The operator introduces the Keysight Technologies Fiscal Fourth Quarter 2023 Earnings Conference Call, and Jason Kary, Vice President, Treasurer and Investor Relations, takes over. He is joined by Keysight's President and CEO, Satish Dhanasekaran, and CFO, Neil Dougherty. They will discuss non-GAAP financial measures and core growth, and make forward-looking statements about the company's financial performance. Satish will focus on three key headlines in his comments.

Keysight had a successful fourth quarter, with record revenue, gross margins, and operating margin despite a challenging macro environment. Their customer engagement remains strong, and they are investing to expand their markets and solutions portfolio. Fourth quarter orders, revenue, and earnings per share exceeded expectations, and the company generated $340 million in free cash flow. Full year results were strong, with orders in line with expectations and record revenue and profitability. Demand dynamics were consistent with expectations within the quarter.

The Aerospace, Defense and Government markets saw growth due to investments in Defense modernization and space applications. Keysight's Leading Threat Emulation solutions also drove order growth in the US. Commercial Communications markets declined, but wireless orders and demand for network and data center applications remained stable. The wireline solutions market saw growth due to investments in AI, ML, and data center expansion. Enterprise customer business was stable with ongoing investments in network monitoring for increasing data traffic and cybersecurity needs.

The Wireless division is investing in new capabilities and devices, and has partnerships with MediaTek and UK universities for Open RAN development. The Electronic Industrial Solutions Group saw a decrease in orders and revenue compared to last year, but is expected to see long-term growth due to demand from post-COVID recovery and supply constraints. In the semiconductor industry, there was a decrease in capital spending, but Keysight's proprietary interferometer systems and differentiated R&D solutions are still in demand. In the automotive industry, there is strong customer investment in R&D for battery and charging infrastructure, driven by competition and government funding. The General Electronics division saw steady demand for solutions in various industries.

The article discusses the fourth quarter financial performance of Keysight, a leading technology company. While there were challenges in the consumer electronics and manufacturing sectors, the company's software and services revenue continued to grow. The company also announced an acquisition and is investing in long-term growth opportunities while remaining disciplined in cost management. The CEO thanks employees for their contributions and the company is well-positioned for continued market outperformance. In the fourth quarter, revenue was just above the high end of guidance and orders declined by 16%.

In the fourth quarter, demand in China remained low and accounted for a third of the year-over-year order decline. The company ended the quarter with $2.3 billion in backlog. Gross margin increased to 65%, operating expenses were $474 million, and net income was $352 million with earnings of $1.99 per share. The Communications Solutions Group saw a decline in revenue, while the Electronic Industrial Solutions Group reported a 7% decrease in revenue. For the full year, Keysight had strong results despite challenges, with revenue growing to a record $5.464 billion and gross margin expanding by 80 basis points. The company also invested in R&D and improved operating margin. They ended the year with $2.5 billion in cash and generated $378 million in cash flow from operations and $340 million in free cash flow.

In the fiscal year of 2024, the company's total free cash flow was $1.212 billion, which accounted for 22% of revenue and 81% of non-GAAP net income. The company also repurchased 3,270,000 shares for a total of $426 million, bringing the total share repurchases for the year to 4.9 million shares for a total consideration of $702 million. The company expects the demand environment to remain mixed in the first half of the year and will closely monitor signs of recovery in the second half. The company also plans to report results including ESI, which is expected to slightly decrease earnings for the full year. The first quarter guidance is based on existing backlog, incoming orders, and the ability to turn those orders into revenue within the quarter. The company expects first quarter revenue to be between $1.235 billion to $1.255 billion and earnings per share to be between $1.53 to $1.59. This guidance includes $60 million in ESI revenue and an EPS impact of $0.05 from ESI net income.

In the paragraph, the speaker mentions that they are expecting a decrease in ESI revenue in Q2, but a slight increase in core Keysight revenue. They also mention that operating expenses are expected to be flat or slightly down, and R&D investment will be 17% of revenue. Annual interest expense is expected to be $80 million and capital expenditures will be $150 million. The speaker expresses confidence in Keysight's ability to outperform in challenging market conditions. The first question asks about the run rate of the EISG business, and the second question asks if the weakness in the Communications business has spread to lab testing.

The speaker discusses the strong performance of the EISG business, which has consistently outperformed the market growth rate. This is due to their unique positions with customers and a focus on diversifying the company. In the commercial comps business, there was sequential order improvement in Q4 compared to Q3, driven by stability in wireless and signs of recovery in the wired part of the ecosystem. The company expects a sequential decline in revenues in the April quarter, but anticipates a low single-digit increase in core Keysight from Q1 to Q2.

The paragraph discusses the impact of ESI's contract renewals on Keysight's revenue and the expected seasonality of the business. It also mentions the potential margin deterioration for the year due to a 10% revenue decline and the recent acquisition of ESI.

