Keysight Technologies, Inc. (KEYS) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal Fourth Quarter 2018 Earnings Conference Call. My name is Jesse, and I'll be your lead operator today. [Operator Instructions]. Please note that this call is being recorded today, Tuesday, November 20, 2018, 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 Fourth Quarter Earnings Conference Call for Fiscal Year 2018. Joining me are Ron Nersesian, Keysight President and CEO; and Neil Dougherty, Keysight Senior Vice President and CFO. Joining us in the Q&A session will be Mark Wallace, Senior Vice President of Worldwide Sales and Satish Dhanasekaran, President of the Communications Solutions Group. 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 the quarterly reports under the Financial Information tab. There, you will find an investor presentation along with Keysight's segment results. Following this conference call, we will post a copy of the prepared remarks to the website. Today's comments by Ron and Neil will refer to non-GAAP financial measures. We will also make references to core growth, which excludes the impact of currency movements as well as revenue from acquisitions or divestitures completed within the last 12 months. 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 on today's call. 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. Note that management is scheduled to present at the Crédit Suisse TMT Conference in Arizona on November 28, the Wells Fargo Tech Summit on December 4, in Park City Utah and the Barclays TMT Conference on December 5, in San Francisco. 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 a very strong finish to a breakout year with both revenue and earnings exceeding the high end of our guidance. Today, I'll focus my formal comments on three key headlines for the quarter. First, fourth quarter revenue grew 16% or 17% on a core basis to reach a record $1.1 billion. We achieved this growth while also delivering 42% year-over-year EPS growth. Second, customers continue to make strong R&D investments in next-generation technologies, and we continue to achieve broad-based momentum across multiple end markets with our solutions. The investments we had made over the past several years in our technology, solutions, software and services are delivering results and have enabled Keysight to be at the forefront and capture the demand we see in the market. And third, 2018 was an outstanding year for Keysight. Revenue grew 20% to reach a record $3.9 billion. We achieved 13% core revenue growth, which was above our expectation of 11%, and we delivered 28% year-over-year EPS growth for 2018. Now let's take a deeper look into our performance for the fourth quarter. We achieved $1.01 per share in earnings, which was $0.13 above the midpoint and $0.10 above the high end of our guidance. This represents 42% year-over-year earnings growth. We also delivered outstanding order growth this quarter. Orders grew 9% in total to surpass $1 billion. This represents our second consecutive quarter of orders above $1 billion. On a core basis, which excludes currency as well as acquisitions or divestitures completed within the last 12 months, orders grew 10%. This was our fifth consecutive quarter of double-digit core order growth and the third quarter out of the last five with orders above $1 billion. Our continued strong order growth has translated into another quarter of record revenue, which was also above $1 billion for the second consecutive quarter. Q4 revenue grew 16% or 17% on a core basis. We're delivering broad-based growth across multiple dimensions of the business and across our major geographies, including China. As we mentioned last quarter, we are seeing some expected headwinds in China as a result of global trade tensions, which we expect to continue in 2019. Despite this dynamic, the breadth of our product offering across the diverse set of end markets enabled strong revenue growth in China in Q4. In particular, we saw a good growth in commercial communications, where we had strong differentiation in 5G. 2018 was a record year for Keysight with total order growth of 20% or 12% on core growth. This brought our total orders for the year to over $4 billion, a new milestone for the company. Total revenue grew 20% to a record $3.9 billion. On a core basis, revenue grew 13%, which was above our 11% expectation. We achieved this growth while also delivering our targeted core operating margin incremental, which resulted in $618 million