Q4 2019 Earnings Call
Fourth quarter 2019 earnings Conference call. My name is Christine and I'll be your lead operator today. After the presentation, we will conduct a question answer session.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press the pound fine if at any time during the conference you need to reach an operator. Please press star followed by zero piece note. This call is being recorded today Tuesday November 26 2009.
Team won 30 PM Pacific time, I would now like to hand, the conference over to chasing Kerry Vice President Treasurer and Investor Relations. Please go ahead Mr. Kerry.
Thank you and welcome everyone to key sites fourth quarter earnings conference call for fiscal year 2019.
Joining me are on the recession, Keysight, President and CEO and Neil Doherty, Keysight Senior Vice President and CFO joining us in the Q1, a session will be Mark Wallace Senior Vice President of worldwide sales since the to start a shocker on president of the communication solutions group you can find the press release and information to supplement today's discussion.
On our website and investor Dot Keysight Dot com well there. Please click on the link for quarterly reports under the financial information tab. There you will find an investor presentation, along with Keysight segment results. Following this conference call. We will post a copy of the prepared remarks to the web site.
Today's comments bharani over refer to non-GAAP financial measures. We will also make references to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months you will find the most directly comparable GAAP financial metrics and reconciliations on our website.
We will make forward looking statements about the financial performance of the company on todays call. These statements are subject to risks and uncertainties and our only ballot as of today. The company assumes no obligation to update that.
Please review the company's recent SEC filings for a more complete picture of our risks and other factors.
Lastly, I would note that management is scheduled to participate and upcoming investor conferences and December hosted by Wells Fargo Credit Suisse Barclays I'm confident we hope to see many of you there and now I will turn the call over to Ron.
Thank you Jason and thank you all for joining us Keysight delivered an outstanding quarter as we executed on our strategy and exceeded our commitments. This fiscal year 2019 was also an exceptional year of record performance as her strategy of innovation and differentiation solidified key sites leader.
Or ship in our target markets.
Today.
I'll focus my formal comments on three key headlights.
First keysight finished the year with both record quarterly and annual performance.
In Q4 and in fiscal year 2019 in total we achieved record orders record revenue record gross margin record operating margin and record EPS.
For the full year revenue grew 10% to reach $4.3 billion, we achieved 11% core revenue growth, while generating 63% gross margin, 24% operating margin and delivering record 46% year over year.
EPS growth.
Second we're well positioned for continued growth with a broad and differentiated portfolio of solutions targeted at the fastest growing segments of our end markets are focused on the long term secular growth rate trends in Fiveg next generation auto networking I O T and defense Mont.
Organization give us confidence in our ability to drive above market growth even in times of macroeconomic uncertainty.
Third over the last five years since launching Keysight, we have successfully executing a strategy to grow our business and improve our financial performance.
Our industry focused solutions targeted R&D investments acquisitions, and operational rigor have enabled keysight to deliver compounded annual revenue growth of 11% and compounded annual EPS growth of 17% since becoming an.
Independent public company.
Now, let's take a deeper look into our record setting performance across the business.
In the fourth quarter, we achieved record earnings of one dollar and 33 cents per share, which was 13 cents above the high end of our guidance and represents 31% year over year earnings growth.
We also delivered record orders in the fourth quarter orders of 1.194 billion grew 6% year over year and 7% on a core basis.
Excluding the unfavorable impact of trade restrictions of one of our larger customers in China orders grew 10%, reflecting the strength of our broad portfolio of solutions and extensive customer reach.
Our continued strong order growth has translated into another quarter of record revenue.
Q4 revenue of 1.122 billion grew 7% both on a reported and core basis.
This quarter, we continue to see good growth in commercial communications, where we have strong differentiation in fiveg as well as strength in U.S. Aerospace defense solutions.
Our Ixia solutions group delivered double digit order growth in 15% revenue growth as network visibility remains strong and network test grew double digits driven by increased investment in 400 gigabit Ethernet solutions 2019 was truly a record year for Keysight with total order growth.
9% or 10% on a core basis, despite macro uncertainties in global trade generations.
Total orders for the year were 4.4 billion a new milestone for the company total revenue grew 10% or 11% on a core basis to a record $4.3 billion. We achieved this growth while increasing gross margin by 280 basis points and operating margin.
By 520 basis points year over year.
This resulted in approximately $1 billion in both operating income and cash flow from operations.
2019 earnings per share of $4.72 were up 46% over the last year.
Our results this year were driven by the strength of our software based solutions broad based growth.
Cross multiple dimensions of the business and the customer focus and operational discipline of our Keysight leadership model.
Now we'll share some data points that illustrate the strength of our business in a few key areas.
