Q1 2022 Keysight Technologies Inc Earnings Call
Yeah.
Good day, ladies and gentlemen, and welcome to the key slight technologies fiscal first quarter 2022 earnings Conference call. My name is Elliot and I will be your.
Lead off with Pfizer today. After the presentation, we will conduct a question and answer session. If you would like to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press the pound sign if at any time during the conference you need to reach an operator. Please press the star followed by Deborah Please.
Please note that this call is being recorded today Thursday February 17th 2022 at 130 P M Pacific time.
I'd like to hand, the conference over to Jason Kary, Vice President Treasurer, and Investor Relations. Please go ahead Mr. Carey.
Thank you and welcome everyone to key sites first quarter earnings conference call for fiscal year 2022, 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 cities start to shake her on 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 side Dot com, while there. Please click on the link for quarterly reports under the financial information tab. There you will find an investor presentation, along with key sites segment results. Following this conference call. We will post a copy of the prepared remarks.
To the website today's comments by Ron and Neil will refer to non-GAAP financial measures. We will also make references to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months you will find the most directly comparable GAAP financial metrics and reconciliations on our website all comparisons.
Or 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 fact.
Lastly, I would note that management is scheduled to participate in upcoming investor conferences in March hosted by Susquehanna.
Organ Stanley and credit Suisse, and now I will turn the call over to Ron.
Thank you Jason and thank you all for joining us <unk> delivered a strong start to the year first quarter results are evidence that our broad based portfolio of differentiated solutions is aligned with the market's most important design and test challenges, we are enabling our customers to address rapidly.
Evolving technologies and market opportunities.
Today I'll focus my comments on three key headlines.
First we continue to see sustained robust demand with record orders again exceeding our expectations growth in the quarter was broad based and balanced across our diverse set of end markets and across all regions orders grew 22% year over year and were 31 per.
<unk> higher than the first quarter of 'twenty 'twenty just prior to the initial impact of the Covid pandemic.
Record first quarter revenue and earnings per share exceeded the high end of our guidance. Despite ongoing supply constraints are results in exceptional execution by the key site team continue to demonstrate the durability and resilience of our business and third T type solutions are aligned with the law.
Long term secular trends fueled by ongoing innovation across multiple markets.
Our investments in growth initiatives and supply chain resiliency are paying off.
We continue to expect to deliver 6% to 7% revenue growth for the year and given the stronger than guided first quarter earnings to achieve 12% earnings growth. We are confident in the strength of the company, we built and our ability to drive above market profitable growth over the long term.
Sure.
Accordingly, with the recent equity market volatility, we capitalized on the opportunity to create value for shareholders by accelerating our share repurchases in the past two quarters.
Now, let's take a deeper look into our first quarter results, we delivered another quarter of record orders, which grew 22% to $1.5 billion.
This outpaced record first quarter revenue, which grew 6% to $1.25 billion. We achieved gross margin of 66% operating margin of 28% and EPS of a dollar and 65 cents all of which were first quarter Records.
Although supply constraints continue to moderate revenue key sites consistent execution and focus on growth initiatives across the five G ecosystem automotive and software position us well to capitalize on a robust demand environment. The.
The electronics industrial solutions group delivered double digit order and revenue growth for the sixth consecutive quarter.
Record orders were driven by strong demand for automotive and semiconductor solutions as well as broad general electronic applications.
Our differentiated solutions position us well to win in the fast expanding automotive market, where we achieved all time record orders and record first quarter revenue orders grew well over 50% in the quarter and exceeded 50% growth over the past year.
Manufacturing capacity continued to expand to meet pent up demand and the E V in AAV technology investment accelerated.
This happened, particularly in Europe , and China, where E beam market share of total car sales in 2021 increased to 19% and 15% respectively.
A man remains strong from leading manufacturers for both EV and EV production test solutions power semiconductors.
Although motive electronics, and RF and millimeter wave wireless test.
<unk> continues to engage with global industry leaders, such as BMW, Sony semiconductor solutions and prevent Shea to enable next generation technologies across the automotive R&D and production workflows.
