Q1 2024 Keysight Technologies Inc Earnings Call

Joel: www.keysight.com Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal First Quarter 2024 Earnings Conference Call. My name is Joel, 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.

Okay.

Joel: Good day, ladies and gentlemen, and welcome to the key site technologies fiscal first quarter 2024 earnings Conference call. My name is Joel 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.

Operator: This call is being recorded today, Tuesday, February 20, 2024, at 1.30 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. Kary.

This call is being recorded today Tuesday February 22024 at 130 PM Pacific time.

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

Jason A. Kary: Thank you and welcome, everyone, to Keysight's first quarter earnings conference call for fiscal year 2024. Joining me are Keysight President and CEO, Satish Dhanasekaran, and our CFO, Neil Dougherty. In the Q&A session, we'll be joined by Chief Customer Officer, Mark Wallace. The press release and information to supplement today's discussion are on our website at Investor. Keysight.com under financial information and quarterly reports.

Jason A. Kary: Thank you and welcome everyone to key sites first quarter earnings conference call for fiscal year 2020 for 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 Chief customer Officer, Mark Wallace The press release and information to supplement today's discussion are on our website at <unk>.

Jason A. Kary: <unk> Dot com under financial information 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 reconciliation.

Jason A. Kary: 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 are on our website, and all comparisons are on a year-over-year basis unless otherwise noted.

Jason A. Kary: <unk> or 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.

Jason A. Kary: 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. Lastly, management is scheduled to participate in upcoming investor conferences hosted by Susquehanna and Morgan Stanley. And now I will turn the call over to Satish. Good afternoon, everyone, and thank you for joining us today.

Jason A. Kary: For a more complete view of these risks and other factors.

Lastly management is scheduled to participate in upcoming Investor conferences hosted by Susquehanna and Morgan Stanley and now I will turn the call over to cities.

Cities: Good afternoon, everyone and thank you for joining us today.

Satish Dhanasekaran: My comments will focus on three key headlines. First, Keysight delivered revenue of $1.3 billion and earnings per share of $1.63, both of which exceeded the high end of our guidance. Given the current market conditions, these results reflect the Keysight team's strong execution and resilience of our financial model. Second, orders were $1.2 billion as the demand environment remains constrained.

Cities: My comments will focus on three key headlines.

Cities: First <unk> delivered revenue of $1 3 billion.

Cities: And earnings per share of $1 63.

Both of which exceeded the high end of our guidance.

Cities: Given the current market conditions. These results reflect the key site teams strong execution and resilience of our financial model.

Cities: Second orders were $1 2 billion at the demand environment remains constrained.

Satish Dhanasekaran: As certain markets continue to normalize from post-pandemic spending levels, our aerospace, defense, and government, and network and data center businesses grew, highlighting the benefit of our diverse end-market exposure. Customer engagement and collaborations on next-generation teams remain strong. The adoption of new use cases such as AI is driving new activity and investment across the ecosystem. However, we're not factoring in a strong recovery this fiscal year.

Cities: As certain markets continue to normalize from post pandemic spending levels, our aerospace defense and government and network and data center businesses grew highlighting the benefit of our diverse end market exposure.

Cities: Customer engagement in collaborations on next generation teams remained strong the.

Cities: The adoption of new use cases, such as AI is driving new activity and investment across the ecosystem.

Cities: However, we're not factoring in a strong recovery this fiscal year our base case.

Satish Dhanasekaran: Our base case scenario is for a modest first half to second half improvement in orders and revenues. Third, Keysight continues to be well-positioned for outperformance during a market recovery. We are investing to enhance our market leadership and expand our broad portfolio of leading solutions. We are also pleased to have completed the acquisition of ESI ahead of schedule and extend a warm welcome to the team, along with our existing EDA business. The addition of ESI further expands our software solutions for simulation and emulation, a market with favorable growth attributes as the virtualization of design and prototyping increases. Now, I will begin with a brief overview of Keysight's first quarter performance. Market conditions were largely unchanged from the prior quarter.

Cities: Scenario is for a modest first half to second half improvement in orders and revenue.

Cities: Key side continues to be well positioned for outperformance into a market recovery, we are investing to enhance our market leadership and expand our broad portfolio of leading solutions.

Cities: We are also pleased to have completed the acquisition of ESI ahead of schedule and extend a warm welcome to the team.

Cities: Along with our existing EDA business. The addition of ESI further expands our software solutions for simulation and emulation, a market with favorable growth attributes as the virtualization of design and prototyping increases.

Yes.

Cities: Now, let's begin with a brief overview of key sites first quarter performance.

Cities: Market conditions were largely unchanged from the prior quarter.

Satish Dhanasekaran: Across our end markets, investment in R&D remains steady, while manufacturing and overall economic activity in Asia continue to moderate. First quarter orders were 1.2 billion dollars. Revenue of $1.3 billion and earnings per share of $1.63 were above our guidance, and we generated strong cash flow. Gross margins across the business were strong, and including ESI, we achieved a record 67%, demonstrating the differentiation of our services. Operating margin was 28%, reflecting expense discipline and cost actions that we have taken over the past quarter and last year. Turning to our business segment, Communication Solutions Group revenue declined relative to a strong compare last year, which was driven by robust backlog conversions. Q1 Gross Margin was a record 68%, reflecting a greater mix of software and higher-value solutions; orders were in line with expectations, with strength in aerospace defense and government and the wireline business, while wireless continues to normalize. Aerospace defense and government revenue declined while orders grew year over year.

Cities: Across our end markets investment in R&D remained steady while manufacturing and overall economic activity in Asia continued to moderate.

Cities: First quarter orders were $1 $2 billion.

Cities: Revenue $1 3 billion and earnings per share of $1 63.

Cities: Were above our guidance and we generated strong cash flow.

Cities: Gross margins across the business was strong and including ESI, we achieved a record 67% demonstrating the differentiation of our solutions.

Cities: Operating margin was 28%, reflecting expense discipline and cost actions that we've taken over the past quarter and last year.

Cities: Turning to our business segments Communications solutions group revenue declined relative to a strong comparator last year, which was driven by robust backlog conversion.

Cities: Quarter, one gross margin was a record, 68%, reflecting a greater mix of software and higher value solutions.

Cities: Orders were in line with expectations with strength in aerospace defense and government and the wireline business, while wireless continues to normalize.

Cities: Aerospace defense and government revenue declined while orders grew year over year.

Satish Dhanasekaran: Spending levels remain elevated as governments around the world prioritize investments in defense modernization, space, and satellite applications. We are scaling our threat emulation offerings to a broader set of customers for electromagnetic spectrum operation applications in the U.S. and Europe, resulting in key wins at large primes. Our space and satellite solutions drove business this quarter for new space modules and low-Earth-orbit applications. Leveraging our protocol and digital twin capabilities, we partnered with Lockheed Martin and a broad set of technology leaders to successfully demonstrate a secure 5G and data link network that integrates land, air, and space operations.

Cities: Spending levels remain elevated as governments around the world prioritize investments and defense modernization space and satellite applications.

Cities: We are scaling our threat emulation offerings to a broader set of customers for electromagnetic spectrum operations applications in the U S and Europe, resulting in key wins at large primes.

Cities: Our space and satellite solutions drove businesses this quarter for new space modules and low Earth orbit applications.

Cities: Leveraging our protocol and digital twin capabilities, we've partnered with Lockheed Martin and a broad set of technology leaders to successfully demonstrate a secure <unk> and data link network that integrates land air and space operations.

Satish Dhanasekaran: Commercial Communications: Customer spending remains cost. While we're not seeing a market recovery yet, industry inventories are slowly returning to normalized levels. For example, smartphone sales in the fourth quarter of 2023 grew meaningfully for the first time since mid-2021. In our wireless business, customer engagements remain high with ongoing R&D activity in advanced technology. This results in software and service upgrades that contributed to higher gross margins in the quarter. 5G standards continue to progress and are driving a wide range of new use cases and features for ongoing network deployment. New band combinations are expected to be added to the 3GPP standard this year, driving certification needs.

Cities: In commercial communications customer spending remains cautious while we're not seeing a market recovery yet in industry inventories are slowly returning to normalized levels.

Cities: For example, smartphone sales in the fourth quarter of 2023 grew meaningfully for the first time since mid 2021.

Cities: In our wireless business customer engagements remained high with ongoing R&D activity in advanced technologies. This results in software and service upgrades that contributed to higher gross margins in the quarter.

Cities: <unk> standards continue to progress and are driving a wide range of new use cases and features for ongoing network deployment.

Cities: New band combinations are expected to be added to the <unk> standard this year driving certification needs.

Satish Dhanasekaran: This quarter, we hosted the Global Certification Forum that brought together industry leaders across a broad array of sectors to collaborate on certification requirements for network and device interoperability and performance. Next week, at Mobile World Congress, we will be demonstrating over a dozen solutions for 5G, Open RAN, satellite connectivity, AI, and early 6G capabilities, many of which will be showcased in partnership with industry-leading customers. Moving to our wireline business, we saw order growth for a data center solution; orders for 400 and 800 gigabit solutions both in R&D and manufacturing grew double digits. We also achieved a key milestone in partnership with Marvell by enabling test and verification of their new ultra-high-speed networking chip designed for next-generation AI-driven cloud applications. The adoption of AI is clearly lifting activity across the entire data center. As the industry deploys AI infrastructure at scale, we expect the demand for high-speed networking and computing capabilities to grow. Turning to the Electronic Industrial Solutions Group, revenue was down, reflecting ongoing normalization from outsized demand in the prior year. However, customer spending remains cautious as market conditions, particularly in manufacturing and regionally in China, are weak.

Cities: This quarter, we hosted global certification Forum that bought together industry leaders across a broad array of sectors to collaborate on certification requirements for network and device interoperability and performance.

Cities: Next week at mobile World Congress, we will be demands trading over a dozen solutions for five G. Open ran satellite connectivity AI and early six key capabilities, many of which will be showcased in partnership with industry leading customers.

Cities: Moving to our wireline business, we saw order growth for our data Center solutions.

Cities: Orders for 408 hundred gig solutions, both in R&D and manufacturing grew double digits.

Cities: Also achieved a key milestone in partnership with Marvell by enabling testing verification of the new Ultra high speed networking chip design for next generation AI driven cloud applications.

Cities: The adoption of AI is clearly lifting activity across the entire data center ecosystem.

Cities: As the industry deploys AI infrastructure at scale, we expect the demand for high speed networking and computing capabilities to grow.

Cities: Turning to the electronic industrial solutions group revenue was down reflecting ongoing normalization from outsized demand in the prior year customer spending remains cautious as market conditions, particularly in manufacturing and regionally in China were weaker.

Satish Dhanasekaran: Underneath the macro headlines, we see pockets of growth where customers are leaning in and investing to address new use cases and emerging technologies across multiple end markets. However, in semiconductors, the market environment is mixed. Despite the improved industry outlook for overall fab investment, foundry customers continue to push out large projects due to delays in construction and production timelines. At the same time, we saw strong demand for Keysight's proprietary interferometers, driven by industry progression in EUV technology. Next-generation performance requirements for new AI-driven data center and ADAS use cases are also driving investment.