Orders for a software solutions grew 19% in 2019 to reach $853 million, representing 19% of total keysafe orders for the year.
This growth was driven by strong demand for Fiveg solutions designed software and network visibility solutions. Our recent announcement of the pathway test 2020 software suite, representing a significant milestone in the ongoing development and deployment of key sites pathway software strategy.
Pathway. Desktop addition, the latest pathway release delivers an integrated experience for leading electronic manufacturers accelerating the time to market of their digital and wireless platforms and products, including Fiveg, I OATI and automotive electronics.
Services or another important elements of our solution centric engagement model with customers. We achieved all time highs for both services orders and services revenues for the fourth quarter and the full year.
Aligning our services business with our industry focus business groups at the beginning of the fiscal year, what's the next level growth catalyst that we expected a.
Im pleased to report that we achieved over $550 million in services orders this year.
Momentum for services offering continues to build across multiple end markets. We're also seeing good adoption of our new support offerings, such as Keysight care, which contributes positively to our margin expansion efforts, notably the combination of or services and software solutions now account for.
Over 30% of Keysight orders.
Moving to our markets our comprehensive suite of Fiveg solutions is driving strong growth in commercial communications as investment across ecosystems is scaling ahead of deployments.
Our broad differentiated portfolio and leadership in this fast growing market position as well as the market expanse. Another recent example of Fiveg leadership is the validation of our Fiveg Conformance test solutions by the global certification Forum.
Our conformance platform has been adopted by all major test labs worldwide as the industry prepares for Fiveg device certification.
Of commercial launches.
In automotive been energy our revenues grew high single digits for the full year and we continue to see investment in next generation technologies. Despite a slow down in auto production.
One example of this next generation technology investment is in battery formation.
This is a core process used in the manufacture of electric vehicle batteries, where specialized equipment must be used to generate accurate voltages incurrence to charge and discharge a battery. We recently achieved an important when using our battery formation test technology.
This solution demonstrates our ability to combine differentiated software and hardware capabilities from multiple R&D teams spanning Germany, Colorado, New Jersey, and Keysight labs.
In our Ixia solutions group, both network visibility and network test revenues grew double digits year over year in Q4 network visibility growth remained strong as we see future opportunities to expand our footprint with enterprises deploying dedicated networks.
Network test strength was driven by 400 gigabit Ethernet investment and layer two three protocol solutions as well as security applications. Our network test solutions have been adopted by many of the large industry players in span this ecosystem from any EMS to OTI EPS.
The differentiated capability of our areas, one 400 gigabit Ethernet platform.
And our global sales reach position us well to capture the investment expected in 2020.
In addition, the integration of I SG into our communication solutions group, which we announced last quarter is expected to accelerate solutions synergies and fiveg as the technology is deployed globally.
In conjunction with our strong financial performance in execution. He said remains committed to our corporate social responsibility vision, which includes the environment communities responsible sourcing ethical governance and our own people in solutions, we continue to be recognized for efforts by inclusion.
In multiple CSR focused indices. Most recently the Dow Jones sustainability Index importantly, we outline key impact goals in our progress in our CSR report earlier this year to highlight just a few of these results we have engaged with over 400000 students and future.
Our engineers through stem education programs, and reduce our global energy and water consumption by 7% an 18% respectively.
In summary, 2019 has been an exceptional year, a great success and a record revenue and earnings as we look ahead, we believe keysight is well positioned to expand their leadership as markets evolve.
Our financial performance in growth across multiple dimensions of the business or a validation of our strategy to offer customers full solutions that include both software and services. We will continue to focus our investments in these key areas to drive innovation and create even more value for customers and.
Shareholders, why we outgrow the market.
Before I turn the call over to Neil I would like to thank all of our Keysight employees for their dedication and hard work that made or success over the past five years possible.
It is an exciting time at Keysight and we believe we are still just getting started.
Thank you Ron.
Everyone before I begin I will note that all comparisons are on a year over year basis, unless specifically noted otherwise.
As Ron mentioned, we delivered an outstanding quarter and fiscal year 2019.
We continue to execute on our strategy for growth, while maintaining focus on operational excellence.
For the fourth quarter 2019, we delivered record non-GAAP revenue of $1.122 billion, which is above the high end of our guidance range and grew 7% on a core basis.
Our better than expected Q4 revenue results were driven primarily by continued strong demand, where we have a leading position and differentiated solutions in the market such as Fiveg Aerospace defense network visibility and general electronics.
Total keysight orders exceeded revenue once again this quarter, we delivered a record $1.194 billion in orders up 6% in total and 7% on a core basis.
