Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal First Quarter 2024 Earnings Conference Call. My name is Joel, and I'll be your lead operator today. This call is being recorded today, Tuesday, February 20, 2024 at 1:30 PM Pacific Time. I would now like to hand the call over to Jason Kary, Vice President, Treasurer and Investor Relations. Please go ahead, Mr. Kary.

Thank you, and welcome, everyone, to Keysight's first quarter earnings conference call for fiscal year 2024. Joining me are Keysight's President and CEO, Satish Dhanasekaran; and our CFO, Neil Dougherty. In the Q&A session, we'll be joined by Chief Customer Officer, Mark Wallace. The press release and information to supplement today's discussion are on our website at investor.keysight.com under the Financial Information and Quarterly Reports. Today's comments 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. 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 and encourage you to review our recent SEC filings for a more complete view of these risks and other factors. Lastly, management is scheduled to participate in upcoming investor conferences, hosted by Susquehanna and Morgan Stanley. And now, I will turn the call over to Satish.

Good afternoon, everyone, and thank you for joining us today. My comments will focus on three key headlines: First, Keysight delivered revenue of $1.3 billion and earnings per share of $1.63, both of which exceeded the high-end of our guidance. Given the current market conditions, these results reflect the Keysight team's strong execution and the resilience of our financial model. Second, orders were $1.2 billion as the demand environment remains constrained. As certain markets continue to normalize from post-pandemic spending levels, our aerospace, defense and government, and network and data center businesses grew, highlighting the benefit of our diverse end-market exposure. Customer engagement and collaborations on next-generation themes remained strong. The adoption of new use cases such as AI is driving new activity and investment across the ecosystem. However, we're not factoring in a strong recovery this fiscal year. Our base-case scenario is for a modest first-half to second-half improvement in orders and revenue. Third, Keysight continues to be well-positioned for outperformance into a market recovery. We are investing to enhance our market leadership and expand our broad portfolio of leading solutions. We are also pleased to have completed the acquisition of ESI ahead of schedule and extend a warm welcome to the team. Along with our existing EDA business, the addition of ESI further expands our software solutions for simulation and emulation, a market with favorable growth attributes as the virtualization of design and prototyping increases. Now, let's begin with a brief overview of Keysight's first quarter performance. Market conditions were largely unchanged from the prior quarter. Across our end markets, investment in R&D remained steady, while manufacturing and overall economic activity in Asia continued to moderate. First quarter orders were $1.2 billion, revenue $1.3 billion, and earnings per share of $1.63 were above our guidance, and we generated strong cash flow. Gross margins across the business were strong, and including ESI, we achieved a record 67%, demonstrating the differentiation of our solutions. Operating margin was 28%, reflecting expense discipline and cost actions that we have taken over the past quarter and last year. Turning to our business segments. Communications Solutions Group revenue declined relative to a strong compare last year, which was driven by robust backlog conversion. Quarter one gross margin was a record 68%, reflecting a greater mix of software and higher-value solutions. Orders were in line with expectations with strength in aerospace, defense and government, and the wireline business, while wireless continues to normalize. Aerospace, defense and government revenue declined while orders grew year-over-year. Spending levels remain elevated, as governments around the world prioritize investments in defense modernization, space and satellite applications. We are scaling our threat emulation offerings to a broader set of customers for electromagnetic spectrum operation applications in the US and Europe, resulting in key wins at large primes. Our space and satellite solutions drove businesses this quarter for new space modules and low Earth orbit applications. Leveraging our protocol and digital twin capabilities, we've partnered with Lockheed Martin and a broad set of technology leaders to successfully demonstrate a secure 5G and data link network that integrates land, air and space operations. In commercial communications, customer spending remains cautious. While we're not seeing a market recovery yet, industry inventories are slowly returning to normalized levels. For example, smartphone sales in the fourth quarter of 2023 grew significantly for the first time since mid-2021. In our wireless business, customer engagements remain high, with ongoing R&D activity in advanced technologies. This results in software and service upgrades that contributed to higher gross margins in the quarter. 