Q3 2019 Earnings Call

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

After the presentation, we will conduct a question and answer session.

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Please note that this call is being recorded today Wednesday August 21st 2019 at 130 P.M. Pacific time.

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

Thank you and welcome everyone to Keysight third quarter earnings conference call for fiscal year 2019, joining me are Ron recession, Keysight, President and CEO and Neil Dougherty Keysight Senior Vice President and CFO .

Joining us on the Q and a session will be Mark Wallace Senior Vice President of worldwide sales and see strong shopper and president of the Communications Solutions Group you can find the press release and information to support today's discussion on our website at Investor Day, Keysight Dotcom, while there. Please click on the link for quarterly reports under the financial information tab. There you will find an investor presentation, along with Keysight segment results. Following this conference call. We will post a copy of the prepared remarks to the web site.

Today's comments by Ron and Neil will refer to non-GAAP financial measures. We will also make references to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months you will find the most directly comparable GAAP financial metrics and reconciliations on our website, 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 only valid as of today.

The company assumes no obligation to update them.

Please review the company's recent FCC filings for a more complete picture of our risks and other factors Lastly, I would note that management is scheduled to present at upcoming Investor conferences in September hosted by Citi and Deutsche Bank, We hope to see many of you there and now I will turn the call over to Ron.

Thank you, Jason and thank you all for joining us.

Keysight delivered another outstanding quarter, our differentiated strategy relentless focus on execution and commitment to operational discipline continue to generate strong financial results.

I will focus my formal comments on three key highlights for the quarter.

First keysight delivered another strong quarter with both revenue and earnings exceeding the high end of our guidance.

Record third quarter revenue grew 8% year over year or 9% on a core basis, our differentiated solutions software and services continues to fuel our growth across a broad portfolio of customers and equally importantly, our strong culture of execution and commitment to operational excellence continues to drive a record performance on the bottom line.

This quarter, we achieved record operating margin of 25%.

And earnings of $1.25 per share and earnings growth of 41%.

We also generated record free cash flow of $244 million.

Second we continue to see customers make R&D investments and certain next generation technologies, such as fiveg across multiple end markets.

However, our macro environment concerns remain and we continue to anticipate headwinds, resulting from trade tensions with China.

Despite these dynamics given our broad portfolio of customers and solutions. We believe we are in a strong position to drive above market growth even in times of economic uncertainty.

Third given our continued success in the market and strong performance in Q3, we are raising our revenue and earnings outlook for the year.

We now expect revenue growth between nine and 10% and earnings growth between 40, and 42% for the full fiscal year.

Now, let's take a deeper look into our performance for the third quarter.

We achieved $1.25 per share and earnings which was 24 cents above the midpoint and 20 cents above the high end of our guidance.

This represents our sixth consecutive quarter of double digit earnings growth.

And earnings growth of 41% for the quarter and 52% year to date.

Revenue grew 8% year over year or 9% on a core basis to surpass $1 billion and reach a new third quarter record for Keysight.

This brings our year to date revenue growth to 13% on a core basis.

We also delivered strong order growth orders grew 10% both in total and on a core basis to exceed $1 billion for the fifth consecutive quarter.

As a reminder, our core metrics exclude the impact of currency movements and revenue from acquisitions or divestitures completed within the last 12 months.

Software orders grew double digits in the quarter, our portfolio of solutions comprised of leading software hardware and services capabilities is at the core of our competitive differentiation and further strengthens keysight as a strategic partner to customers.

Building on our commitment to help customers accelerate their innovations through software Keysight recently collaborated with Nokia to launch the open test automation project, which we referred to as open shop.

This new collaboration provides an open source scalable architecture for automated test solutions and enables innovation and new technologies and increased development efficiency.

Customers can also would stand there open tap capabilities through additional commercial offerings in our past wave lineups.

Our ability to expand our software capabilities across the communications work flow through acquisitions has generated strong returns for keysight.

This began with the acquisition of <unk> and <unk> in 2015, which was a key enabler of our Fiveg platform.

Our expansion into the software layers of tests with anti has resulted in significant share gains in the fiveg market.

As we move forward, we see increased opportunities to make greater contributions to our customers' workflow.

