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spk01: Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal Second Quarter 2023 Earnings Conference Call. My name is Alyssa, and I will be your lead operator today. If at any time during the conference you need to reach an operator, please press star zero. The call is being recorded today, Tuesday, May 16, 2023, at 1.30 p.m. Pacific Time. I would now like to hand the call over to Jason Carey, Vice President, Treasurer, and Investor Relations. Please go ahead, Mr. Carey.
spk00: Thank you, and welcome, everyone, to Keysight's second quarter earnings conference call for fiscal year 2023. Joining me are Keysight's President and CEO, Satish Janasekaran, and our CFO, Neil Doherty. In the Q&A session, we'll be joined by our Chief Customer Officer, Mark Wallace. The press release and information to supplement today's discussion are on our website at investor.keysight.com under the financial information tab and quarterly reports. Today's comments will refer to non-GAAP financial measures. We will also make reference to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months. The most directly comparable GAAP financial metrics and reconciliations are on our website, and all comparisons are on a year-over-year basis unless otherwise noted. We will make forward-looking statements about the financial performance of the company on today's call. These statements are subject to risks and uncertainties and are only valid as of today. We assume no obligation to update them. Please review our recent SEC filings for a more complete picture of these risks and other factors. Lastly, management is scheduled to participate in upcoming investor conferences hosted by J.P. Morgan, Baird, and UBS. And now I will turn the call over to Satish. Satish.
spk10: Thank you, Jason. Good afternoon, everyone, and thank you for joining us today. Keysight delivered a solid second quarter performance, capping off a record first half of the year. Our consistent execution as we navigate near-term macro dynamics reflects the resilience of our diversified business and the differentiation of Keysight's solution portfolio. My comments today will focus on three key headlines. First, Our strong financial performance in the second quarter demonstrated the depth and the breadth of Keysight's solutions and operating discipline. Revenue was at the high end of our guidance, and earnings per share exceeded our guidance range as we delivered record gross margin and record free cash flow. Second, orders in the second quarter were stable and consistent with our expectations. As near-term macro dynamics play out, we're capitalizing on growth opportunities across our end markets with particular strength in automotive and global aerospace defense. And third, we remain confident in the long-term secular growth trends in our markets. While the current environment is uncertain, we are continuing to prudently invest for the future to build on our leadership positions and to deliver on the long-term strategy that I laid out at our investor day in March. Now let's take a deeper look at our second quarter results. Orders declined 10% or 8% on a core basis. Record Q2 revenue grew 3% or 5% on a core basis. Operational excellence combined with favorable software and services mix resulted in record gross margins of 67%, operating margin of 30%, record free cash flow of $370 million, and earnings per share growth of 16%. Turning to our business segments, the Electronic Industrial Solutions Group delivered record Q2 orders driven by demand in automotive and general electronics, representing 33% of the total company revenue. EISG revenue was an all-time high and grew 17% with strong double-digit growth across all end markets. This was also the 11th consecutive quarter of double-digit revenue growth for this business segment, which underscores our broad market reach and diversified portfolio. In automotive, we delivered strong double-digit revenue growth and secured new strategic wins with two large OEMs. Building on our strong position in this market, we introduced further automation and protocol test capabilities for our industry-leading EV charging test portfolio, allowing customers to accelerate their innovation. Improved battery performance and ease of charging are among the most critical capabilities EV developers are bringing to consumers today. Keysight's complete solutions allow customers to develop batteries with better range and faster charging time, and importantly, to efficiently test their interoperability against all global infrastructure standards under real-world conditions. General electronics revenue grew by double digits to reach an all-time high. We are capitalizing on opportunities across a broad range of applications. For example, in quantum and silicon photonics, where we are seeing more advanced research investment. In digital health, where we close deals with several prominent medical device customers for key sites, microwave sensing, and imaging solutions. And in industrial automation, where customers are developing components and products to connect factory and warehouse environments. Our outperformance in general electronics in a soft demand environment demonstrates the benefit of the broad and diverse set of applications and use cases that we enable. Semiconductor solutions deliver double-digit revenue growth driven by continued fab investments in new wafer capacity and advanced nodes. Our