Earnings Call Transcript - KEYS Q3 2023

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal Third Quarter 2023 Earnings Conference Call. My name is Cole, and I'll be your lead operator today. This call is being recorded today, Thursday, August 17, 2023 at 1:30 P.M. Pacific Time. I would now like to hand the call over to Jason Kary, Vice President, Treasurer and Investor Relations. Please go ahead, Mr. Kary.

Jason Kary, Vice President, Treasurer and Investor Relations

Thank you, and welcome everyone to Keysight's Third Quarter Earnings Conference Call for Fiscal Year 2023. Joining me are Keysight's President and CEO, Satish Dhanasekaran; and our CFO, Neil Dougherty. In the Q&A session, we'll be joined by Chief Customer Officer, Mark Wallace. The press release and information that supplement today's discussion are on our website at investor.keysight.com under the financial information tab and quarterly reports. Today's comments will refer to non-GAAP financial measures. We will also make reference to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months. The most directly-comparable GAAP financial metrics and reconciliations are on our website and all comparisons are on a year-over-year basis, unless otherwise noted. We will make forward-looking statements about the financial performance of the company on today's call. These statements are subject to risks and uncertainties and are only valid as of today. We assume no obligation to update them. 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 Deutsche Bank, Goldman Sachs, and Citi. And now, I will turn the call over to Satish.

