Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal Second Quarter 2016 Earnings Conference Call. My name is Connor, and I'll be your lead operator today. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today, Thursday, May 19, 2016, at 1:30 P.M. Pacific Time. I would now like to hand the conference over to Jason Kary, Vice President, Treasurer and Investor Relations. Please go ahead, Mr. Kary.

Thank you, and welcome everyone to Keysight's second quarter earnings conference call for fiscal year 2016. With me are Ron Nersesian, Keysight's President and CEO; and Neil Dougherty, Keysight's Senior Vice President and CFO. Joining in the Q&A after Neil's comments will be Mike Gasparian, Senior Vice President of the Communications Solutions Group; Gooi Soon Chai, Senior Vice President of the Industrial Solutions Group; John Page, Senior Vice President of the Services Solutions Group; and Guy Sene, Senior Vice President of Worldwide Sales. You can find the press release and information to supplement today's discussion on our website at investor.keysight.com. While there, please click on the link for Quarterly Reports under the Financial Information tab. There you'll find an investor presentation along with Keysight's segment results. We will also post a copy of the prepared remarks following this call. Today's comments by Ron and Neil will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. We will make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please review the company's recent SEC filings for a more complete picture of our risks and other factors. I will also note that management is scheduled to present at the JPMorgan TMT Conference on May 24 in Boston, the Stifel Technology Conference on June 6 in San Francisco, and the Credit Suisse Semiconductor Supply Chain Conference on June 15 in Boston. We hope to see many of you there. And now I'd like to turn the call over to Ron.

Thank you, Jason. And thank you all for joining us. Keysight delivered strong second quarter earnings as we continue to navigate a challenging market and execute on our initiatives to transform our business. We will focus today's discussion on three important headlines. First, our second quarter financial results were strong, with earnings and revenue at the high end of our guidance. Second, we continued to make progress on our growth initiatives, and we are pleased with the momentum we are gaining in these areas. And third, consistent with our strategy to opportunistically return capital, we repurchased $42 million in common stock under the $200 million repurchase authorization we announced in February. This action is reflective of the confidence we have in our ability to achieve above market growth in the long-term. Now let's get started with an overview of Keysight's second quarter performance. In Q2 we delivered $0.61 in earnings per share, which was at the high end of our guidance range. Revenue for the quarter was $735 million, representing a decline of 1%. On a core basis, which excludes revenue from acquisitions and the impact of currency, revenue declined 7%, primarily driven from the slowdown in wireless communications. As we expected, the market and spending environment continued to be soft; however, we are pleased with the execution in the quarter. We delivered revenue and EPS at the top end of our guidance range and achieved order growth on a core basis. We continue to make measurable progress on our strategic initiatives to transform our business and position the company for growth. Our momentum in these areas continued to build. First, in wireless we continue to expand our leadership in 5G. While off a small base, orders for our 5G solutions continued to accelerate, and more than doubled over last…

Thank you, Ron. And hello, everyone. Today we reported second quarter non-GAAP revenue of $735 million, at the top end of our guidance range of $695 million to $735 million. On a year-over-year basis this represents an approximate 1% decline, or 7% decline on a core basis. Looking at our top-line performance by end market, communications revenue was $252 million and grew 2% year-over-year, including revenue from Anite. Excluding Anite, communications revenue decreased, as the market dynamics we highlighted last quarter continued, which included softness in the smartphone supply chain and restructuring and consolidation among some of our largest customers. These headwinds offset growth from 5G technologies, as well as strength in data center business that was driven by optical 100-gigabit manufacturing. Revenue from aerospace, defense was $160 million, up approximately 3% from last year's second quarter. Growth in Asia and steady US spending from our aerospace, defense solutions contributed to the uplift in revenue. Second-quarter industrial, computer and semiconductor revenue was $323 million, a 4% decrease year-over-year reflecting the challenging spending environment. Regionally and on a core basis, revenue declined 14% in the Americas, 4% in Europe and 10% in Japan. Revenue in Asia excluding Japan was flat compared with last year. The regional mix of total revenue was 35% from the Americas, 19% from Europe and 46% from Asia. Our second quarter operational results were strong, with gross margins increasing to 57.8%, a 70 basis point improvement year-over-year, largely a result of higher percentage of revenue from software and R&D solutions. Expenses were well managed while we continued to invest in R&D programs in support of our growth initiatives, and on a dollar basis, R&D expenses were in line with Q1. Operating expenses totaled $290 million for the quarter, up 8% over last year, primarily due to the…

Thank you, Neil. Operator, could you please give the instructions for the Q&A?

