Good day, ladies and gentlemen, and welcome to the Keysight Technologies fiscal fourth quarter 2022 earnings conference call. My name is Dante, and I will be your lead operator today. After the presentation, we'll conduct a question and answer session. If you would like to ask a question, please press star followed by the number 1. To withdraw your question, please press the pound sign. If at any time during the conference you need to reach an operator, please press star 0. This call is being recorded today, Thursday, November 17th, 2022 at 2:00 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 fourth quarter earnings conference call for fiscal year 2022. Joining me are Keysight's President and CEO, Satish Dhanasekaran, and our CFO, Neil Dougherty. In the Q&A session, we'll be joined by Senior Vice President of Global Sales and Chief Customer Officer, Mark Wallace. You can find the press release and information to supplement today's discussion on our website at investor.keysight.com under the Financial Information tab and Quarterly Reports. Today's comments by Satish and Neil will refer to non-GAAP financial measures. We will also make reference to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months. The most directly comparable GAAP financial metrics and reconciliations are on our website, and 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. We assume no obligation to update them. Please review our recent SEC filings for a more complete picture of these risks and other factors. Lastly, management is scheduled to participate in upcoming investor conferences hosted by Credit Suisse and Wells Fargo. We hope to see many of you there. Now I will turn the call over to Satish.
Thank you, Jason, and thank you all for joining us. Keysight reported strong fourth quarter results, which exceeded the high end of our guidance and drove a strong finish to the year. Before we get into the quarter, I wanna highlight our exceptional performance for fiscal year, which illustrates continued progress we're making in transforming the company to a software-centric solutions provider. We set new records for orders which grew 12% to $6 billion, a new record for revenue, which was up 10%, and a new record for earnings per share, which increased 22%, all the while returning capital through $849 million in share repurchases or 89% of free cash flow. In addition, we continue to invest in next-generation technologies for long-term differentiation and see a high level of engagement and activity with our customers around their future needs.
Today, I'll focus my comments on three key headlines. First, we delivered an all-time record revenue and earnings per share in the fourth quarter, ahead of expectations enabled by outstanding execution by Keysight teams who successfully navigated supply chain, geopolitical, and macro dynamics. Second, we achieved record orders of $1.6 billion with steady bookings throughout the quarter and a book-to-bill of 1.09. While our customers' multi-year roadmaps remain unchanged, they are exercising more caution given the macro backdrop, which we anticipate will moderate demand in the near term. Third, as we enter fiscal 2023, we remain confident in our ability to outperform the market based on the differentiation of our solutions, our strong R.&D. customer value proposition, and the robust backlog position we have entering the year. As we look longer term, the secular innovation trends in our end markets remain strong.
Now let's take a deeper look at the strength of the fourth quarter. Record orders of $1.6 billion grew 9% on a core basis. Record revenue grew 15% on a core basis with solid growth across all regions as Keysight teams successfully navigated challenging dynamics. This resulted in record quarterly earnings of $2.14 per share. The strength and resiliency of our business model is due to our strategic efforts to diversify our industry exposure. This has been best exemplified in the growth of our Electronic Industrial Solutions Group and our ability to leverage our industry-leading first-to-market solutions to enable expansion across the broader communications ecosystem. EISG achieved its ninth consecutive quarter of double-digit order and revenue growth. Auto, semiconductor solutions, and general electronics all achieved record quarterly revenue.
For the year, both orders and revenues set new records as we capitalize on continued investments across all three EISG markets. In automotive, we're pleased with the continued adoption of our solutions portfolio as orders grew double digits for the seventh consecutive quarter and exceeded $500 million this year. Automotive OEMs and their suppliers continue to focus on strategic new mobility investments, which drove key wins for Keysight. In addition, automotive-focused semiconductor companies continue to add capabilities to support EV and AV applications, which we view as a favorable long-term dynamic. We recently announced the Scienlab DC Emulator, which enables customers to accurately characterize high-voltage, high-power electric vehicle battery performance under varying real-world charging conditions. Keysight's PathWave Lab Operations software won 2022 AutoTech Breakthrough Awards for overall electric vehicle technology.
