Q2 2020 Earnings Call
Quarter 2020 earnings Conference call. My name is Robert and I will be your lead operator for today.
After the presentation, we will conduct a question and answer session. If you'd 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 sign.
If at any time during the conference you need to reach an operator, Please press star followed by zero.
Please note today's conference is being recorded today Tuesday May 26, 2020 at 130 PM Pacific time.
I'd now like to hand, the conference over to.
Jason Kerry Vice President Treasurer.
And if and Investor Relations. Please go ahead Mr. Kerry.
Thank you and welcome everyone to Keysight second quarter earnings conference call for fiscal year 2020, joining me are on their CCM key sites, Chairman, President and CEO and Neil Doherty, Keysight Senior Vice President and CFO, joining us in the queue and any session will be Mark Wallace senior Vice president of worldwide sales and to see done a shocker.
President of the communication solutions group.
You can find the press release and information to supplement today's discussion on our web site at Investor Day, Keysight Dot com, while 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.
Right so.
Today's comments by Ron and Neil will 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.
It's about the financial performance of the company on todays call. These statements are subject to risks and uncertainties and only ballot as of today. The company assumes no obligation to update them. 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 in upcoming.
In virtual Investor conferences in June hosted by Baird Bank of America and Stifel.
And now I will turn the call over to Ron.
Thank you Jason and thank you all for joining us first and foremost, we hope that you're all staying safe and well and our thoughts are with everyone effected by the Corona virus pandemic. The world has faced unprecedented challenges over the past several months and I would like to thank all of our employees for their continued dedication and commitment.
A key site, our customers and our partners.
Our execution and results this quarter underscore the power of our balance sheet business model and our Keysight leadership model, which drives our unique high performance culture and guides, our company to continuously delivering greater value to customers shareholders an ERP.
Please.
I'll focus my formal comments today on three key headlines for the quarter.
First the health and safety of our employees is our top priority.
After acting quickly to temporary close most of our global locations in mid March and implementing risk mitigation measures in response to the pandemic. We're now re opening sites and our production capacity is ramping rapidly.
Second despite the mandatory government shutdown of our production facilities, and resulting supply disruption impact on our Q2 revenue Keysight delivered steady orders strong operating margin and record free cash flow our results demonstrated the exceptional resilience of our business and.
The durability of our financial operating model and third despite the near term uncertainty we are confident in our differentiated market leadership position the strength of our operating model and the long term secular growth trends across our diverse set of end markets.
Turning to the dynamics that impacted second quarter results demand was steady across markets in February as the impact of the pandemic expanded beyond China. In early March we responded quickly to limit the spread of the Corona virus and mitigate the risk to employees customers and suppliers.
While also responding to local government directives on March 18th we issued a press release to announce with temporary closure of most locations around the world, including our production and order fulfillment facilities, which were fully closed for two weeks in March and had limited activity in April.
We also took the necessary steps to deliver on our customer commitments, but particularly those that provide essential services and support the communities in which we operate around the world working with local governments in health officials to implement health and safety measures at all of our locations. We're pleased to announce that we.
Reopening sites worldwide.
Despite ongoing broader industry supply chain challenges, we are ramping our keysight production and services operation and expect to be back to 100% capacity by the end of the third quarter.
Now, let's take a deeper look into our financial results.
Order growth was positive through March followed by a decline in April to finished the quarter down only 3% compared to last year's record second quarter, while we don't typically comment on calendar quarter performance given the dynamic nature of the situation, it's worth noting that key sites orders in red.
Revenues both grew mid single digits in the January through March timeframe.
Despite lower than expected revenue as a result of supply chain disruptions. The resilience of key sites business model was exceptional and our flexible cost structure performed as expected.
As a result of our immediate actions to reduce costs and preserve liquidity, we delivered operating margin of 19% record free cash flow of $275 million.
And a record cash balance of $1.8 billion.
Our second quarter revenue declined 18% year over year as both segments of the business were impacted by the limited manufacturing capacity. However, we continue to see steady demand across several end markets with ongoing investment in next generation technologies, such as Fiveg for her.
Under gig and advanced semiconductor node processes.
Other markets, such as general electronics, and automotive are expected to be more challenged in the near term.
In commercial communications, our ongoing Fiveg order momentum resulted in a new record.
Our end to end solutions portfolio continues to gain strong global customer adoption and is enabling the commercial fiveg launches underway. We're further solidifying our global leadership position across both the wireless and wired fiveg ecosystem through close collaboration with market leaders.
Leadership in standards and first to market Fiveg design in test solutions.
This quarter, we introduce key sites, new Fiveg core network test solution called load core.
The Fiveg core testing software simulates complex real world subscriber models. This enables mobile operators and network equipment manufacturers to qualify performance and reliability of voice and data are transferred over Fiveg networks. This solution leverages from the Ixia and Prism Aquas.
Additions to deliver testing capability needed by our customers.
We also announced the collaboration with record 10, an operator in Japan to enable their fiveg deployments using our solutions for test validation and optimization of devices and networks.