Satish Dhanasekaran, President and CEO

Good afternoon, everyone, and thank you for joining us today. Keysight reported solid results in the third quarter, demonstrating the strength of our portfolio and the resilience of our financial model. We are executing on our strategy and delivering on our commitments to customers and shareholders in a challenging macro-environment. My comments today will focus on three key headlines. First, we delivered another quarter of strong financial performance demonstrating Keysight's diversified portfolio, strong execution, and operating discipline. Third quarter revenue was in line with our expectations, while record earnings per share exceeded our guidance range. Second, while orders came in at the low end of our expectations, we saw positive and steady customer R&D spending and continued stability in commercial communications. Growth in aerospace, defense and government, and growth in our automotive EV and AV solutions partially offset incremental softness in EISG and Asia, primarily related to semiconductor and other manufacturing. This backdrop has tempered our near-term expectations for orders and revenue. We've factored this dynamic into our outlook for Q4, while now expecting full-year EPS growth of 7%. Third, despite the near-term challenges, Keysight's diversified business, differentiated solutions, and durable operating model give us confidence in our ability to capitalize on the long-term secular growth trends of our markets, as well as outperform in a variety of market conditions. Now let's take a deeper look at our third quarter results. While orders declined 15%, revenue of $1.38 billion was up 1% on a core basis and a record for the third quarter. Our differentiation and strong execution resulted in gross margin of 66% and record operating margin of 31%. We delivered $2.19 in earnings per share, which was an all-time high. Turning to the demand environment, we continue to see steady investment in strategic R&D programs in commercial communications, aerospace, defense, and government, and automotive EV solutions. In fact, over the past year, we've seen meaningful growth in large long-term customer commitments related to strategic programs, particularly in automotive and ADG. We view this as an important validation of our strategy; it puts us in a strong position in key emerging technologies and positions us well for future growth. Demand was incrementally weaker in Asia this quarter as customers deferred manufacturing-related spending in semiconductor, general electronics, and automotive markets in many cases well into next year. Taken together, the increase in our customer strategic program investments combined with soft near-term demand environment is moderating revenue in the fourth quarter, which Neil will discuss in more detail. Turning to our business segments. Electronic Industrial Solutions Group revenue grew 14% to another quarterly record and the 12th consecutive quarter of double-digit revenue growth. The strong financial performance was driven by double-digit growth across all markets and regions. EISG orders in the third quarter trended lower, particularly in semiconductor and manufacturing. Our customer engagements remain high as they're planned for, and continue to invest in key long-term strategic initiatives. In semiconductor, despite a near-term pullback in capital spending for wafer capacity, the industry is marching forward and planning for a strong future demand environment. In the near term, customers are prioritizing new applications such as silicon photonics to address the AI demand. As a result, this quarter we did see significant slowdown in our new wafer test solutions, while demand for Keysight's silicon photonics test and proprietary interferometer systems remained high. We expect these dynamics to continue over the next few quarters. In automotive, investments in EV and AV technologies continued to be strong. This quarter, we secured a third strategic win with another large European OEM to supply an EV battery test system that includes our PathWave Lab automation software. This program will be implemented in 2025, and we're quite excited to be working with industry leaders and supporting their goals. To address customer needs for wireless tracking, diagnostics and connected vehicle communications, Keysight also announced support for automated RF testing for Autotalks’ C-V2X chipsets on our PathWave Test Executive software platform. In general electronics, the growing collaboration between universities and companies is driving further investment in our solutions for advanced research. We're also expanding our customer engagement in digital health solutions to support the growing digitalization and connectivity requirements of this industry. Turning to Communications Solutions Group, revenue declined 5%, while the overall stable demand environment continued quarter-to-quarter. Aerospace, defense, and government revenue grew 11% with strong demand from U.S. government and primes. Keysight's differentiated signal generation and threat scenario emulation capabilities led to a large U.S. Air Force contract in Q3. We also won a key contract from leading Canadian prime contractors for electromagnetic spectrum operation applications. In addition, the demand for our radar and defense modernization solutions grew robustly as prime contractors placed orders for systems that support their delivery goals in 2024 and beyond. Government research demand and investment in 5G and 6G continued as well. Commercial Communications revenue declined 12% due to cautious spending by customers and weaker manufacturing activity in smartphone, PC, and component supply chain. Customer engagements remained strong with R&D investments in key technology to support 5G and 6G AI/ML-driven high-speed datacenter networking and satellite communications. Demand for our wireline applications improved sequentially driven by cloud provider and hyperscaler investments as they designed their networks for AI and ML workloads. Enterprise customer and key service provider investment was steady, driven by increased digitization, heavier network loads, and rising cybersecurity concerns. In wireless, 5G standards are progressing and we saw steady R&D investment in Open RAN, satellite, non-terrestrial networks and 5G RedCap Release 17 capability targeted at industrial and IoT applications. Early 6G engagements continued this quarter. We enabled the University of Stuttgart to advance 6G integrated circuit research with our sub-Terahertz solutions. Keysight also led the agreement between the 6G-SANDBOX consortium and the European Space Agency to further research to integrate terrestrial 5G/6G technologies and satellite networks of the future. This quarter, we continued to strengthen our technology leadership in the industry and enable our customers' innovation. For example, we extended our flagship network analyzer portfolio by introducing the industry's first integrated platform with vector component and analysis capabilities for power amplifier and component design applications. We also announced the industry's most comprehensive multi-speed ethernet performance platform supporting data center interconnects up to 800 gigabit ethernet that are critical for data-intensive applications such as AI. And lastly, Keysight enabled 3GPP protocol conformance validation for Release 17 non-terrestrial networks and is continuing to partner with new satellite operators like Skylo to accelerate the deployment of satellite networks. Software and services remain an integral part of our solution strategy and again accounted for one third of total company revenue. Overall, software and services revenue grew year-over-year reflecting the continued expansion of our software-centric solutions. We remain confident in the long-term secular growth of software-intensive R&D applications, particularly earlier in our customers' development process. In line with this trend and the software system simulation opportunity that I laid out at our March Investor Day, this quarter we announced our intent to acquire ESI Group, a leader in virtual prototyping solutions for the automotive and aerospace markets. The addition of ESI broadens our software capabilities into physical simulation and furthers our strategy of moving upstream into earlier stages of our customers' design cycles. Keysight's technology leadership and deep collaboration with industry players remain a significant competitive advantage. Despite current macro uncertainty, we see continued investments in R&D driven by multiple waves of technology innovation and broad-based industrial digitalization and connectivity needs. While continuing to invest in these long-term secular growth trends, we remain disciplined and have driven incremental cost efficiencies throughout the organization this year. Our current guidance expectations are to finish the fiscal year 2023 with 7% EPS growth and 1% revenue growth. We believe this financial performance exemplifies the strength of Keysight's differentiated first-to-market solutions portfolio, our durable and resilient business model, and our winning culture, which altogether positions us well for continued market outperformance. With that, I'll turn the call to Neil to discuss our financial performance and outlook.

