Strong operating margin and free cash flow
despite COVID-19 supply chain disruption
Keysight Technologies, Inc. (NYSE: KEYS) today reported
financial results for the second fiscal quarter of 2020 ended April
30, 2020.
“Keysight delivered strong operating margin and free cash flow
due to solid execution in a challenging environment. While supply
chain disruptions dampened our revenue performance during the
second half of the quarter, which includes April, our results
demonstrated the resiliency of our operating model and durable cash
generation as we reached a record cash balance of $1.8 billion,”
said Ron Nersesian, Keysight’s Chairman, President and CEO.
“Keysight is committed to the health and safety of our employees,
customers and suppliers and acted quickly to implement risk
mitigation measures in response to the pandemic. After site
closures and limited capacity in March and April, we are pleased to
announce that we are re-opening sites and ramping our production,
which we expect to be back to 100% capacity by the end of the third
quarter."
Second Quarter Financial Summary
- Orders were $1,089 million, compared with $1,121 million last
year, a decrease of 3%.
- GAAP revenue was $895 million, compared with $1,090 million
last year. Non-GAAP revenue decreased 18 percent on a core basis,
which excludes the impact of foreign currency changes and revenue
associated with businesses acquired or divested within the last
twelve months.
- GAAP net income was $71 million, or $0.37 per share, compared
with GAAP net income of $153 million, or $0.80 per share, in the
second quarter of 2019.
- Non-GAAP net income was $148 million, or $0.78 per share,
compared with $233 million, or $1.22 per share in the second
quarter of 2019.
- As of April 30, 2020, cash and cash equivalents totaled $1.841
billion.
Reporting Segments
- Communications Solutions Group (CSG)
CSG reported second quarter revenue of $653
million, down 18 percent, due to supply chain disruption related to
the COVID-19 pandemic. From a demand perspective, investment
continued in next-generation technologies such as 5G and 400G
driving record 5G orders in the quarter; demand was strong in the
U.S. for Aerospace Defense and Government solutions.
- Electronic Industrial Solutions Group (EISG)
EISG reported revenue of $242 million in the
second quarter, down 19 percent, due to supply chain disruption
related to the COVID-19 pandemic. General electronics, education
and automotive markets were weak, slightly offset by continued
foundry investment in advanced process node technologies.
Outlook
After site closures resulted in limited production capacity in
March and April, Keysight’s production operations and those of its
suppliers are now ramping capacity. Continued progress is expected
in the third quarter with third-quarter revenue, operating margin
and earnings expected to be in line with, or better than, the most
recent quarter. These expectations are based on the order funnel
and a strong backlog position, and assume limited incremental
supply chain constraints or disruption from additional shutdowns or
a second wave of the pandemic.
Webcast
Keysight’s management will present more details about its second
quarter FY2020 financial results and its third quarter FY2020
outlook on a conference call with investors today at 1:30 p.m. PT.
This event will be webcast in listen-only mode. Listeners may log
on to the call at www.investor.keysight.com under the “Upcoming
Events” section and select “Q2 2020 Keysight Technologies Inc.
Earnings Conference Call” to participate or dial +1 833-968-2178
(U.S. only) or +1 778-560-2837 (International) and enter passcode
2171516.
The webcast will remain on the company site for 90 days. A
telephone replay of the conference call will be available at
approximately 4:30 p.m. PT after the call and remain available for
one week. The replay may be accessed by dialing +1 800-585-8367 (or
+1 416-621-4642 from outside the U.S.) and entering passcode
2171516.
Forward-Looking Statements
This communication contains forward-looking statements as
defined in the Securities Exchange Act of 1934 and is subject to
the safe harbors created therein. These forward-looking statements
involve risks and uncertainties that could significantly affect the
expected results and are based on certain key assumptions of
Keysight’s management and on currently available information. Due
to such uncertainties and risks, no assurances can be given that
such expectations or assumptions will prove to have been correct,
and readers are cautioned not to place undue reliance on such
forward-looking statements, which speak only as of the date hereof.
