Q2 2024 Keysight Technologies Inc Earnings Call

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Sierra: Good day, ladies and gentlemen, and welcome to Keysight Technologies' fiscal second quarter 2024 earnings conference call. My name is Sierra, and I will be your lead operator today. If at any time during the conference you need to reach an operator, please press star zero. This call is being recorded today, Monday, May 20, 2024, at 1.30 PM 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.

Speaker Change: Good day, ladies and gentlemen, and welcome to keep my technologies fiscal second quarter 2024 earnings Conference call.

Sierra: My name is Sierra and I will be your lead operator today.

If at any time during the conference you need to reach an operator, Please press star zero.

Sierra: This call is being recorded today Monday may 20th 2024 at 130 P M Pacific time.

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

Jason Kary: Thank you and welcome, everyone, to Keysight's second 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.

Speaker Change: Thank you and welcome everyone to <unk> second 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.

Jason Kary: The press release and information to supplement today's discussion are on our website, www.keysight.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 impacts 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 our comparisons are on a year-over-year basis, unless otherwise noted.

Speaker Change: Press release and information to supplement today's discussion are on our website at Investor Dotcom site 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 impacts of currency movements and acquisitions or divestitures completed within the last 12 months.

Speaker Change: <unk>.

Speaker Change: The most directly comparable GAAP financial metrics and reconciliations or on our website and all of our comparisons are on a year over year basis, unless otherwise noted.

Jason 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 Baird and UBS. And now, I will turn the call over to Satish.

Speaker Change: 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.

Speaker Change: 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 Baird and UBS and now I will turn the call over to <unk>.

Satish Dhanasekaran: Good afternoon, everyone, and thank you for joining us today. My comments will focus on three key headlines. First, Keysight executed well in a market environment that was largely unchanged from the first quarter. Revenue of $1.2 billion and earnings per share of $1.41 exceeded the high end of our guidance. Second, orders of $1.2 billion were in line with prior quarters.

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

Satish Dhanasekaran: We saw pockets of growth and stability across multiple end markets even as customer spending remained constrained. Our base case scenario for the full year is unchanged, with revenue relatively stable from Q2 to Q3 and orders increasing modestly in the second half. Third, our deep customer collaborations and relationships are strong and continue to inform our future roadmaps. These engagements reinforce our confidence in the long-term secular growth trends of our markets. The pace of innovation is accelerating across multiple vectors, and while remaining disciplined, we are investing to increase our differentiation and to capitalize on the waves of technological inflection ahead of us. Now, let me begin with a brief overview of Keysight's second quarter performance. In a period of 1.2 billion dollars, earnings per share of $1.41 were above our expectations.

Speaker Change: My comments will focus on three key headlines.

Speaker Change: First key side executed well in a market environment that was largely unchanged from the first quarter revenue of $1 2 billion and earnings per share of $1 41 <unk>.

Speaker Change: We exceeded the high end of our guidance.

Speaker Change: Orders of $1 2 billion were in line with prior quarter.

Speaker Change: We saw pockets of growth and stability across multiple end markets, even as customer spending remained constrained.

Speaker Change: Base case scenario for the full year is unchanged with revenue relatively stable from Q2 to Q3 and orders increasing modestly in the second half.

Speaker Change: Third our deep customer collaborations and relationships are strong and continue to inform our future roadmaps.

Speaker Change: These engagements reinforced our confidence in the long term secular growth trends of our markets. The pace of innovation is accelerating across multiple vectors and while remaining disciplined we are investing to increase our differentiation and to capitalize on the waves of technology inflection ahead of US now let me begin with a brief overview.

Of key sites second quarter performance revenue of $1 2 billion and earnings per share of $1 41 were above our expectations revenue and orders continue to normalize from the strong prior year, but were stable on a sequential basis, excluding ESI seasonality.

Satish Dhanasekaran: Revenue and orders continued to normalize from the strong prior year, but were stable on a sequential basis, excluding ESI seasonality. We delivered operating margin of 24%, reflecting a healthy gross margin of 65% and the cost actions and discipline that we have exercised today. Turning to our business segment, Communication Solutions Group revenue declined versus the prior year, which benefited from robust backlog conversion.

Speaker Change: We delivered operating margin of 24%, reflecting a healthy gross margin of 65% and the cost actions and discipline that we've exercised to date.

Speaker Change: Turning to our business segments Communications solutions group revenue declined versus prior year, which benefited from robust backlog conversion on.

Satish Dhanasekaran: On the demand front, orders were flat year over year and grew 4% on a sequential basis. Investment in defense modernization continued to drive activity in aerospace defense and government, and we were pleased to see commercial communications order growth for the first time after six consecutive quarters of decline. Wireline orders grew on robust demand for our differentiated AI data center solutions. These include a new AI test platform that is being used by several industry leaders to emulate AI workloads and benchmark network performance.

Speaker Change: On the demand front orders were flat year over year and grew 4% on a sequential basis investment in defense modernization continued to drive activity in aerospace defense and government and we were pleased to see commercial communications order growth for the first time after six consecutive quarters of declines.

Speaker Change: Wireline orders grew on a robust demand for our differentiated AI data Center solutions.

Speaker Change: These include a new AI test platform that is being used by several industry leaders to emulate AI workloads and benchmark network performance.

Satish Dhanasekaran: Hyperscaler customer engagements remained high as they accelerated their AI application development. We deepened our R&D collaboration with NVIDIA on next-generation communication technologies this quarter. We also saw strong demand for AI infrastructure solutions, including test and validation of 400 and 800 gigabit transceivers and ultra-high-speed interconnects in GPU-based compute systems. Our advancement of leading-edge network innovation was on display at the Optical Fiber Conference, where we demonstrated the industry's first 1.6 terabit Ethernet test solution in partnership with industry leaders.

Hyper scaler customer engagement remained high as they accelerated their AI application development.

Speaker Change: We deepened our R&D collaboration with Nvidia on next generation communication technologies this quarter.

Speaker Change: We also saw strong demand for AI infrastructure solutions, including test and validation up 408 hundred gig Transceivers and ultra high speed Interconnects in GPU based compute systems.

Speaker Change: Our advancement of leading edge network innovation was on display at the optical fiber conference, where we demonstrated the industry's first one six terabyte Ethernet test solution in partnership with industry leaders.

Satish Dhanasekaran: In wireless, there are some encouraging signs of incremental improvement in the industry outlook as parts of the ecosystem continue to normalize. Our latest suite of 5G solutions launched over the past year is enabling ongoing investment in the evolution of 5G standards, non-terrestrial networks, and open RAN. With the first round of NTIA grants to enhance testing of interoperability, performance, and security of open RAN networks, we secured key wins with several customers in the U.S. We also saw increased demand for chipset R&D as well as component production.

Speaker Change: In wireless there are some encouraging signs of incremental improvement in the industry outlook as part of the ecosystem continue to normalize our latest suite of <unk> solutions launched over the past year is enabling ongoing investment in evolution of five G standards non terrestrial networks and open ran.

Speaker Change: With the first round of NTIA grants to enhance testing of interoperability performance and security of open ran networks, we secured key wins with several customers in the U S.

We also saw increased demand for chipset R&D as well as component production.

Satish Dhanasekaran: Earlier in the quarter, we partnered with industry leaders to showcase new products and solutions at Mobile World Congress, including non-terrestrial network chipset development with Qualcomm. Turning to aerospace defense and government, defense modernization spending continued in radar and spectrum operations, Space and Satellite, and Signal Monitoring.

Speaker Change: Earlier in the quarter, we partnered with industry leaders to showcase new products and solutions at mobile World Congress, including non Turkcell network chipset development with Qualcomm.

Speaker Change: Turning to aerospace defense and government.

Speaker Change: Hence modernization spending continued in radar and spectrum operations space and satellite and signal monitoring.

Satish Dhanasekaran: We saw healthy demand from the U.S. government and primes in the quarter. After several continuing resolutions, the 2024 U.S. defense budget was approved in late March. It includes a 5% increase for research, development, test, and evaluation, which is expected to drive incremental program spend. Strong demand for electromagnetic spectrum operation applications resulted in significant wins at U.S. and European primes. We expect this trend to continue into the second half and 20

Speaker Change: We saw healthy demand from the U S government in price in the quarter.

