Q4 2020 Keysight Technologies Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Keysight technologies fiscal fourth quarter 2020, <unk> earnings Conference call My.
My name is gross 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 telephone keep on.
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Please note that this call is being recorded today Wednesday November 18, 2020 at 130 PM Pacific time.
I would now like to hand, the conference over to Jason Kary, Vice President Treasurer, and Investor Relations. Please go ahead Mr. Gary.
Thank you and welcome everyone to Keysight fourth quarter earnings conference call for fiscal year 2020, joining.
Joining me are Ron or 60, M. Keysight is chairman, president and CEO and Neil Dougherty, our CFO joining us on the QNX session will be city standard shock, Ron who was recently appointed our Chief operating officer, and Mark Wallace Senior Vice President of worldwide sales.
You can find the press release and information to supplement today's discussion on our website at Investor Day, Keysight Dot com, while 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 for.
Following this conference call, we will post a copy of the prepared remarks to the web site.
Today's comments by Ron on Neil will refer to non-GAAP financial measures. We will also make references to core growth, which excludes the impact of currency movements on acquisitions or divestitures completed within the last 12 months you will find the most directly comparable GAAP financial metrics and reconciliations on our web site, we will make forward looking statements about the financial.
From inside the company on today's call. These statements are subject to risks and uncertainties on our only valid 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 virtual investor conferences in December.
For hosted by Credit Suisse Wells Fargo Barclays and cone.
And now I will turn the call over to Ron.
Thank you Jason and thank you all for joining us he delivered net outstanding quarter to finish for fiscal year, driven by strong execution and broad based demand for our differentiated solutions. Despite cold bid related macro challenges. It was a record year for orders.
Gross margin operating margin earnings per share and free cash flow.
Today I'll focus my comments on three key headlines first we delivered exceptional fourth quarter results driven by strong execution as demand for Keysight next generation technology solutions continued and end market demand began to recover.
Second record profitability and cash flow again demonstrated the durability and strength of our financial operating model, despite a challenging macroeconomic environment.
And third our long term outlook for revenue and earnings growth is strong and we haven't wavered from our pre coal bid long term financial commitments and growth expectations announced in March of this year the power Keysight leadership model and our execution this year underscore our ability.
To deliver on these commitments, which includes 4% to 6% long term core revenue growth and achieving 26% to 27% sustainable annual operating margin by no later than fiscal year 2023.
Now, let's take a deeper look at the strength of our fourth quarter and fiscal year 2020 financial performance.
In the fourth quarter broad based demand for Keysight solutions drove strong results across the business as the economic recovery in certain sectors gained momentum record orders of 1.2 billion exceeded revenue and growth, 3% year over year and 15% sequentially.
We achieved fourth quarter revenue growth of 9% year over year with growth across all regions, both the communications and electronic industrial solutions group achieved record revenue in the quarter.
The resilience for a financial operating model resulted in their all time high profitability and cash flow in Q4, we delivered gross margin of 66% and operating margin of 29% and earnings on the dollar 62 per share and free cash flow.
$308 million for.
For the year and despite cobot related macro challenges in supply chain disruption orders grew to 4.5 billion, an all time high for Keysight.
As you recall in Q2, we responded to government directors to limit the spread of Corona virus and closed the majority of our offices worldwide, including our order fulfillment and manufacturing operations.
We then ramp back up our production capacity in Q3, despite the significant disruption full year revenue of $4.2 billion declined only 2% year over year.
Even in a difficult operating environment, we continue to deliver on our margin expansion commitment both.
Both gross margin and operating margin improved by over 100 basis points generating a record for dollars an 85 cents per share in earnings.
Fiscal year 2020.
Turning to our markets the communication solutions group record quarterly revenue was driven by growth across the aerospace defense and government and commercial communications Aerospace defense and government revenue increased 13% year over year in Q4, driven by strength in the Americas and Asia as defense.
Modernization continues to drive investments in technology with the focus on electromagnetic spectrum operations space and new commercial technologies like five G.
In commercial communications Fiveg technologies scaling and drove strong demand across the design lifecycle from development to deployment.
He has the industry's most comprehensive range of Fiveg design and test solutions, enabling the global build out of networks on devices.
By GE has been a strong growth driver for us for over the past three years and we continue to see new use cases, and ongoing innovation as the ecosystem scales and adapt to a new technology.
A recent example of our Fiveg solutions approach includes collaboration on old ran with many industry leaders.
Investment continues across the commercial communications markets spanning wireless and Wired Technologies, Inc.
On data centers and also in the cloud.
This quarter, we announced a new high performance PX E modular Fiveg base stations solution.
It is enabling network equipment manufacturers on small cell vendors to accelerate their time to market.
Solution also incorporates enhancement from our pathway of software platform that help automate some of the current work flow limitations.
Within the electronic industrial solutions for orders and revenue for our broad portfolio of general electronic solutions.
<unk> grew double digits, driven by gradual economic recovery across most regions and improvement in the education market.
Demand for our semiconductor measurement solutions was again strong this quarter as investment in next generation process technologies continued.