To that end, we are pleased to announce the acquisition of Prisma Telecom testing.

Based in Milan, Italy, Prisma has deep software expertise and a decades long track record of delivering network equipment manufacturer solutions.

This acquisition further enhances our ability to deliver leading edge end to end solutions across the entire communications ecosystem.

Moving to our markets commercial communications drove considerable upside in the quarter with double digit order and revenue growth.

This growth was driven by another exceptional quarter of Fiveg orders, where we believe we have strong technology leadership over the competition.

She cites Fiveg success as a result of our first to market innovations and engagement, leading edge market makers across the wireless R&D ecosystem.

We are proud of the many industry breakthroughs that are a result of these collaborations for example in July we announced that our efforts with many industry leaders have resulted in the Industrys first global certification for him validation of Fiveg test cases. This achievement combined with our ongoing collaboration with key operators accelerates fiveg deployments globally.

Looking ahead, we expect the commercial communications market will continue to benefit from increasing demand driven by the complete redesign of communication systems for higher speeds and new use cases.

Keysight is at the forefront with solutions designed to accelerate these innovations.

In addition to R&D spring, our new modular products are doing very well in selective customer production workflows.

Moving to automotive, we continue to engage with customers in the automotive electronics market for new powertrain electrification technologies and advanced electronic systems.

With our acquisition of Cyan lab in 2017, we have considerably extended our leadership in this market by integrating our technologies and expanding across tier one customers automotive is an area, where we continue to invest and innovate.

We recently launched key sites automotive cyber security test portfolio, which delivers hardware software and services that address the growing concern of cyber attacks on connected vehicles.

Utilizing security solutions developed by our Ixia solutions group. He said is delivering extensive security validations of the Fourg and Fiveg radio access network infrastructure that connects vehicles and the back end data centers that manage business operations.

Additionally network visibility solutions delivered enhanced infrastructure that improves the efficiency of security tool sets in production networks.

With the combined technology portfolios of Keysight, Anite ixia as well as Prisma, we're delivering solutions across the entire communications workflow from end to end and up and down the stack beginning in Q1, we are taking the combination one step further by integrating I guess G with in our communication solutions group.

We believe this will create improved go to market and product development alignment to foster growth across the ecosystem as fiveg moves from deployment phase to commercialization.

Fiveg deployments Bose complex challenges across devices base stations and core networks on an accelerated timeframe.

He said is uniquely positioned to offer solutions end to end for all of these challenges.

This organizational alignment will further enhance our ability to accelerate innovation in fiveg.

Additionally, we see future opportunities to expand our footprint within enterprises deploying dedicated networks as our network visibility solutions provide increased actionable insight and security for mission critical applications running on these networks.

In summary, Keysight has expanded its technology leadership with a diverse portfolio, while strengthening our competitive position in fast growing high margin target markets.

And their leadership position has delivered strong financial results.

2019 will be a fifth consecutive year of outstanding execution and operational excellence since launching keysight.

At the midpoint of our Q4 guidance, we will deliberate appoint 19 revenues of $4.280 billion and $4.57 EPS.

This represents a compound annual growth rate of 11% for revenue and 16% for Es since our first year as a public company in Fyfifteen.

Most importantly, keysight has achieved a leadership position across growing addressable markets and is well positioned for continued share gains.

Lastly, our commitment to excellence is deep in our DNA extends beyond our financial performance.

On that note I'm proud to report our achievements in corporate social responsibility.

We released our 2018 corporate social responsibility report may outlining key sex accomplishments in this space, including key impact results natural resource Conservation supporting next generation technologies through the education process and programs.

And strengthening local communities. Our continued efforts are often recognized in the industry. Most recently with key sites inclusion in several CSR focus industries.

I'd like to congratulate all keysight employees for their dedication to the company's success over the past five years, while upholding our global business framework ethical environmentally sustainable and socially responsible operations.

Now I will turn it over to Neil to discuss our financial performance and the outlook in more detail.

Thank you Ron and Hello, everyone.

Before I get started I will note that all comparisons are on a year over year basis, unless specifically noted otherwise.

As Ron mentioned, we delivered another strong quarter as we continued to execute on the demand we see in core areas of our business, while maintaining focus on operational excellence and superior execution.

