The paragraph is an introduction to the Keysight Technologies Fiscal Fourth Quarter 2024 Earnings Conference Call. It includes opening remarks by the operator, Joel, and a welcome from Paulenier Sims, the Director of Investor Relations. Paulenier outlines that the call will feature insights from Keysight's President and CEO, Satish Dhanasekaran, and CFO, Neil Dougherty, with Chief Customer Officer, Mark Wallace joining the Q&A session. The discussion will reference non-GAAP financial measures and forward-looking statements, which carry risks and uncertainties. All information is on Keysight's investor website. Additionally, management will attend upcoming investor conferences. Satish Dhanasekaran begins his segment focusing on three key headlines.

In the fourth quarter, Keysight exceeded revenue and earnings expectations due to strong performance in AI and increased year-end bookings in the US Aerospace, Defense, and Government sectors. While annual revenue and earnings per share were lower than 2023's record highs, the company demonstrated resilience with 26% operating profit and over $900 million in free cash flow. Keysight returned about 50% of this to shareholders through repurchases. The company is focusing on its software-centric solutions strategy to drive organic growth via innovation, collaborations, and selective M&A. Looking ahead, Keysight is optimistic about outperforming market recovery due to its strong portfolio and customer engagement. The Communications Solutions Group saw stable year-over-year revenue and notable sequential growth, driven by AI momentum and strong demand for AI data center infrastructure.

The industry is rapidly advancing towards 800 gig and 1.6 terabit adoption, prompting significant investment in technologies like silicon photonics and high-speed interconnects. Keysight is expanding its solutions for both R&D and manufacturing, showcased its AI workload emulation solutions, and highlighted its contributions to 800 gig interoperability at conferences. In wireless, demand is stabilizing with ongoing investments in Open RAN and 6G research. Collaborations with industry leaders were announced, including work on 6G frequency bands with Qualcomm. In Aerospace, Defense, and Government sectors, orders reached an all-time high, driven by increased defense budgets in the US, Europe, and Asia, with strong customer interest in advanced communication and radar use cases.

The paragraph discusses Keysight's activities and market trends across different sectors. In satellite communications, there is ongoing investment with the launch of more LEO constellations. Keysight showcased its capabilities at the European Microwave Conference, including advanced antenna design and testing technologies. The Electronic Industrial Solutions Group experienced year-over-year revenue decline but sequential growth, with strong semiconductor demand, particularly in AI-driven applications and technologies like DRAM and DDR5. The company also introduced a new high voltage test solution for semiconductors. Although facing challenges, the automotive sector showed stable production demand. Despite these headwinds, Keysight continues to invest in R&D, focusing on innovations in areas like software-defined vehicles.

ESI expanded its solution business through renewals and new customers, along with advancements in AI for product performance and immersive visualization workflows. Despite a stable but reduced demand in electronics manufacturing, consumer and industrial high-speed connectivity applications improved modestly. Public and private investments in advanced research and workforce development increased, with strong demand for digital health applications. Software and Services revenue grew 8%, contributing 39% of Keysight's total revenue, and recurring revenue rose 16% to $1.5 billion. Design engineering software saw growth in 2024 due to increased virtual prototyping across industries. Keysight, a leader in RF EDA, is heading a US government AI and ML project for RF integrated circuit design efficiency. Despite economic challenges, Keysight maintained strategic momentum, demonstrating a flexible operating model that delivers strong financial results and positions the company well for future opportunities. The paragraph concludes by thanking employees for their contributions and execution across market conditions.

In the fourth quarter, Keysight Technologies reported revenues of $1,287 million, exceeding guidance but reflecting a 2% decline, or 5% on a core basis. Orders totaled $1,345 million, showing a 1% increase overall but a 1% decrease on a core basis, with a backlog increase of $53 million, reaching $2.4 billion. Gross margin was 64.5%, while operating expenses increased 5% year-over-year to $497 million. The operating margin was 26% or 28% core, with net income at $288 million and earnings per share at $1.65. For the full year, revenue was down 9% (12% core) at $4,979 million, with a gross margin decline of 60 basis points. The company maintained R&D investment at 17.5% of revenue while reducing SG&A expenses by 7% excluding acquisitions. Full-year net income was $1.1 billion, with earnings per share at $6.27. The Communications Solutions Group's revenue was stable at $894 million, while the Electronic Industrial Solutions Group saw a decline, with respective gross margins of 67% and 58%.

