Keysight Technologies Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 17, 2022

There are 13 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal First Quarter 2022 Earnings Conference Call. My name is Elliot, and I will be your lead operator today. After the presentation, we will conduct a question and answer session. Please note that this call is being recorded today, Thursday, February 17, 2022, at 1:30 pm Pacific Time. I would now like to hand the conference over to Jason Carey, Vice President, Treasurer and Investor Relations.

Operator

Please go ahead, Mr. Carey.

Speaker 1

Thank you, and welcome, everyone, to Keysight's Q1 earnings conference call for fiscal year 2022. 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 Dhanasekaran, 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 This is directly comparable GAAP financial metrics and reconciliations on our website.

Speaker 1

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. Please review the company's recent SEC filings for a more complete picture of our risks and other factors.

Speaker 1

Lastly, I would note that management is scheduled to participate in upcoming investor conferences in March hosted by Susquehanna, Morgan Stanley and Credit Suisse. And now I will turn the call over to Ron.

Speaker 2

Thank you, Jason, and thank you all for joining Keysight delivered a strong start to the year. 1st quarter results are evidence that our broad based portfolio of differentiated solutions Is aligned with the market's most important design and test challenges. We are enabling our customers to address 1st, we continue to see sustained robust demand with record orders again exceeding our expectations. Growth in the quarter was broad based and balanced across our diverse set of end markets and across all regions. Orders grew 22% year over year and were 31% higher than the Q1 of 20 20 just prior to the initial impact of the COVID pandemic.

Speaker 2

2nd, record first quarter revenue and earnings per share Exceeded the high end of our guidance despite ongoing supply constraints. Our results and exceptional execution by the Keysight team Continue to demonstrate the durability and resilience of our business. And 3rd, Keysight's solutions are aligned with the long term secular trends fueled by ongoing innovation across multiple markets. Our investments in growth initiatives and supply chain resiliency are paying off. We continue to expect to deliver 6% to 7% revenue growth for the year and given the stronger than guided first quarter earnings To achieve 12% earnings growth, we are confident in the strength of the company we built and our ability to drive Above market profitable growth over the long term.

Speaker 2

Accordingly, with the recent equity market volatility, We capitalized on the opportunity to create value for shareholders by accelerating our share repurchases in the past two quarters. Now let's take a deeper look into our Q1 results. We delivered another quarter of record orders, which grew 22% to $1,500,000,000 This outpaced record 1st quarter revenue, which grew 6% to $1,250,000,000 We achieved gross margin of 66%, operating margin of 28% And EPS of $1.65 all of which were 1st quarter records. Although supply constraints continue to moderate revenue, Keysight's consistent execution and focus on growth initiatives Across the 5 gs ecosystem, automotive and software position us well to capitalize on a robust demand environment. The Electronics Industrial Solutions Group delivered double digit order and revenue growth for the 6th Consecutive quarter.

Speaker 2

Record orders were driven by strong demand for automotive and semiconductor solutions As well as broad general electronic applications, our differentiated solutions position us well to win in the fast Orders grew well over 50% in the quarter and exceeded 50% growth over the past year. Manufacturing capacity continued to expand to meet pent up demand and the EV and AV technology investment accelerated. This happened particularly in Europe and China, where EV market share of total car sales in 20 21 increased to 19% 15%, respectively. Demand remains strong from leading manufacturers and RF and millimeter wave wireless test. Keysight continues to engage with global industry leaders such BMW, Sony Semiconductor Solutions and Provencia to enable next generation technologies Across the automotive R and D and production workflows, strong demand for our semiconductor solutions drove double digit Order and revenue growth and resulted in record orders and record 1st quarter revenue.

Speaker 2

Investments remain high in advanced semiconductor Smartphones, high performance computing, IoT and autos. In general electronics, we achieved Record orders with double digit growth across all regions driven by investment in manufacturing and device development For consumer and industrial IoT, digital health, connectivity and remote monitoring.