5G standards continue to progress and are driving a wide range of new use cases and features for ongoing network deployment. New band combinations are expected to be added to the 3GPP standard this year, driving certification needs. This quarter, we hosted the Global Certification Forum that brought together industry leaders across a broad array of sectors to collaborate on certification requirements for network and device interoperability and performance. Next week at Mobile World Congress, we will be demonstrating over a dozen solutions for 5G, Open RAN, satellite connectivity, AI and early 6G capabilities, many of which will be showcased in partnership with industry-leading customers. Moving to our wireline business, we saw order growth for our data center solutions. Orders for 400 gig and 800 gig solutions, both in R&D and manufacturing, grew double-digits. We also achieved a key milestone in partnership with Marvell by enabling test and verification of their new ultra-high-speed networking chip designed for next-generation AI-driven cloud applications. The adoption of AI is clearly lifting activity across the entire data center ecosystem. As the industry deploys AI infrastructure at scale, we expect the demand for high-speed networking and computing capabilities to grow. Turning to the Electronic Industrial Solutions Group, revenue was down, reflecting ongoing normalization from outsized demand in the prior year. Customer spending remains cautious as market conditions, particularly in manufacturing, and regionally in China were weaker. Underneath the macro headlines, we see pockets of growth where customers are leaning in and investing to address new use cases and emerging technologies across multiple end markets. In semiconductor, the market environment is mixed. Despite the improved industry outlook for overall fab investments, foundry customers continued to push out large projects due to delays in construction and production timelines. At the same time, we saw strong demand for Keysight's proprietary interferometer system, driven by industry progression in EUV technology. Next-generation performance requirements for new AI-driven data center and ADAS use cases are also driving investments. And we saw some improvement this quarter in memory-related demand as well as mature process capacity in China. In automotive, the funnel of EV opportunities continues to be strong. Competition amongst OEMs, upcoming regulatory requirements and support from government subsidies are incentivizing investments in R&D for new battery technology and charging infrastructure. During the quarter, we secured a key win that marks the expansion of our European battery test footprint into France. As we have noted before, the EV funnel is healthy, but the timing and the size of these system-level and longer-dated engagements are expected to vary from quarter to quarter. In general electronics, market conditions were unchanged from last quarter. Ongoing capacity normalization and cautious spending continued to weigh on the consumer electronics and manufacturing portions of the market. We saw steady demand for our solutions in digital health, industrial automation and advanced research. This quarter, we secured key wins in digital health applications for medical imaging and scanning as well as test automation. Consistent with our software-centric solutions strategy, the value that our customers derive from software and service offerings is enabling business resilience in the current market conditions. Software and services orders and revenue continued to outperform the broader business this quarter and were greater than 35% of total Keysight even excluding ESI. ESI further enhances our design engineering software portfolio and expands our addressable market in automotive, avionics, smart manufacturing, and human workflows. We were pleased to complete the acquisition ahead of schedule, and ESI's results were also ahead of expectations for the quarter. In summary, our market leadership and the strength of our solutions portfolio gives us confidence in our ability to capitalize on the multiple waves of technology innovations and long-term secular growth trends of our markets. Our team's relentless customer focus and sustained customer collaborations also position us well for long-term value creation. In addition, the strength of our financial model continues to generate healthy margins and cash flow. With that, I will turn it over to Neil to discuss our financial performance and outlook.

