S., Canada, Brazil, the UK, Germany, France, Italy, Poland, Korea, Malaysia, the Philippines and Vietnam. And as we head into the holiday season, we have an enormous amount to look forward to. We believe that we lead in innovation because we lead with our values. At the time of urgency and action on climate change, we continue to drive breakthroughs in clean power sustainable materials and device recycling. By running a 100% of our global operations on renewable energy and challenging our entire network of suppliers do the same, we are driving a virtuous cycle of demand for clean sources of power. And we see the award Apple recently received from the United Nation's Global Climate Action program as a mandate to deepen this vital work. We continue to invent and improve on cutting edge renewable materials, including the 100% recycled aluminum alloy found in many of our products, and we've added rare earth elements to our list of recycled materials with the introduction of iPhone 11. We're disassembling, recycling or refurbishing millions of devices every year with the help of Daisy, our recycling robot, and we're pushing the entire global supply chain toward recycled or renewable materials. We're driving access to critical coding skills development to educators and students through programs such as our teaching coding academies and our free everyone can code curriculum. We continue to put user privacy at the center of everything that we do and we know that Apple is strongest when our commitment to diversity and inclusion brings all voices to the table. I'd like to thank our customers, our developers, our business partners and our employees for making fiscal 2019 such a success, and I look forward to another great year in 2020. Now for more details on our September quarter results, I'll turn the call over to Luca. Luca Maestri : Thank you, Tim. Good afternoon, everyone. Revenue for the quarter was $64 billion, up 2% from a year ago to a new September quarter record as we had predicted foreign exchange negatively impacted our revenue by close to $1 billion, and in constant currency, our growth was 3%. Products revenue was $51.5 billion, down 1% from last year, mainly due to iPhone, but largely offset by very strong performance from Wearables and iPad. Services revenue grew 18% to $12.5 billion, up over $1.9 billion year-over-year and almost $1.1 billion sequentially to a new all-time record with broad-based growth around the world and across our portfolio. On a geographic basis, we set new fourth quarter revenue records in our Americas and rest of Asia-Pacific segments. We also saw continuous improvement in Greater China where year-over-year revenue comparisons became more favorable each quarter of fiscal 2019 from a 27% decline in the first quarter to a 2% decline in the fourth quarter. At a country level, we established new Q4 records in many major developed and emerging markets including the U.S., Canada, Germany, France, Korea, Singapore, Brazil, India, Thailand, Malaysia and Vietnam. Company gross margin was 38%, up 40 basis points sequentially, driven by leverage from higher revenue. Products gross margin was 31.6%, up 120 basis points sequentially due to leverage and favorable mix. Services gross margin was 64.1% even with the June quarter. Net income was $13.7 billion. Diluted EPS was a Q4 record at $3.03 and up 4% year-over-year, and operating cash flow of $19.9 billion was also a Q4 record, up almost $400 million from the previous record we set last year. Let me get into more detail for each of our revenue categories. iPhone revenue was $33.4 billion a year-over-year decline of 9%. This was a meaningful improvement to the 12% decline in the third quarter and a 16% decline in the first half of the fiscal year. And we saw great customer response to the launch of iPhone 11, 11 Pro and 11 Pro max at the end of the quarter. Our active installed base of iPhone continues to grow to a new all-time high in each of our geographic segments. And in the U.S., the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 99% for iPhone XR, XS and XS Max combined. Among business buyers who plan to purchase smartphones in the December quarter 83% plan to purchase iPhones. Turning to Services, we had a very strong quarter with all-time record performance and growth accelerating from the June quarter. All five geographic segments set new all-time Services revenue records and all grew double-digits. We also established new all-time records for the App Store, Apple Care, Music, Cloud Services, Payment Services and our App Store search ad business. In total, services accounted for 20% of our revenue mix and 33% of our gross margin mix. Customer engagement in our ecosystem continues to grow and the number of both transacting and paid accounts on our digital content stores reached a new all-time high with double-digit growth in paid accounts in all our geographic segments. We now have 450 million paid subscriptions across the services on our platform compared to over 330 million just a year ago, and we are well on our way to our goal of surpassing the 500 million mark during 2020. Absolute revenue grew strong double digits, thanks to robust customer demand for both in-app purchases and subscriptions. Our third-party subscription business grew across multiple categories and increased almost 40% year-over-year. There are now more than 35,000 subscription apps on our platform, with the largest accounting for less than 0.25% of total services revenue. Among our many all-time services records, it was the best quarter ever for AppleCare. Thanks to strong service agreement attach rates and expanded distribution. And to better meet our customers' needs, we announced a new iPhone repair program making it easier for independent providers across the U.S. to tap into the same resources as our Apple Authorized Service Provider network and offering customers additional options for the most common out-of-warranty iPhone repairs. The new program complements our continued investment in our growing global network of over 5,000 Apple Authorized Service Providers the lead the industry for customer satisfaction and help millions of people with both in and out-of-warranty service for all Apple products. Next, I would like to talk about the Mac. Revenue was $7 billion, down 5% from last year due to a different mix of products, given the strength of our MacBook Air line-up and a difficult comparison to last year's launch of MacBook Pro models. Despite the tough compare, we generated an all-time revenue record for Mac in the US and in India and a fourth quarter revenue record in Japan. More than half of the customers purchasing Macs during the quarter were new to Mac, and the active installed base of Macs again reached a new all-time high. We had great results for iPad with revenue of $4.7 billion, up 17% from a year ago. iPad revenue grew in all five of our geographic segments with a Q4 revenue record in Japan. In total, over half of the customers purchasing iPads during the September quarter were new to iPad, and the iPad active installed base also reached a new all-time high. The most recent surveys from 451 Research measured a 95% customer satisfaction rating for iPad from consumers and 97% from businesses. And among both consumers and businesses who plan to purchase tablets in the December quarter more than 80% plan to purchase iPads. Wearables, Home and Accessories established a new fourth quarter record with revenue of $6.5 billion, up 54% year-over-year with growth accelerating from the third quarter across all five geographic segments. The performance was driven by tremendous growth across Apple Watch, AirPods, BIS products and accessories. And as Tim mentioned, we set Q4 records for our Wearables category in every single market we track around the world. Our retail and online stores produced fantastic results, generating record September quarter revenue in all five geographic segments, and strong double-digit growth across iPhone, iPad, Apple Watch and accessories. We also continue to see great results from our trade-in program with more than five times the iPhone trade-in volume we had a year ago. Last month, we reopened the standing Apple Fifth Avenue store in New York with an even more welcoming layout beneath the landmark glass cube providing nearly twice the space of the original store. This iconic store is opened seven days a week, 24 hours a day, and provides an even better environment for customers to experience our latest products, meet with our geniuses, created pros and specialists, and attend our free daily Today at Apple sessions. We also opened our newest and largest store in Japan, and fifth store in Tokyo, in the Marunouchi business district across from the historic Tokyo Station, and we opened a beautiful new store in the heart of Mexico City's vibrant Polanco district to welcome visitors to experience the best of Apple in Mexico. We are seeing strong demand for our products in the enterprise market, with growth significantly ahead of our business overall, and we have great momentum transforming major industries. One example is retail. 80 of the 100 largest retailers in the world are choosing Apple to modernize their customers and employee experiences across all functions of their business. Retailers are using iPhone, iPad and Mac to optimize their back of house operations, modernize point of sale, and deliver differentiated customer and employee experiences. Customer engagement and assisted selling have been areas of particular focus and we're seeing great results for iconic brands such as Burberry, Ralph Lauren, Sephora USA, Gap Inc., and many others. We’re also having been government agencies around the world, use technologies to improve the effectiveness and efficiency of the way they deliver critical services to the public. For example, the U.S. Census Bureau is making fundamental changes to the design and implementation of next year's census with a goal of producing quality results, while reducing costs by leveraging the mobility user experience and privacy of iOS. Hundreds of thousands of Apple devices will be deployed this fiscal year to support an innovative new model for the collection and management of Census data and we are proud that our products will play an important role in driving quality to this critical initiative while safeguarding the privacy and security of this data. CDW Apple's partner in this initiative will also utilize Apple Financial Services, our enterprise financing platform to help minimize the cost to the public by taking advantage of the uniquely strong residual value of Apple devices. Let me now turn to our cash position. We ended the quarter with almost $260 billion in cash plus marketable securities. We issued $7 billion of new term debt, retired $3 billion of maturing debt and reduced commercial paper by $4 billion during the quarter, leaving us with total debt of $108 billion. As a result, net cash was $98 billion at the end of the quarter and we continue on our path to reaching a net cash neutral position over time. We returned over $21 billion to shareholders during the September quarter, including almost $18 billion through open market repurchases of 86 million Apple shares and $3.5 billion in dividends and equivalents. We also retired an additional 7 million shares in the final settlement of our 14th ASR. As we move ahead into the December quarter, I'd like to review our outlook, which includes the type of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be between $85.5 billion and $89.5 billion. This range includes a negative impact from foreign exchange of over $1 billion. We expect gross margin to be between 37.5% and 38.5%. We expect OpEx to be between $9.6 billion and $9.8 billion. We expect OI&E to be about $200 million and we expect the tax rate to be about 16.5%. Also today, our Board of Directors has declared a cash dividend of $0.77 per share of common stock, payable on November 14, 2019 to shareholders of record as of November 11, 2019. Before we open the call to questions, I also have a special announcement to make today. Nancy Paxton, our Head of Investor Relations for the last 23 years has decided to retire at the end of December after a wonderful 33 year career at Apple and 93 earnings calls. Nancy has been the face of Apple with analysts and investors over a period of incredible growth and success. Her passion for our company, her commitment and dedication to serve our entire investor base and her sense of humor will be missed greatly. Personally, I'm very grateful for the advice and support you have given me during this last six years. We all wish you the very best for the next and exciting phase of your life. With that, let us open the call to questions. Nancy Paxton : Thank you very much for the kind remarks, Luca. It's obviously been a great privilege for me to engage with so many investors and analysts on behalf of Apple over the last couple of decades, and of course it's been an extreme pleasure to work alongside with some of the brilliant people here at Apple on a day to day basis. But let's get to the business at hand for the 93rd time, and open the call to questions. We ask that you limit yourself to two questions. Operator, may we have the first question please. Operator : Operator : Certainly, today that will come from Katy Huberty with Morgan Stanley. Katy Huberty : Thank you. Good afternoon and congratulations on the quarter. iPhone revenue trajectory did improve, but it's still declined 9%. So can you talk about the drivers that will allow you to get that category back to growth? And if you think that's something that's realistic to expect in fiscal '20? Tim Cook : Katy, it's Tim. We are very thrilled with what we're seeing in early going on iPhone 11 and iPhone 11 Pro and Pro Max. It's early but the trends look very good. So I don't want to make a long-range forecast here. We've put our current thinking in the guidance and you can tell from the guidance we are bullish. Katy Huberty : Great. And Luca on margins guidance is consistent with September, but there is a lot going on under the covers; tariffs could expand in mid-December; there is some impact from the TV+ bundle; you have some big currency in commodity price move. So can you just talk about the gives and takes that land you at the December quarter gross margin guidance? Luca Maestri : Yes. Katy, of course. As you said, I mean at the midpoint of the range, we are essentially flat sequentially. On one side, we expect -- on the positive side, we expect leverage from higher revenue. On the other side, foreign exchange for us continues to be probably the biggest headwind that we've got right now is going to be negative 70 basis points on a sequential basis. Also keep in mind that during the holiday season, we have a higher mix of products revenue than we have in other quarters, and that obviously is dilutive to the company -- to the company margin. On a year-over-year basis, we are also about flat. And on one side, we've got better commodity pricing, the environment is better than it was a year ago, but foreign exchange is a negative impact of 120 basis points on a year-over-year basis. Nancy Paxton : Thank you, Katy. Can we have the next question please? Operator : Our next question will be from Mike Olson with Piper Jaffray. Mike Olson : Good afternoon, and thanks for taking my questions. So Wearables category has been strong, and it's hard to believe it's now essentially the same size as Mac. But related to Apple's initiatives in healthcare, do you think health-related features are a primary driver of Wearables growth and maybe conversely how important is a rising installed base of Wearables and the data that's associated with that to the ongoing innovation within Apple health? And then I have a follow-up. Tim Cook : Michael, it's Tim. The Wearables have done extremely well. It was acceleration further from the previous quarter. So we're thrilled with the results as to what's driving it it's the totality that's driving it. For some people it's about fitness; for some people, it's about health; for some other people, it's about communication; and for some people, it's all of the above. And I think the new feature of Always-On on Series 5 is a game changer for many of our users. And in terms of other health-related things that we have going, we will be continuing to build out our health records connection into the health app, really democratizes the information about people's health, and so they can easily go from doctor to doctor. We've got the research going that I had mentioned earlier, there will be more of those through time, and obviously we've got things that we're not going to talk about just yet that we're working on. But as I've said before, my view is there will be a day in the future that we look back, and Apple's greatest contribution will be to people's health. Mike Olson : Okay. Thanks. And then with the strong slate of content in Apple TV+, can you just talk about the strategy behind giving it away to those that are buying in applicable device versus charging for it? And my congrats to Nancy. And thank you. Tim Cook : Yes, it's a gift to our users, and from a business point of view, we'd like to -- we're really proud of the content. We'd like as many people as possible to view it. And so this allows us to focus on maximizing subscribers, particularly in the early going. And so we are - we feel great about doing that. I think it's a bold move. And the price also for those people that are not buying a device in the period of time that we offer this, the price is very aggressive as well. You think - think about the quality of content that you get for 499, and it's amazing. It is amazing. Nancy Paxton : Thanks, Mike. Can we have the next question please? Operator : That will come from Evercore’s Amit Daryanani. Amit Daryanani : Yes. Thanks a lot guys. I guess two questions from me as well. First one, Tim, if you think about the Services business, less than $2 billion away from the targets you had laid out a few years back. But I am wondering if you think about the growth rates you've had in the business over the last several years, the high-teens average, I think, how much of that do you think was driven by the installed base growing versus incremental monetization of the installed base. And do you see that ratio essentially flipping or changing as you go forward? Tim Cook : I think, we have opportunities, Amit, in both the growth of the installed base as Luca mentioned in his comments, we continue to grow across every category, hit new highs in the last quarter and we hit new highs in all of our top 20 markets. And so the installed base is clearly a piece of it getting the trade-in program going, and the secondary market moving has been helpful in that as well. And, of course, ultimately the thing that builds the installed base is to make customers happy, and that's our -- always our top objective is to have satisfied customers. The other thing that is obviously happening is in many areas, the ARPU is increasing. And so, as there is more offers out there, I mean the one that is today getting the attention is on the streaming side. But if you look at the number of services that have been added over the years, it's significant and people love them. And so it's really both of those. And obviously in - finally in getting more people that are enjoying things for free to - let to pay for some of the premium services. So it's sort of all three of those. Amit Daryanani : Got it. And if I was just kind of go back to the variables discussion, especially as I think about Apple Watch and AirPods, is there a central way to think about what's the attach rate today to iOS devices for Apple Watch and AirPod update. I just want to understand if I think about 900 million plus iPhone installed base, what kind of penetration do you have at Wearables and how long could this one maybe as you go forward? Tim Cook : We’re not releasing the precise numbers of our Wearables, but it is a really nice try and get me to say that. The -- what we're seeing in terms of new adds on the Watch, I think Luca may have mentioned this in his comments is about three-quarters of the Apple Watch buyers are new to Apple Watch. And so we are still insignificantly in the build mode there, and so don't think of the penetration as anywhere near sort of a mature penetration. We got lot left there, and the AirPods just keep hitting new highs. And I anticipate that will carry over to this quarter too and we are really proud to add another product out there for people wanting noise-cancelling with the AirPod Pro beginning to sell today. Nancy Paxton : Thank you, Amit. Could we have the next question please? Operator : That will come from Shannon Cross with Cross Research. Shannon Cross : Thank you very much. First, Nancy, just want to send you our best wishes. We will definitely miss you. I'm sure, I agree with Luca, you've been very instrumental over the years. Nancy Paxton : Thank you. Shannon Cross : My questions though with regard to China, and I don't know, Tim, if you can talk more about what you're seeing in China, the trends during the quarter, the reception specifically there to the iPhone, any thoughts on - you know, Hong Kong used to be a big market, there is obviously some turmoil there. So if you could provide some more in China that would be helpful? Thank you. Tim Cook : Yes, we had a very good September, Shannon, and the lead of that is sort of the reception of iPhone 11 and 11 Pro and 11 Pro Max, and so we feel really good about how we've gotten started there. As you can tell from the numbers, we've significantly improved since the beginning of the year. We've gone from minus well into the 20s to minus two last quarter. And if you looked at that in constant currency, we actually grew one. And so there is a very slight growth there. We obviously want that to be better. But we feel good about how we're doing. I think it's a combination of things that are - that have turned things around. On a macro basis, I think the trade tension is less and that clearly looks positive right now with the comments that we've been reading in the press. Secondly, the products have been extremely well received there. Third, the things that we've done from a pricing and monthly payments point of view and trade-in, getting the trade-in program up and running, all of these things have had moved the dial. And so it's sort of the sum of all of that. I would also say, it's not all about iPhone in China, the services area grew double digit. We began to see more gaming approvals in the quarter, or I should say some key gaming approvals. It's not all about quantity, but about which ones, we saw that. Also Wearables, Wearables are doing so great at a company level. They're doing even better in China. And so lots of positives there. Shannon Cross : Thank you. And then, I'm curious, Luca, maybe you can talk a bit about how you think about operating expense growth. It continues to grow significantly faster than revenue. So I am just curious as to where you're targeting the incremental spend? And then, is there a point at which we might just see some leverage? Thank you. Luca Maestri : Well, you know, Shannon, we've gone through different cycles. In some cases, our revenue growth exceeds our OpEx growth. In other cases, like fiscal '19, it was the other way around. But our approach frankly is not changing over time. We want to invest in the business. Our primary investments during the last few years have been in the R&D space, because obviously we want to continue to innovate, improve the user experience differentiate our products. We continue to run SG&A tightly. Obviously, if you look at what we had launched in the last few quarters and few years, we launched a lot of new products, and now we are launching a lot of new services. And when we do that we need to make the adequate investments in marketing and advertising to raise the awareness of the new products and new services and that is what you're seeing for example in the guidance that we provided for the first quarter as we’re launching new services right now, and so we're making investments both in engineering and in advertising to support the new launches. Nancy Paxton : Thank you, Shannon. Could we have the next question please? Operator : That will come from Bernstein’s Toni Sacconaghi. Toni Sacconaghi : Yes. Thank you. I think this is for Luca, and then I have a follow-up as well. If I look at your guidance, the midpoint of your guidance for revenues on a sequential basis, it's up about 36.5%. Historically, fiscal Q4 to Q1 was up 50% or more, and even last year given that iPhone is a slower growing product, you guided for revenues to be up 45% sequentially. So given the enthusiasm about the iPhone 11 launch and the new Wearables products and the new services, I guess the question is, why is your guidance not stronger for Q1 on the top line? And is that sort of a reflection of conservatism given that there's a lot of uncertainty in the world and we certainly saw that last year? Or are there other forces at work that we should be considered? Luca Maestri : Toni, thanks for the question. The guidance that we are providing if you look at it at the midpoint implies an acceleration of growth from the performance that we've seen during the course of fiscal 2019. As I said earlier, foreign exchange is clearly a headwind for us right now. This is about $1.1 billion of negative foreign exchange on a year-over-year basis. So that is something to keep in mind. We feel very good as Tim said about the iPhone, the way the new cycle has started, and we do expect an improvement in our year-over-year growth rate on iPhone. Wearables has very, very strong momentum. The portfolio of services also has incredible momentum. One thing to keep in mind as we look at this guidance range is the fact that we also contemplated the comparison to the launch of the iPad Pro, a year ago for iPad as well as the new MacBook Air that was launched during the December quarter last year. So for the iPad and Mac categories, you need to keep in mind that our launch timing is different on a year-over-year basis. Toni Sacconaghi : Okay. Thank you for that. And then if I could follow-up, just on the bundling of Apple TV+, I guess for you, Tim, this is really the first time we've seen a significant bundling of services offering and hardware offering. And I'm wondering if you view this as kind of a strategic advantage of Apple and whether we might see more hardware plus services offerings - bundled offerings, and ultimately do you - do you ever believe that your hardware itself might be offered as a bundled service. And maybe while we're on that either you or Luca could give us the 30 second tutorial on how we should think about the deferred revenue accounting? Approximately how much of the $60 are you going to be deferring, and what's your expectation for attach rate on that? Thank you. Luca Maestri : Let me cover the accounting issue first. Obviously, we need to make some assumptions around the take rate of our customers on the -- on Apple TV+, right. And we don't want to get into the details of that because we do those assumptions as confidential and competitively sensitive. But you need to keep in mind that we contemplate a number of factors including the fact that we have family sharing as part of the service, the fact that there are multiple device purchases, the geographic availability around the world, the availability of local content at the beginning of the service, how many people do we have with payment methods on file. So we use all these things to make assumptions around what the take rate is going to be. Obviously, those assumptions will possibly change over time as we get more information on how the customers behave. We haven't launched the service yet - we're going to serve - serving our customers tomorrow. So we'll see how it goes, but we take into account all these different factors. Tim Cook : On the bundle question, Toni, we look at each service, and decide what's best to do for it and with TV+, we concluded that a great way to get more people to see the content would be to do this, and it would be a good gift for our users, and so that's what we're doing. You can also see that on the other services we're not doing that. And so it's not part of a broader pattern, or although I wouldn't want to rule out for the future that we might not see another opportunity at some point in time. In terms of hardware as a service or as a bundle, if you will, there are customers today that essentially view the hardware like that because they are on upgrade plans and so forth. And so to some degree that exists today, my perspective is that we will grow in the future to larger numbers that will grow disproportionately. And one of the things we are doing is trying to make it simpler and simpler for people to get on these sort of monthly financing kind of things. That's a part of what we announced with the Apple Card earlier in the call and so we are cognizant that there are lots of users out there that want sort of a recurring payment like that and the receipt of new products on some sort of standard kind of basis and we are committed to make that easier to do than perhaps it is today. Nancy Paxton : Thank you, Toni. Could we have the next question please? Operator : That will be from Chris Caso with Raymond James. Chris Caso : Yes. Thank you. Good afternoon. And Nancy, congratulations to you too, and we're going to miss you. Nancy Paxton : Thank you. Chris Caso : My first question is about pricing and the effect of some of the lower price points for iPhone 11 as compared to last year. And it looked like margins and revenues did well on that, and also followed some price adjustments you made in emerging markets last year, and obviously we've seen some improvement in China as well. So if you could talk about maybe what that tells us about pricing strategy in general and perhaps that you're willing to take a little more flexible approach to drive some elasticity if you think that's going to have a positive effect? Luca Maestri : Yes, Chris, I think that the price moves we've made have been smart and well received and do show a level of elasticity, but the most important thing by far is the product. And I think we've got the best line-up we've ever had in the customer response to the product and what the product does for them is really incredible. And photos I am getting from many users around the world are just incredible that people are taking. And so I think it's product first, and then prices sort of falls out of that, and we did decide to be more aggressive. And looking at the results in the early going, I think it was the right call. In terms of emerging markets we picked sort of locally relevant prices, and in some cases where the dollar had become stronger, we took an exchange rate that would have reflected a while back, instead of the current exchange rate. And in other words, we tried to stay as close as we could to a local price point that we knew was effective for that particular market. And those in addition to the U.S. price that has gotten more of a discussion had been extremely well received. Chris Caso : Thank you. As a follow-on, perhaps you could talk about the potential for some of the tariffs that are upcoming what -- do you have a view of what potential impact that could have going forward and how Apple is looking to address it? Will you need to adjust your own pricing if in fact the tariffs are imposed? Tim Cook : We are paying some tariffs today as you know, some that went into effect pre-September, and some others that went into effect in September. So we are paying some that's been comprehended. But in general, my view is very positive in terms of how things are going, and that positive view is obviously factored in our guidance as well. And just the tone I think has changed significantly and I have long thought that it was in both countries, best interests to get to an agreement that may be initially doesn't solve everything but solves some things that each party may want and get to a better place than where we're at and I'm hopeful that that's where we're headed. Nancy Paxton : Thank you, Chris. Could we have the next question please? Operator : That will be from Samik Chatterjee with JPMorgan. Samik Chatterjee : Hi. Good afternoon. Thanks for taking my question. I just wanted to start off with one of the new services Apple Arcade, and if you have any insights in terms of what you're seeing for engagement or retention of customers beyond the initial trial period also how your partnerships with developers progressing there. How does the pipeline look like than any early projections of what that business longer term might look like? Tim Cook : We're not going to give out projections on it, but I would tell you that we were really pleased with the number of people that enter the trial period. People are just coming out of the 30-day trial period in the last few days or week or so. And so it's really too early to tell what the conversion rate will be. But I feel like we're off to a good start and the - most important of everything. The customer feedback to date has really been incredible and we're very excited for the future of the service. Samik Chatterjee : Great. As a follow-up if I can, trying to attack the Wearables question within the angle, what are you seeing in terms of -- I believe consumer behavior in upgrading Wearables like Apple Watch AirPods and how are you thinking about your ability to accelerate some of that replacement cycle by driving innovation? Tim Cook : I think we, because the Watch is relatively young. We haven't seen enough upgrade cycles to really establish a pattern as yet. And as I've mentioned before, 3 out of 4 customers buying an Apple Watch currently or last quarter I should say were buying an Apple Watch for the first time. And so there is still a very, very large new to Apple Watch in this regard. I do think the upgrade market will look at larger over time, but just don't have a current view as to -- how often and so forth. On the AirPods we're anxious to see the customers for the new AirPods Pro. But I would guess that one particularly in the early going will be people that have AirPods today and want to have -- also have a pair for the times that they need noise cancellation. Nancy Paxton : Thank you. Samik. A replay of today’s call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor, and via telephone. And the numbers to the telephone replay are 888-203-1112, or 719-457-0820. Please enter confirmation code 433-1479. These replays will be available by approximately 5 :00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414, and financial analysts can contact Tejas Gala or me with additional questions. Tejas is at 669-227-2402, and I am at 408-974-5420. Thanks again for joining us. Operator : And that will conclude today's conference. Again, thank you all for joining us today.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,020	1	2020Q1	2020Q1	2020-01-28	3.106	3.131	3.514	3.575	4.445	21.4	17.25	Operator : Good day, everyone. Welcome to the Apple Incorporated First Quarter Fiscal Year 2020 Earnings Conference Call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Senior Analyst, Corporate Finance and Investor Relations. Please go ahead. Tejas Gala : Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed periodic reports on Form 10-K and Form 10-Q and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speaks as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thanks, Tejas. Good afternoon, and thanks to all of you for joining us. We're thrilled to report Apple's biggest quarter ever, which set new all-time records in both revenue and earnings. We generated revenue of $91.8 billion, which is above the high-end of our guidance range, with revenue growth accelerating for the third consecutive quarter. Geographically, we set all-time records in the Americas, Europe and rest of Asia Specific and saw Greater China return to growth. Our record performance was fueled by iPhone where December quarter revenue was up 8% year-over-year and by our fifth consecutive quarter of double-digit growth outside of iPhone including a new all-time record for services and another blowout quarter for Wearables. Our active installed base of devices has now surpassed 1.5 billion, up over 100 million in the last 12 months alone, reaching a new all-time high for each of our main product categories and geographic segments. Not only is our large and growing installed base a powerful testament to the satisfaction, engagement and loyalty of our customers, but it's also fueling our growth across the board, particularly in services. Let’s take each category one by one. On iPhone, revenue in the December quarter was $56 billion, again that’s up 8% over a year ago, thanks to the exceptional demand for the iPhone 11, iPhone 11 Pro and iPhone 11 Pro Max. In fact, iPhone 11 was our top-selling model every week during the December quarter and the three new models were our three most popular iPhones. We had double-digit growth in many developed markets, including the U.S., the UK, France and Singapore, and also grew double digits in emerging markets led by strong performances in Brazil, Mainland China, India, Thailand, and Turkey. These new models are by far the best iPhones we've ever shipped with advance technologies and unprecedented leap in battery life to easily get through the day and our best-in-class camera experience. We have been wild with the photos customers have shared in our all-new Night Mode photo challenge this month. Turning to services. Q1 revenue reached $12.7 billion, an all-time record, growing 17% over last year. Once again, we saw double-digit growth in all five of our geographic segments and established new all-time records from multiple categories including cloud services, music, payment services and our App Store search ad business, as well as setting a December quarter record for the App Store and AppleCare. 2019 was a historic year for our services business, and I’d like to touch on some highlights. For the App Store, 2020 started off strong with customers spending a new single day record $386 million on New Year's Day alone, a 20% increase over last year. Apple Arcade, our new game subscription service has been fast off the blocks with a catalog of over 100 new and exclusive games you won’t find anywhere else, all playable across Apple devices with new games and expansions added every month. Apple TV+ is off to a rousing start, and I want to congratulate the entire team at The Morning Show for their multiple Golden Globe nomination. Jennifer Aniston on her Screen Actors Guild award and Billy Crudup on his Critics Choice award. We continue to focus on telling stories that matter, like Little America, which recently premiered to widespread critical acclaim with much more great content still to come. Apple News now draws over 100 million monthly active users in the U.S., UK, Australia and Canada, and provides a curated and personalized experience using on-device intelligence to recommend stories. Apple News+ continues to add new titles, offering subscribers seamless access to the world’s top publications across all of their devices. For Apple Pay, revenue and transactions more than doubled year-over-year with the run rate exceeding 15 billion transactions a year. Apple Pay transit support expanded with customers paying for journeys on transport for London more easily with Apple Pay Express Transit. And in spring of 2020, iPhone and Apple Watch customers will be able to simply tap to ride trains and buses in even more cities including Shenzhen and Guangzhou. We are thrilled with the continued growth at Apple Card. And last month, the customers began using Apple Card monthly installments at Apple retail and online to purchase new iPhones and pay for them over 24 months. We see great promise for these recently launched services, and we're optimistic about what we've got in the pipeline for each of them. Now, turning to Wearables. We had another incredible quarter, setting an all-time record in virtually every market we track around the world, and this product category is now the size of a Fortune 150 company. Demand for AirPods continues to be phenomenal, particularly for our recently launched AirPods Pro, our new addition to the AirPods family that features active noise cancellation. Apple Watch had a great start to fiscal 2020, setting an all-time revenue record during the quarter. It continues to have a profound impact on our customers’ lives and it continues to further its reach as over 75% of the customers purchasing Apple Watch during the quarter were new to Apple Watch. Both AirPods and Apple Watch were must have holiday gifts, helping drive unprecedented results for the category, even as we face supply constraints for Apple Watch Series 3 and AirPods Pro. Mac and iPad generated $7.2 billion and $6 billion in revenue, respectively, and the high level of customer satisfaction and loyalty for both products drove the active installed base of both Mac and iPad to new records in all geographic segments. For iPad, we saw growth in key emerging markets like Mexico, India, Turkey, Poland, Thailand, Malaysia, the Philippines and Vietnam, with our current line-up of iPad Pro, iPad Air, iPad Mini and iPad, along with the new iPadOS will give the customers an unparalleled tablet experience integrating hardware, software and services in a way that only Apple can. This was also a very exciting quarter for the Mac as we launched our most powerful notebook ever. The 16-inch MacBook Pro, as well as Mac Pro and Pro Display XDR, the most powerful tools Apple has ever put into hands of Pros. And we’ve already seen a strong response from the Pro community from developers, photographers and music producers to filmmakers and scientists who rely on the Mac to create their life’s best work. We also want to take a moment to congratulate all the Grammy winning and nominated artists this past weekend who rely on Logic Pro 10 and the Mac to create incredible music we all love. I want to call out and celebrate the exceptional work of our retail and online teams. This quarter, we opened a beautiful new store in Kawasaki, Japan. And exciting things are taking place inside each and every store. Thanks in part to a doubling in iPhone trade-ins versus last year, our retail and online stores set an all-time record and delivered strong double-digit growth in iPhone. We see a very bright future for these efforts and we continue to innovate to ensure that everyone who visits an Apple retail location has a great experience. We began 2020 with our greatest product line-up ever and we are only deepening our commitment to do our part to make the world a better place. In November, we released a completely redesigned Everyone Can Code curriculum to help introduce more elementary and middle school students to the world of coding. The new curriculum includes even more resources for teachers, a brand new guide for students and updates Swift Coding Club materials. Today, millions of students in more than 5,000 schools worldwide use Everyone Can Code curriculum to bring their ideas to life and develop important skills, including creativity, collaboration, and problem-solving. November also saw the launch of our new research app, the latest in our ongoing effort to put the future of health in the hands of every user. Customers in the U.S. can enroll in three landmark multiyear health studies that we’re undertaking with leading academic and research institutions. The Apple Women's Health Study, the Apple Heart And Movement Study and the Hearing Study, as in everything we do, we build user privacy into the research app from the ground up. This quarter we also announced a $2.5 billion plan to help address the housing availability and affording crisis in our home state of California. We feel a great responsibility to help the region we have always called home stay vibrant and to ensure that it remains a great place for everyone to live and raise a family, including those who do so much to serve the community, like firefighters and teachers. In much more recent news, we’re closely following the development of the coronavirus. We're donating two groups that are working to contain the outbreak, we're working closely with our Apple team members and partners in the affected areas, and our thoughts are with all of those affected across the region. As we close the books on a record-breaking December quarter, we are already well underway on some new and exciting developments for the future. Apple’s strength will always be its boundless creativity and innovation, and this year will be no different. But for now, for more details on the results, I would like to turn the call over to Luca. Luca Maestri : Thank you, Tim. Good afternoon, everyone. Our business and financial performance in the December quarter were exceptional as we set new all-time records for revenue, net income and earnings per share. Revenue for the quarter was $91.8 billion, up $7.5 billion or 9% from a year ago, in spite of a $1 billion headwind from foreign exchange. Geographically, we established all-time revenue records in many major developed and emerging markets including, among others, the U.S., Canada, Mexico, Brazil, the UK, Germany, France, Italy, Spain, Poland, Thailand, Malaysia and Vietnam. Products revenue was $79.1 billion, up 8% as iPhone returned to growth, and we had incredibly strong results in Wearables where we set all-time records for both Apple Watch and AirPods. Services revenue grew 17% to a new all-time record, $12.7 billion with double-digit growth in every geographic segment and new all-time records across our portfolio. Company gross margin was 38.4%, up 40 basis points sequentially, driven by leverage from higher revenue, despite of a negative 60 basis-point impact from foreign exchange. Products gross margin was 34.2%, up 260 basis points sequentially, thanks to leverage and favorable mix. Services gross margin was 64.4%, up 30 basis points sequentially, driven by favorable mix. Our reported tax rate for the quarter was 14.2%. Before discrete items, the rate was 16.5%, exactly in line with our guidance. A favorable one-time item impacted the rate by 230 basis points. Net income was an all-time record of $22.2 billion, up $2.3 billion or 11% over last year. Diluted EPS was also an all-time record at $4.99, up 19% and operating cash flow was a very strong $30.5 billion, an improvement of $3.8 billion over a year ago. Let me get into more detail for each of our revenue categories. iPhone revenue of $56 billion grew 8% year-over-year, as we saw a great customer response to the launch of our newest iPhones. We set all-time revenue records in several countries, including the U.S. Mexico, the UK, France, Spain, Poland, Thailand, Malaysia and Vietnam. Our active installed base of iPhones has reached an all-time high and is growing in each of our geographic segments. In the U.S., the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 98% for iPhone 11, 11 Pro and 11 Pro Max combined. Among business buyers planning to purchase smartphones in the next quarter, 84% plan to purchase iPhones. Turning to services. We set an all-time revenue record of $12.7 billion with double-digit growth in all of our five geographic segments. As Tim mentioned, we established new all-time records for Apple Music, cloud services, payment services and our App Store search ad business and December quarter records for the App Store and AppleCare. We are well on our way to accomplishing our goal of doubling our fiscal year ‘16 services revenue during 2020. We've actually already reached that goal on a run-rate basis with the results of the December quarter. Customer engagement in our ecosystem continues to grow and the number of both, transacting and paid accounts on our digital content stores reached a new all-time high with paid accounts growing double digits in all of our geographic segments. We now have over 480 million paid subscriptions across the services on our platform, up 120 million from a year ago. And at this point, we expect to hit our goal of surpassing the 500 million mark already during the March quarter. Given the tremendous momentum we're experiencing across our services offerings, we're increasing our target for paid subscriptions and aim to reach 600 million before the end of calendar 2020. App Store revenue grew strong double digits, thanks to robust customer demand for both in-app purchases and subscriptions. Our third-party subscription business grew across multiple categories and increased almost 40% year-over-year. Our first-party subscription services also continued to perform extremely well. Apple Music set an all-time revenue record, offering a catalog of over 60 million songs to our customers. iCloud also generated an all-time revenue record, growing very-strong double digits while offering our customers a safe, secure and seamless experience across all their devices. It was a December quarter record for AppleCare, thanks to strong service agreement attach rates and expanded distribution, many of our partners have come to appreciate the strength of the AppleCare brand and our ability to deliver the very-best service and support in the world. That value resonates with both our partners and our customers, and we are very happy to see that quality of experience delivered to more and more of our users. Next, I’d like to talk about Mac and iPad. Mac revenue was $7.2 billion and iPad revenue was $6 billion. Both products had a difficult year-over-year comparison due to the launches of MacBook Air here, Mac mini and iPad Pro during the December quarter a year ago and the subsequent channels fill. Despite the tough compare, on a demand basis, our performance for both Mac and iPad was around even to last year. Importantly, around half of the customers purchasing Macs and iPads around the world during the quarter, were new to that product. And the active installed base of both Mac and iPad reached a new all-time high. The most recent surveys from 451 Research measured a 93% customer satisfaction rating for iPad from consumers and 92% from businesses, and among both consumers and businesses were planning to purchase tablets in the March quarter 78% plan to purchase iPads. Wearables, home and accessories established a new all-time record with revenue of $10 billion, up 37% year-over-year with very strong double-digit performance across all five geographic segments and growth across Wearables, accessories and home. We set all-time records for Wearables in virtually every market we track, even as we experience some product shortages due to very strong customer demand for both Apple Watch and AirPods during the quarter. We also continued to see strong demand for our products in the enterprise market as our technology solutions enable businesses to do their best work. 100% of Fortune 500 companies in the healthcare sector use Apple technology in areas such as patient experience, clinical communications and nursing workflows, and we're also seeing smaller companies in this sector drive innovation with our technology and apps. One example is Gauss Surgical, which uses Core ML in iOS to more accurately estimate blood loss during child birth and surgery. This helps clinicians have more complete and timely information on whether a patient needs an intervention, which can impact both, clinical outcomes and costs. Another example is Butterfly Network, a medical imaging company, which makes handheld ultrasound device that connects to iPhone or iPad to enable clinicians to take an ultrasound anywhere at a cost that is dramatically lower than other solutions in the market today. Let me now turn to our cash positions. We ended the quarter with $207 billion in cash plus marketable securities. We issued a 2 billion euro-denominated green bond, retired $1 billion of maturing debt and reduced commercial paper by $1 billion during the quarter, leaving us with total debt of $108 billion. As a result, net cash was $99 billion at the end of the quarter and we maintained our target of reaching a net cash neutral position over time. We returned nearly $25 billion to shareholders during the December quarter. We began a $10 billion accelerated share repurchase program in November, resulting in the initial delivery and retirement of 30.4 million shares. We also repurchased 40 million Apple shares for $10 billion, through open market transactions, and we paid $3.5 billion in dividends and equivalents. As we have done for the last several years, we would share our plans for the next phase of our capital return program when we report results for the March quarter. Finally, as we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. We expect revenue to be between $63 billion and $67 billion. The wider than usual revenue range comprehends uncertainty related to the recently unfolding public health situation in China. We expect gross margin to be between 38% and 39%. We expect OpEx to be between $9.6 billion and $9.7 billion. We expect OI&E to be about $250 million and we expect the tax rate to be about 16.5%. Also today, our Board of Directors has declared a cash dividend of $0.77 per share of common stock, payable on February 13, 2020 to shareholders of record as of February 10, 2020. With that, let's open the call to questions. Tejas Gala : Thank you, Luca. We ask that you limit yourself to two questions. Operator, may have the first question, please? Operator : Yes. That will be from Amit Daryanani with Evercore. Amit Daryanani : Thanks a lot. Good afternoon, guys. I guess, first one for me on Wearables, fairly impressive to see, it’s already a $10 billion business for you guys. Could you just touch on the growth that you are seeing on the Wearables side? How much the growth you think is coming from first time buyers of AirPods or Apple Watch versus folks that seem to be just upgrading the products that they have, because it looks to us the adoption rate is fairly low in your installed base, so there should be a long run way, but love to just understand how you see the growth divided between those two buckets. Tim Cook : Yes. Amit, it’s Tim. If you look at the Apple, the Wearables as a category within the Wearables, Home and Accessories revenue, Wearables grew 44%. So, it was very strong, as you say. Both Apple Watch and AirPods did very well in terms of collecting new customers. Apple Watch in particular, 75% of the customers are new to the Apple Watch. And so, it’s still very much a selling to new customers at this point. Amit Daryanani : Perfect. And I guess, Luca, you could just touch on gross margins. The March quarter guide I think implies gross margin of flat to actually up 10, 15 basis point. It's rare for you guys to actually guide gross margins up in March I think because you have a fairly high seasonal sales deleverage happening. So, what are the offsets that's enabling what looks like a better than seasonal guide for gross margins? Luca Maestri : Yes. That's right, Amit. It’s about flat sequentially, and by the way significantly higher on a year-over-year basis. But on a sequential basis, you are right, on one side we got the loss of leverage from the usual seasonality but we expect that that loss of leverage will be offset by better mix and cost savings. Tejas Gala : Thank you, Amit. Can we have the next question, please? Operator : That will come from Tom Forte with D.A Davidson. Tom Forte : So, congrats on the launch of Apple TV+. I wanted to know internally, how you're getting success, is it truly on critical acclaim, is it on number of consumers that are using the service, contribution and service revenue, et cetera, et cetera? Thank you. Tim Cook : Hey, Tom, it’s Tim. We are primarily measuring our sales on the number of subscribers. As you can tell from the way that we launched the product, we started with a very aggressive price at $4.99. And in addition to that we have our bundle where if you buy pretty much any device, you’re getting a year for free. And so, we're very focused on subscribers. That said, the product itself is about storytelling. And we think if we do that well, then we will find that there will be some number of those that will also be critical acclaimed. And we're seeing that with the morning show, we're seeing that with Little America and others. Tom Forte : Great. And then, my second question is I think you indicated that last month we started offering consumers the ability to use their Apple Card to buy an iPhone on an installment basis. Can you talk about how that’s had an impact on your unit sales for iPhones? Tim Cook : So, retail stores did fantastic on iPhone, very strong double-digit growth in iPhone from a year-over-year point of view. And one of the factors that enabled that was the -- getting to a monthly payments on the Apple Card to make it very simple. Of course, that’s U.S. only at this point, but the U.S. is very key market for us. And so, it was an important part of it. Tejas Gala : Thank you, Tom. Can we have the next question, please? Operator : That will come from Shannon Cross, Cross Research. Shannon Cross : Thank you very much. I wanted to go back to revisit China. Tim, can you talk about what you are seeing in the region -- what you were seeing in the region prior to the health crisis? And then, can you also update us a bit in terms of your manufacturing strategy, dual-sourcing, geographic diversification, even with the region, just so we have some idea of how this will be managed? Thank you. Tim Cook : Yes. Thanks,, Shannon. In terms of China, the results from last quarter, and then I will get into the coronavirus in a second. For the results from last quarter, we had double-digit growth for iPhone in Mainland China. So, that was an important change from where we've been running. We also had double-digit growth in services in Mainland China and we had extremely strong double-digit on Wearables. And so, really, there were a number of different factors in terms of the things that customers are responding to. iPhone 11 is doing well there, the product has been very well-received with its battery life and the camera is unbelievable. We also, as you probably know, have certain trading programs going and financing programs. These have also been well received. And so, it’s sort of the sum of all of this. And we are tracking quite a large percentage of new customers on products like the Mac. Three quarters of the customers buying a Mac in China are new, and nearly two-thirds of the customers buying iPad are new. So, it was a terrific quarter. We had three of the top four selling smartphones in urban China according to Kantar. In terms of the coronavirus, as I mentioned earlier, first and foremost, our thoughts are with all of those that are affected across the region. And as I've mentioned, we’re donating to groups that are working to contain the outbreak. We are also working very closely with our team and our partners in the affected areas, and we have limited travel to business critical situations as of last week. The situation is emerging and we're still gathering lots of data points and monitoring it very closely. As Luca had mentioned, we have a wider than usual revenue range for the second quarter due to the greater uncertainty. I'll talk about supply chain and customer demand some to give you some color. With respect to the supply chain, we do have some suppliers in the Wuhan area. All of these suppliers, they’re our ultimate sources, and we’re obviously working on mitigation plans to make up any expected production loss. We've factored best thinking and the guidance that we've provided you. With respect to supply sources that are outside the Wuhan area, the impact is less clear at this time. The reopening of those factories after Chinese New Year has been moved from the end of this month to February 10th, depending upon the supplier location, and we've attempted to account for this delayed start up through our larger range of outcomes that Luca mentioned earlier. With respect to customer demand and sales, we've currently closed one of our retail stores and a number of channel partners have also closed their store fronts. Many of the stores that remain opened have also reduced operating hours. We're taking additional precautions and frequently deep-cleaning our stores as well as conducting temperature checks for employees. While our sales within the Wuhan area itself are small, retail traffic has also been impacted outside of this area, across the country in the last few days. And again, we have attempted to account for this in our guidance range that we’ve provided you. I hope that gets you some color. Shannon Cross : Yes. That was very helpful. Luca, maybe if you could just touch on from a gross margin from perspective, the commodity pricing environment and availability. Obviously, there has been some movement on DRAM and NAND. So, if you can talk about how you are thinking about inventory levels and managing that going forward? Thank you. Luca Maestri : Yes. As I said earlier to the question around the gross margin guidance for the March quarter, we are seeing a benign commodity environment. Most commodities have been declining during the December quarter, and we expect the same to happen in the March quarter. As always, and as you probably know, we look at the way these prices move and at times when we feel it’s appropriate we buy certain commodities in advance. And so, we will continue that practice as we go through the year. Tejas Gala : Thank you, Shannon. Can we have the next question, please? Operator : That will come from Katy Huberty from Morgan Stanley. Katy Huberty : Luca, can you address the modest slowdown in services growth this quarter, 17% versus 18% in September? Which services categories accelerated versus where did you see some deceleration in the growth? Luca Maestri : Katy, let me make a couple of comments here. The 17% during the December quarter, we look at it against our fiscal year ‘19 growth rate, which was 16%. So, we feel very good about the results for the December quarter. As Tim and I mentioned during our prepared remarks, it was very broad-based growth because we grew double digits in services across all the five geographies. We set all-time records for many, many categories, music, cloud, search ads, payment services, December records for the App Store and the AppleCare. If you remember, we had set two goals for ourselves in the services segment. The first, we set a goal to double our fiscal ‘16 revenue during 2020. And when we look at it on a run rate basis, we’ve already achieved that goal with the results of the December quarter. We also set a goal to pass 500 million paid subscriptions during 2020. And given that we are already at 480 at the end of December, we expect to pass that mark during the March quarter. So, now, we are setting a new target for ourselves for paid subscriptions. And so, we are now aiming to reach 600 million before the end of calendar 2020. So, we feel that the services business is growing incredibly well. Of course, we have launched new services very recently. For example, Apple TV+ just launched in November. And so, while these services did not have a material impact in our December quarter results, we expect that over time they start contributing to the growth of the services business. But, we feel very happy with the 17%. Katy Huberty : Thank you for that. Tim, as a follow-up, at some point in the future, Apple will launch a 5G iPhone. How big of a demand driver do you view 5G capability in a handset? And what's your view as to what the killer app will be from a consumer perspective? Tim Cook : Sorry. We don’t comment on future products. And so, I will try to sidestep a bit. With respect to 5G, I think it’s -- we're in the early innings of its deployment on a global basis. We obviously couldn’t be prouder of our lineup and are very excited about our pipeline as well and wouldn’t trade our position for anybody. Tejas Gala : Thanks, Katie. Can we have the next question, please? Operator : We’ll hear from Kyle McNealy with Jefferies. Kyle McNealy : So, we were seeing some signs of new spectrum being deployed for 5G deployments and even additional 4G capacity, and it’s already having a positive impact for handset upgrades to use that new capacity? Do you get the sense that wireless carriers are getting more incentivize to upgrade handsets to get a leverage out of these new network investments? How much might this be helping, and do you think it will continue to accelerate? Tim Cook : I think that we’ve had some great partners, not only in the U.S. but also around the world that are really helpful this quarter, as partners. And so, I think that probably a part of that is the level of investments they have. And then, a part of it is probably making sure that those customer stick with them in a environment where there's a lot of trading back and forth. So, I am optimistic that it will continue. Kyle McNealy : Okay, great. And then, the comment that you made about capacity in the Wearables division with AirPods Pro and Apple Watch 3, what should we think about the timeline of when those capacity constraints might be alleviated? And will they come from capacity additions or the natural workout of unit shipments and something on the demand side? Tim Cook : I'm hopeful that the Series 3 will come in to balance during this quarter. On AirPods Pro, I don't have estimate for that for you. I just can't predict when at this point. We seem to be fairly substantially off their and we're working very hard to put in additional capacity. Tejas Gala : Thanks, Kyle. Can we have the next question, please? Operator : Yes. Wamsi Mohan, Bank of America. Wamsi Mohan : Hi. Thank you. Tim, Apple has a very valuable installed base of users. Can you see a future where Apple can become larger in the advertising market, as you build out TV+, given you could have the unique position and ability to drive targeted ads to users without compromising on privacy? Tim Cook : I think, it is possible to have advertising in a straightforward manner that doesn’t encroach on people's privacy. I wouldn’t want to conjecture about us in that business. I think for the TV+ business, we feel strongly that what the customer wants is an add-free product, and so that's not our aversion to ads, it’s what we believe that a customer wants. Wamsi Mohan : Okay. Thank you. And Luca, can you just clarify if the services revenue this quarter had any impact of deferrals associated with TV+ at all? And how can you help us maybe size the impact of the amortization of the content costs associated with TV+ as we think about the next couple of years? Thank you. Luca Maestri : Yes. So, yes. Of course, we launched the service and so there was a very small contribution to revenue from the deferral, and there was also contribution to revenue from the people, the subscribers that are actually paying for the service. When you think about what goes into the Apple TV+ revenue, at this point, there are two components. There is paid subscribers, these are the customers that pay for the service and we recognize revenue over the subscription period. And then, we got the what we call the Apple TV+ bundle subscribers. These are the customers that buy an eligible hardware device and redeem the offer for a three-year of TV+ services. We deferred revenue for this offer, based on three items, the first one is the value of the service that is being provided, the one year of Apple TV+. The second one is the number of customers that are eligible for the offer. And the third one is our estimate of the expected number of customers that will redeem the offer. So, you need to keep in mind that from our total eligible device sales, you need to make a number of reductions for family sharing, for multiple device purchases and for geographic availability. Also, the take rate can also be impacted by the availability of local content, and we also require a payment method on file. So, this estimate is reviewed quarterly and gets updated based on actual trends of the offer. So, these inputs provide us with the amount of revenue that we deferred for each device sale that then gets recognized over the one-year period that the TV plus service has provided. So, when you take the combination of paid subscribers and bundled subscribers, you get the Apple TV+ revenue. Of course because we’ve launched the service very recently, the amount of revenue that we recognized during the quarter, was immaterial to our results. With regard to the cost of developing the content, we -- essentially as we incur these costs, we put them on the balance sheet and then we amortize over a certain period of time depending on the type of content that we produce. Tejas Gala : Thanks, Wamsi. Can we have the next question, please? Operator : We’ll hear from Cowen and Company's Krish Sankar. Krish Sankar : I had two questions. First one, Tim, I just wanted to pick your brain a little bit on the overall smartphone market. There is a general view that when 5G phones come out they’re going to be more expensive due to higher component costs, but at the same time, it looks like you guys have proven that there is a market for low cost geographies to phones like iPhone SE. So, how do you see these two different segments within the smart phone market evolving over the next one to three years? And then, I had a follow-up for Luca. Tim Cook : Again, I’m going to stay away from commenting about future products. But, generally, I think it’s important when you think about 5G is to look around the world at the different deployment schedules. And some of those look very different perhaps than what you might be seen here. And so, that’s very important. In terms of the price, I wouldn’t want to comment on the price of handsets that aren’t announced. Krish Sankar : And then, a follow-up for Luca. OpEx as a percentage of sales for March looks like e about 15% higher than in your prior quarters. Kind of curious how much of that is -- part of it is driven by some of your Intel modem asset purchases or TV+ in the OpEx or how do we think about it on a go forward basis? Luca Maestri : Yes. I think we felt good about our OpEx results, because they were at the low end of our guidance range. But clearly, we want to make all the necessary investments in the business. And in terms of the new services, not only for TV+ but all the new services that we launched during 2019, this is period where we’re making the necessary investments in advertising and marketing, and that level of investment is reflected in our OpEx results. And also, as you correctly stated, we completed the acquisition of the Intel baseband business unit in December quarter. And so, we had -- we reflected the run rate of the expenses related to that business, partially during the quarter, after the completion of the transaction. And that is a very important core technology for the Company. So, we will continue to make all the necessary investments also there. There is a third category of expenses that affected the December quarter, and it’s a fact that our revenue was very strong, and we have certain valuable expenses. For example, credit card fees that are associated with the higher volume and of course impacted our OpEx results. Tejas Gala : Thanks, Krish. Can we have the next question, please? Operator : That will be from Mike Olson with Piper Sandler. Mike Olson : Good afternoon. Thanks for taking the questions. So, slightly different take on an earlier question on Wearables, and that is, what impact you think Wearables is driving people into the Apple ecosystem? You mentioned 75% watch buyers are new to the Apple Watch, but are many of them new to Apple overall? I'm sure a lot of existing iPhone, iPads or Mac users are going to Wearables customers, but do you think Wearables bring people into the ecosystem to buy other devices in a material way? Tim Cook : I think that -- Mike, it’s Tim. With each Apple product that a customer buys, I think, they get tighter into the ecosystem because they like -- that's the reason that they're buying into it, is they like the experience, the customer experience. And so from that point of view, I think each of our products can drive another product. I would think, in that case it’s more likely that the iPhone comes first, but there's no doubt in my mind that there's some people that came into the ecosystem for the Watch. Mike Olson : Okay. And then, I think you recently mentioned that augmented reality will pervade our entire lives. And I'm wondering if you could share your thoughts about how you think it starts to impact our lives most significantly. For example, will the inflection point in AR come from gaming or industrial usage or some other category? In other words, where will the average person kind of first feel that impact of AR on their lives in a significant way? Thanks. Tim Cook : I think, when you look at AR today, you would see that there are consumer applications, there are enterprise applications. This is the reason I'm so excited about it is, you rarely have a new technology where business and consumer are both see it as key to them. And so, I think, the answer is --- that's the reason, I think it’s going to pervade your lives is because it’s going to go across business and your home life. I think, these things will happen in parallel. There are already companies that are deep into enterprise business that are working on applications for the enterprise. And of course you can see -- you go on to store, see thousands of apps that are AR kit enabled at this time and would even more coming. Tejas Gala : Thank you, Mike. Can we have the next question, please? Operator : That will come from Raymond James, Chris Caso. Chris Caso : Yes. Thank you. Good afternoon. I guess, the first question is on gross margins. And you spoke about the favorable mix. Wondering if you could expand on that a little bit. And clearly, iPhone is doing well within the overall mix that growing year-on-year. But, if you could talk about what's happening to the mix within iPhone, is that improving as well and also helping margins? And is there anything else you would point to with regard to the overall mix in margins? Luca Maestri : Yes. And I think that the mix helped us both in Q1 and it’s helping us with the guidance for Q2. And as you said, some of it is mix of iPhones. The customer response for iPhone 11, 11 Pro and 11 Pro Max is being exceptional. And that clearly has helped our mix. iPhone 11 was our top selling model throughout the quarter, every single week of the quarter. And so certainly, better mix within iPhone. The other point that I would like to point out is that as we move from Q1 to Q2, the proportion of revenue coming from services increases versus the holiday quarter. And given that fact that services are accretive to gross margin for the Company, we end up getting a better mix from services as well. Chris Caso : Okay. Thank you. And I guess, follow-on question with regard to OpEx. And it has been growing at a faster rate than revenue for I guess largely over the last three years or so. Can you set us some expectation with regard to when you get a return on that investment? I understand there are new investments that are happening now. But, how should we think about potential leverage going forward? Is there a point in time where the OpEx spending tend to level off and you get some return on that or is it just the function of a faster revenue growth in future? Luca Maestri : Well, I would start by saying that our expense to revenue ratio is incredibly competitive relative to other companies in our sector. There are years when our OpEx grows faster than our revenue but we also had years in the recent past where the opposite has happened. We continue to believe that we have a lot of great opportunities in front of us. And just if you look this past year, we launched many new initiatives, for example, on the services front, which we want to support with the appropriate level of investment, and not only marketing and advertising but also in R&D. As I mentioned earlier, we closed the acquisition of the Intel baseband business because we think it’s a very important strategic core technology for the Company going forward. And I think from the results that you’ve seen during this quarter and the guidance that we provided for the March quarter, I think we’re doing a pretty good job of balancing the level of investments that we’re making on the expense front, with the level of returns that we get both in terms of revenue and in terms of profitability that we’re getting. Our net income for example was up 11% during the December quarter. Tejas Gala : Thank you. Can we have the next question, please? Operator : That will come from Samik Chatterjee with JP Morgan. Samik Chatterjee : I just wanted to kind of ask on the iPhone revenue growth, definitely good to see return to growth. Based on the velocity and momentum you’re seeing for the products exiting the quarter, how comfortable are you feeling about sustaining growth in iPhone revenues through year? And I have a follow-up. Tim Cook : We have a practice of forecasting the current quarter. And so, we’ve given you the range that we expect for the current quarter and really don't give a range beyond that. Samik Chatterjee : Okay. So, if I can just maybe then follow up in terms of -- obviously, you’ve returned to growth in most of the regions you report. One of the regions that are declining is Japan. So, if you can share your thoughts on what actions you need to take there to return that segment and that geography to grow? And what are the product trends there and what's probably the headwind that's kind of limiting growth there? Luca Maestri : Yes. So, Japan was down 10% during the December quarter. It was primarily due to iPhone performance, which was challenged because there were some regulatory changes that took effect on the 1st of October where essentially the regulators decoupled the mobile phone pricing from the two-year contract and are capping the maximum amount of carrier discounts that can be made. At the same time, I would say, within a more difficult macro environment, iPhone did incredibly well during the quarter, six of the top seven selling smart models in Japan during the December quarter were iPhones. So, it was very strong performance by iPhone in a difficult environment. Also, in Japan, we had very strong double-digit growth from services, stronger than Company average; and very strong double-digit growth in Wearables, also stronger than Company average. So, we feel very good. Japan is a country where historically we’ve had great success. The customers are very loyal and very engaged and we have very strong position there, we feel we have a very good momentum. Tejas Gala : Thank you, Samik. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor, and via telephone. The numbers for the telephone replay are 888-203-1112, or 719-457-0820. Please enter confirmation code 682-6206. These replays will be available by approximately 5 :00 pm Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator : Again, that will conclude today's conference. Thank you all for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,020	2	2020Q2	2020Q2	2020-04-30	3.067	3.068	3.512	3.565	4.2675	21.1	24.66	Operator : Good day everyone. Welcome to the Apple Incorporated Second Quarter Fiscal Year 2020 Earnings Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Tejas Gala, Senior Manager, Corporate Finance and Investor Relations. Please go ahead. Tejas Gala : Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple’s CEO, Tim Cook, and he will be followed by CFO, Luca Maestri. After that, we’ll open the call to questions from analysts. Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook including the potential impact of COVID-19 on the Company’s business and results of operations. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s most recently filed periodic reports on Form 10-K and Form 10-Q and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speaks as of their respective dates. I’d now like to turn the call over to Tim for introductory remarks. Tim Cook : Thanks, Tejas. Good afternoon, everyone. Thanks for joining us today. I hope you’re staying safe and well. Today Apple reports $58.3 billion in revenue, an all-time record for Services, and a quarterly record for Wearables, Home and Accessories. It was also a quarterly revenue record for Apple Retail powered by phenomenal growth in our online store. Amid the most challenging global environment in which we’ve ever operated our business, we’re proud to say that Apple grew during the quarter. But before we dive more deeply into the numbers, I want to speak just for a bit on COVID-19. This is something Apple has been contending with since January. And I think that how we have responded, what we have been inspired to do, tells an important story about Apple’s great durability as a business, and the enduring importance of our products in our customers’ lives. It also speaks to Apple’s unmatched capacity to be creative, to think always in terms of the long term and to forge ahead when others may feel an instinct to pull back. Before COVID-19 was on the horizon, we anticipated that Q2 was going to be a prolific and energetic period for Apple. And when the pandemic did strike, our teams not only succeeded in growing the business in introducing powerful new products, and in meeting our customers’ needs, but they also rose to the occasion in terms of meeting our broader obligations to the communities in which we live and work. Let’s look quickly across the business. At the same time that they were leaving no stone unturned to get our latest generation of devices manufactured and into our customers’ hands, our worldwide network of supply chain partners, logistics and operations folks in every part of the Company were also sourcing more than 30 million masks for frontline medical workers, ensuring they’re donated to places of greatest need in every region around the world. While our product teams were preparing to launch a new iPad Pro, Magic Keyboard, MacBook Air and the new iPhone SE, all of which have been very well received by reviewers and consumers alike, they were also working with our suppliers to design, test, manufacture and distribute more than 7.5 million face shields, and we continue to ship more than 1 million of these every week to the doctors, nurses and medical personnel on the frontlines. In a quarter where our Services teams achieved strong growth, which Luca will dig into in a minute, and which speaks to the real durability of our Services strategy, these teams were also putting COVID-19 front and center. As Apple News, reached 125 million monthly active users, we elevated trusted information from reliable sources through a special COVID-19 vertical. We let customers skip payments without incurring interest on Apple Card for March and April in light of financial hardship for many families. We worked with everyone from Oprah to Lady Gaga to inform, entertain and give back through Apple TV and services like FaceTime and Messages set new all-time records for daily volume during this quarter as users relied on their devices to stay connected in a new reality. In software, at the same time that our teams worked with great creativity and excitement as we prepare to deliver our first ever all online Worldwide Developers Conference later this quarter, they also worked with the same creativity and speed to put together our COVID-19 symptom checking website and app in partnership with the CDC. As of today, the app has been installed nearly 2 million times and the web tool has received over 3 million unique visits. And just this month, to accelerate contact tracing, we are launching a joint effort with Google to enable the use of Bluetooth technology to help governments and health agencies reduce the spread of the virus with user privacy and security central to the design. We paired these programmatic efforts with a broader strategy to get back where it’s needed most. We’ve made major corporate donations to response efforts around the world to support global citizens as well as a new fund for Americans experiencing food insecurity as a result of the crisis. When you tally these things up and consider our ongoing 2 to 1 match for employee donations, Apple’s contributions to the global response are significant, diverse, and a great source of pride for the whole chain. We’re also doing what we can to help our employees, their families, and by extension their communities stay safe and well by modifying our operations where appropriate. This extends of course to our retail employees, they are Apple’s face to our customers and an instrumental part of our business and we’re compensating them normally despite store closures. During a quarter where circumstances evolve by the hour, we have been gratified by the resilience and adaptability of our global supply chain. While we felt some temporary supply constraints in February, our operations team, suppliers and manufacturing partners have been safely returning to work and production was back at typical levels toward the end of March. At this time of social distance, of shuttered school and gathering places, of delayed plans and new ways of socializing, we have seen significant evidence that our products have taken a renewed importance for customers. Teachers and students around the world are relying on our technology to teach, learn, and stay connected with each other. We are in the process of deploying major orders of iPads to school systems working to keep learning going strong at a distance, including tens of thousands in Ontario, Canada; Glasgow, Scotland and Puerto Rico, a 100,000 to the city of Los Angeles and 350,000 to New York City, our largest educational iPad deployment ever. Since early March, we’ve seen unprecedented demand for a pro app from students, enthusiasts and creative professionals. These folks are keeping us all entertained and inspired as we stay at home. And to help them do it, we made Final Cut Pro X and Logic Pro X available for free for 90-days for everyone. And the reaction has been overwhelming, driving software downloads and usage to record levels. And doctors and medical professionals are making even greater use of Apple Watch and other health features to communicate with patients and to treat them safely from a distance when necessary. With new FDA guidance on non-invasive remote patient monitoring, for example, the ECG app on Apple Watch is increasingly being used to facilitate remote ECG measurements and recordings for telemedicine usage, reducing patient and healthcare provider contact and exposure. Many hospitals such as Geisinger Health System, NYU Langone Health, and Stanford Health Care are using apps on iPad and iPhone to support communication and video conferences between hospitalized patients and their care teams. This enables the care teams to keep a close watch on patients without entering isolation rooms, which helps to minimize exposure and reduces some of the need for personal protective equipment. Now, when you step back and tally all this up, when you consider all the ways COVID-19 has touched Apple, our customers and the way we work, this may not have been the quarter it could have been absent this pandemic, but I don't think I can recall a quarter where I've been prouder of what we do or how we do it. As I said at the outset, we achieved revenue of $58.3 billion and underneath that was product revenue of $45 billion. The performance of our product business had three very different phases during the March quarter. Based on Apple’s performance during the first five weeks of the quarter, we were confident we were headed toward a record second quarter at the very high end of our expectations. In the next five weeks of the quarter, as COVID-19 started impacting China, iPhone supply was temporarily affected, as well as demand for our products within China. This caused us to withdraw our revenue guidance in February. At that point, demand for our products outside of China was still strong and in line with our expectations. During the last three weeks of the quarter, as the virus spread globally and social distancing measures were put in place worldwide, including the closure of all our retail stores outside of Greater China on March 13th, and many channel partner points of sales around the world, we saw downward pressure on demand, particularly for iPhone and Wearables. Given the lack of visibility and uncertainly in the near term, we will not be issuing guidance for the coming quarter. Over the long term though, we have a high degree of confidence in the enduring strength of our business. Our global supply chain is profoundly durable and resilient. We have shown the consistent ability to meet and manage temporary supply challenges like those caused by COVID-19. We have continued to deliver innovative new products across multiple categories that appeal to a broad cross-section of customers, including the all-new iPhone SE, which achieved unmatched technological capacity at an incredible value. Our teams worldwide have tackled the complexities of this moment with unmatched creativity, good humor and dedication to our customers. For a company whose business is innovation, there are real upsides in periodically having to figure out how to do just about everything in a brand new way. Our long-running investment in our Services strategy is succeeding. This business is growing and is a reflection of our enduring large and growing installed base. We expect to meet our longstanding goal of doubling our fiscal 2016 Services revenue in 2020. We have always run Apple for the long term. We entered this period with unmatched financial strain, a robust cash position and our best product pipeline ever. Major investments, including our five-year commitment to contribute $350 billion to the economy here in the United States are moving forward full speed ahead. It’s in these moments that we set ourselves apart. We’ve always managed through difficult moments by doubling down and investing in the next generation of innovation. And that’s our strategy today. And so, while we can’t say for sure how many chapters are in this book, we can have confidence that the ending will be a good one. Apple will continue to do everything we can do to help the global response and to keep our customers learning, creating, sharing, and connecting so that life can remain as normal as it can during this challenging time. With that, I’ll hand things off to Luca. Luca Maestri : Thank you, Tim. Good afternoon, everyone. It has been a very different quarter than we were expecting when we last talked to you at the end of January. But, we could not be more proud of our Apple teams around the world, our role in supporting local communities and our partners throughout the value chain, and how resilient our business and financial performance has been during these challenging times. So, the revenue for the quarter was $58.3 billion, up 1% from a year ago, despite the extreme circumstances from the impact of COVID-19 and a headwind of a 100 basis points from foreign exchange. Products revenue was $45 billion, down 3%. After a very strong January, our performance was impacted particularly during the last three weeks of the quarter when lockdowns and point-of-sale closures increase due to COVID-19 spreading around the world and affected our product sales. However, on a demand basis, our performance was stronger than our reported results as we reduced iPhone channel inventory more than we did a year ago. Importantly, our installed base of active devices reached an all-time high in all of our geographic segments and all major product categories. Services revenue followed a different trend with very strong year-over-year growth of 17%. We set a new all-time revenue record of $13.3 billion with all-time records in many of our Services categories and in most countries we track. I’ll provide more details on this later. Company gross margin was 38.4%, flat sequentially with cost savings and mix shift towards Services offset by the seasonal loss of leverage. Products gross margin was 30.3%, decreasing 380 basis points sequentially due to loss of leverage and unfavorable mix. This drop was more pronounced than under normal circumstances due to the COVID-19 impact I mentioned earlier. Services gross margin was 65.4%, up 100 basis points sequentially, driven by favorable mix. Our reported tax rate for the quarter was 14.4%. This was lower than our 16.5% guidance due to onetime discreet items. Net income was $11.2 billion and earnings per share with $2.55, up 4%. Operating cash flow was very strong at $13.3 billion, an improvement of $2.2 billion over a year ago. Let me get into more detail for each of our revenue categories. iPhone revenue of $29 billion, declined 7% year-over-year as both iPhone supply and demand were affected by the impact of COVID-19 at some point during the quarter. On the supply side, we suffered from some temporary supply shortages during February, but we’ve been extremely pleased with the resilience and adaptability of our global supply chain, as well as its ability to get people back to work safely when circumstances allow. Our operations team and manufacturing partners put forth an extraordinary effort to restore production quickly, and we exited the quarter in a good supply position for most of our product lines. On the demand side, after very strong first five weeks, we saw the impact of COVID-19 affect demand in China for the next five weeks, and then more broadly around the world for the last three weeks of the quarter, when lockdowns and point-of-sale closures became more widespread in many countries. While we did see a slight elongation in our replacement cycle towards the end of the quarter, which we attribute to the widespread point-of-sale closures, our active installed base of iPhones has reached an all-time high. This speaks to the quality of our products and strength of our ecosystem. In fact, in the U.S., the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 99% for iPhone 11, 11 Pro and 11 Pro Max combined. Turning to Services. We set an all-time revenue record of $13.3 billion with strong performance across the board with all-time revenue records in the App Store, Apple Music, Video, cloud services, and our App Store search ad business. And we also set a March quarter record for AppleCare. Our new services, Apple TV Plus, Apple Arcade, Apple News Plus and Apple Card continue to add users, content and features while contributing to overall Services growth. As Tim mentioned, we’re well on our way to accomplishing our goal of doubling our fiscal ‘16 Services revenue during 2020. App Store revenue grew by strong double digits, thanks to robust customer demand for both in-app purchases and subscriptions. Our third-party subscription business grew across multiple categories and increased over 30% year-over-year, reaching a new all-time high. Our first party subscription services also continued to perform very well. Apple Music and cloud services, both set all-time revenue record and AppleCare set a March quarter record. Paid subscriptions for all three of these services were up strong double-digits. Customer engagement in our ecosystem continues to grow strongly, and the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the March quarter. In particular, the number of paid accounts increased double digits in all of our geographic segments. We now have over 515 million paid subscriptions across the services on our platform, up 125 million from a year ago. On a sequential basis, paid subscriptions grew by over 35 million. This is the highest sequential growth we have ever experienced. With this momentum, we’re confident we will reach our increased target of 600 million paid subscriptions before the end of calendar 2020. Wearables, Home and Accessories established a new March quarter record with revenue of $6.3 billion, up 23% year-over-year with strong double digit performance across all five geographic segments. Our Wearables business is now the size of a Fortune 140 company, and we’re very excited by the many opportunities in front of us for this product category. For example, Apple Watch continues to expand its reach as over 75% of the customers purchasing Apple Watch around the world during the quarter were new to the product. Next, I’d like to talk about Mac and iPad. Mac revenue was $5.4 billion; iPad revenue was $4.4 billion. Towards the end of the quarter, we launched a brand new iPad Pro that includes a first in class LiDAR scanner with some really exciting augmented reality applications; and MacBook Air with significantly improved performance at a lower price. We’re very pleased with the strong customer interest for both products. Importantly, around half of the customers purchasing Macs and iPads around the world during the quarter were new to that product and the active installed base for both Mac and iPad reached a new all-time high. And the most recent surveys of consumers from 451 Research measured customer satisfaction at 95% for iPad and 96% for Mac. In the enterprise market businesses everywhere have been making the transition to working remotely. We’ve created content to assist our customers in this transition including an on-demand video learning series focused on topics like remote deployments of iPad and Mac and security. We’ve also realigned our own retail business and enterprise teams to provide timely and relevant support to customers as they navigate new work environments. Some of our largest customers offering Mac to employees such as IBM and SAP have been able to pivot quickly to allow employees to easily set up and secure their devices from home, benefiting from Apple Business Manager and zero-touch deployment. And we’ve seen countless examples of new projects of remote deployments implemented in just a few hours. Peloton for instance, worked with our New York teams to deploy an entire fleet of Macs overnight, so their team could work remotely. In essential sectors, such as grocery and financial services, we’ve seen organizations adopt our technology to better serve their customers safely. Leading grocers around the world, like Trader Joe’s, Woolworths, Lawson’s, Sainsbury’s, Lidl, and Carrefour offer Apple Pay so customers can use contactless payments. And as stores shift to become fulfillment centers for online orders, organizations are leveraging apps for remote shoppers and food delivery to reduce foot traffic. In banking, where safety and securities are a top priority, one way to protect company and client information is by providing corporate iOS devices to employees who use mobile phones daily as part of their jobs. As an example, Bank of America is purchasing tens of thousands of additional iOS devices for their workforce. Let me now turn to our cash position. First, I want to note that liquidity has not been an issue for us during these highly unusual financial market conditions. We have an extraordinarily strong balance sheet, very deep access to capital markets, and unmatched free cash flow generation. We ended the quarter with $193 billion in cash plus marketable securities, total debt of $110 billion. And as a result, net cash was $83 billion at the end of the quarter. We returned $22 billion to shareholders during the March quarter, including $18.5 billion through open market repurchases of 64.7 million Apple shares, and $3.4 billion in dividends and equivalents. Finally, as we move ahead into the June quarter, I’d like to provide some color on what we are seeing, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. As Tim mentioned, given the lack of visibility and certainty in the near term, we will not be issuing guidance for the coming quarter. However, based on what we have seen in April, and how we think things might play out, I would like to provide some additional insight on headwinds and tailwinds we’re facing. From a foreign exchange standpoint, the U.S. dollar has appreciated recently against most currencies around the world. And as a result, we expect our revenue to be negatively impacted by more than $1.5 billion on a year-over-year basis. Our global supply chain is back, up and running. We are in a typical supply position, including our usual ramp associated with new products recently launched. These newly launched products, iPad Pro, MacBook Air, and iPhone SE have all received outstanding customer response, even during these extreme circumstances. On iPhone and Wearables, we expect a year-over-year revenue performance to worsen in the June quarter relative to the March quarter; on iPad and Mac, we expect the year-over-year revenue performance to improve in the June quarter. On Services, we are seeing two distinct trends. First, customers are actively engaging with our ecosystem and digital services, and we believe the very strong recent performance in the App Store, Video, Music, and cloud services will continue throughout the June quarter. Second, due to the overall reduced level of economic activity, due to the lockdowns around the world, services like AppleCare and advertising are being impacted. AppleCare is comprised of our product repair business and the warranty agreements with our customers, both of which have been obviously affected by store closures and reduced level of customer traffic. Advertising, which is comprised of third-party agreements, our App Store search ads, and Apple News ads has been impacted by overall economic weakness and uncertainty on when businesses will reopen. For gross margin, sequential headwinds include foreign exchange, the mix within products, and the seasonal loss of leverage on our product business. Foreign exchange will have a 70 basis points impact sequentially and 130 basis points impact year-over-year. Regarding product mix, keep in mind the commentary we provided at the revenue level. Sequential tailwinds include cost savings and the mix shift towards services. With regard to capital allocation, our approach remains unchanged. We continue to invest confidently in our future while also returning value to our shareholders. We are in the midst of developing our most exciting pipeline of products and services ever while contributing over $350 billion to the U.S. economy and expanding our footprint in many cities around the country over a five-year period. We also continue to believe that there is great value in our stock, and we are maintaining our target of reaching a net cash neutral position over time. As a testament to the confidence we have in our business today and into the future, our Board has authorized $50 billion for share repurchases in addition to the over $40 billion authorization remaining under the current share repurchase plan. Our Board has also authorized a 6% increase in our quarterly dividend and today declared a cash dividend of $0.82 per share of common stock, payable on May 14, 2020, to shareholders of record as of May 11, 2020. Finally, and most importantly, we are managing Apple for the long term, as we’ve always done. During uncertain times historically, we have continued to invest in the business and this remains our philosophy. We will continue to stay focused on what we do best, investing in our product and service pipeline, managing the business wisely, and taking care of our teams and believe we will come out from this stronger. With that, let’s open the call to questions. Tejas Gala : Thank you, Luca. We ask that you limit yourself to two questions. Operator, may have the first question, please? Operator : Yes. That will come from Shannon Cross, Cross Research. Shannon Cross : Thank you very much for taking my question, and I hope everyone is well. Tim, you talked about seeing some improvement in the second half of April. So, I was wondering if you could just talk maybe a bit more on the segment, a geographic basis, what you’re seeing and in the various regions that you’re selling in and what you’re hearing from your customers. And then, I have a follow-up. Thank you. Tim Cook : Sure, Shannon. If you look at -- I’ll start with China. If you look at what happened in China, we were having a really good January. The lockdown started there toward the end of January, as you know. February, we saw a steep decline in demand. We closed our stores in February. As the lockdown completed in mid-February, toward the second half of February, we begin to open stores. We opened on a staggered basis that took about 30 days until mid-March. And from a demand point of view, we saw then an improvement in March over February. And if you look at, kind of where we are today, we’ve seen further improvement in April as compared to March. And so, that’s China. If you look at the rest of the world, we were doing great in January, the first five weeks of the quarter. And we do believe that we were headed toward the sort of the top end of our expectations that we had talked to you about on the last call. The next five weeks were spent sort of reacting and getting the supply chain back up in full force and working through the sharp decline in China that I already talked about. The real thing for the rest of the world happened in March when the shelter-in-place orders went in and the work-from-home began. For those two, three weeks period, at the end of the quarter, we saw a sharp decline in demand. If you now step out into April and look at that, early April started like the end of March, but in the second half of April, we’ve seen an uptick across really across the board. It’s not just related to a certain geo or a certain product. We think, by looking at it, a part of it is due to just our new products, a part of it is due to the stimulus programs taking effect in April, and then a part of it is probably the consumer behavior of knowing this is going to go on for a little while longer and getting some devices and so forth lined up to work at home more. In particular for as I think Luca shared, we believe that iPad and Mac are going to improve on a year-over-year basis during this quarter, and that’s customers that are either taking online education or working remotely. So, complex answer to your question, but that’s what we’re seeing. Shannon Cross : Thank you. That was helpful. Luca, unless I missed it, you talked about various puts and takes in the quarter, but didn’t really discuss operating expenses. I know you mentioned some cost savings on the COGS line. I’m curious how you’re thinking about your spending and OpEx, given some of the macro challenges that you may be facing. Thank you. Luca Maestri : Yes. So, Shannon, as we said, we manage the Company for the long term, right? So, we know that the core of the business, the core of the Company is innovation and product and services development. So, we will continue to invest in our pipeline. We’re very excited about what we have in store. And so, we will continue to invest there. Obviously, we are aware of the environment and so, we will manage the SG&A portion of the company tightly. We are making new investments in the new services that we launched recently. As you know, we purchased the baseband activities from Intel. And obviously, we want to develop that technology because we consider it’s a core technology for us. And so, we will try to balance the need to continue to invest during difficult circumstances and the fact that we like to manage the business wisely. Tejas Gala : Thank you, Shannon. Can we have the next question, please? Operator : That will be from Wamsi Mohan from Bank of America. Wamsi Mohan : Yes. Thank you. Tim, I think I speak for everyone on the call that we’re all very appreciative of Apple’s contribution during this pandemic. We all appreciate it. Tim Cook : Thank you very much for that. Wamsi Mohan : Tim, in past downturns, we have not really seen Apple pull back from investing. And you as a company have largely maintained the product introduction cadence. But given these are unprecedented times and there are a lot of challenges associated with product development, during a time when you have a global footprint for such activities and unable to really do a lot of things in person, how should we think about the product development and introduction cadence as we go over the next several quarters? And I have a follow-up. Tim Cook : Well, we’re continuing to operate. And so, as you can tell, along with everything else going on, we were able to launch and ship the iPhone SE, the iPad Pro with the Magic Keyboard, and the MacBook Air. And so, the business continues and the new products are our lifeblood. And so, we’re continuing to work. Everybody’s getting used to the work-at-home. In some areas of the Company, people maybe even more productive, in some other areas they’re not as productive. And so, it’s mixed, depending upon what the roles are. But, as you can tell from what we did this quarter, despite the environment, we have our head down, are working because we know that our customers want the products that we’ve got. They’re even more important in these times. Wamsi Mohan : Thank you, Tim. As a follow-up, I know you’re doing a lot with both the Apple Card and financing plan for iPhones to get your products in the hands of customers. But, I was wondering, would you consider using the strength of your balance sheet maybe a little differently, structure maybe deferred payments or things like that, or do you think that there could be other steps like bundling that you will consider versus what you already currently do? Thank you. Tim Cook : Well, as you know, we launched the payment plan earlier on Apple Card for iPhone. We’re working on doing that for other products as well. And you’ll see something on that shortly. So, we’re very-focused on the affordability point. The trade-in programs also are fairly wide across the board and act as both something great for the environment, also something great from a way to get that entry price down. In terms of deferred payments, nothing to announce today. But, as you know, having access to the card, at least in the United States, gives us more degrees of freedom. And that is not using our balance sheet. But, we play a key role in deciding what kind of programs go with the card. Tejas Gala : Thanks, Wamsi. Can we have the next question, please? Operator : That will come from Morgan Stanley’s Katy Huberty. Katy Huberty : Thank you for the question. I hope the whole team is staying healthy and safe. Tim, I want to start on a longer term question. Where do you see structural changes on the back of this health crisis that might present opportunities for new revenue streams at Apple? And I’m particularly thinking about your past comments on health and augmented reality. But I’m sure there is even more areas of inspiration and creativity coming out of the company. And then, I have a follow-up. Tim Cook : I think, there are things from just a great reminder of how important our products are for remote work. And it’s pretty clear to me that where things will get a lot closer to normal than they are today, obviously. I think many people are finding that they can learn remotely. And so, I suspect that trend will accelerate some. I think that’s probably also true about working remotely in some areas and in some jobs. And so, I think we have significant solutions and products for all of those groups. On the health area, I gave some examples in my opening comments about the ECG being used on the Watch. You can bet that we’re looking at other areas in this. We were already doing that because we viewed that that area was a huge opportunity for the Company and a way for us to help a lot of people. And so, you will see us continue on that. I wouldn’t say that the health door opened wider. I would say, it was already opened fairly wide. Katy Huberty : Okay. And then, as a follow-up, the $50 billion share repurchase authorization is impressive in absolute terms, but it is a bit lower than the last couple of years. So, just any context around the thought process of landing on $50 billion. And then, related to that, you have one of the strongest balance sheets in the world. Does the current environment change your thinking at all around M&A opportunities? Luca Maestri : Let me answer that, Katy. First of all, on the buyback. As I said, in general, our approach to capital allocation has remained the same for the last several years and it’s not changing now. Keep in mind here, we’re talking about just the authorization, right? And when you look at our actual results at the end of every quarter, you see how much we actually do in terms of share repurchases. The $50 billion is in addition to over $40 billion that is still remaining from the past authorization that we’ve received from our Board, right? So it’s the total available or outstanding in terms of authorization is over $90. And as you look at our run rate during the last several years, you know that that is a very adequate amount. And as you know, we will provide an additional update a year from now. So, nothing really has changed there. And nothing has changed on our approach for M&A. We’ve been quite active over the last several years. We purchase companies on a very regular basis. We’re always looking for ways to accelerate our product roadmaps or fill gaps in our portfolio, both on the hardware side, on the software side, on the services side. So, we will continue to do that. And so, also on the M&A front, nothing has changed. Tejas Gala : Thanks, Katy. Can we have the next question, please? Operator : That will come from Amit Daryanani with Evercore. Amit Daryanani : Thanks for taking my question. I have two as well. I guess, first off on the channel inventory. I was hoping if you could talk about how did channel inventory look like in the March quarter, because it sounds like it may be below the historical ranges. And then, the discussion you had for June quarter performance of iPhones, what are you embedding from a channel building back inventory levels in that expectation. Tim Cook : Amit, it’s Tim. If you look at the iPhone channel inventory during Q2, the reduction of it was more than the reduction from the previous year. It’s not unusual that we reduce in Q2. In fact, if you look back, generally speaking, in the first half of the calendar year, we reduce channel inventories; during the second half of the calendar year, we generally raise channel inventories. That’s a seasonal thing. And sitting here today, I believe that will happen this year as well. So, hopefully, that answers your question. And by the way, we ended in a comfortable position. You could conclude from that that we were within a target range. Amit Daryanani : That’s really helpful. Maybe just for follow-up. Tim, I was hoping you could maybe talk a little bit about, how do you think about Apple’s manufacturing strategy and perhaps need for some diversity, especially given everything in the Company and everyone has gone through over the last 12 months, how do you think about that? And do you feel comfortable that the supply chain and the manufacturing base is well situated today to launch the traditional fall products that they used to get from Apple? Tim Cook : As you know, our supply chain is global. And so, our products are truly made everywhere. And I would focus on that versus focus on one element of the manufacturing process, which tends to get more visibility, which is the final assembly. We have some final assembly in the United States; we have final assembly in China as well. I think, you’d have to conclude, or at least I conclude that if you look at the shock to the supply chain that took place this quarter, for it to come back up so quickly really demonstrates that it’s durable and resilient. And so, I feel good about where we are. That said, we’re always looking at tweaks. And it’s just not something we talk about, because if we view it as confidential and competitive information. And so, we will look at the -- as we get out of this totally, we will look to see what we learned and what we should change. Tejas Gala : Thank you, Amit. Can we have the next question, please? Operator : We’ll hear from Jeriel Ong with Deutsche Bank Jeriel Ong : Hi, guys. Thanks for letting me ask a couple of questions. So, I want to focus my question on Services. The segment was solid in the quarter despite overall macro weakness. I can kind of see the logic behind it being strong despite product weakness overall. As you kind of look at the rest of the year, do you think that sustains or at some point does the macro impacts worldwide impact the Services line? Luca Maestri : Jeriel, let me take that one. We typically don’t give a lot of specifics about our categories. But I’ve said, as we look into the June quarter, we see two distinct trends in our services business overall. Our ecosystem is very strong. Our customers are very engaged. We are continuing to grow double digits, the number of transacting accounts and paid accounts. And so, we expect our digital services to continue at the same level of performance that we have seen during the March quarter. And that includes the App Store, of course, our video business, our music business, cloud services. So, we expect all these businesses to continue to grow very strongly. Given the overall economic environment, the level of demand right now, there are two businesses that we believe are going to be impacted during the June quarter. One of them is AppleCare. AppleCare is essentially comprised of our product repair business and the warranty agreements that we signed with our customers when they purchase our devices. Both these businesses have been affected obviously by the store closures. And not only our retail stores, but also our partners points of sale, and obviously, the reduced level of customer traffic because of the social distancing measures. Right? And we do expect AppleCare to be affected during the during the June quarter. The other business, which we think is going to be impacted by the overall economic weakness and the uncertainty on when businesses will reopen is advertising, which is the sum of our advertising business on the App Store, on Apple News, and the third party agreements that we have on the advertising front. So, these are two things that during the June quarter will create a headwind for the Services business. Jeriel Ong : Got it. I appreciate that. My second question is about the overall purchasing decisions the consumers are making. So far, through April, have you seen increased perhaps downtick across your product line? So for example, somebody might have shift maybe toward the lower end of the storage mix of certain products. And do you expect that going forward, as unemployment uptick and macro impacts kind of layer on through the rest of ‘20? Thanks. Tim Cook : I haven’t seen what you’re asking. No. I have seen a strong customer response to iPhone SE, which is our most affordable iPhone. But it appears that those customers are primarily coming from wanting a smaller form factor with the latest technology, or coming over from it from Android. So, those are the two principal kind of segments versus somebody buying down, as you’re talking about it. We’ve also seen -- we launched the iPad Pro in the midst of all of this and the reception there has also been incredibly good. And that’s obviously our top of the line iPad. And so, I’m not seeing what you’re alluding to, at least at this point. Tejas Gala : Thanks, Jeriel. Can we have the next question, please. Operator : That will be from JP Morgan’s Samik Chatterjee. Samik Chatterjee : Hi. Thanks for taking my question. If I can just start with a question on kind of what you’re seeing in China. You mentioned going to the pickup in activity. But, is that driven by more kind of footfall in the stores, or what’ve you seen relative to online activity, and how much of this recovery is being driven online? Any thoughts on that, please? Tim Cook : Yes. What we saw in China for the full quarter -- and I’ll speak about mainland China because I think that’s the source of your question. We saw strong results in iPad and in Wearables, and in Services. And if you look up underneath the full quarter, we saw a strong January, and then a significantly reduced demand in February as the shelter-in-place orders and the lockdowns went into effect in China and the stores closed. And then, in March, as stores reopened, the recovery began. And then, we’ve seen further recovery in April. Where that goes, we will see. But that’s kind of what we’ve seen so far there. To your question about store traffic, store traffic is obviously up from where it was in February, but it is not back to where it was pre the lockdown. There has been, however, more move to online. And as I mentioned earlier in my remarks, it’s pretty phenomenal actually. Retail had a quarterly record for us during the quarter. And that’s despite stores being closed for the three-week period around the world. And ex China -- and then China was closed prior to that three weeks. And that’s partly because the online store had such a phenomenal quarter, and that included in China, but it was also other regions as well. So, there is definitely a move. And whether that’s a permanent shift, I would hesitate to go that far, because I think people like to be out and about. They just know that now is not the time to do that. Samik Chatterjee : If I can just follow up on your previous comment about the strong demand you’re seeing for iPhone SE. Just given the price point, I’m wondering if you are expecting any change in terms of the geographic mix of where the demand comes from relative to typically what do you see for other iPhones from the line up on, just giving the lower price point? Tim Cook : I think, it plays in every geo, but I would expect to see it doing even better in areas where the median incomes are less. And so, we’ll see how that plays out. And I expect some fair number of people switching over to iOS. So, it’s an unbelievable offer. It’s, if you will, the engine of our top phones in a very affordable package. And I think -- and it’s faster than the fastest Android phones. And so, it’s an exceptional value. Tejas Gala : Thank you. Can we have the next question, please? Operator : Certainly. Our last question today will be from Chris Caso with Raymond James. Chris Caso : Yes. Thank you. I wanted to follow up with another question on iPhone SE and the decision to bring it back and where it sits within the total iPhone strategy. And I guess, coupled with the fact that iPhone 11, you made the decision to bring that at a lower price point. What does that tell us with respect to your approach to iPhone pricing and flexibility? Is this helping to add users and kind of bring people into the ecosystem? And if so, what does that imply for gross margins? Tim Cook : Chris, we’ve always been about delivering the best product at a good price. And that fundamental strategy has not changed at all. As you know, we did have an SE for a while. It’s great to bring it back. It was a beloved product. And so, I wouldn’t read anything into that other than we want to give people the best deal that we can while making the best product. Chris Caso : Okay. As a follow-up -- the follow-up question is on commodity pricing. And I think, you had expected to see some commodity price declines through the March quarter. If you could talk about what you expect, as you go through the year, perhaps in this new environment, and again, whether that turns into a challenge or a headwind for gross margins as you go into the second half? Tim Cook : Yes. For March, Chris, we saw NAND pricing increase slightly while DRAM and displays and the other commodities declined. For the June quarter, we would expect NAND and DRAM pricing to remain at this historically low level, while displays and most other commodity prices we expect to decline. Tejas Gala : Thank you, Chris. A replay of today’s call will be available for two weeks on Apple Podcasts as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 8888-203-1112 or 719-457-0820. Please enter a confirmation code 3229513. These replays will be available by approximately 5 pm Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator : And that does conclude today’s conference. Thank you all for joining us today.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,020	3	2020Q3	2020Q3	2020-07-30	3.146	3.24	3.711	3.87	4.265	27.89	28.97	Operator : Good day, everyone. Welcome to the Apple Incorporated Third Quarter Fiscal Year 2020 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn things over to Mr. Tejas Gala, Senior Manager, Corporate Finance and Investor Relations. Please go ahead, sir. Tejas Gala : Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed periodic reports Form 10-K and Form 10-Q and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thanks, Tejas. Good afternoon, everyone. Thanks for joining the call today. Before we begin, I joined the many millions across this country in mourning and memorialize Congressman John Lewis, who was laid to rest earlier today. We've lost a hero who walked among us, a leader in the truest sense who urged this country to aim higher and be better until the very end. I was humbled and fortunate to know him and as an Alabama native his example inspires me still. It now falls to every American to be a living memorial to John Lewis and to carry forward the work and the mission that defined his life. Throughout the call I'll speak in greater detail about Apple's support for equity and justice topics of great urgency on a number of fronts, but first I want to pull the lens back to consider the quarter and full. In an uncertain environment Apple saw a quarter of historic results demonstrating the important role our products play in our customers' lives. We set a June quarter record with revenue of $59.7 billion, up 11% from a year ago. Both products and services set June quarter records and grew double-digits and revenue grew in each of our geographic segments, reflecting the broad base of this success. As always and especially in times of real adversity, what makes us proud as a company is not merely what we did, but how we did it. As millions March for justice in big cities and small towns alike, we committed a $100 million to launch Apple's racial equity and justice initiative as well as new and renewed internal efforts to foster diversity and inclusion at all levels of the company. As COVID-19 continues to represent great risks for individuals and great uncertainty for our communities, care and adaptability are defining how we conduct our work wherever we work. In some places that has met responsibly reopening our operations and retail stores with enhanced health and safety precautions. In others, where the virus has reemerge it's meant taking the challenging, but necessary step of re-closing stores. I'll touch on these topics more in a little bit. But first I want to offer some more context on the quarter's results. Due to the uncertain and ongoing impacts of COVID-19, we did not provide our typical guidance when we reported our results last quarter, but we did provide some color on how we expected the June quarter to play out. I'd like to contextualize our results in terms of that color across each of our product categories beginning with iPhone. iPhone revenue grew 2% this quarter. In April, we expected year-over-year performance to worsen, but we saw better-than-expected demand in May and June. We attribute this increase in demand to several interactive causes including a strong iPhone SE launch, continued economic stimulus, and potentially some benefit from shelter in place restrictions lifting around the world. We expected iPad and Mac growth to accelerate and we saw very strong double-digit growth for these devices this quarter. This remarkable performance came in spite of supply constraints on both products. We're working hard to get more iPads and Macs into customers' hands as quickly as possible recognizing how integral they have become to working and learning from home providing entertainment and staying connected with loved ones. Wearables growth decelerated as we expected, but still grew by strong double-digits and set a revenue record for a non-holiday quarter. Building on powerful new features built into watchOS 7 and AirPods Pro announced this quarter, we are very excited about the many opportunities in front of us for this product category. These strong results helped drive our installed base of active devices to new all-time records across each of our product categories. Reflecting the deep integration of hardware, software and services, services generated a June quarter record of $13.2 billion, up 15% year-over-year. As we mentioned during our last call, there were two distinct trends we were seeing and they played out as we thought. First, results for advertising and AppleCare were impacted by the reduced level of economic activity and store closures to a degree that was in line with our expectations. Second, we had strong performance in our digital services with all-time revenue records in the App Store, Apple Music, video and cloud services as well as elevated engagement on iMessage, Siri and FaceTime. Customers are loving new offerings across Apple services like Apple News today, our new daily audio briefing and Greyhound, our new summer blockbuster starring Tom Hanks. In fact, Apple TV+ just hit a history making 95 awards nominations and 25 wins and accolades. Based on these results and our performance over the last four quarters, we are proud to announce that we have achieved our goal of doubling. Our fiscal 2016 services revenue six months ahead of schedule. We're conscious of the fact that these results stand in stark relief during a time of real economic adversity for businesses large and small and certainly for families. We do not have a zero-sum approach to prosperity and especially in times like this, we are focused on growing the pie, making sure our success isn't just our success and that everything we make, build or do is geared towards creating opportunities for others. The App Store is a great example. This quarter, a new study by independent economists at the Analysis Group founded the App Store facilitated more than 0.5 trillion in commerce globally in 2019 alone. Especially in a time of COVID-19, you can measure economic resilience in the ways in which the App Store supports remote ordering for restaurants, digital commerce for small businesses and an enduring entrepreneurial opportunity for creators and visionaries. Keeping learning vibrant and impactful in the time of COVID-19 is a priority everyone shares. Earlier this month, we announced significant enhancements to the development Swift and Everyone Can Code curricula and we launched a new professional learning course available exclusively to educators. In just two weeks ago, our Community Education initiative added 10 more historically black college and university regional coding centers to our roster, bringing the total to 24 locations nationwide, 12 of which are HBCUs and 21 of which serve majority black and brown student populations. In Apple's backyard, we announced that we are allocating $400 million of our multi-year $2.5 billion affordable housing commitment to new housing construction, homebuyer assistance programs and support for those at greatest risk of experiencing homelessness across Silicon Valley. Apple's results this quarter are only possible due to our people and their ongoing ingenuity, flexibility, resilience and determination during these ever-changing times. I want to thank our AppleCare and retail teams who have paired exceptional service during a time of intense demand with great adaptability during a quarter where stores have reopened in some places and reclosed in others. A dedicated team of specialists and experts has shouldered the task of caring for the well-being of our teams and communities store by store, location by location with evidence driven granularity and agility that is unrivaled anywhere. Innovation from adversity certainly define this year's Worldwide Developers Conference as well. This is an event where traditionally Apple's worldwide community of developers gathers together to share, celebrate and do big things together. Though we could not be together in person, Apple set a new standard for what online events can achieve with our celebrated all virtual event. The results here speak for themselves. More than 22 million viewers tuned in across all of Apple streams. For our developers we distributed more than 72 hours of video content. That's three full days of video. The weak saw more than 200 direct video engineering and design sessions and about 4500 person to person appointments with developers across 227 virtual labs. And of course that's even before you get to this year's announcements from iOS 14, which boasts the radical redesign to the home screen, powerful updates to messages, streamlined and effortless app clips and even greater privacy transparency and controls to major updates to Apple Pencil, Siri and calling and iPad OS 14 to much anticipated sleep tracking, new fitness and wellness features and unprecedented customization and watchOS 7 to the new macOS Big Sur boasting the biggest redesign upgrade to macOS since OS X. No less important for Apple's innovation roadmap is our transition to Apple silicon for the Mac. This two-year effort will achieve both unprecedented performance for the Mac and a common architecture across all Apple products. Looking forward, we are profoundly optimistic about Apple's future and we recognize that with this success comes some real responsibility to lead with our values because those values help make that success possible in the first place. We are just as proud of our announcement this month that Apple will be fully carbon-neutral by 2030 across our entire supply chain and including the energy use of every device we make as we are of any hardware innovation because they spring from the same instinct to leave the world better than we found it. We're committed to standing with those marching for the lives and dignity through our new $100 million commitment to Apple's racial equity and justice initiative, and we're deepening our diversity and inclusion efforts internally because our future as a business is inextricably linked with the future of our communities. There are times when things seem to move slowly when needed progress, economic or social themes bogged down when the instinct to turn away from the horizon and hold onto what you've got fields and ex-capable, and then there are times like this when people of goodwill step forward, when progressed on Moore's itself, when the insistence of hope forces something new. This is an immensely challenging moment. COVID-19 is still devastating many places and we have work left to do to care for the health and well-being of the communities in which all of us live and work. But no community of people, whether a company or a country, can afford to miss this call when it comes. At Apple, we never have and we don't intend to start now. With that, I'll hand things off to Luca. Luca Maestri : Thank you, Tim. Good afternoon, everyone. Our June quarter was a testament to Apple's ability to innovate and execute during challenging times. Our results speak to the resilience of our business and the relevance of our products and services in our customers' lives. Total revenue was $59.7 billion, a new June quarter record, up 11% from a year ago, despite a 300 basis point headwind from foreign exchange. Our performance was strong across our entire portfolio as we grew revenue in each of our product categories and set June quarter records for Mac, for Wearables and for services. Similarly, our results were very strong all around the world with growth in all geographic segments and new June quarter records in the Americas, in Europe, in Japan and Rest of Asia-Pacific. Products revenue was $46.5 billion, up 10% and a June quarter record. iPhone returned to growth and we saw very strong double-digit growth from iPad, Mac and Wearables. Lockdowns and point of sale closures were widespread during April and impacted our performance, but we saw demand for all products improve significantly in May and June. As a result of our strong performance and the unmatched loyalty of our customers, our installed base of active devices reached an all-time high in all of our geographic segments and all major product categories. Our services continue to grow strongly up 15% year-over-year and reached a June quarter record of $13.2 billion. We set all-time records in many services categories and June quarter records in each geographic segment. I'll cover this in more detail later. Company gross margin was 38%. This was down 40 basis points sequentially due to unfavorable FX of 90 basis points and a different mix of products partially offset by cost savings and services mix. Products gross margin was 29.7% decreasing 60 basis points sequentially due to FX and a different mix partially offset by cost savings. Services gross margin was 67.2% up 180 basis points sequentially mainly due to mix. Net income was $11.3 billion and earnings per share were $2.58, up 18% and a June quarter record. Operating cash flow was also a June quarter record at $16.3 billion, an improvement of $4.6 billion over a year ago. Let me get into more detail for each of our revenue categories. iPhone revenue grew 2% to $26.4 billion with customer demand improving as the quarter progressed. COVID-19 was most impactful during the first three weeks of April when lockdowns and point of sale closures became more widespread in many countries. We saw marked improvement around the world in May and June, which we attribute to an improved level of customer demand helped by the very successful launch of iPhone SE and economic stimulus packages. Our active installed base of iPhones again reached an all-time high as a result of the loyalty of our customer base and strength of our ecosystem. In fact in the US the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 98% for iPhone 11, 11 Pro and 11 Pro Max combined. Turning to services, as I said, we set a June quarter record of $13.4 billion of revenue. We had all-time record performance and strong double-digit growth in the App Store, Apple Music, video and cloud services. Our new services Apple TV+, Apple Arcade, Apple News+ and Apple Card are also contributing to overall services growth and continue to add users’ content and features. At the same time customer engagement in our ecosystem continues to grow at a fast pace. The number of both transacting and paid accounts on our digital content stores reached a new all-time high during the June quarter with paid accounts increasing double-digits in each of our geographic segments. In aggregate, paid subscriptions grew more than 35 million sequentially and we now have over 550 million paid subscriptions across the services on our platform, up 130 million from a year ago. With this momentum we remain confident to reach our increased target of 600 million paid subscriptions before the end of calendar 2020. Wearables, Home and Accessories established a new June quarter record with revenue of $6.5 billion, up 17% year-over-year. Our Wearables business is now the size of a Fortune 140 company and we set June quarter records in the majority of markets we track. Importantly Apple Watch continues to extend its reach with over 75% of the customers purchasing Apple Watch during the quarter new to the product. Next, I'd like to talk about the impressive performance of Mac. Revenue was $7.1 billion, up 22% over last year and a June quarter record. We grew double digits in each geographic segment and set all-time revenue records in Japan and rest of Asia-Pacific as well as June quarter records in the Americas and Europe. Customer response to our new MacBook Air and MacBook Pro launches has been extremely strong. iPad performance was equally impressive with revenue of $6.6 billion, up 31% and our highest June quarter revenue in eight years. Demand was strong around the world with double-digit growth in each of our geographic segments, including a June quarter record in Greater China. The launch of our new iPad Pro has been received incredibly well in every region of the world. Both Mac and iPad are extremely relevant products in the new working and learning environments and the most recent surveys of consumers from 451 Research measured customer satisfaction at 96% for Mac and 97% for iPad. Around half of the customers purchasing Mac and iPad during the quarter were new to that product. And as a result, the active installed base for both products reached a new all-time high. Our retail business had record June quarter revenue. Thanks to the performance of our online store which had records in all geographic segments and grew across all major product categories. In June, we launched Apple Card Monthly Installments for more products in our US stores allowing customers to pay for their devices all the time with 0% interest. We're very pleased with the level of customer interest this new offering has generated. In the enterprise market, we continue to see companies leverage Apple products and offerings to successfully navigate their businesses through COVID-19. In healthcare, we are seeing rapid acceleration of telehealth to support a more flexible model of patient care. Many hospitals such as UVA Health, Rush University Medical Center and UC San Diego Health are using apps on iPad and iPhone to have triage, monitor and care for patients who are at home. This helps free up hospital capacity to support patients who need inpatient care while enabling continued care for patients who do not require in-person visits. Since many call center employees are currently working remotely, Apple Business Chat has proven an invaluable tool for staying connected with customers. This quarter HSBC deployed Apple Business Chat in its US and UK contact centers. Apple Business Chat provides a flexible and secured channel for digital banking assistance through a native Apple experience improving the efficiency and experience for both customers and agents. We are seeing similar adoption by hundreds of other organizations. Let me now turn to our cash position. We ended the quarter with almost $194 billion in cash plus marketable securities. We issued $8.5 billion of new term debt, retired $7.4 billion of term debt and increased short-term borrowing facilities by $1.1 billion during the quarter leaving us with total debt of $113 billion. As a result, net cash was $81 billion at the end of the quarter and we continue on our path to reaching a net cash neutral position over time. We returned over $21 billion to shareholders during the June quarter, including $3.7 billion in dividends and equivalents and $10 billion through open market repurchases of 31.3 million Apple shares. We also began a $6 billion accelerated share repurchase program in May resulting in the initial delivery and retirement of 15.2 million shares. And finally, we retired an additional 4.8 million shares in the final settlement of our 15th ASR. As we move ahead into the September quarter, I'd like to provide some color on what we are seeing, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Similar to last quarter, given the uncertainty around the world in the near-term, we will not be issuing revenue and margin guidance for the coming quarter. However, we will provide some additional insight on our expectations for the September quarter for our product categories. On iPhone, we expect to see recent performance continue for our current product lineup, including the strong customer response for iPhone SE. In addition, as you know, last year we started selling new iPhones in late September. This year we project supply to be available a few weeks later. We expect the rest of our product categories to have strong year-over-year performance. For services, we expect the September quarter to have the same trends that we have observed during the June quarter except for AppleCare where during the September quarter a year ago we expanded our distribution significantly. As a consequence, we expect a difficult comp for AppleCare also considering the COVID related point of sale closures this year. For gross margin, keep in mind that we will have a different mix than in prior years as I just explained. For OpEx, we expect to be between $9.8 billion and $9.9 billion. We expect the tax rate to be about 16.5% and OI&E to be $50 million. Also today our Board of Directors has declared a cash dividend of $0.82 per share of common stock payable on August 13, 2020 to shareholders of record as of August 10, 2020. And finally, today we're announcing a four for one split of Apple common stock to make our stock more accessible to a broader base of investors. Each shareholder of record at the close of business on August 24, 2020 will receive three additional shares for every outstanding share held on the record date and trading will begin on a split-adjusted basis on August 31st, 2020. With that let's open the call to questions. Tejas Gala : Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we please have the first question? Operator : Yes, that will be from Katy Huberty with Morgan Stanley. Katy Huberty : Thank you. Good afternoon. Tim in light of the economic adversity that you talked about in the prepared remarks, can you just walk us through how Apple is leveraging finance and trade-in programs to make technology more affordable and accessible during this period, while also addressing the opportunity to recycle and reuse products and maybe also extend that to how these programs might expand over time and then I have a follow-up. Tim Cook : Yes. As Luca mentioned, in June we actually rolled out to the overwhelming balance of our other products the ability to do interest rate, interest free financing in our stores with payments. And that's in addition to trade-in which is becoming a more common trend now which I think is terrific because it is great for the environment and it acts as a subsidy, if you will, against the price of the new phone. And so when you compound these two things with the financing and the trade-in it makes the product super affordable. And we're really happy with what we're seeing in that regard. Katy Huberty : And then, as a follow-up, just specifically to iPhone the category returned to growth. As you pointed out, the installed base is larger today. Our math would suggest that replacement cycles in some cases are elongated. And then you have the affordability element that you just discussed. Does all of that combine to build confidence that we're entering a longer period of iPhone revenue growth after what's been six quarters of decline? Tim Cook : We're very pleased with how we did on iPhone. It was better than we thought largely because as we pointed out in the prepared remarks May and June were much better. If you look at iPhone in totality the things that get me very optimistic is the size of the active installed base. The fact that if you look in the major geographies like the US, we had the top two selling smartphones. In the UK we had three of the top four. In Australia, we had five of the top six. And in Japan we had the top four. Urban China we were, iPhone 11 was the top selling smartphone in the country. And so these are some very different geographies with their very different competitive situations and we're doing fairly well. The iPhone SE, it's also clear that from the early data we're seeing a higher switcher number than we did in the previous year, which we feel very good about. And it also seems to appeal to some people that were holding onto the device a little longer because they wanted a smaller form factor phone. And so the combination of the smaller form factor and an incredibly affordable price made the iPhone SE very popular. iPhone 11 is still the most popular smartphone, but iPhone SE definitely helped our results. And as we -- as Lucas said in his outlook, we do see that continuing into this quarter currently. Tejas Gala : Thank you, Katy. Katy Huberty : Thank you. Congrats on the quarter. Tim Cook : Thank you so much. Tejas Gala : Can we have the next question, please? Operator : Yes, that would be from Krish Sankar with Cowen & Company. Krish Sankar : Hi, thanks for taking my question. I have two of them. First one, Tim, when you look at the services business and in terms of your TV+ content production have the movement restrictions impacted the content production efforts? And along the same path four years ago your premonition on services being a $50 billion business in 2020 came sooner than expected, I don't know if you want to make any such forecast four years out and how you think services revenue is going to be. Then I have a follow-up for Luca. Tim Cook : I'm sorry. I missed that second question because the audio didn't come through. But I think I got the gist of the first. And that is production has been affected for Apple TV+ as I think it has for most people. We are working to get restarted. I don't have a precise date yet when we will get it restarted, but there will be some impact because we shut down in the March time frame and are yet to really restart in a significant way particularly for those that are shut in the LA area given the current status of the virus and those. And I'm sorry I missed your, the second part of your question. Krish Sankar : Yes, Tim, I was trying to see, four years ago you made a great prediction that services is going to be $50 billion by 2020. I wanted to see if you have any update to the prediction four years down the road? Tim Cook : We're not updating today. We feel good. We want to take the moment and feel good about achieving the doubling six months early. And we do have still hanging out there, as you know, the subscription number that we're shooting for later in the year at 600 million. So we do have that objective out there. Krish Sankar : If I could just squeeze in one for Luca. With the strong sales in Mac given the shelter-in-place, do you think the back-to-school season got pulled in by a quarter or do you expect the momentum to still continue? Thank you very much. Luca Maestri : As I said, when I was talking about providing some commentary for the September quarter, we expect all the non-iPhone product categories to have a very strong year-over-year performance. So we definitely, I mean, the back-to-school season is clearly this one and we are very excited not only for the Mac, but also for the iPad. We've got a fantastic lineup of products and we know that these products are incredibly relevant especially given the current circumstances. So we expect the performance that we've seen for Mac in the June quarter to continue. Tejas Gala : Thank you. Can we have the next question, please? Operator : Yes. From Cross Research we'll hear from Shannon Cross. Shannon Cross : Thank you very much. Tim, can you talk a bit about what you're seeing in China? I know the revenue was up 2% and I think Luca talked about record iPad, but just curious as to given their 5G [indiscernible] how you're seeing the market play out? And then I have a follow-up. Thank you. Tim Cook : Shannon, the growth that we -- we did see growth in Greater China for the quarter of 2%, currency affected China, a bit more than in other places, it affected 400 basis points. And so in constant currency, we would have grown at 6%. As I had mentioned before, the iPhone 11 has been our best-selling phone and has been number one in urban China and so we're very, very proud of that. iPad was helped in the June quarter there by the work from home and distance learning as it was in other geographies and the Mac also grew strong double digit during the quarter. And services set a new June quarter record there. We also continue to see extremely high new customer rates on Mac and iPad there, to give you a perspective, about three out of four customers that are buying the Mac are new in China and about two out of three that are buying the iPad are new. And so these are numbers that we're super proud of. Shannon Cross : Great. And then, can you talk a little bit more about the decision to bring Mac Silicon in-house, then the benefits that you expect to see or you've seen from vertical integration of acquisitions like the Intel modem business? Thanks. Tim Cook : Thanks. Yes, I mean, what we will end up -- what we'll end up with is a common architecture across all of our products, which gives us some interesting things that we can do in products that are -- that is sort of unleashes another round of innovation. And so I don't want to say a lot about it, other than we are extremely excited about it, it's something that we've worked on quite a while to get to this point and we're looking forward to shipping the first Mac with Apple Silicon later in the year. Tejas Gala : Thank you, Shannon. Can we have the next question please. Operator : That will come from Amit Daryanani with Evercore. Amit Daryanani : Thanks a lot for taking my question guys. I have one and a follow-up as well. Fortunately, I guess, Tim, if I think about the strength, you're seeing with iPhones right now, do you have a sense in terms of where is this trend coming from? Is it more replacement cycles getting shorter or which is getting new customers into the iOS ecosystem because, clearly these growth rates seem fairly impressive in the context of a pandemic and upcoming refresh cycle that we have? Tim Cook : I think, Amit, it's a combination of a strong launch with iPhone SE and some -- probably some pick up because of the economic stimulus that hit different countries at different points in time. And probably some of the reopening that took place across the quarter, particularly in May and June as Store started to reopen. And so it's a combination of all of those. And as you know, we've been having a strong cycle with the iPhone 11 and the 11 Pro. And so when you combine the -- a strong cycle plus and iPhone SE launch, plus the reopening of the stores, et cetera, I think there were a lot of things that we're going in the right direction there. Amit Daryanani : Perfect, that's helpful. And then I guess, Luca, if I could just follow up with you. I'd love to get your perspective on how do we think about the overall 38% gross margins? What do you think of the levers to improve this as you go forward, not really September quarter, but over the next one to two years? And in that context, do you see a point where the product gross margin starts to stabilize because they have been trending somewhat lower for the last couple of quarters now. Luca Maestri : Yes. Well, let me start with what we've seen during the June quarter. We were at 38%, we were down slightly sequentially but up the same amount on a year-over-year basis. And really the big negative impact that we felt for several quarters now has been the strength of the US dollar, so the foreign exchange impact on a sequential basis was 90 basis points on a year-over-year basis was 130 basis points. So obviously that is something to keep in mind. And then, the other aspect; I think it's always important to keep in mind, Amit, is that we sell many different products. They have different margin profiles. And so sometimes a different mix can have an impact on the aggregate level of products gross margins and we are very pleased to see the performance of Mac, iPad and Wearables but obviously, it's a different mix. Going forward, the variables are always the same, is that the foreign exchange will continue to play an impact, the mix of products there, we're going to be selling, will have an impact as well. The commodities market has been relatively benign and we'll see how that plays out over time. As you know now for several years, we've been managing gross margin, I would say, fairly well in spite of some difficult situations like the one with the strength of the dollar and we plan to continue to make a good trade off decisions between revenue and units and margins. Tejas Gala : Thank you, Amit. Can we have the next question, please? Operator : It will come from Kyle McNealy with Jefferies. Kyle McNealy : Hi, thanks a lot for the question. Our team in Asia recently, we did some survey work on smartphones in China. It showed that there is still a high proportion of the installed bases on 6, 7, 8 devices. I know you talked about the trade-in programs and promotions that you've been doing there. I wonder if you can tell us whether there is anything else that you're doing to get these customers in your latest technology? What made those customers be looking for and how should we think about when an upgrade cycle might come on more strongly there in China? Thanks. Tim Cook : Customers upgraded different at a different pace and I don't have in front of me the exact installed base data from China. But much like in other geographies, the upgrades have extended some, it extended some during the depths if you will of the pandemic in China and the rest of the world, and probably to some degree is happening still at this point. The key things that we can do is keep innovating, deliver product that people can't imagine, going through life about. And obviously keep rolling out these programs that makes the front-end purchase be much less, and this is things like the financing in the trade-in programs that you mentioned. And I do feel like those are going quite good in a number of geographies. Kyle McNealy : Okay, great, thanks. And one more if I may. Congrats again on the strong iPad and Mac results, that's really impressive. I guess the obvious question is, should we ever think about how much of that might be pull-forward and what might be the future upgrades in next few years? Anything else you can share on how you think about growth from here or whether there is a hangover period maybe after the back-to-school season or holiday season. That would be helpful. Thanks. Tim Cook : The installed base is growing and the new customer numbers that Luca went over in the aggregate are still very high in the close to 50% kind of range. And so, that to me, makes the -- bodes well for the future. There is clearly, as we had indicated, there is some amount of work from home and remote learning that do affect the results of Mac and iPad positively. They probably affect wearables and iPhone, the other direction. And -- but on Mac and iPad, these are productivity tools that people are using to stay engaged with their work or stay engaged with their school work. And we believe we're going to have a strong back to school season. Sitting here today, it certainly looks like that. Tejas Gala : Thank you, Kyle. Kyle McNealy : Great. Thanks very much. Tejas Gala : Can we have the next question, please? Operator : That will come from Cleveland Research's Ben Bollin. Ben Bollin : Good evening, everyone. Thanks for taking the question. Tim, I was hoping you could share a little bit about where you think channel inventory is? You talked about the tightness you saw exiting the June quarter for Mac and iPad. Interested, where you think inventory is across major product categories. And then I had a follow-up for Luca. Tim Cook : We usually -- we've gotten away from talking about channel inventories. But to give you a perspective sitting here looking at it, on iPhone the inventory is slightly less than it was a year ago and that's I'm saying that at a quarter end point, so at the end of Q3. And obviously iPad and Mac are constrained and so both of those are less than they were in the year ago quarter. Ben Bollin : Okay. And then, Luca, I'm interested, any color you could share about the impact COVID had on OpEx in the quarter, be it work from home, stipends, travel, other employee support costs. And also how the company is thinking about the longer-term opportunity of employees working remotely maybe more permanently many considerations and how that could influence the future OpEx? Thanks. Luca Maestri : Well, on the OpEx front, there are being obviously certain things that have been affected in terms of cost reductions. Obviously, travel, it is a perfect example. The number of meetings that we have internally, some of those costs have been reduced. We've also invested heavily in initiatives for example, we're really trying to help during a very difficult circumstances. For example, we have had a program for example where we match our employee donations, we made donations directly as a company around the world to many institutions and governments. On a net basis, I would say probably the cost have outweighed the savings both during the March and the June quarter, but we think it's absolutely the right thing to do. From an employee perspective, what we said so far is that here in the United States, in most -- the majority of our population will continue to work from home until the end of the year. And then we'll see, I mean, we've taken an approach that we try to understand how the virus is evolving over time. We've taken a very cautious approach of both with our corporate facilities and with our retail stores. I think what you've seen with retail stores is that we have reopened in number of geographies around the world. We've reopened here in the United States. We've had to re-close some of the stores yet here in the United States, as the number of cases has gone up. And we will continue to track how the virus is doing. And hopefully at some point, we're going to get to a point where there is a vaccine or there is a cure. And so we will make those decisions as we get more information. Tejas Gala : Thank you. Can we have the next question, please? Operator : That will be from Jeriel Ong with Deutsche Bank. Jeriel Ong : Yes, thank you so much. I have two questions as well. I'd like to focus on the gross margin expansion within the services line all-time record for the quarter. I'm just curious whether you think that will sustain, I understand within services is a pretty wide range of gross margins by business, and I'm wondering if that should continue to improve. Tim Cook : Well, as you've seen, obviously, we've had a sequential expansion in gross margin for services. And that was driven primarily by mix as you said, right. We have a very broad portfolio and depending on which one of the services does better than we have an impact on Services gross margins. We like the Services business because it is -- it's a recurring type of revenue and the margins are accretive to company margin. We did over 67% this quarter, but we want to offer very competitive services across the board and the same -- I think I'm going to make the same comments that I made on products. What matters to us is to be successful with everything that we do and provide great products and services to our customers. So the relative success of our products and services in the marketplace will drive to a certain extent with our margins are, that's the margins are a byproduct of our success in the marketplace. Jeriel Ong : Got it, really appreciate that. And I wanted to ask question on the Wearables segment. It seems to me that you're categorizing the Wearables business as maybe being a little bit impact from pandemic similar to the iPhones. And it's the first time that Wearables hasn't materially upsided and at least a while in recent memory. I guess the drivers of the Wearables being Watch and predominantly Watch and AirPods. What are your thoughts going forward on whether there is a little bit of pent-up demand perhaps that might resume ads that will get back to a more normalized environment? Tim Cook : I think on the Watch in particular is like the iPhone more affected by store closures, because people -- some people want to try on the Watch and see what it looks like, look at different band choices and those sorts of things. And so I think as stores closed, it puts more pressure on that. I was -- we did come out sort of the way we told you last quarter, we were going to come out from the color that we gave you. So we knew things would decelerate because of the closures. So we will end up being, we're very pleased with how we did. But the store closures definitely affect the wearables and the iPhone. Tejas Gala : Thank you, Jeriel. Jeriel Ong : Got it. Really appreciate that. Tejas Gala : Yes. Can we have the next question, please? Operator : That will come from Jim Suva with Citigroup. Jim Suva : Thank you very much. And I have two questions. I'll ask them at the same time and it's one for Tim and one for Luca. Tim, the coronavirus, your company has done a fantastic job at overcoming one of the hurdles. So congratulations to you. As you look forward, say to the Christmas holiday shopping season, and given the economic challenges around the world of virus, coronavirus and your product launches and things like that. Can you give me commentary maybe how this Christmas you're looking forward, to say, maybe some past cycles of Christmas? Because it just seems like it's a little bit different, but Apple is really showing a lot more strength coming into this Christmas than may be some of the past years. And then for Luca, I think you made a quick comment, Luca, that you mentioned something about a few weeks later, was Apple like iPhone, iPhone chips or product launches or maybe expand upon that. I know things are more difficult, but I didn't quite keep the commentary, it was in your prepared comments, we'll go about a few weeks late that let's just have a quick little blood. Thank you so much, gentlemen. Tim Cook : Yes, we take it one quarter at a time. And so, we'll give you color on the December quarter and October. Generally speaking, I think we need to see a vaccine or therapeutic or both. And there is some optimism around that and in that particular timeframe. And so, we'll see, I don't have any information that is publicly available there. But I think that would boost consumer confidence quite a bit if it begins to happen and I think that any kind of consumer style company would benefit from that. Luca Maestri : And Jim, on the iPhone, I said in my remarks that we launched a year ago, we launched the new iPhone in late September. So I was referring to the new product. And I said that this year, the supply of the new product will be a few weeks later than that. Jim Suva : Great. Congratulations to you and your entire organization and teams. Thank you so much. Tim Cook : Thanks so much. Tejas Gala : Thank you. Can we have the next question, please? Operator : That will come from Wamsi Mohan with Bank of America. Wamsi Mohan : Hi. Yes, thank you. I was wondering if you can maybe comment on the penetration of Apple Card users in the iOS installed base? And have you seen any change in the buying behavior of Apple Card users in terms of accelerating spend on more Apple products and services? Then I have a follow-on. Tim Cook : We saw changes in consumer spending as the shutdowns occurred and the store closures occurred, we could see that across the Card. It affected the categories that you would guess the most like travel and entertainment et cetera. But overall if you sort of pull the lens out on the Apple Card, we're very happy with the number of people that have Apple Card. We believe based on what we've heard that it's the fastest rollout in the history of credit cards and so we feel very good about that. Wamsi Mohan : Okay. Thanks, Tim. And as a follow-up, now that Apple has Apple Silicon for Macs. Would you ever consider monetizing this as a merchant silicon vendor or is this going to be forever for Apple use? Tim Cook : Well, I don't want to make a forever comment, but there are -- we are a product company and we love making the whole thing. And because if we can -- on the user experience in that way and with the goal of delighting the user. And that's the reason that we're doing the Apple Silicon is because we can envision some products that we can achieve with Apple Silicon that we couldn't achieve otherwise. And so that's how we look at it. Wamsi Mohan : Thanks, Tim. Tejas Gala : Thank you, Wamsi. A replay of today's call will be available for two-week on Apple podcasts as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 2630782. These replays will be available by approximately 5 :00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator : And again, that will conclude today's conference.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,020	4	2020Q4	2020Q4	2020-10-29	3.341	3.45	3.959	4.055	5.29	30.3	31.52	Operator : Good day everyone and welcome to the Apple Inc. Fourth Quarter Fiscal Year 2020 Earnings Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn things over to Tejas Gala, Senior Analyst, Corporate Finance and Investor Relations. Please go ahead, sir. Tejas Gala : Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple’s CEO, Tim Cook, and he will be followed by CFO, Luca Maestri. After that, we’ll open the call to questions from analysts. Please note that some of the information you’ll hear during the discussion today, will consist of our forward-looking statements including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company’s business, and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s most recently filed Annual Report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I’d now like to turn the call over to Tim for introductory remarks. Tim Cook : Thanks Tejas. Good afternoon and thanks for joining the call today. Back in April, I said we were in the most challenging environment in which Apple as a company has ever operated. That atmosphere of uncertainty, of resolve, of making difficult calls with limited information has not only come to define Apple’s year, but each of our lives as individuals across this country, and around the world. It has been a chapter that none of us will forget. In the face of these challenges, Apple stayed relentlessly focused on what we do best, seeing in every obstacle an opportunity to do something new, something creative, something better on behalf of our customers. Today we report a quarter and a fiscal year that reflects that effort. This quarter, Apple achieved revenue of $64.7 billion, a September quarter record, despite the anticipated absence of new iPhone availability during the quarter, and the ongoing impacts of COVID-19, including closures at many of our retail locations. We also set a new all-time record for Mac and Services. Outside of iPhone, each of our product categories saw strong double digit year-over-year growth, despite supply constraints in several product categories. Our results for this quarter were ahead of our expectations, driven by stronger-than-expected iPhone and Services performance. As we anticipated, we launched new iPhone models in October, a few weeks later than last year’s mid-September launch. Up to that mid-September point, customer demand for iPhone was very strong, and grew double-digits. On Services, we saw stronger-than-expected performance across the board. Geographically, we set September quarter records in the Americas, Europe and Rest of Asia Pacific. We also set a September quarter record in India, thanks in part to a very strong reception to this quarter’s launch of our online store in the country. Greater China is the region that was most heavily impacted by the absence of the new iPhones during the September quarter, still we beat our internal expectations in the region, growing non-iPhone revenue strong double digits and iPhone customer demand grew through mid-September. When you pull back the lens to the entire fiscal year, it’s a testament to the team’s work and to the resilience of the business in the era of COVID-19. This year, we set an all-time revenue record of $274.5 billion, growing 6% year-on-year. We grew every quarter, set all-time yearly records in Mac, Wearables Home and Accessories, and Services, and grew by double-digits in every product category outside of iPhone. When we first began to grapple with COVID-19, I said there are worse things for a company whose business is innovation, than having to periodically do just about everything in an entirely new way. This year, we not only launched our most powerful and compelling generation of hardware, software and Services ever, we did it in a way that pushes to reimagine every part of that innovation process, down to how we share these announcements with the world and how we get new products into our customers’ hands. Working from kitchen tables and bedrooms, in distanced office settings and rework labs and manufacturing facilities, the team rebuilt every part of the plane while it was mid-air, and the results speak for themselves. In a year that has been enormously challenging, our retail teams, contact centers, and all those who work with our customers most closely, have gone to creative and dedicated [lengths] [ph] to keep serving our customers. From adapting our stores for contactless pickup to new Apple Express storefronts, to new online customer support options. Amid store closings, reopenings and reimagining, these teams have been an unfailing source of energy, creativity and determination. Innovation isn’t just about what you make; it’s about how you approach problems, and these teams and every team across Apple having not faced a single question this year that they haven’t found an answer to with passion and resolve. Their actions didn’t just meet the moment; they will make us a better company moving forward. The pandemic has hit home for all of us, and at Apple we have seen it as a call to action. We have seen the pain in our communities. Many of us have seen our children work hard to adapt to remote learning, and we all know that the road ahead is uncertain. This quarter and throughout the year, our response to this crisis has been to ask, how can we help? In terms of COVID-19 response, that has meant sourcing and donating millions of face masks, designing and manufacturing millions of face shields, and scaling the production of millions of test kits. But we have tried to live our values more broadly. We’ve pledged $100 million to our new racial equity and justice initiative. We’ve committed to be fully carbon neutral by 2030 across our entire supply chain and device usage, as massive wildfires, hurricanes and floods, bring home the consequences of climate change for all of us. And we’ve deepened our enduring educational partnerships, from coding education beginning in elementary school, to new efforts with dozens of historically black colleges and universities. One of the many areas where COVID-19 continues to have a significant impact is in education. As teachers, students and parents alike work hard to keep education relevant, creative and effective, our products have helped them meet the moment. In a typical year, the back-to-school season is a bustling time for us. This year, that was true in the biggest way ever. We’ve helped school districts around the world meet this moment in an unprecedented way, including starting nine of our 10 largest school district deployments ever, that alone will support over 1 million students and teachers. We have also supported these deployments and educators and learners everywhere with free tools and training, reaching over 150,000 teachers and millions of parents and students around the world. Looking forward, we feel great optimism about the road in front of us. We’re in the midst of our most prolific product introduction period ever. In addition to the announcement of HomePod Mini, which achieves unmatched sound quality and Siri and smart-home capabilities in a small and affordable format, we just marked the beginning of a new era for iPhone, with the arrival of our first 5G enabled devices. The iPhone 12 and 12 Mini boasts powerful breakthroughs like an edge-to-edge Super Retina XDR display, unprecedented durability with a new ceramic shield, developed with our partners at Corning, new MagSafe charging and accessories, the fastest ever A14 Bionic chip, and a new dual camera system, driven by computational photography. The iPhone 12 Pro and 12 Pro Max take all of this to an even higher level, driven by the most powerful photo and video tools ever delivered by a smartphone, including an all new LiDAR scanner and the ability to shoot an Apple ProRAW and full Dolby video. And of course, all of these devices bring the 5G experience users have been waiting for, with lightning fast download and uploads, a new standard in video streaming, more responsive gaming and much more. The early product reviews have been tremendously positive, and our customers have been similarly excited to get their hands on this next era of devices. We’re very optimistic about what the next few weeks will bring. We’re also seeing a very positive response to our September announcement, the all new Apple Watch Series 6, boasts powerful new health and wellness features, including a blood oxygen sensor, a next generation altimeter, and a wide variety of new colors and bands. The potential for Apple Watch’s powerful health and wellness capabilities continues to grow. Just yesterday, the government of Singapore and Apple launched LumiHealth, a first of its kind program designed to encourage healthy activity and behaviors using Apple Watch. Created in collaboration with a team of physicians and public health experts, LumiHealth uses technology and behavioral insights to encourage Singaporeans to keep healthy and complete wellness challenges through their Apple Watch and iPhone. Singapore is a trailblazer here, and we’re proud to be their partner. Our iPad lineup continues to set the pace for the category, including the new iPad Air now shipping with the A14 Bionic, our most powerful chip ever. We announced Apple Fitness Plus, which delivers deep personalization and integration across the fitness tools our users love and depend on. And Apple One, launching tomorrow, is the easiest way for users to enjoy Apple’s services, like Music, TV+, Arcade, iCloud, News+ and Fitness+ on a single plan that is right for them and their family. Looking across services more broadly, we’re really excited about what we see. This was a record quarter for the App Store, AppleCare, Cloud Services, Music and Payment Services. The App Store in particular, continues to play an essential role in helping small businesses, educational institutions and workplaces adapt to COVID-19. Apple TV+ continues to impress, from fan favorites like Ted Lasso, which has won a worldwide audience with its hopeful tone during challenging times, to critical and award praise, including a Primetime Emmy for Billy Crudup in the morning show. Luca will speak in greater detail about our expectations for the December quarter. Without giving away too much, I can tell you that this year has a few more exciting things in store. Before I hand things off, I want to offer one more comment on resilience, because I think if I had to describe our performance this quarter in a single word, it’s resilient. Financial performance aside, I don’t think this year will be a time that any of us look back on with great fondness or nostalgia. Those of us, who wake up every day, hoping for a return to normal, can count ourselves fortunate. Others don’t have that luxury. There is the great pain of a lost loved one, the uncertainty and fear of a lost job, a deep well of concern for people we care about, who we are not able to see. A sense of opportunities missed, of plans delayed, of time lost. Even though we’re apart, it has been obvious this year that around the company, teams and colleagues have been leaning on and counting on each other more than in normal times. I think that instinct, that resilience has been an essential part of how we have navigated this year. Work can’t solve for all the things we’re missing right now, but a shared sense of purpose goes a long way. A belief that we can do more together than we can alone, that people of goodwill, driven by creativity and passion, and that certain itch of a big idea, can still do things that help other people in our own small way to teach, to learn, to create or just to relax at a time like this. Even as the things we make require us to operate at the very cutting edge of technology, in materials, products and ideas that didn’t exist just a few years ago, this year has forced us to face plainly the things that make us human; disease, resilience and hope. You never wished for a year like this one, but I couldn’t be prouder of the team, the work we have done and the small role we have played in helping our communities find hope and resilience in this time. With that, I’ll hand things over to Luca. Luca Maestri : Thank you, Tim. Good afternoon, everyone. We are very pleased to report today a new September quarter revenue record, which caps a remarkable level of performance for our fiscal year 2020, during which we set new all-time records for revenue, earnings per share and free cash flow, in spite of an extremely volatile and challenging macro environment. We could not be more proud of the way our team has innovated and executed, throughout this unprecedented period of uncertainty. We reported total revenue of $64.7 billion for the September quarter, up 1% from a year ago. This is a very impressive level of performance, when we consider that this year; we did not launch and ship any new iPhone models during the quarter. Outside of iPhone, we grew 25% in aggregate, and had strong double-digit year-over-year revenue growth in each of our product categories. We set all-time records for Mac and Services, and a September quarter record for Wearables, Home and Accessories. We also achieved new September quarter records in the vast majority of countries that we track, including among others, The U.S., Canada Brazil, Germany, France, Italy, Spain, Turkey, Russia, India, Korea, Thailand, Malaysia and Vietnam. Products revenue was $50.1 billion with very strong underlying performance across each product category. Our products outside of iPhone grew a combined 30%, despite supply constraints on iPad, Mac and Apple Watch throughout the quarter. For iPhone, through mid-September, customer demand grew double-digits. As a result of this level of sales performance and the unmatched loyalty of our customers, our installed base of active devices reached an all-time high in aggregate, and in each of our major product categories. Our Services set an all-time record of $14.5 billion, growing 16% year-over-year. We established new all-time records in many Services categories and September quarter records in each geographic segment. I’ll cover this in more detail later. Company gross margin was 38.2%. This was up 20 basis points sequentially, due to cost savings and a higher mix of services, partially offset by a different mix of products. Products’ gross margin was 29.8%, growing 10 basis points sequentially, driven by cost savings, partially offset by a different mix. Services gross margin was 66.9% decreasing 30 basis points sequentially, mainly due to a different mix. Let me get into more detail for each of our product categories; iPhone revenue was $26.4 billion, as we did not have availability of new iPhone models during the September quarter this year, which we had mentioned during our call in July. While COVID-19 and social distancing measures impacted store operations in a significant manner, demand for iPhone remained very strong. In fact, through mid-September, customer demand for our current product lineup grew double digits, and was well above our expectations. Our active installed base of iPhones reached a new all-time high, thanks to the exceptional loyalty of our customer base and strength of our ecosystem. In fact, in the U.S., the last survey of consumers from 451 Research indicates iPhone customer satisfaction of 98% for iPhone 11, 11 Pro and 11 Pro Max combined. Turning to Services, as I said, we set an all-time revenue record of $14.5 billion. We grew strong double digits and set all-time records in App Store, Cloud Services, Music, Advertising and Payment Services. We also set an all-time record in Apple Care, as in-store traffic improved and we were able to support more customers. Our new services, Apple TV+, Apple Arcade, Apple News+, and Apple Card, are also contributing to overall services growth, and continue to add users, content and features. The key drivers for our Services growth, all continue to be moving in the right direction. First, our installed base continues to grow and is at an all-time high across each major product category. Second, the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the September quarter, with paid accounts increasing double digits in each of our geographic segments. Third, paid subscriptions grew more than 35 million sequentially, and we now have over 585 million paid subscriptions across the services on our platform, up 135 million from just a year ago. With this momentum, we are very confident to reach and exceed our increased target of 600 million paid subscriptions before the end of calendar 2020. Finally, as Tim mentioned, we continue to improve the breadth and the quality of our current services offerings, and are adding new service offerings that we think our customers will love, like Apple One and Apple Fitness+. Wearables, home and accessories established a new September quarter record, with revenue of $7.9 billion, up 21% year-over-year. We set September quarter records in every geographic segment and for each of the three product categories; Wearables, Home and Accessories. As a result, our wearables business is now the size of a Fortune 130 company. Importantly, Apple Watch continues to extend its reach, with over 75% of the customers purchasing Apple Watch during the quarter, being new to the product. We’re very excited about the future of this category, including the recent launches of our new products; Apple Watch Series 6 NFC, HomePod Mini, and the MagSafe ecosystem of accessories. Next, I’d like to talk about Mac; revenue was by far an all-time record at $9 billion, up 29% over last year and $1.6 billion above our previous record, in spite of supply constraints during the quarter. We grew strong double digits in each geographic segment and set all time revenue records in the Americas, and the rest of Asia Pacific, as well as September quarter records in Europe and Japan. We’ve seen amazing customer response to the new MacBook Air and MacBook Pro and very strong demand during the back to school season. IPad performance was also very impressive, with revenue of $6.8 billion, up 46%, and our highest September quarter revenue in eight years despite supply constraints. Demand exceeded our expectations around the world, as we grew very strong double digits in every geographic segment, including an all-time record in Japan and a September quarter record in the Americas. Both Mac and iPad are incredibly relevant products for our customers in the current working and learning environments, and we are delighted that the most recent surveys of consumers from 451 Research, measure customer satisfaction at 93% for Mac and 95% for iPad. With this level of customer satisfaction and with around half of the customers purchasing Mac and iPad during the quarter being new to that product, it is no surprise that the active installed base for both products reached a new all-time high. In the Enterprise market, our products are helping companies grow their business, while achieving their sustainability goals. One example is Vestas, a leading producer of wind turbines. Vestas is using Apple products and native iOS apps extensively across their operations to deliver renewable energy efficiently to customers worldwide. For instance, they use iPads to help optimize onsite construction operations, cutting crane usage on average by one day per project. Vestas field technicians are using iPhone for work orders, troubleshooting a remote collaboration, saving them 400,000 service hours annually. More recently, they’ve started piloting the augmented reality capability in iPads, to help customers visualize wind turbine installations. We ended the quarter with almost $192 billion in cash plus marketable securities. We issued $5.5 billion of new term debt, and decreased short term borrowing facilities by $6.2 billion during the quarter, leaving us with total debt of $112 billion. As a result, net cash was $79 billion at the end of the quarter, as we continue on our path to reaching a net cash neutral position over time. We returned nearly $22 billion to shareholders during the September quarter, including $3.5 billion in dividends and equivalents, and $18 billion to open market repurchases of 168.7 million Apple shares. We also retired an additional 3.1 million shares, in the final settlement of our 16th ASR. Before looking ahead, I want to provide just a few highlights for the amazing fiscal year we just completed. In fiscal ’20, we grew revenue by 6% to $274.5 billion, a new all-time record. We showed remarkable resilience throughout the year, as we were able to grow both revenue and installed base of active devices in every quarter. During the September quarter, including $3.5 billion in dividends and equivalents and $18 billion through open market repurchases of 168.7 million Apple shares. We also retired an additional 3.1 million shares in the final settlement of our 16th ASR. Before looking ahead, I want to provide just a few highlights for the amazing fiscal year we just completed. In fiscal 20, we grew revenue by 6% to $274.5 billion and new all-time record. We showed remarkable resilience throughout the year as we were able to grow both revenue and installed base of active devices in every quarter. In spite of the most challenging economic environment we can remember, we said new revenue records in the Americas, in Europe and in the rest of Asia Pacific. We grow our business outside of iPhone by 16%. We grew earnings per share 10% to a new all-time record and most importantly, we continue to deliver innovative products and services that our customers love. As we move ahead into the December quarter, I’d like to provide some color on what we are seeing, which includes the types of forward-looking information that Tejas referred to, at the beginning of the call. Given the continued uncertainty around the world in the near term, we will not be issuing revenue guidance for the coming quarter. However, we are providing some insights on our expectations for the December quarter for our product categories. These directional comments, assume that COVID related impacts to our business in November and December are similar to what we’re seeing in October. We just started shipping iPhone 12 and 12 Pro, and we’re off to a great start. We are also excited to start preorders on iPhone 12 Mini and 12 Pro Max next Friday. Given the tremendously positive response, we expect iPhone revenue to grow during the December quarter, despite shipping iPhone 12 and 12 Pro four weeks into the quarter, and iPhone 12 Mini and 12 Pro Max seven weeks into the quarter. We expect all other products in aggregate to grow double digits, and we also expect services to continue to grow double digits. For gross margin, we expect it to be similar to our most recent quarters, despite the costs associated with the launch of several new products. For OpEx, we expect to be between $10.7 billion and $10.8 billion. We expect OI&E to be around $50 million, and the tax rate to be around 16%. Finally today, our Board of Directors has declared a cash dividend of $0.205 per share of common stock, payable November 12, 2020 to shareholders of record as of November 9, 2020. With that, let’s open the call to questions. Tejas Gala : Thank you, Luca. We ask you that you limit yourself to two questions. Operator, may we have the first question please. Operator : Certainly we'll hear first today from Shannon Cross, Cross Research. ShannonCross: Thank you very much. Tim, can you talk a bit more about China? And in terms of linearity, I think Luca, you'd mentioned that services in all regions were up at an all time high. I'm not sure exactly what your comment was. But, maybe give us a little idea of, whether you're seeing any blowback or benefits in the Huawei situation and just dig a bit more into the trends we're seeing in China, and then have a follow up. Thank you. TimCook: Thanks, Shannon. If you look at China, and look at last quarters, I'll talk about both last quarter and this quarter, the last quarter, what we saw was our non iPhone business was up strong double digit for the full quarter. And then if you look at iPhone and you look at it in two parts one, pre mid September, which is pre the point at which the previous year, we would have launched iPhones that period of time which was the bulk of the quarter iPhone was growing from a customer demand point of view. And of course not shipping new iPhones for the last two weeks of September makes that number in the aggregate a negative but the net is the underlying business in China last quarter was very strong and perhaps very different than you might think from just a quick look at the stated number In terms of this quarter, given the explanation for last quarter and the momentum that we've got, and as importantly given the initial data points that we see on iPhone 12 and iPhone 12 Pro, although we don't guide to revenue as Lucas said, I would tell you that we're confident that we will grow this quarter in China. And so we're very bullish on what's going on there. A little more color on last quarter, we had a much more significant inventory draw down on the channel side than other regions. And so that is one reason why the numbers are different than other regions. And additionally, the new products in the year ago quarter were a higher percentage of our iPhone sales than they were in other regions. So hopefully that explains what's going on in China. In terms of the market there, 5G is fairly advanced there. They're forecasting 600,000 base stations by the end of the year. And so we're entering the market at a very good time, and with the reception that we've gotten so far; we're very confident there. ShannonCross: Okay, great. And then can you talk a bit about just overall in the world, the cadence that you see sort of for the 5G adoption launch, what you see will be sort of the key drivers, obviously, there's a fair amount of subsidies going on in the US at this point. Thank you. TimCook: Yes, we're working hard to provide the best experience for iPhone users. To do so we've been collaborating closely with carriers all around the world to ensure iPhone has great throughput and coverage and battery and call quality. We've completed 5G testing so far on over 100 carriers in over 30 regions. And so it's pretty, it's pretty pervasive around the world. But grantedly, it will continue to roll out in more places as carriers continue to expand their coverage. And this will happen every week. And so it's just going to get better. There are obvious places in the world where it's more ahead than others. But we feel like we are entering at a sort of at exactly the right time. Operator : That will be from Jeriel Ong from Deutsche Bank. JerielOng: Yes, thank you so much. I guess I appreciate the guidance for revenue to grow but I guess my question, perhaps, if I could, is relative to seasonality, you guys over the last five years of seasonality is typically above 50% quarter-on-quarter, do you think that you can beat that, even with the later release? And I have a follow up. LucaMaestri: So as I said, Jay, we're not providing a range, for the reasons that I explained during my prepared remarks. So you need to keep in mind a couple of things that are unique about this quarter versus the past. And that I mentioned again, the launch timing of the phones is different from the past. So we are launching the new iPhones, four weeks into the quarter for two models for the 12 and 12 Pro and seven weeks into the quarter for the other two, the iPhone Mini and for 12 Pro Max. So that is something to keep in mind as you think about the growth rates. With regard to all the other product categories, as I said, we are expecting to grow double digits essentially across the board for the rest of our products and for services. And so we are incredibly optimistic about what we've seen so far. Obviously, we started taking pre orders five days ago and it's a bit early for the phone. But we think that there are a lot of tailwinds this year for iPhone for the entire cycle. Some of the comments that Tim has already made, right, we've got the best lineup of iPhones that we've ever had. We got an install base of iPhone that is very large continues to grow. It's an all time high. Obviously, 5G is a once in a decade, opportunity. And as you've seen in some markets, certainly here in the United States, carrier offers are very aggressive. And so that is very good for consumers and ultimately, very good for us. So very, very optimistic, given what we've seen so far. JerielOng: Awesome, thank you so much for that context and given us some of the levers to think about. I'd like to ask a little bit more of a strategic one, a little bit longer term in nature. I think one thing is interesting about the Apple one bundle is the desire two bundles in the first place, I guess. I'm wondering, and some investors have asked me this as well, is that why wouldn't you also take that rationale perhaps in hardware, perhaps maybe AirPods and iPhone or AirPods watch and iPhone? Because if it makes sense to bundle services, would it also make sense to bundle hardware? And if that's not the case, then are there benefits of services, bundling that don't necessarily translate to hardware bundling? Thanks. TimCook: Yes, we don't have anything to announce today at our hardware bundle but backing up a bit. And we do view that people like to pay for their hardware are at least some substantial portion of it monthly. And so that's the reason that we have implemented installments in our stores and online. And that's the reason you see in some of the channels too selling the hardware on a per month kind of basis. If that begins to look like a subscription, perhaps to some buyers because they're used to holding the phone for a fixed period of time and then turning it over and using the residual value of that phone in a way that gives them a de facto kind of subsidy on a new phone. And so there is something today in the market that works somewhat similar. On the services side; we have -- we had customers coming to us and asking for an easier way to buy all of our services. And we wanted to provide that and we're looking forward to tomorrow to getting Apple one out there. Operator : It will come from Katy Huberty with Morgan Stanley. KatyHuberty: Thank you. Good afternoon. New technologies, including the chips that support 5G put upward pressure on cost this year. But you managed to leave ASPS for iPhones relatively unchanged this product cycle. How should we think about the margin profiles of iPhone 12 relative to past iPhone cycles? LucaMaestri: Hi, Katy. Obviously, we don't provide any outlook at the gross margin level for product categories. What I said in my prepared remarks, we expect gross margins in total for the company to be pretty much in line with what we've seen during the last quarter. Because obviously, as you said, it's very good, right, because we are offering the new phones at price points that are essentially unchanged. And we are taking on a lot of new technology into the phones. I would say the commodity environment is good. For the first time in many, many quarters, I don't have to say that foreign exchange is a headwind and getting into the quarter is not going to be a factor during the quarter. As we've made it clear in our comments, we are bullish about our sales performance expectation, so we should be getting some leverage. And so I think that the gross margin dynamics are good and it's very good to see that we're able to offer so much more technology and still able to deliver the level of gross margins that I think investors are expecting. KatyHuberty: Okay and shifting to the services business. This isn't dependent on certainly any one service but licensing and other historically has been a driver of growth. That's where the ad based revenue comes in. When you think about the Google antitrust pressure, what's the risk that you see some shrinkage in your licensing and others segment within services and do you see opportunities for other services to make up for any potential weakness? KatyHuberty: We've got Katy, as you know; we've announced a number of services over the last couple of years. And we are ramping those between Apple TV plus and Apple News plus and Apple Kay, we've got Apple Card. We've got Apple Fitness Plus coming. We've got a number of services that have been launched a bit longer that are doing really well from the app store to iCloud, and So there's a lot of room their input and potential there. I have no idea how the DOJ suit will go, but I think it's a long way from a conclusion on it. Operator : That will come from Evercore's Amit Daryanani. AmitDaryanani: Thanks for taking my question. I guess I have two as well. First off, Tim, on iPhones, you talked about the iPhone install data thing being the highest and largest ever been satisfaction rates, obviously pretty high. And our data would suggest replacement cycles are getting elongated. And if I take all of that together, along with the fact that, if iPhone user like me with embarrassingly high weekly usage rate, does that in aggregate give you better confident, better clarity that we could enter an extensive period of iPhone revenue growth versus what we seen the last couple of years. TimCook: We're very bullish on this cycle, very bullish on it, because as I sort of step back from it and look at what we've now done, we have for the first time ever, we've launched four iPhones. And there is an iPhone for everyone there. It is the strongest lineup we've ever had by far, we have -- we do have a very large, loyal and growing install base. And we're also reaching out to switchers. And so I'm very optimistic there. We've got a once in a decade opportunity with 5G. There's a lot of excitement around 5G. And we've got some aggressive offers in the marketplace. And so when I think about all of those, I'm really and I look at the initial data points that we've got on the iPhone 12 and the 12 Pro, we are off to a great start. AmitDaryanani: Got it. And I guess, Luca had a follow up to you on the services gross margin it just was to kind of continue to move higher rather nicely. Do you think this level at 67% essentially is sustainable? And what do you think are the two or three factors that are enabling these gross margins to remain here as we go forward? LucaMaestri: I mean, obviously, we're very pleased with the level of gross margins in services, as you said; they've been expanding almost 300 basis points on a year-over-year basis. The reason for that is, of course that, we are growing the services revenue, and therefore we're getting leverage on a lot of these services, right. Some of it, as explained in the past, we have a portfolio of services that got different margin profiles. And so sometimes, depending on the mix of products we have, we can see margin expansion through mix, as well. And so, but we're also launching new services that where we need to invest heavily up front. And but we think we've been able to show, for example, this year that we've launched a lot of new services, made all the necessary investments and still being able to expand gross margin. So we feel quite confident about that trajectory that we have, that we have for services and we're very, very happy to see the customer response to really all of them, because as we've mentioned earlier, I mean, we've seen revenue records across essentially every category and in across the entire world, right? We've seen September quarter records in every geography around the world. So of the dynamics, all the levers that we have in the services business are working very well right now. And that translates also into margin, of course. Operator : We'll hear from Samik Chatterjee with JP Morgan. SamikChatterjee: Hi, thanks for taking the question. I just want to start off with the iPhone lineup here, particularly as you mentioned, the carrier subsidies that you see mixed optimistic about iPhone sales. I think just looking at some other factors here. Earlier in the year, you had mentioned that iPhone sales was seeing an uptake with stimulus checks going out to consumers helping in the consumer spending overall here in the US. So as we see some delays here on that front, are you seeing anything change on the consumer spending side as a macro impacting? How you think about iPhone sales, particularly with -- even with the new product lineup? And I have a follow up. Thank you. TimCook: It's prior to mid September, we were seeing double digit growth in customer demand on iPhone. So there's a lot of momentum there. And there is a lot of momentum even much more so now given the launch of the 12 Pro and the iPhone 12. If you're asking whether it could have been even more with a different macro spending environment? I believe the answer to be yes. But you can't run the experiment. And so I don't know for sure. But I suspect that just the COVID in general take something off from a worldwide economic point of view. SamikChatterjee: Perfect. And if can just follow up just following up on that COVID discussion. We are potentially here looking at a second wave, right. And I think all companies are trying to prepare for that which you discussed as well in your prepared remarks. But if you can share any kind of thoughts about how you're preparing in relation to either inventory levels, or sourcing from the supply chain, to prepare for any potential disruption, like we had earlier this year? TimCook: Well, we're doing everything we can do. But we're prioritizing safety first, obviously. And so with our stores as an example, we've come up with a new concept that puts an essentially turns the store into an express storefront. And we've implemented that in a number of places where we believe that helps from the safety of our employee and the safety of the customer's point of view, but still allows for an interaction to take place. And so we've also put a lot more people on the phones because a lot more people are reaching out to us in that way. And of course, the online store has stayed up and running through the whole of this. I think if you take some of those, the channel is doing some similar things and then some different things as well. And so I think everybody to the best of their ability is putting in contingency plans and finding a way to adapt to the environment. But it is difficult to call and there's a level of uncertainty in it, obviously. And that's what Luca was referring to earlier. Operator : That will come from Krish Sankar from Cowen and Company. KrishSankar: Hi, thanks for taking my question. I have two of them, first on palooka. I understand you don't want to give color on gross margin by products or segments. But Luca you mentioned growth margin should be similar in December versus September. And so it should grow double digit, there's a general view that on the iPhone side, the bond cost would be headwind for gross margin, but carrier subsidies would be attainment. So I'm kind of curious, how should we think about the different, like gross margin levels into December quarter? And I have a follow up. LucaMaestri: Yes. And so typically during the December quarter, we have positive factors because we have the typical seasonal leverage, right, sequentially as we go from September to the holiday season. And we also have an improved mix between products, particularly this year, as we've launched the new iPhone, at the same time, we shouldn't forget that we have launched a lot of new products. During the last several weeks, we launched four new models of iPhone; we launch new models of Apple watch new, models of iPads. And so, clearly every time we launch a new product, the cost structure is higher. And so that is going to be the other side of the coin. So but we think that those two things should balance out and again, as I was saying earlier, and we are accomplishing this while delivering a lot of new technologies, a lot of new features to our customers. This time for an exchange is not a factor and that's something that is a bit different from the past. So but that those are the pluses and minuses. KrishSankar: Got it. Definitely helpful, Luca. And then a follow up for Tim. Tim, I kind of surprised you didn't say a lot about the payments ecosystem in this prepared comments kind of curious to find out from your advantage point, how you think of your whole payments ecosystem including Apple Card, Apple Pay, Apple Cash; now you're disaggregating the whole FinTech environment. TimCook: Thanks for the question. There's just a limited number of things I can talk about is kind of a reason I didn't talk about it. We continue to be very enthusiastic about the whole Payment Services area. Apple Card is doing well. And Apple Pay is doing exceptionally well. As you can imagine in this environment, people are less want to hand over a card. So this contactless payment has taken on a different level of adoption in it that I think will never go back. The US has been lagging a bit in contactless payment. And I think that the pandemic may well get put the US on a different trajectory there. And so we are very bullish about this area and view that there are there are more things that Apple can do in this space. And in so it's an area of great interest to us. Operator : That will come from Kyle McNealy with Jefferies. KyleMcNealy: Hi, thanks for the question. I wanted to ask a little bit about the supply chain. Given your latest start from manufacturing to the flagship phone line of this year, do you think that supply will be able to meet demand through the end of the calendar? Are there any component shortages that you're seeing? Or are there any actions that you can take to increase weekly output versus last year? Thanks. TimCook: Yes, Kyle, I don't know what you're talking about iPhone in particular. But if you look at iPhone, we are constrained today. And that's not a surprise where at the front end of the ramp, if you will, and how long we will be supply constrained, it's hard to predict. I mean, we haven't taken orders yet for the iPhone 12 Mini or the Pro Max either. And so those are coming in. So we shall see. But right now we are supply constrained, we are also supply constrained for avoidance of any confusion where supply constrained on Mac, we are supply constrained on iPad. And we're supply constrained on some Apple watches as well. And so we have a fair number of areas right now of focus, and we're working really, really hard to remedy those as quickly as we can. But at this point, I can't estimate when we'll be out of that. KyleMcNealy: Okay, great. Thanks a lot. And then switching to Mac and iPad. How do you think about the durability of the strength you've seen there with Mac and iPad? Is there any potential for stronger than seasonal pullback after the strong back to school season and holiday season? And these supply constraints make it feel like there's a good chance for continuation of the strong demand trends and in flow through of that. What do we think about the seasonality into December and March quarter being more positive in seasonal or less positive in seasonal? Thanks. TimCook: Yes, we placed our thoughts in the color that Luca provided when he said that all products excluding iPhone, all products and services excluding iPhone or all products, rather excluding iPhone would grow in the double digits. And so we continue to be bullish on what Mac and iPad can do. I think the moves that have taken place to remote learning and remote work are not going to go back to normal, normal will become something different. Because I think people are learning that there are aspects of this that work well. And so I don't believe that we're going to go back to where we were. And I think that means that iPads and Macs are even more important in those environments. The growth in both of these last quarter were phenomenal as you can tell from your from datasheet with Mac at 29 and iPad at 46. These are tremendous numbers and as Luca said the September quarter was the all time high for Mac in the history of the company, and by not by little bit by $1.6 billion. And so it was a substantial difference that we did have aggressive promotion for college students that were going back to going back to school. And so that invariably part of it. But I think the other part of it during the remote work thing is not something that's going to snap back to the way it used to be anytime soon. Operator : That will come from Chris Caso with Raymond James. ChrisCaso: Yes, thank you. I guess first question is on iPhone pricing. And there was some changes in the iPhone price back this year, the iPhone, the price point for iPhone 12 moves up a bit, I guess the difference the gap between 12 and 12 Pro is smaller. And I guess that's after you made some adjustments years prior where the price point came down a bit? Can you talk through the thought process behind that and the potential implications for either unit out elasticity or blended ASP as a result of the price changes? TimCook: Well, I the iPhone 12 family start at $699. In many places, because you can get in the deals that people are really paying are very different than that, because a lot of people, particularly in this country, but also in several other countries in the world connect to a carrier plan. And of course, those offers are much more aggressive. And so the price that our customers paying is probably the most important one. The iPhone 12 is at $799. And so I think what you're saying is there's a $200 difference there. But I would guess that people are viewing it more as a $300 difference between the 12 Mini and the 12 Pro. And so we'll see what the mix turns out. Right now we have no data other than 12 and 12. Pro, we like the data on the 12 Mini and the Pro Max, because we're not taking orders yet. But what we try to always do in pricing is give the customer a great value. And I feel like we really did that this year. And that's despite, as was mentioned earlier, all of the extra features that we placed into the phones, including 5G. ChrisCaso: As a follow up you mentioned, some of the carrier incentives we've seen here in the US. And if you could provide some more color about that, about what you're seeing now. And obviously, as we went through, years ago, the incentive from carriers were a lot larger. Is this mark some shift in the approach of carriers as we're moving into 5G? What's the extent of the permanence of some of these incentives? And then, as 5G rolls out around the world and into other geographies, is this something we should expect that as either they try to protect from switchers or kind of promote the 5G networks will see a higher prevalence of incentives and carriers as we go forward? TimCook: I don't want to speak for our carrier partners that would be up to them to talk about their plans. Generally, I think it's to the vast, vast majority of carriers around the world to their interest to move customers to 5G. And I think it's in the customer's interest to move to 5G and obviously, we like that as well. And so I think you have a situation where everyone's whoring in the same direction. And that's a very different kind of situation than normally we would have. And so it is one of the things as I alluded to earlier that makes me very bullish, only one, the other things are very important to the size of the install base, the product lineup, these things are critically important as well. Tejas Gala : Thank you, Chris. A replay of today's call will be available for two weeks on Apple podcasts, as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457- 0820, please enter confirmation code 9501153. These replays will be available by approximately 5 PM Pacific time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414; financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator : And again, that does conclude today's conference. Thank you all for joining us today.