Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal Second Quarter 2021 earnings conference call. My name is Holly, and I'll be your lead operator today. After the presentation, we will conduct a question-and-answer session. [Operator Instruction] I would now like to hand the conference over to Jason Kary, Vice President, Treasurer, and Investor Relations.

Thank you and welcome everyone to the Keysight Third Quarter earnings conference call for the fiscal year 2021. Joining me are Ron Nersesian, Keysight 's Chairman, President and CEO, and Neil Dougherty, our CFO. Joining us in the Q&A session will be Satish Dhanasekaran, Chief Operating Officer, and Mark Wallace, Senior Vice President of Global Sales. The press release and information to supplement today's discussion, are on our website at investor.keysight.com. Click on the link for quarterly reports under the financial information tab where you will find an investor presentation along with Keysight 's segment results. Following this call, we will also post a copy of the prepared remarks. Today's comments will refer to non-GAAP financial measures. We will also make references to core growth, which excludes the impact of currency and acquisitions or divestitures completed within the last 12 months. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. All comparisons are on a year-over-year basis unless otherwise noted. 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 our recent SEC filings for a more complete picture of risks and other factors. Lastly, I would highlight that management is scheduled to participate in upcoming virtual investor conferences hosted by Jefferies, Deutsche Bank, and Citi. And now, I will turn the call over to Ron.

Thank you, Jason. And thank you, everyone, for joining us. Keysight delivered another Quarter of excellent results. Solid industry dynamics are accelerating demand for our differentiated solutions and we continue to capitalize on broad-based technology investment across a diverse set of growing markets. Today, I'll focus my comments on three key headlines. First, we delivered record Q3 orders, all-time record revenue, and our highest quarterly operating margin of the year. The durability of our business model was on full display as we continued to effectively navigate supply chain challenges. Second, Keysight's first-to-market software-centric solution strategy continues to yield consistently strong results. Since our launch in 2015, through our expected 2021 finish, we will have delivered 9% compound annual revenue growth and 16% annualized earnings growth, both well above our long-term commitments. Despite significant headwinds of trade restrictions and a global pandemic. Our investments are well aligned with the highest impact market opportunities as we continue to enable our customer success and deliver value to our shareholders. Third, given our outstanding performance year-to-date, we expect to achieve 2021 year-over-year revenue growth of 16% and EPS of $6.03, which represents 24% earnings growth at the midpoint of our guidance. We have strong momentum entering 2022, and our long-term revenue and earnings growth targets remain intact. And we expect to drive incremental margin expansion going forward. Now let's take a deeper look at our Third Quarter performance. Record Q3 orders of 1.3 billion grew 23%. All-time record revenue also grew 23% to 1.2 billion. We delivered a gross margin of 65%, operating margin of 27%, and earnings of $1.54, which was well above the high-end of our guidance and represents 29% year-over-year earnings growth. Keysight continues to deliver outstanding growth despite year-over-year headwinds due to trade restrictions in ongoing supply chain disruption. Our…

Thank you, Ron, and hello, everyone. As Ron mentioned, Keysight delivered another outstanding quarter as broad-based technology investment accelerated demand for our differentiated solutions. Resulting in better-than-expected results in the quarter. Third-quarter revenue of one billion was above the high-end of our guidance and grew 23% or 21% on a core basis. We achieved third-quarter orders of $1,310,000 up 23% or 20% on a core basis. Excluding the impact of China trade restrictions, orders grew 29%. Turning to our operational results, we reported a Q3 gross margin of 65%, which increased 60 basis points year-over-year. Operating expenses of $472 million were well-managed despite higher variable compensation. The operating margin was 27%, up over 100 basis points. We achieved a net income of $286 million and delivered $1.54 in earnings per share, which was above the high-end of our guidance. Our weighted average share count for the Quarter was 186 million shares. Moving to the performance of our segments, our Communications Solutions Group, or CSG, achieved Third Quarter revenue of $875 million up 15%. CSG delivered a gross margin of 66%, which increased 50 basis points year-over-year. The operating margin was 26%. Commercial Communications revenue of $595 million increased 6%, driven by continued investments across the 5G lifecycle, and our leadership in emerging applications. As Ron mentioned, adjusting for the transient impact of unfavorable trade restrictions, Commercial Communications revenue grew double-digits. Aerospace, Defense, and Government revenue of $280 million grew 39% and recorded double-digit growth across all major regions led by U.S. and Europe. The Electronic Industrial Solutions Group or EISG generated another record revenue quarter of $371 million up 48% or 44% on a core basis. Order and revenue strength were notable across all markets and regions as semiconductor, general electronics, and automotive solutions, orders and revenue all grew strong,…

Thank you, Neil. Holly, will you please give the instructions for the Q&A?

