| Quarter | Q4 FY24 |
|---|---|
| Call date | 2024-11-19 |
| Results reported | 2024-11-19 |
| Length | 49 minutes |
| Speakers | Paulina Sims, Director of Investor Relations; Satish Dhanasekaran, President and CEO; Dougherty Neil, EVP and CFO; Mark Wallace, Chief Customer Officer |
Results, guidance and Q&A analysis for this call
Paulina Sims (Director of Investor Relations)
Good day, ladies and gentlemen, and welcome to the Key Side Technologies Fiscal Fourth Quarter 2024 Earnings Conference Call. My name is Joel, and I'll be your lead operator today. If at any time during the conference you need to reach an operator, please dial *0. This call is being recorded today, Tuesday, November 19th, 2024 at 1:30 PM Pacific Time. I'll now like to hand the call over to Paulina Sims, Director of Investor Relations. Please go ahead, Miss Sims.
Satish Dhanasekaran (President and CEO)
Thank you and welcome everyone to Key Sites fourth quarter earnings conference call for fiscal year 2024. Joining me are Key Sites President and CEO, Satish Dhana Shekharan and our CFO, Neil Doherty. In the Q&A session, we will be joined by Chief Customer Officer, Mark Wallace. The press release and information to supplement today's discussion are on our website at investor.keysite.com under financial information and quarterly reports. Today's comments will refer to non GAAP financial measures. We will also make a 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 gap 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 more complete view of these risks and other factors. Lastly, management is scheduled to participate in upcoming investor conferences hosted by Wells Fargo and Barclays. And now I will turn the call over to Satish.
Dougherty Neil (EVP and CFO)
Good afternoon, everyone, and thank you for joining us today. My comments will focus on three key headlines. First, Keyside executed well and delivered fourth quarter revenue and earnings per share about the high end of our guidance range under market conditions, which remain consistent with our expectations. Orders finished slightly above our expectations and grew 1% year over year and 8% sequentially, driven by ongoing strength in AI and strong year end bookings in our US aerospace, defense and government business. Second, strong execution and cost discipline drove full year revenue of 5 billion and earnings per share of $6.27, which were down from record highs of 2023. Results were paced by gradual improvement throughout the year with better performance in the second-half as expected under challenging market conditions. We demonstrated the resilience of our business model by delivering 26% operating profit and over 900 million in free cash flow. We also returned approximately 50% of free cash flow to shareholders through repurchases. 3rd, we progressed our software centric solution strategy by investing to realize organic growth opportunities through innovation and industry collaborations, while expanding the breadth of our solutions through selective MNA. As we look ahead, the strength of our differentiated portfolio, deep engagement with customers and the accelerating pace of technology innovation gives us confidence in our ability to outperform as markets recover. Now let's begin with an overview of key sites fourth quarter business performance. Communications Solutions Group revenue was flat year over year and grew 6% sequentially with growth across both commercial communications and aerospace, defence and government. CSG orders returned to growth for the full year, reflecting AI momentum in wireline, stability in wireless and consistent strength in ADG. In wireline markets, demand remains strong due to ongoing expansion in AI data center infrastructure, even as telco investments continue to be muted. As the timeline for 800 gig and 1.6 terabyte adoption accelerates, the industry is investing in advanced technologies including silicon photonics, chiplets and high speed electrical and optical interconix. Keysight continued to expand it's portfolio of solutions across the technology stack to enable customers in both R&D and manufacturing. At the Open Compute Project in San Jose, Keysight showcased our newly introduced AI workload and system emulation solution in collaboration with academia and hyperscalers. Our solution provides high fidelity emulation of AI model training and inferencing workloads to optimize training time and benchmark AI infrastructure performance. At ECO conference, Keysight showcased physical and protocol AI solutions with industry leaders to enable 800 gig interoperability with critical optical and electrical interface technologies. In wireless, demand was stable as smartphone industry nears the end of its inventory correction and telco CapEx normalizes from peak levels. Investment continues in open RAN expansion, ongoing standards progression with emphasis on non terrestrial networks and early 6G research. This quarter we announced multiple O RAN collaborations with industry leaders such as NTT, Docomo, Dish Networks and Pegatron. We also collaborated with Qualcomm to establish industries first end to end interoperability and data connection in the candidate frequency band for six GFR 3. We're also well poised to drive industry innovation forward with our differentiated full stack solutions. Turning to aerospace, defense and government, stronger than expected seasonality drove orders to an all time high. The funnel of opportunities remains strong. the US defence budget is expected to grow low single digits, while government investment in defence modernization in Europe and Asia is projected to increase. Customer engagements on electromagnetic spectrum operations, radar and advanced communication use cases remains high. Satellite communication investments is expected to continue as more Leo's constellations are launched