A month has gone by since the last earnings report for Keysight (KEYS). Shares have lost about 0.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Keysight due for a breakout? 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 catalysts.
Keysight Q2 Earnings Miss Estimates, Revenues Down Y/Y
Keysight Technologies, Inc. delivered second-quarter fiscal 2020 non-GAAP earnings of 78 cents per share, missing the Zacks Consensus Estimate by 22%. The bottom line also declined 36.1% from the year-ago quarter.
Non-GAAP revenues declined 18% year over year to $895 million. Non-GAAP core revenues (excluding the impact of currency and revenues from acquisitions in a year’s time) fell 18% on a year-over-year basis to $892 million. Moreover, GAAP revenues slumped 18% from the prior-year quarter to $895 million. The Zacks Consensus Estimate for revenues was pegged at $1.02 billion.
The coronavirus crisis-induced supply chain disruption and shutdown of production facilities affected Keysight’s fiscal second-quarter results.
Quarter in Detail
Orders fell 3% on a year-over-year basis to $1.089 billion during the reported quarter. Notably, core orders declined 3%.
Beginning first-quarter fiscal 2020, the company’s financial reporting comprises two segments — Electronic Industrial Solutions Group (EISG) and Communications Solutions Group (CSG). Ixia Solutions Group (ISG) segment reporting has been aligned with the CGS segment.
CSG includes commercial communications (CC) and aerospace, defense & government (ADG) end markets. CSG revenues of $653 million declined 18% on year-over-year and core basis. CSG contributed 73% to total non-GAAP revenues in the fiscal second quarter.
CC revenues of $468 million were down 15% year over year due to coronavirus crisis-induced supply chain disruption. However, management noted robust 5G order growth primarily fueled by 5G investments.
ADG revenues came in at $185 million, down 25% year over year, due to lower international spending. However, higher government spending and momentum in investments aimed at technology modernization, across the United States, was a positive.
EISG revenues declined 19% to $242 million. Challenges pertaining to automotive sector weighed on revenues. However, management noted momentum in first-to-market solutions, and demand for the company’s solutions in process node technology testing, considering semiconductor vertical. EISG contributed 27% to total non-GAAP revenues in second-quarter fiscal 2020.
Non-GAAP revenues from Americas came in at $330 million, down 23% year over year. Non-GAAP revenues from Europe and Asia Pacific of $145 million and $420 million declined 19% and 14%, respectively, on a year-over-year basis. Americas, Europe and Asia Pacific contributed 36.9%, 16.2% and 46.9%, respectively, to total non-GAAP revenues in the reported quarter.
Non-GAAP gross margin contracted 90 basis points (bps) to 62.8% during the reported quarter. CSG gross margin of 63.1% contracted 150 bps, while EISG’s gross margin of 61.1% expanded 70 bps on a year-over-year basis.
Non-GAAP operating expenses fell 9.1% to $389 million. As a percentage of revenues, the figure expanded 430 bps to 43.5%.
Consequently, non-GAAP operating margin contracted 520 bps to 19.4%.
Balance Sheet & Cash Flow
As of Apr 30, 2020, Keysight had cash & cash equivalents of $1.841 billion, up from $1.691 billion as of Jan 31, 2020.
As on Apr 30, 2020, the company reported long-term debt of $1.788 billion, which remained unchanged sequentially.
Cash flow from operations during the quarter came in at $298 million compared with $197 million reported in the prior quarter.
Free cash flow was $275 million compared with the previous quarter’s $165 million.
During the first half of the reported quarter, the company repurchased approximately 1.3 million shares for $120 million.
Keysight did not provide a specific quantitative guidance for third-quarter fiscal 2020. The company expects fiscal third-quarter revenues, earnings, and operating margin to be in line with or better than fiscal second quarter.
The company is improving production and services operations and anticipates returning to 100% capacity by the end of the fiscal third quarter amid persistent supply chain challenges.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision flatlined during the past month. The consensus estimate has shifted -28.93% due to these changes.
Currently, Keysight has a nice Growth Score of B, though it is lagging a lot 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.
Keysight has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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