Cities: Underneath the macro headlines, we see pockets of growth where customers are leaning in and investing to address new use cases and emerging technologies across multiple end markets.

Cities: In semiconductor the market environment is mixed despite the improved industry outlook for overall fab investments.

Cities: Foundry customers continued to push out large projects due to delays in construction and production timelines.

Cities: At the same time, we saw strong demand for key sites proprietary interferometer system driven by industry progression in <unk> technology.

Cities: Next generation performance requirements for new AI, driven data center and <unk> use cases are also driving investments and.

Satish Dhanasekaran: And we saw some improvement this quarter in memory-related demand as well as mature process capacity in China. In the automotive industry, the funnel of EV opportunities continues to be strong, competition amongst OEMs. Moreover, upcoming regulatory requirements and support from government subsidies are incentivizing investments in R&D for new battery technology and charging infrastructure.

Cities: And we saw some improvement this quarter in memory related demand as well as mature process capacity in China.

Cities: In automotive the funnel of opportunities continues to be strong competition amongst Oems upcoming regulatory requirements and support from government subsidies are incentivizing investments in R&D for new battery technology and charging infrastructure.

Satish Dhanasekaran: During the quarter, we secured a key win that marks the expansion of our European battery test footprint into France. As we have noted before, the EV funnel is healthy, but the timing and the size of the system level and longer-term engagements are expected to vary from quarter to quarter. In general, electronics, market conditions were unchanged from last quarter.

Cities: During the quarter, we secured a key win that marks the expansion of our European battery test footprint into France.

Cities: As we have noted before EV funnel is healthy, but the timing and the size of the system level and longer dated engagements are expected to vary from quarter to quarter.

Cities: In general electronics market conditions were unchanged from last quarter ongoing capacity normalization and cautious spending continue to weigh on the consumer electronics and manufacturing portions of the market. We saw steady demand for our solutions and digital health industrial automation and advanced research.

Satish Dhanasekaran: Ongoing capacity normalization and cautious spending continued to weigh on the consumer electronics and manufacturing portions of the market. However, we saw steady demand for our solutions in digital health, industrial automation, and advanced research. This quarter, we secured key wins in digital health applications for medical imaging and scanning, as well as test automation, consistent with our software-centric solution strategy. The value that our customers derive from software and service offerings is enabling business resilience in the current market. Software and Services Orders and Revenue continued to outperform the broader business this quarter and were greater than 35% of total Keysight, even excluding ESI. ESI further enhances our design engineering software portfolio and expands our addressable market in automotive, avionics, smart manufacturing, and the human workforce.

Cities: <unk>.

Cities: This quarter, we secured key wins in digital health applications for medical imaging and scanning as well as test automation.

Cities: Consistent with our software centric solution strategy the value that our customers derive from software and service offerings.

Cities: Is enabling business resilience in the current market conditions.

Cities: Software and services orders and revenue continued to outperform the broader business this quarter and were greater than 35% of total key site, even excluding ESI.

Cities: ESI further enhances our design engineering software portfolio and expands our addressable market in automotive avionics smart manufacturing and human workflows. We were pleased to complete the acquisition ahead of schedule and ESI results were also ahead of expectations for the quarter.

Satish Dhanasekaran: We were pleased to complete the acquisition ahead of schedule, and ESI's results were also ahead of schedule. In summary... Our market leadership and the strength of our solutions portfolio give us confidence in our ability to capitalize on the multiple waves of technological innovation and long-term secular growth trends in our market. Our team's relentless customer focus and sustained customer collaborations also position us well for long-term value creation. In addition, the strength of our financial model continues to generate healthy margins and cash flow. And with that, I will turn it over to Neil to discuss our financial performance and out. Thank you, Satish, and hello, everyone. First quarter revenue of $1,259,000,000 was just above the high end of our guidance range and down 9% or 14% on a core budget. Orders of $1,220,000,000 declined 6% or 12% on a core beta. We ended the quarter with $2.3 billion in backlog.

Cities: In summary.

Cities: Our market leadership and the strength of our solutions portfolio gives us confidence in our ability to capitalize on the multiple waves of technology innovations and long term secular growth trends of our markets. Our teams relentless customer focus and sustained customer collaborations also position us well.

Cities: For long term value creation and.

Cities: In addition, the strength of our financial model continues to generate healthy margins and cash flow.

Cities: With that I will turn it over to Neil to discuss our financial performance and outlook.

Neil P. Dougherty: Thank you cities and Hello, everyone.

Neil P. Dougherty: First quarter revenue of $1 $259 million was just above the high end of our guidance range and down 9% or 14% on a core basis.

Neil P. Dougherty: Orders of $1 $220 million declined 6% or 12% on a core basis, we ended the quarter with $2 3 billion and backlog looking.

Neil P. Dougherty: Looking at our operational results for Q1, we reported a record gross margin of 67%, an increase of 200 basis points year over year. Excluding ESI, gross margin was a near record 66% on lower revenue, supported by a solid mix of software and higher value solutions. In addition, software was 22% of revenue, while recurring revenue from both software and services grew 10%. Operating expenses of $491 million were flat year over year, even with the addition of ESI, demonstrating the flexibility of our cost structure and the cost actions that we have taken.

Neil P. Dougherty: Looking at our operational results for Q1, we reported record gross margin of 67% an increase of 200 basis points year over year.

Neil P. Dougherty: Excluding ESI gross margin was a near record 66% on lower revenue supported by a solid mix of software and higher value solutions and.

Neil P. Dougherty: In addition software was 22% of revenue while recurring revenue from both software and services grew 10%.

Neil P. Dougherty: Operating expenses of $491 million were flat year over year, even with the addition of ESI demonstrating the flexibility of our cost structure and the cost actions that we've taken.

Neil P. Dougherty: Q1 operating margin was 28% or 27% excluding ESI. These results demonstrate the financial flexibility and resilience of our business. We are outperforming the financial model that we put in place over a decade ago, which calls for only a 300 to 400 basis point year-over-year decline in operating margin when revenue declines 10%. Turning to earnings. We achieved $286 million of net income and delivered earnings of $1.63 per share, of which ESI contributed $0.09. Our weighted average share count for the quarter was 176 million shares. Moving on, we discuss the performance of our segment. Our Communications Solutions Group generated revenue of $839 million, down 11% or 12% on a core basis. Commercial communications revenue of $544 million declined 14%, while aerospace, defense, and government revenue of $295 million was down 5%.

Neil P. Dougherty: Q1, operating margin was 28% or 27% excluding ESI.

Neil P. Dougherty: These results demonstrate the financial flexibility and resilience of our business. We are outperforming the financial model that we put in place over a decade ago, which calls for only a 300 to 400 basis point year over year decline in operating margin when revenue declined 10%.

Neil P. Dougherty: Turning to earnings we achieved $286 million of net income and delivered earnings of $1 63 per share of which ESI contributed nine cents.

Neil P. Dougherty: Our weighted average share count for the quarter was 176 million shares.

Neil P. Dougherty: Moving to the performance of our segments, our communications solutions group generated revenue of $839 million.

Neil P. Dougherty: Down, 11% or 12% on a core basis.

Neil P. Dougherty: Commercial communications revenue of $544 million declined 14%, while aerospace defense and government revenue of $295 million was down 5%.

Neil P. Dougherty: Altogether, CSG delivered record gross margins of 68% and operating margins of 27%. The Electronic Industrial Solutions Group generated revenue of $420 million, down 5% or 19% on a core basis. EISG reported a gross margin of 65% and an operating margin of 31%. Moving to the balance sheet and cash, We ended the first quarter with $1.7 billion in cash and cash equivalents, which reflects the purchase of ESI within the quarter, generating cashflow from operations of $328 million and free cashflow of $281 million. Sharer purchases this quarter totaled 625,000 shares at an average price per share of approximately $149, for a total consideration of $93 million.

Neil P. Dougherty: Altogether CSD delivered record gross margin of 68% and operating margin of 27%.

Neil P. Dougherty: The.

Chronic industrial solutions group generated revenue of $420 million down, 5% or 19% on a core basis.

Neil P. Dougherty: ISG reported gross margin of 65% and operating margin of 31%.

Speaker Change: Moving to the balance sheet and cash flow.

Speaker Change: We ended the first quarter with $1 7 billion in cash and cash equivalents, which reflects the purchase of ESI within the quarter generated cash flow from operations of $328 million and free cash flow of $281 million.

Speaker Change: Share repurchases this quarter totaled 625000 shares at an average price per share of approximately $149 for a total consideration of $93 million now turning to our outlook given Q1 core orders of 114 billion and the <unk>.

Neil P. Dougherty: Now turning to our out... Given Q1 core orders of $1.14 billion and the typical sequential decline in ESI orders and revenue from Q1 to Q2, we expect second quarter revenue to be in the range of $1,190,000,000 to $1,210,000,000, and Q2 earnings per share to be in the range of $1.34 to $1.40 based on a weighted diluted share count of approximately 175 million shares.

Speaker Change: <unk> sequential decline in ESI orders and revenue from Q1 to Q2, we expect second quarter revenue to be in the range of $1 billion $190 million to $1 billion and $210 million.

Speaker Change: In Q2 earnings per share to be in the range of $1 34 to $1 40.

Speaker Change: Based on a weighted diluted share count of approximately 175 million shares.

Neil P. Dougherty: This guidance includes approximately $25 million in ESI revenue and a few cents of earnings dilution from ESI. As we look to the second half of the year and our six-month order funnel, we aren't assuming a strong revenue recovery in Keysight's fiscal second half, which ends in October. Our base case scenario is that revenue is relatively flat from Q2 to Q3, sequentially up mid-single digits from Q3 to Q4, in line with typical historical seasonality. That said, we do expect second-half orders to exceed first-half orders, which will be supportive of revenue growth in 2025. In closing, Keysight's flexible cost structure and district, Crack Record of Execution, and Diverse End Markets give us confidence in our ability to outperform even in the current market conditions, while at the same time, investing to capitalize on the best growth opportunities as markets recover. With that, I will now turn it back to Jason.

Speaker Change: This guidance includes approximately $25 million and ESI revenue and a few cents of earnings dilution from ESI.

Speaker Change: As we look to the second half of the year and our six month order funnel, we aren't assuming a strong revenue recovery in key sites fiscal second half, which ends in October our base case scenario is that revenue is relatively flat from Q2 to Q3 and sequentially up mid single digits Q3 to Q4 in line with tip.

Speaker Change: Nicole historical seasonality.

Speaker Change: That said, we do expect second half orders to exceed first half orders, which will be supportive of revenue growth in 2025 in closing key sites flexible cost structure and disciplined track record of execution and diverse end markets give us confidence in our ability to outperform even in the current market conditions while it.

Speaker Change: The same time investing to capitalize on the best growth opportunities as markets recover with that I will now turn it back to Jason for the Q&A.

Jason A. Kary: Thanks, Neil. Joel, could you please give the instructions for the Q&A? Absolutely. Ladies and gentlemen, if you'd like to ask a question, please press star one. We ask that you please limit yourself to one question and one follow-up. To withdraw your question, dial star 2.

