Q4 2021 Keysight Technologies Inc Earnings Call
Good day, ladies and gentlemen, welcome to the key site technologies fiscal fourth quarter 2021 earnings conference call. My name is Catherine and I will be read out later today.
After the presentation, we will conduct a question and answer session. If you'd like to ask a question. Please press star followed by the number one on Israel I think keep at <unk>.
This guy a question please press the pound sign.
Any time during the conference you need to reach an operator. Please press the star followed by zero. Please note that today's call is being recorded today Monday February 22nd century, 21, and 130 Pacific time.
I'd now like to hand, the call over to Jason Kary, Vice President Treasurer.
And Investor Relations. Please go ahead Mr. Carey.
Thank you and welcome everyone to key sites fourth 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 President of global sales.
You can find the press release and information to supplement today's discussion on our website at Investor Doc Quayside 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.
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 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 the company's recent SEC filings for a more complete picture of.
Our risks and other factors lastly, I would note that management is scheduled to participate in upcoming investor conferences in December hosted by Credit Suisse Wells Fargo, and Barclays and now I will turn the call over to Ron.
Thank you, Jason and thank you all for joining us.
Keith site delivered a record quarter and fiscal year strong demand for our portfolio differentiated solutions is fueling continued momentum across all of our end markets.
Today I'll focus my comments on four key headlines.
First demand for key sites differentiated solutions continues to be very strong with orders exceeding our expectations.
Outstanding order growth of 21% in the fourth quarter capped off an excellent fiscal year, where we grew 18%.
<unk> continues to be balanced.
Business with double digit gains across all end markets and regions.
Both in the fourth quarter and for the full fiscal year.
Second we delivered outstanding Q4 results, despite tightening supply environment.
<unk> execution by key site employees around the world resulted in record revenue gross margin operating margin and earnings per share for the fourth quarter and for the fiscal year 2021 third we enter 2022 with strong momentum robust end market demand.
And record backlog.
Assuming a loosening of the supply situation in the second half of the calendar year, we expect fiscal year 2022 revenue growth of 6% to 7%, while delivering 10% earnings growth.
Beyond 2022, we are increasingly confident in our ability to deliver sustained above market results.
We have established a strong track record of execution and our competitive position earned over the past seven years of investment in transformation has only grown stronger.
Lastly, given the strength of our cash position and generation, we continue to see tremendous opportunities for value creation through disciplined investment in organic capabilities targeted acquisitions and accordingly today, we announced a new share repurchase authorization of one.
One 2 billion.
Okay.
Now, let's take a deeper look at the strength of our fourth quarter and fiscal year 2021 financial performance.
In the fourth quarter, we saw continued momentum in the demand environment orders exceeded our expectations and grew 21% year over year revenue grew 6% with growth across all regions operational excellence resulted in record profitability as we delivered gross margin of 66%.
Operating margin of 31%.
Earnings of $1.82 per share.
Fourth quarter results drove a very strong finish to an excellent year in 2021, we overcame five percentage points of China trade headwinds and deliberate 18% order growth to outpace the overall market, which continues to be strong.
A tightening supply environment, we ended the year with 17% revenue growth and achieved record profitability with gross margin of 65% operating margin of 28% and earnings of $6 23 per share.
Compared to pre pandemic fiscal year, 2019 orders and revenue have grown 21% and 15% respectively. Over this two year period, highlighting the continued strong demand for our market leading solutions.
Broad based growth across multiple dimensions of the business demonstrates the breadth of our customer base, we added more than 2000 customers in 2021 and more than 1900 2020, as we continue to expand our footprint, adding to the stability and durability of our business model.
Despite the headwinds we faced in 2021, we've delivered annual double digit order and revenue growth in both business segments. The.
The electronic industrial solutions group achieved its fifth consecutive quarter of record revenue driven by double digit growth in semiconductor solutions and in automotive.
Another quarter of record semiconductor revenue was fueled by ongoing investments in advanced technology nodes and capacity expansion to address pent up demand.
In automotive, we achieved record orders for the third consecutive quarter of double digit order and revenue growth investment remains strong in EV and <unk> technologies.
This quarter, we announced the collaboration with Neil one of China's top E. The automakers, who selected key sites five G and <unk> network emulation solutions.
Strong demand for general Electronics solutions was driven by continued investments in digital transformation industrial Iot digital health industrial 4.0, and advanced academic research.
The communications solutions group delivered double digit order growth and record revenue in the fourth quarter for the year orders and revenue grew double digits. Despite the impact of China trade restrictions.