Speaker 1

Turning to

Speaker 2

the Communications Solutions Group, we delivered record 1st quarter orders and revenue with Double digit order growth across all regions. Commercial communications orders achieved the 2nd highest Quarter on record with double digit order and revenue growth in the Americas and Europe. We see continued strength in 4 Keysight's differentiated high performance, real time oscilloscopes grew triple digits this quarter. Keysight's leadership in 5 gs Release 16 applications, broad test case coverage and our Strategic role in O RAN are enabling our expansion across the broad communications ecosystem. Our 5 gs customer base is growing as deployments begin to scale and we are enabling disruptive technologies with key industry players Such as Qualcomm to demonstrate 3.5 gigabit uplink data throughput, KT Corporation in South Korea to verify advanced 5 gs new radio features And LG Electronics to demonstrate 6 gs radio frequencies.

Speaker 2

Investments remain strong in 5 gs wireless R and D and Manufacturing In aerospace, defense and government, double digit order growth was driven by demand for signal monitoring, cyber, space and satellite, As well as 5 gs and 6 gs applications, demand was particularly strong in Asia Pacific and Europe. As design, test and measurement solutions grow in complexity, software and services are an increasingly more important differentiator for Keysight. Combined, they represented more than a third of total revenue this quarter, increasing recurring revenue Contributing to the resiliency and predictability of our business. In summary, demand remains strong for Keysight's Software centric portfolio of differentiated solutions across all of our end markets and regions. Since the pandemic began in 2020, Keysight has been focused on supporting our customers and delivering in our commitments.

Speaker 2

We have implemented new sourcing strategies and increased Partner engagement to improve supply chain flexibility, diversification and resilience. While fully focused on our near term priorities, we continue to work towards a long term sustainable vision for the company and for the communities in which we operate. The Keysight leadership model drives us to deliver business value through ethical, Environmentally sustainable and socially responsible operations. Corporate social responsibility Is an enabling value of the KLM and we are proud to have been included in the Dow Jones Sustainability Index for the 3rd year in a row. Keysight's inclusion exemplifies the company's continued commitment to building a better planet.

Speaker 2

This includes ambitious targets that support several UN Sustainable Development Goals, such as our commitment to achieve net 0 emissions in our company operations by fiscal year 2,040, 10 years ahead of the Paris Agreement goal of 2,050. As we accelerate innovation to connect and secure the world, we are better positioned than ever to deliver value to our customers, Shareholders and employees, now I will turn it over to Neil to discuss our financial performance and outlook in more detail.

Speaker 3

Thank you, Ron, and hello, everyone. Q1 was a great start to fiscal 2022 and our full year outlook exemplifies Keysight's ability Deliver on our commitments. In the Q1 of 2022, we delivered revenue of $1,250,000,000 which was above the high end of our guidance range and grew 6% or 7% on a core basis. As expected, supply chain constraints continued Tempur revenue results. We delivered a record $1,495,000,000 in orders, up 22% or 23% on a core basis.

Speaker 3

We ended the quarter with over $2,300,000,000 in backlog. Turning to our operational results for Q1, we reported gross margin of 66% and operating expenses of 473,000,000 resulting in an operating margin of 28%. We achieved net income of $305,000,000 And delivered $1.65 in earnings per share, which was above the high end of our guidance. Our weighted average share count for the quarter was

Speaker 4

184,000,000 shares.

Speaker 5

Moving to

Speaker 3

the performance of our Moving to the performance of our segments. Our Communications Solutions Group generated record revenue of $878,000,000 Up 3% on both the reported and core basis. CSG delivered record gross margin of 67% And operating margin of 27%. In Q1, commercial communications generated revenue of $584,000,000 up 5% With double digit revenue growth in the Americas and Europe, driven by continued investments in 5 gs, O RAN adoption, 400 Gigabit, 800 Gigabit and Terabit R and D and wireline applications. Aerospace, defense and government revenue of 2 $94,000,000 was flat versus a strong prior year compare.

Speaker 3

Solid growth in Asia Pacific was offset by supply chain constraints That impacted revenue in the Americas and Europe. This was our 4th consecutive quarter of double digit order growth in aerospace, defense and government And the funnel remains strong for this end market. The Electronic Industrial Solutions Group generated 1st quarter revenue of $372,000,000 up 13 gross margin of 63% and operating margin of 31%. Moving to the balance sheet Cash flow. We ended our Q1 with $2,000,000,000 in cash and cash equivalents, generated cash flow from operations of 224,000,000 and free cash flow of $182,000,000 or 15 percent of revenue.