Jason A. Kary: Thanks, Neil Joe could you please give the instructions for the Q&A.

Joe: Absolutely, ladies and gentlemen, if you would like to ask a question. Please press star one.

Joe: Ask that you please limit yourself to one question and one follow up.

Joe: To withdraw your question dial Star two.

Samik Chatterjee: Please hold while we compile the Q&A roster. The first question is from the line of Samik Chatterjee with J.P. Morgan. You may proceed. I, www.keysight.com, the guy, All right.

Joe: Please hold while we compile the Q&A roster.

Neil P. Dougherty: The first question is from the line of stomach <unk> with Jpmorgan you May proceed.

Stomach: Hi, Thanks for taking my questions.

Stomach: If I can start with the first one just on the sort of what you're implying in terms of the recovery for the back half I mean, just looking at the <unk> Guide to me it implies that the organically the businesses or the core business is down a bit.

Samik Chatterjee: Thanks, everyone. Thanks for your help. www.keysight.com Yeah, hi, Samik. I would just say that, as we stated in our prepared remarks, right now, our base case does not include a meaningful second half recovery. We're really more looking at seasonal changes as you move throughout the fiscal year. So, you know, flattish Q2 to Q3, and then a typical seasonal uptick into Q4, which is typically our stronger quarter of the year. In aggregate, we do expect orders and revenue in the second half to be modestly above the first half, but we are not baking in a, Um, sorry, Satish, this guy, if I were you, I would ask what's the driver there, I mean, when you call it... Please share if it was light or not, at https://www.keysight.com, Oh.

Stomach: There's some ESI revenue sequentially declining as well, but.

Stomach: Our witnesses down sequentially, what's driving the expectation for a recovery starting three Q4 Q.

Stomach: You said you are not making any recovery in revision of the macros or is there something more customer specific or market specific that you're seeing that's driving that expectation and then I have a quick follow up thank you.

Speaker Change: Yes, Hi, Matt I would just say that as we stated in our prepared remarks, right now where our base case does not include a meaningful second half recovery, where we're really more looking at seasonal changes as you move.

Speaker Change: Throughout the fiscal year so.

Speaker Change: Flattish Q2 to Q3, and then a typical seasonal uptick into Q4, which is typically our stronger quarter of the year in aggregate, we do expect orders and revenue in the second half to be modestly above the first half, but we are not baking in a recovery at this point.

Speaker Change: Okay, I guess sorry.

Speaker Change: Sorry, if I was more looking at.

What's the driver there I mean, when you call it seasonal.

Speaker Change: It's been below seasonal for a bit so is it something more specific to the end markets and I'll ask my follow up at the same time, if you don't mind, if you could just shed a bit more light on the order trends in relation to ESG. I know you said largely unchanged spending, but what are you seeing in the different verticals when it comes to autos versus broader industrial.

Speaker Change: Because we've seen a lot of macro weaker macro data points on that front. Thank you.

Speaker Change: Yes. Thank you.

Satish Dhanasekaran: Thank you, Samik. I would say at the highest level that the customer engagements that we have are remaining strong, and while there are signs of optimism from customers as we enter the new calendar year, we have not yet seen a progression in our pipeline. And, as we said in my prepared remarks, market conditions remain largely unchanged from a quarter ago.

Speaker Change: I would say at the highest level the customer engagements that we have a remaining strong.

Speaker Change: And while there are signs of optimism from customers as we enter the new calendar year, we have not yet seen a progression through our pipeline and as we said in our in my prepared remarks, the market conditions remain largely unchanged from a quarter ago.

Satish Dhanasekaran: The aerospace defense strength that we saw last year continues. And what we have seen incrementally is the wireline business has actually grown for the first time this quarter. And that was a function of some of the AI-related end market inflections that are occurring. If I took a regional cut at this, I would say our largest region, America, grew for the first time in four quarters.

Speaker Change: The aerospace defense strength that we saw last year continues on and what we have seen incrementally is the wireline business has actually grown for the first time this quarter and that was a function of some of the AI.

Speaker Change: Related end market inflections that are occurring if I take a reasonable cut at this I would say our largest region Americas grew for the first time.

Speaker Change: In flat four quarters and this is driven by again the strength in aerospace defense and the wireline business, but Asia continues to remain weak.

Satish Dhanasekaran: And this is driven by, again, the strength in aerospace defense and the wireline business. But Asia continues to remain weak, especially which is impacting the EISG business and some of the wireless business in that region as it continues to normalize from peak spending levels. Again, to put your question in perspective, CSG entered that normalization phase early, and EISG was offset by a few quarters. And so that's what's currently playing out. So given this backdrop, we think it's important to think of a base case assumption where orders and revenue would be up modestly first half to second half. But should there be a broad and stronger recovery sooner?

Speaker Change: Especially which is impacting the ISG business.

Speaker Change: And some of the wireless business in that region as it continues to normalize from the peak spending levels again to put your question in perspective, <unk> entered that normalization phase early and <unk> was offset by a few quarters and so thats whats currently playing out so given this backdrop we.

Speaker Change: Think it's prudent to think of a base case assumption, where orders and revenue would be up modestly first half to second half, but should there be abroad, and stronger recovery sooner and there may be some signs out there around DSI, a index, where things are picking up some of the inventory digest.

Satish Dhanasekaran: And there may be some signs out there around the SIA index where things are picking up some of the inventory digestion that's happening, capacity utilization fabs. But should that occur, we will be in a good position to capitalize on that and recover quicker. Thank you. The next question is from Mark Delaney with Goldman Sachs. Your line is open. Yes, good afternoon.

Speaker Change: And that's happening.

Speaker Change: Passenger utilization Fabs.

Speaker Change: But should that occur we will be in a good position to capitalize on that and recover quicker.

Speaker Change: Thank you.

Speaker Change: The next question is from Mark Delaney with Goldman Sachs. Your line is open.

Mark Trevor Delaney: Yes. Good afternoon. Thanks for taking the questions <unk> mentioned I believe double digit growth in orders to support data center builds for products like high speed wireline and the future of either to AI can you give us a better sense of how much of either revenue or maybe directly or indirectly benefiting from AI at this stage in Asia.

Mark Trevor Delaney: Thanks for taking the questions. Satish, you mentioned double-digit growth in orders to support data center builds for products like high-speed wireline, which you attributed to AI. Can you give us a better sense of how much of either revenue or orders may be directly or indirectly benefiting from AI at this stage and how you see that progressing? Yeah, that's a really good question.

Speaker Change: Progressing.

Speaker Change: Yes, that's a really good question, it's still an emerging opportunity for us, but what is significant this quarter is we started to see the wireline.

Satish Dhanasekaran: It's still an emerging opportunity for us. But what is significant this quarter is that we started to see the wireline for parts of our business inflect. And if you recall, in previous earnings calls, I've talked about the traffic patterns caused by generative AI really impacting the whole network architecture, compute to networking, switching, and silicon. And therefore, we knew that demand was coming.

Speaker Change: Parts of our business inflect and if youll recall in the past earnings calls I've talked about the traffic patterns.

Speaker Change: Cost by generate of AI really impacting the whole network architecture compared to networking and switching in silicon and therefore, we knew that demand was.

Satish Dhanasekaran: And so what we noticed this quarter is our wireline business started to inflect, driven by the 400 gigabit and 800 gigabit transceiver business in manufacturing. As that starts to scale, we increased our focus on terabit research. We announced a collaboration with Marvell in advanced technologies as well.

Speaker Change: Coming up and so what we noticed this quarter is our wireline business start to inflect driven by 400 gig and 800 gig transceiver business.

Speaker Change: In manufacturing as that starts to scale increased focus on terabyte research, we announced the collaboration with Marvell in advanced technologies as well there. So that's the business of today, but as we start to think about the broader landscape here I would say the memory technologies with HBM is starting to gain interest from our customers.

Satish Dhanasekaran: So that's the business of today. But as we start to think about the broader landscape here, I would say memory technologies with HBM are starting to gain interest from our customers, different processor architectures, and increased silicon activity enabled by AI. And then for us, it's very exciting because there are a lot of tools that we can deploy our IP because we have the full stack to help engineers train the IML models better. And so you will see we announced our collaboration with NVIDIA on this front as well. And there are new interface standards.

Speaker Change: <unk> processor architectures increased silicon activity enabled by AI and then for US it's very exciting because theres a lot of tools that we can deploy our IP because we have the total stack to help engineers trained AI ml models, better and so youll see we announced the collaboration with Nvidia on this front as well.

Speaker Change: And then this new interface standards and you know our business is driven by standardization process. So new interface standards are good for us EXL Pcie Gen seven and the Ultra Ethernet consortium are playing into it silicon photonics and quantum while they are sort of enabling technologies or other areas, where we've had investments.

Satish Dhanasekaran: And you know, our business is driven by the standardization process. So new interface standards are good for us, CXL, PCIe Gen 7 and the Ultra Ethernet Consortium playing into it. Silicon photonics and quantum, while they are sort of enabling technologies, are other areas where we've had investment, where we're now able to address new opportunities. Now, a lot of that is not yet baked into our forecast, but we're continuing to address these things through the investments we're making. This helpful caller.

Speaker Change: We're now able to address new opportunities now a lot of that is not yet baked into our into our forecast, but we're continuing to action. These things through the investments we're making.

Speaker Change: That's helpful color. My second question was on margins. The company has a target for EBIT margin to reach 31% to 32% by fiscal 2000, and <unk>, maybe you can help us better understand what kind of revenue would be needed for the company to reach that kind of margin.

Neil P. Dougherty: My second question was on margins. The company has a target for its EBIT margin to reach 31 to 32% by fiscal 26. Maybe you can help us better understand what kind of revenue would be needed for the company to reach that kind of margin. And I think you have a 5 to 7% revenue CAGR target. I mean, should we be thinking about a couple of years of at least the high end, if not higher revenue relative to that target, in order to reach your margin objective? Thank you. It might be a little too premature to talk about the outer years, but here's how we're thinking about it.

Speaker Change: And I think you have a 5% to 7% revenue CAGR target.

Speaker Change: Should we be thinking about a couple of years or at least the high end, if not higher revenue relative to that target in order to reach our margin objective.

Speaker Change: Yes. Thank you it might be a little too premature to talk about the outer years, but here's how we're thinking about it.

Neil P. Dougherty: You know, we've had, obviously, this is the second year we're entering in where orders are declining. And every time that happened, we would expect the bounce back in the following years to be stronger. You know, so that's still to be proven out.

Speaker Change: We've had obviously.

Speaker Change: Is the second year, we're entering in where orders have declining and every time that happened we would expect a bounce back.

Speaker Change: In the outer years to be stronger.

So that's still to be proven out and you know that sort of earnings leverage that we get when we are able to grow our business about <unk> of our models. So.

Neil P. Dougherty: And, you know, the sort of earnings leverage that we get when we are able to grow our business above our models. So, you know, profitability. I'm pretty encouraged by the strong growth margins we're maintaining, even on a declining top line right now. That's a function of the software and services content and just the discipline in which we run our business.

Speaker Change: Profitability.

