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spk00: Good day, ladies and gentlemen. Welcome to the Keysight Technologies Fiscal Fourth Quarter 2021 Earnings Conference Call. My name is Catherine, and I will 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 today's call is being recorded today, Monday, November 22nd, 2021 at 1.30 Pacific time. I would now like to hand the call over to Jason Carey, Vice President, Treasurer in Investor Relations. Please go ahead, Mr. Carey.
spk15: Thank you and welcome everyone to Keysight's fourth quarter earnings conference call for fiscal year 2021. Joining me are Ron Nersessian, Keysight's chairman, president, and CEO, and Neil Doherty, our CFO. Joining us in the Q&A session will be Satish Janashikaran, 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 December hosted by Credit Suisse, Wells Fargo, and Barclays. And now I will turn the call over to Ron.
spk06: Thank you, Jason, and thank you all for joining us. Keysight delivered a record quarter and fiscal year. Strong demand for our portfolio of differentiated solutions is fueling continued momentum across all of our end markets. Today, I'll focus my comments on four key headlines. First, demand for Keysight's differentiated solutions continues to be very strong with orders exceeding our expectations. Outstanding order growth of 21% in the fourth quarter topped off an excellent fiscal year where we grew 18%. Demand continues to be balanced across our business with double-digit gains across all end markets and regions, both in the fourth quarter and for the full fiscal year. Second, we delivered outstanding Q4 results Exceptional execution by Keysight employees around the world resulted in record revenue, gross margin, operating margin, and earnings per share for the fourth quarter and for the fiscal year 2021. Third, we entered 2022 with strong momentum, robust end market demand, and record backlog. Assuming a loosening of the supply situation in the second half of the calendar year, we expect fiscal year 2022 revenue growth of 6% to 7% while delivering 10% earnings growth. Beyond 2022, we are increasingly confident in our ability to deliver sustained above market results. we have established a strong track record of execution and our competitive position earned over the past seven years of investment and transformation has only grown stronger. Lastly, given the strength of our cash position and generation, we continue to see tremendous opportunities for value creation through disciplined investment and organic capabilities, targeted acquisitions, And accordingly, today we announced a new share repurchase authorization of $1.2 billion. Now let's take a deeper look at the strength of our fourth quarter and the fiscal year 2021 financial performance. In the fourth quarter, we saw continued momentum in the demand environment. Revenue grew 6% with growth across all regions. Operational excellence resulted in record profitability as we delivered gross margin of 66%, operating margin of 31%, and earnings of $1.82 per share. Fourth quarter results drove a very strong finish to an excellent year. In 2021, we overcame five percentage points of China trade headwinds and delivered 18% order growth to outpace the overall market, which continues to be strong. Despite a tightening supply environment, we ended the year with 17% revenue growth and achieved record profitability with gross margin of 65%, operating margin of 28%, and earnings of $6.23 per share. Compared to pre-pandemic fiscal year 2019, orders and revenue have grown 21% and 15% respectively over this two-year period, highlighting the continued strong demand for our market-leading solutions. Broad-based growth across multiple dimensions of the business demonstrates the breadth of our customer base. We added more than 2,000 customers in 2021 and more than 1,900 in 2020 as we continue to expand our footprint, adding to the stability and durability of our business model. Despite the headwinds we faced in 2021, we delivered annual double-digit order and revenue growth in both business segments. The Electronic Industrial Solutions Group achieved its fifth consecutive quarter of record revenue driven by double-digit growth in semiconductor solutions and in automotive. Another quarter of record semiconductor revenue was fueled by ongoing investments in advanced technology nodes and capacity expansion to address pent-up demand. In automotive, we achieved record orders for the third consecutive quarter of double-digit order and revenue growth. Investment remains strong in EV and AV technologies. This quarter, we announced a collaboration with NIO, one of China's top EV automakers, who selected Keysight's 5G and CD2X network emulation solutions. Strong demand for general electronic solutions was driven by continued investments in digital transformation, industrial IoT, digital health, industrial 4.0, and advanced academic research. The Communication Solutions Group delivered double-digit order growth and record revenue in the fourth quarter. For the year, orders and revenue grew double digits despite the impact of China trade restrictions. Commercial communications achieved all-time record orders and revenue in the fourth quarter. Q4 was another record quarter for 5G driven by the strength of our platform, continued O-RAN adoption, and new industry applications. In addition, we saw ongoing investments in 400G and 800G R&D across the entire communications ecosystem. Increased spending in data centers and network security