Why Is Keysight (KEYS) Down 9.2% Since Last Earnings Report?

It has been about a month since the last earnings report for Keysight (KEYS). Shares have lost about 9.2% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Keysight due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Keysight Q1 Earnings Surpass Estimates, Revenues Up Y/Y

Keysight Technologies delivered first-quarter fiscal 2020 non-GAAP earnings of $1.26 per share, which surpassed the Zacks Consensus Estimate by 16.7%. The bottom line improved 35.5% from the year-ago quarter. The figure was also above the higher end of management’s guidance of $1.04-$1.10 per share.

Non-GAAP revenues improved 9% year over year to $1.095 billion, above the higher end of management’s guided range of $1.045-$1.065 billion. Non-GAAP core revenues (excluding the impact of currency and revenues from acquisitions in a year’s time) increased 8% year over year to $1.088 billion. Meanwhile, GAAP revenues advanced 9% from the year-ago quarter to $1.095 billion.

The Zacks Consensus Estimate for revenues was pegged at $1.061 billion.

Robust adoption of the company’s solutions across diversified end-markets, including 5G, aerospace defense, network visibility and general electronics, primarily drove the fiscal first-quarter results. Further, the company is well poised to sustain momentum, courtesy of its differentiated and broad portfolio of solutions across several end-markets.

Quarter in Detail

Orders grew 12% year over year to approximately $1.141 billion during the reported quarter. Notably, core orders improved 11%.

Beginning first-quarter fiscal 2020, the company’s financial reporting comprises two segments — Electronic Industrial Solutions Group (EISG) and Communications Solutions Group (CSG). Ixia Solutions Group (ISG) segment reporting has been aligned with the CGS segment.

CSG includes commercial communications (CC) and aerospace, defense & government (ADG) end markets. CSG revenues of $818 million improved 9% year over year and 8% on a core basis. CSG contributed 74.7% to total non-GAAP revenues in the fiscal first quarter. CC revenues of $573 million improved 8% year over year on the back of strong growth in the wireless ecosystem primarily fueled by advancement in 5G investment. Moreover, robust 5G order growth and strong demand for Ixia’s Network Applications & Security solutions favored revenues. ADG revenues came in at $245 million, increasing 10% year over year. Higher government spending and momentum in investments aimed at technology modernization supported the upside. Management noted demand strength globally.

EISG revenues increased 8% to $277 million. This can primarily be attributed to robust demand for the company’s solutions in process node technology testing, considering semiconductor vertical. Investments in next-generation automotive and energy technologies, and momentum in first-to-market solutions, also contributed to the rally. EISG contributed 25.3% to total non-GAAP revenues in first-quarter fiscal 2020.

Non-GAAP revenues from Americas came in at $447 million, up 10% year over year. Non-GAAP revenues from Europe and Asia Pacific of $179 million and $425 million, improved 4% and 9%, respectively, on a year-over-year basis. Americas, Europe and Asia Pacific contributed 40.8%, 17% and 42.2%, respectively, to total revenues in the reported quarter.

Margin Highlights

Non-GAAP gross margin expanded 280 basis points (bps) to 64.6% during the reported quarter. CSG and EISG’s gross margin of 65.7% and 61.1% expanded 290 bps and 220 bps, respectively, on a year-over-year basis.

Non-GAAP operating expenses increased 3.1% to $433 million. As a percentage of revenues, the figure contracted 220 bps to 39.5%.

Consequently, non-GAAP operating margin expanded 480 bps to 25%.

Balance Sheet & Cash Flow

As of Jan 31, 2020, Keysight had cash & cash equivalents of $1.691 billion, up from $1.598 billion as of Oct 31, 2019. As on Jan 31, 2020, the company reported long-term debt of $1.788 billion, which remained unchanged sequentially.

Cash flow from operations during the quarter came in at $197 million compared with $263 million reported in the prior quarter. Free cash flow was $165 million compared with the previous quarter’s $233 million.

Guidance

For second-quarter fiscal 2020, the company expects revenues to be $1.138-$1.178 billion. The guidance includes impact from ongoing coronavirus crisis. Non-GAAP earnings per share are projected to be $1.28-$1.38.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

At this time, Keysight has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Keysight has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.