over the next few years. Key side is capitalizing on the growing investment in defense modernization around the globe. At the recent European Microwave Conference, we showcased our leading capabilities in phased array over the air compact antenna design and test in collaboration with Analog Devices. We also highlighted our latest flagship performance network analyzer. It's differentiated and industry leading capabilities include wide band high dynamic range pre selected receivers for faster S parameter measurements to enable customers high frequency component designs. Turning to electronic Industrial Solutions Group, revenue was down year over year as expected, but grew mid single digits sequentially. Orders were mixed with year over year growth in semi and general electronics offset by automotive market headwinds. In semiconductor, robust demand drove strong order growth for our parametric wafer test solutions. We saw broad based foundry investment to expand capacity and address leading edge applications driven by AI. This included advanced DRAM technologies such as high bandwidth memory and DDR5 as well as silicon photonics enabling further advances in powers, semiconductor production and efficiency. This quarter, Keysight introduced an innovative single pass 3 kilovolt high high voltage wafer test solution in automotive. The industry is facing challenges and we expect the headwinds to continue in 2025. This quarter, production related demand was sequentially stable, while we saw incrementally cautious spending due to slowing EV sales and battery oversupply. Even with near term headwinds, we remain focused on customers, emerging innovation and design needs. Our R&D engagements for software defined vehicle as well as broader electrical and physical design applications remain high. ESI grew its solution business this year through steady renewals and new customer additions. Over this. The ESI team also made significant contributions to the use of AI to improve product performance simulations and offering workflow solutions with immersive visualization to validate assembly and servicing. In general electronics, we saw stable manufacturing and demand, albeit at lower levels and a modest sequential improvement in consumer and industrial high speed connectivity applications. Public and private sector investment in support of Advanced Research and technology workforce development grew this quarter and digital health application demand was again strong. Turning to software and services, revenues grew 8% this quarter and accounted for 39% of total key side revenue. Annual recording revenue from software and services also grew 16% to approximately 1.5 billion and and accounted for roughly 30% of key side. Overall, we saw solid growth in our design engineering software portfolio in 2024, reflecting the expansion of virtual prototyping across a broad range of industries. As as a recognized thought leader in RFEDA, Keysight was selected to lead AUS government, joint public and private sector effort to leverage AI and machine learning to automate and bring efficiencies to complex RF integrated circuit designs. In summary, Keysight has continued to sustain strategic progress and momentum through the downturn. The flexibility and discipline of our operating model has proven our ability to deliver strong financial results and healthy cash flows in a variety of economic conditions. We have positioned the business to emerge stronger as markets recover, to capitalize on the opportunities ahead of us and to create value for all stakeholders. Before I conclude, I'd like to sincerely thank our employees once again for all their outstanding contributions, commitment and strong track record of execution under a variety of market conditions. With that, I'll turn it over to Neil to discuss our financial performance and outlook.
Unknown (Analyst)
Thank you, Satish, and hello everyone. Fourth quarter revenue of $1,287,000,000 was above the high end of our guidance range and down 2% or down 5% on a core basis. Orders of $1,345,000,000 were up 1% as reported or down 1% on a core basis. Backlog increased $53,000,000 in the quarter to finish at $2.4 billion. Looking at our operational results for Q4, we reported gross margin of 64.5%. Operating expenses of $497,000,000 were up 5% year over year. Q4 operating margin was 26% or 28% on a core basis. Turning their earnings, we achieved $288 million of net income and delivered earnings per share of $1.65. Our weighted average share count for the quarter was 174 million shares. For the full year, Keysight generated revenue of $4,979,000,000, down 9% as reported or down 12% on a core basis. Gross margin was 65%, down 60 basis points versus the prior year. We sustained investment in R&D at $871,000,000 or 17.5% of revenue while driving further operating efficiencies in SGNA, which declined 7%. Excluding acquisitions, full year core operating margin of 26.5% was down 370 basis points, continuing to outperform Keysight's down cycle model and demonstrating the financial resilience of the business. Net income of $1.1 billion resulted in earnings per share of $6.27. Moving to the performance of our segments, the Communications Solutions Group generated fourth quarter revenue of $894 million, flat test reported or down 2%. On a core basis, commercial communications revenue of $591 million grew 4%, while aerospace, defense and government revenue of $303 million declined 6%. Altogether, CSG delivered gross margin of 67% and operating margin of 28%. The Electronic Industrial Solutions Group generated revenue of $393 million, down 6% or 11%. On a core basis, EIC reported gross margin of 58% and operating margin of 21%, an increase of approximately 100 basis points versus the prior quarter. Moving to the balance sheet and cash flow, we ended the quarter with $1.8 billion