In support of AV applications, silicon designers are exploring adoption of commercial standards such as MIPI for automotive and other surround sensor applications, including cameras and in-vehicle infotainment displays. We are now expanding our leading compliance test solutions to offer advanced verification and diagnostic capabilities for automotive designers. Turning to our Semiconductor Solutions business. Q4 was the 10th consecutive quarter of double-digit order growth and a record revenue quarter. We saw sustained demand for our wafer test solutions and precision positioning capabilities, which enable the realization of advanced process nodes. In addition, Keysight has continued to partner with industry leaders Synopsys and Ansys on RF and millimeter wave integrated circuit design flows built for today's wireless communication requirements, including 5G and 6G system on chips. Keysight received a Partner of the Year award from TSMC for joint development design flows in RF and millimeter wave nodes.
In general electronics, record orders grew double digits this quarter as demand remained strong and broad-based across industrial IoT and digital health, as well as education and advanced research markets. Turning to Communication Solutions Group, the business delivered strong orders and record revenue. Annual orders and revenue were all-time highs despite geopolitical headwinds and delays in U.S. defense budget appropriations. Commercial communications revenue grew 10% this quarter and 11% for the year, with growth across all regions. Investments across communications ecosystem continued throughout the year with sustained spending in next-generation wireless and wireline technologies. Ongoing investments in 5G standards, new spectrum, growing deployments around the world, and steady evolution from 400 gig to 800 gig to terabit Ethernet drove growth.
We had another record year for 5G orders as Keysight's market-leading solutions continue to provide the industry with new capabilities needed for development of next-generation devices, as well as wireless and wireline networks. Examples that highlight our portfolio's alignment with key industry priority include a recent partnership with IBM to integrate our Open RAN capabilities into their cloud automation tools to accelerate network deployments. We also completed the validation of our first 5G location-based service use case from Global Certification Forum by combining the testing of 5G New Radio and Global Navigation Satellite System technologies into a single platform. Lastly, in collaboration with key silicon and data center partners, we enabled the industry's first 1.6 terabit transmission and data center interconnect, leveraging our high-speed digital solutions.
Aerospace, Defense, and Government business revenue grew 4% for the quarter and 3% for the year, setting a new record while navigating geopolitical headwinds. Steady investments in spectrum operations, cybersecurity, and space and satellite drove demand. 5G continued to expand in aerospace and defense end markets, and we saw increasing investment in advanced research. Proposed increases in investment in the U.S. and allied countries for modernization of defense capabilities and new satellite and space applications position us well for future opportunities. As an integral part of our solution strategy, software and services order and revenue growth this year continued to outpace Keysight overall, which has driven our annual recurring revenue to approximately $1.2 billion. Software and services again represented just over 1/3 of Keysight's total revenue for the year. Keysight's focus on customer success and innovation is driving our development of first-to-market high-value solutions.
Our achievements over the years exemplify Keysight's collaborative culture and our talented workforce, and we are honored that Keysight has placed 10th on the Fortune's Best Workplaces in Technology list for 2022. We believe our differentiated culture gives us a unique ability to recruit and develop capable talent and will be our sustaining competitive advantage. In conclusion, I would like to thank our employees for all their contributions, commitment, and strong track record of execution. In the midst of an uncertain economic environment, we remain confident in the resilience of our business, the strength of our balance sheet, and the flexibility of our operating model. Now, I'll turn it over to Neil to discuss our financial performance and outlook in more detail.
Thank you, Satish, and hello, everyone. We delivered an outstanding fourth quarter of 2022 with record revenue of $1,443 million, which was above the high end of our guidance range and grew 11% or 15% on a core basis. Our strategies to navigate the ongoing supply constraints continue to be effective. While the supply chain situation improved within the quarter, it continues to moderate our near-term revenue expectations. Record orders of $1,570 million increased 5% or 9% on a core basis, and we entered fiscal year 2023 with over $2.5 billion in backlog.
Looking at our operational results for Q4, we reported gross margin of 64%, which, as expected, was down 80 basis points sequentially due to inflationary pressures and increased shipments of lower-end instruments enabled by the improving supply chain. Operating expenses of $494 million were well managed, and we generated operating margin of 30%. Net income was a record $386 million, and we achieved $2.14 in earnings per share, which was $0.14 above the high end of our guidance. Our weighted average share count for the quarter was 180 million shares. Foreign exchange impact on our earnings was negligible, thanks to a meaningful natural hedge provided by our global footprint, which was then supplemented by our financial hedging program. Moving to the performance of our segments.