Neil Dougherty, CFO

Thank you, Satish, and hello, everyone. We delivered solid financial performance in Q3. Revenue of $1.382 billion was just above the midpoint of our guidance range, flat year-over-year and up 1% on a core basis. Orders of $1.244 billion declined 15% on a reported and core basis. We ended the quarter with $2.3 billion in backlog. Turning to our operational results for Q3. We reported gross margin of 66% and operating expenses of $478 million, resulting in record operating margin of 31%. We achieved net income of $393 million and delivered record earnings at $2.19 per share. Our weighted-average share count for the quarter was 179 million shares. Moving to the performance of our segments. Our Communications Solutions Group generated revenue of $918 million, down 5% on a reported and core basis. Commercial Communications revenue of $611 million declined 12%, while aerospace, defense and government revenue of $307 million was up 11%, driven by increasing defense budgets worldwide and investments in technology modernization. Altogether, CSG delivered gross margin of 68% and record operating margin of 30%. The Electronic Industrial Solutions Group generated record revenue of $464 million, up 14% or 15% on a core basis, with double-digit revenue growth in automotive, general electronics, and semiconductor. EISG reported gross margin of 62% and operating margin of 34%. Moving to the balance sheet and cash flow. We ended our third quarter with $2.6 billion in cash and cash equivalents, generated cash flow from operations of $241 million and free cash flow of $196 million, or 14% of revenue. Share repurchases this quarter totaled approximately 930,000 shares at an average share price of $162 for a total consideration of $151 million. Now with regard to our outlook. Exiting the quarter and as Satish mentioned, the demand environment was mixed, with areas of stability and growth partially offsetting pockets of incremental softening. In addition, the composition of our order mix has changed over the past year. Our ability to deliver differentiated solutions and innovate at the pace of our customers has resulted in meaningful growth and strategic long-term customer commitments, which will deliver high-quality revenue over multi-year periods. These commitments were approximately 2% of orders in Q3 year-to-date last year and are approximately 8% of orders year-to-date this year. Turning to our fourth quarter guidance, which incorporates these factors, we expect revenue to be in the range of $1.290 billion to $1.310 billion. Full-year revenue at the midpoint of our guidance is $5.5 billion, representing 1% growth. We expect Q4 earnings per share to be in the range of $1.83 to $1.89 based on a weighted diluted share count of approximately 179 million shares. Full year earnings per share at the midpoint of our guidance is $8.19, representing 7% growth. As we look to next year with the capitalization of R&D, the pending increase in the guilty tax-rate on offshore earnings, and efforts by the OECD to establish a global corporate minimum tax rate of 15%, we now estimate that our non-GAAP tax rate beginning in fiscal year 2024 will be in the range of 15% to 17%. With that, I will now turn it back to Jason for the Q&A.

Jason Kary, Vice President, Treasurer and Investor Relations

Thank you, Neil. Cole, please give the directions for the Q&A.

Operator, Operator

Of course. Our first question comes from the line of Samik Chatterjee with J.P. Morgan. Your line is now open.

Samik Chatterjee, Analyst

Yeah. Hi, so many thanks for taking my question. Hi, Satish. Can you hear me?

Satish Dhanasekaran, President and CEO

Yes, we can hear you.

Samik Chatterjee, Analyst

Hi. Can you hear me? Yes. Hi. If we can start with EISG where you said demand trends or order trends are stable. Maybe if you can sort of dig into that a bit more because there have been concerns given that the smartphone ecosystem still remains really sort of below average in terms of demand that there could be further weakness there. What are you seeing in terms of wireless versus wireline, particularly interested in understanding if you're seeing any demand uplift from all the uptakes in the AI applications on the wireline side? Just maybe dive into that a bit more. And I have a follow-up. Thank you.

