Q4 2022 Keysight Technologies Inc Earnings Call
Please go ahead Mr. Kerry.
Thank you and welcome everyone to key sites fourth quarter earnings conference call for fiscal year 2022, joining me our key sites, President and CEO of <unk>, and our CFO , Neil Dougherty and the Q&A session, we'll be joined by senior Vice President of global sales and Chief customer Officer Mark.
<unk> you.
You can find the press release and information to supplement today's discussion on our website at Investor <unk> Si Dot com under the financial information tab and quarterly reports today's comments by institution, Neil will refer to non-GAAP financial measures. We will also make reference to core growth, which excludes the impact of currency movements and acquisitions.
Or divestitures completed within the last 12 months.
The most directly comparable GAAP financial metrics and reconciliations or on our website and all comparisons are on a year over year basis, unless otherwise noted we.
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 and we assume no obligation to update them. Please review our recent SEC filings for a more complete picture of these risks and other factors.
Lastly management is scheduled to participate in upcoming Investor conferences hosted by credit Suisse and Wells Fargo. We hope to see many of you there and now I will turn the call over to <unk>.
Thank you, Jason and thank you all for joining us.
Key side reported strong fourth quarter results, which exceeded the high end of our guidance and drove a strong finish to the year.
Before we get into the quarter I want to highlight our exceptional performance for fiscal year, which illustrates continued progress we're making in transforming the company to a software centric solutions provider.
We set new records for orders, which grew 12% to $6 billion, a new record for revenue, which was up 10% and a new record for earnings per share, which increased 22% all the while returning capital through $849 million and share repurchases are 89%.
Free cash flow.
In addition, we continue to invest in next generation technologies for long term differentiation and see a high level of engagement and activity with our customers around their future needs.
Today I'll focus my comments on three key headlines first we delivered an all time record revenue and earnings per share in the fourth quarter ahead of expectations enabled by outstanding execution by key site teams, who successfully navigated supply chain geopolitical and macro.
Dynamics.
Second we achieved record orders of $1 6 billion with steady bookings throughout the quarter and a book to Bill of 1.09.
While our customers' multi year roadmaps remain unchanged. They are exercising more caution given the macro backdrop, which we anticipate will moderate demand in the near term.
Third.
As we enter fiscal 'twenty three we remain confident in our ability to outperform the market based on the differentiation of our solutions, our strong R&D customer value proposition and the robust backlog position, we have entering the year and as we look longer term the secular innovation trends.
In our end markets remained strong.
Now, let's take a deeper look at the strength of the fourth quarter.
Our record orders of $1 6 billion grew 9% on a core basis record revenue grew 15% on a core basis with solid growth across all regions as key site team successfully navigated challenging dynamics.
This resulted in record quarterly earnings of $2 14 per share.
The strength and resiliency of our business model is due to our strategic efforts to diversify our industry exposure.
This has been best exemplified in the growth of our electronic industrial solutions group and our ability to leverage our industry, leading first to market solutions to enable expansion across the broader communications ecosystem.
Yes.
ISG achieved its ninth consecutive quarter of double digit order and revenue growth.
Auto semiconductor solutions and general electronics, all achieved record quarterly revenue.
For the year, both orders and revenue set new records as we capitalized on continued investments across all three ISG markets.
In automotive we're pleased with the continued adoption of our solutions portfolio as orders grew double digits for the seventh consecutive quarter and exceeded $500 million this year.
Automotive Oems and their suppliers continuing to focus on strategic new mobility investments, which drove key wins for key site.
In addition, automotive focused semiconductor companies continue to add capabilities to support EV and Adas applications, which we view as a favorable long term dynamic.
We recently announced the sign lab, DC emulator, which enables customers to accurately characterize high voltage high power electric vehicle battery performance under varying real world charging conditions.
And key sites pathway of labs operation software, one 2022 Auto Tech breakthrough award for overall electric vehicle technology.
In support of applications Silicon designers are exploring adoption of commercial standards, such as maybe for automotive and other surround sensor applications, including cameras and in vehicle infotainment displays we are now expanding our leading compliance test solutions to offer advanced verification.
<unk> and diagnostic capabilities for automotive designers.
Turning to our semiconductor solutions business.
Q4 was the 10th consecutive quarter of double digit order growth and a record revenue quarter.
<unk> sustained demand for our wafer test solutions and precision positioning capabilities, which enable the realization of advanced process nodes.
