Earnings Call Transcript
Keysight Technologies, Inc. (KEYS)
Earnings Call Transcript - KEYS Q4 2022
Operator, Operator
Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal Fourth Quarter 2022 Earnings Conference Call. My name is Dante, and I will be your lead operator today. After the presentation, we will conduct a question-and-answer session. This call is being recorded today, Thursday, November 17, 2022, at 2:00 PM Pacific Time. I would now like to hand the conference over to Jason Kary, Vice President, Treasurer and Investor Relations. Please go ahead, Mr. Kary.
Jason Kary, Vice President, Treasurer and Investor Relations
Thank you, and welcome, everyone to Keysight's fourth quarter earnings conference call for fiscal year 2022. Joining me are Keysight's President and CEO, Satish Dhanasekaran; and our CFO, Neil Dougherty. In the Q&A session, we will be joined by Senior Vice President of Global Sales and Chief Customer Officer, Mark Wallace. You can find the press release and information to supplement today's discussion on our website at investor.keysight.com under the Financial Information tab and quarterly reports. Today's comments by Satish and Neil will refer to non-GAAP financial measures. We will also make reference to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months. The most directly comparable GAAP financial metrics and reconciliations are on our website, and all comparisons are on a year-over-year basis unless otherwise noted. We will make forward-looking statements about the financial performance of the Company on today's call. These statements are subject to risks and uncertainties and are only valid as of today. We assume no obligation to update them. Please review our recent SEC filings for a more complete picture of these risks and other factors. Lastly, management is scheduled to participate in upcoming investor conferences hosted by Credit Suisse and Wells Fargo. We hope to see many of you there. And now, I will turn the call over to Satish.
Satish Dhanasekaran, CEO
Thank you, Jason, and thank you all for joining us. Keysight reported strong fourth quarter results, which exceeded the high end of our guidance and drove a strong finish to the year. Before we get into the quarter, I want to highlight our exceptional performance for the fiscal year, which illustrates the continued progress we're making in transforming the Company to a software-centric solutions provider. We set new records for orders, which grew 12% to $6 billion, a new record for revenue, which was up 10%, and a new record for earnings per share, which increased 22%, all the while returning capital through $849 million in share repurchases or 89% of free cash flow. In addition, we continue to invest in next-generation technologies for long-term differentiation and see a high level of engagement and activity with our customers around their future needs. Today, I'll focus my comments on three key headlines. First, we delivered an all-time record revenue and earnings per share in the fourth quarter ahead of expectations enabled by outstanding execution by Keysight teams who successfully navigated supply chain, geopolitical, and macro dynamics. Second, we achieved record orders of $1.6 billion with steady bookings throughout the quarter and a book-to-bill of 1.09. While our customers' multi-year road maps remain unchanged, they are exercising more caution given the macro backdrop, which we anticipate will moderate demand in the near term. Third, as we enter fiscal '23, we remain confident in our ability to outperform the market based on the differentiation of our solutions, our strong R&D customer value proposition, and the robust backlog position we have entering the year. And as we look longer-term, the secular innovation trends in our end markets remain strong. Now let's take a deeper look at the strength of the fourth quarter. Record orders of $1.6 billion grew 9% on a core basis. Record revenue grew 15% on a core basis, with solid growth across all regions as the Keysight team successfully navigated challenging dynamics. This resulted in record quarterly earnings of $2.14 per share. The strength and resiliency of our business model is due to our strategic efforts to diversify our industry exposure. This has been best exemplified in the growth of our Electronic Industrial Solutions Group and our ability to leverage our industry-leading first-to-market solutions to enable expansion across the broader communications ecosystem. EISG achieved its ninth consecutive quarter of double-digit order and revenue growth. Auto, semiconductor solutions, and general electronics all achieved record quarterly revenue. For the year, both orders and revenues set new records as we capitalize on continued investments across all three EISG markets. In automotive, we're pleased with the continued adoption of our solutions portfolio as orders grew double digits for the seventh consecutive quarter and exceeded $500 million this year. Automotive OEMs and their suppliers continue to focus on strategic new mobility