Good day, ladies and gentlemen. Welcome to the Keysight Technologies Fiscal Fourth Quarter 2021 Earnings Conference Call. My name is Katherine, and I’ll be your lead operator today. After the presentation, we will conduct a question-and-answer session. Please note that today’s call is being recorded today, Monday, November 22, 2021 at 1:30 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.

Thank you, and welcome everyone to Keysight’s fourth quarter earnings conference call for fiscal year 2021. Joining me are Ron Nersesian, Keysight’s Chairman, President and CEO; and Neil Dougherty, our CFO. Joining us in the Q&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. While there, please click on the link for Quarterly Reports under the Financial Information tab where you will find an investor presentation along with Keysight’s segment results. Following this 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 excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. 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. Lastly, I would note that management is scheduled to participate in upcoming investor conferences in December hosted by Credit Suisse, Wells Fargo and Barclays. And now, I will turn the call over to Ron.

Thank you, Jason, and thank you all for joining us. Keysight delivered a record quarter and fiscal year. Strong demand for our portfolio of differentiated solutions is fueling continued momentum across all of our end markets. Today, I’ll focus my comments on four key headlines: First, demand for Keysight’s differentiated solutions continues to be very strong with orders exceeding our expectations. Outstanding order growth of 21% in the fourth quarter topped off an excellent fiscal year where we grew 18%. Demand continues to be balanced across our business with double-digit gains across all end markets and regions, both in the fourth quarter and for the full fiscal year. Second, we delivered outstanding Q4 results despite a tightening supply environment. Exceptional execution by Keysight employees around the world resulted in record revenue, gross margin, operating margin and earnings per share for the fourth quarter and for the fiscal year 2021. Third, we entered 2022 with strong momentum, robust end market demand and record backlog. Assuming a loosening of the supply situation in the second half of the calendar year, we expect fiscal year 2022 revenue growth of 6% to 7%, while delivering 10% earnings growth. Beyond 2022, we are increasingly confident in our ability to deliver sustained above-market results. We have established a strong track record of execution, and our competitive position earned over the past seven years of investment in transformation has only grown stronger. Lastly, given the strength of our cash position and generation, we continue to see tremendous opportunities for value creation through disciplined investment in organic capabilities, targeted acquisitions and accordingly, today, we announced a new share repurchase authorization of $1.2 billion. Now, let’s take a deeper look at the strength of our fourth quarter and the fiscal year 2021 financial performance. In the fourth quarter, we saw continued momentum in the demand environment. Orders exceeded our expectations and grew 21% year-over-year. Revenue grew 6% with growth across all regions. Operational excellence resulted in record profitability as we delivered gross margin of 66%, operating margin of 31% and earnings of $1.82 per share. Fourth quarter results drove a very strong finish to an excellent year. In 2021, we overcame 5 percentage points of China trade headwinds and delivered 18% order growth to outpace the overall market, which continues to be strong. Despite a tightening supply environment, we ended the year with 17% revenue growth and achieved record profitability with gross margin of 65%, operating margin of 28% and earnings of $6.23 per share. Compared to pre-pandemic fiscal year 2019, orders and revenue have grown 21% and 15% respectively over this two-year period, highlighting the continued strong demand for our market-leading solutions. Broad-based growth across multiple dimensions of the business demonstrates the breadth of our customer base. We added more than 2,000 customers in 2021 and more than 1,900 in 2020 as we continue to expand our footprint, adding to the stability and durability of our business model. Despite the headwinds we faced in 2021, we delivered annual double-digit order and revenue growth in both business segments. The Electronic Industrial Solutions Group achieved its fifth consecutive quarter of record revenue, driven by double-digit