Q4 2023 Keysight Technologies Inc Earnings Call

Speaker 1: daily.

Good day, ladies and gentlemen, and welcome to <unk> Technologies' fiscal fourth quarter 2023 earnings Conference call.

Speaker 2: and welcome to Keysight Technologies' fiscal fourth quarter 2023 earnings conference call. My name is Sierra, and I...

My name is Sierra 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.

Speaker 2: Your call is being recorded today, Monday, November 20th, 2023.

This call is being recorded today Monday November 22023 at 130 P M Pacific time.

Speaker 2: I would now like to hand the call over to Jason Carey, Vice President, Treasurer, and Investor Related.

I would now like to hand, the call over to Jason Kary, Vice President Treasurer, and Investor Relations. Please go ahead.

Speaker 3: Thank you and welcome everyone to Keysight's 4th Quarter Earnings Conference Call for Fiscal Year 2023. Joining me are Keysight's President and CEO , Satish Dhanushekaran, and our CFO , Neil Daugherty. In the Q&A session, we'll be joined by our Chief Customer Officer, Mark Wallace.

Thank you and welcome everyone to key sites fourth 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 disk.

Speaker 3: The press release and information to supplement today's discussion are on our website at investor.keysight.com under financial information and quarterly reports.

<unk> or on our website at investors <unk> com under financial information and quarterly reports.

Speaker 3: 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.

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 or on our website and all comparisons are on a year over year basis.

Speaker 3: The most directly comparable GAAP financial metrics and reconciliations are on our website, 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 and encourage you to review our recent SEC filings for a more complete view of these risks and other factors.

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 and encourage you to review our recent SEC filings for a more complete view of these risks and other factors.

Speaker 3: Lastly, management is scheduled to participate in upcoming investor conferences hosted by Wells Fargo and UBS. And now I will turn the call over to Satish. Good afternoon, everyone.

Lastly management is scheduled to participate in upcoming Investor conferences hosted by Wells Fargo, and UBS and now I will turn the call over to cities.

Good afternoon, everyone and thank you for joining us.

My comments today will focus on three key headlines.

Speaker 4: First, Keysight reported solid fourth quarter results and finished the year with record revenue, gross margins, and operating margin in what remains a challenging macro environment.

Key sides reported solid fourth quarter results and finished the year with record revenue gross margins and operating margin in what remains a challenging macro environment.

Fourth quarter revenue and earnings per share exceeded the high end of our guidance as orders came in slightly ahead of expectations.

Speaker 4: For the full year, revenue grew 2% on a core basis, and earnings per share increased 9% while we generated $1.2 billion in free cash flow.

For the full year revenue grew 2% on a core basis and earnings per share increased 9%, while we generated $1 2 billion in free cash flow.

Speaker 4: Second, our customer engagement on next-generation technology teams remains strong. And we continue to action opportunities across a broad and diverse set of end markets.

Second our customer engagement on next generation technology teams remained strong and we continue to action opportunities across a broad and diverse set of end markets. Despite the mixed demand environment as end markets normalize from post COVID-19 supply demand imbalances over the last two years.

Speaker 4: despite the mixed demand environment as end markets normalize from post-COVID supply demand imbalances over the last two years.

Speaker 4: Third, we're investing both organically and inorganically to expand our addressable markets and differentiated solutions portfolio, which took another step forward this quarter with the addition of ESI. We remain confident in the long-term secular growth drivers of our business and our ability to address our customers' most challenging and diverse innovation needs.

We're investing both organically and inorganically to expand our addressable markets and differentiated solutions portfolio, which took as a step forward. This quarter with the addition of ESI. We remain confident in the long term secular growth drivers of our business and our ability to address our customers' most challenging.

And divorce innovation needs.

Speaker 4: Now let's begin with a brief overview of Keysight's fourth quarter and full year performance. We're pleased with our results and execution.

Now, let's begin with a brief overview of key sites fourth quarter and full year performance, we're pleased with our results and execution.

Speaker 4: Fourth quarter orders were $1.3 billion and we delivered $1.3 billion in revenue and $1.99 in earnings per share. We also generated $340 million in free cash flow and repurchased $426 million of our shares this quarter.

Fourth quarter orders were $1 $3 billion, and we delivered $1 $3 billion in revenue and $1.99 in earnings per share. We also generated $340 million in free cash flow and repurchased $426 million of our shares this quarter.

Speaker 4: Fully our results were strong in a year of normalizing demand.

Full year results were strong in a year of normalizing demand orders of $5 2 billion were in line with our original expectations of approximately $1 3 billion per quarter. This year, we delivered an all time high of $5 5 billion in revenue and achieved record profitability with gross margins of 66%.

Speaker 4: Orders of $5.2 billion were in line with our original expectations of approximately $1.3 billion per quarter this year. We delivered an all-time high of $5.5 billion in revenue and achieved record profitability with gross margins of 66% and operating margins of 30% and $8.33 in earnings per share.

<unk> and operating margins of 30% and $8 33 in earnings per share moving to our markets overall, the demand dynamics within the quarter were consistent with our expectations Aerospace defense and government demand increased commercial communications was steady and as anticipated.

Speaker 4: Moving to our markets, overall, the demand dynamics within the quarter were consistent with our expectations.

Speaker 4: Aerospace defense and government demand increased, commercial communications were steady, and as anticipated, broader manufacturing-related spending in the electronics industrial markets was incrementally softer. Turning

<unk> broader manufacturing related spending in the electronics industrial markets was incrementally softer.

Turning to our business segments Communications solutions group revenue declined 10% Aerospace defense and government grew while commercial communication markets are rebalancing off of last year's record highs on a sequential basis orders grew across both markets in aerospace defense and government revenue.

Speaker 4: Communication Solutions Group revenue declined 10%. Aerospace defense and government grew, while commercial communication markets are rebalancing off of last year's record highs. On a sequential basis, orders grew across both markets.

Speaker 4: In aerospace defense and government, revenue grew 4% to an all-time high. We saw healthy order demand from the U.S. and European primes, as well as direct government customers.

<unk> grew 4% to an all time high we saw healthy order demand from the U S and European primes as well as direct government customers driven by investments in defense modernization space and satellite applications.

Speaker 4: driven by investments in defense modernization, space and satellite applications.

Speaker 4: Keysight's leading threat emulation solutions capabilities drove order growth in the U.S., including a large U.S. Department of Defense win for electromagnetic spectrum operation applications.

Sites, leading threat emulation solutions capabilities drove order growth in the U S, including a large U S Department of defense windfall electromagnetic spectrum operations applications.

Speaker 4: We also saw demand from European primes for our radar and phased array antenna solutions to support their delivery goals in 2024 and beyond.

We also saw demand from European primes for our radar and phased array antenna solutions to support their delivery goals in 2024 and beyond.

Speaker 4: The breadth and the depth of our solutions portfolio enable new customer engagements and business in satellite communications, 5G, and 6G, and advanced quantum research, including a large order from a premier research institute contributing to the record quarter. In commercial communication.

The breadth and the depth of our solutions portfolio enable new customer engagements and business in satellite communications, <unk> and <unk> and advanced quantum research, including a large order from a Premier Research Institute contributing to the record quarter in commercial communications revenue declined seven.

Speaker 4: Revenue declined 17% reflecting ongoing customer spending constraints as inventories in their markets normalized.

14%, reflecting ongoing customer spending constraints as inventories in their markets normalize sequentially, we saw stability in wireless orders and incremental strength in demand for network and data center applications.

Speaker 4: Sequentially, we saw stability in wireless orders and incremental strength in demand for network and data center applications.

Speaker 4: Demand for our wireline solutions was driven by AI ML and data center expansion as hyperscalers build infrastructure to handle increasing network and compute workload.

Demand for our wireline solutions was driven by AI ml and data center expansion as Hyperscale build the infrastructure to handle increasing network and compute workloads.

Speaker 4: We expect this trend to continue into the next year and beyond.

We expect this trend to continue into the next year and beyond.

Speaker 4: Enterprise customer business was stable, with ongoing investments in network monitoring driven by increasing data traffic and cybersecurity compliance needs. In wireless, the progression of standards is driving steady R&D investments in new capabilities and devices, as well as Open RAN and Release 17 features.

Enterprise customer business was stable with ongoing investments in network monitoring driven by increasing data traffic and cyber security compliance needs and wireless the progression of standards is driving steady R&D investments in new capabilities and devices as well as open ran and released 17 features.

