Q4 2024 Keysight Technologies Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal Fourth 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 dial star zero.
This call is being recorded today, Tuesday, November 19, 2024, at 1.30 p.m. Pacific Time. I would now like to hand the call over to Paulina Sims, Director of Investor Relations. Please go ahead, Ms. Sims.
Paulina Sims: Thank you and welcome everyone to Keysight's fourth quarter earnings conference call for fiscal year 2024. Joining me are Keysight's president and CEO Satish Dhanasekaran and our CFO Neil Dougherty.
Paulina Sims: In the Q&A session, we will be joined by Chief Customer Officer Mark Wallace.
Paulina Sims: The press release and information to supplement today's discussion are on our website at Investor.Keysight.com under Financial Information and Quarterly Reports.
Today's comments will refer to non-GAAP financial measures.
Paulina Sims: 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.
Paulina Sims: 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.
Paulina Sims: 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.
Paulina Sims: 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.
Paulina Sims: Lastly, management is scheduled to participate in upcoming investor conferences hosted by Wells Fargo and Barclays.
And now, I will turn the call over to Satish.
Satish Dhanasekaran: Good afternoon everyone and thank you for joining us today. My comments will focus on three key headlines.
First...
Satish Dhanasekaran: Keysight executed well and delivered fourth quarter revenue and earnings per share about the high end of our guidance range
Satish Dhanasekaran: under market conditions which remain consistent with our expectations. Orders finish slightly above our expectations.
Satish Dhanasekaran: and grew 1% year-over-year and 8% sequentially, driven by ongoing strength in AI and strong year-end bookings in our U.S. aerospace, defense and government business.
Satish Dhanasekaran: Under challenging market conditions, we demonstrated the resilience of our business model by delivering 26% operating profit and over 900 million in free cash flow.
Satish Dhanasekaran: We also returned approximately 50% of free cash flow to shareholders through repurchases.
Satish Dhanasekaran: Third, we progressed our software-centric solution strategy by investing to realize organic growth opportunities through innovation and industry collaborations.
while expanding the breadth of our solutions through selective M&A.
Satish Dhanasekaran: As we look ahead, the strength of our differentiated portfolio, deep engagement with customers, and the accelerating pace of technology innovation gives us confidence in our ability to outperform as markets recover.
Satish Dhanasekaran: Communication Solutions Group revenue was flat year-over-year and grew six percent sequentially with growth across both commercial communications and aerospace defense and government.
Satish Dhanasekaran: In wireline markets, demand remains strong due to ongoing expansion in AI data center infrastructure, even as telco investments continue to be muted.
Satish Dhanasekaran: As the timeline for 800 gig and 1.6 terabit adoption accelerates, the industry is investing in advanced technologies including silicon photonics, chiplets, and high-speed electrical and optical interconics.
Speaker Change: Keysight continues to expand its portfolio of solutions across the technology stack to enable customers in both R&D and manufacturing.
Speaker Change: At the Open Compute Project in San Jose, Keysight showcased our newly introduced AI workload and system emulation solution in collaboration with Academia and Hyperscalers.
Speaker Change: Our solution provides high-fidelity emulation of AI model training and inferencing workloads to optimize training time and benchmark AI infrastructure performance.
Speaker Change: At ECOG conference, Keysight showcased physical and protocol layer solutions with industry leaders to enable 800 gig interoperability with critical optical and electrical interface technologies.
Speaker Change: In wireless, demand was stable as smartphone industry nears the end of its inventory correction and telco capex normalizes from peak levels.
Speaker Change: Investment continues in Open RAN, expansion, ongoing standards progression with emphasis on non-terrestrial networks and early 6G research.
Speaker Change: This quarter, we announced multiple O-RAN collaborations with industry leaders such as NTT DoCoMo, DISH Networks, and Pegatron.
Speaker Change: We also collaborated with Qualcomm to establish industry's first end-to-end interoperability and data connection in the candidate frequency band for 6G, FR3.
Speaker Change: We're also well-poised to drive industry innovation forward with our differentiated full-stack solutions.
Turning to aerospace defense and government.
