Jason Kary - Vice President, Treasurer and Investor Relations Ron Nersesian - President and Chief Executive Officer Neil Dougherty - Senior Vice President and Chief Financial Officer John Page - Senior Vice President and President, Services Solutions Group Mark Wallace - Senior Vice President, Worldwide Sales Gooi Soon Chai - President of Electronic Industrial Solutions Group

Vijay Bhagavath - Deutsche Bank Stanley Kovler - Citi Research Patrick Newton - Stifel Nicolaus Farhan Ahmad - Credit Suisse Brandon Couillard - Jefferies & Company Richard Eastman - Robert W. Baird & Co.

Good day, ladies and gentlemen, and welcome to the Keysight Technologies’ Fiscal Fourth Quarter 2017 Earnings Conference Call. My name is Kiersten, 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 conference call is being recorded today, Wednesday, December 6, 2017 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 fourth quarter earnings conference call for fiscal year 2017. Joining me are Ron Nersesian, Keysight President and CEO; and Neil Dougherty, Keysight Senior Vice President and CFO. Joining us in the Q&A session will be Satish Dhanasekaran, President of the Communications Solutions Group; Gooi Soon Chai, President of the Electronic Industrial Solutions Group; John Page, President of Services Solutions Group; Mark Pierpoint, Acting President of the Ixia Solutions Group; and Mark Wallace, 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. 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 management is scheduled to present at the Barclays Global Technology Media and Telecommunications Conference in San Francisco on December 7th. We hope to see many of you there. And now, I would 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 key topics. First, we delivered an outstanding fourth quarter across the board. In total, orders grew 27% year-over-year to reach a record of over $1 billion, with core orders increasing 11%. We achieved 20% revenue growth and generated 20% operating margin and EPS of $0.71, which was $0.07 above the midpoint of our guidance and $0.02 above the high-end. Second, our continued focus and commitment throughout the year generated strong results. We have continued to build momentum in key growth areas across multiple end markets, contributing to three consecutive quarters of accelerating core order growth. And third, our success this year demonstrates that our strategy is delivering results. We are well aligned with the needs of our customers and we have a strong foundation to drive growth in earnings in 2018 and beyond. Let’s begin with a review of Keysight’s very strong fourth quarter performance. We achieved earnings of $0.71 per share, exceeding the high-end of our guidance. We grow orders by 27% to surpass $1 billion, a new record for Keysight, and grew revenue by 20%, or 3% on a core basis. We are very pleased with our fourth quarter performance and execution, resulting in an outstanding close to a transformative year for Keysight. Beyond the numbers, we believe our execution in the fourth quarter is even more meaningful when considering the unimaginable challenges our team faced with the Santa Rosa wildfires in October. Personally, I’m proud of how the Keysight team came together to help the community and each other to navigate through this challenging time, as well as deliver a strong quarter. I’m inspired by their resiliency, acts of courage and generosity. I’d like to thank each and every member of the Keysight worldwide team for their unwavering support, as well as thank all of our partners, customers and investors. Our Santa Rosa headquarters did incur some damage and was temporarily closed as it was in a mandatory evacuation zone, which did have an impact on our operations. Neil will discuss the specifics shortly, but I would highlight that Keysight is a global company with global operations and our business performance worldwide remains strong. Our record fourth quarter resulted in a strong finish to the fiscal year with total order growth of 15%, or 7% core growth and total revenue growth of 11%, or 2% core. With our strong 2017 order performance, we are exiting the year with a strong backlog and a solid foundation to build upon as we move into 2018. As we look to our markets, we continue to see increased investments in emerging technologies and overall healthy dynamics. Our strong results throughout the year demonstrate that our strategy is driving growth. We have focused on partnering with customers early and bringing solutions to market that enable them to validate and accelerate their designs. As a result, we are building momentum in key segments of the market that are undergoing technology transformations, such as 5G, next-generation Wi-Fi, electronic warfare, high-speed data centers and automotive and energy. We are seeing excellent adoption of our solutions, including software. Orders for our software solutions grew in the high single digits for the year to reach over $450 million, excluding Ixia. Keysight is at the heart of innovation processes in many dynamic end markets. Today, I will highlight the trends we see in 5G, auto and energy, as well as aerospace and defense. 