Hi, we're ready to go. Thank you everyone for joining. I'm John Souter from Citi. I'm joined by Neil Dougherty from Keysight, the CFO. We're gonna have a very open discussion here about the business, but I just wanna remind everyone, this meeting is for all of you. So if you have questions, don't wait for me, just raise your hand. We have a mic in the back. But, Neil, let me start with this because I don't know how much everybody knows the company. We got kind of like a few maybes. Let's start just with an overview. What is Keysight? Cause it's made a bunch of acquisitions, it's a bunch of different businesses.
Yeah.
How do you describe the business to somebody?
Yeah, so Keysight is the number one provider in the electronic design and test markets. And so, like, what does that really mean? You know, the way I always say is, "Here's what I tell my mother when she asks what Keysight does." At the ten thousand foot view, we make hardware and software tools for electrical engineers. At the simplest level, that's what we're doing. The business is focused on a few key end markets, commercial communications, both wireless and wireline communications, aerospace defense, and then on the industrial side of things, automotive, with a particular focus on kind of next gen auto, both electric vehicles and autonomous driving vehicles, semiconductor end markets, and then we have a broad kind of general electronics industrial market.
It's kind of a catch-all for all the other industries that might have a reason to hire an electrical engineer, but don't fit neatly into one of these verticals.
The funniest thing is, all the things the company does, and does exceptionally well, for three years, all I heard is, "It's a 5G play." They didn't care about anything else you did.
Right.
Now 5G is over, we focus on the next. But let's go back and look at the recent results, cause I was reading through some of the research and some of the transcript, and I thought what was really helpful was how the CEO kind of framed... I wrote them down here, the kind of three initiatives, the way he talked about the earnings, you know-
Yeah
... they beat earnings and obviously orders were better. But can you just remind everyone what were the three kind of big takeaways from the earnings that you wanna share with everyone?
Yeah. So first of all, you know, I think we overachieved relative to both our guidance and Street expectations within the quarter. And so if you go back, you know, rewind three months to mid-May, when we were putting together the guide, you know, there was actually just kind of the first two bullets, you know, one was around orders. We had measurable outperformance in orders relative to our expectations three months prior. And then we did a good job of converting that order outperformance into revenue outperformance, and then flowing that through down into EPS. So the first two kind of focused on the two various components of outperformance within the quarter.
Then the third point was that the business, we remain, you know, focused and committed to value creation. We recognize that, you know, we're in a bit of a mixed macro environment on the downside of the cycle in a number of our end markets, but we continue to focus on execution, on driving profitability. You know, business continues to generate, you know, 25% operating margins. We remain committed to our capital allocation strategies, and again, remain focused on creating value for shareholders.
I think it's very important. You've used M&A pretty successfully over the course of the year to expand the addressable market, and we'll come and talk about that. One of the things that caught my attention was, you talked about returning to long-term growth.
Yeah.
Just remind me, is that the 5-7% growth? Is there another target? And what are sort of the puts and takes you see over the next 3-5 years to get to that growth rate?
Yeah. So, so our long-term target remains at 5-7%. That's a target that we put into place at our Analyst Day in March 2023. And admittedly, at the time that we were standing on the stage down the road here at the New York Stock Exchange, we didn't foresee what the next 18 months were gonna look like. And so, but if you think about, you know, where we are now and how we got here, you know, going back to 2020 and the disruption in 2020 relative to COVID, but then we had two periods, a two-year period of growth that was well above long-term market norms, right?
You saw the post-COVID bounce in 2021, followed by the supply chain disruptions that were, you know, in itself a significant demand driver in 2022. And then we've seen the business pull back from those levels now with about 18 months of below market growth. So as we look forward, admittedly, at this point, you know, visibility is still somewhat limited. You know, I think the long-term secular drivers or industries remain largely intact, but you know, we think the most likely scenario at this point is a bit of a gradual climb out from where we are today. At least that's our base case, and if we get something, you know, that's steeper, we'll deal with that when it comes.
But I think, you know, we're gonna be looking towards things like AI that's driving wireline or continued evolution of 5G. There is still a lot to go there. The semiconductor, you know, the increase in semiconductor demand and the onshoring of semiconductor demand are gonna be some of the things that are gonna drive our businesses back to growth.