In addition, key side has continued to partner with industry leaders Synopsys and answers on RF and millimeter wave integrated circuit design flows built for today's wireless communication requirements, including <unk> and <unk> system on chips.
<unk> received a partner of the year award from TSMC for joined development design flows in RF and millimeter wave notes.
In General Electronics record orders grew double digits. This quarter as demand remained strong and broad based across industrial Iot and digital health as well as education and advanced research markets.
Turning to communications solutions group, the business delivered strong orders and record revenue.
Annual orders and revenue were all time highs, despite geopolitical headwinds and delays in U S defense budget appropriations.
Commercial communications revenue grew 10% this quarter and 11% for the year with growth across all regions.
Investments across communications ecosystem continued throughout the year with sustained spending in next generation wireless and wireline technologies ongoing investments in <unk> standards, new spectrum growing deployments around the world and steady evolution from 400 gig to 800 gig to terabyte Ethernet drove.
Growth.
We had another record year for <unk> orders as key sites market, leading solutions continue to provide the industry with new capabilities needed for development of next generation devices as well as wireless and wireline networks.
Examples that highlight our portfolio's alignment with key industry priority include our recent partnership with IBM to integrate our open ran capabilities into their cloud automation tools to accelerate network deployments.
We also completed the validation of our first <unk> location based service use case from global certification Forum by combining the testing of <unk>, New radio and global navigation satellite system technologies into a single platform.
Lastly in collaboration with key Silicon and data Center partners, we enable the industry's first one six terabyte transformation and data center interconnect leveraging our high speed digital solutions.
Aerospace defense and government business revenue grew 4% for the quarter and 3% for the year setting a new record while navigating geopolitical headwinds.
Steady investments in spectrum operations, cyber security and space and satellite drove demand.
<unk> continued to expand in aerospace and defense end markets and we saw increasing investment in advanced research.
Proposed increases and investment in the U S and allied countries for modernization of defense capabilities, and new satellite and space applications position us well for future opportunities.
As an integral part of our solution strategy software and services order and revenue growth. This year continued to outpace key site overall, which has driven our annual recurring revenue to approximately $1 2 billion.
Software and services again represented just over one third of key sites total revenue for the year.
<unk> focus on customer success and innovation is driving our development of first to market high value solutions.
Our achievements over the years exemplify key sites collaborative culture, and our talented workforce and we are honored that key site has placed 10th on the fortunes best workplaces in technology list for 2022.
We believe our differentiated culture gives us a unique ability to recruit.
<unk> developed capable talent and will be our sustaining competitive advantage.
In conclusion, I would like to thank our employees for all their contributions commitment and strong track record of execution in the midst of an uncertain economic environment. We remain confident in the resilience of our business the strength of our balance sheet and the flexibility of our operating model.
Now I'll turn it over to Neil to discuss our financial performance and outlook in more detail.
Thank you <unk> and Hello, everyone. We delivered an outstanding fourth quarter of 2022 with record revenue of $1 $443 million, which was above the high end of our guidance range and grew 11% or 15% on a core basis.
Our strategies to navigate the ongoing supply constraints continue to be effective.
While the supply chain situation improved within the quarter. It continues to moderate our near term revenue expectations.
Record orders of $1 $570 million increased 5% or 9% on a core basis, and we entered fiscal year 2023 with over $2 5 billion in backlog.
Looking at our operational results for Q4, we reported gross margin of 64%, which as expected was down 80 basis points sequentially due to inflationary pressures and increased shipments of lower end instruments enabled by the improving supply chain.
Operating expenses of $494 million were well managed and we generated operating margin of 30%.
Net income was a record $386 million and we achieved $2 14 and earnings per share, which was <unk> 14 above the high end of our guidance our weighted average share count for the quarter was 180 million shares.
Foreign exchange impact on our earnings was negligible, thanks to a meaningful natural hedge provided by our global footprint, which was then supplemented by our financial hedging program.
Moving to the performance of our segments. The communication solutions group achieved record revenue of $992 million up 8% or 11% on a core basis.
CSC delivered gross margin of 66% and operating margin of 29%.
Commercial communications generated revenue of $681 million in the fourth quarter up 10% driven by strength across the <unk> ecosystem, increasing around adoption and investment in 800 gigabit and one six terabits R&D.