in net income, up 34% over last year. Our results for this year were driven by good demands trends and strong execution on the plan we implemented four years ago to innovate and be a leader in our selected markets, create value for our customers and deliver growth profitably. At that time, we made the commitment to deliver annual EPS growth between 8% and 10% on a 4% core revenue growth CAGR, which we expected to achieve in 3 to 4 years. Earlier this year, we increased that target to 10% or greater EPS growth. I am pleased to report to you today that within three years time we not only met that target, we exceeded it and delivered 28% EPS growth in 2018. Creating value for our customers by providing leading edge technology solutions and insights that help them be at the forefront of innovation is the cornerstone of our strategy and the Keysight leadership model. The targeted investments we have made over the past several years in software and services, and key areas of the market undergoing multiyear transformations are delivering results. Let me share some data points with you that illustrate our growth in a few of our focus areas. Revenue for our software solutions grew strong double digits in 2018 and represents greater than 15% of our total revenue. This growth was driven by strong demand for our 5G solutions, high-frequency measurement application software and digital and photonic application software as well as the addition of ISG. In services, we achieved all-time high for both orders and revenue, as well as record double-digit order and revenue growth for the fourth quarter and for the full year. Services are an increasingly important element of our solution-centric engagement model with customers. We are building momentum in services as we increase full solution sales in key end markets such as automotive and 5G. In automotive and energy, customer demand remains high, and we delivered our eighth consecutive quarter of double-digit order growth with strong growth across multiple applications. During the quarter, growth from our top accounts was enhanced by wins with many new customers. In 5G, we are leading and delivering very strong growth in Q4, resulting in record 5G orders. Our broad portfolio of 5G solutions and engagement with leading market makers continues to strengthen Keysight's leading position in this fast-growing market. We continue to see major operator ecosystems embrace the Keysight platform. This quarter, we received endorsements from China Telecom and SK telecom. The scalability of our platform combined with Keysight's team ability to keep pace with the fast-evolving standard needs positions us for future success as 5G deployment scale. Additionally, our Ixia Solutions Group secured important new 5G orders with leading mobile operators in Japan, Korea, China and The U.S. It is exciting to see ISG's recently launched 5G solutions gain momentum with these Tier 1 accounts. Our combined technologies enabled Keysight to deliver full end-to-end solutions across the total communications workflow, which we view as a significant differentiator as wireless and wireline technologies continue to converge and 5G moves into commercialization. The contract manufacturing transition continues to take longer than we expected. That said, we have continue to make progress in optimizing the ISG business post-integration and order strengthen in the quarter for both visibility and test. We are confident in the plan we have to create long-term shareholder value. In summary, 2018 has been a year of great success and strong revenue and earnings growth. As we look ahead, we believe Keysight is well positioned to expand our leadership as our markets evolve. We have built a robust innovation engine and a broad portfolio of solutions that spans multiple segments. Our solution-centric approach to the market builds deep customer relationships that fuel innovation and customer success. We will continue to focus our investments in these key areas to drive innovation, create even more value for our customers and outgrow the market. Importantly, we have maintained our strong focus on financial discipline and operational excellence to drive earnings growth, while investing in key areas of the business. Before I turn the call over to Neil, I would like to thank every member of Keysight's team for their dedication and hard work that made our record 2018 results possible. I will now turn it over to Neil to discuss our financial performance and outlook in more detail.