[Operator Instructions] And the first question comes from the line of Brandon Couillard with Jefferies. Your line is open.

Thanks, good afternoon. Ron, would be curious to get your thoughts, your granularity thoughts on just where you saw greater strength in the business and would be curious if you could speak to perhaps the linearity of orders in the communications business, sort of coming out of the January air pocket, it seems like the general tone just perhaps a little better than where we were three months ago?

Yes. Hi, Brandon, thanks for the question. The aerospace, defense business especially in the US was relatively steady. It’s been steady for a while and we obviously like the fact that continuing resolutions are gone and the fact that the budgets have been steady for a couple of years. So that's a market that we feel pretty good about. Gooi, also would like to a couple of comments please.

Yes, Brandon, what I want to say is you remember, at last call we had announced the significant slowdown in the second half of January. While the quarter started similar, but our market stabilized over Q2. We kept executing on our plan and really delivered the order growth over last year. As Ron stated earlier, the most notable pullback continued to be in communication and our performance over the other end markets were steady outside of comms market. So we delivered solid mid single-digit order growth with the strength in aerospace, defense as Ron was mentioning and also in industrial.

Thanks. And then one for Neil. Can you remind us, do your you lap the warranty change this period and then with respect to the CSS operating margins, even the revs were flattish sequentially, the operating margin declined a little bit. Should we expect this to be sort of a low watermark and bounce back in a second half?

Yes, so first of all, with regard to the three year warranty, we are now at the point where we have – we've kind of led off all of the deferred revenue from the prior sales of extended warranties that are now covered under standard warranty program. But they will be in our compares through the first quarter of next year. And so from a year-over-year compare basis, we won't have lapped that until we get to that point. From an operating margin standpoint, as you noted, the operating margins are down versus where they had been last year. And I think essentially what you are seeing is that deferred revenue from this extended warranty sales are coming out of the revenue base that was very higher margin warranty and we need to grow the business and replace that warranty and get the revenues for this business up where they are over $100 million per quarter and we will see margins recover. We're highly confident in the investments and capacity that we are making and the ability of this business to generate profitability in line with the broader business moving forward.

Super. Thank you.

Brandon, I'll just add one other comment with regard to our strength, if you look at orders in China we had double-digit order growth and I know everybody's concerned with what's going on in China. We have had a strategic focus of moving our business from manufacturing to R&D for years and I think that helps us with a result that we've seen that were pretty strong.

Thank you.

The next question comes from the line of Vijay Bhagavath with Deutsche Bank. Your line is open.

Yes, hi, Ron, Neil. Great results here, its really been weird, given many of your peers were noting fairly weak demand trends in term, so really buck the trend here.

Thank you.

Question for, in terms of – yes, thanks. In terms of you know, help us understand anyway you can qualitative color on the communication end markets heading into the back half. Like, how should we look in terms of R&D spending into the back half from your customers? And then also what are your customers telling you it terms of their buying habits or Keysight equipment would they primarily be buying more of modular equipment, would they buying kind of the broader portfolio, are there any pockets of use cases of strength you see in the communication end market? Thank you.

Sure, I'll start with just entering the modular question and then I'll turn it over to Mike Gasparian who heads up our communications solutions group. With regards to modular, we saw double-digit growth for orders and double-digit growth for revenue. So we were very pleased with the strength. Aerospace, defense and optical in particular were strong, but it’s very good to see continued double-digit order and revenue growth in modular.