In automotive, while macro driven weakness continues to weigh on the sector strategic investment in the advanced automotive technology is a market priority. We saw improvement from last quarter as orders grew double digits sequentially across all regions, Our science lab electric vehicle test solutions.
Our expanding in Asia in Europe, where government mandates are driving the electrification of vehicles, we continue to add to our solutions portfolio addressing the challenges in the development of advanced driver assistance systems for Ada Es and ensuring compliance two important standards.
In Q4, we introduced the new radar target simulator for Adas being developed to enable autonomous driving as well as a new solution for testing automotive Ethernet standards compliance for in vehicle networks.
We also recently announced collaborations with SGS from Qualcomm to advance testing of cellular vehicle to everything for C V. Two ex technologies.
Turning to software and services combined they were one third of total Keysight revenue for this year after another quarter of solid growth in.
In addition, recurring revenue increased from 18% of total an airplane, 19% to 21% in EPS why 20.
On an annualized basis recurring revenue grew high teens over last year.
Software and services are important elements of our solution centric strategy and differentiation and further strengthen the durability of our business model in Q4, we launched new and enhanced solutions to tap the power of cloud based processing and advanced analytics to speed design simulation that.
Let Asian manufacturing test these.
These include several new path wave software solutions targeting advanced design compliance test automation and measurement and manufacturing analytics.
Increasingly complex designs and the volume of data associated with their validation are driving demand for Keysight solutions.
He said its execution and financial performance. This year is a testament to Keysight leadership model, our values and our commitment to corporate social responsibility a year ago I shared with our teams my top priorities for the company. One of these priorities was a specific focus on increasing our inclusion and diversity effort.
And supported this priority I appointed a new senior director of inclusion and diversity has been working with Keysight leaders in external organizations to increase representation of diverse groups within our workforce.
We place a high value on inclusion and diversity at all levels of for organization, including the board of directors, we continue to make progress and I'm pleased to share that as of today over 30% for U.S. executives are diverse in gender race and or ethnicity.
Before I turn the call over to Neil I'd like to sincerely. Thank all of our Keysight employees for their relentless commitment engagement and dedication to our success over the past year.
Our people and culture are truly a competitive differentiator. Thanks.
Thanks to their efforts and in the face of unprecedented challenges keysight exits this year stronger than ever and is very well positioned to capitalize on our growth opportunities ahead, now I will turn it over to Neil to discuss our financial performance and outlook in more detail.
Thank you Ron and Hello, everyone before I begin. Please note that all comparisons on a year over year basis, unless specifically noted otherwise.
As Ron mentioned, we delivered an outstanding quarter and despite a challenging macro environment, we continue to make great progress towards our long term annual financial targets.
In the fourth quarter of 2020, we delivered record revenue of $1.220 billion, which was above the high end of our guidance range and grew 9% or 7% on a core basis.
Q4 revenue growth was driven by continued demand in areas such as Fiveg semiconductor measurement and aerospace defense, where we have leading positions and differentiated solutions.
Demand for general electronics improved significantly on the quarter driven by regional economic recovery, particularly in Asia.
Total keysight orders exceeded revenue in Q4 with a book to Bill just over one.
We delivered a record $1.231 billion in orders up 3% or 1% on a core basis.
Looking at our operational results for Q4, we reported gross margin of 66% and operating expenses of $446 million, resulting in operating margin of 29% and all time quarterly high.
Net income was a record $305 million and we achieved $1.62 cents in earnings per share, which was well above the high end of our guidance and an increase of 22% year over year.
Our weighted average share count for the quarter was 188 million shares.
Moving to the performance of our segments, our communication solutions group generated record revenue of $901 million up 8%, while delivering record gross margin of 66% and record operating margin of 29%.
In Q4 commercial communications generated revenue of $605 million up 5% driven by strength across the fiveg ecosystem from development to early manufacturing Genfive high speed digital applications and data center related for hundred gigabit and 800 gigabit technology.
Aerospace defense and government achieved record revenue of $296 million, an increase of 13% versus the prior all time high in Q4 last year growth.
Growth was driven by strength in the Americas and Asia with improvement in Europe.
The electronic industrial solutions group generated fourth quarter revenue of $319 million up 12% or 7% on a core basis, driven by strength in general electronics and semiconductor yeah.
Yes, you reported gross margin of 65% an increase of 230 basis points year over year and record operating margin of 30%.
Given the challenges that we faced this year, we're very pleased with our full year results.
For 20 revenue totaled $4.2 billion down 2% year over year or 3% on a core basis and.
Tactic by supply chain disruptions and macro challenges caused by the pandemic.
Despite this rep small revenue decline gross margin improved 140 basis points year over year to 65%.
Well continue to invest in R&D at 16% of revenue or nearly $700 million for the year operating margin improved 130 basis points to 25%.
This year over year improvement demonstrates strong progress towards our annual operating margin target of 26% to 27%, which we expect to achieve by fiscal 2023.
For why 20, non-GAAP net income was $919 million or for dollars 85 cents per share for the full year.