strong relationships with key customers in wafer test and precision lithography provide us with long-range demand visibility, which remains favorable despite near-term inventory headwinds. We believe the long-term growth drivers remain intact, supported by the government investments in initiatives such as Chipsac and advanced node development for small, more efficient, and multifunctional Chipsacs. Turning to our communication solutions group, revenue declined 3% against a strong compare of double-digit growth last year. At 45% of company revenue, commercial communications revenue declined 7%, which reflects the normalization of demand environment that we referenced last quarter. We saw cautious but stable spending across the communications ecosystem, particularly in the smartphone and PC computing markets, as customers work through post-pandemic inventory dynamics and macro uncertainty. At the same time, our customers continue to invest in long-range strategic R&D programs. Keysight's first-to-market solutions are enabling future requirements in 5G, including non-terrestrial networks, Release 17 capabilities, Open RAN, AI ML-driven data center networks, and early 6G research. After a three-year pause, we saw strong global industry participation at Mobile World Congress and Optical Fiber Conference this year. At these events, we showcased our capabilities with the key industry players to advance new technologies and use cases. This quarter, we enabled Samsung to demonstrate 5G new radio non-terrestrial network use cases in satellite connectivity. In addition, we secured a key win in commercial space to test antennas transceivers, and telemetry systems. Keysight is also enabling ongoing Open RAN adoption. For example, Cable Labs used Keysight's Open RAN architect solutions to achieve key interoperability milestones. Regionally, we saw strength in India with ongoing 5G and Open RAN deployments. Strategic data center R&D activity continues to gain momentum And Keysight secured an early win with a leading customer to implement AIML use cases. Our unique and comprehensive solution stack, which spans the physical, protocol, and the application layers, is enabling us to capitalize on these new market and technology inflections. We are also continuing to advance early 6G research with industry leaders around the world. In Japan, we engaged with NTT DoCoMo on new spectrum technologies for sub-terrahertz frequencies. In the UK, in collaboration with National Physical Laboratory and University of Surrey, we enabled connectivity at speeds greater than 100 gigabits per second using Keysight's 6G testbed. Turning to our aerospace and defense government business, we achieved record second quarter orders and revenue. Double-digit order growth was driven by increasing defense spending worldwide. At 22% of company revenue, ADG revenue was up 7%. Defense modernization spending remained strong in radar and spectrum operations, while investment in space and satellite and ongoing research in 5G and 6G drove growth. We saw strong demand from the U.S., and European primes with spend picking up in next-generation programs. We recently announced software-based real-time spectrum analysis solution, allowing satellite network operators to provide users with the highest quality of service. Keysight continues to innovate to meet the needs of this evolving market. Software and services. Revenue growth across business segments was steady and represented over one-third of company revenue. Value-added solutions are becoming increasingly important in the rapidly evolving design, emulation, and test environments. In collaboration with Synopsys and Ansys, we recently announced a 79 GHz millimeter wave radio frequency reference flow for TSMC. This allows us to provide mutual customers with the solutions they need to push the boundaries of RF and millimeter wave design into applications for autonomous systems. Technology megatrends and customers' innovation workflows are driving an expansion in software opportunities. We expect software and services growth to continue to outpace overall company growth over the next three years. Before I turn it over to Neil, I'd like to highlight some of the things that make me proud to lead this company. A collaborative and innovative culture is one of the strategic enablers for Keysight's continued value creation and an enduring competitive advantage. We recently published our 2022 Corporate Social Responsibility Report, which showcases the progress that we have made against our commitments and we're proud to have significantly surpassed many key impact goals for fiscal year 22. We also released our 22 Diversity, Equity and Inclusion Report, which highlights the company's accomplishments in building an inclusive workplace and expanding new STEM partnerships. To sum it up, our market leadership and deep customer relationships are sustainable competitive advantages. We're guided by our Keysight leadership model and run the company to outperform and to consistently create value under all business conditions. We believe the structural and financial flexibility of our operating model enables us to be resilient in the current macro environment. I would like to thank our employees for exemplifying a high-performance winning culture and consistently delivering exceptional value to our customers and shareholders. With that, I will now turn it over to Neil to discuss our financial performance and outlook.