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,021	1	2021Q1	2021Q1	2021-01-27	3.641	3.865	4.313	4.565	5.92896	30.11	27.33	Operator : Good day, and welcome to the Apple Q1 Fiscal Year 2021 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead. Tejas Gala : Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the Company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you, Tejas. Good afternoon, everyone. Thanks for joining the call today. It's with great gratitude for the tireless and innovative work of every Apple team member worldwide that I share the results of a very strong quarter for Apple. We achieved an all-time revenue record of $111.4 billion. We saw strong double-digit growth across every product category, and we achieved all-time revenue records in each of our geographic segments. It is not far from many of our minds that this result caps off the most challenging year any of us can remember. And it is an understatement to say that the challenges it posed to Apple as a business paled in comparison to the challenge it posed to Apple as a community of individuals, to employees, to their families and to the communities we live in and love to call home. While these results show the central role that our products played in helping our users respond to these challenges, we are doubly aware that the work ahead of all of us to navigate the end of this pandemic, to restore normal life and prosperity in our neighborhoods and local economies and, to build back with a sense of justice is profound and urgent. We will speak to these needs and Apple's efforts throughout today's call, but I want to first offer the context of a detailed look at our results this quarter, including why we outperformed our expectations. Let's get started with hardware. We hit a new high watermark for our installed base of active devices, with growth accelerating as we passed 1.65 billion devices worldwide during the December quarter. iPhone grew by 17% year-over-year, driven by strong demand for the iPhone 12 family, and our active installed base of iPhones is now over 1 billion. The customer response to the new iPhone 12 models' unprecedented innovation from world-class cameras to the great and growing potential of 5G has been enthusiastic, even in light of the ongoing COVID-19 impact at retail locations. iPad and Mac grew by 41% and 21%, respectively, reflecting the continuing role these devices have played in our users' lives during the COVID-19 pandemic. During this quarter, availability began for both our new iPad Air as well as the first generation of Macs to feature our groundbreaking M1 chip. The demand for all of these products has been very strong. We have also continued our efforts to bring the latest iPads, enriching content and professional support to educators, students and parents. Educational districts and governments worldwide are continuing major deployments, including the largest iPad deployments ever to schools in Germany and Japan. Wearables, Home and Accessories grew by 30% year-over-year, driven by significant holiday demand for the latest Apple Watch, our entire AirPods lineup, including the new AirPods Max as well as the new HomePod mini. This broad strength across the category led to new revenue records for each of its three subgroups, and we're very excited about the road ahead for these products. Look no further than the great potential of Fitness+, which pairs with Apple Watch to deliver real-time on-screen fitness data alongside world-class workouts by the world's best trainers. There are new sessions added each week, and customers are loving the flexibility, challenge and fun of these classes as well as how the pairing with Apple Watch pushes you to achieve your fitness goals. This deep integration of hardware, software and services, have always defined our approach here, and it has delivered an all-time quarterly Services record of $15.8 billion. This was the first quarter of the Apple One bundle, which brings together many of our great services into an easy subscription and with new content being added to these services every day, we feel very optimistic about where we are headed. The App Store ecosystem has been so important as individuals, families and businesses worldwide evolve and adapt to the COVID-19 pandemic, and we want to make sure that this unrivaled engine of innovation and opportunity continues. This quarter, we also took a significant new step to help smaller developers continue to experiment, innovate and scale the latest great app ideas. The App Store Small Business Program reduces the commission on the sale of digital goods and services to 15% for small businesses earning less than $1 million a year. The program launched on January 1st and we are already hearing from developers about how this change represents a transformation in their potential to create and grow on the App Store. Tomorrow is International Privacy Day, and we continue to set new standards to protect users' right to privacy, not just for our own products but to be the ripple in the pond that moves the whole industry forward. Most recently, we're in the process of deploying new requirements across the App Store ecosystem that give users more knowledge about and new tools to control the ways that apps gather and share their personal data. The winter holiday season is always a busy times for us and our products, but this year was unique. We had a record number of device activations during the last week of the quarter. And as COVID-19 kept us apart, we saw the highest volume of FaceTime calls ever this Christmas. As always, we could not have made so many holidays special without our talented and dedicated retail teams who helped us achieve a new all-time revenue record for retail, driven by very strong performance in our online store. Particularly, after the events of the last few weeks, we are focused on how we can help a moment of great national need. Because none of us should have any illusions about the challenges we face as we began a new chapter in the American story. Hope for healing, for unity and for progress begins with and depends on addressing the things that continue to wound us. In our communities, we see how every burden from COVID-19, to the resulting economic challenges, to the closure of in-person learning for students, falls heaviest on those who have always faced structural barriers to opportunity and equality. This month, Apple announced major new commitments through a $100 million Racial Equity & Justice Initiative. The Propel Center, launched with a $25 million commitment and with the support of historically black colleges and universities across the country, will help support the next-generation of leaders in fields ranging from machine learning to app development to entrepreneurship and design. And our new Apple Developer Academy in Downtown Detroit will be the first of its kind in the United States. Detroit has a vibrant culture of black entrepreneurship, including over 50,000 black-owned businesses. We want to accelerate the potential of the app economy here, knowing there is no shortage of good ideas in such a creative, resilient and dedicated community. Finally, we're committing $35 million across two investments in Harlem Capital and the Clear Vision Impact Fund that support, accelerate and grow minority-owned businesses in areas of great potential and need. In December, we concluded an unmatched year of giving. Since the inception of the Apple Giving Program in 2011, Apple employees have donated nearly $600 million and volunteered more than 1.6 million hours to over 34,000 organizations of every stride. Through our partnership with Product Red, we've adapted our 14-year $250 million effort to support HIV and AIDS work globally to ensure that care of COVID. That includes delivering millions of units of personal protective equipment to health care providers in Zambia. And here in the United States, even with COVID's effects, we are ahead of schedule on our multiyear commitment to invest $350 billion throughout the American economy. As proud as this makes us, we know there is much more to be done. Looking forward, we continue to contend with the COVID-19 pandemic but we must also now work to imagine what we will inherit on the other side. When a disease recedes, we cannot simply assume that healing follows. Even now, we see the deep scars that this period has left in our communities. Trust has been compromised, opportunities have been lost, entire portions of our lives that we took for granted, schools for children, meetings with our colleagues, small businesses that have endured for generations have simply disappeared. It will take a society-wide effort across the public and private sectors as individuals and communities, every one of us, to ensure that what's ahead of us is not simply the end of a disease, but the beginning of something durable and hopeful for those who gave, suffered and endured during this time. At Apple, we have every intention to be partners in this effort, and we look forward to working in communities around the world to make it possible. And as this chapter of uncertainty continues, so will our tireless work to help our customers stay safe, connected and well. With that, I'll hand things over to Luca. Luca Maestri : Thank you, Tim. Good afternoon, everyone. We started our fiscal 2021 with exceptional business and financial performance during the December quarter, as we set all-time records for revenue, operating income, net income, earnings per share and operating cash flow. We are thrilled with the way our teams continued to innovate and execute throughout this period of elevated uncertainty. Our revenue reached an all-time record of $111.4 billion, an increase of nearly $20 billion or 21% from a year ago. We grew strong double digits in each of our product categories, with all-time records for iPhone, Wearables, Home and Accessories and services as well as a December quarter record for Mac. We also achieved double-digit growth and new all-time records in each of our five geographic segments and in the vast majority of countries that we track. Products revenue was an all-time record of $95.7 billion, up 21% over a year ago. As a consequence of this level of sales performance and the unmatched loyalty of our customers, our installed base of active devices passed 1.65 billion during the December quarter and reached an all-time record in each of our major product categories. Our Services set an all-time record of $15.8 billion, growing 24% year-over-year. We established new all-time records in most service categories and December quarter records in each geographic segment. I'll cover our Services business in more detail later. Company gross margin was 39.8%, up 160 basis points sequentially, thanks to leverage from higher sales and a strong mix. Products gross margin was 35.1%, growing 530 basis points sequentially, driven by leverage and mix. Services gross margin was 68.4%, up 150 basis points sequentially, mainly due to a different mix. Net income, diluted earnings per share and operating cash flow were all-time records. Net income was $28.8 billion, up $6.5 billion or 29% over last year. Diluted earnings per share were $1.68, up 35% over last year and operating cash flow was $38.8 billion, an improvement of $8.2 billion. Let me get into more detail for each of our revenue categories. iPhone revenue was a record $65.6 billion, growing 17% year-over-year as demand for the iPhone 12 family was very strong despite COVID-19 and social distancing measures, which have impacted store operations in a significant manner. Our active installed base of iPhones reached a new all-time high and has now surpassed 1 billion devices, thanks to the exceptional loyalty of our customer base and strength of our ecosystem. In fact, in the U.S., the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 98% for the iPhone 12 family. Turning to Services. As I said, we reached an all-time revenue record of $15.8 billion and set all-time records in App Store, cloud services, Music, advertising, AppleCare and payment services. Our new service offerings, Apple TV+, Apple Arcade, Apple News+, Apple Card, Apple Fitness+ as well as the Apple One bundle are also contributing to overall Services growth and continue to add users, content and features. The key drivers for our Services growth all continue to move in the right direction : first, our installed base growth has accelerated and each major product category; second, the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the December quarter, with paid accounts increasing double digits in each of our geographic segments; third, paid subscriptions continue to grow nicely, and we exceeded our target of 600 million paid subscriptions before the end of calendar 2020. During the December quarter, we added more than 35 million sequentially, and we now have more than 620 million paid subscriptions across the services on our platform, up 140 million from just a year ago. Finally, we continue to improve the breadth and quality of our current Services offerings and are adding new services that we think our customers will love. For example, Apple Music recently released its biggest product update ever with features like Listen Now, all new Search, personal radio stations and auto play. 90% of Apple Music users on iOS 14 have already used these new features. In payment services, we continue to expand our coverage, with nearly 90% of stores in the United States now accepting Apple Pay so that customers can easily have a touchless payments experience. Wearables, Home and Accessories grew 30% year-over-year to $13 billion, setting new all-time revenue records in every geographic segment. As a result of this strong performance, our Wearables business is now the size of a Fortune 120 company. Importantly, Apple Watch continues to extend its reach, with nearly 75% of the customers purchasing Apple Watch during the quarter being new to the product. We're very excited about the future of this category and believe that our integration of hardware, software and services uniquely positions us to provide great customer experience in this category. Next, I'd like to talk about Mac. We set a December quarter record for revenue at $8.7 billion up 21% over last year. We grew strong-double-digits in each geographic segment and set all-time revenue records in Europe and rest of Asia-Pacific as well as December quarter records in the Americas, Greater China and in Japan. This performance was driven by strong demand for the new MacBook Air, MacBook Pro and Mac mini, all powered by our brand-new M1 chip. iPad performance was also very impressive with revenue of $8.4 billion, up 41%. We grew strong -- very strong double digits in every geographic segment, including an all-time record in Japan. During the quarter, the new -- the all-new iPad Air became available and customer response has been terrific. Both Mac and iPad are incredibly relevant products for our customers in the current working and learning environments. And we are delighted that the most recent surveys of consumers from 451 Research measured customer satisfaction at 93% for Mac and 94% for iPad. With this level of customer satisfaction and with around half of the customers purchasing Mac and iPad during the quarter being new to that product, the active installed base for both products continues to grow nicely and reached new all-time highs. In the enterprise market, we are seeing many businesses shifting their technology investment in response to COVID. One example is our businesses are handling their hundreds of millions of office desk phones while more employees are working remotely. Last quarter, Mitsubishi UFJ Bank, one of the largest banks in the world, announced that it will be replacing 75% of its fixed phones with iPhones. By doing so, it expects to realize significant cost savings while providing a secure mobile platform to employees. We're also pleased with the rapid adoption of the Mac Employee Choice Program among the world's leading businesses, who are seeing improved productivity, increased employee satisfaction and talent retention. With the introduction of M1-powered Macs, we're excited to extend these experiences to an even broader range of customers and employees, especially in times of increased remote working. Let me now turn to our cash position. We ended the quarter with almost $196 billion in cash plus marketable securities and retired $1 billion of maturing debt, leaving us with total debt of $112 billion. As a result, net cash was $84 billion at the end of the quarter. We returned over $30 billion to shareholders during the December quarter, including $3.6 billion in dividends and equivalents and $24 billion through open market repurchases of 200 million Apple shares as we continue on our path to reaching a net cash neutral position over time. As we move ahead into the March quarter, I'd like to provide some color on what we are seeing, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we will not be guiding to a specific revenue range. However, we are providing some directional insights, assuming that COVID-related impacts of our business do not worsen from our current assumptions for the quarter. For total company revenue, we believe growth will accelerate on a year-over-year basis, and in aggregate, follow typical seasonality on a sequential basis. At the product category level, keep in mind two items : first, during the March quarter last year, we saw elevated activity in our digital services as lockdowns occurred around the world, so our Services business faces a tougher year-over-year comparison; second, we believe the year-over-year growth in the Wearables, Home and Accessories category will decelerate compared to Q1. As you know, we were chasing demand on AirPods last year as we expanded channel inventory from Q1 to Q2. This year, we plan to decrease AirPods channel inventory as is typical after the holiday quarter. We expect gross margin to be similar to the December quarter. We expect OpEx to be between $10.7 billion and $10.9 billion. We expect OI&E to be up around $50 million and our tax rate to be around 17%. Finally, today, our Board of Directors has declared a cash dividend of $0.205 per share of common stock payable on February 11, 2021, to shareholders of record as of February 8, 2021. With that, let's open the call to questions. A - Tejas Gala : Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator : We'll go question from Katy Huberty with Morgan Stanley. Please go ahead. Katy Huberty : Congratulations on a really strong quarter. First question for Luca. The gross margin was particularly strong versus your outlook. Can you talk about whether you recognize the full impact of the weaker dollar in the December quarter, given your typical currency hedges? And then how are you thinking about the headwinds and tailwinds on gross margins as you go into the March quarter? And then I have a follow-up for Tim. Luca Maestri : Yes, Katy. So yes, the gross margin was strong, was better than we had anticipated at the beginning of the quarter. The reason for that was obviously, we had very strong leverage from higher sales. And the mix was strong, both the mix within products and the mix of services, and that was only partially offset by cost. As you know, we've launched many new products during the fall, and that always comes with new cost structures. So in total, it was very good. And from the FX standpoint, really, at the gross margin level, FX didn't play a role neither sequentially nor on a year-over-year basis for the December quarter, partially because of the hedges that you talked about but also because some currencies are still weaker against the dollar, they're still weaker than a year ago. Look specifically to emerging markets in Latin America, in Russia, in Turkey and so on. Clearly, if the dollar remains weak or continues to weaken, that can become a tailwind for us as we get into the March quarter. At current rates, we expect some level of benefit around 60 to 70 basis points for the March quarter. Katy Huberty : That's great. And Tim, one of the challenges with valuing Apple is just a limited visibility that investors have into the road map and any new categories that you might enter over time. Without, of course, commenting on any given opportunity, can you talk about the framework that you use internally to evaluate new markets that might be attractive and what you believe will determine your success as you look to enter new markets? Tim Cook : Thanks, Katy, for the question, and thanks for not asking me any specifics. The framework that we use is very much around we ask ourselves if this is a product that we would want to use ourselves or a service that we would want to use ourselves. And that's a pretty high bar. And we ask ourselves if it's a big enough market to be in unless it's an adjacency product, of which we're looking at it very much from a customer experience point of view. And so there's no set way that we're looking at it, no formula kind of thing. But we're taking into account all of those things, and the kind of things that we love to work on are those where there's a requirement for hardware, software and services to come together because we believe that the magic really occurs at that intersection. And so hopefully, that gives you a little bit of insight into how we look at it. And I think we have some good -- really good opportunities out there. And I think if you look at our current portfolio of products, we still have relatively a low share in a number of cases in very big markets. And so we feel like we have really good upside there, and we feel like we have really good upside in the Services area, too, that we've been working on for quite some time with four or five new services just coming online in the last year, year-plus, and so -- yes. Thank you. Operator : We'll hear next from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan : Luca, the iPhone growth exceeded your expectations despite a late launch. Can you maybe share on the unit side or the ASP side? You referred to very strong mix a couple of times on the call. And how does this change your view on the March quarter? And if you could share any color on if you're still supply constrained, and I have a follow-up for Tim. Luca Maestri : Yes. Yes, certainly, iPhone was one of the major factors why we exceeded our own internal expectations at the beginning of the quarter. We have a fantastic product lineup and we know that, and it's been fantastic to see the customer response for new models, particularly the Pro models, the Pro and the Pro Max. So, we've done very, very well both on units and on pricing because of the strong mix. And we've had some level of supply constraints as we went through the quarter, particularly on the Pro and the Pro Max. As you said correctly, we launched these products in the middle of the quarter, two models after four weeks, the other two models after seven weeks. And so obviously, we had a very steep ramp, which fortunately went very, very well. The products are doing very well all around the world. I think you've seen that our performance has been particularly strong in China, where we've seen phenomenal customer response that probably. There was also some level of pent-up demand for 5G iPhones, given that the market is moving very quickly to 5G. And so as we look ahead into the March quarter, we're very optimistic. We believe we're going to be able to be in supply-demand balance for all the models at some point during the quarter. And it's -- the product is doing very well all around the world. Wamsi Mohan : Great. And Tim, you mentioned about the strength of the installed base performance, which continues to grow very impressively at this scale. Can you maybe help us think through how the switcher versus upgrade activity has been tracking in recent quarters? I would love to get your thoughts on that. Tim Cook : Yes. Thanks for the question. If you look at this past quarter, which has -- we started selling two of the iPhones 4 weeks into the quarter and the other two, seven weeks into the quarter. And so I would caution that this is in the early going. But in looking at the iPhone 12 family, we saw both switchers and upgraders increase on a year-over-year basis. And in fact, we saw the largest number of upgraders that we've ever seen in a quarter. And so, we were very thrilled about that. Operator : We'll go ahead and take our next question from Shannon Cross with Cross Research. Shannon Cross : Tim, can you talk a bit about what you're seeing in China? Clearly, significant sequential growth, which I think has a lot to do with iPhone. But I'm curious, both from an iPhone as well as your other product categories, what you're seeing and how much back to normal you think the Chinese market is? And then I have a follow-up. Tim Cook : Yes. China was more than an iPhone story. iPhone did do very well there. And sort of like the world, if you look at both switchers and upgraders, we were up year-over-year, and China also had a record number of upgraders during the quarter, the most we've ever seen in a quarter. I think probably some portion of this was that people probably delayed purchasing in the previous quarter as rumors started appearing about an iPhone. Keep in mind that 5G in China is -- the network is well established. And the overwhelming majority of phones being sold are 5G phones. And so I think there was some level of anticipation for us delivering an iPhone with 5G. And so, iPhone did extremely well. However, the other products did as well. I mean, we could not have turned in a performance like we did with only iPhone. iPad did extremely well, far beyond the Company average. Mac was about the Company average. Wearables, Home and Accessories was above the Company average. And so if you really look at it, we did really well across the Board there. In terms of COVID, I think they're -- at least for last quarter, they were beat -- sort of beyond COVID, very much in the recovery stage. This quarter, there are different reports about some cases in some places and lockdowns occurring but we have not seen that in our business as yet. Of course, those cases are much smaller than the ones in other countries. Shannon Cross : Right. I guess the other thing I was curious about, with regard to the Services business, if we could dig a little bit more, I think this is one of the first times when Luca, you talked about Apple TV+, Arcade, Apple Pay, some of the smaller services actually kind of moving the needle. And then I was also curious, you had a number of stores closed at least later in the quarter, and that typically has impacted some of your AppleCare revenue and yet you outperformed. So, maybe if you could talk about a bit more about the drivers of the Services revenue? Luca Maestri : Yes. I mean, really, it's been strong across the Board. There are two businesses during COVID that have been impacted negatively, and then we talked about it in the past. One is AppleCare. Obviously, when the stores are closed, it's tougher, of course, for customers to have the interaction with us. And advertising, which is -- it's in line with the overall level of economic activity. What happened during the December quarter is that in-store traffic improved. And so AppleCare, we grew -- we didn't grow as much as company average but we grew in AppleCare, set an all-time record there in spite of the fact that, yes, we are running, particularly in December, we started closing a few stores, particularly here in the United States but also in Western Europe. But in total, we were able to support more customers than in past quarters. And we also saw a sequential acceleration in advertising and so that also helped the overall growth rate. Clearly, the strength was in digital services, in the App Store, in cloud services, in Music. Those were the services that really delivered very, very strong performance. It's something that we've seen happen during the COVID environment. Operator : We'll hear from Toni Sacconaghi with Bernstein. Toni Sacconaghi : I also have one for Luca and one for Tim. Luca, I was wondering if we could just probe a little bit more into iPhone. Maybe you can just -- you talked about a drawdown in channel inventory last quarter. Our iPhone channel inventory is sort of at normal levels now exiting Q1. And should we be thinking about above-seasonal iPhone growth, given that you're still not in supply-demand balance and you had fewer selling days in fiscal Q1? Should we be thinking about sort of above-seasonal iPhone growth looking into Q2? Luca Maestri : So on the December performance, as you know, Toni, this was a very different cycle because we launched at a different time than usual. And so, we had an initial part of the quarter where, obviously, we didn't have the new phones. And then as we launched the new phones, we also did the channel fill that typically happens, to a certain extent, in the September quarter. At the end of the quarter, the demand has been very strong. And so we've been constrained, as I said, on -- especially in the Pro models. At the end of December, we exited with a level of iPhone channel inventory, which was slightly below a year ago. So we -- and we still had some level of supply constraints, which we believe we're going to be able to solve during the March quarter. In terms of the sequential change, we talked about -- during the prepared remarks, we talked about total company average, and we said that we expect that sequential progression to be similar to the typical seasonality that you've seen in past years. Certainly, last year is not typical because of COVID. But if you go back, fiscal '17, '18, '19, that's our typical seasonal progression. And we mentioned a couple of product categories, Services and Wearables, where we're going to be having a slightly more difficult compare. And so I think you can draw your conclusions around the iPhone. Toni Sacconaghi : Okay. And then, Tim, I was wondering if you could just comment more broadly around growth for Apple and sources of growth. The Company this year is going to be well over $300 billion in revenue. Historically, you've issued acquisitions. And I'm wondering if you could comment whether you still feel confident that Apple has Apple organic growth opportunities and that you don't believe acquisitions are an important source of growth? And then I think perhaps most importantly, as you look out, let's say, over the next five years, what do you think is a realistic revenue growth rate for Apple going forward? Tim Cook : Yes. Toni, as you know, we give some color on the current quarter but not beyond that in terms of growth rates, so I'll punt that part of your question. But if you back up and look at the sort of the ingredients that we have at this point, we have the strongest hardware portfolio that we've ever had. And we have a great product pipeline for the future, both in products and in Services. We have an installed base that has hit new highs that we just talked about earlier in our opening comments. And we're still attracting a fair number of switchers and, of course, upgraders. We just set an all-time Services record, and we have that installed base to compound that, and particularly with the added services that we've had over the last year or so, that as they grow and mature, will contribute even more to the Services revenue stream. And on the Wearables side, we've brought this thing from zero to a Fortune 120 company, which was no small feat. But I still think that we're in the early stages of those products. If you look at our share in some of the other products, whether you look in iPhone or Mac or iPad, you find that the share numbers leave a fair amount of headroom for market share expansion. And this is particularly the case in some of the emerging markets, where we're proud of how we've done but there's a lot more headroom in those markets. Like if you take India as an example, we doubled our business last quarter compared to the year ago quarter. But our absolute level of business there is still quite low relative to the size of the opportunity. And you can kind of take that and go around the world and find other markets that are like that as well. And of course, the other thing from a market point of view is we're -- we've been on a multiyear effort in the enterprise and have gained quite a bit of traction there. You've heard some of the things in Luca's comments today and we comment some on it each quarter. We're very optimistic about what we can do in that space. And then, of course, we've got new things that we're not going to talk about that we think will contribute to the Company as well, just like other new things have contributed nicely to the Company in the past. So, we see lots of opportunity. Thank you for the question. Operator : We'll hear from Amit Daryanani with Evercore ISI. Please go ahead. Amit Daryanani : I have two questions as well. I guess, starting with you, Luca, I just wanted to go back to the gross margin discussion, and we really haven't seen gross margins at this level, high 39%, I think, since 2016. Could you maybe step back and talk, what has enabled the shift higher? What are the key drivers to get you there? And is commodity tailwind or in-sourcing of some components really a big part of this? So just love to understand the durability of the gross margin at these levels. And what are the big drivers that got us here? Luca Maestri : Well, I mean, of course, when you grow the way we've grown this quarter, 21%, it's -- obviously, we have a certain level of fixed cost in our product structures, right? And so a high level of sales helps margin expansion without a doubt, and so that has been probably the biggest factor, to be honest. And then as I was saying earlier, we've had, across the Board, in Services, in every product category, we've had a very strong mix of products, right? We were talking about the iPhone, the Pro and the Pro Max, and that's been pretty much the case in every product category. So the mix has also been very good. The commodity environment is fairly benign. And the one thing that has not affected us this time around is the FX that it's true, it has not been a tailwind yet for the reasons that I was explaining to Katy, but at the same time, it has not been a negative. And the reality is that FX for us has been a negative over the last five or six years, almost every quarter. And so that has changed. And that obviously makes a difference. Amit Daryanani : And then Tim and when I look at the growth rates on Mac and iPads, they've been in the 20% to 40% range for the last three quarters, and I suspect some of this is just folks contending with the pandemic. But love to understand, when you look at these growth rates, how much of this do you think is replacement cycle-driven folks upgrading with at home versus new customers and new folks that are coming into the Apple ecosystem? And do you see, I guess, what sort of growth rates do you think is more durable or predictable as we go forward over here? Tim Cook : If you look at the switcher or the switchers, if you look at the new to Mac and new to iPad, these numbers are still about, at a worldwide level, about half of the purchases that are coming from people that are new. And so the installed base is still expanding with new customers in it. And so that's true on both iPad and Mac. If you look at Mac, the M1, I think, gives us a new growth trajectory that we haven't had in the past. Certainly, if Q1 is a good proxy, there's lots of excitement about M1-based Macs. As you know, we're partly through the transition. We've got more -- a lot more to do there. We're early days of a two-year transition, but we're excited about what we see so far. The iPad, as we went out with the iPad Air, and we now have the best iPad lineup we've ever had, and it's clear that some people are using these as laptop replacements. Others are using them as complementary to their desktop. But the level of growth there has been phenomenal. You look at it at 41%. And yes, part of it is work from home and part of it is just learning. But I think I wouldn't underestimate how much of it is the product itself on -- in both the case of iPad and Mac. And of course, our share in the Mac is quite low. In the -- for the total personal computer market. And so there's lots of headroom there. Operator : We'll go ahead and take our next question from Samik Chatterjee with JP Morgan. Samik Chatterjee : Congrats on the record quarter from my side as well. I guess I wanted to start off with iPhone sales. I think in -- general impression we have is China and North America have more robust 5G infrastructure. I just wanted to see kind of what are you seeing in terms of customer engagement or velocity of sales for iPhone in Europe, where I think the general impression is that service providers haven't rolled out robust 5G services. Is that something that's impacting customer interest in the latest lineup in the region? And I have a follow-up. Tim Cook : If you look at the 5G rollout in Europe, it's true that Europe is not in the place of -- certainly nowhere close to where China is and nowhere close to the U.S. either. But there are other regions that 5G is -- that has very good coverage, like Korea is an example. And so the the world, I would describe it right now, is more of a patchwork more to do that we haven't had in quilt. There are places that there's really excellent coverage. There are places where -- within a country that is very good but not from a nationwide point of view. And then there are places that really haven't gotten started yet. Latin America is more closer to the last one. There's lots of opportunity ahead of us there. And I think Europe is where there are 5G implementations there. I think most of that growth is probably in front of us there as well. Samik Chatterjee : Got it. As a follow-up, if I can just ask you, I think you mentioned the momentum you're seeing for the Apple One bundle, which I think has been a couple of months now since you launched it. Any metrics to share in terms of what you're seeing for conversion rate of customers or even insights into which services are turning in that bundle, are turning out to be the anchor Services that's driving adoption of that bundle? Tim Cook : It's really too early to answer some of those questions. As you know, we just got started into the quarter in Q1 so we have less than a quarter on this right now. What we wanted to accomplish with it, we're clearly accomplishing, which is making our Services very easy to subscribe to. Our customers clearly told us that they wanted to subscribe to several services or, in some cases, all of our services. And so, we've made that very simple, and it's clear from the early going that it's working but we've just gotten started on it. Operator : We'll hear from Krish Sankar with Cowen. Krish Sankar : Congrats on the very strong results. My first question is for Tim. Tim, I want to talk a little bit about your search and advertising business. How do you think of the long-term growth opportunities in advertising? How do you think it -- how long can it grow at two times to three times the App Store growth rate? And also, are there any applications where your fundamental search technology, AI could be adapted for other parts of the Services business, that's the first question. And then I have a quick follow-up for Luca after that. Tim Cook : The search advertising business is going well. It's a -- there's lots of intent from search. And we do it in a very private kind of manner, observing great privacy policies and so forth. And I think people see so forth. And I think people see that and are willing to try it out. And we have been growing nicely in that area. It's a part of the advertising area that Luca spoke of earlier. Krish Sankar : Got it, got it. And then a follow-up for Luca. When you look at your Services segment in the March quarter, in China, you typically see a bump due to gaming downloads during Chinese New Year. So should see a similar trend this time around? But do you think with a pandemic, and people think for me at home, that kind of seasonal bump might not happen in China for gaming downloads? Luca Maestri : Yes. I mean, I think I was mentioning it during the prepared remarks. We -- clearly, in China, the March quarter is typically the strongest quarter for our Services business and for the App Store because of Chinese New Year, as you mentioned. And last year, what we saw was an increased level of activity because after Chinese New Year, the whole country went into lockdown for several weeks. And so that propensity for playing games continued for several weeks, more than a typical cycle. So, we expect to have a great quarter in China, but at the same time, you need to keep in mind that the compare is going to of what happened a year ago. Operator : We'll go ahead and take our next question from Chris Caso with Raymond James. Please go ahead. Chris Caso : The first question is on iPhone ASPs and I know you don't disclose the numbers there, but I wonder if you could speak about it qualitatively. You spoke about the richer mix, but there were also some price differences as compared to a year ago. iPhone 12 came higher price point. The Pro established a new price point. Can you speak to how that the level of benefit that you saw there? And going forward, are you confident that you can continue to improve the next in iPhone going forward? Luca Maestri : So, as I said earlier, we grew iPhone revenue 17%. That growth came from both unit sales and ASPs because of the strong mix that I mentioned before. So, I think that answers your question for the December quarter. What we've seen so far, it's very early because we launched the new products only a few weeks ago. What we've seen so far is a very high level of interest for the Pro models, the Pro and the Pro Max. We worked very hard to ramp up our supply. We've had some supply constraints during the December quarter. We think we're going to be able to solve them during the March quarter. But so far, the mix has been very strong on iPhone. Chris Caso : Okay. As a follow-up question, if you could talk a bit to the benefit that you may have seen from some of the carrier actions? We've seen very aggressive trade-ins during the quarter. Did that provide a benefit, in your view, on units or mix or perhaps both? And what would be the level of permanence that you would see in some of those actions such that if those subsidies were removed, could that potentially be a headwind going forward? Tim Cook : I think, Chris, it's Tim. I think subsidies always help, that anything that reduces the price to the customer is good for the customer and obviously good for the carrier that's doing it and good for us as well. And so, it's a win across the board. I believe that, at least based on what I see right now is that there would be probably continuing to have quite a bit of competition in the market, if you're talking about the U.S. market for customers as the carriers work to get more customers to move to 5G. Outside of the U.S., the subsidies are not used in all geographies, and so it really varies greatly by country. Some of them are separate completely, the handset and the service. And in those areas, we don't have subsidies. Operator : We'll go ahead and hear from Jim Suva with Citigroup. James Suva : It's amazing how your company has pivoted and progressed through this uncertain time in society. A lot of the pushback we get on our view on Apple is that everyone around them or that they know developed countries has an iPhone or Apple product and the market is kind of being saturated some. But when I look at other countries like India, I believe statistically, you are materially below that in market share. So are you doing active efforts there? It seems like there's been some news reports of moving supply chain there. Or you recently opened up an Apple Store. How should we think about that? Because it just seems like you're really not full market share equally around the world. Tim Cook : Yes. There are several markets, as I alluded to before. India is one of those, where our share is quite low. It did improve from the year-ago quarter. Our business roughly doubled over that period of time. And so we feel very good about the trajectory. We are doing a number of things in the area. We put the online store there, for example, and last quarter was the first full quarter of the online store. And that has gotten a great reaction to it and has helped us achieve the results that we got to last quarter. We're also going in there with retail stores in the future. And so we look for that to be another great initiative and we continue to develop the channel as well. And so there's lots of things, not only in India but in several of the other markets that you might name where our share is lower than we would like. And I -- again, I would also say, even in the developed markets, when you look at our share, definitely, everybody doesn't have an iPhone, not even close. And so, we really don't have a significant share in any market. So, there's headroom left even in those developed markets where you might hear that. James Suva : Congratulations to your team and employees. Tim Cook : Thank you, Jim. Appreciate that. Tejas Gala : Thank you. A replay of today's call will be available for two weeks on Apple Podcast, as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are (888) 203-1112 or (719) 457-0820. Please enter confirmation code 1828830. These replays will be available by approximately 5 :00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at (408) 974-2414. Financial analysts can contact me with additional questions at (669) 227-2402. Thank you again for joining us. Operator : Once again, that does conclude today's conference. We do appreciate your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,021	2	2021Q2	2021Q2	2021-04-28	4.249	4.712	4.921	5.31	6.29449	26.24	24.51	Operator : Good day, and welcome to the Apple Q2 FY 2021 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Tejas Gala, Director, Investor Relations and Corporate Finance. Please go ahead. Tejas Gala : Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the Company's business results of operation. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I'd now like to turn over the call to Tim for introductory remarks. Tim Cook : Thanks, Tejas. Good afternoon, everyone, and thanks for joining the call today. Apple is proud to report another strong quarter, one where we set new March quarter records for both revenue and earnings, besting our year ago revenue performance by 54%. Reflecting both the enduring ways our products have helped our users meet this moment in their own lives as well as the optimism consumers seem to feel about better days ahead, we set new March quarter records in every geographic segment, and success was broadly distributed across our product categories. Mac and Services delivered all-time record results, and we set new March quarter records for iPhone and Wearables, Home and Accessories. To provide some color on our results, let's turn to our product categories. We saw a very strong performance for iPhone, which grew 66% year-over-year driven by the strong popularity of the iPhone 12 family. With unmatched 5G capability, the best camera system ever in an iPhone and advanced durability from ceramic shield, this family of devices is popular with both upgraders and new customers alike. And just last week, we unveiled an all-new purple finish for iPhone 12 and 12 Mini. As has been the case throughout the pandemic, iPad and Mac continue to be critically important tools for our customers. Over the past year, tens of millions of iPads and Macs have been deployed to help students learn, creators create, and to enhance remote work in all of its forms. This has helped iPad grow very strong double digits to its highest March quarter revenue in nearly a decade. On Mac, fueled by the M1, we set an all-time revenue record continuing the momentum for the product category. In fact, the last three quarters for Mac have been its three best quarters ever. Last week, both iPad and Mac took a big step forward. We debuted a radically redesigned brand-new iMac designed around M1's unmatched capabilities, and we've brought M1 to iPad for the first time in the new iPad Pro with 5G capability and a Liquid Retina XDR display. It was a quarter of sustained strength for Wearables, Home and Accessories, which grew by 25% year-over-year. Apple Watch is a global success story, and the category set March quarter records in each geographic segment, thanks to strong performance from both Apple Watch Series 6 and Apple Watch SE. It's an exciting and busy period ahead for Wearables, Home and Accessories with the launch of the next-generation Apple TV 4K and our newest accessory, AirTag. AirTag builds on the powerful and incredibly useful Find My experience, helping users privately and securely keep track of the items that matter most to them. Third-party accessories and products can also make use of the Find My network guaranteeing a great experience no matter what products you choose to use. Turning to Services. We achieved growth of 27% year-over-year and set new records for services in each of our geographic segments. We continue to enhance and improve our current service offerings from Apple Music to Apple News while continuing to launch new services that enhance our customers' lives. Just last week, we introduced Apple Card family which reinvents how you can share credit cards and build credit together. We also announced Apple Podcast subscriptions, a global marketplace for listeners to discover premium content from their favorite creators and storytellers. While we're on the topic of services, in many ways, this quarter showed the unique value to customers created by Apple's belief in the deep integration of hardware, software, and services. Across our products and throughout our software ecosystem, we continue to deploy industry-leading new tools to protect users' fundamental right to privacy. In addition to the App Store privacy nutrition labels that we discussed on last quarter's call, we're proud to have launched the full implementation of App Tracking Transparency. This powerful, yet simple idea gives users a choice over how their data is used and shared across the apps that they love and use every day. No matter what device you enjoy it from, it is a milestone period for Apple TV+, racking up many new award nominations and wins, including its first Oscar nominations. Ted Lasso, in particular, has been recognized with a multitude of awards and nominations including most recently, an AFI Program of the Year Recognition, Writers Guild of America Awards, and a clean sweep at the Critics Choice Awards. Apple TV+ also continues to be a place where we can tell stories that matter and lift up important voices and experiences like our new upcoming content partnership with Malala, our latest original documentary special The Year the Earth Changed narrated by the legendary David Attenborough and released to commemorate Earth Day. This is, of course, just one example of how Apple lives its values and operationalizes the idea that to whom much is given, much is expected. To begin with our environmental efforts, just last week, we marked a milestone Earth Day on multiple fronts. In addition to the progress we've made in our own efforts to achieve our pledge of a net zero carbon footprint by 2030 across our entire supply chain and use of our products, we're proud to play a role in the growing ripple change taking place across the private sector. As of this month, 110 of our suppliers have joined us in our renewable energy commitment, and we will bring online nearly 8 gigawatts of new clean energy, the equivalent of taking 3.4 million gas-powered vehicles off the road each year. Through Apple's $4.7 billion in green bonds and related efforts, we've supported transformative environmental projects around the world from clean energy initiatives in China to two of the world's largest onshore wind turbines in Denmark to 180-acre solar project outside Reno, Nevada and many more. We're also keenly focused on how this wave of green innovation can lead to equitably shared prosperity. Through our new $200 million Restore Fund, we're helping local and rural communities around the world build sustainable industries around working for us creating opportunities and removing up to 1 million metric tons of carbon from the atmosphere every year. And here in the United States, we started a green impact accelerator, investing and supporting minority-owned businesses at the forefront of environmental fields. As we look forward to WWDC, we're taking new steps to support and foster the unmatched community of developers we work with here in the United States and around the world. I'm particularly excited about our inaugural Entrepreneur Camp for black founders and developers. Building on the success of our Entrepreneur Camp program, which we began in 2019, this program gives this profoundly innovative community of developers the chance to develop next-level technical skills through hands-on technology labs, and with our partners at Harlem Capital, it also shares insights and mentorship on building and scaling an app business. We were proud to announce that we have expanded and accelerated our commitment to the U.S. economy. Over the next five years, we will invest $430 billion, creating 20,000 jobs in the process. The investments will support American innovation and drive economic benefits in every state, including a new North Carolina campus and job creating investments in innovative fields like silicon engineering and 5G technology. Looking forward, whether you're running a business or just hoping to see family again after more than a year, it's tempting at this moment to let hope about the end of the COVID-19 pandemic outstripped clear-eyed realism about the challenges we still face. In many places around the world, new waves of infections driven by even more infectious variants of the virus are driving new lockdowns. Instead of simply assuming that the end is in sight, we at Apple are doing our part to make it a reality. Beginning with an enduring and uncompromising commitment to the health and safety of our teams, and extending well beyond our walls into the communities where we work. We also want to do everything we can to connect users to life-saving vaccinations that are in ever greater supply. Through Apple Maps, for example, we now showcase vaccine site locations here in the United States, building on our maps of testing locations in many countries around the world. It's worth remembering for much more than financial reasons or year-ago compares, just how we felt at this time last year when everything we knew had to change. Plains set grounded, entire business districts were empty and silent. People left groceries or care packages sitting in the garage or in the hall overnight in recognition of all that we didn't know and therefore, had to imagine. Thanks to researchers and scientists, doctors and nurses, everyone who can put a shot in an arm and even just check a name off a list. We have reached new days of hopeful resolve. Our work is not done, but as I said a year ago, while we can't say for sure how many chapters are in this book, we can have confidence that the ending will be a good one. With that, I'll hand things over to Luca. Luca Maestri : Thank you, Tim. Good afternoon, everyone. We are extremely pleased to report record results for our March quarter despite continued uncertainty in the macro environment. We've been operating in new ways for over a year, and we could not be more proud of the way our team continues to execute and innovate at unprecedented levels. Our revenue reached a March quarter record of $89.6 billion, an increase of over $31 billion or 54% from a year ago. We grew very strong double digits in each of our product categories, with all-time records for Mac and for Services and March quarter records for iPhone and for Wearables, Home and Accessories. We also set new March quarter records in every geographic segment with growth of at least 35% in each one of them. Products revenue was a March quarter record of $72.7 billion, up 62% over a year ago. As a result of this level of sales performance and the unmatched loyalty of our customers, our installed base of active devices reached a new all-time record in each of our major product categories. Our services set an all-time record of $16.9 billion, growing 27% over a year ago. We established new records in each geographic segment and in most service categories. I will provide more details about the performance of our services business later. Company gross margin was 42.5%, up 270 basis points from last quarter driven by cost savings, a strong mix and favorable foreign exchange. Products gross margin was 36.1%, growing 100 basis points sequentially also thanks to cost savings and FX, partially offset by seasonal loss of leverage. Services gross margin was 70.1%, up 170 basis points sequentially and mainly due to a different mix. Net income of $23.6 billion, diluted earnings per share of $1.40 and operating cash flow of $24 billion were all March quarter records by a wide margin. Let me get into more detail for each of our revenue categories. iPhone revenues had a March quarter record of $47.9 billion, growing 66% year-over-year as the iPhone 12 family continue to be in high demand. Performance was consistently strong across the world as we grew strong double digits in each geographic segment and set March quarter records in most markets we track. Thanks to the exceptional loyalty of our customer base and strength of our ecosystem, our active installed base of iPhones reached a new all-time high. In the U.S. the latest survey of consumers from 451 Research indicates customer satisfaction of over 99% for the iPhone 12 family. Turning to Services. We reached an all-time revenue record of $16.9 billion with all-time records for the App Store, cloud services, music, video, advertising and payment services. Our new service offerings, Apple TV+, Apple Arcade, Apple News Fitness+ as well as the Apple One bundle, continue to scale across users, content and features and are contributing to overall services growth. The key drivers for our services business all continue to move in the right direction. First, our installed base growth has accelerated and reach an all-time high across each major product category. Second, the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the March quarter, with paid accounts increasing double digits in each of our geographic segments. Third, paid subscriptions continued to show strong growth. During the March quarter, we added more than 40 million paid subs sequentially, and we have now reached more than 660 million paid subscriptions across the services on our platform. This is up $145 million from just a year ago and twice the number of paid subscriptions we are only 2.5 years ago. Finally, we're adding new services that we think our customers will love, while also continuing to improve the breadth and quality of our current service offerings. For example, Apple Arcade launched its biggest expansion yet adding incredibly fun games to the catalog, including new exclusive Arcade originals, along with two entirely new categories, App Store greats and timeless classics. Apple Pay continues to expand geographically, launching in Mexico and in South Africa, bringing our payment service to six continents. Wearables, Home and Accessories grew 25% year-over-year to $7.8 billion, setting new March quarter revenue records in every geographic segment. Apple Watch continues to extend its reach, with nearly 75% of the customers purchasing Apple Watch during the quarter being new to the product. We're very excited about the future of this category and believe that our integration of hardware, software and services uniquely positions us to provide great customer experiences in this category. Next, I'd like to talk about Mac. We set an all-time revenue record of $9.1 billion, up 70% over last year, and grew very strongly in each geographic segment with all-time revenue records in Europe and rest of Asia Pacific and March quarter records in the Americas, Greater China and Japan. This amazing performance was driven by the very enthusiastic customer response to our new Macs powered by the M1 chip. iPad performance was also outstanding with revenue of $7.8 billion up 79%. We grew very strongly in every geographic segment with an all-time record in Japan and a March quarter record in rest of Asia Pacific. Both Mac and iPad are incredibly relevant products for our customers in the current working and learning environments, and we are delighted that the most recent surveys of U.S. consumers from 451 Research measured customer satisfaction at 91% for Mac and 94% for iPad. With this level of customer satisfaction, and with around half of the customers purchasing Mac and iPad during the quarter being new to that product, the active installed base for both products continues to grow nicely and reached new all-time highs. In the enterprise market, customers across many industries are accelerating their adoption of iPhone 12 and 5G as a key platform for the future of their business. Delta Airlines, for example, is putting iPhone 12 and 5G connectivity into the hands of flight attendants so they can provide the best passenger service possible as air travel rebounds. Openreach in the U.K. has started equipping tens of thousands of field engineers with iPhone 12 to speed up their deployment of broadband services to homes around the country. And UCHealth, a large health care provider in Colorado, was able to reduce per patient vaccination time from 3 minutes to only 30 seconds largely by moving from PC stations to iPhones. This has allowed their staff to rapidly scan and register new patients and vastly increase their daily vaccination capacity. Let me now turn to our cash position. We ended the quarter with over $204 billion in cash plus marketable securities. We issued $14 billion of new term debt and retired $3.5 billion of term debt leaving us with total debt of almost $122 billion. As a result, net cash was $83 billion at the end of the quarter. This strong position allows us to continue to invest confidently in our future, while also returning value to our shareholders. We are innovating and investing at an unprecedented pace, including accelerating our investment in the United States with our new commitment to contribute more than $430 billion and 20,000 jobs to the country over the next five years. As we continue to execute at an extremely high level, we were also able to return nearly $23 billion to shareholders during the March quarter. This included $3.4 billion in dividends and equivalents and $19 billion through open market repurchases of 147 million Apple shares. We continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time. Given the confidence we have in our business today and into the future, our Board has authorized an additional $90 billion for share repurchases. We're also raising our dividend by 7% to $0.22 per share, and we continue to plan for annual increases in the dividend going forward. As we move ahead into the June quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance, but we are sharing some directional insights assuming that the COVID-related impacts to our business do not worsen from what we are seeing today for the current quarter. We expect our June quarter revenue to grow strong double digits year-over-year. However, we believe that the sequential revenue decline from the March quarter to the June quarter will be greater than in prior years for two reasons. First, keep in mind that due to the later launch timing and strong demand, iPhone only achieved supply-demand balance during the March quarter. This will cause a steeper sequential decline than usual. Second, we believe supply constraints will have a revenue impact of $3 billion to $4 billion in the June quarter. We expect gross margin to be between 41.5% and 42.5%. We expect OpEx to be between $11.1 billion and $11.3 billion. We expect OI&E to be around $50 million and our tax rate to be around 14.5%. Finally, reflecting the approved 7% dividend increase I just mentioned, today, our Board of Directors has declared a cash dividend of $0.22 per share of common stock payable on May 13, 2021, to shareholders of record as of May 10, 2021. With that, let's open the call to questions. Tejas Gala : Thank you, Luca. [Operator Instructions] Operator, may we have the first question, please? Operator : [Operator Instructions] We'll take our first question from Shannon Cross with Cross Research. Please go ahead. Shannon Cross : Tim, I had sort of a big picture question on iPhone. I'm just curious, there are so many different things happening in this cycle, 5G, pandemic. How are you thinking about the opportunity for refreshing the installed base and attracting new customers? And are you seeing lives shorten given some of the programs that are being put out there by the carriers and by yourself? Just kind of maybe big picture, if you can talk about what you're seeing in terms of iPhone out there in the market. Tim Cook : Sure, Shannon. We saw double-digit increases on a year-over-year basis on both the new to iPhone and upgraders. So -- and in fact, in the March quarter, there was actually a record number of upgraders for a March quarter. And so we like what we see. It's obviously the early days of 5G. Different countries are in different points. But penetration is still -- on a global level, is still low at this point. And so a lot of the 5G upgrades will be in front of us, not behind us. You see in China, things have moved quickly to 5G. They're moving quickly in the United States. But a lot of the other regions are slower to adopt and slower to gain coverage in 5G. Shannon Cross : Okay. And then, Luca, can you talk about gross margin? I mean 42% is higher than it's been that I can kind of remember actually at this point, so maybe if you talk about the drivers of gross margin, and maybe if there were any offsets from higher component costs or the logistics costs that obviously were overshadowed by currency and other things? Luca Maestri : Yes, Shannon. Yes, we did 42.5% during March, and we've guided to similar, slightly lower levels for June. So for March, we were up 270 basis points sequentially, really driven by three major factors. Cost savings, which has been good for us during the cycle. A really strong mix, a strong mix on iPhone, but in general, across all product categories, and that obviously was helpful. And foreign exchange sequentially, again, from December to March, was favorable 90 basis points. So that helped as well. So those are the three major factors there. As we transition into June, as you know, that we will expect some level of deleverage but that will be offset by cost savings. Foreign exchange doesn't have much of an impact as we go from March to June. Operator : We'll now take our next question from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani : I have two as well. First one, just on services, I think 90 days ago, the expectation was that line item would decelerate a little bit into the March quarter. It turned out it actually accelerated for us. I'd like to just understand what do you think drove that acceleration specifically? And is mid-20% sort of the growth norm as we go forward for Services? Luca Maestri : So Amit, -- our Services business did better than what we were expecting when we had the last call in January. It was stronger across the board. One of the things that we've noticed is that throughout COVID was that obviously digital services have done very well. And then we've had a couple of categories like Apple Care because many of the points of sale and stores were closed and advertising because of the reduced economic activity that were negatively affected during COVID. During the March quarter, we've seen a return to growth on Apple Care and obviously, we've reopened a lot of the stores during the course of the quarter. And advertising, obviously, consumer sentiment has improved and advertising is coming back. And so the combination of these factors really delivered this very, very strong performance during the March quarter. As we look ahead, as you know, we don't provide specific guidance for our product categories. But in general, I talked during our prepared remarks, I mean, there are a number of things that we always look at around the Services business, how many new paid accounts do we have, what number of new subscriptions do we get that -- above all, is our installed base continuing to grow? Are we adding new services? Are we improving the quality of the existing services? And so, when we look at all these fundamental vectors of our Services business, obviously we feel very good. We feel very good about it. Amit Daryanani : Got it. That's helpful. And then, Tim, if I could follow up with you, it seems like engagement with iPhones and Apple devices generally has gone up materially over the last 12 months. And I don't think replacement cycles, at least in the data we see, has shrunk or changed that much at the end of the day. I'm wondering does that combination of increased usage, replacement cycles haven't changed, end up in iPhones potentially growing on a multiyear basis, because I would imagine if I'm using something more I have to replace it more often. So, I'd love your perspective on it. Tim Cook : Yes. We're clearly seeing strong performance in both the new to iPhone or the switcher component and upgraders as I'd mentioned before. And in fact, the upgrader was the best March quarter that we've ever had in -- and so that speaks to what you're seeing, I think, a lot. It's difficult with just this far into the cycle to make a statement about the cycle in general because keep in mind that we just launched midway through the Q1 period. And so, we've only been operating for 4.5 months or so. But clearly, we like what we see right now a lot. If you look at how the iPhone did around the world, we had the top five models of smartphone in the U.S., the top selling, the top two in urban China, four out of the top five in Japan, the top four in the U.K., and the top six in Australia. And so, it was sort of across the board in some really key countries, we did really, really well. I do think that the 5G cycle is important, and we're in the early days of it, frankly. Operator : We'll take our next question from Katy Huberty from Morgan Stanley. Please go ahead. Katy Huberty : This was a pretty unbelievable quarter, and investors are going to ask about the sustainability of current demand trends, especially as you lap some of the benefits from COVID in areas like services and Mac later this year. So I know you don't guide beyond or provide an outlook beyond the next quarter. But can you talk from a high level over the next year, which segments do you see the opportunity to maintain strong revenue growth versus where is it reasonable to assume there will be some digestion as consumers shift their spending priorities? And then I have a follow-up for Luca. Tim Cook : If you sort of look at the different products, iPhone, I've already mentioned some of the great momentum that we had there. Keep in mind that the compare that we're running to would be the quarter, the Q2 of last year is the quarter that China would have entered a shutdown first and then the rest of the world entered the shutdown in middle part of March. And so part of the growth is compared -- is the comparison point. But that said, the results were fabulous across the board. The shortages that Luca spoke about in the color that he provided on the future, affect primarily the iPad and the Mac. And so we'll have some challenges in there, and challenges in meeting the demand that we've got. The demand feels very strong right now. Both on the Mac side, you have the combination of M1 and work from home and remote learning. And then iPad, you've got remote learning and work from home as well. And the product that we just announced is really killer, the iPad Pro with the M1 in it. And so there's a lot of great things of the strength of the product cycle in addition to the trends that we're seeing in the marketplace. And where this pandemic will end, it seems like many companies will be operating in a hybrid kind of mode. And so it would seem that work from home and the productivity of working from home will remain very critical. If you look at Wearables then, the watch had a fabulous quarter. And I still think we're in the early innings on the watch. The number of new -- people that are new to the watch is almost three out of four. And so this is a long way from being a mature market. And so -- and then the Services by itself has really accelerated. And so all in all, we feel very, very good. Katy Huberty : And then, Luca, as I look at inventory plus vendor nontrade receivables, that grew only about 8% this quarter which is a big deceleration from last quarter. Should we read into that as a leading indicator for how we should think about the revenue growth deceleration in the business as the world normalizes? Or were there some supply disruptions during the quarter that caused you to drain inventory and create that tightness that you're talking about for June? Luca Maestri : No. On -- as you think about the June quarter, Katy, I would point you to what we said in our prepared remarks around the two factors that will influence our normal seasonality, right? One is the fact that iPhone, we launched iPhone later than usual during this cycle. And so we reached supply-demand balance only during the March quarter, which makes obviously the sequential decline steeper than usual. And then this $3 billion or $4 billion of supply constraints that Tim just said, primarily on iPad and Mac. So as you look at your model and you obviously can look at our numbers that we've done in the past, I think you can try to gauge that. From a channel inventory standpoint, we did what we normally do during a March quarter. So we reduced inventory as it's typical on iPhone. We exited within our target range. So I would say that on the inventory side, it was pretty straightforward Obviously, given that the supply constraints are on the iPad and on the Mac, we wish we had more inventory of iPad and Mac. But this is all a function of high demand for all our products. Operator : We'll take our next question from Wamsi Mohan with Bank of America. Wamsi Mohan : Tim, your content offerings are still at very compelling price points. And you've seen other content providers, whether it be Spotify, Hulu, Netflix, all announced price increases recently. I'm just wondering how you're thinking about pricing as it pertains to your offering here? And if you could share any stats around the uptake of TV+ paid subs that would be great. And I have a follow-up for Luca. Tim Cook : TV+ -- let me start with TV+. TV+ is going very well. As you know, the objective and the philosophy that we've had on TV+ is to create high-quality original content and to be one of the most desired platforms for storytellers. And I see that happening day by day as we sign more shows and more storytellers including Malala as I'd mentioned in my opening comments. To date, we've received -- the Apple originals have received 352 award nominations and had 98 wins. And this is from Oscar nominations to Indie awards to Critic Choice awards and all the rest. And we've got some shows that are -- have gotten significant buzz like Ted Lasso and The Morning Show and Defending Jacob and many others. And so we feel really good about where we are. We're not releasing subscriber numbers. But we feel good about where we are. In terms of other services and pricing, I don't have anything to announce today. We try to give the customer a great value. And we feel that we're doing that in the -- with the prices that we've got. And we'll see where we go from here. Wamsi Mohan : Okay. As my follow-up, Luca, on the June quarter guide, when you talk about the sequential decline being a little bit about perhaps the 13% or low-teens percent that we've seen historically. Are the supply constraints of the $3 billion, $4 billion impact included in that? Or is that in addition to sort of the more than average sequential decline that you're referring to? And any color on what specifically is driving the supply constraints of the subcomponent level? Luca Maestri : So when you look at our normal seasonality, and you've mentioned a percentage that is really an average of several years, what we're saying is that we believe that the sequential decline this year is going to be higher than that. And it's a combination of the two factors, right? One is the timing of the launch and then the very high demand for iPhone during the March quarter. And the $3 billion to $4 billion supply constraints that we mentioned. Yes, and the constraints come from the semiconductor shortages that are affecting many, many industries, and it's a combination of the shortages as well as the very, very high level of demand that we are seeing for both iPad and Mac. For Mac, for example, if you just -- just to keep it into context, the last three quarters of Mac have been the best three quarters ever in the history of the product, right? So we are experiencing an incredible level of demand, which certainly is favored by working from home and learning from home environment, but also by the incredible amount of new products and innovation that we put into the products that we launched during the last couple of quarters. Operator : We'll take our next question from Aaron Rakers with Wells Fargo. Aaron Rakers : Congratulations on the great quarter. I wanted to go back to iPhone. As we think about the iPhone 12 cycle, appreciating that you guys don't give actual shipment numbers, it would appear though that the mix has been quite healthy. So I'm wondering if you could give us any context of what in this cycle you're seeing in terms of the mix relative to past cycles? Is that mix sustainable? I'm just trying to understand kind of the mix of -- within the iPhones and how that's driving, I guess, particularly gross margin. And I have a follow-up. Tim Cook : Aaron, let me give you a little color on that. The iPhone 12 of the -- the iPhone 12 family are or more broadly affect all iPhones. The iPhone 12 is the most popular. But we did see very strong sales of the Pro portion of the family as well, the Pro plus the Pro Max. And so the revenue that you're seeing is a function of unit growth and revenue per unit growth. Does that help? Aaron Rakers : Yes. Can you give any context of how that might have changed this cycle relative to the prior cycles? Have we seen kind of a structural change to the higher band of the product category that you believe can be sustained going forward? Tim Cook : We don't predict going forward other than for our internal use. But we're really happy with the results. Aaron Rakers : Okay. And then as a quick follow-up back to the supply constraints. I guess it's hard to kind of see again, looking forward beyond this quarter. But what's your best assessment of when maybe the supply constraints could ease? Do you have any views of just the industry in general, overcoming some of the supply constraint dynamics? Tim Cook : Most of our issue is on legacy nodes. And so on legacy nodes, there are many different people, not only in the same industry, but across other industries that are using legacy nodes. And so in order to really answer that question on -- accurately, we would need to know the true demand from each of these players and how that's going to change over the next few months. And so it's very, very difficult to give you good answer. I think we have a good handle on our demand. But what everybody else is doing, I don't know. And so we will do our best. That's what I can tell you. Operator : We'll take our next question from Harsh Kumar with Piper Sandler. Harsh Kumar : Congratulations on a very nice quarter. Question on semis supply as well. You just beat by a substantial margin on the top line in the March quarter. I'm curious what went in your favor to be able to secure that kind of supply that you were able to beat by, I think it was $11 million or so? And then I had a follow-up. Tim Cook : We did not have a material supply shortage in Q2. And so how are we able to do that? You wind up collapsing all of your buffers and offsets. And that happens all the way through the supply chain. And so that enables you to go a bit higher than what we were expecting to sell when we went into the quarter 90 days ago. Harsh Kumar : That's very helpful. And then for my follow-up, I know there's a lot of moving parts, Tim, but with the economy sort of reopening here in the U.S., and you mentioned about supply constraints possibly on the Mac and the iPad. I was curious if I can get your thoughts, maybe just color-wise, on what you would expect for those two categories, Macs and the iPads in the second half of this year. Tim Cook : Well, we don't predict a rev guide to product-level detail. We're not even guiding to the top level at this point because of COVID. And so I'll sidestep that question. But I would point to Luca's point earlier about the shortages and those shortages primarily affect iPad and Mac. So, we expect to be supply gated, not demand gated. Operator : We'll take our next question from Krish Sankar with Cowen & Company. Please go ahead. Krish Sankar : Congrats on a fantastic quarter. First question for Tim or Luca. The Greater China sales were very strong in the March quarter. Can you give some color on what drove this strength. Which hardware products or services enabled the solid outperformance in China. And then I had a follow-up. Tim Cook : We were very pleased with our performance in China. We set a March quarter revenue record and grew strong double digits across each of the product categories. And so the revenue growth was broad. We've been especially pleased by the customer response in China to the iPhone 12 family. And as I had mentioned earlier, you have to remember that China entered the shutdown phase earlier in Q2 of last year than other countries. And so they were relatively more affected in that quarter, and that has to be taken into account as you look at the results. As I mentioned earlier, we had the top two selling smartphones in urban China, so we're very proud of that. And iPad, Mac both had enormously positive quarters with great strength across the board. And we're seeing a strong reception to the new iPad Pro as a well that we just announced. A lot of great comments and about 2/3 of the people buying Mac and iPad were buying them for the first time. And so we're attracting some new customers in China, which is really important to us. Krish Sankar : All right. That was very helpful, Tim. And then maybe as a follow-up, I kind of have like a big picture philosophical question, and to the extent you can answer this. One of the concerns many investors have is about the overhang of regulatory risk. I understand it's very hard to handicap that. But I'm kind of curious do you think giving more public disclosure on your Services business like App Store would help alleviate some of those concerns? Or do you think that's revealing a lot of competitive details. But kind of curious to know what you think on services disclosure. Tim Cook : I think with the regulatory questions and scrutiny, we have to make sure that we're telling our story and why we do what we do, and we're very focused on doing that. If we feel that more disclosure would help, we would obviously move in that direction. The App Store and other parts of Apple are not cast in concrete. And so we can move and are flexible with the times. For example, in the App Store, as you know, just a couple of quarters ago, we lowered the commission rate for small developers to 15%. So that was an example of moving with the times, and we've gotten a great, great reception to that. And so we continue to learn, and I think it's very important that we're very clear about why we do what we do. The idea behind curating the App Store in order to get the privacy and security that our customers want, I think is very important, and we have to convey that in a very straightforward manner. Operator : We'll take our next question from Kyle McNealy with Jefferies. Kyle McNealy : One of the things we've been positive about is how growing iPhone sales can pull along Watch and AirPods sales as well as customers shop the whole store. But you mentioned through COVID that accessories do much better in a physical store environment, and that's been hard due to the shutdowns, obviously. So my question is, have you seen any improvement in the attach rate for Watch and AirPods with iPhone? And can it get a lot better from here as the environment gets closer to normalization? Tim Cook : I think we get a lot of benefit from our stores when they're open and are fully operational. And we're in better shape for parts of Q2 than we were previously, but we're still operating with a limited operational model in many stores and there's still some stores today that are closed like stores in Michigan and stores in France and so forth. And so I think it will take some amount of time, but my view would be as the stores get back up to speed, fully up to speed, we should be able to increase some of the accessory sales. Although I think we're doing fairly well at the moment. So it's not something that we're not doing well. Online has been much more beneficial and much more productive than we would have guessed going into this. Operator : We'll take our next question from David Vogt from UBS. David Vogt : Congratulations on a great quarter. Maybe if I could just ask a question. I know it's early days, but any commentary color from maybe the developer community on App track -- on ATT and kind of what the initial feedback and data might look like that you could share with us? Tim Cook : Our ATT's focus is really on the user and giving the user the ability to make a decision about whether they want to be tracked or not. And so it's putting the user in the control. Not Apple, not another company, but the user of where it should be. And so that's really the focus of it. And the feedback that we've gotten from users, both before it went live when it was in the planning stages and so forth and after, has been tremendous. And so we're really standing up on behalf of the consumer here. David Vogt : Maybe just as a quick follow-up, Tim. Can you kind of discuss any sort of -- what the downloads have looked like. I know it just rolled out earlier this week and sort of the acceptance by the consumer at this point. Any sort of metrics that you can share with us, whether it's sort of an opt-in or opt-out sort of view from the consumer perspective? Tim Cook : I don't even know the answer to that. It's not something that we would have predicted beforehand. And frankly, even if it's very low of people that don't want to be tracked, it's worth doing because of the -- those people should have the -- should make their own mind up, whether they would like to be tracked or not. Operator : We'll take our next question from Samik Chatterjee from JPMorgan. Samik Chatterjee : I have a couple and just wanted to get into the performance by geography here a bit, and Europe really exceptional results, particularly for this time of the year. Tim, I know you mentioned some of the 5G iPhone upgrades are in front of you, and I would assume Europe is kind of in that category. But curious to hear or maybe if you can double-click on what's driving the exceptional growth here in Europe, and like are consumers moving to 5G phones even though some of the service provider plans are not rolled out? Or are we still expecting that to be much more in front of us? Luca Maestri : Samik, I'll take that one. You're right. I mean we had great performance in Europe. We grew 56% during the quarter. And it was probably one of the geos where we actually saw results that were better than even our own expectations. We grew very strong double digits across the board, every product category. Particularly, I would say, iPad and Mac, they really was very, very strong. Again, obviously, Europe has been affected by lockdowns. More than most parts of the world, the lockdowns have lasted longer than here in the United States, for example. Tim was mentioning there are places in Europe still today where our stores are closed. And fortunately, we have a very strong online business that has really helped us. But working from home, learning from home, limited entertainment options, that has all played in our favor. Keep in mind that our Europe segment is a very broad version of Europe because it includes Western Europe, which has done very, very well. And then Eastern Europe and it goes into the Middle East. Even India is part of Europe. And those emerging markets have done incredibly well, significantly better than company average. So very, very pleased with some of the results in India, for example, Russia, Middle East in general. So it's been very broad, both across product categories and across countries in Europe. Samik Chatterjee : Okay. Got it. And just a quick follow-up for you, Luca. I think overall, just wanted to understand the implication of the investment plans that you announced recently for the U.S., the $430 billion over a multiyear period, getting some questions from investors of how to think about the implication on the run rate of operating expenses for the Company. Luca Maestri : If you remember, we announced back in 2018 that we were making a very sizable commitment to the United States. We -- at the time we announced $350 billion of investment over the following five years. And during these three years, since then, we've overachieved on those commitments, and we felt it was the right time to update these type of investments. And they span from, obviously, the investment that we made directly at Apple. For example, we talked about the creation of 20,000 new jobs at Apple over the next five years in the United States. And of course, our business has grown. And so our commitment, for example, to U.S. suppliers grows over time, and that shows in the higher numbers. In the meantime, we've got into new businesses, for example, Apple TV+, a lot of the content that we developed for our TV service is produced here in the United States. And so that's additional investment here in the United States. From an OpEx standpoint, I think as you've seen this year, we're getting a lot of leverage. This is one of those years we said many times, sometimes our OpEx grows faster than revenue, and there are some other cycles where the opposite happens. We are growing revenue this year much faster than our OpEx increase. But we want to continue to make all the necessary investments into the business. We will never under invest in our business. And so you will continue to see the fact that we -- we will continue to grow our operating expenses, particularly on the R&D side, which continues to be the core of the Company. Tejas Gala : Thank you, Samik. A replay of today's call will be available for two weeks on Apple Podcast as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are (888) 203-1112 or (719) 457-0820. Please enter confirmation code 5799138. These replays will be available by approximately 5 :00 p.m. Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at (408) 974-2414. Financial analysts can contact me with additional questions at (669) 227-2402. Thank you again for joining us. Operator : Thank you. That does conclude today's Apple Q2 FY 2021 Earnings Conference Call. We thank you for your participation, and you may now disconnect.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,021	3	2021Q3	2021Q3	2021-07-27	5.125	5.6	5.49	5.72	6.32229	26.5	26.05	Operator : Good day, and welcome to the Apple Q3 FY 2021 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Tejas Gala, Director, Investor Relations and Corporate Finance. Please go ahead. Tejas Gala : Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the Company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed Annual Report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I'd like now to turn the call over to Tim for introductory remarks. Tim Cook : Thanks, Tejas. Good afternoon, everyone. Today, Apple is reporting a very strong quarter with double digit revenue growth across our product and services categories, and in every geographic segment. We set a new June quarter revenue record of $81.4 billion, up 36% from last year, and the vast majority of markets we tracked grew double digits, with especially strong growth in emerging markets including India, Latin America, and Vietnam. Total retail sales also set a June quarter record, and almost all of our retail stores have now opened their doors. This quarter saw a growing sense of optimism from consumers in the United States and around the world, driving renewed hope for a better future and for all that innovation can make possible. But as the last 18-months had demonstrated many times before, progress made is not progress guaranteed. An uneven recovery to the pandemic and a Delta variant surging in many countries around the world have shown us once again, that the road to recovery will be a winding one. In the midst of that enduring adversity, we are especially humbled that our technology has continued to play a key role in keeping our customers connected. Just last month, it was great to be back with our teams and customers for the opening of our newest retail store in Los Angeles, our Apple Tower Theater. It was a hopeful reminder of the energy and sense of community, shared spaces bring and how appreciative we all are now of the simple privilege of talking to one another face to face. As we look forward to more in-person interactions in the future, we're doubling down on innovation, and doing all we can to help chart a course to a healthier and more equitable world. I'll have more to say about our work in those areas a bit later on. But first, let's turn to our product and services categories. For iPhone, this quarter saw very strong double digit growth in each geographic segment, and we continue to be heartened by our customer's response to the iPhone 12 lineup. We're only in the early innings of 5G, but already its incredible performance and speed have made a significant impact on how people can get the most out of our technology. Customers love iPhone 12 for its superfast 5G speeds, A14 Bionic chip and Adobe vision camera never seen before in a phone. Users continue to rely on iPad and Mac to work, learn, create and connect. iPad had its highest June quarter in nearly a decade, while Mac set an all-time June quarter record. We've seen a great response to the new iMac and iPad Pro, both powered by the M1 chips exceptional speed and power efficient performance. The iMac’s remarkable thin design and vibrant colors have made it a favorite for users everywhere. And the iPad continues to be an incredibly versatile tool in our user's toolbox, inspiring creativity and connection and keeping us entertained and productive in equal measure. It was another very strong quarter for wearables, home and accessories, which set a new June quarter record, while helping people find more ways to stay entertained, healthy and connected at home and on the go. Apple Watch remains a go to choice for users to stay on top of their health and reach their fitness goals. And our newest accessory AirTag began shipping to an enthusiastic response from customers, making the find my network more useful than ever, while protecting user privacy. Turning to services, which set a new all-time revenue record as we continue to roll out innovative new features and programming. We're proud to be the recipients of 35 Emmy Nominations this year, which speaks to the quality of our programming, and an enthusiastic reception from customers and critics alike. Apple TV+ users are loving series like Mythic Quest, and anticipating groundbreaking films like Coda, which premieres next month. And of course, Ted Lasso kicked off season two just last week, and continues to win over viewers with its heartwarming message about the power of community, compassion and hope. We also introduced Apple Podcast subscriptions, a global marketplace for users to discover exclusive content and support their favorite creators. And we launched spatial audio for Apple Music, a cinematic listening experience that promises to change how music fans listen, and musicians create even more immersive, layered, and beautiful songs. Last month, we shared many exciting new features at WWDC. But more powerful than any of them was the incredible showing of developers from all walks of life and around the world. The new tools we announced will help developers harness cutting edge technologies, like augmented reality, reach new users and customize their experience on the App Store, or learn to update or invent an app with Swift, Apple's powerful and intuitive programming language. Today's investments in education and coding translate to tomorrow's small businesses and groundbreaking new apps. The next act of an app economy, already creating jobs and opportunity around the world. In June, a new study by the analysis group found that it was another record year for App Store developers, whose combined billings and sales increased by 24% to $643 billion in 2020. The app economy continues to be an incredible engine of prosperity and opportunity, fueled by the ceaseless striving for developers to make apps that enrich people's lives. Much like the developer community, we are diehard optimist, about technology's potential to help people live happier, healthier and more fulfilled lives, goals that shine through with powerful new updates coming to iOS, iPad OS, Mac OS, and Watch OS this fall. That begins with innovative new features that help users stay connected with one another, like share play and spatial audio for FaceTime, or disconnect when they need a break like focus, which limits distracting notifications when you're winding down for bed or concentrating at work. And new productivity features make iPad an even more useful tool for multitasking, helping users navigate across apps, split their screen or use quick note to capture a thought the moment inspiration strikes. In the health space, our new health sharing feature will make it easier than ever to securely share your health data to share your health data with loved ones. That includes new capabilities like walking steadiness, which uses sensors to assess user stability doing everyday tasks, and recommends exercises to improve stability and avoid a fall. In the belief that privacy is a fundamental human right, we share new features in iOS 15 that continue to drive our progress forward, from mail privacy protection, which stops invisible pixels and an email from tracking your mail activity to App Privacy Report, which helps users check on the apps they've granted permission to use their personal data. We also introduced some incredible next generation technologies coming to the accessibility space. From assistive touch, which helps people with limb differences navigate Apple Watch to new voiceover capabilities to help blind and low vision users, accessibility remains a bedrock principle for us, in the simple belief that the best technology for the world should be the best technology for everyone. But the responsibility to be a force for good in the lives of others extends beyond the technology we made, so the teachers and students shaping our future. This quarter as part of our racial equity and justice initiative, we awarded innovation grants to engineering schools at four historically black colleges and universities to expand their coursework, scholarships and internship opportunities in hardware engineering and silicon chip design. We see education as a great equalizing force, and we're more dedicated than ever to supporting the educators, advocates and students lining the path and leading the way. That includes the 350 swift student challenge winners, we recognized at this year's WWDC. If you ever need a dose of hope or inspiration, I can't say enough about our students' scholarship winners, whose apps bring so much good into the world, from teaching other young people to code to helping volunteers deliver groceries to people at high risk of COVID-19. Young people's innovations remind us that our collective future is bound up in the next generations' passion for solving global challenges, and of the responsibility we have to join them in building a better world. Turning to our own backyard, we're continuing to press forward in our efforts to help bring more affordable housing to the Bay Area and across California. This month, we shared that we've contributed more than $1 billion to help first time homeowners and construct 1000s of new affordable housing units across the state. And we're continuing to stay focused on supporting the global response to the pandemic and delivering the best products and services for people. Our greatest source of inspiration is a technology itself, but how people use it in their own lives, in ways great and small, to write a novel or to read one, to care for an ailing patient or see a doctor virtually, to track their heart rate on a jog or to train for the Olympics. Every day, I'm grateful for the dedication of our teams to the simple mission of creating technology that improves people's lives. And I want to thank everyone at Apple for the purpose and passion they bring to that mission. With that, I'll hand it over to Luca for a deeper dive on our performance this quarter. Luca Maestri : Thank you, Tim. Good afternoon, everyone. We're very pleased to report record June quarter financial results, which reflect the importance of our products and services in our customers lives and our strong underlying operating performance. Our revenue reached a June quarter record of $81.4 billion, an increase of nearly $22 billion or 36% from a year ago. We grew double digits in each of our product categories, with an all-time record for services, and June quarter records for iPhone, Mac, and Wearables, Home and Accessories. We also set new June quarter records in every geographic segment with very strong double digit growth in each one of them. Products revenue was a June quarter record of $63.9 billion, up 37% over a year ago. This level of sales performance, combined with the unmatched loyalty of our customers drove our installed base of active devices to a new all-time record. Our services set an all-time revenue record of $17.5 billion up 33% over a year ago, with June quarter records in each geographic segment. Company gross margin was 43.3%, up 80 basis points from last quarter driven by cost savings and a higher mix of services, partially offset by seasonal loss of leverage. Products gross margin was 36% down 10 basis points sequentially, a seasonal loss of leverage was almost entirely offset by cost savings. Services gross margin was 69.8% down 30 basis points sequentially, mainly due to a different mix. Net income of $21.7 billion, diluted earnings per share of $1.30, and operating cash flow of $21.1 billion were all June quarter records by a wide margin. Let me get into more detail for each of our revenue categories. iPhone revenue set a June quarter record of $39.6 billion growing 50% year-over-year and exceeding our own expectations, as the iPhone 12 family continued to be in very high demand. Performance was consistently strong across the world, and we grew very strong double digits in each geographic segment, setting June quarter records in most markets we track. Our active installed base of iPhones reached a new all-time high, thanks to the exceptional loyalty of our customer base and the strength of our ecosystem. In the U.S., the latest survey of consumers from 451 research indicates iPhone customer satisfaction of 97% for the iPhone 12 family. Turning to services, as I mentioned, we reach an all-time revenue record of $17.5 billion with all-time records for cloud services, music, video, advertising and payment services, and June quarter records for the App Store and Apple Care. Our newest service offerings Apple TV+, Apple Arcade, Apple News+, Apple card, Apple Fitness+ as well as the Apple One bundle, continue to scale across users, content and features and are contributing to overall services growth. The key drivers for our services business all continue to move in the right direction. First, our installed base of devices reached an all-time high across each geographic segment. Second, the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the June quarter in each geographic segment, and paid accounts increased double digits. Third, paid subscriptions continue to show strong growth. We now have more than 700 million paid subscriptions across the services on our platform, which is up more than 150 million from last year, and nearly four times the number of paid subscriptions we had only four years ago. And finally, we're adding new services that we think our customers will love, while also continuing to improve the breadth and quality of our current services offerings. For example, during WWDC in June, we previewed our new iCloud+, and Apple Wallet features, which we believe will create a more secure and differentiated customer experience. Wearables, home and accessories grew 36% year-over-year to $8.8 billion, setting new June quarter revenue records in every geographic segment. We continue to improve and expand our product offerings in this category. This quarter, we began shipping our new Apple TV 4K with a redesign Siri remote and our brand new air tags, and the customer response to both products has been very strong. In addition to its outstanding sales performance globally, Apple Watch continues to extend its reach, with nearly 75% of the customers purchasing Apple Watch during the quarter being new to the product. For Mac, despite supply constraints, we set a June quarter record of $8.2 billion up 16% over last year, with June quarter revenue records in most markets we track around the world. It is remarkable that the last four quarters for Mac have been its best four quarters ever. This exceptional level of sales success has been driven by the very enthusiastic customer response to our new Macs, powered by the M1 chip, which we most recently brought to our newly redesigned iMac. iPad performance was also strong with revenue of $7.4 billion up 12% in spite of significant supply constraints. During the quarter we also started shipping our new iPad Pro powered by the M1 chip and customer response has been outstanding. Both iPad and Mac have taken computing to the next level, and when you combine their performance over the last 12-months, they're now the size of a Fortune-50 business, thanks to the best product lineups we've ever had, very high levels of customer satisfaction and a loyal growing installed base. In fact, around half of the customers purchasing Mac and iPad during the quarter were new to that product. And in most recent surveys of U.S. consumers from 451 research customer satisfaction was 92% for Mac and 95% for iPad. In enterprise, our customers are excited about the superior performance, battery life and security that the new M1 Macs bring. MassMutual for example, is offering M1 MacBook Pro to all of its employees and equipping all conference rooms with M1 Mac minis in preparation for return to work. And with its incredible performance and affordable entry price, the MacBook Air with M1 is gaining rapid adoption among many leading enterprise organizations. Italgas, Italy's largest natural gas company, which will soon be using its extensive network to distribute renewable gases is replacing every employee's Windows laptop with the new MacBook Air powered by Apple's M1 chip to bring the latest technology to its workforce. And Grab, Southeast Asia's leading super app that provides transportation, food delivery and digital payment services is adding M1 MacBook Air to its company-wide M1 Mac deployment. Let me now turn to our cash position, we ended the quarter with $194 billion in cash plus marketable securities. We retired $3 billion of term debt and increased commercial paper by $3 billion, leaving us with total debt of $122 billion. As a result, net cash was $72 billion at the end of the quarter. As our business continued to perform at a very high level, we were also able to return $29 billion to shareholders during the June quarter. This included $3.8 billion in dividends and equivalence, and $17.5 billion through open market repurchases of 136 million Apple shares. We also began a $5 billion accelerated share repurchase program in May, resulting in the initial delivery and retirement of 32 million shares. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near-term, we're not providing revenue guidance. But we are sharing some directional insights, assuming that the COVID-related impacts to our business do not worsen from what we're projecting today for the current quarter. We expect very strong double digit year-over-year revenue growth during the September quarter. We expect revenue growth to be lower than our June quarter year-over-year growth of 36% for three reasons. First, we expect the foreign exchange impact on our year-over-year growth rate to be three points less favorable than it was during the June quarter. Second, we expect our services growth rate to return to a more typical level. The growth rate during the June quarter benefited from a favorable compare, as certain services were significantly impacted by the COVID lockdowns a year ago. And third, we expect supply constraints during the September quarter to be greater than what we experienced during the June quarter. The constraints will primarily impact iPhone and iPad. We expect gross margin to be between 41.5% and 42.5%. We expect our OpEx to be between $11.3 billion and $11.5 billion. We expect OI&E to be around zero, excluding any potential impact from the mark to market of minority investments and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividends with $0.22 per share of common stock payable on August 12, 2021, to shareholders of record as of August 9, 2021. With that, let's open the call to questions. Tim Cook : Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please. Operator : Thank you. Our first question comes from Katy Huberty from Morgan Stanley. Please go ahead. Katy, your line is open. Please check your mute function. We'll take our next question from Chris Caso with Raymond James. Chris Caso : Thank you. Good morning. Just dig into the commentary on guidance a little bit. Just starting with the fact that last year, obviously there was a later launch of iPhone than what was typically seen in other years. Could you talk us through that, and perhaps some of the other products, what may be different as compared to last year? Luca Maestri : Well, as I explained that, first of all, we are expecting to grow very strong double digits, that's I think Chris the starting point here. We expect this very strong level of growth that we've experienced during the course of the year, to continue into the September quarter. We said that the growth rate is going to be below 36%. And I've listed three factors. The first factor is that the dollar continues to be favorable on a year-over-year basis in the sense that it's weakened against most currencies on a year-over-year basis. But that benefit is going to be about three points less in the September quarter than what we've experienced during the June quarter, because the dollar strengthened against most currencies in recent weeks. Second, I mentioned that the services growth rate that we've experienced in the June quarter 33%, that's significantly higher than what we've had in recent history. And that was due to the fact that there were a couple of services categories, namely, our advertising business and Apple Care, that were significantly impacted a year ago, because of the COVID lock downs. And therefore, they're relatively easy compare in the June quarter. So we don't expect that to continue into the September quarter. And so we expect to see significant growth in services, but not to the level that we've seen in June. And then I mentioned that the supply constraints that we've seen in the June quarter will be higher during the September quarter. Back in when we talked here three months ago, we said that we were expecting supply constraints for the June quarter between $3 billion and $4 billion, to affect primarily iPad and Mac. We were able to mitigate some of those constraints during the June quarter, and so we came in at a number that was slightly below the low-end of that range that we accorded at the beginning of the quarter. But we expect that number to be higher for the September quarter. And so when you put all that together, again, very strong double digit growth for September, with this caveat, that I just mentioned. Chris Caso : Thank you. If I could follow-up with regard to the supply constraints, and do you expect those supply constraints to persist through the December quarter as well? What effect will that have on the holiday selling season? And then, in conjunction with that, what additional costs are you absorbing because of the supply constraints? Is that having an effect on gross margins or just product costs in general, as you perhaps pay a little more to get more supply? Tim Cook : Chris, it's Tim. In terms of the cost, we're paying more for freight than I would like to pay. But component costs continue in the aggregate to decline. In terms of supply constraints, and how long they will last, I don't want to predict that today. We're going to take it sort of one quarter at a time. And as you would guess we'll do everything we can to mitigate whatever set of circumstances were dealt. Luca Maestri : And Chris, on the cost side, as I mentioned during my comments, our results for gross margins for the June quarter 43.3%, we really saw some really nice cost savings during the quarter. And I think you've seen that we provided guidance for 41.5% to 42.5% for September, which is obviously a level that we are very pleased with. Chris Caso : Right. Thank you. Tejas Gala : Thank you, Chris. Can we have the next question please? Operator : Thank you. We'll take our next question from Jim Suva with Citigroup Investment Research. Please go ahead. Jim Suva : Thank you very much, and congratulations to you and your global team for great operations during a challenging time. Tim and Luca, I just have one question and either of you or both of you could figure out who's best to answer it. But we look at a world of pretty unprecedented whether it be COVID, the Delta variant, China floods, supply chain, components. Just wondering for your, like R&D and innovation, is it being materially impacted by that such where a normal cadence is unfair? Or, is it kind of happening during a slow time of year where you're able to empower people to work remotely, and still have the typical innovations and product launches that you've had historically in the past? Tim Cook : Jim, the company has been incredibly resilient. The employees are really doing double duty. And I could not be more pleased with the cadence that we're coming out with new things. As you can see from the software announcements that we made at WWDC, and the corresponding launches of the software that we plan on in the fall, and then all of the products that we've been able to bring out over the last 12 to 18-months, it's amazing. So I'm very pleased with it. Tejas Gala : Thanks, Jim. Can we please the next question please? Jim Suva : Thank you. Congratulations again. Tim Cook : Thank you. Operator : Thank you. We'll take our next question from Shannon Cross with Cross Research. Shannon Cross : Thank you very much, Tim, I'm curious, what have you learned from this iPhone cycle regarding customer preferences and pricing and maybe subscriptions and that? And if there's a difference, if you could talk about on a geographic basis. Thanks. Tim Cook : If you look at our results in Q3, Shannon, we had strong double digit growth for switchers and for upgraders. And, in fact, it was our largest upgrade quarter for Q3 ever. And so we feel really, really great about both categories. And as Luca kind of said, during the preamble or opening comments, our results are really strong for iPhone around the world. And so it's been a very, very strong cycle. And yet we're -- the penetration on 5G is obviously still very, very low. And so we feel really good about the future of the iPhone. Shannon Cross : Okay. And maybe if you can talk a bit about China, up 58%, where are you seeing the growth? What are you hearing from customers there? Obviously 58% is not sustainable, but how sustainable is the strength? Thank you. Tim Cook : It was an incredibly strong quarter, it set a June quarter revenue record for Greater China for us. And so we're very proud of that. And, doing the best job we can to serve customers there. We had a particularly strong response to the 12 Pro and the 12 Pro Max. Those results were particularly strong. But if you look at the balance of our products, we also set June quarter records for Wearables, Home and Accessories, for Mac and for services. So it was sort of an across the board strength. And we're seeing plenty of new customers come to the market. For example, Mac and iPad, about two-thirds of the customers who bought in the last quarter were new to that product. For the Apple Watch that number was 85%. And so, we could not be happier with the results. Shannon Cross : Was 85% China or overall? Tim Cook : 85% was China. I was talking about specifically the numbers of reference were specifically for China. Luca Maestri : And Shannon, for the world with the Watch is 75%. Shannon Cross : Right. Great. Thank you so much. Tejas Gala : Thanks, Shannon. Can we have the next question, please? Operator : Thank you. We'll take our next question from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani : Perfect. Thanks a lot for taking my question, I have two, as well. I guess first off Luca, I was hoping you could maybe talk a little bit more about the gross margins and maybe the expectations you laid out for September, I think sequentially implies down 100 basis points or so. So can you just touch on what are the puts and takes that would be helpful, because I think historically, September tends to be a flattish maybe even up a little bit gross margin number for you folks? Luca Maestri : Yeah, I think it's important to go back to the Q3 results, it's 43.3%. And one of the things that I mentioned is that in addition to getting really good cost savings on a sequential basis, we also had a very high mix of services as part of the total. And particularly with advertising doing really, really well, because of the rebound that we saw from COVID lockdowns a year ago. So as we move forward sequentially, we do expect a different mix and so that that drives the guidance that we provided which again, as you know, is significantly higher than just a year ago, for example. A year ago, we were at 38.2%, so almost 400 basis points of expansion on a year-over-year basis. And so, I think it's important to take that into account, just a different mix. Amit Daryanani : Got it. No, absolutely. I don't think anyone expected gross margins to be north of 40 this quickly for you folks. So that is impressive. As a follow-up on services, and I know you've called out the 33% growth this quarter, as a bit of an aberration that compares easier. But if you look at your services growth rate over the last four quarters, let's just say, what do you think is enabling this growth? Is it you're able to have a higher ARPU more monetization of the installed base? Or, is the installed base growing and choose which one's bigger? And then over time, how do you think those two components stack up for you? Luca Maestri : It's a combination of multiple factors. Obviously, the fact that our installed base continues to grow, and it sets new all-time highs all the time, obviously, it gives us a larger opportunity all the time. And second, we have more and more people that are engaged in our ecosystem, both transacting for free, which is a very large number, and people that are willing to pay for some of the services. And that percentage of people that are paying for our services continues to grow nicely. I mentioned, we grew double digits again this quarter. So that obviously helps on the revenue side. And of course, we continue to increase both the quality and the quantity of the services. As you know, during the last few years, we've launched a lot of new services from Apple TV+, Fitness+, Apple Arcade, News+, of course, the Apple Card. And so these are businesses that we are scaling right now, and so all that additional revenue helps. And I think it flows through our growth rates, as you said, during the last four quarters we are well into the mid-20s. So I think it's obviously very nice for us to see. Amit Daryanani : Perfect. Thank you. Tejas Gala : Thanks, Amit. Can we have the next question, please? Operator : Thank you. We’ll hear next from Katy Huberty with Morgan Stanley. Please go ahead. Katy Huberty : Thank you. Good afternoon. Can you hear me okay? Luca Maestri : Yes, we can. Katy Huberty : Okay, good. So first question, there's a debate in the market around how much Apple benefited from the pandemic, given increased spend in areas like Mac and App Store. But of course, you've mentioned over the past several quarters that there are other areas that were limited by the pandemic, and store closures and less foot traffic. When you net out all the puts and takes was your business helped? Or, was it hindered by the pandemic? Luca Maestri : Well, of course, Katy, we don't have the crystal ball that tells us exactly what these different variables, how they impacted our business. We do know that I would say on the positive side of the ledger, obviously, especially during the periods of extreme lockdowns, digital services did very well because entertainment options were limited. And so obviously, our digital services did really, really well. Obviously with more people working from home, more people studying from home, we know that iPad and Mac demand was very, very strong. On the other side we add certain services like advertising because of the reduced economic activity, Apple Care because our stores were closed, they were affected negatively. And certain products like the iPhone or the Watch that are may be more complex types of sales because of the complexity of the transaction. They were also affected because so many points of sale were closed all around the world, not only our stores but also our partner stores. It’s difficult for us to gauge because we've been constrained for quite a long period of time. And the reality is that maybe the new normal after we exit COVID may be different from the past. For example, maybe there's going to be hybrid models around work, for example. And so, it's difficult to tell you on a net basis what that is. Clearly, and this is very fluid because it tends to change over time. I can certainly tell you that we're all looking forward to a COVID free world, I think that would be very good for us and for our customers as well. Katy Huberty : And just to follow-up on iPhones, specifically, if you look historically, after a really strong product cycle, which you've experienced this year with iPhone 12. iPhone revenues come under pressure, because the upgrade rate slows, the mix often shifts to the lower end of the portfolio. Is it fair to assume a similar trend will play out over the next year? Or if not, time… [ph] Tim Cook : Katy, it's Tim. We're not predicting the next cycle. But I would point out a few things. One is we have a very large and growing installed base. As you know with the iPhones passed a billion active devices earlier this year. Two, we have loyal and satisfied customers. The customer set we're seeing on the new iPhones are just amazing. It's just jaw dropping. And the geographic response is pervasive across the world. In the U.S., we have the top three selling models. In the UK, we have four out of the top five. In Australia, we have the top two. In Japan, we have the top three. In urban China, we have the top two. And so the response from customers all around had been great. Obviously, the product itself is amazing. The 12 lineup was a huge leap that introduced 5G and have A14 Bionic and a number of other fantastic features that customers love. The next thing I think to consider is that we're in the very early innings of 5G. If you look at our 5G penetration around the world there's only a couple of countries that are in the double digits yet. And so that's an amazing thing, nine months or so into this. And the last thing is we're going to continue to deliver great products. We're going to continue to do what we do best is integrate hardware, software and services together into an amazing experience. And so those are the things that I would consider if I were coming up with forecast. Katy Huberty : That's great color. Thank you. Tejas Gala : Thanks, Katy. Can we have the next question, please? Operator : Thank you. We'll take our next question from Harsh Kumar with Piper Sandler. Harsh Kumar : Yeah. Hey, guys, first of all, congratulations, fantastic execution that resulted in consistency for your results. Tim, this is actually perfect timing for this question. You talked about your installed base of a billion odd units. I was curious if you could help us understand how all of that installed base is? And the reason that I'm asking this question is we're clearly seeing people upgrade to 5G phones. That's the case and that continues, that could be a larger force than most other forces for your revenues to continue to grow as people migrate to the 5G family of phones. So I was curious, if you can shed light on how the upgrades are happening and then also, how old that base is? Tim Cook : Yeah, what I would tell you is first of all, it's difficult to answer your question precisely. But what I would tell you is on both switchers and upgraders, we did extremely well in Q3. Both were up strong double digit, and the geographic representation of iPhone year-over-year comps looks extremely well. And so we're really pleased with it. I would remind you that the billion number that I quoted also was iPhone, where we quoted a number earlier in the year in the January call, I believe, of 1.65 billion devices is the total active devices just for clarification. And so the net is very strong switchers, very strong upgraders, best upgrade quarter for the June quarter that we've seen. And we feel really great about the momentum. But at the same time, we recognize that the 5G penetration is quite low around the world. And, they're very, very low. We're at the front end of this. Harsh Kumar : Fair enough. For my follow-up, Apple's probably one of the largest semiconductor companies in the world. How does Apple determine what's strategic, and something that Apple wants to make itself versus non-strategic? And also was curious, there's a lot of -- well, it's public news now the Arm is getting acquired by Nvidia. And I was just curious how Apple views that? Is that something that's beneficial to Apple or not meaningful or negative? Tim Cook : I think that acquisition has lots of questions that people are asking, and I'll sort of leave that up to everyone else. And in terms of us and how we decide to make silicon, we ask ourselves, if we can do something better, if we can deliver a better product, if we can buy something in the market. And it's great, and it's as good as what we could do, we're going to buy it. We will only enter where we believe we have a ability to do something better, and therefore make a better product for the user. And so the M1 is a great example of that. We have the ability within our silicon team to deliver product that we feel is appreciably better than we could buy. And so, we've taken our great hardware and software expertise, and combine those and have brought the M1 out. And the response to the M1 has been unbelievable. It's powering Mac sales that are constrained, it's powering now iPad, which also has constraints on it. And so, that's how we look at whether we should enter into a market or not. Harsh Kumar : Thank you. Tim Cook : Thanks for the question. Tejas Gala : Thank you. Can we have the next question, please? Operator : Certainly, we will take our next question from Krish Sankar with Cowen & Company. Please go ahead. Krish Sankar : Hi, thanks for taking my question, and congrats on the strong results. First one for Luca, you mentioned services growth should normalize in the September quarter. And I understand the last few quarters' services business was strong, driven by work from home, et cetera. So what is the normalized growth rate for the services business as folks return back to the office in this post-COVID world? And then I have a follow-up. Luca Maestri : Well, I think, you can go back several quarters and try to do a bit of an average and that's what we were talking about. Of course, there's always a bit of variability around results, right. But certainly, we haven't done 33% in years and so that was a bit of an anomaly. And again, I explained it's around a couple of the businesses that had a relatively easy compare during the June quarter. So our services growth has been for many, many quarters in strong double digits and we feel confident around that level. Krish Sankar : Got it. And then just a follow-up for Tim or Luca. I think, Tim, you mentioned in your prepared comments that in September quarter, there's going to be greater impact on supply constraints on the iPhone and iPad. So I'm kind of curious, this is the first time I heard you talk about component shortages impacting the iPhone. Can you be more specific? Is it display drivers? Or, what exactly is the choke point on the supply? Tim Cook : The majority of constraints we're seeing are of the variety that I think others are saying that are I would classify as industry shortage. We do have some shortages, in addition to that, that are where the demand has been so great and so beyond our own expectation that it's difficult to get the entire set of parts within the lead times that we try to get those. So it's a little bit of that as well. As I said before, I think probably maybe with the basis of your question, sort of the latest nodes, which we use in several of our products have not been as much of an issue. The legacy nodes are where the supply constraints have been on the silicon. Krish Sankar : Thanks, Tim. Tim Cook : Yeah. Tejas Gala : Thanks, Krish. Can we have the next question, please? Operator : Thank you. We’ll hear the next question from David Vogt with UBS. David Vogt : Great. Thank you guys for the question. So maybe just a point of clarification. So based on the data and the comments about upgraders and switchers being strong, as well as emerging markets were relatively strong in the quarter. What does that specific set of data points strength mean for the iPhone portfolio? And I guess my question around that is, when you think about switchers and price points, I think last year, you launched the SE2 to really address maybe some of the lower price point markets like the emerging markets. So does that mean thinking about the portfolio going forward, there's less of a need for a lower priced product going forward, and the current portfolio and the new cycle going forward would be more high-end in nature, as we currently have today? And then I have a follow-up. Tim Cook : David, we had an incredible quarter for the emerging markets in Q3. We set June quarter records in Mexico, and Brazil, and Chile, in Turkey, and UAE, and Poland and Czech Republic, India. Obviously, in China, as I've talked about before, Thailand, Malaysia, Vietnam, Cambodia, Indonesia, I could go on in the name a few more, it's a very long list. And so those results are for the entire line of products that we have. And keep in mind, we still do have SE in the line, we launched it a year ago, but it's still in the line today. And it’s sort of our entry price point. And so, I'm pleased with how all of them are doing. And I think we need to sort of that range of price points to accommodate the types of people that we want to accommodate. So we've put something for the entry buyer who really wants to get into an iPhone, and then something for the pro buyer who wants the very best iPhone that they can buy. And I think that's true in the emerging markets as good as it's true in the United States or other developed markets. David Vogt : No, that's helpful. I appreciate that, Tim. So does that mean sort of the emerging market buyer that wants to get into the iPhone is looking for a device that has 5G capability as well? Obviously, we're early innings in a lot of markets, or how do we think about that over the intermediate to longer-term in terms of consumer preference for 5G in those markets, if available from an infrastructure perspective? Tim Cook : In most of the markets I read, it is really, really, really early on 5G, really early. But I think the top end buyer is buying for the future as well, because they may hold their phone for two years or longer in some cases. So, 5G becomes an important part of their buying decision. David Vogt : Great. Thank you very much. Tejas Gala : Thank you. Can we have the next question, please? Operator : Thank you. We'll take our next question from Ben Bollin with Cleveland Research Company. Ben Bollin : Good evening, everyone. Thanks for taking the question. I wanted to start Luca or Tim, could you walk us through a little bit about how you think Apple One bundles are influencing the trajectory of services and the economics? And then a second part on services, I'm curious how you think IDFA is developing and influencing the trajectory of the advertising business within services? Tim Cook : In terms of Apple One as you know, we're offering Apple One because it makes enjoying our subscription services easier than ever before, including Apple Music and Apple TV+ and Apple Arcade and iCloud and more. And so we really put the customer at the center of that and have recently began to remind people about Apple One in a way that we probably waited a few months before doing that. And so, I'm very pleased with what we're seeing on Apple One right now. I think it's a great ramp for the future services. And more importantly, it's a great customer benefit because many of our customers like to try out more than one of these services, and it allows them to do that with one easy bundle and subscription service. In terms of IDFA or the advertising in general, I take it your question is around ATT. With ATT we've been getting quite a bit of customer positive reaction to being able to make the decision on a transparent basis about whether to be tracked or not. And it seems to be going very well from a user point of view. Tejas Gala : Thank you. Can we have a question, please? Operator : Thank you. We'll take our next question from Wamsi Mohan with Bank of America. Wamsi Mohan : Yes, thank you, I have two as well. To begin with Luca, you noted significant product revenue deleverage but yet your product gross margins were roughly flat, you know that cost savings. Can you maybe talk about whether these are tactical in nature, or more structural like vertical integration that will continue to drive benefits to product gross margins? And on services side, you noted several times about the strength in ad growth, which is obviously very high margin contributor, but the sequential trajectory on services margins was flat. So what were some of the offsets there? And I’ve a follow-up for Tim. Luca Maestri : Yeah. On the product side, I talked about cost savings. Tim mentioned that, maybe on the freight side, we're seeing some level of cost pressure that is a bit out of the norm, at this point in the cycle. For everything else, for all the major commodities and components, we continue to see a very typical cycle where we are getting good cost savings on a sequential basis. And so far, it's been very good as you can tell from the absolute level of gross margins, because on the product side, we're up more than 600 basis points on a year-over-year basis. So it feels something that we've been able to accomplish, and we were able to maintain, at least in the near-term, nothing that was abnormal during the quarter or a one-off in nature. It was pretty structural. On the services side, again, up a lot on a year-over-year basis. So, the baseline has gone up a lot. The sequential decline, as you said, it was very, very small. And as I mentioned several times in the past, we have a very large services portfolio with very different margin profiles in our services. And so even a slight change in mix can drive some sequential differences, and this was the case this quarter, just a different mix. I mentioned for example, that Apple Care has rebounded. And so the relative success of our services in the marketplace can drive some slight changes in gross margins. Again, step back for a second, 69.8% gross margin we're very, very happy with where we are with the services margin trajectory. Wamsi Mohan : Okay. Thanks, Luca. And Tim, there is increasing regulatory focus in China in particular on some of the Chinese companies. It's not a direct impact of Apple, but how should investors handicap the indirect impact, given some of these companies are pretty large contributors to Apple's App Store revenues? And also, is there -- are you seeing any impact at all from these? And is the limiting of the usage of some of these apps influencing how people are either interacting with your devices, or is there any other ancillary impact that you're seeing? Thank you. Tim Cook : For the quarter, as you can see we grew 58% so it was a strong quarter. And embedded in that was a quarterly record for services, which includes the App Store world. So, we're seeing strength in China. The economy has really bounced back there fairly quickly from COVID. In terms of the regulatory focus, what we are focusing on from our angle is to serve users there and make sure that they're very satisfied with the products and services that we’re showing. And we work with a lot of different companies to ensure that. So that's our focus. Tejas Gala : Thank you, Wamsi. A replay of today's call will be available for two weeks on Apple Podcasts as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter a confirmation code 9766068. These replays will be available by approximately 5 PM Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial Analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator : Thank you. That does conclude today's conference. Thank you for your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,021	4	2021Q4	2021Q4	2021-10-28	5.62	5.642	5.767	5.85	null	26.48	30.65	Operator : Good day, and welcome to the Apple Q4 Fiscal Year 2021 Earnings Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead. Tejas Gala : Thank you. Good afternoon, and thank you for joining us. Speaking today first is Apple’s CEO, Tim Cook; and he’ll be followed by CFO, Luca Maestri. After that, we’ll open the call to questions from analysts. Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the Company’s business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I’d like to now turn the call over to Tim for introductory remarks. Tim Cook : Thanks, Tejas, and good afternoon, everyone, and thank you for joining the call today. A year ago, I spoke to you about the atmosphere of uncertainty in which we were living and the way it had come to define our daily experience, both as people and as a company. Today, much has changed, profoundly so. And while we are still living through unprecedented times, we are encouraged by progress around the world. I’m grateful to our teams who have stayed resolutely focused on our customers and the pursuit of innovation on their behalf. We’ve aimed to help our customers navigate the world as it is while empowering them to create the world as it can be. Whether it’s public health workers managing vaccination campaigns on iPhone or students returning to classrooms full of iPads or family staying connected over FaceTime, it is an honor to know that what we make matters and to see that reflected in the world and in our performance. This fiscal year, we reported $366 billion of revenue, which represents 33% annual growth. We also achieved more than 20% growth across all of our product categories and in every geographic segment. And today, Apple is reporting another very strong quarter. Demand was very robust, and we set a new September quarter record of $83.4 billion, up 29% from last year and in line with what we discussed on our last call, despite larger-than-expected supply constraints. We estimate these constraints had around a $6 billion revenue dollar impact, driven primarily by industry-wide silicon shortages and COVID-related manufacturing disruptions. Even so, we set an all-time record for Mac and quarterly records for iPhone, iPad, Wearables, Home and Accessories, representing 30% year-over-year growth in products. Our services business performed better than we expected, where we hit an all-time record of $18.3 billion and grew 26% year-over-year. And we set quarterly records in every geographic segment with strong double-digit growth across the board. During fiscal 2021, we earned nearly one-third of our revenue from emerging markets and doubled our business in India and Vietnam. We are optimistic about the future, especially as we see strong demand for our new products. At the end of the September quarter, we introduced our iPhone 13 lineup as well as the Apple Watch Series 7, iPad and iPad mini, all of which represents significant advances. The iPhone 13 and iPhone 13 mini, alongside the iPhone 13 Pro and Pro Max, are setting a new standard with their superfast performance, advanced camera systems, longer battery life and brilliant Super Retina displays. Customers are loving the ninth generation iPad, which features a beautifully sharp display and twice the storage of the previous generation, as well as the new iPad mini, with its ultra portable design and impressive speed and performance. And we’ve been thrilled with the reviews that Apple Watch Series 7 has earned for its larger display, faster charging and refined design. And just last week, we introduced the completely reimagined MacBook Pro powered by the extraordinary M1 PRO and M1 Max chips. These are our most powerful notebooks ever with game-changing performance and battery life, and the world’s best notebook display. We think customers are going to love MacBook Pro, whether they’re editing video in Final Cut Pro or making music in Logic Pro and so much more. They’ll be able to do things never before possible on a notebook. We also announced our all-new AirPods that feature spatial audio and industry-leading sound, longer battery life and an all-new design. For the home, we added three new colors to our HomePod mini lineup, which offers seamless integration across Apple’s products and services. We also announced a new subscription tier to Apple Music called Apple Music Voice, which offers subscribers access to the services catalog of 90 million songs all through the power of Siri. Across the board, teams at Apple continue to drive unmatched innovation through the seamlessly integrated hardware, software experience we’ve long prided ourselves on. iOS 15 and iPadOS 15 have created more ways than ever to stay productive, whether choosing Focus to avoid distractions or Quick Note to capture a thought. macOS Monterey offers new ways to connect with friends and family, get more done and work fluidly across Apple devices. And watchOS 8 has made Apple Watch even more powerful and more ways than ever to stay active and to track your health on the go. We’ve never had a more diverse range of services for our customers to choose from, and we’ve been very encouraged by our performance, which reflects growing customer enthusiasm and satisfaction. In just its first two years, Apple TV+ has already proved itself to fans around the world. And I want to congratulate the incredible actors, writers, storytellers, producers and everyone else whose behind-the-scenes work has made that success possible. This quarter, Apple TV+ won 11 Emmys, including the Award for Outstanding Comedy Series for Ted Lasso. That show has continued to bring light and laughter to fans all over the world with its boundless optimism and beloved cast of characters. We couldn’t be more proud of our entire lineup of content from the gripping second seasons of The Morning Show and Truth Be Told to our newest programs, Swagger, which is out tomorrow. The response has been incredible. This quarter also saw major updates to Fitness+, including the addition of new activities like meditation and pilates, and the announcement of group workouts, a feature that brings fitness and friends together. We also shared that Fitness+ will soon be available in 15 new countries, bringing workouts for every age and skill level to millions more people around the world. And those are just two of the services our customers are loving. This quarter, Apple Card won a J.D. Power award for customer satisfaction in its very first year of eligibility. The App Store continues to help people find the apps they depend on to stay productive, creative and entertained. And on Apple News, we launched a News Partner Program that expands Apple’s support for journalism while creating an even better business opportunity for publishers. As we continue to support our customers around the world, we’re glad to report we’ve opened several new Apple Stores. This quarter, we opened a beautiful store in Changsha, which is our first store in the Hunan province of China. We also just opened our third store in Istanbul. And we recently added a store in the Bronx, which means we are now in all 5 boroughs of New York City. All of our stores are now open worldwide and have been for 7 weeks. As we enter our busiest time of year, I particularly want to share my gratitude for our retail teams. Customers have never relied on our products more, and our retail teams have truly answered the call. We meet our customers where they are with many ways to shop through our online and retail stores and can help them choose the best product for them and get it up and running. We are also excited about our education initiatives. This month, we introduced the Everyone Can Code Early Learners program, offering free resources, which helps students and elementary school learn coding. We see education not only as a fundamental good in its own right but is a great equalizing force. A world where all people can access a quality education isn’t just a smarter world. It’s a more equitable one. That desire to create a more just an equitable world is the guiding principle behind our Racial Equity and Justice Initiative. This quarter, Apple shared plans to expand our $100 million investment by an additional $30 million. Those funds will be used in a number of ways, including the creation of a new global Hispanic-serving institution equity and innovation hub. The hub will dramatically expand the technology and resources for students in the STEM fields. Those programs join our ever-expanding work with historically black colleges and universities, including the now 45 community coding centers and regional hubs, serving underrepresented communities across the United States. This month, we were also happy to welcome the inaugural class of developers and entrepreneurs to the Apple Developer Academy in Detroit. The academy is Apple’s first in the United States and is designed to help prepare students for jobs in the thriving iOS app economy, which supports more than 2.1 million jobs across all 50 states. In August, we shared our impact accelerators first cohort of black, Latinx and indigenous-owned businesses whose pioneering work in green technology and clean energy serves many of the communities most impacted by climate change. More broadly, we are already carbon-neutral as a company. And this quarter, we made new strides towards reaching our goal of carbon neutrality across our entire supply chain and the life cycle of our devices by 2030. We’ve made significant product advances in this area. iPad and iPad mini now come with 100% recycled aluminum enclosure. The antenna on iPhone 13 is made up of upcycled plastic water bottles, which marks an industry-first. And as our customers are seeing when they purchase iPhone 13, we’ve redesigned the packaging to eliminate that outer plastic wrap, which will allow us to avoid using 600 metric tons of plastic. This brings us closer to removing all plastic in our packaging by 2025. We’ve also made good progress toward our goal to one day make our products without taking anything from the earth. With Apple Watch Series 7, for example, 99% of the rare earth elements we use are recycled. Ahead of COP26, I’m also pleased to report that we have more than doubled the number of our suppliers who have committed to becoming carbon neutral by 2030. We’re very encouraged to see the growth in this area, and we will continue to drive those changes in the supply chain in the months and years to come. We’ve never viewed our environmental work as a side project. Teams across Apple are pushing this work forward in the same spirit of innovation we bring to our products and services. We are determined to be a ripple in the pond that drives a far greater change. From the pandemic to climate change to an equity and injustice, global challenges won’t abide solitary solutions, and we feel a deep sense of responsibility to help. We are incredibly proud of the product lineup we have going into the holiday season, and we are encouraged by the customer response we’ve seen. And while we cannot know exactly which path the pandemic will take the world down in the months to come, we feel quite confident that this new year will be driven by the values that guide us and by the innovation that defines us. With that, I’ll hand it over to Luca for a deeper dive on our performance this quarter. Luca? Luca Maestri : Thank you, Tim. Good afternoon, everyone. We are pleased to report very strong financial results for the September quarter, capping a record-setting fiscal year 2021. We set a September quarter revenue record of $83.4 billion, an increase of nearly $19 billion or 29% from a year ago, despite larger-than-expected supply constraints. We also reached new Q4 records in every geographic segment with strong double-digit growth in each one of them. And it was a record September quarter for both, products and services. On the product side, revenue was $65.1 billion, up 30% over a year ago as we experienced better-than-expected demand for our products, despite supply constraints that we estimated at around $6 billion. We grew in each of our product categories with an all-time record for Mac and September quarter records for iPhone, for iPad and for Wearables, Home and Accessories. This level of sales performance, combined with the unmatched loyalty of our customers and the strength of our ecosystem, drove our installed base of active devices to a new all-time record. Our services set an all-time revenue record of $18.3 billion, up 26% over a year ago, with September quarter records in every geographic segment and in every services category. Company gross margin was 42.2%, down 110 basis points from last quarter, due to higher costs and a different mix of products, partially offset by leverage. Products gross margin was 34.3%, down 170 basis points sequentially as higher cost structures were partially offset by leverage and mix. Services gross margin was 70.5%, up 70 basis points sequentially, mainly due to a different mix. Net income of $20.6 billion and diluted earnings per share of $1.24, both grew over 60% year-over-year and were September quarter records. Let me get into more detail for each of our revenue categories. iPhone revenue grew 47% year-over-year and set a September quarter record of $38.9 billion, despite supply constraints as customer demand was very strong. The iPhone 12 family continued to perform very well, and we are seeing enthusiastic customer response to the launch of our iPhone 13 family. We also grew double digits in each geographic segment, setting September quarter records in both, developed and emerging markets. The latest survey of U.S. consumers from 451 Research indicates iPhone customer satisfaction of 98% for iPhone, and our active installed base of iPhones reached a new all-time high. For Mac, we set an all-time revenue record of $9.2 billion, despite supply constraints, driven by strong demand for our M1-powered MacBook Air. In fact, our last five quarters for Mac have been the best five quarters ever for the category. iPad performance was also strong with a September quarter revenue record of $8.3 billion, up 21%, in spite of significant supply constraints as customer demand for the iPad Pro also powered by M1 was very strong. For both, Mac and iPad, we continue to see a combination of high levels of customer satisfaction and first-time buyers. Around half of the customers purchasing Mac and iPad during the quarter were new to that product. And in the most recent surveys of U.S. consumers from 451 Research, customer satisfaction was 97% for both, Mac and iPad. Our continued investment in iPad and Mac is taking computing to the next level. We have redesigned and reengineered both products to provide customers an unmatched experience, which resulted in record fiscal years for both categories. We are carrying this momentum also in the enterprise market. For example, SAP has already deployed Macs to tens of thousands of their employees to date. Following the launch of our new M1 MacBook Pro last week, SAP is planning to add it to the growing list of M1 Mac offerings available to their global workforce. Another example is France’s national railway company, SNCF, which equips all train drivers with iPads to manage their entire daily workflow and train operations, helping to lower energy and maintenance costs. In fact, the iPads have been so well received that 90% of the drivers choose to purchase them for personal use at the end of the corporate device refresh cycle. Next, Wearables, Home and Accessories set a new September quarter record of $8.8 billion. We continue to improve and expand our product offerings in this category, which we believe improve the overall customer experience and showcase the integration between our products and services. Apple Watch, AirPods and HomePod mini are powerful devices in their own right, but paired with our other products, software and services, they create unique experiences, like switching audio seamlessly between devices on your AirPods. Turning to services. As I mentioned, we reached an all-time revenue record of $18.3 billion with all-time records for cloud services, music, video, advertising, AppleCare and payment services and a September quarter record for the App Store. Our continued investment and strong execution in services has helped us deliver a record $68 billion in revenue during fiscal 2021, nearly tripling this category in six years. These impressive results reflect the positive momentum we are seeing on many fronts. First, our installed base continues to grow and reached an all-time high across each geographic segment. Next, we continue to see increased customer engagement with our services. The number of paid accounts on our digital content stores grew double digits and reached a new all-time high during the September quarter in each geographic segment. Also, paid subscriptions continued to show very strong growth. We now have more than 745 million paid subscriptions across the services on our platform, which is up more than 160 million from last year and nearly 5 times the number of paid subscriptions we had less than five years ago. And finally, as Tim mentioned earlier, we’re adding new services that we think our customers will love. And we continue to improve the breadth and quality of our current services offerings. Fiscal ‘21 was not only a big year for services but for our entire company. During the past 12 months, we grew our business by 33% or $91 billion, reaching nearly $366 billion of revenue with record level performance across the board. Every product category and every geographic segment set a new annual revenue record and was up at least 20% over fiscal 2020. Let me now turn to our cash position. We ended the quarter with $191 billion in cash plus marketable securities. We issued $6.5 billion of new term debt, retired $1.3 billion of term debt and decreased commercial paper by $2 billion, leaving us with total debt of $125 billion. As a result, net cash was $66 billion at the end of the quarter as we continue to make progress towards our goal of net cash neutral over time. As our business continues to generate very strong cash flow, we were also able to return $24 billion to shareholders during the September quarter. This included $3.6 billion in dividends and equivalents and $20 billion through open market repurchases of 137 million Apple shares. We also retired an additional 5 million shares in the final settlement of our 17th ASR. As we move ahead into the December quarter, I’d like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance but we are sharing some directional insights based on the assumption that the COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. As we mentioned earlier, during the September quarter, supply constraints impacted our revenue by around $6 billion. We estimate the impact from supply constraints will be larger during the December quarter. Despite this challenge, we are seeing high demands for our products and expect to achieve very solid year-over-year revenue growth and to set a new revenue record during the December quarter. We expect revenue for each product category to grow on a year-over-year basis, except for iPad, which we expect to decline year-over-year due to supply constraints. For services, we expect our growth rate to decelerate from the September quarter but to remain strong. We expect gross margin to be between 41.5% and 42.5%. We expect OpEx to be between $12.4 billion and $12.6 billion. We expect OI&E to be around negative $50 million, excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.22 per share of common stock payable on November 11, 2021, to shareholders of record as of November 8, 2021. With that, let’s open the call to questions. Tejas Gala : Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator : Thank you. Our first question comes from Shannon Cross from Cross Research. Shannon Cross : Thank you very much. Tim, I’m wondering, can you talk a bit more about specific supply chain issues you saw and how you’ve seen improvements I think during the current quarter, and how we should think about what products do you expect to see most impacted going forward? Just any more color you can give us on what’s going on out there because clearly, this is hitting everyone. Tim Cook : Sure. If you look at Q4 for a moment, we had about $6 billion in supply constraints, and it affected the iPhone, the iPad and the Mac. We had -- there were two causes of them for Q4. One was the chip shortages that you’ve heard a lot about from many different companies through the industry. And the second was COVID-related manufacturing disruptions in Southeast Asia. The second of those, the COVID disruptions, have improved materially across October to where we currently are. And so, for this quarter, we think that the primary cause of supply-chain-related shortages will be the chip shortage. It will affect -- it is affecting, I should say, pretty much most of our products currently and -- but from a demand point of view, demand is very robust. And so, part of this is the demand also is very strong. But we believe that by the time we finish the quarter that the constraints will be larger than the $6 billion that we experienced in Q4. Shannon Cross : Okay, great. So, you’ll sort of push forward in the next quarter as well. Can you -- just a different question because I’m curious, you’re starting to sell more and more things on a ratable basis. And how are you thinking about that? I mean, you have the new Macs and that we keep seeing. You can buy for a monthly charge in that. How do you think that’s driving sales? And how should we think about percent maybe of the portfolio that’s now available? And I don’t know if you want to tell us how much revenue is now under a recurring nature, but it definitely seems as you’re shifting more and more to maybe sort of a bundled sale or offering from a consumer standpoint where you just pay one price every month and you get all of your Apple devices and Apple services. Thank you. Tim Cook : Yes. The first product, Shannon, that really sold on a monthly basis was iPhone. And that began to happen in the U.S., as an example, shortly after the subsidy kind of world changed markedly. And so, I would say that predominantly, the mode of buying an iPhone in the United States is on a monthly kind of plan today. For the balance of the products, still the most popular would be buying them outright. But, we are seeing more and more demand for monthly payments. And so, we want to give the customer what they want. And so, you will see us do more and more things like that that will meet the customer where -- and provide the price that they want -- in a way that they want to pay for it. I don’t know the percentage of products that are sold that way today, but it is increasing. Operator : We will hear next from Amit Daryanani with Evercore. Amit Daryanani : Perfect. Thanks a lot, and good afternoon, everyone. I have two as well. I guess, when I think about the supply chain headwinds, and you’re talking about $6 billion in September, getting bigger in December. Tim, I would love to understand how do you guys comfort that this is really a demand that’s getting deferred versus potentially getting destroyed at least somewhere else. And if you think about the supply chain bottlenecks -- you were the COO. You managed a lot of the stuff. Do you feel comfortable that sort of peaks in December and alleviates it from there, or what does the trajectory look like for improvement? Tim Cook : Yes. What I feel comfortable on is I feel like we’ve made great progress on the COVID-related disruptions, and that happened across the month of October, and we’re in a materially better position today. It is difficult to predict COVID. And so, I’m not going to predict where it goes. But I can just tell you that as of today, we’re in a materially better position than we were in September and in the first several weeks of October. In terms of the chip shortage, the chip shortage is happening on legacy nodes. Primarily, we buy leading edge nodes, and we’re not having issues on leading edge nodes. But on legacy nodes, we compete with many different companies for supply. And it’s difficult to forecast when those things will balance because you’d have to know how kind of -- how the economy is going to be in ‘22 and the accuracy of everyone else’s demand projections. And so, I don’t feel comfortable in making a prediction. I think, it would be subject to too much inaccuracy. But, I do feel very comfortable with our operational team. I think, we’ve got a world-class one. And I’m sure they’re doing everything they can do to collapse cycle times and improve yields and do all the things that you can do in addition to fundamental capacity investment to remedy the situation. Amit Daryanani : Got it. And then, Luca, if I may ask you a question on gross margins for December, you’re essentially guiding gross margins to be flat to maybe down a little bit versus sort of September. Maybe just touch about it. So, I think historically, I would have expected gross margins to be up in December, given how much revenue leverage you end up with. So maybe, what are the puts and takes on gross margins that are resulting in a more flattish guide versus historical seasonality? Luca Maestri : Well, as you know, typically, obviously with December being the holiday season, we do get leverage, as you say. But, it’s also the period of the year where we launch a lot of new products. And as you know, we launch essentially in every product category. We launch new products. Demand is very strong. But as you know, when we launch these new products, we tend to have higher cost structures at the beginning of the cycle. And so, that’s what balances this out. Obviously, from a year-over-year standpoint, it’s actually a significant expansion, right? Because when you look at what we did a year ago in the December quarter, 39.8%, this clearly indicates a significant expansion. Operator : We’ll hear next from Katy Huberty with Morgan Stanley. Katy Huberty : Thank you. Given the supply chain is blurring the demand picture for iPhone 13, what data points can you share that help investors understand whether demand is tracking to a product cycle that is flat, growing or down from the very strong iPhone 12? And maybe on that front, Luca, you can also comment on where you exited the quarter from a channel inventory standpoint for iPhone relative to a normal product cycle? And then, I’ve got a follow-up. Tim Cook : Yes. Look, maybe I can take both of those. Channel inventory, as you would expect in a constrained environment, the iPhone channel inventory ended below the targeted range and is currently below it. And so, that’s that. In terms of the blurring of demand, we look at -- Katy, we look at a number of different data points. We look at demand across our online store, demand in retail. We look through to back orders on the carrier channels, the ones that do take back orders there. We look at channel orders as well. And so, we have a number of different data points that we use to conclude how strong demand is. And we feel very, very good about where demand is right now. And we’re working feverishly on the supply side of that. Katy Huberty : And Tim, as a follow-up. We recently surveyed 4,000 consumers in the U.S. and China, and the feedback is most of them don’t want to pay for apps or services direct with the developer. They value the security, privacy, ease of transactions with the App Store. So, how do you think about balancing the regulators push for more choice with a customer base that’s happy with the existing experience? And just as a follow-on to that, how are you and Luca thinking about the potential impact of services revenue growth rate as some of the changes to the App Store go into effect? Tim Cook : Katy, the main thing that we’re focused on, on the App Store is to keep our focus on privacy and security. And so, these are the two major tenets that have produced over the years a very trusted environment where consumers and developers come together and consumers can trust the developers on the developers and the apps or what they say they are and the developers get a huge audience to sell their software to. And so, that’s sort of number one on our list. Everything else is a distant second. And so, what we’re doing is working to explain the decisions that we’ve made that are key to keeping the privacy and security there, which is to not have sideloading and not have alternate ways on the iPhone, where it opens up the iPhone to unreviewed apps and also get by the privacy restrictions that we put on the App Store. And so, we’re very, very focused in discussing the privacy and security elements of the App Store with the regulators and legislators. Operator : We’ll take our next question from David Vogt with UBS. David Vogt : Great. Thank you, guys. And I just have two quick questions, one big picture, theoretical. So, you covered the supply chain in pretty extensive detail on the call. But maybe just a bigger picture on how you’re thinking about it philosophically given what you just sort of went through over the last 12 to 8 months. So, what I mean by that, is there sort of a recalibration needed or an adjustment around your supply chain philosophy either from a partner perspective or maybe a regional perspective? And how do you think about the current infrastructure and its ability to sort of rebound and sort of handle sort of these disruptions that seem to crop up from time to time? And then, I have a follow-up. Tim Cook : Yes. I don’t see a fundamental error that we’ve made, if that’s what you’re picking out, in terms of creating the environment that we’re in. It was created for a number of reasons. The pandemic came along. Some people in the industry and some people outside the industry thought that the pandemic would reduce demand. They pulled their orders down. Things reset. And what really happened was demand went up and went up even more than a straight trend would predict. And so, the industry is working through that now. I’m making it little overly simplistic. There’s some other things like yields and things like that that are happening as well. But, those things are mainly manageable in the course of time. And so, what we’re doing is working with our partners on making sure that they have supply that we need and making sure that our demand statements are accurate as we see them and so forth. And at the same time, we are reducing our lead times and cycle times, so that when you get a chip off a fab that as quickly as possible, it’s in a product and shipping and also helping the fab partners increase their yields. And so, those things are things that we’re doing. We also support the CHIPS Act and investment there to put more investment in the ground. And so, we’re spending some time advocating for the CHIPS Act as well. David Vogt : Great. And that’s helpful. And I didn’t mean to implicate that you guys had messed up, just maybe came off that way. And maybe just as a quick follow-up. When you think about purchasing devices ratably, you touched on that earlier. But maybe can you just touch on the partnerships that you have with carriers and the support that they have given you over the last couple of years. Now, it’s been a key component of your success, the tight relationships that you have globally. Do you think sort of this business model, as it’s currently sort of put together globally, is sort of a permanent structure, meaning carriers are going to be integral part of driving demand for iPhones, or is there a sense that maybe it’s a little bit more transitory depending on the part of the cycle that we’re in? Tim Cook : I think that 5G has provided a once in a decade kind of upgrade potential, and it’s a multiyear kind of thing. It’s not a one year and done. And I think that we’re motivated there. The carrier is motivated there. We have mutual interest and the customer benefits hugely from getting a new 5G phone that has 5G and a number of other features in it, too. And so, I think everybody is aligned on purpose. The model that you paint is -- I wouldn’t call it a global model because there are different variations around the world depending upon the country. But, in general, I think that the marriage, if you will, or partnership between Apple and the carrier channel has never been stronger and that it’s on very solid footing. Operator : So, we’ll take our next question from Krish Sankar with Cowen and Company. Krish Sankar : I had two of them, too. And Tim, I will give you a reprieve from the supply chain questions. I had two on services. The first one is on your new ATT, the ad tracking transparency feature, and all the headlines that have gone recently, I’m kind of curious. The feedback you’ve seen or received from your advertisers and users and how it has also impacted search ads your own ad business. Can you let us know the feedback? And then, I have a follow-up. Tim Cook : The feedback from customers is overwhelmingly positive. Customers appreciate having the option of whether they want to be tracked or not. And so, there’s an outpouring of customer satisfaction there on the customer side. And the reason that we did this is that -- as you know, if you followed us for a while, we believe strongly that privacy is a basic human right and we believe that for decades, not just in the last year or so. And we’ve historically rolled out more and more features over time for -- to place the decision of whether to share data and what data to share in the hands of the user where we believe that it belongs. We don’t think that’s Apple’s role to decide, and we don’t think that’s another company’s role to decide but rather the individual who owns the data itself. And so, that’s our motivation there. There’s no other motivation. Krish Sankar : Got it. Got it, Tim. And that’s a very fair characterization. Thank you for that. And then, as a quick follow-up, I’m just kind of curious, on the mobile gaming in your App Store, there have been some recent actions by certain governments to limit game time. Kind of curious how that affects your App Store business in those geographies. And is there a way you can quantify that, or is it too immaterial at this point? Tim Cook : You mean limiting the time on games. Is that what you’re getting at? Krish Sankar : Yes, exactly. Like you’re trying to decide to limit game time and things like that. Tim Cook : It’s very difficult to measure. Yes, with the policy that you’re talking about for those people that don’t know is there’s a policy to restrict kids below a certain age to -- I think it’s one hour on Friday, Saturday, Sunday each. And it’s very difficult to see the impact of it on the App Store at this point. Operator : We’ll take our next question from Samik Chatterjee with JP Morgan. Samik Chatterjee : I guess, Tim, I wanted to first start off on your comment about strong demand across products. And just specific to iPhone 13, if you can give us a bit more insight about what are you seeing in terms of intent, in terms of either upgrades from the installed base or even switchers rate too, if you can compare to iPhone 12 because some of the feedback we are getting is, for example, like strong switching activity in China. So just wondering if you can get a bit more granular there in terms of the -- what’s driving the demand and who is it coming from. And then, I have a follow-up, please. Tim Cook : It’s so early to talk about iPhone 13 because it’s only been on the market for less than 30 days now. What I can tell you is going into the cycle, if you look at our results from last quarter, we grew on upgraders and switchers in the double digits. And so, both were very meaningful for the iPhone results last quarter. And so, there’s significant momentum in iPhone. And I would clearly characterize the demand that we’re seeing currently as robust, as you can tell from the -- some of the quotes that we’re quoting on the online store. Samik Chatterjee : Okay. And as a follow-up, I guess, back to the supply chain but I wanted to just ask more relative to cost implications there. And what we’re hearing is not only delays but also component cost going up. So, as we look through -- as I think about this upcoming cycle, how are you looking to manage component cost related headwinds? And is that something you’re seeing coming through the supply chain? Thank you. Tim Cook : We’ve put our current thoughts in the gross margin guidance that we gave you, the 41.5% to 42.5%. I would tell you that we are seeing a significant increase in freight costs. And I would assume that that is pretty consistent across different companies. And so, we’re clearly seeing some inflation there. Operator : We’ll take our next question from Jim Suva with Citigroup. Jim Suva : Thank you. And I’ll ask both my questions at the same time. Probably the first one is for Tim. On the services revenue, much better than expected. Can you give us some details about what drove that? Was it Apple Stores more open, so more AppleCare or more Apple One or Arcade or TV or Fitness? And then, probably for Luca on supply chain, when you mentioned supply chain headwind is going to get worse and you mentioned $6 billion this quarter, there’s two ways to think about your terminology of worse. Is it the delta from $2 billion that you identified three months ago that went to $6 billion, so therefore, the delta of $4 billion gets worse, or are you just saying -- and therefore, it’s above $10 billion for December quarter. Are you just saying it just gets higher than the $6 billion that you just identified earlier in the call? Tim Cook : Jim, I’m going to take the second question that you asked, and Luca could take the first one on services, just in the reverse of the way you coined it. On the supply constraints, what we’re saying is that the amount of -- the nominal amount of supply constraints for Q1, we estimate to be larger than $6 billion. And so, it’s important to know that we’re getting a lot more supply in Q1 than we had in Q4, obviously, because our sequential growth is significant. And we have very solid growth year-over-year. And so, the amount of supply is growing dramatically. It’s just that the demand is so robust that we envision having supply constraints for the quarter. Luca Maestri : And Jim, on services, the 26% growth rate that we had was better than what we were expecting at the beginning of the quarter. And it was really across the board. It’s difficult to single out a specific area because we set all-time records on cloud. We set all-time records across the board, AppleCare, Music, video, advertising, payment services, the App Store was a September quarter, right? So, it was strong across the board. When we look at the services business, we always think about some fundamental factors that allow us to have good visibility over the sustainability of the business, right? The fact that the installed base continues to grow, that’s obviously a positive. The fact that the number of people that are actually paying on the platform continues to grow double digits. And so, that obviously increases our opportunity. The number of subscriptions that we have on the platform, we mentioned during the call, 745 million paid subs right now. It’s an increase of 160 million versus just 12 months ago, right? And obviously, the fact that we continue to launch new services, new offerings within the services that we already have, new features, that obviously gives us a lot of momentum going forward. We’re very fortunate we have a very -- now it’s a very large business, $68 billion in the last 12 months and very diversified. We sell a lot of different services and our customers seem to really enjoy the experience that they have on the platform. Operator : We’ll take our next question from Chris Caso with Raymond James. Chris Caso : For my first question, it’s a question about your ability to recapture sales that you weren’t able to fill in Q4, Q1 and Q2. And you have some experience in that from last year when the iPhone, not all the models launched at the same time and some are late, and you did recapture some of that as you went past the holidays. Do you think that we should expect similar behavior this year? And then, with that also is, will all product categories behave similarly? Meaning that are the some product categories where if you missed the holidays, you just missed the sale. Tim Cook : I think there are some products that people buy as gifts that if it’s not there that it’s perishable. But I think that we have a lot of products as well that people will wait for and would expect those to be captured in a different time period. So, it’s a combination for this certain quarter, the holiday quarter, I believe. Chris Caso : Okay. As a follow-up, could you speak to iPhone mix? And one of the things we noted is that the delivery time for all iPhones are a bit long because of the constraints. They’re a bit longer on the Pro and the Max. Is that a function of supply or demand or perhaps both? And again, I would imagine you have a little better handle on that this year, given that all the phones were launched at the same time. Tim Cook : Yes. It’s really too early to make comments on mix at this point because it has been -- we have been in a constrained environment. So, the mix becomes more obvious, once supply and demand are balanced. Operator : We’ll take our next question from Harsh Kumar with Piper Sandler. Harsh Kumar : Yes. Hey, guys, first of all, a great job managing to the supply constraints. It’s obviously affecting everybody. So congratulations. And then Tim, one for you, a strategic question. When Apple thinks about strategic areas that as a company that we own, for example, software is a high priority, but you’re also one of the largest semiconductor companies if the company would stand alone. So, curious about the kind of input that -- thinking that goes into owning some piece of technology. For example, when we survey people, they say batteries and screens are very important. So, why doesn’t Apple -- for example, what causes Apple from looking at areas like that? Tim Cook : We look at ones where we believe we can make a substantial difference and have a level of differentiation. And so, we’ve put a lot of energy in the silicon space because we have felt that we could design and develop products that we could not if we were in the -- just buying what’s available on the commercial market. And as you can see, more recently, we made that call on the Mac as well and have shifted to our own chips there. And so, it really depends on whether we see a way to do something that’s differentiated or not. And I wouldn’t want to rule anything out. It’s more of whether or not we see our way clear to doing something that is materially better. We feel like we’ve done that in the chip area. Harsh Kumar : And then, I’ve got one for Luca. I want to go back to a question that Amit asked earlier in the call about the gross margin. So, when I look at the September quarter, services obviously grew much faster than the product business, margin was down and same thing for December. But I think you’re effectively saying that there’s a lot of new product launches. Would that not go into OpEx, for example, marketing, et cetera, as opposed to COGS, or is there something that maybe needs to be clarified here? Luca Maestri : There is -- certainly, obviously, that we have launch expenses in marketing and advertising, of course, when we launch new products. But, the reality, what happens, we always make our products better and which means adding new technology and new features to the product. So, typically, when you move from one generation of products to the next one, the cost structures tend to be higher, particularly at the beginning of the cycle. And so, when you make that transition, there is always some level of margin compression from the transition to a new product. The other aspect that you need to think about is the fact that the December quarter is the holiday season, and so the percentage of products business that we have in the holiday quarter is higher than what we have in the September quarter, for example. And therefore, as you know, because the services margins are higher than the products margin. There’s also a mix between the products and services business that plays into the gross margins for the Company, right? And that’s what you see as you move sequentially from September to December. Operator : We’ll hear next from Wamsi Mohan with Bank of America. Wamsi Mohan : I had a question about -- broadly about pricing of new products. This year, Apple launched the iPhone 13 at a slightly lower price than where the 12 was launched last year in China. Can you maybe help us think through what are some of the things that you look at in deciding that? And is that an action that you could take more broadly in other regions? And I have a follow-up. Tim Cook : We look at a variety of things, including our costs, including competition, including local conditions and exchange rates and a number of different things. And so, there’s not a -- there’s no formula for determining it. It’s done by a level of judgment looking at a number of different points -- data points. And we do that region by region. Wamsi Mohan : But, we shouldn’t, as investors, think of that as something structural that you intend to use to flex demand curves more globally? Tim Cook : It’s something we’ve always done. And so, it’s not something that is new to this year and this cycle. Wamsi Mohan : Okay. And as a follow-up, you’ve introduced a lot of new services over the past few years, and these have become a much more important part of the Apple story. Can you maybe share either some metrics on some of the new Services like TV+ in terms of paid subs? And how are you measuring the success of these investments? Tim Cook : Well, we look at a number of things internally that we don’t share externally. And so, you can bet that we’re looking at subs and ARPUs and conversions and churn and all of the normal things you would look at with a subscription business. But, we’re not going to get into sharing those on an individual service basis. What we’re trying to do is give you visibility to the aggregate number of subscriptions that we’ve had, which Luca covered earlier with the 745 million across both Apple branded and third party. And so, we’re giving you an aggregated view of it instead of the -- at the individual service level. But, you can bet that we’re managing it at the individual service level. Tejas Gala : Thank you, Wamsi. A replay of today’s call will be available for two weeks on Apple Podcast as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 7141415. These replays will be available by approximately 5 :00 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator : This concludes today’s conference. We appreciate your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,022	1	2022Q1	2022Q1	2022-01-27	5.749	5.885	6.099	6.36	8.45	27.88	25.09	Operator : Good day, and welcome to the Apple Q1 FY 2022 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead. Tejas Gala : Thank you. Good afternoon, and thank you for joining us. Speaking today first is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that, some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd like to now turn the call over to Tim for introductory remarks. Tim Cook : Thank you, Tejas, and good afternoon. Today, we are proud to announce Apple's biggest quarter ever. Through the busy holiday season, we set an all-time revenue record of nearly $124 billion, up 11% from last year and better than we had expected at the beginning of the quarter. And we are pleased to see that our active installed base of devices is now at a new record with more than 1.8 billion devices. We set all-time records for both developed and emerging markets and saw revenue growth across all of our product categories, except for iPad, which we said would be supply constrained. As expected, in the aggregate, we experienced supply constraints that were higher than the September quarter. Before I discuss our results in greater detail, I want to first acknowledge the toll that COVID continues to have on communities around the world. In many places, case counts are higher and health systems more strained than at any point throughout the pandemic. On behalf of all of us at Apple, I want to extend our deep gratitude to the scientists, doctors, nurses and so many others on the front lines of combating COVID-19. This is our eighth quarter reporting results in the shadow of the pandemic. And while I can't say it gets any easier, I can say I'm incredibly proud of the way our teams have come together and continue to innovate on behalf of our customers. A few weeks ago, we marked the 15th anniversary of the day Steve revealed iPhone to the world. We knew that we had the beginnings of something fundamentally transformative, though none of us could have predicted the incredible and meaningful impact it would have on all of our lives. The creative spirit that made the first iPhone possible has thrived at Apple every day since. We never stop creating. We never stop innovating. You can see that spirit reflected throughout our products from the incredible performance and capability of our M1 chips to our powerful yet easy to use operating systems to our unrivaled iPhone camera systems to the beauty and magic of AirPods. That's why each of our major products leads the industry in customer satisfaction for their respective category. People expect Apple to solve hard problems with easy to use products. And iPhone has never been more popular. During the December quarter, we set an all-time revenue record for iPhone, thanks to the strength of our incredible iPhone 13 lineup. This is the best iPhone lineup we've ever had and the reaction from the press and our users have been off the charts. This past quarter, we also set another all-time revenue record for Mac with customers eager to get their hands on an M1-powered MacBook Air, iMac or MacBook Pro. We've been thrilled with the response from Pro users to the M1 Pro and M1 Max chips and to see how Apple silicon is blowing them away with its power, performance and efficiency. Despite the constraints I mentioned earlier, our iPad lineup continues to be indispensable to tens of millions of people, from teachers and students to artists and creators. Customers are eager to get their hands on our ninth generation iPad, which features a beautiful display and double the storage capacity, as well as the new iPad Mini with its ultra portable design. Wearable, Home and Accessories, meanwhile, set an all-time revenue record. Customers are loving the Apple Watch Series 7, with its cutting edge health and fitness tracking features. Nearly every day, I get notes from customers who share how a heart alert led to a life saving appointment with a cardiologist. And more recently, I've been hearing from people who tell me that their Apple Watch saved their lives by calling 911, when they couldn't. As I've said, we're still in the early innings with our health work that every day I'm encouraged by our positive impact. We are also making great advancements in audio and are seeing strong demand from customers as a result. The HomePod Mini continues to earn praise for combining the intelligence of Siri with an immersive room filling audio experience. And our customers have responded with a lot of excitement to the magic of spatial audio on AirPods which packs the acoustics of a concert hall. As always, the deep integration of hardware, software and services is a hallmark of everything Apple makes. It's a principle you can see at work in the introduction of SharePlay, a feature that offers a whole new way to create shared experiences by letting users watch and listen to their favorite content together on FaceTime. And we continue to invest in innovation across our services business, which set another all-time revenue record last quarter and performed even better than we had anticipated. The App Store continues to be an economic miracle for developers around the world and a safe and trusted place for consumers to discover their favorite apps. Since its launch, we have paid developers selling digital goods and services more than $260 billion, with 2021 setting a new record for their earnings. I'm also happy to report that in its first 2 years, Apple TV+ shows and movies have earned 200 award wins and more than 890 nominations. Among the powerful lineup are feature films like The Tragedy of Macbeth, CODA and Swan Song, along with many gripping new series coming up, including Severance and The Afterparty. Each one is a tremendous credit to all the storytellers in front of the cameras and behind them who touched audiences all over the world. Fitness+, meanwhile, continues to inspire customers to reach their health and fitness goals. We recently introduced Time to Run, an extension of our popular series Time to Walk, as well as new collections of workouts and meditations to help users make more intentional training choices. Despite the pandemic, our retail businesses saw its highest revenue in Apple's history, and we also earned our highest ever customer satisfaction scores. That is a testament to the incredible adaptability our teams have shown as we've reimagined [digital] experience. I also want to take a moment to thank our retail employees and AppleCare teams for the deep care you've given to our customers as they look to get the most out of our products, learn new skills or track down the perfect gift. We have always led with our values and with compassion and care and never has that been more needed than during the pandemic. Last quarter, we celebrated 10 years of our Employee Giving program, which we started to help our employees identify and support the causes they care most deeply about. We pledged to match their contributions to organizations doing important work at every level from their local food pantry to global humanitarian non-profits. In the last decade, this program has contributed nearly $725 million to charitable organizations. We also celebrated 15 years of Apple's partnership with a global fund on Project RED supporting their life-saving work to expand healthcare services in Sub-Saharan Africa for people living with HIV/AIDS. With the support of our customers, we've now raised nearly $270 million to fund prevention, testing and counseling services for people impacted by HIV/AIDS. And in keeping with our abiding belief in and commitment to education, we also launched a new partnership with the Boys & Girls Club of America. This initiative will help young people across the U.S. learn to code on iPad using our Everyone Can Code curriculum. And we are continuing to drive innovations to help combat climate change. We are already carbon neutral across our own operations, and we are working intensely to meet our 2030 goal of carbon neutrality across our supply chain and the life cycle of our products. To celebrate Black History Month, we will be releasing a special edition Apple Watch Black Unity Braided Solo Loop and a matching Unity Lights Watch Face. And through our racial equity and justice initiative, we are continuing to support organizations blazing trails to a more equitable world in our economies, our classrooms and our criminal justice system. We recognize, as ever, that it takes all of us to confront our most profound challenges. And at Apple, we are determined to do our part. That includes our own work and inclusion and diversity, which we are advancing every day. Let me close by saying that despite the uncertainty of the world, there is one thing of which I am certain : Apple will continue to [innovate] every day and in every way to deliver on the promise of technology at its best. I will now turn it over to Luca to go over our quarterly results in more detail. Luca Maestri : Thank you, Tim, and good afternoon, everyone. We are very pleased to report record financial results for the December quarter. We set an all-time revenue record of $123.9 billion, an 11% increase from a year ago. We reached new all-time records in the Americas, Europe, Greater China and the rest of Asia Pacific. And it was also an all-time record quarter for both products and services. On the product side, revenue was $104.4 billion, up 9% over a year ago, despite significant supply constraints. We grew in each of our product categories, except iPad, where supply constraints were particularly pronounced, and set all-time records for iPhone, Mac and Wearables, Home and Accessories. The strong level of sales performance, the unmatched loyalty of our customers and the strength of our ecosystem have driven our current installed base of active devices to a new all-time record of 1.8 billion devices. The growth in the installed base were broad-based as we set all-time records in each major product category and in each geographic segment. Our Services set an all-time revenue record of $19.5 billion, up 24% over a year ago, with December quarter records in every geographic segment. Company gross margin was 43.8%, up 160 basis points from last quarter due to volume leverage and favorable mix, partially offset by higher cost structures. Products gross margin was 38.4%, up 410 basis points sequentially, driven by leverage and mix. Services gross margin was 72.4%, up 190 basis points sequentially, mainly due to a different mix. Net income of $34.6 billion and diluted earnings per share of $2.10 both grew more than 20% year-over-year and were all-time records. Operating cash flow of $47 billion was also an all-time record. Let me get into more detail for each of our revenue categories. iPhone revenue grew 9% year-over-year to an all-time record of $71.6 billion despite supply constraints, thanks to a remarkable customer response to our new iPhone 13 family. We set all-time records in both developed and emerging markets, reached all-time high in the iPhone active installed base and the latest survey of U.S. consumers from 451 Research indicates iPhone customer satisfaction of 98%. For Mac, revenue of $10.9 billion was an all-time record with growth of 25% year-over-year driven by strong demand for our newly redesigned MacBook Pro powered by M1 despite supply constraints. We are 1 year into our transition to Apple silicon and already, the vast majority of our Mac sales are from M1-powered devices, which helped drive a record number of upgraders during the December quarter. Our momentum in this category is very impressive as the last 6 quarters have been the best 6 quarters ever for Mac. iPad generated $7.2 billion in revenue, down 14% year-over-year due to very significant supply constraints, but customer demand was very strong across all models. Despite the supply shortages, our installed base of iPads reached a new all-time high during the quarter, thanks to a high number of customers that are new to iPad. In fact, around half of the customers purchasing an iPad during the quarter were new to the product. Wearables, Home and Accessories set a new all-time record of $14.7 billion, up 13% year-over-year. And we set all-time revenue records in each geographic segment. We also continue to improve and expand our product offerings in this category to create unique experiences showcasing our deep integration of hardware, software and services. In addition to an outstanding level of sales performance globally, Apple Watch continues to extend its reach, with over 2/3 of customers purchasing an Apple Watch during the quarter being new to the product. Turning to services. As I mentioned, we reached an all-time revenue record of $19.5 billion, up 24%, with all-time records for cloud services, for music, video, advertising and payment services and a December quarter record for the App Store. These impressive results reflect the positive momentum we are seeing on many fronts. First, as I mentioned before, our installed base has continued to grow and has reached an all-time high across each geographic segment and major product category. Next, we continue to see increased customer engagement with our services. The number of paid accounts on our digital content stores grew double digits and reached a new all-time high during the December quarter in every geographic segment. Also, paid subscriptions continue to show very strong growth. We now have more than 785 million paid subscriptions across the services on our platform, which is up 165 million during the last 12 months alone. And finally, we're adding new services that we think our customers will love, and we continue to improve the breadth and quality of our current service offerings. Just in this last quarter, we have added incredible new content on Apple TV+, on Fitness+ and Apple Arcade and a brand-new way to listen to music with Apple Music Voice. We also announced in November the beta program for Apple Business Essentials, a new service offering that brings together device management 24/7 support and iCloud storage to our small businesses, manage the end-to-end life cycle of their employees' Apple devices. We are very excited that many thousands of small business customers are already actively participating in the beta program. This announcement is just one of many ways we are expanding our support for enterprise and business customers. With the latest MacBook Pros that we've introduced last October, the new M1-powered Mac lineup has quickly become the preferred choice of Macs among enterprise customers. Shopify, for example, is upgrading its entire global workforce to M1-powered MacBook Pro and MacBook Air. By standardizing on M1 Max, Shopify continues its commitment to providing the best tools to help its employees work productively and securely from anywhere. And Deloitte Consulting is expanding the deployment of the Mac Employee Choice program, including offering the new M1 MacBook Pro to empower their professionals to choose devices that work best for them in delivering consulting services. Let me now turn to our cash position. Due to our strong operating performance and holiday quarter seasonality, we ended the quarter with $203 billion in cash, plus marketable securities. We decreased commercial paper by $1 billion, leaving us with total debt of $123 billion. As a result, net cash was $80 billion at the end of the quarter. Our business continues to generate very strong cash flow, and we were able to return nearly $27 billion to shareholders during the December quarter. This included $3.7 billion in dividends and equivalents and $14.4 billion through open market repurchases of 93 million Apple shares. Our business continues to generate very strong cash flow, and we're also able to return nearly $27 billion to shareholders during the December quarter. This included $3.7 billion in dividends and equivalents and $14.4 billion through open market repurchases of 93 million Apple shares. We also began $6 billion accelerated share repurchase program in November, resulting in the initial delivery and retirement of 30 million shares. As we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance, but we are sharing some directional insights based on the assumption that the COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. We expect to achieve solid year-over-year revenue growth and set a March quarter revenue record despite significant supply constraints, which we estimate to be less than what we experienced during the December quarter. We expect our revenue growth rate to decelerate from the December quarter, primarily due to 2 factors. First, during the March quarter a year ago, we grew revenue by 54%. Remember that last year, we launched our new iPhones during the December quarter. While this year, we launched them during the September quarter. Due to the later launch a year ago, some of the associated channel inventory fill occurred during the March quarter last year. As a result of the different launch timing, we will face a more challenging year-over-year compare. Second, we expect foreign exchange to be a 3-point headwind when compared to the December quarter growth rate. We currently expect FX to have a negative impact on growth of 2 points in the March quarter, while it represented a 1 point benefit during the December quarter. Specifically related to Services, we expect to grow strong double digits but decelerate from the December quarter performance. This is due to a more challenging compare because a higher level of lockdowns around the world last year led to increased usage of digital content and services. We expect gross margin to be between 42.5% and 43.5%. We expect OpEx to be between $12.5 billion and $12.7 billion. We expect OI&E to be around negative $150 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.22 per share of common stock payable on February 10, 2022, to shareholders of record as of February 7, 2022. And with that, let's open the call to questions. Tejas Gala : Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator : Absolutely. We'll take our first question from Katie Huberty with Morgan Stanley. Hearing no response, we'll take our next question from Wamsi Mohan with Bank of America. Wamsi Mohan : Yes. Thank you. Your margins have clearly been very impressive. So I have one question each on product and one on services gross margins. On product gross margins, that's clearly benefiting from a very strong mix. So Tim, I'm curious how sustainable do you think these mix trends are from the data that you see? And can you share any thoughts across how the Pro and Pro Max mix compared to prior cycles? And on the services side, if I could just ask that, too. When you look at the gross margins there, that's been really impressive. Can you give us some sense of where within services, you're seeing particularly favorable mix trends? And how should investors think about the trajectory of these margins given some of the sizable investments you're making to drive very successful areas like content for TV+ as an example? Tim Cook : Wamsi, it's Tim. In terms of the mix, we don't comment directly on mix. But what I would tell you is that we saw strong demand across the iPhone 13 family. And in fact, we had several of the top-selling models in various markets, including the top 5 in the U.S. and Australia, the top 4 in Urban China, 2 of the top 3 in the UK, 3 of the top 4 in France and Germany and 4 of the top 6 in Japan. And certainly, based on some external data that I've seen, it does seem to say that we are gaining share as well. So we feel quite good about the momentum of iPhone. And I should add that we were constrained during the quarter. Luca Maestri : Wamsi, on the services side, you were asking about gross margin there. As you know, our services business in aggregate is accretive to overall company margin. And as you know, our services portfolio is very broad, and it contains businesses with very different margin profiles. The difference in margin profile is due in part to the nature of those businesses and in part to the way that we account for them, in some cases, we account on a net basis as opposed to a gross basis. And so as a result, the services gross margin percentage over time will be influenced by the relative growth of the different businesses within the portfolio. We do not guide at the product and services level, but I think you've seen the guidance that we provided for the March quarter at the total company level, 42.5% to 43.5%, obviously very strong compared to our recent history. And so we're very pleased with that. Operator : We'll take our next question from Kyle McNealy with Jefferies. Kyle McNealy : Congrats on the solid iPhone result. That's very good. I assume that you may have prioritized iPhone to the extent there may be similar components that are used for iPhone and iPad. Can you just level set me on that if that's not the case? And if it is, should we see a recovery in iPad as you move past your prime iPhone selling season and you may have better access to components or better supply as we move through the next few months of the year? Tim Cook : Yes. Kyle, it's Tim. From a supply constraint point of view, as you recall, we said that in Q1, the December quarter, that would have constraints more than 6, and we clearly did have constraints more than 6. On March, we're saying that where we will have -- we will do better or have less constraints than we had in the December quarter. If you look at the commonality between different products, there is some. But generally, the challenge is on legacy nodes. And these legacy nodes are by supplier. And so it's much more focused on the supplier than anything else and versus us behind the curtain finding a place to take it. There's not -- none of that, but there is some of that. But largely, we have to take it where the shortages are. Kyle McNealy : Okay. Great. Can you give us any other color on kind of the trajectory of iPad and what's impacting this quarter and where it might go in the March and the June quarter? Tim Cook : Yes. The issue with iPad, and it was a very significant constraint in the December quarter, was very much on these legacy nodes that I had talked about. Virtually all of the problem was in that area. And so overall, we're not guiding by product constraint -- by product level. But at the -- but overall, we do see an improvement in the March quarter in terms of the constraints going down versus what they were in the December quarter. Operator : We'll take our next question from Shannon Cross with Cross Research. Shannon Cross : Tim, could you talk a bit about the Mac business? Looking back, it's up about 50% from the calendar 2019 revenue. You did almost $11 billion this quarter, and you're still working through the M1 transition. So can you talk about where you see the opportunity to gain share? What are really sort of the target markets that you think you can go after in order to grow this beyond think it was about $37 billion in the last 12 months? And then I have a follow-up. Tim Cook : Yes. Shannon, thank you for the question. Mac set an all-time revenue record at $10.9 billion for the quarter. That was up 25%. And as you point out, the last 6 quarters for the Mac have been the top 6 revenue quarters of all time. And what's further very good about this is we set all-time revenue records in Americas, in Europe and the rest of Asia Pacific. And we set a December quarter record in Greater China. And so it's not narrowed to a particular geographic area that we're doing well in. It's almost -- about almost across the board. The response is very much because of M1. And we got even more response with the MacBook Pro that we launched in the -- during the Q1 time frame. The -- both the upgraders, which we had a record number of upgraders for the December quarter, but also in markets like China, 6 out of 10 sales are people new to the Mac. And so it's powered by both upgraders and switchers. Customer satisfaction is off the charts. And so what I see this as is a -- that will -- a product that will be very successful in a number of different markets from education, to business, to the creative industry and in all geographic markets. We're not limiting ourselves. Shannon Cross : Great. And then, Luca, can you talk a bit more on services? Just obviously outperformed your guidance or your expectations as well as certainly where we were at. Where were the -- what were the things that really outperformed? And maybe what trends are you seeing that is driving the extra revenue? Luca Maestri : Yes, Shannon. It was -- I mean it was really great on all fronts. We said December quarter records in every geographic segment. And then as I mentioned earlier, an all-time record for cloud, for music, for video, for advertising, for payment services. December quarter record in the App Store. So we've done, as you said, better than we were expecting at the beginning of the quarter. This overperformance has been spread around the world and spread around our services categories. And the reality is this combination of factors, the fact that the installed base is growing, the fact that we continue to have more and more engagement of our customers on all the services -- paid subscriptions is a phenomenal story, right? We now have 785 million paid subs. We just -- we've increased 165 million in the last 12 months alone, right? And so all these things combined are really powering the business. Very, very pleased with the performance. Operator : We'll hear next from Katy Huberty with Morgan Stanley. Kathryn Huberty : So first question just as it relates to some of the disruption you've seen on the component side, manufacturing and logistics over the past couple of years, are you starting to rethink your broader supply chain strategy or the manufacturing footprint on the back of the significant disruption? Are you happy with the overall geographic exposure that you see in the supply chain today? Tim Cook : Katy, if you sort of step back and look at how we've done, our largest issue by far has been the chip shortage. That is industry-wide and on these legacy nodes, as I had mentioned earlier. And I think our supply chain actually does very good considering the shortages because it's a fast-moving supply chain. The cycle times are very short. There's very little distance between a chip being fabricated and packaged and a product being -- going out of factory. And so, no, I don't see that it makes a fundamental change in the supply chain. Kathryn Huberty : Okay. And how are you thinking about the metaverse opportunity and Apple's role in that market? Tim Cook : Well, that's a big question. But we're a company in the business of innovation. So we're always exploring new and emerging technologies. And I -- you've spoken at length about how this area is very interesting to us. Right now, we have over 14,000 AR kit apps in the App Store, which provide incredible AR experiences for millions of people today. And so we see a lot of potential in this space and are investing accordingly. Operator : We'll take our next question from Amit Daryani with Evercore. Amit Daryanani : I have 2 as well. I guess both up on the supply chain side, I think these continue to be fairly volatile. I'd love to get your perspective, if you feel, if things or supply chain issues are starting to alleviate or they still remain challenging? And then maybe I missed this, but could you perhaps tell us how much revenue was left on the table in December because of the supply chain issues? And how does that number shake up in March? Tim Cook : Yes. Amit, what we've said in terms of December and March was that it's very difficult to estimate with great precision the constraints. But we said that they would be more than the Q4 or more than the September quarter, and we're saying that March will be less than the December quarter. And so that's the kind of verbiage that we’ve placed around it. In terms of is it still challenging? Yes, it is challenging. And for us, we pride ourselves on getting products to customers who really want them and try to do that in a fast basis. And so it's frustrating that we can't always do that at the speed that we would like. However, March is better than December. And so there's some encouraging sign there. We're not predicting, [which we do not know] overall, obviously because of the number of variables that go into such a prediction. Amit Daryanani : Fair enough. Tim, I think one of the topics investors can struggle a fair a bit with Apple is really just sort of understand visibility around your product road map, and I think some of your tech peers tend to be more vocal about their initiative. Some of them go change their name when they find an initiative that’s attractive I feel. You folks are spending, I think, $23 billion on R&D in '21. So you're really spending a fair amount. And maybe without telling us the road map, could you just talk about how do you think about where to focus your R&D resources on? And to some extent, is the way to think about this R&D spend, how much of it is really done on things that are more evolutionary in products that are out in the marketplace versus things that we haven't seen yet are on potential new offerings? Tim Cook : We have a little different model. We try to announce things when they're ready or close to ready and try to maintain an element of surprise in there. And so that explains hopefully what we do with our road map. And I think that's proven successful for us, and other people can do it differently, of course, but it's pretty been good for us over time to do that. So we're going to continue to do that. In terms of deciding where we invest in, we look at areas that are sort of at the intersection of hardware, software and services. And because we think that, that's where the magic really happens and it brings out the best in Apple. And so there are areas that have more than peaked our interest, and we are investing in those. And you can tell through time that we've ramped our R&D spend even more than we were before. And so there's quite a bit of investment going into things that are not on the market at this point as there always are. Operator : We'll hear next from David Vogt with UBS. David Vogt : I just wanted to dive in perspective on China and sort of the macro climate there and how that sort of pertains to your business as we think about it going forward. And the reason why I'm asking is we've heard some concerns that current policies might have caused a pause in this market and smartphone inventory. Maybe more specifically the local vendors could be a little bit elevated going into Chinese New Year. So we just want to get your thoughts on what you're seeing in this market around, the sort of potential development and then maybe touch on sell-in versus sell-through in that market. And then I have a follow-up. Tim Cook : Well, I can only comment on, for us. Our sales grew 21% there in the last quarter, and we're very proud of that. I'll stay away and let other people be the economist and make the macro determinations. But what we're seeing there was super impressive with all-time revenue records and a record number of upgraders and strong double-digit growth in switchers on iPhone, which is very important to us. And as I've mentioned before, we had the top 4 selling phones in urban China. And so there's a lot of good there. And I would remind you that iPhone was constrained in the quarter. And so I'm not sure where the statements are coming around about inventory, and I can't comment on whether other people have more or not, I don't know the answer to that. Thanks for the question. David Vogt : That's helpful, Tim. And then maybe just on the supply chain. Obviously, you've been managing it incredibly well over the last 12 to 18 months. And gross margins have actually performed relatively well, mix driven both between products and services. Can you help us think about sort of the quantifiable impact or maybe the costs that you're carrying due to the supply chain that may be sort of -- I don't want to use the word transitory, but we'd expect over the longer term, that might be sort of abate a little bit and you'll get a little bit of a benefit as we get past some of these supply chain issues over the next 12 months or so? Tim Cook : We're seeing inflation, and it's factored into our gross margin and OpEx that Luca reviewed with you earlier. Logistics, as I've mentioned on a previous call, is very elevated in terms of the cost of moving things around. I would hope that at least a portion of that is transitory, but the world is -- the world has changed, and so we'll see. Operator : We'll take the question from Samik Chatterjee with JPMorgan. Samik Chatterjee : I had a couple. The first question that I had was really on Apple TV+, and I know some of the other players in this market have talked about slowing subscriber growth as we exit the pandemic. So curious if you can share what trends you're seeing in Apple TV and Apple TV+ and how similar or dissimilar they are and how your content is maybe helping you on that aspect? And I have a follow-up. Tim Cook : We don't give out subscriber numbers for Apple TV+. What we do, do is give out a subscriber number for our subscription number for the total number of subscriptions that we had. And I think Luca mentioned earlier we ended the quarter at 785 million. And so we were incredibly pleased with that. That's a huge growth on a year-over-year basis of 165 million. And it counts, as you recall, both Apple branded and third party. In terms of how we're doing with TV+, we've been honored with 200 wins and 890 nominations. We're doing exactly like we had wanted to. We’re giving storytellers a place to tell original stories and feel really good about where we are competitively and strategic position of the product. Samik Chatterjee : And if I can just follow up, and similarly on Apple Pay, can you just help us think about when you think about the next few years, where are the biggest opportunities, either be it in terms of like geographies or either segments -- customer segments that you may not be tapping into currently and have an opportunity in. Tim Cook : Well, putting aside any kind of thing that sits on our road map for a second in that area, which we obviously wouldn't talk about in the call, I would say that I think Apple Card has a great runway ahead of us. It was rated to the #1 midsized credit carding customer set by J.D. Power and is getting -- has fast become people's main credit card for many, many people. And the growth of Apple Pay has just been stunning. It's been absolutely stunning. And there's still obviously a lot more there to go and because there's still a lot of cash in the environment. And so I think that both of these and whatever else we might do have a great future ahead. Operator : We'll take our next question from Chris Caso with Raymond James. Christopher Caso : Yes. So the first question is just a little bit of help in interpreting the guidance. And if you could speak to the March quarter, perhaps in terms of seasonality and seasonal performance. And Luca, as you mentioned last year, because of the later launch of the phone that some of that came into the March quarter, and that was better than seasonal performance in March. Should we interpret because the supply constraints are easing somewhat as you go into the March quarter that we should see something similar that March quarter would get some better than seasonal performance? Is that the correct way to interpret your guidance? Luca Maestri : Well, and we talked about it on a year-over-year basis because that's probably how most people look at it. And so just to recap what we said. First of all, we expect a record for the March quarter. We expect solid growth on a year-over-year basis. And -- but as Tim was saying, we still expect significant supply constraints but less than what we've seen in December. So I think on that basis, you can do the math around sequential. But given where we are in the environment, given the difficult compare both on iPhone, and as I mentioned on -- during my prepared remarks, on services, we're very, very happy with the way we're guiding and the way the business is going right now. Christopher Caso : Okay. As a follow-up, a follow-up question is on perhaps the sustainability and repeatability of the growth in iPhone after 2 very good years, well-received product and the 5G upgrade cycle. And I think there was a point in time when perhaps there's a view from some that iPhone was ex growth, and that's been proven wrong. Off of these very strong results, maybe you can speak to your level of confidence that iPhone continues to grow in the future? And kind of what are the avenues for that growth? Tim Cook : Yes. Chris, it's Tim. What I would say is that iPhone has become an integral part of so many people's lives now more than ever. And the active installed base of iPhone continues to grow and is now at an all-time high. And during December, as we had mentioned, we had a record number of upgraders and grew switchers strong double-digit, which I think speaks to the strength of the product. And that's all baked into some -- an enormous customer satisfaction rating of 98% and doing well throughout the geographies. And I've mentioned some of the geos that we track and how many units that we have on the top-selling model charts. And so -- and even though this is the second product announcement that has 5G in it, we're still really in the early innings of 5G, meaning if you look at the installed base and look at how many people are on 5G versus not, and we don't release those exact numbers, but you can do some math and estimate those, we maintain a very optimistic view on iPhone long term. Operator : We'll take our next question from Ben Bollin with Cleveland Research. Benjamin Bollin : Tim, I'm interested in how you think about the relationship between the total iOS installed base and then the subsequent performance you see within the services or the paid subscriptions. And a second part to that is, how do you look at the existing services business in terms of the growth you get from customers who are already subscribers versus completely net new or greenfield subscribers? Tim Cook : I think I'll let Luca comment on the second part of that. But if you back up and sort of look at how we're doing, even though we have 785 million subs, relative to the total number of products offered and the customers that's offered in, there's still a lot of room to grow there. And so I -- the way that I look at it is that we -- there's a lot more greenfield in front of us. Luca Maestri : And Ben, on the services engagement and how we think about customers, right, obviously, it's important for us that customers are engaged on our services platforms. And the ones that we have, we know that the more engaged they are, they're more likely to stay with Apple for the long term. So we just obviously track all those metrics, and they're very important for us. And that's why we continue to improve the quality of our offerings and the quantity over time. As you've seen, we launched a lot of new services. We obviously care a lot about new customers as well, and that's why we keep track of the installed base and a lot of other metrics on that front. It's very similar to what we do with products. I mean, also for products, we care a lot about upgraders. We care a lot about switchers. It's obviously the combination of the 2 that when you put it together provides the level of growth that you've actually seen in our Services business. I mean the last 12 months, we've done over $72 billion of revenue on Services. It's the size of a Fortune 50 company. It couldn't happen with our contribution from both existing and new customers. Operator : We'll take our next question from Harsh Kumar with Piper Sandler. Harsh Kumar : First of all, congratulations on stellar quarter in December and all the records that the Apple community has set. Tim, I had a question on the content on Apple TV. When we look at the Apple content that you guys put all on TV original content, it's typically very socially responsible and healthy, for example, Ted Lasso. Has this, in effect, created a constraint or a hesitancy of some sort for Apple to go and purchase studios when they come up? Or have those decisions be primarily financial or otherwise? Tim Cook : We don't make purely financial decisions about the content. We try to find great content that has a reason for being. And we love shows like Ted Lasso and several of the other shows as well that have reason for existing and may have a good message and may make people feel better at the end of it. But we're -- but I don't view that we've narrowed our universe, the things we're selecting from. There's plenty to pick from out there. And I think that we're doing a pretty good job of it as we speak. Harsh Kumar : Fair enough. And then my follow-up was the Apple vision of healthcare in the future. So you guys have sort of cautiously approached healthcare with iWatch and iPhone. It's mostly a preventative sort of approach. It provides you updates. But do you see a situation down the line where Apple perhaps plays a more active role, either through the Watch or some of the device where perhaps a doctor or a hospital mandates that the watch we want for effectively for critical and vital monitoring? And I was curious if you could just give us some color on how you guys think about health care and iWatch and that confluence? Tim Cook : Well, the -- with the Apple Watch, there's literally not days that go by without me getting notes about someone that's received a health alert. Maybe it's to do with their cardiovascular health. Or more recently, a lot of people have told me that they fell and was knocked unconscious and couldn't respond and the watch responded for them to emergency contacts and emergency personnel. And so there's a lot that we're doing today. My sense has always been that there's more here. I don't want to get into a road map discussion in the call. But we continue to kind of pull the string and see where it takes us. But we're really satisfied with how we're doing in this area because we are fundamentally changing people's lives and, in some cases, saving people's lives. So it's an area of great interest. Tejas Gala : Thank you. A replay of today's call will be available for 2 weeks on Apple Podcast as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are (888) 203-1112 or (719) 457-0820. Please enter confirmation code 3599903. