Agilent Technologies, Inc. Q1 FY2021 Earnings Call

Good afternoon, and welcome to the Agilent Technologies First Quarter Earnings Conference Call. All lines have been muted to avoid background noise. After the speakers' comments, there will be a question-and-answer session. Now, I would like to introduce the host for today's conference, Ankur Dhingra, Vice President of Investor Relations. Please proceed.

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?

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 three of our business groups delivered double-digit growth. All regions grew, with the two 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 and 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 three companies in this ranking. We've also been a leader in our industry all four 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?

Thanks, Mike, and good afternoon, everyone. Today, I will share some additional insights on Q1 revenue and review the first quarter income statement along with other important financial metrics. I will conclude with our outlook for 2021 and the second quarter. Unless mentioned otherwise, my comments will focus on non-GAAP results. We are very pleased with our first quarter results, which showed strong growth surpassing our revised expectations. Revenue for the first quarter was $1.55 billion, representing a reported growth of 14.1%. Core revenue increased by 11.3%, with currency contributing 2.8 percentage points to growth. Before diving into end markets, it’s worth reiterating Mike’s earlier remarks. All three business groups achieved double-digit core growth in the quarter. Our value proposition continues to resonate with customers, and our team performed well, taking advantage of recovering demand in our end markets. The pharma sector, which is our largest market, performed robustly across all regions, achieving 20% growth. The leading growth was driven by NASD, which saw significant increases during the quarter, despite the easier comparison from the previous year. NASD added 4 points to the overall pharma growth rate. We remain very optimistic about the ramp-up of the Frederick oligo facility, and the recently announced capacity expansion in Frederick is progressing on schedule. Small molecule growth was in the mid-teens, while biopharma, excluding NASD, delivered 20% growth, partly due to strong demand for LC and mass spectrometry instrumentation. We noted strong year-end demand from pharmaceutical clients and an uptick in business related to the characterization of oligo-based therapies and vaccines. The food market also saw strong double-digit growth in the quarter, achieving a 22% increase in revenue. Our business expanded in all regions, fueled by greater demand for food safety and quality testing, particularly in China, where investment from commercial and government entities was significant. Environmental and forensics sectors grew at a double-digit rate, posting 10% core growth, as broad regional growth reflected solid tech refresh or replacement demand from contract labs. Our diagnostics and clinical revenue saw a 9% increase during the quarter, benefiting from growth in COVID-related applications, mainly in the Americas and Europe. Our pathology business experienced slight growth as non-COVID testing continues to improve, although it has not yet returned to pre-pandemic levels globally. Although our diagnostics and clinical market in China remains relatively small, it experienced robust growth due to advancements in non-COVID testing and the adoption of our clinical LC/MS. The chemical and energy sector continued its recovery, growing 2% in Q1. We are observing signs of increased business activity, particularly in specialty chemicals and engineered materials, alongside positive trends in the macro environment. While we remain optimistic, we are not yet altering our forecast for the remainder of the year. As expected, the recovery in the academia and government market has lagged behind other sectors, declining 1% year-over-year, as research labs have not yet reached full operational capacity. We anticipate a slow but steady recovery throughout 2021. Geographically, all regions posted growth. China grew by 25%, leading all areas, supported by advancements in the food and pharma markets. The Americas had a strong double-digit performance with a 13% increase, while Europe rose by 6%, both driven by pharma and food markets. Now turning to the P&L, the first quarter gross margin was 55.8%, up by 10 basis points year-on-year. After accounting for exchange rates, gross margins increased by 50 basis points. Our operating margin for Q1 stood at 25.5%, which is an impressive 260 basis points higher than last year, due to volume growth and spending discipline. This result incorporates the effects of increased strategic investments that began last quarter. Our top-line growth and operating leverage contributed to an EPS of $1.06 per share, a 31% increase compared to last year. Our tax rate was 14.75%, and our share count was approximately 309 million shares, as expected. Moving on to cash flow and balance sheet matters, we maintained strong operating cash flow, recording $238 million in Q1, a 43% increase over last year after adjusting for last year's one-time tax payment. This performance highlights the strength of our business model and provides financial flexibility going forward. We adhered to our balanced capital deployment strategy outlined 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. As we announced earlier today, our Board of Directors approved a new $2 billion share repurchase program that replaces the existing one. We concluded the quarter in a strong financial position with $1.3 billion in cash and $2.5 billion in debt. Now, regarding the outlook, we have commenced the year strongly. Despite ongoing uncertainties and a fluid business environment, we have solid momentum and anticipate continued recovery in our end markets, though at varying rates. Consequently, we are raising our full-year projections for both revenue and earnings per share. We now expect revenue to range between $5.825 billion and $5.9 billion, an increase of over $200 million at the midpoint, which signifies reported growth of 9% to 11% and core growth of 6.5% to 8%. This adjustment reflects robust Q1 results and an improved outlook for the rest of the year, assuming stronger performance in most of our end markets. The academia sector continues to track in line with our initial plans, and while we observe a pick-up in business activity in the chemical and energy sector, we haven't included any improvements in that market in this updated outlook. Moreover, we haven't considered any revenue from serology or qPCR COVID assays in this guidance. As Mike mentioned, we are also optimistic about expanding our margins. During the Investor Event in December, we provided a long-range plan for annual margin expansion between 50 basis points and 100 basis points. Given the volatility seen during 2020, our margin expansion profile will vary each quarter. However, we are confident that our full-year margin expansion will trend towards the higher end of that range, while also investing for future growth. The increase in sales and margin expansion, along with maintaining our tax rate at 14.75% and a reduced share count of around 307 million shares, raises our fiscal 2021 non-GAAP EPS estimate to a range of $3.80 to $3.90 per share, reflecting annual growth of 16% to 19%. For the second fiscal quarter, we anticipate revenue to range from $1.37 billion to $1.39 billion, indicating reported growth of 11% to 12% and core growth of 7% to 9%. We expect second quarter 2021 non-GAAP earnings to fall between $0.78 and $0.80 per share, marking growth of 10% to 13% as we near the one-year anniversary of significant expense reductions in Q2 of last year. Before we open the call for questions, I want to express how proud I am of the Agilent team for delivering such strong performance. We have had an excellent start this year, and I am personally very excited about our potential moving forward. We have robust momentum and the right strategy, which leads me to believe we are on a solid path for Q2 and the rest of 2021. Ankur, back to you for the Q&A.

