Agilent Technologies Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2023

There are 18 speakers on the call.

Operator

Ladies and gentlemen, welcome to the Agilent Technologies Q1 2023 Earnings Call. My name is Beau and I will be coordinating your call today. I'll now hand you over to your host, Pareet Ahuja to begin the conference. Perni, please go ahead.

Speaker 1

Thank you, Beau, and welcome, everyone, to Agilent's conference call for the Q1 of fiscal year 2023. With me are Mike McMullen, Agilent President and CEO and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q and A after Mike and Bob's comments will be Jacob Theissen, President of the Agilent Life Science and Applied Markets Group Sam Raha, President of the Agilent Diagnostics and Genomics Group and Parekh 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 the recording of this webcast are available on our website at www at investor.

Speaker 1

Agilent.com. Today's comments by Mike and Bob 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 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.

Speaker 1

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.

Speaker 1

And now, I'd like to turn the call over to Mike.

Speaker 2

Thanks, Parmit, and thanks everyone for joining our call today. The Agilent team delivered an excellent start to 2023, exceeding both top and bottom line expectations. Q1 revenues of $1,760,000,000 are up 10% core. Ashland's broad based portfolio and resilient growth model are on a full display during the quarter, with growth across all end markets in geographic regions. Operating margin in the quarter are 27.1%, up 80 basis points.

Speaker 2

Earnings per share of $1.37 are up 13%. Let's now take a closer look at our Q1 performance starting with end market highlights. Chemicals 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.

Speaker 2

Our environmental forensic 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 posted solid results with 8% growth.

Speaker 2

Looking at our performance by business unit, the Life Science and Applied Markets Group delivered revenues of $1,030,000,000 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 spectroscopy business grew more than 20% in the quarter and we continue to strengthen our position in spectroscopy across multiple end markets. In Q1, we announced the deployment of the Insight 200M.

Speaker 2

This system is used at checkpoints throughout the London Heathrow Airport to officially provide enhanced security and ensure passenger safety. The Agilent CrossEye Group posted revenue of $381,000,000 in Q1. This is up 13% core as the team continues to take advantage of record instruments placements over the past 2 years along with the continued growth in attach rates. The CrossNet 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.

Speaker 2

At the same time, our Enterprise Services business continues its strong momentum, driving growth and converting competitive accounts. The Diagnostics Group delivered revenues of $342,000,000 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 $725,000,000 expansion of our NASD facility that will double our oligo manufacturing capacity.

Speaker 2

And 2 weeks ago, we are pleased to have the Governor of Colorado Join us at 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 Aveda Biomed team into Agilent, further enhancing our genomics capabilities. Aveda is an early stage life sciences company designed to assist clinical researchers using NGS approaches to study cancer. We also continue to partner with new technology platform companies to drive our solutions in the marketplace.

Speaker 2

This quarter, we announced a partnership with Aquia Biosciences to combine our companion diagnostic and IHC workflow expertise with our 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.

Speaker 2

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 created through a targeted investment that aims to expand and enhance our business 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.

Speaker 2

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 queuing a close eye on macroeconomic conditions. I will provide the details and 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.

Speaker 2

Thanks, Mike,

Speaker 3

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 Q2. Unless otherwise noted, my remarks will focus on non GAAP results. We are extremely pleased with our Q1 performance.

Speaker 3

It was a very solid start to the year. Q1 revenue was $1,760,000,000 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 and A contribution was as we expected. Pricing for the quarter was higher than the full year forecast also as we expected.

Speaker 3

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 molecule. Small molecule grew 12%, while large molecule grew 9%.

Speaker 3

And as Mike mentioned, Chemicals and Advanced Materials also continue to be very strong, growing 14% during the quarter on top of 15% growth last year. The chemical and energy sub segments 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.

Speaker 3

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 wave 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.

Speaker 3

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 and L. 1st quarter gross margin was 56.5%, up 40 basis points from a year ago.

Speaker 3

The gross margin performance Coupled with good cost discipline and SG and 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 percent for the quarter and we had 297,000,000 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.

Speaker 3

In Q1, we generated $296,000,000 in operating Up 16% versus last year, while investing $76,000,000 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 $142,000,000 to shareholders through $67,000,000 in dividends and by repurchasing shares worth $75,000,000 We also announced we're increasing our dividend by 7%, along with a new $2,000,000,000 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.

Speaker 3

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 $7,030,000,000 to $7,101,000,000 This increase updates our full year core revenue guidance to a range of In the Q1, although it has remounted somewhat in February. And as a result, the full year guide reflects $100,000,000 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.

