Q3 2021 Keysight Technologies Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the key technology fiscal second quarter 2021 earnings Conference call. My name is Holly and I'll be your lead operator today.
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 keypad.
To withdraw your question press the pound sign if at any time during the conference you need to reach an operator press star followed by zero. Please note today's call is being recorded today Wednesday August 18th 2021 at 130 P M Pacific time.
Now like to hand, the conference over to Jason Kary, Vice President Treasurer and Investor Relations.
Thank you and welcome everyone to key sites third quarter earnings conference call for fiscal year 2021, joining me are Ron necessity in key sites, Chairman, President and CEO and Neil Dougherty, our CFO joining us in the Q&A session will be <unk>, Chief operating officer, and Mark Wallace Senior Vice.
As president of global sales.
The press release and information to supplement today's discussion are on our website at Investor Dotcom site Dot com click on the link for quarterly reports under the financial information Tab, where you will find an investor presentation, along with key sites segment results. Following this call. We will also post a copy of the prepared remarks today.
<unk> comments will refer to non-GAAP financial measures. We will also make references to core growth, which excludes the impact of currency 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 otherwise noted 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 our recent SEC filings for a more.
Fleet picture of risks and other factors lastly, I would highlight that management is scheduled to participate in upcoming virtual investor conferences hosted by Jefferies Deutsche Bank, and Citi and now I will turn the call over to Ron.
Thank you, Jason and thank you everyone for joining us Keith.
<unk> delivered another quarter of excellent results.
Solid industry dynamics are accelerating demand for a differentiated solutions and we continue to capitalize on broad based technology investments across a diverse set of growing markets.
Today I'll focus my comments on three key headlines.
First we delivered record Q3 orders all time record revenue and our highest quarterly operating margin of the year.
The durability of our business model was on full display as we continued to effectively navigate supply chain challenges.
Second key said first to market software centric solution strategy continues to yield consistently strong results since our launch in 2015 through our expected 'twenty 'twenty. One finish we will have delivered 9% compound annual revenue growth.
And 16% annualized earnings growth, both well above our long term commitments, despite significant headwinds of trade restrictions and a global pandemic.
Our investments are well aligned with the highest impact market opportunities as we continue to enable our customers' success and deliver value to our shareholders.
Third given our outstanding performance year to date, we expect to achieve 2021 year over year revenue growth of 16% and EPS of $6.03, which represents 24% earnings growth at the midpoint of our guidance, we have strong momentum entering 'twenty two.
92, and our long term revenue and earnings growth targets remain intact.
And we expect to drive incremental margin expansion going forward.
Now, let's take a deeper look at our third quarter performance record Q3 orders of 1.3 billion grew 23%.
All time record revenue also grew 23% to 1.2 billion we.
We delivered gross margin of 65% operating margin of 27% and earnings of $1.54, which is well above the high end of our guidance and represents 29% year over year earnings growth.
Keith said continues to deliver outstanding growth despite year over year headwinds due to trade restrictions and ongoing supply chain disruption.
Our growth rates are not only just a result of soft year over year comparisons, but also reflects sustained multi year above market growth for.
For example, Q3 orders are up 18% and revenue was up 15% versus the same quarter in 2019 prior to the global pandemic the strength and durability of our business model are delivering as expected, we see accelerated demand for more differentiated.
<unk> from both existing and new customers our customer engagement throughout the pandemic has been strong with approximately 1900, new customers added in 'twenty, 'twenty, which we would expect to exceed in 2021.
Looking at our business segments for the third quarter in a row, we reported double digit year over year order and revenue growth across both segments and all regions, demonstrating the breadth and differentiated portfolio across a diverse set of end markets, our electronic industrial solutions group achieved strong double.
<unk> order and revenue growth across all regions as well as its fourth consecutive quarter of record revenue.
Continued investment in chipsets for five G data center cloud and AI applications drove demand for differentiated semiconductor solutions, resulting in another quarter of record orders and revenue.
Investment also remains high in advanced technology nodes and capacity expansion for mature processes to address surging global semiconductor demand.
Our general electronics business achieved record Q3 orders and revenue.
Four consecutive quarters of double digit order and revenue growth demonstrate T side's wrath of contributions across multiple industries strengthened in the quarter was driven by investments in customers broad based digital transformation industrial Iot digital health industry 4.0.
And advanced academic research.
In automotive record Q3 orders and all time record revenue were driven by the ongoing macro economic recovery acceleration in EV in AAV technology investment and manufacturing expansion to meet pent up demand.