drove double-digit order growth in network test and visibility. In aerospace defense and government, double-digit order growth was driven by ongoing investments in technology with a focus on space and new commercial technologies like 5G. We recently announced a collaboration with Lockheed Martin to advance 5G in support of mission-critical communications for aerospace and defense applications. Keysight's first-to-market solutions are enabling the rapid progression of new technologies and winning engagement with industrial leaders like NXP, NEC, and MediaTek. In Q4, we joined Google's cloud partner initiative to support agile orchestration of innovative 5G services at the network edge. Our end-to-end solutions portfolio continues to capture new opportunities as the 5G lifecycle progresses and expands into aerospace, defense, and government, automotive, and industrial applications. We continue to accelerate Keysight's capabilities to provide industry-leading solutions through strategic acquisitions and recently added scalable network technologies to our software-centric solutions portfolio. Scalable is a provider of best-in-class network simulation solutions to model and visualize communication networks and cyber-guides for aerospace, defense, and government customers. We're excited to welcome the Scalable team to Keysight. Our software-centric solutions and higher-value services continue to drive differentiation, strengthen our competitive position, and capture a higher percentage of our customers' wallet share. In fiscal year 2021, software and services not only delivered double-digit order and revenue growth, but also outpaced Keysight's overall growth. Combined, they represented just over one-third of Keysight's total revenue for the year. We also continued to grow annualized recurring revenue, which now exceeds $1 billion. The growth in software and services, as well as the recurring revenue, further strengthens while at the same time contributing to Keysight's margin expansion. Keysight's focus on first-to-market, software-centric solutions and operational excellence drives our consistent execution. We have a strong track record of performance and proven business resiliency. Since our inception as a public company seven years ago, we have achieved a 10% compound annual revenue growth rate, expanded gross margin by over 800 basis points, increased operating margin by nearly 1,000 basis points, and generate 16% annualized EPS growth, all like significantly increasing investment in R&D and sales to drive future growth. Over the same period, we have nearly tripled the size of our software revenue and more than doubled recurring revenue while growing services 75%. These accomplishments are a testament to Keysight's leadership model, our values, and our people. I would like to thank all Keysight employees for their exceptional execution and dedication. We continue to capitalize on these multiple ways of technology innovation and long-term secular growth trends across multiple markets. We exit this year in a strong competitive position and expect to continue to deliver sustained, above-market, profitable growth. Now, I will turn it over to Neil to discuss our financial performance and outlook in more detail. Happy Thanksgiving.
spk04: Thank you, Ron, and hello, everyone. As Ron mentioned, we delivered an outstanding quarter and fiscal year. In the fourth quarter of 2021, we delivered record revenue of $1,294,000,000, which was above the high end of our guidance range and grew 6% or 5% on a core basis, despite a tightening supply environment. The further contraction of the supply chain within the quarter tempered total revenue results and was more impactful on the communications solutions group businesses. With demand outpacing supply, we delivered a record $1,491,000,000 in orders, up 21% on a reported and core basis, and enter fiscal year 2022 with over $2,000,000,000 in backlog, which will position us well as the supply chain situation improves. Looking at our operation results for Q4, we reported record gross margin of 66%, of $456 million, resulting in an operating margin of 31%, an all-time high. Net income was a record $338 million, and we achieved $1.82 in earnings per share, which was well above the high end of our guidance. Our weighted average share count for the quarter was 186 million shares. Moving to the performance of our segments, our communications solutions group generated record revenue of $919 million, up 2%. CSG delivered gross margin of 66% and operating margin of 28%. In Q4, commercial communications generated revenue of $622 million, up 3%, driven by strength across the 5G ecosystem, O-RAN adoption, and investment in 400 gigabit and 800 gigabit R&D. Aerospace defense and government achieved record revenue of $297 million, up slightly from the same quarter last year, as solid growth in Asia Pacific was offset by supply chain constraints that impacted revenue in the U.S. and Europe. The Electronic Industrial Solutions Group generated fourth quarter revenue of $375 million, up 18% on a reported and core basis, driven by strength in semiconductor and automotive. EISG reported record gross margin of 66% and record operating margin of 36%. Given tightening supply chain constraints and trade headwinds, we are very pleased with our full-year results. In FY21, revenue totaled $4.9 billion, up 17% year-over-year or 15% on a core basis. Gross margin improved 40 basis points year-over-year to 65%, we continue to invest in R&D at 16% of revenue, or $788 