Looking at our operational results for Q4, we reported record gross margin of 64% and operating expenses of $426 million, resulting in an operating margin of 26% the highest quarterly operating margin in key sites history.
We also achieved net income of $254 million and delivered $1.33 cents in earnings per share, which was well above the high end of our guidance and an increase of 31% year over year.
Our weighted average share count for the quarter was 191 million shares.
Moving to the performance of our segments, our communication solutions group generated record revenue of $706 million up 7%.
Liberty gross margin of 63% and an all time high operating margin of just over 28%.
In Q4 commercial communications delivered record revenue of $443 million, 9%.
Driven by strength across the wireless ecosystem as Fiveg investment continues to build.
Aerospace defense and government achieved record revenue of $263 million, an increase of 5% on a core basis versus a prior all time high in Q4 last year.
Growth was driven by U.S. government at year end spending and continued investment in China, offset by softness and Europe and the rest of Asia.
Orders for this end market grew double digits, and we continue to see investment and advanced technology modernization and solutions such as cyber electromagnetic activities.
For the year CST revenue grew 12% trees $2.688 billion.
Yes, she generated fourth quarter revenue of $284 million up 3% driven by strength and the broad portfolio products that serve our general electronics market ongoing investment in Nexgen auto technologies and better than anticipated semiconductor solution demand.
Yes, he reported record gross margin of over 62% and operating margin of 28%.
For the year, he IC revenue grew 6% to reach $1.135 billion.
I see reported Q4 revenue of $132 million a record since the acquisition of Vixia.
Which represents 15% growth over last year with double digit revenue growth and both network test and visibility solutions.
I see reported gross margin of 72% and operating margin of 9%.
As a reminder, this does not include the full benefit of the approximately $50 million and that annualized cost synergies we generated from the transaction.
Of which about 70% or being realized within CSG and he is G.
In Q1, we will align iced tea with our commercial communications end market, including global sales at that time, we were a port IC results within our comfort within our communication solutions group, which will provide solutions across the entire communications ecosystem, both end to end and up and down the stack.
As Ron highlighted we are pleased with our performance and execution as a company for the 2019 fiscal year.
Revenue for the year total $4.3 billion and gross margin improved 280 basis points to 63%.
To fuel innovation and further strengthen our market position and strategic areas, we continue to invest in R&D, while maintaining strong operational discipline.
As a result operating margin improved 520 basis points to 24%.
This translated to strong 46% earnings growth as reported non-GAAP net income of $902 million or $4.72 per share for the full year.
Moving to the balance sheet cash flow.
We ended our fourth quarter with 1.6 billion in cash cash equivalents and reported cash flow from operations of $263 million have free cash flow of $233 million, which represents 21% of revenue.
This brings free cash flow for the year to $878 million, which was 20% of revenue and 97% of non-GAAP net income well ahead of our 80% to 90% free cash flow conversion target for the year.
Under our share repurchase authorization during the quarter, we acquired approximately 300000 shares on the open market at an average price of $98.30 for total consideration of approximately $30 million.
This brings our total purchases for the year to approximately 2.1 million shares at an average price of $76.32.
For a total consideration of $160 million.
Before moving to our outlook I would like to remind you about the trade restrictions impacting one of our larger customers in China and the unfavorable impact this will have on our year over year comparisons in fiscal 2020.
Specifically this customer represented 6% of revenue in Q1 of 2019 and approximately 4% of revenue in Q2 or just under 5% of revenue for the first half of 2019.
Due to ongoing trade concerns we now expect this customer to be approximately 1% of revenue going forward, which represents a five point headwind in Q1, and a three point headwind in Q2 2020.
Virtually all of this unfavorable year over year impact will be reflected in the commercial communications and market.
Now turning to our outlook and guidance, we expect first quarter 2020 revenue to be in the range of $1.045 billion to $1.065 billion and Q1 earnings per share to be in the range of one dollar four cents to $1.10 cents based on a weighted diluted share count of approximately 191 million shares.
For 2020 modeling purposes, we typically expect seasonally higher revenues in Q2 in Q4 versus Q1 and Q3.
Interest expense is expected to be approximately $80 million.
Capital expenditures are expected to be in the range of $120 million to $130 million.
Regarding our tax rate, we are modeling a 12% non-GAAP effective tax rate for F. Why 20.
With that I will now I'll turn it back to Jason for the Q.
Thank you Neil Christine will you. Please give me instructions for queuing.
Ladies and gentlemen, if you'd like to ask your question. Please press star followed by the number one on your telephone keypad. We ask that you. Please limit yourself to one question and one follow up question to withdraw your question. Please press the pound fine. Please hold will be compiled acuity roster.