As the trend towards autonomous vehicles gains momentum keeps it remains focused on enabling next generation technologies across the automotive R&D workflow, we recently announce a new cellular vehicle to everything or CB, two X autonomous drive emulation solution, which provides a real.
All world environment emulator for inland testing to stimulate realistic roadway scenarios, we continue to see steady demand for EV, and Avi solutions, including automotive Ethernet compliance and cyber security test.
Our communications solutions group achieved record third quarter orders and revenue and delivered double digit order and revenue growth. Despite trade restrictions that impacted one of our larger customers in China.
Aerospace defense and government delivered record Q3 orders and revenue revenue grew double digits across all major regions, while benefiting from a soft prior year comparison growth was again driven by space satellite electromagnetic spectrum operations five G.
<unk> an early six G research applications.
U S government and prime contractor investment was strong while internationally Europe rebounded from a year ago, coupled with solid growth in Asia.
Our application solution strategy drove a significant win with a leading research Institute in this quarter.
He said its leading edge integrated wireless and wireline testbed as enabling their next generation Terabits and 60 research our aerospace defense and government customers will also benefit from our differentiated services offering to enable their mission critical program needs.
In Q3, we entered into multiple U S. Prime contractor engagements for calibration and uptime services commercial communications achieved third quarter record orders and revenue adjusted for the impact of China trade restrictions commercial communications orders and revenue both grew double digits.
Ongoing strength was driven by global five G deployments and the rollout of new five G chipsets and devices O ran adoption 400 gig and 800 gig Ethernet for data centers.
An increased spending by service providers, our collaboration with key five G. Innovators remained strong as we continue to lead with new industry firsts.
In partnership with Qualcomm, we were the first to achieve 10 gigabit per second five G data connections.
He said was also selected by Vodafone along with other industry leaders, such as Samsung and E C and Dell to deliver end to end cloud solutions for the deployment of Europe's first commercial O ran network.
Sanjay way acquired earlier this year had a strong quarter driven by expanding adoption of our wave judge wireless test system, which further enhances key sites five G solutions for deployments key say continues to enable next generation wireline standards, such as 800 gigabit.
<unk> met.
Our newly announced 800 gigabit Ethernet solutions saw strong demand within the quarter and recent partnership with Cisco in Amphenol, we demonstrated high data rate multi vendor interoperability a key enabler of next generation networks. The combination of our network application solutions from the Ixia App.
<unk> and our leading physical layer bit error rate testers, and distillate scopes is driving new levels of customer insight and value.
Our software and services solutions remain an important growth vector for key site.
Higher value services are driving differentiation, while strengthening our competitive position.
A greater than 30% of total revenue with air are exceeding $1 billion, our growing mix of software and services is increasing the durability of our business model, while reducing overall cyclicality.
They are both contributing to key sites margin expansion with operating margins at or above the company average.
Key sites focus on operational excellence continues to drive our consistent execution and to our employees are critical to our success.
Employee growth is a key component of the key site leadership model and we view our high performance culture as a competitive advantage.
As such we are honored to have our team in Malaysia recognize as the overall winner of the employee experience awards by human resources online.
This award is in recognition of the innovative programs deployed in the Malaysia, HR team to proactively engage employees and create positive experiences despite unprecedented pandemic related challenges.
Our employees in Malaysia have done an outstanding job under difficult circumstances since COVID-19 restrictions were imposed in our production operations were impacted to mitigate the risk of COVID-19 to employees customers and suppliers.
Key site implemented a vaccine program for both key site employees and their suppliers over 95% of our employees at the Malaysian facility are now vaccinated. In addition, vaccination rates at our large U S sites are above their local community averages.
In summary, our momentum continues and our strategy is generating strong results, we have a track record of consistent execution and delivering on our commitments I am confident in our ability to capitalize on many growth opportunities ahead of us as we finished the fiscal year and look forward to 2020 two.
<unk>.
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 as Ron mentioned Quayside delivered another outstanding quarter as broad based technology investment accelerated demand for our differentiated solutions, resulting in better than expected results in the quarter.
Third quarter revenue of $1.246 billion was above the high end of our guidance and grew 23% or 21% on a core basis.
We achieved third quarter orders of $1.310 billion up 23% or 20% on a core basis, excluding the impact of China trade restrictions orders grew 29%.
Turning to our operational results, we reported Q3 gross margin of 65%, which increased 60 basis points year over year.
Operating expenses of $472 million were well managed despite higher variable compensation.
Operating margin was 27% up over 100 basis points.
We achieved net income of $286 million and delivered $1.54 in earnings per share, which was above the high end of our guidance our weighted average share count for the quarter was 186 million shares.