For the third quarter of 2019, we delivered non-GAAP revenue of $1.088 billion, which was well above the high end of our guidance range and grew 9% on a core basis.

Our better than our better than expected Q3 revenue results were driven primarily by continued strong demand in the areas, where we have a leading position in the market such as Fiveg.

This brings our total revenue growth for the first nine months of the year to 11% or 13% core growth.

Total keysight orders exceeded revenue once again this quarter, we delivered $1.110 billion in orders in Q3.

Orders were up 10% in total and on a core basis.

I will also highlight that in Q3 orders for services again grew double digits on broad based demand a good adoption of our new support offerings, such as Keysight care.

Looking at our operational results for Q3, we reported strong gross margin of 63%.

Our notable gross margin performance and continued strong operational discipline led to another quarter of record operating margin and earnings.

We achieved 25% operating margin and net income of $239 million on a per share basis, we delivered $1.25 cents in earnings which was well above the high end of our guidance our weighted average share count for the quarter was 191 million shares.

Our communications solutions group generated record revenue of $683 million up 13%, while delivering gross margin of 63% and record operating margin of 28% in Q3 commercial communications delivered double digit order growth and revenue of $440 million driven by broad strength across the wireless ecosystem as increased Fiveg investment continued.

Aerospace defense and government generated revenue of $243 million, an increase of 2% on a core basis.

During the quarter, we continued to see steady spending in the U.S., which was offset by softness in some international markets.

Order growth for this end market was high single digits, and we have a strong overall funnel building into Q4.

Yes, she generated third quarter revenue of $295 million up 3% driven by strength in next Gen automotive in general electronics as expected. This growth was offset by lower capital investments by our semiconductor customers.

This quarter, we saw strength in the broad portfolio of products that serve our general electronics end market.

Yes, she reported record gross margin of 62% and record operating margin of 28%.

I see reported Q3 revenue of $110 million, a 7% decline over last year.

The decline in IC revenue reflects ongoing softness in the network test market, whereas network visibility solutions generated high single digit growth driven by enterprise sales in the U.S. and Asia.

I see reported gross margin of 72% and 1% operating margin.

As Ron mentioned in Q1, we will implement a change to our organizational structure to align iced tea with our commercial communications end market, including global sales.

At that time, we will report IC results combined with our communication solutions group, which will provide solutions across the entire communications ecosystem.

Both end to end and up and down the stack.

Moving to the balance sheet cash flow, we ended our third quarter with $1.4 billion in cash and cash equivalents and reported cash flow from operations of $274 million and record free cash flow of $244 million.

Free cash flow for the quarter was 22% of revenue and 102% of non-GAAP net profit.

Under our share repurchase authorization during the quarter, we acquired approximately 760000 shares on the open market and an average price of $78.92 for a total consideration of $60 million.

Before moving to our outlook I would like to make a few comments regarding the United States Department of Commerce export control regulations that impact one of our large customers in China.

As I'm sure you can appreciate the current regulatory environment remains a fluid situation.

On our last conference call. We said that we expect these trade restrictions to be a headwind to revenue growth in the second half of this year and the first half of 2020.

To date, we have been able to ship some products to this customer within the current legal regulations. As a result, we expect to see a slightly smaller had headwind in Q4 than previously anticipated.

Due to ongoing trade concerns we continue to expect a three to four point headwind in the first half of 2020 related to this customer.

Now turning to our outlook and guidance.

We expect fourth quarter 2019 revenue to be in the range of $1.080 billion to $1.100 billion. This brings our revenue growth range for the year to 9% to 10%, which is above our prior outlook of 78%.

We expect Q4 earnings per share to be in the range of $1.14 cents to $1.20 cents based on a weighted diluted share count of approximately 191 million shares the midpoint of our earnings guidance implies 41% earnings growth for the full year.

With that I will now turn it back to Jason for the human eye.

Thank you Neil Rob will you please give the instructions for the Q and a.

Ladies and gentlemen, if youd like to ask a question. Please press star followed by the number one on your telephone keypad.

We ask that you please limit yourself to one question and one follow up question to withdraw your question. Please press the pound sign.

Please hold while we compile the Q and a roster.

And your first question comes from the line of.

