Good day ladies and gentlemen. Welcome to the Keysight Technologies Fiscal Fourth Quarter 2016 earnings conference call. After the presentation, we will conduct a question and answer session. [Operator Instructions] Please note that this call is being recorded today, Thursday, November 17, 2016 at 1:30 p.m. Pacific Time. I would now like to hand the conference over to Jason Kary, Vice President, Treasurer and Investor Relations.

Welcome everyone to Keysight’s fourth quarter earnings conference call for Fiscal Year 2016. With me are Ron Nersesian, Keysight President and CEO and Neil Dougherty, Keysight Senior Vice President and CFO. Joining in the Q&A after Neil’s comments will be Mike Gasparian, President of Communications Solutions Group; Soon Chai Gooi, President of the Electronic Industrial Solutions Group; John Page, President of the Services Solutions Group; and Mark Wallace, Senior Vice President of Worldwide Sales. 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. 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 are 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. I would also note that we are scheduled to participate in the Credit Suisse Technology Conference in Scottsdale on December 1st and the Barclay’s Global Technology Conference in San Francisco on December 7th. We hope to see many of you there. Now, I’d like to turn the call over to Ron.

Thank you, Jason, and thank you all for joining us. We will focus today’s discussion on three key topics. First, we delivered a strong fourth quarter with revenue at the high end of our guidance; achieved earnings of $0.64 per share; and generated $124 million in free cash flow. Second, customers continue to increase investment in next generation technologies and Keysight continues to innovate and expand its leadership in these important areas of the market. Third, during Fiscal Year 2016, the team executed well on its strategy to transform and position the company for growth, and we made measureable progress on our key growth initiatives. Let’s begin with a brief overview of Keysight’s fourth quarter performance. We are pleased with our results and execution in the quarter. We achieved earnings of $0.64 per share, generated $124 million in free cash flow, or 17% of revenue, and delivered $751 million in revenue which was at the high end of our guidance. Additionally, orders grew 3% year-over-year to reach $806 million, which is the highest level we have seen in the past four years. Neil will provide you with further detail on our fourth quarter financial results in a few minutes. Moving to our markets, overall the dynamic we saw in the quarter remained relatively consistent with our expectations. We continue to see softness in the broader communications market and in certain regions within Europe, while investments in the development of next generation technologies continued to grow. More specifically, we saw increased investment in the areas of 5G, wireless LAN, high speed optical networks for data centers, automotive, alternative energy, and leading edge semiconductor process technologies. In 5G major players continued to accelerate development and timelines around the globe and we generated strong growth for our 5G solutions in the fourth quarter.…

Today we reported fourth quarter revenue of $751 million compared with $756 million in the same period last year. On a core basis, which excludes the impact of currency and acquisitions, revenue decreased 2%. Regionally, core revenue declined 7% in Europe, 1% in the Americas, 11% in Japan, and increased 1% in Asia excluding Japan. In China, we achieved our third consecutive quarter of double digit growth driven by strength in optical and semiconductor process solutions. Looking at our operational results, gross margin was 57.5%, a year-over-year decrease of 50 basis points due to product mix. For the quarter, operating expenses totaled $290 million, up 2.7% over last year and reflected higher sales cost given our strong order performance in the quarter. This resulted in fourth quarter operating margin of 18.9% compared with 20.7% last year. We reported net income of $110 million or $0.64 per share, which was at the midpoint of our guidance range. Moving to the performance of our segments; our communications solutions group or CSG includes two primary end markets. First is a commercial communications end market that reported revenue of $254 million, up 3% compared with last year’s fourth quarter driven by growth from 5G and next generation datacenter technologies, offset by continued softness in the broader communications ecosystem. CGS also includes our aerospace defense and government end markets which generated revenue of $188 million in Q4 compared with $206 million in the same quarter last year, reflecting ongoing weakness in Russia and China. This brought total CSG revenue for the quarter to $442 million, a 2% year-over-year decrease or 4% on a core basis. CSG reported gross margin of 60.3% and operating margin of 17.1%. Our electronic industrial solutions group, or EISG generated fourth quarter revenue of $201 million, up 1% from last year…

[Operator Instructions] Our first question comes from Richard Eastman with Robert W. Baird.