Thank you, Satish, and hello, everyone. First quarter revenue of $1.259 billion was just above the high end of our guidance range and down 9%, or 14% on a core basis. Orders of $1.220 billion declined 6%, or 12% on a core basis. We ended the quarter with $2.3 billion in backlog. Looking at our operational results for Q1, we reported record gross margin of 67%, an increase of 200 basis points year-over-year. Excluding ESI, gross margin was a near-record 66% on lower revenue, supported by a solid mix of software and higher-value solutions. In addition, software was 22% of revenue, while recurring revenue from both software and services grew 10%. Operating expenses of $491 million were flat year-over-year even with the addition of ESI, demonstrating the flexibility of our cost structure and the cost actions that we have taken. Q1 operating margin was 28%, or 27% excluding ESI. These results demonstrate the financial flexibility and resilience of our business. We are outperforming the financial model that we put in place over a decade ago, which calls for only a 300 basis point to 400 basis point year-over-year decline in operating margin when revenue declines 10%. Turning to earnings. We achieved $286 million of net income and delivered earnings of $1.63 per share, of which ESI contributed $0.09. Our weighted average share count for the quarter was 176 million shares. Moving to the performance of our segments. Our Communications Solutions Group generated revenue of $839 million, down 11%, or 12% on a core basis. Commercial communications revenue of $544 million declined 14%, while aerospace, defense and government revenue of $295 million was down 5%. Altogether, CSG delivered a record gross margin of 68%, and operating margin of 27%. The Electronic Industrial Solutions Group generated revenue of $420 million, down 5% or 19% on a core basis. EISG reported gross margin of 65%, and operating margin of 31%. Moving to the balance sheet and cash flow. We ended the first quarter with $1.7 billion in cash and cash equivalents, which reflects the purchase of ESI within the quarter, generating cash flow from operations of $328 million and free cash flow of $281 million. Share repurchases this quarter totaled 625,000 shares at an average price per share of approximately $149 for a total consideration of $93 million. Now, turning to our outlook. Given Q1 core orders of $1.14 billion and the typical sequential decline in ESI orders and revenue from Q1 to Q2, we expect second quarter revenue to be in the range of $1.190 billion to $1.210 billion, and Q2 earnings per share to be in the range of $1.34 to $1.40 based on a weighted diluted share count of approximately 175 million shares. This guidance includes approximately $25 million in ESI revenue and a few cents of earnings dilution from ESI. As we look to the second half of the year and our six-month order funnel, we aren't assuming a strong revenue recovery in Keysight's fiscal second half, which ends in October. Our base-case scenario is that revenue is relatively flat from Q2 to Q3 and sequentially up mid-single-digits Q3 to Q4, in line with typical historical seasonality. That said, we do expect second-half orders to exceed first-half orders, which will be supportive of revenue growth in 2025. In closing, Keysight's flexible cost structure and discipline, track record of execution and diverse end markets, give us confidence in our ability to outperform even in the current market conditions, while at the same time, investing to capitalize on the best growth opportunities as markets recover. With that, I will now turn it back to Jason for the Q&A.

Thanks, Neil. Joel, could you please give the instructions for the Q&A?

Absolutely. The first question is from the line of Samik Chatterjee with JPMorgan. You may proceed.

Hi. Thank you for taking my questions. I would like to start with the first one regarding your expectations for recovery in the latter half of the year. Based on the guidance for the second quarter, it seems that the core business is declining a bit, and there is also a sequential decline in ESI revenue. If the core business is down, what is driving the expectation for a recovery in the third and fourth quarters? I understand you mentioned not factoring in a recovery related to macro conditions, so is there something specific to customers or end markets that supports this expectation? I have a quick follow-up after that. Thank you.

Hi, Samik. I would just say that, as we mentioned in our prepared remarks, our current outlook does not anticipate a significant recovery in the second half. We are primarily observing seasonal changes as we progress through the fiscal year, so we expect flat performance from Q2 to Q3, followed by a typical seasonal increase in Q4, which is usually our strongest quarter of the year. Overall, we do anticipate that orders and revenue in the second half will be slightly higher than in the first half, but we are not factoring in a recovery at this time.

Okay. Sorry, Satish, just to clarify, I was more interested in understanding what the driver is. When you refer to it as seasonal, it's been below seasonal for a while. Is there something more specific related to the end markets? I'd like to ask my follow-up at the same time, if that's alright.

