Q1 2021 Keysight Technologies Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the key site technologies fiscal first quarter 'twenty 'twenty One earnings conference call. My name is scenario and I'll be your lead operator today. After the presentation, we will conduct a question and answer session.
If you will like to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press the pound sign.
If at any time during the conference you need to reach and operator, Please press star followed by zero.
Please note that this call is being recorded today Thursday February 18th 2021 at 130 P. M Pacific time, I would now like to hand, the conference over to Jason Kary, Vice President Treasurer and Investor Relations. Please go ahead Mr. Kerry.
Thank you and welcome everyone to key sites first quarter earnings conference call for fiscal year 2021, joining me are Ron <unk> and key sites, Chairman, President and CEO and Neil Dougherty, our CFO joining us on the Q&A session will be <unk>, Ron Chief operating officer, and Mark Wallace Senior Vice President.
Sales.
You will find the press release and information to supplement today's discussion on our website and Investor day on key site Dot com, while there. Please click on the link for quarterly reports under the financial information tab. There you will find an investor presentation, along with key sites segment results. Following this conference call. We will post a copy of the prepared remarks to the website.
So and today's comments by Ron and Neil will refer to non-GAAP financial measures. We will also make references to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months you will find the most directly comparable GAAP financial metrics and reconciliations on our website all comparisons.
And are on a year over year basis, unless specifically noted otherwise we will make forward looking statements about the financial performance of the company on today's call. These statements are subject to risks and uncertainties and are 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 and is scheduled to participate and upcoming virtual investor conferences in March.
Hosted by Susquehanna Credit Suisse, and UBS and now I will turn the call over to Ron.
Thank you, Jason and thank you everyone for joining us pizza deliberate another outstanding quarter, our consistent performance illustrates the strength of our differentiated solutions broad based momentum across diverse end markets and the durability of our business model today.
Today I'll focus my comments on three key headlines first we achieved record first quarter orders driven by growth across all regions, Despite China trade headwinds.
Second strong execution by the quayside team delivered revenue and earnings growth above guidance and.
And third we entered the year with solid momentum across multiple end markets and confidence and our revenue and earnings growth trajectory for the year.
Spite its short term expectation of elevated expenses from variable compensation, which is due to the high near term revenue growth, we expect to achieve mid to high teens earnings growth in fiscal 2021.
Now, let's take a deeper look into our first quarter results. We delivered record first quarter orders of $1.2 billion, which again exceeded revenue and grew 7%.
First quarter revenue grew 8% to $1.2 billion.
As previously discussed we faced strong year over year headwinds in the first quarter due to China trade restrictions and adjusting for this impact both orders and revenue grew solid double digits. We continue to make strong progress towards our long term financial targets with consistent execution.
And enabled by the strength and discipline of the key sales leadership model.
We delivered first quarter gross margin of 64% operating margin of 27%, which increased 210 basis points and free cash flow of $267 million, turning tour markets Aerospace defense and government achieved record first quarter.
Order orders and revenue.
20% revenue growth was driven by continued investment and electromagnetic spectrum operations space and the new commercial technologies like five G and early <unk> G research.
In commercial communications, we achieved all time record orders in total as well as for five G. While revenue declined 3%.
Adjusting for the transit impact of unfavorable trade restrictions commercial communications orders grew double digits and revenue grew high single digits string.
Strength was driven by ongoing global <unk> deployments and the rollout of new five G devices and continued investment and 400 G and 800 G Ethernet for data centers.
Key sites and to and solutions portfolio is enabling the rapid progression of new technologies, both in the wireless and wired systems of the communications network, where our value proposition remains strong.
<unk> continues to lead the industry and five G powered by years of close collaboration with market makers and standards bodies. We are advancing our five day strategy to capture emerging opportunities and the application layer as momentum builds ahead of deployments in 2021.
We made great progress this quarter as broad industries Embraceor five G platform and new applications emerge for example.
Oh land continues to be an area of active investment for our customers. We recently introduced a suite of end to end solutions for OLED and vendors and mobile operators. Our solutions are used to verify the interoperability performance conformance and security of multi vendor five G networks.
We also announced strategic partnerships and the expanding Oran space with industry leaders like xilinx, rather CIS array com and opiate stock.
In addition, we continue to accelerate key sites capabilities to provide industry, leading solutions through strategic acquisitions.
And Q1, we acquired <unk> and July a leader and wireless test and measurement solutions for protocol decoding and interoperability.
Some delays offerings complement our end to end solutions portfolio, providing problem solving tools that extend from inside the wireless network out through over the air analytics.
