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Operator
Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal Fourth Quarter 2022 Earnings Conference Call. My name is Dante, 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. To withdraw your question, please press the pound sign. If at any time during the conference you need to reach an operator, please press star zero. This call is being recorded today, Thursday, November 17, 2022, at 2 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.
Dante
Thank you, and welcome everyone to Keysight's fourth quarter earnings conference call for fiscal year 2022. Joining me are Keysight's President and CEO, Satish Dhanasekaran, and our CFO, Neil Doherty. In the Q&A session, we'll be joined by Senior Vice President of Global Sales and Chief Customer Officer, Mark Wallace. You can find the press release and information to supplement today's discussion on our website at investor.keysight.com under the financial information tab and quarterly reports. Today's comments by Satish and Neil will refer to non-GAAP financial measures. We will also make reference to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months. The most directly comparable GAAP financial metrics and reconciliations are on our website, and all comparisons are on a year-over-year basis unless otherwise noted. We will make forward-looking statements about the financial performance of the company on today's call. These statements are subject to risks and uncertainties and are only valid as of today. We assume no obligation to update them. Please review our recent SEC filings for a more complete picture of these risks and other factors. Lastly, management is scheduled to participate in upcoming investor conferences hosted by Credit Suisse in Las Fargo. We hope to see many of you there. And now I will turn the call over to Satish.
Keysight
Thank you, Jason, and thank you all for joining us. Keysight reported strong fourth quarter results, which exceeded the high end of our guidance and drove a strong finish to the year. Before we get into the quarter, I want to highlight our exceptional performance for fiscal year, which illustrates continued progress we're making in transforming the company to a software-centric solutions provider. We set new records for orders, which grew 12% to $6 billion, a new record for revenue, which was up 10%, and a new record for earnings per share, which increased 22%, all the while returning capital through $849 million in share repurchases, or 89% of free cash flow. In addition, we continue to invest in next-generation technologies for long-term differentiation and and see a high level of engagement and activity with our customers around their future needs. Today, I'll focus my comments on three key headlines. First, we delivered an all-time record revenue and earnings per share in the fourth quarter ahead of expectations enabled by outstanding execution by Keysight teams who successfully navigated supply chain, geopolitical, and macro dynamics. We achieved record orders of 1.6 billion with steady bookings throughout the quarter and a book-to-bill of 1.09. While our customers' multi-year roadmaps remain unchanged, they are exercising more caution given the macro backdrop, which we anticipate will moderate demand in the near term. Third, as we enter fiscal 23, we remain confident in our ability to outperform the market based on the differentiation of our solutions, our strong R&D customer value proposition, and the robust backlog position we have entering the year. And as we look longer term, the secular innovation trends in our end markets remain strong. Now let's take a deeper look at the strength of the fourth quarter. Record orders of 1.6 billion grew 9% on a core basis. Record revenue grew 15% on a core basis, with solid growth across all regions as Keysight teams successfully navigated challenging dynamics. This resulted in record quarterly earnings of $2.14 per share. The strength and resiliency of our business model is due to our strategic efforts to diversify our industry exposure. This has been best exemplified in the growth of our electronic industrial solutions group and our ability to leverage our industry-leading first-to-market solutions to enable expansion across the broader communications ecosystem. EISG achieved its ninth consecutive quarter of double-digit order and revenue growth. Auto, semiconductor solutions, and general electronics all achieved record quarterly revenue. For the year, both orders and revenues set new records as we capitalize on continued investments across all three EISG markets. In automotive, we're pleased with the continued adoption of our solutions portfolio as orders grew double digits for the seventh consecutive quarter and exceeded $500 million this year. Automotive OEMs and their suppliers continue to focus on strategic new mobility investments, which drove key wins for Keysight. In addition, automotive-focused semiconductor companies continue to add capabilities to support EV and AV applications, which we view as a favorable long-term dynamic. We recently announced the SignLab DC Emulator, which enables customers to accurately characterize high-voltage, high-power electric vehicle battery performance under varying real-world charging conditions. And Keysight's PathWave Labs operations software won 2022 Auto Tech Breakthrough Award for overall electric vehicle technology. In support of AV applications, silicon designers are exploring adoption of commercial standards such as MIPI for automotive and other surround sensor applications, including cameras and in-vehicle infotainment displays. We are now expanding our leading compliance test solutions to offer advanced verification and diagnostic capabilities for automotive designers. Turning to our semiconductor