Speaker Change: I'm pretty encouraged by the strong gross margins, we're maintaining even on declining topline right now that's a function of the software and services content and just the discipline, which we run our business and so I felt like getting our business back to growth is the principle driver and given all the trends that we see across wireless wireline the long.

Neil P. Dougherty: And so I feel like getting our business back to growth is the principal driver. And given all the trends that we see across wireless, wireline, the long-term trends that we see in next-gen silicon and aerospace defense, and in Semi, we believe that we can get back to this growth model that we put out at Investor Day. Thank you. The next question is from the line of Meta Marshall with Morgan Stanley. Your line is now open. Great, thanks, and apologies for the background noise.

Speaker Change: Some trends we see.

Speaker Change: Next Gen Silicon and aerospace defense and.

Speaker Change: And in <unk>.

Speaker Change: Semi.

We believe that we can get back to this growth model that we put out at Investor day.

Speaker Change: Thank you.

Speaker Change: The next question is from the line of meta Marshall with Morgan Stanley. Your line is now open.

Meta A. Marshall: Great, Thanks, and I apologize for the background noise.

Meta A. Marshall: Maybe just a couple questions for me, maybe first and just in terms of, you know, Clearly, you guys were a little bit more cautious entering the year. You hadn't guided yourself to the full year. I guess I'm just trying to get a sense of, versus the environment as you saw it 90 days ago, how have your expectations changed? And maybe just on the second question, just in terms of ESI and the earlier closure that we had, just any changes that you can make or are able to make to that business kind of earlier than you expected? Thanks.

Meta A. Marshall: Maybe just a couple of questions for me, maybe first and just in terms of.

Meta A. Marshall: Clearly you guys were a little bit more cautious entering into the year you had guided to the full year I guess I'm, just trying to get a sense of.

Meta A. Marshall: First is the environment as you thought 90 days ago, how have your expectations changed and maybe just on.

Meta A. Marshall: The second question just in terms of ESI and the easy and the earlier closure that we had just any changes that you can make or are able to make to that business kind of earlier than you expected.

Speaker Change: Yes, I think as far as the <unk>.

Satish Dhanasekaran: Yeah, I think as far as the ESI question goes, I think we're quite, you know, positive, incrementally positive about the opportunities that we have to grow our ESI business in Keysight's environment. We've long studied the system simulation emulation marketplace. And so having all of the capabilities is definitely a huge advantage. And for us, bringing an asset that was sort of locked in in a European environment and exposing it through our go-to-market channel and taking it into our customer base remains an opportunity to drive growth beyond what they've been able to do. But incrementally, I'm pretty bullish about the technology and the depth of simulation capabilities they bring. They also have a hybrid AI capability that is pretty unique and differentiated that we'll look to fully leverage across the company as we go. And we're also positive about the strong start in the first quarter for ESI. And I'll just hand it off to Mark to make some comments on the pipeline that he sees and how he sees that progressing. Thanks, Satish.

Speaker Change: Si question goes I think we're quite.

Speaker Change: Positive incrementally positive about the opportunities that we have.

To grow our grow the ESI business in key sites environment.

Speaker Change: We've long studied the system simulation emulation marketplace, and so having all of the capabilities.

Definitely a huge advantage and for us.

Speaker Change: <unk> asset that was sort of locked in the European environment and exposing it with our go to market channel and taking it into our customer base remains an opportunity to drive growth above what they've been able to do but incrementally.

Speaker Change: Bullish about the technology and the depth of simulation capabilities. They bring they also have an hybrid AI capability that is pretty unique and differentiated that we'll look to fully leverage across the company as we go and we're also positive about the strong start.

Speaker Change: In the first quarter for ESI and.

Speaker Change: And I will just hand, it off to mark to make some comments on the pipeline.

Speaker Change: He sees and how he sees that progressing.

Mark: Thank you.

Mark A. Wallace: Well, the pipeline that we see today really supports our base scenario that second-half orders and revenue will be modestly higher than the first half. And this is seen through some improvement in our six-month funnel that Neil mentioned in his prepared statements and we've called out in various other earnings calls as well. The improvement comes in the form of some funnel intake modestly increasing, indicating that we have some green shoots and pockets of demand that are showing up. And the other area is funnel velocity, or in other words, how long it takes for opportunities to move through the funnel as some customers are beginning to move a bit more quickly.

Mark: Well, maybe the the pipeline that we see today really supports our base scenario that second half orders and revenue will be modestly higher than the first half and this is seen through some improvement in our six month funnel that Neil mentioned in his prepared statements and we've called out in various other earnings call.

Mark: As well the improvement comes in the form of some some funnel intake up modestly indicating that we have some green shoots in pockets of demand that are showing up and the other area is in the funnel velocity or in other words, how long it takes for opportunities to move through the funnel as some customers are beginning to move.

Mark: More quickly. So 90 days later those are the big changes the short term funnel is about the same at the beginning of Q1, which still remains constrained, but we are seeing some some positive pipeline dynamics as we look out six months.

Mark A. Wallace: So 90 days later, those are the big changes. The short-term funnel is about the same at the beginning of Q1, which still remains constrained, but we are seeing some positive pipeline dynamics as we look out six months. Great, thanks so much.

Speaker Change: Great. Thanks, so much.

Chris Snyder: Thank you. Thank you. The next question is from the line of Chris Snyder with UBS. You may proceed.

Speaker Change: Thank you.

Speaker Change: Thank you. The next question is from the line of Chris Snyder with UBS you May proceed.

Chris Snyder: Thank you. It sounds like from much of the demand and market commentary that things are very similar in a demand sense from where they were three months ago. But I guess my question is, is there any place in the business where you see demand continuing to deteriorate on the leading edge? Because orders were down, it seems like on an organic basis about mid-teens versus Q4, which is a bit sharper than seasonality. And the book-to-bill did step back below one after being above one last quarter. So are there any places in the business where things are getting worse? Thank you.

Chris Snyder: Thank you.

Chris Snyder: It sounds like from much of the demand and market commentary that things are very similar.

Chris Snyder: Demand from where they were three months ago, but I guess my question is is there any place in the business, where you see demand continuing to deteriorate on the leading edge.

Chris Snyder: Because orders were down it seems like on an organic basis about mid teens versus Q4, which is a bit sharper than seasonality and the book to Bill did step back below one after being above one last quarter. So is there any places in the business where things are getting worse. Thank you.

Speaker Change: Yes, I mean I think.

Neil P. Dougherty: Yeah, I mean, areas of relative weakness, Steve talked about Asia and China specifically, continue to be challenging. I think manufacturing continues to be challenging. And, you know, I think we see our wireless customers that are still working through some of their issues. On the positive side, wireline driven by AI is clearly a strength point. Mark, do you want to add?

Speaker Change: Areas of relative.

Speaker Change: Weakness.

Speaker Change: Talk about Asia, and China, specifically it continues to be challenging.

Manufacturing continues to be challenging and I think we see our wireless customers that are still working through some of their issues on the positive side wireline driven by AI.

Speaker Change: Yes.

Speaker Change: <unk> is clearly clearly a strength point Mark do you want to add yes, I would just add to that we have said that.

Mark A. Wallace: Yeah, I would just add to that, you know, we have said that the weaknesses in China for the EISG businesses, as we said, if you look at China, we saw customer engagements continue, I was there, you know, in December; our historic exposure to China, which has been a high team of revenue, is a little lower than that in Q1. And it was because of the continued headwinds incrementally worse in semi and manufacturing. But we did see sequential order growth from Q1 to Q2, or from Q4 to Q1, driven by this demand that we talked about earlier with growth in 400 gigabit and 800 gigabit R&D for data center upgrades, and some demand for 5G private networks. And, you know, as a global company, we're also exposed to some of the offshoring that has been going on and continues as some of the multinational companies move offshore. And the last thing I'll say is, you know, thinking back over the last several quarters, we vastly de-risked China from a trade perspective, it was meaningless in Q1 additions to the RPL have had very little impact, and we continue to monitor the situation very closely. So that's where we've seen some of the headwinds.

The weaknesses in China for the ISG businesses as we said.

Speaker Change: If you look at China.

Mark: We saw customer engagements continue I was there in December.

Our historic.

Mark: Exposure to China has been high teens of revenue was a little lower than that in Q1 and it was because of the continued headwinds incrementally worse in semi in manufacturing, but we did see sequential order growth from Q1 to Q from Q4 to Q1.

Mark: <unk> by this demand that we talked about earlier with growth in 400 gig and 800 gig.

Mark: R&D for the data center upgrades some demand for five private networks and as a global company. We're also exposed to some of the offshoring that has been going on and continues and some of the multinational companies move offshore.

Mark: Last thing I'll say is you know thinking back over the last several quarters.

Mark: Lastly de risked China from a trade perspective. It was it was meaningless in Q1 additions to the <unk> variable impact we.

Mark: We continue to monitor the situation very closely so that's where we've seen some of the headwinds, but even <unk> seen some positive indicators in China as well.

Mark A. Wallace: But even there, I've seen some positive indicators in China as well. Thank you. I appreciate that.

Speaker Change: Thank you I appreciate that and then for my follow up I wanted to ask around backlog. Neil I think you said $2 3 billion again, which is more than six months of coverage at this quarterly revenue run rate.

Chris Snyder: And then for my follow-up, I wanted to ask about backlog. Neil, I think you said $2.3 billion again, which is more than six months of coverage at this quarterly revenue run rate. But you guys are kind of saying that you don't expect revenue to get better in the back half of the year. So on this excess backlog, when does the company think it could start coming through in revenue? And is it because these big chip customers are pushing out their CapEx plans, or is it just because the company has moved more towards a solutions-based model? Any help with that would be great.

Speaker Change: But you guys are kind of saying that you don't expect revenue to get better into the back half of the year. So on this excess backlog.

Speaker Change: When does the company think it could start coming through in revenue.

Speaker Change: And is it because these big.

Speaker Change: Chip customers are pushing out their capex plans or is it just because of the company has moved more towards a solutions based model any help with that would be great. Thank you.

Neil P. Dougherty: Thank you. Yeah, so you're correct. The number is $2.3 billion. And I would start by saying that we stated a couple of quarters ago that we believe we've worked through the excess backlog. And we did that last year when revenue outpaced orders by the tune of $275 million or something like that. I think as we look today, we're managing a couple of things. Obviously, you know, by design, our recurring revenue businesses, software, and services are holding up.

Speaker Change: Yes. So you are correct the numbers $2 3 billion and I would start by saying that we have now stated a couple of quarter ago that we believe we've worked through the excess backlog and so and we did that last year when revenue outpaced orders by the tune of $275 million or something like that.

Speaker Change: When we work through that excess backlog I think as we look as we look currently we're managing a couple of things obviously by design, our recurring revenue businesses software and.

<unk> services are holding up you see that in an increasing deferred revenue balance but in addition to that we're also managing this dynamic between where our we've seen a pretty significant increase in these longer dated orders, which if you remember correctly historically been about 2% of our incoming order rate and we really didn't talk about it as a result of that.

Neil P. Dougherty: You see that in an increasing deferred revenue balance. But in addition to this, we're also managing this dynamic where we've seen a pretty significant increase in these longer-dated orders, which, if you remember correctly, had historically been about 2% of our incoming order rate. And we really didn't talk about it as a result of that.