The Communication Solutions Group achieved record revenue of nine hundred and ninety-two million dollars, up eight percent or eleven percent on a core basis. CSG delivered gross margin of sixty-six percent and operating margin of twenty-nine percent. Commercial Communications generated revenue of six hundred and eighty-one million dollars in the fourth quarter, up ten percent, driven by strength across the 5G ecosystem, increasing O-RAN adoption, and investment in eight hundred gigabit and one point six terabit R&D. Aerospace Defense and Government achieved record revenue of three hundred and eleven million dollars, up four percent, driven by double-digit growth in Asia-Pacific and Europe. The Electronic Industrial Solutions Group achieved record revenue of four hundred and fifty-one million dollars, up twenty percent or twenty-five percent on a core basis, driven by strength across all markets. EIS reported gross margin of sixty percent and operating margin of thirty-two percent.
Turning to our full-year financial performance, Keysight delivered outstanding results in 2022 despite ongoing supply constraints, foreign exchange headwinds, and incremental trade restrictions. FY 2022 revenue totaled $5.4 billion, up 10% year-over-year or 12% on a core basis. Gross margin was flat at 65%, holding steady in the face of significant inflation. We invested $813 million in R&D while operating margin improved 140 basis points to 29%. FY 2022 non-GAAP net income was $1.4 billion or $7.63 per share, up 22%. Moving to the balance sheet and cash flow.
We ended our fourth quarter with more than $2 billion in cash and cash equivalents, generating cash flow from operations of $398 million and free cash flow of $340 million. Total free cash flow for the year was $959 million, representing 18% of revenue and 69% of non-GAAP net income. Share repurchases this quarter totaled approximately 800,000 shares at an average price per share of $158.77 for a total consideration of $126 million. This brings our total share repurchases for the year to approximately 5.4 million shares at an average share price of $156.09 for a total consideration of $849 million or 89% of free cash flow.
Now turning to our outlook and guidance. We exit the year with record backlog and confidence in Keysight's ability to continue executing through near-term uncertainties. As a result, we expect first quarter 2023 revenue to be in the range of $1,360 million-$1,380 million, and Q1 earnings per share to be in the range of $1.81-$1.87 based on a weighted diluted share count of approximately 180 million shares. A few modeling reminders as we enter the year. Our annual compensation cycle is administered in Q1, and in this current inflationary environment, we expect our second consecutive year of wage increases above our historic average. We are targeting F.Y. 2023 R&D investment at approximately 16% of revenue.
Annual interest expense is expected to be approximately $80 million. Capital expenditures are expected to be approximately $250 million, and we are modeling a 12% non-GAAP effective tax rate for FY 2023. In closing, we recognize the uncertainty of the current macro environment and will continue to be disciplined. Keysight's highly flexible cost structure, track record of execution, diverse end markets, and long-term secular growth drivers give us confidence in our ability to outperform the market. With that, I will now turn it back to Jason for the Q&A.
Thank you, Neil. That concludes our formal remarks. Dante, could you please give the instructions for the Q&A?
Of course, sir. Ladies and gentlemen, if you would like to ask a question, please press star one. We ask that you please limit yourself to one question and one follow-up. To withdraw your question, please press the pound sign. Please hold while we compile the Q&A roster. Our first question comes from the line of Samik Chatterjee. Your line is now open.
Hi, this is Angela Jin for Samik Chatterjee. Congrats on the strong quarter and outlook.
My first question is sort of related to what you mentioned briefly in the prepared remarks on sort of macro slowdown and perhaps some pullbacks. I'd like to dig in a little more there, you know, given that we've seen commentary from other companies indicating that there is a pullback in telco CapEx. Are you seeing any impact to their R&D budgets? I have a follow-up. Thank you.
Thank you, Angela. Yes, we're very pleased with the quarter and, you know, in consideration of this environment, pretty strong results and also a strong finish to the year. As I stated, we saw a steady level of spend from a demand perspective through the quarter. All our regions from a sales perspective grew, so it was broad-based. Going into a little bit on the end market color, I would say 5G continues to remain strong. We grew our 5G orders, double-digit strength in R&D. Also with the inflections that we're seeing in deployments around some parts of the world, even some of the manufacturing spend there remained strong for us this quarter.
We did see pockets of weakness in the broad component ecosystem, and that was an area we obviously watch carefully, and that is related to the smartphone demand. If you look at the cloud and data center markets in wireline, while some of the cloud direct cloud spend from the cloud providers was pushed out, service providers was pushed out, the broad spend to adopt 400 gig and 800 gig continues to remain strong. The focus on R&D and new innovations remain strong. Moving on to aerospace and defense business, obviously, you know, it was still a strong quarter for us, but we did not see the typical year-end surge that we would expect given the budget appropriations process.