Speaker Change: Stronger than expected seasonality drove orders to an all-time high. The funnel of opportunities remains strong. The U.S. defense budget is expected to grow low single digits while government investment in defense modernization in Europe and Asia is projected to increase.
Speaker Change: Customer engagements on electromagnetic spectrum operations, radar, and advanced communication use cases remains high.
Speaker Change: Keysight is capitalizing on the growing investment in defense modernization around the globe.
Speaker Change: Its differentiated and industry-leading capabilities include wideband, high-dynamic range, pre-selected receivers for faster S-parameter measurements to enable customers' high-frequency component designs.
Speaker Change: In semiconductor, robust demand drove strong order growth for our parametric wafer test solutions.
Speaker Change: We saw broad-based foundry investment to expand capacity and address leading-edge applications driven by AI. This included advanced DRAM technologies such as high bandwidth memory and DDR5 as well as silicon photonics.
Speaker Change: Enabling further advances in power semiconductor production and efficiency, this quarter Keysight introduced an innovative, single-pass, 3 kilovolt high-voltage wafer test solution.
Speaker Change: In automotive, the industry is facing challenges and we expect the headwinds to continue in 2025.
Speaker Change: This quarter, production-related demand was sequentially stable, while we saw incrementally cautious pending due to slowing EV sales and battery oversupply.
Speaker Change: ESI grew its solution business this year through steady renewals and new customer additions.
Speaker Change: Over this period, the ESI team also made significant contributions through the use of AI to improve product performance simulations and offering workflow solutions with immersive visualization to validate assembly and servicing.
Speaker Change: In General Electronics, we saw stable manufacturing demand, albeit at lower levels, and a modest sequential improvement in consumer and industrial high-speed connectivity applications.
Speaker Change: Public and private sector investment in support of advanced research and technology workforce development grew this quarter and digital health application demand was again strong.
Speaker Change: As a recognized thought leader in RFEDA, Keysight was selected to lead a U.S. government joint public and private sector effort to leverage AI and machine learning to automate and bring efficiencies to complex RF integrated circuit designs.
in a variety of economic conditions.
Speaker Change: We have positioned the business to emerge stronger as markets recover, to capitalize on the opportunities ahead of us, and to create value for all stakeholders.
Before I conclude
Speaker Change: I'd like to sincerely thank our employees once again for all their outstanding contributions, commitment, and strong track record of execution under a variety of market conditions. With that, I'll turn it over to Neil to discuss our financial performance and outlook.
Neil Dougherty: Thank you Satish and hello everyone. Fourth quarter revenue of $1,287,000,000 was above the high end of our guidance range and down 2% or down 5% on a core basis.
Neil Dougherty: Orders of $1,345,000,000 were up 1% as reported, or down 1% on a core basis.
Neil Dougherty: Backlog increased $53 million in the quarter to finish at $2.4 billion.
Neil Dougherty: Looking at our operational results for Q4, we reported gross margin of 64.5%.
Operating expenses of $497 million were up 5% year-over-year.
Neil Dougherty: Q4 operating margin was 26% or 28% on a core basis.
Neil Dougherty: Turning to earnings, we achieved $288 million of net income and delivered earnings per share of $1.65.
Neil Dougherty: Our weighted average share count for the quarter was 174 million shares.
Neil Dougherty: For the full year, Keysight generated revenue of $4,979,000,000, down 9% as reported, or down 12% on a core basis.
Neil Dougherty: Gross margin was 65% down 60 basis points versus the prior year.
Neil Dougherty: We sustained investment in R&D at $871 million, or 17.5% of revenue, while driving further operating efficiencies in SG&A, which declined 7%, excluding acquisitions.
Neil Dougherty: Full year core operating margin of 26.5% was down 370 basis points.
Neil Dougherty: continuing to outperform Keysight's down cycle model and demonstrating the financial resilience of the business.
Neil Dougherty: Net income of $1.1 billion resulted in earnings per share of $6.27.
Neil Dougherty: Moving to the performance of our segments. The communication solutions group generated fourth quarter revenue of $894 million. Flat test reported or down 2% on a core basis.
Neil Dougherty: Commercial communications revenue of $591 million grew 4%, while aerospace defense and government revenue of $303 million declined 6%.
