Jason Kary - Treasurer, Investor Relations & Vice President Neil Dougherty - Chief Financial Officer & Senior Vice President Guy Séné - SVP Measurement Solutions & Worldwide Sales Michael Gasparian - SVP Customer Support and Services & Worldwide Marketing

Brandon Couillard - Jefferies Rob Mason - Robert W. Baird & Co., Inc. Chelsea Jurman - Goldman Sachs & Co.

Good day, ladies and gentlemen, and welcome to the Keysight Technologies' Fiscal Fourth Quarter 2015 Earnings Conference Call. My name is Melissa, and I will be your lead operator today. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today, Thursday, November 19, 2015, at 1:30 P.M. Pacific Time. I would now like to hand the conference over to Jason Kary, Keysight Treasurer and Vice President of Investor Relations. Please go ahead, Mr. Kary.

Thank you, Melissa, and welcome to Keysight's fourth quarter earnings conference call for fiscal year 2015. With me today are Neil Dougherty, Keysight's Senior Vice President and CFO, and Senior Vice Presidents Guy Séné and Mike Gasparian. Unfortunately, Ron Nersesian, Keysight President and CEO, is unable to join us today. He has hurt his back and he is out of the office for a few days. I will cover Ron's prepared remarks on his behalf before turning the call over to Neil for his comments. Neil, Mike and Guy will then handle the Q&A. As always, you can find the press release and information to supplement today's discussion on our website at investor.keysight.com. While there, please click on the link for Quarterly Reports under Financial Information. There you'll find an investor presentation along with Keysight's segment results. We will also post a copy of the prepared remarks following this call. Today's comments by me and Neil will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. We will make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please review the company's recent SEC filings for a more complete picture of our risks and other factors. Now let's turn to our results for the quarter and the year. Our strong Q4 performance contributed to a solid first year as an independent company. Beginning with four headlines. First, in Q4, we delivered strong profit in a soft market by leveraging the strength of Keysight's business model. This was the seventh consecutive quarter that we delivered financial results at or above the midpoint of our revenue and EPS guidance. Second, we demonstrated strong operational and strategic execution by closing two acquisitions and launching services as a fourth growth initiative for Keysight. Third, we announced the change in our company's organizational structure to focus on customer solutions and accelerate growth. Fourth, and now looking forward, we are holding to our 2% market growth expectation for 2016. However, recent macro data has tempered our expectations for the first half of the year. It's been an exciting year, and a good quarter, so let's move to the specifics of Keysight's performance. In Q4, we generated $756 million of revenue, just above the midpoint of our guidance and delivered $0.71 in EPS which was at the high end of our guidance range. In line with our expectations, revenue for the quarter was down 1% year-over-year on an as reported and core basis which excludes currency and acquisitions. While we did see a strong seasonal rebound in our business from Q3, end market performance in Q4 was mixed. Communications grew 3% year-over-year with growth in wireless R&D and the addition of Anite. That growth was offset by a decline in wireless manufacturing. Aerospace, Defense declined 5%, versus a strong Q4 FY 2014 compare. As you may recall, last year, Q4 FY 2014 was a high point for our Aerospace, Defense business following the post-sequestration recovery. In Q4, Industrial, Computer and Semiconductor declined 2% with growth in computer and semiconductor markets offset by a decline in industrial markets. Regionally, Asia-Pacific and Japan grew on a core basis while Americas and Europe declined. Despite the recent headlines, China remains steady and grew 1% year-over-year. Against this backdrop, Keysight built backlog for the second quarter in a row as core orders, excluding currency and acquisition, increased 1% and our book-to-bill ratio for the quarter was above 1. In Q4, we also demonstrated strong operational and strategic execution by closing two acquisitions - Anite and Electroservices - and launching services as a fourth growth initiative. The Anite integration efforts are going well and tracking to expectations. As we communicated at our Investor Day in September, the Anite business strengthens our wireless software design and test portfolio, and expands our served addressable markets with the addition of network test solutions. Anite truly is a key component of Keysight's strategy to be first in 5G wireless solutions. And in Q4, we made additional progress with our 5G wireless initiative. Our wireless R&D business grew year-over-year, highlighted by orders for our market-leading 5G solutions, and we continue to gain tractions and collaborations with industry consortiums, universities and research institutes around the world, including our newest collaborations with China Southeast University, and the University of Bristol in the UK. 5G opportunities will materialize in the communications market over the next five to 10 years. Our customers will need new tools for 5G which includes certain emerging IoT or Internet of Things applications, driven by faster data connections and electronic devices connecting everything from cars to appliances. Turning to our services initiative. The second acquisition that we closed this quarter is Electroservices Enterprises Limited, a UK-based company, specializing in test equipment service and solutions. As a result of this acquisition, we have already won a large multiyear, multivendor service contract. The Electroservices acquisition supports our newest initiative to grow Keysight services. Our focus on growing services through multivendor calibration and asset management builds upon a strong foundation and expands our overall market by $1 billion. In Q4, we saw a solid revenue growth from the services business. So let's look at how our other initiatives performed in Q4. Expanding our modular solutions is another multiyear growth objective. In Q4, our modular business continued to perform very well. In fact, our modular PXI and AXIe orders topped $150 million for the year. With greater than 60% year-over-year growth in fiscal year 2015, we believe Keysight is growing faster than our competitors in the modular segment of the market. And finally, we continue to focus on expanding our software business. This was a record year for our electronic design automation software platform. These software tools are used by two thirds of the world's wireless designers and are playing a significant role in early 5G work around the world. We are executing on a number of opportunities to grow our software business, including growing recurring revenues through software subscriptions and services. Here too, Anite plays a strong role with their wireless R&D software solutions. We continue to make good progress with all of our initiatives, as we transform our company to create more value for customers and shareholders. With our ongoing R&D investment and innovation, Keysight releases multiple new solutions each quarter that help our customers bring breakthrough electronic products to market faster and at a lower cost. Here are three examples from Q4. The first is in software where we introduced the latest version of our BenchVue Platform. Among other capabilities, BenchVue allows design engineers to graphically automate measurements without the need for programming. The second is in modular, where we introduced the industry's highest performance PXIe Multiport Vector Network Analyzer aimed at high volume manufacturing of wireless components used in mobile phones and base stations. And third, we also introduced the industry's first handheld 50 gigahertz combination analyzer that delivers laboratory-grade measurements for field testing of radar and satellite systems. As you can see, we accomplished a lot in Q4 and in our first 12 months as an independent company. And we did it while meeting our financial commitments and keeping customer satisfaction at a very high level. Going into fiscal year 2016, Keysight will continue to focus on providing industry leading services with solutions as no other electronic design and test company can. To that end, this month we announced a new organizational design with expanded leadership to focus everything we do on our end markets and the development of complete customer solutions. The organizational changes include the creation of a centralized corporate planning and technology team and a move to three customer-focused business groups - the Communications Solutions Group, the Industrial Solutions Group and the Services Solutions Group. These organizational changes are the next step in our evolution and are designed to focus our company, processes and people directly on customers and the development of the solutions they need to succeed in their industries. We are proud of our successes and the results that we have delivered in our first year as an independent company. We enter our second year with momentum, a focused strategy and a team that is completely aligned to create value for customers and shareholders in FY 2016. Now I would turn the call over to Neil to provide more details on our Q4 financial results, as well as our first quarter guidance.