growth in semiconductor solutions and in automotive. Another quarter of record semiconductor revenue was fueled by ongoing investments in advanced technology nodes and capacity expansion to address pent-up demand. In automotive, we achieved record orders for the third consecutive quarter of double-digit order and revenue growth. Investment remains strong in EV and AV technologies. This quarter, we announced the collaboration with NIO, one of China’s top EV automakers who selected Keysight’s 5G and C-V2X network emulation solutions. Strong demand for general electronics solutions was driven by continued investments in digital transformation, industrial IoT, digital health, Industrial 4.0 and advanced academic research. The Communications Solutions Group delivered double-digit order growth and record revenue in the fourth quarter. For the year, orders and revenue grew double digits despite the impact of China trade restrictions. Commercial Communications achieved all-time record orders and revenue in the fourth quarter. Q4 was another record quarter for 5G driven by the strength of our platform, continued O-RAN adoption and new industry applications. In addition, we saw ongoing investments in 400G and 800G R&D across the entire communications ecosystem. Increased spending in data centers and network security drove double-digit order growth in network test and visibility. In aerospace, defense and government, double-digit order growth was driven by ongoing investments in technology with the focus on space and new commercial technologies like 5G. We recently announced a collaboration with Lockheed Martin to advance 5G in support of mission-critical communications for aerospace and defense applications. Keysight’s first-to-market solutions are enabling the rapid progression of new technologies and winning engagement with industrial leaders like NXP, NEC and MediaTek. In Q4, we joined Google’s cloud partner initiative to support agile orchestration of innovative 5G services at the network edge. Our end-to-end solutions portfolio continues to capture new opportunities as the 5G life cycle progresses and expands into aerospace, defense and government, automotive and industrial applications. We continue to accelerate Keysight’s capabilities to provide industry-leading solutions through strategic acquisitions and recently added SCALABLE Network Technologies to our software-centric solutions portfolio. SCALABLE is a provider of best-in-class network simulation solutions to model and visualize communication networks and cyber threats for aerospace, defense and government customers. We’re excited to welcome the SCALABLE team to Keysight. Our software-centric solutions and higher value services continue to drive differentiation, strengthen our competitive position and capture a higher percentage of our customers’ wallet share. In fiscal year 2021, software and services not only delivered double-digit order and revenue growth, but also outpaced Keysight’s overall growth. Combined, they represented just over one-third of Keysight’s total revenue for the year. We also continue to grow annualized recurring revenue, which now exceeds $1 billion. The growth in software and services as well as the recurring revenue further strengthens the durability and resiliency of our business model, while at the same time contributing to Keysight’s margin expansion. Keysight’s focus on first-to-market software-centric solutions and operational excellence drive our consistent execution. We have a strong track record of performance and proven business resiliency. Since our inception as a public company seven years ago, we have achieved a 10% compound annual revenue growth rate, expanded gross margin by over 800 basis points, increased operating margin by nearly 1,000 basis points and generated 16% annualized EPS growth, all while significantly increasing investment in R&D and sales to drive future growth. Over the same period, we have nearly tripled the size of our software revenue and more than doubled recurring revenue while growing services 75%. These accomplishments are a testament to Keysight’s leadership model, our values and our people. I would like to thank all Keysight employees for their exceptional execution and dedication. We continue to capitalize on these multiple ways of technology innovation and long-term secular growth trends across multiple markets. We exit this year in a strong competitive position and expect to continue to deliver sustained above-market profitable growth. Now, I will turn it over to Neil to discuss our financial performance and outlook in more detail. Happy Thanksgiving.