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at (408) 862-1142. Financial analysts can contact me with additional questions at (669) 227-2402. Thank you again for joining us. Operator : This concludes today's conference. We do appreciate your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,022	2	2022Q2	2022Q2	2022-04-28	5.952	6.008	6.412	6.455	8.77555	24.01	20.98	Operator : Good day and welcome to the Apple Q2 FY 2022 Earnings Conference Call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please, go ahead. Tejas Gala : Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that we'll open the call to questions from analysts. Please note that some of the information you'll hear during today's discussion will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information please refer to the risk factors discussed in Apple's most recently filed annual Report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you, Tejas. Good afternoon, everyone, and thank you for joining us today. Apple is proud to report another record quarter, with a March quarter revenue record of $97.3 billion, up 9% from a year ago and better than we anticipated. iPhone, Mac and Wearables, Home and Accessories had their best ever March quarter and Services set an all-time record on the strength of subscription growth over the past year. Before I get into details, I want to take a moment to acknowledge the humanitarian tragedy unfolding in Ukraine. We're continuing to do everything we can to support our teams in the region and we are donating to humanitarian efforts on the ground. We've also committed to donating products to support refugees arriving here in the United States. I also want to speak to the unpredictable nature of the pandemic. We are excited to be welcoming employees back to the offices in the US and Europe. At the same time, we are monitoring COVID-related disruptions in China. Our thoughts are with all those in the path of the virus and we remain as committed as ever to doing our part to help protect people and their communities. These times remind us that we cannot know what the future may hold. But they remind us too, that technology infused with humanity makes a real difference in the world. And that's where our focus has remained, on driving the innovations that can enrich people's lives. Throughout the quarter, Apple continued its streak of unparalleled innovation at an unmatched pace. With Apple Silicon our teams are pushing the limits of what we once thought possible and we are seeing leaps and bounds in performance and efficiency. Last month we announced another breakthrough with M1 Ultra, the world's most powerful chip for a personal computer. The incredible customer response to our M1-powered Macs helped propel a 15% year-over-year increase in revenue, despite supply constraints. We now have our most powerful Mac lineup ever, with the addition of the entirely new Mac Studio. Paired with the new studio display, a 5K resolution display equipped with its own A13 Bionic chip, this new desktop and display transform any workspace into a creative powerhouse. As we release the groundbreaking M1 Ultra, we also expanded our iPhone offerings adding two beautiful green finishes to the iPhone 13 lineup and introducing the new 5G-enabled iPhone SE, which is great for our existing users who want a smaller iPhone and a great value for people buying an iPhone for the first time. They love how much power and performance we've injected into such an affordable device and rave about its incredible camera and its lightning fast speeds. In the March quarter, iPhone revenue grew 5% over the previous year despite a challenging compare as we saw strong demand from our customers for the iPhone 13 family. And with the all-new iPad Air supercharged by M1, iPad brings more power and more versatility across the entire iPad lineup. For customers around the world, iPad continues to be essential for education, creativity and entertainment. That's why we're continuing to see such a strong demand for iPad even while navigating the significant supply constraint we predicted at the start of the quarter. Turning to Wearables Home and Accessories, we are pleased to see these products continue to delight our users growing 12% year-over-year. Customers are enthusiastically taking charge of their health with Apple Watch Series 7 and Apple Watch SE. The rich sound, beautiful colors and compact design of HomePod mini continue to make it a hit with customers. And there's still no better companion to Apple Music than AirPods with spatial audio that transforms the way we listen putting our customers right in the center of the music. The seamless integration of hardware software and services is at the center of our work and philosophy at Apple. Apple Services are designed to be easy to use with expert curation that brings our users compelling content from talented developers, creators, storytellers and artists. These principles are reflected in all of the services we've developed which continue to generate incredible enthusiasm from our customers. Services revenue rose to $19.8 billion in the March quarter reflecting a 17% increase from a year ago. We were especially excited to cheer on CODA as it won the Academy Award for Best Picture making Apple TV+ the first streaming service to win in this category. We were honored to be stewards of this incredibly powerful deeply moving film. In a little over two years Apple TV+ shows and movies have earned over 240 awards and more than 960 nominations from Severance to WeCrashed to Pachinko new Apple originals are connecting with audiences and earning praise from critics. We're also winning over sports fans with Friday Night Baseball, which debuted earlier this month and They Call Me Magic, a four-part documentary that premiered last week tracing the life of the iconic Magic Johnson. Fitness+ is helping users channel their inner athlete with a range of workout routines for any fitness level. We recently introduced a postpartum routine designed by mothers for mothers. And with our Apple heart and movement study, we are helping researchers glean new insights into cardiovascular fitness. As our products and services entertain customers and help them stay healthy, we're also working to make their lives easier. Arizona for example is the first state to enable its citizens to securely add their driver's license and state IDs to Apple Wallet. More states in the territory of Puerto Rico will soon follow. We've also announced plans to introduce Tap to Pay on iPhone a simple and secure way for businesses to accept contactless payments launching across the US later this year. To meet the needs of customers wherever they are, our Apple retail teams are constantly adapting to better serve them. We opened a new store in the United Arab Emirates this quarter at a unique waterfront location with panoramic views of the Abu Dhabi skyline. And earlier this month we opened a new store in Korea, our third and largest store in the heart of Seoul. And across the US we marked the return of in-person today at Apple Sessions with a special program featuring music from pop icon Lady Gaga. I'd like to thank our team members working in Apple stores, customer care centers, channel partner stores and our Apple Care teams for bringing customers the best of Apple. As we look to the environment, we are making good progress on our commitment to achieve carbon neutrality across our products and supply chain by 2030. Through our Green Bonds program, we're investing in breakthrough technologies like low-carbon aluminum which we will be integrating into the new iPhone SE. And we were pleased to announce recently that we've nearly doubled the number of our top suppliers who have committed to accelerating the transition to clean energy. We are also investing in renewable energy projects in communities most impacted by climate change around the world. As we do our part to protect our planet, we're also prioritizing people. As part of our long-standing commitment to inclusion and diversity, we're continuing to build a better, stronger Apple, rooted in a culture where everyone belongs. Last month we published an update on the progress we've made with inclusion and diversity at Apple. We've hired more women than ever into leadership roles. And in the US nearly 60% of all leadership openings were filled by people from underrepresented communities in 2021. We also recently announced a $50 million Supplier Employee Development Fund that will help workers in our supply chain discover additional educational opportunities and build new skills. And through our Racial Equity and Justice initiative, we're continuing to advance our work to support underrepresented communities and help build a more just and equitable world. Before I hand it over to Luca, I want to acknowledge the challenges we are seeing from supply chain disruptions driven by both COVID and silicon shortages to the devastation from the war in Ukraine. We are not immune to these challenges, but we have great confidence in our teams, in our products and services and in our strategy. Fundamentally our work is about making technology that enriches people's lives and unlocks the full creative potential of humanity. And though the twists and turns of the future may be uncertain what is certain is that we will never stop striving to be a force for good in the world in everything we do and everything we are. With that I'll turn it over to Luca. Luca Maestri : Thank you, Tim and good afternoon everyone. We are pleased to report very strong financial results for the March quarter during which we set a revenue record of $97.3 billion, up 9% year-over-year. We also set new March quarter records in the Americas, in Europe and in Greater China. On the product side, revenue was $77.5 billion, up 7% over a year ago and a March quarter record. We grew in each of our product categories except iPad, which remains significantly supply constrained throughout the quarter. And we set March quarter records for iPhone, Mac and Wearables Home and Accessories. This level of sales performance combined with unmatched customer satisfaction and loyalty, helped our installed base of active devices, reach an all-time high for all major product categories, as well as geographic segments. Our Services set an all-time revenue record of $19.8 billion, up 17% over a year ago, with March quarter records in every geographic segment and services category. Company gross margin was 43.7%, down 10 basis points from last quarter. A seasonal loss of leverage and unfavorable foreign exchange were partially offset by favorable mix. Products gross margin was 36.4%, down 200 basis points sequentially, mainly driven by seasonal loss of leverage and FX. Services gross margin was 72.6%, up 20 basis points sequentially due to a different mix. Operating cash flow of $28.2 billion, net income of $25 billion and diluted earnings per share of $1.52 were all March quarter records. These strong March quarter results capped a record first half of the fiscal year in the midst of a challenging macroeconomic environment. We generated over $220 billion in revenue growing 10% year-over-year and set all-time records for iPhone, Mac, Wearables Home and Accessories and Services. These record sales results drove strong double-digit growth in operating income and earnings per share. Let me now get into more detail for each of our revenue categories during the March quarter. iPhone revenue grew 5% year-over-year to a March quarter record of $50.6 billion despite supply constraints. Thanks to our continued strong customer response to our iPhone 13 family and the launch of our new iPhone SE. We set March quarter records in both developed and emerging markets and the latest survey of US consumers from 451 Research indicates iPhone customer satisfaction of 99% for the iPhone 13 family. As a result of this level of sales performance combined with unmatched customer loyalty, the iPhone active installed base reached a new all-time high across all geographies. For Mac, revenue of $10.4 billion was a March quarter record despite supply constraints with 15% year-over-year growth, driven by strong demand for our M1-powered MacBook Pro. As Tim mentioned earlier, our continued innovation and investment in Apple Silicon has clearly shown in our Mac results as the last seven quarters have been the best seven quarter ever for Mac. Our investment focus on Mac has also helped drive significant activity in our growing installed base. In fact, we had a March quarter record for upgraders, while at the same time, nearly half of the customers purchasing Mac were new to the product. iPad revenue was $7.6 billion, down 2% year-over-year due to continued supply constraints. Customer response to our iPad lineup including our new M1-powered iPad Air, remains very strong and our installed base of iPads reached a new all-time high during the quarter, with over half of the customers purchasing an iPad during the quarter being new to the product. Wearables, Home and Accessories set a March quarter record of $8.8 billion, up 12% year-over-year. And we set March quarter revenue records in both developed and emerging markets. In particular, our Wearables business has doubled in three years and is mainly the size of a Fortune 100 business, as we continue to attract many customers who are new to Wearables. For instance, Apple Watch continues to extend its reach, with over two-thirds of customers purchasing an Apple Watch during the quarter being new to the product. Turning to Services. As I mentioned we reached an all-time revenue record of $19.8 billion, up 17%, with all-time records for the App Store, Music, Cloud Services and Apple Care and March quarter records for video, advertising and payment services. These impressive results reflect the impact of our continued investment in improving and expanding our Services portfolio and the positive momentum that we're seeing on many fronts. First, our installed base has continued to grow, reaching an all-time high across each geographic segment and major product category. Next, we continue to see increased customer engagement with our services. Our transacting accounts, paid accounts and accounts with paid subscriptions, all reached all-time highs during the March quarter in every geographic segment. Also, paid subscriptions continued to show very strong growth. We now have more than 825 million paid subscriptions across the services on our platform, which is up more than 165 million during the last 12 months alone. And finally, as Tim highlighted before, we continue to improve the breadth and the quality of our current service offerings while launching new services. In the enterprise market, many businesses and government organizations continue to turn to Apple for the latest technologies, to deliver innovative services to customers and employees. In March, Alaska Airlines began to replace the conventional airport self-service kiosks with iPad Pros for faster passenger check-in and self bag drop. Also, last month, the Western Australia Police Force completed the world's first commercial deployment of CarPlay across their entire fleet of vehicles, to complement the iPhone 13 issued to each officer. This allows officers to access critical information faster on the road and enhance public safety for the community. We also unveiled the general availability of Apple Business Essentials in the US, adding a new subscription services designed to help small businesses manage every aspect of their Apple device life cycle. Let me now turn to our cash position. As we continue to generate very strong cash flow, we ended the quarter with $193 billion in cash and marketable securities. We repaid $3.8 billion in maturing debt, while increasing commercial paper by $2 billion, leaving us with total debt of $120 billion. As a result, net cash was $73 billion at the end of the quarter. We returned nearly $27 billion to shareholders, during the March quarter. This included $3.6 billion in dividends and equivalents and $22.9 billion through open market repurchases of 137 million Apple shares. We also retired an additional 5 million shares in the final settlement of our 18th ASR. Given the continued confidence we have in our business now and into the future, today our Board has authorized an additional $90 billion for share repurchases, as we maintain our goal of getting to net cash neutral, overtime. We're also raising our dividend by 5% to $0.23 a share and we continue to plan for annual increases in the dividend going forward. As we move ahead into the June quarter, I'd like to review our outlook which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near-term, we are not providing revenue guidance, but we are sharing some directional insights, based on the assumption that the COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. We believe our year-over-year revenue performance during the June quarter will be impacted by a number of factors. Supply constraints caused by COVID-related disruptions and industry-wide silicon shortages are impacting our ability to meet customer demand for our products. We expect these constraints to be in the range of $4 billion to $8 billion which is substantially larger than what we experienced during the March quarter. The COVID-related disruptions are also having some impact on customer demand in China. With respect to foreign exchange, we expect it to be a nearly 300 basis point headwind to our year-over-year growth rate. Additionally, we paused, all sales in Russia during the March quarter. This will impact our year-over-year growth rate by approximately 150 basis points. Specifically related to Services, we expect to continue to grow double-digits, but decelerate from our March quarter performance, due to some of the factors I just described. We expect gross margin to be between 42% and 43%. We expect OpEx to be between $12.7 billion and $12.9 billion. We expect OI&E to be around negative $100 million excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally, reflecting the dividend increase I mentioned earlier, today our Board of Directors has declared a cash dividend of $0.23 per share of common stock, payable on May 12th 2022 to shareholders of record as of May 9th, 2022. With that, let's open the call to questions. Tejas Gala : Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator : Absolutely. We'll take our first question from Katy Huberty with Morgan Stanley. Katy Huberty : Yes. Thank you. Congrats on the quarter. A couple of macro-related questions, just given everything that's going on in the market, the first is on how you're thinking about consumer spending, as we see more stock market volatility, rising interest rates, inflation. What metrics are you watching either internal to your business or external at the macro level to understand whether you'll ultimately start to see some demand impact particularly on the product side of your business? And then, I have a follow-up. Tim Cook : Katy, hi, it's Tim. We're obviously monitoring our daily sales very closely. From an inflation point of view, we are seeing inflation. It is or was evident in our gross margin last quarter and in our OpEx last quarter and it is assumed in the guidance that Luca gave for this quarter as well. So we're definitely seeing some level of inflation that I think everybody is seeing. Katy Huberty : And how are – just as a follow-up to that how are you thinking about how that might impact the consumers in your business and whether it influences their ability to purchase at the same level? Tim Cook : Well we're monitoring that closely and we've sort of – but right now our main focus frankly speaking is on the supply side. Katy Huberty : Okay. And as it relates to that in China, how should we think about lockdowns from an impact on supply and an impact on demand? And what products in your portfolio should we expect to be most impacted? Thank you. Tim Cook : Yes. Good question. For Q2 so the quarter that we just finished, the restrictions in China had not started yet. And so Q2, we did have supply constraints. They were significantly lower than what we had experienced during the December quarter. They were driven by industry-wide silicon shortages. And specifically, the issue that I talked about on previous calls with the legacy nodes. But looking ahead, we see two causes of supply constraints. One is the COVID-related disruptions; and there's the industry-wide silicon shortages that will continue. We've estimated the constraints to be in the range of $4 billion to $8 billion. And if you – these constraints are primarily centered around the Shanghai corridor. And the – on a positive front, almost all of the affected final assembly factories have now restarted. And so the range – the $4 billion to $8 billion range reflects various ramps of getting back up and running. We're also encouraged that the COVID case count that's been reported in Shanghai has decreased over the last few days. And so there's – there's some reason for optimism there. Katy Huberty : Thank you. Pretty amazing how the team has navigated all the cross currents. Congrats again on the quarter. Tim Cook : Thanks so much. Tejas Gala : Thank you, Katy. Can we have a next question please. Operator : Thank you. We'll take our next question from Amit Daryanani with Evercore. Amit Daryanani : Good afternoon. Thanks for taking my questions. I guess I have two as well. First of all I was hoping you just touched a little bit on the geographic growth vectors that you saw. And I think Americas grew really well 19%, 20%. But Europe and China had much more muted growth if you may. I know your compares are fairly difficult but I'm curious if anything you would call out in terms of spillover effect on the macro side from Russia, Ukraine in Europe that's seeing some impact to consumer spend or even in China. Just help us understand what happened geographically there. Luca Maestri : So Amit, as you said in the Americas, we had a very strong quarter up 19% very happy across the board there. Europe, again was a really good quarter for us. We grew 5% in spite of the fact that of course as you know during the month of March, we paused our sales in Russia. So we had an impact to our sales results there for a month of the quarter. But a number of European countries particularly in Western Europe did really-really well for us. And so it was a very good quarter for us pretty much in line with our expectations. Americas was better than our expectations. China was again a March quarter record for us. Keep in mind and this affected every geographic segment for us the different launch timing for the iPhone this year versus a year ago had an impact on the March quarter results because we launched the product later a year ago than we did this year. So some of the channel fill for the new products happened during the March quarter a year ago. Japan and Asia Pacific were affected by foreign exchange. Japan would have grown in line with company average in constant currency terms. Asia Pacific as well was affected by foreign exchange with the dollar appreciating against most currencies. And then again this difference in the launch timing for the iPhone made a difference. Keep in mind again the supply constraints that we had during the quarter our results would have been obviously better without the supply constraints. Overall we felt very good about the performance around the world. Amit Daryanani : If I could just follow up on the supply chain the $4 billion to $8 billion impact that you folks talked about. Do you think this is demand that's deferred out, or demand that's essentially destroyed because you have a product cycle that's going to come out in the year at some point soon this year? How do you think about demand deferred versus demand destroyed on that front? And then is there a sense of which product categories are most impacted by this versus not? Tim Cook : It will affect most of the product categories. And in terms of whether it's -- whether we can recapture or not we believe that there's a percentage of it that is recapturable and a percentage of it that is likely not where somebody needs something quickly. And that ratio or that percentage is very difficult to estimate. We obviously, try to do that internally in order to demand plan but it's not something that we share. Amit Daryanani : Got it. Thank you. Tejas Gala : Thanks Amit. Can we have the next question please. Operator : We'll take our next question from Chris Caso with Raymond James. Chris Caso : Yes. Thank you. Good evening. Also just wanted to dig in on the supply constraints a bit. And I guess one of the things you said is that the $4 billion to $8 billion range reflects some reopening of facilities during the quarter. I know obviously it's tough to predict as you go forward into the second half of launch of new products. But at that point would you expect the constraints to still be mainly on the component side? And then hopefully if things don't get worse in China then the facilities are open and the constraints are only the component constraints as you go into the second half of the year. Tim Cook : Yes. Chris it's hard to answer a question about unannounced products. And so I'll try to not do that. But the— Chris Caso : For all products yes. Tim Cook : The $4 billion to $8 billion is simply as I had mentioned that if you look at the Shanghai corridor -- we have some final assembly plants in this area. And almost all of them have restarted as the good news of it working with local officials. But we planned various ramps for these. And that's the range of 4% to 8% that we've estimated. Kobi is difficult to predict. For sure for sure. Chris Caso : As a follow-up I wanted to also follow on some of your comments regarding inflation and how Apple is dealing with it. Obviously component costs have been going up in many different areas. And then specifically in the semiconductor side costs have been going up but perhaps for some different reasons because of the additional cost of going up to new process nodes that it's higher than it has been in the past. How is Apple planning to deal with that? And is it possible for you to get through that without either raising prices on your product or affecting gross margins? Tim Cook : Well, some of what you said is in the results for the last quarter that we've announced. And obviously we've put our current thinking in the current quarter guidance that Luca listed earlier. There are component costs that are falling and ones that are rising. And so not all of them are moving in the same direction. And so we really try to manage to the net of these. And I think we're doing a reasonable job currently navigating the what is a challenging environment. Tejas Gala : Thanks Chris. Can we have the next question please? Operator : Thank you. We'll take our next question from David Vogt with UBS. David Vogt : Great. Thank you guys for taking my question. I just want to dig in a little bit on the product disruption the $4 billion to $8 billion. In the past you kind of gave us a sense for how it would affect each different product lines. And should we expect it to have similar pro rata impacts? And is there an opportunity to maybe reallocate resources to limit maybe some of the impact on the iPhone line and then maybe versus the iPad line? And then I have a quick follow-up. Tim Cook : It will affect most of the product categories. And we obviously will look to do any kind of optimization that we can do to minimize the effect on the user. David Vogt : Great. And then maybe just as a follow-up. You talked about potential COVID-related demand issues in China and taking at 150 basis points from Russia. But when you look at the other geographies is there anything that you can share with us whether it's in Western Europe or the US that you're seeing from a demand perspective that may be sort of out of the ordinary or outside of sort of the disruptions and the lack of product demand seems to be sort of where you would think it would be at this point in the cycle. Thank you. Tim Cook : We were happy with the iPhone growth last quarter, particularly when you think about the comp that it was going against because we had very different timing on the launches in the year ago quarter where we launched in Q1. And therefore naturally Q2 is at a different place on the new product curve. And so, it was a very difficult comp. And so we were pleased with it. And as Luca said, the Americas geography did quite well last quarter. And the US, of course, is the major geography within there. And so the US was quite strong last quarter. David Vogt : Thank you. Tejas Gala : Thanks, David. Can we have the next question please? Operator : We'll take our next question from Jim Suva with Citigroup. Jim Suva : Thank you. Tim and your entire company has done a great job at navigating through all the issues in the past several years whether it be COVID, power outages, trade wars, shipping challenges and all that. When we hopefully someday get past all of these and the supply constraints in society and turmoil hopefully across the world, do you start to reconsider the way you do the supply chain albeit just-in-time ordering and outsourcing so much of your chips? Or do you actually consider like holding more buffer inventory internally, because right now letting $4 billion to $8 billion go away it'd be nice to have that to be able to sell. So do you consider holding more buffer inventory or maybe even doing your own chips by outsourcing your own chips to control them more, or how should we think about strategically when hopefully the world is in a better place from today? Tim Cook : Well, I'm looking forward to that day as I know all of you are. Our supply chain is truly global. And so the products are made everywhere. And we do a lot in the U.S. We'll probably be doing even more here as more chips are produced here. And we continue to look at optimizing. We learn something every day and make changes. But when you back up and kind of zoom out and look to see how the supply chain has done within the environment that you eloquently talked about, I think it's been very resilient with -- the top issue we've had clearly is the silicon shortage that I think everybody is struggling with. And I think we've done a really good job of managing through the COVID piece of it. And so -- but we are learning and we're making some changes as we go, we don't have a tenure. And so, to the degree that we learn something that we should change, you can bet that we're doing that. In this business you don't want to hold a ton of inventory. And so you want to work on cycle times and so forth to do things very quickly and take strategic inventory in places where you need to buffer for interruptions and so forth. And so we're constantly thinking about where those places are. In today's world it's not really possible for us to have buffer on silicon. And so, today silicon rolls off the fab and it's into a final assembly plant very, very quickly and we try to make that as short a time as possible. Jim Suva : And then my quick follow-up. We've been talking about supply chain issues for multiple quarters now. Are you kind of hearing from your suppliers that maybe later half of this year, or is it actually going to go into kind of 2013 for some closer equilibrium time period? Tim Cook : Yeah. I wouldn't – you're talking about for the silicon shortage in particular I assume. I don't want to predict that, because the – that entails knowing how worldwide demand and supply are for the whole – for industries outside of even the industry we're in. And I don't proclaim to be an expert in that. That also heavily is influenced by how strong the economies are in the different markets. And so I think there are varying levels of outcomes. And what we're focused on is doing – trying to do very well regardless of how that question is answered. Jim Suva : Thank you. And congratulations to you and your entire team. Tim Cook : Thanks so much. Tejas Gala : Thanks, Jim. Can we have the next question, please. Operator : We'll take our next question from Samik Chatterjee with JPMorgan. Samik Chatterjee : Hi. Thanks for taking my question and congrats on the results as well. I'll stick to two more micro level questions here. Firstly, Tim you talked about the iPhone SE three demand that you the product that you just launched. I was hoping you could compare what you're seeing in terms of momentum to previous iPhone SE cycles? Particularly I think in the past North America has been the largest region in terms of demand what are you seeing with the current product in terms of demand by geography? And I have a quick follow-up for Luca? Thank you. Tim Cook : Yeah. We don't get to that level of granularity because we view it to be sensitive data that our competitors would love to have. And so I'm going to punt on answering that question. I would just say that, when you zoom out and look at iPhone, as a total we could not be happier with the iPhone 13 family of products and the strength we've seen for this cycle. And really, it's those products that have powered the line and given us the overall results that we've had on iPhone, which for the first half the revenues were $120 billion and we feel very, very good about those results. Samik Chatterjee : And my follow-up for Luca. Luca we are seeing sort of a settling in terms of growth rate for the Services business on the tough comps that you have. We're also seeing the gross margins there settling around this sort of 72% range. And I understand there are a lot of moving pieces beneath that. But is this sort of a good range for Services longer term, or are there sort of moving pieces there that as they scale they can take – there is an opportunity for more upside? Luca Maestri : Well we feel really great about the momentum for our Services business. I was looking at the absolute numbers here. This run rate of almost $20 billion is essentially double what we had just four years ago. So we've done really, really well with Services. We have a lot of momentum for a variety of reasons. The first one is the fact that our installed base of active devices continues to grow very nicely. And so that is obviously a big engine for our Services business. The second thing is that the level of engagement that we see on our platform continues to grow. We have more transacting accounts, more paying accounts, more accounts with subscriptions. The absolute amount of paid subscriptions on our platform is pretty impressive 825 million. It's an increase of 165 million in the last 12 months alone. So you can tell that this is great growth. And of course, as you've seen over the last few years, we've added a lot of new services and we plan to add new services and new features that we believe that our customers would love. And so we think that's a great -- absolute great momentum. The growth rates can change a bit, especially during COVID because we've gone through some cycles of lockdowns and then reopenings and so on. And so sometimes the comps can be a bit deceiving. We are looking at it from the lens of continuing to satisfy our customers, adding to the portfolio, improving the quality of the services and that has served us very well, because in the last 12 months, we've generated $75 billion of Services revenue. And you've seen the margins are obviously accretive to company margin. So we feel good, we feel good about the Services business. I mentioned in my prepared remarks that the growth rate for the June quarter, we expect it to be less than the 17% that we've reported in March for some of the reasons that I described. Of course, foreign exchange is an issue with the dollar being strong at this point. And of course we paused, our sales in Russia. So we need to take that into account. But in general, when we look across the board, we set all-time records and quarterly records for each one of our categories. Samik Chatterjee : Thank you. Tejas Gala : Thanks, Samik. Can we have the next question please. Operator : We'll take our next question from Krish Sankar with Cowen and Company. Krish Sankar : Yeah. Hi. Thanks for taking my question and congrats on the really strong results. I have two questions too and I do apologize. The first one is on supply constraints. Luca, if I tried to read the deal based on June quarter guidance revenue is being impacted kind of implies year-over-year down revenue. And you also spoke about a $4 billion to $8 billion supply constraint which is a large amount compared to the revenue. And I understand you have the supply constraints and the China shutdowns. I'm just kind of curious, do you think the last three quarters Apple supply chain had a better buffer inventory of semis that kind of got used up and now you're kind of more tied to whatever the true supply contains of legacy semis, or is there something else going on? And then I had a follow-up. Luca Maestri : What has happened obviously during COVID has change over the quarters. Recently, for example during the March quarter, the constraints that we had were limited to silicon shortages. When we are giving out this range of $4 billion to $8 billion, it's not only silicon but it's the restrictions in China that we're seeing right now. So they are different. There's additional constraints at this point that we are seeing because of the COVID situation. So it's -- that is the fundamental difference there. Krish Sankar : Got it. Got it. Very helpful. And then as a quick follow-up with the shutdowns, especially in places like China, have you seen actually the App Stores or your Services business actually inflect positively, or is it too short a time frame to make a judgment call on that? Luca Maestri : Yes, I think, it's early to tell. The restrictions in China started at the very end of March. So, it's very, very early to tell. Krish Sankar : Got it. Got it. Thank you Luca. Thank you very much. Tejas Gala : Thanks, Krish. Can we have the next question, please? Operator : We'll take our next question from Wamsi Mohan with Bank of America. Wamsi Mohan : Yes. Thank you. Luca, thanks for the color around the impacts to the revenue guidance. But I was wondering if you could share a if you expect to grow overall revenue in the June quarter on a year-on-year basis. And just to be clear on these impacts that you gave those are on a year-on-year basis. Can you also tell us how much FX is a headwind if any on a quarter-on-quarter basis and incremental Russia impact quarter-on-quarter basis and incremental supply chain impact also on a quarter-on-quarter basis? And I have a follow-up. Luca Maestri : Well, as we said, we're not guiding to a specific revenue number. And -- but just to repeat what I said during the prepared remarks, we're having supply constraints that are caused by the COVID-related disruptions and by the silicon shortages. And that is what is creating the constraints. We expect them to be in the range of $4 billion to $8 billion. This is substantially larger than what we've had during the March quarter. Again, let me repeat the COVID-related disruptions did not affect the March quarter. So you need to keep that in mind. With respect to foreign exchange, we expect it to be nearly 300 basis points headwind. It was about 200 basis points headwind during the March quarter. For Russia, we said that the impact on a year-over-year basis is approximately 150 basis points, that reflects the three months of the quarter. We paused sales in Russia at the beginning of March. So it was a partial impact on the March quarter. So, obviously, on a sequential basis, it's an incremental factor to keep in mind. I would say on the positive side here is that the demand for both our products and services is solid. Tim has mentioned a number of times the iPhone 13 family is having a really strong year. We -- when we look at top-selling smartphones around the world, we've had pretty incredible results during the March quarter. The top six models in the United States are iPhones, the top four in Japan, the top five in Australia, five of the top six in urban China and so on and so forth. So the iPhone 13 has been truly a global success. And as you know and as you can tell even from our website, most of the iPad and Mac models are constrained today. They've been constrained for several quarters, because the demand is very good for those products. And the Services business as you know is growing double digits. So that's what gives us confidence for the June quarter and going forward. Wamsi Mohan : Okay. Thank you, Luca. And if I could follow-up, Tim you're in a really enviable place of being pretty far from your net cash neutral objective. At the same time, you're generating a significant amount of cash flow every year. So your capital return strategy has been an extremely successful program in the past, but $90 billion is 3% of your market cap. And on the other hand there are just a lot of assets that arguably have a lot of synergies with Apple in the health care space, the fitness area like Teladoc or [indiscernible] or Netflix in the content area. Why is this not the right time for Apple to perhaps look at such assets instead of buying back stock or maybe do both? Tim Cook : We're always looking and we continue to look. But we would only acquire something that were strategic. We acquire a lot of smaller companies today and we'll continue to do that for IP and for great talent. And -- but we don't discount doing something larger either if the opportunity presents itself. And so -- but I don't want to go through my list with you on the phone, but we're always looking. Wamsi Mohan : Thanks. Tejas Gala : Great. Thanks Wamsi. Can we have the next question please? Operator : We'll take our next question from Kyle McNealy with Jefferies. Kyle McNealy : Hi, thanks very much for the question. This one is regarding Mac. Great quarter with the results by the way, some exciting products coming out for sure. We're noticing that there's the lead times are longer for Mac's now ordered today with some available now but many not shipping until June. Just wanted to get your insight on how much of that you think is driven by the strong March results with the product launch and likely sellout conditions versus just real tightness in the supply chain? And the obvious follow-on to that is when do you expect you might catch up and get Mac lead times back within a week? Tim Cook : Well, we're working hard. We've got lots of customers that we want to get the new Macs too. And so we're working hard on them. They are a result of the combination of the COVID disruptions and the silicon shortage that we've talked about before. And when we might remedy that, I don't -- we're not really forecasting when we can be out of the silicon shortage, so that would be a difficult answer. I think the COVID piece of it I hope is a transitory kind of issue. And so I would hope that it would get better over time. Kyle McNealy : Great. Thanks a lot. Tim Cook : Yeah. Tejas Gala : Great. Thanks Kyle. Can we have the next question please? Operator : Thank you. We’ll take our next question from Ben Bollin with Cleveland Research. Ben Bollin : Good afternoon, everyone. Thanks for taking the question. The first one is on services. Luca, I was hoping you could share a little bit of perspective on maybe how much of the services contribution is purely consumer versus enterprise? And how you think about the longer term opportunity to monetize the enterprise community? And then Tim for you as a follow-up, I think Jim Suva had asked a question earlier about some of your strategy. I was curious how strategy might have evolved since everything has been going on, what changes you might have seen as of late with respect to freight and some of the geographic production footprint? And any evolution that has happened as of late? Thank you. Luca Maestri : So Ben on the services side, of course, the vast majority of what we do in services is to final consumers. We do understand and appreciate the fact that the enterprise is a great opportunity for us. Very recently, for example, we launched this new subscription service here in the United States which we call Apple Business Essentials where essentially we provide support to small and medium-sized businesses in terms of 24/7 support device management for small business owners which we think small companies will value and appreciate. Obviously, we sell Apple Care to enterprises already today. But we know enterprise in general as a market is a very interesting market for us and we're putting a lot of effort and focus on it and we believe we have really good opportunities to grow. Tim Cook : Ben, you brought up freight. Freight is a huge challenge in today both from an inflationary point of view and from an availability point of view. And so right now the focus is on moving the freight to customers any way that we can do that. Over time, we'll do that much more efficiently. And I would hope that the fundamental rates reset some both -- and I'm talking about both ocean and air. And so both of them have come under some significant inflationary pressure partly due to COVID and some other reasons as well I would guess. And in terms of geo production we are constantly making tweaks here and there. And I don't want to go into the details of those because we view it as to be sensitive kind of information, but we're constantly making moves to optimize in the current environment. Ben Bollin : Thank you both. Tim Cook : Thank you. Tejas Gala : Thank you, Ben. A replay of today's call will be available for two weeks on Apple Podcast as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are in 888-203-1112 or 719-457-0820. Please enter confirmation code 1807633. These replays will be available by approximately 5 P.M. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator : This concludes today's conference. We appreciate your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,022	3	2022Q3	2022Q3	2022-07-28	6.054	6.1	6.436	6.44	7.58	24.04	24.12	Operator : Good day, and welcome to the Apple Q3 FY 2022 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead. Tejas Gala : Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during the discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operation. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you, Tejas. Good afternoon, everyone, and thank you for joining us. Today, Apple is reporting another record June quarter with revenue of $83 billion, which was better than we expected despite supply constraints, strong foreign exchange headwinds and the impact of our business in Russia. We set June quarter records in the Americas, in Europe and in the rest of Asia Pacific region. We also saw June quarter revenue records in both developed and emerging markets with very strong double-digit growth in Brazil, Indonesia and Vietnam and a near doubling of revenue in India. We saw great enthusiasm for our products and services, resulting in an all-time record for our installed base of active devices. Our supply constraints were less than we anticipated at the beginning of the quarter, coming in slightly below the range we discussed during our last call. We know that this is a time of significant challenge around the world for all of us confronting new variants of COVID-19, to those experiencing a prolonged humanitarian crisis in Ukraine and everyone dealing with the consequences of an uncertain economic environment. We know that much of the world is living through uneasy times, and it is all the more reason why we are working hard to help our customers navigate the world as it is while empowering them to create the world as it can be. Turning to iPhone. We set a June quarter record for both revenue and switchers to iPhone. With its advanced performance, capability and ease of use, customers continue to find that iPhone remains the gold standard for smartphones. And they've been raving about the iPhone 13 lineup's extraordinary camera quality with features like cinematic mode and macro photography to create eye-catching content. We were also proud to celebrate the 15th anniversary of iPhone, a device that continues to change the world in profound ways with each new innovation. Last month, Apple unleashed a wave of innovation, including the completely redesigned MacBook Air and a new 13-inch MacBook Pro. Both of these systems are powered by M2, our next generation of Apple silicon for Mac. M2 delivers a faster CPU, GPU and neural engine along with higher memory bandwidth and new capabilities like Pro Res acceleration. And it continues the tremendous pace of innovation in Apple silicon for the Mac. We continue to have supply constraints with Mac, but we're encouraged by the strong response from customers to our incredible lineup. iPad, like Mac, continued to see strong demand during the June quarter despite ongoing supply constraints. Customers and developers have been especially excited about the new features we're bringing to iPad with iPadOS 16. This update was one of the many announcements we made at a truly extraordinary WWDC, where we shared a range of new features that give customers more control of their experience than ever before. This includes the ability to edit or delete sent messages, a new way of organizing apps on iPad and Mac, and an all-new customizable lock screen on iPhone and so much more. Today, iOS 16, iPadOS 16, MacOS Ventura and watchOS 9 are all in public beta, and we couldn't be more excited to see what our community of developers creates with them. We unveiled new innovations and accessibility such as door detection and live captions that support users with disabilities with navigation, health, communication and more. We also announced Apple Pay Later, which gives customers more flexibility to make purchases with their Apple devices. And with our next generation of CarPlay, we're improving the driving experience with deeper integration into vehicle hardware, allowing drivers to control their music, change the temperature and monitor their fuel levels, all from a single integrated platform. In the Wearables, Home and Accessories category, the innovation infused across our products continues to win over new customers. Apple Watch remains a great way for health-conscious customers to track their overall wellness and fitness. And we're bringing them even more data about their workouts, sleep cycles and medications with updates soon to arrive on watchOS 9. We were also pleased to get FDA approval for a new feature that will let users with irregular heart rhythms track the time they spend in Afib. Turning to Services. Customers continue to engage enthusiastically with our content across news, fitness, music, gaming and more. Services revenue rose to $19.6 billion, a June quarter record and a 12% increase year-over-year, which was in line with our expectations. We're proud of how Apple TV+ productions like Severance and Black Bird have captured the popular imagination, and we're looking forward to more exceptional content developed by extraordinary creators throughout the year. In 2.5 years since launch, Apple TV+ has now earned 250 wins and over 1,100 award nominations and counting. Just this month, we learned that Apple TV+ earned 52 Emmy Award nominations across 13 titles. In our last call, I mentioned Friday Night Baseball on Apple TV+, which is already delighting baseball fans. And last month, we announced a 10-year deal to present Major League soccer matches around the world, giving global soccer fans a whole new way of viewing their favorite sport. One of the best parts of WWDC was welcoming developers to Apple Park while continuing to connect with developers all over the world. This year, we had an incredible group of developers and more opportunities to learn from one another than ever before. It was a truly special experience and a reminder of the economic miracle the App Store represents. We are proud of the fact that the iOS app economy supports more than 2.2 million jobs here in the United States and many more around the world. It's been wonderful to see earnings by small developers more than double over the past 2 years. And as we're supporting developers, we're also doing our part to protect customers. In 2021, we prevented nearly $1.5 billion in fraudulent transactions by stopping over 1.6 million risky and vulnerable apps and app updates. Now I want to turn to retail. This quarter, we opened the doors to Apple's first store in the Hubei province in China, welcoming the community to a beautiful new space. And earlier today, we opened Apple Brompton Road, our fifth store in Central London. We also expanded today at Apple Creative Studios to reach even more young creatives from underrepresented communities to help them realize their potential and bring their best ideas to life. I'd like to take this opportunity to express my appreciation to our team members working in Apple Stores, customer care centers and channel partner stores and to our Apple Care teams for their incredible work supporting customers wherever they are. Creating innovative products and services that enrich people's lives is our mission. Leading with our values and everything we do gives that mission purpose. That includes a commitment to the environment where we continue our aggressive pursuit of our 2030 goals. It includes our focus on diversity and inclusion, where we are committed as ever to making progress. And it includes our work to promote racial equity and justice. We recently announced that the Global Equity Innovation Hub, in partnership with Cal State Northridge, will provide new community grants to Hispanic-serving institutions to help the next generation of creators and innovators build skills and pursue high-demand careers in STEM. We also celebrated the graduation of the inaugural class of our Developer Academy in Detroit from a program designed to give students the skills they need to pursue jobs in the thriving iOS app economy. Leading with our values also means leading with a steadfast commitment to privacy and security. Last month, we announced the introduction of passkey, a next-generation credential that's intended to replace passwords. A passkey can't be phished nor can it be stolen by hackers in a data breach because the information is stored on your device and your device alone. And as part of our effort to combat targeted attacks against the highest risk targets like journalists and human rights activists, we introduced Lockdown Mode, which is designed to protect those most at risk of sophisticated digital attacks. And we're committed to doing our part to address the housing crisis across California. To date, we have deployed more than $1.3 billion to a number of initiatives, including ones that provide financial assistance to low and moderate income first-time home buyers develop new affordable housing and help support vulnerable populations. This quarter has ultimately been a reflection of our resilience and our optimism. As we look forward, we're clear-eyed about the uncertainty in the macro environment. Yet we remain ever focused on the same vision that has guided us from the beginning. We strive every day to be a place where imagination ignites innovation like nowhere else, where good people come together to achieve great things, where customers are the center of everything we do. And we'll continue to execute on that vision as we always have, led by a focus on excellence and a desire to leave the world better than we found it. And with that, I'll turn it over to Luca. Luca Maestri : Thank you, Tim, and good afternoon, everyone. We are very pleased to report June quarter financial results that continue to demonstrate our ability to innovate across hardware, software and services while operating our business effectively during very challenging economic circumstances. We set a June quarter revenue record of $83 billion, up 2% year-over-year despite supply constraints, over 300 basis points of foreign exchange headwinds and the impact of our business in Russia. Around the world, we set new June quarter records in the Americas, in Europe and rest of Asia Pacific. On the product side, revenue was $63.4 billion with a June quarter revenue record for iPhone. During the quarter, our installed base of active devices continue to grow well, thanks to our unmatched levels of customer satisfaction and loyalty and reached an all-time high for all major product categories and geographic segments. Our Services set a June quarter revenue record of $19.6 billion, up 12% over a year ago, with all-time revenue records in the Americas and the rest of Asia Pacific and June quarter records in Europe and Greater China. We also achieved June quarter revenue records in each major Services category, including all-time revenue records for Music, Cloud Services, Apple Care and Payment Services. Company gross margin was 43.3%, down 40 basis points from last quarter as seasonal loss of leverage and unfavorable foreign exchange were partially offset by favorable mix. Products gross margin was 34.5%, down 190 basis points sequentially, mainly driven by seasonal loss of leverage, mix and FX. Services gross margin was 71.5%, down 110 basis points sequentially due to a different mix and foreign exchange. Net income was $19.4 billion and diluted earnings per share were $1.20, while operating cash flow of $22.9 billion was a June quarter record. Let me now get into more detail for each of our revenue categories. iPhone revenue grew 3% year-over-year to a June quarter record of $40.7 billion despite foreign exchange headwinds as customer response to our iPhone 13 family continue to be strong. We set June quarter records in both developed and emerging markets. And the iPhone active installed base reached a new all-time high across all geographies as a result of this level of sales performance combined with unmatched customer loyalty. In fact, the latest survey of U.S. consumers from 451 Research indicates iPhone customer satisfaction of 98%. We also attracted a record number of switchers for the June quarter, with strong double-digit year-over-year growth. For Mac, we generated revenue of $7.4 billion despite supply constraints and negative effects. We continue to be excited about our long-term opportunity with Mac and redefining the PC experience with our relentless innovation. Our investment focus on Mac has helped drive significant growth in our installed base, which reached an all-time high during the June quarter as nearly half of the customers purchasing a Mac were new to the product. iPad revenue was $7.2 billion, down 2% year-over-year due to supply constraints and negative foreign exchange. Customer response to our iPad lineup continue to be strong across consumer, education and enterprise markets around the world. And the iPad installed base reached a new all-time high, with over half of the customers during the quarter being new to the product. Wearables, Home and Accessories revenue was $8.1 billion, down 8% year-over-year as we faced foreign exchange headwinds, different launch timing for Home and Accessories products and supply constraints as well as the overall macroeconomic environment. Despite this, our installed base of devices in the category hit a new all-time record, thanks to very strong customer loyalty and high new tool rates. For example, Apple Watch continues to extend its reach, with over 2/3 of customers purchasing an Apple Watch during the quarter being new to the product. Services had a June quarter revenue record of $19.6 billion, up 12% despite almost 500 basis points of FX headwinds as well as impacts from our business in Russia and the macroeconomic environment. We set June quarter revenue records in both developed and emerging markets and set all-time records in many countries around the world, including the U.S., Mexico, Brazil, Korea and India. The record level of performance of our Services portfolio during the June quarter reflects the strength of our ecosystem on many fronts : First, our installed base has continued to grow, reaching an all-time high across each geographic segment and major product category. We also saw increased customer engagement with our Services during the quarter. Our transacting accounts, paid accounts and accounts with paid subscriptions all grew double digits year-over-year. And paid subscriptions showed very strong growth. We now have more than 860 million paid subscriptions across the services on our platform, which is up more than 160 million during the last 12 months alone. And finally, we continue to improve the breadth and the quality of our current Services offerings, from a constant flow of new content on Apple TV+ and Apple Arcade to great new features we recently announced for iCloud and Apple Music, which we believe our customers will love. In the enterprise market, our customers are increasingly investing in Apple products as a strategy to attract and retain talent. Bank of America is providing iPhones to all of its financial advisers so they can instantly access client information and provide timely wealth management advice from anywhere. Wipro, another large global enterprise customer, is investing in MacBook Air with M1 as a competitive advantage when recruiting new graduates globally, thanks to its superior performance and lower total cost of ownership. And with the new M2 chip powering MacBook Air and the 13-inch MacBook Pro, we expect more customers to make Mac available to their entire workforce. Let me now turn to our cash position. We ended the quarter with $179 billion in cash and marketable securities. We repaid $3 billion in maturing debt while increasing commercial paper by $4 billion, leaving us with total debt of $120 billion. As a result, net cash was nearly $60 billion at the end of the quarter. We returned over $28 billion to shareholders during the June quarter. This included $3.8 billion in dividends and equivalents and $21.7 billion through open market repurchases of 143 million Apple shares. We continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance but we are sharing some directional insights based on the assumption that the macroeconomic outlook and COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. Overall, we believe our year-over-year revenue growth will accelerate during the September quarter compared to the June quarter despite approximately 600 basis points of negative year-over-year impact from foreign exchange. On the product side, we expect supply constraints to be lower than what we experienced during the June quarter. Specifically related to Services, we expect revenue to grow but decelerate from the June quarter due to macroeconomic factors and foreign exchange. We expect gross margin to be between 41.5% and 42.5%. We expect OpEx to be between $12.9 billion and $13.1 billion. We expect OI&E to be around negative [indiscernible] impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.23 per share of common stock, payable on August 11, 2022, to shareholders of record as of August 8, 2022. With that, let's open the call to questions. Tejas Gala : Thank you, Luca. [Operator Instructions]. Operator, may we have the first question, please? Operator : [Operator Instructions]. We'll take our first question from Amit Daryanani with Evercore. Amit Daryanani : I guess two from my side. Maybe to start on the gross margin discussion, Luca. You said that implying gross margin will be down I think, 130, 140 basis points sequentially and down a bit year-over-year as well in September. Maybe just what are the puts and takes here. And then very specifically, can you actually just call what the FX headwinds are embedded in the September quarter gross margin, that would be helpful. Luca Maestri : Yes, Amit. We're guiding 41.5% to 42.5%. On a sequential basis, the decline is expected to be driven by, as you mentioned, foreign exchange but also mix, which will be partially offset by better leverage. We expect foreign exchange impact on a sequential basis to be 50 basis points. If you look at it from a year-over-year standpoint, we are in the ballpark of a year ago in spite of the fact that foreign exchange is going to be 130 basis points negative to a year ago. So clearly, foreign exchange is something that is affecting us but we think we're navigating that fairly well. Amit Daryanani : Fair enough. And then if I could just ask Tim the question. There's a lot of macro worries and high inflation impacting consumer demand. Certainly doesn't seem to be very visible in your performance and your expectations. So I'm wondering if you talk about, are you seeing any implications from recession fears or inflation fears to your end demand? And really just related to that, wearables decline was notable. Is that where you would typically see initial signs of consumer softening perhaps? Tim Cook : Thanks for the question. If you -- I'm not an economist and so I'll sort of narrow my comments to what we saw in the business. And if you look at the June quarter, we do believe that we saw macroeconomic headwinds that impacted our business and our results. And so one of those is clearly the FX, which Luca has mentioned, that was over 300 basis points on year-over-year growth rates. When you look at the product categories, on iPhone, there was no obvious evidence of macroeconomic impact during the June quarter besides FX, obviously. Mac and iPad were so gated by supply that we didn't have enough product to test the demand. And Wearables, Home and Accessories, as you mentioned and as Luca mentioned, we did see some impact there that we would attribute to a macroeconomic environment. When you then look at Services, there were some Services that were impacted, for example, like digital advertising was clearly impacted by the macroeconomic environment. And so it's a mixed bag in terms of what we believe that we saw. Overall, we are very happy with the results. And when you think about the number of challenges in the quarter, we feel really good about the growth that we put up for the quarter. Operator : We'll take our next question from Harsh Kumar with Piper Sandler. Harsh Kumar : Yes. First of all, congratulations. As these are tough times, you guys are putting up tremendous results so we appreciate that as investors. My question is, when I look at your Services business, I see a $20 billion business on a quarterly basis. And you keep adding -- as a company, you keep adding very interesting and transformative features such as payments, something like that every year. So I'm struggling to find a good way to think about how to model the growth of this business, considering that you add innovative features. So now that it's fairly matured as a business, what would be a good way for us to think about as investors to model the Services business? And I do have a follow-up. Luca Maestri : Well, as you know, we don't provide guidance past the current quarter. But I think the way to think about it, certainly the way we think about it is that there's a number of levers in our Services business to take into account. The first one is installed base. Installed base is the engine for our company and it continues to grow. As I mentioned, it has reached an all-time high across every geographic segment, across every product category. And so that's very important. Then the second lever is the customer engagement. And we know that our customers are getting more and more engaged over time. Transacting accounts, paid accounts, paid subscriptions are growing, so the level of engagement continues to grow. And then as you mentioned, the breadth and the quality of the services that we offer tends to grow over time. So these are all things that tend to help us over the long term. If you go back and you look at our growth rates over a number of quarters now, they've always been very good. Of course, the macro environment can have an impact on this business. Tim has mentioned, for example, digital advertising can be affected at times. During COVID, some of the compares have been a bit lumpy because there have been lockdowns and reopenings and so on. So it's very difficult to talk about a steady state growth rate for our Services business. But when we look at the entirety of what we are doing in the Services space, we feel very good about the future of the business. Harsh Kumar : Luca, very helpful. And for my follow-up, valuations have come down in the last 18 months or so for things and companies and targets that you might look at. I guess, particularly in the Services area, would there be an appetite on behalf of Apple to accelerate the growth of its Services business by looking at external products to acquire? Tim Cook : We always look and we ask ourselves if it's -- how strategic it is, and we never buy just to buy or buy just for revenue purposes. But we would buy something that is strategic for us. To date, we have concentrated on smaller IP and people acquisitions. But I wouldn't rule anything out for the future, and obviously, we are constantly surveilling the market. Operator : We'll take our next question from Erik Woodring with Morgan Stanley. Erik Woodring : I have two as well. Maybe Tim, if I start with you, I think there's a debate in the market that if you look back over time, there's been a 3-year cadence to iPhone cycles. We're 2 years into your 5G iPhone evolution. You're on track to grow units in '21 and '22. That implies there could be some pressure next year as upgrade rates slow. But your comments really suggest no slowdown. You're seeing double-digit growth in customers new to iPhone. So can you just walk us through some of the various factors you believe are driving this continued iPhone strength? And then I have a follow-up. Tim Cook : Today, the product and the innovation within the product that is driving it. And of course, the other key variables are some things that Luca mentioned earlier where the size of the installed base has been growing significantly. We also, just in this quarter, the June quarter, set a June quarter record for switchers with strong double-digit growth. And so this is fueling the additional installed base even more. And we continue to execute across some significant geographies where there's a very low penetration of iPhone. Some of those were called out in the opening remarks between Indonesia and Vietnam and India, where we did quite well, and iPhone tends to be the engine for those markets, particularly at the beginning of creating the market there for Apple products. And so we're really looking at all of these things from the installed base to the number of switchers to the geographic distribution. Of course, the most important thing for us is to maintain an incredible customer satisfaction and loyalty from the customers. And we're really pleased that it's currently at 98% for the latest iPhones. And so those are the things that underpin it. 5G has been an accelerant. And the 5G penetration, particularly if you look at it globally, is still quite low. In some geographies, it's obviously higher, but around the world, 5G penetration is still low. And so I think there's reason to be optimistic. Erik Woodring : Okay, that's helpful. And then maybe, Luca, for you. As we move from the June to the September quarter, maybe can you dig a level deeper and kind of help us understand some of the moving pieces in the Services business? Meaning where do you think we could see an acceleration or maybe a deceleration? And should we still expect double-digit growth? If you could just frame that for us, that would be great. Luca Maestri : Yes, Erik. I mentioned in my prepared remarks that we expect some deceleration from the 12% that we've had in the June quarter. Keep in mind, we're going to see, on a year-over-year basis, 600 basis points, 6% impact from foreign exchange so that is a big element for us. Also keep in mind that we're still lapping the impact of our business in Russia in these numbers. And Tim mentioned that there are some pockets of weakness, primarily in digital advertising that we will need to work through. But at the same time, our Services business a year ago grew a lot and so also the compare is a bit challenging. So we don't have a very specific number to give out today. Of course, we expect to grow. We will see how the quarter develops. Operator : We'll take our next question from Richard Kramer with Arete Research. Richard Kramer : Tim, you cited growth in Apple apps in the past, and clearly, the privacy policies you've taken have really reshaped the mobile ad market. Can you give us a sense of how you see Apple's role as an ad network and perhaps helping developers to monetize not just app sales but also growing ad monetization over time? Tim Cook : Yes. Richard, we view privacy as a fundamental human right. And so what we try to do with all of our features on privacy is put the decision back at the user where we believe it belongs as to whether they want to share their data or not. And so that was what was behind application tracking transparency and a number of other features. We're trying to empower the user to own their data and make their own choices. In terms of us selling ads, we have a search ad business across the App Store that we believe represents a great way for discovery for small and large developers. And so I see that we play a role in that. Richard Kramer : And then maybe my follow-up for Luca. Can you give us a sense, especially now that you're launching Pay Later, what steps you might be taking to improve affordability of Apple products? We know that it's going to be a tight time economically for people around the world. And how do you see the evolution of various payment plans out of the -- you see in the U.S. now into other markets, especially emerging markets? Luca Maestri : Yes. I mean, obviously, affordability is a very important topic for us. It's been for many years. Buy now, pay later is the latest that we are doing on this front. Fundamentally, we are working on 2 major initiatives for affordability. One is installment plans and installment plans have become more widespread around the world, not only here in the United States but in most markets, particularly in emerging markets. Incredibly important in terms of reducing the affordability threshold. And trading programs. Trading programs are available in a number of markets. We can do better in other markets. They're incredibly important because the residual value of our products is a huge differentiator for our users. After they use our devices, they can bring them back and they retain much more value than other platforms. And therefore, it's important for us to raise that awareness. And so we will continue to expand those programs around the world. So installments and trade-ins, very, very important on affordability. Operator : We'll take our next question from David Vogt with UBS. David Vogt : I just wanted to circle back on sort of the macro and sort of the demand signals that you're seeing versus sort of the supply chains that you're facing. I know that there's been a couple of U.S. carriers that have talked about some of their customers having some difficulty paying bills. And you mentioned in your prepared remarks that you saw sort of the record number of switchers in the quarter. So just wanted to kind of get a sense for what you're seeing in that particular channel without naming a specific customer. And are you seeing any sort of issues from a spin-down effect maybe because customers are having some difficulty because of inflation? And then I have a follow-up on Macs. Tim Cook : On the -- from an aggregate point of view, looking at it worldwide, looking at the data on iPhone for the June quarter, there's not obvious evidence in there that there's a macroeconomic headwind. I'm not saying that there's not one. I'm saying that the data doesn't show it where we can clearly see that in the Wearables, Home and Accessories area. And so I would differentiate those 2. David Vogt : Great. And then on the Mac business, I know that you are severely supply chain constrained. But is there a way to kind of think about the impact of the market overall on the Mac business versus the supply chain? It sounds like -- I guess, it sounds like it's almost effectively 100% supply chain constrained, but we're obviously hearing, like I'm sure you guys are seeing, anecdotal evidence and some quantifiable evidence that the broader PC market is slowing. And I think about 90 days ago, you were pretty confident with the new M2 chip that you could continue to grow throughout a potential drawdown in that particular market. Do you still feel that way? And if you can kind of share how you're thinking about the different sort of components of your growth versus the market. Tim Cook : Yes, I wouldn't want to project into this quarter. But for last quarter, what we saw was the -- when the COVID restrictions hit in the Shanghai corridor, we lost the primary source of supply for Mac units. And that was either running at a reduced rate or down completely for the majority of the quarter. And so it was a very big impact to the Mac business. We felt good, frankly, that we were able to, by the end of the quarter, get this back to where we were down 10 points. But the negative 10 I would classify as being driven by supply. And of course, FX feeds into this as well because of the translation issues around the world. There's also some impact because of the business in Russia. But those are the 3 kind of reasons that I would tell you. In terms of testing the demand, you can't really test the demand unless you have the supply. And we were so far from that last quarter that we have an estimate of what we believe demand was. But it is an estimate. We recognize how the industry is doing. We think that we've got a great story with the Mac with getting M1 out and now M2 out. We have a very, very strong offering for the back-to-school season and we'll see how we do this quarter. We'll report back in October. Operator : We'll take our next question from Ben Bollin with Cleveland Research. Benjamin Bollin : Tim, I was hoping you could share a little bit more about how you're thinking about the supply headwinds. You said less severe or less worse supply challenges into September. I'm interested when you think you find balance across products. And also, any thoughts on how or when that might influence replenishment of supply into your retail channels? Tim Cook : To give you a little more color on what we saw in the June quarter, we came in slightly below, from a constraint point of view, the $4 billion number that we had put, at the 4 to 8 are the low end of that range. And the majority of that constraint last quarter was coming out of the COVID restrictions that occurred, that resulted in plant closures and plants running at less than full utilization for some amount of the quarter, in some cases, the majority of the quarter. And then the other component that is the minority part of it is the silicon shortage that has affected our results for several quarters now. If you look into the future, the silicon shortage, we're not forecasting when that will end. We think that in the aggregate, our constraint numbers for the September quarter will be less than they were in the June quarter. But of the 2 -- there are these 2 components, and of course, we're optimistic about the COVID restriction piece of this. Benjamin Bollin : Okay. The other item. Tim, any thoughts on how you're thinking strategy is evolving with respect to progress in AR, VR in your existing products? Anything you're learning about content or how you're thinking about that opportunity? Tim Cook : We're thrilled right now to have over 14,000 ARKit apps in the App Store. And they're providing incredible AR experiences for millions of people. And that's utilizing iPhone and iPad. And of course, we are in the business of innovation so we're always exploring new and emerging technologies. But I wouldn't want to say anything beyond that. Operator : We'll take our next question from Wamsi Mohan with Bank of America. Wamsi Mohan : Luca, you mentioned revenues to accelerate year-over-year overall in September versus your June growth rate. Would you say that it would be reasonable to assume normal quarter-on-quarter seasonality of about $7 billion or so? Or would you say there are additional puts and takes this time around that could drive upside and downside to that? I know you noted 600 bps year-over-year on FX as potentially one of those. But maybe help us think through, on a sequential basis, how much of a normal versus abnormal seasonality we should expect? And I have a follow-up. Luca Maestri : Yes, Wamsi, as you know, as we said earlier, we're not providing guidance because of all the uncertainty out there. But we have given a few data points. So one of them, which you've mentioned, approximately 600 basis points of negative foreign exchange. I mean, you do a rough math, it's around $5 billion. That's a big number right there that is going to affect us, that we are having some impact from the situation in Russia and that is obviously different from normal seasonality as well. Our supply constraints, as Tim just said, are going to be lower than what we've seen in the June quarter but they're still going to be there. So when you look at those 3 headwinds and you combine them with the acceleration that we talked about, we feel that, that is pretty remarkable. Wamsi Mohan : Okay, Luca. And Tim, I wanted to follow up on your comment about the macro impact that you've seen on wearables. Your wearables portfolio is probably at the lowest ASP range across your product portfolio. As you're giving this guidance or directional guidance here, how much of an impact are you assuming in potentially any macro-related slowdowns across the rest of the portfolio? Why would investors not think that it would be prudent to assume some sort of creep-up of some of these -- some of the hesitation maybe that the macro environment is driving, particularly as it pertains to your higher ASP products? Tim Cook : Yes. Let me expand a little bit on Wearables, Home and Accessories so that I clearly communicate what we saw. We saw sort of a cocktail of headwinds on Wearables, Home and Accessories. We saw FX, which we've talked about. We saw supply constraints, which we've talked about. Of course, there was an impact from the business in Russia. But in addition to those things, which -- those things affected all the products to some degree, we also had a different launch timing for certain home and accessory products. Like in the year-ago quarter, I think, had AirTag in it. That's just 1 example of something that announced last year that didn't announce this -- that we didn't have a comparable announcement this year. And in -- so in addition to those 4 items, we believe, based on the data, that there was also a macroeconomic environment hit. And whether or not that is because they're lower ASPs versus the higher ASPs of a phone, I can't tell you that. I can just tell you that looking at the numbers, there does appear to be headwinds in addition to the 4 items that we can articulate and we believe those to be macroeconomic headwinds. Operator : We'll take our next question from Samik Chatterjee with JPMorgan. Samik Chatterjee : Great. And congrats on the results in this tough macro. I guess I wanted to start with China smartphone market here a bit. Tim, I thought you said in response to earlier question that you haven't really seen a material impact from the macro on iPhone yet. But wondering, did you see an impact of the COVID lockdowns there on demand itself? Or was there a snapback fall in that? If you can comment about the sort of exit run rate that you saw in that market, following the COVID shutdowns ending there. And I have a follow-up. Tim Cook : Yes, both things are true. We did see a lower demand based on the COVID lockdowns in the cities the COVID lockdowns affected. And we did see a rebound in those same cities toward the end of the quarter in the June time frame. And in particular, in the run-up to June 18, which as you know, is a major shopping holiday in China. We think that the net of that was still a negative, but some of it did rebound by June time frame. The restrictions begin to come off toward the beginning of June, if my memory is correct. Samik Chatterjee : Okay. And for my follow-up, I know you said you don't want to sort of predict the macro here or be an economist. But if I go back and look at the sort of OpEx for the last few years, you've been increasing that by a double-digit percentage. And just given the uncertainty that you've talked about in the macro further on this call a lot, how are you thinking about sort of that investment base going forward? Are you trying to look at areas that where you can sort of pull back? I mean, just in terms of how you're preparing for the uncertainty is I guess the question. Tim Cook : We believe in investing through the downturn. And so we'll continue to hire people and invest in areas, but we are being more deliberate in doing so in recognition of the realities of the environment. Operator : We'll take our next question from Jim Suva with Citigroup. James Suva : While I'm calling you on my iPhone 13 Max Pro and loving it, I just wanted to ask you, though, with replacement cycles, have you noticed any change now that we've been through like 2.5 years of COVID where people upgrading at a different rate and kind of post COVID, hopefully, upgrade cycles or replacement cycles, how we should kind of think about that? Obviously, when I drop and break my phone, I replace it immediately. But a normal replacement, have they changed at all? Any insights from that would be great. Tim Cook : It's challenging to measure the replacement cycle at any point in time with exact precision, and so I'm going to punt on the question a bit. However, our key task is to make a product that everybody loves and that they want to trade in their current phone to get. And so that's what we are focused on is innovating like crazy and giving somebody something that they really want and see themselves using. James Suva : Okay, that makes sense. Well, then maybe I can ask Luca a question more on the gross margins. As you look ahead, the supply chain issues, expedited shipping and all of that, do you think probably the September quarter is kind of the worst of FX and all those headwinds and things? Or is there a little bit of timing delays due to your contractual purchase commitments that you do, that maybe your suppliers are looking at higher costs and you're benefiting from some lower contracts or maybe that has already caught up? If you could give us some insights on the kind of longer-term nature of the directions or the gross margin impacts. Luca Maestri : Jim, I would say we provide guidance for the current quarter. But if we look ahead, there's always a couple of elements in gross margin that are a bit outside of our control and we need to be mindful of that. One of them is the foreign exchange environment. That is having an impact already for the September quarter, had an impact on June. And obviously, strong dollar tends to be a headwind for us. As you know, we have a hedging program and so we mitigate that impact. But over time, those hedges roll off and so it becomes more challenging for us. We'll see what happens with foreign exchange rates over time. That is going to be a variable that we need to track. The other one that has an impact on the aggregate gross margin is our mix of products and services. As you know, they have different margin profiles for very different reasons, different businesses, even different accounting treatment at times. And so that is also something that we will need to track over time. What matters to us, I think it goes back to Tim was saying earlier, is we want to make sure that people love our products and services, and we want all of them to be equally successful in the marketplace. Certainly, as you've seen over the last year, we've had a significant expansion in gross margins in spite of very difficult economic circumstances from COVID to inflation, interest rates going up and our margins have expanded. From a commodity standpoint, I think you were asking a question around components. Commodities are behaving okay. We're seeing some price pressure on some silicon components. But other than that, we've -- actually commodities are behaving well. James Suva : Congratulations to you and all your team members. Tim Cook : Thank you. Operator : We'll take our next question from Krish Sankar with Cowen and Company. Krish Sankar : And Tim, I apologize, it's also macro-related. You mentioned that it impacted digital advertising within Services. I'm just kind of curious, if the macro does worsen, do you worry about subscriber growth, App Store purchases, et cetera? And conversely, are there any parts of the Service business that you consider recession-proof, like maybe a buy now, pay later or something else? And then I have a quick follow-up for Luca. Tim Cook : We have incorporated all of our thoughts in the guidance that Luca gave, which says that we think in the aggregate, we're going to accelerate revenues in the September quarter as compared to the June quarter and will decelerate on the Services side. And so we see the digital advertising cloud, if you will, continuing in the current quarter. Krish Sankar : Got it, got it. Very helpful. And then a quick follow-up on the lockdown in China during the June quarter. Do you actually see any noticeable negative effects on your App Store revenue for the region or any positive effects like maybe more gaming downloads? Tim Cook : China had very good results on Services last quarter. And so they grew strong double digit better than the company average, and they set a new June quarter revenue record during the quarter. Tejas Gala : Thank you. A replay of today's call will be available for 2 weeks as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 8820355. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator : This concludes today's conference. We appreciate your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,022	4	2022Q4	2022Q4	2022-10-27	6.124	6.132	6.401	6.342	7.88876	23.05	22.58	Operator : Good day, and welcome to the Apple Q4 Fiscal Year 2022 Earnings Conference Call. For your information, today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead. Tejas Gala : Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Before turning the call over to Tim, I would like to remind you that approximately once every six years, we add a week to the December quarter to realign our fiscal periods with the December calendar. So this December quarter will span 14 weeks rather than the usual 13 and will end on December 31. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expense, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you, Tejas. Good afternoon, everyone, and thank you for joining the call today. Over the past year, despite a range of challenges facing the world, our teams have come together in incredible ways to drive unparalleled innovation and deliver again and again for our customers. For the September quarter, we reported record revenue of $90.1 billion, which was better than we anticipated despite stronger-than-expected foreign currency headwinds. We set an all-time revenue record for Mac and September quarter records for iPhone and Wearables, Home and Accessories. Services notched a September quarter record as well with revenue of $19.2 billion and more than 900 million paid subscriptions. We reached another record on our installed base of active devices, thanks to a quarterly record of upgraders and double-digit growth in switchers on iPhone. Across nearly every geographic segment, we reached a new revenue record for the quarter. And we continue to perform incredibly well in emerging markets with very strong double-digit growth in India, Southeast Asia and Latin America. I'm also happy to report that during the quarter, silicon-related supply constraints were not significant. I want to acknowledge that we are still living through unprecedented times. From war in Eastern Europe to the persistence of COVID-19, from climate disasters around the world to an increasingly difficult economic environment, a lot of people and a lot of places are struggling. Through it all, we've aimed to help our customers navigate through the challenges while giving them the tools to drive progress for themselves and their communities. At Apple, creativity and collaboration have always been at the core of who we are. That spirit of ingenuity and teamwork helped us provide our customers with incredible innovations this year and led to another yearly revenue record. In fiscal 2022, Apple achieved revenue of $394 billion, representing 8% annual growth. We set records for iPhone, Mac, Wearables, Home and Accessories and Services while growing double digits in emerging markets and setting records in the vast majority of markets we track. Customers are loving our iPhone 14 lineup. Loaded with camera upgrades for sharper photos, Action Mode for smoother videos and new safety features like Crash Detection and Emergency SOS via Satellite, iPhone is even more indispensable to our daily lives. iPhone 14 and iPhone 14 Plus come with a new dual-camera system, industry-leading durability, incredible power and amazing battery life. And our iPhone 14 Pro models are packed with even more groundbreaking innovations, including a new camera system as well as always-on display and the Dynamic Island, which offers a whole new way to interact with iPhone. Just yesterday, our most advanced iPad and iPad Pro ever landed in stores. With its all-screen design, advanced cameras and faster wireless connectivity, the tenth generation iPad looks and performs better than ever. For creatives, iPad Pro, now turbocharged by the blazingly fast M2 chip, is the perfect device to make something amazing. Our Mac customers have already been raving about the power of M2 since the arrival of our newest MacBook Air and MacBook Pro this summer. Their incredible long battery life, stunningly rich display and lightning fast speeds are a signature part of the Mac experience and helped drive an all-time record revenue for Mac during the September quarter. In Wearables, Home and Accessories a wave of innovation spurred 10% year-over-year revenue growth during the September quarter. New features in Apple Watch Series 8, including temperature sensing capabilities, retrospective ovulation estimates and crash detection are helping to keep customers healthier and safer. And the updated Apple Watch SE is a great way for users to start their Apple Watch journey, delivering advanced features at a new low price. The biggest, brightest and boldest Apple Watch ever made, Apple Watch Ultra pushes the boundaries of what a smartwatch can do. Packed with innovations like advanced navigation tools and the new Oceanic+ app, which turns it into a dive computer, Apple Watch Ultra has something for athletes and adventures on land and sea. The second generation of AirPods Pro powered by the new H2 chip are receiving rave reviews for delivering an unmatched wireless earbud audio experience, while canceling up to twice as much noise over the previous model. There's no better place to discover the rich spatial audio capabilities of AirPods Pro than Apple Music, the largest music catalog anywhere now with more than 100 million songs. And there's no other company that fuses best-in-class hardware with cutting-edge software and services to create a truly integrated and seamless experience. With iOS 16, we're giving customers more ways to personalize their iPhones through a customizable lock screen and focus filters. New features in Messages and Mail enable users to connect and collaborate like never before. Stage Manager in iPadOS 16 and macOS Ventura, helps users stay more productive with smoother multitasking. And watchOS 9 is empowering customers to live a healthier day through updates to the Sleep App, a new FDA-cleared AFib history feature and the new Medications app. Across our Services, we continue to see enthusiasm and strong engagement from our subscribers. Apple TV+ hits like Severance, Bad Sisters and Blackbird have taken center stage on screens around the world. And baseball fans were glued to their seats this season watching Friday Night Baseball. Meanwhile, Apple TV+ productions continue to earn accolades. At the 74th Primetime Emmy Awards in September, Apple brought home 9 statues, including a second consecutive win for Best Comedy Series for Ted Lasso. And soon, we're going to give audiences an even better entertainment experience when the all-new Apple TV 4K hit stores next week. We're also bringing Fitness+ to more customers than ever by making our entire library of over 3,000 studio-style workouts and meditations available to iPhone users in 21 countries, even those without an Apple Watch. These updates are arriving just in time for a new Artist Spotlight series with workouts featuring the music of Taylor Swift and a new workout program, Yoga for Every Runner featuring and design with one of the world's top ultramarathon athletes, Scott Jurek. While Fitness+ helps subscribers stay active, Apple Card is designed with our customers' financial health in mind. For the second year in a row, Apple Card has been ranked highest in customer satisfaction for midsized credit card issuers by J.D. Power. And our users' favorite Apple Card benefit just got even better with the upcoming addition of a new high-yield savings account to help them save and grow their daily cash rewards. Turning to retail. Last month, our team members welcomed customers to the all-new Apple Jamsil in South Korea. And through today at Apple Creative Studios, we partnered with non-profits in cities around the world to help young diverse creatives pursue their passions and connect with local mentors. And our retail teams have done exceptional work, helping customers explore our latest products and features. As we approach the holiday season with our product lineup set, I'd like to share my gratitude to our retail, AppleCare and channel teams for the work they are doing to support customers. At Apple, we're proud of the ways we are able to help customers be productive, get healthy, stay safe and unlock their creative potential. We also understand we have important responsibilities to the communities we serve. That's why we continue to invest in education, racial equity and justice and the environment. And we are making important progress toward a more inclusive and diverse workforce. Through our Community Education Initiative, we're working alongside more than 150 partners to help students around the world learn new science and technology skills. This summer, we joined with community partners to support coding academies across the United States from Code Academy in Nashville to One Summer Chicago to the Coding 5K Camp for Girls right next door in San Jose. We've also just expanded our racial equity and justice initiative into the UK for the first time. Alongside the South Pink Center, we're helping aspiring creators develop their own voices and position themselves for long-lasting careers. Back in the US, we welcomed a new class of Black, Latino and indigenous entrepreneurs to Apple's second Impact Accelerator. This group of innovators is focused on using green technology to mitigate the effects of climate change and serve communities most affected by it. At Apple, we care deeply about protecting the planet for future generations. To that end, in support of our 2030 environmental goals, we have asked all of our suppliers to become carbon-neutral across their entire Apple-related footprint by the end of the decade. We are also providing them with resources based on what we learned achieving net-zero carbon in our own global operations. Across our entire product lineup, we also continue to source more materials through recycling while taking less from the Earth. Every iPhone 14 is made with 100% recycled rare-earth elements in all magnets, including those used in MagSafe. And in a first for Apple Watch and iPad, we're using recycled gold in the plating of multiple printed circuit boards in our newest devices. While we're working to reduce the footprint of our hardware, we're making changes to our software to be more environmentally-friendly with the soon-to-be released Clean Energy charging feature for iPhone. Our 2030 goal is a reflection of our relentless focus on the future at Apple. The world continues to be unpredictable as old challenges evolve and new ones emerge. What remains constant is the ability of our teams to create great products, services and experiences while being a force for good in the world. Whatever challenges lie ahead in the new year, we're moving forward, as we always have, investing for the long-term to deliver incredible innovations for our customers like only Apple can. And now, I'll hand it over to Luca for more details on our performance. Luca Maestri : Thank you, Tim, and good afternoon, everyone. We are very pleased to report record financial results for the September quarter that capped another record fiscal year for Apple despite a challenging and volatile macroeconomic backdrop. We reached a September quarter revenue record of $90.1 billion, up 8% year-over-year despite over 600 basis points of negative foreign exchange impact, with new September quarter records in the Americas, Europe, Greater China and rest of Asia Pacific. Importantly, in constant currency, we grew nicely in each of our geographic segments, with strong double-digit growth outside the US. Products revenue was $71 billion, up 9% over last year despite FX headwinds and a record for the September quarter. And it was a September quarter revenue record for iPhone and Wearables, Home and Accessories and an all-time revenue record for Mac. Overall, our installed base of active devices continue to grow nicely. It reached an all-time high for all major product categories and geographic segments at the end of the quarter, thanks to extremely strong customer satisfaction and loyalty and a high number of customers that are new to our products. Our Services set a September quarter revenue record of $19.2 billion, up 5% over a year ago despite over 600 basis points of negative impact from foreign exchange. We reached September quarter revenue records in the Americas, Europe, Greater China and rest of Asia Pacific and also in many Services categories, including all-time revenue records for cloud services and payment services. Company gross margin was a September quarter record at 42.3%. It was down 100 basis points from last quarter due to unfavorable foreign exchange and a different mix, partially offset by leverage. Products gross margin was 34.6%, up 10 basis points sequentially, with improved leverage and favorable mix partially offset by foreign exchange. Services gross margin was 70.5%, down 100 basis points sequentially, primarily due to foreign exchange. Net income of $20.7 billion, diluted earnings per share of $1.29 and operating cash flow of $24.1 billion were all September quarter records. Let me now get into more detail for each of our revenue categories. iPhone revenue grew 10% year-over-year to a September quarter record of $42.6 billion, despite significant foreign exchange headwinds. We set September quarter records in the vast majority of markets we track, and our performance was particularly impressive in several large emerging markets, with India setting a new all-time revenue record and Thailand, Vietnam, Indonesia and Mexico more than doubling year-over-year. Thanks to our strong iPhone lineup, we set a quarterly record for upgraders and grew switchers double digits. This level of sales performance, along with unmatched customer loyalty, drove the active installed base of iPhones to a new all-time high across all geographic segments. And the latest survey of US consumers from 451 Research indicates iPhone customer satisfaction of 98%. It was a great quarter for Mac. We achieved an all-time revenue record of $11.5 billion, up 25% year-over-year, despite significant FX headwinds. There were three key items that helped drive this performance. First, we benefited from the launch of our new MacBook Air and MacBook Pro powered by the M2 chip. Second, we were able to satisfy pent-up demand that carried forward from the significant supply constraints we faced during the June quarter. Third, as our supply position improved, we were able to fill the channel. Importantly, our investment in the category has attracted both upgraders and customers new to Mac and helped our installed base reach an all-time high. In fact, we set a quarterly record for upgraders, while nearly half of customers buying Macs during the quarter were new to the device. iPad revenue was $7.2 billion, down 13% year-over-year due to significant negative foreign exchange and a challenging compare due to the launch of new iPads a year ago. Despite this, the iPad installed base reached a new all-time high, thanks to incredible customer loyalty and a high number of new customers. In fact, over half of the customers who purchased iPads during the quarter were new to the product. Wearables, Home and Accessories revenue was $9.7 billion, growing 10% year-over-year, driven by the launch of Apple Watch and new AirPods Pro. This level of safe performance along with very strong new tool rates, drove our installed base of devices in the category to a new all-time record. For instance, two-thirds of customers purchasing an Apple Watch during the quarter were new to the product. Moving to Services, as I mentioned, we set a September quarter record in aggregate and in most geographic segments, generating $19.2 billion in revenue in spite of very large foreign exchange headwinds. It is important to remember, that we achieved double-digit constant currency growth in Services on top of growing 26% during the September quarter a year ago. However, certain services were impacted by macroeconomic headwinds, including foreign exchange. Digital advertising and gaming are areas where we've seen some softness. Throughout the quarter, we continued to observe several trends that reflect the strength of our ecosystem and our long-term opportunity in the category. First, our continued installed base growth across each geographic segment and each major product category represents a great foundation for future expansion of our ecosystem. Second, we saw increased customer engagement with our Services during the quarter. Both our transacting accounts and paid accounts grew double digits year-over-year, each setting a new all-time record. The percentage of accounts that pay for our services continues to increase, and we still see plenty of opportunity ahead of us. Third, paid subscriptions showed very strong growth. We now have more than 900 million paid subscriptions across the Services on our platform, up more than 155 million during the last 12 months alone and double what we had just three years ago. We continue investing in new content and features, across our service offerings. For example, we added several popular sports titles to Apple Arcade. We're also excited about our global partnership with Major League Soccer, where starting next season, fans can stream every single MLS match through the Apple TV app. This momentum helped us achieve over $78 billion in Services revenue during fiscal 2022, a new record and up 14% year-over-year. We continue to invest confidently and believe strongly in the long-term potential of our Services business, which is already the size of a Fortune 50 business on its own, and has nearly doubled during the last four years. It was not only a record year for Services but also for our entire company. During the past four quarters, we grew our business by 8% or $29 billion, reaching more than $394 billion of revenue. We grew diluted earnings per share by 9% and generated over $111 billion of free cash flow, up 20% year-over-year. It was also a strong year for our enterprise business, as we set new annual records for iPhone, iPad and Mac during fiscal 2022 and grew strong double-digits year-over-year as our devices and services continue to help more-and-more companies empower their employees and serve their customers. For instance, Ford Manufacturing employees are using iPad and iPhone to help further improve the quality of its game-changing Ford F-150 Lightning electric trucks. iPhone's powerful A-series chip and advanced camera systems, along with third-party iOS apps, are enabling Ford to automate the visual quality inspection process in real-time to help address issues before they impact customers. And Cisco expanded its Macs as a choice program and is now offering it to all its employees to help attract and retain top talent. And when given this choice, employees have chosen Macs twice as often as other options. In addition, many enterprise customers are taking advantage of the high residual value of our products and simple trade-in process to standardize the refresh cycles for their fleets of Apple devices. This allows employees to upgrade to the latest devices regularly while making it highly predictable and cost effective for the business. Let me now turn to our cash position. Our business continues to generate very strong cash flow, which enabled us to return over $29 billion to shareholders during the September quarter. This included $3.7 billion in dividends and equivalents and $25.2 billion through open market repurchases of 160 million Apple shares. We ended the quarter with $169 billion in cash and marketable securities. We repaid $2.8 billion in maturing debt and decreased commercial paper by $1 billion while issuing $5.5 billion of new debt, leaving us with total debt of $120 billion. As a result, net cash was $49 billion at the end of the quarter as we continue to make progress toward our goal of becoming net cash neutral over time. As we move ahead into the December quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance but we are sharing some directional insights based on the assumption that the macroeconomic outlook and COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. Overall, we believe total company year-over-year revenue performance will decelerate during the December quarter as compared to the September quarter for a number of reasons. First, we expect nearly 10 percentage points of negative year-over-year impact from foreign exchange. Second, on Mac, in addition to increasing FX headwinds, we have a very challenging compare against last year, which had the benefit of the launch and associated channel fill of our newly redesigned MacBook Pro with M1. Therefore, we expect Mac revenue to decline substantially year-over-year during the December quarter. Specifically on Services, we expect to grow but to be impacted by the macroeconomic environment increasingly affecting foreign exchange, digital advertising and gaming. We expect gross margin to be between 42.5% and 43.5%. We expect OpEx to be between $14.7 billion and $14.9 billion. We expect OI&E to be around negative $300 million, excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16.5%. Finally, today, our Board of Directors has declared a cash dividend of $0.23 per share of common stock, payable on November 10, 2022, to shareholders of record as of November 7, 2022. With that, let's open the call to questions. Tejas Gala : Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we please have the first question? Operator : We'll go ahead and take our first question from Shannon Cross calling from Credit Suisse. Please go ahead. Q – Shannon Cross : Thank you very much. It's great to talk to you on the call again. I'm wondering, can you just talk a bit about how you're thinking about this iPhone generation? On the positive side, you've raised prices. It seems to be mixing up. On the negative side, investors are concerned about impacted demand from the higher prices, what Huawei meant to you in prior years versus what could happen now. There are just some pressures out there. So I'm curious if you can kind of talk to what you're seeing initially in iPhone demand and how you think it will move through. With the caveat that I understand, things are pretty uncertain out there. And then I have a follow-up. Thank you. Tim Cook : Shannon, it's Tim. Welcome back. iPhone grew 10% in the Q4 timeframe to $42.6 billion. Customer demand was strong and better than we anticipated that it would be. And keep in mind that this is on top of a fiscal year of 2021 that had iPhone revenue grow by 39%, and so it's a tough compare as well. And so we were happy with it. In terms of the new products, the 14 and the 14 Pro and Pro Max, the -- it's still very early. But since the beginning, we've been constrained on the 14 Pro and the 14 Pro Max and we continue to be constrained today. And so we're working very hard to fulfill the demand. It's difficult to say what the mix will be until we can satisfy the demand because we don't really -- we're not able to determine the accurate mix until then. And so we -- but we're working very hard to do that. We were really pleased with the broadness of the iPhone strength last quarter. We had three of the top four smartphones in the U.S. and the UK, the top three in Urban China, the top six in Australia, four out of the top five in Germany and the top two in Japan. And customer satisfaction for the iPhone remains very, very strong at 98%. And so we feel very good about how we performed in Q4. And certainly, the start of this generation would suggest that we're going to be constrained for a little while on the 14 Pro and 14 Pro Max. But we're working very hard to try to remedy that. Shannon Cross : Thank you. And then, Luca, can you talk a bit about gross margin puts and takes? Just how we should think about, I mean, 10 basis points of currency this coming quarter is, I don't want to say unprecedented, but maybe it is. So I know you have hedges, but how do we think about it flowing through? And then what other -- components seem to be very favorable. But what else should we throw into the mix as we look forward? Luca Maestri : Yeah. Well, let me start with gross margin in Q4 and then I'll get to Q1. It was a September quarter record for the company. We did 42.3%, and that is in spite of, as you mentioned, very significant negative FX in -- for example, for Q4, on a sequential basis, FX was negative 70 basis points and on a year-over-year basis it was negative 170 basis points. Essentially every currency around the world has weakened against the dollar. Now, we have guided Q1 to 42.5% to 43.5% in spite of the fact that we have, on a year-over-year basis, 330 basis points of negative exchange. Sequentially, it's 120 basis points unfavorable. So obviously, the strong dollar makes it difficult in a number of areas. Obviously, our pricing in emerging markets makes it difficult, and the translation of that revenue back into dollars is affected. But on the positive side, we are seeing commodities behave fairly favorably for us. And so we believe we can offset the foreign exchange – the negative foreign exchange that we're seeing. And I think that the guidance that we provided reflects that. It takes into account, of course, FX. It takes into account some level of inflationary pressures. But I think the outcome is, I think, is a good one. Shannon Cross : Great. Thank you very much. Tejas Gala : Thanks, Shannon. Can we have the next question, please? Operator : Yes, sir. Our next question is coming from Erik Woodring with Morgan Stanley. Please go ahead, sir. Erik Woodring : Hey, guys, thanks very much for taking my questions. I have two as well. Maybe if we could just start. Luca, we saw quite the divergence in iPad and Mac performance this quarter. Both were relatively constrained from a supply perspective. So maybe can you just elaborate on some of the most impacted -- important factors that contributed to kind of the divergence in performance and whether after we get through the December quarter, those can reverse or normalize? And then I have a follow-up. A – Tim Cook : Yeah, Erik, it's Tim. I'll take your question. On – if you look at the Mac, the Mac, it was the best quarter we've ever had in the history of the company. It was helped by the product launch of the MacBook Air with M2. It was helped that in the previous quarter, in the June quarter, if you remember, we lost output from the factory for a significant portion of the quarter. And so we had a backlog exiting our Q3 headed into Q4. We were able to satisfy all of that demand during Q4 and filled the channel for the Mac. And so that led to an incredible Mac quarter. If you look at iPad, iPad had sort of the opposite happening from a launch point of view. The comp from a year ago, we launched iPads in September. We launched iPads this year in October. The other point to remember is that the iPad Pro had just launched before the quarter started in the year-ago quarter so it was our first full quarter of iPad Pro. So it was an exceptionally strong iPad quarter a year ago, and the launches were really key to that performance. And so that's the reason iPad contracted during this quarter. Erik Woodring : Okay, that's helpful. Thank you, Tim. And then maybe, Luca, if I were just to ask you, obviously, Tejas at the beginning of the call talked about the 14-week quarter. Maybe can you just elaborate a little bit on how you think that 14-week quarter impacts different line items, whether it's products or certain segments within the product business or the Services stand-alone? Just where we should see that 14-week quarter provide a bit more of a tailwind versus maybe not have an impact at all? And that's it for me. Thanks. Luca Maestri : In general, we have a few more days in the quarter that we're going to -- are going to affect both our revenues and our costs. Not every week is equal because obviously, we have certain peaks during the course of the quarter. Think about Black Friday or the Christmas holiday. But, in general, we're adding a few days of sale and additional OpEx as well on the cost front. So that's what happens to us every approximately six years as we need to align our weekly calendar to the fiscal calendar. Erik Woodring : Super. Thanks, guys. Tejas Gala : Thanks, Erik. Can we have the next question, please? Operator : Yes, sir. The next question is coming from Ben Bollin calling from Cleveland Research. Ben Bollin : Good afternoon, everyone. Thank you for taking the question. Tim, I was hoping we could talk a little bit about services, pieces within the portfolio. It looks like there's been some price adjustments as of late with respect to Music, TV+ and the One bundle. I'm curious how you think about balancing the consumer price versus your own costs and kind of the associated follow-through. And then I have a follow-up. Tim Cook : Yes. If you look at the price increase that you referenced, Ben, on Monday of this week, we announced a price increase on Apple Music and on Apple TV+ and then the corresponding Apple One, that is the consolidated bundle that includes both of those. On -- there's really two different situations here. With Music, the cost of licensing increased. And so we are paying more for music. The good thing about that is the artist will also get more money for their songs that are enjoyed on streaming. And so there's some bit of good news there, I suppose. And then on Apple TV+, if you look at when we first priced it, we only had a very few shows. We were at the beginning. We are very focused on originals only, and so we had four or five shows or so in the beginning and priced it quite low. We now have a lot more content and are coming out on -- with more each and every month. And so, we've increased the price to represent the value of the service. And of course, Apple One is just the consolidation of those two price changes. Ben Bollin : Okay. And then, another item. Any preliminary thoughts around capital intensity into fiscal 2023? Last couple of years, CapEx has been relatively stable. Can you talk to the big constituents of the CapEx figure and maybe any moving pieces and how we could think about that to 2023? Thank you. Luca Maestri : Yes, Ben. So when we look at our CapEx, as you correctly said, I mean, we've been fairly stable, and I think our capital intensity is really very good. We have three major buckets in CapEx for the company. We have certain dedicated tools for the manufacturing facilities. We had some spend around data centers, and we have spend around our office facilities around the world. We obviously monitor all of them. There is nothing unusual that we see for the next 12 months. Ben Bollin : Okay. Thanks, guys. Tejas Gala : Thanks, Ben. Can we have our next question, please Operator : Yes, sir. Our next question is coming from Kyle McNealy calling from Jefferies. Please go ahead. Kyle McNealy : Hi, thanks very much. Just wanted to see if you could give us a sense for what drove the Wearables result and the strength there this quarter. Was it from the maybe strong iPhone attach rates or the new products that you have available that were announced this quarter, or maybe you're still getting some benefit from customers that are more willing to come into the store now and try things on versus the pandemic when that was kind of shut down? Tim Cook : Yes. Kyle, it's Tim. The -- if you look at Wearables, we grew 10%, which we were very happy with. If you look at the individual pieces of that, Apple Watch was a contributor. And in particular, the new lineup was a contributor, including the Apple Watch Ultra and the Apple Watch Series 8 and the SE. The Ultra is -- was supply constrained and continues to be supply constrained during this quarter thus far. And so we're working hard to satisfy the demand bearing, get those products to customers. We also announced and launched the AirPods Pro in September. And the reviews for the product have just been off the charts in terms of the noise cancellation features and the sound quality. We're getting great, great reviews from there. In terms of what played the other way, the headwinds, obviously, FX was a headwind that affected Wearables, Home and Accessories, just like it affected the rest of our products and services. And we also had effect from the business in Russia, obviously, or the impact there. So that's sort of the pro and the con. The other thing that I should mention is that about two-thirds of the Apple Watches that we sold were to customers that had not previously owned an Apple Watch. And so the -- we're still very much selling to new customers here, which is very, very good for the future. Kyle McNealy : Okay, great. One more quick one on Mac. I wanted to see if you could quantify at all how much the channel fill and how much came from satisfying back orders from the June period for Mac. We're just trying to get a sense for where the baseline is, if there's any sense you can give us on that. What would it have grown if not for those factors? Anything you can give us would be great. Thanks. Tim Cook : Yes. I would just say that all three of the reasons that I gave were key in achieving the 25%. The M2 MacBook Air, the launch of the new product, the -- satisfying the back orders from the previous quarter and then filling the channel, all of those were key contributors. Kyle McNealy : Okay, Tim. Thanks. Tejas Gala : Thanks, Kyle. Can we have our next question, please Operator : Yes, sir. The next question is coming from Mr. Jim Suva calling from Citigroup. Jim Suva : Thank you and it's great to see that you talked about your suppliers going carbon-neutral, something -- a small statement I really took to heart. Thank you. My question is on the Services. Could it possibly be impacted more by FX than product, meaning the Jim Suva family has Apple One and TV+ and all that, and we pay typically on annual, but then when we go into the store to buy new Watches and iPad, the price is adjusted more quickly. So could it be that Services growth was impacted a little bit more by FX and down the road, we could see growth reaccelerate, or am I just reading too much into the FX impact that could be different from Services versus product? Thank you. Luca Maestri : Jim, it's Luca. No, you're right. Obviously, the FX impact on our business depends on the geographic mix of the sales that we do. And so yes, it can be -- Services and products can have slightly different effects on foreign exchange. And so, if we look at our Services business in constant currency, we would have grown double digits. And so we're very pleased with that. As I mentioned, there were some areas that we could see some softness in digital advertising. Of course, you know that part, and gaming on the App Store was affected. But we were very happy with what we saw in terms of the behavior of our customers with the engagement with Services. And I mentioned a number of things during the prepared remarks, the fact that, obviously, that installed base is growing, that's a positive and it's a great foundation for the future. We are seeing more transacting accounts and more paid accounts, they're both growing double digits. Paid accounts are growing faster than transacting accounts, so the penetration of paid accounts is increasing. We have a great subscription business, 900 million paid subs now on the platform and growing very fast. We doubled in 3 years. So when we look at all those dynamics, that's the part that is really interesting to us because we really believe that the engine for Services growth is there and foreign exchange is a temporary thing and – but the fundamentals are very good. Jim Suva : Thank you. Congratulations for your team. Tejas Gala : Thanks Jim. Can we have the next question, please. Operator : The next question is coming from Amit Daryanani from Evercore. Please go ahead. Amit Daryanani : Thanks for taking my question. I have 2 as well. The first 1 really is around the iPhone trajectory. There's been a fair amount of focus in terms of what's going to happen to iPhone demand, given the macro worries. It would be really helpful to understand though, given the strength you're seeing, where do you think channel inventory is for iPhones today versus where it would be from a historical perspective? And do you see the channel getting to an optimal level by end of December quarter? Because evenly right now given the lead time data, it looks like your revenue trajectory in iPhones is more driven by the supply you have versus demand. So any color on the channel inventory would be helpful. Tim Cook : Yes. If you look at where we ended, Amit, in the September quarter, we exited below our target inventory range on iPhone and that's -- that in and of itself is not too unusual in the quarter. We start the ramp and demand is robust and so forth. And so I wouldn't call it that abnormal from the past. Q – : Got it. And then I guess, Tim, you folks have been talking about digital advertising a fair bit over the last few quarters, I think. Is there any metrics, any vectors you can talk about kind of to give us a sense of how big those businesses or what vectors are you focused on? And really, if you could talk about, do you think Apple can build an advertising business at scale without sacrificing consumer privacy? Tim Cook : So our -- first and foremost, we focus on privacy and so we would not do anything that stepped away from that. We feel that privacy is a basic fundamental human right, and so that's sort of the lens that we look at it under. Our specific advertising business is not large and relative to others and so forth. But we don't release the exact numbers on it, but it's clearly not large. Tejas Gala : Thanks, Amit. Can we have the next question, please. Operator : Yes, sir. We'll now move on to Mr. Harsh Kumar calling from Piper Sandler. Please go ahead. Harsh Kumar : Yeah. Hey, thanks guys, First of all, fellows congratulations on stellar performance. There's a lot of large-cap companies that are getting ripped around, so we appreciate the steady cadence here. Tim, I wanted to ask you about inflation pressures and labor problems here in the US and globally. And maybe talk about what steps can Apple take to mitigate those? And maybe Luca, on that end, FX is becoming a pretty significant headwind. I was curious what -- if at all, if there's anything that can be done to mitigate that. Tim Cook : I'll let Luca talk about FX. In terms of the people piece, we're focused on taking care of our teams and offering them the best benefits and best compensation so that we can empower them to do the best work of their lives. And so that's what we're focused on in terms of our teams. In terms of inflation, there's clearly wage inflation. There's inflation related to logistics as well. If you compare it to pre-pandemic kind of levels, that has not returned to pre pandemic levels by any means. And there's certain silicon components that are -- have inflationary pressure as well. And so that's not an all-inclusive list of where we see it, but it gives you some ingredients of where we see inflation pressure. And we've obviously taken that into consideration in the gross margin guidance that Luca gave earlier in the call. Luca Maestri : Yes. And on foreign exchange, you're right. I mean, it's obviously a very significant factor that is affecting our results, both revenue and gross margin. What do we do about situation like this, one where we have a very strong dollar? Of course, we hedge our exposures. We try to hedge them in as many places as possible around the world. For example, I think we've been probably the first company that started hedging our exposure in China several years ago. There may be a few currency, small ones, where we don't hedge because the cost is prohibitive or the market is not there. But in general, we tend to hedge because it gives us significant level of margin stability. Obviously, over time, that protection reduces because the hedges roll over and we need to buy new contracts. But that's the primary tool that we use to offset some of the FX pressure. Of course, when we launch new products, in particular, we look at the FX situation. And in some cases, for example, customers in international markets had to -- they saw some price increases when we launched the new products, which is not something that, for example, US customers have seen. And that's unfortunately the situation that we're in right now with the strong dollar. So that's the way we try to deal with that. I have to say that one of the things that we've really appreciated the most during the quarter was the fact that in spite of this very strong dollar and the difficult FX environment, we have seen very strong performance in many international markets, particularly some very large emerging markets where even in reported currencies, so in US dollars, we're seeing very strong double-digit growth in places like India, Indonesia, Mexico, Vietnam, many places where we've done incredibly well. And obviously, in local currency, those growth rates are even higher. It's important for us to look at how these markets perform in local currency because it really gives us a good sense for the customer response to our products, the engagement with our ecosystem and in general, the strength of the brand. And I have to say, in that respect, we feel very, very good about the progress that we're making in a lot of markets around the world. Harsh Kumar : Thanks, Tim and Luca. I had a follow-up. Luca, in your prepared remarks for the guidance, you mentioned that for the December quarter, you expect the performance to decelerate relative to September. So September was a year-over-year about, call it, 8%. Should I think that, that 8% number will go down on a year-over-year basis as we look at December? Maybe you could provide some color on what you're thinking. And are we still looking -- are we looking at a positive number, or are we thinking maybe that the growth rate will be negative on a year-over-year basis? Luca Maestri : What we said is that we're going to be decelerating from September, so September was 8%, so it's going to be a lower percentage than 8%. We're not providing guidance for the reasons that we've explained. There's a lot of uncertainty there. And so we see how the quarter progresses. Keep in mind the 10 points of exchange. Certainly, in normal times, we will be talking about very different numbers, but that's where we are right now. Harsh Kumar : Thank you guys. Tejas Gala : Thanks, Harsh. Can we have the next question please. Operator : Yes, sir. Next question is coming from Krish Sankar calling from Cowen & Company. Please go ahead. Krish Sankar : Yeah. Hi. Thanks for taking my question. I had two of them. First one, either for Tim or Luca, on cash and capital allocation. Given there's some correction and valuation for some of the private and public companies, does it change your thought process on the time line to get to cash-neutral? In other words, would you be more aggressive with acquisitions, or you think holding on to more cash due to interest income becomes more attractive versus your prior investment goals? And then I had a quick follow-up. Tim Cook : This is Tim. In terms of acquisitions, we averaged about one per month, I believe, in across fiscal year 2022. And so we're constantly looking in the market. And what's out there. And what things would be synergistic. And which things would provide either intellectual property or talent or preferably both that we would need. And so we're constantly looking at acquisitions of all sizes. Luca Maestri : In terms of cash deployment, obviously, we like to look at the capital return program over the long arc of time. And we have done, since the beginning of the program we've done over $550 billion of buyback at an average repurchase price of $47. So the program has been incredibly successful. We are still in a position where we have net cash. And we said all along, we want to get to cash-neutral at some point. Our cash generation has been very, very strong over the years, particularly last year. I think, I mentioned in the prepared remarks, we did $111 billion of free cash flow. That's up 20% year-over-year. And so we will put that capital to use for investors. Krish Sankar : Got it, got it, very helpful, Tim and Luca. And then a quick follow-up for Luca on the December guidance, thanks for the color on that. I'm just kind of curious, the extra week in the quarter, is that not helping offset some of the FX, or in other words, the 10 percentage point negative impact from FX will be much higher if that's a 13-week quarter? Luca Maestri : No, I wouldn't say that because those are percentages. So yeah, no, the 10 points wouldn't be different. 13 or 14 weeks would be the same. Krish Sankar : Got it. Got it. Thanks a lot Luca. End of Q&A: Tejas Gala : Thank you, Krish. A replay of today's call will be available for two weeks on Apple Podcasts, as a Webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 7086300, followed by the pound sign. These replays will be available by approximately 5 :00 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator : Once again, this concludes today's conference. We do appreciate your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,023	1	2023Q1	2023Q1	2023-02-02	6.088	6.035	6.297	6.285	8.15685	23.24	24.34	Operator : Good day, everyone, and welcome to the Apple Q1 Fiscal Year 2023 Earnings Conference Call. Today's call is being recorded. And now at this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead. Tejas Gala : Thank you. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Before turning the call over to Tim, I would like to remind everyone that the December quarter spanned 14 weeks, while the March quarter, as usual, has 13 weeks. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Timothy Cook : Thank you, Tejas. Good afternoon, everyone, and thanks for joining us. Today, we're reporting revenue of $117.2 billion for the December quarter. We set all-time revenue records in a number of markets, including Canada, Indonesia, Mexico, Spain, Turkey and Vietnam, along with quarterly records in Brazil and India. As a result of a challenging environment, our revenue was down 5% year-over-year. But I'm proud of the way we have navigated circumstances, seen and unforeseen, over the past several years, and I remain incredibly confident in our team and our mission and in the work we do every day. Let me discuss the 3 factors that impacted our revenue performance during the quarter. The first was foreign exchange headwinds, which had a nearly 800 basis point impact. On a constant currency basis, we grew year-over-year and would have grown in the vast majority of the markets we track. The second factor, which we described in a November 6 update was COVID-19-related challenges, which significantly impacted the supply of iPhone 14 Pro and iPhone 14 Pro Max and lasted through most of December. Because of these constraints, we had significantly less iPhone 14 Pro and iPhone 14 Pro Max supply than we planned, causing ship times to extend far beyond what we had anticipated. As we always have every step of the way throughout the pandemic, we continued to prioritize people and worked with our suppliers to ensure the health and safety of every worker. Production is now back where we want it to be. The third factor was a challenging macroeconomic environment as the world continues to face unprecedented circumstances, from inflation to war in Eastern Europe, to the enduring impacts of the pandemic. And we know that Apple is not immune to it. But whatever conditions we face, our approach is always the same. We are thoughtful and deliberate. We manage for the long term. We adapt quickly to circumstances outside our control while delivering with excellence in the things we can. We invest in innovation, in people and in the positive difference we can make in the world. And we do it all to provide our customers with technology that will enrich their lives and help unlock their full creative potential. It's a wonderful thing to be a part of, and it's so rewarding for all of us at Apple when we hear how much our customers are loving what we create. Let me talk now about what we saw across our product categories. Starting with iPhone. Revenue came in at $65.8 billion for the quarter, down 8% year-over-year. However, on a constant currency basis, iPhone revenue was roughly flat. Our customers continue to rave about the astounding camera capabilities and unprecedented battery life and the groundbreaking suite of health and safety features. The iPhone 14 lineup pushes the limits of what users can do with a smartphone. During the quarter, Mac revenue came in at $7.7 billion, which was in line with what we had expected. We had a difficult compare because this time last year, we had the extremely successful launch of the redesigned M1 MacBook Pros. We also faced a challenging macroeconomic environment and foreign exchange headwinds. We remain confident in and focused on the long-term opportunity for Mac. Just last month, we introduced new MacBook Pro models powered by our latest developments in Apple silicon, M2 Pro and M2 Max. These chips enable unprecedented performance and do so with less energy, which is not only good for the environment but gives the newest MacBook Pro the longest battery life ever in a Mac. We also introduced the M2-powered Mac mini, which will supercharge productivity for users of all kinds and leave them stunned by just how powerful a Mac mini can be. During the quarter, iPad revenue grew 30% to a total of $9.4 billion. The very strong growth was due in part to a favorable compare to the December quarter a year ago when we experienced significant supply constraints. Customers continue to praise our new lineup for its versatility, whether it's the new iPad Pro now powered by the M2 or the newly designed iPad 10th Generation with its stunning liquid retina display and beautiful colors. Revenue for Wearables, Home and Accessories was $13.5 billion, which was down 8% year-over-year driven by foreign exchange headwinds and a challenging macroeconomic environment. We remain excited about the long-term opportunity in the category. As an example, a few weeks ago, we announced the next-generation HomePod, which is an indispensable addition to the smart home. This powerful smart speaker relies on advanced computational audio to produce an incredible listening experience. We're also helping users make their homes safer with sound recognition. This feature, arriving later this spring, allows HomePod to send a notification directly to a user's iPhone if a smoke or carbon monoxide alarm sound is identified. We continue to hear wide praise for Apple Watch Series 8 and Apple Watch Ultra, which has set a new standard for what's possible with a wearable. From a whole host of health and safety features to incredible new capabilities for extreme athletes, there is something for everyone in these amazing products. Customers are excited about some phenomenal new features we've made available across many of our products as well. One of the highlights is emergency SOS via satellite, which launched for iPhone 14 customers in the U.S. and Canada in November and for customers in France, Germany, Ireland and the U.K. in December. This is a feature we hope our users will never need, but it is incredibly heartening to get e-mails from people describing the life-saving impact our new safety features have had on them. We're always looking for new ways to empower people to create and collaborate. In December, we released Freeform, a brand-new app that lets users take their ideas wherever they want, anywhere they are, all while collaborating in real time. Freeform has already received praise from reviewers for its flexibility and simplicity as it works seamlessly across iPhone, iPad and Mac. Today, we are very excited to announce that we've achieved a truly incredible milestone. Thanks to our deep commitment to innovation, incredible customer loyalty and satisfaction and a large number of switchers, we now have more than 2 billion active devices as part of our growing installed base, double what it was just 7 years ago. This is an incredible testament to our products and services and the strength of our ecosystem. We set an all-time revenue record of $20.8 billion in services, which was better than what we had expected. We achieved double-digit revenue growth from App Store subscriptions and set all-time revenue records across a number of categories, including cloud and payment services. All told, Apple now has more than 935 million paid subscriptions. Apple has also just begun a historic 10-year partnership with Major League Soccer. Just yesterday, we launched MLS Season Pass, which will give fans in more than 100 countries access to every live MLS regular season game as well as the playoffs and MLS Cup, all with no blackouts. And while we're providing more content to sports fans than ever before, Apple TV+ continues to showcase powerful characters and moving storytelling. We were thrilled to celebrate the holidays alongside our Apple TV+ subscribers with the hit movie Spirited. And we're delighted to see how much people are enjoying new and returning series like Shrinking, Slow Horses and Truth Be Told. And we have some great upcoming movies in Sharper and Tetris, along with Emmy Award winner Ted Lasso returning this spring. During the quarter, we made some great updates to Fitness+ as well, expanding our catalog of more than 3,500 workouts and meditations to include a new kickboxing category and a new sleep theme for meditations. Our latest artist spotlight series features the music of the incomparable Beyonce, and we're excited to take a stroll with guests appearing on our fifth season of Time to Walk. And we continue to build on our decades-long commitment to helping small businesses thrive when we announced Apple Business Connect. This new tool gives business owners even more control over how billions of people see and engage with their products and services every day. Businesses of all sizes can now customize key information for users across Apple Maps, Messages, Wallet, Siri and other apps. Meanwhile, in retail, we celebrated 25 years of the Apple online store and also opened Apple Pacific Centre in Vancouver and Apple American Dream in New Jersey. And I'm grateful to all the teams who helped our customers throughout the busy holiday season. At Apple, we spend a lot of time focused on creating an unparalleled experience for our customers and every product and service that we offer. We're also just as dedicated to leading with our values in everything we do. As part of that work, we strengthened our deep commitment to privacy and security, giving users 3 new tools to protect their most sensitive data : iMessage contact key verification, security keys for Apple ID and advanced data protection for iCloud. At Apple, we feel a deep sense of responsibility to leave the world better than we found it. We're also a year closer to 2030, and we were ever focused on the environmental commitments we set out for the end of the decade. As an example, the latest Mac mini and MacBook Pro models all use 100% recycled aluminum in the enclosure and recycled rare earth elements in all magnets. And in a first for HomePod, we're using 100% recycled gold in the plating of multiple printed circuit boards. In honor of Black History Month, we released the Black Unity collection, including the Special Edition Apple Watch Black Unity Sport Loop, a new matching watch face and iPhone wallpaper. Through our racial, equity and justice initiative, we're expanding our support of 5 organizations focused on lifting up communities of color through technology. And we are committed as ever to building on our progress around inclusion and diversity. During the quarter, we also announced that since the inception of our Giving program 11 years ago, we've donated more than $880 million to humanitarian efforts, disaster relief, childhood education and more. And over the last 16 years through our partnership with (RED), Apple-supported grants have helped more than 11 million people get the care and support services they need. As we look ahead in 2023, we are excited about the year to come. At Apple, we are always looking forward, always focused on the next challenge, always determined to do great things with unmatched creativity and unrivaled innovation. And that makes me more confident about the future of Apple than I have ever been. With that, I'll turn it over to Luca. Luca Maestri : Thank you, Tim, and good afternoon, everyone. As Tim mentioned, revenue for the December quarter was $117.2 billion, down 5% from last year. A number of factors had a significant impact on our results. First, we faced a very difficult foreign exchange environment, which affected our performance by nearly 800 basis points. In other words, we grew revenue on a constant currency basis. And in fact, we did so in the vast majority of markets. Second, the macroeconomic environment this past quarter was markedly more challenging than 12 months ago. Third, we experienced significant supply shortages for iPhone 14 Pro and iPhone 14 Pro Max in November and through December. On the other hand, we had the positive impact of the 14th week in the quarter that Tejas just mentioned at the beginning of the call. Products revenue was $96.4 billion, down 8% from last year due to the factors I just called out. At the same time, however, our installed base of active devices grew double digits and achieved all-time records in each geographic segment and in each major product category. We're proud to now have over 2 billion active devices in our installed base. This continued growth in the installed base is due to extremely strong levels of customer satisfaction and loyalty and a high number of customers who are new to our products. The installed base growth also helped our services set an all-time revenue record of $20.8 billion, up 6% over a year ago. We achieved this new milestone despite more than 700 basis points of negative impact from foreign exchange. We reached all-time services revenue records in the Americas, Europe and rest of Asia Pacific and a December quarter record in Greater China. We also set records in many Services categories, including all-time revenue records for cloud services, payment services and music and December quarter records for the App Store and AppleCare. Company gross margin was 43%, up 70 basis points from last quarter due to leverage and favorable mix, partially offset by foreign exchange. Products gross margin was 37%, up 240 basis points sequentially. And Services gross margin was 70.8%, up 30 basis points sequentially, both due to the same factors that impacted total company gross margin. Operating expenses of $14.3 billion were significantly below the guidance range we provided at the beginning of the quarter and grew at a slower pace than in the past as we took actions to respond to the current macro environment. Net income was $30 billion. Diluted earnings per share were $1.88, and we generated very strong operating cash flow of $34 billion. Let me now get into more detail for each of our revenue categories. iPhone revenue was $65.8 billion despite significant foreign exchange headwinds, supply constraints on iPhone 14 Pro and iPhone 14 Pro Max and a challenging macroeconomic environment. In spite of these circumstances, we set all-time iPhone revenue records in Canada, Italy and Spain, and saw strong growth in several emerging markets, including all-time iPhone revenue records for India and Vietnam. Importantly, the installed base of active iPhones continues to grow nicely and is at an all-time high across all geographic segments. In emerging markets, in particular, the installed base grew double digits, and we had record levels of switchers in India and in Mexico. Our customers continue to love their experience with our products with the latest survey of U.S. consumers from 451 Research indicating customer satisfaction of 98% for the iPhone 14 family. Mac revenue was $7.7 billion, down 29% year-over-year and in line with our expectations. There were 3 key drivers for our Mac results. First, we had a challenging compare against last year's launch of the completely reimagined MacBook Pros, our first notebooks with M1 Pro and M1 Max. Second, we believe that the macro environment impacted our Mac performance. And third, we faced significant foreign exchange headwinds. At the same time, however, the installed base of active Macs reached an all-time high across all geographic segments, and we continue to see very strong upgraded activity to Apple silicon. Customer satisfaction with Mac remains very strong at 96% based on the latest survey of U.S. consumers from 451 Research. iPad revenue was $9.4 billion, up 30% year-over-year despite significant FX headwinds. This performance was driven by 2 key items. First, during the December quarter a year ago, we experienced significant supply constraints, while this year, we had enough supply to meet demand. Second, we launched our new iPad and the iPad Pro powered by the M2 chip during the quarter. The iPad installed base reached a new all-time high, thanks to incredible customer loyalty and a high number of new customers. In fact, over half of the customers who purchased iPads during the quarter were new to the product. Wearables, Home and Accessories revenue was $13.5 billion, down 8% year-over-year. The year-over-year decline was driven by significant FX headwinds and a challenging macroeconomic environment. However, our installed base of devices in the category set a new all-time record thanks to the largest number of customers new to our smartwatch that we've ever had in a given quarter. In fact, nearly 2/3 of customers purchasing an Apple Watch during the quarter were new to the product. Moving to Services. We generated $20.8 billion in revenue, a new all-time record in total and for many Services offerings in spite of a difficult foreign exchange environment, and macroeconomic headwinds impacting certain categories such as digital advertising and mobile gaming. In constant currency, we grew Services revenue double digits on top of growing 24% during the December quarter a year ago. We remain focused on the large long-term opportunity in this category, and we continue to observe several trends that reflect the strength of our ecosystem. For example, we saw increased customer engagement with our Services during the quarter. Both our transacting accounts and paid accounts grew double digits year-over-year, each setting a new all-time record. Paid subscriptions also continued to grow nicely. We now have more than 935 million paid subscriptions across the services on our platform, up more than 150 million during the last 12 months alone and nearly 4x what we had just 5 years ago. And we continue to increase the reach and improve the quality of our offerings. For instance, Apple Pay is now available to millions of merchants in nearly 70 countries and regions. And we saw a record-breaking number of purchases made using Apple Pay globally during the holiday shopping season. Finally, our installed base of over 2 billion active devices represents a great foundation for future expansion of our ecosystem, and it continues to grow even during difficult macroeconomic conditions, which speaks to the exceptionally high levels of customer loyalty and satisfaction and our ability to attract new customers to our platform. The growth is coming from every major product category and geographic segment, with strong double-digit increases in emerging markets such as Brazil, Mexico, India, Indonesia, Thailand and Vietnam. Turning to the enterprise market. we are seeing continued adoption of our Services for business like Apple Business Essentials, AppleCare, Tap to Pay and Apple Financial Services. For example, Mars Incorporated has expanded its use of AppleCare for Enterprise to provide timely device support and assurance for iPads deployed across their manufacturing sites. Meanwhile, HCA Healthcare has leveraged Apple Financial Services to manage the annual refresh of its entire fleet of iPhones. This not only ensures that their staff stay current on the latest Apple technology, but also provides them with significant annual savings in the process. Let me now turn to our capital return program and our cash position. We returned over $25 billion to shareholders during the December quarter as our business continues to generate very strong cash flow. This included $3.8 billion in dividends and equivalents and $19 billion through open market repurchases of 133 million Apple shares. We ended the quarter with $165 billion in cash and marketable securities. We repaid $1.4 billion in maturing debt and decreased commercial paper by $8.2 billion, leaving us with total debt of $111 billion. As a result, net cash was $54 billion at the end of the quarter, and we maintain our goal of becoming net cash-neutral over time. As we move into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance, but we are sharing some directional insights based on the assumption that the macroeconomic outlook and COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. In total, we expect our March quarter year-over-year revenue performance to be similar to the December quarter. This represents an acceleration in our underlying year-over-year business performance as the December quarter benefited from an extra week. Foreign exchange will continue to be a headwind, and we expect a negative year-over-year impact of 5 percentage points. For Services, we expect revenue to grow year-over-year while continuing to face macroeconomic headwinds in areas such as digital advertising and mobile gaming. For iPhone, we expect our March quarter year-over-year revenue performance to accelerate relative to the December quarter year-over-year revenue performance. For Mac and iPad, we expect revenue for both product categories to decline double digits year-over-year because of challenging compares and macroeconomic headwinds. We expect gross margin to be between 43.5% and 44.5%. We expect OpEx to be between $13.7 billion and $13.9 billion. We expect OI&E to be around negative $100 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.23 per share of common stock payable on February 16, 2023, to shareholders of record as of February 13, 2023. With that, let's open the call to questions. Tejas Gala : Thank you, Luca. [Operator Instructions]. Operator, may we have the first question, please. Operator : [Operator Instructions]. Certainly. We will go ahead and take our first question from David Vogt with UBS. David Vogt : So Tim, and maybe this is for Luca as well. You talked about the supply chain returning back to normal after a very difficult October, November, but we're still seeing some disruptions across tech products, whether it's enterprise or consumer-facing. How do you think about your supply chain and maybe the levels of inventory or builds that you might need as we go forward to sort of insulate your business from these sort of episodic disruptions? Have you changed your view? And if so, how does that affect ultimately margins and sort of your balance sheet and cash flow items going forward? Timothy Cook : This is Tim, David. From a supply point of view, we did see disruption from early November through most of December. And from a supply chain point of view, we're now at a point where production is what we need it to be. And so the problem is behind us. In terms of going forward in the supply chain, we build our products everywhere. There are component parts coming from many different countries in the world, and the final assembly coming from 3 countries in the world on just iPhone. And so we continue to optimize it. We'll continue to optimize it over time and change it to continue to improve. I think when you sort of zoom out and back up from it, the last 3 years have been a pretty difficult time between COVID and silicon shortages and the like. And I think it's -- I think we have had a very resilient supply chain in the aggregate. In terms of supply for this quarter, which I think was one of your points, I think we're in decent supply on most products for the quarter currently. Operator : Our next question is from Shannon Cross of Credit Suisse. Shannon Cross : Luca, I wanted to dig a bit more into the commentary on gross margins. The guidance, especially at 43.5% to 44.5%, is obviously quite strong. So I'm wondering what's helping you out there, assume mix and some other things. And then how should we think about what currency and hedge is going to do as we look forward? And then I have a follow-up. Luca Maestri : Shannon, yes, I mean, we've had good margin for the December quarter to start with. We reported 43%. Obviously, in December, we have the benefit of leverage because of the seasonality of the business, but we also had favorable mix across the board. Of course, foreign exchange is an issue right now. In the December quarter on a sequential basis, foreign exchange was a negative 110 basis points for us. And on a year-over-year basis, it's 300 basis points. So obviously, the FX environment has changed a lot during the last 12 months. For March, yes, we've seen a margin expansion, 43.5% to 44.5%. We're doing a lot of work around cost, of course. Mix will continue to help, both within categories and services mix as we move away from the holiday season. But we're doing a lot of work on the cost structure, and that is paying off. Foreign exchange is still a negative, about 50 basis points sequentially, but it's mitigating. The last couple of weeks, the dollar has weakened a bit. And so hopefully, as we go through the year, hopefully, things will improve. But for now, as you correctly state, we are in a good position on margins. Shannon Cross : And then, Tim, can you talk a bit about China? What you're seeing -- obviously, you've had the issues with production, but I mean more on the demand side. As we've gotten through Chinese New Year and the opening, I'm just wondering, are you seeing the Chinese consumer come back? What are they buying? And how are you thinking about your position there? Timothy Cook : Shannon, last quarter, we declined by 7% on a reported basis, but we actually grew on a constant currency basis. And that was despite some significant -- the supply constraints that we talked about earlier. And obviously, the sort of the COVID restrictions throughout China that happened in various different places throughout the country also impacted the demand during the quarter. When you look at the opening that started happening in December, we saw a marked change in traffic in our stores as compared to November. And that followed through to demand as well. And I don't want to get into January. We've obviously -- January is included in the guidance, or the color rather, that Luca provided earlier. But we did see a marked change from December compared to November. Operator : Our next question is from Erik Woodring of Morgan Stanley. Erik Woodring : Maybe, Tim, first one for you. That 2 billion installed base -- device installed base figure, that's up, I believe, 200 million units year-over-year. That implies the strongest annual gain in new devices in your installed base basically as far back as you've provided those data points. And so I guess my 2 questions are : one, do you -- can you provide the installed base for the iPhone at year-end? And then two, is there anything that you see in this new cohort of users that might look different or similar to past cohorts, either by demographic or regions or monetization ramp? And then I have a follow-up. Timothy Cook : Yes. The installed base is now over 2 billion active devices, as you mentioned. And we set records across each geographic segment and major product category. And so it was a broad-based change. Two -- I'll correct one thing you said, it's up over 150 million year-over-year. The last report we reported to be over 1.85. And so it's 150 million, which we're very proud of. We also saw strong double-digit in several of the emerging markets, which is very important to us. For example, India and Brazil as just 2 examples. So very, very strong. And obviously, it bodes well for the future. Erik Woodring : And then, Luca, obviously, the December quarter was negatively impacted by the production challenges. Can you just maybe unpackage where channel inventory levels are today kind of across the iPhone broadly? And then what the data that you're seeing so far this quarter is telling you about iPhone demand deferral versus kind of iPhone demand destruction and perhaps pushing some upgrades later into the year rather than into the March quarter? And that's it for me. Timothy Cook : Yes. Erik, I'll take that one as well. The channel inventory levels on iPhone, we obviously ended the December quarter below our target range given the supply challenges on iPhone 14 Pro and iPhone 14 Pro Max. But as you think about this, keep in mind that a year ago, we also exited the December quarter below our target inventory range because of supply challenges in the year ago quarter. Not related -- not the same issue, but just as a point. And so that hopefully gives you some flavor of that. In terms of what we're seeing in January, we've included in our color that Luca provided kind of our thinking. It's very hard to estimate the recapture because you have to know exactly what would have happened and how many people bought down. And it takes a while to get that -- to get those reports in during the quarter. And so we've made our best guess at it. In terms of the sizing of the constraint in Q1, what we estimate, although not with precision, is that we would -- I thought we believe iPhone would have grown during the quarter had it not been for the supply shortages. So hopefully, that provides you a little bit of color. Operator : Our next question comes from Aaron Rakers of Wells Fargo. Aaron Rakers : I have two as well, if I can. I guess the first kind of question, just going back on the gross margin line. Pretty good guidance into this March quarter. I'm curious if you unpack that a little bit specific around what you're seeing as far as maybe benefits from component pricing in the guidance, if you're embedding any of that at this point. Luca Maestri : Yes. Of course, with our guidance, we try to capture every aspect of our cost structure. And obviously, components are a big portion of that. So definitely, that's included. And keep in mind, again, that foreign exchange -- I mentioned earlier, I think to Shannon, that the sequential negative on FX is 50 basis points, versus a year ago, it's 270 basis points. Obviously, the U.S. dollar has moved a lot over the last 12 months. So obviously, we need to find offsets and more to the negative FX in order to be able to provide this kind of guidance. And so obviously, components are a big part of that. Aaron Rakers : Yes. And then kind of from a strategic perspective, given kind of the things that we're seeing out in some of your peer group, I'm curious, Tim, how you think about the role of AI in your strategy as far as particularly in the Services segment, whether you're not -- you see opportunities to excel monetization abilities within the paid subscriber base and whether or not AI, is it something that you're implementing a bit more strategically there. Timothy Cook : Yes. It is a major focus of ours. It's incredible in terms of how it can enrich customers' lives. And you can look no further than some of the things that we announced in the fall with crash detection and fall detection or back a ways with ECG. I mean these things have literally saved people's lives. And so we see an enormous potential in this space to affect virtually everything we do. It's obviously a horizontal technology, not a vertical. And so it will affect every product and every service that we have. Operator : Our next question comes from Amit Daryanani of Evercore. Amit Daryanani : I guess the first one I have is, Tim, I think based on your earlier comments that iPhones would have grown ex the production issue that implied that maybe it's a $7 billion or so impact that you had in December quarter from the production challenges on the high-end models. I'm sure it's tough to see what happens this time around. But I think historically, when you've had production issues or things like this happen, what has the consumer behavior being typically? Do they tend to go down towards the lower end models and get the phone they want quickly? Or do they just defer the production? Just from a historical perspective, I think do you typically recover what's deferred out or no? Timothy Cook : It's very hard to estimate is the real answer because you have to know a lot of data, and it's usually only in hindsight that you have a more reasonable view of it. And so we put our best views in the color that Luca provided. That's kind of what I would say. Amit Daryanani : All right. And then I guess maybe if I think about Services as you go forward. I know you had really good growth in Services, I think, over the last several years. But as you go forward in Services, what do you think drives the growth more so? Is it the expansion of your installed base? Or is it more going to be driven by ARPU going higher for you? I'm just curious, how do you think about those 2 buckets as you go forward? Luca Maestri : Amit, there's a number of things, and I've mentioned a few of them during the call. The first step is always the installed base. Installed base is the engine for Services growth. And the fact that the installed base is growing very nicely, and it's growing in a lot of emerging markets, it's growing even faster, that gives us a larger addressable pool of customers. So that's incredibly important. The second one is that we are seeing that the level of engagement of our customers already in our ecosystem continues to grow. We -- I mentioned that both transacting accounts and paid accounts grew double digits. And so that bodes very well for the future. And we have a lot of transacting accounts that kind of moved to paid accounts over time. The other aspect that is very important for us is to continue constantly to improve the reach and the quality of our services. And I give the example of Apple Pay, which it's a great example because we started off primarily in the United States. Now we've taken it to 70 markets, millions of merchants. And so obviously, payment services are -- continue to set new highs all the time for us. And then as you've seen over the last few years, we also launched new services over time, and that obviously contributes to the growth. We're very excited. And when we look at the behavior of our installed base, we think it's very promising for the continued growth of our Services business. Operator : Our next question comes from Harsh Kumar of Piper Sandler. Harsh Kumar : Tim, I had a quick question on emerging markets. Seems like you're making a lot of strides in India. Potentially wanted to understand the kind of share you have in China and India. And relative to that, what would be your aspirational but sort of achievable share in iPhones in those territories, whether it's units or revenues? And I was hoping to draw on your experience and maybe what you've seen in other countries where you've had some longer presence. Timothy Cook : And looking at the business in India, we set a quarterly revenue record and grew very strong double digits year-over-year. And so we feel very good about how we performed, and that was -- that's despite the headwinds that we've talked about. Taking a step back, India is a hugely exciting market for us and is a major focus. We brought the online store there in 2020. We will soon bring Apple retail there. So we're putting a lot of emphasis on the market. There's been a lot done from a financing options and trade-ins to make products more affordable and give people more options to buy. And so there's a lot going on there. We are, in essence, taking what we learned in China years ago and how we scale to China and bringing that to bear. And I don't have the exact market shares in front of me, but I think you would see that from a market share point of view that we grew around the world last quarter despite -- on iPhone despite the challenges that we've had on the supply side. And I wouldn't expect to have a difference in those 2 markets. Harsh Kumar : Understood. And for my follow-up, I had a sort of interesting theoretical question on pricing. Assuming we get the CHIPS Act passed, and there's a whole bunch of manufacturing that happens in U.S. and other territories that are potentially somewhat more expensive than the ones you might be now, have you -- has the company done any studies to gauge the elasticity of demand relative to small price increases in your products? Timothy Cook : We have experience in that, but I wouldn't necessarily draw the same conclusion that you have in terms of the cost of the product. I -- we don't know at this point exactly what that will be, but we're all in, in terms of being the largest customer for TSMC in Arizona. I'm very proud to take part in that. That's what I would say about that. Operator : Our next question comes from Wamsi Mohan of Bank of America. Wamsi Mohan : Tim, you've done a phenomenal job of driving consumer choice towards higher-end products within your portfolio. How would you compare this cycle for iPhones if you were to segment the Pro versus non-Pro models versus the cycles from the past few years? And do you think this move to higher ASPs is sustainable? Or do you think it reverses in a tighter consumer spending environment? And I have a follow-up. Timothy Cook : The Pro has been a -- the 14 Pro and the 14 Pro Max have done extremely well up until the point where we had a supply shortage and couldn't provide them -- couldn't provide the total of the demand. And so it's definitely a strong Pro cycle. I think there's a number of reasons for that, but the most important one is always the product. And I think the innovations and the product speak for themselves. And we feel very good about the product that we announced back in September and are happy to now be at a point where we're shipping to the demand. Wamsi Mohan : And Tim, do you think that this move to sort of higher ASPs that has happened over the last few years is sustainable? Or could it sustain in this very tough macro environment that you've cited? Timothy Cook : I wouldn't want to predict, but I would say that the smartphone for us, the iPhone has become so integral into people's lives. It contains their contacts and their health information and their banking information and their smart home and so many different parts of their lives, their payment vehicle and -- for many people. And so I think people are willing to really stretch to get the best they can afford in that category. Wamsi Mohan : Okay. Great. And Tim, you clearly emphasize the focus and importance of the installed base. If we think about the absolute grit of the installed base from 1 billion to 2 billion over 7 years from a device standpoint, how should we think about the penetration of services or the growth in paying customers on services or that time frame? Is that penetration rate increasing or decreasing? How fast is that growing relative to the growth of the overall installed base? Luca Maestri : Wamsi, it's Luca. Yes, of course, we keep track of that. It's really important for us. Over the last 7 years, as we doubled the installed base, we've seen a growing engagement of our customers on the platform. That happens, first of all, by customers transacting on the platform and then moving to paid accounts. So starting to pay for some of the services. That percentage of paid accounts tends to grow over time. We've seen it in developed markets. We see it in emerging markets. And that is due to some of the reasons that I was explaining earlier, including the fact that we made it easier for our customers to get engaged on the platform. For example, we offer multiple payment methods in many countries. And we've made it easier to explore for more services because we've added a lot of services on the platform over the last 7 years. So to your question, of course, higher engagement means a higher percentage of paid accounts over time. Operator : Our next question comes from Richard Kramer of Arete Research LLP. Tejas Gala : Operator, can we move on to the next? Operator : Next, we'll hear from Jim Suva of Citigroup. James Suva : Tim and Luca, you both mentioned earlier on the Q&A a little bit about India. I was wondering if we're now entering a situation of even more opportunity because we've exited COVID, we've exited countries with different COVID criteria. We've also seen India build out its higher speed transmissions. And your market is -- shares tremendously underrepresented there. And it appears with the supply chain, you're looking at diversifying kind of operational risk not specific to any country, but just overall. Now you look at potentially opening up stores and stuff. Am I right that, that's the way you look at it is it's even more prime for opportunity now than ever? And once you start opening up stores there, you could just see a complete green shoot of adoptions or any additional commentary on your view on India as now we've navigated COVID and supply chain and so many challenges over the past 2 years? Timothy Cook : Yes. Jim, we actually did fairly well through COVID in India. And I'm even more bullish now on the other side of it, or hopefully, on the other side of it. And that's the reason why we're investing there. We're bringing retail there and bringing the online store there and putting a significant amount of energy there. I'm very bullish on India. James Suva : And then as my quick follow-up, you had mentioned that Services, not necessarily specific to India, but Services overall were better than expected. And of course, supply chain was more challenged than expected. So what was the bridge factor of Services being better than expected on upside? Was it like advertising or apps or paid monthly subscriptions? Or what were kind of the things that really surprised you to the upside on Services? Luca Maestri : It was -- Jim, it's Luca. It's primarily the -- this level of engagement we saw, which then reflects into the, as you said, the paid subscriptions. We saw very good results in our cloud services business in payment services. Music was very strong. So we had a number of categories that set new records, all-time records. And they did a bit better than we were expecting at the beginning of the quarter. And so Tim mentioned that during, I think, his prepared remarks that when you look at it in constant currency, we grew services double digits. And that was on top of a 24% increase a year ago. So it's very sustained growth that we're seeing. Operator : Our next question will come from Krish Sankar of Cowen and Company. Krish Sankar : I have 2. The first one, Tim and Luca, you mentioned how the macro did soften, and it has an impact. And as consumers tighten their belt, when you look across your hardware products and service businesses, where are you seeing the biggest impact and where are you seeing the least impact from the softening macro? And then I had a quick follow-up. Timothy Cook : We think there were some impact across the products and in Services. Probably, the ones that we saw the most impact on were Mac and Wearables. You can see that in those numbers. And probably, the least would have been iPhone. Krish Sankar : Got it. Got it. Very helpful, Tim. And then just a quick follow-up on the Mac. The PC industry is expecting a decline in PC shipments this year also. How do you think about the Mac relative to kind of like where the PC industry as a whole is expecting the shipments to end up? Is there any color you can give on that? Timothy Cook : The industry is very challenged, as you say. It's -- the industry is contracting. I think from us, though, is -- and I don't know how this year will play out, so I don't want to predict the year. But over the long run, we have a market that is a reasonable-sized market, a big market. And we have low share, and we have a competitive advantage with Apple silicon. And so strategically, I think we're well positioned in the market, albeit I think it will be a little rough in the short term. Tejas Gala : A replay of today's call will be available for 2 weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 6541285, followed by the pound sign. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator : And once again, this does conclude today's conference. We do appreciate your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,023	2	2023Q2	2023Q2	2023-05-04	6.02	6.005	6.343	6.413	8.80399	26.68	28.69	Operator : Good day, and welcome to the Apple’s Q2 Fiscal Year 2023 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Suhasini Chandramouli, Director of Investor Relations. Please go ahead. Suhasini Chandramouli : Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expense, other income and expense, taxes, capital allocation, and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you, Suhasini. Good afternoon, everyone, and thanks for joining us. Today, we're reporting revenue of $94.8 billion for the March quarter, which was better than our expectations. We set an all-time record for Services and a March quarter record for iPhone. We were particularly pleased with the performance we saw in emerging markets and achieved all-time records in Mexico, Indonesia, the Philippines, Saudi Arabia, Turkey and the UAE, as well as a number of March quarter records, including in Brazil, Malaysia and India. This result is a testament, first and foremost to our teams around the world who are engaged every day in the work of bringing new innovations to life. It speaks to the incredible power of Apple products and services to enrich people's lives in indispensable ways. And whether it's in the design lab in Cupertino, or in one of the brand new retail stores in India, I am constantly inspired by the way our people come together to make a real difference in the world. During the March quarter, we continued to face foreign exchange headwinds, which had an impact of more than 500 basis points, as well as ongoing challenges related to the macroeconomic environment. Revenue was down 3% year-over-year as a result, while on a constant currency basis, we grew in total and in the vast majority of the markets we tried. Despite these challenges, we continue to manage for the long term and to push the limits of what's possible, always on behalf of the customers who depend on our products whether it's students exploring new frontiers, developers dreaming up their next big idea, or artists taking their creativity to a whole new level. Let me share how these results showed up across our lineup of products and services. Let's start with iPhone, which set a new March quarter record with revenue of $51.3 billion. The iPhone 14 and 14 plus continue to delight users with their long lasting battery and advanced camera. And our pro users continue to rave about the most powerful camera system ever in an iPhone. This March, we were excited to expand emergency SOS via satellite to six new countries, bringing this important safety feature to even more users. We now offer this vital service in 12 countries, and I'm grateful for every note I've received from around the world about the life saving impact of our safety features. Now let's turn to Mac, which recorded $7.2 billion in revenue for the March quarter in line with our expectations. As we noted during our last call, Mac faced a very difficult compare because of the incredibly successful rollout of our M1 chip throughout the Mac lineup last year. And like our other product lines, Mac is facing some macroeconomic and foreign exchange headwinds as well. That said, the advancements we've made in power efficient performance continue to amaze our users. Our M2 Mac Mini customers are raving about the pro level powerhouse packed into an ultra-compact design, and users are marveling at the power and speed at the heart of every M2 powered MacBook Air and MacBook Pro, which allowed them to sustain even the most demanding workloads. iPad revenue was $6.7 billion, which was also in line with our expectations. Similar to Mac, iPad revenue performance was impacted by macroeconomic challenges, foreign exchange headwinds, and a difficult compare with last year when we launched the M1 powered iPad Air. iPad's versatility continues to be its greatest strength as we're helping students learn on the same family of devices artists use to create their next masterpiece. Across wearables, home and accessories, revenue was $8.8 billion. With its exceptional range of game changing health and safety features, Apple Watch becomes more and more indispensable every day. Apple Watch Ultra is attracting adventures, athletes and everyday users with its breakthrough features built for endurance and exploration. And with summer travel season soon heating up, there's no better companion in the air or on the road than AirPods, the best and most popular headphones in the world. Meanwhile, Services set an all-time record with $20.9 billion in revenue for the March quarter. We achieved all time revenue records across App Store, Apple Music, iCloud and payment services. And now, with more than 975 million paid subscriptions, we're reaching even more people with our lineup of services. Apple TV Plus continues to draw praise from customers and reviewers alike. During the past quarter, fans tuned in to incredible new series like Shrinking and The Big Door Prize and got to welcome Ted Lasso back into their homes for a third season. Movies like Tetris are captivating viewers with many more to come, including Martin Scorsese’s Killers of the Flower Moon later this year. Three years since its launch, Apple TV Plus programming has been celebrated across the globe, with over 1,450 nominations and more than 350 wins. Recently, we were thrilled to cheer on The Boy, the Mole, the Fox and the Horse, which won an Academy Award for best Animated Short Film. The first season of our historic tenure partnership with Major League Soccer is well underway with MLS season pass, we've created the ultimate destination for soccer fans, offering subscribers the ability to watch every match with no blackouts. And with baseball season in full swing, Apple TV Plus subscribers can watch their favorite teams with the return of Friday night baseball. This quarter, we launched Apple Music Classical, a standalone app that gives something special to classical music lovers. Apple Music Classical packs the largest library of classical music on Earth into a thoughtful and intuitive design that strikes all the right notes. Whether you're listening with AirPods or HomePod, the premium sound experience of Apple Music Classical will leave you with a feeling of being front row at the symphony just behind the conductor. In March, we also launched Apple Pay Later designed with users privacy and financial health in mind. Apple Pay Later allows users to split purchases into multiple payments with no interest or fees. And last month, we introduced Apple Card Savings Accounts to give users even more value out of their daily cash Apple Card Benefit. At Apple, our customers are at the center of everything we do. Nowhere is that more evident than retail, where our teams are dedicated to sharing the best of Apple with our customers. And we're constantly innovating to deliver exceptional experiences and meet our customers where they are. In the US, we launch Shop with a specialist over video, a new way for customers to learn about iPhone and find the one that's just right for them. And as I noted earlier, in a milestone for Apple, we just opened our first two Apple stores in India, in Mumbai and Delhi. I was there to see it for myself, and I couldn't have been more delighted by the excitement and enthusiasm of the customers, developers, creators and team members I got to spend time with. I've had the chance to connect with customers and teams all around the world in recent months, so many people shared with me that they were fans of Apple, not just because of the innovations we create, but because of the values that guide us, and that means a great deal to us. We're constantly striving to make a positive difference in people's lives and be a force for progress. We're investing in education to give students the skills they need to shape the future. We're helping to create pathways of opportunity for communities of color through our Racial Equity and justice initiative. And every day we're building an even more inclusive and diverse Apple rooted in our culture of belonging. To better understand how our work intersects with our values, look no further than what we're doing for the environment. We just celebrated Earth Day in April, and during that month, Apple announced that its global manufacturing partners now support over 13 gigawatts of renewable energy, a nearly 30% increase in just the last year. This translates to 17.4 million metric tons of avoided carbon emissions, the equivalent of removing nearly 3.8 million cars from the road. We're all investing up to an additional $200 million in our Restore Fund, which is designed to support innovative, scalable, nature based carbon removal projects, with the goal of removing 1 million metric tons of carbon every year. These are just the latest steps on our journey toward our 2030 goal to be carbon neutral across our supply chain and lifecycle of our devices. At the same time, we're advancing renewable energy across our supply chain, we're also sourcing more recycled materials in our products. Last month, we announced our plans to have all Apple design batteries include 100% certified recycled cobalt by 2025, and we remain committed to one day using only recycled and renewable materials in our products. We have a deep sense of mission here at Apple. We believe in the power of innovation to build a better world. We are determined to do our best work on behalf of our customers and to give them the tools that can enrich lives. So we will manage for the long term, just as we always have, with our eyes to the horizon, with limitless creativity, and with a deep belief that we can achieve anything we put our minds to. With that, I'll turn it over to Luca. Luca Maestri : Thank you, Tim, and good afternoon, everyone. Revenue for the March quarter was $94.8 billion, down 3% from last year and better than our expectations. Foreign exchange had a negative impact of over five percentage points on our results, in line with what we had expected. On a constant currency basis, our revenue grew year-over-year in total and in the majority of the markets we track. In addition to the records in emerging markets that Tim mentioned, we also set March quarter records in Australia, Canada, Spain and Switzerland, among others. Products revenue was $73.9 billion, down 5% from last year, due to challenging compares on Mac and iPad. iPhone, however, reached a March quarter revenue record thanks to very strong performance in emerging markets from South Asia and India to Latin America and the Middle East. During the quarter, our installed base of active devices continued to grow at a nice pace thanks to extremely high levels of customer satisfaction and loyalty, and reached an all-time high for all major product categories and geographic segments. Our Services set an all-time revenue record of $20.9 billion, up 5% year-over-year, on top of growing 17% in the March quarter a year ago. We reached an all-time services revenue record in Greater China and March quarter records in Americas, Europe and Rest of Asia Pacific. Company gross margin was 44.3%, up 130 basis points from last quarter, driven by cost savings and favorable mix shift towards services partially offset by leverage. Products gross margin was 36.7%, decreasing 30 basis points sequentially due to seasonal loss of leverage and mix, partially offset by favorable costs. Services gross margin was 71%, up 20 basis points sequentially. Operating expenses of $13.7 billion were at the low end of the guidance range we provided at the beginning of the quarter and continued to decelerate from the December quarter. We are closely managing our spend, but remain focused on long term growth with continued investment in innovation and product development. Net income was $24.2 billion. Diluted earnings per share were a $1.52, unchanged versus last year, and we generated very strong operating cash flow of $28.6 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue set a March quarter record of $51.3 billion, up 2% year-over-year despite significant foreign exchange headwinds and a challenging macroeconomic environment. We set March quarter records in several developed and emerging markets with India, Indonesia, Turkey and the UAE doubling on a year-over-year basis. Our active installed base of iPhone grew to a new all-time high and was up in all our geographic segments. We are very pleased by the results of the latest survey of US Consumers from 451 Research, which measured customer satisfaction at 99% for the iPhone 14 family. Mac revenue was $7.2 billion, down 31% year-over-year and in line with our expectations. These results were driven by the challenging macroeconomic environment coupled with a difficult compare against last year's launch of the completely reimagined M1 MacBook Pros. Despite this, the installed base of active Macs reached an all-time high across all geographic segments and we continue to see strong upgraded activity to Apple silicon. Also, the latest survey of US Consumers from 451 Research reported customer satisfaction at 96% for Mac. iPad generated $6.7 billion in revenue, down 13% year-over-year and in line with our expectations. This performance was due to two key factors, a tough compare against the launch of iPad Air powered by the M1 chip in the year ago quarter and headwinds from the macroeconomic environment. The iPad installed base reached a new all-time high in all geographic segments thanks to exceptional customer loyalty and a high number of new customers. In fact, over half of the customers who purchased iPads during the quarter were new to the product. Wearables, home and accessories revenue was $8.8 billion, down 1% year-over-year as the category experienced the impact from the macroeconomic environment. However, we did set March quarter records both in the US and in Greater China. We continue to see strength in our Watch installed base, which set a new all-time record, thanks to very high customer loyalty and new two rates, nearly two thirds of customers purchasing an Apple Watch during the quarter were new to the product. Moving to Services, we reached a new all-time revenue record of $20.9 billion. And in addition to the all-time records Tim mentioned earlier, we set March quarter records for advertising Apple Care and Video. Despite these records, as we saw in recent quarters, certain services offerings such as digital advertising and mobile gaming continue to be affected by the current macroeconomic environment. Stepping back, however, the continued growth in Services is the reflection of our ecosystem strength and the positive momentum we are seeing across several key metrics. First, our growing installed base of over 2 billion active devices represents a great foundation for future expansion of our ecosystem. We continue to grow across every major product category and geographic segment, thanks to very high levels of customer loyalty and satisfaction. Second, we saw increased customer engagement with our services during the quarter. Both our transacting accounts and paid accounts grew double digits year-over-year, each setting a new all-time record. Third, paid subscriptions showed strong growth. We now have more than $975 million paid subscriptions across the Services on our platform, up 150 million during the last 12 months and nearly double the number of paid subscriptions we had only three years ago. And finally, we continue to improve the breadth and the quality of our current services offerings from new content on Apple TV Plus to great new features available in Apple Pay and Apple Music, which we believe our customers will love. Turning to the enterprise market, we see business customers continuing to invest in the Apple platform to drive higher employee productivity and satisfaction. In Brazil, Boticario Group, the world's largest cosmetics franchiser, originally starting with iPhone, 12 employees manage operations across a network of retail stores, franchisees and resellers. As it continues to digitize its business, Boticario has chosen to move all software development in house and adopted Mac as the standard device for all of their developer teams across the world. In small business, we see an increasing number of customers relying on Apple hardware, software and services to power their businesses forward, from accepting payments on iPhone, to tracking inventory on Mac or iPad, to managing employee devices with Apple Business Essentials. As we celebrate National Small Business week here in the US, we are proud to continue supporting the small business community. Let me now turn to our cash position and capital return program. We ended the quarter with over $166 billion in cash and marketable securities. We repaid $2.3 billion in maturing debt and increased commercial paper by about $300 million, leaving us with total debt of $110 billion. As a result, net cash was $57 billion at the end of the quarter. During the March quarter, we returned over $23 billion to shareholders, including $3.7 billion in dividends and equivalents and $19.1 billion through open market repurchases of $129 million Apple shares. Given the continued confidence we have in our business now and into the future, today our Board has authorized an additional $90 billion for share repurchases as we maintain our goal of getting to net cash neutral over time. We're also raising our dividend by 4% to $0.24 a share, and we continue to plan for annual increases in the dividend going forward. As we move ahead into the June quarter, I'd like to review our outlook, which includes the types of forward looking information that Suhasini referred to at the beginning of the call. We expect our June quarter year-over-year revenue performance to be similar to the March quarter, assuming that the macroeconomic outlook does not worsen from what we are projecting today for the current quarter. Foreign exchange will continue to be a headwind and we expect a negative year-over-year impact of nearly four percentage points. For Services, we expect our June quarter year-over-year revenue growth to be similar to the March quarter, while continuing to face macroeconomic headwinds in areas such as digital advertising and mobile gaming. We expect gross margin to be between 44% and 44.5%. We expect OpEx to be between $13.6 billion and $13.8 billion. We expect OINE to be around negative $250 million excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally reflecting the dividend increase I mentioned earlier, today, our Board of Directors has declared a cash dividend of $0.24 per share of common stock payable on May 18, 2023, to shareholders of record as on May 15, 2023. With that, let's open the call to questions. Operator : [Operator Instructions] We will go ahead and take our first question from Erik Woodring of Morgan Stanley. Erik Woodring : Hey, good afternoon, guys. Thank you so much for taking the questions. Tim, maybe if we start with you. If we go back to the December quarter and the shutdowns, the production shutdowns around the time I think the question a lot of us were asking was how should we think about the deferral of demand versus destruction of demand? March quarter was quite strong 2% year-over-year iPhone growth. And so as we sit here in May, how have you seen that customers that weren't able to purchase during the December quarter behave? Meaning, are you seeing that they deferred purchases to March and June? Could they be deferring purchases to later and hopes of buying a new iPhone? Just how should maybe we think about the cadence of that and then I have a follow up. Thanks. Tim Cook : Yes. Hi, Erik. It's hard to quantify this, but we do believe we did recapture some amount of sales in the March quarter as we did see the iPhone performance accelerate relative to the December quarter. The production levels for the whole quarter were where we wanted them to be. So supply was not an issue during Q2. Erik Woodring : Okay, perfect. Thank you for that color. And then, Tim, maybe to follow up, it's been three or four quarters now that you've mentioned emerging markets like India and others. And I imagine, having just opened two new stores in the country, clearly an important market for you. So maybe can you just talk about why you see India as such an important market and others, how you think about monetization trends in the country and specifically what you have to do within the country to really ensure that India becomes maybe a more material mix of your business? And that's it for me. Thanks so much. Tim Cook : Yes, sure. Looking at the business in India, we did set a quarterly record, grew very strong, double digits year-over-year. So it was quite a good quarter for us, taking a step back, India is an incredibly exciting market. It's a major focus for us. I was just there, and the Dynamism in the market, the vibrancy is unbelievable. Over time, we've been expanding our operations there to serve more customers, and three years ago, we launched the Apple Store online, and then, as you just mentioned, we launched two stores just a few weeks ago, and they're off to a great start, one in Mumbai and one in Delhi. We've got a number of channel partners in the country as well that we're partnering with, and we're very happy with how that's going overall. Overall, I couldn't be more delighted and excited by the enthusiasm I'm seeing for the brand there. There are a lot of people coming into the middle class, and I really feel that India is at a tipping point, and it's great to be there. On other emerging markets, we had a stellar quarter in emerging markets overall, as I had mentioned, with records set in a number of different places, including Indonesia and Mexico, the Philippines, Saudi Arabia, Turkey, UAE, and then quarterly records in Brazil, India and Malaysia. And so it was a great quarter for emerging markets in general, despite the headwinds of the currency that Luca mentioned. And so we're putting efforts in a number of these markets and really see, particularly given our low share and the dynamics of the demographics, et cetera, a great opportunity for us in those markets. Operator : Our next question is from Mike Ng of Goldman Sachs. Mike Ng : Hey, good afternoon. Thank you very much for the question. It was encouraging to hear about the record installed base across iPhone and across all devices. It's been, I think, double digit growth over the last few years across the active devices. I was just wondering, is that a good way to think about the installed base growth going forward? And then for the iPhone installed base specifically, I was just wondering if you could provide a little bit of texture around how you think about the growth there, whether regionally or by first, smartphones versus switchers. And then I have a quick follow up. Tim Cook : Yes. If you look at the installed base of active devices now, overall it's more than $2 billion. As you know, we announced in January that we surpassed that. And this quarter, our Q2 rather we set new records across each of the geographic segments and each of the major product categories. And that's despite declines in current quarter sales, in particular in Mac and iPad. This is a huge asset for us, and it's a testament to the overall customer satisfaction and engagement and loyalty of our customers. And so we view this as a major asset for us. The iPhone base is well over a $1 billion active devices. We see this as upgrade rates, and these sorts of things may change quarter-to-quarter depending upon macroeconomic. But if you back up and look at the installed base, we feel great about the size of it and the rate that it's growing. Mike Ng : Great. Excellent. And then it was also encouraging to see the number of devices per iPhone user continue to grow. I was just wondering if you could talk about the opportunity to continue to increase that number of Apple devices per iPhone user and if you have any color around how the monetization per user may differ from those, for lack of better words, super users versus those that may not be as deep into the ecosystem. Thanks. Tim Cook : We try really hard to design our products in such a way that they work seamlessly together, and so whether that's the watch or the Mac, so that you can start working on one device and finish it on the other. And so there are a good deal of people out there that have multiple Apple devices, and I think this is a testament to the customer satisfaction and loyalty that we've been able to get from the incredible design that our engineering teams do on our products. Operator : Our next question is from Shannon Cross of Credit Suisse. Shannon Cross : Thank you very much. Thank you for taking my question. Tim, can you talk a bit about AI? It's obviously more than the topic of the day. It seems like the topic of the year. Just how you think about it through your products and services. I know you use it in different ways, but also if you can just give us any thoughts you have on generative AI and I don't know where you see it going, not sure what you want to say on it, but I'm really curious for your take. Thank you. Tim Cook : Yes, thanks for the question, Shannon. As you know, we don't comment on product roadmaps. I do think it's very important to be deliberate and thoughtful in how you approach these things. And there's a number of issues that need to be sorted, as is being talked about in a number of different places. But the potential is certainly very interesting. And we've obviously made enormous progress integrating AI and machine learning throughout our ecosystem and we weaved it into products and features for many years as you probably know. You can see that in things like fall detection and crash detection and ECG, these things are not only great features, they're saving people's lives out there. And so it's absolutely remarkable. And so we are, we view AI as huge and we'll continue weaving it in our products on a very thoughtful basis. Shannon Cross : Okay. Thank you. And then can you talk a bit about your shift of manufacturing and diversification of manufacturing footprint? I'm curious. Obviously, you have a very tight network in China. So how is it going to move to some of these other regions? Are you seeing any impact from a margin perspective or just any thoughts you have on what you've seen as you started to shift more and more outside of China? Whether it's growth or it's actual production? Thank you. Tim Cook : Our supply chain is truly global and we're investing all over the world. We're investing in the US. We're investing in a number of other countries as well. So we make products everywhere. We'll continue to invest everywhere, and we'll continue to look for ways to optimize the supply chain based on what we learn each and every day and week and so forth, to ensure that we can deliver the best products and services for our customers. If you sort of step back and look at how we've performed over the last three years on the supply chain, despite this parade of horribles, if you will, between the pandemic and the chip shortages and macroeconomic kind of factors, the supply chain has been incredibly resilient, and we feel good about what we are and what our plans are. Operator : Our next question is from Wamsi Mohan of Bank of America. Wamsi Mohan : Yes. Thank you. Tim, you had called out on December quarter earnings that Pro models were significantly constrained. Do you see a catch up on the Pro model specifically in the March quarter? And was the mix better than typical? And do you see that mix renormalizing here in the June quarter? And maybe you can comment on the channel inventory levels as well for iPhones, and I have a follow up. Tim Cook : Sure. It's hard to quantify Wamsi, but we do believe we did recapture some amount of sales in the March quarter, and obviously we had to set the channel at the right levels. And we're very comfortable with the channel inventory that we have on a forward basis. So we do think there were some, but it's difficult to quantify it. Wamsi Mohan : Okay. Thanks, Tim. And Tim, as a follow up, you launched so many services around Apple Pay most recently, you mentioned Buy Now Pay Later high yield savings account. Where do you see the expansion and the payments ecosystem over time? And do you look at the payments ecosystem as a standalone revenue opportunity? Or is it more about making the devices even more inseparable from us? Thank you. Tim Cook : What we're trying to do with our payments work is that sort of like we've done on the watch, where we're focused on helping people live a healthier day on our financial products. We're helping people have a better financial health and so things like the Apple Card and the fact that it has no fees, like the savings account, which has, as you mentioned, it's very attractive yield. So we're trying to help our users, but these things have to stand on their own, obviously. But we're very user focused, and so we're listening to them at what things provide them pinch points and orchestrate our roadmaps around that. Buy Now Pay Later is another one that we've just gotten out of the shoot. But on the savings account specifically, we are very pleased with the initial response on it. It's been incredible. Operator : Our next question is from David Vogt of UBS. David Vogt : Great. Thanks for taking my question. Tim, I just wanted to go back to maybe kind of dig into the restocking of inventory in the channel versus what we're hearing from a demand perspective that appears to be a little bit softer in the March quarter from some of your larger carriers. That exhibited relatively weak upgrade rates. So I just want to kind of get a sense for where you're seeing demand signals today vis-à-vis how you were thinking about it maybe a month ago or even three months ago. And is there sort of an acceleration in demand or any sort of signals that you might want to share with us at this point? And then I have a follow up. Tim Cook : I don't want to go into what we're seeing in Q3 other than the guidance that Luca has given. But for Q2, I think you're probably referencing primarily US carriers. And if you look at our geographic distribution of our performance, it was lower in the Americas, which is primarily predominantly the United States. And a part of that is, I believe it's macroeconomic. A part is that there was more promotional activity in the year ago quarter. And so I think that's what you're seeing there, where our results were really stellar during this quarter, was really in the emerging markets, and we couldn't be prouder of the results that we had there. David Vogt : Great. That's helpful. And then just quickly on Services, are you seeing anything in terms of consumers behavior other than sort of the macro that you mentioned and tough comps on digital advertising and mobile gaming? Are you seeing users of all the disparate services change and what they're using and how they're using it and time spent with an Apple Service? Now that we're technically, hopefully fully past COVID, with China almost fully reopened, I'm just trying to get a sense for how user or consumer behavior has changed over the last three to six months. Thanks. Luca Maestri : David, it’s Luca. As you said, of course we got the issue around the macroeconomic environment, particularly in advertising and in mobile gaming, but outside of those areas the behavior of customers continues to be pretty consistent. We are doing particularly well, obviously in some of the services that we've launched more recently, like payments where our growth rates are very strong as the adoption of Apple Pay and Apple Card and now the new services that Tim mentioned, the adoption continues to increase. Cloud is an area that continues to grow very consistently. Users want to store more photos and videos and more content on their devices and so they adopt our cloud services and in general the model in the App Store around paid subscriptions continues to grow very strongly. I mentioned we now have more than 975 million paid subscriptions on the platform and that's almost twice as much what we had only three years ago. So obviously, the growth in subscriptions is very strong. Operator : Our next question is from Samik Chatterjee of JPMorgan. Samik Chatterjee : Hi, thanks for taking my questions. I guess maybe I can follow up on David's question here on services. And in the past, pre-pandemic the growth rate there was more about sort of mid-teens. The growth rates today, where you stand, even if I back out FX impact is more about low double digit. So one of the questions that we get often from investors and want to get your thoughts on is even as the installed base growth seems to have accelerated, are these more cyclical drivers that are depressing growth at this point from returning to that level or do you see more of a rollout on the monetization that you have need to do to get back to those growth levels. and I have a follow up, please. Luca Maestri : Samik, that the areas where we are seeing the impact on the macroenvironment, as I mentioned, is digital advertising. As you know, obviously the macroenvironment is not helping on that front. And mobile gaming, where we've seen a bit of a slowdown, partly due to the macroenvironment, partly due to the fact that we had very elevated usage during the COVID years. But outside of those areas, we continue to see very healthy growth rates. Samik Chatterjee : Okay. And maybe if I can just follow up and this is more of a macro question. I don't know if Luca, you or Tim want to take this, but obviously the macro is not sort of helpful at this point. But what you're sort of implying in terms of your guide is momentum for your products remains pretty stable. You're actually guiding to a modest uptick FX for the overall business. I mean, what are you seeing in terms of customer sort of spending trends? And overall, does the consumer sort of continue to deteriorate in terms of spending patterns? And is your sort of momentum here just a function of share gains? How should we think about sort of where the consumer is versus what your products are doing independent of that? Luca Maestri : Part of Samik is what Tim was talking about. We're having great momentum in emerging markets, and those are markets where our share is low, gives us a great opportunity to grow over time. It also helps us with the growth of the installed base, because you can imagine that in places where our market share is low, we tend to add a lot of switchers people that are new to the Apple ecosystem. That increases the install base. And over the longer term, it obviously improves our ability to monetize on services as well. Operator : Our next question is from Amit Daryanani of Evercore. Amit Daryanani : I have to as well. I guess, first off on gross margins for the June quarter. They seem to be holding up fairly well, especially given the fact that sales are going down on a sequential basis. So, Luca, I'm wondering if you can just touch on what's driving the strength in gross margin sequentially. It's offsetting the lack of leverage, if you may. And then I also noticed that the range of your gross margin guide is 50 basis points, it's typically 100. What does that entail? What does that mean? Luca Maestri : So you're right. I mean we are guiding to a fairly stable level of gross margins at a very high level. We're very happy with the gross margins that we're having this cycle. For the first time in several quarters, foreign exchange, we expect foreign exchange to be flat on a sequential basis at the gross margin level. Unfortunately, it's still a headwind at the revenue level, but at gross margin level, sequentially, we expect foreign exchange not to be a factor. And so the seasonal loss of leverage that you're referring to, we expect to be offset by cost savings. And so that should give us that level of margins. As you know, you were asking about the 50 basis points. We have guided to 50 basis points of a range before as well, this year in particular, because of the 14th week during the December quarter, we're a bit late in the calendar year, right. And so we have a bit more visibility around margins for the June quarter. Amit Daryanani : Got it. That's helpful. And then I guess, Tim, if I just go back to the India discussion a bit, perhaps you could just contrast what you're seeing in India at today versus what you saw in China maybe a decade or so ago. Is that a reasonable ramp to think India would have, or could it be different from the lessons you've seen in China? Tim Cook : I think each country is different and has their own journey, so I hesitate to compare too much. But what I do see in India is a lot of people entering the middle class, and I'm hopeful that we can convince some number of them to buy an iPhone and we'll see how that works out. But right now, it's working out well. Operator : Our next question is from Krish Sankar of TD Cowen. Krish Sankar : Hi, thanks for taking my question. The first question I had is for Tim. Tim, you're primarily been a consumer centric company, but it seems like the line is blurring with the iPhone, iPad, the hardware products being used for corporate applications. So is there a way to segment how much of your revenues today are coming from enterprise versus consumer? And does the slower corporate IT spend impact your outlook for iPhone, iPad, Mac, et cetera, and then I have a follow up. Tim Cook : Internally, we have our estimates for how much is enterprise versus consumer. And the enterprise business is growing. We have been focusing a lot on BYOD programs and there's more and more companies that are leaning into those and given employees the ability to select which is plays to our benefit, I believe, because I think a lot of people want to use a Mac at work or an iPad at work. And so but we're certainly primarily a consumer company in terms of our revenues, obviously. Krish Sankar : Got it, Tim. Thanks for that. And then just as a follow up, obviously a lot of questions on the India retail opening. I'm just kind of curious. You also mentioned that you hope to convert a lot of folks into iPhone there. Where do you think the biggest opportunity? Is it like primarily a hardware business like the iPhone, iPad wearables, et cetera? Or do you think there is a service opportunity in India longer term too? Thank you very much. Tim Cook : I think there's an opportunity across the board, including in services. Obviously, the ARPUs are lower in India for whether you're talking about TV and movie streaming or music, the ARPUs are much lower than other regions. But if you look at it over a long arc of time, I think there's a good opportunity across the board. Operator : Our next question is from Aaron Rakers of Wells Fargo. Aaron Rakers : Yes, thanks for taking the questions. I guess my first question is that I want to go back to kind of the geographical dynamics. I'm curious, as we all think about the reopening attributes of China, just how you would characterize the shaping of demand you saw through the course of this last quarter and kind of how you're thinking about the impact of that reopening playing out over the next couple of quarters. Tim Cook : If you look at China, our revenue came in at negative three for the quarter year-over-year, but we actually grew on a constant currency basis, and we also accelerate rated as compared to the December quarter, which, as you know, had 14 weeks in it and was a negative seven on a reported basis. And so we were pleased with how we did and with the acceleration that we saw with the reopening, and we'll see how we do this quarter. But if you look at the top selling smartphones in urban China, based on a survey from Kantar, we have four out of the top five. And I think in all of the third party data I've seen on the market itself, in the smartphone space, we believe we gained share during Q2. So we feel good about it. Also, China has a lot of very good metrics in terms of new buyers. For example, on the Mac, about six out of ten customers are buying the Mac for the first time. Same thing on iPad. If you look over at the watch, it's more than three out of four customers are buying the watch for the first time. And so the buyer metrics, if you will, are very, very good. And our services business hit an all-time record in China during the quarter. Aaron Rakers : Very helpful, Tim. As a quick follow up, I want to go back to Amit’s question on gross margin. You talked about FX, the lessening impact there. I'm just curious when you look at your gross margin, obviously got mixed attributes, kind of potentially continuing to drive that higher. But I'm curious on the current environment, how you would characterize the component pricing dynamics and what you're thinking about in this current quarter's Guidance. Luca Maestri : The environment on the component side is favorable. We've seen component prices decline during the March quarter, and we expect the same during the June quarter. Operator : Our next is from Sydney Ho of Deutsche Bank. Sydney Ho : Great. Thanks for taking my question. I was hoping you can talk about the linearity of the March quarter and perhaps the first four and a half weeks of the current quarter. It looks like things are slowing down quite a bit elsewhere, but if my math is right, your fiscal third quarter guidance implied product revenue will be a little bit lower than seasonal average on a sequential basis, any color would be helpful. Thanks. Luca Maestri : We said that we expect our performance during the June quarter at the revenue level to be similar to the one that we just reported for the March quarter. Keep in mind, we always have differences in the launch timing across our products, and also that especially over the last few years, we've seen a certain amount of supply disruptions. Sometimes it was COVID related, sometimes it was related to specific component shortages. Just to remind you, in the June quarter a year ago, at the full quarter impact of the launch for both of the iPhone SE and the iPad Air, which leads to a more difficult compare. So I think it's important to keep those things in mind. Sydney Ho : Okay, that's helpful. Maybe a quick follow up. You talk about Apple Pay Later. How has the feedback been so far? And how do you expect the adoption of that service over the next few quarters? Thank you. Tim Cook : The feedback for both Apple Pay Later and the savings products have both been really good. And we think both of them help customers live a better or healthier financial life. And so we're very excited about the first days of both of them. Operator : Our next question is from Harsh Kumar of Piper Sandler. Harsh Kumar : Yes. Hey, guys. Thanks for squeezing me in. Tim, you're one of the largest chip companies. You're not a component maker. You actually use your own products. But we almost never hear in any context of you guys being a beneficiary, Apple being a beneficiary for either the Chip Act money or the R&D tax credit that's being proposed. I was just curious if you are eligible for any of those. And then I've got a follow up. Tim Cook : I don't see Apple participating in the Chips Act directly, but we would be a beneficiary indirectly because some of our partners would hopefully be recipients of it and therefore put in additional capacity. And so on that sort of indirect basis, we would have a benefit. Harsh Kumar : Understood. And thanks for clarification. Luca, I wanted to clarify your comments about June. When you're saying June performance will be similar to March, I assume on a year-on-year basis, which would be June should be down about two something odd percent. Is that a fair way? And then my question that I wanted to ask, maybe another one for Tim was where do you think is the largest opportunity in your services offering? You're doing a great job, you just set a record. But surely there must be areas where you think you can do better. Luca Maestri : Yes. So to your question around the June performance yes, on a year-over-year basis, so comparable to the March quarter on year-over-year basis. Tim Cook : Harsh, I think we can do better on everything. And so I wouldn't just point to one of them. If you look at the number of active devices and the growth of active devices, I think, our services are underpenetrated in a number of different ways. And so the way that I look at it is there's opportunity in many of them. Suhasini Chandramouli : All right. Thank you, Harsh. A replay of today's call will be available for two weeks on Apple podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-⁠583-⁠1035. Please enter confirmation code 493-⁠4362, followed by the pound sign. These replays will be available by approximately 05 :00 P.M. Pacific time today. Members of the press with additional questions can contact Josh Rosenstock at 488-⁠62-⁠1142 and financial analysts can contact me with additional questions at 408-⁠862-⁠5119. Thanks again for joining us. Operator : Once again, this does conclude today's conference. We do appreciate your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,023	3	2023Q3	2023Q3	2023-08-03	6.037	6.07	6.516	6.59	9.42819	28.15	26.44	Operator : Good day, and welcome to the Apple Q3 Fiscal Year 2023 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Saori Casey, Vice President of Finance. Please go ahead. Saori Casey : Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of macroeconomic conditions on the company's business and the results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you, Saori. Good afternoon, everyone, and thanks for joining us. Today, Apple is reporting revenue of $81.8 billion for the June quarter, better than our expectations. We continued to see strong results in emerging markets, driven by robust sales of iPhone with June quarter total revenue records in India, Indonesia, Mexico, the Philippines, Poland, Saudi Arabia, Turkey and the UAE. We set June quarter records in a number of other countries as well, including France, the Netherlands and Austria. And we set an all-time revenue record in Services driven by more than $1 billion paid subscriptions. We continued to face an uneven macroeconomic environment, including nearly 4 percentage points of foreign exchange headwinds. On a constant currency basis, we grew compared to the prior year's quarter in aggregate and in the majority of markets we track. We continue to manage deliberately and innovate relentlessly, and we are driven by the sense of possibility those efforts inspire. To that end, before I turn to the quarter in more detail, I want to take a moment to acknowledge the unprecedented innovations we were proud to announce at our Worldwide Developers Conference. In addition to extraordinary new Macs and incredible updates to our software platforms, we had the chance to introduce the world to spatial computing. We were so pleased to share the revolutionary Apple Vision Pro with the world, a bold new product unlike anything else created before. Apple Vision Pro is a marvel of engineering, built on decades of innovation only possible at Apple. It is the most advanced personal electronic device ever created, and we've been thrilled by the reaction from press, analysts, developers and content creators who've had the chance to try it. We can't wait to get it into customers' hands early next year. Now let me share more with you on our June quarter results beginning with iPhone. iPhone revenue came in at $39.7 billion for the quarter, down 2% from the year ago quarter's record performance. On a constant currency basis, iPhone revenue grew, and we had a June quarter record for switchers, reflecting the popularity of the iPhone lineup. iPhone 14 customers continue to praise the exceptional battery life and essential health and safety features, while iPhone 14 Plus users are loving the new larger screen size. And with Dynamic Island, Always-On display and the most powerful camera system ever in an iPhone, the iPhone 14 Pro lineup is our best ever. Turning to Mac. We recorded $6.8 billion in revenue, down 7% year-over-year. We are proud to have completed the transition of our entire Mac lineup to run exclusively on Apple silicon. We are also excited to have introduced the new 15-inch MacBook Air during the quarter, the world's best 15-inch laptop and one of the best Macs we've ever made. And we launched 2 new powerhouses in computing, Mac Studio with M2 Max and M2 Ultra and Mac Pro with M2 Ultra, which are the most powerful Macs we've ever made. iPad revenue was $5.8 billion for the June quarter, down 20% year-over-year, in part due to a difficult compare because of the timing of the iPad Air launch last year. Customers are loving iPad's versatility and exceptional value. There was a great deal of excitement from creatives when we brought Final Cut Pro and Logic Pro to iPad this spring. And with the back-to-school season in full swing, iPad has the power to help students tackle the toughest assignments. Across Wearables, Home and Accessories, revenue was $8.3 billion, up 2% year-over-year and in line with our expectations. Packed with features to empower users to live a healthier life, Apple Watch and Apple Watch Ultra continue to help people take the next step on their wellness journey. As I mentioned earlier, last quarter, we held our biggest and most exciting WWDC yet. We were thrilled to welcome developers from across the globe to Apple Park, both in person and virtually, and to share some stunning new announcements with the world. In addition to Apple Vision Pro and the new Macs that we introduced, we had the chance to reveal some truly remarkable new innovations to our software platforms. From exciting new features like Live Voicemail and StandBy in iOS 17, to new tools for users to work, play and personalize their experience in macOS Sonoma and iPadOS 17, to a fresh design and new workout capabilities in watchOS 10, there's so much coming later this year to empower users to get more out of their devices, and we think they're going to instantly love these new features. It was also an exciting quarter for Services where revenue reached $21.2 billion and saw a sequential acceleration to an 8% year-over-year increase, better than we expected. We set an all-time revenue record for total services and in a number of categories, including video, AppleCare, cloud and payment services. Since we introduced Apple Pay almost a decade ago, customers have been loving how easy it is to make purchases online, in apps and in stores. We're also pleased to see Apple Card build on the success of Apple Pay. Designed with our users' financial health in mind, Apple Card has become one of the most successful credit card programs in the U.S. with award-winning customer satisfaction. And this spring, we introduced a new high-yield savings account for Apple Card customers, which has become incredibly popular, with customers already making more than $10 billion in deposits. Meanwhile, Apple TV+ continues to provide a spectacular showcase of imaginative storytelling. Recently, fans welcomed new series like Hijack and Silo as well as returning fan favorites like Foundation and The Afterparty. In the few years since its launch, Apple TV+ has earned more than 1,500 nominations and 370 wins. That includes the 54 Emmy Award nominations across 13 titles that Apple TV+ received last month. It's also been an exciting time for sports on Apple TV+. Soccer legend Lionel Messi made his debut with Major League Soccer last month, and fans all over the world tuned in with MLS Season Pass. We are excited about our MLS partnership, and we're thrilled to see Messi suiting up with Inter Miami. And just in time for summer concert season, Apple Music launched new discovery features celebrating live music, including venue guides in Apple Maps and set lists from tours of major artists. These new features and others join a lineup of updates coming later this year to make Services more powerful, more useful and more fun than ever. Everything we do is in service of our customers, and retail is where we bring the best of Apple. During the quarter, we opened the Apple Store online in Vietnam, and we're excited to connect with more customers there. We also redesigned our first-ever Apple Store located in Tysons Corner, Northern Virginia, with inclusive, innovative and sustainable design enhancements. We opened a beautiful new store beneath our new London headquarters in the historic Battersea Power Station. And the performance of the stores we opened in India this spring exceeded our initial expectations. With every product we create, every feature we develop and every interaction we share with our customers, we lead with the values we stand for. We believe in creating technology that serves all of humanity, which is why accessibility has always been a core value that we embed in everything we do. On Global Accessibility Awareness Day, we unveiled some extraordinary new tools for cognitive, vision, hearing and mobile accessibility that will be available later this year, including Assistive Access, which distills apps to their most essential features, and Personal Voice, which allows users to create a synthesized voice that sounds just like them. Building technology and service of our customers also means protecting their privacy, which we believe is a fundamental human right. That's why we were pleased to announce major updates to Safari Private Browsing, Communication Safety and Lockdown Mode to further safeguard our users. And as part of our efforts to build a better world, we announced that we've more than doubled our initial commitment to our Racial Equity and Justice Initiative to more than $200 million. We will continue to do our part to support education, economic empowerment and criminal justice reform work. And while supporting efforts to advance equity and opportunity, we continue to build a culture of belonging at Apple and a workforce that reflects the communities we serve. Through our environmental work, we're making strides in our commitment to leave the world better than we found it. Last month, Apple joined with global nonprofit Acumen in a new effort to improve livelihoods in India through clean energy innovation, and we are as committed as ever to our Apple 2030 goal to be carbon neutral across our entire supply chain and the life cycle of our products. We've long held that education is the great equalizer. With that in mind, we're expanding Apple Learning Coach, a free professional learning program that teaches educators how to get more out of Apple technology in the classroom. Today, we welcome more than 1,900 educators across the U.S. to the program. By the end of the year, we'll offer Apple Learning Coach in 12 more countries. As we're connecting with teachers, we're also celebrating the graduations of students at our app developer academies around the world. From Detroit, to Naples, to Riyadh and more, we're excited to watch these talented developers embark on careers in coding and find ways to make a positive difference in their communities. Apple remains a champion of innovation, a company fueled by boundless creativity, driven by a deep sense of mission and guided by the unshakable belief that a great idea can change the world. Looking ahead, we'll continue to manage for the long term, always pushing the limits of what's possible and always putting the customer at the center of everything we do. With that, I'll turn it over to Luca. Luca Maestri : Thank you, Tim, and good afternoon, everyone. Revenue for the June quarter was $81.8 billion, down 1% from last year and better than our expectations despite nearly 4 percentage points of negative impact from foreign exchange. On a constant currency basis, our revenue grew year-over-year in total and in the majority of the markets we track. We set June quarter records in both Europe and Greater China and continue to see strong performance across our emerging markets driven by iPhone. Products revenue was $60.6 billion, down 4% from last year, as we faced FX headwinds and an uneven macroeconomic environment. However, our installed base reached an all-time high across all geographic segments, driven by a June quarter record for iPhone switchers and high new-to rates in Mac, iPad and Watch, coupled with very high levels of customer satisfaction and loyalty. Our Services revenue set an all-time record of $21.2 billion, up 8% year-over-year and grew double digits in constant currency. Our performance was strong around the world as we reach all-time Services revenue records in Americas and Europe and June quarter records in Greater China and rest of Asia Pacific. Company gross margin was 44.5%, a record level for the June quarter and up 20 basis points sequentially, driven by cost savings and favorable mix shift towards Services, partially offset by a seasonal loss of leverage. Products gross margin was 35.4%, down 130 basis points from last quarter due to seasonal loss of leverage and mix, partially offset by favorable costs. Services gross margin was 70.5%, decreasing 50 basis points sequentially. Operating expenses of $13.4 billion were below the low end of the guidance range we provided at the beginning of the quarter and decelerated from the March quarter. We continue to take a deliberate approach in managing our spend with strong focus on innovation and new product development. The results of these actions delivered net income of $19.9 billion, diluted earnings per share of $1.26, up 5% versus last year, and very strong operating cash flow of $26.4 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $39.7 billion, down 2% year-over-year but grew on a constant currency basis. We set revenue records in several markets around the world, including an all-time record in India and June quarter records in Latin America, the Middle East and Africa, Indonesia, the Philippines, Italy, the Netherlands and the U.K. Our iPhone active installed base grew to a new all-time high, thanks to a June quarter record in switchers. This is a testament to our extremely high levels of customer satisfaction, which 451 Research recently measured at 98% for the iPhone 14 family in the U.S. Mac generated $6.8 billion in revenue, down 7% year-over-year. We continue to invest in our Mac portfolio. And this past quarter, we were pleased to complete the transition to Apple silicon for the entire lineup. This transition has driven both strong upgrade activity and a high number of new customers. In fact, almost half of Mac buyers during the quarter were new to the product. We also saw reported customer satisfaction of 96% for Mac in the U.S. iPad revenue was $5.8 billion, down 20% year-over-year and in line with our expectations. These results were driven by a difficult compare against the full quarter impact of the iPad Air launch in the prior year. At the same time, we continue to attract a large number of new customers to the iPad installed base with over half of the customers who purchased iPads during the quarter being new to the product. And the latest reports from 451 Research indicate customer satisfaction of 96% in the U.S. Wearables, Home and Accessories revenue was $8.3 billion, up 2% year-over-year, with a June quarter record in Greater China and strong performance in several emerging markets. We continue to see Apple Watch expand its reach with about 2/3 of customers purchasing an Apple Watch during the quarter being new to the product. And this is combined with very high levels of customer satisfaction, which was recently reported at 98% in the United States. Moving on to Services. We reached a new all-time revenue record of $21.2 billion with year-over-year growth accelerating sequentially to 8% and up double digits in constant currency. In addition to the all-time records Tim mentioned earlier, we also set June quarter records for advertising, App Store and Music. We are very pleased with our performance in Services, which is a direct reflection of our ecosystem's strength. First, our installed base of over 2 billion active devices continues to grow at a nice pace and establishes a solid foundation for the future expansion of our ecosystem. Second, we see increased customer engagement with our services. Both our transacting accounts and paid accounts grew double digits year-over-year, each reaching a new all-time high. Third, our paid subscriptions showed strong growth. This past quarter, we reached an important milestone and passed 1 billion paid subscriptions across the services on our platform, up 150 million during the last 12 months and nearly double the number of paid subscriptions we had only 3 years ago. And finally, we continue to improve the breadth and the quality of our current services. From 20 new games on Apple Arcade, to brand-new content on Apple TV+, to the launch of our high-yield savings account with Apple Card, our customers are loving these enhanced offerings. Turning to the enterprise market. Our customers are leveraging Apple products every day to help improve productivity and attract talent. Blackstone, a global investment management firm, is expanding its Apple footprint from their corporate iPhone fleet to now offering the MacBook Air powered by M2 to all of their corporate employees and portfolio companies. Gilead, a leading biopharmaceutical company, has deployed thousands of iPads globally to their sales team. Over the last 6 months, they have also doubled their Mac user base by making MacBook Air available to more employees with a focus on user experience and strong security. Let me now turn to our cash position and capital return program. We ended the quarter with over $166 billion in cash and marketable securities. We repaid $7.5 billion in maturing debt while issuing $5.2 billion of new debt and increasing commercial paper by $2 billion, leaving us with total debt of $109 billion. As a result, net cash was $57 billion at the end of the quarter. During the quarter, we returned over $24 billion to shareholders, including $3.8 billion in dividends and equivalents and $18 billion through open market repurchases of 103 million Apple shares. We continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Saori referred to at the beginning of the call. We expect our September quarter year-over-year revenue performance to be similar to the June quarter, assuming that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. Foreign exchange will continue to be a headwind, and we expect a negative year-over-year revenue impact of over 2 percentage points. We expect iPhone and Services year-over-year performance to accelerate from the June quarter. Also, we expect the revenue for both Mac and iPad to decline by double digits year-over-year due to difficult compares, particularly on the Mac. For both products, we experienced supply disruptions from factory shutdowns in the June quarter a year ago and were able to fulfill significant pent-up demand in the year ago September quarter. We expect gross margin to be between 44% and 45%. We expect OpEx to be between $13.5 billion and $13.7 billion. We expect OI&E to be around negative $250 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.24 per share of common stock payable on August 17, 2023, to shareholders of record as of August 14, 2023. With that, let's open the call to questions. Saori Casey : Thank you, Luca. [Operator Instructions]. Operator, may we have the first question, please? Operator : [Operator Instructions]. We will go ahead and take our first question from Shannon Cross with Credit Suisse. Shannon Cross : Tim, you mentioned -- and actually, Luca, too, you mentioned an uneven macro environment during the quarter several times on the call. I'm wondering if you can talk on a geographic basis about some of the trends you're seeing in iPhone. I'm specifically wondering how demand is trending within... Luca Maestri : Sure. Shannon, I'll answer it. I didn't get the end of your question. Operator : I think she has dropped. Luca Maestri : Okay. Well, let me answer the question for the part that I could follow. So on a geographic basis, we've had great performance for iPhone in emerging markets. We set June quarter records in many of the emerging markets. We grew in total double digits. And the performance was strong across the board in emerging markets from China, where our performance improved from minus 3% to plus 8% in the June quarter and we grew double digits in constant currency, to many other areas around the world from India, where, again, we set a June quarter record with very strong performance there, Indonesia, Southeast Asia, in general, Latin America, Middle East. And so it's been really good there. We -- also, as you can see from our geographic segments, we had a slight acceleration of performance in the Americas, primarily in the United States, but we declined there because the smartphone market has been in a decline for the last couple of quarters in the United States. Shannon Cross : Sorry about that. I'm not sure why I cut off. In terms of gross margin, you were at the high end of the range [Technical Difficulty] and you guided to 45% at the high end, which is, I think, higher than I remember in 20 years of covering you. So how should we think about puts and takes of gross margin? And it seems like there's like a perfect storm of good things. So I just -- maybe if you can talk about how you're thinking about it more holistically. Luca Maestri : I think you remember correctly, Shannon, because the 44.5% for the June quarter is an all-time record for us in June. We were up 20 basis points sequentially. It was driven by cost savings and a mix shift towards Services, which obviously helps company gross margins, partially offset by the seasonal loss of leverage. We have a commodity environment that is favorable to us. Our product mix is quite strong at this point. And so with the exception of foreign exchange, which continues to be a drag, and it was a significant drag on a year-over-year basis, yes, we are in a good position right now. We are in a good position for the June quarter. And as I mentioned, we expect similar level of gross margins for the same reasons, frankly, for the September quarter. Operator : Our next question comes from Wamsi Mohan of Bank of America. Wamsi Mohan : Luca, can you just give us a little more color around the guidance? Your overall revenue performance, you called out similar. Obviously, you absorbed a higher FX impact this quarter versus your guide. And you also noted Services acceleration. So just wondering, when you think about that comment on iPhone acceleration, is that on a reported basis? Is that constant currency basis? And is there something that's changing in terms of seasonality perhaps for you that is causing not as much step-up in product revenue as typical on a sequential basis? And I have a follow-up. Luca Maestri : Yes. So all our comments are in reported currency, not in constant currency in relation to the outlook. And we said acceleration sequentially for iPhone and for Services. But we're also pointing out -- and this is where I think, Wamsi, you're referring to some seasonality issues. We also said that for Mac and iPad, we expect to decline double digits. And the reason for that is that we have a very difficult compare versus last year. You remember that a year ago, in the June quarter, we had factory shutdowns for both Mac and iPad. And so we were able to fill the pent-up demand from those shutdowns during the September quarter. So an unusual level of activity that we had a year ago. And so now, obviously, the compare is difficult. So we expect both iPad and Mac to be down double digits, which offset the acceleration that I mentioned for iPhone and Services. Wamsi Mohan : Okay. And Tim, I was wondering if you could update us on what percent of iPhones are sold on some type of installment basis now versus full upfront payment on a global basis. And maybe some thoughts on if you expect similar promotional activity from carriers, especially in the U.S., that seem to be grappling with a lot of cash flow issues this particular year. Luca Maestri : Wamsi, I'll take it. We've done a really good job over the last few years with affordability programs around the world directly in our direct channel and with our partners around the world. The majority of iPhones, at this point, are sold using some kind of a program, trade-ins, installments, some kind of financing. And that percentage, which again, it's well over 50%, is very similar across developed and emerging markets. We want to do more of that because we think it really helps reduce the affordability threshold for our products. And we think it is also one of the reasons why our product mix has been very strong during the last couple of cycles. So we will continue to push on that front. Operator : Our next question is from David Vogt with UBS. David Vogt : I just wanted to follow up on 2 points that both you, Tim, and Luca made about growth and maybe commodities. So just to be clear, I know you're talking about an acceleration in iPhone, but the comp is about 2 points easier from FX. So I just want to understand, is that on a like-for-like basis, excluding the currency improvement of about 2 points from the June quarter to the September quarter? And from a commodity perspective, I know last quarter, you talked about buying a lot of inventory at favorable prices, which was an incredibly smart strategy. Where do you sit today? And what's sort of the timing or the duration of that commodity sort of backlog that you have as we think about next quarter and the subsequent quarters? How far does that get you out into the future from this favorable cost dynamic? Luca Maestri : Let me start again. I just want to be clear about the guidance, the outlook guidance that we provided. We're referring entirely to reported numbers. So they take into account the fact that we have a slight improvement in foreign exchange. So when I talk about similar performance, I refer to reported performance in the June quarter and then the reported performance in the September quarter. And again, we expect, on a reported basis, our iPhone performance to accelerate, our Services performance to accelerate, and iPad and Mac to decline double digits. On the commodity front, as I mentioned, the environment is favorable. We always make sure that we take advantage of the opportunities that are available in the market, and we will continue to do that going forward. David Vogt : Luca, any sense of how long that gives you a run rate today based on what you currently have? Can you give us a sense for at least the short-term tailwind? Luca Maestri : I don't want to speculate past the September quarter because that's the horizon where we provide guidance. And I've said that the guidance for September is 44% to 45%, which you know is historically very high. And so obviously, that reflects a favorable environment for us. Operator : Our next question is from Erik Woodring with Morgan Stanley. Erik Woodring : I have 2 as well. Maybe if we just start kind of big picture, Tim or Luca. I was wondering if you could just kind of share some incremental color on how you think the consumer is behaving today versus 90 days ago and maybe how that differs by region. Meaning, are there any signs that consumer is incrementally more willing to spend on things like consumer electronics? Or is there still relative caution in the market? Are there any regions where you're seeing more strength in the consumer? And how sustainable do you think some of that strength or weakness could be based on some of the KPIs you track? And then I have a follow-up. Tim Cook : Yes. David, it's Tim. If you sort of step around the world, we did exceptionally well in emerging markets last quarter and even better on a constant currency basis. And so emerging markets were -- was a strength. If you look at China, in China, we went from a negative 3% in Q2 to a plus 8% in Q3. And so in China, we had an acceleration. If you look at the U.S., which is in the -- obviously in the Americas segment, it is the vast majority of what's in there, there was also a slight acceleration sequentially, although the Americas is still declining somewhat year-over-year, as you can see on the data sheet. The primary reason for that is that it's a challenging smartphone market in the U.S. currently. And then in Europe, Europe saw a record quarter and -- for the June quarter, a record. And so some really good signs in most places in the world. Erik Woodring : Awesome. And then maybe, Luca, a question for you. I think it's been about 3 quarters now where we've seen OpEx either grow below historical seasonality or come in below your expectations. I think this is the first time we've seen R&D grow less than 10% year-over-year since fiscal 2Q 2007. So can you maybe just talk about some of the cost actions you're taking? And as you look forward, what are the indicators that you're really evaluating that would give you greater confidence in perhaps returning back to a more seasonal cadence of OpEx spending? Or is this just a new normal that we should be expecting? That's it for me. Luca Maestri : Obviously, we look at the environment, and we know that this has been an uncertain period for the last few quarters. And so we decided to be deliberate in what we do in terms of controlling our spend, and there's many areas across the company that we're working on and we've been quite effective at slowing down the spend. We slowed down also the hiring within the company in several areas. And we're very pleased with our ability to decelerate some of the expense growth taking into account the overall macro situation. We will continue to manage deliberately. You can see that we continue to grow our R&D costs faster than the rest of the company. SG&A is actually growing at a much slower pace because obviously, our focus continues to be in innovation and product development, and we'll continue to do that. Operator : Our next question is from Michael Ng with Goldman Sachs. Michael Ng : I just have 2 questions as well. First, it was encouraging to see the Services outperformance in the quarter, up double digits on an FX-neutral basis, and more Services acceleration next quarter on a reported basis. I was just wondering if you could just talk a little bit more about key underlying drivers for the confidence in the Services acceleration next quarter, understanding that FX a little bit. But anything to call out as it relates to things in Apple Search Ads that's helping. You're obviously making a lot of investments in Apple TV+ between MLS and the Canal+ deal. So any thoughts there would be great. Luca Maestri : Yes, Michael, you're correct. I mean clearly, we've seen an improvement in the June quarter, and we expect further improvement in the September quarter. In June, the performance was across the board. Tim and I mentioned we set records really across the board. We had all-time records in cloud, in video, in AppleCare, in payments and June quarter records in App Store, advertising and Music. So we saw improvement in all our Services categories. We think the situation will continue to improve as we go through September. And that's very positive because not only good for the financial results, but obviously, it shows a high level of engagement of our customers in the ecosystem, which is very important for us. And it's really the sum of all the things that I mentioned in my prepared remarks. It goes from the fact that our installed base continues to grow, so we've got a larger pool of customers, to the fact that our customers are more engaged as we have more transacting accounts and paid accounts on the ecosystem. And the subscriptions business is very healthy with growth of 150 million paid subscriptions just in the last 12 months. It's almost double to what we had 3 years ago. And of course, we are providing more and more content to our users. And so the combination of all these things gives us good confidence for September. Michael Ng : Great. And just as a related follow-up, it's about the hardware installed base and Services ARPU. I was curious when you talked about the Services strength, you talked about the 2 billion-plus installed base. When you think about the opportunity to increase the Services ARPU, do you really think about it internally on a per-active-iPhone user basis or on a per-device basis? Said differently, I'm just curious where you think about -- whether you think there's an incremental opportunity for those users that have multiple devices. Do you really see a big Services ARPU uplift in that respect? Luca Maestri : Well, we know that customers that own more than one device are typically more engaged in our ecosystem. And so obviously, they tend to also spend more on the Services front. I would say the biggest opportunity is that we know that there's a lot of customers that we have that are very familiar with our ecosystem. They are engaged in the ecosystem. But still today, they're using only the portion of the ecosystem that is free. And so we think that by offering better content and more content over time, we're going to be able to attract more of them as paid customers. Operator : Our next question is from Amit Daryanani with Evercore. Amit Daryanani : I have 2 as well. I guess, Luca, maybe if you can talk about Wearables a bit. The growth over there, I think, in constant currency was fairly impressive at plus 6%. Can you just touch on maybe what's driving that? And then how do we think about the Wearables segment heading into the September quarter? I know you talked about a bunch of other ones, but how do we think about Wearables into September as well? Luca Maestri : Sorry, Amit, I didn't get the -- what are you referring to? Amit Daryanani : Yes. Sorry. I was hoping you could talk a bit about the Wearables segment because the growth over there was fairly impressive. And then how do you think about it into September as well? Luca Maestri : Yes. On the Wearables front, we had really good performance in Greater China. And that's, again, very important for us. It was a June quarter record for Greater China. Very important for us because, again, it shows that the engagement with the ecosystem in a market that is so important for us like China continues to grow. It means that there's more and more customers that are owning more than the iPhone. Also, we continue to grow the installed base of the category very quickly because, as I mentioned, 2/3 of every buyer of Apple Watch during the course of the June quarter was new to the product. And so that is all additive to the installed base. So it's just great to see that the AirPods continue to be a great success in the marketplace for us. And so things are moving in the right direction there. It's become a very large business for us in Wearables, Home and Accessories. The last 12 months, we've done $40 billion of business, which is nearly the size of a Fortune 100 company. So it's become very important, and it's allowed us to diversify both our revenues and our earnings. Amit Daryanani : That's really helpful. And then if I could just follow up, the Europe growth, the growth in Europe at up 5% is totally notable as well. I think you have a few emerging markets that you put in Europe as well. But I would love to understand what's happening in Europe and if there's a way to think about sort of Western Europe or developed world versus emerging markets over there. Luca Maestri : Yes. It's been very good, primarily on the emerging market side of Europe. We include India and the Middle East and Central and Eastern Europe into the Europe segment. But as we mentioned at the beginning of the call, we had a number of markets that did very well, like France, like Italy, the Netherlands, Austria. So it was a good quarter for Europe. Operator : Our next question is from Harsh Kumar with Piper Sandler. Harsh Kumar : I have one for Luca and then later on one for Tim. So Luca, for some time now, for many quarters, you've had a currency headwind or foreign exchange currency headwind. It's conceivable that as rates start to come down, hopefully next year that the dollar weakens. Could you take us through the mechanism of how that will work on your revenues and for your costs? Luca Maestri : So we tend -- we try to hedge our foreign exchange exposures because we think it's the right approach for the company in terms of minimizing the volatility that necessarily happens from the movements of currencies. We cannot effectively hedge every single exposure around the world because in some cases, it is not possible. In other cases, it is prohibitively expensive. But we tend to cover all the major currency payers that we have. About 60% of our business is outside the United States. So it's a very, very large and, I would say, very effective hedging program. And so we set up these hedges, and they tend to roll over very regularly. And then we replace them with new hedges at the new spot rate. So the impact that we're going to have on revenue and cost will depend on where the spot rates are at different points in time. And therefore, because of the way the program works, tends to be a bit of a lag in both directions as the foreign exchange moves over time. Harsh Kumar : Understood. Very helpful. And for Tim, Tim, historically, for the last many years, carriers in at least the U.S., which I think is your largest market for iPhone, have had programs to help folks upgrade, whether they give a cash rebate or you bring in your old phone, something like that. I was curious, as you get into your peak December quarter, if you're aware of these programs are in place. And the reason why I'm asking is I think earlier, you mentioned that more than 50% of your phones are sold through some kind of program. I assume the number is even higher in the U.S. Tim Cook : I don't want to get into revealing specifics in the different carriers. But generally speaking, I would think that it would be quite easy to find a promotion on a phone, provided you're hooking up to a service and either switching services, carriers or upgrading your phone at the same carrier. I think both of those cases today that you can find promotions out there, and I would expect that you'd be able to do that in the December time frame as well. Operator : Our next question is from Aaron Rakers with Wells Fargo. Aaron Rakers : I have two as well. So first of all, I just want to kind of ask Tim. Strategically, as we think about the Services growth and kind of the content expansion behind that, I'm curious if you could help us maybe appreciate what you've seen from a sporting perspective in terms of the engagement with MLS, the engagement with Major League Baseball, and how strategically you're thinking about expansion in sports as a key driver of Services growth going forward. Tim Cook : We're focused on original content, as you know, with TV+. And so we're all about giving great storytellers the venue to tell great stories and hopefully get us all to think a little deeper. And sport is a part of that because sport is the ultimate original story. And for MLS, we're -- we could not be happier with how the partnership is going. It's clearly in the early days, but we are beating our expectation in terms of subscribers, and the fact that Messi went to Inter Miami helped us out there a bit. And so we're very excited about it. Aaron Rakers : Yes. And as a quick follow-up, I'm just curious, an update on -- you mentioned in your prepared remarks the continued growth that you've seen in India. I'm curious how we think about that market opportunity looking forward. Is there anything that you see evolving that could accelerate the opportunity for iPhone in that large mobile market? Tim Cook : We did hit a June quarter revenue record in India, and we grew strong double digits. We also opened our first 2 retail stores during the quarter. And it's -- of course, it's early going currently, but they're currently beating our expectation in terms of how they're doing. We continue to work on building out the channel and putting more investment in our direct-to-consumer offers as well. And so I think if you look at it, it's the second largest smartphone market in the world. And it's -- so we ought to be doing really well there. And where I'm really pleased with our growth there, we're still -- we still have a very, very modest and low share in the smartphone market. And so I think that it's a huge opportunity for us. And we're putting the -- all of our energies in making that occur. Operator : Our next question comes from Sidney Ho with Deutsche Bank. Sidney Ho : Your -- I just wanted to ask about the AI side of things. Your strategy on AI seems quite different than many of your peers, at least you don't talk too much about that, how much you invest in it. Maybe you can elaborate a little bit on that. But related to that, how do you see your investment in this area turning into financial performance in the future? Is it mainly through faster upgrade cycle, maybe higher ASP? Or are you thinking about maybe additional services that you can capitalize on that? And then I have a follow-up. Tim Cook : If you take a step back, we view AI and machine learning as core fundamental technologies that are integral to virtually every product that we build. And so if you think about WWDC in June, we announced some features that will be coming in iOS 17 this fall, like Personal Voice and Live Voicemail. Previously, we had announced lifesaving features like fall detection and crash detection and ECG. None of these features that I just mentioned and many, many more would be possible without AI and machine learning. And so it's absolutely critical to us. And of course, we've been doing research across a wide range of AI technologies, including generative AI for years. We're going to continue investing and innovating and responsibly advancing our products with these technologies with the goal of enriching people's lives. And so that's what it's all about for us. And as you know, we tend to announce things as they come to market, and that's our MO, and I'd like to stick to that. Sidney Ho : Okay. That's fair. Maybe as a follow-up is related to -- you talked about WWDC, where you actually introduced Vision Pro there. Clearly, a very big announcement there. How should we think about the revenue ramp related to the Vision Pro? Is there any catalysts that we should be thinking about that will drive an inflection of that product? Tim Cook : Yes. There's enormous excitement around the Vision Pro. We're excited internally. Everybody that's been through the demos are blown away, whether you're talking about press or analysts or developers. We are now shipping units to the developer community for them to begin working on their apps. And we're looking forward to shipping early next year. And so we could not be more excited with that. I'm using the product daily. And so we're not going to forecast revenues and so forth on the call today, but we're very excited about it. Operator : We will take our last question from Krish Sankar with TD Cowen. Krish Sankar : I have two of them as well. Number one, on iPhone, Tim, you mentioned about the record number of switchers in the quarter. I'm kind of curious how to think about, given the weak macro and consumer spending, how is the replacement cycle for iPhone? Is it similar, longer, shorter versus prior years? And can you talk a little bit about the demand linearity of iPhone during the June quarter? And then I have a follow-up. Tim Cook : Switchers were a very key part of our iPhone results for the quarter. We did set a record. We set a record in Greater China, in particular, and it was at the heart of our results there. And we continue to try to convince more and more people to switch because of our -- the experience and the ecosystem and -- that we can offer them. And so I think switching is a huge opportunity for us. In terms of the upgrade cycle and so forth, it's very difficult to estimate real time what is going on with the upgrade cycle. I would say, if you think about the iPhone results year-over-year, you have to think about the SE announcement in the year ago quarter, the iPhone SE announcement in the year ago quarter. And so that provides a bit of a headwind on the comp. But as Luca said, as he talked about how we're viewing Q4, the September quarter, we see iPhone accelerating in Q4. Krish Sankar : Got it. Very helpful, Tim. And then my final question is on your retail stores, you obviously have a very large retail footprint and many of your stores seem to have been open for over a year now. How is the foot traffic there? And how do you think about sales or the retail trends in the June quarter and implications for the back half of this year on a seasonality basis? Tim Cook : I'm sorry, are you talking about our retail stores? Krish Sankar : Yes, yes, your retail stores. Tim Cook : Yes. The -- if you look at retail, it's a key part of our go-to-market approach, and it will be so key and such a competitive advantage with Vision Pro. It will give us the opportunity to launch a new product and demo to many people in the stores. And so it has many advantages in it. And we continue to roll out more stores. As you know, we just opened 2 in India last quarter. We're -- there's still a lot of countries out there that don't have Apple stores that we would like to go into. And so we continue to see it as a key part of how we go to market and love the experience that we can provide customers there. Saori Casey : A replay of today's call will be available for two weeks on Apple Podcasts, at a webcast of apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter the confirmation code 2553017, followed by the pound sign. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me, Saori Casey, with additional questions at 408-974-3123 while Suhasini Chandramouli is on her maternity leave. Thank you again for joining us. Operator : Once again, this does conclude today's conference. We do appreciate your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,023	4	2023Q4	2023Q4	2023-11-02	6.152	6.24	6.644	6.715	10.43133	27.59	29.48	Operator : Good day, and welcome to the Apple Q4 Fiscal Year 2023 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Suhasini Chandramouli, Director of Investor Relations. Please go ahead. Suhasini Chandramouli : Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook. And he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is reporting revenue of $89.5 billion for the September quarter. We achieved an all-time revenue record in India, as well as September quarter records in several countries, including Brazil, Canada, France, Indonesia, Mexico, the Philippines, Saudi Arabia, Turkey, the UAE, Vietnam and more. iPhone revenue came in ahead of our expectations, setting a September quarter record, as well as quarterly records in many markets, including China mainland, Latin America, the Middle-East, South Asia and an all-time record in India. In services, we set an all-time revenue record with double-digit growth and ahead of our expectations. During the September quarter, we continue to face an uneven macroeconomic environment, including foreign exchange headwinds and we've navigated these challenges by following the same principles that have always guided us. We've continued to invest in the future and manage for the long-term. We've adapted continuously to circumstances beyond our control, while being thoughtful and deliberate on spending. And we've carved a path of groundbreaking innovations and delivered with excellence every step of the way. That includes Apple Vision Pro, which has gotten such an amazing response from developers who are currently creating truly incredible apps. We're excited to get this magical product in the hands of customers early next year. Now let me share more about our products, beginning with iPhone. iPhone revenue came in at $43.8 billion, 3% higher than a year ago, and a new record for the September quarter. This fall, we were thrilled to debut the iPhone 15 lineup. The all-new iPhone 15 and iPhone 15 Plus feature a gorgeous design, powerful cameras and the intuitive Dynamic Island. Powered by the industry-leading A17 Pro, our iPhone15 Pro lineup has a beautiful strong and durable titanium design and the best iPhone camera system ever, including a 5X Telephoto lens on iPhone 15 Pro Max. Customers are loving the entire iPhone 15 family and reviews have been off the charts. In Mac, revenue came in at $7.6 billion, down 34% year-over-year from the prior year's record quarter. This was due to challenging market conditions, as well as difficult compares against the supply disruptions and subsequent demand recapture we experienced a year ago. Earlier this week, we were excited to unveil the next generation of Apple silicon with our incredible family of M3 chips, M3; M3 Pro; and M3 Max. We're continuing to innovate at a tremendous pace. And our industry-leading lineup of personal computers just got even better. The new MacBook Pro lineup brings our most advanced technology to our Pro users, while iMac, the world's best-selling all-in-one, just got faster and more capable. And according to the latest data from Student Monitor, nearly two out of three college students chose a Mac. We couldn't be more excited about the future. Turning to iPad. Revenue for the September quarter was $6.4 billion. iPad sets the gold standard for tablets and our competitors are unable to match the iPad experience that is enabled by our seamless integration of hardware and software. iPad is also our most versatile product. In classrooms around the world, it's helping educators bring lessons to life, while giving students a window into the world around them. And in artist workshops, design studios and everywhere else, creative minds come together, iPad supercharges the creative process, helping users take their ideas farther than they ever could before. Across wearables, home and accessories, revenue came in at $9.3 billion. Apple Watch has become essential in our lives and this is our best Apple Watch lineup ever. With Apple Watch Series 9 and Apple Watch Ultra 2, we're giving people even more tools to stay safe and live healthy, active lives. With the new double tap gesture, users can easily control Apple Watch Series 9 and Apple Watch Ultra 2 using just one hand and without touching the display. It feels like magic. Our latest Apple Watch lineup also includes our first-ever carbon-neutral products, a significant achievement of innovation and determination. Apple's unique ecosystem of hardware, software, and services delivers an unparalleled user experience. During the quarter, we also had the chance to introduce a range of exciting new updates to our software that will allow users to get even more out of their devices. Whether it's personalized contact posters and new face time features in iOS 17, new tools for users to make their experience their own in macOS Sonoma and iPadOS 17, or a bold new look in watchOS 10 that lets you see and do more, faster than ever, Apple is delivering an even better, richer experience that users are loving. Services revenue set an all-time record of $22.3 billion, a 16% year-over-year increase. We achieved all-time revenue records across App Store, advertising, AppleCare, iCloud, payment services, and video, as well as the September quarter revenue record in Apple Music. Whether subscribers are waking up to headlines on Apple News+, getting their morning workout in with Fitness+, feeling the beat with Apple Music on their way to work or school, or unwinding at the end of the day with Apple Arcade, we have so many different services to enrich their day. Apple TV+ continues to delight customers as well, with new and returning shows like the Morning Show, Lessons in Chemistry and Monarch. We're telling impactful stories that inspire imagination and stir the soul. Making movies that make a difference is also at the heart of Apple TV+ and we were thrilled to produce Martin Scorsese's Killers of the Flower Moon, a powerful work of cinema that premiered in theaters around the world last month. We're proud to say that since launch, just over four years ago, Apple TV+ has earned nearly 1,600 award nominations and nearly 400 wins. We also offer subscribers an unprecedented live sports experience with MLS Season Pass. We couldn't be more pleased with how our partnership with Major League Soccer has gone in its first year. Subscriptions to MLS Season Pass have exceeded our expectations and we're excited to continue that momentum next year. With the playoffs now underway, we can't wait to see who takes home MLS cup. And nowhere does the magic of Apple come alive more than it does in our stores. Over the past year, we've continued to find ways to connect with even more customers. We welcomed customers to our first-ever retail locations in India. We also opened doors to new stores in Korea, China and the UK and expanded the Apple store online to Vietnam and Chile. And we have another store opening in China this week. In September, I joined our team at Apple Fifth Avenue on launch day and the energy and excitement were unbelievable. Every time we connect with the customer, we're reminded why we do what we do. From simple joys of creating and sharing memories, to lifesaving features like emergency SoS via satellite, we're enriching lives in ways large and small. And whether we're working to safeguard user privacy, ensure technology made by Apple is accessible for everyone, or build an even more inclusive workplace, we're determined to lead with our values. Our environmental efforts are a great example of the intersection of our work and our values. Across Apple, we act on a simple premise, the best products in the world should be the best products for the world. We've made our environmental work a central focus of our innovation, because we feel a responsibility to leave the world better than we found it and because we know that climate change cannot be stopped, unless everyone steps up and does their part. Our first ever carbon-neutral products represent a major milestone and we're going to go even further. We plan to make every product across our lineup carbon neutral by the end of the decade. And we're not doing it alone. Over 300 of our suppliers have committed to using a 100% clean energy for Apple production by 2030. We also continue to invest in entrepreneurs who are lighting the way for a greener, more equitable future. Through our third impact accelerator class, we're proud to support a new class of diverse innovators on the cutting edge of green technology and clean energy. Apple is always looking forward, driven in equal measure by a sense a possibility and a deep belief in our purpose. We're motivated by the meaningful difference we can make for our customers and keenly determined to push the limits of technology even further. And that's why I'm so confident that Apple's future is bright. With that, I'll turn it over to Luca. Luca Maestri : Thank you, Tim, and good afternoon, everyone. Revenue for the September quarter was $89.5 billion, down less than 1% from last year. Foreign exchange had a negative impact of over 2 percentage points. And on a constant-currency basis, our revenue grew year-over-year in total, and in each geographic segment. We set a September quarter record in the Americas and saw strong performance across our emerging markets, where both iPhone and Services grew double digits. Products revenue was $67.2 billion, down 5% from last year, due to very challenging compares on both Mac and iPad, which I will discuss in more detail later on. At the same time, we reached a September quarter record on iPhone, driven by strength in emerging markets. Our total installed-base of active devices reached an all-time high across all products and all geographic segments, thanks to our high levels of customer satisfaction and many new customers joining our ecosystem. Our Services revenue set an all-time record of $22.3 billion, up 16% year-over-year, with growth accelerating sequentially from the June quarter. Our performance in Services were broad based, as we reached all-time revenue records in the Americas, Europe and rest of Asia-Pacific and a September quarter record in Greater China. We also set new records in every Services category. Company gross margin set a September quarter record at 45.2%, up 70 basis points sequentially, driven by leverage and favorable mix, partially offset by foreign exchange. Products gross margin was 36.6%, up 120 basis points sequentially, also driven by leverage and mix, partially offset by foreign exchange. Services gross margin was 70.9%, up 40 basis points from last quarter due to a different mix. Operating expenses of $13.5 billion were at the low end of the guidance range we provided, up 2% year-over-year. Net income was $23 billion, diluted earnings per share was $1.46, up 13% versus last year and a September quarter record, and operating cash flow was strong at $21.6 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $43.8 billion, up 3% year-over-year and a new September quarter record. We had strong performance in several markets, including an all-time record in India as September quarter records in Canada, Latin America, the Middle East, and South Asia . Our iPhone active installed base grew to a new all-time high and fiscal 2023 was another record year for switches. We continue to see extremely high levels of customer satisfaction which 451 Research recently measured at 98% in the U.S. Mac revenue was $7.6 billion, down 34% year-over-year, driven by challenging market conditions and compounded by a difficult compare in our own business, whereby last year we experienced supply disruptions from factory shutdowns in the June quarter and were subsequently able to fulfill significant pent-up demand during the September quarter. We also had a difference in launch timing with the MacBook Air launching earlier this year in the June quarter compared to the September quarter last year. We have great confidence in our Mac lineup and are excited about the recently announced iMac and MacBook Pro powered by our M3 chips. Our installed base is at an all-time high and half of Mac buyers during the quarter were new to the product, driven by MacBook Air. Also, we saw reported customer satisfaction of 97% for Mac in the U.S. iPad generated $6.4 billion in revenue, down 10% year-over-year. Similar to Mac, these results were a function of a difficult compare from the supply disruptions in the June quarter a year ago and the subsequent fulfillment of pent-up demand in the September quarter. iPad continues to attract a large number of new customers to the installed base with over half of the customers who purchase iPads during the quarter being new to the product and the latest reports from 451 Research indicate customer satisfaction of 98% in the U.S. Wearables, Home and Accessories revenue was $9.3 billion, down 3% year-over-year. We had a September quarter record in Europe and we saw strong performance in several emerging markets around the world. Apple Watch continues to expand its reach with nearly two-thirds of customers purchasing Apple Watch during the quarter being new to the product and customer satisfaction for the Watch was recently measured at 97% in the U.S. Services had a great quarter. We reached a new all-time revenue record of $22.3 billion, up 16% year-over-year. And we're happy to see growth coming from all categories and every geographic segment, which is a direct result of the strength of our ecosystem. Our installed base of over 2 billion active devices continues to grow at a nice pace and establishes a solid foundation for the future expansion of the ecosystem. And we continue to see increased customer engagement with our Services. Both transacting accounts and paid accounts grew double-digits year-over-year, each reaching a new all-time high. Also our paid subscriptions showed strong growth. We have well over 1 billion paid subscriptions across the services on our platform, nearly double the number we had only three years ago. And finally, we continue to improve the breadth and quality of our current services from exciting new content on Apple TV+ and Apple Arcade to additional storage tiers on iCloud. We believe our customers will love this new offering. Turning to enterprise. We are excited to see our business customers in both developed and emerging markets expand their deployment of Apple products and technologies to drive business innovation and employee satisfaction. Starbucks continuously invest in Apple technology to bring the best experience to the customers and employees, including tens of thousands of iPads across all retail stores to help their teams streamline order management, operations and training. In addition, Starbucks recently refreshed over 10,000 Macs to the latest M2-powered MacBook Air for all store managers, enabling them to do their best work and improve productivity. And in Indonesia, popular technology company GoTo is offering Mac as a choice, so that employees can have the best tools to be most productive. Today, more than half of its workforce are already choosing Mac for work. Let me now turn to our cash position and capital return program. We ended the quarter with over $162 billion in cash and marketable securities. We increased commercial paper by $2 billion, leaving us with total debt of $111 billion. As a result, net cash was $51 billion at the end of the quarter. And our goal of becoming net cash-neutral over time remains unchanged. During the quarter, we returned nearly $25 billion to shareholders, including $3.8 billion in dividends and equivalents and $15.5 billion through open market repurchases of 85 million Apple shares. We also began a $5 billion accelerated share repurchase program in August, resulting in the initial delivery and retirement of 22 million shares. Taking a step back, as we close our 2023 fiscal year, our annual revenue was $383 billion. While it was down 3% from the prior year, it grew on a constant-currency basis despite the volatile and uneven macroeconomic environment. Our year-over-year revenue performance improved each quarter as we went through the year, and so did our earnings per share performance, as we reported double-digit EPS growth in the September quarter. We are particularly pleased with our performance in emerging markets with revenue reaching an all-time record in fiscal 2023 and double-digit growth in constant currency. We are expanding our direct presence in these markets from new Apple retail stores in India to online stores in Vietnam and Chile. And we continue to work with our partners to offer a wide range of affordability programs so that we can best serve our customers. We're very excited about the momentum we have in these markets and the opportunity ahead of us. As we move ahead into the December quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we are providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. Also, on foreign exchange, we expect a negative year-over-year revenue impact of about 1 percentage point. As a reminder, the December quarter this year will last the usual 13 weeks, whereas the December quarter a year ago spanned 14 weeks. For clarity, revenue from the extra week last year added approximately 7 percentage points to the quarter's total revenue. Despite having one less week this year, we expect our December quarter, total company revenue to be similar to last year. We expect iPhone revenue to grow year-over-year on an absolute basis. We also expect to grow after normalizing for both last year's supply disruptions and the one extra week. We expect Mac year-over-year performance to significantly accelerate from the September quarter. We expect the year-over-year revenue performance for both iPad and Wearables, Home and Accessories to decelerate significantly from the September quarter due to a different timing of product launches. On iPad, we launched a new iPad Pro and iPad 10th Generation during the December quarter a year ago. For the Wearable category, last year we had the full December quarter benefit from the launches of the AirPods Pro 2nd Generation, the Watch SE, and the first Watch Ultra. For our Services business, we expect the average revenue per week to grow at a similar strong double-digit rate as it did during the September quarter. We expect gross margin to be between 45% and 46%. We expect OpEx to be between $14.4 billion and $14.6 billion. We expect OI&E to be around negative $200 million, excluding any potential impact from the mark-to-market of minority investments and our tax-rate to be around 16%. Finally, today our Board of Directors has declared a cash dividend of $0.24 per share of common stock, payable on November 16, 2023, to shareholders of record as of November 13, 2023. With that, let's open the call to questions. Suhasini Chandramouli : Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator : Certainly. We will go ahead and take our first question from Mike Ng of Goldman Sachs. Please go ahead. Michael Ng : Hey. Good afternoon, and thank you very much for the questions. I just have a question on iPhone storage and demand versus iCloud. As demand for storage grows, are you seeing a mix-shift towards higher storage iPhone models or are consumers mostly opting for the same because of increased uptake of iCloud+? What are some of the strategic and financial considerations here and trade-offs, as you think about the mix shift towards higher storage models versus iCloud penetration? Thanks. Tim Cook : Michael, it's Tim. As you probably know, we started the line with the iPhone Pro Max at 256, and so we are seeing a different mix, if you will, this year than last year. Outside of that, not significant changes. Michael Ng : Great. Thank you. And as a separate follow-up, I was just wondering if you could talk a little bit about the market conditions on notebooks and desktops, and then any color that you can share regarding the timing of the Mac -- M3 MacBook Pros this year versus the M2 earlier in the calendar year? Thank you. Tim Cook : Yeah. We're thrilled to have announced the M3 lineup and get the new MacBook Pro, the new iMac out there. We couldn't be more excited about it. We -- as Luca said, with the lineup that we've got and the compare issue that we don't have during Q1, we anticipate a significant acceleration in the Mac space for Q1. To just repeat a little bit about the circumstances of the performance last quarter, in the year-ago June quarter, we had a factory disruption that lasted several weeks. The pent-up demand that resulted from that was filled in the September quarter, and that made the September quarter not only a record, but a substantial record. And obviously, we're now comparing against that for '23 and so that, I wouldn't look at the negative 34% as representative of the underlying business performance. It's sort of the net of it. Michael Ng : Excellent. That's very clear. Thank you, Tim. Tim Cook : Yeah. Suhasini Chandramouli : All right. Thanks, Mike. Can we have the next question, please? Operator : Our next question is from Aaron Rakers with Wells Fargo. Please go ahead. Aaron Rakers : Yeah. Thanks for taking the question and congratulations on the execution in the quarter. I'm curious, if you could help us characterize what the demand environment you're seeing in China looks like. How has the reception been to the iPhone 15? And kind of similar question to the prior one, how would you characterize the mix within China as you go through this current product cycle? And I have a follow-up. Tim Cook : Yeah. If you look at how we did in Greater China for the quarter, we came in at, on a revenue basis, minus 2. But one thing to keep in mind here is that the FX impact was nearly 6 points. So we grew in constant currency. And underneath that, if you look at the different -- the categories, iPhone actually set a September quarter record in mainland China. And the -- what pulled down the performance was a combination, largely of Mac and iPad. Services also grew during the quarter and the Mac and iPad suffered from the same issues that the company did with the compare issues to factory disruptions in Q3 that were filled subsequently in Q4 of '22. We had the -- in addition to that, we had the top four selling phones in urban China for last year, and I was -- I just took a trip over there and could not be more excited about the interactions I had with the customers and employees and others. Aaron Rakers : Yeah. And then, as a quick follow-up, I'm curious as we move towards more of an inflationary component pricing environment. Luca, how do we think about that effect? How you're thinking about the gross margin at the product level, as maybe component pricing starts to turn, what's been clearly very favorable over the last several quarters to more of an inflationary environment? Thank you. Luca Maestri : Well, as you've seen from our results in Q4 and the guidance for Q1, we're obviously experiencing very strong levels of gross margin. The 45.2% was a record for the September quarter. And then, the guidance for Q1 is obviously strong at 45% to 46%. Our gross margins are affected by multiple factors. Obviously, the commodity environment is one of them, as you mentioned. It's been a good environment in recent quarters. But equally important is the mix of what we sell. And obviously, growth in Services for us is favorable, and that has helped our company gross margin. Foreign exchange, on the other hand, has been a drag for us for several quarters, given the strength of the dollar. We don't provide guidance past the December quarter, which is a very important one for us because it's the beginning of the product cycle for many products. And so we feel very good, very confident about, this coming year, and I think the gross margin guidance reflects that. Aaron Rakers : Thank you. Suhasini Chandramouli : Thanks, Aaron. Can we have the next question, please? Operator : Our next question is from Erik Woodring with Morgan Stanley. Please go ahead. Erik Woodring : Awesome. Thank you very much for taking my questions. Maybe if I start, Luca, I know that the iPhone 15 Pro and Pro Max are constrained today, but I think some of your comments suggests you should be back to supply demand balance before quarter end. So, I guess, my question is, does your December quarter revenue guidance account for any supply constraints? And if so, is there any way to kind of quantify how much supply would be limiting your December quarter revenue performance? And then, I have a follow-up. Thank you. Luca Maestri : Yes. It's correct. We are constrained today on iPhone 15 Pro and iPhone 15 Pro Max. We're working very hard to get the product in the hands of all the customers that have ordered it. We expect, as of today, that we're going to be in supply demand balance by the end of the quarter. So the guidance reflects that. Erik Woodring : Okay, very clear. Thanks. And then, maybe for you and Tim. You guys have been on the leading end of -- edge of innovation across hardware, software, silicon, services. And I'm sure there's plenty of technology in kind of longer-term projects that you're investing in. How should we think about your capital intensity as we look to fiscal year '24, just given over the last few years, CapEx as a percentage of revenue had been relatively low compared to the eight years prior? So should we expect a step-up or kind of similar capital intensity? And what are the more notable moving pieces, if any, that we should be thinking about? Thanks. Luca Maestri : Well, the big areas of investment for us are tooling and equipment for manufacturing plants. Our investments in data centers and our investments in our own facilities, both corporate facilities and retail stores. And so, both for the tooling in our plants and our data center investments, we tend to have a bit of a hybrid model where we share some of the investments with our partners and suppliers and so maybe that's why you see sometimes a bit of variability. But over the last few years, we've made all the investments that we needed to make. And obviously, we're planning to make all the investments that we believe are needed and appropriate in order to continue to innovate. Erik Woodring : Great. Thanks so much for the color, guys. Suhasini Chandramouli : Thanks, Eric. Can we have the next question, please? Operator : Our next question is from David Vogt with UBS. Please go ahead. David Vogt : Great. Thanks, guys for taking my question. I know you covered China. I want to pivot to the US for a second. Obviously, iPhone and the business looks like it returned to growth in the quarter. But it's still relatively softer kind of where I thought it would be at this point in the cycle and some of the U.S. carriers obviously haven't been that particularly aggressive in promoting upgrades. So just wanted to kind of get a sense, first, what you're seeing from your partners in the U.S. kind of currently and going forward and what do you expect? And then, second, Luca, on the margins, I mean, is it fair to say that the mix in Q1 from a product versus services dynamic is kind of the key driver of the better gross margin guide as a whole relative to, let's say, the December quarter? Or is there anything else? I know you mentioned there's a lot of moving pieces, but is that the primary driver of the uplift in the margin? Thanks. Tim Cook : On the U.S. carriers and the U.S. business in general, it's really too early to call the iPhone cycle, particularly with the constraint around the Pro and the Pro Max and the U.S. tends to do quite well with those products. It's really too early to tell what the upgrade rates will be and what the switcher rates will be. Luca Maestri : On the margin side, if I understood your question correctly about the December quarter guidance, keep in mind that actually December is the quarter where our products business is tends to be very heavy because of the holiday season. And so the services gross margins that are accretive to total company had an impact, but not as meaningful as other quarters during the year and so I think that the main drivers of the guidance that we provided are the fact that we are seeing improved costs, and improved mix on our -- on the product side of the business, partially offset by foreign exchange, which continues to be a drag, both sequentially and on a year-over-year basis. David Vogt : Got it. So the weakness in iPad and Wearables are less of an impact on sort of the margin trajectory in the December quarter? Luca Maestri : That's correct. David Vogt : I guess? Luca Maestri : That's correct. David Vogt : Got it. Thanks, Luca. Suhasini Chandramouli : All right. Thanks, David. We'll take our next question, please. Operator : Our next question is from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani : Yeah. Good afternoon. Thanks for taking my question. I have two as well. I guess, first off, just the Services growth rate, there's a tremendous acceleration I think in September quarter, the 16% growth. And it sounds like it’s going to hold there pretty well into December. Can you just talk about what is driving this acceleration? Are there a couple of products that have just stepped up in a very meaningful way? Just maybe flush out like what is driving this acceleration because it's fairly notable compared to what you've been seeing in the last few quarters. Luca Maestri : We had a really strong quarter across the border, Amit, because both geographically and from a product category standpoint, we saw very significant growth, I mentioned the records on a geographic basis. And from a category standpoint, literally, we set records in each one of the big categories. We had all-time record for App Store, for advertising, for cloud, video, AppleCare, payments and a September quarter record for Music. So it's hard to pick, one in particular because they all did well. And really then, we step back and we think about why is it that our Services business is doing well and it's because we have an installed base of customers that continues to grow at a very nice space and the engagement in our ecosystem continues to grow. We have more transacting accounts, we have more paid accounts, we have more subscriptions on the platform and we continue to add. We continue to add content and features. We're adding a lot of content on TV+, new games on Apple Arcade, new features, new storage plans for iCloud. So it's a combination of all these things and the fact that the engagement in the ecosystem is improving, and therefore, it benefits every service category. Amit Daryanani : Got it. That's really helpful. And then, maybe if I could ask you about Vision Pro, which I believe is supposed to be launched more broadly sometime in 2024, in the early part of the year. I'm curious how different do you think the launch and the consumer education of this product or a new category will be versus other things like AirPods or Apple Watch that you've done. And then, perhaps any themes I think that's set out to you from the developers that have been able to use this and the developer labs, what feedback have you gotten from them? Tim Cook : Yeah. That's a great question. There is a tremendous amount of excitement around the Vision Pro and we're -- we've been very happy to share it with developers, and we have developer labs set up in different parts of the world so that they can actually get their hands on it and are working on apps and I've been fortunate enough to see a number of those. And there is some real blow away kinds of things that are coming out, and so that all looks good. To answer your question about is it similar to AirPods or Apple Watch, I would say, no. There's never been a product like the Vision Pro. And so, we're purposely bringing it out in our stores only, so we can really put a great deal of attention on the last mile of it. We'll be offering demos in the stores and it will be very different process than the -- a normal grab-and-go kind of process. Amit Daryanani : Perfect. Thank you. Suhasini Chandramouli : Thanks, Amit. We'll take the next question, please. Operator : Our next question is from Harsh Kumar with Piper Sandler. Please go ahead. Harsh Kumar : Yeah. Hey, thanks for the question and congratulations on tremendous execution in a very tough macro. Actually, Tim, the last question is a perfect segue here, given what you are doing with your Vision Pro. So lots of companies are experimenting with generative AI. I'm curious about what kind of efforts you have. I'm sure there are segues into Pro Vision that you have, but I was curious about if you can give us a glimpse on how you might be able to monetize some of these efforts of generative AI. Tim Cook : If you kind of zoom out and look at what we've done on AI and machine learning and how we've used it, we view AI and machine learning as fundamental technologies, and they're integral to virtually every product that we ship. And so just recently, when we shipped iOS 17, it had features like Personal Voice and Live Voicemail. AI is at the heart of these features. And then, you can go all the way to then lifesaving features on the launch end of phone like fall detection, crash detection, ECG on the watch. These would not be possible without AI. And so, we don't label them as such, if you will. We label them as to what their consumer benefit is. But at the fundamental technology behind it is AI and machine learning. In terms of generative AI, we have -- obviously, we have work going on. I'm not going to get into details about what it is, because -- as you know, we don't -- we really don't do that. But you can bet that we're investing, we're investing quite a bit, we're going to do it responsibly and it will -- you will see product advancements over time that where the -- those technologies are at the heart of them. Harsh Kumar : Thanks, Tim. Very clear. And for my follow-up, I had a philosophical question. So, you guys always try to provide the best experience for consumers. To that end, I think, over the last decade you in-sourced a lot of important chips in your phones, in your Macs, iPads, so on and so forth. And that was, I think, a function that ARM wasn't around in the industry from a merchant angle. But now, we see these the silicon guys, the chip guys moving to ARM architecture. So my question to you is, has the move to internal silicon been economically profitable proposition for Apple? Or is it -- or is it a strategic one, where you simply need to own this and it's vital to your products for the consumer experience or maybe there's a path back to chip vendors at some point in time? Tim Cook : It's really enabled us to build products that we could not build without doing it ourselves. And as you know, we like to own the primary technologies in the products that we ship and arguably, the silicon is at the heart of the primary technologies, and so, no, I don't see going back. I am happier today than I was yesterday, than I was last week that we made the transition that we've made, and I see that benefit every day of it. Harsh Kumar : Thanks, Tim. Tim Cook : Yeah. Suhasini Chandramouli : Thank you, Harsh. We'll take the next question, please. Operator : Our next question is from Wamsi Mohan from Bank of America. Please go ahead. Wamsi Mohan : Yes. Thank you so much. Tim, over the last decade, pretty much you've gained a lot of share in China. As you look, your -- some of the domestic players are starting to re-emerge, especially in the high-end phone space. I know you touched on China. But how would you see Apple's positioning and opportunity for continued share gains, particularly in China? And how was the linearity in China from a demand perspective? And I have a follow-up, please. Tim Cook : In the September quarter, we set an iPhone record -- revenue record in China and we're very proud of that and we obviously grew. The market predictions that I've seen, we've had the market contracting. And so if that's -- if those are correct, then we gained share last quarter. And so we are very proud of that, I don't know what every quarter will hold. And obviously, we just give a bit of color on the current quarter. But over the long term, I view China as an incredibly important market and I'm very optimistic about it. Wamsi Mohan : Okay. Thanks, Tim. And as a follow-up, you obviously had a great Services quarter and part of your Services business has these licensing relationships with research partners, where you serve a very important distribution function for them. Can you talk about how you think about these relationships and potentially some of the options maybe Apple has to mitigate some of the risks, given some of the scrutiny on with some of the research partners? Thank you so much. Luca Maestri : They are important relationships. And as you know, we don't get into our commercial relationships in the call. I see them as important and we make decisions that are in the best interest of our users or what we feel is in the best interest of our users. And that's kind of what we've done in the past and how we've -- how we'll run the show in the future as well. Wamsi Mohan : Okay. Thank you, Tim. Suhasini Chandramouli : Thank you, Wamsi. Can we have the next question, please. Operator : Our next question comes from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar : Yeah. Hi. Thanks for taking the question. I had two of them too. First one, Luca, thanks for the color on gross margin. And when I look at it over the last four quarters, even if on a year-over-year basis revenue declined, the gross margins have improved. And I understand Services definitely helped. I'm just kind of curious, when you look at on a go forward basis, are most of the big step functions and cost reductions like the Mac Silicon conversion, et cetera, that are done or is there more room for margin expansion from here? And then, I had a follow-up. Luca Maestri : Well, on the product side, as you know, we -- when we launch new products, the cost structures of those products tend to be higher than the products that they replace. It happens because we are always adding new technologies, new features, and then, we worked through the cost curve over the lifecycle of the product and we tend to get benefits as time goes by. The guidance that we provided for December reflects all that and so we're starting from a better position than a year ago or than, in the past, in general. There are other factors that play a role. For example, the mix of products that we sell. Not every product has the same gross margin profile, and so our guidance, our results are reflective of that. And also, within a specific product category, a lot depends on the kind of models that we sell because they have different margin profiles. I think one of the things that we've done well over the last few years is to offer more affordability solutions to our customers in the form of instalment plans, trading options, and spend -- low-cost financing in general. And what that has accomplished is reduced the affordability threshold for our customers and therefore, they can, buy at the top of our product ranges. That has been a big factor in the reason for our margin expansion. We don't provide guidance or color past the current quarter because there's so many different variables that affect gross margins, but we obviously feel very good about the trajectory that we've had in 2023 and now, the guidance that we provide for the beginning of our fiscal '24. And we need some of these things because, obviously, their foreign exchange environment has been difficult and has been a bit of a drag for us. But net-net, we're very pleased where we are. Krish Sankar : Got it. Thanks for that, Luca. And then, I have a follow-up for Tim. Obviously, you're seeing amazing momentum in India. I'm just kind of curious how do you look at -- when you look at the India growth opportunity on these hardware units, how to think about ASP relative to that versus like the rest of the geographies? And is there a way to compare or contrast India, growth momentum versus China maybe a decade ago or so at the same point in the rollout of, the share gains in that geography? Tim Cook : Yeah. It's a great question. We had an all-time revenue record in India. We grew very strong double-digits. It's an incredibly exciting market for us and a major focus of ours. We have low share in a large market, and so it would seem there's a lot of headroom there. The ASPs, I haven't looked at them most recently, but I'm sure that they're lower than the worldwide. But that doesn't bother us at all. It just -- and in terms of the similarity, I would say, each country has its own journey. And I wouldn't want to play the comparison game. But we see an extraordinary market, a lot of people moving into the middle class, distribution is getting better, lots of positives. We put two retail stores there, as you know. They're doing better than we anticipated. It's still early going, but they're off to a good start and I couldn't be happier with how things are going at the moment. Krish Sankar : Thanks, Tim. Suhasini Chandramouli : Thank you, Krish. We'll now take our next question, please. Operator : Our next question is from Ben Reitzes with Melius Research. Please go ahead. Ben Reitzes : Hey. Thanks a lot. I appreciate the question. Tim, I appreciate all your commentary around China. It was great to kind of hear about the growth potential there, your optimism. I wanted to also ask about the supply chain and where is your priority? Do you have a priority to diversify your supply chain? How do you feel about Apple's supply chain around the world? And in particular, what do you think about further investments in the U.S. as well? Tim Cook : Our supply chain is truly global, and so we're investing all over the world, including in the United States, we were very focused on advanced manufacturing for the U.S. and have worked on a number of different projects in the U.S., whether that's our venture with Corning on the glass or Face ID module or semiconductors. And so all of these are our advanced manufacturing and I think exactly the kinds of things that the U.S. would be and are very, very good at. We also invested in other regions of the world and we're continually optimizing the chain. And so we -- the moment we learned something that didn't work exactly right, we are tweaking it. And so we're going to continue to do that. But at the end of day, it will still be a global supply chain. Ben Reitzes : Got it. Thanks. Tim Cook : Yeah. Ben Reitzes : Next one for Luca. Just really quick on the extra week dynamic. There was also last year an issue with the iPhone production, where there was the COVID lockdowns in China. Is it possible to give some color around what that -- I guess, having a normalized supply chain somewhat this year, what that benefit is this year and maybe contrast that with the 7 point hit from the extra week? Thanks a lot. Luca Maestri : Yeah. Thanks for the question, Ben. I mentioned during the prepared remarks the extra week is 7 points of revenue. We did have disruptions, supply disruptions last year on the phone, on the 14 Pro and Pro Max in the December quarter a year ago. And when we normalize for those two factors, and I said it during the call, we still expect to grow on iPhone. So you take into account the, the loss of the extra week, you compare it with the supply disruptions that are not going to repeat, hopefully, this year. And when you normalize for those two things, we still expect to grow on iPhone. Ben Reitzes : Thanks a lot everybody. Appreciate it, Luca. Suhasini Chandramouli : Thank you, Ben. And we'll take the last question now. Operator : Our last question comes from Richard Kramer with Arete Research. Please go ahead. Richard Kramer : Thank you very much. Tim, first off, if we look over the past two years, Apple sales are about $18 billion higher and R&D is up by about 8% -- $8 billion or over a third higher. Can you give us a sense of some of the main components or drivers behind that increase in innovation spend? Is it Apple Silicon, is it new products like Vision Pro or is it content to support new services? I think that's one of the top questions investors have. Thanks. Tim Cook : Sure. It's a number of things, Richard. It's the -- some things I can't talk about, its Vision Pro, it's AI and ML, it's the silicon investment that we're making, the transition with the Mac and other silicon. It's sort of all of those things and -- but I think you would find that the R&D expenditure in the aggregate looks very competitive versus others. Luca Maestri : And I would add, Richard, on this front. Some of the investments that we're making in R&D are also one of the drivers for the gross margin expansion. So I think it's important to think about it that way. Richard Kramer : That's great. And Luca, you mentioned -- or Tim mentioned college students choosing Mac. Then, you mentioned the record Services revenue. What other metrics do you think you could provide to help investors understand how Apple measures and increases customer lifetime value, especially when we see a lot of users entering the ecosystem with a relatively lower-priced products or even refurbished devices? So you're growing your ecosystem, but how do you think about growing customer lifetime value over the long run? Luca Maestri : Well, some of the metrics that I mentioned before, obviously, we look at the installed base of active devices. We see, we want to make sure that, the customers that we acquire remain with us and so we have good visibility over that, and we pay a lot of attention to the behavior of the installed base, both by product and by geography. And then, we look at the daily engagement in the ecosystem. So that's why we pay a lot of attention on things like transacting accounts, paid accounts, we want to see if, in fact, we are able to move our customers from a free model to a paid model over time. That's obviously very, very important for us. And so, on this, we keep track of all these things and that's -- and then what we do, because I think it's really important is that over time, we add new services and that, obviously, like, for example, the progress that we've made in payments in recent years, very, very important because we've attracted more and more people that are actually now using additional features on our devices and we are able to monetize that, right. So we take all that into account, we understand what happens when a customer joins us, when they buy a primary device versus a used device, we understand their behavior, in different markets and so on. So we have, I think, pretty good visibility. And I think the progress that we're making in Services, we did $85 billion in the last 12 months. It's -- that's a size of a Fortune 50 and significantly bigger than it was just a couple of years ago. Richard Kramer : Absolutely. Thanks very much. Suhasini Chandramouli : Thank you, Richard. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 0106234 followed by the pound sign. These replays will be available by approximately 5 PM Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142 and financial analysts can contact me, Suhasini Chandramouli, with additional questions at 408-974-3123. Thank you again for joining us today. Operator : Once again, this does conclude today's conference. We do appreciate your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,024	1	2024Q1	2024Q1	2024-02-01	6.294	6.345	6.792	6.86	10.77	27.11	24.95	Operator : Good day, and welcome to the Apple Q1 Fiscal Year 2024 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions. I would like to turn the call over to Suhasini Chandramouli, Director of Investor Relations. Please go ahead. Suhasini Chandramouli : Thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Before turning the call over to Tim, I would like to remind everyone that the quarter we're reporting today included 13 weeks, whereas the quarter we reported a year ago included 14 weeks. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you. Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is reporting revenue of $119.6 billion for the December quarter, up 2% from a year ago despite having one less week in the quarter. EPS was $2.18, up 16% from a year ago and an all-time record. We achieved revenue records across more than two dozen countries and regions including all-time records in Europe and rest of Asia-Pacific. We also continue to see strong double-digit growth in many emerging markets with all-time records in Malaysia, Mexico, The Philippines, Poland, and Turkey, as well as December quarter records in India, Indonesia, Saudi Arabia, and Chile. In Services, we set an all-time revenue record with paid subscriptions growing double-digits year-over-year. And I'm pleased to announce today that we have set a new record for our installed base, which has now surpassed 2.2 billion active devices. We are announcing these results on the eve of what is sure to be a historic day as we enter the era of spatial computing. Starting tomorrow, Apple Vision Pro, the most advanced personal electronics device ever, will be available in Apple stores for customers in the U.S. with expansion to other countries later this year. Apple Vision Pro is a revolutionary device built on decades of Apple innovation and it's years ahead of anything else. Apple Vision Pro has a groundbreaking new input system and thousands of innovations, and it will unlock incredible experiences for users and developers that are simply not possible on any other device. There is already so much excitement behind this product from reviewers, customers, and developers. They are praising everything from the incredible experience of watching a movie on a 100-foot screen to remarkable new machine learning capabilities like hand tracking and room mapping. We can't wait for people to experience the magic for themselves. Moments like these are what we live for at Apple. They're why we do what we do. They're why we're so unflinchingly dedicated to groundbreaking innovation and why we're so focused on pushing technology to its limits as we work to enrich the lives of our users. As we look ahead, we will continue to invest in these and other technologies that will shape the future. That includes artificial intelligence where we continue to spend a tremendous amount of time and effort, and we're excited to share the details of our ongoing work in that space later this year. Now, let's turn to the results for the December quarter, beginning with iPhone. We are proud to report that revenue came in at $69.7 billion, 6% higher than a year ago. The iPhone 15 lineup has earned glowing reviews and been embraced by customers. The iPhone 15 and iPhone 15 Plus feature a gorgeous new design with color-infused back glass and contoured edges, Dynamic Island, A16 Bionic, and a new 48 megapixel camera system. And the iPhone 15 Pro and iPhone 15 Pro Max set the gold standard for smartphones with a beautiful and lighter titanium design, industry-leading performance with A17 Pro and our most advanced camera system with the equivalent of seven pro lenses and the ability to record spatial video. Features like Emergency SoS and roadside assistance via satellite bring peace of mind to users when they travel, and I'm grateful for every note I've received about their lifesaving impact. Turning to Mac. Revenue came in at $7.8 billion, up 1% year-over-year, driven by the strength of our latest M3-powered MacBook Pro models in spite of having one less week of sales. Just last week, we got to wish Mac a happy 40th birthday. When it was introduced 40 years ago, Mac changed everything, and through the years, it has done so again and again. Recently, we have been on a tremendous pace of innovation. Since the introduction of Apple silicon in 2020, we've been proud to offer our users unmatched performance and power along with a remarkable Neural Engine for artificial intelligence and machine learning. This past fall, we had an amazing launch of the latest generation of Apple silicon for Mac, M3, M3 Pro, and M3 Max. These chips break new ground in power and performance empowering users to do more than they ever could before, whether they're making a musical masterpiece using the latest features in Logic Pro, or beating their high score in a graphics intensive game. A favorite amongst students, business owners, artists, and video editors, our MacBook Pro lineup is the world's best pro notebook family. And iMac, the world's most capable and best-selling all-in one, is now faster than ever, thanks to M3. In iPad, revenue for the December quarter was $7 billion, down 25% year-over-year due to a difficult compare with the launch of the M2 iPad Pro and the 10th generation iPad during the December quarter last year and one less week of sales. iPad remains the most versatile, capable, and elegant tablet on the market today. It continues to be the go-to-device for students, creators, and more with customers loving iPad's incredible combination of portability and performance. Powerful apps like Final Cut Pro and Logic Pro for iPad allow video and music creators to unleash their creativity in new ways that are only possible on iPad. iPad continues to push the boundaries of what's possible on a tablet. In Wearables, Home and Accessories, revenue came in at $12 billion, down 11% from a year ago due to a difficult compare with the launch timing of several products in this category and the impact of the 14th week last year. Across our latest Apple Watch lineup, we're enabling and encouraging our users to live a healthier day, while making Apple Watch even more intuitive to use. The new double tap gesture on Apple Watch Series 9 and Apple Watch Ultra 2 make it easier to answer calls, play and pause music or take a photo with iPhone. I've been deeply moved by the many touching stories about how features like a regular rhythm notification and fall detection helped Apple Watch users when they needed it most. And for the first time ever, users can choose a carbon-neutral option of any new Apple Watch. Meanwhile, our AirPods lineup continue to be a holiday favorite. In Services, we set an all-time revenue record of $23.1 billion and an 11% year-over-year increase. Because we had one less week this quarter, this growth represents an acceleration from the September quarter, and we achieved all-time revenue records across advertising, cloud services, payment services and video, as well as December quarter records in App Store and AppleCare. Across our services, we're constantly growing our offerings to give users even more to love. With the redesigned Apple TV app, we've made it easier for subscribers to enjoy all their favorite shows, movies and sports, including Apple TV+ hits like Masters of the Air, Monarch, and Slow Horses. We're proud to be a part of Martin Scorsese's Killers of the Flower Moon, a film that has moved audiences and earned more than 200 accolades including Best Film of the Year from the New York Film Critics Circle, nine BAFTA nominations, a Golden Globe win, and 10 Oscar nominations, including Best Picture. Across all Apple TV+ productions, we've now earned 2050 award nominations and 450 wins since we've introduced the service. We're also excited to have a new season of Major League Soccer kicking off this month. We're looking forward to seeing Lionel Messi return to the field and to following all of our favorite teams in what is sure to be an incredible season. And we're counting down to the Apple Music Super Bowl halftime show, featuring Usher. Turning to Retail. In recent months, we opened three stores, including our 100th store in Asia-Pacific. Throughout the holidays, our team members pulled out all the stops to help customers find the perfect gift. And I know our U.S. team members are especially excited to begin demoing Apple Vision Pro for our customers tomorrow. At Apple, we live and breathe innovation. We are driven to pioneer new technology that can enrich our customers' lives, and we're just as intentional about showing up with our values and being a force for good in the world. February is Black History Month, and to honor it, we've launched our new Black Unity Collection, which includes the Black Unity Sport Loop band. This year's designs reflect a lasting commitment to working toward a more equitable world. We also continue to do a central work through our Racial Equity and Justice Initiative, and we're proud to continue providing grants to organizations that are making a real impact in the world. In recent months, we've also taken significant strides in our environmental work. We're partnering with suppliers to bring more clean energy online for Apple production. We're using more recycled materials than ever before and more energy-efficient transportation than ever before. And each day, we are taking more and more steps toward becoming 100% carbon-neutral across all of our products by 2030. Apple is a company that has never shied away from big challenges. That's because we are grounded by a deep sense of purpose and guided by core belief in the transformative power of innovation. And so, we are optimistic about the future, confident in the long-term, and as excited as we've ever been to deliver for our users like only Apple can. With that, I'll turn it over to Luca. Luca Maestri : Thank you, Tim, and good afternoon, everyone. Revenue for the December quarter was $119.6 billion, up 2% from last year. During the December quarter a year ago, two unique factors affected our results. First, we had an additional week in the quarter. And second, we had COVID-related factory shutdowns that limited iPhone supply. We estimate that the net impact of these two factors resulted in a 2 percentage point headwind to our revenue performance this quarter. We set all-time revenue records in Europe and rest of Asia-Pacific, and continue to see strong performance across our emerging markets with double-digit growth in the majority of the emerging markets we track. Products revenue was $96.5 billion, flat compared to last year, driven by strength in iPhone, offset by challenging compares for iPad and Wearables, Home and Accessories and one less week of sales this year across the entire portfolio. Thanks to our unparalleled customer loyalty and very strong levels of customer satisfaction, our total installed base of active devices set a new record across all products and all geographic segments, and is now over 2.2 billion active devices. Services revenue set an all-time record of $23.1 billion, up 11% year-over-year. When we take into account the extra week last year, this represents a sequential acceleration of growth from the September quarter. We are very pleased with our Services performance in both developed and emerging markets with all-time revenue records in the Americas, Europe, and rest of Asia-Pacific. Company gross margin was 45.9%, up 70 basis points sequentially, driven by leverage and favorable mix, partially offset by foreign exchange. Products gross margin was 39.4%, up 280 basis points sequentially, also driven by leverage and mix, partially offset by foreign exchange. Services gross margin was 72.8%, up 190 basis points from last quarter, due to a more favorable mix. Operating expenses of $14.5 billion were at the midpoint of the guidance range we provided and up 1% year-over-year. Net income was $33.9 billion, up $3.9 billion from last year. Diluted EPS was $2.18, up 16% versus last year and an all-time record. And operating cash flow was very strong at $39.9 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $69.7 billion, up 6% year-over-year. We set all-time records in several countries and regions, including Latin America, Western Europe, the Middle East, and Korea, as well as December quarter records in India and Indonesia. Our iPhone active installed base grew to a new all-time high, and we had an all-time record number of iPhone upgraders during the quarter. Customers are loving their new iPhone 15 family, with the latest reports from 451 Research indicating customer satisfaction of 99% in the U.S. In fact, many iPhone models were among the top-selling smartphones around the world during the quarter. According to a survey from Kantar, iPhones were four out of the top five models in the U.S. and Japan, four out of the top six models in urban China and the UK, and all top five models in Australia. Mac generated revenue of $7.8 billion and return to growth, despite one less week of sales this year. This represents a significant acceleration from the September quarter when we faced a challenging compare due to the supply disruptions and subsequent demand recapture we experienced a year ago. Customer response to our latest iMac and MacBook Pro models powered by the M3 chips has been great. And our Mac installed base reached an all-time high with almost half of Mac buyers during the quarter being new to the product. Also, 451 Research recently reported customer satisfaction of 97% for Mac in the U.S. iPad was $7 billion in revenue, down 25% year-over-year. iPad faced a difficult compare because during the December quarter last year, we launched the new iPad Pro and iPad 10 generation, and we had an extra week of sales. However, the iPad installed base continues to grow and is an all-time high with over half of the customers who purchased iPads during the quarter being new to the product, and customer satisfaction for iPad was recently measured at 98% in the U.S. Wearables, Home and Accessories revenue was $12 billion, down 11% year-over-year due to a challenging launch compare and the extra week a year ago. This time last year, we had the full quarter benefit from the launches of the AirPods Pro 2nd generation, the Watch SE, and the first Watch Ultra. We continue to attract new customers to Apple Watch. Nearly two-thirds of customers purchasing an Apple Watch during the quarter were new to the product, and the latest reports from 451 Research indicate customer satisfaction of 96% in the U.S. And in Services, we were very pleased with our double-digit growth, which was driven by the strength of our ecosystem. Our installed base is now over 2.2 billion active devices and continues to grow nicely, establishing a solid foundation for the future expansion of our Services business. And we continue to see increased customer engagement with our services. Both transacting accounts and paid accounts reached a new all-time high, with paid accounts growing double-digits year-over-year. Also, our paid subscriptions showed strong double-digit growth. We have well over 1 billion paid subscriptions across the services on our platform, more than double the number that we had only four years ago. Finally, we continue to build on the breadth and the quality of our current services. From Oscar-nominated theatrical releases with Apple TV+ to more publications or News+ like The Atlantic and exciting new games on Arcade. Turning to Enterprise, we continue to see many business customers leverage Apple products to improve productivity and drive innovation. Target recently added the latest M3 MacBook Pro to their existing deployment of thousands of Mac’s, enabling employees across various departments to do their best work. In emerging markets, Zoho, a leading technology company headquartered in India, offers its 15,000 plus global employees a choice of devices, with 80% of their workforce using iPhone for work and nearly two-thirds of them choosing Mac as their primary computer. With the upcoming launch of Apple Vision Pro, we are seeing strong excitement in Enterprise. Leading organizations across many industries such as Walmart, Nike, Vanguard, Stryker, Bloomberg, and SAP have started leveraging and investing in Apple Vision Pro as their new platform to bring innovative spatial computing experiences to their customers and employees. From everyday productivity to collaborative product design to immersive training, we cannot wait to see the amazing things our enterprise customers will create in the months and years to come. Let me now turn to our cash position and capital return program. We ended the quarter with $173 billion in cash and marketable securities. We decreased commercial paper by $4 billion, leaving us with total debt of $108 billion. As a result, net cash was $65 billion at the end of the quarter, and our goal of becoming net cash-neutral over time remains unchanged. During the quarter, we returned nearly $27 billion to shareholders, including $3.8 billion in dividends and equivalents and $20.5 billion through open market repurchases of 112 million Apple shares. We also retired an additional 6 million shares in the final settlement of our 19th ASR. As usual, we will provide an update to our capital return program when we report results at the end of this quarter. As we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we are providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. And we expect foreign exchange to be a revenue headwind of about 2 percentage points on a year-over-year basis. As a reminder, in the December quarter a year ago, we faced significant supply constraints on the iPhone 14 Pro and 14 Pro Max due to COVID-19 factory shutdowns. And in the March quarter a year ago, we were able to replenish channel inventory and fulfill significant pent-up demand from the constraints. We estimate that this impact added close to $5 billion to the March quarter's total revenue last year. When we remove this impact from last year's revenue, we expect both our March quarter total company revenue and iPhone revenue to be similar to a year ago. For our Services business, we expect a similar double-digit growth rate to what we reported in the December quarter. We expect gross margin to be between 46% and 47%. We expect OpEx to be between $14.3 billion and $14.5 billion. We expect OI&E to be around $50 million, excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally, today our Board of Directors has declared a cash dividend of $0.24 per share of common stock payable on February 15, 2024, to shareholders of record as of February 12, 2024. With that, let's open the call to questions. Suhasini Chandramouli : Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question please? Operator : Certainly. We'll go ahead and take our first question from Erik Woodring with Morgan Stanley. Please go ahead. Erik Woodring : Hey guys, good evening. Thank you for taking my questions. I have two. And congrats on the nice quarter here. Luca, maybe if we start with you. Can you unpackage some of the Services drivers a bit for us. Obviously, really nice outperformance in the December quarter versus your expectations. A record gross margin implies your higher margin businesses were likely the sources of outperformance. But can you maybe just clarify a bit how we should think about Services growth for the March quarter? And then, speak to some of those underlying drivers in the December quarter and then in the March quarter, what the different puts and takes would be? And then, I have a follow-up please. Thank you. Luca Maestri : Thanks, Erik, for the question. Let's start with the December quarter. As we said, up 11%, $23.1 billion is an all-time record for us, with all-time records in The Americas, in Europe, and the rest of Asia Pac. So it was pretty broad-based geographically, and very strong across all the Services categories, because we had all-time revenue records for cloud, for payments, for video, and for advertising and December quarter records for the App Store and for AppleCare. Obviously, last year, we had an extra week, so the 11% is stronger than -- the underlying performance is stronger than the 11% that we have reported. I think the entire ecosystem is doing well because we continue to see growth and new all-time highs in both transacting accounts and paid accounts, which is obviously very important. And paid subscriptions continue to grow strong double-digits. Just as a reference, we have more than a billion paid subscriptions across all the services on our platform. This is more than double the number of paid subscriptions that we had only four years ago. So, obviously, very significant growth there. What I said during the prepared remarks around the March quarter, I mentioned that we will continue to grow double-digits at a percentage that is similar to what we reported for the December quarter. We don't provide guidance around the different services categories. So, we will provide more color when we report in three months. Erik Woodring : Okay. Thank you, Luca. And then, Tim, really nice to see your installed base reach a record high, again, against all products and geos. I'm wondering if you could share a bit more detail about the new users you were able to on-board over the last 12 months. Meaning, how might this new cohort look different from past cohorts, either in terms of geographic representation or SKU to certain products or even how their monetization trends might differ from past cohorts. And that's it from me. Thanks so much. Tim Cook : Yes. Hi, Erik. I would say emerging markets are -- have been a very key area of strength for us. If you look at it, India grew -- in revenue terms grew strong double-digits in the December quarter and hit a quarter revenue record. The other emerging markets like Indonesia also hit a quarterly record. And we had several regions, with records from Latin America to the Middle East. And that theme has been pretty consistent across the other quarters that -- of the year as well. And so, emerging markets, very, very important. And I feel like we are doing a great job there. Suhasini Chandramouli : Thanks, Erik. Operator, can we have the next question please? Operator : Our next question is from Mike Ng with Goldman Sachs. Please go ahead. Mike Ng : Hey, good afternoon. I just have two questions as well. First, on Services. Just on the outlook for the March quarter for a similar double-digit growth rate as of December quarter. I'm just wondering why not -- why won't it be potentially faster, given that the December quarter obviously had a headwind from the extra week comp, and I'd also think that some of the pricing uplifts on select Apple One services that were implemented last winter should help in the March quarter? Any additional thoughts there would be great in terms of what some of your assumptions are. And then, I have a quick follow-up. Luca Maestri : Yes. We'll see how the quarter develops. I would point to two things. One is the fact that we mentioned that we expect a couple of points of negative foreign exchange in the March quarter, and foreign exchange was essentially flat for us in the December quarter. So, you've got a bit of a headwind there. And then, when you look at our other progression of our Services business over the last few quarters, the compares for March are slightly more difficult than the compares for December. Mike Ng : Great. Thank you, Luca. And then, my second question. It was very interesting to hear about some of the enterprise customer investments into Vision Pro. Could you maybe just talk about some of the efforts to support Vision Pro developer ecosystem. And it was also good to hear about the potential upcoming announcements on AI. So any thoughts there would also be helpful. Thank you. Tim Cook : Yeah. Hi. It's -- we are incredibly excited about the Enterprise opportunities with Vision Pro. I've seen several demos from different companies. Luca mentioned several in his opening remarks, but Walmart has a very cool merchandising app. There are firms that are doing collaboration -- design collaboration apps. There are field service applications. Really all over the map, there are applications that are for control center, command center kind of things. SAP has really gotten behind it and, of course, SAP is in so many of companies. I think there will be a great opportunity for us in Enterprise, and we couldn't be more excited about where things are right now. We are obviously looking forward to tomorrow. This has been multiple years of efforts from so many people across Apple. And really, it took a whole of company effort to bring it to this far. In terms of generative AI, which, I'd guess, is your focus, we have a lot of work going on internally as I've alluded to before. Our MO, if you will, has always been to do work and then talk about work and not to get out in front of ourselves. And so, we're going to hold that to this as well. But we've got some things that we are incredibly excited about that we'll be talking about later this year. Mike Ng : Wonderful. Thank you, Tim. Tim Cook : Yes. Suhasini Chandramouli : Thank you, Mike. Operator, can we have the next question please? Operator : Our next question is from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan : Yes, thank you so much. I have two questions as well. First on iPhone. There have been concerns around replacement cycles lengthening, China competition intensifying, and you still beat iPhone revenues despite the weaker performance in China. Curious how you're thinking about the 15 cycle overall, given what you saw in the December quarter. And I've a follow-up. Tim Cook : Hi, it's Tim. The -- we were up 6%, as we mentioned in the opening remarks. We are happy with that performance. Underneath there, we had really strong performance in several parts of the world with all-time records in Europe and rest of Asia-Pacific. As I mentioned earlier, we did particularly well in several emerging markets from Latin America to the Middle East. And we set December quarter records in India and Indonesia. And so, really some spectacular broad-based reactions to iPhone. We also importantly set an all-time record worldwide for iPhone upgraders. And the installed base hit a new all-time high consistent with the -- our overall devices. And so, there's lot of good things. Luca mentioned in his opening comments that iPhones were four out of the top five smartphone models in the U.S. and Japan and four out of the top six in urban China and the UK, and all top five in Australia, and the customer satisfaction level for iPhone 15 hit 99%. If you look at iPhone 15 since the announcement of it and shipment in September, so this is including some of Q4 and you compare that to iPhone 14 over the same period of time, iPhone 15 is outselling iPhone 14. And so, we feel very good about that, and the upgraders hitting a record is particularly exciting for us. Wamsi Mohan : Great. Thank you, Tim. And as a follow-up, obviously, you're just launching the Vision Pro and it's an entirely new category. It's a price point that's a much higher starting price point relative to most of your other, probably over the last decade, product introductions, but just wondering how would you measure the success of Vision Pro over time and which Apple products adoption curve would you look at as potentially the most similar? And is there a way in which we could think Vision Pro could eclipse maybe something like the iPad in revenue over time. Thank you. Tim Cook : You know, each product has its own journey. And so, I wouldn't want to compare it to any one in particular. I would just say we couldn't be more excited. Internally, we've got an incredible amount of excitement from developers and from customers that can't wait till tomorrow to pick up their units. And we are incredibly proud to be able to demo the unit in so many of our stores in the U.S. starting tomorrow for people that are -- that want to check it out. And so, we'll see and report the results of it in the Wearables category that you're familiar with. I think that if you look at it from a price point of view, there's an incredible amount of technology that's packed into the product. There's 5,000 patents in the product and it's, of course, built on many innovations that Apple has spent multiple years on, from silicon to displays and significant AI and machine learning. All the hand tracking, the room mapping, all of this stuff is driven by AI. And so, we're incredibly excited about it. I can't wait to be in the store for tomorrow and see the reaction myself. Wamsi Mohan : Thank you so much, Tim. Suhasini Chandramouli : Thanks, Wamsi. Operator, we'll take the next question please. Operator : Our next question is from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani : Good afternoon. I have two as well. I guess, first off, I was hoping you could talk a little bit about what you're seeing in China right now. I think from a geographic basis, one of the few places that was down double-digits, while everything else was growing. So, I'm hoping you spend a bit of time discussing what are you seeing there from a competitive perspective and more importantly, from a demand perspective in China? Tim Cook : Yeah. If you look at iPhone in China Mainland, which I think has been the focus of a lot of interest, and you look at it in constant currency, so more of an operational view, we were down mid-single digits on iPhone. And so, it was the other things that drove the larger contraction year-over-year. On the good news side, we had solid growth on upgraders year-over-year in Mainland China and we had four of the top six smartphone models in urban China. Also, IDC just put out a note, that you may have seen, that we were the top brand in -- for the full year and for the December quarter. And so, there's some good news along with – obviously, we'd prefer not to [contract] (ph). Amit Daryanani : Fair enough. And then, as a follow-up, you folks have implemented a fair bit of changes around the App Store in Europe post the DMA implementation there. Can you just touch on what are some of the key updates? And then, Luca, as a net of it all, do you see it having any significant impact financially to your services or a broader Apple P&L statement? Thank you. Tim Cook : Yes. You know, the -- let me try to answer a little bit of both and then Luca can add some comments to it. We announced a number of changes last week in Europe that would be in effect beginning in March. So, the last month of the first calendar quarter, the second fiscal quarter. Those are -- some of the things that we announced include alternate billing opportunities, alternate app stores, our marketplaces, if you will. We're also opening NFC for new capabilities for banking and wallet apps. And so, these are some of the things we announced. The -- if you think about what we've done over the years is, we've really majored on privacy, security, and usability. And we've tried our best to get as close to the past in terms of the things that are -- that people love about our ecosystem as we can, but we are going to fall short of providing the maximum amount that we could supply, because we need to comply with the regulation. And so, in terms of predicting the choices that developers and users will make, it's very difficult to do that with precision. And so, I will see what happens in March. Luca Maestri : Yes, Amit. As Tim said, these are changes that we're going to be implementing in March. A lot will depend on the choices that will be made. Just to keep it in context, the changes applied to the EU market, which represents roughly 7% of our global app store revenue. Amit Daryanani : Perfect. That's a really good perspective to have. Thank you very much. Suhasini Chandramouli : Thank you, Amit. Operator, can we have the next question please? Operator : Our next question is from Aaron Rakers with Wells Fargo. Please go ahead. Aaron Rakers : Yes. Thanks for taking the question. I have two as well as you would imagine. I guess, the first question I wanted to just ask maybe unpack a little bit more, just remarkable trends that we're seeing in your product gross margin specifically. So, I'm curious as we look forward, I guess on this last quarter, where there any kind of benefits you're seeing from like just the purchase component, obligations that you've put in place, let's say, a year ago, and that flowing through. And how are you thinking about the component pricing environment as we think about that gross margin into the March quarter and looking-forward? Luca Maestri : Yes. On the product side and then maybe I'll make a comment in total for the company. On the product side, our gross margins increased sequentially 280 basis points. So, obviously, a very significant increase. I would say the two primary components of the increase are a favorable mix. Of course, iPhone did very well. We did very well with our high-end models. And leverage, of course, it's the biggest quarter of the year for us and so we get the leverage effect. We had a partial offset, negative impact from foreign exchange. But net-net, obviously, very significant improvement. And we had very similar dynamics on the Services side where we increased sequentially 190 basis points, also, in this case, due to a more favorable mix. And so, the combined effect of the two businesses gave us the 45.9% at the total company level, which is up 70% sequentially. You've heard from my prepared remarks that we are guiding total company gross margin to 46% to 47%, which is an additional expansion of margins compared to the already very strong results of the December quarter. Aaron Rakers : Okay. And then, the second question I was just going to ask. Tim, you alluded to kind of your excitement around generative AI and some announcements that we should think about maybe later this year. One of the things that stands out for me is that, your capital expenditures has actually come down this last year. I'm curious as you look to lean in more to generative AI, is there something we should consider about the CapEx intensity at Apple to make investments to really set the table for generative AI, kind of platform as we move forward? Just given some of the things that we've seen from some other large tech companies. Luca Maestri : I'll take the question, Aaron. We've always said, we will never underinvest in the business. So, we are making all the investments that are necessary throughout our product development, software development, services development. And so, we will continue to invest in every area of the business and at the appropriate level. And we're very excited about what's in store for us for the rest of the year. Aaron Rakers : Thank you. Suhasini Chandramouli : Thanks, Aaron. Operator, can we have the next question please? Operator : Our next question is from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar : Yes. Hi. Thanks for taking my question. I have two of them. First one for Luca, a clarification on a question. The $5 billion impact in March quarter, is that for product revenue or is that total company revenue. And along the same part, you highlighted the strong gross margins. And I understand last year, some of the commodity costs were deflationary, buy looks like it’s going to be inflationary right now. And also you've done some of the Mac conversions that -- the silicon conversions. So I'm just trying to figure out how much juice is there more to squeeze on the gross margin side? And then I'll follow up for Tim. Luca Maestri : Yes. The -- so the first part of the question was around -- oh, the $5 billion. The $5 billion, as I mentioned, a year ago we had this disruption of supply on iPhone 14 Pro and Pro Max because of the factory shutdown due to the COVID-19 situation. And so, essentially there was pent up demand as we exited December quarter, they got fulfilled and we also did the channel fill associated with it during the March quarter. So close to $5 billion that I mentioned is entirely related to iPhone. On the gross margin side, obviously, we are at very high levels of gross margin. And I'll repeat what I said before, we've had good expansion over the last few quarters and now we are guiding to 46% to 47% and that takes into account everything that is going on, which is, the commodity environment, which is the foreign exchange situation, and obviously the product and services mix. And the outcome of this is the guidance, which obviously is very strong and we're very happy with it. Krish Sankar : Thanks a lot, Luca. And then I have a follow-up for Tim. Tim, it was very interesting to hear your comments on enterprise. And historically, Apple has been a consumer centric company. And now with Vision Pro, Mac, it's sort of penetrating more into the enterprise. I'm kind of curious how to think about Apple of the future? Would it still be consumer centric or do you think it's going to be more enterprise focused also as we get into the future? Thank you very much. Tim Cook : We've really concluded that we can do both. That if you look at it, what has happened over the last several years is that, employees are in a position in many companies to choose their own technology that is the best for them. And so, it sort of took some of the central command from the traditional company and decentralized the decision-making. That is a huge advantage for Apple, because there's a lot of people out there that want to use a Mac. They're using a Mac at home. They'd like to use one in the office as well. iPad has also benefited from that. Vision Pro, it's -- when you look at the ton of use cases, I mean, we're starting with a million apps and 600 plus that are -- have been designed particularly for Vision Pro. When I look at what is coming out of Enterprise, it's some of the most innovative things I've seen come out of Enterprise in a long time. And so, I think there's a like there is for the Mac and iPad, and of course, iPhone has been in enterprise since the early days of iPhone. I think there's a nice opportunity there for Vision Pro as well. Krish Sankar : Great. Thanks a lot Tim. Very interesting to hear. Thank you. Suhasini Chandramouli : Thank you, Krish. Operator, can we have the next question, please? Operator : Our next question is from David Vogt with UBS. Please go ahead. David Vogt : Great. Thanks guys. And I have two questions as well. So, Tim and Luke, I appreciate the strength in the emerging markets like India and the other names that you kind of listed on the call, but can you maybe spend some time on the Americas? Obviously, that was relatively flat, you touched on China, but what are you seeing in that market from the carriers here in the States? And is the sales cycle elongating or the replacement cycle elongating? And in your view what has to change to kind of maybe re-accelerate that business in the America's, particular in the iPhone business? And then on sort of -- I just want to make sure I understand sort of the guide. So when I think about the $5 billion pull forward last year in the March quarter from a channel fill perspective, even if I back it out last quarter or I back it up this quarter, the March quarter, this would be sort of the softest quarter since the COVID pandemic. Obviously, I know the Americas as I just touched on is a little bit softer than China, which you cleared up earlier. But how do you think about the differences in sort of the macro conditions by region? And again, do you have a sense for are we nearing a trough from a macro demand perspective or how long do you think this particular weakness persists? Thanks. Tim Cook : Let me take the first part of your question about America. If you look at the U.S., which obviously drives the vast, vast majority of the revenue in America, we grew in the December quarter from an iPhone business point of view and the install base hit an all-time high. If you look at the replacement cycle, it's very difficult to measure the replacement cycle at any given point. And so, what we focus on internally a lot is the active install base and the -- obviously, the sales over usually a cycle and we feel better about those things. If you look at the -- who's selling what in the U.S., the iPhone is four out of the top five selling smartphones in the US. And of course, the customer satisfaction in the U.S. as we alluded to earlier is 99%. So we feel very, very good about what our position is in the U.S. Luca Maestri : And I would add to that, keep in mind, obviously, the extra week that we had a year ago that obviously makes the compare more -- a bit distorted. On the March quarter guide, I would point to you that, obviously, the COVID years had a lot of, let's say, turmoil in it, a lot of volatility that typically you wouldn't see. If you look at our sequential progression from December to March this year versus pre-COVID versus like a more normal environment, it's actually stronger than those years. David Vogt : Got it. Thanks, guys. Suhasini Chandramouli : Thank you, David. Operator, can we have the last question, please? Operator : Thank you. Our last question is from Ben Reitzes with Melius Research. Please go ahead. Ben Reitzes : Yes. Hi. Thanks. Appreciate it. Two questions, if I can sneak them in. Just wanted to clarify on China. Tim, I think last quarter you still thought it was a growth market. Obviously, there's some concerns with the -- recently and given what we saw in the quarter, is there something that we can kind of point to where you feel that that market can resume growth in the future? And I'm wondering if you're still upbeat about that prospect. And then I just have a quick follow up. Tim Cook : Ben, we've been in China for 30 years. And I remain very optimistic about China over the long term. And I feel good about hitting a new install base number, high watermark and very good about the growth in upgraders year-over-year during the quarter. Ben Reitzes : Great. Thanks Tim. And just in terms of AI, I know you're not going to talk about your plans, but do you believe -- are you a believer in the edge thesis that AI and processing on smartphones and devices like yours is going to have a huge role in AI and AI apps and that it's something you guys can take advantage of. Tim Cook : Let me just say that, I think there's a huge opportunity for Apple with GenAI and AI. And without getting into to more details and getting out in front of myself. Ben Reitzes : Thanks Tim. Tim Cook : Yes, Thanks, Ben. Suhasini Chandramouli : All right. Thank you Ben. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 0106234 followed by the pound sign. These replays will be available by approximately 5 p.m. Pacific time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142 and financial analysts can contact me, Suhasini Chandramouli, with additional questions at 408-974-3123. Thanks again for joining us. Operator : Once again, this does conclude today's conference. We do appreciate your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,024	2	2024Q2	2024Q2	2024-05-02	6.402	6.475	6.954	7.108	11.16	26.14	30.15	Suhasini Chandramouli : Good Afternoon, and welcome to the Apple Q2 Fiscal Year 2024 Earnings Conference Call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed Annual Report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is reporting revenue of $90.8 billion and an EPS record of $1.53 for the March quarter. We set revenue records in more than a dozen countries and regions. These include, among others, March quarter records in Latin-America and the Middle East, as well as Canada, India, Spain and Turkey. We also achieved an all-time revenue record in Indonesia, one of the many markets where we continue to see so much potential. In services, we set an all-time revenue record, up 14% over the past year. Keep in mind, as we described on the last call, in the March quarter a year-ago, we were able to replenish iPhone channel inventory and fulfill significant pent-up demand from the December quarter COVID-related supply disruptions on the iPhone 14 Pro and 14 Pro Max. We estimate this one-time impact added close to $5 billion to the March quarter revenue last year. If we remove this from last year's results, our March quarter total company revenue this year would have grown. Despite this impact, we were still able to deliver the records I described. Of course, this past quarter, we were thrilled to launch Apple Vision Pro and it has been so wonderful to hear from people who now get to experience the magic of spatial computing. They describe the impossible becoming possible right before their eyes and they share their amazement and their emotions about what they can do now, whether it's reliving their most treasured memories or having a movie theater experience right in their living room. It's also great to see the enthusiasm from the enterprise market. For example, more than half of the Fortune 100 companies have already bought Apple Vision Pro units and are exploring innovative ways to use it to do things that weren't possible before, and this is just the beginning. Looking ahead, we're getting ready for an exciting product announcement next week that we think our customers will love. And next month, we have our Worldwide Developers Conference, which has generated enormous enthusiasm from our developers. We can't wait to reveal what we have in-store. We continue to feel very bullish about our opportunity in Generative AI. We are making significant investments, and we're looking forward to sharing some very exciting things with our customers soon. We believe in the transformative power and promise of AI, and we believe we have advantages that will differentiate us in this new era, including Apple's unique combination of seamless hardware, software and services integration, groundbreaking Apple's silicon, with our industry-leading neural engines and our unwavering focus on privacy, which underpins everything we create. As we push innovation forward, we continue to manage thoughtfully and deliberately through an uneven macroeconomic environment and remain focused on putting our users at the center of everything we do. Now let's turn to our results for the March quarter across each product category, beginning with iPhone. iPhone revenue for the March quarter was $46 billion, down 10% year-over-year. We faced a difficult compare over the previous year due to the $5 billion impact that I mentioned earlier. However, we still saw growth on iPhone in some markets, including Mainland China, and according to Kantar during the quarter, the two best-selling smartphones in Urban China were the iPhone 15 and iPhone 15 Pro Max. I was in China recently where I had the chance to meet with developers and creators who are doing remarkable things with iPhone. And just a couple of weeks ago, I visited Vietnam, Indonesia and Singapore, where it was incredible to see all the ways customers and communities are using our products and services to do amazing things. Everywhere I travel, people have such a great affinity for Apple, and it's one of the many reasons I'm so optimistic about the future. Turning to Mac. March quarter revenue was $7.5 billion, up 4% from a year ago. We had an amazing launch in early March with the new 13-inch and 15-inch MacBook Air. The world's most popular laptop is the best consumer laptop for AI with breakthrough performance of the M3 chip and it’s even more powerful neural engine. Whether it's an entrepreneur starting a new business or a college student finishing their degree, users depend on the power and portability of MacBook Air to take them places they couldn't have gone without it. In iPad, revenue for the March quarter was $5.6 billion, 17% lower year-over-year, due to a difficult compare with the momentum following the launch of M2 iPad Pro and the 10th Generation iPad last fiscal year. iPad continues to stand apart for its versatility, power and performance. For video editors, music makers and creatives of all kinds, iPad is empowering users to do more than they ever could with a tablet. Across Wearables, Home and Accessories, March quarter revenue was $7.9 billion, down 10% from a year-ago due to a difficult launch compare on Watch and AirPods. Apple Watch is helping runners go the extra mile on their wellness journeys, keeping hikers on course with the latest navigation capabilities in watchOS 10, and enabling users of all fitness levels to live a healthier day. Across our watch lineup, we're harnessing AI and machine-learning to power lifesaving features like a regular rhythm notifications and fall detection. I often hear about how much these features mean to users and their loved ones and I'm thankful that so many people are able to get help in their time of greatest need. As I shared earlier, we set an all-time revenue record in services with $23.9 billion, up 14% year-over-year. We also achieved all-time revenue records across several categories and geographic segments. Audiences are tuning in on screens large, small and spatial and are enjoying Apple TV+ Originals like Palm Royale and Sugar. And we have some incredible theatrical releases coming this year, including Wolves, which reunites George Clooney and Brad Pitt. Apple TV+ productions continue to be celebrated as major awards contenders. Since launch, Apple TV+ productions have earned more than 2,100 award nominations and 480 wins. Meanwhile, we're enhancing the live sports experience with a new iPhone app, Apple Sports. This free app allows fans to follow their favorite teams and leagues with real-time scores, stats and more. Apple Sports is the perfect companion for MLS Season Pass subscribers. Turning to retail, our stores continued to be vital spaces for connection and innovation. I was delighted to be in Shanghai for the opening of our latest flagship store. The energy and enthusiasm from our customers was truly something to behold. And across the United States, our incredible retail teams have been sharing Vision Pro demos with customers, delighting them with a profound and emotional experience of using it for the very first time. Everywhere we operate and everything we do, we're guided by our mission to enrich users' lives and lead the world better than we found it, whether we're making Apple podcasts more accessible with a new transcripts feature or helping to safeguard iMessage users' privacy with new protections that can defend against advances in quantum computing. Our environmental work is another great example of how innovation and our values come together. As we work toward our goal of being carbon-neutral across all of our products by 2030, we are proud of how we've been able to innovate and do more for our customers while taking less from the planet. Since 2015, Apple has cut our overall emissions by more than half, while revenue grew nearly 65% during that same time period. And we're now using more recycled materials in our products than ever before. Earlier this spring, we launched our first-ever product to use 50% recycled materials with a new M3-powered MacBook Air. We're also investing in new solar and wind power in the U.S. and Europe, both to power our growing operations and our users' devices. And we're working with partners in India and the U.S. to replenish 100% of the water we use in places that need it most with the goal of delivering billions of gallons of water benefits over the next two decades. Through our Restore Fund, Apple has committed $200 million to nature-based carbon removal projects. And last month, we welcomed two supplier partners as new investors, who will together invest up to an additional $80 million in the fund. Whether we're enriching lives of users across the globe or doing our part to be a force for good in the world, we do everything with a deep sense of purpose at Apple. And I'm proud of the impact we've already made at the halfway point in a year of unprecedented innovation. I couldn't be more excited for the future we have ahead of us, driven by the imagination and innovation of our teams and the enduring importance of our products and services in people's lives. With that, I'll turn it over to Luca. Luca Maestri : Thank you, Tim, and good afternoon, everyone. Revenue for the March quarter was $90.8 billion, down 4% from last year. Foreign exchange had a negative year-over-year impact of 140 basis points on our results. Products revenue was $66.9 billion, down 10% year-over-year due to the challenging compare on iPhone that Tim described earlier, which was partially offset by strength from Mac. And thanks to our unparalleled customer satisfaction and loyalty and a high number of customers who are new to our products, our installed base of active devices reached an all-time high across all products and all geographic segments. Services revenue set an all-time record of $23.9 billion, up 14% year-over-year with record performance in both developed and emerging markets. Company gross margin was 46.6%, up 70 basis points sequentially, driven by cost savings and favorable mix to services, partially offset by leverage. Products gross margin was 36.6%, down 280 basis points sequentially, primarily driven by seasonal loss of leverage and mix, partially offset by favorable costs. Services gross margin was 74.6%, up 180 basis points from last quarter due to a more favorable mix. Operating expenses of $14.4 billion were at the midpoint of the guidance range we provided and up 5% year-over-year. Net income was $23.6 billion, diluted EPS was $1.53 and a March quarter record, and operating cash flow was strong at $22.7 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $46 billion, down 10% year-over-year, due to the almost $5 billion impact from a year ago that Tim described earlier. Adjusting for this one-time impact, iPhone revenue would be roughly flat to last year. Our iPhone active installed base grew to a new all-time high in total and in every geographic segment. And during the March quarter, we saw many iPhone models as the top-selling smartphones around the world. In fact, according to a survey from Kantar, an iPhone was the top-selling model in the U.S., Urban China, Australia, the U.K., France, Germany and Japan. And the iPhone 15 family continues to be very popular with customers. 451 Research recently measured customer satisfaction at 99% in the U.S. Mac revenue was $7.5 billion, up 4% year-over-year, driven by the strength of our new MacBook Air, powered by the M3 chip. Customers are loving the incredible AI performance of the latest MacBook Air and MacBook Pro models. And our Mac installed base reached an all-time high with half of our MacBook Air buyers during the quarter being new to Mac. Also customer satisfaction for Mac was recently reported at 96% in the U.S. iPad generated $5.6 billion in revenue, down 17% year-over-year. iPad continued to face a challenging compare against the launch of the M2 iPad Pro and iPad 10th Generation from last year. At the same time, the iPad installed base has continued to grow and is at an all-time high as over half of the customers who purchased iPads during the quarter were new to the product. In addition, the latest reports from 451 Research indicated customer satisfaction of 96% for iPad in the US. Wearables, Home and Accessories revenue was $7.9 billion, down 10% year-over-year due to a difficult launch compare. Last year, we had the continued benefit from the launches of the AirPods Pro second-generation, the Watch SE and the first Watch Ultra. Apple Watch continues to attract new customers, with almost two-thirds of customers purchasing an Apple Watch during the quarter being new to the product, sending the Apple Watch installed base to a new all-time high and customer satisfaction was recently measured at 95% in the U.S. In services, as I mentioned, total revenue reached an all-time record of $23.9 billion, growing 14% year-over-year with our installed-base of active devices continuing to grow at a nice pace. This provides a strong foundation for the future growth of the services business as we continued to see increased customer engagement with our ecosystem. Both transacting accounts and paid accounts reached a new all-time high with paid accounts growing double-digits year-over-year. And paid subscriptions showed strong double-digit growth. We have well over $1 billion paid subscriptions across the services on our platform, more than double the number that we had only four years ago. We continued to improve the breadth and quality of our current services from creating new games on Arcade and great new shows on TV+ to launching additional countries and partners for Apple Pay. Turning to enterprise, our customers continued to invest in Apple products to drive productivity and innovation. We see more and more enterprise customers embracing the Mac. In Healthcare, Epic Systems, the world's largest electronic medical record provider, recently launched its native app for the Mac, making it easier for healthcare organizations like Emory Health to transition thousands of PCs to the Mac for clinical use. And since the launch of Vision Pro last quarter, many leading enterprise customers have been investing in this amazing new product to bring spatial computing apps and experiences to life. We are seeing so many compelling use cases from aircraft engine maintenance training at KLM Airlines to real-time team collaboration for racing at Porsche to immersive kitchen design at Lowe's. We couldn't be more excited about the spatial computing opportunity in enterprise. Taking a quick step back, when we look at our performance during the first-half of our fiscal year, total company revenue was roughly flat to the prior year in spite of having one less week of sales during the period and some foreign exchange headwinds. We were particularly pleased with our strong momentum in emerging markets, as we set first-half revenue records in several countries and regions, including Latin-America, the Middle East, India, Indonesia, the Philippines and Turkey. These results, coupled with double-digit growth in services and strong levels of gross margin, drove a first half diluted EPS record of $3.71, up 9% from last year. Let me now turn to our cash position and capital return program. We ended the quarter with $162 billion in cash and marketable securities. We repaid $3.2 billion in maturing debt and commercial paper was unchanged sequentially, leaving us with total debt of $105 billion. As a result, net cash was $58 billion at the end of the quarter. During the quarter, we returned over $27 billion to shareholders, including $3.7 billion in dividends and equivalents and $23.5 billion through open-market repurchases of $130 million Apple's shares. Given the continued confidence we have in our business now and into the future, our Board has authorized today an additional $110 billion for share repurchases, as we maintain our goal of getting to net cash-neutral over time. We are also raising our dividend by 4% to $0.25 per share of common stock, and we continued to plan for annual increases in the dividend going forward as we've done for the last 12 years. This cash dividend will be payable on May 16, 2024 to shareholders of record as of May 13, 2024. As we move ahead into the June quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we are providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. We expect our June quarter total company revenue to grow low-single-digits year-over-year in spite of a foreign exchange headwind of about 2.5 percentage points. We expect our services business to grow double-digits at a rate similar to the growth we reported for the first-half of the fiscal year. And we expect iPad revenue to grow double-digits. We expect gross margin to be between 45.5% to -- and 46.5%. We expect OpEx to be between $14.3 billion and $14.5 billion. We expect OI&E to be around $50 million, excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. With that, let's open the call to questions. Suhasini Chandramouli : Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator : Certainly. We will go ahead and take our first question from Mike Ng with Goldman Sachs. Please go ahead. Mike Ng : Hey, good afternoon. Thank you very much for the question. I have two, first, I'll ask about the June quarter guidance. The revenue outlook for low-single digits growth, I was wondering if you could run through some of the product assumptions, iPhone, like what kind of gives you confidence around that? And then on the service momentum, what was better than expected in the quarter? And then I just have a quick follow-up. Luca Maestri : Hey, Mike. It's Luca. On the outlook, what we said is we expect to grow low-single-digits in total for the company. We expect services to grow double-digits at a rate that is similar to what we've done in the first-half of our fiscal year. And we've also mentioned that iPad should grow double-digits. This is the color that we're providing for the June quarter. In services, we've seen a very strong performance across the board. We've mentioned, we've had records in several categories, in several geographic segments. It's very broad based, our subscription business is going well. Transacting accounts and paid accounts are growing double-digits. And also we've seen a really strong performance both in developed and emerging markets. So very pleased with the way the services business is going. Mike Ng : Great. Thank you. And I wanted to ask about, as Apple leans more into AI and Generative AI, should we expect any changes to the historical CapEx cadence that we've seen in the last few years of about $10 billion to $11 billion per year or any changes to, you know, how we may have historically thought about the split between tooling, data center and facilities? Thank you very much. Luca Maestri : Yes. We are obviously very excited about the opportunity with Gen AI. We obviously are pushing very hard on innovation on every front and we've been doing that for many, many years. Just during the last five years, we spent more than a $100 billion in research and development. As you know, on the CapEx front, we have a bit of a hybrid model where we make some of the investments ourselves. In other cases, we share them with our suppliers and partners on the manufacturing side, we purchased some of the tools and manufacturing equipment. In some of the cases, our suppliers make the investment. On the -- and we do something similar on the data center side. We have our own data center capacity and then we use capacity from third parties. It's a model that has worked well for us historically and we plan to continue along the same lines going forward. Mike Ng : Excellent. Thank you very much. Suhasini Chandramouli : Awesome. Thank you, Mike. Operator, can we have the next question, please? Operator : Our next question is from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan : Yes, thank you so much. Tim, can you talk about the implications to Apple from the changes driven by EU DMA? You've had to open up third-party app stores, clearly disposes some security risks on the one-hand, which can dilute the experience, but also lower payments from developers to Apple. What are you seeing developers choose in these early days and consumers choose in terms of these third-party app stores? And I have a follow-up. Tim Cook : It's really too early to answer the question. We just implemented in March, as you probably know, in the European Union, the alternate app stores and alternate billing, et cetera. So we're focused on complying while mitigating the impacts to user privacy and security that you mentioned. And so that's our focus. Wamsi Mohan : Okay. Thank you, Tim. And Luca, I was wondering if you could comment a bit on the product gross margins, the sequential step down. You noted both mix and leverage. Any more color on the mix, if you could share if customers are at all starting to mix down across product lines or is this more a mix across product lines? Just trying to get some color on customer behavior given some of the broader inflationary pressures. Thank you so much. Luca Maestri : On a sequential basis, yes, we were down. It's primarily the fact that we had a slightly different mix of products than the previous one. Obviously, leverage plays a big role as we move from the holiday quarter into the -- into, you know, a more typical quarter. So I would say primarily leverage in a different mix of products. I mean, we haven't seen anything different in terms within the product categories, we haven't seen anything particular. Wamsi Mohan : Thank you so much. Suhasini Chandramouli : Thanks, Wamsi. We'll take the next question, please. Operator : Our next question is from Erik Woodring with Morgan Stanley. Please go ahead. Erik Woodring : Great. Thanks so much for taking my questions. Maybe my first one, Tim, you've obviously mentioned your excitement around Generative AI multiple times. I'm just curious how Apple is thinking about the different ways in which you can monetize this technology because historically software upgrades haven't been a big factor in driving product cycles. And so could AI be potentially different? And how could that impact replacement cycles? Is there any services angle you'd be thinking? Any early color that you can share on that? And then I have a follow up, please. Thanks. Tim Cook : I don't want to get in front of our announcements, obviously. I would just say that we see Generative AI as a very key opportunity across our products. And we believe that we have advantages that set us apart there. And we'll be talking more about it in as we go through the weeks ahead. Erik Woodring : Okay. Very fair. Thank you. And then Luca, maybe to just follow up on Wamsi's comments or question. There's a broad concern about the headwind that rising commodity costs have on your product gross margins. Wondering if you could just clarify for us if we take a step back and look at all of the components and commodities that go into your products kind of collectively, are we -- are you seeing these costs rising? Are they falling? What tools do you have to try to help and mitigate some rising costs if at all, rising input costs if at all? Thank you so much. Luca Maestri : Yes. I mean during the last quarter, commodity costs, and in general, component costs have behaved favorably to us. On the memory front, prices are starting to go up. They've gone up slightly during the March quarter. But in general, I think it's been a period not only this quarter, but the last several quarters where, you know, commodities have behaved well for us. Commodities going cycles and so there's obviously always that possibility. Keep in mind that we are starting from a very high level of gross margins. We reported 46.6%, which is something that we haven't seen in our company in decades. And so we're starting from a good point. As you know, we try to buy ahead when the cycles are favorable to us. And so we will try to mitigate if there are headwinds. But in general, we feel particularly for this cycle, we are in good shape. Erik Woodring : Thank you so much. Suhasini Chandramouli : Great. Thank you, Erik. Operator, we'll take the next question, please. Operator : Our next question is from Ben Reitzes with Melius. Please go ahead. Ben Reitzes : Hey, thanks for the question. And hey, Tim, I was wondering if I could ask the China question again. Is there any more color from your visit there that gives you confidence that you've reached a bottom there and that it's turning? And I know you've been -- you've continued to be confident there in the long-term. Just wondering if there was any color as to when you think that the tide turns there? Thanks a lot. And I have a follow-up. Tim Cook : Yes, Ben, if you look at our results in Q2 for Greater China, we were down 8%. That's an acceleration from the previous quarter in Q1. And the primary driver of the acceleration was iPhone. And if you then look at iPhone within Mainland China, we grew on a reported basis. That's before any kind of normalization for the supply disruption that we mentioned earlier. And if you look at the top-selling smartphones, the Top 2 in Urban China are iPhones. And while I was there, it was a great visit and we opened a new store in Shanghai and the reception was very warm and highly energetic, and so I left there having a fantastic trip and enjoyed being there. And so I maintain a great view of China in the long-term. I don't know how each and every quarter goes and each and every week. But over the long haul, I have a very positive viewpoint. Ben Reitzes : Okay. Hey, thanks, Tim. And then my follow-up, I want to ask this carefully though. It's a -- there's a fear out there that, you may lose some traffic acquisition revenue. And I was wondering if you thought AI from big picture and it doesn't have to be on a long-term basis, I mean from a big picture, if AI is an opportunity for you to continue to monetize your mobile real estate, just how you -- how maybe investors can think about that from a big picture, just given that's been one of the concerns that's potentially been an overhang, of course, due to, you know, a lot of the news and the media around some of the legal cases? And I was wondering if there's just a big-picture color you could give that makes us kind of think about it better and your ability to sort of continue to monetize that real estate? Thanks a lot. Tim Cook : I think AI, Generative AI and AI, both are big opportunities for us across our products. And we'll talk more about it in the coming weeks. I think there are numerous ways there that are great for us. And we think that we're well-positioned. Ben Reitzes : Thanks, Tim. Tim Cook : Yes. Suhasini Chandramouli : Thanks, Ben. Can we have the next question, please? Operator : Thank you. Our next question is from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar : Yes, hi. Thanks for taking my question. Again, sorry to beat the AI haul. But Tim, I know you don't want to like reveal a lot. But I'm just kind of curious, because last quarter you spoke about how you're getting traction in enterprise. Is the AI strategy going to be both consumer and enterprise or is it going to be one after the other? Any color would be helpful? And then, I have a follow-up for Luca. Tim Cook : Our focus on enterprise has been and you know through the quarter and the quarters that preceded it on selling iPhones and iPads and Macs and we recently added Vision Pro to that. And we're thrilled with what we see there in terms of interest from big companies buying some to explore ways they can use it. And so I see enormous opportunity in the enterprise. I wouldn't want to cabin that to AI only. I think there's a great opportunity for us around the world in the enterprise. Krish Sankar : Got it. Very helpful. And then for Luca, you know, I'm kind of curious on -- given the macro-environment, on the hardware side, are you seeing a bias towards like standard iPhone versus the Pro model? The reason I'm asking the question is that there's a weaker consumer spending environment, yet your services business is still growing and has amazing gross margins. So I'm just trying to like square the circle over there. Thank you. Luca Maestri : I'm not sure I fully understand the question, but in general, what we are seeing on the product side, we continued to see a lot of interest at the top of the range of our products. And I think it's a combination of consumers wanting to purchase the best product that we offer in the different categories and our ability to make those purchases more affordable over time. We've introduced several financing solutions from installment plans to trading programs that reduce the affordability threshold and therefore, customers tend to buy -- want to buy at the top of the range that is very valuable for us in developed markets, but particularly in emerging markets where the affordability issues are more pronounced. But in general, over the last several years and that is also reflected in our gross margins, over the last several years, we've seen this trend, which we think is pretty sustainable. Krish Sankar : Got it. Thank you very much, Luca, and thanks, Tim. Suhasini Chandramouli : Thank you, Krish. Operator, we'll have the next question, please. Operator : Our next question is from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani : Thanks for taking my question. I have two as well. You know, I guess, first off on capital allocation, you folks have about $58 billion of net cash right now. As you think about eventually getting to this net cash-neutral target, do you think at some point, Apple would be open to taking on leverage on the balance sheet and continuing the buyback program? Or is it more like once you get to this neutral position, it's going to be about returning free cash flow back to shareholders? I'm just wondering, how do you think about leverage on your balance sheet over time and what sort of leverage do you think you'd be comfortable taking on? Luca Maestri : Hey, Amit. This is Luca. I would say one step at a time, we have put out this target of getting to net cash-neutral several years ago and we're working very hard to get there. Our free cash flow generation has been very strong over the years, particularly in the last few years. And so as you've seen this year, we've increased the amount that we're allocating to the buyback. For the last couple of years, we were doing $90 billion, now we're doing $110 billion. So let's get there first. It's going to take a while still. And then when we are there, we're going to reassess and see what is the optimal capital structure for the company at that point in time. Obviously, there's going to be a number of considerations that we will need to look at when we get there. Amit Daryanani : Fair enough. I figure it's worth trying anyway. If I go back to this China discussion a bit and, you know, Tim, I think your comments around growth in iPhones in Mainland China is really notable. Could you step back, I mean, these numbers are still declining at least Greater China on a year-over-year basis in aggregate. Maybe just talk about what are you seeing from a macro basis in China and then at least annual decline -- or year-over-year declines that we're seeing. Do you think it's more macro driven or more competitive driven over there? That would be helpful. Tim Cook : Yes, I can only tell you what we're seeing. And so I don't want to present myself as a economist. So I'll steer clear of that. From what we saw was an acceleration from Q1, and it was driven by iPhone and iPhone in Mainland China before we adjust for this $5 billion impact that we talked about earlier did grow. That means the other products didn't fare as well. And so we clearly have work there to do. I think it has been and is through last quarter, the most competitive market in the world. And I -- so I, you know, wouldn't say anything other than that. I've said that before, and I believe that it was last quarter as well. And -- but if you step back from the 90-day cycle, what I see is a lot of people moving into the middle class, a -- we try to serve customers very well there and have a lot of happy customers and you can kind of see that in the latest store opening over there. And so I continue to feel very optimistic. Amit Daryanani : Great. Thank you. Suhasini Chandramouli : Thanks, Amit. Operator, we'll take the next question, please. Operator : Our next question is from David Vogt with UBS. Please go ahead. David Vogt : Great. Thanks guys for taking my question. I'm going to roll the two together, so you guys have them both. So Luca obviously, I'm trying to parse through the outlook for the June quarter. And just based on the quick math, it looks like all things being equal, given what you said, the iPhone business is going to be down mid-single-digits again in the June quarter. And if that's the case and maybe this is for Tim obviously, how are you thinking about the competitive landscape in the context of what you just said maybe outside of China and what changes sort of, the consumer demand or receptivity to new devices because we've been in this malaise for a while. Is it really this AI initiative that a lot of companies are pursuing? And do you think that changes sort of the demand drivers going forward? Or is it just really more of a timing issue in terms of the replacement cycle is a little bit long in the tooth, and we see a bit of an upgrade cycle at some point, maybe later this year into next year? Thanks. Tim Cook : I do see a key opportunity, as I've mentioned before with Generative AI with all of our devices or the vast majority of our devices. And so I think that if you look out that that's not within the next quarter or so and we don't guide at the product level, but I'm extremely optimistic. And so that -- that's kind of how I view it. In terms of the -- I'll let Luca comment on the outlook portion of it. I think if you step back on iPhone though and you make this adjustment from the previous year, our Q2 results would be flattish on iPhone. And so that's how we performed in Q2. Luca Maestri : Yes, David, on the outlook, I'll only repeat what we said before, and this is the color that we're providing for the quarter. We do expect to grow in total, low-single-digits. And we do expect services to grow double-digits, and we expect iPad to grow double-digits for the rest. I'll let you make assumptions and then we will report three months from now. David Vogt : Great. Thanks guys. I'll get back in the queue. Suhasini Chandramouli : Thanks, David. Operator, we'll take the next question, please. Operator : Our next question is from Samik Chatterjee with JPMorgan. Please go ahead. Samik Chatterjee : Hi, thanks for taking my question, and I have a couple as well. Maybe for the first one, your services growth accelerated from 11% growth to 14%. If you can sort of dig into the drivers of where or which parts of services did you really see that acceleration? And why it isn't a bit more sustainable as we think about the next quarter? Because I believe you're guiding more to sort of averaging out the first half of the year for the next quarter. So just curious what were the drivers and why not have it a bit more sustainably sort of improve as we go through the remainder of the year? And I have a quick follow-up. Thank you. Luca Maestri : So a number of things on services. First of all, the overall performance was very strong. As I said earlier, all-time records in both developed and emerging markets. So we see our services do well across the world. Records in many of our services categories. There are some categories that are growing very fast also because they are relatively smaller in the scheme of our services business like cloud, video, payment services. You know, those all set all-time revenue records. And so we feel very good about the progress that we're making in services. As we go forward, I'll just point out that if you look at our growth rates a year ago, they improved during the course of the fiscal year last year. So the comps for the services business become a bit more challenging as we go through the year. But in general, as I mentioned, we still expect to grow double-digits in the June quarter at a rate that is very similar to what we've done in the first half. Samik Chatterjee : Got it. Got it. And for my follow up, if I can ask you more specifically about the India market. Obviously, you continue to make new records in terms of revenue in that market. How much of the momentum you're seeing would you associate with your sort of retail strategy in that market, retail expansion relative to maybe some of the supply change or the sort of manufacturing changes or strategy you've undergone or taken in that market itself. Any thoughts around that would be helpful? Tim Cook : Sure. We did grow strong double-digit. And so we were very, very pleased about it. It was a new March quarter revenue record for us. As you know, as I've said before, I see it as an incredibly exciting market and it's a major focus for us. In terms of the operational side or supply chain side, we are producing there, from a pragmatic point of view, you need to produce there to be competitive. And so yes, there the two things are linked from that point of view. But we have both operational things going on and we have go-to-market, and initiatives going on. We just opened a couple of stores as last year, as you know, and we see enormous opportunity there. We're continuing to expand our channels, and also working on the developer ecosystem as well. And we've been very pleased that there is a rapidly-growing base of developers there. And so, we're working all of the entire ecosystem from developer to the market to operations, the whole thing. And I just -- I could not be more excited and enthusiastic about it. Samik Chatterjee : Got it. Thank you. Thanks for that. Tim Cook : Yes. Suhasini Chandramouli : Thank you, Samik. Operator, we'll have the next question, please. Operator : Our next question is from. Please go ahead. Aaron Rakers : Yes, thanks for taking the questions, and I think I have to have two as well like everybody else. I guess, I'm going to go back to the China question. I guess, at a high level, the simple question is, when we look at the data points that have been repeatedly reported throughout the course of this quarter, I'm curious, Tim, you know, what are we missing? Like where do you think people are missing, Apple's iPhone traction within the China market, just at a high level, you know, given the data points that were reported throughout this course of the last quarter? Tim Cook : I can't address the data points. I can only address what our results are. And we did accelerate last quarter, and the iPhone grew in Mainland China. So that's what the results were. I can't bridge to numbers we didn't come up with. Aaron Rakers : Okay. And then as a quick follow-up, I know you guys haven't talked about this, you know, quantified it in quite some time. But I'm curious how we would characterize the channel inventory dynamics for iPhone? Tim Cook : Sure. The -- for the March quarter, we decreased channel inventory during the quarter. We usually decreased channel inventory during the Q2 timeframe. So that's not unusual. And we're very comfortable with the overall channel inventory. Aaron Rakers : Thank you. Tim Cook : Yes. Suhasini Chandramouli : Thank you, Aaron. Operator, we'll take the next question, please. Operator : Our next question is from Richard Kramer with Arete Research. Please go ahead. Richard Kramer : Thanks very much. I'm not going to ask about China, but you regularly call out all the rapid growth in many other emerging markets. So is Apple approaching a point where all of those other emerging markets in aggregate might crossover to become larger than your current $70 billion Greater China segments, and maybe investors could look at that for driving growth for the wider business? And then I have a follow-up for Luca. Thanks. Luca Maestri : I think, Richard, you're asking a really interesting question. We were looking at something similar recently. Obviously, China is by far the largest emerging market that we have. But when we started looking at places like India, like Saudi, like Mexico, Turkey, of course, Brazil and Mexico and Indonesia, the numbers are getting large, and we're very happy because these are markets where our market share is low, the populations are large and growing. And our products are really making a lot of progress with the -- in those markets. The level of excitement for the brand is very high. Tim was in Southeast Asia recently, and the level of excitement is incredibly high. So it is very good for us. And then -- and certainly, the numbers are getting larger all the time. And so the gap as you compare it to the numbers in China is reducing, and hopefully, that trajectory continues for a long time. Richard Kramer : Okay. And then as a follow-up, maybe for either of you, I mean, you're coming up on four years from what was incredibly popular iPhone 12 cycle. And, you know, given you're struggling to reduce your net -- your -- reach your net neutral cash position and your margins are sort of near highs, do you see ways to deploy capital more to spur replacement demand in your installed base either with greater device financing, more investment in marketing, more promotions. I mean, do you feel like you needed to produce those sort of margins or is it a more important to spur growth with replacement? Thanks. Tim Cook : I think innovation spurs the upgrade cycle, and as one thing, of course, there's economic factors as well that play in there. And what kind of offerings there are from our carrier partners and so forth. And so there's a number of variables in there. But we work all of those, and you know, we price our products for the value that we're delivering. And so that's how we look at it. Luca Maestri : And if I can add to Tim's comments, Richard, one of the things that when you look over the long arc of time that maybe is not fully understood is that we've gone through a long period of very strong dollar. And what that means given that our company sells more than 60% of our revenue is outside the United States. The demand for our products in those markets is stronger than the results that we report just because of the translation of those local currencies into dollars, right? And so that is something to keep in mind as you look at our results, right? And so we are making all the investments that are needed and Tim has talked about innovation. Obviously, we made a lot of progress with financing solutions, with trading programs and so on, and we will continue to make all those investments. Richard Kramer : Okay. Super. Thanks, guys. Suhasini Chandramouli : Thank you, Richard. Operator, can we take our last question, please. Operator : Our next question is from Atif Malik with Citi. Please go ahead. Atif Malik : Hi. Thank you for taking my questions, and I have two questions as well. First for Tim, for enterprise, specifically, what are some of the top two or three use cases on Vision Pro you're hearing most excitement? And then I have a follow-up for Luca. Tim Cook : Yes, the great thing is, I'm hearing about so many of them. I wouldn't say that one has emerged as the top, right now. The most impressive thing is that similar to the way people use a Mac, you use it for everything. People are using it for many different things in enterprise, and that varies from field service to training to healthcare related things like preparing a doctor for pre-op surgery or advanced imaging. And so the -- it commands control centers. And so it's an enormous number of different verticals. And you know our focus is on -- is growing that ecosystem and getting more apps and more and more enterprises engaged. And the event that we had recently, I can't overstate the enthusiasm in the room. It was extraordinary. And so we're off to a good start, I think, with the enterprise. Atif Malik : Great. And then Luca, I believe you mentioned that for the March quarter, the commodity pricing environment was favorable. Can you talk about what you're assuming for commodity pricing on memory and et cetera for the June quarter and maybe for the full-year? Luca Maestri : Yes, we provide guidance just for the current quarter. So I'll tell you about the, you know, the guidance. We're guiding to again to a very high level of gross margins, 45.5% to 46.5%. Within that guidance, we expect memory to be a slight headwind, not a very large one, but a slight headwind. And the same applies for foreign exchange. Foreign exchange will have a negative impact sequentially of about 30 basis points. Atif Malik : Thank you. Suhasini Chandramouli : Thank you, Atif. A replay of today's call will be available for two weeks on Apple podcasts as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 0467138 followed by the pound sign. These replays will be available by approximately 5 :00 P.M. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142, and financial analysts can contact me, Suhasini Chandramouli, with additional questions at 408-974-3123. Thank you again for joining us.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,024	3	2024Q3	2024Q3	2024-08-01	6.586	6.7	7.295	7.48	10.79886	30.48	29.5	Suhasini Chandramouli : Good afternoon and welcome to the Apple Q3 Fiscal Year 2024 Earnings Conference Call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today is Apple’s CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed Annual Report on Form 10-K and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you Suhasini. Good afternoon everyone and thanks for joining the call. Today, Apple is reporting a new June quarter revenue record of $85.8 billion, up 5% from a year ago and better than we had expected. EPS grew double digits to $1.40 and achieved a record for the June quarter. We also set quarterly revenue records in more than two dozen countries and regions, including Canada, Mexico, France, Germany, the UK, India, Indonesia, the Philippines, and Thailand. And we set an all-time revenue record in services which grew 14%. At our Worldwide Developers Conference, we were thrilled to unveil game-changing updates across our platforms, including Apple Intelligence. Apple Intelligence builds on years of innovation and investment in AI and Machine Learning. It will transform how users interact with technology, from writing tools to help you express yourself, to image playground, which gives you the ability to create fun images and communicate in new ways, to powerful tools for summarizing and prioritizing notifications. Siri also becomes more natural, more useful, and more personal than ever. Apple Intelligence is built on a foundation of privacy, both through on-device processing that does not collect users' data and through private cloud compute, a groundbreaking new approach to using the cloud, while protecting users' information powered by Apple silicon. We are also integrating ChatGPT into experiences within iPhone, Mac, and iPad, enabling users to draw on a broad base of world knowledge. We are very excited about Apple Intelligence and we remain incredibly optimistic about the extraordinary possibilities of AI and its ability to enrich customers' lives. We will continue to make significant investments in this technology and dedicate ourselves to the innovation that will unlock its full potential. Recently, we've also been excited to bring Apple Vision Pro to more countries, giving customers the chance to discover the remarkable capabilities of this magical device. Vision Pro users are customizing their own workspaces, watching movies on 100-foot screens, and exploring entire worlds with just a pinch of their fingertips. With more than 2,500 native spatial apps and 1.5 million compatible apps for Vision OS, the developer community continues to pioneer stunning spatial experiences that are only possible with Vision Pro. Last month, we announced that we're bringing some amazing new immersive content to Vision Pro, including new series, concerts, films, and more. And we've seen great interest for Vision Pro in the enterprise, where it can empower companies large and small to pursue their best ideas like never before. With each innovation, we're unlocking new ways of working, new ways of learning, and new ways of tapping into the unlimited promise of human potential. We are doing that across every product and every service. Now let me share more detail in our June quarter results, beginning with iPhone. iPhone revenue was $39.3 billion, down 1% year-over-year. On a constant currency basis, we grew compared to last year. Customers continue to praise the iPhone 15 lineup for its incredible battery life, exceptional cameras, and unmatched power and performance. And we are excited to bring incredible new features to the iPhone with iOS 18, making it more personal, capable, and intelligent than ever before. This update includes the biggest redesign of the Photos app, new customization options for the home screen, messages over satellite, and the introduction of Apple Intelligence. Apple Intelligence utilizes the power of our most advanced iPhones, the iPhone 15 Pro and Pro Max, offering a transformative set of capabilities. Mac revenue was $7 billion, up 2% from a year ago. Customers are loving the latest M3-powered 13 and 15 inch MacBook Air. With back-to-school season upon us, MacBook Air is the perfect companion for students on campus and small business owners, developers, and creatives of all kinds depend on Mac to do more than they ever could before. Powered by Apple silicon with its neural engine and privacy built in at the chip level, Macs are simply the best personal computers for AI. And every Mac we've shipped with Apple silicon since 2020, is capable of taking advantage of Apple Intelligence with Mac OS Sequoia. We also know the importance of security for our users and enterprises so we continue to advance protections across our products. Turning to iPad, revenue was $7.2 billion, 24% higher year-over-year. During the quarter, we had an incredible launch where we unveiled the all-new 11 and 13 inch iPad Air, the perfect device for education, entertainment, and so much more. And With the new iPad Pro, we pushed the boundaries of power-efficient performance with the remarkable M4 chip, the engine behind this incredibly thin device. By leveraging the latest in Apple silicon, Video Editors and Musicians can take advantage of the cutting edge AI features in Final Cut Pro and Logic Pro. And we're very excited that iPad Pro and iPad Air models powered by the M series of Apple silicon will be able to utilize the powerful capabilities of Apple Intelligence. In wearables, home, and accessories, revenue was $8.1 billion, down 2% from a year ago. Apple Watch is empowering users to live a healthier day with a range of tools to take charge of their wellness journeys. At the core of Apple Watch, are powerful AI features that are helping users get help when they need it most, from irregular heart rhythm notifications to walking steadiness to crash detection and fall detection. I've heard time and again how meaningful these features are for users and their loved ones, and their stories motivate us to keep pushing forward on this vital work. As I mentioned earlier, in services, we set an all-time revenue record of $24.2 billion with paid subscriptions climbing to an all-time high. We achieve revenue records in the majority of the services categories with all-time revenue records in advertising, cloud, and payment services. Apple TV+ productions are delighting audiences on screens large and small. We're sharing powerful works of imagination with series and movies like Presumed Innocent, the Upcoming Disclaimer, and The Instigators starring Matt Damon. And we can't wait for returning fan favorites with new seasons of The Morning Show, Slow Horses, and Severance. Apple TV+ productions also continue to earn accolades with nearly 2,300 nominations and 500 wins to-date. That includes 72 Emmy Award nominations across 16 programs our best ever showing for the upcoming awards event. During the quarter, we also expanded Tap to Pay on iPhone to more markets including Japan, Canada, Italy, and Germany, enabling more businesses to use the power of iPhone to accept contactless payments. And we announced new updates to our services coming this fall, including US national park hikes and custom walk routes and Apple Maps, the ability to pay with rewards using Apple Pay, collaborative listening with Apple Music, and a redesigned Apple Fitness+ experience to help users make the most of our library of workouts and meditations. Turning to retail, we continue to expand in emerging markets with our first ever location in Malaysia. Customers from all over the country came together with our team members to celebrate this special moment. Elsewhere in the world, our teams have been sharing the magic of Apple Vision Pro and demos that delight, inspire, and deeply move customers exploring the wonders of spatial computing for the first time. At the heart of all of our innovations are the values that guide everything we do. We believe fundamentally that the best technology is technology that works for everyone. And in honor of Global Accessibility Awareness Day, we introduced all new capabilities to give users more ways to take advantage of all our products can do. These include eye tracking for users to control iPhone or iPad visually, music haptics to give those who are deaf or hard of hearing a tangible way to experience music, and vocal shortcuts that tie task to a user's voice. And we are committed as ever to shipping products that offer the highest standards of privacy for our users. With everything we do, whether it's offering a browser like Safari that prevents third-parties from tracking you across the internet or providing new features like the ability to lock and hide apps, we are determined to keep our users in control of their own data. And we are just as dedicated to ensuring the security of our users' data. That's why we work to minimize the amount of data we collect and work to maximize how much is processed directly on people's devices, a foundational principle that is at the core of all we build, including Apple Intelligence. And we continue to make significant progress on the environment. We are proud to say that all of our data centers, including those that will run private cloud compute, operate on 100% renewable energy. At Apple, we're constantly accelerating our pace of innovation. We are a company in relentless pursuit of big ideas. Time and again, we've seen how a spark of creativity can reach breakthrough velocity, reach across previously unexplored dimensions, and ultimately take flight in ways that can change the world. It's why we're going to keep investing in the meaningful innovation that enriches the lives of all of our customers. We have a busy time ahead of us, and I couldn't be more excited for all the amazing things yet to come. With that, I'll turn it over to Luca. Luca Maestri : Thank you, Tim, and good afternoon, everyone. We are very pleased to report a new June quarter revenue record of $85.8 billion, up 5% year-over-year, despite 230 basis points of negative foreign exchange impact. We achieved growth in the vast majority of our markets, with June quarter revenue records in the Americas, Europe, and rest of Asia Pacific. Products revenue was $61.6 billion, up 2% year-over-year, driven by the launch of the new iPad Pro and iPad Air. Our installed base of active devices reach an all-time high across all products and geographic segments, thanks to our unmatched levels of customer satisfaction and loyalty and a large number of customers who are new to our products. Services revenue reached an all-time record of $24.2 billion, up 14% year-over-year, with an all-time record in developed markets and a June quarter record in emerging markets. Company gross margin was 46.3% near the high end of our guidance range and down 30 basis points sequentially driven by a different mix within products which was partially offset by a favorable mix shift towards services and cost savings. Products gross margin was 35.3%, down 130 basis points sequentially, primarily driven by mix, partially offset by favorable costs. Services gross margin was 74% down 60 basis points from last quarter. Operating expenses of $14.3 billion were at the low end of the guidance range we provided and up 7% year-over-year. Net income was $21.4 billion, diluted EPS of $1.40 was up 11% year-over-year and set a June quarter record. And operating cash flow was very strong at $28.9 billion, also a June quarter record. Let me get into more detail for each of our revenue categories. iPhone revenue was $39.3 billion, down 1% year-over-year, but grew on a constant currency basis. We set June quarter records across several countries, including the UK, Spain, Poland, Mexico, Indonesia, and the Philippines. And the iPhone Active installed base grew to a new all-time high in total and in every geographic segment. During the June quarter, many iPhone models were among the top selling smartphones around the world. In fact, according to a survey from Kantar, iPhone was the top selling model in the US, urban China, the UK, Germany, Australia, and Japan. Customer satisfaction on the iPhone 15 family continues to be extremely high, with 451 Research measuring it at 98% in the US in their latest reports. Mac generated $7 billion in revenue, up 2% year-over-year, driven by the MacBook Air powered by the M3 chip. We saw particularly strong performance in our emerging markets, with June quarter records for Mac in Latin America, India, and South Asia. The Mac installed base reached an all-time high with half of MacBook Air customers in the quarter being new to Mac. And customer satisfaction for Mac was recently reported at 96% in the US. iPad revenue was $7.2 billion, up 24% year-over-year, driven by the launch of the new iPad Pro and iPad Air. Customers are loving the latest iPad lineup for its new design and display, unparalleled performance, AI capabilities and much more. The iPad install base has continued to grow and is an all-time high, as half of the customers who purchased iPads during the quarter were new to the product. Also, customer satisfaction was recently measured at 97% in the US. Wearables, home and accessories revenue was $8.1 billion, down 2% year-over-year, a sequential acceleration from the March quarter. Watch and AirPods continue to face a difficult compare against prior year launches of the AirPods Pro second generation, the Watch SE and the first Watch Ultra. Apple Watch continues to attract new customers, with almost two-thirds of customers purchasing an Apple Watch during the quarter being new to the product, sending the Apple Watch install base to a new all-time high. And the latest reports from 451 Research indicate a customer satisfaction of 97% for watch in the US. In services, total revenue reached an all-time record of $24.2 billion, growing 14% year-over-year. We continue to have great momentum in services, as the growth of our installed base of active devices, sets a strong foundation for the future expansion of our ecosystem. And we see increased customer engagement with our services offerings. Both transacting accounts and paid accounts reach a new all-time high with paid accounts growing double digits year-over-year. Also, paid subscriptions showed strong double digit growth. We have well over 1 billion paid subscriptions across the services on our platform, more than double the number that we had only four years ago. And we are constantly focused on improving the breadth and quality of our services. From critically acclaimed new content on Apple TV+ to new games on Apple Arcade and the many latest features we previewed during WWDC for iCloud, Apple Pay, Apple Cash, Apple Music, and more. Turning to enterprise, we continue to see businesses, leveraging our entire suite of products to drive productivity and creativity for their teams and customers. USAA, a leading insurance and financial services company, recently expanded beyond their existing iPhone and iPad deployments to provide their employees with the latest MacBook Air. And American Express has continued to add to their fleet of over 10,000 Macs to enhance their employees' productivity, security, and collaboration. We're also excited to see leading organizations such as Boston Children's Hospital and Lufthansa using Apple Vision Pro to build innovative spatial computing experiences to transform the training of their workforces. Let me now turn to our cash position and capital return program. We ended the quarter with $153 billion in cash and marketable securities. We repaid $4.3 billion in maturing debt and increased commercial paper by $1 billion, leaving us with total debt of $101 billion. As a result, net cash was $52 billion at the end of the quarter. During the quarter, we returned over $32 billion to shareholders, including $3.9 billion in dividends and equivalents and $26 billion through open market repurchases of 139 million Apple shares. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we are providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. We expect foreign exchange to continue to be a headwind and to have a negative impact on revenue of about 1.5 percentage points on a year-over-year basis. We expect our September quarter total company revenue to grow year-over-year at a rate similar to the June quarter. We expect services revenue to grow double digits at a rate similar to what we reported in the first three quarters of this fiscal year. We expect gross margin to be between 45.5% and 46.5%. We expect OpEx to be between $14.2 billion and $14.4 billion. We expect OI&E to be around negative $50 million, excluding any potential impact from the mark to market of minority investments, and our tax rate to be around 16.5%. Finally, today our Board of Directors has declared a cash dividend of $0.25 per share of common stock payable on August 15, 2024, to shareholders of record as of August 12, 2024. With that, let's open the call to questions. Suhasini Chandramouli : Thank you Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator : Certainly. We will go ahead and take our first question from Erik Woodring with Morgan Stanley. Please go ahead. Erik Woodring : Great. Thank you very much for taking my question. Maybe Tim, if we start with you, you know, I thought some of the color you provided before the call about iPhone 15 performing better than the iPhone 14 was interesting. So just with that context, can you maybe help us understand where you see iPhone replacement cycles today, where you think the size of the base of iPhones that are aged and likely to upgrade are, and what that translates to in potential pent-up demand, as we enter a new iPhone cycle. And I have a follow-up, thank you. Tim Cook : Yes, hi Eric. The installed base hit an all-time high during the quarter and so we were very happy about that. iPhone in general grew in constant currency. And the 15, as you point out, if you look at the same number of weeks of the 15 from launch and compare that to the 14, the 15 is doing better than the 14. And so that's kind of a state of where we currently are. In terms of upgrade rates, it's very difficult mid-cycle to call upgrade rates. I would just say that with Apple Intelligence, we are very excited about the level of value that we're going to provide to users. And we believe that -- that presents another reason for a compelling upgrade. Erik Woodring : Okay, that's very helpful. Thanks, Tim. And then second, can you maybe dig into the China dynamics a bit? Sales down 6% this quarter, 3% in constant currency, an improvement from last quarter on a tougher compare that came on the back of some iPhone discounting. So can you maybe just share color on the China market as a whole how much you believe promotions helped in the quarter, how sustainable this improvement is, and if this performance really changes any of your approach to the China market as we look forward. Thanks so much. Tim Cook : Yeah, Erik, as you point out, we decreased by 6.5% year-over-year for the whole of Greater China. And if you look at it on a constant currency basis, we declined by less than 3%. So over 50% of the decline year-over-year is currency related. That is an improvement from the first half of the fiscal year, and so we're happy to see the acceleration. If you look at iPhone in particular for Greater China, the installed base set a record. We also in Mainland China set a June quarter record for upgraders and so that's a very strong signal and in fact from Kantar -- the survey from Kantar this quarter showed that iPhones were the top three models in urban China. Also, if you look at -- one of the things we look at is the 15 family compared to the 14 family for the same number of weeks from launch. So this goes all the way back to the September of 2023. If you look at that, the 15 is outperforming the 14. And so those are some of the color I would provide. In addition, one of the things that we're very focused on is the level of new customers buying our products. And so if you look at this on the Mac and iPad, in Mainland China, the majority of customers buying or buying for the first time, buying that product for the first time and the watch, the vast, vast majority of people are buying a product for the first time. And during the quarter, I should say also that iPad returned to growth in Greater China, as it did around the world. And so we continue to be confident in the long-term opportunity in China. I don't know how every chapter of the book reads, but we're very confident in the long-term. Erik Woodring : Great. Thanks so much. Tim Cook : Yeah. Suhasini Chandramouli : Thank you, Erik. Operator, may we have the next question, please? Operator : Our next question is from Ben Reitzes with Melius. Please go ahead. Ben Reitzes : Hey, thanks a lot. Appreciate it. Hey, Tim, you know, now that you've launched or announced Apple intelligence, do you have any ideas on how it may impact services. Would it – do you feel like it'll accelerate your Services business augmented? And maybe folks will need to buy more storage and some other things. How are you thinking about it as a catalyst for Services into next year? And I have a follow-up. Thanks. Tim Cook : We started the rollout of Apple Intelligence this week with developers, so some of the features are out there as of Monday. And we couldn't be more excited about getting them out there. Obviously, this will enable developers to take their apps to the next level. And so we are taking the first step in getting the beta out there, and we can't wait to see what kind of amazing things they do with it. Ben Reitzes : Okay. Thanks. And then Luca, with regard to gross margin, it's been -- there's been some component price inflation and mix. Do you mind just giving us a little more color on how you are managing that sequentially and how you feel about the current component environment as an impact on margins? Thanks. Luca Maestri : Sure, Ben. I think I'll give you a bit of the walk for the June quarter and then get into the outlook that we provided for the September quarter. At the total company level, we've reported 46.3%. It is down 30 basis points sequentially, and it was really driven by a different mix. Within products, of course, we launched very important products like the iPad during the course of the quarter. But we had an offset from a shift in mix towards Services, and we got some good cost savings. And so when you look at it on a year-over-year basis, we are up significantly on the margin front. And keep in mind that foreign exchange continues to be a bit of a headwind for us. As we go into the September quarter, we are guiding 45.5% to 46.5%, which is kind of within the guidance that we provided last quarter. Again similar dynamics, we expect a slightly different mix. We expect foreign exchange to have a minimal impact sequentially, although a more significant impact on a year-over-year basis. On the commodity side, I think that is what you are referring to, yes we have seen some increases on the memory front, but the rest of the commodities, we see a continuous decline. So in general, we feel -- we're well positioned. And as you know well, these are very high levels of gross margin for us and we are pleased where we are. Ben Reitzes : Okay. Thanks a lot. Suhasini Chandramouli : Thank you Ben. Operator may we have the next question please. Operator : Our next question is from Mike Ng with Goldman Sachs. Please go ahead. Mike Ng : Hi, good afternoon. I just have two questions. First, I was wondering if you could talk about whether or not you've seen a shift in demand for iPhone 15 Pro, Pro Max models since WWDC that could potentially foreshadow consumer demand for Apple Intelligence enabled phones? Tim Cook : We just announced the sort of the requirements at the system and the silicon level in June. And so we had very limited time during the quarter. So it's really too early to tell. Mike Ng : That's fair. And then with the focus on upgrader potential over the next several years, I was just wondering if you could talk about what you are expecting from the US promotional environment from your channel partners, whether that's US wireless carriers, given the importance of device sales for those partners during an upgrade cycle. Or any retail support on what could be a very strong smartphone upgrade period? Thank you. Tim Cook : We are very excited about Apple Intelligence and what it brings, and it is another compelling reason for an upgrade. I'd leave the promotional question for the sort of the carriers themselves to answer. But I believe it will be a very key time for -- and a compelling upgrade cycle. Mike Ng : Great. Thank you Tim. Suhasini Chandramouli : Thanks Mike. Operator, can we have the next question please. Operator : Our next question is from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani : Good afternoon everyone. And I have two as well. I guess, Tim, maybe back to the Apple Intelligence dynamic. There's clearly a lot of excitement from consumers around what Apple Intelligence could mean for them. Can you just touch on your -- do you think the intent is to launch all the Apple Intelligence features at the same time to consumers, or do you think they end up getting staggered a bit? And if they are staggered, do you think it impacts how consumers come out and buy the next-generation iPhone? Tim Cook : The rollout, as we mentioned in June, sort of -- we've actually started with developers this week. We started with some features of Apple Intelligence, not the complete suite. There are other features like languages beyond US English that will happen over the course of the year, and there are other features that will happen over the course of the year. And ChatGPT is integrated by the end of the calendar year. And so yes, so it’s a staggered launch. Amit Daryanani : Got it. And then I guess your Services growth rates have been extremely impressive for several quarters and it seems like it is accelerated recently. Can you just touch -- talk about when you look at this double-digit growth, how much of that do you think is coming from the installed base growth versus better ARPU or better monetization of the installed base? And how do you kind of see that mix changing as you go forward? Luca Maestri : Yes, Amit, it is Luca. It's a combination of a number of factors. The installed base growth is very important of course, because we have a larger pool of customers that uses the ecosystem and uses our Services. We are seeing and we've seen this consistently for many, many quarters now. We see continued growth in the level of engagement that our customers have with our ecosystem. We have more transacting accounts every quarter, so more people using the ecosystem both the free elements of the ecosystem and the paid elements. We see paid accounts growing double digits, and we've seen that for many, many quarters. Now we look at our paid subscriptions on our platform, and they are growing strong double digits as well. So obviously, the growing level of engagement helps us both from an ARPU standpoint and just a volume standpoint. Obviously, as you've seen over the last several years, we launched new services over time, and we've launched many new services, fairly recently. Obviously, our payments business is relatively new, Apple TV+, Apple Arcade, Fitness+, so many other services we've added. And so we are providing more and more opportunities for our customers to interact with the ecosystem. And we believe we are doing also a very good job at improving the quality of these services and improving the amount of content that we make available. We continue to make significant investments on TV+, on Apple Arcade. We are launching new shows, new games all the time. And I think you will continue to see that as we go forward. We are very, very happy with the 14% growth that we had this quarter because, particularly if you look at the performance that we had in Services a year ago, the compares for us tend to get a bit more challenging in the second half of our fiscal year. But in spite of that, we delivered a level of growth that was better than what we were expecting at the beginning of the quarter. Suhasini Chandramouli : Thanks Amit. Operator we will take the next question please. Operator : Our next question is from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan : Yes. Thank you so much. Tim, you announced Apple Intelligence, but you also announced partnerships with OpenAI and presumably more coming down the road. How should investors think about the monetization models around these partnerships where the CapEx investments are clearly being made by these potential partners. But you're obviously -- they're leveraging your distribution to your very attractive installed base. So in the long-term, do you see the Apple Intelligence part -- the Services growth from Apple Intelligence being the larger contributor over time? Or do you see these partnerships becoming a larger contributor over time? And I have a follow-up. Tim Cook : I think the way that I look at it is that Apple Intelligence is the on-device processing and the Private Cloud Compute. And a lot of that will be things with a personal context. And then for world knowledge, we are integrating with ChatGPT initially, and that will be focused on world knowledge as I said. And so the monetization model, I don't want to get into the terms of the commercial agreements because they are confidential between the parties. But I see both aspects as being very important. People want both. Wamsi Mohan : Okay. Thanks. As a follow-up maybe for Luca. Just stepping back to the gross margin discussion again. If I look at calendar 2023, you had on average 150 basis points increase in product gross margins on a year-on-year basis. In 2024 so far, it had been more flat year-on-year. When we think about that, is the incremental headwind, I mean there was FX headwinds throughout the last several years. So ex-FX, are there other incremental headwinds that are either temporary or structural in nature that are perhaps limiting further upside to what are obviously very strong gross margins? Thank you. Luca Maestri : Yes. Of course, as you said, the foreign exchange continues to be -- this is incremental on a year-over-year basis. And it is one of those things that is outside of our control. We try to hedge our exposures. But it is what it is. We know that when the dollar is strong, our gross margins are affected. The other element that I think it's always important to keep in mind is that within the Products business, our products have different margin profiles. And depending on the relative success in the marketplace, our products' gross margin tends to move. And so the mix of our products has an impact on gross margins, right? And so we need to pay attention to that. Of course, we just launched an iPad and that is one of the factors. But we want all our products to be very successful in the marketplace. And that's why we always look at gross margin dollars as the first order of priority, and gross margin percentage tends to follow from that. The other factor that obviously has an impact, a significant impact is the state of the commodity markets, and they tend to go in cycles. And so we will see how that plays out over time. But in general, we feel good about the level of gross margins that we have for our products business, and we think we are in a good position there. Suhasini Chandramouli : Thanks Wamsi. Operator, can we have the next question please. Operator : Our next question is from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar : Hi, thanks for taking my question. And congrats on the strong results. The first one for Luca or Tim. We keep hearing about these increasing silicon content for AI edge devices. And also, I think, Luca you spoke about increasing commodity costs. So I'm curious how to think about margins for these new AI devices. And Tim, do any of these Apple Intelligence features need more hardware updates than what we have today? And then I have a quick follow-up. Tim Cook : Maybe I'll take the second one first and then pass it over to Luca. In terms of the requirements to run Apple Intelligence, there are system requirements and there are silicon requirements. And so from an iPhone point of view, the iPhone 15 Pro and Pro Max will run Apple Intelligence and the successor products obviously. If you look at the Mac, it starts with the M series of silicon that started in 2020. And the iPad is the same, and so it starts with the M series of silicon. And so there are system requirements and silicon requirements that go with each of those. Luca Maestri : And from a gross margin standpoint, as you know, we don't provide any color past the current quarter, and we just provided guidance for the quarter 45.5% to 46.5%. It is essentially broadly in line with what we reported for the June quarter. So we'll take it quarter by quarter and we will report as the time goes by. Krish Sankar : Got it. Very helpful. And then a quick follow-up for Tim. Thanks for the color on China. We also see many other consumer discretionary and luxury brands talk about a weak China. And I think Tim, you said half the details was FX related. I'm curious, the other half of the weakness, was that more China macro related or do you think it is kind of like specific to Apple with domestic competitors? Any other color you could give would be very helpful. Thank you very much. Tim Cook : Well, certainly, the competitive environment there is the most competitive in the world. I've said that before and that remains to be the case. The macroeconomic factors have been in the press too, and I'm not an expert on those. I can only tell you what we're seeing. And we were pleased that the business showed improvement from the first half of the year. Krish Sankar : Thanks Tim. Suhasini Chandramouli : Thank you Krish. Operator, can we have the next question please. Operator : Our next question is from David Vogt with UBS. Please go ahead. David Vogt : Great. Two, if I may also. Tim, first one for you. I know it is early days, and you talked about the developers just getting their hands on Apple Intelligence. But when you think about the categories that are currently in the App Store and kind of what you think app developers could do with this new technology, what's your instinct say in terms of -- are these going to be iterative applications to currently available applications? Is there any sort of category that you think lends itself more naturally to Apple Intelligence? Is it games? Is it more creative? I'm just trying to get a sense of how you're thinking about it. And then I have a follow-up for Luca. Thanks. Tim Cook : If you look at how we've deployed Apple Intelligence or are deploying Apple Intelligence, we've really thought about it at pretty much all of the apps that you use every day. And so we've thought about it from Notes to Mail to Messages and all the rest. And so there is been a deep level of thinking about how it affects those apps. And that's going to surface Apple Intelligence in a way that is natural to the user, in a way that will I think, get them very excited about it and get usage. Similarly, I think the developers will do that on a broad basis with their apps as well. And so I think, it is profound and we'll see what the developers do. But we're very excited to get the initial seed out there this week and see what they do. I think it will be amazing, yes. David Vogt : Yes. No, that's helpful. I appreciate it. And Luca, just maybe -- I know you didn't give a full rundown of product categories in your prepared remarks. But if I kind of take your comments at face value, I guess what I'm trying to think about is for the next quarter, it sounds like with Services being relatively strong and FX easing a little bit. You are effectively saying that product revenue in the September quarter is going to basically be flat with the September quarter last year ahead of a product launch. And so I'm just trying to get a sense for, what are the puts and takes in that sort of outlook particularly as you have Apple Intelligence hopefully stoking the fire for demand going forward? Thanks. Luca Maestri : Well, we have provided -- let me repeat what we provided. We think that we are going to be growing total company revenue at a rate that is similar to what we reported, so the plus 5%, right? In spite of the fact that we are going to have some foreign exchange headwinds, and we said about 150 basis points in the December quarter. And we said that we will grow Services double digits at a rate that is similar to what we've reported for the first three quarters of the fiscal year. We are not going into the other categories. I think there is a lot of good math that you can do from what we've given you here. Keep in mind on the Mac that we will have a challenging compare from a year ago, given the fact that we launched and we had the full quarter impact of the launch of the MacBook Air 15-inch a year ago. And also on the iPad, we reported 24% growth in the June quarter. Clearly we had the benefit from the launch in the June quarter of the new products, the iPad Air and the iPad Pro. So important to keep that in mind on a sequential basis. David Vogt : Great. Thank you very much. Suhasini Chandramouli : Thank you David. Operator may we have the next question please. Operator : Our next question is from Atif Malik with Citi. Please go ahead. Atif Malik : Hi, thank you for taking my question. The first one is for Tim. I know it's early days. The feedback on Apple Intelligence software features like notification summary and reduced interruption focus from the developers who have tried the iOS 18.1 beta version this week is very positive. My question is in response to an earlier question, you talked about a staggered launch on some of these software features. So are you expecting most of the features that you announced at WWDC to be part of iOS 18? Or we should be thinking that some of these features could potentially be part of iOS 19 next year? Tim Cook : Our objective that we said in June is to roll out US English starting in the fall and that is to users, and then proceed with more functionality, more features, if you will, and more languages and regions coverage as we proceed across the next year. And so we sort of gave a time frame that -- and we're tracking to that. Atif Malik : Understand. And the next one for Luca. Luca the Services growth momentum seems very strong. Are you seeing any impact from changes made to comply with the DMA rules? Luca Maestri : Well, as you know we have introduced some changes to the way we run the App Store in Europe already in March. And we are seeing a good level of adoption from developers on those changes. We are on an ongoing basis, discussing with the European Commission how to ensure full compliance with the DMA. It is obviously early stage, but in general, our results for the Services business and for the App Store have been pretty good until now. Again to just provide you a frame of reference, the percentage of revenue that we generate from the European Union on the App Store is about 7% of the total. Atif Malik : Very helpful. Thank you. Suhasini Chandramouli : Thank you Atif. Operator may we have the next question please. Operator : Our next question is from Samik Chatterjee with JPMorgan. Please go ahead. Samik Chatterjee : Yes. Hi. Thanks for taking my question. I guess, Tim, if I can just ask you about Apple Intelligence as well. There is a regulatory aspect as well in certain geographies. You mentioned the staggered launch that you are aiming for and the timelines you're thinking. How are you thinking about the complexity of the regulatory process, in particular like EU and maybe China? And does -- in terms of your timelines of the rollout, are you sort of embedding in the regulatory aspect here? And how should we think about timing then including that? And I have a follow-up. Thank you. Tim Cook : We are engaged as you would guess, with both regulatory bodies that you mentioned. And our objective is to move as fast as we can, obviously because our objective is always to get features out there for everyone. We have to understand the regulatory requirements before we can commit to doing that and commit a schedule to doing that. But we're very constructively engaged with both. Samik Chatterjee : Okay, got it. And a quick one on the Wearables category, Luca. I know you mentioned the acceleration there on a sequential basis. Maybe you can just sort of parse that out in terms of what -- which categories drove the acceleration because that's been a category that has been lagging a bit in terms of revenue trends for the past couple of quarters. So just curious what is starting to sort of drive it to accelerate on a sequential basis? Thank you. Tim Cook : Yes, I'll take that one. I think the important thing to remember when you look at the Wearables, Home and Accessories categories is that we have a difficult launch compare. And we've been running that for a few quarters and we still have that because last year had the continued benefit from the AirPods Pro second generation, the Watch SE and the very first Watch Ultra. And so it is important to keep that in mind. If you sort of take a step back, however and look at the business across the trailing 12 months, it is grown -- the Wearables, Home and Accessories business has grown to almost $40 billion, which is double what it was five years ago. Samik Chatterjee : Thank you. Suhasini Chandramouli : Thank you Samik. Operator, may we have the last question please. Operator : Our last question is from Richard Kramer with Arete Research. Please go ahead. Richard Kramer : Thanks. Thanks very much. Tim, you referenced the investment in innovation, and your R&D sales ratio reached what I think was a June quarter record even before launching Apple Intelligence. Do you see the rollout of these features requiring further increases in R&D or increases in OpEx or CapEx for cloud compute capacity? And is it even possible to forecast the Services usage as they roll out, given that they are so new for consumers? Thanks. Tim Cook : Clearly, we have increased R&D over time. We have been investing in AI and ML for years. And in addition to investing more, we've also redeployed certain skills onto AI and ML. And so the growth in sort of embedded in our numbers that we've shared here, it is increasing year-over-year. On the CapEx part, it is important to remember that we employ a hybrid kind of approach, where we do things internally and we have certain partners that we do business with externally where the CapEx would appear in their respective businesses. But yes, I mean you can expect that there is -- we will continue to invest and increase it year-on-year. Richard Kramer : Okay. And maybe a quick follow-up for Luca. When we look at the free cash flow margins for the first nine months, they are up materially. And given this year's product mix, can you describe to us what exactly in the Services mix or cost control is driving what seems to be structurally higher free cash flow margins across the business? Luca Maestri : Yes, I'm glad you noticed that. We are pretty pleased with that fact. And I think you probably also noticed that we've increased our return of capital to shareholders this quarter. This one was a record quarter for us. Well, it's a combination of a number of things. Of course, an improvement in the top-line helps the margin expansion that we've had over the last several years and several quarters obviously has helped. And so that is driving better operating cash flow. On the CapEx front as Tim said, we employ a hybrid model. Some of the investments show up on our balance sheet and some other investments show up somewhere else and we pay, as we go. But in general, we try to run the company efficiently. We continue to think that capital efficiency is a good thing. And therefore, we are pleased with the fact that our free cash flow is doing well this year. Richard Kramer : Okay. Thanks. Suhasini Chandramouli : Thank you, Richard. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor, and via telephone. The number for the telephone replay is (866)-583-1035. Please enter confirmation code 1969407 followed by the pound sign. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at (408)-862-1142. And financial analysts can contact me, Suhasini Chandramouli with additional questions at (408)-974-3123. Thank you again for joining us today. Operator : Once again this does conclude today's conference. We do appreciate your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,024	4	2024Q4	2024Q4	2024-10-31	6.799	6.91	7.547	7.623	12.86261	30.4	32.54	Suhasini Chandramouli : Good afternoon, and welcome to the Apple Q4 Fiscal Year 2024 Earnings Conference Call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today are Apple CEO, Tim Cook, and CFO, Luca Maestri, and they'll be joined by Kevan Parekh, Vice President of Financial Planning and Analysis. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. Additionally, today's discussion will refer to certain non-GAAP financial measures. You can find a reconciliation of these measures in our fourth quarter and full year 2024 earnings release, which is available on our Investor Relations website. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is reporting revenue of $94.9 billion, a September quarter record and up 6% from a year ago. iPhone grew in every geographic segment, marking a new September quarter revenue record for the category, and Services set an all-time revenue record, up 12% year-over-year. We also set September quarter segment revenue records in the Americas, Europe, and the Rest of Asia Pacific, as well as in a large number of countries, including the United States, Brazil, Mexico, France, the UK, Korea, Malaysia, Thailand, Saudi Arabia, and the UAE. And we continue to be excited by the enthusiasm we're seeing in India, where we set an all-time revenue record. This has been an extraordinary year of innovation at Apple. We brought the revolutionary Apple Vision Pro to customers in February, which brings users tomorrow's technology today. And in June, we announced Apple Intelligence, a remarkable personal intelligence system that combines the power of generative models with personal context to deliver intelligence that is incredibly useful and relevant. Apple Intelligence marks the beginning of a new chapter for Apple innovation and redefines privacy and AI by extending our groundbreaking approach to privacy into the cloud with Private Cloud Compute. Earlier this week, we made the first set of Apple Intelligence features available in US English for iPhone, iPad, and Mac users, with systemwide Writing Tools that help you refine your writing, a more natural and conversational Siri, a more intelligent Photos app, including the ability to create movies simply by typing a description, and new ways to prioritize and stay in the moment with notification summaries and priority messages. And we look forward to additional intelligence features in December, with even more powerful Writing Tools, a new visual intelligence experience that builds on Apple Intelligence, and ChatGPT integration, as well as localized English in several countries, including the UK, Australia, and Canada. These features have already been provided to developers and we're getting great feedback. More features will be rolling out in the coming months, as well as support for more languages, and this is just the beginning. Now, I'll turn to our results for the quarter, beginning with iPhone. iPhone revenues set a September quarter record of $46.2 billion, up 6% from a year ago, with growth in every geographic segment. With the introduction of Apple Intelligence, we're beginning a new era for iPhone. iPhone 16, powered by A18, is equipped with an incredible new 48-megapixel Fusion camera, fantastic photo experiences, and the addition of the action button and camera control. An iPhone 16 Pro is the most advanced iPhone we've ever made, powered by A18 Pro and featuring even larger displays, an industry-leading pro camera system with camera control, and studio quality mics, all with a huge leap in battery life. Turning to Mac, revenue was $7.7 billion, up 2% from a year ago. Just this week, we brought a new generation of Apple Silicon to Mac, M4, M4 Pro, and M4 Max. From blazing fast performance to Apple's most advanced neural engine yet, our latest chips can easily tackle incredibly complex workflows, and they ensure our newest Macs will be the best personal computers for AI the instant they hit stores. With the newest additions to our Mac lineup, customers can choose the Mac that's just right for them, whether that's iMac, the world's best and most beautiful all-in-one; MacBook Air, the world's most popular laptop now with double the starting memory; MacBook Pro, the best Pro notebook anywhere; or the incredible, mighty new Mac mini, our first-ever carbon-neutral Mac. iPad revenue was $7 billion, 8% higher year-over-year. iPad is unlike any other product on the market today, and it's become an essential device in homes, schools, and businesses of all sizes. Recently, we were thrilled to introduce the newest iPad mini, featuring an ultra-compact design built for Apple Intelligence with support for Apple Pencil Pro. It's been a big year for iPad. iPad Air was popular with students and teachers as they got back to school this year, while creators are pushing the boundaries of what's possible with the M4-powered iPad Pro. In Wearables, Home and Accessories, revenue was $9 billion, down 3% from a year ago. During the quarter, we launched the all-new Apple Watch Series 10, bringing a beautiful new design and new capabilities to the world's most popular watch that make it even more powerful, intelligent, and sophisticated. It's the thinnest Apple Watch yet, making it more comfortable than ever, while offering the biggest, most advanced display. watchOS 11 brings some huge new health and fitness insights to users, including sleep apnea notifications, which help to alert people with a potentially serious but often undiagnosed condition. We're proud of the impact we make through our health innovations on watch, and I'm grateful for every note I receive about the importance of watch in people's lives. With AirPods 4, we broke a new ground in comfort and design with our best-ever open-ear headphones available for the first time with active noise cancellation. And we were especially pleased to unveil revolutionary end-to-end hearing health capabilities for AirPods Pro 2 with hearing protection, hearing test, and hearing aid features. These just became available in a software update this week, and we believe this will make a meaningful difference in our users' lives. I've already started getting notes from customers calling the experience life changing. And Apple Vision Pro continues to deliver spatial experiences that weren't possible before, including immersive entertainment like the new short film, Submerged, which gives people a view into the unique storytelling power made possible by spatial computing. Vision Pro has more than 2,500 native spatial apps and 1.5 million compatible apps for visionOS 2, as well as applications companies are building to reimagine how they work. Vision Pro continues to inspire awe in its users, and we're just scratching the surface of what's possible. And just yesterday, we announced we're bringing Vision Pro to Korea and the UAE. As I mentioned earlier, Services achieved an all-time revenue record of $25 billion, up 12% from a year ago, and with all-time revenue records across most of our categories. With Apple TV+, we love celebrating the craft of great storytellers who know how to put on a show. Audiences love to discover new movies like Wolfs, explore acclaimed new series like Disclaimer, and dive back into returning favorites like Slow Horses and Shrinking. Apple TV+ productions have become fixtures at award shows, earning more than 2,300 nominations and more than 500 wins today. Apple also offers a live sports experience in a league of its own with MLS Season Pass, and subscribers have been cheering on their favorite teams in the MLS Cup playoffs. This month, we also marked 10 years of Apple Pay. There's always something magical about being able to buy groceries or pay for movie tickets seamlessly with your Apple device. Today, users choose Apple Pay for purchases across tens of millions of retailers worldwide. And we're excited to make the Apple Pay experience even better, with the option to redeem rewards and access loans from credit cards, debit cards, and other lenders right at checkout. Whenever we celebrate big moments, Apple Stores are the best places to share them with customers. I had an incredible time during launch day in September alongside our team at Apple Fifth Avenue, where energy and enthusiasm filled the air. And in stores all over the world, customers are eager to get a closer look at our latest innovations. We also opened two new stores during the quarter and we can't wait to bring four new stores to customers in India. We're passionate about education and believe technology has a vital role to play in both helping teachers to inspire their students and students to learn about the world around them. In honor of World Teachers' Day, Apple was proud to share new resources for teachers to engage their students in ways that aim to make learning easy and fun. Additionally, we've expanded our education grant program into 100 new schools and communities, helping with everything from access to technology, to educator resources, to scholarships and financial support. As we near the end of the year, we're proud of the progress we've made in our efforts to be carbon-neutral across our entire footprint by the end of the decade. As I mentioned earlier, we were thrilled to introduce our first-ever carbon-neutral Mac with the latest Mac mini. And in another milestone, customers can choose a carbon-neutral option of any Apple Watch. These achievements are amazing for all of us at Apple, and we are determined to reach our 2030 goal. At Apple, across everything we do, we manage for the long term, because we're always thinking about what comes next, the next great challenge, the next innovative idea, the next big breakthrough. As we close out the year, we have the best lineup we've ever had going into the holiday season, including Apple Intelligence, which marks the start of a new chapter for our products. This is just the beginning of what we believe generative AI can do, and I couldn't be more excited for what's to come. Before I hand it over to Luca, with Luca transitioning to a new role with Apple, this will be the final time he's joining our call. So, I just wanted to take a moment to recognize his extraordinary service as Apple's CFO and to thank him for his partnership. I am deeply grateful. In his 10 years in the role, Luca has done truly exceptional work in shaping Apple as we know it today. He has helped manage Apple for the long term, thoughtfully and deliberately. He has helped us enrich the lives of so many around the world, and he has been a leader that people look up to and have learned so much from. I have incredible confidence in our incoming CFO, Kevan Parekh, and we look forward to more of you meeting and working with him going forward. With that, I'll turn it over to Luca. Luca Maestri : Good afternoon, everyone. And thank you, Tim, for the very kind words. Serving as Apple's CFO has been a real privilege and an amazing journey, and I've greatly appreciated the support from our investors and the analyst community over the years. Kevan is exceptional, and I know you will enjoy interacting with him going forward. Let me now turn to the results for the fourth quarter of our fiscal year. We're very pleased to report a new September quarter revenue record of $94.9 billion, up 6% year-over-year. We grew in the vast majority of the markets we track and achieved September quarter revenue records in the Americas, Europe and Rest of Asia Pacific. Products revenue was $70 billion, up 4% year-over-year, driven by growth in iPhone, iPad and Mac. Our installed base of active devices reached an all-time high across all products and geographic segments, thanks to very high levels of customer satisfaction and loyalty and a large number of customers who are new to our products. Services revenue reached an all-time record of $25 billion, up 12% year-over-year. We saw broad-based strength around the world, reaching all-time records in both developed and emerging markets with double-digit growth and record results across most services categories. Company gross margin was 46.2%, near the high end of our guidance range. Products gross margin was 36.3%, up 100 basis points sequentially, primarily driven by favorable mix. Services gross margin was 74%, unchanged from the prior quarter. Operating expenses of $14.3 billion were at the midpoint of the guidance range we provided at the beginning of the quarter and up 6% year-over-year. During the quarter, we recorded a one-time income tax charge of $10.2 billion, which relates to the impact of the reversal of the European General Court's State Aid decision. When we exclude this one-time charge, net income was $25 billion and diluted earnings per share were a $1.64, up 12% year-over-year, and a September quarter record. Operating cash flow was very strong at $26.8 billion, a new September quarter record. Let me now get into more detail for each of our revenue categories. iPhone revenue was $46.2 billion, up 6% year-over-year, and a September quarter record in total and across several markets, including the US, the Middle East, Korea, and South Asia. The iPhone active installed base grew to a new all-time high in total and in every geographic segment. During the September quarter, many iPhone models were among the top-selling smartphones around the world. In fact, according to a survey from Kantar, iPhone was the top-selling model in the US, Urban China, the UK, Australia, and Japan. We continue to see high levels of customer satisfaction for the iPhone 15 family, with 451 Research recently measuring it at 98% in the US. Mac revenue was $7.7 billion, up 2% year-over-year, driven by the strength in MacBook Air. Customers have been loving the performance of Apple Silicon on Mac and we are very excited to bring the latest M4 family of chips to the lineup. The Mac installed base reached an all-time high with about half of customers in the quarter being new to Mac. And in the latest reports from 451 Research, customer satisfaction was 95% in the US. iPad generated $7 billion in revenue, up 8% year-over-year. In addition to growth in developed markets, we also saw strong performance in many emerging markets, with double-digit growth in Mexico, Brazil, the Middle East, India and South Asia. The iPad installed base reached another all-time high, and over half of the customers who purchased iPads during the quarter were new to the product. Also, customer satisfaction was recently measured at 97% in the US. Wearables, Home and Accessories revenue was $9 billion, down 3% year-over-year. The Apple Watch installed base reached a new all-time high, with over half of customers purchasing an Apple Watch during the quarter being new to the product. And the latest reports from 451 Research indicated customer satisfaction of 96% for watch in the US. Our Services revenue reached an all-time record of $25 billion, growing 12% year-over-year. Services continue to see strong momentum with the growth of our installed base of active devices setting a solid foundation for the future expansion of our ecosystem. And we see increased customer engagement with our services offerings. Both transacting accounts and paid accounts reached a new all-time high, with paid accounts growing double-digits year-over-year. Paid subscriptions also grew double-digits. We have well over 1 billion paid subscriptions across the services on our platform, more than double the number we had only four years ago. And as always, we remain focused on improving the breadth and quality of our services from new games on Apple Arcade to new features like Tap to Cash and pay with installments using Apple Pay to many successful new and returning shows on Apple TV+. This past quarter, we celebrated the five-year anniversary of Apple Card, which was ranked #1 in customer satisfaction among co-branded credit cards by J.D. Power for the fourth year in a row. Turning to enterprise, we continue to see strong demand across our products and services. NVIDIA launched its Mac as a choice program supported by AppleCare for Enterprise and Apple Professional Services with over 10,000 Macs deployed worldwide. And Novartis, a leading global pharmaceutical company, recently chose iPhone 16 as the standard mobile device for all employees. We also see continued momentum with Apple Vision Pro in the enterprise space. UC San Diego Health is the first hospital in the world to test spatial computing apps on Apple Vision Pro in clinical trials for patient surgery in the operating room. Let me now turn to our cash position and capital return program. We ended the quarter with $157 billion in cash and marketable securities. We repaid $2.6 billion in maturing debt and increased commercial paper by $7 billion, leaving us with total debt of $107 billion. As a result, net cash was $50 billion at the end of the quarter. During the quarter, we returned over $29 billion to shareholders, including $3.8 billion in dividends and equivalents and $25 billion through open market repurchases of 112 million Apple shares. As we move ahead into the December quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we're providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. We expect our December quarter total company revenue to grow low- to mid-single digits year-over-year. We expect Services revenue to grow double-digits at a rate similar to what we reported in the fiscal year 2024. We expect gross margin to be between 46% and 47%. We expect OpEx to be between $15.3 billion and $15.5 billion. We expect OI&E to be around negative $250 million, excluding any potential impact from the mark to market of minority investments. And our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.25 per share of common stock payable on November 14, 2024 to shareholders of record as of November 11, 2024. With that, let us open the call to questions. Suhasini Chandramouli : Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator : Certainly. We will go ahead and take our first question from Michael Ng with Goldman Sachs. Please go ahead. Michael Ng : Hey, good afternoon. I just have two. The first one is for Tim on Apple Intelligence. I was wondering if you could just expand a little bit on some of the early feedback to Apple Intelligence both for iOS 18.1, but also the developer beta so far, and whether you would attribute Apple Intelligence to any of the strong iPhone performance that we've seen to date. Thanks. Tim Cook : Thanks, Michael. As I noted in my comments, just this week on Monday, we made the first set of Apple Intelligence features available in US English for iPhone, iPad, and Mac. This includes things like systemwide Writing Tools that help you refine your writing, a more natural conversational Siri, more intelligent Photos app, including the ability to create movies, simply by typing a description, which is really cool, and new ways to prioritize and stay in the moment with notification summaries and priority messages. There's also email summaries and email priority. We're getting a lot of positive feedback from developers and customers. And in fact, if you just look at the first three days, which is all we have obviously from Monday, the 18.1 adoption is twice as fast as the 17.1 adoption was in the year-ago quarter. And so, there's definitely interest out there for Apple Intelligence. Carrying on in the quarter, we are looking forward to bringing even more features in December, and this will include even more powerful Writing Tools and visual intelligence experience that builds on Apple Intelligence, and ChatGPT integration in addition to other features, as well as we'll bring localized English to several countries that include the UK, Australia, and Canada. So, it's going to be quite a software quarter between the release on Monday and the release in December. And then, as we turn the corner to '25, we'll have more languages rolling out, starting in April as well and more features as well. And so, it's a very strong drumbeat, and we couldn't be more excited about it. Michael Ng : Great. Thank you very much. And my second one just for Luca. First, congratulations again, Luca, on the new role and it's been a real privilege being able to spend some time with you. A question that I think will overlap with your new role as well. Could you just talk a little bit about the CapEx outlook and whether investments in things like Private Cloud Compute could change the historical CapEx range of roughly $10 billion a year? Thank you very much. Luca Maestri : Thank you, Michael. On the CapEx front, I've mentioned before a number of times, we have a bit of a hybrid model in the way we run our data centers. In some cases, we use our own data centers. In some cases, we use, third-party providers. So, our CapEx numbers may not be fully comparable with others. But, obviously, we are rolling out these features, Apple Intelligence features already now, and so we are making all the capacity that is needed available for these features. You will see in our 10-K the amount of CapEx that we've incurred during the course of fiscal '24, and we will -- in fiscal '25, we will continue to make all the investments that are necessary, and of course, the investments in AI-related CapEx will be made. Michael Ng : Great. Thank you, Tim. Thank you, Luca. Suhasini Chandramouli : All right. Thanks, Mike. Can we have the next question, please? Operator : Our next question is from Erik Woodring with Morgan Stanley. Please go ahead. Erik Woodring : Great. Thanks so much for taking my questions. I have two as well. Tim, maybe if we start with you, I think each of the last four years you've exited the December quarter with iPhone demand outpacing supply. As we look to this quarter in the iPhone 16 cycle, lead times are relatively short. There are no known supply shortages. And I'm just curious whether you've been able to maybe get a better read on early cycle iPhone demand this year relative to past years. And if so, what you've learned about upgrade rates, switching rates, trade-ups versus trading down and being more price sensitive? And overall, any impact that Apple Intelligence may have on iPhone 16 sales? And then, I have a follow-up. Thank you. Tim Cook : There's a lot there. On Apple Intelligence, we believe it's a compelling upgrade reason. And we'll -- but we just launched it three days ago and so what we've got now from a data point point of view is the number I just referenced that 18.1 has twice the adoption rate of 17.1. So, that clearly shows a level of interest out there. In terms of exiting the December quarter with demand greater than supply, that's not my recollection that, that happened for all four of the years. We clearly had cases during COVID where there were disruptions and that's the some spilled over, but in a more regular environment where we're not having something, a 100-year flood kind of thing, we would -- our desire is to get into balance as quickly as possible. We don't want customers having to wait for products. And so, if you look at how we've done this year, we did that very quickly on the 16, on the 16 Pro family, the Pro and the Pro Max, we've been constrained in October, but we believe that soon we'll be out of constraint. And so, that's a good sign from our point of view. Keep in mind that, that's a function of supply and demand, not one side or the other. And we've been preparing for the quarter for a while. So that's what I would say there. Erik Woodring : Okay. That's really helpful. Thank you, Tim. Tim Cook : Yeah, thank you. Erik Woodring : And then, Luca, if I just turn to you, obviously, it's been a pleasure working with you, and we wish you all the best in the next role. There's plenty of debate in the market right now about input costs and commodity prices, and the impact that will have on gross margins. Historically, you do guide gross margins up 50 basis points sequentially, which you just told us about for the December quarter. So, can you maybe just help us understand your view of component prices and broadly whether you still see those as tailwinds to gross margins and how sustainable that tailwind might be, or whether that should become a headwind as we look forward? Thanks so much. Luca Maestri : Yes, Erik. As you know, our gross margins are a factor of many, many variables. Commodities, of course, are important. They're not the only factor. But specifically on commodities, I can tell you that both for the September quarter and what we expect for the December quarter, most commodities are going to move down in price, while NAND and DRAM increased during the course of the September quarter and we expect them to increase during the December quarter. We are very pleased with the level of gross margins that we've reported during the course of the year. The entire fiscal year of '24, they're really, for our company, record levels of gross margin, and obviously guiding to 46% to 47% for the December quarter with all the new technologies that we've included in the products, with all the new features that Tim has talked about, a lot of new products across the board, I think it's a very good sign. Erik Woodring : Great. Thanks so much, Luca. Suhasini Chandramouli : Thank you, Erik. Can we have the next question, please? Operator : Our next question is from Ben Reitzes from Melius. Please go ahead. Ben Reitzes : Hey, thanks a lot. And I'll echo those comments about Luca. Miss you, and good luck. And my question is with regard to iPhone again, and with regard to the fourth quarter, is my first question -- or sorry, the fourth calendar quarter, your first quarter. When you look at mid- to low-single-digit revenue growth, do you expect the iPhone to grow faster? And what are you thinking about in the answer to that question with regard to China, which keeps improving each quarter? Thanks very much. And then, I have just a follow-up. Thanks. Luca Maestri : Ben, we are not providing that level of color today. Yes, we've said that we expect total company revenue to grow low- to mid-single digits. Keep in mind, Apple Intelligence, as Tim said, is rolling out over time, both features and languages. And we just had a number of exciting launches just this week from the Apple Intelligence feature to the new Mac. So, we leave it at that. We've given you the total for the company and some pretty good direction on Services, which we expect to continue to grow at a similar rate than what we've seen in fiscal '24. Ben Reitzes : Great. Thanks, Luca. Hey, Tim, I wanted to ask you, I mean, you guys are well aware a lot of the noise out there, people chattering about builds, lead times, and you guys are guiding for mid- to low-single-digit growth. That certainly doesn't sound like alarm bells here, vis-a-vis what you guys must be hearing. And I know you guys are just running your business and doing the best you can, but you have a lot of perspective now, Tim. What are people missing here? And it certainly just sounds like -- you guys are typically conservative. That guide for revenue is certainly sounds like [this guy is certainly not falling] (ph), and you have a pretty good product cycle. So, what do you think people are missing and what are you excited about? Thanks so much, Tim. Tim Cook : Ben, I could not be more excited about Apple Intelligence and the rollout that we've got in front of us. I'm on the -- I'm obviously on future releases as well, working on it and it's changing my daily life. I'm super excited about the health features that we're rolling out. If the number of emails I'm already getting from customers that have taken a hearing test and are using their AirPods Pro 2 as a hearing aid, are just -- are staggering and heartwarming to read. I'm also thrilled about sleep apnea and the notification there that we'll have through the watch. This week is a very exciting week for us because we just rolled out three days -- three launches of different, Macs and desktops and laptops. And so, we have a lot of things on the docket and it's definitely the strongest lineup we've ever had going into the holiday season. In terms of the noise, I tune it out, because if not, it would just be, deafening. And so that that's what I do, I can't speak for everybody else, but that's what I do. Ben Reitzes : Thanks a lot, Tim. Appreciate it. Tim Cook : Thanks, Ben. Suhasini Chandramouli : Thank you, Ben. Can we have the next question, please? Operator : Our next question is from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani : Good afternoon. Thanks for taking my questions. I have two as well. And Luca, best of luck in the future. It's been a pleasure working with you. I guess the first one I have is, away from iPhones, on the Services side, you're adding $100 billion run rate with Services today, which is a phenomenal achievement by itself. As you look at the Services portfolio today, can you just talk about how much of this business do you think is reoccurring versus transactional? And are the growth rates different between the subscription portfolio over here versus transactional portfolio? Luca Maestri : Yes, Amit, I'll take this one. Yes, we are, first of all, very, very happy with -- it's an important milestone. Of course, we've got to a run rate of $100 billion. You look back just a few years ago, and the growth has been phenomenal. We're very pleased. We've got a very diversified portfolio of services. And over the years, the amount that is recurring in nature has grown and is growing faster than the transactional piece. We have well over 1 billion paid subscriptions on our platform right now between our own services and third-party services. That continues to grow strong double-digits. So, we feel very, very good. And, essentially, to your question, yes, the recurring portion is growing faster than the transactional one. Amit Daryanani : Got it. If I can just follow-up, if I look at the growth rates across the different geographies, there's always concern around China when it comes to iPhone demand, I feel, but the performance in September looks fairly good. I wonder if you just touch on, what are you seeing from a demand perspective in China? If the recent stimulus plan in China could essentially be a catalyst for iPhone? And then, EMEA really stood out with double-digit growth. Maybe you can just flush that out as well for us. Thank you. Tim Cook : Yeah, I'll take the China question. If you look at how we did for the quarter, we were relatively flat year-over-year. And a key component of that improvement relative to the year-over-year performance that we had been achieving is that there was a sequential improvement in foreign exchange. And so that helped us out. As you know, it's been a headwind that we've been reporting for a period of time. And -- but the other parts that are -- what else is going on there is that our installed base of the active devices reached an all-time high. We had the top two selling, smartphones in Urban China according to Kantar. The level of new customers that we have buying the products like Mac and iPad are well over 50%. Watch is over three quarters that are new to the product. And so, there's several positive signs there. In terms of the stimulus, it's a clear focus of the team there, but I'm not an economist and don't want to ad lib on the effect of it. Luca Maestri : On the Europe side, Amit, a number of things. As you see from our results during the quarter, Europe grew double-digits, 11%, and really, it was really good growth across the board, the different segments. They all did well. Keep in mind, our definition of Europe in our segment reporting includes a number of emerging markets, like Turkey, where we've grown very strongly, the Middle East. Tim mentioned a number of records in Saudi, in UAE, and we also include India where we set an all-time revenue record during the September quarter. But I have to say also Western Europe grew nicely. So, we've seen very good results for us in the entire segment. Amit Daryanani : Great. Thank you very much. Suhasini Chandramouli : Thanks, Amit. Can we have the next question, please? Operator : Our next question is from David Vogt with UBS. Please go ahead. David Vogt : Great. Thanks everyone for taking my question, and congratulations, Luca. I know Luca, and I know Tim, you don't want to give a lot of granularity, but if I just try to pull together your comments about what the demand environment looks like, are we to assume based on sort of the commentary that there is a risk that maybe the product revenue portfolio could be down in the December quarter if I take your numbers at face value? And if that's the risk, is that more iPhone-related, Mac-related, given the strength that you've seen in iPad related? Just trying to get a handle on kind of what potentially is giving you that degree of, I don't want to say caution, but maybe balanced for you going into the December quarter. And then, I have a follow-up. Luca Maestri : As I said, David, we're not providing that level of color. We're giving you some data on services. I would repeat what I said earlier. We're very early in the cycle, very early in the cycle with a lot of new products and features that that we are launching. And we're very excited about them, but it's early. And the Apple Intelligence rollout is going to happen over time, not across the world as normally we do with software releases. David Vogt : Right. Okay. So maybe a follow-up for, Tim. When you think about to Luca's point about the rollout being staged over the next several quarters across the world, do you think that has any impact on sort of the normal historical demand cadence across different regions? So, should we see something different, let's say, in the December quarter, the March quarter, the June quarter, et cetera, relative to history, given the timing of the rollout and where customers are probably waiting for the devices to be enabled to have the operating system? Would just love to kind of get your perspective on how we think about the demand cadence, how it might be different than maybe historically? Thank you. Tim Cook : Yeah, David. It's clearly, as you point out, a different cadence, if you will, than we would normally do. As we talked about at WWDC, we wanted to give a comprehensive vision of Apple Intelligence, and we said then that it would rollout over time. And we're right on the, what we said, at WWDC, and so we're executing well. In terms of the demand curve, I would just say that what we believe here is that it's a compelling reason for upgrading. And, it's -- that's both my personal experience and feedback that I'm getting and so we'll see. We're not projecting, beyond the current quarter obviously. We just don't do that. David Vogt : Great. Thanks, Tim, and best of luck, Luca. Luca Maestri : Thank you very much. Suhasini Chandramouli : Thank you, David. We'll take the next question, please. Operator : Our next question is from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan : Yes, thank you so much. Luca, we will miss you on these calls. Tim, maybe for you, as you think about this staggered rollout of Apple Intelligence, can you help us think through potentially how much of the global installed base of phones will have access to Apple Intelligence in their native language, in their region within the next year or maybe in the next two years? And what are some of the gating factors in the rollout? And I have a follow-up. Tim Cook : If you look at our schedule, we started in the -- with US English, that started on Monday. There's another release coming that adds additional features that I had referenced in December in not only US English but also localized for UK, Australia, Canada, Ireland, and New Zealand. And then, we will add more languages in April. We haven't set the specifics yet in terms of the languages, but we'll add more in April and then more as we step through the year. And so, we're moving just as fast as possible while ensuring quality. That's what we're doing. Wamsi Mohan : Okay. Thanks, Tim. Tim Cook : Yeah. Wamsi Mohan : And then, as a follow-up, maybe this is a little premature, but how is Apple at a high level prepared to potentially deal with any tariffs that might come post the selection cycle? And if not exactly how, perhaps you can just help investors think about some of the things Apple has done already to try to insulate from some of these impacts, potential impacts? Tim Cook : I wouldn't want to speculate about those sorts of things. And so, I'm going to punt on that one. Wamsi Mohan : Okay. Thank you, Tim. Tim Cook : Yeah. Thank you. Suhasini Chandramouli : Thank you, Wamsi. May we have the next question, please? Operator : Our next question is from Krish Sankar from TD Cowen. Please go ahead. Krish Sankar : Yeah. Hi, thanks for taking my question. And again, thanks Luca for all your help with analyts and investors. My first question is on R&D. Given how much your tech peers are spending on AI, does this new era of Apple Intelligence actually require Apple to invest more in R&D beyond your current 7% to 8% of sales to capture this opportunity? And then, I had a follow-up. Luca Maestri : Krish, as you know, we've been investing heavily in R&D over the last several years. Our R&D growth has been significant during the last several years. And obviously, as we move through the course of fiscal '24, we've also reallocated some of the existing resources to this new technology to AI. And so, the level of intensity that we're putting into AI has increased a lot, and you maybe don't see the full extent of it because we've also had some internal reallocation of the base of engineering resources that we have within the company. Krish Sankar : Got it. Thanks for that, Luca. And then, another quick follow-up. I understand Apple Intelligence is a feature on the phone today, but do you think that, in the future, it could potentially have or benefit the services growth business, or is that too -- are these too bifurcated to even make a call on the [indiscernible]? Thank you. Tim Cook : I think, just to keep it in mind, Apple Intelligence is also available on the Mac for the M-series products and on certain models of iPad, and in addition to the phone. And so, it's on all three. You're quite -- what was your follow-on question? Krish Sankar : Tim, it does on -- can the Apple Intelligence actually help the Services growth rate? Tim Cook : Keep in mind that we were have released a lot of APIs and developers will be taking advantage of those APIs. That release has occurred as well and of course more are coming. And so I, definitely believe that a lot of developers will be taking advantage of Apple Intelligence in a big way. And what that does to Services, I'll not forecast, but I would say that from an ecosystem point of view, I think it will be great for the user and the user experience. Krish Sankar : Got it. Thanks, Tim. Tim Cook : Yeah. Suhasini Chandramouli : All right. Thank you, Krish. Can we have the next question, please? Operator : Our next question comes from Samik Chatterjee with JPMorgan. Please go ahead. Samik Chatterjee : Great. Thank you. Thanks for taking my questions. And Luca, congrats on the new role and pleasure working with you these years. I guess, if I could, for my first one, start with mix on the iPhone side? And what I'm really curious about if you have any thoughts given that Apple Intelligence is now going to be a consistent feature set across all the four sort of iPhones on the iPhone 16 series that you launched and going back to iPhone 15 Pro and Pro Max. Are you seeing any change in behavior from a consumer perspective in terms of which sort of on the mix front within the iPhone series where consumer adoption is given that there's more consistency of the features when it comes to Apple Intelligence across the board? And I have a follow-up. Thank you. Tim Cook : It's tough to answer your question, because we've been constrained in October on the Pro and the Pro Max. And so, it's really too early in the curve to call the precise mix on the consumer versus the Pro. So, we'll see. Samik Chatterjee : Okay. And for my follow-up, Tim, during the quarter I think over the last 90 days, we had the quotes come out in relation to the DOJ relative to the Google sort of revenue sharing agreement that you have with them. How do you sort of look at it going forward in terms of emphasizing the role that Apple has in that ecosystem with Safari and sort of the potential outcomes that you're looking at? Thank you. Tim Cook : I don't want to speculate on that from a legal point of view. It's an ongoing case, and I will save that for another day. Samik Chatterjee : Okay. Thank you. I'll leave it there. Thank you. Suhasini Chandramouli : All right. Thank you, Samik. Operator, may we have the next question, please? Operator : Our next question comes from Richard Kramer with Arete Research. Please go ahead. Richard Kramer : Thanks very much. My first one, Tim, I'd like to ask about some of the components in Services where despite your installed base, some parts of the Apple One bundle, like Music and News and Arcade and Fitness, are not obviously the market-leading offerings. And maybe what might change that and what other services could you call out as growing faster, having wider -- widening addressable markets like we've seen in pay or advertising? Tim Cook : The way that I view it is that we have lots of opportunity in all of those. And so, there's lots of customers to try to convince to take advantage of it, and we're going to continue investing in the Services and adding new features and -- whether it's News+ or Music or Arcade, that's what we're going to do. Keep in mind that for us, we're more focused on being best than being most. And so, in some cases, not in every case, some of the services that you -- the majority of the services that you mentioned are not cross platform. We make them for our customers only and so that in some cases changes the person who's going to sell the most perhaps, but that's -- our objective is to make the best. Richard Kramer : Okay, thanks. And then, Luca, one piece of unfinished business was your pledge to get to a net-neutral cash position. And over the last two years, you stayed around $50 billion of net cash. We've clearly seen instances in the past where elevated marketing spend or other programs brought increases in market share. I guess my question looking back on your tenure is, at your scale now of $57 billion of OpEx, do you still see incremental ways to put that cash to work in the business? Or will we just continue to see increased shareholder returns? Luca Maestri : Well, obviously, as you've seen, our OpEx has gone up over the years. We've also seen at the same time a significant expansion in gross margin, maybe to a level that I would have not expected a few years ago, but we've done a very good job on a number of fronts. And so, I would say we -- when we plan -- every time we plan for the upcoming year, we think about all the different areas where we can deploy our resources and we make them available to grow the business. I think we've done very well over the long term and -- but our fundamental philosophy is to look after the business first. And then, if we have excess cash, we will continue to return it to our shareholders and the plan has worked quite well so far. Richard Kramer : Okay. Thank you very much. Suhasini Chandramouli : Thank you, Richard. We'll take our last question, please, operator? Operator : Our last question comes from Atif Malik with Citi. Please go ahead. Atif Malik : Thank you for squeezing me in. It seems to us that the spec differentiation between iPhone 16 Pro and base model isn't as big as prior years. All iPhones have new A18, A18 Pro chips and there wasn't an increase in ASPs versus last year. Can you share with us if there is a shift in your strategy in terms of... Operator : Unfortunately, Mr. Malik's line has dropped. Suhasini Chandramouli : All right. Sorry, Atif. We'll connect offline. Thank you, everybody. A replay of today's call will be available for two weeks on Apple Podcasts as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 0331536 followed by the pound sign. These replays will be available by approximately 5 pm Pacific today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. And financial analysts can contact me, Suhasini Chandramouli, with additional questions at 408-974-3123 Thank you again for joining us. Operator : Once again, this does conclude today's conference. We do appreciate your participation.
AAPL	Apple Inc.	320,193	Information Technology	Technology Hardware, Storage & Peripherals	Cupertino, California	1977	1982-11-30	2,025	1	2025Q1	2025Q1	2025-01-30	null	null	null	null	null	null	null	Suhasini Chandramouli : Good afternoon, and welcome to the Apple Q1 Fiscal Year 2025 Earnings Conference Call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today are Apple CEO, Tim Cook, and he will be followed by CFO, Kevan Parekh. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Before I talk about our results I'd like to take a moment to acknowledge the devastating wildfires that impacted the Los Angeles area this month. From our retail teams to Apple TV+, Apple Music, Fitness Plus, Beats and more LA is home to many of our team members. Our thoughts are with everyone who is beginning the road to recovery. For our part, we are contributing to the relief efforts and we will continue to support our teams and the local community. Now turning to the quarter. Today, Apple is reporting revenue of $124.3 billion for the December quarter, up 4% from a year ago, and an all-time record. EPS also set an all-time record of $2.40, 10% higher year-over-year. We achieved all-time revenue records across the majority of the countries and regions we track, including the Americas, Europe, Japan, and the rest of Asia Pacific. We also continue to see momentum in emerging markets, setting all-time revenue records in a number of markets, including Latin America, the Middle East, and South Asia, among others. In services, we achieved an all-time revenue record, and in the past year, we've seen nearly $100 billion in revenue from our services business. I'm also pleased to announce that we reached a new record for our installed base with over 2.35 billion active devices. In October, we released the first set of Apple Intelligence features in U.S. English for iPhone, iPad, and Mac, and we rolled out more features and expanded to more countries in December. Now users can discover the benefits of these new features in the things they do every day. They can use writing tools to help find just the right words, create fun and unique images with Image Playground and Genmoji, handle daily tasks and seek out information with a more natural and conversational Siri, create movies of their memories with a simple prompt, and touch up their photos with clean up. We introduced visual intelligence with camera control to help users instantly learn about their surroundings. Users can also seamlessly access chat GPT across iOS, iPadOS and MacOS. And we were excited to recently begin our international expansion with Apple Intelligence now available in Australia, Canada, New Zealand, South Africa, and the U.K. We're working hard to take Apple Intelligence even further. In April, we're bringing Apple Intelligence to more languages, including French, German, Italian, Portuguese, Spanish, Japanese, Korean, and simplified Chinese, as well as localized English to Singapore and India. And we'll continue to roll out more features in the future, including an even more capable Siri. Apple Intelligence builds on years of innovations we've made across hardware and software to transform how users experience our products. Apple Intelligence also empowers users by delivering personal context that's relevant to them. And importantly, Apple Intelligence is a breakthrough for privacy and AI with innovations like Private Cloud Compute, which extends the industry-leading security and privacy of Apple devices into the cloud. Apple Intelligence opens up an exciting new frontier and is already elevating experiences across iPhone, iPad, and Mac. We're going to keep investing in innovation and in transformative tools that help users in their everyday lives. Let me now turn to our results for the quarter, starting with iPhone. iPhone revenue came in at $69.1 billion, reaching all-time iPhone revenue records in dozens of markets and regions. Our iPhone 16 lineup takes the smartphone experience to the next level in so many ways, and Apple Intelligence is one of many reasons why customers are excited. With the A18 powered iPhone 16 and iPhone 16 Plus, users are getting a big boost in battery life and incredible camera experiences with camera control. Our amazingly powerful iPhone 16 Pro models go even further with larger-than-ever displays and a pro camera system so advanced it can turn moments into masterpieces. In Mac, revenue was $9 billion for the December quarter, 16% higher year-over-year, driven by significant excitement around the world for our latest Mac lineup. The Mac is more than just a powerful tool. It's a launchpad to enable users to bring their best ideas and boldest creations to life. And there are so many reasons to choose Mac, from the breathtaking performance of the M4 family of chips to the groundbreaking and growing capabilities of Apple Intelligence. Every product in the Mac lineup offers something extraordinary, whether that's the super portable MacBook Air, the powerhouse MacBook Pro, the world's best all-in-one iMac, or the small wonder that is the Mac Mini, which is not only stunningly capable, but is our first carbon neutral Mac. All of this is enabled by the unparalleled power of Apple Silicon. iPad revenue was $8.1 billion, up 15% from a year ago, driven by strong interest for our latest products. We love hearing from customers, who are discovering for the first time the versatility of iPad from the ultra-portal iPad Mini, built from the ground up for Apple intelligence, to the powerful M4 iPad Pro in a stunningly thin and light design. iPad is there for our users whenever they need it and wherever they go and we are pleased to see so much excitement and enthusiasm for our lineup. Wearables home and accessories revenue came in at $11.7 billion. With its most advanced display yet and a thinner more comfortable design, the all-new Apple Watch Series 10 is the perfect companion to help users pursue their health and fitness goals this year. From the powerful Vitals app to more customizable activity rings, users have an ever-increasing set of innovative health tools at their fingertips and watchOS 11. Health innovation has long been a focus for us, and we're committed to continuing to advance this work, because we know how much it matters to our users. We've introduced new hearing health features on AirPods Pro 2, and new sleep apnea notifications on Apple Watch are also helping users learn of a potentially serious condition that's thought to affect up to a billion people worldwide. During the quarter, we also brought Apple Vision Pro to even more countries, enabling more customers to discover the magic of spatial computing. Users are enjoying incredible immersive entertainment experiences and powerful new features and enhancements to Mac virtual display. Vision Pro is also supercharging the creative process and the incredibly talented director John M. Chu recently shared how its extraordinary capabilities helped him bring the movie Wicked to life. Turning to services, we set an all-time revenue record of $26.3 billion for the December quarter, growing 14% from a year ago. We set all-time records in the Americas, Europe, and rest of Asia-Pacific, and a December quarter record in Japan. Five years since launch, Apple TV+ continues to be home to incredible storytelling that viewers love. There's nothing quite like the anticipation that comes when a fan favorite returns, and we were thrilled to debut the second season of Severance earlier this month. We have so much in store for our subscribers this year with new shows like The Studio and Your Friends and Neighbors. And we can't wait for the premiere of Formula 1 starring Brad Pitt on June 27, which will take viewers inside the sport in a truly unprecedented way. We're excited that Apple TV+ continues to draw attention and accolades. To-date, Apple TV+ productions have earned more than 2,500 nominations and 538 wins. During the quarter, we were also excited to launch a new Find My Service that can help our users when they lose their luggage. For the first time, if you put an air tag in your suitcase, you'll be able to share its location information with many major airlines, so they can quickly track down your bags if they get lost. Turning to retail, our teams went above and beyond to help customers find the perfect gift throughout the holiday season. We also celebrated openings of new stores in China, Spain, and the U.S. and we were excited to announce plans to connect with even more customers this year by adding a fifth store in the UAE and bringing our online store to Saudi Arabia this summer. We can't wait to welcome customers to the first of several flagship store locations in Saudi Arabia that were opening beginning in 2026. I just had the chance to visit both countries last month, and I had a great time meeting with customers and team members. There's an incredible energy and passion for technology in these growing markets. Every day, I get deeply moving notes about the many ways our technology is enriching our users' lives. I recently got a note from a customer who put his watch on his father's wrist when he feared something was wrong with him. The watch alerted them that the father was an AFib and they were able to get him to the hospital for potentially life-saving treatment. Another user put his new watch on for the first time and within 15 minutes was notified of a low heart rate that led to a necessary pacemaker. And there are so many touching notes around the profound impact of our new hearing health feature like a recent user who told me it had changed her life, allowing her to take part in conversations with her children and grandchildren. These are the kind of stories that remind us of how profoundly important our work is, and it drives us to innovate each and every day. At Apple, the future is full of promise and potential. We're always searching across a world of possibilities, finding those places where we can do the most good and putting all of our energy and ingenuity into making something special. With that, I'll turn it over to Kevin. Kevan Parekh : Thanks Tim, and good afternoon everyone. I'm going to cover the results for the first quarter of our fiscal year. We are very pleased to report an all-time high for revenue with December quarter revenue of $124.3 billion, up 4% year-over-year. We achieved all-time revenue records in the Americas, Europe, Japan, and rest of Asia Pacific and grew in the vast majority of markets we track. Products revenue was $98 billion, up 2% year-over-year, driven by growth from iPad and Mac. Thanks to our incredible customer satisfaction and strong loyalty, our installed base of active devices reached an all-time high across all products and geographic segments and is now over 2.35 billion active devices. Services revenue reached an all-time record of $26.3 billion, up 14% year-over-year. We grew in every geographic segment and achieved all-time records in both developed and emerging markets. Company gross margin was 46.9% at the high-end of our guidance range and up 70 basis points sequentially, primarily driven by favorable mix. Products gross margin was 39.3%, up 300 basis points sequentially, primarily driven by favorable mix and leverage. Services gross margin was 75%, up 100 basis points sequentially, primarily driven by mix. Operating expenses of $15.4 billion landed at the midpoint of our guidance range and up 7% year-over-year. This strong business performance resulted in all-time records for both net income at $36.3 billion and diluted earnings per share of $2.40, up 10% year-over-year. Operating cash flow was also strong at $29.9 billion, which included the impact of the $11.9 billion we paid during the quarter in connection with the state aid decision. Now, I'm going to provide some more details for each of our revenue categories. iPhone revenue was $69.1 billion, roughly flat to the prior year. We grew in the majority of markets we track and reached all-time revenue records in several developed markets, including Canada, Western Europe, and Japan and in emerging markets like Latin America, the Middle East, and South Asia. The iPhone Active installed base grew to an all-time high in total in an average geographic segment. We also set an all-time record for upgraders. According to a recent survey from Kantar during the December quarter, iPhone was a top-selling model in the U.S., Urban China, India, the U.K., France, Australia, and Japan. We continue to see high levels of customer satisfaction in the U.S. at 96% as measured by 451 research. Mac generated $9 billion in revenue, up 16% year-over-year. We saw strength across our lineup from the new Mac Mini to the latest MacBook Air and MacBook Pro models. This incredible performance was broad-based with double-digit growth in every geographic segment. With our latest advances in Apple Silicon and our fastest neural engine ever, customers are able to take advantage of the full capabilities of AI and Mac. The Mac installed base reached an all-time high and we saw a double-digit growth for both upgraders and customers new to the Mac. Additionally, customer satisfaction in the U.S. was recently measured at 94%. iPad revenue was $8.1 billion, up 15% year-over-year, driven by the new iPad Mini and latest iPad Air. The iPad installed base reached another all-time high, and over half of the customers who purchased an iPad during the quarter were new to the product. Customer satisfaction was at 96% in the U.S. based on the latest reports from 451 Research. Wearable's home and accessories revenue was $11.7 billion, down 2% year-over-year. Customers are excited about the new AirPods 4 and the latest hearing health features in AirPods Pro 2. On watch, although we face a difficult compare against the watch Ultra 2 launch last year, the Apple Watch installed base reached a new all-time high, with over half of customers purchasing an Apple Watch during the quarter being new to the product. Customer satisfaction for watch in the U.S. was reported at 94%. Our services revenue reached an all-time high of $26.3 billion, up 14% year-over-year. Services continues to see strong momentum, and the growth of our installed base of active devices gives us great opportunities for the future. We also see increased customer engagement with our services offerings. Both transacting and paid accounts reached new all-time highs, with paid accounts growing double-digits year-over-year. Paid subscriptions also grew double-digits. We have well over 1 billion paid subscriptions across the services on our platform. We remain focused on improving the breadth and quality of our services offerings, from new games on Apple Arcade to exciting new programming on Fitness Plus, and the continued expansion of features like Tap to Pay, now live in 20 markets. Turning to enterprise, we have seen businesses continue to expand their deployments of our products and services. Deutsche Bank launched its Mac as Choice program for the developers and also issued the latest MacBook Air as a standard computer for their entire mortgage lending division. And we're excited to see leading enterprises such as SAP leverage Apple Intelligence in the U.S., with features like writing tools, summarize, and priority notifications to enhance both their employee and customer experiences. We also see strong demand in our emerging markets. For example, Zomato, a leading food ordering and delivery company in India, has deployed 1,000 of Macs across their workforce to foster innovation. In Vision Pro continues to see more use cases in enterprise, with Cisco's new spatial meetings delivering a fully immersive video conferencing experience for remote collaboration and learning. Let me quickly summarize our cash position and capital return program. We ended the quarter with $141 billion in cash and marketable securities. We repaid $1 billion in maturing debt and decreased commercial paper by $8 billion, resulting in $97 billion in total debt. Therefore, net cash at the end of the quarter was $45 billion. During the quarter, we returned over $30 billion to shareholders. This included $3.9 billion in dividends and equivalents and $23.3 billion through open market repurchases of 100 million Apple shares. As usual, we will provide an update to our capital return program when we report results for the March quarter. As we move ahead into the March quarter, I'd like to review our outlook which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we're providing today assumes that the macroeconomic outlook doesn't worsen from what we're projecting today for the current quarter. As the dollar is strengthened significantly, we expect foreign exchange to be a headwind and to have a negative impact on revenue of about 2.5 percentage points on a year-over-year basis. Despite that headwind, we expect our March quarter total company revenue to grow low to mid-single-digits year-over-year. We expect services revenue to grow low-double-digits year-over-year. When you remove the negative impact of the foreign exchange headwinds I described earlier, the year-over-year growth rate would be comparable to that of the December quarter. We expect gross margin to be between 46.5% and 47.5%. We expect operating expenses to be between $15.1 billion and $15.3 billion. We expect OI&E to be around negative $300 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. Finally, today our Board of Directors has declared a cash dividend of $0.25 per share of common stock payable on February 13, 2025, to shareholders of record as of February 10, 2025. With that, let's open to call the questions. Suhasini Chandramouli : Thank you, Kevin. We ask that you limit yourself to two questions. Operator, may we have the first question please? Operator : Certainly, we will go ahead and take our first question from Erik Woodring with Morgan Stanley. Please go ahead. Erik Woodring : Great guys, Thanks so much for taking my questions. Tim, in your prepared remarks, you had noted that iPhone 16 models are selling better in markets where Apple Intelligence is available? And I'm just wondering if you could double-click on that comment a bit and share any other details you believe could better help us understand how Apple Intelligence is really impacting iPhone demand and/or what features you find that users are using most often already? And then I just have a quick follow-up. Thank you. Tim Cook : Yes, Eric. Hi, it's Tim. The -- we did see that the markets where we had rolled out Apple Intelligence, that the year-over-year performance on the iPhone 16 family was stronger than those where Apple Intelligence was not available. In terms of the features that people are using, they're using all of the ones that I'd referenced in my opening comments from writing tools to image playground and Genmoji to visual intelligence and more. And so we see all of those being used. The cleanup is another one that is popular and people love seeing that one demoed in the stores as well. We only had 2, 2.5 weeks or so during the December quarter of the second release of [18.2] (ph) and then only had the U.K. and the other English language countries for the 2.5 weeks. And so we've got just the early indications at the moment, but we were glad… Erik Woodring : Okay, that's really helpful. Tim Cook : Yes. Erik Woodring : Okay, thank you for that, Tim. It's helpful. And then, you know, if we just touch on China, obviously, in the news fairly frequently, if we set aside China Macro, which I understand is still challenging, can you maybe talk about the headwinds that that Apple faces, whether that's, you know, shifting preferences for Western technology brands in favor of domestic vendors, or is this just a function of not necessarily having Apple intelligence available with the iPhone 16, which is, you know, not necessarily helping replacement cycles. Just maybe double clicking on, on what you think and what you're hearing in China as a regard as it relates to the iPhone. Thanks so much. Tim Cook : Yes, sure. If you look at our greater China revenue for the quarter, we were down 11% year-over-year. And over half of the decline that we experienced was driven by change in channel inventory from the beginning to the end of the quarter. And of course on the Apple intelligence side we have not rolled out in China and as we just talked about we did see better results in the markets that we had rolled out in than markets we hadn't rolled out in. And of course, it's the most competitive market in the world. And so all of those things are true. In terms of the macro situation, there was a fiscal stimulus or subsidy announced in very recently in January that did not affect the December quarter. There were some provincial subsidies in the December quarter, but the national program was announced, I believe, on January 20. And it does cover the categories that we have products in from smartphones to tablets and PCs and smart watches up to a certain, a maximum price point. And so we do see fiscal stimulus occurring and we'll be glad to talk about what that looks like on the next call. Erik Woodring : Great. Thanks so much, Tim. Good luck. Tim Cook : Thank you. Suhasini Chandramouli : Thank you, Eric. Operator, can we have the next question, please? Operator : Our next question is from Ben Reitzes with Melius. Please go ahead. Ben Reitzes : Hey, guys. Thanks a lot for the question. And, hey, Tim, I wanted to ask you who -- you knew this one was coming, but there's a perception that you're a big beneficiary of lower cost of compute and I was wondering if you could give your worldly perspective here on the DeepSeek situation and if you are going to, if you, if anything's happened to change your views in terms of a tailwind to margins and your ability to execute even due to the potential for cost to come down due to that development and probably what was going to happen anyway. But I'd love your perspective on that and then have a quick follow-up. Thanks. Tim Cook : Sure. In general, I think innovation that drives efficiency is a good thing. And that's what you see in that model. Our tight integration of silicon and software, I think, will continue to serve us very well. As you know, we do things on the device, and we do things in the private cloud and which mimics from a architectural point of view the -- what happens on the device. And from a CapEx point of view, we've always taken a very prudent and deliberate approach to our expenditure and we continue to leverage a hybrid model, which I think continues to serve us well. Ben Reitzes : Oh, great. All right. Thanks, Tim. And then, you know, just with regard to, you know, the iPhone trajectory, do you feel like, I guess, what is -- you obviously don't talk about new products and stuff like that, but do you feel that there's a lot of room for form factor innovation in the future? Or do you feel that the current lineup kind of it shows where you're going? I guess without pulling punches wondering if you, you thought you know in terms of the phone innovation if there's a lot more to come and you could see the kind of current market changing a bit over the next two to three years. Thanks. Tim Cook : I think, Ben, I think there's a lot more to come and I could not feel more optimistic about our product pipeline. So I think there's a lot of innovation left on the smartphone. Ben Reitzes : Thanks a lot, Tim. Tim Cook : Yes, thank you. Suhasini Chandramouli : Thank you, Ben. Operator, could we have the next question, please? Operator : Our next question is from Michael Ng with Goldman Sachs. Please go ahead. Michael Ng : Good afternoon. Thank you for the question. I have two as well. First, it was encouraging to hear about the record for iPhone upgraders, which I think is something you haven't said for about a year now. I was wondering if you could talk a little bit about what you would attribute this upgrade strength to? Has Apple Intelligence played a role in helping upgrades in the markets that you've launched in? Thanks. Tim Cook : Yes, thank you for the question. If you look at iPhone, we did set an all-time record for upgraders, so we've never seen a higher level of upgraders before. The installed base hit a new all-time high as well. And if you look at the 16, compared to the 15 from launch, which occurred, as you know, in September, so this is across now two quarters from September to the end of the December fiscal quarter, the 16 outperformed the 15. And so I think you can conclude from that, that there are compelling reasons to upgrade. And in the markets where we had launched Apple Intelligence, they outperformed the markets that we did not. So lots… Michael Ng : Great, thank you, Tim. That's… Tim Cook : Yes, lots of good color there. Michael Ng : Great, thank you, Tim. That's very clear. And then I had one about the iPad Pro and for the thinner version. I was just wondering if you could talk about that thin form factor for the iPad Pro. How did it help iPad sales overall and what did your kind of marketing consumer research tell you about how consumers valued that thin product form factor? Thank you. Tim Cook : It's a good question. iPad overall grew 15% for the quarter and it was more driven by iPad Air and the entry level iPad than it was the top level iPad. But overall we could not be more pleased with the iPad category growing 15%. It's a great achievement for the quarter. And probably what is most important is that over half of the sales in the December quarter went to customers who were new to the iPad. So that tells us that there's a good amount of customers there to attract. Michael Ng : Thank you very much, Tim. Tim Cook : Yes. Thank you. Suhasini Chandramouli : Thanks, Mike. Operator, could we have the next question, please? Operator : Our next question is from Amit Daryanani from Evercore. Please go ahead. Amit Daryanani : Good afternoon, everyone. I have two as well. Maybe to start with, you folks are seeing some very robust growth trends in emerging markets right now for Apple products? Can you just add a high level, just talk about the durability of growth that you see in emerging markets? And then do you think the summation of these emerging markets are starting to get big enough or perhaps starting to grow fast enough that it can actually offset some of the China headwinds you're going through? Tim Cook : We have great results in a number of emerging markets. And as you know from past calls, I'm particularly keen on India. India set a December quarter record during the quarter. And we're opening more stores there. We've announced that we're going to open four new stores there. We also, the iPhone was the top selling model in India for the quarter. And it's the second largest smartphone market in the world and the third largest for PCs and tablets and so there's a huge market and we are -- we have very modest share in these markets. And so I think there's lots of upside there. And that's just one of the emerging markets. Kevan Parekh : Yes, maybe I'll add, Amit, that in emerging markets we're also seeing double-digit growth on the install base, both in total and for the iPhone as well. So that's also an encouraging sign. Amit Daryanani : Perfect. Thank you. And then, you know, just a question on gross margins for the March quarter. You folks are guiding gross margin is flattish on a sequential basis. Typically, I think it tends to be guided up a little bit, 50 basis points, so sequentially. Can we just touch on like, what are the offsets of the puts and takes you see here on gross margins? And Kevan, maybe you can just talked about its FX having an outsized impact in your margin profile as well in March? Kevan Parekh : Yes, Amit, let me take that One. You know, as we mentioned in my remarks, we're guiding to 46.5% to 47.5%. So we think it's, you know, we're very pleased with that level of guidance. As you mentioned, there's always puts and takes. We do think there's going to be some FX headwinds, which we talked about, that's going to affect, you know, our revenue growth as well. You know, it'll have an impact here on the margin, a sequential impact on margins. But we think that's going to be offset by favorable costs and the relative mix of services. We also, as you know, when we move from Q1 to Q2, especially on the product side, because Q1 is such a large quarter for a products business, we do have a loss of leverage. So there are some puts and takes, and I think we feel good about the range. We think it's a very, very strong guide for gross margin. Suhasini Chandramouli : Thanks, Amit. Operator, could we get the next question, please? Operator : Our next question is from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan : Yes, thank you so much. Tim, I want to follow-up on your comment about channel inventory in China. I was wondering if you could maybe address more broadly if channel inventory across your different product lines and regions? Do you feel they're elevated or out of range in any other regions? And given the clearing event that kind of happened in China, I guess in the quarter, should we think of a more normal progression quarter-on-quarter into the March quarter in China in particular, and I will follow. Tim Cook : Yes, I don't want to project sales for the current quarter by region, but if you if you look at the channel inventory and look at iPhone in the aggregate, so on a worldwide basis we're very comfortable with our channel inventory position in the -- in China my point was that our channel inventory reduced from the beginning of the quarter to the end of the quarter, and that was over half of the reduction in the reported results. And so if you look, part of the reason for that is that our sales were a bit higher than we forecasted them to be toward the end of the quarter. And so we ended a little leaner than we had expected to. Wamsi Mohan : Okay, that's very clear. Thank you. Tim Cook : Yes, thank you. Wamsi Mohan : And then maybe as my follow-up, your services growth has been very strong and I know you've kind of been navigating some pretty challenging regulatory burdens on the business globally. So how should investors think about maybe either a top line or margin headwind that let's say you're currently absorbing in your results that could potentially maybe reverse in a more balanced regulatory environment? Thank you so much. Kevan Parekh : Yes. So I think one, I just wanted to kind of reiterate the fact that, you know, our services business had an all-time record for December quarter of 14%. And that was a one strength that we saw across all geographic segments and also was very broad base across all of our services. So we have, as you know, a very broad services portfolio. And so we do see, you know, good momentum across the board. And as well, we continue to see increasing engagement across the customer base, across all of the service offerings, both transacting and paid accounts. We talked about reaching all-time highs, and we have over now 1 billion paid subscriptions across the services platform. Suhasini Chandramouli : All right. Thanks, Wamsi. Operator, could we get the next question, please? Operator : Our next question is from Samik Chatterjee with JPMorgan. Please go ahead. Samik Chatterjee : Hi. Thanks for taking my questions. I guess for the first one, if I -- I mean, you had a great quarter on Macs and iPads both. And I'm just curious, in terms of if you can help us think about the sustainability of this double-digit growth that you saw in both the product lines, and more interest are also here, we are talking about Apple Intelligence sort of influencing volumes on iPhones, but any thoughts on sort of how -- what does that influence look like in terms of volumes for Macs, for example, where I think there's a lot of conversation on AI PCs, how you're thinking about the impact there? And I have a quick follow-up. Thank you. Tim Cook : Yes. If you look at Mac, Mac was up 16% and on iPad, we were up 15%. The Mac was driven by the very strong uptake on our new products during the quarter and the continued success of the MacBook Air. And so as you know, we've launched an M4-based MacBook Pro, an iMac and a Mac Mini during the quarter. We believe we've got the best AI PC out there for running workloads. The silicon in the Mac is, and it has been for several years now, designed by us and really designed for these workloads. And so I don't want to project at the category level for the future, but we're incredibly pleased with both the Mac and the iPad for the quarter. Samik Chatterjee : Okay. And Tim, I'm going to use your earlier discussion about India as a strong emerging market to sort of ask you about the supply chain planning there in terms of how much of the supply chain planning there that you're doing is more of a reflection of the growth expectations from that market relative to in terms of diversification of the supply chain? And how should we sort of think about that strategy in terms of that particular country? Thank you. Tim Cook : Yes. If you look at the manufacturing we do there, we do manufacturing both for the domestic market, and we export. And so in -- our business needs a certain economies of scale for it to make sense to manufacture in country. And so that really means that we're going to be both a use for the domestic market and an export market. Samik Chatterjee : Great. Thank you. Tim Cook : Yes, thanks. Suhasini Chandramouli : Thank you, Samik. Operator, could we get the next question, please? Operator : Our next question is from David Vogt with UBS. Please go ahead. David Vogt : Great, thanks, guys, for taking my question. So maybe, Tim, this is for you. I'm trying to think about your commentary around Apple Intelligence being sort of a momentum driver for the iPhone business. But when I think about your kind of framework for the March quarter, if I kind of adjust for channel inventory over the last couple of years, kind of, feels like your iPhone revenue for the March quarter is going to be relatively similar to the quarter two years ago and even the quarter last year? So how do we square kind of the momentum versus kind of the iPhone business effectively really kind of unchanged over the last couple of years? And then second, when I think about kind of the gross margin profile of the business, obviously, you've done a great job in taking gross margins up. Where do you think we sit in terms of, on the services side at least, where margins could go? It looks like the 75% margin has been incredibly successful quarter. But just trying to get a sense for where do you think this number could go over the intermediate term? Thank you. Tim Cook : Yes. If you look at Apple Intelligence, what my point earlier was, that markets where we had rolled out Apple Intelligence during the Q1 period performed better on a year-over-year basis than markets where we had not. And so that gives us -- it's a positive indicator that we were pleased with. There are many compelling reasons to upgrade. And the other thing I would say, that I think I mentioned earlier, is that if you look at it from a launch to the end of the December quarter, and so that goes back to September, the 16 family is outperforming the 15 family. And so I think those are two good data points. Our next round of language rollouts will be in April. And so it will be at the -- in our Q3 quarter. And I'll let Kevan take the gross margin question. David Vogt : Yes, great. Kevan Parekh : Hi, David. How are you? So on the Services gross margin, I think maybe just stepping back a second. Services business in general in aggregate is accretive to the overall company margin. And one of the things, as an important reminder, is we've got a very broad services portfolio. And those businesses have very different margin profiles. And so I think, one, it's because of the nature of those businesses and in part also because of the way we account for them. And so one of the big factors that drive the Services gross margins and relative performance of those different businesses within the portfolio. We also have the dynamic of some scale businesses like payment services, iCloud, that are actually growing. And there, when we add incremental users, those end up being accretive to margins as well. And so in general, what we saw in the December quarter was nice momentum across our entire services business that allows us to deliver that 75% margin at the services level. And I think our guidance takes into consideration what we think we're going to land from a company standpoint of 46.5% to 47.5%, which again, we think is a strong guide. David Vogt : Great, thanks, guys. Suhasini Chandramouli : All right, thank you, David. Operator, could we have the next question, please? Operator : Our next question is from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar : Yes, thanks for taking my question. I also had two of them. One, the first one for Tim. You had very strong Mac growth, 16% year-over-year last quarter. Just wondering how much of that was driven by some of the Mac silicon innovation versus a replacement cycle for Macs? Tim Cook : I don't know the answer to your question precisely, but I think it is a combination of these products are so compelling, the M4-based products are so compelling, that it's driving both upgrades at the double-digit level and it's driving switchers at a double-digit level. And so we're seeing both come out, and I think it's just because of the compelling products. Krish Sankar : Got it. Got it. Thanks for that, Tim. And then a follow-up for Kevan on the gross margin. I want to ask you on the product side. Last quarter, you had 39.3%, which is very strong, similar to a year ago period. I'm kind of curious how much more levels do you have on the product side to improve the gross margin? Or do you think with some of the more new AI-related devices, there's more upside to gross margin from here on the product hardware side? Kevan Parekh : Yes. Thanks, Krish, for the question. So on the product side, as you mentioned, we had pretty strong sequential improvement, 300 basis points, for the December quarter. That was really driven by, we talked about, favorable mix and leverage. As you know, in Q1, again, it's a launch quarter for many products, and so we tend to benefit from the leverage that we get from that higher volume. I would say, in general, our gross margin on products is driven by a number of factors. One of them is the various product launches that we have. Different products do have different margin profiles. And so that mix does make a difference. And in particular, what we're seeing is, for example, many of our mix is across like phone, for example, we're seeing customers gravitate towards our Pro products because of things like affordability that allows our customers to get into our best products, which have favorable gross margins. So we're continuing to see that trend, that impacted us in the December quarter. As well, I think we're in a favorable commodity environment from a cost standpoint. And so we're benefiting from that as well in the December quarter. And then that's going to be, as we talked about, we're going to have a foreign exchange headwind heading into the March quarter, but we figured that's contemplated in the guidance range that we gave, the 46.5% to 47.5%. Krish Sankar : Thanks, Kevan. Thanks, Tim. Suhasini Chandramouli : Thank you, Krish. Operator, could we get the next question, please? Operator : Our next question is from Richard Kramer with Arete Research. Please go ahead. Richard Kramer : Thanks very much. My first question is for Tim. I'd like to ask about what might accelerate the pace of Apple Intelligence adoption. I guess do you see this simply as a question of time i.e., to launch more markets and languages or increase the percentage of installed base devices that can support it? Or is it a question of money, i.e., shifting R&D or marketing spend towards AI? And based on other prior Apple services, do you expect a sort of tipping point where adoption will go mainstream? Thanks. Tim Cook : I do believe it will go mainstream. I'm getting feedback from people using different features today. And this is -- keep in mind that on the iPhone side of our business, you either have to have an iPhone 15 Pro or iPhone 16 to use Apple Intelligence. And so the -- as that base grows, I think the usage will continue to grow. And I think -- I know from my own personal experience, once you start using the features, you can't imagine not using them anymore. I know I get 100s of e-mails a day, and the summarization function is so important. So I think it's a combination of that. And of course, in April, we roll out a whole series of new languages that we had mentioned, and so the base grows further. Richard Kramer : Okay, thank you. And then, Kevan, one of Luca's legacies was really getting Apple to record margin levels and also maintaining very consistent pricing across the product range. But taking the current high levels of profitability as fairly stable, what observations might you share about price sensitivity of users and whether having a wider range of pricing across the products might unlocks potentially further market share gains or boost overall product growth? Kevan Parekh : Yes, it's a good question. I think one, I don't think we're going to really depart from what served us pretty well to now. I mean we always take it into consideration, looking at short-term -- comparison between the short term and the long term. I think we've had a pretty disciplined pricing strategy, which would serve us pretty well. And I think we're going to continually kind of stick with that as far as I can tell. Richard Kramer : Okay, thanks. Suhasini Chandramouli : Thank you, Richard. Operator, could we get the next question, please? Operator : Our next question is from Atif Malik with Citi. Please go ahead. Atif Malik : Hi, thank you for taking my question. How do you guys see the potential tariff impact to your product for consumer demand under Trump 2.0 you guys did find under Trump 1.0? Tim Cook : We are monitoring the situation and don't have anything more to add than that. Atif Malik : Great. And Tim, as a follow-up, there is a lot of discussion on agentic AI, the use of agents. Do you guys see the upgraded series expected in April as something that will, let's say, be the killer application among the suite of features that you have announced in Apple Intelligence? Tim Cook : I think the killer feature is different for different people. But I think for most, they're going to find that they're going to use many of the features every day. And certainly, one of those is the -- is Siri, and that will be coming over the next several months. Atif Malik : Thank you. Suhasini Chandramouli : All right. Thank you, Atif. Operator, could we please get the last question? Operator : Our last question is from Ben Bollin from Cleveland Research Company. Please go ahead. Ben Bollin : Good evening, everyone. Thanks for taking the question. Tim, I'm interested in your thoughts and how you would have us think about the average useful life of these devices in the wild. And in particular, curious, if you look at the strength you saw in fiscal ‘21 and how that might support accelerated refresh opportunity into the future? Tim Cook : Yes. Ben, I think it's different for different types of users. I mean you have very early adopter kind of users that are very quick to jump on the latest technology that upgrade very frequently. And then you have people that are on the entire opposite side of that barbell. And most people are between those two points. And so I do think there were lots of units that are sold during the COVID period of time, and it's a huge opportunity for us as a company to -- for more than one of the product categories. Ben Bollin : That’s it from me. Thanks, Tim. Tim Cook : Thank you. Suhasini Chandramouli : All right. Thanks, Ben. A replay of today's call will be available for two weeks on Apple Podcasts or as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 7398532 followed by the pound sign. These replays will be available by approximately 5 p.m. at Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. And financial analysts can contact me, Suhasini Chandramouli, with additional questions at 408-974-3123. Thanks again for joining us here today. Operator : Once again, this does conclude today's conference. We do appreciate your participation.
ABBV	AbbVie	1,551,152	Health Care	Biotechnology	North Chicago, Illinois	2013 (1888)	2012-12-31	2,014	2	2014Q2	2014Q1	2014-04-25	3.139	3.133	3.207	3.238	5.92944	16.07	16.4	Executives: Richard Gonzalez – Chairman, Chief Executive Officer William Chase – Executive Vice President, Chief Financial Officer Scott Brun – Vice President, Clinical Development Larry Peepo – Vice President, Investor Relations Analysts : Steve Scala – Cowen & Co. Jami Rubin – Goldman Sachs Jeff Holford – Jefferies David Risinger – Morgan Stanley Chris Schott – JP Morgan Vamil Divan – Credit Suisse Alex Arfaei – BMO Capital Colin Bristow – Bank of America Merrill Lynch Mark Goodman – UBS Operator : Good morning and thank you for standing by. Welcome to the AbbVie First Quarter 2014 Earnings conference call. All participants will be able to listen only until the question and answer portion of this call. During the question and answer session, you will be able to ask your question by pressing the star, one key on your touchtone phone. Should you become disconnected throughout this conference call, please dial 1-877-934-8565 and reference the AbbVie call. This call is being recorded by AbbVie. With the exception of any participants’ questions asked during the question and answer session, the entire call including the question and answer session is material copyrighted by AbbVie. It cannot be recorded or rebroadcast with AbbVie’s express written permission. I would now like to introduce Mr. Larry Peepo, Vice President of Investor Relations. Larry Peepo : Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer, and Bill Chase, Executive Vice President of Finance and Chief Financial Officer. Joining us for the Q&A portion of the call are Laura Schumacher, Executive Vice President, Business Development, External Affairs and General Counsel; and Scott Brun, Vice President of Clinical Development. Rick will begin by discussing AbbVie’s results from the first quarter and then provide an update on our pipeline and some of the key milestones we expect this year. Bill will give a more detailed review of our quarterly performance and then provide an overview of our 2014 outlook. Following our comments, we’ll take your questions. Before we get started, I remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about the factors that may affect AbbVie’s operations is included in our 2013 annual report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today’s conference call as in the past, non-GAAP financial measures will be used to help investors understand AbbVie’s ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. With that, I’ll now turn the call over to Rick. Richard Gonzalez : Thank you, Larry. Good morning everyone, and thank you for joining us for our first quarter 2014 earnings conference call. Today, we’re pleased to report strong results with adjusted earnings per share of $0.71, exceeding our guidance range for the quarter. This included strong operational sales growth also ahead of our outlook for the quarter. We delivered this performance with strong growth across a number of products in our portfolio, including Humira, Synagis, Synthroid, and Creon. Our performance this quarter illustrates our ability to grow our business despite the impact of generic competition. It also provides confidence in our ability to deliver meaningful sales and EPS growth starting next year as we launch our HCV therapy. In 2014, our focus remains on continued strong commercial and operational execution as well as pipeline advancement. Today, I’ll briefly discuss our first quarter performance and provide an update on our pipeline and some of the key milestones we expect to occur throughout the year. Then I’ll turn the call over to Bill, who will provide you additional detail on our performance and our second quarter outlook. Our first quarter performance was led by Humira, which delivered more than 18% global operational growth. We continue to see increasing penetration across therapeutic categories and geographies which is driving strong market growth. Additionally, Humira continues to gain market share across segments. Humira is off to a strong start and we’re well on our way to achieving our sales growth outlook. Beyond Humira, we also saw a strong performance from other products in our portfolio, including Creon, Synthroid, Synagis, and Sevoflurane. We continue to be pleased with the performance of these durable and growing brands. In addition to our strong commercial performance in the quarter, we also made significant progress advancing our pipeline. So far in 2014, we have achieved a number of key regulatory and clinical objectives. This includes an important milestone for our interferon-free HCV combination. As you may have seen, earlier this week we announced the submission of our U.S. regulatory application for HCV therapy for genotype 1 patients. Our European regulatory application will occur in early May based on specific dates allowed for submitting applications to the CHMP. In anticipation of U.S. commercialization in late 2014 and European approval in early 2015, we’ve continued to make good progress in building the appropriate infrastructure. Detailed results from several of our Phase III registrational studies were recently presented at EASL and published in the New England Journal of Medicine. The comprehensive body of data demonstrates that our combination provides high rates of cure across genotype 1 populations, including difficult-to-treat patients. As we evaluate the HCV market and consider which patients which likely be treated in 2015 to 2017 time frame, we believe the most advanced patients – those with cirrhosis, fibrosis, and patients who have previously failed treatment – will be treated sooner. This view is consistent with feedback we’ve received from payor organizations and physicians around the world, and based on the high level of efficacy demonstrated by our therapy in these difficult-to-treat patients, we believe we’re well positioned for success in this market. Further, because we’ve conducted independent studies across specific genotype 1 patient populations, we’re able to characterize the performance in each patient type with a very high degree of confidence and we believe this will be an important point of differentiation. During the quarter, we also presented results from our mid-stage HCV trials in Japan as well as initial data on our next-generation HCV assets. Given patient characteristics and the prevalence of genotype 1b in Japan, we are evaluating a 12-week 2daa once daily ribavirin-free treatment for these patients. Data from our Phase II study with this combination in Japan demonstrated SVR12 rates in the mid-90% range. Our Phase III program is ongoing and enrolling rapidly, and we expect to submit our regulatory application in the first half of 2015. Japan represents the second-largest HCV market globally, and given our commercial presence and the potential product profile, we believe we’re well positioned relative to the competitive offerings. At the recent CROI meeting, we presented initial data from our next-generation HCV assets, including ABT493, a potent protease inhibitor, and our new NS5A inhibitor, ABT530. As we’ve said before, it is our goal with our next-generation program to bring to market a ribavirin-free, once daily pan-genotypic combination. As I mentioned last quarter, we have ongoing efforts to further simplify our initial offering with a once-daily formulation, and we’ve continued to make progress in this regard. Certainly there has been significant attention regarding the competitive landscape for this market. While we can’t make direct comparisons between studies, we do believe there are important differences between the clinical trial designs across various programs. This includes significant differences in cohort size for specific subgroups and patient populations, and the confidence intervals around trial results. We believe these factors will be important considerations for physicians, payors, and patients. Based on the large body of data supporting our therapeutic profile across genotype 1 patients, our global footprint and our ability to execute commercially, we continue to believe we’re in a strong position. AbbVie will be an early entrant into this market where there is clearly a strong desire from both physicians and payors for multiple therapeutic options. Well-tolerated treatments like ours that demonstrate high levels of efficacy, particularly in difficult-to-treat patients, will fare well; and considering the number of patients afflicted and both the physician and payor capacity, we believe there will be a steady cadence of patients treated annually, making this a very attractive market for many years to come. While HCV certainly garners significant attention, today I’d also like to highlight some of the other important pipeline programs and milestones that we expect throughout the remainder of 2014. We continue to have a high level of enthusiasm on our late-stage oncology assets, including our BCL-2 inhibitor, ABT-199, in development for a number of hematological malignancies, including our late-stage trials for our vanguard indication, CLL; our PARP inhibitor, ABT-888, in development for more than a dozen different cancer types; elotuzumab in Phase III development for multiple myeloma. The ABT-199 clinical program, which is partnered with Roche Genentech, continues to progress very well. As a reminder, last spring we refined the dosing and monitoring approach with ABT-199 in CLL to minimize the risk for tumor lysis syndrome. Since initiating the new protocol, we’ve collected and analyzed data on a significant number of patients. There have been no clinically significant events of TLS reported. We recently shared these findings with the U.S. regulatory authorities and reached agreement to remove the hospitalization requirement for a significant portion of patients going forward. We plan to present these safety data at an upcoming European Hematology Association meeting. As you know, last year we initiated a large Phase II single agent study in relapsed refractory CLL patients with 17p deletion. The initial date readout from this trial is expected in the first part of 2015. If the data warrants and regulatory agencies agree that ABT-199 addresses an unmet medical need, these data have the potential to serve as a path to early registration. We have a number of ABT-199 data presentations and other activities that are also expected this year. We plan to present initial Phase I combination data with Rituxan in relapsed refractory CLL patients at the upcoming AASCO and EHA meetings. Later this year, we expect to present initial single agent AML data and multiple myeloma data, and also later this year in collaboration with our partner, we plan to start a Phase III combination study of ABT-199 plus GA101 in first-line CLL patients. We’ve also seen good progress with ABT-888, our PARP inhibitor. We recently announced the initiation of a global Phase III trial evaluating ABT-888 in patients with previously untreated squamous non-small cell lung cancer. The data supporting the decision to advance the Phase III development will be presented at a medical meeting in the second half of this year. Earlier this year, we started a Phase III study of ABT-888 for neo-adjuvant treatment of triple-negative breast cancer. Several other mid-stage trials will complete in 2014 with the potential for additional Phase III transitions yet this year. Also in late stage development in our oncology pipeline is elotuzumab for multiple myeloma, the second most common blood cancer, in partnership with Bristol-Myers Squibb. Two Phase III studies are ongoing in relapsed refractory and first-line patients. Results from the event-driven trial are expected in early 2015. Now turning to our other late-stage pipeline assets. This summer, we’ll see data from the second of two registrational studies on daclizumab. As a reminder, the DECIDE trial is designed to show a reduction in annualized relapse rates and disability progression in patients with relapsing remitting multiple sclerosis versus an active comparator. Despite advances in this category, there continues to be a significant need for high efficacy agents and we believe daclizumab has the potential to deliver the right balance of clinical activity and an acceptable safety profile. In our neuroscience pipeline is Duopa. Regarding our U.S. regulatory application, we recently received questions on the submission. FDA did not identify safety issues in the clinical data and no new clinical trials were requested. The questions were primarily related to the use of the delivery system. We’re in the process of addressing the questions and plan to submit a response when that process is complete. Moving on to Elagolix, our compound in Phase III development for endometriosis and Phase IIb for uterine fibroids, we’ll see initial data from the first of two pivotal studies in endometriosis in the second half of 2014. Finally, we look forward to seeing Phase IIb data in RA in our partner-selected JAK1 inhibitor. Beyond our partnership with Galapagos, we have a robust pipeline in mid-stage immunology assets, including an internal selected JAK1 inhibitor, an IL6 nanobody, and DVD bispecific biologics, among others. In closing, we’re off to a strong start in 2014. We delivered strong performance in the quarter and we continue to make good progress executing on our key strategic priorities, including pipeline advancement. As we evaluate our pipeline prospects, including a number of potential opportunities, we believe our pipeline is the strongest it has ever been. We’re on the cusp of a number of important data milestones, phase transitions, and product launches. Given the progress we’ve made, we continue to expect strong sales and earnings growth beginning in 2015. With that, I’ll turn the call over to Bill for a more detailed view of our results. William Chase : Thank you, Rick. This morning, I’ll review our first quarter performance and provide an update on our outlook for the remainder of 2014. As Rick said, we’re very pleased with the strong quarter we delivered. Total sales increased 6.7% on an operational basis, excluding a 1.3% unfavorable impact from foreign exchange. Excluding sales from our lipid franchise due to loss of exclusivity, total sales increased 13.5% on an operational basis. Humira delivered global sales of more than $2.6 billion, up 18.4% on an operational basis. In the U.S., Humira sales increased 24.7% driven by continued market expansion, share gains, and particularly strong growth in the gastro segment. Internationally, Humira sales grew nearly 14% on an operational basis and more than 12% on a reported basis. International growth is being driven by continued uptake of new indications, share gains, and double-digit market growth in most key countries. On a global basis, we continue to expect double-digit sales growth for Humira in 2014. International sales of Synagis were strong in the first quarter at $354 million, up 9.3% on an operational basis. Synagis, which protects at-risk infants from severe respiratory disease, is a seasonal product with the majority of sales in the first and fourth quarters. Androgel sales were up 6%, benefiting from a favorable comparison versus the market dynamics of the prior year quarter. While Androgel continues to gain share, we have seen a notable slowdown in the market this year with overall prescriptions down roughly 10%. We expect Androgel performance for the year to be in line with these market trends. Global Lupron sales were $189 million in the quarter, up 5.6% on an operational basis. For the full-year 2014, we expect sales to be down modestly from 2013. U.S. sales of Synthroid were up $157 million with the year-over-year growth rate aided by a favorable comparison to the first quarter of 2013, which was unfavorably impacted by customer ordering patterns. Synthroid maintains strong brand loyalty and market leadership despite the entry of generics into the market many years ago. For the full-year 2014, we expect low double-digit sales growth for the brand. U.S. Creon sales were $107 million in the quarter, up 18.4%. Creon maintains its leadership position in the pancreatic enzyme market where we continue to capture the vast majority of new prescription starts. We expect low double-digit sales growth for Creon in 2014. Sales of Duodopa, our therapy for advanced Parkinson’s disease, grew nearly 30% on an operational basis this quarter. For the remainder of 2014, we expect continued double-digit growth in Europe and other international markets where Duodopa is currently approved. All of the products in our lipid franchise are now experiencing generic competition. Sales of Niaspan were $47 million and TriCor Trilipix sales were $23 million, both down significantly versus the first quarter of 2013. We expect these trends to continue for the remainder of 2014. I’ll now turn to the P&L profile for the first quarter. The adjusted gross margin ratio was 78.4%, in line with our expectations and up 220 basis points from the prior year quarter. This reflects loss of exclusivity in our lipid franchise offset by favorable mix impacts across the portfolio and margin-enhancing initiatives we’ve implemented. Adjusted R&D was 16.9% of sales, up 22% from the prior year driven by increased funding of our mid- and late-stage pipeline assets and the continued pursuit of additional Humira indications. The level of R&D investment in the quarter was above our guidance. Adjusted SG&A was 27.6% of sales in the first quarter, reflecting continued investment in our growth brands and preparations for our upcoming HCV launch. Adjusted SG&A investment increased 4.6% from the prior quarter. We remain on track for a full-year adjusted SG&A profile approaching 28%. Net interest expense was $65 million and the adjusted tax rate was 22.3% in the quarter. First quarter adjusted earnings per share, excluding non-cash amortization expense and specified items, were $0.71, up 4.4% year-over-year and exceeding our previous guidance range. On a GAAP basis, earnings per share were $0.61. Moving on to our full-year 2014 outlook, we are confirming our adjusted earnings per share guidance of $3 to $3.10. This guidance range excludes $0.37 per share related to amortization expense and ongoing separation and restructuring costs. We continue to expect sales of approximately $19 billion this year with growth from our key marketed products offsetting the decline in lipids from generic competition. Included in our sales guidance is an estimated negative impact from exchange of roughly 1% for the year. We’re committed to improving our gross margin ratio in 2014 despite the loss of high-margin lipid sales. As a result, we continue to forecast an adjusted gross margin ratio approaching 79% for the year, reflecting actions we’ve taken to further improve our margin profile. As you know, we have a record number of Phase III programs in development, including a number of exciting opportunities in oncology, HCV, immunology and other areas that warrant investment. We now expect R&D expense to be somewhat above 16% of sales as we continue to advance our late-stage pipeline. As I noted during our call in January, we expect to see an increase in SG&A this year as we invest in our key brands and our upcoming HCV launch. As a result, we continue to expect SG&A expense to approach 28% of sales in 2014. We are forecasting net interest expense of about $270 million for the full year and we continue to expect an adjusted tax rate of approximately 22%. Regarding our second quarter outlook, we expect adjusted earnings per share of $0.75 to $0.77. This excludes roughly $0.10 of specified items and non-cash amortization resulting in a second quarter EPS in the range of $0.65 to $0.67 on a GAAP basis. Our second quarter outlook reflects a flat to slightly increasing top line, including a modest negative impact from foreign exchange. We expect gross margin as a percentage of sales to be in line with our full-year guidance. The amount of investment in R&D and SG&A in the second quarter is expected to increase sequentially from the first quarter as we accelerate spending, particularly for our upcoming HCV launch. This has been captured in our EPS guidance range for the second quarter. In conclusion, we’re pleased with our first quarter performance as well as our outlook for the remainder of 2014. With that, I’ll turn it back over to Larry. Larry Peepo : Thanks Bill, and we’ll now open the call for questions. Elan (ph), we’ll take our first question, please. Operator : Thank you. [Operator instructions] Our first question today is from Steve Scala from Cowen. Steve Scala – Cowen & Co.: Thank you so much. I have three questions. First regarding the hep-C opportunity, has your strategy on how to approach the market changed at all in the past six months, and if so, in what ways? Secondly on Duopa, I assume the PDUFA date will be pushed out from the early May time frame. Do you have visibility on for how long? And then thirdly, maybe a bit of a bigger picture question. Some companies are philosophically opposed to changing full-year EPS guidance at the end of Q1 because it’s simply too early in the year to do so. Does AbbVie share this view, or would the company have increased its full-year EPS guidance already if it thought that was prudent? Thank you. Richard Gonzalez : Okay Steve, this is Rick Gonzalez. I’ll take the first one and the last one – let me start with the last one. Yeah, I think we are in a position where it just doesn’t make sense based on first quarter to change guidance. I wouldn’t say we have a philosophy where we won’t change it if ultimately we believe it should be changed going forward, but it’s just too early in the year to ultimately make that decision today. As far as hep-C is concerned, I think it is a very interesting market as it’s evolved over time, but the one thing I’d roll out is we said early on in the process that we thought we had a very competitive profile on our product and we thought we could position this product well in the marketplace. If you recall, one of the things that we talked about is that we had done a significant amount of market research in this area and there were really three key drivers of success. One was clearly cure rates – SBR12 rates in both naïve patients but more importantly in difficult-to-treat patients; and second was therapies that were highly tolerable. Those two factors alone drove the vast majority of physician prescribing patterns. Convenience was a distant third – a very, very distant third is what we said. At the same time, we also said that this was a large market and would stay a large market for a long period of time because of the clinical capacity and the triaging of patients over time, and that physicians and payors would want multiple options in the marketplace. We also said that we believe that the patients that would get treated first were cirrhotics, fibrotic patients, and experienced patients, that they’d be a significant amount of the treatment in the first several years. When you look at the way the market is playing out today, it’s playing out pretty close to what I just described to you, and that’s what we articulated more than a year ago. If you look at our product profile against that, we have very strong SBR12 rates in cirrhotic patients and experienced patients. We have strong individual patient data around sub-populations with very tight confidence intervals. We have extremely high tolerability with or without ribavirin. We have very low relapse rates in these patients, and we’re going to be an early entry into the marketplace and provide an alternative to the other competitive offerings. So when I look at it, it’s playing out very similar to what we expected, and I think we’ll be in a very good position to compete very effectively in this market. Scott Brun : This is Scott Brun and I’ll take the second question on Duopa regarding the PDUFA date. So certainly through our interactions with FDA, they acknowledge the importance of Duopa in providing an option for patients with severe Parkinson’s disease who other than deep-brain stimulation really have no other options, so we’ve been working very closely with them to address some questions predominantly related to the use of the delivery system. Really, we’ve gotten no concerns with regard the safety efficacy profile of the product. I think this is more a factor that this is a very unique drug-device combination and we’re working with multiple constituent parts of the FDA beyond just the drug review division, so certainly there are some additional questions related to patient use, instructions for use. We’re working through those with the various FDA divisions, our partner who manufactures the pump, and our own internal AbbVie experts. I don’t want to give you guidance on the PDUFA date right now. Certainly it will extend beyond May, but we’re working very expeditiously in partnership with the FDA to address those questions. Operator : Thank you. Our next question is from Jami Rubin from Goldman Sachs. Jami Rubin – Goldman Sachs : Thank you. Just a couple questions – Rick, I’m not even really sure where the question is here, but maybe you can comment on this. As you know, Sovaldi sales this quarter were $2.2 billion. J&J’s Olysio sales this quarter, one single agent protease inhibitor generated $350 million in sales annualizing at $1.4 billion, and I look at consensus numbers for AbbVie’s hep-C regimen next year and they’re under $800 million. What do you think the world is missing here, because we’ve seen really good data, et cetera, but I don’t know – maybe you can just comment on what you think the gaps and misunderstanding are. Secondly, Scott to you on your second-generation hep-C regimen, clearly I think one of the key messages at EASL is just how aggressively your competitors are moving in this space, and I’m wondering if you can give us an update on your development timelines for your second-generation hep-C regimen and if we will see data at AASLD. Then just lastly on the news, Rick, on ABT-199, so are you saying that we are now out of the woods on TLS with respect to ABT-199? Thanks. Richard Gonzalez : Thanks Jami. Okay, so I’ll cover the question on hep-C. I’m not sure what the gaps are. I mean, I just went through how I think our product fits against the market criteria, and I think that’s consistent with our view of how we’ll compete in the marketplace. I will say, look – the data is evolving here very rapidly. We just saw a lot of the competitive subset data at EASL, and the market probably needs a little time to digest that over a period of time and make some determinations as to how they want to value each of the competitive alternatives in the marketplace. But I can tell you from our perspective, we feel pretty good about our position and we feel it’s playing out very consistently with what we thought would play out in the marketplace. Having said all that, it’s certainly better to delight than disappoint, and so the number that’s out there I think is a number that certainly is one that we have confidence we can beat. Scott Brun : Jami, it’s Scott. Maybe I’ll go on with the HCV second-generation. So as Rick said, we presented data at CROI showing the characteristics of our new protease inhibitor, ABT-493 and our new NS5A, ABT-530. Both are pan-genotypic with very balanced activity against genotypes 1 through 6, activity against the first generation compound typical mutations that we see arise, and frankly very interesting characteristics with regard to their barriers to resistance. So certainly if you compare these against other next-generation compounds, these compounds are ranking near the top – extremely favorably. We are in Phase II right now. We have established to our confidence that these are indeed once daily compounds without the need of ritonavir. We are very pleased with regard to what we’re seeing in patients, and we are moving forward with our Phase II program that’s going to incorporate elements of, let me say, much of what we’ve been learning about where the competition is moving with the next wave of therapy. We certainly feel we are on track for these therapies to be available in the 2017 time frame. Moving on to ABT-199, as Rick said, after we changed our dosing protocol to start at a somewhat lower dose and ramp up more slowly, we had been hospitalizing all of our CLL patients with the initiation of 199. We had monitored them very carefully, collected a very significant body of data, and certainly have seen no TLS – clinically significant TLS – with that approach. As a consequence of our analyses of these data, moving forward with the FDA we’ve been able to remove the hospitalization requirement for, I will say the majority of patients. We’re continuing hospitalization for those patients at highest risk with the most bulky disease, who frankly are also the ones who have the fewest options and the greatest ability to benefit from ABT-199 therapy. So the program is expanding rapidly with Phase III studies having initiated, so we’re going to be getting a lot more patient experience. You’re going to see what we’ve seen at the upcoming AASCO meeting. Always want to be careful about saying out of the woods, but I will say strongly off to the races based on what we’ve been seeing. Jami Rubin – Goldman Sachs : Okay, thanks. Operator : Thank you. Our next question is from Jeff Holford from Jefferies. Jeff Holford – Jefferies: Hi, thanks very much for taking my questions. Just on the once daily formulation of the current offering, wondering if you can just give us a bit more color around timing of that and what you’re required to do for that in terms of any clinical studies or work with the FDA. Secondly, can you just let us know if you’ve had any indication around guideline advantage potentially in patient groups like cirrhotics or any other hep-C population where you think you have a higher level of evidence than he competitors so far in terms of specific trials? And then just a last question, what do you guys think the percentage of the global hep-C opportunity that’s driven by tender or preferential access based pricing, just to give us a sense of how important pricing might be in this market? Thank you. Scott Brun : It’s Scott Brun again. So with regard to our once daily formulation of our first generation regimen that will take our twice daily non-nuke polymerase ABT-333 and coformulate with the once daily 450 267, we are finishing up some of our pharmacokinetic work to make sure that we’re selecting the optimal candidate formulation. Certainly based on what those data look like and how similar the PK profiles are to the regimen with (indiscernible) will drive exactly what our next steps are going to be. Certainly if there is additional clinical work required, we fully anticipate that we’re going to be beginning that work before the end of the year, and this regimen will slot in between the entry of the first generation regimen and, as I referred to, the second generation. With regard to guidelines, certainly we work very closely with the various groups that drive the prevailing global guidelines, certainly to make sure that they understand the breadth and depth of our program. I think typically guidelines are driven by weight of evidence. Certainly you can see ADC gradings with regard to how strong evidence is, and having dedicated data in some of the most important patient groups – those that are the hardest the treat – in very significant numbers that shrink your confidence intervals and provide you greater certainty, I think is going to resonate with these guideline groups. Again, those guidelines haven’t been written yet, but if you look at how these are conventionally put together, it’s a weight of evidence approach and I think we feel very, very confident in our body of data, particularly in the groups that you referenced, such as the cirrhotics. Richard Gonzalez : Jeff, this is Rick on the tender question. Well, as you know, the U.S. is a big part of this market, which isn’t a tender-driven kind of market, and then obviously a lot of the major European countries would be the other significant part, and Japan. So if you look at pure tenders across the G7, it will be a relatively small percentage of the overall revenue in this market as it exists today. Jeff Holford – Jefferies: Thanks very much. Operator : Thank you. Our next question is from David Risinger from Morgan Stanley. David Risinger – Morgan Stanley : Yes, thanks very much. Good morning. I have a number of questions but I’ll try to just ask three, if that is okay. The first is relatively straightforward, just a simple numbers question. IMS has been reporting mid to high single digit TRX growth for Humira in the U.S. in the first quarter. Could you just break down the reported 25% U.S. Humira sales growth to give us some better perspective on underlying demand as you see it, in case the IMS TRX growth is misleading, and then also on price and any inventory stocking. Second, with respect to HCV on pricing, maybe Rick, you could just give us your thoughts at a high level about how competitive one needs to be on price in a duopoly. I would think that in the initial duopoly, it would make little sense to price aggressively when you have just one competitor, but just wanted to get your perspective on that. Then third, with respect to HCV diagnosis, I think the HCV bulls are talking about significant diagnosis increases in the U.S., but I don’t have a good perspective on what the real numbers are. So maybe you could talk about the number diagnosed in terms of whatever number you have recently, and how that number is really going to grow annually in the next three years. We think about the number diagnosed in the United States growing in the low single digit percentage annually or mid-single digit percentage. Any color on that would be helpful. William Chase : So David, it’s Bill Chase. I’ll start with your Humira question. As you pointed out, the IMS scripts on Humira are high single digit. The numbers we see are actually a little higher than that typically on an annual basis. This thing is doing high single to low double digits, and then obviously you’ve seen it when we’ve taken price increases, so price does remain a component of the U.S. growth. Inventories – we try to minimize fluctuations from quarter to quarter on inventories as much as we possibly can. In both the fourth quarter and the first quarter, Humira inventories were about half a year. There were some impacts—half a month, rather, I’m sorry. There were some impacts in the first quarter of 2013 but that was maybe four to five points on the growth altogether. This is a brand that continues to perform very, very strongly in the U.S. You saw the numbers last year and certainly we expect continued performance this year. David Risinger – Morgan Stanley : I’m sorry – I don’t know if you can hear me. Sorry to interrupt, but with respect to four to five points in the first quarter of ’13, did you say there was a negative impact resulting in a somewhat easy comp for the first quarter of ’14, given what happened in the first quarter of ’13? William Chase : There was a favorable comp versus the first quarter of 2013 related to ordering patterns. David Risinger – Morgan Stanley : Thank you. Richard Gonzalez : Okay David, this is Rick. I’ll cover the HCV one. As it relates to pricing, as we’ve said before, if I look at the product profile that we have and I look at the mix of patients that are going to be treated first, we have a product profile that stands up quite nicely in the marketplace, so that’s not our strategy going forward. So we’re not going to talk specifically about how we’re going to deal with pricing, as I mentioned on the last call as well, but I’ll just tell you the product attributes of the AbbVie therapy, I think stand up quite nicely to what the market wants, and certainly that will be the driver of how we try to educate the market and market the product. As far as diagnosis rates are concerned, I don’t have the numbers directly in front of me but last time I recall we thought they were about 3.5 million patients in total in the United States. About half of those were currently diagnosed, and I’d say in our LRP modeling we’re not modeling out dramatic increases in newly diagnosed patients. I mean, there are obviously patients that are being diagnosed and coming into the system, but it’s probably in that high single or low double digit kind of rate. You have to remember, there’s a certain level of clinical capacity here to begin with just to get through the people that are already diagnosed that need treatment, so I think everybody will have campaigns to go forward and try to diagnose more patients, but the governing factor may be the level of clinical capacity that exists in the marketplace anyway. Scott Brun : David, it’s Scott. I completely agree with Rick. You see some varying numbers with regard to, say the U.S., how many patients are actively in care with HCV. I’ve seen numbers on the order of 400,000 –again to Rick’s point, maybe 1.5 to 1.7 diagnosed on the total of 3 million. But I think the more relevant question, as Rick laid out, if you’re trying to see how this market is going to evolve is all the various factors in the patient, their journey not only diagnosis, clinical capacity, but then some of the things certainly both in the U.S. and globally with regard to how payors are going to be looking at the cadence of treatment with certainly all the signaling that we’ve been seeing, those with the most advanced fibrosis and/or prior treatment experience coming in first. So I agree with Rick. We have not modeled and don’t need to model very aggressive diagnostic uptake in our forecast. David Risinger – Morgan Stanley : Great, thank you. Operator : Thank you. Our next question is from Chris Schott from JP Morgan. Chris Schott – JP Morgan : Great, thanks very much. Following up on the pricing topic here on the HCV side, I guess your competitors price and launch have obviously attracted a lot of attention from payors and some politicians. Can we have a little bit more on your view on how this all plays out? If price doesn’t come down in this market, do you think we’re going to see more efforts to restrict usage of these products that it medically makes sense at all to do, and I guess finally, does that attention at some point give AbbVie better negotiating position with payors? I guess it’s a couple questions there, but just any thoughts would be appreciated. My second question was on ABT-199. I guess two clarifying questions there – first, how many patients have been dosed on the new regimen at this point? And the second question is, it looks like you could have a best-in-class product here but one that’s going to be coming to market a few years later than some other highly effective, novel agents. How do you see that playing out commercially, the time to market issue here? Thanks very much. Scott Brun : Chris, it’s Scott Brun, so maybe I can talk about--. Obviously I don’t want to be giving away exact numbers with regard to where we’re at on our Phase II program, again just because of the competitive fervency here. But to your point, when I look at the characteristics of these drugs – and again, we’re comparing in your minds the preclinical information that’s out there and then certainly what I know about from what we’ve seen in patients so far. No, I absolutely think that this particular regimen has the potential for best-in-class. We will know more over the ensuing years as we—ensuing year as we continue our Phase II program. But when I say for a regimen that’s going to be out in 2017, referring back to the prior question, this epidemic is going to be far from over, okay, and I’m talking in the developed markets. You just look at our throughput, even if you assume in the G7, say, on the order of 250,000 patients coming through, they are going to be a number of patients still in need and certainly this number, as you made the point, is going to be affected by healthcare system decisions on how are patients going to be prioritized. Now certainly this is a disease where the consequences occur decades after initial infection, so you do have some time before you have to act. You don’t have to treat everybody with no or little evidence of liver scarring right off the bat. Certainly I think those patients who have more advanced fibrosis or scarring or other factors that are medical indications for treatment, I cannot imagine any healthcare system is going to be making the decisions to deny that care. Richard Gonzalez : Chris, this is Rick. The only thing I would add to that is what will really drive access and who is treated is capacity, guidelines, and then ultimately whatever criteria the governments or managed care organizations put in place. I think those will be responsible and appropriate clinical guidelines that are put in place because they tend to come together, and the governing factor may be more one of capacity than it is other kinds of things. Operator : Thank you. Our next question is from Vamil Divan from Credit Suisse. Vamil Divan – Credit Suisse : Yes, thanks for taking the question. So just following up a little bit on the pricing question there with hep-C, I just actually wanted to ask you a question as it relates to Humira. Obviously hep-C, there’s some unique components here, but are you seeing or do you expect to see any greater pressure across other specialty care markets, I guess specifically with Humira in a class of anti-TNS where we do have a number of different competitors. I think we’re starting to see some of these concerns maybe extend to areas that have been immune to this issue before, so just curious to hear your thoughts. And then separated and unrelated question, just on Androgel – appreciate what you said about 2014. Just what do you think about the longer term potential for this class and your drug specifically, just given some of the safety concerns that have been raised? Do you see any potential to re-establish growth for this category, or not? Thanks. Richard Gonzalez : This is Rick. So if you look at Humira and the class of anti-TNS, I think you have to reflect back on there have been many, many competitors in this market for a long period of time, and you still see Humira have a leadership position in this category. Obviously a component of that is working with governments and working with managed care organizations to ensure that you’re demonstrating the right value proposition for the product and it is priced appropriately against that value proposition, and that’s something we deal with every single day, every single year. I wouldn’t say that we’ve seen dramatic changes in the approach that we’ve had to take with those organizations. Even recently, I wouldn’t say we’ve seen dramatic changes. As it relates to Androgel, certainly we’re not projecting going forward that the market will accelerate dramatically, and so I think we’re assuming in our modeling per our long-range plan that ultimately the market will be relatively slow growing to flat going forward. Operator : Thank you. Our next question is from Alex Arfaei from BMO Capital. Alex Arfaei – BMO Capital : Good morning and congratulations on the quarter, folks. Three questions, if I may. Regarding your hep-C regimen, are you having discussions with payors already, and specifically I’m wondering if your (indiscernible) Phase III in cirrhotics is resonating with payors given the importance of this group. Second, could you comment on the enhanced gross margin initiatives that you were talking about earlier? What are those initiatives, and what is your longer term outlook on gross margin given your plans to establish manufacturing in Singapore? Then third, when can we expect data from your own JAK1 inhibitor? Thank you. Scott Brun : So maybe, Alex, going on with regard to our data particularly in cirrhotics and the payor community, look – we’ve been sharing the specifics on these data with a variety of different stakeholders that are involved in the care of these patients, ranging from again clinicians to various payor groups around the world. As I’ve said before, yeah, when you have been the only company that has done a dedicated study in a population that traditionally has had lower rates of response with any other HCV therapy that’s been seen, there’s great interest in how therapies are going to perform in this population, and I will say great appreciation to the fact that we did a very comprehensive 400-patient study in these patients to be able to provide them some granularity in terms of how sub-populations of cirrhotics will perform. Their view is we’re not—we understand there’s a population, but the individual clinician is going to be treating the 1a cirrhotic relapsed patient – they're not going to be looking at a blended population when they make their choice, and that’s exactly what payors want to be seeing. So I’d say there’s been a very robust interest in those data. Maybe I could go ahead with regard to the JAK question. Certainly we have two selective JAK1 programs ongoing, our partnered program with Galapagos and then our own internal ABT-494 selective JAK inhibitor. Certainly we’re looking at both of these in rheumatoid arthritis. We’ve also been studying Galapagos in Crohn’s disease. We will be seeing data on our JAK inhibitor on the first part of 2015. William Chase : On gross margin, I would say that our gross margin profile has been a focus of emphasis on this business going back actually many, many years, even pre-spin. The way we drive those savings is a combination of everything from manufacturing efficiencies to purchasing efficiencies to even lean manufacturing techniques – that sort of thing. Certainly we’re keeping our eye on all of those balls as we move forward through the LRP. We expect over the next few years that you’ll see some gross margin profile expansion. A lot of that is going to be driven by the launch of HCV, which as you can imagine, will be a higher margin product relative to our base, so I think you’ll be very happy watching that line develop over the next couple years. Alex Arfaei – BMO Capital : Great, thank you. Operator : Thank you. Our next question is from Colin Bristow from Bank of America Merrill Lynch. Colin Bristow – Bank of America Merrill Lynch : Thanks for taking the questions. Another one on hep-C – just with regards to what you are seeing in terms of the Solvadi Olysio numbers, how has this changed your internal expectations regarding the number of patients treated and launch ramp? And you talked a little bit about capacity – where do you think we are now with regards to the sort of percentage of capacity, and what do you assume the limit is here? On Humira, previously you’ve given some good color on the share and trends in each of the indications. If you could give us an update on this, that would be great. And just one on ABT-199 – what are your expectations now for potential post-approval monitoring requirements? Do you envisage a scenario where patients are stratified based on tumor bulk regarding whether they need monitoring? Thanks. Larry Peepo : Thanks Colin – this is Larry. I’ll start with some Humira overview, as you mentioned. Certainly we’re seeing very good growth by indication. In general, I would say we’re seeing the rheum growth in kind of the mid to high single digit range. The derm area is growing probably close to mid single digits, and in gastro we’re seeing more strong double-digit growth there. Ex-U.S., it’s a little bit harder to cut it by indication, but as we mentioned in the prepared remarks, we continue to see nice double-digit growth across the major markets ex-U.S. In terms of share at this point in time, we would say that we’re seeing gains in rheum – we’ve got about a 25% share there. We see steady derm share at about a 40% share, and gastro we’re seeing share gains there and we’re probably about a 45% shareholder there, toggled between number one and number two there, number one in derm. So very pleased with the progress that we’re seeing, strong commercial execution across the board. The mix of sales right now, we see RA in the U.S. is actually just a little bit below 40% of our overall sales. Ex-U.S., it’s probably around 35%. The gastro space is probably around 25% or so of the overall sales mix, both here in the U.S. and ex-U.S. The derm space is probably in the range of 15% or so of sales in both geographies, and then the remainder is a little heavier ankylosing spondylitis, psoriatic arthritis component ex-U.S. – call it 25% or so, and in the U.S. that component is around 20% of our sales mix, so it’s becoming a nicely diversified book of business for us overall in both geographies. Scott Brun : Colin, it’s Scott. I’ll go ahead and take the 199 question. So with regard to speculating on post-approval monitoring, obviously a little bit early but as we’ve said today, we’ve been able to successfully remove the requirement for hospitalization for both the low and medium risk patients, which accounts for the majority of the patients, be it either first line or later line. We’re going to continue with hospitalization for the time being on the high risk patients, which as you said are those with the bulkier tumors, but as we include more data on those patients, we’re going to continue to see how we can refine any requirements for that type of monitoring. So I just think we need some more patients under our belts for us to be able to really say what it’s going to look like at the time of launch. Richard Gonzalez : Colin, this is Rick. I’ll cover the hep-C one. We’re obviously pretty early into this launch, so it’s a little difficult, I think, to project off of one quarter. I’d say it is relatively consistent with how we modeled it. If you go back to the initial PI launches, what you saw was some de-warehousing occurring and then in the first quarter or two it was high, and then it started to flatten out a bit and come down a little bit. So if you think through that and you say that was a model that you wanted to follow, that ultimately you might see it peak, come down, flatten out a bit and then you see another peak occur with the launch of all orals where you see more de-warehousing occur. But at this point, you’re looking at one quarter, you’re looking at one data point, so it’s a little hard to model against that; but I wouldn’t say it was out of the realm of what we anticipated. As far as capacity is concerned, I think we’ve talked before about the capacity. We do anticipate that there will be some expansion of capacity with all oral coming into the marketplace, so I think we will see, particularly in the United States, some expansion of capacity going forward, so we will see more patients being able to be treated by the time those products get to the marketplace. Larry Peepo : Thanks Colin; and Elan, we have time for one final question. Operator : Our final question today is from Mark Goodman, UBS. Mark Goodman – UBS: Yes. Can you talk about the PARP and the market, and how you view your product in comparison to the other products? Scott Brun : Yeah, definitely. Mark – Scott Brun. So Veliparib, our PARP, one of the things we’ve tried to do differently from the competition is to not just limit the use of the PARP mechanism as monotherapy in genetically deficient tumors, such as breast cancer with the BRCA mutation. So I think you can see from the Phase III trials that we’ve started so far, as a neo-adjuvant therapy in triple-negative breast cancer, these are for women who have been initially diagnosed with breast cancer where we treat with the Veliparib-based regimen prior to therapy to de-bulk the tumor. And then certainly in non-small cell lung cancer which is an area that no other PARP inhibitor has explored, we’re able to go there because we found a way to successfully combine with carboplatin-based chemotherapy. So we’re really looking to more broadly leverage the potential of PARP by using it in combination with chemotherapies reflected in our initial Phase III trials. We have an ongoing Phase II trial where we’re using it in combination with whole brain radiation in patients who have brain metastases from lung cancer. That study is going to be reading out later this year. Looking at a variety of other solid tumors in combination with other chemotherapies as well. So I’d say through a lot of the work that we’ve been doing, we’ve been able to set the stage to be able to do things with our PARP that, frankly, the competition is not currently pursuing, so I think it really broadens our opportunity for Veliparib as a consequence. Larry Peepo : Thanks Mark. That concludes today’s conference call. If you’d like to listen to a replay of the call after 11 :00 am Central time today, visit our website or you can call 866-491-2909, pass code 42514. The audio replay will be available until midnight on Friday, May 9. Thanks again for joining us. Operator : Thank you, and this does conclude today’s conference. You may disconnect at this time.
ABBV	AbbVie	1,551,152	Health Care	Biotechnology	North Chicago, Illinois	2013 (1888)	2012-12-31	2,014	3	2014Q3	2014Q2	2014-07-25	3.136	3.14	3.362	3.485	5.90522	15.37	15.66	Executives: Larry Peepo – VP, IR Richard Gonzalez – Chairman and CEO William Chase – EVP and CFO Operator : Good morning and thank you for standing by. Welcome to the AbbVie Second 2014 Earnings Conference Call. All participants will be able to listen-only. This conference is being recorded by AbbVie. I would now like to introduce Mr. Larry Peepo, Vice President of Investor Relations. You may begin sir. Larry Peepo : Thank you. Good morning and thanks for joining us. On the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; and Bill Chase, Executive Vice President of Finance and Chief Financial Officer. Rick will begin by discussing AbbVie’s results from the second quarter and then provide an update on our pipeline and some of the key milestones we expect this year. Bill will give a more detailed review of our quarterly performance and then provide an overview of our 2014 outlook. As a reminder we are currently operating under the UK takeover code and will be until the Shire transaction is completed. The UK takeover code governs what we are able to disclose regarding the specifics of the transaction as well as the various aspects of AbbVie’s underlying business, including operating performance, product details and pipeline milestones. To help investors we have added a Q&A section to our earnings news release today which addresses a number of typical questions we receive. Due to the UK takeover code we will only be providing prepared remarks during our conference call today. There will not be a question-and-answer portion of today’s call. Before I turn the call over to Rick I remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about the factors that may affect AbbVie’s operations is included in our 2013 Annual Report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law. On today’s conference call as in the past non-GAAP financial measures will be used to help investors understand AbbVie’s ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our regulatory filings which can be found on our website. And with that I’ll now turn the call over to Rick. Richard Gonzalez : Thank you, Larry. Good morning and thank you for joining us this morning. We’re pleased to report a strong second quarter result with adjusted earnings per share of $0.82, exceeding our guidance range for the quarter. This included sales growth of nearly 5% also ahead of our outlook for the quarter despite the positive impact from loss of exclusivity in our lipid franchise. Sales growth was led by continued robust performance from HUMIRA and other key products including Synthroid, Sevoflurane and Duodopa. We have been pleased with our performance in the first-half of the year and as a reminder last month we raised our full year 2014 earnings per share guidance range to $3.06 to $3.16 on an adjusted basis, reflecting strong underlying business performance. Beyond our strong financial performance we had a very productive second quarter with a number of important pipeline advancements, clinical trial results and other strategic activities. We submitted our U.S. and EU regulatory applications for interferon-free HCV combination. Both applications are currently under active priority review. We continue to anticipate U.S. approval later this year and EMA authorization in early 2015. We are also working to advance our Next-Generation HCV assets which are currently in Phase 2 development. We expect data from the Phase 2/b program in 2015 and plan to start Phase 3 development next year as well. We have also made progress with several assets in our oncology pipeline. At the recent ASCO and EHA meetings we presented interim-results from our Phase 1 clinical trial of ABT-199 our BCL-2 inhibitor in combination with Rituxan in relapsed refractory CLL patients. The data showed an overall response rate of 84% and a complete response of 36% which compares favorably to trial results from other therapies in this patient population. This combination is being investigated in an ongoing Phase 3 clinical trial for the treatment of relapsed refractory CLL. We are also evaluating ABT-199 in a variety of other cancer types including AML. We expect to present data from the AML study at an upcoming medical meeting. Also at ASCO AbbVie released preliminary results from an ongoing Phase 1 study of ABT-414 an anti-EGFR monoclonal antibody drug conjugate used in combination with chemotherapy. The study showed a level of response not typically seen in patients with recurrent or unresectable GBM. GBM is the most common and most aggressive type of malignant primary brain tumor. Patients currently have few treatment options and the five year survival rate for this type of cancer is less than 3%. We are working quickly to advance ABT-414. We recently announce the initiation of a Phase 3 study of our PARP inhibitor ABT-888 in patients with HER2 negative breast cancer containing BRCA gene mutations. The start of this trial follows initiation of Phase 3 clinical work in two other settings; non-small cell cancer and neoadjuvant treatment of triple negative breast cancer. This fall we will present data from the mid-stage trial on lung cancer that supported our decision to advance the Phase 3 development. We have a number of other mid-stage trials that we expect to read out in the coming months. In June we announced positive top line results from our Phase 3 daclizumab study. It demonstrated that patients treated with daclizumab had a statistically significant 45% reduction in annualized relapsed rates versus on active comparator. We are excited about these results and we are in the process of working with our partner to complete our global regulatory application. In our immunology pipeline we recently advanced two bispecific DVDs in to Phase 2 development; ABT-122 for RA and ABT-981 for OA. Additionally, we continue to make progress on our selective JAK-1 inhibitor programs. We recently initiated a second Phase 2 trial in RA with our internal JAK-1 compound ABT-494 and we look forward to seeing data from the Phase 2/b Galapagos collaboration early next year. Since becoming an independent company 18 months ago AbbVie has built a strong and sustainable strategy for the business. Last week we announced an important step in taking that strategy to the next level, the proposed merger with Shire. The combination of AbbVie and Shire represent a compelling opportunity to create a new world-class biopharmaceutical company. The combined company would have leadership positions within multiple important areas of medicine, a deeper and broader pipeline and greater access to its global cash flows. This transaction offers significant strategic and financial benefits for our respective shareholders and companies as well as the patients that we serve. The combined company would be larger more diversified company with significant financial capacity for future strategic investment. Additionally the proposed combination offers an opportunity for enhanced shareholder return of capital and shareholder value creation. We’re currently seeking the relevant approvals for the transaction and are working towards our stated goal of closing in the fourth quarter of 2014. In summary we’re very pleased with the strong performance we’ve had in the first half of 2014. In the second quarter we saw strong performance across our portfolio, including double-digit growth from Humira, We made significant progress advancing our pipeline and expect a number of additional milestones over the next six to nine months. And with the recent agreement to merge with Shire I believe we’ve taken an important strategic action to enhance our position as a world class biopharmaceutical company. With that I’ll turn the call over to Bill. Bill? William Chase : Thank you Rick. This morning I’ll review our second quarter performance and provide an update on our outlook for the remainder of 2014. As Rick said we are very pleased with our results this quarter. We exceeded our guidance on both the top and bottom line. Total sales increased 4.8% on an operational basis, excluding 0.2% favorable impact from foreign exchange. Excluding sales from our lipid franchise, due to loss of exclusivity total sales increased 12.3% on an operational basis. Humira delivered global sales of nearly $3.3 billion, up 25.4% on an operational basis and 26.2% on a reported basis. In the United States Humira sales increased 35.6% driven by continued market expansion, share gains and particularly strong growth in the gastro segment. Growth in the second quarter also benefited from retail buying patterns and a favorable comparison to the prior year. Second quarter wholesaler inventory levels remain at roughly two weeks consistent with the first quarter. We expect third quarter Humira sales growth in the U.S. to be reflective of underlying product demand and pricing trends, partially offset by a reduction in retail buying patterns. As a result we are forecasting high teens growth in the U.S. for Humira in the third quarter. Internationally Humira sales grew 16.2% on an operational basis and 17.8% on a reported basis. International growth continues to be driven by the uptake of new indications, share gains and double digit market growth in most markets. Performance in the quarter also benefited modestly from the timing of international shipments. We are forecasting low double digit growth for Humira internationally in the third quarter driven by strong underlying trends, partially offset by the timing of shipments in international markets. On a global basis we continue to expect double digit sales growth for Humira in 2014. AndroGel sales were $218 million, down 15.6% from the prior year quarter. We continue to see a notable slowdown in the market with overall prescriptions down more than 20% in recent months. We expect these market trends to continue. U.S. sales of Synthroid were $166 million, up 8.7% year-over-year. Synthroid maintain strong brand loyalty and market leadership despite the entry of generics into the market many years ago. The overall market has experienced low-single digit growth with Synthroid growth outpacing the market including product pricing trends. U.S. CREON sales were $110 million in the quarter, up 4.1%. CREON maintains its leadership position in the pancreatic enzyme market where the product continues to capture the vast majority of new prescription starts. Global Lupron sales were $186 million in the quarter, down 5.2% on an operational basis. Lupron continues to hold a leadership position and maintain significant share of the market. Performance this quarter is roughly in line with our full year expectation and is also consistent with recent market trends. Sales of Synagis were $74 million in the second quarter up 16.3% on an operational basis. Synagis which protects at risk infants from severe respiratory disease is a seasonal product with the majority of sales in the first and fourth quarters of the year. Growth in the quarter was driven by continued product uptake and strong commercial execution. Sales of Duodopa our therapy for advanced Parkinson’s disease approved in Europe and other international markets were $56 million, up 24.2% on an operational basis this quarter. Performance in the quarter is in line with recent trends as well as our full year outlook for the product. And sales of Niaspan and TriCor /Trilipix were both down significantly due to generic competition. We expect these trends to continue for the remainder of 2014. I will now turn to the P&L profile for the second quarter. The adjusted gross margin ratio was 79.6% in line with our expectations. This reflects loss of exclusivity in our lipid franchise offset by favorable mix impacts across the portfolio and margin enhancing initiatives we’ve implemented. Adjusted R&D was 16.1% of sales in the second quarter. R&D spending was up sequentially over the first quarter as we increased funding of our mid and late stage pipeline assets and additional Humira indications. Adjusted SG&A was 27.1% of sales in the second quarter. As expected SG&A spending increased from the first quarter, reflecting continued investment on our growth brands and preparations for our upcoming HCV launch. Net interest expense was $69 million and the adjusted tax rate was 22.2% in the quarter. Second quarter adjusted earnings per share, excluding non-cash amortization expense and specified items were $0.82 exceeding our previous guidance range of $0.75 to $0.77. On a GAAP basis earnings per share were $0.68. Moving on to our outlook for the remainder of 2014, for the full year we are confirming our recently increased adjusted earnings per share guidance of $3.06 to $3.16. For the third quarter we expect adjusted earnings per share of $0.77 to $0.79. We are forecasting low to mid-single digit operational sales growth in both the third and fourth quarters of 2014. As a reminder our 2014 outlook excludes any potential revenue from the expected 2014 U.S. launch of our HCV therapy. We expect the third quarter gross margin ratio to be approximately 79%. For the fourth quarter the ratio is expected to be somewhat lower than the third quarter driven by product mix particularly an increase in lower margin Synagis sales. As noted on our fourth quarter earnings call in January we are forecasting a higher level of SG&A expense in 2014 driven primarily by investments we are making for the upcoming launch of our HCV regimen in the U.S. and Europe. For the third quarter we expect a modest sequential increase in absolute SG&A expense from the second quarter. For the fourth quarter given the proximity of the U.S. HCV launch we’d expect a more meaningful sequential increase in absolute SG&A expense from the third quarter level. This has been reflected in our recently increased adjusted earnings per share guidance. We currently have a significant number of Phase 3 programs in active development including exciting opportunities in oncology, HCV immunology and other areas that warrant investment. As a result we expect R&D expense to be above 16% of sales for the full year 2014 reflecting a meaningful increase in the spending over the prior year. For the third quarter we expect a sequential increase in absolute R&D investment from the second quarter level. For the fourth quarter we are forecasting a more modest sequential increase from the third quarter level. This has been reflected in our recently increased adjusted earnings per share guidance. So overall we’re pleased with our strong quarter performance in the second quarter as well as our outlook for the remainder of 2014. And with that I’ll turn it back over to Larry. Larry Peepo : Thanks Bill. And that concludes today’s conference call. As a reminder we will not be opening the line for question but there is comprehensive Q&A in this morning’s earnings news release which can be found on our website, abbvieinvestor.com. Thanks again for joining us today. Operator : Thank you. And this does conclude today’s conference. We thank you for your participation. At this time you may disconnect your lines.
