good day ladies and gentlemen and welcome to the keysight technologies fiscal second quarter 2022 earnings conference call my name is tia and i will be your lead operator today after the presentation we will conduct a question and answer session if you would like to ask a question please press star followed by the number one on your telephone keypad to withdraw your question please press the pound sign if at any time during the conference you need to reach an operator, please press the star followed by zero. Please note that this call is being recorded today, Tuesday, May 17, 2022 at 1.30 p.m. Pacific time. I would now like to hand the conference over to your host, Jason Carey, Vice President, Treasurer and Investor Relations. Please go ahead, Mr. Carey.

Thank you and welcome everyone to Keysight's second quarter earnings conference call for fiscal year 2022. Joining me are Satish Dhanushakaran, President and CEO, and Neil Doherty, our CFO. In the Q&A session, we will be joined by 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. There you will find an investor presentation along with Keysight's segment results. Following this conference call, we will post a copy of the prepared remarks to the website. Today's comments by Satish 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 hosted by J.P. Morgan, Baird, and UBS. And now I will turn the call over to Satish.

Thank you Jason and thank you all for joining us. Welcome to the second quarter 2022 earnings call and my first as the CEO of Keysight. I'm humbled and honored to be Keysight's CEO and excited about the future. I would like to thank Ron Nersessian for his visionary leadership of the company which has provided us a solid foundation to build on. Over the last decade I've had the honor of working closely with Ron and benefited greatly from his experience in many different roles I've held since joining the company 16 years ago. This is a great time to be at Keysight as we remain focused on our core purpose of accelerating innovation to connect and secure the world. Keysight delivered exceptional results in quarter two driven by strong execution and broad-based demand across the business. The team focused on innovating and solving customers' design and test challenges while successfully navigating the ongoing supply chain and geopolitical challenges. I will focus my comments today on three key headlines. First, we delivered record quarter two orders capitalizing on the robust end market demand for Keysight's high-value differentiated solutions. Our focus on delivering first-to-market solutions is enabling us to uncover new emerging applications, adding to our momentum. Second, we achieved record revenue, strong operating margin performance resulting in record earnings per share, which grew 27%, demonstrating the durability and resilience of our business. Third, we are raising our outlook for the year based on our strong performance in the first half and continued momentum. We now expect to achieve revenue growth approaching 8% and earnings per share growth in the range of 14 to 15% for the fiscal year. Let's now take a deeper look at our results for the quarter. Second quarter orders grew 9% to $1.46 billion and outpaced revenue which grew 11% to a new record of $1.35 billion and was $41 million above the high end of our guidance. We achieved gross margins of 65%, operating margin of 29%, and record EPS of $1.83, exceeding the high end of our guidance by $0.14. Also with the ongoing equity market volatility, we again capitalized on the opportunity to accelerate share repurchases. These results are a reflection of our strong portfolio and our global team's application of the Keysight leadership model which enables us to deliver consistent value to all stakeholders. We delivered these results despite many headwinds including geopolitical challenges, inflationary pressures, and continued supply chain disruptions. We continue to advance our software centric solution strategy as the rapid pace of technology accelerates, our customers across end markets are seeking deeper engagements earlier in the design cycle and are adopting our software solutions. The capabilities of our PathWave software platform facilitate continuous stream of releases that matches the innovation cadence of our customers. This enables us to secure enterprise agreements with market leaders for high-value R&D solutions. Orders for software and value-added services like Keysight Care again grew double digits as we continued to grow recurring revenue this quarter. Turning to our business segments, Communications Solutions Group delivered record second quarter orders and an all-time record revenue. Within CSG, Commercial Communications achieved all-time record orders and revenue with double-digit order growth for the third consecutive quarter. Ongoing innovation and investments in our end markets spanning both the wireless and wireline segments remain strong, driven by adoption of 5G, 400GB, 800GB and terabit and optical technologies. In wireless, the increase in the number of 5G device types continues to drive test and certification requirements. With our leading solutions portfolio, we expect to benefit from the continued investment in the evolution of 5G standards, including standalone 5G, Release 16, and beyond. In quarter two, Keysight announced collaborations with leading companies such as NTT Docomo, Telefonica, and Analog Devices to enable a wide range of 5G applications, including ORAN, which continues to gain momentum. In Wireline, we're enabling the digital transformation driven by cloud computing and telecom stack virtualization through our end-to-end solutions. We recently launched the industry's first 800-gig solution to enable data center design workflows for ultra-high data rates and energy efficiency. Aerospace, defense, and government achieved record Q2 revenue driven by double-digit growth in Americas and strength in signal monitoring, cyber, and space and satellite solutions as well as 5G and 6G applications. Complex scenario emulations continue to drive the need for modeling and digital twin solutions with increasing software content. Our leading network analyzer platform and phased array test solutions enable increasingly complex satellite communication design and test requirements. Increasing defense budgets in the U.S. and Europe are expected to provide support for higher spend going forward. CSG is well positioned to capitalize on growth by enabling innovation in our end markets through our broad and synergistic portfolio, including wireline, wireless, cyber security, satellite, and space solutions. The Electronics Industrial Solutions Group delivered double-digit order and revenue growth for the seventh consecutive quarter driven by automotive and semiconductor solutions. In automotive, all-time record revenue was driven by strong demand for our expanding portfolio of EV and AV applications. Keysight is capitalizing on strategic investments in the automotive and energy space, providing industry-first solutions that support new capabilities and use cases, such as our recently launched protocol test solution for in-vehicle networking. During the quarter, we secured EV wins with major OEMs across all regions. In addition, we're excited by the recognition of our new radar scene emulator solution, including the 2022 TechDOT80 Europe Award. We saw strong demand for our semiconductor solutions, which delivered double-digit order and revenue growth. Investments in advanced semiconductor technologies along with capacity expansion for existing nodes remain robust. Over the next three to five years, we see solid customer R&D roadmaps for ICs for a broader set of applications. As an example, in Q2, we sold our first OnWafer silicon photonics parametric test solution to a major semiconductor fab to develop and manufacture next-generation data center transceivers. We believe this trend represents long-term opportunities for Keysight's R&D solutions portfolio. Our general electronics business achieved all-time record revenue as investments continued in manufacturing and device development for consumer and industrial IoT, digital health, and advanced research. We're seeing active investments globally in fundamental research in terahertz and quantum technologies. For example, we recently announced a collaboration with National Research Foundation of Singapore's quantum engineering program to accelerate research and development and education in quantum technologies. The strength of our general electronics business reflects the broad nature of applications for our solutions. Before I wrap, I'd like to acknowledge and thank our more than 14,000 employees worldwide for their commitment to our customers around the globe and for their passion in delivering market-leading solutions. I'm proud to share that Keysight was recently named as one of Fortune 100's best companies to work for in 2022. This is a recognition of our inclusive and diverse culture, exhibiting value for collaboration, high performance, and innovation. Our culture also places high value on corporate social responsibility. We recently released our 2021 CSR report highlighting our progress in environmental, social, and governance efforts worldwide and announcing new goals to track through 22 and into 23. I believe Keysight has a bright future ahead. I look forward to working with the team to execute our strategy and continue to deliver greater value for our customers, shareholders, and employees. With that, I'll turn the call over to Neil to discuss our financial performance and outlook.