5G networks and devices will explore uncharted territory in frequency coverage, data rates, number of simultaneous users, spectral efficiency and reduced latency. This will allow providers to introduce new and potentially game-changing business models. Our early engagement with leading market makers and solutions-based go-to-market strategy have advanced Keysight to a leadership position. Orders for our 5G solutions grew to a new record in Q4, and we delivered high double-digit growth for the year. This is an area, where we continue to invest in our partnerships and solutions in order to strengthen our position as the marketplace develops. We have teamed up with multiple industry leaders to successfully demonstrate industry-first achievements that are important milestones towards making 5G commercialization a reality. By leveraging our core strengths in our acquisitions of Anite and AT4 Wireless, we have developed groundbreaking solutions and established a leadership position in 5G. Auto and energy is another key area, where we are building momentum as technology advancements transform the market. Keysight has achieved double-digit order growth with our automotive and energy solutions for four consecutive quarters. While there are several trends driving development activities across multiple dimensions at once in this end market, including the increasing content of electric vehicles, electric and hybrid power cars and radar technologies for autonomous driving. Autonomous driving in itself encompasses the spectrum of technologies. At one end, there are driver assisted features that include lane centering, parallel parking and collision avoidance. At the most advanced end, there’s the next generation vehicle with full self-driving capabilities, which will need multiple sensors, high power computing, artificial intelligence and communications infrastructure to support real-time information flow. With this broad development landscape, we believe we will see continued R&D investments in auto and energy for many years to come. Accordingly, we’re intensifying our focus on this key growth area and investing to expand our presence. We introduced over 70 new solutions for the auto and energy market since October of last year. Just last month, we opened an Automotive Solution Center in the Detroit area that features an electronic test and measurement lab, a training facility and a fully equipped vehicle test bay, which complements our automotive solution centers in Germany, Silicon Valley and other strategic locations. Additionally, we recently expanded our auto and energy solutions offerings with our acquisitions of Scienlab, which is based in Germany and serves a Tier 1 customer base. This acquisition strategically expands our global footprint and solutions portfolio, allowing end-to-end solutions for hybrid and electric vehicles and battery test solutions. In the aerospace and defense end market, electronic warfare is defending against malicious actors looking to take advantage of security gaps in electronic and digital communications are growing in importance. Aerospace and defense technologies need to keep advancing in order to stay ahead of commercially available technology evolutions. And this is driving innovation across multiple dimensions. For example, in communications, new breakthrough frequency domains need to be explored. Additionally, aerospace and defense needs to be on the cutting-edge of software-defined radios, future generations of satellite communications and private mobile Ad-Hoc Networks. Keysight provides the industry’s most advanced electronic warfare and radar testing solutions and has been a longstanding leader in this market. While delayed budget approvals in the U.S. impacted our aerospace and defense growth in the first three quarters of 2017, we exited the year with strong Q4 aerospace defense orders growing 20% year-over-year. The timing of annual budget approvals is always a concern. However, over the long-term, we remain bullish on both our market position in aerospace and defense and the prospect for increasing U.S. defense spending. In closing, our clear vision, continued focus and commitment led to our strong results for the quarter and the year. We have consistently delivered on our commitments and are very pleased with our steady progress to transform and position Keysight for growth. We’re executing on our strategy to create value for our customers and shareholders and driving growth across multiple avenues of emerging technology trends. This year, we continue to increase investments in R&D, while expanding our technology portfolio and market inorganically with several acquisitions. We believe these investments already delivering results and are well aligned with growing market trends, where customers are investing in next generation digital and electronic technologies. We’re poised to continue to drive growth in earnings, as these long-term trends evolve and look forward to sharing our progress with you along the way. With that, I will turn the call over to Neil for a detailed review of our financial performance and outlook.