Ladies and gentlemen, [Operator Instructions]. We do ask that you please limit yourself to one question [Operator Instructions] And our first question will come from the line of Jim Suva with Citigroup. Jim, your line is open. Okay, we'll go to the next caller. Our next question will come from the line of Mehdi Hosseini with Susquehanna.

Yes. Two follow-up questions, regarding the communications group. Could it be possible that some of the high-end equipment you sell that is used for high-frequency and traditionally categorized under communication -- under commercial communications is now categorized in mid-layer or vice versa, like it's early in the adoption, maybe more millimeter way of application is currently categorize in middle arrow. And then when it's commercialized, it would be reclassified under Commercial Communications? And I have a follow-up.

Mehdi, this is Satish, I'll take this. Clearly, the focus for us is to maintain a lot of leverage across our portfolio between CSG, both commercial and aerospace, and defense. And in our Industrial business across the portfolio, we sell a common set of tools to all engineers. And you're right in pointing out that the millimeter-wave opportunity is pretty broad. Now, it will take quite a bit of time to play out in the end markets driven by spectrum and different interests across the globe. But it is broad, such as millimeter-wave is clearly being used in space and satellite communications. It's being used in aerospace -- in automotive for sure. And now with the commercialization of this technology finds its application in 5G. And we actually classify orders based on customers who buy them. And we're able to maintain a lot of operating leverage across our businesses that way.

Thank you. And then one follow-up for Neil. When are we going to get an update on the longer-term target operating margin? I know you have been focusing on increasing the ratable mix of business and software mix, but you're -- you have been operating above the long-term target, and I just -- we're in a phase where it's like how long can you operate above it? Any metric, any update will be great here. Thank you.

Yes. Just make one final comment to tack on to Satish 's answer. As a result of our classification of sales by customer, we actually have 5G orders and revenue not only within aerospace, defense, and commercial comps but also with EISG as well because of the way that, that is done. Under a question about, long-term operating model. First, we're very pleased with the results. If you look at our 3 quarters to date here in 2020 -- FY21 plus our guide for Q4, we expect to finish this year with an Operating margin basically at the long-term target that we outlined at our March 2019 Analyst Day where we said 20 -- 26 to 27%. We are going to be at that 27% level here in FY '21. So, we're pleased that we've achieved that objective two years ahead of where we expected to achieve it. So, we've been making progress faster than expected. And then, as we said in our prepared comments today, we don't believe that we're done. We believe that we have continued room for margin expansion. And while I don't have an updated guide for you today or an updated long-term model. I will tell you that we do have multiple levers that we're working across the business. You noted a couple of them, continuing to grow our software and services businesses at a rate that's faster than the overall Company average and therefore growing our ARR at rates that are faster abroad instead of initiatives focused on gross margin improvement wherever you've seen our gross margin improvement over the last several years go from the upper 50s into the mid-60 percent range and then continuing to leverage our G&A infrastructure. And so, we believe we continue to have a lot of levers and we remain confident in our ability to continue to drive margin improvement going forward.

Thank you, guys.

And our next question will come from the line of Jim Suva with Citigroup.

Thank you very much. Can you hear me?

Yes.

Great. Thank you. When I think about the longer-term, specifically your end markets, and I look at them, I take a look at automotive, where it looks like you've been underpenetrated or at least a smaller portion of your sales. As you look ahead, is that something that you think could materially be pretty big for the Company in the years ahead, or is there something unique about it? I mean, I look at every car that's being sold out there or the newer ones coming out, they just have a lot more electronics and things that need to be calibrated and tested, or is there something unique about that industry that would prevent you from going into it? Or maybe it's already big for you now, how much is it? Is the profitability the same, it seems like the design times should actually be more favorable because you design a car for multiple years compared to consumer electronics. If you can give us some insights on the automotive strategic view that you may have?

