Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal First Quarter 2019 Earnings Conference Call. My name is Kensie, and I'll be your lead operator today. [Operator Instructions] Please note that this call is being recorded today, Thursday, February 21, 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 First Quarter Earnings Conference Call for Fiscal Year 2019. 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 scheduled to present at the Susquehanna Technology Conference in New York on March 12th. 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 an outstanding first quarter with both revenue and earnings exceeding the high-end of our guidance and very strong free cash flow. Our continued focus on strategic execution and commitment to operational excellence are delivering strong results for Keysight. Today, I’ll focus my formal comments on three key headlines for the quarter. First, it was a great start to the year and Keysight continued to deliver exceptional results. Revenue was well above our guidance and grew 18 %, or 20% on a core basis, to surpass $1 billion for the third consecutive quarter. We grew earnings high double-digits and delivered $0.93 in EPS, which also exceeded our guidance. And, we generated a record $209 million in free cash flow, an increase of 42%year-over-year. Second, customers continued 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. Keysight is at the forefront of several emerging technology trends. With our broad and differentiated portfolio of solutions, software and services, we are capturing a significant portion of the demand we see in the marketplace. And third, looking forward, we believe we are well-positioned to continue to build on our success and expand our leadership. Given our strategic positioning in the key areas of the market, strong start to the year and outlook for Q2, we are confident in our revenue growth and earnings profile for the year. Now let’s take a deeper look into our performance for the first quarter. We achieved $0. 93 per share in earnings, which was $0.14 above the midpoint and $0.11 above the high-end of our guidance. We delivered 81% earnings growth for the quarter versus a low compare in the previous year. We also…

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. Additionally, when viewing our first quarter year-over-year operational compares, please keep in mind that last year’s first quarter results were negatively impacted by the closure of our Santa Rosa facility due to the 2017 wild fires. As Ron mentioned, we delivered another strong quarter as we continued to execute on the demand we see in core areas of our business, while maintaining focus on operational excellence. For the first quarter of 2019, we delivered non-GAAP revenue of $1,009 million, which was well above our guidance of $965million to $985 million, and grew 20% ton a core basis versus a soft compare. Our better than expected results were driven by continued strong demand and execution. Orders exceeded revenue once again this quarter. We delivered $1,016 million in orders in Q1. Orders were up 5% in total, and 7% on a core basis, which excludes the impact of currency movements and two small divestitures completed within the last year. Looking at our operational results for Q1, we reported record gross margin of 62% and operating expenses of $420 million, resulting in operating margin of 20%. We also achieved net income of $176million and delivered $0.93 in earnings per share, which was above our guidance of $0.76 to $0.82 per share. Our weighted average share count for the quarter was 190 million shares. Moving to the performance of our segments, as Jason mentioned, we made a change to our reporting segments and now results from services, which was previously in our Services Solutions Group are reported in the segment in which the services are delivered. That said I will highlight that in Q1, orders for services grew double-digits.…

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

[Operator Instructions] And the first question comes from the line of John Pitzer from Credit Suisse. Your line is open.

Yes, good afternoon guys. Thanks for letting me ask the question. Ron maybe the first question for you just on the 5G market and how it evolves over time. I think one of the investor concerns out there is that you are levered early to deployment of prototype 5G, but perhaps not as levered as you get to broader deployment of 5G. I'm wondering if you can help us understand how you think the market is going to evolve for 5G for you and as you answer the question can you talk a little bit about your share from 4G to5G and kind of what you've done to augment your TAM from 4G to 5G?

Sure, thank you very much, John. Well, a couple of comments. The first thing is that we are --we have invested up and down the overall workflow for 5G. So we have solutions that exist in our EDA software early on when people are developing their designs, solutions for validation and verification not only of the hardware but now we have it a habit for the software that is done in R&D. We do have solutions too for manufacturing although that is not the main focus and then at the end of the lifecycle once things go into operations that's where Ixia plays in. So with our Ixia acquisition that bolsters up our overall solutions for the workflow along Anite Solutions that we have earlier in R&D. There is no doubt that our share is much higher than it was in 4G. In 4G, we did not have the funds to invest as heavily as we needed to in order to win in the protocol space. Clearly, as you look at the network space, as well as in many other sub areas. In 5G, we made this decision back in 2013 before we even went public. As soon as we announced the split we decided to go all in for 5G. So you will see that and see dramatic share gains between 5G versus where we are in 4G. I will let Satish also add a couple more --a couple more comments with regards to the overall 5G workflow.