Moving to the performance of our segments.
Our communications solutions group or C. S. G achieved third quarter revenue of $875 million up 15%.
CST delivered gross margin of 66%, which increased 50 basis points year over year operating margin was 26%.
Commercial communications revenue of $595 million increased 6% driven by continued investments across the five D lifecycle and our leadership in emerging applications.
As Ron mentioned adjusting for the transient impact of unfavorable trade restrictions commercial communications revenue grew double digits.
Aerospace defense and government revenue of $280 million grew 39% and recorded double digit growth across all major regions led by U S and Europe.
The electronic industrial solutions group or ESG generated another record revenue quarter of $371 million up 48% or 44% on a core basis.
Order and revenue strength was notable across all markets and regions as semiconductor general electronics, and automotive solutions orders and revenue all grew strong double digits.
E. I S. You reported gross margin of 64% and record operating margin of 31%.
Moving to the balance sheet and cash flow, we ended our third quarter with over $2 billion in cash and cash equivalents and reported cash flow from operations of $257 million and free cash flow of $217 million or 17% of revenue.
Our capital allocation priorities are unchanged and remain focused on investments in or any organic growth value, creating acquisitions and share repurchase under.
Under our share repurchase authorization during the quarter, we acquired approximately 570000 shares on the open market in an average price of $140 for a total consideration of $80 million.
Now turning to our outlook and guidance, we expect fourth quarter 2021 revenue to be in the range of $1.250 billion to $1.270 billion, which represents 3% revenue growth at the midpoint full year revenue at the midpoint of our guidance is $4.9 billion, representing 16% revenue growth.
We expect Q4 earnings per share to be in the range of $1.59 to $1.65 based on a weighted diluted share count of approximately 186 million shares.
Full year earnings at the midpoint of our guidance is $6.03, representing 24% EPS growth.
In closing our expected 2021 revenue and earnings per share represent 7% and 13% compounded annual growth over the last two years since 2019.
Both are not only above our long term expectations, but accomplished in the face of significant COVID-19 related disruption last year and the substantial negative effect of China trade restrictions.
Our consistent execution demonstrates the resilience of our business and our ability to drive sustainable and profitable growth.
Beyond 2021 our long term revenue and earnings growth targets as well as our financial model remain intact. As we see continued opportunity for incremental margin expansion with that I will now turn it back to Jason for the Q&A.
Thank you Neil Holly will you please give the instructions for the Q&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 do ask that you. Please limit yourself to one question to withdraw your question press the pound sign.
And our first question will come from the line of Jim Suva with Citigroup.
Yes.
Ken Your line is open.
Yeah.
Okay. We'll go to the next caller. Our next question will come from the line of Mehdi Hosseini Susquehanna.
Yes.
Two follow up questions.
Regarding the.
Communications group.
Could it be possible that.
Some of the high end.
Equipment that you sell that is used for high frequency and <unk>.
Traditionally categorized under communications on the commercial communications is now categorized in Malaya.
Or vice versa.
It's early in the adoption.
Maybe more of it admittedly the millimeter wave application.
Currently categorized in Mil Aero and then what is commercialized.
It would be reclassified under commercial communications I don't have a funnel.
Yeah. Mehdi this is the teeth I'll take this.
Clearly the focus for us is to maintaining a lot of leverage across our portfolio between CSD, both commercial and aerospace and defense and in our industrial industrial business across the portfolio. We sell a common set of tools to all engineers and youre right in pointing out that the millimeter wave op.
Acuity is pretty broad now it will take quite a bit of time to play out in the end market.
Driven by spectrum and different interests across the globe, but it is broad at such as millimeter wave.
He is clearly being used in space and satellite communications, it's being used in aerospace and automotive for sure and now with commercialization of this technology finds its application in <unk> and we actually classify orders based on customers, who buy them and we're able to maintain a lot of operating leverage.
<unk> across the across our businesses that way.
Got it. Thank you and then one follow up for Neil.
What are we going to get an update on the.
On a longer term target of operating margin I know you have been focusing on increasing the ratable mix of business the software mix, but.
You have been operating above the long term target and I, just we're in a phase where like how long can you.
Operate above it any kind of metric any update would be great. Thank you yes.
Make one final comment to tack on to <unk> answer as a result of our classification of sales by customer we actually have five G.
Orders and revenue not only within the aerospace defense and commercial comps, but also with any ISG as well because of the way that that is done under a question about <unk>.
