Keysight Technologies Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 21, 2021

There are 14 speakers on the call.

Operator

Good day, ladies and gentlemen. Welcome to the Keysight Technologies Fiscal 4th Quarter 2021 Earnings Conference Call. My name is Catherine, and I will be your lead operator today. After the presentation, we will conduct a question and answer session. Please note that today's call is being recorded today, Monday, November 22, 2021, at 1:30 Pacific Time.

Operator

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

Speaker 1

Thank you, and welcome, everyone, to Keysight's 4th quarter earnings conference call for fiscal year 2021. Joining me are Ron Nersesian, Keysight's Chairman, President and CEO and Neil Daugherty, our CFO. Joining us in the Q and A session will be Satish Janashekaran, Chief Operating Officer and Mark Wallace, Senior Vice President of Global Sales. You can find the press release and information to supplement today's discussion on our website at investor. Keysight.com.

Speaker 1

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's segment results. Following this conference call, we will post a copy of the prepared remarks to the website. 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.

Speaker 1

You will find the most directly comparable GAAP financial metrics and reconciliations on our website. All comparisons are on a year over year basis unless otherwise noted. 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. The company assumes no obligation to update them.

Speaker 1

Please review the company's recent SEC filings for a more complete picture of our risks and other factors. Lastly, I would note that management is scheduled to participate in upcoming investor conferences in December hosted by Credit Suisse, Wells Fargo and Barclays. And now I will turn the call over to Ron.

Speaker 2

Thank you, Jason, and thank you all for joining us. KingSight delivered a record quarter and fiscal year. Strong demand for our portfolio of differentiated solutions is fueling continued momentum across all of our end markets. Today, I'll focus my comments on 4 key headlines. 1st, Demand for Keysight's differentiated solutions continues to be very strong with orders exceeding our expectations.

Speaker 2

Outstanding order growth of 21% in the 4th quarter topped off an excellent fiscal year where we grew 18%. Demand continues to be balanced across our business with double digit gains across all end markets and regions, both in the Q4 and for the full fiscal year. 2nd, we delivered outstanding Q4 results despite a Tightening supply environment. Exceptional execution by Keysight employees around the world resulted in record revenue, Gross margin, operating margin and earnings per share for the Q4 and for the fiscal year 2021. 3rd, we entered 2022 with strong momentum, robust end market demand and record backlog.

Speaker 2

Assuming a loosening of the supply situation in the second half of the calendar year, we expect fiscal year 2022 revenue growth of 6% to 7%, while delivering 10% earnings growth. Beyond 2022, we are increasingly confident in our We have established a strong track record of execution And our competitive position earned over the past 7 years of investment and transformation has only grown stronger. Lastly, given the strength of our cash position in generation, we continue to see tremendous opportunities for value creation through disciplined investment

Speaker 3

of $1,200,000,000

Speaker 2

Now, let's take a deeper look at the strength of our 4th quarter and the fiscal year 2021 Financial performance. In the 4th quarter, we saw continued momentum in the demand environment. Orders exceeded our expectations and grew 21% year over year. Revenue grew 6% with growth across all regions. Operational and earnings of $1.82 per share.

Speaker 2

4th quarter results drove a very strong finish to an excellent year. In 2021, we overcame 5 percentage points of China trade headwinds and delivered 18% order growth to the overall market, which continues to be strong. Despite a tightening supply environment, we ended the year with 17% revenue growth And achieved record profitability with gross margin of 65%, operating margin of 28% and earnings of $6.23 per share. Compared to pre pandemic fiscal year 2019, Orders and revenue have grown 21% 15%, respectively, over this 2 year period, Highlighting the continued strong demand for our market leading solutions. Broad based growth across multiple dimensions of the Business demonstrates the breadth of our customer base.

Speaker 2

We added more than 2,000 customers in 2021 And more than 1900 in 2020 as we continue to expand our footprint, adding to the stability and durability of our business model. Despite the headwinds we faced in 2021, we delivered annual double digit order and revenue growth in both business segments. The Electronic Industrial Solutions Group achieved its 5th consecutive quarter of record revenue, driven by double digit growth in Semiconductor Solutions and in Automotive. Another quarter of record semiconductor revenue was fueled by Ongoing investments in advanced technology nodes and capacity expansion to address pent up demand. In automotive, we achieved record orders for the 3rd consecutive quarter of double digit order and revenue growth.

