Good day, ladies and gentlemen. Welcome to the Keysight Technologies Fiscal Fourth Quarter 2021 Earnings Conference Call. My name is Katherine, and I’ll be your lead operator today. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note that today’s call is being recorded today, Monday, November 22, 2021 at 1:30 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 2021. Joining me are Ron Nersesian, Keysight’s Chairman, President and CEO; and Neil Dougherty, our CFO. Joining us in the Q&A session will be Satish Dhanasekaran, Chief Operating Officer; and Mark Wallace, Senior Vice President of Global 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 where you will find an investor presentation along with Keysight’s segment results. Following this 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 and acquisitions or divestitures completed within the last 12 months. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. All comparisons are on a year-over-year basis unless otherwise noted. 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. Lastly, I would note that management is scheduled to participate in upcoming investor conferences in December hosted by Credit Suisse, Wells Fargo and Barclays. And now, I will turn the call over to Ron.

Thank you, Jason, and thank you all for joining us. Keysight delivered a record quarter and fiscal year. Strong demand for our portfolio of differentiated solutions is fueling continued momentum across all of our end markets. Today, I’ll focus my comments on four key headlines: First, demand for Keysight’s differentiated solutions continues to be very strong with orders exceeding our expectations. Outstanding order growth of 21% in the fourth quarter topped off an excellent fiscal year where we grew 18%. Demand continues to be balanced across our business with double-digit gains across all end markets and regions, both in the fourth quarter and for the full fiscal year. Second, we delivered outstanding Q4 results despite a tightening supply environment. Exceptional execution by Keysight employees around the world resulted in record revenue, gross margin, operating margin and earnings per share for the fourth quarter and for the fiscal year 2021. Third, we entered 2022 with strong momentum, robust end market demand and record backlog. Assuming a loosening of the supply situation in the second half of the calendar year, we expect fiscal year 2022 revenue growth of 6% to 7%, while delivering 10% earnings growth. Beyond 2022, we are increasingly confident in our ability to deliver sustained above-market results. We have established a strong track record of execution, and our competitive position earned over the past seven years of investment in transformation has only grown stronger. Lastly, given the strength of our cash position and generation, we continue to see tremendous opportunities for value-creation through disciplined investment in organic capabilities, targeted acquisitions and accordingly, today, we announced a new share repurchase authorization of $1.2 billion. Now, let’s take a deeper look at the strength of our fourth quarter and the fiscal year 2021 financial performance. In the fourth quarter, we saw…

Thank you, Ron, and hello, everyone. As Ron mentioned, we delivered an outstanding quarter and fiscal year. In the fourth quarter of 2021, we delivered record revenue of $1,294 million, which was above the high end of our guidance range and grew 6% or 5% on a core basis despite a tightening supply environment. The further contraction of the supply chain within the quarter tempered total revenue results and was more impactful on the Communications Solutions Group businesses. With demand outpacing supply, we delivered a record $1,491 million in orders, up 21% on a reported and core basis and enter fiscal year 2022 with over $2 billion in backlog, which will position us well as the supply chain situation improves. Looking at our operational results for Q4, we reported record gross margin of 66% and operating expenses of $456 million, resulting in an operating margin of 31%, an all-time high. Net income was a record $338 million, and we achieved $1.82 in earnings per share, which was well above the high end of our guidance. Our weighted average share count for the quarter was 186 million shares. Moving to the performance of our segments. Our Communications Solutions Group generated record revenue of $919 million, up 2%. CSG delivered gross margin of 66% and operating margin of 28%. In Q4, commercial communications generated revenue of $622 million, up 3% driven by strength across the 5G ecosystem, O-RAN adoption and investment in 400-gigabit and 800-gigabit R&D. Aerospace, defense and government achieved record revenue of $297 million, up slightly from the same quarter last year as solid growth in Asia Pacific was offset by supply chain constraints that impacted revenue in the U.S. and Europe. The Electronic Industrial Solutions Group generated fourth quarter revenue of $375 million, up 18% on a reported and…

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

[Operator Instructions] The first question is from Samik Chatterjee with JP Morgan.

