Neil Dougherty: No. I think that’s basically — we are performing in line with the model, right? So, if you take a look at what’s happening, obviously, you see the significant sequential decline in ESI, which is as expected. But if you adjust for that, you’re seeing a mid-teens kind of decline in the core business, right, from a revenue perspective. And we’ve talked about the downside model that contemplates 300 basis points to 400 basis points of operating margin decline when revenues are down 10%. Obviously, we’re down significantly more than that, but we’re continuing to perform basically in line with that model. We’ve taken significant actions. Our cost actions started last year and enabled us to deliver record operating margins on flat revenue in an inflationary environment.
And then, this quarter, as it started to begin to appear that the recovery was pushing out, we’ve taken incremental actions that are going to benefit us. We now expect that total OpEx for the company will be down low-single digits on a year-over-year basis prior to the addition of ESI. And all of that reduction is going to show up in the SG&A line items as we like to strike a balance between investment and financial performance. We’re going to maintain our investments in R&D. We would expect R&D to be flat. But again, total OpEx down about 3%, driven by actions we’ve taken to control SG&A.
Adam Thalhimer: Okay. And then just a quick one on — how is auto demand holding up in this environment, EV/AV charging?
Mark Wallace: Yeah, Adam, in the quarter, we saw continued R&D spend for battery and charging infrastructure. We expect that to continue. Manufacturing spend, supply chain spend was down. You’ve seen unit volumes drop for both conventional and EV demand. So that’s where we see that. But e-mobility, which is EV and autonomous, as Neil mentioned, as I mentioned, the funnel remains strong, very robust, as we look at Q2 into FY ’24. A lot of this is a long-dated program spend around battery test charging infrastructure. Some of these products — programs are fluid. So many of them are based on some government subsidies that you may have read have been delayed in Europe and so forth. But we’re tied into all of those. And as we look forward, this space continues to be one that’s going to be driving growth for us for a long time.
Satish Dhanasekaran: And also, some of the capabilities that we have developed around electrification are finding new applications in aerospace and defense and other end-markets that are also going to be impacted by the similar trends. And so, we’re quite pleased by the leverage and synergies we’ll see as we move forward.
Operator: Thank you. The next question is from Tim Long with Barclays. Your line is open.
Tim Long: Thank you. I wanted to ask one on the wireless business. Can you just kind of run through some of the technologies and give us a sense how they might be influencing the business? Just curious, you mentioned the 5GPP standards. What’s on the come there? Anything new with millimeter wave, or 6G, or O-RAN? If you could just kind of give us a little state of the union on those? And then, I have a follow-up.
Satish Dhanasekaran: Yeah, we’ll do. Tim, I think at the highest level, what we’ve seen so far is that Release 15 and 16 deployments that have occurred largely in the United States and in China and now in India. So, we expected, and we’ve talked about this to the industry capital, would peak some point in ’22-’23. So roughly we got that timing right. But if you think about the business model that we established for commercial comms and for our wireless business, it was always about more vector to service the R&D customers. So, while even in this environment, the volumes are down especially the manufacturing production-related volumes with the RAN markets down. So, we’re starting to see that effect and the businesses normalizing.
But what we’re continuing to see is customers engage with us in buying upgrades for their release library. So going from 15, 16 to 17 as an example, which is much more evolutionary nature. But as we think about the future now, the roadmap is very clear. It’s sort of a roadmap for the next five years where the industry is working on Release 18, Release 19 followed by 20, which would include some early study items on 6G as an example. But some of the same ideas that we had for growth, which are built around vertical industry expansions with AI ML, new device form factors such as the Vision Pro that’s just launched that’s capturing a lot of imagination on what augmented reality can mean in the future. And just sort of the integration I should say of satellite communications and terrestrial networks is opening up new threads of innovation and exposing us to more customers that want our capability.
So all-in-all, in balance, I look at the capabilities we have, our market leadership position that we’ve established in 5G, and I feel confident that post-normalization of this demand that we can return the business to growth even prior to 6G. But that’s yet to play out, but that’s our best thinking at this point.
