Q2 2023 Keysight Technologies Inc Earnings Call
And I will be your lead operator today.
If at any time during the conference you need to reach an operator, Please press star zero.
The call is being recorded today Tuesday may 16th 2023 at 130 P M Pacific time.
I would now like to hand, the call over to Jason Kary, Vice President Treasurer, and Investor Relations. Please go ahead Mr. Carey.
Thank you and welcome everyone to <unk> second quarter earnings conference call for fiscal year 2023, 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 our Chief customer Officer, Mark Wallace The press release and information to supplement today's discussion are on our website at <unk>.
Investor deck, <unk> dot com under the financial information tab and quarterly reports today's comments 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 on our.
A web site and 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, we assume no obligation to update them. Please review our recent SEC filings for a more complete picture of these <unk>.
Risks and other factors lastly 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 Good afternoon, everyone and thank you for joining us today.
<unk> delivered a solid second quarter performance capping off a record first half of the year are.
Our consistent execution as we navigate near term macro dynamics reflects the resilience of our diversified business and the differentiation of key sites solution portfolio. My comments today will focus on three key headlines.
First our strong financial performance in the second quarter demonstrated the depth and the breadth of key site solutions and operating discipline.
Revenue was at the high end of our guidance and earnings per share exceeded our guidance range as we delivered record gross margin and record free cash flow.
Orders in the second quarter was stable and consistent with our expectations as near term macro dynamics play out we're capitalizing on growth opportunities across our end markets with particular strength in automotive and global Aerospace defense and.
And third we remain confident in the long term secular growth trends in our markets. While the current environment is uncertain. We are continuing to prudently invest for the future to build on our leadership positions and to deliver on the long term strategy that I laid out at our Investor day in March.
Now, let's take a deeper look at our second quarter results orders declined 10% or 8% on a core basis.
Record Q2 revenue grew 3% or 5% on a core basis operational excellence combined with favorable software and services mix resulted in record gross margins of 67% operating margin of 30% record free cash flow of $370 million and.
Earnings per share growth of 16% turning to our business segments. The electronic industrial solutions group delivered record Q2 orders driven by demand in automotive and general electronics, representing 33% of the total company revenue ISG revenue was an all time high and grew 70.
10% with strong double digit growth across all end markets. This was also the 11th consecutive quarter of double digit revenue growth for this business segment, which underscores our broad market reach and diversified portfolio.
In automotive, we delivered strong double digit revenue growth and secured new strategic wins with two large Oems.
Building on our strong position in this market, we introduced further automation and protocol test capabilities for our industry, leading EV charging test portfolio, allowing customers to accelerate their innovation.
Improved battery performance and ease of charging are among the most critical capabilities EV developers are bringing to consumers today key sites complete solutions allow customers to develop batteries with better range and faster charging times and importantly to efficiently test interoperability again.
All global infrastructure standards under real world conditions Gen.
General Electronics revenue grew by double digits to reach an all time high we are capitalizing on opportunities across a broad range of applications. For example in quantum in Silicon Photonics, where we are seeing more advanced research investment in digital health, where we closed deals with several prominent medical device customers for key.
<unk> microwave sensing and imaging solutions and in industrial automation, where customers are developing components and products to connect factory and warehouse environments.
Our outperformance in general electronics in a soft demand environment demonstrates the benefit of the broad and diverse set of applications and use cases that we enable semi.
Semiconductor solutions delivered double digit revenue growth driven by continued fab investments in new wafer capacity and advanced nodes are strong relationships with key customers and wafer test and position lithography provide us with long range demand visibility, which remains favorable despite near term inventory headway.
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We believe the long term growth drivers remain intact supported by the government investments in initiatives, such as chip Sac and advanced node development for small more efficient and multi functional chipsets.
Turning to our communications solutions group revenue declined 3% against a strong comparator of double digit growth last year.
At 45% of company revenue commercial communications revenue declined, 7%, which reflects the normalization of demand environment that we referenced last quarter.
We saw cautious but stable spending across the communications ecosystem, particularly in the smartphone and PC computing markets as customers work through post pandemic inventory dynamics and macro uncertainty.
At the same time, our customers continued to invest in long range strategic R&D programs key sites first to market solutions are enabling future requirements in five G, including non terrestrial networks released 17 capabilities open ran AI ml, driven data center networks and early <unk> research.
<unk>.
After a three year pause, we saw strong global industry participation at mobile World Congress and optical fiber conference this year.
At this event, we showcased our capabilities with key industry players to advanced new technologies and use cases.
This quarter, we enabled Samsung to demonstrate <unk>, new radio non terrestrial network use cases and satellite connectivity.
In addition, we secured a key win in commercial space to test antennas, Transceivers and telematics systems.
Key site is also enabling ongoing open ran adoption for example cable labs used key sites open ran architecture solutions to achieve key interoperability milestones.
Regionally, we saw strength in India with ongoing <unk> and open ran deployments.
Strategic data center R&D activity continues to gain momentum and key site secured an early win with a leading customer to implement AI ml use cases.
Our unique and comprehensive solution stack, which spans the physical protocol and the application layers is enabling us to capitalize on these new market and technology inflections.
We're also continuing to advance early 60 research with industry leaders around the world in Japan, we engaged with NTT Docomo on new spectrum technologies for sub terahertz frequencies.
In the UK in collaboration with National Physical Laboratory and University of Sara we enabled connectivity at speeds greater than 100 gigabit per second using key sites <unk> testbed.
Turning to our aerospace and defense government business, we achieved record second quarter orders and revenue double digit order growth was driven by increasing defense spending worldwide at 22% of company revenue <unk> revenue was up 7%.
Defense modernization spending remained strong in radar and spectrum operations, while investment in space and satellite and ongoing research in <unk> and <unk> drove growth.
Saw strong demand from the U S and European primes with spend picking up in next generation programs. We recently announced software based real time spectrum analysis solution, allowing satellite network operators to provide users with the highest quality of service key side continues to innovate to meet the needs of.
This evolving market.
Software and services revenue growth across business segments was steady and represented over one third of company revenue value added solutions are becoming increasingly important in the rapidly evolving design emulation and test environments and collaboration with Synopsys and answers, we recently announced.
A 79 gigahertz millimeter wave radio frequency referenced flow for TSMC.
This allows us to provide mutual customers with the solutions they need to push the boundaries of RF and millimeter wave design into applications for autonomous systems technology.
Technology Mega trends and customers' innovation workflows are driving an expansion in software opportunities, we expect software and services growth to continue to outpace overall company growth over the next three years before I turn it over to Neil I'd like to highlight some of the things that make me proud to lead this company.
Our collaborative and innovative culture is one of the strategic enablers for key sites continued value creation and an enduring competitive advantage.
We recently published our 2022 corporate social responsibility report, which showcases the progress that we've made against our commitments and we're proud to have significantly surpassed many key impact goals for fiscal year 'twenty two.
Speaker 1: overall company growth over the next three years.
Speaker 1: Before I turn it over to Neil, I'd like to highlight some of the things that make me proud to lead this company.
Speaker 1: A collaborative and innovative culture is one of the strategic enablers for Keysight's continued value creation and an enduring competitive advantage.