Speaker 3

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 $500,000,000 up $200,000,000 from our guidance at the beginning of the year. Now turning to Q2, we expect revenue in the range of $1,655,000,000 to $1,680,000,000 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 and A will contribute 0.1 points of growth in Q2, which is consistent with Q1. 2nd quarter non GAAP earnings per share are expected to be between $1.24 and 1 $0.27 representing growth of 10% to 12% versus the prior year. I'm pleased with how the team has delivered in the Q1.

Speaker 3

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 Parmit as we take your questions. Pardon me?

Speaker 3

Thanks, Bob. Beau, if you could please provide instructions for the Q and A now.

Operator

Certainly, Mr. We'll Take our first question this afternoon from Matt Sykes of Goldman Sachs.

Speaker 4

Hi, good afternoon, Mike and Bob. Thanks for taking my questions.

Speaker 2

You're quite welcome, Matt.

Speaker 4

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 under penetration. I think China was a region you called out. Could you just maybe Kind of give us 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

Speaker 2

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 Cor, provide a little bit

Speaker 5

more color on where those opportunities may lie. Yes. So look, I think the broad product offering across the hardware platforms Where we've had 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.

Speaker 2

Yes, I think we see a lot of opportunity obviously in China. That's one we flagged in the past. The other one that we were 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.

Speaker 2

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.

Speaker 4

Great. Thanks. And then maybe just kind of refresh us on your outlook for Tremendous. 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 in that backlog.

Speaker 4

How are you thinking about sort Back half for instruments overall.

Speaker 2

Yes. So first of all, let me I'll tag you a bit on this with Bob, but let's talk about the backlog first of all. I It's very important to just remind the audience that the quality of our backlog remains extremely high. So and you can see the work of our team really to work down the backlog, but we're not seeing any cancellations or anything pulling out of backlog. So that gives us a level of confidence around the revenues we can forecast.

Speaker 2

I think there really isn't anything new to talk about today relative new news relative to the second half. We still remain Lisa, I want to acknowledge the uncertainty about the back half of the year. So really no new news here. They're very consistent 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.

Speaker 2

So The funnels remain healthy. The deal cycle times are I think we've already more towards the historical levels. And Bob, I don't know if you'd add anything to that.

Speaker 3

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 changed.

Speaker 4

Got it. Thanks and congrats on the quarter.

Speaker 2

Thank you very much.

Operator

Thank you. We'll go next to Brandon Couillard of Jefferies.

Speaker 6

Hey, thanks. Good afternoon. Thanks for taking my

Speaker 7

question. Sure. Mike, I think you said China was up 13% in

Speaker 8

the quarter. That's a lot better than we've heard from some of your other Counterparts,

Speaker 2

could you unpack that a little bit

Speaker 8

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 for year. So I think

Speaker 9

it was high single digits has changed at all.

Speaker 2

Well, I'm glad you noticed, Brandon, that if you were in the conference room here, you'll 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 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 delighted with the performance out of China in Q3.

Speaker 2

And Bo, I think it was a broad based story. We had growth and double digit growth in pharma, CAM, 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, our capabilities is also different.

Speaker 7

Got it. And then on the NASD Train C, I guess expansion, can you

Speaker 8

just talk about timeline for That's Bill Bout. And as

Speaker 7

I remember back to Train B,

Speaker 8

I think a good amount of that was already kind of earmarked for customer demand.

Speaker 6

The same case, this time around with the current expansion.

Speaker 2

Yes. I'm going to tag team a bit with this with Sam and myself and Bob. So we lovingly 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 Train C, C and D.

Speaker 2

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. It's just a matter of ramping again the 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 I'd like to see some of that first revenue coming into Agilent.

Speaker 7

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 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 on 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.

Speaker 7

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 C. T. And under Brian Crothers leadership is firing in all cylinders.

Speaker 2

Hey, Sam, unless you're going to commit to me for an earlier to go live, I think you meant to say 26, right?

Speaker 7

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.

Speaker 3

And Brandon to your point around the question of purchase orders and so forth, We have good visibility into the pipeline and the funnel, but we haven't started taking orders given the timeframe there.

Speaker 2

Yes, exactly.

Speaker 3

But we have high confidence that we wouldn't be putting in $725,000,000 into the expansion.

Operator

Very helpful. Thank you. We'll go next now to DJ Kumar of Evercore ISI.

