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spk01: Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal First Quarter 2022 earnings conference call. My name is Elliot, 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 this call is being recorded today, Thursday, February 17th, 2022, at 1.30 p.m. Pacific time. I would now like to hand the conference over to Jason Carey, Vice President, Treasurer, and Investor Relations. Please go ahead, Mr. Carey.
spk12: Thank you, and welcome, everyone, to Keysight's first quarter earnings conference call for fiscal year 2022. 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 Dhanasekaran, Chief Operating Officer, and Mark Wallace, Senior Vice President of Global Sales. You can find the press release and information to supplement today's discussion on our website at investor.keysight.com. While there, please click on the link for quarterly reports under the Financial Information tab. There you will find an investor presentation along with Keysight's segment results. Following this conference call, we will post a copy of the prepared remarks to the website. Today's comments by Ron and Neil will refer to non-GAAP financial measures. We will also make references to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. All comparisons are on a year-over-year basis, unless otherwise noted. We will make forward-looking statements about the financial performance of the company on today's call. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please review the company's recent SEC filings for a more complete picture of our risks and other factors. Lastly, I would note that management is scheduled to participate in upcoming investor conferences in March, hosted by Susquehanna, Morgan Stanley, and Credit Suisse. And now I will turn the call over to Ron.
spk05: Thank you, Jason, and thank you all for joining us. Keysight delivered a strong start to the year. First quarter results are evidence that our broad-based portfolio of differentiated solutions is aligned with the market's most important design and test challenges. We are enabling our customers to address rapidly evolving technologies and market opportunities. Today, I'll focus my comments on three key headlines. First, we continue to see sustained robust demand with record orders again exceeding our expectations. Growth in the quarter was broad-based and balanced across our diverse set of end markets and across all regions. Orders grew 22 percent year-over-year and were 31 percent higher than the first quarter of 2020 just prior to the initial impact of the COVID pandemic. Record first quarter revenue and earnings per share exceeded the high end of our guidance despite ongoing supply constraints. Our results in exceptional execution by the Keysight team continue to demonstrate the durability and resilience of our business. And third, Keysight solutions are aligned with the long-term secular trends fueled by ongoing innovation across multiple markets. our investments in growth initiatives and supply chain resiliency are paying off. We continue to expect to deliver six to seven percent revenue growth for the year and given the stronger than guided first quarter earnings to achieve 12 percent earnings growth. We are confident in the strength of the company we built and our ability to drive above market profitable growth over the long term. Accordingly, With the recent equity market volatility, we capitalized on the opportunity to create value for shareholders by accelerating our share repurchases in the past two quarters. Now let's take a deeper look into our first quarter results. We delivered another quarter of record orders, which grew 22% to $1.5 billion. This outpaced record first quarter revenue, which grew 6% to $1.25 billion. We achieved gross margin of 66%, operating margin of 28%, and EPS of $1.65, all which were first quarter records. Although supply constraints continue to moderate revenue, Keysight's consistent execution and focus on growth initiatives across the 5G ecosystem, automotive, and software position us well to capitalize on a robust demand environment. The Electronics Industrial Solutions Group delivered double-digit order and revenue growth for the sixth consecutive quarter. Record orders were driven by strong demand for automotive and semiconductor solutions, as well as broad general electronic applications. Our differentiated solutions position us well to win in the fast-expanding automotive market, where we achieved all-time record orders and record first quarter revenue. Orders grew well over 50% in the quarter and exceeded 