Q2 2022 Keysight Technologies Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Quayside technologies fiscal second quarter 2022 earnings Conference call.
My name is Tia and I'll be your lead operator 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 zero.
Please note that this call is being recorded today Tuesday May 17, 2022 at 130 PM Pacific time.
I would now like to hand, the conference over to your host Jason Kary, Vice President Treasurer and Investor Relations. Please go ahead Mr. Kerry.
Thank you and welcome everyone to <unk> second quarter earnings conference call for fiscal year 2022, joining me are <unk>, president and CEO and Neil Dougherty, our CFO and the Q&A session. We will be joined by Mark Wallace Senior Vice President of Global sales you can find the press release and information to supplement today's.
<unk> on our website at Investor <unk> Si 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 cities and Neil will refer to non-GAAP financial.
<unk>, 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 hosted by JP Morgan Baird and UBS and now I will turn the call over to <unk>.
Thank you, Jason and thank you all for joining us well.
Welcome to the second quarter 2022 earnings call and my first as the CEO of key site I am humbled and honored to be key sites CEO and excited about the future I would like to thank Ron <unk> for his visionary leadership of the company, which has provided US a solid foundation to build on.
Over the last decade, I've had the honor of working closely with Ron and benefited greatly from his experience in many different roles I've held since joined the company 16 years ago. This is a great time to be at key sites as we remain focused on our core purpose of accelerating innovation to connect and secure.
The World key side delivered exceptional results in quarter, two driven by strong execution and broad based demand across the business.
The team focus on innovating and solving customers design and test challenges, while successfully navigating the ongoing supply chain and geopolitical challenges I will focus my comments today on three key headlines.
First we delivered record quarter, two orders capitalizing on the robust end market demand for key sites high value differentiated solutions, our focus on delivering first to market solutions is enabling us to uncover new emerging applications, adding to our momentum.
We achieved record revenue strong operating margin performance, resulting in record earnings per share, which grew 27% demand straightening, the durability and resilience of our business.
We are raising our outlook for the year based on our strong performance in the first half and continued momentum we now expect to achieve revenue growth approaching 8% and earnings per share growth in the range of 14% to 15% for the fiscal year, let's now take a deeper look at our results for the <unk>.
Quarter.
Second quarter orders grew 9% to $1 $46 billion, and outpace revenue, which grew 11% to a new record of $135 billion.
And was $41 million above the high end of our guidance, we achieved gross margins of 65% operating margin of 29% and record EPS of $1 83 <unk>.
Exceeding the high end of our guidance by <unk> 14.
Also with the ongoing equity market volatility, we again capitalize on the opportunity to accelerate share repurchases.
These results are a reflection of our strong portfolio and our global teams application of the key side leadership model, which enables us to deliver consistent value to all stakeholders. We delivered these results despite many headwinds, including geopolitical challenges inflationary pressures and continued supply chain disruptions.
<unk>.
We continue to advance our software centric solution strategy as the rapid pace of technology accelerates our customers across end markets are seeking deeper engagements earlier in the design cycle and are adopting our software solutions the capabilities of our pathway of software platform.
Facilitate continuous stream of releases that Matt just the innovation cadence of our customers.
This enables us to secure enterprise agreements with market leaders for high value R&D solutions.
Orders for software and value added services like key Sidecare again grew double digits as we continue to grow recurring revenue this quarter turning to our business segments communication.
<unk> solutions group delivered record second quarter orders and an all time record revenue within <unk> commercial communications achieved all time record orders and revenue with double digit order growth for the third consecutive quarter ongoing innovation and investments in our end markets spanning.
Both the wireless and wireline segments remained strong driven by adoption of <unk> 400 gig 800 gig and terabyte and optical technologies.
In wireless the increase in the number of <unk> device types continues to drive test and certification requirements with our leading solutions portfolio. We expect to benefit from the continued investment in the evolution of <unk> standards, including Standalone <unk> release 16 and beyond.
Quarter, two key site announced collaborations with leading companies such as NTT, Docomo Telefonica and analog devices to enable a wide range of five applications, including Oran, which continues to gain momentum in wireline, what enabling the digital transformation driven by cloud <unk>.
<unk> and telecom stack virtualization through our end to end solutions.
We recently launched the industry's first 800 gig solution to enable data center design workflows for ultra high data rates and energy efficiency.
Aerospace defense and government achieved record Q2 revenue driven by double digit growth in Americas, and strength and signal monitoring cyber and space and satellite solutions as well as <unk> and <unk> applications.
