Q2 2021 Keysight Technologies Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to the <unk> technologies fiscal second quarter 2021 earnings Conference call. My name is Gabriel now for the year lead operator today. After the presentation. We will conduct a question and answer session. If you'd like to ask the question. Please press star followed by the number 1 on your telephone keypad.
To withdraw your question. Please press the pound side 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 Wednesday may 19th 2021 at 130 PM Pacific time for.
And now I'd like to hand, the conference over to John Kerry Vice President Treasurer, and Investor Relations. Please go ahead Mr. Kerry.
Thank you and welcome everyone to <unk> second quarter earnings conference call for fiscal year 2021.
Joining me are Ron necessity, and key sites, Chairman, President and CEO and Neil Dougherty, our CFO, joining us and the Q&A session will be strategic down of Shekhar on Chief operating officer, and Mark Wallace Senior Vice President of global sales.
Can find the press release and information to supplement today's discussion on our website at Investor day of 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.
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 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 our own the 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 highlight the management is scheduled to participate and upcoming virtual investor conferences hosted by JP Morgan Stifel Baird UBS and bank of America and.
Now I will turn the call over to Ron.
Thank you Jason and thank you everyone for joining us <unk> delivered a record quarter and we are entering the second half of the year with momentum our broad portfolio of differentiated solutions continues to drive growth across the diverse set of growing markets.
Today I'll focus my comments on 3 key headlines first we delivered outstanding Q2 results with all time record orders revenue and free cash flow.
Second key site is enabling leading edge disruptive innovation around the world our solutions have significant differentiation and contribute significant value to customers, which is fueling our growth for the long term third while we are managing longer lead times and component availability our lead.
The market position and strong customer relationships and supply chain resiliency give us the confidence and our ability to deliver on our commitments.
Now, let's take a deeper look across the second quarter performance across both business segments.
Record orders of $1.3 billion grew 22%.
Revenue grew 36% to $1.2 billion, which was an all time high.
We delivered second quarter gross margin of 64% operating margin of 26% and earnings of $1.40 for which was above the high end of our guidance and represents 85% year over year earnings growth.
We also achieved record free cash flow of $369 million.
Over the last 12 months <unk> generated just over $1 billion of free cash flow that we've deployed through approximately $500 million and acquisitions and $455 million and share repurchases.
We continue to be active and disciplined and our capital deployment second.
Second quarter strength was broad based with double digit order and revenue growth across all markets and regions outstanding results by both business segments demonstrates the power of <unk> diversified portfolio and <unk> and beyond our.
Of our electronic and industrial solutions group achieved its third consecutive quarter of record revenue with strong double digit order and revenue growth and general electronics semiconductor and automotive the <unk>.
Breath of our contributions across multiple industries is exemplified by our double digit order and revenue growth and our general electronics business with.
With ongoing investment and broad digital transformation, including advanced consumer electronics digital health care and industrial Iot, Keith said, it's enabling innovation and capturing technology inflections for the Iot ecosystem.
Strong demand for our semiconductor solutions drove record orders and revenue customer investment and advanced technology nodes remains high while capacity is expanding for mature processes to address surging global semiconductor demand and automotive record orders resulted from improved macro conditions.
And increasing investments and EV and HEV technologies <unk> solutions portfolio for the automotive market continues to expand with new advanced technologies, such as AC power emulation millimeter wave radar power semiconductor technology automotive Ethernet.
See the V 2 ex and cyber security software systems as the reinvention of automotive ecosystems continues Keith said as the enabling the disruptive innovation of new mobility technologies.
Our communications solutions group achieved record of orders and delivered double digit order and revenue growth and commercial communications and aerospace defense and government.
Aerospace defense and government revenue grew 46% driven by strong demand and space satellite signal monitoring <unk> and early <unk> research applications.
<unk> engagement with key industry players remains strong we recently enabled the large prime contractors first test bed and of secured multiple <unk> solutions wins, and the aerospace defense and government markets.
Commercial communications orders and revenue both grew double digits, driven by the ongoing investments and 5 and 400 gig 800 gig Ethernet solutions for data centers as.
And as <unk> progresses, and deployments drive sustained investment we are uniquely positioned to capture the opportunities ahead of the ecosystem scales.
Recent engagements include of broadening set of new customers as well as key industry players such as NBC, Fujitsu and Mediatek, we continue to maximize the <unk> lifecycle opportunity and lead the industry with differentiated <unk> solutions.