Keysight undertakes no responsibility to publicly update or revise
any forward-looking statement. The forward-looking statements
contained herein include, but are not limited to, information and
future guidance on the company’s goals, priorities, revenues,
demand, financial condition, earnings, impacts of US export control
regulations, the expected growth of the markets the company sells
into, operations, operating earnings, and tax rates that involve
risks and uncertainties that could cause Keysight’s results to
differ materially from management’s current expectations. Such
risks and uncertainties include, but are not limited to, changes in
the demand for current and new products, technologies, and
services; customer purchasing decisions and timing; the risk that
we are not able to realize the savings or benefits expected from
integration or restructuring activities; increased trade tension
and tightening of export control regulations; impact on the supply
chain causing delays in our ability to manufacture or deliver
products and solutions to customers, the impact of social
distancing requirements, slowdown in customer purchasing, order
cancelations, a second wave of infection resulting in additional
government mandated shutdowns, and labor shortages caused by
pandemic conditions such as the novel coronavirus (COVID-19). The
words “estimate,” “expect,” “intend,” “will,” “should,” “forecast,”
and similar expressions, as they relate to the company, are
intended to identify forward-looking statements.
In addition to the risks above, other risks that Keysight faces
include those detailed in Keysight’s filings with the Securities
and Exchange Commission, including our Form 10-K for the fiscal
year ended Oct. 31, 2019 and Keysight’s quarterly report on Form
10-Q for the period ended January 31, 2020.
Segment Data
Segment data reflects the results of our reportable segments
under our management reporting system. Segment revenue excludes the
impact of fair value adjustments to acquisition-related deferred
revenue balances. Segment data are provided on page 6 of the
attached tables.
Use of Non-GAAP Financial Measures
In addition to financial information prepared in accordance with
U.S. GAAP (“GAAP”), this document also contains certain non-GAAP
financial measures based on management’s view of performance,
including:
- Non-GAAP Core Revenue
- Non-GAAP Net Income
- Non-GAAP Net Income per share
Income per share is based on weighted average diluted share
count. See the attached supplemental schedules for reconciliations
of each non-GAAP financial measure to its most directly comparable
GAAP financial measure for the three months ended April 30, 2020.
Following the reconciliations is a discussion of the items adjusted
from our non-GAAP financial measures and the company’s reasons for
including or excluding certain categories of income or expenses
from our non-GAAP results.
About Keysight Technologies
Keysight Technologies, Inc. (NYSE: KEYS) is a leading technology
company that helps enterprises, service providers and governments
accelerate innovation to connect and secure the world. Keysight's
solutions optimize networks and bring electronic products to market
faster and at a lower cost with offerings from design simulation,
to prototype validation, to manufacturing test, to optimization in
networks and cloud environments. Customers span the worldwide
communications ecosystem, aerospace and defense, automotive,
energy, semiconductor and general electronics end markets. Keysight
generated revenues of $4.3B in fiscal year 2019. More information
is available at www.keysight.com.
Additional information about Keysight Technologies is available
in the newsroom at www.keysight.com/go/news and on Facebook,
LinkedIn, Twitter and YouTube.