Speaker 3

Under the new share repurchase authorization announced in November of last year, We acquired 1,130,000,000 shares in the quarter at an average price of $182.19 For a total consideration of $206,000,000 Now turning to our outlook and guidance. Demand remains strong for Keysight Solutions. However, supply constraints continue to moderate shipments. We expect Q2 2022 revenue $1.63 to $1.69 based on a weighted diluted share count of approximately 183,000,000 shares. Assuming a loosening of the supply situation in the second half, we continue to expect full year revenue growth to be in the range of 6% to 7%, while delivering 12% earnings growth.

Speaker 3

The raised EPS growth expectation reflects our higher than expected Q1 earnings. In closing, the demand environment remains strong across our end markets and regions. With a record backlog position and a strong track record operational excellence, we are confident in our ability to meet our customer commitments and continue to deliver profitable above market growth going forward. With that, I will now turn it back to Jason for the Q and A.

Speaker 1

Thank you, Neil. Elliot, will you please go ahead and give the instructions for the Q and A?

Operator

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

Speaker 6

Thank you. Yes, I was hoping you could talk a little bit more about the 5 gs end market, maybe as it Cuts across your businesses. Could you talk about kind of the revenue order momentum there? And maybe you could touch on some of the newer Erez, I think you mentioned O RAN, but can you talk O RAN, private networks, millimeter wave, some of the newer areas that are contributing to growth there? Thank

Speaker 5

you. Hi. Yes, Tim, this is Satish. We have Another strong quarter in our commercial communications business, driven by 5 gs and all the wireline evolutions. Specific to 5 gs, I think as I've stated before, we see near term and medium term catalysts that remain intact.

Speaker 5

If you look at it more near Term, I would say the ongoing global deployments that are scaling continue to drive demand in both R and D and manufacturing offerings. Specific to R and D, the Release 16 is really aimed at some of these new use cases with industrial applications And Private Networks in particular, longer term, we remain bullish about millimeter wave and its adoption. But in the medium term, the applications such as ORAN are really growing the ecosystem of opportunities for us. We just added Over 100 new customers into our 5 gs platform in the most recent quarter. So very strong growth In the 5 gs applications for sure across both R and D and manufacturing and deployments and across the globe.

Speaker 5

So broad strength.

Speaker 6

Okay. I'm sorry, if I could just follow-up. It sounds like you've already had a few 6 gs announcements. Can you talk a little bit about kind of the cadence of when you think that will start to impact This business, is this still a few years out? Or are you starting to see some real traction with some of the larger players in the industry?

Speaker 6

And I'm done. Thank you.

Speaker 5

Yes. We're still if you look at it from a standards perspective, we're still in Release 16. Release 17 It's just getting started and you've got Release 18 being planned. So there is still considerable time to go with 5 gs evolutions that will continue for quite some time. But the industry is also looking at what's the next wave of innovations, 6 gs on the wireless side, Ecosystem, we're engaged in those advanced research discussions with multiple consortiums around the globe.

Speaker 5

And we've already started to get some early research business, which positions us for continued leadership over time.

Speaker 6

Okay. Thank you very much.

Operator

Our next question comes from the line of Samik Chatterjee from JPMorgan, your line is open.

Speaker 7

Thanks for taking my question. I guess I'm just trying to get some help in understanding the divergence here between the order growth and The revenue outlook, this is, I think, the 4th quarter where you've expanded orders by more than 20% year on year. And when we look The revenue outlook, obviously, that's materially below that. How should we think about it? Sort of is there more of a So unwind into the revenue or sort of realization of revenue or supply chain eases?

Speaker 7

Or is that is the order strength driven by a lot Or early ordering or sort of long dated orders? And in particular, if I can just ask on a follow-up there, if how are we thinking about the same divergence between ATG revenues here remaining flat for the last couple of quarters versus what you talked about in terms of strong order increase? Thank you.

Speaker 3

Yes. So this is Neel. So I think first of all, I would say that the order growth we believe is indicative of the highly or the very strong demand environment We're seeing across a wide range of end markets, right? Within the ISG, the semi and auto market is very strong. The surge in manufacturing driving Strength in general electronics and communications side, we're seeing great strength in 5 gs as Ashish just talked about, but also 400 gigabit, 800 gigabit On the networking side as well.

