Keysight Technologies, Inc. (KEYS) Q1 2023 Earnings Call Transcript

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Keysight Technologies, Inc. (NYSE:KEYS) Q1 2023 Results Conference Call February 21, 2023 4:30 PM ET

Company Participants

Jason Kary - VP, Treasurer and IR

Satish Dhanasekaran - President and CEO

Neil Dougherty - CFO

Mark Wallace - SVP, Global Sales and Chief Customer Officer

Conference Call Participants

Mark Delaney - Goldman Sachs

Mehdi Hosseini - SIG

Meta Marshall - Morgan Stanley

Samik Chatterjee - JP Morgan

Chris Snyder - UBS

Aaron Rakers - Wells Fargo

Jim Suva - Citigroup

Matthew Niknam - Deutsche Bank

Adam Thalhimer - Thompson Davis

Rob Mason - Baird

David Ridley-Lane - Bank of America


Good day, ladies and gentlemen, and invited to nan Keysight Technologies Fiscal First Quarter 2023 Earnings Conference Call. My sanction is Jason, and I’ll beryllium your lead usability today. After nan presentation, we will behaviour a question-and-answer session. [Operator Instructions] This telephone is being recorded today, Tuesday, February 21, 2023 astatine 1:30 p.m. Pacific Time.

I would now for illustration to manus nan convention complete to our host, Jason Kary, Vice President, Treasurer and Investor Relations. Please spell ahead.

Jason Kary

Thank you, and invited everyone to Keysight’s first 4th net convention telephone for fiscal twelvemonth 2023.

Joining maine are Keysight’s President and CEO, Satish Dhanasekaran, and our CFO, Neil Dougherty. In nan Q&A convention we will beryllium joined by Senior Vice President of Global Sales and Chief Customer Officer, Mark Wallace.

The property merchandise and accusation to supplement today’s chat are connected our website astatine nether nan financial accusation tab and quarterly reports.

Today’s comments will mention to non-GAAP financial measures. We will besides make reference to “core” growth, which excludes nan effect of rate movements and acquisitions, aliases divestitures completed wrong nan past 12 months. The astir straight comparable GAAP financial metrics and reconciliations are connected our website, and each comparisons are connected a year-over-year ground unless different noted.

We will make forward-looking statements astir nan financial capacity of nan Company connected today’s call. These statements are taxable to risks and uncertainties and are only valid arsenic of today. We presume nary responsibility to update them. Please reappraisal our caller SEC filings for a much complete image of these risks and different factors.

As a reminder, we are hosting our 2023 Investor Day connected March 7th astatine nan New York Stock Exchange. Management is besides scheduled to participate successful nan Morgan Stanley Investor Conference connected March 8th.

And now, I’ll move nan telephone complete to Satish.

Satish Dhanasekaran

Thank you, Jason. Good afternoon, everyone and convey you for joining america today.

Keysight delivered exceptional first 4th financial results, posting gross and net supra nan precocious extremity of our guidance against a backdrop of moderating demand. Our capacity and accordant execution show nan resilience of our business, and contempt nan challenging macro dynamics, we judge Keysight is well-positioned to build connected our occurrence and grow our activity crossed our end-markets.

I’ll attraction my comments coming connected 3 cardinal headlines. First, we achieved beardown financial results. Revenue was a first 4th grounds and grew 14% connected a halfway basis, driven by spot successful some business segments and crossed each geographies. We again demonstrated nan durability of our financial exemplary and delivered $2.02 successful net per share.

Second, we started to spot a normalization of what has been a robust and prolonged play of finance by our customers. Over nan past 2 years, important request for Keysight’s solutions resulted successful a 15% compound bid maturation complaint and a book-to-bill of 1.09. As request slows successful nan near-term, Keysight’s vulnerability to aggregate extremity markets, its differentiated portfolio, and our beardown operating subject positions america good to upwind nan existent macro dynamics.

Third, we stay assured successful nan secular, semipermanent maturation trends crossed our markets. Our software-centric solutions strategy is well-aligned pinch nan needs of our customers, which we expect will alteration america to outperform nan market. We look guardant to providing you a much broad update connected our semipermanent maturation strategies and financial objectives astatine our upcoming Investor Day.

Now let’s return a deeper look astatine our first 4th results.

Orders declined 13% year-over-year against a beardown comparison of 22% maturation successful nan past year’s first quarter. The slowing request and business circumstantial headwinds that we anticipated past 4th materialized mostly arsenic expected. These included nan year-over-year effect of currency, our exit of Russia, and incremental China waste and acquisition sanctions, which together contributed to a 6-point resistance connected nan compare.

We saw customers workout be aware successful consequence to macroeconomic uncertainty. This was astir notable among our largest customers successful Commercial Communications, who were impacted by crisp request diminution successful user electronics and computing segments. They are restructuring and reassessing their near-term priorities arsenic nan manufacture digests inventory, while astatine nan aforesaid clip maintaining investments crossed key, strategical programs. While nan long is difficult to predict, we expect these dynamics to measurement connected our customers for astatine slightest nan adjacent mates of quarters.

Despite macro challenges, gross grew 10%, aliases 14% connected a halfway basis. Strong execution and operational subject resulted successful gross separator of 65%, operating separator of 30%, and net per stock maturation of 22%.

Turning to our business segments. The Electronics Industrial Solutions Group gross grew 19% and delivered double-digit gross maturation for nan 10th consecutive quarter, which underscores nan diverseness of our manufacture exposure.