Well, thank you, Ron. Just maybe a few points a strong 5G quarter for us extending our lead on the double-digit, triple digit growth that way of experiencing to 13th consecutive quarter. And when I look at the distribution of orders very pleased that we're seeing success across the ecosystem chipset companies, device companies, network equipment manufacturers, operators. And for the first time test labs even that are starting to invest in early 5G. And then when you look at the global spread, all regions participated in this reflecting the strength of our solution portfolio. There are no doubt the early R&D investments, some of them in the prototyping phase played itself out up to now, but if I reflect on this industry and look at the state of what's coming next, it's that --it's a scaling and it's still early days, but it's scaling for commercialization that's going to play out. And operator's interest is speaking as they vie to establish network leadership. And that's what's playing out and Ron referenced a few key design wins we had with lead operators in all regions in his narrative. But I would just want to end by saying it's still early days for the technology. We see that at scale the technology becomes relevant for consumers by at 2022 timeframe, plenty of innovation yet to come both from a standards point of view and from prioritization point of view. And from our plans, just this year we have a number of solutions that we will be launching. We just announced as a matter of fact the solution working closely with our Ixia Solutions Group just today. So number of solutions that will launch this year and we're also planning for more as the industry scales. Thank you.

That's helpful guys. And then for me my follow-up for Neil. Neil you highlighted that you guys are rightfully investing to leverage kind of your IP to drive higher growth. I'm just kind of curious as to where you think you are in the investment cycle for the company and how we should think about kind of operating margin targets over a multiyear period?

Yes. So we continue to see a very high level of demand for continued innovation investment across multiple platforms within Keysight. As we've talked about, we've talked about driving a 400 basis point improvement on our operating margins from 2017 levels. So I've got to get us into the 22% -23% operating margin ranges by 2021. And so we remain focused on that. You'll see as we look to achieve that we're really not looking to get leverage on the R&D line because of exactly what I've talked about the demand that we're seeing for customers for continued development were from Keysight. But you'll continue to see gross margin improvement from us as well as leveraging our general administrative functions to drive increased profitability over that horizon.

John I'll just add that we --I'll just add that we continue to pick up new customers. We announced four more customers for instance today four large customers and we continue to go ahead and see our business delivered double double-digit growth.

Your next question comes from the line of Toshiya Hari from Goldman Sachs. Your line is open.

Great, thanks very much for taking the question and congrats on the strong results. Can you guys talk a little bit about 4G? What you're seeing from a customer activity perspective? How strong or weak that business has been over the past couple of quarters? And how should we think about sustainability in that business relative to 5G?

Yes. Satish feel to fill in.

Yes, I will do, Ron. So as we have talked about before with 5G there's the --there's a non standalone version which requires a lot of the 4G capabilities. So there is still continued innovation in 4G, but there's no doubt that the 4G and if you expand that question a little bit further legacy communications will continue to be down as 5G starts to scale. And in particular it's all about the way you characterize platforms too because increasingly as we roll new products and capabilities out, they will have some aspect of legacy comps built into them, but they get --they tend to be lumped in under our 4G orders. But, overall, you'll see between all our communications technology evolution focus is resulting in double-digit growth for the quarter. And we continue to see the funnel pretty strong for our business across the globe.

Great and then I had a quick follow-up. Ron you flagged the risk around China over the past couple of quarters, very impressed to hear that you guys had record bookings in the quarter. So I guess the question is how you are achieving record bookings given the weak macro backdrop, as well as sort of a difficult political landscape. Thank you.