Neil Dougherty: The Electronic Industrial Solutions Group generated revenue of $393 million, down 6% or 11% on a core basis.
Neil Dougherty: EISG reported gross margin of 58% and operating margin of 21%, an increase of approximately 100 basis points versus the prior quarter.
Neil Dougherty: Moving to the balance sheet and cash flow, we ended the quarter with $1.8 billion in cash and cash equivalents, generating cash flow from operations of $359 million and free cash flow of $328 million.
Neil Dougherty: Sharer purchases this quarter totaled 974,000 shares at an average price per share of approximately $154, for a total consideration of $150 million.
Neil Dougherty: Full year share purchases totaled $439 million, or 49% of the $905 million in free cash flow generated this year.
Now turning to our Outlook.
Neil Dougherty: We expect the demand environment to remain mixed, and for recovery to occur gradually through the year, barring any further macro-degradation.
Neil Dougherty: Our base case assumptions for FY25 are for revenue growth at the low end of our 5-7% long-term target and earnings growth in line with our 10% target.
Neil Dougherty: As a reminder, the timing of ESI's annual contract renewals typically results in 40 to 45% of their full year revenue being recognized in our fiscal first quarter.
Neil Dougherty: with the balance recognized relatively evenly over the remainder of the fiscal year.
Neil Dougherty: For the rest of the business, we are modeling the typical mid-single-digit seasonal decline in revenue from Q4 to Q1. As a result, we expect first quarter revenue to be in the range of $1,265,000,000 to $1,285,000,000.
Now a few modeling considerations for the full year.
Neil Dougherty: Given the annual ESI contract renewals in Q1, we expect a material sequential decrease in ESI revenue in Q2, and over the same period, we expect a low single-digit increase in core Keysight revenue.
Neil Dougherty: At current debt levels, annual interest expense is expected to be approximately $70 million, capital expenditures are expected to be approximately $150 million, and we are modeling a 14% non-gap effective tax rate for FY25.
Speaker Change: With that, I will now turn it back to Paulina for the Q&A.
Paulina Sims: Thank you, Neil. Operator, will you please give the instructions for the Q&A?
Speaker Change: Absolutely. Ladies and gentlemen, if you would like to ask a question, press star one. We ask that you please limit yourself to one question and one follow-up. To withdraw your question, press star two.
Please hold while we compile the Q&A roster.
Speaker Change: The first question comes from the line of Erin Rakers from Wells Fargo. Your line is now open.
Speaker Change: Yeah, thanks for taking the question and congrats on the results.
Speaker Change: I guess my first question is, I want to ask you about the wireless piece of the business. It seems to be recovering. I think it was kind of...
Speaker Change: You know, mid-single digit, if I'm correct, from the presentation, order growth in the quarter. I'm just curious of how you, you know, I guess the past conversations have suggested that's more of a stabilizing business as we move through this year. Has that started to change as your view of growth kind of recovery in that business, you know, started to evolve or deepen, you know, as we look through this next fiscal year?
Speaker Change: Yeah, thank you, Aaron. Indeed, a good quarter. We executed well and capitalized on the opportunities we saw.
Speaker Change: Specific to your question on wireless, we continue to feel more confident, I would say, after two quarters where the business has stabilized.
Speaker Change: and we're seeing more strengths on the infrastructure side where there's more activity from customers around Open RAN and 6G research, so that drives that.
Speaker Change: And on the devices side, it's lagging a little bit where customers still continue to be focused on ongoing standards evolutions.
Speaker Change: So, I mean, at this point, we continue to believe that the business will remain stable in 2025, we'll call it when we see it. But we continue to feel good about the ongoing momentum we're seeing in our wireline business.
that's driven growth for commercial communications.
Speaker Change: Yep, and then as a quick follow-up, kind of sticking with looking at some of the segments, the aerospace and defense segment, I'm curious if this question has come up with some investors.
Speaker Change: But, you know, have you seen any, you know, areas of concern or any kind of, you know, churn in programs, et cetera, around some of the federal dynamics of spend? Any uncertainties around that that you would point to?
Speaker Change: Yeah, I think, Aaron, the long-term trajectory for that business is actually the one that is easiest to forecast given the budget clarity that typically gets and the priorities that get set both in the U.S. and in allied nations.
