Q3 2020 Keysight Technologies Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Keysight technologies fiscal third quarter 2020, <unk> earnings Conference call.
My name is Chris and I'll be your lead operator today.
After the presentation, we will conduct a question and answer session.
If you would like to ask a question. Please press star followed by the number one on your were telephone keypad.
We're trying to question please press the pound side.
If at any time during the conference you need to reach an operator. Please press the star followed by zero.
Please note that this call is being recorded today Wednesday August Twentyth 2020 at 130 specific time.
I'd now like to turn the conference over to Jason Gary Vice President Treasurer, and Investor Relations. Please go ahead Mr. Gary.
Thank you and welcome everyone to Keysight third quarter earnings conference call for fiscal year 2020, joining me are Ron or session, Keysight, Chairman, 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 and such.
He's done 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 at Investor Day, Keysight Dot com well there. Please click on the link for quarterly reports under the financial information tab, there you'll find an investor presentation, along with Keysight segment results following.
This conference call, we will post copy of the prepared remarks to the website today's comments by Ron and ill 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 measure.
Tricks 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 got what as of today. The company assumes no obligation to update them. Please review the company's recent FCC filings for a more complete picture of our risks and other factors.
Lastly, I would note that the management team is scheduled to participate in upcoming virtual investor conferences in September hosted by Jefferies, Citibank and Deutsche Bank, and now I will turn call over to Ron.
Thank you Jason and thank you all for joining us keysight delivered stronger than expected third quarter results demonstrating the exceptional resilience of our business for the second quarter in a row, despite ongoing macro challenges I.
Hi, I'm proud of how the Keysight team rapidly adapted to a new operating environment, while delivering on her commitments to our customers partners and shareholders.
Today I'll focus my formal comments on three key headlines for the quarter.
First we delivered stronger than expected third quarter results with solid gross margin in a record operating margin.
Our differentiated solutions drove steady demand through the quarter and our operational execution was exceptional as we ramp production capacity to nearly 100% by quarter ends.
Second despite the ongoing pandemic uncertainty we remain confident in our differentiated leadership position and the long term secular growth trends driving or markets. The past two quarters have demonstrated the resilience of the Keysight leadership model, which we believe provides a durable competitive advantage.
The long term.
And third despite near term macro disruption, we expect to achieve year over year revenue and earnings growth in the fourth quarter.
Now, let's take a deeper look into our financial results in the market dynamics within the quarter.
Despite the challenging macro environment demand for key sex differentiated solutions was steady through the quarter.
Orders declined 4% year over year, and 2% sequentially inline with our typical Q2 to Q3 seasonality.
Revenue declined 7% year over year, while increasing 13% sequentially.
The durability over a financial operating model and flexibility of our cost structure. Once again exceptional as we delivered third quarter gross margin of 64% and record operating margin of 26% and free cash flow of $151 million.
In commercial communications, we continue to see the global adoption of T. sites Fiveg platform, our end to end solutions for the Fiveg lifecycle across both wired and wireless domain and from Oregon, D. in high value manufacturing or niebling, the ecosystem to scale for product development.
Two deployments.
Oh Gee commercialization is progressing and on track to add an estimated 190 million subscribers and twentytwenty.
Device design and development investments continue to be strong driven by the large scale ramps in Asia.
As fiveg deployment expands in ongoing innovations game customer interest, we continue to see strength in R&D.
With several test house announcements this quarter Keysight leadership is further solidified as her fiveg test platforms are now being used by all the leading test houses worldwide Keysight first to market Fiveg designing touch solutions are also helping to accelerate and enable the virtualization of the rate.
Do you access network and the rapid adoption of the open radio access network technologies.
We also saw strong demand for high speed digital one optical solutions, driven by 400, GE manufacturing expansion and an uptick in R&D investments in 800 Julie.
He said is well positioned to capitalize in commercial rollouts in mainstream deployments.
Our comprehensive platform provides end to end solutions that enable customer innovation throughout the entire fiveg lifecycle.
In the aerospace defense in government orders were strong in the U.S. offset by lower investment in Europe and to a lesser extent in Asia.
We continue to see strong demand for electromagnetic spectrum threat simulation platform as well as solutions for radar space satellite and five G.
In addition, we continue to enable our customers initiatives to increase their electronic supply chain capacity and reliability in the U.S., which we believe will be a multiyear opportunity.
In the automotive sector macro driven weakness persists. However, the fundamental drivers for the long term investment in electric.
Economists vehicle technologies continue to be a strategic industry priority.
The industry adapts to tremendous change your multiple technology disruptions.
He said is investing in first to market solutions and remains firmly engaged with key market players, we recently announced the multiyear collaboration with I.P.G. automotive and Nord says.
To jointly develop a new modular test platform for autonomous driving emulation.