Hi. This is Joe Cardoso on for Samik. My first question is just around the full year guide. So, you’re guiding the full year to 6% to 7% growth, and I’m just trying to flip that with your commentary last quarter around -- expectations around a more muted seasonality. First of all, does that expectation still stand true? And if so, does that imply that we should expect to see a similar cadence to revenue as we did in fiscal ‘21, or is there something I’m not appreciating here as I think about revenue trends for the full year, such as maybe the benefits of the loosening of the supply chain as we head into the back half of the year?

Yes. Hi, Samik. It’s a great question. So, yes, as we mentioned on the call, we did see the supply chain situation tightened during the quarter, and our guidance does assume that we will see some relaxation in that environment in the back half of the year. So, if I was thinking about the seasonality for FY22, I’d say two things. I think, first of all, I think we’d expect revenue to build as we move throughout the year. And then, maybe if you think about it in terms of year-over-year growth, right, our guidance of 6% to 7% for the full year. I was thinking about that on a quarter-by-quarter basis, I’d be expecting growth rates in the first half of the year that are below that 6% to 7% level and growth rates in the back half of the year that are slightly above that 6% to 7% level, so that we average that for the full year.

Got it. I appreciate the color there. And then, just on my second question, EISG posted record operating margin this quarter. They were really strong. Just curious to hear what were some of the big drivers or contributors to the margin there relative to operating margins? And just curious to hear if there was any onetime benefits in the quarter that we should consider?

Yes. No onetime benefits, but I mean I think the thing that comes immediately to the forefront is obviously the extraordinarily strong revenue growth for the year with 30% revenue growth on the year. The business -- the demand for those products has been very strong. We’ve seen a very nice rebound this year in the automotive business, the semi business, we all have -- everybody has seen the press on the continued strength in semi. So, you take that strong demand picture and -- which essentially allowed them to leverage their OpEx infrastructure and drive really high levels of operating margin in the short run. I think as we look forward, we continue to see great opportunities to continue to grow the business as well as to invest in further technology investments to serve these end markets.

The next question is from John Pitzer with Credit Suisse.

Yes. Good afternoon, guys. Congratulations on the solid results. Neil, I wonder if you could just dig a little bit deeper into kind of some of the supply constraints that you’re seeing out there. I think you said in your prepared comments, it’s hitting you guys, EISG stronger than comms. I’m kind of curious, is this logistical constraints? Is it component constraints? Is it a little bit of everything? And is there a dollar amount you can give us that impacted revenue, both in the fiscal fourth quarter and the fiscal first quarter?

Yes. Thanks, John. It’s a great question. So, first of all, I said the opposite. The impact was greater on CSG businesses than in EISG businesses. If you think about why that is, the CSG products tend to be more complex. They have a longer bill of materials. And so, there are more parts and components that go into building those instruments on average. And so that, just by its nature, increases the risk and the challenges that we have to fulfill that supply chain. I think, it’s also true on average that the CSG products tend to be at the higher end of the technology spectrum. And so, there are fewer suppliers for those cutting-edge technology products than for a little bit more of the mainstream products that exist within EISG. I think, if you think about the impact of supply chain, I’d maybe lump COVID and supply chain together because we’ve really seen this phenomenon over the last couple of years. And if you’re starting to think about how to quantify those impacts, I’d really kind of focus your attention, not on any one quarter, but over time you’re looking at the full fiscal years, as an example, at our order rates, right? If you look at our history prior to 2020, we have done a pretty good job of converting our orders to revenue. There’s typically a little bit of a lag at certain percentage of each quarter’s order ship within the quarter, another portion shift out into the following quarters. But over the past couple of years in 2020 because of COVID and in 2021 because of supply chain, we have seen that delta between orders and revenue grow. And so, I think we estimate that if you think about it in terms of kind of an abnormal backlog build, that abnormal backlog build over the last couple of years is in the $300 million to $400 million range. And so, I think that’s the opportunity for us as we look forward to eventually clear that backlog, once the supply chain situation fixes itself. I don’t expect that we’ll flush that in a quarter or two. I think it will happen over time because the kind of the remedies of the supply chain are going to happen over time as well. But, that’s the rough magnitude of what we’ve -- what the impact has been here over a couple of year period of time.