Source: IR-KEYS
KEYSIGHT TECHNOLOGIES, INC. CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS (In millions, except per share
amounts) (Unaudited) PRELIMINARY
Three months ended
April 30, Percent
2020
2019
Inc/(Dec) Orders
$1,089
$
1,121
(3)%
Net revenue
$895
$
1,090
(18)%
Costs and expenses: Cost of products and
services
379
442
(14)%
Research and development
166
171
(2)%
Selling, general and administrative
251
300
(16)%
Other operating expense (income), net
(3)
(8)
(57)%
Total costs and expenses
793
905
(12)%
Income from operations
102
185
(45)%
Interest income
4
6
(37)%
Interest expense
(20)
(20)
(2)%
Other income (expense), net
22
22
3%
Income before taxes
108
193
(44)%
Provision for income taxes
37
40
(6)%
Net Income
$71
$
153
(54)%
Net income per share: Basic
$0.38
$
0.81
Diluted
$0.37
$
0.80
Weighted average shares used in computing net income
per share: Basic
187
188
Diluted
189
191
Page 1
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In
millions, except per share amounts) (Unaudited)
PRELIMINARY
Six months ended
April 30,
Percent
2020
2019
Inc/(Dec) Orders
$
2,230
$
2,137
4%
Net revenue
$
1,990
$
2,096
(5)%
Costs and expenses: Cost of products and
services
819
870
(6)%
Research and development
353
344
3%
Selling, general and administrative
551
588
(6)%
Other operating expense (income), net
(38)
(12)
208%
Total costs and expenses
1,685
1,790
(6)%
Income from operations
305
306
-
Interest income
10
10
(5)%
Interest expense
(39)
(40)
(2)%
Other income (expense), net
34
37
(6)%
Income before taxes
310
313
(1)%
Provision for income taxes
76
46
65%
Net Income
$
234
$
267
(12)%
Net income per share: Basic
$
1.25
$
1.42
Diluted
$
1.23
$
1.40
Weighted average shares used in computing net income
per share: Basic
188
188
Diluted
190
191
Page 2
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (In millions, except
par value and share amounts) (Unaudited)
PRELIMINARY
April 30,
October 31,
2020
2019
ASSETS Current assets:
Cash and cash equivalents
$
1,841
$
1,598
Accounts receivable, net
485
668
Inventory
756
705
Other current assets
211
244
Total current assets
3,293
3,215
Property, plant and equipment, net
575
576
Operating lease right-of-use assets
153
-
Goodwill
1,217
1,209
Other intangible assets, net
382
490
Long-term investments
57
46
Long-term deferred tax assets
726
755
Other assets
354
332
Total assets
$
6,757
$
6,623
LIABILITIES AND EQUITY Current
liabilities: Accounts payable
$
182
$
253
Employee compensation and benefits
241
278
Deferred revenue
391
334
Income and other taxes payable
25
55
Operating lease liabilities
38
-
Other accrued liabilities
72
83
Total current liabilities
949
1,003
Long-term debt
1,788
1,788
Retirement and post-retirement benefits
344
357
Long-term deferred revenue
167
176
Long-term operating lease liabilities
124
-
Other long-term liabilities
300
295
Total liabilities
3,672
3,619
Stockholders' Equity: Preferred stock; $0.01
par value; 100 million shares authorized; none issued and
outstanding
-
-
Common stock; $0.01 par value; 1 billion shares authorized; 195
million shares at April 30, 2020, and 194 million shares at October
31, 2019, issued
2
2
Treasury stock at cost; 8.5 million shares at April 30, 2020 and
6.5 million shares at October 31, 2019
(537)
(342)
Additional paid-in-capital
2,044
2,013
Retained earnings
2,143
1,909
Accumulated other comprehensive loss
(567)
(578)
Total stockholders' equity
3,085
3,004
Total liabilities and equity
$
6,757
$
6,623
Page 3
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (In
millions) (Unaudited) PRELIMINARY
Six months ended
April 30,
2020
2019
Cash flows from operating activities: Net
income
$
234
$
267
Adjustments to reconcile net income to net cash
provided by operating activities: Depreciation
50
48
Amortization
109
103
Share-based compensation
54
50
Deferred tax expense (benefit)
27
(2)
Excess and obsolete inventory related charges
12
13
Gain on insurance proceeds received for damage to property, plant
and equipment
(32)
-
Other non-cash expenses (income), net
(10)