Speaker 9

Hey, guys. Congrats on a good print share, Mike. Thank you, Vijay. My first question here on 2nd quarter guidance, 6% to 7.5% organic, that's a sequential step down of fact 100 and 50 basis points at the high end. I guess the comps get easier.

Speaker 9

Is there anything in the second quarter, was there any

Speaker 2

Yes. I'll pass this over to Bob for some additional detail, but I think the answer is no, not 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

Speaker 3

Q2 that was above our full year guide. So that was the thought process there. 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.

Speaker 2

I haven't heard Prudent yet today, Bob.

Speaker 9

I was waiting for that, Mike.

Speaker 2

So, is it fair to say the second quarter is a

Speaker 9

prudent guide? Is that a fair comment? That is correct. Fantastic. And then I do have one on this NASD, my And we think there was a Novartis, I think they're pulling their API manufacturing in house and I know you're starting to train to see maybe For what some context and how big is Novartis as a customer?

Speaker 9

What's the pipeline looking in the FDA and is this at risk?

Speaker 2

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 already that was that's 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.

Speaker 2

Relative to the Novartis is one of 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, We'll talk a lot about an island because we're allowed to talk about those programs, but we have a much broader base of 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?

Speaker 2

Yes, let me

Speaker 3

just add something. I would say This means nothing to our expansion. I mean, 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.

Speaker 3

And I think that continues to be the case And we feel extremely good about the overall technology and our position in the marketplace.

Speaker 2

Thanks, Bob. Appreciate that, Bill.

Speaker 7

Hey, Mike, if I can just add to just a couple of quick things, right? We've stated this before. We think the therapeutic oligo market for the suppliers that we are $1,000,000,000 today going to $2,400,000,000 by 2027. And what's really encouraging about the market is the number of molecules That are advancing. Right.

Speaker 7

Just to give you a little bit more color, we're doing work with over 30 pharma partners today and dozens of programs at various stages. The pipeline of programs are working on, some of which have the potential of being molecules also Broad populations is absolutely there and something we're excited about.

Speaker 9

Great. Thanks, Dan. Helpful guys. Thank you.

Speaker 2

You're welcome, Vijay.

Operator

Thank you. We go next now to Pramit Souda of SVB.

Speaker 10

Yes. Hi, Mike, Bob. Thanks for taking the questions. 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 what we're trying to understand Given the tailwinds you're seeing in China and if the other areas and obviously congrats on the strong growth in the quarter.

Speaker 10

Is there anything you're seeing beyond sort of tougher compares that are emerging in the sort of the second half?

Speaker 3

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 2023. And you're right, that would speak to roughly a 3 point volume.

Speaker 3

What I would say is, we're taking a 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.

Speaker 10

Okay. That's helpful. And then on the Lunar New Year, is that part of is that baked in into the guide as well? And just wanted to clarify on China, I mean, obviously, you have heard about the stimulus. Your AstraZeneca Agilent is listed One of the companies listed within the document that was put out for the loan stimulus for China, this is sizable.

Speaker 10

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 2024? Thank you.

Speaker 2

You want to take the first part? Yes. Yes.

Speaker 3

So I think yes. 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 a 0.5 point headwind in Q1 and that's come back to us in Q2.

Speaker 3

So it was kind of as planned.

Speaker 2

And in regards to the stimulus, the way we're looking at this is stimulus 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 Beau, I think at this point, we really haven't put anything assumed in our guide or trying to grow relative to the stimulus. So If it does get deployed and comes to our way, then that'll be an upside to our current forecast.

Speaker 3

And I think the Puneet, you said it well. I mean, our business in China continues to be very, very strong and 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.

Speaker 10

Got it. Congrats guys. Thank you.

Speaker 6

Thanks.

Operator

Thank you. We'll go next now to Rachel Van Sindel at JPM.

Speaker 11

Hey, thanks for taking the questions and congrats on the quarter. So first up on semiconductors, one of your peers implied that they were expecting the semiconductor market to be soft throughout 2023 just as semiconductors For semi customers, we're facing a reset because we've been on a macro environment. So you mentioned strength in semis during your prepared. So can you just walk us through, first off, which part of the market do you guys Really play in semis. And then are you seeing any of the softness that one of your peers have flagged?

Speaker 3

Yes. I'll start and then we'll turn it over to Jacob to give him some additional color about where we play and so But I would say the short answer is no. I mean, as our spectroscopy business grew over 20% in the quarter and we're still seeing Strong demand. And Jacob, do you want to provide a little more color?

