Earnings Call Transcript - KEYS Q2 2022

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal Second Quarter 2022 Earnings Conference Call. My name is Tia, and I will be your lead operator today. Please note that this call is being recorded today, Tuesday, May 17, 2022, at 1:30 p.m. Pacific Time. I would now like to hand the conference over to your host, Jason 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 second quarter earnings conference call for fiscal year 2022. Joining me are Satish Dhanasekaran, President and CEO; and Neil Dougherty, our CFO. In the Q&A session, we will be joined by Mark Wallace, Senior Vice President of Global Sales. You can find the press release and information to supplement today's discussion on our website at investor.keysight.com. While there, please click on the link to quarterly reports under the Financial Information tab. There, you will find an investor presentation along with Keysight's segment results. Following this conference call, we will post a copy of the prepared remarks to the website. Today's comments by Satish and Neil will refer to non-GAAP financial measures. We will also make references to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. All comparisons are on a year-over-year basis unless otherwise noted. We will make forward-looking statements about the financial performance of the Company on today's call. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. Please review the Company's recent SEC filings for a more complete picture of our risks and other factors. Lastly, I would note that management is scheduled to participate in upcoming investor conferences hosted by JP Morgan, Baird, and UBS. And now, I will turn the call over to Satish.

Satish Dhanasekaran, President and CEO

Thank you, Jason, and thank you all for joining us. Welcome to the second quarter 2022 earnings call and my first as the CEO of Keysight. I am humbled and honored to be Keysight's CEO and excited about the future. I would like to thank Ron Nersesian for his visionary leadership of the Company, which has provided us a solid foundation to build on. Over the last decade, I've had the honor of working closely with Ron and benefited greatly from his experience in many different roles I've held since joining the Company 16 years ago. This is a great time to be at Keysight as we remain focused on our core purpose of accelerating innovation to connect and secure the world. Keysight delivered exceptional results in quarter two, driven by strong execution and broad-based demand across the business. The team focused on innovating and solving customers' design and test challenges while successfully navigating the ongoing supply chain and geopolitical challenges. I will focus my comments today on three key headlines. First, we delivered record quarter two orders, capitalizing on the robust end-market demand for Keysight's high-value differentiated solutions. Our focus on delivering first-to-market solutions is enabling us to uncover new emerging applications, adding to our momentum. Second, we achieved record revenue, strong operating margin performance, resulting in record earnings per share, which grew 27%, demonstrating the durability and resilience of our business. Third, we are raising our outlook for the year based on our strong performance in the first half and continued momentum. We now expect to achieve revenue growth approaching 8% and earnings per share growth in the range of 14% to 15% for the fiscal year. Let's now take a deeper look at our results for the quarter. Second quarter orders grew 9% to $1.46 billion and outpaced revenue, which grew 11% to a new record of $1.35 billion and was $41 million above the high end of our guidance. We achieved gross margins of 65%, operating margin of 29%, and record EPS of $1.83, exceeding the high end of our guidance by $0.14. Also with the ongoing equity market volatility, we again capitalized on the opportunity to accelerate share repurchases. These results are a reflection of our strong portfolio and our global team's application of the Keysight leadership model, which enables us to deliver consistent value to all stakeholders. We delivered these results despite many headwinds, including geopolitical challenges, inflationary pressures, and continued supply chain disruptions. We continue to advance our software-centric solution strategy as the rapid pace of technology accelerates, our customers across end markets are seeking deeper engagements earlier in the design cycle and are adopting our software solutions. The capabilities of our PathWave software platform facilitate a continuous stream of releases that matches the innovation cadence of our customers. This enables us to secure enterprise agreements with market leaders for high-value R&D solutions. Orders for software and value-added services like KeysightCare again grew double digits as we continued to grow recurring revenue this quarter. Turning to our business segments. Communications Solutions Group delivered