in cash and cash equivalents, generating cash flow from operations of $359,000,000 and free cash flow of $328 million. Share of purchases this quarter totaled 974,000 shares and an average price per share of approximately $154.00 for total consideration of $150 million. Full year share purchases totaled $439 million or 49% of the $905,000,000 in free cash flow generated this year. Now turning to our outlook. We expect the demand environment to remain mixed and for recovery to occur gradually through the year barring any further macro degradation. Our base case assumptions for FY25 are for revenue growth at the low end of our 5 to 7% long term target and earnings growth in line with our 10% target. As a reminder, the timing of ES is annual contract renewals typically results in 40 to 45% of their full year revenue being recognized in our fiscal first quarter with the balance recognized relatively evenly over the remainder of the fiscal year. For the rest of the business, we are modeling the typical mid single digit seasonal decline in revenue from Q4 to Q1. As a result, we expect first quarter revenue to be in the range of $1,265,000,000 to $1,285,000,000 and Q1 earnings per share in the range of $1.65 to $1.71 based on a weighted diluted share count of approximately 174 million shares. Now a few modeling considerations for the full year. Given the annual ESI contract renewals in Q1, we expect a material sequential decrease in ESI revenue in Q2 and over the same. We expect a low single digit increase in core Keysight revenue. At current debt levels, annual interest expense is expected to be approximately $70 million. Capital expenditures are expected to be approximately $150 million and we are modeling a 14% non GAAP effective tax rate for FY25. With that, I will now turn it back to Paulina for the Q&A.
Satish Dhanasekaran (President and CEO)
Thank you, Neil. Operator, will you please give the instructions for the Q&A?
Paulina Sims (Director of Investor Relations)
Absolutely. Ladies and gentlemen, if you would like to ask a question, press *1. We ask that you please limit yourself to one question and one follow up. To withdraw your question, press *2. Please hold while we compile the Q&A roster.
Paulina Sims (Director of Investor Relations)
The first question comes from the line of Aaron Rakers from Wells Fargo. Your line is now open.
Mark Wallace (Chief Customer Officer)
Yeah, thanks for taking the question and Congrats on the results. I guess my first question is, I, I want to ask you about the, the wireless piece of the business seems to be recovering. I I think it was kind of, you know, mid single digit if I'm correct from the presentation order growth in the quarter. I'm just curious of how you, you know, I guess the past conversations suggested that's more of a stabilizing business as we move through this year. Has that started to change? Has your view of growth kind of recovery in that business, you know started to evolve or deepen, you know, as?
Unknown (Analyst)
We look through the next.
Dougherty Neil (EVP and CFO)
Fiscal year, yeah. Thank you, Aaron. Indeed, a good quarter. We executed well and capitalized on the opportunities we saw. Specific to your question on wireless, we continue to feel more confident, I would say after two quarters were the businesses stabilized and we're seeing more strength on the infrastructure side where there's more activity from customers around open RAN and 6G research. So that drives that. And on the on the devices side, it's lagging a little bit where customers still continue to be focused on ongoing standards evolutions. So I mean, at this point, we continue to believe that the business will remain stable in 25. We'll, we'll call it when we see it, but we, we, we continue to feel good about the ongoing momentum we're seeing in our wireline business that's driven growth for commercial communications.
Mark Wallace (Chief Customer Officer)
Yep. And then as a quick follow up, kind of sticking with looking at some of the segments, the aerospace and defense segment. I'm curious because this question come up with some investors, You know, it sounds like you're pretty confident that that business continues to progress on the on the growth profile that you outlined. But you know, have you seen any, you know, areas of concern or any kind of you know, churn in, in programs etcetera around some of the federal dynamics of of spend any, any uncertainties around that that you would point to?
Dougherty Neil (EVP and CFO)
Yeah. I think the Aaron, the long term trajectory of the business is actually the one that is easiest to forecast given the budget clarity that typically gets and the priorities that get set both in the US and in allied nations. And if you look at electromagnetic spectrum operations, space and satellite and other areas. Those are the areas where defense modernization investments are moving too and we feel good about our position relative to the year. Obviously, orders were slightly down a year over year, but off of a record compare from a year ago. And some of the wins that we had were systems wins which take us a little longer to ship. So you haven't yet seen that in in the revenue line. But as we look ahead, obviously the short term with the administration change in the US does bring some uncertainties. But even at times like in 2016 where that happened, we just had some business more out between quarters and and so we'll we'll monitor the situation, but we feel good about the current situation with regard to our business there.
Mark Wallace (Chief Customer Officer)
Yeah. Thank you.
Paulina Sims (Director of Investor Relations)
Thank you. The next question is from Rob Mason with Baird. Your line is now open. I apologize. The next question is from Tim Wong with Barclays. Your line is now open.
Unknown (Analyst)
Thank you.