Complex scenario emulation continued to drive the need for modeling and digital twin solutions with increasing software content, our leading network analyzer platform and phased array test solutions enable increasingly complex satellite communication design and test requirements increase.
<unk> defense budgets in the U S and Europe are expected to provide support for higher spend going forward <unk> is well positioned to capitalize on growth by enabling innovation in our end markets through our broad and synergistic portfolio, including wireline wireless cyber security.
Satellite and space solutions, the electronics industrial solutions group delivered double digit order and revenue growth for the seventh consecutive quarter, driven by automotive and semiconductor solutions.
In automotive all time record revenue was driven by strong demand for our expanding portfolio of EV and HEV applications.
Key site is capitalizing on strategic investments in the automotive and energy space, providing industry for solutions that support new capabilities and use cases, such as our recently launched protocol test solution for in vehicle networking during the quarter we secure.
EV wins with major Oems across all regions.
In addition, we're excited by the recognition of our new radar seen emulator solution, including the 2022 Tech Dot 80, Europe Award, we saw strong demand for our semiconductor solutions, which delivered double digit order and revenue growth.
Investments in advanced semiconductor technologies, along with capacity expansion for existing nodes remained robust.
Over the next three to five years, we see solid customer R&D roadmaps for Ics for a broad set of applications.
As an example in Q2, we sold our first on wafer Silicon Photonics parametric test solution to a major semiconductor fab to develop and manufacture next generation datacenter transceivers.
We believe this trend Rhopressa <unk> long term opportunities for key sites R&D solutions portfolio.
Our general electronics business achieved all time record revenue as investments continued in manufacturing and device development for consumer and industrial Iot Digital health and advanced research.
We're seeing active investments globally, and fundamental research and terahertz and quantum technologies.
For example, we recently announced a collaboration with National Research Foundation of Singapore's Quantum engineering program to accelerate research and development and education and quantum technologies the strength of our general electronics business reflects the broad nature of applications for our solutions before I wrap.
I'd like to acknowledge and thank our more than 14000 employees worldwide for their commitment to our customers around the globe and for their passion in delivering market, leading solutions I am proud to share. The key site was recently named as one of Fortune 100, best companies to work for in 2022.
This is a recognition of our inclusive and diverse culture exhibiting value for collaboration high performance and innovation. Our culture also places high value on corporate social responsibility. We recently released our 2021 CSR report highlighting our progress environmental so.
<unk> and governance efforts worldwide and announcing new goals to track through 'twenty, two and into 'twenty three.
I believe key site has a bright future ahead I look forward to working with the team to execute our strategy and continuing to deliver greater value for our customers shareholders and employees.
I'll turn the call over to Neil to discuss our financial performance and outlook Neil.
Thank you <unk> and Hello, everyone. Our performance this quarter once again demonstrated the resilience of our business, we delivered on our commitments and exceeded expectations as we powered through multiple challenges and new headwinds in the quarter.
In the second quarter of 2022, we delivered revenue of $1.351 billion.
Which was above the high end of our guidance range and grew 11% or 12% on a core basis.
We generated $1 billion and $458 million in orders up 9% or 11% on a core basis.
During the quarter, we suspended our operations in Russia, and canceled our entire backlog of Russian orders core growth adjusted for Russia was 13%.
Demand again outpaced supply and we ended the quarter with over $2 4 billion and backlog turning to our operational results for Q2, we reported gross margin of 65% and operating expenses of $489 million.
Resulting in an operating margin of 29%.
The strength of our results highlights the resiliency of our business and our team's ability to execute despite significant supply cost and currency headwinds within the quarter.
We achieved net income of $334 million and delivered $1 83 in earnings per share, which was above the high end of our guidance our weighted average share count for the quarter was 183 million shares.
Moving to the performance of our segments, our communications solutions group generated record revenue of $963 million.
Up 10% or 11% on a core basis.
CSU delivered gross margin of 66% and operating margin of 28%.
Within <unk> commercial communications generated revenue of $672 million up.
Up 11% with double digit revenue growth in the Americas, driven by strong demand for <unk> device and component development as well as network test Oran and terabyte R&D Eric.
Aerospace defense and government revenue of $291 million grew 7%.
Our backlog for this end market remains strong and we reported solid growth in the Americas and Europe .
The electronic industrial solutions group generated second quarter revenue of $388 million up 13% or 15% on a core basis, driven by strong revenue growth in automotive and semiconductor.