Speaker 3

And so very strong demand, and I think that's reflected in the order strength and in the growth you're seeing in orders. On the revenue side, obviously, we continue to work through significant supply chain challenges. Our revenue is constrained by the supply environment and we're working through that. We have said on prior calls that we have seen Lead times to our customers extend by about a month and that month extension has really happened over the course of the last two years really from the onset of COVID Back in the spring of 2020. And I think the good news is that our customers have responded to that and are Placing orders with Keysight a bit earlier so that they can still get product delivery on a timeline that meets their needs.

Speaker 3

And I think we're doing a good job getting Product into the hands of our customers on those timelines. I think as you turn the lens forward, what you're going to see as the supply chain situation And starts to improve and we hope to see that beginning in the second half, but certainly, we expect to see some supply chain constraints through 2023 That our lead times will slowly start to migrate back in over a number of quarters. And similarly, our customers will once again readjust their ordering patterns to again align them with their own need for delivery. Why don't I turn it back to Mark with some more comments on the demand side?

Speaker 4

Yes. Thanks, Neil. I think you covered it well. I just would add that reiterating the demand remains strong. It was very strong in Q1, very broad.

Speaker 4

We saw some earlier orders Placed in distribution as an example where the channel inventories are low because of the demand that we Seeing there, so that's to be expected. We also saw some earlier orders from semiconductor, which is typical. They have longer term horizons and we work with them In that fashion. But the headline is our strong double digit order growth. It was not an outcome of advanced purchases.

Speaker 4

And On the plus side, as Neil mentioned, we are now working with customers much earlier than we may have done in the past. We've always had deep relationships. But the outcome is we're getting better visibility to their forecast and their forward looking plans, which I think will sustain.

Operator

Our next question comes from from the line of Meta Marshall from Morgan Stanley. Your line is open.

Speaker 8

Great. Thanks. Maybe following up on Samik's question, Just in terms of supply chain, would you say that condition any kind of material tightening that you saw kind of in any of the categories? Just trying to get a sense Of whether it remains constrained or whether you started to see some improvement or worsening? And then maybe second question, obviously, we've seen If anything becomes more attractive from an M and A environment just as some of these valuations reset?

Speaker 8

Thank you.

Speaker 3

So this is Neel again. So first of all, with regard to the supply chain situation, I think

Speaker 5

It's safe to say that

Speaker 3

we didn't see things materially worse. I would call it largely the same. I think we continue to look Forward to some relaxation in the second half and that's still our expectation, but We did not see any acceleration or

Speaker 2

early With regard to software valuations, obviously, you're exactly correct. The IPE software companies, we've seen their valuations come down. But realistically, when we talk to And they've seen when they see a pullback, they still view their old share price as Price that their company should get a premium to, it normally takes about a year. It depends company by company. Before they would go ahead and sell at a lesser value.

Speaker 2

But we're highly engaged at looking at opportunities, looking at things that make sense, and we have a very Funnel right now, including software.

Speaker 8

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Mark Delaney from Goldman Sachs. Your line is open.

Speaker 9

Yes. Thanks very much for taking the question.

Speaker 5

I was hoping you could comment

Speaker 9

a little bit more on the P and L outlook for next Quarter revenue guidance is up sequentially. EPS is relatively flattish quarter on quarter. So maybe you can bridge us from You know what's leading to the

Speaker 3

as we look forward into the second quarter, Scheduled shipments, some unfavorable mix on a sequential basis as well as kind of continuing impact From other inflationary elements, most notably, expediting fees and other things are continuing to impact gross margins. And I think the other thing is we are continuing to ramp kind of back into our targeted levels Of R and D, we were actually sub-fifteen percent in Q4, approaching 16% here in Q1 as we look to kind of mid-sixteen So, I'd expect in that rate of investment in the R and D side of things, More or less flattish EPS.

Speaker 9

That's helpful. Thank you. And for my follow-up question was on the comp segment. The company's focus has done a very good job broadening out the exposure in various ways, right, in terms of the types of tests you're doing, but also the I think it's been going for some time. So maybe you can level set us on how big or larger an 800 gs is and how much data Is this contributing to that comp segment at this point?

Speaker 7

Thank you.

Speaker 5

Yes. I'll take this. I think you're right. I mean, our strategy to really connect the workflow Across the communications ecosystem continues to play out and our execution remains very strong. At the Part of it, we've been focused on connecting the workflow between the wireless and the wireline parts of the ecosystem.