solutions business, Q4 was the 10th consecutive quarter of double-digit order growth and a record revenue quarter. We saw sustained demand for our wafer test solutions and precision positioning capabilities, which enabled the realization of advanced process nodes. In addition, Keysight has continued to partner with industry leaders Synopsys and Ansys on RF and millimeter wave integrated circuit design flows built for today's wireless communication requirements, including 5G and 6G system on chips. Keysight received a Partner of the Year award from TSMC for joint development design flows in RF and millimeter wave nodes. In general electronics, Record orders grew double digits this quarter as demand remained strong and broad-based across industrial IoT and digital health as well as education and advanced research markets. Turning to Communication Solutions Group, the business delivered strong orders and record revenue. Annual orders and revenue were all-time highs despite geopolitical headwinds and delays in U.S. defense budget appropriations. Commercial communications revenue grew 10% this quarter and 11% for the year, with growth across all regions. Investments across communications ecosystem continued throughout the year, with sustained spending in next-generation wireless and wireline technologies. Ongoing investments in 5G standards, new spectrum, growing deployments around the world, and steady evolution from 400 gig to 800 gig to terabit Ethernet drove growth. We had another record year for 5G orders as Keysight's market leading solutions continue to provide the industry with new capabilities needed for development of next generation devices as well as wireless and wireline networks. Examples that highlight our portfolio's alignment with key industry priority include a recent partnership with IBM to integrate our Open RAN capabilities into their cloud automation tools to accelerate network deployments. We also completed the validation of our first 5G location-based service use case from Global Certification Forum by combining the testing of 5G new radio and global navigation satellite system technologies into a single platform. Lastly, in collaboration with key silicon and data center partners, We enabled the industry's first 1.6 terabit transmission and data center interconnect, leveraging our high-speed digital solutions. Aerospace, defense, and government business revenue grew 4% for the quarter and 3% for the year, setting a new record while navigating geopolitical headwinds. Steady investments in spectrum operations, cybersecurity, and space and satellite drove demand. 5G continued to expand in aerospace and defense end markets, and we saw increasing investment in advanced research. Proposed increases in investment in the US and allied countries for modernization of defense capabilities and new satellite and space applications position us well for future opportunities. As an integral part of our solution strategy, software and services order and revenue growth this year continued to outpace Keysight overall, which has driven our annual recurring revenue to approximately $1.2 billion. Software and services again represented just over one-third of Keysight's total revenue for the year. Keysight's focus on customer success and innovation is driving our development of first-to-market, high-value solutions. Our achievements over the years exemplify Keysight's collaborative culture and our talented workforce, and we are honored that Keysight has placed 10th on the Fortune's Best Workplaces in Technology list for 2022. We believe our differentiated culture gives us a unique ability to recruit and develop capable talent and will be our sustaining competitive advantage. In conclusion, I would like to thank our employees for all their contributions, commitment, and strong track record of execution. In the midst of an uncertain economic environment, we remain confident in the resilience of our business, the strength of our balance sheet, and the flexibility of our operating model. Now I'll turn it over to Neil to discuss our financial performance and outlook in more detail.
Jason
Thank you, Satish, and hello, everyone. We delivered an outstanding fourth quarter of 2022 with record revenue of $1,443,000,000, which was above the high end of our guidance range and grew 11% or 15% on a core basis. Our strategies to navigate the ongoing supply constraints continue to be effective. While the supply chain situation improved within the quarter, it continues to moderate our near-term revenue expectations. Record orders of $1,570,000,000 increased 5% or 9% on a core basis, and we entered fiscal year 2023 with over $2.5 billion in backlog. Looking at our operational results for Q4, we reported gross margin of 64%, which, as expected, was down 80 basis points sequentially due to inflationary pressures and increased shipments of lower-end instruments enabled by the improving supply chains. Operating expenses of $494 million were well managed, and we generated operating margin of 30%. Net income was a record $386 million, and we achieved $2.14 in earnings per share, which was 14 cents above the high end of our guidance. Our weighted average share count for the quarter was 180 million shares. Foreign exchange impact on our earnings was negligible thanks to a meaningful natural hedge provided by our global footprint, which was then supplemented by our financial hedging program. Moving to the performance of our segments. The communications solutions group achieved record revenue of $992 million, up 8% or 11% on a core basis. CSG delivered gross margin of 66% and operating margin of 29%. Commercial communications generated revenue of $681 million in the fourth quarter, up 10%, driven by strength across the 5G ecosystem, increasing O-RAN adoption, and