<unk> revenue for our electronic industrial solutions group was driven by double digit growth and semiconductors and general electronics solutions Rec.
Record semiconductor revenue was fueled by ongoing investment and next generation process technologies bolstered by new customer wins in China as we successfully redeployed our sales force to capitalize on new opportunities.
General electronics strength reflected continued economic recovery with growth across all regions and improvement in the advanced research education market.
And automotive despite ongoing macro challenges and demand is stabilizing as strategic investments and advanced technologies have accelerated in Asia and in the Americas.
In Europe, we continue to expand their presence and recently announced a collaboration with L ring cleaner one of the world's leading system partner to the automotive industry.
They chose <unk> battery test solution to advance E mobility, and the field of battery development for electric vehicles software and services each delivered double digit order and revenue growth combined they were approximately one third of total key site revenue contributing significantly tour.
Software centric solution strategy and differentiation and further strengthen the durability of our business model with increasing recurring revenue.
In summary, I'd like to thank our key said employees around the world, who have reacted dynamically to a challenging environment to deliver exceptional results for our customers and shareholders.
We are pleased with their first quarter performance and encouraged by the broad based momentum across our markets entering the year now I would like to turn it over to Neil to discuss our financial performance and outlook in more detail.
Thank you, Ron and I, and Hello, everyone and as Ron mentioned, the key site team delivered an outstanding first quarter as continued economic recovery drove a steady improvement and demand across all major regions.
First quarter revenue of $1.180 billion was above the high end of our guidance range and grew 8% or 6% on a core basis Q1 revenue growth was driven by broad strength across multiple end markets and geographies.
Total key state orders again exceeded revenue in Q1 with a book to Bill just over one and we achieved first quarter orders of $1 $223 million up 7% or 5% on a core basis successfully overcoming increased trade restrictions and turning to our operational results for Q1, we reported gross margin of 64% and operating.
Expenses of $439 million were well managed resulting in an operating margin of 27% and increase of 210 basis points year over year.
We achieved net income of $270 million and delivered $1 43 and earnings per share, which is well above the high end of our guidance our weighted average share count for the quarter was 188 million shares moving.
Moving to the performance of our segments, our communications solutions group generated record first quarter revenue of $852 million up 4%, while delivering gross margin of 65% and operating margin of 26%.
In Q1 commercial communications achieved all time record total and five G quarterly orders first quarter revenue declined 3% to $558 million with commercial communications disproportionately impacted by the China trade restrictions.
Aerospace defense and government achieved record first quarter revenue of $294 million and increase of 20% versus a strong compare in Q1 last year.
This was driven by robust year and spending across all major regions and the U S growth was driven by prime crocs contractor spending offsetting slightly lower spending from direct government customers as we saw less and expected disruption from the U S administration transition the electronic industrial solutions group generated record revenue of 320.
$8 million up 18% or 13% on a core basis orders and revenue for our semiconductor and general electronics measurement solutions. Both grew double digits for the second quarter on a row with strong revenue growth across all regions, particularly in Asia Pacific.
E I S. T reported gross margin of 63% and operating margin of 29%.
Moving to the balance sheet and cash flow, we ended our first quarter with $1.9 billion and cash and cash equivalents and reported cash flow from operations of $295 million and free cash flow of $267 million or 23% of revenue.
Under our share repurchase authorization during the quarter, we acquired approximately 137000 shares on the open market and an average price of $145 and 14th.
For a total consideration of $20 million.
Before moving to our guidance I'd like to remind everyone of my comments last quarter, and which I stated that flexible spending and variable compensation is expected to increase in FY 'twenty, one with Q2 expenses seasonally higher than all other quarters. The principal driver is variable compensation, which is a function of organic revenue growth and operating margin.
This reflects the expenses down last year and response to a decline in revenue it will flex up this year, particularly in quarters with soft revenue comps, notably Q2 and Q3.
We believe our variable compensation is an important element of not only our flexible cost structure, but our human capital philosophy, and which employees are engaged and participate in both the ups and downs of the business.
Now turning to our outlook and guidance, we expect second quarter 'twenty 'twenty, one revenue to be and the range of $1.190 billion to $1 billion and $210 million, which represents 34% revenue growth at the midpoint.
We expect Q2 earnings per share to be and the range of $1 29 to $1 35 based on a weighted diluted share count of approximately 188 million shares.
In closing we are entering the year with order momentum a solid backlog position and strong operational execution.
