Keysight Technologies Inc.

Good day, ladies and gentlemen, and welcome to the Keysight Technologies fiscal third quarter 2020 earnings conference call. My name is Chris, and I'll be your lead operator today. After the presentation, we will conduct a question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press the pound sign. If at any time during the conference you need to reach an operator, please press the star followed by zero. Please note that this call is being recorded today, Wednesday, August 20, 2020, at 1.30 Pacific Time. I would now like to turn the conference over to Jason Carey, Vice President, Treasurer, and Investor Relations. Please go ahead, Mr. Carey.

Thank you, and welcome, everyone, to Keysight's third quarter earnings conference call for fiscal year 2020. Joining me are Ron Nersessian, Keysight's Chairman, President, and CEO, and Neil Doherty, Keysight's Senior Vice President and CFO. Joining us in the Q&A session will be Mark Wallace, Senior Vice President of Worldwide Sales, and Satish Dhanashakaran, President of the Communications Solutions Group. 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'll find an investor presentation along with Keysight 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. 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 the management team is scheduled to participate in upcoming virtual investor conferences in September hosted by Jefferies, Citibank, and Deutsche Bank. And now I will turn the call over to Ron.

Thank you, Jason, and thank you all for joining us. Keysight delivered stronger than expected third quarter results, demonstrating the exceptional resilience of our business for the second quarter in a row, despite ongoing macro challenges. I am proud of how the Keysight team rapidly adapted to a new operating environment while delivering on our commitments to our customers, partners, and shareholders. I'll focus my formal comments on three key headlines for the quarter. First, we delivered stronger than expected third quarter results with solid gross margin and record operating margin. Our differentiated solutions drove steady demand through the quarter, and our operational execution was exceptional as we ramped production capacity to nearly 100% by quarter ends. Second, despite the ongoing pandemic uncertainty, we remain confident in our differentiated leadership position and the long-term secular growth trends driving our markets. The past two quarters have demonstrated the resilience of the Keysight leadership model, which we believe provides a durable competitive advantage for the long-term. And third, despite near-term macro disruption, we expect to achieve year-over-year revenue and earnings growth in the fourth quarter. Now let's take a deeper look into our financial results and the market dynamics within the quarter. Despite the challenging macro environment, demand for Keysight's differentiated solutions was steady through the quarter. Orders declined 4% year-over-year and 2% sequentially, in line with our typical Q2 to Q3 seasonality. Revenue declined 7% year over year, while increasing 13% sequentially. The durability of our financial operating model and flexibility of our cost structure was again exceptional as we delivered third quarter gross margin of 64% and record operating margin of 26% and free cash flow of $151 million. In commercial communications, we continue to see the global adoption of Keysight's 5G platform. Our end-to-end solutions for the 5G lifecycle across both wired and wireless domain and from R&D and high-value manufacturing are enabling the ecosystem to scale from product development to deployments. 5G commercialization is progressing and on track to add an estimated 190 million subscribers in 2020. Device design and development investments continue to be strong, driven by the large-scale ramps in Asia. As 5G deployment expands and ongoing innovations gain customer interest, we continue to see strength in R&D. With several test house announcements this quarter, Keysight's leadership is further solidified as our 5G test platforms are now being used by all the leading test houses worldwide. Keysight's first-to-market 5G design and test solutions are also helping to accelerate and enable the virtualization of the radio access network and the rapid adoption of the open radio access network technologies. We also saw strong demand for our high-speed digital and optical solutions driven by 400G manufacturing expansion and an uptick in R&D investments in 800G. Keysight is well-positioned to capitalize on commercial rollouts and mainstream deployments. Our comprehensive platform provides end-to-end solutions that enable customer innovation throughout the entire 5G life cycle. In aerospace defense and government, orders are strong in the U.S., offset by lower investment in Europe, and to a lesser extent in Asia. We continue to see strong demand for our electromagnetic spectrum threat simulation platform, as well as solutions for radar, space, satellite, and 5G. In addition, we continue to enable our customers' initiatives to increase their electronic supply chain capacity and reliability in the US, which we believe will be a multi-year opportunity. In the automotive sector, macro-driven weakness persists. However, the fundamental drivers for the long-term investment in electric and autonomous vehicle technologies continue to be a strategic industry priority. As the industry adapts to tremendous change in multiple technology disruptions, Keysight is investing in first-to-market solutions and remains firmly engaged with key market players. We recently announced a multi-year collaboration with IPG Automotive and Nordsys to jointly develop a new modular test platform for autonomous drive emulation. This will accelerate the validation of advanced driver-assisted systems and functions for autonomous driving. Strategic investment in next-generation semiconductor process technology remains a priority for our customers. Demand is being driven by 5G smartphone processors, high-speed networking, and high-performance data center applications to serve the work-from-home economy. This trend resulted in double-digit, year-over-year order growth for our semiconductor measurement solutions. Software and services again delivered solid revenue growth this quarter. Our software centric solution strategy is providing strong value to our customers. Services and support, such as Keysight Care, continue to expand to higher value added consulting and optimization offerings. At greater than 30% of total revenue, our growing mix of software and services is contributing to the durability of our business model while increasing recurring revenue and improving gross margins. With the bulk of our 5G opportunity ahead of us and millimeter wave commercialization still in its early days, we recently launched the PathWave Design 2021 software suite. This advanced software accelerates 5G design, simulation, and verification workflows with an integrated solution that ensures design performance, improves accuracy, and speeds time to market. In the manufacturing arena, Keysight continues to collaborate with leading 5G infrastructure customers on new cloud-based pathway manufacturing solutions. We continue to increase our solution differentiation with strategic acquisitions, expanding into the application layer, and growing our addressable market. We recently acquired 8Plant, an industry-leading software test automation platform provider. Eggplant's differentiated technology uses artificial intelligence and analytics to automate test creation and test execution. With this acquisition, Keysight is now the only company that can provide test capability from the physical layer through the application layer and extending to the user experience, or UX. Eggplant's customers span a wide range of sectors overlapping Keysight's existing customer base while expanding software test opportunities into new end markets. Looking back at the past two quarters, our performance exemplifies the core values of the Keysight leadership model on multiple fronts. We demonstrated operational excellence and the durability of our financial operating model. KLM also extends beyond financial accountability and aligns with our foundational pillars of corporate social responsibility. We released our latest annual CSR report in May. We are proud to have surpassed our social impact goals in community and education while making progress on our governance and environmental goals, including climate change. Lastly, As a result of recent events, we are taking further actions to expand our inclusion and diversity programs to advance racial equality. For example, we are working with academic institutions, including historically black colleges and universities, to reinforce our diversity recruiting strategy. We are committed to accelerating racial equality and will do our part to make a difference. To wrap up my comments, Keysight's execution this quarter is a reflection of our values and our commitment to customers to deliver first to market solutions for their businesses and technology challenges. I couldn't be prouder of the Keysight team. They have risen to the occasion in a challenging environment and continue to execute on customer commitments while at the same time upholding the values that makes Keysight a diverse, inclusive work environment with a culture of innovation, ownership, passion, and respect. Now I will turn it over to Neil to discuss our financial performance and outlook in more detail.