Thank you, Jason, and hello, everyone. As Jason mentioned, Q4 was a strong finish to our first fiscal year as a new company. Fourth quarter revenues of $756 million that were just above the midpoint of our guidance declined 1% year-over-year on both on as reported and core basis. Currency had a negative impact of four percentage points, offset by four percentage points of growth from acquisitions. Regionally, and on a core basis, revenue declined 6% in the Americas and 3% in Europe. Japan revenues improved 2% year-over-year, while Asia excluding Japan grew 5%. The regional mix of total revenues was consistent with prior periods, with 39% from the Americas, 18% from Europe, and 43% from Asia. Gross margins increased 190 basis points year-over-year, as our mix of R&D and software revenues improved. Expenses were well managed while we continue to invest in R&D programs in support of our growth initiatives. Operating profit performance for the quarter was good, with a Q4 operating margin of 20.7%. Non-GAAP net income after-tax was $122 million or $0.71 per share which was at the high end of guidance. Shifting briefly to GAAP results, you will note that GAAP net income was significantly higher than usual this quarter due to a material deferred tax benefit recognized in Q4. This tax benefit resulted primarily from a ruling obtained from Singapore that allows us to amortize the value of the intellectual property acquired from Agilent in the separation. In addition, this quarter, we substantially completed the purchase price accounting and IFRS to GAAP accounting adjustments associated with the acquisition of Anite. GAAP rules require us to revalue certain pre-acquisition revenue classified by Anite as deferred. Consistent with standard industry practice, we will include the amortization of pre-acquisition deferred revenue in our non-GAAP quarterly revenue reporting, which will then reflect our true business performance on a normalized basis. Going forward, GAAP accounting will also require us to defer and amortize a larger portion of revenue than Anite had previously under IFRS accounting standards. While increasing the portion of our revenue that's recurring is a positive, this change will drive a revenue and corresponding profit reduction of approximately $12 million versus our prior expectations, all in the first half of FY 2016. For the year, this adjustment moves our accretion expectations for Anite to the low end of the $0.14 to $0.17 range that we previously communicated. Given this adjustment, we are not expecting Anite to be accretive in Q1 of 2016 Turning to full year results. Fiscal 2015 has been a highly successful first year for Keysight. We launched the company, completed the separation and stabilized our operations. We made significant organic and inorganic investments to drive future growth. We increased our investment in R&D to 13% of revenue and we completed the acquisition of Anite, significantly improving our competitive positioning in our wireless communications end markets. In addition to these accomplishments, Keysight generated strong financial results in fiscal 2015. Full year revenues of $2.9 billion were flat on a core basis. Gross margins improved 80 basis points to 56.9% as we shifted the mix of our business to more R&D and software solutions. We exercise excellent discipline as we transition to operating as an independent company which allowed us to generate 19.5% operating margin for the year. Non-GAAP net income after-tax was $432 million or $2.52 per share. Cash generation was also solid for the year with $376 million of cash from operations. Capital expenditures for the year totaled $92 million resulting in $284 million of free cash flow. We closed the year with cash and cash equivalents of $483 million and total debt of $1.1 billion. Moving to the results of our two operating segments. Measurement Solutions generated fourth quarter revenue of $653 million, down 3% on a core basis, with an operating margin of 21%. Full year Measurement Solutions revenues were $2.5 billion, a decline of 1% on a core basis. Full year operating margin was 19.8%. The Customer Support and Services segment generated revenue of $103 million in Q4, up 8% on a core basis, with an operating margin of 19.5%. Full year Customer Support and Services revenues were $401 million, an increase of 4% on a core basis. Full year operating margin was 17.9%. Looking forward to fiscal 2016. Several of the macro indicators that we monitor have weakened over the past quarter. The IMF reduced their 2016 forecast of global GDP. PMI data has fluctuated and China growth remains uncertain. While we still expect the broader electronic design and test market to grow at approximately 2% this coming year, the softening of these macro indicators has tempered our expectations for the first half of the year. A few items to note as you adjust your model for fiscal 2016. Our annual salary increases are effective December 1, 2015, other operating income is projected to be $12 million, interest expense for the year is projected to be $44 million. And lastly, we are assuming a diluted share count of 174 million shares by yearend. Turning to our outlook and guidance for the first quarter. We do expect Q1 to follow our typical seasonality, with lower revenues in the range of $702 million to $742 million, which at the midpoint reflects 3% growth or a core decline of 1%. As I've mentioned previously, expenses are also seasonally higher in our fiscal first quarter, which results in lower Q1 profitability. Given the combined effect of seasonally lower revenue and higher expenses, we expect first quarter non-GAAP earnings per share to be in the range of $0.44 to $0.58. With that, I will now turn it back to Jason to lead the Q&A.

