A month has gone by since the last earnings report for Keysight (KEYS). Shares have lost about 5.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Keysight due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Keysight Q3 Earnings Beat Estimates, Revenues Down Y/Y
Keysight Technologies (NYSE:KEYS), Inc. reported third-quarter fiscal 2020 non-GAAP earnings of $1.19 per share, outpacing the Zacks Consensus Estimate by 41.7%. However, the bottom line declined 4.8% from the year-ago quarter.
Non-GAAP revenues declined 7% year over year to $1.011 billion. Non-GAAP core revenues (excluding the impact of currency and revenues from acquisitions in a year’s time) declined 7% on a year-over-year basis to $1.007 billion. Moreover, GAAP revenues slumped 7% from the prior-year quarter to $1.011 billion. The Zacks Consensus Estimate for revenues was pegged at $919 million.
The coronavirus crisis-induced weakness in automotive and general electronics sectors, and sluggish spending across Europe, primarily led to year-over-year decline.
Nevertheless, improving supply chain management, uptick in 5G test solutions on accelerated 5G deployment, and demand recovery across Asia Pacific led to better-than-expected performance.
Also, robust growth in Software and services revenues (represented more than 30% of total revenues) are providing buoyancy to Keysight’s business model, bolstering recurring revenue growth and leading to expansion in gross margins.
During the reported quarter, Keysight concluded the acquisition of Eggplant from The Carlyle Group (NASDAQ:CG) with an aim to boost software test automation capabilities.
Quarter in Detail
Orders fell 4% on a year-over-year basis to $1.067 billion during the reported quarter. Notably, core orders declined 4%.
Beginning first-quarter fiscal 2020, the company’s financial reporting comprises two segments — Electronic Industrial Solutions Group (EISG) and Communications Solutions Group (CSG). Ixia Solutions Group (ISG) segment reporting has been aligned with the CGS segment.
CSG includes commercial communications (CC) and aerospace, defense & government (ADG) end markets. CSG revenues of $760 million declined 4% on year-over-year and core basis. CSG contributed 75% to total non-GAAP revenues in the fiscal third quarter.
CC revenues of $559 million were up 2% year over year due to robust 5G order growth primarily fueled by 5G investments despite coronavirus crisis-induced supply chain disruption.
5G commercial deployment led to improvement in orders from 5G device and design developers. Moreover, expansion of investments in O-RAN (or Open Radio Access Network) and virtualization technologies contributed to recovery.
ADG revenues of $201 million were down 17% year over year, due to coronavirus pandemic induced lower spending in aerospace, defense and government across Europe and Asia. However, higher government spending and momentum in investments aimed at technology modernization across the United States was a positive.
EISG revenues declined 15% to $251 million. Challenges pertaining to coronavirus crisis induced softness in automotive and general electronics sector weighed on revenues. However, management noted momentum in first-to-market solutions, and strong demand for the company’s solutions in process node technology testing, in semiconductor end-market. EISG contributed 25% to total non-GAAP revenues in third-quarter fiscal 2020.
Markedly, solid momentum in semiconductor measurement solutions was driven by growing clout of high-speed networking, smartphone processors, and high-performance data center applications.
Revenue Breakup by Geography
Non-GAAP revenues from Americas were $365 million, down 18% (down 18% on a core basis) year over year on sluggishness in CC and EISG domains, on account of COVID-19 led disruptions. Robust order demand in ADG vertical failed to mitigate the decline.
Non-GAAP revenues from Europe of $159 million declined 13% (down 14% on a core basis) on a year-over-year basis. Solid order demand in EISG vertical could not offset coronavirus crisis induced sluggishness in ADG and CC domains.
Non-GAAP revenues from Asia Pacific of $487 million improved 5% (up 5% on a core basis) on a year-over-year basis. Strength in order demand across CC and EISG offset the softness in ADG domain.
Americas, Europe and Asia Pacific contributed 36%, 16% and 48%, respectively, to total non-GAAP revenues in the reported quarter.
Margin Highlights
Non-GAAP gross margin expanded 110 basis points (bps) to 64.5% during the reported quarter. CSG gross margin of 65.2% expanded 110 bps, while EISG’s gross margin of 62.4% expanded 90 bps on a year-over-year basis.
Non-GAAP operating expenses fell 6.5% to $388 million. As a percentage of revenues, the figure expanded 30 bps to 38.4%.
Non-GAAP operating margin expanded 90 bps to 26.1%.
Balance Sheet & Cash Flow
As of Jul 31, 2020, Keysight had cash & cash equivalents of $1.697 billion, compared with $1.841 billion as of Apr 30, 2020. The cash balance reflects impact of $319 million of expenses pertaining to acquisition of Eggplant. At the end of the quarter, the company also had $450 million of further liquidity available for use under untapped revolving credit facility.
As on Jul 31, 2020, the company reported long-term debt of $1.789 billion, compared with $1.788 billion as of Apr 30, 2020.
Cash flow from operations during the quarter was $183 million compared with $298 million reported in the prior quarter.
Free cash flow was $151 million compared with the previous quarter’s $275 million.
During the reported quarter, the company did not repurchase any shares.
Guidance
Keysight is improving production and services operations, and anticipates returning to 100% capacity by the end of the fiscal fourth quarter despite persistent supply chain challenges.
For fourth-quarter fiscal 2020, the company expects revenues to be $1.17-$1.19 billion. The guidance includes impact from ongoing coronavirus crisis. Non-GAAP earnings per share are projected to be $1.42-$1.48.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 8.44% due to these changes.
VGM Scores
At this time, Keysight has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Keysight has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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