Good day, ladies and gentlemen, and welcome to the Keysight Technologies First Quarter 2020 Earnings Conference Call. My name is Josh, and I will be your lead operator today. [Operator Instructions] Please note that this call is being recorded today, Monday, February 24, 2020 at 1:30 p.m. 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 first quarter earnings conference call for fiscal year 2020. Joining me are Ron Nersesian, Keysight's Chairman, President and CEO; and Neil Dougherty, Keysight's Senior Vice President and CFO. Joining us on the Q&A session will be Mark Wallace, Senior Vice President of Worldwide Sales; and Satish Dhanasekaran, President of the Communications Solutions Group. 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. We will also make references to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months. 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. As a reminder, we are hosting our 2020 Investor Day on March 3, at the New York Stock Exchange. Management is also scheduled to participate in the Susquehanna Technology Conference in New York on March 12. We hope to see many of you there. And now, I'll turn the call over to Ron.

Thank you, Jason, and thank you all for joining us. Keysight delivered another outstanding quarter. Our consistent performance illustrates the strength of our differentiated solutions, the diversity of our end markets, as well as the robustness of our business model. I will now focus my formal comments on three key headlines for the quarter. First, Keysight delivered a strong start to the year demonstrating sustained profitable growth across multiple dimensions of our business, both revenue and earnings exceeded the high end of our guidance and we achieved record first quarter orders, revenue and earnings, including an all-time record of gross margin of 65%. Second, our ongoing strength in 5G-related investments and Keysight's leading solutions across the ecosystem resulted in record 5G orders and continued growth in Commercial Communications. In addition, secular growth trends are fueling broad-based momentum across our target markets. And third, we are monitoring the coronavirus situation and want to acknowledge those who have been affected. While we do see some potential for near-term impact, we remain confident in the strength of our broad portfolio of industry-focused solutions, software and services. Now, let's take a deeper look into our first quarter. We achieved $1.26 in earnings per share, which was $0.16 above the high end of our guidance and represents 36% year-over-year earnings growth. We achieved record first quarter orders that grew 12% year-over-year, reflecting the resilience of our business and extensive market reach. Revenue grew 9% year-over-year to reach a new first quarter record. First quarter revenue performance was driven by strength in Commercial Communications, Aerospace, Defense and Government, and Semiconductor Measurement Solutions. In commercial communications, record first quarter revenue was driven by continued investments in 5G, fueled by the transformation of communications systems, including wireless access, infrastructure, wireline technologies, data center and the cloud. Our success is being driven by close collaboration with key market players to innovate and create many industry firsts. For example, we recently introduced the Value Series Channel Emulation Solution called PROPSIM FS16. This solution was enabled by the Anite acquisition and is the latest in a long line of our innovative first-to-market solutions to accelerate 5G development and commercialization. We’re also excited to announce today another industry-first solution that enables customers to model 5G security threats in the lab. 5G technology innovation is enabling a massive proliferation of connected devices resulted in greater security, vulnerabilities, and an expanded attack surface. Keysight's 5G security testbed was made possible by the cybersecurity expertise and technology gained through the Ixia acquisition. Recall, that as of the first quarter, we integrated the Ixia Solutions Group, ISG, into our Communication Solutions Group to accelerate solution synergies and the teams are already getting very good traction. For the second consecutive quarter, orders for Ixia Solutions grew double-digits as we saw continued strength in network visibility and 400-gigabit Ethernet investment in Layer 2/3 protocol solutions. Ixia and our other commercial communications acquisitions such as Anite, AT4 and PRISMA enable us to provide our customers with a broad and differentiated set of solutions that span the stack layers as 5G evolves over the years to come. We are pleased with the broad global adoption of our 5G platform as our R&D solutions continue to lead the industry. For example, we recently announced that Keysight's 5G conformance test solutions have been selected by the Korea testing laboratory for global 5G device certification. We are also seeing success beyond R&D with key wins this quarter in component manufacturing for base stations and devices as 5G production begins to ramp globally. Moving on to other growth factors, our strong performance beyond commercial communications reinforces our broad momentum across Keysight's diverse end markets. In Aerospace Defense and Government, our revenue grew double digits to achieve a first quarter record with broad base strength across all regions. This was the third consecutive quarter of strong year-over-year order growth in Aerospace Defense. Our solutions for electromagnetic spectrum operations, radar, space and satellite continue to benefit from a favorable U.S. spending environment and ongoing investments in technology modernization. In automotive and energy, revenue grew high single digits with increasing customer demand for key strategic applications. Our success in automotive is being driven by our first-to-market solutions and focus on next-generation technologies. For example, this quarter we achieved 3GPP validation of the industry's first C-V2X or cellular vehicle-to-everything radio frequency conformance test case. As a result, Keysight is enabling the automotive industry to accelerate commercialization of connected cars and autonomous vehicles. We also announced a collaboration with a leading provider of battery cells on cell formation. This collaboration supports the electrification of vehicles by enabling the development and manufacture of advanced battery cells. In Semiconductor Measurement Solutions, we achieved strong order and revenue growth driven by our customer strategic investments in next-generation process readiness. Our software and services continue to play an increasingly important role in Keysight's differentiated portfolio of customer-centric solutions. Software orders once again grew above our overall growth rate. Notably, this quarter, Keysight was named the organizational winner of the 2020 Business Intelligence Group Award for our PathWave Test 2020 software released just last October. PathWave Test 2020 was selected from a range of recent innovations submitted by organizations around the globe. I'm also happy to report that services orders and revenue grew double-digits in the quarter. We continue to see good adoption of our new support offerings such as Keysight Care, which was also a contributor to our year-over-year gross margin expansion. In summary, we delivered another outstanding quarter and a strong start to the year. Differentiated solutions across diverse end markets, consistent execution, and strong financial performance continue to drive our value creation. We have an exciting lineup for you at our Investor Day next week on March 3 and we look forward to sharing an update on our strategy and our long-term expectations to the business. Now, I will turn it over to Neil to discuss our financial performance and outlook in more detail.