That’s really helpful color. And then, Ron, over the last several years, we, on this side of the world, have been trying to compare and contrast sort of the 5G rollout with the 4G rollout relative to your business. And I guess, what I was hoping to do is get a little bit more color about the software strategy you’re deploying this time around, which seems like an incremental driver. I’m just kind of curious, can you size the potential TAM opportunity that gives you, especially as the network more from just being a backbone for handsets and mobile to actually being a backbone for a lot of new incremental applications. And to the extent that software and services is a third of the business now, sort of how do we think about that over like the next three to five years?

Thanks, John. It’s very, very clear that software and services continues to be a bigger and bigger percentage of our total business as we move from a hardware product supplier to a software-centric solution provider and the solutions obviously include hardware, software and services. And we’ve seen great growth obviously in our software and our services, and they’ve outpaced the hardware growth. Looking overall at 5G versus 4G, we made a decision in 2013, we announced at Agilent, we’re going to spin off Keysight in 2013, which we eventually did in November of 2014. But in 2013, I started working with the team that was developing to invest in 5G and make sure that we were going to be leaders. In 4G, we were providing a little bit more of, let’s say, cash contribution to Agilent where we were not investing as heavily in the communications rollout of 4G by a substantial amount. So, we invested earlier. We invested a greater amount as now we’re roughly at 16% R&D where we used to be at approximately 12% of R&D. And we’ve gone from roughly $400 million to roughly $800 million in R&D spend over this period of time, but software is a key part. What we did was we consolidated our hardware development facilities into one organization as opposed to in separate divisions. And accordingly, that enabled us to basically provide software that could span the whole product offering. And we made an acquisition for instance of a company called Anite, which gave us software capability. They had some capability in 4G. We moved them over to 5G. And all this together, investing more, starting earlier, having a consistent R&D and investment profile has really gave us the lead and caused us to be a much, much stronger provider, and I believe the leading provider for 5G. 5G is still growing, and we anticipate it growing for years. I’m going to turn it over to Satish, who could tell you a little bit more about our results and our growth in, not only 2021, but what he sees going forward.

Thank you, Ron. Great question. I think at the summary, we’ve had another record quarter for 5G and the drivers are scaling deployments, but equally important is the new application space. And I think we outplayed that as a strategy. We had to continue the progression from physical to protocol to application, and this application area is very rich, right? As I look forward, some of these application spaces have software as a percentage of the total value proposition in the 30%, 40%, 50% range and one we pursue very actively. I’ll just make a few examples of these, right? So, you can think of on the 5G side, O-RAN being a great example of that. On the wireline side, the protocols with 400-gig, 800-gig getting more complex. You look at new emerging spaces like SD-WAN, SASE and MACsec and the security domain. So, you look at the commercial comms portfolio, it’s very rich in applications that really favor our strategy of being more software-centric and one we’re investing to pursue, and we’re generating strong results.

We are ready for the next question from Jim Suva of Citibank.

I had a thought about your vertical integration. You’re a lot more vertically integrated than the other companies. Has that materially benefited you during the supply chain bottlenecks, or are there like little things, whether it be plastics or connector or housing that held you back just as much as the other? And I’m just trying to think about does this now cause you to even want to be a little bit more vertically integrated, or how core are you at the sweet spot of your vertical integration? Thank you.