Sure. I would say, at the highest level, the customer engagements that we have are remaining strong. And while there are signs of optimism from customers as we enter the new calendar year, we have not yet seen a progression through our pipeline. And as we said in my prepared remarks, the market conditions remain largely unchanged from a quarter ago. The aerospace, defense strength that we saw last year continues on. And what we have seen incrementally is the wireline business has actually grown for the first time this quarter, and that was a function of some of the AI-related end-market inflections that are occurring. If I take a regional cut at this, I would say, our largest region, Americas, grew for the first time in four quarters, and this is driven by again the strength in aerospace, defense and the wireline business. But Asia continues to remain weak, especially which is impacting the EISG business and some of the wireless business in that region as it continues to normalize from the peak spending levels. Again, to put your question in perspective, CSG entered that normalization phase early and EISG was offset by a few quarters. And so, that's what's currently playing out. So, given this backdrop, we think it's prudent to think of a base-case assumption where orders and revenue would be up modestly first half to second half. But should there be a broad and stronger recovery sooner, and there may be some signs out there around SIA index where things are picking up, some of the inventory digestion that's happening, capacity utilization, fabs, but should that occur, we will be in a good position to capitalize on that and recover quicker.

Yes. Good afternoon. Thanks for taking the questions. Satish, you mentioned I believe double-digit growth in orders to support data center builds for products like high-speed wireline, which you attributed to AI. Can you give us a better sense of how much of either revenue or orders may be directly or indirectly benefiting from AI at this stage, and how you see that progressing?

Yeah, that's a really good question. It's still an emerging opportunity for us, but what is significant this quarter is, we started to see the wireline core parts of our business inflect. And if you recall in the past earnings calls, I've talked about the traffic patterns caused by generative AI really impacting the whole network architecture, compute to networking and switching and silicon, and therefore, we knew that demand was coming up. And so, what we noticed this quarter is our wireline business started to inflect, driven by 400-gig and 800-gig transceiver business in manufacturing as that starts to scale, increased focus on terabit research, we announced a collaboration with Marvell in advanced technologies as well there. So that's the business of today. But as we start to think about the broader landscape here, I would say the memory technologies with HBM are starting to gain interest in our customers, different processor architectures, increased silicon activity enabled by AI. And then, for us, it's very exciting because there is a lot of tools that we can deploy our IP because we have the total stack to help engineers train the AI ML models better. And so, you will see, we announced a collaboration with NVIDIA on this front as well. And there's new interface standards. And you know our business is driven by standardization process. So new interface standards are good for our CXL PCIe Gen-7 and the Ultra Ethernet Consortium are playing into it. Silicon photonics in quantum, while they are sort of enabling technologies, are other areas where we've had investment, where we're now able to address new opportunities. Now a lot of that is not yet baked into our forecast, but we're continuing to action these things through the investments we're making.

Yeah. That's a helpful color. My second question was on margins. The company has a target for its EBIT margin to reach 31% to 32% by fiscal '26. Maybe you can help us better understand what kind of revenue would be needed for the company to reach that kind of margin. And I think you have a 5% to 7% revenue CAGR target. I mean, should we be thinking about a couple of years of at least the high-end, if not, higher revenue relative to that targeted order to reach your margin objective? Thanks.

Thank you. It may be too early to discuss the outer years, but here's our perspective. This is the second consecutive year we're experiencing declining orders. Typically, we expect a stronger rebound in the outer years when this occurs. However, that remains to be seen. We also recognize the earnings leverage we achieve when our business grows beyond our projections. On profitability, I'm optimistic about the strong gross margins we're sustaining even with a declining top line, which is due to our software and services components and the disciplined management of our business. I believe that returning our business to growth is our main priority. Considering the trends in wireless, wireline, next-gen silicon, aerospace, defense, and semiconductors, we are confident that we can return to the growth model we outlined at Investor Day.