Sure. This is Ron. Hi, Jim. If you take a look at our overall automotive business. It is really transforming in a very large way. As you know, the automobile is really turning into a computer with big batteries and a lot of wireless sensors that communicate to many, many different devices. And that really plays right into our strength. In the old world, the electromechanical car with the combustion engine was relatively low-tech with regards to electronics. Sure, there are transducers and things that are put on suspension systems. To look at shocks and engine performance. But more and more microprocessors are in cars and the whole car itself is really built around electronics that we test. Whether it's computers or the wireless sensors for either radar or for 5G, et cetera. So, we see this as a very big long-term trend for us. As far as production, it depends. Things that are more complex, we're going to have a role in. Things that get reduced to a simple test; we won't be playing in that area as it's a very price competitive market that doesn't really need as much value from us. But in R&D, where we focus, that is the sweet spot for us. So, R&D-focused AV, EV technology is really, really a great opportunity for us going forward.

Thank you so much for the details and congratulations to you and all your teams.

Thanks, Jim. The team did a great job.

And our next question is going to come from the line of Matt Niknam with Deutsche Bank.

Hey guys, thank you for taking the questions. I have on eon supply chain and one follow-up. Just on the supply chain, you've obviously managed to navigate through some of the challenges of peers you're seeing. Can you comment on whether you saw any incremental Headwinds or even Tailwinds or improvement relative to Last Quarter, and then thoughts on any impact you've embedded into the next quarter's guide? And then my follow-up, you talked about adding 1900 new customers last year and expecting to exceed that this year. Just any color you can provide in terms of skew or mix, in terms of where these new customers are coming from? Thanks.

Sure. This is Ron. I'll start off on the supply chain answer, and then turn it over to Neil as we go forward. And then Mark Wallace, our head of sales, will talk about the excellent progress of our new customers. First, with regard to the supply chain, we've commented on this before. The more complex semiconductors that are in our products, we make right in-house. So, we have a boutique fab that has to produce products that literally have, in many cases, 10 times the performance of commercial products because we're the measurement device, and we have to be more accurate to be able to measure the performance on the commercial devices. That gives us more control of our supply chain, although we do obviously buy parts and some common -- some common components from other suppliers. But I think we have an exceptional management team and order fulfillment. We have the largest order fulfillment organization in the test and measurement industry. And I think they've done an excellent job working with our suppliers. There is no doubt that we continue to beat our expectations Quarter after Quarter, after Quarter. But obviously, if there were more components, we'd be able to take our revenue up a little bit more quickly. Now we'll turn it over to Neil, who will add some more commentary.

Yes. Just the -- we're not immune to the supply chain situation that's I guess where I would start, but as Ron said, the vertical integration of our supply chain and the fact that we control the production of our most highly specialized parts really helps to mute the impact. And so, while the impact is not 0 within the quarter, and it's not 0 within Q4 where -- where we just guided the impact is relatively small. And so, I don't think it's a terribly huge concern, I think we're doing a good job managing the expectations of our customers and getting the product into the hands of customers on a timeline that they find to be acceptable. I can't point to any examples at this point where we have had orders canceled because of the inability of us to manage our supply chain risks and get the product into the hands of our customers. So, I'll leave it at that.

And with regard to new customers, before I turn it over to Mark, that's an effort of doing many different things. First, we have added many folks to our feet on the street program that Mark will talk about, or direct field engineers or salespeople that could expand our presence. We've worked in indirect channels and expanding our efforts there, as well as increasing our marketing efforts to make sure that people understand our value. And all of those things feed on top of each other.

That's right. Thanks, Ron. And Matt, I'll just build on that. As you've heard our results were very broad-based across all segments in all regions. And we put a lot of attention as you hear from these calls on innovating with the industry leaders. Our largest customers are top 20 were up very strong, high double-digit. But we added 600 more than 600 new customers during Q3. And as Ron mentioned in his prepared statements, we're on track to exceeding 1900, which we added last year. And this is by design. We have a focus on reaching new customers through a combination of marketing, our direct channel, which, at the end of this year, will be more than twice as big as it was just a few years ago, and through our indirect channel, which is a combination of distributors and our e-commerce platform, where the majority of customers who access Keysight electronically online, are new customers. So, I think you could think of it's broad-based across all the segments that we are focused on delivering solutions to today. And it gives us this broader footprint and this higher diversity of customer base that adds to our strength in addition to the top-line growth that delivers quarter after quarter.