It's always good to under promise and overdeliver. Investors like that, cause I've seen too many of the other ones. And it's sort of like, cause I think about coming into calendar 2023, I just remember how much backlog you came in, coming out of the pandemic.
Mm-hmm.
And there was that disconnect between strong backlog, strong visibility, versus, you know, revenue growth was slowing as you were burning off that backlog and looking at order replacement. So, it's nice to see that you've kind of turned the corner on that. Let me ask first about M&A, because it's been a-- I'd like to say, and correct me if I'm wrong, but it, I feel like it's a core part of the Keysight story. As opposed to some companies, they do, like, occasional deal-
Yeah
... or maybe a strategic transformational one, but I feel like tuck-ins and growth is kind of a core part of the story. So maybe remind us how do you think about, because you're in so many end markets, how do you think about M&A, and how do you think about what the ultimate TAM for Keysight is?
Yeah. So there's a couple parts to that. I think, you know, the TAM, as we currently divide it, define it, is a $21 billion-$22 billion TAM. You know, roughly half of that in commercial communications, and the other half spent relatively equally between the industrial end markets and the aerospace defense end markets. And I think, you know, I mean, you're right. We've done, you know, a fair amount of M&A over the years. We have a ten-year history now as an independent company since spinning off from Agilent in 2014. I think we've done 22 or something deals, most of those smaller tuck-ins, some things that are a bit larger. And I think, you know, we're looking at a couple of different things, right?
A lot of the tuck-ins are really designed around plugging small gaps in the portfolio, bringing in talent, in some cases, you know, getting, you know, early seeds into new markets like quantum computing. We did some small tuck-ins in the quantum computing space. And I think some of the larger deals we've done have been more around expanding our addressable markets. I look at the most recent acquisition of size that we closed, which was our acquisition of ESI, which closed in the first quarter of this fiscal year, you know, really aligned with the stated objective to get more presence in these design engineering tools. Keysight's always had a presence in that space, or always, for the last thirty years, has had some presence in that space via our RF and microwave EDA franchise.
But this acquisition of ESI moves us more into kind of broader multi-physics, computer-aided engineering types of simulations and allows us to provide a more complete engineering toolkit to our customer set.
It's funny because you mentioned Agilent, and I just-- I mean, I go back and think about the genesis of HP-
Yeah.
the original HP, and how many companies out there are part of that original core engineering talent.
Sure.
And how built into the DNA it is of the company and all the companies, Broadcom and HPE, HP, et cetera. But I wanna ask about orders, because as I said earlier, like if I go back to the beginning, first half of 2020, calendar 2023, orders were softening at a time when you had a lot of backlogs, so revenue growth was better, and it wasn't unique to Keysight.
Yeah.
I mean, a lot of your peer group and hardware were experiencing the same thing coming out of the pandemic with all these backlogs. Orders started to turn the corner last quarter.
Yeah.
Right? I think if I saw it correctly, it was the first positive year-over-year order quarter in six quarters.
That's correct.
That's a big deal.
Yeah.
I guess the first question is, like, how sustainable is that? Or another way to ask it is, what's driving it? Is it, like, a specific area of the business that's driving it, or is it broad-based, or is it green shoots? Like, how would you characterize-
Yeah
... what's driving orders and how sustainable you think that is?
Yeah, I think it's a great question. And so first of all, there were definitely positives to take from the quarter that we just put up. I mean, we have already mentioned the order outperformance relative to what we were expecting three months prior. And that order outperformance was really focused in two end markets. The first one is our wireline business. You can think about AI as the driver of investments in wireline, and certainly there's been no shortage of discussion about that market opportunity here recently. And the second was in semi, where we saw, again, really the first signs of positive signs there. I think the question in semi is, you know, is this just a blip, or is this something that will sustain over the next couple of quarters?
Wherein on the wireline side, we have now seen multiple quarters of year-over-year growth, and so I think we have a higher degree of confidence, and that is a business that is truly inflecting. And so, you know, the question gets to about sustainability, though, and I think we continue to remain cautious, right? Even if you said both semi and wireline were inflecting, it's still less than 50% of Keysight's total revenues, revenue exposure, and so we remain cautious. We still haven't seen that broad catalyst that's gonna lift the business in its entirety, and so we remain cautious going into twenty twenty-five. We'll take the positive data points that we have and go.