Thanks, Bob. Jason, if you can provide the instructions for Q&A, please.

Your first question comes from Tycho Peterson from JPMorgan.

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?

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...

No. You got it.

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?

Yes, I think that it's a continuation of a 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 they 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...

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 thing 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.

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.

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?

What — I'm going to let Padraig talk a little bit about that. Padraig, why don't you share your thoughts on that?

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.

Yes, Tycho, to expand on what Padraig mentioned, we have also increased our investments in personnel in the field. As Mike pointed out in his remarks, we are focused on converting ongoing revenue into service contracts, particularly in China, and this focus has been beneficial for us. The aspect of productivity is continuing to improve in China.

Your next question comes from the line of Brandon Couillard from Jefferies.

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?

Yes, we're really discussing order activity. We're having numerous conversations with our field teams, especially concerning high-value and specialty chemicals. There is increased dialogue happening with them at the moment, and it seems our customers are gaining more confidence in the economic outlook and the anticipated end market demand for the upcoming quarters. This is occurring amid a backdrop of significant pent-up demand due to deferred investments. We continue to observe strong PMIs. However, as I've mentioned previously, I'm cautious about declaring a turnaround until we have a couple of quarters of data. While we're optimistic about our current observations, we're not yet ready to include this in our formal guidance for the year.

Yes. And just on the second part of your question, Brandon, our instrumentation was roughly flat, and ACG was up mid-single-digits.

Then one follow-up for you, Bob. Gross margins in the first quarter were better. Do we expect that you still think the full year will be relatively flat to down? And could you quantify the impact of the NASD capacity built on gross margin in the first quarter?

Yes. It was a bit lower than we anticipated, but we expect it to be higher in the latter half of the year as we continue to ramp up. Therefore, it did not have a significant impact on the first quarter. If you remember, we estimated it would be approximately 20 basis points for the entire year, and this did not affect the first quarter. For the overall year, I would say we're slightly more optimistic, considering how the first quarter turned out. This optimism is part of why we are increasing the upper end of our margin expansion. It involves a slight increase in gross margin, but the majority will actually come from operating expenses.

Your next question comes from the line of Vijay Kumar from Evercore ISI.

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?