(3)
Changes in assets and liabilities: Accounts receivable
178
(28)
Inventory
(63)
(53)
Accounts payable
(67)
1
Employee compensation and benefits
(36)
5
Deferred revenue
51
85
Income taxes payable
1
(8)
Retirement and post-retirement benefits
(6)
(23)
Other assets and liabilities
(7)
6
Net cash provided by operating activities(a)
495
461
Cash flows from investing activities:
Investments in property, plant and equipment
(55)
(60)
Insurance proceeds received for damage to property, plant and
equipment
32
-
Acquisition of businesses and intangible assets, net of cash
acquired
(5)
-
Proceeds from divestiture
-
2
Proceeds from sale of investments
-
7
Other investing activities
-
2
Net cash used in investing activities
(28)
(49)
Cash flows from financing activities: Proceeds
from issuance of common stock under employee stock plans
26
39
Payment of taxes related to net share settlement of equity awards
(50)
(24)
Treasury stock repurchases
(196)
(69)
Net cash used in financing activities
(220)
(54)
Effect of exchange rate movements
(4)
5
Net increase in cash, cash equivalents and restricted
cash
243
363
Cash, cash equivalents and restricted cash at
beginning of period
1,600
917
Cash, cash equivalents and restricted cash at end of
period
$
1,843
$
1,280
(a) Cash payments included in operating
activities: Income tax payments, net
$
(47)
$
(48)
Interest payment on senior notes
$
(38)
$
(38)
Page 4
KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATION OF NON-GAAP CORE REVENUE (In millions)
(Unaudited) PRELIMINARY
Year-over-year compare Q2'20 Q2'19
Percent Inc/(Dec) GAAP Revenue
$
895
$
1,090
(18)%
Amortization of
acquisition-related balances
-
3
Non-GAAP Revenue
$
895
$
1,093
(18)%
Less: Revenue from acquisition or
divestitures included in segment results
(6)
-
Currency impacts
3
-
Non-GAAP Core Revenue
$
892
$
1,093
(18)%
Non-GAAP core revenue excludes impact of currency and
revenue from acquisitions or divestitures closed within the last
twelve months. Please refer page 10 for discussion on
our non-GAAP financial measures. Page 5
KEYSIGHT
TECHNOLOGIES, INC. SEGMENT RESULTS INFORMATION (In
millions, except where noted) (Unaudited)
PRELIMINARY Communications Solutions
Group(a) YoY Q2'20 Q2'19 % Chg
Revenue
$
653
$
794
(18)%
Gross margin, %
63.1%
64.6%
Income from operations
$
114
$
190
Operating margin, %
18%
24%
Electronic Industrial Solutions Group
YoY Q2'20 Q2'19 % Chg Revenue
$
242
$
299
(19)%
Gross margin, %
62.0%
61.3%
Income from operations
$
59
$
78
Operating margin, %
24%
26%
(a) Restated for the recently completed organizational
change to manage our Ixia Solutions Group within our Communications
Solutions Group effective Q1'20. Net revenue for
Communications Solutions Group excludes the impact of amortization
of acquisition-related balances of $3 million for Q2'19. Segment
revenue and income from operations are consistent with the
respective non-GAAP measures as discussed on Page 10. Page 6
KEYSIGHT TECHNOLOGIES, INC. NON-GAAP NET INCOME AND
DILUTED EPS RECONCILIATIONS (In millions, except per share
amounts) (Unaudited) PRELIMINARY
Three months ended Six months ended
April 30, April 30,
2020
2019
2020
2019
NetIncome DilutedEPS NetIncome
DilutedEPS NetIncome DilutedEPS
NetIncome DilutedEPS
GAAP Net income
$
71
$
0.37
$
153
$
0.80
$
234
$
1.23
$
267
$
1.40
Non-GAAP adjustments:
Amortization of acquisition-related balances
54
0.28
54
0.28
113
0.59
108
0.56
Share-based compensation
15
0.08
23
0.12
54
0.29
50
0.26
Acquisition and integration costs
2
0.01
1
0.01
4
0.02
3
0.02
Northern California wildfire-related impacts
-
-
-
-
(32)
(0.17)
-
-
Restructuring and related costs
1
0.01
6
0.03
3
0.01
6
0.03
Other
(12)
(0.06)
(12)
(0.06)
(11)
(0.06)
(15)
(0.08)
Adjustment for taxes (a)
17
0.09
8
0.04
23
0.13
(10)
(0.05)
Non-GAAP Net income
$
148
$
0.78
$
233
$
1.22
$
388
$
2.04
$
409
$
2.14
Weighted average shares
outstanding - diluted
189
191
190
191
(a) For both the
three and six months ended April 30, 2020 and 2019, management uses
a non-GAAP effective tax rate of 12%.