But again, I point back to those secular drivers that are gonna ultimately, you know, drive growth in our business. And again, we believe those remain intact. We just need a little bit of help, industry-specific help across the markets we serve.
I can tell you one thing. I've been going to investor conferences for a lot of years, and I can tell you, when you look up at 4:30 P.M. and there's a pretty full room, you're doing something right. So I'm gonna stop here. I have a bunch more questions, but I'd love to open it up to the audience. If anybody had a question they wanna ask, just raise your hand, or you can just yell it out.
Right here in the front.
Okay. Let the record show I didn't pay this guy to ask a question.
So, I mean, I think there's a lot of talk about how just these transceiver failures can really, you know, cripple chip-to-chip communication and, you know, really hinder some of these training jobs. And, you know, it seems like your customers for this would be the ones who may wanna maybe test more of these components. But, you know, when we're getting into these level two and level three, you know, data center networks, you're gonna have maybe up to ten to one, you know, transceiver to GPU ratio. So I guess I'm just trying to think, like-
... Like, how many of these transceivers would someone, one of your customers even want to test? Because, like, on one hand, you have just the importance of, you know, a failure here being so crucial, but on the other hand, you have such a high number of these things-
Yeah.
going to the data center so.
Yeah.
So I'm gonna back up a little bit, and then I'll come and answer your question more directly. So first of all, I think it's worth noting that if you think about our exposure to wireline, that first of all, there are a lot of touchpoints. It's network silicon guys, it's transceiver folks, it's network equipment manufacturers, it's hyperscalers, it's connectivity. There are a lot of touchpoints in that ecosystem. The other thing that's of note is our business at the Keysight level is roughly 55%-60% R&D, 30% manufacturing, and the balance in kind of post-deployment operations. But our wireline business skews even more heavily towards R&D. We're primarily helping our customers in the R&D lab, rather than the manufacturing line. Now, we do some transceiver tests in manufacturing.
And all I'll say is that, you know, across numerous end markets, we see exactly the phenomenon that you're talking about, right? Early on, things get tested, you know, a 100% test. And as yields get better, and as cost of failure gets lower, they start to simplify or reduce the testing. So this is a phenomenon that we've seen across many end markets over the years. And so, you know, we'll have to see how it develops here, but again, the primary exposures that we have in this space are on the R&D side, rather than on the manufacturing side.
Thank you.
Yep.
That was a good question. If you wanna switch seats, going once, going twice. Any other questions in the field? All right, let's go back then. My friend gave me a good lead into AI, because-
Yeah
It's obviously a hot topic, and over the last year, every company I've met, even if they're not anywhere in technology, they're trying to get in on this AI momentum, and you really have multiple plays here.
Yeah.
So when we talk about where does Keysight play in the AI ecosystem? And have you quantified it as a % of sales that you're either directly or indirectly, you think you get from AI?
Yeah. So again, I just touched on the fact that we have lots of touchpoints, and I'll expand upon that a little bit more. So I think, again, when we think about our commercial communications exposure, the first kind of subdivision of that we do is wireless versus wireline. And I think if you look at our. And just rough math, wireless is 55-60% of commercial communications, wireline is 40-45%. That's the rough breakdown of the two businesses. And right now, you know, it's pretty clear that AI is the number one driver across that wireline ecosystem. In some way, it's impacting just about all of those revenue streams. And as I. So as I think about it, there's kind of another segmentation one can do.
You can look at kinda what are the infrastructure-related investments. I would kind of put this in the category of rising tides raise all boats, right?
Yeah.
So this is primarily the investment in increasing Ethernet speeds, 100 Gb to 400 Gb, to 800 Gb, to 1.6 Tb. And again, primarily servicing that ecosystem in R&D, physical layer and protocol layer, and helping to, you know, essentially, you know, to drive that infrastructure development that's necessary for these AI work streams. And then there's another set of revenues that are much more AI specific, right? Helping hyperscalers, as an example, where we provide tools now that help the hyperscalers essentially emulate their AI workloads, but in a lab environment, before they deploy a network. Obviously, if they can optimize those data flows, they can deploy a smaller but more efficient network, costs them less money, as an example.