Strong demand for our semiconductor solutions drove double digit order and revenue growth and resulted in record orders and a record first quarter revenue investments remained high in advanced semiconductor technologies and capacity expansion to serve a broad set of applications, including silicon rich smart.
Phones high performance computing, Iot and autos.
In General Electronics, we achieved record orders with double digit growth across all regions driven by investment in manufacturing and device development for consumer and industrial Iot digital health connectivity and remote monitoring.
Turning to the Communications solutions group, we delivered record first quarter orders and revenue with double digit order growth across all regions commercial communications orders achieved the second highest quarter on record with double digit order and revenue growth in the Americas and.
In Europe .
We see continued strength in 400, G and 800 G Ethernet solutions for enterprise and service provider customers as well as increasing demand for terabyte Communications solutions drip.
Driven by the ongoing investment in data center and cloud applications orders for key sites differentiated high performance real time as scilla scopes groups triple digits this quarter.
Key sites of leadership in five G release, 16 applications broad test case coverage and a strategic role in old ran or enabling our expansion across the broad communications ecosystem. Our <unk> customer base is growing as deployments begin to scale and we are enabling disruptive technology.
With key industry players such as Qualcomm to demonstrate three and a half gigabit uplink data throughput.
Chunghwa telecom in Taiwan to accelerate verification of O ran connectivity.
Kt Corporation in South Korea to verify advanced five <unk>, New radio features and LG electronics to demonstrate 60 radio frequencies investments remains strong and five G wireless R&D and manufacturing as well as networking is market expansion trans.
<unk> two devices network equipment, and the aerospace defense vertical in aerospace defense and government double digit order growth was driven by demand for signal monitoring cyber space and satellite as well as five G and 60 applications demand was particularly.
We're really strong in Asia Pacific and Europe .
As design test and measurement solutions growing complexity software and services are an increasingly more important differentiator for key site combine they represented more than a third of total revenue this quarter, increasing recurring revenue and contributing to the resiliency and predictability of our <unk>.
In summary demand remains strong for key sites software centric portfolio of differentiated solutions across all of our end markets and regions. Since the pandemic began in 2020 key site has been focused on supporting our customers and delivering on our commitments we have implemented new.
New sourcing strategies and increased partner engagement to improve supply chain flexibility diversification and resilience.
While fully focused on our near term priorities, we continue to work towards a long term sustainable vision for the company and for the communities in which we operate.
The key site leadership model drives us to deliver business value through ethical environmentally sustainable and socially responsible operations.
Corporate social responsibility as an enabling value of the K L. N and we are proud to have been included in the Dow Jones sustainability index for the third year in a row.
Key search inclusion exemplifies the company's continued commitment to building a better planet.
This includes ambitious targets that support several UN sustainable development goals, such as our commitment to achieve net zero emissions in our company operations by fiscal year. 'twenty 40, 10 years ahead of the Paris agreement goal of 2050, as we accelerate innovation to connect and <unk>.
Sure the world, we are better positioned than ever to deliver value to our customers shareholders and employees.
Now I will turn it over to Neil to discuss our financial performance and outlook in more detail.
Thank you Ron and Hello, everyone Q1 was a great start to fiscal 2022, and our full year outlook exemplifies key side's ability to deliver on our commitments.
In the first quarter of 2022, we delivered revenue of $1.250 billion, which was above the high end of our guidance range and grew 6% or 7% on a core basis as.
As expected supply chain constraints continued to temper our revenue results.
We delivered a record $1.495 billion in orders up 22% or 23% on a core basis, we ended the quarter with over $2 $3 billion in backlog.
Turning to our operational results for Q1, we reported gross margin of 66% and operating expenses of $473 million, resulting in an operating margin of 28%.
We achieved net income of $305 million and delivered $1 65 in earnings per share, which was above the high end of our guidance our weighted average share count for the quarter was 184 million shares.
Moving to the performance of our segments, our communications solutions group generated record revenue of $878 million of 3% on both a reported and core basis.
C. S. G delivered record gross margin of 67% and operating margin of 27% in Q1 commercial communications generated revenue of $584 million up 5% with double digit revenue growth in the Americas and Europe , driven by continued investments in five G O ran adoption.