Historical amounts are reclassified to conform with
current presentation.
Please refer page 10 for discussion on our non-GAAP financial
measures.
Page 7
KEYSIGHT TECHNOLOGIES, INC. NON-GAAP OPERATING
MARGIN RECONCILIATION (In millions) (Unaudited)
PRELIMINARY
Three months ended
April 30,
2020
2019
Income from operations, as reported
$
102
$
185
Amortization of acquisition-related balances
54
54
Share-based compensation
15
23
Acquisition and integration costs
2
-
Restructuring and related costs
1
6
Other
(1)
-
Non-GAAP income from operations
$
173
$
268
GAAP Operating Margin
11.4%
17.0%
Non-GAAP Operating Margin
19.4%
24.6%
Please refer page 10 for discussion on our non-GAAP
financial measures. Page 8
KEYSIGHT TECHNOLOGIES,
INC. FREE CASH FLOW (In millions)
(Unaudited) PRELIMINARY
Q2'20 Net cash provided by operating
activities
$
298
Less: Investments in property, plant and equipment
(23)
Free cash flow
$
275
Free cash flow as a percentage of GAAP Revenue
31%
Operating free cash flow is a non-GAAP
measure which management believes provides useful information to
management and investors about the amount of cash generated by the
business after the acquisition of property and equipment, which can
then be used for strategic opportunities including investing in the
Company's business and making strategic acquisitions. Our
management uses this measure which is a common one in our industry
to compare ourselves to our competitors and to measure our own
performance. A limitation of operating free cash flow is that it
does not represent the total increase or decrease in the cash
balance for the period. Our management compensates for this
limitation by monitoring and providing the reader with a complete
GAAP statement of cash flows which includes net cash provided by
operating activities. Page 9
Non-GAAP Financial Measures
Management uses both GAAP and non-GAAP financial measures
to analyze and assess the overall performance of the business, to
make operating decisions and to forecast and plan for future
periods. We believe that our investors benefit from seeing our
results “through the eyes of management” in addition to seeing our
GAAP results. This information enhances investors’ understanding of
the continuing performance of our business and facilitates
comparison of performance to our historical and future periods.
Our non-GAAP financial measures may not be comparable to
similarly titled measures used by other companies, including
industry peer companies, limiting the usefulness of these measures
for comparative purposes.
These non-GAAP measures should be considered supplemental to and
not a substitute for financial information prepared in accordance
with GAAP. The discussion below presents information about each of
the non-GAAP financial measures and the company’s reasons for
including or excluding certain categories of income or expenses
from our non-GAAP results. In future periods, we may exclude such
items and may incur income and expenses similar to these excluded
items. Accordingly, adjustments for these items and other similar
items in our non-GAAP presentation should not be interpreted as
implying that these items are non-recurring, infrequent or
unusual.
Non-GAAP Revenue includes recognition of acquired deferred
revenue that was written down to fair value in purchase accounting.
Management believes that excluding fair value purchase accounting
adjustments more closely correlates with the ordinary and ongoing
course of the acquired company’s operations and facilitates
analysis of revenue growth and business trends.
Non-GAAP Core Revenue is non-GAAP revenue (see Non-GAAP Revenue
above) excluding the impact of foreign currency changes and revenue
associated with businesses acquired and divested within the last
twelve months. We exclude the impact of foreign currency changes as
currency rates can fluctuate based on factors that are not within
our control and can obscure revenue growth trends. As the nature,
size and number of acquisitions can vary significantly from period
to period and as compared to our peers, we exclude revenue
associated with recently acquired businesses to facilitate
comparisons of revenue growth and analysis of underlying business
trends.
Non-GAAP Income from Operations, Non-GAAP Net Income and
Non-GAAP Diluted EPS may include the following types of
adjustments:
- Acquisition-related Items: We exclude the impact of certain
items recorded in connection with business combinations from our
non-GAAP financial measures that are either non-cash or not normal,
recurring operating expenses due to their nature, variability of
amounts and lack of predictability as to occurrence or timing.