Sure, Jim. The first thing that’s probably really important to note is that our differentiating technologies that have given us the leadership position outside of the software that we have developed is semiconductors that have very particular high-performance capabilities. And as you know, we have an on-site fab that exists in Santa Rosa, and that fab makes gallium arsenide and indium phosphide semiconductors. So, a lot of people are having trouble now getting more custom components built. And we build a lot of those custom components in-house. So, that has definitely helped us. Now, again, if you don’t have all the parts, you can’t ship anything. And we are in relatively good shape compared to other competitors, but there’s no doubt that we have to make sure that we get all the components that are needed in order to ship the product. We always will look for opportunities to integrate, provided that it makes financial sense. We feel very good about what we have in-house right now. It’s not so much the plastic pieces and things like that. There are obviously not only components, but there is the whole logistical shipping issues that the whole world is going through. So, we are impacted, a little bit less than others. And I think the overall organization has done a real good job of being able to deliver during these very challenging times.

Great. Thank you. Congratulations to you and your team at Keysight.

Great. And the next question goes to Mark Delaney from Goldman Sachs.

Some of the defense primes have spoken to slowing Department of Defense budget outlays, and I appreciate that Keysight reported broad-based order strength. But, I was hoping you could talk a little bit more on what you’re seeing in your AD&G segment? And if you are experiencing any slower end market trends, even if in certain portions of that business segment?

Yes. So, again, a pretty strong quarter for aerospace defense orders growing double digits, finishing off a year with double-digit growth. If you look at what drove that growth, it’s recovery in the macro environment globally, similar spend, especially towards technology that continues to increase, both in the U.S. and internationally and one we’re capturing. We also took some concerted steps last year or two years ago, in fact, to take our 5G technology stack and customize it for aerospace, defense applications, and as you’ve probably seen, our collaboration with Lockheed Martin that we announced. So we’re very pleased with the progression that we’re making with commercial technologies that are getting adopted. So, all of these are pretty favorable. We are observing that right now, the -- we are under continuing resolution from a budget perspective in the U.S. But, if you look at the budget that has been put in place and if -- or that has been proposed and if it’s approved, it does call for a year-over-year increase and also increased spend in technology or our T&E line item, which we view as a favorable dynamic. Peripherally, the Infrastructure Bill that is getting through the Congress has some sustained spend outlays for EV and broadband and semiconductor, which we also think is favorable for us.

That’s really helpful color. Thank you for all those comments. And my follow-up question was on the supply chain. And if you could talk in a bit more depth around what is leading to your comments of potential alleviation in the second half of this coming fiscal year? Thank you.

Yes. I mean, the supply chain situation is very dynamic, I guess, I would start by saying that. And we are -- we have very close relationships with our key suppliers and are in constant dialogue with them during this period of time to make sure that we are procuring the parts that are necessary to meet the needs of our customers. I think it’s -- our confidence and our guide reflects a -- the start of a recovery in the supply chain situation in the back half, and that stems from direct indications that we’ve got from key suppliers within our supply chain environment.

We’ll move over to Tim Long from Barclays.

Thank you. Two, if I could. Maybe on the wireless side, could you talk a little bit about kind of the impact of C-band and current views on millimeter wave and particularly with the C-band, any impacts from these potential delays with the FAA, et cetera? And then secondly, maybe, Neil, could you just kind of update us -- it’s obviously been a great period of margin expansion. Can you talk a little bit -- give us an updated view on kind of leverage and incremental margin growth and operating from these levels? Thank you.

I’ll make a few comments on 5G. As we stated before, the continuing deployments that are going on, especially in the low frequency bands across the world, we view it as a favorable dynamic, specifically the C-band auction was a near-term catalyst. And we’ve had some strong results, as I mentioned, double -- strong double-digit growth in 5G this quarter, capping off a double-digit growth in 5G for the full fiscal year. And a big part of that was driven by the C-band auction and the related investments that are going on in the Americas. Our Americas business was -- grew the strongest in our 5G from a regional perspective, and we also saw our FR1, our low frequency business double year-over-year. So, very strong results, all the while when our millimeter wave business has been pretty stable this year. And as we have mentioned before, in the medium term, we’re expecting that the millimeter wave adoption continues to rise in a very steady manner and we’re watching for the Beijing Olympics use cases to emerge from the success of the Beijing Olympics that we expect to occur next year.

