Jason Kary - VP, Treasurer & IR Ron Nersesian - President & CEO Neil Dougherty - SVP & CFO Mike Gasparian - President, Communications Solutions Group John Page - President, Services Solutions Group Guy Séné - SVP, Worldwide Sales

Sachin Kulkarni - Jefferies Patrick Newton - Stifel Charles Long - Goldman Sachs Brian Modoff - Deutsche Bank Richard Eastman - Robert W. Baird

Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal Third Quarter 2016 Earnings Conference Call. My name is Christine 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, Wednesday, August 17, 2016, at 1:30 PM Pacific Time. I would now like to hand the conference over to Jason Kary, Vice President, Treasurer, and Investor Relations. Please go ahead, Mr. Kary.

Thank you, and welcome everyone to Keysight's third quarter earnings conference call for fiscal year 2016. With me are Ron Nersesian, Keysight President and CEO; and Neil Dougherty, Keysight Senior Vice President and CFO. Joining in the Q&A after Neil's comments will be Mike Gasparian, President of the Communications Solutions Group, John Page, President of the Services Solutions Group, and Guy Séné, Senior Vice President of Worldwide Sales. 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 the financial information tab. There you will find an investor presentation along with Keysight’s segment results. Following this conference call, we will post a copy of the prepared remarks to the website. As a reminder and as we announced earlier this month, we have changed our reporting segments in order to align them with our end markets and management reporting structure. We are now reporting our operating results based on three segments: the Communications Solutions Group, the Electronic Industrial Solutions Group, and the Services Solutions Group. The prior period results for these segments back to 2014 can also be found on our website. Today's comments by Ron 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 on today's call. 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. I would also note that we are scheduled to participate in the Citibank Global Technology Conference in New York on September 7th and management is scheduled to present at the Deutsche Bank Technology Conference in Las Vegas on September 13th. We hope to see many of you there. And now I'd like to turn the call over to Ron.

Thank you, Jason, and thank you all for joining us. We will focus today's discussion on three important headlines. First, we delivered strong third quarter results, which included growing revenue 8%, and achieving 20% operating margin and 15% earnings growth. Second, even though we continue to see headwinds in some markets, customers are accelerating investment in next-generation technologies. And third, we have made solid progress on our strategy to transform Keysight for growth. Given our targeted investments, including the acquisition of Anite, and the company focus on customer solutions, we believe we are capturing share in key next-gen markets. While it is still early, the strides we are making in the market today position us well for growth in the long-term. Now let's start with an overview of Keysight's third quarter performance. We are pleased with our strong financial results and execution in the quarter. Revenue of $718 million grew 8% over last year while earnings per share of $0.63 increased 15%. As we expected, the communications market remains soft. Additionally, macro uncertainty in Europe, which was further compounded by Brexit, impacted third quarter orders primarily in our aerospace, defense and government and electronic industrial end markets. We estimate that Europe was an approximate 3% headwind to our order growth for the quarter. Outside of Europe, we delivered order growth across all regions. Even with these broader market dynamics, we are seeing customers increase investment in next-generation technologies such as 5G, optical networks for datacenters, leading-edge semiconductor processes, and high-performance wireless-LAN chipsets. The mega-trend driving development of all of these technologies is the increasing reliance on electronic