50% growth over the past year. Manufacturing capacity continued to expand to meet pent-up demand, and the EV and AV technology investment accelerated. This happened particularly in Europe and China, where EV market share of total car sales in 2021 increased to 19% and 15%, respectively. Demand remained strong from leading manufacturers for both EV and AV production test solutions, power semiconductors, automotive electronics, and RF and millimeter wave wireless test. Keysight continues to engage with global industry leaders such as BMW, Sony Semiconductor Solutions, and Provencia to enable next-generation technologies across the automotive R&D and production workflows. Strong demand for our semiconductor solutions drove double-digit order and revenue growth and resulted in record orders and record first-quarter revenue. Investments remain high in advanced semiconductor technologies and capacity expansion to serve a broad set of applications, including silicon-rich smartphones, high-performance computing, IoT, and autos. In general electronics, we achieved record orders with double-digit growth across all regions, driven by investment in manufacturing and device development for consumer and industrial IoT, digital health, connectivity, and remote monitoring. Turning to the communication solutions group, we delivered record first quarter orders and revenue with double-digit order growth across all regions. Commercial communications orders achieved the second highest quarter on record with double-digit order and revenue growth in the Americas and Europe. We see continued strength in 400G and 800G Ethernet solutions for enterprise and service provider customers, as well as increasing demand for terabit communication solutions. Driven by the ongoing investment in data center and cloud applications, Orders for Keysight's differentiated high-performance real-time oscilloscopes grew triple digits this quarter. Keysight's leadership in 5G release 16 applications, broad test case coverage, and our strategic role in ORAN are enabling our expansion across the broad communications ecosystem. Our 5G customer base is growing as deployments begin to scale, and we are enabling disruptive technologies with key industry players such as Qualcomm to demonstrate 3.5 gigabit uplink data throughput, Tsinghua Telecom in Taiwan to accelerate verification of O-RAN connectivity, KT Corporation in South Korea to verify advanced 5G new radio features, and LG Electronics to demonstrate 6G radio frequencies. Investments remain strong in 5G wireless R&D and manufacturing, as well as networking as market expansion transitions to devices, network equipment, and the aerospace defense vertical. In aerospace defense and government, double-digit order growth was driven by demand for signal monitoring, cyber, space, and satellite, as well as 5G and 6G applications. Demand was particularly strong in Asia Pacific and Europe. As design, test, and measurement solutions grow in complexity, software and services are an increasingly more important differentiator for Keysight. Combined, they represented more than a third of total revenue this quarter, increasing recurring revenue and contributing to the resiliency and predictability of our business. In summary, demand remains strong for Keysight's software-centric portfolio of differentiated solutions across all of our end markets and regions. Since the pandemic began in 2020, Keysight has been focused on supporting our customers and delivering in our commitments. We have implemented new sourcing strategies and increased partner engagement to improve supply chain flexibility, diversification, and resilience. While fully focused on our near-term priorities, we continue to work towards a long-term, sustainable vision for the company and for the communities in which we operate. The Keysight Leadership Model drives us to deliver business value through ethical, environmentally sustainable, and socially responsible operations. Corporate social responsibility is an enabling value of the KLM and we are proud to have been included in the Dow Jones Sustainability Index for the third year in a row. Keysight's inclusion exemplifies the company's continued commitment to building a better planet.
spk14: This includes net zero emissions in our company ahead of the Paris Agreement goal. As we accelerate innovation to
spk05: To connect and secure the world, we are better positioned than ever to deliver value to our customers, shareholders, and employees.
spk14: Now, we'll turn it over to Neil to discuss our financial performance and outlook in more detail.