Speaker 12

Yes, absolutely. We have I would say we have the strongest portfolio in atomic spectroscopy 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 upstreams for all the fine chemicals that goes into the fabs, they require the same level of QC testing like they do in the lab, And hence, they are using the same instruments. So we see a lot of benefits both in that new fabs build, but also for the continuous operation in the fab labs. So We expect this to continue.

Speaker 12

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 real play, but 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 demands, not only for our spectroscopy business, but really across our broad portfolio where Litho battery needs both the LCs, the GCs, the spectroscopies and the LCMS. So we are very excited about that space and see a lot of continued growth in there. And Cengo, I think

Speaker 2

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 that semiconductor industry, which has benefited us.

Speaker 11

Great. And then maybe just shifting over more towards pharma biotech. So 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 catch up spending related to instrument purchases that were delayed back in 20 eighteen-twenty 19 timeframe. Can you walk us through really what inning are we in, in terms of that catch up spend? And how long can you sustain this Outpaced growth in small molecule before I kind of reset back to that normalized level and then just update on large molecule as well.

Speaker 11

Thanks.

Speaker 2

Sure, Rachel. Do I dare pass this question to the Danish member of the staff with the baseball analogy? But I think, Jacob, you 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.

Speaker 5

Yes, absolutely. I will start by saying

Speaker 12

I don't think this is a baseball game. I think there is a continuous opportunity in this market 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 investment we have done into we made into our portfolio over the past years, both for the LC and the LCMS. So it's really Focus very much on where we have gone strategically on a lot of investment into making robust, reliable and routine instruments and instrument solutions.

Speaker 12

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 brilliant in 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. Yes. Rachel, maybe can I this

Speaker 3

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.

Speaker 3

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 large molecule and certainly starting off the year very nicely.

Speaker 11

Great. Thank you, guys.

Speaker 2

You're welcome.

Operator

We'll go next now to Derik De Bruin of Bank of America.

Speaker 13

Hi, good afternoon. This is Peter on for Derek. Thanks for taking our question. Could you just dive a bit more into the latest than what you're seeing in Europe? You expressed inventing some caution particularly in chem on the last call.

Speaker 13

So if you can touch on that as well that would be great.

Speaker 2

Yes. So I hope it came through in the call remarks and I'll make a few comments here then invite Porek in here as well, but we were delighted with the print in Europe in the Q1 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 CAM markets along with diagnostics.

Speaker 2

But I have to say we continue to watch closely investment plans particularly for our large accounts in the chemical space As well as the pharma space. But we're off to a really good start, but that remains a watch out for us. But Again, we're delighted with the broad based growth we had in a few I

Speaker 5

think you said it all, Mike. I think it's broad based in 5 out of the 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 service and consumables has really benefited as well.

Speaker 2

I think we usually 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 a net positive, but we're still keeping an eye on things.

Speaker 13

Okay. And then could you just discuss your margin outlook and then pacing across 2023? 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? Thank you.

Speaker 2

You want to take that one?

Speaker 3

Yes. I'd say there's still gas in the tank. There's still 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.

Speaker 3

You saw both 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.

Speaker 13

Very good. Thank you.

Speaker 2

You're welcome.

Operator

And we'll go next now to Dan Brennan of Cowen.

Speaker 6

Great. Thanks for taking the question guys. Congrats on the quarter. Thanks, Ann. Maybe just the first hey, Mike.

Speaker 6

Maybe the first one, I know there were a few questions asked on Chemical and Advanced Materials segment booked, obviously great growth in the quarter. Just wondering with your new hire 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 break broke out this quarter between Advanced Material And then Chemical and Energy?

Speaker 3

Yes, that's a 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 at the beginning of the year, what was 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 CAM 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 and batteries area Grew in excess in the high 20s.

Speaker 3

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 high 20s for the rest of the quarters, we'll take it. But we're expecting a slight uptick there given the strong performance that we had in Q1.

Speaker 6

Great. Thanks, Bob. And then maybe just one on the balance sheet. Obviously, it's in great Leverage is very low. Just wondering what you're seeing from the

Speaker 2

M and A environment. Obviously Waters had a deal

Speaker 6

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 From Agilent Walter, we started time. I'm just kind of wondering about your appetite potential to do something bigger since I know you guys been looking for the right fit. Thanks.

Speaker 2

Yes. No, I think you're closing happy to comment on that, Danny. Your closing comment is exactly where our heads 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.