investments, which drove key wins for Keysight. In addition, automotive-focused semiconductor companies continue to add capabilities to support EV and AV applications, which we view as a favorable long-term dynamic. We recently announced the Scienlab DC Emulator, which enables customers to accurately characterize high-voltage, high-power electric vehicle battery performance under varying real-world charging conditions. And Keysight's PathWave Lab's operation software won the 2022 AutoTech Breakthrough Award for overall electric vehicle technology. In support of AV applications, silicon designers are exploring the adoption of commercial standards such as MIPI for automotive and other surround sensor applications, including cameras and in-vehicle infotainment displays. We are now expanding our leading compliance test solutions to offer advanced verification and diagnostic capabilities for automotive designers. Turning to our semiconductor solutions business. Q4 was the tenth consecutive quarter of double-digit order book and a record revenue quarter. We saw sustained demand for our wafer test solutions and precision positioning capabilities, which enable the realization of advanced process nodes. In addition, Keysight has continued to partner with industry leaders, Synopsys and Ansys, on RF and millimeter-wave integrated circuit design flows built for today's wireless communication requirements, including 5G and 6G system-on-chips. Keysight received a Partner of the Year Award from TSMC for joint development design flows in RF and millimeter wave nodes. In general electronics, record orders grew double digits this quarter as demand remains strong and broad-based across industrial IoT and digital health as well as education and advanced research markets. Turning to the Communication Solutions Group. The business delivered strong orders and record revenue. Annual orders and revenue were all-time highs despite geopolitical headwinds and delays in U.S. Defense budget appropriations. Commercial communications revenue grew 10% and 11% for the year, with growth across all regions. Investments across the communications ecosystem continued throughout the year with sustained spending in next-generation wireless and wireline technologies. Ongoing investments in 5G standards, new spectrum growing deployments around the world and steady evolution from 400 gig to 800 gig to terabit Ethernet drove growth. We ended a record year for 5G orders as Keysight's market-leading solutions continue to provide the industry with new capabilities needed for the development of next-generation devices as well as wireless and wireline networks. Examples that highlight our portfolio's alignment with key industry priority include a recent partnership with IBM to integrate our Open RAN capabilities into their cloud automation tools to accelerate network deployments. We also completed the validation of our first 5G location-based service use case from the Global Certification Forum by combining the testing of 5G new radio and global navigation satellite system technologies into a single platform. Lastly, in collaboration with key silicon and data center partners, we enabled the industry's first 1.6 terabit transmission and data center interconnect, leveraging our high-speed digital solutions. Aerospace, defense, and government business revenue grew 4% for the quarter and 3% for the year, setting a new record while navigating geopolitical headwinds. Steady investments in spectrum operations, cybersecurity, and space and satellite drove demand. 5G continued to expand in aerospace and defense end markets, and we saw increasing investment in advanced research. Proposed increases in investment in the U.S. and allied countries for modernization of defense capabilities and new satellite and space applications position us well for future opportunities. As an integral part of our solution strategy, software and services order and revenue growth this year continued to outpace Keysight overall, which has driven our annual recurring revenue to approximately $1.2 billion. Software and services again represented just over one-third of Keysight's total revenue for the year. Keysight's focus on customer success and innovation is driving our development of first-to-market, high-value solutions. Our achievements over the years exemplify Keysight's collaborative culture and our talented workforce, and we are honored that Keysight has placed tenth on Fortune's Best Workplaces in Technology list for 2022. We believe our differentiated culture gives us a unique ability to recruit and develop capable talent and will be our sustaining competitive advantage. In conclusion, I would like to thank our employees for all their contributions, commitment, and strong track record of execution. In the midst of an uncertain economic environment, we remain confident in the resilience of our business, the strength of our balance sheet, and the flexibility of our operating model. Now, I'll turn it over to Neil to discuss our financial performance and outlook in more detail.