About kind of long term operating Molly first we're very pleased with the results. If you look at our three quarters to date here in 2020 FY 'twenty, one plus our guide for Q4, we expect to finish this year with operating margin basically at the the long term target that we outlined at our March 2019 Analyst day, where we said 22%.
26%, 27%, we're gonna be at that 27% level here in <unk>.
In FY <unk> FY 'twenty one so we're pleased that we've achieved that objective two years ahead of where we expected to achieve it. So we've been making progress faster than expected and then as we said in our prepared comments today. We don't believe that we're done we believe that we have continued room for margin expansion.
And while I don't have an updated guide for you to hear day or an updated long term model I will tell you that we do have multiple levels levers that we're working across the business. You noted a couple of them continuing to grow our software and services businesses at a rate that's faster than the overall company average and therefore growing our E. R. R.
Rates that are faster a broad set of initiatives focused on gross margin improvement, where you've seen our gross margin improvement over the last several years go from the upper fifty's into the into the mid 60% range and then continuing to leverage our G&A infrastructure and so we believe we continue to have a lot of levers, we and we remain confident in our ability.
To continue to drive margin improvement going forward.
Yes.
And our next question will come from the line of Jim Suva with Citigroup.
Thank you very much can you hear me.
Yes, yes, we can.
Great. Thank you.
When I think about longer term, specifically your end markets and I look at them I cannot take a look at automotive where it looks like you've kind of been underpenetrated or at least a smaller portion of your sales. As you look ahead is that something that you think could materially be pretty big for the company in the years ahead or is there something unique about it I mean I look.
Every car that's being sold out there or the newer ones coming out. They just have a lot more electronics and things that need to be calibrated and tested or is there something unique about that industry that would prevent you from going into it or maybe it's already big for you know how much is it is the profitability. The same it seems like the design times would actually be more favorable because.
You design a car for multiple years compared to like a consumer electronics and maybe if you can just give us some insights onto automotive strategic view that you may have.
Sure. This is Ron Hi, Jim.
If you take a look at our overall automotive business is really transforming.
And a very large way as you know the automobile is really turning into a computer with big batteries and a lot of wireless sensors that communicate.
To many many.
Different different devices.
And that really plays right into our strength in the old World.
The Mccann electromechanical car with the combustion engine was relatively low tech with regards to electronics sure. There are transducers and things that are put on suspension systems to look at shocks and engine performance.
More and more but more and more micro processes are in cars and the whole car itself is really built around electronics that we test, whether it's computers or the wireless sensors for either radar or for five G et cetera. So we see this as a.
A very big long term trend for us.
As far as production it depends things that are more complex, we're going to have a role in things that get reduced to simple task, we won't be playing in that area as it's a very price competitive market that doesn't really need as much value from us but.
In R&D, where we focus.
That is the sweet spot for us So R&D focused a V E V.
Technology is really really a great opportunity for us going forward.
Thank you so much for the details and congratulations to you and all your teams.
Thanks, Jim the team did a great job.
And our next question is going to come from the line of Matt Knickman with Deutsche Bank.
Hey, guys. Thank you for taking the questions.
One on supply chain and one follow up just on the supply chain. You. Obviously, you managed to navigate through some of the challenges tiers are seeing.
Can you just comment on whether you saw any incremental headwinds or even kilotons or improvement relative to last quarter, and then thoughts on any impact you've embedded into next quarter's guide.
And then my follow up.
Talked about adding 1900, new customers last year.
And expecting to exceed that this year just any color you can provide in terms of.
SKU or mix in terms of where these new customers are coming from thanks.
Sure. This is Ron I'll start off on the supply chain answer and then turn it over to Neil as we go forward and then Mark Wallace our head of sales will talk about the excellent progress on our new customers.
First with regard to the supply chain. We've commented on this before the more complex semiconductors that are in our products. We make right in house. So we have a boutique fab that has to produce products that literally add.
In many cases 10 times the performance of commercial products, because where the measurement device and we have to be more accurate to be able to measure the performance on the commercial devices that gives us more control of our supply chain, although we do obviously buy parts and some common.
Some common components from other suppliers, but I think we have an exceptional.
Management team in order fulfillment, we have the largest order fulfillment organization in the test and measurement industry and I think they've done an excellent job working with our suppliers. There is no doubt that we continue to beat our expectations quarter after quarter.
After quarter, but obviously, if there were more components, we'd be even able to take take a revenue up a little bit more quickly.
Now I'll turn it over to Neil who will add some more commentary.
We were not immune to the supply chain situation Thats, I guess, where I would sharpened as Ron said, the kind of the vertical integration of our supply chain and the fact that we control.