Satish Dhanasekaran, President and CEO

Sure, Samik. I want to emphasize that the Keysight team performed exceptionally under current conditions, which is evident in our strong quarterly and year-to-date performance. According to our guidance, we anticipate 7% EPS growth for the year with 1% revenue, while maintaining solid profitability. That's our baseline. In terms of orders, they were down 10% year-over-year in Q2, and currently, our orders for the reported quarter have declined by 15%. A significant portion of this year-over-year drop is from our Greater China operations, linked to a production slowdown which affected the EISG business that had been performing relatively well until the first half of the year. We expect this situation to persist for a few more quarters but believe it will be temporary. Based on our interactions with customers, including the fabs, they also view this as a short-term situation. From a regional standpoint, our Americas business grew this quarter following a record Q3 last year, while Europe remained stable, bolstered by strength in the EV and AV sectors. Looking at specific segments, commercial communications remained stable, aerospace and defense experienced growth, while EISG saw a slight decline. In commercial communications, 5G investments in R&D have remained stable. However, we have not yet seen a recovery in the manufacturing business related to components, which is connected to declines in overall smartphone volumes. The premiumization trend in the smartphone market is significant; customers with better performance or earnings have resumed investments in their R&D innovation needs. This reaffirms our belief that R&D investments are robust and customers are eager to keep up. On the wireline side, AI influences are becoming notable as hyperscalers assess AI within their data center investments. We have observed some initial increase in investments for 800 gig, though it's still early to draw definitive conclusions, and one quarter does not establish a trend. However, we are encouraged by two consecutive quarters of stability given the economic context. I believe Keysight's extensive portfolio and our contributions to the communications ecosystem are helping us outperform. Additionally, our Network and Security business, formerly the Ixia business, is also performing well and I believe we are gaining market share. I'll wait for your follow-up question.

Samik Chatterjee, Analyst

Thank you. Could you share your thoughts on the orders we need to see going into next year for Keysight to return to the long-term growth outlook for revenue? Historically, your orders and revenues have had a close correlation. How are you approaching the necessary orders? Additionally, I would like to clarify what Neil mentioned regarding more long-term strategic orders from customers. Does this imply a disconnect between order trends and their conversion into revenue next year? I'd appreciate your insights on that.

Satish Dhanasekaran, President and CEO

Well, I'll just make some high-level comments. First is, the successes we are having in this environment is a function of execution, but also a function of the breadth of the company and all the different end markets we serve. Obviously, we don't control the macro, but we're able to figure out where there are strengths and we're able to maximize, such as in aerospace, defense, and automotive with AV and EV, which is going through a bit of an uptick in the market and we're able to capitalize on that and outperform. I'll just let Neil speak about the guide and the comments he made about our system integration business and associated revenue implications there.

Neil Dougherty, CFO

Yes, thanks, Samik. As we consider orders, we've managed to maintain revenues significantly higher than the incoming order rate during the first quarters of this year while addressing the backlog accumulated during the COVID period and the supply-chain disruptions over the past 12 to 18 months. However, we've noticed a decline in demand this quarter, which will likely affect orders as we head into Q4 and potentially Q1. This makes it increasingly difficult to sustain revenue based on our backlog. We've utilized about $300 million of backlog this year, indicating how revenues have exceeded orders. Additionally, we've observed a shift towards longer-term systems, which represents a smaller portion of our business that has consistently been under 5%. We are working on larger-scale strategic programs delivered over extended periods, which we see as a positive development, as our customers continue to invest in these projects. Last year, this segment accounted for roughly 2% of orders through three quarters, while this year, it represents about 8%. This means that in addition to the $300 million backlog we've addressed, we've also converted $200 million of short-term backlog into long-term backlog. Looking ahead to our guidance for Q4, it is primarily based on the scheduled backlog we plan to deliver next quarter and our expectations for incoming orders and our capability to convert some of those orders into revenue within Q4.