In addition, the success of our application layer strategy is reflected and the strong demand for new technologies, such as Oran and business expansion and new end to end verticals.
Our ability to provide complete solutions for network protocol test security and visibility is enabling us to solve many challenges across the industry.
And another area of disruption, we continue to advance our long term initiatives to enable the quantum revolution we.
We are growing our quantum engagements with key customers worldwide and we also expanded our quantum solutions portfolio of this quarter with the acquisition of quantum benchmark, which brings deep expertise and the performance validation software for quantum computing.
<unk> software centric solutions and higher value services continue to drive differentiation and recurring revenue growth for the second quarter and a row software and services each delivered double digit order and revenue growth.
Beyond the innovation execution and financial discipline and key sites culture has long embraced corporate social responsibility. We believe our focus on climate and diversity provides us with a competitive advantage.
We recently published our annual CSR report, which includes progress towards the prior goals and the announcement of our commitment to achieving net zero emissions and the company operations by 2040 and.
We are working to set interim science based targets to ensure our progress towards the skull diversity and inclusion are also and body and our key leadership model as the CEO of priority, we have specific goals and actions that will be tracked by our leadership team and the board of directors diverse.
City and inclusion brief will be published this month that describes our long standing DNI philosophy as well as the details of our strategies and goals.
While there is more work to do key site remains steadfast and our commitment to CSR and building a better planet.
As we look ahead, we are encouraged by the strong demand for our differentiated solutions, while managing the longer lead times and component availability constraints.
Our in house high performance semiconductor fab and the strength of our order fulfillment team are helping us manage these near term supply challenges and.
And give us confidence and our ability to navigate them entering the second half of this year.
In summary, key services, enabling disruptive innovation across multiple waves of technology with a decade's long runway ahead of us our execution and the face of many dynamic challenges. This past year is a testament to the key site leadership model, our employees and the breadth and depth of <unk>.
Our customers.
Now I would like to turn it over to Neil to discuss our financial performance and outlook in more detail.
Thank you, Ron and Hello, everyone and as Ron mentioned, the key site team delivered another outstanding quarter and better than expected results as robust demand for our differentiated solutions and continued macro recovery resulted in strong growth across all regions.
Second quarter revenue of $1 billion $221 million was above the high end of our guidance range and grew 36% or 33% on a core basis versus a soft compare due to COVID-19 COVID-19 related disruption.
Q2 revenue growth was driven by broad strength across all markets and geographies as the key <unk> navigated macro dynamics and supply chain constraints.
We achieved second quarter orders of $1.332 million of 22% or 19% on a core basis.
Turning to our operational results for Q2, we reported gross margin of 64%, which increased 170 basis points operating expenses of $467 million were well managed resulting in operating margin of 26%.
As discussed last quarter variable pay expense increased approximately $30 million sequentially as the result of higher revenue growth and operating margin.
We achieved net income of $270 million and delivered $1.40 for <unk> and earnings per share, which was above the high end of our guidance our weighted average share count for the quarter was 187 million shares.
Moving to the performance of our segments, Our communications solutions group achieved second quarter revenue of 877 billion up 34%, while delivering gross margin of 65% and operating margin of 25%.
Commercial communications orders and revenue and the second quarter were all time highs and revenue of $606 million increased 30% driven by continued investment across the <unk> lifecycle.
Aerospace defense and government revenue of $271 million grew 46%, resulting from strong demand across all regions, primarily and the U S and Asia Pacific followed by a strong recovery in Europe.
The electronic industrial solutions group generated record revenue of $344 million.
Up 42% or 37% on a core basis.
Order and revenue strength was notable across all regions, particularly in the Asia Pacific.
Semiconductor general electronic measurement and automotive solutions orders and revenue all grew strong double digits.
ISG reported gross margin of 64% and the operating margin of 28%.
Moving to the balance sheet and cash flow. We ended our second quarter with approximately 2 billion and cash and cash equivalents and reported cash flow from operations of $402 million and free cash flow of $369 million or 30% of revenue.
Our capital allocation priorities are unchanged and are focused on investments and organic growth value, creating acquisitions and share repurchases under our share repurchase authorization during the quarter. We acquired 159 million shares on the open market and the average price of $138.36.
And for total consideration of $220 million.