ISG reported gross margin of 62% and operating margin of 30%.
Moving to the balance sheet and cash flow. We ended the second quarter with $1 9 billion in cash and cash equivalents generating cash flow from operations of $298 million.
And free cash flow of $245 million or 18% of revenue.
Share repurchases this quarter totaled one 9 million shares at an average price per share of $153 78.
For a total consideration of $289 million.
Year to date, we have purchased approximately 3 million shares for a total consideration of $495 million.
Now turning to our outlook and guidance.
And environment remains strong for key site solutions as in recent quarters, our revenues continue to be constrained by tight supply conditions. However, we have demonstrated our ability to effectively navigate through this environment and we remain confident in our ability to execute and deliver on our commitments.
We expect third quarter 2022 revenue to be in the range of $1 $330 million to $1 $350 million in Q3 earnings per share to be in the range of $1 74.
To $1 80.
Based on a weighted diluted share count of approximately 181 million shares.
We now expect full year revenue growth to approach, 8%, which given the recent strengthening of the U S. Dollar now includes a two point year over year headwind from currency.
We're also raising our earnings growth expectation to 14% to 15%.
Despite quarter to quarter dynamics being difficult to predict we have confidence in our raised expectations for the year end.
In closing we have a strong track record of execution. Our backlog is at an all time high and we are well positioned to capitalize on the growth opportunities across our diverse set of end markets with that I will now turn it back to Jason for the Q&A.
Thank you Matt.
Can the instructions for the Q&A.
Absolutely.
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 and one follow up too.
To withdraw your question. Please press the pound sign please.
Please hold while we compile the Q&A roster.
The first question is from the line.
David Rightly Lane with Bank of America. Please go ahead Sir.
Good morning, good afternoon.
Wondering if you have seen.
Uptick in any.
Supplier Decommitments over the last few months, obviously, China shutdowns has impacted a lot of electronic manufacturing components suppliers and so forth I'm wondering if you have seen any of that show up in your operations.
Yes, Hi, David Thanks for the question as you saw from our results this quarter.
We had a very strong quarter from a revenue perspective.
Very pleased with the strong execution progress of the team and the five point program, we've been running around strengthening our relationships with suppliers finding alternate sourcing being nimble in this environment is really paid rich dividends along with some of the other initiatives, we have and one of the suppliers.
London remains.
In our view pretty challenging, but we have found a way to find more upside I would say that the demand from our customers is robust and our customers want the products as quickly as.
As we can make them and we're shipping them as quickly as we can so the supply situation does remain challenging to the point you made but.
We've been able to find a way around it. Thank you.
So here is a quick follow up to that.
Have your own lead times.
The time to.
Expected to ship the product have those actually started to decline or are they.
Stabilizing at elevated levels. Thank you.
Yes, obviously, we still have a situation where this is neal by the way that we're where demand is outpacing supply and so we have not at this point started to pull lead times back down I would call. Our lead times generally stable I'd say, they're slightly creeping north at this point with demand continuing to outpace supply.
By and large on average we see a lot of stability in lead times currently with a goal to work them down over time as the supply chain situation ultimately.
It starts to loosen.
Alright, Thank you very much.
Thank you.
The next question is from the line of Matt <unk> with Deutsche Bank You May proceed.
Hey, guys. Thank you for taking the questions.
First on the fiscal <unk> revenue guide.
Neil if you could talk about what's driving the expected sequential decline in revenues and then maybe how you're thinking about core constant currency trends relative to any FX headwinds that are embedded in next quarter's guide and then just.
Secondly, on Europe , and Asia Pac I was just wondering if you've seen any change in customer demand or buying patterns, given the Russia, Ukraine conflict that may be impacting Europe or even in Asia.
Given the some of the reemergence of Lockdown in China in recent months.
I'm, sorry, I'll take the first part of that question.
The guide.
We've already stated revenue situation is still highly constrained by the supply environment and.
We had significant outperformance in Q2.
As we navigated the tight supply environment.
And did better than we expected and so but what you can read into that is that a significant portion of our Q2 outperformance.
Was shipment of.
Orders that we had originally or going into the quarter had scheduled to.
<unk> be in Q3.
And so that's great news and we're pleased with that.
On a quarter over quarter basis that can be a significant impact I would say that the guidance reflects our best estimate as we see it at this point in time this quarter to quarter perturbations can be can be very difficult to call. In this environment. We certainly have the backlog to do better if depending on how incoming supply works and I think the point that we want everybody to two.