Speaker 4: Our R&D engagements with customers continue to expand. This quarter, we enabled MediaTek to validate non-terrestrial network connectivity. In addition, Keysight was awarded two key U.K. government grants in partnership with universities and leading telecom operators to support open RAN design, testing, and deployment in Europe .

Our R&D engagements with customers continuing to expand this quarter, we enabled mediatek to validate non terrestrial network connectivity. In addition key side was awarded two key U K government grants in partnership with universities and leading telecom operators to support open ran design testing and deployment.

All I meant in Europe.

Speaker 4: Turning to Electronic Industrial Solutions Group, as expected, Q4 orders and revenue were both down compared to record levels of last year. It is important to note that the EISG has shown significantly above long-term expectations with revenue increasing by 30% in 2021, 14% in 2022, and an additional 10% in 2023.

Turning to electronic industrial solutions group as expected Q4 orders and revenue were both down compared to record levels of last year.

It is important to note that the ISG has shown significantly above our long term expectations with revenue increasing by 30% in 2021, 14% in 2022 and an additional 10% in 2023.

Speaker 4: This growth was driven by both our differentiated solutions portfolio and an outsized demand from post-COVID recovery and supply constraints.

This growth was driven by both our differentiated solutions portfolio and an outsized demand from post COVID-19 recovery and supply constraints in.

Speaker 4: In the second half of this year, we begin to see a normalization from these highs as well as ongoing cautious customer spending.

In the second half of this year, we began to see a normalization from the size as well as ongoing cautious customer spending.

Speaker 4: In Semiconductor, capital spending for wafer capacity contracted in the quarter as Foundry customers pushed out their new FAB investment timeline.

In semiconductor capital spending for wafer capacity contracted in the quarter as foundry customers pushed out their new fab investment timelines, we continue to see strong customer engagement for key sites proprietary interferometer systems and differentiated R&D solutions for Silicon Photonics and power semiconductors.

Speaker 4: We continue to see strong customer engagement for Keysight's proprietary interferometer systems and differentiated R&D solutions for silicon photonics and power semiconductors, reflecting the industry's medium to long-term recovery and growth expectations. In automotive, customer investment in R&D for battery and charging infrastructure continues and is being fueled by increasing competition, regional legislative deadlines, and government funding, particularly in Europe and Asia.

Reflecting the industry's medium to long term recovery and growth expectations in automotive customer investment in R&D for battery and charging infrastructure continues and is being fueled by increasing competition regional legislative deadlines and government funding, particularly in Europe and Asia.

Speaker 4: The funnel of EV opportunities remains strong, while the timing and size of these systems engagements are expected to vary from a quarter to quarter.

The funnel of EV opportunities remained strong while the timing and size of these systems engagements are expected to vary from quarter to quarter.

Speaker 4: In general electronics, we saw steady demand for our solutions in advanced research, industrial automation, and digital health. However, and more broadly, manufacturing capacity normalization and cautious spending continue to weigh in on consumer electronics and manufacturing portions of the market. We're watching global PMI and other macroeconomic indicators to gauge the timing of the market recovery.

In General Electronics, we saw steady demand for our solutions and advanced research industrial automation and digital health, However, and more broadly manufacturing capacity normalization and cautious spending continue to weigh in on consumer electronics and manufacturing portions of the market, we're watching global PMI and other macro.

Economic indicators to gauge the timing of the market recovery.

Speaker 4: As an integral part of our solution strategy, software and services revenue growth this year continued to outpace Keysight overall. The recurring portion of software and services grew 9% this year, driving total annual recurring revenue to approximately $1.3 billion, or 23% of total revenue.

As an integral part of our solution strategy software and services revenue growth. This year continuing to outpace key site overall the record portion of software and services grew 9%. This year driving total annual recurring revenue to approximately $1 3 billion or 23% of total revenue an increase of two <unk>.

Speaker 4: an increase of 200 basis points year over year. In early November , ahead of schedule, we announced our acquisition of a controlling block of shares of ESI Group.

Hundred basis points year over year in early November ahead of schedule, we announced our acquisition of a controlling block of shares of ESI Group. The addition of ESI further increases our software and annual recurring revenue expands our addressable markets and strengthens our strategy of moving upstream.

Speaker 4: The addition of ESI further increases our software and annual recurring revenue, expands our addressable markets.

Speaker 4: strengthens our strategy of moving upstream into earlier stages of our customer's design cycle.

Into earlier stages of our customers' design cycles.

Speaker 4: We continue to invest prudently to capitalize on our long-term growth opportunities. In parallel, we remain disciplined and are taking additional targeted cost actions to streamline operations and ensure strong financial performance.

We continue to invest prudently to capitalize on our long term growth opportunities in parallel we remain disciplined and are taking additional targeted cost actions to streamline operations and ensure strong financial performance in wrapping up my first full year as the CEO of key side I'd like to thank our employees for their outstanding.

Speaker 4: In wrapping up my first full year as the CEO of Keysight, I'd like to thank our employees for their outstanding contributions, commitment, and strong track record of execution in these tough market conditions.

Contributions commitment and strong track record of execution in these tough market conditions.

Speaker 4: strength of Keysight's differentiated solutions, the diversity of our end markets, and the durability of our business model all position us well for continued market outperformance as we enter the new fiscal year.

The strength of key sites differentiated solutions, the diversity of our end markets and the durability of our business model all position us well for continued market outperformance as we enter the new fiscal year.

Speaker 4: With that, I'll turn it over to Neil to discuss our financial performance and outlook.

With that I'll turn it over to Neil to discuss our financial performance and outlook.

Thank you cities and Hello, everyone fourth quarter revenue of $1.311 billion was just above the high end of our guidance range and down 9% or 10% on a core basis orders of $1 $327 million declined 16% on both a reported and core.

Speaker 5: Fourth quarter revenue of $1,311,000,000 was just above the high end of our guidance range and down 9% or 10% on a core base.

Speaker 5: Orders of $1,327,000,000 declined 16% on both a reported and core basis.

Speaker 5: Similar to the third quarter, demand in China was muted and accounted for roughly a third of the year-over-year order decline.

Basis.

Similar to the third quarter demand in China was muted and accounted for roughly a third of the year over year order decline.

Speaker 5: We ended the quarter with $2.3 billion in back.

We ended the quarter with $2 $3 billion in backlog.

Speaker 5: Looking at our operational results for Q4, we report a gross margin of 65%.

Looking at our operational results for Q4, we reported gross margin of 65% an increase of 130 basis points year over year, and operating expenses of $474 million, resulting in operating margin of 29%.

Speaker 5: an increase of 130 basis points year-over-year and operating expenses of $474 million, resulting in an operating margin of 29%.

Speaker 5: We achieved net income of $352 million and delivered earnings of $1.99 per share. Our weighted average share count for the quarter was 177 million shares.

We achieved net income of $352 million and delivered earnings of $1 99 per share our weighted average share count for the quarter was 177 million shares.

Moving to the performance of our segments, our communications solutions group generated revenue of $891 million down 10% on a reported and core basis.

Speaker 5: Our Communications Solutions Group generated revenue of $891 million, down 10% on a reported ANCOR budget.

Speaker 5: Commercial communications revenue of $568 million declined 17%.

Commercial communications revenue of $568 million declined 17%, while aerospace defense and government revenue of $323 million was up 4% driven by increasing defense budgets and investments in technology modernization.

Speaker 5: while aerospace defense and government revenue of $323 million was up 4% driven by increasing defense budgets and investments in technology modernization.

Speaker 5: Altogether, CSG delivered gross margin of 68% and operating margin of 29%.

Altogether CSD delivered gross margin of 68% and operating margin of 29%.

Speaker 5: The Electronic Industrial Solutions Group generated revenue of $420 million, down 7% as reported, or 8% on a core basis.

The electronic industrial solutions group generated revenue of $420 million down, 7% as reported or 8% on a core basis.

Speaker 5: EISG reported gross margin of 61% and operating margin of 30%.

ISG reported gross margin of 61% and an operating margin of 30%.

Speaker 5: Turning to our full-year financial performance, Keysight delivered strong results despite demand and foreign exchange headwinds.

Turning to our full year financial performance <unk> delivered strong results, despite demand and foreign exchange headwinds full year 2023 revenue grew 1% as reported or 2% on a core basis to a record $5.464 billion.