Mark Wallace (Chief Customer Officer)
Yeah, 2 for me as.
Unknown (Analyst)
Well, first, could you, you mentioned AI leading the strength in, in wireline, Obviously a lot going on there a lot.
Mark Wallace (Chief Customer Officer)
Of activity, could you?
Unknown (Analyst)
Maybe expand a little bit on on.
Mark Wallace (Chief Customer Officer)
How big that business is?
Unknown (Analyst)
Getting for you and maybe some examples of newer areas.
Mark Wallace (Chief Customer Officer)
That.
Unknown (Analyst)
Keyside is being pulled into because of the move in AI. And then the second one, I just wanted to follow up on the, the software services, you know, up to 39% of revenues here. Maybe just talk a little bit about that evolving part of the business model and how how Keetight's going to be?
Dougherty Neil (EVP and CFO)
Able to move that.
Unknown (Analyst)
Number further and maybe impact on on gross margin as that as that moves higher as well.
Dougherty Neil (EVP and CFO)
Thank you. Thank you, Tim. Clearly, you know the waterline business has gained momentum this year driven by AI, but this is one of the examples of proof of concepts that I highlighted at Investor Day last year. And so we're quite pleased with the way the opportunity is progressed. Our water line business has exceeded over a billion dollars in orders this year, growing at double digit rates. And we service a broad set of customers in that industry, right? Do you think about silicon designers, system integrators, NEMS, hyperscalers and contract manufacturers? So it's actually a broad set of customers, but what's driving the activity in AI right now is actually a concentrated set of customers from hyperscalers that are investing in in large infrastructure upgrade. So that's the effort. And the supply chain right now continues to be constrained. So investments are being made to unlock the supply chain to enable the the scale to build. And so we're involved in that, we're capitalizing on that. But as we think about the future, we participated in some forums like the OCP and E Cock earlier this year and you can start to see the scale expand. It's not yet reflected in the results yet, but we start to build scale around compute whether it's centralized or at the edge, power internal being very big issues for companies. Networking technologies are being adopted maybe even faster than they were being adopted before this. AI became a big friend and and our opportunities we're excited about are not just in the physical layer, but in the protocol layer, allowing customers to emulate how traffic flows to an AI infrastructure and therefore optimize their investment. So we're pretty excited about the opportunities long term here and capitalizing on the near term strength.
Unknown (Analyst)
Yeah. And then as it relates to software and services, obviously continuing to see a nice mix shift towards those portions of our business. And you know as I think a part of your question address gross margin, you know there could be software portions of those businesses are key accretive to Keysight's average gross margin. The services portions are slightly dilutive to Keysight's average gross margin. But overall both, both the service business has a lower expense structure. So both contribute nicely to profitability when you think about it from the operating margin line.
Speaker 7
And then Tim, I would just add this as Mark, as far as the expansion, you know, it's, it's we've shown that it's more resilient to the the current macro customers continue to invest in new methods shifting left on virtual simulation and emulation of their systems to help reduce costs and increase efficiencies. And we're seeing that. And then the second part of course is the further leverage of of some of our our new assets like ESI being exposed to more of our customers in different regions, the US for aerospace, defence, parts of Asia with the broad key site footprint in those regions. We see that as a driver for additional growth as we.
Mark Wallace (Chief Customer Officer)
Go forward, OK.
Dougherty Neil (EVP and CFO)
Thank you. Thank you, Tim.
Paulina Sims (Director of Investor Relations)
Thank you. The next question is from Rob Jamison with Vertical Research Partners. Your line is now open.
Unknown (Analyst)
Hey guys, Congrats on the.
Mark Wallace (Chief Customer Officer)
Quarter, just a couple of quick ones for me.
Unknown (Analyst)
Just first on, on the communications business, just what kind of benefit could we see from the funding just in second-half of 25? I mean, is there much benefit there if that that funding does get actually released and finally comes to fruition? And then I guess you know, also any potential risk of that, you know, being reversed just given some of Trump's advisors at at this point that are that have been anti bead funding.
Dougherty Neil (EVP and CFO)
Yeah. I think you know the good thing about key sites business modeling in comms and in fact the rest of our business is the broad set of customers we serve. That diversity in breath is a is a source of great strength during times of change. And so while we do pick up, you know, some some incremental business every year from new logos that come up because they're funded directly or indirectly. There are some direct funding from government at times that flows into open ran and we've called some of those winds out and even the chips act, but we're not heavily tethered to any one of those things. So I would just say that those are incremental in some ways, but not not as as material as as maybe the headlines enthusiastic especially because we're more involved in the R&D side of of those labs. And and so we forgot I think the momentum we see because of our renewed focus on go to market expansion that we had put in place with marketing is the continued attraction of new logos that we see across our business. It continues to be the focus for us moving forward as well that that's.