We also released our 'twenty to diversity equity and inclusion report, which highlights the companys accomplishments in building, an inclusive workplace and expanding new stem partnerships.
Speaker 1: We recently published our 2022 Corporate Social Responsibility Report, which showcases the progress that we have made against our commitments and we are proud to have significantly surpassed many key impact goals for fiscal year 2022. We also released our 2022 Diversity, Equity and Inclusion Report.
To sum it up our market leadership and deep customer relationships, our sustainable competitive advantages, we're guided by our key site leadership model and run the company to outperform and to consistently create value under all business conditions, we believe the structural and financial flexibility of our operating model.
Speaker 1: which highlights the company's accomplishments in building an inclusive workplace and expanding new STEM partnerships.
<unk> enables us to be resilient in the current macro environment I would like to thank our employees for exemplifying a high performance, winning culture and consistently delivering exceptional value to our customers and shareholders.
Speaker 1: To sum it up, our market leadership and deep customer relationships are sustainable competitive advantages. We are guided by our Keysight leadership model and run the company to outperform and to consistently create value under all business conditions. We believe the structural and financial flexibility of our operating system is a key factor in
With that I.
I will now turn it over to Neil to discuss our financial performance and outlook.
Thank you <unk> and Hello, everyone. We delivered exceptionally strong financial performance in Q2, demonstrating the resilience of our business model.
Revenue of $1 $390 million was at the high end of our guidance range and grew 3% or 5% on a core basis.
Speaker 1: I will now turn it over to Neil to discuss our financial performance and outlook.
Macroeconomic uncertainty continue to impact demand in the second quarter and orders of $1 $319 million declined 10% or 8% on a core basis, we ended the quarter with over $2 4 billion in backlog.
Speaker 2: Thank you Satish and hello everyone. We delivered exceptionally strong financial performance in Q2, demonstrating the resilience of our business model. Revenue of $1,390,000,000 was at the high end of our guidance range and grew 3% or 5% on a core basis.adelayering Paige
Turning to our operational results for Q2, we reported record gross margin of 67% and operating expenses of $504 million, resulting in operating margin of 30%.
Speaker 2: Macroeconomic uncertainty continued to impact demand in the second quarter, and orders of $1,319,000,000 declined 10% or 8% on a core basis.
We achieved net income of $380 million and delivered $2 12 and earnings per share, which was above the high end of our guidance our weighted average share count for the quarter was 179 million shares.
Speaker 2: We ended the quarter with over $2.4 billion in backlog.
Speaker 2: Turning to our operational results for Q2, we reported record gross margin of 67% and operating expenses of $504 million resulting in operating margin of 30%.
Moving to the performance of our segments, our communications solutions group generated revenue of $937 million down.
Down, 3% or down 1% on a core basis commercial.
Speaker 2: We achieved net income of $380 million and delivered $2.12 in earnings per share, which was above the high end of our guidance.
Communications revenue of $627 million was down 7%.
Aerospace defense and government revenue of $310 million increased 7% driven by investments in defense modernization altogether <unk> delivered record gross margin of 68% and operating margin of 28%.
Speaker 2: Our weighted average share count for the quarter was 179 million shares.
Speaker 2: Moving to the performance of our segments. Our Communications Solutions Group generated revenue of $937 million, down 3% or down 1% on a core basis.
The electronic industrial solutions group generated second quarter revenue of $453 million up 17% or 19% on a core basis with double digit revenue growth in automotive general electronics and semiconductor demonstrating the diversity of our markets ESG.
Speaker 2: Commercial communications revenue of $627 million was down 7%.
Speaker 2: Aerospace, Defence and Government Revenue of $310 million dollars increased 7% driven by investments in defence modernization.
Speaker 2: Altogether, CSG delivered record gross margin of 68% and operating margin of 28%.
ISG reported gross margin of 64% and operating margin of 35%.
Moving to the balance sheet and cash flow. We ended our second quarter with $2 5 billion in cash and cash equivalents generating cash flow from operations of $423 million and free cash flow of $370 million or 27% of revenue, which includes $107 million in onetime proceeds.
Speaker 2: The Electronic Industrial Solutions Group generated second quarter revenue of $453 million, up 17% or 19% on a core basis, with double-digit revenue growth in automotive, general electronics, and semiconductor, demonstrating the diversity of our markets.
Speaker 2: EIC reported gross margin of 64% and operating margin of 35%.
From the unwind of an interest rate swap.
Now turning to our outlook.
Speaker 2: Moving to the balance sheet and cash flow. We ended our second quarter with 2.5 billion dollars in cash and cash equivalents generating cash flow from operations of 423 million dollars and free cash flow of 370 million dollars or 27% of revenue which includes 107 million dollars in one-time proceeds from the...
In this challenging macro environment. The scenario, we laid out last quarter for first half demand levels to persist through the remainder of the fiscal year is playing out.
Given the strength of our operating model and the actions we have taken to date, we now anticipate better earnings performance than previously communicated with strong mid single digit EPS growth expected for the full year.
Turning to our third quarter guidance, we expect revenue to be in the range of $1 billion $370 million to $1 billion $390 million at Q3 earnings per share to be in the range of $2 to $2 <unk>.
Speaker 2: Given the strength of our operating model and the actions we have taken to date, we now anticipate better earnings performance than previously communicated, with strong mid-single digit EPS growth expected for the full year.
Based on a weighted diluted share count of approximately 179 million shares.
Despite ongoing uncertainty key sites durable and resilient financial model positions us well to outperform in the current economic environment.
Speaker 2: Turning to our third quarter guidance, we expect revenue to be in the range of $1,370,000,000 to $1,390,000,000 and Q3 earnings per share to be in the range of $2 to $2.06.
Over the longer term, we remain confident in the underlying demand drivers for our markets and our ability to execute and achieve our new raise long term targets as presented at our Investor day in March with that I will now turn it back to Jason for the Q&A.
Speaker 2: based on a weighted diluted share count of approximately 179 million shares.
Speaker 2: Despite ongoing uncertainty, T-site's durable and resilient financial model positions as well to outperform in the current economic environment.
Thank you Neil Elisa could you please give the instructions for the Q&A.
Absolutely, ladies and gentlemen, if you would like to ask a question. Please press star one.
Speaker 2: Over the longer term, we remain confident in the underlying demand drivers for our markets and our ability to execute and achieve our new raised long term targets as presented at our investor day in March.
We ask that you limit yourself to one question and one follow up please.
To withdraw your question press Star two.
Speaker 2: With that, I will now turn it back to Jason for the Q&A.
Please hold while we compile the Q&A roster.
Speaker 3: Thank you, Neil. Alyssa, could you please give the instructions for the Q&A?
Our first question comes from the line of Cemig Chatterji with J P. Morgan.
Speaker 4: Absolutely. Ladies and gentlemen, if you would like to ask a question, please press star 1. We ask that you limit yourself to one question and one follow-up, please.
Your line is now open.
Yes, hi.
Thanks, Thanks for taking my questions I guess.
If I start with the strong operating performance I think you.
Speaker 4: To withdraw your question, press star 2.
