Keysight Technologies (KEYS) Baird 2024 Global Consumer, Technology, & Services Conference summary

Market environment and business outlook

• End markets have stabilized with little change in outlook over the last quarter, though most are experiencing a pause.

• Wireline business is showing positive inflection, driven by AI, turning commercial communications order growth positive for the first time in six quarters.

• Wireless sector still has significant 5G evolution ahead, with 6G expected late in the decade; aerospace defense remains stable and positive.

• Semiconductor sector anticipates growth from supply chain efforts and re-onshoring, with long-term secular growth themes intact.

• EISG faces a few more quarters of tough comparisons, but AV/EV investments for next-gen auto remain strong.

Cost management and margin strategy

• Operating expenses are expected to decline low single digits year-over-year, mainly from SG&A savings, while R&D investment is maintained.

• Structural cost flexibility includes variable pay for all employees and a 4-5% headcount reduction through attrition, early retirement, and targeted restructuring.

• Permanent and temporary cost reductions position the company to convert top-line growth into profitability as markets recover, targeting 40% operating leverage with mid-single-digit growth.

• Gross margin is mix dependent, with overall stability around 65%; communications business margins are higher and more stable than industrial.

• Commitment remains to long-term targets of gross margins in the upper 60s and operating margins in the low 30s, though timelines may be extended due to current market conditions.

Communications segment developments

• Wireline business, about 40-50% of commercial comms, grew double digits last quarter, driven by AI/ML applications and data center expansion.

• Demand is strong for design, emulation, and test tools across the data center ecosystem, with new customer segments emerging due to AI/ML.

• Solutions serve multiple tiers: chipset makers, component manufacturers, network gear makers, ODMs, and hyperscalers, with increasing adoption from new players.

• Wireline business is heavily weighted toward R&D workflows, with high-margin manufacturing as a smaller portion.

• Wireless business is stable, with growth potential from further 5G deployment, new use cases, and upcoming standards releases; catalysts include 5G SA, industrial/private networks, and AI-driven devices.