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

Thank you, and welcome, everyone, to Keysight's third 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 discussions are on our website at investor.keysight.com under 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 Jefferies, Deutsche Bank, Citi and Goldman Sachs. 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 executed well by delivering revenue and earnings above the high end of our guidance in market conditions that were stable and consistent with our expectations. Second, orders of $1.25 billion were slightly above expectations and in line with the prior year, growing low-single-digits sequentially. In a mixed demand environment, we continue to see stability and pockets of growth, particularly in commercial communications. The funnel of opportunities supports our outlook for second half orders to be above first-half orders, followed by a more gradual recovery in 2025, barring any further macroeconomic degradation. Third, we remain confident in the strength of our business model and are intently focused on value creation for both customers and our shareholders. Our capital allocation priorities have not changed. First, we're strategically investing to deliver leading-edge capabilities as new technologies inflect, and to return the company to our long-term growth trajectory. Second, we're expanding our SAM and growth opportunities through disciplined M&A. And third, we are committed to returning capital through share repurchases. In fact, we returned over $715 million or 78% of free cash flow over the past four quarters. Now let's begin with a brief overview of Keysight's third quarter performance. Revenue of $1.2 billion and earnings per share of $1.57, above our expectations. And for the second consecutive quarter, we saw relative stability in both orders and revenue. Turning to our business segments. CSG returned to order growth in Q3. While revenue declined 8% year-over-year, we saw some modest improvement sequentially. Commercial Communications orders grew low-double-digits. Strong growth in wireline driven by AI more than offset the year-over-year decline in a sequentially stable wireless business. Wireline orders grew for a third consecutive quarter, driven by robust investment in the re-architecture of data center networks for 400-gig, 800-gig and terabit data rates, AI model training and network performance. We're benefiting from the investments we have made to position Keysight ahead of this technology inflection. In R&D, we're enablers with our design and emulation solutions across the technology stack for key applications, including GPU servers, AI workload emulation and performance benchmarking. In manufacturing, AI cluster and switching deployments drove capacity demand this quarter, and we secured key wins in GPU rack connectivity applications with market-leading customers. Keysight also collaborated with Cisco and Panduit to demonstrate interconnect technologies in AI cluster networks to reduce power consumption. We're also actively engaged with customers in the ultra-ethernet consortium to define future network architectures for AI and high-performance workloads. In wireless, demand has been stable for the past three quarters, albeit at a lower level on a year-over-year basis. While customer spending remains cautious, the breadth of our solutions portfolio is enabling us to capture ongoing R&D investment in non-terrestrial networks, open radio access network deployments and release 18 of the 3GPP standard. Customers are also investing in scaling 5G and evaluating next-generation technologies. For example, at the recent IEEE International Conference on Communications, Keysight showcased early 6G technology together with Ericsson. Government incentives, particularly in the U.S., Europe and Japan are driving the development of a robust ecosystem to commercialize open radio access networks. This quarter, Keysight's open radio access network solutions enable state-of-the-art open testing and integration centers across the globe from Europe to North America to Asia. Turning to aerospace, defense and government, revenue and orders were down year-over-year, sequentially flat. The prolonged U.S. budget approval process has caused delays in the appropriation of funding for new projects, which we expect to filter through over the next few quarters. In the interim, spending on defense modernization remains steady with healthy demand from U.S. primes and allied governments. Keysight recently expanded its engagement with the U.S. government through a joint cyber defense collaborative to enhance cybersecurity resiliency. In the quarter, we secured key wins with U.S. and European primes for spectrum operation applications. We also expanded our Quantum footprint with a multi-hundred Cubed application win with a key government customer. Turning to Electronic Industrial Solutions Group, revenue continued to normalize from a strong prior year, declining double-digits as expected. Customer spending and market conditions remain muted, but we saw relative stability in orders and revenue on a sequential basis. In semiconductor, revenue was also down year-over-year versus an all-time high Q3 last year. Orders increased low-single-digits and were up strongly on a sequential basis. While certain segments of the market continue to work through excess inventory, higher performance requirements for AI workloads drove spending in advanced nodes, high-bandwidth memory and silicon photonics technologies. The investments that we have made specific to these market opportunities resulted in increased demand from foundry and memory customers for our parametric wafer test solutions. In automotive, orders and revenue were down double-digits. Lower auto manufacturing activity remains a headwind in the near term. In new mobility, EV orders were lower as demand for some battery test and charging infrastructure investments were delayed, while AV orders grew mid-single-digits on a sequential basis. The opportunities in R&D continue to grow as customer engagement in the transition to software-defined vehicles ramps. As an example, Riscure successfully completed the first car connectivity consortium digital key certification in conjunction with NXP. This certification strengthens trust in the security of next-generation vehicles. It also further expands Keysight's security evaluation offering for the automotive industry. In general electronics, customer spending remains constrained, particularly in manufacturing, China and the distribution channel. There were pockets of growth in digital health and advanced research, where orders grew low-double-digits. Software and services revenues are resilient and grew this quarter while accounting for 39% of total Keysight revenue. Annual recurring revenue from software and services also increased year-over-year and in Q3 accounted for roughly 29% of overall Keysight. Our Eggplant software test automation platform is expanding with multiple consecutive quarters of double-digit growth. We're also gaining early traction in sales channel leverage between ESI and Keysight to expand into select accounts and geographies. The collaboration resulted in a key win in the satellite communication space. Lastly, Keysight's design engineering software platform continues to grow. This quarter, we launched new releases for virtual prototyping and simulation capabilities, which address high-performance use cases across our communications, aerospace and defense, and automotive end markets. In summary, the strength and differentiation of Keysight's business model is enabling us to outperform in a variety of economic conditions. We're well positioned to capitalize on technology inflections ahead of us and remain laser-focused on value creation for both customers and shareholders. With that, I'll turn it over to Neil to discuss our financial performance and outlook.