Aerospace defense and government achieved record revenue of $311 million up 4% driven by double digit growth in Asia Pacific and Europe .
The electronic industrial solutions group achieved record revenue of $451 million up 20% or 25% on a core basis driven by strength across all markets.
ISG reported gross margin of 60% and operating margin of 32%.
Turning to our full year financial performance <unk> delivered outstanding results in 2022, despite ongoing supply constraints foreign exchange headwinds and incremental trade restrictions.
FY 'twenty two revenue totaled $5 4 billion up 10% year over year or 12% on a core basis.
Gross margin was flat at 65% holding steady in the face of significant inflation.
We invested $813 million in R&D, while operating margin improved 140 basis points to 29%.
FY 'twenty two non-GAAP net income was $1 4 billion or $7 63 per share up 22%.
Moving to the balance sheet and cash flow, we ended our fourth quarter with more than $2 billion in cash and cash equivalents generating cash flow from operations of $398 million and.
And free cash flow of $340 million total free cash flow for the year with $959 million, representing 18% of revenue and 69% of non-GAAP net income.
Share repurchases this quarter totaled approximately 800000 shares at an average price per share of $158 77.
For a total consideration of $126 million.
This brings our total share repurchases for the year to approximately $5 4 million shares at an average share price of $156 and 90.
For total consideration of $849 million or 89% of free cash flow.
Now turning to our outlook and guidance, we exit the year with record backlog and confidence in key sites ability to continue executing through near term uncertain near term uncertainties.
As a result, we expect first quarter 2023 revenue to be in the range of $1 $360 million to $1 billion and $380 million in.
In Q1 earnings per share to be in the range of $1 81 to $1 87.
Based on a weighted diluted share count of approximately 180 million shares.
A few modeling reminders as we entered the year our annual compensation cycle is administered in Q1 and in this current inflationary environment, we expect our second consecutive year of wage increases above our historic average.
We are targeting FY 'twenty, three R&D investment at approximately 16% of revenue.
Annual interest expense is expected to be approximately $80 million capital expenditures are expected to be approximately $250 million and we are modeling a 12% non-GAAP effective tax rate for FY 'twenty three.
In closing, we recognize the uncertainty of the current macro environment and we will continue to be disciplined.
<unk>, it's highly flexible cost structure track record of execution diverse end markets and long term secular growth drivers give us confidence in our ability to outperform the market.
With that I will now turn it back to Jason for the Q&A.
Thank you Neal that concludes our formal remarks downtick could you. Please give the instructions for the Q&A.
Of course, Sir.
Ladies and gentlemen, if you would like to ask a question. Please press star one we ask that you. Please limit yourself to one question and one follow up to withdraw your question. Please press the pound frame. Please hold while we compile the Q&A roster.
Our first question.
Comes from the line of Cemig chatter G.
Your line is now open.
Hi, This is Angela answer Amit Chatterjee, congrats on the strong quarter and outlook.
My first question is sort of related.
Well you mentioned briefly in the prepared remarks on sort of macro slowdown, perhaps some pullback so I'd like to dig in a little more that given that we've seen commentary from other companies indicating.
The pullback in telco Capex are.
Are you seeing any impact to their R&D budget.
And.
And then I have a follow up thank you.
Thank you Angela Yes, we're very pleased with the quarter.
And in consideration of this environment pretty strong results and also a strong finish to the year.
And.
As I stated, we saw a steady level of spend from a demand perspective through the quarter all our regions from a sales perspective grew so it was broad based.
And.
Going into a little bit on the end market color I would say <unk> continues to remain strong we grew our <unk> orders double digit strength in R&D and also where the inflections that we're seeing in deployments around some parts of the world even some of the manufacturing spend there remained strong for us this quarter.
And we did see pockets of weakness in the broad component ecosystem.
And that was an area, we obviously watch carefully and that is related to the smartphone demand.
If you look at the cloud and data center markets and wireline, while some of the cloud.
Our cloud spend from the cloud providers was pushed out service providers was pushed out the broad spend.
To adopt 400 gig and 800 gig continues to remain strong so they focus on R&D and new innovations remain strong moving on to aerospace and defense business obviously.
It was still a strong quarter for us, but we did not see the typical year end surge that we would expect given given the budget appropriations process, and then moving to ISG and markets. All of the markets remained strong right automotive we had strong double digit growth as continued investments in inflection.