Neil P. Dougherty: Last year, they were more like 8% of the incoming order rate. And they were 8% again, here in Q1. And as Mark talked about, we have a robust funnel of longer-dated opportunities, you know, as we look out over the course of the next six months. And so that's the dynamic that we're starting to see. We are starting to see those longer data orders show up in revenue. We saw that beginning in Q1. And by Q4, we'd expect revenue from those longer-dated programs to be about 8% of that Q4 revenue. Thank you. The next question is from Adam Thalhimer with Thompson Davis. Your line is open.

Speaker Change: Last year, they were more like 8% of the incoming order rate. They were 8% again here in Q1 and as Mark talked about we have a robust funnel of longer dated opportunities.

Speaker Change: As we look out over the course of the next six months and so that's the dynamic that we're starting to see we are starting to see those longer data order show up in revenue we saw that beginning in Q1 and by Q4, we'd expect revenue.

Speaker Change: From those longer dated programs to be about 8% of that Q4 revenue.

Speaker Change: Thank you.

Speaker Change: The next question is from Adam Thalheimer with Thompson Davis Your line is open.

Adam Robert Thalhimer: Hey, good afternoon, guys. I think to get to the question of operating margins, I think to get to the midpoint of guidance, they're down six, 700 basis points year over year. And my question is, is that what you would expect in your model? Or is there something specifically impacting margins. No, I think that that's basically, we're performing in line with the model, right? So if you take a look at what's happening, obviously, you see the significant sequential decline in ESI, which is as expected. But if you adjust for that, you're seeing a mid-teens kind of decline in the core business, right, from a revenue perspective. And we've talked about a downside model that contemplates 300, 300 to 400 basis points of operating margin decline when revenues are down 10.

Adam Robert Thalhimer: Hey, good afternoon guys.

Hi, Adam I think to get to the question on operating margins I think to get to the midpoint of guidance there down six or 700 basis points year over year and my question is is that what you would expect in your model or is there something specifically impacting margins in Q2.

Speaker Change: No I think.

Speaker Change: That's basically it.

Speaker Change: We are performing in line with the model right. So if you take a look at what's happening obviously, you see the significant sequential decline in the ESI, which is as as expected, but if you adjust for that you are seeing a mid teens kind of decline in the core business right from a revenue perspective, and we've talked about.

Speaker Change: Downside model contemplates $303 to 400 basis points of of.

Operating margin declined when revenues are down 10, obviously were down significantly more than that but we're continue to perform basically in line with that model, we've taken significant actions.

Neil P. Dougherty: Obviously, we're down significantly more than that, but we're continuing to perform basically in line with that model. We've taken significant actions, you know; our cost action started last year and enabled us to deliver record operating margins on flat revenue in an inflationary environment. And then this quarter, as it started to begin to appear that the recovery was pushing out, we've taken incremental actions that are going to benefit us. We now expect that total OPEX for the company will be down those single digits on a year-over-year basis prior to the addition of ESI.

Speaker Change: Our cost actions started last year and enabled us to deliver record operating margins on flat revenue in an inflationary environment and then this quarter as it started to begin to appear that the recovery was pushing out we have taken incremental actions.

Speaker Change: That are going to benefit us we now expect that total opex for the company will be down low single digits on a year over year basis. Prior to the addition of ESI and all of that reduction is going to show up in the SG&A line items as we like to strike a balance between investment and financial performance, we're going to maintain our investments in R&D, we'd expect R&D to be flat.

Neil P. Dougherty: And all of that reduction is going to show up in the SG&A line items as we like to strike a balance between investment and finance performance. If we were going to maintain our investments in R&D, we'd expect R&D to be flat. But again, total OPEX down about 3% driven by actions we've taken to control SG&A. Okay, and then just a quick one on how is auto demand holding up in this environment? What is the EVAV charge?

Speaker Change: But again total opex down about 3% driven by actions, we've taken to control SG&A.

Speaker Change: Okay, and then just a quick one on how is auto demand holding up in this environment EV charging.

Satish Dhanasekaran: Yeah, Adam, in the quarter, we saw continued R&D spend for battery and charging infrastructure. We expect that to continue. However, manufacturing spend, and supply chain spend was down.

Speaker Change: Yes, Adam.

Adam Robert Thalhimer: In the quarter, we saw continued R&D spend for battery and charging infrastructure, we expect that to continue Manny.

Adam Robert Thalhimer: Manufacturing spend supply chain spend was down you've seen unit volumes dropped for both conventional and EV demand. So that's where we see that but E mobility, which is EV and autonomous.

Satish Dhanasekaran: You've seen unit volumes drop for both conventional and EV demand. So that's where we see that. But e-mobility, which is EV and autonomous, as Neil mentioned, as I mentioned, the funnel remains strong, very robust as we look at Q2 and FY24. A lot of this is long-dated program spend around battery testing, and charging infrastructure. Some of these programs are fluid. Many of them are based on some government subsidies that you may have read have been delayed in Europe and so forth.

Adam Robert Thalhimer: As Neil mentioned as I mentioned, the funnel remains strong very robust as we look at Q2 and the FY 'twenty four.

Adam Robert Thalhimer: A lot of this is long dated program spend around.

Adam Robert Thalhimer: Battery test charging infrastructure some of these products or programs or fluid. So many of them are based on some government subsidies that you may have read has been delayed in Europe, and so forth. So, but we're tied into all of those and as we look forward. This space continues to be one that's going to be driving growth for us for a long time.

Satish Dhanasekaran: So, but We're tied into all of those. And as we look forward, this space continues to be one that's going to be driving growth for us for a long time, and also some of the capabilities that we have developed around electrification are finding new applications in aerospace and defense and other end markets that are also going to be impacted by similar trends, and so we're quite pleased by the leverage and synergies we'll see as we move forward. Thank you. The next question is from Tim Long with Barclays. Your line is open.

Adam Robert Thalhimer: And also some of the capabilities that we have double up.

Adam Robert Thalhimer: Around electrification.

Finding new applications in aerospace and defense and other end markets that are also going to be.

Adam Robert Thalhimer: Impacted by the similar trends and so we're quite pleased by the leverage and synergies, we'll see as we move forward.

Adam Robert Thalhimer: Okay.

Thank you.

Adam Robert Thalhimer: The next question is from Tim long with Barclays. Your line is open.

Timothy Patrick Long: Thank you. I wanted to ask one about the wireless business; can you just kind of run through some of the technologies and give us a sense of how they might be affecting the business? Just curious, you mentioned the 5GPP standards. What's on the horizon for 5GPP? Anything new with millimeter wave or 60 or O-RAN?

Tim Long: Thank you.

Tim Long: I wanted to ask one on the wireless business can you just kind of run through some of the technology you can give us a sense.

Tim Long: How they might be in influencing the business. Just curious you mentioned the Pouchy PPE standards whats on the what's on the come there anything new with millimeter wave or <unk> or <unk>. If you could just kind of give us a little state of the union on those and then I have a follow up.

Satish Dhanasekaran: If you could just kind of give us a little State of the Union on those, and then I have a follow-up. Yeah, we'll do that. Tim, I think at the highest level, what we've seen so far, are the release 15 and 16 deployments that have occurred largely in the United States, and in China, and now in India. So, you know, we expected, and we've talked about this, that the industry capital would peak at some point in 2022-23. So roughly, we got that timing right. But if you think about the business model that we established for commercial comms and for our wireless business, it was always about more, more vectors to service the R&D customers. So while even in this environment, volumes are down, especially manufacturing production-related volumes with the RAN markets down. So we're starting to see that effect, and the business is normalizing. But what we're continuing to see is customers engaging with us in buying upgrades for the release library, so going from 15, 16 to 17, as an example, which is much more evolutionary in nature.

Speaker Change: We'll do Tim.

Speaker Change: Tim I think at the highest level, what we have seen so far is it released 15 and 16 deployments that have occurred largely in the United States.

Tim Long: And in China, and now in India. So.

Tim Long: We expected and we've talked about this that the industry capital would peak some point in 'twenty two 'twenty three so roughly we got that timing right, but if you think about the business model that we established for commercial comms and for our wireless business. It was always about more more vector to service the R&D the customers.

Tim Long: So while even in this environment the volumes are down, especially the manufacturing production related volumes with the ran market is down so we're starting to see that effect in the business is normalizing, but what we're continuing to see as customers engaged with us in buying upgrades.

Tim Long: For the release library, so going from 15 to 16 to 17 as an example, which is much more evolutionary in nature, but as we think about the future now the roadmaps very clear, it's sort of a roadmap for the next five years, where the industry is working on release 18 released 19, followed by 'twenty one.

Satish Dhanasekaran: But as we think about the future, now, the roadmap is very clear. It's sort of a roadmap for the next five years, where the industry is working on release 18, release 19, followed by 20, which would include some early study items on 6G, as an example. But some of the same ideas that we had for growth, which are built around vertical industry expansions, with AI and ML, new device form factors, such as the Vision Pro that's just launched, that's capturing a lot of imagination about what augmented reality can mean in the future. And just this sort of integration, I should say, of satellite communications and terrestrial networks is opening up new threads of innovation and exposing us to more customers that want our capability So, you know, all in all, in balance, I look at the capabilities we have, our market leadership position that we've established in 5G, and I feel confident that, post-normalization of this demand, we can return the business to growth even prior to 6G. That's yet to play out, but that's our thinking at this point. Okay, great.

Tim Long: Which would include some early study items on <unk> as an example, but some of the same ideas that we had for growth which are built around vertical industry expansions with AI ml, new device form factors such as the.

Tim Long: The vision for all of this just launched is capturing a lot of imagination on what augmented reality can mean in the future and just is there.

Speaker Change: Sort of.

Speaker Change: Okay.

Speaker Change: The integration I should say of satellite communications in Telcel networks is opening up new threads of innovation and exposing us to more customers that want our capability. So.

Speaker Change: All in all in balance I look at the capabilities, we have our market leadership position that we've established in <unk> and I feel confident that post normalization of this demand that we can return the business to growth even prior to <unk>, but that's yet to play out but that's our that's our thinking at this point.

Satish Dhanasekaran: And I just wanted to follow up on the optical side. It sounds like 400, 800 gigabits are pretty strong. Could you talk a little bit about what you're seeing in R&D for the cycle beyond that? And also curious about what's going on on the software side, you know, Ixia and some of the other software businesses related to optical wireline. Thank you.

Speaker Change: Okay, Great and then just wanted to follow up on the optical side. It sounds like 400 800 gig are pretty strong could you talk a little bit about what you're seeing on R&D.

Speaker Change: So the cycle beyond that and also curious.

Speaker Change: About what's going on the software side.

Speaker Change: And some of the other software.

Speaker Change: <unk> related to optical wireline. Thank you.

Satish Dhanasekaran: Yeah, I think, you know, what we're seeing is obviously the first instantiation of every technology like this, where 100 gig times 400 gig times eight sort of topologies are currently being deployed. And so we're obviously engaged with that. And we're starting to benefit from that. But the roadmaps are clear, right? Then it's going to get to 200 times four because the scaling continues and is leading to even higher speed research at 1.6 terabits and beyond. So that's on the wireline side.