Satish Dhanasekaran, President and CEO

Yes. To add to what Neil mentioned, the $200 million he referred to comes from high-quality customers who are making long-term commitments, which further supports our strategy with them. These customers are large aerospace defense companies that are looking to us for more comprehensive solutions and systems. In the automotive sector, particularly regarding electric and autonomous vehicles, we are providing complete solutions, including power management and workflow automation software. Completing these projects takes time as they align with the launch of their gigafactories. This approach is highly coordinated and strategic for our customers, and I believe it offers us deeper penetration into new applications that will support our long-term growth rate.

Samik Chatterjee, Analyst

Got it. Thank you. Thanks for taking my questions.

Satish Dhanasekaran, President and CEO

Thank you, Samik.

Operator, Operator

Our next question is from Mehdi Hosseini with SIG. Your line is now open.

Mehdi Hosseini, Analyst

Yes. Thanks for taking my question. And two for me. Just as a follow-up to your commentary to the prior question. I just wanted to get a better understanding, especially in terms of backlog normalization; it's good to hear of strategic orders longer-term and the inherent business is also driven by some of the R&D projects. In that context, should we assume that backlog normalization is into full gear? And then your backlog could remain in a level that would start with a two-zip code? And I'm not asking for order guide, but I just want to better understand how you see the post-COVID normalization of backlog trending against some of the pluses and minuses in various parts of the business. And I have a follow-up.

Neil Dougherty, CFO

Yes, Mehdi. I think that's mostly accurate. Over the past year, I've mentioned that we believed we had built what I refer to as an abnormal backlog of $400 million to $500 million. As I mentioned earlier, we have utilized $300 million of that over the first three quarters of this year and have essentially converted another $200 million of near-term backlog into backlog for longer-term programs. Therefore, I believe we have significantly processed that abnormal backlog at this point, and I consider it reasonable to expect that in this environment, our normalized backlog level could start with a two.

Satish Dhanasekaran, President and CEO

I also thank Mehdi to the point I think you're alluding to is software and services, we continue to be stronger even in this environment for us, again reflecting the strength of our customer relationships. And so the deferred balance is also a factor that is elevated that leads to the two zip-code calculation you have.

Mehdi Hosseini, Analyst

Okay, great. And my follow-up has to do with the semi-mix. I think you mentioned that the semi-bookings or new orders were weak in the quarter. Is that due to the delayed ramp of tape-outs for 3 nanometers? And if that's the case, should we assume a rebound in semi-related orders as we start with the new fiscal year, fiscal year 2024?

Satish Dhanasekaran, President and CEO

Yes, Mehdi. I think what you've probably seen public announcements from major fabs around pulling back of wafer capacity; so some of the investments associated with our parametric test systems, which typically feed the fabs have been pulled back, especially around legacy technologies and memory applications. So as that rebounds, you can expect that capacity to rebound. Again, this is an area where we have good customer visibility given long-standing relationships that we have had. But it's also a tale of two worlds because the same customer base is focused with us relentlessly about the advanced node development, about new application areas such as silicon photonics, which in today's world translates to AI. And we also have another business that we've talked about in the past around making interferometer systems for two nanometer sort of technologies. And there, there is no change in demand because we are working with customers on enabling this technology. So, yeah, there is a pullback in the near term. But again, I want to stress this is temporary and transient.

Mehdi Hosseini, Analyst

I just want to understand, would increase 3-nanometer tape-out next year have a positive impact for your semi-business?

Satish Dhanasekaran, President and CEO

I'll have Mark Wallace take that.

Mark Wallace, Chief Customer Officer

Yes, despite the short-term pullback, we continue to engage with our customers on advanced process technologies like 3-nanometer, 4-nanometer, and 2-nanometer. Many customers are evaluating various market factors and their financials. For instance, one US customer is delaying their fab build-out due to construction issues, but we anticipate this will stabilize in the coming quarters. Another customer, who is also working on advanced node sizes and has locations in both the US and Asia, is maintaining their overall project plan and investment while distributing their capital expenditures over several quarters. There are numerous similar cases. It seems we are experiencing a phase of pullback, but I can confirm that we expect this situation to positively affect our business in 2024.

Mehdi Hosseini, Analyst

Thank you.

Operator, Operator

Our next question is from Aaron Rakers with Wells Fargo. Your line is now open.