Commercial communications achieved all time record orders and revenue in the fourth quarter.
Q4 was another record quarter for <unk>, driven by the strength of our platform continue all ran adoption and new industry applications.
And we saw ongoing investments in 400, G and 800 G R&D across the entire communications ecosystem.
<unk> spending in data centers and network security drove double digit order growth in network test and visibility.
In aerospace defense and government double digit order growth was driven by ongoing investments in technology with the focus on space and new commercial technologies like <unk> G. We recently announced the collaboration with Lockheed Martin to advance <unk> in support of mission critical communications for aerospace and.
Applications.
Can you touch first to market solutions are enabling the rapid progression of new technologies and winning engagement with industrial leaders like NXP any fee and media Tech in Q4, we joy Google's cloud partner initiatives to support agile orchestration of innovative <unk> services at the <unk>.
Work edge.
Our end to end solutions portfolio continues to capture new opportunities as the <unk> lifecycle progressive and expands into aerospace defense and government.
We continue to accelerate key sites capabilities to provide industry, leading solutions through strategic acquisitions, and recently added scalable network technologies towards software centric solutions portfolio scalable as a provider of best in class network stimulation solutions to model and visualized communications.
Works and cyber effects for aerospace defense and government customers. We're excited to welcome the scalable team to key sites.
Our software centric solutions and higher value services continue to drive differentiation strengthen our competitive position and capture a higher percentage of our customers' wallet share in fiscal year 2021 software and services not only delivered double digit order and revenue growth, but also outpaced key.
Sites overall growth.
Combined they represented just over one third of <unk> total revenue for the year.
We also continued to grow annualized recurring revenue, which now exceeds $1 billion the growth in software and services as well as the recurring revenue further strengthens the durability and resiliency of our business model, while at the same time contributing to key sites margin expansion.
<unk> focus on first to market software centric solutions and operational excellence drives our consistent execution.
We have a strong track record of performance and proven business resiliency.
Our inception as a public company seven years ago, we have achieved a 10% compound annual revenue growth rate expanded gross margin by over 800 basis points increased operating margin by nearly 1000 basis points and generate 16%.
<unk> EPS growth.
All while significantly increasing investment in R&D and sales to drive future growth.
Over the same period, we have nearly tripled the size of our software revenue and more than doubled recurring revenue while growing services, 75%. These accomplishments are a testament to Keith leadership model, our values and our people I would like to thank all key site employee.
For their exceptional execution and dedication we continue to capitalize on these multiple ways of technology innovation and long term secular growth trends across multiple markets. We exit this year in a strong competitive position and expect to continue to deliver sustained above market profitable growth.
Now I will turn it over to Neil to discuss our financial performance and outlook in more detail.
Happy Thanksgiving.
Thank you Ron and Hello, everyone as Ron mentioned, we delivered an outstanding quarter and fiscal year.
In the fourth quarter of 2021, we delivered record revenue of $1 $294 million.
Which was above the high end of our guidance range and grew 6% or 5% on a core basis, despite a tightening supply environment.
To further contraction of the supply chain within the quarter tempered total revenue results and was more impactful on the communications solutions group businesses with.
With demand outpacing supply, we delivered a record $1.491 billion in orders up 21% on a reported and core basis and enter fiscal year 2022 with over $2 billion in backlog, which will position us well as the supply chain situation improves.
Looking at our operational results for Q4, we reported record gross margin of 66% and operating expenses of $456 million <unk>.
Resulting in an operating margin of 31% an all time high.
Net income was a record $338 million and we achieved $1 82 and earnings per share, which was well above the high end of our guidance are.
Our weighted average share count for the quarter was 186 million shares.
Moving to the performance of our segments, our communications solutions group generated record revenue of $919 million up 2%.
<unk> delivered gross margin of 66% and operating margin of 28%.
In Q4 commercial communications generated revenue of $622 million.
Up 3% driven by strength across the <unk> ecosystem, Oran adoption and investment in 400 gigabit and 800 gigabit R&D <unk>.
Aerospace defense and government achieved record revenue of $297 million up.
Up slightly from the same quarter last year as solid growth in Asia Pacific was offset by supply chain constraints that impacted revenue in the U S and Europe.
The electronic industrial solutions group generated fourth quarter revenue of $375 million up 18% on a reported and core basis, driven by strength in semiconductor and automotive.
ISG reported record gross margin of 66% and record operating margin of 36%.
Given tightening supply chain constraints and trade headwinds, we are very pleased with our full year results and FY 'twenty, one revenue totaled $4 9 billion.