We are pleased with the trajectory of our business and expect to achieve mid to high teens earnings growth for the full fiscal year with that I will now turn it back to Jason for the Q&A.
Thank you Neil scenarios, where you please give the instructions for the Q&A.
Yes, 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 sign please hold while we compile the Q&A roster.
And your first question and comes from a line of Rick Eastman with Baird.
Yes, good afternoon.
Could you, perhaps maybe just kind of walk through a little bit of the operating leverage debt.
And that we really saw and bold.
Both commercial and communication solutions group.
I'm kind of looking at the op profit number up 170 and is that with the gross margin may be down.
Is that primarily all mix or maybe give us a couple a little bit of a feel for that and.
And maybe the same question around E. I S. T. Just significant operating leverage there I'm curious how much is mix versus volume.
And.
And that's one word yes.
This is Neil So I you know I think you you hit on it right Q4 was a very favorable.
Looking sequentially Q4 was a very favorable gross margin quarter for us as we really significantly ramp production. After the COVID-19 disruptions of Q2 and Q3 and I.
Just the nature of Av.
Responding to immediate customer demand for for urgent delivery.
On a shifted the mix and a favorable direction and the fourth quarter I think what we saw and the first quarter with a return to a more normalized mix and it aligns with kind of the quarters, leading up to up to Q4 as well as slightly lower volume and I think that that comment is basically true across both the communications group as well as the ISG, There's no there's not.
And really specific to either one of the two businesses let's.
Let's see and Lindsay.
And if you also look at the long term model that we outlined at analyst day for FY 'twenty three.
Yes, Lee our performance shows very strong against that and we.
Have no doubts that we'll be able to deliver to that level going forward.
That's great and then just a just a quick question, maybe if I could.
I'm on you know.
Surprised to see and positively surprised to see the order growth and.
And you basically it looks like you held your backlog up you know kind of on the low twenty's year over year, 20% year over year I think my math quickly says 23 per cent year over year on the backlog side and I know you spoke to orders being strong across geographies and across product lines is there any particular place that you might flag, whether it be geography.
Or between the two business segments, where where you were pleasantly surprised with the with the order with the order growth and the quarter.
Yeah, I'll mention a couple and then I'll, let mark chime in with a little more detail first of all if you look at China, Our China orders were down 6% and we expected them to be down much more because of the effects of the China trade restrictions with Huawei. If you were to strip out Huawei, we had 19 person.
And order growth from our other Chinese customers and as Huawei comes out of the compare and the past were very very pleasantly supply are surprised and pleased with that performance. Our Chinese sales force was redeployed from the accounts, where they cannot sell into other accounts within the.
Geography, and we were to do that almost instantaneously to produce a type of the type of results that we did do so that was clearly one India was also very strong Japan was very strong both of those well into double digits as well as Europe, which also had double digit performance.
Mark you may want to add a couple more regional comments.
Sure Ron covered it really well, Rick, but I would just add debt about half our growth and China overcoming the headwinds was from new customers again, showing how we're executing and and rotating to both new opportunities and new customers and we won additional business with our existing customers whether that be around five G to some of it the long tail of customers 400 gig and.
Tier two customers and I was very pleased with semiconductor very strong growth again, both from existing large customers as well as acquiring two new fab fabless semiconductor customers and the quarter.
And China very strong results in Japan for five G and Aerospace Defense and then if you look at Europe. It really was a story of this.
Very broad demand across multiple end market markets.
Growth across most of our country or countries across Europe, and it really goes to show the strength of our portfolio and the depth of our our penetration into all these end markets.
Go ahead, just a couple more comments, Rick one our general electronics business was up and orders over 20% and that's a really good sign that talks about the macro environment in the industrial markets. So we're very pleased to see that and also our overall corporate strategy and moved.
And to more software centric solutions, which requires more software and more services, both software and services both grew double digits and orders again this quarter.
Gotcha.
Good Ah congrats and thank you.
Thank you.
Your next question comes from the line of Jim Suva from Citigroup and investment your line is open.
Thank you very much and really good job on the results and a unclear on certain environment and my question is a little bit more just to help us out looking forward not so much on the trade and tariff stuff, but recently the supply chain with the freezing in Texas and chip sure.
<unk> can you talk to us a little bit about you know do you have some buffer chips that you're okay for the next three to six months or are you temporary and your outlook, a little bit and I'm, just kind of a little bit concerned about the procurement cycle seems to have this additional variable and then my second question is on Opex, how should we be thinking about that as hoped.
Covid becomes behind us at some point. Thank you so much.