The company ended the quarter with $1.8 billion in cash and generated $359 million from operations, with free cash flow of $328 million. They repurchased 974,000 shares for $150 million this quarter and $439 million for the year, using 49% of the annual free cash flow. Looking ahead, they expect gradual recovery in a mixed demand environment, forecasting FY'25 revenue growth at the low end of 5% to 7% and earnings growth of 10%. ESI contract renewals will lead to 40%-45% of annual revenue in Q1. They anticipate first-quarter revenue between $1,265 million and $1,285 million, with earnings per share of $1.65 to $1.71. They project Q2 ESI revenue to decrease, with a slight increase in core Keysight revenue. Expected annual interest expense is $70 million, capital expenditures are $150 million, and a 14% non-GAAP tax rate is modeled for FY'25.

The paragraph features a Q&A session during an earnings call, where Aaron Rakers from Wells Fargo asks about the wireless segment of the business, noting its recovery and potential growth. Satish Dhanasekaran responds by expressing confidence in the wireless business, citing stabilization over two quarters and increased infrastructure activity from customers focusing on Open RAN and 6G research. He mentions that the device side is slower as customers focus on evolving standards. Dhanasekaran believes the wireless business will remain stable into 2025. Rakers also inquires about the Aerospace and Defense segment, to which it's implied there is continued confidence in its growth trajectory.

In the paragraph, Satish Dhanasekaran discusses the company's outlook on defense modernization investments, particularly in areas like electromagnetic spectrum operations, space, and satellite, emphasizing confidence in their market position. He notes that while orders were slightly down year-over-year, they were compared to a record high from the previous year, and some deals are taking time to show in revenue due to systems wins. Despite uncertainties with the US administration change, he feels positive about their business prospects. Tim Long from Barclays then shifts the focus to the impact of AI on the company's wireline business, asking for details on its growth and new opportunities, and also inquires about software services representing 39% of revenues.

In the paragraph, Satish Dhanasekaran discusses the growth and future potential of Keysight's wireline business, primarily driven by AI-related demand. The business has surpassed $1 billion in orders, growing at double-digit rates, with significant contributions from hyperscalers investing in infrastructure upgrades. Despite supply chain constraints, Keysight is making investments to alleviate these issues and capitalize on AI trends. The company is actively participating in forums like OCP and ECOC to expand their reach. They are focusing on opportunities beyond the physical layer, such as the protocol layer, which helps optimize AI infrastructure investments. Overall, Dhanasekaran expresses optimism for both near-term and long-term growth.

In the discussion, Neil Dougherty and Mark Wallace talk about the business's software and services segments, highlighting a positive shift towards these areas. While software boosts Keysight's average gross margin, services slightly decrease it, yet both contribute positively to operating margin due to the lower expense structure of services. Mark Wallace points out that the expansion is resilient to macroeconomic challenges, with customers investing in methods like virtual simulation to cut costs. Additionally, leveraging new assets like ESI helps broaden customer reach globally, driving growth. Tim Long and Satish Dhanasekaran acknowledge a question from Rob Jamieson. Jamieson asks about the Communications business, specifically potential benefits from BEAD funding in the latter half of 2025 and risks of it being reversed due to some Trump's advisors opposing it.

Satish Dhanasekaran discusses the stability and growth of Keysight's business model, highlighting its diverse customer base as a strength during changing times. He notes the incremental business from new customers attracted by initiatives like the CHIPS Act, but emphasizes that these aren't critical dependencies for the company. Keysight's focus remains on R&D and expanding its market presence. When asked about handling tariffs and trade challenges, particularly in the APAC region, Dhanasekaran mentions the company’s strategic pivots in response to factors like US elections and related policy changes, including tax, trade, and defense spending.

In the paragraph, Satish Dhanasekaran discusses the company's focus on stabilizing the business and achieving order growth, which they prioritized for the second half of the year. He notes that the Communications Solutions Group (CSG) has returned to growth in terms of orders for the full year, while the Electronic Industrial Solutions Group (EISG) has not yet achieved the same level of growth. Satish also addresses a question from Robert Mason about the potential for growth across all major segments (such as wireline, wireless, automotive, and general electronics) by 2025, expressing that they have positioned themselves to leverage new opportunities, especially given shifts in the market like companies moving operations from China to Southeast Asia.

The paragraph discusses the financial outlook and operational expenses for the coming quarters. The company expects a gradual recovery moving into 2025, forecasting 5% revenue growth and 10% EPS growth. Neil Dougherty explains that due to higher ESI revenue in the first quarter, a gross margin increase is anticipated, while seasonality could reverse this effect in the second quarter. Additionally, operational expenses (OpEx) are expected to rise in the first quarter due to salary adjustments and the reactivation of the variable pay programs as the business transitions from contraction to growth.