Thank you, Ron, and hello, everyone. Before I get started, I will note that all comparisons are on a year-over-year basis unless specifically noted otherwise. We delivered another strong quarter as we continue to capitalize on the broad-based momentum across Keysight's diverse end markets. For the first quarter of 2020, we delivered non-GAAP revenue of $1.095 billion, which was well above the high end of our guidance range and grew 8% on a core basis. Better than expected revenue results were driven by broad strength across multiple end markets. Orders outpaced revenue for the sixth consecutive quarter as Q1 orders of $1.141 billion grew 12% in total and 11% on a core basis. Looking at our operational results for Q1, we reported record gross margin of 65% and our operating expenses of $433 million, resulting in our fourth consecutive quarter with operating margin at or above 25%. We also achieved net income of $240 million and delivered $1.26 in earnings per share, which was well above the high end of our guidance. Now, moving to the performance of our segments. Our Communications Solutions Group generated total revenue of $818 million, up 9% while delivering record gross margin of 66% and operating margin of 25%. In Q1, Commercial Communications delivered double-digit order growth and revenue of $573 million, driven by strength in 5G solutions. As Ron mentioned earlier, starting in the first quarter, we have aligned the former Ixia Solutions Group or ISG with our commercial communications end market and are now reporting Ixia results within our Communications Solutions Group. Aerospace Defense and Government generated revenue of $245 million, an increase of 10% and a first quarter record driven by a broad-based growth across all regions as investment in advanced technology continued. Order growth for this end market was high-single digits and we have a strong funnel going into Q2. EISG generated first quarter revenue of $277 million, up 8% driven by strength in semiconductor measurement and next-gen automotive solutions. EISG reported gross margin of 61% and operating margin of 26%. Moving onto the balance sheet and cash flow, we enter our first quarter with $1.69 billion in cash and cash equivalents and reported cash flow from operations of $197 million and free cash flow of $165 million or 15% of revenue. Under our share repurchase authorization, during the quarter, we acquired approximately 730,000 shares on the open market at an average price of $102.48 for a total consideration of $75 million. Now, turning to our outlook and guidance. We expect second quarter 2020 revenue to be in the range of $1.138 billion to $1.178 billion. For the first half of 2020, the midpoint of our guidance reflects 7% revenue growth or 6% core growth. This guidance incorporates our current assessment of the coronavirus impact. Given the dynamics of the situation, we expect any impact from coronavirus to simply be a push-out in demand and do not anticipate any impact on our full-year results at this time. We expect Q2 earnings per share to be in the range of $1.28 to $1.38 based on a weighted diluted share count of approximately 191 million shares. The midpoint of this guidance reflects approximately 20% earnings growth for the first half of 2020. As Ron mentioned, we look forward to sharing our strategy to drive profitable growth, as well as our latest long-term expectations for the business at our upcoming Investor Day on March 3. With that, I will now turn it back to Jason for the Q&A.