Speaker Change: Yes, I think.

Speaker Change: What we're seeing is obviously the first instantiation with every every technology like this where 100 gig times 400 gig times eight topologies are currently being.

Speaker Change: Being deployed and so we're obviously engaged with that and we're starting to benefit from that but the roadmap is clear right. Then it's going to get to 200 times four because of the scaling continues and leading to even higher speed research and one six terabits and beyond so that's on the on the wireline side.

Satish Dhanasekaran: You know, the Ixia business or what it was, Ixia business, we integrated it into our wireline business. And it's been remarkably stable for us in the commercial communications market because of the higher services and software content associated with that business. And it's also a business that doesn't really, you know, trend up that significantly during an upcycle.

Speaker Change: The ixia business of what it was ixia business.

Speaker Change: Integrated into our wireline business.

Speaker Change: It's been remarkably stable.

Speaker Change: For us in the commercial communications market.

Speaker Change: Because of the higher services and software content associated with that business and then it's also a business that doesn't.

Speaker Change: It doesn't really trend.

Speaker Change: Trend up that significantly during up cycles. So it's been a very steady business for us and one where now we're able to take out some of the traffic generation capabilities and adapt it to go address some of the emerging AI use cases. So we're quite pleased by the assets we have in the company and by our ability to go.

Satish Dhanasekaran: So it's been a very steady business for us, and one where we're now able to take out some of the traffic generation capabilities and adapt them to go address some of the emerging AI use cases. So we're quite pleased by the assets we have in the company and by our ability to go and solve customers' emerging challenges even beyond the traditional segments we serve. Thank you. The next question is from the line of Aaron Rakers with Wells Fargo. Your line is open. Yeah, thanks for taking the questions. I have two as well.

Speaker Change: And solve customer emerging challenges even beyond the traditional segments we serve.

Speaker Change: Thank you. The next question is from the line of Aaron Rakers with Wells Fargo. Your line is open.

Aaron Christopher Rakers: Yes, thanks for taking the questions I am curious well.

Aaron Christopher Rakers: Neil, I wanted to go back to your prior comments on kind of the backlog. I know last quarter, the last couple quarters, you've talked about these longer-dated backlog or order dynamics. And I think even last quarter, you quantified it at like 400 million. Could you give us an update?

Aaron Christopher Rakers: I wanted to go back to your prior comments on kind of backlog I know last quarter last couple of quarters, you've talked about these longer dated backlog or order dynamics and I think even last quarter you quantified it at like $400 million.

Speaker Change: Could you give us an update how much how much of your backlog today is kind of these longer dated.

Neil P. Dougherty: How much of your backlog today is kind of these longer-dated deals? And, you know, could we consider them as kind of large lumpy deals that possibly rep rec wise will show up late this year into more so 25? Or how do we just think about that?

Speaker Change: Deals in.

Speaker Change: Could we consider them as kind of large lumpy deals that possibly Rev. Rec wise show up late this year into more so a 25 or how do we just think about that.

Neil P. Dougherty: Yeah, from a backlog perspective, we're in the $400 to $500 million range of our backlog. These are long-term deals. You are correct that they tend to be larger, lumpier deals in aerospace, defense, auto, and even in the semi-space, and, As I said in the previous question about this, we've actually started to see them now, because we started to see the ramp up a little bit in Q1 of last year, but then really in earnest in Q2 of last year on the order line, and some of those things are starting to flow through to revenue now. Now, we're not at 8% yet from a revenue perspective. We expect to be there by the end of the year, but just as you suggested, it is lumpy, right?

Speaker Change: Yes from a backlog perspective, we are in the $4 to $500 million range.

Speaker Change: Our backlog is these long dated deals you are correct that they tend to be larger lumpier deals in aerospace defense auto and even in even in the semi space.

Speaker Change: Sure.

Speaker Change: And.

<unk>.

Speaker Change: As I said on the previous question about this we've actually started to see them now because we started to see the ramp.

Speaker Change: In a little bit in Q1 of last year, but then really in earnest in Q2.

Last year on the order line and some of those things are starting to flow through to revenue now now we're not at 8% yet from a revenue perspective, we expect to be there by the end of the year, but just as you suggest.

Aaron Christopher Rakers: So you could end up in a situation where there is relatively lower either order or revenue activity from these types of transactions, and some other quarter you might have double activity, just given the nature of the business. Yep, yep, that's helpful, Neil. And then as a second question, I wanted to go back to the AI networking discussion, you know, clearly, you know, a lot of focus here, but a lot of focus on the wireline side is this, 400, 800, transition towards Ethernet versus InfiniBand. I'm curious about Keysight's positioning.

Speaker Change: It is lumpy right. So you could end up in a situation, where there is relatively lower either order or revenue activity from these types of transactions in some other quarter you might have double activity just given given the nature of the business.

Speaker Change: Yeah, Yeah, that's helpful and then as a.

Speaker Change: Second question I wanted to go back to the AI networking discussion.

Speaker Change: Nearly a lot of focus here, but a lot of focus on the wireline side is this 400 800.

Speaker Change: Transition towards Ethernet versus Infiniband I'm curious the key sites positioning is there a disproportionate position around Ethernet and the deployment cycle backend AI networks based on Ethernet.

Satish Dhanasekaran: Is there a disproportionate position around Ethernet and a deployment cycle of back-end AI networks based on Ethernet versus InfiniBand? Or is it maybe, you know, not such that we should delineate between the two for the company? Yeah, I think, you know, for us, we don't try to pick winners in some ways. Innovation is best served when you have multiple competing technologies approach the same challenge. But fundamentally, data is growing, the pattern of data through these networks is altering and changing, which requires communication systems to adapt. And I think all the way from memory, to network NIC cards, to compute architectures are getting more heterogeneous, if you will. So more standards. I talked about CXL, the Ultra Ethernet Consortium, PCIe Gen 7, etc. So all of that really creates a really good bed of technologies for us to service through our platforms. And often, it's the same underlying platform; I missed out USB4.

Speaker Change: <unk> infiniband or is it maybe not.

Speaker Change: Such that we should delineate between the two for the company.

Speaker Change: Yes, I think for US we don't try to pick winners in some ways.

Speaker Change: Innovation is best served when you have multiple competing technologies approach. The same challenge fundamentally data is growing the pattern of data to these networks at al <unk>, and changing which requires the communication systems to adapt and I think all the way from memory to network.

Speaker Change: Nic cards.

Speaker Change: <unk> architectures.

Speaker Change: Getting more heterogeneous if you will so more standards I talked about CSL the outright Ethernet consortium PCI Gen seven et cetera, So all of that really creates a real good.

Speaker Change: A bed of technologies for us to service through our platforms and often it's the same underlying pipeline I missed out USB four but often it's the same sort of underlying platforms that we have with us from all the way from a similar scopes to our birds to our.

Satish Dhanasekaran: But often, it's the same sort of underlying platforms that we have with us also, from all the way from oscilloscopes to our BERTs to our network traffic emulators from our XT acquisition. So we tend to approach these things and then add in more software capabilities. As we move forward, we're actually quite pleased with the performance and the resilience of our software business, even in these times. And software and services represent roughly now 40% of the total order slash revenue in the most recent quarter. And we'll continue to keep growing the value of the company. Our ARR was also up double digits this quarter.

Speaker Change: Network traffic emulators from our <unk> acquisition. So we tend to go approach. These things and then add in more software capabilities as we move forward, we're actually quite pleased with the performance and the resilience of our software business, even through these times and suffering.

Speaker Change: Services represents roughly now 40% of the total.

Speaker Change: Slash revenue.

Speaker Change: The most recent quarter and we'll continue to keep growing the value of the company. Our IRR was also up double digits this quarter.

Matt Robison: Thank you. The next question is from Matt Nicknam with Deutsche Bank. You may proceed. Hey guys, thanks for taking the questions. Just maybe unpacking the guide for fiscal 2Q, are you anticipating modest sequential pressure across the board, or are there any pockets in the business where you may be anticipating or seeing some level of sequential improvements in the fiscal second quarter? And then maybe just secondly, in terms of, we talked a lot about wire line.

Speaker Change: Thank you.

Speaker Change: The next question is from Matt <unk> with Deutsche Bank You May proceed.

Matt: Hey, guys. Thanks for taking the questions maybe.

Matt: Maybe unpacking the guide for fiscal <unk>.

Matt: Are you anticipating modest sequential pressure across the board or are there any pockets in the business, where you may be anticipating we're seeing some level of sequential improvement.

Matt: In the fiscal second quarter, and then maybe just secondly in terms of we talked a lot about wire line I'm just wondering on the wireless side.

Matt Robison: I'm just wondering, on the wire list side, expectations for that business this year, simply given maybe some green shoots we're reading about, and also the fact that that seems to be a business that maybe started seeing the downturn a little bit sooner. So I'm just wondering if there's any additional color you can share in terms of expectations for the year. Thanks.

Matt: Expectations for that business this year simply.

Matt: Given maybe some green shoots we are reading about and also the fact that that seem to be a business that maybe started seeing the downturn a little bit sooner. So I'm just wondering if theres any additional color you can share in terms of expectations for the year. Thanks.

Satish Dhanasekaran: Yeah, I'll take the second part, then I'll have Mark sort of walk through his thinking on the pipeline, which really, you know, impacts, I mean, which really flow into our guide, if you will. On the wireless side, I think we're continuing to expect stability and moderation, you know, as it comes off of strong peak demand years in 21 and 22. So that normalization phase will continue to play out over the next couple of quarters, and that's sort of our base case thinking on wireless. All of the R&D activity that I described continues, but we're still waiting for any inflection in component spend, which we're not seeing at this point. So that's sort of our expectations for wireless. And I'll just have Mark make comments on the pipeline.

Speaker Change: Yes, I'll take the second part and then I'll have mark sort of walked through is thinking on the pipeline with truly.

Speaker Change: The impact I mean, we certainly flow into our guide if you will on the wireless side.

Speaker Change: We're continuing to expect stability and moderation as it comes off of strong.

Speaker Change: Peak demand years in 'twenty, one and 'twenty two so that normalization phase continues to play out over the next couple of quarters.

Speaker Change: That's sort of our base case thinking on wireless.

Speaker Change: All of the R&D activity that I described continues on but we're still waiting for any inflection and and components spend.

Mark: Which we're not seeing at this point, so that that's sort of our expectations on wireless and I'll just have mark make comments on the pipeline, yes, Matt I think it's more of the same what we've been speaking about in terms of the markets that are driving growth I expect aerospace defense to continue to be an area of of driving growth for us not.

Mark A. Wallace: Yeah, and Matt, I think it's more of the same as what we've been speaking about in terms of the markets that are driving growth. I expect aerospace defense to continue to be an area of driving growth for us, not only in the U.S. but in Europe and other countries that are faced with the geopolitical situation that exists today. We are operating under a continuing resolution in the U.S., and we're expecting that budget to be signed this quarter, which is favorable for us in terms of the RDT and E line items that are getting bipartisan support to progress through this election year. So that seems to be an area for us. And then the defense modernization, as we've already touched on, there are multiple areas of innovation that involve long-term, short-term programs with the prime contractors, again, around EMSO space, crossing over into the commercial sector. So there are a lot of vectors within what we traditionally call aerospace and defense.