Thank you, Ron, and hello, everyone. Today, we reported fourth quarter GAAP revenue of $878 million and non-GAAP revenue of $902 million, which excludes the impact of the acquisition-related fair value adjustments to Ixia’s deferred revenue balance. Core revenue, which excludes the impact of currency and revenue from acquisitions completed within the last 12 months grew 3% year-over-year and core orders grew 11%. Regionally, order growth was strong across all geographies, whereas core revenue declined 3% in the Americas and grew 6% in Europe, 11% in Japan and 7% in the rest of Asia. Looking at our operational results, gross margin was 61.9%, a year-over-year increase of 440 basis points, driven by favorable core product mix and the addition of Ixia. For the quarter, operating expenses totaled $377 million, compared with $290 million in the same period last year, reflecting the addition of Ixia and ongoing R&D and sales investments. This resulted in fourth quarter operating margin of 20.1%, up from 18.9% last year. We reported net income of $135 million, up 22% over last year and $0.71 in earnings per share, which was $0.02 above the high-end of our guidance range. We ended the quarter with a weighted average diluted share count of 189 million shares. Moving to the performance of our segments. Our Communication Solutions Group or CSG includes two primary end markets versus the commercial communications end market that reported revenue of $280 million, up 10% compared with last year’s fourth quarter, driven by R&D solutions for new technologies, including 5G, 4.9G LTE-Advanced and Wi-Fi test. CSG also includes our aerospace, defense and government end markets, which generated revenue of $182 million in Q4, compared with $188 million in the same quarter last year. Total CSG revenue for the quarter was $462 million, or 4% growth was 62.9% gross margin and 21.3% operating margin. Our Electronic Industrial Solutions Group or EISG generated fourth quarter revenue of $206 million, up 3% from last year. Automotive and energy led the growth, followed closely by general electronics measurement. EISG reported gross margin of 61.3% and operating margin of 21.8%. Our Ixia Solutions Group generated revenue of $124 million, gross margin of 76.2% and an operating margin of 16.4%. ISG revenue was above the level implied in our guidance for the quarter. ISG saw solid demand for its high-speed Ethernet test solutions, including 400 gig and strong orders for its security and application solutions. Additionally, visibility sales with service provider customers were strong, offset by softness and enterprise accounts. Lastly, the Services Solutions Group or SSG revenue grew 2% year-over-year to reach $110 million. Revenue growth for SSG was driven by an increase in sales for both calibration and remarketed solutions. This brings our SSG revenue for the year to $419 million, up 4% over last year. In the fourth quarter, SSG reported gross margin of 42.6% and operating margin of 16.3%. As Ron highlighted, overall, we are pleased with our performance and execution as a company for the 2017 fiscal year. Revenue for the year totaled $3.2 billion and gross margin improved 230 basis points to 60.0%. To fuel innovation and strengthen our market position in strategic areas, we continue to invest in R&D and made several acquisitions. At the same time, we remain within our operating model, delivering 19.1% operating margin and reporting non-GAAP net income after-taxes of $462 million, or $2.53 per share. Moving to the balance sheet and cash flow. We ended our fiscal year 2017 with $818 million in cash and cash equivalents, compared with $873 million last quarter. Our quarter-end cash balance reflects a $40 million pay down of our term loan, $60 million of net cash used for the acquisition of Scienlab and a $68 million payment for a Malaysian tax liability, which we continue to actively dispute. We generated $64 million in cash flow from operations in the fourth quarter and invested $18 million in capital purchases. This brings our free cash flow for the quarter to $46 million. Turning to our outlook and guidance. We are encouraged by the healthy market dynamics, strong order growth and increased backlog we saw in the fourth quarter, as well as our strong funnel of future opportunities. However, as Ron noted, Keysight was impacted by the Northern California wildfires. Our headquarters was under mandatory evacuation for more than three weeks and while direct fire damage to our core facilities was limited. Especially when compared to the immediate surrounding area, our buildings did experience some smoke and other fire-related environmental impacts. Since regaining access to our site, our focus has been on returning manufacturing to full production. Over the intermediate term, we expect the fire to have no net impact on our business results, but the disruption will impact the seasonality of revenue in the next few quarters. For this reason, we are taking the unusual step of focusing our guidance on the first-half of FY 2018. For the first-half of the year, we currently expect non-GAAP revenue to be approximately $1.775 billion, with non-GAAP earnings per share of $1.29, based on a weighted diluted share count of approximately 190 million shares and a non-GAAP tax rate of 17%. As we look at the expected seasonality within the half, we currently expect first quarter non-GAAP revenue to be in the range of $780 million to $820 million, with non-GAAP EPS in the range of $0.29 to $0.43. Assuming Q1 performance at the midpoint, the balance of $975 million of revenue and $0.93 of EPS will end in Q2 to reach our guidance for the first-half of non-GAAP revenue of $1.775 billion and non-GAAP earnings per share of $1.29. As Ron mentioned in his opening remarks, we have built a strong foundation and remain confident in our ability to drive revenue and earnings growth in 2018, while continuing to create value for our customers. With that, I will now turn it back to Jason for the Q&A.