That's great. Thank you, guys, all for the caller.

Thank you.

Our next question will come from the line of Chris Snyder with UBS.

Thank you. My question is on the guide, which puts I think FQ4 revenues at the midpoint of 4% below FQ3 orders. I mean, looking back the last few years, FQ4 revenues had outpaced the Q3 orders. So, does the guidance reflects expectations that supply chain headwinds will persist? Or are we seeing longer customer lead times or just a longer duration backlog as the Company continues to push into software and return revenues?

Yes. I think it's a mix of several of those factors. I certainly don't feel like at this point that we can say the supply chain concerns are behind us. We're continuing to very actively manage the supply chain, and we do expect there'll continue to be some limitations on our ability to ship as a result of those supply chain constraints going forward. I think you highlighted some of the efforts that are going on in our services and software business that is resulting in increases in our deferred revenue accounts and the ratable recognition of some revenues. And then I think in some markets, most notably the semi market, we have seen -- we have seen customers look to place orders earlier in the system for delivery later out, just as they're looking to secure supply and communicate their own needs. But we take comfort from the fact that we see the amount of fab construction that is underway and we believe that those orders, particularly given the relationship that Keysight has with that relatively limited customer set are very strong.

I appreciate all that. And then I just want to follow up on the previous comments around new customers. 1900 new customers are a lot for a Company who has the market share and the history that Keysight has. Is the strong rate of customer additions driven by the fact that the total addressable market here is expanding? As we're seeing that the 5G ecosystem brings new verticals into it or is the Company taking wallet share from just existing customers that maybe haven't known, or existing people in the supply chain that have not done business with Keysight previously?

Yes. Chris, this is Mark. I will add some more color to that. You have to first start with the baseline that we do business with more than 30,000 customers each and every year. So, we have -- in more than 100 countries. So, our presence is broad and wide. You did hit on one of the key elements, which is the expansion of various ecosystems. O-RAN is a great example that is accelerating bringing new customers into the 5G ecosystem. And then the success we're achieving in really all the ecosystems is expanding our footprint through that leverage. The other part again that Ron mentioned is the combination of marketing and increased selling capacity is enabling us to reach more customers into some of the more broad-based segments. As an example, in the last several quarters, we saw more education customers turn on, we saw more research. And as we spoke about earlier in the call, it's still early days on the ramp of automotive. And with that transformation, from prior ICE vehicles to electric and autonomous vehicles, we're seeing a large number of new companies and customers that we're serving in all 4 regions. It's -- as I said before, this is a part of our strategy. We've been running this for 5 years and it's helping us to build this base of customers and accounts going forward.

And the only --

Appreciate all of that.

And the only thing I would add to that is if you look at wallet share, you're exactly right. We've expanded into services to get more of our customer's wallet share. We've expanded with our software offerings, and we have added more solutions up and down the communications ecosystem, which clearly gives us a higher percentage of our customer share. But it's also important to take a look at our competitors and just go back over the last 1, 2, 3, 4 years and take a look at our growth rates versus others. And I think you'll also see market share gains for Keysight.

Thank you.

You're welcome.

Our next question will come from the line of Samik Chatterjee with JPMorgan.

Hi, this is Joe Cardoso, I'm for respondent [Indiscernible] Samik Chatterjee. Just one question for me and circling back to automotive. Within the auto, there has been this general excitement around EVs and AV's both with not auto-aligned and not auto-aligned companies looking to leverage those upcoming opportunities. Can you touch on the competitive landscape there? Particularly in that area of auto and whether you're finding it incrementally tougher relative to the traditional automotive world, given the potential of new competition and how is driving differentiation there? Thank you.