Moving to EISG end markets, all of the markets remain strong, right? Automotive, we had strong double-digit growth as continued investments and inflection from EV and AV are playing out. Semiconductor is an area we watch carefully, but because of our exposure into the wafer stage equipment process and new node, specifically new nodes, that remains strong. Lastly, the general electronics business, which typically gets its part of its spend from PMI, continued to remain strong from a demand perspective. I would say we're doing well and the customer activity with our customers and engagements remain strong and quite pleased with our quarter in this environment.
Great. Thank you so much for that color. Just for my follow-up, you posted 10% revenue growth this year, and I know your long-term guide is sort of mid-single digits revenue growth. Just what are you thinking sort of broad strokes for fiscal 2023 revenue growth? You know, did you see any pull forward with supply easing? Could there be an air pocket in fiscal 2023, or do you still expect to sort of perhaps trend above your typical long-term range? Thank you.
Yeah. We remain confident, Angela, with what we see so far. Obviously, it's an uncertain environment, so we're guiding one quarter at a time. You see the confidence reflected in our Q1 guide, which we feel good about. As we look forward, you know, we'll look at the demand environment, and we'll keep you updated as we go.
Thank you for your question, ma'am. Our next question comes from the line of Chris Snyder with UBS. Your line is now open.
Thank you. I just kind of wanted to follow up on those comments on the market demand commentary. I mean, orders were, I think you said steady each month of the quarter and up 9% year-on-year. What should we make of the commentary that, you know, maybe customers are being a bit more cautious? Because, you know, Satish, as you just kind of ran through all the different subsegments and businesses, it seems like, you know, everything is going quite strong. You know, should we take this as maybe an indicator that fiscal Q1 orders are easing a bit? Ultimately, does this push that, you know, the growth profile back to that 4%-6% normalized range, or could it sink below that?
Thank you.
Hi, Chris, this is Mark. I'll take that and add a little bit more detail here. You know, as Satish said, our order level was steady throughout the quarter. We're watching this, right? Because if customers are taking more time to make decisions, you would look for orders to slow down. They did not. As a matter of fact, October was very strong. It was a record October for us in terms of orders. That's good. You've heard us talk about before the addition of new customers. We've added about 450 this quarter, again for nearly 2,000 new customers across the whole year. That creates more diversity and durability to our business, and I see that paying off. Our top 20 customers in the quarter were up strong double digits as well.
All of that continues to translate to the fact that we did not see an impact to our business because of the customers taking more time. I think it also has to do with the fact that we are so biased toward R&D and design optimization. As we've seen through other waves in the recent term where some markets slowed, the advanced technology development continues. That's what we see, but we look around, and we do see some macro uncertainty. From my seat, what I see in terms of order or in terms of customer activities is very active customers. Our six-month funnel continues to grow, but customers are taking more time to make ultimate CapEx decisions.
Yeah, this is Neil. I just give you a little bit maybe more quantification of the situation going into Q1. While we don't guide orders, I would point out that we have, you know, a bit of a difficult compare here in the first quarter. A year ago in Q1, that was the first time in Keysight's history that we'd ever posted order growth moving from the end of Q4 into the first quarter of the new fiscal year. We've got a tough compare from that perspective. In addition, as you all know, the U.S. dollar began to strengthen pretty significantly in the back half of this year.
We estimate the FX headwind in our first quarter to be a full five percentage points. We've got a five-point FX headwind, and we estimate another 2-3 points of headwind from the recent increase in China trade restrictions, as well as the loss of our Russia business which happened in the second quarter of last year. Those things combined give us a 7-8-point headwind just coming out of the gate here as we enter the first quarter.
I appreciate that. You know, on the commentary that customers are taking longer to order, maybe they're ordering slower, you know, how do you separate, you know, kind of the supply chain element of that from the demand element? Because, you know, if supply chains are generally moving in the right direction, you know, I think that maybe customers will not, you know, kind of order with the same lead times or urgency that we saw last year. Thank you.
Yeah, Chris, I think you're right. I think as the supply chain continues to ease and the delivery duration that it takes for us to fulfill an order continues to pull in, you would expect some level of normalization as well. The reason we also put out that the demand environment is moderating is we're starting to also see some of our customers whose earnings has fallen also put additional scrutiny on spend, right? That takes a little bit more time to close the deal as they go through their process. Those are some factors. Neil, I know you've commented on the normalization before.