In automotive, we achieved grounds gross and beardown double-digit maturation crossed each regions. Sales of electrical vehicles continued to turn importantly successful 2022, further fueling finance successful EV and AV technologies and manufacturing. This 4th we secured aggregate strategical wins pinch ample OEMS and Tier 1 suppliers crossed a breadth of applications specified arsenic 5G, autonomous driving emulation, artillery and charging infrastructure design, and in-vehicle networks. To fortify our position successful this marketplace and capitalize connected this growing, decades-long opportunity, we proceed to grow our portfolio of solutions. An illustration is our existent collaboration pinch Jiyun Technologies to create a high-efficiency, compact artillery trial strategy to thief accelerate nan motorboat of caller electrical vehicles.

In wide electronics, double-digit gross maturation was driven by continued spot successful emerging verticals specified arsenic integer wellness and IoT. We besides secured wins successful precocious research, arsenic R&D finance remains robust successful quantum, photonics, and Beyond 5G.

Semiconductor solutions gross maturation was driven by continued fab investments successful caller wafer capacity and precocious nodes. While nan inventory adjustments are pacing demand, foundries proceed to execute their longer-term plans to globalize their production. We spot important opportunities successful this market, and are investing successful solutions for emerging semiconductor applications specified arsenic silicon photonics, high-power semis, and millimeter wave.

Turning to our Communications Solutions Group, gross grew 7%, pinch maturation crossed some extremity markets and each regions. Commercial Communications gross grew 11% connected a halfway basis, to scope a grounds Q1, which was driven by ongoing, strategical investments successful communications ecosystem. We saw spot successful 5G R&D and deployments, Open-RAN, and datacenter networking, pinch accrued attraction connected 800 gigabit and terabit communications solutions. These programs stay a privilege and are driving request for Keysight’s first-to-market solutions.

As a trusted advisor, we stay actively engaged pinch our customers arsenic they accommodate to nan existent macro environment. We precocious announced our collaboration pinch Qualcomm to accelerate 5G non-terrestrial web communications for broadband successful distant areas, and alteration instrumentality makers to velocity improvement and verification of 3GPP Release 17 compliant designs. We continued to support nan progression of standards and submitted nan first 3GPP Release 16 protocol conformance test, enabling caller usage cases specified arsenic backstage and business networks, and autonomous vehicles.

Investment successful early 6G investigation is underway and Keysight joined forces pinch 16 organizations to create 6G-SANDBOX, a pan-European testbed for 6G experimentation and validation of 5G-Advanced and 6G capabilities. Nokia precocious selected Keysight’s sub-Terahertz testbed to validate D set and E set exertion to accelerate R&D captious to 5G-Advanced and 6G usage cases successful millimeter activity and sub-terahertz wave spectrum. We besides announced industry’s first and highest density web cybersecurity trial platform, which provides information halfway web infrastructure and unreality providers pinch starring 400 gigabit Ethernet information validation capabilities. These solutions reenforce our activity crossed wireless and wireline ecosystems.

We are besides looking guardant to Mobile World Congress successful Barcelona adjacent week. Keysight will beryllium engaged pinch galore customers and manufacture leaders, and showcasing our solutions for advancing 5G standards including Release 17 and early investigation successful 6G and intelligent automation.

Turning to our government, defense, and aerospace business, grounds Q1 gross grew 9% connected a halfway basis, achieving its 2nd highest gross 4th driven by accrued U.S. authorities spending, and spot successful abstraction and satellite, including caller applications for non-terrestrial networks. We precocious won a five-year statement pinch nan U.S. Army who chose Keysight’s Field Fox handheld spectrum researcher for section use. We expect U.S. authorities fund appropriations to ramp spending successful caller programs successful nan 2nd half of this year. We besides expect an summation successful defense budgets worldwide, and increasing finance successful caller technologies specified arsenic 5G, abstraction and satellite, quantum, and precocious research.

Consistent pinch our strategy, we proceed to grow our package capabilities. We precocious completed nan acquisition of Cliosoft, whose information and IP guidance package devices heighten our portfolio of physics creation automation solutions. In addition, Eggplant’s trial automation level was precocious recognized arsenic a leader by The Forrester Wave. About one-third of full revenue, nan increasing operation of package and services is integral to nan durability of our financial model.

Keysight’s differentiation is simply a usability of our software-centric solutions strategy, collaboration pinch our customers, and investments we are making to guarantee that we reside nan astir challenging exertion needs of today, and into nan future. We are prioritizing high-conviction maturation opportunities to solidify our competitory position for nan long-term, while astatine nan aforesaid clip accelerating initiatives to thrust further efficiencies accordant pinch our financial model.

We stay committed to creating semipermanent worth for business stakeholders, and positively impacting nan world community. I’m proud that Keysight has been named to nan Dow Jones Sustainability Index for nan 4th twelvemonth successful a row. I’d for illustration to convey each our Keysight labor for their dedication and relentless execution, which drives our beardown way grounds of capacity and is simply a testament to Keysight’s Leadership Model, our values, and to our people.

With that, I’ll now move nan telephone complete to Neil to talk our financial capacity and outlook.

Neil Dougherty

Thank you, Satish, and hello, everyone.

Q1 was a beardown 4th and a coagulated commencement to nan year. We delivered gross of $1,381 million, which was supra nan precocious extremity of our guidance range, and grew 10%, aliases 14% connected a halfway basis.

As we anticipated, macroeconomic uncertainty moderated request successful nan first quarter. Orders of $1.3 cardinal were down 13%, aliases 10% connected a halfway basis. Even pinch gross outpacing orders by $80 million, we ended nan 4th pinch complete $2.5 cardinal successful backlog.

Turning to our operational results for Q1, we reported gross separator of 65% and operating expenses of $492 million, resulting successful operating separator of 30%.

We achieved nett income of $363 cardinal and delivered $2.02 successful net per share, which was supra nan high-end of our guidance. Our weighted mean stock count for nan 4th was 180 cardinal shares.