Yes. And Tim, to your second question, yes, we’ve obviously had a great run here in terms of margin expansion since the birth of Keysight, adding 800 basis points approximately to gross margins, about 1,000 basis points to operating margins. And I think the key point is that as we look forward over the longer term, we continue to see opportunities for further expansion of margins within the Keysight portfolio. I think as we look to next year, it’s a really dynamic time, obviously, with supply chain pressures putting a little bit of a governor on revenue. At the same time, we’ve got inflationary pressures across the broader economy. And then, the other thing that we’re looking forward -- looking to, that’s a little bit of a cost up within next year is hopefully a return to kind of a post-COVID or a pre-COVID normal in terms of our general operating environment, and that includes the costs associated with the facilities management as we return to the office, increase travel as people get back out and start seeing customers and conducting more business in person rather than over Zoom. I think -- and maybe the last point being that we saw -- we invested in R&D this year just under 16% of revenue. I think we continue to see great opportunities to invest in technology and bring new solutions into the marketplace. I think you’re likely to see R&D tick upward next year into that kind of mid-16% range. So from those perspectives, I think FY22 may be a bit of a catch-up year. But over the longer term, a lot of opportunity as we expand our software portfolio, expand our solutions portfolio, continue to work with customers and provide them with first-to-market solutions to continue to drive both, gross and operating margins northward.

And the next question comes from Matt Niknam of Deutsche Bank.

Hey, guys. This is Nick on for Matthew. Congrats on the quarter. So just first, I wanted to talk about CapEx, the guide is picking up next year. I just want to know what’s driving that uplift and whether that should carry on into future years, like is that sustainable, or is there a specific project that’s going on, and I have a follow-up.

So, we started to -- or we talked about in this recently completed fiscal year that we expected a couple of years of elevated CapEx as a result efforts to improve the resiliency of our supply chain. And that, in fact, did pan out with CapEx of approximately $175 million this year. I think, in addition to continuing those investments, we see incremental investments that are necessary as we continue to expand our own capacity and invest in key technologies to drive the future growth of our business. So, I think those are additive, given everything that’s happening across the economic sphere today, there is, relative to what we were seeing this time last year, an increased need to spend money on capacity investments here within Keysight. And so, I do not believe that the approximately $250 million of CapEx that we’ve communicated for next year is the new steady state, that is not the case. That steady state is significantly lower, exactly where -- a little bit difficult to call at this point, but materially lower than the $250 million that we’re indicating for FY22.

Okay. That makes sense. And then, just a quick follow-up on competitive environment. I mean, there are a few puts and takes that I’m just thinking about and I was wondering you could provide some color. On the one hand, a lot of competitors are having a harder time sending up shipments, does that create a positive pricing environment? And then, a slightly different angle, one of your competitors recently made some easy acquisitions. Just how you think about EISG from the competitive landscape going forward?

Yes. Very strong performance in our EISG business. Again, strength, as I mentioned, in the semiconductor, where new wafer starts are really enabling us to continue to drive growth there. A very strong year again, building off of a strong double-digit year last year in semiconductor as well. So, when I think about what we’re doing there, we’re definitely taking share and we are continuing to invest to keep that portfolio growing and capitalizing on the environment we see semiconductor. With regard to automotive, it’s been a newer market entry for us. Relatively speaking, we started this in spin. We’re very pleased with the results we’re seeing so far. And we’ve made -- if you look at this fiscal year, we’ve had some wins in the manufacturing expansions that have happened in the EV sector. And as we shore up our contributions in the AV market, we’ve announced a partnership with NIO, as an example, of what we’re doing by extending our 5G technology stack in C-V2X. In summary, all-in-all, you look at our entire portfolio for automotive, it is growing and it is much more comprehensive than any of our traditional competitors at this point, and we are continuing to invest in growing that business. So overall, pleased with where we find ourselves with the EISG business.

And your second question, which was with competitors having a little tougher time on shipments, are we going ahead and taking advantage of that for pricing? The answer is no. We’re in this for the long haul with customers. We’ve been back from the original Hewlett-Packard days, over 80 years working with customers. We’re not taking advantage of them. Where costs are up in certain areas for shipments and others, we will do price increases, but not because of any competitive position or hard ability for our customers to get products from competitors.