Thank you, Ron, and hello, everyone. As Ron mentioned, we delivered an outstanding quarter and fiscal year. In the fourth quarter of 2021, we delivered record revenue of $1,294 million, which was above the high end of our guidance range and grew 6% or 5% on a core basis despite a tightening supply environment. The further contraction of the supply chain within the quarter tempered total revenue results and was more impactful on the Communications Solutions Group businesses. With demand outpacing supply, we delivered a record $1,491 million in orders, up 21% on a reported and core basis and enter fiscal year 2022 with over $2 billion in backlog, which will position us well as the supply chain situation improves. Looking at our operational results for Q4, we reported record gross margin of 66% and operating expenses of $456 million, resulting in an operating margin of 31%, an all-time high. Net income was a record $338 million, and we achieved $1.82 in earnings per share, which was well above the high end of our guidance. Our weighted average share count for the quarter was 186 million shares. Moving to the performance of our segments. Our Communications Solutions Group generated record revenue of $919 million, up 2%. CSG delivered gross margin of 66% and operating margin of 28%. In Q4, commercial communications generated revenue of $622 million, up 3% driven by strength across the 5G ecosystem, O-RAN adoption and investment in 400-gigabit and 800-gigabit R&D. Aerospace, defense and government achieved record revenue of $297 million, up slightly from the same quarter last year as solid growth in Asia Pacific was offset by supply chain constraints that impacted revenue in the U.S. and Europe. The Electronic Industrial Solutions Group generated fourth quarter revenue of $375 million, up 18% on a reported and core basis, driven by strength in semiconductor and automotive. EISG reported record gross margin of 66% and record operating margin of 36%. Given tightening supply chain constraints and trade headwinds, we are very pleased with our full year results. In FY21, revenue totaled $4.9 billion, up 17% year-over-year or 15% on a core basis. Gross margin improved 40 basis points year-over-year to 65%. We continue to invest in R&D at 16% of revenue or $788 million for the year, while operating margin improved 260 basis points to 28%. On the strength of this performance, we have achieved our long-term operating margin target of 26% to 27%, two years ahead of plan. FY21 non-GAAP net income was $1.2 billion or $6.23 per share, up 28%. Moving to the balance sheet and cash flow. We ended our fourth quarter with $2.1 billion in cash and cash equivalents, generated cash flow from operations of $368 million and free cash flow of $295 million. Total free cash flow for the year was $1.1 billion, representing 23% of revenue and 99% of non-GAAP net income. As announced earlier today, the Keysight Board of Directors has approved a new share repurchase authorization of $1.2 billion, effective immediately. Under our prior share repurchase authorization, we acquired approximately 2.1 million shares in the quarter at an average share price of $171 for a total consideration of $353 million. This brings our total share repurchase for the year to approximately 4.4 million shares at an average share price of $154 for a total consideration of $673 million or 59% of free cash flow. Now, turning to our outlook and guidance. Despite a strong demand backdrop, supply chain constraints continue to moderate shipment expectations. As a result, we expect first quarter 2022 revenue to be in the range of $1.225 billion to $1.245 billion and Q1 earnings per share to be in the range of $1.50 to $1.56 based on a weighted diluted share count of approximately 185 million shares. Looking forward to 2022, we expect the supply chain to remain tight in the first half of the year. Assuming a loosening of the supply situation in the second half, we expect full-year revenue growth to be in the range of 6% to 7%, while delivering 10% earnings growth. Interest expense is expected to be approximately $78 million and capital expenditures are expected to be in the range of $240 million to $260 million with increasing capacity and technology investments. Regarding our tax rate, we are modeling a 12% non-GAAP effective tax rate for FY22, which assumes no change to current U.S. tax policy. In closing, we are entering the fiscal year with strong momentum, a record backlog position and a strong track record of operational excellence. We’re encouraged by the strong dynamics across our end markets and are competitively positioned to drive sustainable and profitable growth going forward. With that, I will now turn it back to Jason for the Q&A.

Thank you, Neil. Katherine, will you please give the instructions for the Q&A?

The first question is from Samik Chatterjee with JP Morgan.

Hi. This is Joe Cardoso on for Samik. My first question is just around the full year guide. So, you’re guiding the full year to 6% to 7% growth, and I’m just trying to flip that with your commentary last quarter around expectations around a more muted seasonality. First of all, does that expectation still stand true? And if so, does that imply that we should expect to see a similar cadence to revenue as we did in fiscal ‘21, or is there something I’m not appreciating here as I think about revenue trends for the full year, such as maybe the benefits of the loosening of the supply chain as we head into the back half of the year?

Yes. Hi, Samik. It’s a great question. So, yes, as we mentioned on the call, we did see the supply chain situation tighten during the quarter, and our guidance does assume that we will see some relaxation in that environment in the back half of the year. So, if I was thinking about the seasonality for FY22, I’d say two things. I think, first of all, I think we’d expect revenue to build as we move throughout the year. And then, maybe if you think about it in terms of year-over-year growth, right, our guidance of 6% to 7% for the full year. I was thinking about that on a quarter-by-quarter basis, I’d be expecting growth rates in the first half of the year that are below that 6% to 7% level and growth rates in the back half of the year that are slightly above that 6% to 7% level, so that we average that for the full year.

