Keysight Earnings: In-Line Result as Communications Softness Again Offset by Automotive Strength

We maintain our $175 fair value estimate for wide-moat Keysight Technologies KEYS shares after fiscal second-quarter results bore no large surprises. Communications sales continue to stagnate amid a soft spending environment at commercial customers and weak consumer demand. Government and automotive markets remain bright spots that are helping to offset commercial communications weakness. Fiscal second-quarter profitability meaningfully beat our expectations from positive mix that we think will be short-lived. Still, we see a path to these strong margins longer-term, and make no changes to our positive growth expectations for Keysight and its comprehensive portfolio for communications testing. Shares have approached our fair value, popping 8% upon the release, which we believe is due to alleviation of fear that demand might weaken further. We see shares as fairly valued now.

Fiscal second-quarter sales rose 3% year over year to $1.39 billion, despite softness in Keysight’s commercial communications customers which make up the largest portion of sales. Automotive strength drove 17% year-over-year growth for the electronic industrial segment as Keysight continues to win customers and gain traction in electric and autonomous vehicles. Keysight saw all-time record orders for automotive in the quarter. Steady sequentially, government sales also helped to offset commercial communications softness. Commercial communications declined 7% year over year from continuing soft enterprise spending and weak personal computer and smartphone sales.

Non-GAAP gross margin of 66.7% was well ahead of our expectations. This is a very strong level for Keysight, but we credit the beat to one-time more favorable product mix, which we don’t expect to endure in coming quarters. Still, we think this is a level Keysight can build to maintain in the long term as it expands software solutions, which aligns with its model as presented at its investor day in March.