Your first question comes from line a friend in Q, yet from Jefferies. Your line is open.
Thanks, Good afternoon.
Good afternoon.
Ron maybe just start with you in terms of this quarter can you sort of spike out you know what areas of the business, specifically kind of outperformed relative to your plan and kind of maybe any color you can share with the symptoms or how you always came in relative to what you'd embedded in guidance on the revenue line with her.
Sure I'll just pick a couple of comments and I'll turn it over to meal to give you the could be the precise numbers with regards to wall Army. It you can mute or meet yourself by pressing star.
Hello can you hear me Brandon.
Yes, Ken now.
Okay very good.
The biggest surprise was was ixia ixia performed extremely well with 12% order growth and 15% revenue growth.
Profitability that was at 99% not including about seven point of benefit that gets a portion to effectively to the other groups due to synergies that art or represented in other PNM filed so we were very pleased with that and it was great to see not only network visibility, but also network test.
Turn on with the acceleration of 400 gigabit Ethernet solutions, which we have talked about in the past.
We had mentioned that in the past that it would take a little longer for that to turn on so that was one the other thing with Fiveg continues to be exceptionally strong we had very high double digit growth there for the quarter and we a triple digit order growth there for the year. So we still see very soon.
Among momentum in Fiveg, the semiconductor business had a very good order order pickup not so much on the revenue side, yes, you'll see that flow later, but that was also very encouraging to see semiconductors semiconductors turn on as we look at people investing more for.
Seven nanometer and five nanometer solutions, where we play play very strongly.
Also aerospace defense was was very solid and we saw double digit order growth in aerospace defense.
In the quarter and that's just the start.
Yes brand and then he asked the question about law way the actual impact of walk away on the revenue line was relatively where we saw a bigger impact within the order line on a year over year basis in Q4 orders directly to walk away, we're down about $40 million and that includes approximately $20 million aboard.
Owners, which we took off the books.
You too.
Just no direct path to be able to ship them in the immediate future and so we've de book about $20 million in the quarter from that perspective as well.
Okay. Thanks, that's helpful. And then we think about the full year run any greater give sort of goal post you can give us in terms of how you're thinking about topline.
For fiscal 2000, and we just look at the first quarter kind of gotten to 5%, which is at the high end it sort of your mid term model you lapped the toughest comp for the year and you've got to 5% headwind from.
Yeah, I weigh restrictions.
You know any finer point do you can sort to share with us in terms of for full year topline outlook.
The Unfortunately, we're not going to be sharing the details beyond Q1 at this point, but I am going to announce that we will be doing an investor and analyst day in New York City in March where we'll get a chance to talk about our model in our model going forward as you've seen some of our results we pretty much.
Blown through all of the commitments, we made for instance, 4% to 5% core core growth on revenue we've delivered 11%. The last five years. When you look at gross margin. We said in 2018, we would get to 61% to 63% by 2021.
Well here in 2019, we already hit 63% operating margin, we said, 21% to 22% and we delivered 24% for the year again, that's above what we had committed to two years ahead of schedule and the same thing with EPS growth, we delivered 17%.
Its growth versus our commitment to greater than 10%.
We did the same thing and free cash class cash flow conversion. So we'll get a chance at the analyst day to give you more details on the on the model going forward, but we're very pleased to have exceeded those commitments and we see more opportunity in front of us.
Thank you.
Your next question comes from the line of Tim Long from Barclays. Your line is open.
Thank you.
Just two on on the Fiveg side, if I could first just update us on kind of competitive landscape and what you're seeing.
There and any impacts that you might expect.
Marketshare pricing anything.
Like that and then just following up on China lot of moving parts over there, but I'd love your take on.
Obviously, we're seeing an acceleration in pull in of Fiveg. So what does that mean for you guys. What does that mean as far as R&D and manufacturing and.
With the walk away.
You know ban they are taking share. So what do you think that means longer term as that business that could come back to you.
Or do you see enough strength with the other players there. Thank you.
Tim I'm going to turn the the first question on Fiveg over to cities, who runs that business and then have Mark who is the head of sales talk about talk about China, and while we impact.
Tim.
You know pushed to the to the aspect of differentiation the breadth of far portfolio combined with the leadership that we continue to maintain.
Is clearly evident across ecosystem the extensibility apart platform. The experience we've gained through all the only collaboration and now with I.S.G. Auryxia capabilities, we're layering on additional capability to help our customers scale and navigate through the challenges of Fiveg.
Through the quarter as Ron mentioned very strong quarter for Fiveg orders all regions grew from an auto perspective and.
Commercial Communications group grew double digits in revenue if you exclude the impact of the 111 customer that we just referenced very strong strengthen orders from a device ecosystem, particularly the tier one tier two players.