Keysight comprehensive solutions portfolio spanning the entire ecosystem is a key differentiator in the market.
In aerospace defense in government order growth was driven by strong demand in the US which was partially offset by lower international investment our solutions for electromagnetic spectrum operations radar space and satellite continue to benefit from a favorable us spending environment and ongoing.
Investments in technology modernization.
Despite the substantial challenges in the automotive sector next generation electric and autonomous vehicle technology is a strategic priority for our customers Keysight continues to invest to be first to market with solutions and remains highly engaged with key market players.
For example, we recently announced the use of our scion lab battery test solution in the BMW groups, New battery sell competency center in Germany.
Foundry customers are continuing to prioritize investment in advanced process node technologies and incremental infrastructure. This resulted in revenue growth for a semiconductor measurement solutions, where we had less supply chain disruption.
Software and services continue to contribute to the differentiation of our solutions in recurring revenue base, while growing above the company average over time, they are strengthening the durability and diversity of our business model in Q2, the combination of both software and services represented approximately 35.
5% of revenue.
Turning back to the current coated 19 pandemic, we're committed to supporting our customers and our communities through this challenge for our customers, we launched and innovate anywhere program to enable it teams to support remote users ensuring VPN performance in security.
We also implemented various health and safety measures at our facilities to ensure all safeguards a met before production and other operations resumed.
For our communities, we are contributing to the relief efforts globally through monetary and supply donations.
These include donations of personal protective equipment to local hospitals in government agencies, providing support to children families and the most vulnerable.
We're also making direct financial contributions to local communities and global nonprofit organizations before turning the call Overdid Neil.
I'll close with a few key points.
Keith site is a market leader in large diverse and growing end markets and serves a diversified global base of over 32000 customers across multiple industries.
The challenges of this pandemic or unprecedented and I'm proud on how our team has responded our execution demonstrates the durability of our business and the resilience of our business model with 19% operating margin and solid cash flow, even with a Q2 results.
Correct.
We continue our significant investment in R&D and remain focused on first to market solutions. Our sales teams remain highly engaged with our customers and we continue to execute our strategy for long term above market growth.
While we expect ongoing coated 19 demand and supply chain headwinds over the next few quarters, our long term secular market growth trends and the strength of our operating model remain intact, we expect to come through this challenge stronger than ever.
Now I will turn it over to Neal to discuss our financial performance and the outlook in more detail.
Thank you Ron and Hello, everyone before I get started I will note that all comparisons are on a year over year basis, unless specifically noted otherwise keysight delivered a solid quarter. Thanks to strong execution in a challenging environment.
While supply chain disruptions dampened our revenue performance during the second half of the quarter. Our results demonstrated the resiliency of our operating model and durable cash generation.
We responded quickly with proactive measures to reduce cost and preserve liquidity, while supporting our customers and advance in key projects.
For the second quarter of 2020, we delivered revenue of $895 million down 18% on a reported and core basis due to our site closures and supply chain disruptions that started in mid March and continued through the end of the quarter.
Orders of $1.1 billion were down 3% on a reported and core basis as Ron mentioned, we continued to see steady demand and investment across multiple end markets, particularly for our next generation Communications solutions.
Turning to our operational results for Q2.
We reported gross margin of 63% with improved mix and lower spending partially offsetting the impact of lower revenue.
Flexibility of our cost structure resulted in lower variable compensation, and a reduction and outsource manufacturing costs.
This combined with other specific actions such as a temporary hiring freeze and reductions in discretionary spending enabled our flexpay flexible operating model to perform as expected, resulting in resulting in 19% operating margin for the quarter.
Net income in the second quarter was $148 million on a per share basis, we delivered 78 cents and earnings our weighted average share count for the quarter was 189 million shares.
Regarding performance of our segments in light of the broad supply chain disruptions CSG and Iasci expense management and margin performance were exceptional.
CSG operating margin was 18%, while iasci delivered 24% operating margin.
On the demand side General electronics education, and automotive where week will investment continued in Fiveg aerospace defense and other leading edge technology solutions.
Moving to the balance sheet and cash flow, we ended our second quarter with a record $1.8 billion in cash and cash equivalents with $450 million of additional liquidity available under our undrawn revolving credit facility.
We reported cash flow from operations of $298 million and record fee cat and record free cash flow of $275 million or 31% of revenue.
The strength of our cash generation reflects the power of our financial operating model, which incorporates for flexible cost structure and includes a financial playbook that is designed to preserve margins and cash generation during challenging times.
Under our share repurchase authorization, we acquired approximately 1.3 million shares on the open market in the first half of the quarter at an average price of $91.14 for total consideration of $120 million our year to date repurchases are sufficient to achieve our objective of being anti dilutive for the full year and to exit the year.
At 190 million shares.
While we are focused on optimizing liquidity, given our strong operating model and cash generation, our capital allocation priorities remain unchanged.
Now turning to our outlook and guidance.
While we are not quite back to full capacity, our production operations and those of our suppliers had been ramping since mid April.