To focus on is that we are taking up the full year guidance significantly from 6% to 7% growth to approaching eight.
And that 8% growth as you noted has kind of new and significant FX headwinds we saw.
Very significant strengthening of the dollar within our fiscal second quarter, we now have.
Two point year over year headwind in the second half that we're baking into account.
And on a full year basis, we have a point and a half relative.
FX.
From November when we put out the 6% to 7% guide to where we are today, saying approaching 8%. There is a new one 5% FX headwind baked into that and so.
We feel very good about the.
The situation as it as it currently sits and are pleased to be raising estimates for the year.
And Matt Hi, This is mark I'll address your second question on the kind of customer dynamics in Europe and Asia. So in Asia Pac we had double digit order growth again as well as in China, where as you noted we had the Covid protocol restrictions and Lockdowns and it's really a continuation of our ability to <unk>.
<unk> pivot and work with customers, while both in a face to face as well as a virtual remote.
Nature so.
It's a testament to the broad strength and demand of our business across multiple industries and segments.
Asia in particular, we saw strong continued demand and growth in automotive in semi.
400 gig 800 gig terabyte all of those things so very.
Stable there in Europe , we did see an impact obviously from the Russia cancellation. So we had double digit order growth in all regions except for Europe .
But again the demand continues.
We saw a robust demand for our semiconductor solutions again automotive or commercial comms.
Across the European region. So.
<unk> broad.
The interactions in dynamics with our customers so far remained pretty much unchanged.
That's great. Thank you both.
You bet.
Thank you.
The next question is from the line of Mark Delaney with Goldman Sachs. You May proceed.
Yes, good afternoon, and thank you very much for taking the questions institution has to be speaking to you in your new role.
I was hoping to start first on the auto business you mentioned some strong growth there on your prepared remarks today, maybe you can talk about how big that is now relative to the company overall and given some of the drivers like autonomy and electric vehicles, how big do you think the auto business for Keith I could become in the coming years.
Yes. Thank you.
I think the auto business is very exciting for us for more than one reason I would say first.
A very strong quarter, obviously building on many quarters, where we've seen very strong uptick in the business, primarily driven by this decade, plus long trends of electrification autonomous driving and were actually feeding a number of these engineering labs with our tools and capabilities and solutions designed.
For this end market.
We're engaging with the Oem's globally, we've had some successes as I reported in this quarter and we're also working with the entire ecosystem with the tier one tier two suppliers. The semiconductor houses that feed the auto and the test test labs that are just growing across the world. So it's a growing ecosystem will expand.
Our portfolio into EV, particularly around battery test charging test in vehicle network testing as an example, and they are very excited by the new solution that we have offered.
Economists drive emulation, which is enabling real time synchronized sensor.
Evaluations and this is a build on our <unk> platform and capability. So we're very pleased with the progress we're making and.
We know that while we have a long runway ahead with automotive.
That's very helpful. Thanks, and my final question was on the EPS guidance, if I look at the mid point of the <unk> guidance and also the midpoint of our full year EPS guidance, it would imply that fourth quarter EPS.
The midpoint would be something like a.
$1 89, and that would imply that the growth rate would be slowing from mid teens year on year.
Through the first three quarters on average to more like mid single digits in the fourth quarter or is there something you could better contextualize the implied fourth quarter EPS guidance for us and is there anything in terms of supply chain cost or mix, that's perhaps impacting the rate of EPS growth in the fourth quarter. Thanks.
Yes, So I think you need to take a close look at our Q4 performance in FY 'twenty, one which was a bit of an outlier at 31% operating margin a full almost four points higher than the than the prior.
The sequential quarters, leading leading up.
To that end, so I think as you and the other one of the big drivers within the fourth quarter of last year. If you look at it we had a sequential decrease in R&D investment that was quite substantial going from Q3 to Q4.
And that is atypical and so we would expect.
Increasing investments on a sequential basis jazz, we move from Q2 to Q3, and then again as we moved from Q3 to Q4 as we invest in the future and the future growth of our business and so again we.
We remain optimistic about our business and some of these quarter to quarter perjury patients can be difficult to call, but we are raising our both revenue and EPS guidance for the year quite substantially and are focused on executing.
Thank you.
Thank you.
The next question is from the line of Sumit challenging with Jpmorgan you May proceed.
Hi, Thanks for taking my questions.
Congratulations on the first floor in the road.
In the prepared remarks, you did mentioned the higher defense budget.