Speaker Change: After several continuing resolutions that 2020 for U S. Defense budget was approved in late March. It includes a 5% increase for research development test and evaluation, which is expected to drive incremental program spend.

Speaker Change: Strong demand for electromagnetic spectrum operations applications resulted in significant wins at U S and Europeans Prime.

Speaker Change: We expect this trend to continue into the second half and 2025.

Satish Dhanasekaran: Turning to Electronic Industrial Solutions Group, orders and revenue continue to normalize from a record prior year, declining double digits as expected. Customer spending and market conditions remain muted, but we saw relative stability on a sequential basis.

Turning to electronic industrial solutions group orders and revenue continue to normalize from a record prior year declining double digits as expected.

Speaker Change: Customer spending and market conditions remained muted.

Speaker Change: But we saw relative stability on a sequential basis.

Satish Dhanasekaran: In semiconductors, the industry outlook is improving with projections of recovery in 2025. Inventories are coming down to more healthy levels, and demand is picking up in certain areas, such as high bandwidth memory. Additional new fab installations were announced this quarter. In the near term, Foundry customers are working through delays in existing projects and expect production to begin in late 2024 and 2025. Consistent with this backdrop, we saw improvement in our memory-related business and ongoing steady demand for Keysight's proprietary laser interferometer positioning system. In automotive, revenue was sequentially stable when excluding acquisitions.

Speaker Change: In semiconductor the industry outlook is improving with projections of recovery in 2025 inventories are coming down to more healthy levels and demand is picking up in certain areas suggest high bandwidth memory.

Speaker Change: Additional new fab installations were announced this quarter in the near term foundry customers are working through delays in existing projects and expect production to begin in late 'twenty, four and 'twenty five <unk>.

Speaker Change: Consistent with this backdrop, we saw improvement in our memory related business and ongoing steady demand for key sites proprietary laser interferometer are positioning systems in automotive revenue was sequentially stable when excluding acquisitions, we had a steady demand for both our <unk> and <unk> solutions.

Satish Dhanasekaran: We had steady demand for both our EV and AV solutions. Beyond the headlines, consumer adoption of EVs continues to grow, although at a slower pace. The development of cost-effective, longer-range batteries and a more robust charging infrastructure remains a strategic priority for OEMs and governments in a very competitive market.

Beyond the headlines consumer adoption of EV continues to grow although at a slower pace the development of cost effective longer range batteries and a more robust charging infrastructure remains a strategic priority for Oems and governments in a very competitive market during the quarter, we expanded our global battery test.

Satish Dhanasekaran: During the quarter, we expanded our global battery test footprint with a new large Gigafactory customer in Europe. We're also pleased with the addition of ESI to our Automotive and Simulation Software Solutions portfolio. The business is tracking well to both top-line and profit expectations. This quarter, ESI expanded its multi-decade collaboration with Volkswagen Group, establishing a joint material testing and intelligence simulation lab in Asia. This collaboration will advance automotive simulation technology and drive new industry standards, safety, and efficiency forward in the region. However, in general electronics markets, customer spending remains constrained, particularly in manufacturing, China, and the distribution channel.

Speaker Change: Footprint with a new large giga factory customer in Europe.

Speaker Change: We're also pleased with the addition of ESI to our automotive and simulation software solutions portfolio the.

Speaker Change: The business is tracking well to both top line and profit expectations.

Speaker Change: This quarter ESI expanded its multi decade collaboration with Volkswagen group, establishing a joint materials testing and intelligent simulation lab in Asia.

Speaker Change: This collaboration will advance automotive simulation technology and drive new to industry standard safety and efficiency forward in the region.

Speaker Change: In general electronics markets customer spending remains constrained, particularly in manufacturing, China and the distribution channel. We do continue to see growth in digital health and advanced research supported by government funding in Asia, and the U S such as the chips Act.

Satish Dhanasekaran: We continue to see growth in digital health and advanced research supported by government funding in Asia and the U.S., such as the CHIPS Act. This quarter, we expanded our partnership with EMVision in Australia to enable innovation in novel point-of-care medical imaging technology and analysis. As a key element of our solution strategy, software and services orders and revenue growth continue to outpace overall Keysight. At approximately 39% of total revenue, software and services enhance the differentiation of our solutions and are more resilient in current market conditions.

Speaker Change: This quarter, we expanded our partnership with <unk> in Australia to enable innovation in novel point of care medical imaging technology and analysis.

Speaker Change: As a key element of our solution strategy software and services orders and revenue growth continued to outpace overall key site at approximately 39% of total revenue software and services enhance the differentiation of our solutions and are more resilient in current market conditions.

Satish Dhanasekaran: Within the chip domain, next-generation performance demands are driving an exponential increase in system-level design requirements and complexity. Keysight's simulation and emulation software capabilities enable our customers to address these challenges and accelerate time to market for their advanced systems and chips. We recently introduced QuantumPro, an integrated EDA solution for qubit design and development of quantum computers. In addition, we launched a new solution for die-to-die interconnect simulation, which is a key step in verifying the performance of heterogeneous and 3D integrated circuit designs, commonly known as chiplets.

Speaker Change: Within the chip domain next generation performance demands are driving an exponential increase in system level design requirements and complexity key sites simulation and emulation software capabilities enable our customers to address these challenges and accelerate time to market for their advanced systems and chips, we reach.

Speaker Change: Simply introduced quantum pro and integrated <unk> solution for Cuba design and development of quantum computers. In addition, we launched a new solution for die to die interconnect stimulation, which is a key step in verifying performance of heterogeneous and three D integrated circuit designs, commonly known.

Speaker Change: <unk> chipsets.

Satish Dhanasekaran: Looking ahead, the pace of technology innovation and digitization is accelerating and proliferating across multiple industries and use cases. Keysight is investing today both organically and inorganically to capitalize on these future technological waves and inflections. In addition to steady organic investment in R&D, we are expanding our solutions portfolio and our served addressable markets through M&A. This quarter, we announced our intent to acquire Spiron Communications, a highly complementary business in network analytics. We also completed the acquisition of RISCure in the quarter, expanding our automated security assessment capabilities and solutions for semiconductors, embedded systems, and connected devices.

Speaker Change: Looking ahead, the pace of technology innovation, and Digitization is accelerating and proliferating across multiple industries and use cases.

Speaker Change: Site is investing today, both organically and inorganically to capitalize on these future technology waves and inflections. In addition to steady organic investment in R&D, we are expanding our solutions portfolio and our served addressable markets through M&A.

Speaker Change: This quarter, we announced our intent to acquire Spirent Communications Ah ha.

Speaker Change: Daily complementary business in network analysis.

Speaker Change: We also completed the acquisition of <unk> in the quarter, expanding our automated security assessment capabilities and solutions for semiconductors embedded systems and connected devices.

Satish Dhanasekaran: In closing, I would like to thank our employees once again for consistently delivering value to our customers and shareholders. The Keysight team's high-performance and winning culture is key to our success and a competitive differentiator. While it's difficult to predict the timing of the recovery, we're encouraged by pockets of growth that are emerging, the relative stability of investment levels, and the strength of our customer collaboration. Consistent with the Keysight leadership model, we remain disciplined and continue to streamline operations to ensure strong financial performance in these dynamic market conditions.

Speaker Change: In closing I would like to thank our employees once again for consistently delivering value to our customers and shareholders. The key site teams high performance and winning culture is key to our success and our competitive differentiator.

Speaker Change: While it's difficult to call the timing of the recovery. We are encouraged by pockets of growth that are emerging the relative stability of investment levels and the strength of our customer collaborations.

Speaker Change: <unk> with the key <unk> leadership model, we remain disciplined and continue to streamline operations operations to ensure strong financial performance in these dynamic market conditions as we look beyond the current period of normalization. The long term secular growth trends driving our business are intact taken together are.

Satish Dhanasekaran: As we look beyond the current period of normalization, the long-term secular growth trends driving our business are intact. Taken together, our broad portfolio of differentiated solutions, strong customer relationships, technology leadership, and durable financial model position us well into a market recovery. With that, I'll turn it over to Niels to discuss our financial performance and outlook.

Speaker Change: Broad portfolio of differentiated solutions strong customer relationships technology leadership, and durable financial model positions us well into a market recovery with that I'll turn it over to Neil to discuss our financial performance and outlook.