Hi, Vijay, this is Mike Gasparian. Maybe I'll start out with a couple of macro comments about the communications industry. As Ron indicated in his opening comments, probably the biggest event during this previous quarter was the contraction in the overall supply-chain associated with the devices and chipsets and component manufacturer. So - but we also saw pretty big contraction in the R&D part of the communications market. A lot of the major accounts that operate in that ecosystem were still going through consolidation and restructuring and that's putting a real damper on their capital equipment spend. So that’s the - I think the color commentary I can make there. In regards to pockets of strength, we really do have a unique competitive advantage when you look at the data centers and what's going on there with a 100 gigabit rollout, as well as the 400 gigabit R&D spend, you know, more in the research phase. We're very well-positioned from a portfolio standpoint. We've got a variety of high-speed digital products that are ray testes, arbitrary waveform generators and in fact in the year of digital communication analyzers, we just introduced a new family of sampling scopes from one to four channels, very compact form factor, low noise and really designed for high throughput, in a manufacturing setting. So I think we will continue to benefit from that 100 gigabit build out. In the area of 5G, that's probably the other area to highlight and I'll go back to again some of Ron's comments about Mobile World Congress, several of us were there and met with a lot of customers and going into Mobile World Congress I think our general consensus was that we would see an initial deployment in the 6 gigahertz range. But what's happened since then it’s very clear that there will be at least a dual deployment and much higher frequency band, 28 gigahertz seems to be the sweet spot of a secondary implementation. And that really plays well into the product portfolio that we have and have had for decades on aerospace, defense side of the house. And so in fact, we had something called a 5G testbed that we put out which is a way for customers to upgrade their labs, to have test equipment that’s more compatible with the testing requirements of millimeter wave frequency and we've seen that testbed be very well accepted in the market and sales have far exceeded our expectations. And that's the primary driver behind our high 5G strength right now. So hopefully that helps give you a little bit of perspective.

Yes. It’s really helpful. A quick follow-up is around gross margin and OpEx through the rest of year. Any guidelines can you give us for modeling? Thanks.

Yes, so first of all, with regard to gross margin, our gross margins are really driven more by product mix than anything else. And so I think as we look forward we don't really see any fundamental drivers that would change, would drive a meaningful shift in gross margin. Moving forward, with regard to OpEx, you'll notice that are OpEx is been reasonably stable through the first half of this year. Since the addition of Anite and from a modeling perspective I look to that moving forward.

Excellent. Yes, congratulations. Thanks.

Thank you.

The next question comes from the line of Patrick Newton with Stifel. Your line is open.

Good afternoon, Neil and Ron. Thanks for taking my questions. I guess jumping right in, Neil, when you provided the guidance, and I am sorry, if I missed this, did you speak to your targeted core growth rate in the July quarter?

I did, yes. The core growth rate is 2% and the absolute growth rate is 8%.

Okay, great. And then if we were to take into account, kind of the communications weakness, is there anyway you could comment on what kind of a core excluding communications would be?

No, no, the only comment that I can say is that, we do continue to be very cautious around the communications space moving forward. We've taken the same approach that we always take to preparing our guidance looking at incoming order rates, strength of our funnel and the quality of our backlog. So as our approach to guidance this quarter was entirely consistent with prior quarters. The only thing that I would note is in the current quarter, in our second quarter we did post solid single digit growth rate outside of the comms area.

Okay, great. I guess maybe dovetailing off that, part of the - one of those areas that you touched on was industrial, which I guess is some – is kind of surprising, that was sighted as an area of strength, was that more just rebound off of a very depressed levels in the early calendar Q1 timeframe that we've seen a snap back from a lot of customers or is there something fundamentally that's reaccelerated in industrial end market?

Yes, I think from an industrial orders perspective we had a reasonably strong quarter, but I would note that it was against a pretty soft compare from Q2 of last year. So we were certainly happy with the order results in industrial. If I was to provide you with a little bit of commentary, it was driven, the orders in the industrial side were stronger than the comms semi side, but again just note this is off compare from Q2 a year ago.

Great. And then I guess for either Ron or Mike, to extrapolate on your commentary on optical communications test. Can you help us understand the potential duration of this 100-gig strength, just seem this is historically a very volatile and cyclical end market? And then any way to help us understand or size this market opportunity or contribution to revenue given that there really is some very explosive growth opportunities here?