Speaker Change: and if you look at electromagnetic spectrum operations, space and satellite and other areas
Speaker Change: Those are the areas where defense modernization investments are moving to and we feel good about our position.
Relative to the year, obviously orders were slightly down year-over-year.
Speaker Change: but off of a record compare from a year ago. And some of the wins that we had were systems wins, which take us a little longer to ship, so you haven't yet seen that.
Speaker Change: in the revenue line. But as we look ahead, obviously the short-term with the administration change in the U.S. does bring some uncertainties.
but even at times...
Speaker Change: like in 2016, where that happened, we just had some business morale between quarters and and so we'll monitor the situation but we feel good about the current situation with regard to our business there.
Thank you.
Thank you. Thank you.
Speaker Change: I apologize the next question is from Tim Long with Barclays. Your line is now open.
Speaker Change: Thank you. Yeah, two for me as well. First, could you, you mentioned AI leading the strength in in wireline, obviously a lot.
Going on there a lot of activity. Could you?
Speaker Change: maybe expand a little bit on on how big that business is getting for you and maybe
Speaker Change: Some examples of newer areas that Keysight is being pulled into because of the move in AI.
Speaker Change: And then the second one, I just wanted to follow up on the software services, you know, it's a 39% of
Speaker Change: revenues here. Maybe just talk a little bit about that evolving part of the business model and how
how Q-Tide is going to be able to
Speaker Change: move that number further and maybe impact on gross margin as that moves higher as well. Thank you.
Thank you, Tim. Clearly, you know, the waterline business...
Speaker Change: has gained momentum this year driven by AI. But this is one of the examples of proof of concepts that I highlighted at Investor Day last year. And so we're quite pleased with the way the opportunity has progressed. Our waterline business has exceeded over a billion dollars in orders this year, growing at double-digit rates.
Speaker Change: And we service a broad set of customers in that industry, right? You think about silicon designers, system integrators.
any
Speaker Change: Hyper-Scalers and Contract Manufacturers. So it's actually a broad set of customers. But what's driving the activity in AI right now is actually a concentrated set of customers from Hyper-Scalers that are investing in
in large infrastructure upgrades, so that's the...
Speaker Change: And the Supply Chain right now, continues to be constrained. To unlock the supply chain to enable the scale to build. And so we are involved in that, over capitalizing on that. But as we think about the future articulated in mention of put this in a branch
Speaker Change: Forums like the OCP and ACOC earlier this year and you can start to see the scale expand. It's not yet reflected in the results yet
when we start to build scale around.
Speaker Change: Compute, whether it's centralized or at the edge, power and kernel being very big issues for companies.
Speaker Change: networking technologies are being adopted, maybe even faster than they were being adopted before this.
Speaker Change: AI became a big trend and our opportunities we're excited about are not just in the physical layer, but in the protocol layer.
Speaker Change: allowing customers to emulate how traffic flows to an AI infrastructure and therefore optimize their investment. So, we're pretty excited about the opportunities long-term here and capitalizing on the near-term strength.
Speaker Change: Yeah, and then as it relates to software and services, obviously continuing to see a nice mixed shift.
towards those portions of our business.
Speaker Change: And, you know, as I think a part of your question addressed gross margin.
Speaker Change: You know, the software portions of those businesses are creative to Keysight's average gross margin. The services portions are slightly dilutive to Keysight's average gross margin. But overall, the service business has a lower expense structure, so both contribute nicely to profitability when you think about it from the operating margin.
Speaker Change: And then Tim, I would just add, this is Mark, as far as the expansion, you know, it's, it's, we've shown that it's more resilient to the current macro. Customers continue to invest in new methods, shifting left on
Speaker Change: virtual simulation and emulation of their systems to help reduce costs and increase efficiencies, and we're seeing that.
Speaker Change: And then the second part, of course, is the further leverage of some of our new assets like ESI being exposed to more of our customers in different regions, the U.S., for aerospace defense, parts of Asia, with the broad key site footprint in those regions. We see that as a driver for additional growth as we go forward.
Thank you very much. Thank you. Thank you.
Okay, thank you.