We expect to make continued progress in Q3 and as a result expect third quarter revenue operating margin and earnings to be in line with or better than Q2.
These expectations are based on our order funnel, a strong backlog position and assume limited incremental supply chain constraints or disruption from additional shutdowns or a second wave of the pandemic.
While maintaining R&D investments for the future growth, we will continue to focus on profitability and leverage the flexibility we're operating model to manage expenses.
In closing the near term situation is obviously challenging but we remain focused on our long term strategy of enabling our customer success, the first to market leading edge solutions.
Once the cobot 19 situation stabilizes the derbio the durability of our business model cash generation strong balance sheet and market leadership position give us confidence in our long term financial targets that we shared with you at our Investor day in early March specifically sustainable long term core growth of 4% to 6% operate.
The margin of 26% to 27% and EPS growth of at least 10% over the long term.
With that I will now turn it back to Jason for the Q anyway.
Thank you Neil Robert will you please give instructions for the Q and I.
Certainly ladies and gentlemen, if you'd like to ask a 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.
To withdraw your question. Please press the pound Sai please hold while we compile the culinary roster.
Your first question comes from the line of Mehdi.
Postini with Susquehanna. Please go ahead your line is open.
Yes, Thanks for taking my question I want to.
Go back to your reported backlog despite the shortfall.
In revenues, you were still able to grow backlog by double digit and given your assumption for book for the current July quarter do you expect resumption of year over year.
Growth in quarterly revenue by October quarter.
A follow up.
Thanks.
This is Ron our backlog our book to Bill was 1.22 for the quarter.
Showing.
Very strong backlog build and obviously our profitability or operating model was strong and held up at 19%. If we had ship that we clearly would have been.
And very strong strong shaped with operating margin in the mid twenties.
As far as the quarter going forward, we have seen our operations churn on our main international operations that we have in Penang, Malaysia is back to 100% capacity. The main operations that we have in the U.S. our at about 70%.
Capacity and we'll be at 100% by the end of the quarter. So even though there is a short term disruption to the end of Q to the second half of Q2 and the first half of Q3.
We expect Q3 revenue could be about at about the same level, we don't guide for orders for Q for the future quarter, though.
Okay.
Perhaps maybe I could rephrase the question a different way.
Im assuming that this strength in your communication group is driven by orders for millimeter wave R&D and also you highlighted for 100 gig networking.
As R&D activity on the mill.
Wave picks up is there any synergy between that and the networking that would enable you with the big.
Size the customer wallet in other words seven to stem the stack.
And approach that you have focused on with that filing to become becoming material. So that you could capture a big part of.
Customer.
Yes, that's what's driving the moment.
Looking forward.
Growth areas.
Yeah, we've had a but we had a strong quarter in Fiveg, we had a very strong quarter in 400 gig back into the network and our overall play of winning up and down the ecosystem does create that synergy I'm going to want to teach talk a little bit about the details.
Yes, Thanks, Ron Monday, and you're correct in that communications, especially these new areas.
Such as Fiveg with millimeter wave adoption and 400 gate and such are really gaining increased importance in today's world given what we have seen in terms of for disruption.
So that should start to manifest itself in fact would discussions with customers who are having today.
The focus is on accelerating innovation and going faster, so that positions us well, having the entire layer one to last seven capabilities income for the company and having built that platform I I referenced at the Investor Day gives us an advantage to go faster and deploy solutions with customers. You will also note that we.
Have a number of industry, leading collaborations that we announced just this quarter, how wed like Qualcomm, Morocco, 10, China, Unicom, Sonic and others that spans the wireless to wireline.
Arenas and positions us well for the future.
So does that mean that the synergies are beginning to materialize.
Yes, I think selling you will start to see them accelerate as we launch most solutions. We have some 90 new solutions planned for the second half multi year, which were investing for and that should continue to position us very well in the communication space.
Thank you.
Your next question comes from the line of Chem long with Barclays. Please go ahead. Your line is open.
Thank you.
Just wanted to ask about.
China market could you talk a little bit about the trend there obviously the timing.
From manufacturing in on business since opening was a little bit different so.
Obviously, some more political talk there. So can you just give us an update how China was and how you're viewing that.
The next few quarters, and then a follow up.
So Tim this is mark Mark Wallace I'll take that question talking about China. So.
The main headline from Q2 is that our business remained steady.
We had a stronger February than we expected coming out of the lunar new year that as you recall was extended by an extra week.
And we saw strength continuing in Fiveg in commercial columns that you should talked about both at the physical layer at across the protocol stack 400, gigabit R&D and optical manufacturing continue to ramp as we saw global demand to come from the carriers and that data centers.
Automotive was down and we saw some mixed conditions in general electronics and education.
As we made comments in the opening remarks.
And China continues to accelerate investments in semiconductor capability.
Typically around next generation semiconductor technology and as you alluded to there is that continuing set of Valving US regulations were playing very close attention to these.
At this point.
They are there might be some indirect impact of some of the foundry business were not really able to quantify that just yet.