We're selling to the folks that are making the copper connectors that are connecting these GPUs together, so you can build these networks of GPUs. And so again, there continues to be a lot of data points, both kind of network-focused and how do you improve the overall performance of the network, and then things that are much more specific to the AI solutions that are in place today.
Okay. Is that all in with those businesses would be more than 10% of the company revenue?
Again, so rough math is it's 40%-45% of commercial communications, you're about $1 billion.
Okay.
Yeah.
Perfect.
Total for wireline.
Going off script, I wanna ask you a question, cause I hadn't thought about this: the hyperscalers emulating their environment. Given that up until, I don't know, a few months ago, it was pretty much just GPUs, maybe Google had their TPU, that was kind of it.
Yeah.
Now, I look at all the companies that are making a custom ASICs or various other solutions for AI. That proliferation of other non-NVIDIA GPU, is that a driver for Keysight?
Yeah, I think that-
They have to test all those different models.
I think it is, and I think it will be. And one of the things that we talked about on our call is how the AI and wireline markets is still a relatively consolidated market, right?
Okay.
That the primary revenue drivers for us are all with big household name, you know, types of companies. And we saw a similar phenomenon in 5G, right? Through the first multiple years of 5G, it wasn't a handful or two, but it was multiple handfuls of customers. But now we probably have four or five hundred customers in 5G. And what we haven't yet seen on the wireline and AI side is this democratization of the market opportunity.
Yeah.
I think that's something that's gonna come, and it's gonna create, you know, more opportunity for Keysight.
The other thing I hadn't thought about today, I was sitting in the Marvell meeting a couple hours ago, and they got a question because they also have, like, a communication networking business, and somebody was asking the question of: how much an opportunity, instead of just directly to hyperscalers, is the telecommunications interconnect of all those data centers as a driver for them? So I would imagine that would have at least some effect for Keysight.
Absolutely. Sounds about, sure.
All right, let's talk about wireless, because as I said, for two years, every time people talk about Keysight, it's a 5G play.
Yeah.
They could care less whatever else was going on under the hood there. You said earlier 5G is not done. There's still other opportunities, but there's 6G, but there's probably other things. So can we talk about just generally what drives the wireless business from here?
Yeah, so first of all, not only is 5G not done, 4G is not done, right? We still have significant 4G business, so-
My grandmother has that phone.
Yeah. So I think the point being is that these are very long cycles, and people are continuing to invest in the current. So if you think about our customer set, right, in this ecosystem, right, they're investing across this suite of technologies, right? They still have some folks that are working on legacy 4G projects, eking out performance and sustaining the life and monetization of those networks. The lion's share of their teams are working on 5G-related programs, and then they have early-stage teams that are working on research for 6G, early-stage research for 6G. And what we're gonna see is a continued evolution of those, right? The 4G ones are gonna continue to roll off.
The 6G ones will eventually become the dominant ones, but right now, the lion's share of that market is still happening in the 5G space. People are continuing to invest in things like non-terrestrial networks and satellite communications, open radio access networks or O-RAN. You may hear that term.
Mm-hmm.
Standalone versions of 5G instead of the versions that most of us are using today, which ride on the back of the 4G network, you know, getting to a truly standalone 5G network. Other use cases, as well as the performance enhancements that are gonna come in future revs of the standard. So reminding everybody, if you go back to 3G, you know, we had 3G, three and a half G, three point nine G, and then we went to 4G, and it was LTE, LTE Advanced, LTE Advanced Pro. We're still in the very first instantiations of 5G, and there's a lot of evolution that still has to happen before we're gonna be ready for 6G deployment, which we're probably looking at commercialization sometime in twenty twenty-nine.
You know, people are pointing to the LA Olympics in 2028, is where you might see some early-stage trials. And so for Keysight, you probably back up a couple of years from that and say, "Hey, we're gonna start to see meaningful, you know, ramp of our 6G opportunity in the 2026, 2027 timeframe," is kind of the timeframe that we're looking at. And so you're gonna see this evolution from 5G to 6G over that window in time.
You're in the lab, so it's not like we're gonna see it in deployment.
We're primarily in the lab.
Yeah, exactly.
