Earnings Call Transcript - KEYS Q1 2022

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal First Quarter 2022 Earnings Conference Call. My name is Elliott, and I will be your lead operator today. Please note that this call is being recorded today, Thursday, February 17, 2022, at 1:30 p.m. 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, VP, Treasurer and Investor Relations

Thank you and welcome, everyone, to Keysight's first quarter earnings conference call for fiscal year 2022. Joining me are Ron Nersesian, Keysight's Chairman, President and CEO; and Neil Dougherty, our CFO. Joining us in the Q&A session will be Satish Dhanasekaran, Chief Operating Officer; and Mark Wallace, Senior Vice President of Global Sales. You can find the press release and information to supplement today's discussion on our website at investor.keysight.com. While there, please click on the link for quarterly reports under the Financial Information tab. There, you will find an investor presentation along with Keysight's segment results. Following this conference call, we will post a copy of the prepared remarks to the website. Today's comments by Ron 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 in March, hosted by Susquehanna, Morgan Stanley and Credit Suisse. And now I will turn the call over to Ron.

Ronald Nersesian, Chairman, President and CEO

Thank you, Jason, and thank you all for joining us. Keysight delivered a strong start to the year. First quarter results are evidence that our broad-based portfolio of differentiated solutions is aligned with the market's most important design and test challenges. We are enabling our customers to address rapidly evolving technologies and market opportunities. Today, I'll focus my comments on three key headlines. First, we continue to see sustained robust demand with record orders again exceeding our expectations. Growth in the quarter was broad-based and balanced across our diverse set of end markets and across all regions. Orders grew 22% year-over-year and were 31% higher than the first quarter of 2020, just prior to the initial impact of the COVID pandemic. Second, record first quarter revenue and earnings per share exceeded the high end of our guidance despite ongoing supply constraints. Our results and exceptional execution by the Keysight team continue to demonstrate the durability and resilience of our business. And third, Keysight solutions are aligned with the long-term secular trends fueled by ongoing innovation across multiple markets. Our investments in growth initiatives and supply chain resiliency are paying off. We continue to expect to deliver 6% to 7% revenue growth for the year, and given the stronger-than-guided first quarter earnings, to achieve 12% earnings growth. We are confident in the strength of the company we built and our ability to drive above-market profitable growth over the long term. Accordingly, with the recent equity market volatility, we capitalized on the opportunity to create value for shareholders by accelerating our share repurchases in the past two quarters. Now let's take a deeper look into our first quarter results. We delivered another quarter of record orders, which grew 22% to $1.5 billion. This outpaced record first quarter revenue, which grew 6% to $1.25 billion. We achieved gross margin of 66%, operating margin of 28% and EPS of $1.65, all of which were first quarter records. Although supply constraints continue to moderate revenue, Keysight's consistent execution and focus on growth initiatives across the 5G ecosystem, automotive and software position us well to capitalize on a robust demand environment. The Electronics Industrial Solutions Group delivered double-digit order and revenue growth for the sixth consecutive quarter. Record orders were driven by strong demand for automotive and semiconductor solutions as well as broad general electronic applications. Our differentiated solutions position us well to win in the fast-expanding automotive market, where we achieved all-time record orders and record first quarter revenue. Orders grew well over 50% in the quarter and exceeded 50% growth over the past year. Manufacturing capacity continued to expand to meet pent-up demand, and the EV and AV technology investment accelerated. This happened particularly in Europe and China, where EV market share of total car sales in 2021 increased to 19% and 15%, respectively. Demand remains