I could start with that.
I mean, when should we be realistically expecting the higher defense spending budgets to start impacting sort of your order trends what is the typical sort of.
Jim Lane that you see and have seen in the past until when you start to see the flow through of that into Europe .
And to your order trends and a quick follow up.
Thank you so much.
Of course, aerospace and defense business has been historically as we've talked about a GDP plus business for us.
It is very broad with 50% of the business tied to the U S or North America, and we're excited by the number of new areas that where we're applying our technology to space and satellite being one of them and <unk> and <unk> adoption into the sector as a new opportunity for us so.
And of the budgets, we're pleased with the traction we're making.
In applying our technology to offer for new solutions the budgets obviously.
Huge stability I think the fact that you have bipartisan bipartisan support for the defense budget.
<unk> and <unk> line item for this year and then subsequent growth also projected for 2023, we view as a favorable sign I think these geopolitical tensions tend to tend to.
Ill provide more stability not only in the U S. But we're also expecting a similar uptake in Europe , and therefore technology spend but as we know this business is.
As an average over the long term and we have been doing better than GDP and our intent is to continue to do that and offer new solutions with regard to the court activity I'll, let mark to make a few comments.
Yes. So Mike this is mark I think just to add to the budget in the U S was approved it was increased and as we've been watching.
Customers, both the direct government and the prime contractors, we expect some of that funding to start flowing to new program starts here in our second half. So we look forward to that.
As you probably know as many of the programs Nowadays are multi year. This will flow into the fiscal year 'twenty, three and beyond and you've been following what's going on in Western Europe as well with increased spend from the NATO Nations, we will see how that flows through we expect that to be favorable as well and then I think the last thing I'll just.
Mentioned is there are other aspects of this industry segment that are representing new growth opportunities for us around space.
<unk> space in particular is a very hot area for US we continue to focus on and then the continuing modernization that we've been talking about for many quarters or years is a long term trend that we're very excited about we see a strong funnel of opportunities going into the future.
Got it okay.
For my follow up I guess this is more than we need.
Neil.
<unk> posted revenue growth guide for the yield and plays a little 1 million sort of half on half revenue performance, which is very similar to what we saw last June .
Wondering what are you kidding.
Getting there in terms of improvements in the sort of supply environment in general versus your own capacity increases.
Could there be sort of more modest or sort of upside potential.
A play of component just trying to understand sort of what's embedded because it seems to be typical of compared to last year that your guidance is.
Yeah. So.
Prior in prior quarters, we've talked about an expectation or thinking that we would see some material improvement in the supply chain situation in the second half of this year to this to this point, we have not seen that and in fact I think if you look broader across the tech industry. There is an argument that things got incrementally worse in Q2 or more chat.
<unk> driven by the Russia, Ukraine conflict as well as the shut the Covid shutdowns in China, even though those COVID-19 shutdowns don't impact us directly I think for US we look at the items that we can control our own capacity both for finished goods as well as for the sub components that come out of our fab in technology centers that feed.
Our that feed our instrumentation.
We look at our relationships with our suppliers some of the engineering efforts that we have to quantify or qualify new parts or a secondary sources to open up new sources of supply those things are paying dividends for us and it contributed to the revenue performance that we've been able to able to deliver in <unk>.
But as we look forward and you asked specifically about the guide for the second half we are still very much supply chain constrained and so what that really bakes in is kind of our direct line of sight to delivery of the piece parts that we need to get products out the door and into the hands of our customers. It's a situation that's being very.
Actively managed but I think we're doing a good job of getting product into the hands of our customers on the timeline that is that is acceptable to them.
This is <unk> just to add on to.
What Neil mentioned, we have a very solid backlog position over $2 4 billion.
The demand continues to outpace supply we know the challenges out there, but we feel very confident and we're very prudent in our guide to ensure that we execute.
Lastly, and we are continuing to be nimble and agile and as Neil mentioned and I mentioned earlier to execute to our commitments we take it very seriously.
Thank you. Thank you.
Thank you.
The next question is from the model.
Marshall with Morgan Stanley You May proceed.
Perfect. Thanks, a couple of questions for me one.
Opex.
Despite the revenue be opex kind of came in about as expected and so I just wanted to see.
How are you guys managing TMA coming back or just inflationary pressures on opex.
Kind of finding efficiencies and then.
A follow up.
You mentioned, a new win in Silicon Photonics test, obviously, it seems like a good long term opportunity just time to ramp and whether you have already seen interest from some other customers.