Now turning to our outlook and guidance, we expect third quarter of 2021 revenue to be and the range of $1.205 million to $1.225 million.
Which represents 20% revenue growth at the midpoint.
We expect we expect Q3 earnings per share to be and the range of $1.39 to $1.45.
Based on a weighted diluted share count of approximately 187 million shares and.
In closing we are entering the second half of the year with strong momentum. We are pleased with our operational execution and remain confident and our ability to drive growth and deliver on our commitments with that I will now turn it back to Jason for the Q&A.
Thank you Neil Gabriel will you please give the instructions for the Q&A.
And ladies and gentlemen, if you would like to ask the question. Please press star followed by the number 1 on the telephone keypad. We ask that you. Please limit yourselves to 1 question and to withdraw your question. Please press the pound sign.
<unk> holds a lot of the compile the Q&A roster.
The first question will come from Mehdi Hosseini Susquehanna. Please go ahead.
Yes, thanks for taking my question.
And Neil the.
Both the segment's CST and <unk> as she had sequential increase in revenue, but operating margin decline can you elaborate is that due to the ongoing corporate costs and what else is impacting and then where are we and the evolution of millimeter wave and when 1 of these key.
Size the expectation for millimeter wave 2.
To go from the R&D into full production.
Yeah, Hey, thanks for the question. So yes, you are correct.
And as as I had indicated last quarter, we were expecting a very sizable sequential increase and our variable pay.
Expense and in Q2 relative to Q1, given that the 1 of the primary drivers of that of that payout is organic revenue growth and we had the soft revenue comp a year ago because of the COVID-19 disruption. So we we saw about a $30 million sequential increase and variable pay.
As a result of that and then I'll hand, it over substitution and he can address your millimeter wave question.
Yeah, Hi, <unk>.
As we have said before.
And I made of wave is the long term opportunity for key site, we are already seeing a pretty steady.
<unk> for millimeter wave of offerings from our customers for the past few years and we expect it to continue to grow again, we're on the front end of something Thats going to play out over the next decade, because of the progression and millimeter wave spectrum from 20 to 42.
70% to 90 gigahertz, and then with <unk> coming in with Terre Haute. So there is a big long term roadmap thats playing out specific to your question on <unk>, maybe I can offer of data point. If you think of the certification being critical patent of Iot devices and about 150 devices are being 75 right now about.
30% of them have millimeter wave in it so that paints the picture of hopefully and the total number of <unk> devices right. Now that are being leased is about 700. So it sort of gives you maybe of framing on 1 of the it's still very early days.
Thank you.
Next question will come from some of the challenging.
And of J P. Morgan. Please go ahead.
Hi, Yes. This is Joe Cardoso on for Sonic Cherokee I, just wanted to follow up on the last question, particularly around the supply chain issues and housing.
Impacting company the Industrywide I guess just for clarification on my part.
And this quarter did you see an impact for the supply and issues on the top line and margins and if so what was the impact can you quantify the impact and then relative to the guidance are you guys baking in any headwinds material headwinds and the topline and margin. Thank you.
Hi, This is Ron.
You know in the last quarter, we exceeded our revenue guidance and you've seen our guide for the next quarter and very pleased with the performance and how we've been able to deliver the revenue despite what's going on and the world of course, we see some some COVID-19 manufacturing decreases and.
<unk> as well as some supply chain components.
Shortages. However, we planned ahead, we thought for those and the most important part is that when you look at customized feeds which have a very very long lead time for many folks and the industry, we have and onsite fab that creates and produces all of our custom Ics. So.
Net of enabled us to basically have complete control of that supply chain for the critical customer parts.
We're very confident and the guide that we have but there is no doubt that we have built backlog.
And our order book is strong so as the world situation unravels, we could increase revenue, even more and more and the future.
Our next question will come from John Pitzer of Credit Suisse. Please go ahead.
Yes, good afternoon, guys congratulations on the strong quarter Ron.
Just kind of curious.
For the recent C band auctions and the U S. Now behind US can you help me better understand how the.
That kind of impacts your view on your comms business as we go throughout the balance of this year and as you do that it'd be kind of curious as to the sort of geographic distribution, specifically as you think about next quarter and beyond how much more important is China or are you actually starting to see things percolate and the U S and beyond.
Yes, John.
Good question with regard to.
And the deployment scenarios globally.
We all know China is starting to lead the fight the deployment and with the C band option coming and the major announcements from the U S. The operator.