Thank you, Ron, and hello, everyone. Before I get started, I will note that all comparisons are on a year-over-year basis unless specifically noted otherwise. As Ron mentioned, we delivered another strong quarter as we continue to execute on the demand we see in core areas of our business. For the fourth quarter of 2018, we delivered record non-GAAP revenue of $1,051,000,000, which was above our guidance of $1 billion to $1,020,000,000. We also delivered $1.1 billion in orders in the quarter, which were up 9% in total and 10% on a core basis. Looking at our operational results for Q4, we reported gross margin of 61% and operating expenses of $408 million, resulting in operating margin of 22.3%, which is the highest level in Keysight's history. We also achieved record net income of $193 million and delivered $1.01 in earnings per share, which was up 42%. Our weighted average share count for the quarter was 191 million shares. GAAP net loss for the quarter was $114 million. In conjunction with our annual financial planning cycle and asset impairment review, we recorded a noncash goodwill impairment charge of $700 million net of tax, primarily due to weaker-than-expected market dynamics experienced in the Ixia Solutions Group. While this is disappointing, the Ixia Business is a valuable asset in the Keysight portfolio. We remain confident in the long-term opportunities created by combining Ixia's strength in networking and Keysight's strength in wireless and physical layer test. Our combined technologies enable Keysight to deliver full end-to-end solutions across the total communications workflow, which we view as a significant differentiator as wireless and wireline technologies continue to converge and 5G moves into commercialization. Moving to the performance of our segments. Our Communications Solutions Group, or CSG, generated total revenue of $566 million, up 23%, while delivering record gross margin of 63.7% and record operating margin of 27%. In Q4, Commercial Communications delivered strong double-digit order growth and record revenue of $357 million, up 28%, driven by increased 5G R&D demand across the wireless ecosystem and growth in data center next-generation 400-gigabit and high-speed digital test. Aerospace defense and government grew 15% and generated revenue of $209 million. Aerospace defense and government growth was driven by continued strong demand across the aerospace, defense supply chain, including space, satellite, cybersecurity, radar and electronic warfare applications. For the year, CSG revenue grew 17% to reach a record $2 billion. Our Electronic Industrial Solutions Group, or EISG, generated fourth quarter revenue of $249 million, up a record 21%, driven by strength across all of its markets, automotive and energy, semiconductor and general electronics. EISG reported gross margin of 60.6% and operating margin of 26%. Our Ixia Solutions Group, or ISG, reported Q4 revenue of $115 million, gross margin of 70.5% and breakeven operating profit. ISG orders grew mid-single digits year-over-year and double-digit sequentially, driven by 5G wins as well as increased 400-gigabit and visibility sales. We were encouraged to see another quarter of improved sales execution, but as Ron mentioned, the contract manufacturing transition is ongoing, which impacted ISG's Q4 revenue and operating results. We remain confident in our ability to work through these challenges, grow the business and increase profitability. Lastly, Services Solutions Group, or SSG, revenue grew 10% in Q4 to reach a record $121 million, while delivering 40.9% gross margin and an operating margin of 13%. Q4 services revenue was driven by growth for calibration, remarketed solutions and repair. This brings SSG revenue for the year to $461 million, up 10% over last year as our pivot to an organic growth strategy takes hold. As Ron highlighted, we are pleased with our performance and execution as a company for the 2018 fiscal year. Revenue for the year totaled $3.9 billion and gross margin improved 70 basis points to 60.7%. To fuel innovation and further strengthen our market position in strategic areas, we continue to invest, while at the same time, remain within our operating model. We achieved our core operating margin incremental target for the year and achieved 20% operating margin. This translated to strong 28% earnings growth and reported non-GAAP net income after taxes of $618 million or $3.24 per share for the full year. Moving to the balance sheet and cash flow. We ended our fourth quarter with $913 million in cash and cash equivalents and reported cash flow from operations of $235 million and free cash flow of $201 million, which represents 19% of revenue. This brings our free cash flow for the year to $423 million or 11% of revenue, which includes the onetime $85 million accelerated funding of our U.S. pension plan that we discussed last quarter. Under existing share repurchase authorization, during the quarter, we acquired approximately 634,000 shares on the open market at an average price of $63.11 for a total consideration of $40 million. This brings our total repurchases for the year to approximately 2 million shares at an average price of $57.91 for a total consideration of $120 million. Now turning to our outlook and guidance. We expect first quarter 2019 revenue to be in the range of $965 million to $985 million and Q1 earnings per share to be in the range of $0.76 to $0.82 based on a weighted diluted share count of approximately 190 million shares. For 2019 modeling purposes, I would like to remind you that the quarterly revenue seasonality in the first half of 2018 was heavily skewed towards Q2 as a result of the closure of our Santa Rosa facility due to last year's wildfires. Historically, sequential revenue growth from Q1 to Q2 has averaged mid-single digits. With regard to our tax rate, based on our latest assessment of the benefits of tax reform, we are currently modeling a 12% non-GAAP effective tax rate for FY '19, a or reduction of 3 percentage points from our prior rate of 15%. With that, I will now turn it back to Jason for the Q&A.