The production of our most highly specialized parts really helps to mute the impact and so while the impact is not zero within the quarter and its not zero within within Q4, where we just guided the impact is relatively small and so I don't think it's a terribly huge concern I think we're doing a good job managing the X.
<unk> of our customers and getting product into the hands of customers on a timeline that they find to be acceptable I can't point to any examples at this point, where we have had orders cancel because of an inability of us to manage our supply chain risk and get product into the hands of our customers.
So.
Yes, I'll leave it at that.
And with regard to new customers before I turn it over to Mark.
That's an effort of doing many different things first we have added.
Many folks to our feet on the Street program that Mark will talk about or direct field engineers are salespeople that could expand their presence we've worked in indirect channels and expanding our efforts there as well as increasing our marketing efforts to make sure that people understand.
And our value and all of those things feed on top of each other.
That's right, Thanks, Ron and Matt I'll, just build on that as you've heard our results were very broad based across all segments and all regions.
And we put a lot of attention as you hear from these calls on innovating with the industry leaders our largest customers. Our top 20 were up very strong high double digit, but we added 600 more than 600, new customers during Q3 and as Ron mentioned in his prepared statements were on track to exceeding 1900, which we added last.
Year and this is by design, we have a focus on reaching new customers through a combination of marketing our direct channel, which at the end of this year will be more than twice as big as it was just a few years ago and through our indirect channel, which is a combination of distributors and our e-commerce.
Platform, where the majority of customers, who access key site electronically online our new customers. So I think you could think of it is broad based across all the segments that we're focused on and delivering solutions to today.
It gives us this broader footprint and this higher diversity of customer base that adds to our strength. In addition to the top line growth that delivers quarter after quarter.
That's great. Thank you guys all for the color.
Thank you.
Our next question will come from the line of Chris Snyder with UBS.
Thank you. My question is on the guide, which puts I think F Q4 revenues at the midpoint about 4% below Q3 orders.
Looking back the last few years.
Q4 revenues had outpaced.
Q3 orders so does the guidance reflect expectations that supply chain headwinds will persist or are we seeing longer customer lead times or just a longer duration backlog as the company continues to push into software and recurring revenues.
I think it's a mix of several of the factors I certainly don't feel like at this point that we can say the supply chain concerns are behind us we're continuing to very actively manage.
Supply chain and we do expect there continue to be.
Some limitations on our ability to ship as a result of the supply chain constraint going forward I think you highlighted.
Some of the efforts that are going on in our services and software business that are resulting in increases in our deferred revenue accounts and the ratable Rev.
Recognition of some revenues from that I think in some markets most notably the semi market we have seen.
I've seen customers look to place orders earlier in the system or for delivery later out.
As theyre looking to secure supply and communicate their own their own needs, but we take comfort from the fact that we see the amount of fab construction that is under underway and we believe that those orders, particularly given the relationship that <unk> has with that relatively limited customer set are very strong.
I.
All of that and I just wanted to follow up on the previous comments around new customers nine.
9800, new customers, there's a lot for a company who has kind of the market share in the the history that Keith St has so I guess just to kind of simplify it.
Is all is the strong rate of customer additions driven by just the fact that the total addressable market here is expanding.
We're seeing that five G ecosystem bring new verticals into it.
Or is the company.
Taking wallet share from just existing customers that maybe haven't done.
Existing people in the supply chain that have not done business with you said previously.
Yes, Chris This is mark I'll add some more color on that if the first start with the baseline that we do business with more than 30000 customers each and every year. So we have more than 100 countries. So our presence is broad and wide you did hit on one of the key elements, which is the <unk>.
Spansion of various ecosystems Oran is a great example.
That is accelerating bringing new customers into the <unk> ecosystem.
And then the success, we're achieving in really all of the ecosystem is expanding our footprint through that leverage.
The other the other part again that Ron mentioned is the combination of marketing.
And increased selling capacity is enabling us to reach more customers into some of the more broad based segments. As an example in the last several quarters. We saw more education customers turn on we saw more research and as we spoke about earlier in the call it still.
Early days on the ramp of automotive and with that transformation from prior IC E vehicles to electric and autonomous vehicles, we're seeing a large number of new companies and customers.
That we are serving in all four regions. So it's.
Like I said before this is a.
Part of our strategy, we've been running this for five years, and it's helping us to build this base of customers and accounts going forward.
And the only appreciate all that you.
The only thing I would add to that is if you look at wallet share you're exactly right. We've expanded into services to get more of our customers' wallet share we've expanded with our software often offerings and we have added more solutions up and down the communications ecosystem, which.