Sure I'll cover the procurement piece, and then I'll, let neel talk a little bit more on the Opex.
And on the Opex formula going forward as far as procurement we are.
We have taken into account the long lead time cycles that we're seeing from some semiconductor providers as well as the other environmental impacts that we're seeing around the world a matter of fact, we have just put out guidance, where the midpoint is at $1.2 billion for the next quarter and that takes into <unk>.
Count the semi cycles.
We do hope, though that things don't get worse from the standpoint of Covid and another surge, although we feel very confident that we are in good shape to come out with this guidance, which was above the street consensus for the next quarter.
Yeah and Jim Your second your second question was kind of forward looking as it related to Opex.
And I made some comments and my prepared prepared remarks, certainly I think our underlying investment levels are stable and are likely to be stable.
And forward, but we do expect some some short term increases over the course of the next couple of quarters and we're not the only impact by far the biggest driver of that increases our variable pay program.
I mentioned in my prepared remarks last quarter. Our Q2 expenses are expected to be seasonally higher than all other quarters. This year. The principal drivers the bounce back of variable compensation relative to last year and net that variable compensation as a function of both organic revenue growth and operating margin and in quarters, where we have soft revenue comps and therefore higher revenue.
Mike We will see and Q2 and in Q3 of this year, our variable compensation is going to be materially higher. So as you saw we guided variable regarded a very we guided very strong revenue growth of 34% and Q2 and.
And expect a sequential increase as a result, and our variable compensation program and more than $30 million relative to Q1.
And and since all of our nonexecutive employees, our participants and that variable pay program that increase is split roughly equally between cost of sales R&D and SG&A. So specifically impacting the Opex line that you do that you're asking about but again important to note that the underlying investment level is stable and once we get past Q.
Three.
We're gonna our variable pay and our expense levels are going to return to more normalized levels.
Thank you and congratulations again to you and your team. Thank you.
Thanks, Jim and and just to just to finish that up if you take a look at our overall model with this as a short term effect and that's why for one of the few times, we've guided out to the whole year, producing EPS growth and the teams as we had mentioned and our prepared remarks.
Your next question comes from the line of John Marchetti with Stifel. Your line is open.
Thanks, very much I was wondering if you could just take a moment and talk about some from the strength that you continue to see and <unk> how much of that maybe is coming from new customers as you sort of hinted at in the comment about the order strength and and how much of it is maybe moving into different variants and <unk>, whether it's standalone versus non ore or mill.
And either way versus sub six.
So teach feel free to answer this question and I'll take that Ron I think one of the FX and five day that we're seeing as deployments of scaling is a broader interest in deploying this technology across different end market verticals and that as a result of expanding the ecosystem as we've talked about this quarter.
And over 100, new customers to our <unk> platform. So that's that continues to be strong.
And at the highest level I think we stated it's growth across all regions for <unk> and all parts of the ecosystem. So it is broad and we see sort of four teams right. You look at the R&D investment cycle Theres, new teams such as on release 16, and Oran debt are capturing interest.
Any factoring opportunities scale and five G deploys and it's profitable and manufacturing as we have talked about at select manufacturing strategy and.
And third is the is the interest in this technology from new verticals, such as aerospace defense automotive.
And industrial and finally, we see this long term steady.
You know push to commercialize and millimeter wave as as we've talked about as a long term dynamic for our business, which has got on upgrade pattern and to feed this momentum we've just announced over 30, new product introductions this quarter and we feel confident about the projections based on everything we see in the industry.
And maybe just as a follow up their cities do.
And we still you know you guys had mentioned in the past do you think this market sort of peaked out in 'twenty two 'twenty three for you I'm curious if that's still the case or do you think with some of these newer coming on and that actually extends that out a little bit.
Yes, I think based on what we what we've seen in the past I think we've sort of seen a industry capex.
I'll start and projected to peak due to the millimeter wave parts of <unk> being deployed however for our business and comps we have a broad portfolio of both wired and wireless and this end to end.
So that we have created not only has sort of a per incident effect, but as Ron referenced higher software content and tire services. So we're much more plugged in and able to monetize the lifecycle value of from from our from early early lead.
Thank you.
Your next question on comes from the line of stomach Chatterji with J P. Morgan Your line is open.
Hi, This is Joe Cardoso on per Sonic and so my first question is just around air space and defense and <unk>.
Charnock industrial sales and segment, obviously had two great quarters of execution and a row I guess, how should we think of the sustainability of the momentum and both those segments and what is driving our content.