and digital communications and the growing number of connected devices from watches to cars. First, let's take a look at 5G. It is clear that timelines and investments in 5G are accelerating. Carriers plan to launch 5G trials as earlier as 2017 with early deployment of 5G technologies in 2018. In order to help foster the development of 5G wireless networks in the U.S., the FCC has opened up nearly 11 gigahertz of higher-frequency spectrum. Additionally, the U.S. government has launched a $400 million initiative for advanced wireless research. The National Science Foundation will lead this new initiative and will use Keysight's solutions and services to test next-generation cellular and wireless LAN technologies. As we have discussed before, our strategy to be first in 5G includes developing leading-edge technologies and solutions and engaging early with key partners. We are making solid progress on this initiative and 5G orders continue to outpace our expectations. Driving this growth is demand for our millimeter wave solutions, including over-the-air, channel sounding and massive MIMO solutions. In addition to our industry-leading 5G solutions, our early engagements with 5G innovators are contributing to our success. With over 25 collaborations to-date, we added two new strategic partnerships this quarter: Datang from China and The National Applied Research laboratories in Taiwan. Demonstrating our continued innovation in 5G and software solutions, we recently introduced the industry's first all-in-one signal optimizer software for designing 5G candidate waveforms. This solution enables R&D engineers to confidently validate their designs by simplifying the critical design tasks related to signal creation and analysis. Keysight is committed to advancing global 5G innovation. We have a strong new product roadmap that will enable us to gain share as the migration to 5G evolves. Moving to high-speed optical networks for datacenters, the upgrade to 100 gigabit is just beginning and efforts to increase data speeds and reduce power are driving the need to measure signal quality and integrity. In the third quarter we secured several large deals with leaders throughout this supply chain, including chip, network equipment, and optical transceiver vendors. We are also seeing an increase in 400 gigabit activity. Our recently introduced modular solution for 400 gigabit addresses critical R&D and testing requirements and integrates both PAM-4 and NRZ signals on one testing platform. This unique level of integration and scalability will enable engineers to master the receiver test and design challenges for 400 gigabit datacenter interconnects. In the semiconductor industry, the major foundries are in a race to shrink form factors and build faster, more energy-efficient components. This is driving increased investment in future semiconductor process technology and timelines have accelerated. As a result, we delivered strong double-digit order and revenue growth for our parametric test solutions in the third quarter. These next-generation technologies represent long-term opportunities for Keysight and are important to achieving our growth objectives. The strategic actions we have taken are strengthening our market position and creating new business opportunities. This included the acquisition of Anite that we completed one year ago. Anite significantly enhanced our wireless protocol capabilities and software portfolio, which are critical technologies as the industry migrates to 5G. Anite has achieved two consecutive quarters of double-digit order growth, despite headwinds in the communications market. Additionally, the acquisition has been accretive to both gross margin and earnings as we are executing seamlessly on the integration and are on-track to deliver the committed synergies. Moving forward, we will continue to execute our strategy to transform our business for long-term growth with the objective of creating added value for both customers and shareholders. Now I will turn the call over to Neil to provide more details on our Q3 financial results, as well as our fourth quarter guidance.