Moving to nan capacity of our segments, our Communications Solutions Group generated gross of $939 million, up 7%, aliases 10% connected a halfway basis. Commercial Communications gross of $629 cardinal was up 8%, pinch double-digit gross maturation successful nan Americas. Aerospace, defense and authorities gross of $310 cardinal benefited from accrued U.S. authorities spending, which we judge will proceed to ramp done FY23. Altogether, CSG delivered grounds gross separator of 67%, and operating separator of 29%.

The Electronic Industrial Solutions Group generated first 4th gross of $442 million, up 19%, aliases 23% connected a halfway basis, pinch double-digit gross maturation successful automotive and wide electronics, demonstrating nan diverseness of our markets. Growth was strongest successful nan Americas and Europe. EISG reported gross separator of 61%, and operating separator of 32%.

Moving to nan equilibrium expanse and rate flow. We ended our first 4th pinch $2.2 cardinal successful rate and rate equivalents, generating rate travel from operations of $366 million, and free rate travel of $306 million, aliases 22% of revenue.

Shares repurchases this 4th totaled astir 700,000 shares astatine an mean stock value of $176, for a full information of $125 million.

Now, turning to our outlook.

We’re navigating nan aforesaid evolving macro and manufacture dynamics that others person noted. As Satish mentioned, we expect it will return astatine slightest a mates of quarters for customers to activity done their near-term challenges. If nan existent request situation persists done our 4th quarter, we would expect to present debased single-digit gross and net per stock maturation for nan year, achieved done dependable backlog conversion, beardown costs discipline, and nan elasticity of our financial model.

Turning to our 2nd 4th guidance. We expect gross to beryllium successful nan scope of $1,370 cardinal to $1,390 million, and Q2 net per stock to beryllium successful nan scope of $1.91 to $1.97, based connected a weighted diluted stock count of astir 179 cardinal shares.

While near-term uncertainties are moderating nan request environment, Keysight’s secular, semipermanent maturation trends stay intact. Our differentiated, first-to-market solutions, durability of our financial model, dependable rate generation, and beardown equilibrium expanse position america good to present connected our commitments to our customers and shareholders. We look guardant to sharing much pinch you astir nan compounding quality of our business astatine our upcoming Investor Day.

With that, I will now move it backmost to Jason for nan Q&A.

Jason Kary

Thanks, Neil. Jason, tin you springiness nan instructions for nan Q&A, please?

Question-and-Answer Session


Yes. [Operator Instructions] Our first mobility is from Mark Delaney pinch Goldman Sachs.

Mark Delaney

Yes. Good afternoon. Thank you very overmuch for taking nan question. I was hoping, first, if you could elaborate a small spot much connected nan comments connected orders. It seems for illustration it’s peculiarly impacting nan Commercial Communications business and possibly definite different areas are doing a spot better. But if you could connection a spot much connected wherever you’re seeing nan orders and wherever possibly you’re seeing immoderate moderation from customers?

Satish Dhanasekaran

Yes. Hi Mark. What we’ll do -- first, I want to commencement by saying our customer engagements stay very strong, robust shipment activity this quarter, and you spot that reflected successful nan beardown gross performance. Second, our backlog is still astatine $2.5 billion, high-quality, debased cancellations to date. And to put this request normalization successful context, I would conscionable constituent to 2 things. First, arsenic we said successful nan past net call, we person immoderate business-specific headwinds, astir 6 to 7 points, that played out. And this quarter, our comps from a twelvemonth ago, we were up 22%. So putting those things successful context, a small spot much heavy dive I’ll supply connected nan extremity markets could beryllium helpful.

In Commercial Communications, we saw nan apical customer propulsion back, particularly successful nan wireless portion of nan business, owed to nan macro challenges and nan inventory digestion that they were going through, particularly pinch respect to nan smartphone industry. We besides saw arsenic nan activity strategy pickup connected nan wireline broadside arsenic customers are investing successful 400 gig and 800 gig Ethernet and terabit and beyond. So, those investments stay strong.

In our aerospace and defense business, we’re starting to spot a favorable uptick successful nan U.S. business arsenic budgets are passed and programme spends get unlocked. It’s besides important to statement that nan -- that each of nan premier contractors had stronger backlog positions, which besides gives america a bully outlook arsenic we look ahead.

And our Industrial business continues to show resilience pinch nan investigation walk occurring successful different countries astir nan world, automotive pinch EV and AV and next-gen semi investments remaining beardown arsenic well.

So, we put each of this successful discourse and say, we stay assured successful nan portfolio differentiation we person and we’re actively engaged pinch our customers, which will alteration america to outperform this environment.

Mark Delaney

Thanks, Satish. That’s very helpful. My different mobility was connected nan costs controls, and nan Company said astir being disciplined. Were you alluding much to nan adaptable quality of your costs structure, and that will mean spending depending connected what request yet does this year, aliases are location much circumstantial steps that Keysight is readying to return connected costs controls? Thank you.

Satish Dhanasekaran

Yes. Mark, arsenic we mentioned, ever that we person this adaptable costs building and operating model, that’s nan first limb of our resilience from a financial perspective. But we’re ever looking for move assets allocation opportunities, particularly successful a marketplace for illustration this, wherever we spot immoderate of our customers propulsion back. We redeploy to different customers who request these technologies truthful that we’re maximizing. So that’s portion of that subject that I referenced. And we ever person connected platform operational ratio programs arsenic portion of nan Keysight activity model. And we’re remaining focused connected that, successful immoderate cases, moreover accelerating that. That should thief america offset nan inflationary impacts to nan P&L arsenic we are each faced pinch correct now.


Our adjacent mobility comes from Mehdi Hosseini pinch SIG.

Mehdi Hosseini

I want to spell backmost to booking a backlog. You guys person been very clear for a mates of quarters that post-COVID we’re going to person to spell done a backlog normalization. And I want to get immoderate much colour from you is, is location immoderate measurement you tin abstracted aliases differentiate nan backlog normalization from extremity marketplace request weakness, particularly successful nan smartphone area that you highlighted?