Yes, I'll let Neil comment about you know, can we quantify that, the magnitude of it. I can comment a little bit on the duration. We're re seeing a very broad widespread uptake in this whole 100 gigabit Ethernet build out in the manufacturing space. So I don't think that's a trend that's going to disappear overnight. In parallel with that, right on the heels we have the 400 gigabit wave that's coming and there is quite a bit of research going on in that phase, and the manufacturing deployment of that will likely be in late 2017. So I think we've got a pretty good trend to play to here over the next year or two.

With regard to size we just don't provide granularity at that level to individual portions of our product platform, the only thing I would reiterate was the statements that Mike had made about we feel that we have a strong hand to play here and as he just said, we think its one that's got – got a little bit of legs.

Great. And then if I can get one more in on 5G, the 5G sales doubling again in the quarter year-over-year. Last quarter you give us a sequential growth rate of 50%, if you could provide us with the sequential growth rate that would be helpful. And then, could you also help us understand how we should think about 5G deployments moving out of the research phase and development into deployments with infrastructure in handset over the next several years, just how this wave, obviously it’s a very long tail, but just any type of thought process of X amount of years down the road is when we should start to see the handoff from one portion of your market to the next?

I will take the first part of that question and then I'll hand off to Gooi for the second part, which is – we're not going to provide granularity on the sequential gain at this point in time. The more than doubling year-over-year is all that we can give you.

Yes. Patrick, on the ramp, its very difficult to call at this moment, you've seen that Mobile World Congress, so its no doubt that it have shown acceleration currently in the market and with some customers, but I would say its too early to call when the ramp up is really going to happen.

Great. Thank you for taking my questions. Good luck.

Thank you, Patrick.

The next question comes from Richard Eastman with Robert W. Baird. Your line is open.

Sure. Very nice quarter. Just Rob or maybe could you just kind of speak for a minute or two and maybe reconcile the service double-digit growth rate in orders with the sales growth rate here, without deferred it was up a percentage point and maybe are these multi-year orders? How do you reconcile those two and when does the sales growth rate start to approach that double digit order number? I am sorry, Ron, maybe that’s directed to you.

Yes, but I'm going to let John Page, who is the head of our services organization get a chance to talk.

So, I'm glad to answer that question. There are a number of factors going on, so yes, there are multiyear contracts in there and some of the contracts coming in a lumpy fashion, but I think the real underlying story here is that services is composed of two major components, one is our repair and calibration services business and that showed strong consistent growth. The other part of the equation is that we have a used equipment business that is also included in our services numbers and that's very lumpy and goes up and down depending on our demo inventory that's available for sale, as well as general product trends. So the underlying growth area for repair and calibration is very strong and used equipment continues to be a little bit lumpy.

I see. Okay. And the n just also, could you just provide a little bit of color, maybe on the end markets that are captured in the Americas 8% decline? I am just curious how comms, gen purpose and A&D did in the Americas?

We don't quantify the individual market segments by region, but I can – like Gooi see if he has any qualitative points that might be able to assist you.

Richard, yes, this is Gooi, here. The think I can say is that in the Americas we did see as expected growth in aerospace, defense and this is where our tool for the DoD and for the time, but clearly comms was slow, especially with the large account and this comes back to the comment we did at the beginning of the call of still liked to the overall situation in the wireless industry.

Because again my math might be off a bit here, but it looks like if I pull Anite out of the numbers, the comms business was down high teens and your commentary around Asia I believe seem to maybe suggest that comms business did better there, but was the Americas comms business down more than 20%? And was that a comms issue or…

We can't quantify that for you. Sorry.

Okay. And just one last observation, if I look at the revenue that you generated this quarter, the conversion of last quarter's orders to this quarter's revenue looks very seasonal. And I would make the same general argument about this quarter's orders if we get a typical conversion quarter-to-quarter it looks like you are almost at the midpoint of your guide. So I guess, Ron, do you kind of view the business here as kind of returning to maybe a more normal seasonal pattern off of this lower base?