We have assessed the overall situation in terms of the most recent.
You asked you see restrictions and regulations and we believe it represents something on the order of one to two points of headwind going forward, but you know as we did with the August 2018 RPL additions.
We will read direct sales resources to go after new opportunities to drive gross growth elsewhere and all of these restrictions.
Go across all of our technology companies that supply into China, and not just keysight. So the bottom line I would say with China is our customer engagements remained high during the quarter as we adapted to the new remote environment that we're now leveraging across other geographies and our business in China.
Remained steady despite all of these challenges and headwinds.
Okay. Thank you and then just as the follow up I think you think you mentioned, 35% of revenues coming from a software and service.
In the quarter.
Could you talk a little bit about the ramp there and do you think are you hearing from customers with the kind of global disruption like this that there might be more of an accelerated move to those those type of models. Thank you.
Yes, Tim this is mark again, I'll take that regarding software and services as you point out we saw revenue growth in the quarter faster than the rest of Keysight as has been the case for many many quarters revenue for software was roughly flat services waps.
Was up slightly on a core basis.
We had a record high Q2 for our design software orders, which indicates that continued demand from customers who continue to work remotely.
During the global pandemic and as Ron mentioned in his opening comments, we introduced the innovate anywhere initiative, which was very successful.
It really enabling thousands of software engineers to work from home and moving forward. We see this program feeding into the superior software and services growth that we've been delivering for a long time our customers.
And their engineering work flow has changed and we expect to see customers continuing to work in this mixed.
Lab and work from home environment, and I think our software and services provides us another way to support their engineering teams in either case to maintain engineering productivity. So yes, we do see our software strength continuing to be a factor, especially in the new go forward environment that we're experiencing.
Okay. Thank you.
Okay.
Your next question comes from the line of John Marchetti with Stifel. Please go ahead. Your line is open.
Thanks, very much when I was wondering if you could comment a little bit on the demand side as you've gone through these last couple of months you mentioned, obviously that January through March both orders and revenue we're growing in the mid single digits Im just curious with orders down 3% year over year.
For for the quarter did you have customer behavior change dramatically in that month in April as well that coincide with your ability to shift.
How is this sort of disrupted your customer landscape not just around supply side issues.
Sure obviously, we had a drop off in April when everything everything pretty much shut downs on order level was lower our sales organization work from home and actually has been very effective after the first couple of weeks just trying to figure out how to contact customers.
A matter of fact, they've been finding it pretty efficient to be able to get on with assume as long as they havent established relationship with those customers but.
Thats, what we saw with with regards to the seasonality in in the quarter revenue, we've talked about that and how that is how that is ramping now and we'll be back to full strength by the end of the quarter Mark do would you like to add anything.
Yes, what I would add as we did see customers.
Working hard from home, they're actually more accessible than they normally would be because we knew where to find them. So we engaged with them. We continue to book business and we continue to build our funnel for Q3 and beyond its at the highest level really it's ever been looking out three months, but there was.
Some pullback in certain areas as an example.
Some of our general electronics business is tied to new engineers being hired right and obviously that wasn't going on.
Some of the government funded activities such as research, obviously, our education business based on universities being closed.
Were affected and we saw that affect happened more towards the ended the quarter. So theres. Some theres some dynamics from the industry that that really played in that timing as well.
Great and then maybe just as a follow up to that was there a big difference that you saw geographically obviously, we we all know that China has kind of come back from this.
Little bit more quickly than some other areas just given that that's where everything started but as you look out across North America and Europe had there then I guess gig regional differences as you've seen knows demand trends play out.
Yes, John what I would say is there was there was some regional differences mainly from kind of the distribution of different segments and different customer behaviors. As an example, we already talked about the fact that we saw strong order growth in the us from aerospace defense.
That continue throughout the quarter from both the direct government and the prime contractors.
Whereas in Europe, the strength was really more around semiconductor solutions.
Tied to advanced technologies like you be which is extreme also brought ultraviolet lithography and some next generation processes.
And then we saw some growth in commercial comes in Europe tied to some new Fiveg design wins and.
And so it's very what I would say is is most regions saw the impact when it came to kind of that general electronics and automotive segments. So there's some theres some friday from region to region based on different industry dynamics in each of the regions.
Yes. It is interesting John it is interesting to note, though that a lot of our major customers has said, they're not slipping schedules and they're doing everything they can to either stay on track or make up for any type of shortfall that they have and that bodes well for some type of.
Let's say accelerated purchasing at some point when when they do need it.
So as we get back to ignore a more normal environment, you would expect that you'll be able to at least sort of make up some of this shortfall here in this.
Fiscal Twoq you in Threeq.
Yes.
And clearly with the backlog you could see we've built $200 million worth the backlog in the in the last quarter. It. There's no doubt that we will be able to clear that out at some point in the future. We've guided for giving you a range for for Q3, where we expect to be but beyond that we expect our.
Sales to be at 100% and will be ramping rapidly from there.
