Keysight Technologies, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended January 31, 2023; comparisons are to the three months ended January 31, 2022 unless noted. Financial statements are unaudited. Keysight provides electronic design and test solutions and related services through its Communications Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG).
Financial performance
| Metric | Q1 FY2023 | Prior period | Change |
|---|---|---|---|
| Revenue | $1.381B | $1.250B | +10% |
| Gross margin | 63.9% | 64.3% | Down 0.4 percentage points |
| Operating income / margin | $322M / 23.3% | $271M / 21.7% | Income +19%; margin +1.6 points |
| Net income | $260M | $229M | +14% |
| Diluted earnings per share | $1.45 | $1.24 | +17% |
| Cash from operations | $366M | $224M | +$142M |
| Capital expenditures | $60M | $42M | +$18M |
Revenue increased in both segments: CSG rose 7% to $939M and EISG rose 19% to $442M. Growth was reported across regions and end markets. Foreign exchange reduced reported revenue growth by 4 percentage points overall. Orders were $1.300B, down 13%, with declines across all regions; currency movements reduced order growth by 3 percentage points.
Operating cash flow was supported by higher net income and movements in liabilities, including deferred revenue, while working capital in accounts receivable, inventory and accounts payable used $57M of cash. Inventory rose to $909M from $858M at October 31, 2022, primarily from stock build to secure supply.
Financial position and liquidity
- Cash and cash equivalents were $2.228B at January 31, 2023, versus $2.042B at October 31, 2022; cash, cash equivalents and restricted cash totaled $2.244B.
- Long-term debt was $1.793B on the balance sheet ($1.800B principal value); no borrowings were outstanding under the $750M revolving credit facility. The company reported compliance with debt covenants.
- Current assets were $4.498B and current liabilities $1.465B. Stockholders’ equity was $4.404B.
- Net cash from operating activities less investing activities was $306M. Financing used $139M, including $125M of share repurchases.
Material changes and management commentary
- Revenue rose 10%, but orders fell 13%, indicating softer incoming demand amid customer caution. Management cited moderating demand, inflation, financial-market volatility, currency movements, geopolitical tensions, trade restrictions and supply-chain constraints.
- Gross margin was slightly lower year over year: higher material costs, unfavorable mix and higher variable people costs were largely offset by pricing. Operating margin improved as operating expenses declined as a share of revenue.
- Net income growth reflected higher revenue and interest income, partly offset by higher income taxes, material costs, R&D and SG&A. The effective tax rate increased to 21.5% from 13.1%, including effects of required capitalization of tax R&D expenditures and lower discrete tax benefits.
- R&D expense increased 8% to $227M. Management said it continues to invest in growth opportunities, including 5G/6G, next-generation mobility, industrial IoT and defense modernization.
- Management expressed confidence in long-term secular market trends and its operating model, while noting continued monitoring of macroeconomic, geopolitical, trade and supply-chain conditions. No specific revenue or earnings guidance was provided in the supplied filing text.
Outlook, unusual items and risks
- Management expected fiscal 2023 capital spending of approximately $250M, with greater investment in capacity expansion and technology. It said cash, operating cash generation and access to capital markets and credit lines should meet foreseeable cash needs.
- On February 7, 2023, Keysight acquired Cliosoft for approximately $100M net of cash acquired; its results will be included from the acquisition date.
- In February 2023, the company terminated $600M notional forward-starting interest-rate swaps, recording a deferred gain of $107M in accumulated other comprehensive income to be amortized to interest expense over the anticipated debt term. The filing states the termination had no impact on the accompanying quarter’s financial statements.
- Key risks include weaker customer demand, supply constraints and excess inventory, geopolitical and trade restrictions, foreign-exchange exposure, competition and execution of innovation and acquisitions. Foreign-exchange hedges cover a rolling period of up to 12 months, leaving longer-term exposure.
- Keysight is defending patent-infringement claims brought by Centripetal Networks in the U.S., Germany and before the ITC. Management did not identify a pending matter it believed was probable and reasonably possible of materially affecting results, but noted adverse litigation outcomes could cause significant damages or injunctive relief.
- A Malaysian tax audit concerns fiscal 2008. Keysight’s appeals to the Special Commissioners and High Court were unsuccessful; a Court of Appeal hearing was scheduled for April 2023. Management said it believed its tax provision was adequate but acknowledged examination outcomes are uncertain.
- Singapore and Malaysia tax incentives reduced Q1 tax provision by $25M; renewal is due in 2024 and 2025, respectively. The filing also notes the U.S. corporate minimum tax is effective for Keysight beginning November 1, 2023, with impacts under evaluation.
Important facts for investors to verify
- Whether the 13% orders decline persists and translates into lower future revenue, given the quarter’s 10% revenue growth.
- Whether inventory and supply constraints improve, and how stock levels affect cash conversion and potential obsolescence charges.
- Future gross-margin performance amid material costs, product mix, pricing and people costs.
- The effective-tax-rate impact of R&D tax capitalization, evolving tax rules and renewal of Singapore and Malaysia incentives.
- Developments in the Centripetal litigation and Malaysian tax appeal, as well as integration and expected returns from the Cliosoft acquisition.