Speaker Change: Thank you. The next question is from Rob Jamieson with Vertical Research Partners. Your line is now open.
Speaker Change: Hey guys, congrats on the quarter. Just a couple of quick ones from me. Just first on
Speaker Change: On the communications business, what kind of benefit could we see from VEED funding just in the second half of 2025? I mean, is there much benefit there if that funding does get actually released and finally comes to fruition? And then I guess, you know, also any potential risk of that, you know.
Speaker Change: being reversed, just given some of Trump's advisors at this point that have been anti-BID funding.
Speaker Change: Yeah, I think, you know, the good thing about Keysight's business model in coms and in fact the rest of our business is the broad set of customers we serve.
Speaker Change: that diversity in practice is a source of great strength during times of change and so while we do pick up
Speaker Change: Some incremental business every year from new logos that come up because they're funded directly or indirectly. There are some direct funding from government at times that flows into Open RAN. We've called some of those wins out and even the ChIP Sac
Speaker Change: as material as maybe the headlines which are just especially because we're more involved in the R&D side of things.
Speaker Change: of those labs and and so we feel good. I think the momentum we see because of our renewed focus on go-to-market expansion that we had put in place
Speaker Change: with marketing is the continued attraction of new logos that we see across our business that continues to be the focus for us moving forward as well.
Speaker Change: That's really helpful. I appreciate that. And then I guess just on, you know,
Speaker Change: Paris just real quick and just you guys have been dealing with this in one way or another for over eight years Can you just talk about you know your
Jason Kary, Neil Dougherty
Speaker Change: Yeah, I would just say, you know, it's probably a question behind the question if I'm...
Speaker Change: If I'm understanding you right, what are the implications of the U.S. elections and therefore the policy changes that may ensue?
And so, like everybody, we're monitoring three areas, tax, trade.
Speaker Change: both tariffs and credit restrictions, right, the areas, and along with defect spending.
Speaker Change: that might ensue. It'll be premature for us to comment on them except to say that you know we've been pretty agile in
Speaker Change: and ensuring compliance when there is a new government restriction and pivoting our sales resources to go after new opportunities, a potential offset could be, and again I'm
Thank you very much.
Speaker Change: Got it. So similar to like what we saw with reshoring and everything during supply chain disruptions, you know, the benefit that we saw there. Exactly.
Exactly. Great, great. Thank you very much.
Thank you.
Speaker Change: Thank you. The next question is from Rob Mason with Baird. Your line is now open.
Rob Mason: Good afternoon and again nice jump on the quarter. Just with respect to your
Thoughts around 2025 revenue?
Speaker Change: Satish, I know you covered some of the segments, but just at a high level, I mean is it is it fair to think you think all of your major, you know, I'll say segments, again we're talking wireline, wireless,
Rob Mason: automotive, general electronics, some of these verticals. Would all of them have an opportunity to grow in 25, do you think, you know, within the kind of mid-single-digit profile that you're talking about? Automotive sounded like maybe it was the most challenged, but...
I'd just like to get your thoughts there around all.
Speaker Change: Yeah, that's good. Look, our job number one, Rob, was to stabilize the business and return forward to growth.
Speaker Change: which we set out as a priority for the second half and I'm quite pleased that we've executed to that. Now looking at the facts, you'd say CSG has returned to growth.
Speaker Change: for the full year from an audit perspective and EIC is yet to do that. So that sort of summarizes the mixed demand environment.
Speaker Change: And just projecting forward, we expect continued sort of slow, gradual recovery as we move into 2025. We're not baking in, in our base case,
Speaker Change: All segments inflecting and should that happen, we'll be prepared to capitalize on it. But our base case that Neil's called out in his Outlook section is for 5% revenue growth and 10% EPS growth for the year.
Yes, OK, that's helpful.
Speaker Change: Just as a follow up and maybe this directed to Neil, just, you know, with the higher ESI revenue in the first quarter, you know, the, I would assume that the gross margin, you know, will reflect that at least sequentially.
Speaker Change: You know, could you maybe give us a little bit of thoughts around your OpEx as you trend in, you know, from fourth quarter into first quarter? There's often some some resets. I know seasonality as well influences that, but I'm just, you know, kind of curious what kind of trajectory OpEx is.
is on as you enter the new year.