Up 17% year over year or 15% on a core basis gross margin improved 40 basis points year over year to 65%.
We continue to invest in R&D at 16% of revenue or $788 million for the year.
While operating margin improved 260 basis points to 28%.
On the strength of this performance we've achieved our long term operating margin target of 26% to 27% two years ahead of plan.
FY 'twenty, one non-GAAP net income was $1 2 billion or $6 23 per share up 28%.
Moving to the balance sheet and cash flow, we ended our fourth quarter with $2 $1 billion in cash and cash equivalents generated cash flow from operations of $368 million.
And free cash flow of $295 million.
Total free cash flow for the year was $1 1 billion, representing 23% of revenue and 99% of non-GAAP net income.
As announced earlier today, the <unk> Board of directors has approved a new share repurchase authorization of $1 2 billion.
Effective immediately under our prior share repurchase authorization, we acquired approximately $2 1 million shares in the quarter at an average share price of $171 for total consideration of $353 million.
This brings our total share repurchase for the year to approximately 4.4 million shares at an average share price of $154 for a total consideration of $673 million or 59% of free cash flow.
Now turning to our outlook and guidance. Despite a strong demand backdrop supply chain constraints continue to moderate shipment expectations.
As a result, we expect first quarter 2022 revenue to be in the range of $1 $225 million to $1 billion and $245 million.
And Q1 earnings per share to be in the range of $1 50.
To $1 56 based on a weighted diluted share count of approximately 185 million shares.
Looking forward to 2022, we expect supply chain to remain tight in the first half of the year, assuming a loosening of the supply situation in the second half, we expect full year revenue growth to be in the range of 6% to 7%, while delivering 10% earnings growth.
Interest expense is expected to be approximately $78 million and capital expenditures are expected to be in the range of $240 million to $260 million with increasing capacity and technology investments.
Regarding our tax rate, we are modeling a 12% non-GAAP effective tax rate for FY 'twenty, two which assumes no change to current U S tax policy.
In closing we are entering the fiscal year with strong momentum our record backlog position and a strong track record of operational excellence. We're encouraged by the strong dynamics across our end markets and are competitively positioned to drive sustainable and profitable growth going forward.
With that I will now turn it back to Jason for the Q&A.
Thank you Neil Catherine will you please give the instructions for the Q&A.
If you have a question press star one on your telephone keypad again style one final question.
Your first question is from Sumit <unk> with J P. Morgan.
Hi, This is Joe Cardoso on for <unk>. My first question is just around the full year guide.
So you're getting the full year, two 6% to 7% growth and I'm, just trying to put that with your commentary last quarter around expectations around a more muted seasonality.
First of all does that expectation still stands true and if so does that imply that we should expect to see a similar cadence to revenue as we did in fiscal 'twenty, one or is there something I'm not appreciating here as I think about revenue trends for the full year, such as maybe the benefits of the loosening of the supply chain as we head into the back half of the year.
Yes, I can make it it's a great question so yeah.
As we mentioned on the call we did see the supply chain situation tightened during the quarter and our guidance does assume that we will see some relaxation in that environment in the back half of the year. So if I was thinking about the seasonality.
For FY 'twenty, two I'd say two things I think first of all I think we'd expect revenue to build as we move throughout the year and then maybe if you think about it in terms of year over year growth rate.
Our guidance for 6% to 7% for the full year.
If I was thinking about that on a quarter by quarter basis, I think be expecting growth rates in the first half of the year that are below that 6% to 7% level and growth rates in the back half of the year that are slightly above that six to seven 7% level. So that we average that for the full year.
Got it appreciate the color there and then just on my second question is.
ISG posted record operating margin this quarter.
They were really strong just curious to hear you know what were some of the big drivers are contributors to the margin there.
Relative to operating margins and just curious to hear if there was any onetime benefits in the quarter that we should consider.
No one time benefits, but I mean, I think the thing that comes immediately.
To the forefront as obviously the extraordinarily strong.
Our revenue growth for the year with with 30% revenue growth on the year.
The business the demand for those products has been it has been very strong we've seen a very nice rebound this year and the automotive business the semi business we all.
Everybody has seen the press on the continued strength in semi so you take you take that strong demand picture.
And and.
Which essentially essentially allowed them to leverage their opex infrastructure and drive really high levels of operating margin in the short run I think as we look forward. We continue to see great opportunities to continue to grow the business as well as to invest in further technology investments to serve these end markets.
Thanks, guys I appreciate the color.
