The operator introduces the Keysight Technologies Fiscal First Quarter 2024 Earnings Conference Call and hands the call over to Jason Kary, Vice President, Treasurer and Investor Relations. Kary introduces the CEO, Satish Dhanasekaran, and CFO, Neil Dougherty, who will be joined by Chief Customer Officer, Mark Wallace, for the Q&A session. Non-GAAP financial measures and core growth will be discussed, and forward-looking statements will be made. Management will also participate in upcoming investor conferences. Satish then begins his presentation.

In the second paragraph, the author discusses three key headlines from Keysight's first quarter performance. These include exceeding revenue and earnings per share guidance, constrained demand environment, and strong positioning for market recovery. The company also completed the acquisition of ESI and saw steady investment in R&D. First quarter orders, revenue, and earnings per share were all above guidance, and the company generated strong cash flow.

The company has achieved a record gross margin of 67% and operating margin of 28% through expense discipline and cost actions. The Communications Solutions Group saw a decline in revenue but a record gross margin of 68%, with strength in aerospace, defense and government and wireline businesses. Aerospace, defense and government revenue declined but orders grew, and the company is scaling its threat emulation offerings for electromagnetic spectrum operation applications. The space and satellite solutions were a driving force for the business this quarter. In commercial communications, customer spending remains cautious but industry inventories are slowly returning to normalized levels. The wireless business saw high customer engagements and ongoing R&D activity in advanced technologies, resulting in higher gross margins.

The 5G standards are constantly evolving and driving new use cases and features for network deployment. The addition of new band combinations to the 3GPP standard is expected this year, leading to increased certification needs. The company recently hosted a Global Certification Forum to collaborate on certification requirements for network and device interoperability and performance. At the upcoming Mobile World Congress, the company will showcase over a dozen solutions for 5G, Open RAN, satellite connectivity, AI, and early 6G capabilities in partnership with industry-leading customers. In the wireline business, there was growth in orders for data center solutions, including 400 gig and 800 gig solutions. The company also achieved a key milestone in partnership with Marvell for their new ultra-high-speed networking chip for AI-driven cloud applications. The adoption of AI is driving demand for high-speed networking and computing capabilities. In the Electronic Industrial Solutions Group, revenue was down due to weaker market conditions, particularly in manufacturing and in China. However, there are pockets of growth in certain end markets where customers are investing in new use cases and emerging technologies. In the semiconductor market, there is a mix of positive and negative trends, with some foundry customers delaying projects due to construction and production delays.

Keysight experienced strong demand for their interferometer system due to advancements in EUV technology and increased performance requirements for AI and ADAS use cases. There was also some improvement in memory-related demand and investments in R&D for new battery technology and charging infrastructure in the automotive industry. The EV funnel remains healthy, but the timing and size of engagements may vary. Market conditions in general electronics were unchanged, with steady demand in digital health, industrial automation, and advanced research. Keysight's software and service offerings are providing business resilience in the current market conditions, with software and services orders and revenue outperforming the broader business. The acquisition of ESI has further expanded Keysight's addressable market in various industries.

The acquisition of ESI was completed ahead of schedule and their results for the quarter exceeded expectations. The company's market leadership and strong solutions portfolio give them confidence in their ability to capitalize on technology innovations and long-term growth trends. The team's customer focus and collaborations also position them well for value creation. The company's financial model continues to generate healthy margins and cash flow. In the first quarter, revenue was just above the high end of guidance and orders declined. Gross margin was a record 67%, operating expenses were flat, and operating margin was 28%. These results demonstrate the financial flexibility and resilience of the business.

Keysight reported a net income of $286 million and earnings of $1.63 per share, with ESI contributing $0.09. The Communications Solutions Group saw a decline in revenue of 11% and the Electronic Industrial Solutions Group saw a decline of 5%. The company ended the quarter with $1.7 billion in cash and cash equivalents and expects second quarter revenue to be in the range of $1.190 billion to $1.210 billion. The company also expects earnings per share to be in the range of $1.34 to $1.40 and is not assuming a strong revenue recovery in the second half of the year.

