Ladies and gentlemen, and welcome to the Keysight Technologies Fiscal First Quarter 2021 Earnings Conference Call. My name is Sedarius, and I will be your lead operator today. After the presentation, we will conduct a question and answer session. Please note that this call is being recorded today, Thursday, February 18, 2021 at 1:30 pm Pacific Time. I would now like to hand the conference over to Jason Carey, Vice President, Treasurer and Investor Relations.
Please go ahead, Mr. Carey.
Thank you, and welcome, everyone, to Keysight's Q1 earnings conference call for fiscal year 2021. Joining me are Ron Nersetsian, Keysight's Chairman, President and CEO and Neil Daugherty, our CFO. Joining us in the Q and A session will be Satish Daneshkaran, Chief Operating Officer and Mark Wallace, Senior Vice President of Global Sales. You will find a 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's segment results. Following this conference call, we will post a copy of the prepared remarks to the website. Today's comments by Ron and Neil will refer to non GAAP financial measures. We will also make references to core growth, which excludes the impact of currency movements 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 specifically noted otherwise. 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 virtual investor conferences in March hosted by Susquehanna, Credit Suisse and UBS. And now I will turn the call over to Ron.
Thank you, Jason, and thank you everyone for joining us. Seaside delivered another outstanding quarter. Our consistent performance illustrates the strength of our differentiated solutions, broad based momentum across diverse end markets and the durability of our business model. Today, I'll focus my comments on 3 key headlines. 1st, we achieved record 1st quarter orders driven by growth across all regions despite China trade headwinds.
2nd, strong execution by the Keysight team delivered revenue and earnings growth above guidance. And third, we entered the year with solid momentum across multiple end markets and confidence in our revenue and earnings growth trajectory for the year. Despite a short term expectation of elevated expenses from variable compensation, which is due to the high near term revenue growth, we expect to achieve mid to high teens earnings growth in fiscal 2021. Now let's take a deeper look into our Q1 results. We delivered record first quarter orders of $1,200,000,000 which again exceeded revenue and grew 7%.
1st quarter revenue grew 8% to $1,200,000,000 As previously discussed, we faced strong year over year headwinds in the first quarter due to China trade restrictions. Adjusting for this impact, both orders and revenue grew solid double digits. We continue to make strong progress towards our long term financial targets with consistent execution and enabled by the strength and discipline of the Keysight leadership model. We delivered 1st quarter gross margin of 64%, operating margin of 27%, which increased 2 10 basis points and free cash flow of $267,000,000 Turning to our markets. Aerospace, Defense and Government achieved record 1st quarter orders and revenue.
20% revenue growth was driven by continued investment in electromagnetic spectrum operations, space and the new commercial technologies like 5 gs and early 6 gs research. In commercial communications, we achieved all time record orders in total as well as for 5 gs, while revenue declined 3%. Adjusting for the transit impact of unfavorable trade restrictions, commercial communications orders grew double digits and revenue grew high single digits. Strength was driven by ongoing global 5 gs deployments and the rollout of new 5 gs devices and continued investment in 400 gs and 800 gs Ethernet for data centers. Keysight's end to end solutions portfolio is enabling the rapid progression of new technologies, both in the wireless and wired systems of the communications network where our value proposition remains strong.
Keysight continues to lead the industry in 5 gs powered by years of close collaboration with market makers and standards bodies. We are advancing our 5 gs strategy to capture emerging opportunities in the application layer as momentum builds ahead of deployments in 2021. We made great progress this quarter as broad industries embrace our 5 gs platform and new applications emerge. For example, O RAN continues to be an area of active investment for our customers. We recently introduced a suite end to end solutions for O RAN vendors and mobile operators.
Our solutions are used to verify the interoperability, performance, conformance and security of multi vendor 5 gs networks. We also announced strategic partnerships in the expanding O RAN space with industry leaders like Xilinx, Latticeys, Arraycom and AltioStore. In addition, we continue to accelerate Keysight's capabilities to provide industry leading solutions through strategic acquisitions. In Q1, we acquired Sangalay, a leader in wireless test and measurement solutions for protocol decoding and interoperability. Sanjalay's offerings complement our end to end solutions portfolio, providing problem solving tools that extend from inside the wireless network out through over the air analytics.