Thank you, Ron, and hello, everyone. Today we reported third quarter revenue of $718 million, up 8% year-over-year, or up 2% on a core basis. Regionally, core revenue declined 8% in Europe and grew 3% in the Americas, 1% in Japan and 6% in Asia excluding Japan. The regional mix of total revenue was 37% in the Americas, 17% from Europe, and 46% from Asia. China, which represents 20% of our overall business, grew at a low double-digit rate in the third quarter. Our third quarter operational results were strong with gross margin increasing to 58.7%, a year-over-year improvement of 210 basis points. Our improving gross margin continued to reflect a higher percentage of revenue from software and R&D solutions. Additionally, we realized a 70 basis point benefit from an adjustment to our warranty reserve liability as we have had lower than expected warranty claims. For the quarter operating expenses totaled $281 million, up 11% over last year primarily due to the addition of Anite. This resulted in third quarter operating margin of 19.5%, a year-over-year increase of 90 basis points. Net income increased 15% to $108 million or $0.63 per share, which was at the high-end of our guidance range. Moving to the performance of our segments. Our Communications Solutions Group, or CSG, includes two primary end-markets. First is the commercial communications end market, which includes the mobile device and infrastructure supply chain, wireless network operators and datacenter and optical equipment manufacturers. Commercial communications revenue was $252 million in the third quarter, up 14% including revenue from Anite. As Ron mentioned, the market headwinds in the wireless supply chain that we highlighted earlier this year continued to offset the strong growth from 5G and next-generation datacenter technologies. CSG also includes our aerospace, defense and government end markets, which generated revenue of $172 million in Q3, up 3% over the same quarter last year. Growth in this end market was driven by steady spending in the U.S., partially offset by softness in Europe and Asia. This brought total CSG revenue for the quarter to $424 million, which is up 9% year-over-year or flat on a core basis. CSG reported gross margin of 61.7%. Expenses increased year-over-year with the acquisition of Anite, bringing operating margin to 18.1%, compared with 18.4% in the third quarter of last year. Moving to our Electronic Industrial Solutions Group, or EISG, this group provides design and measurement solutions across a broad set of electronic industrial end markets including automotive, energy, consumer electronics, education, and semiconductor. EISG generated third quarter revenue of $191 million, up 9% over last year or 7% on a core basis. The growth in EISG was driven by strong sales for our parametric semiconductor measurement solutions, partially offset by weakness in Europe. With the strong top-line performance, EISG gross margin improved 340 basis points to 60.7% and operating margin improved 460 basis points to 23.1%. Lastly, in our third segment, the Services Solutions Group, or SSG, we generated revenue of $103 million in Q3, a 2% year-over-year increase or flat on a core basis. Excluding the impact of the three-year warranty program, revenue for this segment grew 6%. Growth was driven by our multi-vendor calibration services and a rebound in used equipment sales. SSG reported operating margin of 18.7%, up 750 basis points over the prior quarter. The significant sequential improvement in operating margin was largely driven by the higher top-line. Moving to the balance sheet and cash flow, we ended the quarter with $664 million in cash and cash equivalents. In the quarter we generated $68 million in cash flow from operations, reflecting our typical seasonality as well as higher working capital balances driven largely by timing factors within the quarter. Capital purchases totaled $14 million, bringing our free cash flow to $54 million, or 8% of revenue. We do expect Q4 cash flow to improve in line with our historical seasonality. In the third quarter, we repurchased approximately 707,000 shares of common stock at an average price of $28.20 per share for a total consideration of $20 million. This brings our total shares repurchased to-date to approximately 2.3 million for a total consideration of $62 million, or 31% of our $200 million authorization. We will continue to opportunistically deploy capital under this repurchase program, even as we work to identify M&A opportunities that will help us achieve our growth objectives. Overall, we are very pleased with our operational performance and execution as a company. Our operating model has the ability to deliver strong profitability under a variety of end-market conditions, which sets us apart from others in our industry. We remain committed to executing our strategy to transform Keysight for long-term growth and create value for our shareholders. Turning to our outlook and guidance for the fourth quarter. As Ron noted, while we are seeing increased investment in the development of next-generation technologies, we continue to see headwinds in the broader communications market. Additionally, orders in the third quarter were impacted by macro uncertainty in Europe and we are incorporating this into our market outlook. We currently expect Q4 revenue to be in the range of $715 million to $755 million, which at the mid-point reflects a year-over-year decline of 3%, or 4% on a core basis. Note that as we have now passed the one-year anniversary of the Anite acquisition, the difference between total and core revenue growth in the fourth quarter will be entirely due to currency. We expect fourth quarter non-GAAP earnings per share to be in the range of $0.57 to $0.71, or $0.64 at the mid-point, based on a weighted diluted share count of approximately 172 million shares. At the mid-point, this would bring our non-GAAP earnings per share for FY 2016 to $2.43 on revenue of $2.9 billion. With that, I will now turn it back to Jason for the Q&A.