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

[Operator Instructions] And the first question comes from the line of John Pitzer from Credit Suisse. Your line is open.

Yes. Good afternoon, Ron and Neil. Congratulations on the solid results. Neil, I know you said in your prepared comments that the guidance for the fiscal second quarter includes your view of the coronavirus impact. I'm just wondering if you can quantify it for us a little bit – for us? Did it bring down the midpoint? Did it widen the range? And I guess, how are you thinking about kind of your exposure? Is it mainly a function of what you're shipping into China or if you can just walk through the methodology that would be helpful.

Yes. Hi, John. This is Ron. I'm going to give you a little bit of a long answer on this because I figure there's a lot of interest in the effects of the coronavirus. First of all, it's a very unfortunate situation affecting not only China, but we're seeing it obviously in South Korea, Italy, and other countries, including customers around the world. The situation is changing, so here is an up-to-the-minute update, as far as what we know at this point. The first thing I'd like to say is that we have a lot of sales in China, but we do not do much manufacturing at all. Over 99% of our products are not manufactured in China. We do receive about 10% of our parts or a little bit less than 10% of our parts from China, but all of this is built into what our guide is. So, let's talk about our employees. We have 991 people in China and another about 233 non-Keysight workers that help us in sales, support, and research and development. Of those 1,224 workers, luckily none have reported coronavirus cases at all. The other thing that's worthwhile to note is, if you look at Hubei province in Wuhan, they're not a big employment center for us. We have folks in Beijing, Shanghai, Chengdu in Szechwan Province and Shenzhen primarily, as well as some salespeople that are scattered throughout the rest of China. One third of those people are back at work already as we've opened up offices in Beijing, Shanghai, Chengdu, and Shenzhen and the rest, the other 770 folks are working remotely through video conferences, remote support with remote control of instruments and giving daily reports to the sales management. So, we get a daily report on the health status of every one, the sales funnel and how everybody is doing in order to make sure we're taking care of our customers, as well as our employees. We're working through that same process in other parts of the field or in other regions, but clearly the impact in other regions is smaller and not as big of a center for us. So, let's talk about the business implications as we know it. Last quarter, we guided [$1.055 billion] in revenue and we delivered [$1.141 billion] in orders or we delivered $86 million in orders above what we said assuming a book to bill of 1%. Of that $86 million in orders, we shipped $40 million of it. So we actually delivered revenue of $1.095 billion, not $1.055 billion, but the additional $46 million we have in backlog that can help smooth out any timing delays that we would see from the coronavirus. We have guided $1.158 billion, plus or minus $20 million, and we've built in approximately $20 million worth of impact into our guide. The key point though that you should remember is that we have a good backlog situation. We have very differentiated products, and we're very confident at this point that we'll be able to make up any delays that we see in the second half of the year, therefore not affecting Keysight's performance in fiscal year 2020. I hope that helps, John.

Very thorough – very thorough and helpful, Ron. I guess, as my follow up, second consecutive strong quarter for Ixia. It's a relatively new business within your portfolio. For us in the investment community, we haven't had a lot of experience with the Ixia asset. I'm just kind of curious as to how you would characterize sustainability of the growth you're seeing now. Is this in your mind a naturally lumpy business or do you feel like Ixia has kind of turned the corner and there's sustainability to these [terms].

There's two main parts of the Ixia – what was the Ixia business, which is now our network assurance solutions, one of them is network test and then the other section is network visibility. Network visibility is a consistent grower. It was smaller, but it continues to get larger and larger, and we're very happy with that. And there we see a little bit more of a linear growth. The network test business isn't as linear; it depends on basically the build-outs that happen in our end customers. I'll turn it over to Satish to maybe add a couple of more comments, but that's the high level summary.