<unk> from Evs and Avs, playing out semiconductor is an area, we watch carefully but because of our exposure into the wafer stage.
Equipment process, a new node is specifically new nodes that remained strong and lastly, the general electronics business, which typically gets gets.
Part of it spend from PMI continued to remain strong from a demand perspective, so I would say, where we're doing well and the customer activity with our customers and engagements remained strong and quite pleased with.
Our quarter in this environment.
Great. Thank you so much for that color and then just for my follow up.
The 10% revenue growth this year.
And I know your long term guide is sort of mid single digits revenue growth.
Okay.
What do you think that sort of broad strokes for fiscal 'twenty three revenue growth.
Did you see any pull forward with supply easing so could there be an air pocket in fiscal 'twenty three target back to sort of perhaps trying to Bob.
Typical long term range. Thank you yeah, we remain we remain confident Angela with what.
What we see so far obviously, it's an uncertain environment. So we're guiding one quarter at a time you will see the confidence reflected in our Q1 guide, which is which we feel good about and as we look forward.
We'll look at the demand environment, and we will keep you updated as we go.
Thank you for your question Ma'am.
Our next question comes from the line of Chris Snyder with UBS. Your line is now open.
Thank you.
I wanted to follow up on those comments on the market demand commentary I mean orders were I think you said steady each month of the quarter.
<unk>, 9% year on year.
So what should we make of the commentary that maybe customers are being a bit more cautious as we just kind of ran through all the different sub segments of business. It seems like.
Everything is going quite strong if we take this as maybe an indicator that fiscal Q1 orders or are easing a bit.
And ultimately does this push that.
Growth profile back to that 4% to 6% normalized range or could it sink below that.
Hi, Chris This is Marc I'll take that and add a little bit more detail here. So.
<unk> said, our order level was steady throughout the quarter. So we're watching this right because if customers are taking more time to make decisions you would look for orders to slow down they did not as a matter of fact aka.
October was very strong it was it was a record October for us in terms of orders. So that's good you have heard US talk about before the addition of new customers. We've added about 450 this quarter again for nearly 2000, new customers across the whole year, so that that creates more diversity and durability to our business and I see that paying.
Off our top 20 customers in the quarter were up strong double digits as well. So all of that continues to translate to the fact that we did not see an impact to our business because of the customers taking more time and I think it also has to do with the fact that we are so bias towards R&D and design optimization and as we've seen.
Through other waves in the recent term where some markets slowed the advance technology development continues so that's what we see but we look around and we do see some macro uncertainty and from my seat what I see in terms of order or in terms of customer activities is very <unk>.
Active customers are six month funnel continues to grow but customers are taking more time to make ultimate capex decisions.
Yes. This is Neil.
Ill give you a little bit maybe more quantification of the situation going into Q1, so while we don't guide orders.
I'd point out that we have a bit of a difficult compare here in the first quarter a year ago. In Q1 that was the first time, a key sites history that we'd ever posted order growth moving from the end of Q4 into the first quarter of the new fiscal year. So we've got a tough compare from that perspective. In addition, as you all know.
Dollar began to strengthen pretty significantly in the back half of this year, we estimate the FX headwind in our first quarter to be a full five percentage points and so we've got a five point FX headwind and we estimate another two to three points of headwind from the.
The recent increase in China trade restrictions as well as the loss of our Russia business, which happened in the second quarter of last year. So those things combined give us a seven to eight point headwind just coming out of the gate here as we entered the first quarter.
I appreciate that.
On the commentary that customers are taking longer to order, maybe the ordering slower.
How do you separate.
The supply chain element of that from the demand element because supply chains are generally moving in the right direction.
Maybe customers will not kind of order with the same lead times, our urgency that we saw.
Last year. Thank you.
Yes, Chris I think.
Youre right I think as as the supply chain continues to ease and.
The delivery duration that it takes for us to fulfill an order continues to pull and you would expect some level of normalization as well and we the reason we also put out the demand environment is moderating as we're starting to also see some of our customers who earnings whose earnings has has fallen.
Also put additional scrutiny on spend rate and so that takes a little bit more time to close the deal as they go through their process. So those are some factors.
Neil I don't know if you want to I don't know.
You've commented on the normalization before yes, I guess.
Another point that we would make around that that level is if you look at our last three years, we've averaged a book to bill over the last three years of one point O nine driven first by Covid. Obviously, then by the supply chain disruption that's happened over the last say 18 months and so we've known for some time that that book to Bill had to <unk>.