record second quarter orders and an all-time record revenue. Within the CSG, commercial communications achieved all-time record orders and revenue with double-digit order growth for the third consecutive quarter. Ongoing innovation and investments in our end markets spanning both, the wireless and wireline segments remained strong, driven by the adoption of 5G, 400 gig, 800 gig, and terabit and optical technologies. In wireless, the increase in the number of 5G device types continues to drive test and certification requirements. With our leading solutions portfolio, we expect to benefit from the continued investment in the evolution of 5G standards, including stand-alone 5G, Release 16 and beyond. In quarter two, Keysight announced collaborations with leading companies such as NTT DOCOMO, Telefonica, and Analog Devices to enable a wide range of 5G applications, including O-RAN, which continues to gain momentum. In wireline, we're enabling the digital transformation, driven by cloud computing and telecom stack virtualization through our end-to-end solutions. We recently launched the industry's first 800-gig solution to enable data center design workflows for ultra-high data rates and energy efficiency. Aerospace, defense, and government achieved record Q2 revenue, driven by double-digit growth in the Americas and strength in signal monitoring, cyber, and space and satellite solutions as well as 5G and 6G applications. Complex scenario emulations continue to drive the need for modeling and digital twin solutions with increasing software content. Our leading network analyzer platform and phased array test solutions enable increasingly complex satellite communication design and test requirements. Increasing defense budgets in the U.S. and Europe are expected to provide support for higher spend going forward. CSG is well positioned to capitalize on growth by enabling innovation in our end markets through our broad and synergistic portfolio, including wireline, wireless, cybersecurity, satellite and space solutions. The Electronics Industrial Solutions Group delivered double-digit order and revenue growth for the seventh consecutive quarter, driven by automotive and semiconductor solutions. In automotive, all-time record revenue was driven by strong demand for our expanding portfolio of EV and AV applications. Keysight is capitalizing on strategic investments in the automotive and energy space, providing industry-first solutions that support new capabilities and use cases, such as our recently launched protocol test solution for in-vehicle networking. During the quarter, we secured EV wins with major OEMs across all regions. In addition, we're excited by the recognition of our new Radar Scene Emulator solution, including the 2022 Tech.AD Europe award. We saw strong demand for our semiconductor solutions, which delivered double-digit order and revenue growth. Investments in advanced semiconductor technologies, along with capacity expansion for existing nodes, remain robust. Over the next 3 to 5 years, we see solid customer R&D roadmaps for ICs for a broader set of applications. As an example, in Q2, we sold our first on-wafer silicon photonics parametric test solution to a major semiconductor fab to develop and manufacture next-generation data center transceivers. We believe this trend represents long-term opportunities for Keysight's R&D solutions portfolio. Our general electronics business achieved all-time record revenue as investments continued in manufacturing and device development for consumer and industrial IoT, digital health, and advanced research. We're seeing active investments globally in fundamental research in terahertz and quantum technologies. For example, we recently announced a collaboration with the National Research Foundation of Singapore's quantum engineering program to accelerate research and development and education in quantum technologies. The strength of our general electronics business reflects the broad nature of applications for our solutions. Before I wrap, I'd like to acknowledge and thank our more than 14,000 employees worldwide for their commitment to our customers around the globe and for their passion in delivering market-leading solutions. I'm proud to share that Keysight was recently named one of Fortune 100's best companies to work for in 2022. This is a recognition of our inclusive and diverse culture exhibiting value for collaboration, high performance, and innovation. Our culture also places high value on corporate social responsibility. We recently released our 2021 CSR report, highlighting our progress in environmental, social, and governance efforts worldwide and announcing new goals to track through 2022 and into 2023. I believe Keysight has a bright future ahead. I look forward to working with the team to execute our strategy and continue to deliver greater value for our customers, shareholders, and employees. With that, I'll turn the call over to Neil to discuss our financial performance and outlook. Neil?