investment in 800 gigabit and 1.6 terabit R&D. Aerospace defense and government achieved record revenue of $311 million, up 4%, driven by double-digit growth in Asia Pacific and Europe. The Electronic Industrial Solutions Group achieved record revenue of $451 million, up 20%, or 25% on a core basis, driven by strength across all markets. EIC reported gross margin of 60% and operating margin of 32%. Turning to our full-year financial performance, Keysight delivered outstanding results in 2022 despite ongoing supply constraints, foreign exchange headwinds, and incremental trade restrictions. FY22 revenue totaled $5.4 billion, up 10% year over year, or 12% on a core basis. Gross margin was flat at 65%, holding steady in the face of significant inflation. We invested $813 million in R&D, while operating margin improved 140 basis points to 29%. FY22 non-GAAP net income was $1.4 billion, or $7.63 per share, up 22%. Moving to the balance sheet and cash flow. We ended our fourth quarter with more than $2 billion in cash and cash equivalents, generating cash flow from operations of $398 million and free cash flow of $340 million. Total free cash flow for the year was $959 million, representing 18% of revenue and 69% of non-GAAP net income. Share purchases this quarter totaled approximately 800,000 shares at an average price per share of $158.77 for a total consideration of $126 million. This brings our total share purchases for the year to approximately 5.4 million shares at an average share price of $156.09 for a total consideration of $849 million for 89% of free cash flow. Now turning to our outlook and guidance, we exit the year with record backlog and confidence in Keysight's ability to continue executing through near-term uncertainties. As a result, we expect first quarter 2023 revenue to be in the range of $1,360,000,000 to $1,380,000,000 and Q1 earnings per share to be in the range of $1.81 to $1.87. based on a weighted diluted share count of approximately 180 million shares. A few modeling reminders as we enter the year. Our annual compensation cycle is administered in Q1, and in this current inflationary environment, we expect our second consecutive year of wage increases above our historic average. We are targeting FY23 R&D investment at approximately 16 percent of revenue. Annual interest expense is expected to be approximately $80 million, Capital expenditures are expected to be approximately $250 million, and we are modeling a 12% non-GAAP effective tax rate for FY23. In closing, we recognize the uncertainty of the current macro environment and will continue to be disciplined. Keysight's highly flexible cost structure, track record of execution, diverse end markets, and long-term secular growth drivers give us confidence in our ability to outperform the markets. With that, I will now turn it back to Jason for the Q&A.
Dante
Thank you, Neil. That concludes our formal remarks. Dante, could you please give the instructions for the Q&A?
Operator
Of course, sir. Ladies and gentlemen, if you would like to ask a question, please press star 1. We ask that you please limit yourself to one question and one follow-up. To withdraw your question, please press the pound sign. Please hold while we compile the Q&A roster. Our first question... comes from the line of Samik Chatterjee. Your line is now open.
spk08
Hi, this is Angela Jin for Samik Chatterjee. Congrats on the strong quarter and outlook. My first question is sort of related to what you mentioned briefly in the prepared remarks on sort of macro slowdown and perhaps some pullbacks. I'd like to dig in a little more there, given that we've seen commentary from other companies indicating that there's a pullback in telco capex. Are you seeing any impact to their R&D budget? And then I have a follow up. Thank you.
Keysight
Thank you, Angela. Yes, we're very pleased with the quarter. And, you know, in consideration of this environment, pretty strong results and also a strong finish to the year. And as I stated, we saw a steady level of spend from a demand perspective through the quarter. All our regions from a sales perspective grew, so it was broad-based. And going into a little bit on the end market color, I would say 5G continues to remain strong. We grew our 5G orders double-digit strength in R&D. And also with the inflections that we're seeing in deployments around some parts of the world, even some of the manufacturing spend there remains strong for us this quarter. And we did see pockets of weakness in the broad component ecosystem, and that was an area we obviously watched carefully, and that is related to the smartphone demand. And if you look at the cloud and data center markets in Waterline, while some of the direct cloud spend from the cloud providers was pushed out, service providers was pushed out, the broad spend to adopt 400 gig and 800 gig continues to remain strong. So they focus on R&D and new innovations remain strong. Moving on to aerospace and defense business, obviously it was still a strong quarter for us, but we did not see the typical year-end surge that we would expect given the budget appropriations process. And then moving to EISG end markets, all of the markets remain strong, right? Automotive, we had strong double-digit growth as continued investments and inflection from EV and AV are playing out. Semiconductor is an area we watch carefully, but because of our exposure into the wafer stage equipment process and new nodes, specifically new nodes, that remains strong. And lastly, the general electronics business, which typically gets part of its spend from PMI, continue to remain strong from a demand perspective. So I would say we're doing well, and the customer activity with our customers and engagements remain strong and quite pleased with our quarter in this environment.