Normalized and and as our lead times come in we would expect that normalization to occur and so as I think about it and again, we're not guiding orders, but a move a move of our book to build back to a more normal level something approaching one is not something thats going to impact our ability to continue to grow revenue.
I appreciate all that color great quarter guys. Thank you.
Thank you Chris.
Thank you for your question Sir.
Our next line of question comes from the line of Mehdi Hosseini.
<unk>.
Your line is now open.
Yes.
Yes. Thanks for taking my question two follow ups, one I'd go back to Capex for 250.
Should I assume that capital intensity will remain around 3%.
In fiscal year 'twenty three.
Yes, so I mean, one of the things that's happening with our Capex is.
Our capital purchases in this fiscal year were definitely impacted by the broader supply chain environment and so we guided at the beginning of the year I'm talking about fiscal 'twenty. Two now to Capex that was close to $250 million and we significantly underspent that from a cash flow perspective, but what.
You can see is that our commits were very much in line with our original expectations. It just took longer for things to be delivered and so what we're seeing as we go into next year is a pretty dramatic.
Scaling back of new capital purchases, but with a little bit of a cash flow overhang as we go into next year.
So that's what's going to carry our our capital purchases up to that $250 million level in fiscal 'twenty three.
Sure sure.
Capex.
Two.
Come up with some revenue or revenue growth expectation for fiscal 'twenty three there is some.
Cash flow as we have the Capex right.
That's right.
Okay and then.
Let me go back to China.
APAC region as a percentage of revenue.
In the low 40% over the past several years, including the headwind from Huawei.
I assume that.
Youre growing outside of China. So.
So much should extend that.
Able to offset.
Increase restriction.
On shipping to China is it just the mix within the APAC region that.
Mitch China kind of neutralized.
Yes, I think maybe as we have spoken before we.
We have a broad based business in China, and despite the ongoing geopolitical situation.
We have a demonstrable ability to pivot and and address customers in that region and given the focus there on technology development I think we're seeing good demand in the region, but we're also seeing the multinational companies that are that are there are creating that are moving out of.
China in some ways and into rest of Asia Pac and other parts of the world, including Onshoring moves into into North America, and we're we're successfully capturing some of that spend as well.
Okay.
The supply chain.
China that's positive.
If I may just a quick follow up so you do have more than 60% exposure to your customers' R&D budget.
<unk> of that.
There is a structural change is happening with the supply chain that is also positive and those two factors.
Advocate could offset some of the cyclicality nature or.
Production related.
So the beauty of volatility is that the right way to think about this.
I think that's what's playing out.
Right now for Us yes.
Okay.
Thank you.
Thank you for your question Sir.
Our next final question comes from the line of Matthew nickname with Deutsche Bank.
Line is now open.
Hey, guys. Thank you for taking the question.
Two if I could first on backlog. So you mentioned you ended the year at about $2 $5 5 billion.
Our math would suggest something about $100 million higher just relative to the $2. Five you mentioned last quarter and I'm just wondering if theres any order cancellations to be aware of or if there is an FX component.
Affecting this and then secondly on the China trade restrictions I think you had called out a two to three percentage point headwind from those restrictions I am just wondering is that incremental in fiscal <unk> and is this primarily in the ISG or could it show up elsewhere. Thanks.
Okay.
Yeah, So listen I'll take the backlog question and then let Mark address the China question, but yes, I mean, obviously, our orders within the quarter outpaced revenue by.
A little bit more than $100 million. So we do continue to add.
To the backlog as we've gone gone throughout the year.
So, yes and met the <unk>.
Specific China trade situation that went into effect on October 7th So there wasn't much effect in Q4, we will see some effect in our in our first quarter, but the 1% to 2% is projecting out over a run rate of business for the for.
For the entire year based on other situations. The other thing just to note is that we have not seen any changes in our cancellations. It's been running at a historically low level for the last four quarters and that was the case again in Q4.
Got it thank you.
Youre welcome.
Thank you for your question Sir.
Our next line of questions comes from the line of one Aaron Rakers with Wells Fargo.
Your line is now open.
Yes.
Yes, Thanks for taking my question and congrats on the good execution in the quarter.
I just wanted to add a high level go back to kind of the defensibility of the model. If I can can you remind us where the mix of the business stands today between R&D exposed versus let's say manufacturing exposed.