Speaker 2

Investment remains strong in EV and AV Technologies. 5th quarter, we announced the collaboration with NIO, 1 of China's top EV automakers who selected Keysight's 5 gs and CV2X network emulation solutions. Strong demand for general electronic solutions was driven by continued investments in digital transformation, The Communication Solutions Group delivered double digit order growth and record revenue in the 4th quarter. For the year, orders and revenue grew double digits despite the impact of China trade restrictions. Commercial Communications achieved all time record orders in revenue in the 4th quarter.

Speaker 2

Q4 was another record quarter for 5 gs driven by the In addition, we saw ongoing investments in 400 gs and 800 gs R and D across the entire communications ecosystem. Increased spending in data centers and network security drove double digit order growth in network test and visibility. In Aerospace, Defense and Government, double digit order growth was driven by ongoing investments in technology With the focus on space and new commercial technologies like 5 gs, we recently announced a collaboration with Lockheed Martin to advance 5 gs in Support of mission critical communications for aerospace and defense applications. Keysight's first to market solutions are enabling the rapid progression of New technologies and winning engagement with industrial leaders like NXP, NEC and MediaTek. In Q4, we joined Google's cloud partner initiative to support agile orchestration of innovative 5 gs services at the network edge.

Speaker 2

Our end to end solutions portfolio continues to capture new opportunities as the 5 gs lifecycle progresses and expands into aerospace, Defense and Government, Automotive and Industrial Applications. We continue to Keysight's capabilities to provide industry leading solutions through strategic acquisitions and recently added Scalable network technologies to our software centric solutions portfolio. Scalable is a provider of best in class network simulation solutions to model And visualize communication networks and cyber guides for aerospace, defense and government customers. We're excited to welcome the scalable team to Keysight. Our software centric solutions and higher value services Continue to drive differentiation, strengthen our competitive position and capture a higher percentage of our customers' wallet share.

Speaker 2

In fiscal year 2021, software and services not only delivered double digit order and revenue growth, but also outpaced Keysight's overall growth. Combined, they represented just over 1 third of Keysight's total revenue for the year. We also continue to grow annualized recurring revenue, which now exceeds $1,000,000,000 The growth in software and services As well as the recurring revenue further strengthens the durability and resiliency of our business model, while at the same time Contributing to Keysight's margin expansion. Keysight's focus on first to market, software centric solutions and operational excellence drives our consistent execution. We have a strong track record of performance and proven business resiliency.

Speaker 2

Since our inception as a public company 7 years ago, we have achieved a 10% compound annual revenue growth rate, Expanded gross margin by over 800 basis points, increased operating margin by nearly 1,000 basis points And generate 16% annualized EPS growth, all by significantly increasing investment in R and D. Over the same period, we have nearly tripled the size of our solid recurring revenue while growing services 75%. These accomplishments, our leadership model, our values and our people. Thank you, Steve. We continue to capitalize on these multiple ways of technology We

Speaker 4

expect to continue

Speaker 2

to be focused on delivering strong growth trends across multiple markets. We exit this year in a strong competitive position above market profitable growth. Now I will turn it over to Neel to discuss our

Speaker 4

Thank you, Ron, and hello, everyone. As Ron mentioned, we delivered an outstanding quarter and fiscal year. In the Q4 of 2021, we delivered record revenue $1,000,000 which was above the high end of our guidance range and grew 6% or 5% on a core basis, despite a tightening supply environment. The further contraction of the supply chain within the quarter tempered total revenue results Thank

Speaker 5

you, Jason.

Speaker 6

We are

Speaker 7

now in

Speaker 2

the line with our expectations

Speaker 4

and solutions group businesses. With demand outpacing supply, we delivered a record $1,491,000,000,000 in orders, up 21% on a reported and core basis and enter fiscal year 2022 with over $2,000,000,000 in backlog, which will position us well as the supply chain situation improves. Looking at our operational results for Q4, We reported record gross margin of 66% and operating expenses of $456,000,000 resulting in operating margin of 31%, an all time high. Net income was a record $338,000,000 and we achieved $1.82 in earnings per share, which was well above the high end of our guidance. Our weighted average share count for the quarter was 186,000,000 shares.