million for the year, while operating margin improved 260 basis points to 28%. On the strength of this performance, we've achieved our long-term operating margin target of 26% to 27% two years ahead of plan. FY21 non-GAAP net income was $1.2 billion, or $6.23 per share, up 28%. Moving to the balance sheet and cash flow, we ended our fourth quarter with $2.1 billion in cash and cash equivalents, generated cash flow from operations of $368 million and free cash flow of $295 million. Total free cash flow for the year was $1.1 billion, representing 23% of revenue and 99% of non-GAAP net income. As announced earlier today, the Keysight Board of Directors has approved a new share repurchase authorization of $1.2 billion, effective immediately. Under our prior share repurchase authorization, we acquired approximately 2.1 million shares in the quarter at an average share price of $171 for a total consideration of $353 million. This brings our total share purchase for the year to approximately 4.4 million shares at an average share price of $154 for a total consideration of $673 million, or 59% of free cash flow. Now turning to our outlook and guidance. Despite a strong demand backdrop, supply chain constraints continue to moderate shipment expectations. As a result, we expect first quarter 2022 revenue to be in the range of $1,225,000,000 to $1,245,000,000, and Q1 earnings per share to be in the range of $1.50 to $1.56, based on a weighted diluted share count of approximately 185 million shares. Looking forward to 2022, we expect supply chain to remain tight in the first half of the year. Assuming a loosening of the supply situation in the second half, we expect full-year revenue growth to be in the range of 6% to 7% while delivering 10% earnings growth. Interest expense is expected to be approximately $78 million, and capital expenditures are expected to be in the range of $240 million to $260 million with increasing capacity and technology investments. Regarding our tax rate, we are modeling a 12% non-GAAP effective tax rate for FY22, which assumes no change to current U.S. tax policy. In closing, we are entering the fiscal year with strong momentum, a record backlog position, and a strong track record of operational excellence. We're encouraged by the strong dynamics across our end markets and are competitively positioned to drive sustainable and profitable growth going forward. With that, I will now turn it back to Jason for the Q&A.
spk15: Thank you, Neil. Catherine, will you please give the instructions for the Q&A?
spk01: If you have a question, press star 1 on a telephone keypad. Again, star 1 for a question. Your first question is from Sameek Chatterjee with JP Morgan.
spk08: Hi, this is Joe Cardozo on for SOMIC. My first question is just around the full year guide. the full year to 6% to 7% growth. And I'm just trying to flip that with your commentary last quarter around expectations around a more muted seasonality. First of all, does that expectation still stand true? And if so, does that imply that we should expect to see a similar cadence to revenue as we did in fiscal 21? Or is there something I'm not appreciating here as I think about revenue trends for the full year, such as maybe the benefits of the loosening of the supply chain as we head into the back half of the year?
spk04: Yeah, it's a great question. So yeah, as we mentioned on the call, we did see the supply chain situation tighten during the quarter, and our guidance does assume that we will see some relaxation in that environment in the back half of the year. So if I was thinking about the seasonality for FY22, I'd say two things. I think, first of all, I think we'd expect revenue to build as we move throughout the year. And then, you know, maybe if you think about it in terms of year-over-year growth, right, our guidance was 6% to 7% for the full year. If I was thinking about that on a quarter-by-quarter basis, I'd be expecting growth rates in the first half of the year that are below that 6% to 7% level and growth rates in the back half of the year that are slightly above that 6% to 7% level so that we average that for the full year.
spk08: Scott, I appreciate the color there. And then just on my second question, you know, EISG posted record operating margins this quarter. You know, they were really strong. Just curious to hear, you know, what were some of the big drivers or contributors to the margins there relative to operating margins? And, you know, just curious to hear if there was any one-time benefits in the quarter that we should consider.
spk04: Yeah, no one-time benefits, but I mean, I think the thing that comes immediately to the forefront is obviously the extraordinarily strong revenue growth for the year with 30% revenue growth on the year. You know, the business, the demand for those products has been very strong. We've seen a very nice rebound this year in the automotive business, the semi-business. We all have, you know, everybody is seeing the press on the continued strength in semi-business. So you take that strong demand picture and, you know, which essentially allowed them to leverage their OpEx infrastructure and drive really high levels of operating margin in the short run. I think as we look forward, you know, we continue to see great opportunities to continue to grow the business as well as to invest in further technology investments to serve these end markets.
spk08: Thanks, guys. Appreciate the call.
spk00: So next question is from John Pitzer with Credit Suisse.
