Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal First Quarter 2022 Earnings Conference Call. My name is Elliot, and I will be your lead operator today. After the presentation, we will conduct a question-and-answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press the pound sign. If at any time during the conference, you need to reach an operator, please press the star followed by zero. Please note that this call is being recorded today, Thursday, February 17, 2022 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 2022. 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. There you will find an investor presentation along with Keysight 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 and acquisitions or divestitures completed within the last twelve 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 March, hosted by Susquehanna, Morgan Stanley, and Credit Suisse. Now I will turn the call over to Ron.
Thank you, Jason, and thank you all for joining us. Keysight delivered a strong start to the year. First quarter results are evidence that our broad-based portfolio of differentiated solutions is aligned with the market's most important design and test challenges. We are enabling our customers to address rapidly evolving technologies and market opportunities. Today, I'll focus my comments on three key headlines. First, we continue to see sustained robust demand with record orders again exceeding our expectations. Growth in the quarter was broad-based and balanced across our diverse set of end markets and across all regions. Orders grew 22% year-over-year and were 31% higher than the first quarter of 2020, just prior to the initial impact of the COVID pandemic. Second, record first quarter revenue and earnings per share exceeded the high end of our guidance despite ongoing supply constraints.
Our results and exceptional execution by the Keysight team continue to demonstrate the durability and resilience of our business. Third, Keysight solutions are aligned with the long-term secular trends fueled by ongoing innovation across multiple markets. Our investments in growth initiatives and supply chain resiliency are paying off. We continue to expect to deliver 6%-7% revenue growth for the year and, given the stronger than guided first quarter earnings, to achieve 12% earnings growth. We are confident in the strength of the company we built and our ability to drive above-market profitable growth over the long term. Accordingly, with the recent equity market volatility, we capitalized on the opportunity to create value for shareholders by accelerating our share repurchases in the past two quarters. Now let's take a deeper look into our first quarter results.
We delivered another quarter of record orders, which grew 22% to $1.5 billion. This outpaced record first quarter revenue, which grew 6% to $1.25 billion. We achieved gross margin of 66%, operating margin of 28%, and EPS of $1.65, all which were first quarter records. Although supply constraints continue to moderate revenue, Keysight's consistent execution and focus on growth initiatives across the 5G ecosystem, automotive, and software position us well to capitalize on a robust demand environment. The Electronic Industrial Solutions Group delivered double-digit order and revenue growth for the sixth consecutive quarter. Record orders were driven by strong demand for automotive and semiconductor solutions, as well as broad general electronic applications.
Our differentiated solutions position us well to win in the fast-expanding automotive market, where we achieved all-time record orders and record first quarter revenue. Orders grew well over 50% in the quarter and exceeded 50% growth over the past year. Manufacturing capacity continued to expand to meet pent-up demand, and the EV and AV technology investment accelerated. This happened particularly in Europe and China, where EV market share of total car sales in 2021 increased to 19% and 15% respectively. Demand remains strong from leading manufacturers for both EV and AV production test solutions, power semiconductors, automotive electronics, and RF and millimeter wave wireless test. Keysight continues to engage with Global industry leaders such as BMW, Sony Semiconductor Solutions, and Proventia to enable next-generation technologies across the automotive R&D and production workflows.
Strong demand for our semiconductor solutions drove double-digit order and revenue growth and resulted in record orders and record first quarter revenue. Investments remain high in advanced semiconductor technologies and capacity expansion to serve a broad set of applications, including silicon-rich smartphones, high-performance computing, IoT, and autos. In general electronics, we achieved record orders with double-digit growth across all regions, driven by investment in manufacturing and device development for consumer and industrial IoT, digital health, connectivity, and remote monitoring. Turning to the Communications Solutions Group, we delivered record first quarter orders and revenue with double-digit order growth across all regions. Commercial communications orders achieved the second-highest quarter on record, with double-digit order and revenue growth in the Americas and Europe. We see continued strength in 400G and 800G Ethernet solutions for enterprise and service provider customers, as well as increasing demand for terabit communication solutions.