Neil P. Dougherty: Thank you, Satish, and hello everyone. Second quarter revenue of $1,216,000,000 was just above the high end of our guidance range and down 13% or 14% on a core basis; orders of $1,219,000,000 declined 8% or 9% on a core basis. As a reminder, Keysight's historical first to second quarter seasonality was muted by the cadence of the ESI business, with approximately half of ESI orders and revenue recognized in the first quarter of the fiscal year.

Neil P. Dougherty: Thank you cities and Hello, everyone second quarter revenue of $1 $216 billion was just above the high end of our guidance range and down 13% or 14% on a core basis orders of $1 billion and $219 million declined 8% or 9%.

Speaker Change: On a core basis.

Neil P. Dougherty: As a reminder, key sites historical first to second quarter seasonality was muted by the cadence of the ESI business with approximately half of ESI orders and revenue recognized in the first quarter of the fiscal year.

Neil P. Dougherty: Excluding ESI, orders grew 4% sequentially, and revenue was in line with Q1. We ended the quarter with $2.3 billion in backlog. Looking at our operational results for Q2, we report a gross margin of 65%, and operating expenses of $496 million were down 2% year-over-year, even with the addition of ESI and RISCure. Excluding these acquisitions, SG&A expenses were down 10%, or $29 million, reflecting the flexibility of our cost structure and actions taken to date.

Neil P. Dougherty: Excluding ESI orders grew 4% sequentially and revenue was in line with Q1, we ended the quarter with $2 3 billion in backlog.

Neil P. Dougherty: Looking at our operational results for Q2, we reported gross margin of 65%.

Neil P. Dougherty: Operating expenses of $496 million were down 2% year over year, even with the addition of ESI and riskier.

Neil P. Dougherty: Excluding these acquisitions SG&A expenses were down 10% or $29 million.

Neil P. Dougherty: Reflecting the flexibility of our cost structure and actions taken to date.

Neil P. Dougherty: Q2 operating margin was 24% or 25% on a core basis. Despite a 14% decline in core revenue in the first half, first half operating margin declined 400 basis points, outperforming Keysight's downside model expectations and demonstrating the financial resiliency of the business. Turning to earnings, we achieved $247 million of net income and delivered earnings of $1.41 per share. Our weighted average share count for the quarter was 175 million shares. Moving on to the performance of our segment.

Neil P. Dougherty: Q2, operating margin was 24% or 25% on a core basis.

Neil P. Dougherty: Despite a 14% decline in core revenue in the first half first half operating margin declined 400 basis points outperforming key sites downside model expectations and demonstrating the financial resiliency of the business.

Neil P. Dougherty: Turning to earnings we achieved $247 million of net income and delivered earnings of $1 41 per share our weighted average share count for the quarter was 175 million shares.

Moving to the performance of our segments, our communications solutions group generated revenue of $840 million.

Neil P. Dougherty: A communications solutions group generated revenue of $840 million, down 10% or 11% on a core basis. Commercial communications revenue of $563 million declined 10%, while aerospace, defense, and government revenue of $277 million was down 11%. Altogether, CSG delivered gross margin of 68% and operating margin of 27%. The Electronic Industrial Solutions Group generated revenue of $376 million, down 17% or 21% on a core basis. EISG reported a gross margin of 58% and an operating margin of 19% due to the seasonality of ESI profitability, lower revenue volume, and some unfavorability in the mix.

Neil P. Dougherty: Down, 10% or 11% on a core basis.

Neil P. Dougherty: Commercial communications revenue of $563 million declined 10%, while aerospace defense and government revenue of $277 million was down 11%.

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

Neil P. Dougherty: The electronic industrial solutions group generated revenue of $376 million down, 17% or 21% on a core basis.

Neil P. Dougherty: ISG reported gross margin of 58% and operating margin of 19% due to the seasonality of ESI profitability lower revenue volume and some unfavorable city and mix.

Neil P. Dougherty: Moving to the balance sheet and cash flow, we ended the quarter with $1.7 billion in cash and cash equivalents, generating cash flow from operations of $110 million and free cash flow of $74 million, which reflected higher cash taxes and the timing of collections in the quarter. Shareholder purchases this quarter totaled 302,000 shares at an average price per share of approximately $153 for a total consideration of $46 million. Now, turning to our album.

Neil P. Dougherty: Moving to the balance sheet and cash flow, we ended the quarter with $1 7 billion in cash and cash equivalents generating cash flow from operations of $110 million and free cash flow of $74 million, which reflected higher cash taxes and the timing of collections in the quarter.

Neil P. Dougherty: Share repurchases this quarter totaled 302000 shares at an average price per share of approximately $153 for a total consideration of $46 million.

Neil P. Dougherty: Now turning to our outlook, we expect third quarter revenue to be in the range of $1 billion $180 million to $1 $200 million.

Neil P. Dougherty: We expect third-quarter revenue to be in the range of $1,180,000,000 to $1,200,000,000 and Q3 earnings per share to be in the range of $1.30 to $1.36 based on a weighted diluted share count of approximately 175 million shares. As we look to the full year, our base case scenario remains the same and assumes a mid-single digit increase in revenue from Q3 to Q4, which implies full year revenue of approximately $4.9 billion.

Neil P. Dougherty: Q3 earnings per share to be in the range of $1 30 to $1 36.

Neil P. Dougherty: Based on a weighted diluted share count of approximately 175 million shares.

As we look to the full year our base case scenario remains the same and assumes a mid single digit increase in revenue from Q3 to Q4, which implies full year revenue of approximately $4 9 billion.

Neil P. Dougherty: In closing, we remain disciplined and focus on what we control, while investing to capitalize on the best growth opportunities as markets normalize and recover. Keysight's customer focus, technology leadership, and broad solutions portfolio give us confidence in the long-term trajectory of the business and the ability to outperform in a variety of market conditions. With that, I will now turn it back to Jason for the Q&A.

Neil P. Dougherty: In closing, we remain disciplined and focus on what we control while investing to capitalize on the best growth opportunities as markets normalize and recover.

Neil P. Dougherty: Say its customer focus technology leadership, and broad solutions portfolio give us confidence in the long term trajectory of the business.

Neil P. Dougherty: And the ability to outperform in a variety of market conditions with that I will now turn it back to Jason for the Q&A.

Jason Kary: Thank you, Neil. Sierra, would you please give the instructions for the Q&A?

Jason Kary: Thank you Neil Sarah would you give the instructions for the Q&A. Please.

Jason Kary: Absolutely.

Sierra: If you would like to ask a question, please press star 1. We ask that you please limit yourself to one question and one follow-up. To withdraw your question, press the pound sign. Please hold while we compile our Q&A roster. Our first question today comes from the line of Rob Mason with Bayard. Please proceed.

Speaker Change: If you'd like to ask a question. Please press star one.

Speaker Change: That you please limit yourself to one question and one follow up.

Speaker Change: To withdraw your question press the pound sign.

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

Speaker Change: Our first question today comes from the line of Rob Mason with Baird.

Speaker Change: Please proceed.

Robert W. Mason: Yes, good afternoon. Thanks for the question.

Speaker Change: Hi, Yes. Good afternoon. Thanks for the question.

Speaker Change: Im thinking it sounds like your base case for the year, obviously is still intact, just thinking through that more thoroughly.

Speaker Change: <unk>.

Speaker Change: Typically in the third quarter.

Speaker Change: May be down maybe flat to down slightly sequentially and then do you have better order trends in the fourth quarter seasonally.

Speaker Change: Should we think this is again still tied more to book and ship.

Speaker Change: As you think about the revenue.

Robert W. Mason: So I think it sounds like your base case for the year obviously is still intact. Just thinking through that more thoroughly, the orders, typically, in the third quarter maybe down, maybe flat to down slightly, sequentially, and then you have better order trends in the fourth quarter seasonally. Should we think this is, again, still tied more to book and ship, as you think about the revenue, upticking in the fourth quarter? Or any help you can provide just on the clarity for that slope?

Speaker Change: Up ticking in the fourth quarter.

Speaker Change: Any help you can provide just on the clarity for that that slope.