Unknown (Analyst)
Really helpful. I appreciate that. And then I guess just on, you know tariffs just real quick and just you guys have been dealing with this in one way or another for over 8 years. Can you just talk about, you know, your previous strategies around, you know, your pivots in the APAC region, just, you know, whether it's been Yahweh, ZTE or, you know, even the Trump tariffs, just how you kind of manage that in the past?
Dougherty Neil (EVP and CFO)
Yeah, I would just say, you know, it's, it's probably, it's a question behind the question. If I'm, if I'm understanding, you're right, is what are the implications of the US elections and therefore the policy changes that means you. And so like everybody, we're monitoring 3 areas, tax, trade, both tariffs and trade restrictions, right areas and along with defense spending that might ensure it would be premature for us to comment on them, except to say that, you know, we've and pretty agile in and ensuring compliance when there is a new government restriction and pivoting our sales resources to go after new opportunities. A potential offset could be, and again, I'm, I'm, I'm breaking my rule and speculating a little bit is if there were to be tariffs of the orders being discussed. Many companies are looking to Morrow China into other areas in Southeast Asia and we remain prepared to capitalize on the opportunities if should that occur.
Unknown (Analyst)
Got it. So similar to like what we saw with reshoring and everything during supply chain disruptions, you know the benefit that we saw there.
Dougherty Neil (EVP and CFO)
Exactly, exactly. Great, great.
Unknown (Analyst)
Thank you very much.
Dougherty Neil (EVP and CFO)
Thank you. Thank you.
Paulina Sims (Director of Investor Relations)
The next question is from Rob Mason with Baird. Your line is now open.
Mark Wallace (Chief Customer Officer)
Good afternoon and again, nice.
Speaker 7
Jump on the quarter just.
Mark Wallace (Chief Customer Officer)
With respect to your thoughts around 2025 revenue, Satish, I know you.
Speaker 7
You covered some of the segments, but.
Mark Wallace (Chief Customer Officer)
Just at a high level, I mean, is it, is it fair to think you think all of your major, you know, I'll say.
Speaker 7
Segments again we're.
Mark Wallace (Chief Customer Officer)
Talking wire line, wireless automotive.
Speaker 7
General Electronics. Some of these verticals.
Mark Wallace (Chief Customer Officer)
Would all of them have an opportunity to grow in 20?
Speaker 7
Five, do you think?
Mark Wallace (Chief Customer Officer)
You know, within the.
Speaker 7
Kind of mid single digit.
Mark Wallace (Chief Customer Officer)
The profile that you're talking about automotive sound like maybe it was the most.
Speaker 7
Challenge, but I'm just like to get your thoughts there around.
Dougherty Neil (EVP and CFO)
Yeah, that's good. Look, our job number 1, Rob was to stabilize the business and.
Mark Wallace (Chief Customer Officer)
Return to order growth.
Dougherty Neil (EVP and CFO)
Which we set out as a priority for the second-half and I'm quite pleased that we've executed to that. Now looking at the facts, you'd say CSG has returned to growth in in for the full year from an order perspective and EIC is yet to do that. So that sort of summarizes the mixed demand environment. And just projecting forward, we expect continued sort of slow gradual recovery as we move into 2025. We're not baking in, in our base case all segments by inflecting and should that happen, we'll be prepared to capitalize on it. But on base case, the Neil's called out at in his outlook section is for 5% revenue growth and 10% EPS growth for the year.
Mark Wallace (Chief Customer Officer)
Yes, OK. That's helpful. Just as a follow.
Speaker 7
Up and maybe this directed to Neil just.
Mark Wallace (Chief Customer Officer)
You know with the higher ESI revenue in the first quarter, you know the I would assume that the.
Speaker 7
Gross margin, you know, Will.
Mark Wallace (Chief Customer Officer)
Reflect that at least sequentially, you know, could you?
Speaker 7
Maybe give us a.
Mark Wallace (Chief Customer Officer)
Little bit of.
Speaker 7
Of thoughts around your OpEx?
Mark Wallace (Chief Customer Officer)
As you trend in you know from 4th.
Speaker 7
Quarter in the 1st.
Mark Wallace (Chief Customer Officer)
Quarter, there's often some, some.
Speaker 7
Resets, I know, seasonality.
Mark Wallace (Chief Customer Officer)
As well influences that, but I'm just.
Speaker 7
You know, kind of.
Mark Wallace (Chief Customer Officer)
Curious what kind of trajectory?
Speaker 7
OpEx.
Mark Wallace (Chief Customer Officer)
Is is on as you enter the new year?