spk16: Thank you, Ron, and hello, everyone. Q1 was a great start to fiscal 2022, and our full-year outlook exemplifies Keysight's ability to deliver on our commitments. In the first quarter of 2022, we delivered revenue of $1,250,000,000, which was above the high end of our guidance range and grew 6% or 7% on a core basis. As expected, supply chain constraints continued to temper revenue results. we delivered a record $1,495,000,000 in orders of 22% or 23% on a quarter of $3 billion in backlog. Turning to our operational results for Q1, we reported gross margin of 66% and operating expenses of $473,000,000, resulting in an operating margin of 28%. We achieved net income of $305,000,000, $5 million and delivered $1.65 in earnings per share, which was above the high end of our guidance. Our weighted average share count for the quarter was 184 million shares. Moving to the performance of our segments, our communication solutions group generated record revenue of $878 million. CSG delivered record gross margin of 67%, In Q1, commercial communications generated revenue of $584 million, up 5%, with double-digit revenue growth in the Americas and Europe, driven by continued investment in 800 gigabit and terabit R&D. Aerospace defense and government revenue of $294 million was flat versus a strong prior year compare. Solid growth in Asia Pacific was offset by supply chain constraints that impacted revenue in the Americas and Europe. This was our fourth consecutive quarter of double-digit order growth in aerospace defense and government in this end market. The electronic industry had a first quarter revenue of $372 million, up 13% or 15% on a core basis, driven by strong revenue growth in semiconductor and automotive. EISG reported gross margin of 63% and operating margin of 31%. Moving to the balance sheet and cash flow, we ended our first quarter with $2 billion in cash and cash equivalents, generated cash flow from operations of $224 million and free cash flow of $182 million, or 15% of revenue. purchase authorization announced in November of last year, we acquired 1.13 million shares in the quarter and an average price of $182.19 for a total consideration of $206 million. Now turning to our outlook and guidance. Demand remains strong for Keysight Solutions. However, supply constraints continue to moderate shipments. We expect second quarter 2022 revenue to be in the range of $1 billion $290 million to $1,310 million in Q2 earnings per share to be in the range of $1.63 to $1.69 based on a weighted diluted share count of approximately 183 million shares. Assuming a loosening of the supply situation in the second half, we continue to expect full-year revenue growth to be in the range of 6% to 7% while delivering 12% earnings growth. Unexpected Q1 earnings. In closing, the demand environment remains strong across our end markets and regions. With a record backlog position and a strong track record of operational excellence, we are confident in our ability to meet our customer commitments and continue to deliver profitable above-market growth going forward. With that, I will now turn it back to Jason for the Q&A.
spk12: Thank you, Neil.
spk01: Elliot, will you please go ahead and give the instructions for the Q&A? to ask a question, please press star followed by the number one on your telephone keypad. We ask that you please limit yourself to one question.
spk14: To withdraw your question, please press the pound sign.
spk01: Please hold while we compile the Q&A roster. And the first question comes from the line of Tim Long from Barclays. Your line is open.
spk13: Thank you. Yeah, I was hoping you could talk a little bit more about the 5G end market, maybe as it cuts across your businesses. Can you talk about kind of the revenue order momentum there and maybe touch on some of the newer areas? I think you mentioned O-RAN, but can you talk O-RAN, private networks, millimeter wave, some of the newer areas that are contributing to growth there? Thank you.
spk10: Hi, Tim, this is Satish. We have another strong quarter in our commercial communications business driven by 5G and all the wireline evolution. Specific to 5G, I think as I've stated before, we see near-term and medium-term catalysts that remain intact. If you look at it more near-term, I would say the ongoing global deployments that are scaling continue to drive demand in both R&D and manufacturing offerings. Specific to R&D, the Release 16 is really aimed at some of these new use cases with industrial applications and private networks in particular. So longer term, we remain bullish about millimeter wave and its adoption. But in the medium term, the applications such as O-RAN are really growing the ecosystem of opportunities for us. We just added over 100 new customers into our 5G platform in the most recent quarter. So, you know, very strong growth in the 5G applications for sure across both R&D and manufacturing and deployments and across the globe.
spk14: Vince, can you talk a little bit about that will start to impact this? Are you starting to see some real?
spk10: larger players in the industry thank you yeah we're still you know if you look at it from a standards perspective you know we're still in release 16 release 17 is it's just getting started and you got release 18 being being planned so there is still a considerable time to go with five 5G evolutions that will continue for quite some time. But the industry is also looking at what's the next wave of innovations. 6G on the wireless side. On the wireline side, terabit ethernet is definitely an area where there's a lot of advanced research happening both on the wireless and wireline side. And Keysight, given our strong strategy focus on building out the workflow for the communications ecosystem, we're engaged in those with multiple consortiums around the globe, and we've already started to get some early research business, which positions us for continued leadership. Okay. Thank you very much.
spk01: Our next question comes from the line of Samik Chatterjee from J.P. Morgan. Your line is open.