Test labs, the operators around the world are embracing our platform. So I would I would say both for the quarter and for the are very strong performance.
In Fiveg from traditional customers, but we also saw some five to order is starting to appeal from automotive customers. As an example, as fiveg starts to scale. So when we look forward to 2020 I continue to believe given the massive commercialization that's occurring on the world. The runway that's data with millimeter wave.
Adoption what customers are investing early for that we think 2020 will be a big year for fiveg adoption, and we're very well positioned.
Because of the strength of our portfolio as I mentioned before.
It off the Mark to make some comments on China sure. Thanks cities. So Tim we've talked about China in the past it really isn't change it's a very important market for us we're deeply engaged with all the industry leading customers all of our all of our customers over there in Q4, our business in China was just above the historical average of 17 to 18.
10% with strong growth growth across.
Virtually every segment.
From general electronics to automotive to semiconductor and commercial comps. So the one customer that we're talking about is certainly a part of that but we have a very very broad business broad set of industries broad set of solutions around the world in China is no different and look forward. The automotive element continues to grow cities mentioned this.
It has a tie into fiveg and our solutions are really providing a lot of value to our customers around the world and including China. So we're very close to the situation will keep a close eye on it and and continue to.
You know monitor the situation closely.
Okay. Thank you.
Your next question comes from the line of Toshiya Hari from Goldman Sachs. Your line is open.
Hi, guys. Thanks, very much for taking the question.
I guess my first question as I was hoping you could provide us with the split.
Of your business between R&D test and production test.
Specifically incomes in fiscal 19.
And how you see that evolving into into fiscal 20.
And I realize you you've got a lot of inputs when you think about margins, but how would that.
Evolution impact margins going forward as well could have a quick follow up thank you.
Yes to see it thanks for the question. So first of all it let's start at the highest level.
Where we were approached we're approaching 60% of R&D and.
Other pre deployment types of solutions with manufacturing being close to 40%. So that's roughly the split we haven't we havent given that split for other businesses, but certainly in commercial comps, which is not being driven by fiveg that is probably more heavily skewed towards R&D. At this point then than the overall business I think we can say that very key.
Clearly.
But you can think of it about US 60 40 split for the company in total.
Okay, Great and then as my follow up.
On on hallway specifically.
The 3% to 5% headwind for Q1 and Q2 of this fiscal year is that is that 100% due to the export ban or are they not taking product that you can actually ship as well meeting like our other demand signals from that specific customer deteriorating overtime.
Thank you.
So this is mark I'll answer that it is it is related to the restrictions that are preventing us from shipping some products during the first quarter. So it's the demand is continuing but the products that were able to shippers limited.
As we think about that situation more broadly obviously, we've got the wall with different situations, specifically, you've got a trade more broadly you've got things like the election, and general manufacturing headwinds that have us a little bit more cautious going end up why 20, I think as we look at it though we continue to believe that our end markets grow in the you know mid.
Low to mid single digits and that we're well positioned as result of our portfolio of solutions to continue to outgrow the market even in light of those headwinds and even with the new always situation that we're facing here in 2020.
Heavily weighted obviously towards the first half.
Thank you.
Your next question comes from the line of somebody who Sani from as I see your line is open.
Yes. Thanks for taking my question I want to go back to your network contests.
It's actually better than expected.
I remember last earning conference call you talked about.
That particular segment of Ixia.
Should pick up later in flight 20, and now we're seeing.
Better than expected traction I want to bid I understand that dynamics here, what's driving and to what extent dishes wonderful R&D and when and if that's the case when do you expect production related orders and revenue would commit and have a follow up.
So ticket.
Yes, Hi, I would say that we're very pleased as Ron mentioned with the recovery and the test business in Q4.
May be slightly ahead of our expectations, but I would I would attribute it to two factors one it's a slightly improving market dynamic associated with 400 gig where customers are new customers are entering that ecosystem and trying to innovate to address the technology challenges and upscale that technology and the second one is is really the differentiate.
One off of a platform and our solution area, one that we announced last year in October that continue to builds trend through the year to sell it to a large degree you could say most of the applications. Currently at least one is going into in the.
In the R&D slash early very early validation phase where people are using it for more automated testing.
The rest of our 400 gig portfolio continues to be strong as well and the physical layout, including in production test, where we had a pretty significant manufacturing test when this quarter and but we are are sort of outlook for 400 gig is a very steady sort of demand through the year.
At this point.
Sure just a quick follow up to that.
You you highlighted.
New type of customers.
These like a hyperscalers or is it or digital equipment makers or Dmps Oems.