You were mentioning in your prepared remarks.
Speaker 4: Please hold while we compile the Q&A roster.
Just maybe give us a bit more color. There obviously record gross margins very strong operating margins in the context of sort of how the top line is playing out and what the macro is.
Speaker 4: Our first question comes from the line of Samik Chatterjee with J.P. Morgan.
Speaker 4: Your line is now open.
Now what are the drivers behind the gross margin improvement in <unk>.
Speaker 5: open.
Overall, how much of this is just sort of some of the supply pressures easing versus something that you guys have said you've taken actions in sort of that is driving some of the improvement. If you can lay that out for us in terms of how sustainable that is going to have a follow up.
Speaker 5: I guess if I start with the strong operating performance setting need you were mentioning in your prepared remarks, just maybe give us a bit more color there. Obviously record cross margins, very strong operating margins in the context of sort of how the top line is playing out and how the macro is.
Yes, it's a great question and to some extent it depends on what your compare is over the over the past couple of quarters, a big driver of the sequential order improvement from that from the last couple of quarters comes from the improvement in the supply chain and in fact, I would tie to the reduction in the <unk>.
Speaker 5: What are the drivers behind the cross-margin improvement? And overall, how much of this is just sort of some of the supply pressures easing versus something that you, as you said, you've taken actions and sort of that's driving some of the improvement if you can lay that out for us in terms of how sustainable that is. And I have a follow-up. Yes, Samek, it's a great question. And to some extent,
In the third party premiums that had kind of peaked in the back half of this year.
Last year and into the first quarter of this year on a year over year basis, it's really far more mix, we had significantly favorable mix relative to relative to.
The mix that we saw in the same quarter a year ago as the as the sustainability I think.
Obviously, we set a new.
Speaker 2: in the third party premiums that had kind of peaked in the back half of this year, and last year, and into the first quarter of this year. On a year over year basis, it's really far more mix. We had significantly favorable mix relative to the mix that we saw in the same quarter a year ago....
<unk> raised our gross margin target for this business of 66% to 67% over the longer term.
This is a great proof point in terms of showing our ability to achieve those kinds of levels I don't necessarily know that we're ready to.
Operator at this level continuously going forward, but we also raised the.
Speaker 2: As to sustainability, I think, you know, obviously we set a new raised gross margin target for this business of 66 to 67% over the longer term. I think this is a great proof point in terms of showing our ability to achieve those kinds of levels. I don't necessarily know that we're ready to...
<unk>.
The EPS guidance for the year relative to the scenario, we laid out last quarter and certainly.
The operating margin performer excuse me the gross margin performance in the.
The.
Easing of the supply chain constraints and costs are factored that led to that increased EPS guidance.
Speaker 2: to operate at this level continuously going forward. But we also raised the
Yes.
<unk> sure if I can add to neil's points.
Quite pleased to the financial performance in this environment, obviously, both CST and <unk> ISG showed gross margin improvements.
Speaker 2: the EPS guidance for the year relative to the scenario we laid out last quarter, and certainly, you know, the operating margin perform- excuse me, the gross margin performance and the easing of the supply chain constraints and costs are a factor that led to that increased EPS guidance.
I see a lot of it was linked to volume, but if you look.
The business model is solid right you look at the software and services have been steadily outpacing the business overall business growth for a long time now and we expect that tend to continue and I would say that that gives us confidence as Neil pointed out that as we continue to execute our strategy of going up the stack all the way from.
Speaker 1: Sathish, if I can add to Neil's points, quite pleased with the financial performance in this environment. Obviously, both CSG and EISG showed gross margin improvements. In EISG, a lot of it was linked to volume, but if you look at the business model, the core thats your company, people are in the middle of murky mountains, right? And they brought me toflake. So, I thought that's great. If you look just at the size, you get a great Ana eye.
<unk> protocol and application layers will continue to have more more opportunities moving forward.
Speaker 1: is solid, right? You look at the software and services have been steadily outpacing the business, overall business growth for a long time now and we expect that tend to continue and I would say that that gives us confidence as Neil pointed out that as we continue to execute our strategy of going up the stack, you know, all the way from physical protocol and application layers we'll continue to have more opportunities moving forward.
Got it.
If I can follow up with you on the demand side for commercial communication.
You talked about the sort of customer spending patterns last quarter have you seen any more sort of broad or broadening out of the weakness I know some of your peers have talked about even some of the base station testing et cetera, being a bit more vehicles, but have you seen any broadening beyond this sort of just the smartphone ecosystem of players in that week.
Speaker 5: Satish, if I can follow up with you on the demand side for commercial communication. You talked about the customer spending patterns last quarter. Have you seen any more broader broadening out of the weakness? I know some of your peers have talked about
You're seeing an even interested in hearing what you're seeing from your customers in relation to do you really see sort of pure commodity.
Sort of hitting a trough already starting to sort of stabilize at these levels because that's what the numbers are indicating but interested to hear how you're thinking about it. Thank you.
Speaker 5: even some of the base station testing, etc., being a bit weaker, but have you seen any broadening beyond just the smartphone ecosystem of players and that weakness that you're seeing? And even interest in hearing what you're seeing from your customers in relation to, do you really see sort of your commercial comp hitting a trough already and now starting to sort of stabilize at these levels because that's what they know.
Yes, I think the headline on demand I think in order to suspend stability right I think that's sort of the team and its holds true even in commercial communications, where obviously, we discuss the dynamics of customers working through inventory correction. Some of them are in a place where they are.
Starting to think about next year's programs are starting to think about other programs, but then some of them are still working through.
The inventory correction situation in their business. So it is really dependent on different customers, but broadly I would say if you look at our <unk> business.
R&D parts of the opportunity continues to hold up better and there are different drivers there and then you referenced the base station side actually.
Speaker 1: customers working through inventory corrections. Some of them are in a place where they are starting to think about next year's programs, they're starting to think about other programs, but then some of them are still working through the inventory correction situation in their business. So it's really dependent on different customers.
It was also holding up in line with quarter, one and I think on the networking side, we had a slightly down quarter over quarter, but all in all.
It's holding up well at this time.
Speaker 1: But broadly, I would say if you look at our 5G business, you know, the R&D parts of the opportunity continues to hold up better, and there are different drivers there. And then you referenced the base station side. It actually was also holding up in line with, you know, quarter one.
Don't know that I would go as far as calling calling a trough for calling a bottom.
We remain focused on delivering to our customers Roadmaps and we're seeing high engagement with our customers, particularly in comps after the OFC in mobile World Congress I think people are starting to think about what the future might bring and the tremendous opportunity to innovate and nobody wants to fall behind.
Speaker 1: And I think on the networking side, we had slightly down quarter over quarter, but all in all, it's holding up well at this time. I don't know that I would go as far as calling a trough or calling a bottom, but we remain focused on delivering to our customers roadmaps.
<unk>.
And if I was just going to add onto that I mean, just kind of catching onto that that theme of stability that <unk> mentioned I think as we look at demand and turn that lens forward.
Speaker 1: and we're seeing high engagement with our customers, particularly in comms after the OFC and Mobile World Congress. I think people are starting to think about what the future might bring, and there's tremendous opportunity to innovate, and nobody wants to fall behind.