Thank you, Satish, and hello, everyone. Our performance this quarter once again demonstrated the resilience of our business. We delivered on our commitments and exceeded expectations as we powered through multiple challenges and new headwinds in the quarter. In the second quarter of 2022, we delivered revenue of $1,351,000,000, which was above the height of our guidance range and grew 11% or 12% on a core basis. We generated $1,458,000,000 in orders, up 9% or 11% on a core basis. During the quarter, we suspended our operations in Russia and canceled our entire backlog of Russian orders. Core growth adjusted for Russia was 13%. Demand again outpaced supply, and we ended the quarter with over $2.4 billion in backlog. Turning to our operation results for Q2, we reported gross margin of 65% and operating expenses of $489 million, dollars, resulting in an operating margin of 29%. The strength of our results highlights the resiliency of our business and our team's ability to execute despite significant supply, cost, and currency headwinds within the quarter. We achieved net income of $334 million and delivered $1.83 in earnings per share, which was above the high end of our guidance. Our weighted average share count for the quarter was 183 million shares moving to the performance of our segments our communication solutions group generated record revenue of 963 million dollars up 10% or 11% on a core basis CSG delivered gross margin of 66% and operating margin of 28% within CSG Commercial Communications generated revenue of $672 million, up 11%, with double-digit revenue growth in the Americas, driven by strong demand for 5G device and component development, as well as network tests, ORAN, and terabit R&D. Aerospace defense and government revenue of $291 million grew 7%. Our backlog for this end market remained strong, and we reported solid growth in the Americas and Europe. The Electronic Industrial Solutions Group generated second quarter revenue of $388 million, up 13% or 15% on a core basis, driven by strong revenue growth in automotive and semiconductor. EISG reported a gross margin of 62% and an operating margin of 30%. Moving to the balance sheet and cash flow, we ended the second quarter with $1.9 billion in cash-in-cash equivalents, generating cash flow from operations of $298 million and free cash flow of $245 million, or 18% of revenue. Shower purchases this quarter totaled 1.9 million shares and an average price per share of $153.78 for a total consideration of $289 million. Year-to-date, we have purchased approximately 3 million shares for a total consideration of $495 million. Now turning to our outlook and guidance. The demand environment remains strong for Keysight Solutions. As in recent quarters, our revenues continue to be constrained by tight supply conditions. However, we have demonstrated our ability to effectively navigate through this environment and we remain confident in our ability to execute and deliver on our commitments we expect third quarter 2022 revenue to be in the range of 1 billion 330 million dollars to 1 billion 350 million dollars and q3 earnings per share to be in the range of 1.74 cents to 1.80 cents based on a weighted diluted share account of approximately 181 million shares. We now expect full-year revenue growth to approach 8%, which given the recent strengthening of the U.S. dollar, now includes a two-point year-over-year headwind from currency. We're also raising our earnings growth expectation to 14% to 15%. Despite quarter-to-quarter dynamics being difficult to predict, we have confidence in our raised expectations for the year in closing we have a strong track record of execution our backlog is in an all-time high and we are well positioned to capitalize on the growth opportunities across our diverse set and end markets with that i will now turn it back to jason for the q a thank you