Aaron Rakers, Analyst

Yes. Thanks for taking the questions. And Neil, I apologize to go back to this. But I want to be clear, what I'm hearing from you guys is that, it sounds like Neil you believe that backlog coming out of this quarter is basically near normalized levels in your opinion. And I guess what I'm really asking is that if I look back over the past couple of years appreciating that there are some variables with COVID and everything else involved. But it looks like seasonally, you typically see a sequential increase in your order growth in fiscal 4Q. I guess, as I look at that, are you expecting sequential or how would you characterize seasonal growth in orders? Or maybe rather discussing on a book-to-bill basis, embedded in your expectation for the fiscal fourth quarter at this point? I apologize for the confusing question, but I'm just trying to understand how you're seeing order growth and backlog.

Neil Dougherty, CFO

Yes. No, it's a fair question. So first off, do we believe backlog has normalized, and I'd say the answer to that is largely, yes. We believe backlog has normalized at this point. With regard to incoming order rates and seasonality, you're absolutely correct. We typically see a pretty sizable increase as we move from Q3 to Q4 at the end of our fiscal year and what I would say is we do expect orders to be up sequentially from Q3 to Q4. But we expect a significantly smaller sequential increase than would be typical based on weakness of the funnel that materialized during the third quarter.

Aaron Rakers, Analyst

That's fair. So a book-to-bill improvement from this level is basically what you're alluding to?

Neil Dougherty, CFO

Yes. I mean, I guess, I would think of it as with backlog having normalized, we would expect orders and revenue to start to converge.

Operator, Operator

Thank you. Our next question is from Adam Thalhimer with Thompson Davis. Your line is now open.

Adam Thalhimer, Analyst

Hey, good afternoon, guys. The revenue guidance for Q4 of minus 10% at the midpoint, do you see both segments down? Can you just help us on how that plays out between the segments?

Neil Dougherty, CFO

Just give me one second here. Yes, we definitely observe declines in both segments, which is a notable change for EISG, as it has significantly increased revenues in the first three quarters of the year. However, we are seeing similar levels of revenue decline across both segments.

Adam Thalhimer, Analyst

Okay, helpful. And then in aerospace and defense, can you talk at all about the outlook there? It's been a well-timed acceleration offsetting some weakness in communication. Just wondering if the aerospace and defense can stay as strong.

Satish Dhanasekaran, President and CEO

Yes. The global security environment clearly indicates that defense budgets are receiving bipartisan support in the US. Japan has also announced plans to double its defense spending over the next five years. Similarly, Europe is increasing its defense and security budgets. While predicting results on a quarterly basis can be challenging, the long-term trend is more apparent. Our aim is to continue to outperform this sector. We anticipate that Q4 will be seasonally strong, particularly with the end-of-year budgets being released.

Adam Thalhimer, Analyst

Thanks, guys.

Operator, Operator

Our next question is from Meta Marshall with Morgan Stanley. Your line is now open.

Meta Marshall, Analyst

Great, thanks. Maybe first question for me, you guys have talked about a lot of new kind of extension areas that you're seeing traction, and particularly on the AI side. With the flat OpEx that you've noted, just wanted to get a sense of how you're making sure of kind of touch base with some other new customers that might be entering into this space or how you're finding better leverage through channels. And then as a second question, just as a reminder on the Communications Group, can you just kind of lay out what you would consider as kind of rough percentages of kind of maintenance standard, so 4G you're kind of existing 5G versus kind of the next-Gen portfolio. Thanks.

Satish Dhanasekaran, President and CEO

Yes, we are maintaining our investments in research and development to ensure we can outperform the market, especially as it rebounds in the medium to long term, which we anticipate. Many of our customers are launching AI initiatives, whether in silicon or networking, providing significant leverage for AI. The shift to 800-gig ethernet, which offers higher interface capacity, increased bandwidth, and lower power consumption per bit, plays to our strengths. Our leadership in this area is enabling us to secure more orders as we expect this business to scale. In the communications segment, there are three main factors at play: deployments are continuing to grow, which in turn expands our business; the progression of standards is fostering new customer needs, particularly with Release 17; and research into what I refer to as beyond 5G is increasing globally, aligning well with our strategy to serve R&D customers.