Thank you, and I apologize for the background noise. I have a couple of questions. First, you seemed more cautious at the start of the year. Based on the environment you observed 90 days ago, how have your expectations changed? Secondly, regarding ESI and the earlier closure, are there any changes you can implement in that business sooner than initially anticipated? Thank you.

I believe we are quite optimistic about the opportunities to grow our ESI business within Keysight's environment. We have extensively analyzed the system simulation and emulation marketplace, and having all the necessary capabilities is a significant advantage for us. We are looking to leverage an asset that was previously confined to a European market by utilizing our go-to-market channels, which presents a chance to drive growth beyond their past achievements. Overall, I am very positive about the technology and the advanced simulation capabilities they offer. They also possess a unique hybrid AI capability that we plan to fully utilize across the company. Additionally, we are encouraged by the strong start for ESI in the first quarter. Now, I will turn it over to Mark to discuss the pipeline and his thoughts on its progression.

Yeah. Thanks, Satish. Well, Meta, the pipeline that we see today really supports our base scenario that second-half orders and revenue will be modestly higher than the first half, and this is seen through some improvement in our six-month funnel that Neil mentioned in his prepared statements and we've called out in various other earnings calls as well. The improvement comes in the form of some funnel intake up modestly indicating that we have some green shoots and pockets of demand that are showing up. And the other area is in the funnel velocity, or in other words, how long it takes for opportunities to move through the funnel as some customers are beginning to move a bit more quickly. So, 90 days later, those are the big changes. The short-term funnel is about the same at the beginning of Q1, which still remains constrained, but we are seeing some positive pipeline dynamics as we look out six months.

Thank you. I guess it sounds like from much of the demand end-market commentary that things are very similar in a demand sense from where they were three months ago. But I guess my question is, is there any place in the business where you see demand continuing to deteriorate on the leading edge? Because orders were down, it seems like on an organic basis, about mid-teens versus Q4, which is a bit sharper than seasonality, and the book-to-bill did step back below 1 after being above 1 last quarter. So, are there any places in the business where things are getting worse? Thank you.

Yeah. I mean I think areas of relative weakness, Satish talked about Asia and China specifically continues to be challenging. I think manufacturing continues to be challenging. And I think we see our wireless customers that are still working through some other issues. On the positive side, wireline, driven by AI is clearly a strength point. Mark, do you want to add?

I would like to mention that we've identified weakness in our EISG businesses in China. Analyzing the situation, we noticed continued customer engagements; I was there in December. Historically, our revenue exposure to China has been in the high-teens percentage. However, this was slightly lower in Q1 due to ongoing challenges, which have worsened in the semiconductor and manufacturing sectors. That said, we did experience sequential order growth from Q4 to Q1, fueled by demand in 400 gig and 800 gig, research and development for data center upgrades, and some interest in 5G private networks. As a global entity, we're also affected by the ongoing offshoring as multinational companies relocate operations. Reflecting on the past few quarters, we've significantly reduced our trade risk with China, which had negligible impact in Q1, and changes to the RPL have had varying effects. We're keeping a close watch on the situation. While we've encountered some challenges, I've also noted some positive signs emerging in China.

Thank you. Appreciate that. And then, for my follow-up, I wanted to ask around backlog. Neil, I think you said $2.3 billion again, which is more than six months of coverage at this quarterly revenue run rate. But you guys are kind of saying that you don't expect revenue to get better into the back half of the year. So, on this excess backlog, when does the company think it could start coming through in revenue? And is it because these big chip customers are pushing out their CapEx plans, or is it just because of the company has moved more towards a solutions-based model? Any help with that would be great. Thank you.