spk12: Thank you, Satish, and hello, everyone. We delivered exceptionally strong financial performance in Q2, demonstrating the resilience of our business model. Revenue of $1,390,000,000 was at the high end of our guidance range and grew 3% or 5% on a core basis. Macroeconomic uncertainty continued to impact demand in the second quarter, and orders of $1,319,000,000 declined 10% or 8% on a core basis. We ended the quarter with over $2.4 billion in backlog. Turning to our operational results for Q2, we reported record gross margin of 67% and operating expenses of $504 million, resulting in operating margin of 30%. We achieved net income of $380 million and delivered $2.12 in earnings per share, which was above the high end of our guidance. Our weighted average share count for the quarter was 179 million shares. Moving to the performance of our segments. Our communications solutions group generated revenue of $937 million, down 3% or down 1% on a core basis. Commercial communications revenue of $627 million was down 7%. Aerospace defense and government revenue of $310 million increased 7%, driven by investments in defense modernization. Altogether, CSG delivered record gross margin of 68% and operating margin of 28%. The Electronic Industrial Solutions Group generated second quarter revenue of $453 million, up 17% or 19% on a core basis, with double-digit revenue growth in automotive, general electronics, and semiconductor, demonstrating the diversity of our markets. EISG reported gross margin of 64% and operating margin of 35%. Moving to the balance sheet and cash flow. We ended our second quarter with $2.5 billion in cash and cash equivalents, generating cash flow from operations of $423 million and free cash flow of $370 million, or 27% of revenue, which includes $107 million in one-time proceeds from the unwind of an interest rate swap. Now turning to our outlook. In this challenging macro environment, the scenario we laid out last quarter for first half demand levels to persist through the remainder of the fiscal year is playing out. However, given the strength of our operating model and the actions we have taken to date, we now anticipate better earnings performance than previously communicated, with strong mid-single-digit EPS growth expected for the full year. Turning to our third quarter guidance. We expect revenue to be in the range of $1,370,000,000 to $1,390,000,000 and Q3 earnings per share to be in the range of $2 to $2.06, based on a weighted diluted share count of approximately 179 million shares. Despite ongoing uncertainty, Keysight's durable and resilient financial model positions us well to outperform in the current economic environment. Over the longer term, we remain confident in the underlying demand drivers for our markets and our ability to execute and achieve our new, raised, long-term targets as presented at our Investor Day in March. With that, I will now turn it back to Jason for the Q&A.
spk00: Thank you, Neil. Alyssa, could you please give the instructions for the Q&A?
spk01: Absolutely. Ladies and gentlemen, if you would like to ask a question, please press star 1. We ask that you limit yourself to one question and one follow-up, please. To withdraw your question, press star 2. Please hold while we compile the Q&A roster. Our first question comes from the line of Sameek Chatterjee with JP Morgan. Your line is now open.
spk09: Thanks for taking my questions. If I start with the strong operating performance, I think, Neet, you were mentioning in your prepared remarks. Just maybe give us a bit more color there. Obviously, record cross margins, very strong operating margins in the context of sort of how the top line is playing out and how the macro is. What are the drivers behind the cross margin improvement? And overall, how much of this is just sort of some of the supply pressures easing versus something
spk12: that you as you said you've taken actions and sort of that's driving some of the improvement if you can lay that out for us in terms of how sustainable that is and have a follow-up yes to make it it's a great question and to some extent it depends on what your compare is uh over the over the past couple of quarters a big driver of the you know sequential or improvement from the from the last couple of quarters comes from the improvement in the supply chain and and in fact I would tie it to the reduction in the third-party premiums that had kind of peaked in the back half of this year, last year and into the first quarter of this year. On a year-over-year basis, it's really far more mixed. We had significantly favorable mix relative to the mix that we saw in the same quarter a year ago. As to sustainability, I think, you know, obviously we set a new raised gross margin target for this business of 66% to 67% over the longer term. I think this is a great proof point in terms of showing our ability to achieve those kinds of levels. I don't necessarily know that we're ready to operate at this level, you know, continuously going forward, but we also raised the – the EPS guidance for the year relative to this scenario we laid out last quarter, and certainly, you know, the operating margin performance, excuse me, the gross margin performance and the easing of the supply chain constraints and costs are a factor that led to that increased EPS guidance.