This will accelerate the validation of advanced driver assistance systems and functions for autonomous driving.
Strategic investment in next generation semiconductor process technology remains a priority for our customers demand is being driven by Fiveg smartphone processors high speed networking and a high performance data center applications to serve the work from home economy.
This trend resulted in double digit year over year order growth for semiconductor measurement solutions.
Software and services again delivered solid revenue growth this quarter, our software centric solutions strategy is providing strong value to our customers services and support such as Keysight care continue to expand to higher value added consulting and optimization offerings at greater than 30.
Percentage of total revenue are growing mix of software and services is contributing to the durability of our business model, while increasing recurring revenue and improving gross margins.
With the bulk of our Fiveg opportunity ahead of us and millimeter wave commercialization still in its early days, we recently launched the pathway design 2021 software suite.
As advanced software it accelerates fiveg designed simulation and verification workflows with integrated solution that ensures design performance improves accuracy and speeds time to market.
In the manufacturing Arena Keysight continues to collaborate with leading fiveg infrastructure customers, a new cloud based pathway manufacturing solutions, we continue to increase our solution differentiation with strategic acquisitions, expanding into the application layer and growing or addressable market.
[music].
We recently acquired eight plan and industry, leading software test automation platform provider.
Plants differentiated technology uses artificial intelligence and analytics to automate test creation and test execution.
With this acquisition Keysight is now the only company that can provide test capability from the physical layer through the application layer and extending to the user experience or you acts.
Eight plants customer span a wide range of sectors overlapping keysight existing customer base, while expanding software test opportunities into new end markets looking back at the past two quarters, our performance exemplifies the core values of the Keysight leadership model on multiple fronts.
Demonstrated operational excellence and the durability of our financial operating model.
KLM also extends beyond financial Accountability and alliance with her foundational pillars of corporate social responsibility.
We released our latest annual CSR report in May we are proud to have surpassed her social impact goals in community and education, while making progress on our governance and environmental goals, including climate change.
Lastly, as a result of recent events, we are taking further actions to expand their inclusion and diversity programs to advance racial equality.
For example, we are working with academic institutions, including historically black colleges and universities to reinforce our diversity recruiting strategy. We're committed to accelerating racial equality and we'll do our apart to make a difference.
To wrap up my comments Keysight execution. This quarter is a reflection of our values in our commitment to customers to deliver first to market solutions for their businesses and technology challenges I couldn't be prouder of the keysight team they have risen to the occasion in a challenging environment and continued.
Execute on customer commitments, while at the same time upholding the values that makes keysight a diverse inclusive work environment with a culture of innovation ownership passion and respect.
Now, we'll turn it over to Neal to discuss our financial performance and outlook in more detail.
Thank you Ron and Hello, everyone note that all comparisons are on a year over year basis, unless specifically noted otherwise.
Keysight delivered a solid quarter, thanks to steady demand and strong execution, despite a challenging economic environment and supply chain disruption, our financial and operational performance demonstrated the durability of or operating model as reported record operating margin and solid cash flow.
This performance also approved for the second quarter in a row the effectiveness of our financial playbook, which is the designed to preserve margins and cash generation during challenging times.
For the third quarter of 2020, we delivered revenue of $1.011 billion down 7% on a reported and core basis, our team executed well in ramping production capacity managing supply chain constraints, which resulted in stronger than expected sequential revenue growth of 13%.
Orders of $1.067 billion were down 4% on a reported and core basis and were steady through the quarter in aggregate.
Regionally demand accelerated in Asia and began to stabilize in the U.S., while Europe lagged as the pay them pandemic continues to hampered their economic recovery.
Turning to our operational results for Q3, we reported gross margin of 64% with improved mix and lower discretionary spending offsetting the impact of lower revenue.
Expenses were well manage as we benefited from our flexible cost structure and the specific actions that we initiated last quarter.
The combination of strong gross margin performance and expense discipline resulted in record operating margin of 26%.
Net income in the third quarter was $226 million on a per share basis, we delivered $1.19 cents in earnings on a weighted average share count for the quarter of 190 million shares regarding the performance of our segments. We saw continued strength in fiveg investments, both in R&D and manufacturing as.
Wallace next generation semiconductor node technologies, which drove double digit order growth across both markets respectively.
This strength was offset by weaker spending in legacy communications automotive General electronics, and international Aerospace defense and government markets.
Exceptional execution the expense discipline resulted in CSG operating margin of 26% and he eyes GE operating margin of 27%.
Moving to the balance sheet cash flow, we ended our third quarter with $1.7 billion in cash cash equivalents with $450 million of additional liquidity available under our undrawn revolving credit facility.
Our quarter and cash balance reflects the impact of the $319 million net of cash acquisition of eggplant reported cash flow from operations of $183 million and free cash flow of $151 million, we did not repurchase any shares during the quarter.