spk09: Thanks for taking my question. I guess I'm just trying to get some help in understanding the divergence here between the order growth and the revenue outlook. This is, I think, the fourth quarter where you've expanded orders by more than 20%. Look at the revenue outlook of the seed. That's materially below that. How should we think about it? of is it is there more of a sort of unwind uh into the revenue or some of the realization of revenue or supply chain eases or is that is the order strength driven by a lot of early ordering or sort of long-dated orders and in particular if i can just ask on a follow-up there if How are we thinking about the same divergence between ATG revenues here remaining flat for the last couple of quarters versus what you talked about in terms of strong order increase? Thank you.
spk16: Yeah, so this is Neil. So I think, first of all, I would say that the order growth, we believe the demand environment we're seeing across a wide range of end markets, right? Within EISG, the semi-auto market is very strong. The surge in manufacturing driving strength in general electronics, In the communication side, we're seeing, you know, great strength in 5G, as you just talked about, but also 400 gigabit, 800 gigabit on the networking side as well. And so very strong demand, and I think that's reflected in the order strength and in the growth you're seeing in orders. On the revenue side, obviously, we continue to, you know, work through significant supply chain challenges. Our revenue is significantly constrained by the supply environment, and we're working through that. We have said on prior calls that we have seen lead times to our customers extend by about a month, and that month extension has really happened over the course of the last two years. COVID back in the spring of 2020. And, you know, I think the good news is that our customers have responded to that and are placing orders with Keysight, you know, a bit earlier so that they can still get product delivery on a timeline that meets their needs. And I think we're doing a good job getting product.
spk14: I think as you turn the lens forward, the chain situation starts
spk16: starts to improve, and we hope to see that, you know, beginning in the second half, but certainly we expect to see some supply chain constraints through 2023, you know, that our lead times will slowly start to migrate back in over a number of quarters. And similarly, our customers will once again readjust their ordering patterns to, you know, to again align them with their own need for delivery.
spk03: Why don't I turn it back to Neil? I think you covered it well. I just would add that, reiterating that demand remains strong. It was very strong in Q1, very broad. We saw some earlier orders placed in distribution, as an example, where the channel inventories are low because of the demand that we've seen there, so that's to be expected. We also saw some earlier orders from semiconductor, which is typical. They have longer-term horizons, and we work with them in that fashion. But the headline is our strong double-digit order growth was not an outcome of advanced purchases. And on the plus side, as Neil mentioned, we are now working with customers much earlier than we may have done in the past. We've always had deep relationships. But the outcome is we're getting better visibility to their forecast and their forward-looking plans, which I think will sustain for the long term.
spk01: Our next question comes from the line of Meta Marshall from Morgan Stanley. Your line is open.
spk00: Great, thanks. Maybe following up on Sam's question, just in terms of supply chain, you know, would you say that conditions largely stayed the same in fiscal Q1 over fiscal Q4, or was there any kind of material changes tightening that you saw kind of in any of the categories, just trying to get a sense of whether it's a second question. You know, obviously we've seen some valuation re-rating on the software side, an M&A environment, just as some of these valuations reset. Thank you.
spk16: Yeah, so this is Neil again. So first of all, with regard to the supply chain situation, you know, I think it's safe to say that we didn't see
spk14: see things materially get better within the quarter.
spk16: I don't think they got worse. I would call it largely the same. I think we continue to look forward to, you know, to some relaxation in the second, you know, early signs of change within the quarter on the supply chain side.
spk05: And, Mita, this is Ron. With regard to software valuations, obviously you're exactly correct. The IPE software companies we've seen the value realistically when we talk to companies and they've seen when they see a pullback they still their old share prices price that their company should get a premium to. It normally takes about a year. It depends company by company before they would go ahead and sell at a lesser value. But we're highly engaged at looking at opportunities, looking at things that make sense, and we have a very active funnel right now, including software.
spk00: Great. Thank you.
spk14: Thank you. Our next question.
spk01: This question comes from the line of Mark Delaney from Goldman Sachs. Your line is open.