spk14: Yeah, good afternoon, guys. Congratulations on the solid results. Neil, I'm wondering if you could just dig a little bit deeper into kind of some of the supply constraints that you're seeing out there. I think you said in your prepared comments it's hitting EISG stronger than comms. I'm kind of curious, is this logistical constraints? Is it component constraints? Is it a little bit of everything? And is there a dollar amount – you can give us that it impacted revenue both in the fiscal fourth quarter and the fiscal first quarter.
spk04: Yeah, thanks, John. It's a great question. So first of all, I said the opposite. The impact was greater on CSG businesses than in EISG businesses. And if you think about why that is, the CSG products tend to be more complex. They have a longer, you know, bill of materials. And so there are more parts and components that go into building those instruments on average. And so that, you know, just by its nature increases, you know, the risk and the challenges that we have to fulfill that supply chain. I think it's also true on average that the CSG products tend to be at the higher end of the technology spectrum. And so there are fewer suppliers for those cutting-edge technology products than for a little bit more of the mainstream products that exist within the ISG industry. I think if you think about the impact that supply chain, you know, I maybe lump COVID and supply chain together because we've really seen this phenomenon over the last couple of years. And if you're starting to think about, you know, how to quantify those impacts, you know, I'd really kind of focus your attention, not on any one quarter, but over time, you're looking at the full fiscal years, as an example, at our order rate, right? If you look at our history prior to 2020, You know, we've done a pretty good job of converting our orders to revenue. There's typically, you know, a little bit of a lag, a certain percentage of each quarter's orders ship within the quarter, another portion shift out into the following quarters. But over the past, you know, over the past couple of years in 2020 because of COVID and in 2021 because of supply chain, you know, we have seen that delta between orders and revenue grow. And so I think we estimate that if, you know, if you think about it in terms of kind of an abnormal backlog build, that that abnormal backlog build over the last couple of years is in the $300 million to $400 million range. And so I think that's the opportunity for us as we look forward to eventually clear that backlog once the supply chain situation, you know, fixes itself. I don't expect it will flush that in a quarter or two. I think it will happen over time because, you know, kind of the remedies to the supply chain are going to happen over time as well. But that's the rough magnitude of what the impact has been here over a couple-year period of time.
spk14: That's really helpful, Collar. And then, Ron, you know, over the last several years, We on this side of the world have been trying to compare and contrast sort of the 5G rollout with the 4G rollout relative to your business. And I guess what I was hoping to do is get a little bit more color about the software strategy you're deploying this time around, which seems like an incremental driver. I'm just kind of curious, you know, can you size the potential TAM opportunity that gives you, especially as you know, the network morphs from just being a backbone for handsets and mobile to actually being a backbone for a lot of new incremental applications. And to the extent that software and services is a third of the business now, sort of how do we think about that over like the next three to five years?
spk06: Well, thanks, John. It's very, very clear that software and services continues to be a bigger and bigger percentage of our total business as we've moved from, a hardware product supplier to a software-centric solution provider. And the solutions obviously include hardware, software, and services. And we've seen great growth, obviously, in our software and our services, and they've outpaced the hardware growth. Looking overall at 5G versus 4G, we made a decision in 2013. We announced that we were going to spinoff Keysight in 2013, which we eventually did in November of 2014. But in 2013, I started working with a team that was developing to invest in 5G and make sure that we were going to be leaders. In 4G, we were providing a little bit more of, let's say, cash contribution to Agilent, where we were not investing as heavily in the communications rollout of 4G by a substantial amount. So we invested earlier. We invested a greater amount, as now we're roughly at 16% R&D, where we used to be at approximately 12% of R&D. And we've gone from roughly $400 million to roughly $800 million in R&D spent over this period of time. But software is a key part. What we did was we consolidated our hardware development facilities into one organization as opposed to in separate divisions. And accordingly, that enabled us to basically provide software that could span the whole product offering. And we made an acquisition, for instance, of a company called Anite, which gave us software capability. They had some capability in 4G. We moved them over to 5G. And all this together, investing more, starting earlier, having a consistent R&D and investment profile has really gave us the lead and caused us to be a much, much, much stronger provider, and I believe the leading provider for for 5G. 5G is still growing and we anticipate it growing for years. I'm going to turn it over to Satish to tell you a little bit more about our results and our growth in not only 2021, but what he sees going forward.
