I was able to get up early this morning since the Warriors game ended early since it had to fit into a National TV schedule. And now, I have to write my review of Keysight's Q2 Results. Ah well. So, the numbers in Q2 (note they are not using the Calendar Year as their quarters) were okay. Not great but okay. Revenue was $740M and non-GAAP Earnings Per Share (EPS) was $0.70. And the stock is down considerably this morning to $32.50 a share. The reason is the forward looking guidance that the company gave and some of the comments provided by Management on the call.
The company has reported that future orders are soft and that (all numbers at the mid-point of guidance) Revenue will be $655M and EPS will be $0.44. Those numbers are dramatically down. The basic notes were that this was due to problems outside the United States, particularly in Russia. It was not stated that China was also a problem, but the numbers in Asia-Pacific outside Japan were down as well. China is the big bully in that block of countries. The communications business is down generally where aerospace/defense is up.
Well, in the long term all of that is a problem because the growth areas for the company in its own investment presentations lie outside of aerospace/defense. This means that the company is looking at either a market or competitor problem. Either way, it will struggle with organic growth. Certain sectors of the company are growing, but they are being offset by those parts that are troubled. The good news is that the existing business is highly profitable, so there is time to make changes. We are talking about a business that generated $68M in cash in Q2. The question is how it will be deployed.
One other announcement on the call. That is that Keysight will be looking at reducing costs going forward. The most significant of that is a Voluntary Early Retirement program. This is one of these things where companies don't want to do a layoff, but will try to encourage a reduction in headcount. There are 2 problems with these programs. First, you can not control who takes them. That means that employees that are still have some Entrepreneurial Spirit tend to jump on them. Those about to retire and don't want to go do something new tend to stay. Just as an aside, these are normally followed up later by real layoffs. If you are thinking you might want out and are eligible, then take the plan. Have them pay you to leave instead of being forced out later.
I think the telling part of the call and one that I think anyone interested in investing should listen to is the part where an analyst asks about what the company is going to do with the Cash it generates. The CEO answered that they were likely to deploy it to grow the company. The problem with that from an investor standpoint is that the market that the company is in is stalled. So, investors in the company will be doubling down in a market that is stuck. What investors would prefer is to either return cash to the shareholders (dividend) or reduce the number of outstanding shares (buy back). Keysight Management has not shown (and they can't have to date given the short run of the company) that they are effective investors of the money. As a cynic on corporate governance, investing in the business does support management and ensures their future employment.
Well if you are either a Keysight Investor or Employee, there was lots to think about. I strongly recommend you listen to the call if you are in either category. There is a recording of the call on the Keysight website.
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