strong from leading manufacturers for both EV and AV production test solutions, power semiconductors, automotive electronics and RF and millimeter wave wireless test. Keysight continues to engage with global industry leaders such as BMW, Sony Semiconductor Solutions and Proventia to enable next-generation technologies across the automotive R&D and production workflows. Strong demand for our semiconductor solutions drove double-digit order and revenue growth and resulted in record orders and record first quarter revenue. Investments remain high in advanced semiconductor technologies and capacity expansion to serve a broad set of applications, including silicon-rich smartphones, high-performance computing, IoT and autos. In general electronics, we achieved record orders with double-digit growth across all regions driven by investment in manufacturing and device development for consumer and industrial IoT, digital health, connectivity and remote monitoring. Turning to the Communications Solutions Group, we delivered record first quarter orders and revenue with double-digit order growth across all regions. Commercial communications orders achieved the second-highest quarter on record with double-digit order and revenue growth in the Americas and Europe. We see continued strength in 400G and 800G Ethernet solutions for enterprise and service provider customers as well as increasing demand for terabit communication solutions. Driven by the ongoing investment in data center and cloud applications, orders for Keysight's differentiated, high-performance, real-time oscilloscopes grew triple digits this quarter. Keysight's leadership in 5G Release 16 applications, broad test case coverage and our strategic role in O-RAN are enabling our expansion across the broad communications ecosystem. Our 5G customer base is growing as deployments begin to scale, and we are enabling disruptive technologies with key industry players, such as Qualcomm to demonstrate 3.5-gigabit uplink data throughput, Chunghwa Telecom in Taiwan to accelerate verification of O-RAN connectivity, KT Corporation in South Korea to verify advanced 5G new radio features and LG Electronics to demonstrate 6G radio frequencies. Investments remain strong in 5G wireless R&D and manufacturing as well as networking as market expansion transitions to devices, network equipment and the aerospace, defense vertical. In aerospace, defense and government, double-digit order growth was driven by demand for signal monitoring, cyber, space and satellite as well as 5G and 6G applications. Demand was particularly strong in Asia Pacific and Europe. As design, test and measurement solutions grow in complexity, software and services are an increasingly more important differentiator for Keysight. Combined, they represented more than one-third of total revenue this quarter, increasing recurring revenue and contributing to the resiliency and predictability of our business. In summary, demand remains strong for Keysight's software-centric portfolio of differentiated solutions across all of our end markets and regions. Since the pandemic began in 2020, Keysight has been focused on supporting our customers and delivering on our commitments. We have implemented new sourcing strategies and increased partner engagement to improve supply chain flexibility, diversification and resilience. While fully focused on our near-term priorities, we continue to work towards a long-term sustainable vision for the company and for the communities in which we operate. The Keysight leadership model drives us to deliver business value through ethical, environmentally sustainable and socially responsible operations. Corporate social responsibility is an enabling value of the KLM, and we are proud to have been included in the Dow Jones Sustainability Index for the third year in a row. Keysight's inclusion exemplifies the company's continued commitment to building a better planet. This includes ambitious targets that support several UN Sustainable Development Goals, such as our commitment to achieve net-zero emissions in our company operations by fiscal year 2040, ten years ahead of the Paris Agreement goal of 2050. As we accelerate innovation to connect and secure the world, we are better positioned than ever to deliver value to our customers, shareholders and employees. Now I will turn it over to Neil to discuss our financial performance and outlook in more detail.