spk11: Satish Patel Thank you, Ron. Great question. I think at the summary, we've had another record quarter for 5G. and the drivers are scaling deployments. But equally important is the new application space. And I think we outlayed that as a strategy we had to continue the progression from physical to protocol to application. And this application area is very rich, right? As I look forward, some of these application spaces have uh software you know as a percentage of the total value proposition in the 30 40 50 range and one we uh we uh we pursue very actively i'll just make a few examples of these right so you can think of on the 5g side oran being a great out great example of that on the wireline side the protocols with 400 gig 800 gig getting more complex You look at new emerging spaces like SD-WAN, SASE, and MACSEC in the security domain. So you look at the commercial comms portfolio, it's very rich in applications that really favor our strategy of being more software-centric and one we're investing to pursue and we're generating strong results.
spk14: Perfect. Thanks, guys. Congratulations.
spk06: Thank you. We are ready for the next question from Jim Suva of Citibank.
spk10: Thank you very much. I had a thought about your vertical integration. You know, you're a lot more vertically integrated than the other companies. Has that materially benefited you during the supply chain bottlenecks? Are there like little things, whether it be or a connector or a housing that held you back just as much as the other? And I'm just trying to think about, you know, does this now cause you to even want to be a little bit more vertically integrated, or are you at the sweet spot for the vertical integration? Thank you.
spk06: Sure, Jim. The first thing that's probably, you know, really important to note is that our differentiating technologies that have given us the leadership position outside of the software that we have developed is semiconductors that have very particular high-performance capabilities. And as you know, we have an on-site fab that exists in Santa Rosa, and that fab makes gallium arsenide and indium phosphate semiconductors. So a lot of people are having trouble now getting more custom components built where custom components built, and we build a lot of those custom components in-house. So that has definitely helped us. Now, again, if you don't have all the parts, you can't ship anything, and we are in relatively good shape compared to other competitors, but there's no doubt that we have to make sure that we get all the components that are needed in order to ship the product. We always will look for opportunities to integrate, provided that it makes financial sense. We feel very good about what we have in-house right now. It's not so much the plastic pieces and things like that. There are obviously not only components, but there is the whole logistical shipping issues that the whole world is going through. So we are impacted a little bit less than others, and I think the overall organization has done a real good job of being able to deliver during these very challenging times.
spk10: Great. Thank you, and congratulations to you and your team at Keysight.
spk06: Thank you, Jim.
spk15: Great. And then the next question goes to Mark Delaney from Goldman Sachs.
spk12: question some of the defense primes have spoken to slowing Department of Defense budget outlays and I appreciate that Keith a reported broad-based order strength but I was hoping you could talk a little bit more on what you're seeing in your ad and G segment and if you are experiencing any slower and market trends even if in certain portions of that business segment you know so again a pretty strong quarter for aerospace defense orders growing double digits and
spk11: finishing off a year with double-digit growth. If you look at what drove that growth, it's recovery in the macro environment globally, stimulus spend, especially towards technology that continues to increase both in the U.S. and internationally, and one we're capturing. We also took some concerted steps last year or two years ago, in fact, to to take our 5G technology stack and customize it for aerospace defense applications. And as you've probably seen, our collaboration with Lockheed Martin that we announced. So we're very pleased with the progression that we're making with commercial technologies that are getting adopted. So all of these are pretty favorable. We are observing that right now we are under continuing resolution from a budget perspective in the U.S., But if you look at the budget that has been put in place or that has been proposed, and if it's approved, it does call for a year-over-year increase and also increased spend in technology or RDT and E-line item, which we view as a favorable dynamic. Peripherally, the infrastructure bill that is getting through the Congress has some sustained spend outlays for EV and broadband and semiconductor, which we also think is favorable for us.
spk12: That's really helpful, Culler. Thank you for all those comments. And my follow-up question is on the supply chain, and if you could talk in a bit more depth around what is leading to your comments of potential alleviation in the second half of this coming fiscal year. Thank you.
spk04: Yeah, I mean, the supply chain situation – It's very dynamic, I guess I would start by saying that. And, you know, we have very close relationships with our key suppliers and are in constant dialogue with them during this period of time to make sure that we are, you know, procuring the parts that are necessary to meet the needs of our customers. I think it's, you know, our confidence and, you know, our guide reflect a, you know, the start of a recovery in the supply chain situation in the back half, and that stems from direct indications that we've got from key suppliers within our supply chain environment.
spk15: Okay, great. Thanks for that, Mark. We'll move over to Tim Long from Barclays.
spk03: Thank you. Two, if I could, maybe on the wireless side, could you talk a little bit about kind of the impact of C-band and current views on millimeter wave, and particularly with the C-band, any impacts from that? these potential delays with the FAA, et cetera. And then secondly, maybe Neil, could you just kind of update? It's obviously been a great period of margin expansion. Can you talk a little bit, give us an updated view on kind of leverage and incremental margin growth and operating from these levels? Thank you.
