Keysight Technologies, Inc. (NYSE:KEYS) Q4 2022 Earnings Call Transcript – Yahoo Finance

Keysight Technologies, Inc. (NYSE:KEYS) Q4 2022 Earnings Call Transcript November 17, 2022
Keysight Technologies, Inc. beats earnings expectations. Reported EPS is $2.14, expectations were $1.99.
Operator: Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal Fourth Quarter 2022 Earnings Conference Call. My name is Dante, and I will be your lead operator today. After the presentation, we will conduct a question-and-answer session. This call is being recorded today, Thursday, November 17, 2022, at 2:00 PM Pacific Time. I would now like to hand the conference over to Jason Kary, Vice President, Treasurer and Investor Relations. Please go ahead, Mr. Kary.
Jason Kary: Thank you, and welcome, everyone to Keysight’s fourth quarter earnings conference call for fiscal year 2022. Joining me are Keysight’s President and CEO, Satish Dhanasekaran; and our CFO, Neil Dougherty. In the Q&A session, will be joined by Senior Vice President of Global Sales and Chief Customer Officer, Mark Wallace. You can find the press release and information to supplement today’s discussion on our website at investor.keysight.com under the Financial Information tab and quarterly reports. Today’s comments by Satish and Neil will refer to non-GAAP financial measures. We will also make reference to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months.
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The most directly comparable GAAP financial metrics and reconciliations are on our website, and 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. We assume no obligation to update them. Please review our recent SEC filings for a more complete picture of these risks and other factors. Lastly, management is scheduled to participate in upcoming investor conferences hosted by Credit Suisse and Wells Fargo. We hope to see many of you there. And now, I will turn the call over to Satish.
Satish Dhanasekaran: Thank you, Jason, and thank you all for joining us. Keysight reported strong fourth quarter results, which exceeded the high end of our guidance and drove a strong finish to the year. Before we get into the quarter, I want to highlight our exceptional performance for fiscal year, which illustrates continued progress we’re making in transforming the Company to a software-centric solutions provider. We set new records for orders, which grew 12% to $6 billion, a new record for revenue, which was up 10%, and a new record for earnings per share, which increased 22%, all the while returning capital through $849 million in share repurchases or 89% of free cash flow. In addition, we continue to invest in next-generation technologies for long-term differentiation and see a high level of engagement and activity with our customers around their future needs.
Today, I’ll focus my comments on three key headlines. First, we delivered an all-time record revenue and earnings per share in the fourth quarter ahead of expectations enabled by outstanding execution by Keysight teams who successfully navigated supply chain, geopolitical and macro dynamics. Second, we achieved record orders of $1.6 billion with steady bookings throughout the quarter and a book-to-bill of 1.09. While our customers’ multiyear road maps remain unchanged, they are exercising more caution given the macro backdrop, which we anticipate will moderate demand in the near term. Third, as we enter fiscal ’23, we remain confident in our ability to outperform the market based on the differentiation of our solutions, our strong R&D customer value proposition and the robust backlog position we have entering the year.
And as we look longer term, the secular innovation trends in our end markets remain strong. Now let’s take a deeper look at the strength of the fourth quarter. Record orders of $1.6 billion grew 9% on a core basis. Record revenue grew 15% on a core basis, with solid growth across all regions as Keysight team successfully navigated challenging dynamics. This resulted in record quarterly earnings of $2.14 per share. The strength and resiliency of our business model is due to our strategic efforts to diversify our industry exposure. This has been best exemplified in the growth of our Electronic Industrial Solutions Group and our ability to leverage our industry-leading first-to-market solutions to enable expansion across the broader communications ecosystem.
EISG achieved its ninth consecutive quarter of double-digit order and revenue growth. Auto, semiconductor solutions and general electronics all achieved record quarterly revenue. For the year, both orders and revenues set new records as we capitalize on continued investments across all three EISG markets. In automotive, we’re pleased with the continued adoption of our solutions portfolio as orders grew double digits for the seventh consecutive quarter and exceeded $500 million this year. Automotive OEMs and their suppliers continue to focus on strategic new mobility investments, which drove key wins for Keysight. In addition, automotive-focused semiconductor companies continue to add capabilities to support EV and AV applications, which we view as a favorable long-term dynamic.