Moving to the balance sheet and cash flow, we ended our fourth quarter with $1.8 billion in cash and cash equivalents, our reported cash flow from operations of $338 million and record free cash flow of $308 million for.
Free cash flow is net of a 100 million dollar funding contribution to our us pension plan in the quarter, which provides a tax benefit in the current year and a pension expense benefit in F y 21.
Total free cash flow for the year was $899 million, representing 21% of revenue and 98% of non-GAAP net income.
Under our prior share repurchase authorization, we were opportunistic on deploying capital during the quarter.
We acquired approximately 2.2 million shares on the open market at an average price of $96.55 for a total consideration of $215 million and exhausting our $500 billion share repurchase authorization from may of 2019.
This brings our total share repurchases for the year to approximately 4.3 million shares at an average share price of $95.90 for a total consideration of $410 million or 46% of free cash flow.
As announced earlier today, the Keysight Board of directors has approved a new share repurchase authorization of $750 million effective immediately.
Before moving to for 21 modeling and our Q1 guidance I'd like to provide a brief update on global trade concerns. We admittedly have a tough order comp in Q1 due to China trade restrictions and the pending U.S. administration change, which has historically dampened government business during the transition.
Despite these headwinds we have started to see gradual improvements in many of our markets and are entering the year and a strong backlog position gift, giving us confidence on our ability to navigate these near term perturbations.
Looking to EPS why 21, we expect quarterly revenue seasonality be more muted than in the past due to ongoing COVID-19, and macro related uncertainty just as we flex expenses down this year flexible spending on variable compensation is expected to increase in F Y 21 to more normal levels with Q2 EPS.
Expenses seasonally higher than all other quarters.
In addition for 21 pension expenses reflected in the other expense line are expected to increase by $5 million per quarter interest expense is expected to be approximately $78 million and capital spending is expected to be in the range of $170 million to $180 million as we begin a two year project to increase the.
Resiliency of our supply chain.
Regarding our tax rate, we are modeling a 12% non-GAAP effective tax rate for F y 21.
Now turning to our outlook and guidance, we expect first quarter 2021 revenue to be in the range of $1.140 billion to $1.160 billion and Q1 earnings per share to be in the range of $1.32 cents to $1.38 cents based on a weighted diluted share count of.
Proximately 188 million shares.
In closing our solid outlook for revenue and earnings growth, coupled with the durability of our business model give us confidence on our ability to deliver on the long term financial commitments that we outlined in March prior to Kobin.
Despite the challenges of this past year, we continue to make good progress towards our long term targets of 4% to 6% core revenue growth in the annual operating margin of 26% to 27%.
With that I will now turn it back to Jason for the Q on a.
Thank you Neil Chris will you please give the instructions for the Q on a.
Ladies and gentlemen, if you would 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.
To withdraw your question please press the pound side.
Please hold while we complete it will be Q1 day roster.
Our first question is from Mehdi Hosseini with Susquehanna. Your line is open.
Yes. Thanks for taking my question I wanted to go back to your booking them better understand the specific too.
Commercial communication actually they think Bert.
Orders for flow.
Specifically millimeter wave.
And how does that net working record fiber for 800 compared to mitigate that rate related orders and how that's going on.
Yes, Thanks, Mandy the city shall take it.
Commercial Communications group.
Group had a record revenue this quarter and a second consecutive quarter of sequential improvement and large part of the results were driven by strength in both the wireless and wireline ecosystem.
Specifically from on trend perspective, Fiveg and 400 gig were big drivers of growth for us.
And I would say in Fiveg while.
We observed three things right. The commercialization is ramping a large part of that is low.
Low frequency or mid mid band frequency networks. The standardization on the technology continues to progress and the big theme is they call system is expanding so these are sort of three big trends that are enabling both wireless and wireline technologies to to be strong for us as far as the millimeter wave.
Is concerned how we view the b have long viewed and we continue to view the millimeter wave opportunity is very favorable for us because of the upgrade great potentially from presidents and our traditional strength in millimeter wave technologies play out.
And even this quarter, specifically, we continue to see a steady ramp in customer interest as the retool getting uniting flow to adopt to the millimeter wave technology.
On the wireline side, you know, we captured pretty strong ramps that occurred for 400 gig in Asia throughout the year and we are starting to see decreased activity in R&D too far out for hundred gig and 800 gig Ethernet this quarter.
Okay, just a quick follow up and as we look into slide 21 five.
Fiveg It goes into production, how should I think about the software content and this question actually ties into the last question as we go into production.
Sure we expect continued.
Strength in R&D specifically.
R&D to these assets.
Perfect and heavy and in that context would the gross margin cold double as we go into production Fiveg and should we expect some gross margin headwind. Thank you.
Yes on Monday.
As far as R&D, we continue to see robust pipeline for demand for R&D with release 16 features coming out next year. So I would continue to see strength there.
With regard to what production test opportunity, we're starting to see that the deployments are actually driving ramps in the supply chain and we are benefiting from them and in fact.