<unk> clearly gives us a higher percentage of our customer share, but it's also.
Important to take a look at our competitors and just go back over the last 1234 years and take a look at our growth rates versus others and I think you'll also see.
Market share gains for key site.
Thank you.
Youre welcome.
Our next question will come from the line of Xiaomi.
<unk> with J P. Morgan.
Hi, This is Joe Cardoso on for <unk> category. Just one question for me circling back to automotive within auto there has been there's general excitement around <unk> and <unk>, both with auto aligned.
<unk> companies.
To leverage this upcoming opportunity can you touch on the competitive landscape there, particularly in that area of auto and whether you are finding incrementally tougher relative to traditional automotive world given the potential of new competition in house key jogging differentiation there. Thank you.
Thanks, So much I think if you on one on one dimension you look at the biggest changes going on in auto around EV and Avi as Ron mentioned.
In the EV space, its all about bringing the best position metrology that we have to measure current and voltage and other basic parameters that enable decision, making on extending ranges and this is a matter of us making.
Configuring, our IP to apply to a different application set and it's one where theres a lot of parallel trends of innovation going on and where we're able to do that today and it's still very early days in the EV segment, but where we're getting embedded with a lot of the leading innovators and the larger ecosystem that for me.
With regard to <unk>, clearly <unk> is going to be a big big factor, that's going to impact the <unk>.
<unk> cars, just from the connectivity aspect and the entire technology stack that goes with it and that's we're extending our strength and differentiation in <unk> into this marketplace continues to give us a unique position of differentiation some of the successes we're having.
Is it on account of that and as you saw we just entered into a partnership with <unk> well to continue to promote the new standards approach to test.
In this marketplace. So it's still very early days, we're very pleased with the results. This quarter, we had strong growth and second consecutive quarter of double digit growth in auto and there is plenty of runway ahead.
And then on the competitive landscape being tougher.
Yeah, but they're not to the competitive landscape I mean clearly anytime.
There are traditional competitors that have been in the <unk>.
The combustible market players that are trying to configure to try to address this opportunity, but as we think about it the expertise needed.
And that and the IP needed to play in this space longer term.
We bring a very unique perspective there.
Got it appreciate the color. Thanks.
And our next question will come from the line of David Ridley Lane with Bank of America.
Good evening.
So Keith.
Keith I came into fiscal year 'twenty, one with a backlog built up due to COVID-19 disruptions in the prior year.
And year to date.
Already built up.
We kind of call it above average backlog.
So how do you see this.
Interplay of kind of delivery timing.
Supply chain.
It did.
Do you think you.
And you are able to deliver on that excess backlog over the next 12 months. This is something that extend how should we think about that.
Yes, it's a great question. So again I would reiterate I would start by reiterating the points that I've made which I think we've done a really good job of meeting the needs of our customers and getting them the products that they need in a timing, which is which is.
That is factory at least.
As you know we've built up significant backlog I think that backlog, it's going to it's going to come down over time, but we're also growing into it right. The business is significantly larger now than it than it than it has been previously so we would expect to be carrying higher amounts of backlog, but.
But I don't expect that there's going to be a one or two quarter flush of material backlog I think.
We're going to we're going to work it down over time and continue to meet the needs of our customers working with them on scheduling deliveries as we manage the supply chain constraints and the addition of capacity, which we're still investing in to ultimately.
Backlog levels in line with the size of our business.
That does provide a lot of confidence for us to be able to continue to grow our revenue base, having such a strong backlog.
Situation that we have.
Got it and then.
I think this is the first quarter that you've cited Oran as a driver for orders I know theres been you've been making investments there has been a lot of industry interest here.
Are you starting to see real tangible orders as a result.
Yes.
Orion was a strategic bet, we made a year or so ago, we were participating with the origin of the all around the alliance for a longer time than that at the highest level. We've long seen that the technology stacks are going to get virtualized to take advantage of the economics and the flexibility that cloud that.
So the cloud and so we if you remember a couple of years ago. We made the acquisition of Prisma, which gave us some unique capabilities, which were then able to combine with our ixia acquisition that we made subsequently and we've launched the key site open ran architect.
Capability last quarter and we've received.
Pretty sizable orders already and we have a very strong pipeline and this quarter. We took the key side open ran architecture and have now made it available on the Amazon cloud as an offering for customers that are coming into this opportunity from a software perspective, So it's software testing software.
We feel very good about our position in this marketplace.
Just wanted to highlight that multiple open ran test and integration centers around the globe have already selected us and a core offering and you've also heard I think Ron referenced the success, we've had with Vodafone selecting key side.