400, gigabit 800 gigabit in terabyte, R&D and wireline applications Aerospace defense and government revenue of $294 million was flat versus a strong prior year compare.
Solid growth in Asia Pacific was offset by supply chain constraints that impacted revenue in the Americas and Europe .
This was our fourth consecutive quarter of double digit order growth in aerospace defense and government and the funnel remains strong for this end market. The electronic industrial solutions group generated first quarter revenue of $372 million up 13% or 15% on a core basis driven by strong revenue growth in semiconductor.
<unk> and automotive EIA.
E ISG reported gross margin of 63% and operating margin of 31%.
Moving to the balance sheet and cash flow. We ended our first quarter with $2 billion in cash and cash equivalents generated cash flow from operations of $224 million and free cash flow of $182 million or 15% of revenue.
Under the new share repurchase authorization announced in November of last year, We acquired 1.13 million shares in the quarter and an average price of $182.19 for a total consideration of $206 million.
Now turning to our outlook and guidance demand remains strong for key site solutions. However supply constraints continue to moderate shipments. We expect second quarter 2022 revenue to be in the range of $1.290 billion to $1.310 billion in Q2 earnings per share to be in the range of $1.
63 to $1.69 based on a weighted diluted share count of approximately 183 million shares assuming a loosening of the supply situation in the second half. We continue to expect full year revenue growth to be in the range of 6% to 7%, while delivering 12% earnings growth there.
As the EPS growth expectation reflects our higher than expected Q1 earnings.
In closing the demand environment remains strong across our end markets and regions with a record backlog position and a strong track record of operational excellence. We are confident in our ability to meet our customer commitments and continued to deliver profitable above market growth going forward.
With that I will now turn it back to Jason for the Q&A.
Thank you Neil Elliott will you. Please go ahead and 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 ask that you. Please limit yourself to one question to withdraw your question. Please press the pound sign.
Please hold while we compile the Q&A roster.
The first question comes from the line of Tim Long from Barclays. Your line is open.
Thank you.
Yeah, I was hoping you could talk a little bit more.
The <unk> end market.
Maybe as it cuts across your businesses.
Can you talk about kind of the.
Revenue order momentum there and maybe touch on some of the newer areas I think you mentioned Oran, but can you talk over in <unk>.
Private networks millimeter wave some of the some of the newer areas that are contributing to growth there. Thank you.
Yeah.
Yeah, Tim this is <unk>.
We have another strong quarter in our commercial communications business.
Driven by <unk> and all the wireline evolutions specific till five G. I think as I have stated before we see near term and medium term catalysts that remain intact. If you look at it more near term I would say the ongoing global deployments that are scaling.
Continue to drive demand in both the R&D and manufacturing offerings specific to R&D the release 16.
It is really aimed at some of these new use cases with the industrial applications and private networks in particular.
Longer term we remain.
You know bullish about millimeter wave and its adoption, but in the medium term the applications such as the Oran are really growing the ecosystem of opportunities for us. We just added over 100, new customers into our <unk> platform in the most recent quarter. So.
Very strong growth in in the five G applications for sure across both R&D and manufacturing in deployments and across the globe So broad strength.
Okay, I'm, sorry, if I could just follow up it sounds like you've already had a few six G announcements.
Announcements can you talk a little bit about kind of the cadence of when do you think that will.
Start to impact.
This business is there's still a few years out or are you starting to see some real.
Traction with some of the larger players in the industry. Thank you.
Yeah, we're still you know if.
If you look at it from a standards perspective, you know we're still in release 16 at least 17 as is.
He is just getting started and you got released 18 being being planned. So there is still considerable time to go with five G. Evolutions that will continue for quite some time, but the industry is also looking at what's the next wave of innovation <unk> on the wireless side on the wireline side Terabits.
Terabyte Ethernet is definitely.
Area, where theres a lot of advanced research happening both on the wireless and wireline side and key side, given our strong strategy our focus on building out the workflow for the communications ecosystem, we're engaged in those advanced.
Research discussions with multiple consortium as around the globe and we've already started to get some early research business, which positions us for continued leadership over time.
Okay. Thank you very much.