Neil Dougherty, CFO

Thank you, Ron, and hello, everyone. Q1 was a great start to fiscal 2022, and our full year outlook exemplifies Keysight's ability to deliver on our commitments. In the first quarter of 2022, we delivered revenue of $1.250 billion, which was above the high end of our guidance range and grew 6% or 7% on a core basis. As expected, supply chain constraints continue to temper revenue results. We delivered a record $1.495 billion in orders, up 22% or 23% on a core basis. We ended the quarter with over $2.3 billion in backlog. Turning to our operational results for Q1. We reported gross margin of 66% and operating expenses of $473 million, resulting in an operating margin of 28%. We achieved net income of $305 million and delivered $1.65 in earnings per share, which was above the high end of our guidance. Our weighted average share count for the quarter was 184 million shares. Moving to the performance of our segments. Our Communications Solutions Group generated record revenue of $878 million, up 3% on both the reported and core basis. CSG delivered record gross margin of 67% and operating margin of 27%. In Q1, commercial communications generated revenue of $584 million, up 5%, with double-digit revenue growth in the Americas and Europe driven by continued investments in 5G, O-RAN adoption, 400-gigabit, 800-gigabit and terabit R&D and wireline applications. Aerospace, defense and government revenue of $294 million was flat versus a strong prior year compare. Solid growth in Asia Pacific was offset by supply chain constraints that impacted revenue in the Americas and Europe. This was our fourth consecutive quarter of double-digit order growth in aerospace, defense and government, and the funnel remains strong for this end market. The Electronic Industrial Solutions Group generated first quarter revenue of $372 million, up 13% or 15% on a core basis, driven by strong revenue growth in semiconductor and automotive. EISG reported gross margin of 63% and operating margin of 31%. Moving to the balance sheet and cash flow. We ended our first quarter with $2 billion in cash and cash equivalents, generated cash flow from operations of $224 million and free cash flow of $182 million or 15% of revenue. Under the new share repurchase authorization announced in November of last year, we have acquired 1.13 million shares in the quarter at an average price of $182.19 for a total consideration of $206 million. Now turning to our outlook and guidance. Demand remains strong for Keysight Solutions. However, supply constraints continue to moderate shipments. We expect second quarter 2022 revenue to be in the range of $1.290 billion to $1.310 billion and Q2 earnings per share to be in the range of $1.63 to $1.69 based on a weighted diluted share count of approximately 183 million shares. Assuming a loosening of the supply situation in the second half, we continue to expect full year revenue growth to be in the range of 6% to 7% while delivering 12% earnings growth. The raised EPS growth expectation reflects our higher-than-expected Q1 earnings. In closing, the demand environment remains strong across our end markets and regions. With a record backlog position and a strong track record of operational excellence, we are confident in our ability to meet our customer commitments and continue to deliver profitable above-market growth going forward. With that, I will now turn it back to Jason for the Q&A.

Operator, Operator

Thank you, Neil. Elliott, will you please go ahead and give the instructions for the Q&A?

Timothy Long, Analyst

I was hoping you could talk a little bit more about the 5G end market maybe as it cuts across your business. Could you talk about kind of the revenue order momentum there and maybe touch on some of the newer areas? I think you mentioned O-RAN, but could you talk O-RAN private networks millimeter waves, some of the newer areas that are contributing to growth there?

Satish Dhanasekaran, COO

Yes. Tim, this is Satish. We had another strong quarter in our commercial communications business driven by 5G and all the wireline evolutions. Specific to 5G, I think as I've stated before, we see near-term and medium-term catalysts that remain intact. If you look at it more near term, I would say, the ongoing global deployments that are scaling continue to drive demand in both R&D and manufacturing offerings. Specific to R&D, the Release 16 is really aimed at some of these new use cases with industrial applications and private networks in particular. Longer term, we remain bullish about millimeter wave and its adoption. But in the medium term, the applications such as O-RAN are really growing the ecosystem of opportunities for us. We just added over 100 new customers into our 5G platform in the most recent quarter. So significant growth in the 5G applications for sure across both R&D and manufacturing and deployments and across the globe. So broad strength.

Timothy Long, Analyst

Okay. I'm sorry, if I could just follow up. It sounds like you've already had a few 6G announcements. Can you talk a little bit about kind of the cadence of when you think that rollout starts to impact this business? Is this still a few years out? Or are you starting to see some real traction with some of the larger players in the industry?

Satish Dhanasekaran, COO

Yes. From a standards perspective, we are still in Release 16. Release 17 is just beginning, and Release 18 is in the planning stages. There is still significant time remaining for the evolution of 5G, which will continue for quite a while. However, the industry is also exploring the next wave of innovations, including 6G in wireless technology. On the wireline side, terabit Ethernet is a major focus of advanced research, both in wireless and wireline sectors. At Keysight, our strong strategy centered on developing the workflow for the communication cycle system allows us to participate in advanced research discussions with various consortiums around the world. We have already begun to secure some early research business, positioning us for ongoing leadership in the future.