Neil Dougherty, CFO
Thank you, Satish, and hello, everyone. We delivered an outstanding fourth quarter of 2022 with record revenue of $1.443 billion, which was above the high end of our guidance range and grew 11% or 15% on a core basis. Our strategies to navigate the ongoing supply constraints continue to be effective. While the supply chain situation improved within the quarter, it continues to moderate our near-term revenue expectations. Record orders of $1.570 billion increased 5% or 9% on a core basis, and we entered fiscal year 2023 with over $2.5 billion in backlog. Looking at our operational results for Q4, we reported a gross margin of 64%, which, as expected, was down 80 basis points sequentially due to inflationary pressures and increased shipments of lower-end instruments, enabled by the improving supply chain. Operating expenses of $494 million were well managed, and we generated an operating margin of 30%. Net income was a record $386 million, and we achieved $2.14 in earnings per share, which was $0.14 above the high end of our guidance. Our weighted average share count for the quarter was 180 million shares. Foreign exchange impact on our earnings was negligible, thanks to a full natural hedge provided by our global footprint, which was then supplemented by our financial hedging program. Moving to the performance of our segments. The Communications Solutions Group achieved record revenue of $992 million, up 8% or 11% on a core basis. CSG delivered gross margin of 66% and operating margin of 29%. Commercial communications generated revenue of $681 million in the fourth quarter, up 10% driven by strength across the 5G ecosystem, increasing O-RAN adoption, and investment in 800 gigabit and 1.6 terabit R&D. Aerospace, defense, and government achieved record revenue of $311 million, up 4%, driven by double-digit growth in Asia Pacific and Europe. The Electronic Industrial Solutions Group achieved record revenue of $451 million, up 20% or 25% on a core basis, driven by strength across all markets. EISG reported gross margin of 60% and operating margin of 32%. Turning to our full year financial performance. Keysight delivered outstanding results in 2022 despite ongoing supply constraints, foreign exchange headwinds, and incremental trade restrictions. FY '22 revenue totaled $5.4 billion, up 10% year-over-year or 12% on a core basis. Gross margin was flat at 65%, holding steady in the face of significant inflation. We invested $813 million in R&D, while operating margin improved 140 basis points to 29%. FY '22 non-GAAP net income was $1.4 billion or $7.63 per share, up 22%. Moving on to balance sheet and cash flow. We ended our fourth quarter with more than $2 billion in cash and cash equivalents, generating cash flow from operations of $398 million and free cash flow of $340 million. Total free cash flow for the year was $959 million, representing 18% of revenue and 69% of non-GAAP net income. Share repurchases this quarter totaled approximately 800,000 shares at an average price per share of $158.77 for a total consideration of $126 million. This brings our total share repurchases for the year to approximately 5.4 million shares at an average share price of $156.09 for a total consideration of $849 million or 89% of free cash flow. Now turning to our outlook and guidance. We exit the year with record backlog and confidence in Keysight's ability to continue executing through near-term uncertainties. As a result, we expect first quarter 2023 revenue to be in the range of $1.360 billion to $1.380 billion and Q1 earnings per share to be in the range of $1.81 to $1.87 based on a weighted diluted share count of approximately 180 million shares. A few modeling reminders as we enter the year. Our annual compensation cycle is administered in Q1. And in this current inflationary environment, we expect our second consecutive year of wage increases above our historic average. We are targeting FY '23 R&D investment at approximately 16% of revenue. Annual interest expense is expected to be approximately $80 million. Capital expenditures are expected to be approximately $250 million, and we are modeling a 12% non-GAAP effective tax rate for FY '23. In closing, we recognize the uncertainty of the current macro environment, and we'll continue to be disciplined. Keysight's highly flexible cost structure, track record of execution, diverse end markets, and long-term secular growth drivers give us confidence in our ability to outperform the market.
Jason Kary, Vice President, Treasurer and Investor Relations
Thank you, Neil. That concludes our formal remarks. Dante, could you please give the instructions for the Q&A?
Operator, Operator
Our first question comes from the line of Samik Chatterjee.
Angela Zhang, Analyst
This is Angela Zhang on for Samik Chatterjee. Congrats on the strong quarter and outlook. My first question is sort of related to what you mentioned briefly in the prepared remarks on sort of macro slowdown and perhaps some pullbacks. I'd like to dig in a little more there. Given that we've seen commentary from other companies indicating that there's a pullback in telco CapEx, are you seeing any impact on their R&D budget? And then I have a follow-up.