The only other AD effort and for John just real quick we look at cancellations, we didnt see any increase in cancellations. We look at is there any kind of push outs to runs point about projects staying on track, we really didnt see a lot of pushouts either so.
We built a strong funnel and I think we're going to be at a good position when the economy begins to recover.
And the good news is the global rates continues to be ahead in fiveg, which nobody wants to take a pause.
Okay.
Thank you very color.
Your next question comes from the line of Toshiya Hari with Goldman Sachs. Your line is open.
Good afternoon, guys and thanks very much for taking the question.
Ron you talked about record Fiveg bookings in the quarter I was hoping you could low leveraged a little bit more on that in terms of.
The composition.
Of those orders between R&D test production testing, if you can kind of speak to individual customer groups.
Like the chip guys and the base station customers the mobile smartphone customers that would be helpful. Because I've got a quick follow up.
Sure Toshio, let oh, let's sit th whose rate in the middle of it.
Give you more of the details.
Yes. So she is a very strong order quarter for Fiveg orders grew at record levels as we as we've mentioned before and Rons comments, but equally worth noting what the strength.
Continued into April.
And the growth of that we saw was broad.
It was across all regions grew and all segments of the customer base grew.
All the ones that you referenced chipsets, the license and and that Nams and even the operators segments.
I would say if we if we fell back the types of applications sustained investments in R&D.
Manufacturing started to ramp in fact, we had a good uptake for our modular offerings, which are enabling some of the component manufacturers to ramp up so that was a positive note for US and then we also saw success in new verticals.
Such as automotive with the CV two X application that we just launched and with our aerospace and defense solution with some of the Fiveg security offerings, we have launched so.
In summary, some off the.
The opportunity progression that I had outlined at Investor day.
Sort of started to play out in Q2, and we also added 40, new customers for Fiveg platform.
Through our marketing efforts and working with our sales teams globally.
I also want to say that our customer engagement. So this phase has been at very strong even though some of our customers are working from home.
They have been continually engage as Ron mentioned to make sure that their projects don't slipped too much and in some cases, where they are slipping, they're looking at at waste to accelerate.
I also want to highlight some of our let's say remote working with customers is working very well in fact, our.
Fiveg a virtual events have been well attended by over 8000 customers, so that that points to the strength of the Central Park solutions that.
Got it very helpful in that as a quick follow up.
You spoke about some of the some of the near term headwinds related to automotive.
General at Tronics education and government.
Just curious what percentage of the overall business to those end markets collectively accounted for.
Is it fair to say fundamentals, whether it be bookings or revenue troughs and the April quarter or could there be continued weakness into July and.
As a follow up to that you can kind of speak to your exposure to walk away. The foundries in the semiconductor business that will be very helpful. Thank you.
Yes, we have outsized specific market this year, but the GE and automotive markets are a significant portion you are more than half of of Iasci. Obviously, the part part that's missing there is a semi business, which has been strong but.
But she is businesses is kind of more heavily or more that you know the weaker market areas are more heavily weighted towards the I.S.G. with with general electronics automotive Iasci. These things that tend to be more more tightly linked to too.
To GDP.
Auto business in particular has slowed down we obviously saw.
Significant slowdowns as everybody is seen in the industry's for the old technologies are old auto some of the new auto wasn't as strong as it was pre co vid.
But.
We still feel very good about our position. So we are there for when that market snaps back.
And then two second part your question as it relates to walk away. We don't really have any any change at this point as it relates to our expectations of while way going forward to kind of still we expect them to be a 1% to 2% customer for us on a go forward basis.
Thank you.
Thank you all to shift.
Your next question comes from the line of John Pitzer with Credit Suisse. Your line is open.
Yeah, Ron Neil Thanks, Let me ask the question Ron I was just wondering if you could help us understand what you think this supply impact.
As for co bid in the quarter and I guess in your prepared comment you said it was both a production and an order fulfillment hits I'd be kind of curious as to how much revenue and orders do you think you lost in the quarter from the supply side of covert.
Yeah, I mean, it's impossible for us to know what would have happened right, but I think if you go back to where we were at the beginning of the quarter. We obviously put a guide out for the quarter that we had a high degree and confidence in our ability to hit and so you could look at that delta relative to our guidance on the revenue line and fraud tend to purposes, I would attribute that shortfall.
Paul to.
Cove It I think from our perspective, the world change in mid March as we talked about the sites being closed limited productivity and April but we continue to be very optimistic about how we're positioned on a go forward basis.
We're a leader in our markets, we have a strong technology position and and I think.
As as markets recover we are we're going to come through this even stronger.
Thank you quick I'm, sorry, but yes, I think I think it is fair to say, taking a look at or order rate in knowing how we do our or supply chain planning.
A book to Bill of around one was probably would have been normal if there wasn't a co that issue for Q2.
That's helpful and then because I know, you're not giving official guidance for the July quarter, but but I'm just kind of curious from a production perspective. If you look at the April quarter relative to 100% where were you for the blended average at the quarter and as you look in July I know, there's a lot of moving parts, but but how do you think sort of raw.