Referencing our roadmap to deploy more of <unk>.
And the country and we view it as a positive we saw and uptake of our and our business and the U S. Specifically for our capabilities in the C band this quarter and we view the funnel and pipeline to be strong there, but again.
Not to not to get too Siloed and 1 spectrum because at the end of the day of customers are looking to test for creating devices and products that cater to the global marketplace and right. Now we have 9000 different band combinations that our customers have to test for and eventually and today that testing too.
So and the enabling all of our customers was staying and the need and we feel good about our position there.
And then just quickly Niall on the variable comp this quarter, and particularly sort of step up quarter and how do we think about the kind of the growth and variable comp from here and as you guys continue to execute yes.
Yes, so I mean this quarter was it wasn't unusual obviously we delivered.
36% revenue growth that's the.
Total there was some of that was inorganic.
But with those with those high levels of revenue growth it drives our variable compensation and towards the high end of the of what of what is possible and it gives you look forward next quarter, we still have a reasonably soft comp and are guiding into the kind of low 20% range, which is still quite aggressive growth and it's going to be variable comp.
Again in Q3, and not quite as high as Q2, but still quite elevated and then we start to get to more normalized comps here and the filtering and a little bit more of a return to normalized levels.
Perfect helpful guys and congratulations.
Thanks, very much John.
And please note that the comps that we're talking about the variable comp is for all employees and key site and that has paid 1 big factor is revenue growth and you saw a revenue growth number which is driving that near the extreme limit.
The next question will come from John Marchetti of Stifel. Please go ahead.
Thanks very much.
I was wondering if you could just comment a little bit on the move.
And the agent operations that you guys have obviously with some of the searches that were starting to see particularly in southeast Asia. There is concerns there on your side.
You may have the slow some things down there for from your own manufacturing standpoint.
Our manufacturing is.
Well distributed we have the largest test and measurement factory in the world in Penang, Malaysia, but we also have facilities that do develop in early production runs as well as produce certain products in Europe as well as in the U S. But the bulk of it is overseas.
<unk>.
We don't manufacture anything of scale in China. So that's not an issue issue to us and <unk> seems to be and very good position to capitalize on any type of regional shift.
Got it and then maybe just a quick.
Quick follow up regionally when we think of the China business overall.
Mentioned some of the uptick on the <unk>.
On the side as Youre seeing some of the and increased capacity not just there but elsewhere coming in.
Any change that you've seen relative to some of the language out of what's going on and China, just given the the bit of exposure that you have across the portfolio there.
No.
We actually saw saw strong order results and order growth as well as well as revenue growth Mark will tell you a little bit more about it we did have about 3 points of headwinds from Huawei, where this is really the.
The second to last quarter that we expect to have that but despite that we had very strong order and revenue growth and I'll, let mark.
Our head of sales gives you a little more color.
Yes. Thank you Ron Jon It is another quarter, where we've mitigated the impact from the headwinds and as Ron said about 3 points during the second quarter and it.
The other opportunities and other customers it really exemplifies the breadth and strength of our business as well as the investments we've made and our direct sales organization, there and we're seeing.
Strong opportunities and growth across China, and semiconductor <unk> commercial space automotive is really starting to pick up and then general electronics as well so very.
We're very pleased with what we've seen we've got 1 more quarter and Q3 with some headwinds, but the bottom line is our business and China is strong with this broad footprint of customers.
Thanks for the color John and I, just felt like to point out. The fact that Xiaomi was effectively the trade restrictions were were loosened.
As the positive sign for us not so much the account the xiaomi, but the fact that there is some progress that is being made.
Got it thank you Ron.
And welcome next question will come from Mark Delaney with Goldman Sachs. Please go ahead.
Yes, good afternoon, and thanks very much for taking the question I think of the last earnings call of the company had talked about the potential for EPS. This fiscal year to grow and the mid to high teens range and through the first half of the year and with guidance for fiscal <unk> and Youre tracking very well relative to that so hoping to better understand it.
And if youre still expecting that sort of the mid to high teens growth rate and we need to be thinking about potentially.
Potentially a slower fiscal fourth quarter. So we're going to be the cause of that are perhaps theres now of some upside to the the prior commentary around the EPS growth for sure.
Yes, Mark and I don't have a specific update for you too to that prior number but obviously.