Speaker Change: Yeah, let me just touch on a couple of seasonality related comments since you both opened the door to that. I think, first of all, as you mentioned with regard to gross margin,
with the, you know, sizable uptick in ESI revenue.
Speaker Change: We would expect some gross margin upside from that business in Q1.
Speaker Change: Similarly, though, then as you move from Q1 to Q2, you have reverse effect.
as that revenue comes out of the mall.
Speaker Change: So just if you put it on one side, you've got to take it out on the other side. With regard to OPEX, just reminding you of some things that are kind of the norm for Keysight. We do do salary administration for the entire company here in the first quarter of the year. So that will be impacting the P&L starting essentially now. And then as the business inflects from a period of contraction back to a period of growth,
Speaker Change: We have essentially our variable pay programs turning back on, which will increase OPEX here starting in the first half of next year.
Very good, that's helpful. Thank you.
Speaker Change: Thank you. The next question is from Matt Nicknam with Deutsche Bank. Your line is now open.
Hey guys, thank you so much for taking the question.
Speaker Change: On macro, I'm curious if you can speak to how that backdrop has evolved over the last quarter. It seems like there's some pockets that are getting better yet. It seems like others like auto that are maybe a little bit softer. So, any general commentary on the macro backdrop?
Speaker Change: you can provide. And then just as a follow-up, on aerospace defense, can you talk about maybe what changed later in the quarter? You mentioned the very strong closeout to the quarter, particularly around the U.S. I'm just curious in terms of, you know, what changed and how maybe that's trended into the start of fiscal 1Q. Thanks.
Speaker Change: Yeah, why don't I start by making some comments about macro and then we'll let Mark Wallace make some comments about the broader aerospace defense business.
Speaker Change: You know, so first of all, as Satish mentioned in his prepared comments,
Speaker Change: So I think that's possible. A lot of that strength itself was in aerospace defense and so Mark will talk about that But I think as you as you think about macro changes
Speaker Change: and the previous question alluded to this as well. I think the automotive business is where we're seeing the most pressure, significant pullback in spend around EV development at this point in time, which is impacting that industry pretty significantly. I think if you look across broader strength and wireline,
Speaker Change: Stability, maybe not yet a strong catalyst for growth and wireless, but at least stability, nice forward momentum in aerospace defense.
Speaker Change: I think with regard to SEMI, it's a question of timing, you know, when do, I think everybody's optimistic about a turn back on in SEMI, the question is when does that really begin in earnest.
Speaker Change: and then the industrial line markets, you know, maybe the biggest question mark.
Speaker Change: because I think some of that is going to be tied to how a lot of that capacity that was put in place.
Speaker Change: during the 21, 22, 23 supply chain disruptions. Over what time is that capacity fully absorbed? And people start to, once again, reinvest in manufacturing capacity. So that's kind of how we're thinking through the end markets from a macro perspective. Yeah. And Matt, I think the aerospace defense, as Satish talked about,
Speaker Change: The focus on defense modernization has remained a top priority in the U.S. and allied nations.
Speaker Change: We had continuing resolution in the first part of last fiscal year, the government fiscal year 24, which put some delays on new program starts. So, as we entered into the fourth quarter with the government fiscal year ending in September, we saw, you know, increased spend as we would normally see, which was not certain because of delays in the budgeting process. So that was a big positive.
We see continued investments from the prime contractors.
Speaker Change: as well as the direct government in the U.S. and the prime contractors in Western Europe as well, as we've been talking about for many quarters, due to the geopolitical situation that continues to unfold.
Speaker Change: So those factors come together, and then, you know, longer term, I think the areas that are promising for us continue to be around EMSO, space and satellite, and quantum, with some of the government-funded research that's occurring in all parts of the world, continue to offer us opportunities over the coming quarters.
Thank you.
Speaker Change: Thank you. The next question is from Samik Chatterjee with J.P. Morgan. Your line is now open.
Speaker Change: It seems like both are a bit mixed in terms of what you're seeing, but if you can just outline how you're thinking about those two areas in particular, and I have a quick follow-up after that. Thank you.