Ron can I take yes, so sure.
As far as the aerospace defense is concerned.
Very police record orders and a record revenues and.
As we've mentioned before the strength is coming across all the regions.
Tracking the Covid recovery.
Macro recovery and that's that's probably a common dynamic between.
Our aerospace defense business, and the general electronics business and our industrial segment.
Specifically on the aerospace defense our portfolios.
Focus on defense modernization and particular.
You know and around these new teams continue to position us well the passage of the NDA or the budget and the United States in December.
We feel cautiously optimistic about the outlook for that business.
Move forward and we also have a pretty healthy healthy backlog in the business. So we continue to expect strong growth and the next couple of quarters as far as the ISC business is concerned again.
Broad strength from our general electronics business, but also semiconductor where we are seeing increased investments driven by the advanced nodes and the China IC investment that mark referenced earlier.
Got it somewhat also comment.
I'd also comment that different form factors are contributing to that such as our modular solutions had a very strong quarter as well as software and services that have been mentioned earlier all play into this general electronics market and the overall <unk> market.
And I appreciate the color and then just a quick follow up and you guys kind of went into detail about the hygiene and the momentum that you're seeing there I'm. Just curious can we get an update on how you're seeing the declines play out and the <unk> side I know last year because of Covid. There was obviously a big impact there, but are we seeing the clients starting to moderate on the FERC impact.
Yes sequentially Fuji has been flat quarter over quarter for us and we're very pleased with the uptick and <unk> had referenced and with a record quarter and.
And was and if you include <unk> and <unk> together.
You know, we've grown it year over year and sequentially quarter over quarter. So we feel we feel good about the portfolio and I didn't mention that we've launched 13, new products this quarter to feed that momentum and the market.
Got it appreciate the color guys congrats on the results.
Thank you.
Your next question comes from the line of Matt D Hosseini with <unk>. Your line is open.
Yes, thanks for taking the question.
One follow up for cities can you. Please help me understand the mix of four and 800 gig Ethernet as a <unk>.
Mix of overall communications sector group and how do you see that trending, especially as the volume ramp for 400 gig plays out and the second half and Ford and Neil and it wont be great. If you could give us some reference.
I think there was a.
Mention of software and services accounting for one third of our revenue can you give us a qualitative or quantitative assessment of what the mix of software is where was it a year ago and how should we be thinking about the software mix looking forward.
Yeah, I'll, maybe start with the 400 gig question Mindy.
We have.
Really done very well with the wireline technology evolutions over a number of years and last year was a pretty strong year for 400 gig I think we've referenced it on calls and what we saw this quarter was a broader adoption of 400 gig technologies still heavily driven by data center demand.
Which tends to.
Would you see which is adopting I should say the 400 gig at scale we saw.
Increased spend from tier two and long term long tail customers in Asia in particular and.
And we expect as the as the 400 gig economies of scale and maturity occur that are small.
More of that demand would start to shift in the telco or metro Metro opportunities. So we're still on the front end of that I would also say that on 800 gig the investments on an early R&D, which we expect to play out and in production and 18 to 24 months. So we're engaged early just this quarter we announced.
The full suite of <unk>.
RMB offerings for 800 gig as well, which positions us well to benefit from not only the wireless on the five day side, but also from the wireline opportunities and our commercial communications business as.
As far as the software I'll kick it off and maybe Neil can make a comment we see for our double digit growth and software coming from our pathway of design franchise and from the <unk> solutions, which as we have referenced before.
Have a higher percentage of software content with them. We're also seeing renewals for subscription contracts become become important to our five key growth, which I think.
Helps us with E R R.
After the meal just in terms of the relative size of software. We've said previously that software is approximately 20% of total revenues and as <unk> mentioned as it continues to outgrow the broader business.
Growing double digits again.
And this quarter. So that makes it is increasing slowly over time and and you know we expect that it will continue to do so as we continue this migration towards more complete solutions with higher software content.
If I may just a quick follow up for Neil here, if you execute and deliver.
The software growth above that topline could that be potentially a source of gross margin upside that could potentially drive EPS.
S growth this shift towards the high end of.
Mid to high and mid.
Mid teens mid to high teens sorry.
I mean, certainly over the long run, we see increasing software content and as a driver of gross margin I think you've seen that over the past couple of years as we've added software to our portfolio as well as taking other actions that are driving our gross margin northward the the <unk>.
Mix shift as does is not dramatic it's slow and steady over time.