Tim Long: Okay, great. And then I just wanted to follow up on the optical side. It sounds like 400 gig, 800 gig are pretty strong. Could you talk a little bit about what you’re seeing on R&D for the cycle beyond that? And also, curious about what’s going on the software side Ixia and some of the other software businesses related to optical wireline. Thank you.
Satish Dhanasekaran: Yeah. I think, what we’re seeing is obviously, the first instantiation with every technology like this, where 100 gig times 400 gig times eight sort of topologies are currently being — are being deployed. And so, we’re obviously, engaged with that and we’re starting to benefit from that. But the roadmap is clear, right, then it’s going to get to 200 times four, because the scaling continues and leading to even higher-speed research in 1.6 terabits and beyond. So that’s on the wireline side. The Ixia business or what was Ixia business, we — it’s integrated into our wireline business and it’s been remarkably stable for us in the commercial communications market because of the higher services and software content associated with that business.
And it’s also a business that doesn’t really trend up that significantly during upcycles. So, it’s been a very steady business for us. And one we’re — now we’re able to take out some of the traffic generation capabilities and adapt it to go address some of the emerging AI use cases. So, we’re quite pleased by the assets we have in the company and by our ability to go and solve customers’ emerging challenges even beyond the traditional segments we serve.
Operator: Thank you. The next question is from the line of Aaron Rakers with Wells Fargo. Your line is open.
Aaron Rakers: Yeah. Thanks for taking the questions. I have two as well. Neil, I wanted to go back to your prior comments on kind of backlog. I know last quarter — last couple of quarters, you’ve talked about these longer-dated backlog or order dynamics, and I think even last quarter you quantified it at like $400 million. Can you give us an update how much of your backlog today is kind of these longer-dated deals? And could we consider them as kind of large lumpy deals that possibly rev rec wise show up late this year into more so ’25? Or how do we just think about that?
Neil Dougherty: Yeah. From a backlog perspective, we’re in the $400 million to $500 million range of our backlog as these long-dated deals. You are correct that they tend to be larger lumpier deals in aerospace, defense, auto, and even in the semi space. And as I said on the previous question about this, we’ve actually started to see them now, because we started to see the ramp in a little bit in Q1 of last year, but then really in earnest in Q2 of last year on the order line, and some of those things are starting to flow through to revenue now. Now, we’re not at 8% yet from a revenue perspective. We expect to be there by the end of the year. But just as you suggested, it is lumpy, right? So, you could end up in a situation where there is relatively lower either order or revenue activity from these types of transactions and some other quarter you might have double activity just given the nature of the business.
Aaron Rakers: Yeah, that’s helpful, Neil. And then, as a second question, I wanted to go back to the AI networking discussion. Clearly, a lot of focus here, but a lot of focus on the wireline side is this 400-gig, 800-gig transition towards Ethernet versus InfiniBand. I’m curious to Keysight’s positioning. Is there a disproportionate position around Ethernet and the deployment cycle of back-end AI networks based on Ethernet versus InfiniBand? Or is it maybe not such that we should delineate between the two for the company?
Satish Dhanasekaran: Yeah. I think for us, we don’t try to pick winners. In some ways, innovation is best served when you have multiple competing technologies approach the same challenge. But fundamentally, data is growing. The pattern of data through these networks are altering and changing, which requires the communication systems to adapt. And I think all the way from memory to network, NIC cards, to compute architectures are getting more heterogeneous if you will. So, more standards. I talked about CXL, the Ultra Ethernet Consortium, PCIe Gen-7, et cetera. So, all of that really creates a real good bed of technologies for us to service through our platforms. And often, it’s the same underlying platform — I missed out USB 4.0, but often it’s the same sort of underlying platforms that we have from all the way from oscilloscopes, to our BERTs, to our network traffic emulators from our Ixia acquisition.