That's right.
I still can't get a good signal in parts of Manhattan, but that's a different discussion. Let's talk about semis. And you already mentioned, you know, there's some green shoots, and there's some opportunity there, and orders are getting a little better, but it's still early days and, you know-
Yeah
... one day at a time kind of thing. But remind us, what parts of semiconductors are you most exposed to?
Yeah.
What are your key end markets within semis?
Yeah. So, I mean, you can really think of ours, our primary customers are the foundry customers, and it's a... I get this question a lot. What are you seeing in memory? What are you seeing in logic? And the answer, for us, really is we're agnostic. We almost, our solution is totally independent of what's actually on the chips themselves. We make a solution called a parametric tester. It is really a check on the foundry process itself and has the fab essentially maintain process control over the manufacturing environment. And so, I mean, I can tell you, we have seen some, you know, you can tell a little bit, some relative strength in memory in other places, but for Keysight, we're really agnostic to what's on the chip itself.
It's much more of a, you know, a fab process check.
They must think you're KLA. That's why they're asking. Software and services, and it's interesting because a lot of companies, particularly equipment companies, have been building their software and services franchises. It's up to about 29% of your mix. It's obviously good margin, sticky business. Where do you think that can go? Or, if even Keysight has a target and say, "Look, over time, you know, five years out, we'd like it to be this percent of the business," or is it not, it's more of just-
Yeah
... depends on placements and-
Yeah.
Yeah.
First let me just correct the record. In the most recent quarter, it was 39%, not 29%.
Ah.
39% of revenue is roughly mid-twenties on software and roughly 15% on services, is how we get to that number. And both of those businesses have been outperforming the broader business. And so I think what you're we haven't put out a target, so I'll start by that. We haven't put out a target as to where we think this heads, other than we expect it to continue to increase as a percentage of the overall mix. And I think what you'll see is, on an organic basis, you'll continue to see kind of incremental improvement as, you know, as those businesses outperform. But software, in particular, is an area of focus for M&A.
I've obviously referenced the recent acquisition of ESI, and so I think there is potential for us to potentially accelerate that mix shift via M&A as we-
Okay
... as we find targets, particularly software targets.
Okay. I'm gonna go once more back to the room and then have a couple more questions. Oh.
One there and one here.
Go ahead. You're next. Yeah.
Yeah, I gotta amplify the signal, I guess. But, yeah, so I guess, like, on that note of the software attach rate, like, just love to get... You know, you have- when you have, like, newer, maybe hyperscaler customers in a wireline segment, like, you know, is there kind of a difference in maybe the appetite for these guys to have- that a higher attach rate in the, it's the software side.
Yeah, yeah, I think the answer to that question is yes, but maybe for reasons that are different than you're thinking, right? I think as our business has evolved, we're providing more complete solutions to our customer set. And so you think of the hyperscalers, obviously, when we're helping them emulate data traffic, that this hardware is part of that solution, but there is also a significant software component to the offering that we have and a required component to address the specific problems that they're working on. And so I think that's what we're looking for, is where are the pain points across these?
We did the same thing in 5G, where we help you know folks that are developing modems and devices emulate how those modems and devices will perform on a network, but in a lab environment. So we essentially recreate the network environment in a lab, and you can do the same things for the folks who are working on base stations or via O-RAN for part of the base station solution. You can emulate the data traffic so they can see how that network tool will behave when flooded with network traffic, but again, in a lab environment. So this trend towards simulation and emulation more broadly, I think is helping these customers, whether wireline or wireless, solve the complex challenges that they're looking to solve.
It's a lot more just specialized to their own needs.
To the needs of the industry. That's right.
Got it.
There was a question in the back over here.
Get to your 10,000 steps today, don't we?
You know, I just wanna circle back on semis. So when you talk about the exposure to foundry, would you be able to elaborate? Is it more on legacy foundry or advanced foundry, or should we think about analog manufacturing?
You know-
What type of foundry?
Yeah, both. I would say our differentiation is highest at the more modern process architectures, right? There are other ways to address this at, say, forty-five nanometers and above. So more modern process architectures, our differentiation is higher, and therefore, the value that we bring to the foundry customer is higher.
Right. Thanks.
Yeah.
