Release Date: May 20, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Keysight Technologies Inc (KEYS, Financial) exceeded the high end of their guidance with revenue of $1.2 billion and earnings per share of $1.41.
- The company saw strong demand for AI infrastructure solutions, including test and validation of 400 and 800 gig transceivers and ultra high-speed interconnects in GPU-based compute systems.
- Keysight Technologies Inc (KEYS) deepened its R&D collaboration with NVIDIA on next-generation communication technologies.
- The company expanded its global battery test footprint with a new large Gigafactory customer in Europe.
- Software and services orders and revenue growth continued to outpace overall Keysight, now representing approximately 39% of total revenue.
Negative Points
- Communications Solutions Group revenue declined versus the prior year, impacted by a robust backlog conversion.
- Electronic Industrial Solutions Group orders and revenue declined double digits as expected, with customer spending and market conditions remaining muted.
- The semiconductor industry outlook is improving but recovery is projected for 2025, indicating a delay in immediate revenue growth.
- Customer spending remains constrained in general electronics markets, particularly in manufacturing, China, and the distribution channel.
- Operating expenses of $496 million were down only 2% year-over-year despite the addition of ESI and Riscure, indicating limited cost reduction.
Q & A Highlights
Q: It sounds like your base case for the year is still intact. Can you provide clarity on the order trends for the third and fourth quarters?
A: Yes, typically, we see a small downtick in both orders and revenue from Q2 to Q3, followed by a mid-single-digit uptick into Q4 driven by annualized sales cycles and strength in aerospace defense tied to the government fiscal year-end. This year, we expect similar trends.
Q: Can you dig deeper into your overall Wireline business and the AI data center piece?
A: This quarter, for the first time in six quarters, our commercial communications orders grew, driven by the AI data center segment. It's still early days, but we are seeing strong double-digit growth in our Wireline business, particularly in networking, computing, storage, and interconnects.
Q: What gives you confidence that orders will pick up in the second half of the fiscal year?
A: The market environment remains unchanged, and our base case does not assume significant market recovery. However, we see stability in demand, particularly in Wireline and aerospace defense, and some sequential growth in our ISG business, which indicates a stabilizing demand environment.
Q: How are you managing OpEx in these volatile end markets?
A: We expect total OpEx spending to be down about 3% year-over-year, excluding acquisitions, with savings coming from SG&A. We are maintaining our R&D investments to ensure we are well-positioned for the upswing. Our cost structure is flexible, and we've reduced headcount by about 5% over the last four quarters.
Q: Can you provide clarity on the semiconductor space within the EISG segment and the timing of fab projects?
A: Our semiconductor business is about 10% of total Keysight. We are seeing some activity suggesting that delayed fab expansions should begin to show CapEx spend towards the end of the calendar year. We have deep relationships with customers, and the underlying drivers for advanced process technologies related to AI remain strong.
Q: Any commentary on the early performance of ESI and its integration?
A: We are pleased with the acquisition; performance in the first half has exceeded our initial plans. We are prioritizing taking ESI's core products into aerospace defense in the U.S. and increasing exposure with Asian auto manufacturers. The sales team is making good progress, and we are seeing opportunities open in both directions.
Q: Can you discuss the strategic rationale behind the Spirent deal?
A: The Spirent deal is a SAM expansion opportunity, fitting well with our network analytics expansion strategy. It creates value for customers and shareholders, meeting our M&A hurdles and being accretive to gross and operating margins post-integration. We are currently working through the regulatory process.
Q: What gives you confidence in your recovery outlook compared to competitors who have pushed out their timelines?
A: We focus on execution and customer discussions, where many customers have commented that they are going through the bottom and doubling down on programs. We see improvement in macro factors like SIA, smartphone sales, and PMI indices. Our pipeline supports the expectation of modest improvement in H2 orders.
Q: Do you see further weakness in revenue and margins in the EISG segment in the back half?
A: We expect demand to improve in the second half, especially Q4, driven by semiconductor spend. However, revenue may face headwinds due to the long-dated nature of some backlog items. Margins will be impacted by revenue decline and seasonality of ESI profitability.
Q: How are you managing the business beyond the second half, considering the long-term revenue growth targets?
A: We feel good about our long-term growth expectations. We continue to invest in R&D and focus on strategic areas. While the timing of recovery may push out, we remain confident in our strategy. M&A will be selective and strategic, focusing on areas where we can bring value.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