Speaker 5

And we see that All of the data that comes through the networks through the networks have to ultimately flow into a data center or cloud. And So as we follow that trial, we have significant upgrades happening across the And we're participating in a number of those technology trends associated with Not only the speeds, as you referenced, with 400, 800 in terabit, but also the underlying infrastructure that It's changing with the memories, the server technologies and the edge compute as well. And we're also very pleased with the number of new chipset starts, the design starts And we saw that reflected in our commercial communications business, where we maintain a good balance between the 5 gs growth And also the wireline evolutions growth.

Operator

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

Speaker 10

Thank you and congratulations. I just have one question. There's been a lot of news about new building of semiconductor equipment Factories and a lot more of like automobiles being more electronics. Given the large long supply chain, I'm just kind of curious, Are those big orders already coming into your company? Or since they have to pour concrete and walls, would those be much More long dated and not even in your orders at this point because it seems like those are long term multi year products Projects that will actually extend much more beyond the typical horizon where people may think that we're kind of at the peak of orders right now, which I potentially could disagree with.

Speaker 4

Yes. Hi, Jim. This is Mark. I'll take that. And you're exactly right.

Speaker 4

The strengths that we're seeing today and have been seeing for the last many quarters It's around new process technology development and mature technology scaling. But what you're referring to is the global Expansion of new fabs in North America and the United States, in parts of Asia and across Europe. These are multi year, multi $1,000,000,000 investments that the semiconductor leaders are making. And The vast majority of those investments, we're going to continue to

Speaker 2

see the impact of

Speaker 3

the business. Just remind everybody of our order acceptance policy. We Generally, don't put an order on the books unless it's shippable within a 6 month period of time. And so those orders for those longer things well, in some cases,

Speaker 2

Yes, I'll just follow-up just To emphasize that we are talking to all

Speaker 4

working through the planning and Preparation for the future, but it is really based on demand that we can see going out 6 months.

Speaker 10

Thank you so much for the detail.

Operator

Thanks, Jim. Our next question comes from the line of Chris

Speaker 9

Thank you. And I guess

Speaker 11

my first question is kind of bigger picture. In the middle of a very strong period of demand. The orders were up against sequentially here despite negative seasonality. So I guess my question is, the industry backed 3% to 5% growth that Keysight has called out in the past? And is it

Speaker 4

So Chris, this is Mark. I'll take a stab at that. I think Into a lot about what Satish has been talking about, which is connecting our customers' workflows, even goes back to the previous question as it pertains to The growth in semiconductor being fed into demands from multiple different industries, all bringing more electronic Content together. So that has this compounding effect. I certainly think that as we get to With some of these technologies, the capacities will meet certain levels, so we can see some of that begin to The growth began to turn more to the models that we've been seeing.

Speaker 4

The next generation and as also we mentioned, it's occurring around 6 gs Given our leadership position in the market gives us opportunities to Continue to drive this high secular growth that we've been delivering.

Speaker 2

That you're talking about that we have clearly done a pretty good job of growing faster than the market quarter after quarter, and we intend to do so going forward. Look at the convergence in semiconductors and how more and more functions are being integrated into Semiconductors and everything, whether you're talking about IoT or any of the other apps that we talk about, that's a Look at automotive. We're not talking about things that will grow for a year or 2, even though we Typically EV in Europe and Asia, I mean, that's going to go up close to 100%. And then we have the Americas too, which is behind. 5 gs has a ton of runway.

Speaker 2

And then following that, where we're starting to see early investments and It's 60 that will follow it. On top of that, you put Quantum. So the use of high performance electronics It's not rolling over, and we don't see that at all in any short or medium term situation. And whatever the market growth rate in Keysight's aspirations, goals and results have always been to outgrow the market?

Speaker 11

Yes. No, I actually just back down to mid single digit growth. And you kind of touched on my follow-up. The company has Significantly outgrew the market and taken a lot of share ever really since you spun out, but it feels like it's kind

Speaker 9

of accelerated here. Is there anything that

Speaker 11

could cause that to compress?

Speaker 2

If we were at 65%, 70% share, you could say, oh, will it start to flatten out? We're at roughly 25% market share in total. We have So much headroom. I mean, the market's 4x the size of Keysight and we're gaining share. We're investing as much as that's needed.

Speaker 2

We're investing more than anyone else in the industry, and we have the We provide complete solutions which makes and we help them accelerate their innovation timelines. So is also. And

Speaker 11

then that last point, like how The industry has accelerated

Speaker 2

towards software.