The speaker believes that ESI can be integrated into the company in the short term while still operating independently. Once full ownership is obtained, the focus will be on cost reduction and synergy realization. Last quarter saw a surge in longer-dated orders, which accounted for 8% of total orders and will mostly contribute to revenue in 2024 with some extending into 2025. The orders were a mix of EISG and CSG segments. The timeline for completing the ESI acquisition depends on the tender offer process, which is expected to be completed in the first quarter of the year.

The company expects to complete a squeeze-out process by mid-year if enough people tender their shares, but it may take longer if the required number of people do not participate. The longer-dated backlog is estimated to be around $400 million, which is included in the total backlog of $2.3 billion and will likely be recognized in the back half of fiscal year 2024.

During the third quarter, Keysight Technologies saw a 7% increase in orders, which was the best order quarter number for fiscal year 2023. The company noted that while there was some seasonality involved, there were also signs of improvement in certain areas compared to three to six months ago, while other areas continued to show softening in orders.

Satish Dhanasekaran and Mark Wallace discuss the performance of their company's AI ML and data center infrastructure business. They mention an increase in orders from the Aerospace, Defense, and Commercial Communications sectors, as well as stability in the Wireless/5G and Wired parts of the ecosystem. They also mention some softness in the EISG business, but attribute it to normal demand normalization. They expect the AI ML spend to become a bigger part of their business as more network traffic is driven by AI ML applications. Mark adds that their customers are still active in R&D projects and new funnel intake has been positive.

In the fourth quarter, our ability to convert backlog into revenue remained high, although some customers took longer to make decisions. The indirect businesses have stabilized and our e-commerce business is growing. We added over 2,000 new customers in the last year, with 300 coming through e-commerce. For the first quarter, our revenue guidance of $1.245 billion at the midpoint includes $60 million from ESI, implying $1.185 billion for Core Keysight. We expect a high single-digit sequential decline in orders, larger than historical average, due to normalization in EISG. Our next question comes from Mark Delaney with Goldman Sachs.

The company's CEO is confident in the long-term outlook for the business and believes that they can continue to grow despite a current demand normalization. They have not seen any changes in the competitive landscape following a recent acquisition by one of their competitors. In terms of China, they have not seen any significant improvements but remain engaged with customers in the automotive market.

The company is pleased with the execution and operational performance of the business in fiscal '23. The business in China remains diverse, but there is incremental weakness in manufacturing and semiconductor. The company remains focused on high-speed digital, optical, auto and EV and AE opportunities. They have de-risked the trade impact, but are monitoring it closely. The company is seeing stability in the 5G market and restocking in China smartphones. They are optimistic about the second half of next year and are watching for continued progression in inventory reductions in the smartphone industry.

The company is seeing increased interest in Open RAN and non-terrestrial networks for 5G. They are investing in R&D for next-generation themes to continue growing the business. In the January quarter, orders were down due to EISG, and they expect a revenue trough in the April quarter due to ESI seasonality. Core Keysight typically sees a sequential increase from Q1 to Q2, and the company expects this trend to continue.

During a conference call, Matthew Niknam from Deutsche Bank asked a follow-up question about the company's outlook for the first quarter of fiscal 1Q. Mark Wallace, the speaker, clarified that the expected softness in the first quarter is primarily due to a decrease in the EISG segment, particularly in China and Asia. Neil Dougherty, another speaker, explained that the company has reduced its expected CapEx for fiscal '24 due to the current macro environment and the softer business performance. In response to a question from Tim Long with Barclays, the speakers provided more details about the challenges in the Wireline side, specifically in the optical sector and where the company currently stands in the cycle.

The company's physical and protocol test capabilities give them an advantage in the market, with a focus on 400 gig Ethernet and potential growth in 800 terabit. The Defense Automation business is also performing well, with increased spending in technology investments in Aerospace and Defense. The company is confident about the outlook for fiscal '24, pending the passing of the Defense budget.

The company has seen a pattern of R&D and manufacturing growth in the wireline side, particularly in 800 gigabit manufacturing for optical transceivers and AI server and GPU infrastructure testing. This has led to an uptick in demand and an improvement in the funnel for the company. The company's broader portfolio in protocol solutions has also contributed to growth, particularly in network visibility from enterprise customers. These strengths were captured in Q4 and are expected to continue in the first quarter. The first quarter margins should be in line with the previous quarter, with the only changes being an increase in the tax rate and a reduction in revenue. The full year impact of project push-outs in semiconductors and China is expected to have a negative impact on orders in fiscal '23.

The company is uncertain about the construction timeline, but expects similar revenue in fiscal year 2024. Orders for semi fabs have been delayed, pushing back revenue recognition to late 2024 and early 2025. The company remains confident in its future and is investing in next-generation technology, while also being prudent with spending and maintaining operating discipline.

The speaker is confident in the company's free cash flow and mentions that in the most recent quarter, they bought back over 100% of their free cash flow in their own shares due to the current valuation. The conference call is now over.

This summary was generated with AI and may contain some inaccuracies.