Sure. We're seeing exceptionally strong orders from China right now because we have a broad base of solutions. We have solutions that we're selling for 5G for auto, for 400 gigabit, for A&D below certain performance level. And that has given us very; I would a strong double-digit orders as well as strong double-digit revenue growth for the quarter. There were some pull-ins but then again there were also some push outs and even if you were to factor out the push outs, we still had double-digit growth in China. So we are winning and the end users and the companies really want our products. So we hope to trade situation, gets a little better but it's not an excuse for us at all as we've seen outstanding order and revenue growth in China.

Your next question comes from the line of Jim Suva from Citi. Your line is open,

Thank you very much. Most of the Q&A in a conference call was focused on your core business, which is definitely very impressive and doing well. Shifting over to area that could potentially be of improvement I kind of see that Ixia sales grew about 1% year-over-year. Should they ever mirror or kind of fluctuate with orders like an attach rate that's closer to your revenue growth year-over-year or does it not work that way? How should we think about Ixia and what you're doing there?

Sure. The Ixia Solutions for 5G or later on downstream, so a product for instance first gets designed and they buy -- our customers by our electronic design automation software. Then they use our products to go ahead and to develop solutions at the physical layer. Once that's done you can start testing all the protocol layers whether it's for the handsets or the user equipment or whether you're talking about four base stations or for the networks in the cloud. So that follows what you typically see in the beginning. So as Satish mentioned, we're at the beginning of this 5G wave. And we will see Ixia accelerate because you can't go ahead and test the protocol until you've actually built out physical devices and then you start putting software layers on top of it. So we will continue to see the Ixia business accelerate in prominence in our business. And we're very excited with it for instance their new solution that we just came out with.

And then the quick follow that --follow-on flow through for Ixia benefit. Is that a 2019 positive or is it more further out like 2020 and beyond? We're just trying to figure out the inflection point of when that business-- it seems like at some point it's really going to shift into a much higher gear than it is right now.

Yes. Well, I'll let Neil get a chance to talk a little bit about that. As you know, we've been integrating Ixia and we found areas where we could work together to improve our solutions and our processes for longer term growth and longer term gross margin. We actually had as you saw the record revenue even though was only up slightly from where we were in the past, but it was the highest level since the acquisition. Neil, I don't know if you want to add a couple of comments with regards to modeling on Ixia.

Yes. Jim maybe just a couple of comments. I think the specific quarter or a period of time when these businesses will transition to from physical to protocol layers is difficult to call. That being said, we're encouraged by the 400 gigabit growth we've seen in classic Keysight and Satish's Communications business over the past several quarters. And we think that bodes well for future growth and Ixia on the protocol layers. I guess if I was just going to summarize that we think relative to where we were in 2018 and where we are today, there's upside from Ixia both in terms of increased growth and increased profitability that will be net added at the Keysight going forward.

And your next question comes from the line of Vijay Bhagavath from Deutsche Bank. Your line is open.

Yes. Hi, Neil. I missed the [Technical Difficulty]

Vijay, there is a problem with your phone. We can't -- it's very garbled. We can't understand --it's unclear. We have no idea what you're saying. Why don't we put-- operator, if we could put VJ back into the queue and let's move to the next caller and we'll come back to VJ at the end.

Your next question comes from the line of Adam Thalhimer from Thompson Davis. Your line is open.

Hey, good afternoon guys. Great quarter. You mentioned the semiconductors dropped off kind of in line with expectations. So can you remind us, what are your expectations for kind of how long this tough patch last? I think you said maybe late 2019 you'll start to see recovery?

Yes. Ron I'll take this. Just to keep it simple we've essentially model a softness in semi through FY 2019 and we don't have detailed models going beyond that, but at least through the remainder of this fiscal year for us we're expecting semi to be relatively soft.

All right. And then I also wanted to ask about cash deployment and kind of the buyback. I mean you've been doing $40 million a quarter pretty consistently here. You got a great price on the stock that you bought in Q1. What are your thoughts on cash deployment going forward?