Meta Marshall, Analyst

Great. Thanks.

Operator, Operator

Our next question is from Mark Delaney with Goldman Sachs. Your line is now open.

Mark Delaney, Analyst

Yes. Thank you for taking the questions. Follow-up question as it relates to 800-G ethernet and some of the AI activity you're seeing. You mentioned some orders already on that front, but you described it is still in the relatively early phases. Do you have a sense of when 800-G orders related to AI or are there reasons 800-G may become more meaningful?

Satish Dhanasekaran, President and CEO

It is difficult to specify a timeline, but overlapping waves of technology are central to our strategy. Our dual exposure to both wireless and wireline is a key strength, and we are currently seeing the benefits of this diversity in our applications. The capability to be first-to-market with 800-gig ethernet is definitely aiding us in securing early engagements, positioning us well as the industry grows. As hyperscalers emerge from their current economic challenges and begin their upgrades, they are considering 800-gig ethernet for the technical advantages I mentioned.

Mark Delaney, Analyst

That's helpful, Satish. Thank you. And then on the ESI acquisition you made some comments already that were helpful, including the gross margin accretion. I apologize if I missed this. But can you talk a little bit more in terms of what it may mean in terms of EPS contribution when it's integrated and how is that progressing over time? Thank you.

Neil Dougherty, CFO

Yes. Obviously, this is Neil. We do expect that there's some complexities of doing a public deal in France; it takes a little bit longer than typical to get the deal fully closed, and for us to then, therefore, begin to start realizing the G&A synergies that we typically rely heavily on to drive EPS. But I think first and foremost, this is a business that we feel like we can grow pretty aggressively with, obviously strong software-like margins. We can via the significant breadth and reach of our sales force to get them access to new market participants, and then heavily leverage our G&A, our highly offshored low-cost G&A infrastructure to drive significant margin expansion for the business and ultimately drive EPS growth.

Mark Delaney, Analyst

Got it. Thank you.

Neil Dougherty, CFO

Thank you.

Operator, Operator

Our next question is from Rob Mason with Baird. Your line is now open.

Rob Mason, Analyst

Yes, good evening. I wanted to go back to the conversation around these more strategic longer-dated orders. I'm not sure that I still fully understand what the ship schedule or revenue recognition timing would look like on those. And I'm just curious, as well as those have been booked into orders. Have you widened or changed the order booking policy around kind of shippable in the next six months around those timing?

Satish Dhanasekaran, President and CEO

Yes, thank you. I want to clarify that this has historically been a very small part of our business, which is why we've not discussed it before. Due to the current lower order levels, the presentation may look different. However, there is no change to our order acceptance policy. These are complex systems requiring coordination from our inventory and staff to deliver to our customers. They are booked for the right reasons and represent high-quality deals that we are confident about.

Neil Dougherty, CFO

Generally uncancelable without significant penalty would be the last part of that I would make. And from a delivery schedule, you could think of them certainly beyond six months or they'd be within the standard, but you can think of it as in the case of a lot of the aerospace defense kind of 12 months; some of the auto ones are 18 months or more because they tend to be even longer types of programs for us to deliver. So as we mentioned in the prepared comments, some of these deals are scheduled for revenue recognition out in 2025 upon delivery of the complete project to the customer.

Rob Mason, Analyst

Understood. As a follow-up, Satish, ESI Group seems to align well with our strategy of moving upstream and maintaining a close relationship with R&D and simulation. However, I'm interested in your perspective on the opportunities beyond our core electrical engineering customers, particularly regarding more physical tests. Was ESI unique in this aspect, or are we considering a broader range of options outside of electrical engineering tests?

Satish Dhanasekaran, President and CEO

Yes, absolutely. When we consider the opportunities in system simulation and emulation, it’s essential to have the capability to simulate very intricate interactions involving physical, electrical, and software aspects. The strengths of our company position us well, as having these resources will enable us to discover new use cases and address them in a unique way. This gives us a distinct advantage due to our comprehensive portfolio and its alignment with our enhanced design efforts. We view this as a unique opportunity for the company that supports our software-focused transformation. Additionally, being based in Europe, particularly in France, allows us to leverage our US customer base to better target our market approach, which should help us accelerate growth and deliver greater value.