Yes. Thanks Ron. I'll just say that the improved performance is a function of a few factors. First, it's improving market dynamics associated with the broader adoption of 400-gig Ethernet, technologies from data centers, and then solid execution both on the business and the sales side through the changes that we have just instituted. The differentiated products and solutions that are coming out are gaining good traction with customers. On the visibility side, as Ron mentioned with network packet brokers and taps and on the test side with our [Layer 2/3 business], which is a big part of that portfolio which had a record quarter through the broad adoption of the 400-gig technologies. Looking ahead, we're really focused on accelerating synergies inside the group. As we've talked about, 5G is a big trend that impacts both wireless and wire line technologies and that convergence is really a sweet spot that we're targeting. We have started some new solution offerings in the space, for example, with the combination of RAM and co-testing, we are very uniquely positioned there. And second, we've recently launched the security testbed for 5G that does reference to Ron's transcript, which is really a combination of Ixia security toolkit and applied to the 5G technologies, which is gaining a lot of interest from customers. So, in summary, improving market dynamics, solid execution combined with this synergy utilization should position us well in this business. Thank you.

The other thing I would like to say is that obviously with the second quarter of double-digit growth, we're very happy with the way this business is progressing. At first, we had to do a lot more integration work than we thought. We had to move the supply chain to ours to get basically the improvements and the synergies that we expected on the cost side and we had to enhance the quality. So that took a little bit more time than we had expected originally. However, the business and the business dynamics and where it's going in the synergies that we have really makes us excited about this business' contribution to Keysight in the long-term and our ability to provide complete workflow solutions from one end to the other.

Thank you.

Your next question comes from Brandon Couillard with Jefferies. Please go ahead.

Thanks. Good afternoon.

Hi, Brandon.

Ron, Europe – and the European region kind of grew 2%, slowest on a two-year stack in about a year. Can you sort of give us sort of macro picture maybe what you've seen in terms of the sub-segments in that region?

Sure. I'm going to turn it over to Mark. Our order growth was higher than the 2% than we reported, and revenue was roughly 5% growth. So, that's a little bit of a different picture, but Mark, the Head of Sales, will take you further.

Right. So, Brandon, we have seen gradually improving business conditions across Europe. And as Ron said, revenue up 4%, 5% on orders, and we're seeing some of that come from the commercial comps side of our business. Automotive, especially advanced automotive solutions and next-generation auto and semiconductor continue to show signs of recovery. Aerospace Defense is mixed, the situation in Russia remains slow and there are some delays to some of those orders. On the other side, general electronics is an area that we put a lot of focus on not only in Europe but around the world, both from our broad portfolio of customers, as well as our education customers and we continue to see growth there as well. And then finally, the automotive business, particularly around electric vehicle, continues to expand with new customers and a strong funnel of new opportunities going forward. Some of these customers are more traditional automotive mechanical type of customers that are now moving into the electronics domain, and we are very well-positioned to support them with our solutions from Scienlab, as well as our broader offering of services. So, we're seeing improving conditions as compared to kind of the middle of last year and we hope to see that continue going forward.

Thanks. And a follow-up for Neil, 65% gross margin in the first quarter is a step up from the kind of where you exited the year last year; can you sort of speak to the room to continue to push that higher and perhaps help us bridge the year-over-year gross margin expansion in terms of the factors and drivers behind that? Thanks.

I think we have multiple levers that are helping us on the gross margin line. First of all, I pointed the overall strategy to migrate towards first-to-market solutions to that first-to-market nature, as well as just the nature of providing complete solutions as opposed to tools leads to higher differentiation in the marketplace of the solutions and to have higher software content. So, mix is helping us not only in terms of the mix of software, but the continued mix shift toward winning in R&D tends to be a higher gross margin sale as well. And notably, this quarter, we actually saw a pretty strong improvement in our services gross margins that it's a smaller business. It does have below-average gross margin in total, but we saw nice improvement in our services business. I think you see the migration toward Keysight Care, which is our new pay-for support or offering is being – is additive there as well.

Okay. Thank you.

Your next question comes from the line of John Marchetti from Stifel. Your line is open.

Hi, John.

Sorry about that. I just wanted to ask, Ron, you talked about obviously the 5G strength globally. And just curious if you can characterize that, is there still a fair number of new customers that you're winning in that business? Is it the strengthening or reordering by existing customers? Just curious as you're looking at that business continuing to sort of gain momentum, how we should think about the customer profile within it?

Yes. Satish will take you through that, but I'm really pleased with the breadth of our overall customer base as it starts to go from Tier 1 to other players. And he'll talk about that.