Yeah. I guess the only other point that we'd make around that level is if you look at our last three years, we've averaged a book-to-bill over the last three years of 1.09, driven first by COVID, obviously, then by the supply chain disruption that's happened over the last, say, 18 months. We've known for some time that that book-to-bill had to normalize, and as our lead times come in, we would expect that normalization to occur. You know, as I think about it, and again, we're not guiding orders, but a move of our book-to-bill back to a more normal level, something approaching one, is not something that's gonna impact our ability to continue to grow revenue.
I appreciate all that color. Great quarter, guys. Thank you.
Thank you, Chris.
Thank you for your question, sir. Our next line of questions comes from the line of one Mehdi Hosseini with SIG. Your line is now open.
Yes. Thanks for taking my question. Two follow-ups. I want to go back to CapEx, the $250. Should I assume that capital intensity will remain around 3% in fiscal year 2023?
Yeah. I mean, one of the things that's happening with our CapEx is, you know, our capital purchases in this fiscal year were definitely impacted by the broader supply chain environment. You know, we guided at the beginning of the year, I'm talking about fiscal 2022 now, to CapEx that was close to $250 million, and we significantly underspent that from a cash flow perspective. What you can't see is that our commits were very much in line with our original expectations. It just took longer for things to be delivered. What we're seeing as we go into next year is a pretty dramatic scaling back of new capital purchases, but with a little bit of a cash flow overhang as we go into next year.
That's what's gonna carry our capital purchases up to that 250 million-dollar level in fiscal 2023.
I shouldn't use your CapEx guide to come up with some revenue guide or revenue growth expectation for fiscal 2023.
You should not.
Cash flow aspect of the CapEx, right?
That's right.
Okay. Want to go back to China. The APAC region as a percentage of revenue has remained in the low 40% over the past several years, including the headwind from Huawei. Should I assume that you are growing outside of China so much to the extent that you are able to offset increased restriction on shipping to China? Is it just a mix within the APAC region that makes China kind of neutralized?
Yeah. I think, Mehdi, as we have spoken before, you know, we have a broad-based business in China, and despite the ongoing geopolitical situation, we have a demonstrated ability to pivot and address customers in that region. Given the focus there on technology development, I think, you know, we're seeing good demand in the region. We're also seeing multinational companies that are moving out of China in some ways and into rest of Asia Pac and other parts of the world, including onshoring moves into North America, and we're successfully capturing some of that spend as well.
Okay. The fact that the supply chain is moving out sort of China, that's positive. Now, if I may just quick follow-up. You do have more than 50% exposure to your customers' R&D budget. On top of that, there is structural changes happening with the supply chain that is also positive, and those two factors on aggregate could offset some of the cyclicality nature or production-related sensitivity or volatility. Is that the right way to think about this?
I think that's what's playing out right now for us, yes.
Okay. Thank you.
Thank you.
Thank you for your question, sir. Our next line of questions comes from the line of one Matthew Niknam with Deutsche Bank. Your line is now open.
Hey, guys. Thank you for taking the question. Two, if I could. First on backlog. You mentioned you ended the year at about $2.55 billion. I think our math would suggest something about $100 million higher, just relative to the $2.5 you mentioned last quarter. I'm just wondering if there's any order cancellations to be aware of, or if there's an FX component affecting this. Secondly, on the China trade restrictions, I think you'd called out a 2-3 percentage point headwind from those restrictions. I'm just wondering, is that incremental in fiscal 1Q, and is this primarily an EISG, or could it show up elsewhere? Thanks.
Yeah. This is Neil. I'll take the backlog question and then let Mark address the China question. Yeah, I mean, obviously our orders within the quarter outpaced revenue by, you know, a little bit more than $100 million. We do continue to add to the backlog, you know, as we've gone throughout the year.
Yeah. Matt, the specific China trade situation, that went into effect on October 7th. There wasn't much effect in our Q4. We will see some effect in our first quarter. The 1%-2% is projecting out over a run rate of business for the entire year based on other situations. The other thing just to note is that we have not seen any changes in our cancellations. It's been running at a historically low level for the last four quarters. That was the case again in Q4.
Got it. Thank you.
You're welcome.
Thank you for your question, sir. Our next line of questions comes from the line of one Aaron Rakers with Wells Fargo. Your line is now open.