Satish Dhanasekaran

Yes. Maybe I’ll conscionable start, and past Neil tin add. I’d opportunity that if we look astatine our extremity markets and if you return a look astatine nan commercialized comps, particularly successful nan wireless side, nan apical customer propulsion backmost is decidedly macro related and related to nan inventory vulnerability that they have, which has been wide talked about. But if we look astatine nan guidelines customer spend, it remains beautiful strong. So, that’s arsenic acold arsenic that extremity marketplace is concerned, but we commencement to look astatine aerospace defense and our business exposure, which continues to supply america apical statement diversity. And I deliberation that will play retired arsenic we spell done nan twelvemonth arsenic well. Neil, circumstantial to our backlog position?

Neil Dougherty

Yes. I mean, nan only point I would adhd to that is possibly starting pinch nan proviso chain, we still person areas wherever we are proviso concatenation constrained. But successful different areas, we’ve seen a beautiful accelerated betterment successful position of readiness of merchandise and benignant of nan inclination towards normalization of lead times. And truthful what we are seeing, and I’ve talked astir this is thing we expected. In galore cases, we person products for nan -- aliases customers for those products that person scheduled shipments now retired an further 4th and beyond.

And arsenic our lead times person travel in, they don’t now, astatine this time, request to spot caller orders until they get transportation of nan merchandise that’s already sitting successful backlog. And so, nan -- if you’re astir 6 aliases 8 months, location was this inclination to spot orders early to get successful statement to set for those agelong lead times. Now that we’re seeing lead times normalize and coupled pinch macro uncertainty, there’s nary longer that inducement to get successful statement early and that is creating a small spot of further unit connected nan bid line.

Mehdi Hosseini

Sure. And conscionable a follow-up here. You did $1.3 cardinal of caller orders. Is location immoderate measurement we could deliberation astir nan R&D information of that bid aliases nan strategical finance that were reflected successful nan $1.3 cardinal from production? And I’m conscionable trying to amended understand really we should deliberation astir nan downside consequence successful booking activity from here? Is location for illustration a -- is $800 cardinal a 4th nan worst-case scenario, aliases thing successful that quality that you tin connection would beryllium very helpful.

Satish Dhanasekaran

Yes. Thank you, Mehdi. Again, it remains a highly uncertain situation arsenic you know. What we’re seeing is customers typically patient up request and budgets astatine nan opening of nan twelvemonth because of nan concerns they have, they’re pushing retired those decisions to later successful nan year. So, nan uncertainty decidedly remains. But arsenic we look astatine nan spending environment, particularly moreover successful commercialized comms, we spot much pullback astir manufacturing description s comparative to nan R&D plans of customers. So that’s mostly nan trend.

And if you look successful nan ISG business, I’ll say, successful nan semiconductor arsenic an example, customers are not pulling backmost connected next-gen semi capacity, right, whether it’s 5-nanometer aliases 3-nanometer, they’re really possibly cutting backmost connected immoderate of nan 7-nanometer activity they were readying on. So, nan attraction connected adjacent procreation remains very strong. I whitethorn -- I will inquire Mark to supply immoderate colour connected nan customer dynamics that he’s seeing successful nan -- from a income perspective.

Mark Wallace

Yes. And I would -- Mehdi, I would -- conscionable to straight reply your question, nan operation during nan 4th was still very predominant R&D. And Satish mentioned, nan pullback was overmuch little location and particularly successful commercialized comms than it was connected nan manufacturing side.

The different facet that we’ve talked astir successful nan past connected different convention calls is our funnel. We person a six-month chimney that gives america a beardown denotation of nan forward-looking demand. That has been factored into our guide. It has normalized pinch nan effects that we saw beautiful acutely present successful nan first quarter. And looking retired six months, nan request awesome looks to beryllium reasonably consistent, successful statement pinch what we saw successful Q1.

Satish Dhanasekaran

Mehdi, nan different constituent pinch respect to your remark connected nan downside risk, right? I’ll opportunity that we’ve done a batch of activity to participate into much of nan R&D markets of our customers. That still remains a privilege for us. We’ve besides done rather a spot of activity to diversify this business to grow into business extremity markets, aerospace defense and car successful particular. And finally, done our income footprint, we’ve done activity to pull caller customers, and that remains a captious privilege for us, and we -- which I stay assured that each of these actions will alteration america to outperform successful this situation arsenic well.


Our adjacent mobility is from Meta Marshall pinch Morgan Stanley.

Meta Marshall

Just a mates of questions. I mean, possibly you said to benignant of Open-RAN millimeter activity and benignant of immoderate areas of investment. I conjecture arsenic we deliberation astir nan communications business, could you conscionable springiness america a consciousness of for illustration what are nan strongest gross driver is increasing successful - moving into benignant of almanac twelvemonth 2023? Is it Open-RAN? Is nan millimeter wave? Is it 6G? Just benignant of immoderate -- what is nan wide spot of that business coming from? And then, possibly arsenic a follow-up question, you guys mentioned immoderate benignant of costs discipline, stronger costs subject that you are balancing retired benignant of nan little request indications from. But conscionable a consciousness of wherever investments are still being made, conscionable what grade of those cuts are we benignant of talking astir arsenic we move passim nan year? Thanks.

Satish Dhanasekaran

Yes. Meta, convey you. So first of all, we stay intensely focused connected continuing to innovate and fortify our portfolio. So from an R&D perspective, nan collaborations we person pinch our customers informs wherever we invest, and we consciousness beautiful bully astir it. At best, immoderate of these pullbacks are short-term delays for R&D spend, and we expect those to retrieve arsenic our customer deals pinch these inventory dynamics that we mentioned. With respect to 5G, I deliberation I would opportunity that nan R&D roadmap remains successful place, right? Our customers person a multiyear roadmap, and they proceed to put to recognize that roadmap.