Thank you, Neil. Christine, could you give the instructions for the Q&A, please.

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

Hi good afternoon, it's Sachin in for Brandon. Ron, what are the operational implications if any of a new segment, any sales force realignment involved or changes in terms of internal resource allocations or just simply a manifestation of the leadership realignment you made last fall. Any thought process on the groupings?

Sure. The main difference is that we have aligned all of the efforts that we have in the groups to be focused on customers. So we have one group that will work with key customers, for instance, communication customer and find out what type of solutions they need. Now it may be a standard solution that we already have, such as a spectrum analyzer or network analyzer, but they also may need something different like a special channel sounding solution, which we didn't have approximately a year ago. And this group is tasked and has all the technology and all the people to bring any type of solution to bear. The field organization is aligned to go after specific customers, and they're doing that very, very well.

Got it. And in terms of like the 5G demand that you're seeing so far, could you say how it translates towards modular products versus the other products and portfolio?

Yes. This is Mike Gasparian. Let me give you a couple of comments about 5G. I'm really pleased with our position in 5G. The headlines would be we're seeing really strong growth. We've got a good solution set now and we're really well-positioned for the long-term. From a growth standpoint, our orders have more than doubled over where they were last year at this time. The timelines and the investments are accelerating in the R&D space. There's a lot of catalysts in the market that are causing that acceleration, and I think Ron covered those in his comments. We've a good set of solutions now. There's a lot of millimeter wave solutions that are needed for trials and deployment. And just in general, we're seeing that the 28-gigahertz frequency being a primary area where trials are being done. This is going to require major retooling at all of our customers and there's a lot of new challenges associated with millimeter wave. Channel sounding reference solutions. There is a big challenge in over-the-air testing, massive MIMO applications. Even the new signal optimizer or software that Ron talked about, that's all about people evaluating, calibrating 5G candidate waveforms. So kind of the bottom-line out of whole thing is we're extremely well-positioned for the long-term, we've got good focus on R&D. The fact that we’ve got Anite in our portfolio allows us to deliver much more complete solutions. And then, in regards to Modular, just I'll add a couple of comments in there. Our momentum really continues in Modular. It's important to remember, we've got a good combination of both PXI and AXIe components. I think we're outperforming the markets we're up double-digits again this last quarter, and we're building out our portfolio. So in the past we've done things like that. The PXI vector network analyzer continues to exceed expectations, but a lot of new products this quarter we introduced high-performance [BERT rate][ph] tester that's really going after 400-gigabit research applications in data center interconnects. Lots of other parts of our portfolio get impacted by things like the new PXI 18 slot, third-generation chassis that has super high bandwidth and that plays really into anything that's got multi-channel applications. So that's just that's not only 5G, but it gets us into variety of other aerospace and defense applications. So let me stop there and see if that covered your topic.

Yes, it did, thank you. And for Ron, I'm sorry, for Neil, would you remind us what the incremental cost savings were for what we should expect in FY 2017 from recent restructuring actions? I think, it was around $25 million to $30 million and most of it should be in year two, which is next year.

Yes. We've talked about a $25 million cost reduction program that was announced at the end of Q2 last year, and we said that was a two-year program, and we are materially it's not totally complete, but we are well on our way to having fully realized that $25 million worth of savings. And then, there was another $20 million of cost-related synergies that come out from Anite and it was those synergies that are pretty heavily backend loaded. So we're very much on track with Anite to deliver those synergies. We've given some of the work that had to be done that was going to be backend loaded, so that was $20 million run rate at the two-year anniversary of the Anite acquisition.

Got it thanks.

Both are on track.

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

Hi Ron and Neil, thank you very much for taking my questions. I guess, just given the solid Anite orders that you talked about and progress towards achieving synergies with that acquisition I would love to hear what your appetite is for M&A currently and how your pipeline looks?

Well, we cannot make any specific comments with regards to M&A. The one big question that was asked before was Keysight is a good operator as you've seen what we've done in Agilent and the question was can we also do that effectively with M&A on inorganic activities. And I think we've shown that we can integrate companies very, very effectively. We can retain the key management people, and we could generate orders and accretion. Of course, we would not do an acquisition if we couldn't get to at least 15% return on invested capital. So I think this is another proof point besides some of the smaller proof points that we don't talk about that shows that we can be very effective at creating value through organic or inorganic activities.

Great. Okay. And I guess Ron could you elaborate on the communication softness that you're seeing may be discuss where weakness is most pervasive or least pervasive I guess across infrastructure, handset, R&D components or any way you like to break down that market?

Yes, Ron this is Mike Gasparian. I will take that. No, overall the communications ecosystem is soft. If we look at it from a manufacturing capacity standpoint, I think there is plenty of capacity there for devices, the same thing is true, lot of digestion that had to happen in the supply chain, and then certainly, we virtually every week, every month you see more consolidation in restructuring particularly in the chipset area. So those are the factors that are kind of keeping it on the soft side. On the really on more of a positive note, I've seen a very disciplined capital allocation model coming from most companies where a lot -- a lower emphasis is being put, you might call it muted investment in 4G and LTE and more emphasis and increased investment in 5G as well as high-performance wireless LAN technologies, the backend of the ecosystem is very strong and healthy data centers, optical network connections, other things just R&D is strong across the board, good strength in China, and we've got great partnerships with key players all around the world throughout the entire ecosystem and that's leading to a lot of very strategic design wins for us.