These amounts may include non-cash items such as the amortization
of acquired intangible assets and amortization of items associated
with fair value purchase accounting adjustments, including
recognition of acquired deferred revenue (see Non-GAAP Revenue
above). We also exclude other acquisition and integration costs
associated with business acquisitions that are not normal recurring
operating expenses, including amortization of amounts paid to
redeem acquires’ unvested stock-based compensation awards, and
legal, accounting and due diligence costs. We exclude these charges
to facilitate a more meaningful evaluation of our current operating
performance and comparisons to our past operating performance.
- Share-based Compensation Expense: We exclude share-based
compensation expense from our non-GAAP financial measures because
share-based compensation expense can vary significantly from period
to period based on the company’s share price, as well as the
timing, size and nature of equity awards granted. Management
believes the exclusion of this expense facilitates the ability of
investors to compare the company’s operating results with those of
other companies, many of which also exclude share-based
compensation expense in determining their non-GAAP financial
measures.
- Northern California wildfire-related impacts and Other Items:
We exclude certain other significant income or expense items that
may occur occasionally and are not normal, recurring, cash
operating, from our non-GAAP financial measures. Such items are
evaluated on an individual basis based on both quantitative and
qualitative factors and generally represent items that we would not
anticipate occurring as part of our normal business on a regular
basis. While not all-inclusive, examples of certain other
significant items excluded from non-GAAP financial measures would
include net unrealized gains on equity investments still held, and
significant non recurring events like realized gains or losses
associated with our employee benefit plans, costs and recoveries
related to unusual disaster like Northern California wildfires,
gain on sale of assets and small divestitures, etc.
- Restructuring and Related Costs: We exclude incremental
expenses associated with restructuring initiatives, usually aimed
at material changes in the business or cost structure. Such costs
may include employee separation costs, asset impairments,
facility-related costs, contract termination fees, and costs to
move operations from one location to another. These activities can
vary significantly from period to period based on the timing, size
and nature of restructuring plans; therefore, we do not consider
such costs to be normal, recurring operating expenses. We believe
that these costs do not reflect expected future operating expenses
and do not contribute to a meaningful evaluation of the company’s
current operating performance or comparisons to our operating
performance in other periods.
- Estimated Tax Rate: We utilize a consistent methodology for
long-term projected non-GAAP tax rate. When projecting this
long-term rate, we exclude any tax benefits or expenses that are
not directly related to ongoing operations and which are either
isolated or cannot be expected to occur again with any regularity
or predictability. Additionally, we evaluate our current long-term
projections, current tax structure and other factors, such as
existing tax positions in various jurisdictions and key tax
holidays in major jurisdictions where Keysight operates. This tax
rate could change in the future for a variety of reasons, including
but not limited to significant changes in geographic earnings mix
including acquisition activity, or fundamental tax law changes in
major jurisdictions where Keysight operates. The above reasons also
limit our ability to reasonably estimate the future GAAP tax rate
and provide a reconciliation of the expected non-GAAP earnings per
share for the third fiscal quarter of 2020 to the GAAP
equivalent.
Management recognizes these items can have a material impact on
our cash flows and/or our net income. Our GAAP financial
statements, including our Condensed Consolidated Statement of Cash
Flows, portray those effects. Although we believe it is useful for
investors to see core performance free of special items, investors
should understand that the excluded costs are actual expenses that
may impact the cash available to us for other uses. To gain a
complete picture of all effects on the company’s profit and loss
from any and all events, management does (and investors should)
rely upon the Condensed Consolidated Statement of Operations
prepared in accordance with GAAP. The non-GAAP measures focus
instead upon the core business of the company, which is only a
subset, albeit a critical one, of the company’s performance.
Page 10
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version on businesswire.com: https://www.businesswire.com/news/home/20200526005780/en/
EDITORIAL CONTACT: Denise Idone +1 941-888-2388
denise.idone@keysight.com
INVESTOR CONTACT: Jason Kary +1 707-577-6916
jason.kary@keysight.com
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