Turning to our outlook and guidance.
As Ron mentioned, we expect to make continued progress in Q4 and as a result, we expect fourth quarter revenue to be in the range of $1.170 billion to $1.190 billion and Q4 earnings per share to be in the range of $1.42 cents to $1.48 cents based on a weighted average share count of 190 million.
Shares at the midpoint this represents 5% year over year revenue growth and 9% year over year earnings growth. These expectations assume limited incremental supply chain constraints or disruption from additional shutdowns or a second wave of the pandemic.
Well the near term remains challenging the long term secular growth trends in our markets remain intact. We continue to invest in R&D and focus on our long term strategy of enabling customer success, the first to market leading edge solutions.
I mentioned last quarter, the durability of our business model steady cash generation strong balance sheet and market leadership give us confidence in our long term core revenue growth target of 4% to 6% and operating margin target of 26% to 27%.
With that I will now turn it back to Jason for acuity.
Thank you Neil.
Chris when you give the instructions for the Q in April.
Ladies and gentlemen, if you would like to ask your question. Please press star followed by the number one on your telephone keypad.
Yes. Thank you please limit yourself to one question and one follow up to withdraw your question press the pound.
Please hold while we compile the kuni roster.
And the first question comes from Cemig Chatterji with JP Morgan Your line is open.
Hi, Thanks, taking my question.
To start off.
Hello.
Cranes.
Like on a sequential pieces.
But do it does.
But maybe if you can.
Based on what do you see.
Outside of the season for example in commercial communication.
Great.
And in the market.
For example.
Decline so changes in order.
Thank you.
Hi.
This is Ron I'm going ask Mark Wallace had sales to talk about the order trends first and then I think to teach can also add some more color commentary towards your commercial communications questions.
Okay. Thanks, Ron Heights for me. Thanks for your question. So you know orders were very steady throughout the quarter and actually in certain areas. They trended to increase as we saw some of the you know covert related impact diminish, but we've seen continue in continuing.
The next generation technologies with strong order growth and fight. She that's already been mentioned our high speed digital in optical solutions to support our.
400 gigabit data center expansion customers around the world has been very strong and the advanced semiconductor process technologies, including E. B, which is extreme ultra ultra violet five nanometer continue to be very strong and with semiconductor in particular, we saw strength across all.
The regions. So the other the other part that was was up was aerospace defense for us in the U.S.
That was offset by some weakness in Europe, principally due to the Colgate effects and some mixed conditions in Asia.
The co bid impact I would say, there's there was some disruption certainly across all regions, but Asia was leased affected because they came out first it on a relative basis, we saw a larger impact across continental Europe, where many of the countries' economies started slowly restarting and reopening.
Late may into June so where do we see this impact we saw in general electronics several of our indirect channels and in areas, where government funding was redirected like an education and research and then the macro impact from automotive remains soft, but as Rob noted easy and aid the continues to be a very strong.
On top priority for our customers for the industry and we had several large new customer wins in the quarter. So what I would summarize. This is overall there were cobot 19 headwinds, but our our sales productivity and customer engagement remain very high we delivered steady and improving orders throughout the quarter.
Sure.
Much of that was delivered by gross and demand from our solutions for Fiveg 400 gig next generation semis and we also delivered strong growth for services.
As customers relied on us to help support their operations and the adoption of Keysight care continues to grow and we built a strong funnel along the way as well so Scottish I'll hand, it back to you and you can make some further comments on commercial cops.
I think mark you covered it I guess, maybe say that cranking out fiveg with broad and we continue to see strong demand for our offering.
Okay.
Thanks.
If I can just follow on question on margins and maybe this is.
Neil Calibrating that implied margin operating margin of somebody.
Seven.
In the fourth.
Guidance.
When I look at Daytona seek benches pieces I think it's implying wonderful 33.
So just wanted to check on that does sound a bit no.
It does imply.
In the Opex level that.
That's really realistic given.
You might have.
Structure.
Somewhat.
Cost reductions yield benefiting from.
Yes.
The.
Yeah.
Sorry about that.
Mike is now on the probably easier to hear me.
You know you typically see even as we in a typical year as you migrate from Q3 to Q4.
Some uptick in expenses.
You know that some of that is related to the field as we get back after the year and push to push to finish the year strong.
The 40% incremental is never intended to be something that is quarter to quarter. It they're going to be quarters, where were above and quarters, where we're a blow but we're committed to over the over the medium to long term achieving that 40% incremental which is something we've been able to do so.
Yes.
I think we're very well positioned from that perspective.
Okay. Thank you thanks for taking my questions.
And our next question is from Brendan cleared with Jefferies. Your line is open.
Thanks, Good afternoon.
Maybe Ron could you just elaborate on what you saw in China in the quarter in terms of core orders and revenues and remote it's what the total impacted the trade restrictions were.
