Keysight Technologies, Inc. (KEYS) Earnings Call Transcript & Summary

Hello, good morning, good afternoon. My name is David Ridley-Lane. I am a research analyst here at Bank of America, covering Keysight. Keysight is a leading test and measurement company with a strong presence in the communications space. The company has roots tracing back to the earliest days with Hewlett-Packard. About 75% of all 5G equipment out there in the field today has been developed using the company's test and measurement tools and software. They also have a strong business in general electronics, aerospace defense, semiconductors and connected autos and the EV transition. We're lucky to have CFO Neil Dougherty with us today, who has been with the company and its predecessors since 1996, CFO since 2014 spin-off from Agilent. I'll turn it over to Neil for brief opening remarks. Thanks.

Thank you, David. I appreciate the chance to be here today. So as David said, I'm Neil Dougherty. I'm the Vice President -- Senior Vice President and Chief Financial Officer here at Keysight, and I have been the CFO since the company's inception at the time of its spin-off from Agilent. Prior to that, I was the Treasurer at Agilent for a number of years and have over 20 years of experience in the industry, primarily at Keysight and its predecessor [ sites ] on Hewlett-Packard. Keysight as David said is a market and technology leader in the electronic design and test space. We have key businesses in commercial communications, aerospace, defense, electronic -- and electronic industrial end markets including automotive, general electronics and semiconductor. We have been independent since 2014, and we believe that the spin-off of Keysight really created an inflection point for our business, enabling us to invest significantly in our end markets, both through R&D and through marketing and M&A, and it enabled us to transform our business for growth. We have been taking share in our markets every year since our spin-off and have really carved out a nice leadership position in our core end markets. We positioned ourselves as a technology leader in those markets. We have an extraordinarily broad portfolio of design and test solutions, by far the broadest portfolio of the industry -- broadest portfolio in the industry. And those solutions include both software, hardware and services. I think our progression in software is one of the key success stories for the company. We have continued to grow our software business for a number of years at a rate that was above the company average. At the time of our separation, we had in the mid-$300 million range of software sales. And in our most recent fiscal year, that number was above $800 million. So we've seen significant growth in software which obviously provides a nice base of revenues and has contributed to an improving both gross and operating margin story for the company. As I've mentioned, we've had 4 consecutive share -- years of market share gains driven by investments that align well with key secular growth trends and our end markets' decisions to invest early to capture those secular growth trends. Right now, I'm thinking primarily about investments we made early in 5G and next-gen auto, both electric vehicles and autonomous vehicles, and 400 gigabit and to capture the wave of investment that's happening to modernize defense infrastructures around the world. We have a very strong history, a track record of operational excellence within the company. We use something that we call the Keysight Leadership Model to communicate with our employees what's expected with them. And that Keysight Leadership Model essentially puts our customer success at the center. And really that desire to make our customers successful guides everything that we do from the way we think about our markets to the way we allocate capital and the way we operate our business. We have an increasing -- not only has the business been growing, but we have an increasing base of recurring revenue driven by the increases in software that I've talked about, but by also increases in our services business. I think this continues to be a big opportunity for us as we look forward. Even as we've grown our software business to over $800 million, still more than half of those software sales are on a onetime or perpetual basis. We want to migrate the way our customer purchase software from Keysight so it's more of a time-based or a subscription model, and we expect it to be successful in doing that over the coming years. While we have an extraordinarily broad customer base, servicing over 30,000 customers annually, we don't have any single customer that represents even 5% of our total revenues. We sell into a diverse set of end markets. And along with that diverse customer base, we have highly differentiated solutions and a durable operating model that enables us to deliver strong profit and cash flow under a wide variety of economic circumstances. That operating model is obviously being tested in the current environment around COVID-19. We did see, driven by supply chain concerns, a significant reduction in our revenues. In the most recent quarter, they were down 18%. But even with that reduction in revenue, our operating margins only declined about 500 basis points, and we still maintain 19% operating margin and very strong cash flow within the quarter. So that operating model is going to enable us to keep our foot on the gas from an investment standpoint. We'll continue to invest heavily in R&D. We continue to have no meaningful change to our capital allocation priorities, and that should enable us to exit this COVID situation in a stronger position than when we went in. We do believe there are a number of secular themes that should provide some resilience to our business, most notably the investments in 5G, the investments in next-gen auto. I've mentioned the defense modernization. Those trends should continue and should have some resilience even in the face of some macro headwinds. We made great progress on our multiyear strategy and continue to deliver leading edge solutions to the marketplace. And I think most importantly we remain bullish about the long term. We believe we're really just getting started. And there's a lot in front of us, not only in terms of the growth trends that I've just mentioned, but we're already starting to seed investments for the wave of things that will come beyond that. We talked recently at our Analyst Day in March about 6G and about quantum computing, 2 things that are really in their infancy today and are not material from a revenue perspective but we think can be big markets for us as we look forward. So with that, David, I think I'm going to turn it back to you, and we can move to Q&A. But we continue to be excited about the prospects for Keysight.

