Keysight Technologies Reports Fourth Quarter and Fiscal 2017

Keysight Technologies Reports Fourth Quarter and Fiscal 2017 Results

About Keysight Technologies

Keysight Technologies, Inc. (NYSE: KEYS) is a leading technology company that helps its engineering, enterprise and service provider customers accelerate innovation to connect and secure the world. Keysight’s solutions optimize networks and bring electronic products to market faster and at a lower cost with offerings from design simulation, to prototype validation, to manufacturing test, to optimization in networks and cloud environments. Customers span the worldwide communications ecosystem, aerospace and defense, automotive, energy, semiconductor and general electronics end markets. Keysight generated revenues of $3.2B in fiscal year 2017. In April 2017, Keysight acquired Ixia, a leader in network test, visibility, and security. More information is available at www.keysight.com.

Additional information about Keysight Technologies is available in the newsroom at www.keysight.com/go/news and on Facebook, Google+, LinkedIn, Twitter and YouTube.

Source: IR-KEYS


KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
PRELIMINARY


	Three months ended
	October 31,						Percent
	2017			2016			Inc/(Dec)

Orders	$	1,027		$	806		27	%

Net revenue	$	878		$	751		17	%

Costs and expenses:
Cost of products and services		404			331		22	%
Research and development		139			105		32	%
Selling, general and administrative		294			211		40	%
Other operating expense (income), net		2			(3	)	(155	)%
Total costs and expenses		839			644		30	%

Income from operations		39			107		(64	)%

Interest income		2			1		119	%
Interest expense		(22	)		(12	)	87	%
Other income (expense), net		11			2		801	%

Income before taxes		30			98		(69	)%

Provision for income taxes		68			6		1,054	%

Net income (loss)	$	(38	)	$	92		(140	)%


Net income (loss) per share:
Basic	$	(0.20	)	$	0.54
Diluted	$	(0.20	)	$	0.53

Weighted average shares used in computing net income (loss) per share:
Basic		186			170
Diluted		186			172


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KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
PRELIMINARY


	Year ended
	October 31,						Percent
	2017			2016			Inc/(Dec)

Orders	$	3,406		$	2,953		15	%

Net revenue	$	3,189		$	2,918		9	%

Costs and expenses:
Cost of products and services		1,487			1,294		15	%
Research and development		498			425		17	%
Selling, general and administrative		1,049			818		28	%
Other operating expense (income), net		(84	)		(25	)	237	%
Total costs and expenses		2,950			2,512		17	%

Income from operations		239			406		(41	)%

Interest income		7			3		128	%
Interest expense		(80	)		(47	)	71	%
Other income (expense), net		13			4		335	%

Income before taxes		179			366		(51	)%

Provision for income taxes		77			31		152	%

Net income	$	102		$	335		(69	)%


Net income per share:
Basic	$	0.57		$	1.97
Diluted	$	0.56		$	1.95

Weighted average shares used in computing net income per share:
Basic		180			170
Diluted		182			172


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KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions, except par value and share amounts)
PRELIMINARY


	October 31,			October 31,
	2017			2016
	(unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	818		$	783
Accounts receivable, net		547			437
Inventory		588			474
Other current assets		224			160
Total current assets		2,177			1,854

Property, plant and equipment, net		530			512
Goodwill		1,882			736
Other intangible assets, net		855			208
Long-term investments		63			55
Long-term deferred tax assets		186			392
Other assets		240			39
Total assets	$	5,933		$	3,796

LIABILITIES AND EQUITY

Current liabilities:
Current portion of long-term debt	$	10		$	—
Accounts payable		211			189
Employee compensation and benefits		217			183
Deferred revenue		291			180
Income and other taxes payable		28			41
Other accrued liabilities		62			51
Total current liabilities		819			644

Long-term debt		2,038			1,093
Retirement and post-retirement benefits		309			405
Long-term deferred revenue		101			72
Other long-term liabilities		356			69
Total liabilities		3,623			2,283

Stockholders' Equity:
Preferred stock; $0.01 par value; 100 million shares authorized; none issued and outstanding		—			—
Common stock; $0.01 par value, 1 billion shares authorized; 188 million shares at October 31, 2017 and 172 million shares at October 31, 2016, issued		2			2
Treasury stock at cost; 2.3 million shares at October 31, 2017 and October 31, 2016, respectively		(62	)		(62	)
Additional paid-in-capital		1,786			1,242
Retained earnings		1,041			949
Accumulated other comprehensive loss		(457	)		(618	)
Total stockholders' equity		2,310			1,513
Total liabilities and equity	$	5,933		$	3,796


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KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
PRELIMINARY