Our next question comes from the line of stomach Chatterji from J P. Morgan Your line is open.
Hey, Thanks for taking my question I guess I'm, just trying to get some help in understanding the divergence between the order growth.
Well the revenue outlook I think the fourth quarter, where you've expanded autos by more than 20% deal on yield and when we look at the revenue outlook. Obviously, that's materially below that how should we think about it sort of is it is there more for sort of.
Unwind into the revenue or upset a realization of revenue or supply chain you guys or is that is the auto trends driven by a lot of all the ordering or long dated autos I mean, particularly if I can just ask one follow up there.
How are we thinking about the same divergence between <unk> Avenue scale debating back for the last couple of quarters versus what you talked about in terms of strong order increase thank you.
Yeah.
This is Neil so I think first of all I would say that the the order growth. We believe is indicative of the highly are the very strong demand environment, we're seeing across a wide range of end markets right with any ISG that semi and auto market is very strong.
The surge in manufacturing driving strength in general electronics and.
On the communications side, we're seeing great strength in in <unk>, just talked about but also the 400 gigabit 800 gigabit.
On the networking side as well and so very strong demand and I think thats reflected in the order strength in the growth Youre seeing in orders on the revenue side. Obviously, we continue to you know.
It worked through significant supply chain challenges, our revenue is significantly constrained by the supply environment and we're working through that.
We have said on prior calls that we have seen lead times to our customers extend by about a month and that that month extension that has really happened over the course of the last two years really from the onset of Covid back in the spring of 2020, and you know I think the good news is that our customers have responded to that and.
Our placing words with key site.
A bit earlier, so that they can still get product delivery on a timeline that meets their needs and I think we're doing a good job getting product into the hands of our customers on those timelines I think as you turned the lens forward, what you're going to see as the supply chain situation starts to improve and we hope to see that beginning in the second half, but certainly.
We expect to see some supply chain constraints through 2023, you know that our lead times will slowly start to migrate back in over a number of quarters in and similarly, our customers will once again readjust your order of ordering patterns to.
So again aligning them with with their own need for delivery.
Why don't I turn it back to Marc Yeah, some more comments on the demand side. Yeah. Thanks, Neal I think he covered it well I just would add that reiterating the demand remains strong. It was very strong in Q1 very broad we saw some earlier orders placed in distribution as an example, where.
The channel inventories are low because of the demand that we've seen there. So that's to be expected. We also saw some earlier orders from semiconductor which is typical they have longer term horizons and we work with them in that in that fashion.
But the headline is our strong double digit order growth. It was not an outcome of advanced purchases and on the plus side as Neil mentioned, we are now working with customers much earlier than we may have done in the past, we've always had deep relationships, but the outcome is we're getting better visibility to their forecast and their they're forward looking.
Land, which I think will sustain.
For the long term.
Thanks.
Our next question comes from the line of meta Marshall from Morgan Stanley . Your line is open.
Great. Thanks, and maybe following up on <unk> question.
Just in terms of supply chain, you know would you say that conditions largely stayed the same in fiscal Q1 over fiscal Q4 or was there any kind of material tightening that you saw kind of in any of the categories. Just trying to get a sense of whether it remains constrained or whether you started to see some improvement or worsening.
And then maybe second question.
Yeah, obviously, we've seen some.
Valuation related on that on the software side.
Stocks is there just wondering if anything becomes more attractive from an M&A environment. Just says if somebody's valuations reset. Thank you.
Yeah. So this is Neal again, so first of all with regard to the supply chain situation.
I think.
Safe to say that we didn't see things materially get better within the quarter I don't I don't think they got worse I would call. It largely the same I think we continue to look forward to.
To some relaxation in the second half and that's still our expectation, but we did not see any acceleration or.
Or.
Early the early signs that that is happening at silver expectation, but largely unchanged within the quarter on the supply chain side.
And meta this is Ron with regard to software valuations, obviously, you're exactly correct. The IP software companies, we've seen their valuations come down, but realistically when we talk to companies and they've seen when they see a pull back they still view.
They're old share price is the price that their company should get a premium to normally takes about a year. It depends company by company before that it would go ahead and sell in a lesser value, but we're highly engaged in looking at opportunities looking at things that make sense and we have a very.