Yeah, thanks for taking the question and congrats on a good execution in the quarter. I just wanna at a high level go back to kind of the defensibility of the model, if I can. Can you remind us where, you know, the mix of the business stands today between, you know, R&D exposed versus, let's say, manufacturing exposed? I guess on that same kind of thought process is that, you know, where do you stand as far as the monetization effect of the software strategy? Where do we think that progresses to over the next year, whatever timeframe you wanna think about?
Yeah. Thank you for the question. I think at the highest level, we're at approximately 60% R&D today, 30% manufacturing, and 10% deployments. That's the sort of mix of the business. Clearly, we believe R&D is secular. You look at some of the areas in R&D that we're focused on that involve next-generation innovations, such as with 5G and then 6G and automotive and digital health, so on and so forth, and it really gives us this diversity of applications that gives us a resilience in this environment for sure. With regard to the software strategy, it again goes congruent with our go-to-market approach because we're here to enable innovations to happen faster, and the way we do that is by offering more software-centric solutions.
As we deploy more solutions to our customers, increasingly, you know, that is in the form of growing software mix. That goes again synergistic with our services strategy. You look at our software and services revenue this year will end at 34% of the total mix, and with our ARR or annual recurring revenue is reached a new high of $1.2 billion. We'll continue to invest to grow those portions of the business and increase our resilience and durability over time as well. Thank you.
Yeah. Thanks. As a quick follow-up, if I can. You know, just curiously, when we think about, you know, the progression of backlog, we appreciate that your backlog is only looking out on a forward six-month basis. Neil, just curious, how should we think about what a normalized backlog level looks like?
Yeah. I mean, given some of the dynamics that Satish just talked about, increasing software services, recurring revenue, you know, we have seen growth in our deferred revenue over the same three-year period of time, as well as our migration towards systems rather than tools, I think will drive our ultimate, you know, backlog level, you know, when things normalize to be significantly higher than it was, say, you know, pre-COVID in the 2018, 2019 timeframe. I think we'll have to see how that plays out over time. I think, you know, again, you can do the math.
We built, you know, well north of $1 billion of backlog over the course of the last three years as we've had this, you know, book-to-bill that I've mentioned of 1.09.
You know, as our lead times come in, we're gonna expect, you know, ordering patterns to adjust and, you know, lead times to pull in. I've said previously that there's probably 4-5 weeks worth of kind of abnormal backlog as a result of a 4-5-week extension of lead times, kind of on average, would be a way to think about it.
It's also important to add that we're still in a supply, you know, challenge environment. While it's improving, supply is the constraining factor right now.
Thank you.
Thank you for your questions, sir. Our next line of questions comes from the line of one Jim Suva with Citi. Your line is now open.
Thank you so much. It's very noteworthy and impressive about your software and services, which I think is about 34%. Can you help us understand, like, reasonable growth as a percent of totality going forward? 'Cause I would imagine it's very hard to ever get over 50% or, you know, are you looking at a point where it starts to level off around, you know, 35% or is that way too low, 40%? Where could this kind of feasibility go for software and services as you kind of look at adding these incremental benefits to your sales process?
Yeah, Jim, I think as a strategy, you know, as a company from in 2015, we've been focused on the software-centric solution strategy and really focused on our customers' most demanding and challenging problems that they have and solving this better than anyone else. As we have continued to do that, our strategy has taken the form of not just a per incident sale, but our focus on this life cycle of, you know, value creation for our customers, but also value capture for Keysight. That's the journey we've been on.
Some of the more newer solutions, such as in Open RAN that we've talked about where we are seeing considerable traction, software alone is nearing 40%-50% of the total sale value, and with a lot bigger portion of it being in the recurring category as well. We feel good about the continued traction we're seeing for our solutions. As we continue to deploy the solution strategy over time, we will enter into new end market verticals. As you've seen some examples I put out this latest earnings announcement, we've also had some successes in the automotive sector with deploying software and in the semiconductor as well with our design offerings. Mark may make some comments on the sales side.
Yeah. Thanks, Satish. Jim, what I would ask is the go-to-market, you mentioned that, and that is an important element of this. We are attaching upfront attached services and software. We're at about 60% for services today. I wanna see that grow, so that's another stream of advancement. The other thing that you can see is we are delivering solutions more and more through updates to our software. If you think about our 5G solutions going from release 15 to release 16 and 17, much of that is software updates that creates additional opportunities for upsell, cross-sell, and, of course, recurring revenue as well. There's several elements of our go-to-market that we are deploying now to encourage that recurring growth and expansion of attachment upfront to our total solutions.