And astatine nan large image level, I would opportunity while important advancement has been made successful position of 5G deployments, we still person astir about 1 cardinal subscribers successful nan world, and nan roadmap is to return it from $1 cardinal to $5 cardinal successful nan adjacent 5 years aliases so. So clearly, there’s much deployment activity occurring that’s successful beforehand of america pinch India and different parts of nan world starring that effort. The standards progression, which really is simply a ground for R&D business pinch Release 16 and Release 17, moving into Release 18, which will beryllium 5G advanced, is beautiful strong. And those invention vectors astir non-terrestrial networks, caller features specified arsenic RedCap for IoT applications -- proliferation of 5G into caller verticals remains areas of opportunity for america that we’re investing successful to proceed to differentiate on pinch Open-RAN arsenic well, which we person talked about. But nan manufacture roadmap remains solid, and our differentiation remains beardown successful these markets.

Neil Dougherty

And then, Meta, I’ll conscionable reside nan costs subject question. So, first and foremost, I’d for illustration to conscionable stress that we are continuing growth-oriented investments that are going to thrust this business guardant successful nan future. We’re very clear astir what those priorities are internally and we’re keeping our ft connected nan state pinch respect to our astir important growth-driven investments. That being said, I for illustration nan measurement Satish characterized it, right?

We ever person onset a pat of ratio gains that we’re looking to that we’re looking to run connected arsenic portion of our continuous betterment culture. And fixed nan situation that we’re successful pinch unit connected nan apical line, coupled pinch not conscionable inflation, frankly, but signs that nan dollar is going to backtrack connected immoderate of nan strengthening that we saw past year, which will besides put unit connected our overseas rate spending. We felt it was prudent for america to return actions to accelerate immoderate of that efficiency. So, it’s crossed nan P&L, but we are not putting early maturation investments astatine risk.


Our adjacent mobility comes from Samik Chatterjee pinch JP Morgan.

Samik Chatterjee

I conjecture if I tin conscionable commencement pinch orders. And if you tin remark connected nan linearity of orders done nan 4th based connected your expectations for seeing immoderate of this digestion from customers for different mates of quarters, truthful conscionable you had much deterioration possibly arsenic you exit nan quarter. But conscionable wanted to cheque if benignant of what’s nan inclination done nan period successful nan 4th that you saw.

And nan remark that you made astir electronics orders holding up amended than connection overall. Now, I dislike to benignant of generalize EISG overall, but it’s seems a spot counterintuitive because my belief was that connection is simply a spot much R&D aligned for you than EISG successful general. But possibly if you tin benignant of correct maine location aliases why -- explicate why that’s happening if R&D is astir protected? And I person a follow-up. Thank you.

Mark Wallace

Sure. Samik, this is Mark. I’ll return nan first mobility connected linearity of orders. And it was -- we had astir two-thirds of our orders aft nan 2nd month. We had a large decorativeness to nan extremity of FY22 and our 4th quarter. So, we had a bully rebound successful December and nan past 4th was astir 34% of nan full orders of bookings for nan quarter. So, it was a beautiful linear travel of business.

On nan physics business side, what we see, arsenic Satish mentioned, is continued request astir next-generation process technologies for our semiconductor business, very semipermanent secular maturation drivers that we’ve been talking astir for a agelong time. The activity level and attraction astir nan next-generation auto, EV successful particular, is continuing to ramp. Again, this is simply a decade-long transformation. The number of EVs sold past twelvemonth arsenic opposed to ICE vehicles continues to grow. So, I spot this arsenic a semipermanent trend.

And what I was peculiarly amazed pinch was really our wide electronics business held up, peculiarly astir immoderate of nan verticals that we’re focused on, integer wellness care, precocious investigation and education. Obviously, immoderate of this is exposed to broader GDP benignant of markets, and we saw nan PMI enactment beneath 54. I deliberation it was 5 aliases six months successful a row. But successful general, nan 3 segments beneath EISG continued to show resilience and, overall, continued investments successful these next-generation technologies.

Samik Chatterjee

For my follow-up and possibly to conscionable alteration gears present a bit, there’s a competitor of yours who is going done a strategical reappraisal process pinch liking from aggregate parties for an acquisition. I’m not asking you to remark connected nan liking successful that institution successful itself. But really should we deliberation astir benefits to Keysight from scaling nan business successful a measurement usability from present on? And nan level of -- leverage -- indebtedness leverage connected nan equilibrium expanse you would beryllium comfortable pinch if charismatic opportunities did travel done that are much visible?

Satish Dhanasekaran

Yes. Thank you, Samik. I’d opportunity you’re right. We don’t remark connected immoderate circumstantial opportunity. I would conscionable opportunity that we stay assured successful nan business that we run, its rate procreation potential. You’ve seen nan beardown free rate travel capacity of nan business. And truthful congruent pinch that, we person a accordant superior allocation discipline, which is astir integrated maturation and M&A wherever it makes consciousness and return of capital. And pinch respect to M&A, you’ve seen america beryllium incredibly diligent and disciplined pinch respect to nan opportunities we pursue.

We look astatine hundreds of companies aft having done marketplace assessments connected them. And past we’ve done astir 20 to date. And we’ve been -- and we’ve done them pinch a position of nan strategy and what standard that we tin bring to nan target and really we spot nan -- first, nan strategical fed, but 2nd and arsenic important is nan return to our shareholders. So, I deliberation those hurdles will proceed to stay successful place, and we stay very disciplined.


Our adjacent mobility is from Chris Snyder pinch UBS.

Christ Snyder

So backmost connected nan convention telephone successful November, nan Company talked astir book-to-bills approaching a much normalized 1.0x. The 4th came successful a spot beneath that astatine 0.94. So, were orders successful nan 4th softer than you would person expected backmost successful November? Or [Technical Difficulty] for book-to-bills to amended arsenic nan twelvemonth goes connected and benignant of scope that much normalized mean of 1.0x for nan afloat year?