Thank you, Neil. Jesse, will you please give the instructions for the Q&A?

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

Ron, if you look at the business in the fourth quarter, clearly quite a bit of momentum across the board. Where would you say were the biggest areas that surprised to the upside relative to your guidance? And then just look out to fiscal '19, any goal posts you can share with us relative to your 4% to 5% long-term top line growth target? Understanding you're lapping pretty tough comps, but what areas of the business you think get stronger versus those might moderate a bit?

Brandon, one of the good things is that a lot of our growth initiatives there are hitting on all cylinders and continue to break the records. 5G is the area that is -- has grown triple digits as we had talked about, and it continues to be very strong and very strong around the world. And that feeds into our commercial communications business, which is also very strong as we reported our revenue for overall for China. That was a bit of a surprise how strong that was, but our services business, for instance, has grown double digits throughout the year. On top of that, our automotive business has grown very strong. So when we look at, for instance, revenue growth of CSG of 23%, we see also EISG at 21%, SSG at 10%. All of those are doing well, but EISG and SSG driven primarily from commercial communications and automotive seem to be strong. There's is no doubt that we do have a tough compare compared to with this last year, which the performance was so much better than the year before, but we actually see upside to that 4% to 5%. And Neil, feel free to go in and to add some more color to that.

Yes. I think, Ron, you hit it. I think we feel like we're at the front end of the number of secular themes that will continue to provide growth opportunities for us moving forward. As you mentioned, Brandon, the 2018 growth will provide some tougher comps for us, particularly in the back half of the year. We're weighing that with the strength we see in our growth initiatives with some potential headwinds in China as well as in semi. But all in all, we see some upside to the 4% to 5% long-term growth target that we put out there for the company, and we feel we have a broad portfolio of solutions and selling to diverse set of end markets, and believe, we're well positioned across that entire space.

And again, if you look at our growth initiatives, services, automotive and software all grew double digits in orders. And the only exception was 5G, which grew triple digits. So that momentum continues to be strong, and that's why we're raising the outlook relative to street consensus going forward for Q1.

That's helpful. And then one more, Ron, with respect to Ixia, it wasn't quite clear that the contract manufacturing transition is still behind you. Should we still think about that as a headwind to the top line for that business segment in the first quarter? And then with respect to the revenue synergy target of, I think, $50 million-plus by year three, is that still a relevant figure that's still intact in your mind?

Sure. Well, let me just start and say, overall, although we have at a record year, all is not perfect. The Ixia integration has become a bigger job than we had thought it originally. We're making excellent progress, but it's taking longer than we originally thought. And we have a -- we've a multifaceted plan to go after this. One, we put new leadership in place with Mark Pierpoint to lead that group, and that's working out very well. We've completed our transition and integration to a new sales platform that will help make sales much more integrated and also share on the information to really accelerate our revenue synergies, which are starting to pop up with Satish in our general Communications Solutions Group. We've seen improvements in our order flow, in our funnel conversion throughout the quarter. And as we reported, we had mid-single-digit growth for ISG in orders this past quarter and double-digit growth in orders sequentially. But we are consolidating the CM supply chain, and we're transferring about 75 products and major products, I should say. And although they're not new products, it's a whole new process that we're putting into this CM. And what it will do, it will improve the quality and lower the cost to provide great performance in the long term. So that's what's going on. We still have a lot of confidence in the business. We recently introduced new solution, the AresONE solution for 400 gig, it is the denser solution to go ahead and to address this need. Compared to the competition, it's very, very strong. So we're excited about that. And now, I'll turn it over to Neil, who could talk a little bit about the guidance and the financials for Ixia.

Yes, Ron, I think you covered it pretty well. I think, as Ron mentioned, the contract manufacturing transition has taken us longer than we expect, but we would point to the strong order growth rates that we saw in the quarter. And you mentioned revenue synergies, I think, we can point to Ixia's success in China, particularly at some of the bigger customers that have been strongholds for Satish's commercial communications business and the winds that we're getting there as evidence that we are getting revenue synergies in this business. So I think as we look forward, we remain confident in our thesis and that as wireless -- as 5G rolls out and wireless and wireline converts the ability to provide end-to-end solutions across communications ecosystem by bringing these businesses together in the end is a winning strategy.

It may be worthwhile for Satish to add a point on what he's seeing in 5G and how it intersects with Ixia?

Yes. Thanks, Ron. Clearly, on one way you look at 5G as a wireless standards evolution, but it's really causing the entire communication block diagram to be reconstituted or transformed. And that transformation is occurring end-to-end, you start with devices, the entire memory system start changing and then you go into the cloud and the core network side, there is fundamental shifts occurring there. Our ability to sort of keep pace with the needs of the entire ecosystem is a big differentiator, and you can see that in our continued momentum of 5G orders in the company. We are into -- in conversations with lead customers today, because of the fact that we have the entire 5G stack end-to-end. We don't have to look elsewhere, we can look inwards and provide the complete solution for the ecosystem. So I continue to believe that getting this entire capabilities together will keep the momentum for our 5G success going for some years to come. Thank you.

