Keysight Technologies Investor Presentation. September 2017

Transcription

1 Keysight Technologies Investor Presentation September 2017 Page 1

2 Safe Harbor This communication contains forward-looking statements as defined in the Securities Exchange Act of 1934 and is subject to the safe harbors created therein. These forward-looking statements involve risks and uncertainties that could significantly affect the expected results and are based on certain key assumptions. Due to such uncertainties and risks, no assurances can be given that such expectations will prove to have been correct, and readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. The forward-looking statements contained herein include, but are not limited to, information and future guidance on the company s goals, priorities, revenues, demand, growth opportunities, customer service and innovation plans, new product introductions, financial condition, earnings, the company s ability to pay dividends, ability to access capital markets, the continued strengths and expected growth of the markets the company sells into, operations, operating earnings, and tax rates) that involve risks and uncertainties that could cause Keysight s results to differ materially from management s current expectations. Such risks and uncertainties include, but are not limited to, unforeseen changes in the strength of our customers businesses; unforeseen changes in the demand for current and new products, technologies, and services; customer purchasing decisions and timing, and the risk that we are not able to realize the savings or benefits expected from integration and restructuring activities. The words anticipate, plan, estimate, expect, intend, will, should, forecast, project, and similar expressions, as they relate to the company, are intended to identify forward-looking statements. In addition to the risks above, other risks that Keysight faces include those detailed in Keysight s filings with the Securities and Exchange Commission, including our Form 10-K for the fiscal year ended October 31, 2016, and Keysight s quarterly report on Form 10-Q for the period ended April 30, Forward-looking statements are based on the beliefs and assumptions of Keysight s management and on currently available information. Keysight undertakes no responsibility to publicly update or revise any forward-looking statement. This presentation includes a number of different financial measures, both GAAP and non-gaap, in analyzing and assessing the overall performance of the business, for making operating decisions and for forecasting and planning for future periods. Non-GAAP measures exclude primarily the impacts of share-based compensation, restructuring and related costs, separation and related costs, acquisition and integration costs, acquisition-related fair value adjustments, asset impairments and non-cash intangible amortization. Also excluded are tax benefits or expenses that are not directly related to ongoing operations and which are either isolated or cannot be expected to occur again with any regularity or predictability. Most of these excluded amounts pertain to events that have not yet occurred and are not currently possible to estimate with a reasonable degree of accuracy. Accordingly, no reconciliation to GAAP amounts has been provided. The definitions of these non-gaap financial measures may differ from similarly titled measures used by others, and such non-gaap measures should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP. Keysight generally uses non-gaap financial measures to facilitate management s comparisons to historic operating results, to competitors operating results and to guidance provided to investors. In addition, Keysight believes that the use of these non-gaap financial measures provides greater transparency to investors of information used by management in its financial and operational decision-making. Page 2

3 Agenda Executive Overview Growth Initiatives Page 3

4 Compelling Investor Value Proposition Commitment to Growing Long-Term Total Shareholder Returns Market Leader in Attractive Markets #1 market position in key software & hardware verticals (1) $15.5B electronics and communication SAM (2) 20%+ market share in core end markets (2) Aligned to Critical Industry Growth Themes Diversified tail winds across 5G, IoT, Auto, Software, Services and Networking Organizational realignment to end markets Strong Culture of Execution Proven track record of operational excellence following separation R&D investment up over 200bps as percent of revenue since FY2014 (3) Market share gains since 2014 (1) Attractive Financial Model Multiple levers to drive long-term 8-10% EPS (4) growth Ixia acquisition adds $485M (5) to the topline and $2.5B in incremental SAM $60M combined annual cost synergies; $40M achieved in 12 months (Q3 18) $100M revenue synergies by year 5 (1) Per Prime Data. Keysight core products (2) Per company estimates for FY16. $15.5B SAM represents combined Keysight and Ixia SAM (3) Non-GAAP measure. Refer to appendix for reconciliation (4) Non-GAAP measure. (5) Based on FYE Dec-31, 2016 revenue Page 4