Yes, I'll address the second question first and then return to the first. For the full year, we primarily see growth in the pharmaceutical and food markets across all regions. While we are hopeful about the chemical and energy sectors, we are not yet including them in our forecast since it's still early in the quarter. As Mike mentioned, there is significant business activity, and we are witnessing an increase in orders, but we want to see these turn into actual orders and revenue. Everything is headed in the right direction, and we anticipate this trend will continue throughout the year. Regarding Q2, we experienced a higher-than-expected budget dynamic for the year-end, which contributed to the 11% increase; however, we do not expect this to recur in Q2. Despite that, we are confident in the ongoing momentum of the business going forward.

And that was probably a couple of points of growth maybe.

Yes. It's hard to estimate, but that's the best guess that we have, yes.

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?

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.

Yes. I believe the growth in our margin expansion has primarily been due to the increase in our volume. When we experience such strong growth, it positively affects our bottom line. If we compare last year, our spending varied significantly from quarter to quarter as we adapted to the pandemic. Looking at the current year, our spending from Q1 to Q2 can be considered relatively flat.

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.

Your next question comes from the line of Puneet Souda from SVBL.

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?

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 reminder 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.

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 two 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.

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.

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.

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.

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.

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.

Yes. And that small molecule in China was very strong.

Your next question comes from the line of Dan Leonard from Wells Fargo.

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?

I think the headline here is potential upside to our guide. And then, Bob, maybe you can answer the...

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.

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.

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.

Yes. It should have been part 2 of my headline. When the business is there, we're going to get it.

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 now as flush, particularly in pharma? Was this one for the history books? Or was this just a good flush? Like how would you characterize that?

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 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...

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.

Our next question comes from the line of Doug Schenkel from Cowen.

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?

Yes, Doug, thanks a lot for that. Happy to opine on both questions. So yes, we really wanted to make sure the story came through that we had this great start to 2021, and it wasn't just about a year-end budget flush. There are 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.

Yes, and in our oligos business.

Yes, oligos because it always comes in threes. 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 two. 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?

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.

Yes. And Doug, we continue to look for companies also not only to meet that criteria, but also we think there are strong cultural fits 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.

Your next question comes from the line of Matt Sykes from Goldman Sachs.

It was a solid quarter, and I wanted to focus on the DGG operating margin in the fourth quarter, which was very strong. What was driving that, and what should we expect moving forward in 2021?

Hey, Bob, do you and Sam want to tag team on this?

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?

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.

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?

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, two separate business group results, they work very, very closely together, not only inside the company, but most importantly, with customers.

Your next question comes from the line of Mike Ryskin from Bank of America.

This is Mike on for Derik. I want to follow-up on one thing you touched on 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 the 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.

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. 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.

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?

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 variants 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...

We’re just one quarter in.

But we don't expect the momentum to abate.

Your next question comes from the line of Daniel Brennan from UBS.

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?

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. 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.

Yes. I think also with food, I'm not sure I would really use catch up to describe this because, clearly, where you had some of the pharma companies just weren't having the research 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.

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.

Your next question comes from the line of Puneet Souda from SVBL.

What was the dollar contribution this quarter? What is assumed for the full year? I'm not sure if there have been any changes to that. I know you've addressed this, but regarding other modalities besides interference, is that still a possibility? It seems like it might be coming, but we will wait to hear more from you on that.

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.

We're really happy with how that business is ramping.

And we're not done yet.

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.

Your next question comes from the line of Patrick Donnelly from Citi.

Mike, I have a question for you regarding the chemical and energy aspect. I appreciate the cautious approach you've taken. Could you discuss the transition from insourcing to outsourcing that you've mentioned in the past, and how this aligns with your strengths? Additionally, can you elaborate on our current status in this transition and the potential opportunities it presents for your team?

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 2022 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 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.

Okay. Now it's going to be the year of durability at least. And then maybe just one...

I like what you said; I should have used durability. How was the short to answer your question.

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.

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 the 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…

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?

Yes.

Are people — are students going to be back full? Or is it still going to be at kind of reduced rates and so forth.

Yes. I would say, though, that the conversation with customers is very robust right now. So it's just a matter of things opening up.

Your final question comes from the line of Paul Knight from KeyBanc.

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?

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?

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.

You mentioned your cost-cutting program that started in the second quarter of last year. Where do you currently stand in that process? Also, what will happen to cost-cutting as travel and entertainment might resume after COVID? 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.

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.

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.