Thank you, Neil. Operator, will you give the instructions for the Q&A please?

[Operator Instructions] And the first question comes from the line of Brandon Couillard with Jefferies. Your line is open.

Hi, Brandon.

Thanks. Good afternoon. Neil or Jason, I guess, in the context of fiscal 2016 looking a little softer in the first half, on a full year basis, which are the three primary end markets do you view has the strongest tailwinds, or those that are facing challenges? And if I understand your comments right, are you suggesting a stronger second half outlook than perhaps you initially anticipate to get to the full year?

Yeah. So this is Neil. I'll let Guy comment on kind of our view of the markets going forward. But I think as we look at our performance in FY 2015, and our expectations going into FY 2016, that your statement about stronger second half is accurate. We obviously had a relatively weak Q3, a softer Q4 than normal giving us relatively easier compares in the second half of FY 2016 and then some headwinds here as I mentioned from macro as well as the aerospace defense situation coming out of Q4. So I'm going to let Guy comment more broadly on the market situation. Guy Séné: Yeah. Brandon, you may remember on September 1 at the Analyst Day, we gave forward-looking numbers of expectations for each of the market segments that on the long term was around 2% to 3% for our market growth, with comps being 1% to 2% and the two other segments, Aerospace, Defense and ICS being in the 2% to 3%. We also had said that we'll see fiscal year 2016 on this lower end of this, with average of 2% market growth for 2016. So as I think we said in Ron's prepared comments is that we still see this 2%. The market segments themselves are - the one that is probably slower in the first half is aerospace, defense. We have seen a slower Q4 in Aerospace, Defense, mostly driven by our budget - the end of year budget that we usually see from our government in the U.S. spending did not happen. This will mean a slower Q1 for Aerospace, Defense. The other markets [indiscernible] very well aligned with the expectation for going forward in this year.

