Good day, ladies and gentlemen and welcome to the Keysight Technologies Fiscal Second Quarter 2020 Earnings Conference Call. My name is Robert and I will be your lead operator for today. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note, today's conference is being recorded today, Tuesday, May 26th, 2020 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 second 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 in 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 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. Lastly, I would note that management is scheduled to participate in upcoming virtual investor conferences in June hosted by Baird, Bank of America, and Stifel. And now, I will turn the call over to Ron.

Thank you, Jason and thank you all for joining us. First and foremost, we hope that you're all staying safe and well and our thoughts are with everyone affected by the coronavirus pandemic. The world has faced unprecedented challenges over the past several months and I would like to thank all of our employees for their continued dedication and commitment to Keysight, our customers, and our partners. Our execution and results this quarter underscore the power of our balance sheet, business model, and our Keysight leadership model, which drives our unique high performance culture and guides our company to continuously delivering greater value to customers, shareholders, and employees. I'll focus my formal comments today on three key headlines for the quarter. First, the health and safety of our employees is our top priority. After acting quickly to temporarily close most of our global locations in mid-March and implementing risk mitigation measures in response to the pandemic, we are now re-opening sites and our production capacity is ramping rapidly. Second, despite the mandatory government shutdown of our production facilities and resulting supply disruption impact on our Q2 revenue, Keysight delivered steady orders, strong operating margin, and record free cash flow. Our results demonstrated the exceptional resilience of our business and the durability of our financial operating model. And third, despite the near-term uncertainty, we are confident in our differentiated market leadership position, the strength of our operating model, and the long-term secular growth trends across our diverse set of end markets. Turning to the dynamics that impacted second quarter results. Demand was steady across markets in February. As the impact of the pandemic expanded beyond China in early March, we responded quickly to limit the spread of the coronavirus and mitigate the risk to employees, customers, and suppliers while also responding to local government directives. On March 18th, we issued a press release to announce the temporary closure of most locations around the world, including our production and order fulfillment facilities, which were fully closed for two weeks in March and had limited activity in April. We also took the necessary steps to deliver on our customer commitments, particularly those that provide essential services and support the communities in which we operate around the world. Working with local governments and health officials to implement health and safety measures at all of our locations, we are pleased to announce that we are re-opening sites worldwide. Despite ongoing broader industry supply chain challenges, we are ramping our Keysight production and services operation and expect to be back to 100% capacity by the end of the third quarter. Now let's take a deeper look into our financial results. Order growth was positive through March, followed by a decline in April to finish the quarter down only 3% compared to last year's record second quarter. While we don't typically comment on calendar quarter performance, given the dynamic nature of the situation, it's worth noting that Keysight's orders and revenues both grew mid-single digits in the January through March time frame. Despite lower than expected revenue as a result of supply chain disruptions, the resilience of Keysight's business model was exceptional and our flexible cost structure performed as expected. As a result of our immediate actions to reduce costs and preserve liquidity, we delivered operating margin of 19%, record free cash flow of $275 million, and a record cash balance of $1.8 billion. Our second quarter revenue declined 18% year-over-year as both segments of the business were impacted by the limited manufacturing capacity. However, we continue to see steady demand across several end markets with ongoing investment in next generation technologies such as 5G, 400 gig, and advanced semiconductor node processes. Other markets such as general electronics and automotive are expected to be more challenged in the near-term. In Commercial Communications, our ongoing 5G order momentum resulted in a new record. Our end-to-end solutions portfolio continues to gain strong global customer adoption and is enabling the commercial 5G launches underway. We are further solidifying our global leadership position across both the wireless and wired 5G ecosystem through close collaborations with market leadership and standards and first-to-market 5G design and test solutions. This quarter, we introduced Keysight's new 5G core network test solution called LoadCore. The 5G core testing software simulates complex real-world subscriber models. This enables mobile operators and network equipment manufacturers to qualify performance and reliability of voice and data transferred over 5G networks. This solution leverages from the Ixia and PRISMA acquisitions to deliver testing capability needed by our customers. We also announced a collaboration with Rakuten, an operator in Japan, to enable their 5G deployments using our solutions for test, validation, and optimization of devices and networks. Keysight's comprehensive solutions portfolio spanning the entire ecosystem is a key differentiator in the market. In aerospace, defense and government, order growth was driven by strong demand in the U.S. which was partially offset by lower international investment. 