No. We don't expect any immediate change to our cash deployment efforts. As we stated when we announced the share buyback program the initial intent would be to remain anti-dilutive and we expect to continue along that track. Obviously, we saw a pretty significant increase in cash flow generation this quarter. We do want to maintain some excess cash on the balance sheet so that we can maintain the flexibility needed to invest in the business. And as that cash balance grows, we'll continue to look at appropriate ways to deploy it. But we continue to have active M&A funnels continue to buyback shares and we'll continue -- no immediate changes to our cash deployment plans.

Yes. And just with regards our free cash flow conversion four years ago, we were in the mid-60% range we stated at our last Analyst Day, we would get it to the 80% to 90% range at this time. This quarter was exceptionally strong at 119% on our conversion. That's obviously above average, but we're very, very pleased with our ability to start taking that to the bottom line.

Our next question comes from the line of Richard Eastman from Baird. Your line is open.

Yes, good afternoon. Thanks for the questions. First of all, just wanted to ask, Ron, could you kind of speak -- double back to the aerospace defense business and the growth rate there? I think we had -- generally speaking we had a fairly easy comp there. Was the government shutdown an issue there at all? Or is the -- has the backlog build on the aerospace and defense side meaningfully? Or maybe just kind of speak to that?

Yes. I'm going to let Mark Wallace make a couple of comments. But as you saw, we saw a 3% revenue growth in aerospace defense. So we think there's a lot of upside, but money did get clogged. The only area where we saw that it was relatively weak was Russia. But Russia in particular is less than 2% of our total business, but it did pull down once we start looking at just our aerospace defense business. But overall, we saw the U.S. and we saw China being pretty decent. But Mark would you like to add a couple of more comments on aerospace defense, please?

Yes, Ron. Rick and Ron covered it pretty well. We did see strength in the U.S. and China despite the RPL companies that were named last year. So we're continuing to grow. This is year four or five of the China plan, so we expect to see some growth in investment and we're capturing quite a bit of that. The other thing is the government shutdown tended to delay some of the process. So we built a nice funnel as we go into Q2. And then seasonally, as you get into the second half of the year, especially as you get closer to the end of the U.S. government fiscal year, we expect to see some of those opportunities strengthen.

Let me add to that if I could. So we grew 3% -- the revenue line grew 3% in total, but one of the two divestitures we completed within the last 12 months was specific to aerospace defense. So just for that, we don't typically talk about core growth at the segment level, but aerospace defense grew 7% on a core basis on the revenue line. So it was immaterial in total, but quite material to aerospace defense. And then as Mark said, we saw pretty good order strength in both China and the U.S. offset by weakness in Europe as -- from Russia which is what Ron talked about.

I see, okay. If you think about the 7% core number without the divestitures did the -- was the book-to-bill there greater than one in A&D in the quarter?

We don't talk about at that level, yes. I forgot the level. We don't typically share.

6% order growth -- 6% order growth for A&D and the book-to-bill was very, very close to 1. We think money -- as starts to flow, it will change.

Okay. And then just a question around the 5G marketplace and how Keysight addresses it. What's the strategy, Ron, around the manufacturing test site for 5G? Historically, we've had a very good market share in base station test on the manufacturing side. Hence, the test -- we kind of a pull back there, I believe, earlier in the 2000s, mid-2000s. But I'm curious, what would be the approach this year around 5G, I'm going to say devices test versus base station test on the manufacturing side?

Sure. Well, first of all, the first step is component test. And the components are tested when you get to the final, let's say, handset or device that you're trying to test, the components have been rung out. There is very minimal test that is done at the overall device. And that's why we moved away from that. We are very strong in component test; we're the number one player in the products that are used. We have over 50% share in the network analysis business, which does all that component test and that's a very good business for us. The second is in base station test, and we continue to be strong in base station test and we have new solutions and we have, I would just say partnerships that are very good there. The other thing is when you talk about all this and you start moving to 5G, it's not just about getting the signal to the cell tower. You need to go ahead and overhaul the overall network to handle massive amounts of data from 5G as well as IoT in general. And that could be moved to 400-gig. And as we see that, we have a lot of products and solutions that are very, very strong in that area. On the end of device, let's say a phone or an iPad, there isn't much money there. So we are opportunistic, but we capture a lot of revenue and profit in components in base stations and in the network area.