Speaker 4

Moving to the performance of our segments. Our Communications Solutions Group generated record revenue of $919,000,000 up 2%. CSG delivered gross margin of 66% And operating margin of 28%, driven by strength across the 5 gs ecosystem, O RAN adoption

Speaker 6

We are now in the line

Speaker 4

with our expectations and our outlook for the Q4 of 2018. Aerospace, Defense and Government achieved record revenue of $297,000,000 Up slightly below, solid growth in Asia Pacific was offset by supply chain constraints that impacted revenue in the U. S. And Europe. The Electronic Industrial Solutions Group generated 4th quarter revenue of 3 percent and record operating margin of 36% and tightened supply chain constraints and trade up 17% year over year or 15% on a core basis.

Speaker 4

We continue to invest in our quarterly earnings release and

Speaker 8

expect to be

Speaker 4

up 40 basis points year over year to 65 We continue to invest in our operating margin, which is a significant portion of our Operating margin improved 260 basis points to 28%. On the strength of this performance, we have achieved our long term operating margin 2 years ahead of plan. FY 2021 non GAAP net income was $1,200,000,000 or $6,000,000 Cash and cash equivalents generated cash flow from operations of 300 Total free cash flow for the year was $1,100,000,000 representing 23% of revenue and 99% of non GAAP net income. As announced earlier today, the Keysight Board of Directors has approved of $1,200,000,000 Effective immediately. Under our prior share repurchase authorization, we acquired approximately 2,100,000 shares in the quarter at an average share price of $171 For a total consideration of $353,000,000 This brings our total share repurchase for the year to approximately 4,400,000 shares At an average share price of $154 for a total consideration of $673,000,000 or 59 percent of free cash flow.

Speaker 4

Now turning to our outlook and guidance. Despite a strong demand backdrop, supply chain constraints continue to moderate shipment expectations. As a result, we expect Q1 2022 revenue to be in the range of 1,225,000,000 to $1,245,000,000 in Q1 earnings per share to be in the range of approximately 185,000,000 Looking forward to 2022, we expect supply chain to remain tight in the first half of the year. Assuming a loosening of the supply In the second half, we expect full year revenue growth to be in the range of 6% to 7%, while delivering 10% earnings growth. Interest expense is expected to be approximately $78,000,000 and capital expenditures are expected to be in the range of $240,000,000 to 2 Regarding our tax rate, we are modeling a 12% non GAAP effective tax rate for FY 2022, which assumes no change to current U.

Speaker 4

S. Tax policy. In closing, we are entering the fiscal year with strong momentum, a record backlog position and a strong track record of operational excellence. We're encouraged by the strong dynamics across our end markets And are competitively positioned to drive sustainable and profitable growth going forward. With that, I will now turn it back to Jason for the Q and A.

Speaker 1

Thank you, Neil. Catherine, will you please

Operator

Your first question is from Samik Chatterjee with JPMorgan.

Speaker 9

Hi, this is Joe Cardoso on for Samik. My first question is just around the full year guide. So you're guiding The full year to 6% to 7% growth. And I'm just trying to flip that with your commentary last quarter around expectations around a more muted seasonality. First of all, does that expectation still stands true?

Speaker 9

And if so, does that imply that we should expect To see a similar cadence to repreciating here as I think about revenue trends for the full year, such as maybe the benefits of the loosening of the supply chain as we head into the back half of the

Speaker 4

Yes. Hi, Samek. It's a great question. So yes, as we mentioned on the call, we did see the supply chain situation tightened during the quarter And our guidance does assume that we will see some relaxation in that environment in the back half of the year. So if I was thinking about Seasonality for FY 2022, I'd say 2 things.

Speaker 4

I think first of all, I think we'd expect revenue to build as we move throughout the year. And then maybe if you think about it in terms of year over year growth, right, where our guidance was 6% to 7% for the full year. If I was thinking about that on a quarter by quarter basis, I think we're expecting growth rates in the first half of the year that are below that 6% to 7% level And growth rates in the back half of the year that are slightly above that 6% to 7% level, so that we average that for the full year.

Speaker 9

And just on my second question, E and A, operating margins this quarter, They were really strong. Just curious to hear what were some of the big drivers or contributors to the margin there relative to operating margins. And just curious to hear if

Speaker 2

there is any one time benefits in the

Speaker 9

quarter that we should consider?

Speaker 4

Yes. No one time benefits, but I mean, I think the thing that comes immediately to the forefront is obviously the extraordinarily strong revenue growth The year with 30% revenue growth on the year. The business, the demand for those products has been very We've seen a very nice rebound this year in the automotive business, the semi business. We all have everybody has seen the press on the continued strength in semi. So you take which essentially allowed them to leverage Our OpEx infrastructure and drive really high levels of operating margin in the short run.