And I guess on that same kind of thought processes.
Where do you stand as far as the monetization of effect of the software strategy, where do we think that progressive too over the next year or whatever timeframe you want to think about.
Yes. Thank you for the question I think at the highest level, we're at approximately 60% of R&D today, 30% manufacturing and 10% deployments. So that's that's the sort of mix of the business clearly we believe R&D secular you look at some of the areas in R&D that we're focused on.
It involves next generation innovations such as with <unk> and then <unk> in automotive.
<unk> digital health, so on and so forth and it really gives us this diversity of applications that is it gives us.
Resilience in this environment for sure.
With regard to the software strategy. So again goes congruent with our with our go to market approach because we're here to enable innovations to happen faster and the way. We do that is by offering more software centric solutions. So as we deploy more solutions to our customers increasingly that is in the form of <unk>.
<unk> software mix and that goes again.
I'll just stick with our services strategy. So you look at our software and services revenue. This year will end at 34% of the total mix and our IRR or annual recurring revenue.
Is reached a new high of $1 2 billion and we will continue to invest.
To grow those portions of the business and increase our resilience and durability over time as well. Thank you.
Yes. Thanks.
Quick follow up if I can.
Just curious when we think about.
The progression of <unk>.
Backlog in.
We appreciate that your backlog is only looking out on a forward six month basis, Neil just curious how should we think about what a normalized backlog level looks like.
Yes.
Given some of the dynamics Thats achieves just talked about increasing software services recurring revenue, we have seen growth in our deferred revenue over the same three year period of time as well as our migration towards systems, rather than tools, I think will drive our ultimate backlog level.
<unk>.
When things normalize to be significantly higher than it was say pre COVID-19 in the 2018 2019 timeframe and so I think we'll have to see how that plays out over time I think.
Again, we built you can you can do the math, we built well north of $1 billion of backlog over the course of the last three years as we've had this book to Bill that I've mentioned of 109.
<unk>.
As our lead times come in we're going to expect ordering patterns to adjust and.
Our lead times to pull and I've said previously there's probably four to five weeks worth of kind of abnormal backlog as a result of four to five week extension of lead times kind of on average would be a way to think about it.
But it is also important.
We're still in it.
We're still in a supply.
Challenge environment, while it's improving supply is the constraining factor right now.
Thank you.
Thank you for your question Sir.
Our next line of questions comes from the line of one Jim Suva with Citi.
Your line is now open.
Thank you so much.
Very noteworthy and impressive about your software and services, which I think is about 34%.
Is it can you help us understand like reasonable growth as a percent of totality going forward because I would imagine.
Hard to ever get over 50% or are you looking at a point, where it starts to level off around.
So 35% or is that way too low, 40%, where could this kind of feasibility go for software and services as you can kind of look at adding these incremental benefits to your sales process.
Yes, Jim I think as a strategy as a company from 2015, we have been focused on on the software centric solution strategy and really focused on our customers most demanding and challenging.
Problems that they have and solving this better than anyone else.
And as we have continued to do that our strategy has taken the form of not just a per incident sale, but our focus on this lifecycle.
Value creation for our customers, but also value capture for key site and that's the journey we've been on some of the more.
Newer solutions such as an open ran that we've talked about where we are seeing considerable traction software alone is nearing 40%, 50% of the total total sale value and with a lot bigger portion of it being in the recurring category as well so we feel good about.
The continued traction we're seeing for our solutions as we continue to deploy the solution strategy over time, we will enter into new end market verticals and as you've seen some examples that put out. This this latest.
Our earnings announcement, we've also had some successes in the automotive sector with with deploying software and in the semiconductor as well with our design offerings.
Mark May make some comments on the sales side, yes, thanks cities and Jim what I would ask as the go to market you mentioned that and that is an important element of this we are attaching upfront attached services and software. We are at about 60% for services today I want to see that growth. So that's another stream of advancement. The other thing that you can see is we are delivered.
<unk> solutions more and more through updates to our software. If you think about our <unk> solutions going from released 15 to release 16 and 17 much of that is software updates that creates additional opportunities for upsell cross sell and of course recurring revenue as well. So there is and there is there are several elements.
<unk> of our go to market that we are deploying now to encourage that recurring growth and expansion of attachment upfront to our total solutions.