Record revenue for our Electronic Industrial Solutions Group was driven by double digit growth in semiconductors and general electronic solutions. Record revenue was fueled by ongoing investment in next generation process technologies bolstered by new customer wins in China as we successfully redeployed our sales force to capitalize on new opportunities. General electronic strength reflected continued economic recovery with growth across all regions and improvement in the advanced research education market. In automotive, despite ongoing macro challenges, end demand is stabilizing as strategic investments in advanced technologies have accelerated in Asia and in the Americas. In Europe, we continue to expand our presence and recently announced a collaboration with L ring cleaner, one of the world's leading system partners to the automotive industry.
They chose Keysight's battery test solution to advance eMobility in the field of battery development for electric vehicles. Software and services each delivered double digit order and revenue growth. Combined, they were approximately 1 third of total Keysight revenue contributing significantly to our software centric solution strategy and differentiation and further strengthening the durability of our business model with increasing recurring revenue. In summary, I'd like to thank our Keysight employees around the world who have reacted dynamically to a challenging environment to deliver exceptional results for our customers and shareholders. We are pleased with their Q1 performance and encouraged by the broad based momentum across our markets entering the year.
Now, I would like to turn it over to Neil to discuss our financial performance and outlook in more detail.
Thank you, Ron, and hello, everyone. As Ron mentioned, the Keysight team delivered an outstanding Q1 as continued economic recovery drove a steady improvement in demand across all major regions. 1st quarter revenue of $1,180,000,000
was above the high
end of our guidance range and grew 8% or 6% on a core basis. Q1 revenue growth was driven by broad strength across multiple end markets and geographies. Tova key state orders again exceeded revenue in Q1 with a book to bill just over 1. We achieved 1st quarter orders of 1,223,000,000 up 7% or 5% on a core basis successfully overcoming increased trade restrictions. Turning to our operational results for Q1, we reported gross margin of 64% and operating expenses of $439,000,000 were well managed resulting in an operating margin of 27%, an increase of 2 10 basis points year over year.
We achieved net income of $270,000,000 and delivered $1.43 in earnings per share which is well above the high end of our guidance. Our weighted average share count for the quarter was 188,000,000 shares. Moving to the performance of segments, our Communications Solutions Group generated record 1st quarter revenue of $852,000,000 up 4%, was delivering gross margin 65% and operating margin of 26%. In Q1, commercial communications achieved all time record total and 5 gs quarterly orders. 1st quarter revenue declined 3% to $558,000,000 with commercial communications disproportionately impacted by the China trade restrictions.
Aerospace Defense and Government achieved record 1st quarter revenue of $294,000,000 an increase of 20% versus a strong compare in Q1 last year. Growth was driven by robust year end spending across all major regions. In the U. S, growth was driven by prime contractor spending, offsetting slightly lower spending from direct government customers as we saw less than expected disruption from the U. S.
Administration transition. The Electronic Industrial Solutions Group generated record revenue of $328,000,000 up 18% or 13% on a core basis. Orders and revenue for our semiconductor and general electronics measurement solutions growth grew double digits for the Q2 in a row with strong revenue growth across all regions, particularly in Asia Pacific. EISG reported gross margin of 63% and operating margin of 29%. Moving to the balance sheet and cash flow, we ended our Q1 with $1,900,000,000 in cash and cash equivalents and reported cash flow from operations of $295,000,000 and free cash flow of $267,000,000 or 23% of revenue.
Under our share repurchase authorization during the quarter, we acquired approximately 137,000 shares on the open market at an average price of $145.14 for a total consideration of $20,000,000 Before moving to our guidance, I'd like to remind everyone of my comments last quarter in which I stated that flexible spending and variable compensation is expected to increase in FY 'twenty one with Q2 expenses seasonally higher than all other quarters. The principal driver is variable compensation which is a function of organic revenue growth and operating margin. Just as we flexed expenses down last year in response to a decline in revenue, it will flex up this year particularly in quarters with soft revenue comps, notably Q2 and Q3. We believe our variable compensation is an important element of not only our flexible cost structure but our human capital philosophy in which employees are engaged and participate in both the ups and downs of the business. Now turning to our outlook and guidance.