Your next question is from John Pitzer with Credit Suisse.
Yes. Good afternoon, guys. Congratulations on the solid results Neil I Wonder if you could just dig a little bit deeper into kind of some of the supply constraints that you're seeing out there I think you said in your prepared comments its hitting es ISG stronger than comms I'm kind of curious as this logistical constraints as a component constraints.
There's a little bit of everything and is there a dollar amount you can give us that it impacted revenue both in the fiscal fourth quarter and the fiscal first quarter. Yeah. Thanks, John It's a great question. So first of all I said the opposite the impact was greater on CSD businesses than in EDA is E. ISG businesses and if you think about why that is.
CST products tend to be more complex they have it they have a longer.
Bill of materials and so there are there are more parts and components that go into building those instruments on average and so that just by its nature increases the risk and the challenges that we have to fulfill that supply chain. I think it's also true on average that the CSC products tend to be at the higher end of the technology spectrum and so there are.
Fewer.
Suppliers for those for those cutting edge technology products.
And then for.
A little bit more of the mainstream products that exist within within the ISG I think if you think about the impact that supply chain.
Lump COVID-19 and supply chain together, because we've really seen this phenomenon over the last couple of years and if youre, if youre starting to think about.
How to quantify those impacts I'd really kind of focus your attention not on any one quarter, but over time you are looking at the full fiscal years as an example.
At our order rates right. If you look at our history prior to prior to 2020.
We've done a pretty good job of converting our orders to revenue. There is typically a little bit of a lag a certain percentage of each quarter's order shipped within the quarter. Another another portion shift out into into the into the following quarters, but over the past over.
Over the past couple of years in 2020, because of Covid and in 2021 because of supply chain.
We have we have seen that delta between orders and revenue grow and so I think we estimate that.
If you think about it in terms of kind of an abnormal backlog build that.
That abnormal backlog build over the last couple of years is in the 3% to $400 million range and so I think that's the opportunity for us as we look forward to to eventually clear that backlog once the supply chain situation.
No.
Fixes itself I don't expect it will flush that in a quarter or two I think it will it will happen over time because of the.
The remedies to supply chain are going to happen over time as well, but that's the rough magnitude of what we've what the impact has been here over a couple year period of time.
That's really helpful color and then Ron you know over the last several years.
On this side of the world have been trying to compare and contrast sort of the <unk> rollout with the <unk> rollout relative to your business and I guess, what I was hoping to do is get a little bit more color about the software strategy, you're deploying this time around which seems like an incremental driver I'm just kind of curious can you size.
The potential Tam opportunities that gives you, especially as the network Morris from just being a backbone for handsets and mobile to actually being a backbone for a lot of new incremental applications and to the extent that software and services as a third of the business now sort of how do we think about that over the next three years to five years.
Well. Thanks, John It is very very clear that software and services continues to be a bigger and bigger percentage of our total business as we've moved from a hardware product supplier to a software centric solution provider and the solutions obviously include.
Hardware software and services and we've seen great growth, obviously in our software and our services and they outpaced the hardware growth looking overall at five <unk> versus four G. We made a decision in 2013, we announced that we were going to spin off <unk>.
In 2013, which we eventually did in November of 2014, but in 2013 I started working with the team that was developing two invest in <unk> and make sure that we were going to be leaders in four G. We were providing a little bit more.
Let's say cash contribution to agile and where we were not investing as heavily in the communications rollout.
For G by a substantial amount so we invested earlier, we invested or greater.
Greater amount is now we're roughly at 16% R&D, where we used to be at approximately 12% of R&D and we've gone from roughly 400 million to roughly $800 million in R&D spend.
Over this period of time, but software is a key part what we did was we consolidated our hardware our hardware development facilities into one organization as opposed to in separate divisions.
And accordingly that enabled us to basically provide software that could span the whole product offering and we made an acquisition for instance of a company called <unk>, which gave us software capability. They had some capability in <unk>, we move them over to five G.
All of this together.
Investing more starting earlier, having a consistent <unk>.
D and investment profile has really gave us the lead and caused us to be a much much much stronger provider and I believe the leading provider for four or five G E.
Is it.
Still growing and we anticipated grown for years, so I'm going to turn it over to cities you can tell you a little bit more about our results and our growth in <unk>.
Not only 2021, but what he sees going forward.
Yeah. Thank you Ron Great question I think the summary, we've had another record quarter for <unk>.
And the drivers are scaling deployments, but equally important is the new application space and I think we all played that as a strategy. We had to continue the progression from physical to protocol to application and this application areas very rich right as I look forward. Some of these application spaces have.