spk11: I'll make a few comments on 5G. You know, as we stated before, the continuing deployments that are going on, especially in the low-frequency bands across the world, we view it as a favorable dynamic, specifically the C-band auction was a near-term catalyst. And we've had some strong results, as I mentioned, strong double-digit growth in 5G this quarter. capping off a double-digit growth in 5G for the full fiscal year. And a big part of that was driven by the C-band auction and the related investments that are going on in the Americas. Our Americas business was the strongest in our 5G from a regional perspective. And we also saw our FR1, our low frequency business double year over year. So very strong results all the while when our millimeter wave business has been pretty stable. this year. And as we have mentioned before, in the medium term, we're expecting that the millimeter wave adoption continues to rise in a very steady manner. And we're watching for the Beijing Olympics use cases to emerge from the success of the Beijing Olympics that we expect to occur next year.
spk04: Yeah. And Tim, to your second question, yeah, we've obviously had a great run here in terms of margin expansion since the birth of Keysight. adding 800 basis points approximately to gross margins, about 1,000 basis points to operating margins. And I think the key point is that as we look forward over the longer term, we continue to see opportunities for further expansion of margins within the Keysight portfolio. I think as we look to next year, it's a really dynamic time, obviously, with supply chain pressures putting a little bit of a governor on revenue. At the same time, you've got inflationary pressures across the broader economy. And then the other thing that we're looking to that's a little bit of a cost up within next year's is hopefully a return to kind of a post-COVID or pre-COVID normal in terms of our general operating environment. And that includes the costs associated with the facilities management as we return to the office, increased travel costs. as people get back out and start seeing customers and conducting more business in person rather than over Zoom. I think maybe the last point being that we invested in R&D this year, just under 16% of revenue. I think we continue to see great opportunities to invest in technology and bring new solutions into the marketplace. I think you're likely to see R&D tick upward next year into that kind of mid-16% range. So from those perspectives, I think FY22 may be a bit of a catch-up year. But over the longer term, a lot of opportunity as we expand our software portfolio, expand our solutions portfolio, continue to work with customers and provide them with first-market solutions to continue to drive both gross and operating margins northward. Okay, thank you.
spk15: All right, and the next question comes from Matt Nicknam of Deutsche Bank.
spk13: Hey, guys. This is Nick on for Matthew. Congrats on the quarter. So just first, I wanted to talk about CapEx. I see the CapEx guide is picking up next year. I just want to know what's driving that uplift and whether that should carry on to future years. Is that sustainable? Is there a specific project that's going on? I'll have to follow up.
spk04: Yeah, it's a great question, Nick. So we started to, or we talked about in this recently completed fiscal year that we expected a couple of years of elevated CapEx as a result of efforts to improve the resiliency of our supply chain. And that, in fact, did pan out with CapEx for approximately $175 million this year. I think In addition to continuing those investments, we see incremental investments that are necessary as we continue to expand our own capacity, invest in key technologies to drive the future growth of our business. So I think those are additive. Given everything that's happening across the economic sphere today, there is You know, relative to what we were seeing this time last year, you know, an increased need to spend money on capacity investments here within Keysight. And so, you know, I do not believe that the approximately $250 million of CapEx that we've communicated for next year is the new steady state. That is not the case. You know, that steady state is significantly lower, exactly where I, a little bit difficult to call at this point, but materially lower than the $250 million that we're indicating for FY20, for FY22.
spk13: Okay, that makes sense. And then just a quick follow-up on competitive environment. I mean, there are a few pricks and takes that I'm just thinking about, and I was wondering if you could provide some color. On the one hand, a lot of competitors are having a harder time sending out shipments. Does that create a positive pricing environment? And then in a slightly different angle, one of your competitors recently made some easy acquisitions. Just how you think about EISG from a competitive landscape going forward?
spk11: Yeah, very strong performance in our EISG business. Again, strength, as I mentioned, in the semiconductor where new wafers start are really enabling us to continue to drive growth there. A very strong year. Again, building off of a strong double-digit year last year in semiconductor as well. So when I think about what we're doing there, we're definitely taking share and we are continuing to invest to keep that portfolio growing and capitalizing on the environment we see with semiconductor. With regard to automotive, it's been a newer market entry for us, relatively speaking. We started this since then. We're very pleased with the results we're seeing so far. And we've made, if you look at this fiscal year, we've had some wins in the manufacturing expansions that have happened in the EV sector. And as we shore up our contributions in the AV market, we've announced a partnership with NIO as an example. of what we're doing by extending our 5G technology stack in CV2X. You know, in summary, all in all, you look at our entire portfolio for automotive, it is growing and it is much more comprehensive than any of our traditional competitors at this point. And we are continuing to invest in growing that business. So overall, pleased with where we find ourselves with the EIC business.