We expect Q2 2021 revenue to be in the range of $1,190,000,000 to $1,210,000,000 which represents 34% revenue growth at the midpoint. We expect Q2 earnings per share to be in the range of $1.29 to $1.35 based on a weighted diluted share count of approximately 188,000,000 shares. In closing, we are entering the year with order momentum, a solid backlog position and strong operational execution. We are pleased with the trajectory of our business and expect to achieve mid to high teens earnings growth for the full fiscal year. With that, I will now turn it back to Jason for the Q and A.
Thank you, Neil. Sidarius, will you please give the instructions for the Q and A?
And your first question comes from the line of Rick Eastman with Baird.
Yes, good afternoon. Could you perhaps maybe just kind of walk through a little bit of the operating leverage that we really saw in both Commercial Communications Solutions Group. I'm kind of looking at the op profit number of 170. And is that with gross margin maybe down, is that primarily all mix or maybe give us a couple a little bit of a feel for that And maybe the same question around EISG, just significant operating leverage there. I'm curious how much is mix versus volume?
Maybe that's a new word for it.
Yes. Rick, this is Neil. So I think you've hit on it, right. Q4 was a very favorable if you're looking sequentially, Q4 was a very favorable gross margin quarter for us as we really significantly ramped production after the COVID disruptions of Q2 and Q3. And I think just the nature of us responding to immediate customer demand for urgent delivery kind of shifted the mix in a favorable direction in the Q4.
I think what we saw in the Q1 was a return to more normalized mix that it aligns with kind of the quarters leading it up to Q4 as well as slightly lower volume. And I think that comment is basically true across both the communications group as well as ISG. There's nothing really specific to either one of the two businesses.
I see.
And if you also look at the long term model that we outlined at Analyst Day for FY FY 'twenty three. Obviously, our performance shows very strong against that and we have no doubts that we'll be able to deliver to that level going forward.
Got you. Great. And then just a quick question maybe if I could. Surprised to see and positively surprised to see the order growth and basically it looks like you held your backlog up kind of in the low 20s year over year, 20% year over year. I think my math quickly says 23% year over year on the backlog side.
And I know you spoke to orders being strong across geographies and across product lines. Is there any particular place that you might flag, whether it be geography or between the two business segments where you were pleasantly surprised with the order growth in the quarter?
Yes. I'll mention a couple and then I'll let Mark chime in with a little more detail. First of all, if you look at China, our China orders were down 6% and we expected them to be down much more because of the effects of the China trade restrictions with Huawei. If you were to strip out Huawei, we had 19% order growth from our other Chinese customers. And as Huawei comes out of the compare in the past, we're very, very pleasantly surprised and pleased with that performance.
Our Chinese sales force was redeployed from the accounts where they cannot sell into other accounts within the geography. And we were to do that almost instantaneously to produce the type of results that we did do. So that was clearly one. India was also very strong. Japan was very strong, both of those well into double digits as well as Europe, which also hit double digit performance.
Mark, you may want to add a couple more regional comments.
Sure. Ron covered it really well, Rick, but I would just add that about half our growth in China overcoming the headwinds was from new customers, again showing how we're executing and rotating to both new opportunities and new customers. And we won additional business with our existing customers, whether that be around 5 gs to some of the long tail of customers, 400 gigabit Tier 2 customers. And I was very pleased with semiconductor very strong growth again both from existing large customers as well as acquiring 2 new fabless semiconductor customers in the quarter in China. Very strong results in Japan for 5 gs and aerospace defense.
And then if you look at Europe, it really was a story of this very broad demand across multiple end markets. We had growth across most of our countries across Europe and it really goes to show the strength of our portfolio and the depth of our penetration into all these end markets.
I'll add just a couple more comments, Rick. 1, our general electronics business was up in orders over 20% and that's a really good sign. That talks about the macro environment in the industrial markets. So we're very pleased to see that. And also our overall corporate strategy in moving to more software centric solutions, which requires more software and more services.
Both software and services both grew double digits in orders again this quarter.
Got you. Very good. Congrats. Thank you.
Thank you. Your
next question comes from the line of Jim Suva from Citigroup Investment. Your line is open.