will you please give the instructions for the q a absolutely ladies and gentlemen if you would

like to ask a question, please press star followed by the number one on your telephone keypad. We ask that you please limit yourself to one question and one follow-up. To withdraw your question, please press the pound sign. Please hold while we compile the QA roster. The first question is from the line of David Rodley Lane with Bank of America. Please go

ahead, sir. Good afternoon. I'm wondering if you have seen an uptick in any supplier decommitments over the last few months. Obviously, China shutdowns have impacted a lot of electronic manufacturing, component suppliers, and so forth. I'm wondering if you have seen any of that show up in your operations.

Yeah. Hi, David. Thanks for the question. As you saw from our results this quarter, we had a very strong quarter from a revenue perspective. You know, we're very pleased with the strong execution progress of the team and the five-point program we've been running around, strengthening our relationships with suppliers, finding alternate sourcing, being nimble in this environment has really paid rich dividends along with some of the other initiatives we have. And while the supply environment remains in our view pretty challenging, but we have found a way to find more upside. I would say that the demand from our customers is robust and our customers want the products as quickly as we can make them and we're shipping them as quickly as we can. So the supply situation does remain challenging to the point you made, but we've been able to find a way around it.

Thank you. And as a quick follow-up to that, have your own lead times, the time expected to ship the product, have those actually started to decline or are they stabilizing at elevated

Yeah. Obviously, we're still in a situation where – this is Neil, by the way – where demand is outpacing supply, and so we have not at this point started to pull lead times back I would call our lead times generally stable I'd say they're slightly creeping north at this point with demand continuing to outplay supply but but large by and large on average we see a lot of stability and lead times currently with a goal to work them down over time as the supply chain situation ultimately you know starts to loosen thank you very much thank you the next question is from

the line of Matt Nickman with Dorsha Bank you may proceed hey guys thank you for

uh taking questions um so first on the fiscal 3q revenue guide um maybe neil if you could talk about what's driving the expected sequential decline in uh revenues and then maybe how you're thinking about core constant currency trends relative to any fx headwinds that are embedded uh in next quarter's guide and then just secondly on europe and asia pack i'm just wondering if you've seen any change in customer demand or buying patterns given the russia ukraine conflict uh that may be impacting europe or even in asia back uh given the uh some of the re-emergence of lockdowns in china in recent months thanks i'm sorry i'll take the first part of that the