Active funnel right now including software.
Great. Thank you.
Thank you.
Our next question comes from the line of Mark Delaney from Goldman Sachs. Your line is open.
Yes, thanks very much for taking the question I was hoping you could comment a little bit more on the P&L outlook for next quarter revenue guidance is up sequentially EPS is relatively flattish quarter on quarter. So maybe you can bridge us from some of the higher revenue.
And what's leading to the.
More flat.
Flat quarter on quarter I guess.
Yeah, So I'll take that one as well so you know as we look as we look forward into the end of the second quarter. We do see as you look at scheduled shipments some unfavorable mix on a sequential basis as well as kind of continuing impact from other inflationary elements, most notably expediting.
Fees and other things are continuing to impact the impact gross margins and I think the other thing is you know we.
We are continuing to ramp kind of back into our targeted levels of R&D, we were actually sub sub 15% in Q4 approaching 16% here in Q1, as we look to kind of mid 16% of revenue is more the level side I would expect some further increase.
And in that rate of investment in the R&D.
Side of things as well, which is what's leading to the more.
More or less flattish.
EPS.
That's helpful. Thank you and for my follow up question was on the Comms segment in either company's focused and has done a very good job broadening out the exposure.
Wade right in terms of the types of tests you are doing but also there.
In various parts of the industry and 408 hundred G. I think has been growing for some time. So maybe you can almost set up and how big was 800 years and how much data center is contributing to that comms segment at this point. Thank you.
Yeah I'll take this I think you're right I mean, our strategy to really connect the workflow across the communications ecosystem continues to play out in our execution.
It remains very strong at the heart of it we've been focused on connecting the workflow between the wireless and the wireline parts of the ecosystem and we see that all of the data that comes through the network's two five G. As an example.
I have to ultimately flow into a data center or a cloud and so as we followed that trial and to and we see a significant upgrades happening across the entire communications design flow and we're participating in a number of those technology trends associated with not only the speeds as you referenced with 400 agent.
And terabyte, but also the underlying infrastructure, that's changing with the memories the servo technologies in the edge compute as well and we're also very pleased with the number of new chipset starts. The design starts that are occurring across the entire industry today and all of this is contributing to strength and we saw that reflected.
And I'll come in our commercial communications business, where we maintain a good balance between the five G growth and also the wireline evolutions girl.
Our next question comes from the line of Jim Suva from Citigroup. Your line is open.
Thank you and congratulations I just have one question.
There's been a lot of news about new building semiconductor equipment factories, and a lot more like automobiles being more electronics given.
Given the large long supply chain I'm, just kind of curious are those big orders already coming into your company or something you have to pour concrete and walls with those be a much more long dated and not even in your orders at this point because it seems like those are long term multi year products projects that will actually extend.
Much more beyond the typical horizon, where people may think that we're kind of at the peak of orders right now, which potentially could disagree with.
Yeah, Hi, Jim This is mark I'll take that and you're exactly right. The strength that we're seeing today and have been seeing for the last many quarters is around new process technology development and mature technology scaling, but what youre, referring to is the global expansion of new Fabs.
In North America, and the United States and parts of Asia and across Europe . These are multiyear multibillion dollar investments.
The semiconductor leaders are making and the Mac. The vast majority of those investments are well in front of us.
Just remind me alright. Thank.
Thank you.
And let me just remind everybody of our order acceptance policy, we generally don't put an order on the books unless it's shippable within a six month period of time and so those orders for those longer things went well in some cases those customers are giving us visibility to their needs for at for these future factories in fabs that are going into place theyre not really.
<unk> and orders as of today, Yes, I'll just follow up just to emphasize that we are talking to all of the semiconductor players and we are working through the planning and preparation for the future, but as Neil said, what we booked today is really based on demand that we can see going out six months.
Thank you so much for the detail I appreciate it.
Thanks, Jim.
Our next question comes from the line of Chris Snyder from UBS. Your line is open.
Thank you.
I guess my first question is kind of bigger picture clearly the industry is in the middle of a.