Your next question comes from Vijay Bhagavath with Deutsche Bank.

Ron, Neil, the mood at your company should be party like it's 1999. So yes, I know it's a tough tape still. A question for you, which you get asked a lot from clients is how should we think about the duration or the longevity of some of these secular growth drivers you mentioned? You could pick on, for example, 5G, the aerodefense program complex, connected cars ADAS. So that we -- from a modeling point of view, we get an understanding of the longevity and the duration of some of these growth cycles? And I have a follow-on for Neil.

Sure. Well, first of all, I just want to say as you said, people of the company should be happy. We just sent out a note that our employees have variable pay based on their performance, and they're receiving record of bonuses for this record performance during the last year, and there is nothing that makes me feel happier than to be able to share this success with all the employees that are working very hard. Second, with regard to the growth initiatives, one of the things that we looked at when we set this up roughly four years ago was to look for a secular growth trend that last at least a decade and typically two plus. And that's what we're seeing in 5G as well as in commercial comps, and we're seeing it in automotive with ADAS, et cetera, and these trends are going to go on for a long period of time before you see automotive get to Level 5, and there is plenty, plenty of opportunity for us as this gets implemented and safety becomes extremely important and there are multiple technologies that are utilized. 5G, it's the same thing before that gets implemented around the world. A lot of times we forget and we think of how fast The U.S. is moving or how fast, for instance, China is moving right now and other countries. The world is much bigger and nobody -- there's many, many countries that will utilize this technology, that will not see it for many years, but we're starting to see some countries that will be seeing their first rollouts very soon. So we're really excited that you'll see these growth initiatives and what we have going on for another decade, at least. And again, we will also look as we continue to build those out to add more, but right now there is such a opportunity and a gold mine in these applications, we're focusing and it's providing us the growth that we had promised and then some as well as the earnings growth, which is our ultimate job.

It's very helpful, Ron. Neil, a question for you. Recently, we have been kind of picking up on the tape here, some design wins and success story with, for example, China Mobile, South Korea Telecom and perhaps other places, rest of world. So how should we think about gross margins and also sales OpEx versus those in the U.S.? Would they be roughly comparable? Would they be meaningfully below their U.S. counterparts?

It's a great question. Thank you, Vijay. I think from a gross margin perspective, we do not see big differentiation as we look to the different geographies around the world. The biggest differentiator we see on the gross margin line is whether or not we're selling into an R&D lab for an R&D solution or selling into a manufacturing line once production has begun -- once volume production has begun. Obviously, the overwhelming majority of our 5G sales at this point are still in the R&D phase. Satish did reference last quarter that we had gotten our first manufacturing order, but again that's really around the edges at this point. What was the second part of your question? I'm sorry.

The second part is also like the sales OpEx, like the cost ...

Yes, sales. Yes, the sales OpEx. There, I would look to reference the initiative that Mark Wallace has to double our number of direct frontline sellers. That's a multiyear effort that we are undertaking to essentially increase the capacity of our sales force and ultimately drive the top line. I'll let Mark make additional comments. Obviously, there will be some additional expense associated with that, but you can think of it as kind of continuing into operate within the current operating model on a percentage basis, maybe get a little leverage.

Right. And just a comment, the way we're deploying the resources are where the growth and the opportunity, where the market inflections are occurring. So as there's a lot of growth occurring in Asia, in China, in Korea and other locations like that, that's where we're focusing a lot of our increased capacity and capability. So we're really focusing on a pretty surgical deployment to follow our growth strategy on increasing our capacity to support customers and grow the business wherever that may be.

Your next question comes from Toshiya Hari with Goldman Sachs.

Great. In EISG, you guys delivered very nice acceleration in the quarter, 21% growth year-over-year. You guys talked about strength pretty much across the board, maybe outside of semiconductor test. But as you look out across the next 12 to 18 months, how should we think about sustainability of growth here? I know some of your subsegments are a little bit more secular in nature, I know some of your businesses are a little bit more cyclical. So if you can help us with the modeling for the next year or so, that would be helpful.

I'll let you take that one, Neil.