Yeah, we saw strength across the ecosystem, including the once you reference.
Okay. Thank you and just if I may just as my second question. When you look you orders and you highlighted sami's were strong in new booking and but is not really impacting.
Your Q1 revenue so would the semi bookings was just start to flow into Q2 and was dead are going to also helped the Q2 as a stronger quarter relative to Q1.
Well first of all lot of the bookings that we received in Q4 will flow out in Q1, not Q2, but the guide that we gave you encompass is that.
Thank you.
Thank you.
Your next question comes from the line of David Marchetti from Stifel. Your line is open.
Hi.
Joe market here just a quick question should this if you could go back to some of the comments on on the millimeter wave strength, just curious as you're looking out over the next 12 months or so if you see that as a an additional driver with sort of the sub six being relatively steady if those two or maybe moving into different phases just.
How you think of maybe some of those two different technologies playing out for you over the next 12 months or so.
Yes, yes, two really good question I would say that.
You know very insightful and that a lot of activity that you see that is in a public domain is related to Asia and some of the ramps are happening down in the sub six gigahertz band, but what we see is is also capability building out for a potential millimeter wave ramp 20, 122, where customers are buying ahead of that the strip.
Stuff our platform I touched upon the extensibility off that.
You know it allows customers to move from sub 60 goes to millimeter wave at say an essay seamlessly and that really gives gives us a a strong portfolio and competitive differentiation that we're benefiting from the other angle that I would probably highlight is the complexity with fiveg, even though there are some early.
The.
60 operators have deployed some sort of commercial service with Fiveg.
As we start to learn from those deployments the complexities in forming greater investment in R&D driven by some of the dynamics such as over 2000 band combinations.
Thank you and is is that primarily still with with Oems are you seeing increasing demand from the service provider community as well.
Yes crossed the ecosystem and in particular in Q4, we saw strength from the top service providers, who are embracing our platform.
Great and then Neil if I can just so I look back on 19, you had relatively stable.
Spending levels operating expenses as you went through the year just curious as we look out into 20.
Any sort of big ticket items or any sort of things to be aware of as as we're looking at those opex levels heading into into next fiscal year.
Nothing specific the one thing that I would say is that we do continue to model internally, 16% of revenue going towards R&D spend we were a little bit under that in the back half of 15 Oxys boy in the behind the back half of 19.
But but as we as we move into it into 2020, we continue to be anchored on 16% of revenue going into R&D.
Thank you.
Thanks, John Your next question comes from the line if David Ridley Lane from Bank of America. Your line is open.
Thank you.
At a question on the $550 million and services orders. This year do you have a comparable figure for the prior year or could give us a sense.
Growth rate.
Services business.
Yeah, So I'd make a couple of comments about that if you remember this business was a 400 million dollar business for many many years and if you actually went back to our very first analyst day after the launch of Keysight.
You know, we talked about growing this business to being a 600 million dollar business and being able to do that by 2020.
You know, we're not going to hit that target on the revenue line next year, but we would expect that we would be able to come very close to delivering $600 million in orders.
In in 2020 sworn a very nice trajectory and continue to see great growth in that business and it's an important part of our overall solutions authoring offering.
And just to answer the last part of your question.
Services grew double digits in 49 team.
Okay.
And and then on software excuse me software sales.
Can you give a sense of how that sales processes going are you displacing existing software providers or is this more about when you do get a new program when you're having better success about adding software program win.
David This is mark Wallace I'll take that so software is an ever increasing part of our overall solution as we are delivering complete solutions to our customers. So thats a piece of it. We've also been very successful and implementing our software business model and our go to market strategy. So when we're selling software that's got a perpetual license we sell support with that we're.
Now being successful with growing new business model offerings with time based licenses and we are always adding new features and capabilities. They as an example that Ron talked about with pathway 2020. So it's a combination of all those things.
If you break it down it's there were three main parts. One is our design software or 88 design software. The second is application software that gives customers answers versus just lots of numbers and the third is platforms and platforms such as pathway will help.
Tie everything together throughout the complete work flow on top of that we provide all types of software updates and that's why we're very pleased to see our over $850 million worth of software you couple that with their services business, our HR or recurring revenue continues to increase.
Which is the strategy one of the strategy support for our company and just you we had mentioned earlier.
Software orders were up 19% for the year AD revenue was double digits at a lower level, but that's only because it gets recognized overtime.
All right. Thank you very much.
Thanks, David.
Next question comes on line or Richard Eastman from Baird. Your line is open.
Yes. Good afternoon. Thank you.
Good afternoon.
Very quickly just to return for second to lower discussion around the headwind in the first half for the years is reasonably consistent with what you'd laid out but I'm curious when when you look at.