5 History of Leadership and Innovation Unlocking measurement insights for over 75 years : The Hewlett-Packard years A company founded on electronic measurement innovation : The Agilent Technologies years Spun off from HP, Agilent became the World s Premier Measurement Company 2014: Keysight is launched Focused singularly on electronic design and test solutions Page 5

6 Keysight Today: Market & Technology Leader Business Overview Worldwide leader in high value, mission critical electronic design and test solutions Relied on by the world s leading technology companies 75+ years of innovation, measurement science expertise and deep customer relationships Complementary Ixia Acquisition Industry pioneer and technology leader in network test and visibility 400+ US and foreign patents issued or pending; approximately 60% software related 700+ Software engineers 15 of the Top 15 NEMS Customers 47 of the Top 50 Carriers 77 of the Fortune 100 Services Solutions Group $0.4B, 14% Electronic Industrial Solutions Group $0.8B, 26% Free Cash Flow (1),(2) Operating Margin (2) Number of customers (3) Countries served FY16 Key Statistics Revenue Mix $2.9B Countries with R&D centers Manufacturing sites (4) Communication Solutions Group $1.7B, 60% $325M 19% ~30, Note: FY16 Key Statistics are not pro forma for Ixia acquisition (exclude Ixia) (1) Free Cash Flow calculated as Operating Cash Flow less Capital Expenditures (2) Non-GAAP measure. Refer to appendix for GAAP reconciliation. See non-gaap Income from Operations divided by non- GAAP revenue to derive operating margin (3) Includes indirect channels (4) Sites with greater than 70 manufacturing employees Page 6

7 Our Value to Customers Unmatched in the Industry Accelerating innovation to connect and secure the world WIRELESS COMMUNICATIONS NETWORKS AND CLOUD AEROSPACE AND DEFENSE AUTOMOTIVE, ENERGY, AND IOT Customer s Product Lifecycle Simulate Prototype Manufacture Optimize Page 7

8 A Strong Financial Framework for Value Creation Driving shareholder returns Business Model Organic Growth Mergers & Acquisitions Return of Capital Cost Structure Flexibility Cost Reductions Margin Expansion R&D Investment SAM Expansion Profit Leverage Strategic Alignment Growth Value Creation U.S. Cash Generation Appropriate Leverage Page 8

9 Organized to Grow First to Market Aligned with End Markets Trusted Advisor Corporate Planning and Technology Communications Solutions Group Electronic Industrial Solutions Group Ixia Solutions Group Services Solutions Group Worldwide Sales Jay Alexander Satish Dhanasekaran Soon Chai Gooi Bethany Mayer John Page Mark Wallace Software Technology Hardware Technology Commercial Communications Aerospace, Defense & Government Automotive Energy General Electronics Semiconductor Network Test Network Visibility Calibration Repair Remarketing Americas Europe Asia Japan Page 9

10 Strong Progress on Growth Initiatives Be First in 5G Wireless Triple-digit 5G order growth in FY16 Positioning Keysight as the market leader in 5G Collaborating with leading consortiums, universities, and research institutes to define 5G standards and technologies Expand Leadership in T&M Software Double-digit order growth in FY16 Anite acquisition materially expanded software business Staffing of new software design center ahead of schedule 9% order growth in FY16 Grow Services Business by 50% New opportunities in multi-vendor support, asset management, systems integration and training Continuing to win new multi-vendor business Page 10

11 Disciplined approach to capital investment Phase 3 Return Capital Return of Capital Phase 1 Separate Stabilize as Independent Company Completed April 30, months ahead of schedule Phase 2 Return to Growth Sustained 4% CAGR over Cycle M&A as priority use of cash Ixia (closed April 2017) Anite (closed Aug 2015) Electroservices (closed Aug 2015) Balanced Return of Capital Return of capital tied to US cash generation Appropriate leverage and commitment to investment grade credit metrics Opportunistic M&A Completed 3-4 Years Beyond Page 11