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. Despite the substantial challenges in the automotive sector, next generation electric and autonomous vehicle technology is a strategic priority for our customers. Keysight continues to invest to be first-to-market with solutions and remains highly engaged with key market players. For example, we recently announced the use of our Scienlab battery test solution in the BMW Group's new Battery Cell Competence Center in Germany. Foundry customers are continuing to prioritize investment in advanced process node technologies and incremental infrastructure. This resulted in revenue growth for our semiconductor measurement solutions where we had less supply chain disruption. Software and services continue to contribute to the differentiation of our solutions and recurring revenue base. While growing above the company average over time, they are strengthening the durability and diversity of our business model. In Q2, the combination of both software and services represented approximately 35% of revenue. Turning back to the current COVID-19 pandemic, we are committed to supporting our customers and our communities through this challenge. For our customers, we launched an Innovate Anywhere Program to enable IT teams to support remote users ensuring VPN performance and security. We also implemented various health and safety measures at our facilities to ensure all safeguards are met before production and other operations resumes. For our communities, we are contributing to the relief efforts globally through monetary and supply donations. These include donations of personal protective equipment to local hospitals and government agencies providing support to children, families, and the most vulnerable. We are also making direct financial contributions to local communities and global non-profit organizations. Before turning the call over to Neil, I'll close with a few key points. Keysight is a market leader in large, diverse, and growing end markets and serves a diversified global base of over 32,000 customers across multiple industries. The challenges of this pandemic are unprecedented and I'm proud on how our team has responded. Our execution demonstrates the durability of our business and the resilience of our business model with 19% operating margin and solid cash flow even with a Q2 revenue impact. We continue our significant investment in R&D and remain focused on first-to-market solutions. Our sales teams remain highly engaged with our customers and we continue to execute our strategy for long-term above market growth. While we expect ongoing COVID-19 demand and supply chain headwinds over the next few quarters, our long-term secular market growth trends and the strength of our operating model remain intact. We expect to come through this challenge stronger than ever. Now, I will turn it over to Neil to discuss our financial performance and the 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. Keysight delivered a solid quarter thanks to strong execution in a challenging environment. While supply chain disruptions dampened our revenue performance during the second half of the quarter, our results demonstrated the resiliency of our operating model and durable cash generation. We responded quickly with proactive measures to reduce costs and preserve liquidity while supporting our customers and advancing key projects. For the second quarter of 2020, we delivered revenue of $895 million, down 18% on a reported and core basis due to our site closures and supply chain disruptions that started in mid-March and continued through the end of the quarter. Orders of $1.1 billion were down 3% on a reported and core basis. As Ron mentioned, we continued to see steady demand in investment across multiple end markets, particularly for our next generation communication solutions. Turning to our operational results for Q2, we reported gross margin of 63% with improved mix and lower spending partially offsetting the impact of lower revenue. The flexibility of our cost structure resulted in lower variable compensation and a reduction in outsourced manufacturing costs. This combined with other specific actions such as a temporary hiring freeze and reductions in discretionary spending enabled our flexible operating model to perform as expected resulting in 19% operating margin for the quarter. Net income in the second quarter was $148 million. On a per share basis, we delivered $0.78 in earnings. Our weighted average share count for the quarter was 189 million shares. Regarding the performance of our segments. In light of the broad supply chain disruptions, CSG and EISG expense management and margin performance were exceptional. CSG operating margin was 18% while EISG delivered 24% operating margin. On the demand side, general electronics, education, and automotive were weak while investment continued in 5G, aerospace defense, and other leading-edge technology solutions. Moving to the balance sheet and cash flow. We ended our second quarter with a record $1.8 billion in cash and cash equivalents with $450 million of additional liquidity available under our undrawn revolving credit facility. We reported cash flow from operations of $298 million and record free cash flow of $275 million or 31% of revenue. The strength of our cash generation reflects the power of our financial operating model, which incorporates a flexible cost structure and includes a financial playbook that is designed to preserve margins and cash generation during challenging times. Under our share repurchase authorization, we acquired approximately 1.3 million shares on the open market in the first half of the quarter at an average price of $91.14 for a total consideration of $120 million. Our year-to-date repurchases are sufficient to achieve our objective of being anti-dilutive for the full year and to exit the year at 190 million shares. While we are focused on optimizing liquidity, given our strong operating model and cash generation, our capital allocation priorities remain unchanged. Now turning to our outlook and guidance. While we are not quite back to full capacity, our production operations and those of our suppliers have been ramping since mid-April. We expect to make continued progress in Q3 and as a result, expect third quarter revenue, operating margin, and earnings to be in line with or better than Q2. These expectations are based on our order funnel, a strong backlog position, and assume limited incremental supply chain constraints or disruption from additional shutdowns or a second wave of the pandemic. While maintaining R&D investments for future growth, we will continue to focus on profitability and leverage the flexibility of our operating model to manage expenses. In closing, the near-term situation is obviously challenging, but we remain focused on our long-term strategy of enabling our customers' success through first-to-market leading-edge solutions. Once the COVID-19 situation stabilizes, the durability of our business model, cash generation, strong balance sheet, and market leadership position give us confidence in our long-term financial targets that we shared with you at our Investor Day in early March, specifically sustainable long-term core growth of 4% to 6%, operating margin of 26% to 27%, and EPS growth of at least 10% over the long-term. With that, I will now turn it back to Jason for the Q&A.