Mark: Only in the U S, but in Europe and other countries that are faced with the geopolitical situation that exists today.

Mark: We are operating under continuous continuing resolution in the U S, which we're expecting that budget to be signed this quarter.

Mark: Which is favorable for us in terms of the <unk> line items that are getting bipartisan support.

Mark: Progress through this election year, so that seems to be an area for us and then the defense modernization as we've already touched around there's multiple areas of innovation that involve.

Mark: Long term short term programs with the prime contractors again around <unk>, so space crossing over into the commercial sector. So theres a lot of lot of vectors within what we have traditionally called aerospace and defense wireline as we just spent a lot of time talking about continues to provide opportunities for us to grow.

Mark A. Wallace: Wireline, as we just spent a lot of time talking about, continues to provide opportunities for us to grow. And then, you know, I think, as we've mentioned, the automotive funnel, which is quite robust, has programs that are crossing into the next several three quarters. And we are actively engaged with all of those.

Mark: And then I think as we mentioned the automotive funnel, which is quite robust.

Mark: As programs that are crossing into the next several three quarters.

Mark: And we are actively engaged with all of those so I expect that to be a driver of growth for us as well and we'll watch it and take it a quarter at a time with the headwinds that we're currently experiencing manufacturing.

Matt Robison: So I expect that to be a driver of growth for us as well. And we'll watch it and take it a quarter at a time with the headwinds that we're currently experiencing in manufacturing and on semiconductors. But as we mentioned, we saw some growth around memory. That's an early indicator that typically goes first.

And on semiconductor, but as we mentioned we saw some some growth around memory. That's an early indicator that typically goes first we expect that to continue to be an area of strength and of course, we are watching very closely the status of these additional fabs that are in the process of being built out in various places around the world.

Mehdi Hosseini: We expect that to continue to be an area of strength. And, of course, we're watching very closely the status of these additional fabs that are in the process of being built out in various places around the world. Great, thank you.

Speaker Change: Great. Thank you.

Mehdi Hosseini: Thank you. The next question is from the line of Mehdi Hosseini with Susquehanna. You may proceed.

Speaker Change: Thank you. The next question is from the line of Mehdi Hosseini with Susquehanna You May proceed.

Mehdi Hosseini: Yes, thanks for taking my question. First one for Neil, I just want to better understand the organic change in your revenue. Assuming 60 million from ESI in the January quarter and then about 25 million in the April quarter, the decline in organic gravity on a sequential basis is only 2%? Is that correct?

Mehdi Hosseini: Yes. Thanks for taking my question first one for Neil just wanted to better understand the organic.

Mehdi Hosseini: Changing your revenue.

Mehdi Hosseini: <unk> hundred $60 million from ESI.

Mehdi Hosseini: January quarter, and then about $25 million in the April quarter decline in organic revenue on a sequential basis is only two percentage is that correct.

Neil P. Dougherty: It was, yes, ESI was 67, 68 in Q1, a little higher. And so I think the revenue decline from Q1 to Q2 in the core is still rounds to one; it's just a tick over one. So, perhaps, maybe..., the expectation was for a different contribution from ESI and maybe a little bit better than expected trend with the organic, but the ESI is making some comparisons difficult. Would you agree?

Neil: It was yes, ESI was 67 68 in Q1, a little higher and so I think the revenue decline Q1 to Q2 and the core is still rounds to wanted to just a tick over one.

Sure so perhaps maybe.

Neil: The expectation was for <unk>.

Neil: Different contribution from ESI, and maybe a little bit better than.

Neil: Spec.

Neil: <unk> organic but DSI is making some.

Neil: Compares difficult would you agree.

Neil P. Dougherty: Yeah, I mean, ESI. First of all, ESI was great in Q1. They were significantly 10% or more above our expectation going into the quarter. They saw, you know, strong renewal activity as expected with some good upsizing of transactions and other things that drove that revenue nicely. The sequential decline in ESI is totally as expected, you know, that we talked about it last quarter, that 40 to 45% of their orders in revenue are falling because their renewal schedules fall on Keysight's first quarter, but it does make the comparisons a bit more challenging when looking at the combined end. Right, right. Okay. Don't want to come across as a cheater, but I think these comparisons get a little bit murky looking at April versus January.

Speaker Change: Yes, so first of all ESI.

Speaker Change: Great in Q1, they are significantly 10% or more above our expectation going into the quarter.

Speaker Change: Our strong renewal activity as expected with some good upsizing of transactions and other things that drove that revenue nicely the sequential decline and ESI is totally as expected.

Speaker Change: We talked about it last quarter their 40% to 45% of their orders and revenue are falling because the renewal schedules fall in key side first quarter, but it does make the compare is a bit more challenging when looking at the combined entity.

Speaker Change: Right right, Okay don't want to come across the cheaters, but I think this compares get a little bit murky looking to April versus January looking into.

Mehdi Hosseini: Looking into July and October, obviously, your comments suggest maybe April and July will be the bottom, and then a modest recovery in October. So the question for Satish is, what do you think the driver behind that modest rebound would be? And why should we assume consideration for their rebound into FY25?

Speaker Change: Literally too.

Speaker Change: July.

Speaker Change: <unk>, obviously your comments suggest.

Speaker Change: Maybe April July will be the bottom.

Speaker Change: Modest recovery in October so the question for the teachers.

Speaker Change: Do you think that.

Speaker Change: The driver behind the modest rebound would be.

Speaker Change: Why should we assume.

Speaker Change: Acceleration in rebound into FY 'twenty five.

Satish Dhanasekaran: The 5G is behind us, but what are some of the other key drivers that would give you confidence that the modest rebound should follow an acceleration? Unless you tell me, it's just going to be a modest improvement into FY25. Yeah, you know, the profile, the timing, and the profile of the recovery, Mehdi, as you can appreciate, is hard to hard to really quantify or analytically quantify for you at this point, but let me give you some subjective color of what we're seeing.

Speaker Change: <unk> is behind us.

Speaker Change: Some of the other key drivers.

Speaker Change: Give you confidence that the.

Speaker Change: <unk>.

Speaker Change: The street bonds should followed by acceleration unless you tell me.

Speaker Change: Just going to be a modest improvement into FY 'twenty one.

Speaker Change: Yes.

File at the timing and the profile of the recovery.

Speaker Change: As you can appreciate it is hard to hard to really.

Speaker Change: Quantify or our analysis.

Speaker Change: Quantify for you at this point, but let me give you some subjective color what we're seeing.

Satish Dhanasekaran: I think we're seeing continued strength in aerospace defense. Mark touched upon that. The trends are toward defense modernization. The new emulation solutions are continuing to proliferate through that ecosystem.

Speaker Change: We are seeing continued strength in aerospace defense was touched upon that defense defense modernization, the new emulation solutions.

Speaker Change: Continuing to proliferate through that ecosystem and given the sort of national security emphasis that's playing out.

Satish Dhanasekaran: And given the sort of national security emphasis that's playing out, we think that's on a sure track. We also have seen the 5G platform that we have get into some of the more defense-related applications, and we announced a collaboration as an example with Lockheed Martin. So we look at that. We look at the pipeline of opportunities that Mark referenced and feel good about aerospace and defense. And typically, as you would expect, our aerospace defense has the strongest quarter in quarter four. So that's one part of the equation.

Speaker Change: That's that's that's on a sure.

Speaker Change: Sure track, we also have seen the <unk> platform that we have get into some of the more.

Speaker Change: Hence related applications and we announced the collaboration is an example, with Lockheed Martin. So we look at that we look at the pipeline of opportunities that mark referenced and feel good about the aerospace and defense and typically as you would expect our aerospace defense is our strongest quarter in quarter. Four so that's that's one part of the <unk>.

Speaker Change: The equation. The other thing is what we're hearing from some of our semiconductor customers as the fab companies coming out and laying out their plans for 'twenty five is they're all planning for a pretty strong 25 capital environment around next generation two nanometer technology and some of the new.

Satish Dhanasekaran: The other thing is what we're hearing from some of our semiconductor customers as the fab companies come out and lay out their plans for 25, if they're all planning for a pretty strong 25 capital environment around next generation two nanometer technology and some of the new investments around power semiconductors and silicon photonics and other areas. And so we would expect some uptake there in our semi-business, which has been depressed by the time we roll out in Q4 and enter into Q1. So it's hard to really time it on a quarterly basis.

Speaker Change: Investments around power semiconductor and silicon photonics in other areas and so we would we would expect some uptick there in our semi business, which has been depressed.

Speaker Change: The time, we rollout in Q4 and entering into Q1, so it's hard to really time, it on a quarterly basis, but thats sort of the horizon that we would expect.

Satish Dhanasekaran: But that's sort of the horizon that we would expect. We would expect the wireline business to largely continue to perform well because the drivers for AI continue to remain robust. And then wireless, you know, I'm just factoring in a pretty gradual recovery as we go through the year. So that's sort of our base case. Now, you know, there is this whole macro. What does the macro do?

Speaker Change: We would expect wireline business to largely continue to perform well because the drivers on the AI continue to remain robust and then wireless.

Speaker Change: Just I'm just factoring in a pretty gradual recovery.

As we go through the year. So that's sort of a base case now there is this whole macro what does the macro do and if if the global PMI improves quicker than maybe there is some upside in our general electronics business.

Satish Dhanasekaran: And if the global PMI improves quicker, then maybe there's some upside in our general electronics business, but we're at this point just assuming that, you know, there isn't this big, broad recovery this year or in this fiscal year anyway. We would assume that the second half is just modestly bigger in business than the first half. But again, if we go back and look at the situation as we take it a step back, last year was the first year where orders declined double digits, yet we were still able to use our backlog to deliver. Transcribed by https://otter.ai. Thank you.

Speaker Change: We're we're at this point just assuming that.

Speaker Change: There isn't this Matt big broad recovery this year or in this fiscal year anyway, we would assume that second half is just modestly.

Speaker Change: Bigger business than the first half, but again, if we go back and look at the situation as we take a step back last year.

Speaker Change: Was the first year, where orders declined double digits, we were still able to use our backlog to deliver.

Speaker Change: Our revenue stronger revenue I mean at least upside revenue and strong profitability. So now we're coming off of that this will be the second year. When if orders don't rebound, we would expect a strong rebound from from our experienced historically running this business.

David Ridley: Thank you. The next question is from David Ridley Lane with Bank of America. Your line is open.

Speaker Change: Yeah.

Satish Dhanasekaran: One of the hallmarks of Keysight has been the ability to continue to invest organically and inorganically through cycles. How do you see R&D spending and also your appetite for additional M&A? Yeah, thank you.

Speaker Change: Got it thank you.

Speaker Change: Thank you.

Speaker Change: Next question is from David Ridley Lane with Bank of America. Your line is open.

Speaker Change: One of the hallmarks of <unk> has been the ability to continue to invest organically and inorganically through cycles. How do you see R&D spending and also your appetite for additional M&A this year.