	Year Ended
	October 31,
	2017			2016

Cash flows from operating activities:
Net income	$	102		$	335

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		225			134
Share-based compensation		56			49
Excess tax (benefit) deficiency from share-based plans		(3	)		5
Debt issuance expense		9			—
Deferred tax expense (benefit)		(47	)		17
Excess and obsolete inventory related charges		16			17
Gain on sale of land		(8	)		(10	)
Asset impairment		7			—
Pension curtailment and settlement gains		(69	)		—
Other non-cash expenses (income), net		10			4
Changes in assets and liabilities:
Accounts receivable		(11	)		(42	)
Inventory		(4	)		(22	)
Accounts payable		15			(8	)
Employee compensation and benefits		(1	)		16
Income taxes payable		3			(9	)
Retirement and post-retirement benefits		(15	)		(32	)
Other assets and liabilities		28			(38	)
Net cash provided by operating activities ^(a)		313			416

Cash flows from investing activities:
Purchases of property, plant and equipment		(72	)		(91	)
Proceeds from sale of property, plant and equipment		8			10
Acquisition of businesses and intangibles assets, net of cash acquired		(1,702	)		(10	)
Purchase of investments		(1	)		—
Proceeds from sale of investments		45			1
Net cash used in investing activities		(1,722	)		(90	)

Cash flows from financing activities:
Issuance of common stock under employee stock plans		51			43
Issuance of common stock under public offerings		444			—
Treasury stock repurchases		—			(62	)
Proceeds from issuance of long term debt		1,069			—
Debt issuance costs		(16	)		—
Proceeds from short term borrowings		212			—
Repayment of debt and credit facility		(323	)		(1	)
Excess tax benefit (deficiency) from share-based plans		3			(5	)
Net cash provided by/(used in) financing activities		1,440			(25	)

Effect of exchange rate movements		4			(1	)

Net increase in cash and cash equivalents		35			300

Cash and cash equivalents at beginning of year		783			483

Cash and cash equivalents at end of year	$	818		$	783

^(a) Cash payments included in operating activities:
Income tax payments, net		(121	)		(23	)
Interest payment on borrowings		(63	)		(44	)


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KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATION OF REVENUE EXCLUDING IMPACTS OF CURRENCY AND ACQUISITIONS
(In millions)
(Unaudited)
PRELIMINARY


	Q1'18 Guidance				H1'18		Year-over-year compare							Year-over-year compare
	Low end		High end		Guidance		Q4'17			Q4'16		Percent Inc/(Dec)		FY17			FY16		Percent Inc/(Dec)
GAAP Revenue	$	762	$	802	$	1,748	$	878		$	751	17	%	$	3,189		$	2,918	9	%
Amortization of acquisition-related balances		18		18		27		24			—				60			12
Non-GAAP Revenue	$	780	$	820	$	1,775	$	902		$	751	20	%	$	3,249		$	2,930	11	%
Less revenue from acquisition included in segment results								(127	)		—				(260	)		—
Currency impacts								1			—				9			—
Non-GAAP Core Revenue							$	776		$	751	3	%	$	2,998		$	2,930	2	%



Please refer to page 9 for discussion on our non-GAAP financial measures.


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KEYSIGHT TECHNOLOGIES, INC.
NON-GAAP REVENUE AND OPERATING MARGIN RECONCILIATIONS
(In millions)
(Unaudited)
PRELIMINARY


	Three Months Ended						Year Ended
	October 31,						October 31,
	2017			2016			2017			2016
Revenue	$	878		$	751		$	3,189		$	2,918
Amortization of acquisition-related balances		24			—			60			12
Non-GAAP Revenue	$	902		$	751		$	3,249		$	2,930


	Three Months Ended						Year Ended
	October 31,						October 31,
	2017			2016			2017			2016

Income from operations, as reported	$	39		$	107		$	239		$	406
Amortization of acquisition-related balances		86			10			256			56
Share-based compensation		12			10			56			49
Acquisition and integration costs		18			7			57			18
Acquisition-related compensation expense		—			—			28			—
Separation and related costs		2			8			20			24
Pension curtailment and settlement gains		(1	)		—			(69	)		—
Northern California wildfire-related costs		16			—			16			—
Restructuring and related costs		5			—			11			—
Other		4			—			6			(7	)
Non-GAAP income from operations	$	181		$	142		$	620		$	546


GAAP Operating Margin		4.4	%		14	%		7	%		14	%
Non-GAAP Operating Margin		20	%		19	%		19	%		19	%



Please refer to page 9 for discussion on our non-GAAP financial measures.


