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Keysight (KEYS) Earnings & Revenues Beat Estimates in Q1

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Keysight Technologies Inc. (KEYS - Free Report) delivered first-quarter fiscal 2019 non-GAAP earnings of 93 cents per share beating the Zacks Consensus Estimate by 14 cents. Further, the figure soared 82.4% from the year-ago quarter and came higher than management’s guided range of 76-82 cents per share.

Non-GAAP revenues increased 18% year over year to $1.009 billion surpassing the higher end of management’s guided range of $965-$985 million. Non-GAAP core revenues (excluding the impact of currency and revenues from acquisitions completed within the last 12 months) increased 20% year over year to $1.018 billion.

Meanwhile, GAAP revenues advanced 20% from the year-ago quarter to $1.006 billion. The Zacks Consensus Estimate for revenues is pegged at $978 million.

Management is optimistic about capitalizing on key growth segments of a number of end markets. The company’s focus on launching new solutions for growth markets like 5G, Internet of Things (IoT), next-generation wireless, high-speed datacenters and automotive & energy is a key catalyst.



Coming to price performance, shares of the company are up more than 2% in after-hours trading. This can primarily be attributed to robust first-quarter results and promising outlook for second quarter. Notably, Keysight stock has returned 76.6% in the past year, outperforming the industry’s rally of 42.2%.

Restructuring Activities

In a bid to remove ambiguity in the reporting processes, Keysight removed Services Solutions Group (“SSG”) as a discrete reportable segment, from first-quarter fiscal 2019.

The financial reporting is now realigned into three segments, namely Ixia Solutions Group (“ISG”), Electronic Industrial Solutions Group (“EISG”) and Communications Solutions Group (“CSG”).

Keysight restructured reporting segments as part of its go-to-market plan. Notably, SSG revenues are reflected in CSG and EISG adjusted according to the respective services delivery.

The company has provided previously reported figures adjusted accordingly to streamline comparison.

Quarter in Detail

Orders grew 5% year over year to $1.016 billion during the reported quarter. Notably, core orders grew 7%.

Notably, robust demand along with higher investments in emerging technologies drove order growth during the reported quarter in markets such as solutions and commercial communications, aerospace, defense and services.

However, management had expected softness in semiconductor market, given the uncertain macroeconomic conditions and imposition of tariff owing to trade war between the United States and China. Notably, the company anticipates semiconductor domain to remain a concern through 2019.

CSG includes commercial communications (“CC”) and aerospace, defense & government (“ADG”) end markets. Non-GAAP CSG revenues climbed 25% to $623 million.

CC revenues of $400 million improved year over year on the back of “double-digit” growth in orders driven by research and development (R&D) solutions related to technologies like 5G, 400 Gigabit Ethernet (GbE), and LTE-Advanced and Wi-Fi testing.

ADG revenues improved 3% for to $223 million. Lower spending in international end-markets was offset by higher adoption of applications in satellite and space domains across the United States.

Keysight stated that orders for 5G solutions recorded double-digit growth year over year for the quarter under review. Acquisition of Ixia, in particular, is enabling the company to unveil new offerings in 5G domain, including the latest 5G User Equipment Emulation scalable solution.

In fact, Keysight boasts of a robust 5G portfolio comprising comprehensive set of test and design solutions enabling telecom companies in accelerating 5G deployment. In the reported quarter, Keysight’s 5G solutions witnessed adoption from Softbank, SK Telecom, China Telecom, to mention a few.

We believe Keysight’s strength in 5G testing and design solutions holds promise. The new collaborations with AT&T (T - Free Report) , Xilinx , among others on development of Open RAN 5G network are likely to enable the company in expanding proliferation in 5G. Alliance with Qualcomm Technologies, Inc., a subsidiary of Qualcomm (QCOM - Free Report)     remains notable.

Non-GAAP EISG revenues increased 13% to $257 million. Automotive and Energy domain recorded double-digit growth year over year for the ninth consecutive quarter.

In the reported quarter, witnessed traction from notable automakers including the likes of BMW Group, among others. Notably, Keysight will offer battery test systems and services to enhance laboratory workflow operations to BMW.

With an aim to aid automotive customers the company intends to open automotive customer centers “in close proximity of their design hubs”. In fact in January 2019, Keysight inaugurated a new center in Nagoya, Japan.

It is to be noted that Keysight now has four automotive customer centers globally. One in the United States at Detroit, MI, one in Europe at Boeblingen, Germany; and two in Asia at Shanghai, China and Nagoya, Japan.

ISG reported non-GAAP revenues of $129 million, increasing 1% year over year on the back of adoption of network visibility solutions. However, revenues from testing solutions remained flat on a year-over-year basis.

Region-wise, non-GAAP revenues from Americas advanced 15% from the year-ago quarter to $405 million (40% of total revenues). Non-GAAP revenues from Asia-Pacific surged 31% on a year-over-year basis to $425 million (42%). Non-GAAP revenues from Europe inched up 1% on a year-over-year basis to $179 million (18%).

Margin Highlights

Non-GAAP gross margin was 61.8%, expanding 200 basis points (bps) from the year-ago quarter.

CSG and EISG gross margin of 61.1% and 58.9% expanded 390 and 230 bps respectively on a year-over-year basis. Meanwhile, ISG gross margin contracted 420 bps to 71.3%.

Non-GAAP operating expenses increased 6.9% from the year-ago quarter to $420 million. Non-GAAP operating expenses (as a percentage of non-GAAP revenues) contracted 430 bps to 41.6%.

Consequently, non-GAAP operating margin expanded 620 bps on a year-over-year basis to 20.2%.

Balance Sheet & Cash Flow

Keysight ended the reported quarter with cash & cash equivalents of $1.098 billion, up from the previous quarter of $913 million.

As on Jan 31, 2019, the company reported total debt (short-term plus long-term) of $1.79 billion which was flat compared with the figure reported in the previous quarter.

Cash flow from operations during the quarter came in at $240 million compared with previous quarter’s reported figure of $235 million.

Free cash flow was reported at $209 million compared with previous quarter’s figure of $201 million. On a year-over-year basis, free cash flow margin (as a percentage of GAAP revenues) expanded 300 bps to 21%.

During the reported quarter, the company repurchased approximately 686,000 shares for a total of $40 million.

Guides Strong

For the second-quarter of fiscal 2019, the company expects GAAP revenues to be in the range of $1.057-$1.077 billion. Meanwhile, non-GAAP revenues are expected in the range of $1.06-$1.08 billion. The Zacks Consensus Estimate for revenues is pegged at $1.04 billion.

Non-GAAP earnings per share are projected in the range of 93-99 cents per share. The Zacks Consensus Estimate for revenues is pegged at 91 cents.

Zacks Rank

Keysight carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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