Software.
As a percentage of the total value proposition in the 30 40, 50% range and one we.
We pursue very actively.
Just make a few examples of these right. So you can think of on the <unk> side or and being a great out.
Example of that on the wireline side, the protocols with 400 gig 800 gig getting more complex.
You look at new emerging spaces, like SD Wan SaaS and Mac Sac in the security domain. So you look at the commercial comms portfolio.
Very rich in applications that really favor our strategy of being more software centric and one we're investing to pursue and we're generating strong results.
Perfect. Thanks, guys congratulations.
Thank you.
We are ready for the next question.
From Jim Suva of CIT.
The bank.
Thank you very much.
I had thought about your vertical integration.
You're a lot more vertically integrated than the other companies.
Has that materially benefited you during the supply chain bottlenecks are there like little things, whether it be plastics or connector or housing debt that held you back just as much as the other and I'm just trying to think about does this now cause you to even want to be a little bit more vertically integrated or are you at the sweet spot of your vertical.
Integration. Thank you.
Sure Jim the first thing that's probably real.
Really important to note is that our differentiating technologies that have given us the leadership position.
Outside of the software that we have developed is semiconductors that have very.
Particularly high performance capabilities and as you know we have an onsite fab that exists in Santa Rosa and that fab mix gallium arsenide and indium phosphide semiconductors. So a lot of people are having trouble now getting more custom components.
Built where.
Custom components built and we build a lot of those custom components in house. So that has definitely helped US now again, if you don't have all the parts you can't ship anything.
And we are in relatively good shape compared to other competitors, but.
There is no doubt that we have to make sure that we get all the components components.
Components are needed in order to ship the product, we always will look for opportunities to integrate provided that it makes financial sense. We feel very good about what we have in house right now it's not so much the plastic pieces and things like that there are obviously not only <unk>.
<unk>, but there is the whole logistical.
Shipping.
Issues that the whole world is going through so we are impacted a little bit less than.
Less than others and I think the overall organization has done a real good job of.
Unable to deliver.
These very very challenging times.
Great. Thank you and congratulations to you and your team at key sites.
Thank you Tim.
Great and then the next question goes to Mark Delaney from Goldman Sachs.
Question.
The defense primes have spoken too slow and department of defense budget outlays and I appreciate that Keith say to reported broad based order strength, but I was hoping you could talk a little bit more on what youre seeing in your <unk> segment, and if you are experiencing any slower end market trends, even if in certain portions of that business segment.
So again.
A pretty strong quarter for aerospace defense orders are growing double digits, finishing off a year with double digit growth. If you look at what drove that growth.
The recovery in the macro environment globally stimulus spend especially towards technology that continues to increase both in the U S and internationally.
And one where we're capturing we also took some concerted steps.
Last year or two or two years ago in fact, too to take our <unk> technology stack and and customize it for aerospace defense applications and as you've probably seen our.
Collaboration with Lockheed Martin that we announced so we're really pleased with the progression that we're making with commercial technologies that are getting adopted so all of these are pretty favorable.
We are observing that right now the.
We are under a continuing resolution from a budget perspective in the U S.
But if you look at the budget that has been put in place and if that has been proposed and if it's approved that's called for a year over year increase and also increased spend in technology or <unk> line item, which we view as a favorable dynamic, particularly the infrastructure Bill that is that is getting through the Congress has some.
Sustained spend outlays for EV and broadband in semiconductor, which we also think is favorable for us.
That's really helpful color. Thank you for all those comments and my follow up question is on the supply chain and if you could talk in a bit more depth around what is leading to your comments of potential alleviation in the second half of this coming fiscal year. Thank you.
Yes.
The supply chain situation.
It's very dynamic I guess I would start by saying that and we are we have very.
Close relationships with our key suppliers and are in constant dialog with them. During this period of time to make sure that we are procuring the parts that are necessary to meet the needs of our customers I think.
Our our confidence and.
Our guide reflect.
<unk>.
The start of a recovery in the supply chain situation in the back half.
Comes from direct indications that we've got from key came from key suppliers within our supply chain environment.
Okay, great. Thanks.
Thanks for that Mark will move over to Tim long from Barclays.
Thank you.
Two if I could.
And maybe on the wireless side could you talk a little bit about kind of the impact of C band.
And current views on millimeter wave, particularly with the C band any impacts from.
These potential delays with the FAA et cetera.
And then secondly, and maybe Neil could you just kind of update US has obviously been a great period of margin expansion.