Neil Dougherty, CFO

Thank you, Satish, and hello, everyone. Our performance this quarter once again demonstrated the resilience of our business. We delivered on our commitments and exceeded expectations as we powered through multiple challenges and new headwinds in the quarter. In the second quarter of 2022, we delivered revenue of $1,351 million, which was above the high end of our guidance range and grew 11% or 12% on a core basis. We generated $1,458 million in orders, up 9% or 11% on a core basis. During the quarter, we suspended our operations in Russia and canceled our entire backlog of Russian orders. Core growth adjusted for Russia was 13%. Demand again outpaced supply, and we ended the quarter with over $2.4 billion in backlog. Turning to our operational results for Q2. We reported a gross margin of 65% and operating expenses of $489 million, resulting in an operating margin of 29%. The strength of our results highlights the resiliency of our business and our team's ability to execute despite significant supply, cost, and currency headwinds within the quarter. We achieved net income of $334 million and delivered $1.83 in earnings per share, which was above the high end of our guidance. Our weighted average share count for the quarter was 183 million shares. Moving to the performance of our segments. Our Communications Solutions Group generated record revenue of $963 million, up 10% or 11% on a core basis. CSG delivered a gross margin of 66% and operating margin of 28%. Within CSG, commercial communications generated revenue of $672 million, up 11% with double-digit revenue growth in the Americas, driven by strong demand for 5G device and component development as well as network test, O-RAN, and terabit R&D. Aerospace, defense, and government revenue of $291 million grew 7%. Our backlog for this end market remains strong, and we reported solid growth in the Americas and Europe. The Electronic Industrial Solutions Group generated second quarter revenue of $388 million, up 13% or 15% on a core basis, driven by strong revenue growth in automotive and semiconductor. EISG reported a gross margin of 62% and operating margin of 30%. Moving to the balance sheet and cash flow. We ended the second quarter with $1.9 billion in cash and cash equivalents, generating cash flow from operations of $298 million and free cash flow of $245 million or 18% of revenue. Share repurchases this quarter totaled 1.9 million shares at an average price per share of $153.78, for a total consideration of $289 million. Year-to-date, we have purchased approximately 3 million shares for a total consideration of $495 million. Now, turning to our outlook and guidance. The demand environment remains strong for Keysight solutions. As in recent quarters, our revenues continue to be constrained by tight supply conditions. However, we have demonstrated our ability to effectively navigate through this environment, and we remain confident in our ability to execute and deliver on our commitments. We expect third quarter 2022 revenue to be in the range of $1,330 million to $1,350 million and Q3 earnings per share to be in the range of $1.74 to $1.80, based on a weighted diluted share count of approximately 181 million shares. We now expect full year revenue growth to approach 8%, which given the recent strengthening of the U.S. dollar, now includes a 2-point year-over-year headwind from currency. We're also raising our earnings growth expectation to 14% to 15%. Despite quarter-to-quarter dynamics being difficult to predict, we have confidence in our raised expectations for the year. In closing, we have a strong track record of execution. Our backlog is at an all-time high, and we are well positioned to capitalize on the growth opportunities across our diverse set of end markets.

Jason Kary, Vice President, Treasurer and Investor Relations

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

Operator, Operator

The first question is from the line of David Ridley-Lane with Bank of America. Please go ahead, sir.

David Ridley-Lane, Analyst

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

Satish Dhanasekaran, President and CEO

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

David Ridley-Lane, Analyst

As a quick follow-up, have your lead times for shipping the product started to decline, or are they stabilizing at high levels? Thank you.

Neil Dougherty, CFO

Yes, we are currently experiencing a situation where demand exceeds supply. We have not yet been able to reduce lead times. Overall, I would describe our lead times as generally stable, although they are slightly increasing at this time due to ongoing demand surpassing supply. However, we are seeing a fair amount of stability in lead times right now, with the aim to reduce them over time as the supply chain situation improves.