spk15: Yes, thanks very much for taking the question. I was hoping you could comment a little bit more on the P&L outlook for next quarter. Revenue guidance is up sequentially. EPS is relatively flat-ish quarter-on-quarter. So maybe you can bridge us from the somewhat higher revenue and what's leading to the more flat quarter-on-quarter EPS.
spk16: Yeah, so I'll take that one as well. So, you know, as we look at scheduled shipments, some unfavorable mix on this level is, you know, kind of continuing impact from other inflationary elements, most notably expediting, you know, fees and other things are continuing to impact gross margins. And I think the other thing is, you know, we are continuing to ramp kind of back into our targeted levels of R&D. We were actually sub 15% in Q4, approaching 16% here in Q1. You know, as we look to kind of mid 16% of revenue is more the level. So I'd expect, you know, some further increase in that rate of investment in the R&D side of things as well, which is what's leading to, you know, the more or less flat-ish EPS.
spk15: That's helpful. Thank you. And for my follow-up question, it was on the comm segment. And the company's focused and done a very good job broadening out the exposure in various ways, right, in terms of the type of tests you're doing, but also the various parts of the industry. And 400 and 800G, I think, has been going for some time. So maybe you can level set up on how big 400 and 800G is and how much data center is contributing to that comm segment at this point. Thank you.
spk10: Yeah, I'll take this. I think you're right. I mean, our strategy to really connect the workflow across the communications ecosystem continues to play out and our execution remains very strong. At the heart of it, we've been focused on connecting the workflow between the wireless and the wireline parts of the ecosystem. And we see that all of the data that comes through the networks through 5G, as an example, you know, has to ultimately flow into a data center or a cloud. And so as we follow that trail end-to-end, we see significant upgrades happen as well. And we're participating in a number of those technology trends associated with it. not only the speeds, as you referenced with 400, 800, and terabit, but also the underlying infrastructure that's changing with the memories, the server technologies, and the edge compute as well, contributing to strength.
spk14: And we saw that reflected in our commercial communications business where we maintain a good balance between between the 5G growth and also the wireline evolutions growth.
spk01: Our next question comes from the line of Jim Suva from Citigroup. Your line is open.
spk06: Thank you and congratulations. I just have one question. There's been a lot of news about, you know, new building of semiconductor equipment factories and a lot more of like automobiles being more electronics. Given the large, long supply chain, I'm just kind of curious, are those big orders already coming into your company or since they have to pour concrete and walls, would those be much more long-dated orders? And not even in your orders at this point, because it seems like those are long term multi year products, projects that will actually extend much more beyond the typical horizon where people may think that we're kind of at the peak of orders right now, which I potentially could disagree with.
spk03: Yeah, I Jim, this is Mark, I'll take that. And you're exactly right. The strengths that we're seeing today and have been seeing for the last many quarters is around new process, technology development and mature technology scaling. But what you're referring to is the global expansion of new fabs in North America, in the United States, in parts of Asia and across Europe. The semiconductor leaders are making and the vast majority of those investments
spk16: are well in front of us let me just remind everybody of our order acceptance policy we generally don't put an order on the books unless it's those orders for those longer things well in some cases those customers are giving us visibility to their needs for as for these future factories and fast that are going into place. They're not reflected in orders as of today.
spk03: Yeah, I'll just follow up just to emphasize that we are talking to all of these semiconductor players and we are working through the planning and preparation for, you know, the future. But as Neil said, what we booked today is really based on demand that we can see going out six months.
spk06: Thank you so much for the detail. That's appreciated.
spk01: Thanks, Jim. Our next question comes from the line of Chris Snyder from UBS. Your line is open.
spk04: Thank you. I guess the first question is kind of bigger picture. Clearly, the industry is in the middle of a very strong period of demand. The orders were up against sequentially here despite negative seasonality. So I guess my question is kind of what pushes the industry back down towards that normalized 3% to 5% growth that Keysight has called out in the past? And is it fair to think that the industry kind of collectively can achieve outsized growth until 5G peaks?