Yes. Thanks, Ron. Very pleased with the results on 5G. I would say a new record as we indicated and growth across all regions and representing customers across this diverse set of ecosystems. The collaborations that we have sustained through years of work with them continue to be very strong and a foundation for the business, but we're also adding new customers as 5G scale. So this quarter, we added 40-plus new customers into our 5G platform, which has been a source of strength. One particular driver that I like to maybe point out that is – that'll play out to this year and the remaining part of this year is the adoption of number of devices that are being announced for 5G. Over 200 devices have been announced to-date. That is up 100% since August of 2019 when we last spoke about this. So that is a big driver for the ecosystem and that will continue to place as well. And finally, from an application point of view, we continue to be strong in R&D where our differentiation is increasing through the test coverage and the new features we're landing, but we're also starting to pick up wins in manufacturing as we have stated we're following our customers' lifecycle. And we've had some pretty decent wins in manufacturing for components in base stations this quarter as well.

And maybe as a follow-up to that, I mean, historically you guys have talked about wanting to make sure you're really in cast where there's a high cost of failure. And as you're looking at some of the production opportunities within 5G, does that still fit that category? Is it that this is such a complicated technology for OEMs and operators to roll out that that cost of failure is still higher? Is it a little bit of a change in strategy to try to broaden out the reach within 5G? Thank you.

There is plenty of manufacturing opportunities for us in 5G. There is no doubt that our R&D presence has grown and has grown dramatically, and that really plays well to our business model, but there are a high value-add opportunities for us in manufacturing. Whether you see that with components or subassemblies, or you look at it down even on the wired part of 5G, you can't just put in wireless 5G and not be able to handle the data on the wired side. So when you look at everything from fiber optic tools and going all the way through the network, there is more and more opportunities for us especially you'll see that on the physical layer, on the physical layer back in the network. On top of that, as everything moves to millimeter-wave, it gets more complex, more difficult to do, and that's where we've been playing for many, many decades and it's relatively new to most of our competitors. So that provides us an opportunity not only to focus on areas where the cost of failure is high, but really we focus on where we can add value-add in total and generate great margins for us.

Thank you.

Thanks, John.

Your next question comes from the line of Mehdi Hosseini with SIG. Your line is open.

Yes. Thanks for taking my question. Ron, a couple of quarters ago, you tried to take some of the revenue opportunity associated with Huawei, and there was like a 200 basis point to 500 basis point of the first half of the revenue target that was taken off to de-risk from Huawei, especially with the tariffs. And now we have the coronavirus, but what I want to learn is, assuming that this is more of push out, what happens when like 6, 9, 12 months from now coronavirus is over and hopefully the tariff is over. Can you help us understand what happens to these opportunities – revenue opportunities that are pushed out? And I have a follow up.

Yes. I'll start and I'm going to let Neil go ahead and quantify the Huawei situation, but I'll just say this, the Huawei customers really like our products and solutions and they come to us and there's a good demand for those products. As we look further in the year, we have a modest amount in our forecast, but for the long-term they're looking to lead in many markets and we have the differentiated tools to help them out.

I think that's right. I think the same is largely to a broader coronavirus, as I said in my comments, we believe that any disruption that we may see in the short-term that results from coronavirus would simply be a push-out in demand. We don't believe it has an ultimate impact on the absolute level of demand in this fiscal year. I think if you look at Huawei more specifically, we saw broad strength within the quarter. We are limited in terms of what we can sell to Huawei, we're complying with the Department of Commerce regulations, but even with that limited portfolio, our sales to Huawei in the first quarter were a bit ahead of where we expected them to be. I think as we look forward, however we're pretty comfortable with the estimate that we provided of thinking of Huawei as a 1% to 2% customer as we move forward from here.

Okay. And then, I know you're going to dive into this next week, but as we think about your incremental booking, how much of this is driven by your ability to offer full of stack? Are you actually seeing any traction there? Is there any incremental business you're capturing by offering full stack or is that more of a longer-term target?

Yes. No – this is Satish here, and I'll just maybe offer a follow-through. Yes, I think the ability to serve the entire ecosystem is a huge differentiator for us. It separates us from any product-oriented competition that may come up with products. I'd give you an example. In many cases, we're working with operators. We just announced recently that we released 600 test scripts for the four U.S. operator test plans for 5G. So, someone that wants to service these operators in that ecosystem now have a fastest way of ramping up and getting their time-to-market. So, that's an example of sort of the advantage you get when you are working with somebody that has the end-to-end portfolio. Our ability to reconfigure and create solutions with the broad capabilities we have is another advantage. I'll just give you an example again with the five-year security testbed. A number of our Aerospace and Defense customers wanted to prototype this threat environment in the lab. We were the ones that were able to provide them the solutions. So, hopefully, those help.