Perfect, thank you. [Operator Instructions]

Just to maybe kick it off, talk about how demand trended. So your orders were rising at a mid-single-digit pace January, February and March, but your fiscal quarter ended April. For that full quarter we're down a bit maybe 2% or 3%, suggests that the April exit rate perhaps in a high single-digit decline. So could you maybe just talk about how the orders trended over the last 4 months and where you saw the relative strength and weakness?

Yes. So obviously it's been a pretty tumultuous time over the past couple of months. And really we saw a significant change in the world and in economies in mid-March as it became clearer that the COVID-19 virus had kind of gone beyond China and it was having significant impacts not only here in the U.S., but in Europe and other parts of Asia and around the globe. That has had a dramatic impact on supply chains, including our own. It's had a dramatic impact on key macro indicators like unemployment. And I think it has caused our customer base and just general investment around the world for people to get cautious. And so we've seen -- we have -- one of the things we said on our earnings call last week is we actually enter Q3 with -- on a dollars basis with the strongest funnel of opportunities that we've ever had. And so we still continue to have high levels of engagement with our customers, but the conversion of that funnel from -- to actual orders has slowed, and it started to slow in the back half of March and continued through April. I think within our end markets, there are areas of relative strength and relative weakness. I think the key kind of technology trends around 5G and 400 gigabit and aerospace defense modernization as well as the migration towards smaller process architectures and semi are providing areas of relative strength. And at the same time, our businesses that are more linked to production and GDP have weakness. So that's general electronics, auto. Even though our auto business is heavily skewed towards R&D, I think the true dramatic impact on auto sales has caused our auto customers to get cautious even around their R&D investments. And so where they are investing, it is in next-gen auto, AV and EV, but those investments themselves have slowed as well. So we've over a large number of years, have made a significant migration of our revenue base towards the R&D -- towards our customers' R&D labs as opposed to their manufacturing lines. We believe this will provide us with some significant resilience as the situation plays out because we know that our customers act much the same way that Keysight acts. And in a downturn while we are looking to reduce spending, we are very much focused on preserving our core R&D program so that we can exit these downturns as strongly as possible, and our customers approach it the same way.

Perfect. And then maybe we can talk a little bit on 5G. So I think you're nearing about 500 customers for your 5G-related products. I think at the Analyst Day, you said you expect that to be over 1,000 by the end of this. Are you starting to see customers from outside of core end markets like network equipment manufacturers? Are you starting to see sort of that next wave of adoption? And then maybe just for the investors on the line, how much of your revenue is really tied to 5G? Is there some way to sort of size that or scale it?