John Marchetti from Stifel. Your line is open.

Thanks, very much good evening, guys just real quick on the upside in the quarter itself.

I think on the last call you talked about the the walk away or the expectation of y way.

You know being about a $25 million in the quarter.

Just curious where that stands now I know you said that in the guidance a little less than you had thought but how much of your sort of that of that 25 million actually came through in the quarter and as you've been going through some of your your process. He's there and looking at what you can ship.

How does that stand now in terms of what you're shipping today versus maybe what you were shipping at least from a product perspective earlier in the year.

Yes, John So couple of comments of first of all as it relates to Q3, we ended up shipping about a little you know approximately $10 million more to our way than we had originally drawn up when we were when we were.

Issuing the guidance three months ago, I think as we look forward as we mentioned in our prepared remarks, we do see.

A muting if you will of the of the risk in Q4, because we are able to ship a portion of our portfolio in into Wawa and so there was the.

You know that impact is more muted than we had originally anticipated and we've reflected that in the guidance that we provided to you.

In the fourth fourth quarter I think as we look forward.

As we've mentioned, while it's historically been a 3% customer approximately a 3% customer for us they were significantly larger than that in the first half of the last year and with 2020 hindsight, it's pretty clear that they were buying ahead in anticipation of trade tensions.

I think so they'll need to work through what other whatever incremental inventory they've built up and so I think as we look to next year, we would expect wild way to be maybe a one or a 2% customer for us therefore, resulting in a three to four point headwind for us in the first half of next year.

Thank you and then maybe just as a follow up shifting gears, a little bit to the European market. You know that as that was certainly a little bit of a drag this quarter. Just curious if you can share some color there about what areas seem to be you know weaker is it just a sense that the general economic outlook. There has deteriorated or is there something more to it than that and does that become a greater concern for you as we get further into this calendar year and into early next.

Yeah. John This is Mark Wallace I'll take that question. So you know we had mixed results in Europe during the quarter, we saw growth in Fiveg as we did in every single region across the world. We saw a growth in automotive we saw growth in education and in that general broad.

Customer base, including research the two areas, we saw some softness that offset it wasn't semiconductor, which we had a pretty tough compared to this time last year to Q3 of last year due to some acceleration of business with one of our customers there and we saw some general softness in aerospace defense. So I would say, it's a mix set of markets that we experienced during the quarter as opposed to anything broader.

Thank you very much.

Your next question comes from the line of Tim Long from Barclays. Your line is open.

Thank you just two questions if I if I could.

First on the five cheese side I'm not sure. If you gave the order number just just curious if you can just update us on competition, obviously continues to be a really a strong performer for you. Just wondering what you think will happen when that pet segment gets a little more competitive and then secondly, you could just touch on X yet understand the.

Moving it around closer to the commercial.

Communications group.

Maybe just touch on a little bit what why there hasn't really been the same type of pull through that we would have expected with those two businesses and how mechanically that you think that will change.

And help the ICSI group in the a and the next year or so thank you.

Yeah, I'll just take the first question the city.

Got to Fiveg. So we continue to have strong momentum in Fiveg this quarter.

Yet again, and our strength is pretty broad, it's mark Wallace reference since really a reflection off our portfolio, which is intended to be broad and applicable to the entire ecosystem end to end and and across all the regions, where we saw customers adopt adopt our solutions a particular driver that if I may I like amongst everything is the GSK reported that well over 100 devices have been announced for Fiveg. Most recently through the year and the number of subscribers.

Who who will have access to fiveg ready devices next year would be north of 60 to 70 million, that's a pretty big number and we saw that reflected in in some of the R&D spend that is coming from the tier one and kill two players in the smartphone space. So continues to be strong and our differentiation.

Holes and because of our lead in the in the Fiveg standards, we continue to continue to do well.

Tim This is Brian and I will take the second question and then pass it over to Mark Wallace. So with regards to I guess GE. There are two different businesses. There one is network visibility and the second is network test.

Network test sits right in the communications work flow and it's very much predicted to what happens in CSG network visibility is a little bit further down the line and therefore is able to get going without the integration directly. So in network visibility, we had 9% revenue growth and we had 17% revenue growth year to date. So we feel that we've integrated that business stabilize that business and we have turned that around and that is growing and doing well the network test business, which is in a tough market right now.