question of about the guide you know as we've already stated you know our revenue situation is still highly constrained by the supply environment and we had significant out outperformance in q2 we as we navigated the tight supply environment uh and did and did better than we expected. And so, but what you can read into that is that a significant portion of our Q2 outperformance was shipment of, you know, orders that we had originally or going into the quarter had scheduled to be in Q3. And so that's great news. And we're pleased with that. But on a quarter over quarter basis, that can be a significant impact. I would say that the The guidance reflects our best estimate as we see it at this point in time. This quarter to quarter perturbations can be very difficult to call in this environment. We certainly have the backlog to do better if depending on how incoming supply works. And I think the point that we want everybody to focus on is that we are taking up the full year guidance significantly from six to 7% growth to approaching eight. And that 8% growth, as you noted, it has new and significant FX headwinds. We saw a very significant strengthening of the dollar within our fiscal second quarter. We now have a two-point year-over-year headwind in the second half that we're baking into account. And on the full-year basis, we have a point and a half relative of FX just from November when we put out the 6% to 7% guide to where we are today, saying approaching eight percent there's a new one and a half percent fx headwind baked into that and so um you know we we feel very good about the the uh the situation as it as it currently sits and are pleased to be raising estimates for the year and and matt hi this is mark i'll i'll address

your second question on the kind of customer dynamics in europe and asia so in asia pack we had double digit order growth again as well as in china where as you noted we had the COVID protocol restrictions and lockdowns. And it's really a continuation of our ability to dynamically pivot and work with customers while, you know, both in a face-to-face as well as a virtual remote, you know, nature. So it's a testament to the broad strength and demand of our business across multiple industries and segments. In Asia in particular, we saw strong continued demand and growth in automotive and semi, 400 gig, 800 gig terabit, all of those things. So very stable there. In Europe, we did see an impact, obviously, from the Russia cancellation. So we had double-digit order growth in all regions except for Europe. But again, the demand continues. We saw a robust demand for our semiconductor solutions, again, automotive, our commercial comms across the European region. So the broad interactions and dynamics with our customers so far remain pretty much unchanged.

That's great. Thank you both. You bet.

Thank you. The next question is from the line of Mark Delaney with Goldman Sachs. You may proceed.

Yes, good afternoon. Thank you very much for taking the questions. It's a Tish, nice to be speaking to you in your new role. I was hoping to start first on the auto business. You mentioned some strong growth there on your prepared remarks today. Maybe talk about how big that is now relative to the company overall, and given some of the drivers like autonomy and electric vehicles, how big do you think the auto business for Keysight could become in the coming years?

Yeah, thank you.

I think the auto business is very exciting for us for more than one reason, I would say.

first you know very strong quarter obviously building on many quarters where we've seen very strong uptick in the business primarily driven by this decade-plus long trends of electrification autonomous driving and we're actually feeding a number of these engineering labs with our tools and capabilities and solutions designed for this end market we're we're engaging with the OEMs globally. We've had some successes as I reported in this quarter. And we're also working with the entire ecosystem with the Tier 1, Tier 2 suppliers, the semiconductor houses that feed the auto, and the test labs that are just growing across the world. So, it's a growing ecosystem. We're expanding our portfolio into EV, particularly on battery tests, charging tests, in-vehicle network testing as an example. And in EV, we're very excited by the new solution that we have offered for autonomous drive emulation, which is enabling in-loop, real-time, synchronized sensor evaluations. And this is a build on our 5G platform and capability. So we're very pleased with the progress we're making, and we know that we have a long runway ahead with automotive. That's very helpful. Thanks. And my follow-up

question was on the EPS guidance. If I look at the midpoint of the 3Q guidance and also the midpoint of the full year EPS guidance, it would imply that fourth quarter EPS at the midpoint would be something like $1.89, and that would imply that the growth rate would be slowing from mid-teens year on year through the first three quarters on average to more like mid-single digits in the fourth quarter. So I was hoping you could better contextualize the implied fourth quarter EPS guidance for us? And is there anything in terms of supply chain cost or mix that's perhaps impacting the rate of EPS growth in the fourth quarter? Thanks. Yeah, so I think you need

to take a close look at our Q4 performance in FY21, which was a bit of an outlier at 31% operating margin, you know, a full almost four points higher than the prior, the sequential quarters leading up to that. And so I think as you – and the other – one of the big drivers within the fourth quarter of last year, if you look at it, we had a sequential decrease in R&D investment that was quite substantial going from Q3 to Q4, and that is atypical. And so we would expect increasing investments on a sequential basis as we move from Q2 to Q3, and then again as we move from Q3 to Q4 as we invest in the future growth of our business. And so, again, Again, we remain optimistic about our business and some of these quarter to quarter perturbations can be difficult to call, but we are raising our both revenue and EPS guidance for the year quite substantially and are focused on executing. Thank you.

