Keysight Technologies Inc. (NYSE: $KEYS) is a leading technology company that provides electronic design and test solutions to help enterprises, service providers and governments accelerate innovation. The company’s solutions go into smartphones, automobiles, capital equipment, and aerospace and defense systems, among other applications.
Keysight reported its fiscal second-quarter 2024 results on Tuesday, May 21st, for the quarter ended April 2024, surpassing Wall Street’s expectations for earnings despite a year-over-year revenue decline.
Revenue and Earnings Highlights
Keysight posted revenue of $1.22 billion, a 12.3% decline compared to the same period last year. However, this figure beat the Zacks Consensus Estimate of $1.2 billion by 1.45%. The company’s earnings per share (EPS) came in at $1.41, surpassing analysts’ expectations of $1.39 and representing a 1.44% earnings surprise.
While revenue and earnings declined year-over-year, Keysight’s earnings and revenue beat is a positive sign for the company. The revenue decline was attributed to weakness in multiple end markets, including consumer electronics and semiconductors, which impeded the company’s top-line growth.
Keysight Segment Performance
Keysight’s two main business segments, Communication Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG) exhibited contrasting performances during the quarter.
The CSG segment saw a 10.4% year-over-year drop in revenue to $840 million, primarily due to declines in the Aerospace, Defense & Government end markets. However, strong demand from the U.S. Government and prime contractors, driven by accelerated defense modernization efforts in radar, spectrum operations, space, and satellite, as well as signal monitoring, partially offset this decline.
The EISG segment experienced a steeper 17% year-over-year revenue decline to $376 million, impacted by soft demand trends in consumer electronics, manufacturing, and distribution channels. Despite an improvement in the industry outlook, project delays and inventory corrections in the semiconductor sector continued to weigh on the segment’s performance.
Regional Performance
Geographically, Keysight saw a 23% year-over-year revenue decline in the Asia-Pacific region, where all end markets experienced declining trends. The Americas region reported a 5% year-over-year drop in revenue, while Europe saw a 1% decline.
Profitability and Cash Flow
Keysight’s non-GAAP gross profit for the quarter was $790 million, with a gross margin of 65%. The company’s non-GAAP operating margin stood at 24.2%, down from 30.4% in the prior-year quarter. The CSG segment reported a non-GAAP operating margin of 26.5%, down 190 basis points year-over-year, while the EISG segment’s non-GAAP operating margin was 19%, down 1,550 basis points.
In the first six months of fiscal 2024, Keysight generated $438 million in cash from operating activities, compared to $789 million in the same period last year.
Outlook and Acquisition
For the third quarter of fiscal 2024, Keysight expects revenue in the range of $1.18 billion to $1.2 billion and non-GAAP earnings per share between $1.30 and $1.36.
During the quarter, Keysight completed the acquisition of Riscure, a cybersecurity company specializing in automated security assessment capabilities for semiconductors, embedded systems, and connected devices. This acquisition is expected to expand Keysight’s offerings in the cybersecurity space.
Analyst Perspective
Keysight’s lackluster performance compared to the broader market this year raises questions about the stock’s future trajectory. While there are no straightforward answers, the company’s earnings guidance can provide valuable insights. Zacks has assigned Keysight a Rank #3 (Hold), suggesting the stock may move in tandem with the market in the near term.
However, Zacks also highlights that Keysight’s industry, Electronics – Measuring Instruments, currently ranks in the bottom 9% of over 250 industries tracked by the firm. This unfavorable industry positioning could potentially weigh on Keysight’s stock performance, despite the company’s outlook.
Keysight Stock Performance
KEYS took a significant hit following the Q2 earnings release, plunging 9.26% to $144.96 as of 1:40 PM EDT. The sharp decline suggests investor concerns over the company’s 12.3% year-over-year revenue drop, despite beating earnings estimates. With a day’s range of $142 to $154, the stock appears to be facing heavy selling pressure. Keysight’s ability to regain revenue growth and maintain profitability will be critical in determining the stock’s future trajectory amid challenging market conditions.
Should You Buy Keysight Technologies’ Stock in 2024?
While Keysight’s revenue decline in Q2 2024 is concerning, the company’s ability to beat earnings estimates and its strategic acquisitions like Riscure suggest potential for future growth. However, with the Electronics – Measuring Instruments industry underperforming and Keysight’s stock taking a significant hit post-earnings, you should exercise caution.
A sustained recovery in revenue growth, especially in key segments like EISG, could make Keysight an attractive investment opportunity in 2024. For now, a “hold” rating seems prudent until the company demonstrates consistent positive momentum.
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