This quarter, we referenced a pretty soon.
Sizable win for our.
PXI on release of our vs. I see a modular solution, which has also has.
Saw from content associated with it. So we'll continue to see a steady improvement debt as well, yes, I certainly expect any margin impact from a migration towards manufacturing to be more or less undetectable at the keysight level. When you think about $4.5 billion of revenue on the progress, we're making generally the company around software and services and other areas.
So not something that we're concerned about.
Thank you.
Our next question is from semi Chatterji with JP Morgan Your line is open.
Hi, good from thanks.
Thanks for taking my question, if I can just start off with.
Communications as well and just following up on some of these commitments for these is coming for yield on fighting moving them being strong just wanted to see if you can outline.
How to think about maybe kind of an acceleration in terms of fiveg and revenue momentum and how does that play into cash.
Going on claims to expect on the for GE revenue side any thoughts as we look into kind of the next couple of years on that front and I think one of income base business also talked about some of the fiveg.
He is driving order weakness on have you seen anything on that front.
Yes, there's no doubt that the debt it has been from implementation delays in some quarters of the ecosystem.
If it were not for this.
Given given the momentum that the industry sustaining we would be for their long, having said that we saw strong orders.
For our business the quarter and for the full year in Fiveg and.
We see a robust pipeline for release 16 in R&D and and for production rate to the expansions that customers are planning for so.
We continue to believe that Fiveg to present for long term opportunity for us, especially as we have talked about on portfolio being broad starting with the physical layer, where we have millimeter wave bulk of the millimeter wave opportunity in front of US and then we have the protocol layer, where it really 16 and really think 17 to follow whether there has been some delays and low.
17.
That you reference.
But release 16 is very high impact income so if its expansion into new use cases that we're very excited about and and lastly, I would say that we saw strong growth in the application layer opportunity, where we've expanded our fiveg trend even be on commercial comps into aerospace and defense with security applications into.
Who are generally electronics business through two multiple industries on into automotive with CV to act. So you piece that altogether. We continue to believe that this is still very early innings and in Fiveg as we stated at Investor Day.
Okay. So I think if I can just follow up low what are you seeing in terms of activity on the for you side.
We at a point, where some of these revenue declines more agreed on on the for your site.
Yes, I think yes.
We've obviously the year over year, if you looked at last year.
We saw some expansions in traditional smartphone driving up the legacy of Fourg business and so comparatively things declined to shop for this year.
Given that customers prototype fiveg, but again I would go back to saying we have a very broad breadth of tools for the labs that we offer and many cases customers delayed that spend and we expect that to.
To to stabilize and ramp back up as customers for ton and recover from Cowen.
Thank you. Thank you for taking the questions.
Our next question is from Tim long with Barclays. Your line is open.
Thank you.
Just if I could just follow up with one on the Fiveg decide to ask on optical just talk a little bit about kind of the pricing and competitive environment as.
As some of the competitors try to play a little catch up there any any changes of note and.
And then secondly, you mentioned some strength in the datacenter 400 gig 800 gig.
Could you expand on that a little bit where do you think we are in that cycle.
You could also talk.
Into the service for rider opportunities as we as they transition to 600.
And 800 gig as well thank you.
Yes, Thanks, I think our differentiation strength I would say continues to be strong you look at the standard based test cases that we offer and you can see that were leading and we're staying on the cutting edge and that's what our customers. Appreciate so on the edge on the edges. We don't see we don't see any material change to.
Our competitive position with regard to these advanced technologies and we have continued to invest for this year in R&D to get to keep our differentiation strong. So that's that's the point on make with regard to how this is all playing out you might say if you just think of the smartphone use case, there's about 7200 band combinations in Fiveg.
Been defined and to date only 1500 on them are being tested so the latest devices that we have accounted for 1500. So you start to see that there is considerable runway just in the smartphone use cases with release 16 that is in front of us that this new expansion opportunities for.
For industrial applications for automotive applications that creates a healthy pipeline for us with regard to the wireline the force phase of the 400 gig deployments have largely been and what I would consider east west traffic that flows in the data center and with more more to come as operators start to.
[music].
Deployed this technology when the price when the price on the Transceivers for start to become more affordable. So thats. The second wave, we expect but there was continued evolution for 400 gig and the 800 gig that have started which we which feeds into our R&D strength.
Thank you.
Our next question is from John Pitzer with Credit Suisse. Your line is open.
Yes. Good afternoon, guys. Congratulations on the solid results couple of questions. Just from we think about the year over year compares on both revenue.
And orders to the fiscal first quarter guidance can you just remind us how much of a headwind while way should represent fiscal first quarter fiscal first quarter and sticking on the China topic I'm just kind of curious when you think about the fiveg strength, how important has China been over the last several quarters more importantly, as you look into the.
First half for the year, what are you expecting from China, I guess that the underlying question is do you feel as though China will continue to deploy fiveg at a relatively healthy clip. Despite the wawa band or do you think there's some potential for digestion there before we acceleration.