Neil P. Dougherty: Yeah, so yeah, first of all, I agree with your assessment of the typical seasonality of our business as we typically move from Q2 to Q3. I'd say that, you know, a small downtick in both orders and revenue would be typical seasonality, admittedly hard to find over the last couple of years, COVID, and the COVID recovery supply chain. But if you went back in time, that would have been the typical seasonality Then there was a big single-digit uptick into Q4 driven by the Envar annualized sales cycle, or second half sales cycle, as well as the strength of aerospace defense business tied to the government fiscal year end. And I think that's largely what we're seeing here this year as well, as we in terms of our expectations for the remainder of the year.

Speaker Change: Yeah. So yeah. So first of all I agree with your assessment of the typical seasonality of our business as we typically move from Q2 to Q3, I would say that a small downtick in both orders and revenue would be typical seasonality admittedly hard to find over the last couple of years Covid COVID-19 recovery supply chain, but if.

Speaker Change: We went back in time that would've been the typical seasonality than with the mid single digit uptick into Q4, driven by the end of our annualized sales cycle or a second half sales cycle as well as the strength of aerospace defense business tied to the government fiscal year end and I think that's largely what we're seeing here.

Speaker Change: This year as well.

Speaker Change: In terms of in terms of our expectation for the remainder of the year.

Satish Dhanasekaran: Very good. And just as a follow-up, could you dig a little bit deeper into your overall wireline business, the AI data centerpiece, obviously seeing some strength. I'm just curious about these new platforms that are rolling out, you know, what stage of adoption are we seeing with those? And, you know, just kind of more broadly on the wireline business.

Speaker Change: Very good and then just as a follow up could you.

Speaker Change: Dig a little bit deeper into your overall wireline business.

The AI data data center piece, obviously seeing some strength I'm just curious with these new platforms.

Speaker Change: That are rolling out at what stage of adoption.

Speaker Change: Are we seeing with those and just.

Speaker Change: And then just more broadly on the wireline business over and beyond the data center exposure.

Satish Dhanasekaran: Thank you, Rob. I think, you know, this quarter for the first time in six quarters, our commercial communications orders grew. And as a result of the inflection that we're seeing in the wireline business associated with AI, and it's still very early days, as the world continues to look at all of the applications that could be, that could be launched, leveraging AI at scale. And I would say it's still very early days, even for Keysight's business. So what we're seeing is probably the first, first inflection, I would say.

Speaker Change: Thank you Rob.

Speaker Change: This quarter for the first time in six quarters, our commercial communications orders grew.

Speaker Change: And as a result of the inflection that we're seeing in the wireline business associated with AI and it's still very early days.

Speaker Change: As the World continues to look at all of the applications that could be that could be launched leveraging AI at scale and I would say, it's still very early days even for key sites business. So what we're seeing is probably.

Speaker Change: Our first.

Speaker Change: First inflection I would say.

Satish Dhanasekaran: The big headline that we've seen in the last couple of quarters and that accelerated this quarter was the push from customers to lead in the hardware infrastructure space and how critical its performance is for cost, for energy, and in general for the user experience in the AI application. For Keysight, in our wireline business, you know, having the breadth of the portfolio that caters to networking, computing, storage, interconnects, and we're able to make contributions that are broad, but we're just getting started is the way I would frame it up. The heterogeneous environment there is helping us play a critical role, and we're also engaged in a number of standards bodies. So we saw strong double-digit growth in the wireline business this quarter.

Speaker Change: The big headline that we've seen in the last couple of quarters and that accelerated this quarter.

Speaker Change: The push from customers to lead in the hardware infrastructure space and how critical it is performance is.

Speaker Change: For cost for energy and in general for the user experience and the AI applications for key site in our wireline business, having the breadth of the portfolio that caters to networking computing storage interconnect and we're able to make contributions that abroad, but we're just getting started.

Speaker Change: I I would frame it up.

Speaker Change: The heterogeneous environment, there is helping us play a critical role and we're also engaged in a number of these standards body. So we saw strong.

Speaker Change: Double digit growth in the business.

Speaker Change: The wireline business this quarter and also sequentially a strong uptake in Q2.

Satish Dhanasekaran: Very good. That's helpful. Thanks, Satish.

Speaker Change: Very good thats helpful. Thanks.

Unknown Attendee: Thank you all. Thank you. This message comes from Mark Delaney with Goldman Sachs. Please proceed.

Speaker Change: Thank you our question today.

Speaker Change: Comes from Mark Delaney with Goldman Sachs.

Speaker Change: Please proceed.

Unknown Attendee: Hey, good afternoon, everyone. And you have Will Bryant on for Mark Delaney.

Speaker Change: Hey, good afternoon, everyone and you have well Brian on for Mark Delaney and thank you for taking our question. So in your press release, you. All reiterated that you are assuming modest order growth in the second half of the fiscal year can you give us some additional color on what gives you confidence that the orders will pick up in the second half. Thank you.

Unknown Attendee: And thank you for taking our question. So in your press release, you reiterated that you are assuming modest order growth in the second half of the fiscal year. Can you give us some additional color on what gives you confidence that orders will pick up in the second half?

Speaker Change: Yes. Thank you I think what we've said is the market environment remains unchanged and as we said in the previous call.

Speaker Change: We're not our base case does not assume any significant market recovery right. So barring that as just a seasonal uptick in Q4 as Neil just referenced coming from our aerospace defense business.

Satish Dhanasekaran: Yeah, thank you. I think what we've said is that the market environment remains unchanged. And as we said in the previous call, our base case does not assume any significant market recovery, right? So barring that, it's just a seasonal uptick in Q4, as Neil just referenced, coming from our aerospace defense business. Well, we are continuing to feel that the demand environment is stabilizing. I would say, as I pointed out earlier, wireline inflections and demand remain strong.

Speaker Change: We are continuing to feel that the demand environment is stabilizing I would say as I pointed out earlier, our wireline inflections and demand remains strong I'd say the aerospace defense is stable and our ESG business, which had which had seen four quarters, including the current quarter of <unk>.

Satish Dhanasekaran: I'd say the aerospace defense business is stable, and our EISG business, which has seen four quarters, including the current quarter, of declines stemming from normalization and manufacturing, is also starting to show some seasonal or starting to show some sequential growth, I should say, this quarter, all of which we view as signs of stability in the business.

Speaker Change: Declines.

Speaker Change: Stemming from normalization in manufacturing is also starting to see some seasonal.

Speaker Change: Starting to show some.

Speaker Change: Our sequential growth I should have said this quarter.

Speaker Change: All of which we view a sense of stability in the business.

Neil P. Dougherty: Thank you, that's helpful. And just one quick follow-up, just thinking about how you guys are managing OPEX as you plan your business in these volatile end markets. Can you give us any additional color about what you're doing to manage OPEX? Yeah, first I'd remind you

Speaker Change: Thank you that's helpful and just one quick follow up.

Speaker Change: Just thinking about how you guys are managing Opex as you guys are planning the business in these volatile markets could you give us any additional color about what youre doing to manage opex.

Neil P. Dougherty: Yeah, first, I'd remind you of the statements we made a quarter ago that we do expect, if excluding the additional OPEX from our acquisitions, our total OPEX spending to be down about 3% on a year-over-year basis, with all of that savings coming from the SG&A-lined items, as we look to maintain our investments in R&D to ensure that the business is well-positioned to capture the up I think we're looking, in terms of the types of actions that we're taking, obviously always looking for ways to streamline operations and drive efficiency in our business.

Speaker Change: Yes.

Speaker Change: First I'd remind you of the statements we made a quarter ago that we do expect.

Speaker Change: If excluding the additional opex from our acquisitions, our total opex spending to be down about 3% on a year over year basis with all of that savings coming from the SG&A line items as we look to maintain our investments in R&D to ensure that the business is well positioned to capture the upswing.

Speaker Change: When that occurs I think we're looking in terms of the types of actions that we're taking we're obviously always looking for ways to streamline operations and drive efficiency in our business I think if you take a look you'll notice that over the course of the last four quarters. Our head counts are down about 5% as we look to absorb attrition we've provided.

Neil P. Dougherty: I think if you take a look, you'll notice that over the course of the last four quarters, our headcounts are down about 5% as we look to absorb attrition. We've provided some incentives for folks to transition into retirement and have been absorbing those during this period of time. In addition, we obviously have a very flexible cost structure; the cost structure has been flexing as expected, which is also contributing to the financial performance in line with our model.