Great Mike. Thanks for the details.

I would just add that if you look at where we are now versus where we were at this time in the 4G cycle, we are much better positioned than we were before, we are much more focused at working to bring the right solutions to market, we're confident in our progress and our operating model is intact, I mean had to turn that into cash.

Great. And then I guess for Mike or Ron, you spend a significant amount of time talking about 5G calling the timing for deployments and how orders continue to pace ahead of expectations. I think you gave us little future that 5G orders doubled year-over-year. What I'm trying to figure out is the relative sizes of the 5G market, can you give us any type of teaser as to when you think 5G could be 10% of revenue or the relative size of 5G within your order book now to just for us to gauge the impact from this to the P&L?

Hey, Patrick, so this is Mike again. We're really still in the early days, this is pre-standard phase of 5G most of the engagements are very strategic working with customers, trying to understand their most challenging problems associated with, that's the new millimeter wave frequency. So it's going to be, we really thought 5G was going to hit mainstream in 2019, 2020. We definitely seen that accelerate. I think it could start to become more significant for us in may be 2018. But between now and then it's more about strategic wins and alignment with key customers so you're viewed as a solution provider of choice.

Great. And then Neil just a gross margin question it seemed that guidance is implicit with the step-down sequentially. I've seen some of that is due to the reversal of the warranty benefit that we just saw this quarter. Just want to make sure I'm reading the tea leaves right there and if so what is embedded into that expectation for the decline?

Yes, so the -- on the one end you are correct, the warranty doesn't reverse but it was a one-time entry to adjust the overall size of our warranty accrual which is now lower because of our improving quality of our instruments. So just generally speaking our warranty costs are less than expected and so you will see a benefit going forward but there was a one-time benefit in Q3 to adjust the size of the warranty liability. Going forward, as we look forward to next quarter, so the sequential, the sequential deterioration is really due to that. We believe our gross margin performance continues to be very strong. We continue to see a larger and larger portion of our revenue come from R&D solutions and from software solutions which tend to have higher gross margin so we're very pleased with the trajectory of gross margins within the business.

Your next question comes from the line of Toshiya Hari from Goldman Sachs. Your line is open.

Hi, this is Charles calling in for Toshiya. Thanks for taking my question. I had two. One, can you kind of talk about how core comps trended ex-Anite in the quarter. And then two or I guess take part of that one can you give us a little feel for what kind of drove the acceleration in semiconductor spending and the sustainability of that spend?

The core communications excuse me the core communications orders were flat for the quarter and I'll let Mike talk a little bit about the trends.

Just the revenue was flat within communications for the quarter not orders.

So I think we covered a lot of the trends. We've talked about the overall market remaining soft. I kind of highlighted a few areas of supply chain issues consolidation, restructuring. I think the big strength we're seeing is in the R&D phase. It's all about new technologies, very selective investments by customers in various 5G technologies, high-performance wireless LAN technologies, data center technologies, optical technologies. So those are the areas where we're seeing strength, there is big investment in the China chipset companies and we've got partnerships with a lot of those companies that that end up playing into the communications ecosystem as well.

You asked the second part of your question was about semiconductor and I think we're really seeing strength in a couple of areas there. So first of all there is a broad effort within China to go after the semiconductor market spaces, big investments that are happening in China that are driving strength in our Parametric Test business and across some of our other solutions gone to semiconductor as well. And then just generally speaking across the boundaries, there is a migration to smaller and smaller chip architectures and as they migrate to those chip architectures they can drive demand for our products as well.

Got it, thank you. And then I guess just one more can you give us as a rough reminder of what the kind of split is between R&D software and manufacturing revenue? Thanks.

Well we've sized our software business about a year ago, it was north of $300 million prior to the acquisition of Anite and Anite added about an additional $100 million to our software business, so that gives you an idea of the proportion of our business is coming from software. The only thing we've said publicly about the proportion of our manufacturing versus R&D business is that we have kind of jumped it, the threshold where R&D is now the larger portion of our business greater than 50%. And we did that little over a year ago as well and continued to make progress in that area so that it doesn't move terribly quickly but we continue to migrate more and more towards software solutions. So I would also note that the Anite business which we acquired a year ago this week actually was almost exclusively sold into R&D type application so that helped to drive that balance as well.