The number is $2.3 billion. A couple of quarters ago, we mentioned that we believed we had worked through the excess backlog. We achieved that last year when revenue exceeded orders by approximately $275 million while addressing that backlog. Currently, we are managing several factors. Our recurring revenue streams from software and services are performing well, as indicated by an increasing deferred revenue balance. Additionally, we are observing a significant rise in longer-dated orders, which historically ranged around 2% of our incoming order rate. Last year, that figure increased to about 8%, and it remained 8% in Q1. As Mark highlighted, we have a strong pipeline of longer-dated opportunities for the next six months. This shift is becoming apparent, as we are starting to see these longer-dated orders contribute to our revenue. We noticed this beginning in Q1, and by Q4, we expect that revenue from these longer-dated programs will account for about 8% of our total Q4 revenue.

Hey, good afternoon, guys.

Hi, Adam.

I have a question about operating margins. To reach the midpoint of guidance, they are down 600 to 700 basis points year-over-year. Is that what you expected in your model, or is there something specific affecting margins in Q2?

No. I think we're performing in line with the model. If you look at what's happening, there's a significant sequential decline in ESI, which we expected. However, when you adjust for that, we see a mid-teens decline in the core business from a revenue standpoint. We've discussed the downside model that anticipates a 300 to 400 basis points decline in operating margins when revenues decrease by 10%. We're experiencing a decline greater than that, but we're still performing in line with the model. We took substantial actions last year, which allowed us to achieve record operating margins on flat revenue in an inflationary environment. This quarter, as the recovery seems to be delayed, we've implemented additional actions that will benefit us. We now expect total operating expenses for the company will decrease by low single digits year-over-year before considering ESI. All of this reduction will reflect in the SG&A line items, as we aim to balance investment with financial performance. We will continue our investments in R&D, expecting R&D to remain flat. Overall, total operating expenses are projected to decrease by about 3%, driven by our efforts to manage SG&A.

Okay. And then just a quick one on how is auto demand holding up in this environment, EV/AV charging?

In the quarter, we continued to invest in R&D for battery and charging infrastructure, and we expect this to persist. However, spending on manufacturing and the supply chain has decreased, and we have seen a drop in unit volumes for both conventional vehicles and electric vehicles. E-mobility, which includes electric and autonomous vehicles, remains strong as we look towards Q2 and into fiscal year '24. Much of this involves long-term spending on battery testing and charging infrastructure, although some of these projects are uncertain due to delays in government subsidies in Europe. We are closely connected to these developments, and we believe this sector will continue to drive our growth for the foreseeable future.

And also, some of the capabilities that we have developed around electrification are finding new applications in aerospace and defense and other end markets that are also going to be impacted by the similar trends. And so, we're quite pleased by the leverage and synergies we'll see as we move forward.

Thank you. I wanted to ask one on the wireless business. Can you just kind of run through some of the technologies and give us a sense how they might be influencing the business? Just curious, you mentioned the 5GPP standards. What's on the come there? Anything new with millimeter wave, or 6G, or O-RAN? If you could just kind of give us a little state of the union on those? And then I have a follow-up.

Yeah, we'll do. Tim, I think at the highest level, what we've seen so far is that Release 15 and 16 deployments that have occurred largely in the United States and in China and now in India. So, we expected, and we've talked about this that industry capital, would peak some point in '22-'23. So roughly we got that timing right. But if you think about the business model that we established for commercial comms and for our wireless business, it was always about more vector to service the R&D customers. So, while even in this environment, the volumes are down especially the manufacturing production-related volumes with the RAN markets down. So, we're starting to see that effect and the business is normalizing. But what we're continuing to see is customers engage with us in buying upgrades for their release library. So going from 15, 16 to 17 as an example, which is much more evolutionary nature. But as we think about the future now, the roadmap is very clear. It's sort of a roadmap for the next five years where the industry is working on Release 18, Release 19 followed by 20, which would include some early study items on 6G as an example. But some of the same ideas that we had for growth, which are built around vertical industry expansions with AI ML, new device form factors such as the Vision Pro that's just launched that's capturing a lot of imagination on what augmented reality can mean in the future. And just sort of the integration I should say of satellite communications and terrestrial networks is opening up new threads of innovation and exposing us to more customers that want our capability. So all-in-all, in balance, I look at the capabilities we have, our market leadership position that we've established in 5G, and I feel confident that post-normalization of this demand that we can return the business to growth even prior to 6G. But that's yet to play out, but that's our best thinking at this point.