Satish Dhanasekaran, CEO
Thank you, Angela. We are very pleased with the quarter, especially considering the current environment. We achieved strong results and finished the year well. We experienced steady demand throughout the quarter, with growth across all our sales regions, indicating broad-based success. In terms of specific markets, 5G remains robust, with double-digit growth in our orders and significant R&D activity. Although we noticed some weakness in the broader component ecosystem related to smartphone demand, manufacturing spending in certain areas was strong this quarter. While the direct spending from cloud providers was delayed, the overall investment in adopting 400 gig and 800 gig technologies remains strong, along with a focus on R&D and innovation. Our aerospace and defense business had a solid quarter, although we did not see the typical year-end surge due to the budget process. In the EISG markets, all areas are performing well; automotive saw strong double-digit growth driven by continued investments in electric and autonomous vehicles. We are closely monitoring the semiconductor sector, particularly our involvement in the wafer stage equipment and new node processes, which remain strong. Lastly, the general electronics business, which receives part of its spending from PMI, continues to see robust demand. Overall, we are satisfied with our performance this quarter and the strong engagement with our customers.
Angela Zhang, Analyst
Great. For my follow-up, you announced a 10% revenue growth this year. I understand your long-term guidance suggests mid-single-digit growth. What are your thoughts on fiscal '23 revenue growth? Did you experience a pull forward due to easing supply? Is there a possibility of a slowdown in fiscal '23, or do you anticipate trending above your usual long-term range?
Satish Dhanasekaran, CEO
Yes. We remain confident, Angela, with what we see so far. Obviously, it's an uncertain environment. So, we're guiding one quarter at a time. You see the confidence reflected in our Q1 guide, which we feel good about. And as we look forward, we'll look at the demand environment, and we'll keep you updated as we go.
Operator, Operator
Our next question comes from the line of Chris Snyder with UBS. Your line is now open.
Chris Snyder, Analyst
I want to follow up on the comments regarding market demand. You mentioned that orders were steady each month of the quarter and up 9% year-on-year. What should we make of the idea that customers might be showing more caution? Satish, you've gone through various subsegments and businesses, and it seems everything is performing well. Should we interpret this as a sign that fiscal Q1 orders are slowing down a bit? Ultimately, does this mean that the growth profile will revert to the 4% to 6% normalized range, or could it drop below that?
Mark Wallace, Senior Vice President of Global Sales and Chief Customer Officer
Chris, this is Mark. I'll take that and add a little bit more detail here. So as Satish said, our order level was steady throughout the quarter. So, we're watching this, right, because if customers are taking more time to make decisions, you would look for orders to slow down. They did not. As a matter of fact, October was very strong. It was a record October for us in terms of orders. So that's good. You've heard us talk about before the addition of new customers. We've added about 450 this quarter again for nearly 2,000 new customers across the whole year. So that creates more diversity and durability to our business, and I see that paying off. Our top 20 customers in the quarter were up strong double digits as well. So, all of that continues to translate to the fact that we did not see an impact to our business because of the customers taking more time. And I think it also has to do with the fact that we are so biased toward R&D and design optimization. And as we've seen through other waves in the recent term where market slowed, the advanced technology development continues. So that's what we see, but we look around and we do see some macro uncertainty. And from my seat, what I see in terms of order or in terms of customer activities is very active customers. Our six-month funnel continues to grow, but customers are taking more time to make ultimate CapEx decisions.
Neil Dougherty, CFO
Yes. And this is Neil. I just give you a little bit maybe more quantification of the situation going into Q1. So while we don't guide orders, I would point out that we have a bit of a difficult compare here in the first quarter. A year ago, in Q1, that was the first time in Keysight's history that we'd ever posted order growth moving from the end of Q4 into the first quarter of the new fiscal year. So we've got a tough compare from that perspective. In addition, as you all know, the U.S. dollar began to strengthen pretty significantly in the back half of this year. We estimate the FX headwind in our first quarter to be a full five percentage points. And so we've got a five-point FX headwind. And we estimate another two to three points of headwind from the recent increase in China trade restrictions as well as the loss of our Russia business, which happened in the second quarter of last year. So those things combined give us a seven- to eight-point headwind just coming out of the gate here as we enter the first quarter.
Chris Snyder, Analyst
Appreciate that. And on the commentary that customers are taking longer to order, maybe they're ordering slower, how do you separate kind of the supply chain element of that from the demand element? Because if supply chains are generally moving in the right direction, I think that maybe customers will not kind of order with the same lead times or urgency that we saw last year.