Got it. I appreciate the color there. And then, just on my second question, EISG posted record operating margin this quarter. They were really strong. Just curious to hear what were some of the big drivers or contributors to the margin there relative to operating margins? And just curious to hear if there was any one-time benefits in the quarter that we should consider?

Yes, there were no one-time benefits, but the most significant point is the remarkable 30% revenue growth for the year. The demand for our products has been exceptionally strong. We've observed a significant rebound in the automotive sector and continued strength in the semiconductor business. This strong demand has allowed us to optimize our operating expense infrastructure and achieve high operating margins in the short term. Looking ahead, we see excellent opportunities for further business growth and investment in technology to meet the needs of these markets.

The next question is from John Pitzer with Credit Suisse.

Yes. Good afternoon, guys. Congratulations on the solid results. Neil, I wonder if you could just dig a little bit deeper into kind of some of the supply constraints that you’re seeing out there. I think you said in your prepared comments, it’s hitting you guys, EISG stronger than comms. I’m kind of curious, is this logistical constraints? Is it component constraints? Is it a little bit of everything? And is there a dollar amount you can give us that impacted revenue, both in the fiscal fourth quarter and the fiscal first quarter?

Thank you for the question, John. The impact has actually been greater on CSG businesses than on EISG businesses. The CSG products are generally more complex, with a longer bill of materials, meaning there are more parts and components needed to build those instruments. This complexity inherently increases the risks and challenges we face in fulfilling the supply chain. Additionally, CSG products are typically at the higher end of the technology spectrum, which results in fewer suppliers for those advanced technology products compared to the more mainstream products in EISG. When considering the supply chain impact, I would combine the effects of COVID and the supply chain disruptions we have experienced over the past couple of years. To quantify these impacts, it's better to look at the full fiscal years rather than any individual quarter, focusing on our order rates. Historically, before 2020, we've been successful in converting our orders into revenue. There has usually been a slight lag, with a percentage of quarterly orders shipped within the quarter and the remainder pushed to subsequent quarters. However, in 2020 due to COVID and in 2021 due to supply chain issues, we have seen the gap between orders and revenue widen. We estimate that this abnormal backlog build over the past couple of years is in the range of $300 million to $400 million. This represents an opportunity for us moving forward as we aim to clear that backlog once the supply chain situation improves. I don't expect this to happen quickly, but rather over time as the solutions to the supply chain problems develop. This gives a rough idea of the impact we've experienced over the past couple of years.

That’s really helpful color. And then, Ron, over the last several years, we, on this side of the world, have been trying to compare and contrast sort of the 5G rollout with the 4G rollout relative to your business. And I guess, what I was hoping to do is get a little bit more color about the software strategy you’re deploying this time around, which seems like an incremental driver. I’m just kind of curious, can you size the potential TAM opportunity that gives you, especially as the network moves from just being a backbone for handsets and mobile to actually being a backbone for a lot of new incremental applications. And to the extent that software and services is a third of the business now, sort of how do we think about that over like the next three to five years?