Speaker Change: Some incentives for folks to transition into retirement.

Speaker Change: <unk> been absorbing those during this period of time and.

Speaker Change: In addition, we obviously have a very flexible cost structure cost structure has been flexing as expected, which is also contributing to the financial performance in line with our model.

Speaker Change: Okay.

Speaker Change: Thank you.

Aaron Christopher Rakers: Our next question today comes from Aaron Rakers with Wells Fargo. Please proceed.

Speaker Change: Our next question today comes from Aaron Rakers with Wells Fargo. Please proceed.

Aaron Christopher Rakers: Yeah, thanks for taking the questions. I'll just put them both out there right away.

Aaron Christopher Rakers: Yes, thanks for taking the question.

Aaron Christopher Rakers: I'll just put them both out there right away I guess on the <unk>.

Speaker Change: ISG segment I'm curious on the semiconductor space can you first of all help us appreciate the size of that or any kind of clarity you can give in terms of the.

Speaker Change: That piece of ESG.

Speaker Change: Yes.

Speaker Change: Within that how do we think about these fab projects being delayed into late calendar 2000 and forward into 'twenty five and the timing when that starts to certain were positive and then I'd also be curious on the interconnect side, you mentioned chip to chip interconnect stimulation stuff I'm curious of how much of an opportunity.

Speaker Change: Presents who are you competing against there.

Speaker Change: And just kind of framing that out as far as opportunities we look forward.

Aaron Christopher Rakers: I guess on the EISG segment, I'm curious about the semiconductor space. Can you first of all, help us appreciate the size of that or any kind of clarity you could give in terms of, you know, that piece of ESIG? And, you know, within that, how do we think about these fab projects being delayed into late calendar 24 and into 25 and in the timing, you know, when that starts to turn more positive?

Speaker Change: Yes, so I'll take the first question sizing of semi and I'll hand, it over to Mark to make some comments on the market. What we've said is that our semi business is kind of 10 ish percent, maybe a little less.

Speaker Change: Okay, Yeah, and then in terms of the in terms of the Fabs and the delays or timing, we've been watching that closely over the last several quarters. We have seen some movement. We've said before that our funnel gives us about six months of visibility out into market timing.

Speaker Change: And we're starting to see some activity that would suggest that some of those fab expansion that had been delayed.

Speaker Change: <unk> associated with them.

Speaker Change: Should be beginning to show some signs of capex spend perhaps towards the end of the calendar year, but we're watching it very closely we have very deep relationships.

Speaker Change: With our customers and certainly the underlying drivers for advanced process technologies related back to AI are continuing to be very strong.

Speaker Change: As these applications begin to grow at scale.

Aaron Christopher Rakers: And then I'd also be curious on the interconnect side. You mentioned chip-to-chip interconnect simulation stuff. I'm curious about, you know, how much of an opportunity that presents. Who are you competing against there? And just kind of framing that out as far as opportunities we look forward to.

Speaker Change: And then last.

Speaker Change: Question was on interconnect.

Speaker Change: The last part of your question I didn't want to Miss It was our interconnect.

Speaker Change: Technology and as you think about data centers.

Speaker Change: Today's node sizes of 350 K too.

Speaker Change: Two 1 million and beyond at some point I think interconnects become very important that the nature of those interconnects. The high performance requirement associated with them are critical and therefore interoperability testing needs are key and key sites differentiated technologies across our core product line.

Speaker Change: <unk>.

Speaker Change: Is playing a critical role already and will continue to play a critical role moving forward to help our customers.

Speaker Change: Thank you.

Yeah.

Speaker Change: Thank you.

Neil P. Dougherty: Yeah, so I'll take the first question on the size of the semi, and we'll hand it over to Mark to make some comments on the market. What we've said is that our semi businesses are kind of 10 ish percent of total Keysight, maybe a little less.

Speaker Change: Our next question today comes from meta Marshall with Morgan Stanley.

Speaker Change: Please proceed.

Speaker Change: Great. Thanks, maybe a couple of questions for me.

Speaker Change: First just on ESI.

Speaker Change: Any commentary in terms of ability to sell that product to other customers as you get it integrated and just any commentary on early performance.

Speaker Change: And then just maybe as a second question any update on long dated orders or contribution of orders from long dated orders worth noting.

Speaker Change: Thank you.

Speaker Change: Again, we are quite quite pleased with the acquisition the performance in the first half has exceeded our initial plan, so which is which is good.

Speaker Change: Again, I view this simulation and emulation as a as a long term strategic priority for the company and ESI was was clearly gave us some differentiated capability to go pursue it the culture fit one two quarters in.

Speaker Change: As reiterated because our teams are working seamlessly the collaborative culture focus on technology all of those things are headed in the right direction.

Speaker Change: And from a revenue acceleration perspective.

Speaker Change: The focus for this team right.

Speaker Change: We're really prioritizing taking ESI as core products into aerospace defense in the U S and increasing our exposure with Asia auto manufacturers I'll, let mark make some comments on how the sales team is doing on that front, but overall quite pleased with the acquisition. Yes. Thanks cities. So it's been an exciting quarter and a half for us as we've begun to work more closely.

Mark: Across different geographies really the plan that we put in place back in late Q1 continues to be the plan, we're executing around our common areas of focus from a customer standpoint in North America, where ESI has underexposed with aerospace defense and then in both directions around auto, especially in Europe, we're seeing opportunity.

Speaker Change: Is open for both our classic business and working closely with ESI. So.

Speaker Change: Momentum. These are these are fairly long cycle sales cycles, many months to get to a point of closure, but we're already starting to see some progress in our funnel and I'm encouraged with the way. The teams are working together and just a quick comment on long dated orders the mix of long dated orders within the quarter were consistent with the with the recent past.

Speaker Change: Great. Thank you.

Speaker Change: Thank you.

Mark A. Wallace: Yeah, and then in terms of the fabs and the delays in timing, we've been watching that closely over the last several quarters. We have seen some movement, you know; we've said before that our funnel gives us about six months of visibility out into market timing. And we're starting to see some activity that would suggest that some of those fab expansions that have been delayed, the funding associated with them should be beginning to show some signs of CapEx spend perhaps toward the end of the calendar year, but we're watching it very closely. We have very deep relationships with customers, and certainly, the underlying drivers for advanced process technologies related back to AI are continuing to be very strong as these applications

Speaker Change: Our next question comes from Matt <unk> with Deutsche Bank. Please proceed.

Mark A. Wallace: And then the last point of your question was on interconnectivity. The last part of your question, I didn't want to miss it, was about our interconnect technologies. And as you think about data centers scaling from today's node sizes of 300k or 250k to, you know, a million and beyond, at some point, I think interconnects will become very important. The nature of those interconnects, and the high performance requirements associated with them, are critical, and therefore, interoperability testing needs are key, and Keysight's differentiated technologies across our core product line are playing a critical role already and will continue to play a critical role moving forward to help our customers.

Speaker Change: Hey, thanks, so much for taking the question.

Matthew Niknam: Just two if I could first maybe big picture, if you could talk a little bit about the Spirent deal why now and maybe some of the strategic rationale behind.

Meta A. Marshall: Our next question today comes from Meta Marshall with Morgan Stanley. Please proceed.

Speaker Change: Behind that deal and then secondarily just as we think about operating cash flow maybe for Neil could you just maybe talk a little bit about some of the drivers of sort.

Speaker Change: Relative softness this quarter and how to think about.

Speaker Change: Working cap and some of the other items that go into that for the second half of the year. Thanks.

Meta A. Marshall: Great, thanks. Maybe a couple of questions for me. First, on ESI, you know, any commentary in terms of the ability to sell that product to other customers as you get it integrated in, or just any commentary on early performance? And then, maybe, as a second question, any update on long-dated orders or contribution of orders from long-dated orders worth noting? Thanks.

Speaker Change: Thank you.

Speaker Change: As far as when the company we've known for some time, we used to have a partnership with them and I think that the rationale headlines are first it's a sam expansion.

Speaker Change: Pension opportunity think about the portfolio at Spirent with focus on service assurance positioning.

Speaker Change: Really a good fit to that network and <unk> expansion opportunity I laid out at the Investor Day and then.