Great and then my follow up is on the China, I think I heard two to three points of headwind.
For the full fiscal year were there any like in calendar I'm, sorry fiscal Q4 like buying ahead of the rule changes I'm just trying to kind of.
Triangulate around the magnitude of it and I assume after fiscal 'twenty three it's kind of all out of the model from a rule changes.
Yes, Jim.
We said one to two points of headwind for the entire fiscal year 'twenty three.
And again, that's based on what we estimate as the run rate of business that will won't be available to us with the new.
The new trade restrictions there.
There will be a little bit more in Q1, as we look at some of the backlog, but thats. The run rate and then there was another I think Neil mentioned another point of headwind with from Russia.
Great. Thank you so much and congratulations to you and your teams.
Thank you Jim.
Thank you for your question Sir.
Our next line of question comes from the line of one meta Marshall with Morgan Stanley .
Your line is now open.
Great. Thanks.
In the past you guys have talked about kind of.
The <unk> was going to be much later than kind of investors were expecting but you kind of talked about the 'twenty three 'twenty four time period.
For the <unk> I just wanted to kind of get current thoughts on that just how initiatives like Oran are just some of the other initiatives or maybe extending that and then maybe a second you gave.
Some context that you are seeing some loosening in supply chain, but just kind of what is.
Current thinking is it still just a small amount of parts that you are kind of waiting to release suggest wendy's the more general availability.
As part of just kind of tightening between supply and demand.
Yes. Thank you meta I think on the <unk> front I think as we have always stated there are multiple catalysts I think about 18 months ago. I said the first catalyst was the C band deployments in the U S. That's played out as we as we as we had hoped and we have captured a lot of that spend we are pleased.
With some action that's happening in Asia, and India parts of India that have made commitments to rollout <unk>. So thats again opportunity for us that's playing out right now, but the second and third parts to this is the millimeter wave opportunity. There is still some complex challenges with millimeter wave that customers are trying to solve that continues to be.
Longer term.
The opportunity for us as that deployment is continuing to push out anyway scale deployments anyway and lastly.
<unk> deployed operators are looking to further monetize by adding the SA versions and new new applications such as open ran.
I'll continue to be gained traction across the global ecosystem and so the opportunity that we have in R&D continues to grow and we're well positioned.
With our comprehensive offerings, we have to address it I also want to point out that we have a very diversified business <unk> gets a lot of attention, but we have secular trends in wireline evolutions, which we are well positioned to capitalize on based on the acquisitions of <unk> that we have made and we continue to see traction there now.
You mentioned, the new newer additions to our go to market with automotive and with next next generation semiconductor nodes. So we run a diversified business and I think thats that source of greater stability for us and overtime.
And the second part of the supply chain question that you asked is.
At the beginning of last year, we took a series of actions to.
Two to basically redesign our products to second source components, and we had a we've talked about it on earnings calls and all of those actions. It really enabled us to do better than we expected every quarter.
But as we think about the supply chain I speak with a number of our.
Semiconductor.
Why chain partners and they're all putting actions in place to obviously increase capacity, but it still continues to be a constrained environment, we're not back to this pre COVID-19.
Sort of supply environment, yet and might take all of 'twenty three to get there from from our best information right now.
Great. Thank you.
Thank you for your questions ma'am.
Our next final question comes from the line of <unk>, David Ridley Lane with Bank of America. Your line is now open.
Sure good evening.
You talked about some of the headwinds to revenue in the first quarter, but.
One tailwind mentioned this pricing and just sort of wondering how significant is pricing today versus more normal levels.
A couple of points tailwind from that.
And then.
What type of volume growth is really embedded into first quarter's guidance.
What was the last part of the question I'm, sorry, David I missed that last part.
So is the type of volume growth is embedded in the first quarter guidance.
Yes, I mean, I think the pricing question. Obviously, we've had we've been doing our best to keep pace with inflation, we've had multiple rounds of price increases over the course of the last 12 to 18 months.
And those are embedded in the backlog, although I think you can see.
Based on the fact that we have maintained margins over the course of fiscal 'twenty two at flat at 65%, which frankly I think in this inflationary environment was a very strong result that were basically keeping pace on a margin basis with what we're seeing in terms of in terms of increases in so so.
Right now while on the one side, yes, we have these price increases that are embedded in our backlog and we will continue to yield dividends in revenue its not like the inflationary elements have stopped in the cost structure as well I referenced for example that we are going to be.