Unknown (Analyst)
Yeah, Let me just touch on a couple of seasonality related comments since you since you've opened the door to that. I think first of all, as you mentioned with regard to gross margin with the, you know, sizable uptick in in ESI revenue, we would expect some gross margin upside you know from that business in in Q1. Similarly though, then as you move from Q1 to Q2, you have reverse effect as that revenue comes out of comes out of the model. So just just if you put it on one side, you got to take it out on the on the on the other side with regard to OpEx, just reminding you of some things that are kind of the norm for Keysight. We do do salary administration for the entire company here in the first quarter of the year. So that will be impacting the P&L starting, starting essentially now and then as the business in flats from a period of contraction back to a period of growth, we have essentially our variable pay programs turning back on which will you know increase OpEx here in the starting in the first half of next year.
Mark Wallace (Chief Customer Officer)
Very good. That's helpful. Thank you.
Paulina Sims (Director of Investor Relations)
Thank you. The next question is from Matt nickname with Deutsche Bank. Your line is now open.
Mark Wallace (Chief Customer Officer)
Hey, guys. Thank you so much for taking the question. On macro. I'm curious if you can speak to how that backdrop has evolved over the last quarter because it seems like there's some pockets that are getting better, yet it seems like others like auto that are maybe a little bit softer. So any general commentary on the macro backdrop you can provide? And then just as a follow up on aerospace defense, can you talk about maybe what changed later in the quarter? You mentioned the very strong close out to the quarter, particularly around the US. Just curious in terms of, you know, what changed and how maybe that's trended into the start of fiscal one. Q Thanks.
Unknown (Analyst)
Yeah, Why don't I start by making some comments about macro and then we'll then we'll let Mark Wallace make some comments about the broader aerospace defense business. You know, so first of all, as Satish mentioned in in his prepared comments, you know the results in Q4 were were marginally better than we expected coming into the court. And so I think that's possible. A lot of that strength itself was an aerospace defense. And so Mark will talk about that, but I think as you as you think about macro changes and the and the previous question alluded to this as well. I think the automotive business is where we're seeing the most pressure significant pullback in spend around EV development at this point in time, which is which is impacting that industry pretty significantly. I think if you if you look across broader strength and wireline stability, maybe not yet a strong catalyst for growth and wireless, but at least stability, nice forward momentum in aerospace defense. I think with with regard to semi, it's a question of timing. You know, when do I think everybody's optimistic about to turn back on and semi, the question is when does that really begin in earnest? And then the industrial end markets, you know, maybe maybe the biggest question mark because I think some of that is going to be tied to how, how will a lot of that capacity that was put in place during the 212223 supply chain disruptions, over what time is that capacity fully absorbed and people start to once again reinvest in, in manufacturing. So that's kind of how we're thinking through the end markets from a macro perspective.
Speaker 7
Yeah. And Matt, I think the aerospace defence has such he's talked about the, the, the focus on defence modernization has remained a top priority in the US and allied nations. We had continuing resolution in the first part of last fiscal year, the government fiscal year 24, which put some delays on new program starts. So as we entered into the fourth quarter with the government fiscal year end in September, we saw you know, increase spend as we would normally see, which was not certain because of delays in the budgeting process. So that was a big positive. We see continued investments from the prime contractors as well as the direct government in the US and the prime contractors in Western Europe as well as we've been talking about for many quarters to the geopolitical situation that continues to unfold. So those factors come together and then, you know, longer term, I think the areas that are are promising for us continue to be around him. So space and satellite and quantum, with some of the government funded research that's occurring in all parts of the world continue to offer us opportunities over the coming quarters.
Mark Wallace (Chief Customer Officer)
Thank you.
Paulina Sims (Director of Investor Relations)
Thank you. The next question is from Samik Chatterjee with JP Morgan. Your line is now open.
Mark Wallace (Chief Customer Officer)
Hey, thanks for taking my question. I guess for my first one, Satisha, if I can go back to your comments earlier about not really embedding sort of inflection in all of the businesses and your 5% growth target for fiscal 25. How should I think about what kind of recovery or what your expectations are embedded in for semi cap and general electronics? Seems like both are a bit mixed in terms of what you're seeing, but if you can just outline how you're thinking about those two areas in particular? And I have a quick follow up after that. Thank you.
Dougherty Neil (EVP and CFO)
Thank you, Sami. I think for semiconductor fabs, so just based on what we're seeing and the pipeline of opportunities we see for our wafer test solutions around silicon photonics and new memory topologies and some of the higher higher voltage types of wafers. I think that's front continues for us in somewhat a little bit offset by and that's the bigger part of our semi business somewhat offset by a slow down that number of the semiconductor equipment manufacturers have reported as well. So you put that in the mix. We still think semi grows from from these levels for us. And again semiconductor is you know it's roughly 10% of our total revenue at the company level from a general electronics perspective would we have started to see and again 1/4 doesn't make a trend. So I just want to caution you, but I do think in Q4 we saw stability in manufacturing which finally resulted in in you know the underlying strength in research spending around next generation technologies, the broad new customer logo, all of that return that business to growth. Again, it's just one quarter, but we we think that that stability in manufacturing continues as we move forward as well which should, which should give some, which should return, which should which should put EISG on return to order growth at some point in the year. It's, you know, difficult to call at this point.
