Why Is Keysight (KEYS) Up 18.3% Since Last Earnings Report?
A month has gone by since the last earnings report for Keysight (KEYS). Shares have added about 18.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Keysight due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Keysight Q4 Earnings Top Estimates Despite Lower Revenues
Keysight reported relatively decent fourth-quarter fiscal 2023 results, with the bottom and the top line beating the respective Zacks Consensus Estimate. The company reported a top-line contraction year over year owing to declining trends and cautious spending in commercial communications and consumer electronics. However, positive momentum in defense and aerospace cushioned the top line. The buyout of the ESI group diversified Keysight’s product offerings and improved its prospects in various end markets.
Net Income
Net income on a GAAP basis was $226 million or $1.28 per share, down from $299 million or $1.66 per share in the year-ago quarter. The downside was caused by top-line contraction year over year.
Non-GAAP net income in the reported quarter was $352 million or $1.99 per share compared with $386 million or $2.14 per share in the prior-year quarter. The bottom line surpassed the Zacks Consensus Estimate by 12 cents.
For fiscal 2023, GAAP net income declined to $1.06 billion or $5.91 per share from $1.12 billion or $6.18 per share in 2022. Net income on a non-GAAP basis stood at $1.49 billion or $8.33 per share, up from $1.39 billion or $7.63 per share in fiscal 2022.
Revenues
Net sales stood at $1,311 million compared with $1,443 million recorded in the year-ago quarter. Total orders declined 16% year over year to $1,327 million. Soft demand trends in various end markets impacted the top line. Positive trends in aerospace, defense and automotive are tailwinds. However, the top line beat the Zacks Consensus Estimate of $1,298 million.
In 2023, Keysight registered a revenue of $5.46 billion, up from $5.42 billion in 2022.
Communication Solutions Group (CSG) contributed $891 million, down 10% year over year. Cautious spending behavior amid inventory normalization impeded revenues in this vertical. However, healthy traction for AI-ML powered network and data center applications, 5G and Open RAN supported the top line. Growing investments in electromagnetic spectrum operations, radar, satellite solutions and defense technology upgradation are strong suits. The top line beat our revenue estimate of $876.8 million.
The Electronic Industrial Solutions Group (EISG) segment revenues dropped to $420 million from $451 million in the prior-year quarter. Constrained spending behavior negatively impacted sales in consumer electronics and manufacturing. Declining capex for new wafer capacity also impeded the top line from this vertical. However, healthy demand for Keysight's proprietary interferometer systems, solutions for silicon photonics and power semiconductors partially reversed this trend. Strength in automotive is a positive. The top line marginally outmatched our revenue estimate of $419.4 million.
Region-wise, Asia-Pacific revenues aggregated $513 million compared with $618 million in the prior-year quarter. Declining trends in all verticals led to a 17% year over year drop. The company reported a 4% year-over-year decline in the Americas to $571 million. Revenues from Europe were $227 million, down 2% from the year-ago quarter's levels.
Other Details
During the quarter, the company’s non-GAAP gross profit totaled $858 million compared with $926 million in the year-ago quarter, with gross margins of 65.5% and 64.2%, respectively. The non-GAAP operating margin was 29.3%, marginally down from 29.9% in the prior-year quarter.
CSG reported a non-GAAP operating margin of 28.8%, down 30 basis points (bps) year over year. EISG reported a non-GAAP operating margin of 30.3%, down 130 bps year over year.
Cash Flow & Liquidity
In the fourth quarter of fiscal 2023, Keysight generated $378 million in cash from operating activities compared with $398 million a year ago, bringing the respective tallies for fiscal 2023 and fiscal 2022 to $1.41 billion and $1.14 billion. As of Oct 31, 2023, the company had $2,472 million in cash and cash equivalents with $1,195 million of long-term debt.
Outlook
For the first quarter of fiscal 2024, Keysight expects revenues in the range of $1.235-$1.255 billion. Non-GAAP earnings are estimated between $1.53 and $1.59 per share.
Management expects a mixed demand environment will likely persist throughout the first half of fiscal 2024. The acquisition of a majority stake in the ESI group will strengthen Keysight’s portfolio with simulation software and virtual prototyping capabilities. This is likely to boost commercial expansion in the upcoming quarters.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
VGM Scores
Currently, Keysight has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Keysight has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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Keysight Technologies Inc. (KEYS) : Free Stock Analysis Report