Speaker 4

I continue to see great opportunities to continue to grow the business as well

Operator

Your next question is from from Jon Pitzer with Credit Suisse.

Speaker 10

Yes, good afternoon, guys. Congratulations on the solid results. Some of the supply constraints that you're seeing out there. I think you said in your prepared comments, it's hitting EISG stronger constraints, is it component Is a little bit of everything. And is there a dollar or a magnitude of market revenue both in the fiscal 4th quarter and the fiscal Q1?

Speaker 4

Yes. Thanks, John. It's a great question. So first of all, I said the opposite. The impact was greater on CSG businesses than in EISG businesses.

Speaker 4

If you think about why they're complex, they have a long So there are more parts and components that go into building those instruments on average. And so that just by It's nature increases the risk and the challenges that we have to fulfill that supply chain. So there are fewer suppliers for those cutting edge technology products than for a little bit more of the mainstream products that Just within the idea of the impact that supply chain, I've maybe lump COVID and supply chain together because we've really seen this phenomenon over the last couple And if you're starting to think about how to quantify those impacts, I'd really kind of focus your attention not on 1 quarter, but over time, you're looking at the full fiscal years as an example, at our order rate, right. If you look Revenue, there's typically a little bit of a lag, a certain percentage or another portion shift out into the following quarters. But over the past couple of years in 2020 because of COVID and in 2021 because of supply We have seen that delta between orders and revenue grow.

Speaker 4

And so I think we estimate that If you think about it in terms of kind of an abnormal backlog build, that abnormal backlog build over the last couple of years is in the $300,000,000 to $100,000,000 range. And so I think that's the opportunity for us as we look forward to eventually clear that backlog once the supply chain situation Pyxis itself, I don't expect they will flush that in a quarter or 2. I think it will happen over time because Kind of the remedies to supply chain are going to happen over time as well, but that's the rough magnitude of what we've what the impact has been here over a couple of year

Speaker 10

Over the last several years, we on this side of the world have been trying to compare and contrast Sort of the 5 gs rollout with the 4 gs rollout relative to your business. And I guess what I was hoping to do is get a little bit more color about the software strategy you're This time around, which seems like an incremental driver. I'm just kind of curious, can you size the potential TAM opportunity that gives you, especially as the network morphs from just being a backbone for handsets and mobile To actually being a backbone for a lot of new incremental applications and to the extent that software and services is a third of the business now. So how do we think about that over like the next 3 to 5 years?

Speaker 2

Thanks, John. It's very, very clear that software and services continues to be a bigger and bigger percentage of our total business as we move from a hardware Product supplier to a software centric solution provider and the solutions obviously include hardware, software and services. And we've seen great growth obviously in our software and our services and they've outpaced the hardware growth. 5 gs versus 4 gs, we made a decision in 2013. We announced that Adelim, we were going to spin off Keysight in 2013, which we eventually did in November of 2014.

Speaker 2

But in 2013, I started working with Team that was developing to invest in 5 gs and make sure that we were going to be leaders. In 4 gs, we were providing a little bit more of, let's say, cash contribution to Agilent where we were not investing as heavily in the communications rollout of 4 gs By a substantial amount. So we invested earlier. We invested a greater amount as now we're roughly at 16% R and D where we used to be at approximately 12% of R and D and we've gone from roughly 400,000,000 Roughly $800,000,000 in R and D spend over this period of time, but software is a key part. What we did was we consolidated our hardware our hardware development facilities into one organization as opposed to in separate divisions.

Speaker 2

And accordingly that enabled us to basically provide software that could span the whole product offering. And we made an acquisition for instance of a company called Anite, which gave us software capability. They had some capability in 4 gs, We move them over to 5 gs. And all this together, investing more, starting earlier, Having a consistent R and D and investment profile has really gave us the lead and caused us to be a Much, much stronger provider and I believe the leading provider for 5 gs. 5 gs is still growing and I'm going to turn it over to Satish who could tell you a little bit more about our results and our growth in Not only 2021, but what he sees going forward.

Speaker 5

Yes. Thank you, Ron. Great question. I think at the summary, we've had another record Quarter for 5 gs, and the drivers are scaling deployments. But equally important is the new application And I think we outplayed that as a strategy we had to continue the progression from physical to protocol to application.