We're thinking about second half demand thats largely in line with what we saw in the first half, albeit with some seasonality attached to it typically we would see Q3 ticked down in Q4 tick up not just because of the way we manage our R.
Our sales compensation programs, but also in particular in this scenario, where one of the growth drivers that we're seeing in this market is aerospace defense and the fact that those markets tend to skew up in our in our fourth quarter.
Speaker 2: And if I was just going to add on to that, I mean, just kind of catching on to that theme of stability that Satish mentioned, I think as we look at demand and turn that lens forward, you know, we're thinking about second half demand that's largely in line with what we saw in the first half, albeit with some seasonality attached to it. Typically, we would see Q3.
Got it okay, great. Thank you congrats on the execution.
Thank you so much.
Speaker 2: tick down and Q4 tick up, not just because of the way we manage our our sales compensation programs, but also particularly in this scenario where one of the growth drivers that we're seeing in this market is aerospace defense and the fact that those markets tend to skew up in our fourth quarter. Thank you. Congrats on the execution.
Thank you.
Our next question comes from the line of Mehdi Hosseini with Susquehanna. Your line is now open.
Yes, thanks for taking my questions.
Going back to.
Backlog.
I wanted to better understand how the normalization, especially post Covid is played out and just for illustration.
Speaker 4: Thank you so much. Our next question comes from the line of Mehdi Hosseini with Susquehanna. Your line is now open.
I'd like to look at a prior to Covid and look at.
Look three to five years of history, the next quarter revenue to prior quarter backlog averaged around nine.
Speaker 6: Yes, thanks for taking my questions. Going back to backlog, I want to better understand how the normalization, especially post-COVID, is played out. And just for illustration, if I were to look at prior to COVID, how many people are in the same place?
Reflecting the nature of the business, which was turn Covid change that your backlog went up due to supply chain disruption and as you look forward.
Should we expect more of a turn business.
And I have a follow up.
Speaker 6: and look at like three to five years of history, the next quarter revenue to prior quarter backlog averaged around 0.9, reflecting the nature of the business which was turned. COVID changed as your backlog went up due to supply chain disruption. And as you look forward,
Yes, I think maybe at.
From a business model standpoint, as you know we've been driving to.
Two increasing solutions more software and services mix higher IRR and that's been part of the strategy for go to market and that that could alter or in a very.
Speaker 6: post COVID, should we expect more of a term business? And I have a follow up.
A moderate way the mix, but at some point, yes, I think as demand demand gets back in line, we would we would expect the supply and.
Speaker 1: I think, Maddie, from a business model standpoint, as you know, we've been driving to increasing solutions. Software and services makes higher ARR and that's been part of the strategy for go-to-market.
Demand balanced too to be restored.
Yes.
Sorry about.
About it from a backlog perspective, I think in terms of the backlog normalization, it's happening much like we laid out last quarter right.
Speaker 1: And that could, you know, alter in a very moderate way the mix. But at some point, yes, I think as demand gets back in line, we would expect the supply and demand balance to be restored.
Speaker 1: that could alter in a very moderate way the mix. But at some point, yes, I think as demand gets back in line, we would expect the supply and demand balance to be restored. At the end of the day, it's pretty seven minutes but I am going to end here speaking to an approach for one more,
Orders are.
Revenues have outpaced orders in both Q1 and Q2.
We expect that largely to continue here through the remainder of the year and while we may not work through all of what I've kind of had described as the abnormal backlog, we're going to work through a significant portion of that if you think of it as kind of the $80 million a quarter kind of a kind of kind of kind of a run rate.
Speaker 2: Sorry, Maddy, as I said from a backlog perspective, I think in terms of the backlog normalization, it's happening much like we laid out last quarter, right? We expect that, you know, orders or revenues have outpaced orders in both Q1 and Q2. We expect that largely to continue here through the remainder of the year and
And so.
And then you are correct as the supply chain situation has evolved we are once again, becoming more and more reliant on on turns business not quite back to where we were pre COVID-19, but some of that is the fact.
Speaker 2: While we may not work through all of what I've kind of had described as the abnormal backlog, we're going to work through a significant portion of that if you think of it as kind of an $80 million a quarter kind of a run rate. And so, and then you are correct as the supply chain situation is involved, we are once again becoming more and more reliant on
The kind of the structural changes that have occurred in our business over that period of time.
Sure. Thank you.
I, certainly don't want to take away anything.
From the.
Demand drivers and in that context, maybe you could remind us what are the key demand drivers looking forward.
Speaker 2: on Tern's business, not quite back to where we were pre-COVID, but some of that is the fact of the kind of the structural changes that have occurred in our business over that period of time.
600 gig Ethernet Numero.
Semiconductor and.
And to me.
Those dynamics are very different than the investment cycle that you went through from Tony 17 through 2019.
Speaker 6: Thank you. I certainly don't want to take away anything from the demand drivers. In that context, maybe you could remind us what are the key demand drivers looking forward like 600 gig ethernet, nil-aero, semiconductor and how...
Again, if you could just remind us.
The next couple of years could be different then.
Prior upturn.
Yes, Thank you Andy and as you know we have a diversified portfolio and we have diversified end market exposure that gives us plenty of opportunity to continue to expand our share position.
Speaker 6: And to me, those dynamics are very different than the 5G investment cycle that you went through from 2017 through 2019. Again, if you could just remind us.
We are we still only have 25% market share in our markets and we have additional new Sam opportunities that I outlined at Investor day, but if you just look at the high level.
Speaker 6: how the next couple of years could be different than prior upturn.
Speaker 1: Thank you, Mandy. As you know, we have a diversified portfolio and we have diversified end-market exposure that gives us plenty of opportunity to continue to expand our share position. We still only have 25% market share in our markets.
You'd say the innovation trends across our end markets continue to accelerate and I think what we're seeing even during this time as customers are not pulling back on their long term priorities, especially with regard to keeping their competitiveness going and so that is a trend that we expect to continue and that will that will bode well for in wireless.
Speaker 1: and we have additional new SAM opportunities that I outlined at Investor Day. But if you just look at the high level, you'd say the innovation trends across our end markets continue to accelerate. And I think what we're seeing even during this time is customers are not pulling back on their long-term priorities, especially with regard to keeping their competitiveness going.
Released 17, and new innovations that are coming up and.
And heading into <unk>, which.
Which is on our roadmap.
For the industry and in wireline clearly the move to 800 gig terabyte Ethernet and multiple.
Optimizations that networks have to go through in the world of AI ml I think thats another diversified opportunity for us that we're pretty excited about and then you go into aerospace defense I think recent spanned across multiple nations of the world continue to continue to remain strong as many nations are investing in organic IP.
Speaker 1: And so that is a trend that we expect to continue and that would bode well for in wireless release 17 and new innovations that are coming up and heading into 6G which is on a roadmap for the industry. And in wireline, clearly, the move to 800 gig, terabit Ethernet and...
If you look up supply.
Onshoring or re shoring of security around supply chain.
That is a demand driver and when you look at semiconductor the move the roadmap is pretty secure.