Okay. And if I might just one last one sneak one in. Neil around Ixia, 9% op margin in the quarter here, is this a baseline level of operating profit margin at $129 million of revenue? Or is there some self-help margin expansion yet to come against just call it $130 million run rate -- quarterly run rate?

Yes. So I think we're, obviously, not satisfied with the 9% operating margin. We'll continue to drive that first into the mid-teens, and ultimately we expect to get operating margins in this business I can go ahead and start with the two as the first digit. I think the primary driver of that profit improvement will come from revenue growth given the high gross margins in this business. That's not to say there aren't other opportunities for us to do things but the primary driver that we're looking for is through the top line.

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

Yes. Hey, congratulations. Hope you guys can hear me now? Yes. I'm here in Minnesota, so out of the office. So quickly I mean Ron, Neil my question is on -- there are two questions actually. The first is around any geographical color you can give on the 5G strength, this question does get asked quite a bit from clients. Is this primarily a U.S. order book, or are you also seeing like orders coming from like Japan and Korea who have this nation-state intensity in 5G? And then a quick follow-on for Neil.

Sure, I'm going to let Satish answer that, but clearly we saw 5G strength in the Americas. We also saw it in China. We announced and talk about a deal that we had in Japan on the earlier part of the call. But Satish, why don't you give a little bit more color on our 5G profile?

Well, thank you, Ron. I think as I mentioned before, Vijay, it's very clear that we're contributing broadly across the ecosystem of customers and across the globe. No doubt the countries that Ron referenced are building their local capabilities and many of our customers in those regions Korea, Japan, China and the Americas are dominating but definitely we continue to see broad participation for orders across the globe. In fact if you will attend Mobile World Congress, we look forward to hosting a number of investors, I know Jason Kary and Clay have put a schedule together and you will see on display a pretty broad diversity of customers who are actually applying Keysight technology to really showcase their pioneering innovation and 5G readiness. I hope you get a chance to see it live.

Yes, I'll be there as well. A quick follow-on for Neil. Any color or puts and takes you can give on order trends? I know there was some wildfire impact and all but just clarify to us in terms of quarter-on-quarter year-on-year kind of the order momentum in the business ideally normalized for the wildfire's impact? Thanks.

Yes, we were very pleased with the performance that we delivered in Q1. We talked about it being a record for our first quarter. As we look forward to Q2, we have a very strong funnel of opportunities entering the second quarter. So, I think that bodes well. If you think about it from a seasonality perspective, we do typically see our strongest order quarters being in Q2 and Q4. And that's partially linked the way we pay our salesforce. We essentially have two quarter periods one for the first half one for the second half. So it tends to be a big push at the end of each of those which then leads to a little bit lower orders and correspondingly revenue in Q1 and Q3. So, that's how we typically think about the business but we have a great funnel of opportunities. We see broad adoption of our solutions across a number of ecosystems. Most notably the ones we've been talking about 5G, automotive, aerospace, defense; really had a great quarter for our software solutions here in Q1. So we're seeing continued increased penetration of software and that increasing as a mix of our overall order and revenue base.

Congratulations.

Yes. It's worthwhile to note that if you combine Q1 and Q2 as we mentioned last year, it normalizes out the fire impact where we had less shipments in Q1 and more in Q2. So as Neil had mentioned we have a very strong funnel going into the quarter. And if you combine Q1 and Q2 our guidance at the midpoint is 14% core revenue growth for the half and 41% earnings growth for the half without effectively neutralizing out fire seasonality. End of Q&A

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

Well, thank you Kensie and thank you everyone for joining us today. We look forward to seeing you at Mobile World Congress and some of the upcoming conferences and other events that we have and hope you have a great day. Thank you.

This concludes our conference call. You may now disconnect.