Speaker 5: Full year 2023 revenue grew 1% as reported or 2% on a core basis to a record $5,464,000,000.

Speaker 5: Gross margin of 66%, expanded 80 basis.

Gross margin of 66% expanded 80 basis points.

Speaker 5: We invested $842 million in R&D while operating margin improved 90 basis points to 30%.

We invested $842 million in R&D, while operating margin improved 90 basis points to 30%.

Speaker 5: The flexibility of our cost structure and actions that we've taken to further reduce costs drove FY23 net income to a record $1.5 billion, resulting in earnings per share of $8.33, which was up 9%.

The flexibility of our cost structure and actions that we've taken to further reduce costs drove FY2023 net income to a record one 5 billion.

Resulting in earnings per share of $8 33.

Which was up 9%.

Moving to the balance sheet and cash flow. We ended the fourth quarter with $2 5 billion in cash and cash equivalents generating cash flow from operations of $378 million.

Speaker 5: We ended the fourth quarter with $2.5 billion in cash and cash equivalent.

Speaker 5: generating cash flow from operations of $378 million and free cash flow of $340 million.

And free cash flow of $340 million.

Speaker 5: Total free cash flow for the year was $1,212,000,000, representing 22% of revenue and 81% of non-GAAP net income.

Total free cash flow for the year was $1 billion $212 million, representing 22% of revenue and 81% of non-GAAP net income.

Speaker 5: Sharer purchases this quarter total $3,270,000 at an average price per share of approximately $130.

Share repurchases this quarter totaled $3 million 270000 shares at an average price per share of approximately $130 for a total consideration of $426 million.

Speaker 5: for a total consideration of $426 million.

Speaker 5: This brings our total share of purchases for the year to 4.9 million shares at an average share price of approximately $143 for a total consideration of $702 million or 58% of free cash flow.

This brings our total share repurchases for the year to $4 9 million shares at an average share price of approximately $143 for a total consideration of $702 million.

Or 58% of free cash flow now turning to our outlook.

Speaker 5: Looking forward to fiscal year 24, we expect the demand environment in the first half to remain mixed, and we'll be closely watching for signs of recovery in the second half.

Looking forward to fiscal year 'twenty four we expect the demand environment in the first half to remain mixed and will be closely watching for signs of recovery in the second half.

Speaker 5: Going forward, we will report results including ESI, which is expected to be slightly diluted to earnings on the full year.

Going forward, we will report results, including ESI, which is expected to be slightly dilutive to earnings on the full year.

Speaker 5: Given the timing of annual contract renewals, ESI typically recognizes 40-45% of their full-year revenue in Keysight's fiscal first quarter, with the balance recognized relatively evenly over the remainder of the year.

Given the timing of annual contract renewals ESI typically recognize this $40 to 45% of their full year revenue and key sites fiscal first quarter with the balance recognized relatively evenly over the remainder of the year.

Speaker 5: Also, due to GAAP accounting rules, ESI earnings recognition will be proportional to our shareholding until all shares are acquired.

Also due to GAAP accounting rules ESI earnings recognition will be proportional to our shareholding until all shares are acquired.

Speaker 5: With the normalization of backlog over the past year, our Q1 guidance is based on, one, existing backlog is scheduled to ship this quarter, two, our view of incoming Q1 orders, and three, our ability to turn a portion of those incoming orders into revenue within the quarter.

With the normalization of backlog over the past year. Our Q1 guidance is based on one existing backlog is scheduled to ship this quarter to our view of the income in Q1 orders and three our ability to turn a portion of those incoming orders into revenue within the quarter.

Speaker 5: We now expect first quarter revenue to be in the range of $1,235,000,000 to $1,255,000,000.

We now expect first quarter revenue to be in the range of $1 $235 million to.

<unk> to $1 $255 million.

Speaker 5: and Q1 earnings per share in the range of $1.53 to $1.59 based on a weighted diluted share count of approximately 176 million shares.

And Q1 earnings per share in the range of $1 53 to $1 59.

Based on a weighted diluted share count of approximately 176 million shares.

Speaker 5: This guidance includes approximately $60 million in ESI revenue and an EPS impact of approximately $0.05 from ESI net income. Now I would like to highlight a few modeling

This guidance includes approximately $60 million and ESI revenue and an EPS impact of approximately <unk>.

From ESI net income.

Now I would like to highlight a few modeling items for FY 'twenty four.

Speaker 5: As I just mentioned, we are modeling a significant sequential decrease in ESI revenue in Q2, and over the same period, we expect a low single-digit increase in core Keysight revenue.

As I just mentioned we are modeling a significant sequential decrease in ESI revenue in Q2 and over the same period, we expect a low single digit increase in core key site revenue.

Speaker 5: Excluding ESI, FY24 operating expenses are expected to be flat to slightly down year over year, reflecting the structural flexibility of our business model and the cost actions we have initiated.

Excluding ESI FY 'twenty four operating expenses are expected to be flat to slightly down year over year, reflecting the structural flexibility of our business model and the cost actions we have initiated.

Speaker 5: With the addition of ESI, we expect FY24 R&D investment to be 17% of revenue.

With the addition of ESI, we expect FY 'twenty for R&D investment to be 17% of revenue.

Speaker 5: Annual interest expense is expected to be approximately $80 million.

Annual interest expense is expected to be approximately $80 million capital expenditures are expected to be approximately $150 million and we are modeling a 17% non-GAAP effective tax rate for FY 'twenty four.

Speaker 5: Capital expenditures are expected to be approximately $150 million.

Speaker 5: And we are modeling a 17% non-GAAP effective tax rate for FY20.

Speaker 5: In closing, Keysight's flexible cost structure, track record over execution,

In closing key sites flexible cost structure track record of execution diverse end markets and long term secular growth drivers give us confidence in our ability to outperform even in challenging market conditions with that I will now turn it back to Jason for the Q&A.

Speaker 5: Diverse end markets and long-term secular growth drivers give us confidence in our ability to outperform, even in challenging market conditions. With that, I will now turn it back over to you.

Speaker 3: Thank you, Neil. Ciara, will you please give the instructions for the Q&A?

Thank you Neil.

Please give the instructions for the Q&A.

Absolutely.

Speaker 2: Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad.

Ladies and gentlemen, if you would like to ask a question.

Please press star one on your telephone keypad.

Speaker 2: We ask that you please limit yourself to one question and one follow-up. To withdraw your question, press the pound sign.

We ask that you please limit yourself to one question and one follow up.

To withdraw your question press the pound sign.

Please hold all we compile the Q&A roster.

Speaker 2: Our first question today comes from Mita Marshall with Morgan Stanley . Please proceed.

Our first question today comes from meta Marshall with Morgan Stanley.

Please proceed.

Great. Thank you.

Speaker 6: Maybe first question, you guys talked about kind of an over performance of the SG or, you know, how well that business had done over the last couple of years, just trying to get a sense of, you know,

Maybe first question you guys talked about kind of an over.

Over performance SG or how well that business had done over the last couple of years, just trying to get a sense of.

Speaker 6: is there a period where you think kind of represents the run rate of that business, just as we think of the growth of that business going forward? And then maybe just the second question, just on the communications business, you know, you guys have mentioned kind of seeing stabilization in that business. I just wanted to kind of clarify that none of the weakness that you're seeing has kind of spread to more of the lab testing, that it's largely kind of stayed on the production side. Thanks.

Is there a period, where you think kind of represents the run rate of that business.

Just as we think of the growth of that business going forward.

And then maybe just the second question just on the communications business.

I know you guys have mentioned kind of seeing stabilization in that business. So just wanted to kind of clarify that none of the weakness that you're seeing has spread to more of the lab testing that that's a large state on the production side. Thank you.

Speaker 7: Thank you, Meta. Absolutely. You know, the EISG business, as we have said, the long term market growth rates, four to six percent on our and our and our goal is to beat it. And the business obviously has been performing significantly about that for a prolonged period of time. And that's really a function of the differentiated positions we have, almost unique positions with some with some customers across these end markets that they serve.

Thank you meta.

Hello Lee.

<unk> business as we have said the long term market growth rates, 4% to 6% on our and our.

And our goal is to be that in the <unk>.

Business, obviously has been performing significantly above that for a prolonged period of time and thats really a function of the differentiated positions. We have almost unique positions with some with some customers across these end markets that they serve.

Speaker 7: And it's also been a focus for us to continue to diversify the company.

And it's also been a focus for us to continue to diversify the company.