Speaker Change: Yes. Thank you I think first and foremost I would say from an organic or inorganic first company. We believe in taking a long term view of our markets and what's changed since we formed K side as our organization that is focused on customers. So we're getting strong validation of our <unk>.

Satish Dhanasekaran: I think first and foremost, I would say, from an organic point of view, we're an organic first company; we believe in taking a long-term view of our markets. And what's changed since we formed Keysight is our organization, which is focused on customers. So we're getting strong validation around our investments with our customers, you know, so partnerships and collaborations are key to how we are able to realize the full value of organic investment. So we feel very good about where we are focused from a portfolio perspective and our ability to drive long-term organic growth. Now, having said that, I laid out on investor day four or five areas where we are looking at some expansion opportunities, some of them we're pursuing organically as well. But we're also looking at our pipeline from an M&A perspective and looking for opportunities where we can create a good return on investment for our shareholders. You've seen us be incredibly disciplined.

Speaker Change: And our investments.

Speaker Change: With our customers.

Speaker Change: So partnerships and collaborations are key to how we how we are able to realize the full value of our organic investments. So we feel very good about where we are focused on from a portfolio perspective, and our ability to drive long term organic growth now having said that I laid out at Investor day, four or five areas.

Speaker Change: We are looking at some expansion opportunities some of them were pursuing organically as well, but we're also looking at our <unk>.

Speaker Change: Pipeline from an M&A perspective, and looking for opportunities, where we can create good return on investment for our shareholders you've seen us be incredibly disciplined as we have pursued these opportunities we walked away from deals where we thought we couldn't get a good return and so you can expect that even as we pursue these opportunities and look at the.

Neil P. Dougherty: As we have pursued these opportunities, we walked away from deals where we thought we couldn't get a good return. And so you can expect that even as we pursue these opportunities and look at the pipeline, we will stay disciplined as we go through this as it goes through the evaluation. I just had one additional bit of color on the R&D side. We stayed very disciplined during the period of time in 21 and 22 where revenues were growing at a high rate of rate. We underspent our R&D target of 16.5% of revenue.

<unk>, we will stay disciplined as we go through this as it goes to the evaluation.

Speaker Change: I'd just add one additional bit of color on the R&D side.

We stayed very disciplined in the in the period of time, where in 'twenty. One 'twenty, two where revenues were growing at a high level of rate, we underspent. Our R&D target of 16, 5% of revenue that continued into 'twenty three without enables us to do now in 'twenty four is maintain R&D investments basically flat as I said in.

Neil P. Dougherty: That continued into 23, but what it enables us to do now in 24 is maintain R&D investments basically flat. As I said in my earlier comments, that'll take R&D up above that 16.5% target of 100% of revenue basis, but it'll allow us to continue our investments to make sure that we're full participants in the eventual upturn. Thank you. And then just a quick follow up. How are you working on getting the ESI and Keysight sales forces aligned and prioritizing which customers to go after on a joint basis? And am I right in thinking that, similar to other software companies, six, nine months to build the pipeline and close?

Speaker Change: In my earlier comments that will take R&D up above that 16, 5% target 100% of revenue basis, but it will allow us to continue our investments to make sure that we're full participants in the eventual upturn.

Speaker Change: Great. Thank you and then just a quick follow up.

Speaker Change: How are you working on getting the ESI and <unk> sales forces aligned.

Speaker Change: And prioritizing which customers to go after.

Speaker Change: Yes.

Speaker Change: And am I right in thinking that.

Speaker Change: Similar to other software companies.

Speaker Change: It takes six to nine months to build the pipeline and then another six months to close.

Satish Dhanasekaran: So those benefits we should think of showing up. Yeah, I think ESI was well on a track of transforming the business to growth. And our first priority is to continue to support that base plan. And that's baked into 24.

Speaker Change: Those benefits, we should think of showing up maybe in fiscal 'twenty.

Speaker Change: Yes, I think ESI has.

Speaker Change: Well on a track of transforming the business to growth and our first priority is to continue to support that their base plan and thats baked into 'twenty four but in a targeted way mark and his team have already started engage.

Satish Dhanasekaran: But in a targeted way, Mark and his team have already started to engage to take those capabilities and apply them to our aerospace and defense customer base in the US as a first order of priority. But as I've gotten to know that portfolio, what gives me excitement is their core technologies around hybrid AI, which I think could find a broader leverage into other key site applications to accelerate our pursuits. But that's what time our number one priority is to stabilize, integrate, and basically keep their base plan on track. And I think they're off to a good start.

Speaker Change: Those capabilities and apply them to our aerospace and defense customer base in the U S. As a first order of priority, but as I've as I've gotten to know that portfolio. What gives me excitement as their core technologies around hybrid AI, which I think could find a broader leverage into other key site applications.

Speaker Change: <unk> to accelerate our pursuits, but thats whats time, our number one priority is to us.

Speaker Change: Stabilize integrate and basically keep their base based plan on track and I think they're off to a good start.

David Ridley: Thank you very much. Thank you. Thank you. The next question is from Rob Mason with Baird. You may proceed. Yes, thank you. Neil, I wanted to go back to the conversation.

Alright, Thank you very much.

Speaker Change: Thank you.

Thank you. The next question is from Rob Mason with Baird You May proceed.

Robert W. Mason: Yes. Thank you.

Robert W. Mason: Neal I wanted to go back to the conversation you pointed out the operating model performing as expected on the downside.

Robert W. Mason: You pointed out the operating model performing as expected on the downside operating margin on a year over year basis. Is there anything that you'd call out sequentially? Impacting operating margins, it just looks like the sequential de-leverage. A Little Hive.

Robert W. Mason: Operating margin on a year over year basis is there anything.

Robert W. Mason: That you would call out sequentially.

Robert W. Mason: Impacting operating margins it just looks like the sequential de Leverages, a little high from doing my math correctly.

Neil P. Dougherty: I'm a math corrector. Yeah, it's a good question. And there are a few things. So first of all, we had a very favorable mix within the quarter in Q1, not just because ESI was in at $67 or $68 million of revenue on software. But even within the Keysight Classic portion of the business, we were north of 66%. So very favorable in the core as well.

Robert W. Mason: Yes.

Neal: It's a good it's a good question and there are a few things. So first of all we had very favorable mix within the quarter in Q1, not just because ESI was in at 67 or $68 million of revenue on software, but even within the key say classic portion of the business, we were north of 66% so very favorable.

Neal: In the core as well, we do not expect the mix to be favorable.

Neil P. Dougherty: We do not expect the mix to be as favorable next quarter as it was, or frankly, probably for the rest of the year, the mix is unlikely to be as favorable as it was in the first quarter. And the other thing would be from an OPEX perspective; we do expect Q2 OPEX to be seasonally higher. That is typical, and the single biggest factor contributing to that is PTO usage. PTO usage is at its lowest in the second quarter of our fiscal year, and that's enough to drive a measurable increase in OPEX as we move from Q1.

Neal: Next quarter as it was or frankly, probably for the rest of the year and mix is unlikely to be as favorable as it was in the first quarter.

Neal: I think it would be from an opex perspective.

Neal: We do expect Q2 opex to be seasonally higher that is typical and.

Neal: The single biggest factor to that is PTO usage.

Neal: <unk> usage is the lowest in the second quarter of our of our fiscal year and that's enough to drive.

Neal: A measurable increase in Opex as we move from Q1 to Q2.

Neil P. Dougherty: But it might also be worth highlighting our confidence in both the operating cash flow performance and also the free cash flow conversion; we had 98% of net net operating profit this quarter. So we feel good about the cash flow generation capabilities as we navigate this near-term downturn in our market. I did, just as a second question, there's, you know, during the quarter, we saw more of your EDA and simulation. Participants in the market are converging.

But it might also be worth highlighting.

Neal: Our confidence in both the operating cash flow performance and also the free cash flow conversion, we have 98% of net net operating profit. This quarter. So we feel good about the cash flow generation capabilities as we navigate this.

Neal: Near term downturn in our markets.

Neal: Yes.

Neal: Certainly.

Speaker Change: I did just as a second question.

Speaker Change: During the quarter, we saw more I guess.

Speaker Change: Some of your EDA and stimulation.

Speaker Change: Participants in the market converging I know Keith I'd have some strategic partnerships with some of the players involved there.

Satish Dhanasekaran: I know you have; Keysight has some strategic partnerships with some of the players involved there. You know, I'm just curious how consolidation around those areas affects your opportunity, and maybe you could speak to any of the test layers that would be more impacted or not, and really just kind of getting at, how do you define Keysight's moat in this backdrop where you're seeing some of the simulation? For more information, visit www.keysight.com Yeah, I think, you know, when we think about the markets, we're In many ways, we collaborate with all of the players that have been on record, and we have a relationship with them so that we can offer a good workflow experience for our customers.

Speaker Change: I'm just curious how you think consolidation around those areas affects your opportunity.

Speaker Change: And maybe just speak to any of the tests layers, there would be more impacted or not.

Speaker Change: And really just kind of getting at how do you define key sites mode. In this backdrop, where youre seeing some of the simulation converge.

Speaker Change: Yes, I think.

Speaker Change: When we think about the markets we're approaching it obviously from test to emulation to simulation work connecting the workflow there in many ways, we collaborate with all of the players.

Speaker Change: That I've been on record and we have a relationship with them. So that we can offer.

A good workflow experience for customers and this has long been a market where.

Satish Dhanasekaran: And this has long been a market where there's been good interplay between the tools, because just like Keysight's been an engineering company, we are also a customer of a number of these tools, and it's hard to standardize on one tool or the other because each of them has different focus areas and different strategies. So when we piece it together, we don't view this as necessarily a big impact on our plans.

Speaker Change: Theres been good into play between the tools because just like key sites are an engineering company. We are also a customer of a number of these tools and it's hard to standardize on the tool or the other because each of them have different focus areas and the different strategy. So when we piece it together.

Speaker Change: Don't view this as necessarily.

Speaker Change: A big impact to our plants. We in fact are continuing to progress our system simulation emulation strategy in Sam expansion.

Satish Dhanasekaran: We are, in fact, continuing to progress our system simulation, emulation strategy, and SAM expansion, and with ESI in the company, we have more capabilities to drive that strategy moving forward. Very good. That's helpful. Thank you. Thank you. There are no further questions in queue.

Speaker Change: And with ESI in the company, we have more capabilities to drive that strategy moving forward.

Very good that's helpful. Thank you.

Thank you.

Speaker Change: Thank you there are no further questions in queue with that I would like to turn the call back over to Jason for concluding remarks.

Jason A. Kary: With that, I would like to turn the call back over to Jason for a concluding remark. Hey, thanks, Joel. And thanks, everyone, for joining us today. We'll look forward to talking to you later this quarter and wish you a good day. That concludes today's conference call. Thank you for your participation. You may now disconnect your line.

Jason A. Kary: Hey, Thanks, Joel and thanks, everyone for joining us today.

Jason A. Kary: Look forward to talking to you later this quarter and wish you a good day.

Speaker Change: That concludes today's conference call. Thank you for your participation you may now disconnect your lines.

Jason A. Kary: Later, this quarter and wish you a good day.