In the third quarter was down about 3% to 4% in total.
Hi, Brandon This is Ron I'm going to pass this over to Mark who manages obviously, China sales, but I think you also can makes him make some comments.
With regards to walk away because new news came out this week.
Yes, Thanks, Ron High Brandon So business in China during Q3.
Was strong we saw order growth and revenue growth and.
Much like my comments earlier, we saw steady flow of business throughout the quarter again strengths in fiveg with some of the market leaders as well as increasingly selling to this longer tail of customers within the ecosystem. This is where we saw a lot of growth with high speed digital above.
Factoring again, driven by this global demand from our data centers or the data center customers around the world and China continue to invest in semiconductor capability.
We saw some headwinds from coded mainly from other parts of the world as opposed to in China directly some macro economic influence.
From automotive.
We did see an impact in Q3 and in aerospace and defense as you May recall, there was some new regulations that we're.
Now in skin made that were put into place in late June the route military end user customers. So we saw small effect because it was later in the quarter.
We are starting to see some some rebound in some of the markets that were early affected by.
Like Colgate like General electronics, and starting to show some signs of recovery, but outside the quarter run referenced. This earlier. This week there was a new regulation for why wait and deep water.
Entity list that was published and this was.
Describing some increased restrictions on the sale of products, which are manufactured outside the U.S., but have us based technology or software as as part of the development. So you know this shift too.
Tighter restrictions than the previous regulation.
We'll limit sales to walk away in their affiliates there were some additional announcements made on some additional affiliates added as well that don't have much of an impact somewhat a pass it to neal to make some more.
Quantitative comments the one thing I will say, though is that we faced adversity and challenges in China in the past and we've been very effective at redirecting our focus set priorities and we're certainly looking at that as we continue to digest the information so Neil what only pass it to you can comment further on the on the effects.
Yes, I just wanted to give some more specific quantification of the of the likely impacted the new away news. So we had said previously based on previous rounds of restrictions to walk away with that we expected while way to be a 1% to 2% customer a year to date, they've actually been exceeding that they are closer to double that rate.
Though say increased sales in Q1, which we've talked about and then again here in the third quarter.
We look forward.
To next year it does look like.
This these new restrictions are pretty comprehensive and so we expect why we'd be a very small customer for us going going forward.
But again, if you think about it from a long term, we were already expecting them to be a 1% to 2% customer. So the headwinds are little bit bigger next year potentially up to 4%, but over the long term, it's a pretty minor adjustment from what we've been expecting.
That's very helpful. Thank you for that color.
Just maybe one for Ron on the Eggplant acquisition sounds like pretty interesting asset you sort of speak to the growth rate in the business from the primary end markets.
And the margin profile of the business and whether that acquisition is dilutive TPS near term or not.
Sure Brandon.
Plan is really an exciting acquisition for US again, as we move more and more to software centric solutions.
This fits in right with our strategy and the way to think about this is a lot of our products are most of our products test hardware.
Or test firmware with in our customers and products. This test software. So we're finally using software to test software and in particular this is used to test user interface develop and someone when someone's developing new user interface. How do you know that its effect.
I've been and it will be something that can get customers through the interface and have a really good user experience. So it's a special unique set of AI. He that existed by anybody that creates any type of user experience on the web the customer bases.
Broad aerospace defense is one area, where there is a lot of sales, but even sells for instance, the and into even into the financial community.
It is it is.
Accretive to us it's a small acquisition it is growing and growing.
Growing roughly double digits, but it has tremendous potential as we marry that in the future with the rest of Keysight solutions and in particular with our path wave architecture.
Thank you.
Next question is from John Marchetti with Stifel. Your line is open.
Thanks, very much I was wondering if maybe just come back to China, maybe a little bit more broadly.
No not just walk away in particular deal I know you gave us some of their numbers. They are about the headwind that you are expected to face, but but you mentioned some of the strength you saw in their efforts to be more semiconductor independent and things like that you how much I guess is we're looking a little bit more broadly than just why way do you see this is a potential headwind as we look out.
Maybe over the next several quarters. It if we're going to see some some broader entity enforcement on this list against Us technology.
So John this is mark I'll, Oh, absolutely part of that question. So first of all China as we've said before as a very and you mentioned this is very broad diverse.
Business for US we serve multiple segments and semi is one of those right now based on the regulations that were just put out our semiconductor test solutions.
Our not directly affected by the new regulations as these parametric test systems, our engineered and manufactured outside the U.S. So what we are watching is a possible impact from reduced capacity demand for.
Ships through the foundries, we're monitoring that situation and and looking at the the forward looking past.
But again, we expect to see continued investments driven by fiveg or the other leading technologies not only in China, but from around the world to support these next generation process technologies.