Yes. So this is Neil why don't I take the first part of that and then maybe we'll have mark comment on on on China on some of our expectations there and I think the most important comment with regard to walk away is the situation with wawa is not going to change.
Our expectations as it relates to our long long term growth outlooks for our business or for our for our for our markets right. We entering the year and a very strong backlog position and I think that that strong backlog position is going to enable us to essentially mitigate the impact of any short term perturbations that may happen on the order line because of because.
Most of the because of the Euro your way compares we have an extraordinarily diverse base of customers or you know around the world of its driving demand in our end markets and and we're looking at that and there was the strength and we've seen over the past couple of quarters.
Relative to where we were in Q2, and we're going to keep our foot on the gas relative to those long term targets.
Yes, John This is mark I'll look I'll follow up with that so the business our orders in China in Q4 were strong and steady throughout the quarter. Despite some decline obviously impact from from Wawa.
That came from strength in Fiveg and it is extending it across the ecosystem as we scale those solutions.
Cities talked about 400 gig as hot high speed digital and optical manufacturing. So it's a very broad industry for us. We've also seen the economic recovery in China. They recovered first and more quickly and we've seen that show up in our automotive order growth and general electronics and the bottom line is as Neil.
Mentioned, our business in China is it we have a very broad footprint. The business is strong we've been successful in we will continue to be successful to deploy and redeploy our resources.
To continue to capture growth in fiveg and across the other segments.
Thanks, guys for helpful.
Our next question is from an ethnic Smith with Deutsche Bank. Your line is open.
Hey, guys. Thank you for taking the questions.
One on margins, so you're exiting the year.
A lot closer together.
Yeah actually exceeding your sort of longer term target. So maybe Neil if you can help us think through.
Why with a seemingly improving you've got a big backlog revenue trajectory should improve.
In anticipation of margins may be reverting back.
Lower how do we should sort of think about the different puts and takes.
And then just one follow up on orders I know normalized order growth was about 1% and you're sort of reaffirming that sort of longer term topline growth targets of 4% to 6%. Just wondering if you can sort of call out the bigger areas that are still lagging and the path to get back to that sort of a longer term mid singles growth rate. Thanks.
Yes so.
Let me let me, let me start with the margin side of that for so first of all we're very pleased with the margin performance of the business in the year and we look at this year in the in some of the challenges of this year as a great test of the operating model that we've been talking about really since the launch of the company that being said our operating margin targets for our margin targets in general.
Their annual targets not quarterly targets, we hit 25% this year.
And we've talked about getting to 26 for 27% operating margin.
Is the target that we outlined at our analyst day, and we're still we're still working towards towards that objective I think we're highly confident or ability to to achieve that and as we look forward to this year I think you can look to.
Mostly in the in the second and third quarters.
With with with revenue down and the corresponding expenses.
On.
What you saw in Q for the kind of margin performance that we can put up with expenses turning to average returning to a more normalized level with regard to with regard to kind of how we get back to mid single digits. I think we are seeing some relative strengthening across the broader markets and economies in general I think we.
A great indicator of that is what we're seeing in general electronics.
We saw strong return under education businesses as I think is indicative of some recovery from the co bid situation, even a looking at businesses like auto.
While while auto orders were still down on a year over year basis, we saw very strong sequential improvement on auto so to so things are getting better and and I think we're going to look really across.
Across the entire portfolio for strength and it just broad macro strengthening to help drive us to those levels.
Thank you.
For next question is for on Chriss Snyder with the vs. Your line is open.
Thank you you guys talked about the tough Q on comp can you just maybe tell us what percent of F. Q1 orders and revenue came from walk away just to give us a feel for what the underlying demand as well.
We expect it to be about a five point headwind in the end the first half.
That's that's roughly how were thinking about it but again I think given the backlog situation that we have coming into the year I think thats going to predominate thats going to be the dominant dry.
Good driver of of our business and so I think thats going to give us the ability to and give us some time to overcome what might be some short term perturbations on the order line, we're highly confident going into the year.
Okay appreciate that and I mean is it fair to assume that you 5% for the first half it's more weighted into fiscal Q1, I'm just kind of given that the China cobot impact in the fiscal Q2.
No that's correct and I said I said as much in our in my prepared remarks, we clearly have a tough order comp in Q1, but I'd point you back to you know to the to the backlog situation. We're guiding strong revenue revenue revenue growth in the first quarter and we're going to be in a good position as we as we migrate through the year is certainly our revenue.
Comps in Q2, Q3 getting to get significantly softer, obviously, but but but the backlog that we built over the last several quarters is going to provide a buffering for us.
Appreciate that and then just kind of following up on that some peers have talked about the ability to sell non U.S. IP to Wawa can you maybe talk about on any opportunity here for Keysight and have no. These restrictions that we've seen led to any upstream share shifts that when maybe allow you guys to partially offset this headwind as we move into 25.
Let me take the first part of that and I'll, let cities maybe comment on the second part we do have some ability to sell some small portions of our portfolio into why way going forward. They don't include any material U.S. technology, but it is a very small portion of the portfolio. We do not expect away to be immaterial customer for us going forward.