12 Disciplined and Well-Defined Criteria for Acquisitions The Example Strategic Alignment Aligns with strategic growth priorities Delivers higher gross margin R&D or software solutions Growth Expands Served Addressable Market (SAM) Focuses on faster growing market segments or adds key technology Expected ROIC materially above cost of capital Value Creation Expected to be quickly accretive Valuation aligns with appropriate market multiples Page 12

13 Long-Term Expectations Revenue Growth Sustainable 4% CAGR Op Margin Incremental 40% on growth of 4% or greater Profitability Over the Cycle Average operating margin of >20%* Committed Return of Capital Yields 8-10% EPS* Growth * Non-GAAP Page 13

14 Agenda Executive Overview Growth Initiatives Page 14

15 Leadership in Attractive Markets Segments End Markets Communications Solutions Group Commercial Comms Aerospace, Defense & Government Electronic Industrial Solutions Group Electronic Industrial Services Solutions Group Services Ixia (1) Solutions Group Network Test Network Visibility TOTAL Revenue (2) $1B $0.7B $0.8B $0.4B $0.35B $0.14B $3.4B Market Size (3,5) $4B $3B $4B $2B $1B $1.5B $15.5B Market Share (3) 25% 23% 20% 20% 35% 9% 22% Long-term Market 1-2% 2-3% 2-3% 2-3% 3-5% 20-25% 4-5% (6) Growth (4) (1) Per Ixia filings and company estimates (2) FY16 presented on a Non-GAAP basis. Refer to appendix for GAAP reconciliation (3) Per Company estimates for FY16 (4) Market growth per Company estimates; average over 3-5 years (5) Includes network test; excludes network assurance (6) Weighted-average growth rate of end markets Page 15

16 Market Leader in Key Software & Instrument Platforms Core Solution Platforms Market Position (1) Simulation Software (2) #1 Ixia (3) Network Test #1 Ixia (3) Network Visibility #2/3 Network Analyzers #1 Signal Analyzers #1 Signal Sources #1 Oscilloscopes #2 (1) Per Prime Data, IHS Technology, and Company estimates (2) RF/Microwave design simulation software (3) A Keysight Company Page 16

17 Multiple Growth Drivers Provide Diversification Growth Drivers Commercial Communications Network Test & Visibility Aerospace, Defense & Government Automotive & Energy Evolving standards 5G All data, all the time Internet of Things (IoT) Rapidly expanding cloud data and apps Growing security risks World instability Defense modernization Evolving battery technologies Connected car General Electronics Consumer electronics demand Semiconductor Technology evolution China investment Services Customer outsourcing Page 17

18 Growth Strategies Aligned to Key Market Themes Growth Strategies Growth Strategies Software-centric solutions Organic R&D investments Strategic M&A Be first in 5G wireless Expand leadership in T&M software Grow services business Extend into network test and visibility Page 18

19 First in 5G Wireless Unprecedented Wireless Demand 30bn+ connected devices by x mobile data in five years IoT consuming exponential amount of instantaneous data Disruptive auto and medical applications Accelerated Industry 5G Deployment Timeline Pre-commercial North American deployment mid-2017 Worldwide carrier trials begin 2H G standards set by 2018 Public service sector services (fire, police) adopting wireless technologies 5G in G Deployment expected 2019 Keysight Positioned to Lead Triple-digit 5G order growth in FY2016 >10 targeted simulation and prototype 5G solutions launched in the last year Collaborating with 30+ partners worldwide on research and trials Frost & Sullivan 2016 Global T&M: Company of the Year Award Source: Company estimates and Cisco Visual Networking Index forecast, Mobile World Congress 2017, 3GPP Page 19