Thank you, Satish, and hello, everyone. Third quarter revenue of $1.217 billion was above the high end of our guidance range and down 12% or 13% on a core basis. Orders of $1.249 billion were essentially flat or down 1% on a core basis. Backlog at the end of the quarter grew $30 million to finish at $2.3 billion. Looking at our operational results for Q3, we reported a gross margin of 64%. Operating expenses of $484 million were up 1% year-over-year. Excluding acquisitions, SG&A expenses were down 7%, reflecting our cost flexibility and actions taken to date. Q3 operating margin was 24%, or 26% on a core basis. Year-to-date, core operating margin is down only 400 basis points, continuing to outperform Keysight's down cycle model and demonstrating the financial resiliency of the business. During the quarter, we amended our tax returns from 2020 onward to reflect an amortization deduction related to a prior period corporate restructuring. This change reduces our effective non-GAAP tax rate from 17% to 14% or 300 basis points for fiscal year 2024 and going forward. Turning to earnings, we achieved $275 million of net income and delivered earnings of $1.41 per share, excluding the impact of the tax rate change. This tax change added an additional $0.16 to earnings per share, of which $0.11 relates to the first half of FY '24 and $0.05 to Q3. All in, we finished the quarter at $1.57 in earnings per share. Our weighted average share count for the quarter was 175 million shares. Moving to the performance of our segments. The Communications Solutions Group generated revenue of $847 million, down 8% on both a reported and core basis. Commercial communications revenue of $572 million declined 6%. While aerospace defense and government revenue of $275 million was down 10%. Altogether, CSG delivered gross margin of 67% and operating margin of 26%. The Electronic Industrial Solutions Group generated revenue of $370 million, down 20% or 24% on a core basis. EISG reported gross margin of 58% and operating margin of 20%, an increase of approximately 100 basis points versus the prior quarter on slightly lower revenue. Moving to the balance sheet and cash flow. We ended the quarter with $1.6 billion in cash and cash equivalents, generating cash flow from operations of $255 million and free cash flow of $222 million. Share repurchases this quarter totaled 1.07 million shares at an average price per share of approximately $140 for a total consideration of $150 million. Now turning to our outlook. We expect to finish the year slightly better than anticipated, with fourth quarter revenue in the range of $1.245 billion to $1.265 billion, and Q4 earnings per share in the range of $1.53 to $1.59 based on a weighted diluted share count of approximately 174 million shares. In closing, in an uncertain macro environment, we are executing on the dimensions that we control, capturing the current market opportunities and positioning Keysight for success as markets recover. With that, I will turn it back to Jason for the Q&A.