Speaker 4

Do you think that has been a driver of

Speaker 11

For Keysight, just given your whether it's organic or M and A relative to a lot of your smaller competitors?

Speaker 2

No. I think there is opportunity for us to grow software and we are And we've seen that since we launched the company more than the business and there's a lot more headroom there. But we see it in a lot of Also down in the physical layer, where you need both. You need the ability to Acquire the signal in a very high fidelity way at very, very high performance when we're talking Plus, you need the analysis capability that's in firmware and in software. Service and support from people that are qualified to put this all together.

Speaker 2

And Keysight has all of that. And that's been a real, real advantage for us and we continue to see that as we continue to Expand our investments and our programs in each of these areas.

Speaker 5

Appreciate all that. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Matt Niknam from Deutsche

Speaker 11

Hey, thank you for taking the question. Just 2 if I could. First on the U. S, maybe if you can talk about what drove the sequential downtick In U. S.

Speaker 11

Or Americas revenue this quarter, I think you'd called out the softness in Aerospace Defense, just curious, gross margins there actually improved about 120 bps sequentially, even though revenues actually We're down sequentially. And I think last quarter you had mentioned some initial Expectations that there would be more of a negative mix shift in this fiscal quarter. So I'm just wondering maybe what drove some of the outperformance there? Thanks.

Speaker 2

Yes. Thanks, Matt. I think if you really want to figure out what's going on in the marketplace, orders is the best Port orders with as much detail, but we want to give you as much insight as we can. So if you look at the revenue numbers which drive sales, It may not be commensurate with what's going on in the market. In the Americas, for instance, we were up 23%.

Speaker 2

Now if perchance because we're not shipping everything and we're building backlog, which is in an incredible position at almost $2,400,000,000 That just means we're going to produce a lot more profit later when we clear that out. But the market performance is very strong. And as we continue to improve the supply chain, You'll see the revenue get a chance to work that backlog out over time.

Speaker 5

Yes. With regard to the gross margin, you're right. We had a higher software mix this quarter as we continue to progress our strategy of software centric solutions. And from the aerospace and defense While the defense budget has been passed in the Americas, in the U. S, we are waiting on the conclusions to the appropriations process that's currently underway, which is expected to occur somewhere between March April timeframe.

Speaker 5

That should allow for increased program And for rest of the year and the following year. But if you look at just the Aerospace and Defense order growth to The point that Ron made continues to go strongly and our multiyear programs remain intact.

Speaker 11

That's great. Thank you both.

Speaker 2

You're welcome.

Operator

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

Speaker 11

Hey, good afternoon, guys. Congrats on another Strong quarter.

Speaker 2

Thanks, David.

Operator

First question,

Speaker 11

I wanted to ask about just at a high level, what kind of inflation are you seeing? And then how is the Pricing environment, how does the how does that paradigm work for Keysight?

Speaker 5

Yes. So

Speaker 3

Sorry, turn on my microphone, it will help. We are seeing inflation across a number of different areas within the supply chain and they are within the cost Sure. I think as we noted last quarter, certainly labor is one of those. We had our largest salary increase cycle in the fall In our 7 year history as an independent company, certainly in certain aspects of the business, freight and logistics, clearly Clearly an area where we're seeing costs go up, even though raising prices as aggressively We are sometimes paying or charging for expedited shipments. We're seeing it in

Speaker 2

Number of different numbers,

Speaker 3

as far as our own pricing, I think we're constantly trying to What we're seeing on the cost side, we're seeing margins as much as possible, and

Speaker 2

I think we've done a good job of doing that So far and would expect to going forward? So, if you take a look at this, when we launched the company, we were at roughly 56% gross margin and now we're talking 66% From software, from our hardware differentiation, from leadership positions in 5 gs, which gives us the Opportunity to do a little bit of value pricing and we're going to continue to work to drive that higher.

Speaker 11

And then Ron, just real quickly, you mentioned that orders came in above expectations. Can you give a little color as to what was stronger?

Speaker 4

Yes. Adam, this is Mark. The strengths, as we said before, were double digit order growth. 2 of the 4 regions or 2 of the 3 regions We're, growth across all of the end segments as well. We added just over 500 new customers to Keysight during the quarter.

