Agilent gradually stumbles toward simplicity

Agilent Technologies reported disappointing quarterly returns last week, and it blamed severe problems in a new software system it is using to manage customer service and financial operations.

Some investors may be surprised that a large technology company could be so waylaid by a software upgrade. But, then some on Wall Street believe that the problems for Agilent are deeper.

The question that some people on Wall Street are asking is whether, absent a boom, Agilent's management can capitalize on the company's leadership in an array of technologies, including electronic test and measurement equipment and semiconductor products.

"It's kind of a national asset in terms of the kinds of technologies it has in-house," said Mark Fitzgerald, an analyst with Banc of America Securities. "But the management has never been able to get at the financial performance that the technical position deserves."

The company counters that critics should give it more credit for its efforts this past year, specifically its cost cutting. It has sought to excise US$1.2 billion in annual expenses, a process that Hilliard C. Terry, the company's director of investor relations, said would be completed by the end of the current quarter.

Edward W. Barnholt, Agilent's chief executive, acknowledged in an interview that it had been a difficult year. The company is still reducing its work force by 8,000 employees -- 20 percent -- mostly by layoffs. But Barnholt said that Agilent was poised to excel.

"We have more speed. We can move faster, and pick up the pace. We have more focus, and we're accountable," said Barnholt.

Richard Chu, an analyst with SG Cowen Securities Inc, defended Barnholt, noting that he "had pretty much of a six or nine-month reprieve and then had to confront a very, very tough downturn." "I am optimistic that Agilent will remain a major factor in their businesses," he said.

One thing about Agilent's businesses is certain: There are many of them. The company has three core markets: tests and measurements, a US$5.4 billion business last year that entails sellingtesting equipment and services to a range of industries; semiconductor products, a US$1.8 billion business lat year; and life sciences and chemical testing, a US$1.1 billion business last year.

Within each of those businesses are numerous components, making Agilent a company with many product lines, from parts used in laser-based computer mice, to equipment used in the human genome project, to equipment for building wireless networks. It claims to have 20,000 devices for product testing, chemical analysis and other technologies.

In part, it was this diversity that led Agilent to change its internal management software. The company said it had about 2,200 legacy computer systems, which go under the general rubric of enterprise resource planning, or ERP. It employed Oracle to reduce them to 20 systems. On June 12, Agilent switched over to the new system, but in a transition that could hardly be called smooth.

"The enormity of the problems was surprising," said Karen Lewis, a company spokeswoman. The company said the hiccups included problems with customers' placing orders and employees' trying to track them.

Agilent says that Oracle is not to blame, noting that such moves are typically complex. And analysts have validated that position, noting that other big public companies, including Sun Microsystems and Applied Materials, had struggled when they upgraded such software.

In Agilent's earnings announcement last week, the company said the transition cost it US$105 million in lost revenue in the quarter. Overall, it reported revenue of US$1.39 billion, compared with the US$1.5 billion to US$1.6 billion it had projected. And it reported that it lost US$0.31 a share, excluding one-time expenses, twice the 15-cent loss analysts had expected.

Fitzgerald from Banc of America Securities said the new software system was not alone to blame for the financial struggles. He said that the company had yet to develop a tough, profit-oriented culture since it left HP. He said the company's operating margins last quarter were minus 18.8 percent, a figure he called miserable.