Satish Dhanasekaran, CEO
Yes, Chris, I think you're right. As the supply chain improves and the time it takes for us to fulfill orders decreases, we can expect some level of normalization. Additionally, the reason we mentioned that the demand environment is moderating is that some of our customers, whose earnings have declined, are putting more scrutiny on their spending. This leads to longer deal closure times as they go through their process. Those are some of the factors at play. Neil, I know you've commented on the normalization before; do you want to add anything?
Neil Dougherty, CFO
Yes. To add to that point, in the last three years, our average book-to-bill ratio has been 1.09, influenced first by COVID and then by supply chain disruptions over the past 18 months. We have anticipated that this book-to-bill ratio would need to normalize. As our lead times decrease, we expect this normalization to happen. While we are not providing guidance on orders, a shift of our book-to-bill closer to a more typical level, around one, will not hinder our ability to continue growing revenue.
Operator, Operator
Our next line of questions comes from the line of Mehdi Hosseini of SIG. Your line is now open.
Mehdi Hosseini, Analyst
Two follow-ups. I want to go back to CapEx to 250. Should I assume that capital intensity will remain around 3% in fiscal year '23?
Neil Dougherty, CFO
Yes. Our capital expenditures this fiscal year were certainly affected by the overall supply chain situation. At the start of the year, we projected capital expenditures close to $250 million, but we ended up spending significantly less from a cash flow standpoint. However, our commitments aligned well with our initial expectations; it simply took longer for deliveries. Looking ahead to next year, we anticipate a notable reduction in new capital purchases, but we still expect to have some cash flow carryover that will help us reach that $250 million target in fiscal '23.
Mehdi Hosseini, Analyst
So, I shouldn't use your CapEx guide to come up with some revenue guide or revenue growth expectation for fiscal '23? There is some cash flow as per the CapEx, right?
Neil Dougherty, CFO
That's right.
Mehdi Hosseini, Analyst
Okay. And then, I want to go back to China. The APAC region as a percentage of revenue has remained in the low 40% over the past several years, including the headwind from Huawei. Should I assume that you're growing outside of China so much should extend that you're able to offset increased restriction on shipment to China? Is it just a mix within the APAC region that makes China kind of neutralized?
Satish Dhanasekaran, CEO
Yes. I think maybe as we have spoken before, we have a broad-based business in China. And despite the ongoing geopolitical situation, we have a demonstrated ability to pivot and address customers in that region. And given the focus there on technology development, I think we're seeing good demand in the region, but we're also seeing multinational companies that are moving out of China in some ways and into the rest of Asia Pac and other parts of the world, including onshoring moves into North America, and we're successfully capturing some of that spend as well.
Mehdi Hosseini, Analyst
Okay. So the fact that the supply chain is moving out sort of China, that's positive. Now if I may, just a quick follow-up. So you do have more than 50% exposure to your customers' R&D budget. On top of that, there is a structural changes happening with the supply chain that is also positive. And those two factors on aggregate could offset some of the cyclicality nature or production-related sensibility or volatility. Is that the right way to think about this?
Satish Dhanasekaran, CEO
I think that's what's playing out right now for us, yes.
Operator, Operator
Our next line of questions comes from the line of Matthew Niknam with Deutsche Bank. Your line is now open.
Matthew Niknam, Analyst
Two, if I could. First on backlog. So you mentioned you ended the year at about $2.55 billion. I think our math would suggest something about $100 million higher, just relative to the 2.5 you mentioned last quarter. I'm just wondering if there's any order cancellations to be aware of or if there's an FX component affecting this? And then secondly, on the China trade restrictions, I think you'd called out a two to three percentage point headwind from those restrictions. I'm just wondering, is that incremental in fiscal 1Q? And is this primarily an EISG? Or could it show up elsewhere?
Neil Dougherty, CFO
Yes, this is Neil. I'll respond to the backlog question and then let Mark handle the inquiry about China. Our orders during the quarter exceeded revenue by just over $100 million, indicating that we continue to build our backlog as the year progresses.