Thanks, Samik. I think if you -- on one dimension, you look at the biggest changes going on in auto around EV and av as Ron mentioned, in the EV space, it's all about bringing the best precision metrology that we have to measure current and voltage and other basic parameters that enable decision making on extending ranges and this is a matter of us making -- configuring our IP to apply to a different application set. And it's one where there are a lot of Pavlov trends of innovation going on. And we're able to do that today. And its still very early days in the EV segment, but we're getting embedded with a lot of lead innovators and the larger eco-system that's forming. With regard to AV, clearly, 5G is going to be a big factor that's going to impact the autonomous cars just from the connectivity aspect and the entire technology stack that goes with it. And that's were extending our strength and differentiation in 5G into this marketplace continues to give us a unique position of differentiation. Some of the successes we're having are on account of that. And as you saw, we just entered into a partnership with Dechra as well to continue to promote this new standard approach to test in this marketplace. Still very early days, we're very pleased with the results this Quarter. We had strong growth and second consecutive Quarter of double-digit growth in auto and there's plenty of runways ahead.

And then competitive landscaping tougher?

Yes. But there's not to the competitive landscape. Clearly, anytime there are traditional competitors that have been in the combustible marketplace, that are trying to configure to try to address this opportunity. But as we think about it, the expertise needed and that -- and the IP needed to play in this space long term. I think we bring a very unique perspective there.

Got it. I appreciate the color., Thanks, guys.

And our next question will come from the line of David Ridley-Lane with Bank of America.

Good evening. So Keysight came into Fiscal year '21, with a backlog built up due to COVID-19 disruptions in the prior year, and year-to-date, you've already built up what I would kind of call an above-average backlog. So how do you see this interplay of delivery timing, of the supply chain? Do you think that you are able to deliver on that excess backlog over the next 12 months? Is it something that extends? How should we think about that?

Yes. It's a great question. So again, I'd start by reiterating the points that I made, which I think we've done a really good job of meeting the needs of our customers and getting them the products that they need in timing, which is satisfactory, at least. I think as you know, we've built up a significant backlog. I think that backlog is going to -- it's going to come down over temporal, to growing into a right to businesses significantly larger now than it has been previously. So, we would expect to be carrying higher amounts of backlog. But I don't expect that there's going to be a one or two-quarter flush of material backlog. I think we're going to work it down over time and continue to meet the needs of our customers working with them on scheduling deliveries as we manage the supply chain constraints and the addition of capacity, which we're still investing in to ultimately bring backlog levels in line with the size of our business.

That does provide a lot of confidence for us to be able to continue to grow our revenue base having such a strong backlog situation that we have.

Got it. And then I think this is the first quarter than you've cited O-RAN as a driver for orders. I know there's been -- you've been making investments. There's been a lot of industry interest here. But are you starting to see via tangible orders as a result?

Yeah. O-RAN was the strategic pact we made a year or so ago, we were participating with the original O-RAN Alliance for a longer time than that. At the highest level, we've long seen that the technology stacks are going to get virtualized to take advantage of the economics and the flexibility that comes with the cloud. And so, we -- you remember, a couple of years ago, we made the acquisition of Prisma, which gave us some unique capabilities, which were then able to combine with our Ixia acquisition that we made subsequently and we've launched the Keysight open ran architect capability Last quarter. And we've received a sizable order already, and we have a very strong pipeline and this Quarter, we -- we took the Keysight, open ran architect and have now made it available on the Amazon cloud as an offering

As in for customers that are coming into this opportunity from a software perspective. So; it's software testing software. We feel very good about our position in the marketplace. Just want to highlight that multiple open ran test and integration centers around the globe have already selected us in our core offering. And you've also heard -- I think Ron referenced the success had with Vodafone, one of the phones selecting Keysight as a partner for design and test. So very pleased with it. But again, from a timeline of O-RAN, this is a long-term trend, one that we're well-positioned today, but we'll continue to grow this business over time.

Alright. Thank you very much and congratulations on the great results in a very tough market. Thank you.

Thank you.

Our next question will come from the line of Adam Thalhimer with Thompson Davis.

Thanks. Good afternoon, guys, and congratulations.

Thanks, Adam.

I wanted to ask one question on semiconductors, can you give us a sense of where we are in the semiconductor cycle for Keysight? And also, how much visibility do you have there?