Driven by the ongoing investment in data center and cloud applications, orders for Keysight's differentiated high-performance real-time oscilloscopes grew triple digits this quarter. Keysight's leadership in 5G Release 16 applications, broad test case coverage, and our strategic role in O-RAN are enabling our expansion across the broad communications ecosystem. Our 5G customer base is growing as deployments begin to scale, and we are enabling disruptive technologies with key industry players such as Qualcomm to demonstrate 3.5 Gb uplink data throughput, Chunghwa Telecom in Taiwan to accelerate verification of O-RAN connectivity, KT Corporation in South Korea to verify advanced 5G new radio features, and LG Electronics to demonstrate 6G radio frequencies. Investments remain strong in 5G wireless R&D and manufacturing, as well as networking, as market expansion transitions to devices, network equipment, and the aerospace defense vertical.
In aerospace, defense, and government, double-digit order growth was driven by demand for signal monitoring, cyber, space, and satellite, as well as 5G and 6G applications. Demand was particularly strong in Asia-Pacific and Europe. As design, test, and measurement solutions grow in complexity, software and services are an increasingly more important differentiator for Keysight. Combined, they represented more than a third of total revenue this quarter, increasing recurring revenue and contributing to the resiliency and predictability of our business. In summary, demand remains strong for Keysight's software-centric portfolio of differentiated solutions across all of our end markets and regions. Since the pandemic began in 2020, Keysight has been focused on supporting our customers and delivering on our commitments. We have implemented new sourcing strategies and increased partner engagement to improve supply chain flexibility, diversification, and resilience.
While fully focused on our near-term priorities, we continue to work towards a long-term, sustainable vision for the company and for the communities in which we operate. The Keysight Leadership Model drives us to deliver business value through ethical, environmentally sustainable, and socially responsible operations. Corporate social responsibility is an enabling value of the KLM, and we are proud to have been included in the Dow Jones Sustainability Index for the third year in a row. Keysight's inclusion exemplifies the company's continued commitment to building a better planet. This includes ambitious targets that support several UN Sustainable Development Goals, such as our commitment to achieve net zero emissions in our company operations by fiscal year 2040, ten years ahead of the Paris Agreement goal of 2050.
As we accelerate innovation to connect and secure the world, we are better positioned than ever to deliver value to our customers, shareholders, and employees. Now, I will turn it over to Neil to discuss our financial performance and outlook in more detail.
Thank you, Ron, and hello, everyone. Q1 was a great start to fiscal 2022, and our full-year outlook exemplifies Keysight's ability to deliver on our commitments. In the first quarter of 2022, we delivered revenue of $1.25 billion, which was above the high end of our guidance range and grew 6% or 7% on a core basis. As expected, supply chain constraints continued to temper revenue results. We delivered a record $1.495 billion in orders, up 22% or 23% on a core basis. We ended the quarter with over $2.3 billion in backlog. Turning to our operational results for Q1, we reported gross margin of 66% and operating expenses of $473 million, resulting in an operating margin of 28%.
We achieved net income of $305 million and delivered $1.65 in earnings per share, which was above the high end of our guidance. Our weighted average share count for the quarter was 184 million shares. Moving to the performance of our segments. Our Communications Solutions Group generated record revenue of $878 million, up 3% on both the reported and core basis. CSG delivered record gross margin of 67% and operating margin of 27%. In Q1, commercial communications generated revenue of $584 million, up 5% with double-digit revenue growth in the Americas and Europe, driven by continued investments in 5G, O-RAN adoption, 400G, 800G and terabit R&D and wireline applications.
Aerospace, defense and government revenue of $294 million was flat versus a strong prior year compare. Solid growth in Asia-Pacific was offset by supply chain constraints that impacted revenue in the Americas and Europe. This was our fourth consecutive quarter of double-digit order growth in aerospace, defense, and government, and the funnel remains strong for this end market. The Electronic Industrial Solutions Group generated first quarter revenue of $372 million, up 13% or 15% on a core basis, driven by strong revenue growth in semiconductor and automotive. EISG reported gross margin of 63% and operating margin of 31%. Moving to the balance sheet and cash flow.
We ended our first quarter with $2 billion in cash and cash equivalents, generated cash flow from operations of $224 million, and free cash flow of $182 million or 15% of revenue. Under the new share purchase authorization announced in November of last year, we acquired 1.13 million shares in the quarter at an average price of $182.19 for a total consideration of $206 million. Now turning to our outlook and guidance. Demand remains strong for Keysight solutions. However, supply constraints continue to moderate shipments.