Thank you, Neil. Sierra, could you proceed with the instructions for the Q&A?

Definitely. Our first question comes from the line of Mark Delaney with Goldman Sachs. Your line is now open.

Yes. Good afternoon, and thanks very much for taking my questions. Orders were up slightly both sequentially and year-on-year after being down year-on-year for the prior six quarters. Maybe you can help us better understand how meaningful you think the pickup in orders is as a sign that the cyclical environment may be changing?

Yes, hi Mark, thanks for the question. Obviously, we're encouraged by the continued stability that we see in our base business, inflections that are material in our wireline business, and some signs of rebound in semi, although it's too early to call it. And then there's some incremental weakness in the automotive sector. So we put it all together and say, in this current environment, we're encouraged by this return to slight year-over-year growth as we've seen, but it might be too soon to call a recovery at this time. And the key point is we're executing well, and we feel good about our own portfolio and its differentiation and the investments we have made to continue to keep that going.

Thanks for that, Satish. My other question was a follow-up on the orders. You mentioned AI as a positive contributor yet again to commercial communications. Maybe you can help us better understand what percentage of commercial communications orders are tied to AI at this point? And how impactful might AI be for revenue within commercial comms as you look out over the next 12 months or so? Thank you.

Thanks, Mark. Yes, we're quite pleased that commercial communications orders grew double-digits this quarter. Again, as I mentioned, we have a pretty diverse portfolio that caters to the entire communication cycle system with solutions. So you can think of wireless and wireline, and the wireline ecosystem represents roughly about 40% to 45% of our commercial communications business, and it's inflecting driven by the AI spend. Now when you think about how big it could be longer-term, I think the answer is becoming quite clear that AI is going to be a pretty transformational technology that's going to lead to evolutions of multiple underlying waves of standards and technologies, but it's not yet played out. Today, the state of affairs is that it's a highly concentrated opportunity set driven by the big investments made by the hyperscalers, and it is a constricted sort of environment from a supply perspective. So there are some challenges that the customers are working through. So we're seeing and picking up some of that capital investments that are playing out through our manufacturing business that is rapidly expanding. But equally, we're making good progress, I would say, in engaging with standardization across the entire stack and in making meaningful contributions in R&D across compute, power and thermal, networking protocols and memory, all aspects of innovation that customers are playing into. But again, the ecosystem, I believe, will broaden over time. And our goal has been for the last 18 months to nest this opportunity and feel good about our market position.

Thank you.

Yes. Thanks for taking the questions. I want to go back, it's been a little while, but at the Analyst Day a little over a year ago, you outlined a revenue CAGR of 5% to 7%. And I'm curious as we kind of see the stabilization of orders, we think about the return of growth here. Is there anything that's changed as we start to think about the next fiscal year that you would put out there for us to think about relative to that 5% to 7% growth rate? And if so, I mean, why wouldn't we expect even a stronger growth rate just given the easy comps that you're looking at?