spk10: Yes, if I can, Satish, if I can add to Neil's points, you know, quite pleased with the financial performance in this environment. Obviously, both CSG and EISG showed gross margin improvements. In EISG, a lot of it was linked to volume. But if you look, you know, the business model is solid, right? You look at the software and services have been steadily outpacing the business, overall business growth for a long time now, and we expect that tend to continue. And I would say that that gives us confidence, as Neil pointed out, that as we continue to execute our strategy of going up the stack all the way from physical protocol and application layers, we'll continue to have more opportunities moving forward.
spk09: Correct. And Satish, if I can follow up with you on the demand side for commercial communication. You talked about the customer spending patterns last quarter. Have you seen any more sort of broader broadening out of the weakness? I know some of your peers have talked about even some of the base station testing, et cetera, being a bit weaker. But have you seen any broadening beyond just the smartphone ecosystem of players and that weakness that you're seeing? And even interested in hearing what you're seeing from your customers in relation to do you really see sort of your commercial com hitting a trough already and now starting to sort of stabilize at these levels because that's what the numbers are indicating. But interested to hear how you're thinking about it. Thank you.
spk10: Yes, I think the headline on demand, I think, and orders has been stability, right? I think that's sort of the theme. And it holds true even in commercial communications where obviously we discuss the dynamics of customers working through inventory corrections. Some of them are in a place where they're starting to think about next year's programs. They're starting to think about other programs. But then some of them are still working through the inventory correction situation in their business. So it's really dependent on different customers. But broadly, I would say if you look at our 5G business, the R&D parts of the opportunity continues to hold up better, and there are different drivers there. And then you referenced the base station side actually was also holding up in line with quarter one. And I think on the networking side, we had a slightly down quarter over quarter, but all in all, You know, it's holding up well at this time. I don't know that I would go as far as calling a trough or, you know, calling a bottom, but we remain, you know, focused on delivering to our customers roadmaps, and we're seeing high engagement with our customers, particularly in comms after the OFC and Mobile World Congress. I think people are starting to think about what the future might bring, and there's tremendous opportunity to innovate, and nobody wants to fall behind.
spk12: And if I was just going to add on to that, I mean, it just kind of catching on to that, that theme of stability that Satish mentioned. I think as we look at demand and turn that lens forward, you know, we're thinking about second half demand that's largely in line with what we saw in the first half, albeit with some seasonality attached to it. Typically we would see Q3 tick down and Q4 tick up, not just because of the way we manage our sales compensation programs, but also particularly in this scenario, where one of the growth drivers that we're seeing in this market is aerospace defense and the fact that those markets tend to skew up in our fourth quarter. Great.
spk09: Thank you. Congrats on the execution.
spk10: Thank you so much.
spk01: Thank you. Our next question comes from the line of Mehdi Hosseini with Susquehanna. Your line is now open.
spk13: Yes, thanks for taking my questions. Going back to backlog, I want to better understand how the normalization, especially post-COVID, is played out. And just for illustration, if I were to look at prior to COVID and look at like three to five years of history, the next quarter revenue to prior quarter backlog averaged around 0.9%. reflecting the nature of the business that was turned. COVID changed that. Your backlog went up due to supply chain disruption. And as you look forward post-COVID, should we expect more of a turn business? And I have a follow-up.
spk10: Yeah, I think, Maddy, from a business model standpoint, as you know, we've been driving to increasing solutions more software and services mix, higher ARR, and that's been part of the strategy for go-to-market, and that could alter in a very moderate way the mix. But at some point, yes, I think as demand gets back in line, we would expect the supply and demand balance to be restored.
spk12: Sorry, Mehdi. As I think about it from a backlog perspective, I think In terms of the backlog normalization, it's happening much like we laid out last quarter, right, that, you know, orders or revenues have outpaced orders in both Q1 and Q2. We expect that largely to continue here through the remainder of the year. And while we may not work through all of what I kind of had described as the abnormal backlog, we're going to work through a significant portion of that if you think of it as kind of an $80 million a quarter kind of a run rate. Um, and, and so, uh, and then you are correct as the supply chain situation is involved, we are once again, becoming more and more reliant on, on turns business, not quite back to where we were, uh, pre COVID, but some of that is a fact, uh, of the, of the kind of the structural changes that have occurred in our business over that period of time.