Again, like KLA, in one process control and advanced nodes. All right, I'm gonna switch gears to the financial model because we wouldn't have the CFO here if we didn't ask a couple of financial-
Perfect.
Questions, so one, I wanna ask you about gross margin, the other about just sort of revenue growth, but in gross margin, I was looking, so last quarter, margin- well, let me say this, margins have been very resilient.
Yeah.
Despite EV sales declines, margins have held up in, like, 64% last quarter, not far off the peak from last year in the mid-60s%. So how do you think about margin resilience, and how do you think about margin expansion going forward when we do start to get the recovery?
Yeah.
What are the kind of puts and takes around margin?
Yeah. So, Amen, I think the two biggest impacts on margin for us are in fact volume and mix, right? And that can be volume is obvious, right? We've seen a you know low double-digit core pullback in our business. And then the mix side, it can be not just the mix of software versus hardware, but even within the hardware portfolio, there can be a substantial difference in various components of the portfolio. And so, you know, we've seen both of those things impact our business unfavorably over the course of the last you know couple of years. But as you noted, the margins have been pretty resilient, you know, with roughly the peak to trough two hundred basis point-
Yeah
... 200 basis point shift. I think, you know, we certainly see opportunities for us to get back to sixty-six, and then we'll see where we take it from there. I think it's gonna be a function of recovery. We're gonna need revenues to get back to growth. And then we have seen some of the largest pullbacks in some of the highest margin portions of our business. And I think as those things recover, we're gonna be well positioned to see those gross margins bounce back.
Yeah, but then I would imagine semis is gonna be one of the higher.
Yeah, semis is certainly a favorable market, yeah.
Okay, revenue growth. This was a challenging year, and by the way, I'm not asking you to endorse consensus. I'm just saying if I look at consensus, they had sales down about 9% this year-
Mm-hmm
and up mid-single digits over the next year. The company, I think, has been pretty clear to talk about gradual recovery, not trying to over-promise. So again, not asking whether it's gonna be mid-single or not next year, but just how do you think about the recovery over the next two to three years? What are sort of the drivers of that? And the reason I ask is because if you look, a lot of times what happens is, there's a saying on Wall Street: "The bigger the dip, the bigger the rip.
Yeah.
Like, if your sales are down 9%, it's not hard to get back to good trajectory of growth. So how do you think about sort of the recovery, not the slope of recovery, but just how do you think about the recovery-
Yeah
... in next year? What, again, are the puts and takes that you see for Keysight?
Yeah, I kind of see it as being a little bit industry specific, right? We've talked about AI is driving wireline, but we haven't yet seen that catalyst in many of our other end markets, right? So if we just step through them, again, I think, you know, we've seen a bit of a pause in 5G investment, even in the R&D lab. You know, some of the big customers in that space are going through restructurings. They have inventory challenges. We've seen refresh cycles on cell phones slow. So I think as that customer set, you know, starts to get confidence in their own business, we'll see, you know, R&D investments once again start to inflect, and that'll become a positive trend for our wireless business.
In semi, you know, we've seen delays in some of these big fab programs in Arizona and Texas and Ohio and other places
Yeah
... around the world. I think as those fab investments get back on track, again, that's gonna be a positive catalyst for our business. In our general electronics business, we generally watch PMI pretty carefully. It has a little bit of a higher manufacturing focus than many of our businesses, and I think there's a little bit of a watch for there, because I do think there was some overcapacity that got put into place in response to the supply chain, so we probably need a little bit of sustained, you know, some sustained PMIs above fifty for a while, to allow that capacity to be absorbed, and once again, spur new investment.
The one area where, you know, at least in the current environment, we've seen actually some incremental weakness is in auto, particularly with a lot of the press that you've seen around EV pullback in the adoption rates of electric vehicles, lower cost Chinese electric vehicles, leading to some tariffs and other things. And I, you know, I think, you know, we'll have to see how that develops. I think some people, people in the industry are rethinking what that investment model looks like, and a little bit of a watch for. So I think the point being that, you know, there are strong secular drivers, but these things don't always happen in phase, right?
Mm-hmm.
I mean, the post-COVID recovery plus the supply chain, things were in phase, kind of everything was up and to the right, but that's pretty atypical for our business. It's much more common that you have some things that are firing, when other things are in maybe a little bit less favorable state. It's a more common scenario.