Really needs to play out in our next phase of our original vision. Our original vision was to provide solutions across the total communications ecosystem end to end and up and down the stack.

And this next step in our evolution, where were combining it with the rest of CX GE is something that myself and others had envisioned right from the start and the reason is twofold. One is product synergy and then the product synergy area for instance.

They have introduced for 400 gig solution for Aries, one and we use part of the stack that was developed in Ixia network test in our birds are bit error rate testers and there's much more opportunities on the product synergy area. As we go forward. The second area is the sales synergy will I'll, let mark talk to that but the key reason is by pulling this together, we're finding more and more areas to drive product synergy and therefore revenue synergies and Tim. This is mark I'll just add to what Ron just said this product synergy is going to be amplified by the changes that were making the reorganization and sales which is a continuation of the transformation that we've been doing for the last three years further scaling our footprint across all of our group global markets. Leveraging these really deep account relationships and access that we've built over years and decades into some of the same customer base and then as Ron as men.

Second and we've talked about before really enabling us to bring the complete set of end to end solutions to our customers. So I think thats really ties it all together.

And I'll just add one other comment that you may be wondering about we had talked about at an earlier investor day of doubling our sales force from approximately 500 people to 1000, we are right on track with that and that does not include the additional people that will move over from the ixia Salesforce. So that will be incremental of about 100 people on top of that.

Okay. Thank you very much.

Thank you Tim.

And your next question comes from the line of John Pitzer from Credit Suisse. Your line is open.

Yeah. Good afternoon, Ron Neil Congratulations on the solid results. Ron do you guys have done a good job sort of quantifying the direct impact from wild way I'm wondering if you talk a little bit about maybe an indirect impact that might have been or are you seeing any changes in deployment schedules in fiveg in China because of this and when you think about the direct impact to walk away.

Is this a temporary loss of business or do we have to worry that you might look for other potential non U.S. suppliers.

Got to set the treatment.

Well on your first question, yes, it is impacting fiveg in China. It is accelerating our growth in that area. Our order growth was very very strong in China in the quarter and again with the race is on where countries are competing for Fiveg growth and we saw that also in China. So we're very pleased with the overall results.

In in that area.

And then guys maybe as my follow up maybe for Neil Neil This little bit of nitpicking, but just when you look at the forward guidance, you're guiding revenue kind of flattish.

EPS is down a little bit just given how well you guys have done operationally on both the gross and operating margins can you just help me square the circle, a little bit as to what's happening maybe either with mixed in period costs that would drive EPS down a little bit on flattish revenues.

Yeah, we do have a you know some seasonally higher expenses that were expecting here in the in the coming quarter that that we think will impact will impact profitability a little bit this quarter, obviously weve over the long term talked about an operating model delivers a 40% incremental on on on revenue growth and we've been over the past couple of quarters really.

You know really exceeding that by a very very large degree. So we have some pent up demand for for expenses and some seasonality around year end sales commissions and other things that will well will impact our profitability in the fourth quarter, but we're comfortable with the long term and we're pleased that we were able to raise both our revenue and earnings estimates this quarter.

And John just getting back to this.

Yeah, just getting back to the second half of your question I believe you asked about whether or not in China.

There were other competitors that may gain from the from the trade Wars, we don't see that obviously for other U.S. competitors, but for competitors that have Germany and added Japan. They can get let's just say a more consideration, but we're very comfortable with our overall differentiation, which will enable us to drive our growth throughout the world.

Perfect. Thanks, guys that's very helpful.

Thank you.

And your next question comes from the line of branding keyboard from Jefferies. Your line is open.

Hi, Thanks, good afternoon.

Good afternoon.

Ron a question for you is we're sort of looking out to fiscal 22 extent, you're willing you know sort of given the.

While weight loss and tougher comps kind of an uncertain macro environment.

Would you still expect to be able to deliver top line growth organically above your 45% long term range any color you can help us out with as we sort of build our models for next year.

I'm going to let Neil take this obviously, we only guide one quarter out, but you will be able to give you a little bit of color.