And so hard for me to draw a direct link between a mix shift over the next couple of quarters and immediate EPS increases and Theres a lot of things that are going to go and.
Two.
Going to play a role in determining that level over the course and the next several quarters, but generally speaking, yes, our growth or our software growth is absolutely contributing to our gross margin improvement over time.
Thank you also if you're looking if you're looking for the short term.
Orders were to go ahead and work to exceed our projections when you take a look at our Incrementals.
And we we have delivered to our model and then some.
Pretty much consistently over the last five years and.
But to continue to do so.
Yeah and that was.
Just trying to understand how conservative is that.
Mid to high teen EPS growth and hub.
And how should we think about upside from there.
And I think I think you know you can see and our guide that we're we're we're very encouraged.
<unk> by the market and our performance and the business on the top line. We do have some short term expense pressures over the couple of quarters that will put some pressure on EPS relative to normal incrementals over the core where the incrementals would otherwise have been over the course of the next several quarters, but by Q4, we were kind of returned to where kind of.
Lap those comps and the impact that they have on our business from a return to kind of a more normalized level.
Okay. Thanks, guys.
Thank you.
Your next question comes from a lot on Mark Delaney with Goldman Sachs. Your line is open.
Yes, good afternoon, and thanks for taking the question and I was hoping to dig more into the full year EPS growth commentary and mid to high teens.
And recognizing and very good orders that the company just reported for the quarter, if my math right.
Implied second half EPS growth is it relatively flattish to slightly higher.
Year over year, it's flat to up 10% or so and I understand that higher variable comp, which makes a lot of sentiment is good news, but is there anything else. Besides the variable comp that youre trying to factor into the implied EPS growth guidance that you're discussing.
Discussing today thanks.
The only other thing I mentioned was.
Mentioned earlier is that our Q4 gross margins and last year, we are extraordinarily favorable right, we'd not only do we have the highest revenue quarter. We've had by it by a pretty significant margin, we had significantly higher gross margin and we'd ever had previously so we're going to have a tough year over year comp and the fourth quarter debt.
Is.
That is going to factor into that ultimate equation as well.
That's helpful and and it makes sense.
Question on was on the five G order strength and debt.
The strength of the company is now seen within.
On millimeter wave can you describe to what extent you are seeing some increased adoption and millimeter wave and different geographies and perhaps the opportunity for a millimeter wave deployments to help your business and China. Thank you.
Yes, Thank you and I think the as.
As we have referenced before the millimeter wave opportunity is a long term one for us we see a very steady increase and interest from our customers at this point heavily driven by the U S. Bands, you think of 20% to 40 gigahertz sort of spectrum.
And with new spectrum coming on line, 6% to 6% to 90 gigahertz range.
And that tends to sow the seeds for the runway and we're talking about China's 'twenty and 'twenty. Two Winter Olympics is we expect it to be a push with a showcase of millimeter wave. So those are clearly drivers and then if you look even further out.
And you start thinking about some early research occurring and the Terre Haute space. So again. This is a very long term opportunity key sites got.
Our competitive differentiation, we have talked about this and we are well positioned to to address. This currently we're working with customers to solve some critical challenges and commercializing millimeter wave like and advanced being management peak higher data rates of 10 gigabit per second and above and it's a long term dynamic and very well positioned there.
Thank you.
Your next question comes from the line of Tim Long from Barclays. Your line is open.
Good afternoon, Peter on for Tim.
Congratulations on the results.
I see.
On <unk> just again is when you see the 400 gig cycle coming closer.
Could you help us parse out what that has meant for you between wireless and wireline and hardware business versus the network visibility side and do you have a sense of what inning, we are and that cycle from the test and measurement perspective.
And then also on A&D.
Should we think about what is a very strong Q1 here implies for Q2 seasonality just coming off this very strong base.
Yes.
Your partner Channel could you please repeat it.
I'm sorry.
And.
Is this better.
Yes, and just say if he could slow down just a touch that that would help.
Sure.
I was just asking on CSD.
Just as we see the 400 G cycle coming closer I was wondering if you could help us parse out what that has meant for you between the wireline hardware side versus the network visibility side and do you have a sense of what inning, we are in that and that cycle from a test and measurement perspective.
And then just to follow up on A&D was wondering how we should think about Q1 seasonal Q2 seasonality given the very strong Q1 base.
Yeah, So I'll take the aerospace Defense force.
Our record orders and.
And given the comps from favorable comps we have for the next couple of quarters.
We expect strong revenue performance and the business and our focus areas around defense modernization are also aligned with some of the strategic priorities of the governments around the world. So we feel we feel good about where are we on the business.