We expect second quarter 2022 revenue to be in the range of $1.29 billion-$1.31 billion, and Q2 earnings per share to be in the range of $1.63-$1.69 based on a weighted diluted share count of approximately 183 million shares. Assuming a loosening of the supply situation in the second half, we continue to expect full year revenue growth to be in the range of 6%-7% while delivering 12% earnings growth. The raised EPS growth expectation reflects our higher than expected Q1 earnings. In closing, the demand environment remains strong across our end markets and regions.
With a record backlog position and a strong track record of operational excellence, we are confident in our ability to meet our customer commitments and continue to deliver profitable above-market growth going forward. With that, I will now turn it back to Jason for the Q&A.
Thank you, Neil. Elliot, will you please go ahead and give the instructions for the Q&A?
Ladies and gentlemen, if you would like to ask a question, please press star followed by the number one on your telephone keypad. We ask that you please limit yourself to one question. To withdraw your question, please press the pound sign. Please hold while we compile the Q&A roster. The first question comes from the line of Tim Long from Barclays. Your line is open.
Thank you. Yeah, I was hoping you could talk a little bit more about the 5G end market, maybe as it cuts across your businesses. Could you talk about kind of the, you know, revenue order momentum there? And maybe to touch on some of the newer areas. I think you mentioned O-RAN, but can you talk O-RAN, private networks, millimeter wave, some of the, you know, some of the newer areas that are contributing to growth there? Thank you.
Hi. Yeah, Tim, this is Satish. We have another strong quarter in our Commercial Communications business, driven by 5G and all the wireline evolutions. Specific to 5G, I think as I've stated before, we see near-term and medium-term catalysts that remain intact. If you look at it more near term, I would say the ongoing global deployments that are scaling continue to drive demand in both R&D and manufacturing offerings. Specific to R&D, Release 16 is really aimed at some of these new use cases with industrial applications and private networks in particular. Longer term, we remain you know bullish about millimeter wave and its adoption. In the medium term, the applications such as O-RAN are really growing the ecosystem of opportunities for us.
We just added over 100 new customers into our 5G platform in the most recent quarter. Very strong growth in the 5G applications for sure across both R&D and manufacturing and deployments and across the globe. Broad strength.
Okay. I'm sorry if I could just follow up. It sounds like you've already had a few 6G announcements. Could you talk a little bit about kind of the cadence of when you think that will start to impact this business? Is this still a few years out, or are you starting to see some real traction with some of the larger players in the industry? Then I'm done. Thank you.
Yeah, we're still, you know, if you look at it from a standards perspective, you know, we're still in Release 16. Release 17 is just getting started, and you got Release 18 being planned. There is still considerable time to go with 5G evolutions that will continue for quite some time. The industry is also looking at what's the next wave of innovations, 6G on the wireless side. On the wireline side, terabit Ethernet is definitely, you know, an area where there's a lot of advanced research happening both on the wireless and wireline side. Keysight, given our strong strategy, focus on building out the workflow for the communication ecosystem, we're engaged in those advanced research discussions with multiple consortiums around the globe, and we've already started to get some early Research business which positions us for continued leadership over time.
Okay. Thank you very much.
Our next question comes from the line of Samik Chatterjee from JP Morgan. Your line is open.
Hey. Thanks for taking my question. I guess I'm just trying to get some help in understanding the divergence here between the order growth and the revenue outlook. This is, I think, the fourth quarter where you've expanded orders by more than 20% year-on-year. When we look at the revenue outlook, obviously, that's materially below that. How should we think about it? Sort of, is there more of a sort of unwind into the revenue or sort of realization of revenue or supply chain pieces, or is the order strength driven by a lot of early ordering or sort of long-dated orders?
In particular, if I can just ask on a follow-up there, how are we thinking about the same divergence between ADG revenues here remaining flat for the last couple of quarters versus what you talked about in terms of strong order increase? Thank you.
This is Neil. I think first of all, I would say that the order growth, we believe is indicative of the very strong demand environment we're seeing across a wide range of end markets, right? Within EISG, the semi and auto market's very strong. The surge in manufacturing, driving strength in general electronics. In the communication side, we're seeing, you know, great strength in 5G, as Satish just talked about, but also 400 Gb, 800 Gb on the networking side as well. Very strong demand, and I think that's reflected in the order strength and in the growth you're seeing in orders. On the revenue side, obviously, we continue to, you know, work through significant supply chain challenges.