spk03: So, Chris, this is Mark. I'll take a stab at that. I think the success that we've achieved and the level of order growth is tied into a lot about what Satish has been talking about, which is connecting our customers' workflows, even goes back to the previous question as it pertains to the growth in semiconductor being fed into demands from multiple different industries, all bringing more electronic content together. So that is this compounding effect. I certainly think that as we get to maturity with some of these technologies, the capacities will meet certain levels so we can see some of that begin to, the growth begin to turn more to more long-term models that we've been seeing. But as we do so, we look forward to the next generation. And as also we mentioned earlier, the early research that's occurring around 6G and the participation that we have given our leadership position in the market gives us opportunities to continue to drive this high secular growth that we've been delivering for several quarters.
spk05: And the, you know, Christy, 3% to 5% that you're talking about, that was for the market. We have clearly done a pretty good job of growing faster than the market, quarter after quarter. And we intend to do, they're being integrated into semiconductors and everything, whether you're talking about IoT or any of the other apps that we talk about, that demand we're going to see for a long period of time.
spk14: Look at automotive.
spk05: You know, we're not talking about things that will grow for a year or two, even though we talked about 19% and 15% of the total market being effectively easy in Europe and Asia. I mean, that's going to go up close to close to 100%. And then we have the Americas, too, which is which is behind. 5G has a ton of runway. And then following that, where we're starting to see early investments and talking is 60 that will follow it. On top of that, you put quantum. So the the use of high performance electronics is not rolling over. And we don't see that at all in any, you know, in any short or medium term situation.
spk04: and whatever the... Yeah, no, I appreciate that. It just feels like so many of the drivers here are secular, and that's why I was trying to kind of figure out what pushes this back down to mid-single-digit growth. And you kind of touched on my follow-up. You know, the company has significantly outgrew the market and taken a lot of share, you know, ever really since you spun it out, but it feels like it's kind of accelerated here. You know, is there anything that could cause that to compress?
spk05: You know, if we were at 65, 70 percent share, you could say, oh, will it start to flatten out? We're at roughly 25 percent market share in total. We have so much headroom. I mean, you know, the market, we're gaining share. We're investing as much as that's needed. We're investing more than anyone else in the And we have the credibility with these players to be the chosen partner. And now that we've expanded beyond hardware to hardware to software and service solutions, which makes our customers' lives easier. And we help them accelerate their innovation timeline. So I'm very bullish on this, and I know the whole team is also.
spk04: If I just call it really quickly on that last point, you know, the industry has accelerated towards software. You know, do you think that has been a driver of maybe accelerated share gains for Keysight, just given, you know, your capacity to invest in, you know, whether it's organic or M&A relative to a lot of your smaller competitors?
spk05: No, I think there is opportunity for us to grow software and we are and we've seen that since we launched the company more than double the more than double that business and there's a lot more headroom there. But we see it in a lot of the technologies. that are also down in the physical layer where you need both. You need the ability to acquire the signal in a very high fidelity way at very, very high performance when we're talking millimeter wave and up to terabit. Plus you need the analysis capability that's in firmware and in software. And these are complex problems. You need service and support from people that are qualified to put this all together. And Keysight has all of that. And that's been a real, real advantage for us. And we continue to see that as we continue to expand our investments and our programs in each of these areas. Appreciate all that.
spk04: Thank you for the time.
spk01: Thank you. Our next question comes from the line of Matt Nickman from Deutsche Bank. Your line is open.
spk11: Hey, thank you for taking the question. Just two, if I could. First, on the U.S., maybe if you can talk about what drove the sequential downtick in U.S. or America's revenue this quarter. I think you called out the softness in aerospace defense. I'm just curious if that was more tied to supply chain or more demand-related. And then within CSG, gross margins there actually improved about 120 bps sequentially. even though revenues actually were down sequentially. And I think last quarter you would message some initial expectations that there would be more of a negative mix shift in this fiscal quarter. So I'm just wondering maybe what drove some of the outperformance there. Thanks.