And just to add to what Neil said, it's too too soon to call any cash if we start to see the smartphone tier.
Tier a tier two smartphone makers in China.
I will continue to invest in R&D, because they see it they see an opportunity. So thats, probably one positive offset if you will the second one that is evolving is the research.
Surgeon interest in Openreach on technology.
To sort of provide a different alternative to base station. So for Fiveg base stations I think you look at those two things.
Have the potential to for us in the you know as we look into 2021 and beyond.
Thank you for the time appreciate it.
Our next question is from Adam Cohen with Thompson Davis Your line is open.
Hi, Good afternoon, guys great quarter I have like 15 question for that can only ask one.
Make it a good day.
Let's go with the seasonality for fiscal year 21, Neil I think you said less seasonality in 21 I'm just curious what you meant by that and how you want us to model. It. Yes. We just we just think it again I'm going to bring you back to the backlog situation as we slowly work off the backlog that we built up over the last couple of quarters, we think that is going to assess.
Actually a mute the impact of what would typically be more demand driven quarterly seasonality that we've seen in prior years, we expect a much more muted.
Adjusted.
Revenue seasonality over over the coming quarters, maybe with a slight uptick in Q4, but but but much more muted revenue seasonality than with debt is typical.
Got it thank you guys.
The next question is from on the David Ridley Lane with Bank of America. Your line is open.
Okay.
Sure.
Thank you for taking my question on.
Just wondering what the kind of all then temporary cost reductions were in fiscal year 20.
To come back in fiscal year, 21, just trying to get a sense of.
As you've referenced on your prepared remarks for those variable cost flexing back up.
Yeah, I mean, I think that you know the big drivers obviously, we have talked at length in prior quarters about our variable pay programs in the end the flexibility of our cost model. So thats probably the single biggest driver then there are the obvious things that.
That.
Impacted many companies.
Dramatic reductions in travel as an example, I would point you to kind of our Q for expenses I think we largely Saar spending returned to more normalized levels here in the fourth quarter of the year. Obviously, we'll continue do salary administration and other things, but I think as we look forward you could look to Q4 is the baseline and then as we said in the in the.
In the prepared remarks, we do expect.
Q2 to be to be higher than the other quarters from an opex standpoint.
Enough for 21.
Okay. Thank you very much.
Next question is from Richard Eastman with Baird. Your line is open.
Yes. Thank you thanks for the thanks for the question.
New could you just give us the backlog number at the end of the year I mean at face value. It looks like it's up 22%, but I'm curious maybe was there any de booking of orders for you know around walk away or anything on the defense side or do we enter with a kind of a step up.
We have not seen any material and any change in kind of de booking there's always some noise level.
Level of the bookings, but that hasn't changed at all.
Obviously, we built a significant amount of backlog just looking at the difference between orders and revenue for the year. It's on the order of $300 million of which a portion of which you would consider to be kind of abnormal backlog build given the given the revenue disruptions are the shipment disruptions in the second and third quarter. So it's that abnormal portion of backlog build that.
We'll be looking to work off over the course of the next several quarters. Okay. Okay, and then just a question around ixia.
Can you can you give us a sense of are you seeing any any uptick in demand there.
Would you just given the timing and the pacing a demand relative to the network Rollouts and infrastructural us, but how does how does ixia look here at the end of the year and for the year and what does the outlook look like.
From a demand standpoint for 2021.
Yes, Rick so it's been a little over a year since we integrated the hip business into the.
And for the commercial communications segment, and we've made some mix on progress in and realizing synergies with respect to solutions, let's say on the networking space we see.
We see a 400 gig Ethernet our portfolio has been significantly strengthened not only the physical layer, but also on the protocol layer with the addition of the addition off the CS later to live on three business and we are where we were.
For securing some a good win.
In the industry as the R&D investment flows.
And would the security piece of the business that we acquired now we're able to integrate that with our fiveg platform and realize greater synergies there as we position solutions for the aerospace and defense industry. So thats another area, where not only ought to be addressing traditional opportunities, but also some expansion expansion.
Areas with Fiveg now getting deployed we're starting to see a pickup in demand for the visibility part of the business, where we just this quarter. We had a couple of big opportunities that we closed on with operators low.
Looking for enhanced application layer visibility there so.
Overall, I would say you look at the big trends of virtualization cloud and the progression that's going into the application layer, we view or the view of the portfolio to be strong and and we think that outlook is favorable abhi.
Now obviously right now you know every.
But he is recovering from coal would so that you know that sort of gates that recovery.
Okay. Okay, alright, thank you and congrats on a very solid quarter next quarter. Thank you.
Rick This is Ron just one other comment we talked about the backlog build it quite twice a day.
May want to also go back and look at the backlog build in F. Y 19, because it's been a very steady build that we've had for many quarters be on equate 20.
Got you Okay, we'll do that thank you.
Next question is from Jim Suva with Citigroup investment Research your line is open.
Thank you very much.
A question on the backlog I heard you mentioned several times you know that has strong and then you just had a clarification that is built in fiscal 19 as well as fiscal 20. So.