Neil Dougherty

Yes. I mean, if you spell backmost to nan November quarter, we talked astir 8 points of circumstantial headwinds that we were facing from rate and from China, Russia, those things, and that we expected that we were besides recognizing macro connected -- softness connected apical of that aliases anticipating macro softness connected apical of that. So, by and large, I’d opportunity nan 4th came successful mostly successful statement pinch our expectations. It’s evidently difficult to put a quantification connected macro. I mean, looking forward, arsenic Satish has said, it’s very difficult to telephone astatine this point. We’ve attempted to springiness you immoderate parameters pinch which to deliberation astir nan business.

Mark has commented that successful our funnel, which looks retired complete nan adjacent mates of quarters would bespeak request that’s much aliases little successful statement pinch what we conscionable saw successful nan first quarter. And then, I did authorities successful my prepared comments that if that benignant of bid inclination stay successful spot for our full remainder of our fiscal year, we’d expect to still beryllium capable to present a debased single-digit gross and EPS growth. So, we’re taking it 1 4th astatine a time, but that should hopefully springiness you immoderate guardrails pinch which to deliberation astir nan business.

Christ Snyder

Thank you. I admit that. And past conscionable benignant of staying connected orders for fiscal Q1, is location thing aliases colour you could supply astir really orders successful China did during nan quarter, fixed a batch of nan disruption complete there? And besides authorities and defense business orders, conscionable fixed immoderate of nan budgeting solution processes going on? Thank you.

Mark Wallace

Sure. This is Mark. I’ll remark connected some of those. So we faced, arsenic everyone did, nan unanticipated breakout from COVID, and location were immoderate incremental waste and acquisition restrictions that happened successful nan period of December. We did spot orders diminution successful China. They really accrued sequentially. So, that benignant of indicates nan different seasonality that we faced. But it was -- comparative to what we were expecting to look pinch immoderate of nan declines, I was pleased pinch our response. And it really continues to beryllium successful statement pinch what we’ve talked astir successful nan past, which is our expertise to pivot to caller opportunities and nan breadth of our customer guidelines successful China, which continues to beryllium an area of spot for us. And that includes automotive, wherever nan business was up. Some of nan backstage networks, which is simply a caller usage lawsuit for 5G from an business standpoint, proceed to show signs of maturation for us. Mature process technologies for semiconductor.

So, arsenic we spell guardant and nan system originates to normalize location and possibly reopen into nan 2nd half, we’ll support a adjacent oculus connected that arsenic well.

Aerospace defense, arsenic Satish noted successful his opening comments and otherwise, we saw a beardown maturation -- bid growth, successful nan U.S. That’s a nonstop byproduct of nan fund being approved overmuch earlier this twelvemonth than past year. And what we spot hap successful Q1 was not caller programme starts, but alternatively multiyear programs that were stalled because of continuing solution move backmost connected and immoderate of that walk proceed to flow.

So, arsenic we get done nan adjacent respective months and quarters, and nan grounds precocious RDT&E fund flows done nan process, we dream to spot immoderate further tailwinds there. Outside nan U.S., pinch nan geopolitical situation, we expect to spot continued semipermanent request for defense modernization. So, we’re positioned good to seizure that arsenic well.

Satish Dhanasekaran

Yes. Just possibly to adhd a remark to Mark, nan abstraction and outer besides continues to inflect for america successful nan aerospace defense business, and is showing immoderate momentum location pinch customers, too.


Our adjacent mobility comes from Aaron Rakers pinch Wells Fargo.

Aaron Rakers

I’m going to spell backmost to benignant of nan bid and backlog dynamics. Neil, I deliberation past quarter, you had mentioned that you were possibly astir 4 aliases 5 weeks of benignant of inflated aliases elevated backlog comparative to normal. I’m funny wherever that stands correct now? And does your debased single-digit presumption presume -- growth-wise presume benignant of backmost to normalized backlog levels done nan people of nan year?

Neil Dougherty

Yes. It’s a awesome question. So obviously, gross outpaced orders by astir $80 cardinal wrong nan quarter. You tin do nan mathematics connected it. But if we spot a akin situation persist for nan remainder of nan year, which is, again, successful statement pinch nan guardrails what I put retired there, we’d pain $300 cardinal positive of that benignant of abnormal backlog. So, it whitethorn not get america each nan measurement home, but it would get america a important chunk of nan measurement towards normalization of nan backlog complete a multi-quarter period. We ever knew it would return aggregate quarters to normalize nan backlog. And while this is conscionable 1 scenario, I deliberation it’s not retired of statement pinch our expectations.

Aaron Rakers

Okay. And that’s helpful. And then, a speedy follow-up. Just connected nan semiconductor business, you proceed to execute well. And I don’t cognize nan reply to this question, but I’ll conscionable put it retired there, is that -- is location immoderate benignant of disruptions? I deliberation there’s been a supplier successful nan semiconductor proviso concatenation that had seen, I think, immoderate cyber onslaught issues. Is that astatine each impactful to your business aliases not?

Satish Dhanasekaran

No, not astatine all. For us, we service nan wafer stage, which is connected nan beforehand end. It takes a longer lead clip from our fabs to put capacity. And we spot customers sticking pinch their plans for 5-nanometer and below. And equally, we’re besides rather pleased pinch nan progression we’re making to further adhd much applications into our solution stat, whether it is high-power applications for definite chips aliases silicon photonics aliases millimeter wave. So we proceed to build that portfolio out.


Our adjacent mobility comes from Jim Suva pinch Citigroup.