Operator, Operator

The next question is from the line of Matt Niknam with Deutsche Bank.

Matt Niknam, Analyst

So first, on the fiscal 3Q revenue guide. Maybe, Neil, if you could talk about what's driving the expected sequential decline in revenues. And then maybe how you're thinking about core constant currency trends relative to any FX headwinds that are embedded in next quarter's guide. And then just secondly, on Europe and Asia Pac, I'm just wondering if you've seen any change in customer demand or buying patterns, given the Russia-Ukraine conflict that may be impacting Europe or even in Asia Pac, given the sort of the reemergence of lockdowns in China in recent months. Thanks.

Neil Dougherty, CFO

I will address the first part of your question regarding our guidance. As we mentioned earlier, our revenue continues to be heavily affected by the supply environment. We experienced considerable outperformance in Q2 as we managed through these constraints, exceeding our expectations. It's important to note that a significant part of our Q2 success was due to shipments of orders we had originally planned for Q3. While this is encouraging news and we are happy with it, it can heavily influence our quarter-over-quarter performance. The guidance we provide reflects our best estimate at this moment. These quarter-to-quarter fluctuations can be challenging to predict in the current environment. We certainly have sufficient backlog to perform better, depending on incoming supply. One key point we want everyone to keep in mind is that we are significantly raising our full-year guidance from 6% to 7% growth to nearly 8%. This anticipated 8% growth faces new and notable foreign exchange headwinds. We observed a marked strengthening of the dollar in our fiscal second quarter, resulting in a two-point year-over-year headwind in the second half. On a full-year basis, we are factoring in a 1.5-point impact from foreign exchange. Compared to when we initially provided the 6% to 7% guidance in November, we now account for an additional 1.5% FX headwind as we approach the 8% mark. Overall, we feel very optimistic about our current situation and are pleased to be increasing our estimates for the year.

Mark Wallace, Senior Vice President of Global Sales

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

Operator, Operator

The next question is from the line of Mark Delaney with Goldman Sachs.

Mark Delaney, Analyst

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

Satish Dhanasekaran, President and CEO

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

Mark Delaney, Analyst

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

Neil Dougherty, CFO

I think it's important to closely examine our Q4 performance in FY21, which was somewhat of an anomaly with a 31% operating margin, nearly 4 points higher than the sequential quarters leading up to that. One significant factor in last year's fourth quarter was a notable decrease in R&D investment from Q3 to Q4, which is unusual. We anticipate an increase in investments on a sequential basis moving from Q2 to Q3 and then from Q3 to Q4 as we focus on future growth. We remain optimistic about our business. While quarter-to-quarter fluctuations can be challenging to predict, we are considerably raising our revenue and EPS guidance for the year and are committed to executing effectively.

Operator, Operator

The next question is from the line of Samik Chatterjee with JP Morgan.

Samik Chatterjee, Analyst

Congratulations on your first earnings call as CEO, Satish. In your prepared remarks, you mentioned the increased defense budgets, so I'd like to ask when we can realistically expect these higher defense spending budgets to start influencing your order trends. What has been the typical timeline you've observed in the past for the flow-through effect on order trends? I have a quick follow-up after that.

Satish Dhanasekaran, President and CEO

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

Mark Wallace, Senior Vice President of Global Sales

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

Samik Chatterjee, Analyst

And for my follow-up, I guess this is more for Neil. But Neil, I mean, your 8% revenue growth guide for the year implies about a $150 million sort of half-on-half revenue performance, which is very similar to what we saw last year. I'm just wondering what you're capturing there in terms of improvements in the sort of supply environment in general versus your own capacity increases. And where would there be sort of more modest or sort of upside potential if supply of components are better? Just trying to understand sort of what's embedded because it seems very typical compared to last year that your guidance is.