We recently announced the Scienlab DC Emulator, which enables customers to accurately characterize high-voltage, high-power electric vehicle battery performance under varying real-world charging conditions. And Keysight’s PathWave Lab’s operation software won 2022 AutoTech Breakthrough Award for overall electric vehicle technology. In support of AV applications, silicon designers are exploring adoption of commercial standards such as MIPI for automotive and other surround sensor applications, including cameras and in-vehicle infotainment displays. We are now expanding our leading compliance test solutions to offer advanced verification and diagnostic capabilities for automotive designers. Turning to our semiconductor solutions business. Q4 was the tenth consecutive quarter of double-digit order book and a record revenue quarter.
We saw sustained demand for our wafer test solutions and precision positioning capabilities, which enable the realization of advanced process nodes. In addition, Keysight has continued to partner with industry leaders, Synopsys and Ansys, on RF and millimeter wave integrated circuit design flows built for today’s wireless communication requirements, including 5G and 6G system-on-chips. Keysight received a Partner of the Year Award from TSMC for joint development design flows in RF and millimeter wave nodes. In general electronics, record orders grew double digits this quarter as demand remains strong and broad-based across industrial IoT and digital health as well as education and advanced research markets. Turning to Communication Solutions Group.
The business delivered strong orders and record revenue. Annual orders and revenue were all-time highs despite geopolitical headwinds and delays in U.S. Defense budget appropriations. Commercial communications revenue grew 10% and 11% for the year, with growth across all regions. Investments across communications ecosystem continued throughout the year with sustained spending in next-generation wireless and wireline technologies. Ongoing investments in 5G standards, new spectrum growing deployments around the world and steady evolution from 400 gig to 800 gig to terabit Ethernet drove growth. We ended a record year for 5G orders as Keysight’s market-leading solutions continue to provide industry with new capabilities needed for development of next-generation devices as well as wireless and wireline networks.
Examples that highlight our portfolio’s alignment with key industry priority include a recent partnership with IBM to integrate our Open RAN capabilities into their cloud automation tools to accelerate network deployments. We also completed the validation of our first 5G location-based service use case from Global Certification Forum by combining the testing of 5G new radio and global navigation satellite system technologies into a single platform. Lastly, in collaboration with key silicon and data center partners, we enabled the industry’s first 1.6 terabit transmission and data center interconnect, leveraging our high-speed digital solutions. Aerospace, defense and government business revenue grew 4% for the quarter and 3% for the year, setting a new record while navigating geopolitical headwinds.
Steady investments in spectrum operations, cybersecurity and space and satellite drove demand. 5G continued to expand in aerospace and defense end markets, and we saw increasing investment in advanced research. Proposed increases in investment in the U.S. and allied countries for modernization of defense capabilities and new satellite and space applications position us well for future opportunities. As an integral part of our solution strategy, software and services order and revenue growth this year continued to outpace Keysight overall, which has driven our annual recurring revenue to approximately $1.2 billion. Software and services again represented just over 1/3 of Keysight’s total revenue for the year. Keysight’s focus on customer success and innovation is driving our development of first-to-market, high-value solutions.
Our achievements over the years exemplify Keysight’s collaborative culture and our talented workforce, and we are honored that Keysight has placed tenth on the Fortune’s Best Workplaces in Technology list for 2022. We believe our differentiated culture gives us a unique ability to recruit and develop capable talent and will be our sustaining competitive advantage. In conclusion, I would like to thank our employees for all their contributions, commitment and strong track record of execution. In the midst of an uncertain economic environment, we remain confident in the resilience of our business, the strength of our balance sheet and the flexibility of our operating model. Now, I’ll turn it over to Neil to discuss our financial performance and outlook in more detail.