Thank you very much and really good job on the results in an unclear uncertain environment. My question is a little bit more just to help us out looking forward, not so much on the trade and tariff stuff, but recently the supply chain with the freezing in Texas and chip shortages. Can you talk to us a little bit about do you have some buffered chips that you're okay for the next 3 to 6 months or are you tempering your outlook a little bit? I'm just kind of a little bit concerned about the procurement cycle seems to have this additional variable. And then my second question is on OpEx.
How should we be thinking about that as hopefully COVID becomes behind us at some point? Thank you so much.
Sure. I'll cover the procurement, please, and then I'll let Neil talk a little bit more on the OpEx formula going forward. As far as procurement, we have taken into account the long lead time cycles that we're seeing from semiconductor providers as well as the other environmental impacts that we're seeing around the world. A matter of fact, we have just put out guidance for the midpoint is at $1,200,000,000 for the next quarter and that takes into account the semi cycles. We do hope though that things don't get worse from the standpoint of COVID, another surge, although we feel very confident that we are in good shape to come out with this guidance, which was above the Street consensus for the next quarter.
Yes. And Jim, your second question was kind of forward looking as it related to OpEx. And I made some comments in my prepared remarks. Certainly, I think our underlying investment levels are stable and are likely to be stable going forward. But we do expect some short term increases over the course of the next couple of quarters.
And while not the only impact, by far the biggest driver of that increase is our variable pay program. As I mentioned in my prepared remarks last quarter, Q2 expenses are compensation is a function of both organic revenue growth and operating margin. And in quarters where we have soft revenue comps and therefore higher revenue growth like we will see in Q2 and in Q3 of this year, our variable compensation is going to be materially higher. So as you saw, we guided very strong revenue growth of 34% in Q2 and expect a sequential increase as a result in our variable compensation program of more than $30,000,000 relative to Q1. And since all of our non executive employees are participants in that variable pay program, that increase is split roughly equally between cost of sales, R and D and SG and A, so specifically impacting the OpEx lines that you asked about.
But again, important to note that the underlying investment level is stable. And once we get past Q3, we're going to our variable pay and our expense levels are going to return to more normalized levels.
Thank you. And congratulations again to you and your team. Thank you.
Thanks, Jim. And just to finish that up, if you take a look at our overall model, this is a short term effect and that's why for one of the few times we've guided out for the whole year producing EPS growth in the teens as we had mentioned in our prepared remarks.
Your next question comes from the line of John Marchetti with Stifel. Your line is open.
Thanks very much. I was wondering if you could just take a moment and talk about some of the strength that you continue to see in 5 gs. How much of that maybe is coming from new customers as you sort of hinted at in the comment about the order strength? And how much of it is maybe moving into different variants of 5 gs, whether it's standalone versus non or millimeter wave versus sub-six?
Satish, feel free to answer this question.
Yes. I'll take that, Ron. I think one of the effects in 5 gs that we're seeing as deployments are scaling is the broader interest in deploying this technology across different end market verticals and that as a result of expanding the ecosystem, as we have talked about this quarter, we added over 100 new customers to our 5 gs platform. So that continues to be strong. At the highest level, I think we stated it's growth across all regions for 5 gs and all parts of the ecosystem.
Our Release 16 and O RAN that are capturing interest. RLEE 16 and ORAN that are capturing interest, manufacturing opportunities, scale as 5 gs deploys and it's profitable manufacturing as we have talked about a select manufacturing strategy. And 3rd is the interest in this technology from new verticals such as aerospace, defense, automotive and industrial. And finally, we see this long term steady push to commercialize millimeter wave as we've talked about is a long term dynamic for our business, which has got an upgrade pattern. And to feed this momentum, we've just announced over 30 new product introductions this quarter, and we feel confident about the projections based on everything we see in the industry.
And maybe just as a follow-up there, Satish. Do we still you guys have mentioned in the past you think this market sort of peaks out in 2022 or 2023 for you. I'm curious if that's still the case or if you think with some of these newer things coming on that actually extends it out a little bit.
Yes. I think based on what we have seen in the past, right, I think we have sort of seen industry CapEx projected to peak due to the millimeter wave parts of 5 gs being deployed. However, for our business in comms, we have a broad portfolio of both wired and wireless. This end to end portfolio that we have created not only has sort of a per incident effect, but as Ron referenced, higher software content, higher services. So we're much more plugged in and able to monetize the lifecycle value from our early lead.
Thank you.