Thank you. The next question is from the line of Suneek Chatterjee with JP Morgan. You may proceed.

Thanks for taking my questions. Thank you, Samik. Of course, aerospace and defense business has been historically, as we have talked about,

a GDP plus business for us. It's very broad with 50% of the business tied to the U.S. or North America. And we're excited by the number of new areas that we're applying our technology to, space and satellite being one of them. and 5G and 6G adoption into the sector is a new opportunity for us. So independent of the budgets, we're pleased with the traction we're making in applying our technology to offer new solutions. The budget is obviously a huge stability. I think the fact that you have bipartisan support for the defense budget, growth in RDT and E-line item for this year, and then subsequent growth also projected for 2023. we view as a favorable sign. I think these geopolitical tensions tend to provide more stability, not only in the U.S., but we're also expecting a similar uptake in Europe and therefore technology spend. But as we know, this business is an average over the long term, and we have been doing better than GDP, and our intent is to continue to do that and offer new solutions. With regard to the court activity, I'll let Mark make a few comments.

Yeah, Samik, this is Mark. I think just to add to Satish, you know, the budget in the U.S. was approved. It was increased. And as we've been watching, you know, our customers, both the direct government and the prime contractors, we expect some of that funding to start flowing to new program starts here in our second half. So we look forward to that. And as you probably know, as many of the programs nowadays are multi-year, this will flow into the fiscal year 23 and beyond. And you've been following what's going on in Western Europe as well with increased, you know, spend from the NATO nations. We'll see how that flows through. We expect that to be favorable as well. And then I think the last thing I'll just mention is there are other aspects of this industry segment that are representing new growth opportunities for us around space. Commercial space in particular is a very hot area for us. We continue to focus on. And then, you know, the continuing modernization that we've been talking about for many quarters or years is a long-term trend that we're very excited about. We see a strong funnel of opportunities going into the future.

And for my follow-up, I guess this is moving in need, but it implies about all.

So, you know, in prior quarters, we've talked about an expectation or thinking that we would see some material improvement in the supply chain situation in the second half of this year. To this point, we have not seen that. And in fact, I think if you look broader across the tech industry, there's an argument that things got incrementally worse in Q2, or more challenging, driven by the Russia-Ukraine conflict, as well as the COVID shutdowns in China, even though those COVID shutdowns don't impact us directly. I think for us, we look at the items that we can control our own capacity, both for finished goods, as well as for the subcomponents that come out of our fab and technology centers that feed our instrumentation. We look at our relationships with our suppliers, some of the engineering efforts that we have to quantify or to qualify new parts or secondary sources to open up new sources of supply. Those things are paying dividends for us and have contributed to the revenue performance that we've been able to able to deliver and so but as we look forward and you asked specifically about the guide for the second half we're still very much supply chain constrained and and so what that really bakes in is kind of our direct line of sight to you know delivery of the piece parts that we need to get products out the door and into the hands of our customers you know it's a situation that's being very actively managed but I think we're doing a good job of getting product into the hands of our customers on a timeline that is that is acceptable to them yes

something this is Satish just to add on to what Neil mentioned we have a very solid backlog position over 2.4 billion dollars you know the demand continues to outpace supply we know the challenges out there but we feel very confident and and we're very prudent in our guide to ensure that we execute flawlessly and And we are continuing to be nimble and agile, you know, as Neil mentioned and I mentioned earlier, to execute to our commitments. We take it very seriously.

Thank you.

The next question is from the metal Marshall with Morgan Stanley.

You may proceed. A couple of questions for me. One, you know, OPEX, despite the revenue, the OPEX kind of came in about as expected. And so I just wanted to see how you guys are managing either T&E coming back or just inflationary pressures on OPEX and where you're kind of finding some of those efficiencies. And then as a follow-up, you guys mentioned the new win in Silicon Photonics test. Obviously, it seems like a good long-term opportunity. Just time to ramp and whether you've already seen interest from other customers as you've kind of made progress in that.