ABBV	AbbVie	1,551,152	Health Care	Biotechnology	North Chicago, Illinois	2013 (1888)	2012-12-31	2,014	4	2014Q4	2014Q3	2014-10-31	3.148	3.148	3.583	3.69	6.25752	15.24	16.16	Executives: Larry Peepo – VP, IR Rick Gonzalez – Chairman and CEO Bill Chase – EVP and CFO Mike Severino – EVP, R&D and Chief Scientific Officer Analysts : Chris Schott – JPMC Jami Rubin – Goldman Sachs David Risinger – Morgan Stanley Mark Goodman – UBS Jeff Holford – Jefferies Colin Bristow – Bank of America Alex Arfaei – BMO Capital Markets Mark Schoenebaum – ISI Group Steve Scala – Cowen & Company Vamil Divan – Credit Suisse Mark Purcell – Barclays Operator : Good morning and thank you for standing by. Welcome to the AbbVie Third 2014 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion of this call. (Operator Instructions). This call is being recorded by AbbVie. I would now like to introduce Mr. Larry Peepo, Vice President of Investor Relations. Larry Peepo : Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; and Bill Chase, Executive Vice President of Finance and Chief Financial Officer. Joining us for the question-and-answer portion of the call are Laura Schumacher, Executive Vice President Business Development, External Affairs and General Counsel, and Mike Severino, Executive Vice President of R&D and Chief Scientific Officer. Before we get started, I’ll remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about the factors that may affect AbbVie’s operations is included in our 2013 Annual other SEC filings. AbbVie undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law. On today’s conference call as in the past non-GAAP financial measures will be used to help investors understand AbbVie’s ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we’ll take your questions. So, And with that I’ll now turn the call over to Rick. Rick Gonzalez : Thank you, Larry. Good morning everyone and thank you for joining us. During today’s call, I’ll spend a few minutes on our strong results in the quarter as well as our performance since we launched as an independent company. I’ll also discuss our pipeline advancement including forthcoming data and other milestones. I’ll then turn the call over to Bill who will provide additional color regarding the quarter and our outlook for the remainder of the year. We’ll also make sure we leave enough time for your questions. Since launching AbbVie 22 months ago, we are focused on driving strong performance, creating shareholder value and building a robust pipeline to derive future growth. To that end, we have delivered a total shareholder return of more than 90%, representing $40 billion of shareholder value creation. Today, we reported robust third quarter results with adjusted earnings per share of $0.89, significantly exceeding our guidance range for the quarter. This included operational sales growth of more than 8%, also ahead of our outlook for the quarter. We drove this performance with double-digit growth across a number of products including, HUMIRA, Synagis, Synthroid, Duodopa and Creon. In the quarter, we also delivered improvements in gross margin and continued to invest in the business for future growth. And for the second time this year, we significantly raised our full-year EPS guidance range for 2014, reflecting the robust performance of our underlying business and positive trends we expect through the remainder of the year. This guidance reflects EPS growth for 2014 despite the headwinds created by the loss of exclusivity in our lipids franchise. Our results demonstrate the strength and sustainability of our portfolio and they underscore our continued focus and execution. Our third quarter results were led by HUMIRA, which delivered, nearly 18% global operational growth. HUMIRA’s performance was driven by several factors including continued market growth resulting from increasing penetration across therapeutic categories and geographies. As we’ve indicated in the past, HUMIRA’s broad label and new indications are a competitive advantage. We recently reported positive results from our Phase 3 studies of HUMIRA in HS, a chronic inflammatory skin disease that currently has no approved treatment options. We’re on track to submit our U.S. and European regulatory applications for HS this year. We’ve also spent the last several years, developing and implementing a strategy that we believe will protect and grow our leadership position in immunology including product enhancements and intellectual property. And behind HUMIRA we have a number of promising immunology assets and development. As a result, we are confident in our strategies to defend our position across our immunology categories. Our interferon-free HCV therapy represents another exciting vehicle for strong growth. We’re on the cusp of approval with the regulatory reviews progressing very well. We’re actively engaged with regulators on various fronts and have completed our pre-approval manufacturing and clinical inspections. As we said at a healthcare conference last month, we do not expect that an advisory committee meeting will be required prior to U.S. approval. In anticipation of U.S. commercialization by year-end and European approval in early 2015, we’ve built the appropriate infrastructure and are fully prepared for our launch. Our next generation HCV program also continues to progress well. We’re currently conducting Phase 2b studies and expect to transition the Phase 3 development in 2015. Beyond HCV, we have a robust pipeline of promising development programs. These programs stand especially therapeutic areas and include both biologics and small molecules. All told, we have more than 40 active clinical development programs underway, this includes 12 products in Phase 3 development or currently under regulatory review. We have a high level of enthusiasm in our oncology pipeline, which includes 10 new molecular entities being studied in more than 55 clinical trials. In collaboration with Roche, we will present additional data on ABT-199 at an upcoming medical meeting, including Phase 1 data on AML and early data from a trial combining ABT-199 with Gazyva. We’ll also see data from a large single-agent study in relapsed refractory CLL patients with 17-p dilution in early 2015. As a reminder, if the data warn and regulatory authorities agree to ABT-199, addresses an unmet medical need in this patient population. These data have the potential to support an early pathway to registration. Veliparib is our PARP inhibitor in development for a wide range of solid tumors. Over the past year, we have initiated four pivotal studies. This includes Phase 3 trials in neoadjuvant breast cancer BRCA breast cancer and most recently two studies in non-small cell lung cancer than include patients with squamous and non-squamous cancers. We’re also excited about ABT-414, our anti-EGFR monoclonal antibody drug conjugate being evaluated in combination with Chemotherapy for glioblastoma multiforme, the most common and most aggressive type of malignant primary brain tumor. We were recently granted orphaned drug designation for ABT-414 by the EMA and FDA. And we are moving aggressively to start a Phase 2 study in patients with GBM by early next year. Also on our late stage development on Oncology pipeline is elotuzumab in partnership with Bristol-Myers Squibb for multiple myeloma. Results from the pivotal trial in relapsed refractory multiple myeloma patients are expected in early 2015. Our late stage neuroscience pipeline includes daclizumab and Duopa. Daclizumab is in development for the treatment of multiple sclerosis. Despite advances in the MS category, there continues to be a significant need for novel, high-efficacy agents with favorable benefit risk profiles. And we believe Daclizumab has the potential to be an important therapy in this large and growing market. We presented promising pivotal trial data earlier this year, which demonstrated patients treated with daclizumab had a statistically significant 45% reduction in annualized relapse rates versus Avonex. We have begun to engage with global regulatory authorities and are working with our partner to complete our regulatory applications in the first half of 2015. Duopa, is AbbVie’s novel therapy for advanced Parkinson’s disease. It is currently under regulatory review in the U.S. with an FDA action expected in early 2015. Elagolix is our compound in Phase 3 development for endometriosis and Phase 2b for uterine fibroids. We continue to expect to see initial data from the first of two pivotal studies in endometriosis later this year and plan to report top line data shortly thereafter. We also see data from the mid-stage program in uterine fibroids next year as well. As I mentioned, we have a number of promising immunology assets in development, including oral selective JAK1 inhibitors, several biologics and two by specific biologics currently in mid-stage trials. We expect to see data from the selective JAK1 inhibitors next year, allowing us to make a decision regarding Phase 3 development. In summary, we delivered excellent performance in the quarter and our pipeline continues to evolve. We’re on the verge of a number of important milestones including the commercialization of our interferon-free HCV combination and we’re prepared for a successful launch. AbbVie is poised to deliver top-tier performance including strong sales and earnings growth beginning in 2015. We have a high degree of confidence in our strategy and our performance. With that, I’ll turn the call over to Bill for a more detailed view of our results. Bill? Bill Chase : Thank you, Rick. This morning I’ll review our third quarter performance and provide an update on our outlook for the remainder of 2014. This was another very strong quarter for AbbVie as we exceeded our guidance on both the top and bottom line. Total sales increased 8.3% on an operational basis, excluding 0.5% on favorable impact from foreign exchange. HUMIRA delivered global sales of more than $3.2 billion up 17.8% operationally and up 17.5% on a reported basis. In the United States, HUMIRA sales increased 25.3% driven by continued market expansion, strong prescription trends and share gains partially offset by a reduction in retail buying patterns. Internally, HUMIRA sales grew 10.3% on an operational basis excluding a 0.6% unfavorable impact from exchange. International growth was driven by strong underlying trends including the uptake of new indications and share gains but was partially offset by the timing of shipments in international markets. We continue to see double-digit market growth for HUMIRA in most international markets. Certainly we are well on track to significantly exceed our original full-year guidance for HUMIRA. AndroGel sales were $232 million, down 6.7% from the prior year quarter. We continue to see a notable slowdown in the market with overall prescriptions down significantly. However, we did gain share from competitors during the quarter and benefited somewhat from favorable pricing trends. U.S. sales of Synthroid were $200 million, up 24.3% year-over-year. Synthroid maintained strong brand loyalty and market leadership despite the entry of generics into the market many years ago. The overall market has experienced low-single digit growth with Synthroid growth outpacing the market including product pricing trends. Global Lupron sales were $196 million in the quarter, up 0.4% on an operational basis. Lupron continues to hold a leadership position and maintain significant share of the market. U.S. CREON sales were $148 million in the quarter, up 47.6%. CREON maintains its leadership position in the pancreatic enzyme market where the product continues to capture the vast majority of new prescription starts. Growth in the quarter benefited from a favorable comparison to the prior year quarter. Sales of Synagis were $109 million in the third quarter up 18.3% on an operational basis. Synagis which protects at risk infants from severe respiratory disease is a seasonal product with the majority of sales in the first and fourth quarters of the year. Growth in the quarter was driven by continued product uptake and strong commercial execution. Sales of Duodopa on our therapy for advanced Parkinson’s disease approved in Europe and other international markets were $56 million, up 20.8% on an operational basis this quarter. Performance is in line with recent trends as well as our full year outlook for the product. And sales in our lipid franchise were down significantly due to generic competition. We expect these trends to continue for the remainder of 2014. I’ll now turn to the P&L profile for the third quarter. The adjusted gross margin ratio was 81.1% somewhat above our expectations and up 140 basis points year-over-year. This reflects the loss of exclusivity in our lipid franchise offset by favorable mix impacts across the portfolio as well as and margin enhancing initiatives we’ve implemented. Adjusted SG&A was 26.4% of sales in the third quarter, up more than 9% year-over-year reflecting continued investment in our growth brands and preparations for our upcoming HCV launch. Adjusted R&D was 16.2% of sales in the third quarter up more than 14% versus the prior year quarter. As expected our absolute R&D investment was up sequentially over the second quarter as we increased funding of our mid and late stage pipeline assets and additional HUMIRA indications. Adjusted net interest expense was $53 million and the adjusted tax rate was 22.4% in the quarter. Third quarter adjusted earnings per share, excluding non-cash intangible amortization expense and specified items were $0.89 well above our previous guidance range of $0.77 to $0.79. On a GAAP basis earnings per share were $0.31. You will recall that in early September we updated our third quarter and full year GAAP EPS guidance to reflect upfront payments related to the infinity and calico agreements which were treated as specified items. Also in accordance with the final regulations issued to the pharmaceutical industry in the third quarter by the IRS, AbbVie has booked an additional year of its branded prescription drug fee which we have treated as a specified item. By way of background, starting in 2011, the pharma industry was acquired under the affordable care act to begin paying a fee based on branded prescription drugs sold to the U.S. government. During the third quarter of this year, the IRS issued final regulations which changed the recognition of the fee from the period in which the fee was paid to the period for which the fee is owed. As a result, the industry is now required from an accounting perspective to recognize in 2014 one additional year of the fee. There is no cash flow impact of this one-time adjustment. Due to the timing of the termination of the Shire transaction, the majority of one-time costs related to that event were reflected in our fourth quarter results. Moving on to our outlook for the remainder of the year, this morning we significantly raised our adjusted EPS guidance for 2014. We now expect adjusted earnings per share guidance of $3.25 to $3.27. As a reminder, our 2014 outlook continues to exclude any potential revenue from the expected 2014 U.S. launch of our HCV therapy. Our revised GAAP guidance for the year includes the full impact of the Shire transaction costs. Given our strong product performance, we now expect sales to exceed $19.5 billion in 2014. We’re forecasting an adjusted gross margin ratio of approximately 79% for the year reflecting product mix and actions we’ve taken to further improve our margin profile. We expect full year R&D expense to be somewhat above 16% of sales as we continue to advance our late stage pipeline. And we expect SG&A expense of around 27% of sales in 2014. We are forecasting net interest expense of about $250 million for the full year, and we continue to expect an adjusted tax rate just above 22%. As you know, our business generates significant cash flow and we expect this to grow in 2015 and beyond with new product introductions. As a result, we announced last week that AbbVie’s quarterly dividend will be increased by more than 16% to $0.49 beginning with the dividend payable in February 2015. We intend to maintain our strong commitment to a growing dividend going forward. And we disclosed a new $5 billion share buyback program to be executed over the next several years, further reflecting our commitment to return cash to shareholders. So, overall, we’re very pleased with our strong third quarter performance as well as our outlook for the remainder of 2014. And with that I’ll turn it back over to Larry. Larry Peepo : Thanks Bill. We’ll now open the call for questions. Elon, we’ll take our first question please. Operator : (Operator Instructions). Our first question is from Chris Schott from JMPC. Chris Schott – JPMC: Great. Thanks very much for the questions. First one for Rick, operationally AbbVie seems to be obviously firing on all cylinders here. But with the Shire deal you highlighted the potential for greater access to your cash flow as well as the diversification that deal would bring. So on those two topics, first can you talk about your access to cash flow and your ability to deploy capital on an ongoing basis with your current tax structure and the recent dividend increase? And then second on the business development side, what is the sense of urgency at this point to further diversify AbbVie? And can you give us any color on the range of M&A options you are considering. I guess specifically should we think of Shire as a one-off or would the company still consider pursuing large-cap acquisitions? Thanks very much. Rick Gonzalez : Okay. Hi Chris, it’s Rick. I think this question has come up a couple of times now since the termination of the Shire agreement and in the backdrop of the Shire agreement. And so, I think it’s important to put it in perspective and important to acknowledge that at the outset, there are certain attributes of the Shire transaction that made it unique and out of the normal course of our M&A strategy. I’d say specifically the potential for inversion is only offered with target selections of very significant size and the benefit of inversion allowed for an acquisition price that was obviously higher. So, I think one of the things that you must remember as we approach the opportunity with Shire was against the backdrop of where was AbbVie overall, because I think that’s an important perspective to keep in mind. And if you think about the prospects of our business, they were never brighter than it were when we approached the Shire transaction. We’ve cleared most of our significant LOE events, our growth brands are exhibiting extremely strong growth, particularly HUMIRA, we build a deep, mid and late stage pipeline with several potential blockbusters which we believe will allow us to drive top-tier EPS growth starting in ‘15 and beyond, HCV is a good example of that, 199 is a good example of that, Daclizumab is a good example of that and there were many more. And while I think it’s fair to ask a question as our strategy, our M&A strategy changed following the Shire affair, I think it’s also important to acknowledge that we’re a company that’s in even stronger position today than we were before we announced this deal. Today’s earnings show that very clearly, the base business is running stronger than our guidance at the beginning of the year suggested to us. We have a much better idea of the size of the HCV market and our potential to stake out a significant position in that market. We’ve had positive data readouts on DAC 888, 199 continues to perform well. And we’ve continued to be active in the L&A front. So, there are no development really that have happened to our business, in fact any development that’s happened has actually been a positive development. They don’t leave us with a tremendous amount of confidence that we can drive the level of performance that we have projected and the level of performance that we need going forward from 2015 with our base strategy. Which brings me to M&A. If you look at our cash flow and our ability to access that cash flow, we clearly have the where with all to be active in the M&A front. What’s more is we have a track record in our ability and our willingness to pursue and acquire attractive assets, assuming two things, it makes strategic sense and they have a good financial return. That’s essentially the criteria that we use. We’ve always said that our highest priority for our cash is to deploy it to further grow the business and make the business more and more healthy going forward. And I think you’re going to expect us to continue to do exactly that, deploying cash to acquire attractive on-market and pipeline assets to further enhance our growth. But what I don’t think is that we absolutely have an imperative to one out and do another $50 billion deal, in fact I would tell you, we don’t have that imperative. And it’s unlikely that we would do another $50 billion deal. As I said before, Shire is a unique opportunity based on a number of different factors, some of which don’t exist in the same way as they did before. So, the underlying growth prospects for AbbVie don’t require us to do a transaction that size. I’d also say we’re not going to limit ourselves to what we do. We look at individual products, we look at mid-size companies and we look at larger companies. And we’re going to continue to do that and continue to look for those opportunities that strategically fit and give us a strong financial return. And we’ll deploy our capital accordingly. The other thing I’d say is, we have always committed that we’ll return cash to shareholders and that’s a commitment that we’ve made as part of our cash, which I used to do that here recently with the dividend increase and the buyback program. Those are the two priorities for the cash. The cash isn’t trapped, obviously we have access to the cash for offshore acquisitions, we have access to the cash if we choose to repatriate it. Obviously, we have an incentive to look outside the U.S. first if we choose to, but we have total flexibility as it relates to our cash. Larry Peepo : Thanks Chris. Elon, we’ll take our next question please. Operator : Thank you. Our next question is from Jami Rubin from Goldman Sachs. Jami Rubin – Goldman Sachs : Thank you. Can you all hear me all right? Bill Chase : We sure can. Rick Gonzalez : Yes. Jami Rubin – Goldman Sachs : Thank you. Congratulations on a terrific quarter. Bill Chase : Thanks. Jami Rubin – Goldman Sachs : This is either for Rick or Bill. Clearly 2015 is shaping up to be a huge year. I think 2014 turned out to be a much bigger year that you or anybody else anticipated just given the profitability of the base business. But 2015 is really shaping up to be a very big year with the hep C launch. But as we move out beyond 2015 post the HCV launch, can you comment on the pace of earnings growth? Obviously with bio-similar competition towards the end of the decade for HUMIRA that is going to have an impact on your earnings growth. But will 2015 be a one-off year, or how should we think about the pace of earnings growth going forward? And then a second question for you, Rick. We have a lot more information now about the hep C market. We now know the pricing of the new Gilead combo. We’ve seen the spectacular initial launches of Sovaldi. Can you comment on how I think early at one point you talked about achieving a 20% market share in this massive market, can you refresh us on your expectations just given how much more information we have now? Thanks very much. Rick Gonzalez : Well Jami, this is Rick. So, first I’d say on the expectations for ‘15 and beyond, obviously we’re not going to give guidance out multiple years. But I think I can frame it this way for you. If you look at what we expect to be able to deliver out of our pipeline including HCV and other assets like 199, we have a high level of confidence that we can continue to drive strong growth over the long-term. As far as the bio-similar impact is concerned, obviously that’s something we have looked at and we have carefully analyzed and we’ve had now a number of years to put a strategy in place that we believe will protect in HUMIRA, through that period of time. And so we’ve obviously modeled what that looks like and I can tell you we have confidence in what we can do in that area. I’m not going to give you a lot more specifics on that at this point. We’ve described in detail what it looks like it is a combination of three major areas, product enhancements, both, formulation as well as device, intellectual property and commercial strategies. And this is a market we understand well. And as I said, I think we have planned this out very well. And I think we have a high level of confidence in our ability to be able to execute that strategy in the face of bio-similar competition. There will be a time where we can give you more color I know this isn’t very satisfying to you. There will be a time where we can give you more color this just is not the time to be able to do that. We have to make sure that we have planned this out appropriately. And so, in the future we will be able to give you a little more detail around that. As it relates to Hepatitis C, what I would tell you is this. If you look at the Hep C market and HCV for us, it’s a very exciting opportunity. And I would tell you it’s a very important opportunity for AbbVie. So, let me say, in the backdrop of we’re getting very close to entering the U.S. market once we’re approved, it wouldn’t be prudent for us to provide a lot of specific details around our commercial strategy or go-to-market strategy. But what I can do is I think frame for you, how we think about the competition in the marketplace, how we think about the marketplace. I’m not going to provide an expectation at this point but I’ll give you some perspective I think. As we said many times before, we believe the clinical performance of our product across all patient types is very strong. And it’s especially strong in the psoriatic and difficult to treat patients. And we believe that will be an important factor in how we compete in the marketplace. We believe relapse rates and SPRs are important. We still don’t believe that minor differences in pill count or shorter duration of therapy in certain patients will significantly change the competitive dynamics in this marketplace. In fact I tell you, in our interactions with many KOLs, they indicate that they’re going with 12 weeks of therapy in patients to minimize the risk of relapse in those patients. As far as the market is concerned to the point you made, we see the market as being even more attractive than we thought about it a year ago. It’s certainly bigger than we thought, it’s far more receptive to high curate therapies that are highly tolerable and the market wants alternatives, that’s clear. So, I can tell you, we feel very good about our ability to compete in this market and create meaningful share for our product. As I said, I’m not going to go through a lot of specifics around the commercial strategy until we’ve launched. Last thing I’d say is, as you know, the 2014 guidance we provided excludes any HCV revenues. So, it’s not counting on any HCV revenues, whenever we get an HCV we’ll obviously be upside. But certainly when we provide 2015 guidance and product specific detail, at that point we will provide you with what our expectation is for HCV for 2015. Thanks. Jami Rubin – Goldman Sachs : Thanks. Larry Peepo : Thanks Jami, our next question please Elon. Operator : Thank you. Our next question is from David Risinger from Morgan Stanley. David Risinger – Morgan Stanley : Yes. Thanks very much. So I missed a little bit of the call. I just wanted to ask a couple of questions about some of the select product upside. I guess specifically maybe you could just make an overall comment on whether inventory levels changed at AbbVie between the end of the second quarter and the end of the third quarter, i.e. was there a buy-in or buy-out for the company overall? And then second, were there any buy-ins for any select products of note? And then third, with respect to Kaletra ex-U.S., I don’t know if you commented but that was unusually strong. Could you just explain that revenue number in the quarter and what we should think about for the fourth quarter head sequentially? Thank you. Bill Chase : David, its Bill Chase. So, inventory I’ll discuss in really two different pieces. You’ve got inventory at wholesalers and then obviously you’ve got inventory in the retail chain. At the wholesale level, our inventories across all products in the U.S. was roughly consistent between quarter two and quarter three. The retail channels are little tougher to call as you know. In Q2, we did see some speculative buying in advance of the price increase around HUMIRA. We think some of that buying came out in Q3, although obviously it didn’t mute the overall performance of the brand to a meaningful extent. But in general, at the wholesale level everything was consistent quarter-to-quarter. From a Kaletra ex-U.S. standpoint, that product is subject to some volatility based on tender timing. And you saw that in the third quarter. I think in the long-term outlook for this brand is probably somewhat negative from a single digit standpoint. So, I think what you’re really seeing in Q3 was the anomaly of tenders internationally. David Risinger – Morgan Stanley : Got it. Thank you. Larry Peepo : Thanks David. Elon, next question please. Operator : Thank you. Our next question is from Mark Goodman from UBS. Mark Goodman – UBS: Yes, I was hoping you could give us a flavor for how much of the, pre-spend for the HCV launch is already showing up in the quarter here? And how much additional we should be expecting in the fourth quarter and the first quarter? And then second, if you could just go through what data we will be seeing at ASH? Bill Chase : So Mark, Bill Chase. We’re not going to get into specific details on how much of the HCV investment we’ve put in. Sufficed to say, we have obviously begun spending this year and you should expect that spending to increase sequentially in the fourth quarter and that’s been reflected in the profile guidance we’ve given. Mark Goodman – UBS: Change in sales force, has that started already? Bill Chase : Excuse me. Mark Goodman – UBS: Sales force? Bill Chase : We are all ready to go on HCV. We’re just waiting approval. Mark Goodman – UBS: So that is already reflected in the third quarter? Bill Chase : It is. Mike Severino : On your question regarding ASH, this is Mike Severino, I’ll take the question regarding ASH. There is going to be a number of important presentations on ABT-199 or BCL-2 inhibitor. This includes initial single-agent data in AML. And we’ll also provide a number of updates on our ongoing earlier studies, and update on our Rituxan plus 199 Study in CLL, including an update on patients who have stopped therapy. And we’re going to have first data on Chemo combination study bendamustine plus Rituxan plus 199 in non-Hodgkin’s lymphoma in DLBCL. And there will be a number of other updates including 199 and GA-101, and CLL from early phase studies. Larry Peepo : Thanks Mark. Elon, we’ll take our next question please. Operator : Thank you. Our next question is from Jeff Holford from Jefferies. Jeff Holford – Jefferies: Hi. Thanks very much for taking my questions. So just on your HCV program you mentioned do you expect to bring a new – at any point into your next-generation program and give us any updates on how you think you might go about that if that is the case? Secondly around margins, other results of some of the cost savings you would’ve looked at as part of the Shire transaction going forward, did you see any opportunities in the base business going forward that you can look at for further margin enhancement? And then just lastly, this will be for Rick, of course, are you concerned that by highlighting your underlying tax situation that you could have potentially made the company vulnerable to a takeover by a foreign company going forward? Thank you. Rick Gonzalez : So, Mike, why don’t you cover the first question? Mike Severino : Sure. This is Mike Severino. With respect to our plans with hep C, we feel very good about both our current generation hep C program and our next-generation hep C program which is advancing very nicely to the clinic. We’re currently in Phase 2b studies with our next generation program. Back in mind is our next-generation protease inhibitor and our next-generation NS5A inhibitor. Things are progressing very well. We’re going to continue to evaluate these data as they roll-out and we’ll be providing updates and appropriate scientific settings over the course of the next year. We’re always looking at promising mechanisms in our early discovery efforts and we’ll continue to evaluate those efforts in light of the clinical results as described as well. Overall though, I feel very good the progress we’re making in hep C. And I think we’re going to have a compelling offering with first generation and it’s an area that we’re committed and it’s an area that we’ll remain active. Bill Chase : Jeff, on cost savings, yes, I can tell you this is an organization that has always been focused on driving cost out of the business. I think you can see that to an extent on the progress we’ve made on gross margin. And certainly we keep our eye open for those things all the time. I think in 2015, if you look at some drivers behind the business, the dynamics trend favorably for operating margin expansion. Obviously the TriCor/Trilipix LOE event is fully behind us at that point. You’re seeing the efficiency efforts play out on gross margin. And we would obviously expect a strong positive impact of the HCV launch which offers both a high gross margin as well as SG&A profile improvement. So, too early to get into a specific operating margin number for you for next year, but I’m confident we’re going to have a nice story to tell on this when we get into it next year. Rick Gonzalez : And on your question about potentially being a takeover target, let me address it this way. If you look at our situation about offshore cash, we’re certainly not unique in our industry in fact I’d say we’re pretty consistent with how our industry tends to operate. So I don’t know that we flagged anything in the process. But essentially I’d tell you that our goal as a company is to stay a strong sustainable independent company. We’ve demonstrated that we can drive strong shareholder value you see that in the GSR that we’ve delivered, you see that in our market cap. So I can tell you my focus is on driving the business at top-tier performance, building out a robust pipeline and delivering strong returns to shareholders. My philosophy is if you do that well, the market will reward you both in your PE as well as your market cap. And that’s the focus that we have for the business and that’s what we pay attention to going forward. Jeff Holford – Jefferies: Thanks very much. Larry Peepo : Thanks Jeff. Elon, next question please. Operator : Thank you. Our next question is from Colin Bristow from Bank of America. Colin Bristow – Bank of America : Good morning and congrats on the quarter. Just on hep C, arguably you’re most competitive versus Harvoni in the treatment experience cirrhotics with the TURQUOISE-II data. Given your excluded prior protease inhibitor patients, how should we be thinking about this from a labeling perspective and can tell you help us quantify the size of this population? And then just a little more on the label. I know it is hard but how confident are you that you can get a 12-week label in the treatment experience cirrhotics and how important is this for you from a commercial perspective? It seems like the FDA has a very high bar for the SVR sacrifice versus duration of therapy? Thanks. Rick Gonzalez : We’re in the midst right now of dialog with the agency over labeling so we’re not going to, it’s not just appropriate to talk about a lot of the specifics that we’re talking through with them. I can tell you, we feel comfortable with our data set in cirrhotics and across all the other patients. We certainly feel comfortable when we look at our 12-week and 24-week data in cirrhotics, both have excellent SVR performance. And so, we don’t feel at all uncomfortable with the direction that our labeling is going in. PI failures. Mike Severino : Yes. Treatment, this is Mike Severino, treatment regimens are obviously evolving considerably. I think that I would point to the overall breadth of our data both in cirrhotics and outside of cirrhotics, we feel very good with our profile we have, very high SVR, very high cure rates. And again, we feel very good about the profile that we see. I think that’s probably it. Colin Bristow – Bank of America : Thanks a lot. Larry Peepo : Okay. Thanks Colin. Next question Elon. Operator : Thank you. Our next question is from Alex Arfaei from BMO Capital Markets. Alex Arfaei – BMO Capital Markets : Good morning and thank you for taking the questions. Bill, could you please build on your earlier comments about gross margin. What specifically are these margin-enhancing initiatives that you are referring to? And is this what we can expect going forward because we would only expect gross margin going up with hep C? And a follow-up, could you please give us an update about your efforts to simplify your current hep C regimen with fewer pills, please? Thank you. Bill Chase : So, Alex, regarding the gross margin, there are a couple of things are in play on that line. First and foremost as you know we have obviously lost TriCor/Trilipix which had a higher than average gross margin than the corporate rate. So that’s some headwind we’ve actually been facing over the last couple of years. And you can see we’ve negotiated that nicely. Offsetting that there has been a couple of things. First of all, there is an impact of product mix in pricing. But equally important there have been efforts that we’ve put in place to reduce cost and that could be manufacturing cost, supply chain cost as well as of course to address some of our royalty burden on HUMIRA as well. And you’re seeing some of that play out this year. Next year obviously with HCV coming online, we would expect that to have a gross margin that would be higher than the corporate mix. And HUMIRA obviously has been performing very, very nicely as well and that ought to have a benefit on that line item as well. Rick Gonzalez : Alex, this is Rick. You kind of broke off when you said the last question, but I think what you asked was what are we doing to work on simplifying the regimen for HCV, is that what you asked? Alex Arfaei – BMO Capital Markets : That is correct, yes. Rick Gonzalez : Okay. Well, let me start with what I commented on before. We don’t believe the difference in pill burden is going to be a competitive disadvantage. So, first and foremost I’d tell you that. The second thing is we are working on some ways to be able to simplify our regimen with the current generation and that has continued to progress well. Next generation obviously has significant simplification associated with it as well, and that would be advancement as well. So, we have an active program in both areas to move it forward. We’re not at a point where we want to talk a lot about it beyond that but we are working on ways to simplify the regimen and continue to make sure that we’re advancing the regimen. This is a market that I can tell you we’re absolutely committed to for the long-term. And obviously we’re investing in a way to be able to continue to sustain our position in the market. Larry Peepo : Thanks Alex. Next question please Elon. Operator : Thank you. Our next question is from Mark Schoenebaum from ISI Group. Mark Schoenebaum – ISI Group : Hi guys, thanks a lot for taking the question. Larry Peepo : Sure. Mark Schoenebaum – ISI Group : Number one, do you guys happen to have data out there in the hep C it around how many patients are actually under the active care of a treating specialist, that is a data point that one of your competitors historically has provided and declined to provide in the most recent quarter, just wondering if you have a view on that? And then number two on hep C, have you generated yet any data for your regimen in Victrelis or Incivek failures? And then finally on HUMIRA, could you just give us the year-on-year price versus volume change please? Thank you. Rick Gonzalez : Thanks Mark. As far as the data of the number of patients under active care was specialist, I’m assuming you’re talking about hepatologists and infectious disease specialists. Our people know that but to be honest with you, I don’t know that number. Does anybody else in the room know that number? Bill Chase : Yes, I don’t think we have that on for you Mark. Rick Gonzalez : So, maybe as a follow-up we’ll try to provide that. I can tell you that as we’ve geared up commercially, we obviously believe that it’s important and I’ve seen the numbers that a significant percentage of the patients are under the care of specialists. But I’d also tell you that based on the massive number of GI specialists, that’s also an important commercial channel to cover. And we have scaled our sales force to cover both aspects of it, both specialists as well as GI physicians as well. But I don’t remember Mark, the actual split between the two. Bill Chase : Mark on HUMIRA, you really have a tail of really two different markets. In the U.S. we have typically been able to take some price along with the category. And if you really look at volume trend, script trends, which this quarter we’re very, very strong. You can pretty much get back to the 25.3% growth on the quarter by looking at that strong TRX and really reconciling it back to the price increases we’ve taken this year. Ex-U.S., we typically see negative price so actually that’s primarily more than 100% volume. On a total brand basis, yes, I think you can think of price this quarter netting out in the mid single-digits and the rest being volumes. Mark Schoenebaum – ISI Group : And the PI failures? Mike Severino : This is Mike Severino, with respect to data on PI failures, those aren’t data that we’ve generated yet, something that we would look at and maybe do it in the future. Mark Schoenebaum – ISI Group : Thanks a lot. Larry Peepo : All right, thanks Mark. Operator : And our next question is from Steve Scala from Cowen. Steve Scala – Cowen & Company: Thank you. I have two questions. First on hep C, AbbVie would appear to have a potential competitive advantage in the sickest patients where treatment to 12 weeks might be necessary and I know that AbbVie isn’t going to reveal pricing today. But given this possible competitive advantage, what are reasons that AbbVie would not price at a premium? Maybe you can provide at least one reason why AbbVie wouldn’t price at a premium? And then second, a bit of a broader issue, AbbVie has done a terrific job maintaining HUMIRA’S position as the leading TNF despite very similar competitive products and very high price points. It seems that your competitors that sell basal insulins and inhaled asthma products could have learned from your strategies. But as managed care seems to be rotating among the big therapeutic categories and attempting to extract price, why won’t we see this happen in TNFs? Thank you. Rick Gonzalez : Okay, this is Rick. I’ll try to answer two questions. Although I would say your first question basically asks me about our pricing strategy which I’m not going to go into any detail. But what I would say to you is, we looked very carefully at the overall market how our products would be positioned in that market, our ability to be able to take share. And we’ve come up with the strategy that we believe optimizes our ability to take a meaningful share position. We’ve looked at alternatives that were different, some of which similar to what you described and some of which weren’t similar to what you described. And so, we’ve come up with what our commercial strategy will be and we’re going to execute that upon launch of the product and the approval of the product. And at that point we’ll provide you more color. On HUMIRA and payer actions, what I would tell you is this we’ve competed in this market for a long-long time. Obviously in the U.S. market the payer component is a very critical component. In scenario where we have good relationships with payers, there have been lots of competitive entrants into this market. And I take predictions of HUMIRA’s market share erosion and that hasn’t occurred. And it’s partially because if you look at the product and its ability to be able to perform clinically, if you look at the breadth of the menu of applications and indications that it has, that plays a very important role. And so, I don’t see the payer dynamic changing significantly in anti-TNS going forward. This has been a competitive market for many years now. And we’ve done quite well in that market and there is always price pressure and you have to work through that in the appropriate way. Larry Peepo : I would say Steve, this is Larry that we certainly feel good about how 2015 settles out for us with payers on HUMIRA. Steve Scala – Cowen & Company: Thank you. Larry Peepo : All right. Thanks Steve, next question please. Operator : Thank you. Our next question is from Vamil Divan from Credit Suisse. Vamil Divan – Credit Suisse : Yes, thanks for taking the questions. A couple here. One, you recently announced this $5 billion buyback program. Can you just let us know if you’ve already started executing on that program and if so how much buybacks have you completed this quarter? I guess specifically I’m just wondering in terms of your – what your share count expectations might be that are baked into your new 2014 earnings guidance and is it a very different number from what we saw at the end of the third quarter? And the second one kind of following up on Chris’s question earlier on M&A. You talked about size, can you talk a little bit about maybe therapeutic areas that might be of a priority now, for example rare diseases where Shire is obviously strong? Is that an area in particular that you may wish to invest more? Any thoughts around areas of investment would be helpful. Thanks. Bill Chase : So, Vamil, obviously the quarter is not done yet, the fourth quarter that is. We do intend to when the year finishes, you’ll see that we have repurchased shares that I can’t give you exact guidance on what that number is going to be at this point in time. Rick Gonzalez : Vamil, on the M&A strategy, this is Rick. I mean, I think if you look at what our strategy is for AbbVie, we want to build leadership positions in specially focused areas. If you look at what we’re good at, what we’re really good at is taking products that have strong clinical data and the decision making process is driven around clinical data and being able to – be able to go out and commercialize that effectively. And so, we really have two primary goals, when we look at M&A. One is to build out those areas where we currently have leadership positions like immunology is an example. And other areas where we have leadership position, our goal is to try to restate standard care in those segments. And in many cases, we’re looking at multiple different mechanisms of action to be able to try to do that, standard of care restatement in the areas that we have leadership positions in. And then we have areas where we have emerging strengths where we want to build out leadership positions and expand more aggressively, oncology is a good example. 199 and we believe will create a good anchor position for us in that market. AAA, 414, we have a number of assets coming behind them. Certainly we would be interested in looking for more oncology assets. If there was the right kind of opportunity with on-market products in oncology and had some commercial infrastructure in place that would be attractive to us moving forward. Rare diseases, is certainly a profile of the specialty market. It’s consistent than what we look at. And I’d hepatology is the other area that would be of strong interest. I’m not giving you a complete list but I’m giving you sort of the top of mind areas that we focus on. Bill Chase : Vamil, one other thing, Bill Chase again. Just in the event that you’re inferring something to your question. Our increase in the guidance for the year is purely based on the business fundamentals as we see them. We’re not anticipating that being significantly moved by our buyback activity, just wanted to be clear on that. Vamil Divan – Credit Suisse : Okay. That’s helpful. Thank you. Rick Gonzalez : Thanks Vamil, and Elon, we have time for one more question please. Operator : Thank you. Our final question today is from March Purcell from Barclays. Mark Purcell – Barclays: Thanks for taking my question. On HUMIRA could you help us understand the benefit from the royalty roll-off in Q3 from the cessation of payments to Merck KGA I think was in June and how that schedule of roll-off changes going forward through the plan expiries in both U.S. and Europe? Secondly, could you help us understand the size of the international shipment timing effect for HUMIRA in terms of how much growth it took off the ex-U.S. sales? Third, the IL-17 is about to launch in psoriasis, I think it is about 15% of HUMIRA sales. Could you help us understand the impact you feel those will have, or otherwise, on your business for next year? And then lastly on debt $9 billion of long-term debt. Can you help us understand your plans to restructure that and that is with respect to potential capital employment going forward. Bill Chase : So, Mark, on the dynamics in gross margin, I guess this is a simple way to think of that. We in the quarter had about 1-point headwind from related to TriCor/Trilipix LOE event. Obviously we made that up and then some. Our ability to make that up was driven probably somewhat equally by product mix and cost efficiency as well as including royalty – the royalty stack. I’m not going to get into specifics on how much that royalty stack impacted it. What I can tell you though is it’s not all royalty stack, we have a lot of activities going on right now, to streamline our supply chain and our overall manufacturing base. In terms of adds the same plays out over the LRP, we’ve never been specific on what the exact royalty stack is, some have estimated it’s between 5% and 10%. We’ve said those are good estimates. And one of the benefits of that royalty stack is, it will be largely removed at the point that we lose exclusivity on HUMIRA. So that’s an important upside to the product when we come to that point in time. In terms of the impact of international shipments on HUMIRA, obviously that puts some volatility quarter to quarter in the XUS HUMIRA number. This quarter it was about 1%, it wasn’t huge. Rick Gonzalez : Debt question. Bill Chase : From a debt perspective, what I would tell you is we’re pretty happy with our balance sheet right now. Obviously we’re building cash, we’re looking at ways to deploy that cash whether it be through M&A or giving it back to the shareholders as you’ve seen in our recent announcements. I don’t think there is any compelling reason to necessarily reduce the amount of debt on our balance sheet. So, as those maturities come up, obviously we’re looking to term those things up. But as whole, we think we’ve got a very, very strong balance sheet. Rick Gonzalez : This is Rick, on the IL-17 obviously we study every new mechanism that comes into this market and developer strategy to deal with that mechanism going forward. We understand the IL-17 very well and the data that we’ve seen so far. What I’d tell you is if you look at many other mechanisms that have into all the different categories we compete in whether it’s RA or GI or psoriasis, this is a tough market to break into and gain significant share because there is a reluctance to ultimately go to a new mechanism very quickly. These are very potent drugs and have sometimes unknown side-effect profiles until there are in large populations. And that tends to make physicians more reluctant to switch in mass patients. And so, we view IL-17 as a good mechanism, there is no question it’s a good mechanism. And, but we view it early on it would be like other mechanisms that would come into this market, it will probably be more for failures, TNF failures, and eliminate some of that rotation that would have occurred. But we don’t assume that is going to have a dramatic impact on our psoriasis share going forward. Mark Purcell – Barclays: Thank you. Larry Peepo : All right, thanks Mark. And that concludes today’s conference call. If you’d like to listen to a replay of the call, visit our website or call 800-262-4947 passcode 103114. The audio replay will be available until midnight on Friday November 14. Thanks again for joining us today. Operator : Thank you. And this does conclude today’s conference. You may disconnect at this time.
ABBV	AbbVie	1,551,152	Health Care	Biotechnology	North Chicago, Illinois	2013 (1888)	2012-12-31	2,015	1	2015Q1	2014Q4	2015-01-30	3.219	3.3	3.947	4.26	6.05925	15.33	15.63	Executives: Larry Peepo - Vice President, IR Rick Gonzalez - Chairman of the Board and Chief Executive Officer Bill Chase - Executive Vice President of Finance and Chief Financial Officer Laura Schumacher - Executive Vice President Business Development, External Affairs and General Counsel Mike Severino - Executive Vice President of R&D and Chief Scientific Officer Analysts : Jami Rubin - Goldman Sachs Mark Goodman - UBS Chris Schott - JP Morgan Jeff Holford - Jefferies Vamil Divan - Credit Suisse Mark Schoenebaum - Evercore ISI Robyn Karnauskas - Deutsche Bank David Risinger - Morgan Stanley Colin Bristow - Bank of America Merrill Lynch Alex Arfaei - BMO Capital Markets Operator : Good morning and thank you for standing by. Welcome to the AbbVie Fourth Quarter 2014 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion of this call. [Operator Instructions]. This call is being recorded by AbbVie. I would now like to introduce Mr. Larry Peepo, Vice President of Investor Relations. Larry Peepo : Good morning and thanks for joining us today. Also on the call with me is Rick Gonzalez, Chairman of the Board and Chief Executive Officer; and Bill Chase, Executive Vice President of Finance and Chief Financial Officer. Joining us for the Q&A portion of the call are Laura Schumacher, Executive Vice President Business Development, External Affairs and General Counsel; and Mike Severino, Executive Vice President of R&D and Chief Scientific Officer. Before we get started, I’ll remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about the factors that may affect AbbVie’s operations is included in our 2013 Annual report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law. On today’s conference call as in the past non-GAAP financial measures will be used to help investors understand AbbVie’s ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we’ll take your questions. So, with that I’ll now turn the call over to Rick. Rick Gonzalez : Thanks, Larry. Good morning everyone and thank you for joining us this morning. Since becoming an independent company, our strategy has centered around delivering strong results and returns for our shareholders while insuring, we have a strong sustainable growth business over the long term. As we look back over the past year and assess our performance, we’re pleased with the significant progress we've made, not only in delivering outstanding 2014 results, but also in establishing a solid platform for growth well into the future. As we announced this morning, we delivered exceptional results in 2014. With sales and earnings well above our original projections for the year, we delivered 7% global operational sales growth in 2014 and we increased our ongoing earnings per share by nearly 6%. When we launched AbbVie two years ago, one of our key priorities was to return to strong growth in 2015. I’m pleased that we were able to achieve that goal a year ahead of schedule. This performance demonstrates the strength and sustainability of our portfolio and underscores our continued focus and execution. Our performance in 2014 was driven by growth from key products including Humira , Synthroid, Synagis, CREON, and Duodopa. We also delivered year-over-year margin improvement while continuing to invest in R&D and SG&A to drive future growth. In addition to our strong financial results over the past year, we are seeing significant pipeline advancement and have achieved a number of important development and regulatory milestones. We secured US and European approval for interferon-free HCV treatment [inaudible]. We successfully completed several late stage clinical trials including daclizumab and Humira HS registrational programs. We initiated a number of promising phase 3 through programs including several phase 3 studies of our PARP inhibitor Veliparib in solid tumors such as breast and lung cancer and our BCL-2 inhibitor ABT 199 in hematological malignancies. We also made significant advancements with our next-generation HCV program, initiating a broad phase 2 B program which is on track to transition the phase 3 in 2015. We advanced a number of early-stage assets in the mid-stage development including our DB platform and ABT 414R our antibody drug conjugate in development for glioblastoma multiforma. We augmented our pipeline through strategic licensing and partnering activities. We acquired the rights to [inaudible] now in development for CLL and NHL. And we entered into a novel collaboration with Calico to accelerate the discovery, development and commercialization of innovative therapies for age-related diseases such as cancer and neurological diseases. And over the first couple of weeks in 2015 we have seen additional pipeline developments. With the recent US approval of DUOPA, our therapy for advanced Parkinson’s disease and positive topline efficacy results from the first year-to-go ex-pivotal trial in endometriosis. So we have established a strong foundation and have entered 2015 with good momentum which we intend to build upon. As I outlined earlier this month in 2015 we are forecasting full-year adjusted earnings per share of $4.25 to $4.45. It is important to remember that this range reflects EPS growth of 28 to 34% which is well above our peer group. And in the coming year we expect to see significant activity across our pipeline including the potential for several regulatory submissions data readouts and phase transitions that I will discuss in more detail in a moment. Humira was certainly an important driver of our strong performance in 2014 with nearly 19% operational growth for the year. Humira has averaged well over $1 billion of growth per year for the past eight years. For 2015 we expect Humira to once again be an important contributor to our robust performance with the mid-teens global operational growth expected. We also saw strong performance from several other products in 2014 including Creon, Synthroid, Synagis, and Duodopa. We expected each of these products would hold leadership positions in their respective categories, will continue to represent an important part of our business mix in 2015. Clearly another important driver of performance in 2015 will be our interferon-free HCV therapy Viteron [ph] which is now been approved in the US, EU and a number of other countries around the world. We are pleased with Viekira product label and updated AASLD treatment guidelines and we believe both reflect the strength of the product’s clinical profile across genotype-1 patient population. Position reception of Viekira has been positive and in line with our expectations. While we moved quickly upon approval, I would say that the US launch began in earnest in early January and we’re pleased with our progress today. The first phase of the launch securing payer positions and access for Viekira is well underway. As we indicated once a highly competitive alternative was available Managed Care began their contracting for this class. Obviously in this category the contracting process is occurring very rapidly unfolding over a period of weeks versus months. As we embarked on our discussions with payers we applied a standard Managed Care contracting approach with each account, basing our contracting terms upon four key tenants including the volume of Managed Care lives, the level of formulary control, the term of the contract and patient access within the system. A significant number of payer contracts have been completed in the U.S. with more than half the Managed Care lives in the US now under contract. Based on the outcome of this process today, we estimate that more than 40% of the covered lives will have access to access to Viekira pak including both the exclusive and parity positions we have secured. More than 20% of the lives will be in an exclusive position and we would expect the Viekira pak to capture some portion of the patients in plans that have elected to pursue exclusive contracts with other suppliers, given certain aspects of the Viekira pak profile and product label for certain patients. We need to see how the remainders of the contracts are finalized, but up to this point we're pleased with our formulary position and we believe we have the potential to capture meaningful share of the US HCV market. As we do with most new product launches, we monitor both prescriptions filled data as well as prescriptions written or claimed to assess our sales effectiveness and the efficiency of the payer administrative and prior authorization processes. To that end we have data from external sources, which show 11,000 Viekira prescriptions have been written through January 16th, with the majority occurring in the first two weeks of January. These prescriptions are working their way through the administrative and prior authorization process in order to be filled. While some of these claims may not be filled as is the case with all prescription claims, the majority will make their way through the administrative process and should be dispensed in the coming weeks. This level of Viekira prescription generation is well within our expectations for this stage of the U.S. launch. So based on the full body of data that we have in hand we feel good about the early days of our U.S. launch. Moving forward, our commercial efforts in the U.S. will focus on driving strong penetration in the AbbVie's exclusive and parity accounts while ensuring access to Viekira and non-AbbVie accounts, where our product offerings more appropriately based on the label or medical preference for certain patients. Our international launch is also progressing well and discussions with government payers in various countries are under way and they are advancing rapidly. We are currently selling Viekira in a number of countries around the world including Germany, U.K, Canada, Austria and Sweden and we are on the crux for beginning promotion in several other countries. The HCV market is significant and rapidly growing and based on patient prevalence, diagnosis, and treatment rates we expect it to remain large and an attractive opportunity for many years to come. We're excited about the opportunity Viekira offers us in this market and we're committed to this therapeutic category for the long term and we'll continue our efforts to evolve the treatment paradigm with next generation development programs well under way. Based on our current projections we estimate by the end of 2015 we will achieve a global annualized sales running rate for Viekira of more than $3 billion dollars. Given that we are early in our launch and there are numerous factors that play we will be providing more specific guidance regarding our 2015 sales expectation for the product as the year unfolds. Pipeline development is an important component about these long-term success and we continue to place a tremendous amount of organizational focus in this area. We have a rich and broad pipeline with more than 40 clinical development programs under way spanning large and growing especially categories. Our portfolio is comprised of assets that have the potential to deliver compelling clinical performance, patient benefits and economic value. Many of these products have the opportunity to generate multibillion dollar peak year sales. For a company of our size the sales projections from our late stage pipeline assets represent an impressive opportunity for meaningful revenue growth in the years to come. Over the past year, we demonstrated a strong track record of successful positive clinical data and regulatory outcomes from a number of clinical programs. And we look forward to numerous important pipeline milestones in the year ahead. This includes phase 3 trial initiations, data readouts for multiple programs across our pipeline, the submission of regulatory applications for several major late stage assets and potential product approvals. While I won't cover our entire pipeline in detail today, I thought it would be helpful to review some of the expected milestones in 2015. As I mentioned in 2014 successfully completed our registrational trials evaluating Humira as a treatment for HS. Our US and EU regulatory applications for this indication are currently under review, and we expect decisions from regulatory authorities later this year. Given our strong data and a high unmet need of patience, we believe this will be a significant indication for Humira sales potentially approaching a billion dollars. We’re also exploring Humira as a possible treatment for uveitis, a sight threatening inflammatory eye disease. We expect to complete the phase 3 program and some middle regulatory applications for uveitis later this year. We expect to see data from several of our promising oncology programs in 2015. This data includes data from ABT-199 study in patients with relapsed refractory CLL who had the 17p deletion mutation. We believe this study has the potential to be a registrational trial. Should we see the level of efficacy observed in the earlier studies, and regulatory agencies agreed ABT-199 addresses an unmet medical need, we plan to submit our regulatory applications for this indication later in 2015. We also plan to start a phase 3 study of ABT-199 in Gazyva in frontline fit CLL patients in 2015. This year, we expect to see results from the phase 3 study of elotuzumab in relapsed refractory multiple myeloma. Assuming positive results, we expect our partner to submit the regulatory applications for this indication later in 2015. We also expect to present mid stage data from our PARP inhibitor veliparib at medical meetings throughout this year. In addition to the four phase 3 trials already underway in 2015, we’re planning to begin phase 3 studies, evaluating veliparib as a treatment for ovarian cancer. We’re also excited about ABT-414, our anti- EGF monoclonal antibody drug conjugate, which is currently being evaluated in glioblastoma multiforme and has demonstrated encouraging responses in early-stage clinical trials. We will see additional data from the ongoing trial throughout the year and we’re on the cusp of starting a phase 2 study in this aggressive type of malignant primary brain tumor. With respect to our HCV programs, we expect continued progress in 2015. We’re on track to submit a regulatory application for HCV combination in Japan in the first quarter and anticipate approval in the second half. As a reminder, we expect to commercialize a 12-week, two-pill once-a-day combination for this market. We also expect to see SVR data from our next generation HCV program and transition to phase 3 development later this year. We have significant R&D efforts in place to advance the standard of care in each of our areas of immunology leadership and we’ll see mid stage results from several programs this year. We had two selective JAK1 Inhibitors in our portfolio – GLPG0634 and ABT-494. Both oral compounds are currently being evaluated as potential treatments for RA, and we look forward to learning more about each assets’ profile as the phase 2B data study is complete later this year. We’re working with our partner to complete our regulatory applications for daclizumab or Zinbryta in the first half of 2015. As a reminder we presented strong pivotal trial results last year which demonstrated MS patients treated with Zinbryta at a statistically significant 45% reduction in annualized relapse rates versus Avonex. Given the product profile and its once monthly subcutaneous administration, we believe this agent has the potential to be an important therapy in this large and growing market. Earlier this month we announced positive topline results from the first of two ongoing phase 3 clinical trials of the elagolix in endometriosis. Initial results from the study show that after six months of treatment both doses of elagolix evaluated met the studies co-primary endpoints of reducing scores of non-menstrual pelvic pain and menstrual pain associated with endometriosis relative to placebo control. We will see additional efficacy and safety data from this trial later this year. Results from the mid-stage trial on uterine fibroids are expected later this year as well. Clearly, 2015 promises to be another important year with numerous developments and regulatory milestones. We believe AbbVie has a unique investment identity. We offer promising pipeline prospects as described along with strong growth and compelling shareholder returns. Our business generates significant cash flow which we expect will grow in 2015 and beyond with new product introductions. We’re committed to returning cash to shareholders and our primary means to do so will continue to be our dividend. Last year we announced that AbbVie’s quarterly dividend will be increased to $0.49, an increase of nearly 17% beginning with the dividend payable next month. We intend to maintain our strong commitment to growing our dividend going forward. Additionally last year we also disclosed a $5 billion share buyback program to be executed over the next several years further reflecting our commitment to returning cash to shareholders. We will also utilize our strong cash flow to enhance our pipeline through licensing and partnering activities. As a mentioned in 2014 we entered into several collaborations to add to our pipeline. We view these activities as an important component of our overall R&D strategy and we expect to continue to augment our pipeline in 2015 and in the years to come. In closing, since AbbVie became an independent company we’ve been focused on executing our key strategic priorities and delivering market-leading returns for our shareholders. One of our primary stated objectives upon our inception was to return the strong growth in 2015. And we’re pleased that we’ve been able to do that a year ahead of schedule. We feel good about the high level of execution of our key strategic priorities, we’ve established a strong track record consistently delivering our financial commitments generating strong shareholder returns and driving leading performance of HUMIRA and other products in our portfolio. We’ve also built a promising late stage pipeline which will fuel our future growth. So we set a very sound foundation for our company. We were entering 2015 with strong momentum. We intend to build upon to drive a high level performance in our operations and strong growth. With that I will turn the call over to Bill for additional comments in the fourth quarter and our 2015 outlook, Bill? Bill Chase : Thank you, Rick. This morning I will start with an overview of our fourth quarter performance and then I will walk through our outlook for 2015. We had an outstanding fourth quarter, getting off the year, a better-than-expected performance. This performance allowed us to raise our people year EPS guidance range of 23 year and ultimately deliver results that exceeded our final guidance. Off note in 2014 we delivered EPS growth despite headwinds from currency in the fourth quarter as well as the loss of exclusivity in our lipid franchise. For the quarter total adjusted sales were nearly $5.4 billion up 8.9% on operational basis. And as I mentioned exchange dynamics in the fourth quarter were significant reducing sales growth in the quarter by 3.8%. Fourth quarter revenue growth by Humira which delivered global sales of $3.4 billion, up 14.4% operationally and up 10.6% on a reported basis. In the U.S. Humira sales increased 15.8% reflecting continued strong prescriptions trends double digit market growth across all three major categories rhum, gastro and derm. Internationally Humira sales grew 12.7% on an operational basis, excluding an 8.4% unfavorable impact from exchange. International Humira performance continues to be driven by double-digit market growth in most countries. Globally Humira sales for the full-year 2014 were more than $12.5 billion, up 18.9% operationally, versus the prior year. Sales of Synagis were $298 million on quarter, up 4.9% on an operational basis. For the full year, Synagis sales were $835 million an increase of 9.3% operationally versus the prior year. Growth in 2014 was driven by continued product uptake and strong commercial execution. As a reminder, this is a seasonal product with the majority of sales in the first and fourth quarters of the year. AndroGel sales were $230 million in the fourth quarter, down about 20% versus the prior year, reflecting the continuation of recent market trends. Full year sales were $934 million, down 9.7% year-over-year. Global Lupron sales were $207 million in the fourth up 0.6% on an operational basis. For the full year Global Lupron sales were $778 million, roughly flat from the prior year and in line with our expectations. Lupron continues to hold a leadership position and maintains significant share of the market. U.S. sales of Synthroid were $186 million in the quarter, with full-year sales of $709, up nearly 14%. Synthroid maintain strong brand loyalty and market leadership despite the entry of generics into the market many years ago. U.S. Creon sales were $151 million with full-year sales of $516 million up 25.3% versus 2013. Creon maintain its leadership position in the pancreatic enzyme market with roughly 70% share, and we continue to capture the vast majority of new prescription starts. International sales of Duodopa, our therapy for advanced Parkinson's disease were $56 million in the fourth quarter up 25.4% on an operational basis. For the full year, Duodopa sales were $220 million, a 24.7% increase versus 2013 on operational basis. And as you know, we launched our VIEKIRA, in the US in mid-December following FDA approval, sales of VIEKIRA were $48 million in the quarter, reflecting the shipment of stocking quantities into the market over the holiday to support our full commercial launch in January. I'll turn now to the P&L profile for the fourth quarter. The adjusted gross margin ratio was 81.2% excluding amortization and other specified items. This represents a significant increase over the prior year due to favourable mix impact across the portfolio, margin enhancing initiatives and the impact of exchange dynamics. Adjust SG&A was 29.1% of sales in the fourth quarter, reflecting investments and support of the recent VIEKIRA launch and in our other growth brands and adjusted R&D was 16.3% of sales in the quarter reflecting funding actions in support of our pipeline assets. Net interest expense was $63 million and the adjusted tax rate was 22.5% in the fourth quarter. Fourth quarter adjusted EPS was $0.89 excluding non-cash amortization expense and specified items. On a GAAP basis, we posted the loss per share of $0.51. Specified items were primarily comprised of various cost associated with the termination of the share transaction, our Calico collaboration and ongoing separation costs. I'd like to now discuss the outlook for 2015. We are confirming the full-year guidance we issued earlier this month including adjusted EPS of $4.25 to $4.45. This guidance excludes $0.34 per share of amortization expense and other specified items. On the topline, we expect high-teens revenue growth on an operational basis. Clearly we have seen significant currency movements in the recent weeks. If the recent rates would remain in effect for the remainder of the year our sales growth would be roughly 5% lower. Given our global business structure and programs we have in place to mitigate exchange impacts, the fall-through from currency to the bottomline is much more modest for us. We are comfortable with our 2015 EPS guidance range despite potential currency swings. Included in our topline guidance our assumptions for our key products, for HUMIRA, we expect global sales growth in the mid-teens. For Synagis we expect similar performance to 2014 growth rates. Regarding AndroGel we're forecasting continued market declines as well as a negative impact from the recent entry of generic competition for the 1% formulation. As a result we expect 2015 AndroGel sales of less than $500 million. We expect 2015 Lupron sales to be roughly in line with 2014 levels. For Synthroid we expect sales to be roughly flat from 2014 levels in line with market trends. For Creon we expect low double digit sales growth in 2015. We expect continued double-digit growth for Duodopa with a modest level of U.S. sales in 2015. Given the underserved patient population and the products profile and efficacy we are excited about Duopa's potential in the U.S. and expect it to be a meaningful contributor over time. That said, we anticipate a gradual ramp for the product sales in the U.S. as physicians grow familiar with the product. And we expect declines in several other products with continued lipid erosion and negative market trends in HIV and other material products. Turning back to the P&L, we are forecasting in improvement in the adjusted gross margin ratio of around 100 basis points for the year reflecting product mix and actions we've taken to further improve our margin profile. This level of improvement would be considerably higher if current exchange rates were to hold throughout the year given how exchange flows through our P&L profile in 2015. In 2015, we will continue to invest in our pipeline supporting our exciting opportunities in oncology, HCV, immunology and other areas. We are forecasting R&D expense of approximately 15.5% of sales, and we expect to continue investing in our growth brands with SG&A levels and approximately 25.5% of sales. As a result, we are forecasting a significant increase in our operating margin profile, which we expect to reach 40% of sales in 2015 up roughly 400 basis points reflecting the positive impact of leverage across the income statement, given our ability to moderate bottomline Fx impacts in 2015. Operating margin would be greater than 40% if current exchange rates were to hold throughout the year. We are forecasting net interest expense of about $275 million for the full year and we continue to expect an adjusted tax rate in the 22% range in 2015. Regarding our first quarter outlook, we expect adjusted earnings per share in the first quarter of $0.82 to $0.84. This excludes roughly $0.18 cents of specified items and non-cash amortizations resulting in a first quarter EPS in the range of $0.64 to &0.66 on a GAAP basis. So, as we look back we are very pleased with AbbVie’s performance in our first two years as an independent company. In 2014, we delivered sales in our names well above our original outlook and returned to growth a year ahead of expectations. And we expect to build on that momentum in 2015 with industry leading growth. And with that I'll turn it back over to Larry Peepo. Larry Peepo : Thanks Bill. We’ll now open the call for questions. Elon, we’ll take our first question please. Operator : Thank you. [Operator Instructions] and our first question today is from Jami Rubin from Goldman Sachs. Jami Rubin : Thank you and good morning everyone. I have a few questions related to Viekira, but first Rick, congratulations on an order. So, first if you can clarify your $3 billion Viekira forecast, is that a runway you expect to achieve by the end of the year or is that a forecast for the full year, I am a little bit unclear, I think the street is too. And secondly, if you can provide a little bit more color on the percent of cover to Manage lies or you have an exclude deal with Viekira, I think you said 20%. The only exclusive deal with the PBM that we've seen come across the tape is Express Scripts, and I think they cover around 8%. So, where is the other 12% coming from? Is that on the state side or is that other Managed Care companies that just haven't issued press releases? There is confusion around there. And then just lastly I'm just curious what your assumptions are for pricing in the market, once Merck enters either late this year or early next? Rick Gonzalez : Good morning Jami. And thank you for the congratulations. Let me address your questions. So let me start with the run rate question. Yes, what we were describing to you is there are exit rate at the end of 2015. It should be above $3 billion. So, and the reason why we're characterizing it that way is because we're still assessing the speed at which the ramp will occur, and because there are many different factors that will impact that. Obviously, a number a different processes about how the administrative and prior authorization process ramps up in the United States, how we get pricing and reimbursement, many countries around the world, the speed of which we decide and a number of other factors. So what we're basically saying to you is based on our current forecast that we have built in for 2015, as we look at that exit rate it should be above $3 billion. Second question was around PBM access. So, if you look at our preferred position indeed it is above 20%. That includes obviously significant portion of Express Scripts. It also includes a number of different more regional based PBMs. It includes a number of Blue Cross Blue Shield or Blue Shield plans. And I think as an example Blue Shield of California announced yesterday that position, but there are a number of those they are also in the mix. And so, it's a variety of plans in those areas that make up the 20%. And then assumptions on price post Merck's entry; I think there is a lot of factors that will play out over time obviously in most markets as you get more competition, there is some additional price pressure. But I wouldn't anticipate that we will see significant price pressure as we see more players come into the market, but it's very early to tell what that looks like going forward. It will depend a lot on the performance of those products and other aspects of the market and how it plays out. So I think, it's just very hard to predict, Jami. Operator : Our next question is from Mark Goodman from UBS. Mark Goodman : Bill, I was wondering if you could just talk a little bit about how much of the spending is now in there for the HCV. And then on the gross margin you'd mention mix effects, margin enhancing initiatives; can we go into that a little bit more? And then about your commentary about the 2015 guidance you talked about the margins if Fx stays the same, the margins would be even better. Can you just give us an update on what you mean there? And then you had mentioned the infinity product that you are not licensed? And can you just tell us where that is, when will the studies be getting going and when we will see some data? Bill Chase : Sure, so it's a lot of different items here, but starting first with the spend for HCV. Yes, as you would imagine in the fourth quarter of 2014, we had fully built out a U.S. sales-force, we had everything basically provided for a strong launch. So those expenses were reflected in the fourth quarter. In 2015, there will be some annualization of those expenses in the U.S. because obviously we didn't have the full organization on board early 2014. The ex-US, we are currently building out and that timing is gated based on expected reimbursement timelines and launch timeline, but the bulk of that has been encompassed in our 2015 guidance. I think what's important on SG&A is we've gotten a lot of questions in the past about operating leverage on this P&L and we are beginning to show it. Our SG&A profile is coming down considerably versus where we’ve been in the last couple of years, so we are pleased on the progress there. Gross margin is another area, frankly Mark we've been focussed on since our inception. We are benefiting from some product mix but we also have programs underway to drive efficiencies on that line and we are very focussed on it. And that's what you're seeing playing through to a great extent. We were impacted in the fourth quarter by exchange and it was a favorable impact and let me explain like this. It is a little counterintuitive, but we have within our P&L natural hedges that exist on developed market currencies and we do from time to time, when we think prudent, set up other programs to offset exchange fluctuations, primarily around the Euro. And we are to a great extent in 2014 and 2015 protected from swings in the Euro. The manifestation on profile of course is you have weakness on the topline and an offset on the gross margin line, which actually has the impact of increasing gross margin profile. And we saw that play out in the fourth quarter. That was about 200 basis points. The rest was operating efficiencies and product mix. In 2015, we see the same dynamic playing through in the event that currencies were to remain at where they are at, that said what we have forecasted is 100 basis points of gross margin improvement and that's purely related to the operating efficiency programs we have in place as well as product mix. Is that clear? Mark Goodman : Yeah, so you're saying that there would be more upside to the gross margin on the Fx, that you just haven't baked that in. Bill Chase : No, what I'm saying on a profile bases it would manifest itself as a higher profile because we'd have the weakness on the topline, but the bottomline would be protected based on our internal high dispositions. Mike Severino : So with respect to Infinity, this is Mike Severino. The Infinity collaboration around duvelisib, this one we're very excited about. There are a number of studies are up and running and the key studies are dynamo which is a phase 2 study in patients with refractory indolent nonHodgkin's lymphoma and the duo trial which is a phase 3 study in patients with relapsed refractory CLL. Those studies are up and running. We don't have a specific timing for readouts there, but they're progressing nicely. Over the course of last year, we would this to continue over the course of 2015, earlier studies are continuing to mature on that molecule and there will be a day-to-day readouts over the course of the year. Operator : Our next question is from Chris Schott from JP Morgan. Chris Schott : Just two here. First, coming back to the greater than $3 billion run rate by year-end 2015, is that a number that you expect you can continue to grow over time? So when we think about the year-end run rate in 2015, could that continue to grow in 2016 or do you really think about sales plateauing at that type of level over time? Second question was just on Viekira and just with all the headlines we're seeing regarding contracting. I guess just high level is pricing and the amount of access you're securing, is that progressing as expected or are you at all disappointed in terms of the number of formulary wins you're getting at this point? Rick Gonzalez : Okay, Chris, this is Rick. On the $3 billion run rate we would expect growth between 15 and 16 and if you think about the gating of countries coming online over the course of 2015 as an example, you'd certainly expect you'd see some annualized improvement year-over-year. But again, we have to see how that plays out in the timing of that. We're pleased with the progress that we're making so far. On the Managed Care contracting I think we are overall pleased with how it has proceeded. I think it's come within the expectations that we had, having overall 40% coverage for Viekira between our parity positions and our preferred positions, I think it is well within the expectations. But again, as I mentioned in my formal comments we have to see how the rest of it plays out and we're continuing to work on a number of contracts and I think those will conclude over the course of the next 30 days. But so far it's within our expectations. Thanks. Operator : Our next question is from Jeff Holford from Jefferies. Jeff Holford : Just a couple of extra questions around Viekira. Can you give us any kind of sense for the US visit the ex-US mix on the run rate by the end of 2015; just any color on that would be useful? Second you talked about getting potential access, in contrast we don’t have access; how much leakage would you expect of your exclusive contracts to Gilead? And then just lastly we were talking with Roche just the other day, their results about ABT 199, they seem to indicate that the data were almost in-house or were in-house. Can you give any further commentary around near-term timing on that readout? Mike Severino : Yes, I will take 199 first. This is Mike Severino. 199 is a program that we continue to be very excited about. We are accruing data in the study that Rick referred to earlier that same patients with refractory or relapse CLL with 17P delta lesion. That's a data set that's accumulating. It's a single arm study, so obviously that data builds over time. We’d expect to have a data set that would allow us to draw some conclusions sometime early this year and we continue to make good progress. So again if the level of activity that we saw on earlier studies persists, we’d expect that to support a regulatory filing obviously, in discussion with regulatory agencies later on this year Rick Gonzalez : Okay Jeff, this is Rick. If you are asking the question of what will the US/ex-US mix be in 2015, obviously the US will be a much heavier mix based on how the gating will occur across those countries, and that mix will continue, I think going forward. As far as leakage or assumptions around what we will be able to achieve within accounts that are Gilead preferred, I think both of these products, if you look at the labels, if you look at the performance there are clearly a certain number of patients and patient types that will benefit from one therapy versus the other. So as we look at our own, we think that numbers are around 10%, for example, PI failures and decompensated cirrhotics are two examples of patient populations that will be more appropriate for the alternative. As we look at Gilead are certainly -- as you look at our label and our performance we think there is probably in the neighborhood of about 15% that would be available for therapy, those will be transplant patients, HIV co-infected patients, patient who have significant renal insufficiency, and we also think that there will be some experienced cirrhotic patients. They could benefit from 12 weeks of therapy with Viekira verses 24 weeks of therapy with Harvoni. And so those are some examples of how we see that sorting out. Operator : Our next question is from Vamil Divan from Credit Suisse. Vamil Divan : Just a couple if I could on the pipeline, with daclizumab, you mentioned some excitement around there. I guess the questions we’re getting a lot from investors, in terms of your future looking at MS having this one product, this partner obviously with a player that’s much bigger than you and MS, and has other products that they are going to be promoting as well, do you think MS is a space where you need to invest more, obtain more assets in order to have a broader impact? Or is this one where you think where you have daclizumab alone is sufficient? And a second just on Duopa. If you can just give a little more color there, where we think a lot more activity in terms of new approaches to treating Parkinson’s, how long or how much of an impact do you think that can really have if you think about, it is more of a formulation plan that you guys have here as these other agents maybe come to the market in the coming years? Rick Gonzalez : Let me start with daclizumab. Certainly as we look at the daclizumab profile, we are very pleased with how it sorted out. This is a high efficacy agent. We think the subcutaneous dosing based on the market research we’ve done is something that is appealing to positions and will be appealing the patients. And so we think it as a clear fit. As far as the space I would say the MS space is an area that is attractive. It fits the profile of the kinds of markets that we’re interested in and we constantly look for opportunities within all these spaces. I can tell you, we will look at different opportunities that exist there and evaluate those and if we saw the right opportunity come along we could build us some more critical mass in the MS space, I can tell you we would be interested in that. On Duopa we've obviously had a fair amount of experience with that product in the international markets, in particular in Western Europe. And this is a product that is unique. I mean, when you actually look at the clinical benefit that this provides for these patients it's nothing less than astonishing what the benefit that these patients get from this product. Having said that, it is also a product that has a slow ramp up because it requires a lot of training to get patients on board, to get them titrated to the right level, to get the impact it requires a fair amount of clinical support for those patients that have to be provided. So it's not a product that has a massive ramp. What we've seen in Europe in particular is that it has good strong steady growth. But we do believe that this is a product that over the long term could become a very significant product, $500 million to $750 million range. Certainly we’re seeing some estimates that were even higher than that. But it's gonna have a gentle ramp and obviously the U.S. market is an attractive market for us. So we're pleased that we've gotten it approved in the United States and we can bring that product to patients. Operator : Our next question is from Mark Schoenebaum from Evercore ISI. Mark Schoenebaum : Hey, guys, thanks a lot for the question. Thanks for all the detailed color; that's super helpful. Out here on Wall Street where we all sit in chairs and watch flashing lights, there's a lot of speculation that the discounts you guys offered in the hep C market were outsized and that you've ignited a pricing war that will only end badly for everybody in the industry. So I'd just love to hear your comments generally on that. I recognize you're not going to give us the extent of the discounts, but just qualitatively I'd like to know if those perceptions out on Wall Street you agree with or you don't agree with and why. And then perhaps for Mike, on elagolix; elagolix is a compound I've become quite interested in lately. Street estimates are around $500 million in the AbbVie consensus model. Why couldn't this be significantly larger than that? Maybe you can talk about the unmet need, how you guys see this fitting in and specifically can this be a chronic therapy for women? Rick Gonzalez : Hi Mark, so I'll cover your first question. This is Rick. You know I think the contracting strategy that we put in place was very consistent with the contracting strategy as I said in my remarks that we put in place for all the specialty products. What we say is this, it became very clear to us prior to approval as we were engaging with payers ahead of the launch that payers made it clear was that they were going to contract this category, and there were many payers that said they were going to contract this category with one preferred agent. And so, we had to dial that into our launch strategy and essentially we built the launch strategy, was built around those sets of assumptions. We priced and rebated consistent with the value of our product and what we thought was appropriate for the market and we did it around a disciplined approach around those parameters that I described. And so I don't believe that this is unusual. In fact I believe this is a very typical kind of an approach that we've taken across many specialty categories and the rest of the industry has taken it across many different categories. Mark Schoenebaum : Elagolix? Mike Severino : Okay, so this is Mike. I'll take the Elagolix question. Just a few weeks ago we announced with our partner, topline results from the first of two phase III studies. Now, that's an ongoing study, so we're limited in terms of the amount of detail that we can go into. And we will obviously update you as more data come and present full results in a scientific setting at some later day. But, we're very pleased with what we've seen today. We hit our end points, and these are very difficult end points to hit on pelvic pain and menstrual pain in women who had very difficult to control disease. We did that at both dose levels; we studied with a high level of statistical significance. We are obviously -- we are going to watch as those data mature and as we get additional data on long-term safety that might inform chronic use, but we feel good about what we've seen today and we clearly feel that there is a very large on that medical need, a large number of women live with endometriosis. Current treatment options are not sufficient in many women, a little bit debilitating chronic pain and other symptoms. So it's a molecule that we feel good about long-term. Rick Gonzalez : Mark, maybe I will add a couple of comments. This is obvious scenario where we have some experience because we have Lupron that’s available for this indication as well. And fundamentally what we liked about this molecule is that we thought we could get to a chronic use claim for this therapy. And we also like the fact that this is fast-on and fast-of, one of the challenges with a with a drug like Lupron is once you inject the patient, the impact last for 6 to 12 months and you basically put the woman in the menopause until you have all the normal side effects associated with that; hot flashes and bone loss. So an ideal profile here would be one that would provide sufficient efficacy but have a safety and side effect profile that was consistent with longer-term use, so minimal bone loss and minimal hot flashes. A product like that, an oral product, that was fast-on and fast-off, we think has a substantial opportunity in the market. And as Mike said, this is a high prevalence disease where there aren’t great options available for these women. So as we as we release more of the data and we see more of the data, that’s certainly the profile we’re shooting for, it doesn’t mean that a slightly different profile wouldn’t be a very competitive product. But the ideal profile is what you’re describing. Operator : Our next question is from Robyn Karnauskas from Deutsche Bank. Robyn Karnauskas : Just one on hep C and one on the pipeline. So we're hearing a lot about volume and there's been some volume restrictions by payers this year, and just trying to get a sense when you've been negotiating, what do you think the volume restriction is or how much do you think the volume -- the number of patients the system can handle this year? Are your contracts incorporating any volume restrictions by fibrosis score? And then the second question is on TNF and IL-17, a lot of excitement in the field. Trying to get a sense of when we will get the next data update? And we've seen very good data on IL-17. Do you expect to have better response rates or would this just work for a dual population that had dual symptoms for psoriasis and RA? Rick Gonzalez : Hi Robin, this is Rick. So let me address your first question. As I mentioned in my comments about the four tenants that we operated with our contracting strategy, obviously one of those was access. And we believe strongly that opening up access for all patients regardless of fibrosis score is something that's positive for patients. So certainly as we approached our contracting strategy we offered the greatest benefit to those plans that were willing to do that. Not every plan is willing to do that. I would give as an example Express Scripts a lot of credit for their willingness to open up access. And so they vary by plan. Some are completely open, that’s zero to F4, some are F2 to F4, some are just F3 and F$. So there is quite good variability across the plans as to how they are proceeding with that, but certainly that was something that we pursued with each and every one of the of the payers that we tried to contract with. Mike Severino : Okay so this is Mike. With respect to TNF and IL-17, I think you’re referring to our program ABT 122 which uses our dual variable domain technology, so a single biologics that blocks the action of those two important cytokines. When you look at that the spectrum of activity of agents targeted against the cytokines, one can see very real potential in rheumatoid arthritis, psoriasis, and in particular psoriatic arthritis. The IL17 as we have seen have very pronounced efficacy in skin disease in psoriasis. But the TNF mechanism remains the most highly active in our opinion in psoriatic arthritis. So we have the agent that I described in substantial phase 2 studies, in rheumatoid arthritis and in psoriatic arthritis and those will be progressing over the course of this year and the next and will provide data updates as appropriate. Operator : Our next question is from David Risinger from Morgan Stanley David Risinger : Yes, thanks very much and thank you for all the detailed comments on HCV. That is very helpful. Just a couple questions. First, could you just provide some more color on the 25 state Medicaid group and how investors should think about the news and specifically what your contract states and what the implications are across those 25 state Medicaid organizations? Second, with respect to ABT-199 data in 17p and filing, could you provide some updates on the timing of both of those? And then, finally, in the past, you provided HUMIRA sales by indication. If you could provide a breakdown of 2014 sales again by indication, that would be great? Rick Gonzalez : This is Rick. We’re in the process of continuing to work with that group so I don’t think it is appropriate that we talk and in detail. There was a public announcement on one of them but the rest of them are still in process and we’re just not in a position to be able to give you a lot more information on that, as they’re finalized my guess is that they will provide some color to their members and through that process you will get some visibility to it but we’re just not in a position where it would be prudent for us to give you that information right now. With respect 199 were expecting to see data from our study in refractory relapsed CLL in patients with 17p del mutation in the first half of this year. And when we have this data in hand, we will discuss them with regulatory agencies and assuming we see maintenance of effect size that was observed in early trials, and regulatory agencies agree, we would expect to move to a filing in that indication later on this year. And in terms of the mix David, right now globally we’d estimate that RA is approaching 40% of the sales mix. Derm is about 15%, gastro is about 25% and then other would be the remainder. That would be akylosing spondylitis and the other psoriatic arthritis etc. Indications. Operator : Our next question is from Colin Bristow from Bank of America Merrill Lynch. Colin Bristow : Hey, guys, thanks for squeezing me in. The commentary on hep C over the last 12 months has clearly highlighted the payer sensitivity to high-cost drugs in therapeutic areas. I'm just curious what gives you confidence that HUMIRA won't face an aggressive headwinds posed by a similar entry given the size of this asset? And then just a quick one; additional one on HUMIRA in the additional indications such as HS, how much off-label use is already occurring in the indication? Rick Gonzalez : This is Rick. Let me cover the payer comment. Obviously we have had lots of experience in interacting with payers with HUMIRA and this class there’s a lot of competition that already exist in the class and obviously we’ve been tremendously successful in securing strong positions with payers in the United States with HUMIRA. With the entry of a potential biosimilar at some point in the future, as I said many times before, I don’t see the competitive dynamics changing dramatically from where they are now. I also don’t necessarily agree that the precedent that occurred in hepatitis C changes the competitive dynamics in any way from the way it was prior to that despite a fair amount of rhetoric that has come out over the last month or so. The thing that’s important to remember in a chronic used drug, that’s different, is you have large groups of patients that are on drug, well-controlled. This is a class where when you move patients from one drug to another, not necessarily all patients do well, and has to be switched again, and so there are different dynamics, different competitive dynamics in each class. In oncology I would tell you, it has very different dynamics. Hepatitis C here you have two products that have tremendous performance and you have basically a product that cures patients is used for a relatively short period of time. Those are different dynamics than you see in many other areas. So, I don't think you can draw a strong correlation from one to the other. Having said that I'm sure one and if biosimilar competition comes along, it will be another opportunity to be able to work with and negotiate with Managed Care organizations and we'd anticipated that in our planning assumptions as we look at our long range plan. Off late we'll use on HS, you know I would tell you I just came back from a European meeting where we brought in a number of HS patients. And the first thing I'll tell you is, it's obviously a disease that most people including myself didn't know a lot about. What struck me is how debilitating this disease really is for these patients and how little therapy there is or knowledge of alternatives that are available out there. And so I would tell you that I think there is probably very-very little use of HUMIRA in a HS today and I think when we launch, when we get approval one of the things we're focussing a lot of attention on will be education of physicians in order to know that there is an available therapy for these patients. And so, I would think it was tiny, if anything at all at this point. Thanks, Colin. Alright. Operator, we have time for one more question please. Operator : Our final question today is from Alex Arfaei from BMO Capital Markets. Alex Arfaei : On Hep C, what is your estimate for the number of genotype 1 patients treated in 2014 and your expectation for how many are likely to be treated in 2015? Clearly, the size of the pool has a meaningful impact on you. Could you also comment on the early impact of REMICADE biosimilar in Europe and whether you expect this to be a major factor this year as it enters more markets? And then, finally, I just wanted to clarify and make sure I heard this right. The Fx positive impact on gross margin was 2% this quarter and maybe 1% next year. Could you just please remind us of that again? Bill Chase : Alex, let me start with the Fx. In the quarter it was 200 basis points. Our guidance in 2015 is an improvement on 100 basis points and that has no effects on it whatsoever. So, we think we can drive that 100 basis point purely through operational efficiencies that we've been committed to over the last couple of years as well as product mix. What I did say was if current exchange rates continued, simple math given that our bottom line is greatly protected from those winds, if the current rates continued it'd have the effect of actually increasing the profile above that 100 basis points. But that basically just math along through as you have a headwind on the topline that we are protecting the bottomline from. Rick Gonzalez : On HCV genotype 1 patients, you know obviously that is one of the parameters that we were carefully watching as it plays out. We are assuming that we'll see a significant increase in patient access going forward and therefore in the U.S. we'll see more patients treated. I think a reasonable range to think about would be something in the range of may be a 175,000 patients to as much as may be low 200's to 10 to 15 something in that range. Obviously, based on our planning assumptions we've bracketed between those numbers and that's one of the reasons why we don't want to come out with a 2015 number, because we need to see how that plays out. We build obviously a certain base level number into our guidance they were comfortable with. It may end up being more than that going forward. But that's at least our view of what it looks like. On [Rentia] I mean thus far we haven't see a lot of impact, one difference is in European markets self-injectables are treated differently than infusion products, so it doesn't necessarily impact HUMIRA directly in very many markets, I'd say it's tracking for the most part very consistent with what our modelling assumptions were for its level of success and you know we watched that carefully over a period of time and it's proceeding as we would have got. So, we are not assuming that will have any material impact on us in 2015. Larry Peepo : And that concludes today’s conference call. If you’d like to listen to a replay of the call, visit our website or call 866-479-2459 passcode 1305. The audio replay will be available until midnight on Friday February 13. Thanks again, for all of you joining us. Thanks for the questions today. If you have any further questions, please give us a call. Thanks. Operator : Thank you. And this does conclude today’s conference. You may disconnect at this time..
ABBV	AbbVie	1,551,152	Health Care	Biotechnology	North Chicago, Illinois	2013 (1888)	2012-12-31	2,015	2	2015Q2	2015Q1	2015-04-23	3.435	3.58	4.415	4.517	7.33874	14.11	13.26	Executives: Larry Peepo - Vice President, IR Rick Gonzalez - Chairman of the Board and Chief Executive Officer Bill Chase - Executive Vice President of Finance and Chief Financial Officer Laura Schumacher - Executive Vice President Business Development Mike Severino - Executive Vice President of R&D and Chief Scientific Officer Analysts : Mark Schoenebaum - Evercore ISI Jami Rubin - Goldman Sachs Jeff Holford - Jefferies Marc Goodman - UBS Alex Arfaei - BMO Vamil Divan - Credit Suisse Steve Scala - Cowen Robyn Karnauskas - Deutsche Bank Chris Schott - JP Morgan Colin Bristow - Bank of America Operator : Good morning and thank you for standing by. Welcome to the AbbVie First Quarter 2015 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion of this call. [Operator Instructions]. And I would now like to introduce Mr. Larry Peepo, Vice President of Investor Relations. Larry Peepo : Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; and Bill Chase, Executive Vice President of Finance and Chief Financial Officer. Joining us for the Q&A portion of the call are Laura Schumacher, Executive Vice President Business Development, External Affairs and General Counsel; and Mike Severino, Executive Vice President of R&D and Chief Scientific Officer. Before we get started, I’ll remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about the factors that may affect AbbVie’s operations is included in our 2014 Annual report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law. On today’s conference call as in the past non-GAAP financial measures will be used to help investors understand AbbVie’s ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our Web site. Following our prepared remarks, we’ll take your questions. So with that, I’ll now turn the call over to Rick. Rick Gonzalez : Thank you, Larry. Good morning, everyone and thank you for joining us for our first quarter 2015 earnings conference call. Today we are pleased to report strong results with adjusted earnings per share of $0.94, up more than 32% from the first quarter of 2014 and significantly exceeding our guidance range for the quarter. Our performance included strong operational sales growth of nearly 18%, we delivered these results with growth across the number of products in our portfolio including update of our new HCV therapy Viekira, as well as strong growth from HUMIRA, Synagis, Synthroid, Creon and Duodopa. We continue to see strong underlying demand for HUMIRA with accelerating new U.S. prescription growth and continued market-share gains. We also saw improvement in gross margin to 82.9% and we continue to see our investment in the business deliver strong results. Based on our out-performance, we’ve raised our full year EPS guidance range for 2015 by $0.05, reflecting our strong underlying business performance year-to-date and the expected continued positive trends through the remainder of the year and we’ve also done this despite the negative impact of foreign exchange. In addition to our strong financial results we also have advanced several of our most important strategic priorities during the quarter. Since the start of the year, we’ve achieved a number of important regulatory and development milestones including the EMA approval of our interferon-free HCV treatment. The regulatory submission and priority review of our 2-DAA ribavirin-free once daily combination for genotype 1b HCV patients in Japan. The U.S. regulatory approval for DUOPA our therapy for advance Parkinson disease and the U.S. and EMA regulatory submissions for Zinbryta, our novel treatment relapsing remitting multiple sclerosis. We also reported positive top-line efficacy data results from the first goal ex-pivotal trial in endometriosis. And recently our partner Galapagos reported positive data on our partnered selective JAK-1 compound. Each of these milestones continue to underscore the advancement and robust nature of our mid and late stage pipeline. Importantly we recently announced the acquisition of Pharmacyclics, a strategic addition to our business that will provide significant benefit for our shareholders and the patients which we serve. Pharmacyclics acquisition will add another compelling growth platform to add these existing strong prospects in immunology and virology. We'll accelerate AbbVie’s clinical and commercial presence in oncology broadening our portfolio in haematological oncology an attractive and rapidly growing market and a segment where we have several other assets in mid and late stage development. While strategically important this acquisition will also drive strong financial benefits, it further diversifies our revenue base and significantly enhances our revenue growth across our long range plan. We expect the transaction will be accretive beginning in 2017 and significantly accretive in the years to follow specifically as we have outlined we expect accretion in excess of $0.60 per share in 2019, ramping to more than $1 per share by 2021. The addition of Pharmacyclics will augment at these already strong position and growth prospects. We remain on track to complete the acquisition in the second quarter. When we launched AbbVie as an independent company nearly 2.5 years ago it was our stated goal to build an innovation driven patient focused biopharmaceutical company which can deliver strong sustainable performance over the long-term. Our efforts have been focused on developing our culture of innovation and building a strong and talented team, driving strong performance from our current portfolio and building a robust pipeline of innovative new drugs, and enhancing our efficiency and delivering outstanding returns for our shareholders. As we look back at our performance we are pleased to say that we've made significant progress towards all of these objectives. Our 2015 guidance underscores our goal of driving industry leading growth this year. As we expect earnings per share growth of nearly 27% at the midpoint of our guidance range. Our strong first quarter performance certainly supports our ability to deliver on this objective. And we expect to be among the top performers over our long range plan. In fact given our execution across the number of fronts in the strategic actions that we've taken in the business and now the addition of Pharmacyclics we’re well positioned to generate top tier growth through the rest of this decade and beyond. As we look at our business following the acquisition we’re strategically positioned with a number of compelling growth platforms. Clearly we’re enthusiastic about our oncology franchise. The acquisition of Pharmacyclics is highly complementary with our existing oncology pipeline which is comprised of five late stage assets poised to launch over the next few years. This includes our BCL-2 inhibitor [indiscernible] and our dual PI3 kinase inhibitor Duvelisib both being investigated for the treatment of a wide range of blood cancers. So our portfolio will include three novel and promising mechanisms for the treatment of hematological malignancies. BTK inhibition, Bcl‐2 inhibition and PI3 kinase inhibition. We intend to move quickly to explore combination therapies that have the potential to significantly elevate the standard of care and approve efficacy in hematological cancers. The combinations have the potential to reduce or eliminate the toxic chemotherapeutic age being used in the management of these conditions. Our oncology pipeline also includes veliparib our PARP inhibitor being investigated for a wide range of solid tumors and ABT‐414 our antibody-drug conjugate for Glioblastoma Multiforme, both of which have demonstrated promising signals of efficacy. We’re also partnering with Bristol-Myers Squibb on elotuzumab in late stage development for front-line and relapsed/refractory multiple myeloma. We'll see data from a number of our oncology programs as the year progresses including data from genetic labs and lapsed refractory CLL patients with 17p deletion as well as mid-stage data on veliparib in non-small-cell lung cancer, and Phase 3 data on elotuzumab and relapsed/refractory multiple myeloma. We also anticipate numerous readouts on Imbruvica, including data from RESONATE-2 study in CLL Phase 3 monotherapy data and relapsed/refractory mantle cell lymphoma and additional details from the Phase 3 trial on the last refractory CLL. Our combined late stage oncology franchise will represent a significant source of growth for AbbVie in the coming years with peak year sales estimated to exceed $15 billion. Our virology franchise will also be a growth driver for AbbVie going forward. With the launch of Viekira we've established a meaningful position in HCV, another large and growing category. Our global launch of Viekira which is been underway roughly three months continues to perform within our expectations. As a reminder the tracking services do not capture all the sources of prescription data for Viekira, including certain managed care organizations and number of government entities. When all sources are considered Viekira weekly prescriptions are tracking well ahead of reported levels. Our international launch is progressing faster than anticipated. And discussions with government payers in various countries are on the way and advancing rapidly. We are pleased with the pace of our progress internationally which is tracking ahead of our planning assumptions, this will lead to a higher level of international sales this year than we originally expected. Viekira will be a significant product for us and we continue to expect an annualized run rate of more than $3 billion in global sales by the end of 2015. Our current position will serve as a strong base from which we will launch further enhancements and innovations. Our next generation HCV program continues to progress well. It is our goal with this program to bring to market our ribavirin 3 once daily pan-genotypic combinations. Our next generation HCV program is generating promising early SVR data. Earlier this month we disclosed preliminary results from a 79 patient Phase 2b study of our next protease inhibitor ABT‐493 and our next generation NS5A inhibitor ABT-530. The interim data showed that treatment with the two compounds in non-cirrhotic genotype 1a and 1b patients receiving the ribavirin-free therapy for 12 weeks, resulted in SVR4 range of 99%. Full data from the Phase 2 studies will be presented at future medical meetings. Evaluation and another genotypes continues to progress with encouraging results. But also evaluating shorter durations of therapy with this combination the data expected later this year and we remain on track to advance our next generation HCV program into Phase 3 later this year with commercialization expected in 2017. The HCV market is significant and we expect it will remain a large and attractive opportunity for many years to come. Our immunology franchise represents another compelling growth platform for AbbVie, clearly we have established a strong leadership position in the immunology market with HUMIRA, the world’s leading anti-TNF. Behind HUMIRA, we have a rich pipeline of mid and late stage immunology assets in clinical development. This includes our two selective JAK-1 inhibitors currently in mid-stage development. As I mentioned our partner Galapagos recently announced promising top-line 12-week data from the first of two Phase 2b studies in RA supporting our thesis for JAK-1 specificity and drive high levels of efficacy while maintaining an appropriate safety profile. We look forward to seeing additional data from the ongoing trials as well as results from a mid-stage study of our internal JAK-1 inhibitor ABT-494 as the year progresses. We’re also working to advance several other mid-stage immunology programs including ABT-122, our anti-IL-17 TNF combination and an anti-IL-6 nanobody among others. All of our R&D efforts are focused on advancing the standard of care in each of our areas of immunology leadership. As we have said, we expect HUMIRA to continue to drive strong growth and significant cash flow generation for many years. We have a multi-faceted strategy in place which we believe will allow us to protect and grow our immunology position. We had two new indications in late stage development, as well as a new formulation currently under regulatory review in U.S. and in Europe. We have a robust portfolio of intellectual property protecting HUMIRA which we intent to enforce if infringe by a bio-similar applicant. We have hundreds of patents globally covering the formulation, manufacturing and indications for which HUMIRA is approved. As a first fully human monoclonal antibody approved, the extensive clinical trial work, development and investment we undertook led us to many important inventions with HUMIRA. We have important intellectual property covering these innovations and we intend to enforce this intellectual property. And we recently received a commission decision in Europe regarding compliance with the pediatric investigation plan for HUMIRA. With this decision, we’ll now apply for a six-month extension through our composition of matter patent extending the date for this key European patent from April 2018 to October 2018. Beyond the pipeline assets I’ve already mentioned, we have a number of other compelling pipeline programs that have potential to deliver significant peak year sales. All told we have more than 40 active development programs underway, spanning large and growing specialty categories. And our late stage pipeline has been significantly de-risked as a result of our ongoing clinical work are demonstrating safety and efficacy. This includes Zinbryta which as I mentioned is currently under U.S. and EMA regulatory review for relapsing, remitting multiple sclerosis. Elagolix, which is our compound in Phase 3 development for endometriosis and Phase 2b for uterine fibroids. Atrasentan, our internally discovered compound in late stage development for diabetic kidney disease and a number of other attractive assets in mid to late stage clinical trials. We have a number of attractive growth platforms which set within the context of a company that consistently generate strong financial results and consistently meets financial commitments. We believe AbbVie has a unique investment identity, as we are promising pipeline prospects along a strong growth and compelling shareholder returns. Our business generates significant cash flow which we expect will grow in 2015 and beyond with new product introductions. To that end earlier this year, we increased our quarterly dividend to $0.51 beginning with the dividend payable May. This increase follows an increase of nearly 17% late last year, since our inception as an independent company in 2013 we’ve increased the dividend nearly 28%. We intend to maintain our strong commitment to a growing dividend going forward. Additionally, we’ve utilized our strong cash flow to enhance our pipeline through licensing and partnering activities. We view these activities as an important component of our R&D strategy and we expect to continue to augment our pipeline from the coming years. And finally, operating margin expansion is a key priority for AbbVie. We have initiatives in place to improve efficiency across our operations and we've delivered significant improvements in our operating margin profile since we launched in January 2013 to the current level today of just over 40%. We’re forecasting additional improvements in operating margin profile in 2015 reflecting these efforts as well as favorable leverage across our income statement, and we remain committed to improving this metric across our long range plan. In closing since AbbVie became an independent company we've been focused on executing our key strategic priorities. We've established a strong track record consistently exceeding our financial commitments, generating strong shareholders returns and driving leading performance of HUMIRA and other products in our portfolio. We have also built a promising late stage pipeline which will fuel our future growth and we gained regulatory approval on several important products and advanced many more. We set a strong foundation for the company. The addition of Pharmacyclics significantly strengthens our long-term growth prospects, positioning AbbVie for top tier growth through the rest of the decade and beyond. With that I will turn the call over to Bill for some additional comments on the first quarter performance as well as our second quarter outlook. Bill? Bill Chase : Thank Rick. This morning I will review our first quarter performance and provide an update on our outlook for the remainder of 2015. As Rick said we’re very pleased with the strong quarter we delivered. Reported sales were up 10.5% despite a challenging foreign exchange environment. Operational growth on the top line was a very strong 17.8%. HUMIRA delivered global sales of more than $3.1 billion up 26% on an operational basis. We continue to see strong momentum from HUMIRA with robust growth across categories driving all-time high market share for the brand. U.S. HUMIRA sales increased 39.6% driven primarily by prescription volume increases in excess of 20% and favorable pricing impacts. Wholesale inventory remain constant at fourth quarter 2014 level of less than half a month. International HUMIRA sales grew 14.8% on an operational basis excluding a 14.6% unfavorable impact from foreign exchange. As occurs periodically the first quarter was favorably impacted by the timing of shipments in select markets. For the full year 2015 we continue to expect global HUMIRA sales growth in the mid-teens on an operational basis. International sales of Synagis were $335 million in the quarter up 8% on an operational basis. Synagis which protects at risk infants from severe respiratory disease is a seasonal product with the majority of sales in the first quarters and fourth quarters. We continue to expect 2015 Synagis sales growth to be similar to 2014 performance. Global VIEKIRA sales in the first quarter were $231 million. In the U.S. many of our contracts have start dates in the April and May timeframe and we expect those to begin to ramp in the second quarter and third quarters and build for the remainder of the year. Our commercial efforts are focused on driving strong penetration in the AbbVie exclusive accounts. We've been successful in this regard with our largest contract which is been in place since the beginning of the year. Internationally we've been able to secure reimbursement in many markets faster than we had originally anticipated. As a result as Rick indicated we expect a higher mix of international sales this year than originally forecasted. Globally we continue to expect an annualized run rate of more than $3 billion in sales by the end of 2015. Global Lupron sales were $192 million in the quarter up 3.8% on an operational basis. For the full year 2015 we expect Lupron sales to be roughly in line with 2014 sales. U.S. sales of Synthroid were $186 million up 18.8% versus the prior year quarter. For the full year 2015 we expect Synthroid sales to be roughly flat from 2014 level in line with market trends. AndroGel sales were $153 million down significantly due to continued market declines in the entry of generic competition for the 1% formulation. As we said previously we expect AndroGel sales of less than $500 million for the full year 2015. U.S. Creon sales were $127 million in the quarter up 18.8%. We continue to capture the vast majority of new prescription starts in the pancreatic enzyme market, and we expect double-digit sales growth for Creon in 2015. Sales of Duodopa our therapy for advanced Parkinson's disease grew 19.5% on an operational basis in the quarter. We expect continued double-digit growth for Duodopa with a modest level of U.S. sales in 2015. Our U.S. launch will be getting underway in the second quarter and third quarters and as we said previously we anticipate a gradual ramp for product sales in the U.S. this year as physicians grow familiar with the product. The foreign exchange environment has clearly been challenging for our industry over the last few quarters and like our peers we saw a negative impact on our top-line in the quarter as a result. While we are not completely immune from currency swings, our global business structure and hedging actions we’ve taken will allow us to deliver our bottom-line commitments despite foreign exchange headwinds and protect shareholders from the negative impact. As a result of this mitigation, we will see a favorable effect on our margin profile. We showed continued improvement in gross margin as a percentage of sales in the first quarter. The adjusted gross margin ratio was 82.9%, up 450 basis points from the prior year quarter driven by the effects of exchange, product mix and operational efficiencies. Adjusted R&D was 16.1% of sales, reflecting funding actions in support of our mid and late stage pipeline assets. Adjusted SG&A was 26.7% of sales in the first quarter, down from the prior year contributing to continued improvement in operating margin leverage. The adjusted operating margin in the first quarter was 40.1% of sales, up 620 basis points to prior year quarter. The majority of this improvement was driven by product mix and efficiencies. We are on track to deliver an operating margin profile in excess of 40% in 2015. Adjusted net interest expense was $67 million and the adjusted tax rate was 22.3% in the quarter. First quarter adjusted earnings per share excluding non-cash amortization expense in specified items were $0.94, up 32.4% year-over-year and exceeding our previous guidance range. On a GAAP basis, earnings per share were $0.63. As Rick communicated, this morning we increased our adjusted earnings per share guidance range for 2015 by $0.05. Our adjusted EPS guidance range is now $4.10 to $4.30. This range reflects EPS growth of 23% to nearly 30%. The increase in guidance is reflective of the strong underlying performance of the business that we see playing out this year. And we have raised our outlook despite the increasingly negative impact from foreign exchange. We are now forecasting roughly 7% negative top-line impact from currency this year which we have covered in our guidance increase. Our 2015 adjusted guidance range includes the previous communicated $0.20 dilutive impact of the Pharmacyclics acquisition. It excludes $0.53 of amortization in specified costs including Pharmacyclics transaction costs booked in the first quarter. We plan to communicate specific profile guidance for the combined company as well as 2015 accounting impacts of the transaction on our second quarter call in July. Regarding the second quarter, we expect adjusted earnings per share of $1.04 to $1.06. This excludes roughly $0.09 of specified items and non-cash amortization and includes the modest amount of Pharmacyclics dilution based on a partial quarter impact. So in conclusion, we are very pleased with our out-performance in the first quarter and its impact on our full year projection. We’ve driven strong top and bottom-line growth and delivered operating margin expansion, while also advancing on our strategic priorities. This puts us in a strong position to deliver industry leading growth this year. And with that, I’ll turn it back over to Larry. Larry Peepo : Thanks, Bill. We’ll now open the call for questions. Evan, we’ll take our first question please. Operator : Thank you. [Operator Instructions]. Our first question today is from Mark Schoenebaum from Evercore ISI. Mark Schoenebaum : Congratulations on fantastic P&L management this quarter. Rick I heard during your opening comments you talked a little bit about your long range plan kind of qualitatively about operating margin improvement as part of your long range plan. What I'd like to know perhaps is can you -- are you willing or can you yet quantify where you see operating margins going over the medium to long-term? And if you can’t do that today, well it should be understandable view that plans to maybe said on analyst meeting or some other venue at which you might communicate a long range plan with investors? And then also can you comment on whether or not your assumption for operating margin improvement over the medium to long-term is or is not dependent on revenue, in other words can you commit to your investor base that AbbVie can and will expand its operating margin even if the top-line were to come in below your internal expectations and obviously there the focus will be the HUMIRA bio similar erosion curve? Rick Gonzalez : This is Rick. I think probably the best way to answer your question is to maybe talk for a few moments about the philosophy by which we manage the business and how we think about investment, and how we think about revenue, and ultimately how we try to deal with changes in those dynamics. So let me share by saying, I am sure you understand that our business strategy is really designed to maximize both short and long-term profitability to business. Getting sure the strong returns and strong value over that long period of time, that philosophy really plays out in how we look at investment decisions, whether we’re increasing investment or decreasing investment. And what I’d say is this management team at AbbVie, they came out of Abbott has always been disciplined in our approach to resourcing opportunities as well as overall P&L management. We managed the business with the objective of driving robust growth in both revenue and EPS but at the same time improving operational efficiencies and I think you have seen some of that and I will talk more about that in a moment. In cost, in order to maximize shareholder returns but again short-term and long-term. And the examples I will give you is this. Just take a look at what we you have seen play out since we launched a new company. For example our gross margin profiles improved from 76.2% in the first quarter of 2014 to 82.9% this quarter. Additionally if you look at despite building the infrastructure that was necessary to be an independent public company operating margin profile was improved from 33.7% in first quarter of 2014 to 40.1% in the most current quarter. So we've delivered significant improvement in both of those metrics and we’re committed to continue to do that. And importantly we delivered six points of operating margin profile improvement in the last four quarters. The other thing I would say is we've seen a number of comparisons to various peers group as it relates to AbbVie. And I think it's important to recognize that no two companies are identical when it comes to product mix, geographic coverage, the size of the market that they operate in, the brands responsiveness to investment and many other factors. And I realized it is tempting to do these macro comparisons and I would even agree to some extent that is instructive at some level. But I'll also tell you there are limitations and flaws in doing it. I can tell you that we benchmark and compare ourselves to many companies and we believe that we compare favorably to most of our peers and we will give you a couple of examples here. When you compare AbbVie to the other large cap pharma peers, Bristol, Lilly, Merck, Pfizer, what you would see is the following. Our gross margin profile is on average approximately six points higher. Our R&D profile on average is five points lower. Our SG&A profile on average is three points lower. And our operating margin profile is about 13 points higher. Our geographic footprint is similar to many of those peers but our product mix is different. They have more primary care. And when you compare AbbVie to the pure biotech peers specifically Amgen, Biogen, Celgene, what you see is that our gross margin profile is on average six points lower and as due to differences in the product mix. Our R&D profile is approximately four points lower. Our SG&S profile is approximately five points higher and that’s driven by geographic distribution of our revenues especially the percentage of revenues that come from international sales as you probably know is about 45% for us and many biotech companies have 70% of their revenues coming from the U.S. And there are other anomalies that you have to be careful, such as some biotech companies have a definition adjusted SG&A that excludes the impact of equity-based compensation which we include and there are other accounting differences as well. So finally when you compare to this group and you look at our operating margin profile it's approximately seven points lower as it exists today. But the conclusion of assuming that that’s related to investments spending is not accurate. In fact I would tell you it's misleading. If you look at our total investments spending R&D and SG&A our investment spending on a profile basis is slightly below those peer companies. The entire difference is in the gross margin profile because of the product mix. And we've shown significant improvement there with more to come we’re committed to deliver more but that’s the fundamental difference between those peers groups. And again as we look at this data it is instructive and on balance I would tell you that based on the geographic footprint that we have it's larger than any biotech companies, the product mix and investment in R&D and SG&A the analysis shows us that we’re favorable to both of those peer groups. But in the end what really matters is what investment decisions do you make in the business and what’s the return that you ultimately get from. So you maximize the short-term and long-term value for the shareholder, and our philosophy is we invest in businesses and the brands to maximize that value, meaning we increase investment when we can drive a strong return and we reduce investment when we can't or a product gets to the end of its lifecycle. And I would tell you that I believe we do both very well. And we give you an example of each. If you think about the last two years, we've protected shareholder profitability for the last two years as our $2.5 billion Lupron franchise went generic. We did it by drastically reducing costs in that brand and other parts of the business. We’re doing the same thing right now on AndroGel, it's the obvious decision for us. I would just tell you it's the culture that we have here. Now let’s take the opposite example of that, HUMIRA. HUMIRA is a complex business model. HUMIRA sales and profit contributions come from a broad geographic footprint with about 40% of its sales coming from outside the United States. HUMIRA has an unparallel breath of indications and we use the unique selling model for HUMIRA. We utilize specialized and dedicated sales organizations for all major indications. We manage and invest in HUMIRA to maximize in short-term and its long-term value to the company and to our shareholders. And I think it’s pretty hard to argue with our success when we took the company public a little over two years ago, HUMIRA was $9 billion product. Today in 2015 HUMIRA is a $14 billion product, $5 billion of growth in 2.5 years despite the foreign exchange headwinds, the brand’s 55% larger. If you take Enbrel and Remicade together over that same period of time HUMIRA grew almost twice as much. So we think the performance speaks for itself. And I can tell you that based on the performance the strong potential for future continued growth, accelerating strip trends in the U.S. and strong international growth cutting HUMIRA, spending today is not a prudent long-term strategy for us. And finally, I’d make two last points, we’ve been very clear that we’re committed to driving strong continued improvement in operating margin profile, you saw that this quarter and we’re going to drive further improvements in 2015 and across the long range plan. Our goal is to drive strong growth and operate as efficiently as we possibly can to maximize profitability. We’re not going to make a prediction right now because we just made a significant acquisition and we need to start to integrate that acquisition and we will be in a position to be able to communicate things after that. Second, I get to the final part of your question because I think what you're really trying to ask me is if there was some unforeseen surprise around HUMIRA how we would react to that? So let me begin by saying the following; we do not in any way expect that type of event to happen. In fact I yell you quite the contrary. We anticipate HUMIRA will be a growth driver for us for many years and our investment and new indications like HS and Uveitis speak volumes for our confidence. However to answer your questions, it's a bare scenario played out and threaten to materially impact the profit contributions of HUMIRA we would apply our investment philosophy in an appropriate manner. We will take prompt and appropriate action to reduce our expense base accordingly with an eye to minimize the impact for the investors. To us as I said before, that’s the obvious strategy, it's part of our responsibility to shareholders as management. As a new company, we have met or exceeded expectations in every quarter of our existence including this quarter. We take our responsibility to deliver on our commitments and our performance to shareholders very seriously. If we saw any unforeseen event impact the business, we'd aggressively pursue actions to preserve profitability. As part of the culture and the commitment that we have and in fact I tell you we’re doing that right now. We’re protecting shareholders against significant foreign exchange impact and so that’s the philosophy we run the business and hopefully that answers the question that you asked. Mark Schoenebaum : I really appreciate it Rick. Look forward to more communication after PCYC closes. Operator : Thank you. Our next question is from Jami Rubin from Goldman Sachs. Jami Rubin : And I don’t want to be the dead horse obviously there has been a lot of focus on operating margins, but Rick or Bill maybe just comment on our math here. I mean clearly we see the improvements in gross margins and much about will come from royalties going away on HUMIRA as R&D seems to be in line with other large biotech peers that SG&A seems to be where things appear to be a bit out of kilter. If I do a bottoms-up analysis on HUMIRA it would seem that it will be difficult to spend more than 1 billion maybe a 1.5 billion if you really stretch it, so that leads about 4 billion to 4.5 billion for the rest of the portfolio and when I look at the rest of the portfolio, I mean Synagis, Lupron, Synthroid these are drugs that I don’t think require active promotion and I can’t imagine requires the multi-billion dollars and expenses. Obviously there is other stuff thrown in there, but when I sort of bring it all back to really start it out here, it seems that there is about $2 billion in excess spending. Can you comment on this? And is there anything structural that would prevent you from eliminating that without really touching taking HUMIRA spend? And just maybe another way to go about this is that is there anything structural that would impede you from achieving large cap biotech operating margins which in the next couple of years are forecasted to be in the low 50% range? Rick Gonzalez : Well, first Jami I disagree with your analysis on the investment expense, because if they take your own report and I had to gather the SG&A and the R&D spend for those three companies that I mentioned were slightly below total investment, when you include SG&A and R&D. So it's a question of how you distribute your investments, I would say the second thing is in any cases, we have a broader portfolio of products and broader geographic spread of our products within some of those companies still. Is there anything structural? No, there is nothing structural, I mean obviously we have a geographic footprint it's much larger than many of those other company companies. We believe that’s a competitive advantage. As far as HUMIRA spending is concerned, we obviously do bottoms up budgeting every single year, we justify what we’re going to spend, I would tell you that the selling model that we have is somewhat unique in the industry, but it also tell you that the performance that it's delivering is unique as well. And products don’t sell themselves and so at the end of the day we believe we’re getting a good return out of the investment that we’re making. And we’re balancing our ability to be able to perform in best long-term as well as short-term significant return, and we may increase all the time. I would also say that when you look at some of those brands the broad conclusion that they don't require promotion is not an accurate conclusion. Lupron has promotional activities associated as an example with it. And so generally speaking what I would say is that there is nothing structural that would cause us not to be able to make significant changes. And as I mentioned in my comments to Mark if we were in a situation where ultimately that was something that we believe it was in the best long-term interest of shareholders then we will make that change. But we’re certainly not in that position now. If you look at our performance this quarter we’re growing rapidly, we expect to continue to grow. We have a number of pipelined drugs, as we believe will be approved over the course of the next two years we’re certainly going to put ourselves in a position to be able to launch those drugs and be effective and we’re going to balance the investment we’re making in other areas against that investment to try to be as efficient as possible. And we believe that is the appropriate way to run the business. And we don't believe it is appropriate to try to hit some margin target whatever the number is by cutting R&D or productive SG&A. We don't think that is in the long-term interest of the shareholders. Operator : Our next question is from Jeff Holford from Jefferies. Jeff Holford : Three questions. The first is just a very short one, just wanted if you can comment a bit more in terms of the gross margin uplift you've had there. Just give us a bit more breakdown in terms of what was mix, what was efficiency and what was FX? Second I wonder if you could maybe comment around there are quite a few experts speaking about patents on HUMIRA, really focusing on dosing and formulation and specifically potential weakness is there. Would you say that that’s the key area of the IP portfolio to focus on? Or are there potentially other stronger areas that are being discussed? And then lastly also on IP, I wonder if you can talk to any of the IP that have in the areas of Alzheimer's, it is antibody, and just tell us a little bit more around that? Bill Chase : So Jeff its Bill Chase I'll start with your gross margin question. I am actually going to expand it to operating margin as well, because exchange impact those profile metrics differently. So on the gross margin basis exchange made up a little bit over half of the improvement in the quarter, the remainder was product mix and efficiency. And I would say you can split those remainder two-thirds, one-third. On the operating margin line where exchange has less an effect, what we saw was about a one-third impact of exchange and the rest being leverage on the P&L product mix and efficiencies. Laura Schumacher : This is Laura, I'll take the question on IP. As we said before we've a robust portfolio of IP that covers a wide variety of patents including manufacturing patients, formulation patents, process patents and patents that cover virtually every indication for which HUMIRA is currently approved. We think these patents have a very broad applicability to any bio-similar application and the earliest of these patents expires in 2022. When thinking about these patents it's important to note that HUMIRA was the first fully human monoclonal antibody as such little was known about how to use fully human monoclonal antibodies, and the work that we did in the area was foundational. Collectively we think these patents were the subject of extensive prosecution in the patent and trademark office over nearly a decade and we think given the innovative nature of our work and the rigorous prosecution that the patents are strong and will withstand challenge. Rick Gonzalez : Who wants to talk about the Alzheimer's IP? Mike Severino : With respect to IP, this is Mike Severino. With respect IP in Alzheimer's disease, we’re active from a research perspective in a wide range variance and we’re active in Neuroscience as well and that work generates IP it's done so in the past and we will continue to do so in the future. So I think you will see us continue to pursue research activities in this area over time. Rick Gonzalez : Yes, we just haven't provided a lot of detail there yet Jeff. Operator : Our next question is from Marc Goodman from UBS. Marc Goodman : On the VIEKIRA overseas can you give us a sense of what countries the growth came from? And what new countries are coming on, so we can get a sense of just the geographical mix there? And then you mentioned at your -- can you just give us an update on that product we haven't talked about that in a long. Where is it? When do we get to see data? And then third questions is why are there still such significant separation cost that you are excluding from the numbers given that we’re couple of years out from the separation form Abbott. Rick Gonzalez : This is Rick. I will talk a little bit about the international roll-out. Obviously we've launched in a number of European countries and in a number of other select countries outside of Europe, Germany is a good example of one that has gotten significant uptake. But you will see Italy coming online, Spain has come online and a number of other ones have come on line. So it's the major European countries that you would expect to be the greatest value. And then assume -- we’re assuming Japan we will see in the fourth quarter as well. Mike Severino : This is Mike Severino. With respect to offsetting status that’s our molecule that's been studied in diabetic neuropathy that is progressing well, it's in the Phase 3 study, that’s an outcome study and it's invent driven. So it's hard to make exact predictions about when it will read out, but I think those data will continue to mature over the next few years and so I think you can expect to hear more from it in that timeframe. Rick Gonzalez : I think it is fair to say that because it's an outcome driven trial this trial will take a significant period of time to hit the number of events based on the endpoint that we’ve assumed. Mike Severino : That’s correct. Rick Gonzalez : Several years. Mike Severino : And then Mark on separation expenses, when we separated from Abbott, we operated under a number of transition service agreements. It generally had a two to three year timeline. The majority of those were off with the exception of two large ones and that has to do with the rollout of the existing back office in Abbott and how quickly we could create a new back office and we’ve made great progress on that rolling out a very efficient shared outsource model, but we’re not completely done with that, we’ll be done at midpoint of this year. The other major initiative as you can imagine is just entangling the IT environment and infrastructure in general is extremely complex and that will be done by the third quarter and those are the majority of the costs you're still seeing coming through. Operator : Thank you. Our next question is from Alex Arfaei from BMO. Alex Arfaei : Rick or Laura, the intellectual property, the HUMIRA intellectual property that you referred to, will that protect you against biosimilars manufactured outside the U.S.? In other words are there ways for biosimilar companies to circumvent those patents with ex-U.S. manufacturing? And second question on HUMIRA, the U.S. growth is truly impressive, you mentioned I think old time take market-share could you put some numbers around those market-shares in major indications? And then finally on Hep C why did you exclude cirrhotic in your Phase 2 and will you how cirrhotic data that is this year? Laura Schumacher : I’ll take the IP question first, with respect to the IP the patents that I am talking about broadly are global patents. So we have global patents covering manufacturing and process. The specific indication patents that I referenced are U.S. patents. We have patents pending outside the U.S. right now. Those patents have not issued yet, but we think the portfolio we have is very broad and we think that we will have some protection outside the United States as far as -- certainly right now manufacturing process and formulations. Rick Gonzalez : In terms of market-share Alex, let me give you just a quick snapshot, rheumatology we’ve got about a roughly 25% share right now and dermatology it's approaching a 40% share and in the gastro space it's kind of around 45% market share for us, so very strong market share. Mike Severino : So this is Mike Severino, with respect to our next generation HCV program, I think you're referring to comments we made about a 99% SVR4 response rate in genotype 1 non-cirrhotic patients. Those are simply the first data that we have available. We have not excluded cirrhotic patients on our Phase 2 program. You’ll see our Phase 2 program continue to mature a little course of this year and we'll be providing update as appropriate. Operator : Thank you. Our next question is from Vamil Divan from Credit Suisse. Vamil Divan : So just couple more on the Hep C side; one, can you just share your kind of internal sense of the market share breakdown right now, it's obviously a tougher market than usual for us, you kind of see from the outside between Merck and Gilead any color there in terms of the breakdown would be helpful. And then in terms of the next gen we’re seeing some good day over here at ESOL from competitors. How do you think about duration there, does there need to be any regimen? Are you looking maybe then potentially shorter than that? How do you think about they are giving what the competitors are showing over here? Rick Gonzalez : This is Rick, I’ll cover the market-share piece. So we’re obviously still pretty early on in the launch with three, four months into the launch and maybe the easiest way to characterize it is this, if you actually look I am going to give you a slightly different number than we’ve given you in the past because it will relate better to the overall market-share. So if you look at what we have under contract now and preferred or exclusive contracts total in other words there is still a percentage of covered lives that have not contracted yet and that percentage actually has stayed pretty constant for the last 30 or 45 days. So that’s why I am going to give you a total market-share. You say that we have about 21% of the market that’s under contract as a preferred, well we have preferred agent within those accounts. The vast majority of those have come online roughly in the March timeframe and there actually spread for March, April, May, obviously ESI came on early on and we’ve now demonstrated within the exclusives that we’ve been in for 90 days that we’re able to achieve high share. But ultimately we will deliver the overall share in the U.S. market will be ramping up in these other preferred or exclusive accounts and we’re not going to be able to see that data probably for another 90 days or so as they come online and we ramp. So, I think the best way I need the best way to think about the U.S. just qualitatively would be that you will see this essentially this lighter ramp in the first half of the year for the U.S. and a faster ramp in the second half of the year. Then the parody accounts obviously we've had a number of those under contract and we’re ramping there, they are not ramping as high as the exclusive accounts did. And so the blended share will be determined it's really too early I think to give you a prediction yet, but within 90 days or so I think we will be in a better position to be able to predict that. But it will be a blended share between what we’re able to drive in these preferred accounts, a level we get in parody accounts and then obviously in the areas where our volumes are indicated, we’re getting some share out of their exclusive accounts and it will be the blend of all of those. But now I would say you should be thinking about it in the teens right now, on a low end of the teens but should ramp from there. Mike Severino : This is Mike Severino. With respect to data coming out of ESOL and short course therapy in the future for Hep C. I think it's still a bit early to say where various regiments around the industry are going to sort out with respect to treatment duration. We've seen hints that six weeks maybe possible but those have sort of come and gone in the past and I think we’re going to need more data to know where treatment durations will really sort out over the next few years. What we do know is that it's very important to have high response rates to very high cure rates and I don't personally believe that people will be willing to sacrifice a lot on secured rates to say for example two weeks of the treatment duration and that’s certainly the philosophy that we’re taking. So I think those data will continue to evolve and we'll keep a close eye and with respect to our next generation program we’re going to study eight weeks and we will go where the data take us. We will go as short as we think the data support. Again while maintaining those very high cure rates. So I think when I look at all the data coming out of ESOL I still see our regimen is very, very competitive and I think treatment durations that we’re exploring are going to be appropriate with the landscape that we see out there in three to five years and beyond. Operator : Our next question is from Steve Scala from Cowen. Steve Scala : I have a few questions. On the January call AbbVie said it would provide more specific guidance on 2015 VIEKIRA sales expectations as the year unfolds. What uncertainties still exists such that a single point full year guidance number is not being provided now? So that’s the first question. Second question is I thought both the ABT-199, 17p deletion and elotuzumab readouts were supposed to be in early 2015. What does it imply that the data is not yet available? And then lastly what has been the tone and the substance of your conversations with partners J&J, with ibrutinib and Roche with ABT-199 post the news of the Pharmacyclics acquisition. It would seem that there could be some issues and our concerns and I am just wondering if that’s the case. Rick Gonzalez : This is Rick, I'll take the guidance question. It's specifically two things, it's what I just mentioned a moment ago that many of these exclusive accounts are just now coming on and if we look at our experience in the earlier ones that has taken us about 90 days to get to peak share. And so we need to make sure that we can demonstrate that level of share in those accounts to be able to give you an accurate prediction because obviously that drives a significant part of the share and the volume. And then the second thing is it's this issue that we described before and that is clearly we’re having greater success than we had planned in the international markets. And so the mix is different than what we expected in our original planning process. And so we need more time to see that rollout and that’s gated based on how you get reimbursement in those countries. So we don't want to give you an inaccurate number and we want to see it play out a little bit longer. But what we do know is we feel confident that we should be able to hit the greater than $3 billion run rate by the end of the year. And we've looked at that carefully and we've really communicated that. When we’re at a point that we feel comfortable we can give you a full year estimate we will provide that to you. Mike Severino : This is Mike Severino. With respect elotuzumab and ABT-199 specifically the 17p del data. The question if I can paraphrase is, are we on track? And when we can see more data from these programs? We’re on track with both programs. Elotuzumab you will see an update at ASCO so that’s in a very near future. With ABT-199, and 17p del, we’re on track where we’re working with the data recall that this is an open label study so we’re working with the data. And what we see is consistent with our expectations. We'll look for an appropriate venue and timeframe to share details for those data externally. But we continue to have confidence in that molecule and have a view towards the regulatory submission later on this year. Rick Gonzalez : The partner aspect of it, first let me start with J&J. Obviously Pharmacyclics is an independent company right now and the relationship that they have with J&J is that something we can interfere with or be directly involved and we've had communication with J&J it's been very, very positive, I think we’ve worked with J&J in other aspects relationships that we've very had and our prior experience with Abbott and they are fine company, I think the relationship will work extremely well. I make similar comments about Roche, I think Roche, Genentech we’ve had very good relationships with and we don’t anticipate any challenges and managing our way through this relationship between the two partners. Operator : Thank you. Our next question is from Robyn Karnauskas from Deutsche Bank. Robyn Karnauskas : Just two questions I guess for Rick, so first of all I guess are you opposed to an Analyst Day just to help us understand in greater depths your rationale behind the confidence in HUMIRA, how you run your business? And the second question is and I appreciate that your confidence in HUMIRA business, but when you talk about disaster scenario what is that for you, is that a launch of a biosimilar or is that massive share loss? And do you run your business like that is the possibility or do you run your business like we are so confident in HUMIRA that is something we were not really worried about, just trying to understand how you're run your business versus your confidence? Rick Gonzalez : Two big questions. So the Analyst Day, we had kick around the idea of an Analyst Day, we may do something post closing Pharmacyclics so we -- that was just something we need to plan for and not only we’ll be able to talk about the other aspects of the business that talk about our oncology strategy in more detail. So I would stay tuned on that and we think there a number of things if we could communicate kind of the summer, fall kind of timeframe. I think would be the most appropriate time and now there is a suggested similar suggestion to us about doing an Analyst Day. So that is something we’re considering. What I would tell you on the HUMIRA situation, it is not the launch of a biosimilar, obviously we had a strategy in place that we believe will allow us to continue to drive strong performance out of HUMIRA a post launch of a biosimilar. But what I would tell you is we obviously have contingency plans that we have in place that we will pull the trigger on. Remember it's going to be not just one single launch, right, because HUMIRA is sold all around the world. So there will be different countries, obviously the U.S. is significant part of that and the major European countries are another significant part of it. But we would be evaluating every single country on an ongoing basis and we would make a determination and I’d say the disaster scenario for us would be that ultimately we were significantly unable to achieve the objective that we built into our long range plan. Obviously built into the plan expectations, how we would deal with any price erosion that might occur, any share erosion that might occur and then we have a contingency plan that basically will be built around missing that particular set of assumptions, and you wouldn’t pull it all at once, you basically start to titrate if you are missing in a way to be able to offset or mitigate any financial impact versus what you had planned for. And so I think that’s the way to think about it. Operator : Thank you. Our next question is from Chris Schott from JP Morgan. Chris Schott : First of all just on HUMIRA, was just interested in your perspective and how you're thinking about the biosimilar Remicade launch in Europe this year. I guess what you're expecting there in terms of uptake? And how should we think about this launch as a comp that if a biosimilar HUMIRA was to enter the market in Europe let's say in late 2018, is the Remicade biosimilar ramp something that we should think about as a reasonable comparison there? Second question was on leverage and business development priorities post PCYC. What is the sense of urgency at this point you add or build upon existing growth verticals with further end market product acquisitions post this deal, is that short of priority or should we think about AbbVie kind of coming back to focusing on some of these earlier stage more R&D focus transaction is going forward? Rick Gonzalez : So on HUMIRA and the biosimilar launch in -- the Remicade biosimilar launch expanding beyond the countries that has been in now for a couple of years. What it says we’ve been watching these launches carefully in the countries that they have been in for some period of time. If you look at those countries relatively modest share has been achieved by the biosimilar product in most of those countries and its well within the expectations of what we would have assumed. We’re watching the competitive response and learning from how that competitive response works. And I’d say so far that’s been consistent with what we would have expected from a pricing standpoint and a strategy standpoint. And so within the countries we’re in now, where we’re seeing these launches I can tell you HUMIRA is not impacted. We’re continuing to grow patient share within those countries and so there certainly isn’t any direct impact on HUMIRA within those countries what where we see it today. Is it a good metric in order to measure what we could expect with HUMIRA? I think that’s probably a little bit difficult to judge because again it all bodes boils to your position in the marketplace and I’d also say that the European market and international markets are different than the U.S. market for a number of different reasons. And so if you were to assume that a HUMIRA biosimilar would be in the U.S. prior to the international markets then I would say it's not a good surrogate at all to look at because I think U.S. will be a very different kind of competitive situation. And I think even in the European markets each product is positioned a little bit differently within the market and it bodes down to how to stay competitive response handle the launch of that product. So that one is a little tougher for me to answer. But I would say for right now it's tracking the way we would expected it to be. On the BD priorities post deal, if I understand the question correctly, are we looking to go out and find another large growth platform? The answer is no. We've obviously made a significant commitment here with the acquisition of Pharmacyclics and it positions us well in this sector. And ultimately it was platform play for us and it's a platform play that we would assume that we needed or wanted going forward. So now I think you will see us go back to a similar kind of strategy that we had before which is more looking for individual products that we build out. The areas that we had specific therapeutic interest in like immunology, like virology, like oncology and continuing to add on to that potentially some tuck in kinds of acquisitions, smaller acquisitions to add to it, but more of what you've seen from us in the past. Operator : Thank you. Our final question today is from Colin Bristow from Bank of America. Colin Bristow : Just to piggyback on Vamil's question, we’re seeing a new dates that Merck and Gilead ESOL I was just curious how do you see VIEKIRA PAK competitive position as we move into 2016 given the sentence upon competitive landscape? And there is another one on Hep C, there has been some discussion in the Hep C community that new world realize cure rates for VIEKIRA PAK could be a greater delta to those in clinical trial versus Harvoni given the complex measurement. I would like to get your feedback here based on your experience so far. And then just one quick one Imbruvica. Your peers recently entered in a partnership with the BTK inhibitor for autoimmune conditions including RA, is it something you planned to perceive with Imbruvica? Mike Severino : So with respect to ESOL, we continue to feel confident that VIEKIRA PAK will provide competitive efficacy in the timeframe that’s you are describing in the 2065 timeframe and beyond. Recall that cure rates of VIEKIRA are very high and that duration is been well tolerated and we don't see major shifts for example in duration of therapy in the timeframe that you are describing that would change that picture in any meaningful way. Of course over the longer-term we have our own next generation program which I talked about a little bit earlier in this call, which will continue to drive innovation in this space. And so we feel good about our presence in Hep C today. And we'll continue to do so over the years to follow. With respect real world cure rates with VIEKIRA PAK that doesn't match our experience. And so I really can't comment on that report. Our real world experience is actually a quite good with respect to adherence to the regimen and therefore realizing the cure rates that have been demonstrated in clinical trials. With respect to Imbruvica, we're each obtaining inhibition in autoimmune disorders, obviously that’s something that has been a focus of research for a number of companies including ourselves. It's something we'll continue to investigate. I think we will be positioned very well to pursue that aggressively given our extensive experience in immunology and post close given PCYC's experience in BTK inhibition. So it's certainly something that we will keep a close eye on something that we would pursue. Larry Peepo : And that concludes today's earnings conference call. If you like to listen to a replay of the call please visit our Web site at abbvieinvestor.com. And thanks again for joining us today. Operator : Thank you. And this does conclude today's conference. You may disconnect at this time.