Mark Wallace, Chief Customer Officer

I would just add one thing to the exciting part is the alignment to the verticals, automotive, aerospace, defense; it's broadening our footprint and broadening our value to these important customers.

Rob Mason, Analyst

Very good.

Operator, Operator

Our next question is from Atif Malik with Citi Research. Your line is now open.

Adrienne Colby, Analyst

Hi, it's Adrienne Colby for Atif Malik. Thank you for the question. I wanted to ask a clarifying question on orders; you had commented that the 15% decline in overall orders was heavily influenced by China. Just hoping you could clarify what you saw in the Americas and Europe if you were seeing improvements in the rate of year-over-year declines there?

Satish Dhanasekaran, President and CEO

Yes, I believe I've mentioned that our Americas business grew quarter-over-quarter in Q3, and Europe remained stable.

Adrienne Colby, Analyst

And sorry, was that sequentially or year-over-year?

Satish Dhanasekaran, President and CEO

Year-over-year.

Adrienne Colby, Analyst

Thank you. And then I just wanted to ask with regards to the long-term strategic multiyear engagements you've been speaking about. Can you comment on how much of the growth in orders is a factor of up-selling or expanding some of the existing agreements versus new agreements? Just trying to get a sense of the number of customers that are falling into this category, if that's growing.

Mark Wallace, Chief Customer Officer

Yes, Adrienne. I think it's a combination, as I mentioned before, these strategic first-time wins with the automotive OEMs into themselves are long-dated and enlarged. And through the process, we work with the customers to up-sell and cross-sell capabilities and then get more visibility across other parts of the groups as they're oftentimes organized or across the ecosystem as well. So I think the way to think about it in its simple terms is these longer-term programs are about as strategic as we can get with our customers. So it opens up new opportunities to sell, including software and other aspects of delivering value services, et cetera. So we're excited about it, and we're looking forward to continuing to deliver through these vehicles.

Adrienne Colby, Analyst

Thank you.

Neil Dougherty, CFO

Thank you, Adrienne.

Operator, Operator

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

Jason Kary, Vice President, Treasurer and Investor Relations

Hey, thanks, Cole. And thanks everyone for joining us. I'm going to turn it over to Satish for a few closing comments and then we'll wrap up the call.

Satish Dhanasekaran, President and CEO

Yes, thank you very much. I know we discussed quite a bit today, but I want to leave you with some—few important takeaways. First, we're executing very well, maximizing our performance in the near-term and we're tracking to deliver 7% EPS growth with 1% revenue growth this year. Solid profitability in the business, and you should take that away. Second, we have strong differentiated portfolio that's aligned with multiple end markets and customer priorities and this will continue to enable us to outperform, both in the near-term and will grow stronger as market conditions change. You see the differentiation in our portfolio reflected in our ability to maintain strong gross margins in our business in these conditions. Third, we have a strong balance sheet, strong cash position, and we remain confident in our free cash flow generation capabilities in the business, and we will continue to maintain the balanced capital allocation approach that we described at Investor Day. Fourth, we have a proven operating model with a highly flexible cost structure, which has been proven before and will continue to play out as we had projected as well. Fifth, we have a seasoned management team here that has experience in the business for decades and will continue to remain proactive and balanced in navigating this environment, and you've seen us do this already this year. Finally, I want to remind everyone that we remain incredibly confident and excited about the favorable long-term secular trends that are underpinnings of our growth strategy. This is around the next-generation technology waves, new addressable customers and industries, and R&D investment wave across multiple end-markets. We are focused on positioning the company to grow and emerge from this environment stronger. Thank you very much for joining us today. I'll hand this back to Jason.

Jason Kary, Vice President, Treasurer and Investor Relations

Thank you, Satish. And that concludes our comments today. Have a great day.

Operator, Operator

That concludes today's conference call. You may now disconnect your line.