Thanks, John. It’s very, very clear that software and services continues to be a bigger and bigger percentage of our total business as we move from a hardware product supplier to a software-centric solution provider and the solutions obviously include hardware, software and services. And we’ve seen great growth obviously in our software and our services, and they’ve outpaced the hardware growth. Looking overall at 5G versus 4G, we made a decision in 2013, we announced at Agilent, we’re going to spin off Keysight in 2013, which we eventually did in November of 2014. But in 2013, I started working with the team that was developing to invest in 5G and make sure that we were going to be leaders. In 4G, we were providing a little bit more of, let’s say, cash contribution to Agilent where we were not investing as heavily in the communications rollout of 4G by a substantial amount. So, we invested earlier. We invested a greater amount as now we’re roughly at 16% R&D where we used to be at approximately 12% of R&D. And we’ve gone from roughly $400 million to roughly $800 million in R&D spend over this period of time, but software is a key part. What we did was we consolidated our hardware development facilities into one organization as opposed to in separate divisions. And accordingly, that enabled us to basically provide software that could span the whole product offering. And we made an acquisition for instance of a company called Anite, which gave us software capability. They had some capability in 4G. We moved them over to 5G. And all this together, investing more, starting earlier, having a consistent R&D and investment profile has really given us the lead and caused us to be a much, much stronger provider, and I believe the leading provider for 5G. 5G is still growing, and we anticipate it growing for years. I’m going to turn it over to Satish, who could tell you a little bit more about our results and our growth in, not only 2021, but what he sees going forward.

Thank you, Ron. Great question. I think at the summary, we’ve had another record quarter for 5G and the drivers are scaling deployments, but equally important is the new application space. And I think we outplayed that as a strategy. We had to continue the progression from physical to protocol to application, and this application area is very rich, right? As I look forward, some of these application spaces have software as a percentage of the total value proposition in the 30%, 40%, 50% range and one we pursue very actively. I’ll just make a few examples of these, right? So, you can think of on the 5G side, O-RAN being a great example of that. On the wireline side, the protocols with 400-gig, 800-gig getting more complex. You look at new emerging spaces like SD-WAN, SASE and MACsec and the security domain. So, you look at the commercial comms portfolio, it’s very rich in applications that really favor our strategy of being more software-centric and one we’re investing to pursue, and we’re generating strong results.

We are ready for the next question from Jim Suva of Citibank.

I had a thought about your vertical integration. You’re a lot more vertically integrated than the other companies. Has that materially benefited you during the supply chain bottlenecks, or are there like little things, whether it be plastics or connector or housing that held you back just as much as the other? And I’m just trying to think about does this now cause you to even want to be a little bit more vertically integrated, or how core are you at the sweet spot of your vertical integration? Thank you.

Sure, Jim. The first thing that’s probably really important to note is that our differentiating technologies that have given us the leadership position outside of the software that we have developed is semiconductors that have very particular high-performance capabilities. And as you know, we have an on-site fab that exists in Santa Rosa, and that fab makes gallium arsenide and indium phosphide semiconductors. So, a lot of people are having trouble now getting more custom components built. And we build a lot of those custom components in-house. So, that has definitely helped us. Now, again, if you don’t have all the parts, you can’t ship anything. And we are in relatively good shape compared to other competitors, but there’s no doubt that we have to make sure that we get all the components that are needed in order to ship the product. We always will look for opportunities to integrate, provided that it makes financial sense. We feel very good about what we have in-house right now. It’s not so much the plastic pieces and things like that. There are obviously not only components, but there is the whole logistical shipping issues that the whole world is going through. So, we are impacted, a little bit less than others. And I think the overall organization has done a real good job of being able to deliver during these very challenging times.

Great. Thank you. Congratulations to you and your team at Keysight.

Great. And the next question goes to Mark Delaney from Goldman Sachs.

Some of the defense primes have spoken to slowing Department of Defense budget outlays, and I appreciate that Keysight reported broad-based order strength. But, I was hoping you could talk a little bit more on what you’re seeing in your AD&G segment? And if you are experiencing any slower end market trends, even if in certain portions of that business segment?

Yes. So, again, a pretty strong quarter for aerospace defense orders growing double digits, finishing off a year with double-digit growth. If you look at what drove that growth, it’s recovery in the macro environment globally, similar spend, especially towards technology that continues to increase, both in the U.S. and internationally and one we’re capturing. We also took some concerted steps last year or two years ago, in fact, to take our 5G technology stack and customize it for aerospace, defense applications, and as you’ve probably seen, our collaboration with Lockheed Martin that we announced. So, we’re very pleased with the progression that we’re making with commercial technologies that are getting adopted. So, all of these are pretty favorable. We are observing that right now, we are under continuing resolution from a budget perspective in the U.S. But, if you look at the budget that has been put in place and if it’s approved, it does call for a year-over-year increase and also increased spend in technology or our T&E line item, which we view as a favorable dynamic. Peripherally, the Infrastructure Bill that is getting through the Congress has some sustained spend outlays for EV and broadband and semiconductor, which we also think is favorable for us.