Very strong period of demand to orders were up again sequentially here despite negative seasonality.
So I guess my question is more kind of what pushes.
The industry back down towards that normalized 3% to 5% growth.
That key state has called out in the past and is it fair to think that the industry kind of collectively can achieve outsized growth until five G peaks.
So Chris this is mark I'll take a stab at that I think.
The success that we've achieved in the the level of order growth is is tied into a lot about what <unk> been talking about which is connecting our customers workflows. Even goes back to the previous question as it pertains to the growth in semiconductor being fed into demands from multiple different industries all bring.
A more electronic content together, so that as this compounding effect I, certainly think that as we get to the maturity with some of these technologies the capacities will meet certain levels. So we can see some of that.
Begin to.
The growth begin to turn more to more long term models that we've been seeing but.
But as we do so we look forward to the next generation and as also we mentioned earlier the early research that's occurring around <unk> and the participation that we have given our leadership position in the market gives us opportunities to continue to drive this high secular growth that we've been.
<unk> been delivering for for several quarters.
And the Christie, 3% to 5% that you're talking about that was for the bid.
We've clearly done.
Done a pretty good job.
Of growing faster than the market quarter after quarter, and we intend to do so going forward, but look at the convergence in semiconductors, and how more and more functions are being integrated into semiconductors, and everything whether youre talking about Iot or any of the other app.
<unk> that we talk about that demand, we're going to see for a long period of time look at automotive, we're not talking about things that will grow for a year or two even though we talked about 19% and 15%.
Of the total market being effectively EV in Europe , and Asia, I mean, that's going to go up close to close to 100% and then we have the Americas too, which is which is behind five G has a ton of runway and then following that where we're starting to see early.
Investment in talking as 60 that will follow it up.
On top of that you put quantum so the use of high performance electronics is not rolling over and we don't see that.
At all in any you know in any.
Short or medium term situation and whatever the market growth rate in key sites aspirations goals and results have always been to outgrow the market.
Yeah, no I appreciate that and it just feels like so many of the drivers here are secular that's what I was trying to kind of figure out what pushes us back down to mid single digit growth.
You kind of touched on my follow up the company has significantly.
Algorithm market and taken a lot of share.
Ever really since you spun out but it feels like it's kind of accelerated here.
Is there anything that caused that to compress.
If we were at $65, 70% share you could say Oh will it start to flatten out we're at roughly 25% market share in total we have so much headroom I mean, you know the markets.
Forex the size of key sites and we're gaining share we're investing as much as that's needed we're investing more than anyone else in the industry. We're investing earlier in the cycles for new developments and we have the credibility with these players to be the chosen partner and now that we've expanded.
<unk> beyond the hardware the hardware to software and services, we provide complete solutions, which makes our customers' lives easier and we help them accelerate their innovation timeline. So.
I'm very bullish on this and I know the whole team is is also.
And I just call it really quickly on that last point how does.
The industry has accelerated towards software.
That has been a driver of maybe accelerated share gains for key site, just given your capacity to invest and weather.
Whether it's organic or M&A relative to a lot of your smaller competitors.
No I think there is opportunity for us to grow software and we are and we've seen that since we launched the company.
More than double more than double that business and there's a lot more headroom there, but we see it in a lot of the technologies that are also down in the physical layer, where you need both you need the ability to acquire the signal in a very high fidelity way at very very high performance when we're talking.
Millimeter wave and up to terabyte, plus you need the analysis capability. That's in firm Ware, and then software and these are complex problems you need service servicing support from people that are qualified to put this all together and key site has all of that and that's been a.
Real real advantage for us and we continue to see that as we continue to expand our investments and our programs in each of these areas.
I appreciate all of that thank you for the time.
Thank you.
Our next question comes from the line of Matt Knickman from Deutsche Bank. Your line is open.
Hey, Thank you for taking the question.
Just two if I could first on the U S. Maybe.
Maybe if you can talk about what drove the sequential downtick.
In U S.
Our Americas revenue this quarter, I think you'd called out some softness in.
Aerospace defense, just curious if that was more tied to supply chain or demand related.
And then within PSG.