As a partner for design and test so.
Very pleased with it but again from a timeline of Oran. This as a long term trend.
One that where we're well positioned today, but we will continue to grow this business over time.
Alright, Thank you very much and congratulations on delivering results in a very tough market. Thank you.
Thank you.
Our next question will come from the line of Adam Thalheimer with Thompson Davis.
Thanks, Good afternoon, guys and congratulations.
Thanks, Dan I wanted to ask one question on semiconductors can you give us a sense of where we are in the semiconductor cycle for key site and also how much visibility you have there.
Yeah I'll take this clearly very strong quarter again building on four consecutive quarters of record orders and revenue in the business. We're very pleased with the performance there.
We got to where we play we're playing in the wafer test which is in the front end of the of the semi process.
And given the dynamics that are going on around the lithography and the advancements that are playing out, especially driven by <unk> and data center applications for seven nanometer five nanometer and three nanometers I think all of those new node sites based opportunities are still on the very early innings because one.
<unk>.
Those nodes have to get stable and then ramp up so it's still very early stages. There. So we view the.
Capital.
Spend for those new node sizes to be too.
To be fairly.
Stable over time.
Obviously, there is there is a part of the business that that is about scaling capacity into mature processes and we think that will continue given this current semi.
Or they just don't are going on and demand being high through 'twenty, two and domains.
It remains to be seen what happens longer term. We also it is important to highlight that given the infrastructure spend that's likely to come into the United States and Europe and other regions looking to localize supply chain. It's one dynamic that's not factored into any of these outlook projections could have more upside for the semi business.
But again you look at the end market demand drivers, whether it's new memory topologies are <unk>, our data center demand all of those are feeding into this at this point.
Good outlook. Thank you very much.
Our next question will come from the line of Rob Mason with Baird.
Yes, good afternoon.
Several questions already around supply chain, but.
Perhaps I missed it but did you speak to your own efforts internally too.
Kind of boost capacity production capacity.
Going to increase that.
At the same time battling some of the COVID-19 related restrictions it wasn't effort.
Maybe just an update on that front and maybe relatedly as well, it's just how do you think about.
The seasonality of the business, we went through this year with kind of muted seasonality.
For several reasons.
That seasonality continuing as we head into.
Or kind of muted seasonality continuing as we head into 'twenty two.
Yeah, Great question. So obviously, we have been and continue to invest in increasing our own capacity just as a point, we did $4.2 million of revenue last year.
We're going to be $4.9 billion of revenue. This year. So we've added significantly to two revenue.
Last quarter, we did talk about how we are within our own factories and subcontractors you did have some capacity constraints there.
What items, we're not a gating item for us this quarter, we have added enough capacity that it was no longer the gating item that doesn't mean that we are done investing as we continue to look forward to the future growth of our business, we're continuing to make investments in and further capacity expansion, but right now I feel like we're doing we're doing a good job of.
Staying ahead of ahead of the curve and certainly, particularly given that there are some supply chain constraints.
Potentially as we're leaving a little bit of the up a little bit of the pressure there on the seasonality question I've answered. This question many times over the years, you know when I sit back to model our business at the beginning of any year. We tend to think of coming off of Q4 is our biggest quarter of the year. So we model sequentially down in Q1 up in Q2 down a little.
In Q3, and then a big finish.
Q4 was the highest quarter of the year, that's how I would sit down to model our business as we talked about all through this year, we expected because of the the rebound from Covid and then more recently with some of the supply chain constraints and the need to add capacity, we expect that seasonality to be more muted this year than it has historically been.
And I think that's prudent proven out here over the last several quarters I think as we look forward at least over the next couple of quarters I expect that muted seasonality to remain intact that doesn't mean, there won't be any I just think that the swings will be less than they typically are.
And beyond that it's hard to call.
And our next question will come from the line of Mark Delaney with Goldman Sachs.
Yes, hi, good afternoon, and thanks for taking the question. The company cited trade restrictions with China as a headwind to the growth rate that you reported I was hoping you could elaborate a bit more on what you've ended up seeing in some of.
The puts and takes.
And in the context of maybe there are certain customers youre not able to ship to but to what extent have you been able to offset some of those.
S trade related headwinds.
As you can focus more of your own resources on other customers or some of your other customers perhaps took market share.
Mark Mark do you want to take that or.
Yeah, Yeah, I'll be happy to Hey, Mark.
No.
As I mentioned before we.
We did see some uplift from the Covid recovery in certain segments that were really more affected by the the impact last year and the early part of this year. So you would consider that to be automotive manufacturing supply chain. The things we've talked about rate education at reach.