spk13: Sure. Thank you. And I certainly don't want to take away anything from that. demand drivers. And in that context, maybe you could remind us what are the key demand drivers looking forward like 600 gig Ethernet, nail arrow, semiconductor. And to me, those dynamics are very different than the 5G investment cycle that you went through from 2017 through 2019. And you could just remind us how the next couple of years could be different than prior upturn.
spk10: Yeah, thank you, Mandy. And as you know, we have a diversified portfolio and we have diversified end market exposure that gives us plenty of opportunity to continue to expand our share position. And we still only have 25% market share in our markets. And we have additional new SAM opportunities that I outlined at Investor Day. But if you just look at the high level, you know, you'd say the innovation trends across our end markets continue to accelerate. And I think what we're seeing even during this time is customers are not pulling back on their long-term priorities, especially with regard to keeping their competitiveness going. And so that is a trend that we expect to continue, and that would bode well for in wireless release 17 and new innovations that are coming up and heading into 6G, which is which is on a roadmap for the industry. And in wireline, clearly, the move to 800 gig, terabit Ethernet, and multiple optimizations that networks have to go through in the world of AIML. I think that's another diversified opportunity for us that we're pretty excited about. And then you go into aerospace defense. I think research spanned across multiple nations of the world continue to remain strong as many nations are investing in organic IP. You look up supply onshoring or reshoring or security around supply chain, that is a demand driver. And when you look at semiconductor, the roadmap is pretty secure to actually go through the progression from 7 nanometer to 5 to 3 to 2 and so on and so forth. So we look at across our end markets, including the general electronics business with digital health, And I didn't talk about the one that is currently inflecting, which is automotive with EV and AV. And all these are secular trends, and I think our focus as a company on R&D innovations, enabling customers to go faster, definitely will put us in a good position to capitalize.
spk07: Thank you.
spk01: Thank you. The next question comes from the line of Chris Snyder from UBS. Your line is now open.
spk15: Thank you. So fiscal Q2 revenue came in below typical seasonality. And obviously, you guys have been talking about the cyclical slowdown. So it's not a surprise there. But I guess my question is, the guidance calls for you know, kind of typical seasonality into the third quarter with top line largely flattish. Can we take that or should we take that as a vote of confidence that the market dynamics or demand is not getting worse?
spk12: Yeah, I mean, as I said, I think, you know, we largely think, albeit at a lower level, we think we largely face Tad Piper- Think see things as stable here as we move from the first half into the second half right I just talked about how. Tad Piper- On the demand side we expect second half orders to be on par with with the first half, albeit with. Tad Piper- With the you know the seasonality that I mentioned anything from a revenue perspective, the same is largely correct we. Tad Piper- You know, we delivered 1380 and in Q1 guided to 1380 and Q2 we did a little bit better we've guided to 1380 and Q3. And I think if you think about, you know, a level of revenue stability at about that level, you're thinking about it the right way.
spk15: I appreciate that. I'm kind of taking that and following up on the guide. You know, if my back of the envelope math is correct here, you know, mid single digit EPS growth for the year would imply a pretty big decline in Q4, both first Q3, but also year on year. And with top line seemingly at least kind of stable, it seems to be calling for a decline in margins. Any reason for that? You know, I don't know if there's ever been a quarter where Q4 EPS came in below Q3. Thank you.
spk12: Yeah, well, again, as I said, I think if you think about the top line for Q4, you know, stability would be the term that I'd use to describe that. When it comes to EPS, I think on a year-over-year basis, you're not incorrect at modeling a decline. While Q4 a year ago was not that dissimilar from what we just delivered here in Q2, as we look into the back half of the year, as I said, we might not be able to sustain the gross margin quite as favorably as the mix we just delivered. And then in addition, we want to see some incremental investments into some of the future technologies that are going to drive our markets as we move forward. So I do think on a year-over-year basis, you will expect a decline in the fourth quarter.