I agree. I agree. Okay.
You have a question right here.
Oh, sure. Thank you.
So, and we had Michael Dell saying today that, you know, he's expecting a big refresh cycle in the sort of PC market, and many are also anticipating the same in smartphones towards the end of this year. Can you maybe comment on how Keysight is sort of geared into that, and whether you've shared the view on a big refresh cycle driven by AI at the edge?
Yeah. Well, so I'll leave the commentary on the current refresh cycle to those that are closer to it. But I think we do see investment cycle driven by AI at the edge. Again, for us, it's primarily in the R&D lab. I, you know, we think that's a necessity as you think about AI - how AI is happening, that a lot of that stuff is gonna need to happen at the edge device. And so we do see that as a significant opportunity for us, again, to help our customers with that, primarily in the R&D lab.
I think if they're, if they are correct, and that you see a, you know, significant reset refresh cycle, both in PCs and in handsets, I think that will be net net good for business. I mean, there's evidence to suggest that the chip inventories are still increasing. I think that's a headwind for some of these businesses. If we can start to get inventories under control, get confidence in, again, the business performance, these are many of these companies are our customers, they will once again start to reinvigorate their investments in R&D, and that's what we really need to see.
Can you talk about the... Just touch a little bit on the Spirent transaction?
Sure.
Sort of the strategic rationale, you know, why you're buying it, what you get from it.
Yeah, so we're somewhat limited, we could say, given the UK Takeover Panel rules. You know, but this is a business that is, you know, exposed to the same broad market themes that we're exposed to around wireless and wireline and Automotive, even some aerospace defense. And so, you know, there is, you know, pretty significant overlap with our selling and sales and marketing infrastructure, ability to leverage those to drive incremental revenue, as well as some cost efficiencies through those line items. There's some significant market expansion that's attractive to us, both in terms of their network assurance business and their precision location business. Those things would be net additive to us from a market perspective and, you know, extend our reach within the broader commercial communications ecosystem.
I think if you step back at a high level, we saw an opportunity to buy a business that ultimately we think can be accretive to Keysight's growth and operating margins and create value for shareholders.
I was gonna tag on to that and ask about your capital allocation strategy.
Sure.
Just how you think about, particularly you've done a lot of deals over the last decade, but how do you think about returning cash to shareholders?
Yeah
... and the balance sheet?
Yeah, it's, you know, I come back to kind of Satish's third comment from our recent earnings call. We continue to remain focused on value creation and operating the business as efficiently as possible, and I think capital allocation goes with that. And our capital allocation priorities have not changed. I think one of the things that we're proudest of as an organization is that we have been able to sustain our investments in R&D over the course of this down cycle. And that's our number one capital allocation priority, is to sustain the organic growth of our business.
The fact that our R&D is basically flat this year, even in the face of a 9% decline in the top line, I think is positive and positions us really well as we look forward to fully capitalize on some of these technological transitions we're talking about. Whether it's AI, AI at the edge, 6G, autonomous driving, quantum computing, these are all areas where we're investing. I think beyond that, we're looking to strike a balance between returning capital to our shareholders and doing M&A. We've talked about some of the successes that we've had in M&A. We closed the ESI transaction at the beginning of the year. We did two smaller tuck-ins, a company called Riscure, which is chip-level security, and we did a small communications tool provider called AnaPico in Switzerland, here in the most recent quarter.
But at the same time, we're actively returning, you know, share value to shareholders as well. Over the last four quarters, we've returned about 78% of free capital to shareholders via our buyback program. And so again, looking to strike that balance, but again, an emphasis on continuing to make the investments that are necessary to drive the organic growth of our business. That's the number one priority.
Okay, I'm out of questions. So you and I are the only thing standing between these people and a bar.
All right.
So-
Anybody else?
Any last questions? If not, we're gonna call it here. Thank you very much. Neil, thank you for your time.
Thank you very much.
It was awesome. Jason as well, and you'll be around for a couple of minutes, and if not, thank you everyone for joining day one of our Citi Tech Conference. We'll be back tomorrow in force, and I think we even go through Friday, so thanks, everyone, for joining.