<unk> made progress in that.
I'll take the first part of that and then we will.
<unk> or market to address this silicon photonics are part of the question. So yes with that with regard to the Opex.
Opex spending and the return of TNT and facilities costs.
We didn't have the honest answer is we did not see a lot of that in Q2 right. The omicron Spike. If you will was kind of right in the middle of our second quarter, and we did not see any meaningful.
Kind of return to.
<unk>.
Travel Entertainment and returned to office, we have recently more at the beginning of Q3 started to bring our employees back to our physical sites.
Great.
We are starting to see travel and entertainment not returned to normal but starting to re ramp here more of as more of a third quarter event as regard to inflation.
We are seeing we are seeing cost inflation in a number of different places across the P&L and I think our actions our challenges with managing that is to capitalize on the differentiation that exists in our portfolio and look to monetize that where we can and continue to bring differentiated <unk>.
Our content solutions to the marketplace. So that we can so that we can continue to manage that and I think if you look at the margin performance of the business. We're doing a good job to date, managing managing those inflationary increases across the P&L.
Yes.
I think if you look at the entire customer base a key site.
The amount of inputs that we're getting for strong collaborations to set a record high customers.
Deeper engagement with us and they're there.
Very often are engaging us much earlier, India design design cycles. So we are very well positioned given the strength of our relationships to be able to act on some of your inputs what it matches our strategy and continue to progress it if I look at the at the semiconductor activity.
All the way from <unk>.
New silicon wafer starts to the cloud there is a.
A tremendous amount of designs that are occurring.
Both from traditional players moving up the stack and from system players that are want to vertical ice and own the IP.
Well positioned to be working with all of these customers across the wireless wireline and even the fab to progress.
Some of their strategies and enable them to be successful and we're very pleased I mean, the silicon photonics solution is very unique.
It's an industry first and we are very pleased with the design wins, we are getting because with each of these wins is a deeper collaboration to understand where the future is going and define it silicon photonics is one of the technologies that is seen as a possible.
Pushing to the high high throughput.
Demands of a data center and cloud environment. So it's kind of an area where key sites opening up a new franchise, which will continue to position us for future growth.
Perfect Congrats guys. Thanks.
Thank you.
Thank you.
The next question is from the line of Chris Snyder with UBS.
You May proceed.
Thank you I wanted to ask about the backlog I think the prepared remarks disclosed it to be $2 4 billion, which is roughly 45% of the current air revenue guide.
And obviously well above where it's been historically.
So based on the guidance and the commentary around supply chain and it certainly does not sound like this backlog will be released at any capacity. This year. So I guess my question is how should we think about the cadence of this backlog release any color on like the duration or impact will we see it come through or will it just be kind of tapered and over.
For many many quarters any color there is helpful.
Yeah, well first you're absolutely right, we do not expect that we're going to reduce backlog at all this year. In fact, we would estimate in the current supply environment. We experienced we expect to be challenging through the remainder of our fiscal year that we're going to continue.
Add to backlog.
<unk>.
How the how the backlog eventually winds its way from where it from its current elevated levels to a to a more normalized level is really a function of how the broader supply chain situation resolves itself right.
And.
It's only educated guesses at this point because we're honest answer is we don't know what that's going to look like but I'm not expecting that there's going to be.
A step function improvement across the supply chain that allows us to flush backlog grew over a one or two quarter period, I think it's going to be much more a function of a.
Slowly, bringing bringing our quoted lead times on products down and slowly working that.
The backlog down to more normalized levels.
And we also.
View this as a favorable long term trend for our business to enter in a given quarter and having higher confidence in with the backlog and as we think about the growing solutions that we're engaging with customers and these are deeper longer term relationships.
They tend to give us very good visibility into into our business and we're pretty bullish by the growth prospects across the wireless the wireline ecosystem, our industrial business, we have multiple vectors of growth around these big Mega trends that is driving some of this backlog as well.
I appreciate that so then.
Excellent.
Turn back and follow up on earlier commentary around the auto business.
Understanding that from a high level. The company is levered into really all of the great secular trends in auto whether it's battery R&D charging infrastructure and autonomous.
But I guess my question is what's the biggest driver of this business and is there anything we can track or monitor so just benchmark where growth could be here.
Whether that's industry battery R&D spend EV model proliferation.
Help on how to think about.
Just kind of conceptualize the growth potential.
Yes, I think at a simplistic level.