Mark Wallace (Chief Customer Officer)
OK, fine. And with some follow up, maybe this is more for Neil. I think, Neil, a question you're getting a lot from investors is when they look at some of your previous margin targets that were a bit more longer term for fiscal 26. You're not really that much different at this point from a gross margin perspective where the guidance was 66 to 67. But you significantly at a gap to your operating market target of 31 to 32. How should we think about the drivers and sort of beyond volume leverage, how you're thinking about other drivers that get you closer to that target or is there something that sort of needs to be re evaluated related to those targets? Thank you.
Unknown (Analyst)
Yeah, I, I'd say a couple of things. You know, so first of all, I think we're we're pleased with how gross margins have have held up on the downside of the cycle. Obviously we've gotten some benefit here from the addition of the ESI software business. But even if you will get the core key side business, the gross margins have held up pretty well in total on on the downside of the cycle. I think when you start to think about those targets that we put out.
Mark Wallace (Chief Customer Officer)
6667.
Unknown (Analyst)
Percent operating margin targets where again you know we're 100 and 5200 basis points off of that at at current levels and you know, but we're significantly further off on the operating margin line. I think you need to look at the impact that the acquisitions are having in the short run where we've made some acquisitions that are accretive to gross margins, but significantly dilutive to operating margins. And I think as we get this business integrated and you know start to operate them within the greater, like you said operating model, there's going to be opportunity for us to drive significant profit leverage on those acquisitions and start to close that gap on the on the operating margin side of things. And.
Dougherty Neil (EVP and CFO)
And Summit, we remain confident in the long term both opportunities of this business and you've seen when we can deliver about model growth rates, the sort of earnings power and leverage we have, we continue to operate this.
Mark Wallace (Chief Customer Officer)
Business in a disciplined.
Dougherty Neil (EVP and CFO)
Way to be able to realize those and get us back on track.
Mark Wallace (Chief Customer Officer)
Thank you. Thanks.
Dougherty Neil (EVP and CFO)
Thank you.
Paulina Sims (Director of Investor Relations)
Thank you. The next question is from Amita Marshall with Morgan Stanley. Your line is now open.
Mark Wallace (Chief Customer Officer)
Hi, this is Quran on for me to Congrats on the quarter. So just starting on the automotive side, clearly you remain quite positive on simulation. But outside of that, are there any other exposures that you have within auto that could cause a pickup in the business outside of maybe EV sales improving? And then I have a follow up? Thank you.
Speaker 7
Sure. Yeah. So there's several parts to automotive. The the part that we're seeing the the slowdown and and project delays is around EV investments that have been quite robust over the last several years with battery test labs. So we're seeing a pause in that. We're seeing manufacturing demand also stay lower levels, but that's another part of our business that you know, as inventories normalize that we should see some increasing flow through of manufacturing test for that. The part that's remained steady is the software defined vehicles or the a dash, the autonomy side where we have continued innovation crossing over multiple parts of our business into communications, sensor technology and so forth. And a lot of that is software as well. So there's there's a lot of work being done in in that frame. And the other one that doesn't get as much attention at least from from these calls, but gets a lot of attention on the news is the infrastructure. So the charging infrastructure and the standards associated with those in every region of the world represents, you know, additional opportunities that we're pursuing. So long term drivers are of growth secular drivers around AV, the manufacturing coming back on new advanced technologies remains a an area of of focus for us, you know, over many years.
Mark Wallace (Chief Customer Officer)
Got it. That's helpful. And then coming back to the AI side, are there any areas that?
Unknown (Analyst)
You see in your portfolio.
Mark Wallace (Chief Customer Officer)
That you could maybe grow content or offer new products to sort of take advantage of the opportunity that you're seeing today.
Unknown (Analyst)
Thank you.
Dougherty Neil (EVP and CFO)
Yeah, the good question. I think as we mentioned, the more logical areas which we have seen growth come from today, the results come from today are associated with the physical layer tools where we provide our scopes of sampling scopes and other tools that we provide. And what we're seeing is a bigger opportunity for our emulation platforms. We're still in early pilots with customers on. Again, it's a small, it's a concentrated set of opportunities today. We expect that industry and the impact AI is going to have to be broader and we're participating in enabling the ecosystem with the right set of tools all the way from design emulation to task and and our focus is on the are enabling our customers in the R&D parts of the workflow and it's a pretty rich opportunity for us. Thank you.