Neil Dougherty, CFO

Yes. In previous quarters, we expressed hope for significant improvements in the supply chain during the latter half of this year. However, we have not witnessed such improvements yet. In fact, looking at the broader tech sector, there is a case to be made that conditions worsened in the second quarter, largely due to the Russia-Ukraine conflict and COVID shutdowns in China, despite not being directly affected by those shutdowns. We focus on the factors under our control, such as our capacity for finished goods and the subcomponents produced at our facilities that support our instrumentation. We also consider our relationships with suppliers and the engineering initiatives we undertake to qualify new parts or alternate sources to diversify our supply. These efforts have been beneficial and contributed to our revenue performance. However, as we look ahead, particularly concerning guidance for the second half of the year, we are still facing significant supply chain constraints. This reflects our limited visibility into the timely delivery of the components necessary to ship products to our customers. We are actively managing this situation, and I believe we are succeeding in delivering products to our customers within an acceptable timeline.

Satish Dhanasekaran, President and CEO

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

Operator, Operator

The next question is from Meta Marshall with Morgan Stanley.

Meta Marshall, Analyst

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

Neil Dougherty, CFO

I'll take the first part of that, and then we'll let Satish or Mark address the silicon photonics part of the question. Regarding OpEx spending and the return of travel and entertainment and facilities costs, the honest answer is that we did not see much of that in Q2. The Omicron spike occurred right in the middle of our second quarter, and we did not notice any significant return to travel, entertainment, or office attendance. Recently, more at the beginning of Q3, we have started to bring our employees back to our physical sites. We are beginning to see travel and entertainment not returning to normal, but gradually increasing as more of a third-quarter event. Concerning inflation, we are experiencing cost increases in several areas across the P&L. Our challenge in managing that is to leverage the unique aspects of our portfolio and look to monetize that where possible while continuing to introduce differentiated, high-software-content solutions to the market. If you observe the margin performance of the business, we are effectively managing those inflationary pressures across the P&L.

Satish Dhanasekaran, President and CEO

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

Operator, Operator

Thank you. The next question is from the line of Chris Snyder with UBS. You may proceed.

Chris Snyder, Analyst

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

Neil Dougherty, CFO

We do not expect to reduce backlog at all this year. In fact, we anticipate that, given the current challenging supply environment, we will continue to add to backlog. The transition from the current elevated levels to a more normalized backlog will depend on how the broader supply chain situation evolves. At this point, it's difficult to predict what that will entail. I do not expect a sudden improvement in the supply chain that would allow us to significantly decrease backlog over just one or two quarters. Instead, it will likely involve gradually reducing our quotes and lead times on products while slowly working down the backlog to more normalized levels.

Satish Dhanasekaran, President and CEO

We see this as a positive long-term trend for our business as we enter a quarter with increased confidence in our backlog. As we consider the expanding solutions we are developing with customers, we recognize that these deeper, long-term relationships provide us with excellent visibility into our operations. We are optimistic about growth opportunities in the wireless and wireline sectors, as well as in our industrial business. There are several avenues for growth linked to major trends that are contributing to this backlog.

Chris Snyder, Analyst

I appreciate that. For my next question, I'd like to follow up on the earlier comments regarding the auto business. From what I understand, the Company is well-positioned to benefit from significant trends in the auto sector, such as battery research and development, charging infrastructure, and autonomy. However, I'm curious about the primary driver of this business. Is there anything specific we can track or monitor to benchmark potential growth, such as industry spending on battery R&D or the proliferation of electric vehicle models? Any insights on how to conceptualize the growth potential would be helpful.

Satish Dhanasekaran, President and CEO

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

Mark Wallace, Senior Vice President of Global Sales

Hey Chris, this is Mark. I just wanted to add to what Satish mentioned. It can be challenging to track everything happening in the mobility space transformation. There are many factors involved, such as the electrification of the drivetrain, vehicle connectivity to external networks, and our recently announced communication solutions. The charging infrastructure is receiving significant investment from various nations as part of this transformation. Additionally, advancements in millimeter wave and high-frequency technology for sensors are impressive given their computational capabilities. This makes the mobility space very important for us, as it connects with our strengths. We are also continuing to innovate alongside industry leaders across global ecosystems. There is a vast potential for different types of innovation ahead.