With regard to your question on wireline and the entire portfolio of wireline involves the focus on and three areas. If you think of it the focus on high speed evolutions 400 gig 800 gig Tara Tara herds and tried a bit Ethernet and beyond and security as a second team, which is gaining customer interest and the third area.
And is on visibility.
Clearly were the drivers for the business right now are 400 gig and 800 gig in terms of the visibility business, we expect or where everything we hear and we see the pipeline building towards it is a recovery and in enterprise it spend which would be a good which would be a good peg and that'll occur as as folks who've done.
Back to back to.
Work on in a hybrid mode.
Later on and the year. So that's probably a driver for that part of the business, but overall, we're pleased with the synergies, we're seeing and you see that reflected and the strength of our commercial communications business this quarter.
Great. Thank you for the color.
Yeah.
Your next question comes from the line of David Ridley Lane from Bank of America. Your line is open.
Thank you good evening.
Since you've done the math on the impacts from trade restrictions on both orders and revenue what was the estimated headwind for both of those.
It was roughly six points six to seven points at the key site level, obviously heavily skewed to cft's, specifically to commercial comms. So I think if you get to the commercial comms level was it was a it was a double digit headwind for the commercial communications business.
And thats, what putting that putting the record orders for commercial comms and contact we were extraordinarily pleased with that result, given given the China trade headwinds on that business.
Got it Okay, and then since no one else has.
And that picked up on it all I'll ask.
Can you tell us a little bit more on the San Juli acquisition that you closed I think it was about $100 million or so from the cash flow.
Revenue, how it fits into the portfolio.
And it seems like it's on a very fast growing.
Part of the market.
And so kind of you.
What's your near term revenue expectations and as well.
Yeah, So maybe I'll.
I'll start by saying you know, it's a smaller acquisition.
Currently half half point to the key side revenue.
And.
And as an estimate and.
And it's highly profitable and it aligns with our M&A strategy focusing on software centric.
Our product categories, and and more importantly enables us to complete on.
And the customer workflow.
Julia plays into into the interoperability testing space, which enables customers to resolve complex system issues and given that the fiber deployments are taking place at scale and new trends like open ran our disaggregated ing and more.
More of the what used to be a monolithic block. We believe this acquisition will really help us.
A lot of momentum with the commercial coms business.
Yeah.
Yeah.
Got it and then last one from me I mean, you're now and a net cash position.
How do you think about <unk> ability to be more aggressive on share repurchase as being in and net caps position.
On a line for you.
Yeah.
So go.
Go ahead I'm sorry.
Yes.
Our first objective obviously is to grow the business and provide a great return above our whack. So we continue to look for M&A opportunities that can further our strategy, but again, if we can't go ahead and and produce a and.
And are always see above our whack, we're not going to spend it. So you can see we're very deliberate and we're very focused and we will not go ahead and go after things that are too speculative. So that is our first priority to second.
The second thing and if we have we have excess funds at the end of the day, we would rather do that through opportunistic share repurchases as you saw not this quarter, but as you saw on Q4 or average price was below $100 and the shares that we did repurchase but.
And then third would be to do something like a dividend, but we're far far from that at this point, but still first we're going ahead and making sure. After organic growth is funded through our over $700 million and R&D second it's to look for M&A that could go ahead and enhancer.
Growth and produce a higher return on invested capital third clearly is to look for opportunistic.
Opportunistic share buybacks, which we have done and we plan to make sure. We're at least anti dilutive like we've seen.
And before but we will get a little bit more aggressive if we see a very big opportunity.
Your next question comes from the line of Adam Palmer from Thomas Davis. Your line is open.
Close enough guys great quarter.
Thanks, Adam Thanks, Adam.
Shoot I mean, this might be a waste of question, but I got to ask about the bite and administration and Huawei there've been some early indications that may be some of the restrictions get eased.
Curious if you have any thoughts on that.
Well, we don't have any particular insight as to what the bagged and administration will do but I'm very pleased that we were concerned about having to have that and our compare and to go ahead and seeing what that would do to our top line. When we had to go ahead and stop sell.
<unk>.
According to the government government laws and.
And we're very very pleased that we reported double digit order growth and revenue growth outside of our other.
And our other accounts in order to basically smooth right over that so if things were to change at Huawei or with any other government restrictions that would be certainly be.
Significant upside for US okay. Thank you.
Thanks, Adam.
Your next question comes from a line of Chris Snyder from UBS. Your line is open.