Got it and then maybe if we look out over the next quarter or so how should we think maybe about some of these geographies snap. He said you saw some improvement obviously post coded as that continues maybe to get a little bit better in Europe.
Hopefully here in North America do you expect some of the order strength there were some of the meant to come back into that order line, just sort of getting back to sneaks question about.
Down again on a year over year basis, a little bit more sequentially just tried to get a sense for you know how you're feeling about that may be overall order trends of the business.
Okay.
Yes, so if you're referring to semi specifically you know there's going to still be market constraints in the coming quarters.
Demand will be based somewhat on supply and how much how much acceleration occurs in in the the end markets more broadly.
We are seeing improving conditions in clearly in North America and the early rebound at some of the business that was impacted by coated.
In Europe in particular, we saw the sequential improvement during Q3, particularly in Europe, and we expect to see that continue in those two geographies.
Asia is pretty much through that as we stand now and then you have some seasonal effects with aerospace defense being large in the U.S. in Q4, and we're expecting to see that surge occur again as we get to the ended the government's fiscal year.
Thanks very much.
Next question is from Tim along with Barclays. Your line is open.
Thank you.
Wanted to ask on the the Fiveg side could you talk a little bit about where we are in the transition to the manufacturing side. It sounded like both R&D and manufacturing we're strong in the quarter, but you could just touch on kind of where you're starting to see little bit more traction on the manufacturing.
Side as well.
Whitman manufacturers start to ramp up to meet growing.
The growing demand.
And then secondly, if we could just touch on 400 gig in 800 gig sounds pretty positive for the traditional wireline and ixia businesses could you just give us a little color on how the complexity of that business. How much is datacenter how much is telco.
How much is in the China and market that'd be great. Thank you.
Thanks, I think first I want to say that from a fiveg perspective.
The industry continues to progress.
In a very strong man or did I have been some pushouts in some parts of the world acceleration others net net.
Our long term view and outlook remains unchanged and we look at it bullet from deployments and and actually the number of devices.
That are going to be manufactured this year, so pretty strong from that point of view and we see that trends reflected and increasing demand for our R&D solutions, but also on a year over year basis, we had a very strong uptake for our manufacturing solutions I think that referenced before our modular offerings.
Specialty are resonating very well with base station manufacturing and component and a funnel spent in that area continues to be strong as well.
With regard to the 400 gig business. This is the third straight quarter, where that businesses had strong growth we've had differentiated offerings.
You're right in that a lot of the demand. So far has been driven by the web scale companies into data centers, which we think we'll continue to accelerate and industry is not done in a waiting. So there is more innovation 800 gig that's underway as well and a bulk of this opportunity from a production perspective is playing out in Asia and live.
We have capturing a majority of the share in on that front and we'll continue to see that as the industry progress is to fiveg and especially Standalone use cases more of the more of the operator based or metro based.
Versions of 400 gig play out.
So we feel we feel strong about the were our wireline opportunity as well.
Okay. Thanks.
I would just at a comment too when you look at so scope, which include sampling scopes that.
That serve this optical market. The results were very strong with double digit growth in orders.
When we look at that on a competitive basis, we're very happy with our performance and are relative performance.
Okay, great. Thanks.
Next question is from Mehdi Hosseini with Susquehanna. Your line is open.
Yes. Thanks for taking my question My first one has to do.
Your guide when I look at the pads.
The two four years.
You have done a great job keeping book to bill above.
1.0 and.
If I look to pick the midpoint of your revenue guide it would suggest that booking would have to be up.
By double digit on a sequential basis and kind of flattish on a year over year basis, and I'm not asking for a guy booking but I'm just wondering the funded loan business opportunities that.
Laid out last earning conference call. It seems to me that is beginning to materialize, especially the we'd call we'd behind US and is this the right way to think about anything else you can add to recreate that know how to follow up.
Sure Mindy.
Yeah, obviously, we don't guide orders as you know we haven't we haven't commented on orders in general we have built our backlog.
Over over the past quarters, that's good and given all the supply constraints and things that that come in from external to key sites manufacturing.
We see that backlog position that we have.
Remaining roughly in the same area with some puts and takes as we go forward and as far as orders as far as going that we're very pleased where we are quarter by quarter. We'll we'll see how Q4 happens we clearly we're very pleased with our order performance is low.
Last quarter, and our book to Bill based on what's going on in the environment, but.
We are going at that.
Got it thank you and wanted to dive into the networking and ixia.
It seems to me that based on to peer group there's acceleration on.
Indeed, six and 800 gig and perhaps this crude.
Minimize the tailwind of 400 and Im just wondering if you could comment on it now so that's how you see your networking split between R&D and production.
Yes, I think the way to think about amenities.
We have a diverse portfolio in commercial communications and on the wireline side have a good breadth of solutions, both between R&D and production and they sort of.
