Release Date: August 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) delivered revenue and earnings above the high end of their guidance.
- Orders of $1.25 billion were slightly above expectations and showed low single-digit sequential growth.
- Commercial Communications orders grew low double digits, driven by strong growth in wireline.
- Software and services revenues grew, accounting for 39% of total revenue, with annual recurring revenue from software and services increasing year-over-year.
- The company returned over $715 million or 78% of free cash flow through share repurchases over the past four quarters.
Negative Points
- Revenue for the Electronic Industrial Solutions Group declined double digits year-over-year.
- Aerospace, defense, and government revenue and orders were down year-over-year, though sequentially flat.
- Customer spending in the semiconductor segment was down year-over-year, despite some sequential improvement.
- Automotive orders and revenues declined double digits, with lower auto manufacturing activity being a near-term headwind.
- The prolonged US budget approval process has caused delays in the appropriation of funding for new aerospace and defense projects.
Q & A Highlights
Q: Orders were up slightly, both sequentially and year on year after being down year on year for the prior six quarters. Maybe you can help us better understand how meaningful you think the pickup in orders is as a sign that the cyclical environment may be changing?
A: Hi, Mark. Thanks for the question. We're encouraged by the continued stability in our base business and material inflections in our wireline business. There are some signs of a rebound in semiconductors, although it's too early to call it a recovery. We feel good about our portfolio and its differentiation and value investments.
Q: You mentioned AI as a positive contributor to commercial communications. Can you help us understand what percentage of commercial communications orders are tied to AI and how impactful AI might be for revenue within commercial over the next 12 months?
A: Our commercial communications orders grew double digits this quarter, driven by AI spend. The wireline ecosystem, which represents roughly 40% to 45% of our commercial communications business, is inflecting due to AI. AI is expected to be transformational, and we are making meaningful contributions in R&D across compute, power, thermal networking protocols, and memory.
Q: At the Analyst Day over a year ago, you outlined a revenue growth figure of 5% to 7%. Given the stabilization of orders, is there anything that has changed as we think about the next fiscal year?
A: Our long-term view remains unchanged, and we expect the business to trend back to those levels. However, '21 and '22 were outsized years, and '23 was flat. '24 is a down year for the market. We are executing well and feel good about our portfolio. We expect a slow, gradual recovery in 2025.
Q: Can you provide an update on the long-dated backlog build or orders?
A: The incoming order rate remains stable in the upper single digits level of mix. On the revenue side, we are trending in that direction and expect to achieve that in the next quarter or two.
Q: Can you dig a little more into the aerospace and defense segment? Are these delays pushing more into the next quarters?
A: The overarching trends in aerospace and defense are positive, with bipartisan support for defense budgets in the US and increasing support globally. We have a strong pipeline, and the prime contractors' backlog increases are expected to convert into orders. We are lapping a record year in 2023, so revenue levels are down, but the drivers remain intact.
Q: On automotive, clients are delaying projects. Are they looking to restart at the beginning of calendar 2025?
A: It's hard to predict the timing of these projects, but we are seeing continuous focus on innovation with key automotive customers. We expect the pause in battery test and EV projects to gain momentum in the next several quarters.
Q: What do you see as catalysts for improvement in the communications business in fiscal '25? Any update on the Spire acquisition?
A: We expect continued demand in the wireline business driven by AI. The R&D opportunities across compute, power, thermal networking protocols, and memory are strong. We expect stability in wireless and some increase in deployment activity globally. Regarding Spire, we have received shareholder approval and are working through the regulatory process, expecting completion in the first half of fiscal '25.
Q: Historically, Q1 has been seasonally down in terms of bookings. Is there anything different this year?
A: Given the visibility, it's premature to give too much guidance. Historically, we see a sequential decrease in orders and revenue from Q4 to Q1. However, the ESI business has opposite seasonality, recognizing about 40% to 45% of their revenues in Q1. We'll have to see how that plays out given the market environment.
Q: How does the autonomous vehicle side lean on your core competencies of communications, and what does the long-term opportunity look like?
A: The automotive marketplace is transforming, and we have grown our business significantly. The AV side leverages our strengths in commercial communications, semiconductor, and EDA design tools. We are well-positioned for the long-term opportunities in this space.
Q: You stated that you have a huge opportunity set because of hyperscaler investments. Are these hyperscalers direct customers for test equipment, and how can this exposure broaden over time?
A: Hyperscaler investments in digital infrastructure upgrades are proliferating to the ecosystem, benefiting our manufacturing exposure. We are expanding into hyperscaler silicon programs and participating in consortiums for open standardization. We feel good about our ability to provide total solutions for customers in computation, connectivity, and AI scaling.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