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

[Operator Instructions] Your first question comes from the line of Mehdi Hosseini with Susquehanna. Please go ahead. Your line is open.

I want to go back to your reported backlog. Despite the shortfall in revenues, you were still able to grow backlog by double-digit and given your assumption for booking for the current July quarter, do you expect a resumption of year-over-year growth in quarterly revenue by the October quarter and I have a follow-up. Thanks.

Yes, this is Ron. Our backlog - our book-to-bill was 1.22 for the quarter showing very strong backlog build and obviously, our profitability - our operating model was strong and held up at 19%. If we had shipped that, we clearly would have been in very strong shape with operating margin in the mid-20s. As far as the quarter going forward, we have seen our operations turn on. Our main international operations that we have in Penang, Malaysia is back to 100% capacity. The main operations that we have in the U.S. are at about 70% capacity and will be at 100% by the end of the quarter. So even though there is a short-term disruption to the end of - to the second half of Q2 and the first half of Q3, we expect Q3 revenue to be at about the same level. We don't guide for orders for the future quarter though.

Perhaps maybe I could rephrase the question a different way. I'm assuming that the strength in your communication group is driven by orders for millimeter wave on R&D and also you highlighted 400 gig networking. As R&D activity on the millimeter wave picks up, is there any synergy between that and the networking that would enable you with a bigger size of the customer wallet. In other words the stack approach that you have focused on, would that finally become material so that you could capture a bigger part of the customer and is that what's going to be driving the momentum with booking for some of the growth areas.

Yes, we had a strong quarter in 5G. We had a very strong quarter in 400 gig back into the network and our overall play of winning up and down the ecosystem does create that synergy. I'm going to let Satish talk a little bit about the details.

Yes, thanks, Ron. Mehdi, you're correct in that communications especially these new areas such as 5G with millimeter wave adoption and 400 gig and such are really gaining increased importance in today's world given what we have seen in terms of a disruption. So that should start to manifest itself. In fact, with discussions with customers we're having today, the focus is on accelerating innovation and going faster. So that positions us well having the entire layer one to layer seven capabilities internal to the company and having built that platform I referenced at the Investor Day gives us an advantage to go faster and deploy solutions with customers. You will also notice that we have a number of industry-leading collaborations that we announced just this quarter with the likes of Qualcomm, Rakuten, China Unicom, SONiC and others that spans the wireless to wireline arenas and positions us well for the future.

So, does that mean that the synergies are beginning to materialize?

Yes, I think so and you'll start to see them accelerate as we launch more solutions. We have some 90 new solutions planned for the second half of the year, which we're investing for and that should continue to position us very well in the communication space.

Your next question comes from the line of Tim Long with Barclays. Please go ahead. Your line is open.

I just wanted to ask about the China market. Could you talk a little bit about the trends there. Obviously, the timing for manufacturing and businesses opening was a little bit different and obviously some more political talk there. So can you just give us an update how China was and how you're viewing that - the next few quarters and then I had a follow-up?

So, Tim, this is Mark, Mark Wallace. I'll take that question talking about China. So the main headline from Q2 is that our business remained steady. We had a stronger February than we expected coming out of the Lunar New Year that as you recall was extended by an extra week and we saw strength continuing in 5G and commercial comms as Satish had talked about both at the physical layer and across the protocol stack, 400 gigabit R&D and optical manufacturing continued to ramp as we saw global demand come from the carriers and the data centers. Automotive was down and we saw some mixed conditions in general electronics and education as we made comments in the opening remarks. And China, you know, continues to accelerate investments in semiconductor capability particularly around next generation semiconductor technology and as you alluded to, there is a continuing set of evolving U.S. regulations. We're paying very close attention to these. At this point, there might be some indirect impact to some of the foundry business, we're not really able to quantify that just yet. We have assessed the overall situation in terms of the most recent [USDOC] restrictions and regulations and we believe it represents something on the order of 1 points to 2 points of headwind going forward, but you know as we did with the August 2018 RPL additions, we will redirect sales resources to go after new opportunities to drive growth elsewhere and all of these restrictions go across all of our technology companies that supply into China and not just Keysight. So the bottom line I would say with China is our customer engagements remained high during the quarter as we adapted to the new remote environment that we're now leveraging across other geographies and our business in China remained steady despite all of these challenges and headwinds.