Pete each other we start early with customers and followed that lifecycle as they get into production and an add back into deployments with operators sites that whole, let's say solution franchise that we have that allows us to maintain a pretty steady.
Especially business and on the wireline side in particular, the business has been a lot more steady and augmented by the addition of the led to let the capabilities from the ICSI acquisition. So yeah right now Datacenters is driving 400 gig demand, we expect than the telecom demand to pick up.
And then simultaneously 800 gig with the first instantiation being 100 gig serio based where we'll start and that goes into production. So these these waves continue and give us a lot of stability in our.
Commercial communications outlook.
But does that include the R&D that is being a scale for the next generation.
Absolutely yes.
Thank you.
Next question is from Mark Delaney with Goldman Sachs. Your line is open.
Yes, good afternoon, and thanks for taking the questions for since I've been to better understand the growth outlook and.
She segment and understanding that the comment and then they made in prepared remarks about some weakness that has been seen in the industrial and automotive portions of your business, but when I look at the I asked them index back to year over year growth.
Oh production is ramping back up pretty quickly and the company commented about electric and autonomous vehicle investment continuing I'm wondering when you think some of those factors may translate into better demand indicators for your EA SG segment.
Hi, Mark This is Ron first of all congratulations on your new role and thank you very much for covering Keysight. We're happy to have you with us with with regards to automotive, we're not ready to call a big upturn, we've seen the negative rates.
Growth in the automotive industry, although the second order.
We are the second derivative I should say you know is you know is positive in the growth rate or the decline rate is lessening, we're still not at a point, where we believe that thats translating into more and more cash into the auto industry, which would feed into the R&D funds. So we're going to play.
It cautiously.
Through this period of time, we are ready.
Mostly to capitalize on any new spending that's there and where you see a lot of the spending an AB and E V. It it's really a big strategic priority for US we have a lot of.
Solutions that are in the market and we have other ones that were working on and over this multi year.
You know this multiyear scenario, we see tremendous potential for us.
Thanks and also thank you asked for the next welcome.
My other question I do understand on EBIT margins company to 26% non-GAAP EBIT margin this quarter, which I believe was the target model for 2023 cents so coming in.
Well ahead of.
And your plan.
With with respect to profitability margins you can talk about how sustainable you think this level of.
EBIT margin may be certainly apply that to be at these kind of levels again next quarter, but you think about between now and in 2023 already you're at those those those levels at debt today. It is something you can sustain or can even potentially operate above your target margins. Thanks.
Yes, obviously, we just put out those long term target margins of 26% to 27% and and as I said in my prepared comments over the longer term, we are highly confident our ability to to get to and sustain those those things.
Obviously, we hit 26%. This quarter. These are clearly not normal times, nor do we expect nor next quarter to be normal times.
We have a.
A unique operating model that allows us to maintain profitability cash flow generation in the day tough economic times, a key portion of that model is the variable pay component for 100% of our employees. The drivers there organic growth in operating margin, obviously, the organic growth situation right now driven by the.
Macro economy is allowing us to save significant money on the on the single biggest component of our cost structure, which is our people are we see other areas to that's a direct result of co bid spending decreased significantly whether that's travel which is an obvious one.
R&D project materials with engineers working from home those types of things as well as we've taken specific actions around NK W.'s and excuse me temporary workers and in other areas to two to really put a clamp on discretionary spending so again over the longer term, we're committed to 26% to 27%.
We're very pleased with results were getting in the short run as those costs come back as we faced some other expenses as we go into 21, one of things were watching very carefully as are our pension expense with interest rates being at historically low levels. We're expensing expecting pension expenses to increase next year, so they're going to be some things that that in the in the short run are going to.
Probably push us back a little bit the other direction and term, but we're well on our way towards a long term trend of getting too and sustaining those 26, 27% operating margins.
Yes, Neal said there are lot of there are lot of things puts and takes that we're managing as he said from everything from pension expenses in this low interest rate environment, we had temporary executive salary cuts. The overall comp that we had on a variable babies is traveling et cetera. However, it is.
Worthwhile to to note from from my Chair, it's always a balance between long term profitability in short term profitability and as we look at this.
As we look at the margins could we take the margins a little bit higher yes, but we're investing to make sure we have a differentiated.
Competitive advantage versus the competition and could give customer solutions that they want to provide growth and as we model. This all out we think we're in a very good shape to create the most value for the shareholders balancing investment with.
Short term return.
Understood. Thank you.
Thank you.
Next question is from Jim Suva with Citigroup investment Research your line is open.
Thank you very much all my two questions asking about the same time, she could kind of cancer government any order you want it but regarding the eight plant acquisition that you. Just closed can you talk is a little bit about the contribution for the revenues that it will be for that quarter outlook, you dig I'm trying to.
Look at organic growth rate.
There is also impact.