Angela
Great. Thank you so much for that, Kalar. And then just for my follow-up,
spk08
You posted 10% revenue growth this year, and I know your long-term guide is sort of mid-single digits revenue growth. Just what are you thinking sort of broad strokes for fiscal 23 revenue growth? You know, did you see any pull forward with supply easing? And so could there be an air pocket in fiscal 23, or do you still expect to sort of perhaps trend above your typical long-term range?
Keysight
Thank you. Yeah, we remain confident, Angela, with what we see so far. Obviously, it's an uncertain environment, so we're guiding one quarter at a time. You see the confidence reflected in our Q1 guide, which we feel good about. And as we look forward, you know, we'll look at the demand environment and we'll keep you updated as we go.
Angela
Thank you for your question, ma'am.
Operator
Our next question comes from the line of Chris Snyder with UBS. Your line is now open.
Chris Snyder
Thank you. I just kind of wanted to follow up on those comments on the market demand commentary. I mean, orders were, I think you said, steady each month of the quarter and up 9% year on year. So what should we make of the commentary that, you know, maybe customers are being a bit more cautious? Because, you know, Satish, as you just kind of ran through all the different subsegments and businesses, it seems like, you know, everything is going quite strong. You know, should we take this as maybe an indicator that fiscal Q1 orders are easing a bit? And ultimately, does this push that, you know, the growth profile back to that 4% to 6% normalized range, or could it sink below that?
Mark
Thank you. Chris, this is Mark. I'll take that and add a little bit more detail here. So, you know, Satish said our order level was steady throughout the quarter. So we're watching this, right? Because if customers are taking more time to make decisions, you would look for orders to slow down. They did not. As a matter of fact, October was very strong. It was a record October for us in terms of orders. So that's good. You've heard us talk about before the addition of new customers. we've added about 450 this quarter again for nearly 2,000 new customers across the whole year. So that creates more diversity and durability to our business, and I see that paying off. Our top 20 customers in the quarter were up strong double digits as well. So all of that continues to translate to the fact that we did not see an impact to our business because of the customers taking more time. And I think it also has to do with the fact that we are so biased toward R&D and design optimization. And as we've seen through other waves in the recent term where some markets slowed, the advanced technology development continues. So that's what we see. But we look around and we do see some macro uncertainty. And from my seat, what I see in terms of order or in terms of customer activities is very active customers Our six-month funnel continues to grow, but customers are taking more time to make ultimate CapEx decisions.
Jason
Yeah, and this is Neil. I'll just give you a little bit maybe more quantification of the situation going into Q1. So while we don't guide orders, I would point out that we have a bit of a difficult compare here in the first quarter. A year ago in Q1, that was the first time in Keysight's history that we'd ever posted order growth moving from the end of Q4 into the first quarter of the new fiscal year. So we've got a tough compare from that perspective. In addition, as you all know, the U.S. dollar began to strengthen pretty significantly in the back half of this year. We estimate the FX headwind in our first quarter to be a full five percentage points, and so we've got a five-point FX headwind, and we estimate another two to three points of headwind from the recent increase in China trade restrictions, as well as the loss of our Russia business, which happened in the second quarter of last year. So those things combined give us a 78-point headwind just coming out of the gate here as we enter the first quarter.
Chris Snyder
I appreciate that. And, you know, on the commentary that customers are taking longer to order, maybe they're ordering slower – How do you separate kind of the supply chain element of that from the demand element? Because if supply chains are generally moving in the right direction, I think that maybe customers will not kind of order with the same lead times or urgency that we saw last year. Thank you.
Keysight
Yeah, Chris, I think you're right. I think as the supply chain continues to ease and the delivery duration that it takes for us to fulfill an order continues to pull in, you would expect some level of normalization as well. And the reason we also put out that the demand environment is moderating is we're starting to also see some of our customers whose earnings has fallen also put additional scrutiny on spend, right? And so that takes a little bit more time to close the deal as they go through their process. So those are some factors. Neil, I don't know if you want to, I know you've commented on the normalization before.