Do you have to 100% your production levels look in July versus April.
Well it you could go back and look at history of where we've been operating somewhere around the $1.1 billion per quarter kind of kind of range as.
As close to full production. So that gives you an idea of something.
Something to key off of obviously, the dynamic is a little bit different right. We we were going where we're going full steam ahead through mid March and then it shut off pretty quickly with the with the ramp in April.
We're now can continuing to ramp a may expecting to be back to something close to 100% across the across the ecosystem.
Bye Bye bye the ended the quarter, she going out the ramp down last quarter fall by the ramp up this quarter and you know as close as we can call. It at this point the revenue numbers in a profitability numbers are going to be in in the same this entity as one another.
So if you if you look at that you could see where we were down roughly roughly a couple of hundred million dollars were down at roughly roughly 80% of capacity. So the fact that we took out we lost a couple of weeks in March and then you could take another week or two.
As of April.
Just as you start to see that ramp or ramp linearly.
That's a very rough estimate, but I think it's pretty accurate.
And Ron if I could just sneak one last one and just given your production issues can you talk a little bit about your share position and is there any concern that.
Competitors might be able to take this opportunity to steal some share rooms on the margin.
I don't think so there could have been there can be some very minor issues. If I take a look at orders and I look at orders January February and March we grew mid single digits on the order line, which is pretty competitive nobody else are very few people have reported and our industry what has.
Happened in April so when they come out I'd be surprised if their numbers were not the same we've been growing above market every single quarter now for.
For years and for everything that was going on I do anticipate that we.
At market or better and our backlog position now is so strong you'll see that flow into revenue and profitability and cash flow as we go forward.
Very helpful. Thank you.
Thank you.
Your next question comes from the line of Adam Thalhimer with Thompson Davis. Please go ahead. Your line is open.
Hey, Thanks, very much the I wanted to try to understand the margin disparity in Q2, just because of that.
S.G. margins held up so much better.
And is that a trend you expect to continue.
Yes, so I mean, if you look at a if you look across our business right that one area, where we saw actual revenue growth was in semi which is a which is all with any I SGN. It's also very high margin segment for US I think your price primary predominantly looking at a a mix issue or not.
Issue a mix benefit SG received with a very strong semi shipments relative to the other parts of their business and so that's that's really what you see going on a going on there.
Okay and is worthwhile to note that obviously with a lot of fixed infrastructure as we start to see the business.
Come back you will continue to see very strong gross margin performance.
Okay and then.
Hi level, it sounds like you're kind of girding for more protracted downturn SG.
But thats at communications it sounds like when the Covidien situation allows you'll kind of quickly turned back to revenue growth is that fair.
Yeah I think he is he has has businesses that are more GDP linked we've talked about general electronics, which includes the education segment, but if we just talked about education for awhile.
Bill until Theres really two aspects of education, theres that teaching aspect and the research aspect, but in both cases, you need students on campus rate to it to really get those education markets up and going.
Automotive, we know what's happening in the auto industry. So we still don't know with the shape of the recovery is going to look like you can read all the same reports that I read about what what the ultimate recovery is looking like.
But but.
Iasci I think tends to be more macro Lincoln more GT more linked to GDP linked our GDP were the drivers within CSG that rule at rollout of Fiveg. The rollout of 400 gigabit the aerospace defense and investments potentially have the ability to buck some of those trends as folks work to get those technologies to market.
Okay. Thanks.
Your next question comes from the line of Jim Suva with Citigroup. Your line is open.
Thank you and I have to hi, good evening I have two questions awesome. Both at the same time. So you can answered M&A order and they're pretty straight forward.
First is with krona virus is the R&D cycle still lengthening or as our people now adjusted to work from Holland work remotely the now where it's actually compressing. The reason why asking it seems like you know two months ago. It was everything progressing slower and announced sounds like from your comments and other companies comment.
Things are kind of coming back. So I was kind of wondering about the design cycle and then my second question is.
Your inventory went up quite a bit, but you talked about supply chain issues.
Is that simply not have all the right parts to put together your heavy equipment and your big calibration items and your test and measurement things or did some of your inventory like crap trapped in certain locations or you're missing just a couple of widgets that go into it and so you're like 98% of the box completed before you can ship. Thank you.
Sure. Jim This is Ron I'll, just take your questions will take him and reverse order with regards to the inventory situation, it's real simple way of parts coming in the door and we have no one in the factory to build them and that's the case that we had the second half of March it's not the case now as we have been hang up and running but we also supply part.
From our Tech center in the United States. So when there's nobody putting together ports or even if things are put together and they are not shipped.
There is no revenue credit so.
All parts have to be there in order to complete a product there are thousands of parts in certain products. Some made with in keysight at more of the commodity type pieces that are that are putting to put into products. In addition toward unique differentiators.
Some of them flowing in some flow out at the bottom line was we weren't putting together any systems or shipping them out and that was because of not only internal to the keysight manufacturing facilities, but also the contract manufacturers that would do sub assemblies, but now we're very happy with the progress that has been made them wherever you are.