We guide one quarter out obviously, there is a lot of - there are a lot of dynamics that happen within the marketplace. We're very glad that we've seen aerospace, defense business be steady. We're very glad that we see China being steady. We're glad that we see Russia return to growth. This quarter and last quarter in orders versus last year when we saw a lot of solid declines. So outside of comms, the backdrop is reasonable, but when you integrate comms it’s still a little uncertain. However, there is one thing that we're re very, very confident in, and we have a very good business model. We had to turn that into cash at the end of the day and produce the results that you've seen. So we'll keep at it and we think our relative position and our growth relative to the competition was pretty strong and I remember talking about two years ago about how we want - wanted to return to market growth and you can assess how we did relative to the other players in the industry and very pleased with our posted revenue growth and our profit growth, as well as our 9% order growth in the quarter.

If you turned out Ron, just I'm curious, if you trend out and you are looking at fiscal third quarter and fourth, you turned off seasonally, it might suggest your business is up overall Keysight growth would be up low single digits. And a prime competitor in Japan kind of gave their fiscal March '17 outlook and kind of put industry growth for test and measurement at zero flat. So just trying to get maybe reconciles the growth rate here. Do you feel at this point in time the Keysight in fact is outgrowing the industry? Or do you feel that, as the industry growth rate low single digits, is a flat or its just - put that in context for us?

Well, clearly the macro is still very uncertain as you can see. You, look, you could also look at all the competitors and see what they posted during the last quarter relative to what we posted. But at this point Japan still is soft and we see the comp semi business to be not so strong. China clearly they are making some significant investments in Semiconductor, but the question is how long or what will happen at the end of the year. So it is still a very uncertain background, but as we have guided the last almost nine quarters independently from Agilent from the first quarters before we split until now we have met our guidance every single quarter. So hopefully that gives you some confident.

Okay, very good. Thank you.

Thanks, Richard

We have time for one last question. And the question comes from the line of Toshi Ahari [ph] with Goldman Sachs. Q – Unidentified Analyst: Hi, this is Alex actually on Toshi. First of all congratulations on the strong quarter. I have a quick question on capital allocation. You obviously repurchase the shares to this last quarter, any updated thoughts here, specifically around the M&A environment how you all look at repurchases?

Yes, so obviously we've instituted the share repurchase program last quarter. We executed about 20% of it during Q2 and that’s really designed to be an opportunistic program that - and you can read into the fact that we executed a significant portion of that, that we have confidence in our ability to perform in a variety of market conditions. Are stated strategic priorities haven’t changed. We continue to look for M&A opportunities that will help us to achieve our longer-term growth objectives. But at the same time when the opportunities present itself we will continue to execute on the share repurchase program, as well although we don't give any particular color as to what our plans are as regard to that execution. Q – Unidentified Analyst: Got it. And then on the defense business, you all saw good growth here, commenting on the next quarter looking similar, I guess just a question on how lumpy this business is and how strong of a line of sight you have moving into the back half of this year?

Our aerospace defense business Alex has been very steady. It modulated down a bit when there were continuing resolutions going on. But overall, if you look at the threats line of that business for 16 years since we split from Hewlett-Packard not Agilent, its pretty darn steady compared to any of our other businesses. And again, we're the prime player in the United States, the United States is the largest spender in the world by large amount. We believe in the long-term that there will be bringing in new programs to strengthen our ability to deal with new types of threats and we are very pleased with the position that's there. We don't expect any instantaneous sharp turns up or sharp turns down, but we feel very comfortable with our position. It’s also worthwhile to note that are aerospace defense business is not only in the US that's also overseas and although it’s somewhere around the third of our business, a lot of the business for the international countries are sold through US primes. So in total a higher percentage of our business goes to international countries approaching 50%. So we're very well balanced with US and with other countries. We've had a very steady business in that area and we're looking forward to capitalize on any gains in any defense spending around the world.

I think we can also say that with the relative stability in the US budget situation over the past couple of years we do expect euros base defense spending to return to typical norms as you think about government fiscal year end in September. Q – Unidentified Analyst: Correct, got it. Thanks again and congrats on the quarter.

Thank you very much, Alex.

Thank you. That concludes our question-and-answer session for today. I would like to turn conference back to Jason Kary.

Thank you and thank you all for joining us today. We look forward to seeing you at that coming investor conferences that I mentioned at the top of the call and have a great day.

This concludes our conference call. You may now disconnect.