We're tethered to the R&D spend that's occurring and if you look at it that entire ecosystem is spending to continually innovate on range autonomous capabilities and it's a long term driver and if you look at the organic R&D investments being made by automakers, it's only price to increase with time.
I think that would be the closest external dynamic I would point too I would also say if you look back even a few years ago. The number of in house labs to.
And in one generation of R&D from automakers was fairly sketchy, but we're starting to see more investment there across the world.
As as more and more cars have more of these EV features driven by the bigger ESG goals and environment concerns around the world.
Hey, Chris This is mark I'll, just add one thing to what <unk>, just said and it makes it harder to track for you and for everyone, but theres. So many different elements of what's happening with this transformation within the whole mobility space, whether it's the electrification of the drivetrain the connectivity to the external network or.
Communications within the vehicle, which we just announced some solutions to to the charging infrastructure, which is being funded heavily by multiple nations as part of this transformation.
To the millimeter wave and high frequency technology around the sensors, it's just remarkable the computational capabilities and that's why this is such an important space to us as it intersects with all of these areas of strength and we continue to innovate with the industry leaders around all of the global ecosystems as we said earlier so.
It's a long long runway with all kinds of different elements of innovation.
No I appreciate all that color really helpful. Thank you guys.
Thank you.
Thank you.
The next question is from the line of Matt It.
With <unk> you May proceed.
Thank you I have two follow up I apologize you sort of questions have already been raised it since I joined the call late one on the pricing dynamic.
For any quantities Congo, but perhaps maybe you can explain to me on a qualitative basis youre relatively more vertically integrated.
And you have relatively more relationship with strategic mission critical customers.
These two.
Assuming lower input costs.
And how you are relevant to these mission critical application.
They enabled you to extract more economics from your customers and I have a follow.
No.
Yes. Thank you for that question absolutely I mean, you look at our focus around offering total solutions to customers. This has been our strategy since spin and that is really separating ourself.
Our strategy is very clear we look at some of the most tougher challenges in the industry that we serve and we offer solutions and by definition. It has higher software content and over time, we've layered in services, which allows us to.
Work with customers through their lifecycle needs all of that.
Favorable to our ability to continue to grow margins in the business and.
Help offset some of the <unk>.
Inflationary pricing pressures that we face.
Okay.
Perhaps.
It's already reflected in your free cash flow margin that has been double digits.
And.
I see.
We do this.
Topic since the stock has been under pressure and you have also been very active in buyback is there anything else with capital returned to you think you are contemplating.
Yes.
Reflect.
<unk> ability to extract more economics.
Stable.
Free cash flow like would.
Would you favor paying more.
Cash dividend rather than buyback.
A quick follow up.
FX been dialed into your guide thank you.
Thank you Mandy.
I think as you heard.
Multiple end market exposures, we have and as you stated towards many critical mission critical applications, we're really bullish on the long term opportunity at key side to create value and so congruent with that we continue to be committed to this disciplined balanced approach for capital allocation.
First priority is obviously to invest for organic growth and differentiation and we're seeing a lot of opportunities as we engage with our customers second we were disciplined with M&A and but we're continuing to look for opportunities. We have a strong funnel, but we remain patient to make sure that it fits our hurdle.
As we are all as we have done in the past and <unk>.
Of course, it has to make sense for our strategy and lastly, what do we see opportunities like the current situation.
We believe that we will be more aggressive and take take advantage of.
After a return of capital through share buybacks as we have done this quarter and we will continue to and continue to remain on it we have $600 million of.
<unk>.
<unk>.
Previously authorized share.
The share buyback.
We can we can still deploy and we will continue to deploy it as we as we see opportunities at these levels.
And then the second part of your question was have we accounted for FX in the guide it to the extent that FX has moved to date, yes, that's all baked into in into our guide I had mentioned that it's about a two percentage point headwind on a year over year basis in the second half and relative to when we.
Put out our original full year guide of 6% to 7% growth. There is an additional one five points of unfavorable currency. So we're raising from six to seven.
Although.
8%, but there is an additional unfavorable one five points of currency baked into that again based on rates as of today.
Okay.
Okay.
Thank you.
The next question is from the line of Jim <unk> with Citigroup you May proceed.
Thank you I just have one question and that is could you, let us know a little bit about the software and services specifically with some of these growing newer end markets like automotive and power is the attach rate.
<unk> opportunity some more with the past.
Less or more.
Then what the past has for these newer end markets again services and software.
Thank you Jim.
As we stated as we are starting to go beyond the core products and engineered that engineering.