Great. My follow-up is on the China. I think I heard 2 points-3 points of headwind. Is that for kind of the full fiscal year? Was there any, like in fiscal Q4, like, buying ahead of the rule changes? I'm just trying to kinda, you know, triangulate around the magnitude of it. I assume after fiscal 2023, it's gonna cut all out of the model from the rule changes.
Yeah. Yeah, Jim. I think we said 1-2 points of headwind for the entire fiscal year 2023. Again, that's based on what we estimate as the run rate of business that won't be available to us with the new trade restrictions. There will be a little bit more in Q1 as we look at some of the backlog, but that's the run rate. I think Neil mentioned another point of headwind from Russia.
Great. Thank you so much, and congratulations to you and your teams.
Thank you, Jim.
Thank you for your questions, sir. Our next line of questions comes from the line of one Meta Marshall with Morgan Stanley. Your line is now open.
Great. Thanks. In the past, you guys have talked about kind of, you know, that the 5G peak was going to be much later than kind of investors were expecting, but you kind of talked about a 2023-2024 time period for the 5G peak. I just wanted to kind of get current thoughts on that and just how initiatives like O-RAN or just some of the other initiatives are maybe extending that. Maybe second, you know, you gave some context that you're seeing some loosening in supply chain, but just kind of what is current thinking, you know, is it still just a small amount of parts that you're kind of waiting to release? Just when do you see more general availability of those parts and just kind of a tightening between supply and demand? Thanks.
Yeah. Thank you, Meta. I think on the 5G front, I think as we have always stated, you know, there is multiple catalysts. I think about 18 months ago, I said the first catalyst was the C-band deployments in the U.S. That's played out as we had hoped, and we have captured a lot of that spend. We are pleased with some action that's happening in Asia and India, parts of India that have made commitments to roll out 5G. That's again, opportunity for us, that's playing out right now. The second and the third parts to this is the millimeter wave opportunity.
There's still some complex challenges with millimeter-wave that customers are trying to solve that continues to be a longer-term R&D opportunity for us as that deployment has continued to push out, anyway, scale deployments anyway. Lastly, as 5G is deployed, you know, operators are looking to further monetize by adding the SA versions, and new applications such as Open RAN gain traction across the global ecosystem. The opportunity that we have in R&D continues to grow, and we're well-positioned with the comprehensive offerings we have to address it. I also want to point out that, you know, we have a very diversified business.
Yes, 5G gets a lot of attention, but we have secular trends in wireline evolutions which we're well-positioned to capitalize on based on the acquisitions of Ixia that we have made, and we continue to see tractions there. Not to mention the newer additions to our go-to-market with automotive and with next-generation semiconductor nodes. We run a diversified business, and I think that's that source of greater stability for us and over time. The second part of the supply chain question that you asked is, you know, at the beginning of last year, you know, we took a series of actions to basically redesign our products to second source components.
We've talked about it on earnings calls, and all those actions have really enabled us to do better than we expected every quarter. As we think about the supply chain, I speak with a number of our semiconductor supply chain partners, and they're all putting actions in place to obviously increase capacity, but it still continues to be a constrained environment. We're not back to this pre-COVID sort of supply environment yet, and it might take all of 2023 to get there from our best information right now.
Great. Thank you.
Thank you for your questions, ma'am. Our next line of questions comes from the line of one David Ridley-Lane with Bank of America. Your line is now open.
Sure. Good evening. You talked about some of the headwinds to revenue in the first quarter. One tailwind not mentioned is pricing. I'm just sort of wondering, you know, how significant is pricing today versus more normal levels? I mean, are you getting a couple of points tailwind from that? You know, what type of volume growth is really embedded into first quarter's guidance?
What was the last part of the question? I'm sorry, David, I missed just that last part.
Oh, sorry. The type of volume growth is embedded in the first quarter guidance.
Right. Yeah, I mean, I think the pricing question, obviously, we've been doing our best to keep pace with inflation. We've had multiple rounds of price increases over the course of the last 12-18 months. You know, those are embedded in the backlog. Although I think you can see, you know, based on the fact that we have maintained margins over the course of fiscal 2022 at flat at 65%, which frankly, I think in this inflationary environment was a very strong result, that we're basically keeping pace on a margin basis with what we're seeing in terms of increases.