We exceeded the high end of our guidance range and here and the second quarter and you've seen our guide for Q3. So I think at the margin things are trending a little bit better than they were when we when we've made that statement and 3 months ago and.
But I don't have the specific update for you at this point and time.
Okay.
Thank you.
Next question will come from Adam Tal Hammer.
From Davis. Please go ahead.
Thanks, Great quarter, guys and.
Just quickly there was and other expense and the quarter just curious what that was because it did detract from the Q2 performance it looks like.
Yes, we did have we did.
And we.
Did a modification to our pension schemes and the Netherlands and had some settlement settlement.
The expense as a result, as we transferred those liabilities to and insurance company.
Okay.
Yes.
Our next question will come from David for things Zone of Bank of America.
Please go ahead.
Good afternoon.
I definitely heard you on yes.
The key side, having its own supply chain and your control.
All the companies.
Maybe struggling.
Walk more than you.
And placing orders ahead of time.
Trying to make sure of that they get.
And the equipment that they need so I'm wondering are you seeing anecdotally.
Any kind of pull forward on the orders or maybe companies, placing the order earlier.
And that would've influenced here strong order growth this quarter.
Okay.
Yes. This is mark no, we really didn't see any yet and so that what we saw was.
A little bit of pent up demand from the impact of Covid last year, which we kind of expected it somewhat offset the trade headwinds that we talked about earlier.
We watch cancellations very closely there they were at a record low for the quarter and we're seeing again this steady broad demand. So we had no signs thus far that there is any material pull and of our borders.
And David if I could just add on I like your characterization of the the.
And the vertically integrated supply chain.
And it potentially making us a little bit less susceptible to some of the the supply constraints than maybe others are facing.
As I sit and look at the challenges with regard to movement control and social distancing do make it a challenge to add capacity during during these times and so I've talked about in the past our seasonality being more muted at least through the first part of the year I think I think those things are going to really serve to keep that kind of muted seasonality and place really.
Through the end of through the end of this fiscal year.
Thank you very much.
Your next question will come from Jim Suva Citigroup. Please go ahead.
Thank you very much and congratulations on the results outlook and all of the details. So far my question is.
And there's lots of talk about and double ordering and double booking maybe from other industries like automobiles or consumer electronics or Pcs and such.
Or are you building and some conservatism for some double ordering or customers that may be putting in a little more orders due to the semiconductor shortage and I'm just kind.
And the kind of see if youre billing and a little bit of conservatism or simply and the test and measurement industry do the company just not double order due to the lead times and specialty configurations needed.
Yes, Jim This is mark as I said earlier, we do watch for this and Theres really no evidence our funnel has been very strong now for many months as we continue to see.
Supply our solutions the results as you've seen are very broad based and unlike other industries as you point out often times the planning associated with customers procuring some of our of.
Our systems and solutions can go out many months so it really doesn't lend itself to that sort of doubled.
Double booking if you will if you look at semiconductor is 1 of our stronger segments. We see activities that are that are a year or more out and preparation for outfitting of new fab or growing capacity. So it makes it very difficult to see any sort of hedging of our double double booking and as I said before we.
We arent seeing that occur thus far.
That's what I thought thank you so much.
Youre welcome.
Our next question will come from Tim long of Barclays. Please go ahead.
Hi, This is Peter.
Tim.
And on.
I was wondering what you think the give us some color on how much of the double digit order growth and commercial communications was relates to <unk> versus the other businesses and.
And in particular, if you could talk a little more of the.
And the opportunity on the application layer side in light of some of these new deployments.
Yes.
And so the commercial comp strength again.
Ron covered both the wireless and wireline subs on the wireless side, and and 400 gig or 1 of them on the wireline side as well. We also saw some recovery and our network's disability business as enterprises of planning for return to work and thinking about what that and it infrastructure spend and looks like so those of all looked at.
The favorable so generally a very positive dynamic.
Specific to the application layer we identified.
A few a few areas around the different end market verticals and new applications to focus on about a year ago and Thats paid rich dividends on the new application front. It's the open ran.
And open Virtualized network, bringing and no new customers and more players into the ecosystem. So we had strong demand for our solutions that we launched in Q1 and.
The 1 and on the new vertical side, we gained.
And traction with a lot of the aerospace and defense.
<unk> that are looking to invest in the Dod.
The <unk> program. So both of those are going very well and when we look forward and look at the funnel for both of these opportunities. They are very healthy and the very rich with the customer strong customer collaborations that are building.