The paragraph features a discussion led by Matthew Niknam, asking about recent trends in the macroeconomic backdrop, highlighting improvements and challenges in various sectors such as automotive and aerospace defense. Neil Dougherty begins by noting that Q4 results slightly exceeded expectations, with aerospace and defense performing strongly, while the automotive sector faces pressure due to reduced EV development spending. There's stability in the wireline sector, no strong growth catalyst for wireless yet, and cautious optimism about a future recovery in the semiconductor industry, though the timing remains uncertain.

The paragraph discusses the outlook for industrial end markets and aerospace and defense sectors. It highlights uncertainty in how the additional capacity created during the 2021-2023 supply chain disruptions will be absorbed, affecting manufacturing reinvestment. Mark Wallace notes that despite delays in government budgeting, there was increased spending in the US and Europe in Q4, driven by defense modernization and geopolitical factors. The promising areas for future opportunities include EMSO space, satellite, and quantum technologies, supported by global government-funded research. Samik Chatterjee from JPMorgan then follows up with a question regarding growth targets for fiscal 2025.

In the paragraph, Satish Dhanasekaran discusses the outlook for the semiconductor and general electronics sectors. For semiconductor fabs, he mentions ongoing strength in wafer test solutions, particularly in areas like silicon photonics and new memory technologies, despite a reported slowdown by some semiconductor equipment manufacturers. He expects growth in this segment, which constitutes about 10% of the company's revenue. On the general electronics front, he notes that Q4 showed stability in manufacturing, leading to a revival in research spending and customer expansion, which could potentially return their business to growth. However, he cautions that it’s too early to identify a trend, indicating uncertainty about the timing of sustained order growth for their EISG (Electronic Instruments and Systems Group).

In this paragraph, Neil Dougherty addresses investor concerns about Keysight's margin targets for fiscal 2026. While the company's gross margin guidance remains strong at 66% to 67%, there is a notable gap in meeting the operating margin target of 31% to 32%. Dougherty attributes this to recent acquisitions that have been beneficial to gross margins but have diluted operating margins in the short term. He believes that integrating these acquisitions into the Keysight operating model will allow for significant profit leverage and help close the gap in operating margins over time. Satish Dhanasekaran adds that they remain confident in the long-term growth prospects of the business.

The paragraph discusses the state of the automotive sector, highlighting several areas of opportunity and challenge. The speaker notes a slowdown in electric vehicle (EV) investments, particularly in battery test labs and manufacturing demand, which have dropped due to inventory normalization. However, there are positive developments in software-defined vehicles, such as ADAS and autonomy, involving innovation in communications and sensor technology. Additionally, the growing focus on charging infrastructure and the associated regional standards presents further opportunities for growth.

The paragraph discusses a conversation between Karan Juvekar, Satish Dhanasekaran, and others about growth opportunities in areas like AI and related technologies. Satish Dhanasekaran highlights the company's focus on physical layer tools like oscilloscopes and sampling scopes, and mentions new opportunities in emulation platforms, which are in early pilot stages with customers. The company aims to enable customers in R&D parts, from design to testing. Additionally, Adam Thalhimer congratulates Mark Wallace on his retirement and inquires about the high operating margins in the Communications segment, noting it as the best ever quarterly margin, and Neil Dougherty confirms satisfaction with the results and strong gross margins in that business.

The paragraph discusses the company's financial performance and outlook, specifically highlighting strong profitability and operating margins in their CSG portfolio due to high software content and recurring revenue. They mention ongoing investments in R&D and efficiencies in SG&A. Adam Thalhimer inquires about offsets to weaknesses in the auto sector for fiscal 2025, to which Neil Dougherty responds with optimism about the semiconductor and broader industrial markets, expecting potential order growth for EISG later in the year. The conversation ends with a transition to a question about mergers and acquisitions from a representative of Goldman Sachs.

The discussion involves Keysight's ongoing transaction with Spirent and the company's openness to pursuing additional large transactions if they align with business and financial goals. Satish Dhanasekaran emphasizes a strong focus on organic growth and a selective M&A strategy. Neil Dougherty mentions that while preparing for the significant capital outlay for the Spirent transaction, Keysight plans to continue its buyback program at a minimum anti-dilutive level and may seek additional buyback opportunities. The session concludes with closing remarks, and the call is ended.

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