Speaker 5

And this application area is very rich, right? As I look forward, some of these application spaces have software as a percentage of the total value proposition in the 30%, 40%, 50% range and one we pursue very actively, I'll just make a few examples of these, right. So you can think of on the 5 gs side, O RAN being a great example of that. On the wireline The protocols with 400 gig, 800 gig getting more complex, you look at new emerging spaces like SD WAN, SASE and MACsec In the security domain, so you look at the commercial comps portfolio, it's very rich in applications that really favor our Strategy of being more software centric and one we're investing to pursue and we're generating strong results.

Speaker 10

Perfect. Thanks guys. Congratulations.

Speaker 2

Thank you. We are ready for the next question from Jim Suva of Citibank.

Speaker 6

Thank you very much. I had a thought about your vertical integration. You're a lot more vertically integrated than the other Companies, have that materially benefited you during the supply chain bottlenecks? Are there like little things, whether it be Plastics or connector or housing that had held you back just as much as the other. And I'm just trying to think about does this now cause you to even want to be

Speaker 3

a little bit

Speaker 6

more Or are you at the sweet spot for the vertical integration? Thank you.

Speaker 2

Sure, Jim. The first thing that's probably really important to note is that our differentiating technologies that have given us the leadership position Outside of the software that we have developed is semiconductors that have very Particular high performance capabilities. And as you know, we have an on-site fab that This in Santa Rosa and that fab mix gallium arsenide and indium phosphide semiconductors. So a lot of people are having trouble now getting more custom components built Where custom components built and we build a lot of those custom components in house. So that has definitely helped Now again, if you don't have all the parts, you can't ship anything and we are in relatively good compared to other competitors, but there's no doubt that we have to make sure that we get all the components We always will look for opportunities to integrate, provided that It makes financial sense.

Speaker 2

We feel very good about what we have in house right now. It's not so much the plastic pieces and things like that. There Obviously, not only components, but there is the whole logistical shipping issues that the whole world is going through. So we are impacted a little bit less than others. And I think The overall organization has done a real good job of being able to deliver during these very challenging times.

Speaker 6

Great. Thank you and congratulations to you and your team at

Speaker 3

Keysight. Thank you, Jim.

Speaker 1

Great. And then the next question goes to Mark Delaney from Goldman Sachs.

Speaker 8

Question. Some of the defense primes have Welcome to slowing Department of Defense budget outlays and I appreciate that Kissei reported broad based order strength, but I was hoping you could talk a little bit more on what you're seeing in your AD and G segment and if you are experiencing any slower end market trends even if in certain portions of that business segment?

Speaker 5

Yes. So again, a pretty strong quarter for Aerospace Defense orders, growing double digits, finishing off the year with double digit growth. If you look at what drove that growth, it's recovery in the macro environment globally, Stimulus spend, especially towards technology that continues to increase both in the U. S. And internationally and one we're capturing.

Speaker 5

We also took some concerted steps last year or 2 years ago, in fact, to take our 5 gs technology stack And customize it for aerospace defense applications. And as you've probably seen our collaboration with Lockheed Martin that we announced, so we're very pleased With the progression that we're making with commercial technologies that are getting adopted. So all of these are pretty favorable. We are observing that Right now, we are under continuing resolution from a budget perspective in the U. S.

Speaker 5

But if you look at the budget That has been put in place and if or that has been proposed and if it's approved, it does call for a year over year increase and also increased spend in technology or RD line item which we view as a favorable dynamic. Peripherally, the infrastructure bill that is getting through the Congress

Speaker 6

for us.

Speaker 8

That's really helpful color. Thank you for all those comments. And my follow-up question is on the supply chain and If you could talk in a bit more depth around what is leading to your comments of potential alleviation in the second half of this coming fiscal year? Thank you.

Speaker 4

Yes. I mean, the supply chain situation is very dynamic. I guess I would start by saying that. And we have Very close relationships with our key suppliers and are in constant dialogue with them during this period of time to make sure that we are procuring the parts that are To meet the needs of our customers, I think it's our confidence and our guide reflect The start of a recovery in the supply chain situation in the back half and that stems from Direct indications that we've got from key suppliers within our supply chain environment.

Speaker 1

Thanks for that, Mark. We'll move over to Tim Long from Barclays.

Speaker 11

Thank you. 2, if I could. Maybe on the wireless side, could you talk a little bit about kind of the impact of C band And current views on millimeter wave and particularly with the C band, any impacts from these potential delays with the FAA, etcetera? And then secondly, maybe Neil, could you just kind of update us, it's obviously been a great period of margin expansion. Can you talk a little bit Give us an updated view on kind of leverage and incremental margin, gross and operating from these levels?