Super. And then just one more on Anite. Neil, just to confirm was 100% of the revenue contribution there captured within the Communications segment and then could you give us an update on the integration progress. Exactly where you are in terms of getting down the cost synergy pathway?

Yeah. So the answer to your first question is, yes, we captured all of the Anite revenue within the Communications segment in terms of our industry segmentation. And Guy Séné is actually heading up the integration of Anite. So let me allow him to take the second part of that question. Guy Séné: Yeah. Remember with Anite, what we're doing is really strengthen our wireless solution portfolio and expand our served addressable market. And now with 13 weeks into the acquisition for Anite, I must say we're very pleased on the overall integration. All the milestones that we have set so far being on track. We see good engagement on both sides from the employees, working on the plans. We're currently aligning our roadmaps and portfolios, so that we are completely ready to communicate this by Mobile World Congress in February. And I must say all the communication and discussions we have with customers are going extremely well. So we are very pleased at this stage.

Thank you.

Your next question comes from the line of Patrick Newton from Stifel. Your line is open.

Hi, Patrick.

Hi guys. Good afternoon. This is [indiscernible] for Patrick.

Hi, James [ph].

How is it going? Can you remind us about some of the specific drivers behind increasing service revenue to your $600 million target annually by 2020? And then also maybe quantify some of the additional costs that will be associated with building out and expanding your service to support infrastructure?

Yeah. Mike, do you want to go ahead and take that one?

Sure. Hi, [ph] James. Yeah. You're really referring to the Analyst Day presentation, where we laid out this exciting opportunity to grow this business to $600 million over the next five years. It's really a great long-term opportunity. And as Ron said in his prepared comments read by Jason, over $1 billion in new served addressable market. We did have a really solid year with 4% core growth and even better finish with 8% growth in Q4, and the drivers really remained the same. The highlight is really the opportunity in calibration. There's two parts to that. Part one is we're pursuing a very flexible approach to onsite calibration services. So we've got volume onsite calibration capability where we can go in for two days, three days a month and take care of a customer's complete calibration needs. We've got resident professionals who go onsite and actually do the calibration on the customer site. We've got mobile calibration labs in Europe. We've got local calibration centers all around the world with pick-up and delivery capability. The second part of the strategy is really related to expansion to a multi-vendor capability. And this is really driven by the customers' desire for a one-stop shop. They want somebody who can handle their electrical calibration from a variety of vendors but also cover physical, dimensional and optical and that's really what's behind our too small but very strategic acquisitions we've done in the last year with PSNA about a year ago in the U.S., and Electroservices this past quarter, both very high quality companies, great reputations and offering that multivendor capability which we were lacking. In both cases, we have immediately won larger deals, multiyear, very strong recurring revenue streams. The way this typically works, is you get in, you win one site. And then based on how well you do, you can expand within the customer base. And we've had wins both in the U.S. and Europe and this is primarily in the aerospace, defense environment. So getting to part two of your question, I feel like we're really on track. Again the primary driver to get to that $600 million in fact is going to be the expansion of the calibration play. But as you go in and you do calibration, the very next step would be asset management services. And so, we're aggressively pursuing that in different parts of the world with different capabilities and adding those capabilities into the company. We also believe there's opportunities for us in professional services. And so, those would be layered in on top of the repair and cal business that we have as a core.

So do you expect any effect on costs going through your fiscal 2016?

Yeah. [ph] James, as we think about that, the effort to grow the services business is not necessarily analogous to what we're seeing on the product side. These aren't R&D-driven programs. And so, while there is some investment that is involved, it tends to be smaller in scale than you would typically see on the product side and also it tends to be more directly linked with the revenue opportunities that are there. So you got to have some capacity ahead of demand. But I don't think you should see a material fluctuation in the profitability of this business moving forward based on the investments that are required to grow the business.

Yes. Thank you. That's helpful. Just one more quick question. Do you have any indication on semiconductor CapEx trends in 2016 given the current soft spending environment?

Guy, I don't know if you have any specific comments? Guy Séné: This is Guy. No, we don't have specific CapEx numbers different from any of the reports that you get commercially. I think what we look at is really the new technologies. If they're going to go into the sub 20-nanometers and probably sub 15-nanometers pitches that we see happening. And we expect some of this to be happening later in the year that you may know we have a big market share with some of our products in this industry.