Just a couple of questions. Let me just kind of start with the aerospace defense piece of the comm solutions group. Could you kind of just walk through a little bit on the quarter how did the US business do in A&D and any positive vibes here going forward maybe from an order perspective or anything from a front log perspective that suggest that the A&D business can be up low single digits or mid-single digits as we work our way through ’17.

I’m going to turn it over to Mike Gasparian. The other question that comes up is whether or not we see any change in aerospace defense spending based on the election results and our take is that aerospace defense spending will increase based on the US election results. I’ll turn it over to Mike who will tell you a little bit more about some of the questions you asked.

Our view on aerospace defense is we still view it as a very stable segment going forward. We clearly have pockets of weakness in Russia and China which Mark Wallace will make some comments on when I’m done, but that’s offset by some really good growth opportunities in some of the other areas. You asked for some color. In the Americas we have a really nice systems business as well as a great service opportunity with the prime contractors. Both the systems and the services play into the outsourcing trend that I’ve talked about before, so those are good opportunities for the company. Western Europe and India, both have good opportunities for services as well. Then we’ve got radar/satellite segments within those regions that are performing well. Mark, do you want to maybe add some color about what we’re seeing in China and Russia?

In Russia spending declined in Q4 as demand remained soft. During the quarter we saw some delays to some deals and some budgets and it’s really all based on what we’ve seen for a while. It’s the US and European sanctions, low commodity pricing, weak currency, just altogether continue to make the environment challenging. It’s again, important to note that this is not a change from what we saw previously. Then in China, it’s different it’s a weak government spending as we expected as we’re in the early part of China’s five year planning cycle. So, this is kind of normal seasonality as part of that process.

Just a follow up question, the other piece on the comm’s solutions business, I think you highlighted datacenter spend, optical spend, as being higher in the quarter. Even with that the commercial coms business kind of outperformed our expectations. How do you view this business going forward? You commented we’ll still see headwinds here on the more traditional LTE and 4G side, but again, do you start to look at this business as stable with upside potential or stable with maybe still downside exposure? How do you look at this overall collection of products and markets here geographically as well as by product for commercial comms going forward?

I’ll make a general worldwide comment and then I’ll turn it over to Mike for a little bit more of the detailed color. But, we don’t see any specific catalyst at this point. Budgets, outside of leading edge technologies, remains weak but we do of course see increased spending and focus on leading edge technologies such as 5G. We’ve been focused on that and we’ve brought a lot of new solutions to market and as a matter of fact, we mentioned really leap frogging the competition with our 110 gigahertz spectrum analyzer or signal analyzer. So, the story remains the same, we see leading edge technologies where money is being spent. We see it being pulled in a little bit on 5G and we’re strong there. But outside of that we see things being weak such as 4G spending. We certainly have seen a roll off in that over the year.

I’ll just add a little bit to Ron’s response. The whole wireless ecosystem just across the board has kind of a weak characteristic. We’re between 4G and 5G so kind of dealing with the trough right now. It almost doesn’t matter if you look at component suppliers, chipset companies, device makers, operator test labs, all of them are dealing with bringing some equilibrium to their supply chains, consolidation and restructuring and so the net effect of all of that is a very restrained CAPEX environment. We do see, I would characterize it as some wide variations from company-to-company, but across the board despite these headwinds the leading companies continue to make investments in R&D in these next generation technologies. So, Ron highlighted 5G, all the wireless LAN areas 802.11 ad, ay, ax, 400 gigabyte, those are all big good growth areas for us going forward and I think we’re well positioned to capitalize on all those trends.

I’ll add if you take a look at our growth rate versus the competition, you can see that we’ll feel very good about our ability to gain share and our market position is much stronger than it was a year or two ago.

The next question comes from Brian Yuen with Deutsch Bank.

I’m curious to get your view on what you think the most important demand drivers for 2017 would be? I know you have a lot going on with growth autos, 5G module, and cloud so how should we sort of think about all these things coming together to impact topline from a modeling perspective in 2017?