That's great color. Thank you very much.
Your next question will come from Rick Eastman of Baird. Please go ahead.
Yes, Thank you and thanks again and.
Good quarter to be sure.
And work for the team the bump.
Just a question around maybe the backlog and and maybe let me just start for 1 second again and it looks like you built backlog again and maybe my my rough math. So as your backlog is up maybe 15% or so year over year.
And when you provided second excuse me third quarter revenue guide just the assumption.
The <unk>.
Orders or your book to Bill will be about 1 point of <unk> or is there an assumption that you work off some backlog into that realm.
The new guide for fiscal Q3.
Yes, Hi, Rick This is Ron our assumption is that our book to Bill will be about about 1 and.
And we have strong backlog and we expect to exit 2.3 with the strong backlog.
Okay.
We're lengthening and your backlog in terms of deliveries.
And obviously another supply chain question, but is there a lengthening out or are you foreseeing some ability to clear some of the backlog and in Q4 by year end.
Yes.
Adam.
Okay.
I'm, sorry, and then.
And sorry about that I said I think the most important of factor at this point of view, we feel like we're doing a good job meeting the needs of our customers and getting them the product that they need on the timelines of which they need it and.
While we're not immune to some of the supply chain constraints that are out there I think we're doing a good job managing them, we're benefiting from having the vertically integrated supply chain.
And.
And we are and we are making investments to add capacity, obviously, our revenues are going to be up substantially.
Year over year, but not just because of the soft comps are up very substantially over 2019 levels as well and we'll continue to make.
The investments necessary that the.
To get the to get products into the hands of customers.
Okay sure.
And it's also worthwhile to note that if you look at software and you look at services not only do they both have great double digit order and double digit revenue growth.
We've seen more and more <unk>, which is going to go into the backlog in and let's put it displays slow a little bit.
And how that peels off but it will provide a great consistency of earnings as we go forward.
And the north of $1 billion now.
Great great.
Yes position to be in the 1 billion. Okay, and then just last follow up here.
Neil on the on the guide for.
The fiscal Q3 because of the conversion is the key.
Conversion.
Margin here, which I'm kind of calculating maybe low twenties.
And again reflect the variable comp step up here that's correct. Okay, alright very good. Thank you. Thank you again tremendous quarter.
Thank you.
Our next question will come from Chris Snyder of UBS. Please go ahead.
Thank you I want the follow up on the <unk> earlier comments, which are the.
Part of heard right. The companies are currently testing.
2000, and bands and this is going to the 9000 and bands.
So and more than a quadrupling of the testing I guess the question of how should we think about this what it means for industry test capacity I assume its not a 1 for 1 relationship there, but any color on that just higher level of intensity will be helpful.
Yes, I think it's been combinations, but you are right that the more frequency spectrum.
And the heterogeneous manner that gets deployed the.
The test intensity goes up and if you think of a typical device maker or.
Our companies and the OTA and space out of putting radio and CEO components together and they have to do the testing the amount of time they have to do the testing doesn't go up and so essentially.
Of the Covid restrictions of social distancing and all of that essentially means that the customers are looking at ramping up capacity for the future, but it's the.
Steady demand and that gives us confidence and out of them in Atlanta.
And long term outlook for the business.
And 1 dimension of.
<unk> of capacity of the other ones being all of the complexity associated with the release 15 deployments and now with release 16 ramping up we have new capabilities to offer.
And what you saw with a press release with the media type of this quarter.
I appreciate all of that and then I guess following up on the buyback.
You guys bought back a lot more shares this quarter, then so it's kind of and the historical run rate.
I guess going forward.
Is it fair to assume that the majority of free cash is going to go to share repurchase assuming there's no M&A. So I guess the question is this like this $2 billion cash kind of balance the right.
And the right maybe go forward run rate the model and put everything access of the share repurchase until.
MAA starts coming through and obviously when it comes up.
I think we've seen a pretty balanced use of capital from us as we as we mentioned in our prepared comments. The we've generated $1 billion of cash over the last 4 quarters, we spent $500 million on M&A, just under 500 million on share repurchase.
And I would expect you'll continue to see balanced as we look to invest and the future growth of our business I think specifically as it relates to share repurchase we've committed to at least being anti dilutive with our buyback program, but we've proven with.