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

[Operator Instructions] Our first question comes from the line of Vijay Bhagavath from Deutsche Bank. Your line is open.

Yes, thanks. I hope, you guys can hear me, okay.

Yes, Vijay, no problem.

Yes, excellent. Yes, hi, Ron and Neil. So, we wish you all the well with the fire damage recovery. My question is, you don’t guide for the full-year, but give us kind of qualitative color if you could on some of the big growth areas for next year, which would be around 5G testing, also industrial IoT, semi testing and the like. So that we get a qualitative demand picture from you for the full-year? Thanks.

Sure. If you take a look at Q4, our 5G orders were over 50% – had 50% growth. And for the year, it was in the upper double-digits north of 50%. So we continue to see very strong 5G demand. We're winning business that we didn’t win in 4G by combining not only the new innovations at Keysight, but also combining those with innovations from Anite and AT4 wireless, which is why we did those two acquisitions. Aerospace defense, while for the year the orders were roughly flat, accelerated and had 20% growth in Q4. Now if you remember Q1 of last year, Q1 was very light. So we would anticipate strong order growth for aerospace defense in Q1. We also see an accelerating picture in overall commercial communications, which includes 5G, where we saw a double-digit growth in the quarter. Our automotive and energy growth initiative had 18% growth in Q4 and over 20% growth for fiscal year 2017. And we think that that is another long-term trend. And the last thing that I’ll mention is modular. So when you compare us to some of the other players in the industries, our modular growth for the year was – for orders was 18%, and it even accelerated, where Q4 was over 20%. So looking at all these factors when you look at 5G, when you look at commercial communications and other wireless, if you look at automotive and energy, if you look at our progress in software, if you look at our building modular base, that’s why we feel very confident in guiding for the half. Also, you probably have noticed that we built up a good bit of backlog and we’ll be burning that, burning bunch – a bunch of that backlog off in the first-half. Yes, we’re going to shift our seasonality. Q1 will be a little lighter and Q2 will be a little heavier. But we’re very confident with our backlog and our market positions that will be able to meet or exceed our half one guidance.

Certainly, it’s truly helpful. A quick follow-on for Neil. Software and modular in terms of product mix is one of the stories on the stock. So question for you Neil is, the improvement in software and modular in the product mix, when could it start it impacting the gross margin line, would it be first-half, or closer to the second-half of next year? Thanks.

You did see a 440 basis point increase in our gross margin in FY 2017. Now some of that was driven by the addition of Ixia, which is obviously the high gross margin business. But we also saw a favorable mix shift within the core business, driven by the types of things that you’re talking about, not only the increase, the above average growth rate of our software and modular businesses, but also the continued migration of our revenue towards more of our customers R&D labs and away from their manufacturing line. So I think, you are seeing that already, and I think you will continue to see it as we move forward.

And our next question comes from the line of Stanley Kovler from Citi Research. Your line is open.

Hi, good afternoon. [Indiscernible] as well to the team on the ground and the recovery efforts. So I wanted to ask you guys just in terms of the outlook for the first-half. Can you help us understand what safeguards you might have for orders that you’ve secured just given the seasonality and concerns around potential customer cancellations or things like that? And then I just have a quick follow-up.

Sure. Well, first of all, we had a lot of calls from our customers asking what they could do to help us, which was very rewarding and we’ve gone out and talked to all of them. When you’re talking about $100 million shift, you’re talking about two weeks worth of shipments for our company. It’s not that big. It’s not that big in the grand scheme of things. But we have worked with every customer. We’ve realized exactly when they need their products. Most of them are getting them and the ones that aren’t, we’re basically prioritizing for folks that could accept products two to three weeks later. So we’re in. We feel very comfortable with that. Also as the incoming order rate has been high, as you’ve heard the 11% organic growth for the quarter and you see our market position and our ability to win over the competition, we feel very strongly about the guidance and our ability to preserve customers.

Thanks. And as a follow-up, I wanted to ask you just in terms of the tax reform implications. What does it mean for you guys? Have you tried to quantify it on earnings basis, or the potential to repatriate some of your cash from overseas? Would – in that scenario, would you prioritize deleveraging M&A, cash return? How should we think about that? Thanks a lot. Good luck.

Sure. Well, thank you, Stanley. First of all, obviously, if the tax reform does go through, which I think everybody expects, it will go through in one form or the other. That would make a very, very large percentage of our cash accessible to us at the exact same tax rate or very, very close. So we’re excited about that. That gives us more leverage. That’s been one of the things in the longer-term that makes it hard to give back cash to our investors in the form of share buybacks or in dividends. But that constraint will be released. Our first priority is to delever roughly $550 million after the acquisition of Ixia. We’ve already delevered by hundreds of millions of dollars. We’ll continue to meet our commitments and do that, but this opens up the opportunity in the future to have a Board decision on how and – if and how we return cash to the shareholders.