<unk>, which is <unk>.
<unk> instruments into more solutions, they have a higher weighted average of software and then greater ability to monetize through services. So we're still very early innings in deploying those things the latest AE offering that we have we're building it on top of our <unk> platform, which is which is <unk>.
Rich with software, but also as we expand into the application layer as we bring more real world challenges in the auto industry into the lab will continue to see the opportunity would be bigger.
Overtimes and we're investing to realize that.
Thank you.
Thank you.
The next question is from the line of Rob Mason with Baird. You May proceed.
Yes, good evening institution look sturmer, congratulations to your new role as well.
My question was around the general Electronics business you did mentioned all time record revenue there and I was curious how the the order rate performed in that piece of the business as well Im not sure I caught that.
And then just maybe related.
Well historically kind of thought of the general electronics piece of the business is more PMI sensitive.
As you were describing that business there seems like there is a lot of new newer applications there.
Im just curious is that broadened out.
How youre viewing that historical perspective.
At least from perhaps a macroeconomic view to that part of the business.
Yes.
It's a great question I'll have mark answer the first part of it as to how we're doing with orders, but I will say you are right I mean, as we have when we started the company and when we thought about general electronics business had a bigger correlation to manufacturing customer base and over time, we've been adding more R&D.
Vacations and focus to the team as it has been able to bring in some newer end market applications, such as digital health and Iot and it continues to move up the value chain.
Without customer so over time, we would expect it to continue to be more in that direction. Another area of focus for that group is also around advanced research as I noted we had some.
Announcements with the Singapore University in Singapore around quantum we also had a major win in Terre Haute research associated with that business. So we continue.
Ensure that we're seeking more value added sustainable durable opportunities in that business, but that business. Historically has had a little bit more manufacturing exposure than the rest, but I will just hand over to mark to speak about <unk>.
Rob we saw some moderating order growth during the quarter, mainly because of some soft softness in education.
With some of the delays to government spending and some of the other priorities that have come upon the funding we did see some softness there, but we saw a lot of new customers and growth from R&D solutions for digital health care.
We've added nearly 500, new customers again in the quarter, which helps to diversify our base of represents these broad base of industries across multiple segments and so forth.
We saw a strong demand continue across Asia with several new wins around the R&D solutions and.
<unk> just mentioned there have been some real bright spots around advanced research with our University. So.
GDP markets are affected more or less with some of the activities and the geopolitical situation, which I think translates to some of the moderating growth we saw it but.
All in all we see a continued demand for some of our advanced R&D solutions.
Sure.
That's great color.
Just as a quick follow up maybe for Neil.
Is there anything deal that you would call out that we should be monitoring around our margin assumptions as you convert some of the backlog just again, taking your commentary around.
Rising inflation.
Just how your how we should look at the price cost dynamic within your backlog.
Yes.
The backlog thing the biggest issue there is the backlog does create a little bit of a delay between the time at which we might and impact a price increase and the time at which that price increase would be recognized in revenue, whereas it seems like on the input cost side the cost increases are much more.
Real time, particularly if you want to secure delivery of product and so that mismatch is something we are very actively managing but it can cause some quarter to quarter perturbations.
Yeah.
If the timing gets off but I think generally speaking we're good youre doing a good job of managing in this inflationary environment and protecting margins.
Excellent. Thank you.
Thank you.
The next question is from the line of Adam Palmer.
Thomas Davis you May proceed.
Good afternoon, and great quarter guys.
Thanks, one on M&A have you seen.
On M&A have you seen any softening in seller expectations.
Not a lot yet obviously, we've seen we've seen in the market pullbacks that seller expectations still seem to be kind of linked to prior prior valuations.
We're watching that closely and very actively managing our funnel staying disciplined with regard to our return hurdles and hoping that we get the opportunity to act on some of these targets, but right now there does seem to be a little bit of a mismatch there.
Got it and then.
Sorry, if you flesh this out but what was the Russia impact Neil.
It's about two points so core order growth within the quarter was 11 adjusted for Russia. It was 13.
We canceled.
Low 20 millions kind of kind of.
Backlog for Russia. It is has historically been a 1% business for us.
Got it thanks guys.
Yes.
Okay.
There are no additional questions at this time I will now pass back to the management team for any closing remarks.
Well. Thank you to you and thank you all for joining US today, we look forward to speaking with many of you at the upcoming conferences and wish you a great day.
That concludes today's conference call. Thank you you may now disconnect your line.