And then just as a follow-up, I think you mentioned 35% of revenues coming from software and service in the quarter. Could you talk a little bit about the ramp there and do you think - are you hearing from customers with the kind of global disruption like this that there might be more of an accelerated move to those type of models. Thank you.

Yes, Tim, this is Mark again. I'll take that. Regarding software and services, as you point out, we saw revenue growth in the quarter faster than the rest of Keysight as has been the case for many quarters. Revenue for software was roughly flat, services was up slightly on a core basis. We had a record high Q2 for our design software orders, which indicates the continued demand from customers who continued to work remotely during the global pandemic and as Ron mentioned in his opening comments, we introduced the Innovate Anywhere initiative, which was very successful really enabling thousands of software engineers to work from home. And moving forward, we see this program feeding into the superior software and services growth that we've been delivering for a long time. Our customers and their engineering workflow has changed and we expect to see customers continuing to work in this mixed lab and work from home environment and I think our software and services provides us another way to support their engineering teams in either case to maintain engineering productivity. So yes, we do see our software strength continuing to be a factor, especially in the new go-forward environment that we're experiencing.

Your next question comes from the line of John Marchetti with Stifel. Please go ahead. Your line is open.

Ron, I was wondering if you could comment a little bit on the demand side as you've gone through these last couple of months. You mentioned obviously that January through March, both orders and revenue were growing in the mid-single digits, but I'm just curious with orders down 3% year-over-year for the quarter, did you have customer behavior change dramatically in that month of April as well that coincided with your ability to ship. How has this sort of disrupted your customer landscape not just your own supply-side issues?

Sure. Obviously, we had a drop off in April when everything pretty much shut down. So our order level was lower. Our sales organization worked from home and actually has been very effective after the first couple of weeks just trying to figure out how to contact customers. A matter of fact, they've been finding it pretty efficient to be able to get on with Zoom as long as they have an established relationship with those customers, but that's what we saw with regards to the seasonality in the quarter. Revenue, we've talked about that and how that is ramping now and we'll be back to full strength by the end of the quarter. Mark, would you like to add anything?

Yes, what I would add is we did see customers working hard from home. They were actually more accessible than they normally would be because we knew where to find them. So we engaged with them. We continue to book business and we continue to build our funnel for Q3 and beyond. It's at the highest level really it's ever been looking out three months, but there was some pull back in certain areas. As an example, some of our general electronics business is tied to new engineers being hired, right? And obviously, that wasn't going on. Some of the government-funded activities such as research obviously, our education business based on the universities being closed were affected and we saw that effect happen more towards the end of the quarter. So there's some dynamics from the industry that really played into that timing as well.

And then maybe just as a follow-up to that, was there a big difference that you saw, geographically. Obviously, we all know that China has kind of come back from this a little bit more quickly than some other areas just given that that's where everything started, but as you look out across North America and Europe, have there been, I guess, big regional differences as you've seen those demand trends play out?

Yes, John, what I would say is, there was some regional differences mainly from kind of the distribution of different segments and different customer behaviors. As an example, we already talked about the fact that we saw strong order growth in the U.S. from aerospace defense that continued throughout the quarter from both the direct government and the prime contractors whereas in Europe, the strength was really more around semiconductor solutions tied to advanced technologies like EUV, which is extreme ultraviolet lithography and some next generation processes and then we saw some growth in commercial comms in Europe tied to some new 5G design wins and - so it varied. What I would say is most regions saw the impact when it came to kind of the general electronics and automotive segments. So there is some variety from region to region based on different industry dynamics in each of the regions.

John, it is interesting to note though that a lot of our major customers has said they're not slipping schedules and they're doing everything they can to either stay on track or make up for any type of shortfall what they have and that bodes well for some type of let's say accelerated purchasing at some point when they do need it.

So as we get back to a more normal environment, you would expect that you'll be able to at least sort of make up some of the shortfall here in this fiscal 2Q and 3Q.

Yes and clearly with the backlog, you could see, we've built $200 million worth of backlog in the last quarter. There is no doubt that we will be able to clear that out at some point in the future. We've guided or given you a range for Q3 where we expect to be, but beyond that, we expect ourselves to be at 100% and we'll be ramping rapidly from there.