Search and then our sales into some of the broad customers, both direct and indirect so that's.
That's a dynamic that we certainly experienced we had some pull in as we talked about before in semiconductor, but it was small.
It really gives us this longer visibility through their forecasts and funnels going out many many quarters as that is a slower moving process with with the fabs and so forth.
But again most of our growth in the quarter still comes from the continuing investments in the areas that we're talking about for next generation technologies.
Across commercial comms in aerospace defense in E mobility and.
We've done a great job of capturing those in all regions, including China, where obviously, that's where the headwinds originate.
This last quarter, we overcame them again sustaining top line growth in China double digit growth when you exclude the trade it.
Trade impact and.
It's really a testament to our ability to pivot to the broad based business that's available to us in China and the ability to capture that throughout the various cycles. So semiconductor again automotive general electronics. So we've not only pivoted in China, but we've also captured this around the world.
And getting more specifically with regard to the trade headwinds.
There's no doubt there's been some work.
He has been added to the restricted list, but the team has done an excellent job of still providing growth despite that and making up for.
For let's say large sales that were a headwind going into into this year and most of that is behind us and we look forward to.
Future.
Yes, just wanted one more add on that Q2 Q3 was the last quarter of strong headwinds.
From from one customer in China, So, it's going to be a little better going forward.
Just a follow up question.
On supply chain, and specifically with Malaysia, given the vaccination rates that you mentioned within your factory can you talk about to what extent you can operate at normal or near normal levels of capacity in Malaysia, because of those vaccination rates or are there still.
Restrictions on how much you can have.
Operating in Malaysia.
Yes.
We're in Penang in Malaysia, some of the bigger outbreaks that they did have in Malaysia first occurred in the southern part of Malaysia not.
In Penang, where we are but regardless regardless of that we had a very.
Very massive effort to not only backs in a our employees, but also folks that we work with our partners are some of our contract manufacturers are shippers that come in anybody that gets in contact with us and we have over 95% that have received the first dose.
As the beginning of this week. This week they were getting the second dose so that feels very good that's not a constraint right now, but as the orders grow will continue to build that the constraint is just getting some.
Lower level of components on certain areas, but we feel very good about our production capacity that we have in Malaysia as well as what we have in the other facilities, where we do manufacturer as we do some manufacturing in the U S. We do some in Germany.
And altogether, it's all built into the guide.
Thank you.
Youre welcome.
And our next question will come from the line of Brandon Couillard with Jefferies.
Hey, good afternoon.
Neil just.
Clarifications just on the <unk> guide I mean, if the Huawei headwinds roll off in the fourth quarter will surprise.
The implied revenue growth in the fourth quarter wouldn't be better than kind of low single digits.
If that's the case, which would imply a deceleration on a two to three years, two and three year stacked comps it doesn't sound like the end markets have changed all that much you talked about supply chain constraints here and there, but you seem to be managing it fairly well so.
Am I missing something here or are you embedding, perhaps a little more conservatism around.
One particular end market.
Yes, no I think I think as we've gone through this year, we've been building our ability to ship and our ability to drive incremental revenues as we've gone through the year at <unk>.
<unk> hundred 80, Q1.12, one in Q2.246 Q3, we're guiding to $12.60, Q4, so we're making some stepped up progression in terms of the year over year growth rates obviously.
The Q4 of last year with the kind of the big bounce back quarter after our factories reopened up and re ramp.
During the initial COVID-19 shutdown and so we have an unusually tough compare from a year ago and frankly, not just on the revenue line, but we've talked about the extraordinarily favorable mix that we saw in Q4 of last year that grow gross margins and operating margins high and so I think if youre thinking about it from that perspective, I, just point really to that tough comp.
It is something thats going to thats going to mute growth rates here in the fourth quarter, but I think we continue to make progress adding capacity continue to making progress in terms of ramping our revenue and.
We're really well positioned as we look forward to FY 'twenty two.
Okay, and then maybe I missed this but did you get the software and service revenue growth for the third quarter.
We did not but both both businesses to continue to grow very very strongly here in the fourth quarter and we're very pleased with it would be.
With the progress, we're making in both areas double digits for both for both lines of business.
Got you. Thank you.
Thank you and with that that will conclude today's question and answer session and I will turn the call over to Jason Kary for closing comments.
Thank you Holly and thank you everyone for joining US today, we look forward to speaking with many of you at the upcoming conferences.
And wish you all a great day and a great evening.
Once again, we'd like to thank you for your participation on today's conference call you may now disconnect.
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