So the question is as you know are you at a point where the backlog is now this most recent quarter, we use reported starting to work down or was it still growing and the duration of work down as it kind of two or three quarters, but you just said in fiscal 19. It was building also so I'm just trying to figure out the dynamics of the variable.
Of the backlog.
Yes.
So I've, obviously, Jim we've been a growing business here for a number of years and so we you know it's not.
We would expect that our backlog will be growing in absolute terms just given the overall growth of the business I think if you look what you saw in Q4 was a on.
Pretty much a rate reduction in the rate of growth of that backlog right. We built very significant backlog in Q2 and Q3 as I previously referenced kind of abnormal levels of backlog because shipments were depressed because of the factory shutdown and re ramp in Q3, while our book to Bill was over one it was just a tick over one right. So we were more or less in a neutral but.
In addition in the fourth quarter and so you know as I think about is I think about going into next next year. We have this you know this.
This does backlog that is particularly focused on on the abnormal amount on a backlog build where we where we've got to get where we've got to get product delivered to customers and I think on a positive note.
Really when we were in the process of building that backlog in Q2, and Q3, while orders remain strong because our customers businesses were disrupted we weren't in a situation where they were really pounding on the door, saying when but in most cases, we need immediate delivery of this product and we really saw that pick up and in the fourth quarter, which is.
Drove though the revenue is north of $1.2 billion and I think its that dynamic of our customers now looking to take delivery of that backlog that was built in the Q2 Q3 timeframe on that is going to be the predominant driver of revenue for the next couple of quarters.
And just housekeeping for the stock buyback is it meant to just keep share count relatively flat on offset dilution or is it actually meant to bring the share count down.
Well I'd say a couple of things about that so first of all obviously, we've made a commitment to at least at a minimum be anti dilutive with our buyback programs and we will continue to do that but just as you saw with us in Q4, and frankly over the course of F. Y 20, we will be opportunistic when those windows when those a price.
That's right and so we were very pleased to take 4.3 million shares off the market at an average price somewhere around $96. This year, bringing the share count down and so when we see those windows will certainly do that but at a bare minimum you can count on us to to keep the share count content content. We did stay on her prepared remarks that we expect to end up by 21 or.
For account to be 180 million shares which is flat. So that's what that's what the that's our base case for modeling when I think about when I think about capital for use priorities for capital beyond be on share repurchase. We continue to have an active M&A funnel development process. We continue to look for ways to put put money to work.
Through M&A and assets that are accretive to growth accretive to gross margin much like the acquisition that we did have eggplant at the end of last quarter. So.
No real change for our capital allocation priorities at this point in time.
Thank you so much for the details on clarifications and good results. Thank you.
Good day.
Our next question is from Shawn marketing with Stifel. Your line is open.
Thanks, very much I wanted to ask a quick question on the semiconductor business.
That's been strong now for a few quarters. So just curious to get your view on where we are in that process node transition cycle and as we're looking out into 21, how we should think about that semi business performing for years as we're going into next year.
Yes, I'll make some comments and maybe mark Mark can also chime in on the on the forward looking demand I would say that.
We had a very strong year for the semi business and it's been driven by.
The growth in the Fiveg devices.
And the high performance computing need that of debt of.
Proliferated, especially due to.
For looking remotely and working from home environment, and we've also captured and capitalize on the China I see I see spend our position in that in the semi business is highly differentiated and we continue to track that node sizes from seven to five and now a new and new activity starting for three nanometer. So for how do you do for.
On shaded, there and and I'll hand, it off to Mark to make some comments on forward looking demand.
Yes, what I would add is that the the leading demand as Steve talked about is continuing and the the length of the process of retooling the fabs as a very long one so we're involved in it relatively long sales cycles that involve both the process nodes and new technologies like with extreme ultraviolet saga.
And we see those those.
Opportunities continuing to drive into next year.
We see continued investments in China as well as other parts around the world, including the United States with the chips program that was announced several months ago. So the bottom line is we could see some market constraints coming in the next couple of quarters, but we see continuing demand for our process solutions to support these next generation technologies.
Great and then maybe Neil just a quick follow up on the gross margin strength Peter.
How much of that I guess it is mix related is it on a function of that continuing growth in the.
On the recurring software piece of the business.
As we look out into next year for I guess whats the right sort of level setting for that given some of the strength we've seen.
Even with some of the challenges that you had through through this fiscal year.
Sorry.
Let me repeat that because I realize my Microsoft we continue to be very pleased with the progress we're making on on gross margin.
And really there's a lot that goes into that first of all I'd start with software content right. During this year, our software business continued to grow outgrow the broader company and.
So we continue to see nice nice growth in software and we continue to make great progress in the conversion of the way our customers buy software from us towards more time based on time based.
Uh huh.
Purchasing so we've actually we actually saw or annualized recurring revenue growth in the in the high teens.
During it during up why 20. So that's helpful. We're making great progress I talked about this last quarter and our services.