You know, Ron, the only other add I had for John just real quick, we look at cancellations, we didn't see any increase in cancellations. We look at, is there any kind of push outs to Ron's point about projects staying on track, we really didn't see a lot of push outs either. So we've built a strong funnel and I think we're going to be in a good position when the economy begins to recover.

And the good news is the global race continues to be ahead in 5G, which nobody wants to take a pause.

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

Ron, you talked about record 5G bookings in the quarter, I was hoping you could elaborate a little bit more on that in terms of the composition of those orders between R&D test and production test and if you can kind of speak to the individual customer groups like the chip guys and the base station customers, the mobile smartphone customers, that would be helpful. And then I've got a quick follow-up.

Sure, Toshiya, I'll let Satish, who is right in the middle of it, give you more of the details.

Yes, Toshi, it's a very strong order quarter for 5G. Our orders grew at record levels as we mentioned before in Ron's comments, but equally worth noting was the strength continued into April and the growth that we saw was broad. It was across all regions grew and all segments of the customer base grew, all the ones that you referenced, chipsets, devices, and the NEMs and even the operator segments. I would say if we fill back the types of applications, the sustained investments in R&D, manufacturing started to ramp. In fact, we had a good uptick for our modular offerings, which we're enabling some of the component manufacturers to ramp up. So that was a positive note for us. And then we also saw success in new verticals such as automotive with the C-V2X application that we just launched and with our Aerospace and Defense solution with some of the 5G security offerings we have launched. So in summary, some of the opportunity progression that I had outlined at Investor Day sort of started to play out in Q2 and we also added 40 new customers for our 5G platform through our marketing efforts and working with our sales teams globally. I also want to say that our customer engagement through this phase has been very strong, even though some of our customers are working from home, they have been continually engaged as Ron mentioned to make sure that their projects don't slip too much and in some cases where they are slipping, they're looking at ways to accelerate. I also want to highlight some of our, let's say, remote working with customers is working very well. In fact, our 5G virtual events have been well attended by over 8,000 customers. So that points to the strength of our solutions there.

And then as a quick follow-up, you spoke about some of the near-term headwinds related to automotive, general electronics, education, and government. I'm curious what percentage of your overall business to those end markets collectively account for and is it fair to say fundamentals, whether it be bookings or revenue troughed in the April quarter or could there be continued weakness into July and as a follow-up to that, if you can kind of speak to your exposure to Huawei and the foundries in semiconductor business, that would be very helpful. Thank you.

Yes, we haven't sized those specific markets Toshiya but the GE and automotive markets are a significant portion, more than half of EISG obviously the part that's missing there is the semi business which has been strong, but EISG's business is kind of more heavily or more - the weaker market areas are more heavily weighted towards EISG with general electronics, automotive, EISG, these things that tend to be more tightly linked to GDP.

The auto business in particular has slowed down, we obviously saw significant slowdowns as everybody has seen in the industries for the old technologies or old auto. Some of the new auto wasn't as strong as it was pre-COVID, but we still feel very good about our position. So we are there for when that market snaps back.

And then to your second part of your question as it relates to Huawei. We don't really have any change at this point as it relates to our expectations of Huawei going forward. We kind of still we expect them to be a 1% to 2% customer for us on a go-forward basis.

Your next question comes from the line of John Pitzer with Credit Suisse. Your line is open.

Ron, I was just wondering if you could help us understand what you think the supply impact was for COVID in the quarter and I guess in your prepared comments, you said it was both a production and an order fulfillment hit. So I'd be kind of curious as to how much revenue and orders do you think you lost in the quarter from the supply side of COVID?

Yes, I mean it's impossible for us to know what would have happened right, but I think if you go back to where we were at the beginning of the quarter, we obviously put a guide out for the quarter that we had a high degree of confidence in our ability to hit. And so you could look at that delta relative to our guidance on the revenue line and for all intents and purposes, I would attribute that shortfall to COVID. I think from our perspective, the world changed in mid-March. As we talked about the sites being closed, limited productivity in April, but we continue to be very optimistic about how we're positioned on a go-forward basis. We're a leader in our markets, we have a strong technology position and I think as markets recover, we are going to come through this even stronger.

I'm sorry, go ahead.

Yes, I think it is fair to say taking a look at our order rate and knowing how we do our supply chain planning, a book to bill of around 1 was probably would have been normal if there wasn't a COVID issue for Q2.

That's helpful. And then, guys, I know you're not giving official guidance for the July quarter, but I'm just kind of curious from a production perspective, if you look at the April quarter, relative to 100% where were you for the blended average of the quarter and as you look into July, I know there's a lot of moving parts, but how do you think sort of relative to 100% your production levels looked in July versus April?

