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Keysight (KEYS) Earnings & Revenues Beat Estimates in Q2

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Keysight Technologies Inc. (KEYS - Free Report) delivered second-quarter fiscal 2019 non-GAAP earnings of $1.22 per share beating the Zacks Consensus Estimate of 98 cents. Further, the figure soared from 83 cents reported in the year-ago quarter and came higher than management’s guided range of 93-99 cents per share.

Non-GAAP revenues increased 9% year over year to $1.093 billion surpassing the higher end of management’s guided range of 1.06-$1.08 billion. Non-GAAP core revenues (excluding the impact of currency and revenues from acquisitions concluded within the last 12 months) increased 12% year over year.

Meanwhile, GAAP revenues advanced 10% from the year-ago quarter to $1.090 billion. The Zacks Consensus Estimate for revenues is pegged at $1.062 billion.

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, 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 8% in after-hours trading. This can primarily be attributed to robust second-quarter results. Notably, Keysight stock has returned 25.5% in the past year, outperforming the industry’s rally of 14.6%.

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 14% year over year to $1.121 billion during the reported quarter. Notably, core orders grew 16%.

CSG includes commercial communications (CC) and aerospace, defense & government (ADG) end markets. Non-GAAP CSG revenues climbed 8% to $676 million.

CC revenues of $431 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 dipped 1% year over year to $245 million. Higher spending across the United States and China was offset by weakness in international end-markets.

Keysight stated that orders for 5G solutions recorded triple-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 to accelerate 5G deployment.

We believe the company’s strength in 5G testing and design solutions hold promise. The collaborations to develop of Open RAN 5G network with companies like AT&T (T - Free Report) , Xilinx (XLNX - Free Report) , to name a few,  is likely to enable Keysight in proliferating the 5G space. Alliance with Qualcomm Technologies, Inc., a subsidiary of Qualcomm (QCOM - Free Report) remains noteworthy.

Moreover, the company teamed up with Nokia to roll out the Open Test Automation Project (OpenTAP).

Non-GAAP EISG revenues increased 6% to $299 million, primarily owing to strength in automotive, general electronics and next-generation parametric tests.

In the reported quarter, the company witnessed robust R&D investments in autonomous driving, electric and hybrid electric vehicles, and connectivity. 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 $118 million, increasing 32% year over year on the back of adoption of network visibility solutions.

Region-wise, non-GAAP revenues from Americas advanced 11% from the year-ago quarter to $426 million (39% of total revenues). Non-GAAP revenues from Asia-Pacific surged 13% on a year-over-year basis to $487 million (45%). Non-GAAP revenues from Europe declined 4% on a year-over-year basis to $180 million (16%).

Margin Highlights

Non-GAAP gross margin was 64%, expanding 200 bps from the year-ago quarter.

CSG and EISG gross margin of 63.4% and 61.3% expanded 520 and 230 bps, respectively, on a year-over-year basis. Meanwhile, ISG gross margin contracted 410 bps to 71.5%.

Non-GAAP operating margin expanded 570 bps on a year-over-year basis to 24.6%.

Balance Sheet & Cash Flow

Keysight ended the reported quarter with cash & cash equivalents of $1.277 billion, up from the previous quarter of $1.098 million.

As on Apr 30, 2019, the company reported total debt (short-term plus long-term) of $1.79 billion compared with $1.79 billion reported in the previous quarter.

Cash flow from operations during the quarter came in at $221 million compared with previous quarter’s reported figure of $240 million.

Free cash flow was reported at $192 million compared with previous quarter’s figure of $209 million.

During the reported quarter, the company repurchased approximately 344,000 shares for a total of $30 million.

Guides Weak

For the third-quarter of fiscal 2019, the company expects GAAP revenues to be in the range of $1.018 billion to $1.058 billion. Meanwhile, non-GAAP revenues are expected in the range of $1.02-$1.06 billion. The Zacks Consensus Estimate for revenues is pegged at $1.07 billion.

Non-GAAP earnings per share are projected in the range of 97 cents to $1.05 per share. The Zacks Consensus Estimate for revenues is pegged at 98 cents.

Notably, the outlook for the third quarter was impacted by Keysight’s connection with the Chinese telecom giant, Huawei. This electronic measurement solutions provider was perceived as a “small direct customer” and was anticipated to benefit from 5G technological development with Huawei. The program was focused on technology verification and system program validation.

Keysight generates significant portion of revenues from outside the United States rendering it susceptible to exchange rate volatility owing to sluggishness in China and trade war. The new trade restrictions are likely to impact revenue growth in the forthcoming quarter.

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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