Your revenue from Europe was up double-digit on a sequential basis. Was that driven by OEM customers, OEM incumbent companies, or is that more of a broad base?

We don't look at Europe or many other regions on a sequential basis because there is such seasonality built into our customer base, as well as into even our sales force and the commissions and how that works out. So, we look at it on a year-over-year compare and that's why we've taken it modestly to 5% order growth and 2% revenue growth for the quarter.

Yes. And this is Mark. I would just add again like I said before, we did see some softness in certain end markets last year particularly automotive. There was some mixed conditions in Aerospace and Defense and we're starting to see some moderating trends in that respect. We're starting to see some improvements in semiconductor. We're seeing our broad-based customers and the solutions we're providing to them, shows some signs of improvement as well. So, it's trending in a more positive direction.

Got it. Thank you.

Your next question comes from the line of David Ridley-Lane from Bank of America. Your line is open. David Ridley-Lane: Good afternoon. I wanted to get a little bit more color on what – helping to drive the aerospace defense revenue and order growth and was that you – did you see any potentially budget flush at the end of the year or do you feel like this is pretty good underlying payment as well?

Yes, hi. This is Satish. I will take it. On the Aerospace and Defense front, record orders this quarter, building on the $1 billion record finish we had last year. So, very pleased with the results so far. The budget stability in the U.S. is a big contribution factor. There is a lot of program wins that are being awarded by DoD, that’s flowing through to the prime contractors in the supply chain. Our differentiated capability combined with decades of providing solutions to the space position us well. In particular, our Electromagnetic Spectrum Operations Solutions, Space and Satellite solutions are receiving good growth for us in that region. We also see a broader – internationally, a broader wave of defense modernization where people are re-tooling and upgrading their capabilities, and that position us well for the long run. David Ridley-Lane: And then a different topic, the sales force expansion, can you maybe talk about how the recent hires are ramping up in productivity and just sort of your early results on those hirers, potentially biased you towards increasing your sales headcounts even further? Thank you.

Sure. This is Mark; I'll make a comment on that. So, we are on track in making really good progress with doubling the number of frontline sellers across key site and next week, at the Investor Day conference, I will be outlining a tremendous amount of detail on where we stand and what our next steps are. What I can tell you is we are hiring across all regions, we're focused on where the growth is. So, we're concentrating our hires to where we see the best opportunities, and we're equipping our teams with the right tools and training. So not only are we seeing an increase in capacity in terms of just the number of frontline sellers we've deployed, but their productivity is also improving as well. So, again, stay tuned for more. I'll go through a lot more in detail next week. David Ridley-Lane: Okay. I look forward to. Thank you very much.

Thank you.

Your next question comes from the line of Adam Thalhimer from Thompson Davis. Your line is open.

Hi. Good afternoon, guys. Congrats on a great quarter.

Thank you.

I wanted to ask first about Millimeter Wave, your thoughts on Millimeter Wave in general and how it's performing in the field?

Yes, it's still very early days for millimeter wave deployments at scale. I would say that, you know a large part of the deployment so far subscale 6-gigahertz and still even there, there's a lot of challenges that our customers face, which is why our tools continue to be embraced and are helping with scaling up the ecosystem. The other factor I would mention here is this sort of heterogeneous spectrum environment both with new frequency bands and the higher frequency bands getting integrated is creating sort of this cycle of demand for our tools in this marketplace. So, very early days overall with millimeter-wave, and but there is no doubt that millimeter-wave will be realized just because of all the spectrum that's being put in place and the high innovation that currently the ecosystem is undergoing. Eventually there will be millimeter-wave based offerings with [time].

Okay. And I wanted to ask about cash flow and balance sheet. Your net debt is now, I think, tied for the lowest since the IPO. What are your thoughts on cash deployment? And on M&A, is there any big out there you could do or do you think it's more about continued tuck-ins?