So, we tend to go approach these things and then add in more software capabilities as we move forward. We’re actually quite pleased with the performance and the resilience of our software business even through these times. And software and services represents roughly now 40% of the total order/revenue in the most recent quarter, and we’ll continue to keep growing the value of the company. Our ARR was also up double digits this quarter.
Operator: Thank you. The next question is from Matt Niknam with Deutsche Bank. You may proceed.
Matt Niknam: Hey, guys, thanks for taking the questions. Just maybe unpacking the guide for fiscal 2Q, are you anticipating modest sequential pressure across the board? Or are there any pockets in the business where you may be anticipating or seeing some level of sequential improvements in the fiscal second quarter? And then maybe just secondly, in terms of — we talked a lot about wireline. I’m just wondering on the wireless side, expectations for that business this year, simply given maybe some green shoots we’re reading about, and also the fact that seem to be a business that maybe started seeing the downturn a little bit sooner. So, I’m just wondering if there’s any additional color you can share in terms of expectations for the year. Thanks.
Satish Dhanasekaran: Yeah. I’ll take the second part, then I’ll have Mark sort of walk through his thinking on the pipeline, which really no impact — I mean, which really flow into our guide, if you will. On the wireless side, I think we’re continuing to expect stability and moderation as it comes off of strong peak demand years in ’21 and ’22. So that normalization phase continues to play out over the next couple of quarters, and that’s sort of our base case thinking on wireless. All of the R&D activity that I described continues on, but we’re still waiting for any inflection in component spend which we’re not seeing at this point. So that’s sort of our expectations on wireless. And I’ll just have Mark make some comments on the pipeline.
Mark Wallace: Yeah. And Matt, I think it’s more of the same what we’ve been speaking about in terms of the markets that are driving growth. I expect aerospace, defense to continue to be an area of driving growth for us, not only in the US but in Europe and other countries that are faced with the geopolitical situation that exists today. We are operating under continuing resolution in the US, which we’re expecting that budget to be signed this quarter, which is favorable for us in terms of the RDT and E-Line items that are getting bipartisan support to progress through this election year. So that seems to be an area for us. And then, the defense modernization, as we’ve already touched around, there is multiple areas of innovation that involve long-term, short-term programs with the prime contractors, again around MSO space crossing over into commercial sector.
So there’s a lot of vectors within what we would traditionally call aerospace and defense. Wireline as we just spent a lot of time talking about continues to provide opportunities for us to grow. And then I think as we’ve mentioned, the automotive funnel, which is quite robust, has programs that are crossing into the next several three quarters and we are actively engaged with all of those. So, I expect that to be a driver of growth for us as well. And we’ll watch it and take it a quarter at a time with the headwinds that we’re currently experiencing on manufacturing and on semiconductors. But as we mentioned, we saw some growth around memory. That’s an early indicator that typically goes first. We expect that to continue to be an area of strength.
And of course, we’re watching very closely the status of these additional fabs that are in the process of being built out in various places around the world.
Matt Niknam: Great. Thank you.
Operator: Thank you. The next question is from the line of Mehdi Hosseini with Susquehanna. You may proceed.
Mehdi Hosseini: Yes. Thanks for taking my question. First one is for Neil. Just want to better understand the organic change in your revenue. Assuming $60 million from ESI in the January quarter and then about $25 million in the April quarter, the decline in organic revenue on a sequential basis is only 2%. Is that correct?
Neil Dougherty: It was — ESI was $67 million, $68 million in Q1 a little higher, and so I think the revenue decline Q1 to Q2 in the core is still rounds to 1%. It’s just a tick over 1%.
Mehdi Hosseini: Sure. So perhaps maybe the expectation was for a different contribution from ESI and maybe a little bit better than expected trend with the organic. But the ESI is making some compares difficult. Would you agree?
Neil Dougherty: Yeah. I mean, yes. First of all, ESI was great in Q1. There’s significantly 10% or more above our expectation going into the quarter. They saw strong renewal activity as expected with some good upsizing of transactions and other things that drove that revenue nicely. The sequential decline in ESI is totally as expected that we talked about it last quarter, that 40% to 45% of their orders and revenue are falling because their renewal schedules fall on Keysight’s first quarter. But it does make the compares a bit more challenging when looking at the combined entity.