Yeah, I'll take the first part of that, and then we'll let Satish or Mark address the silicon frontonics part of the question. So yeah, with regard to the OPEC spending and the return of T&E and facilities costs, we didn't – honest answer is we did not see a lot of that in Q2, right? The Omicron spike, if you will, was kind of right in the middle of our second quarter, and we did not see any meaningful kind of return of travel, entertainment, and return to office. We have recently, more at the beginning of Q3, started to bring our employees back to our physical sites. We are starting to see travel and entertainment not return to normal, but starting to re-ramp here as more of a third-quarter event. As regards to inflation, we are seeing cost of inflation in a number of different places across the P&L, and I think our challenges with managing that is to capitalize on the differentiation that exists in our portfolio and look to monetize that where we can and continue to bring differentiated high software content solutions to the marketplace so that we can continue to manage that. I think if you look at the margin performance of the business, we're doing a good job to date managing those inflationary increases across the P&L. Yeah, Mehta, I think if you look

at the entire customer base of Keysight, the amount of inputs that we're getting for strong collaborations is at a record high. You know, customers, deeper engagement with us, and they very often are engaging us much earlier in their design cycle. So we are very well positioned given the strength of our relationships to be able to act on some of their inputs where it matches our strategy and continue to progress it. If I look at the semiconductor activity, all the way from new silicon wafer starts to the cloud, there is a tremendous amount of designs that are occurring both from traditional players moving up the stack and from system players that want to verticalize and own the IP. We are well positioned to be working with all these customers across the wireless, wireline, and even the fab to progress some of their strategies and enable them to be successful. and we're very pleased. I mean, this Silicon Photonics solution is very unique. It's an industry first, and we're very pleased with the design we're getting because with each of these wins, it's a deeper collaboration to understand where the future is going and define it. Silicon Photonics is one of the technologies that is seen as a possible solution to the high throughput demands of a data center and cloud environment. So it's another area where Keysight's opening up a new franchise which will continue to position us for future growth perfect congrats

thanks thank you thank you the next question is from the line of chris schneider with ubs

you may proceed uh thank you i wanted to ask about the backlog i think the prepared remarks disclosed it to be 2.4 billion which is you know roughly 45 percent of the current year revenue new guide, and obviously well above where it's been historically. So, you know, based on the guidance and the commentary around supply chain, it certainly does not sound like this backlog will be released in any capacity this year. So I guess my question is, how should we think about the cadence of this backlog release? You know, any color around like the duration or impact, like will we see it come through or will it just be kind of tapered in over many, many quarters? Any color there is helpful.

Yeah, well, first, you're absolutely right. We do not expect that we're going to reduce backlog at all this year. In fact, we would estimate in the current supply environment, which we expect to be challenging through the remainder of our fiscal year, that we're going to continue to add to backlog. I think how the backlog eventually winds its way from its current elevated levels to a more normalized level is really a function of how the broader supply chain situation resolves itself. Right. And, you know, it's only educated guesses at this point, because the honest answer is we don't know what that's going to look like. But I'm not expecting that, you know, there's going to be a step function improvement across the supply chain that allows us to flush backlog over a one or two quarter period. I think it's going to be much more a function of us slowly bringing our quoted lead times on products down and slowly working the backlog down to more normalized levels.

And we also view this as a favorable long-term trend for our business to enter a given quarter and having higher confidence with the backlog. And as we think about the growing solutions that we're engaging with customers in, these are deeper, longer-term relationships, and they tend to give us very good visibility into our business. And we're pretty bullish by the growth prospects across the wireless, the wireline ecosystem, our industrial business. We have multiple vectors of growth around these big megatrends that is driving some of this backlog as well.

Appreciate that. So then for my next one, maybe I'll turn back and follow up on earlier commentary around the auto business. I understand from a high level the company is levered into really all the great secular trends in auto, whether it's battery R&D, charging infrastructure, and autonomous. But I guess my question is, what's the biggest driver of this business? And is there anything we can track or monitor to just benchmark where growth could be here, whether that's industry battery R&D spend, EV model proliferation, You know just any help on how to think about like just kind of conceptualize the growth potential

Yeah, I think at the simplistic level, you know, we're we're tethered to the R&D spend that's occurring And if you look at it, the entire ecosystem is spending to continually innovate on range Autonomous capabilities and it's a long-term driver And if you look at the organic R&D investments being made by automakers, it's only poised to increase with time So I think that would be the closest external dynamic I would point to. I would also say if you look back even a few years ago, the number of in-house labs to bring in and own the generation of R&D from automakers was fairly sketchy, but we're starting to see more investment there across the world as more and more cars have more of these EV features driven by the bigger ESG goals and environment concerns around the world.