Speaker 2

Most people are willing to come off in our view of the last round. There's still Some dialogue around there. So we have obviously nothing to announce, but we remain very interested in looking for opportunities I can talk about 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.

Speaker 2

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 today. We'll continue to use that framework moving forward. I think that fit piece that you described is really the key criteria for us.

Speaker 12

Great. Thank you.

Operator

Our next question comes from Patrick Donnelly of Citi.

Speaker 4

Hey guys, thanks for taking the questions. Sure.

Speaker 14

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

Speaker 2

a little bit, can you

Speaker 14

just talk about, I guess, order growth versus revenue growth, what you saw in the quarter? And any color there would be helpful.

Speaker 2

Yes. Let me make some summary comments and then Bob, and probably jump in here. But as you mentioned, we don't to 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 services business.

Speaker 2

On the instrument side, we continue to bring down this record As we really are focused on meeting those customer shipping requirements and really thanks to the great work of 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 had pretty much next to no cancellation. So the quality is good.

Speaker 2

It gives Bob and I level of predictability around revenue from that backlog.

Speaker 3

Yes. I would say, as Mike said, I mean, the Cloud 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.

Speaker 2

But I would emphasize the 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.

Speaker 14

Yes. That's helpful. I appreciate that. And maybe just on kind of the environmental spend, PFAS testing, you called out last couple of quarters. Mike, I know you're excited to see some actual infrastructure dollars coming through in the U.

Speaker 14

S. Here. Can you just talk about what you're seeing there, kind of the 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?

Speaker 2

Sure. Happy to talk about that and actually happy 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, not only educating the Board on

Speaker 12

what it's all about, but the durability of growth we see here. 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.

Speaker 12

Infrastructure bill that was a $4,000,000,000 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, the sample prep and consumables to really make sure that you don't contaminate while 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 we're excited about that area also besides the Advanced Materials.

Speaker 10

Great. Thank you, guys.

Speaker 2

You're quite welcome.

Operator

And we'll go next now to Jack Meehan at Nephron Research.

Speaker 15

Thank you. Good afternoon. Wanted to spend a little time on DGG, maybe start with the pathology business. So Double digit growth was stronger than

Speaker 2

I guess what we've seen

Speaker 15

in the last few quarters. Was there anything you noticed in terms of the uptick in the quarter?

Speaker 2

Yes. Jack, I'm going to actually pass it 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 right latest and greatest on the ground from Glastrop. Go ahead, Sam.

Speaker 7

Yes. Thanks, Mike. Jack, thanks for

Speaker 1

the question.

Speaker 7

I 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 healthcare systems being able to work through COVID and start to reprioritize cancer, cancer diagnostics. Overall, I think that's been something that's positive. We've continued to see strength in our IHC solutions, be it our Companion Diagnostics 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 Doco Omnis.

Speaker 7

All of that, you look at geographically, we've had some good success, particularly in Europe, but the Americas as well.

Speaker 15

Great. And then sticking with DGG either for you Sam or for Mike, just on the genomic side, I was backing into sort of like a high teens decline in the quarter, if that sounds right. I was 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.

Speaker 2

Hey, Bob, I don't remember the exact number, but it was down, but not to that extent.

Speaker 3

Yes, it was down close to double digits. Okay.

Speaker 1

But not in high

Speaker 2

And I'm going to have Sam talk about this, but we're seeing some what we think is a transitory disruption in the Diagnostic side of genomics, so there's a lot going on with a lot of the diagnostics firms where we provide our solutions into their assays. So Sam, your perspective on that thing would be really good.

Speaker 7

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 be 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 seeing a little bit of hesitation in purchase patterns.

Speaker 7

Now that being said, just recently, earlier in February, I had a 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.

Speaker 15

Thank you.

Speaker 2

All right.

Operator

Thank you. We take our next question now from Josh Waldman of Cleveland

Speaker 16

Research. Hey guys, thanks for taking my questions. Sure, Thanks. 2 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.

Speaker 16

I guess maybe a bit surprised we didn't see more of the Q1 upside flow through 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 or some I guess something else.

Speaker 2

Yes, Bob, I'll let you handle it. I think the headline was more just the recognition of the continued uncertainty about The back half, but

Speaker 3

Yes, I think the way to think about that Josh is that 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 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.

Speaker 16

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 respects to instrument budgets and purchasing plans here in 20 30?

Speaker 2

Yes, sure, Josh. And in fact, Porg, I think you've just done recently around with some of the large pharma accounts and

Speaker 5

Yes. So I think what we're seeing is our funders 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.