To actually go through the progression from seven nanometer to five to three to two and so on so forth. So we look at across our end markets, including the general electronics business with digital health and I didn't talk about the one that is currently inflicting which is automotive with EV and <unk> and all these are secular trends.
Speaker 1: continue to remain strong as many nations are investing in organic IP. You look up supply on-shoring or re-shoring or security around supply chain, that is a demand driver and when you look at semiconductor, the roadmap is pretty secure.
And I think the our focus as a company on R&D innovations, enabling customers to go go faster is definitely will put us in a good position to capitalize.
Speaker 1: to actually go through the progression from 7 nanometer to 5 to 3 to 2 and so on and so forth. So we look at across our end markets, including the general electronics business with digital health, and I didn't talk about the one that is currently inflecting, which is automotive, with EV and AV. And all these are...
Yes.
Thank you.
Thank you.
The next question comes from the line of Chris Snyder from UBS. Your line is now open.
Speaker 1: secular trends, and I think our focus as a company on R&D innovations, enabling customers to go faster, is definitely will put us in a good position to capitalize.
Thank you.
So.
Fiscal Q2 revenue came in below typical seasonality and obviously you guys.
Speaker 7: Thank you.
Speaker 7: Thank you.
I have been talking about the cyclical slowdown so so not a surprise there, but I guess my question is the guidance calls for.
Speaker 4: Thank you. The next question comes from the line of Chris Snyder from UBS.
Typical seasonality into the third quarter with topline largely flattish can we take that or should we take that as a vote of confidence that the market dynamics are demand.
Speaker 8: Your line is now open. Thank you. So fiscal Q2 revenue came in below typical seasonality, and obviously you guys have been talking about the cyclical slowdown, so not a surprise there. But I guess my question is, the guidance calls for my interest of the 2nd quarter 10 we've become of our long term
It's not getting worse.
Yes.
As I said I think we largely thing, albeit at a lower level, we think we largely face see things as stable here as we move from the first half into the second half right I just talked about how on the demand side, we expect second half orders to be on par with the first half, albeit with with the seasonality.
Speaker 8: you know, kind of typical seasonality into the third quarter with top line largely flattish. Can we take that or should we take that as a vote of confidence that the market dynamics or demand is not getting worse?
That I mentioned on anything from a revenue perspective. The same is largely correct. We delivered $13 80 and in Q1 guided to $13 80 in Q2, we did a little bit better we've guided to $13 <unk> in Q3, and I think if you think about.
Speaker 2: Yeah, I mean, as I said, I think, you know, we largely think, albeit at a lower level, we think we largely see things as stable here as we move from the first half into the second half, right? I just talked about how on the demand side, we expect second half orders to be on par with the first half, albeit with the seasonality that I mentioned. And I think from a revenue perspective, the same is why.
The level of revenue stability at about that level youre thinking about it the right way.
I appreciate that and then kind of taking that and following up on on the guide.
If our back of the <unk>.
<unk> math is correct here.
I know, there's an EPS growth for the year would imply a pretty big decline in Q4, both versus Q3, but also year on year.
And with topline seemingly at least kind of stable it.
It seems to be calling for a decline in margins.
Any reason for that.
I don't know if there's ever been a quarter, where Q4, yes, great. Thank you.
Speaker 8: You know, if I'm back to the envelope math is correct here, you know, mid-single-digit EPS growth for the year would imply a pretty big decline in Q4, both versus Q3, but also year on year. And with top line seemingly at least kind of stable, it seems to be calling for a decline in margins. Any reason for that? I don't know if there's ever been a quarter where...
Yeah, well again as I said I think as you think about the top line for Q4 stability would be the term that I'd use to describe that when it comes to EPS I think on a year over year basis.
Not incorrect.
Modelling a decline while while Q4, a year ago was not that dissimilar from what we just delivered here in Q2 as we look into the back half of the year as I said, we might not be able to sustain the gross margin quite as favorably as the mix. We just delivered and then in addition, we want to see some incremental investment.
Into some of the future.
<unk> technologies that are going to drive our markets as we move forward. So I do think on a year over year basis, you will expect a sequential decline in the fourth quarter and I think too just to add to the point right. It is a.
Speaker 2: not that dissimilar from what we just delivered here in Q2. As we look into the back half of the year, as I said, we might not be able to sustain the gross margin quite as favorably as the mix we just delivered. And then in addition, we want to see some incremental investments into
Certain environment.
Out there and I think when we speak with customers the engagement levels are high but in terms of them planning for budgets. They are really relying on their underlying business to pick up and so there is that dynamic which results in.
Speaker 2: some of the future technologies that are going to drive our markets as we move forward. So I do think on a year-over-year basis you will expect a decline in the fourth quarter.
An elongated cycle to close the pipeline and so that's the case and our guide.
Speaker 1: Yes, and I think just to add to the point, right, it is an uncertain environment that's out there, and I think when we speak with customers, the engagement levels are high, but in terms of them planning for budgets, they're really relying on their underlying business to pick up, and so...
We try to be central weighted we're not we're not factoring in any macro recovery.
Or are we factoring in any recovery from China reopening.
Into the guide and those could be upside, but the macro Colgate. We're still so that's that's the way we see it and we will keep you updated.
Speaker 1: there's that dynamic which results in, you know, an elongated cycle to close the pipeline. And so that's the case. In our guide, we, you know, we try to be central weighted. We're not factoring in any macro recovery, and not are we factoring in any recovery from China reopening into the guide. And those could be upside, but...
Thank you.
Thank you.
Next question comes from the line of Aaron Rakers from Wells Fargo. Your line is now open.
Yes. Thank you for taking the question and also congrats on the execution in the quarter.
Speaker 1: you know the macro could get worse too. So that's the way we see it and we'll keep you updated.
A lot of questions that I had were already answered, but I wanted to go back to kind of the narrative around AI and ml.
And maybe you can help just unpack a little bit of the demand insertion that youre seeing just maybe help us appreciate where and to what extent.
Speaker 4: from Wells Fargo. Your line is now open.
Key sites involved in those opportunities I'm, just kind of curious if just helping us I appreciate a little bit more of.
Speaker 9: Yeah, thank you for taking the question. Also, congrats on the execution in the quarter. A lot of questions that I had were already answered, but I want to go back to kind of the narrative around AI and ML. Maybe you can help just unpack a little bit of the demand insertion that you're seeing. Just maybe help us appreciate where and to what extent it might be for into what language we have that's on the table.
The AI narrative and the demand drivers youre seeing.
Yes, Thank you I think.
AI.
It's safe to say that it's been under discussion for.
For quite a long time, and you could say machine learning algorithms or not.
That new but what we're seeing now is a pickup in.
Speaker 9: key sites involved in those opportunities. I'm just kind of curious of just helping us appreciate a little bit more of the AI narrative and the demand drivers you're seeing.
In networks really thinking about the way to train AI models to way to infer.
Our environment and that create some opportunities for us I think highlights.
Speaker 1: Yeah, thank you. I think, you know, AI, it's safe to say that it's been under discussion for quite a long time and you could say machine learning algorithms are not that new. But what we're seeing now is a take up in networks really thinking about...