ABBV	AbbVie	1,551,152	Health Care	Biotechnology	North Chicago, Illinois	2013 (1888)	2012-12-31	2,015	3	2015Q3	2015Q2	2015-07-24	3.661	3.78	4.512	4.615	7.42596	14.12	14.68	Executives: Larry Peepo - Vice President, Investor Relations Richard Gonzalez - Chairman of the Board and Chief Executive Officer William Chase - Executive Vice President and Chief Financial Officer Laura Schumacher - Executive Vice President, Business Development Michael Severino - Executive Vice President of R&D and Chief Scientific Officer Analysts : Jami Rubin - Goldman Sachs Jeffrey Holford - Jefferies Mark Goodman - UBS Alex Arfaei - BMO Capital Markets Mark Schoenebaum - Evercore ISI Chris Schott - JPMorgan Robyn Karnauskas - Deutsche Bank Steve Scala - Cowen Operator : Good morning and thank you for standing by. Welcome to the AbbVie Second Quarter 2015 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion of this call. [Operator Instructions] I would now like to introduce Mr. Larry Peepo, Vice President of Investor Relations. Larry Peepo : Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Laura Schumacher, Executive Vice President Business Development, External Affairs and General Counsel; Michael Severino, Executive Vice President of Research & Development and Chief Scientific Officer; and Bill Chase, Executive Vice President of Finance and Chief Financial Officer. Before we get started, I’ll remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about the factors that may affect AbbVie’s operations is included in our 2014 Annual report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law. On today’s conference call as in the past, non-GAAP financial measures will be used to help investors understand AbbVie’s ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we’ll take your questions. So with that, I’ll now turn the call over to Rick. Richard Gonzalez : Thank you, Larry. Good morning everyone and thank you for joining us for our second quarter 2015 earnings conference call. We delivered another strong performance with second quarter results ahead of our expectations including adjusted earnings per share of $1.08 representing growth of more than 31% versus the second quarter of 2014. Our results included strong operational sales growth of nearly 20% driven by a number of products across the portfolio including strong performance from our newly acquired oncology therapy, IMBRUVICA, continued global uptake of VIEKIRA and continued strong growth from HUMIRA as well as other products in our portfolio including Creon, Synthroid, and Duodopa. We are particularly pleased with the high quality of our results in the quarter. We saw significant margin expansion, continued R&D investment and SG&A leverage and we delivered these results despite a significant foreign exchange headwind. We are also pleased with our outperformance and progress year-to-date. We've driven strong commercial, operational and R&D execution resulting in industry-leading top and bottom line performance. During the quarter, we advanced several important strategic priorities, continued to enhance operational efficiency and achieved a number of regulatory and clinical objectives. Importantly, we completed the acquisition of Pharmacyclics augmenting AbbVie's already strong position and growth prospects. I'll discuss our progress with Pharmacyclics in more detail in just a moment. We are also driving strong performance from our current portfolio, including HUMIRA which is off to a very good start in the first half of the year with robust underlying global demand and exceptional performance in the U.S. We made significant progress with our mid- and our late-stage R&D programs. During today's call our Chief Scientific Officer, Mike Severino will provide an update on our pipeline. And we've also continued to improve efficiency across our operations delivering roughly 800 basis points in operating margin expansion this quarter versus the prior year, achieving an operating margin profile of 44.2% and we remain committed to improving this metric across our long-range plan. This quarter and our first half results demonstrate the significant progress that we've made towards our objective of delivering industry-leading growth. As I mentioned, during the quarter we successfully completed the acquisition of Pharmacyclics, a strategic addition to our business that adds another compelling growth platform to AbbVie's strong prospects in immunology and virology and accelerates AbbVie's clinical and commercial presence in oncology. While strategically important, the acquisition of Pharmacyclics will also drive strong financial benefits, further diversifying our revenue base, significantly enhancing our revenue growth across our long-range plan and delivering EPS accretion beginning in 2017. And as we have outlined, we expect accretion related to the acquisition in excess of $0.60 per share in 2019 ramping to more than $1.00 per share in 2021. Pharmacyclics will operate from Sunnyvale, California headquarters under the leadership of Erik von Borcke. Erik has held a number of leadership positions within AbbVie since joining the Company in 2001 including his most recent role as Vice President of Global Marketing. The transition has been seamless and we've been impressed by caliber of talent we've welcomed from Pharmacyclics into AbbVie. We saw a strong momentum with IMBRUVICA in the quarter. Full second quarter U.S. IMBRUVICA sales were $234 million. We continue to expect IMBRUVICA to drive U.S. sales of approximately $1 billion for the full calendar year 2015. Since we completed the Pharmacyclics transaction we have seen additional positive data and progress on our regulatory objectives, including positive readouts from two Phase 3 studies, HELIOS and RESONATE-2. With respect to the positive RESONATE-2 data, a significant portion of our valuation for Pharmacyclics was attributed to advancing into first line treatment. And while we assumed a very high probability of success, these data provide strong evidence of IMBRUVICA's dramatic efficacy in the frontline setting and further de-risks this component of our model. Our virology franchise will be a significant growth driver for us in 2015 and in the years to come. With the launch of Viekira we have established a meaningful position in the HCV market. We continue to see progress particularly internationally which is tracking ahead of our planning assumptions. We received approval in 47 markets and we expect a number of additional countries to come online as the year progresses and into 2016. This includes Japan where we continue to expect a regulatory decision during the second half of this year. As a reminder, in Japan we will commercialize a 12-week, two-pill, once a day ribavirin combination. Overall, we continue to see excellent progress across our total pipeline. We've advanced several assets into the regulatory approval cycle, we've moved assets into pivotal trials, reported positive data from several assets and we expect additional regulatory approvals as the year progresses. We are also encouraged with the advancement in de-risking of our mid and our late-stage pipeline. Over the past six months we've reported positive data from several programs. For example, earlier this year we reported positive top line results from the first of two elagolix pivotal trials in endometriosis. Our partner, Galapagos recently reported positive interim topline findings from two Phase 2b studies of our partner in selective JAK1 inhibitor in RA. We've also recently seen data from the six-month extension trial of the first elagolix endometriosis pivotal study and the results were consistent with the previously reported efficacy and safety findings. Several other assets such as venetoclax in relapsed refractory CLL patients with 17p deletion are demonstrating strong results. We are very encouraged with each of these data readouts. In summary, we delivered another quarter of strong results exceeding our guidance range for the quarter. When we launched AbbVie back in January of 2013, we set an objective for ourselves, to build an innovation driven, patient focused biopharmaceutical company capable of delivering and sustaining top-tier financial performance. We have made significant progress in building the key strategic elements necessary to deliver on that objective. We're driving exceptional performance out of our existing portfolio including HUMIRA. We have a robust pipeline with several assets with multibillion-dollar potential. We're achieving significant operational efficiencies which are apparent in our first half 2015 results and we've added another major growth platform with Pharmacyclics and IMBRUVICA. We've also delivered on our commitments to shareholders with a total shareholder return since launching the company in January of 2013 of more than 125%. We are well-positioned to deliver industry-leading EPS growth in 2015 and we continue to make significant progress advancing our pipeline and other strategic actions that will position AbbVie for top-tier growth through the rest of the decade and beyond. With that, I'll turn the call over to Mike. Mike? Michael Severino : Thank you, Rick. It's an exciting time to be leading research and development at AbbVie. We've got a broad and robust pipeline that includes more than 40 active clinical development programs, including 10 programs in late-stage development or under regulatory review. Our core areas of focus include immunology where we're leveraging our deep expertise to develop next-generation biologics from small molecules that elevate the standard-of-care. Oncology, including assets to address both hematologic malignancies and solid tumors, neuroscience with a particular focus on developing disease modifying therapies for Alzheimer's and other neurotic, degenerative conditions, and virology with an emphasis on continuing to evolve the ACB treatment landscape. We are also placing focused investment in our late-stage programs in women's health with elagolix and renal disease with Atrasentan. Today I'll cover each of these areas and highlight some of our most promising programs. In immunology, we've established clear leadership positions across therapeutic categories including rheumatology, dermatology and gastroenterology and we're leveraging our expertise to build upon these strong positions. Our strategy is centered upon identifying treatments that offer differentiated profiles relative to currently available therapies with the goal of continuing to raise the standard-of-care. We have several promising assets in development including two oral selective JAK 1 inhibitors, several biologics and a bi-specific biologic currently in mid-stage trials. Most advanced are our two selective JAK 1 inhibitors on the cusp of completing mid-stage development in RA. As Rick mentioned, earlier this year our partner Galapagos announced positive topline interim data from two Phase 2b studies in RA. Over the next few months we will evaluate data from our internal program ABT-494 and make decisions about next steps. We also believe our DVD-Ig antibody platform holds tremendous promise in the treatment of immune mediated conditions. ABT-122 is our combination anti-TNF anti-IL-17 two validated mechanisms in Phase 2 trials for RA and psoriatic arthritis. Our early development work with the DVD platform has established as our DVDs have favorable drug-like properties similar to monoclonal antibodies and can be manufactured reliably. We will see data from our mid-stage trial in RA in early 2016. And we have other promising mechanisms in development including an IL-6 Nanobody as well as several early-stage programs. Finally, in immunology we continue to innovate with HUMIRA. We have new indications and formulations in late-stage development. We recently received a positive opinion from the EMA for hidradenitis suppurativa and we expect a U.S. regulatory decision in the second half of this year. We also received EMA approval for a new HUMIRA formulation specifically designed to reduce injection pain and reduce injection volume compared to the current formulation. This new formulation is currently under review by the FDA. And we're on track to submit our U.S. and European regulatory applications for Uveitis in the second half following the recent completion and positive results from our second pivotal trial. The acquisition of Pharmacyclics significantly accelerated AbbVie's clinical and commercial presence in oncology. With IMBRUVICA we've established a leadership position in the treatment of blood cancers and we're well-positioned to build upon that strength with other promising assets in development. Within the hematologic oncology space we have three novel mechanisms that are either on market or in registration enabling trials, DTK, PI 3-kinase and bcl-2 inhibition. We are well positioned to continue to evolve the treatment landscape with innovative combinations of these and other mechanisms. Our goal is to markedly improve efficacy by achieving deep, durable disease control and/or remission. As I mentioned, IMBRUVICA represents our first foray into this therapeutic category and we're pleased with the continued progress we are seeing with IMBRUVICA since the close of the acquisition. At the recent ASCO meeting, we and our co-development partner Janssen, presented data from the Phase 3 HELIOS trial which studied the combination of bendamustine and rituximab or BR with and without IMBRUVICA in relapsed/refractory CLL. The study demonstrated that IMBRUVICA improves outcomes when combined with BR illustrating that IMBRUVICA is not only effective as a single agent, but is also potent safe when used in combination. We also announced topline results from the Phase 3 RESONATE-2 trial comparing IMBRUVICA monotherapy to chlorambucil in patients aged 65 or older with previously untreated CLL. The results illustrate that treatment with IMBRUVICA improved progression free survival in multiple secondary endpoints including overall survival in the first-line setting. We plan to present and publish the full results and will submit the data to regulatory authorities in the second half, building upon our existing set of indications and expanding into the frontline CLL setting. We've also continued to make progress with our first-in-class BCL-2 inhibitor, venetoclax. At the recent EHA Meeting we presented updated study results showing patients with relapsed/refractory CLL taking venetoclax in combination with rituximab had an overall response rate of 84% with 41% of patients achieving a complete response. While early, these encouraging results speak to the valuable role venetoclax may play in novel combinations with the potential to restate standard-of-care in a variety of these cell malignancies. We recently received the FDA's breakthrough therapy designation for venetoclax in relapsed/refractory patients with a 17p deletion of genetic mutation. We plan to present the data that supported this designation at the upcoming ASH Meeting and we remain on track to submit our regulatory applications for the 17p deletion indication by the end of 2015. Our hematologic oncology pipeline also includes duvelisib a dual PI 3 kinase gamma/delta inhibitor being investigated for the treatment of a wide range of blood cancers. And we have partnered with Bristol-Myers Squibb on elotuzumab, a monoclonal antibody targeting CS1 a protein primarily expressed on the surface of myeloma cells in late-stage development for frontline and relapsed/refractory multiple myeloma. Data from the Phase 3 study in relapsed/refractory patients recently published in the New England Journal of Medicine showed that adding elotuzumab to standard treatment significantly reduced the risk of disease progression. We expect our partner to submit regulatory applications for this indication this year. We are also leveraging this mechanism within the context of our antibody drug conjugate platform with ABBV E3A and anti-CS1 ADC currently in early-stage clinical development. Our pipeline also includes late-stage assets in development for the treatment of solid tumors. Veliparib is our PARP inhibitor being investigated as a treatment for several solid tumor types. In contrast other PARP inhibitors in development which are being evaluated as monotherapy specifically in cancers with inherited genetic deficiencies in DNA repair any later lines of therapy we've taken a different approach with Veliparib. We have numerous ongoing Phase 3 trials evaluating Veliparib in combination with common DNA damaging chemotherapies in a wide range of clinical settings. Veliparib has demonstrated promising signals of efficacy and is currently in late-stage development for breast cancer and non-small cell lung cancer. Additionally, we plan to evaluate Veliparib in combination with checkpoint inhibitors with clinical trials planned for 2016. We are leveraging our strong capabilities in protein engineering with ABT-414 our antibody drug conjugate for glioblastoma multiforme or GBM. GBM is the most common and most aggressive type of malignant primary brain tumor. The early data for ABT-414 are promising and we recently initiated additional single arm studies and a randomized controlled trial in second line GBM which could provide a pathway to registration if the data are consistent with earlier phase studies. Certainly the area of the immuno-oncology has recently garnered significant attention. We have an active discovery program with an objective to drive the next wave of immuno-oncology development beyond checkpoint inhibitors. We are particularly focused on the use of our bi-specific platform to support conditional activation of the immune system in the vicinity of tumor cells. And we are leveraging the emerging science of soluble T-cell receptor technology as well. We anticipate multiple immuno-oncology assets moving into the clinic in the 2016 timeframe. Our virology franchise will be a significant growth driver for us in 2015 and in the years to come. With the launch of VIEKIRA we have established a meaningful position in the HCV market and our current position will serve as a base from which we will launch further innovation. We are on track with our next-generation HCV program to bring to market a ribavirin-free, once-daily, pan-genotypic combination with high rates of efficacy and a competitive duration of therapy. Earlier this year, we disclosed preliminary results from a Phase 2b study of our next-generation protease inhibitor ABT-493 and our next-generation NS5A inhibitor ABT-530. The interim data showed that treatment with our next-generation combination in non-cirrhotic genotype 1a and 1b treatment-naïve and experienced patients receiving the ribavirin-free therapy for 12 weeks resulted in an SVR4 rate of 99%. Today I am pleased to report that the SVR 12 results are really impressive. In fact, the dose we intend to pursue in Phase 3 drove an SVR 12 rate of 100%. Evaluation in other genotypes continues to progress with encouraging results and we are also evaluating shorter duration of therapy with this combination. We expect to present data from the Phase 2 studies at the AASLD Meeting later this year and we remain on track to advancing into Phase 3 development this year with commercialization expected in 2017. In neuroscience we're focused on pursuing transformational therapies for the treatment of conditions like Alzheimer's disease, Parkinson's, MS and other neurodegenerative conditions. Zinbryta, our investigational biologic for relapsing/remitting multiple sclerosis is currently under regulatory review in the U.S. and Europe with regulatory decisions expected in the first half of 2016. The filings are based upon strong pivotal trial results which demonstrated patients treated with Zinbryta had a statistically significant 45% reduction in annualized relapse rate versus Avonex an established standard-of-care. Given the product profile, novel mechanism of action and its once monthly subcutaneous administration, we believe Zinbryta has the potential to be an important therapeutic option. We're also in the early stages of our U.S. launch of Duodopa for advanced Parkinson's disease which was approved earlier this year. We are continuing to innovate with Duodopa working on drug delivery improvements and moving toward less invasive approaches and continued improvements in the Duodopa pump. We also have numerous early-stage neuroscience programs underway that have the potential to come to fruition in the later years or our long-term plan. For example, earlier this year we entered into a collaboration with C2N Diagnostics to develop and commercialize a portfolio of anti-tau antibodies for the treatment of serious brain disorders. Tau is a key protein associated with the pathologic progression of Alzheimer's diseases and like amyloid tau also has the ability to be imaged and tracked in the central nervous system. We recently received an orphan drug designation and initiated a Phase 1 program in patients with progressive supranuclear palsy, a rare and debilitating neurologic disease. We're on track to start clinical development with C2N in Alzheimer's disease in 2016. Finally, as I mentioned, we continue to make focused investment in our late-stage programs in renal disease and woman's health. Atrasentan is our internally discovered selective endothelin antagonist in late stage development for the prevention of progression of diabetic kidney disease. A large global Phase 3 program is currently underway evaluating the impact of Atrasentan on renal outcomes such as the onset of end-stage renal disease, transplantation or death due to renal failure. Elagolix is our compound in Phase 3 development for endometriosis and Phase 2b for uterine fibroids. Given the high prevalence of these conditions and the current lack of treatment options we view elagolix as a significant opportunity. Our goal with elagolix in endometriosis is to bring to market an oral therapy that provides a high level of efficacy with minimal menopausal side effects such as hot flash while preserving bone health. Earlier this year we announced positive top-line results from the first of two ongoing Phase 3 clinical trials. Initial results from the study showed that after six months of treatment both doses of elagolix met the study's co-primary endpoints with the safety profile consistent with prior studies. We have also now seen data from the six-month extension of the first elagolix endometriosis pivotal study and the results were consistent with previously reported efficacy and safety findings. We will see top line results from the second pivotal study in endometriosis in the first quarter of 2016, and we plan to disclose top-line data from our Phase 2b trial in uterine fibroids in the fall. So in summary, since the start of the year we've made significant progress and are on track to advance several programs in the coming months. We've built a promising late-stage pipeline comprised of potentially transformational medicines which will fuel our future growth. With that, I'll turn the call over to Bill for additional comments on the quarter and 2015. Bill? William Chase : Thank you, Mike. This morning I'll review our second quarter performance and provide an update on our outlook for 2015. As Rick said, we are very pleased with the strong quarter we delivered. Operational growth on the top-line was a very strong 19.4% excluding an 8.3% negative impact from foreign exchange. Reported sales were up more than 11%. HUMIRA delivered global sales of more than $3.5 billion, up 16.4% on an operational basis. We continue to see strong momentum for HUMIRA as the market leader around the world. On a reported basis currency had a negative 8.8% impact on global HUMIRA sales and reduced international HUMIRA sales by nearly 18%. U.S. HUMIRA sales increased nearly 29% driven by prescription volume and favorable pricing impacts. We've seen acceleration in market growth this year in the U.S. with HUMIRA driving double-digit growth in the gastro, rhum and derm segments. Wholesale inventory remained constant at less than half a notch. Internationally HUMIRA sales have grown nearly 9% on an operational basis in the first half of the year consistent with our planning capitalizations [ph]. As we noted last quarter, the first quarter international growth rate of nearly 15% was favorably impacted by the timing of shipments in select markets. Consequently international sales growth in the second quarter was negatively impacted by the shipment timing. Market growth internationally remained strong with most major markets experiencing double-digit growth and HUMIRA's international market share has remained stable despite new competitors and the launch of biosimilar infliximab. HUMIRA's momentum has not been adversely impacted by the biosimilar. For the full year 2015 we continue to expect global HUMIRA sales growth in the mid-teens on an operational basis. This reflects a forecast for the U.S. growth approaching 30% and 9% to 10% operational growth internationally. Global Viekira sales in the quarter were $385 million. In the U.S. we are wrapping share in our exclusive accounts and have now achieved our target level of penetration and our largest contract. As we've said previously, the contribution of the international launch has exceeded our planning expectations, which will lead to a higher mix of international sales this year. International sales of Viekira in the second half will also benefit from an expected approval in Japan where we will commercialize a two-drug, once daily, ribavirin-free combination. As Rick noted, total U.S. sales of IMBRUVICA in the quarter were strong at $234 million. Given the May 26 closing date for the Pharmacyclics transaction, we recorded a partial quarter of IMBRUVICA sales including $97 million of U.S. sales and $10 million of international profit-sharing. For 2015 we anticipate Pharmacyclics adding more than $750 million to our top-line for revenue occurring after the May 26 closing date. Global Lupron sales were $198 million in the quarter, up nearly 10% on an operational basis. For the full year 2015 we expect Lupron sales to be roughly in line with 2014. U.S. sales of Synthroid were $187 million, up nearly 12% versus the prior year quarter. For the full year 2015 we expect modest growth for Synthroid. AndroGel sales were $170 million, down significantly due to continued market declines and the entry of generic competition for the 1% formulation. We expect AndroGel sales somewhat above $500 million for the full year 2015. U.S. Creon sales were $159 million in the quarter, up significantly from the prior year. We continue to capture the vast majority of new prescription starts in the pancreatic enzyme market. We expect double-digit sales growth for Creon in 2015. Sales of Duodopa, our therapy for advanced Parkinson's disease grew more than 20% on an operational basis in the quarter. We expect continued double-digit growth for Duodopa with a modest level of U.S. sales in 2015. Our U.S. launch will be getting underway this quarter and as we've said previously, we anticipate a gradual ramp for product sales in the U.S. this year as physicians grow familiar with the product. Turning to the P&L profile for the second quarter, since becoming an independent company we placed a high priority on becoming more efficient in driving operating margin improvement. We are pleased with our progress in the quarter as we delivered an adjusted operating margin of 44.2% of sales. Excluding a modest negative impact from Pharmacyclics our operating margin improved 820 basis points versus the prior year quarter. More than 500 basis points of this improvement was driven by efficiencies and P&L leverage. We showed continued improvement in gross margin as a percentage of sales in the quarter. The adjusted gross margin ratio was 85.3%, up 570 basis points from the prior year quarter driven by exchange, operational efficiencies and product mix. Adjusted R&D was 15.9% of sales reflecting funding actions and support of our pipeline assets. Adjusted SG&A was 25.1% of sales in the quarter, down from the prior year contributing to overall continued improvement in operating margin leverage. Adjusted net interest expense was $137 million reflecting the impact of debt issued in conjunction with the Pharmacyclics acquisition. The adjusted tax rate was 21.9% in the quarter. Second quarter adjusted earnings per share excluding non-cash intangible amortization expense and specified items were $1.08, up 31.7% year-over-year and exceeding our previous guidance range. On a GAAP basis earnings per share were $0.83. Moving on to our outlook for the remainder of the year we are confirming our 2015 adjusted EPS guidance range of $4.10 to $4.30. This range reflects EPS growth of 23% to nearly 30%. Our 2015 adjusted guidance range includes the previously communicated $0.20 dilutive impact of the Pharmacyclics acquisition. It excludes $0.84 of intangible amortization of specified costs including Pharmacyclics transaction costs. Regarding the P&L profile for 2015 the following estimates have been updated to include the impact of significant foreign exchange and the Pharmacyclics acquisition. On the top-line we expect revenue growth on an operational basis of roughly 20%. We are forecasting approximately 7% negative top-line impact from currency this year resulting in a reported sales growth of around 13%. We are forecasting a significant increase in our operating margin profile which we expect to reach approximately 42% of sales in 2015. Excluding the negative impact from the Pharmacyclics acquisition, we expect to deliver roughly 650 basis points of improvement over the prior year, about 500 basis points of this improvement results from efficiency initiatives and leverage across the income statement. We are forecasting an adjusted gross margin ratio approaching 83%. This is an increase from our original guidance reflecting significant year-over-year improvement driven by the impact of exchange, product mix and actions we've taken to further improve our margin profile. We will continue to invest in our pipeline supporting our exiting opportunities in oncology, HCV immunology and other areas. We are forecasting R&D expense of approximately 16% of sales and we expect to continue investing in our growth brands with SG&A levels at approximately 25% of sales. We are now forecasting net interest expense of about $625 million for the full year including the incremental debt from the Pharmacyclics acquisition. And we continue to expect an adjusted tax rate in the 22% range in 2015. Regarding the third quarter we expected adjusted earnings per share of $1.05 to $1.07. This excludes roughly $0.14 as specified items in non-cash amortization and includes the impact of Pharmacyclics dilution. We expect third quarter revenue growth on an operational basis in the low 20 percentage range excluding approximately 7% negative impact from exchange. So in conclusion, we're very pleased with the level of quality in the quarter and our performance in the first half of 2015. We’ve driven strong top and bottom line growth and delivered operating margin expansion while also advancing our strategic priorities. This put us in a strong position to deliver top-tier industry growth this year and in the years to come. And with that, I’ll turn it back over to Larry. Larry Peepo : Thanks, Bill. We’ll now open the call up for questions. Operator, we’ll take our first question please. Operator : Okay, sir. Thank you. [Operator Instructions] Our first question comes from Ms. Jami Rubin from Goldman Sachs. Your line is open. Jami Rubin : Thank you very much. Hope you guys can hear me okay. With respect to HUMIRA international sales you've pointed to shipment timing, tough comparisons and FX as reasons for the underperformance, but wouldn’t REMICADE biosimilars be the real culprit here? What evidence specifically can you share with us that suggests that this quarter performance was more of a one-timer verses a new trend? I mean may be you can share what you're seeing in terms of market share changes et cetera? And then a question for your Rick, on potential for U.S. biosimilars, as you know Amgen filed an IPR on the two long data pats, may be you can talk to those patents that are being challenged and put that into the context of your broader patent defense strategy. Thanks very much. RichardGonzalez: Thanks, all right Jami. Jami, this is Rick, good morning. I'll take the first question and let Laura Schumacher answer the second question for you. So it’s a good question and I’m going to answer your question, I’d say very directly and very clearly because I want to make sure that there is no misunderstanding or confusion around this issue. But the bottom line when we’ve done is I would tell you that we have seen no impact from Remicade biosimilar on HUMIRA in the international market, but I’ll give you some color to be able to support that. so I'm going to go back to the first quarter, when we announced first quarter results, if you look at Bill’s formal remarks, in his remarks we identified the fact that they benefited from shipment timing and that is exactly what we’re seeing here and I would tell you that the impact we’re seeing here is consistent with what we expected in that. Secondly, I’d tell you that when we put out the original guidance on HUMIRA, both at the beginning of the year and then when we raised guidance, within that guidance range we had assumed international performance growth of HUMIRA at 9% to 10%. If you look at the performance in the first quarter, we delivered 14.9% growth in the first quarter, second quarter was 3.6%, the average for the two quarters or the first half of the year is 8.8%. We are confirming now explicitly that the second half is forecasted internationally to be 9% to 10% which is exactly what it was in the original guidance. We are also confirming the original guidance. So obviously we feel that we were sitting here with our toes hanging over the edge of the cliff that would be an awfully foolish thing to do. So I can tell you we absolutely have no concerns around that. So let’s talk specifically around what we’re seeing with biosimilars and I’ll give you a little bit of facts maybe to support it. So the biosimilar Remicade has been approved now in 46 countries. It is actually launched in about 36 of those countries. They participated in five national tenders and they participated in about 11 regional hospital tenders. If you look at markets that they have been in for more than a year to be able to measure what their market share is, their total market share is 2.8%. So they haven’t any meaningful impact. We measured every one of those markets that they are in, we've been doing it from the very beginning and in those markets HUMIRA continues to grow as we would have expected it. We don’t see any impact from nor did we expect any impact from Remicade biosimilars within those markets. We obviously continue to watch that. If we look at the pricing within those markets, the medium discount versus the innovator is about 25% odd. For the ones that were tendered it is a little over 50% odd which again is in the range of what we would have expected. The reaction that we’re seeing in the market is consistent with what we expected. And so I would just tell you that it is playing out as we anticipated. Now we need to continue to monitor, but I can tell you that we don’t have any concerns in that area as we would have expected. So the reality is, this is nothing more than movement of shipments between a handful of countries. I'll give you a couple of examples maybe to make you feel a little better. So if you take France which I know there has been a lot of public concern about France, if you look at our growth rate in the first quarter and our growth rate in the second quarter they’re almost identical. If you look at Canada our growth rate accelerated between first and second quarter. If you look at the Netherlands our growth rate accelerated between first and second quarter. Now there are countries where clearly we saw tenders move around. There weren’t any countries that we're impacted by biosimilars, they were due to other events. So reality is, this is nothing more than shipment timing. Did I answer your question? I think we might have muted her line. Jami Rubin : The IPR? Richard Gonzalez : Go ahead on the IPR. Laura Schumacher : With respect to your question about Amgen’s IPR, as we’ve said before, we have a broad portfolio of IP covering manufacturing, process, formulation and methods that we use. Amgen’s IPR does not impact our patent strategy. We don’t know why Amgen selected the two formulation patents that it did to challenge, potentially challenge an IPR, but it does give some perspective on the breadth of our IP including over 40 additional patents that are not the subject of the IPR. Richard Gonzalez : Thanks Jami. Operator we will take our next question please. Operator : Okay sir. Our next question comes from Mr. Jeff Holford of Jefferies. Sir your line is open. Jeffrey Holford : Hi, there does still seem to be a lot of noise on the line it is not coming from me. First question is on new HUMIRA, the one you just had approved in Europe. Can you just give us a bit more color around some numerical data, whatever you have on the clinical differentiators you seem to have on pain and injection volume, just give us a bit more review whether the label that you are getting is going to help you potentially do hard switches in some of the markets you were thinking about? And how this product could help you in the future potentially as a biosimilar defense mechanism, because that’s not entirely clear from this? And then just on Viekira contracts in the U.S., could you just give us any updates on how these are actually playing out versus how you thought they were going to, just some of the metrics that you are looking at? And then, just last question around Viekira, does your run rate for the last quarter of the year, the $3 billion run rate that you are looking at, does that assume a full quarter Japan, how important is that in your minds at achieving that run rate? Thanks very much. Richard Gonzalez : Okay, very good. So Jeff, this is Rick. I’ll answer most of the first question. Let me see if Mike may be able to add a little bit of specificy. So there were two benefits that the new formation was designed to do. We know that there are patients who ultimately stop therapy with the current product because of the pain that they feel upon injection. So we know that’s an important driver of adherence of the product and so we designed this product as a differentiation. The clinical data Mike, I don’t recall the specific numbers, do you recall the actually percent? Michael Severino : This is Mike. So there are data in the studies that were submitted to regulatory agencies. We’re still waiting on a final labeling in the U.S. and Europe. So I think it’s probably a bit premature, numbers that might in labeling, but we assessed this in the course of the clinical development program. Richard Gonzalez : But what I would say is, it’s a significant reduction in pain, a very significant reduction in pain. The second part is that this will also allow us to ultimately reduce the volume of injection, volume and therefore potentially over time reduce the number of injections particularly on the loading dose. So as we said before this is an incremental improvement to the product. We think it’s a meaningful improvement. We’ve obviously studied the different kinds of things that we could do HUMIRA. We have other things that we’re continuing to work on. But we think these are a meaningful opportunity to be able to launch the product. We haven’t formally decided exactly how the product will launch or at least formally announced how the product will launch. So I’m not going to talk through any details around whether or not it will a full conversion or ultimately a phased-in kind of an approach based on certain countries. And so that’s essentially how we see the product and we do think it will differentiated in a significant enough way. It will have both a material impact on HUMIRA itself, HUMIRA’s performance itself, as well as a differentiator versus competitors. So on Viekira pack as far as contracting is concerned I think the contracting hasn’t changed a lot in the U.S. from the last time we talked on the call. As we indicated we had a number of exclusive contracts that were coming online. They are now up and running. We are ramping within those particular contracts. I’d say we are ramping within the expectations that we expected. If you look at our single largest customer in the U.S., that’s an exclusive, we’ve now reached peak share there and so ultimately we’ve reached the level of share that we had anticipated, and it’s a very high level of share. And so now the rest of the growth will be around driving these incremental contracts and then also driving additional share gains within the parity accounts and the non-exclusive accounts. And that’s the work that goes on day by day by day. As far as the $3 billion running rate that we’ve talked about before, I’d say we’re still tracking against that U.S. specifically. Is Japan important? It does assume that we have a full quarter of Japan and I would say Japan is an important market for us. Now based on everything that we know today and the competitiveness of that product and where we are in the regulatory cycle, I think we should get a full quarter’s worth of Japan potentially, but maybe a little bit better than that. As we look at Viekira, the other thing I’d say is, when we originally launched Viekira our expectation was that we would build this into a meaningful product for us and then position ourselves so that as we launched a next generation asset which as you know we've described as a pan-genotypic, ribavirin-free, QD product and the profile of next generation is maintaining consistent with what we would have expected that then with the launch of that we will continued to gain further share with that product as we introduced that product in that marketplace. If we look at our performance so far, I think we’re up by I don’t know 67% quarter-over-quarter if you look at just the second quarter running rate as the product is tracking at about at about a $1.5 billion product and continuing to grow nicely. The international side of the business obviously has performed better than the U.S. I think the U.S. has not met our expectations and I think we understand why and we’re continuing to work on that, but certainly the international market is performing incrementally better than what we expected. And so, I think everything we are looking at right now would suggest that that should be a solid number. I'd say there are three factors that are important for that to happen and we’re continuing to monitor those three things, one is we have seen patient volumes in the U.S. overall volumes in the market decline. Latest data would suggest genotype-1 patients are down around 175,000 to 180,000 now on an annualized basis. We’re assuming that's the level that it will stabilize at and I think the data would suggest that that is a reasonable assumption. Second assumption is that the VA has run into funding difficulties. So the level of patients that they’re treating is down and we are assuming that starting October 1, that they will get additional funds and they will come back up to the level that we saw in the earlier part of the year. And then the third assumption obviously is Japan that we just talked about. So those are the three things that I think will drive the ultimate performance. I guess the last thing I’d say is, if you look at our overall performance in the first half and both in second quarter, I think it demonstrates the strength of the business that we have here. If you look at consensus we were slightly off the consensus number for Viekira this quarter, but yet we over performed. And we over performed because we delivered better operational efficiency, we delivered over performance in other areas. And the balance of our business and our ability to be able to still deliver strong performance even when there are changes, I think is could be one reassuring our investors and two it demonstrates the strength of the overall business. Jeffrey Holford : Thanks. That is very helpful color and congratulations on a great IMBRUVICA number. Larry Peepo : Thanks Jeff. Next question operator. Operator : Our next question comes from Mr. Mark Goodman of UBS. Sir your line is open. Mark Goodman : Yes, good morning. First of all, you have a guidance range that is pretty wide, I was just wondering why you didn’t tighten it this quarter? Second you talked about immuno-oncology you would have multiple assets in the clinic by next year, can you talk about are these going to be similar types of assets to the PD-1 and PD-L1 things like that are they kind of the next wave of products? Richard Gonzalez : Okay. This is Rick. I will cover the first one. We haven’t narrowed the guidance range yet, we probably will here as we get closer to third quarter narrow the guidance range. And I'd say the primary reason for that is foreign exchange has certainly been more challenging than we anticipated and we want to see how that plays out. We told investors that we were going to cover foreign exchange. That we weren’t going to do – we weren’t going to pass that on and so we just want to see another quarter’s worth of performance here and what foreign exchange does over that period of time to feel more comfortable that when we narrow the range or within a range that we are comfortable with. It is just that simple. And them Mike why don’t you talk about immuno-oncology? Michael Severino : Certainly, with respect to immuno-oncology, we’re really referring to the next wave of programs. These would be things beyond PD-1 and PD-L1 or perhaps they might combine well with those mechanisms, but we’re looking at driving for treatment results that can't be achieved today. So we would be referring to novel mechanisms. Larry Peepo : Thanks Mark. Operator, we will take our next question please. Operator : Our next question comes from Mr. Alex Arfaei from BMO Capital Markets. Sir, your line is open. Alex Arfaei : Good morning folks and thank you for taking my questions. Richard Gonzalez : Good morning. Alex Arfaei : Regarding HUMIRA, you mentioned you are seeing accelerated market growth in the U.S. very impressive U.S. performance by the way. Are you seeing increased penetration of biologics in these markets or is it overall volume growth or both? And can you provide more color on some of the efficiencies we are seeing, some of the operating efficiencies we’re seeing? Where are you cutting and why? Thank you. Richard Gonzalez : So Alex on HUMIRA, if you look at the U.S., it’s really been a remarkable story. If you look at market growth last year, it was in the 6% range. That has now moved to about a 13%. We’ve held that pretty steady across the quarter. So what that’s a sign of is that the SG&A that we put behind the brand continues to work and it continues to give a positive return. And the way that that growth is delivered is in fact by penetration as well as improved patient compliance and a number of other things. But there is definitely a penetration element that is the big growth driver in this market. And as you know all of the autoimmuno segments are relatively under penetrated versus what you would expect given the power of a biologic. So that is a big part of the story. In terms of efficiencies, look, we’ve been focused on efficiencies from the very beginning now they shake on the number of different places. In manufacturing, they are the traditional efficiencies you would expect, whether it be purchasing, better utilization of plants or in some cases even take offline non-productive capacity, we've done all of those sorts of things. Across the P&L though, leverage itself presents a different type of efficiency, right. We’re obviously no longer in a situation where we need to grow expense in at the same rate of the top line. In fact, if you look at our expense growth particularly on SG&A it is far, far, far, below what the top-line is growing and that’s pretty much the new model for this business now that we’ve made the investments we needed to make back in '13 and '14 and we’re on track to start delivering growth through the introduction of new products in '15 and beyond. So there are really two different types of efficiencies in the numbers. Alex Arfaei : Thank you. Larry Peepo : Thanks, Alex. Next question please, operator. Operator : Our next question comes from Mr. Mark Schoenebaum from Evercore ISI. Sir, your line is open. Mark Schoenebaum : Okay. Hey, guys, thanks a lot for the transparency, always the most detailed prepared remarks of any company, any big company, so thanks for that. I just want to go back to the central point that others have asked about. Because the stock is off right now and the consistent feedback I’m getting is that people are just very concerned about the rest of the world's HUMIRA numbers. So my question is really simple; one, what was the sequential volume growth for rest of the world HUMIRA? Two, what was the average change in price quarter-on-quarter in the 2Q, please? And then my second question if I may is, you guys I think as mentioned that you might contemplate in the Analyst Meeting or you might provide some long-term financial targets or vision and go over the pipeline, and then you would contemplate this once the PCYC deal is closed. So I’d just like to know what your current thinking is on that? Thank you and congratulations on a great stock move this quarter. William Chase : Thanks, Mark. So Mark on HUMIRA, the volume growth quarter-over-quarter was slightly above 10%, overall price was 6% on a global basis. Mark Schoenebaum : Do you have just rest of the world? William Chase : Rest of the world had negative price of 4.1 and volume was up over 7%. Mark Schoenebaum : The volume was up over 7%, rest of the world. Okay. William Chase : Yes. Mark Schoenebaum : Got it. People are very confused out there. Thank you. William Chase : Thank you. Richard Gonzalez : And then Mark, this is Rick. On the Analyst Meeting, yes it is something we are still considering, I think as you indicated maybe in one of your remarks, I think timing wise if we decide to do it, it probably will be at the beginning of the year, maybe time with a major meeting where it would be convenient for investors to be able to participate. We haven’t made a final decision yet, but we will communicate something around that at some point here, probably third quarter. Mark Schoenebaum : And just to confirm the HUMIRA numbers, those were sequential correct? William Chase : Quarter-over-quarter 2015 versus '14. Mark Schoenebaum : Do you have the sequential numbers 1Q this year versus 2Q and then I’ll stop. William Chase : I don’t have them handy, because we don’t typically look it at that way. I would say price will be relatively flat quarter-to-quarter, price would be probably down about may be 2% quarter-over-quarter. But I don’t have a firm volume number for you. Would you followup with me on that? Mark Schoenebaum : Was it positive? William Chase : Yes. Mark Schoenebaum : It was positive. Okay. Thank you. Richard Gonzalez : Was the price positive, he’s asking... William Chase : No price was negative. Mark Schoenebaum : Okay. William Chase : The volume was positive. Mark Schoenebaum : Thank you. Larry Peepo : Thanks Mark. Next question please operator. Operator : Our next question comes from Mr. Chris Schott from JPMorgan. Sir, your line is open. Chris Schott : Great. Thanks very much for the questions and just couple of quick ones here. First can you just quantify the impact to gross margins from FX in the quarter and in your annual guidance? I’m just trying to get a best sense of what type of underlying growth we are seeing on that gross margin line as we're going through the year here? The second question was on the IL-17 just would be interested in your perspective on what those products are going to kind of mean for the psoriasis market and as you think about HUMIRA over time? And a final one, just so I just come back to clarify some of the earlier comments on the new HUMIRA formulation and launch dynamics, just want to make sure I understood the comments. Should we think about when this product launches it is going to basically fully replace the prior version of HUMIRA in whatever countries it goes out in or is this going to be a conversion type process, we have to go to physicians, get them to select the new version for more of a gradual process? Just wanted to make sure I understood your earlier comments. Thanks very much. William Chase : So Chris, on gross margins I'm just going to just give you some numbers. So our gross margin was up about 570 basis points. Pharmacyclics diluted that by about 50 basis points. So if you exclude Pharmacyclics we are up 620 basis points, just over half of that was exchanged. And then for the year very similar story, different numbers but similar story, gross margin we are forecasting up around 300 basis points. Pharmacyclics will have about 90 basis points to a full point impact. So net-net excluding Pharmacyclics, you would expect to see about a 400 basis point improvement of which again just slightly over half is exchange. Michael Severino : Okay. So this is Mike. I’ll take the second component of your question. With respect to the IL-17s, I think clearly the IL-17s in plaque psoriasis demonstrate very strong efficacy. There are areas where their profile is not quite as compelling in psoriatic arthritis for example. The initial uptake of the 17s has been relatively slow. We would expect the dermatologist would take some time to become comfortable with the new mechanism before they would adopt it. So we feel comfortable about the trajectory of HUMIRA in the psoriasis space for quite some time. Richard Gonzalez : Okay. And on the new formulation, I mean we really can’t talk specifically about what the strategy is because it’s somewhat condition on the regulatory approval and we don’t have regulatory approvals yet all around the world. But there probably will be situations where it will be a replacement product, meaning it will replace not over a very short period of time, but over a relatively short period of time as inventory runs out of the old product, the new product will replace the old product and we will only maintain the new product in the marketplace. I would say that will probably be the predominant model that is out there, but it might not be the exclusive model that is out there depending upon the regulatory approvals. Chris Schott : Thanks very much. Larry Peepo : Thanks Chris. Next question please. Operator : Our next question comes from Mr. Robyn Karnauskas of Deutsche Bank. Sir, your line is open. Robyn Karnauskas : Hello, it’s Mr. Robyn Karnauskas, thanks for taking my question. Richard Gonzalez : Glad to meet you. Robyn Karnauskas : All right, so two quick questions, one you didn’t mentioned anything about celiac disease, I am wondering if you could comment on did the program fail or are you still interested in that program? Second question on HUMIRA II, the new HUMIRA, do you think will be able to track that in any way will it be given a different name? Just wondering like how the Street will be able to monitor that as it has an uptick? And then the last question big picture for your RA franchise given that looks like you don’t have to go through the patent dance and Amgen’s filing an IPR which could speed up sort of the clarity around when they are actually going to launch. How do you view the time lines for some of your emerging RA drugs and whether it is important to get them on the market sooner or whether or not you'll still be okay if Amgen’s biosimilar hits ahead of their launch? Thanks. Michael Severino : So, this is Mike. With respect to celiac disease, we're still evaluating the opportunity and we’ve not reached a decision point yet. Richard Gonzalez : Okay and Robyn this is Rick. I will cover the HUMIRA formulation. Again it is consistent with what I described to you before. It will depend upon the regulatory approval. So we don’t know the answer to that yet. It could be that it has the exact same name as the current product and therefore you wouldn’t necessarily have any direct visibility to it. It could be HUMIRA plus some designation after HUMIRA and therefore we would be able to track it, or you would be able to track it in some separate fashion. So we’re going to see how that plays out before I can give you an accurate answer. And then, I'd just say on the big picture piece, I'd say the IPR doesn’t necessarily change anything that we thought about before from a timing standpoint. As we've said and as Laura mentioned a momentum ago, we have a broad group of, or portfolio of IP. We have some very important patents in this area and we intend to enforce those patents and this IPR process won’t affect those timelines as we’ve assumed it. Robyn Karnauskas : Okay, great. Thank you. Larry Peepo : Thanks Robyn. Operator, we have time for one more question please. Operator : Okay sir. Our last question comes from Mr. Steve Scala from Cowen. Sir your line is open. Steve Scala : Thank you and thanks for the R&D overview. AbbVie really does have an impressive pipeline. On the new HUMIRA formulation what portion of the current patients on HUMIRA have issues with pain and or volume? What additional IP protection does it offer? And then third, it sounds like there is a bit of hedging on the prior of Viekira guidance of annualizing as $3 billion exiting 2015 am I wrong? Thank you. Richard Gonzalez : Thanks Steve. This is Rick. I guess I’ll do the last one first. I was trying to describe to you the elements that will drive our overall performance in Viekira. If I sounded like I was hedging, I apologize for that. It is our goal to still hit the number that we described to you. So I was trying to describe to you the elements associated with it. As far as the details around percentage of patients, I mean I don’t recall it offhand. I’d say there is a fairly substantial percentage of patients that when they first go on the drug do experience or express concern about pain upon injection. The vast majority of those patients obviously work through it and stay on the drug, but it’s not an insignificant percentage of patients that we see that, that experience at the beginning of their use of the product. And as far as volume, it’s more of a practical thing. At the end of the day if you inject less volume obviously that helps with the pain as well assuming it is not more viscous, so it has some other reason why would have pain. But if you - as you get less volume in the indications where you have loading doses, there would be a substantial benefit there, where you can go from multiple loading doses to one loading dose an example in certain conditions and I think that would be a significant benefit for patients. Steve Scala : And the IP? Richard Gonzalez : I mean essentially it has IP associated with it, I'd say this is really a strategy to differentiate the product. Obviously we have IP around this particular formulation. I think that IP will protect this particular formulation. As we've described I think a couple of times before, we don’t view this as an absolute block. When you think about our biosimilar strategy, it’s a number of things that have all been put together, a very large portfolio of IP, some of that IP is very broad and very challenging I think for someone to work around. New formulations, it helps differentiate the product. Our commercial strategy, when and if biosimilar is launched and then our pipeline of new assets to be able to move into this market and I'd say although we tend not to probably be able to get there in any meaningful way, I think one of the exciting things that we see internally is if you look at the data that we’ve seen around the JAK 1 hypothesis that we have its is playing out and its playing out in a very positive way. And I think it’s a profile of a drug that we believe could have a meaningful impact in the marketplace and I think that would be an important product for us to advance and get into the marketplace and then also ABT-122, I think as we talk about an IL-17 combined with a TNF as we see that data, I think that product could have a very meaningful place in the market as well. And so I think we’re gaining a lot of encouragement about de-risking that mid-stage pipeline to ensure that we have some products that will follow on with HUMIRA. Steve Scala : Thank you. Larry Peepo : Thanks Steve. And that concludes today’s conference call. If you would like to listen to a replay of the call please visit our website at abbvieinvestor.com. Thanks again to everyone for joining us. Operator : That concludes today's conference. Thank you for participating. You may now disconnect.
ABBV	AbbVie	1,551,152	Health Care	Biotechnology	North Chicago, Illinois	2013 (1888)	2012-12-31	2,015	4	2015Q4	2015Q3	2015-10-30	3.896	4.017	4.723	4.828	7.37243	14.3	12.33	Executives: Larry Peepo – Vice President, Investor Relations Richard Gonzalez – Chairman and Chief Executive Officer William Chase – Executive Vice President and Chief Financial Officer Laura Schumacher – Executive Vice President, Business Development Michael Severino – Executive Vice President of R&D and Chief Scientific Officer Analysts : Jami Rubin – Goldman Sachs Jeffrey Holford – Jefferies Mark Goodman – UBS Chris Schott – JPMorgan Mark Schoenebaum – Evercore ISI Vamil Divan – Credit Suisse Alex Arfaei – BMO Capital Markets Colin Bristow – Bank of America Merrill Lynch. Operator : Good morning and thank you for standing by. Welcome to the AbbVie Third Quarter 2015 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion of this call. [Operator Instructions] I would now like to introduce Mr. Larry Peepo, Vice President of Investor Relations. Larry Peepo : Good morning and thanks for joining us today. Also on the call with me is Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Laura Schumacher, Executive Vice President Business Development, External Affairs and General Counsel; Michael Severino, Executive Vice President of Research & Development and Chief Scientific Officer; and Bill Chase, Executive Vice President of Finance and Chief Financial Officer. Before we get started, I'll remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about the factors that may affect AbbVie's operations is included in our 2014 Annual report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law. On today's conference call as in the past, non-GAAP financial measures will be used to help investors understand AbbVie's ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. We want to remind you that we issued two separate news releases this morning in advance of today's call and have also posted slides on abbvieinvestor.com that supplements some of the content we'll be covering this morning. Following our prepared remarks, we'll take your questions. So with that, I'll now turn the call over to Rick. Richard Gonzalez : Thank you, Larry. Good morning, everyone and thank you for joining us. As Larry mentioned, we'll be covering two topics on the call this morning. I'll briefly discuss our third-quarter 2015 performance highlights and Bill will walk you through the quarter in a bit more detail. I'll then discuss the Company's long-term strategic and financial objectives that we outlined this morning, including our expectations for growth and other financial metrics over our long-range plan. As always, we'll provide ample time to answer your questions. We delivered another quarter of strong performance with third quarter results well ahead of our expectations. Adjusted earnings per share were $1.13, representing growth of nearly 27% versus the third quarter of 2014. This is the third consecutive quarter of delivering roughly 30% EPS growth. Our results in the quarter included operational sales growth of more than 26%. Before I provided an overview of our highlights in the quarter, I'll briefly provide our perspective on the recent update to our U.S. VIEKIRA label. As you're likely aware, last week, we updated the prescribing information to reflect a change in the use of VIEKIRA in certain patients with advanced cirrhosis. Specifically, Child-Pugh C patients. VIEKIRA went from not recommended to contraindicated. VIEKIRA was and remains contraindicated in Child-Pugh C patients. In addition, the updated label recommends a clinical and laboratory assessment for patients with cirrhosis to ensure that those with decompensated disease are identified. Turning now to the other quarterly events. In the quarter, we advanced several important strategic priorities, continued to enhance operational efficiency and achieved a number of clinical and regulatory objectives. Our third-quarter performance was driven by growth from several product in our portfolio, including strong growth from HUMIRA and IMBRUVICA, continued uptake of VIEKIRA and continued growth from Creon and Duodopa. We also continued to improve efficiency across our operations delivering roughly 640 basis points in operating margin expansion this quarter versus the prior year, achieving an operating margin of 44.9%. I'll discuss our commitment to further drive this metric in the context of our long-term financial objectives in just a few moments. We continue to be very pleased with the advancement and de-risking of our mid- and late-stage pipeline. During the quarter, we reported positive data, advanced programs into the regulatory approval cycle and received approval for several assets. Last month, we reported positive top line results from two Phase 2b studies of our selective JAK1 inhibitor. We believe ABT-494 has a very compelling profile, with a potential for best in class efficacy even in the most difficult to treat TNF inadequate responder patients, and with once daily dosing. We'll present the full results from the two mid-stage trials in an upcoming medical meeting and are on track to initiate the Phase 3 studies by year-end. We also reported positive top line findings from a Phase 2b trial of elagolix in patients with uterine fibroids. Preliminary results from the six-month study demonstrated that all of the treatment arms achieved the study's primary endpoint. Based on these findings, we plan to advance elagolix into Phase 3 development for fibroids, with initiation expected in the first quarter of 2016. We recently submitted the U.S. regulatory application for IMBRUVICA as a therapy in treatment naive patients with CLL. In June, we announced the top line results from the Phase 3 RESONATE-2 trial comparing IMBRUVICA monotherapy to chlorambucil in patients aged 65 or older. The results illustrate that treatment with IMBRUVICA significantly improved progression-free survival and multiple secondary endpoints, including overall survival in first-line therapy. As we've said, a significant portion of our valuation for Pharmacyclics was attributed to advancing into first line treatment, and while we assumed a very high probability of success, the RESONATE-2 data provides strong evidence of IMBRUVICA's efficacy in a frontline setting, further de-risking this component of our model. The trial results will be published in a peer reviewed medical journal and presented at an upcoming medical meeting, and we anticipate a regulatory decision to use in treatment naive first-line patients in the first half of 2016. Given the robust results, we have a high degree of confidence that IMRUVICA will be very successful as front line therapy. We also recently completed our U.S. regulatory submission for venetoclax or ABT-199 in relapsed/refractory CLL patients with 17p deletion. We also recently received regulatory approval for our two pill, once daily HCV therapy in Japan. We expect to receive reimbursement and launch in Japan in the next month or so. Late last month, we submitted our regulatory application for a once daily formulation of VIEKIRA PAK in the U.S. Finally, during the quarter, we received regulatory approval for HUMIRA as a treatment for HS and we submitted our U.S. and European regulatory applications for HUMIRA as a treatment for uveitis. In summary, we delivered another quarter of strong results exceeding our guidance range for the quarter, and we raised our full-year 2015 outlook to the upper end of our previous guidance range, reflecting growth of roughly 28%. Our results year-to-date demonstrate the significant progress we've made towards our objective of delivering industry-leading growth. I'll discuss our strong outlook for 2016, as well as our longer term financial commitments after Bill covers our third quarter results in more detail. With that, I'll turn the call over to Bill. Bill? William Chase : Thank you, Rick. This morning, I'll review our third quarter performance and provide an update on our outlook for 2015. As Rick mentioned, in addition to delivering strong top line growth in the third quarter, we again exceeded our earnings-per-share guidance range with growth of nearly 27% versus the third quarter of 2014. Operational growth on the top line was very strong at 26.2%, excluding a 7.8% negative impact from foreign exchange. Reported sales were up 18.4%. HUMIRA delivered global sales of more than $3.6 billion, up 19.6% on an operational basis. We continue to see strong momentum for HUMIRA as the market leader around the world. On a reported basis, currency had a negative 7.5% impact on global HUMIRA sales, and reduced international HUMIRA sales by 16%. U.S. HUMIRA sales increased 30.4%. We've seen acceleration in market growth this year in the U.S. with HUMIRA driving strong growth across the gastro, rhum and derm segments. Wholesale inventory levels remained constant at roughly half a month. Internationally, HUMIRA sales increased 7.1% on an operational basis in the third quarter, roughly double the rate of growth we reported in the second quarter. HUMIRA's momentum has not been adversely impacted by the Remicade biosimilar. We continue to see only modest overall share gains for the biosimilar in the major markets, in line with our planning assumptions. HUMIRA's list of indications continues to grow with recent EMA and FDA, approvals for HS. HUMIRA is also currently under regulatory review for uveitis with approval expected by the end of 2016. Global peak year sales for HS are expected to be approximately $1 billion per year, while uveitis sales are expected to reach several hundred million dollars per year. For the full year 2015, we now expect global HUMIRA sales growth in the high teens on an operational basis, an increase from previous guidance of mid-teens operational growth. This reflects a forecast for you U.S. growth approaching 30% and high single-digit international operational growth. This was the first full quarter of IMBRUVICA sales since the closing of the Pharmacyclics acquisition and global sales were strong at $304 million. U.S. sales were $267 million and our international profit-sharing was $37 million. For 2015, we continue to expect Pharmacyclics to add more than $750 million to our top line through revenue occurring after the May 26 closing date. Global VIEKIRA sales in the third quarter were $469 million. The international launch has continued to exceed our planning expectations and has resulted in a higher mix of international sales this year. As Rick mentioned, we recently received regulatory approval in Japan for our two drug, once daily, ribavirin free combination for the treatment of genotype 1b. We anticipate launching in Japan next month following the traditional 60 day reimbursement review cycle. We also saw a strong performance across a number of our other products including Duodopa, Creon and Lupron. Turning to the P&L profile, we are pleased with our progress in the quarter as we showed continued improvement in gross margin as a percentage of sales. The adjusted gross margin ratio was 83.3%, driven by exchange, operational efficiencies as well as product mix. Adjusted R&D was 15.4% of sales, reflecting funding actions in support of our pipeline asset. Adjusted SG&A was 23% of sales in the third quarter, down from the prior year, contributing to continued improvement in our operating margin profile. We delivered an adjusted operating margin of 44.9% of sales, up 640 basis points versus the prior year quarter. After adjusting for a modest negative impact from Pharmacyclics, more than 500 basis points of this improvement was driven by efficiencies and P&L leverage. Net interest expense was $197 million, reflecting the impact of debt issued in connection with the Pharmacyclics acquisition. The adjusted tax rate was 21.9% in the quarter. Third quarter adjusted earnings per share excluding non-cash intangible amortization expense and specified items were $1.13, up nearly 27% year-over-year and exceeding our previous guidance range. On a GAAP basis, earnings per share was $0.74. Moving on to our outlook for the remainder of the year, we are raising our 2015 adjusted EPS guidance to a range of $4.26 to $4.28. This reflects EPS growth of approximately 28% at the midpoint. This guidance excludes $1.10 per share of intangible amortization expense, deal costs, integration and other specified items. We expect fourth quarter revenue growth on an operational basis in the low 20% range, excluding approximately 5% negative impact from exchange in the quarter. For the full year 2015, we are forecasting an operating margin of 42% to 42.5% of sales, and as Rick noted, today, we provided a 2016 adjusted earnings per share guidance range of $4.90 to $5.10. We'll provide more detail regarding this guidance as we normally do, on the fourth quarter call in January. So, in conclusion, we're pleased with the drivers of our strong performance, further demonstrating the quality of our results in the quarter, and thus far in 2015. We've driven strong top and bottom line growth and delivered operating margin expansion, while also advancing our strategic priorities. This puts us in a strong position to deliver top-tier industry growth this year and in the coming years. With that, I'll turn it back to Rick to walk you through our long-term strategic objectives. Richard Gonzalez : Thanks Bill. As a reminder, we have posted slides to our website which you can use to follow along. My remarks regarding our long-term strategy generally coincide with the presentation. Today, we'll share with you some of the key assumptions from our long-range plan which we review annually with our Board of Directors. Over the past couple of quarters. There has been an increasing level of interest from investors for more detail on our views regarding a variety of topics, including AbbVie's long-term growth prospects over the next several years, our ability to expand margins, our expectations around biosimilars and our pipeline prospects. Additionally, as we evaluated our long-range plans, expected performance versus Wall Street's consensus, there is a clear gap in revenue and EPS growth. Based on these dynamics, we decided it was appropriate to provide investors with a clear view of our expected performance and the significant drivers of that performance. Turning to Slide 3, our mission when we launched as an independent company was to create an innovation driven patient focused specialty biopharmaceutical company, capable of achieving sustainable top-tier performance through outstanding execution and a consistent stream of innovative medicines. Our actions, since our inception have clearly supported that mission. We've built an innovation driven culture, attracting top talent, focused on developing new products to address some of the most serious health conditions. We delivered outstanding performance from our promoted portfolio. This includes, HUMIRA, where we have accelerated growth and developed a comprehensive strategy for the future. Our heightened level of R&D investment has generated above industry success rate with positive clinical data and regulatory outcome from a number of development programs. Our pipeline now has a number of late stage de-risked assets with multibillion-dollar potential. We acquired Pharmacyclics, providing a major new growth platform in a key strategic area, and significantly strengthening our long-term growth prospects. We have placed a significant focus on driving operating efficiencies with impressive results to date. We've built shareholder value and confidence with investors based on consistent strong performance and we've delivered strong return of capital to investors, including a rapidly growing dividend. Our actions have placed AbbVie in a position to achieve top-tier performance, and you clearly see that in our results. As I mentioned earlier, our current guidance projects EPS growth of more than 28% in 2015. Our fundamental strategy is strong and we've built an excellent foundation. As you can see on Slide 4, since 2013 we have consistently delivered strong financial results, including acceleration across key financial parameters. We've generated significant top and bottom-line growth and robust operating cash flows. Turning to Slide 5, despite our enhanced level of R&D spend as you can see on this slide, which has grown substantially since we were a division within Abbott. We've driven significant improvement in both gross and operating margin profiles. We remain focused on further margin expansion, and I'll outline our commitments to enhancing these metrics in just a moment. Moving to Slide 6, we've also established a strong track record of delivering on our financial commitments, consistently meeting or exceeding our earnings estimates. We're proud of this outperformance, and we remain disciplined in achieving our stated objectives. As noted on Slide 7, AbbVie's total shareholder return since separation is nearly 76%, a result that places AbbVie in the top third of our peer group. These strong returns have created more than $35 billion of value for our shareholders, and a market cap of nearly $90 billion. Turning to Slide 8, while we've demonstrated a very strong track record of historical performance, we're also committed to delivering top-tier results in the years to come. As we evaluate our prospects over our long-range plan. We believe we're well-positioned for success. We're strategically positioned in attractive, high-growth market segments and based on continued strong performance from our existing portfolio of on market products, including our flagship brands HUMIRA and IMBRUVICA, as well as growth from our pipeline products, we expect to deliver top-tier revenue growth through 2020. Today, as you can see on Slide 8, we're providing guidance for total company sales of approximately $37 billion in 2020. This reflects 10% top line sales growth on average over the five-year period. This guidance includes estimated global HUMIRA sales of more than $18 billion in 2020, which we believe appropriately captures the expected biosimilar dynamics globally. I'll share more detail on our comprehensive strategy to continue our leadership position in immunology later in these remarks. Additionally, we expect AbbVie's IMBRUVICA revenues to reach approximately $5 billion in 2020, driven by continued growth within the hematological oncology market, and our pipeline has the potential to achieve nominal peak revenues of nearly $30 billion by 2024. This estimate excludes new HUMIRA and IMBRUVICA indications and sales from our next-generation HCV combination, which are considered on market products, for the purpose of this calculation. We have the potential to launch more than 20 new products or indications through 2020, including seven approvals that will contribute in 2016, and beyond. I'll discuss some of these promising programs today but we will be covering our full pipeline in more detail at an R&D pipeline review to be held in Chicago during the 2016 ASCO meeting. As I mentioned, our significant focus on operating efficiencies has resulted in strong improvement of our gross and operating margin profiles. The Company is committed to driving continued expansion of operating margin and is targeting an adjusted operating margin of greater than 50% by 2020, with an average of 100 basis points to 200 basis points of improvement per year. AbbVie also remains committed to returning cash to shareholders, through a strong and growing dividend. To that end, today, we announced that our Board declared an increase in our quarterly cash dividend from $0.51 per share to $0.57 per share, an increase of approximately 12% beginning with a dividend payable in February 2016. Our commitment to top line growth and continued operating margin expansion will drive double-digit earnings-per-share growth on average through 2020, and today we're issuing strong full year 2016 adjusted EPS guidance of $4.90 to $5.10. This outlook represents 17% growth versus 2015, at the midpoint and positions AbbVie to be among the industry leaders for EPS growth again next year. Turning now to Slide 9. To accomplish these goals, we have narrowed our focus, and positioned AbbVie for a leadership in extremely attractive market segments. Our core areas of therapeutic focus include immunology, where we have a strong leadership position, across rheumatology, GI and dermatology. We're leveraging our scientific leadership and expertise to develop next-generation biologics and small molecules that elevate standard of care. We have multiple pipeline assets in mid- to late-stage development with best in class potential. The oncology market represents an $85 billion segment projected to grow at a compounded annual growth rate of 12% through 2020. Within this market, we have a developing leadership position in the hematological segment with IMBRUVICA and we have several other mechanisms in development, including our BCL-2 PI3 kinase and our anti-CS1 antibody drug conjugate. We also have an emerging pipeline of assets for the treatment of solid tumors, including our PARP inhibitor, Veliparib and ABT-414 for glioblastoma multiforme. Virology also represents a large and durable segment for us. We've established a foothold in the marketplace with our current offering VIEKIRA. Our emphasis is on continuing to evolve HCV treatment, and our next-generation combination is poised to deliver meaningful improvements relative to currently available therapies. Earlier this year, we disclosed preliminary results from a Phase 2b study of our next-generation protease inhibitor ABT-493 and our next-generation NS5A inhibitor ABT-530. The interim data showed non-cirrhotic genotype 1a and 1b treatment-naive and experienced patients receiving the ribavirin free therapy for 12 weeks, achieved SVR 12 rates of 99%. The dose we intend to pursue in Phase 3 drove SVR 12 rates of 100%. Preliminary results from the eight-week treatment cohort were disclosed last week. These data show that 34 of 34 or 100% of genotype 1 patients achieved SVR4. We'll share additional results from our next-generation combination at the AASLD meeting next month. Neurology represents a large market with significant unmet need. We're focused on developing disease modifying therapies for Alzheimer's and other neurodegenerative conditions. Our existing portfolio includes Duopa for the treatment of advanced Parkinson's disease and Zinbryta which is currently under regulatory review in the U.S. and Europe for multiple sclerosis. We're also placing focused investment in our late stage programs in women's health with elagolix, and renal disease with atrasentan, as well as early-stage programs in cystic fibrosis. Endometriosis and uterine fibroids are both highly prevalent conditions and elagolix has demonstrated promising results in the treatment of both of these conditions. Now turning to Slide 10, based on our long-range plan for our marketed product portfolio, and our risk-adjusted pipeline, we're targeting total revenue of approximately $37 billion in 2020, reflecting a top line compounded annual growth rate of 10%. As you can see, our estimates are roughly $5 billion above the current Wall Street consensus. Our 2020 target revenue is based on a number of performance drivers. We expect HUMIRA to continue to be a strong growth driver, adding close to $4 billion in sales by 2020. AbbVie's IMBRUVICA revenue will reach approximately $5 billion by 2020. Our HCV franchise will remain a significant contributor to our long-range plan. Our pipeline will add more than $4 billion in risk-adjusted sales and Duopa will reach blockbuster status globally. Turning now to Slide 11, we expect several key products within our current marketed product portfolio to add significant growth in the years to come, including HUMIRA, IMBRUVICA, HCV and Duopa collectively will add $10 billion in incremental sales by 2020. Growth of HUMIRA will be driven by continued biologic penetration across disease categories and new indications. I'll talk more about our planning assumptions around HUMIRA growth and the impact of biosimilars in just a moment. IMBRUVICA's growth in this timeframe will be predominantly driven by increasing penetration within our currently approved set of indications and movement in the frontline use for those indications. The RESONATE-2 data further reinforces our view that IMBRUVICA will be a highly successful agent in frontline therapy for CLL. Growth will also come from label expansion into new hematological cancer, such as diffuse large B-cell lymphoma, follicular lymphoma and multiple myeloma. Growth in our HCV franchise will be driven by continued uptake of VIEKIRA PAK across geographies, including Japan, the second largest HCV market globally, and we expect to commercialize our next-generation HCV offering in 2017, which will be a pan-genotypic once daily, ritonavir and ribavirin-free combination. Given the significant global prevalence of this disease, we expect the HCV market to be very durable, well into 2020. As I said, we forecast Duopa will achieve sales greater than $1 billion globally by 2020, and finally other products in our on market portfolio including Creon, Synagis, Lupron, Synthroid represent steady and durable sales contributors over our long-range plan. Turning to Slide 12, our growth outlook for HUMIRA is based on a thorough analysis of the global market dynamics and the strategy that we've put in place. We've taken what we believe is a realistic view of the market and the competitive environment over the next five years, and expect global HUMIRA sales in 2020 to exceeded $18 billion. Turning to Slide 13, we have a comprehensive strategy in place, which we believe will allow us to protect and grow our leadership position in immunology. Our multifaceted strategy is comprised of HUMIRA intellectual property, enhancements to HUMIRA, innovation, including a robust immunology pipeline and strong commercial execution. Turning now to Slide 14, we're planning conservatively with respect to the timing for European biosimilars and for planning purposes expect direct HUMIRA biosimilar competition upon expiration of our compound patent in Europe in October 2018. However, we are pursuing additional IP in Europe and expect the situation to evolve over time. Again, though, the guidance we've outlined today excludes any potential benefit from our IP in Europe. Turning to our U.S. patent estate, as you can see on Slide 14, we have built a robust portfolio of intellectual property. Beyond our composition of matter patent, we have more than 70 additional later expiring U.S. patents related to HUMIRA. The vast majority of these patents which reflect significant innovation and investment were granted by the U.S. patent and trademark office within the past two years. These patents expire between 2022 and 2034. The size of AbbVie's patent estate is a direct consequence of the ground-breaking work of AbbVie scientists in a new field of biologics. Small molecules drugs have been around for many decades, but therapeutic antibodies are much newer, larger and more complex. Because they must be made in living organisms, biologics are more difficult to manufacture. In addition, because they are foreign proteins that are introduced into the human body, biologics present unique challenges in terms of formulation and treatment. Not only is the field new, but HUMIRA itself was a new type of biologic. It was the first fully human therapeutic antibody ever approved by the FDA. The development of HUMIRA was unchartered territory. Those efforts resulted in the United States Patent Office granting AbbVie dozens of patents covering HUMIRA. The coverage of our later expiring patents includes methods of use for the drug in all HUMIRA indications, methods to formulate the drug, and methods to make the drug, as well as other aspects of the HUMIRA product such as the delivery device. Any company seeking to market a biosimilar version of HUMIRA will have to contend with this extensive patent estate, which AbbVie intends to enforce vigorously. With respect to formulating the drug, we have patents on formulating the HUMIRA antibody, that also expire no earlier than 2022. Biologic drugs must be administered intravenously or as injections and can be difficult to formulate properly. Given our extensive experience with HUMIRA, these patents cover not only our commercial formulation, but also other related formulations that biosimilar companies might employ. 14 patents have been issued covering different formulations of HUMIRA. With respect to making the drug, we have important patents on the methods of manufacturing HUMIRA that expire no earlier than 2027. The living cells that produce biologic drugs such as HUMIRA can be sensitive to small changes in the manufacturing process. Minor differences in manufacturing process can affect the nature of the biologic drug and even its clinical effect. 24 patents have been issued covering methods of manufacturing HUMIRA and HUMIRA compositions resulting from those methods. Today, I'll focus on those patents which cover using the drug, otherwise known as method of treatment patents. While AbbVie's formulation and manufacturing patents for HUMIRA also have broad coverage, without further information on the biosimilar we cannot know with certainty, the extent to which these patents will be infringed. Now turning to Slide 15. Since the biosimilar statute requires the biosimilar to obtain approval for one or more indications previously approved for the innovator drug, and have the same route of administration, dosage form and strength, we know biosimilars will infringe these method of use patents. We have method of treatment patents covering all the indications for which HUMIRA has been approved. These patents do not expire until 2022 or later. These patents reflect the development work of more than 100 clinical trials, spanning 18 years. As discovered through this work and reflected in the HUMIRA label, different diseases require different treatment regimens, which AbbVie discovered following significant investment in clinical development. These patent in uses have been key to the success of HUMIRA. They have opened up new and better treatment options for an increased patient population and improved the quality of life for those patients. Our method of treatment patents cover the approved dosing regimens for each indication and are not mere refinements of previous dosing regimens, which is often the case with method of treatment patents in the small molecule arena. Furthermore, biologics like HUMIRA are more complex and unpredictable by their nature than small molecules. As such, Biologics present unique challenges in terms of treatment. One challenge was the fact that HUMIRA targets TNF alpha, a protein that plays an important role in the human immune system. It is critical to find the right balance in terms of blocking the harmful effects caused by excessive TNF alpha without interfering with the normal functioning of the immune system. This made the development of safe and effective methods of administering HUMIRA all the more difficult, and because HUMIRA was the first human therapeutic antibody ever approved by the FDA of any type, the work by AbbVie scientists was unprecedented. In total, putting aside the composition of matter patents on HUMIRA, there are 22 issued patents directed to the treatment of TNF mediated diseases that expire in 2022 or later. Additional applications are pending and still being examined in the patent office. Again, a biosimilar company will have to contend with our method of treatment patents for every indication for which it seeks approval, as well as our formulation and manufacturing patents which are not limited to any particular indication. Turning to Slide 16. As you evaluate the timeframe for a potential U.S. biosimilar market entry, it is important that you consider the legal process and the likely timeline for resolution. While it's always difficult to estimate the precise duration of the litigation process, the average time to trial for a patent action is nearly 3.5 years. Appeals to the Federal Circuit Court usually take one year. So, based on similar cases, the total litigation timing may be as long as four or five years. At risk launches, when a company launches a generic product before patent expiration and before a final determination that a patent is invalid or not infringed, are relatively rare due to the potential exposure. Because of HUMIRA's success such damages could be extremely large. Of course, we can't know how other companies will evaluate that risk. However, in the event a biosimilar attempts to launch at risk, AbbVie will seek injunctive relief. For the reasons we've already discussed, biosimilars will necessarily infringe our patents. Given the unique properties of HUMIRA and the lack of any prior experience with fully human monoclonal antibodies these patents are strong. Courts considering request for preliminary injunctions have considered these factors important and have granted injunctions where they are present. Turning now to Slide 17, another important aspect of our immunology strategy is our pipeline. This includes both enhancements to HUMIRA as well as our promising pipeline of new products in development, which are designed to restate standard of care in each of our areas of leadership. We have two new indications for HUMIRA that will contribute significantly to the product's continued growth. We also recently received approval in Europe for a new formulation of HUMIRA, which provides meaningful patient benefit, including lower levels of pain, versus the current formulation, and we are submitting regulatory applications for an improved HUMIRA pen device which we expect to introduce in 2016. Finally, we are continuing to work on developing proprietary delivery technologies and devices to further enhance the product. Behind HUMIRA, we have a pipeline of mid and late stage immunology assets in clinical development. AbbVie is the clear leader in immunology. It is a category we understand extremely well and our performance is reflective of our deep expertise. As we embarked upon developing a set of next-generation assets, we did so with our knowledge of the type of breakthrough profile a new drug would require in order to achieve a significant market share position. Each of the assets that we have in our immunology pipeline has the potential to deliver that type of market changing product profile that we're targeting. We're very pleased with the mid-stage results from our selective JAK1 inhibitor ABT-494, which shows the potential to be best in class in RA with high efficacy once daily dosing and a favorable benefit risk profile. We're particularly excited about the results of ABT-494 demonstrated in the most challenging patient population, the anti-TNF inadequate responders. Given that anti-TNF therapies have been available now for nearly 2 decades. This patient population has grown over time. In fact, the population currently represents roughly 35% of the U.S. patient population. We are rapidly moving ABT-494, the Phase 3 studies, and it is our goal to launch this asset into the U.S. market well in advance of any biosimilar entry. Our large and experienced commercial organization which currently represents HUMIRA will promote ABT-494 and our other immunology pipeline assets upon their U.S. commercialization. We have tremendous confidence in the organization's ability to successfully represent these assets. We also believe our DVD antibody platform holds tremendous promise in the treatment of certain immunity conditions. ABT-122 is our combination anti-TNF anti-IL-17, two proven mechanisms which is currently in Phase 2 trials for RA, and psoriatic arthritis. Our earlier development work with the platform has established that our DVDs have favorable drug-like properties, similar to monoclonal antibodies and can be manufactured reliably. We'll see data from the mid-stage trial in RA in early 2016 and results from our study in psoriatic arthritis later in the year. If the results are positive, we will quickly advance ABT-122 into Phase 3 development. We're also working to advance several other early and mid-stage immunology programs including our partnered anti-IL-6 Nanobody and we continue to explore the LMA landscape for assets that fit our target product profile. Moving on to Slide 18, HUMIRA's unique product profile and AbbVie's strong commercial execution has HUMIRA the number one prescribed biologic with the highest commercial prescription market share, including the highest percentage of new patient starts. HUMIRA holds the preferred or co-preferred position on managed care of more than 90% of U.S. covered lives. Patients, physicians and payers recognize the meaningful clinical and economic value of HUMIRA as a treatment option for the broadest set of immune mediated diseases. We've demonstrated that treatment with HUMIRA is more cost-effective and saves payers on downstream costs associated with diseases like RA, Crohn's and psoriasis. Moving on now to Slide 19. As I said, we've taken what we believe is a realistic view of our prospects of our long-range plan. Given the competitive landscape, potential for biosimilars and other factors. Our plan is built around a key set of assumptions that vary by geography. Let me start with international. Internationally, we are planning for mid-single digit market growth over the long range plan. Our plan assumes some limited erosion upon Enbrel biosimilar launches starting in 2016. As outlined, embedded within our guidance is an expectation for HUMIRA ex-U.S. biosimilar launch in the fourth quarter of 2018, with the expected pricing and market share performance for such products. We anticipate moderate erosion from direct HUMIRA biosimilar competition beginning in 2019. In the U.S. our long-range plan assumes that U.S. markets deliver mid to high size single digit market growth driven by roughly a 4 point increase in biologic penetration. Despite competitive entries we expect HUMIRA will only experience minor erosion of market share over our LRP, and as we've outlined, we believe the litigation process and our intellectual property estate will protect HUMIRA from biosimilar entry until 2022. Our LRP also assumes successful penetration of new HUMIRA indications and then our immunology pipeline will begin to contribute new revenues with commercialization of ABT-494 in 2019 and other assets to follow. It is our expectation that AbbVie's immunology pipeline will contribute nearly $8 billion in nominal sales in 2024, with ABT-494 a significantly de-risked asset, representing roughly half that expected contribution. Now, moving to Slide 20 and moving on to our oncology portfolio, as we've said, we acquired Pharmacyclics and IMBRUVICA represents a pipeline in a molecule with significant growth potential through its existing and expanding list of indications and lines of therapy. This transformative therapy has already secured approval for the treatment of four indications and there are more than 25 company-sponsored clinical studies to evaluate IMBRUVICA as a treatment for a wide range of additional cancers. In its first year on the market, Pharmacyclics and our partner have driven market-leading performance and therapeutic uptake of IMBRUVICA, clearly demonstrating the strength of the medicine's attributes and its clinical profile. We expect IMBRUVICA to achieve blockbuster status in 2015, with AbbVie's projected IMBRUVICA revenues growing to approximately $5 billion in 2020. IMBRUVICA, has vast potential for label expansion and future indications. It is currently being evaluated in mid and late stage trials in follicular lymphoma, marginal zone lymphoma, diffuse large B-cell lymphoma and multiple myeloma. We are also encouraged about IMBRUVICA's potential in graft-versus-host disease based on data from an earlier stage study, and if IBRUVICA demonstrates clinical value in solid tumors there would certainly be significant upside to our expectations. We recently initiated a phase 3 trial evaluating IMBRUVICA and pancreatic cancer, and we're currently studying IMBRUVICA in other solid tumour types in combination with immuno-oncology, including early-stage studies in breast and lung cancer. Turning now to Slide 21, our acquisition of Pharmacyclics significantly accelerated AbbVie's clinical and commercial presence in oncology. With IMBRUVICA, we've established a leadership position in the haematological oncology market, which is poised to nearly double to $50 billion by 2020. We're well-positioned to build upon our leadership in this category with other promising assets in development. Beyond IMBRUVICA, we have several other products in development that have the potential to offer differentiated efficacy in a wide range of blood cancers. Our BCL-2 inhibitor, venetoclax is in late stage development for CLL, and mid-stage trials for several other cancer types, including NHL, AML and multiple myeloma. Duvelisib is a mid and late stage trials for CLL and NHL, and we have an innovative antibody drug conjugate in early development for multiple myeloma. Given our broad portfolio, we believe, we have the potential to continue to evolve the treatment landscape with combinations of these and other mechanisms. Our goal is to markedly improve efficacy by achieving deep, durable disease control or remissions while reducing or eliminating the use of toxic chemotherapy. We recently completed the design for our first clinical trial evaluating Venetoclax in combination with IMBRUVICA and Gazyva in first-line CLL and we expect to initiate the study in the first half of 2016. We also have an active discovery program with the objective to drive the next wave of immuno-oncology development beyond checkpoint inhibitors. We're particularly focused on the use of our bispecific biologic platform to support conditional activation of the immune system in the vicinity of tumour cells, and we're leveraging the emerging science of soluble T-cell receptor technology as well. We anticipate multiple immuno-oncology assets moving into human trials in 2016. Moving to Slide 22, the assets in our pipeline stay in attractive especially categories. All told, we have more than 50 products or indications currently being evaluated in human trials with more than 20 currently in registrational trials or under active regulatory review. Turning now to Slide 23, we built a robust pipeline comprised of potentially transformational medicines in large markets with profound unmet medical need. Our pipeline has the potential to deliver nearly $30 billion in nominal new revenue by 2024. Several products currently in late stage development have the potential to be multibillion-dollar assets that will offer growth and top line diversification. We also have numerous programs in early stage development underway that have the potential to come to fruition in the later years of our long-range plan. Now turning to Slide 24. Over the past year, we've seen data from numerous key assets that have further increased our level of confidence in all likelihood of clinical, regulatory and commercial success. Based on our progress, we have significantly de-risked a large number of major development programs that now have a very high probability of success. For example, our first registrational study for Venetoclax in relapsed refractory CLL patients with 17P deletion met its primary endpoint and is currently under regulatory review. As mentioned earlier, the frontline data for IMBRUVICA in CLL were robust and our regulatory applications are under active review. Regulatory submissions for Zinbryta and MS are well underway, supported by a large registration program that showed the novel biological superior versus an active comparator. We've seen positive data from several Elagolix studies in endometriosis and uterine fibroids. Our partnered asset, Elotuzumab is currently under regulatory review for relapsed refractory multiple myeloma, following receipt of breakthrough designation. We disclosed top line data from our selective JAK1 inhibitor ABT-2494, illustrating its potential for best in class efficacy in RA even in the most difficult to treat TNF inadequate responder patients. We have successfully completed the HUMIRA uveitis pivotal trial with filings currently under regulatory review, and we announced top line data from our next-generation HCV program illustrating its potential to offer a highly competitive profile. Turning now to Slide 25. We made significant progress with our pipeline and we anticipate continued advancements between now and the end of 2016. As you can see noted on this slide, we have numerous product approvals, data readouts, registration submissions and phase transitions anticipated over the next year or so. Now turning to Slide 26. The continued growth from our existing portfolio combined with the risk-adjusted sales contribution from our pipeline will drive top-tier revenue performance over our long-range plan. This level of revenue growth puts AbbVie near the very top of our expanded peer group based on current consensus estimates. Turning now to Slide 27, in addition to the strong top line growth we also expect to deliver significant margin expansion in the years to come. Our focus on driving operating efficiencies to date has resulted in strong improvement in both gross and operating margin profiles. On this slide, you can see the significant level of margin improvement that we've delivered since our first quarter as an independent company. Turning to Slide 28. Our continued focus on operating margin will drive further expansion with a projected operating margin of greater than 50% by 2020 and an average of 100 basis points to 200 basis points of improvement per year. Expansion will be driven primarily by ongoing efficiency programs, optimized manufacturing, commercial infrastructure, administrative costs and general corporate expenses, productivity initiatives and supply chain, and the reduction of HUMIRA royalty expense in 2017 and 2018. Additionally, we'll see continued sales leverage from our rapidly growing top line. Our guidance for 2020 operating margin incorporates approximately 200 basis points of diluted impact partnered assets, including IMBRUVICA, Venetoclax, Zinbryta and Synagis. As you can see on Slide 29, this powerful combination of revenue growth and margin expansion, positions AbbVie as one of the top EPS growth companies among our expanded peer group. Turning now to Slide 30. AbbVie generates significant cash flow, which we expect will grow in 2016, and beyond. So far in 2015, we have repurchased $6.25 billion of shares, including the ASR associated with Pharmacyclics acquisition, and we have $3.45 billion remaining on our current buyback program. As I mentioned earlier, today, we announced that our Board has authorized a 12% increase in our quarterly dividend. Since 2013, we've increased our dividend by more than 42%, and we intend to maintain a strong commitment to growing dividend going forward. We'll also use our strong cash flow to continue to augment our pipeline through strategic licensing, acquisitions and partnering activity. Over the past several years, we've added numerous promising assets to our portfolio and we continue to focus on identifying compelling programs that fit our strategic criteria. Turning to Slide 31, since we became an independent company in 2013, we've consistently delivered on our commitments, and we are positioned to deliver more than 28% bottom-line growth in 2015. A level of performance that puts us at the top of our peer group, and as we look at 2016, we're once again poised to deliver top tier financial performance with EPS growth of 17%, the midpoint of our strong guidance range. Based on our 2016 midpoint, AbbVie will have grown its EPS by roughly 60% in just three years. Across our long-range plan, we're projecting our EPS growth to average nearly 15%, again putting AbbVie in the very top of our peer group. In summary, we're well-positioned to deliver strong top and bottom-line performance through 2020 and beyond. We've established growth platforms in some of the largest and most diffractive market segments, including immunology, oncology, virology and neurology and we build a compelling pipeline in these areas which will contribute significantly to our performance in the years to come. Our commitment to top line growth and expanding our operating margin to greater than 50% will generate double-digit EPS growth on average through 2020. We've built a strong foundation and we are committed to delivering top-tier financial performance. With that, I'll turn the call back over to Larry. Larry? Larry Peepo : Thanks, Rick, and we'll now open the call for questions. Operator, we will take our first question please. Operator : [Operator Instructions] Our first question comes from Jami Rubin from Goldman Sachs. Your line is open. Jami Rubin : Thank you, and wow that was a lot of detail, Rick. It's going to take time I think to digest it all, but I know that we certainly really appreciate it. First question is this, was wondering if management's comp is tied to the long term targets. Secondly, it seems that the biggest delta between the Street and your guidance on HUMIRA is timing of a biosimilar launch. Wondering if you could comment on that and also if you could comment on Amgen CEO's comment on his earnings call, where he said that HUMIRA has IP and Amgen has to respect that. So, is it the case that the Street's coming around to your view on the strength of your IP and the timeline of 351(k) pathway regulations or has something really changed in terms of your confidence with IP? Thirdly, and I'm sorry for this but, with your operating margin guidance growing to over 50% by the end of the decade, it looks like that's really coming or driven by strong revenue growth not by operating cost cuts. Can you confirm that and obviously in a sort of a bear case scenario, how much flexibility do you have to reduce your SG&A? We all know you're spending a lot on HUMIRA and having a really good return on investment, but if that changes, how much flexibility do you have? Thanks very much. Larry Peepo : Thank you, Jami. Richard Gonzalez : Thank you Jami for all those questions. So, we'll cover each and every one of them. Let me start with the management comp. I mean, I think similar to probably the other companies in our industry, the vast majority of the executive team's comp is in long-term incentive that's associated with the appreciation of the stock. So, I'd say we're directly linked to that. In addition to that, for the top people within our company, we have two levels of incentive plans. One, is basically focused on the short-term plan year and then we have one, which is a longer term plan that basically is designed to hit a three-year out target, where you would set things like this operating margin target and so the bottom line is yes, I mean, there's perfect alignment between all of these metrics and how people will be rewarded against those. To your second question, which was, is the GAAP primarily the timing of biosimilars? I'd say, that's accurate for the most part. There's probably more penetration and more growth in the indications in general that are built-in versus the Street but the more significant part is the assumption that we're making around the timing of U.S. biosimilar entry. As far as the Amgen CEO, I read the comment. I find the comment encouraging, but I'm not going to comment specifically on what they said. I think, to your point about, is the Street just now coming around to our point of view, I mean, in fairness much of this IP has only really come out in the last two years and I think both competitively that is now something that people who were interested in coming up with a biosimilar are having to evaluate. So, it's not like they had a lot of time. The Street certainly didn't have a lot of time to be able to evaluate that as well. I'd say, secondarily look, there was no advantage to us going out early and touting that either. We were to make sure that our strategy was in a position that was solid and where we wanted to be and we worked hard over the last three or four years to get our strategy in place and we're at a point now where we're confident to be able talk about it, and you heard my words, so you probably can't be much clearer about what our intent is and so at the end of the day, I think, in fairness to the Street you now have all the information you can determine your point of view around that. I'd say on the confidence in the IP, we have a high level of confidence in the IP, and so I think we feel very good about our position and if anything, our tendency, when we do our long-range plan is to be a little bit on the conservative side. I'd say the Europe assumptions that we're making as an example, I think are clearly conservative. There's far more opportunity for upside than there is downside and that's normally how we try to build our forecast because, we want an opportunity to be able to make sure that we achieve those. On the operating margin, I think what your question was, was, is it almost all driven by sales leverage? No, and I think, the way to think about it is this, so, in Bill's comments, we guided to the end of this year being 42.5, because remember the fourth quarter will have high Synagis sales and we'll also have a full quarter of IMBRUVICA. So, we have more partnered revenues in the fourth quarter. So that tends to be dilutive as I described. So we'll exit this year somewhere around 42.5, but then I think that the way to think about the target that we've set here is you have to back out the dilutive impact over the five-year LRP, which is about 200 basis points. So you back down to about 40 as your starting point. So you're going to go to 40 to something north of 50, so about a 10 point improvement. If you look at that 10 point improvement, and I've Bill here with me, roughly 25% of it comes from the royalty reduction on HUMIRA that will occur between '17 and '18, about 30% of it comes from cost reductions, cost management kinds of programs and the remainder comes from the leverage that we see of a fast growing top line with expenses being managed at a significantly lower growth rate. That's how you ought to think about it. Jami Rubin : Okay. Super helpful. Thank you, very much. Larry Peepo : All right, thanks Jami. Next question for us please. Operator : Our next question comes from Jeffrey Holford from Jefferies. Sir, your line is open. Jeffrey Holford : Thanks very much and thanks to the team. It was a very comprehensive midterms outlook today, which I mean really sets out your positioning on HUMIRA and the rest of the business very clearly. So, now obviously the debate on HUMIRA will continue and it seems that the linchpin near term is the achievement of an injunction against any would be at risk launches. We've recently heard from Amgen, regarding at risk launch and we certainly heard that also from other large biosimilar players, but could you be more specific on the trigger starting perhaps on the infringement process and the injunction process so we can think better at the timing of those. Are they more likely to be tied to filings or FDA approvals? So, that's the first piece. Second on 2016 guidance, it would just seem to us that you're potentially implying you do not expect to increase the $3 billion exit rate for the hep C franchise in 2016, if you could speak to that too. Then just last, you talked about being ready for larger deals again by 2017. To be clear, the current guidance does not include anything for additional M&A, just to be clear on that and then, can you tell us a bit more about substantial share repurchases that might be part of your midterm plan too, at least as a backstop if you can't find substantial M&A targets? Thank you. Richard Gonzalez : I'm actually going to have Laura address your first question Jeff and then I'll cover the rest. Laura Schumacher : With respect to the trigger for the filing of litigation, there's a process that's laid out specifically in the statute, which there has been litigation over whether or not that process is mandatory or not. From our standpoint, we are anticipating that in the event that there is a biosimilar applicant, they will or won't choose to follow that process, at some time to be not mandatory, should they choose not to follow that process upon notice of the filing of the application, of course, we would initiate the litigation. With respect specifically to an injunction against an at risk launch, that injunction against an at risk launch would be triggered upon the approval of a biosimilar and of course we would then request that the court enforce our IP. As Rick laid out earlier, we intend to vigorously enforce the IP and we believe we have a very strong case for an injunction. First of all that we believe any biosimilar applicant will infringe at least certain of our patents, because in order to follow the -- to be classified as a biosimilar they will need to have the same dosing regimen as the innovator product. As to validity, we think we have a very strong case on validity given the uniqueness of HUMIRA and the fact that HUMIRA was the first fully human antibody approved by the FDA, and there was nothing known about its effectiveness or its optimal dosing regimen at the time that we did extensive clinical work, trial, investment et cetera. So, we believe in the event that there was an at risk launch, we would have a very strong case for our preliminary injunction. Also, as you know, in the event a biosimilar would choose to launch at risk, the damages for such a launch, should it be found to be violative of our patents would be very significant. Jeffrey Holford : Thank you. Richard Gonzalez : Okay, thanks Laura. So, let me take the M&A question. Yes, the guidance that was laid out today doesn't cover any significant acquisition activity or licensing acquisition activity. So obviously, as that played out, we would look at -- based on the significance of it, we would make a decision how we would with that. Something we could manage or something that we could not and then we would obviously pass that into our guidance and communicate it appropriately. As we talked about before, I'd say that our focus for the next couple of years is more trying to fill out our portfolio of assets within the therapeutic areas that we're in. We don't anticipate a large transaction in that timeframe and nothing has changed around that front, and that kind of gets to the whole share repurchase. Although, I'll have Bill talk about that just for a moment as well, but ultimately, how we look at share repurchase versus M&A is we're trying to manage between those two to make sure that we have the appropriate capacity to be able to do the things that we need to do for the business longer-term and share repurchase is more of an opportunistic kind of approach. So, Bill, is there anything you want to add to it? William Chase : No, I mean, obviously, if you look at this long-range plan, there's going to be pretty robust cash generation. As we get out a couple of years, that can clearly fund larger M&A if we deem that's necessary. To the extent that, that an opportunity isn't readily apparent, well then, we'd certainly have to look at other things to do with that cash and share repurchases could very well be part of that. Richard Gonzalez : So on the 2016 guidance, I mean, obviously, we've just gone through our planning process for 2016, and the way we do planning is we build everything up from the bottom up, product by product, and we make determinations as to what we're going to assume for each product based on a set of assumptions that we think are absolutely realistic and so we have an HCV number that's in our 2016. We tend to be a little bit on the conservative side when we build these up so that we have the flexibility to make sure that for any unforeseen events, we have the ability to be able to manage our way through those and I'd say, this plan is no different than previous ones that we built, but specifically, for HCV, I'd say HCV will have some growth built into it year-over-year because just the gadding [ph] of how the countries have rolled out over time internationally you're going to get year-over-year and we're just launching in Japan now, well, we're not launching. We will be launching shortly in Japan now and Japan's a significant opportunity for us. So it will create a year-over-year growth driver for us as well. So, I'd say there is growth built into the HCV franchise, but let me specifically talk maybe about this $3 billion running rate, because I know I made that prediction in the early part of the year. If you look at where we are right now, what I would tell you is, we're going to be close, but we're slightly below that right now in the fourth quarter. At least as what we had built into our current guidance for the year and is the function primarily of the fact that -- in the beginning of the year, the number of patients being treated was significantly higher. We've seen that trend down. We've seen some changes in VA, in the United States. So, I'd say, we're going to be close. We could make it, but we might miss it and as I said, we tend to build conservatively what we have in the fourth quarter right now is slightly below that. Jeffrey Holford : That's great. Thanks very much. Larry Peepo : All right. Thanks Jeff. Next question for us please, operator? Operator : The next question comes from Mr. Mark Goodman from UBS. Sir, your line is open. Mark Goodman : Yes, morning. 494, $4 billion in 2024 is a pretty big number. Can you help frame how you're thinking about that and then secondly, just AndroGel continues to be a little stronger than we think, why is that? What's going on behind the scenes? Thanks. Richard Gonzalez : 494, based on the profile that we've set up. I would say $4 billion of risk-adjusted revenue for an asset that has that profile in that timeframe isn't a stretched number from our perspective at all. When you look at the level of response you have in the TNF inadequate responder patient population, which as I said in my remarks represent about 35% of the U.S. patients, we assume it's something similar to that in Europe. It's a little more difficult to get to the data in Europe. It's a sizable population and it's in the population that has relatively limited number of options available to it. In addition to that, when you think about how biosimilars will ultimately roll out, I think it's a good assumption to assume that biosimilars are going to capture some portion, maybe a significant portion but at least some portion of the new patients. So they're going to be generating more TNF inadequate responders. Now, they might rotate to another TNF after that but, a proprietary product will have an opportunity in a biosimilar world to go after those nonresponders, and so that's a very significant opportunity. In addition to that, obviously to my comments about our organization representing this product will be a goal to be able to take the appropriate patients and try to move them to the appropriate kinds of therapies. So, patients that aren't responding as well on HUMIRA, obviously we would want to move them to 494 as an alternative. So when you look at all of that, I'd actually say that the $4 billion number is not a number that we're uncomfortable with. William Chase : And Mark on AndroGel, clearly it has performed better than the Street was thinking and frankly it's performed a little bit better than we were thinking. The market still is in decline. However, what you're really seeing is less uptake or less impact on the brand from the generic 1% formulation. It's something we're just going to have to keep our eye on, but so far so good. Larry Peepo : Thanks Mark. Our next question please operator? Operator : The next question comes from Chris Schott of JPMorgan. Your line is open. Chris Schott : Great. Thanks very much and thanks for all the details today. Just had three quick ones here. First, following up on Jami's question. If for whatever reason the HUMIRA IP falls and sales end up closer to say consensus than your $18 billion target, is a 50% margin realistic in that scenario? I'm just trying to get a sense of like where margins could go in that downside case, that's not the scenario you laid out, but just trying to understand that. Second, just thoughts on what happened earlier this year with Amgen and Sandoz with NEUPOGEN. Are there any learnings, similarities or differences that we should apply when you think about the HUMIRA situation? Then finally, on the longer term, international HUMIRA targets, could you just give us a little bit more color on the type of erosion you're assuming given biosimilars for Enbrel and potentially HUMIRA over that window, just how much price and volume impact are you kind of reflecting here? Thanks very much. Richard Gonzalez : Okay. So, I don't know that the 50% margin target would be realistic in a more catastrophic kind of situation. What I would tell you is, we've obviously laid out contingency plans by country, because this will be rolled out by country obviously, right as biosimilars enter those countries and we have an erosion curve that we built by country and if the country starts to fall below that erosion curve, then we'll do what we always do and that is, we will manage the expense base accordingly. So, we have the ability to be able to manage and offset the profitability like we would do with any type of LOE. So at the end of the day, I think know whether or not it had a 50% margin target or not, we would put a contingency plan in place that would allow us to try to maximize profitability or preserve profitability under that scenario. Having said that, what I will tell you is, we have a high level of confidence in what we've built here and we don't build LRPs that we don't believe we can achieve. Again, we're not showing you anything different than what our internal LRP says that we present to our Board every year. So, at the end of the day, I can tell you, we have a high level of confidence that we can deliver against what we've put here. The learnings from Amgen. I'm assuming you're talking about sort of the whole IP and litigation process for Amgen. I'm going to have Laura address that for you. Laura Schumacher : With respect to the Amgen Neupogen litigation, a lot of the debate in that litigation surrounded whether or not the pre-litigation exchange process, whereby patents and information were exchanged between the innovator and biosimilar, whether that was a mandatory process or a voluntary process, and ultimately, as I said previously, we're not anticipating from a timing standpoint that there will be a litigation exchange, it will be something that the biosimilar applicant will choose to participate in or not. With respect to the underlying patent infringement litigation with Amgen and Neupogen, our litigation, our patent estate is very different than that. In that case, there's very few claims and patents and ours is as we've said before, we have over 70 patents, many of which, certain of which will be infringed and some of which may be infringed. So, we'll have to see when we know more specifically about what formulation and/or process that particular biosimilar applicant uses. Richard Gonzalez : Okay. Thanks Laura. Then on the European erosion curve, obviously as part of this planning process we have built a very specific erosion curve for both Europe as well as the United States when we get beyond 2022. So, what I would say to you is, I'll walk through the European one or I'll walk through the international one, I guess more generally. What I'd say is, it's fairly complex, because there are lots of different variables if you think about it right, you're going to have countries rolling out at different times as they enter those countries and they get pricing approval within those countries. Not every country is exactly the same, how you get pricing approval. So, there's sort of this gated period where you go across country by country as biosimilars would enter it. The second thing is, you have to layer in what our strategy will be, and we've built a strategy by country. There will be countries where we choose to take price erosion to maintain all of the patients, new patients and well-maintained patients. There may be countries where we choose to only keep well-maintained patients, and do something different from a pricing standpoint. So, there's some complexities around that. Then the third point that I'd say to you, that's very important as you think about this, because I'm going to walk you through what the erosion looks like here in just a moment, is when a biosimilar enters the international market, these markets are still growing. As I said, they're growing like mid-single-digits and so as I described to you what the erosion looks like, the number I'm going to give you is lower than what they could actually capture or the price erosion might ultimately translate to, because they will take a certain portion of that market growth within those markets. So having said all that, I think the simplest way to think about the erosion curve is this, if you think about international HUMIRA sales, they will peak in the forecast we laid out for you here, all the financials we've laid out, they peak in 2018 and from 2018 then they start to decline, and if you move out two years to 2020 which is the year we're characterizing for you, the erosion of the international HUMIRA business is about 15% to 18%. Now, having said that, the impact or the opportunity lost, that probably is the best way to think about would be greater than that, because without biosimilar competition, HUMIRA would've continued to grow in those international markets beyond that period of time, and so it probably sounds a little lower than you would've expected, but it's because you have to think about it in those two components, part of the component is it will take some price out of the market which will reduce market growth, the other component is and they take some new patients. So, they're taking some of the market growth out that way, but just say what is the impact on AbbVie? It is the brand peaks at that point and it declines about 15% over that period of time. Chris Schott : Very helpful. Thank you. Larry Peepo : Thanks Chris. Next question, operator. Operator : The next question operator question comes from Mark Schoenebaum of Evercore ISI. Your line is open. Mark Schoenebaum : Hey guys, thanks for all the detail. I am in agreement with the other analysts on that. A couple of questions. Number one, what was operational HUMIRA growth rates -- operational HUMIRA growth rates quarter on quarter as well as year on year in international markets? The second question is you didn't comment on your tax rate over the long-term. I don't think I saw that in your slides, and I would assume that as the Company diversifies away from HUMIRA, you're going to diversify into more tax optimized drugs -- tax optimized assets. So, I would personally be comfortable modelling a decline in your tax rate. I wanted to hear your thoughts on that and when I do that, and when I use an operating margin of only 51, even though your guidance says, greater than 50, it could be 55 or 60 who knows, I'm getting to an EPS number in 2020 of around $10 a share. I'm just -- I know you're not giving an EPS number, but am I thinking about this all wrong, because most people say I'm not very good with math. Richard Gonzalez : Why don't you cover the tax rate Bill, I'll cove the -- William Chase : Yeah, so, if you look at this business since we separated from Abbott, the tax rate has been pretty consistently in the 21% to 22% range. That's largely driven by our need for U.S. cash for certain items. So, as we do our LRP again, what we do is, we build it on a fairly conservative basis and what I would tell you is our assumptions are that that tax rate in the 21% to 22% is the right assumption for this business over the next 10 years. Mark Schoenebaum : That's because of your repatriation needs. So, imagine the tax rate on single assets that are large, like your new JAK and IMBRUVICA, on a P&L basis, a single product P&L basis would be much lower. William Chase : Yeah, but you've got IMBRUVICA which is largely a U.S. product for us from a tax rate. So, that actually lifts the tax rate the other way. So, I mean, you've got a lot of different things in the mix, Mark. Mark Schoenebaum : Okay thanks. Richard Gonzalez : So, on the EPS target, I would just tell you that at the end of the day, we built it up from the bottom up and we don't come up with your number. At the end of the day, you're going to assume 50%, 60%, 70% operating margin profile and get pretty big numbers, but if you're going to drive this level of growth, you have to invest in the business in a way that allows you to be able to do that. So I think the numbers we have forecasted certainly represent the top tier in this industry and they're the numbers that we're willing to stand behind. On operational growth internationally for HUMIRA quarter versus quarter, what I'd tell you is this, we sell HUMIRA in almost 100 countries around the world, right and many of those countries have tenders and tenders don't always fall consistently in the same quarter. So, quarter over quarter, doesn't necessarily give you a very accurate picture of how the brand is growing, although I'll address it here in a moment to answer specifically your question. I think the best way to think about HUMIRA internationally, I'd like to choose this year as the example is the [indiscernible] growth rate is for the first three quarters worth of growth and compare it to what the prior year was, I think that's the most reflective way to look at it, and I would say that revenues are up about 8.3% year to date, year-over-year. Volume is up about 10%, so slightly down in price, which is consistent with what we've seen in previous years, nothing unusual there, and market share is stable at just under 34%, versus the prior year, and I would tell you that's well within the range of what we expected when we did our plan and it's tracking consistently with what we expected as it relates to our plan. So, international HUMIRA is performing the way we would've hoped and expected it to be able to perform. Now, if you look at quarter versus quarter and I'm assuming you're specifically talking about third quarter versus second quarter. If you look at third quarter versus second quarter, it's down about 1.3% or 1.4%. 1.4%, which you have to recognize, I'm sure you're aware of this, the month of August in Europe is the holiday month, right and so most physician offices don't have the same number of office days. In fact, they have very limited number of office days. So you get a significantly lower level of new patient starts in the month of August versus other months in the year and therefore every year the third quarter is lower. In fact, if you look at last year, I think last year, it was down about 4% or 4.4%, and so, that's a common trend that we see. I'd also tell you as I mentioned at the very beginning, this -- if you look at it quarter to quarter and you don't make all the adjustments for any kind of anomaly of tenders between those periods of time. It's not very meaningful information for you. So I think the best way to look at it is year-to-date how are we performing and I'd say when you look at this level of performance, we're pretty comfortable with it. Mark Schoenebaum : Rick, I've got a bunch of e-mails in from clients to the answer to my previous question about the $10 number where you said, you didn't come up it. Were you trying to suggest that you came up with numbers higher than that or numbers lower than that? Thanks. Richard Gonzalez : No. I was trying to suggest the number that we communicated is the number that we came up with. Mark Schoenebaum : Okay. Thanks a lot. Richard Gonzalez : All right. Thanks Mark. Next question operator. Operator : The next question comes from Vamil Divan of Credit Suisse. Your line is open. Vamil Divan : Great. Thanks or taking the questions and again, thanks for all the details you provided. So, one more if I could HUMIRA and then one on a different topic. Just to HUMIRA, I think, obviously a lot of focus on the biosimilars and you addressed that pretty well, I thought, just what about the other sort of innovative products that are coming in to target some of the indications -- I'm thinking about the IL-17, competing, oral JAKs, oral products for Crohn's. I know you guys highlighted what you have in your pipeline but, can you just comment on how you think the market share erosion might be for HUMIRA as some of these new innovative products come into these other indications? Then second just on neurology, this is an area of always struggled a little bit for you guys, so, if you can just touch on that a little bit more, you mentioned Duopa could be a big product, maybe a little bit more around sort of the number of patients you think would be willing to use a product like that, Zinbryta and where does that fit in? Most neurologists we've spoken to, [indiscernible] crowded MS space and even Alzheimer's, you kind of highlight that in the total market opportunity for your products. So, just maybe a little more color on how you see your neurology franchise growing would be very helpful. Thanks. Richard Gonzalez : Thanks Vamil. So, let me start with HUMIRA competition. I think, as you know, this is in particularly take RA as an example, it's a pretty crowded field already, and there's the pretty good mechanisms in there, and yet still the TNF still control the vast majority of this market. It's a tough market to break into even with fairly good profiles of drugs. Now, having said that, I'd say there are some good profiles that are starting to emerge. The IL-17s are a good example. I think IL-17s have a pretty strong profile, but what typically happens in this area is those mechanisms for quite a period of time are relegated to the failure patient population, because physicians are comfortable. There are many other factors that are built into it and they tend to take up that failure population for at least a number of years and that tends to be the areas that they grow in. Now, over a longer period of time, they might have a more material impact, but as I mentioned, our assumption is and I think this is a valid assumption based on our experience in the past is that HUMIRA will have some erosion in the United States, but relatively modest erosion over this five-year period of time, and that because we're assuming biosimilars don't come into the marketplace that is driven by these other innovative products that enter the market. So that is our assumption around that. As it relates to neuro, maybe I'll have Mike talk a little bit about some of the earlier stuff, but I'd say our work in Alzheimer's an example there really isn't anything that's built into this planning period, but -- Michael Severino : Certainly, so perhaps to address your question on Zinbryta first. What we see with MS unfortunately is that it afflicts patients, often relatively early in their lifespan. They deal with many, many years of ongoing relapses and ultimately in many patients a downward clinical trajectory and so what that does is it creates a need for different mechanisms. Mechanisms that attack the problem from different directions mechanistically, and mechanisms with considerable efficacy. So, we feel that there is a real place for Zinbryta in the treatment armamentarium particularly when folks are looking for agents that have substantial efficacy as has been demonstrated in that program. When you look at the rest of our neuroscience efforts, apart from Duopa obviously and Zinbryta, they're very early and they're not contributing as Rick said to the financial numbers yet in a large way, but we do feel that we have a number of very promising approaches to go after in the longer-term the neurodegenerative aspects of MS, for example, which is still a large unmet medical need and diseases such as Alzheimer's. So that's a focus on our labs in the early end. Richard Gonzalez : I'll just add a couple of points on Zinbryta, I mean, we're obviously doing a lot of the work to prepare as we anticipate approval of this product, so we've been doing market research and a fair amount of work in preparation and I'd say the profile of Zinbryta is a pretty compelling profile and as Mike mentioned, the unfortunate thing about this disease is that patients relapse and they relapse on average, probably about every 2 to 3 years on the current agents and this is certainly a high efficacy agent, from an annualized relapse rate, reduction and when you look at it versus the active comparator it has good performance. I think the other thing that is appealing to physicians is the compliance aspect of it that from a dosing standpoint, they know they'll have drug on board for an extended period of time. So, I think Zinbryta will have a very important role in the treatment of MS patients and it's going to be one of the things that physicians are able to go to, a more -- I'd say a higher efficacy kind of agent. We don't view it coming in as the first line but certainly as patients rotate through that, we think it will compete quite effectively in that second line. Larry Peepo : Thanks Vamil. Operator, next question please. Operator : The next question comes from Alex Arfaei of BMO Capital Markets. Your line is open. Alex Arfaei : Good morning. Thank you for taking the questions and also thanks for all the details. It certainly helps. I have a few questions on HUMIRA if I may. In 3Q, how much of your 30% growth in the U.S. was volume and price? Our audit suggests it was 11% to 14% volume. So, could you comment on the price component and what are your long-term pricing assumptions in the U.S. for HUMIRA? And a follow up for Rick. I just wanted to make sure I understood your comments earlier, are you assuming no biosimilars of products that compete with HUMIRA in the U.S.? I just want to make sure that -- what your timeline for biosimilar competition for other products is in the U.S. And finally, if you could provide your thoughts about the [indiscernible] versus HUMIRA? Thank you very much. Richard Gonzalez : Why don't you go with the price? William Chase : So, our numbers for Q3 -- our volume was higher than what you're seeing in the script, so the way you've got to think about price in the U.S. on the quarter was around a third of the overall growth, was related to price. In terms of over the LRP, look, again we've said multiple times, as we build out our LRP, we try to put in conservative and realistic assumptions. So along those lines we don't take what is currently happening in price and extrapolate that out across the LRP. In the U.S. it is -- where we do think we'll be able to maintain some degree of positive price, but what I would tell you is we're modelling a little lower than mid-single digits on that as you go out over the long range plan period. Ex-U.S., it's actually a negative pricing environment. So, when you actually look at the additive of the two across the LRP, we've got very, very, very low levels of price built in to our forecast. Richard Gonzalez : Then as it relates to biosimilars, I just wanted to clarify, you're talking about a HUMIRA biosimilar or are you talking about a biosimilar to something else? Alex Arfaei : No, biosimilar of competing products such as Remicade and [indiscernible] in the U.S. Richard Gonzalez : Okay. I'm sorry. So, obviously we're not assuming any -- because of the IP and the litigation strategy we talked about, we're not assuming any HUMIRA biosimilar. I think as you click through the rest of them, as we look at the Enbrel IP, we think they have pretty good IPs, so we're not assuming we'll see Enbrel biosimilars in the United States. Then as it relates to any kind of Remicade, I think it would be a similar scenario to what we see outside the U.S. because it's an infusion product, it doesn't necessarily compete directly against us. Then on Bari, Mike, why don't you cover the head to head on Bari? Michael Severino : Sure. When we look at the Baricitinib head to head data clearly both agents are very active. When we focus on higher levels of response which we think are the most clinically significant. For example, DAS low disease activity or DAS remission, we really see very similar response rate at week 24, and of course also, consider the very long track record with HUMIRA well understood safety and efficacy profile. So, we feel good about the overall performance of HUMIRA over the course of its lifespan and think it will continue to play a very important role in the treatment armamentarium as Rick has already outlined. Alex Arfaei : Thank you, folks. Richard Gonzalez : All right, thanks Alex and operator, we have time for one more question please. Operator : Thank you. Our last question comes from Colin Bristow of Bank of America Merrill Lynch. Your line is open. Colin Bristow : Good morning, thanks for squeezing me in and as others have said, great presentation today. The methods being covered, but on hep C what proportion of your contracts are exposed to competition in 2016 versus in a multiyear and the cargo expectations changed per your performance in 2016 if at all based on the recent label update. Then two, just from a high level, given the sort of focus on drug pricing at utility [indiscernible] recently, could you give us your thoughts on these ongoing debates and whether you anticipate any impact to your business. Thanks. Richard Gonzalez : I'm not sure I could give you the exact percentage of the contracts. I'd say the vast majority of them are protected through -- vast majority of the volume is protected I'd say through 2016, but, let us get back to you with something that's maybe a little bit more specific. As it relates to the label, as outlined in my comments, this was obviously moving from not recommended to contraindicated, and if you look at the patient population in Bs and Cs, it's a relatively small patient population. It's probably something in the 3% or 4% kind of range of U.S. patients. So if you look at it purely from the perspective of that, it wouldn't be a big impact and frankly the fact that we weren't recommended and contraindicated in Cs you wouldn't assume that there was a lot of volume treating those patients anyway. Having said that, I will tell you we've gone out and contacted probably now around 80% of the physicians that prescribed the drug to make sure that they understand the changes in the label. I think that's gone well, and the feedback I'm getting directly back from the commercial organization. So, that is going well. We've gone back to all of our contracted -- our contract managed care contracts and other contracts and that has gone well, they understand it and I think, agree that in the previous label it was outlined in a way that probably there wasn't a tremendous amount of use there anyway. Having said that, I think we have to wait for -- see how this plays out for the next maybe 30 days or so to be absolutely sure, but right now, we are assuming based on everything that we know, that we'll have a material impact on the brand. The drug pricing. Well, certainly, I think if you look at the debate around drug pricing, it's not likely to go away. In fact, I think with a political debate that's going on we'll probably continue to hear more about it and I think, everything isn't consistent across our industry. Certainly a lot of the debate came around taking old drugs and raising the prices a very significant amount. That's not a model that we have or we participate in. I think the important thing for our industry, the innovative industry is that we continue to bring out drugs that have a significant impact and we price those drugs in a way that gets the right value proposition, the right return for the value that those drugs have, both the clinical value but also the economic value and we demonstrate that economic value. I will tell you, in the international markets like Europe, where HUMIRA has competed for a long time, those are markets that looked very carefully at the economic value that their healthcare system pays and obviously HUMIRA has done extremely well in those markets and it's because it is a good value proposition and I think a lot of the areas that we're in, in specialty pharmaceuticals, it allows you to be able to do that. It allows you to be able to create a medicine that has truly outstanding impact for patients and also has the right economic value proposition and then pricing them accordingly. So, I don't fundamentally believe we'll see a significant change, but I think the debate will continue on and I think our industry needs to respond in a way that's appropriate to that. Larry Peepo : And that concludes today's conference call. If you'd like to listen to the replay of the call please visit our website at abbvieinvestor.com. Thanks again for joining us today. Operator : That concludes today's conference. Thank you for participating. You may now disconnect.
ABBV	AbbVie	1,551,152	Health Care	Biotechnology	North Chicago, Illinois	2013 (1888)	2012-12-31	2,016	1	2016Q1	2015Q4	2016-01-29	4.146	4.28	4.921	5	8.24558	11.69	11.53	Executives: Larry Peepo - Vice President-Investor Relations Richard A. Gonzalez - Chairman & Chief Executive Officer Michael E. Severino - Executive Vice President, Research & Development and Chief Scientific Officer William J. Chase - Chief Financial Officer & Executive Vice President Analysts : Christopher Schott - JPMorgan Securities LLC Jami Rubin - Goldman Sachs & Co. Marc Goodman - UBS Securities LLC Mark J. Schoenebaum - Evercore ISI David R. Risinger - Morgan Stanley & Co. LLC Vamil K. Divan - Credit Suisse Securities (USA) LLC (Broker) Alex Arfaei - BMO Capital Markets (United States) Stephen M. Scala - Cowen & Co. LLC John T. Boris - SunTrust Robinson Humphrey, Inc. Colin N. Bristow - Bank of America Merrill Lynch Andrew S. Baum - Citigroup Global Markets Ltd. Operator : Good morning, and thank you for standing by. Welcome to the AbbVie Fourth Quarter 2015 Earnings Conference Call. All participants will be able to listen only until the question-and-answer portion of this call. I would now like to introduce Mr. Larry Peepo, Vice President of Investor Relations. Larry Peepo - Vice President- Investor Relations : Good morning, and thanks for joining us today. Also on the call with me are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Executive Vice President of Research & Development and Chief Scientific Officer; and Bill Chase, Executive Vice President of Finance and Chief Financial Officer. Before we get started, I remind you that some statements we make today may be considered forward-looking statements for the purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about the factors that may affect AbbVie's operations is included in our 2014 Annual Report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand AbbVie's ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll now turn the call over to Rick. Richard A. Gonzalez - Chairman & Chief Executive Officer : Thank you, Larry. Good morning, everyone, and thank you for joining us today. This morning, I'll briefly discuss our fourth quarter performance, and our 2015 operational highlights. Mike will then provide updates on recent advancements across our R&D programs, and Bill will discuss the quarter, and our 2016 guidance in more detail. As always following our remarks, we'll take your questions. We delivered another strong performance in the fourth quarter, with results ahead of our expectations, including adjusted earnings per share of $1.13, representing growth of 27% versus the fourth quarter of 2014. Our fourth quarter performance caps off a very strong year for AbbVie, with sales and earnings well above our original projections for the year. We delivered 22% global operational sales growth in 2015, and we increased ongoing earnings per share by more than 29%. We've driven strong commercial, operational, and R&D execution, resulting in industry-leading performance, with both strong revenue growth and improvement in our operating margin profile. AbbVie's EPS growth for 2015 ranks us among the top growth companies in our industry. Clearly, 2015 was a year of excellent performance. We delivered outstanding results from our current portfolio, with strong growth from HUMIRA, which drove 19% global operational growth in 2015, including U.S. growth of nearly 29%, and international operational growth of 8.6%. We saw continued strong momentum from IMBRUVICA, with full year 2015 sales in excess of $1 billion. Global VIEKIRA performance, although below our original expectations, generated more than $1.6 billion in its first year on the market and we had strong performance from other products in our portfolio including Creon, LUPRON, and DUODOPA. Over the past year, we've seen significant pipeline advancement and achieved a number of important development and regulatory milestones. We secured approvals for several assets including HUMIRA as a treatment for HS, our once-daily HCV combination in Japan, and our partner received approval for elotuzumab for relapsed or refractory multiple myeloma. We successfully completed registrational studies and submitted regulatory applications for a number of programs including venetoclax for relapsed refractory CLL, IMBRUVICA for first-line CLL, ZINBRYTA for multiple sclerosis and HUMIRA for uveitis. We successfully completed mid-stage clinical trials and transitioned into the registration enabling phase of development for several key programs including our selective JAK1 inhibitor, ABT-494 in RA, our pan-genotypic next-generation HCV combination Elagolix for uterine fibroids and ABT-414, our antibody drug conjugate for glioblastoma multiforme. We also reported compelling data from several development programs including Elagolix pivotal data in endometriosis, the HELIOS and RESONATE-2 IMBRUVICA data which we anticipate will be reflected in the product label this year and venetoclax data in several cancer types including robust results in CLL and AML. In fact, the data we presented on venetoclax this year has resulted in three breakthrough therapy designations, a status granted by the FDA when clinical evidence indicates that a medicine may demonstrate a substantial improvement over existing therapies. We believe venetoclax has significant potential across a wide range of blood cancers with the first of potentially numerous indications coming in the first half of this year. The progress we've made with our pipeline including the impressive data we've shared over the past year has further increased our level of confidence and de-risked many of our key R&D programs. Numerous assets in our late-stage pipeline have the opportunity to generate multibillion dollar peak-year sales and represent an opportunity for meaningful revenue growth in the years to come. 2016 promises to be another milestone filled year with significant activity across our pipeline which Mike will discuss in more detail here in just a few moments. In 2015, we also augmented our portfolio and our pipeline through strategic licensing and acquisition activity. The acquisition of Pharmacyclics provided a major new growth platform in a key strategic area, hematological oncology. IMBRUVICA which is now a blockbuster therapy offer significant growth potential towards existing and expanding list of indications and lines of therapy. We remain excited about the potential for IMBRUVICA and we are pleased that our thesis is playing out as we expected. Within the hematological oncology segment, we have invested strategically to build a portfolio of medicines with the potential to transform the care of a large range of malignancies. Our portfolio includes three novel mechanisms of action; BTK inhibition, Bcl-2 inhibition; PI3 kinase dual inhibition. These mechanisms are either on market, under regulatory review, or in registration enabling trials. We're well positioned to build upon our leadership in this category with unique combinations of these and other agents. Over the past year, we've delivered a strong return of capital to our investors, including a rapidly growing dividend, which is growing 42% since our inception, as well as share repurchase. We remain committed to a balanced capital allocation strategy, returning cash to shareholders while continuing to add strategically to our pipeline. Following our acquisition of Pharmacyclics last year, our focus in the near-term is on continuing to augment our therapeutic areas of focus especially oncology and immunology. We evaluate opportunities that fit our strategic criteria and can deliver strong returns. In 2015, we also drove improved efficiency across our operations, delivering significant operating margin expansion while continuing to invest in R&D and SG&A to drive future growth. We have delivered a significant level of margin expansion to-date, and we remain committed to doing more to improve our operating margin profile going forward. Our focus on operating efficiencies will drive our adjusted operating margin profile to greater than 50% by 2020. We've entered 2016 with strong momentum which we intend to build upon to drive a high level of performance across our operations and strong growth. Our full-year 2016 EPS guidance of $4.90 to $5.10 represents growth of 16.5% at the midpoint, positioning AbbVie to be among the industry leaders for EPS growth once again this year. On our third quarter conference call, we outlined our long-term guidance for a number of key metrics including our expectations for top and bottom line growth and margin expansion over our five-year plan. We remain committed to delivering on these long-term objectives which will generate double-digit EPS growth on average through 2020. So, in summary, we're pleased with our strong execution and significant advancements we made in 2015. Over the past year, we've demonstrated a strong track record of success with positive clinical data and regulatory outcomes, and we look forward to numerous important pipeline milestones in the year ahead. We've consistently delivered on our commitments and are positioned for another year of strong growth. We've built a strong foundation, and we're focused on generating top-tier financial performance in the years to come. With that, I'll turn the call over to Mike for additional comments on R&D programs. Mike? Michael E. Severino - Executive Vice President, Research & Development and Chief Scientific Officer : Thank you, Rick. In 2015, we significantly advanced and de-risked our pipeline and achieved a number of important regulatory milestones. And we expect 2016 to be a very productive year as well with a potential for several regulatory submissions and approvals, key data readouts, and phase transitions. We have a broad pipeline that includes more than 50 active clinical development programs including more than 20 new products or indications in late stage development or under regulatory review. Today, I'll highlight recent updates and discuss some of the milestones we anticipate in the year to come. I'll start with hematologic oncology, an area where we have invested heavily and are uniquely positioned. As Rick mentioned, we have built a strategic portfolio of assets including multiple mechanisms of action that have significant potential alone and in combination. The development program for our flagship oncology product, IMBRUVICA, continues to progress nicely. Our next opportunity for label expansion is in the first line CLL setting. Data from the RESONATE-2 trial in treatment-naïve CLL patients recently published in the New England Journal of Medicine, showed treatment with IMBRUVICA resulted in an 84% reduction in the risk of disease progression versus chlorambucil with 87% of patients remaining on single agent IMBRUVICA treatment at 18 months. Additionally, treatment with IMBRUVICA showed an 84% reduction in overall mortality. We believe RESONATE-2 represents a practice-changing study that will set a new treatment standard for many treatment-naïve patients. We submitted a supplemental new drug application to the FDA which is currently under priority review and we anticipate approval in the first half of 2016. IMBRUVICA is also being evaluated in mid to late stage trials in follicular lymphoma, marginal zone lymphoma, diffuse large B-cell lymphoma, multiple myeloma, graft versus host disease and pancreatic cancer. At the recent ASH meeting, 65 IMBRUVICA-related abstracts were presented, including data from several studies and potential new indications. And there is potential for data flow and possible regulatory submissions this year for several indications including treatment-naïve mantle-cell lymphoma, relapsed/refractory follicular lymphoma, and treatment naïve diffuse large B-cell lymphoma, with timing dependent on event-driven analyses of ongoing studies. In the area of immuno-oncology, ongoing trials evaluating IMBRUVICA in combination with checkpoint inhibitors are progressing well, with a potential to see proof-of-concept data in solid tumors over the course of the year. Another important strategic asset in our oncology portfolio is venetoclax, our novel BCL-2 inhibitor, which has demonstrated strong efficacy, achieving deep levels of response and durable disease control, both as monotherapy and in combination with Rituxan in patients with relapsed/refractory CLL. Venetoclax is currently under priority review for relapsed/refractory CLL, including patients whose tumors harbored the 17p deletion mutation. And we expect FDA action in the first half of 2016. At ASH, we presented data in the relapsed/refractory CLL patients in combination with Rituxan, showing an overall response rate of 86% and a complete response rate of 47%. Additionally, minimal residual disease negativity in the bone marrow was observed in 55% of all patients treated with the combination. We're very encouraged by the depth of the responses driven by combination therapy in this patient population. Based on these data, earlier this month the FDA granted breakthrough therapy designation for venetoclax when used in combination with Rituxan. We also believe BCL-2 will be effective in other hematologic malignancies. We recently presented encouraging venetoclax data in treatment naïve AML patients over 65 years of age who are ineligible for intensive induction chemotherapy. The early data showed combination treatment with venetoclax and hypomethylating agents resulted in complete response rate of approximately 71%, which is roughly double the response rate that would be expected with the current standard of care. And based on these promising results, earlier this week the FDA granted the third venetoclax breakthrough therapy designation. We are moving expeditiously into registrational trials for this indication. In addition to IMBRUVICA and venetoclax, we are developing a dual PI-3-kinase inhibitor, Duvelisib, currently in late-stage development. In collaboration with our partner, Infinity, we'll see data on Duvelisib in relapsed/refractory NHL and CLL in the second half of the year with potential regulatory submissions to follow. We're well positioned to continue to evolve the treatment landscape in CLL and other blood cancers by exploring novel combinations including the programs in our pipeline and other mechanisms with the goal to achieve deep, durable disease control and/or remissions while reducing or eliminating the use of toxic chemotherapy. To that end, we have numerous combination trials underway or starting n 2016. This includes our Phase III study of a chemotherapy-free combination of venetoclax and Gazyva in first-line unfit CLL patients. This study is underway and enrolling well. A large Phase III study is being initiated in collaboration with the German CLL working group to evaluate treatment with venetoclax in combination with a variety of therapies including Gazyva and IMBRUVICA in previously untreated, fit CLL patients. This study, which we expect to initiate midyear, will assess the ability of venetoclax-based combinations to drive achievement of minimal residual disease, which has been associated with improved survival in CLL patients. To augment ongoing investigator-sponsored and collaborative group studies evaluating venetoclax and ibrutinib combinations, we are designing company-sponsored studies to evaluate the combination in first line CLL patients. In addition, AbbVie and Genentech are finalizing plans to pursue registrational studies evaluating combinations of venetoclax with proteasome inhibitors in multiple myeloma and, as I mentioned previously, in combination with hypomethylating agents in AML. Finally, we are preparing to initiate a dose finding study evaluating venetoclax and Duvelisib in patients with a variety of hematologic malignancies. In addition to our work in hematologic oncology, we have also been investing in a number of programs for the treatment of solid tumors, including our PARP inhibitor, veliparib, with five Phase III studies underway in lung, breast and ovarian cancer, and ABT-414, which is in development for glioblastoma multiforme, or GBM. GBM is the most common and most aggressive type of malignant primary brain tumor. Previously reported interim results from a Phase I clinical trial of ABT-414 showed that roughly 25% of patients with EGFR amplification or the B3 variant treated with ABT-414 in addition to standard of care achieved an objective response. These results illustrate a level of efficacy not typically seen in this difficult to treat cancer where historic data of response rates in our refractory population have been less than 10%. Later this year, we'll see additional data for ABT-414 and second-line GBM. If the data are consistent with the earlier studies, these trials could represent a path to a regulatory submission in the second half of 2016. In parallel, larger randomized comparative registrational trials are ongoing in first and second-line GBM. We also have an active program focused on driving the next wave of immuno-oncology development beyond checkpoint inhibitors. We recently entered into a collaboration with MD Anderson Cancer Center focused on the discovery and development of new immuno-oncology therapies. Through this agreement, we're pairing MD Anderson's cutting edge pre-clinical translational and clinical capabilities with our strength in biology, protein engineering and chemistry with a goal to accelerate the development of new medicines. We anticipate a number of immuno-oncology assets moving into the clinic this year and we look forward to sharing more details on our strategy in this area at our R&D Day in June. Moving on to immunology, our strategy is centered upon identifying treatments that offer differentiated profiles relative to currently available therapies with a goal of continuing to raise the standard of care. We have multiple mid and late stage pipeline assets with best-in-class potential. In late 2015, we initiated a Phase III program in rheumatoid arthritis for our selective JAK-1 inhibitor, ABT-494, following positive results from our mid-stage clinical trials. We are particularly excited about the results of ABT-494 in a difficult-to-treat population, anti-TNF inadequate responders, a growing segment of the RA market. Results from the BALANCE-I trial in this patient population recently presented at ACR illustrate the agent's potential to be a best-in-class therapy with ACR20 responses up to 73% and ACR50 responses up to 44%. Additional data from our Phase II program will be presented over the course of 2016 and we expect to commercialize ABT-494 in 2019. We also have additional immunology candidates in development and we'll see mid-stage data from multiple programs in 2016. Finally, in immunology, we continue to innovate with HUMIRA. Last year, we received the EU and U.S. approval for a new formulation of HUMIRA. Additionally, we have submitted regulatory applications for an improved HUMIRA Pen device. And our U.S. and European regulatory applications for uveitis are currently under review with decisions expected in the second half of this year. Moving now to virology where our goal is to develop a next-generation asset that offers high cure rate in ribavirin and ritonavir-free regimen. Mid-stage data indicate that our new pan-genotypic combination can deliver cure rates approaching 100%. And we believe the majority of patients will be well-served with an eight week treatment option. Late last year, we initiated a comprehensive registrational program including six global Phase III studies. We'll start to see data from our registrational trials later this year. And this combination is poised for commercial entry next year. In neurology, we're focused on therapies for the treatment of conditions like Alzheimer's disease, Parkinson's, MS, and other neuro-degenerative conditions. ZINBRYTA is our first in class investigational biologic for relapse-remitting multiple sclerosis which is currently under regulatory review in the U.S. and Europe with the regulatory decisions expected in the first half of 2016. The filings are based upon strong pivotal trial results which demonstrated patients treated with ZINBRYTA had a statistically significant 45% reduction in annualized relapse rates versus AVONEX, an established standard of care. Given the product profile, novel mechanism of action and its once monthly subcutaneous administration, we believe ZINBRYTA has the potential to be an important therapeutic option. Last year, we entered into a collaboration with C2N Diagnostics to develop and commercialize a portfolio of anti-tau antibodies for the treatment of serious neuro-degenerative disorders. Last year, we initiated a Phase I program in patients with progressive supranuclear palsy, and we remain on track to start clinical development with C2N in Alzheimer's disease in 2016. Finally, Elagolix is our compound in Phase III development for endometriosis and uterine fibroids. Our goal with Elagolix in endometriosis is to bring to market an oral therapy that provides a high level of efficacy, with minimal menopausal side effects such as hot flush while preserving bone health. We reported positive results from our first pivotal trial in endometriosis last year, and plan to report top line results from the second pivotal study in the first quarter of 2016. We also plan to present more detailed findings from both registrational trials at the ASRM Meeting in October. We also recently initiated a Phase III program investigating the effect of Elagolix on bleeding related to uterine fibroids. So in summary, we continue to make significant progress with our pipeline, and are on track to advance several programs in 2016. We've built a promising late-stage pipeline comprised of potentially transformational medicines, which will fuel our future growth. We look forward to covering our full pipeline in more detail, and an R&D pipeline review to be held in Chicago during the 2016 ASCO Meeting in June. We hope you will join us. With that, I'll turn the call over to Bill for additional comments on the quarter, and our 2016 guidance. Bill. William J. Chase - Chief Financial Officer & Executive Vice President : Thank you, Mike. This morning, I'll share with you the highlights of our full-year 2015 performance, provide an overview of our fourth quarter results, and then walk through our outlook for 2016. We had a strong performance in 2015, allowing us to raise our full-year EPS guidance range twice during the year and ultimately deliver sales, margin expansion, and earnings projections that exceeded our original expectations. For the full-year 2015, adjusted net revenues were $22.8 billion, up 22% on an operational basis. We expanded our adjusted operating margin profile to 42.3% in 2015, up 610 basis points for the year. And as Rick mentioned, we reported adjusted earnings per share results of $4.29, up more than 29% for the year. Turning to the fourth quarter, total adjusted sales were $6.4 billion, up more than 24% on an operational basis. Unfavorable impacts from foreign exchange rate fluctuations reduced sales growth in the quarter by 6%. HUMIRA delivered global sales of $3.8 billion in the quarter, up 16% operationally excluding the impact of foreign exchange. In the U.S., HUMIRA sales were more than $2.3 billion, increasing nearly 21%, reflecting exceptional growth across all three major categories : rheumatology, gastro and dermatology. Internationally, HUMIRA sales were nearly $1.4 billion in the quarter, up a strong 9.7% on an operational basis excluding an unfavorable impact from exchange. Global HUMIRA sales for the full-year 2015 were $14 billion, up 19.1% operationally versus the prior year. International HUMIRA sales in 2015 increased 8.6% on an operational basis. Global IMBRUVICA net revenues were $343 million in the quarter. U.S. sales were $295 million and our international profit sharing was $48 million. Since the closing of the Pharmacyclics acquisition on May 26, IMBRUVICA has driven $754 million of new revenue for AbbVie, and we are pleased with its progress. A significant portion of our valuation for Pharmacyclics is attributed to advancing in the first-line therapy in treatment naïve CLL patients and the submission of the strong RESONATE-2 data to the FDA this quarter bodes well for this assumption. Global VIEKIRA sales in the fourth quarter were $554 million. The international launch has exceeded our planning expectations resulting in a higher mix of international sales again this quarter. As expected, VIEKIRAX, our two-drug, once-daily ribavirin-free combination for the treatment of genotype 1b in Japan launched late in the fourth quarter. Global sales of DUODOPA, our therapy for advanced Parkinson's disease grew 24.4% on an operational basis in the quarter. We saw continued double-digit growth internationally for DUODOPA with a modest level of U.S. sales as expected. Global DUODOPA sales for the full-year 2015 were $231 million, up 23.5% operationally versus the prior year. Global Creon sales were $185 million, up 22.8%. Full-year sales of Creon were $632 million, up 22.5% versus 2014. Creon maintains its leadership position in the pancreatic enzyme market with roughly 70% share. Global LUPRON sales were $235 million in the fourth quarter, up 15.6% on an operational basis. For the full year, global LUPRON sales were $826 million, up 9.3% exceeding our expectations. LUPRON continues to hold the leadership position and maintains significant share of the market. Turning to the P&L profile for the fourth quarter, the adjusted gross margin ratio was 80.5%, excluding amortization and other specified items. Excluding the impact of Pharmacyclics, we saw a nearly 100-basis improvement year-over-year. In the fourth quarter, adjusted R&D was 15.9% of sales, and adjusted SG&A was 23.9% of sales, contributing to continued improvement in our operating margin profile. Operating margin in the quarter was 40.1% of sales compared to 35.8% in the fourth quarter of 2014. Adjusting for the negative impacts of foreign exchange and the acquisition of Pharmacyclics, operating margin increased by 540 basis points. As a reminder, the fourth quarter margin profile is generally the lowest of any quarter during the year. This reflects seasonal product mix impacts from higher sales of products like SYNAGIS, a lower-margin partnered product. Net interest expense was $199 million, and the adjusted tax rate was 21.6% in the fourth quarter. Fourth quarter adjusted EPS was $1.13, excluding non-cash amortization expense and specified items. On a GAAP basis, we posted EPS of $0.92. As we look ahead to 2016, we are confirming our previously issued full-year adjusted EPS guidance range of $4.90 to $5.10. This guidance excludes $0.42 per share of non-cash amortization and non-cash Pharmacyclics acquisition impacts, as well as $0.03 per share of other specifieds. On the top line, we expect mid-teens revenue growth on an operational basis, excluding roughly 2% negative impact from exchange. Included in our top line guidance, our assumptions for our key products as follows : HUMIRA has averaged well over $1 billion of annual growth for a number of years. In 2016, we expect HUMIRA to once again be an important contributor to our performance with high-teens growth expected in the U.S. Internationally, we are forecasting mid-single-digit operational growth, reflecting the latest market dynamics including the launch of a biosimilar for Enbrel. For IMBRUVICA, we expect revenues to AbbVie of at least $1.8 billion. We anticipate global VIEKIRA sales of approximately $2 billion for the year. This level of sales includes significant international growth with a full year's of sales in Japan. We expect continued double-digit growth for DUODOPA, including an increased U.S. sales contribution. As mentioned on previous calls, we anticipate a gradual ramp for product sales in the U.S. as physicians continue to get more familiar with the product. For SYNAGIS, we expect mid-single-digit operational growth in 2016. Regarding AndroGel, we're forecasting 2016 sales of roughly $500 million. For Creon, we expect high-single-digit sales growth. For LUPRON and Synthroid, we expect sales to be roughly flat year-over-year. And we expect declines in several products with continued lipid franchise erosion as well as negative market trends in HIV and other mature products. Turning back to the P&L for 2016, we are forecasting an adjusted gross margin ratio approaching 82%. We are forecasting R&D expense above 15% of sales and we expect to see sales leverage with SG&A levels at approximately 23% of sales, well below the 24.6% booked in 2015. As a result, in 2016, we are forecasting an increase in our operating margin profile of 100 basis points, reflecting ongoing initiatives and sales leverage. Excluding year-over-year impacts of foreign exchange and Pharmacyclics, this operating margin improvement would exceed 300 basis points. We are forecasting net interest expense of about $800 million for the full year, and we expect an adjusted tax rate of approximately 21% to 22% in 2016. Regarding our first quarter outlook, we expect adjusted earnings per share in the quarter of $1.13 to $1.15. This guidance reflects growth of approximately 21% at the midpoint. Our first quarter adjusted EPS guidance excludes roughly $0.11 of non-cash amortization and specified items. We are forecasting revenue growth in the first quarter just above 20%, excluding roughly 4% negative exchange. While our full-year outlook for international HUMIRA growth is mid-single digits, in the first quarter, we anticipate an operational international growth rate of 3%. This is the direct result of a difficult comparison to the prior-year quarter where we posted a 15% increase for the brand due to shipment timing. So, as we look back, we're very pleased with AbbVie's performance in our first three years as an independent company. In 2015, we delivered sales, margin expansion, and earnings well above our original outlook, and we expect to build on that momentum in 2016 with industry-leading growth and an exciting pipeline. And with that, I'll turn it back over to Larry. Larry Peepo - Vice President- Investor Relations : Thanks, Bill, we'll now open the call for questions. Sheryl, we'll take our first question, please. Operator : All right, sir. Thank you. Our first question comes from Mr. Chris Schott of JPMorgan. Sir, your line is open. Christopher Schott - JPMorgan Securities LLC : Great. Thanks very much and thanks for the questions. Richard A. Gonzalez - Chairman & Chief Executive Officer : Sure. Christopher Schott - JPMorgan Securities LLC : First one here, just any perspective on the recent Amgen IPR decision on your formulation patent and what that means for HUMIRA. And maybe while we're talking about IP, maybe – any touch as well on the Coherus and BI filings on your dosing patents. That will be my first question. Second one, the mid-single digit growth for international HUMIRA, can you just elaborate a little bit more on the drivers and assumptions there. Specifically, what are you anticipating in terms of pricing or volume competition when we think about biosimilar Remicade and Enbrel? Thanks so much. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. Hi, Chris. It's Rick. So, I'll cover those two. Let me do the HUMIRA one first. So, as we mentioned in our previous call, we are anticipating that we will see indirect biosimilar competition outside the U.S. meaning Enbrel biosimilars outside the U.S. this year. So, if you think about our growth rate, we finished this year internationally at about 8.6% and we're guiding for next year at about mid-single digits. And you can break it up into sort of two components. One would be obviously as the brand gets a little bit bigger, the growth rate as a percentage is slowing down a bit. And then we have built in what are a set of assumptions of what kind of price impact we might see from Enbrel in certain markets, particularly in Europe I would say. And that represents about 2% of our growth. So you can think of it coming down about 2% based on that. So that's the HUMIRA piece. On the Amgen IPR and the other IPRs, I think in general across all of the litigation aspects of HUMIRA, I think it's important to recognize that we have now entered a new phase of our biosimilar strategy. And in our third quarter call, we laid out a detailed explanation of our patent estate in an effort to really provide the investment community with a comprehensive set of information around the IP and what we thought the litigation timelines would look like going forward. What I can tell you is nothing has changed from that assessment. We still believe in everything that we've described to you as part of that. But now we're in the active litigation process with other players, whether that be IPR litigation or other kind of litigation that will start to play out. And it's just not prudent for us to lay out for the world a play-by-play analysis of our positions around this. That's just not the – that's not the smart thing to do from a litigation standpoint. So what I'd tell you is I'd reiterate the points that we made before. We have a large, robust portfolio of IP. We have done significant work from an innovation standpoint in this area, and we have prosecuted all of this IP based on the work that we've done and the investment that we've made, and we feel good about the IP in our portfolio. And as we've said before, we intend to vigorously defend our IP, and this is going to need to play out over time. We're certainly pleased with the decision of the patent office, but we're not going to basically do a play-by-play on this because that potentially could jeopardize our position. Christopher Schott - JPMorgan Securities LLC : All right. Thanks very much. Larry Peepo - Vice President- Investor Relations : Thanks, Chris. Next question, please. Operator : Our next question comes from Ms. Jami Rubin of Goldman Sachs. Ma'am, you're line is open. Jami Rubin - Goldman Sachs & Co.: Thank you. I just want to talk about U.S. HUMIRA sales this past quarter. I guess, 20% or 21% was a bit below consensus expectations. If you look at volume growth and price contribution, that should have led to slightly higher growth. I'm wondering if you can talk about what is happening to net price increases, are they sticking? And with respect to your high-teens guidance for U.S. HUMIRA sales in 2016, what again are your assumptions for price? Thanks very much. Larry Peepo - Vice President- Investor Relations : Thanks, Jami. William J. Chase - Chief Financial Officer & Executive Vice President : Hi, Jami. It's Bill. Look, I think we've seen spectacular growth numbers out of HUMIRA in the U.S. all year long, and certainly Q4, 21% isn't a bad number. And if you look at the market, TRx growth right now in the quarter was about 13%. From an inventory standpoint sequentially quarter versus quarter, it stayed roughly flat at a little less than half a month. But one thing that is impacting this number is we had slightly higher inventory numbers in the channel in Q4 2014. And if you adjust that out, it pretty much gets you back to where guidance had us. So we haven't seen anything on this brand that would lead us to pause and restate our expectations. And as I said in the call, in my comments, we're expecting high-teens growth, so it's going very well. From price perspective, it's normal for these sorts of products to take price increases towards the end of the year or the beginning of the year. We certainly have done that at the beginning of the year. So there is going to be a price dynamic on HUMIRA in 2016, and we want to see how things pan out as the year progresses above and beyond that. Richard A. Gonzalez - Chairman & Chief Executive Officer : And Jami, this is Rick. The only thing I would add is much like the discussion we had last quarter about international third quarter, if you look at our ordering or if you look at our growth rate patterns over the last several years, what you'll see is typically fourth quarter is a little bit lower from a growth standpoint. But I think what you're asking is are we seeing any kind of a slowdown in the U.S.; we're not. The U.S. is performing very robustly. We guided, I think, at the beginning of this year to about the same number, high teens, and obviously overachieved that. So I mean, we feel very good about the performance going forward with HUMIRA. Jami Rubin - Goldman Sachs & Co.: Thank you. Larry Peepo - Vice President- Investor Relations : Thanks, Jami. Operator : Our next question comes from Mr. Marc Goodman of UBS. Sir, your line is open. Marc Goodman - UBS Securities LLC : Yes. Good morning. You mentioned the HUMIRA price increase which was like 10-ish%. How much of that is actually flowing through to the bottom line this year that you project and how has that changed as far as the growth scenario in the past couple of years? And then second, if you could talk about hepatitis C a little bit. Obviously, the U.S., there's one dynamic and obviously with Merck coming in, they got approved. They set their pricing last night. If you could comment on that. And then secondly, if you could talk about Japan, where we are and how it's doing. I know you didn't have a lot of Japan in the quarter, but now it's been a good month and a half later. So, maybe you could just give us a sense for how Japan is doing in the ramp and how much Japan is going to be a piece of that O-U.S. this year. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. So, let me take the HUMIRA price piece. I understand all of the focus on price. I mean, I think all of us in this industry recognize all of the headlines we've seen around price and I think an important perspective to step back and think about for our business. This is not a business that is highly dependent upon price, our business I'm talking about. So if you look at our operational growth in 2015 of 22%, only 2% of that was price across the business. And if you look at HUMIRA, roughly around 25% of the overall growth is driven by price. Now, you do have certain managed care contracts that have some level of price protection, so all the price doesn't fall through at 100%. And depending upon where the price increases are and the magnitude of those price increases, less of it will fall through in a later price increase, as an example. But overall, the vast majority of our growth, whether it be HUMIRA or other assets in our pipeline, is driven by volume growth, and I think that's an important perspective for the investor community to understand. As far as HCV is concerned, as we've planned out for 2016, I'd say the Merck label came in pretty much spot-on what we had expected, so I think it's within our expectations. We have built into our assumptions for HCV a level of competition and some level of price competition. We're going to have to see how that plays out. We don't believe we have any exposure there at all, so we're not concerned about that. But we have built in what we believe is an appropriate level of both price and volume competition that we could see in the marketplace in 2016. Japan, to your point, we launched very late in the fourth quarter, and so far I had an update just a week or so ago from the team, Japan is going well. It's tracking on our expectations. Larry Peepo - Vice President- Investor Relations : Thanks, Marc. Next question please, Sheryl. Operator : Our next question comes from Mr. Mark Schoenebaum of Evercore ISI. Sir, your line is open. Mark J. Schoenebaum - Evercore ISI : Hey, guys. Thanks. Wondering if I could take a left turn here away from hep C and drug pricing and talk a little bit about your pipeline, which is arguably not discussed a lot on the Street. So, number one, I'd love to – and also competition. So, first of all, I'd love to get your thoughts on there's been a lot of news in the JAK space. I'd love to get your thoughts comparing baricitinib to 494. I'd also love to get an update on how you're thinking about ABT-122 and ALX-0061. What's the next step, when we make a next step? And if possible, throw in a comment about ACP-196 versus IMBRUVICA. This molecule has obviously come into the headlines after AZN paid, I think, $7 billion for it. Thank you very much. Larry Peepo - Vice President- Investor Relations : Thanks, Mark. Michael E. Severino - Executive Vice President, Research & Development and Chief Scientific Officer : Sure, Mark. This is Mike. I'll take those questions. Your first question was about our JAK franchise and competition. I think that if we look at JAK inhibitors, there had been a fair amount of enthusiasm several years ago that actual results didn't live up to expectations for the first generation of those molecules, such as tofacitinib. But the current generation, I think, have very nice profiles. And I think baricitinib has generated a nice profile based on the data that we've seen today. We'll see more as they proceed through the regulatory review. And I think the class is going to get used over time. What we see with this class is, it tends to start slow and build over time and work from more resistant patients up to all the other lines of therapy, and we see that with therapies in RA and in immunology in general. So when I compare the two, I feel very encouraged by the results that we've seen with ABT-494. We've seen very strong efficacy, not just at the ACR20 level, but at much higher levels of response, ACR50, ACR70, DAS remission, et cetera. And we've seen that across two large Phase IIb studies, including a TNF-inadequate responder study, and those are the results that I mentioned in our opening comments. And there, we see a level of response in TNF-inadequate responders that we believe has the potential to be best-in-class. And so if you link that up with what I said about how RA dynamics play out, those data can be very important, and we believe that that is a big opportunity for this molecule. We do believe over time that 494 will certainly have use in earlier lines of therapy. But when you look at the balanced profile of 494, we feel very good about it. So moving on to ABT-122 and Ablynx, those are in mid-stage trials, and we'll see data from ABT-122 mid-year, and from Ablynx towards the back end of the year. And once we have those data, then that'll be the time to make decisions about next steps, so we'll be sharing those data as soon as it's reasonable to do so after we get them. Mark J. Schoenebaum - Evercore ISI : What are the hurdles for success in those trials? Michael E. Severino - Executive Vice President, Research & Development and Chief Scientific Officer : Well, our general approach has been that we believe we need to raise the standard of care. So what we're going to want to see is something that is over and above the level of efficacy that can be achieved with comparable agents, if you will. So ABT-122 combines 17 in TNF, so you're going to want to see something in the disease populations we've studied in RA and in psoriatic arthritis. It's better than one can get with those mechanisms alone. And Ablynx is another approach at IL-6, you'll see something that's better than the existing therapies that are out there. Now, obviously, these aren't comparative studies, but we'll have the data, we believe, to make those assessments and to determine whether we will advance those programs this year, as I've said. So, with Acerta, there certainly has been a lot of talk about Acerta given its relatively early stage of development. What I would say, first and foremost, is we've set a very high bar with IMBRUVICA. We've set a very high bar with efficacy and also with safety. I quoted some of the numbers from RESONATE-2. We don't believe we've left any room on the table for there to be a story of improved efficacy. And we feel very good about the safety profile of IMBRUVICA. With Acerta, we're looking at much earlier data. We're looking at Phase Ib, Phase IIa studies. I think the study that's garnered the most attention is about a 61-patient dose rising study with an expansion. And it's really just not possible to compare those very early trials to a molecule like IMBRUVICA which has multiple phases of readouts and has been on the market now for a considerable period of time. So we'll see as their programs continues to progress, what they're able to demonstrate. They have comparative studies, so a readout in a couple of years' time, and I think that's really the first time we'll be able to make any sort of comparative assessment. Those are open-label studies, and that's a limitation of them. And I'll also add that Acerta's comparative studies are in relapsed/refractory patients, and IMBRUVICA is moving to the front-line over time. And that momentum is going to keep up. So we feel very confident in our position with IMBRUVICA. Mark J. Schoenebaum - Evercore ISI : Thanks a lot. Richard A. Gonzalez - Chairman & Chief Executive Officer : The only other thing I'd add is – this is Rick. Mark J. Schoenebaum - Evercore ISI : Hey, Rick. Richard A. Gonzalez - Chairman & Chief Executive Officer : When we did the acquisition of Pharmacyclics, we did it with the knowledge of Acerta. So we thoroughly reviewed, based on the information we had at that time, the compound and evaluated whether or not we thought it was a risk. And I think one of the things to keep in mind is a follower strategy in oncology, at least historically, has not worked very well. And the reason it doesn't work very well is if the innovator keeps advancing the bar, the regulatory environment changes on the follower and what they need to do to be able to get their approvals, it's more difficult, takes more time, it's more expensive because it can't do single arm studies to get approval. The second thing I'd say is there seems to be two theses out there. One would be improved efficacy, one would be improved safety profile, particularly around bleeding and AFib. I wouldn't say that those are issues that are inhibiting our ability to be able to advance the brand and standard of care today. But what I'd also say is as we have evaluated it, we believe that the vast majority of the data would support that those are on-mechanism side effects. And so we'll have to see what their data proves out and we'll have to see what their inclusion and exclusion criteria is on the trials that they run to make sure it's a balanced view to be able to demonstrate what the bleeding AFib rate would be. And remember, we didn't see AFib in IMBRUVICA until we got to something like 1,500 patients or so. And I think we saw bleeding at about 500 to 600 something like that, right? So we have to see a lot more data to see a real signal, and it has to be in the population that's consistent with the population that's being treated. And we'll see what the data looks like, but I think the evidence today would suggest that those are on mechanism. And so we'll have to see how it plays out, but I would tell you that we're confident in our position with IMBRUVICA. Mark J. Schoenebaum - Evercore ISI : Thanks, Rick. Larry Peepo - Vice President- Investor Relations : Thanks, Mark. Next question, please. Operator : Our next question comes from Mr. David Risinger of Morgan Stanley. Sir, your line is open. David R. Risinger - Morgan Stanley & Co. LLC: Thanks very much. So, I wanted to go back to the positive IPR decisions. Could you please characterize the breadth of those two patents, the 157 and 158 patents which were surprisingly upheld? Specifically, you must have an opinion on the likelihood that other biosimilar manufacturers beyond Amgen will infringe these patents because it's challenging to make a stable monoclonal antibody without infringing. And then second, I'm interested in your perspective on duration of therapy for IMBRUVICA currently and how you expect that to evolve with new indications. And then also if you could share any thoughts on venetoclax on that front with respect to expected duration of therapy as well, that would be very helpful. Thank you. Larry Peepo - Vice President- Investor Relations : Thanks, David. Richard A. Gonzalez - Chairman & Chief Executive Officer : Yeah. David, this is Rick. On the IPR part, I guess what I'd say is it wasn't surprising to us. We obviously have a pretty high level of confidence in the IP. As far as others that would infringe, I mean, we're certainly not in a position to be able to answer that question because we don't know what their formulations are. I guess the best place to get that answer would be to ask them. But as I said, we're not going to talk a lot about how we're positioning things and how we plan on running the IPR process going forward. The most important thing here is that we prevail. And I realized that probably doesn't give you great comfort, but you have to recognize our responsibility is to make sure that we put the best position forward and that we don't tip off our opponents in this process as to what our strategy is. And so I apologize for that part of it, but that's the tradeoff we have to make here. And you're going to see more of this play out over time and I think you'll get a feel for it and you can get other people to evaluate what you think that will look like from an IP standpoint, although I'd say much like this particular patent, some people opine that they didn't think it was very strong and you saw at the patent office made their decision, right? So, I think that's about all we can talk about as it relates to the litigation. The second would be on duration on therapy on IMBRUVICA. If you look at the duration on therapy today, I'd say it's tracking on what we expected as part of the original deal model that we put together. To give you some flavor for that, I'd say it's about 75% of the clinical trial duration. It has been increasing over time. There are a number of elements that basically we've analyzed and have programs in place. Some of those are payer-related and some are other kinds of things that we have to continue to work through. I think one of the things that will be extremely helpful is the RESONATE-2 data here because now you have absolute data that supports that if you keep these patients on therapy for a longer period of time, then you get very good outcomes. And so I think not only from the standpoint of allowing us to be able to move into front line, but as another piece of strong, credible evidence that maintaining therapy over a longer period of time gives patients the benefit they were looking for. One of the things that we did see is in certain physician populations, from a duration standpoint, when blood counts improved, some physicians would take patients off of therapy. And obviously, that's not something that we would want. And so I think RESONATE-2 is a strong supporting set of data that will help give physicians the knowledge and information they need to be convinced that they should keep them on therapy even though the blood counts have improved. And then on venetoclax, I don't know. Mike, can you talk at all about that? I mean, it's a little hard to tell at this point. Michael E. Severino - Executive Vice President, Research & Development and Chief Scientific Officer : Yeah. I think – this is Mike. With respect to duration of therapy with venetoclax, I think it's early to make a statement because we're treating many different populations now in clinical trials. We have a large number of patients continuing on therapy, so those mean durations of therapy are increasing as the data set matures. So, I think we can't give a specific number. I think what we can say is that the responses we're seeing are very good. We're keeping patients on therapy. There's good durability of those responses. And as the data set matures and as we move to a label, I think we can update you on that. Larry Peepo - Vice President- Investor Relations : Thanks, David. David R. Risinger - Morgan Stanley & Co. LLC: Thank you. Larry Peepo - Vice President- Investor Relations : Next question, please, Sheryl? Operator : Our next question comes from Ms. Vamil Divan of Credit Suisse. Ma'am, your line is open. Vamil K. Divan - Credit Suisse Securities (USA) LLC (Broker): Yeah. It's actually – this is Vamil. Thanks so much... Larry Peepo - Vice President- Investor Relations : Thanks, Vamil. Vamil K. Divan - Credit Suisse Securities (USA) LLC (Broker): ...for taking my questions. Hi. How are you doing? I get it. All sorts of interesting moves with my name. But anyways, a couple of questions if I could. One, just in terms of hep C, I appreciate the comments you made for next year and how are you looking to that. Can you give us a sense have you've seen any impact on prescription trends from the label change that you had to make back near the start of the fourth quarter and if that's impacted things at all? And then maybe on the pipeline again, I appreciate all the comments that were made earlier also in response to Mark's question. Maybe if you could just streamline things a little bit and just flag, if you could, the two or three most important data releases that you think investors should be focused on for AbbVie between now and your June R&D day? Thanks so much. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. Vamil, this is Rick. I'll take the HCV one. We have seen an impact. Maybe the best way to describe it would be this, you saw what our revenues were in the fourth quarter. We had flagged that the $3 billion running rate in the fourth quarter that we thought we – I flagged that we might miss it, but we would be relatively close and that is what we have been tracking against for the fourth quarter. I'd say in the fourth quarter, there were two impacts, and one of them is going to be a label change. That's why I'm going through this explanation for you. So one was the VA volumes stayed very low through the fourth quarter because of the funding issue in the VA. And so that was one of the impacts. But then the second was, what we saw from collateral impact on the label. And I'd say we lost about one share point. So there was some bleed-over impact to other segments because the Child-Pugh B isn't worth one share point. It has stabilized now at that level. And so, I think the impact has flowed through, and we've assumed that in what we've built for 2016. But that's been the overall impact. Michael E. Severino - Executive Vice President, Research & Development and Chief Scientific Officer : And in terms of data releases to keep an eye on, as we said in our remarks, we're going to see results from the Elagolix endometriosis second pivotal study in the first quarter. We'll top line that, so that'll obviously be something to keep an eye out for. At EASL, we'll present a large amount of data on our next-generation hep C program, including 8-week and 12-week components of our Phase II program. So that'll be something to keep an eye on. And at ASCO, I would look to our data in CLL in venetoclax, and also AML and venetoclax as updates that we can keep an eye out for. Vamil K. Divan - Credit Suisse Securities (USA) LLC (Broker): Okay. Thank you. Larry Peepo - Vice President- Investor Relations : Thanks, Vamil. We'll take our next question, please. Operator : Our next question comes from Alex Arfaei of BMO Capital Markets. Your line is open. Alex Arfaei - BMO Capital Markets (United States): Good morning, folks, and thank you for taking the questions. Larry Peepo - Vice President- Investor Relations : Good morning. Alex Arfaei - BMO Capital Markets (United States): Obviously, there's quite a bit of skepticism about your 2020 HUMIRA guidance. And given what you said today about Europe and the fact that biosimilar competition will only increase there, can you help us understand how you get there, basically help us bridge the difference between where consensus is right now to your expectation for greater than $18 billion by 2020 for HUMIRA? And then I'm curious about what are some of the things that you'll be looking for during the upcoming Remicade biosimilar FDA panel? Thank you. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. So, Alex, this is Rick. If you think about what we described for you on the 2020 HUMIRA guidance ex-U.S., we basically said that we would see direct biosimilar competition in the fourth quarter of 2018. We'd have some impact from indirect biosimilar starting in 2016. I described earlier in the call what that impact assumption is for 2016. It will obviously have a flow-through impact into 2017, as that expands and basically flows through. But then, if you think about the erosion curve that I described on the third quarter call. So what we said was internationally, the brand will peak in 2018 and then it will gently start to decline and if you get to the end of 2020, it's down about 15% or so. That's a combination of volume and price. Now, I'd also tell you that because the category is still growing, obviously then the growth would have been there and some of that growth went to a biosimilar player. So it basically says, that about 30% of the total opportunity would have gone over that period of time. And, that's the point at which we see some level of stabilization going forward. So I think that's the way you would characterize it, and although we don't have direct knowledge of how each analyst builds consensus around their international and U.S. sets of assumptions, what I would say is the biggest difference between consensus and our forecast is that some people are still forecasting that HUMIRA sees biosimilar competition in the United States. The number is too big to be anything other than that, the change. So after our guidance, what we did see is we saw HUMIRA move up pretty significantly, but not all the way out to our 2020 forecast. So there are still some individuals who are assuming that they see biosimilar competition, probably now in that 2019 timeframe it's pretty much slid out to. So it's the difference between that and ultimately our assumption that we'll get through 2020 to 2022, right? And I think that's the biggest single impact. As far as the Remicade panel, I think as we've talked about internationally we've been watching this play out in the international markets and studying it carefully. And as we've indicated to the marketplace many, many times before, we're not seeing a direct impact on HUMIRA. And obviously, if you look at our growth rates in 2015 and you look at our growth rate in the fourth quarter, I think that's indicative of the fact that we're not seeing any substantial impact as well. And so we wouldn't assume that there would be an impact in the United States either. It really fits in a different category. I think the one thing that will be interesting to look at in the panel is we have assumed in our planning assumptions that biosimilar players get extrapolation. We don't agree with that. We think it's important for any drug to be tested in the indication that it's going to be used in and generate some clinical data. But I'd say we plan from a conservative standpoint that we will see extrapolation in all the major markets around the world. I think as we go forward here, if somehow we got an indication that that were not going to be the case in the United States that would be a positive to us. So that's one of the things we'll be looking at. Larry Peepo - Vice President- Investor Relations : Thanks, Alex. Operator, we'll take our next question, please. Operator : All right, sir. Thank you. The next question comes from Mr. Steve Scala of Cowen. Your line is open. Stephen M. Scala - Cowen & Co. LLC: Thank you. You mentioned the $2 billion in VIEKIRA sales in 2016. That is less than annualizing Q4 2015 sales, which were already a bit held back as you described a couple of minutes ago. So it seems as these expectations – or you're expecting a slowdown quarter-over-quarter in 2016, despite the launch in Japan. So, where are you expecting to see the pressure? Secondly, where specifically in Merck's hep C label does AbbVie see competitive advantages for VIEKIRA, if any? And then lastly, what has been the uptake of the new formulation of HUMIRA in the EU? Thank you very much. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. Steve, this is Rick. I'll take the first one. So, you are correct that if you look at what we're guiding going forward, it is less than our fourth quarter annualized. And that is our intent. I'd say there's two factors there. Let's be honest, we've had trouble predicting this number. And so we wanted to go into 2016 with a number that we had a very high level of confidence that we could hit, so that's certainly a component of it. The second component is we are assuming some level of competition from Merck. So, we'll have to see how it plays out, but I would say we're going to set this one at a number that we have a high level of confidence that we think we can deliver, and I'd much rather surprise you on the positive than sit here and apologize on the miss. And Mike, why don't you cover the label? Michael E. Severino - Executive Vice President, Research & Development and Chief Scientific Officer : Okay. Well, so recognizing that the Merck label has just come out, what I would say is we would look particularly at the impact of RAVs on response. And this is something we've been saying since the Phase III data were presented. The U.S. label recommends RAV testing for Merck and guides both regimen and treatment duration based on that. And with VIEKIRA, that's not the case. And also when we look at our next generation regimen and we look at activity in a number of pre-clinical systems in viruses that carry those resistance mutations we see very high levels of activity for our agent. So we think that that's going to be a strength for our programs going forward. Richard A. Gonzalez - Chairman & Chief Executive Officer : And then on your last question, we have not launched the new HUMIRA formulation internationally or in the U.S. We need a new pen device for this formulation. And so we have submitted the pen in both jurisdictions. We'll have to wait for that to get approved, once that's approved then we'll make our decisions on launching those. Stephen M. Scala - Cowen & Co. LLC: Thank you. Larry Peepo - Vice President- Investor Relations : Thanks. Next question please, operator. Operator : Our next question comes from John Boris of SunTrust. Your line is open. John T. Boris - SunTrust Robinson Humphrey, Inc.: Thanks for taking the questions and congratulations on the results. Richard A. Gonzalez - Chairman & Chief Executive Officer : Thanks, John. John T. Boris - SunTrust Robinson Humphrey, Inc.: First question has to do with the Japanese market. Are you anticipating any impact to your franchises from price decreases in Japan in April? The second question, what percent of HUMIRA revenues in U.S. and ex-U.S. come from rheumatoid arthritis? And can you give some color on timing around when the pen might see or secure approval? And then last question just has to do with ABT-494. It seems that competitively baricitinib and the developers there have latched on to an important area of diabetic nephropathy that appears to have an effect; that would be a very large untapped market. I'm sure you'll talk about this in June, but any thoughts around further broadening the development outside of RA for ABT-494? Thanks. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. So, John, this is Rick. I'll take the first one. So the Japanese market price adjustments, we are aware of it, it has been communicated to us. So it's built into our 2016 guidance. I don't think it's something we can tell you because really the Japanese authorities need to release that, not us. But I'd say it was in the range, slightly lower than we would have expected. So I think it's fine and as I said it's in the guidance already. But we are aware of what the number is. The HUMIRA indication mix, it was RA you said? William J. Chase - Chief Financial Officer & Executive Vice President : Yeah. RA, John, right now is just a bit under 35% of global sales. Richard A. Gonzalez - Chairman & Chief Executive Officer : And then the pen devices, they were submitted recently. So we're thinking second half of 2016. John T. Boris - SunTrust Robinson Humphrey, Inc.: Thanks. Richard A. Gonzalez - Chairman & Chief Executive Officer : And then ABT-494, Mike? Michael E. Severino - Executive Vice President, Research & Development and Chief Scientific Officer : Sure. This is Mike. So with respect to broadening out ABT-494 development, we obviously believe that ABT-494 has broad potential in RA. In other immunologically mediated conditions, we have programs underway in inflammatory bowel disease, and I think the data support that we're likely to see a good effect there. With respect to diabetic nephropathy, it's an intriguing idea. It's certainly something we consider. And perhaps that is a good topic for our R&D Day in June. Larry Peepo - Vice President- Investor Relations : Thanks, John. Appreciate the question. Next question please, operator? Operator : Our next question comes from Colin Bristow of Bank of America. Your line is open. Colin N. Bristow - Bank of America Merrill Lynch : Morning, and thanks for taking the questions and all the useful color. So first on HUMIRA, just in the 4Q, can you comment specifically or at least qualitatively on the level of rebating in the quarter and how it compares year-over-year and sequentially? Second on hep C, can you give us some idea of the number of contracts perhaps as a proportion of 2015 which you secured with exclusivity for 2016? And then thirdly, and sorry if I missed this, but on the HUMIRA ex-U.S. front, can you give us an update on the impact you're seeing from biosimilar Remicade? I think previously you said around 3% share. And then just following on from that theme, how do you anticipate the threat from the biosimilar Enbrel given that it's an injectable versus an infusion? Thanks. William J. Chase - Chief Financial Officer & Executive Vice President : Colin, it's Bill Chase. On the rebating around HUMIRA, obviously, we don't go to any great lengths explaining the levels of rebating. What you need to think about with our pricing dynamic on HUMIRA is price increases in the latter half of the year tend to have less of a fall through that's related to basically pricing caps in certain programs. So to the extent that we take price later in the year, our rebate goes up for those particular programs, but I don't want to get into any specific numbers around that at this point in time. Richard A. Gonzalez - Chairman & Chief Executive Officer : On the HCV contracting, when we originally launched and the exclusive contracts that we had were multiyear contracts with the exception of the Medicaid contracts which many of those are annual contracts, get bid out on a yearly basis. So I'd say, certainly, the majority of our business is under a multiyear contracting strategy. On HUMIRA, Remicade, I may not have heard the question correctly, but we haven't communicated that it had a 3% impact, in fact it had virtually no impact on our business. Overall, if you look at their overall biologic share is somewhere around 3%, but the vast majority of that has come from Remicade. And then Enbrel is what I described earlier that we are anticipating about a 2% impact from a growth rate standpoint. The majority of that, the vast majority of that is price. There are certain markets where there will be a price impact. Colin N. Bristow - Bank of America Merrill Lynch : Great. Thank you. Larry Peepo - Vice President- Investor Relations : Thanks, Colin. And operator, we have time for one more question please. Operator : All right, sir. Our last question comes from Mr. Andrew Baum of Citi. Sir, your line is open. Andrew S. Baum - Citigroup Global Markets Ltd.: Thank you. Three questions, please. Firstly, you've expressed previously your confidence in the robustness of the 135 patent within the U.S. and I know it had a very lengthy prosecution history to attain inclusion in the USPTO. Could you contrast that with the withdrawal of the similar patents from Europe? What underpins the confidence in the U.S. building on the lengthy prosecution, if you'd like to comment? Second, perhaps if you could go into a little bit more detail in terms of the reference pricing for anti-TNF agents within Europe. What was the thinking of the impact of Enbrel in dragging down the prices of the category? And then finally, just on Acerta's BTK inhibitor, do you believe that they infringe AbbVie's intellectual property? Thank you. Larry Peepo - Vice President- Investor Relations : Thanks, Andrew. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. On the 135 patent as I said before, I mean we're not going to go through a lot of detail back and forth. But one thing I do want to clarify is remember, IP in Europe is different than IP in the United States in how it is ultimately prosecuted. The second thing is, it's important to remember that although we withdrew the parent patent, we did it because there was one particular assay that we had a second patent that didn't have that question and therefore we pulled that patent in order to basically just focus on these other patents. So it's not like we withdrew it because we were concerned about it. And so ultimately – but that is not an issue from a U.S. standpoint, and I think that's probably as much as we're going to talk about it. Reference pricing, obviously part of what I indicated earlier is reference price, but I'd say also there are some markets where there could be some hospital negotiations also that could have an impact here. And so we factored in what we think is certainly a conservative number. But I think it's an appropriate number to be able to ultimately plan for 2016. And then on Acerta BTK, the IP, again, we have significant IP in this area. And if we believe Acerta infringes that IP, we'll enforce the IP. Andrew S. Baum - Citigroup Global Markets Ltd.: Thank you. Larry Peepo - Vice President- Investor Relations : Thanks, Andrew. Larry Peepo - Vice President- Investor Relations : And that concludes today's conference call. If you'd like to listen a replay of the call, please visit our website at abbvieinvestor.com. Thanks again for joining us. Operator : That concludes today's conference. Thank you for participating. You may now disconnect.