spk06: And your second question, which was, you know, with competitors having a little tougher time on shipments, are we going ahead and taking advantage of that for pricing? The answer is no. We're in this for the long haul with customers. You know, we've been back from the original Hewlett Packard days, over 80 years working with customers. We're not taking advantage of them. Where costs are up in certain areas for shipments and others, we will do price increases. but not because of any competitive position or hard ability for our customers to get products from competitors.
spk13: Okay, great. Thanks, and congrats again.
spk06: Thank you very much, Nick.
spk15: Next question comes from the line of Chris Snyder of UBS. Yes.
spk02: Thank you. So the company in the past has talked to industry growth in the 3% to 5% range with expectations for about 100 to 200 bits of outgrowth for Keysight above the industry. But when we look at it over the last four years now, the company has been growing about 10% organically per annum. So I guess my question is, is this level of growth more so driven by just much stronger industry growth over the last four years or just better key site outgrowth or a combination of both? Can you just kind of help us unpack how we kind of bridge that gap?
spk06: I'll make a couple of comments and then turn it over. I think it's a combination of two. There's no doubt that we've seen more growth and more opportunity in 5G. But as we see the digitization of everything, the market is there is no doubt a great place to be. And we have a very diversified portfolio and we're seeing growth in semiconductor. We're seeing growth in, you know, in industrial 4.0. We're seeing growth in all across our real stated growth initiatives and the markets that we've gone after. So there is no doubt we picked markets that are winning, and we have been growing faster than the market in general. And I think the execution of the team, the investment that we have, and our strategy of providing customers with total solutions is unmatched in the industry. Others are trying to mimic it to a certain extent. But I do believe with our outstanding Salesforce self-support organization, our overall organization that provides hardware, software, and we'll call it partnership with key market makers, it makes a huge difference on how successful we are. So I'll start there, and Satish may want to make another comment.
spk11: Yeah, Ron, I think you're absolutely right with regard to what we see in the marketplace is this expanding ecosystem as we have expanded our portfolio from just products to offering total solutions to customers. And we remain focused on the end markets that we've called out. Another angle to this that Mark Wallace can add is the customer ads that occurs as this expanding contribution that we're making.
spk05: Yeah, thanks, Satish. Chris, to add to this, I think our go-to-market investments we've made in sales and in marketing and customer engagement is making a big difference. As you've heard, we had strong double-digit order growth across all regions and all end markets, not just for Q4, but for the entire fiscal year. So this is a very sustaining effect that we've had as we engage with the market leaders, implanting our solutions engineers to help innovate with customers. Our largest customers have grown substantially. Our long tail of small and medium-sized business customers have grown. And as Ron has mentioned in the prepared statements, we continue to add new customers every quarter and every year. More than 2,000 were added during fiscal year 21, which creates sustaining opportunities for us going forward, diversifies our business. And then it's not just all about our direct channel. We have a very strong partnership or partner channel with the indirect channel distribution sales, helping us reach more than 30,000 customers per year. And we're seeing continued adoption and growth from our e-commerce channels as well. So we have multiple ways to serve our customers and deliver these great solutions. And I think that's a big part of it too.
spk02: Yeah, I appreciate all of that, Colin, from everybody. I guess my follow-up would be, so in terms of the above-normal industry growth, how long can that last? And is it reasonable to think that lasts until 5G peaks, which I believe is expected maybe in the 23 or 24 months? timeframe. And then in addition to that, is there any reason why we should expect key site outgrowth over the market to compress back to the 100 or 200 bits, you know, kind of guided levels just given the R and D scale investment advantage the company has?
spk06: If we were sitting at a total of, let's say, 60% market share or 70% market share, you may say there's diminishing returns. But when we look overall where we are, we're in the 25% to 30% range. We have a lot of headroom, and I believe it's going to go way past 5G. whether you're talking 24 or whatever your perspective is on that. We're already investing in 6G. We're investing in EV. We're investing in AV. And there are so many more opportunities that are being put right in front of us or that we see. We are aiming to go ahead and outgrow the market for many, many years.
spk04: The only thing I would add to that is our ability to spend $800 million a year in R&D is a real differentiator in the marketplace and I think goes to, you know, at least to indicate, you know, what our ability to continue to outperform the broader market should be over time.