Expansion can you talk a little bit.
Give us an updated view on kind of leverage and incremental margin gross and operating from from these levels. Thank you.
They will make a few comments on <unk>.
As we stated before the.
Continuing deployments that are going on especially in the low frequency bands across the world. We viewed as a favorable dynamic specifically the C band auction was a near term catalysts and we've had some strong results as I mentioned.
Double strong double digit growth in <unk> this quarter capping off a double digit growth in <unk>.
For the full fiscal year.
And a big part of that was driven by the C band auction and the related investments that are going on in the Americas, Our Americas business was.
Drew the strongest in our <unk> from a regional perspective, and we also saw our fr one of low frequency.
Business doubled year over year, so very strong results all the while we're not a millimeter wave business has been pretty stable. This year and as we have mentioned before in the medium term, we're expecting that the millimeter wave adoption continues to rise in a very steady manner and we're watching for the Beijing Olympics.
Use cases to emerge from from the success of the Beijing Olympics that we expect to occur next year.
Yes, Tim to your second question, Yes, we've obviously had a great run here in terms of in terms of margin expansion since that since the birth of key site, adding 800 basis points approximately two gross margins about 1000 basis points of operating margins and I think the key point is that as we look forward over the longer term, we continue to see opportunity.
<unk> for further further expansion of margins.
Within the key site portfolio I think as we look at look to next year.
It's a really dynamic time, obviously with supply chain pressures, putting a little bit of a governor on revenue at.
At the same time, we've got inflationary pressures across the broader economy and then the other thing that we're looking forward looking too that's a little bit of a cost up within the within next year's is is hopefully a return to kind of a post COVID-19 or are pre COVID-19 normal in terms of our general operating environment and that includes the costs associated with that facility.
These management when we as we return to the office increased travel.
As people get back out and start seeing seeing customers and conducting more business in person rather than over over over zoom.
And maybe the last point being that.
We saw we invested in R&D. This year, just under 16% of revenue I think we continue to see great opportunities to invest in technology and bring new solutions into the marketplace I think youre likely to see R&D.
Tick upward next year into that kind of mid 16% range. So from those perspectives I think FY 'twenty, two maybe a bit of a catch up year, but over the longer term a lot of opportunity as we expand our software portfolio expand our solutions portfolio continue to work with customers and provide them with first to market solutions to continue to drive.
Both gross and operating margins northward.
Okay. Thank you.
Alright, and the next question comes from Matt Mcnulty of Deutsche Bank.
Hey, guys. This is Nick on for Matthew Congrats on the quarter.
So just first I wanted to talk about Capex.
The capex guidance picking up next year I, just want to know, what's driving that uplift and whether that should carry on into future years.
Sustainable or is there a specific project that's going on.
Yes.
Yes, it's a great question Nick in them. So we started to or we talked about in this in this recently completed fiscal year that we expected a couple of years of elevated capex as a result of efforts to improve the resiliency of our supply chain.
And that in fact did pan out with with a capex of approximately $175 million. This year I think in addition to continuing those investments we see incremental investments that are necessary as we as we continue to expand our own capacity invest in key technologies to drive the future growth of our business. So I think.
Those are additive given everything that's happening across the economic.
Severe today there are there is.
Relative to what we were seeing this time last year.
An increased need to spend money on capacity investments here within within key site and so.
I do not believe that the 200 or approximately $250 million of.
Capex that we've communicated for next year as the new steady state that is not the case.
That steady state is significantly lower exactly where a little bit difficult to call at this point, but materially lower than the $250 million that we're indicating for for FY 'twenty for FY 'twenty two.
Okay that makes sense and then just a quick follow up on the competitive environment.
There are few puts and takes that I'm just thinking I was wondering if you could provide some color on the one hand, a lot of competitors are having a harder time depending on shipment.
That created a positive pricing environment, and then slightly different.
One of your competitors recently made some easy acquisition, just how you're thinking about ESG from a competitive landscape going forward.
Very strong performance in our <unk> business again strength as I mentioned in the semiconductor where new wafer starts.
<unk> really enabling us to continue to drive growth there a very strong year again building off of a strong double digit year last year in semiconductor as well so when I think about what we're doing there we're definitely taking share and we're continuing to invest to keep that portfolio growing and capitalizing on the environment, we see with semiconductor.
With regard to automotive it's been a newer market entry for us relatively speaking we started this since spin we're very pleased with the results we're seeing so far and we've made.
Look at this fiscal year, we've had some wins in the manufacturing expansions that have happened in the EV.