Well, you could go back and look at history of where we've been operating somewhere around the $1.1 billion per quarter kind of range as close to full production. So that gives you an idea of something to key off of. Obviously, the dynamic is a little bit different, right? We were going full steam ahead through mid-March and then it shut off pretty quickly with the ramp in April. We're now continuing to ramp in May, expecting to be back to something close to 100% across the ecosystem by the end of the quarter. So you kind of have to ramp down last quarter followed by the ramp-up this quarter and as close as we can call it, at this point, the revenue numbers and the profitability numbers are going to be in the same vicinity as one another.

So if you look at that, you could see where we were down roughly a couple of hundred million dollars, we're down at roughly 80% of capacity. So the fact that we took out - we lost a couple of weeks in March and then you could take another week or two out of April, just as you start to see that ramp or ramp linearly. So that's a very rough estimate, but I think it's pretty accurate.

And Ron, if I could just sneak one last one in, just given your production issues, can you talk a little bit about your share position and is there any concern that competitors might be able to take this opportunity to steal some share on the margin?

I don't think so. There could have been - there can be some very minor issues, but if I take a look at orders and I look at orders January, February and March, we grew mid-single digits on the order line, which is pretty competitive. Nobody else or very few people have reported in our industry what happened in April. So when they come out, I'd be surprised if their numbers were not the same. We've been growing above market every single quarter now for years and for everything that was going on, I do anticipate that we are at market or better and our backlog position now is so strong, you'll see that flow into revenue and profitability and cash flow as we go forward.

Your next question comes from the line of Adam Thalhimer with Thompson Davis. Please go ahead. Your line is open.

I wanted to try to understand the margin disparity in Q2 just because the EISG margins held up so much better and is that a trend you expect to continue?

Yes. So, I mean if you look across our business, right, the one area where we saw actual revenue growth was in semi, which is all within EISG and it's also a very high margin segment for us. So I think predominantly looking at a mix issue or not issue, a mix benefit that EISG received with the very strong semi shipments relative to the other parts of their business and so that's really what you see going on there. And it's worthwhile to note that obviously with a lot of fixed infrastructure as we start to see the business come back, you'll continue to see very strong gross margin performance.

Okay and then so high level, it sounds like you're kind of girding for a more protracted downturn in EISG, but at communications, it sounds like when the COVID situation allows, you'll kind of quickly turn back to revenue growth, is that fair?

Yes, I think EISG has businesses that are more GDP linked. We've talked about general electronics, which includes the education segment, but if we just talk about education for a while, until - there's really two aspects of education, there's the teaching aspect and the research aspect, but in both cases, you need students on campus, right, to really get those education markets up and going. Automotive, we know what's happening in the auto industry. So we still don't know what the shape of the recovery is going to look like. You can read all the same reports that I read about what the ultimate recovery is looking like, but EISG I think tends to be more macro linked and more linked to GDP where the drivers within CSG the roll out of 5G, the roll out of 400 gigabit, the aerospace defense investments potentially have the ability to buck some of those trends as folks work to get those technologies to market.

Your next question comes from the line of Jim Suva with Citigroup. Your line is open.

I have two questions. I'll ask them both at the same time so you can answer them in any order and they are pretty straightforward. The first is with coronavirus, is the R&D cycle still lengthening or are people now adjusted to work from home and work remotely now where it's actually compressing. The reason why I ask is it seems like two months ago, was everything progressing slower and it now sounds like from your comments and other companies comments, things are kind of coming back. So I was just kind of wondering about the design cycle and then my second question is your inventory went up quite a bit, but you talked about supply chain issues. Was that simply not having all the right parts to put together your heavy equipment and your big calibration items in your test and measurement things or did some of your inventory like trapped in certain locations or you're missing just a couple of widgets that go into it and so you're like 98% of the box completed before it can ship. Thank you.

Sure, Jim, this is Ron. I'll just take the questions. I'll take them in reverse order. With regards to the inventory situation, it's real simple. We have parts coming in the door and we have no one in the factory to build them and that's the case that we had in the second half of March. It's not the case now as we have Penang up and running, but we also supply parts from our tech center in the United States. So when there is nobody putting together parts or even if things are put together and they're not shipped, there is no revenue credit. So all parts have to be there in order to complete a product. There are thousands of parts in certain products, some made within Keysight and more of the commodity type pieces that are put into products in addition to our unique differentiators. Some of them flow in and some flow out, but the bottom line was we weren't putting together any systems or shipping them out and that was because of not only internal to the Keysight manufacturing facilities, but also the contract manufacturers that would do sub-assemblies, but now we're very happy with the progress that has been made and where we are now and where we expect to be by the end of this quarter. The second issue with regard to the R&D cycle, there was a bit of a stop but everyone's trying to figure out how to operate in this new normal where every customer that we spoke to are very, very high percentage of them went through that. Now they've situated to work at home, to go in part time, to use test systems or in some cases, like China, return back to work. So we see the R&D engineers being much more efficient and accordingly, they're trying to figure out how to keep their projects on track because they are competing against their ultimate competition. So that's why we see things accelerating in that cycle. How much equipment acceleration we'll see at what rate is yet to be seen, but we feel very positive as we look forward.