And in our presentation at Investor Day is some pilots that we have going on and fundamentally you look at it at a high level you have in a typical search not solid traffic in our network and with AML you have a lot of east west traffic and I think modeling that and being able to train your network to perform.
Speaker 1: the way to train AI models, the way to infer in an AI environment, and that creates some opportunities for us. I think Kailash referred to that in our presentation at Investor Day as some pilots that we have going on. And fundamentally, you look at it at a high level. You have, in a typical search, knots out traffic in a network.
<unk> is going to become a differentiator and I think having the full stack in wireless and wireline allows us to go address opportunities for our customers.
How big that could be to be determined, but I do know that a lot of our customers are having discussions with us at this time and we're continuing to invest in this new emerging opportunity.
Speaker 1: and with AIML you have a lot of east-west traffic. And I think modeling that and being able to train your network to perform is going to become a differentiator. And I think having the full stack in wireless and wireline allows us to go address opportunities for our customers.
Yes. Thank you very helpful. And then as a quick follow up I noticed this quarter you did not repurchase any shares.
I think that's the first time in a little while so Neil I'll, just curious how youre thinking about very strong free cash flow, how youre thinking about share repurchase maybe M&A just overall capital allocation given given the strong balance sheet position.
Speaker 1: how big that could be, I mean, to be determined, but I do know that a lot of our customers are having discussions with us at this time, and we're continuing to invest in this new emerging opportunity. Yep, thank you, very helpful. And then as a quick follow-up, I noticed this quarter you did not repurchase any shares.
Yes, there have been no changes to our capital allocation priorities, obviously, we laid them out at our at our analyst day in March we continue to look for opportunities to grow our business for via value accretive M&A, while we didn't purchase any shares during the quarter for a variety of <unk>.
Speaker 9: I think that's the first time in a little while. So, Neil, I'm just curious of how you're thinking about very strong free cash flow, how you're thinking about share repurchase, maybe M&A, just overall capital allocation given the strong balance sheet position.
Reasons, we've been very active in the buyback market and would expect that to continue to be at least anti dilutive with our buyback programs and be opportunistic on top of that and so we continue to believe there is ample opportunity for us to create value through appropriate capital allocation.
Speaker 2: Yeah, there have been no changes to our capital allocation priorities. Obviously, we relive them out at our analyst day in March. We continue to look for opportunities to grow our business via value accretive M&A. While we didn't purchase any shares during the quarter for a variety of reasons, we've been very active in the buyback markets and would expect that.
Thank you.
Thank you.
The next question comes from the line of Mark Delaney with Goldman Sachs. Your line is now open.
Hi, everyone. Thank you for taking my question. This is Brian asking question on behalf of Mark Delaney.
First question is with orders down year over year.
Easier comps and backlog being up for the company to grow at that 5% to 7% target that you laid out next year, if the macro still similar to current conditions or with the macro needs to improve at all.
Speaker 4: The next question comes from the line of Mark Delaney with Goldman Sachs.
Speaker 4: comes from the line of Mark Delaney with Goldman Sachs. Your line is now open.
To reach that goal.
Speaker 10: Hey everyone, thank you for taking my question. This is Will Bryan asking a question on behalf of Mark Delaney. So first question is with orders down year over year, will easier comps and backlog be enough for the company to grow at that 5 to 7 percent target that you laid out next year?
Yes.
As we've said the macro environment continues to remain highly uncertain and we're not ready to make a call as to what the environment is going to be six months from now when we get when we get to FY 'twenty four I think.
What we see right now is largely stability in this that she's just said, we're not ready to call an upturn, but nor do we have any additional downside baked into what we're seeing currently.
Speaker 10: if the macro is still similar to current conditions or would the macro need to improve at all to reach that goal?
Speaker 2: Yeah, as we said, the macro environment continues to remain highly uncertain and we're not ready to make a call as to what the environment is going to be, you know, six months from now when we get to FY24. I think, you know, what we see right now is largely stability and as Satish just said, we're not ready to call an upturn but nor do we have any additional downside baked into what we're seeing currently.
Okay. That's helpful. Thank you.
My second question.
I Wonder if you can comment or give some additional color around our regional order trends at all thank you.
Sure will this is mark I'll talk about.
The region trends so begins with the word stability, we talked about that many times already Q2 orders were steady and predictable and really consistent with our expectations.
Speaker 10: Okay, that's helpful. Thank you. And my second question is, I wonder if you can comment or give some additional color around regional order trends at all. Thank you.
We saw increased customer demand and increased customer engagements with continuing focus on their R&D programs across all four regions. This was especially.
Speaker 8: Sure, Will. This is Mark. I'll talk about the region trend. So it begins with the word stability. We talked about that many times already. Q2 orders were steady and predictable and really consistent with our expectations. We saw increased customer demand and increased customer engagements.
In the case for aerospace and defense, where we saw strong growth in demand across all of our regions.
The demand in automotive continue with some key wins, a couple of key OEM wins, particularly in Europe .
<unk>.
In general the broad base of customers and the variety of applications that we serve within general electronics really held up strongly.
Speaker 8: with continuing focus on their R&D programs across all four regions. This was especially shown in the case for aerospace and defense, where we saw strong growth and demand across all of our regions. We saw the demand and automotive continue with some key wins, a couple key OEM wins, particularly in Europe .
Across most regions as well we did see some pullback as we saw in Q1 around commercial comms that was center with some of our larger customers in the Americas. We saw some pullback in short term demand with semiconductor in Asia.
But in general across all regions. We saw this continuing stability in engagements and an order flow as we expected.
Speaker 8: And, you know, in general, the broad base of customers and the variety of applications that we serve within General Electronics really held up strongly across most regions as well. We did see some pullback, as we saw in Q1, around commercial comms that was centered with some of our larger customers in the Americas.
Thank you.
Okay.
Thank you.
Our next question comes from the line of meta Marshall.
Speaker 8: We saw some pullback in short-term demand with semiconductor in Asia. But in general, across all regions, we saw this continuing stability in engagements and order flow as we expected.
From Morgan Stanley . Your line is now open.
Great. Thanks.
It looks like you guys were down about $100 million backlog. This quarter than you had been kind of guiding to about $300 million of backlog for the remainder of the year. So it seems like everything is on track there I guess I just wanted to get an update us as to whether kind of a $200 million of additional backlog for the year.
Speaker 7: Thank you.
Speaker 7: Thank you. Thank you.
That's a good estimate then just kind of what segment that is most concentrated on.
Speaker 11: Your line is now open. Great, thanks. It looks like you guys burned down about $100 million of backlog this quarter, and you had been kind of guiding through about $300 million of backlog for the remainder of the year. So it seems like everything is on track there. I guess I just wanted to get an update as to whether kind of $200 million of additional backlog for the year.
And then just a second question just in terms of where youre seeing some of the more cautious spending on Cogs is that.
Legacy standards, just kind of what what projects are being potentially pushed out.
Wow.
<unk> put on 60 and kind of new releases of <unk>.
Thank you Matt I'll take the second part first and then Neil will speak.