Order growth rate, you just reported which I think was down about 4% Prudence report a quarter horse power plant not into you owners. The my second question is can you help us better understand about the connection between or higher revenues next quarter year over year, yet your order rate.
Still being nice year over year kind of how do you bridge to fundamental metrics. Thank you.
Yes, let me take the first question with regard to eggplant.
As as you know are as as we've said, it's a relatively small business, but as we report core growth numbers relative to as reported we would expect take might have about a one point impact on on our growth rates, it's going to add about a point of growth on either their order or revenue line on a go.
Forward basis, obviously, they were only part of of Keysight for a portion of the third quarter, but on a go forward basis that puts it into an order of magnitude with regard to Q4 and kind of the revenue being sequentially up but orders continuing to be down on a year over year basis.
Obviously, where were we aren't as strong backlog position, we've been building capacity over the course of the last three months and are now in a position, where we can where we can ship.
Essentially at a level that was on par with where we were before coming into cobot and so thats driving revenue as Mark said the macro economy is still highly uncertain, we're seeing areas of relative strength in areas that relative weakness, but the cobot situation is impacting.
More or less every business in the industry equally and we remain confident in our competitive position in the strength of our technology and over the long term.
And the secular growth trends that are driving our end markets.
Okay. So much that clarification its greatly appreciate it.
Thanks, Jim.
Next question is from Rick Eastman with Baird. Your line is open.
Yes, good good afternoon, Thank you and tremendous quarters. Thank you.
He just just a question around the book to Bill here in the quarter.
Obviously, the the math is at 1.0544 for Keysight in the quarter.
Could you just give us a sense.
What's the book to Bill greater than one.
In Iasci.
And.
Andy.
Obviously, we don't we don't turnover not reporting orders at the segment level.
You have the information for Keysight, and we're just not going into that level granularity.
Okay, well, let me let me ask another question when you when you look at Iasci orders and.
Potentially ace aerospace and defense and you just look at the absolute dollar amount of the orders is there is there a general sense that.
There were stabilizing at a im going to at this lower level I mean, we assume a book to bill of one.
Is there some stabilization in the overall.
Gee business.
And the same question around aerospace defense.
Let me take that let me take the IC portion and then I'll, let cities address the.
We see the CSG and specifically the aerospace defense question.
She we've talked about the various segments within the wind with any idea and we clearly have an auto industry that is.
That is going through some pretty pretty difficult times, and and our business selling directly into audit was similarly impacted right and so you're seeing I'd say, but more severe macro impact or an above average negative macro impact in the auto industry at the flip side, you've got the semi industry.
The within a few which is doing very well right now as folks are investing it process technology, you have fiveg and other things that are driving semiconductor demand and so not just us but across the semi industry are seeing you're seeing relative strength, even in a time of broad macro weakness and then the third piece being general electronics is the one that's kind of both macro tied.
We bought we've often talked about that being as are most GDP linked business and and so there I think you're going to see.
Our performance or our general electronics business, largely mere what happens with the broader economy as we recover from recover from cobot cities you want to comment on Earth that show.
So obviously I think you see the revenue line was down for the aerospace and defense business, but when you look at the orders.
This was the second highest order quarter second highest Q3 in the last five years. So it's it's the businesses actually holding up very well with strength in the U.S. and our own position.
Back to electromagnetic spectrum operations Fiveg and.
Space and satellite is strong and when you couple that with the prime contractor backlogs that has continued to increase through the year. It also sort of portends, a strong indicator for future orders as well.
Okay, and then if I could just sneak in one more thing cities.
No lots of puts and takes around adoption curves for for sub six and for millimeter wave.
Curious.
There is a measurable impact on either orders or demand as as open ran seems to be maybe.
Gaining some traction.
Again, I don't know whats key sites content would be into those development efforts, but is that a measurable.
Having any kind of measurable impact on demand, whether it be orders or revenue.
Well first of all I want to say, our Fiveg platform continues to do well across the ecosystem and on a whole range of applications. So we call at the end to end platform, both wireless and wireline as Ron as mentioned before let's say the next sort of demand driver in the business continues to be the adoption of the standalone warship fiveg along with millimeter wave.
And then we just had to release 16, one of the standard that just got passed in July. So we have some strong drivers going for the business. When you then compounded with this macro situation thats going on with security concerns around.
Now for base stations, clearly opened ran or virtualize ran has got a lot of interest.
You know and the fact that we have the total technology stack, including ICSI US core network test capabilities that we're now able to purpose to address this opportunity in fact this quarter. We just launched our opened brand tool kit to enable developers there why there isn't a big player a yet that's emerging in open ran theres a lot.
Customers that broader market space, that's emerging with with different tests need and interoperability needs. We're participating in the old on standards and we're already starting to book some orders as well.
Okay very good thank you.