Now and where we expect to be.
By the end of this quarter.
Second issue with regard to the R&D cycle, there was a bit of a stock but everyone is trying to figure out how to operate in this new normal where.
Every customer that we spoke to we're very very high percentage of them when through that now they've situated to work at home to go in part time to use test systems or in some cases like China returned back to work. So we see the R&D engineers being much more efficient.
And accordingly, there trying to figure out how to keep their projects on track because there are competing against their ultimate competition. So that's why we see things accelerating and that cycle on how much equipment acceleration will see at what rate.
Is yet to be seen but.
We feel very positive.
As we look forward.
Thank you so much for your details and clarifications greatly appreciate it.
Thanks, Jim.
Your next question comes from the line of Richard Eastman from Robert Baird. Your line is open.
Just a few questions two questions one just kind of targeted at aerospace defense and just a couple of thoughts here what.
Was the order growth in the year over year, and then secondly was the with the indeed was the business.
The revenue there disproportionately impacted by the plant shutdowns.
Because it was never a tough comp and I'm just curious with the revenue down 24%. If there was a disproportionate impact there.
Yes, so I'll take that we we need the from the order perspective orders were basically stable.
Versus last year with regard to the revenue impact some of that stuff it, particularly for the U.S. markets required to be built in the U.S.. We did get earlier access to our Penang facility than we did to some of our locations in the U.S. and so there probably was hi, good it's fair to say that there was.
Disproportionate impact on aerospace defense from a manufacturing perspective.
Given the fact that the the access to the U.S. facilities lagged the access to our facilities in Asia in April.
And then just to just a follow up question around the backlog.
One would expect perhaps the given axis just globally is better to customers is hopefully the everybody's dose to return to work here.
We got some of the access kings may be worked a little bit in the fiscal second quarter, but typically your orders are flat just to a bit softer.
In the third quarter relative to the second but again with improvements around access would you expect to build backlog again in the third quarter, given where you are in the disconnect between the production ramp.
And kind of what's going on on the order and sales soon.
We don't guide orders out for Q3, Rick I think as you know, but we're going to try to do everything we can to get to lower our backlog.
I'm, not saying that we've guided that but we were trying to do is approve our position to get our deliveries out to the customers that need them you're right on a typical non covidien environment, we see a ramp at the end of Q2 and then the biggest ramp at the end of Q4, which is low.
Literally how we do the comp in the field organization and then Q3 is not as high as not as high as you would expect.
When looking at Q2.
But.
Overall, we expect orders to.
To be very.
Very solid in not.
Out of line with what we've seen in the past yeah, I I mean, obviously the cobot situation is going to supersede the normal seasonality of the business from a Q2 perspective, we had the first up the quarter, which was.
I don't what they unimpacted, but through the first half of our quarter. This was essentially still viewed as largely China problem. It didn't go global until March March in the second part of the quarter.
I think the macro the macro side of things is in play is where it is now we don't know where it's headed.
But so I think you're going to see a different seasonality that as is typical and then I like runway of characterizing it I mean, I think we've guided we've guided revenue in Q3 in line with too.
Certainly pushing on the manufacturing side as hard as we can push it.
But but.
Right now right now we see it away, we see the ramp progressing you're going to be looking at revenue or more or less in line.
And the reason why why you see that isn't so much the internal capacity you could do the math and say for 100% right now internationally in Penang and were 70% in the U.S. and you do some type of linear extrapolation of basically the facility that we have in our fab in the U.S. you could come up with a much higher number but in order to.
Produced products should need three things you need all the parts you need your contract manufacturers for sub assemblies, and you need to Keysight manufacturing facilities. These pcms are.
Very close to 100% you see our facilities getting close to 100%, but we still are relying on the delivery of components from different suppliers that go into our products and that is something that.
That is something that you know is a bit extended that is figured into our guide I.
I see okay, Okay, and can you just putting that all together just tying that together.
Neil if we're looking at a similar cadence of revenue monthly through the fiscal third quarter. We've got the issues that you've spoken to around production production ramp overhead is there any reason to assume the decremental.
For the third quarter will be similar to the second quarter given.
Flexibility in the model.
I expected to be similar.
Good.
Thanks for the short answer to a long question. Thank you.
Your next question comes from the line of David Ridley Lane with Bank of America. Your line is open.
Sure good afternoon.
So China stimulus package included 30 billion or so.
Data centers.
In the U.S. in Europe. The work from home trend has shown some of the weaknesses that are out there in corporate.
Data centers and network.
How do you think about Keysight.
And their ability.
Benefit on a relative basis.
Those trends.
Satish owns the data center portion.
I didn't answer.
Yes. Thank you know, we think with the upgrades to datacenter technology and in view of what people have learnt from working at home and at this scale is definitely going to be a positive driver for us, especially for our ixia business ill with with multiple indications speed is one of them secure.
These one off them and visibility being the other other piece to it right. Now we did have will that strong double digit quarter for 400 gig based on some ramps, we're seeing in China and our outlook for that part of the business that continues to be favorable.