Sector and as we sure up our contributions in the AAV market, we've announced a partnership with Neil as an example.
What we're doing by extending our <unk> technology stack and CV to wax.
In summary, all in all you look at our entire portfolio for automotive is growing and it is much more comprehensive than any of our traditional competitors at this point and we are continuing to invest in and growing that business. So overall pleased with where we find ourselves with the IC business.
And your second question, which was with competitors, having a little tougher time on shipments or are we going ahead and taking advantage of that for pricing. The answer is no. We're in this for the long haul with customers. We've been back from the original Hewlett Packard days.
Over 80 years working with customers.
We're not taking advantage of them where costs are up in certain areas for shipments and others. We will do price increases, but not because of any competitive position or hard ability for our customers to get products from competitors.
Okay, great Thanks, and congrats again.
Thank you very much.
Next question comes from the line of Chris Snyder of UBS.
Thank you.
So the company in the past just talked to industry growth in the 3% to 5% range with expectations for about 100 to 200 bps of outgrowth for key site above the industry.
But when we look at it over the last four years now the company has been growing about 10% organically per annum. So I guess my question is isn't.
Is this level of growth more so driven by just much stronger industry growth over the last four years or just better key site outgrowth or combination of both can you just kind of help us unpack, how we kind of bridge that gap.
I'll make a couple of comments and then turn it over I think it's a combination of two there is no doubt that we've seen more growth and more opportunity to get in <unk>, but as we see the digitization of everything the market as there is no doubt a great place to be and we have a very <unk>.
Diversity portfolio and we're seeing growth in semiconductor we're seeing growth in.
In industrial industry industrial 4.0, we're seeing growth.
All across our real stated growth initiatives in the markets that we've gone. After so there is no doubt we pick markets that are winning and we have been growing faster than than the market in general and I think the execution of the team the investment that we have in our <unk>.
Strategy of providing customers with total solutions.
Is unmatched in the in the industry others are trying to mimic it to a certain extent, but I do believe with our outstanding sales force sales support organization. Our overall organized organization that provides hardware software and.
We will call its partnership with key market makers. It makes a huge difference on how successful we are so.
I'll start there and so teach may want to make another comment.
Now Ron I think Youre, absolutely right with regard to what we see in the marketplace is this expanding ecosystem as we have expanded our portfolio from just products to offering total solutions to customers.
We remain focused on the end markets that we've called out another angle to this that Mark Wallace can add is the customer adds that of course as this expanding contribution that we're making.
Yes, Thanks <unk>.
Chris to add to this I think our go to market. The investments we've made in sales and marketing and customer engagement is is making a big difference as you heard we had strong double digit order growth across all regions and all end markets not just for Q4, but for the entire fiscal year. So this is a very soft.
Staining effect that we've had as we engage with the market leaders.
Implanting, our solutions engineers to help innovate with customers our largest customers have grown substantially our long tail of small and medium sized business customers have grown and.
As Ron has mentioned in the prepared statements. We continue to add new customers every quarter and every year more than 2000 were added during fiscal year.
21.
Which create sustaining opportunities for us going forward Diversifies, our business and then it's not just all about our direct channel we have a very strong.
<unk> ship or partner channel with the indirect channel distribution sales, helping us reach.
More than 30000 customers per year, and we're seeing continued adoption and growth from our e-commerce channels as well. So we have multiple ways to serve our customers and deliver these great solutions and I think that's a big part of it too.
Yeah.
Yeah, I appreciate all of that color from everybody.
My follow up would be so.
Terms of the above normal industry growth, how long can that last and is it reasonable to think that lasts until five G peaks, which I believe is expected maybe in the 'twenty three 'twenty four time frame.
Then in addition to that is there any reason why we should expect key site outgrowth over the market to compress back to the 100 or 200 bps.
Kind of guided levels, just given the R&D scale investment advantage the company has.
If we were sitting at a total of lets say, 60% market share or 70% market share you may say there is diminishing returns, but when we look overall, where we are we're in the 25% to 30% range. We have a lot of headroom and I believe it's going to go way past five.
G five G, whether youre talking 24 or whatever whatever your perspective is on that we're already investing in <unk>.
<unk>, we're investing in.
In easy we're investing in AAV and there are so many more opportunities that are being put right in front of us or that we see.
We are aiming to go ahead and outgrow the market for many many years.
The only thing I would add to that is our ability to spend $800 million a year in R&D is a real differentiator in the marketplace and I think goes to at least to indicate what our ability to continue to outperform the broader market should be over time.