Next question comes from the line of Chris Snyder of UBS.

So, the Company in the past has talked to industry growth in the 3% to 5% range with expectations for about 100 to 200 bps of outgrowth for Keysight above the industry. But, when we look at it over the last four years now, the Company has been growing about 10% organically per annum. So, I guess, my question is, is this level of growth more so driven by just much stronger industry growth over the last four years or just better Keysight outgrowth or a combination of both? Can you just kind of help us unpack how we kind of bridge that gap?

I’ll make a couple of comments and then turn it over. I think it’s a combination of two. There’s no doubt that we’ve seen more growth and more opportunity in 5G. But, as we see the digitization of everything, the market is, there is no doubt, a great place to be. And we have a very-diversified portfolio, and we’re seeing growth in semiconductor. We’re seeing growth in Industrial 4.0. We’re seeing growth all across our real stated growth initiatives and the markets that we’ve gone after. So, there is no doubt we pick markets that are winning, and we have been growing faster than the market in general. And I think the execution of the team, the investment that we have and our strategy of providing customers with total solutions is unmatched in the industry. Others are trying to mimic it to a certain extent. But I do believe with our outstanding sales force, sales support organization, our overall organization that provides hardware, software and, we’ll call it, partnership with key market makers, it makes a huge difference on how successful we are. So, I’ll stop there, and Satish may want to make another comment.

Yes. Ron, I think you’re absolutely right. With regard to what we see in the marketplace is this expanding ecosystem as we have expanded our portfolio from just products to offering total solutions to customers, we remain focused on the end markets that we’ve called out. Another angle to this that Mark Wallace can add is the customer adds that occurs has this expanding contribution that we’re making.

Yes. Thanks, Satish. Chris, to add to this, I think our go-to market, the investments we’ve made in sales and marketing and customer engagement is making a big difference. As you’ve heard, we had strong double-digit order growth across all regions and all end markets, not just for Q4, but for the entire fiscal year. So, this is a very sustaining effect that we’ve had as we engage with the market leaders implanting our solutions engineers to help innovate with customers, our largest customers have grown substantially, our long tail of small and medium-sized business customers have grown. And, as Ron has mentioned in the prepared statements, we continue to add new customers, every quarter and every year, more than 2,000 were added during fiscal year ‘21, which creates sustaining opportunities for us going forward, diversifies our business. And then, it’s not just all about our direct channel. We have a very strong partnership or partner channel with the indirect channel distribution sales helping us reach more than 30,000 customers per year, and we’re seeing continued growth from our e-commerce channels as well. So, we have multiple ways to serve our customers and deliver these great solutions. And I think that’s a big part of it, too.

Yes. I appreciate all of that color from everybody. I guess, my follow-up would be -- so in terms of the above normal industry growth, how long can that last? And is it reasonable to think that lasts until 5G peaks, which I believe is expected maybe in the ‘23 or ‘24 time frame? And then, in addition to that, is there any reason why we should expect Keysight outgrowth over the market to compress back to the 100 or 200 bps kind of guided levels, just given the R&D scale investment advantage the Company has?

If we were sitting at a total of, let’s say, 60% market share or 70% market share, you may say there’s diminishing returns. But when we look overall, where we are -- we’re in the 25% to 30% range, we have a lot of headroom, and I believe it’s going to go way past 5G. 5G, whether you’re talking ‘24 or whatever your perspective is on that, we’re already investing in 6G. We’re investing in EV. We’re investing in AV. And there are so many more opportunities that are being put right in front of us or that we see, we are aiming to go ahead and outgrow the market for many, many years.

The only thing I would add to that is our ability to spend $800 million a year in R&D as a real differentiator in the marketplace, and I think goes to at least to indicate what our ability to continue to outperform the broader market should be over time.

Next question comes from the line of Rob Mason at Baird.

Yes. Thanks [Technical Difficulty]

Sorry, Rob. We…

Rob, your audio has cut out.