Speaker Change: When I think about the financial aspect of this deal I think.

Satish Dhanasekaran: Thank you, Meta. Again, we're quite pleased with the acquisition; the performance in the first half has exceeded our initial plans. So which is which is good? Again, I view this simulation emulation as a long-term strategic priority for the company. And ESI clearly gave us some [inaudible], but we're already starting to see some progress in our funnel, and I'm encouraged with the way the teams are working together. And just a quick comment on long-dated orders, the mix of long-dated orders within the quarter.

Speaker Change: It creates.

Speaker Change: For customers and more scale and synergies inside the key site environment, but equally for.

Speaker Change: For our shareholders.

Neil P. Dougherty: And just a quick comment on long-dated orders; the mix of long-dated orders within the quarter was consistent with the recent past.

Speaker Change: Good deal from our from our point of view.

Speaker Change: It meets our hurdles M&A hurdles internally and it's accretive to gross and operating margins post integration. So we feel really good about the opportunity we are continuing to work through the regulatory process right now.

Matthew Niknam: Our next question comes from Matt Niknam with Deutsche Bank. Please proceed.

Matthew Niknam: Hey, thanks so much for taking the question. Just two, if I could. First, maybe big picture, if you could talk a little bit about the Spirant deal, why now, and maybe some of the strategic rationale behind that deal. And then, secondarily, just as we think about operating cash flow, maybe for Niels, we could maybe talk a little bit about some of the drivers of relative softness just this quarter and how to think about working capital and some of the other items that go into that for the second half of Thanks.

And then getting to your question on free cash flow and working capital. So obviously free cash flow, so a little bit softer within the quarter, but pointing out.

Speaker Change: North of $350 million through the first half of this year.

Speaker Change: Within the quarter as I mentioned in the prepared remarks, we do have unseasonable seasonally higher.

<unk> payments in the second quarter of the fiscal year that was expected and then the timing of revenue.

Speaker Change: Over the past couple of quarters for us.

Speaker Change: Not conducive to high collections within the quarter is the best way to say that we actually entered the quarter with about $90 million lower accounts receivable than we entered the prior quarter and then because of the lunar new year and other things, we got off to a bit of a slow start in February and so that that meant that.

Speaker Change: Those Q2 revenues that otherwise would have been collectable within the quarter was we were off to a slow start and your question about working capital just a couple of comments.

Speaker Change: So while collections were lower within the quarter, we do not have any material increase risk around accounts receivable are allowed.

Speaker Change: Allowance for bad debt is very low and we tend to not have issues in that area. We do however have significantly increased inventory over the past couple of years largely stemming from various things related to the supply chain, we delayed for a long time, the refresh of our demo portfolio. So we could take new products.

Speaker Change: And get them to customers when supply chains normalize we did refresh our demo portfolio and took the existing demo equipment and put it in a very used equipment pool, which is a benefit now because it gives us yet another opportunity to serve customers and we also had to make some investments because some of our vendors were.

Speaker Change: Yes.

Speaker Change: Cleaning up there. They are part list, we had to make some longer term investments and assurance of supply and inventory so feel pretty good about it I think there is a path to reducing inventory over time, but it's going to be tied to market market recovery.

Speaker Change: Thank you.

Speaker Change: Our next question today comes from David Ridley Lane with Bank of America. Please proceed.

Satish Dhanasekaran: Thank you. You know, Aspirant has been a company we've known for some time; we used to have a partnership with them. And I think the rationale headlines are first, you know, it's a SAM expansion opportunity. Think about the portfolio at Aspirant with a focus on service assurance, and positioning. Really a good fit to that network analytics expansion opportunity I laid out at Investor Day. And then, you know, when I think about the financial aspect of this deal, I think it creates value for customers and more scale and synergies inside the Keysight environment, but equally so for our shareholders.

Satish Dhanasekaran: It's a good deal from the point of view of it meeting our hurdles, M&A hurdles internally, and it's a creative to gross and operating margins post-integration. So we feel really good about the opportunity. We're continuing to work through the regulatory process right now. Yeah, and then getting to your question on free cash flow and working capital.

Speaker Change: Thank you good afternoon.

Speaker Change: Several competitors have pushed out their own recovery timelines here, obviously sticking with yours.

Speaker Change: What are the one or two things.

You would point to and in the results that give you the most confidence in that outlook.

Neil P. Dougherty: Yeah, and then getting to your question on free cash flow and working capital, so obviously free cash flow is a little bit softer within the quarter, but it points out north of $350 million through the first half of this year. In terms of within the quarter, as I mentioned in the prepared remarks, we do have seasonably higher tax payments in the second quarter of the fiscal year, but that was expected.

David: Yes. Thank you David I think look we look at it one quarter at a time and.

David: So far our focus has been on execution.

David: In our discussion with customers I would say that's the most relevant one is.

David: Many customers have commented that they are going through the burden has their own economics improve their comeback and they have doubled down on the programs and projects that we've been in discussions with so.

David: That inflicting nature that correlation to their business is perhaps the most important one that we look at a big.

David: Big picture when we start to look at macro factors I would say you look at even the smartphone sales PC sales and other things you start to see some improvement along with that.

David: The PMI indices that are growing so while not calling for a timing or magnitude of the recovery.

Neil P. Dougherty: And then the timing of revenue over the past couple of quarters was not conducive to high collections within the quarter. The best way to say that is that we actually entered the quarter with about $90 million less accounts receivable than we entered the prior quarter. And then because of the Lunar New Year and other things, we got off to a bit of a slow start in February. And so that meant that those Q2 revenues that otherwise would have been collectible within the quarter were we were off to a slow start.

At this point, we remain focused on execution the one tactical area.

David Emerson Ridley: The data that we have in houses on a pipeline I'll have mark make a comment on the pipeline, yes, David I would just simply say our pipeline supports this expectation of the modest improvement in H two orders driven by the seasonality in Q4.

David Emerson Ridley: Our next question today comes from David Ridley Lane with Bank of America. Please proceed.

Neil P. Dougherty: And your question about working capital, just a couple of comments. So while collections were lower within the quarter, we do not have any material increased risk around accounts receivable. Our allowance for bad debt is very low, and we tend not to have issues in that area.

Neil P. Dougherty: We do, however, have significantly increased inventory over the past couple of years, largely stemming from various things related to the supply chain. We delayed for a long time the refresh of our demo portfolio so we could take new products and get them to customers. When supply chains normalized, we did refresh our demo portfolio and took the existing demo equipment and put it in our used equipment pool, which is a benefit now because it gives us yet another opportunity to serve customers. And we also had to make some investments because some of our vendors were www.keysight.com

David Emerson Ridley: Thank you. Good afternoon. You know, several competitors have pushed out their own recovery timelines; you're obviously sticking with yours. What are the one or two things that you would point to in the results that give you the most confidence in that outlook?

David Emerson Ridley: Funnel intake, which is growth of new business into the funnel is up in pockets with the green shoots that we've already spoken about with AI and wireline memory.

David Emerson Ridley: And continued demand in the longer term secular businesses that we've spoken about with aerospace defense and EV, we have not yet seen.

David Emerson Ridley: The lift from the U S defense budget being signed in the Middle of March So we hope to see some of that.

David Emerson Ridley: Come through as well and again velocity is key and we're starting to see some of that pickup which showed some confidence in our customers.

Satish Dhanasekaran: Yeah, thank you, David. I think look, we look at it one quarter of the time. And, you know, so far, our focus has been on execution. In our discussions with customers, I would say that's the most relevant one: many customers have commented that they are going through the bottom, their own economics have improved, they've come back, and they have doubled down on the programs and projects that we've been in discussions with.

Satish Dhanasekaran: So, you know, that the inflection nature and correlation to their business is perhaps the most important one that we look at. Big picture, when we start to look at macro factors, I would say SIA, you look at even smartphone sales, PC sales, other things, you start to see some improvement along with the PMI indices that are growing. So, you know, while not calling for a timing or magnitude of recovery, you know, at this point, we remain focused on execution. The one tactical area that we have data on houses on our pipeline, I'll have Mark make a comment on the pipeline. Yeah, David, I would just simply say our pipeline.