Appreciate the time guys. Thank you.
Thank you.
Next question comes from the line of Rob Mason at Baird.
Yes. Thanks.
Sorry, Rob.
Yeah.
Rob your audio.
<unk> has cut out I.
I think we just lost the call can come back to you.
Mr. Baker Your line is open.
Yes.
Yeah.
Can you hear me, yes, yes, we can hear you Rob go ahead, okay apologies I'm not sure what happened.
I did have a clarification question just on the first quarter guidance. So I guess, Neil maybe just directed to you.
Is the assumption that.
Margins would be down year over year within your guidance.
Sure totally caught your.
Below the line guidance.
Yes.
All I said was.
Relative to where we just finished Q4 right. We finished we finished the year at 15, 9% R&D investment it was a point lower than that in the fourth quarter and I think we look and see a tremendous amount of opportunity for us to invest.
Via the R&D line to bring new technologies to market. So I think over the course of FY 'twenty two you could expect us.
To return our R&D spend more into that mid 16% kind of a range, which will obviously have a little bit of a pressure on margins. The only other thing I would say is in Q4, we did have extraordinary or we did a very favorable product mix within the quarter at least as we see.
Q1, taking shape, we expect mix on a sequential basis to be a little bit less favorable so.
And then there are some normal items for key sites that also typically impact Q1, most notably that we do company wide salary administration in the first quarter and given the inflationary environment that we're in that is.
Sure.
Larger than typical salary increase.
This Q1.
Okay.
And again.
And again, that's compared to Q4, which was a 31% operating margin that was very very high record.
Right.
How would.
Your expectation within 10% type EPS growth how would you.
Your assumptions around incentive compensation play on a year over year basis.
Yes. So obviously there is two components to our incentive programs there's the.
There is the incentive programs for the broader employee base, which are driven.
Based on the.
Organic growth rate of the company as well as our operating margins and so those would be the true drivers. There I think for the executive population its ability to grow EPS and this is where the cash compensation portion of its ability to grow EPS and grow the top line and over the long.
Her term our primary source of variable compensation is based on total shareholder return.
And so I think as we look forward to FY 'twenty, two we're seeing wages up significantly as a result of kind of the broader inflationary environment and that's being offset by a decrease in the broader variable pay programs.
Okay. Okay.
Just a quick follow up with respect to your capital allocation.
Planned could you just give us an update on how you view the M&A pipeline.
Where you are maybe where your focus would be.
At this point.
Yes, absolutely run.
Yes, again in our target markets. What we're looking to do is provide total solutions, but as we and there's no doubt if there are certain parts or components of a total solution that we need that would be the first priority. The second thing that we're doing is we're expanding into a into adjacent markets.
As <unk> had mentioned earlier, we started off in <unk>, mostly on the physical layer.
<unk> ahead, and providing solutions there than we've moved up into the protocol layer and now you can see we're in the application layer and security. So we continue to look for.
Adjacent opportunities also.
<unk> is what we're looking at we have a very robust funnel, but we also have very high hurdles. So we have the ability to not only make the acquisitions that we need to make but also to return cash to the shareholders and that's why we announced the $1 $2 billion share buyback.
Program.
Excellent excellent. Thank you.
Alright, Thank you Rob.
Next question comes from the line of Adam Thalheimer of Thompson Davis.
Hey, good afternoon, guys great quarter.
Just a quick one on margins I'm curious.
How are you guys are thinking about operating margin improvement.
Segment.
Because you have such tough you had a great year at ISG I, just wonder if that creates a tough comp for you.
Or if you can even build off of the 21 resolved.
Yeah.
Certainly, obviously, a very very tough comp for <unk>.
ISG given the given the strong results not just within the quarter, where they where they reached up into the upper thirty's, but 36%, but for the full year here I think I think we have opportunities to increase margins across both segments. I think we have initiatives in place across both segments to increase software content to increase salute.
<unk> content and to increase the value added that we're bringing to customers and so I think.
If you think about opportunities in EV and Iot for ISG and of course in not just <unk>, but <unk> and quantum and aerospace defense on the CSD side, there's ample market opportunity for us to continue to increase the value add that <unk> brings to our customers and I think.
As we do that that has a chance to be margin accretive across both groups.
Okay. Thanks Neil.
Great. Thanks, Adam So well that concludes our question and answer session for today.
I'd like to thank you all for joining us and we look forward to speaking with many of you at the upcoming conferences.
Thanks, again and have a great day.
That concludes today's call you may now disconnect.
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