Page 6

KEYSIGHT TECHNOLOGIES, INC.
NON-GAAP NET INCOME AND DILUTED EPS RECONCILIATIONS
(In millions, except per share amounts)
(Unaudited)
PRELIMINARY


	Three Months ended												Year ended
	October 31,												October 31,
	2017						2016						2017						2016
	Net Income			Diluted EPS ^(b)			Net Income			Diluted EPS			Net Income			Diluted EPS			Net Income			Diluted EPS

GAAP Net income (loss)	$	(38	)	$	(0.20	)	$	92		$	0.53		$	102		$	0.56		$	335		$	1.95
Non-GAAP adjustments:
Amortization of acquisition-related balances		86			0.46			10			0.06			256			1.41			56			0.32
Share-based compensation expense		12			0.06			10			0.06			56			0.31			49			0.28
Acquisition and integration costs		18			0.10			7			0.04			67			0.37			17			0.10
Acquisition-related compensation expense		—			—			—			—			28			0.15			—			—
Separation and related costs		2			0.01			8			0.05			20			0.11			24			0.14
Pension curtailment and settlement gains		(1	)		(0.01	)		—			—			(69	)		(0.38	)		—			—
Northern California wildfire-related costs		16			0.08			—			—			16			0.09			—			—
Restructuring and related costs		5			0.03			—			—			11			0.06			—			—
Other		(6	)		(0.03	)		—			—			(4	)		(0.02	)		(7	)		(0.04	)
Adjustment for taxes ^(a)		41			0.21			(17	)		(0.10	)		(21	)		(0.13	)		(55	)		(0.32	)
Non-GAAP Net income	$	135		$	0.71		$	110		$	0.64		$	462		$	2.53		$	419		$	2.43

Weighted average shares outstanding - diluted		186						172						182						172

^(a) For the three months ended October 31, 2017 and October 31, 2016, management uses a non-GAAP effective tax rate of 17%. For the twelve months ended October 31, 2017 and October 31, 2016, management uses a non-GAAP effective tax rate of 18% and 17%, respectively. Historical amounts are reclassified to conform with current presentation.

^(b) EPS impact on Non-GAAP adjustments and Non-GAAP net income is based on an adjusted share count of 189 million.

Please refer to page 9 for discussion on our non-GAAP financial measures.


Page 7

KEYSIGHT TECHNOLOGIES, INC.
SEGMENT RESULTS INFORMATION
(In millions, except where noted)
(Unaudited)
PRELIMINARY


Communications Solutions Group							YoY								YoY
	Q4'17			Q4'16			% Chg		FY17			FY16			% Chg
Revenue	$	462		$	442		4	%	$	1,738		$	1,752		(1	)%
Gross Margin, %		62.9	%		60.3	%				61.5	%		60.8	%
Income from Operations	$	98		$	75				$	311		$	314
Operating Margin, %		21	%		17	%				18	%		18	%


Electronic Industrial Solutions Group							YoY								YoY
	Q4'17			Q4'16			% Chg		FY17			FY16			% Chg
Revenue	$	206		$	201		3	%	$	836		$	776		8	%
Gross Margin, %		61.3	%		59.6	%				61.1	%		59.2	%
Income from Operations	$	45		$	47				$	199		$	169
Operating Margin, %		22	%		23	%				24	%		22	%


Ixia Solutions Group							YoY								YoY
	Q4'17			Q4'16			% Chg		FY17			FY16			% Chg
Revenue	$	124			—		—		$	256			—		—
Gross Margin, %		76.2	%		—					76.6	%		—
Income from Operations	$	20			—				$	42			—
Operating Margin, %		16	%		—					17	%		—


Services Solutions Group							YoY								YoY
	Q4'17			Q4'16			% Chg		FY17			FY16			% Chg
Revenue	$	110		$	108		2	%	$	419		$	402		4	%
Gross Margin, %		42.6	%		42.2	%				41.2	%		40.9	%
Income from Operations	$	18		$	20				$	68		$	63
Operating Margin, %		16	%		18	%				16	%		16	%

Net revenue for our segments excludes the impact of amortization of acquisition-related balances of $24 million and $59 million for Q4'17 and FY17 for Ixia Solutions Group, respectively. For Communications Solutions Group zero for Q4'17 and Q4'16 and $1 million and $12 million for FY17 and FY16 respectively. Segment revenue and income from operations are consistent with the respective non-GAAP measures as discussed on Page 9.


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Non-GAAP Financial Measures

Management uses both GAAP and non-GAAP financial measures to analyze and assess the overall performance of the business, to make operating decisions and to forecast and plan for future periods. We believe that our investors benefit from seeing our results “through the eyes of management” in addition to seeing our GAAP results. This information enhances investors’ understanding of the continuing performance of our business and facilitates comparison of performance to our historical and future periods.

Our non-GAAP financial measures may not be comparable to similarly titled measures used by other companies, including industry peer companies, limiting the usefulness of these measures for comparative purposes.

These non-GAAP measures should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP. The discussion below presents information about each of the non-GAAP financial measures and the company’s reasons for including or excluding certain categories of income or expenses from our non-GAAP results. In future periods, we may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, adjustments for these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent or unusual.