Speaker 7: And with regard to the commercial coms business, we saw sequential order improvement between Q4 relative to Q3, and again, that's stability in wireless.

With regard to the commercial comps business, we saw sequential order improvement.

Between Q4 relative to Q3 and again.

Stability in wireless.

Speaker 7: Continuous stability now for a few quarters in wireless, especially with 5G, and again, that is a function of the R&D holding up much better and we're still awaiting a recovery in manufacturing.

Continuous stability now for a few quarters in wireless, especially with <unk> and again that is a function of the R&D.

Holding up much better and we're still awaiting a recovery in manufacturing and then we saw some signs of recovery in our wired part of vehicle system.

Speaker 8: And then we saw some signs of recovery in our wired part of the ecosystem, again, driven by what appears to be a sustained push to invest in AIML slash data center infrastructure by the cloud slash hyperscalers. Great. Thank you.

Again, driven by what appears to be a sustained push to invest in AI ml slice data center infrastructure.

By the cloud Slash Hyperscale.

Okay.

Great. Thank you.

Thank you.

Our next question comes from Nick <unk> with J P. Morgan please.

Please proceed.

Speaker 7: Hi, thanks for my question. I guess for my first one, so just to clarify the comments around seasonality that you had, particularly now, including the acquisition, I think what you're, I guess, guiding to is a sequential decline.

Hi, Thanks for taking my question I guess for my first one.

Just to clarify the comments that I will see that impact.

<unk>.

Particularly now including.

The acquisition I think what Youre.

Got it.

Sequential decline into the April quarter, and that is the trough in terms of revenues and when you think about the sick. So back half of the yield how do you think about seasonality from Q1, what should we be thinking about sort of the typical seasonal increases that you see just any clarification.

Speaker 7: into the April quarter, and that is the trough in terms of revenues. And when you think about the sector sort of back half of the year, how do you think about seasonality from 2Q onwards? Should we be thinking about sort of the typical seasonal increases that you see? Just any clarification in terms of if I interpreted those comments correctly, and I have a follow-up. Thank you.

In terms of if I interpret those comments correctly and I have a follow up thank you.

Speaker 5: Yeah, so I do think you interpreted the comments correctly. As we move from Q1 to Q2, we do expect a low single digit increase in core key sites.

Yes, so I do think you interpreted the comments correctly I think as we move from Q1 to Q2, we do expect a low single digit increase in core key site, but ESI as we mentioned because of the timing of their contract renewals <unk> recognized a disproportionate portion of their revenue and key sites first quarter.

Speaker 5: But ESI, as we mentioned, because of the timing of their contract renewals, recognizes a disproportionate portion of their revenue in Keysight's first quarter, 40 to 45%, with the balance, you know, 55 to 60% spread roughly evenly over the subsequent three quarters. So there is a significant drop off on the ESI side of things, just given the timing of those.

40% to 45% with the balance 55% to 60% spread roughly evenly over over the subsequent three quarters. So there is a significant drop off on the ESI side of things just given the timing of those contractual renewables.

Speaker 5: I think obviously we're taking this one quarter at a time, given the normalization that we're seeing in the marketplace. I do think that over time we expect the seasonality of the key site business to return more towards historic norms than what we've seen over the last couple of years as a result of the supply chain disruptions. But we'll have to wait and see how that develops as we move forward.

I think obviously, we're taking this one quarter at a time.

Given given the normalization that we're seeing in the marketplace I do think that over time, we expect to.

The key the seasonality on the key side business to return more towards historic norms than what we've seen over the last couple of years as a result of the supply chain disruptions, but we'll have to wait and see how that develops as we move forward.

Speaker 7: Okay, and just in terms of the how to think about margins for this year, just a lot of percentage. I know you had some comments earlier about, I think last quarter it was about sort of 10% revenue decline is where we should expect 200 to 250 basis points of margin.

Okay. Okay.

Just in terms of the how to think about margins for this year is a lot of puts and takes I know you had some comments earlier about I think last quarter. It was about so.

So 10% revenue decline is where we should expect 250 basis points of margin.

Speaker 7: deterioration in the operating margin side, but you now have the acquisition, which is probably a bit dilutive, but you also have taken cost action. So can you just give us an updated framework on how to think about margins for the year, particularly given all the puts and takes. Thank you.

In relation to the operating margin side with you now have the acquisition, which has probably been diluted but you also have taken cost actions. So can you just give us an updated framework of how to think about margins for the year were particularly given all the puts and takes thank you.

Speaker 5: Yeah, so so we've shared the same essentially model describing kind of demand normalization here really since our spin and that's a model that says if if our revenues are down.

Yeah. So so we've shared the same essentially bottle describing kind of demand normalization here really since our spin and that's a model that says if our revenues are down 10% that we would expect operating margins to be down 3% to 400 basis points in that scenario. That's obviously.

Speaker 5: 10% that we would expect operating margins to be down 3 to 400 basis points in that scenario. That's obviously, you know, pre any acquisition activity.

Pre any acquisition activity. So when you think about layering in.

Speaker 5: So when you think about layering in ESI, obviously it's a public company, you can look at their results. At this point, you know, we only own half the shares. It's gonna take us a while to get to full ownership.

Obviously, it's a public company you can look at their results at this point, we only own half the shares it's going to take us a while to get to full ownership.

Speaker 5: So I think you can layer in ESI, you know, in the short run, much as they were running as an independent company. And once we get to full ownership, we'll be able to really, you know, set our mind on cost reduction within that space.

Thank you Ken layer and ESI.

In the short run much as they were as they were running as an independent company and once we get to full ownership will be able to really.

Our mind, Don on cost reduction within that space.

Okay.

And synergy realizations.

Okay. Thank you.

Speaker 2: Your next question comes from Rob Mason with Bayard. Please proceed.

Our next question comes from Rob Mason with Baird.

Please proceed.

Speaker 9: Yes, good afternoon. Last quarter, we talked about, you know, a surge in some of these long, longer-dated orders, year-to-date. I'm just curious, as you wrapped up the year, where, you know, the total sum of those came in relative to last year. And then, do you have any perspective on how those would start to be converted to revenue? Are those 2024 revenue events, or are we looking more out into 2025?

Yes, good afternoon.

Last quarter, we talked about.

A surge in some of these along longer dated orders year to date I'm just curious as you wrapped up the year where.

The total sum of those came in relative to last year and then do you have any perspective on how those would start to be converted to revenue is are those 2024 revenue Vince or are we looking more out into 2025.

Speaker 5: Yeah, so first of all, as we said last quarter, they were about 8% of orders to date, and that's where they finished. So Q4 was on par with the first three quarters of the year, and that compared to more like 2% as a historic run rate. The majority of that revenue will be in 24, although there is a portion, you know, a sizable portion that pushes out.

Yes. So so first of all as we said last quarter. They were about 8% of orders to date and Thats, where they finished Q4 was on par with the first three quarters of the year and that compared to where like 2%.

As a as a sort of historic run rate the.

The majority of that revenue will be in 'twenty four although there is a portion.

A sizable portion that pushes out into 'twenty five.

Okay.

Speaker 9: And is, just for clarification, is that likely to show up in the.

And as.

Just for clarification is that likely to show up in the.

Speaker 9: in the EISG segment or in the CSG segment.

ISG segment or in the <unk> segment.

Speaker 5: It's a mix. I think earlier in the year, those orders skewed towards EISG, not surprising with the strength in aerospace defense and government fiscal year end. In the fourth quarter, they were more skewed towards aerospace defense and market. So it really is a mix.

It's a mix I think earlier in the year those order skewed towards ESG not surprising with the with the strength in aerospace defense and government fiscal year end in the fourth quarter. They were more skewed towards courts Aerospace defense end market. So really it's a mix.

Speaker 9: Very good. Just as a final question, if I could, do you have any sense as to what a reasonable timeline should be to complete the entirety of the ESI acquisition, the squeeze-out process?

Very good just as a final question if I could just do you have any sense as to what a.

A reasonable timeline should be.

Complete.

Complete the entirety of the ESI acquisition, the squeeze out process.

Speaker 5: Yeah, it really depends on on what happens during this this tender offer process, you know, which, again, we expect to complete the tender in in the calendar first quarter. I think if we do that, then we'll move immediately in and that goes as expected. We'll move immediately to a squeeze out that I think would have us completing at mid year. You know, there are scenarios where if if less than the required number of people get to tender where it will take us a little bit longer to.