The company expects second-half orders to exceed first-half orders, which will support revenue growth in 2025. They have a flexible cost structure and diverse end markets, giving them confidence in their ability to outperform in current market conditions and invest in growth opportunities. The Q&A session will provide more information. The first question is about the expected recovery in the back half of the year. The company's base case does not include a meaningful second-half recovery, but they expect seasonal changes and a typical uptick in the fourth quarter. Overall, they expect orders and revenue in the second half to be slightly higher than the first half, but they are not counting on a recovery at this time.

The speaker is answering a question about the drivers behind the seasonal decrease in the company's business. They mention that customer engagements remain strong, but there has not been much progression through the pipeline. The aerospace and defense sectors are still strong, but the wireline business has grown for the first time in four quarters. The Americas region has seen growth, but Asia remains weak, particularly in the EISG and wireless sectors. This is due to the normalization of spending levels, with CSG entering this phase earlier than EISG.

The speaker discusses the potential growth in orders and revenue for the company, particularly in the data center and wireline sectors, due to the increasing demand for AI technology. They note that while this is still an emerging opportunity, they have seen an inflection in their wireline business and are collaborating with other companies to advance their technology. They also mention the potential for growth in memory technologies and different processor architectures due to AI.

The company is excited about the tools it has to deploy its IP and has announced a collaboration with NVIDIA. New interface standards and investments in silicon photonics and quantum technology are expected to drive future growth, although they are not yet included in the forecast. The company has a target for its EBIT margin and expects a bounce back in orders in the outer years to drive earnings leverage.

The speaker is encouraged by the company's strong gross margins and disciplined approach to running the business. They believe that getting the business back to growth is the main goal, and they are optimistic about the potential for growth in wireless, wireline, next-gen silicon, aerospace, defense, and semi industries. The speaker also mentions being positive about the opportunities to grow the ESI business in Keysight's environment, as they have studied the system simulation/emulation marketplace and believe they can drive growth with their go-to-market channel.

The company has a unique hybrid AI capability and a positive outlook for ESI in the first quarter. The pipeline for the second half of the year is showing improvement, with an increase in funnel intake and velocity. Demand remains similar to three months ago, but orders were down compared to the previous quarter. The book-to-bill ratio also decreased below 1 after being above 1 in the previous quarter.

Neil Dougherty and Mark Wallace discuss the areas of weakness in the business, including challenges in Asia and China, manufacturing, and wireless customers. However, they also mention strengths in wireline, driven by AI. They note that customer engagements in China have continued, but the headwinds in semi and manufacturing have worsened. They also mention some positive indicators in China, but continue to monitor the situation closely. They mention a backlog of $2.3 billion, which is more than six months of coverage, but do not expect revenue to improve in the back half of the year.

The speaker discusses a $2.3 billion backlog and states that they have worked through the excess backlog. They mention managing a dynamic between recurring revenue businesses and longer-dated orders. They expect revenue from longer-dated programs to be 8% of Q4 revenue. A question is asked about operating margins.

The company is performing in line with their model, with a mid-teens decline in core business revenue. They have taken cost actions to reduce operating expenses and maintain investments in R&D. Auto demand has decreased for both conventional and EV vehicles.

Satish Dhanasekaran discusses the strong and robust funnel for e-mobility, including electric vehicles and autonomous technology, which will continue to drive growth for the company for a long time. He also mentions that the company's capabilities in electrification are finding new applications in other industries, such as aerospace and defense. In response to a question about the wireless business, Dhanasekaran notes that the industry is currently focused on Release 15 and 16 deployments in the US, China, and India, and that the company's business model is centered around serving R&D customers.

The company is experiencing a decline in volumes due to the current market conditions, but customers are still upgrading to newer releases. The roadmap for the next five years is clear, with plans for Releases 18, 19, and 20, which will include some early study items on 6G. The company is focused on vertical industry expansions with AI and ML, new device form factors, and the integration of satellite and terrestrial networks. Despite the current market conditions, the company remains confident in its market leadership position in 5G and believes it can return to growth even before 6G. In terms of the optical side, the company is seeing strong demand for 400 gig and 800 gig, and is also investing in R&D for the next cycle. The software side, including Ixia and other related businesses, is also performing well.