20 Expand Leadership in T&M Software Business Update $2B market for electronic test software, ~7% CAGR (1) Double digit order growth in FY16 Software revenues over $400M New software design center staffed ahead of schedule 1 Expand simulation business Address growth opportunities in High-Speed Digital and Power design Growth Strategy 2 3 Deliver solutions focused on growth segments Deliver R&D (prototype test) solutions focused on growth segments such as 5G Communications, Power, and Automotive Grow subscriptions and services Implement software capabilities to enable revenue growth from subscriptions and from services 4 Pursue selective acquisitions Increasing overall software content (1) Per Company estimates Page 20

21 Grow Services Business by 50% 2016 $402M Revenue (9% order growth) 2020 $600M Revenue Used Equipment Calibration Used Equipment Calibration Plus Repair Repair Grow Core Add New Services Leverage Portfolio Expand Multi-Vendor Calibration Business Build and Deploy Professional Services Launch and Expand Asset Management Page 21

22 Extend into Network Test and Visibility Creating a compelling innovation engine with Ixia to drive growth A Combination of Complementary Strengths A global leader in measurement instrumentation and software for physical and protocol layer testing Deep expertise in wireless technology, strong worldwide sales presence, proven operational discipline Industry pioneer and recognized leader in network test; a leader in network visibility solutions Deep expertise in IP network assessment, excellent customer relationships, softwarecentric business & team A global leader in communications with the ability to deliver end-to-end solutions across the network and up and down the stack Scale and operational excellence to drive revenue and profit growth A software-centric team to enable further transformation and value creation Page 22

23 From hardware to software BTS* Emulation Drive Test Customer Experience Management Keysight as a Platform for Accelerated Growth High-value capabilities across the communications network and throughout the stack Stack Layers Components & Chipsets Devices Base Stations Hyperscale and Data Centers Enterprise Layers 2-7 Mobile Device Test Mobile Network Test Network Test, Visibility and Security Layer 1 Electrical, Optical and & Wireless Test Test Channel Emulation Keysight Classic Anite Ixia * Base Transceiver Station Page 23

24 Synergistic Combination with Ixia Driving the Opportunity in Visibility (1) Network Visibility 28% Service Providers 23% Ixia FY16 Revenue $485M Growing the Enterprise Mix (1) $485M Network Equipment Manufacturers 42% Network Test 72% Enterprise and Government 35% Financial Impact and Outlook Accretive to top-line growth SAM expansion and go-to-market leverage driving $50M in revenue synergies by year three and $100M by year five Annual cost savings of $60M resulting from infrastructure rationalization and supply chain efficiencies Expect to achieve $40M of cost savings in 12 months (Q3 18) Growth and operating model discipline drive sustainable cash flow and superior performance throughout the business cycle Commitment to rapid deleveraging and investment grade credit ~2x Gross Debt / Adjusted EBITDA leverage within 24 months (1) Refer to appendix for Ixia supplemental disclosures. Note that the enterprise sales mix information is prepared based primarily on amounts invoiced to Ixia s customers. (2) Adjusted EBITDA calculated as Non-GAAP Operating Income plus depreciation, excluding amortization of intangibles Page 24

25 FY16 Combined Financial Overview $2.9B Revenue (1) $3.4B Revenue (1) 58% 14% Gross Margin (1) R&D % of Revenue (1) 19% $325M Operating Margin (1) Free Cash Flow (1) 61% 15% Gross Margin (1) R&D % of Revenue (1) 18% $397M Operating Margin (1),(2) Free Cash Flow (1) Note: Figures represent non-gaap measures. Combined figures represent summation of Keysight s FYE October 31, 2016 and Ixia s FYE December 31, Excludes PF transaction adjustments (1) Non-GAAP measure. Refer to appendix for GAAP reconciliation. Gross margin, operating margin, and R&D % of revenue excludes stock-based compensation for Ixia. (2) See combined non-gaap Income from Operations divided by combined non-gaap Keysight revenue and GAAP Ixia revenue to derive combined operating margin. Excludes expected synergies Page 25