Mark Wallace, Senior Vice President of Global Sales and Chief Customer Officer
Yes. And Matt, the specific China trade situation that went into effect on October 7. So there wasn't much effect in our Q4. We will see some effect in our first quarter, but the 1% to 2% is projecting out over a run rate of the business for the entire year based on other situations. The other thing just to note is that we have not seen any changes in our cancellations. It's been running at a historically low level for the last four quarters, and that was the case again in Q4.
Operator, Operator
Our next line of questions comes from the line of Aaron Rakers with Wells Fargo. Your line is now open.
Aaron Rakers, Analyst
Congrats on good execution in the quarter. I just want to at a high level go back to kind of the defensibility of the model, if I can. Can you remind us where the mix of the business stands today between R&D exposed versus, let's say, manufacturing exposed? And I guess on that same kind of thought process is that, where do you stand as far as the monetization effect of the software strategy? Where do we think that progresses to over the next year, whatever time frame you want to think about?
Satish Dhanasekaran, CEO
Yes. Thank you for the question. I think at the highest level, we're at approximately 60% R&D today, 30% manufacturing, and 10% deployments. So that's the sort of mix of the business. Clearly, we believe R&D secular, you look at some of the areas in R&D that we're focused on, that involve next-generation innovations such as with 5G and then 6G and automotive and digital health, so on and so forth. And it really gives us this diversity of applications that gives us a resilience in this environment for sure. With regard to the software strategy, it, again, goes congruent with our go-to-market approach because we're here to enable innovations to happen faster. And the way we do that is by offering more software-centric solutions. So as we deploy more solutions to our customers, increasingly, that is in the form of growing software mix. And that goes, again, synergistic with our services strategy. So you look at our software and services revenue this year will end at 3% of the total mix and our ARR, or annual recurring revenue, has reached a new high of $1.2 billion. And we'll continue to invest to grow those portions of the business and increase our resilience and durability over time as well.
Aaron Rakers, Analyst
Yes. And then as a quick follow-up, if I can. Just curious, when we think about the progression of backlog, and we appreciate that your backlog is only looking out on a forward six-month basis. And Neil, just curious, how should we think about what a normalized backlog level looks like?
Neil Dougherty, CFO
Yes. Considering the dynamics that Satish mentioned, such as increasing software services and recurring revenue, we have observed growth in our deferred revenue over the same three-year period, along with a shift towards systems instead of tools. I believe this will lead to a significantly higher backlog level once things normalize compared to the pre-COVID period of 2018 and 2019. We'll need to monitor how this develops over time. We have successfully built over $1 billion of backlog in the past three years, with a book-to-bill ratio of 1.09. As our lead times shorten, we anticipate adjustments in ordering patterns and lead times. I previously noted that we likely have four to five weeks of abnormal backlog due to lead times being extended on average by that duration.
Satish Dhanasekaran, CEO
We're still in a supply challenge environment. While it's improving, supply is the constraining factor right now.
Operator, Operator
Our next line of questions comes from the line of Jim Suva with Citi. Your line is now open.
Jim Suva, Analyst
It's very impressive what you've achieved with your software and services, which I believe is around 34%. Can you help us understand what reasonable growth might look like as a percentage of the total going forward? I would think it would be challenging to exceed 50%. Are you anticipating a point where it levels off around 35%, or is that too low, perhaps 40%? What do you see as the potential growth for software and services as you continue to enhance your sales process?
Satish Dhanasekaran, CEO
Yes, Jim, since 2015, our company has been committed to a software-centric solution strategy, concentrating on addressing our customers' most significant and challenging issues more effectively than anyone else. As we have pursued this approach, our strategy has evolved to not only include careful sales practices but also to emphasize lifecycle value creation for our customers and value capture for Keysight. This has been our path. We have seen notable progress with newer solutions like Open RAN, where software is accounting for nearly 40% to 50% of the total sales value, with a significant portion coming from recurring revenue. We are optimistic about the ongoing momentum for our solutions. As we advance our solution strategy, we will explore new market verticals. In our recent earnings announcement, I highlighted successes in the automotive sector with software deployments and in semiconductors with our design offerings. Mark may provide additional insights on the sales side.