With the significant buybacks both in Q4 of last year as well as in Q2 of this year that.
And when appropriate we will step up and be more aggressive.
Thank you.
Our next question will come from Matthew <unk> of <unk>.
Deutsche Bank. Please go ahead.
Hi, guys. This is Nick on for Matt Congrats again on the quarter.
And just 2 quick ones. So first on free cash flow cash.
And the really strong this quarter I was just wondering if you guys can.
Per I don't want the more color on that and.
Kind of how free cash flow.
Trend moving forward.
And then just the follow up and fee.
Obviously from other guys from other companies are seeing.
Tighter and the gross margin because of the supply chain issues and inflation and et cetera, and so.
What are we.
And your margin the really stable here is that because of the in house fabrication and <unk>.
Color there would also be really helpful. Thanks.
Yes, So let me take the let me take those questions first of all with regard to our free cash flow. Obviously, we're very very pleased with the cash generation of of the business cash registration was unusually strong here and the second quarter. I think there are a couple of drivers of that.
1 is the increasing.
The deferred revenue balances as a result of our push into software and services and building building recurring revenue.
And that's a great long term trend and there is 1.
A significant timing difference, which we've already talked about and that has to do with the variable pay and obviously, we've recruited net variable pay based on what was earned here and the second quarter, but that will not hit the paychecks are of our employees until Q3, and so there'll be a bit of reversal.
Of that over the course of a couple of quarters, because we expect accruals to be high here and the third quarter as well.
As it looks for gross margin we are seeing in some cases.
The increasing input costs.
As we've said most of our highly differentiated Ics are manufactured in house I think that helps shield us I think long term if you look at our business.
The push that we have again towards the increasing software content, increasing recurring revenue and migration of business into selling into our customers' R&D labs. The move towards complete solutions that are more highly differentiated all of those things are helping to drive the gross margin performance that you've seen and this business.
For a number of years right at the time of our spin we were in the mid to upper <unk> and now we're in the mid Sixty's and so I think we've got a lot of great momentum in that space and as we as we continue to build software and our solutions portfolio I think there's still room for further improvement.
The next question will come from Brandon Couillard of Jefferies. Please go ahead.
Hey, Thanks, good afternoon.
Ron that the strength and aerospace and defense, it's pretty impressive can you just talk about.
And how you're feeling about the durability of the current momentum and how would you characterize the degree of visibility in terms of of the funnel there relative to the histories.
Yes, Brandon this is mark.
As we've said we've had.
And ongoing focus on aerospace defense and the dirt.
Aerospace defense.
In the U S and around the world the orders that we saw during the quarter were very strong across western Europe.
As we saw increased program funding.
Business and Asia was up we had several strategic wins as was mentioned earlier for <unk>. So the long term growth drivers are really remaining in place around the whole defense modernization with space and satellite.
And with the addition of 5 G and we are continuing to see our funnels continue to grow.
As these investments continue so.
Both across multiple regions and strength in the next generation technologies and is there going to be deployed over really many years.
1 more and market question and my auto.
Yes.
And 1 more point to Mark at bite and administration has just released they are for.
First the first pass of budget for 'twenty, 2 and it's actually points to a higher number and that combined with any other potential.
The technology spend from the administration, we view as of favorable dynamic.
Gotcha and then.
Just switching gears in terms of of the auto market and soft for a few quarters now and feel like the space is finally, maybe beginning to start the turned the quarter in terms of the best.
And sort of next gen programs.
Yes.
The automotive market had a very solid quarter.
And quarter, 2 and it was driven by some return to normalcy for manufacturing and I know that at <unk>.
As the as the automotive end market production is projected to increase and the second half that should be a favorable dynamic for the business.
But consistent with what we saw even through last year the demand for RMB offerings and auto continues to be steady, we actually saw an uptick and.
And that especially around EV, and <unk> and and our funnel for the automotive EV offerings that we have is very strong looking into the second half and we just launched <unk>.
Solutions to solidify our EV portfolio and charging test and we continue to see a lot.
Long runway for those offerings.
Great. Thanks.
Thank you and that concludes our question and answer session for today and now.
And I'd like to turn the conference back over to Jason Kary for any closing remarks.
Well. Thank you all for joining US today, we look forward to speaking with you at the upcoming conferences and just wish you a good day.
Thank you.
Thank you. This concludes our conference call you may now disconnect.
[music].
Okay.