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

Just a few questions, two questions, one just kind of targeted at aerospace defense, and just a couple of thoughts here. What was the order growth in A&D year-over-year? And then secondly was the - with A&D, was the business in the revenue there disproportionately impacted by the plant shutdowns, because it wasn't a very tough comp and I'm just curious with the revenue down 25%, if there was a disproportionate impact there?

Yes, so I'll take that. From the order perspective, orders were basically stable versus last year. With regard to the revenue impact, some of that stuff, particularly for the U.S. markets require to be built in the U.S. We did get earlier access to our Penang facilities than we did to some of our locations in the U.S. and so there probably was - I think it is fair to say that there was a disproportionate impact on aerospace defense from a manufacturing perspective just given the fact that the access to the U.S. facilities lagged the access to our facilities in Asia in April.

And then just a follow-up question around the backlog. One would expect perhaps that given access just globally is better to customers as hopefully they - everybody starts to return to work here and we got some of the access kinks maybe worked out a little bit in the fiscal second quarter, but typically, your orders are flat to a bit softer in the third quarter relative to the second, but again with improvements around access, would you expect to build backlog again in the third quarter given where you are and the disconnect between the production ramp and kind of what's going on the order and sales side?

We don't guide orders out for Q3. Rick, I think as you know, but we're going to try to do everything we can to lower our backlog. I'm not saying that we've guided that but what we're trying to do is improve our position to get our deliveries out to the customers that need them. You're right on a typical non-COVID environment, we see a ramp at the end of Q2 and then the biggest ramp at the end of Q4, which is literally how we do the comp in the field organization and then Q3 is not as high as you would expect when looking at Q2, but overall, we expect orders to be very solid and not out of line with what we've seen in the past.

Yes, I mean obviously the COVID situation is going to supersede the normal seasonality of the business. From a Q2 perspective, we had the first half of the quarter, which was, I don't want to say unimpacted, but through the first half of our quarter, this was essentially still viewed as largely a China problem, it didn't go global until mid-March in the second part of the quarter. I think the macro side of things is where it is now, we don't know where it's headed, but - so I think you're going to see a different seasonality than is as typical and then I like Ron's way of characterizing it, I mean, I think we've guided revenue in Q3 in line with Q2. We're certainly pushing on the manufacturing side as hard as we can push it, but right now, the way we see it and way we see the ramp progressing, you're going to be looking at revenues that are more or less in line.

And the reason why you see that isn't so much the internal capacity, you could do the math and say for 100% right now internationally in Penang and we're at 70% in the U.S. and you do some type of linear extrapolation of basically the facility that we have in our fab in the U.S., you could come up with a much higher number. But in order to produce products, you need three things, you need all the parts, you need your contract manufacturers for sub-assemblies and you need the Keysight manufacturing facilities. The CMs are very close to 100%, you see our facilities getting close to 100%, but we still are relying on the delivery of components from different suppliers that go into our products and that is something that is a bit extended that is figured into our guide.

And can I just putting that all together just tying it together. Neil, if we're looking at a similar cadence of revenues, monthly through the fiscal third quarter, we've got the issues that you've spoken to around production, production ramp overhead. Is there any reason to assume the decremental for the third quarter won't be similar to the second quarter given the flexibility in the model?

I expect it to be similar.

I got you. Thanks for the short answer to a long question. Thank you.

Your next question comes from the line of David Ridley Lane with Bank of America. Your line is open. David Ridley-Lane: So, China's stimulus package included $30 billion or so earmarked for data centers and in the U.S. and Europe, the work-from-home trend has shown some of the weaknesses that are out there in corporate data centers and networks. How do you think about Keysight and their ability to benefit on a relative basis from those trends?

Satish owns the data center portion and I'll let him answer.