I'll take this. Clearly, very strong quarter. Again, building on 4 consecutive quarters of record, orders, and revenue in the business. We're very pleased with the performance there. With regard to where we play, we're playing in the wafer test, which is on the front end of the semi-process. And given the dynamics that are going on around lithography and the advancements that are playing out, especially driven by 5G and datacenter applications for 7-nanometer, 5-nanometer, and 3-nanometers. I think all of those new node-size-based opportunities are still in the very early innings, because one, those nodes have to get stable and then ramp up. So, it's still very early stages there. So, we view the capital spend for those new node sizes to be, to be fairly stable over time. Obviously, there is a part of the business that is about scaling capacity into mature processes. And we think that will continue given this current semi shortage that is going on and demand being high through '22. And it remains to be seen what happens longer-term. We also -- it's important to highlight that given the infrastructure spend that's likely to come into the U.S and Europe and other regions, looking to localize supply chain, it's one dynamic that's not factored into any of these outlook projections, but could have more upside for the semi business. But again, you look at the end-market dramatic drivers, whether it's a new memory, topology, or 5G, or data center demand, all of those are feeding into this at this point.

Good outlook. Thank you very much.

Our next question will come from the line of Rob Mason with Baird.

Yes. Good afternoon. Several questions already around supply chain, but I -- perhaps I missed it. But did you speak to your own efforts internally to kind of boost capacity? I know production capacity trying to increase that, at the same time, you're battling some of the COVID-related restrictions was an effort, maybe just an update on that front. And maybe relatedly as well, is just how do you think about the seasonality of the business we went through this year with the kind of muted seasonality for several reasons, that seasonality continuing as we head into -- or kind of muted seasonality continuing as we head into '22?

Yeah. A great question. So obviously we have been and continue to invest in increasing our own capacity just as a point, we did $4.2 million of revenue last year. We're going to be at $4.9 billion of revenue this year. So, we've added significantly to revenue. Last quarter, we did talk about how within our own factories in subcontractors, we did have some capacity constraints. Those where items were not gating items for us this quarter. We've added enough capacity that it was no longer the gating item. That doesn't mean that we're done investing as we continue to look forward to the future growth of our business, we're continuing to make investments in further capacity expansion but right now I feel like we're -- doing a good job of staying ahead of the curve, and certainly particularly given that there is some supply chain constraint potentially is relieving a little bit of the -- a little bit of the pressure there. On the seasonality question, I've answered this question many times over the years. When I sit back to model our businesses at the beginning of any year, we tend to think of coming off of Q4 as our biggest quarter of the year as we model sequentially down in Q1, up in Q2, down a little bit in Q3, and then a big finish in Q4 with the highest quarter of the year. That's how I would sit down to model our business. As we talked about all through this year, we expected because of the rebound from COVID, and then more recently with some of the supply chain constraints and the needs capacity, we expected that seasonality to be more muted this year than it has historically been. And I think that's proven out here over the last several quarters. I think as we look forward, at least over the next couple of quarters, I expect that muted seasonality to remain intact. That doesn't mean there won't be any, I just think that the swings will be less than they typically are, and beyond that, it's hard to call.

Our next question will come from the line of Mark Delaney with Goldman Sachs.

Yes. Good afternoon. And thanks for taking the question. The Companies cited trade restructuring into China as a headwind to the growth rate that you reported. I was hoping you could elaborate a bit more on what you've ended up seeing and some of the puts and takes in the context of maybe there are certain customers are not able to shift too. But to what extent have you been able to offset some of those trade-related headwinds, either as you focus more of your own resources on other customers, or some of the other customers perhaps took market share?