Yes, I don’t have a ton to add, maybe just a couple of comments. So first Id just make note of a statement that I made in my prepared remarks about modeling a 17% tax rate for the first-half of the year. And that’s based on the integration work we’ve done for Ixia to-date, and that is pre any tax reform. And so we’re already ahead of where we expected to be with regard to taxes post the acquisition of Ixia. As Ron has mentioned, the biggest benefit we see from the potential tax reform is the access to capital that it could provide. Obviously, the reduction in the U.S. tax rate that’s being proposed to approximately 20%. We see as being net favorable for growth and should have a positive impact on our end markets, but the biggest direct impact for us is access to capital. The number one priority will be to hit the approximately $240 million from incremental delevering that we have to do. We’ve got a plan in place to do that with or without tax reform, and then we can talk about the priority there. We then begin to start return cash to shareholders.

Thank you.

Thank you, Stanley.

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

Yes, good afternoon, Ron and Neil. First off, I guess, my condolences to those in the Keysight family that experienced loss in the Santa Rosa fire. Jumping into the questions, I guess, Neil, can you elaborate a little bit more on the half-year guidance? I can absolutely understand how fires disrupted seasonal trends and deliveries near-term. But I’m hoping for a little more detail on how this may impact seasonality in the back-half of the year or visibility in the back-half of the year? And are you implying the effects of the fire are greater in out quarters? Meaning that maybe some of the smoke damage could have some shipment shortages or impacts from longer-term? And then Ron, along the same lines thinking out longer-term, I think, last quarter, you talked about EPS growth approximating 10% in FY 2018. And I’m wondering if there’s any change to that expectation?

Sure. I’ll start with the end. No, there’s no change to what we had said about EPS growth. Overall, for the year, for 2018, we expect there to be no net impact at all from the fire. But just to put it in context, we had 119 employees who did lose their owns. So it has been a pretty big effort here, and we had to make sure that our employees not only tended to the company, but also could tend to their families. But right now, we already have 90% of our Santa Rosa facility – operations facility up and running. And that’s only a fraction of the total manufacturing that we have in the company. We have to do some cleaning and calibration of some equipment and things like that. But we’re very pleased to where we are. We’re actually ahead of where we expected to be at this point.

Yes, as it relates to guidance, at this point, we don’t have any significant concerns about our ability to get product to customers. Again, we’re working actively with them to communicate to them what our delivery schedules are like and we’re working to accelerate recovery from the production disruption as quickly as possible. I think, as you look at the first-half, we expect to be mostly whole by the end of the first-half. There are some small lingering amounts that carry into Q3 in terms of catch up, but those numbers are relatively small. And then certainly by Q4, we’re back to normal seasonality. So we really see the disruption is over the next three quarters, but really what you’re seeing is primarily a shift from Q1 into Q2 with some small amounts lingering into Q3 and back to normal by Q4. It is not right now impacting incoming orders in anyway. And as Ron has said, our customers have been very, very gracious, I guess, and asking what they can do to help us through this period of difficulty.

And if you take a look at the total effect, as Neil said, we’re going to ship less in Q1 and more in Q2. Outside of that, there may be, we’re talking some roughly $30 million that may linger into Q3, but our goal is to obviously make that zero. We’re not saying that, we can do that yet. We’ll make sure that we can get that done before we’d make a public commitment. Also, just let you know, we’re here at the Santa Rosa site right now during this conference call with you. And it’s great to see all of our operations people here and really charged up at helping the company and how fast we’ve been up. We have hundreds of machines here. And every single one of our machines and everything is, there is no damage to them that we found. So things, we’re very pleased with how things have progressed since the fires have stopped.

I appreciate the details. And I guess, the CSG and EISG segments both performing quite well. So I did kind of want to nitpick on your services side with core growth of 0%. If we kind of back up to your Analyst Day you had been targeting an 8% CAGR in services. And I believe, it’s – or $600 million revenue target by 2020. I’m curious as to how you reaccelerate growth and how we should think about that longer-term target for hitting that $600 million in service revenue?

Yes. Good question, Patrick. First of all, let me just make a statement. First, when we went ahead and we said we were going to get to that 8% growth for services, we anticipated doing acquisitions to putting capability in certain areas and then to leverage that new capability and quickly expand and grow. What we found is that the acquisitions that were out there with the prices and the prices demanded by the companies that were selling really did not provide a good return to Keysight shareholders. So we’ve decided to build some of that capability as opposed to buying the capability and just adding to it. It’s a much better return for the shareholders, but it will take a little longer to get to that numbers. But I’m going to let John talk a little bit about the progress that has been made and what he plans to do.