Hey, Chris, this is Mark. I'll just add one thing to what Satish just said, and it makes it harder to track for you and for everyone, but there's so many different elements of what's happening with this transformation within the whole mobility space, whether it's the electrification of the drivetrain the connectivity to the external network or or communications within the vehicle which we just announced some solutions to to the charging infrastructure which is being funded heavily by multiple you know nations as part of this transformation to the to the millimeter wave and high frequency technology around the sensors it's just remarkable the computational capabilities and that's why this is such an important space to us is it intersects with all these areas of strength, and we continue to innovate with the industry leaders around all of the global ecosystems, as we said earlier. So it's a long, long runway with all kinds of different elements of innovation. I appreciate all that, caller. Really helpful.

Thank you, guys. Thank you. Thank you. The next question is from the line of Medit Huzene with SIG. You may proceed. Thank you. I have two follow-ups, and I apologize.

Jersey, some of the questions have already been raised since I joined the call late. One on the pricing dynamic, and I'm not asking for any quantitative color, but perhaps maybe you can explain to me on a qualitative basis. You are relatively more vertically integrated, and you have relatively more relationship with strategic mission-critical customers. Are these two, perhaps assuming lower input costs and higher relevancy to these mission-critical applications, have they enabled you to extract more economics from your customers? And I have a follow-up.

Yeah, Mandy, thank you for that question. Absolutely. I mean, you look at our focus on offering total solutions to customers. This has been our strategy since then, and that is really separating ourselves. Our strategy is very clear. We look at some of the most tougher challenges in the industry that we serve, and we offer solutions. And by definition, it has higher software content. And over time, we've layered in services, which allows us to work with customers through their lifecycle needs. All of that is favorable to our ability to continue to grow margins in the business. and help offset some of the inflationary pricing pressures that we face.

So perhaps that's already reflected in your free cash flow margin that has been double-digit. And I'm asking or raising this topic since the stock has been under pressure and you've also been very active in buyback. Is there anything else with capital return that you're thinking or contemplating that would better reflect a company's ability to extract more economics and have a rather stable free cash flow? Would you favor paying more cash dividend rather than a buyback? And as a quick follow-up, have FX been dialed into your guide? Thank you.

Thank you, Mandy. I think as you heard, multiple end market exposures we have, and as you stated, towards many critical, mission critical applications, we're really bullish on the long-term opportunity at Keysight to create value. And so congruent with that, we continue to be committed to this disciplined, balanced approach for capital allocation. You know, first priority is obviously to invest for organic growth and differentiation. And we're seeing a lot of opportunities as we engage with our customers. Second, we are disciplined with M&A, but we're continuing to look for opportunities. We have a strong funnel, but we remain patient to make sure that it fits our hurdle, as we have done in the past, and of course, it has to make sense for our strategy. And lastly, where we see opportunities, like the current situation, we believe that we We will be more aggressive and take advantage of the return of capital through share buybacks as we have done this quarter and we'll continue to remain on it. We have $600 million of previously authorized share buyback that we can still deploy and And we'll continue to deploy it as we see opportunities at these levels.

And then the second part of your question was, have we accounted for FX in the guide? To the extent that FX has moved to date, yeah, that's all baked into our guide. I had mentioned that it's about a two-percentage point headwind on a year-over-year basis in the second half. And relative to when we put out our original full-year guide of 6% to 7% growth, there's an additional one and a half points of unfavorable currency. So we're raising from six to seven, all the way to eight percent, but there's an additional unfavorable one and a half points of currency baked into that, again, based on rates asset

Thank you.

Thank you.

The next question is from the line of Jim Sambal with Citigroup. You may proceed.

Thank you. I just have one question, and that is, could you let us know a little bit about the software and services, specifically with some of these growing and newer end markets like automotive and power, is the attach rate and opportunity similar with the past, less or more than what the past is for these newer end markets? Again, services and software. Thank you.

Thank you, Jim.