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Neil Dougherty: Thank you, Satish, and hello, everyone. We delivered an outstanding fourth quarter of 2022 with record revenue of $1.443 billion, which was above the high end of our guidance range and grew 11% or 15% on a core basis. Our strategies to navigate the ongoing supply constraints continue to be effective. While the supply chain situation improved within the quarter, it continues to moderate our near-term revenue expectations. Record orders of $1.570 billion increased 5% or 9% on a core basis, and we entered fiscal year 2023 with over $2.5 billion in backlog. Looking at our operational results for Q4, we reported gross margin of 64%, which, as expected, was down 80 basis points sequentially due to inflationary pressures and increased shipments of lower-end instruments, enabled by the improving supply chain.
Operating expenses of $494 million were well managed, and we generated operating margin of 30%. Net income was a record $386 million, and we achieved $2.14 in earnings per share, which was $0.14 above the high end of our guidance. Our weighted average share count for the quarter was 180 million shares. Foreign exchange impact on our earnings was negligible, thanks to a full natural hedge provided by our global footprint, which was then supplemented by our financial hedging program. Moving to the performance of our segments. The Communications Solutions Group achieved record revenue of $992 million, up 8% or 11% on a core basis. CSG delivered gross margin of 66% and operating margin of 29%. Commercial communications generated revenue of $681 million in the fourth quarter, up 10% driven by strength across the 5G ecosystem, increasing O-RAN adoption and investment in 800 gigabit and 1.6 terabit R&D.
Aerospace, defense and government achieved record revenue of $311 million, up 4%, driven by double-digit growth in Asia Pacific and Europe. The Electronic Industrial Solutions Group achieved record revenue of $451 million, up 20% or 25% on a core basis, driven by strength across all markets. EISG reported gross margin of 60% and operating margin of 32%. Turning to our full year financial performance. Keysight delivered outstanding results in 2022 despite ongoing supply constraints, foreign exchange headwinds and incremental trade restrictions. FY ’22 revenue totaled $5.4 billion, up 10% year-over-year or 12% on a core basis. Gross margin was flat at 65%, holding steady in the face of significant inflation. We invested $813 million in R&D, while operating margin improved 140 basis points to 29%.
FY ’22 non-GAAP net income was $1.4 billion or $7.63 per share, up 22%. Moving on to balance sheet and cash flow. We ended our fourth quarter with more than $2 billion in cash and cash equivalents, generating cash flow from operations of $398 million and free cash flow of $340 million. Total free cash flow for the year was $959 million, representing 18% of revenue and 69% of non-GAAP net income. Share repurchases this quarter totaled approximately 800,000 shares at an average price per share of $158.77 for a total consideration of $126 million. This brings our total share repurchases for the year to approximately 5.4 million shares at an average share price of $156.09 for a total consideration of $849 million or 89% of free cash flow. Now turning to our outlook and guidance.
We exit the year with record backlog and confidence in Keysight’s ability to continue executing through near-term uncertainties. As a result, we expect first quarter 2023 revenue to be in the range of $1.360 billion to $1.380 billion and Q1 earnings per share to be in the range of $1.81 to $1.87 based on a weighted diluted share count of approximately 180 million shares. A few modeling reminders as we enter the year. Our annual compensation cycle is administered in Q1. And in this current inflationary environment, we expect our second consecutive year of wage increases above our historic average. We are targeting FY ’23 R&D investment at approximately 16% of revenue. Annual interest expense is expected to be approximately $80 million. Capital expenditures are expected to be approximately $250 million, and we are modeling a 12% non-GAAP effective tax rate for FY ’23.
In closing, we recognize the uncertainty of the current macro environment, and we’ll continue to be disciplined. Keysight’s highly flexible cost structure, track record of execution, diverse end markets and long-term secular growth drivers give us confidence in our ability to outperform the market. With that, I will now turn it back to Jason for the Q&A.
Jason Kary: Thank you, Neil. That concludes our formal remarks. Dante, could you please give the instructions for the Q&A?
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