Keysight Technologies Inc.

Good day, ladies and gentlemen, and welcome to Keysight Technologies' fiscal fourth quarter 2023 earnings conference call. My name is Sierra, 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. This call is being recorded today, Monday, November 20, 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.

Thank you and welcome, everyone, to Keysight's fourth quarter earnings conference call for fiscal year 2023. 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 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 Financial Information 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 and encourage you to review our recent SEC filings for a more complete view of these risks and other factors. Lastly, management is scheduled to participate in upcoming investor conferences hosted by Wells Fargo and UBS. And now I will turn the call over to Satish.

Good afternoon everyone and thank you for joining us. My comments today will focus on three key headlines. First, Keysight reported solid fourth quarter results and finished the year with record revenue, gross margins, and operating margin in what remains a challenging macro environment. Fourth quarter revenue and earnings per share exceeded the high end of our guidance as orders came in slightly ahead of expectations. For the full year, revenue grew 2% on a core basis and earnings per share increased 9% while we generated $1.2 billion in free cash flow. Second, our customer engagement on next-generation technology teams remains strong, and we continue to action opportunities across a broad and diverse set of end markets. Despite the mixed demand environment, as end markets normalize from post-COVID supply demand imbalances, over the last two years. Third, we're investing both organically and inorganically to expand our addressable markets and differentiated solutions portfolio, which took another step forward this quarter with the addition of ESI. We remain confident in the long-term secular growth drivers of our business and our ability to address our customers' most challenging and diverse innovation needs. Now let's begin with a brief overview of Keysight's fourth quarter and full year performance. We're pleased with our results and execution. Fourth quarter orders were $1.3 billion and we delivered $1.3 billion in revenue and $1.99 in earnings per share. We also generated $340 million in free cash flow and repurchased $426 million of our shares this quarter. Full year results were strong in a year of normalizing demand. Orders of $5.2 billion were in line with our original expectations of approximately $1.3 billion per quarter this year. We delivered an all-time high of $5.5 billion in revenue and achieved record profitability with gross margins of 66% and operating margins of 30% and $8.33 in earnings per share. Moving to our markets, Overall, the demand dynamics within the quarter were consistent with our expectations. Aerospace defense and government demand increased, commercial communications were steady, and as anticipated, broader manufacturing-related spending in the electronics industrial markets was incrementally softer. Turning to our business segments, communications solutions group revenue declined 10%, Aerospace defense and government grew, while commercial communication markets are rebalancing off of last year's record highs. On a sequential basis, orders grew across both markets. In aerospace defense and government, revenue grew 4% to an all-time high. We saw healthy order demand from the U.S. and European primes, as well as direct government customers, driven by investments in defense modernization, space, and satellite applications. KeySight's leading threat emulation solutions capabilities drove order growth in the US, including a large US Department of Defense win for electromagnetic spectrum operation applications. We also saw demand from European primes for our radar and phased array antenna solutions to support the delivery goals in 2024 and beyond. The breadth and the depth of our solutions portfolio enable new customer engagements and business in satellite communications, 5G and 6G, and advanced quantum research, including a large order from a premier research institute contributing to the record quarter. In commercial communications, revenue declined 17%, reflecting ongoing customer spending constraints as inventories in their markets normalized. Sequentially, we saw stability in wireless orders and incremental strength in demand for network and data center applications. Demand for our wireline solutions was driven by AIML and data center expansion as hyperscalers build infrastructure to handle increasing network and compute workloads. We expect this trend to continue into the next year and beyond. customer business was stable, with ongoing investments in network monitoring driven by increasing data traffic and cybersecurity compliance needs. In wireless, the progression of standards is driving steady R&D investments in new capabilities and devices, as well as Open RAN and Release 17 features. Our R&D engagements with customers continue to expand. This quarter, we enabled MediaTek to validate non-terrestrial network connectivity. In addition, Keysight was awarded two key UK government grants in partnership with universities and leading telecom operators to support Open RAN design, testing, and deployment in Europe. Turning to Electronic Industrial Solutions Group, as expected, Q4 orders and revenue were both down compared to record levels of last year. It is important to note that the EISG has shown significantly above long-term expectations with revenue increasing by 30% in 2021, 14% in 2022, and an additional 10% in 2023. This growth was driven by both our differentiated solutions portfolio and an outsized demand from post-COVID recovery and supply constraints. In the second half of this year, we begin to see a normalization from these highs as well as ongoing cautious customer spending. In semiconductor, Capital spending for wafer capacity contracted in the quarter as Foundry customers pushed out their new fab investment timelines. We continue to see strong customer engagement for Keysight's proprietary interferometer systems and differentiated R&D solutions for silicon photonics and power semiconductors reflecting the industry's medium to long-term recovery and growth expectations. In automotive, Customer investment in R&D for battery and charging infrastructure continues and is being fueled by increasing competition, regional legislative deadlines, and government funding, particularly in Europe and Asia. The funnel of EV opportunities remains strong, while the timing and size of these systems engagements are expected to vary from a quarter to quarter. In general electronics, we saw steady demand for our solutions in advanced research, industrial automation, and digital health. However, and more broadly, manufacturing capacity normalization and cautious spending continue to weigh in on consumer electronics and manufacturing portions of the market. We're watching global PMI and other macroeconomic indicators to gauge the timing of the market recovery. As an integral part of our solution strategy, software and services revenue growth this year continue to outpace Keysight overall. The recurring portion of software and services grew 9% this year, driving total annual recurring revenue to approximately 1.3 billion, or 23% of total revenue, an increase of 200 basis points year over year. In early November, ahead of schedule, we announced our acquisition of a controlling block of shares of ESI Group. The addition of ESI further increases our software and annual recurring revenue, expands our addressable markets, and strengthens our strategy of moving upstream into earlier stages of our customers' design cycles. We continue to invest prudently to capitalize on our long-term growth opportunities. In parallel, we remain disciplined and are taking additional targeted cost actions to streamline operations and ensure strong financial performance. In wrapping up my first full year, As the CEO of Keysight, I'd like to thank our employees for their outstanding contributions, commitment, and strong track record of execution in these tough market conditions. The strength of Keysight's differentiated solutions, the diversity of our end markets, and the durability of our business model all position us well for continued market outperformance as we enter the new fiscal year. With that, I'll turn it over to Neil to discuss our financial performance and outlook.