Speaker 11

Thank you.

Speaker 5

I'll make a few comments on 5 gs. As we stated before, the continuing deployments that are going on, Especially in the low frequency bands across the world, we view it as a favorable dynamic, specifically the C band auction was a near term And we've had some strong results, as I mentioned, strong double digit growth in 5 gs this quarter, capping off a double digit growth in 5 gs For the full fiscal year, and a big part of that was driven by the C band And then the related investments that are going on in the Americas, our Americas business was the strongest in our 5 gs from a regional perspective. And we also saw our FR1, our low frequency business double year over year. So very strong results All the while, when our millimeter wave business has been pretty stable this year and as we have mentioned before in the medium term, We're expecting that the millimeter wave adoption continues to rise in a very steady manner, and we're watching for the Beijing Olympics Some use cases to emerge from the success of the Beijing Olympics that we expect to occur next year. Yes.

Speaker 4

And Tim, to your second question, yes, we've obviously had a great run here in terms of margin expansion since the birth of Keysight, I think 800 basis points approximately to gross margins, about 1,000 basis points to operating margins. And I think the key point is that as we look forward over the longer We continue to see opportunities for further expansion of margins within the Keysight portfolio. I think as we Look to next year, it's a really dynamic time, obviously, with supply chain pressures putting a little bit of a governor on revenue. At the same time, you've got inflationary pressures across the broader economy. And then the other thing that we're looking forward looking to that's a little bit of a cost up within next year Is hopefully a return to kind of a post COVID or pre COVID normal in terms of our general operating environment

Speaker 6

And

Speaker 4

that includes the costs associated with the facilities management as we return to the office, increased travel as people get back out and start Seeing customers and conducting more business in person rather than over Zoom. I think and maybe the last point being that We saw we invested in R and D this year just under 16% of revenue. I think we continue to see great opportunities To invest in technology and bring new solutions into the marketplace, I think you're likely to see R and D tick upward next year into that kind of 16% range. So from those perspectives, I think FY 2022 maybe a bit of a catch up year. But over the longer term, a lot of opportunity as we Expand our software portfolio, expand our solutions portfolio, continue to work with customers and provide them with first to market solutions to continue to drive Both gross and operating margins northward.

Speaker 11

Okay. Thank you.

Speaker 1

All And the next question comes from Matt Niknam of Deutsche Bank.

Speaker 3

This is Nick on for Matthew. Congrats So just first, I wanted to talk about CapEx. I think CapEx guide is picking up next year. I just want to know what's driving that And whether that should carry on to future years, like is that sustainable or is there a specific project that's going on? And I'll have a follow-up.

Speaker 4

Yes, it's a great question, Niknam. So we started to or we talked about in this recently completed fiscal year That we expected a couple of years of elevated CapEx as a result of efforts to improve the resiliency of our supply chain And that in fact did pan out with CapEx of approximately $175,000,000 this year. I think in addition to continuing those investments, We see incremental investments that are necessary as we continue to expand our own capacity and invest in key technologies to drive the Future growth of our business. So I think those are additive given everything that's happening across the economic sphere today. There is Relative to what we were seeing this time last year, an increased need To spend money on capacity investments here within Keysight.

Speaker 4

And so, I do not believe that the $250,000,000 of CapEx that we've communicated for next year is the new steady state. That is not the case. That steady state is Significantly lower exactly where I a little bit difficult to call at this point, but materially lower than the $250,000,000 that we are indicating For FY 'twenty for FY 'twenty two.

Speaker 3

Okay. That makes sense. And then just a quick follow-up On competitive environment, I mean, there are a few puts and takes that I'm just thinking about and I want to just provide some color. On the one hand, a lot of competitors are having Charter time sending out shipments. Does that create a positive pricing environment?

Speaker 3

And then in a slightly different Engel, one of your competitors recently made some easy acquisitions. Just how you think about the ISG from the competitive landscape going forward?

Speaker 5

Yes, very strong performance in our EISG business. Again, strength, as I mentioned, in the semiconductor where new wafer starts Are really enabling us to continue to drive growth there, a very strong year, again, building off of a strong double digit year last year in semiconductor So when I think about what we're doing there, we're definitely taking share and we are continuing to invest to keep that portfolio growing and on the environment we see with semiconductor. With regard to automotive, it's been a newer market entry for us, relatively speaking. We started this since then. We're very pleased with the results we're seeing so far.