Jason
Yeah. I guess the only other point that we'd make around that level is if you look at our last three years, we've averaged a book to bill over the last three years of 1.09, driven first by COVID, obviously, then by the supply chain disruption that's happened over the last, say, 18 months. And so we've known for some time that that book to bill had to normalize. And as our lead times come in, we would expect that normalization to occur. And so, you know, as I think about it, And again, we're not guiding orders, but a move of our book to bill back to a more normal level, something approaching one, is not something that's going to impact our ability to continue to grow revenue. I appreciate all that, Collin. Great quarter, guys. Thank you.
Collin
Thank you, Chris.
Operator
Thank you for your questions, sir. Our next line of questions comes from the line of one, Mehdi Hosini, SIG. Your line is now open.
Mehdi Hosini
Yes, thanks for taking my question. Two follow-ups. Let me go back to CapEx, the 250. Should I assume the capital intensity will remain around 3% in fiscal year 23?
Jason
Yeah. So, I mean, one of the things that's happening with our CapEx is, you know, our capital purchases in this fiscal year were definitely impacted by the broader supply chain environment. You know, we guided at the beginning of the year, I'm talking about fiscal 22 now, to CapEx that was close to $250 million, and we significantly underspent that from a cash flow perspective. But what you can't see is that our commits were very much in line with our original expectations. It just took longer for things to be delivered. And so what we're seeing as we go into next year is a pretty dramatic scaling back of new capital purchases but with a little bit of a cash flow overhang as we go into next year. And so that's what's going to carry our capital purchases up to that $250 million level in fiscal 23.
Mehdi Hosini
So I shouldn't use your CapEx guide to come up with some revenue guide or revenue growth expectation for fiscal 23. There is some cash flow aspect of the CapEx, right? That's right. And then I want to go back to China. The APAC region as a percentage of revenue has remained in the low 40% over the past several years, including the headwind from Huawei. Should I assume that you are growing outside of China so much to the extent that you are able to offset increased restriction on shipment to China? Is it just a mix within the APAC region that makes China kind of neutralized?
Keysight
Yeah, I think maybe as we have spoken before, you know, we have a broad-based business in China and despite the ongoing geopolitical situation, we have a demonstrated ability to pivot and address customers in that region. And given the focus there, On technology development, I think we're seeing good demand in the region. But we're also seeing multinational companies that are creating, that are moving out of China in some ways and into rest of Asia Pac and other parts of the world, including on-shoring moves into North America. And we're successfully capturing some of that spend as well.
Mehdi Hosini
Okay. Okay. So the fact that the supply chain is moving out to China, that's positive. Now, if I may, just a quick follow-up. So you do have more than 50% exposure to your customers' R&D budget. On top of that, there is structural changes happening with the supply chain that is also positive. And those two factors on aggregate could offset some of the cyclicality, nature, or production-related issues. sensitivity or volatility. Is that the right way to think about this?
Keysight
I think that's what's playing out right now for us, yes. Okay, thank you.
spk12
Thank you. Thank you for your questions, sir.
Operator
Our next line of questions comes from the line of one Matthew Nicknam with Deutsche Bank. Your line is now open.
Matthew Nicknam
Hey, guys. Thank you for taking the question. Two, if I could. First, on backlog, so you mentioned you ended the year at about $2.55 billion. I think our math would suggest something about $100 million higher just relative to the $2.5 you mentioned last quarter. I'm just wondering if there's any order cancellations to be aware of or if there's an FX component affecting this? And then secondly, on the China trade restrictions, I think you'd call that a two to three percentage point headwind from those restrictions. I'm just wondering, is that incremental in fiscal 1Q? And is this primarily an EISG? Or could it show up elsewhere? Thanks.
Jason
Yeah, so this is me. I'll take the backlog question and then let Mark address the China question. But yes, I mean, obviously, our orders within the quarter outpaced revenue by You know, a little bit more than $100 million. So we do continue to add to the backlog, you know, as we've gone throughout the year.
Mark
Yeah, and Matt, the specific China trade situation, that went into effect on October 7th, so there wasn't much effect. In our Q4, we will see some effect in our first quarter, but the 1% to 2% is projecting out over a run rate of business for the entire year based on other situations. The other thing just to note is that we have not seen any changes in our cancellations. It's been running at a historically low level for the last four quarters, and that was the case again in Q4.
Angela
Got it. Thank you. You're welcome.
Operator
Thank you for your question, sir. Our next line of questions comes from line of one, Aaron Rakers with Wells Fargo. Your line is now open.