Your next question comes from the line of Samik Chatterjee with JPMorgan. Your line is open.
Hi, this is Joe Cardoso on for Samik. So my first question is just around Aerospace Expense and Electronic Industrial segment. Obviously, you had 2 great quarters of execution in a row. I guess, how should we think of the sustainability of the momentum in both those segments? And what is driving your confidence?
Prashant, should I take? Yes. So as far as Aerospace Defense is concerned, very pleased record orders and record revenues. And as we mentioned before, the strength is coming across all the regions, tracking the COVID recovery macro recovery, and that's probably a common dynamic between our Aerospace Defense Business and the General Electronics Business in our Industrial segment. Specifically on the aerospace defense, our portfolio is focused on defense modernization, in particular and around these new themes continue to position us well.
The passage of the NDAA or the budget in the United States in December, we feel cautiously optimistic about the outlook for that business as we move forward. And we also have a pretty healthy backlog in the business. So we continue to expect strong growth in the next couple of quarters. As far as the EISG business concerned, again, broad strength from our general electronics business, but also semiconductor where we are seeing increased investments driven by the advanced nodes and the China IC investments that Mark referenced earlier.
Got it. I would
also comment that different form factors are contributing to that such as our modular solutions had a very strong quarter as well as software and services that have been mentioned earlier all play into this general electronics market and the overall EISG market.
No, appreciate the color. And then just a quick follow-up. I mean, you guys kind of went into detail about the 5 gs and the momentum that you're seeing there. I'm just curious, can we get an update on how you're seeing the declines play out in the 4 gs side? I know last year because of COVID, there was obviously a big impact there.
But have we are we seeing declines starting to moderate on the 4 gs side?
Yes. Sequentially, 4 gs has been flat quarter over quarter for us, and we're very pleased with the uptick in 5 gs. As I referenced, it was a record quarter. And was and if you include 5 gs and 4 gs together, we've grown it year over year and sequentially quarter over quarter. So we feel good about the portfolio.
And I did mention that we've launched 13 new products this quarter to feed that momentum in the market.
Got it. Appreciate the color, guys. Congrats on the results.
Thank you. Your
next question comes from the line of Mehdi Hosseini with SIG. Your line is open.
Yes. Thanks for taking the question. One follow-up for Satish. Can you please help me understand the mix of a 48 100 gig Ethernet as a mix of overall communication sector group? And how do you see that trending, especially as the volume ramp for 400 gig plays out in the second half?
And for the NIO, it will be great if you could give us some reference. I think there was a mention of software and services accounting for 1 third of revenue. Can you give us a qualitative or quantitative assessment of what the mix of software is? Where was it a year ago? And how should we be thinking about the software mix looking forward?
Yes, I'll maybe start with the 400 gig question, Mandy. As we have really done very well with the wireline technology evolutions over the number of years and last year was a pretty strong year for 400 gig, I think we've referenced it on calls. And what we saw this quarter was a broader adoption of 400 gig technologies, still heavily driven by data center demand, which tends to which is adopting, I should say, the 400 gig at scale, we saw increased spend from Tier 2 and long term long tail customers in Asia, in particular. And we expect as the 400 gig economies of scale and maturity occur that more of that demand would start to shift in the telco or metro opportunities. So there is we're still on the front end of that.
I would also say that on 800 gig, the investments are in early R and D, which we expect to play out in production in 18 to 24 months. So we're engaged early. Just this quarter, we announced a full suite of R and D offerings for 800 gig as well, which positions us well to benefit from not only the wireless on the 5 gs side, but also from the wireline opportunities in our commercial communications business. As far as the software, I'll kick it off and maybe Neil can make a comment. We see, for our double digit growth in software coming from our Pathway design franchise and from the 5 gs solutions, which as we have referenced before, have a higher percentage of software content with them.
We're also seeing renewals for subscription contracts become important to our 5 gs growth, which I think helps us with the ARR. I'll just pass it off to Neil.
Just in terms of the relative size of software, we've said previously that software is approximately 20% of total revenues. And as Satish has mentioned, they continue to outgrow the broader business, growing double digits again this quarter. So that mix is increasing slowly over time, and we expect that it will continue to do so as we continue this migration towards more complete solutions with higher software content.