Speaker Change: Thank you, Sameh. I think for semiconductor fabs, just based on what we're seeing and the pipeline of opportunities we see,
Speaker Change: for our wafer test solutions around silicon photonics and new memory topologies and
some of the higher voltage types of wafers.
Speaker Change: I think that strength continues for us in somewhat, a little bit offset by, and that's the bigger part of our semi business, somewhat offset by a slowdown that a number of the semiconductor equipment manufacturers have reported as well. So, you put that in the mix, we still think SEMI grows from these levels.
Speaker Change: for us. And again, semiconductor is, you know, it's roughly 10% of our total.
revenue at the company level.
Speaker Change: From a general electronics perspective, what we've started to see, and again, one quarter doesn't make a trend, so I just wanna caution you, but I do think in Q4 we saw stability in manufacturing.
Speaker Change: which finally resulted in, you know, the underlying strength in research spending around next generation technologies, the broad new customer level.
Speaker Change: All of that return that business to growth. Again, it's just one quarter, but we think that that stability in manufacturing continues as we move forward as well, which should
Speaker Change: which should put EISG on return to order growth at some point in the year.
It's difficult to call at this point.
Speaker Change: but you significantly had a gap to your operating market target of 31 to 32. How should we think about the drivers and sort of beyond volume leverage, how are you thinking about other drivers that get you closer to that target or is there something that sort of needs to be evaluated relative to those targets? Thank you.
Speaker Change: Yeah, I'd say a couple things, you know. So first of all, I think we're pleased with how gross margins have held up on the downside of the cycle. Obviously, we've gotten some benefit here from the addition of the ESI software business, but even if you look at the core Keysight business,
Speaker Change: The growth margins have held up pretty well in total on the downside of the cycle. I think when you start to think about those targets that we put out, 66%, 67% operating margin targets, where again, you know, we're 150, 200 basis points off of that at current levels.
Speaker Change: and, you know, but we're significantly further off on the operating margin line. I think you need to look at the impact that the acquisitions are having in the short run.
Speaker Change: where we've made some acquisitions that are creative to gross margins.
Speaker Change: but significantly dilutive to operating margins. And I think as we get those businesses integrated and start to operate them within the greater Keysight operating model, there's gonna be opportunity for us to drive significant profit leverage on those acquisitions and start to close that gap on the operating margin side of things.
Speaker Change: We remain confident in the long-term growth opportunities of this business.
Speaker Change: And you've seen when we can deliver about model growth rates, the sort of earnings power and leverage we have. We continue to operate this business in a disciplined way to be able to realize those and get us back on track.
Thank you.
Thank you.
Speaker Change: Thank you. The next question is from Amita Marshall with Morgan Stanley. Your line is now open.
Speaker Change: Hi, this is Karan on Formida. Congrats on the quarter. So just starting on the automotive side, clearly you remain quite positive on simulation, but outside of that, are there any other exposures that you have with an auto that could cause a pickup in the business outside of maybe EV sales improving? And then I have a follow-up. Thank you.
Speaker Change: Yeah, so there's several parts to automotive. The part that we're seeing, the slowdown and project delays is around EV investments.
Speaker Change: have been quite robust over the last several years with battery test labs.
Speaker Change: flow through of manufacturing test for that. The part that's remained steady is the software-defined vehicles or the ADAS, the autonomy side, where we have continued innovation crossing over multiple parts of our business into communications.
Speaker Change: sensor technology and so forth. And a lot of that is software as well. So there's there's a lot of work being done in in that frame. The other one that doesn't get as much attention, at least from from these calls, but gets a lot of attention on the news
Speaker Change: is the infrastructure. So the charging infrastructure and the standards associated with those in every region of the world represents, you know, additional opportunities that we're pursuing. So long-term drivers.
Speaker Change: are of growth, secular drivers around AV, the manufacturing, coming back on new advanced technologies remains an area of focus for us, you know, over many years.
Speaker Change: Got it, that's helpful. And then coming back to the AI side, are there any areas that you see in your portfolio that you could maybe grow content or offer new products to sort of take advantage of the opportunity that you're seeing today? Thank you.
Yeah, good question. I think as we mentioned...