spk10: Yeah, and I think just to add to the point, right, it is an uncertain environment that's out there, and I think when we speak with customers, yeah, the engagement levels are high, but in terms of them planning for budgets, they're really relying on their underlying business to pick up, and so there's that dynamic which results in an elongated cycle to close the pipeline. And so that's the case. In our guide, we try to be center-weighted. We're not factoring in any macro recovery, nor are we factoring in any recovery from China reopening into the guide. And those could be upside, but the macro could get worse too. So that's the way we see it, and we'll keep you updated.
spk15: Thank you.
spk01: Thank you. The next question comes from the line of Aaron Rakers from Wells Fargo. Your line is now open.
spk02: Yeah, thank you for taking the question. Also, congrats on the execution in the quarter. A lot of questions that I had were already answered, but I want to go back to kind of the narrative around AI and ML, and maybe you can help just unpack a little bit of the demand insertion that you're seeing Just maybe help us appreciate where and to what extent, you know, Keysight's involved in those opportunities. I'm just kind of curious of just helping us appreciate a little bit more of the AI narrative and the demand drivers you're seeing.
spk10: Yeah, thank you. I think, you know, AI, it's safe to say that it's been under discussion for quite a long time, and you could say machine learning algorithms are not that new anymore. But what we're seeing now is a take up in networks, really thinking about the way to train AI models, the way to infer in an AI environment. And that creates some opportunities for us. I think Kailash referred to that in our presentation at Investor Day as some pilots that we have going on. And fundamentally, you look at it at the high level. You have in a typical search, not sell traffic in a network. And with AIML, you have a lot of east-west traffic. And I think modeling that and being able to train your network to perform is going to become a differentiator. And I think having the full stack in wireless and wireline allows us to go address opportunities for our customers. How big that could be, I mean, to be determined, but I do know that a lot of our customers are having discussions with us at this time and we're continuing to invest in this new emerging opportunity.
spk02: Yep. Thank you. Very helpful. And then as a quick follow-up, I noticed this quarter you did not repurchase any shares. I think that's the first time in a little while. So, Neil, I'm just curious of how you're thinking about very strong free cash flow, how you're thinking about share repurchase, maybe M&A, just overall capital allocation given the strong balance sheet position.
spk12: Yeah, there have been no changes to our capital allocation priorities. Obviously, we relayed them out at our analyst day in March. We continue to look for opportunities to grow our business via value accretive M&A. While we didn't purchase any shares during the quarter for a variety of reasons, we've been very active in the buyback markets and would expect to continue to be at least anti-diluted with our buyback programs and be opportunistic on top of that. And so we continue to believe there is ample opportunity for us to create value through appropriate capital allocation. Thank you.
spk01: Thank you. The next question comes from the line of Mark Delaney with Goldman Sachs. Your line is now open.
spk14: Hey, everyone. Thank you for taking my question. This is Will Bryan asking a question on behalf of Mark Delaney. So first question is with orders down year over year, will easier comps and backlog be enough for the company to grow at that 5% to 7% target that you laid out next year if the macro is still similar to current conditions or would the macro need to improve at all to reach that goal?
spk12: Yeah, as we said, the macro environment continues to remain highly uncertain, and we're not ready to make a call as to what the environment is going to be six months from now when we get to FY24. I think what we see right now is largely stability, and as Satish just said, we're not ready to call an upturn, but nor do we have any additional downside baked into what we're seeing currently. Okay, that's helpful.
spk14: Thank you. And my second question is wondering if you can comment or give some additional color around regional order trends at all. Thank you.
spk11: Sure, Will. This is Mark. I'll talk about the region trends. So, you know, it begins with the word stability. We talked about that many times already. Hue 2 orders were steady and predictable and really consistent with our expectations. We saw increased customer demand and increased customer engagements with continuing focus on their R&D programs across all four regions. This was especially shown in the case for aerospace and defense, where we saw strong growth and demand across all of our regions. We saw the demand in automotive continue with some key wins, a couple key OEM wins, particularly in Europe. And, you know, in general, the broad base of customers and the variety of applications that we serve within General Electronics really held up strongly across most regions as well. We did see some pullback as we saw in Q1 around commercial comms that was centered with some of our larger customers in the Americas. We saw some pullback in short-term demand with semiconductor in Asia. But in general, across all regions, we saw this continuing stability in engagements and order flow as we expected.