That’s really helpful color. Thank you for all those comments. And my follow-up question was on the supply chain. And if you could talk in a bit more depth around what is leading to your comments of potential alleviation in the second half of this coming fiscal year? Thank you.

Yes, I would say that the supply chain situation is quite dynamic. We have strong relationships with our key suppliers and maintain constant communication with them during this time to ensure that we are obtaining the necessary parts to meet our customers' needs. Our confidence and guidance indicate the beginning of a recovery in the supply chain situation in the latter half of the year, which is based on direct feedback we've received from key suppliers within our supply chain.

We’ll move over to Tim Long from Barclays.

Thank you. I have two questions. First, could you discuss the impact of C-band on the wireless side and share your current thoughts on millimeter wave? Specifically, are there any effects from potential delays with the FAA regarding C-band? Secondly, Neil, could you provide an update on the recent margin expansion? I would like to know more about leverage, incremental margin growth, and operating from these levels. Thank you.

I’ll share some insights on 5G. As we mentioned earlier, the ongoing deployments, particularly in the low frequency bands globally, are viewed as a positive trend. The C-band auction served as a short-term catalyst, leading to robust results with strong double-digit growth in 5G this quarter, contributing to double-digit growth in 5G for the entire fiscal year. A significant portion of this growth can be attributed to the C-band auction and the associated investments in the Americas. Our Americas segment experienced the highest growth in 5G on a regional basis, and our low frequency business doubled year-over-year. These results are impressive, especially with our millimeter wave business remaining stable this year. In the medium term, we anticipate that millimeter wave adoption will steadily increase, and we are monitoring the use cases expected to emerge from the Beijing Olympics next year.

Yes. Tim, in response to your second question, we have indeed experienced significant margin expansion since Keysight's inception, adding approximately 800 basis points to gross margins and about 1,000 basis points to operating margins. Looking ahead, we see continued potential for further margin growth within the Keysight portfolio. Next year presents a dynamic landscape, with supply chain pressures slightly limiting revenue, alongside broader inflationary pressures in the economy. Additionally, we anticipate a return to a more normal operating environment as we navigate post-COVID conditions, which includes costs related to facility management as we resume office work and increase travel for in-person customer interactions. Furthermore, we invested nearly 16% of our revenue in R&D this year, as we see great opportunities to invest in technology and introduce new solutions to the market. We expect R&D to rise next year, potentially reaching the mid-16% range. In these respects, FY22 may serve as a catch-up year, but there’s substantial long-term potential as we expand our software and solutions portfolios, continue to engage with customers, and deliver first-to-market solutions to drive both gross and operating margins higher.

And the next question comes from Matt Niknam of Deutsche Bank.

Hey, guys. This is Nick on for Matthew. Congrats on the quarter. So just first, I wanted to talk about CapEx, the guide is picking up next year. I just want to know what’s driving that uplift and whether that should carry on into future years, like is that sustainable, or is there a specific project that’s going on, and I have a follow-up.

We mentioned earlier that we anticipated a few years of increased capital expenditures due to efforts aimed at enhancing our supply chain's resilience. This year, our CapEx was about $175 million, which aligns with those expectations. We plan to continue these investments while also making additional expenditures to expand our capacity and invest in essential technologies for future growth. Given the current economic landscape, there’s a greater need for capacity investments at Keysight compared to this time last year. Therefore, I do not consider the projected CapEx of around $250 million for next year to be the new normal. That figure is not indicative of our steady state, which I believe will be considerably lower than the $250 million we are suggesting for fiscal year 2022.

Okay. That makes sense. And then, just a quick follow-up on competitive environment. I mean, there are a few puts and takes that I’m just thinking about and I was wondering you could provide some color. On the one hand, a lot of competitors are having a harder time sending up shipments, does that create a positive pricing environment? And then, a slightly different angle, one of your competitors recently made some easy acquisitions. Just how you think about EISG from the competitive landscape going forward?