Yes. Happy to do it. So just a couple of comments as it relates to subsegments within EISG. As Ron has already indicated with regard to automotive, we really believe that we're in the front end of a multiyear rollout of next-generation auto. And so we just don't see any reason to believe that the growth there is going to subside anytime soon. The 2 other segments and they are obviously semiconductor and general electronics. The general electronics business is really extraordinarily diverse set of business. It's probably the most tightly linked to the overall macro environment. And so there is no one single driver in that business, but as long as the macro economy stay strong and electronics in general, are doing well, we'll continue to generate strong revenues in our general electronics business. And lastly, semiconductor, we've been cautious about semi for several quarters in a row. We did put up really strong revenue growth in the fourth quarter, but orders in the fourth quarter, as we expected, were down in the fourth quarter. And so we are expecting some softness in the semi piece of our business going into next year, but I would remind everybody that semi as a part of Keysight is substantially less than 10% of our overall revenue.

And it's probably worthwhile to note that orders overall were great -- was greater than revenue, and we built backlog again in Q4.

Got it. Very helpful. And then as a quick follow-up, again execution on the margin front was very strong as well. I think you're already in your long-term model range of 22%, 23% despite some of the near-term weakness at Ixia. How should we think about potential upside in margins as you think about your business over the next 12 to 18 months?

We're committed to doing two things. One, providing a 40% incremental and two, reinvesting in the business for growth. So as long as we continue to see opportunities there, as we see upside, you can count on a 40% incremental and you can count on us doing everything we can to grow the top line and bottom line even further.

Your next question comes from Amir Rozwadowski with Barclays.

Peter Zdebski on for Amir. I just want to circle back on China. When we last checked in, there was a little bit of headwind on the A&D side from related to trade situation, trade restrictions. Is that continuing? Has it sort of flatlined or improved at all?

Sure. It's a great question, Peter. The first thing that's probably not apparent is that now what we see is our A&D business in China as a relatively small portion of overall China sales. It's less than 15%. So most of the business that we see there is commercial comps, and we see some general purpose products, but so 85% is nothing to do with aerospace defense, which sees the, let's say, the more short-term pressure. So that's the first answer, and I'll let Satish make some other comments about his aerospace defense business.

Yes. Thanks, Ron. Overall, I'd say, aerospace defense had a record year finishing the year at close to $800 million in revenue and sales. And as you pointed out, China is a small part of it. We saw some softness in China as anticipated specific to the aerospace and defense application, but it was more than made up for -- to the strengths we saw in our commercial comps business.

Okay, great. That's very helpful. And just a quick follow-up specific to China in the semi business. When we last checked in, that was substantially exposed to sort of the evolution and neogeometries and more on the R&D side, has that -- is that still strong in the quarter?

Yes. As I said, semi revenues were very strong in the quarter, but we did see a softening or a slowdown in the incoming order rate during the quarter. The two drivers, as you mentioned, were the -- moved to smaller process architectures as well as to the general fab buildout that's happening in China. But semi orders were, in fact, soft during the quarter.

We got a huge buildout last year, wherein about 17 different foundries in China were formed and that created a nice base or let's say, a healthy compare. But what's also interesting is that we built backlog in the semi business this year, we built it also last year. So things are pretty reasonable there.

Your next question comes from Jim Suva with Citigroup.

Your results are very stellar. So I guess, I'll focus a little bit on more of the opportunity. When we look at the revenues for services up year-over-year nicely, margins down year-over-year. A lot of investors get concerned when they see those trends. It sounds like from your prepared comments you're investing in the sales force and such, and increasing the number of body, is that the way to think about it? And when we do that, is it like a six month, nine month? How long to kind of sow before the harvest comes from those efforts?

Yes. I think, Mark Wallace, Head of Sales, can give some initial comments, and then Neil will follow it up with the financials.

Sure. Thanks, Ron. Jim, we're deploying new resources continuously. And it -- yes, about six months to bring resources on board, but it's happening over multiple phases across multiple parts of our business. Last year, at the beginning of our fiscal year, we deployed the first global services sales organization within Keysight. So we've had our first year of having a focus sales organization. And as you heard from Ron's comments earlier, we delivered record high order growth during the year, 30% order growth in Q4, 22% growth for the entire year. So it is working. The other subtlety here is we're really putting a lot of focus across all of Keysight global sales on selling services, not just a dedicated sales team that sells value-added services. We put a lot of focus on upfront services sales. So that means when you sell a piece of equipment or a solution, we're selling more services upfront, and that's really helping us to drive growth now and over time, because a lot of this will be reoccurring. And then across the board, our services business for multivendor repair and cal is up, our remarketed equipment sales are up, and I think it's a direct result of us being successful with our organic services capability as well as deploying a sales organization that is capable of selling services.