Mark Wallace, Senior Vice President of Global Sales and Chief Customer Officer
Thank you, Satish. Jim, regarding our go-to-market strategy, it's a crucial aspect of our approach. Currently, we have about 60% of services attached upfront, and I aim to see that increase. This presents another pathway for growth. Additionally, we are continuously enhancing our solutions through software updates. For instance, with our 5G solutions moving from Release 15 to Releases 16 and 17, most of this involves software updates that provide further chances for up-selling, cross-selling, and generating recurring revenue. We are implementing various components of our go-to-market strategy to foster ongoing growth and to expand our upfront service attachments to our overall solutions.
Jim Suva, Analyst
Great. My follow-up question is about China. I believe I heard there are two to three points of headwind. Is that for the entire fiscal year? Was there any advance purchasing in fiscal Q4 due to the upcoming rule changes? I'm trying to understand the scale of this. I assume that after fiscal '23, the impact from the rule changes will be fully reflected in the model.
Mark Wallace, Senior Vice President of Global Sales and Chief Customer Officer
Yes, we mentioned we expect a one to two point headwind for the entire fiscal year 2023. This is based on our estimation of the business run rate that will be impacted by the new trade restrictions. There may be a slightly larger effect in the first quarter as we assess some of the backlog, but that's our overall run rate. Additionally, Neil noted another point of headwind related to Russia.
Operator, Operator
Our next line of questions comes from the line of Meta Marshall with Morgan Stanley. Your line is now open.
Meta Marshall, Analyst
In the past, you guys have talked about kind of the 5G peak was going to be much lower than kind of investors were expecting, but you kind of talked about a '23, '24 time period for the 5G peak. I just wanted to kind of get current thoughts on that and just how initiatives like ORAN or just some of the other initiatives are maybe extending that. And then maybe a second, you gave some context that you're seeing some loosening in supply chain. But just kind of what is current thinking? Is it still just a small amount of parts that you're kind of waiting to release? But just when do you see more general availability of those parts and just kind of a tightening between supply and demand?
Satish Dhanasekaran, CEO
Thank you, Meta. Regarding 5G, we have consistently highlighted several catalysts. About 18 months ago, I identified the C-band deployments in the U.S. as the first catalyst, which has unfolded as anticipated, allowing us to capture a significant share of that spending. We're also encouraged by developments in Asia, particularly in parts of India, where commitments to roll out 5G present further opportunities. The millimeter wave opportunity remains complex, with challenges that customers are still addressing, indicating a longer-term R&D focus for us as these deployments progress. Additionally, as 5G networks are established, operators are eager to monetarily benefit by incorporating SA versions and exploring new applications such as Open RAN, which is gaining momentum globally. Our R&D possibilities continue to expand, and we are well-equipped to meet these needs with our extensive offerings. It's important to note that while 5G attracts considerable attention, we also have ongoing trends in wireline progression, where we are positioned to benefit from our acquisitions of Ixia. We are seeing growth there, along with new ventures in automotive and next-generation semiconductor nodes. Our diversified business model contributes to greater stability. Regarding supply chain concerns, at the start of last year, we implemented several strategies to redesign our products and source components from alternative suppliers, which we've discussed in previous earnings calls. These measures have surpassed our expectations each quarter. Although we are in dialogue with our semiconductor supply chain partners, who are striving to increase capacity, the environment remains constrained. We have not yet returned to a pre-COVID supply situation, and it may take all of 2023 to achieve that, based on our current insights.
Operator, Operator
Our next line of questions comes from the line of David Ridley-Lane with Bank of America. Your line is now open.
David Ridley-Lane, Analyst
Sure. You talked about some of the headwinds to revenue in the first quarter, but one tailwind not mentioned is pricing. And just sort of wondering how significant is pricing today versus more normal levels. I mean you're giving a couple of points tailwind from that. And then what type of volume growth is really embedded into first quarter's guidance?
Neil Dougherty, CFO
What was the last part of the question? I'm sorry, David, I missed just that last part.
David Ridley-Lane, Analyst
The type of volume growth is embedded in the first quarter guidance.