Mark A. Wallace: Yeah, David, I would just simply say our pipeline supports this expectation of a modest improvement in H2 orders driven by the seasonality in Q4. Funnel intake, which is growth of new business into the funnel, is up in pockets with the green shoots that we've already spoken about with AI and wireline memory, and continued demand in the longer term secular businesses that we've spoken about with aerospace defense and EV. We have not yet seen the lift from the US defense budget being signed in the middle of March. So we hope to see some of that come through as well. And again, velocity is key, and we're starting to see some of that pick-up, which shows some confidence in our customers.

Unknown Attendee: Got it. Okay. And, just a quick follow-up on, You know, obviously, you have your internal plans. And in terms of the cost actions you're taking, I was a bit surprised by the sort of the magnitude of the restructuring costs in the quarter, though. Did you take expanded actions? Or is this all part of the plan as envisioned, you know, three, six months ago?

Speaker Change: Got it okay.

Speaker Change: And just quick.

Speaker Change: Quick follow up.

Speaker Change: Obviously, you have your internal plans on in terms of the cost actions you're taking.

Speaker Change: I was a.

Speaker Change: It surprised that sort of the magnitude of the restructuring costs in the quarter, though did you did you take expanded actions or is this all part of the plan as envisioned three six months ago.

Neil P. Dougherty: Uh, no, no expanded actions. I think if you're looking at the reconciliations that were provided, the categories actually listed as restricting slash other, and there was a modest legal settlement that occurred within the quarter as well, that's skewing that number higher. Okay.

Speaker Change: No expanded actions I think if youre looking at the reconciliations that were provided the category is actually listed as restructuring plus other than there was a modest legal settlement that occurred within the quarter as well thats skewing that number higher.

Unknown Attendee: Okay, that explains it. Thank you very much.

Speaker Change: Okay that explains it thank you very much.

Speaker Change: Thank you.

Adam Robert Thalhimer: Our next question today comes from Adam Townsend with. Thomas Davis.

Speaker Change: Our next question today comes from Adam <unk> with <unk>.

Thomas Davidson: Thomas Davidson.

Adam Robert Thalhimer: Please proceed. Hey. In the EISG segment, yeah, in the EISG segment, do you see revenue, do you see further weakness in revenue and margins in the back half, or do you think things will improve versus...

Speaker Change: Please proceed hey, good afternoon guys.

Speaker Change: And the ISG segment.

Speaker Change: And the ESG segment do you see revenue do you see further weakness in revenue and margins in the back half or do you think things improved versus Q2.

Neil P. Dougherty: Yeah, I think, you know, it I would say the answer is twofold, right? One is on the order line. We think the demand environment improves, even as orders improve.

Thomas Davidson: Yes, I think.

Yes.

Speaker Change: I would say the answer is twofold. One is on the order line, we think the demand environment improves a bit as we go into the second half, especially Q4, driven by some of the semiconductor spend that we're expecting to land in Q4, but again revenue would be offset because some of the business that we book in the.

Speaker Change: ISG.

Speaker Change: Does have a bigger percentage of long dated sort of backlog items. So.

Speaker Change: It has to fall, we expect that Neil can give us.

Speaker Change: But that revenue would be.

Speaker Change: We faced some headwinds in the second half.

Speaker Change: Even as orders improve.

Neil P. Dougherty: Yeah, you know, as you think about the margin situation in the EISG, I highlighted kind of three factors, right? The seasonality of ESI, which is, you know, strongly profitable in Q1 and in a modest loss position the remainder of the year, that is impacting EISG profit. But by far the biggest issue, the biggest driver is the revenue decline, right? So revenues are down sharply here in Q2, and I think as long as we're operating in these revenue ranges, it's going to be reasonably range bound in the current operating margin vicinity.

Yes.

Speaker Change: As you think about the margin situation in ISG highlighted kind of three factors right the seasonality of ESI, which is.

Speaker Change: Strongly profitable in Q1, and a modest loss position in the remainder of the year that that is impacting the ISG profit, but by far the biggest situated.

Speaker Change: Biggest driver is the revenue decline rates of revenues down sharply here in Q2, and I think as long as we are operating in these revenue ranges, it's going to be reasonably range bound in the current in the current operating margin percentage and just want to add on the order line.

Neil P. Dougherty: And just one add on the order line, the EISG business in Asia went in about two quarters after CSB, so that was just lapped at the end of Q2, so that gives us some confidence that the comparison piece will be getting easier in the second half.

Speaker Change: ISG businesses in business in Asia, when in about two quarters after CSP. So.

Speaker Change: That was just lapped at the end of Q2, so that gives us some confidence that the comparison will be getting easier in the second half.

Adam Robert Thalhimer: Okay, and then one for commercial communications. Can you help us frame the AI data center opportunity for you guys? versus 5G at the peak?

Speaker Change: Okay and then.

Speaker Change: One for commercial communications on.

Speaker Change: Can you help us frame the AI data center opportunity for you guys versus five <unk> at the peak.

Satish Dhanasekaran: Well, first of all, from a timing perspective, it's very early days for the AI opportunity, primarily because there are obviously logical areas where we engage with customers. But we have several active collaborations underway, around silicon, one on real-time training of clusters, interconnect. Testing Methodologies for Benchmarking AI, Protocol Aspects of the New Standard, UEC, Transceiver Manufacturing, Interoperability.

Well first of all from a timing perspective.

Speaker Change: It's very early days for.

Speaker Change: For the AI opportunity, primarily because there are obviously logical areas, where we engage with customers, but we have several active collaborations underway.

Speaker Change: Around silicon.

Speaker Change: One on real real time training of clusters Interconnects.

Speaker Change: <unk> methodologies for benchmarking AI protocol expert aspects of the new standard UEC.

Speaker Change: Transceiver manufacturing interoperability so while we are while we are.

Satish Dhanasekaran: So while we are booking some business today, and we have several active collaborations underway which are quite promising, and the ecosystem of customers that we serve will expand over time, it's very hard to compare and contrast with 5G or the wireless side. But I think the key for the commercial comms business has always been to increase our emphasis on early R&D because we know that it makes us much more strategic and critical to customers.

Speaker Change: Bookings in business today and.

Speaker Change: We have some several active collaborations underway, which are quite promising and the ecosystem of customers that we serve.

Speaker Change: Expand over time very hard to compare and contrast.

Speaker Change: With <unk>, the wireless side, but I think the key for the commercial comps business has always been to increase our emphasis on early R&D, because we know that it makes us much more strategic and critical to customers second is to maintain diversity and application set. So we have both equal focus on wireless and wireline that give us.

Satish Dhanasekaran: Second, is to maintain diversity in application sets, so we have an equal focus on wireless and wireline that gives us ways to drive growth in our market, and we feel really good about our competitive position based on our portfolio strength. And it's only going to grow as the industry adopts AI at scale.

Speaker Change: Ways to drive growth above market, and then <unk> feel really good about R. R.

Speaker Change: Our competitive position on our portfolio strength, and it's only going to grow as we as the industry adopts AI at scale.

Satish Dhanasekaran: Okay, good color, thanks.

Speaker Change: Okay. Good color. Thanks.

Mehdi Hosseini: Our next question comes from Mehdi Hosseini on SICK.

Speaker Change: Our next question comes from Mehdi Hosseini with Sig. Please.

Speaker Change: Please proceed.

Mehdi Hosseini: Yes, thanks for taking my question. Two follow-ups. Satish, I'm trying to better understand how you're managing business beyond the second half. And I want to go back to the analyst. They talked about five to 7% longer-term revenue growth. And obviously, 2023, fiscal year 2023 turned out to be a lot worse, so it helps you with a lower base.

Mehdi Hosseini: Thanks for taking my question two follow ups.

Speaker Change #101: I'm trying to better understand how you're managing business beyond the second half and I wanted to go back to the analyst day.

Speaker Change #102: For the 5% to 7%.

Speaker Change #101: Yeah.

Speaker Change #103: Longer term revenue growth and that was the 2023 fiscal year 2003 turned out to be a lot worse. So it helps you with a lower base.

Speaker Change #103: Hi.

Speaker Change #103: Think of the low end of that longer term revenue target range.

Speaker Change #103: Revenues in FY, 'twenty, 546 would need to be up double digits, and whether I want to understand.