Collin
Yeah, thanks for taking the question and congrats on a good execution in the quarter. I just want to at a high level go back to kind of the defensibility of the model if I can. Can you remind us where, you know, the mix of the business stands today between, you know, R&D exposed versus, let's say, manufacturing exposed? And I guess on that same kind of thought process is that, you know, where do you stand as far as the monetization effect of the software strategy? Where do we think that progresses to over the next year, whatever timeframe you want to think about?
Keysight
Yeah, thank you for the question. I think at the highest level, we're at approximately 60% R&D today, 30% manufacturing, and 10% deployments. So that's the sort of mix of the business. Clearly, we believe R&D is secular. You look at some of the areas in R&D that we're focused on that involve next-generation innovations, such as with 5G and then 6G and automotive, and digital health, so on and so forth. And it really gives us this diversity of applications that gives us a resilience in this environment for sure. With regard to the software strategy, it again goes congruent with our go-to-market approach because we're here to enable innovations to happen faster. And the way we do that is by offering more software-centric solutions. So as we deploy more solutions to our customers, Increasingly, that is in the form of growing software mix, and that goes, again, synergistic with our services strategy. So you look at our software and services revenue this year will end at 34% of the total mix, and our ARR, or annual recurring revenue, has reached a new high of $1.2 billion, and we'll continue to invest to grow those portions of the business and increase our resilience and durability over time as well. Thank you.
Collin
Yeah, thanks. And as a quick follow-up, if I can, just curious, when we think about the progression of backlog, and we appreciate that your backlog is only looking out on a forward six-month basis. Neil, just curious, how should we think about what a normalized backlog level looks like?
Jason
Yeah, I mean, given some of the dynamics that Satish just talked about, increasing software services, recurring revenue, we have seen growth in our deferred revenue over the same three-year period of time, as well as our migration towards systems rather than tools, I think will drive our ultimate backlog level when things normalize to be significantly higher than it was, say, pre-COVID in the 2018-2019 timeframe. And so I think we'll have to see how that plays out over time. I think, you know, again, we've built, you can do the math, we've built, you know, well north of a billion dollars of backlog over the course of the last three years as we've had this, you know, booked a bill that I've mentioned of 1.09. And, you know, as our lead times come in, we're going to expect, you know, ordering patterns to adjust and, you know, lead times to pull in. I've said previously, you know, that there's probably four to five weeks' worth of kind of abnormal backlog as a result of a four- to five-week extension of lead times kind of on average would be a way to think about it.
Keysight
But it's also important to add that we're still in a supply challenge environment. While it's improving, supply is the constraining factor right now.
Angela
Thank you. Thank you for your question, sir.
Operator
Our next line of questions comes from the line of one Jim Suva with Citi. Your line is now open.
Jim Suva
Thank you so much. It's very noteworthy and impressive about your software and services, which I think is about 34%. Can you help us understand reasonable growth as a percent of totality going forward? Because I would imagine it's very hard to ever get over 50% or are you looking at a point where it starts to level off around 35% or is that way too low, 40%? Where could this kind of feasibility go for software and services as you kind of look at adding these incremental benefits to your sales process?
Keysight
Yeah, Jim, I think as a strategy, as a company from 2015, we've been focused on on the software-centric solution strategy and really focused on our customers' most demanding and challenging problems that they have and solving this better than anyone else. And as we have continued to do that, our strategy has taken the form of not just a per-incident sale, but our focus on this lifecycle of value creation for our customers, but also value capture for Keysight. And that's the journey we've been on. Some of the more newer solutions, such as in Open RAN, that we've talked about where we are seeing considerable traction. Software alone is nearing 40, 50% of the total sale value and with a lot bigger portion of it being in the recurring category as well. So we feel good about the continued traction we're seeing for our solutions as we continue to deploy the solution strategy over time. we will enter into new end market verticals. And as you've seen some examples I put out this latest earnings announcement, we've also had some successes in the automotive sector with deploying software and in the semiconductor as well with our design offerings. Mark may make some comments on the sales side.
Mark
Yeah, thanks, Satish. And Jim, what I would ask is the go-to-market, you mentioned that, and that is an important element of this. We are attaching upfront attached services and software We're at about 60% for services today. I want to see that grow. So that's another stream of advancement. The other thing that you can see is we are delivering solutions more and more through updates to our software. If you think about our 5G solutions going from release 15 to release 16 and 17, much of that is software updates that creates additional opportunities for upsell, cross-sell, and, of course, recurring revenue as well. So there's several elements of our go-to-market that we are deploying now to encourage that recurring growth and expansion of attachment up front to our total solutions.