Our revenue is significantly constrained by the supply environment, and we're working through that. You know, we have said on prior calls that we have seen lead times to our customers extend by about a month. That month extension has really happened over the course of the last two years, really from the onset of COVID back in the spring of 2020. You know, I think the good news is that our customers have responded to that and are placing orders with Keysight, you know, a bit earlier so that they can still get product delivery on a timeline that meets their needs. I think we're doing a good job getting product into the hands of our customers on those timelines.
I think as you turn the lens forward, what you're going to see as the supply chain situation starts to improve, and we hope to see that, you know, beginning in the second half, but certainly we expect to see some supply chain constraints through 2023, you know, that our lead times will slowly start to migrate back in over a number of quarters. Similarly, our customers will once again readjust their ordering patterns to, you know, to again align them with their own need for delivery. Why don't I turn it back to Mark with some.
Yeah.
Some more comments on the demand side.
Yeah. Thanks, Neil. I think you covered it well. I just would add that reiterating that demand remains strong. It was very strong in Q1, very broad. We saw some earlier orders placed in distribution as an example, where you know the channel inventories are low because of the demand that we've seen there. So that's to be expected. We also saw some earlier orders from semiconductor, which is typical. They have longer term horizons, and we work with them at you know in that fashion. You know, the headline is our strong double-digit order growth. It was not an outcome of advanced purchases. On the plus side, as Neil mentioned, we are now working with customers much earlier than we may have done in the past.
We've always had deep relationships, but the outcome is we're getting better visibility to their forecast and their forward-looking plans, which I think will sustain, you know.
Our next question comes from the line of Meta Marshall from Morgan Stanley. Your line is open.
Great. Thanks. Maybe following up on Samik's question. Just in terms of supply chain, you know, would you say that continues any kind of material tightening that you saw kind of in any of the categories? Just trying to get a sense of whether it remains constrained or whether you started to see some improvement or worsening. And then maybe second question. You know, obviously, we've seen if anything becomes more attractive from an M&A environment, just as some of these valuations reset. Thank you.
This is Neil again. First of all, with regard to the supply chain situation, you know, I think it's safe to say that we didn't see things materially worse. I would call it largely the same. I think we continue to look forward to, you know, to some relaxation in the second half, and that's still our expectation. But we did not see any acceleration or, you know, early.
With regard to software valuations, obviously, you're exactly correct. The IP and EDA software companies, we've seen their valuations come down. But realistically, when we talk to companies, and when they see a pullback, they still view their old share price as the price that their company should get a premium to. It normally takes about a year, it depends company- by- company, before they would go ahead and sell at a lesser value. We're highly engaged at looking at opportunities, looking at things that make sense, and we have a very active funnel right now, including software.
Great. Thank you.
Thank you.
Our next question comes from the line of Mark Delaney from Goldman Sachs. Your line is open.
Yes, thanks very much for taking the question. I was hoping you could comment a little bit more on the P&L outlook for next quarter. Revenue guidance is up sequentially. EPS is relatively flattish quarter- on- quarter. Just maybe you can bridge us from the somewhat higher revenue, you know, and what's leading to the, as we look forward into the second quarter.
You know, scheduled shipments, some unfavorable mix on a sequential basis, as well as, you know, kind of continuing impact from other inflationary elements, most notably expediting, you know, fees and other things are continuing to impact gross margins. I think the other thing is, you know, we are continuing to ramp kind of back into our targeted levels of R&D. We were actually sub 15% in Q4, approaching 16% here in Q1, you know, as we look to kind of mid-16 level. I'd expect, you know, in that rate of investment in the R&D side of things, the more or less flattish EPS.
That's helpful. Thank you. My follow-up question is on the Comm segment. The company's focus has done a very good job broadening out the exposure in various ways, right? In terms of the type of tests you're doing, but also the 800G, I think, has been going for some time. So maybe you can level set us on how big 400G and 800G is and how much data center is contributing to that Comm segment at this point. Thank you.