Sure. If I may just a quick follow-up for Neil here. If you execute and deliver the software growth above the top line, could that be potentially a source of gross margin up upside that could potentially drive EPS growth this year towards the high end of mid to high mid teens mid to high teens, sorry?
I mean, certainly over the long run, we see increasing software content as a driver of gross margin. I think you've seen that over the past couple of years as we have added software to our portfolio as well as taking other actions to drive our gross margin northward. The mix shift is not dramatic. It's slow and steady over time. So hard for me to drive direct link between a mix shift over the next couple of quarters and immediate EPS increases, there's a lot of things that are going to go into they're going to play a role in determining that level over the course of the next several quarters.
But generally speaking, yes, our software growth is absolutely contributing to our gross margin improvement over time.
Thank you.
Also, if you're looking for the short term, if orders were to go ahead and were to exceed our projections, when you take a look at our incrementals, we have delivered to our model and then some pretty much consistently over the last 5 years and we expect to continue to do so.
Yes. And I was just trying to understand how conservative is that net to high teen EPS growth and how should we think about upside from there?
Yes. I mean, I think you can see in our guide that we're very encouraged by the market and our performance in the business on the top line. We do have some short term expense pressures over the couple of quarters that will put some pressure on EPS relative to normal incrementals over the or what incrementals would otherwise have been over the course of the next several quarters. But by Q4, we've kind of returned to we kind of lapped those comps and the impact that they have on our business and we've returned to kind of more normalized levels.
Okay. Thanks, guys.
Thank you.
Your next question comes from the line of Mark Delaney with Goldman Sachs. Your line is open.
Yes, good afternoon and thanks for taking the question. I was hoping to dig more into the full year EPS growth commentary of mid to high teens and recognizing the very good orders that the company just reported for the quarter. If my math's right, the implied second half EPS growth is relatively flattish to slightly higher year over year, flat to up 10% or so. And I understand the higher variable comp, which makes a lot of sense and is good news. But is there anything else besides the variable comp that you're trying to factor into the implied EPS growth guidance that you're discussing today?
Thanks.
The only other thing I've mentioned was what I mentioned earlier is that our Q4 gross margins in last year were extraordinarily favorable, right. Not only did we have the highest revenue quarter had by a pretty significant margin. We had significantly higher gross margins than we'd ever had previously. So we are going to have a tough year over year comp in the 4th quarter that is going to factor into that ultimate equation as well.
That's helpful and make sense. My other question was on the 5 gs order strength and the strength that the company is now seeing within millimeter wave. Can you describe to what extent you're seeing some increased adoption in millimeter wave in different geographies and perhaps the opportunity for millimeter wave deployments to help your business in China? Thank you.
Yes. Thank you. I think the as we have referenced before, the millimeter wave opportunity is a long term one for us. We see a very steady increase in interest from our customers at this point, heavily driven by the U. S.
Bands, you think of 20 to 40 gigahertz sort of spectrum. And with new spectrum coming online, the 66 to 90 gigahertz range, I think that tends to sow the seeds for the runway we're talking about. China's 2022 Winter Olympics is we expect it to be a push with a showcase of millimeter wave. So those are clearly drivers. And then if you look even further out, you start thinking about some early research occurring in the terahertz space.
So again, this is a very long term opportunity. Keysight's got a competitive differentiation. We have talked about this and we are well positioned to address this. Currently, we're working with customers to solve some critical challenges in commercializing millimeter wave like in advanced beam management, peak higher data rates, 10 gigabits per second and above. And it's a long term dynamic and we're well positioned there.
Thank you.
Your next question comes from the line of Tim Long from Barclays. Your line is open.
Good afternoon. This is Peter Desske on for Tim. Congratulations on the results. On CSG, just again as we see the 400 gs cycle coming closer, could you help us parse out what that has meant for you between your wireline hardware business versus the network visibility side? And do you have a sense of what inning we are in that cycle from the test and measurement perspective?
And then also on A and D, how should we think about what this very strong Q1 here implies for Q2 seasonality just going off a very strong pace?
Yes. I didn't hear your question. Could you please repeat it?
I'm sorry. Is this better?
Yes. If you could slow down just a touch dive, that would help.