<unk> I, obviously brand, it's a little bit of a difficult question given some of the macro uncertainty that exist today I think what we would focus on is that were very confident in the strength of differentiation that exists in our portfolio and we're very confident in our ability to outgrow the market and our competitors you know regardless of what set of our economic circumstances take place I think we still see.

You know strong secular trends in some of these big growth areas as we've talked about the fiveg ramp is accelerating and in China is kind of leading that today, but we expect other countries will soon follow onto is the other one that obviously, where we would see.

We expect to see a little bit of an arms race going on as folks who.

You know across the globe look to get out of the V. and increased levels of autonomous vehicles out into the marketplace.

We would also expect aerospace defense habit to have a good year next year, so as well.

As you know we operate in a in a diverse set of end markets. Both from a from a market standpoint from a geographical standpoint, the broadest portfolio in the industry, which is very well positioned and so we're pretty confident going into next year.

Thanks, and just one follow up on the Prism acquisition can you quantify the revenue base for that asset kind of what your pipeline looks like for other other deals right now and exactly what whole prisma filled that in terms of capabilities that you didnt have in house already thanks.

When I take the first part of that and I'll, let ill let cities talk you know, it's a small acquisition, it's substantially less than 2% of company revenue.

We have a strong as always we have a strong funnel development process and but I think we set a high bar in terms of the types of of assets or we're looking to bring in turn into Keysight and the types of returns that we that we like to get but we're always looking to reinvest to drive growth and value expansion for our for our investors.

Thank you as you know a big part of our success and expansion in Fiveg has been in the software layers of test, where we have made this a strategic priority and we've made some acquisitions a fan out and continue to invest for the position. We have we believe we have a leadership position here, but having said that as fiveg evolves, we see opportunities in new areas like with Rand segregating and virtualization and other areas, where our collaboration with customers has been very close and as you saw from the press release that we had with Nokia as an example.

To continue to build on this trend we're always looking for great talent teams with credibility and Prisma Telecom testing has had over two decades of experience as specifically focused on helping base station designers overcome the software leaders challenges and it's a great team and a great add and while the revenue today is a is a smaller fraction of key side I know it'll add and strengthen our fiveg platform and build on the runway. We currently have.

And Brandon This is Ron a good way to think about Prisma. Its very similar to and I were it has capability to help us move forward in the software layers to leverage our overall fiveg and communication solutions and as far as utilization of our cash with regards to other M&A as you can see we're generating very strong free cash flow, we have $1.4 billion of cash right now, but if you take a look at our at our return on invested capital over the last 12 months, it's been roughly 26%. So we have a high threshold as Neil had mentioned as far as our you utilize utilization of cash and we're going to make sure that anything we buy will always generate an ROI see above our WACC and we've done about nine acquisitions and eight of them are are in really good shape and one of them. We've got about halfway there.

Okay. Good thank you.

And your next question comes from the line of Adam Thalhimer from Thompson Davis. Your line is open.

Hey, good afternoon, guys congrats on a great quarter.

Oh, Thanks, Adam I also wanted to ask about the fiscal 20, and particularly on the margin front. Just curious if there is any reason the margins that you put up in Q2 Q2, Q3, and then you're guiding to for Q4 I mean are those sustainable for next year, maybe you could just walk us through puts and takes there.

Yeah, I mean I had focused its start on the gross margin line. We did talk about in the second quarter, having some really favorable mix that kind of drove that to be rounding to 64% I think were comfortable on the 63% range as we look out over foreseeable horizon.

Moving down through the piano continue to see a tremendous amount of demand for research and development activities coming from our customers. So if anything I see upward pressure on the R&D line.

Particularly relative to the past couple of quarters right, we're running close to 16% year to date, but we're close to the 15% for the last few quarters and so you could see that trending back up towards 16% next year given some of the demand that we see in the marketplace, but overall, we feel like we're very well positioned and are pleased with both the profit and cash flow that we've been generating.

Okay and then just a second question for me is Fiveg it feels like we're still.

Awfully early in kind of a development stage fiveg is that correct or.

How are you guys viewing that at this point.

We are early and Fiveg development continues for a while even after manufacturing starts. We also mentioned that we do have some manufacturing solutions, but we're very selective there were only going to go after opportunities that give us very good returns, but we see a decade long evolution at least in this fiveg market and we're very happy with where we're at I'll, let to teach also make a couple of comments.