Yeah, I'll take this. I think you're right. I mean, our strategy to really connect the workflow across the communication ecosystem continues to play out, and our execution remains very strong. At the heart of it, we've been focused on connecting the workflow between the wireless and the wireline parts of the ecosystem. We see that all of the data that comes through the networks have to ultimately flow into a data center or cloud. As we follow that trail, upgrades happening across the flow, and we're participating in a number of those technology trends associated with not only the speeds, as you referenced with 400, 800, and terabit, but also the underlying infrastructure that's changing with the memories, the server technologies, and the edge compute as well.
We're also very pleased with the number of new chipset starts, the design starts that are occurring across the entire industry today. All of this is contributing to strength. We saw that reflected in our Commercial Communications business, where we maintain a good balance between the 5G growth and also the wireline evolutions growth.
Our next question comes from the line of Jim Suva from Citigroup. Your line is open.
Thank you, and congratulations. I just have one question. There's been a lot of news about, you know, new building of semiconductor equipment factories and a lot more of, like, automobiles being more electronics. Given the large, long supply chain, I'm just kind of curious, are those big orders already coming into your company? Or since they have to pour concrete and walls, would those be much more long dated and not even in your orders at this point? Because it seems like those are long-term, multi-year projects that will actually extend much more beyond the typical horizon, where people may think that we're kind of at the peak of orders right now, which I potentially could disagree with.
Yeah. Hi, Jim. This is Mark. I'll take that. You're exactly right. The strengths that we're seeing today and have been seeing for the last many quarters is around new process technology development and mature technology scaling. What you're referring to is the global expansion of new fabs in North America, in the United States, in parts of Asia, and across Europe. These are multi-year, multi-billion-dollar investments that the semiconductor leaders are making. The vast majority of those investments
Just remind everybody of our order acceptance policy. We generally don't put an order on the books unless it's shippable within a six-month period of time. Those orders for those longer things, well, in some cases, your factories and fabs that are going as of today.
Yeah, I'll just follow up just to emphasize that we are talking to all, working through the planning and preparation for, you know, the future. It is really based on demand that we can see going out six months.
Thank you so much for the detail.
Thanks, Jim.
Our next question comes from the line of Chris Snyder
Thank you. Hey, I guess my first question is kind of bigger picture is in the middle of a very strong period of demand. The orders were up against sequentially here, the slight negative seasonality. I guess my question is, you know, the industry backdrop 3%-5% growth that Keysight has called out in the past. Is it you know, kind of collectively can achieve outsized growth until 5G peaks?
Chris, this is Mark. I'll take a stab at that. I think a lot about what Satish has been talking about, which is connecting our customers' workflows. It even goes back to the previous question as it pertains to the growth in semiconductor being fed into demands from, you know, multiple different industries, all bringing more electronic content together. That has this compounding effect. I certainly think that, you know, as we get to the maturity with some of these technologies, the capacities will meet certain levels. We can see some of that, you know, the growth begin to turn more to models that we've been seeing. The next generation. As we also mentioned, that's occurring around 6G. Given our leadership position in the market gives us opportunities to continue to drive this high secular growth that we've been delivering.
In the sense that you're talking about that was for the market. We have clearly done a pretty good job of growing faster than the market quarter- after- quarter, and we intend to do so going forward. Look at the convergence in semiconductors and how more and more functions are being integrated into semiconductors and everything, whether you're talking about IoT or any of the other apps that we talk about, that demands time. Look at automotive. We're not talking about things that will grow for a year or two, even though we talked about 19% and 15% of the total market being effectively EV in Europe and Asia.
I mean, that's going to go up close to 100%. We have the Americas too, which is behind. 5G has a ton of runway, and then following that, where we're starting to see early investments and talking, is 6G that will follow it. On top of that, you put quantum. The use of high-performance electronics is not rolling over, and we don't see that at all in any, you know, short or medium term situation. Whatever the market growth rate, Keysight's aspirations, goals and results have always been to outgrow the market.
Yeah, no, I push this back down to mid-single digit growth. You kind of touched on my follow-up. You know, the company has significantly outgrew the market and taken a lot of share, you know, ever really since you spun out, but it feels like it's kind of accelerated here. You know, is there anything that could cause that to compress?