Yeah. Thanks, guys. That's it from me.

Your next question comes from the line of Rob Mason with Robert W. Baird. Your line is open.

Yes. Good afternoon, guys.

Hi, Rob.

I had a couple of clarifications first if I could. Neil, the midpoint of your guidance with core down 1%. What are you assuming for FX and the acquisition contribution in the quarter? I may have missed that if you spoke about it?

Yeah. Hang on one minute if you would. Give me one second. I did not break it out. I have those numbers but unfortunately, I don't have them off the top of my head. Do you have a second question while I [indiscernible].

Yeah. And maybe just another clarification as well. The deferred revenue push-out, or I should say revenue recognition push-out, that you're going to deal with at Anite. Did you incur any of that in the fourth quarter? In other words, push-out some of the revenue recognition?

We did to the tune of about $3 million.

Okay. And so, the $12 million that we get pushed out, that's for the full - you said that's for the full year next year?

The $12 million is for the full year but it's consolidated in the first half of the year, because essentially you defer revenue but then that deferred revenue gets amortized. And by the second half, the amortization of the revenues that we've deferred in Q4, Q1 and Q2 will have caught up and we will essentially have gotten back to normal.

Okay. And then just maybe why you're still looking there, if I exclude Anite from your Communications revenue, it looks like maybe the core Communications business was down low double digits. And the reason there is primarily wireless manufacturing it sounds. Do you have any insight - because it sounds like China has stabilized for you but do you have any insight as to maybe how China infrastructure spending will trend into next year - wireless infrastructure?

Guy, if you would you like to comment on that? Guy Séné: Yeah. Let me comment on China in general. As you have seen, we said that China stabilized and in fact we had a slight cost in Q4. And it's now the fifth quarter where we have seen the stabilization going forward. There is no doubt that one of the delta we got with last year is the fact that we did not see the revenue from the 4G infrastructure build-out as it came down over the year now. Going forward, we're not expecting major investments coming into 4G. We're still looking for the operators like China Telecom, China Unicom that are investing in the this 4G network but we have not seen any material change in investment into infrastructure. So I'm not really counting of this going forward in this year.

Okay.

Yeah. And on your other question, it's between - sorry, on your other question, the currency impact's between 1% and 2% and the balance is acquisition.

Okay. Okay. Thank you.

We have time for one last question. And that question comes from the line of James Covello from Goldman Sachs. Your line is open.

Hi, this is Chelsea Jurman on behalf of Jim. Thanks for letting me ask a question. With the industry growth being...

Hello.

Hi - with the industry growth being less than 2% in the beginning of the year and your revenue guidance being up 3% year-over-year at the midpoint, can you just talk about what you think could drive above industry growth for you in the first quarter?

Yeah. So in the first quarter I'd just reiterate that our core growth assumption is down 1%. Our total growth assumption is up 3% but that delta is primarily driven by the addition of Anite which obviously wasn't in the year ago numbers.

Okay, great. Thanks. And then in terms of your comment on aerospace and defense earlier, can you just give a little bit more detail on U.S. government spending and why purchasing didn't come through as you might have expected?

Yeah. Guy, do you want to take that? Guy Séné: Sure. In fact, two things. One is, in the normal seasonality that we see year-over-year, we in general see a boost of investments coming up in our Q4. Most these orders that where the government is just choosing to budget that they have. This did not happen this year, and you may have seen that in fact, the whole fiscal year, we had unusual seasonality for the budget. So that's really what happened. Looking forward, we're still waiting for the budget to be signed, and we expect that the budget in the U.S. gets signed in the next two weeks. And once this is or will, this will be signed, we should start seeing the orders flow in more in the [indiscernible] Q2.

Great. Thank you very much.

Thank you. That concludes our question-and-answer session for today. I would like to turn the conference back to Jason Kary for final comments.

On behalf of Ron, I'd like to thank everyone for joining the call today. As I mentioned at the top of the call, our strong Q4 performance contributed to a very solid first year as an independent company for Keysight. Our team's operational discipline drove excellent earnings results in Q4 and throughout the year while we completed the separation and closed our first major acquisition in Anite. We also established a consistent track record of meeting our guidance commitments over the past several quarters. So going forward, we will continue to leverage our unique formula of technology leading hardware and software and our large global network of experts to create value for customers and shareholders alike. Our new organizational structure is the next step in driving increased focus on customer solutions and accelerating our growth initiatives in 2016. Thank you very much. And have a nice day.

This concludes our conference call. You may now disconnect.