You know, right now, while on the one side, yeah, we have these price increases that are embedded in our backlog and will continue to yield dividends and revenue, it's not like the inflationary elements have stopped in the cost structure as well. You know, I referenced, for example, that we are going to be, you know, doing our salary administration for next year here in our fiscal first quarter, and this will be our second consecutive year, you know, with salary increases that are materially above our historic averages. As to the volume question, you know, given the nature of our business, where we're selling instruments that literally cost, in some cases, hundreds of dollars, and in other cases cost million dollars, that's a very difficult question to answer.
There's such a high deviation of mix that it's really hard to get to a meaningful answer on that question.
Sure. As a follow-up, you know, another tailwind here is autos, right? I think last quarter you mentioned that it's basically doubled over the last two years. This quarter you mentioned $500 million in orders. It's nearing close to 10% of your orders in this fiscal year. Do you feel like the trend there is kind of, I don't want to say not subject to sort of macroeconomic conditions, but certainly has a strong secular element to it?
David, this is Mark. I'll answer that. You know, the growth we're seeing is coming from next-generation mobility. There's some continuing R&D on the electronic side that's more conventional. The growth in new mobility is sustaining, it is secular, and it doesn't just stop at the vehicle. It goes out into the charging infrastructure, into the underlying battery technologies.
You know, we've seen what's happened here in the last year with different countries and different regulations pushing this further toward adoption. The adoption in Europe is very strong and growing fast in other regions as well. Our position in the market is very strong, helping our customers design and deploy this next-generation technology from the batteries to the charging infrastructure. Add on top of that all the connectivity and communications and protocols as we talked about in the prepared statement. This is really a great intersection of multiple strengths for us, and it has long-term secular growth drivers behind them.
Thank you very much.
Thank you for your question, sir. Our next line of questions comes from the line of one Robert Mason with Baird. Your line is now open.
Oh, yes. Good evening. Thank you. Neil, I wanted to just clarify, you mentioned that R&D, I thought would be roughly 16% of revenue this year. I just wanna make sure that's correct because this is about a point more than it was this past year in 2022. Just I'm curious how that steps up and, you know, what does an exit rate look like if that's the case?
Yeah. You're right. Obviously, our 16% or 16%+ has been our long-term target. We underspent that here in FY 2022. I think a big function of that was the revenue outperformance within the year. If you remember this time last year, we guided you to 6% revenue growth on the year, and we actually grew 12% on a core basis. Our R&D plans for the year were much more aligned with that lower level of revenue growth. I think, you know, as we go, we certainly continue to see a large amount of opportunity for us to continue to invest in the future growth of our business. A lot of pull from our customers to do R&D work. Our intent is to ramp back towards 16% of revenue.
Uh, obviously, the salary administration here in the, in the first quarter is gonna, is gonna help to move us, uh, in that direction. We, uh, we may not get to sixteen percent here in the first quarter, but, uh, looking at an exit rate that's at sixteen percent or even potentially a little bit above by the time you get out to the fourth quarter is not, uh, is not out of the question.
Okay. That's helpful. You know, to the extent that supply chain does still remain somewhat tight through the year, how are you thinking about working capital and any ability to pull that down as you go through the year? What are you thinking about working capital contribution for the year?
Well, I certainly think over the longer term, you know, that as the supply chain normalizes, there will be an opportunity for us to reduce some of the working capital that's built up over the course of the last year. We see it in terms of inventory, increased inventory via the prices that we're paying for parts. We see it, money tied up in terms of commitments to buy future inventory where we paid in advance for future delivery, has been a use of working capital that frankly is new over the course of the last 12 months. Frankly, the supply chain situation has significantly impacted the linearity of our revenue within the quarter.
You can imagine when you move from more of a just-in-time environment where you're just building and shipping and building and shipping, we're doing a lot more, you know, build to a certain stage, wait for parts, finish and ship. Our revenue has tended to be more back-end loaded, which results in us carrying more receivables at the end of the quarter than we would if we were shipping in a more linear fashion. Again, I think it's a function of how does a supply chain normalize and when does that eventually happen? That is, you need a little bit of a crystal ball to answer that question. When it does happen, we would expect to see an ability to reduce working capital.
Very good. Thank you.
Thank you for your question, sir. That concludes our question and answer session for today. I would like to turn the conference back to Jason Kary for any closing remarks.
Thank you, Dante, and thank you, everyone, for joining us. As he mentioned, that concludes the call, and we wish you all a good evening and look forward to seeing you soon.
This concludes our conference call. You may now disconnect.