If I was just going to add to your point on margin, if you look at, take, Q4 financials, for example, we -- what we saw was 30% order growth and 10% revenue growth and it's -- but we pay our commissions based on orders. And so we're very happy with the performance of our services business during the year and during the quarter. Right now, we've got expenses that are some extent leading revenue because of the outpaced order growth during the period.

Great. And then my follow-up question is, switching gears to your contract manufacturing challenges. I believe a quarter or two ago, maybe it was three ago, you mentioned some ERP issues. Are those completely independent of each other? Are those two somewhat related? And if so, the resolution of each of those, when should we think about it?

I would say, at this point, they're independent issues. We did the transition of Ixia onto the Keysight ERP as well as the transition to the new contract manufacturer, both of those were executed during the Q2 time frame. At this point, the ERP issues are largely behind us. We're continuing to, obviously, work to stabilize the contract manufacturing situation. As Ron mentioned, transferring 75 complex projects into the new CM, putting processes in place to improve quality, reduce cost. We're confident in our ability to get this done and to come out the other side, but it's taking longer than we expected.

And when is the duration or end of it that we anticipate?

We haven't put a time line on it. We're continuing to work to resolve issues. We're making progress every quarter. We expect that progress to continue, and we'll keep working on it.

Your next question comes from Adam Thalhimer with Thompson Davis.

Ron, you really caught my attention when you talked about the auto orders, I mean, you emphasized many new customers. Just curious if you can give us some more color there?

Sure. I'll let Mark talk and some of the information we can tell you and other stuff we're restricted to share, but Mark will be able to share what we can at this point.

Sure. Adam, I think, we've been talking about new customer acquisition for several quarters now, and we have acquired several thousand new customers overall during the course of the last 12 months during our last fiscal year. That is an explicit focus across the board, including automotive. One of the vehicles, no pun intended, we're using to find and capture new customers is putting customers solution centers, where the customers are located. A year ago, we opened up our solution center right outside Detroit. It's been very successful. We have regular interaction with both new and existing customers there. And just last month or back in October, I should say, we opened up another new center in Shanghai, China, and that complements our capabilities that exist today in Bochum, Germany, in the Bay Area and other locations. So we're going to continue to deploy this strategy, it brings customers and innovators within Keysight together and it's really working very well. The other just comment I'lI make is that the additive function of Scienlab to our portfolio is making a big difference in terms of finding new customers, especially on the Tier 1 OEM side, where we have new solutions for that particular set of customers.

Got it. And then a follow-up. I wanted to ask about Ixia margins. At one point, I think, you talked about upper teens next couple of quarters just curious whether that's still possible?

Well, we obviously took a step backwards here during the fourth quarter and -- but we are singularly focused on improving both the top line and bottom line in this business. Ron mentioned that we have a multifaceted plan of attack and so that is still the objective is to get this business into the teens level of operating margins as soon as practically possible.

Your next question comes from John Marchetti with Stifel.

I wanted to touch a little bit on the goodwill impairment, Neil. And just maybe walk through a little bit of how you guys looked at it? Where you think you are in sort of that now? And if we should expect sort of anymore of that as we continue to move forward here, if you just kind of taken that down to bare bones at this point?

Yes. Well, I'd start by saying that obviously the noncash goodwill impairment charges, it does not change our confidence in ISG and the business and our strategy about bringing networking and wireless together within Keysight. We do -- we view ISG as a very valuable asset within our portfolio. That said, in conjunction with our annual financial planning processes and our annual review of our asset base, we did take the goodwill impairment charge really driven by two primary factors. The first is that the test and visibility markets have really seen moderated growth rates since the time of the acquisition relative to our expectations. And at least as we look forward, we expect those moderated growth rates to continue for at least a period of time. Second factor is one that we've talked about in the past. Obviously, we did have a bit of a disruption to our revenues in the second quarter of this year as part of this contract manufacturer transition. And as we talked about that, that transition is still ongoing. To answer the second part of your question, we don't believe that we're going to face any additional impairment, because we have, again, the multifaceted plan in place to improve this business. We are getting traction in the marketplace. Ron talked about the increasing sales velocity. We talked about the ability -- the driving orders with the new 400 gig ethernet solution, the new 5G solution, we got a new Wi-Fi solution coming out in the spring. And so as we get these new technologies to market and we have the opportunity to combine the capabilities of Keysight and Ixia together, we believe that we can generate value with this asset.