Yes. So the question is a good one. If you think about kind of the progression that we're on, the early stage investments in 5G really across the ecosystem, whether you're talking components and chipsets, devices, base stations or service providers, were really being done by kind of the big market makers in the industry, right, the household names that we all know about. As you get closer and closer to deployment of these technologies, you start to get first a second tier of customers. They come in whether that's the second tier handset providers or just a different subset of folks that then start to participate in these markets and aren't necessarily going to lead with the core research that is going to enable them. And so we definitely have started to see that kick in. And then the second thing that is adding customers to the base is the fact that the -- and now, here I'm drawing off a contrast between 5G and in previous generations 3G and 4G, which were heavily focused or almost exclusively focused on the cell phone. 5G is going to move beyond the cellular end markets to other industries: automotive, IoT, those types of things. So to your point, we are starting to see sales outside of the core network to auto manufacturers, in some cases, defense applications of use of 5G equipment are starting to take place and expand our customer base. So in addition to kind of the growth that comes from the rollout of 5G, you're getting this expansion in customers that also contributes to the growth opportunity for us.

Got it. And then maybe just because I have gotten some investors curious on this. Aerospace and defense for you is about 22% of the revenue. Just to clarify, is there a way to break that out between U.S. defense, international defense and the commercial aerospace?

Yes. This is not something -- it's never really been an issue before, but we were joking yesterday that we -- maybe we should move away from the alphabetical listing of these things because our business is heavily skewed towards defense and government-type applications versus commercial aerospace. And obviously we know that given everything that's happened with travel recently, there's a lot of concern about folks that have outsized exposure to those commercial aerospace-type industries. It's really a very small portion of the overall segment for us. It's heavily skewed towards defense and government. And even within the commercial sector, I think it's more heavily skewed towards satellite rather than consumer-level aerospace.

Perfect. And then you touched on deep focusing on your clients' R&D budgets. And one factor there is the budgets tend to be set kind of on a calendar basis for most companies. They tend to be pretty stable. But are you seeing perhaps customers trade down from sort of your best platinum type of equipment packages to a better type of package, more of a gold or silver, if that makes sense?

No, I don't think we're seeing that phenomenon. The -- what we are seeing, I think, is more market-specific. I touched on it in automotive. I think for these industries that maybe are facing more severe impacts, even though they might like to keep investing at a similar rate, their prudence dictates that they get a little bit more cautious. And then they have to prioritize, right? And so again, it's not like there's no investment that's happening in next-gen auto, but we're seeing a slowing. I can definitely point to examples. I have one great example from the most recent quarter where we added a new logo, a new -- a brand new customer for us with a very significant multimillion-dollar order in the EV space. So investment does continue, but we are seeing slowing in certain markets based on the individual market conditions that are happening. I think just generally speaking though, your point is correct, right, that people work really hard to protect their R&D investments. They hold on to their R&D engineers. They want to keep them working. And so while you may see some measured pullbacks, those R&D markets tend to be far more resilient, and that's one of the reasons we're attracted to them. They also tend to be higher gross margin to -- getting to your kind of gold-silver things, would our customers want most of the things that's going to get them to market the fastest? And if you can provide them tools that they're going to help them with their own time to market, the price sensitivity is lower than it is in the manufacturing space. Therefore, the gross margins are higher.

That makes sense. Let's shift a little bit over to production itself. So your manufacturing I know was hit by COVID. I think in the April quarter, you were around 80% capacity through the quarter. Obviously, you had a couple of weeks where your main facilities were shut down. Can you talk about how you're ramping back on the manufacturing capacity? And given the backlog that you built, is there a level of surge capacity beyond 100% if you -- is there second shifts, overtime, et cetera, is that something you're considering?