Speaker 4

We've done that every quarter, adding hundreds of new customers across all the different end markets around all the geographies. That's really important to us. That helps us Diversify our business and grow our base. And our business to the base is up very strong double digits as well. So we are Really working hard, as I mentioned, growing the long tail of small And medium sized businesses as well, so we're seeing some of the key areas around all the regions and all the end segments.

Speaker 5

Okay. Good color. Thanks, Mark.

Speaker 7

You're welcome.

Operator

Our next question comes from the line of David Ridley Lane from Bank of America, your line is open.

Speaker 12

Thank you. As supply chain issues ease, how much of a margin benefit could there be? I imagine in addition to the higher freight costs and so on you're carrying now, there's also some manufacturing inefficiencies Just related to the component shortages?

Speaker 2

It's not obvious to me

Speaker 3

that there's going to be a margin benefit Other than volume that comes from a relaxation of the supply chain environment, I think our factories are continuing to run pretty efficiently. I think we'll need to take a wait and see approach, but it's not obvious to me that it's going to be a big margin benefit other than the benefits of volume.

Speaker 12

Got it. And are there any data points you can give us around sort of the internal initiatives you've got New sourcing partners, other things that you're doing to remove some of these supply chain Bottlenecks, and just to check, it doesn't sound like Omicron had much of an impact to you incrementally in the quarter.

Speaker 5

Yes. So no incremental impact. Obviously, the constraints in the supply chain Our broad and I think you're hearing this, taking to maximize those include internal value engineering Looking for alternate sourcing from the open markets, we have strong collaborations with a number Our strategic silicon or semiconductor suppliers And our customers too. So when we look at the end market demand for Keysight products around 5 gs, automotive and semiconductor, We have strong engagements with customers and our supply chain so that we're able to coordinate this. At this point, as Neil mentioned earlier, that we're able to meet our customers' needs very high percentage of the time.

Speaker 5

So we're very confident on our ability to Processed this backlog and converted into revenue in future quarters and we're spending upside from any improvement in the supply chain, We could further

Speaker 12

Thank you very much.

Operator

Our final question comes from the line of Rob Mason.

Speaker 2

Thank you for taking my questions. Thank you. Thank you. Thank you. And then, I'll turn it over to Paul for you in the long runway that exists there.

Speaker 2

The question is, How do you view that market's growth in the next few years? And then Since it is at the EV and ADAS elements of that market are newer,

Speaker 11

for test and

Speaker 2

How you think about your mix evolving into that market between R and D

Speaker 5

Yes. So I'd say that when we look at the automotive market, as Ron referenced in his script that we see a real inflection in adoption of EV and then a subsequent Simultaneous adoption for AV as well, really driving the needs of the automotive market. At the simplistic level, we see the number of new lab activities that are starting in R and D across the globe, where automotive customers traditionally outsourced a lot of the R and D work, But they are now starting to build new facilities for research and development, hiring of electrical engineering talent, hiring of software talent is increasing and that's really reflected in our R and D business that continues to grow strongly and we see this continuing to It will be a secular growth driver for us. With regard to the Manufacturing expansion, as you saw the number of EV starts increase, our manufacturing business in this market also continues to grow. So at this point, I would say the opportunities for us for Keysight is to expand with the number of new lab starts In the most recent quarter, we've basically announced at So automotive continues to be the area of investment for us.

Speaker 5

And it's really hard to predict the growth rate, but we're quite pleased with the very strong results we're seeing so far.

Speaker 4

On the radar scene emulator, you got that, Satish. The funnel is very strong. It's growing. We're seeing a lot of customers look out to For both EV and AV expertise, You think about all of the changes that are occurring within the customer base, as well as the All this stuff that we are providing leading solutions to. So that funnel is growing substantially.

Speaker 4

The other indicator that I think is very positive The adoption of our services, which again is another innovating and getting these tough jobs done. So we're attaching a lot more services to our solutions, especially in the EV and the AV space. In the EV and the AV space.

Speaker 11

Perfect. That's very helpful. Thank you.

Operator

Thank you, Rob. That concludes our question and answer session for today. Closing comments.

Speaker 2

Thank you, everyone, for joining us today. As you can probably tell, we are very pleased with what our team has done to produce Consistently excellent results. But I would also love to add that we are very optimistic

Operator

This concludes our conference call. You may now disconnect.

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Earnings Conference Call
Keysight Technologies Q1 2022
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