Gross margins are actually improved about 120 bps sequentially, even though revenues actually were down sequentially and I think last quarter. You had met some initial expectations that there would be more of a negative mix shift.
In this fiscal quarter. So I'm just wondering maybe what drove some of the outperformance there. Thanks.
Yeah. Thanks, Matt I think if you really want to figure out what's going on in the market place orders is the best indicator and I know some companies don't don't report orders with as much detail, but we wanted to give you as much insight as we can so if you look at the revenue numbers, which drives.
Sales it may not be commensurate with what's going on in the market in the Americas for instance, we were up 23% now if per chance because we're not shipping everything and we're building backlog, which is in an incredible position at almost two $4 billion.
That just means we're going to produce a lot more profit later, when we clear that out but the market performance is very strong and as we continue to improve the supply chain, you'll see the revenue get a chance to work that backlog out overtime.
Yeah with regard to the gross margin you're right, we had a higher software mix.
This quarter as we continue to progress our strategy of software centric solutions.
And from the aerospace and defense perspective.
While the defense budget has been passed in the Americas in the U S. We are waiting on the conclusions to the appropriations process. That's currently underway, which is expected to occur somewhere between March and April timeframe that should allow for increased program spend for the rest of the year and the following year, but if you if you look.
It just the aerospace and defense order growth to the point that Ron made continues to grow strongly and our multiyear programs remain intact.
That's great. Thank you both.
Youre welcome.
Our next question comes from the line of Adam Thalheimer from Thompson Davis Your line is open.
Hey, good afternoon, guys congrats on another strong quarter.
Thanks, So first question I wanted to ask about.
Just at a high level, what do you what kind of inflation are you seeing and then how is the pricing environment.
Does the how does that paradigm, where tricky side.
Yes so.
I'm, sorry, Tom My microphone will help.
We are seeing inflation.
Inflation across a number of different areas within the supply chain and they are within that within the cost structure I think as we noted last quarter. No. Certainly labor is one of those we had our largest salary increase cycle in the fall.
And our seven year history, as an independent company certainly in certain aspects of the supply chain we are seeing.
Various levels of price increases freight and logistics clearly an area, where we're seeing cost go up.
Even those companies that maybe aren't raising prices as aggressively or sometimes paying are charging for expedited shipments or to get your spot in line and so we're seeing it in a number of different a number of different places and I think you know.
As far as our own pricing I think we're constantly trying to about our balance our competitive situation with what we're seeing on the cost side and working to maintain maintain margins as much as possible and I think we've been on a good job of doing that so far and would expect to going forward.
But net net there's no look at this when we if you take a look at this when we launched the company we were at roughly 56% gross margin and now we're talking 66% from software from our hardware differentiation from leadership positions in five G, which gives us the opportunity to do a lot.
But a value pricing.
And.
We're going to continue to work to drive that higher.
And then Ron just real quickly you mentioned that orders came in above expectations can you give a little color as to what was stronger.
Yeah, Adam this is mark.
The strengths as we said before really broad base.
All regions were double digit order growth two of the four regions are two of the three regions where were record high we saw double digit order growth across all of the end segments as well we added just over 500, new customers too.
Two key site during the quarter.
We've done that every quarter, adding hundreds of new customers across all the different end markets around all of the geographies, that's really important to us that helps us diversify our business and grow our base in our business to the base.
Is up very strong double digits as well. So we are really working hard as I mentioned before to align.
Our plans with our market, leading customers, where we've done very well and we're also adding new customers and growing the long tail of small and medium sized businesses as well so very very broad strengths around all of the regions and all the end segments.
Okay. Good color thanks, Mark.
Youre welcome.
Our next question comes from the line of David Ridley Lane from Bank of America. Your line is open.
Thank you.
Our supply chain issues is how much of a margin benefit could there be I imagine in addition to the higher freight costs and so on you're carrying now there's also some manufacturing inefficiencies just related to the component shortages.
It's not obvious to me that theres going to be a margin benefit other than volume that comes from.
Relaxation of the supply chain environment, I think our factories are continuing to run pretty.
Pretty efficiently.
It will need to take a wait and see approach, but it's not obvious to me. This is going to be a big margin benefit other than the benefits of volume.