We are seeing very strong performance in our EISG business, particularly in the semiconductor sector. The increase in new wafer starts is helping us maintain our growth in this area, following a successful year with double-digit growth last year. We are gaining market share and continuing to invest in our portfolio to take advantage of the current semiconductor environment. In terms of automotive, we have recently entered this market, and we are pleased with the results so far. This fiscal year, we have achieved some wins in the manufacturing expansions within the EV sector. Additionally, we have strengthened our presence in the autonomous vehicle market by announcing a partnership with NIO to extend our 5G technology stack in C-V2X. Overall, our automotive portfolio is growing and is more comprehensive than that of our traditional competitors, and we are committed to further investing in this business. Overall, I am pleased with the progress of our EISG business.

And your second question, which was with competitors having a little tougher time on shipments, are we going ahead and taking advantage of that for pricing? The answer is no. We’re in this for the long haul with customers. We’ve been back from the original Hewlett-Packard days, over 80 years working with customers. We’re not taking advantage of them. Where costs are up in certain areas for shipments and others, we will do price increases, but not because of any competitive position or hard ability for our customers to get products from competitors.

Next question comes from the line of Chris Snyder of UBS.

So, the Company in the past has talked to industry growth in the 3% to 5% range with expectations for about 100 to 200 bps of outgrowth for Keysight above the industry. But, when we look at it over the last four years now, the Company has been growing about 10% organically per annum. So, I guess, my question is, is this level of growth more so driven by just much stronger industry growth over the last four years or just better Keysight outgrowth or a combination of both? Can you just kind of help us unpack how we kind of bridge that gap?

I’ll make a couple of comments and then turn it over. I think it’s a combination of two. There’s no doubt that we’ve seen more growth and more opportunity in 5G. But, as we see the digitization of everything, the market is, there is no doubt, a great place to be. And we have a very diversified portfolio, and we’re seeing growth in semiconductor. We’re seeing growth in Industrial 4.0. We’re seeing growth all across our real stated growth initiatives and the markets that we’ve gone after. So, there is no doubt we pick markets that are winning, and we have been growing faster than the market in general. And I think the execution of the team, the investment that we have and our strategy of providing customers with total solutions is unmatched in the industry. Others are trying to mimic it to a certain extent. But I do believe with our outstanding sales force, sales support organization, our overall organization that provides hardware, software and, we’ll call it, partnership with key market makers, it makes a huge difference on how successful we are. So, I’ll stop there, and Satish may want to make another comment.

Yes. Ron, I think you’re absolutely right. With regard to what we see in the marketplace is this expanding ecosystem as we have expanded our portfolio from just products to offering total solutions to customers, we remain focused on the end markets that we’ve called out. Another angle to this that Mark Wallace can add is the customer adds that occurs has this expanding contribution that we’re making.

Yes. Thanks, Satish. Chris, to add to this, I think our go-to market, the investments we’ve made in sales and marketing and customer engagement is making a big difference. As you’ve heard, we had strong double-digit order growth across all regions and all end markets, not just for Q4, but for the entire fiscal year. So, this is a very sustaining effect that we’ve had as we engage with the market leaders implanting our solutions engineers to help innovate with customers, our largest customers have grown substantially, our long tail of small and medium-sized business customers have grown. And, as Ron has mentioned in the prepared statements, we continue to add new customers, every quarter and every year, more than 2,000 were added during fiscal year ‘21, which creates sustaining opportunities for us going forward, diversifies our business. And then, it’s not just all about our direct channel. We have a very strong partnership or partner channel with the indirect channel distribution sales helping us reach more than 30,000 customers per year, and we’re seeing continued growth from our e-commerce channels as well. So, we have multiple ways to serve our customers and deliver these great solutions. And I think that’s a big part of it, too.

I appreciate all the insights from everyone. My follow-up question is about the above normal industry growth – how long can we expect that to continue? Is it reasonable to anticipate that it will last until the peak of 5G, which I believe is expected around 2023 or 2024? Additionally, should we expect Keysight's growth to gradually align with market levels, returning to the 100 or 200 basis points range, considering the company's scale in R&D investments?