I think we just lost the call.

We can come back to you.

Mr. Mason, your line is open.

Yes. Can you hear me?

Yes, we can hear you, Rob. Go ahead.

Okay. Apologies, not sure what happened. I did have a clarification question just on the first quarter guidance. So, I guess, Neil, maybe this directed to you. Is the assumption that margins would be down year-over-year within your guidance? I’m not sure I totally caught your below-the-line guidance.

Yes. All I said was relative to where we just finished Q4, right, we finished the year at 15.9% R&D investment. It was a point lower than that in the fourth quarter. And I think we look and see a tremendous amount of opportunity for us to invest via the R&D line to bring new technologies to market. So, I think over the course of FY22, you could expect us to return our R&D spend more into that mid-16% kind of a range, which will obviously have a little bit of a pressure on margins. The only other thing I would say is in Q4, we did have extraordinary -- we did a very favorable product mix within the quarter, at least, as we see Q1 taking shape, we expect mix on a sequential basis to be a little bit less favorable, so. And then, there are some normal items for Keysight that also typically impact Q1, most notably that we do company-wide salary administration in the first quarter. And given the inflationary environment that we’re in, that is a larger than typical salary increase, this Q1.

I see. How would...

And again that’s compared to Q4, which was a 31% operating margin. That was very, very high record.

Right. How would your expectation within 10% type EPS growth, how would your assumptions around incentive compensation play out on a year-over-year basis?

Yes. So obviously, there’s two components to our incentive programs. There’s the incentive programs for the broader employee base, which are driven based on the organic growth rate of the Company as well as our operating margins. And so, those would be the true drivers there. I think, for the executive population’s ability to grow EPS, and this is for the cash compensation portion, its ability to grow EPS and grow the top line. And over the longer term, we -- our primary source of variable compensation is based on total shareholder return. And so, I think as we look forward to FY22, we’re seeing wages up significantly as a result of kind of the broader inflationary environment, and that’s being offset by a decrease in the broader variable pay programs.

Okay. Just a quick follow-up. With respect to your capital allocation plan, could you just give us an update on how you view the M&A pipeline, where -- maybe where your focus would be at this point?

Yes. Absolutely, Ron?

Yes. Again, in our target markets, what we’re looking to do is provide total solutions. But, as we -- and there’s no doubt if there are certain parts or components of a total solution that we need, that would be the first priority. The second thing that we’re doing is we’re expanding into adjacent markets. As Satish had mentioned earlier, we started off in 5G or 4G, mostly on the physical layer going ahead and providing solutions there, then we moved up into the protocol layer and now you can see we’re in the application layer and security. So, we continue to look for adjacent opportunities also. That is what we’re looking at. We have a very robust funnel, but we also have very high hurdles. So, we have the ability to not only make the acquisitions that we need to make, but also to return cash to the shareholders, and that’s why we announced $1.2 billion share buyback program.

Next question comes from the line of Adam Thalhimer of Thompson Davis.

Just a quick one on margins. I’m curious how you guys are thinking about operating margin improvement by segment. You had such tough -- you had a great year at EISG. I just wonder if that creates a tough comp for you, or if you can even build off of the ‘21 result?

Yes. Certainly, obviously, a very tough comp for EISG, given the strong results, not just within the quarter where they reached up into the upper 30s, but 36%, for the full year here. I think we have opportunities to increase margins across both segments. I think we have initiatives in place across both segments to increase software content, to increase solutions content and to increase the value added that we’re bringing to customers. And so, I think if you think about opportunities in EV and IoT for EISG and, of course, in not just 5G, but 6G and quantum and aerospace, defense on the CSG side, there’s ample market opportunity for us to continue to increase the value add that Keysight brings to our customers. And I think as we do that that has a chance to be margin accretive across both groups.

Great. Thanks, Adam. So, well, that concludes our question-and-answer session for today. I’d like to thank you all for joining us. And we look forward to speaking with many of you at the upcoming conferences. So, thanks again, and have a great day.

That concludes today’s call. You may now disconnect.