Jim Suva
Great. And then my follow-up is on the China. I think I heard two to three points of headwind. Is that for kind of the full fiscal year? Was there any like in fiscal Q4 like buying ahead of the rule changes. I'm just trying to kind of, you know, triangulate around the magnitude of it. And I assume after fiscal 23, it's kind of all out of the model from the rule changes.
Mark
Yeah, Jim, I think we said one to two points of headwind for the entire fiscal year 23. And again, that's based on what we estimate as the run rate of business that won't be available to us with the new trade restrictions. There will be a little bit more in Q1 as we look at some of the backlog, but that's the run rate. And then there was another, I think Neil mentioned another point ahead win from Russia.
Jim Suva
Great. Thank you so much, and congratulations to you and your teams.
Operator
Thank you, Jim. Thank you. Thank you for your questions, sir. Our next line of questions comes from the line of one Meta Marshall with Morgan Stanley. Your line is now open.
Jim
Great, thanks. In the past, you guys have talked about kind of, you know, that the 5G peak was going to be much later than kind of investors were expecting, but you kind of talked about a 23, 24 time period for the 5G peak. I just wanted to kind of get current thoughts on that and just how initiatives like ORAN or just some of the other initiatives are maybe extending that. And then maybe second, you know, you gave some context that you're seeing some loosening in supply chain, but just kind of what is current thinking, you know, is it still just a small amount of parts that you're kind of waiting to release, but just when do you see more general availability of those parts and just kind of a tightening between supply and demand? Thanks.
Keysight
Yeah, thank you, Matt. I think on the 5G front, I think as we have always stated, you know, there are multiple catalysts. I think about 18 months ago I said the first catalyst was the C-band deployments in the U.S. That's played out as we had hoped and we have captured a lot of that spend. We are pleased with some action that's happening in Asia and India, parts of India that have made commitments to roll out 5G. So that's, again, opportunity for us that's playing out right now. But the second and the third parts to this is the millimeter wave opportunity. There's still some complex challenges with millimeter wave that customers are trying to solve that continues to be a longer term R and D opportunity for us as that deployment has continued to push out, uh, anyway, scale deployments anyway. And lastly, As 5G is deployed, operators are looking to further monetize by adding the SA versions and new applications such as Open RAN continue to gain traction across the global ecosystem. And so the opportunity that we have in R&D continues to grow and we're well positioned with the comprehensive offerings we have to address it. I also want to point out that we have a very diversified business. Yes, 5G gets a lot of attention, but we have secular trends in wireline evolutions, which we're well-positioned to capitalize on based on the acquisitions of Ixia that we have made, and we continue to see attractions there, not to mention the newer additions to our go-to-market with automotive and with next-generation semiconductor nodes. We run a diversified business, and I think that's the source of greater stability for us over time. The second part of the supply chain question that you asked is, you know, at the beginning of last year, you know, we took a series of actions to basically redesign our products to second source components, and we had a We've talked about it on earnings calls, and all those actions have really enabled us to do better than we expected every quarter. But as we think about the supply chain, I speak with a number of our semiconductor supply chain partners, and they're all putting actions in place to obviously increase capacity, but it still continues to be a constrained environment. We're not back to this pre-COVID situation. sort of supply environment yet. It might take all of 23 to get there from our best information right now.
Angela
Great. Thank you. Thank you for your questions, ma'am.
Operator
Our next line of questions comes from line one, David Ridley Lane with Bank of America. Your line is now open.
David Ridley Lane
Sure. Good evening. You talked about some of the headwinds to revenue in the first quarter, but one tailwind not mentioned is pricing. And I'm just sort of wondering, you know, how significant is pricing today versus more normal levels? I mean, you're getting a couple of points tailwind from that. And then, you know, what type of volume growth is really embedded into first quarter's guidance?
Jason
What was the last part of the question? I'm sorry, David. I missed just that last part.
David Ridley Lane
Oh, sorry. So the type of volume growth is embedded in the first quarter guidance.
Jason
Yeah, I mean, I think the pricing question, obviously, we've been doing our best to keep pace with inflation. We've had multiple rounds of price increases over the course of the last 12 to 18 months. And, you know, those are embedded in the backlog, although I think you can see that you know, based on the fact that we have maintained margins over the course of fiscal 22 at flat at 65%, which frankly, I think in this inflationary environment was a very strong result that we're basically keeping pace on a margin basis with what we're seeing in terms of, in terms of increases. And so, so, and I, you know, right now, while on the one side, yeah, we have these price increases that are embedded in our backlog and will continue to yield dividends and revenue. It's not like the inflationary elements have stopped in the cost structure as well. I referenced, for example, that we are going to be doing our salary administration for next year here in our fiscal first quarter, and this will be our second consecutive year with salary increases that are materially above our historic averages. As to the volume question, Given the nature of our business where we're selling instruments that literally cost in some cases hundreds of dollars and in other cases cost a million dollars, that's a very difficult question to answer. There's such a high deviation of mix that it's really hard to get to a meaningful answer on that question.