Sure. Thanks for the question, Patrick. Yes, so overall, the SSG segment showed 4% growth for the year, which is actually a record revenue number for SSG ever. Q4 was building on that traction and that was an all-time record for our quarter four revenue as well. So we continue to gain traction. We’re as confident as ever about the long-term direction of the services business and the opportunity that exists there. As Ron mentioned, part of the plan was always to have inorganic sprinkled in with organic growth to enable certain capabilities and accelerate growth in certain portions around the world. The opportunities to find good targets at reasonable prices has been harder than we thought. So that that has have to shift to a more of an organic methodology to hit those growth numbers. But we’re very confident about it, and we see the areas that we’re really focused on with multi-vendor managed services growing strongly with our remarketing organization, growing strongly with the reaction from customers to these offerings and expanding on what they’re asking Keysight to do for them being very strong as well. So it’s a good story. It’s just going to take a little bit longer than we had originally expected when we expected more M&A activity.

Thank you.

Let me just also put that into context. Overall, with Keysight, we remain committed to the model that we talked about before. We talked about in September of 2015 and three to four years getting to a 4% growth and 40% incrementals. We see a very clear path to get to that model early and deliver that in FY 2018. As you know, the four quarters of – in the four quarters of FY 2017, our core growth accelerated from 2% to 4% to 7% to 11% core growth. And with all of that, there are some puts and takes. Some of the growth initiatives are running a little bit harder than we expect most of them, and we’re able to make up for that that services gap.

Thank you for taking my questions. Good luck.

Thank you, Patrick.

And our next question comes from line of Farhan Ahmad from Credit Suisse. Your line is open.

Hi, thanks for taking my question. I kind of just wanted to ask Vijay’s question in a different way. You had stronger than seasonal growth in orders in the fourth quarter much stronger than anytime you have had impact. So can you just talk about relative to the – what you see the seasonal trends, which are the areas when you see – saw very strong growth?

Yes. I mean, our order growth was very strong across the board in the fourth quarter. We saw order growth across all geographies. We saw order growth across all of our end segments. We saw a pretty strong rebound in aerospace defense, Ron mentioned that in his script, 20% growth –the order growth in aerospace defense, which offset the sharp decline we saw earlier in this fiscal year. We saw a very strong growth in 5G, a very strong growth in modular software growth.

Auto…

Yes, auto and energy, semi orders were up. Commercial communications, it was a very, very broad based across virtually all end markets, all geographies, very strong end markets. And we really feel, it’s driven by our strong market position and really the decisions we’ve made multiple years ago to identify these market opportunities and invest.

Yes, and this is Mark Wallace. Just to add to that, we’ve gone through all the industries as was noted a 11% core order growth with positive order growth in every single region. And when you start to look at the breakdown of customers, we saw double-digit order growth with our largest customers. These are the same industry leaders that we’re engaging with early on developing new solutions. And by the way, these engagements are sustaining when we start down a path around some new technology development. It creates additional opportunities for us to continue to work with them. So our largest customers were up 20%. And as you may recall, earlier in the year, we put an emphasis on our capability in digital marketing and increasing our front-line sales capacity. So our smallest customers, our emerging accounts and the long tail of customers was also up double-digit during the quarter as well. So just to reiterate what Neil said, our results are very strong and well-balanced.

Nice thing about this is, these aren’t things that happened just by chance. These are literally the programs that we put in place. The growth initiatives we identified three years ago that we focused on, as well as the sales and marketing programs that we focused on and that’s where we’re seeing very strong results.

And you also talked about modular growing very strongly for you this year. Can you just talk about what are some of the factors, which is driving your modular business to be so much stronger than some of the others in the industry?

Well, I think a lot of the modular business is also in the wireless business or 5G and even 4G. And our strength and our differentiation in the wireless area from our decades and decades of expertise helps us solve problems that we will say some other companies may get stuck with. And when we go head-to-head, we win a very, very high percentage of the time. So we’re starting to see modular in that area, but it’s not at the expense, where we’re losing one box solution sales to the point where we’re not getting any growth. When you add them together, we’re still getting a 11% organic growth in Q4. So we’re very pleased with that. What’s happening is, some people are trying to move towards 5G or wireless, and we were moving towards modular and we’re clearly winning.

Got it. Thank you. That’s all I have.

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

Thanks. Good afternoon.

Hi, Brandon.

Ron, would love to hop back to the aerospace and defense business and sort of get your qualitative comments on how the U.S. is trending, whether you saw the U.S. orders turn the corner, recognizing that revenue was still down year-over-year, but overall, so much better if you kind of say, we turn the corner in the U.S.?