Speaker 5

And we've made if you look at this fiscal year, We've had some wins in the manufacturing expansions that have happened in the EV sector. And as we shore up our Contributions in the AV market, we've announced a partnership with NIO as an example of what we're doing by Sending our 5 gs technology stack in CB2X. In summary, all in all, you look at our entire portfolio for automotive, it is growing And it is much more comprehensive than any of our traditional competitors at this point. And we are continuing to invest in growing that So overall, pleased with where we find ourselves with the EIC business.

Speaker 2

And your Second question, which was with competitors having a little tougher time on shipments, are we going ahead and taking advantage of that For pricing, the answer is no. We're in this for the long haul with customers. We've been back from the original Hewlett Packard days, Over 80 years working with customers, we're not taking advantage of them. Where costs are up in certain areas for shipments and others, we will do price increases, But not because of any competitive position or hard ability for our customers to get products from competitors.

Speaker 3

Okay, great. Thanks and congrats again.

Speaker 2

Thank you very much, Nick.

Speaker 1

Next question comes from the line of Chris Snyder of UBS.

Speaker 12

Thank you. So the company in the past has talked Industry growth in the 3% to 5% range with expectations for about 100 to 200 bps of outgrowth For Keysight, above the industry. But when we look at it over the last 4 years now, the company has been growing about 10% organically per annum. So I guess my question is, is this level of growth more so driven by just much stronger industry growth over the last 4 years Or just better Keysight outgrowth or a combination of both. Can you just kind of help us unpack how we kind of bridge that gap?

Speaker 2

I'll make a couple of comments and then turn it over. I think it's a combination of 2, there's no doubt that we've seen more growth and more opportunity in 5 gs. But as we see the digitization of everything, the market is there is No doubt a great place to be. And we have a very diversified portfolio and we're seeing growth in semiconductor. We're Seeing growth in Industrial 4.0.

Speaker 2

We're seeing growth All across our real stated growth initiatives in the markets that we've gone after. So there is no doubt we picked markets And I think the execution of the team, the investment that we have and our strategy of providing customers with total solutions is unmatched in the industry. Others are trying to mimic it to a certain extent. But I do believe with our outstanding sales force, sales support organization, our overall organization that provides hardware, software and we'll call it partnership with key market makers, it makes Huge difference on how successful we are. So I'll start there and Satish may want to make another

Speaker 5

Yes, Ron, I think you're absolutely right. With regard to what we see in the marketplace is this expanding ecosystem As we have expanded our portfolio from just products to offering total solutions to customers, we remain focused on the end markets that we've called out. Another angle to this that Mark Wallace can add is the customer adds that occurs as this expanding contribution that we're making.

Speaker 7

Yes. Thanks, Nikesh. Chris, to add to this, I think our go to market investments we've made in sales and marketing and Customer engagement is making a big difference. As you've heard, we had strong double digit order growth across all regions And all end markets, not just for Q4, but for the entire fiscal year. So this is a very sustaining effect that we've had As we engage with the market leaders in planting our solutions engineers to help innovate with customers, Our largest customers have grown substantially.

Speaker 7

Our long tail of small and medium sized business customers have grown. And as Ron has mentioned in the prepared statements, we continue to add new customers every quarter and Our business and then it's not just all about our direct channel. We have a very strong partnership or Partner channel with the indirect channel distribution sales helping us reach more than 30,000 customers per year And we're seeing continued adoption and growth from our e commerce channels as well. So we have multiple ways to serve our customers And deliver these great solutions and I think that's a big part of it too.

Speaker 12

Yes, I appreciate all of that color from everybody. I guess my follow-up would be, so in terms of the above normal industry growth, how long Can that last? And is it reasonable to think that lasts until 5 gs peaks, which I believe is expected maybe in the 2023 or 2024 Time frame? And then in addition to that, is there any reason why we should expect Keysight outgrowth over the market to compress Back to the 100 or 200 bps kind of guided levels, just given the R and D scale investment advantage the company has?

Speaker 2

If we were sitting at a total of, let's say, 60% market share or 70% market share, you may say Diminishing returns, but when we look overall where we are, we're in the 25% to 30% range. We have a lot of headroom And I believe it's going to go way past 5 gs. 5 gs, whether you're talking 24 or whatever Your perspective is on that. We're already investing in 6 gs. We're investing in EV, we're investing in AV and there are so many more opportunities that are being put right in front of us or that we see.

Speaker 2

We are aiming to go ahead and outgrow the market for many, many years.