Speaker 11: was a good estimate and just kind of what segment that's most concentrated on. And then just a second question just in terms of where you're seeing some of the more cautious spending on comms, you know, is that legacy standards? Just kind of what projects are being potentially pushed out, you know, while?
Speak to the backlog I think.
At.
<unk> comps obviously, the big driver is new innovation, new technology trends. So we saw strength in really 2017 non terrestrial networks. All of the same themes that we've been talking about and some increased investments around the globe around the next generation technologies, and so largely and R&D the <unk>.
Speaker 1: kind of emphasis is still being put on 6G, kind of new releases of 5G. Thanks. Thank you, Emmett. I'll take the second part first, and then Neil will speak to the backlog. I think the incomes, obviously the big driver is new innovation, new technology trends.
<unk> are holding.
And in production environments, our production test environments, where we're seeing much more much more weakness in demand as customers are digesting this excess inventory associated with smartphones and Pcs and such and.
Speaker 1: So we saw strength in release 17, non-terrestrial networks, all of the same themes that we've been talking about, and some increased investments around the globe, around the next generation technologies. And so largely, or indeed, the trends are holding.
Our share position, even though at a lower level continues to be strong and we're focused on our portfolio and our portfolio continues to grow and we will continue to release new products in alignment with customer needs.
Speaker 1: In production environments or production test environments is where we're seeing much more weakness in demand as customers are digesting this excess inventory associated with smartphones and PCs and such. And our share position, even though at a lower level, continues to be strong. And we're focused on...
With regard to the backlog position, obviously, we have a backlog situation as Neil mentioned, we have a growing deferred revenue balance with the increasing focus we placed on software services and IRR and we also in accordance with.
Where we're seeing the order strength, whether it's automotive or in semiconductor or.
In Aerospace defense, we're also providing more system type of capabilities to our customers, which have longer lead times Neal will give you more specifics.
Yes, I think on the back on the backlog side, you referenced our comments about expecting to burn somewhere around $300 million of backlog for the year. I mean that that statement was made last quarter when revenues outpaced orders by by $80 million and we talked about how we expected that demand environment to sustain itself for at least the next call.
Speaker 1: increasing focus we've placed on software services and ARR. And we also, in accordance with where we're seeing the order strength, whether it's automotive or in semiconductor or in aerospace defense, we're also providing more system type of capabilities to our customers which have longer lead times.
<unk> quarters, and that's in fact, what's playing out. So if you think about kind of an $80 million backlog burn per quarter, you get to $3 20, and that's largely how we're thinking about it with <unk>.
Speaker 2: Neil will give you more specifics. Yeah, I think on the backlight side, you referenced our comments about expecting to burn somewhere around $300 million of backlog for the year. I mean, that statement was made last quarter when revenues outpaced orders by 80 million. And we talked about how we expected that demand environment to.
Orders and revenue of largely stable into the back half of the year.
Great. Thanks, so much and yes it does.
Last question you asked is how does it skew by business right now, it's clearly skewed towards ESG.
Okay perfect. Thank you.
Thank you.
The next question comes from the line of Adam Thalheimer with Thompson Davis. Your line is now open.
Hey, guys nice quarter Hey.
Speaker 2: Great, thanks so much. And the last question you asked is how does it skew by business? Right now it's clearly skewing towards CSG.
Neil the.
The working capital is pretty negative in 2022, and it looks like it kind of is finally, starting to swing positive in Q2 do you expect that trend to continue in the back half cash from working capital.
Speaker 11: Okay, perfect. Thank you.
Speaker 4: Thank you. The next question comes from the line of Adam Sollheimer with Thompson Davis. Your line is now open.
Yes, I mean, it's certainly something we're.
Watching carefully.
There's a number of factors there.
The supply chain situation, clearly put pressure on working capital and a number of ways.
Speaker 12: Hey guys, nice quarter. Hey, um, Neil the...
Speaker 12: The working capital is pretty negative in 2022 and it looks like it's finally starting to swing positive in Q2. Do you expect that trend to continue in the back half?
First of all inventory purchase commitments, which while things are getting better we did make significant purchase commitments over the course of the last four to six quarters and during that timeframe. So I think that's going to keep some pressure and we also to be honest.
Speaker 12: So working capital is pretty negative in 2022 and it looks like it's finally starting to swing positive in Q2. Do you expect that trend to continue in the back half? I think it's going to change from working capital.
Speaker 2: Yeah, I mean it's certainly something where we're watching carefully. There's a number of factors there. The supply chain situation clearly put pressure on working capital in a number of ways. First of all, inventory purchase commitments, which while things were getting better, we did make significant purchase commitments over the course of the last four to six quarters during that timeframe.
It began to alter our.
Our processes around demo so that we could rather than putting new units into demo inventory, we sustain the lives of our demo inventory. So we could deliver products into the hands of our customers and so as.
As we start to as we start to normalize that rotate that demo back out and sell to sell that equipment VR used equipment business I think we'll be able to bring inventory overtime down over time, and then I think.
Speaker 2: I think that's going to keep some pressure. And we also, to be honest, began to alter our processes around demos so that we could, rather than putting new units into demo inventory, we sustained the life of our demo inventory so we could deliver products into the hands of our customers. And so, as we start to normalize that, rotate that demo back to normal.
On the on the receivables side, what's really going to help us there as as the supply chain situation continues to improve and we can really start to linearize, our revenue delivery within the quarter.
That will help and I think there is room for continued improvement there over time.
Okay, and then it was slight but the capex guidance came down a touch just wondering what drove that.
Well similarly there.
The capex that Youre seeing there is obviously the cash flow side of things and again with the supply chain situation a lot of what we're seeing on the cash flow side is where commitments that were made.
Speaker 2: our revenue delivery within the quarter, you know, that will help, and I think there is room for continued improvement there over time.
Many months ago and to which we're starting to get delivery, we actually have seen our new commitments.
Speaker 12: Okay, and then it was slight, but the CAPEX guidance came down a touch. I was wondering what drove that.
Drop even even further than what you've seen on the cash flow side of things as the supply chain situations resolved, but.
Speaker 2: Well, similarly there, if you think, you know, the capex that you're seeing there is obviously the cash flow side of things. And again, with the supply chain situation, a lot of what we're seeing on the cash flow side is, were commitments that were made, you know, many months ago and to which we're starting to get delivery. We actually have seen our new commitments.
We do expect.
Capex cash flows to be high for the remainder of the year.
Higher okay. Thank you.
Alright.
Thank you.
The next question comes from the line of Matt Nick.
Speaker 2: actually drop even further than what you've seen on the cash flow side of things as the supply chain situations resolve. We do expect CapEx cash flows to be high for the remainder of the year.
With Deutsche Bank.
Your line is now open.
Hey, guys. Thanks for taking the question and congrats on the quarter.
I want to go back to gross margins and maybe if we can talk a little bit about.
Speaker 4: Okay, thank you. Thank you. The next question comes from the line of Matt Nicknam with Deutsche Bank. Your line is now open.
Some of the drivers of upside I think there was reference to product mix. If we can just go back to that and unpack that and I'm also curious whether there were any software license sales in there that may not recur.
Go forward basis, and then just one follow up as well on orders if you could talk about the linearity over the course of the quarter and how that trended by month if possible. Thanks.