Yes, it really depends on what happens during this tender offer process.

Again, we expect to complete the tender.

And the calendar first quarter I think if we do that then we'll move immediately and that goes as expected we'll move immediately to a squeeze out that I think would have us completing at mid year.

There are scenarios, where if if.

Less than the required number of people get to tender, where it will take us a little bit longer too.

Speaker 5: to meet the appropriate thresholds to essentially do the squeeze-out process.

The appropriate thresholds, so essentially due to the squeeze out process.

Okay.

Very good thank you.

Thank you.

Speaker 2: Our next question comes from Erin Rikers with Wells Fargo, please proceed.

Our next question comes from Aaron Rakers with Wells Fargo.

Please proceed.

Speaker 3: Yeah, yeah, thanks for taking the questions. I want to go back to the prior question on on kind of a longer, longer backlog. Um, you know, metric, I think last quarter, you talked about that being 200M. Is that is that. I know you said 8% of orders, but is that is that still that. Roughly that number, which would be on top of the 2.3Billion or so total backlog. He came out of exiting this last quarter.

Yes.

Yes, thanks for taking the question I want to go back to the prior question on kind of a longer longer backlog.

The metric I think last quarter, you talked about that being $200 million is that I know you said, 8% of orders, but is that is that still that roughly that number which would be on top of the $2 3 billion or so total backlog he came out of exiting last quarter.

Speaker 5: Well, the numbers are included in the backlog, right? And so if you take our order rate for the year, about 8%, so you get to somewhere around 400 million of longer dated backlog orders with longer dated backlog that we took within the year. Obviously, some of that, you know, if we took if we took a 10 month order in Q1, it would have shipped here at the tail end of 23. But you can view that most of that 400 million dollars is sitting in our backlog here as we.

Well the numbers are included in the backlog right and so if you take our order rate for the year of about 8%. So you get to somewhere around $400 million of longer dated backlog orders with longer dated backlog that we took within the year, obviously some of that.

We took if we took a 10 month order in Q1. It would have shipped here at the tail end of 'twenty three but you could view that most of that $400 million is sitting in our backlog here as we enter fiscal 'twenty four.

Speaker 10: And to be clear that that battle, you know, typically your backlog was a 6 months forward number. It sounds like, you know, majority of that would be recognized in the back half of the fiscal year. That's a fair assessment.

And to be clear.

That will typically your backlog was a six month forward number it sounds like majority of that would be recognized in the back half of the fiscal year.

Fair assessment.

Uh huh.

Speaker 5: I'm just think as we've received those orders, you know, all throughout the year. And so again, there is a, there are a couple large scale projects that pushed out into twenty five where we'll get kind of lump sum revenue recognition. It probably has a back half skew though for the, for the portion that's in twenty four. I would say there's a back half skew for sure.

I'm just thinking we've received those orders all throughout the year and so again. There is there are a couple of large scale projects that pushed out into 'twenty, five where we'll get kind of lump sum revenue recognition.

It probably has a back half SKU, though for the portion Thats in 'twenty four I would say there is a back half skew for sure.

Okay, perfect and then.

Speaker 10: Perfect. And then the real quick follow-up is, can you talk a little bit about what you're seeing on the wireline with regard to AI? Just maybe flush out exactly, you know, where you're involved, you know, because it seems like that is, you know, clearly as we move towards possibly Ethernet and 800 gig, it seems like that would be impacting. I'm just curious to how Keysight's involved in that.

Real quick follow up.

Can you talk a little bit about what youre seeing on wireline with regard to AI, just maybe flush out exactly.

Where you're involved.

Because it seems like that is clear.

Clearly as we move towards possibly Ethernet and 800 gig it seems like that would be collecting I'm just curious of how key sites involved in that.

Speaker 7: Yeah, thank you. I think, you know, as we talked about, you know, our commercial comms business.

Yes. Thank you.

Thank you.

We talked about in our commercial comms business is diversified with exposure into both wireless and wireline parts of the ecosystem.

Speaker 7: is diversified with exposure into both wireless and wireline parts of the ecosystem.

Speaker 7: For the waterline parts of the ecosystem, we're obviously tethered to computing, networking.

The wireline parts of the ecosystem, where obviously.

Heather to computing networking.

Speaker 7: being the core and markets and what we're starting to see is some signs that the compute markets are

Being the core end markets and what we're starting to see some signs of the compute markets are.

Speaker 7: are starting to stabilize after a period of inventory digestion that was underway.

<unk> are starting to stabilize after a period of inventory digestion that was that was underway, but equally there is some incremental spend that's occurring driven by cloud and hyperscale.

Speaker 7: But equally, there is some incremental spend that's occurring.

Speaker 7: are driven by cloud and hyperscalers who are pretty serious about upgrading that infrastructure. And so that's manifesting itself in manufacturing tests for our transceiver test business. It's also manufacturing manifesting itself in.

We're pretty serious about upgrading that infrastructure and so that's manifesting itself in.

Manufacturing test for our transceiver test business. Its also manufacture manifesting itself in increased spends that we saw this quarter for 800 gig and also tell a bit Ethernet solutions.

Speaker 7: increased spends that we saw this quarter for 800 gig and also terabit Ethernet solutions.

Speaker 7: And so we're quite pleased with the sequential uptick we've seen. Again, one quarter doesn't make a trend, but I think.

And so we're quite pleased with the sequential uptick we've seen again, one quarter doesn't make a trend, but I think.

Speaker 7: encouraged by the progression that we've seen on the wireline side.

Encouraged by the progression that we've seen on the wireline side.

Yes, Thank you guys.

Thank you.

Speaker 2: Our next question comes from Chris Snyder with UBS. Please proceed.

Our next question comes from Chris Snyder with UBS. Please proceed.

Okay.

Speaker 11: Thank you. So orders came in of about 7% sequentially. I think it was the best order quarter number for fiscal 23.

Thank you.

Orders came in up about 7% sequentially I think it was the best order quarter number for fiscal 'twenty three.

Speaker 11: And I understand there's seasonality involved, but could you maybe just talk about.

And I understand there is seasonality involved but can you maybe just talk about where orders have.

Speaker 11: where orders have, you know, improved, verse three to six months ago, verse maybe where you've seen continued softening in orders, verse three to six months ago. And then specifically for the AIML and the data center infrastructure.

Proved versus three to six months ago versus maybe where <unk> seen continued softening in orders versus three to six months ago, and then specifically for the AI ml and the data center infrastructure.

Speaker 11: No, could you size, you know, how big that a, I am now related businesses today, whether it's on orders or revenue.

Could you size.

How big that AI ml related businesses today, whether it's on orders or revenue. Thank you.

Speaker 7: Yeah, maybe at the highest level, I'll just say, you know, we got a sequential improvement, I would say, in orders from our aerospace defense business, which was strong. Obviously, the year-end is typically what we expect. We saw that for commercial communications, sequential growth, stability in wireless slash 5G, and sequential uptick in our wired part of the ecosystem.

Yes, maybe at the highest level I would just say.

We got a sequential improvement I would say in orders from our aerospace defense business, which was strong obviously the year end.

Typically what we expect we saw that for commercial.

Communications sequential growth stability and wireless slashed and sequential uptake in our wired part of the ecosystem.

Speaker 7: And what we anticipated also was we would see some softness in the EISG business, particularly with Asia and China, and we did experience that. Now again, to put it in context, the EISG business

And what we anticipated also was we would see some softness in the EIC business, particularly with Asia, and China, and we did experience that again to put it in context, the IC business.

Speaker 7: just later in undergoing this demand normalization. And so that was what we had sort of forecasted. And so it behaved as we expected.

Later in the in undergoing this demand normalization and so that was what we had forecasted and so it behaved as we expected.

Speaker 7: With regard to the wireline ecosystem, I just go back to our long-term growth rate expectations for the communications business in general and say that, you know, we see a business that is diversified where multiple technology waves are overlapping. And that gives us inherent stability and resilience. And we're pleased by some of the progression we're seeing in the AIML spend.

With regard to the the wireline ecosystem I just go back to our long term growth rate expectations for the communications business in general and say that.

We see a business that is diversified where multiple technology waves are overlapping and that gives us inherent stability and resilience and we're pleased by some of the progression were seeing in the AI ml spend.

Speaker 7: Because we've been working with customers on this for some time now, and we expect that

Because we've been working with customers on this for some time now and we expect that as as more of the network traffic is driven by applications.

