Satish Dhanasekaran
President and Chief Executive Officer at Keysight Technologies
Good afternoon, everyone, and thank you for joining us today. My comments will focus on three key headlines. First, Keysight executed well in a market environment that was largely unchanged from the first quarter, revenue of $1.2 billion and earnings per share of $1.41 exceeded the high end of our guidance. Second, orders of $1.2 billion were in line with prior quarter. We saw pockets of growth and stability across multiple end markets even as customer spending remained constrained. Our base case scenario for the full year is unchanged with revenue relatively stable from Q2 to Q3 and orders increasing modestly in the second half. Third, our deep customer collaborations and relationships are strong and continue to inform our future roadmaps. These engagements reinforce our confidence in the long-term secular growth trends of our markets. The pace of innovation is accelerating across multiple vectors and, while remaining disciplined, we are investing to increase our differentiation and to capitalize on the waves of technology inflection ahead of us.
Now, let me begin with a brief overview of Keysight's second quarter performance. Revenue of $1.2 billion and earnings per share of $1.41 were above our expectations. Revenue and orders continued to normalize from the strong prior year, but were stable on a sequential basis excluding ESI seasonality. We delivered operating margin of 24%, reflecting a healthy gross margin of 65% and the cost actions and discipline that we have exercised to date.
Turning to our business segments. Communications Solutions Group revenue declined versus prior year, which benefited from robust backlog conversion. On the demand front, orders were flat year-over-year and grew 4% on a sequential basis. Investment in defense modernization continued to drive activity in aerospace, defense and government, and we were pleased to see commercial communications order growth for the first time after six consecutive quarters of declines.
Wireline orders grew on a robust demand for our differentiated AI data center solutions. These include a new AI test platform that is being used by several industry leaders to emulate AI workloads and benchmark network performance. Hyperscaler customer engagements remained high as they accelerated their AI application development. We deepened our R&D collaboration with NVIDIA on next-generation communication technologies this quarter. We also 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.
Our advancement of leading edge network innovation was on display at the Optical Fiber Conference, where we demonstrated the industry's first 1.6 terabit Ethernet test solution in partnership with industry leaders. In wireless, there are some encouraging signs of incremental improvement in the industry outlook as parts of the ecosystem continue to normalize. Our latest suite of 5G solutions launched over the past year is enabling ongoing investment in evolution of 5G standards, non-terrestrial networks and Open RAN. With the first round of NTIA grants to enhance testing of interoperability, performance and security of Open RAN networks, we secured key wins with several customers in the US. We also saw increased demand for chipset R&D, as well as component production. Earlier in the quarter, we partnered with industry leaders to showcase new products and solutions at Mobile World Congress, including non-terrestrial network chipset development with Qualcomm.
Turning to aerospace, defense and government. Defense modernization spending continued in radar and spectrum operations, space and satellite, and signal monitoring. We saw a healthy demand from the US government and primes in the quarter. After several continuing resolutions, the 2024 US defense budget was approved in late March. It includes a 5% increase for research, development, test and evaluation, which is expected to drive incremental program spend. Strong demand for electromagnetic spectrum operation applications resulted in significant wins at US and Europeans prime. We expect this trend to continue into the second half and 2025.
Turning to Electronic Industrial Solutions Group, orders and revenue continue to normalize from a record prior year declining double digits as expected. Customer spending and market conditions remain muted, but we saw relative stability on a sequential basis. In semiconductor, the industry outlook is improving with projections of recovery in 2025. Inventories are coming down to more healthy levels and demand is picking up in certain areas such as high bandwidth memory. Additional new fab installations were announced this quarter. In the near-term, foundry customers are working through delays in existing projects and expect production to begin in late '24 and '25. Consistent with this backdrop, we saw improvement in our memory-related business and ongoing steady demand for Keysight's proprietary laser interferometer positioning systems.
In automotive, revenue was sequentially stable when excluding acquisitions. We had a steady demand for both our EV and AV solutions. Beyond the headlines, consumer adoption of EV continues to grow although at a slower pace. The development of cost-effective longer range batteries and a more robust charging infrastructure remains a strategic priority for OEMs and governments in a very competitive market. During the quarter, we expanded our global battery test footprint with a new large gigafactory customer in Europe. We're also pleased with the addition of ESI to our automotive and simulation software solutions portfolio. The business is tracking well to both top line and profit expectations. This quarter, ESI expanded its multi-decade collaboration with Volkswagen Group, establishing a joint material testing and intelligent simulation lab in Asia. This collaboration will advance automotive simulation technology and drive new industry standards, safety and efficiency forward in the region.
In general electronics markets, customer spending remains constrained, particularly in manufacturing, China and the distribution channel. We do continue to see growth in digital health and advanced research supported by government funding in Asia and the US such as the CHIPS Act. This quarter, we expanded our partnership with EMVision in Australia to enable innovation in novel point-of-care medical imaging technology and analysis.
As a key element of our solutions strategy, software and services orders and revenue growth continued to outpace overall Keysight. At approximately 39% of total revenue, software and services enhance the differentiation of our solutions and are more resilient in current market conditions.
Within the chip domain, next-generation performance demands are driving an exponential increase in system level design requirements and complexity. Keysight's simulation and emulation software capabilities enable our customers to address these challenges and accelerate time-to-market for their advanced systems and chips. We recently introduced QuantumPro, an integrated EDA solution for qubit design and the development of quantum computers. In addition, we launched a new solution for die-to-die interconnect simulation, which is a key step in verifying performance of heterogeneous and 3D integrated circuit designs, commonly known as Chiplets.
Looking ahead, the pace of technology innovation and digitization is accelerating and proliferating across multiple industries and use cases. Keysight is investing today both organically and inorganically to capitalize on these future technology waves and inflections. In addition to steady organic investment in R&D, we are expanding our solutions portfolio and our served addressable markets through M&A. This quarter, we announced our intent to acquire Spirent Communications, a highly complementary business in network analytics. We also completed the acquisition of Riscure in the quarter, expanding our automated security assessment capabilities and solutions for semiconductors, embedded systems and connected devices.
In closing, I would like to thank our employees once again for consistently delivering value to our customers and shareholders. The Keysight team's high performance and winning culture is key to our success and a competitive differentiator. While it's difficult to call the timing of the recovery, we're encouraged by pockets of growth that are emerging, the relative stability of investment levels and the strength of our customer collaborations.
Consistent with the Keysight leadership model, we remain disciplined and continue to streamline operations to ensure strong financial performance in these dynamic market conditions. As we look beyond the current period of normalization, the long-term secular growth trends driving our business are intact. Taken together, our broad portfolio of differentiated solutions, strong customer relationships, technology leadership and durable financial model positions us well into a market recovery.
With that, I'll turn it over to Neil to discuss our financial performance and outlook.