ABBV	AbbVie	1,551,152	Health Care	Biotechnology	North Chicago, Illinois	2013 (1888)	2012-12-31	2,016	2	2016Q2	2016Q1	2016-04-29	4.38	4.47	5.129	5.25	8.07816	10.55	10.73	Executives: Larry Peepo - Vice President-Investor Relations Richard A. Gonzalez - Chairman & Chief Executive Officer Michael E. Severino - Executive Vice President, Research & Development and Chief Scientific Officer William J. Chase - Chief Financial Officer & Executive Vice President Henry O. Gosebruch - Chief Strategy Officer & Executive Vice President Analysts : Jeffrey Holford - Jefferies LLC Christopher Schott - JPMorgan Securities LLC Jami Rubin - Goldman Sachs & Co. David R. Risinger - Morgan Stanley & Co. LLC Marc Goodman - UBS Securities LLC Andrew S. Baum - Citigroup Global Markets Ltd. John Scotti - Evercore ISI Alex Arfaei - BMO Capital Markets (United States) Operator : Good morning, and thank you for standing by. Welcome to the AbbVie First Quarter 2016 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion of this call. I would now like to introduce Mr. Larry Peepo, Vice President of Investor Relations. Larry Peepo - Vice President- Investor Relations : Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Executive Vice President of Research & Development and Chief Scientific Officer; and Bill Chase, Executive Vice President of Finance and Chief Financial Officer. Henry Gosebruch, our Chief Strategy Officer, will be joining us for the Q&A portion of the call. In addition to our earnings release this morning, we have also issued a press release announcing our acquisition of Stemcentrx. You can find a set of slides on our website that provide an overview of the transaction. Before we get started, I remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about the factors that may affect AbbVie's operations is included in our 2015 Annual Report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to release publicly any revisions to the forward-looking statements as a result of subsequent events or developments, except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand AbbVie's ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll now turn the call over to Rick. Richard A. Gonzalez - Chairman & Chief Executive Officer : Thank you, Larry. Good morning, everyone, and thank you for joining us today. This morning, I'll discuss our first quarter performance and provide an overview of the Stemcentrx acquisition, which we announced earlier today. Mike will provide updates on recent advancements across our R&D programs, and Bill will discuss the quarter and our 2016 guidance in more detail, including the financial aspects of Stemcentrx' transaction. And as always, following our remarks, we'll take your questions. We delivered another strong quarterly performance, including adjusted earnings per share of $1.15, representing growth of more than 22% versus the first quarter of 2015. Our results included strong operational sales growth of 22.4% driven by a number of products across our portfolio. This includes HUMIRA global operational growth of more than 19%, strong growth from IMBRUVICA, continued global uptake of VIEKIRA, and strong performance from several other products in our portfolio, including CREON and DUODOPA. We also continued to deliver improvements in our operating margin profile. In addition to our strong financial results, we also advanced several of our key strategic priorities. Late in the quarter, we secured FDA approval for IMBRUVICA as a first-line treatment for patients with CLL. We're roughly one month into our first-line launch, and we're pleased with our progress to-date. The National Comprehensive Cancer Network, or NCCN, recently published an updated view of its guidelines, granting IMBRUVICA a category 1 recommendation for certain CLL patients, the highest recommendation assigned by the organization. We are also approaching the one-year mark for Pharmacyclics, and we continue to be very pleased with the progress we've made to-date. The Pharmacyclics team continues to rapidly advance trial activity, exploring IMBRUVICA across a broad range of tumor types. IMBRUVICA offers significant growth potential through its expanding list of indications and lines of therapy, and we remain excited about the vast potential for this unique asset. Earlier this month, we received FDA approval for another transformative therapy for the treatment of CLL. Venclexta, our novel BCL-2 inhibitor, was approved for patients with relapsed/refractory CLL who harbor the 17p deletion, a difficult to treat form of the disease typically associated with poor prognosis. Based on the level of efficacy in this patient population, the FDA granted the approval under its Breakthrough Therapy and Priority Review designations. Since the beginning of the year, we've also reported compelling data from several development programs, including positive top-line results from our second pivotal Elagolix trial in endometriosis and strong data from our next-generation HCV program. Mike will provide updates on both programs during his remarks in just a few moments. We also augmented our pipeline with a late-stage asset with a global collaboration with Boehringer Ingelheim to develop and commercialize an anti-IL-23 currently in Phase 3 development for psoriasis and mid-stage development for several additional indications. The agreement provides AbbVie with another potential best-in-class late-stage asset adding to our immunology pipeline, which includes our selective JAK1 inhibitor, ABT-494, currently in Phase 3 development for RA as well as several other biologics that are in mid-stage trials. Based on its potential for best-in-class efficacy, we believe the BI asset could generate multibillion dollars in peak year revenues across several immune-mediated diseases. Clearly, the most notable and exciting news today is our planned acquisition of Stemcentrx. We could not be more pleased to have this talented group of individuals join our organization. We have been tremendously impressed with their accomplishments to-date, and their innovation and expertise will drive strong benefits for AbbVie going forward. The addition of Stemcentrx is a strategically compelling opportunity for our company, our shareholders and the patients which we serve. Over the past several years, we've taken a number of steps to build and strengthen our position in oncology research and development with the objective of becoming a leading oncology company. We've advanced numerous promising pipeline assets, including our BCL-2 inhibitor for blood cancers and our PARP inhibitor, an anti-EGFR antibody drug conjugate in development for solid tumors. We've strengthened our discovery efforts through collaborations with leading academic and other institutions around the world. We've added top talent to our R&D organization. Last year, through the acquisition of Pharmacyclics, we obtained IMBRUVICA, a first in class BTK inhibitor which has already achieved blockbuster status and is on a trajectory to achieve multibillion dollar peak-year sales. And as I mentioned earlier, we just launched our internally developed Venclexta, which adds another transformational therapy to our hematological oncology franchise. We view oncology as a significant pillar of growth for AbbVie going forward. And as we evaluate all opportunities, we do so with the desire to balance near-term performance while continuing to build a portfolio of assets that will generate strong growth in 2020 and beyond, supporting our commitment to drive top-tier performance over the long term. So that brings me to our announcement today, the acquisition of Stemcentrx, which gives AbbVie a highly attractive platform for solid tumors and an extremely exciting late-stage asset in Rova-T. The transaction enables AbbVie to further expand and accelerate our presence in oncology, building upon our growing position in hematological oncology. Stemcentrx' proprietary solid tumor platform leverages cancer stem cell biology to identify and validate novel therapeutic targets. The company has demonstrated a track record of successfully engineering and manufacturing antibodies and antibody drug conjugates for those targets. Stemcentrx' lead asset is Rova-T, a DLL3 targeted antibody drug conjugate. DLL3 is a novel target expressed in several tumor types, including small cell lung cancer, an aggressive and difficult to treat disease. Small cell lung cancer accounts for roughly 15% of all lung cancers, and more than 60,000 patients are diagnosed annually in the major developed markets. DLL3 is the first predictive biomarker associated with drug efficacy in small cell lung cancer. It is highly expressed in a majority of small cell lung cancer tumors as well as cancer stem cells, and is not expressed in normal tissue. Predictive biomarkers help identify which patients have the potential to benefit from a therapy. Rova-T is currently in registrational trials for third-line small cell lung cancer. There's a significant unmet need for this patient population as the treatment landscape has not changed for several decades. In fact, there is currently only one approved treatment for second-line small cell lung cancer and no approved agents for third-line use. The five-year survival rate for patients diagnosed with this type of cancer is unfortunately very low at approximately 6%. Last year at the European Society of (sic) [for] (10:49) Medical Oncology Meeting, Stemcentrx presented exciting Phase 2 results in small cell lung cancer, including data that illustrated an overall response rate of 44% in a DLL3 biomarker-defined population. Rova-T also demonstrated a clinical benefit rate of 78% in this refractory and difficult-to-treat set of patients. Response rates were similar in third-line and second-line patients with a manageable safety profile. These landmark data represent the first time a biomarker targeted therapy has shown significant efficacy in small cell lung cancer. Additional data from a broader set of patients and longer-term follow-up, including compelling overall survival results, will be disclosed during an oral session at the upcoming ASCO meeting in June where the abstract has been selected as a Best of ASCO presentation, a distinction only 1% of abstracts receive. Given the very promising efficacy in third-line small cell lung cancer, Stemcentrx recently filed for FDA Breakthrough designation for this setting. Based on the compelling data and the significant unmet need in this patient population, we're certainly hopeful that we will be successful in obtaining this status. Stemcentrx has moved rapidly through clinical development in third-line small cell lung cancer, from the initiation of the first in-human trials to the recent start of the registration-enabling study. Based on the expected completion of the ongoing registrational trial, commercialization of this indication is expected in 2018. Stemcentrx is also moving to rapidly advance into front-line small cell lung cancer. Mike will provide more detail on the planned first-line program in just a few moments. Like HUMIRA and IMBRUVICA, we believe Rova-T has the potential applicability across a broad range of indications and tumors. In addition to small cell lung cancer, expression of DLL3 indicates Rova-T may be useful across multiple solid tumor types, including metastatic melanoma, glioblastoma multiforme, as well as some prostate, pancreatic and colorectal cancers, among others. There is a significant subset of patients whose tumors are positive for DLL3 expression within this broader set of tumors, representing more than 65,000 patients treated annually. We plan to evaluate Rova-T across numerous indications, leveraging our R&D infrastructure and global clinical trial organization to move rapidly and efficiently. The acquisition of Stemcentrx also broadens AbbVie's oncology pipeline with a portfolio of earlier-stage candidates focused on novel oncology targets. In addition to Rova-T, the Stemcentrx pipeline includes four clinical candidates being evaluated in trials across a range of solid tumors, as well as two additional INDs for new targets planned for 2016 and a broad portfolio of validated pre-clinical targets. Stemcentrx also enhances AbbVie's oncology discovery capabilities. The technology platform that identified Rova-T and the other assets in the Stemcentrx pipeline has strong potential for continued asset generation and will strengthen AbbVie's discovery and development efforts in solid tumors going forward. So as we summarize the transaction, the addition of Stemcentrx is strategically compelling. The acquisition is highly complementary with our growing hematologic oncology franchise and existing portfolio of solid tumor assets. The lead asset, Rova-T, represents a multibillion-dollar peak revenue opportunity with revenue potentially approaching $5 billion as we advance into first-line small cell lung cancer and other indications. Rova-T has the potential to have a dramatic impact on our growth over the long term. Additionally, Stemcentrx' existing pipeline of additional assets in their R&D engine will augment our future development efforts in solid tumors. Stemcentrx adds to AbbVie's long-term growth prospects, providing another compelling growth platform that will further diversify our revenue base beginning in 2018 and will enhance our EPS growth starting in 2020 and beyond. Stemcentrx fits well within our overall strategy. We have now assembled a significant number of late-stage assets which have been significantly de-risked, have multibillion dollar potential and the potential to drive sustainable growth in 2020 and beyond. Assets including IMBRUVICA, Venclexta, ABT-494, ZINBRYTA, Elagolix, the next-generation HCV combination, our recently in-licensed anti-IL-23, and now Rova-T. All of these assets have a high probability of regulatory and commercial success. In closing, we continue to be pleased with our strong execution and strategic advancement. We continue to demonstrate an exceptional track record of success with positive clinical data and regulatory outcomes, and we look forward to additional important pipeline milestones in the year ahead. We're off to a strong start this year, and we intend to build upon our momentum to drive a high level of performance across our operations and deliver strong growth in 2016. And we remain committed to delivering on the long-term objectives that we outlined last year. With that, I'll turn the call over to Mike for additional comments on our R&D programs. Mike? Michael E. Severino - Executive Vice President, Research & Development and Chief Scientific Officer : Thank you, Rick. We had a very productive first quarter from an R&D perspective, with a number of important data readouts, Phase transitions and regulatory approvals, as well as licensing activity. This morning, I'll provide color on some of the key highlights. I'll start by saying that I certainly share Rick's enthusiasm for Stemcentrx, which brings us a promising late-stage program with Rova-T, a pipeline of earlier-stage candidates and a platform technology that will enhance our future solid tumor discovery and development efforts. We very much enjoyed our dialogue with the Stemcentrx team as we've gotten to know them over the past several months, and we've been impressed with the individuals and the innovative platform they've built. Stemcentrx has established an impressive track record. The company's first three clinical stage drugs each represent novel targets with single agent activity demonstrated in the early phase trials in small cell lung cancer, triple negative breast cancer and ovarian cancer, all difficult-to-treat solid tumor indications. Stemcentrx's highly productive discovery effort is driven by the company's core technology, which utilizes a library of more than 700 patient-derived tumor xenograft models and leverages cancer stem cell biology to identify and validate therapeutic targets that would be overlooked by other methods. This platform has yielded impressive results to-date, and we are excited about the potential for continued asset generation, which will aid AbbVie in our R&D efforts going forward. The company's lead asset, Rova-T, represents a significant opportunity not only through its lead indication third-line small cell lung cancer, but also through the potential for expansion into the front-line setting, as well as other types of cancer where DLL3 plays an important role. Stemcentrx has a broad development program for Rova-T currently underway. We've been impressed with the speed with which Stemcentrx has moved through the clinic. It's been roughly four-and-a-half years since target identification and less than three years between filing the Rova-T IND to the initiation of the registration study in third-line small cell lung cancer. The confirmatory third-line trial, which is called TRINITY, began in January and is expected to complete enrollment by the end of 2016, with commercialization expected in 2018. We view the Rova-T small cell lung cancer program as significantly de-risked with a high profitability of success. In addition to the overall response data presented at ESMO last year, which showed an overall response rate of 44% in DLL3 positive patients, the profile of Rova-T is supported by longer-term data, some of which will be presented at the upcoming ASCO meeting. These updated data include promising overall survival findings that compare favorably to historical controls. We believe the full body of data generated to-date are highly compelling and strongly support the value proposition of Rova-T. Stemcentrx is also moving rapidly into front-line small cell lung cancer with Rova-T. The company is on the cusp of initiating a study designed to select the optimal regimen for the front-line registrational program. This four-arm trial will evaluate several permutations of Rova-T and standard-of-care chemotherapy, including both monotherapy and combination arms. Given the compelling data we've seen in small cell lung cancer to-date, we believe there is a high likelihood of successfully moving into earlier lines of therapy. Stemcentrx is also evaluating an eight-arm 400 patient basket study, which will look at Rova-T as monotherapy in patients with a range of tumor types that share neuroendocrine features, including malignant melanoma, medullary thyroid cancer, glioblastoma, large cell neuroendocrine carcinoma, and forms of prostate cancer and other solid tumors. This study is on track to start enrolling patients this quarter. Additional first-line studies are planned, including a Phase 1 study to assess the safety of Rova-T in combination with antibody therapy targeting the PD-1/PD-L1 axis, which is on track to be initiated during the second half of 2016. Clearly, prior to the Stemcentrx acquisition, AbbVie was already focused on establishing a strong position in oncology. Since the company was established in 2013, we've added 10 new oncology assets through internal advancement or partnership efforts. The Stemcentrx acquisition accelerates our objective of becoming a leading oncology company. We look forward to spending more time discussing Stemcentrx, including their pipeline, at our upcoming R&D Day in June. In addition to the Stemcentrx acquisition, last week we also announced two early-stage oncology collaborations, including an agreement with argenx for a novel immuno-oncology target, GARP, and an agreement with CytomX to develop Probody drug conjugates, a platform which provides another differentiated opportunity to combine with our strength in antibody drug conjugates. Beyond oncology, as Rick noted, we also recently entered into a global agreement with BI to develop and commercialize risankizumab, an anti-IL-23 monoclonal antibody in Phase 3 development for psoriasis, and mid-stage development for several additional indications. The collaboration positions this promising asset as AbbVie's lead investigational compound in psoriasis, and complements our robust immunology pipeline. Recent Phase 2 study results for risankizumab in patients with moderate to severe plaque psoriasis showed improved efficacy over STELARA, a commonly used treatment for this life-impacting skin condition that was included in the study as an active comparator. Specifically, the strong head-to-head results showed that at 12 weeks 81% of patients treated with 180mg of the BI compound achieved PASI 90, more than double the rate achieved by patients treated with STELARA. And 50% of the patients treated with the BI compound achieved complete skin clearance, or PASI 100, versus just 17.5% of the STELARA-treated patients. We're pleased with this level of efficacy as our immunology development strategy is centered upon identifying treatments that offer differentiated profiles relative to currently available therapies with the goal of continuing to raise the standard of care. Beyond the impressive efficacy, this asset also has the potential to offer a favorable dosing profile with subcutaneous quarterly administration. The BI compound is also currently in Phase 2 development for psoriatic arthritis in Crohn's disease, with plans to initiate a Phase 2b study in psoriatic arthritis in mid-2016 and the potential to transition into Phase 3 development in Crohn's disease next year. We will present mid-stage Crohn's disease induction data at the upcoming Digestive Disease Week, or DDW, meeting next month. We've also disclosed positive results for several late-stage programs, including, most recently, additional data on our next-generation HCV regimen. Earlier this month at The International Liver Congress in Barcelona, we presented data on our pan-genotypic, once-daily, ribavirin-free combination of ABT-493 and ABT-530 in patients with genotypes 1 through 6, including data on treatment durations as short as eight weeks. The data illustrate that with eight weeks of treatment, 97% to 98% of genotype 1 through 3 patients without cirrhosis achieve sustained virologic response at 12 weeks post-treatment. Additionally, 100% of genotype 4 through 6 patients without cirrhosis achieved SVR12 with 12 weeks of treatment. We also presented late-breaking data showing our next generation combination drove 100% SVR12 with 12 weeks of treatment without ribavirin in treatment naïve genotype 3 patients with compensated cirrhosis. While recent advancements in HCV treatment have resulted in high cure rates for many patients, there remain distinct areas of unmet need, including patients with genotype 3. These new data illustrate the potential of our next-generation combination to address this need. Another area of unmet need is patients who have failed previous therapy with direct-acting antivirals, or DAAs, as retreatment options for these patients are limited. We presented data showing that 95% of genotype 1 patients who failed previous therapy with DAAs achieved SVR12 with 12 weeks of therapy without the need for ribavirin. The mid-stage data we've disclosed to-date indicates that our new HCV combination can deliver cure rates approaching 100%, and we believe the majority of patients will be well served with an eight-week treatment option. We expect to see results from the pivotal studies in the second half of this year and we remain on track for commercialization next year. We also announced positive top-line results from the second of two replicate pivotal Phase 3 clinical trials evaluating the efficacy and safety of Elagolix in pre-menopausal women who suffer pain from endometriosis. Trial results showed that after six months of continuous treatment, both doses of Elagolix met the study's co-primary endpoints with Elagolix reducing scores of menstrual pain and non-menstrual pelvic pain at month 3 and month 6. We intend to present detailed results from both Phase 3 trials at a medical conference later this year, and we will complete the clinical database in anticipation of a New Drug Application submission for endometriosis in 2017. We also continue to advance the Elagolix development program in uterine fibroids. During the quarter, we initiated a Phase 3 program investigating the effect of Elagolix on heavy bleeding related to this highly prevalent condition. As Rick noted, we received two important approvals within our hematologic oncology portfolio as well. The expansion of the IMBRUVICA label into first-line use for CLL and the initial approval of our novel BCL-2 inhibitor, Venclexta. With IMBRUVICA and Venclexta, we now have two therapies on the market for the treatment of CLL addressing a range of patient types. We continue to advance our development efforts for IMBRUVICA, Venclexta and several other assets in our oncology pipeline. We'll present data across a wide range of studies at the upcoming ASCO meeting. We've built a strategic portfolio of oncology assets, including multiple mechanisms of action, that have significant potential alone and in combination. So in summary, we continue to make significant progress with our pipeline and are on track for further advancements in 2016. We have a broad pipeline that includes more than 50 active clinical assets, including more than 20 new products or indications in late stage development or under regulatory review. We look forward to covering our full pipeline in more detail at our R&D Pipeline Review to be held in Chicago on June 3. We hope you will join us. With that, I'll turn the call over to Bill for additional comments on our first quarter performance. Bill? William J. Chase - Chief Financial Officer & Executive Vice President : Thanks, Mike. As Rick said, we are very pleased with the strong quarter we delivered. Net revenues were up 22.4%, operationally, and we expanded our adjusted operating margin profile by 300 basis points to 43.1% of sales. We reported adjusted earnings per share results of $1.15, up 22.3% over the first quarter of 2015. Strong operational revenue growth in the quarter was in line with our guidance for growth of just above 20%. Foreign exchange had a negative 4.2% impact on revenue in the quarter, also in line with our guidance of roughly 4% negative exchange. We continue to see strong momentum from HUMIRA, which delivered global sales of more than $3.5 billion, up 19.2%, operationally, excluding the impact of foreign exchange. In the U.S., HUMIRA sales were nearly $2.2 billion, reflecting exceptional growth across all three major categories : rheumatology, gastro, and derm. Internationally, HUMIRA sales were nearly $1.4 billion in the quarter, up 4.6% on an operational basis, excluding an unfavorable impact from exchange. This exceeded our previous forecast of 3% operational growth. Currency reduced reported international HUMIRA sales by 9.2%. While early in the launch, the Enbrel biosimilar is tracking in line or favorable to what we had modeled. Global IMBRUVICA net revenues were $381 million in the quarter. U.S. sales were $325 million, and our international profit sharing was $56 million. Global VIEKIRA sales in the quarter were $414 million. The launch of Viekirax, our two-drug, once-daily, ribavirin-free combination for patients with HCV genotype 1b is underway in Japan leading to a continued higher mix of international sales on the quarter. Global sales of Duodopa, our therapy for advanced Parkinson's disease, grew 36.7% on an operational basis in the quarter. We saw continued double-digit growth internationally for Duodopa with a modest level of U.S. sales, as expected. Global Creon sales were $150 million, up 18.2% operationally. Creon continues to maintain its leadership position in the pancreatic enzyme market with the majority of the market share. The adjusted gross margin ratio was 81.3% of sales in the first quarter, which was impacted by the Pharmacyclics transaction and year-over-year impacts of foreign exchange. Excluding these impacts, the ratio was up over 200 basis points. As I mentioned earlier, we continue to show improvement in our adjusted operating margin profile, which increased to 43.1% of sales, up 300 basis points. Excluding the impacts of Pharmacyclics and foreign exchange, operating margin improved over 600 basis points versus the prior-year quarter. The majority of this improvement was driven by efficiencies and our rapidly growing top line. Adjusted R&D was 15.6% of sales, reflecting funding actions in support of our pipeline assets. Adjusted SG&A was 22.6% of sales in the first quarter, down significantly from the prior year on a profile basis, contributing to continued improvement in operating margin leverage. Adjusted net interest expense was $200 million, and the adjusted tax rate was 20.7% in the quarter. First quarter adjusted earnings per share, excluding non-cash and tangible amortization expense and specified items, were $1.15, up 22.3% year-over-year. During the quarter, as a result of the economic conditions in Venezuela and the lack of availability of U.S. dollars at the government's official exchange rate, we changed the exchange rate we use in Venezuela to the floating DICOM rate. This resulted in a charge of $298 million related to a devaluation of our net monetary assets in Venezuela. This will also impact revenue booked for products sold in Venezuela. I would like to now walk you through the financial aspects of the Stemcentrx transaction. We are acquiring Stemcentrx for $5.8 billion, with the consideration to be paid out as $3.8 billion in equity and $2 billion in cash. The use of equity in this transaction reflects Stemcentrx' management and board of directors' desire to retain a stake in the asset, as well as achieve a tax-deferred structure. Upon closing, we plan to execute an accelerated share repurchase program to reacquire all of the newly-issued equity. We anticipate the transaction to close late in the second quarter. We are forecasting $0.20 of dilution in 2016 as a result of the transaction, which represents a half year of R&D operating and interest expense. We plan to provide specifics on Stemcentrx's impact on our P&L profile during the second quarter earnings call in July. We expect the transaction to generate positive operating margin beginning in 2019 and EPS accretion starting in 2020. Given these facts, we are updating our 2016 adjusted earnings per share guidance range to $4.62 to $4.82 to reflect the Stemcentrx transaction. This range reflects EPS growth of 10% at the midpoint and includes the previously-communicated $0.08 dilutive impact of the BI collaboration announced last month. It excludes $0.75 of intangible amortization and specified costs. Specified items related to the Stemcentrx acquisition will be quantified and included on our second quarter call. Regarding the second quarter, we expect adjusted earnings per share of $1.19 to $1.21. This excludes roughly $0.18 of specified items and noncash amortization and includes the BI and Stemcentrx dilution impacts. We are expecting mid-teens operational sales growth, excluding a roughly 2% negative foreign exchange impact on the quarter. As a result, we are expecting low-teens sales growth on a reported basis. We are forecasting 3% operational growth for International HUMIRA in the second quarter. Excluding Venezuela, this growth would have exceeded 5%. We currently expect a negative 4% currency impact on International HUMIRA in the second quarter, resulting in a modest decline year-over-year on a reported basis. However, we remain on track with our previously communicated full-year guidance for HUMIRA outside the U.S., including the mid-single-digit operational growth expected internationally. So in conclusion, we are very pleased with our performance in the quarter as we've driven strong top and bottom line growth and delivered operating margin expansion, while also advancing on our strategic priorities. This puts us in a strong position to continue delivering industry-leading growth this year. And with that, I'll turn it back over to Larry. Larry Peepo - Vice President- Investor Relations : Thanks, Bill, and we'll open the call for questions, now. Jay, we'll take our first question, please. Operator : Thank you. We'll now being the question-and-answer session. Our first question comes from Jeff Holford from Jefferies. Your line is now open. Jeffrey Holford - Jefferies LLC : Good morning, everybody, and thanks very much for taking my questions. So, just for Stemcentrx, just because it's a company we all don't know so well, can you just help us a little bit more on the valuation? Was it primary driven by the last financing round that you cite or other things in terms of peak sales expectations of visible assets that's driving that? Secondly, also, just on that transaction, how much data beyond what's been publicly disclosed, i.e. some of the data perhaps that's coming to ASCO, was management able to see before agreeing to this deal? And then, my last question is just around the upcoming IPR decisions. Can you just confirm timing and expectations there, 18th of May, and do you expect these decisions to be consolidated? And then, just secondly to that, there's a patent adjustment out there that potentially takes the 135 patent out to 2028. If and when that's granted, which seems to be procedural, will you extend your HUMIRA exclusivity guidance on the back of that? Thank you very much. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. Hi, Jeff, it's Rick. So, I'll take, I guess, all of those questions. So, as it relates to the valuation, I would say it had nothing to do with what their prior round valuation was. That's not how we do acquisitions. Essentially, how we do acquisitions, and you probably recall this from the Pharmacyclics discussion that we had, and I think it's typical within our industry how it's done, is you build a model that ultimately projects out what you think the company and assets can do. And then, off of that model you determine what the return would look like at various price points, what the NPV would look like and, ultimately, you have a threshold at which – the way we do it is we have a threshold at which we say we won't go above. And then, we get into the process and ultimately try to validate those assumptions and make a decision as to whether or not we want to go forward. And if we want to go forward, then we'll obviously negotiate as hard as we can to try to get it at the lowest possible price, but most of these are a competitive kind of situation. So what I would tell you about this transaction is that I believe it is at a very good valuation for us. It has a good NPV based on the base case, which was essentially on second- and third-line small cell lung cancer and a couple of other indications, and it has significant upside if we move to first-line or more broadly across those cancers that are DLL3 positive. Now, those trials are ongoing, so we don't have that data; so we didn't necessarily build all of those in. If that were to occur, you probably saw there's a CDR for first-line that the investors would receive. But I would tell you first-line will have a very, very strong NPV above and beyond what we factored in here. But with the base case, this has a very good NPV and a very good IRR. So I can just tell you I feel good about the valuation. As far as the data is concerned, we have seen a significant amount of data above and beyond what is public now. We obviously need to be careful about what we talk about, because some of that data will be presented at the ASCO meeting. I think we've given you a pretty good idea of what you're likely to see at the ASCO meeting, but I can tell you that we have seen all the data that was available to the management team and we're impressed with that data. So I can tell you I'm very, very excited. We've looked for quite some time, now, for a solid tumor platform play, and they're hard to find in this market. And I think if you look at the productivity of this group and the novel therapeutic targets that they have been able to come up with, and their hit rate on those targets is significantly above industry average, and the way they approach it is pretty impressive, and the fact that this is focusing to a great extent on cancer stem cell. And I think there's a strong belief that if you can knock out in certain cancer stem cells, you can dramatically impact the course of that disease for those patients. And I think the data will speak for itself when it's available, and you can take a look at it. So we're impressed with this. I think – we think Rova-T is a very good asset and gives us a good strong position in solid tumors going forward. On the IPRs, as we've said before, we're not going to talk a lot about the process now that we're in litigation. I can answer maybe one or two of these questions. We don't have the ability to predict the timing. You have the date correct, that you described. So it should occur sometime no later than that date. We don't know whether they'll be consolidated or not. And we're not going to comment on the issuance of the patent and what we would do in that scenario. Okay? Jeffrey Holford - Jefferies LLC : Thanks very much, and congratulations on the deal. Larry Peepo - Vice President- Investor Relations : Yeah. Thanks, Jeff. Next question please. Operator : Thank you. Our next question comes from Chris Schott from JPMorgan. Your line is now open. Christopher Schott - JPMorgan Securities LLC : Great. Thanks very much. Just a couple on the deal today. Maybe first, can you just talk about the competitive landscape for the DLL3 target or just other companies working on cancer or stem cells as an ADC target? Second question was on the $0.20 of dilution this year. I'm just trying to get a sense of what this is going to look like out in 2017. Should we be thinking about something larger than $0.40 as we get the full year impact and as you ramp R&D associated with these assets? And then, the final one was just, post this deal, can you just give us some sense of the position the company is to pursue larger transactions if the right opportunity were out there? Should we think about Stemcentrx is the type of size and profile you're looking for? Or could you look to get more aggressive as the year kind of – or as we go to 2017 if the right deal is out there? Thanks so much. Michael E. Severino - Executive Vice President, Research & Development and Chief Scientific Officer : So, this is Mike. I'll take the first question with respect to the competitive environment for Rova-T and some of the other programs that Stemcentrx has been working on. And what I'll say is that one of the things that really impressed us with Stemcentrx is the novelty of their platform. They've invested early in this technology. They have developed great expertise. And they are out in the lead in all of the areas that they're pursuing. So DLL3 is out in the lead. It's demonstrated very compelling results, and we think it's an asset that has tremendous promise and will really change the standard of care. And I think if you look at all of the programs that Stemcentrx is advancing, there's a high degree of novelty and very strong signs of activity from the first three clinical programs. So, we vary – we feel very good about their position in the competitive environment. William J. Chase - Chief Financial Officer & Executive Vice President : So on the dilution, as we've said, the $0.20 this year represents roughly a half year of the current burn rate that Stemcentrx is showing as well as the additional financing costs. I think 2017, we need to get in and look at the clinical programs, but obviously we are going to invest appropriately on Rova-T and the other assets in order to maximize the value of the asset. What's nice about this transaction, though, is in 2018 we're going to be bringing a product to market. And we think, given the clinical data that has been shown so far, we're going to have a fairly impressive uptake on Rova-T. And that will offset that dilution pretty quickly. And in 2020, we see the deal being accretive. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. Chris, this is Rick. The only thing I'd add on the – I know what you're trying to do. You're obviously trying to model – or incorporate into your model what the R&D impact will be on 2017. I think that's what you're trying to do, based on your question. And I'd say, as we factored in this number and as we look at 2017, it certainly incorporates the assumptions that we've made around the expansion into other tumors that are DLL3 positive. It incorporates what Mike described as the first-line trials that ultimately they're pursuing with Rova-T. The one part that it probably does not include at this point, and we just need to work on it some more, would be we also believe that this could be a synergistic strategy in first-line with immunotherapy. And they have walked us through a plan where, potentially, as an example, Rova-T could be a highly specific debulking agent on the front end for DLL3 positive patients in small cell; and knocking out the stem cells in the process, which traditional chemotherapy does not do today. And then, you would get the disease under control and debulked and you would follow it with immunotherapy for longer-term maintenance. And so, they've laid out some plans around that, and that has not been incorporated to this point. So that would be the only thing. Now, we obviously have a significant R&D budget and we would look at how we normally do R&D – is we add everything up, and then we make a decision where we draw the line, and we're going to be conscious of that. So I'm not telling you that would be incremental, but what I'm telling you is that's the one thing that's outside the scope of what's in the current R&D planning assumptions. So, hopefully that gives you some clarity around that. On the M&A front, similar to the comments that I made earlier, we have been looking for a solid tumor platform. I think we made that somewhat clear that that was something we were interested in doing. I would say this came in at a valuation that was significantly below the numbers that we had flagged before. But we are looking to balance near-term performance against making sure that we build a significant portfolio of assets out in that 2020 and beyond period that can contribute to delivering strong EPS growth and strong revenue growth. But I'd say where we are right now is we have a lot of things going right now and we've filled a lot of the needs that we have. And so, I would not expect that we will go out and do another significant transaction. And – obviously, Pharmacyclics was a significant transaction, but I'm talking about even a transaction of this size. So I think for the next, certainly, 18 months or so, if we were to do anything, it would probably be more of a BI kind of transaction, more of a single asset; might be an in-licensing kind of a transaction. And I think, based on the fact that we have delivered some level of dilution here, we would have to be in position we would absorb the dilution going forward. So, hopefully, that answers your question. Christopher Schott - JPMorgan Securities LLC : That's great. Thanks so much for the color. Larry Peepo - Vice President- Investor Relations : All right, thanks. Next question, please, operator. Operator : Thank you. Our next question comes from Jami Rubin, Goldman Sachs. Your line is now open. Jami Rubin - Goldman Sachs & Co.: Thank you. I just want to follow up on some of the Stemcentrx questions; and congratulations. But clearly the whole, sort of, stem cell based focus has been fraught with challenges, and I'm just wondering maybe if you could reply to the specific questions. What gives you confidence that findings from mouse models translate to human cancers? And also, what gives you confidence that small cell lung cancer data will translate to other tumor types? And was also curious to know how Stemcentrx's ADC technology differs from other ADC players. And then, a follow-up question, and sorry about this, but just to follow-up on an earlier question, if you could kind of play out the scenario of the upcoming IPR, which investors are obviously highly focused on, what is the right analytical framework, Rick, that we should think about this in the event that, A, the IPR is heard, or it is dismissed, just in relation to the overall IP picture and duration of HUMIRA? Thanks very much. Michael E. Severino - Executive Vice President, Research & Development and Chief Scientific Officer : All right. So, I will – this is Mike. I will take the first of those, and then Rick may want to add some follow up. So with respect to cancer stem cells, what I would say is we've had a fair amount of time to get very comfortable with the platform that Stemcentrx has developed. And we believe that they are doing something really novel here. In terms of understanding how mouse models might translate into human clinical trials or, ultimately, clinical benefit, we certainly recognize that that translational leap is often fraught with peril, but in this case we don't have to wonder. We've seen the first three assets move into the clinic showing strong activity. And so, they have demonstrated with their first three clinical assets activity in small cell lung cancer, triple-negative breast cancer and ovarian cancer. So there are human data to back up their hypothesis, not only one time, but three times in a row; and, obviously, being right three times in a row in this business doesn't happen by chance very often. So with respect to our confidence that small cell lung cancer will transfer to other cancers, the set of cancers that we're talking about all share neuroendocrine features, as does small cell. And Stemcentrx has done a large amount of work to understand the role that DLL3 plays biologically in these tumors. And we know, based on the work that they have done, that DLL3 is playing the same role across these tumors. And so, that's why we have much greater than average confidence that what we're seeing in those preclinical studies in other tumors will translate into the basket study that they are running. So, as Rick said, we've seen a lot of data here and we feel very good about this opportunity. With respect to the ADC landscape, Stemcentrx has shown that they are very good at generating highly selective monoclonal antibodies that make good reagents for ADCs, and they also have the linker technology and the toxin technology all fully integrated within their company to rapidly produce these ADCs. And, again, I would say that their clinical track record speaks for itself. So with that, I'll turn it over to Rick for the other questions. Richard A. Gonzalez - Chairman & Chief Executive Officer : Yeah. I mean, I guess the only thing I'd add on that first set of questions, Jami, is the reality is human data trumps everything else in our business, right? So I think you can interpret from that we had to get comfortable with the human data that we saw and the impact that it had to make the decisions that we made. And as that comes out, I think you'll draw your own conclusions, obviously, but I think that will be informative as it comes out for you, okay? I want to make sure I understand your IPR question, so I'm going to ask you to ask it one more time. Jami Rubin - Goldman Sachs & Co.: Okay. So I just want you to kind of frame the landscape for us, because investors are hyper-focused on this upcoming Coherus IPR. If the IPR is thrown out, I think that's pretty clear. But if it is heard, help us to understand the significance of that in the context of your overall IP surrounding HUMIRA. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. Thank you. If you think about this process, the process we will go through is that the Patent Office makes a decision whether or not there is enough evidence to even review the patent. That's the process that's going to occur here in the May-June timeframe with the IPRs. And so, all it is is, is there enough in the claim of the company challenging the IP to even make a decision to review it? If the Patent Office decides that is the case, then they will review it; and there'll be a process that we go through that's well documented of how we defend the patent, and the process that the challenger would go through as well. That takes about 12 months. So at the end of 12 months there would be a decision on the patent. And depending upon which way that decision went, if it went for us, then obviously the patent would be upheld and would be, obviously, strengthened dramatically. If not, then we have the right to appeal. So that's the process. And I think that essentially defines sort of the implications of the process. If it gets turned down on the front end similar to what the formulation patent with Amgen did, then obviously that creates a very significant hurdle for the company that's challenging it. So those are the implications of it. Jami Rubin - Goldman Sachs & Co.: Okay. Thank you. I appreciate it. Larry Peepo - Vice President- Investor Relations : Thanks, Jami. Operator, next question, please. Operator : Thank you. Our next question comes from David Risinger, Morgan Stanley. Your line is now open. David R. Risinger - Morgan Stanley & Co. LLC: Thanks very much, and congrats on the news this morning. I have three questions. First, with respect to Stemcentrx, could you just talk about how you plan to integrate and retain the employees now that they're going to be part of a much larger pharmaceutical company. Second, could you explain the Stemcentrx-Pfizer partnership and how you expect that to evolve? And then, as an aside, AbbVie doesn't talk much about your 50-50 funding along with Google of Calico, but obviously you have made a significant investment there and Calico is quite an interesting company given its leadership. Could you just update us on the pipeline at Calico as well, please? Thank you. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. So, David, this is Rick. I'll take probably the first of those and maybe some part of the second. I may ask Henry to chime in on the second part. And I'll take the Calico one for you. So, I mean, obviously, an important part of these kinds of companies is retaining the people. And – particularly, when you think about this kind of a company where a lot of the intellectual property of the company is that, right? It's the intellectual horsepower of the people. And I would say we have been interacting with Stemcentrx, now, for a number of months, well before this process started. And so, we've had a chance to get to know the team and get to know the leadership within the team. And they had a decision to make, right? They could have gone down the IPO route. They could have collaborated with somebody and gone down the IPO route, if they wanted to. And I think, based on the kind of asset they have in Rova-T, they certainly would have had – even in a tough IPO market as it is today, I think they would have had the ability to be able to do that; or they could do a transaction like the transaction we ended up doing with them. And I think one of the deciding factors for them was what they're really good at and what they love doing is essentially going in and discovering novel markers and creating drugs; so, going through the discovery and early development process. And they demonstrated they can do that in a highly efficient and effective way, and they can do that very, very rapidly. If they went down the IPO route, they had to basically build all the other infrastructure that a fully-integrated business would need to have, including all the commercial and medical affairs and global clinical development groups in order to be able to execute a fully-integrated strategy. And I think as they looked at that, I think they had confidence that they could do it, but it would be a tremendous amount of effort on their part and their leadership team to be able to do that. When they looked at coming together with us, they ultimately said, look, we can do the part that we think we're great at and we can plug in to what you already have for all those other things, the global clinical development group that we have, the medical affairs group that we have all around the world, the commercial organization that we have all around the world. And so, I think they perceived it to be a win-win. So I think that's the first thing. Winning their hearts and their minds through that process, I think, was an important aspect of it. Second aspect of it was that, obviously, the CVRs – all of the leadership team and many of the employees have either ownership in the company or they have – and they have stock options, right? So these CVRs are pretty important to them. They can extract a tremendous amount of value through that process if they deliver against those CVRs, and I can tell you that's a pretty healthy financial incentive for them to stay and execute against those. And I can tell you, in the interactions that I had with them – we had with them, I should say, I can tell you that's an important point to them. Third thing is they wanted this stock transaction. Now, they wanted it somewhat for tax purposes, but they also wanted it because they wanted to believe that they could share in the upside. And some of what they agreed to do with their options only reinforced that, meaning their Stemcentrx options and what they we will become and how that value will be derived. And so, I think there's a very high likelihood that we will retain the key people in this, and I think they like our culture and they like the environment that we're operating in. And so, I'd tell you I have a fairly high level of confidence. And I think Pharmacyclics demonstrates – we have retained all of the key clinical development people. And I've spent time, Mike has spent time with that team. I think they're very happy being part of AbbVie and they get to execute their strategy that they wanted as an independent company as well or better than they could have as an independent company. So I feel pretty good about that, but it's an important point. On the Pfizer transaction, it's something we want to be careful with because I'm not sure what their confidentiality agreement is. Henry, you want to comment anything on it? Henry O. Gosebruch - Chief Strategy Officer & Executive Vice President : Yeah. Just to be clear, Pfizer does not have any rights to Rova-T at all. We did put out some slides this morning and you see that there's four additional assets in Phase 1. And obviously, there's a number of late pre-clinical assets behind there. Two of these assets Pfizer has some rights to, but we really can't go into further details on how those deals are structured; but again, to be clear, that is the extent of the Pfizer relationship. Richard A. Gonzalez - Chairman & Chief Executive Officer : And of the two assets, they can opt-in. Henry O. Gosebruch - Chief Strategy Officer & Executive Vice President : Correct. They can opt-in back in one of them. Richard A. Gonzalez - Chairman & Chief Executive Officer : So, therefore, we can opt-in back on one of those if we choose to. So I think that probably gives you as much as we can give you around the Pfizer compounds. On Calico, I'm going to have Mike talk a little bit about the pipeline, but that is a transaction that we did about a year or so ago, now. And when you look at the individuals that Calico first started-up with, Art and Hal and others, they've assembled a very talented team. And that's – that was the big reason that we ultimately decided to do something with them. But essentially what we have is we co-fund a discovery effort to find new innovative targets in a number of different areas. Oncology is one of them; diseases of the aging is another. Neurodegenerative diseases is another area that ultimately we have a lot of interest in. And the way it works is, essentially, we can opt-in on anything that's discovered there, and there's a point at which we take it over. We have commercial rights to it, and then there's basically a 50/50 profit sharing arrangement between us and Calico. So, essentially, we have rights to anything over a certain period of time that is discovered within Calico. Mike works closely with the team, so I'm going to ask him to talk a little bit more about progress that they're making. Michael E. Severino - Executive Vice President, Research & Development and Chief Scientific Officer : Sure. So one of the things that I think is very important to note in the Calico collaboration is that there's a very strong scientific and cultural fit between our teams. And that was one of the real drivers behind doing that deal. The Calico team is obviously very talented. They have a long and very successful track record. Our teams are working together very well. We're advancing a number of programs. But, of course, we do need to keep in mind that these are early discovery programs that have been initiated in the last 12 months to 18 months. So we intend to move very quickly, but it takes a bit of time before programs are ready for clinical introduction and the sort of news flow that would – you'd expect to hear in this sort of setting. So what I would say is the cultural fit is great. We've made great progress building up a set of programs in the areas that Rick mentioned that I think are a very good fit for our overall strategy, and we remain very optimistic about the Calico partnership. David R. Risinger - Morgan Stanley & Co. LLC: Great. Thank you very much. Larry Peepo - Vice President- Investor Relations : All right. Thanks, David. Operator, next question, please. Operator : Thank you. Your next question comes from Marc Goodman, UBS. Your line is now open. Marc Goodman - UBS Securities LLC : Yes, morning. Maybe we can talk a little bit about just the business for a sec. VIEKIRA was a little bit weak. Maybe you can talk about the U.S. versus international, how Japan is doing. U.S. seems to be falling off quite a bit; I mean, we're just losing share. Give us a sense of what's going on there. Second, HUMIRA in the U.S., I was just curious – obviously, we've seen quite a few price increases if you look out over the past 12 months, and I was curious whether you are still being able to get the same amount of price dropping to the bottom line as you have been in the past, if there was more pressure on that? And then, third, can you give us an update on what we're going to see at ASCO for the broader portfolio? Thanks. Richard A. Gonzalez - Chairman & Chief Executive Officer : Thanks, Marc. Okay. So, this is Rick. I'll take VIEKIRA , and Bill can take the HUMIRA question, and we'll have Mike cover the ASCO question. So, VIEKIRA, let me start with Japan. I mean, Japan is continuing to track consistent with our expectations, so I think there's nothing all that remarkable from Japan. It's a good market, and our profile within that market is a good profile. The U.S. has certainly been more challenging. I would say that it's a combination of several factors, some volume loss as well as some price loss. As Merck has entered the market, we know that they set the list price lower than the other products in the marketplace. That strategy, initially, I think we interpreted as a strategy that would go after medical exceptions, because medical exceptions historically are in at more of a list price point. And so, they have the lowest price, essentially, on a medical exception basis. And they have been somewhat successful in gaining some of those medical exceptions. So that's part of the issue. The second part of the issue, though, is they have been more aggressive than we anticipated from a pricing standpoint, particularly in the public segments, the VA in particular. And as we looked at that, we ultimately made the decision that we were not going to compete with the lowest overall price in the VA. We did adjust our price down, but we didn't adjust it down to the very lowest price. And that has caused us to obviously lose price, but also lose volume. And we had a fairly significant share of VA. So I think it is those factors playing out. And I would say that, based on where the U.S. is going, it is unlikely that we will achieve the $2 billion number that we described earlier. I think a number that you should be thinking about now is more in the $1.6 billion range; globally, I'm talking about. And you can look at this quarter as an example. Even though VIEKIRA was weaker than we expected, we obviously beat our EPS number and achieved our revenue numbers. So I talked to strength of the rest of the business; and that's the nice thing about our business is we have good balanced performance across a number of different assets. And so, when one thing doesn't go as well as we had hoped, then others can pick up the slack. So we will not be changing our guidance based on this. We've factored that into our going-forward guidance in 2016 and we're comfortable with the guidance that we've provided you, but those are the facts around VIEKIRA. William J. Chase - Chief Financial Officer & Executive Vice President : So, Marc, on HUMIRA pricing in the U.S., look, obviously, we continue to put up pretty impressive numbers in the U.S. If you look at Script trends, it was up over 16%. So there's a – the majority of the increase in Q1 is related to volume, but price is a component. Now, the category has taken some price in the last four months or five months; we did as well. And we don't see any major shift relative to what we've been experiencing over the last few years, but obviously we're keeping our eye on it. Michael E. Severino - Executive Vice President, Research & Development and Chief Scientific Officer : So with respect to ASCO, we'll obviously be seeing the Rova-T data that we've talked about in small cell lung cancer, which is a Best of ASCO presentation. Venclexta also has a Best of ASCO presentation, which comes from the program in AML in combination with hypomethylating agents. There are nine additional abstracts for Venclexta that'll be presented, updating across the range of studies that are being conducted with that molecule in non-Hodgkin lymphoma and other settings as well. You'll start to see additional data from ADCs that we're introducing into the clinic. There'll be updated data on ABT-414. You'll start to see data on some of our newer ADCs and we continue to have a number of programs that will be moving into clinical development in oncology. So, overall, we're going to be active at ASCO and, of course, we're also having our R&D Day to coincide with the timing of ASCO. So you'll see a broad update on our pipeline there. Larry Peepo - Vice President- Investor Relations : Thanks, Marc. Appreciate it. Operator, next question, please. Operator : Thank you. Our next question comes from Andrew Baum, Citigroup. Your line is now open. Andrew S. Baum - Citigroup Global Markets Ltd.: Hi. Three questions, please. First, on the Stemcentrx transaction, could you provide a little bit more detail on the earn-outs? The press release references milestones, and you mentioned in passing the first-line indication, but if you could provide some more granularity that would be great. Second, I would imagine this was a competitive auction just given – well, especially as Stemcentrx just got a finance professional as their CEO and there's several high-profile tech investors involved. Perhaps, you could just give us some sense of the competitive dynamics as you think about valuation. Second, in reference to your comment on your IL-23, you highlighted it as your priority compound in psoriatic arthritis. What's the future of ABT-122? Do you intend to proceed in either psoriatic arthritis, or is psoriasis or in RA for that compound? And then, finally, more broadly, now that you've got a lung candidate in your oncology pipeline, how you think about augmenting that compound going forward. Larry Peepo - Vice President- Investor Relations : Thanks, Andrew. Richard A. Gonzalez - Chairman & Chief Executive Officer : So, Andrew – Henry, why don't you cover the milestones, and then we can talk a little bit about first-line. Henry O. Gosebruch - Chief Strategy Officer & Executive Vice President : Yeah. Hey, Andrew. So there are in total $4 billion of milestones. $2 billion relate to the first-line approval that Rick talked about. So that approval is $2 billion and is qualified by a favorable position in the guidelines at the time. And as Rick talked about, we believe that would create significantly more value than that $2 billion. In addition, there is a second $2 billion, and that relates to four individual $500 million milestones, so totaling $4 billion, and those are for the commencement of registration trials for additional assets in indications that would be at least $1 billion in revenue potential. So that is $500 million each for a total of $2 billion, and then with the first-line, $4 billion in total. Richard A. Gonzalez - Chairman & Chief Executive Officer : So, on those second set of milestones, just to be clear, they're individually earned, right? So if they take one asset and they move it through and we take it to a registration study and we determine that that asset in that indication would generate a commercial asset that had greater than $1 billion worth of revenue, then we would pay them $500 million. And then, if they do a second one or a third one and a fourth one, they can get up to four $500 million milestones. So that's how the contingent – or the contingent payments are laid out. On the competitive dynamics, it was a competitive process. It was relatively blind to us, so we don't know who the other competitors were; but we do know there were other players that were involved. And I'd say it ended up being us and one other player at the very end who were competing for the asset through that process. And ultimately, as I told you on the valuation, it's consistent with what I described to you before. If you look at what we are paying in the base case for this asset and you look at the base case forecast without first-line in it, it has a significantly positive NPV and well above the threshold at which we look at the cutoff for IRRs. And so, this is a transaction that we feel very comfortable with from a financial standpoint. And we've obviously built-in the upside for first-line because we don't have data on first-line right now. And we're not going to – we didn't want to be in a position where we're paying for something that we didn't know what it was going to look like. We were very comfortable with second- and third-line because we saw data that supported that – human data that supported that. I do believe, based on everything I've seen, and I think Mike and others believe that there is a high probability this asset will move into first-line; but we're going to pursue it aggressively. And if they do, they will get the incremental reward and we will, obviously, get the incremental award of being able to move into that. And we have specified where – how the guidelines have to characterize the asset : that it would be a broad-based first-line agent in order for that milestone to be paid. On the BI and ABT-122, Mike, why don't you cover that? Michael E. Severino - Executive Vice President, Research & Development and Chief Scientific Officer : Certainly. So the BI compound, which is now called risankizumab, the IL-23 antibody, is our lead asset in psoriasis, and I think the data clearly bear that out. And I think, based on what we know about the pathway, it makes sense to make that same statement about psoriatic arthritis. We're very pleased with the data we've seen today. We think there's really tremendous potential for that asset. With respect to ABT-122, which is our IL-17 TNF DVD, we are going to be seeing mid-stage data internally the middle of this year; so, shortly. We'll probably be in a position to present that externally around the ACR timeframe. And so, we'll make a decision when we have those data. But what I can say is, to move forward with those molecules, it would have to fit our strategy with that molecule, with ABT-122. It would have to fit our strategy to raise the bar in the standard of care. So we would be looking through differentiated efficacy compared to not only what we have in our own portfolio, but what's available externally. And so, we'll be making that decision later on this year. With respect to your question about our presence in lung cancer, we've said for quite some time that we want to build our presence in solid tumors. I think the Stemcentrx acquisition clearly does that. It gives us a broad platform as well as a very promising lead asset and other clinical assets behind that. And so, we're going to continue to build on that presence, not only with the development engine that comes from Stemcentrx, but with our internal pipeline. And I think you'll see that we have a number of programs that could be applicable to lung cancer and other solid tumors that will be moving through the clinic, shortly. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. And then on the M&A, it's consistent with what I described earlier. We'd be looking for those kinds of assets. We continue to evaluate things that are in the marketplace. We've built a fairly extensive pipeline internally and – but obviously we continue to look on the outside for those assets that look interesting. And – but it will be of a profile – an investment profile of what I described to you a moment ago. Larry Peepo - Vice President- Investor Relations : Thanks, Andrew. Andrew S. Baum - Citigroup Global Markets Ltd.: Thank you. Larry Peepo - Vice President- Investor Relations : Jay, we'll take our next question, please. Operator : Thank you. Your next question comes from Mark Schoenebaum, Evercore ISI. Your line is now open. John Scotti - Evercore ISI : Good morning. This is John Scotti in for Mark. I just have a few questions, if I may. Larry Peepo - Vice President- Investor Relations : Hey, John. John Scotti - Evercore ISI : First – hey, Larry. The first on Stemcentrx. So I recall last year when you purchased Pharmacyclics with IMBRUVICA, you gave a lot of helpful color on how you built up in your model to the peak sales – your end-user peak sales estimate for IMBRUVICA. You sort of broke out by indication, line of therapy, and gave some color on risk adjustment. Do you think you could do the same thing here for Rova-T and the $5 billion number you've put out there in terms of what year do you model peak, are you talking small cell alone, other indications and sort of give some more granular color on how you built up to that number? And then the second question, now that you have purchased Stemcentrx and you've in-licensed the IL-23 from BI, can you give a little bit more color on how you see the R&D line evolving over the next few years? So, specifically, with regard to 2020 guidance, are you going to be able to keep – hold, essentially, the greater than 50% non-GAAP operating margin guidance that you've given previously or should we expect that to have to come down a bit below what you've given? Thank you so much. Larry Peepo - Vice President- Investor Relations : Thanks, John. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. As far as the model, obviously, we went through the model in some level of detail around Pharmacyclics, one, because of the magnitude of the investment that we were making, and we described what supported that investment and how we built up the model. What I characterized for you already basically tells you how we built this model, right? It's built primarily around second- and third-line small cell, which we believe has a very high probability of success. So you can imagine we've risk-adjusted it, accordingly, at a high probability of success. It does have a couple of other smaller indications where we believe there is a very high probability of being able to extend it into some of these other cancers that we described. I wouldn't say that has a significant impact on it, and those are risk-adjusted, accordingly. It doesn't have first-line in it, and the milestone, or the CVR, is basically driven off of what we think the value would be and the return would be appropriate for first-line; and it doesn't have any other of these other milestone-driven POCs that would come forward. So I think that's roughly the same kind of guidance. We gave share and some other kinds of things, and we've obviously built the model around those same kinds of assumptions. But I think, in this case, we'll wait to provide that at a later date once we get closer to a launch of the asset in 2018. On the R&D line – or I think really what you're asking is are we still committed to delivering 50% or greater in 2020? And the short answer to that is, yes. We've looked at it. We've carefully looked at the commitments we've made around the compounded growth rate and the revenue projections as well as the operating margin profile that we communicated last year, and we're still absolutely committed to delivering against that. Larry Peepo - Vice President- Investor Relations : Thanks a lot, John. Operator, we have time for one final question, please. Operator : Thank you. Our last question comes from Alex Arfaei, BMO Capital Markets. Your line is now open. Alex Arfaei - BMO Capital Markets (United States): Good morning, folks, and thank you for taking the questions. Rick, just following up on some of the earlier questions, the Street has obviously taken a significantly more cautious view relative to your long-term guidance, particularly for HUMIRA. Do you see anything changing in the near future that would allow investors to have more confidence in your long-term guidance? And I guess what I'm asking is, basically, are we going to go through this long drawn out process where we're going from one HUMIRA hearing to another? Or do you see a point where it becomes clear that you can hold off HUMIRA biosimilars in the U.S. for as long as you believe you can? Thank you. Richard A. Gonzalez - Chairman & Chief Executive Officer : I think there's two ways to look at it. I mean, first of all, if you look at the guidance that we provided back in, I think it was October 29 of last year, and you look at what happened to the consensus numbers, what you'll see is they shifted out roughly a year. I think the mean now is probably – if you look at where people are assuming biosimilar impact in the United States, it's probably in that 2019 – Larry, correct me if I'm wrong here, that 2019 timeframe; so, it moved out from about 2017 to 2019. And I'd say one of the things we track to try to understand how the market is perceiving that guidance is we track what our stock performance has been versus our peers over that period of time. And I saw it just the other day. It may have changed in the last couple of days a little bit, but we're the number one performing stock since that point in time. So I think it was around 14% appreciation, or something like that; 15% appreciation. So I think it did have a positive impact. Having said that, I would agree with your point that there's still this overhang and this overhang is built around different catalysts. As we've said before, we've given a lot of clarity in that review of what our IP strategy is and the confidence that we have in our IP strategy. How the market will relate to that, that's a little harder for me to describe or predict, I'd say. But certainly, I think, as it plays out, I think the market will basically start to better understand what our position is. And certainly, as you have more confidence around that, I think you will see the sentiment change. I think the bigger issue – and I think Rova-T and the IL-23 are two good examples. Look, we obviously have a point of view of what we think is going to happen. We've communicated what that point of view looks like, I think, in very clear terms. That doesn't mean that everybody believes that point of view. But what I'd say is, if you look at even the bear case on HUMIRA, which we certainly don't agree with, and you look at this pipeline that we've now assembled of assets that have a very high profitability of success, I think even in the most bear case possible, most people would look at that pipeline and say, they should be able to grow through whatever happens. Now, obviously, we have a different view of what we think is going to happen, but even if you look at – at least the models I've looked at that have the worst case built into them, when I look at our pipeline and the probability of success of those assets I described in my formal remarks, and you just add them up and risk-adjust them based on the data you've seen and the commercial success you would expect from those assets, I think a reasonable person would draw the conclusion that you can grow through that. And I think that ultimately will be the calculus that investors are going to have to make. Alex Arfaei - BMO Capital Markets (United States): Thank you. Larry Peepo - Vice President- Investor Relations : Thanks, Alex. And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at abbvieinvestor.com. Thanks, again, for joining us. Operator : Once again, that concludes today's conference. Thank you for participating. You may disconnect at this time.
ABBV	AbbVie	1,551,152	Health Care	Biotechnology	North Chicago, Illinois	2013 (1888)	2012-12-31	2,016	3	2016Q3	2016Q2	2016-07-29	4.502	4.525	5.216	5.19	7.95461	11.38	11.64	Executives: Liz Shea - Head-Investor Relations Richard A. Gonzalez - Chairman & Chief Executive Officer Michael E. Severino - Chief Scientific Officer & Executive VP William J. Chase - Chief Financial Officer & Executive Vice President Analysts : Jeffrey Holford - Jefferies LLC Jami Rubin - Goldman Sachs & Co. Chris Schott - JPMorgan Securities LLC Marc Goodman - UBS Securities LLC Andrew S. Baum - Citigroup Global Markets Ltd. Mark J. Schoenebaum - Evercore Group LLC Vamil K. Divan - Credit Suisse Securities (USA) LLC (Broker) David R. Risinger - Morgan Stanley & Co. LLC Gregg Gilbert - Deutsche Bank Securities, Inc. Operator : Welcome to the AbbVie Second Quarter 2016 Earnings Conference Call. All participants will be able to listen only until the question-and-answer portion of this call. I would now like to introduce Liz Shea, Vice President of Investor Relations. Ma'am, you may now begin. Liz Shea - Head- Investor Relations : Good morning and thank you for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Executive Vice President of Research & Development and Chief Scientific Officer; and Bill Chase, Executive Vice President of Finance and Chief Financial Officer. Before we get started, I want to remind you that some statements made today are or may be considered forward-looking statements for the purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about the factors that may affect AbbVie's operations is included in our 2015 annual report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand AbbVie's ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll turn the call over to Rick. Richard A. Gonzalez - Chairman & Chief Executive Officer : Thank you, Liz. Good morning, everyone, and thank you for joining us today. We delivered another strong quarter with results well ahead of our expectations including adjusted earnings per share of $1.26, representing growth of 16.7% versus the second quarter of 2015. Our results in the quarter included strong top-line performance with global operational sales growth of 18%, reflecting robust growth from several products in our portfolio, including HUMIRA and IMBRUVICA among others. We're pleased with our outperformance in the quarter and progress year-to-date. We've driven outstanding commercial, operational and R&D execution resulting in strong top and bottom line results. Based on our performance in the first half of the year, we're raising our full-year 2016 EPS guidance to $4.73 to $4.83 on an adjusted basis reflecting growth of 11.4% at the midpoint. As I mentioned, several products within our portfolio are driving robust growth. HUMIRA continues to drive strong performance delivering global operational growth of more than 17% in the quarter. Despite increasing competition from new classes of drugs and indirect biosimilar competition in international markets, HUMIRA continues to demonstrate exceptional performance and durability across all three market segments. In rheumatology, HUMIRA is the number one prescribed biologic and we continue to grow our share position in the face of new competition. And in dermatology and gastro, HUMIRA continues to hold a strong market leadership position demonstrating double-digit growth year-over-year. We also continue to be pleased with the strong IMBRUVICA performance, which is tracking in line to slightly ahead of our expectations following our approval for first line use in CLL. IMBRUVICA has achieved the number one market share position in all approved disease indications in second line and second line plus treatment. And since we received the FDA approval of IMBRUVICA as a first line treatment for CLL late in the first quarter, IMBRUVICA has already gained a market share position in first line in the mid-teens and the third position in the market. And the share, continues to steadily increase with approximately one of every six patients now receiving IMBRUVICA as a front line therapy surpassing FCR which is generally considered the gold standard for young and fit CLL patients. This market share and the strong momentum underlying its performance further reinforces our confidence in our long-term expectations for IMBRUVICA. That supported our decision to acquire Pharmacyclics last year. We also saw a strong performance from several other products in our portfolio including Duodopa, Creon and Lupron. Each of these therapies within our marketed product portfolio continue to deliver durable performance. Global VIEKERA sales in the second quarter were $419 million, up 8.2% on an operational basis. Growth in the quarter was driven by our international business. In the U.S. as we described on our first quarter call, we have seen market share loss and some price erosion due to the entry of a new competitor into the HCV market. We are nearing the completion of our registrational studies for our next generation pan-genotypic HCV combination. Based on the mid-stage data, we've disclosed to-date, we believe that our new HCV combination will be highly competitive. The data illustrates that this therapy can deliver cure rates approaching 100% across genotypes. And we believe the majority of patients will be well served with an eight-week treatment option. We expect to see results from the pivotal studies in the second half and we remain on track for commercialization next year. In addition to our strong financial results, we continue to advance our strategic priorities and have made excellent progress with our R&D pipeline. Mike will cover the pipeline in more detail in just a few moments, so I'll only mention a few highlights. Importantly, we successfully completed the acquisition of Stemcentrx. We've been impressed by the caliber of talent we've welcomed from Stemcentrx, and the transition has been seamless. The addition of Stemcentrx is a strategically and financially compelling opportunity for our company, giving AbbVie a highly attractive platform for solid tumors and an extremely exciting late stage asset in Rova-T. The transaction enables AbbVie to further expand and accelerate our presence in oncology, building upon our growing position in hematological oncology. We are moving rapidly to advance Rova-T in its lead indication, third-line small cell lung cancer. And we continue to feel confident about our 2017 BLA filing strategy and launch in 2018. We're also rapidly advancing studies to evaluate Rova-T in earlier lines of therapy for small cell lung cancer including combination studies with both chemotherapy and immuno-oncology agents. Earlier this week, we jointly announced a clinical collaboration with Bristol-Myers Squibb to evaluate the combination of Rova-T with BMS's immuno-oncology agents in small cell lung cancer with trials beginning this year. We're pleased to be partnering with BMS to bring innovative new therapies forward that have the potential to significantly improve the survival of patients with small cell lung cancer, a disease with devastating outcomes. We've also continued to make significant progress with our hematological oncology portfolio. We're building upon our strong position with IMBRUVICA in treating blood cancers with VENCLEXTA. During the quarter, we received the first FDA approval for VENCLEXTA for patients with relapsed/refractory CLL who harbor the 17p deletion, a difficult-to-treat form of the disease, typically associated with poor prognosis. The approval for this transformative therapy was granted under breakthrough therapy and priority review designations, and the launch is still in its early stages. Although this first indication is a relatively small patient population, it is important to provide patients with this difficult-to-treat disease a new therapy with strong clinical results, and it's also important to give positions an opportunity to gain experience with a particular initial dosing regimen of VENCLEXTA to ensure patients receive the benefit of this therapy. We expect data from the Phase III study evaluating VENCLEXTA in a broader set of relapsed/refractory CLL patients to read out next year supporting our regulatory submission for an expanded label covering all relapsed/refractory CLL patients, a much larger population. Like IMBRUVICA, we believe that VENCLEXTA will be effective across a range of hematological malignancies with high unmet need, and we're actively evaluation additional indications including acute myeloid leukemia, non-Hodgkin's lymphoma, and multiple myeloma among others. We also continue to make progress across other important areas of our pipeline. During the quarter, we presented positive results from mid-stage study of our anti-IL-23 monoclonal antibody, risankizumab, in patients with moderate to severe Crohn's disease. The pivotal program for risankizumab is in psoriasis and it's underway and enrolling very well. And in partnership with Biogen, we recently received FDA and EC approval for ZINBRYTA, for relapsing forms of multiple sclerosis. We plan to launch ZINBRYTA in the U.S. in August. In summary, we continue to be pleased with our strong execution and the significant advancements in our pipeline. As we outlined at our recent R&D day, we have eight late-stage assets which have been significantly de-risked, and have the potential to drive meaningful revenue growth in the years to come. We continue to demonstrate an exceptional track record of success, with positive clinical data and regulatory outcomes and strong commercial performance. We intend to build on this momentum to drive a high level of performance across our operations in the second half of the year. With that, I'll turn the call over to Mike for some additional comments on our R&D programs. Mike? Michael E. Severino - Chief Scientific Officer & Executive VP : Thank you, Rick. We had another very productive quarter from an R&D perspective. With significant progress on several programs, including the FDA approval of VENCLEXTA for its first indication in patients with relapsed relapsed/refractory CLL with a 17p deletion mutation, as well as the FDA and EMA approvals of ZINBRYTA for relapsing forms of multiple sclerosis. Today, I'll highlight additional updates and discuss some of the milestones we anticipate in the second half of 2016. I'll start with our oncology portfolio, an area where we are growing our already strong position in hematologic malignancies, as well as establishing a strong foundation in solid tumors, which was significantly accelerated by our recent acquisition of Stemcentrx, and its lead asset, Rova-T. At the ASCO meeting in early June, we presented data from a Phase II trial in small cell lung cancer that demonstrated that Rova-T monotherapy drove a one-year survival rate of 32% in DLL3 positive patients. Almost triple that of historical third line standard of care at 12%. In addition to the impressive one-year survival, Rova-T showed the most compelling single-agent activity in terms of overall response rate, clinical benefit rate and progression-free survival in third-line small cell lung cancer. The patient population where our first pivotal trial for registration is rapidly enrolling. The confirmatory third-line registrational trial which is called Trinity began in January and is expected to complete enrollment by the end of 2016 with commercialization expected in 2018. We are also quickly advancing Rova-T in the studies to support front-line treatment in small cell lung cancer in combination with chemotherapy. The first-line development program includes a Phase I/II regimen selection study that will be used to inform future Phase III pivotal trials evaluating various combinations of Rova-T and chemotherapy. The regimen selection study is expected to begin next quarter. The first line program also includes the (13:10) study, a Phase III registrational trial evaluating standard chemotherapy followed by Rova-T in the front line setting. We expect to have this study up and running by the end of the year. We are also advancing an 8-arm basket study evaluating Rova-T in a range of neuroendocrine tumors where DLL3 plays an important role. This study is on track to begin this quarter with data expected next year. Given that many of these tumor types have low survival rates and limited treatment options available, there may be an opportunity to explore single-arm studies to support accelerated approval. As Rick mentioned earlier this week, we announced a clinical collaboration with BMS to evaluate the investigational combination of Rova-T with OPDIVO and with OPDIVO and YERVOY in small cell lung cancer. We believe that combining Rova-T with these checkpoint inhibitors could drive enhanced and sustained efficacy above what that which either approach could offer individually. Preclinical evidence and biological rationale supports our prioritization of efforts to combine Rova-T with IO agents, and we believe these combinations have the potential to establish a new standard of care. We expect to begin the Rova-T/IO combination study by the end of the year. In addition to Rova-T, we've also continued to make progress with our pipeline assets targeting solid tumors. In particular, our PARP inhibitor Veliparib and ABT-414 an antibody drug conjugate for glioblastoma multiform. We presented Phase I data for both of these assets at the recent ASCO meeting and anticipate data readouts from registration enabling studies for both programs over the next 12 months. We also continue to make good progress with our hematologic oncology portfolio. In the second quarter, the FDA updated the IMBRUVICA label to include new data from two Phase III trials supporting expanded use in patients with CLL and SLL, including overall survival data from both the RESONATE-2 and HELIOS trials. IMBRUVICA is also being evaluated in mid to late stage trials for several additional indications. With timing of data readouts and potential regulatory submissions dependent on event driven analysis of ongoing studies. In June, IMBRUVICA received breakthrough therapy designation as a potential treatment of chronic graft-versus-host-disease after failure of one or more lines of systemic therapy marking the drugs fourth breakthrough therapy designation. The FDA also granted IMBRUVICA Orphan Drug Designation for the same condition. The breakthrough designation was based on clinical data from a Phase II study evaluating the safety and efficacy of IMBRUVICA for the treatment of patients with steroid dependent or refractory chronic GVHD. Our registrational study in graft versus host disease is underway with data expected late this year or early 2017. We've made significant progress with the development of another important strategic asset, our novel BCL-2 inhibitor VENCLEXTA, which is being developed in collaboration with Roche. VENCLEXTA was recently approved under priority review for its first indication in patients with relapsed/refractory CLL with 17p deletion. Earlier this year, VENCLEXTA also received the FDA's breakthrough therapy designation for use in combination with rituximab for the treatment of patients with relapsed/refractory CLL. The Phase III MURANO trial which will support a broader label in relapsed/refractory CLL is fully enrolled with data readout and regulatory submission anticipated in 2017. Additionally, we have an active Phase III program evaluating VENCLEXTA in treatment-naive CLL patients with studies underway and progressing well. Like IMBRUVICA, we believe VENCLEXTA will be effective across a range of blood cancers including AML and multiple myeloma. We recently started a Phase III program evaluating VENCLEXTA in combination with standard of care in multiple myeloma and we anticipate moving forward with Phase III development in AML by the end of the year. In addition to the elements of the program I've described, we continue to be excited about the ongoing clinical evaluation of combinations of IMBRUVICA and VENCLEXTA, which we believe have the potential to drive profound responses and minimal residual disease negativity in a number of clinical settings. Now, I'd like to turn our attention to the immunology portfolio where we have two late stage assets, our anti-IL-23 monoclonal antibody risankizumab, and our selective JAK1 inhibitor, ABT-494. Each of these assets has the potential to significantly advance standard of care in immune-mediated conditions such as RA, psoriasis and Crohn's disease, covering the major market segments where we currently have a leadership position. ABT-494 is currently in Phase 3 development for rheumatoid arthritis, where we are studying the asset in six pivotal trials. Our JAK inhibitor has the potential to be best-in-class with what we believe will be an optimized benefit risk profile. Our development strategy is aimed at delivering a comprehensive label to cover multiple lines of therapy from first line use in methotrexate-naive patients to use in patients with inadequate response to biologics, where the highest unmet need remains in this market. Data from the ABT-494 Phase 3 RA program is expected in the first half of 2018, with commercialization targeted in 2019. We have also accelerated the development of this important asset in gastrointestinal disorders. Our Phase 2 study in Crohn's disease is well underway and data should be available internally later this year. This will enable a decision to advance to Phase 3 development by the first quarter of next year. You can expect to see the data from this Phase 2 Crohn's study at DDW next year. In addition, we recently initiated a Phase 2 study in ulcerative colitis with data expected in 2018. Risankizumab is another strategically important late-stage immunology asset. This anti-IL-23 monoclonal antibody, which we licensed from Boehringer Ingelheim earlier this year, has the potential to be a transformative therapy by providing best-in-class efficacy with increased dosing convenience. Risankizumab is currently in Phase III psoriasis trials, and in mid-stage development for both Crohn's disease and psoriatic arthritis. Interest in the Phase III psoriasis program has been strong, and enrollment is progressing very well. We continue to expect data from the registrational program in 2018. At the Digestive Disease Week meeting in May, we reported encouraging results from a Phase II study of risankizumab in patients with moderate to severe Crohn's disease, a particularly difficult-to-treat population given that the majority of these patients had previously failed treatment with one or more TNF antagonists. Based on these strong results, we intend to move rapidly into Phase III studies in Crohn's disease with registration trials commencing later this year or early next year. Another technology that we believe holds great promise is our proprietary bispecific antibody platform. We've introduced a number of these assets into the clinic in both our immunology and oncology therapeutic areas. Based on our early-stage studies, we've established proof of concept across several programs, demonstrating that these antibodies possess good drug-like properties, and delivered the desired pharmacodynamic effects. And we've learned how to successfully and consistently manufacture them. We recently evaluated data from one of our bispecific programs in development, ABT-122, our combination anti-TNF and anti-IL-17, in Phase II trials for RA and psoriatic arthritis. The data demonstrated that ABT-122 was well tolerated with a safety profile that was comparable to HUMIRA. In the mid-stage psoriatic arthritis and RA studies, ABT-122 showed ACR20 response rates as high as 75% and 82% respectively, demonstrating that the platform worked well with clear evidence of biologic activity. However, the simultaneous inhibition of IL-17 and TNFα do not produce the strong synergistic effect necessary to differentiate ABT-122 from other candidates in our pipeline, such as ABT-494 and risankizumab. As a result, we have made the decision not to pursue further development of this asset. While in this particular setting, we didn't see the high level of differentiation we were seeking, the validation of the bispecific platform gives us confidence to continue to advance other programs with different mechanisms of action. Also in our immunology portfolio, we continue to make progress with vobarilizumab, an anti-IL-6 receptor nanobody being developed in collaboration with Ablynx for patients with moderate to severe rheumatoid arthritis. Earlier this month, Ablynx announced positive top-line results from a Phase II monotherapy study demonstrating that this asset improved symptoms of RA. We expect results from a second Phase II study evaluating use with methotrexate in the third quarter which will allow us to determine next steps for development of this asset. In the quarter we also made significant progress in other key therapeutic areas and are on track to advance several programs in the second half of the year. In virology, our next-generation HCV program is progressing well. Early in the quarter, at the International Liver Congress, we presented new data on our pan-genotypic, once-daily, ribavirin-free combination of ABT-493 and ABT-530 in patients with genotypes one through six, including data on treatment durations as short as eight weeks. The data illustrate that with eight weeks of treatment, 97% and 98% of genotype one through three patients without cirrhosis treated with AbbVie's next-generation regimen, achieved sustained virologic response at 12 weeks. Additionally, 100% of genotype four through six patients without cirrhosis achieved SVR 12 with 12 weeks of treatment. Overall, we believe that AbbVie's next-generation HCV therapy will be able to address the remaining unmet medical need within this market. We continue to expect to see results from the Phase III trials in the coming months. And we remain on track for commercialization next year. And in the area of women's health, we are nearing completion of our Phase III endometriosis program with regulatory submission planned for 2017. Earlier this year, we announced positive top line results from the second of two replicate pivotal Phase III clinical trials evaluating Elagolix in premenopausal women who suffer pain from endometriosis. The results show that after six months of continuous treatment, both doses of Elagolix met the studies co-primary endpoints with Elagolix reducing scores of menstrual pain and non-menstrual pelvic pain at month three and month six. We plan to present detailed results from both Phase III studies including extension study data up to 12 months at the American Society for Reproductive Medicine in October. And our Phase III studies in uterine fibroids are underway and progressing well. This program is investigating the effect of Elagolix on heavy bleeding related to this highly prevalent condition. So, in summary, we continue to make significant progress with our pipeline and are on track for further advancements in the remainder of 2016. We have a broad pipeline that includes more than 50 active clinical development programs including more than 20 new products or indications in late-stage development or under regulatory review. With that, I'll turn the call over to Bill for additional comments on our second quarter performance. William J. Chase - Chief Financial Officer & Executive Vice President : Thanks, Mike. This morning, I will review our second quarter performance and provide an update on our outlook for 2016 inclusive of the recently completed Stemcentrx transaction and the BI collaboration. We're very pleased with our strong second quarter results. In addition to delivering strong operational sales growth of 18%, we exceeded the midpoint of our adjusted earnings per share guidance range by $0.06 and delivered growth of nearly 17% over the second quarter of 2015. As Rick mentioned, we continue to see strong momentum from HUMIRA with global sales of more than $4.1 billion, up 17.7% operationally. In the U.S., HUMIRA sales increased nearly 27%. We continue to see mid-teens prescription volume growth across the brand fueled by robust demand in the rheum, derm, and gastro market segments. In the quarter, we also saw a low-single-digit benefit on the growth rate as a result of customer buying patterns versus the prior year quarter. Channel inventory levels in both the second quarter of 2015 and 2016 were below half a month. International HUMIRA sales were more than $1.4 billion in the quarter, up 4% on an operational basis and exceeding our prior guidance of 3% operational growth for the quarter. Internationally, HUMIRA continues to maintain its market leadership position. We continue to see only modest overall market share gains for biosimilar REMICADE in major markets in line with our planning assumptions. And while still early in the launch, the ENBREL biosimilar continues to perform in line with our assumptions. Global IMBRUVICA net revenues were $439 million in the quarter. U.S. sales were $384 million and our international profit sharing was $55 million. Global Viekira sales in the second quarter were $419 million. This reflects weaker quarter-over-quarter sales in the U.S. due to competitive dynamics offset by our performance in international markets. Global sales of Duodopa, our therapy for advanced Parkinson's disease grew nearly 29% on an operational basis in the quarter continuing to grow by double digits internationally with a modest level of U.S. sales as expected. We also saw strong operational sales growth in the quarter from both Creon and Lupron, which were up 13% and 11% respectively. As Rick noted in the quarter, we received approval for two new products, VENCLEXTA and ZINBRYTA. We launched VENCLEXTA early in the quarter in its initial indication for relapsed/refractory CLL patients with the 17p deletion, which represents a smaller addressable patient population in the U.S. We have begun a measured commercial rollout to ensure adequate physician training and we expect a modest level of VENCLEXTA sales for 2016. For ZINBRYTA, we plan to launch in the U.S. in August. Adjusted gross margin for the quarter was 81.9% of sales. On a comparative year-over-year basis, this ratio reflects an adverse impact from foreign exchange of roughly 320 basis points. In addition, the adjusted gross margin reflects 160 basis points of unfavorable impact related to the Pharmacyclics acquisition including the profit transfer for IMBRUVICA. Adjusting for these impacts, gross margin profile performance improved by approximately 140 basis points versus the prior year. Adjusted R&D was 15.5% of sales, reflecting funding action supporting the pipeline, as well as the impact of both Stemcentrx transaction and the BI collaboration. Adjusted SG&A was 22.2% of the sales in the second quarter, down 290 basis points from the prior year. Adjusted operating margin was 43.9% sales, down 30 basis points relative to the second quarter of 2015. Excluding the negative impact of foreign exchange and the Pharmacyclics acquisition, operating margin profile performance improved 370 basis points versus the prior year. Net interest expense was $225 million and the adjusted tax rate was 20.1% in the quarter. Second quarter adjusted earnings per share excluding noncash intangible amortization expense and specified items were $1.26 up 16.7% year-over-year. Moving on to our outlook for the remainder of the year. Based on our strong business performance year-to-date, we are raising our 2016 adjusted EPS guidance range to $4.73 to $4.83, reflecting adjusted EPS growth of 11.4% at the midpoint. This includes the previously communicated $0.28 of dilution related to the Stemcentrx acquisition and the BI collaboration. We are also updating our 2016 GAAP diluted EPS guidance range to $3.82 to $3.92, which includes $0.91 per share of noncash intangible asset amortization expense and other specified items including acquisition costs and accounting impacts associated with Stemcentrx and the BI collaboration. On the top-line, we expect full year sales approaching $26 billion. Foreign exchange dynamics have run favorable relative to our initial projections and we are now forecasting approximately 1% of negative top-line impact from currency for the full year. Based on our strong performance year-to-date, we now expect U.S. HUMIRA operational sales growth of more than 20%. And we remain on track with our previously communicated full year guidance for international HUMIRA with operational growth in the mid-single digits. We now forecast an adjusted gross margin profile approaching 81% impacted by stronger performance of hedged currencies in 2016. The gross margin profile also reflects 130 basis points of impact related to the Pharmacyclics acquisition. Excluding this and the year-over-year exchange impacts, the gross margin profile is expected to improve relative to 2015 by roughly 190 basis points. We are now forecasting R&D expense of more than 16% of sales reflecting our increased R&D investments related to the Stemcentrx acquisition, and the BI collaboration. And we expect SG&A to run at approximately 23% of sales. We now forecast an adjusted operating margin profile approaching 42% on a full year basis. We remain committed to delivering on our 2020 targeted operating margin forecast of above 50% of sales. We are now forecasting net interest expense of approximately $925 million for the full year, above our original guidance of approximately $800 million, as a result of the debt we issued for the Stemcentrx acquisition. And we expect an adjusted tax rate in the 20% to 21% range in 2016. Regarding the third quarter, we expect adjusted earnings per share of $1.18 to $1.20. This excludes roughly $0.16 of specified items and noncash amortization, and includes the dilutive impact of Stemcentrx and the BI collaboration. We are expecting high single digit operational sales growth, excluding a modest negative foreign exchange impact in the quarter. So, in conclusion, we are very pleased with our performance in the quarter as we've driven strong top and bottom line growth while also advancing on our strategic priorities and our pipeline. This puts us in a strong position to continue delivering industry-leading growth this year. And with that, I'll turn the call back over to Liz. Liz Shea - Head- Investor Relations : Thanks, Bill. We'll now open the call for questions. Operator, we'll take the first question. Operator : Thank you. The first question comes from the line of Jeff Holford of Jefferies. Sir, Your line now is open. Jeffrey Holford - Jefferies LLC : Thanks for that. I'll start with a question for Rick, please. So, Rick, there's clearly substantial trapped value in the company because of the uncertainty for investors around HUMIRA. And you've made positive steps to deal with this through building new growth drivers through R&D, aggressive business development as well as making clear your long-term expectations regarding HUMIRA. Even so, despite great quarters like today, we're still seeing the shares trade at a substantial discount to peers. So, is there anything else that's up for discussion in terms of how you can unlock the trapped value in the company whether it's through different capital allocation, separation of your oncology platform given the valuations they can carry these days or anything else? Second, then for Mike, I wonder what does your collaboration with Bristol on Rova-T tell you about what they are thinking regarding their positioning of their OPDIVO-YERVOY combination in small cell lung cancer? And then last, maybe for Rick again, we're expecting that you'll be in place by Q4 to initiate patent litigation against Amgen. And it will be beyond just the dosing and formulation patents that have been more widely discussed today. Are those still reasonable expectations? And do you think investors will be reassured when we see what other patents Amgen has agreed that they are potentially infringing out of the patent bounds? Thank you. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. So, Jeff, this is Rick. I'll cover the first and third one and then I'll have Mike cover the other one. So, on the untrapped value, what I would tell you is that if you look at our PE, I think what you've seen and if you look at the range of companies in our peer group, there are obviously companies that have a much lower PE for a variety set of reasons and there are companies where the, have higher PEs and the median PE is certainly above where we are. So, there's certainly a level of overhang that's associated with the biosimilar uncertainty around HUMIRA. And I think what we have laid out for investors is a clear strategy that we put in place starting back in 2013 of how we were going to deal with that. Ultimately, we have a large portfolio of IP around HUMIRA and we certainly expect that to be able to protect the asset as we described back in October. We have now added to the portfolio two fundamentally differentiated new assets in 494 and risankizumab. And you're seeing some of that data play out, and so, that we fundamentally believe that those will allow us to ultimately be able to grow through what will obviously be at some point a biosimilar impact both internationally, as well as in the U.S. And then, we've spent a considerable amount of time building a robust pipeline that we've shown at our R&D Day and in other events that had the ability to be able to ultimately generate a very significant revenue opportunity that would allow us to grow through even the most bearish impact that's out there from an analyst standpoint around biosimilars. So, I think, we've done the things that we think are important to be able to communicate and then ultimately, build a strategy to be able to drive the business from a growth perspective because that was the charter that we set for the company when we launched. And, I think we've demonstrated that were capable of doing that. I think it will take some time for the litigation strategies to play out and for investors to continue to gain confidence. Having said that, we constantly look at different kinds of alternatives that we think truly are value-enhancing to shareholders but also value-enhancing to the business itself. And we'll explore all of those in time to determine whether or not they make sense. I mean, I think, if anything, we've probably been on the proactive side of going out and building new growth platforms and other kinds of things to be able to sustain the business going forward. And we have seen the PE improve, and we would certainly expect that it will continue to improve. I mean, if you look at our performance, both currently as well as going forward as we projected it in our LRP, we will perform in the top tier of our peer groups and we would expect that we'll start to see the PE reflect that to a greater extent going forward as the litigation strategy plays out more. On the third question, and I'm sure there will be other questions around the litigation and I'll apologize in advance that this won't be a very satisfying answer for you but it certainly I think you'll understand why. We're now in the very active phase of litigation around HUMIRA biosimilars. And therefore, we're not in a position where we're going to be able to provide a lot of color. And we're certainly not in a position where we can do this play-by-play strategy of how we're going to deal with every aspect of it. That just wouldn't be a smart thing for us to do. What I can reiterate is this. Back in October, we outlined in detail the extensive portfolio of IP that we have for HUMIRA and our confidence in that IP and it goes beyond any one single patent. And I can tell you we remain confident in that IP portfolio and we've made it very clear that we intend to vigorously defend all of our IP against anyone that potentially infringes it. And, so that process will play out. So, as I said, it's just not prudent for us now in this space to ultimately lay out in detail the play-by-play. And, so we're just not in a position to be able to do that. Michael E. Severino - Chief Scientific Officer & Executive VP : Okay. So, this is Mike. I'll take the question about the BMS collaboration. So, I think that, first of all, we're very fortunate that after many years, without much progress in the treatment of small cell lung cancer, there are very promising mechanisms coming forward, our own Rova-T, as well as the data that have been presented recently in immuno-oncology. And I think that offers real benefit for patients downstream. What I would say about the way the two companies are thinking about these assets, I think that the speed which the deal came together really speaks for itself. And that collaboration would not have been possible in this short period of time if we were thinking about the assets very differently. As we've said, in other settings, when one is thinking about the treatment of patients with small cell lung cancer, there are a couple of treatment goals. The first is that one needs to get disease control because these patients present very ill with very rapidly progressing disease. And Rova-T has shown in its Phase II studies that it can do that and it can do that with a defined course of therapy. We also believe that the data strongly supports that the responses with Rova-T will be durable. Now, when one thinks about other treatment goals, it would be desirable to have a long-term surveillance on board after one achieves that initial strong and durable disease control and we believe that IO agents can play a real role there. And so, the collaboration with Bristol will test this. And we believe will provide very exciting data for patients with small cell lung cancer in the future. Jeffrey Holford - Jefferies LLC : Thank you. Liz Shea - Head- Investor Relations : Thanks, Jeff. Operator, next question please? Operator : Next question is from Jami Rubin of Goldman Sachs. Your line now is open. Jami Rubin - Goldman Sachs & Co.: Hi. Can you hear me? Liz Shea - Head- Investor Relations : Yes. Jami Rubin - Goldman Sachs & Co.: I assume you can hear me. Anyway, I have a couple of questions. First on the outlook for hep C. Rick, I think you had said earlier obviously VIEKIRA underperformed in the U.S., outperformed internationally. But how are you thinking about the opportunity for next generation hep C given what clearly has been a more challenging pricing environment? And I'm just wondering if you still stand by your $3 billion forecast? And secondly, on Stemcentrx. When do the next two assets for Stemcentrx enter the clinic? Now, is that this year and for which indications? And wondering what we will see potentially at ESMO? And Michael, just maybe if you can explain. I'm still getting a lot of pushback from investors who are unclear about the value of Rova-T just given that the response rate that we saw at ASCO was a bit lower than what we saw at World Lung, I think creating question marks around the durability of response. Thanks very much. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay, Jami. This is Rick. I'll take the hep C question that you had. Certainly, as we said in the first quarter call, we have seen an impact of the new entrant into the marketplace. I'd say we've seen it primarily in the public channels, particularly I'd say the VA, and it really boiled down to a pricing strategy and ultimately we decided that we were not going to match the lowest price, the eight-week price, that was out into the marketplace. And therefore, we lost a significant amount of share. I mean, at our peak, we probably had close to 40% share, and now we have share that's more down in the single-digit range. So, I'd say that's the vast majority of the impact that we've seen. There has been some price impact also that played through but the greater impact is clearly share loss in that public channel primarily. And so, as we look forward to next generation, I think as we look at the profile of that asset, obviously from a clinical performance standpoint, it is everything we would have hoped it would be. Based on the data that we've seen so far, I think it will be a highly competitive asset. It will also provide, because it is pan-genotypic, an opportunity to be able to bridge across all of the genotypes, and in particular in the United States, genotype 2 and genotype 3, where Sovaldi essentially had a strong position in the marketplace, and so this will even that playing field. So, we fundamentally believe that next generation will allow us an opportunity to be able to grow our share. If you look outside the United States, as an example, and you look in countries where there is predominantly a 1B population, but even in some countries where there's a significant 1A population, our market shares in most of those countries are in, I'd say, on the low end, 30%; on the high end, sometimes as high as 70%. So, we compete very well, and the profile of 1B is certainly much more of a competitive profile to the alternatives that are available outside the United States. And so I think it gives you an idea of our ability to be able to perform in those markets. So, we would hope, and I think expect, that next generation will allow us to be able to gain share in those marketplaces. Your $3 billion, you are probably going back to the first prediction and I think we anticipate that we would get back into that range. But I'm going out of the business of predicting HCV at this point. I think what I would say is despite the impact that we've seen in the U.S. from a share standpoint, I think it shows you how fundamentally strong the overall business is because we've taken a fairly substantial hit in the U.S. on HCD (sic) [HCV]. But, yet, we continue to perform at a very high level and offset all of that impact and are now raising guidance on top of that. So, the balance of our entire business and in particular I'd say HUMIRA and IMBRUVICA right now gives us the ability to be able to do that. And so, we're not dependent upon that single asset performing at a certain level. Mike? Michael E. Severino - Chief Scientific Officer & Executive VP : Okay. So, with respect to the Stemcentrx questions. Rova-T, the objective response data for Rova-T have been very consistent in our view across the various reports over the last several months. And they've ranged from about 39% into the mid 40% range. And that really just relates to the cut of the data, whether one is using initial investigator reports or subsequent adjudicated assessments of objective response and doesn't bear on durability of those responses in any way. And the objective response rate and, importantly, the clinical benefit rate have both remained very high. The one-year survival has also been very consistent in the 30%-plus range across the data cuts, which gives us a very good feel for the durability of those responses. And in this heavily pre-treated patient population, the best estimate – the most rigorous but also the highest estimate of one year survival is about 12% and in many cases it may actually be lower than that. And so, that 30% number we view as very important. So, we don't see anything concerning with respect to the durability of the responses with Rova-T. So, with respect to the remainder of the Stemcentrx pipeline, there are actually five programs in the clinic now, one of those is Rova-T, two are the Pfizer-partnered programs, PTK7 and Ephrin-A4. And then, there are two other programs in the clinic for solid tumor indications, but we haven't disclosed those targets or the particular tumors of interest at this point in time. In addition to those five, there are five additional assets that will enter the clinic over the next 12 months to 18 months, so by the end of 2017. In the areas of initial interest when one looks at the tumors that we're treating today, will obviously be small cell. There's also a focus on ovarian cancer and triple-negative breast cancer among others. Liz Shea - Head- Investor Relations : Thanks, Jami. Operator, we'll take the next question. Operator : Thank you. The next question is from Chris Schott of JPMorgan. Your line now is open. Chris Schott - JPMorgan Securities LLC : Great. Thanks very much for the questions. First one is just can you elaborate a little bit more on biosimilar dynamics in Europe? Now that we've had some additional experience with both Remicade and early with Enbrel. Just how are volume and price dynamics shaping up there and the impact to HUMIRA? Second was on HUMIRA and maybe the derm business. It sounds like very strong performance in the quarter. But the environment overall seems to be getting more competitive here with the IL-17 seeing some nice uptake. Are you seeing any impact to the business from these competitors? And just how do you think about the outlook for that part of the franchise over time? Thanks very much. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. Great. Chris, this is Rick. So, I'll cover those. So, let me start with the biosimilar impact because, as you said, we've seen biosimilars certainly with the Remicade biosimilar in the market for quite some time and now we're in the early phases of the launch of Enbrel biosimilars, particularly in the European areas. So, if you look at Remicade, there are Remicade biosimilars now in roughly 60-plus countries, like 62 countries. About 50 of those, a little more than 50 of those, have pricing and reimbursement. So, they are actively involved in marketing the product in those countries. If, we've studied it very carefully, if you look at the overall share of biosimilars it's less than 5%, it's about 4.5%. If you look at their share of Remicade, it's about 20%, 22% something like that. It varies a lot. So, I'd say it's very high in tender based countries like a Norway, Denmark, Poland is an example. Very high market share in those. If you go more into the traditional Western European markets, more like in the 20% to 25% share of the Remicade market. And, the discounting has played out to basically range in the tender countries fairly high, I'd say that 50% to 70% kind of range from a discounting standpoint and then the rest of the market probably in that 30% to 40% kind of range. It hasn't had any impact on us at all. Remicade because it's an infusion product in most of those countries doesn't compete in the same space that we compete in. So, then, you move over to Enbrel. So, Enbrel is approved now. The Enbrel biosimilar is approved in about 32 countries. There's pricing and reimbursement in about a third of those countries right now. We've seen much lower discounting than what we've expected, I'd say. It ranges from as little as low-single digit discounting to maybe up in the 30% to 35% range in non-tender countries, and kind of the high 30%s to high 50%s in the tender countries. Again, it's playing out similar to the way we saw the Remicade biosimilar. So in the tender countries, they are having higher share like the Norways and the Denmarks, Germany, Sweden, single digit kind of share. So, really no substantial market share impact but it's too early in the process for us to see that. I'd say the strategy that we anticipated and the one we put in place seems to be working well but it's the early rounds and you can see it in the performance of the business. You can see HUMIRA's continuing to grow in the international markets. And as you back out the Venezuela impact, you can see that it's actually growing in the 6% or so range, 6.2% range. And so, we're continuing to see good, strong growth in those markets. And so, I'd say the early rounds are working like we had anticipated they would. But we need to give it some more time and see how it plays out. But it's a good opportunity for us to see how our strategy is working and be able to modify that strategy. So, that's essentially the biosimilar impact that we see. Nothing different than what we had expected. Now, let me move over to derm and the impact on 2017. I'd say, overall, we're very happy with our performance in the derm space. So, if you look at the U.S., I'll talk specifically about the U.S., we've seen TRx's grow. In fact, accelerate over the course of time. I mean, if you go back to the early part of 2015 or even look at the average across 2015, we had kind of low double-digit TRx growth. In first quarter and second quarter that's accelerated to like 17% or 18% TRx growth in derm. And so, we're seeing nice strong growth in that segment of the market. If you look at our revenue, a very similar kind of profile, we had strong double-digit growth and now it's accelerated fairly dramatically probably about 10 points to 15 points above what it had been running at. If you look at market share, our overall market share is pretty stable to maybe slight down, 1.5% or so. As we analyze it, it is really driven extensively by the Otezla experience where we're seeing a lot more patients, particularly moderate and sometimes mild patients coming into the category. And so, therefore, the category is growing faster and so that dilutes our market share position. We when pull Otezla out, and we looked at our market share, our market share looks relatively stable. In particular, if you look at PsA, our overall share has been stable in the U.S. at about 32%. If you look at Rheum PsA, it's actually increased about three points, which is the larger part of the PsA market, it's about 75% of the overall PsA market. And even the AS PsA has increased about two points. Psoriasis as I said, it's down about one-and-a-half points to two points in total, but it's more driven by Otezla. So, overall, we feel very good about how the business is performing across all the indications but certainly in derm as well. Liz Shea - Head- Investor Relations : Thanks, Chris. Operator, we'll take the next question. Operator : Next question is from Marc Goodman of UBS. Your line now is open. Marc Goodman - UBS Securities LLC : Yeah. I was hoping you could give us a flavor for managed care coverage for the key products for 2017, I mean, it's obviously, specifically HUMIRA. And then, could you just give us an update on how you're thinking about AndroGel this days? Thanks. Richard A. Gonzalez - Chairman & Chief Executive Officer : Well, managed care, I mean, we're in really the thick of the negotiations for the 2017 and 2018 timeframe. So, I'm not necessarily going to talk about a lot of specifics because we're in active negotiations on a number of those contracts. But what I would say is HUMIRA has typically had a very, very strong position on managed care and we're not anticipating anything different going forward. But it would be premature to basically talk about a lot of specifics around the contracting, but, I'd say, we feel good about how it is sorting out. On AndroGel, I guess I'm trying to better understand your question. Are you thinking more about follow-on products or are you thinking about the durability of it? Marc Goodman - UBS Securities LLC : Yeah. Both. Thank you. Richard A. Gonzalez - Chairman & Chief Executive Officer : Yeah. Well, we don't necessarily have a follow-on product. We had some programs that we had been working on and that we ultimately decided to stop. And so, it will be running this franchise out. We're treating it as a typical LOE kind of an asset. And it's performing better than what we had expected but ultimately there will come a time where it will suffer more impact from generic competition. And so, we're basically dealing with it as we would deal with most assets, smaller molecule kind of asset LOEs where we take a large part of the cost out of the product. And manage it for maximum profitability. William J. Chase - Chief Financial Officer & Executive Vice President : And Marc, we do continue to see market shrinkage. We've been very pleased with the way that the share has hung in there. And obviously, it's been a nice story this year but we got to watch how this thing plays out as the LOE dynamics proceed. Liz Shea - Head- Investor Relations : Thanks, Marc. Operator, we'll take the next question. Operator : Next question is Andrew Baum of Citi. Your line now is open. Andrew S. Baum - Citigroup Global Markets Ltd.: Thank you. You've obviously done few very substantial deals within the oncology segment with Pharmacyclics and Stemcentrx. Could you just outline what your appetite is and how you see your oncology franchise broadening out over the next few years? Is it now pausing to integrate the two transactions and set up the trial programs that you need? Or is the appetite still there and you see additional opportunities to address other facets of oncology? Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay, Andrew. This is Rick. So, I'll cover that. And maybe Mike can jump in on some specifics. When we went into – when we made the decision that the core future growth franchise on top of immunology was going to be oncology, we made a decision that we would invest in a way to try to build leadership positions in certain areas where we thought we had core competencies that were complementary to being able to perform in those areas. So, specifically, we started with hematological oncology based on the assets that we had internally as well as the opportunity that existed with Pharmacyclics. And our goal was to be basically build a position where we thought we could drive to a leadership position within that category. So, if you look at the assets we have today including IMBRUVICA and where we think VENCLEXTA will be able to expand to, it would tell us that we should have an opportunity to be able to bring forward innovative therapies in roughly 65% of the overall market in hematological malignancies. And I'd say that's an area where we feel comfortable with what we have. Now, having said that, if we found unique opportunities, I'd say particularly in the acute leukemia side, assets or technologies or a drug that we thought was particularly attractive in an area where we didn't think we had a strong asset already, certainly we would pursue that kind of an asset. But I'd say from a platform standpoint, we feel very good about what we have in hematological malignancies, both internally as well as the addition of Pharmacyclics that we did a year or so ago. On the solid tumor side, as we've said before about Stemcentrx, one of the things that was attractive to us is we have a number of efforts internally to be able to identify new targets, and so we have an effort internally to be able to do that. We obviously have a collaboration with Calico, and part of the work that their doing is to identify new oncology targets, but we wanted a more fundamental base platform for solid tumors, and one of the things that attracted us to Stemcentrx is we believe they have that. And we're excited about that opportunity and Mike talked earlier about the number of candidates that will be moving out of that platform; and I think it's impressive what they've accomplished. And, so, that has built what we fundamentally believe will be the core platform for us in solid tumors, in addition to what we already have. We certainly continue to look for, again, now, more individual kinds of technology plays or assets that might be complementary to that, but we're not looking for another big platform. I don't know. Mike, would you want to add anything? Michael E. Severino - Chief Scientific Officer & Executive VP : I agree with that certainly. When we look at what we've built in terms of the hematological malignancies platform, I think we have the assets we need to drive standard of care not only in the short term, but also, in the longer term. And then when one considers what we've built on the solid tumor side both internally through Stemcentrx and through our partnership with Calico, we feel good about the pipeline opportunities that we'll be able to bring forward over the course of the next several years. We'll always keep our eyes open particularly for earlier technologies, earlier programs things that can add to those efforts, but we feel good about the engine we've built. Andrew S. Baum - Citigroup Global Markets Ltd.: Thank you. Liz Shea - Head- Investor Relations : Thanks, Andrew. Operator, we'll take the next question please. Operator : Next question is from Mark Schoenebaum of Evercore. Your line now is open. Mark J. Schoenebaum - Evercore Group LLC : Sorry about that guys. I always have trouble picking up my phone this week. I had a couple of questions. The first is related to Elagolix. There are competitors on the horizon; you're well ahead. There is a drug out there I think from Takeda that's been licensed to be developed in the U.S. and the owners of that drug say it's better than Elagolix because it's QD, once a day, and you can – it's more potent. And most importantly, you can co-formulate it with Add-back. So, I'd love for you to give us your view on Add-back. Is it attractive to have co-formulation or are you guys at a disadvantage or not? And the other question I had was kind of an off the rails question, but I know Henry joined you guys a while back and a lot of people on the Street say great things about him. I'm just wondering will he ever be investor facing? Thank you. Richard A. Gonzalez - Chairman & Chief Executive Officer : Okay. So, Mark, this is Rick. And I'd say we feel very good about Henry. Specifically, I'll talk myself. Specifically, I feel very good about having Henry as part of the leadership team. And certainly, yeah. I mean, over time I think we will bring Henry in. It will be most relevant when we're talking about those kind of areas where we has direct responsibility for. But Henry has already become an integral part of the leadership team and has contributed significantly. So, Mike, do you want to cover Elagolix? Michael E. Severino - Chief Scientific Officer & Executive VP : Certainly. So, with respect to Elagolix, as you pointed out, Mark, we have a substantial lead, having completed our two pivotal Phase III studies and already being in the process of collecting longer-term data that are necessary to define benefit risk. And we think that is a real advantage for our program, and one that we're going to continue to drive as we drive forward for example with the Add-back program to further enhance the understanding of how we can use Elagolix to treat endometriosis and uterine fibroids. With respect to some of the issues you brought up on competitive programs, we don't really view potency as a primary driver here. In fact, the most potent agent in this access is Lupron and the problem is in fact the degree to which that shuts down the access. We're trying to achieve a fine titration of dose. And we believe Elagolix has the properties to allow us to do that. With respect to co-formulation, with Add-back, there is nothing that would prevent us from co-formulating with Add-back as well and we believe over time, there may be a number of strategies that could be used to protect bone and so we'll have flexibility to employ many, many different strategies. So, we feel very good about the position of Elagolix. We think it's an important treatment option and we think that it's going to make a real impact on endometriosis. With respect to relative advantages of a Q day formulation, I think that again depends on the dose one ultimately selects. And I think, when we look at the overall profile of Elagolix, we remain convinced that it's very strong. Mark J. Schoenebaum - Evercore Group LLC : Can I say one more thing? Liz Shea - Head- Investor Relations : Sure. Mark J. Schoenebaum - Evercore Group LLC : Oh, sorry. Yeah. I wasn't sure if I was muted. Hey – and one shout out to Liz, congrats on getting the IR seat. Thanks for all the help. She's doing great. Liz Shea - Head- Investor Relations : Thanks, Mark. Operator, we'll take the next question. Operator : The next question is from Vamil Divan of Credit Suisse. Your line now is open. Vamil K. Divan - Credit Suisse Securities (USA) LLC (Broker): Great. Thanks so much for taking the question. So, maybe two. You touched on this a little bit at your R&D day, but just around multiple myeloma and some of the work you guys are doing there and you touched a little bit on VENCLEXTA and moving that one in there. A little bit more just thoughts around that given such a competitive space and what you see as the advantages of moving into there. And then, the other one which you didn't touch much on at the R&D day and I think it's overlooked a little bit is veliparib and there's been a lot of discussions around the PARPs recently. Just curious if you can kind of maybe refresh us on sort of what you feel is the competitive advantages that you may hold or where that's going to sort of fit in relative to the other PARPs that are either on the market or in development? Thanks. Michael E. Severino - Chief Scientific Officer & Executive VP : Okay. So, the first part of the question related to multiple myeloma and we have the potential to pursue myeloma with a number of assets in our portfolio. VENCLEXTA has clear potential there and we're advancing that program rapidly as we mentioned during our opening remarks. IMBRUVICA also has potential, as do a number of the molecules in our pipeline. It is a competitive space. One can prolong survival to a much greater extent today than was possible a decade ago. But we still don't have curative therapies. Patients ultimately fail therapy and progress which means that we need new mechanisms that aren't cross-reactive that provide durable disease control. And we think we have a number of those in our pipeline. So, we're aware of the competition certainly. But we think we have therapies that will further the standard of care in that disease and we'll be driving clinical programs forward to demonstrate that. With respect to veliparib, so veliparib is a molecule that is an important part of our overall oncology efforts. It's in Phase III studies across a range of tumor indications. We have a bit of a different hypothesis around the way veliparib should be used than perhaps some of the others who are developing PARPs. We are not focused solely on the use in patients with germline BRCA mutations or other HRD deficient tumors. We are exploring the hypothesis in our Phase III program that PARP can augment DNA damage in chemotherapy; essentially that the first hit doesn't have to come from a genetic hit. It can come from a therapeutic hit that is DNA damaging which would increase the importance of DNA repair mechanisms. That hypothesis is being tested in a range of Phase III programs in non-small cell lung cancer and breast cancer and in ovarian cancer. And those studies will start to read out in 2017. We'll have a number of important data readouts which will tell us the role that PARP can play there. So, we haven't focused on it as much in recent investor days and that's largely because it is in a quiet period where the studies are up and running. We're generating the results but you'll hear a lot more about PARP in 2017. Liz Shea - Head- Investor Relations : Thanks, Vamil. Operator, we'll take the next question, please. Operator : Next question is from the David Risinger, Morgan Stanley. Your line now is open. David R. Risinger - Morgan Stanley & Co. LLC: Thanks very much. I have two questions. First, with respect to payers, they are starting to talk about trying to contract for individual indications. And obviously, one area they might be thinking about is alternatives to HUMIRA for certain indications from new drugs that have potentially better profiles than HUMIRA in certain indications. Could you just comment on your perspective on contracting for individual indications in autoimmune disease? And then, second, Rick, I was hoping that you could provide a little bit more detail on the sort of timing and specifics surrounding the patent litigation steps? So, obviously, you're not going to comment on individual patents or individual patent strategies. But as I understand it, there will be immediately after Amgen gets approval of its biosimilar, immediately after that occurs, there will be a wave of patent litigation that kicks in and I was just hoping that you could provide a little bit more perspective on how investors should think about that, and what they should be expecting? Thank you. Richard A. Gonzalez - Chairman & Chief Executive Officer : Yeah. So, this is Rick. So, let me start with the payer question that you had. Indication-based pricing, I think, first evolved primarily in the oncology space. And it was driven, I think, by certain efforts to say, you'll have an oncology agent that has very strong efficacy in a certain disease, and might have significantly lower efficacy in another disease, and why would I pay the same for this strong efficacy as I would for relatively modest efficacy? I think that was how the concept originally evolved. As we look at HUMIRA, and we look across all of the major indications at least, with every single indication, there's obviously some variation between the competitive profiles. But I'd say, in general, HUMIRA tends to perform across those broad set of indications in the top tier. And so that is how we view it. So, indication-based pricing wouldn't be something that we think is very applicable for this specific asset in this particular class. And we haven't seen it take off much prior to this, and we'll have to see how it plays out over time. There are a lot, it may sound to you like it's a fairly innocent issue around timing and the steps and what should play out, but I would tell you, it's not that from a litigation standpoint. And so I'm just going to need to take the same position I did before. We're not in a position to be able to give you a lot more color. Certainly, we've made it clear what our position is going to be. And I think that will become clearer as the steps play out. But I can't give you a whole lot of color on the timing or what the alternatives would be. Liz Shea - Head- Investor Relations : Thanks, David. David R. Risinger - Morgan Stanley & Co. LLC: Thank you very much. Liz Shea - Head- Investor Relations : Operator, we have time for one last question. Operator : Okay. The last question is from Gregg Gilbert of Deutsche Bank. Your line now is open. Gregg Gilbert - Deutsche Bank Securities, Inc.: Thanks. I want to go back to Bill's comments on HUMIRA growth in the beginning. Clearly, prescription growth has been very robust. But you're also enjoying a really nice pricing tailwind. And I think the net price benefit you saw in the U.S. was about 10% which required, I think, a 20%-plus lift price increase over the year-ago period. So, I'm curious how you would expect that dynamic to play out, both list price increased magnitude and frequency going forward, the ability to realize net price and how you're thinking about that? Seems like a very robust high set of numbers for such a big product. And lastly, Bill, since we don't have a 10-Q, perhaps you could provide cash flow from ops and receivables if you have those handy, would appreciate that. Thank you. William J. Chase - Chief Financial Officer & Executive Vice President : Sure. Gregg, I think probably the best thing to do is dissect the U.S. number on the quarter for you. And I think that will give you a good sense of the overall dynamics of the brand. And then I'll back up and talk a little bit about the business in general. Obviously, the brand is performing very, very well in the U.S. We grew at 26.7% in the Q. Script trends, the way we see them, we're in the mid-teens for the quarter. Our price was up – it was actually up in the single digits. And then, as I said in my comments, we did see a modest impact from differences in customer order patterns. Again, we run this business at less than half-a-month inventory. But it gets a little tough to call at various times and we did see a little bit of demand differences between the Q. We had a little bit lower inventories in the second quarter of 2015 relative to 2016. So, I think the way you got to think about this is mid-teens growth from script and single-digit price. And when you add those up, you can pretty much get to the 20% number that we've guided to. From a overall price standpoint, look, I would say if you back up and look at our growth on the quarter of 18%, the majority was volume. Across the total book of business, we had a price impact of less than 4%. So, the strategy that we've actually employed for the business and certainly with our new products launching is this is going to be a product, company that's fueled by volume and not price. Obviously price, we do have an opportunity in certain markets to take it, but I would not say this is a company that is heavily dependent on price. And then, as we look out over the LRP, we tend to scale down our price expectations in the U.S. because we think that's the prudent way to model. Richard A. Gonzalez - Chairman & Chief Executive Officer : Yeah. And the only thing I'd add is – on the inventory discussion that Bill had, it's important to keep in perspective both periods were under a half-a-month, but even relatively small variations in a day here or a day there can have some impact on the growth rate. So, what Bill was describing is that the prior period had a inventory level that was below 0.5, right, but it was lower than what the inventory level was this period, which was also below 0.5. William J. Chase - Chief Financial Officer & Executive Vice President : From a cash flow and receivable standpoint, again, we're still working on the Q, so I'm not going to specifics there other than to say that cash flow remains very robust and frankly from a receivable standpoint we're collecting fine. So, but I can't give you specifics at this point in time. Gregg Gilbert - Deutsche Bank Securities, Inc.: Thank you. Liz Shea - Head- Investor Relations : Thanks, Gregg. And that concludes today's conference call. If you'd like to listen to a reply of the call, please visit our website at abbvieinvestor.com. Thanks again for joining us. Operator : Thank you, speakers. And that concludes today's conference call. Thank you, all, for joining. You may now disconnect.
ABBV	AbbVie	1,551,152	Health Care	Biotechnology	North Chicago, Illinois	2013 (1888)	2012-12-31	2,016	4	2016Q4	2016Q3	2016-10-28	4.6	4.68	5.326	5.448	7.76687	12.12	11.63	Executives: Elizabeth Shea – Vice President, Investor Relations Richard Gonzalez – Chairman & Chief Executive Officer Michael Severino – Chief Scientific Officer & Executive Vice President-Research William Chase – Chief Financial Officer & Executive Vice President Analysts : Jami Rubin – Goldman Sachs Jeffrey Holford – Jefferies Christopher Schott – JPMorgan Andrew Baum – Citigroup Vamil Divan – Credit Suisse Geoff Meacham – Barclays Capital Ami Fadia – UBS Securities John Scotti – Evercore Group Alex Arfaei – BMO Capital Markets Steve Scala – Cowen & Co. Operator : Good morning and thank you for standing by. Welcome to the AbbVie third quarter 2016 earnings conference call. All participants will be able to listen only until the question and answer portion of this call. [Operation Instructions] I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations. Elizabeth Shea : Good morning and thank you for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Executive Vice President of Research & Development and Chief Scientific Officer; and Bill Chase, Executive Vice President of Finance and Chief Financial Officer. Before we get started, I want to remind you that some statements made today are or may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about the factors that may affect AbbVie's operations is included in our 2015 Annual Report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to release publicly any revision to forward-looking statements as a result of subsequent events or developments, except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand AbbVie's ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll now turn the call over to Rick. Richard Gonzalez : Thank you, Liz. Good morning, everyone, and thank you for joining us today. This morning I'll discuss our third quarter performance, recent operational highlights, and I'll also share some high-level perspective regarding our growth profile for 2017. Mike will then provide updates on recent advancements across our R&D programs, and Bill will provide additional color on the quarter and our outlook for the remainder of this year. 2016 is shaping up to be another very strong year, with operational revenue growth year-to-date of nearly 16% and EPS growth through three quarters of 14.6%. This follows a very strong 2015, where we delivered operational revenue growth of 22% and EPS growth of 29%. Based on our confidence in the performance of the business going forward, today we'll provide a view of 2017 which will once again demonstrate strong underlying performance. Our third quarter results were ahead of our expectations, including adjusted earnings per share of $1.21, representing growth of 7.1% versus the third quarter of 2015. Our results included global operational sales growth of 8%, reflecting continued strong performance from our on-market business, led by HUMIRA and IMBRUVICA, as well as other products in our portfolio. HUMIRA continues to drive robust performance, delivering global operational growth of more than 12% in the quarter. Despite increasing competition from new classes of drugs and indirect biosimilar competition in international markets, HUMIRA continues to demonstrate exceptional performance and durability across the three major market segments. In rheumatology, HUMIRA continues to hold the number one market share position with year-over-year share gains. In dermatology, we're seeing mid-teens volume growth, and we're maintaining a very strong number one market share position with a 15-point lead over the number two competitor. And in GI, we continue to see strong double-digit volume growth. Internationally, HUMIRA continues to maintain its strong position, despite indirect biosimilar competition, which is tracking in line with our expectations. We also continue to deliver on our oncology strategy. IMBRUVICA's performance in the quarter was outstanding, with third quarter global revenues to AbbVie of just over $500 million. We're continuing to drive strong uptake in CLL. In the second-line-plus-CLL market, we continue to hold the leadership position, with more than four of 10 patients starting treatment with IMBRUVICA. And in the front-line setting, our market share position is steadily increasing, with nearly one out of five patients now starting IMBRUVICA as first-line therapy. While we're pleased with this performance, we're still in the very early stages of our trajectory in the front-line setting. We're making progress in a number of important comparative and combination studies, evaluating IMBRUVICA monotherapy and combination therapy versus regimens such as BR and FCR, often considered the gold standards in the treatment of CLL. These studies are being run in different patient segments, including young and fit patients and the watch-and-wait population. And the results will add significantly to the breadth of data supporting IMBRUVICA and will provide physicians with more evidence of the compelling clinical benefit in the front-line setting. Additionally, in other approved indications, including mantle cell lymphoma and Waldenstrom's, IMBRUVICA holds the market-leading position in the relapsed/refractory segments. In geographies outside the U.S., IMBRUVICA continues to experience strong adoption in Europe and Canada and has recently been launched in several new markets, including Japan. While CLL clearly represents the largest revenue contributor to IMBRUVICA's growth over our long-range plan, new indications will also augment our performance. To that end, there is potential for several IMBRUVICA regulatory submissions and approvals over the next few years, including relapsed/refractory marginal zone lymphoma, which is currently under regulatory review; chronic graft-versus-host disease, which we expect to submit for approval in the first half of 2017; front-line mantle cell lymphoma, which will add to our existing indication in relapsed/refractory MCL; as well as relapsed/refractory follicular lymphoma and front line diffuse large B-cell lymphoma. For several of these indications, IMBRUVICA will be the only approved treatment, underscoring the importance of this therapy for patients. Collectively, these new IMBRUVICA indications represent a significant incremental revenue opportunity for AbbVie. Mike will provide an update regarding some upcoming data flow for several of these potential new indications. Earlier this year, we received approval for Venclexta monotherapy in patients with relapsed/refractory CLL who harbor the 17p deletion, a relatively small subset of the refractory patient population. In partnership with Roche/Genentech, we're continuing to make good progress with our launch within this indication, with Venclexta now added to the NCCN guidelines and continued progress with formulary access. Physicians are gaining experience with the therapy, and we look forward to additional data next year in the broader relapsed/refractory setting. We also saw a strong performance from several other products in our on-market portfolio, including Duodopa, Creon, and international Viekira. In addition to our strong financial results, we have continued to advance our late-stage pipeline. Last week, at the ASRM meeting, we presented positive data on Elagolix in endometriosis, including additional results from our two pivotal studies. Results from these trials will support our U.S. regulatory application, which is on track for submission in 2017. We're nearing the completion of our registrational program for our next-generation HCV combination, which is on track for commercialization next year. Based on the data we've shared to date, we believe our next-generation HCV therapy will address the remaining unmet medical needs within this market, with high SVR rates across genotypes with eight weeks of therapy. We're making good progress with the risankizumab program, which is in development in partnership with BI. We recently completed, ahead of schedule, patient enrollment for the pivotal studies in psoriasis, with data from three of these trials expected in 2017. We recently launched ZINBRYTA, for relapsing-remitting multiple sclerosis and are in the early stages of our rollout in collaboration with Biogen. And we've also continued to advance assets from the Stemcentrx pipeline. We recently started a basket study evaluating Rova-T in several neuroendocrine tumors where DLL3 is expressed. And we also initiated a regimen selection study for Rova-T in front-line small-cell lung cancer. Based on our performance year-to-date, we're raising our full-year 2016 guidance to $4.80 to $4.82 on an adjusted basis, reflecting growth of 12.1% at the midpoint. Over the past several months, we've received a lot of interest regarding our expectations for 2017. While we're in the midst of our annual planning process, based on the continued strength of the business and especially HUMIRA and IMBRUVICA, we're now at a point where we can provide some high-level direction regarding our top and bottom line growth expectations for 2017. We expect low-double-digit operational growth in 2017. 2017 will be another important year of investment in R&D, as we expand our leadership position in immunology and hematological oncology and also build our position in solid tumors. As a result, we expect EPS growth of roughly 13% to 15% from the midpoint of our new 2016 guidance range. This level of performance positions AbbVie to be among the industry leaders for both revenue and EPS growth once again next year. We'll outline our detailed 2017 guidance on our fourth quarter earnings call in January. Since our inception in 2013, we've delivered strong financial results, and we're well-positioned to deliver industry-leading growth again in 2017 for the third consecutive year. We continue to be proud of our strong execution, and we remain committed to our long-term strategic and financial objectives, which we outlined for you in October of 2015. AbbVie represents a unique investment opportunity, offering both compelling growth, along with a strong return of capital to investors, including a rapidly growing dividend. To that end, today we announced our board of directors declared an increase in our quarterly cash dividend from $0.57 per share to $0.64 per share, an increase of over 12%, beginning with the dividend payable in February 2017. We view the dividend as an important aspect of our investment identity and as a sign of our confidence in the business going forward. Since the company's inception in 2013, AbbVie has increased its dividend by more than 60%. In summary, the strategy we've put in place puts news a position to deliver strong top and bottom line performance. We've established growth platforms in some of the largest and most attractive segments, and we've built a compelling pipeline in these areas, which will contribute significantly to our performance in the years to come. With that, I'll turn the call over to Mike for additional comments on our R&D programs. Mike? Michael Severino : Thank you, Rick. Once again, we had a very productive quarter in R&D, with significant progress across a number of programs. Today, I'll highlight key pipeline events that occurred during the quarter, as well as some of our upcoming milestones. I'll start with oncology, an area where we are advancing our pipeline in both hematologic malignancies and solid tumors. Turning our attention to solid tumors, we continue to make good progress with Rova-T. We recently began enrolling patients in two new studies, a Phase I, eight-arm basket study in a broad set of narrow endocrine tumors, and a Phase 1/2 regimen-selection study in front-line small-cell lung cancer. We expect to start seeing data from both studies in the second half of next year. The Rova-T program in relapsed/refractory small-cell lung cancer is progressing well. We continue to see good results from the ongoing Phase 1 study, with patients still alive more than two years after receiving just two doses of Rova-T. Enrollment in the TRINITY study, our confirmatory third-line registrational trial in small-cell lung cancer, is also going very well. And we expect the study to be fully enrolled within the next month. Data from TRINITY will be available next year, which will trigger the submission of our regulatory dossiers. We are also on the cusp of starting two additional Rova-T studies, MARU, the Phase 3 registrational trial evaluating standard chemotherapy followed by Rova-T in the front-line setting, and the Phase 1/2 combination study, evaluating Rova-T with Opdivo and with Opdivo and Yervoy in small-cell lung cancer. We expect both trials to be up and running by the end of the year. We're also making good progress with other assets from the Stemcentrx pipeline. In addition to Rova-T, we have four assets in the clinic and are on track to transition up to five additional programs into the clinic over the next year. This will add to our growing oncology pipeline of more than 35 late preclinical or clinical stage assets. I'll now turn to our hem/onc programs. In the quarter, we announced our U.S. regulatory submission of a Supplemental New Drug Application for the use of IMBRUVICA in previously treated patients with marginal-zone lymphoma, a slow-growing form of non-Hodgkin's lymphoma which accounts for roughly 12% of NHL cases. There are currently no approved treatments specifically indicated for patients with marginal-zone lymphoma, and we expect a regulatory decision in the first half of 2017. The data that supported this regulatory submission will also be presented at the upcoming ASH meeting in December. Additionally, at ASH, we'll present data from the registration-enabling trial in chronic graft-versus-host disease, as well as data from several other IMBRUVICA studies across multiple blood cancers, including diffuse large B-cell lymphoma and follicular lymphoma. We've also made significant progress with the development of Venclexta, which was approved earlier this year in the U.S. under priority review for its first indication, as monotherapy in patients with relapsed/refractory CLL with the 17p deletion mutation, a small but medically important segment of the CLL market and an important first step for this exciting new therapy. Earlier this month, we received Canadian approval for Venclexta in previously treated CLL patients with the 17p deletion mutation, as well as in patients with no other treatment options regardless of their mutational status. We also received a positive opinion from the European CHMP for the treatment of relapsed/refractory CLL patients with 17p deletion or TP53 mutations. The CHMP also recommended approval of Venclexta for patients who have failed both chemo immunotherapy and a B-cell inhibitor, regardless of mutational status. Venclexta has demonstrated strong efficacy, driving deep levels of response and durable disease control, both as monotherapy and in combination with Rituxan in patients with relapsed/refractory CLL. Earlier this year, Venclexta received the FDA's breakthrough therapy designation for use in combination with rituximab for the treatment of patients with relapsed/refractory chronic lymphocytic leukemia. We're expecting data from the MURANO study in the first half of next year, which will support a broader label in relapsed/refractory CLL. The breakthrough designation and the upcoming MURANO data are important milestones for Venclexta that will expand use to the broader relapsed/refractory CLL population. We remain excited about the long-term potential for this molecule and believe that Venclexta will be effective across a range of blood cancers. We're particularly encouraged by the opportunity in AML, as the data generated to date have demonstrated clear signs of efficacy. Earlier this year, Venclexta received its third breakthrough therapy designation for use in combination with hypomethylating agents for the treatment of patients with AML who are ineligible to receive standard induction with high-dose chemotherapy. We're moving quickly with Venclexta's development in AML and expect to begin our Phase 3 programs by the end of the year. At the upcoming ASH meeting, we'll also present Venclexta data in a range of tumor types, including Phase 1 safety and efficacy data in both AML and multiple myeloma, as well as results from the mid-stage CONTRALTO and CAVALLI studies in follicular lymphoma and B-cell non-Hodgkin's lymphoma, respectively. As we look ahead to 2017, there will be several additional key data readouts from our hematologic/oncology portfolio that could enable registration of both IMBRUVICA and Venclexta in new indications. For IMBRUVICA, there are a number of planned interim analyses that could potentially lead to regulatory filings, including data in relapsed/refractory, follicular lymphoma, front-line diffuse large B-cell lymphoma, and in front-line mantle cell lymphoma. And for Venclexta, as I mentioned, we'll see data from the MURANO study, which will support a broader Venclexta label in CLL. Now we'll move on to our immunology programs, where we continue to make great progress with our two late-stage immunology assets, risankizumab and ABT-494. As Rick mentioned, we have fully enrolled the Phase 3 psoriasis program for risankizumab and will begin to see data from these pivotal studies toward of the end of the next year. Interest in the psoriasis program has been very strong, as evidenced by the fact that we fully enrolled the four Phase 3 studies in just seven and a half months, well ahead of our planning assumptions. The registration trials in Crohn's disease are expected to begin next year, and we also intend to move risankizumab into late-stage studies in both ulcerative colitis and psoriatic arthritis by the end of 2017. The registration-enabling studies for ABT-494 in RA are also progressing very well, and we remain on track for data readouts from these Phase 3 studies during the first half of 2018. The development program for ABT-494 in gastrointestinal disorders is also progressing well, with a Phase 2 study in Crohn's disease ongoing and a Phase 2 study in ulcerative colitis getting underway in the third quarter. Data from the Crohn's study should be available in the first half of 2017, with Phase 3 Crohn's studies starting later in the year. We also recently began a Phase 2 study to evaluate our oral selective JAK1 inhibitor in atopic dermatitis. I'll now move to virology, where we're nearing the completion of our registrational program for our next-generation HCV regimen. This program was designed to investigate a faster path to cure for all genotypes types of HCV and to address treatment areas of continued unmet need. Based on the data we've presented today, our once-daily pan-genotypic regimen is highly effective and has the potential to cure the majority of HCV patients in just eight weeks. The FDA recently granted breakthrough therapy designation for our next-generation regimen, for the treatment of patients with chronic HCV who have failed previous therapy with directly acting antivirals in genotype 1. This designation is an important step in our efforts to bring our pan-genotypic regimen to market. At the AASLD meeting in November, we'll be presenting pivotal data from our next-generation regimen, including results from eight-week cohorts in non-psoriatics, as well as data in patients who have failed prior DAA-containing regimens. We expect to submit the NDA for our next-generation HCV regimen to the FDA by the end of this year and file the marketing authorization application with the EMA in the first quarter next year, and we remain on track for commercialization in the U.S. in 2017. We believe that AbbVie's pan-genotypic, once-daily, ribavirin-free HCV therapy will be competitively positioned and will be able to address the remaining unmet medical need within this market. Finally, in the area of women's health, we are nearing completion of our Phase 3 endometriosis program, with regulatory submission planned for 2017. The Elagolix clinical development program includes the largest clinical trials conducted to date in endometriosis, with nearly 1,700 patients in two pivotal trials. At the ASRM Congress earlier this month, we presented detailed results from two pivotal studies, demonstrating that Elagolix reduced menstrual and non-menstrual pelvic pain associated with endometriosis compared to placebo. We also presented research on the economic and healthcare costs associated with endometriosis and endometriosis-related surgery in women in the United States. These data support AbbVie's continued efforts to pursue a regulatory filing of Elagolix as a potential new treatment option for the most prevalent symptoms of the disease. In addition to the endometriosis program, we have Phase 3 studies underway in uterine fibroids. This program is investigating the effect of Elagolix on heavy bleeding related to this highly prevalent condition. We anticipate beginning to see data from this Phase 3 program late next year. So in summary we are very pleased with the progress of our pipeline and are on track for further advancements in the remainder of 2016 and into 2017. With that, I'll turn the call over to Bill for additional comments on our third quarter performance. Bill? William Chase : Thanks Mike. This morning I'll review our third quarter performance and provide an update on our outlook for 2016. In the quarter, we delivered strong operational sales growth of 8%, excluding a little more than 0.5% of unfavorable impact from foreign currency. We exceeded our adjusted earnings per share guidance, delivering growth of more than 7% compared to the third quarter of 2015. HUMIRA delivered another quarter of strong sales growth, with global sales of more than $4 billion, up 12.1% operationally. Globally we continue to see strong volume growth across all therapeutic segments. In the U.S., HUMIRA sales increased 16.7% compared to the prior year. The growth rate in the quarter was negatively impacted by 4 points due to higher customer ordering patterns in the prior year, a reversal of what we experienced with second quarter growth rates. Normalized for this, HUMIRA performance in the quarter exceeded 20%, comprised of low-teen prescription growth and single-digit price. Wholesaler inventory levels remained below half a month across all periods. On a year-to-date basis, HUMIRA U.S. sales growth exceeds 24%. For the fourth quarter, we forecast sales growth in excess of 20%, which will contribute to our full-year forecast of above 20%. International HUMIRA sales were more than $1.4 billion in the quarter, up 4.5% on an operational basis. Biosimilar Remicade has not had a material impact on performance, and the Enbrel biosimilar continues to perform in line with our previously communicated assumptions. We continue to forecast HUMIRA international operational sales growth in the mid-single digits for the full year. HUMIRA's unique product profile and AbbVie's strong commercial execution has made HUMIRA the number one prescribed biologic, and we continue to see strong momentum for HUMIRA as market leader around the world. Global IMBRUVICA net revenues in the third quarter were $501 million, up nearly 65% over prior year, driven by increased penetration in relapsed/refractory CLL and other indications, as well as continued uptake in first-line CLL where we launched earlier this year. Global Viekira sales in the third quarter were $378 million, down versus the prior year. Our international business delivered operational sales growth of nearly 31% in the quarter, driven by new launches and continued uptake. In the U.S., as we communicated earlier this year, we have seen market share loss and some price erosion due to the entrance of a new competitor in the market. Global sales of Duodopa, our therapy for advanced Parkinson's disease, grew 21.4% on an operational basis in the quarter, reflecting robust international growth and a modest level of U.S. sales. We also saw strong operational sales growth in the quarter from Creon, which was up 16.6%. We are in the early stages of our commercial launches of Venclexta and ZINBRYTA, which had modest sales impact in the third quarter. We have begun our commercial rollout of Venclexta with our first priority being to ensure adequate physician training and to give physicians an opportunity to gain experience with a dosing ramp. As we've outlined, our initial indication for Venclexta, relapsed/refractory CLL patients with the 17p deletion, represents a fairly small market segment, estimated to be roughly $300 million. IMBRUVICA currently holds a strong market leadership position in this segment, with well over 50% share. However, Venclexta is an asset that offers significant growth potential over the longer term. It in the next several years, we expect to augment our label to address the broader relapsed/refractory CLL patient population, expand in earlier lines of therapy, and broaden into other hematologic malignancies. The next major milestone for Venclexta will be the submission of data from the MURANO trial to regulatory authorities, which will expand the addressable patient population from Venclexta to all relapsed/refractory CLL patients, a much larger patient population. This will add meaningfully to Venclexta's growth, beginning in 2018. Additionally, we expect further augmentation of the Venclexta label beginning in 2019, with the potential for first-line data and expansion into additional blood cancers. In August, we launched ZINBRYTA in the U.S. The ZINBRYTA label requires the establishment of an appropriate REMS program, and we are on track with the required physician certification and training. While we're very early in the launch, we're encouraged by the level of physician and patient interest. For example, in the U.S. more than 80% of our high-priority physicians have been certified through the REMS program, enabling them to begin prescribing. Based on the approved labeling, we expect ZINBRYTA to be used as a third-line agent, offering a unique mechanism of action, compelling efficacy, and convenient dosing. Turning to the P&L profile for the quarter. The adjusted gross margin was 80.7% of sales. On a comparative year-over-year basis, this ratio reflects an adverse impact from foreign exchange of roughly 320 basis points. In addition, the adjusted gross margin reflects 110 basis points of unfavorable impact related to the Pharmacyclics acquisition, including the profit transfer for IMBRUVICA, which is booked as cost of goods sold. Adjusting for these impacts, the gross margin profile improved by approximately 170 basis points versus the prior year. Adjusted R&D was 16.5% of sales, supporting pipeline opportunities in oncology, immunology, HCV, and other areas. Adjusted SG&A was 21.4% of sales in the third quarter, down 160 basis points from the prior year, as we drive operational deficiencies (sic) [efficiencies] (30:49) while maintaining our investments in our growth brands. Adjusted operating margin was 42.8% of sales, down 210 basis points relative to the third quarter of 2015. Excluding the negative impact of exchange, the operating margin profile improved 120 basis points versus the prior year. We remain committed to achieving an adjusted operating margin target of greater than 50% of sales by 2020. Net interest expense was $250 million in the quarter, and the adjusted tax rate was 19.9% in the quarter. Third quarter adjusted earnings per share, excluding noncash intangible amortization expense and other specified items, was $1.21, up 7.1% year over year. Moving on to our outlook for the remainder of the year. Based on our strong business performance year-to-date and our confidence in our momentum going forward, we are raising our 2016 adjusted EPS guidance range to $4.80 to $4.82, reflecting adjusted EPS growth of 12.1% at the midpoint. We are also updating our 2016 GAAP EPS guidance range to $3.74 to $3.76, which includes $1.06 per share of noncash intangible amortization expense and other specified items. Regarding the fourth quarter, we expect adjusted earnings per share of $1.18 to $1.20. This excludes roughly $0.22 of noncash amortization and other specified items. We expect high single-digit operational sales growth with minimal foreign exchange impacts in the quarter. In closing, we delivered strong performance in the quarter. We've driven strong top and bottom line growth, while also advancing our strategic priorities and our pipeline. And, as Rick outlined, we're well-positioned for strong growth again in 2017, as we expect to deliver low double-digit operational revenue growth and EPS growth of 13% to 15% from the midpoint of our new 2016 guidance range. This level of performance should place us among the industry leaders for both revenue and EPS growth once again next year. And, underscoring our confidence in the business going forward, today we announced a 12.3% increase in our quarterly cash dividend, beginning with the dividend payable in February 2017. And with that, I'll turn the call back over to Liz. Elizabeth Shea : Thanks, Bill. We'll now open the call for questions. Operator, we'll take the first question. Operator : [Operation Instructions] Our first question comes from the line of Ms. Jami Rubin from Goldman Sachs. Ma'am, your line is open. Jami Rubin : Thank you. Rick, a couple questions. My first question is more sort of a broad industry question, and maybe you can talk about what you're seeing from your perspective. Obviously, there is tremendous concern in the marketplace about structural change to pricing. We saw McKesson highlight significant moderation in price increases next year, which caused them to lower their guidance. Novo significantly lowered their expectations. Amgen talked about TNF pricing basically going away. From your vantage point, what are you seeing, and maybe you can share with us changes that we should anticipate in our models with respect to net pricing for HUMIRA in the U.S. going forward? Secondly, we appreciate the early commentary and color on 2017 guidance, 13% to 15% earnings growth. However, that is a little bit below consensus. Maybe if you could just step back – you gave us 2020 guidance a couple years ago; maybe you could just step back and help us think about the cadence of earnings growth. AbbVie's a different company from the industry average just given the looming competition to HUMIRA. Maybe if you could just help us think about the growth of this company over the next five years, how you're thinking about it? What you see relative to the plan that you put out a couple years ago? Thanks very much. Richard Gonzalez : Sure, Jami. So this is Rick. Thank you for the questions. I think as you look at price, certainly the rhetoric on price has been more intense than we've seen it in a number of years, and some of that is driven by the political environment, and some of its driven by more fundamentals. I think if you look at our business specifically, our business is primarily a volume-driven business. That's not to say we don't benefit at all from price. But clearly the vast majority of our growth comes from volume. And the key, I think, for our entire industry is to continue to drive innovation and innovative products in general. And innovative pharmaceuticals, I think in general, tend to save the healthcare system money over time. And I don't know that we've done everything we should do to be able to make sure that, one, we get that message out and, two, maybe support that message a little bit better than we than we have in the past. And so I think that's the key for the industry going forward. And that's the thing that we need to focus our attention on. And if you look at the products that we've been successful with, I think they have a good economic value proposition. HUMIRA's a good example of that as well. And so what I'd say as we look at our planning process, just as we have in previous years, we tend to plan conservatively when it comes to price and then evaluate the market environment at the time that we ultimately get close to that period of time and make a decision around what is the appropriate pricing strategy. And our guidance in 2017 and our long-range plan are both reflective of that philosophy. That philosophy hasn't changed. I think if you look at the 2017 EPS forecast that we gave you, I'd say that there's two things in the consensus that are important to look at. One is, if you looked at consensus, I don't believe everyone has rolled into their model the full year R&D expectation for the BI and the Stemcentrx acquisition, and so obviously that was not reflected in the overall consensus numbers. The second thing is if you look at gross margin, the consensus number's gross margin profile is off. And we've communicated that a couple of times. And where it's off is trying to calculate what the partnered products' contribution will be. And I think if you look at those two factors, if you look at the top line, what we're communicating is very close to what the top line is. If you look at our overall operating expenses, certainly SG&A, R&D's a little bit higher, SG&A, probably be a little bit lower, but net-net, probably a little bit higher. But the difference that you would see would be in the gross margin profile. The other thing I'd say is if you look at that level of performance based on everything that we see, it will rank us certainly in the top tier if not number one. Obviously, we have to see what others report, but based on consensus that's out there today. So we're delivering another year of truly outstanding performance. As far as what we communicated to you from the long-range plan back in October, as I said in my formal comments, this is consistent with what we communicated. I'd say we're still on track to be able to deliver what we expected. And in fact, if anything, I'd say HUMIRA is probably ahead. I think there was a lot of surprise when we first communicated the $18 billion for HUMIRA. There's obviously less surprise now to that number based on our overall performance. And so I think we're tracking on what we had communicated. We're absolutely committed to delivering a 50% operating margin by 2020. And that's despite the negative impact that we will see from the partner products. And we're committed to be able to drive that average compounded growth rate of EPS that we communicated, as well as our top line. And we continue to have a lot of confidence in the business going forward. As we look at the pipeline rolling out, the assets in our late-stage pipeline, I think, are continuing to advance in a way that is consistent with what we thought back then, and those assets are starting to roll out now, as Venclexta, as an example, gets a broader label. That's going to be a very meaningful contributor to our overall performance. And a number of other programs are continuing to advance. Risankizumab as an example, I think, is ahead of schedule by a significant amount of time. 494 continues to advance very well. And so generally what I'd say is we're very confident in what our outlook looks like, and it's consistent with what we communicated to you back in October of 2015. Jami Rubin : Thank you. Elizabeth Shea : Operator, we'll take the next question. Operator : Our next question comes from the line of Jeffrey Holford from Jefferies. Sir, your line is open. Jeffrey Holford : Oh, good morning. Thanks very much for taking my question. Just want to ask you, Rick, just to comment on a couple of things said by Amgen yesterday. So they have an expectation for flat net pricing for their TNF in 2017. Do you have a similar expectation built into your guidance for 2017 for HUMIRA? I wonder if you can give us a bit more color on that. And then beyond 2017, do you already anticipate that that flat net pricing in the U.S., if that's what you consider for 2017, actually becomes negative maybe in 2018, 2019? Just wondering what you've considered in your midterm plan. And then also, Amgen seemed to communicate yesterday evening that they won't launch at risk in 2017, and indeed whilst the legal process is going on. Is that your interpretation of what they were saying also? And how long you think do you think that that legal process going to go on for? I don't know if you have any court dates yet. Thanks very much. Richard Gonzalez : Okay. Thanks, Jeff. So I'm not going to necessarily give you the absolute color on what our assumption is in 2017 as it relates to price. But I'd say we don't have a consistent view of the TNF market to the one that was described by Amgen. And I think every product obviously has a different perspective in the marketplace. Maybe it's worthwhile to walk through HUMIRA in a little bit of detail, because I know there's always a lot of interest in it, and that'll give you, I think, a perspective of where we stand overall. I mean, if you step back and you look at where HUMIRA is, take the international market first, HUMIRA continues to perform as we've described it, despite the fact that we've seen the launch of Enbrel biosimilars in that market now for about seven or eight months, I would guess, maybe nine months, something like that, that they've actually been in the marketplace. They've had a very modest impact. We're delivering mid-single digit growth, as we've described to you. In fact, this quarter was about 4.5%. Now, the interesting thing is, if you adjust for the impact of Venezuela, which will be a one-time impact in 2016, the underlying growth of our international business for HUMIRA is 7.6%. So good, strong growth. It's primarily volume growth because you typically have negative price in those international markets. So I'd say HUMIRA's performing exactly where we would have expected it to perform in the international markets. If you look at the U.S., the U.S. has had just truly outstanding growth. If you looked at the past six quarters, on average, HUMIRA has averaged about 25% growth. The last two quarters, second and third quarter, if you average the two of them together, the growth was 21.7%. If you make the adjustment for the ordering patterns that Bill described, third quarter was just over 20% growth. And, as Bill indicated, we're forecasting 20% growth again in the fourth quarter. The October weeklies are consistent with that. We obviously pay a lot of attention to HUMIRA. And so this brand continues to grow extremely well. And the vast majority of that growth is volume. If you look at market share in the U.S., we continue to perform well. Probably the best way to look at market share would be, if you track it at the beginning of 2016 and look at it through the latest data points that we have, which would be September data points, the overall market share for HUMIRA is about 31.8%. It's up 0.6% over that period of time from January through September. Rheumatology, our share is 26.8%; it's increased a full point over that period of time. Gastro and derm, our market share remains basically flat at 43% and 35% market share. And so this brand continues to perform extremely well in the marketplace. And it's because of the attributes of this product and how well it is accepted by physicians and by patients. We're continuing to see good market growth. There's an anomaly in the IMS data because a large managed-care organization has blinded their data, but it's still in the base. But what I would tell you is that if you look at script growth on HUMIRA, it's above 13% when you make the appropriate adjustments. And the market's growing high single digits, around 9% or so. So prescription growth continues to be extremely robust. And then if you look at our formulary position, we just finished our 2017-2018 negotiations. We're pleased with how those negotiations sorted themselves out. We basically had the same level of strong market access for HUMIRA that we had in 2016. Net price, which we don't talk about a lot, but what I can tell is you there was only a very minimal, almost no change in net price between the 2016 contracts and the 2017 and 2018 contracts. And all other attributes of the contracts, like price protection, are consistent – basically consistent with what we've had previously. And so we feel good about our access in the marketplace. And so I think you can expect that HUMIRA's going to continue to perform well. I mean, every brand has its own set of issues that it has to deal with, and I'm certainly not in a position to be able to talk about their brand. But what I am in a position to talk about is how HUMIRA's performed and how we expect it to continue to perform going forward. Price is something that, as I said, we look at it very carefully every single year, and we make a determination as to what we think is appropriate. And we'll do the exact same thing this year. We typically build in a conservative level of price into our planning assumptions because we don't want to be exposed in any way, and in the information that we provided you thus far, it includes that level of conservative assumptions built into it. As it relates to the comments on the litigation, that's not something I can talk about in a lot of detail. I would've interpreted their comments to be the same as the way you interpreted them. I don't think that's a big surprise. At the end of the day, when you look at the magnitude of our IP portfolio and you look at the risk of launching at risk against that portfolio, that would be a high-risk proposition for anyone, and we've made our intentions very clear about, we plan to enforce our IP against anyone who attempts to enter the marketplace, and that we would – if someone chose to make a decision to launch at risk, we would seek a PI. And I think the power of our IP, I think, is very clear in the marketplace. So hopefully that was responsive to your question. Jeffrey Holford : Thanks very much. Elizabeth Shea : Thanks, operator. We'll take the next question. Operator : Our next question comes from the line of Chris Schott from JPMorgan. Your line is open. Christopher Schott : Great. Thanks very much. Just two quick ones here. First, Rick, just to clarify that comment you made on HUMIRA net pricing for 2017. I know you don't talk a lot about price, but just to make sure I heard that right, did you say minimal to no change in net price? Is that basically implying you're not seeing net price up in 2017, or is that referring to the kind of realized price increase? I just wanted to make sure I heard that one right. The second one was just talking about formulary dynamics. I think some payers have talked about wanting to move to more indication-based pricing and have talked specifically about the TNF category. Just interested in your thoughts on that, and is that anything we should be seeing from you either in 2017 or 2018 as you're going through these formulary discussions? Thanks very much. Richard Gonzalez : Well, as I described to you before, Chris – so we are through the 2017 and 2018 negotiations now. Now, that doesn't mean you can't open something up. But at the end of the day, we have completed all of our negotiations at this point for the 2017 and 2018 contract periods. My comment on net price was essentially, as you go in and you negotiate for your next contract, typically there is pressure to take your rebates up, right? So that's – if you put any price increase and the fall-through of price increase aside, it's what would you increase your rebates by over that period of time? That's what my comment was designed to address, that there was minimal to no change from that perspective. Any price will flow through based on the normal dynamics of how that would occur. And, as I said, it was consistent with what we had in place from any levels of price protection in 2016. So it's basically business as usual for us going forward in 2017 and 2018. As far as indication-based pricing, I mean, I think that's a phenomenon that originally started in the area of oncology, where you could have an oncolytic agent that had very different activity or efficacy in one type of cancer versus another, and is the value proposition the same? If you look at HUMIRA typically across the areas that we compete, HUMIRA is typically the gold standard in most of the areas that we compete in. I'd say generally speaking we have seen some interest in indication-based pricing and potentially doing that. That's not something that, as I said, I think fits well for HUMIRA because of its broad applicability and its level of performance across the range of indications that it has. But it's certainly something that has been of interest. I don't see that as a fundamental issue in the contracting that we've seen go forward for 2017 and 2018, at least for HUMIRA. Christopher Schott : Thank you. Elizabeth Shea : Operator, we'll take the next question. Operator : Our next question comes from Andrew Baum from Citi. Your line is open. Andrew Baum : Hi. A couple of questions, please. Could you help me just further categorize the slowing HUMIRA growth, given the biosimilar impact is obviously going to be pretty limited given the geography and limited time that the other TNF biosimilars have been the market. How much is competition from the IL-17s in the psoriasis class? How much is saturation of indications? And how much is mandatory price reductions outside the U.S.? And I know you've given earnings guidance for next year. I wonder whether you'd like to give revenue guidance for HUMIRA. Second, AbbVie's enjoyed a mutually positive relationship with the PBMs. In general, do you anticipate any change between the relationships between the PBMs and the pharma industry given the political focus on the PBMs on the lack of transparency, as well as the ongoing attorney general investigations? And then finally, for Mike, could you tell us what percentage of patients on IMBRUVICA run into problems with atrial fibrillation or coagulopathy? I'm obviously thinking about future competition from Astra's acalabrutinib. Many thanks. William Chase : So Andrew, in terms of HUMIRA, if you look at the overall growth rates outside the U.S., I can't give you a complete slice of what IL-17s are doing specifically, because it impacts market by market. But broadly, when you look at our assumptions that we had around biosimilars and the underlying growth of the markets, things have been progressing very, very well. So you look at major markets across Europe, we've got market growing in the low teens, no changes there. And if you look at HUMIRA share, very, very minimal change year over year. Biosimilar Remicade has not had a major impact on the brand in any way whatsoever. And Enbrel, as we had told you at the beginning of the year, we anticipated a 2 to 3 percentage growth impact, but that was more or less based on the pricing that we expected the biosimilar to come in at. So the biosimilars have been performing very much in line with our expectations. The new entrants to market – look, it's something we're watching very closely. But the reality is, those new entrants tend to get slotted as for patients that are ultimately anti-TNF failures. And so while they are ultimately gaining some traction in the market and they're picking up market share, I don't think you should read that through as a direct erosion to the market share of HUMIRA. Again, in fact, we've got a very, very strong market share position across those markets. Richard Gonzalez : I think, Andrew – this is Rick. When you say the brand is slowing, I'm not sure whether you're referencing what Bill said in his comments about the prior-year inventory levels or you're just looking at, as in the U.S., as I said in my comments a moment ago, we've averaged over six quarters about 25%, and the last two quarters are more in the 21% range. There's obviously fluctuation from quarter to quarter. But if you look at the dollar contribution across those quarters of growth, it's fairly consistent. And there's always ins and outs, but at the end of the day, as the brand gets bigger, the percent growth is going to go down, and the brand has obviously grown significantly across that period of time. If you look at the IL-17s of some of the other brands, as I mentioned in the market share, our market share in derm is roughly flat. We clearly have the leadership position in that segment. And I think as we look at the dynamics within that market, just to reinforce what Bill said, it's typically the number two player that's getting the bulk of any erosion in their market share with the entrance of a new mechanism like a 17, as an example, because it is usually the second-line failure that they tend to get their market share from. And so HUMIRA has not had as much as of a negative impact based on that because we're typically the first TNF that is used in those indications. On the PBMs, obviously we try to have good relationships with all of our customers, whether they be managed care organizations or PBMs. They are professional relationships. I think PBMs serve a very important purpose. They obviously allow plans to be able to have formularies that they can help manage, and that's the role that they play, and we play an important role with them in being able to supply them with products that can go on those formularies, and so I think it's a typical business relationship. And on IMBRUVICA, I mean, I don't know that we commented specifically about the rates. They're obviously relatively low rates. Mike, do you want to add anything? Michael Severino : Well, I think we can comment on the clinical trial experience as probably the best ability to assess the rates. And there the AFib rates have been in large data sets, so big Phase 3 studies, on the order of about 6% to 7% on a number of – across the studies that make up our label. And there is a background rate, of course, for AFib in that population as well, which runs in the low single digits. And for bleeding events, we're seeing bleeding events in about that same range of patients. And, again, there's a background rate in the population. With bleeding, most of the episodes of major bleeding that we've seen in our clinical trial program have generally been associated with other precipitants, so trauma or other events that might be associated with bleeding. And, again, there's a background rate there as well. Andrew Baum : Thank you. Elizabeth Shea : Thanks, Andrew. Operator, we'll take the next question. Operator : Our next question comes from the line of Vamil Divan from Credit Suisse. Your line is open. Vamil Divan : Great. Great, thanks so much for taking my questions. So two questions I have. So one on HUMIRA. You've talked obviously kind of how you see things relative to the longer-term guidance you gave last year. I just had a question more on the longer term, because I think there's been a lot of expectation that once there is biosimilar HUMIRA available in the U.S., because of some of the relationships you have with the PBMs, that the erosion of HUMIRA may be relatively slow. I'm wondering if any of this sort of rhetoric and discussion around drug pricing and transparency around drug pricing, does that change your view on the tail for HUMIRA after we have biosimilar entry, whatever year that entry actually occurs in the U.S.? And then my second question, a couple of your key pipeline products are also in the autoimmune [indiscernible] oral JAK and your IL-23. I'm wondering if you could just talk a little bit about the dynamic there, because there's obviously competitors ahead of you in both of those spaces. You're going to be entering what appears to be pretty competitive and maybe price-sensitive markets as well. And you will not have the same sort of dominant position that you've enjoyed with HUMIRA. So how do you think about the opportunity to get into those markets coming behind competitors, with price again being a potential issue? Thanks. Richard Gonzalez : Yeah, I mean, based on the long-term expectations, as we've communicated to the market before, we don't anticipate biosimilar competition in the U.S. market for quite some time. And so I think we have a strategy that we have developed that we will put in place at the point at which we see biosimilar competition in any market around the world. We'll obviously implement that strategy outside the U.S. potentially earlier, in an earlier timeframe. And that strategy is designed for us to be able to maintain our position going forward. I think it's far enough out in the U.S. that we will have to see how the dynamics play out. I don't anticipate anything significantly changing that strategy based on how we would employ the strategy, based on the debates that we see going on and the market dynamics going on. I'll have Mike maybe talk a little bit about the JAKs and the IL-23s from a performance standpoint, but what I would say from a market standpoint is we have always tried to position that our follow-on products would be significantly differentiated versus others in the marketplace. And we've designed our clinical trials to be able to produce that level of differentiation. And I would expect that if anything we would be in a better position based on our experience and our position in this market to be able to launch these products successfully into the market as companion products behind what will be a workhouse product like HUMIRA. We still anticipate that HUMIRA will be the workhorse product that will handle the vast majority of the volume, particularly in the beginning, and these products will fit into different segments going forward in a complementary way, and I think that gives us an advantage, not a disadvantage, in the marketplace. Mike? Michael Severino : Yes, this is Mike. What I would add is, as a leader in immunology, we have a very clear understanding of the profile that we believe will be competitive, not only today but in the future and in the timeframe that these products will launch. And when we look at, in the case of the two molecules you mentioned, the Phase 2b data to make a decision on either advancement or in-licensing, we kept that profile in mind. And I think each of those assets stands up very well to that understanding of what we'll need to be competitive. With the JAK, for example, that's why we focused on differentiated efficacies, strong efficacy in very difficult-to-treat patient populations, and very, very strong data at the higher-levels response, endpoints like remission, low disease activity, durable ACR70s, and the like. And for risankizumab, it was it was really the same thought process. We looked at those data and we believed, based on a very substantial set of clinical trial results, that the efficacy there was truly differentiated. And we can point, for example, to the approximately 50% posi 100 response for risankizumab in Phase 2b with very favorable pharmaceutical properties of that agent, very favorable dosing that we believe is attainable in Phase 3 and in registration. So we're keeping that profile in mind, and we're advancing assets that we believe will be competitive in the future. Elizabeth Shea : Thanks, Vamil. Operator, we'll take the next question, please. Operator : Our next question comes from the line of Geoff Meacham from Barclays. Your line is open. Geoff Meacham : I wanted to switch gears away from HUMIRA a little bit and talk a little bit about IMBRUVICA. And curious if you can give us any commentary post the first-line approval just with respect to durational therapy, dose interruptions. Clearly extended treatment is clearly one of the big value drivers here for IMBRUVICA. And then just for Elagolix, just wanted to get your perspective, updated perspective, just given a new competitor in the marketplace about the value of having add-back or not and what that means in terms of differentiation in the women's health market. Thanks. Richard Gonzalez : This is Rick. I think on IMBRUVICA, if you look at our performance in first line, we're obviously pleased with the ramp that we've seen so far. I mean, we're ramping fairly rapidly to about 20% now of the overall market. The duration of therapy, I think we've communicated historically, has been in the area of about 75% of the clinical trial experience. I haven't seen the data in the last couple of months, but I think in first line it's consistent with that, and it has been increasing slightly in the relapsed/refractory area. But it's certainly at a very respectable level and certainly isn't anything that we're concerned about at all. I mean, it's certainly at a level that we would expect it to be going forward. And so I think the adoption of IMBRUVICA in that first line, I think the speed of adoption in that first line is an indication of the power of the data that we've seen in RESONATE-2 and physicians' receptivity to that data, both from a PFS and an overall survival standpoint. That's really what's driving a lot of the usage of this product. And I think as we expand and provide even more data, we should continue to see the ability to be able to penetrate that first-line market to an even greater extent. Elagolix? Michael Severino : With respect to Elagolix, we're obviously aware of the competition and keep a close eye on competition across all of our franchises. But we feel very good about the position we have with Elagolix. We have a substantial lead, having completed two Phase 3 studies, and competition is considerably behind that in terms of timing. And we're going to continue to drive that program forward. The efficacy and the safety results that we see, we view very favorably. We think they support the value proposition that we had in mind when we entered into Phase 3. And we're going to continue in subsequent studies, in post-registration studies, Phase 4 work, if you will, to continue to define that profile. Add-back could be an important part of that profile, and we are pursuing that. And there may be other strategies to continue to enhance the value proposition for Elagolix. Then we're going to be driving forward with that aggressively. Elizabeth Shea : Thanks, Geoff. Operator, we'll take the next question. Operator : Our next question comes from the line of Marc Goodman from UBS. Your line is open. Ami Fadia : Hi. This is Ami Fadia; I'm on for Marc. Most of our questions have been answered, but I'll ask three quick follow-up questions. Firstly, on HUMIRA for the quarter, if you look at the sequential sales in 3Q versus 2Q, there was weakness sequentially, but if you could help us understand what might have driven that, that would be helpful. Secondly, just with respect to your long-range guidance for EPS growth, how should we think about the 15% growth over the longer term? Right now it's sort of ranging in the lower double-digit range. When do you expect to see the spike more closer to the mid double-digit range? And then thirdly, on Rova-T, could you elaborate a little bit on the basket study? What are you looking to see there? That would be helpful. Thanks. William Chase : Ami, it's Bill Chase. HUMIRA's kind of a difficult brand to look at on a sequential quarter basis. First of all, it's a very well-established brand – growing rapidly, but well-established. If you go back and look over the years, it is not unusual in the U.S. or abroad to see a general flattening out over the summer and then an acceleration back in the back half of the year. And that is the pattern that we're seeing this year. Now, could there be some degree of inventory between Q2 and Q3 that's impacting that sequential growth? Yeah. I mean, look, minor moves flow – impact that sequential. But really at the end of the day when we look at the brand, and we look at the dynamics around the brand, and we look at the prior year destock that we saw in the second quarter, and the subsequent restock in the third quarter, there is nothing that is alarming us about this third quarter. You have you to remember that our second quarter results had 26.7% growth. That was largely related – that difference from the 20% was largely related to a destocking event in the second quarter of 2015, and we're just seeing the impact of the restock in the third quarter of 2015. So we actually feel very, very good about it. We're guiding fourth quarter above 20%. We feel very, very good about our full-year forecast. Richard Gonzalez : On the EPS, so 2015 we delivered EPS growth of 29%. And this year, the midpoint is about 12%, right? Elizabeth Shea : Yeah. Richard Gonzalez : Now, you got to remember, that 12% has the dilution associated with the Stemcentrx transaction and the dilution associated with the BI transaction. So that's certainly weighing on this year. We're guiding next year to be 13% to 15%, so that's certainly in the range of the 15% area. And then nothing has changed that gives me any concern that we won't achieve the number that we talked to you about on average across that period of 2015 to 2020, that we can average that kind of a compounded growth rate. But I'd say, thus far, if you look through 2017, you'd say we're at or above that range, across the average, including the dilution of those two transactions. And then Rova-T? Michael Severino : Yeah, this is Mike. With respect to the basket study for Rova-T, so this is a study that has eight arms, and each arm looks at a different type of the tumors that have neuroendocrine features and share the same underlying biology as small-cell lung cancer. Examples of these tumor types might be the large-cell component of non-small-cell lung cancer, a form of pancreatic cancer that has neuroendocrine features, subsets of colorectal cancer and metastatic melanoma, for example. So each of these eight arms is going to look for response rate in refractory patients with those tumors. And when we see a response rate that we view as indicative of good activity, we would then have the ability to expand out both those cohorts and start additional studies that could be registration-enabling, following the same conceptual strategy that we did with Rova-T and small-cell. Of course the nature of what each registrational program would look like would be tailored to the individual tumor type. But this is a study that could rapidly trigger additional registrational work in those other tumors as we see signs of activity. Ami Fadia : Thank you. Elizabeth Shea : Thanks, Ami. Operator, we'll take the next question. Operator : Our next question comes from the line of John Scotti of Evercore LSI (sic) [ISI] (1:11:32). Your line is open. John Scotti : Hi. Thanks for taking my questions. I have a couple, please. So I apologize for touching on this I think the third time, but I just want to make sure I'm absolutely clear. So when you say minimal to no change in net price from 2017 to – 2016, 2017, 2018, just to be clear, so what you mean is that the gross-to-net spread on HUMIRA you don't anticipate widening, but you will still continue to capture at least some net price growth? Or is it that you do not anticipate on capturing any net price growth because gross-to-net spreads are widening? And then also, I was also curious on the P&L management this quarter, particularly on the SG&A side, which came in a little bit better than expectations. So where are those cost savings coming from, and are they coming from HUMIRA? Are you reducing your global footprint on HUMIRA ahead of the biosimilar entry? If not, just curious where they're coming from. Thank you. William Chase : Okay, so, John, just to clarify on the price, the net price comment refers to what happened to net price before any future price actions. Okay? Now, what we're not saying is that there will be no net price increase next year. We still have within our contracts the ability to raise price and see a positive impact on the P&L from those actions. The net price actually has to do with, without any future price increases – which, by the way, that isn't how we're modeling the year, what we would expect – price would be an a constant basis without price increases. The contracts allow us to take net price. And any net price increases, any price increase that we took, would have a positive impact on our bottom line. That's the way you need to think about it. That said, in 2017, we are planning conservatively, as we always do. We're approaching the 2017 guidance with the exact same philosophy on how we plan for price increases that we have in the past. So hopefully that helps out. And then from a P&L management standpoint – look, the SG&A ratio, we're very pleased with. It's really a couple different things. There is a leverage impact from the rapidly growing top line that obviously we've been delivering over the last few quarters. That said, we look at our spend. We're looking at admin very, very closely. We're looking at the productivity of all of our SG&A investments, as you would expect us to. And we fund projects based on an ROI and a return. And if they have positive ROI, we find a way to get the money in the right places to deliver the return. In terms of HUMIRA, we are not backing off our spend on HUMIRA. The spend on HUMIRA has been the driver of the spectacular growth that the brand has put up. And all of those programs are very, very high ROI, which as you can see – as you can imagine based on the sales growth. John Scotti : Thank you. Elizabeth Shea : Thanks, John. Operator, we'll take the next question. Operator : Our next question comes from the line of Alex Arfaei from BMO Capital Markets. Your line is open. Alex Arfaei : Good morning, folks. Thank you for taking the questions. Most of my HUMIRA and price questions have been asked and answered. Just looking out at pipeline and business development opportunities, what are your thoughts about either developing or pursuing CAR-T products to augment your hematology pipeline and maintain your leadership? That seems to be where we're going with a lot of hematologic malignancies. Thank you. Michael Severino : So this is Mike. With respect to CAR-Ts, obviously there's been a lot of activity. It's still early days for the use of those agents in later-stage trials and obviously not yet being registered agents. And there's also a lot of work that is going on to try to figure out what is the right functionality that one would want to build into a CAR-T to optimize its applicability across a range of both hematologic and other tumors. And so we're keeping a close eye on the space. As a leader in immunology with our very strong presence in oncology, obviously there are a lot of skills that we bring to the table that we think we could apply to CAR-Ts. And we'll continue to monitor that area closely, both with our internal work and keeping an eye on the external environment. Elizabeth Shea : Thanks, Alex. Operator, we have time for one more question. Operator : Our last question comes from the line of Steve Scala from Cowen. Steve Scala : Thank you very much. I believe HUMIRA's IP estate has increased by 30 or so patents from this point last year. Last year you gave us a very nice chart of the nature of the patents and the expiration dates. It was page 14 of your slide deck. In general terms, can you detail the nature of the additional 30 in terms of the type of patent they are and the expiration dates? And then, secondly, AstraZeneca has saying they could file acalabrutinib for an indication by the end of this year, but I'm not aware that they have identified that indication. Does AbbVie have any competitive intelligence on what AstraZeneca might be up to? Thank you. Richard Gonzalez : Yeah, Steve. This is Rick. On the IP, off the top of my head, I can't give you all of the dates of the incremental 30 patents. We continue to work on our patent estate. So I think maybe off-line we'll try to get back to you with whatever we are able to provide you. And then, Mike, do you want to talk about AZ? Michael Severino : Sure. This is Mike. And we've certainly heard the comments that you're referring to by AZ, but we agree that they've not been very specific. I don't think we can really speculate on what they have in mind. What I can tell you is with ibrutinib, we're moving forward very aggressively, very rapidly across a number of fronts, moving to front line in CLL, advancing our programs in other areas like non-Hodgkin lymphoma. So we're really focused on raising the bar there and making sure that we're driving IMBRUVICA as rapidly and aggressively as we possibly can. Elizabeth Shea : Thanks, Steve. That concludes today's conference call. If you'd like to like to listen to a replay of the call, please visit our website at abbvieinvestor.com. Thanks again for joining us. Operator : Participants, the call has concluded. You may now disconnect. Thank you.

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