Speaker 7: And as more of the network traffic is driven by applications

Speaker 7: that are coming out for AML, this will become a bigger part of our business.

That are coming out for AML. This will become a bigger part of our business.

Speaker 9: I'll just maybe hand it off to Mark to make some comments and orders. Yeah, thanks Satish. Chris, I'll just add a few color comments to what Satish just shared and it really begins with all of our customers still remaining very active in their R&D projects.

Maybe I'll hand, it off to Mark to make some comments on orders yeah. Thanks, Chris I'll, just add a few color comments to what's <unk> and then it really begins with all of our customers still remaining very active in their R&D projects and we see that in our follow in terms of new funnel intake, which has been very positive.

Speaker 9: And we see that in our funnel in terms of new funnel intake, which has been very positive and and our ability to convert that remains high, although, as we've said for the last several quarters.

Our ability to convert that remains high although as we've said for the last several quarters.

Speaker 9: Some of this long dated backlog and then customers taking a bit more time to make these decision has have been a factor as well

Some of this long dated backlog and then customers taking a bit more time to make these decisions have been a factor as well.

Speaker 9: I'm also seeing stabilization in the indirect business as some of the inventories in our distributors normalize. And I'm very pleased with our e-commerce business, which continues to be strongly adopted. We saw about a doubling of business through that channel. And in total, we continue to add new customers, more than 2,000 during the course of the last year, and about 300 of those came through e-commerce. So there's just some positive elements of what we've seen in the fourth quarter.

Also seeing stabilization in the indirect business at some of the inventories in our distributors normalized and I'm very pleased with our E Commerce business, which continues to be strong. We adopted we saw about a doubling of business through that through that channel and then toll in total we continue to add new customers more than 2000 during the course of the.

The last year and about 300 of those came through E. Commerce. So there is some positive elements of what we've seen in the fourth quarter.

Yeah.

Speaker 11: I appreciate that. And then for my follow-up, I guess maybe more of a modeling question. For the revenue, Q1 revenue guide, the 1, 2, 4, 5 at the midpoint, does that include 60 million from ESI implying about 1, 2, 8, 5 at the midpoint for organic Keysight? Because it seems to be a pretty sharp falloff versus the 1, 3, 2, 7 orders we just got. Thank you.

I appreciate that and then for my follow up.

I guess, maybe more of a modeling question.

For the revenue Q1 revenue guide the one to $4 five at the midpoint does that include 16 million from E. S.

Implying about 1285 at the midpoint for organic key site.

There will be a pretty sharp falloff for 1327 orders, we just got it. Thank you.

Speaker 5: Yeah, 1185, not 1285, but your math is correct. 1245 less 60 million gets you to 1185 for core key sites.

Yes, 1185, not 1285, but your math is correct 1245, less 60 million gets you to 185 for core key site.

Speaker 5: And, you know, what we've typically seen is on the order side is a high single digit sequential decline as we move from Q4 into Q1. And I think given the normalization that we're currently seeing, particularly in EISG, we expect the sequential decline this year to be a little bit larger than historical average. And so that's, again, with orders and revenue converging, that's how you can think about getting to that 1185 for Querqisa. For more information, visit www.fema.gov

And what we've typically seen is on the order side as a high single digit sequential decline as we move from Q4 into Q1, and I think given the normalization that we're currently seeing particularly in ISG ISG we.

<unk> sequential decline this year to be a little bit larger than historical average and so that's again with orders and revenue converging. That's how you can think about getting to that 11 to 85 for core he said.

Thank you.

Thank you.

Our next question comes from Mark Delaney with Goldman Sachs.

Speaker 12: Please proceed.

Please proceed.

Yes. Good afternoon. Thanks for taking my questions a question on commercial comps.

Do you think.

Speaker 13: The company can get back to the historical highs in the commercial comms segment in terms of revenue from a resumption in 5G alone, or do you think you would need some contribution from things like E&C?

The company can get back to the historical highs in the commercial comms segment in terms of revenue from a resumption in <unk> alone or do you think you would need some contribution from things like 800 gig and <unk> in order to get there.

Speaker 7: Yeah, thank you, Mark. Absolutely. We're confident.

Yes, Thank you Mark absolutely we're confident.

Speaker 7: in the long-term outlook for the business I outlined at Investor Day.

In the in the long term outlook for the business I outlined at Investor Day.

Speaker 7: several overlapping themes of technology waves that are playing out across end markets and our view remains solid with that. In fact, as we engage with customers, even through this time where the spend has been lower, customers are intensely focused on higher priority R&D programs.

Several overlapping teams of technology waves that are playing out across end markets in our view.

It remains solid with that in fact, as we engage with customers even through this time.

Where the spend has been lower customers are intensely focused on higher priority R&D programs and so that strategic view has not changed.

Speaker 7: And so that strategic view has not changed for us. Obviously, there is this current demand normalization that's occurring after Fiscal 21 and 22, where we had outsized order growth in the business. And so post normalization, we we remain confident in our ability to continue to grow the business.

For US obviously there is this current demand normalization that's occurring after.

Fiscal 'twenty, one and 'twenty, two where we had outsized order growth in the business and so post normalization. We remain confident I believe to continue to grow the business because of these multiple ways of technology across both wired and wireless ecosystem.

Speaker 7: because of these multiple ways of technology across both wired and wireless.

Speaker 13: And the other question on the competitive landscape was one of your competitors having recently been acquired, have you seen any change in...

That's helpful. And then another question on the competitive landscape with one of your competitors, having recently been acquired have you seen any change.

Speaker 13: opportunities in terms of new business wins or any changes on the competitive

The opportunities in terms of new business wins or any changes on the competitive front that you pointed out thanks.

Speaker 14: Yeah, no, we we remain active in in all of the markets that we serve. The automotive market, in particular, continues to be quite robust with many customers investing in long term EV projects, which we continue to engage with. So, no, we've not seen any, any change since any recent.

Yes no.

We remain active in all of the markets that we serve.

The automotive market in particular continues to be quite robust with many customers investing in long term EV projects, which we continue to engage with so no. We've not seen any any change since any recent announcements.

Thank you.

Yeah.

Speaker 2: Our next question comes from Adam Talamer with Thomas & Davis.

Our next question comes from Adam <unk> with Thompson Davis.

Please proceed.

Speaker 15: Hey, good afternoon, guys. Congrats on the strong Q4. Can you give a little more color into what is going on in China and whether you're seeing any green shoots?

Hey, good afternoon, guys. Congrats on the strong Q4.

Can you give a little more color into what is going on in China.

And whether youre seeing any green shoots there.

Speaker 7: Yeah, thank you. I'll have Mark make some comments, but thank you. We're pleased with the execution and the operational performance of the business in fiscal 23, our engagements in China with customers remain strong, but I'll have Mark make some comments by and Mark.

Yes. Thank you I'll have mark make some comments with thank you. We're pleased with the execution and the operational performance of the business in fiscal 'twenty three.

Engagements in China with customers remains strong, but I'll have mark make some comments by end market, yes, our business in China remains very diverse we did see softer demand in Q4 and in the second half, but actually our business in China held up relatively strong in the first half, especially from the ISG standpoint.

Speaker 14: Yeah, our business in China remains very diverse. We did see softer demand in Q4 and in the second half. But actually, our business in China held up relatively strong in the first half, especially from the EISG standpoint.

Speaker 14: Um, but, you know, there is incremental weakness in manufacturing and in semiconductor, and we expect that to continue for the next couple of quarters where I see the activity is around the areas that we have remained focus on high speed digital.

But there is incremental weakness in manufacturing and in semiconductor and we expect that to continue for the next couple of quarters, where I see the activity is around the areas that we have remained focused on high speed digital optical auto and EV in AE and opportunities.

Speaker 14: optical, auto, and EV, and AE, and opportunities for mature semiconductor technologies continue there as well. I also think we've de-risked quite a bit of the trade impact that we've been experiencing for the last several years. We'll watch that carefully. It's been fairly status quo, I would say, for the last couple of quarters.

For mature semiconductor technologies continue there as well.

I also think we've derisked quite a bit of the trade impact that we've been experiencing for the last several years, we will watch that carefully it's been fairly status quo I would say for the last couple of quarters.

Speaker 14: And if we do see some moderation to the demand normalization on the manufacturing side, I think we'll be very well positioned when that happens.

If we do see some moderation to the demand normalization.