The combination of Wawa in high Silicon.
Do you expect the revenue of the combination.
To those one or two customers. However, you define them do you expect the revenue to be up in fiscal 20 versus.
19.
No we consider high silicon to be part of Wawa in so we have a pretty significant headwind as it relates to that combination of customers.
Roughly 2% total for the year, but pretty heavily skewed towards the first half with a 5% headwind in Q1, and a 3% revenue headwind in Q2.
Definitely down from that set of customers. Okay. You consider consume the same entity I guess, they are but but im curious.
In the past historically Q so to set a very very strong position.
And kind of the base station Tessa manufacturing test within infrastructure and I'm curious, where where are we in that growth curve to should this does keysight expect to hold share there.
And if so.
With that business not ramp into fiscal 2000.
Yes, that's a good question our we've we've secured similarly design wins this year that positions us well for the production ramps and.
In Fiveg. So if you look at it in aggregate, we will maintain our gain position, especially as new forms of base station suggests millimeter wave and.
CP devices become.
Proliferate across ecosystem, so we're well positioned by the products and solutions that we've already had design wins with.
And we're also layering in additional.
Capability with pathways that that Ron just referenced where we've been working with Nokia to further accelerate some of the.
The testing needs for Fourg base station manufacturers.
And I just want to add also that this quarter and foot whole year as well we had significant uptake for our modular vector network analyzers, which are largely used for base station filter manufacturing, we have high share historically any we continue to do well in that market.
And Rick back to your original question with regards to walk away and high Silicon, Let me just step back a little bit and talk about China. We were successful this last quarter of crossing the 1 billion dollar Mark in sales into China or excuse me orders in.
China and the reason I bring that up as we have a very broad portfolio across many end markets.
And that is something that it's a strengthened continues to grow.
Very well.
And then just as just a follow up question run you'd you'd made comments around the aerospace defense business.
Kind of noteworthy the orders where their post double digits.
Revenue was kind of mid single digits, but you made the comment that kind of more to come but does the order again I don't know what the.
The shipping cycle would be on the orders a double digit orders, but is there an order and momentum backlog around.
In the Andy business that might suggest you've got line of sight on.
Mid single digit type growth through 20, because I think that that business tends to flow out of backlog at more of a six to 12 months pace.
Yes, I agree to put it simply I think some of the order sent the we saw was successful or adoption of our electronic warfare with pets simulation platform that Neil reference to cyber and electromagnetic activities.
And we're now embedded with all the major labs in the U.S. and some in Europe for that solution and since it's a solution that has a longer gestation period between orders and revenue.
Now with regard to the outlook of at least for Q1, we continue to see order strength and funnel is is very strong.
For for our offerings, obviously, we monitor the budget situation in the United States.
And as that as that process evolves.
Okay, given our position.
Given our position with the government not only as of the solution play, which makes it longer but also through the overall buying cycle is longer so there's a bit of history says in in that process, which provides more stability in the business.
Okay. Thank you.
Thank you.
Next question comes from a line of Jim Suva from Citigroup investments. Your line is open.
Thank you and I have two questions and I'll ask them at the same time. So you can answer them much ever order you feel is best.
On the wall way status.
There are some companies that have been.
Putting in applications to the government about being able to still be able to sell to them in the future I assume keysight has done this.
Could you give response are you still in the weighting pattern of that or any feedback on that because I know that there are some companies are getting positive yes. They can continue to ship in the future or is it simply it's not going to happen much how should we think about that and then my second question is on the orders that you gave me other positive.
But theres been a meaningful deceleration from that it seems like that there would also be maybe is it a one percentage point or two percentage points because of walk away from that but also the orders deceleration is it mostly macro related or trade tensions or peaking going to fiveg. We.
R&D test equipment, how should we think about that thank you.
Let me take the second part of that first and then we'll let the T. shandell handle the first part so as we said on the on the order line. We saw a 40 million dollar impact from walkaway within the quarter. So that's four points roughly four points at the keysight level, but a much greater level it either the CSG or commercial communications level, which is where that business is very heavy.
Okay skewed. So we definitely are saying is seeing an impact, but we're offsetting that and making it up via the strength of our portfolio and the broad set of customers that we have that are adopting those commercial communication solutions.
Yeah with regard to your first question, it's a pretty.
Pretty dynamic situation, we monitor this carefully some off the announcements on licensing as well as we read it applies to very low end technology capabilities. If at that so it does not apply to some of the capabilities that we offer at this time now again, we monitor the situation and remain compliant.
With that you'll still see norms. Thank you.