Yes.
Got it and then a question.
Can you maybe quantify that the cost savings actions that you took and if there are uh huh.
Some that are structural in nature.
Maybe called that out. Thank you yeah, we're very pleased with away. Our operating model has performed we've talked a lot about what we felt we could do in a down cycle.
The business or the model has a number of structural elements that are designed to respond instantaneously to changes and condition. The number one of those is the variable pay component again, 100% of our employees have a portion of their pay that fluctuates with with our business results.
Outside of the executives there were the rank and file if you will that that's really tied to our growth rates and our operating margins and so at both of those things corrected in the third quarter, we saw significant reduction in our people related costs.
Similarly, the contract manufacturing outsource sales those types of things those came in line beyond that we took action to to reduce.
To reduce.
Discretionary spend.
Everything from.
It against certain things happen relatively automatically like travel.
Basically crash towards zero in the second half of the quarter reductions and temporary workers.
Actually executive who have actually put into pay cut for our executive team.
Ranging from 100% at the CEO level to 50% for the.
For the senior Vice President So we've taken a number of different actions to further.
To further reduce spending.
Okay. Thank you very much.
Your next question comes from the line of Brandon Couillard with Jefferies. Your line is open.
Hey, Thanks, good afternoon.
Ron just quick view now that you back to the net cash position now.
Yes.
What you might do you see in terms the M&A funnel.
Dislocation in the market is perhaps the created.
And incremental opportunities for you to take a look out here.
Yes, well you upper and do we have the same priorities that we had before obviously to fund or organic growth to make sure that we stay.
Stay neutral or anti dilutive and to look at it look at M&A opportunities.
In certain cases things have become more attractive, but we still have or high hurdle to be our or you know to beat our AR.
Our cost of capital with our return on but with our.
Excuse me to beat our whack with our ROI C and we continue to look pretty aggressively at those but again, we will make sure that there are we seize the ROI sees high enough.
Thanks quick one for Neil.
Just on the Capex light for the year still thinking about 120 million for the year as that still affirmed number you expect some of those projects to maybe get pushed out yes, no, we'll probably push out a little bit obviously, we waived significant capital commitments already for the year, but we will that we would expect to understand where probably now looking at something more like 100 to 110 million for the year.
I guess thank you.
Your next question comes from the line of Samik Chatterjee with JP Morgan Your line is open.
Hi, Thanks for taking my question I, just wanted to start off with more or question on the manufacturing footprint field I mean, we've seen a lot of companies fees supply chain headwinds this quarter, but.
You are magnitude of the truck will have to be able to see larger given your concentration of U.S. and Malaysia, just wanted to get it talks about whether you are thinking any differently about would be long gone plans for the manufacturing footprint than it's been going back to get that Chris obviously on the phone. So once in a lifetime thing, but how you're thinking about it in the long film book.
He wants to be.
Yes to have a global pandemic come and literally be order out of our own factories as something that we don't think as typical and I don't know if it's once in a lifetime, but it's a it's a very rare occasion. We also have a lot of our manufacturing capacity that are spread around with cpms and the cpms are located.
In different countries, where they can move they can move their production from one facility to another and move it around.
Into different countries. So we look at that we review that annually and make sure that we have an optimized footprint trying to balance what we what we typically.
Would see and what type of benefit there is financially versus spreading out over multiple factories. So we continue to do that analysis, we have discussions all the time and there are some.
Some things that we do do that were not always always public.
So.
Just a follow up and I know you come in could quite a bit on the quality of about one of the spent in the order trends you're seeing just wanted to get them see if you can help post match set up relative to allow kind of how you expect some will be custom was that you interacting with the risk on if the macro remains quite weak going into the second pub or is the auto.
And here, what's wrong with the expectation that think means from a customer that lack will equal up quite well.
What do you think income so where do you expect to see some incremental weakness, which custom was up projects do you expect to be more fungible.
If you have a weaker macro in the back couple of deal. Thank you.
I think the country by country race to lead in Fiveg will continue regardless of the Mac boat macro situation.
There is too much at stake for a lot of or large customers and you know them from the any ams right through right through the whole ecosystem and communications and they will continue to drive towards.
Getting to market first when you look at the GDP, plus or the GDP or GDP plus businesses, such as general electronics in the general.
General manufacturing there you could see a slowdown as we've seen for instance in automotive.
So I think those are the businesses that will continue to see some weaknesses, which our automotive in general electronics, but I do expect that communications business, where there's a race for that to be robust going forward and as you know that's the strong as part of the business and that enabled us to.
To produce 19% operating margin.
Thank you thanks.
Thank you that concludes our question and answer session for today I'd now like to turn the conference back over to Jason carry for any closing comments.
Thank you Robert and thanks, everyone for joining us today are we look forward to hopefully speaking with many of you at the upcoming virtual conferences that we mentioned and I wish you all and good day.
This concludes our conference call you may now disconnect.
[music].
[noise] Oh.
[music].
Oh.