On the manufacturing side I think it will be very well positioned when that happens.

Great. Thank you Mark.

Yes.

Speaker 2: Our next question comes out of Molly with C. Please proceed.

Our next question comes from out of Mali with Citi. Please proceed.

Speaker 16: Hi, thank you for taking my questions. The first one for Satish, you guys are seeing stability in 5G market, there may be restocking in China's smartphones, and it sounds like you're optimistic about second half of next year. Is it possible for you to provide us a few milestones on the next 5G standards, or maybe early rollout of 6G that we should be looking forward to for next year?

Hi, Thank you for taking my question.

First one is you guys are seeing stability in the <unk> market that maybe destocking in China's smartphone.

It sounds like you're optimistic about second half of next year is it.

Possible for you to provide us a few milestones on.

On the next five years standard then maybe early rollout of <unk>.

Should be looking forward to for next year.

Speaker 7: Yeah, thank you. I think at the highest level, the things that I watch for are the continued progression the smartphone industry is making in inventory reductions, right? That's being talked about for chips and final device form factors.

Yes. Thank you I think at the highest level of the things that I watch for are the continued progression. The smartphone industry is making in inventory reductions right. That's been talked about for chips and final device form factors. So that's one thing we watch obviously.

Speaker 7: So that's one thing we watch. Obviously, when we think about the 5G standards progression, what we're seeing so far is increased interest from customers in Open RAN. Even in our 5G business this year, Mark and team have added new customers.

When we when we think about the <unk>.

<unk> standards progression.

What we're seeing so far is increased interest from customers in open ran.

Even in our <unk> business this year, Mark and team have added new customers.

Speaker 7: to our already strong mix of install-based customers. So our leadership position continues to remain strong and we're continuing to remain differentiated with our portfolio, which is very broad and caters to the need of the entire ecosystem.

To our already strong mix of installed based customers. So our leadership position continues to remain strong and we're continuing to remain differentiated.

With our portfolio, which is very broad and caters to the meat of the entire ecosystem.

Speaker 7: The area that has also gained a lot of importance as we went through the last year has been the non-terrestrial networks, so the satellite cases with 5G, and we're also seeing some interesting new use cases associated with release 17, and the research interest across the globe to build organic IP in what comes beyond 5G is already kicked off, and Keysight continues to play an early role in partnering with these customers. So, when we look at our...

The area that has also gained a lot of importance as we went through the last year has been the non terrestrial networks. So the satellite cases with <unk> and we're also seeing some interesting new use cases associated with release 17, and the research interest across the globe to build organic IP in what comes.

<unk> has already kicked off and key side continues to play an early though and in partnering with these customers. So when we look at our.

Speaker 7: our investment priorities. Yes, we're investing in R&D, and we're focusing that investment around these next generation themes, which will continue to enable us to be strong and grow the business over the long run at the rates that we've put out at Investor Day.

Our investment priorities.

Yes, we are investing in R&D, but and we're focused on that focusing that investment around these next generation teams, which will continue to enable us to be strong and grow the business over the long over the long run at the rates that we put out at Investor day.

Speaker 16: Great. And then a follow-up for Neil. Neil, you're talking about orders down high single digit in the January quarter because of EIST being down more than historical average. And you're pointing to an April quarter revenue drop because of ESI seasonality. Should we be thinking about orders recovering in the April quarter or coming down with that revenue drop?

Great and then a follow up for Neil Neil you're talking about orders down high single digits in the January quarter because of.

S T.

Download an historical average and you're pointing to in April quarter revenue trough because the ESI.

Seasonality should we be thinking about orders recovering in the April quarter or coming down with that revenue decline.

Speaker 12: On core Keysight, we would typically see a sequential increase as you move from Q1 to Q2. I think we'll need to wait for some time to pass to give you a sense of, you know, how that increase is going to compare to historic norms. But typically, you would see a Q1 to Q2 increase. And I think based on everything we see at this point, that's what we expect. Great. Thank you.

On core key site, we would typically see a sequential increase as you move from Q1 to Q2, I think we'll need to wait for some time to past, but to give you a sense of how that how that increase is going to compare to historic norms, but typically you would see a Q1 to Q2 increase and I think based on everything we see at this.

Point, that's what we expect.

Great. Thank you.

Thank you.

Our next question comes from Matthew <unk> with Deutsche Bank.

Please proceed.

Speaker 17: Hey guys, thank you for taking the questions. I have one follow-up to a prior question and one other one for Neil. In terms of the follow-up, so we're talking about a softer than seasonal outlook for core keys, stripping out that 60-ish mil from ESI in fiscal 1Q. Is that primarily EISG?

Hey, guys. Thank you for taking the questions.

I have one follow up to a prior question and then one other one for Neil.

So the follow up so we're talking about a softer than seasonal outlook for core key stripping out that 60 ish from ESI in fiscal <unk> is that primarily ISG.

Speaker 17: i.e. are there expectations for more relative stability to sustain in comms and some of the strength of persistent ADG, so more just sort of unpacking that outlook for fiscal 1Q.

I E are there expectations for more relative stability to sustain in coms and some of the strength of the persistent EDG. So more just sort of unpacking that outlook for fiscal <unk>.

Speaker 17: across the segments. And then maybe for Neil, you're talking about CapEx of about 150 mil. I think at the analyst day, it was around the 225 million mark for fiscal 24. I'm just wondering what's changed. Thanks.

Across the segments and then maybe for Neil Youre talking about Capex of about 150 mill I think at the analyst day. It was around 225 million Mark for fiscal 'twenty four I'm just wondering what's changed thanks.

Speaker 14: Yeah, so on the first question regarding the seasonality, I think you have it mostly right. I think we're experiencing incremental softness in EISG. And then a lot of that is in China and Asia. And that's what we're attributing to the slightly expected higher seasonal decrease from Q4 to Q1. And then the second.

Yes. So on the first question regarding the seasonality I think you have it mostly right I think we're experiencing incremental softness in ESG and then a lot of that is in China and Asia and that's what we're attributing too.

Slightly expected higher seasonal decrease from Q4 to Q1 and then the second yes.

Speaker 5: Yeah, on on on the CapEx, I mean, obviously, you know, the business is has been softer this this year than we expected. And so when you think about investments in capacity and those types of things, we have either canceled in many cases or delayed other programs in response to the current macro environment, which is resulting in the in the reduced expectations for CapEx going forward.

On the Capex I mean, obviously.

The business has been softer this this year than we expected.

And so when you think about investments in capacity and those types of things we have either canceled in many cases or delayed other programs in response to the current macro environment, which is resulting in the reduced expectations for capex going forward.

Great. Thank you for 24 individuals.

Yeah, you're welcome thank you.

Speaker 2: Our next question comes from Tim Long with Barclays. Please proceed.

Our next question comes from Tim Long with Barclays. Please proceed.

Okay.

Speaker 5: Thank you. Yeah, two if I could. First, on the wireline side, can we talk a little bit more specifically about optical, kind of what you're seeing there? Where are we in cycle? It's been a little bit more challenged with some of the companies in the ecosystem. So if you could just talk about what you're kind of seeing on the physical test side, as well as Ixia. And then just the second one on the defense automation business.

Thank you.

Yes, two if I could first on the <unk>.

Wireline side can you talk a little bit more specifically about optical kind of what youre seeing there where are we in cycle.

It's been a little bit more challenged with some of the companies in the ecosystem. So if you could just talk about which kind of seeing on the physical test side as well.

And then.

Just the second one on the defense automation business.

Speaker 5: seems to be continuing rolling along really strong. Could you talk a little bit about sustainability of that kind of defense line over the next multiple quarters? Thank you.

Seems to be continuing rolling along really strong could you talk a little bit about sustainability of that.

That kind of defense line over the next multiple quarters. Thank you.

Speaker 7: Yeah, thank you. Sure. I'd say, you know, we've always believed that strategically having both the physical and protocol and having leadership position across both is an advantage. And we're seeing that play out at this point, especially as.

Yes. Thank you sure I'd say, we've always believed that strategically having both the physical and protocol.

And having leadership position across both as an advantage and we're seeing that play out at this point, especially as as the challenges migrate between <unk> and the optical side in the electrical side and our ability to connect the dots for our customers as an advantage for us and we're able to.

Speaker 7: as the challenges migrate between SIRDIs and the optical side and the electrical side. And our ability to connect the dots for our customers is an advantage for us. And we're able to monetize the advantage.