Got it and are there.
Any data points, you can give us around sort of the internal initiatives, you've got new sourcing partners.
Other things that youre doing to remove some of the supply chain bottlenecks and just to check it doesn't sound like <unk>.
Micron had much of an impact.
To you incrementally in the quarter.
Yeah, So no incremental impact obviously the constraints in the supply chain.
Our broad and I think youre hearing this across multiple industries as well and we feel it but with regard to the actions that we're taking to maximize those include internal value engineering activities to to find multiple sources for products looking for alternate sourcing from the open market with strong collaboration.
With the number of our strategic silicon semiconductor.
Supplier suppliers and our customers too so when we look at the end market demand for key side products around five <unk> automotive and anthem.
In semiconductor, we have strong engagements with customers and our supply chain. So that we're able to coordinate this at this point as Neil mentioned earlier that we're able to meet our customers' needs a very high percentage of the time. So we're very confident on our ability to process this backlog and converted into revenue in future quarters.
And pending upside from any improvement in the in the supply chain, we could we could further accelerate.
Alright, Thank you very much.
Our final question comes from the line of Rob Mason from Baird. Your line is open.
Yes, good evening.
I just wanted to ask about the automotive market.
Comments around how strong that has been for you in that.
Runway that exist there.
The question is how do you view that market's growth rate.
Over the next few years.
And then since it is the EV and Adas elements of that market are newer.
For test and measurement high end test to measure I'm curious, how you think about your mix.
Evolving into that market between R&D and production test or manufacturing tests.
Yeah, So I'd say that when we look at the automotive market as Ron referenced in his script that we see a real inflection in adoption of EV and then a subsequent.
Simultaneous adoption for AVB as well really driving the needs of the automotive market at the simplistic level, we see the number of new lab activities that are starting and R&D across the globe, where automotive customers traditionally outsourced a lot of the.
R&D work, but they're now starting to build new.
New facilities for research and development hiring of electrical engineering talent hiring of software talent is increasing and that's really reflected in our R&D business that continues to grow strongly and we see this continuing to be a.
Our second growth driver for us with regards to the manufacturing expansion as you as you saw the number of EV stocks increase our manufacturing business. In this market also continues to grow so at this point I would say the opportunities for us for key scientists to expand with a number of new lab starts just the hiring of electrical engineers growth in the automotive.
Market will continue to grow but we also have the opportunity to increase our solutions content in display and some of the acquisitions that we have made enables us to play strongly into the battery test and charging arena and solar Butler positioning ourselves there along with the C V to X Tac debt.
We've invested in with our <unk> portfolio that allows us to get into this marketplace.
The most recent quarter.
We basically announced at CES. The radar seen him later solution, which is again <unk> got a lot of active interest from our customers. So automotive continues to be the area of investment for us and it's really hard to predict the growth rate.
Quite pleased with the very strong results, we're seeing so far.
I'll just hand, it off tomorrow to make some comments on the funnel.
Yeah, I was going to mention the radar seen emulator you got that cities. The funnel is very strong it's growing.
We're seeing a lot of customers look out key sites for both EV and <unk> expertise.
Think about all of the changes that are occurring within the customer base.
As well as the new entrants coming in dealing with millimeter wave dealing with high power semiconductors charging infrastructure all of the stuff that we are providing leading solutions too. So that funnel is growing substantially the other indicators that I think is very positive as the adoption of our services, which again is another indicator that customers are looking for.
Help in innovating and getting these tough jobs done so we're attaching a lot more services to our solutions, especially in the EV and the <unk> space.
Perfect.
Very helpful. Thank you.
Thank you Rob that concludes our question and answer session for today.
I'd now like to turn the conference back to Jason carrying for any closing comments.
Thanks, Elliot I'll turn it over to Ron to wrap this up for today. Thank you for joining.
Thank you everyone for joining us today.
As you can probably tell we are very pleased with what our team has done to produce consistently excellent results.
But I would also love to add that we are very optimistic for key site not only in the short term, but with the position that we're in for long term shareholder value creation.
Thank you very much and have a great day.
This concludes our conference call you may now disconnect.
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