Thank you. So just following up on the capital allocation and so the company finished the quarter with $1 9 billion of cash, which is certainly well above historical levels.
What do you view to be the optimal level of cash to keep on hand and is there a willingness to go after a larger acquisition targets because while there has been a steady stream of bolt on type acquisitions and it feels like it feels like that is difficult it will be difficult to kind of rightsize the cash balance with these.
Bolt ons alone.
Sure well I'll just say this that we have looked at over 300 different acquisitions and again, we're very selective we've made about a dozen at this point and Youre right.
Most of them have been smaller except for two of them and we continue to look for large and small things that fit into our strategy, but there is a very high hurdle for the large acquisitions, obviously, the downside or the upside is much is much more significant but when you look at the premium and the amount of <unk>.
Dollars that you have to make up and the premium you pay per a company we want to make sure that pays off for the shareholders. We have more cash and we need to run the company right now, but we are aggressively looking at M&A and Unfortunately, we can't share much more than that.
Neil you may have something else you wanted to add.
Yeah. The only thing I was going to add is that you know the the optimal level of cash I would agree with Ron and we have we have more cash than we currently need but the optimal level of cash and there's a lot of things that go into that it fluctuates over time and you know where.
And we're looking to put that cash to work either through value, creating M&A are looking for opportunities to return it.
<unk> and.
And a favorable fashion like we did and in Q4 of last year. So we'll continue to continue.
Continue to do that.
And thank you for that and then just for the second question can you talk about the pricing environment on both for CST and ISG.
And what level of positive pricing if any is baked into the companies mid single digit long term core growth targets.
We always look at pricing, depending on what's going on and the market and how much of a differentiation.
And is in a particular segment. So clearly if there's a lot of competition, we don't have differentiation.
That is debt great. We can go ahead and utilize too much pricing power, but what we're doing and five G is certainly unique where on the leadership and and not only in different products, but when you look across to work flow and we look for opportunities to do so, but we're not going to gouge, our customers we want them.
Make sure that we have a good long term environment and they stick with us. So we review our pricing at a minimum twice a year and we look for opportunities for price increases and we will continue to do so to drive.
To drive our margins higher or to offset inflation, but as far as what the amount is that's something that we do not state publicly.
Thank you.
Thanks, Chris.
Your next question comes from the line of Brandon Couillard from Jefferies. Your line is open.
Okay.
Hey, Thanks, good afternoon.
Most of my questions have been covered but Ron and I don't think you've mentioned.
Any color on the auto market, specifically, yet curious latest thoughts there and.
If theres been kind of any term, perhaps and the order trends and that market. Thanks.
Yeah, well I'll, let I'll, let satish answer this we've been focusing certainly on the battery test and the and the overall infrastructure for EV. We mentioned the wing a nice win that we had in the prepared remarks earlier and we continue to be in good position in that.
Also as we look at autonomous vehicles, it's the same thing, but as far as the market we've seen the market.
A little bit more depressed as we all know and auto and I'll, let cities get a chance to comment on where he sees debt going.
Yeah. Thanks, Ron.
We're seeing signs of.
Flow recovery and the auto markets. The business is definitely stabilizing manufacturing parts of the business and depressed as Ron referenced, but theres a steady focus on nexgen R&D.
Avi and EV applications definitely the push around the world.
For a more electrification, we view as a long term opportunity and we're focused on creating value to help.
Extend the ranges help with interoperability needs by implementing global standards, including in China, and focusing on bidirectional charging applications with five gene in particular, we have a differentiated position on C V to X technology that we're continuing to progress so.
This may be a market, where as the as the auto and market recovers, we start to see even bigger traction, especially in <unk> and a b, that's our expectation, but our portfolio is strong and we continue to be engaged with customers.
Thanks, and then.
Neil.
Could you remind us just what the China trade headwind is on a year over year basis to the topline and the second quarter is that a similar sort of 6% to 7%.
And what we said what we said before was that it was 5% on the half.
Obviously skewed towards scored skewed towards Q1, we've just told you Q1 was six so Q twos and the and the three to four ish range.
Got you. Thank you.
Thank you that concludes our question and answer session for today I would now like to turn the conference back to Jason Kary for any closing comments.
Alright, Thanks and areas no further comments just like to thank everyone for joining us today and wish you all a great day.
This concludes our conference call you may now disconnect.
And then.
Yes.
[music].
Yes.
[music].
And then.
Yes.
Yes.
Okay.
[music].
And.
And.
[music] zone.
Okay.
[music].