Mark, do you want to take that or --

Yes. Yes, I will be happy to. Hey, Mark. As I mentioned before, we did see some uplift from the COVID recovery in certain segments that were really more affected by the impact last year and the early part of this year. You would consider that to be automotive, manufacturing supply chain, the things we've talked about, right, Education and research. And then our sales into some of the broad customers, both direct and indirect. So, you know that's a dynamic that we certainly experience. We had some pull-in as we talked about before in semiconductor, but it was small and it really gives us this longer visibility through their forecasts and funnels going out many, many quarters as that are a slower moving process with fabs and so forth. But again, most of our growth in the quarter still comes from the continuing investments in the areas that we're talking about for next-generation technologies across commercial comms, and aerospace, defense, and eMobility. And we've done a great job of capturing those in all regions, including China, where we get all obviously, that's where the headwinds originate. And this last quarter, we overcame them again, sustaining top-line growth in China, double-digit growth when you exclude the trade impact. And it's really a testament to our ability to pivot to the broad-based business that's available to us in China. And the ability to capture that throughout the various cycles. So, semiconductor again, automotive, general electronics. So, we've not only pivoted in China, but we've also captured this around the world.

And getting more specifically with regard to the trade headwinds, there's no doubt there have been some more companies that have been added to the restricted list. But the team has done an excellent job with still providing growth despite that and making up for, let's say, large sales that were a headwind going into this year. And most of that is behind us. And we look forward to the future.

Yeah. I just want to add a little more on that. Q3 was the last quarter of a strong headwind from one customer in China. So, it's going to be a little better going forward.

Just a follow-up question on supply chain, and specifically with Malaysia. Given the vaccination rates that you mentioned within your factory, can you talk about to what extent you can operate at normal or near-normal levels of capacity in Malaysia because of those vaccination rates, or are there still restrictions on how much you can have operating in Malaysia? Thanks.

Yes. We're in Penang in Malaysia. Some of the bigger outbreaks that they did have in Malaysia first occurred in the southern part of Malaysia, not in Penang where we are. But regardless of that, we had a very massive effort to not only vaccinate our employees but also folks that we work with, our partners, some of our contract manufacturers, our shippers that come in. Anybody that gets in contact with us and we have over 95% that have received the first dose as of the beginning of this week. This week, they were getting the second dose. So that feels very good. That's not a constraint right now. But as the orders grow, we'll continue to build that. The constraint is just getting some, lower-level components in certain areas but we feel very good about the production capacity that we have in Malaysia. As well as what we have in the other facilities where we do manufacture as we do some manufacturing in the U.S., we do some in Germany. And all together, it's all built into the guide.

Thank you.

You're welcome.

And our next question will come from the line of Brandon Couillard with Jefferies.

Hey, good afternoon. Neil, just clarification on the 4Q guide. I mean, if the [Indiscernible] headwinds roll-off in the fourth quarter, a little surprise is that the implied revenue growth in the fourth quarter wouldn't be better than low single-digits. If that's the case, which would imply a deceleration on two to three-year stack comps. It doesn't sound like the in-market to change all that much. You talked about supply chains and trains here and there. But you seem to be managing it fairly well. So, am I missing something here or are you embedding perhaps a little more conservatism around in one particular end market?

Yeah, no, I think as we've gone through this year, we've been building our ability to ship and our ability to drive incremental revenues as we've gone through the year right 1180 Q1,1220 Q2, 1246 Q3. We are guiding to 1260 Q4. So, we're making some stepped-up aggressions. In terms of the year-over-year growth rates, obviously, the Q4 of last year was the big bounce-back quarter after our factories reopened up and revamp, following additional COVID shutdown. And so, we have an unusually tough comparison from a year ago. And frankly, not just on the revenue line, but we've talked about the extraordinarily favorable mix that we saw in Q4 of last year that grew gross margins and operating margins high. And so, I thinking -- if you're thinking about it from that perspective, I'd just point really to that tough comp is something that's going to mute growth rates here in the fourth quarter. But we continue to make progress as to adding capacity, continue to making progress in terms of ramping our revenue and we're really well-positioned as we look forward to FY '22.

Okay. And then maybe I missed this, but did you give the software and service revenue growth for the third quarter?

We did not, but both businesses do continue to grow very, very strongly here in the fourth quarter. And we're very pleased with the progress we're making in both areas, double-digits for both lines of business.

Got you. Thank you.

Thank you. And with that, that will conclude today's question and answer session, and I will turn the call over to Jason Kary for closing comments.

Thank you, Holly. And thank you everyone for joining us today. We look forward to speaking with many of you at the upcoming conferences and wish you all a great day and a great evening.

Once again, we'd like to thank you for your participation in today's conference call. You may now disconnect.