Operator, Operator

The next question is from the line of Mehdi Hosseini with SIG.

Mehdi Hosseini, Analyst

I have two follow-up questions. I apologize if some of them have already been addressed since I joined the call late. First, regarding the pricing dynamics, I am not looking for any quantitative details, but perhaps you could explain it qualitatively. Given that you are relatively more vertically integrated and have stronger relationships with strategic mission-critical customers, have these factors, along with potentially lower input costs and a higher relevance to mission-critical applications, allowed you to extract more value from your customers? I also have another follow-up.

Satish Dhanasekaran, President and CEO

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

Mehdi Hosseini, Analyst

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

Satish Dhanasekaran, President and CEO

Thank you, Mehdi. As you mentioned, we have multiple exposures across various end markets. We remain optimistic about the long-term opportunities at Keysight to generate value in critical applications. In line with this, we are committed to a disciplined and balanced approach to capital allocation. Our first priority is to invest in organic growth and differentiation, and we see plenty of opportunities as we interact with our customers. We are also being selective with mergers and acquisitions, actively seeking opportunities while remaining patient to ensure they meet our criteria, just as we have in the past. They must align with our strategy. Additionally, where we identify opportunities, such as in the current environment, we plan to be more aggressive in returning capital through share buybacks, as we have done this quarter. We still have $600 million approved for share buybacks that we plan to utilize as opportunities arise at these levels.

Neil Dougherty, CFO

And then, the second part of your question was have we accounted for FX in the guide. To the extent that FX has moved to date, yes, that's all baked into our guide. I had mentioned that it's about a 2 percentage-point headwind on a year-over-year basis in the second half. And relative to when we put out our original full year guide of 6% to 7% growth, there's an additional 1.5 points of unfavorable currency. So, we're raising from 6% to 7% all the way to 8%, but there's an additional unfavorable 1.5 points of currency baked into that, again, based on rates as of today.

Operator, Operator

The next question is from the line of Jim Suva with Citigroup.

Jim Suva, Analyst

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

Satish Dhanasekaran, President and CEO

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

Operator, Operator

The next question is from the line of Rob Mason with Baird.

Rob Mason, Analyst

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

Satish Dhanasekaran, President and CEO

Yes, that's a great question. I’ll have Mark address the first part regarding our orders. You are correct; when we started the company and considered the general electronics business, it had a stronger correlation to the manufacturing customer base. However, over time, we have been incorporating more R&D applications and focusing our team on newer end-market applications like digital health and IoT. This shift allows us to move up the value chain with our customers. We expect this trend to continue. Another area of our focus includes advanced research. As I mentioned, we had announcements with a university in Singapore concerning quantum research, and we also achieved a significant success in terahertz research related to our business. We remain committed to pursuing more value-added, sustainable, and durable opportunities in this sector, although historically, it has had more exposure to manufacturing than others. Now, I’ll turn it over to Mark to discuss...

Mark Wallace, Senior Vice President of Global Sales

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

Operator, Operator

Thank you. The next question is from the line of Adam Thalhimer with Thompson Davis.

Adam Thalhimer, Analyst

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

Neil Dougherty, CFO

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

Adam Thalhimer, Analyst

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

Neil Dougherty, CFO

We saw core order growth of 11% for the quarter. When adjusting for Russia, that figure increased to 13%. We canceled approximately $20 million in backlog related to Russia, which has traditionally represented about 1% of our business.

Operator, Operator

There are no additional questions at this time. I will now pass it back to the management team for any closing remarks.

Jason Kary, Vice President, Treasurer and Investor Relations

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

Operator, Operator

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