Speaker 9: Hey guys, thanks for taking the question. Congrats on the quarter. I want to go back to gross margins and maybe if we can talk a little bit about
Speaker 9: Some of the drivers of upside, I think there was reference to product mix. If we can just go back to that and unpack that. And I'm also curious to whether there were any software license sales in there that may not recur on a go forward basis. And then just 1 follow up as well on orders. If you could talk about. The linearity over the course of the quarter and how that trended by month.
Yes, let me take the gross margin question and then I'll have Mark address the orders question I think on the gross margin side again.
On a year over year basis, its primarily mix and we do see a fair amount of movement in mix mix within the quarter can shift, but if you think about it in this particular situation obviously the shift towards higher recurring revenue is helping to the extent that those software revenues are sustained and stable and.
In a period of time, where where revenues are orders and revenue and demand for hardware is generally under pressure I think thats a favorable shift on mix and then.
Probably even a bigger impact than that within the quarter is within the within the product shipments itself, it's skewed towards higher end systems, rather than lower end tools within the quarter is the best way to describe it and.
Speaker 2: particular situation, obviously the shift towards higher recurring revenue is helping to the extent that those software revenues are sustained and stable in a period of time where orders and revenue and demand for hardware is generally under pressure. I think that's a favorable shift on mix.
Particularly versus a year ago.
Versus prior quarters, where we may be you've had an unfavorable mix shift towards high levels of Disney shipments some of our lower end products or things that can can skew can SKU mix. The other way. So that's what we saw within the quarter, yes, and Matt as far as the order flow within the quarter I would say it was very typical for a Q2.
Speaker 2: And then probably even a bigger impact than that within the quarter is within the product shipments itself, it's skewed towards higher end systems rather than lower end tools within the quarter is the best way to describe it. And particularly versus a year ago, versus prior quarters where we maybe have had an unfavorable mix shift towards.
As the second period and the six month performance period, we saw it ramp throughout each of the three months February is a shorter month fewer selling days as you get to the end of the performance period with our incentive comp and sales we do expect.
high levels of DISTI shipments. Some of our lower end products are things that can skew mix the other way. So that's what we saw within the quarter. Yeah and Matt as far as the order flow within the quarter I would say it was very typical for a Q2 as the second period and the six month performance period we saw it ramp throughout each of the three months. February is a shorter month, fewer selling days. As you get to the end of the performance period with our incentive comp and sales we do expect
Stronger finish which is exactly what we saw what I can say, though which was very consistent was the kind of elevated level of customer engagement.
As customers prioritized on different programs that they felt were important going forward and we saw that really is the stabilizing factor after coming out of Q1. So we did see a ramp but I wouldn't read anything more into that other than the natural seasonality of the Q2.
Got it and then just on the gross margins any sort of abnormal software license sales in there to call out.
No.
Okay, great. Thanks.
Thank you.
The next question comes from the line of David Ridley Lane with Bank of America.
Line is now open.
Got it. Just on the gross margins, any sort of abnormal software license that's in there to call out? No.
Thank you good evening.
Maybe even a little bit of a strategy question. So as you've grown your automotive and EV battery business.
Great thanks.
Great, thanks. Thank you.
Are there some attractive adjacencies there would you consider inorganic investments to kind of round out the offering or do you feel.
The next question comes from the line of David Ridley-Lane with Bank of America. Your line is now open.
Did you have kind of the solutions that they need to.
Keep up the growth there.
Yes. Thank you I think as we mentioned automotive has been a fairly new vertical expansion for us one that we've focused on since since.
Thank you. Good evening. Maybe a little bit of a strategy question. So as you've grown your automotive and EV battery business, are there some attractive adjacencies there? Would you consider inorganic investments to kind of round out the offering or do you feel that you have kind of the solutions that you need to...
Since key side is formed and we've successfully grown that to over $500 million.
And we continue to see even more opportunity to expand as there is going to be ongoing innovations in in EV and <unk> not only in automobiles, but in other sectors as well.
keep up the growth there. Yeah, thank you. I think as we mentioned, automotive has been a fairly new vertical expansion for us, one that we've focused on since Keysight has formed and we've successfully grown that to over $500 million.
With the push for autonomous and electrification, even and broader set of industries and we're continuing to build the most comprehensive portfolio all the way from design to silicon and bring up to simulation validation compliance testing and manufacturing.
And we continue to see even more opportunity to expand as there's going to be ongoing innovations in EV and AV, not only in automobiles, but in other sectors as well, with the push for autonomous and electrification, even in broader set of industries. And we're continuing to build the most comprehensive portfolio all the way from design.
With more emphasis on R&D really and and we are helping create standards. We're also working on finding new methodologies for testing.
With more emphasis on R&D really and and we are helping create standards. We're also working on finding new methodologies for testing.
That will be disruptive and to that extent, we have made a small small technology tuck ins that have enhanced our software content on ability to make contributions to the workflow in this area and we see as we think about our M&A, we see a strong pipeline.
to silicon bring up, to simulation, validation, compliance testing, and manufacturing, with more emphasis on R&D, really, and we're helping create standards. We're also working on finding new methodologies for testing that will be disruptive. And to that extent, we've made a small technology tuck-in.
For opportunities and we will continue to evaluate them against our strategic and financial hurdles and we'll look to lean in for the right opportunity.
Thank you for that and then just a quick follow up.
that have enhanced our software content and our ability to make contributions to the workflow in this area. And we see, as we think about our M&A, we see a strong pipeline for opportunities, and we'll continue to evaluate them against our strategic and financial hurdles, and we'll look to lean in for the right opportunity.
How are your own lead times as the supply chain.
<unk> heavier on lead times relative to pre Covid history.
Where do we stand on that thank you.
Yes.
No.
Still improving for a significant part of the portfolio. We're already back there is another significant chunk that should work its way back to kind of pre COVID-19 lead times here over the third quarter and then there will continue to be some outliers beyond that but.
We're rapidly moving in the right direction.
Thank you.
Good to hear thank you.
Yeah, so.
Thank you.
still improving for a significant part of the portfolio. We're already back. There's another significant chunk that should work its way back to kind of pre-COVID lead times here over the third quarter. And then there will continue to be some outliers beyond that, but we're rapidly moving in the right direction. Good to hear. Thank you.
significant part of the portfolio, we're already back. There's another significant chunk that should work its way back to kind of pre-COVID lead times here over the third quarter, and then there will continue to be some outliers, you know, beyond that. But we're rapidly moving in the right direction. Good to hear. Thank you. Thank you.
Thank you.
That concludes our question and answer session for today.
I would like to turn the call back to Jason Kary for any closing comments.
Thanks, Melissa and thanks, everyone for joining us today that concludes our call and we look forward to seeing you at some of the upcoming conferences here in the quarter.
Thank you. That concludes our question and answer session for today. I would like to turn the call back to Jason Carey for any closing comments.
This concludes our conference call you may now disconnect.
Thanks, Alyssa, and thanks everyone for joining us today. That concludes our call and we look forward to seeing you at some of the upcoming conferences here in the quarter.
This concludes our conference call. You may now disconnect.