And Charles, our overall strategy is, is really played out in the numbers Neil was just talking about. Our overall strategy is to move from hardware centric products to software centric solutions. So in doing that we are seeing the percentage of our software business we'll be driving that up further and further. Second we'll be moving to more solutions which includes not only software but includes a lot of services from John Page's groups. But on top of that we are migrating and migrating as quickly as we can from manufacturing to R&D and that's something that we stated back as early as 2013 and we've made great progress on that where R&D is our number one market as Neil pointed out.

Got it and if I could actually just flip one more in, just kind of wondering what kind of traction you've had with some of the cross-sell opportunities in terms of getting Anite into the aerospace and defense space and how that's trending? Thanks. Guy Séné: This is Guy. Definitely we have had one of our successes with Anite is the leverage of the sales channel that we have in Keysight and driving some of their key products into older customer sets. Aerospace defense is one but it's more generic than this. And I came with nice portfolio of solutions one is the channel emulation solution where they are leading in fact and we've been able to start proposing this to a number of customers as we go and clearly has helped but more work is happening and I'm really bullish for this type of technology going forward.

The next question comes from the line of Vijay Bhagavath from Deutsche Bank. Your line is open.

Hi this is Brian on for Vijay. Thanks for taking the question. Could you may be give us some visibility into the business in the back half of 2016 and into 2017. I think you touched on the Communications side, but on the government end market, are you seeing any new large deals or follow-ons in the back half? And then my second question is more about housekeeping one, but how should we think about OpEx over the next few quarters from a modelling perspective?

Yes. So let me address some of those questions. So first of all, with regard to kind of the back half of 2016 calendar year 2016 and beyond, obviously, we will only provide guidance one quarter out and so you can see what we provided there. If you take a look at the midpoint of our guidance that implies of about a 3% decline in our total business for the year, which we actually think is better than what the total markets achieved. We think the total market this year was down mid-single-digits. As we look forward, we talked about the softness we're seeing in the Communications, and what we're seeing in Europe. With regard to aerospace/defense, we're relatively -- we expect to see normal kind of cyclicality with regard to the aerospace/defense business in the U.S., which tends to peak around government fiscal year ended September. We have seen some softness in our offshore aerospace/defense clients. I think, over the longer-term, I'd point back to the next generation technologies where we're seeing continued and rapid growth we believe we're well-positioned to win in those markets, and those are the markets that are going to drive overall growth in the business when the broader market recovers. So we believe, we are well-positioned, and we have an operating model that enables us to deliver strong profitability in a variety of economic conditions as evidenced by the 20% operating margins that we developed this quarter.

Okay. Great. And just about OpEx over next few quarters?

Yes I think our OpEx trends are more or less are in line. We basically have been maintaining our R&D investment on a dollars basis. You can see as our top-line has been moving around our R&D investments have been pretty stable, and that's intent with us maintaining our investments for the future and basically not overreacting to short-term perturbations in our market, but making sure that we're making the investments that we need to make to drive growth in the future. And similarly on the SG&A lines, I think, you shouldn't expect any material change there.

We have time for one last question. And the question comes from the line of Richard Eastman from Robert W. Baird. Your line is open.

Yes thank you for sneaking me in here. Ron, I think you talked at the beginning here about orders late in the quarter in Europe kind of Brexit pushback. I think the math may be suggest you were about $20 million short. I think you said it was a 2% headwind. If you -- if that's the right math and you throw the $20 million in there, it looks like may be orders were pretty seasonal. Has -- with that exception in Europe is that about how you feel about or how the business looks at the present time that it's kind of returned to more seasonal norms in terms of demand?