We were able to monetize the advantage I would say.

Speaker 7: I would say, you know, 400 gig ethernet still continues to be the predominant investment standard with customers shifting priority to 800 and terabit and beyond from a research perspective or development perspective. And we're able to engage across that entire entire lifecycle, which is which has caused the sequential uptake we see. And we also see some of that. I'll have Mark make some comments on the funnel.

400 gig Ethernet still continues to be the predominant investment standard with customers shifting priority to 800, and terabyte and beyond from a research perspective development perspective, and we're able to engage across that entire.

Lifecycle.

Which has caused a sequential uptake we see and we also see some of that I'll have mark make some comments on the funnel.

Speaker 7: of opportunities as we look ahead. On the different side of the business, again, not only in the U.S.

Opportunities as we look ahead on the defense side of the business again.

Not only in the U S, but across the globe the increased spending in technology investments in aerospace and defense.

Speaker 7: across the globe, the increased spending in technology investments in aerospace and defense is a trend that's playing out. In the U.S., I would say

Is a is a trend that's playing out in the U S. I would say the prime contractors have been referencing our growth in backlog and growth in orders and I think all of that.

Speaker 7: the prime contractors have been referencing a growth in backlog and growth in orders. And I think all of that, we've seen a stronger uptake, I should say, in the aerospace defense business in the most recent quarter. But equally, that bodes well for 2024. Obviously, we watch the defense budget getting passed, because that's an important milestone for that business. But I think given the bipartisan support.

We've seen a stronger uptake I should say in the aerospace defense business in the most recent quarter, but equally that bodes well for 2024, obviously, we watch the defense budget getting past that because that's an important milestone for that business.

I think given the bipartisan support that exists.

Speaker 7: we can be reasonably confident about the outlook for aerospace and defense.

Can be reasonably confident about the outlook for aerospace and defense.

Speaker 14: in fiscal 24. I'll have Mark make some comments. There's not much to add. He's covered it well. But what we've seen is this pattern of R&D and manufacturing on the wireline side. And we saw an uptick in 800 gigabit manufacturing spend for optical transceivers feeding into network build-out and data center upgrades.

In fiscal 'twenty, four I'll have mark make some yes, there is not much to add cities covered it well, but what we've seen is this pattern of R&D and manufacturing on the wireline side and we saw an uptick in 800 gigabit Manny.

Manufacturing spend for optical transceivers feeding into network build out and data center upgrades.

Speaker 14: So, we saw a sequential improvement and the funnel would support that continuing. We saw AI server and GPU infrastructure testing also on the physical side, so there's some demand growth there. And as you pointed out, you know, our broader portfolio with protocol solutions was reflected in some of our network visibility growth, particularly from enterprise customers. So, these are all strengths that we were able to capture during Q4. Thank you. Thank you.

So we saw a sequential improvement in the funnel would support that continuing we saw AI server and GPU infrastructure testing also on the physical side. So there is some demand growth there and as you pointed out our broader portfolio with protocol solutions was reflected in some of our network visibility growth, particularly from enterprise customers.

So.

These are all strengths that we were able to capture during during Q4.

Okay. Thank you.

Speaker 2: Our next question comes from David Reilly Lynn with Bank of America. Please proceed.

Our next question comes from David Wright with Bank of America.

Please proceed.

Good evening. Thank you.

So just.

Speaker 18: Really quick question on the margins.

Quick question on the margins.

Speaker 18: If I'm understanding sort of the seasonality comments on the ESI group, that's actually should be a.

If I'm understanding sort of the seasonality comments on the ESI group, that's actually Shapiro.

Speaker 18: Very modest, but it should be a tailwind to margins in the first quarter. So I completely understand the revenue guidance, but is there anything one time that's implied in the first quarter margins?

Very modest, but it should be a tailwind to margins in the first quarter.

So I completely understand the revenue guidance, but is there any.

Anything one time, that's implied in the first quarter.

Margin.

Speaker 5: You should be able to bridge from the Q4 results that we just put up to the Q1 guide, even if it's just for the ESI, really with two bridging items. The first is the increase in the tax rate from 12 to 17 percent, and the second is the implied reduction in revenue, which we just talked about goes from $13.11 to $11.85. So about a $125 million reduction in revenue should be sufficient to bridge the delta.

You should be able to bridge from the from the Q4 results that we just put up to the Q1 guide even if you adjust for the ESI really with two bridging items. The first is the increase in the tax rate from 12% to 17% in the second is there is the implied reduction.

In revenue right, which we just talked about goes from 13 to 11 to $11 85, so about $125 million reduction in revenues should be sufficient to bridge the delta.

Okay and then.

Speaker 18: And then, you know, for the full year, I know there were several project push-outs in semiconductors in other areas, maybe more broadly in China, but

For the full year I know there were several project push outs.

In semiconductors and other areas.

Maybe more broadly in China.

But could.

Speaker 18: Could you cite sort of the full year impact to orders in fiscal 23 from those kind of project pushouts and then, you know, look, if it's always uncertain, but if the construction timeline stayed intact, should we expect sort of a similar magnitude to show up in fiscal 24?

Could you size sort of the full year impact to orders in fiscal 'twenty three from those kind of project push outs and then yeah.

It's always uncertain, but if the construction timeline stayed intact should we expect sort of similar.

Magnitude to show up in fiscal 'twenty four.

Speaker 14: I'm not sure I follow your question. You know, if people are pushing out, and we have confidence that they're ultimately going to take delivery of product, generally speaking, we leave those orders on the books. Are we speaking about semi specifically with with fabs? Is that?

I'm not sure I follow your question.

People are pushing out and we have confidence that they are ultimately going to take delivery of product generally speaking we leave those orders on the books.

Are you speaking about semi specifically with with Fabs.

Ed.

Speaker 18: Okay, so it was revenue, and so if it was an order that was tied to a semi-fab where the construction itself got pushed, that stayed as orders, and you would just recognize the revenue later.

Okay.

Revenue and it's and so if it was an order that is tied to the semi fab, where the construction itself got crushed that stayed as orders and you would just recognize the revenue later.

Speaker 14: So you're talking about where deliveries got pushed out of three out of twenty three and twenty four beyond. Yeah, correct. Yeah. So on semi specifically, I think there's two factors. One is the forward looking demand. Some of that has been pushed out because delays in in the fabs. And then the second part is delays of backlog. And I think you characterized it right. Going into late twenty four and early twenty five.

So youre talking about where deliveries got pushed out of three out of 23 to 24 or beyond.

Correct, yes, so on semi specifically I think theres two factors one is.

The forward looking demand some of that has been pushed out because delays in the Fabs and then the second part is delays of backlog and I think you characterized it right going into late 'twenty four and early 'twenty five.

Thank you very much.

Thank you.

Thank you for your question.

Speaker 2: That concludes our Q&A session for today. I would like to now turn the call back to Jason Carey for any closing remarks.

That concludes our Q&A session for today I'd like to now turn the call back to Jason Kary for any closing remarks.

Speaker 7: Thank you, Sierra, and thank you, everyone, for joining us. Just to wrap up the call, I'll turn it over to Satish and over to you. Thank you, Jason. I want to thank all our shareholders for your support of Keysight. And I want to I want to let you know we remain incredibly confident in our future and we're continuing to invest.

Thank you Sarah and thank you everyone for joining us just to wrap up the call ill turn it over to <unk>.

Over to you. Thank you Jason I want to thank all our shareholders for your support of key site and I want to I want to let you know we remain incredibly confident in our future and we're continuing to invest for growth around next generation technology teams, which have strong customer validation while doing so we're also prudent.

Speaker 7: for growth around next generation technology teams which have strong customer validation.

Speaker 7: While doing so, we're also prudent in our spending and maintaining a strong discipline from an operating perspective.

In our in our spending and maintaining a strong discipline from an operating perspective.

Speaker 7: in factoring in the current environment. And finally, we're also very confident in the free cashflow position of the business. And you've seen us in the most recent.

In fact.

Factoring in the current environment and finally, we're also very confident in that free cash flow position of the business and you've seen us in the most recent quarter.

Speaker 7: buy back over 100% of our free cash flow in our own shares given the valuation at this time.

Back over 100% of our free cash flow in our own shares given the valuation at this time. Thank.

Speaker 19: Thank you very much and hope you have a good rest of your day.

Thank you very much and hope.

Hope you have a good rest of your day.

That concludes our conference call you May now disconnect your line.