Samik Chatterjee, Analyst

I'm seeking clarification on the difference between order growth and the revenue outlook. This is the fourth consecutive quarter where orders have increased by over 20% year-on-year, while the revenue outlook is significantly lower. How should we interpret this? Is it that revenue will eventually catch up, potentially due to supply chain improvements or earlier orders? Additionally, can you address the discrepancy between the strong increase in orders and the fact that ADG and UC have remained flat for the last few quarters?

Neil Dougherty, CFO

Yes. So this is Neil. So I think, first of all, I would say that the order growth, we believe, is indicative of the very strong demand environment we're seeing across the wide range of end markets, right? Within EISG, the semiconductor auto market is very strong. The surge in manufacturing is driving strength in general electronics. In the communications side, we're seeing great strength in 5G, as Satish just talked about, but also 400 gigabit, 800 gigabit on the networking side as well. Very strong demand, and I think that's reflected in the order strength and in the growth you're seeing in orders. On the revenue side, obviously, we continue to work through significant supply chain challenges. Our revenue is significantly constrained by the supply environment, and we're working through that. We have said on prior calls that we have seen lead times to our customers extend by about a month, and that month extension has really happened over the course of the last two years, really from the onset of COVID back in the spring of 2020. The good news is that our customers have responded to that and are placing orders with Keysight a bit earlier so that they can still get product delivery on a timeline that meets their needs. Our customers will once again readjust their ordering patterns to align with their own need for delivery. Why don't I turn it back to Mark for some more comments on the demand side.

Mark Wallace, SVP, Global Sales

Yes, thanks, Neil. I think you covered it well. I would just add that the demand remains strong. It was very strong in Q1 and widespread. We observed some early orders placed in distribution, as an example, where channel inventories are low due to the demand we've seen. This is to be expected. We also noticed some early orders from semiconductor customers, which is typical because they have longer-term planning horizons, and we collaborate with them accordingly. The key point is our strong double-digit order growth, which was not a result of advanced purchases. We are now engaging with customers much earlier than in the past, allowing us better visibility into their forecasts and future plans, which I believe will support long-term sustainability.

Meta Marshall, Analyst

Maybe following up on Samik's question. Just in terms of supply chain, would you say that conditions largely stayed the same in fiscal Q1 over fiscal Q4? Or was there any kind of material tightening that you saw kind of in any of the categories? Just trying to get a sense of whether it remains constrained or whether you started to see some improvement or worsening. And then maybe second question. Obviously, we've seen some valuation rerating on the software side of stocks. And so just wondering if anything becomes more attractive from an M&A environment just as some of these valuations reset.

Neil Dougherty, CFO

Yes. So this is Neil again. So first of all, with regard to the supply chain situation, I think it's safe to say that we didn't see things materially get better within the quarter. I don't think they got worse. I would call it largely the same. We continue to look forward to some relaxation in the second half, and that's still our expectation. But we did not see any acceleration or early signs that that's happening. It's still our expectation, but largely unchanged within the quarter on the supply chain side.

Ronald Nersesian, Chairman, President and CEO

And Meta, this is Ron. Regarding software valuations, you are absolutely right. We have observed that valuations for IPE software companies have declined. However, when we speak with these companies about a pullback, they still perceive their previous share price as the benchmark for what their company should command a premium over. It generally takes about a year, varying from company to company, before they would consider selling at a lower value. We are actively seeking opportunities and have a very engaged pipeline at the moment, including in the software sector.

Mark Delaney, Analyst

I was hoping you could comment a little bit more on the P&L outlook for next quarter. Revenue guidance is up sequentially. EPS is relatively flattish quarter-on-quarter. So maybe you can bridge us from some higher revenue. And what's leading to the more flat quarter-on-quarter EPS?