On margin portfolio Thats, a below average gross margin business for us, but on the operating line, we have our services business now north of 20%, which had been a long term goal and a lot of that improvement has come on the gross margin line and then I would talk about our migration toward selling complete solutions across the entire portfolio right as we migrate to those complete solutions they tend to be more highly.
The differentiated and we can monetize that differentiation and so you couple that with the strength that we're seeing the strength, saying, we're seeing in the markets over the last couple of quarters. I mean, I think we're very pleased with the way.
Orders.
The strength of orders really through the entire cycle of this year, but but the strengthening in Q4 the broad.
Abroad.
Indications of macro recovery across large portions of our portfolio on large geographic large geographies around the world as I think very favorable as we look into for 21 excuse me for 21.
Thank you.
Our next question is from Brandon Couillard with Jefferies. Your line is open.
Hey, good afternoon.
Grant.
Neil just a quick one you alluded to a two year Capex program I think to modernize some plants.
First part is that growth oriented or or cost oriented and should we expect a similar kind of 170 to 180.
In fiscal 2002.
Yeah, It's a two year program. So I'm I'm envisioning, obviously, we're still a year away, but for 22, I think will be similar from a capex perspective, and we've essentially got some facility up I would call. It just kind of resiliency of our supply chain with some facility upgrades, we need to do in other cases, we're looking to get some alternative sourcing.
Sites for some specialized productions for diversification purposes, those types of activities to just make sure that that our supply chains you secure.
Alright. Thanks.
The next question is from Mark Delaney with Goldman Sachs. Your line is open.
Yes, hi, good afternoon, thanks for taking the question.
He mentioned covert 18 is one of the factors behind the muted seasonality that this this coming year can you elaborate a bit more on that are you on it now that we have unfortunately seen from some increasing cases in many countries are you seeing any.
Customers are in geographies, where there is actually some for some push out and schedules that have been occurring on are you more rate in this as a potential risk we should be mindful about.
I think it's just broad uncertainty right nobody knows exactly exactly what's going to happen and it's a you know the question about seasonality typically we see plus or minus a couple of points as we move from quarter to quarter. You can go look at the history and see where that is in all EPS, we're saying two things one you've got this kind.
Kind of broader overarching uncertainty around Cove. It and then we've got this backlog for and that is going to be happening and we think those are going to kind of more or less drown out the on the typical typical seasonality that we see we would see on a current year. So we're expecting a much more steady revenue flow over the course for the next several quarters.
Okay. That's helpful on a follow up question on the.
Geopolitical issues that Keysight has been dealing with the China market and we're just that's why we are already on this call, but can you talk about any other customers, where perhaps you've been doing business with and is there has been some increase and sanctions even beyond hallway I know that that credit for some potential risk for for for Tech companies and is there any business you may be doing separate from hallway.
Net.
You think it could potentially come.
Come under additional restrictions that we need to be thinking about or maybe already has for thanks.
Yes, so I'll, let mark come on on that as well I mean, I think we were a couple of years now into this you know kinda on going back.
Back and forth around trade restrictions and I will tell you that we've weathered a very well our business in China continues to do very well and and so whether you're talking about the initial tariffs for or you know.
Companies added to the restricted party list or you know the is the situations with ZT and why we have been through a lot of these things and our China business continues to grow we have a very broad portfolio, we have a bravery broad customer set the.
The types of things that Keysight does is the company is very well aligned with what's happening in China, and so I, just think that and Mark mentioned that we have been very good at redirecting our own internal sales and other resources.
To where the market opportunities our Mark I don't know if you have anything you want to add to that.
Yes, so mark I would just reiterate that weve already pivoted with the most recent regulations and for as perfect. There were earlier ones back in June that.
Was tied to the military end use customers in China, and Russia, and Venezuela that we also endured and we made some changes associated with that so we are closely monitoring. This thing will continue to be 100% compliance as we always are and we have built a core capability to pivot quickly and go after the.
Total business, that's available to us and as Neil just pointed out for many many quarters, we've been very successful in doing so.
Thank you.
Thank you that concludes our question and answer session for today on outlets.
The conference back over to Jason carry for any closing remarks.
Chris Thanks for thanks for that and I'd like to just turn it to Ron for some closing comments.
Thank you everyone for joining us today, we are very very pleased with the results we delivered despite co bid and despite the trade environments.
Delivering record orders record revenue record gross margin record operating margin and record free cash flow.
Really believed and see that we have a very strong market position with very differentiated solutions across the ecosystem.
On our solutions incorporate world class hardware very good and strong software analysis capability as well as services. Our software content continues to increase our services business is growing and both of them together or giving us an even stronger business model with more recurring revenue.
But our business model is strong it was tested during the cold period of time and you could see the type of for results that we can deliver and last but not least I really believe we have the best employees on the world that worked very hard to bring our customers the best solutions in the world and support them as for.
They try to innovate across their end markets and we are committed to create value as we've done in or for six years for our shareholders and I really believe that the best is yet to come. Thank you very much and have a great day.
This concludes our conference call and you may now disconnect.
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