Yes. So I’ll let Mark talk about the budget process and where we are and what it needs, but we’re very pleased with the 20% order growth in Q4. Obviously, if you look at where the compare is for Q1, we expect to see some nice growth numbers in Q1. But I’ll let Mark talk through the budget process that leads us to be very confident in where we are.

Yes. Thanks, Ron. Hi, Brandon. So, we had a very strong Q4 20% order growth. And this was predicted back in the early part of the year, as we saw the change of administration. So it really happened the way we thought it would. And where we find ourselves today, as we all know, is we’re waiting for the budget to be signed if the deadline is coming up later this week. So that means there’s a high likelihood. There will be a push out, a delay, which means probably some continuing resolution probably into the first couple months of the next calendar year, because it doesn’t allow for new program starts, it may have some short-term impact. But again, we’re operating on last year’s budget as part of continuing resolution. And it’s very likely that a budget will be approved in 2018 probably for multi-year and it’s believed with bipartisan support that it will include a sizable U.S. Department of Defense increase, which is beneficial to Keysight because of our strong position in the U.S. DOD. So, what I’d summarize is that, we have very strong customer relationships in this segment. We have a leading position with new technology development and deployment like electronic warfare that Ron mentioned in his opening comments. We have a very robust funnel. And therefore, our outlook over the medium and long-term for aerospace defense is very strong.

Thanks. And one for Neil. In terms of the fourth quarter cash flow, free cash flow conversion was a little bit lighter than I guess we would have thought. As we look out to 2018, I think the outsized pension outlays that you’ve been absorbing last couple of years, I think those are supposed to expire. Are there any other one-timers or headwinds that we should think about as we sort of think about the full-year next year and perhaps some expectation that conversion can improve from here?

Yes. So a couple of comments. So first of all, as you look at FY 2017, or excuse me, Q4, you’re right, our cash – our free cash flow was lower in the quarter. And the primary driver of that was this Malaysian tax payment that we need to bake. Again, we’re continuing to actively dispute that. We believe the facts very much line up favorably for us and hopefully that will ultimately be resolved to our benefit, but those things can take time. I think, as you look forward to FY 2018, first of all know that cash flow conversion is an area of focus for us. We will continue to see some additional pension funding requirements as we move forward. I think, the other thing that we will continue to be a bit of a drag on cash flow, at least, through the first-half is the remainder of the Ixia integration. And as we look to realize the synergies associated with that acquisition, again, we’ve committed to deliver $10 million per quarter by Q3 of next year and we’re on track to do that. But there will be some cash costs associated with recognizing those synergies. I think once we get beyond that, we’re going to be in a much better position to start converting profit to cash flow in a more aggressive fashion and narrowing the gap between our overall levels of profitability and cash flow.

I’ll just add that, as Neil mentioned, the Malaysian tax issue, we believe our case is very, very strong. And unfortunately, with the Malaysian government, the way that it works is you pay upfront before you have your day in court, if you will, where – which is not the case in other regions of the world. So if it works out the way that we think, we could see a reversal of that cash position.

Okay. Thank you.

Thank you, Brandon.

And our next question comes from the line of Richard Eastman from Robert W. Baird. Your line is open.

Yes, good afternoon. Thanks for the questions. Ron or Neil, could you perhaps bracket maybe what the core growth might look like first-half versus second-half of 2018? And the math – my math kind of suggest that maybe core growth is 3% or a little shy of that in the first-half. And then it seems like it would need to pick up in the second-half, but you’re going to have tougher comps. So maybe you can just walk us through maybe the timing there?

Yes. Thanks, Rick. We deliberately didn’t break down the guidance for the first-half between core and non-core. The reality is, we’ve got an awful lot of moving pieces more so than usual here as we move through the first-half. We’re very confident in our ability to get to that first-half number that we put out there, but we haven’t broken it down any further. I think, as you look at the full-year, as Ron mentioned, we see a clear path to get to the long-term operating model for the year of delivering 4% core growth with 40% incremental. And so, as you think about the year, I think, we expect to do at least that well, but we haven’t broken it down here for the first-half.

And can I – just in the mix there, can I ask you has any of the revenue outlook for Ixia, has that moved around a bit? In other words, it sounds like the core order growth here heading into fiscal 2018 is stronger. Is my sense correct that maybe a little bit of Ixia revenue falls out, maybe business conditions weaker. I think, you mentioned enterprise visibility weaker, and offsetting that might be a bit of an acceleration in core growth?