We believe that we’re very well positioned in some of the high growth environments. In particular, we see more investment in R&D than we see in manufacturing and our strategy for years has been to really focus on R&D where we see higher margins and more stability in the business. The other thing is it really plays to our strength of being a leading edge technology player so as we bring out leading edge technologies that no one else can match, that gives us a real advantage in being able to grow and to gain market share. The biggest thing that we see is 5G. There is no doubt about it that 5G has a very, very broad coverage all up and down throughout the communications ecosystem and it’s been playing very well for us. The other thing that’s a growth initiative that it’s not so much a market issue is services. We have had a focus on services and this past quarter we had very strong order growth and we also, for the year, had 9% order growth for services in our service business. We’ve had many successes that in our multivendor calibration service business. So, overall 5G is one very, very big effort. I’ve already mentioned aerospace defense where with the new administration we anticipate there being a ramp up, although it will be probably slow in the beginning to the aerospace defense business, and then on top of it, our competitiveness not only in 5G, but across our electronic industrial market and our services business. But, we do remain cautious on the overall market outlook because you can look at the rest of the players in the industry and some of the customers that we serve, how their business are going. But again, we have been focusing on the part that has been growing the most which is the R&D environment for leading edge technologies.

Maybe a quick follow up on the product roadmap. You noted the 50 automotive design wins, the 100 gigahertz spectrum analyzer and 5G, so for 2017 do you have any early indications of what products might be rolling out to address those growth areas? Anything you might be working on now or have plans to roll out in 2017.

We don’t comment on the future roadmap. If there is something that we want to comment on, we would go ahead and put it in a press release such as we announced previously that our breakthrough in high performance digital oscilloscope technology in getting to the 100 gigahertz mark with very, very strong signal integrity and high performance. So, that is one thing that we’ve commented on but other things we won’t comment on. But, we feel very good about our solutions roadmap and their increased market position. We really see that we have gained share from the competition and from our efforts that are really starting to just take stride. We see over the next couple of years being able to create some moment.

The next question comes from Patrick Newton with Stifel Nicolaus.

Given that you’re well positioned to grow above the industry and you seem very confident in share gains, the key question seems to be what are your thoughts on the industry growth potential in FY17 and just given the choppy growth for the industry in general, do you anticipate collectively there will be growth in the industry next year?

As Ron just said, we still remain cautious about the overall market outlook looking forward. Clearly, we’re seeing acceleration in next generation technologies, but there are other portions of the market that continue to remain under pressure. I think the important thing for us is that we have a business and an operating model that enables us to perform and delivery some profitability and cash flow under any market conditions. We’re going to continue to be cautious, continue to execute on our plan, continue to transform our investments if you will, continue making investments in R&D and in the field to capture future growth. We’re funding those investments through increased efficiencies in our factories through improved gross margins. Our gross margins were up 80 basis points this year and increased efficiency in our administrative functions as well. ’17, these markets are notoriously difficult to call. We see no specific catalyst at this point and remain cautious as we enter 2017.

I’m just trying to understand the guidance a little bit. You have bookings up almost $30 million year-over-year but the midpoint of the guidance matches revenue from fiscal 1Q last year. I guess after a soft bookings quarter in 3Q is this kind of a backlog refill? Is there any change into maybe the timing of deliveries that’s embedded in the bookings or backlog, or any reason why we wouldn’t see a higher midpoint in the guidance?

First of all, you’re largely correct, we saw good bookings here in Q4 but had been in a relatively softer backlog position entering the quarter. So, first of all we keep the exact same process going into Q1 as we have used previously. We look at our existing backlog, that backlog is scheduled out from a shipment perspective so we know what portion of our backlog is shippable in Q1. We then look at our order funnel and make some assumptions about how incoming orders are going to convert to revenue within the quarter. The one other factor, which is a change from this year, in fiscal 2016 Chinese New Year fell at the beginning of Q2 which quite frankly is a little bit better timing from a business perspective than where it falls here in FY17 at the very tail end of our Q1. So, we’ve certainly factored that in to our guidance, although I will say it is another factor that impacts predictability for the quarter. So, we’re highly confident in our ability to fall within our range, but that timing of Chinese New Year, depending on how shipments move, there’s very little time to recover if things happen differently than we’ve modeled them.