Neil Dougherty, CFO

Yes. So I'll take that one as well. So as we look forward into the second quarter, we do see, as you look at scheduled shipments, some unfavorable mix on a sequential basis as well as kind of continuing impact from other inflationary elements, most notably expediting fees and other things are continuing to impact gross margins. I think the other thing is we are continuing to ramp kind of back into our targeted levels of R&D. We were actually sub-15% in Q4, approaching 16% here in Q1 as we look to kind of mid-16% of revenue is more the level. So I'd expect some further increase in that rate of investment in the R&D side of things as well, which is what's leading to the more or less flattish EPS.

Mark Delaney, Analyst

That's helpful. And for my follow-up question was on the comms segment. The company is focused and done a very good job broadening out the exposure into various ways, right, in terms of the type of tests you're doing but also the various parts of the industry. And 400 and 800, you guys have been going for some time. So maybe you can level set us on how big 400 and 800G is and how much data center is contributing to that comms segment at this point.

Satish Dhanasekaran, COO

Yes. I'll take this. I think you're right. I mean our strategy to really connect the workflow across the communications ecosystem continues to play out, and our execution remains very strong. At the heart of it, we've been focused on connecting the workflow between the wireless and the wireline parts of the ecosystem. We see that all of the data that comes through the networks through 5G, as an example, have to ultimately flow into a data center or cloud. As we follow that trial end-to-end, we see significant upgrades happening across the entire communications design flow. We're participating in a number of those technology trends associated with not only the speed because you referenced with 400, 800 and terabit but also the underlying infrastructure that's changing with the memories, the server technologies and the edge compute as well. We're also very pleased with the number of new chipset starts, the design starts that are occurring across the entire industry today. All of this is contributing to strength, and we saw that reflected in our commercial communications business, where we maintain a good balance between the 5G growth and also the wireline evolutions growth.

James Suva, Analyst

Congratulations. I have one question. There's been a lot of news about new semiconductor equipment factories and more vehicles incorporating electronics. Considering the lengthy supply chain, I'm curious if those substantial orders are already reaching your company. Or since construction requires pouring concrete and building walls, are those orders going to be much longer-term and not reflected in your current orders? It seems like these are long-term projects that will extend beyond the typical period where people might think we're at the peak of orders, with which I might disagree.

Mark Wallace, SVP, Global Sales

Yes. Jim, this is Mark. I'll take that. And you're exactly right. The strength that we're seeing today and have been seeing for the last many quarters is around new process technology development and mature technology scaling. But what you're referring to is the global expansion of new fabs in North America, in the United States, in parts of Asia and across Europe. These are multi-year, multi-billion-dollar investments that the semiconductor leaders are making, and the vast majority of those investments are well in front of us.

Neil Dougherty, CFO

I want to remind everyone about our order acceptance policy. We typically do not record an order unless it can be shipped within six months. Therefore, orders for projects that take longer are not currently reflected in our orders, although some customers are providing visibility into their needs for future factories and fabs that will be established.

Mark Wallace, SVP, Global Sales

Yes. I'll just follow up just to emphasize that. We are talking to all of the semiconductor players and we are working through the planning and preparation for the future. But as Neil said, what we booked today is really based on demand that we can see going out six months.

Christopher Snyder, Analyst

I guess my first question is kind of bigger picture. Clearly, the industry is in the middle of a very strong period of demand. The orders were up against sequentially here, the slight negative seasonality. So I guess my question is kind of what pushes the industry back down towards that normalized 3% to 5% growth that Keysight has called out in the past? And is it fair to think that the industry kind of collectively can achieve outsized growth until 5G peaks?

Mark Wallace, SVP, Global Sales

So Chris, this is Mark. I'll take a stab at that. I think the success that we've achieved and the level of order growth is tied into a lot about what Satish has been talking about, which is connecting our customers' workflows, even goes back to the previous question as it pertains to the growth in semiconductor being fed into demands from multiple different industries all bringing more electronic content together. That has this compounding effect. I certainly think that as we get to the maturity with some of these technologies, the capacities will meet certain levels so we can see some of that begin to turn more to more long-term models that we've been seeing. But as we do so, we look forward to the next generation. The early research that's occurring around 6G and the participation that we have, given our leadership position in the market, gives us opportunities to continue to drive this high secular growth that we've been delivering for several quarters.