Jim Suva

The first portion of my mobility is, Neil, you made nan mobility that are nan connection arsenic nan twelvemonth plays out, if it does according to plan, you’re looking astatine benignant of income growth. I deliberation I heard you opportunity debased mid-single digits, and past you said -- and EPS growth. Did you mean nan EPS maturation to beryllium affirmative aliases for illustration successful that aforesaid scope of income growth? Because typically, net per stock grows astatine a bigger aliases a magnitude astir income growth. Then I’ll person a follow-up. Thank you.

Neil Dougherty

Yes. So what I said, first of all, we weren’t guiding nan year. What we said is, it’s a highly uncertain environment, it’s difficult to know. But if nan request stays accordant pinch wherever -- what we saw successful Q1 done nan remainder of our year, we would expect to present successful that script debased single-digit gross and debased single-digit EPS growth.

Obviously, our exemplary calls for higher gross maturation than that pinch 40% operating leverage, which enables america to get to double-digit EPS growth. So, successful a script wherever revenues are increasing astatine a little level, coupled pinch this inflationary environment, which is simply a spot abnormal, we’d beryllium looking astatine debased singles for some gross and EPS. Again, nether that circumstantial script wherever our orders stay much aliases little successful statement pinch what we saw successful nan first quarter.

Jim Suva

Great. And past my follow-up mobility is, I judge it was successful nan period of December that had nan incremental waste and acquisition restrictions against China. I deliberation that’s right. And truthful erstwhile we deliberation astir your commentary for 2023, if things are consistent, really overmuch of income effect is that incremental restrictions? Is that what you’re referring to successful your prepared commentary astir nan benignant of 3 to 4 points -- aliases 6 to 7 points of maturation impact, aliases tin you conscionable thief maine soma retired nan effect of nan waste and acquisition restrictions? Thank you.

Neil Dougherty

So, nan caller China waste and acquisition restrictions that came astir successful December is an further 1 to 2 points of headwind for america complete nan longer term.

The remark astir 6 to 7 was -- connected nan telephone past quarter, I outlined what astatine nan clip we thought was going to beryllium 8 points of headwind coming from China, Russia and FX. As we sewage to nan extremity of nan quarter, what we thought was going to beryllium 8 was much for illustration 6.5, truthful telephone it 6 to 7, and that’s mostly because nan dollar backed up a small bit. So, nan FX effect was little than primitively expected. The China effect was somewhat little arsenic well.


Our adjacent mobility is from Matthew Niknam pinch Deutsche Bank.

Matthew Niknam

Maybe conscionable a follow-up connected that past one. On nan Analyst Day, I’m conscionable wondering immoderate first thoughts connected what we could expect connected March 7th successful position of conscionable updates to longer-term targets? And past conscionable connected nan M&A backdrop, I’m conscionable wondering, what’s nan latest you’re seeing successful position of opportunities and valuations. And I cognize successful nan past you’ve been focused connected immoderate smaller size package deals. I’m conscionable wondering if that’s still nan attraction aliases possibly whether you’re unfastened to larger deals, conscionable considering nan pullback successful backstage marketplace valuations. Thanks.

Satish Dhanasekaran

Yes. Thank you. I look guardant to sharing nan forward-looking position connected nan marketplace fundamentally astatine nan Investor Day. Across our extremity markets, we person -- we spot invention accelerating. And I deliberation we’ll laic retired Keysight’s strategy to spell into group those breathtaking semipermanent opportunities. So that’s number one. But I deliberation pinch respect to M&A, clearly, if you look astatine really we’ve grown, we’ve been disciplined successful actioning M&A of each sizes. You’ve seen america do Anite and Ixia, somewhat larger standard and past a batch of exertion tuck-ins, which person helped america complete nan workflow and really create greater worth for customers and besides grow our margins successful nan process.

So from that perspective, we stay progressive successful exploring caller markets and targets arsenic well. But again, arsenic I mentioned before, we person beardown strategical and financial hurdles that we person to meet arsenic gates earlier we spell up and transact nan business.

On nan valuation front, connected nan margin, we deliberation nan valuations are apt to travel successful arsenic much of nan marketplace reality sets successful pinch a number of nan firms, so. And pinch nan beardown equilibrium expanse and rate position, we stay progressive successful exploring opportunities.


Our adjacent mobility is from Adam Thalhimer pinch Thompson Davis.

Adam Thalhimer

Congrats connected nan Q1 beat. First mobility connected cancellations. You said that they’ve been debased to date. I conjecture I conscionable wanted to gauge your level of interest that that could get worse.

Neil Dougherty

Yes. We’ve had nary summation successful our cancellation rate. So we proceed to judge nan value of our backlog is very high.

Adam Thalhimer

And past I conjecture I’m conscionable curious, really does this downturn and what you’re seeing truthful acold comparison to anterior downturns? Because amazingly, you guys person been nationalist almost 10 years, but we haven’t had a prolonged recession during that period.

Satish Dhanasekaran

Yes. I deliberation I’ll return this. Satish here. Every recession, nan situation is different. And I would opportunity that aft having a mates of very beardown maturation years, immoderate normalization was inevitable. And what we’re seeing is propulsion backmost from immoderate of nan customers successful consequence to immoderate of nan inventory excesses successful circumstantial markets. But I spell backmost to our portfolio position is nan strongest it’s ever been because of our accent connected solutions. Our business exemplary coming is overmuch stronger because we person -- complete 33% of our business is package and services, which gives america further resilience. And we person a beardown operating exemplary astatine nan Company that allows america to tide complete immoderate perturbations successful nan marketplace.

And we besides participate nan twelvemonth pinch a beardown backlog position arsenic well. So from those perspectives, it’s different. I besides deliberation if you look astatine nan gross separator astatine nan Company level, we proceed to enactment beardown astatine 65%. And I deliberation pinch nan operational exemplary successful place, we stay assured astir our expertise to show that resilience.