Yes. I don't think you see any – we don't expect to have any significant changes to our capital allocation priorities. We're looking to strike balance with what we'll do, we continue to invest, to drive organic growth in the investments we're making in R&D close to $700 million per year, the investments Mark just talked about in terms of doubling our sales force. You mentioned M&A, we have an active funnel development process, but we'll remain patient and disciplined when it comes to that, but we are out there actively looking for opportunities to add value – add value through acquisitions. And then we're returning capital as well, right? We have, I think, $335 million remaining on the authorization that we have outstanding, which is $75 million worth of stock this last quarter. And so, I think you'll see us continue to strike that balance and will trade off amongst those categories as appropriate over time.

Okay. Thanks, guys.

Your next question comes from the line of Jim Suva of Citigroup Investments. Please go ahead. Your line is open.

Thank you. And I have two questions now and at the same time so you can take them in any order that you'd like to. If I heard correctly, it sounds like the coronavirus you believe is just a push out. So, the question I have is, does it impact the revenue guidance only in the revenues or did it also impact the orders? And the reason why I ask is the orders I believe were up about 12% year-over-year, up 11% on a core basis, which looks like the orders actually reaccelerated, but I understand the coronavirus on sales. I just don't know about the impact orders or some hesitancy on orders also. Then my second question is, when we think about you expanding your sales force, you mentioned kind of across all the front lines in all regions. Is it also going into more different types of work like more higher volume or still very focused on the R&D side of things or how should we kind of think about you guys really putting up a lot of more resources behind the sales force expansion? Thank you.

Thanks, Jim. I'll start off first with the coronavirus. First of all, we didn't see any impact on Q1 orders. As you know, our Q1 ends at the end of January and right near the end of January a matter of fact I was in China I think it was the third week of January. People were at that point starting to head out for Chinese New Year. So, people had planned ahead, so that's great. Going forward in Q2, we're assuming, it will hit us with about 2% or 3%, but we're very happy with our backlog situation and accordingly we've guided the revenue as we did.

And Jim, this is Mark. I will make a few more comments. I don't want to steal all the thunder from next week, but there's basically three areas that we're concentrating and deploying more selling capacity. One is, we've talked a lot about acquiring new customers and increasing our reach into the geographies to diversify and broaden our business. So, we're continuing on that. We are also deploying e-commerce as part of that as well from an efficiency standpoint. Our focus on solutions remains one of our top priorities and that includes how we sell and the value we contribute to our customers. And the third area of concentrated focus is around services and selling our software portfolio. A year-and-a-half ago, we launched a services sales channel and we continue to expand that including a focus on the renewal part of our business, which is helping to feed and grow our recurring revenue. So, again, more coming next week. I appreciate the interest.

Thank you so much. It's greatly appreciated. We'll see you next week.

Thanks, Jim.

And your next question comes from the line of Brian Yun with Deutsche Bank. Your line is open.

Hi, guys. Nice to see all-time high kind of gross margins. I had a few questions on your...

Thanks.

...software opportunity. First, are you able to share what software is as a percent of revenues this quarter? And then, just broadly, if you can talk about how software is being purchased today, what percent of sales or licenses versus subscription and if you see that changing over the next few years? And then, finally, I think the 5G test measurement software use case is very clear, but maybe if you can expand on the automotive software opportunity.

Yes. Let me just make a couple of comments with regards to software. Orders grew double-digits. Revenue grew single digits, but the growth was driven a lot by our network emulation solutions and our network assurance business. The great thing is and why we see the order growth higher than the revenue growth, we continue to shift our portfolio from more and more subscription services over time so we could see more recurring revenue. And we're working on increasing our ARR, and that's not an instantaneous change, but we're very pleased with the direction that we're taking.

And then, I will just add that, the – what we're providing to our customers are complete solutions, and that's the combination of hardware and software and the services. So, all of this is coming together around the solutions play, whether it's around our 5G or a network application security solutions, or as you mentioned the automotive solutions, that is a large and growing part of our portfolio. And I think the difference that's occurring now is accelerating is the way customers consume those applications in terms of a more of a subscription based model. So, over time, we're supporting them with updates through a renewal process or through services, which support the application that's being deployed whether it's automotive or 5G.

Okay. Thank you.

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

Okay. Thanks, Josh. I'll turn it over to Ron to close this up.

Well, thank you everyone for attending. As you probably know, we're very pleased with the performance that we have. And we've seen in Q1 and we were very pleased with the long-term prospects of Keysight. And we look forward to seeing many of you next week for our annual or biannual Analyst Day. Thank you.

This concludes our conference call. You may now disconnect.