26 Key Messages Leader in profitable market Technology and market leader in ever-evolving technology market Transformation Objectives Over the Cycle* Transform for growth Strong business model Target fast growing areas and expand Served Addressable Market (SAM) Proven operating performance and cash generation across cycles 4% revenue CAGR Deliver >20% operating margin 8-10% EPS growth * Non-GAAP measure Page 26

27 Modular Form Factor Page 27

28 Fast Growing Modular Small Portion of Total Market 2016 Total Modular Solutions Market $1.2 Billion* 2016 Total Design & Test Market $13 Billion* % Other Modular 63% PXI/AXIe Modular $750M* PXI/AXIe Modular 13% CAGR* to 2020 $B PXI/AXIe Modular 13% CAGR** Keysight s double-digit growth continued in FY16 * Per Company estimates. Excludes SAM expansion from acquisition of Ixia ** Per Company estimates. Page 28

29 Investments Leveraged into Multiple Form Factors Provides Competitive Differentiation Form Factor Customer Best For X-Chips Chipset Highly integrated High performance Low power Feature Rich Box R&D Validation Complex device manufacturing Full measurement set One-button measurements Shared lab equipment Modular Manufacturing Small footprint AXI PXI R&D Validation Flexible configuration Multi-channel applications Proprietary technology developed by central Keysight Labs, manufactured at in-house semiconductor fab, and deployed into all three form factors Handheld Installation Maintenance Portability Harsh environments Page 29

30 Reconciliations Page 30

31 Keysight Non-GAAP gross margin reconciliation Year Ended October 31, 2016 ( in millions) GAAP Gross Profit $ 1,624 56% Intangible amortization 38 Share-based compensation 11 Acquisition and integration costs 2 Acquisition related fair value adjustments 12 Gross Margin % Other 2 Non-GAAP Gross Profit $ 1,689 58% GAAP Revenue $ 2,918 Non-GAAP Revenue $ 2,930 Page 31

32 Keysight Non-GAAP operating margin reconciliation Year Ended October 31, 2016 ( in millions) Income from operations, as reported $ 406 Intangible amortization 44 Share-based compensation 49 Acquisition and integration costs 18 Acquisition-related fair value adjustments 12 Separation and related costs 24 Restructuring and related costs Other (7) Non-GAAP income from operations $ 546 GAAP Operating Margin 14% Non-GAAP Operating Margin 19% Page 32

33 Keysight Non-GAAP research and development expenses reconciliation Year Ended October 31, 2016 October 31, 2014 ( in millions) Research and Development expense, as reported $ 425 $ 361 Share-based compensation (8) (7) Acquisition and integration costs (1) - Separation and related costs - (2) Restructuring and related costs - 1 Other - (1) Non-GAAP Research and Development expense $ 416 $ 352 GAAP Revenue $ 2,918 $ 2,933 R&D as a % of GAAP Revenue 14.6% 12.3% Non-GAAP Revenue $ 2,930 $ 2,933 R&D as a % of Non-GAAP Revenue 14.2% 12.0% Page 33

34 Keysight Non GAAP revenue by end market reconciliation GAAP Revenue Acquisitionrelated fair value adjs FY16, (in millions) Non-GAAP Revenue Aerospace, Defense & Government $ 740 $ 740 Commercial Communications 1, ,012 Electronic Industrial Services Total Keysight Revenue $ 2,918 $ 12 $ 2,930 Non-GAAP revenue is defined to exclude the fair value adjustments to the Anite acquisition-related deferred revenue balances. Page 34

35 Keysight Non GAAP revenue reconciliation FY16, (in millions) GAAP Revenue $ 2,918 Acquisition-related fair value adjustments 12 Non-GAAP Revenue $ 2,930 Keysight Free cash flow reconciliation Year Ended October 31, 2016 (in millions) Net cash provided by operating activities $ 416 Less: Investments in property, plant and equipment (91) Free cash flow $ 325 Page 35