spk05: Yeah, thanks, Matt. You know, I think if you really want to figure out what's going on in the marketplaces, Orders is the best indicator, and I know some companies don't report orders with as much detail, but we want to give you as much insight as we can. So if you look at the revenue numbers which drive sales, it may not be commensurate with what's going on. We were up 23%.
spk14: Now, if perchance, because... ...clear that out, but...
spk05: The market performance is very strong, and as we continue to improve the supply chain, you'll see the revenue get a chance out over time.
spk14: Yeah, with regard to the gross margin, you're right.
spk10: We had a higher software mix this quarter as we continue to progress our strategy of software-centric solutions. And from the aerospace and defense perspective, you know, while the defense budget has been passed in the Americas, in the U.S., we are waiting on the conclusions to the appropriations process that's currently underway, which is expected to occur somewhere between March and April timeframe. That should allow for increased program spend for the rest of the year and the following year. But if you If you look at just the aerospace and defense order growth to the point that Ron made, continues to go strongly and our multi-year programs remain intact.
spk11: That's great. Thank you both. You're welcome.
spk01: Our next question comes from the line of Adam Falhimmer from Thompson Davis. Your line is open.
spk08: Hey, good afternoon, guys. Congrats on another strong quarter. First question I wanted to ask about just at a high level, what kind of inflation are you seeing and then how is the pricing environment? How does that paradigm work for Keysight?
spk16: Sorry, turn on my microphone. It will help. You know, we are seeing, you know, inflation across a number of different areas within the supply chain or within the cost structure. I think, as we noted last quarter, you know, certainly labor is one of those. We had our largest salary increase cycle in the fall in our seven-year history as an independent company. Certainly in certain aspects of the supply chain, we are seeing, you know, various levels of price increases frequently. Logistics clearly an area where we're seeing costs go up even those companies that maybe aren't raising prices as aggressive aggressively or sometimes paying or charging for expedited shipments or to get your spot in line. And so you know we're seeing it in a number of different number of different places. And I think You know, as far as our own pricing, I think we're constantly trying to balance our competitive situation with what we're seeing on the cost side and working to maintain margins as much as possible. And I think we've done a good job of doing that so far and would expect to going forward.
spk05: But, Ned, look at this. If you take a look at this, when we launched the company, we were at roughly 56% gross margin, and now we're talking 66% from software, from our hardware differentiation, from leadership positions in 5G, which gives us the opportunity to do a little bit of value pricing. And we're going to continue to work to drive that higher.
spk08: And, Ron, just real quickly, you mentioned that orders came in above expectations. Can you give a little color as to what was stronger?
spk03: Yeah, Adam, this is Mark. The strengths, as we said before, really brought base. All regions were double-digit order growth. Two of the four regions or two of the three regions were record high. We saw double-digit order growth across all of the end segments as well. We added just over 500 new customers to Keysight during the quarter. We've done that every quarter, adding hundreds of new customers across all the different end markets around all the geographies. That's really important to us. That helps us diversify our business and grow our base. And our business to the base is up very strong double digits as well. So we are really working hard, as I mentioned before, to align our plans with our market-leading customers, where we've done very well. And we're also adding new customers and growing the long tail of small and medium-sized businesses as well. So very, very broad strengths around all the regions and all the end segments. Okay. Good color. Thanks, Mark. You're welcome.
spk01: Our next question comes from the line of David Ridley Lane from Bank of America. Your line is open.
spk07: Thank you. As supply chain issues ease, how much of a margin benefit could there be? I imagine in addition to the higher freight costs and so on you're carrying now, there's also some manufacturing inefficiencies just related to the component shortages.
spk16: um it's it's not obvious to me that there's going to be a margin benefit other than volume that comes from you know a relaxation of the supply chain environment i think our factories are continuing to run uh pretty efficiently uh you know i think we'll need to take a wait and see approach but it's not obvious to me that it's going to be a big margin benefit other than the benefits of volume got it and as you've got new sourcing partners
spk07: other things that you're doing to remove some of these supply chain bottlenecks? And just to check, it doesn't sound like Omicron had much of an impact to you incrementally in the quarter.