Last quarter, we talked about the relative market weakness that Ixia was seeing. And to some extent that is continuing. That being said, Q4 was better than what we had modeled into our guidance three months ago for Ixia. So, yes, at the margin, things are a little bit better than they were three months ago for Ixia. And they tend to be seasonally very strong in the fourth calendar quarter, and so we’re going through that period right now. But we definitely haven’t seen any deterioration of the Ixia end markets over the last two months, if anything they’re a little bit better at the margins, but we have an awful lot of backlog over the course of the last year. We feel like we’re very well-positioned going into the end of the fiscal year, especially on a core basis, where as you noted, orders have grown to 11% the most recent quarter.

Okay. And just last question for me then I’m sorry. The – within the EISG business, how did the semi business, parametric test business do in the quarter? I mean, I presume you’re lapping some pretty heavy big comps. And what’s your outlook there and maybe the trend line look like in the – on the semi test side?

I’ll just say in the semi test side, we saw double-digit order growth, which was very good. It’s funny. It’s very hard to predict. We always say, oh, this is the last quarter we’re going to get orders and we keep hitting double digit numbers. But again, when you look at it as a total of our business, it’s less than 10% of our total business. So we have the ability to buffer that a bit. I’ll turn over to Mark for some other comments.

Yes, just – I’ll just add to that. The blistering growth that we saw in the first-half from a lot of the fabs building capacity and upgrading their process for a lot of the products that are shipping now with smart devices, smartphones, they’re moving into a production kind of mode versus the investment. But as we’ve spoken about, I think, many times on these calls, the opportunities in China with the indigenous semiconductor capabilities are very strong, and we’re continuing to see those. And the other thing to remember is that, our solutions set into the fabs is pretty diverse. Everything from nano positioning tools to parametric testers to general purpose. So in services as well, we’re selling a lot of managed services to these organizations as well. So the outlooks continue to look pretty good.

Yes.

And we also got some new solutions that are going in for, let’s just say, at a lower price point for a slightly lower performance point that we never had before, which makes us very competitive for others trying to come in and take that business.

As the other pieces, the industrial and the auto and energy within the EISG business have grown. Has the gross margin contribution there also expanded such that, when semi test finally does flatten out some, will there be a noticeable impact to the gross margin line for EISG, or have we kind of closed the gap there on profit contribution?

Sure. I’m going to turn this question over to Gooi Soon Chai, who is on the phone with us from Asia and runs EISG.

Okay. Thank you, Ron. I think, maybe let me just take a step back and look at EISG overall business segment. We have three major business segment within the EISG, which is the general electronic, which has – the second segment is the automotive energy, and the third segment is around semiconductor. And you’re precisely correct that from a mixed perspective, the best gross margin business that we have essentially comes from the semi business. But again, I think, as what Mark has alluded to, even if we expect some moderation in semiconductor, we do have diversity in the semi portfolio to at least and navigate through for any major perturbation, so to say, because within the semi, we do have offering in the biometric, which is really very much focused on the next-generation process nodes. We also have a good relationship with the – some of the semi equipment manufacturer like currently, we’re working on some of the newer program, by the EUV program, we should expect to continue to grow in 2018 and 2019. And then looking beyond that, we also have other offering in the wafer ecosystem, so that’s one. Now, going back to the other two segments. For the general electronic area, what we see growing especially is IoT application. And we’re focusing a lot on the value-add. So our solution goes not only for the manufacturing ecosystem, but also moving into the design and prototyping, that’s really where we are getting better margin, okay?

Okay.

And in case of automotive and energy, right? As again, I think Ron mentioned in his – the initial part of the discussion is that, it’s expanding, but we’re also moving into a new field like power electronics and power actually testing with the acquisition of Scienlab. So some work really is now being done to improve gross margin definitely. But we do expect that as we continue growing, we will do beyond just expanding the top line. We’re also focusing on leveraging the skill of Keysight and derive some gross margin improvement over the long run, okay? So hopefully that give a context of what it is in the EISG, okay? Yes.

That’s very good. Thanks for the overview. Thank you very much.

Okay.

Thank you. That concludes our question-and-answer session for today. I’d like to turn the conference back over to Jason Kary for any closing remarks.

Thank you, Kiersten. I’d like to turn it over to Ron now for his comments just to wrap us up here.

Thank you very much, Jason, and thank you, everyone, for being on the call. But the best thanks go out to all the employees that have worked very hard to get us in this position, where we have production flowing and that we have generated record orders for the company in over $1 billion record gross margin for the company, as well as 11% core growth. We’re very pleased that the direction and the position of the company right now, and I wish you all a great day.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.