Keysight Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended July 31, 2023. Amounts are in U.S. dollars; financial figures are in millions except per-share amounts.
Business context and results
Keysight provides electronic design and test solutions, software, and related services. Its reportable segments are Communications Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG). Quarterly revenue was essentially flat as EISG growth offset a decline in CSG.
Key financial metrics
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $1,382 | $1,376 | $4,153 | $3,977 |
| Gross margin | 64.8% | 63.8% | 64.7% | 63.9% |
| Operating income | $365 | $357 | $1,041 | $955 |
| Operating margin | 26.4% | 25.9% | 25.1% | 24.0% |
| Net income | $288 | $338 | $831 | $825 |
| Diluted EPS | $1.61 | $1.87 | $4.63 | $4.52 |
| Cash from operating activities | Not stated for the quarter | $1,030 | $746 |
- Q3 revenue comprised $1,099 of products and $283 of services and other. Revenue by segment was CSG $918, down 5%, and EISG $464, up 14% year over year.
- For the nine months, CSG revenue was $2,794, down 1%; EISG revenue was $1,359, up 17%.
- Q3 net income fell 15% despite higher operating income, principally because income tax expense rose to $101 from $8. Nine-month net income increased slightly.
- Effective tax rates were 25.8% in Q3 and 23.1% for nine months, versus 2.3% and 10.0% in the corresponding prior-year periods. The 2023 periods included discrete tax expense; prior-year periods benefited from discrete tax benefits.
- Nine-month operating cash flow increased $284 year over year. It included $107 of proceeds from terminating interest-rate swaps. Inventory rose to $975 at July 31, 2023 from $858 at October 31, 2022.
Balance sheet, liquidity, and capital allocation
- Cash, cash equivalents, and restricted cash were $2,588 at July 31, 2023, up from $2,057 at October 31, 2022. Cash and cash equivalents alone were $2,572.
- Long-term debt was $1,794; total debt at par was $1,800. The company had no borrowings under its $750 revolving credit facility and reported covenant compliance.
- For the nine months, capital expenditures were $158, acquisition spending net of cash acquired was $85, and share repurchases were $276. The board authorized a new $1,500 repurchase program in March 2023.
- Management expected 2023 capital spending of approximately $215 and said available cash, operating cash generation, and access to capital markets and credit lines should meet foreseeable cash needs.
Material changes, outlook, and risks
- Total orders declined 15% in Q3 and 12% for the nine-month period. Management attributed softer demand to customer spending caution, post-pandemic inventory dynamics, macroeconomic uncertainty, and geopolitical and trade headwinds.
- Management cited continued customer investment in 5G, early 6G, high-speed data-center networking, AI/ML, satellite networks, automotive mobility, industrial IoT, and defense modernization. It expressed confidence in longer-term market growth but provided no numerical revenue or earnings guidance in the supplied filing text.
- Gross-margin improvement reflected price increases and favorable mix, partly offset by warranty or material costs. R&D spending increased as the company continued investing in growth opportunities.
- Keysight announced its intention to acquire ESI Group for €155 per share, a fully diluted valuation of €913 million, expected to be funded with existing cash. Closing of the controlling block was expected before the end of calendar 2023. The company also acquired Cliosoft for approximately $85 million net of acquired cash during the nine-month period.
- Key risks include economic weakness and delayed orders, supply constraints and excess inventory, trade restrictions and geopolitical tensions, foreign-exchange exposure, tax-law changes, and execution and integration risks from acquisitions. The Singapore and Malaysia tax incentives were due for renewal in 2024 and 2025, respectively.
- Contingencies include Centripetal Networks patent litigation in the U.S., Germany, and the ITC; Keysight denies the allegations and is defending the cases. The filing also describes a disputed Malaysian tax assessment relating to fiscal 2008; management stated it believed its provision was adequate and did not expect examinations to have a material impact, while noting outcomes are uncertain. The ITAR consent-agreement penalty was $6.6 million, of which $3.1 million had been paid; the suspended portion had been satisfied through qualifying compliance spending.
Important facts for investors to verify
- Whether order declines continue and how they translate into revenue, particularly in commercial communications and Asia Pacific.
- Whether EIS Group receives required approvals and closes on the expected terms, and the resulting effect on cash, debt, and integration costs.
- How the higher tax burden, discrete tax items, research-cost capitalization, and renewals of Singapore and Malaysia incentives affect future effective tax rates.
- Whether inventory levels normalize and whether operating cash flow remains strong excluding timing-related working-capital movements and swap-termination proceeds.
- Developments in the Centripetal litigation and Malaysian tax appeal, including potential financial or operational consequences.