Doing our salary administration for next for next year here in our fiscal first quarter and this will be our second consecutive year with with salary increases that are materially above.
Our historic averages as to the volume question, given the nature of our business, where we're selling instruments that literally cost in some cases hundreds of dollars and in other cases cost $1 million.
That's a very difficult question to answer there is such a high deviation of mix.
But it's really hard to get to a meaningful answer on that question.
Yeah.
Sure.
As a follow up.
Another tailwind here as autos rate I think last quarter, you mentioned that it's basically doubled over the last two years.
This quarter, you mentioned $500 million in orders.
Marin.
Close to 10% of your orders for this fiscal year.
Do you feel like the trend there.
It's kind of.
Don't want to say.
Not sick.
Subject to.
Sort of macroeconomic conditions, but certainly has a strong secular element to it.
David This is mark.
To answer that the growth we're seeing is coming from next generation mobility. There is some there is some continuing R&D on the electronics side thats more conventional but the growth in new mobility is.
As sustaining it is secular.
And it doesn't just stop at the at the vehicle it goes out into the charging infrastructure into the underlying battery technologies and we've seen what's happened here in the last year with different countries and different regulations pushing this further toward adoption the adoption in Europe is very very.
Strong and growing fast.
The other regions as well and our position in the market is very strong helping our customers design.
And deploy this next generation technology from the batteries to the charging infrastructure and then add on top of that all the connectivity and communications and protocols as we talked about in the prepared statement. So this is really a great intersection of multiple strengths for us and it has it has long term secular growth drivers behind them.
Thank you very much.
Thank you for your question Sir.
Our next final question comes from the line of one Rob Mason with Baird.
Your line is now open.
Yes, good evening. Thank you.
Neal I wanted to just clarify you mentioned that the R&D I thought would be sixth roughly 16% of revenue. This year I just wanted to make sure that's correct.
This is about a point more than it was.
This past year in 'twenty, two and just I'm curious how that steps up in what is an exit rate look like.
If thats the case.
Yes, so you're right, obviously, our 16% or 60% plus has been our long term target. We underspent that here in FY 'twenty two I think a big function of that was the revenue outperformance within the year. If you remember this time last year, we guided to 6% revenue growth on the year and we actually grew 12% on a core basis.
And so our R&D plans for the year, we're much more aligned with with that lower level of revenue growth. So I think as we go we certainly continue to see a large.
Mt of opportunity for us to continue to invest in the future growth of our business a lot of pull from our customers to do R&D work and so our intent is to revamp back towards 16% of revenue obviously the salary administration here in the first quarter is going to is going to help to move us in that direction. We we may not get to 2016.
<unk> here in the first quarter, but looking at exit rate, that's at 16% or even potentially a little bit above by the time you get out to the fourth quarter is not it's not out of the question.
Okay. Okay. That's helpful and then.
To the extent the supply chain does still remain somewhat tight through the year. How are you thinking about working capital in.
Any ability or.
To pull that down as you go through the year. What are you what are you thinking about working capital contribution for the year.
I certainly think over the longer term that as the supply chain normalizes, there will be an opportunity for us to reduce some of the working capital. That's built up over the course of the last year, we see it in terms of inventory increased inventory via the prices that we're paying for <unk>.
<unk> parts, we see it money tied up in terms of commitments to buy future inventory, where we paid in advance for future delivery has been a use of working capital that frankly is new over the course of the last 12 months and then frankly the supply chain situation has significantly impacted the linearity of our <unk>.
Revenue within the quarter.
You can imagine when you move from more of a just in time environment, where you're just building and shipping and building and shipping were doing a lot more build to a certain stage wait for parts finish and ship and so our revenue has tended to be more backend loaded which results in us carrying more receivables at the end of the quarter than we would if we were shipping in a more linear fashion.
Again, I think it's a function of how does supply chain normalize and when does that eventually happen.
That is you need a little bit of a crystal ball to answer that question, but when it does happen. We would see we would expect to see an ability to reduce working capital.
Great good.
Thank you.
Thank you for your question Sir.
That concludes our question and answer session for today I would like to turn the conference back to Jason Kary for any closing remarks.
Thank you Jonathan and thank you everyone for joining us as he mentioned that concludes the call and we wish you all a good evening and look forward to seeing you soon.
This concludes our conference call you may now disconnect.