Thank you, Aaron. Our long-term outlook on the opportunities and underlying drivers remains consistent, and we anticipate the business will return to those levels. It's important to note that 2021 and 2022 were exceptional years for our markets, while 2023 has been relatively flat. We aim to deliver value in 2024 despite the market downturn. Our initial focus is on the stabilization of business conditions, which we view as a key milestone. We are optimistic about what we shared last quarter regarding second-half orders outpacing those from the first half. The recovery appears to be mixed at this stage, and we are not anticipating a synchronized recovery across all our various end markets. Therefore, we are approaching this as a slow, gradual recovery in 2025. The actions we are undertaking, including our innovations and customer engagements, are intended to enhance our position. I feel confident about Keysight's standing. We hope to see further improvements in the funnel dynamics, which are currently trending positively, but we will provide more details later about potential growth rates for 2025.

Yes. Very helpful. And then just as a quick follow-up. I'm curious, Neil, I think a quarter or two ago, you talked about longer-dated backlog build or orders. I'm curious, any update on that and what you're seeing in the market today.

Yes. The incoming order rate range is reasonably stable in the upper single digits level of mix. And on the revenue side, we are trending in that direction. We're not yet at the point where the revenues are at that level, but in the next quarter or two, we'd expect to achieve that.

Thank you for taking my question. I'm interested in learning more about the aerospace ADG segment. Are the current delays pushing things into the next quarter, or do they indicate a slowdown in the year-over-year growth rate? Any additional insights on this would be appreciated.

Yes. Thank you. I'd say the overarching trends given the geopolitics that we're under are positive, so that's number one. There is bipartisan support for budgets in defense in the United States and increasing support for raising budgets around the world. Japan just announced an increase, and Europe is also focused on that. And I feel good about Keysight's focus—long-term focus we've had in defense modernization with Quantum solutions for ultra-magnetic spectrum operations, space and satellite. They're all aligned with the right priorities. Having said that, the budgets and appropriation timing does have an impact that is really hard to predict on a quarterly basis. But we like the pipeline that's building. The prime contractors increases are also something we monitor in the U.S., and we feel good that those will all eventually filter into orders for us. This year, obviously, we're lapping a full year of 2023 of record levels for order and revenue for the aerospace and defense business. So you'll see some— the revenue levels are down. And to the point about the long-dated backlog, we have won some large systems businesses last year and this year, which will also convert into revenue next year. So I would say that the drivers have remained intact. Our position remains solid and the pipeline is strong. Thank you.

Just on automotive. I mean, I think the broader weakness in the EV market is well known. But I saw you mentioned clients delaying projects. Are they looking to kind of restart maybe at the beginning of calendar 2025? Just sort of gain a sense of the tone in those customer conversations.

Yes, David, this is Mark. It's hard to predict when the timing is for some of these projects. Some of them have very long processes associated with the procurement process, including proof of concepts. And then the projects themselves last many quarters; it falls into this category of some of the long-dated business that we've been talking about for quite a while. What I think we are seeing though is the continuous focus on innovation with our key automotive customers, the AV side and software-defined vehicles that are now migrating toward continued growth in the quarter sequentially. We are continuing to work with customers in all regions. So this is a global situation that we are well positioned for. And what I would look for in 2025 is some moderation of the slowness that we've experienced for many quarters around manufacturing as capacities are required to increase. And then I think given the regulatory situation, the political climate and the long-term commitments to e-mobility, I would expect the pause that we're seeing right now in some of these battery test and EV projects to begin gaining some momentum in the next several quarters.

Yes. For next year, we would actually expect that tax rate to hold for multiple years. The next thing that we're aware of is the U.S. GILTI tax rate, that's a tax on offshore profitability, is scheduled to increase in 2027. So we'll need to evaluate the impact of that on Keysight once we get closer to that implementation date. And then the only other thing I would add is both of the current presidential candidates have prioritized tax legislation for the first year of a new administration. Obviously, we don't have any way to assess what those programs would be like and so this doesn't account for anything that could be passed as part of a new presidential administration. But the status quo through '27.

Great, thanks. A couple of questions maybe on kind of the communications business. And what do you see as catalysts for improvement in fiscal '25 in that business, even if they are gradual? And then just maybe as a second question, I realize probably limited updates, but any update on Spirent acquisition. Thanks.