You know, if we were at 65, 70% share, you could say, "Oh, will it start to flatten out?" We're at roughly 25% market share in total. We have so much headroom. I mean, the, you know, the market's, you know, 4x the size of Keysight, and we're gaining share. We're investing as much as that's needed. We're investing more than anyone else in R&D and we have the credibility with these players to be the chosen partner. Now that we've expanded beyond hardware to software and services, we provide complete solutions, which makes, and we help them accelerate their innovation timelines. is also.
On that last point, like you know, the industry has accelerated towards software. You know, do you think that has been a driver for Keysight? Just given, you know, your whether it's organic or M&A, relative to a lot of your smaller competitors.
No, I think there is opportunity for us to grow software, and we are, and we've seen that since we launched the company, you know, more business, and there's a lot more headroom there. We see it in a lot of areas also down in the physical layer where you need both. You need the ability to acquire the signal in a very high fidelity way at very, very high performance when we're talking. Plus you need the analysis capability that's in firmware and in software. You know, service and support from people that are qualified to put this all together. Keysight has all of that. That's been a real advantage for us, and we continue to see that as we continue to expand our investments and our programs in each of these areas.
Appreciate all that. Thank you.
Thank you.
Our next question comes from the line of Matt Niknam from Deutsche Bank. Your line is open.
Hey, thank you for taking the question. Just two, if I could. First, on the U.S., maybe if you can talk about what drove the sequential downtick in U.S. or Americas revenue this quarter. I think you'd called out some softness in aerospace defense. Just curious, gross margins there actually improved about 120 basis points sequentially, even though revenues actually were down sequentially. I think last quarter, you had mentioned some initial expectations that there would be more of a negative mix shift in this fiscal quarter. I'm just wondering maybe what drove some of the outperformance there. Thanks.
Yeah. Thanks, Matt. You know, I think if you really want to figure out what's going on in the marketplace, orders is the best report, orders with as much detail, but we want to give you as much insight as we can. If you look at the revenue numbers, which drive sales, it may not be commensurate with what's going on in the market. In the Americas, for instance, we were up 23%. Now, if per chance, because we're not shipping everything and we're building backlog, which is in an incredible position at almost $2.4 billion, that just means we're going to produce a lot more profit later when we clear that out. The market performance is very strong.
As we continue to improve the supply chain, you'll see the revenue get a chance to work that backlog out over time.
Yeah. With regards to the gross margin, you're right. We had a higher software mix this quarter as we continue to progress our strategy of software-centric solutions. From the aerospace and defense perspective, you know, while the defense budget has been passed in America's, in the US, we are waiting on the conclusions to the appropriations process that's currently underway, which is expected to occur somewhere between March and April timeframe. That should allow for increased program spend for the rest of the year and the following year. If you look at just the aerospace and defense order growth to the point that Ron made, continues to go strongly and our multi-year programs remain intact.
That's great. Thank you both.
You're welcome.
Our next question comes from the line of Adam Thalhimer from Thompson Davis. Your line is open.
Hey, good afternoon, guys. Congrats on another strong quarter.
Thanks.
First question I wanted to ask about, just at a high level, what kind of inflation are you seeing? How is the pricing environment? How does that paradigm work for Keysight?
Yeah, sorry, turn on my microphone. It will help. You know, we are seeing inflation across a number of different areas within the supply chain and they are within the cost structure. I think, as we noted last quarter, you know, certainly labor is one of those. We had our largest salary increase cycle in the fall in our seven-year history as an independent company. Certainly in certain aspects of this, freight and logistics, clearly an area where we're seeing costs go up. Even though we're raising prices as aggressively, we're sometimes paying or charging for expedited shipments. You know, we're seeing it in a number of different areas.
As far as our own pricing, I think we're constantly trying to value what we're seeing on the cost side and contain margins as much as possible, and I think we've been doing a good job of doing that so far and would expect to going forward.
Look at this. If you take a look at this, when we launched the company, we were at roughly 56% gross margin. Now we're talking 66% from software, from our hardware differentiation, from leadership positions in 5G, which gives us the opportunity to do a little bit of value pricing. We're going to continue to work to drive that higher.
Ron, just real quickly, you mentioned that orders came in above expectations. Can you give a little color as to what was stronger?