Sure. I was just asking on CSG. Just as we see the 400 gs cycle coming closer, I was wondering if you could help us parse out what that has meant for you between the wireline hardware side versus the network visibility side? And do you have a sense of what inning we are in that cycle from a test and measurement perspective? And then just a follow-up on A and D, I was wondering how we should think about Q1 seasonality given this very strong Q1 base.
Yes. So I'll take the aerospace defense first. Again, record orders and given the comps from favorable comps we have for the next couple of quarters, we expect strong revenue performance in the business and our focus areas around defense modernization are also aligned with some of the strategic priorities of the governments around the world. So we feel good about where we are in the business. With regard to your question on wireline, the entire portfolio of wireline involves the focus on in 3 areas, if you think of it, the focus on high speed evolutions, 400 gig, 800 gig, terabit Ethernet and beyond and security as a second theme, which is gaining customer interest.
And the 3rd area is on visibility. Clearly, we're the drivers for the business right now are 400 gig and 800 gig. In terms of the visibility business, we expect or where everything we hear and we see the pipeline building towards it is a recovery in enterprise IT spend, which would be a good peg and that will occur as folks return back to work or in a hybrid mode later on in the year. So that's probably a driver for that part of the business. But overall, we're pleased with the synergies we're seeing and you see that reflected in the strength of our commercial communications business this quarter.
Great. Thank you for the color.
Your next question comes from the line of David Ridley Lane from Bank of America. Your line is open.
Thank you. Good evening. Since you've done the math on the impacts from trade restrictions on both orders and revenue, what was your estimated headwind for both of those?
It was roughly 6 points, 6 to 7 points at the Keysight level, obviously heavily skewed CSG, specifically the commercial comms. So I think if you get to the commercial comms level, it was a double digit headwind for the commercial communications business. Got it. Putting the record orders for commercial pumps in context, we were extraordinarily pleased with that result given the China trade headwinds on
that business. Got it.
Okay. And then since no one else has picked up on it, I'll ask, can you tell us a little bit more on the Sanjoli acquisition that you closed? I think it was about $100,000,000 or so from cash flow revenue, how it fits into the portfolio and it seems like it's in a very fast growing part of the market. So kind of what's your near term revenue expectations
as well?
Yes. So maybe I'll start by saying it's a smaller acquisition, roughly half point to the Key site revenue as an estimate. And it's highly profitable and it aligns with our M and A strategy of focusing on software centric product categories and more importantly enables us to complete the customer workflow. Cengile plays into the interoperability testing space, which enables customers to resolve complex system issues. And given that the 5 gs deployments are taking place at scale and new trends like Open RAN are disaggregating more of the what used to be a monolithic block, we believe this acquisition will really help us continue our momentum with in the commercial comps business.
Got it. And then last one for me. I mean, you're now in a net cash position. How do you think about Keysight's ability to be just is being in a net cash position aligned for you?
Yes. So I guess
go ahead.
I'm sorry.
Yes. Our first objective obviously is to grow the business and provide a great return above our WACC. So we continue to look for M and A opportunities that can further our strategy. But again, if we can't go ahead and produce an ROIC above our WACC, we're not going to to spend it. So you can see we're very deliberate and we're very focused and we will not go ahead and go after things that are too speculative.
So that is our first priority. The second thing is we have excess through opportunistic share repurchases. As you saw, not this quarter, but as you saw in Q4, where our average price was below $100 in the shares that we did But and then 3rd would be to do something like a dividend, but we're far, far from that at this point. But still, first, we're going ahead and making sure after organic growth is funded through over $700,000,000 in R and D. 2nd, it's to look for M and A that could go ahead and enhance our growth and produce a higher return on invested capital.
3rd, clearly, is to look for opportunistic share buybacks, which we have done. And we plan to make sure we're at least anti dilutive, like we've stated before, but we will get a little bit more aggressive if we see a very big opportunity.
Your next question comes from the line of Adam Thalhimer from Thomas Davis. Your line
is
open. I mean, this might be a waste of question, but I got to ask about the Biden administration and Huawei. There have been some early indications that maybe some of the restrictions get eased. Just curious if you have any thoughts on that?
Well, we don't have any particular insight as to what the Biden administration will do, But I'm very pleased that we were concerned about having to have that in our compare and to go ahead and seeing what that would do to our top line when we had to go ahead according to the government laws. And we're very, very pleased that we reported double digit order growth and revenue growth outside of our other at our other accounts in order to basically smooth right over that. So if things were to change at Huawei or with any other government restrictions, that would be certainly be significant upside for us.