Non-GAAP Revenue includes recognition of acquired deferred revenue that was written down to fair value in purchase accounting. Management believes that excluding fair value purchase accounting adjustments more closely correlates with the ordinary and ongoing course of the acquired company’s operations and facilitates analysis of revenue growth and business trends.

Non-GAAP Core Revenue is non-GAAP revenue (see Non-GAAP Revenue above) excluding the impact of foreign currency changes and revenue associated with businesses acquired within the last twelve months. We exclude the impact of foreign currency changes as currency rates can fluctuate based on factors that are not within our control and can obscure revenue growth trends. As the nature, size and number of acquisitions can vary significantly from period to period and as compared to our peers, we exclude revenue associated with recently acquired businesses to facilitate comparisons of revenue growth and analysis of underlying business trends.

Non-GAAP Income from Operations, Non-GAAP Net Income and Non-GAAP Diluted EPS may include the following types of adjustments:

•	Share-based Compensation Expense: We exclude share-based compensation expense from our non-GAAP financial measures because share-based compensation expense can vary significantly from period to period based on the company’s share price, as well as the timing, size and nature of equity awards granted. Management believes the exclusion of this expense facilitates the ability of investors to compare the company’s operating results with those of other companies, many of which also exclude share-based compensation expense in determining their non-GAAP financial measures.

•	Acquisition-related Items: We exclude the impact of certain items recorded in connection with business combinations from our non-GAAP financial measures that are either non-cash or not normal, recurring operating expenses due to their nature, variability of amounts and lack of predictability as to occurrence or timing. These amounts may include non-cash items such as the amortization of acquired intangible assets and amortization of items associated with fair value purchase accounting adjustments, including recognition of acquired deferred revenue (see Non-GAAP Revenue above). We also exclude transaction and certain other cash costs associated with business acquisitions that are not normal recurring operating expenses, including amortization of amounts paid to redeem acquires’ unvested stock-based compensation awards, and legal, accounting and due diligence costs. We exclude these charges to facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.

•	Separation and Related Costs: We exclude all incremental expenses incurred to effect the separation of Keysight from Agilent. We exclude expenses that would not have been incurred if we had no plan to spin-off including, among other things, branding, legal, accounting and advisory fees, costs to resize and optimize our infrastructure and other costs to separate and transition from Agilent. We believe that these costs do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of the company’s current operating performance or comparisons to our operating performance in other periods.

•	Restructuring and Related Costs: We exclude incremental expenses associated with restructuring initiatives, usually aimed at material changes in the business or cost structure. Such costs may include employee separation costs, asset impairments, facility-related costs, contract termination fees, and costs to move operations from one location to another. These activities can vary significantly from period to period based on the timing, size and nature of restructuring plans; therefore, we do not consider such costs to be normal, recurring operating expenses. We believe that these costs do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of the company’s current operating performance or comparisons to our operating performance in other periods.

•	Northern California wildfire related costs and Other Items: We exclude certain other significant income or expense items that may occur occasionally and are not normal, recurring, cash operating from our non-GAAP financial measures. Such items are evaluated on an individual basis based on both quantitative and qualitative factors and generally represent items that we would not anticipate occurring as part of our normal business on a regular basis. While not all-inclusive, examples of certain other significant items excluded from non-GAAP financial measures would be: costs related to unusual disaster like Northern California wildfires, significant realized gains or losses associated with our employee benefit plans, significant litigation-related loss contingency accruals and settlement fees or gains associated with other disputed matters.

•	Estimated Tax Rate: We utilize a consistent methodology for long-term projected non-GAAP tax rate. When projecting this long-term rate, we exclude any tax benefits or expenses that are not directly related to ongoing operations and which are either isolated or cannot be expected to occur again with any regularity or predictability. Additionally, we evaluate our current long-term projections, current tax structure and other factors, such as existing tax positions in various jurisdictions and key tax holidays in major jurisdictions where Keysight operates. This tax rate could change in the future for a variety of reasons, including but not limited to significant changes in geographic earnings mix including acquisition activity, or fundamental tax law changes in major jurisdictions where Keysight operates. The above reasons also limit our ability to reasonably estimate the future GAAP tax rate and provide a reconciliation of the expected non-GAAP earnings per share for the fourth quarter of fiscal 2017 to the GAAP equivalent.

Management recognizes these items can have a material impact on our cash flows and/or our net income. Our GAAP financial statements, including our Condensed Consolidated Statement of Cash Flows, portray those effects. Although we believe it is useful for investors to see core performance free of special items, investors should understand that the excluded costs are actual expenses that may impact the cash available to us for other uses. To gain a complete picture of all effects on the company’s profit and loss from any and all events, management does (and investors should) rely upon the Condensed Consolidated Statement of Operations prepared in accordance with GAAP. The non-GAAP measures focus instead upon the core business of the company, which is only a subset, albeit a critical one, of the company’s performance.

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