The speaker discusses the deployment of new technology and the roadmap for future developments. They also mention the integration of the Ixia business and its stability in the commercial communications market. The company is confident in their ability to address emerging challenges and solve customer needs. In response to a question about backlog, the speaker mentions that there are longer-dated deals in the backlog, but does not provide an updated number. They suggest that these deals may be large and lumpy, potentially impacting revenue recognition in late 2021 or 2025.

The company's backlog is currently in the range of $400 million to $500 million, with larger and lumpier deals in the aerospace, defense, auto, and semi space industries. The ramp up in orders has been seen in Q1 and Q2 of last year and is expected to reach 8% in revenue by the end of the year. The company does not pick winners in the AI networking market and sees growth in both Ethernet and InfiniBand technologies due to the increasing amount and changing patterns of data. There are also multiple competing technologies in the market, such as CXL, Ultra Ethernet Consortium, and PCIe Gen-7.

The company has a strong bed of technologies that allows them to service their platforms well. They have a good mix of software and services, which represented 40% of their total order/revenue in the most recent quarter. The ARR was also up double digits. The company expects modest sequential pressure in the fiscal second quarter, but there may be some pockets of improvement. The wireless business is expected to see stability and moderation after strong peak demand years in '21 and '22.

The normalization phase is expected to continue for the next few quarters in the wireless market, with no significant changes in component spend. The company's R&D activities are ongoing, but there is still no indication of an inflection point. In terms of growth, the aerospace and defense sector is expected to continue driving growth, particularly in the US and Europe. The company is also seeing opportunities in wireline and the automotive sector, although there are some headwinds in manufacturing and semiconductors. The recent growth in memory is a positive sign for the company.

The company expects continued strength in a certain area and is closely monitoring the progress of new fabs being built. The decline in organic revenue in the second quarter was only 1%, despite the positive contribution from ESI in the first quarter. The compares may be more challenging due to the renewal schedules of ESI's orders falling in the first quarter. The company anticipates a bottom in April and July, with a modest recovery in October.

Satish Dhanasekaran, a representative from the company, is unable to definitively predict the timing and extent of the company's rebound, but he provides some subjective insight on potential drivers. These include continued strength in aerospace and defense, with a focus on defense modernization and collaborations with companies like Lockheed Martin. Additionally, there is potential for growth in the semiconductor business due to planned investments in new technologies.

The speaker discusses Keysight's ability to invest in both organic and inorganic growth throughout economic cycles. They emphasize the company's focus on organic growth and long-term view of markets, as well as the strong validation of their investments by customers.

The company is focused on partnerships and collaborations to drive organic growth, but is also looking at expansion opportunities through M&A. They have been disciplined in their approach and will continue to be so. R&D investments will be maintained flat in 2024 to prepare for an eventual upturn. The ESI and Keysight sales forces are being aligned and it may take up to a year for the benefits to show up in fiscal '25.

Satish Dhanasekaran and Mark are working to transform the business to growth, with a focus on supporting their base plan and targeting aerospace and defense customers. The company is also looking to leverage their core technologies to accelerate pursuits. The main priority is to stabilize and integrate the business, with a good start so far. During the Q&A session, Neil Dougherty mentions that the operating model is performing as expected, but there were a few factors that impacted operating margins, such as favorable mix in Q1 and higher OpEx expected in Q2.

The paragraph discusses the impact of PTO usage on OpEx, as well as the company's confidence in its cash flow generation. The second question addresses consolidation in the EDA and simulation market and how it affects Keysight's moat. The company views this as an opportunity and continues to progress its system simulation and emulation strategy.

The speaker discusses the company's strategy and how the addition of ESI has enhanced their capabilities. They thank the participants and conclude the call.

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