spk07: Thank you.
spk01: Thank you. Our next question comes from the line of Meta Marshall from Morgan Stanley. Your line is now open.
spk08: Great. Thanks. It looks like you guys burned down about $100 million of backlog this quarter, and you had been kind of guiding through about $300 million of backlog for the remainder of the year. So it seems like everything is on track there. I guess I just wanted to get an update as to whether kind of $200 million of additional backlog for the year was a good estimate and just kind of what segment that's most concentrated on. And then just a second question, just in terms of where you're seeing some of the more cautious spending on comms, you know, is that legacy standards, just kind of what projects are being potentially pushed out, you know, while kind of emphasis is still being put on 6G, kind of new releases of 5G? Thanks.
spk10: Thank you, Amanda. I'll take the second part first, and then Neil will speak to the backlog. I think the In comms, obviously, the big driver is new innovation, new technology trends. We saw strength in Release 17, non-terrestrial networks, all of the same themes that we've been talking about, and some increased investments around the globe around the next generation technologies. Largely in R&D, the trends are holding. In production environments or production test environments is where we're seeing much more weakness in demand as customers are digesting this excess inventory associated with smartphones and PCs and such. And our share position, even though at a lower level, continues to be strong. And we're focused on our portfolio, and our portfolio continues to grow, and we'll continue to release new products in alignment with customer needs. With regard to the backlog, Obviously, we have a backlog situation, as Neil mentioned. We have a growing deferred revenue balance with increasing focus we've placed on software services and ARR. And we also, in accordance with where we're seeing the order strength, whether it's automotive or in semiconductor or in aerospace defense, we're also providing more system type of capabilities to our customers which have longer lead times. Neil will give you more specifics.
spk12: Yeah, I think on the backlight side, you referenced our comments about expecting to burn, you know, somewhere around $300 million of backlog for the year. I mean, that statement was made last quarter when revenues outpaced orders by $80 million. And we talked about how we expected that demand environment to sustain itself for at least the next couple of quarters. And That's in fact what's playing out. So if you think about kind of an $80 million backlog burn per quarter, you get to 320, and that's largely how we're thinking about it with, you know, orders and revenue largely stable into the back half of the year.
spk08: Great. Thanks so much.
spk12: And the last question you asked is how does it skew by business? Right now it's clearly skewing towards CSG.
spk08: Okay. Perfect. Thank you.
spk01: Thank you. The next question comes from the line of Adam Salimer with Thompson Davis. Your line is now open.
spk04: Hey, guys. Nice quarter. Hey, Neil, the working capital was pretty negative in 2022, and it looks like it's finally starting to swing positive in Q2. Do you expect that trend to continue in the back half, cash from working capital?
spk12: Yeah, I mean, it's certainly something we're watching carefully. There's a number of factors there. The supply chain situation clearly put pressure on working capital in a number of ways. First of all, inventory purchase commitments, which while things are getting better, we did make significant purchase commitments over the course of the last four to six quarters during that time frame. So I think that's going to keep some pressure. And we also, to be honest, began to alter our processes around demo so that we could, rather than putting new units into demo inventory, we sustained the life of our demo inventory so we could deliver products into the hands of our customers. And so, you know, as we start to normalize that, rotate that demo back out and sell that equipment, be our used equipment business, I think we'll be able to bring inventory down over time. And then I think You know, on the receivable side, what's really going to help us there is as the supply chain situation continues to improve and we can really start to linearize our revenue delivery within the quarter, you know, that will help. And I think there is room for continued improvement there over time. Okay.
spk04: And then it was slight, but the CapEx guidance came down a touch. Just wondering what drove that.