Hi Richard, you're very astute. That's exactly what we saw. If you look at our forecast, and we do a monthly forecast, actually we do a roll up every couple of weeks. But if you take a look at the forecast month by month for the sales organization, we were on the first month of the quarter on the second month of the quarter and off by $20 million in July. So that really adds up to what we're seeing. It's not all Brexit; we see Russia and Russia being weak in aerospace/defense and a general malaise in Europe. And as I did point out earlier, every region grew in orders with the exception of Europe. So we feel very good about our business and our competitive position, but we do deal with the economic situations that do exists around the world, but this will not stop us from investing and making sure that we're leading for the next wave of 5G. I'm going to ask Guy to see if he wants to make any other questions -- make any other comments about Europe. Guy Séné: Well, on Europe, I think most of the summary clearly, it has, we've seen the impact in July when this came after the announcement of Brexit, but also Russia was weaker. Across the board and rest of the world, we must say that we grew orders in all the other regions and clearly America was stable or with steady aerospace/defense from prime contractors on major programs that we're winning, so America is stable. Japan was steady with broad industries good successes. And then, Asia was strong. We had a very solid growth of our business in China, for instance, on the semiconductor solutions that Neil mentioned earlier, but also optical and 5G. So that's a broader perspective for what's happened. And I believe we're well-positioned in the market with our solutions, especially for our next-generation technologies.

Ron, when you and again, I realized that you guys give one quarter guidance, but into the fourth quarter here at this point, Ron, what sort of prospects here that your hand electronic test market outlook, for the next 12 to 15 months, do we -- does the market kind of pop back in the positive territory. I mean, we've had the downdraft on the non-5G, e-com side, maybe there is a new wrinkle here in Europe now with Brexit, I don't know what the tail is on that, but it's been sometime since the industry has seen a positive growth rate certainly in the range of 2% to 3%. But is there a pretty good portability here that the industry could actually see this long-term growth rate of 2% to 3% through 2017?

No, we don't comment on markets further up, but I just will make a couple of qualitative comments. Obviously, you remember everything in 2009 and then we saw a big bounce back of over 20% growth in 2010 and 2011, and we're not in that situation at all. We do see at times in R&D where there is a pent-up demand where business is soft and people are holding off on their capital equipment and capital equipment can pop back a bit, but we do not forecast that further out. But as you know, our markets are cyclical, and we have seen them come back at times. I do think on the manufacturing side that the actual cost per test has reduced as we've all talked about for manufacturing Smartphones. We saw that in 2012. We actually walked away from a major supplier at that point and it turned out to be a pretty smart move that was a very profitable deal for us. And I think in the future, it would have been slightly different. But as far as when the market will bounce back, we do not predict that. Neil, are there any other comments that you'd like to add?

Yes. I would just point you back to some of the numbers that we put out there right we think the market in 2016 is down mid-single-digits. We don't -- we're not going to call an uptick until we see it. That being said, as we look forward we see the softness in comps, the softness in Europe, we're incorporating that into our market outlook, but it's hard to know when things are going to turn around. We built the business model that is designed to deliver strong profitability whether we recognize in our markets kind of move in plus to minus 10% band and you see that in the profitability that we're generating today and looking over the long-term, we do see pockets of the market focused around next-generation technologies that are growing very well. 5G, the new semiconductor process is 100-gigabit looking forward to 400-gigabit. And we really like the way we're positioned in those next-generation technologies, so when markets recover again, we'd like to hand that we have and we like where we are positioned.

Okay. And just last question, I apologize. Neil, within the EISG segment, the gross margin step up to the 60.7%, could you just purse that out a bit, does the warranty adjustment fall in there, and then also is that also reflective of the software mix or is it a parametric test business nicely profitable? What's going on in the 340 bps?

Yes, so the warranty benefit was spread across the other businesses, all businesses and no one business did proportionately benefited from that. I think you're seeing basically the favorable mix of products that were sold in that business -- on a business that had a pretty strong revenue performance for the quarter as well.

Okay, okay very good. Thank you again.

Historical financials for that business, which you are available on the website, you'll see there is some volatility around profits, but there have been several quarters over the past couple of years where the profits have ticked up to this kind of level, driven by top-line, driven by mix.

But Richard, I'd just like to make one last comment. You can see our operating margin up 20% at this revenue level, and I think we have done a pretty decent job of managing to a solid operating model. And if the revenue goes up, our incremental look pretty doing good, and as we've commented that they're 40% when our growth rate is above 40%.

4%. Okay.

4%.

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

Thank you, Christine, and thank you all for joining us today. We look forward to seeing many of you at the upcoming investor conferences that I mentioned at the top of the call. And I wish you all a good day. Thank you.

This concludes our conference call. You may now disconnect.