Speaker 2

So I think we probably haven't seen Surprises on those slides themselves, but they're not aggressively releasing yet either. Yes, for sure. That's why I made a few times Call comments around normalization of deal cycle times.

Speaker 1

Got it. Okay.

Speaker 6

Appreciate it guys.

Speaker 2

You're welcome.

Operator

And we'll take our next question now from Liza Garcia of UBS.

Speaker 17

Good evening, guys. Thanks so much for taking the question and congrats on the quarter. I wanted to talk about Shell analysis if we could. Obviously, it's like a $400,000,000 business over for you at this point. I'd love to hear about performance.

Speaker 17

And then I think in a recent presentation, Ken 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?

Speaker 2

It's hard to get a lot of all the good news in, but I think we had A good start to the year in Cell Analysis, Jacob, as I recall.

Speaker 12

Yes. We had another good quarter in Cell Analysis. Actually, we're really proud of what we have built up of our business over the Yes, here in Cell Analysis, including the M and 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, 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.

Speaker 12

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 Cartiva, 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 arenas right now.

Speaker 17

Awesome. And then I guess

Speaker 3

And then I guess Hey, Eliza, just one other comment. You had asked about kind of growth rates. What I would say is it grew faster than The overall company is faster than LSAG.

Speaker 17

Awesome. Thank you. Super helpful. I guess if I could just squeeze in one last one on the attachment rate. You just crossed over the 30% line.

Speaker 17

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?

Speaker 2

Yes. And I'll have you make some comments here, Paret, but I

Speaker 5

think we're expecting to continue to step up with that attach rate. Yes. I think there's significant opportunity to drive growth for business and it's about one point of a tax rate is about $30,000,000 annually and we know our customers have adopted Workflow Solutions does a tight integration on the instruments and that allows us of course with the 1 commercial organization to demonstrate the value and of course At Hatch 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

Speaker 2

to grow as we move forward. And, Elijah, your question focused on the attach rates on services, but I'd be remiss not to have Jacob talk about what's going on attach rate to consumer that ties in this workflow solution because we did make some changes organizationally, but The ACG strategy of driving connect rates

Speaker 12

and services and consumables remains intact. Yes, exactly. And I think along what what Parekh also 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 percent of instrument, percent of the instrument is the consumables informatics to go after, As Parekh was mentioning PFAS, other workflows in the biopharmas and really addressing we're starting to addressing the high end parts of the markets. And And we've seen that as significant uptake in our attach rates in our consumables.

Speaker 12

And I would say, we are We will continue to see growth. We still have a long lot of opportunities, but I've been really impressed with the team to take it from In the 20s up way beyond the 30s now.

Speaker 17

Thanks so much guys. Appreciate the time.

Speaker 2

You're welcome.

Operator

Thank you. We go next now to Paul Knight of KeyBanc.

Speaker 8

Hey, Mike. Thanks for being patient and getting me in.

Speaker 2

Not a problem, Paul.

Speaker 8

I'll call in earlier next time. 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 talked to and project count It 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?

Speaker 8

And 2, does this number of partners So Jeff, you're going way beyond Novartis and Alnylam.

Speaker 2

Paul, I'm really glad you hung on and got your question in Very enthusiastic to answer that question. We have a much broader base of business behind me. 2 very good customers, But the programs go much, much, much broader than that. Yes, we are the market leader. Yes, we crossed over on the siRNA piece.

Speaker 2

We are the clear to market leader. We are going to be going after more aggressively the CRISPR space where we can't yet claim leadership. But overall, we have really with the capacity expansion, the continued great work of our team, we've continued to gain market share. And From the math we're doing, we've now crossed over and the leader in the space.

Speaker 8

So, in fact, what you're really building out is the kind of market Except for the technological, I guess, threshold we've now achieved, is that fair to say?

Speaker 2

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 with 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

Speaker 3

call Project Endeavor. 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 two customers that you just talked about.

Speaker 7

Hey, Bob, maybe just to add just a touch of 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 European approvals that have happened. So there's momentum in the market and we are We've worked hard to be leaders in siRNA, but there's momentum that's there for us to ride as well.

Speaker 10

Thank you. Good luck.

Operator

Thank you. And gentlemen, it appears we have no questions today, pardon me, I'll hand things back to you for any closing comments.

Speaker 1

Thanks, Beau, 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, Parete. And ladies and gentlemen, this concludes today's call. Thank you again for joining and you may now disconnect

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Earnings Conference Call
Agilent Technologies Q1 2023
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