David Ridley Lane
Sure. And as a follow-up, you know, another tailwind here is autos, right? I think the last quarter you mentioned that it's basically doubled over the last two years. This quarter you mentioned $500 million in orders, so it's nearing close to 10% of your orders in this fiscal year. Do you feel like the trend there is kind of, I don't want to say not significant, not subject to sort of macroeconomic conditions, but certainly has a strong secular element to it?
Mark
David, this is Mark. I'll answer that. You know, the growth we're seeing is coming from next-generation mobility. There's some continuing R&D on the electronic side that's more conventional, but the growth in new mobility is sustaining. It is secular mobility. And it doesn't just stop at the vehicle. It goes out into the charging infrastructure, into the underlying battery technologies. And, you know, we've seen what's happened here in the last year with different countries and different regulations pushing this further toward adoption. The adoption in Europe is very strong and growing fast in other regions as well. And our position in the market is very strong, helping our customers design and deploy this next-generation technology from the batteries to the charging infrastructure. And then, and on top of that, all the connectivity and communications and protocols, as we talked about in the prepared statement. So this is really a great intersection of multiple strengths for us, and it has long-term secular growth drivers behind them.
Angela
Thank you very much.
spk12
Thank you for your questions, sir.
Operator
Our next line of questions comes from the line of one Rob Mason with Baird. Your line is now open.
Rob Mason
Yes, good evening. Thank you. Neil, I wanted to just clarify, you mentioned that R&D I thought would be roughly 16% of revenue this year. I just want to make sure that's correct because it's about a point more than it was this past year in 22. And just I'm curious how that steps up and what does an exit rate look like if that's the case?
Jason
Yeah, so you're right. Obviously, our 16% or 16% plus has been our long-term target. We underspent that here in FY22. I think a big function of that was the revenue outperformance within the year. If you remember this time last year, we guided you to 6% revenue growth on the year, and we actually grew 12% on a core basis. And so our R&D plans for the year were much more aligned with that lower level of revenue growth. So I think, you know, as we go, we certainly continue to see a large amount of opportunity for us to continue to invest in the future growth of our business, a lot of pull from our customers to do R&D work. And so our intent is to revamp back towards 16% of revenue. Obviously, the salary administration here in the first quarter is going to help to move us in that direction. We may not get to 16% here in the first quarter, but looking at an exit rate that's at 16% or even potentially a little bit above by the time we get out to the fourth quarter is not out of the question.
Rob Mason
Okay. Okay. That's helpful. To the extent that supply chain does still remain somewhat tight through the year, how are you thinking about working capital and any ability to pull that down as you go through the year? What are you thinking about working capital contribution for the year?
Jason
Well, I certainly think over the longer term, you know, that as the supply chain normalizes, there will be an opportunity for us to reduce some of the working capital that's built up over the course of the last year. We see it in terms of inventory, increased inventory via the prices that we're paying for parts. We see money tied up in terms of commitments to buy future inventory where we paid in advance for future delivery. It's been a use of working capital that, frankly, is new over the course of the last 12 months. And then, frankly, the supply chain situation has significantly impacted the linearity of our revenue within the quarter. You can imagine when you move from more of a just-in-time environment where you're just building and shipping and building and shipping, we're doing a lot more build to a certain stage, wait for parts, finish, and ship. And so our revenue has tended to be more back-end loaded, which results in us carrying more receivables at the end of the quarter than we would if we were shipping in a more linear fashion. So, again, I think it's a function of how does a supply chain normalize and when does that eventually happen? You need a little bit of a crystal ball to answer that question. But when it does happen, we would expect to see an ability to reduce working capital.
Angela
Very good. Thank you.
spk12
Thank you for your question, sir.
Operator
That concludes our question and answer session for today. I would like to turn the conference back to Jason Carey for any closing remarks.
Dante
Thank you, Dante, and thank you, everyone, for joining us. As he mentioned, that concludes the call, and we wish you all a good evening and look forward to seeing you soon.
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