Neil Dougherty, CFO
Yes, I believe the pricing issue is significant. We have been working hard to keep up with inflation and have implemented several price increases over the last 12 to 18 months, which are now reflected in our backlog. Despite this, we have managed to maintain our margins throughout fiscal '22, holding steady at 65%, which is a commendable outcome given the current inflationary climate as it shows we’re keeping up on a margin basis with the rising costs. However, it’s important to note that inflationary pressures on our cost structure continue. For instance, we will be addressing salary administration for the upcoming year in our fiscal first quarter, marking our second consecutive year of salary increases significantly above our historical averages. Regarding volume, due to the nature of our business, where our instruments can range in cost from hundreds to a million dollars, it's quite challenging to provide a straightforward answer as there is a substantial variation in product mix, making it difficult to derive a clear response on that matter.
David Ridley-Lane, Analyst
Sure. As a follow-up, another positive factor is the automotive sector, right? I believe you mentioned last quarter that it has essentially doubled over the past two years. This quarter, you reported $500 million in orders, making it close to 10% of your total orders for this fiscal year. Do you think this trend is not cyclical and not influenced by macroeconomic conditions, but rather has a strong long-term growth aspect to it?
Mark Wallace, Senior Vice President of Global Sales and Chief Customer Officer
David, this is Mark. The growth we're seeing is coming from next-generation mobility. There's some continuing R&D on the electronics side that's more conventional, but the growth in new mobility is sustaining. It is secular. And it doesn't just stop at the vehicle. It goes out into the charging infrastructure, into the underlying battery technologies. And we've seen what's happened here in the last year with different countries and different regulations pushing this further toward adoption. The adoption in Europe is very strong and growing fast, in other regions as well. And our position in the market is very strong, helping our customers design and deploy this next-generation technology from the batteries to the charging infrastructure and then add, on top of that, all the connectivity and communications and protocols, as we talked about in the prepared statement. So, this is really a great intersection of multiple strengths for us, and it has long-term secular growth drivers behind them.
Operator, Operator
Our next line of questions comes from the line of Rob Mason with Baird. Your line is now open.
Rob Mason, Analyst
Neil, I wanted to just clarify, you mentioned that R&D I thought would be roughly 16% of revenue this year. I just want to make sure that's correct because that's about one point more than it was this past year in '22. And just I'm curious how that steps up. And what does an exit rate look like if that's the case?
Neil Dougherty, CFO
Yes, you're correct. Our long-term target has been 16% or slightly above that. In fiscal year '22, we spent less than that, primarily due to stronger revenue performance than anticipated. Last year, we projected a 6% revenue growth, but ended up with a 12% core growth. Consequently, our R&D plans were aligned with the lower revenue growth expectation. Moving forward, we see ample opportunity to invest in our business's future growth, driven by strong customer demand for R&D. Our goal is to return to 16% of revenue. While we may not reach 16% in the first quarter, we could approach that rate or even exceed it by the fourth quarter.
Rob Mason, Analyst
That's helpful. If the supply chain remains somewhat tight throughout the year, how are you planning to manage working capital? What are your thoughts on the potential to reduce working capital as the year progresses?
Neil Dougherty, CFO
I believe that, in the long run, as the supply chain stabilizes, we will have the chance to decrease some of the working capital that has accumulated over the past year. We are seeing this in our inventory costs, particularly relating to the prices we are paying for parts. There is also money tied up in our commitments to purchase future inventory, for which we’ve paid upfront, creating a new strain on our working capital over the last 12 months. Additionally, the supply chain challenges have notably affected the consistency of our revenue within each quarter. Transitioning from a just-in-time approach, where we build and ship continuously, to a model where we often build to a certain point, pause for parts, then finish and ship, has led to more revenue being recognized later. This has resulted in us having more receivables at the end of the quarter than we would in a more consistent shipping environment. Ultimately, the timing of the supply chain's normalization is uncertain, but once it occurs, we anticipate that we'll be able to reduce our working capital.
Operator, Operator
That concludes our question-and-answer session for today. I would like to turn the conference back to Jason Kary for any closing remarks.
Jason Kary, Vice President, Treasurer and Investor Relations
Thank you, Dante, and thank you, everyone, for joining us. As he mentioned, that concludes the call, and we wish you all a good evening and look forward to seeing you soon.
Operator, Operator
This concludes our conference call. You may now disconnect.