A month has gone by since the last earnings report for Keysight (KEYS Quick QuoteKEYS - Free Report) . Shares have lost about 9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Keysight due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Keysight Q1 Earnings & Revenues Surpass Estimates, Up Y/Y

Keysight Technologies, Inc. reported first-quarter fiscal 2021 non-GAAP earnings of $1.43 per share, outpacing the Zacks Consensus Estimate by 3.6%. Moreover, the bottom line increased 13.5% from the year-ago quarter’s figure.

Revenues increased 8% year over year to $1.18 billion, surpassing the Zacks Consensus Estimate by 1.9%.

Core revenues (excluding the impact of currency and revenues from acquisitions in a year’s time) rose 6% on a year-over-year basis to $1.157 billion.

Improving aerospace and defense vertical, uptick in 5G test solutions on accelerated 5G deployment as well as continued investment in 400G and 800G Ethernet for data centers led to better-than-expected results.

Quarter in Detail

Orders improved 7% on a year-over-year basis to $1.22 billion during the reported quarter. Notably, core orders (excluding the impact of currency and revenues from acquisitions in a year’s time) moved up 5%.

Beginning first-quarter fiscal 2020, the company’s financial reporting comprises two segments — Electronic Industrial Solutions Group (EISG) and Communications Solutions Group (“CSG”).  Ixia Solutions Group (ISG) segment reporting has been aligned with the CGS segment.

CSG includes commercial communications (“CC”) and aerospace, defense & government (“ADG”) end markets. CSG revenues of $852 million increased 4% year over year and 3% on a core basis. CSG contributed 72% to total revenues in the fiscal first quarter.

CC revenues of $558 million were down 3% year over year due to negative impact from China trade restrictions.

5G commercial deployment led to improvement in orders from 5G device and design developers. Moreover, expansion of investments in O-RAN (or Open Radio Access Network) and virtualization technologies contributed to recovery. The company recently rolled out a portfolio of O-RAN end to end solutions. These offerings will assist O-RAN vendors and mobile operators to test security, performance and conformance of multi-vendor 5G networks that are based on O-RAN standard interfaces.

Keysight also announced that it had collaborated with the likes of Radisys, Xilinx, ArrayComm and Altiostar in the O-RAN domain.

In the quarter under review, Keysight also purchased Sanjole, which is engaged in offering wireless test and measurement solutions for interoperability and protocol decoding.     

ADG revenues of $294 million increased 20% year over year, on higher spending and momentum in investments aimed at defense technology modernization across all main regions. Keysight is poised to gain as economies increasingly focus on electro-magnetic spectrum operations, space and advanced commercial technologies that include 5G and early 6G research.

EISG revenues increased 18% year over year and 13% on a core basis to $328 million. Solid demand for the company’s solutions in next-generation process node technology testing in semiconductor end-market and strength in general electronics sector drove growth. Also, new customer wins in China contributed to the segment’s top line in the quarter under review. EISG contributed 28% to revenues in first-quarter fiscal 2021.

Nevertheless, Keysight added that the automotive end market demand is stabilizing owing to increasing investments in advanced automotive technology in Asia and Americas. The company partnered with ElringKlinger AG to further the development of batteries for electric vehicles.

Also, robust software test automation capabilities are fueling growth in Software and services revenues. This, in turn, is providing buoyancy to Keysight’s business model, which is driving recurring revenue growth and leading to expansion in gross margins.

Revenue Breakup by Geography

Americas, Europe and Asia Pacific contributed 40%, 17% and 43%, respectively, to revenues in the reported quarter.

Revenues from Americas were $468 million, up 5% (up 3% on a core basis) year over year on robust order demand in ADG and EISG domains.

Revenues from Europe of $202 million increased 8% (up 3% on a core basis) on a year-over-year basis. Solid order demand in CC and ADG vertical drove growth. Notably, revenues from EISG were soft in the reported quarter.

Revenues from Asia Pacific of $510 million increased 10% (up 9% on a core basis) on a year-over-year basis. Strength in order demand across ADG and EISG domains drove growth.

Margin Highlights

Keysight reported gross margin of 64% during the reported quarter. CSG gross margin of 64.6% contracted 110 bps, while EISG’s gross margin of 63.4% expanded 230 bps on a year-over-year basis.

Operating expenses were $439 million in the fiscal fist quarter of 2021 compared with $433 million reported in the year-ago quarter.

Consequently, non-GAAP operating margin expanded 210 bps to 27.1%.

Balance Sheet & Cash Flow

As of Jan 31, 2021, Keysight had cash & cash equivalents of $1.887 billion compared with $1.756 billion as of Oct 31, 2020. As on Jan 31, 2021, the company reported long-term debt of $1.79 billion compared with $1.789 billion as of Oct 31, 2020.

Cash flow from operations during the quarter was $295 million compared with $338 million reported in the prior quarter. Free cash flow was $267 million compared with the previous quarter’s $308 million.

In first-quarter fiscal 2021, the company acquired approximately 137K shares on the open market, at an average price of $145.14, totaling $20 million. Notably, in fourth-quarter fiscal 2020, Keysight’s board of directors approved a new share purchase authorization worth $750 million.

Q2 Guidance

Keysight provided impressive second-quarter fiscal 2021 guidance on strong backlog and continued momentum in 5G test solutions.

For second-quarter fiscal 2021, the company anticipates revenues in the range of $1.19-$1.21 billion. Non-GAAP earnings per share are projected to be $1.29-$1.35.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

VGM Scores

At this time, Keysight has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Keysight has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.