Mehdi Hosseini: Right. Okay. Don’t want to come across [indiscernible], but I think these compares get a little bit murky looking into April versus January. Looking into July and October, obviously, your comments suggest maybe April, July will be the bottom and then a modest recovery in October. So the question for Satish is what do you think the driver behind that modest rebound would be? And why should we assume acceleration in that rebound into FY ’25? The 5G is behind us, but what are some of the other key drivers that would give you confidence that the modest rebound should follow by acceleration unless you tell me it’s just going to be a modest improvement into FY ’25?
Satish Dhanasekaran: Yeah. The profile — the timing and the profile of the recovery, Mehdi, as you can appreciate, is hard to really quantify or analytically quantify for you at this point. But let me give you some subjective color on what we’re seeing. I think we’re seeing continued strength in aerospace, defense. Mark touched upon that. The trends are on defense modernization. The new emulation solutions are continuing to proliferate through that ecosystem. And given the sort of national security emphasis that’s playing out, we think that’s on a sure track. We also have seen the 5G platform that we have get into some of the more defense-related applications and we announced a collaboration as an example with Lockheed Martin.
So, we look at that and we look at the pipeline of opportunities that Mark referenced and feel good about the aerospace and defense. And typically, as you would expect, our aerospace, defense has the strongest quarter in quarter four. So that’s one part of the equation. The other thing is what we’re hearing from some of our semiconductor customers as the fab companies coming out and laying out their plans for ’25 is they’re all planning for a pretty strong ’25 capital environment around next-generation 2-nanometer technology, and some of the new investments around power semiconductor and silicon photonics and other areas. And so, we would expect some uptick there in our semi business, which has been depressed by the time we roll out in Q4 and entering into Q1.
So, it’s hard to really time it on a quarterly basis, but that’s sort of the horizon that we would expect. We would expect the wireline business to largely continue to perform well because the drivers on AI continue to remain robust. And then wireless, I’m just factoring in a pretty gradual recovery as we go through the year. So that’s sort of our base case. Now, there is this whole macro. What does the macro do? And if the global PMI improves quicker, then maybe there’s some upside in our general electronics business. But we’re at this point just assuming that there isn’t this big broad recovery this year or in this fiscal year anyway. We would assume that second half is just modestly bigger in business than the first half. But again, if we go back and look at the situation as we take it a step back, last year was the first year where orders declined double digits.
We were still able to use our backlog to deliver revenue — a stronger revenue — I mean at least an upside revenue and strong profitability. So now we’re coming off of that, this will be the second year when if orders don’t rebound, we would expect a strong rebound from our experience historically running this business.
Mehdi Hosseini: Got it. Thank you.
Operator: Thank you. The next question is from David Ridley-Lane with Bank of America. Your line is open.
David Ridley-Lane: One of the hallmarks of Keysight has been the ability to continue to invest organically and inorganically through cycles. How do you see R&D spending and also your appetite for additional M&A this year?
Satish Dhanasekaran: Yeah. Thank you. I think first and foremost, I would say from an organic — we’re an organic-first company. We believe in taking a long-term view of our markets. And what’s changed since we formed Keysight is our organization that is focused on customers. So we’re getting strong validation around our investments with our customers. So, partnerships and collaborations are key to how we are able to realize the full value of our organic investment. So, we feel very good about where we are focused on from a portfolio perspective and our ability to drive long-term organic growth. Now, having said that, I laid out at Investor Day four or five areas where we are looking at some expansion opportunities. Some of them we’re pursuing organically as well, but we’re also looking at our pipeline from an M&A perspective and looking for opportunities where we can create good return on investment for our shareholders.
You’ve seen us be incredibly disciplined as we have pursued these opportunities. We walked away from deals where we thought we couldn’t get a good return. And so, you can expect that even as we pursue these opportunities and look at the pipeline, we will stay disciplined as we go through this — as we go through the evaluation.