I agree I think.

With Fiveg, obviously, the first use cases, the enhanced mobile broadband smartphone use case, and that's playing out and even there. We're still very early days with the first device is just being announced so that will play out over the next few years and then we believe with release 16, a new use cases coming online.

You know the runway there and obviously for Keysight, having been with all the leading the waiters very early on in the design phase.

Continues to give us a strategic advantage. The other point I want to highlight is we've always believed in the thesis and we've talked about it that fiveg because of the technology changes that presents an upgrade cycle, Florida for test and design and test and you can start to see that they now our numbers and youre starting to hear that on other conference calls as well.

That's great. Okay. Thanks, a lot.

Thank you.

Your next question comes from the line of Jim Suva from Citigroup. Your line is open.

Thank you very much and I will ask both my questions at the same time. So you can sort out about answering the order of them, but on Fiveg I believe a previous person asked what was the order rate for Fiveg and I can't remember if you actually said the percent or if you just kind of talk in generalities and with the Fiveg orders versus four g. orders since a lot of hardware can be upgradable via software base stations can be upgraded that our fourg and fiveg via software.

Is it the thing is the same true about a tester can attest or be upgraded from fourg to fiveg your need to completely new tester. So just kind of a little bit more on the Fiveg orders and testers and then my second question is on the Act acquisition you mentioned.

Can you explain exactly kind of what they do and how magnitude wise they fit into your sales outlook for this year are they meaningfully contributing in sales this year and what about a full full run rate and why this acquisition should make sense as compared to say ixia, which has had some challenges.

Okay, well, thank you and I think the first thing is our our Fiveg momentum continues as we have said before.

Our commercial communications you can look at the the segment growth rates have been double digit has Ron has mentioned and we continue to do well across the across the entire ecosystem in Fiveg and it's still very early days with regard to the upgrade question that you had.

For most of the test tools that we've talking about fiveg in a presence that complete change higher frequencies wider bandwidth, which means the physical equipment is different and then even in the protocol stack the diversity between the non Standalone and Standalone that we talked about and also represents a pretty big opportunity for us not only for test equipment replacement, but also a continuous software mix changes and you will start to see that reflected in our margin profile as software becomes a bigger part of our business.

So thats it thats the other piece with regard to Prisma, we're very pleased with the acquisition because we have been engaging very closely with a number of the base stations and small cell equipment.

Designers, especially in the software layers of cast and Prisma brings the expertise and the installed base would that customer set that allows us to build on the strengths of ours Fiveg platform and I'll, let Neil make some comments on the on the menu.

The deal Prisma.

So I'll, let me do that so prisma as I said is substantially less than 2% of revenue think of it as closer to one.

You know, we're obviously baking into Andrew our forecast that level of revenue. So it's a relatively small impact its a profitable business.

But we're excited for what they bring both in terms of the talent of the people that we brought onboard and being able to bring on a technology that is additive to our five you portfolio.

And Jim This is mark I, just want to add one thing to the Fiveg discussion and that is that we're seeing a strong demand and growth for our services as a part of this business and overall, we saw double digit order growth in services in Q3, and if you think about the expansive nature of these solutions and the complexity associated with them, we're selling more and more professional services and now that we're into the second and soon to be the third year of deploying some of these network equipment.

Emulation solutions I am really excited to see some of the opportunities grow for us to sell continuing services to help our customers to be successful.

Thank you Thats all very useful on your additional commentary was greatly appreciate it. Thank you.

Thanks, Jim.

And your next question comes from the line of Richard Eastman from Robert Baird. Your line is open.

Yes, good afternoon, and thank you for the questions and during this quarter.

Thank you Ron could you just speak for just a second or two.

We're talking about while way and trying to get our arms around.

You know the situation kind of going forward.

What has changed here is.

The fact that we're able to ship more is this part of the licensing process or is this you know definition so a definitional.

Adjustment as to whats characterize to be affected by the restricted list because again you know the Commerce Department just put out 44, New highway entities, who are just added to the restricted list.

And I'm trying to maybe figure out a little bit of what's changed here on a go forward basis, because you seem to be including.