We think with the upgrades to data center technology and in lieu of what people have learned from working at home and at this scale is definitely going to be a positive driver for us, especially for our Ixia business with multiple implications, speed is one of them, security is one of them, and visibility being the other piece to it. Right now, we did have a bit strong double-digit quarter for 400 gig based on some ramps we're seeing in China and our outlook for that part of the business continues to be favorable. David Ridley-Lane: And then a question, could you maybe quantify the cost savings actions that you took and if there are - some that are structural in nature could you may be call that out. Thank you.

Yes, we're very pleased with the way our operating model has performed. We've talked a lot about what we felt we could do in a down cycle. The business there - the model has a number of structural elements that are designed to respond instantaneously to changes in condition. The number one of those is the variable pay component. Again 100% of our employees have a portion of their pay that fluctuates with our business results. Outside of the executives, the rank and file, if you will, that's really tied to our growth rates and to our operating margins and so as both of those things corrected in the third quarter, we saw a significant reduction in our people-related costs. Similarly, contract manufacturing, outsource sales, those types of things, those came online. Beyond that we took action to reduce discretionary spend, everything from - again, certain things happened relatively automatically like travel basically crashed towards zero in the second half of the quarter, reductions in temporary workers, the executives who have actually put in a pay cuts for our executive team ranging from 100% at the CEO level to 50% for the senior vice presidents. So we've taken a number of different actions to further reduce spending.

Your next question comes from the line of Brandon Couillard with Jefferies. Your line is open.

Ron, just a quick one for you, now that you're back to the net cash position, I'm curious what you might be seeing in terms of the M&A funnel and if the dislocation in the market has perhaps created some incremental opportunities for you to take a look out here.

Yes, well, Brandon, we have the same priorities that we had before obviously to fund organic growth to make sure that we stay neutral or anti-dilutive and to look at M&A opportunities. In certain cases, things have become more attractive, but we still have a high hurdle to beat our cost of capital with our - excuse me, to beat our WACC with our ROIC and we continue to look pretty aggressively at those but again, we will make sure that the ROIC is high enough.

A quick one for Neil just on the CapEx line for the year, you still thinking about $120 million for the year, is that still a firm number or would you expect some of those projects to maybe get pushed out on…

Yes, no, we'll probably push out a little bit, obviously we made significant capital commitments already for the year, but we will - we would expect to under spend. We're probably now - we're looking at something more like a $100 million to $110 million for the year.

Your next question comes from the line of Samik Chatterjee with JPMorgan. Your line is open.

I just wanted to start off with more a question on the manufacturing footprint here. I mean, we've seen a lot of companies face supply chain headwinds this quarter, but your magnitude of the shortfall has been obviously larger given your kind of concentration in the U.S. and Malaysia. Just wanted to get your thoughts about whether you're thinking any differently about the long-term plan related to the manufacturing footprint, anything to mitigate that risk. Obviously, I understand its once in a lifetime thing, but how are you thinking about it in the long-term about where you want to be?

Yes, to have a global pandemic come and literally be ordered out of our own factories is something that we don't think is typical and I don't know if it's once in a lifetime, but it's a very rare occasion. We also have a lot of our manufacturing capacity that are spread around with CMs and the CMs are located in different countries where they can move, they can move their production from one facility to another and move it around into different countries. So we look at that, we review that annually and make sure that we have an optimized footprint trying to balance what we typically would see and what type of benefit there is financially versus spreading out over multiple factories. So we continue to do that analysis. We have the discussions all the time and there are some things that we do, do, that were not always public.

Just a follow-up and I know you've commented quite a bit on the call here about how kind of the strength in the order trends you're seeing. Just wanted to kind of see if you can help us to match that up relative to kind of how you expect some of the customers that you are interacting with to respond if the macro remains quite weak going into the second half. Obviously the order trends here are strong, but the expectation I think remains from the customers that macro will hold up quite well. What do you think in terms of where do you expect to see some incremental weakness or which customers or projects do you expect to be more fungible relative to if we have a weaker macro in the back half of the year? Thank you.

I think the country by country race to lead in 5G will continue regardless of the macro situation. There is too much at stake for a lot of our large customers and you know them from the NEMs right through the whole ecosystem in communications and they will continue to drive towards getting to market first. When you look at the GDP plus or the GDP or GDP plus businesses, such as general electronics and the general manufacturing, there you could see a slow down as we've seen, for instance, in automotive. So I think those are the businesses that will continue to see some weaknesses which are automotive and general electronics, but I do expect the communications business where there is a race for that to be robust going forward and as you know, that's the strongest part of the business and that enabled us to produce 19% operating margin.

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

Thank you, Robert and thanks everyone for joining us today. We look forward to hopefully speaking with many of you at the upcoming virtual conferences that we mentioned and wish you all a good day.

This concludes our conference call. You may now disconnect.