Okay. Thank you. Thanks, Adam.
Your next question comes from the line of Chris Snyder from UBS. Your line is open.
Thank you. So just following up on the capital allocation. So the company finished the quarter with $1,900,000,000 of cash, which is certainly well above historical levels. What do you view to be the optimal level of cash to keep on hand? And is there a willingness to go after larger acquisition targets?
Because while there's been a steady stream of bolt on type acquisitions, it feels like it's difficult to kind of right size the cash balance with these just bolt ons alone. Sure. Well, I'll just say this that we had looked at over 300 different acquisitions. And again, we're very selective. We've made about a dozen at this point.
And you're right, most of them have been smaller except for 2 of them and we continue to look for large and small things that fit into our strategy. But there is a very high hurdle for the large acquisitions. Obviously, the downside or the upside is much more significant. But when you look at the premium and the amount of dollars that you have to make up in the premium you pay for a company, we want to make sure that pays off for the shareholders. We have more cash than we need to run the company right now, but we are aggressively looking at M and A.
And unfortunately, we can't share much more than that. Neil, you may have something else you want to add on.
Yes. The only thing I was going to add is that the optimal And for and for opportunities to return it in a favorable fashion like we did in Q4 of last year. So we'll continue to do that.
Thank you for that. Can you talk about the pricing environment, both for CSG and EISG? And what level of positive pricing, if any, is baked into the company's mid single digit long term core growth targets? We always look at pricing depending on what's going on in the market and how much your differentiation is in a particular segment. So clearly, if there's a lot of competition, we don't have differentiation that is that great.
We cannot go ahead and utilize too much pricing power. But what we're doing in 5 gs is certainly unique. We're on the leadership end and not only in different products, but when you look across the workflow. And we look for opportunities to do so, but we're not going to gouge our customers. We want to make sure that we have a good long term environment and they stick with us.
So we review our pricing at a minimum twice a year and we look for opportunities for price increases and we will continue to do so to drive our margins higher or to offset inflation. But as far as what the amount is, that's something that we do not state publicly. Thank you.
Thanks, Chris.
Your next question comes from the line of Brandon Couillard from Jefferies. Your line is open.
Hey, thanks. Good afternoon. Most of my questions have been covered, but Ron, I don't think you've mentioned any color on the auto market specifically yet. I'm curious, latest thoughts there and if there's been kind of any turn perhaps in the order trends in that market? Thanks.
Yes. Well, I'll let Satish answer this. We've been focusing certainly on the battery test and the overall infrastructure for EV. We mentioned the nice win that we had in the prepared remarks earlier and we continue to be in good position in that space. Also as we look at autonomous vehicles, it's the same thing.
But as far as the market, we've seen the market a little bit more depressed as we all know in auto. And I'll let Satish get a chance to comment on where he sees that going.
Yes. Thanks, Ron. We're seeing signs of slow recovery in the auto market. The business is definitely stabilizing. Manufacturing parts of the business are depressed, as Ron referenced.
But there is a steady focus on next gen R and D with AV and EV Definitely the push around the world for more electrification, we view as a long term opportunity and we're focused on creating value to help extend the ranges, help with interoperability needs by implementing global standards, including in China and focusing on bidirectional charging applications. With 5 gs in particular, we have a differentiated position on Cv2X technology that we're continuing to progress. So this may be a market where as the auto end market recovers, we start to see even bigger traction, especially in EV and AV. That's our expectation. But our portfolio is strong and we continue to be engaged with customers.
Thanks. And
Neil, would you remind us just what the China trade headwind is on a year over year basis to the top line in the second quarter? Is that a similar sort of 6% to 7%?
Yes. What we said before was that it was 5% on the half, obviously skewed towards skewed towards Q1. We've just told you Q1 was 6, so Q2 is in the 3 to 4 ish range.
Got you. Thank you.
Thank you. That concludes our question and answer session for today. I would now like to turn the conference back to Jason Kary for any closing comments.
Hi. Thanks, Sadarius. No further comments. I'd like to thank everyone for joining us today and wish you all a great day.
This concludes our conference call. You may now