And John, we don't expect there to be another one. We looked at that, and we're -- we feel very confident there will not be another.

Okay. And then just maybe following up a little bit on that CM issue. In terms of maybe what was left on the table, is it specific product areas? Or opportunities there that have been left behind? And given what you're talking about now with some opportunities in 400 gig in 5G and you just mentioned Wi-Fi as well coming, are those new enough opportunities to where those were transitioned first or at least those sort of near-term growth opportunities at least all the way transferred over where we shouldn't expect that opportunity to be disrupted in any way?

No, we feel very good about where we are. Would we have liked to have had more output? Yes, there is no doubt about that. There was some component shortages that did not help at all. But overall what we have forecast and what we have guided, as you know, we beat our guidance, met or beat our guidance 16 out of 16 quarters and that includes everything that we see at Ixia. So we feel pretty good about that. And Satish, it may be worthwhile to say another comment or two with regards to Ixia and what you're seeing again.

Yes. Ron, thanks. One of the things that we're seeing is as we are engaging with customers on 5G and you talked about our triple-digit growth. What might be worth highlighting is the diverse nature of that growth. We see growth across the comm ecosystem. We've seen strong orders and adoption of our 5G platform from chipset providers, device makers, NEMs and operators. Especially when we work with operators, the challenges they face in deploying 5G go beyond just wireless and go into the aspects of the core network. It's all about the end-to-end equation. And our ability to have the right expertise, the right talent and have the right technology stack in the company is a big deal. And a differentiator of that, I believe, will play out in the next few years as 5G becomes more -- becomes real across the globe.

And the only other point that I'll add, John, is that we have transferred like most companies manufacturing facilities over time for thousands and thousands of products. So we know how to do it. Just in certain cases, working with some CMs and due to the current situation, it's just taking a little longer. So this is no different, and this will be fixed and then you will see earnings growth improve. Rick?

Your next question comes from Richard Eastman with Baird.

Just as a last second follow-up on Ixia. Is the margin profile of that business the same? Or will it be the same here published to the CM transitions and the investments that you're making in there as it was prior to your acquisition, in other words mid-70s gross margin and 20%-plus type of EBIT?

Yes. We're seeing upper 70s gross margin and operating margin around 20% is where we're planning to get it back to. And of course, we're looking for ways to go even further than that. But that's where we plan to get it to, and we're looking for all types of ways to continue to improve the quality and to lower the cost. But first, we're just making sure we get the flow right and making those other improvements in parallel.

And is it a reasonable assumption that Ixia shows low single-digit growth, mid-single-digit growth in '19 here, with the order growth that you referenced?

Neil, I'll leave the guidance to you.

Yes. We don't guide our businesses specifically. But particularly at the Keysight level, we have obviously difficult comps. But at Ixia level, we have some easier comps, and we expect Ixia to be a growth business for us in FY '19.

Okay. Fair enough. And then also on the aerospace defense side, I may have missed this, but in the fourth quarter was there an order number? And did you again build backlog on the A&D side of the business in the fourth quarter?

Ron -- this is Satish here. Yes, we build backlog for that business in the fourth quarter. As you know, the revenues for aerospace defense were up 15%. And while the orders were down for the quarter, it was down over what was the highest quarter ever for that business in Q4 2017. So the orders this quarter -- for this year were the second largest since we've been tracking this business. So the growth drivers are strong, our focus on electronic warfare, signal monitoring radar, satellite and space are all continuing to gain momentum with customers, and we anticipate growth for that business looking ahead.

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

Thank you, Jesse, and thank you all for joining us today. We look forward to seeing many of you at our upcoming conferences, and wish you a good day. Thank you.

This concludes our conference call. You may now disconnect.