On modular I think you gave us the data point that you had double digit growth in orders for both the AXL and PXL side of the business. I’m just curious, I think you gave us a data point last year of kind of where your analyzed orders were and any update you can give us currently?

We’re not giving any new specific guidance or I would say information except that year-over-year we did see double digit order and revenue growth for modular.

Anite is fully integrated. I would just love your thoughts on your appetite for M&A or if you’re more focused now on more organic initiatives?

We have a blend. There’s no doubt that what we’re doing is we’re focusing on getting our organic growth up like we mentioned at the end of last year and that continues to be a real focus for us. We’re doing that obviously by shifting more of our expense to R&D and to direct feet on the street to sell and we’re very pleased with our progress. But also, we’re looking at market segments that are adjacent that could actually be something where we could create value for our shareholders and increase our overall growth rate. So, we’re looking at both organic and inorganic but ROIC is clearly one very, very strong measure that use to make sure that we can get a great return on anything we do that’s inorganic.

The next question comes from Brandon Couillard with Jefferies.

I’m just curious in general are you satisfied, are you happy with the returns you’re seeing on the stepped up R&D investment and at this point do you have any appetite to perhaps take that another 100 basis points further?

We’re very, very pleased with the progress that we’re making and again, as you know, when you invest in R&D sometimes it’s a 24 to 36 month investment before the product even hits the market and then a product ramps from there and has to go through a customer’s buying cycle so you don’t always see it in the quarter or even the fiscal year in the actual result. But, we are very pleased with the path that we’re on and the results that we’re getting in at this point. As far as taking it further, right now we’ll be talking a little bit more about modeling but we are slowly making sure that we can get the right returns on the investments that we have before we’re going ahead and trying to invest even more heavily.

Let me make a couple of extra comments. We’re very pleased with the results that we’re getting from our R&D and the positioning that we’re having in the leading edge technologies referencing again, 5G and our relative position in 5G relative to where we were in prior generation. So, I think you will continue to see us make investments for growth both in R&D and in the field and as we’ve said previously we look to fund those investments in the current revenue levels through efficiencies elsewhere in the P&L reminding you the business model is set up to deliver high teen s operating margins at current revenue levels. We’re investing in R&D in the field to drive growth when markets recover and we can get this business growing at a 4% sustained rate, we can deliver our 40% incremental when we get to those growth rates. Right now it’s about transitioning the investments we’re making to be more growth oriented so that when markets recover we’re positioned to capture them.

As you look at our year numbers, we delivered 19% operating margin while increasing our R&D spend by going ahead and being more efficient in our manufacturing by increasing our gross margin as well making other tradeoffs in the OPEX lines.

In the fourth quarter revenues came in at the high end of the range, EPS more towards the midpoint low end, was that just a surprise on the mix in gross margins? Then, did you say $15 million of other operating income in fiscal 17 and what exactly is that tied to? Is that Agilent related?

First all, with regard to kind of revenue in Q4 coming in at the high end of the range and EPS more in the middle, really there were two factors that fully explain that. One was product mix. We’ve been working on kind of a long term trend to increase the proportion of our business that comes from R&D versus manufacturing solutions and that’s still a trend line that we’re comfortably on. But relative to the past couple of quarters, our mix in Q4 of manufacturing based solutions was slightly higher and that drove a lower overall gross margin. Then the second thing was a direct result of the higher order levels. Obviously, our commissions climb with the higher order levels and that obviously will yield a benefit in coming quarters. The second part of the question was with regard to other income and yes, that is a direct relation to the kind of the landlord tenant relationship that exists with Agilent where we essentially own facilities and are leasing space back to our prior parent.

That concludes our question and answer session for today. I would like to turn the conference back to Jason Kary.

Thank you all for joining us today. We look forward to seeing you at the upcoming investor conferences that I mentioned at the top of the call and appreciate you joining us today. Have a great day.

This concludes our conference call. You may now disconnect.