spk02: Appreciate the time, guys. Thank you.
spk15: Thank you. Next question comes from the line of Rob Mason at Baird. Yes, thanks. Sorry, Rob.
spk06: Rob, your audio has cut out. I think we just lost the call. We can come back to you.
spk01: Mr. Mason, your line is open.
spk07: Yes. Can you hear me? Yes, we can hear you, Rob. Go ahead. OK. Apologies. Not sure what happened. I did have a clarification question just on the first quarter guidance. So I guess, Neil, maybe this is directed to you. Is the assumption that margins would be down year over year within your guidance? I'm not sure I totally caught your below the line guidance.
spk04: Yeah, all I said was relative to where we just finished Q4, right, we finished the year at 15.9% R&D investment. It was a point lower than that in the fourth quarter. And I think we look and see a tremendous amount of opportunity for us to invest via the R&D line to bring new technologies to market. So I think over the course of FY22, you could expect us to return our R&D spend more into that mid-16% kind of a range, which will obviously you know, have a little bit of a pressure on margins. The only other thing I would say is in Q4, we did have extraordinary, we did have very favorable product mix within the quarter, at least as we see a Q1 taking shape, we expect mix on a sequential basis to be a little bit less favorable. So, you know, and then there are some normal items for Keysight that also typically impact Q1, most notably that we do a company-wide salary administration in the first quarter. And given the inflationary environment that we're in, that is a, you know, a larger than typical salary increase this Q1. I see. How would... And again, that's...
spk06: Again, that's compared to Q4, which was a 31% operating margin. That was a very high record.
spk07: Right. How would your expectation within 10% type EPS growth, how would your assumptions around incentive compensation play out on a year-over-year basis?
spk04: Yeah, so obviously there's two components to our incentive programs. There's the incentive programs for the broader employee base, which are driven based on the organic growth rate of the company as well as our operating margins. And so those would be the true drivers there. I think for the executive population, its ability to grow EPS, and this is for the cash compensation portion, its ability to grow EPS and grow the top line. And over the longer term, our primary source of variable compensation is based on total shareholder return. And so, you know, I think as we look forward to FY22, we're seeing wages up significantly as a result of kind of the the broader inflationary environment, and that's being offset by a decrease in the broader variable pay programs.
spk07: Okay. Okay. Just a quick follow-up. With respect to your capital allocation plan, could you just give us an update on how you view the M&A pipeline, maybe where your focus would be at this point? Yep. Absolutely, Ron.
spk06: Yes. Again, in our target markets, what we're looking to do is provide total solutions. And there's no doubt if there are certain parts or components of a total solution that we need, that would be the first priority. The second thing that we're doing is we're expanding into adjacent markets. As Satish had mentioned earlier, we started off in 5G or 4G, mostly on the physical layer, you know, going ahead and providing solutions there. Then we moved up into the protocol layer, and now you can see we're in the application layer and security. So we continue to look for adjacent opportunities also. That is what we're looking at. We have a very robust funnel, but we also have very high hurdles. So we have the ability to not only make the acquisitions that we need to make, but also to return cash to the shareholders. And that's why we announced $1.2 billion share of that program.
spk07: Excellent. Excellent. Thank you. All right. Thank you, Rob.
spk15: Next question comes from the line of Adam Thalheimer of Thompson Davis.
spk09: Hey, good afternoon, guys. Great quarter. Just a quick one on margins. I'm curious how you guys are thinking about operating margin improvement by segment. You had a great year at EISG. I just wonder if that creates a tough comp for you or if you can even build off of the 21 results.
spk04: Yeah, it's certainly obviously a very, very tough comp for EISG given the strong results, not just within the quarter where they reached up into the upper 30s, but 36% for the full year. I think we have opportunities to increase margins across both segments. I think we have initiatives in place across both segments to increase software content, to increase solutions content, and to increase the value added that we're bringing to customers. And so I think, you know, if you think about opportunities in EV and IoT for EISG, and of course, and not just 5G, but 6G and quantum and aerospace defense on the CSG side, You know, there's ample market opportunity for us to continue to increase the value add, the key side brings for our customers. And I think as we do that, that has a chance to be margin of creative across both groups. Okay. Thank you.
spk15: Great. Thanks, Adam. So, well, that concludes our question and answer session for today. I'd like to thank you all for joining us, and we look forward to speaking with many of you at the upcoming conferences. So, thanks again, and have a great day.
spk00: That concludes today's call. You may now disconnect.
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