Keysight Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2024. Unaudited results; comparisons are with the periods ended April 30, 2023 unless noted. Fiscal year ends October 31.
Business context and results
Keysight provides design and test software, hardware, systems, and services for communications, aerospace and defense, electronics, and industrial markets. It reports two segments: Communications Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG). Management said customer caution amid macroeconomic and geopolitical headwinds weighed on demand.
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Revenue | $1.216B | $1.390B | $2.475B | $2.771B |
| Gross margin | 62.8% | 65.4% | 63.7% | 64.7% |
| Operating income | $177M | $354M | $398M | $676M |
| Operating margin | 14.6% | 25.4% | 16.1% | 24.4% |
| Net income | $126M | $283M | $298M | $543M |
| Diluted EPS | $0.72 | $1.58 | $1.70 | $3.02 |
| Operating cash flow | Not separately stated | Not separately stated | $438M | $789M |
- Q2 revenue fell 13%; first-half revenue fell 11%. Products revenue was $909M in Q2 versus $1.108B; services and other revenue grew to $307M from $282M.
- Orders were $1.219B in Q2, down 8%, and $2.439B for six months, down 7%. Acquisitions contributed 3 and 4 percentage points, respectively, to year-over-year order comparisons.
- Q2 CSG revenue declined 10% to $840M; EISG revenue declined 17% to $376M. Segment operating income was $223M for CSG and $71M for EISG, versus $266M and $157M, respectively, a year earlier.
- Q2 gross margin contracted 2.6 percentage points and operating margin 10.8 points. Management attributed the deterioration principally to lower sales volume, higher acquisition-related amortization and expenses; EISG also faced unfavorable mix. Lower material costs partly offset pressure.
Cash, debt and liquidity
- At April 30, cash and cash equivalents were $1.657B, down from $2.472B at October 31, 2023; total cash, cash equivalents and restricted cash were $1.674B. Current assets were $3.968B and current liabilities $1.994B.
- Six-month operating cash flow was $438M. Investing used $631M, including $556M for acquisitions; financing used $621M, including $458M to acquire ESI Group’s non-controlling interest and $139M for share repurchases. Cash and restricted cash decreased $814M.
- Total debt was approximately $1.8B: $600M of senior notes due in 2024, $700M due in 2027 and $500M due in 2029. The $750M revolving facility had no borrowings outstanding; Keysight reported covenant compliance.
- Keysight says cash, operating cash generation, capital-market access and credit lines should meet foreseeable cash needs. Expected 2024 capital spending is approximately $150M. The company had $785M remaining under its $1.5B repurchase authorization at April 30.
Material changes, outlook and notable items
- Keysight completed its acquisition of ESI Group for $935M net of cash acquired, including the purchase of the remaining non-controlling interest in January. ESI contributed $26M of Q2 revenue and recorded a $22M Q2 net loss attributable to Keysight shareholders. Purchase accounting remains preliminary. Keysight also acquired Riscure for $78M net of cash acquired.
- Keysight announced a planned cash acquisition of Spirent Communications, valued at approximately $1.463B on a fully diluted basis, subject to regulatory clearances and expected to close in the first half of fiscal 2025. A £1.35B, 364-day bridge facility was committed to support a planned acquisition; $5M of related costs were incurred by quarter-end.
- Management expects customer investment in selected long-term opportunities, including AI-related data-center networks, 5G/6G, satellite, electric and autonomous vehicles, industrial IoT, semiconductors and defense modernization. It offered no specific financial guidance in the provided filing text and emphasized near-term uncertainty.
- Q2 results included $19M of acquisition and integration costs and $37M of acquisition-related amortization. First-half acquisition and integration costs were $36M and restructuring and other costs were $54M. The Singapore tax incentive expires July 31, 2024; Keysight said this expiration is reflected in its annual tax forecast. The effective tax rate rose to 27.6% for Q2 from 21.8%.
- The Malaysia Court of Appeal ruled in Keysight’s favor on May 24, 2024 in a disputed historical tax assessment. The ITAR consent agreement was closed by the U.S. Department of State on May 22, 2024 after Keysight completed its obligations. Patent litigation brought by Centripetal Networks remains ongoing; the company denies the allegations, and an appeal is pending from the ITC determination in Keysight’s favor.
- Principal disclosed risks include weak or volatile demand, inflation and interest rates, geopolitical tensions and export restrictions, foreign-exchange exposure, supply-chain and inventory risks, acquisition integration and financing, tax changes, cybersecurity, and litigation. Management stated that it did not believe pending matters were then probable and reasonably possible of materially affecting the company, while noting litigation outcomes are uncertain.
Important facts for investors to verify
- Whether order trends and revenue recover, particularly in Asia Pacific, commercial communications and EISG, and how much demand weakness is cyclical versus structural.
- ESI and Riscure integration, ESI profitability, final purchase-price allocations, acquired-intangible amortization, and the assumptions supporting goodwill.
- Spirent’s regulatory approvals, financing plan, final cash outlay and effects on debt, liquidity and shareholder returns.
- Cash-flow conversion and liquidity after acquisitions, including the use and terms of the bridge facility and the 2024 senior-note maturity.
- Margin recovery, restructuring and acquisition costs, the effect of Singapore tax-incentive expiration, and outcomes of the Centripetal litigation and related appeal.