spk12: Well, similarly there, if you think, you know, the CapEx that you're seeing there is obviously the cash flow side of things. And again, with the supply chain situation, a lot of what we're seeing on the cash flow side were commitments that were made, you know, many months ago and to which we're starting to get delivery. We actually have seen our new commitments actually drop even further than what you've seen on the cash flow side of things as the supply chain situation's resolved. the we do expect you know capex cash flows to be high you know for the remainder of the year higher okay thank you thank you the next question comes from the line of matt nicknum with deutsche bank your line is now open
spk03: Hey, guys. Thanks for taking the question. Congrats on the quarter. I want to go back to gross margins, and maybe if we can talk a little bit about some of the drivers of upside. I think there was reference to product mix, if we can just go back to that and unpack that. And I'm also curious whether there were any software license sales in there that may not recur on a go-forward basis. And then just one follow-up as well on orders, if you could talk about the linearity over the course of the quarter and how that trended by month, if possible.
spk12: Thanks. Yeah, let me take the gross margin question, and then we'll have Mark address the orders question. I think on the gross margin side, again, on a year-over-year basis, it's primarily mixed. And we do see a fair amount of movement and mix within the quarter can shift. But if you think about it in this particular situation, obviously the shift towards higher recurring revenue is helping to the extent that those software revenues are sustained and stable in a period of time where orders and revenue and demand for hardware is generally under pressure. I think that's a favorable shift on mix. And then probably even a bigger impact than that within the quarter is within the product shipments itself, it's skewed towards higher end systems rather than lower end tools within the quarter is the best way to describe it. And particularly versus a year ago, versus prior quarters where we maybe have had an unfavorable mix shift towards high levels of disty shipments. Some of our lower end products are things that can skew mix the other way. So that's what we saw within the quarter.
spk11: Yeah, and Matt, as far as the order flow within the quarter, I would say it was very typical for a Q2 as the second period in the six-month performance period. We saw it ramp throughout each of the three months. You know, February is a shorter month, fewer selling days. As you get to the end of the performance period with our incentive comp and sales, we do expect a stronger finish, which is exactly what we saw. What I can say, though, was very consistent was the kind of elevated level of customer engagement as customers prioritized on different programs that they felt were important going forward. And we saw that really as the stabilizing factor after coming out of Q1. So we did see a ramp, but I wouldn't read anything more into that other than the natural seasonality of a Q2.
spk03: Got it. And just on the gross margins, any sort of abnormal software license sales in there to call out?
spk12: No.
spk07: Great. Thanks.
spk06: Thank you.
spk01: The next question comes from the line of David Ridley Lane with Bank of America. Your line is now open.
spk05: Thank you. Good evening. Maybe a little bit of a strategy question. So as you've grown your automotive and EV battery business, are there some attractive adjacencies there? Would you consider inorganic investments to kind of round out the offering, or do you feel... that you have kind of the solutions that you need to keep up the growth there?
spk10: Yeah, thank you. I think as we mentioned, you know, automotive has been a fairly new vertical expansion for us, one that we've focused on since Keysight has formed, and we've successfully grown that to over $500 million. And we continue to see even more opportunity to expand as there's going to be ongoing innovations in EV and AV, not only in automobiles, but in other sectors as well, with the push for autonomous and electrification, even in broader set of industries. And we're continuing to build the most comprehensive portfolio all the way from design to silicon bring up to simulation, validation, compliance, testing, and manufacturing. with more emphasis on R&D, really, and we're helping create standards. We're also working on finding new methodologies for testing that will be disruptive. And to that extent, we've made small technology tokens that have enhanced our software content and ability to make contributions to the workflow in this area. And we see, as we think about our M&A, we see a strong pipeline for opportunities, and we'll continue to evaluate them against our strategic and financial hurdles, and we'll look to lean in for the right opportunity.
spk05: Thank you for that. And then just a quick follow-up. How are your own lead times as the supply chain has improved? How are your own lead times relative to pre-COVID history? Where do we stand on that? Thank you.
spk12: Yeah, so still improving for a significant part of the portfolio. We're already back. There's another significant chunk that should work its way back to kind of pre-COVID lead times here over the third quarter. And then there will continue to be some outliers, you know, beyond that. But we're rapidly moving in the right direction.
spk05: Good to hear. Thank you.
spk10: Thank you.
spk01: Thank you. That concludes our question and answer session for today. I would like to turn the call back to Jason Carey for any closing comments.
spk00: Thanks, Alyssa, and thanks everyone for joining us today. That concludes our call and we look forward to seeing you at some of the upcoming conferences here in the quarter.
spk01: This concludes our conference call. You may now disconnect.
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