Thank you ill just add one other comment that made a comment earlier that are China orders for over a billion I was referring to greater China in greater China, Obviously includes Taiwan, and Hong Kong as well as mainland China and that's how we look at the business, but just for clarification.
Thank you so much.
Your next question comes from the line of Adam Sandler from Thompson Davis. Your line is open.
Hey, good afternoon, guys congrats on a great quarter in a great year.
Thanks, Adam.
Hey, Ron I guess I hear you that you don't want to steal from the upcoming analyst day, but you're guiding Q1 operating margins up about 200 basis points.
Year over year, I think and then I mean, how would you model the rest of year kind of flattish up 50 basis points.
I'm just trying to figure out to read your comments on that.
Typically we have we talked about having a softer Q1, given the strong year end that we typically have as the way.
We finished our year from a sales perspective, and we have people on on year on compensation. So we tend to start out slow in Q4, we do excuse me in Q1, we do salary administration for the whole company in the in the first quarter of the year, which can puts some downward pressure on operating margins for that first quarter I think as we think about the whole fiscal year I'd guide you back to that kind of the macro level statements.
We've made in the past market growth in that 3% to 5% us looking to outpace the markets even in the face of the of the headwinds that we've talked about.
When we grow mid single digits or better we can deliver a 40% incremental to the bottom line. So there is room for increased profitability, even from where we are today, obviously, we did much better than that incremental this year, but we've come very far very fast and I don't think we're going to sustain the 90 plus percent incremental that we put up we put up this year.
You can definitely think about that 40% incremental is a good way to model our business going forward.
Okay. That's fine and then I wanted to ask about Europe it seemed like it.
Seeing some broad based weakness there, which perhaps is nothing new are you seeing any green shoots in Europe .
Yes, Adam this is mark it's a mixed bag in Europe , we did see some lower investment some from some of the network equipment manufacturers. Some of the chipset companies. There was some mixed results in aerospace defense with some of the.
Western European Primes, Russia was down.
What's really showing though is that our general electronics business is up.
With growth from the broad portfolio of solutions that we have we've invested in I O T based solutions for number of companies into education, and research and we continue to grow that business and new customers across Western Europe .
Another bright spot is the expansion of our.
Signed labs solutions to many customers around the world as well as across Europe . So is it was mixed and those are those are the headlines.
I'd just add a comment that Europe is only 15% of our business or was 15% of our business as we looked at the last quarter.
And in addition to the gems business or the general electronics business and saw in lab that Mark talked about we also saw network test network test grow in ixia.
Okay understood. Thanks, guys.
Thank you.
Your next question comes from the line of Brian Young from Deutsche Bank. Your line is open.
Hey, guys really appreciate the color on the software solutions revenues. So I just had two questions are on that.
First how should we think about sort of the ramp in softer revenues over the next couple of years and are there any goals or initiatives focused on driving software growth specifically and then second you kind of broke out the three key pieces of software you sell today could you maybe rank order, which ones you see the largest opportunities and.
Yes, I mean, I definitely think we have.
Continued opportunity to grow software as an overall percentage of the portfolio as we continue this migration from just selling.
Centrally test and design tools to selling selling complete solutions to our customers those solutions have much higher software and services content and that's definitely a trend.
That has a lot of runway in front of it I think as you look forward.
You know the big opportunities I would I continue to pointed Fiveg, we have very high software content and some of our cutting edge Fiveg solution. So that's a big driver of growth, but it's also a big opportunity for us as we look forward.
Given that we're still in the very early stages of Fiveg deployment, Ron talked about our EPA tools.
We already have very high market share in EPA, and so we're kind of growing with the market more than anything else in the in the space and then we're very excited about our pathway platform right, we're where we announced in a while back but we're going to be designing tools into our platform platform for many years to comment we're really just just getting started in two.
In terms of in terms of connecting the workflow for our customers and so I think theres, a big opportunity for us.
As it relates to pathway and then the last thing that I would just comment on is.
Another big opportunity that we see is the opportunity to take more and more of our software and convert it from kind of onetime sales to more time based sales I would say, we're a little bit behind as it comes.
Behind industry norms as it relates to that but that creates a big opportunity for us as we look forward.
I would just add on software just to step back when we launched the company, we had roughly $370 million worth of software orders and software revenue and we finished this year with 853 million. So we've dramatically grown or software portfolio and as Neal mentioned, we have much more up.
Finally in front of us.
Awesome. Thank you.
Thank you.
Thank you that concludes our question and answer session for today I would like to turn the conference back to Jason Kerry for any closing comments.
Well, thank you Christine and thank you all for joining US today, we look forward to see many of you at the upcoming conferences and have a great day. Thank you.
This concludes our conference call you may now disconnect.