Mehdi Hosseini: And if I even think of the low end of that longer-term revenue target range, your revenues in FY 25 and 26 would need to be up by double digits. And what I want to understand, as I noted earlier, I want to see how you're planning on running the operation. I don't see any one killer app on the horizon. There are several smaller killer apps. And to what extent M&A is going to be part of your strategy to hit that revenue target and have a follow-up.

Speaker Change #104: I noted earlier I wouldn't see how youre planning, how youre running the operation.

Speaker Change #103: <unk>.

Speaker Change #105: Any one.

Speaker Change #105: Killer App on the horizon there are several.

Speaker Change #105: A smaller killer app.

Speaker Change #106: And to what extent M&A is going to be part of your strategy to hit the revenue target and I have a follow up.

Satish Dhanasekaran: Yeah, thank you, Mehdi. So I know you asked several questions in one, but let's make sure I hit all of them. But I'll start by saying, look, we feel, you know, really good about our long-term growth expectations for this business. And as we laid out the three-prong growth strategy at Investor Day, you know, we see these technology trends are accelerating, we see transforming industries, increasing our ecosystem of customers we can serve. And we see market dynamics with governments around the world investing in organic IP. So, you know, none of those have fundamentally changed.

Speaker Change #107: Yes. Thank you Mehdi so I know you asked several questions in one, but let's make sure I hit all of them, but I'll start by saying look we feel.

Speaker Change #107: Really good about our long term growth expectations for the business and as we laid out.

Speaker Change #107: The three pronged growth strategy at Investor Day, we see this technology trends are accelerating we see transforming industries, increasing our ecosystem of customers. We can serve and we see market dynamics with governments around the world investing for organic IPC.

Satish Dhanasekaran: And we feel like we're in a good position. And if you look at our strategy through this downturn, which is to continue to invest in R&D in a prudent way but really focus those investments on where our customers need the most help, especially in the R&D labs of our customers, making us more strategic. And the cost actions that we've taken in navigating this downturn have been largely on the SG&A line. So, you know, we feel good about the opportunity that we see ahead.

None of those have fundamentally changed and we feel like we're in a good position and if you look at our strategy through this downturn is to continue to invest in R&D in a prudent way, but really focus those investments on where our customers need the most help especially in the R&D labs of our customers, making us more strategic and the cost actions that.

Speaker Change #107: We have taken in navigating this downturn has been largely on the SG&A line. So we feel good about the opportunity that we see ahead.

Satish Dhanasekaran: As far as you know, our ability to deliver those results clearly, while we feel good, you know, you know, it is possible that the timeline pushes out a bit given the decline that we've had in 2024. And so a lot depends on the timing of the recovery.

Speaker Change #107: As far as.

Speaker Change #107: Our ability to deliver to those results clearly.

Speaker Change #107: While we feel good.

Speaker Change #107: It is possible that the.

Speaker Change #107: Timeline pushes out a bit given given the decline that we've had in 2024.

Speaker Change #107: And so a lot depends on the timing of the recovery, but if history is any measure every time, we've had strong pullbacks we've had stronger.

Satish Dhanasekaran: But if history is any measure, every time we've had strong pullbacks, we've had stronger, stronger, you know, uptrends as well in terms of orders. So we continue to watch that strategically, you know, software and services have been an area of focus for us. Software and services now make up roughly 40% of the total company, which is a good, good trend. And we want to keep driving that higher. And as I've retraded before, we look at several deals; we've looked at over 350-400 deals in the company, and we've only done about 20.

Stronger.

Speaker Change #107: Uptrend as well in terms of orders. So we continue to watch that strategically in our software and services has been an area of focus for US software and services now is roughly 40% of the total company, which is a good trend and we want to keep driving that higher and as I've reiterated before.

Speaker Change #107: We look at several deals we've looked at over 300 5400 deals in the company and we've only done about 20. So we're very selective in our strategy. It's not about revenue we look strategically at the areas, where we feel like we want to make a bigger contribution and where we can bring value to those assets when they come inside key site.

Satish Dhanasekaran: So we're very selective in our strategy. It's not about revenue; we look strategically at the areas where we feel like we want to make a bigger contribution and where we can bring value to those assets when they come inside Keysight. So from that point of view, there's really no change. We're an organic first company; we believe in investing with our customers to create long-term value.

Speaker Change #107: So there is from that point of view there is really no change.

Speaker Change #107: Organic first company, we believe in investing.

Speaker Change #107: With our customers to create long term value.

Mehdi Hosseini: Great, thank you. And then maybe I'll follow up and ask Neil the question.

Speaker Change #108: Great. Thank you and then maybe a follow up question to the new as you think about this longer.

Neil P. Dougherty: As you think about these long-term targets and Inventory Cash Flow Normalizing, should we assume that your free cash flow would go back to the historical average of like a high team percentage of revenue that was very significant when we were going through the upcycle a couple of years ago? Yeah, I think I think over time, Mehdi, but I think

Speaker Change #107: And longer term targets.

Speaker Change #107: And.

Speaker Change #109: Inventory cash flow normalizing should we assume that your free cash flow back to the historical.

The average uplift.

Speaker Change #110: <unk> percentage of revenue.

That was very significant.

Speaker Change #110: We're going through the up cycle, a couple of years ago.

Neil P. Dougherty: Yeah, I think I think over time, Mehdi, but I think in the short run, the way we think about free cash flow internally is we look for a relatively high conversion of non gap net non gap net income into free cash flow. And we've talked about running that in the 90% or higher range.

Speaker Change #111: Yes, I think I think over time, maybe but I think in the short run the way, we think about free cash flow internally as we look for a relatively high conversion of <unk>.

Speaker Change #111: non-GAAP net non-GAAP net income into free cash flow and we've talked about running that in the 90% or higher range and so while we don't have a specific free cash flow guide that we put out there I think that's how we think about it over the longer term. The one thing that I would say and you can see this by looking back in our history.

Neil P. Dougherty: And so while we don't have a specific free cash flow guide that we put out there, I think that's how we think about it over the longer term. The one thing that I would say, and you can see this by looking back in our history, is that there are periods in time where we have kind of non-standard cash flow items that can reduce that level of free cash flow conversion. And specifically, I'm thinking about things like restructuring costs and, most notably, given where we are right now, M&A costs, either integration or transaction costs associated with M&A.

Is that there are periods of time, where we have kind of non standard cash flow items that can reduce that level of free cash flow conversion and specifically I'm thinking about things like restructuring costs and most notably given where we are right now M&A costs, either integration or transaction costs associated with M&A.

Neil P. Dougherty: So you start to think about us now working on the integration of ESI and, hopefully, in the not too distant future, beginning to work on the integration of Spirant. Those things will be short-term drains on free cash flow conversion. I think the good news is the ability for us to, you know, drive future benefits. We talked about Spirant being ultimately accretive to operating margins. It's ultimately going to drive higher free cash flows going forward once we get through those periods of integration.

Speaker Change #111: As soon as you start to think about is now working on the integration of ESI and hopefully in the not too distant future beginning to work on the integration of <unk>.

Speaker Change #111: Spirent all of those things will be short term drains on free cash flow conversion I think the good news is the ability for us to.

Speaker Change #111: Drive future benefits, we've talked about spire and being ultimately accretive to operating margins.

Speaker Change #111: It's ultimately going to drive higher free cash flows going forward once we get through this and periods of integration.

Speaker Change #112: Got it thank you.

Jason Kary: Thank you all for your questions. That will conclude our Q&A session for today. I'd like to turn the call back to Jason Kary for any closing comments.

Speaker Change #113: Thank you all for your questions.

Speaker Change #114: That will conclude our Q&A session for today.

Speaker Change #115: Like to turn the call back to Jason Kary for any closing comments.

Jason Kary: Thank you, everyone, for joining us. And we appreciate the opportunity to speak with you today. We'll turn it back to CR just to wrap up and close the call.

Jason Kary: Thank you everyone for joining us and we appreciate that.

Speaker Change #116: <unk> to speak with you today, we will turn it back to Sarah just to wrap up and close the call.

Sierra: Thank you. That will conclude today's conference call. Thank you all for your participation. You may now disconnect your lines.

Jason Kary: Okay.

Sarah: Thank you.

Speaker Change #118: That will conclude today's conference call.

Speaker Change #119: Thank you all for your participation you may now disconnect your lines.