As we stated, as we are starting to go beyond the core products that engineering teams use, which is lab instruments, into more solutions, they have a higher weighted average of software and then greater ability to monetize through services. So we're still very early in deploying those things. The latest ADE offering that we have, we're building it on top of our 5G platform, which is rich with software, but also as we expand into the application layer, as we bring more real-world challenges in the auto industry into the lab, we'll continue to see the opportunity be bigger over time, and we're investing to realize that.

Thank you.

Thank you. The next question is from the line of Rob Mason with BEAR.

you may proceed. Yes, good evening. And Satish, I'll extend my congratulations to your new role as well. My question was around the general electronics business. You did mention all-time record revenue there, and I was curious how the order rate performed in that piece of the business as well. I'm not sure I caught that. And then just maybe related as well, historically, kind of thought of the general electronics piece of the business is more PMI sensitive. But as you were describing that business, there seems like there's a lot of newer applications there. And I'm just curious, as that's broadened out, how you're viewing that historical perspective, at least from perhaps a macroeconomic view to that part of the business.

Yeah, it's a great question. I'll have Mark answer the first part of it as to how we're doing with orders. But I'll say you're right. I mean, as we have, when we started the company and when we thought about General Electronics business, had a bigger correlation to manufacturing, customer base. And over time, we've been adding more R&D applications and focus to the team as it has been able to bring in some newer end market applications such as digital health and IOT, and it continues to move up the value chain with our customers. So over time, we would expect it to continue to be more in that direction. Another area of focus for that group is also around advanced research. As I noted, we had some announcements with the University in Singapore on quantum. We also had a major win in terahertz research associated with that business. So we continue to, you know, ensure that we're seeking more value-added, sustainable, durable opportunities in that business. But that business historically has had a little bit more manufacturing exposure than the rest. But I'll just hand over to Mark to speak about. Thanks, Satish. Yeah, Rob, we saw

some moderating order growth during the quarter, mainly because of some softness in education. with some of the delays to government spending and some of the other priorities that have come upon the funding. We did see some softness there, but we saw a lot of new customers and growth from R&D solutions for digital healthcare. We've added nearly 500 new customers again in the quarter, which helps to diversify our base and represents these broad base of industries across multiple segments and so forth. We saw a strong demand continue across Asia with several new wins around the R&D solutions. And as Satish just mentioned, there have been some real bright spots around advanced research with our university. So GDP markets are affected more or less with some of the activities in the geopolitical situation, which I think translates to some of the moderating growth we saw. But, you know, all in all, we see a continued demand for some

of our advanced R&D solutions. Sure. That's great color. Just as a quick follow-up, maybe for Neil, is there anything, Neil, that you would call out that we should be monitoring around our margin assumptions as you convert some of the backlog? Just, again, taking your commentary around rising inflation, just how we should look at the price-cost dynamic within your backlog.

I mean, the biggest issue there is the backlog does create a little bit of a delay between the time at which we might impact a price increase and the time at which that price increase would be recognized in revenue, whereas it seems like on the input cost side, the cost increases are much more real-time, particularly if you want to secure delivery of product. And so that mismatch is something we're very actively managing, but it can cause some quarter-to-quarter perturbations if the timing gets off. But I think, generally speaking, we're doing a good job of managing in this inflationary environment and protecting margins. Thank you. Thank you. The next question

is from the lineup, Adam Thalmer with Thomas Davis. You may proceed.

Great quarter, guys. Quick one on M&A. On M&A, have you seen any softening in seller expectations?

Not a lot yet. Obviously, we've seen the market pullbacks, but seller expectations still seem to be kind of linked to prior valuations. We're watching that closely and very actively managing our funnel, staying disciplined with regard to our return hurdles and, you know, hoping that we get the opportunity to act on some of these targets. But right now, there does seem to be a little bit of a mismatch there.

Got it. And then, sorry if you fleshed this out, but what was the Russia impact, Neil?

uh we it was about two points so core order growth within the quarter was 11 adjusted for russia it was 13 uh you know we canceled you know low 20 millions kind of kind of a backlog for russia it is historically been a one percent business for us got it thanks guys there are

no additional questions at this time i will now pass back to the management team for any closing

the remarks. Well, thank you, Tia, and thank you all for joining us today. We look forward to speaking with many of you at the upcoming conferences and wish you a great day. That

concludes today's conference call. Thank you. You may now disconnect your lines.