Okay, great. And then I just wanted to follow up on the optical side. It sounds like 400 gig, 800 gig are pretty strong. Could you talk a little bit about what you're seeing on R&D for the cycle beyond that? And also, curious about what's going on the software side Ixia and some of the other software businesses related to optical wireline. Thank you.

We are currently experiencing the initial deployment of various technologies involving 100 gig, 400 gig, and eight different topologies. We are actively involved in this process and beginning to see benefits from it. The future roadmap is evident, as it will progress to 200 times four, continuing the trend of scaling and leading to even higher speeds such as 1.6 terabits and beyond. On the wireline side, the former Ixia business has been effectively integrated into our wireline operations and remains stable in the commercial communications market, thanks to the enhanced services and software it offers. This business does not show significant growth during economic upturns, thus proving to be consistent for us. Furthermore, we are now leveraging some of the traffic generation tools from this segment to address emerging AI applications. We are very satisfied with the resources we possess and our ability to tackle our customers' evolving needs, extending beyond our traditional markets.

Thank you for the questions. I have two as well. Neil, I wanted to revisit your earlier comments regarding backlog. In the past couple of quarters, you've mentioned longer-dated backlog or order dynamics, and I believe you quantified it at around $400 million last quarter. Can you provide an update on how much of your current backlog consists of these longer-dated deals? Should we consider them as large, lumpy deals that may result in revenue recognition occurring later this year into more of 2025? How should we think about this?

Yeah. From a backlog perspective, we're in the $400 million to $500 million range of our backlog as these long-dated deals. You are correct that they tend to be larger lumpier deals in aerospace, defense, auto, and even in the semi space. And as I said on the previous question about this, we've actually started to see them now, because we started to see the ramp in a little bit in Q1 of last year, but then really in earnest in Q2 of last year on the order line, and some of those things are starting to flow through to revenue now. Now, we're not at 8% yet from a revenue perspective. We expect to be there by the end of the year. But just as you suggested, it is lumpy, right? So, you could end up in a situation where there is relatively lower either order or revenue activity from these types of transactions and some other quarter you might have double activity just given the nature of the business. I want to add a bit more detail regarding our R&D efforts. During 2021 and 2022, while our revenues were increasing significantly, we were very disciplined and did not exceed our R&D target of 16.5% of revenue, which has continued into 2023. This approach allows us, in 2024, to keep our R&D investments approximately the same. As I mentioned earlier, this will push our R&D spending above the 16.5% target when viewed as a percentage of revenue, but it will enable us to keep investing to ensure we are well-positioned for the eventual recovery.

One of the hallmarks of Keysight has been the ability to continue to invest organically and inorganically through cycles. How do you see R&D spending and also your appetite for additional M&A this year?

Thank you. I want to emphasize that we are an organic-first company and take a long-term perspective on our markets. Since the inception of Keysight, we have organized ourselves around our customers, which has led to strong validation of our investments. Our partnerships and collaborations are crucial in maximizing the value of our organic investments. We are optimistic about our focus on our portfolio and our capacity for long-term organic growth. I previously mentioned several areas where we see expansion opportunities; some of these we are pursuing organically, while we are also examining our pipeline for M&A opportunities that could yield good returns for our shareholders. We have been very disciplined in pursuing these opportunities, choosing to walk away from deals that do not meet our return expectations. You can expect us to maintain that discipline as we evaluate potential opportunities.

Thanks, Neil. Joel, could you please give the instructions for the Q&A?

Absolutely. That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.