Paulina Sims (Director of Investor Relations)
Thank you. The next question is from Adam Thalhimer with Thompson Davis. Your line is now open.
Mark Wallace (Chief Customer Officer)
Hey, good afternoon, guys. Congrats on the beat and Mark, congratulations on your retirement.
Paulina Sims (Director of Investor Relations)
Wanted to ask first about. I wanted to ask first about the operating margin and communications.
Mark Wallace (Chief Customer Officer)
I think that was your.
Paulina Sims (Director of Investor Relations)
Best ever quarterly operating margin.
Mark Wallace (Chief Customer Officer)
Kind of took me by surprise. Curious what drove that and what the outlook is there?
Unknown (Analyst)
Yeah. So obviously we very pleased with the results in in CSG gross margins have held a very strong in that business. I think we see a tighter, not only do we see a higher software content, higher recurring revenue from software, which obviously helps margins, but I think there's less, there's less margin diversity in the in the CSG portfolio then we see on the ESG side. So, so less impact from from mix, you know, from a profitability standpoint, I think we're very pleased that we're keeping our foot on the gas on the on the R&D side, continuing to invest to position ourselves to capitalize on the upside while driving while driving, you know significant efficiencies and SG and a resulting resulting in the in the strong profitability that we saw. So it was, it was the strongest profitability we saw this quarter, not, not an all time record obviously, but but it's very strong operating margins in in CSG this quarter.
Mark Wallace (Chief Customer Officer)
And then in EISG, as you think about the full year, what are the growth offsets to the weakness in auto?
Unknown (Analyst)
You're talking about in 24 and 25.
Mark Wallace (Chief Customer Officer)
For fiscal 25, what off?
Unknown (Analyst)
Yeah, I mean, I think.
Mark Wallace (Chief Customer Officer)
In auto this year.
Unknown (Analyst)
Yeah, I mean, I think.
Mark Wallace (Chief Customer Officer)
It's a as a teach.
Unknown (Analyst)
Look forward as we look, as we look to semi and to the broader industrial markets, you know there is reason for optimism with some of the fab programs and and and you know the absorption of capacity that was put in place in prior years again likely to be more back end loaded. We've talked about it the key site level of gradual improvement through the year. And so you know as Satish just said, we would expect, you know there is an opportunity for EIC, which is not yet returned to order growth to do so in the back half of the year. And I think that would be with, you know, some significant increase in the strength of the semi markets and some modest recovery and industrial end markets.
Mark Wallace (Chief Customer Officer)
Got it. Thanks, Neil. Thank you the.
Paulina Sims (Director of Investor Relations)
Next question is from Mark Delaney with Goldman Sachs. Your line is now open.
Mark Wallace (Chief Customer Officer)
Hey, thank you for taking my question. You have Will on for Mark Delaney here. Just one on M&A. So with the proposed firing transaction still ongoing, will Keyside be open to doing other larger transactions in in the near term if one if one that made business and financial sense was?
Dougherty Neil (EVP and CFO)
Available, Yeah. I'll just say, look, we have, we have reiterated a very strong organic growth strategy. So we're focused on realizing. We've also identified specific markets that we have studied to pursue a selective MNA. And at this point while we continue to evaluate targets, we'll you know, we always remain disciplined and we'll look at them. But it's not a matter of capital as much as, you know, bandwidth to pursue more deals given, given the deals that we've already announced which we're working through.
Mark Wallace (Chief Customer Officer)
No, it shouldn't be helpful.
Unknown (Analyst)
Thank you for.
Mark Wallace (Chief Customer Officer)
That and just one more capital allocation. How should we be thinking about buybacks?
Unknown (Analyst)
For fiscal 25.
Mark Wallace (Chief Customer Officer)
Any cadence commentary?
Unknown (Analyst)
Or any color that you can add there will be helpful. Thank you. Yeah. The only thing I would say is that obviously we look forward to the close of the Spiran transaction, which will be a significant capital outlay for the company. And but we do expect that we will at a minimum continue with our buyback program at least the anti dilutive level. And then we'll be trying to strike a balance between, you know, starting to get the cash ready to close the the Spiran transaction traded off against what we might see as opportunities, opportunistic opportunities to, you know, to to do more on the buyback front.
Paulina Sims (Director of Investor Relations)
Thank you. That concludes our question and answer session for today. I would like to turn the call back to Paulina Sims for any closing comments.
Satish Dhanasekaran (President and CEO)
Thank you, operator, and thank you all for joining us today. Have a great day.
Other transcripts: Q3 FY26 transcript · Q2 FY26 transcript · Q4 FY25 transcript · Q3 FY25 transcript · Q2 FY25 transcript · Q1 FY25 transcript
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