Yes. I'll take the second one first. We’ve received the shareholder approval for the Spirent transaction, and we're working through the regulatory process. At this point, we expect the transaction to be completed in the first half of fiscal '25. As far as your original question, I mean, it is quite exciting to see tremendous demand and inflection in the wireline business. As I mentioned before, it is concentrated and it is in a supply-constrained environment. So it remains to be seen how long the manufacturing build-outs go, but that's a near-term dynamic, and we're capitalizing on it. The R&D opportunities associated with the multiple areas that I touched upon—Keysight engaging with customers—give us a good pipeline to execute for the next three-to-five-year horizon because there is going to be a bigger wave. With any of these technology trends, it's hard to really see it until it happens, but we're engaged and we're making meaningful contributions for our customers. But I would expect stability in wireless to continue and some increase perhaps in deployment activity across the globe, which would give further signs of growth to our component test business there. And then as I think about the wireline side of the business, continued investments in R&D, and maybe some moderating manufacturing investments in the second half of next year. So that's sort of our thinking at this point.

Yes, thanks for taking my question. A couple of follow-ups for me. Thanks for color on the booking trends into the October quarter. But if I were just to take a look into the Q1 fiscal year '25. Historically, Q1 has been seasonally down in terms of booking. And is there anything with the startup of the new fiscal year that would make this year any different from prior years? And I have a follow-up.

Yes. I think as it relates to that, the visibility is probably a little premature for us to give too much guidance. As Satish said, we are expecting a moderate recovery into '25. As you have just noted, in Keysight's core business, we do typically see a sequential decrease in the mid-single-digits, orders and revenue as we move from Q4 into Q1. The ESI business has kind of the opposite seasonality, recognizing about 40% to 45% of their revenues in the first quarter of Keysight's fiscal year. So you'll have historic history suggesting that Keysight will be sequentially down, and ESI will be sequentially up, and we'll have to see how that plays out given the market environment.

So Mehdi, the funnel, as we said before, is trending positive, I would say. As I look at where we are today versus three months ago, we're seeing more funnel intake. So that's new opportunities coming into our pipeline. And we're seeing speed or the velocity at which some of those deals are going through the funnel and closing increasing as well. So that gives us a short-term funnel that supports our guide for Q4, and we'll continue to watch this carefully. But there are improving pipeline dynamics that we're seeing in the business.

Yes. It's a really good question, Mehdi. I think the thing about our business is we tend to be more on the R&D labs of our customers. So we're on the front end. So towards that end, we see continued progression of standards—release '17, release '18, release '19 coming in—and new teams such as AI in the context of RAN becoming real. Open RAN deployments or Open RAN interoperability labs around the world are scaling. So all those are positive trends from a sequential basis. Obviously, we're down from the peak, as the capex cycle from telcos is down. But the stability in the business is good. We feel good about our engagements around these next-generation themes that I mentioned, and some earlier activity around 6G is picking up, for which we're making contributions. But again, I would expect the 5G business to have some stability because there's more deployment activities around the world, and that should provide some more stability until 6G arrives.

Hey, good afternoon, guys, nice quarter.

Hi, thank you, Adam.

Sorry if I missed this, but the sequential revenue growth that you're looking for in Q4, is that weighted more towards communications? Like do you expect both segments to be sequentially up?

Yes, so this is the seasonal uptick obviously we see in both businesses. It's probably going to skew a little bit more towards the comms business than the industrial business at this point, given some of the pressure that we continue to experience in manufacturing and automotive that Satish just shared.

And typically, end of the year, Adam, we would expect a seasonal uptick in our Aerospace and Defense business, which has always been the case. So that's another contributor as well.

Okay. And on the semiconductor side, last quarter, you talked about fabrication delays. I think you said it might come back late Q4 or 2025. Can you just give an update there?