Our adjacent mobility is from Rob Mason pinch Baird.

Rob Mason

Satish, frankly, I’ll travel up your remark pinch a mobility conscionable astir nan package orders successful nan quarter. I benignant of inferred that they stay resilient. But arsenic you deliberation astir wherever you’ve seen immoderate challenges successful Commercial Communications, to nan grade that there’s a slowdown successful renewals, aliases is that thing that hits your radar surface arsenic you spot immoderate of nan headcount reductions return spot successful nan tech sector? Just really you take sides against that?

Satish Dhanasekaran

Yes. I deliberation we person an incredibly sticky business pinch our customers, and we’re not seeing them propulsion backmost connected renewals. Obviously, caller purchases are taking longer, arsenic Mark alluded to earlier. But I deliberation moreover successful nan Commercial Communications sector, we person 2 businesses, right, wireless and wireline. We’re seeing stronger pullback from customers successful nan wireless broadside of nan equation. The wireline customers proceed to innovate. You spot immoderate of nan trends successful information halfway and unreality that are playing out. Need for faster information rates is important. Also successful lieu of each of nan activity that’s going connected astir AI, there’s a greater request to optimize nan workflows of our customers. So, that portion of nan opportunity continues to stay stronger connected a comparative basis.

I’ll conscionable person Mark make immoderate remark on...

Mark Wallace

Yes. Rob, conscionable to reply -- yes, that was -- Satish did a awesome job. And I’ll conscionable fto you cognize we didn’t spot nan pullback successful package for illustration we did successful different parts of nan business. As a matter of fact, our renewals were up and our maturation from subscriptions and endeavor agreements remained steady, which is what you would expect from a sticky business, thing that has benignant of a continuous travel of worth successful a subscription model. So that really worked for america this quarter.

Rob Mason

Sure. Sure. Is that -- possibly conscionable arsenic a follow-on question, is that nan power that -- location seems to surely beryllium possibly a inclination pinch -- 2 quarters, 2 years make a trend, wherever nan first 4th gross separator is simply a bully spot stronger successful nan Commercial Communications conception and past possibly steps down, moderates successful nan 2nd quarter. Is that still nan anticipation aliases nan move astatine play there?

Neil Dougherty

Could you repetition that? I’m sorry.

Rob Mason

Yes. Just essentially, your communications -- CSG group gross margins tends to person a overmuch stronger first 4th gross margin, astatine slightest going by nan past mates of years, than it does nan remainder of nan year. Is that -- would that beryllium nan anticipation this twelvemonth arsenic well?

Neil Dougherty

Yes. I mean I don’t deliberation you tin tie immoderate conclusions looking astatine humanities sequential gross separator information arsenic to what to expect. At slightest arsenic I would deliberation astir it, immoderate perturbations that whitethorn person appeared to person repeated person to beryllium much coincidental than systematic.


And our last mobility is from David Ridley-Lane pinch Bank of America.

David Ridley-Lane

The emblematic seasonality is for a bully sequential uptick successful EISG successful nan 2nd quarter. Lot of nan commentary connected nan telephone has been that ESG remains beautiful strong. I mean, wrong your 2nd 4th guidance, should we expect benignant of that humanities sequential shape successful EISG?

Neil Dougherty

Yes. I mean each I would opportunity is our sequential guideline correct now takes a look astatine our ample backlog, looks astatine nan schedule of shipments, looks astatine nan incoming funnel. And obviously, we’re going to trust connected a information of incoming orders to move into gross wrong nan quarter. And so. we person a precocious grade of assurance successful our expertise to present to nan number that we’ve put out.

David Ridley-Lane

Got it. And past besides IE -- connected EISG, excuse me. The inclination successful gross separator has been a small spot softer complete nan past mates of quarters. Is location -- that being said, separator description -- operating separator description has continued to beryllium rather good. But I’m conscionable wondering, is location thing successful nan operation aliases different dynamics that you could telephone retired to benignant of explicate that gross separator inclination there?

Satish Dhanasekaran

Yes. Across nan businesses, we’re evidently looking to create worth for our customers and that worth expectations spell up pinch time, greater solutions, content, greater -- package evidently increases nan gross margin. You spot that successful our CSG business, 67% gross margin. So, we’ll proceed to thrust that up. On nan EISG business, somewhat little package content, higher operation of manufacturing offerings traditionally. But equally, our accent connected creating solutions is not diminished. We’re successful fact, adding much package content, moreover to our semi manufacturing trial systems, we’re providing much analytics capabilities, and we person beardown customer uptake for those. So, complete time, arsenic we travel disconnected this inflationary impacts of nan proviso concatenation and different things that we’ve talked about, I would proceed to expect much separator upside and look guardant to sharing immoderate of that pinch you astatine nan Investor Day.


There are nary much questions, truthful I’ll walk nan telephone backmost complete to nan guidance squad for closing remarks.

Satish Dhanasekaran

Yes. Thank you, and convey you each for joining. Keysight delivered different beardown quarter, gross up 10%, beardown gross margins astatine 65%, operating profit 30%, free rate travel of greater than $300 million. And we proceed to stay focused connected actively collaborating pinch our customer -- customers crossed nan aggregate extremity markets we service arsenic they navigate these move conditions, which gives america nan assurance successful our expertise to outperform. Again, we person a diversified extremity marketplace exposure, beardown solutions portfolio that’s growing, spot of backlog, beardown rate position and a beardown equilibrium sheet. And each of these alteration america to put to recognize our semipermanent maturation strategies. But we’re doing truthful pinch nan fiscal subject and prudent operational initiatives that we person successful place.

We look guardant to seeing you each successful New York connected March 7th. And I’m excited to stock nan early maturation strategy moving forward. Thank you.


That concludes nan convention call. Thank you for your participation. You whitethorn now disconnect your lines.

Editor: Naga

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