Wow way orders in your order growth rate. So presumably there is an assumption that you'll be able to ship those in 12 months.

Good luck there but.

Sure.

You know I'll I'll, just say this with regard to understanding what products, we can ship and where they are that was a moving target and it changed a couple of times and we've sorted that out and we're very very confident in what not only what we did do but in what we believe we can do with the regulation stay as they are the new list that was just put out mentioning new entities. We've also looked at that and that's also in our guidance. So I'll, let mark talk about that.

Yeah, Rick It's a you know it's a fluid situation is changing as you just pointed out most recently in the last few days. So we're focusing on this we're complying fully with all of the export regulations and as we pointed out in following those we were able to ship some products and some more products than we originally.

When we guided Q3, but I don't want to lose sight of the broader China situation, we have a very strong and broad business in China, and it's a very important market for US you know the prior headwinds beyond the export control issues with semiconductor in some of the RPL customers that we've been talking about for a year now they still remain and yet we had very strong double digit order growth in the quarter.

In Fiveg in automotive and aerospace defense in the broad industries in semiconductor and so we've got a we've got a very strong position there better effect when you exclude while way during Q3, we still delivered double digit order growth for the quarter. So yes, while we is built into our assumptions were looking at it very closely but there is a broader story there it's very strong.

And can I wanted just to follow up on that particular point.

Yes have you started shipping.

Infrastructure kind of manufacturing cost.

Yeah kind of kind of moving down to the value chain, there from R&D, which which obviously is probably held up but have you started shipping any manufacturing infrastructure manufacturing test equipment.

Yeah for the broader sense.

It's still very early days for manufacturing and the Fiveg ecosystem level and our solutions have gained.

Good penetration with all the major players.

The volume is not high it's more or less prototype lines and an early start so we haven't come close to the knee of the curve there.

What we expect to see.

And then just the last question follow up front for Neil.

Around the CSG business the margins of just.

Been fantastic.

Year to date, both gross and operating margin the Incrementals coming in you know modest will be 100%.

Is that is that the influence of.

Software in CSG in other words, you know somewhat sustainable at these levels.

Going forward.

Yes, we definitely are seeing as part of our Fiveg portfolio is significantly higher software content than in prior generations. You took the words out of my mouth might be going to point to a single driver that is that is the biggest driver of the margin improvement you couple that with the fact that we have a highly differentiated portfolio.

And an early lead to see you know the advantage of being a first mover in the marketplace, but certainly that the software the software component or the software portion of Fiveg is is higher and we do believe this is sustainable over time.

Okay, great. Thank and I'll, just add that our software growth. We don't report. This all the time was was oh well over 20%.

Okay fantastic. Thank you.

Thank you.

Your next question comes from the line of Brian Young from Deutsche Bank. Your line is open.

Hey, guys Great quarter. My question is on your China business can you expand on sort of your competitive mode in the region as well as give us an update on.

Domestic or global competitors are you seeing any increasing competitive efforts from peers, especially given sort of ongoing macro trade concerns.

Yes, Brian this is mark I'll take that so there's a lot of competitors in China, and we are continuing to focus on delivering value as we've just been speaking about so when it comes to the highly differentiated solutions and our global connection across these ecosystems. We have a very clear differentiation. So I think we're winning a lot of that business. There's some lower end commoditized business, including some some companies that are based in China that were seeing an increased activity level as you might imagine because of the trade situation and with the ongoing growth of all the industries that we've talked about in China. There is always going to be competition, we take the competition very seriously, but we're going to continue to focus on our strengths and differentiating being first to market.

With with the products that we're bringing to our customers.

And then I you know globally, it's kind of hard to tell it's hard to speak to that in a general sense, but I think again what were doing today with our focus on solutions and being first to our first to market with customer solutions is a is a differentiator that we're driving across all the regions and we continue to be very successful.

Okay, great. Thanks.

Thank you that concludes our question and answer session for today I would like to turn the conference back to chasing carry for any closing comments.

All right very good thank you Rob and we thank you all for your time and joining US today, we look forward to seeing you at the upcoming conferences and that concludes our call. So thank you and have a great day.

This concludes our conference call you may now disconnect.

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