Yes. On the semi side, I'd say that the project activities are returning and we started to see some sequential growth. The pipeline remains solid, especially around memory, which is stronger and technologies such as silicon photonics, where we had invested with customers. AI is driving a higher sense of urgency to pull the trigger on those activities. Some parts on the logic side are still in a mixed environment. But we feel good about sequential recovery in that business.

Hi there. Yes, just a quick question on the auto exposure here. I know you talked about the EV weakness and some of the political headwinds there. But on the autonomous vehicle side, just would look to kind of have you expand a little bit on how that leads on your core communications? And maybe some color around what that opportunity might look like in the long term? And how much of a percentage of total orders that is for that business?

Yes. So thank you. As you have rightfully noted, the automotive business and the automotive marketplace is transforming. For Keysight historically, we have very low exposure in that area. And as we have said before, we have grown the business to $500 million almost from a very small base. A big part of that was really manufacturing, one-third of the business is manufacturing and production where we are engaged in the electronics manufacturing of it, and we have a differentiated position there. Two-thirds of the business is all new mobility, EV that Mark talked about earlier, and AV as well. It's a marketplace that continues to transform. On one dimension, you have Chinese battery commoditization pressures that customers are feeling. Yet the regulations around batteries and their safety needs dictate more testing in the region. On the other side, the commercial ecosystem is starting to engage directly with automakers. That's what Mark defined as the software-defined vehicle opportunity set with silicon software combining, and it really plays to Keysight's traditional strength. Mark, anything further?

Yes. No, you hit it on the last part. I was going to point out that this crosses over many parts of our business going back many years, from our semiconductor and our comms EDA design tools to more and more our security and cyber types of tools that go into these environments with silicon. They leverage our strengths in commercial comms, which we've been capturing for many years with communication standards, connecting vehicles to everything, and the components that are used to sense as well as the computational capabilities and the standards that go within the vehicle itself. So that's the—from radar to connected cars, this is crossing over multiple areas where Keysight has a leadership position, and that's why we continue to see such an active customer landscape.

That's really helpful. Perfect. And then I guess just one last one. I know there was a lot of volatility at the end of July. But just curious on demand trends through maybe the back half of the quarter and an early look into August. Was there any material changes or is it just kind of like plotting along or any positives or negatives that we should be aware of?

Now, we saw ramping in the quarter from month to month, but it wasn't necessarily unusual. We ended our first half in May, and that typically pulls some business in because most of our sellers are on a six-month quota. We had to start a little bit with a depleted funnel, but we quickly grew that in. As I said, what we've seen throughout the last three months is the positive funnel dynamics, which is more funnel intake and then moving that business through the funnel. So I would say it was a fairly typical seasonality to the quarter, and we're two weeks into Q4 now.

Hi, this is Priyanka Thapa on for Samik Chatterjee. Just one question. You stated that you have a huge opportunity set because of hyperscaler investments. Are these hyperscalers direct customers for test equipment relative to the AI data center equipment testing? And which kind of areas can you potentially see this exposure to hyperscalers broadening out over time? Thanks.

Thank you, Priyanka. So what I stated was obviously the hyperscaler investment in digital infrastructure upgrades and the capital equipment being deployed to upgrade the networks to be more AI-ready, if you will, is proliferating through the ecosystem and the large supply chain, and we're benefiting from the manufacturing exposure there. But we're increasing our exposure as some of the hyperscalers enter into silicon programs and build their own organic capability, that's a growing customer base that we're continuing to expand into. We're also participating in consortiums for more open standardization that some of the hyperscalers are leading. So we're making a growing contribution there. We feel good about our ability to take the physical and protocol layer assets into this marketplace and provide total solutions for customers, not only in traditional areas you would expect us to in computation or connectivity but also into emulating training and inference schemes so that AI can scale effectively.

Thank you all for your questions. That concludes our Q&A session for today. I would like to turn the call back to Jason Kary for any closing remarks.

Well, thanks, Sierra, and thanks, everyone, for joining us today. We look forward to seeing you at the upcoming conferences this quarter and have a great day.

This concludes our conference call. You may now disconnect.