Ronald Nersesian, Chairman, President and CEO

And the 3% to 5% that you're talking about that's for the market, we have clearly done a pretty good job of growing faster than the market quarter after quarter, and we intend to do so going forward. But look at the convergence in semiconductors and how more and more functions are being integrated into semiconductors and everything, whether you're talking about IoT or any of these other apps that we talk about, that demand we're going to see for a long period of time. Look at automotive. We're not talking about things that will grow for a year or two. Even though we talk about 19% and 15% of the total market being effectively EV in Europe and Asia, that's going to go up close to 100%. And then we have the Americas, too, which is behind. 5G has a ton of runway. Following that, we're starting to see early investments in talking about 6G that will follow it. On top of that, you put quantum. The use of high-performance electronics is not rolling over, and we don't see that at all in any short- or medium-term situation. Whatever the market growth rate, Keysight's aspirations, goals and results have always been to outgrow the market.

Christopher Snyder, Analyst

No, I appreciate that. It just feels like so many of the drivers here are secular. That's what I was trying to kind of figure out what pushes this back down to mid-single-digit growth. You kind of touched on my follow-up. The company has significantly outgrown the market and taken a lot of share ever really since you spun out, but it feels like it's kind of accelerated here. Is there anything that could cause that to compress?

Ronald Nersesian, Chairman, President and CEO

If we were at 65%, 70% share, you could say, 'Oh, will it start to flatten out?' We're at roughly 25% market share in total. We have so much headroom. The market is four times the size of Keysight, and we're gaining share. We're investing as much as that's needed. We're investing more than anyone else in the industry. We're investing earlier in the cycles for new developments, and we have the credibility with these players to be the chosen partner. Now that we've expanded beyond hardware to hardware to software and services, we provide complete solutions which make our customers' lives easier and help them accelerate their innovation timeline. So I'm very bullish on this, and I know the whole team is also. When we launched the company, we were at roughly 56% gross margin, and now we're talking 66% from software, from our hardware differentiation, from leadership positions in 5G, which gives us the opportunity to do a little bit of value pricing. We're going to continue to work to drive that higher.

Adam Thalhimer, Analyst

Congrats on another strong quarter. First question, I wanted to ask about just at a high level, what kind of inflation are you seeing? And then how is the pricing environment? How does that paradigm work for Keysight?

Neil Dougherty, CFO

We are experiencing inflation in various parts of the supply chain and cost structure. As mentioned last quarter, labor is a significant factor, with our largest salary increase cycle occurring last fall in our seven years as an independent company. We are observing different levels of price increases in several areas of the supply chain, particularly in freight and logistics, where costs are rising. Even companies that are not aggressively raising prices may charge extra for expedited shipping or to secure a timely delivery. We are encountering inflation in multiple areas. Regarding our pricing strategy, we continuously strive to balance our competitive position with the cost pressures we face while working to maintain margins as much as possible. We feel we have managed this effectively thus far and expect to continue doing so in the future.

Mark Wallace, SVP, Global Sales

Yes, Adam, this is Mark. The strengths are broad-based, with all regions experiencing double-digit order growth. Two of the three regions saw record highs. We also recorded double-digit order growth across all end segments. During the quarter, we added just over 500 new customers to Keysight, continuing our trend of adding hundreds of new customers across various end markets and geographies every quarter. This is crucial for us as it diversifies our business and significantly grows our customer base. Consequently, our business growth is also very strong in double digits. We are working hard to align our plans with our market-leading customers where we have seen significant success.

