Keysight Technologies, Inc. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended January 31, 2024; comparisons are with the three months ended January 31, 2023 unless noted. Keysight provides design, test and simulation solutions for communications, aerospace and defense, and electronic industrial markets.
Financial results and liquidity
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $1.259 billion | $1.381 billion | Down 9% |
| Gross margin | 64.6% | 63.9% | Up 0.7 percentage points |
| Operating income / margin | $221 million / 17.6% | $322 million / 23.3% | Income down 31% |
| Net income | $172 million | $260 million | Down 34% |
| Diluted EPS | $0.98 | $1.45 | Down 32% |
| Operating cash flow | $328 million | $366 million | Down $38 million |
Product revenue was $952 million, down from $1.114 billion; services and other revenue was $307 million, up from $267 million. R&D expense increased 2% to $232 million, and selling, general and administrative expense increased 7% to $362 million. The effective tax rate was 24.5%, versus 21.5%.
Orders totaled $1.220 billion, down 6%; acquisitions contributed a favorable 6 percentage points to the year-over-year comparison. Revenue included a favorable 5-percentage-point acquisition impact. CSG revenue declined 11% to $839 million; EISG revenue declined 5% to $420 million. Total revenue declined 8% in the Americas, 1% in Europe, and 13% in Asia Pacific.
Cash and cash equivalents were $1.745 billion at January 31, compared with $2.472 billion at October 31, 2023. Cash, cash equivalents and restricted cash totaled $1.765 billion. Total debt was $1.817 billion, including $609 million current; the $750 million revolving credit facility was undrawn, and Keysight reported compliance with debt covenants. Investing cash outflow was $511 million and financing cash outflow was $548 million, principally reflecting the ESI Group acquisition. Capital expenditures were $47 million.
Material changes and notable items
- Keysight completed its acquisition of ESI Group in Q1, acquiring the remaining shares after purchasing a 50.6% stake in November 2023. The filing reports total consideration of $935 million, net of cash acquired, funded with existing cash. ESI contributed $68 million of revenue and $2 million of net income attributable to Keysight shareholders for the post-acquisition period.
- The acquisition added $603 million of goodwill and $494 million of intangible assets on a preliminary purchase-price allocation. Keysight expects to finalize the allocation in Q3 FY2024; revisions may be material. Acquisition and integration costs were $17 million in the segment reconciliation, and acquisition-related amortization was $38 million.
- Reported gross margin improved, supported by acquisition contribution, favorable mix and lower variable people-related costs. Operating margin fell as operating expenses rose relative to revenue, including restructuring and acquisition-related costs.
- Foreign-exchange contracts related to the ESI purchase were settled during the quarter, resulting in an $18 million loss recorded in other income (expense), net.
Outlook, commentary and risks
Management cited inflation, higher interest rates, currency movements, geopolitical tensions and trade restrictions as headwinds. Customers remained cautious, contributing to lower year-over-year demand. Management expressed confidence in long-term growth opportunities in 5G and early 6G, high-speed data centers, satellite networks, AI/ML, automotive mobility, industrial IoT and defense modernization, but provided no specific revenue or EPS guidance in the supplied filing text.
Keysight expects approximately $150 million of capital spending in FY2024 and $8 million of non-U.S. defined-benefit plan contributions for the remainder of the year. Management said available cash, operating cash generation and access to capital markets and credit lines should meet cash needs for the foreseeable future.
Key uncertainties include macroeconomic and geopolitical conditions, customer spending and order volatility, export controls and tariffs, supply-chain and inventory risks, acquisition integration and potential impairment, foreign-exchange exposure, cybersecurity, and litigation. The Singapore tax incentive expires July 31, 2024; management has reflected its expiration in the annual tax forecast. A Malaysian tax dispute concerning fiscal 2008 remained pending, with a Court of Appeal decision then expected in May 2024. Centripetal Networks’ patent litigation continues; the ITC terminated its investigation in Keysight’s favor, but Centripetal appealed. Management stated it did not believe pending matters were probable and reasonably likely to have a material impact, while noting litigation outcomes are uncertain.
Investor facts to verify
- How orders and revenue develop after accounting for the acquisition contribution, particularly across Asia Pacific and commercial communications.
- ESI integration progress, realized synergies, the final purchase-price allocation, and the acquired intangible-asset amortization burden.
- Operating-expense and restructuring trends, and whether margins recover as demand conditions change.
- Cash use, debt maturities and liquidity following the acquisition, alongside the planned FY2024 capital spending and share repurchases.
- Effects of the Singapore incentive expiration, the Malaysian tax appeal, and developments in the Centripetal litigation.