Next question is from Adam Thalhimer with Thompson Davis Your line is open.
Thanks, Good afternoon, guys congrats on a great quarter.
Thank you thanks Adam.
Curious for your revenue.
Look for Q4 do you see revenue up in those segments or is the growth really driven by communications.
You're talking sequentially or year over year.
Year over year.
Yes, Yeah, we don't we don't guide at the segment level. So I don't think Thats information, we want to share at this point in time.
Okay, and then I was hoping maybe you could give some high level 21 thoughts just given that two quarters of low single digit.
Order declines how that might juxtaposed against your thoughts on 21 growth.
Yes.
21 is difficult to call here, even three months out obviously, we've got a lot of factors that are play, including what's what's the pace of the cobot recovery what happens with the U.S. election.
And those types of things again, I think as we look over the longer term, we continued to be encouraged by our position relative position in the marketplace. We recommend recognize that those macro factors are going to more or less impact everybody equally so not only our market position, but the strength of our the strength of our.
Our portfolio and our technology is going to enable us to weather winter weather everything better it better than most and so we're very very encouraged by that I did touch on some of the specific headwinds there we're going to be facing going into for 21, specifically about wallet.
But other than that you've got it we've got a great operating model.
That's driving strong profitability and cash flow today and it will continue to do so no matter how the macro economy develops over the course the next several quarters.
Okay. Thanks, Neal Congrats again thanks.
Next question is from and David Ridley Lane with Bank of America. Your line is open.
Thank you.
So.
I wanted to ask how much of the backlog that you built in second quarter sales.
You had about a 200 million dollar bill.
Were you able to ship.
In the third quarter.
Yes, as you as you can see we built backlog here again in the third quarter or should we did not see a backlog reduction I guess the way I would answer that as we were working very closely with our customers to meet their most urgent delivery needs and to this point, we're not aware of a single instance, where we have lost in order because of.
Inability to ship so.
We continue to we we ramped production consistently throughout the year, we're very close to 100% capacity across all of our internal manufacturing.
We do see some supply chain constraints regard with some our suppliers, but we're very actively managing those.
As Ron said as we look forward we expect.
Backlog position to be to be similar to where it is today and.
And tactically tickets, probably pretty obvious a lot of the orders that we received that went into backlog in Q2.
Were shipped in Q3, however, the orders that came in in Q3 in particular typically orders that come in towards the end of Q3 go into the backlog. So although you don't see backlog change in Q3 or you see one year roughly $50 million. It doesn't mean, we ship those orders and Didnt get that.
Q3, it's always to rolling to Rolling accounts, and we're always shipping first bell based on customer requirement and typically the customer requirements that we received from the Q2 orders are things that are needed by our customers before the Q3 order.
So it's rolling we're clearing out obviously, what we received in Q2 and then in Q3, we build up again and it sort of works that way through the quarter, depending on the seasonality month to month.
Got it and.
As you sit here.
In August.
I think it would.
As a six month timeframe for kind of getting back to.
If you will sort of a normal backlog gauge I.
Okay shipping all the things on on a normal schedule if you will.
Yes, as we're back to it as I said close to 100% capacity at this point in time.
You know and very successfully managing other supply chain constraints. So I.
I think we are right now shipping per inaudible schedule unable to meet the demand requirements of our customers.
Got it and just one last one if I could.
Was there anything unusual in terms of the mix of revenues that was either benefit or or drag on gross margins.
Going and I would say is that obviously, we had a very strong semi business continues to be very strong at this point in time that can be.
Above average from a from.
From a gross margin perspective, and then we continued to see great performance and our software business.
Adding recurring revenue software and services in combination as we mentioned north of 30% of our total revenue and so that is also additive to gross margins and even if you look at services specifically it is a below average gross margin business, but but we have over the course, though last services used to be a separately reported segment for us.
Over the course, the last 18 months, we've continued to make great progress on services profitability. So we talked over the long term about getting services profitability up north of 20% and we've now achieved that objective for our services business. So it's it's come a long way as well as not as dilutive as these to be.
The services business, which has been part of our growth strategies that was one of our key elements continues to grow orders from revenue grew double digits and that is a chain that keeps going and that helps our IR. Our there's there's no doubt about that and it has increased our margins end as Neal mentioned, it's above.
20% and also software grows.
Typically grows faster than the rest of our business in that helps or gross margin but.
We produced a real solid 64, 64% gross margin this quarter and there's nothing really unusual with regard to what we delivered relative to our strategy.
Perfect. Thank you very much.
Thank you that concludes our question and answer session for today I would now like to turn the conference back to Jason carry for any closing comments.
Well, thank you Chris and thank you all for joining US today, we look forward to speaking with many of you at the upcoming virtual conferences.
And with that I wish you do have a great. Thank you.
This concludes our conference call you may now disconnect.
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