spk10: Yeah, so no incremental impact. Obviously, the constraints in the supply chain are broad, and I think you're hearing this across multiple industries as well, and we feel it. But with regard to the actions that we're taking to maximize, those include internal value engineering activities to find multiple sources for products, looking for alternate sourcing from the open markets. We have strong collaborations with a number of our strategic silicon or semiconductor suppliers and our customers, too. So when we look at the end market's demand for Keysight products around 5G, automotive, and technology, and semiconductor, we have strong engagements with customers and our supply chain so that we're able to coordinate this. At this point, as Neil mentioned earlier, that we're able to meet our customers' needs very high percentage of the time. So we're very confident in our ability to process this backlog and convert it into revenue in future quarters. And pending upside from any improvement in the supply chain, we could further accelerate
spk07: Thank you very much.
spk01: Our final question comes from the line of Rob Mason from Baird. Your line is open.
spk02: Yes, good evening. I just wanted to ask about the automotive market. A number of comments around how strong that has been for you and the long runway that exists there. The question is, how do you view that market's growth rate you know, over the next few years. And then since it is the EV and the 8S elements of that market are newer for test and measurement, high-end test and measurement, I'm curious how you think about your mix evolving into that market between R&D and production tests or manufacturing tests.
spk10: Yeah, so I'd say that when we look at the automotive market, as Ron referenced in his script, that we see a real inflection in adoption of EV and then a subsequent simultaneous adoption for AV as well, really driving the needs of the automotive market. At the simplistic level, we see the number of new lab activities that are starting in R&D across the globe. where automotive customers traditionally outsourced a lot of the R&D work, but they're now starting to build new facilities for research and development, hiring of electrical engineering talent, hiring of software talent is increasing, and that's really reflected in our R&D business that continues to grow strongly, and we see this continuing to be a secular growth driver for us. With regard to the manufacturing expansion, as you saw the number of EV starts increase, our manufacturing business in this market also continues to grow. So at this point, I would say, you know, the opportunities for us, for Keysight, is to expand with the number of new lab starts as the hiring of electrical engineers grows in the automotive market will continue to grow. But we also have the opportunity to increase our solutions content. in display. And some of the acquisitions that we have made enables us to play strongly into the battery test and charging arena. And so we're positioning ourselves there, along with the CB2X stack that we've invested in with our 5G portfolio that allows us to get into this marketplace. In the most recent quarter, we've basically announced at CES the radar scene emulator solution, which, again, got a lot of active interest from our customers. So automotive continues to be the area of investment for us, and it's really hard to predict the growth rate, but we're quite pleased with the very strong results we're seeing so far.
spk03: Yeah, I was going to mention the radar scene emulator. You got that, Satish. The funnel is very strong. It's growing.
spk14: We're seeing a lot.
spk03: A lot of customers look out to Keysight for both EV and AV expertise. You think about all of the changes that are occurring within the customer base, as well as the new entrants coming in, dealing with millimeter wave, dealing with high-powered semiconductors, charging infrastructure, all this stuff that we are providing leading solutions to. So that funnel is growing substantially. The other indicator that I think is very positive is the adoption of our services, which, again, is another indicator that customers are looking for help in innovating and getting these tough jobs done. So we're attaching a lot more services to our solutions, especially in the EV and the AV space. Perfect. That's very helpful.
spk02: Thank you.
spk01: Thank you, Rob. That concludes our question and answer session for today. I would now like to turn the conference back to Jason Carey for any closing comments.
spk12: Thanks, Elliot. I'll turn it over to Ron to wrap us up for today. Thank you for joining.
spk05: Thank you, everyone, for joining us today. As you can probably tell, we are very pleased with what our team has done to produce consistently excellent results. But I would also love to add that we are very optimistic for Keysight, not only in the short term, we are in for long term shareholder value creation. Thank you very much and have a great day.
spk01: This concludes our conference call. You may now disconnect.
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