Speaker 4

The only thing I would add to that is our ability to spend $800,000,000 a year in R and D is a real differentiator in the marketplace. And I think goes To at least to indicate what our ability to continue to outperform the broader market should be over time.

Speaker 12

Appreciate the time guys. Thank you.

Speaker 2

Thank you.

Speaker 1

Next question comes from the line of Rob Mason at Baird.

Speaker 13

Yes. Thanks.

Speaker 2

Rob, your audio has cut out.

Speaker 4

I think we just lost the call.

Speaker 2

We can come back to you.

Operator

Mr. Mason, your line is open.

Speaker 13

Yes. Can you hear me?

Speaker 1

Yes, we can hear you, Rob. Go ahead.

Speaker 3

Okay. Apologies. Not sure what happened.

Speaker 13

I did have a clarification question just on the Q1 guidance. So I guess, Neil, maybe this directed you. Is the assumption that margins would be down year over year within your guidance? I'm not sure I totally caught your Below the line guidance.

Speaker 4

Yes. All I said was relative to where we just finished Q4, right, we finished the year at 15.9 percent R and D investment. It was a point lower than that in the And I think we look and see a tremendous amount of opportunity for us to invest via the R and D line to bring new technologies So I think over the course of FY 2022, you could expect us to return our R and D spend more into that mid-sixteen That kind of a range, which will obviously have a little bit of a pressure on margins. The only other thing I would say is in Q4, we did have extraordinary we did a very favorable Product mix within the quarter, at least as we see Q1 taking shape, we expect mix on a sequential basis to be And that is a larger than typical salary increase this Q1.

Speaker 2

I see. How would And again, that's compared to Q4, which was a 31% operating Margin, that was very high record.

Speaker 13

Right. How would your expectation within 10% Type EPS growth, how would your assumptions around incentive compensation

Speaker 2

play out

Speaker 13

on a year over year basis?

Speaker 4

Yes. So obviously, there's 2 components to our incentive programs. There's the incentive programs for the broader Employee base, which are driven based on the organic growth rate of the company as well as So our operating margins and so those would be the true drivers there. I think for the executive population's ability to grow EPS and this The cash compensation portion is ability to grow EPS and grow the top line. And over the longer term, our primary source of variable compensation is based on total shareholder return.

Speaker 4

And so I think as we look forward to FY 2022, we're seeing wages up significantly as a

Speaker 13

Okay. Just a quick follow-up with respect to your capital allocation Could you just give us an update on how you view the M and A pipeline, maybe where your focus would be At this point?

Speaker 2

Yes. Absolutely, Ron. Yes. Again, in our target markets, what we're looking to do is provide total solutions. But as we and there's no doubt if there are certain parts Or components of a total solution that we need, that would be the first priority.

Speaker 2

The second thing that we're doing is we're Expanding into adjacent markets. As Satish had mentioned earlier, we started off in 5 gs or in 4 gs, Mostly on the physical layer, going ahead and providing solutions there. Then we've moved up into the protocol layer and now you can see we're in the application layer and And security. So we continue to look for, additional opportunities, also. That is what we're looking at.

Speaker 2

We have a very robust funnel, but we also have very high hurdles. So we have the ability to not only make the acquisitions that we need to make, but also to return cash to the shareholders and that's why we announced 1

Speaker 1

All right. Thank you, Rob. Next question comes from the line of Adam Thalhimer of Thompson Davis.

Speaker 3

Hey, good afternoon guys. Great quarter. Just a quick one on margins. I'm curious How are you guys are thinking about operating margin improvement by segment? Because such tough you had a great year at EISG, I just wonder if that creates a tough comp for you Or if you can even build off of the 2021 result.

Speaker 4

Yes. Certainly, Obviously, a very tough comp for EISG given the strong results, not just within the quarter where they reached Up into the upper 30s, but 36% for the full year here. I think we have opportunities to increase margins Across both segments, I think we have initiatives in place across both segments to increase software content, to increase solutions And to increase the value added that we're bringing to customers. And so I think if you think about opportunities In EV and IoT for EISG and of course in not just 5 gs, but 6 gs and Quantum and Aerospace Defense on the CSG side, there's ample market opportunity for us to continue to increase the value add that Keysight

Speaker 1

Great. Thanks, Adam. So well, that concludes our question and answer session for today. I'd like to thank you all for joining us and we look

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Earnings Conference Call
Keysight Technologies Q4 2021
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