If we were at a market share of around 60% or 70%, you might argue that returns would start to diminish. However, considering where we currently stand at approximately 25% to 30%, we still have significant room for growth, and I believe our potential will extend well beyond 5G. Regardless of whether we're discussing 2024 or another timeframe, we are already investing in 6G, as well as in electric vehicles and autonomous vehicles. Numerous additional opportunities are emerging, and we are determined to outpace the market for many years to come.

The only thing I would add to that is our ability to spend $800 million a year in R&D as a real differentiator in the marketplace, and I think goes to at least indicate what our ability to continue to outperform the broader market should be over time.

Next question comes from the line of Rob Mason at Baird.

Yes. Thanks. I did have a clarification question just on the first quarter guidance. So, I guess, Neil, maybe this directed to you. Is the assumption that margins would be down year-over-year within your guidance? I’m not sure I totally caught your below-the-line guidance.

Yes. What I mentioned is that after concluding Q4, we finished the year with a 15.9% investment in R&D. This was slightly lower by a point in the fourth quarter. We see substantial opportunities to invest in R&D to introduce new technologies to the market. Therefore, during FY22, you can anticipate our R&D spending to return to a mid-16% range, which will naturally exert some pressure on margins. Additionally, in Q4, we experienced an exceptionally favorable product mix, but as we look into Q1, we expect the mix to be somewhat less favorable sequentially. There are also typical factors for Keysight that influence Q1, such as our company-wide salary adjustments occurring in the first quarter. Given the current inflationary climate, this will result in a larger-than-usual salary increase this Q1.

I see. How would your expectation within 10% type EPS growth, how would your assumptions around incentive compensation play out on a year-over-year basis?

Yes. There are two parts to our incentive programs. One is for the overall employee base, which is influenced by the company's organic growth rate and operating margins. These are the main factors driving those incentives. For executives, their cash compensation is tied to their ability to increase earnings per share and overall revenue. In the long run, our main way of determining variable compensation relies on total shareholder return. As we look ahead to FY22, we are observing significant wage increases due to the broader inflationary climate, which is countered by a reduction in the overall variable pay programs.

Okay. Just a quick follow-up. Can you provide an update on your capital allocation plan and your perspective on the M&A pipeline, as well as where your focus is at this point?

Yes. Absolutely, Ron?

Yes. In our target markets, we aim to provide comprehensive solutions. Our top priority is to focus on any necessary components of these solutions. Additionally, we are expanding into related markets. As previously mentioned, we began with 5G and 4G, primarily working on the physical layer. We then advanced to the protocol layer and are now involved in the application layer and security. We continue to seek adjacent opportunities as well. Our pipeline is strong, but we also face significant challenges. This enables us to pursue necessary acquisitions while also returning cash to shareholders, which is why we announced a $1.2 billion share buyback program.

Next question comes from the line of Adam Thalhimer of Thompson Davis.

I'm interested in how you plan to improve operating margins by segment. You had an impressive year at EISG, but I wonder if that will make it difficult to compare going forward or if you can leverage the results from 2021.

Yes. Certainly, obviously, a very tough comp for EISG, given the strong results, not just within the quarter where they reached up into the upper 30s, but 36%, for the full year here. I think we have opportunities to increase margins across both segments. I think we have initiatives in place across both segments to increase software content, to increase solutions content and to increase the value added that we’re bringing to customers. And so, I think if you think about opportunities in EV and IoT for EISG and, of course, in not just 5G, but 6G and quantum and aerospace, defense on the CSG side, there’s ample market opportunity for us to continue to increase the value add that Keysight brings to our customers. And I think as we do that that has a chance to be margin accretive across both groups.

Great. Thanks, Adam. So, well, that concludes our question-and-answer session for today. I’d like to thank you all for joining us. And we look forward to speaking with many of you at the upcoming conferences. So, thanks again, and have a great day.

That concludes today’s call. You may now disconnect.