David Ridley-Lane, Analyst

As supply chain issues ease, how much of a margin benefit could there be? I imagine in addition to the higher freight costs and so on you're carrying now, there's also some manufacturing inefficiencies just related to the component shortages.

Neil Dougherty, CFO

It's not obvious to me that there's going to be a margin benefit other than volume that comes from a relaxation of the supply chain environment. I think our factories are continuing to run pretty efficiently. We need to take a wait-and-see approach, but it's not obvious to me that it's going to be a big margin benefit other than the benefits of volume.

Satish Dhanasekaran, COO

Yes. So no incremental impact. Obviously, the constraints in the supply chain are broad, and I think you're hearing this across multiple industries as well, and we feel that. But with regard to the actions that we're taking to maximize, those include internal value engineering activities to find multiple sources for products, looking for alternate sourcing from the open markets. We have strong collaborations with a number of our strategic silicon or semiconductor suppliers and our customers, too. So when we look at the end-markets demand for Keysight products around 5G, automotive and semiconductor, we have strong engagements with customers and our supply chain so that we're able to coordinate this. At this point, as Neil mentioned earlier, we're able to meet our customers' needs a very high percentage of the time. We're confident in our ability to process this backlog and convert it into revenue in future quarters. Pending upside from any improvement in the supply chain, we could further accelerate.

Robert Mason, Analyst

I wanted to ask about the automotive market. There have been several comments regarding its strength and the significant potential it holds. How do you anticipate the growth rate of that market over the next few years? Additionally, as the EV and ADAS components of the market are relatively new for high-end test and measurement, how do you see your mix evolving between R&D and production or manufacturing tests?

Satish Dhanasekaran, COO

When we examine the automotive market, we are witnessing a significant shift towards the adoption of electric vehicles (EV) and autonomous vehicles (AV), which is driving the industry's needs. Many automotive customers are beginning to establish new research and development facilities globally, moving away from outsourcing R&D work. This trend is reflected in our growing R&D business, as there is an increase in hiring electrical and software engineering talent. We expect this to continue as a key growth driver for us. As the number of EVs increases, our manufacturing segment within this market is also seeing growth. Keysight has opportunities to expand with new lab initiatives, leveraging the ongoing demand for electrical engineers in the automotive sector. Additionally, we aim to enhance our solutions in battery testing and charging, supported by recent acquisitions. We're also focusing on the C-V2X stack, integrated with our 5G portfolio to strengthen our position in this area. Recently at CES, we introduced our radar scene emulator solution, which has garnered considerable interest from clients. Investments in the automotive sector remain a priority for us, and while it's challenging to forecast growth rates, we are very pleased with the strong outcomes we've experienced thus far. I’ll now pass it over to Mark for further insights on our sales funnel.

Mark Wallace, SVP, Global Sales

Yes. I was going to mention the radar scene emulator. You got that Satish. The funnel is very strong. It's growing. We're seeing a lot of customers look out to Keysight for both EV and AV expertise. You think about all of the changes that are occurring within the customer base as well as the new entrants coming in, dealing with millimeter wave, high-power semiconductors, charging infrastructure, all of this stuff that we are providing leading solutions to. The funnel is growing substantially. The other indicator that I think is very positive is the adoption of our services, which again is another indicator that customers are looking for help in innovating and getting these tough jobs done. We're attaching a lot more services to our solutions, especially in the EV and AV space.

Operator, Operator

That concludes our question-and-answer session for today. I would now like to turn the conference back to Jason Kary for any closing comments.

Jason Kary, VP, Treasurer and Investor Relations

Thanks, Elliott. Now I'll turn it over to Ron to wrap this up for today. Thank you for joining.

Ronald Nersesian, Chairman, President and CEO

Thank you, everyone, for joining us today. As you can probably tell, we are very pleased with what our team has done to produce consistently excellent results. But I would also love to add that we are very optimistic for Keysight not only in the short term but with the position that we are in for long-term shareholder value creation. Thank you very much, and have a great day.

Operator, Operator

This concludes our conference call. You may now disconnect.