Speaker Change: The more logical areas which we have seen growth come from to date, or results come from to date,
Speaker Change: are associated with the physical layer tools where we provide our oscilloscopes, our sampling scopes, and other tools that we provide. And what we're seeing is a bigger opportunity for our emulation platforms. We're still in early pilots with customers on.
Speaker Change: Again, it's a small, it's a concentrated set of opportunities today. We expect that industry and the impact AI is going to have to be broader. And we're participating in enabling the ecosystem with the right set of tools all the way from design emulation to test. And our focus is on enabling our customers in the R&D parts of the workflow, and it's a pretty rich opportunity for us. Thank you.
Thank you.
Speaker Change: The next question is from Adam Thalheimer with Thompson Davis. Your line is now open.
Speaker Change: Hey, good afternoon guys. Congrats on the beat and Mark, congratulations on your retirement.
Speaker Change: I wanted to ask first about the operating margin in communications. I think that was your best ever quarterly operating margin.
Speaker Change: It kind of took me by surprise. Curious what drove that and what the outlook is there.
Speaker Change: Yes, so obviously we are very pleased with the results in in CSG gross margins have held a very strong in that business I think we see a tight not only do we see a higher software content higher recurring revenue from software Which obviously helps margins, but I think there's less
Speaker Change: There's less margin diversity in this ESG portfolio than we see on the ESG side, so less impact from mix.
Speaker Change: You know, from a profitability standpoint, I think we're very pleased that we're keeping our foot on the gas on the R&D side, continuing to invest to position ourselves to capitalize on the upside, while driving significant efficiencies in SG&A, resulting in the strong profitability that we saw. So it was the strongest profitability we saw this quarter, not an all-time record, obviously, but very strong operating margins.
in CSG this quarter.
and then an EISG
Speaker Change: If you think about the full year, what are the growth offsets to the weakness in auto?
You're talking about in 24 and 25.
What offer do you think is in auto this year?
Speaker Change: Yeah, I mean, I think as the Chiefs look forward, as we look to Semi and to the broader industrial markets,
Speaker Change: There is reason for optimism with some of the FAB programs and the absorption of capacity that was put in place.
Speaker Change: in prior years, again, likely to be more back-end loaded. We've talked about at the key site level, a gradual improvement through the year. And so, you know, as Satish just said, we would expect, you know, there is an opportunity for EIC, which has not yet returned to order growth, to do so in the back half of the year. And I think that would be with, you know, some significant increase in the strength of the semi-markets and some modest recovery in industrial end markets.
Got it. Thanks, Neil.
Thank you.
Speaker Change: The next question is from Mark Delaney with Goldman Sachs. Your line is now open.
Speaker Change: Hey, thank you for taking my question. You have well on for Mark Delaney here. Just one on M&A. So with the proposed Spire-N transaction still ongoing, will Keysight be open to doing other larger transactions in the near term if one that made business and financial sense was available?
Speaker Change: Yeah, I'll just say, look, we have we have retraded a very strong organic growth strategy that we're focused on realizing
We've also identified specific markets that we have studied.
Speaker Change: to pursue a selective M&A, and at this point, while we continue to evaluate targets, we always remain disciplined.
Speaker Change: and we'll look at them. But it's not a matter of capital as much as, you know, bandwidths to pursue more deals given the deals that we've already announced, which we're working through.
Speaker Change: No, it shouldn't be helpful. Thank you for that. And just one more on capital allocation. How should we be thinking about buybacks for fiscal 25? Any cadence commentary or any color that you can add there will be helpful. Thank you.
Speaker Change: Yeah, the only thing I would say is that obviously, we look forward to the close of the Spiron transaction, which will be a significant capital outlay for the company. But we do expect that we will, at a minimum, continue with our buyback program at at least the anti-dilutive level. And then we'll be trying to strike a balance between starting to get the cash ready to close the Spiron transaction, trade it off against what we might see as opportunistic opportunities to do more on the buyback front.
Thank you.
Speaker Change: That concludes our question and answer session for today. I would like to turn the call back to Paulina Sims for any closing comments.
Paulina Sims: Thank you operator and thank you all for joining us today. Have a great day.
This concludes our conference call. You may now disconnect.