Yeah, Adam, this is Mark. The strengths, as we said before, were double-digit order growth. Two of the four regions or two of the three regions were growth across all of the end segments as well. We added just over 500 new customers to Keysight during the quarter. We've done that every quarter, adding hundreds of new customers across all the different end markets around all the geographies. That's really important to us. That helps us diversify our business and grow our base. Our business to the base is up very strong double digits as well. We are really working hard, as I mentioned, growing the long tail of small and medium-sized businesses as well around all the regions and all the end segments.
Okay. Good color. Thanks, Mark.
You're welcome.
Our next question comes from the line of David Ridley-Lane from Bank of America. Your line is open.
Thank you. As supply chain issues ease, how much of a margin benefit could there be? I imagine in addition to the higher freight costs and so on you're carrying now, there's also some manufacturing inefficiencies just related to the component shortages.
It's not obvious to me that there's gonna be a margin benefit other than volume that comes from, you know, a relaxation of the supply chain environment. I think our factories are continuing to run pretty efficiently. You know, I think we'll need to take a wait and see approach, but it's not obvious to me that there's gonna be a big margin benefit other than the benefits of volume.
Got it. Are there any data points you can give us around sort of the internal initiatives you've got, new sourcing partners, other things that you're doing to remove some of these supply chain bottlenecks? Just to check, it doesn't sound like Omicron had much of an impact to you incrementally in the quarter.
Yeah. No incremental impact. Obviously, the constraints in the supply chain are broad, and I think you're hearing this everywhere to maximize. Those include internal value engineering activities looking for alternate sourcing from the open markets. We have strong collaborations with a number of our strategic silicon or semiconductor suppliers and our customers too. When we look at the end markets demand for Keysight products around 5G, automotive and semiconductor, we have strong engagements with customers and our supply chain so that we're able to coordinate this. At this point, as Neil mentioned earlier, that we're able to meet our customers' needs a very high percentage of the time. We're very confident on our ability to process this backlog and convert it into revenue in future quarters. Pending upside from any improvement in the supply chain, we could further.
Thank you very much.
Our final question comes from the line of Rob Mason.
For you know, the long runway that exists there. Question is, how do you view that market for the next few years? Since the EV and ADAS elements of that market are newer for testing, how do you think about your mix evolving into that market between R&D and manufacturing tests?
Yeah. I'd say that when we look at the automotive market, as Ron referenced in his script, that we see a real inflection in adoption of EV and then a subsequent, you know, simultaneous adoption for AV as well, really driving the needs of the automotive market. At the simplistic level, we see the number of new lab activities that are starting in R&D across the globe, where automotive customers traditionally outsourced a lot of the, you know, R&D work, but they're now starting to build new facilities for research and development. Hiring of electrical engineering talent, hiring of software talent is increasing, and that's really reflected in our R&D business that continues to grow strongly. We see this continuing to be a secular growth driver for us.
With regard to the manufacturing expansion, as you saw the number of EV starts increase, our Manufacturing business in this market also continues to grow. At this point, I would say, you know, the opportunities for us, for Keysight, is to expand with the number of new lab starts to play strongly into the battery test and charging arena. And so we're positioning ourselves there along with the
Helps us to get into this marketplace. In the most recent quarter, we've basically announced at CES the Radar Scene Emulator solution, which has again got a lot of active interest from our customers. Automotive continues to be the area of investment for us, and it's really hard to predict the growth rate, but we're quite pleased with the very strong results we're seeing so far.
On the Radar Scene Emulator, you got that, Satish. The funnel is very strong. It's growing. You know, we're seeing a lot of customers look out to Keysight for both EV and AV expertise. You think about all of the changes that are occurring within the customer base, as well as the new entrants coming in, dealing with millimeter wave, dealing with high-power semiconductors, charging infrastructure, all this stuff that we are providing leading solutions to. That funnel is growing substantially. The other indicator that I think is very positive is the adoption of our services, which again is another indicator of getting these tough jobs done. We're attaching a lot more services to our solutions, especially in the EV and the AV space.
Perfect. That's very helpful. Thank you.
Thank you, Rob. That concludes our question and answer session for today. Closing comments.
Thanks, Elliot. I'll turn it over to Ron to wrap this up for today. Thank you for joining.
Thank you everyone for joining us today. As you can probably tell, we are very pleased with what our team has done to produce consistently excellent results. I would also love to add that we are very optimistic for Keysight, not only in the short term, but with the position that we are in. Have a great day.
This concludes our conference call. You may now disconnect.