Yes. So yes, certainly our capacities were severely impacted in the back half of the quarter as we moved to shut down our factories and put the safety -- health and safety of our employees at the forefront. We then spent a number of weeks making sure that we have protocols in place so that we could keep those employees safe and protected when they return to work. And we have been ramping -- re-ramping production at facilities since various points in April, depending on the individual facility. But when we [ green -- gained ] access to those facilities, it wasn't like we just sent out a message and told everybody to come back to work. We started slow, maybe 10% of the employees showing back up and getting things started. And once we tested the processes, we moved from 10% to 20% to 30% and slowly ramped production. So with regard to our internal facilities, which is again about half of our overall production, at our primary finished goods manufacturing facility, in Penang, Malaysia, we have 100% of our workforce back in the facility. I think if you look at the rest of the world, the number is closer to 70% on average. We are working with our subcontractors who are maybe a little bit behind us to also ramp production. And then the last piece is the broader supply chain that provides the components and piece parts that ultimately go under instrumentation. We have seen some lengthening of lead times in certain cases. We've got supply chain experts that are working very carefully with those suppliers to get us access to the parts that we need. And in most cases, we're being successful in doing so. I think there's some reason for optimism. I think if you were -- if you'd gone back to Keysight in early April and said, "Hey, where do you expect to be at the end of May?" I think we're ahead of where we would -- the way we would have answered that question. And we're -- hopefully our suppliers are having similar experiences once they get back in that they're able to kind of get production re-ramp faster than expected. And maybe there's some conservatism with the lead times that are being shared. I think we'll have to wait and see. I think that is one risk as we go forward, that even if we get our own capacities back online, that if we do struggle to get parts, that could be an issue. Not an issue yet, but certainly something that we are watching. I think your question about surge capacity, right now, we're focused on getting back to kind of pre-COVID levels. We do realize that we're going to have a backlog that we're going to have to work off. I don't think it's realistic to assume that in like the first quarter back, we're going to have 20% or 30% or 40% incremental capacity and be able to work through that backlog that we built in a one quarter period of time. I think it's going to be something that we're going to have to work off of for a number of quarters. But we already have a process in place to work with our customers to prioritize urgent needs, and from our perspective to prioritize obviously our most strategic customers so that we can get them what they need. And we will work the backlog off over time.

Okay. It's good to hear you running a little bit ahead of your own internal plans. That's very positive. Switching a bit over to services. I think services is a bit over 10% of revenue today. Correct me if I'm wrong, but I think growth is mainly on new sales, i.e., having better attach rates than you have in the past. You kind of look forward maybe a number of years, if your attach rates stayed in a similar ZIP code to where they are now, what would that mix of services be like over a 5-year time frame?

Yes. We've got a number of different growth drivers in our services business as we look to add new services and new services capabilities. A key driver has been this pay-for-support KeysightCare model, which we rolled out last November. And I think we're still in the very early days of that, but I think that provides -- will provide a catalyst for growth for the foreseeable future. I think the only numbers that we put out there is we have talked about growing our business to -- our services business to being a $600 million business, and we're well on our way towards achieving that objective. I do not believe that $600 million is a cap in any way. It was a 50% increase from where we had kind of -- we'd been flat at $400 million for a long time, and we definitely saw upside. And so I think we want to achieve that objective before we go out and put the next bogey in front of us. But I think we definitely have the $600 million in kind of relatively immediate sites, or certainly did pre-COVID. We have to see whether or not that slows our progress towards achieving that objective. But I would imagine that like I said, we don't see that as a cap in any way, and we'll see where we can take it after we hit that level.

Perfect. And then maybe switching over to margins, I think second quarter results really show Keysight's been successful in increasing the mix of variable cost. As you kind of work through what the new normal is, are there areas where you might think about fine-tuning the cost structure further? And how are you sort of thinking about that going forward?

Yes. I mean I think we're always fine-tuning. But I think we're pretty happy with the overall model that we have. I'll give an example of an area where we're fine-tuning. Approximately 25% of our sales are flowing through an indirect channel. But we're constantly monitoring the effectiveness of those indirect channels versus our own direct channels. And I can point to a number of different geographies around the world where over the last 3 to 4 years, we've actually moved portions of sales back to the direct model because we feel like we get better coverage and better growth opportunities from doing those things direct. So I think we're going to continue to have a balance. But we're always fine-tuning around the edges to make sure that we've got the right balance of overall cost, of cost flexibility and effectiveness. And there are some things that ultimately we decide that it might be worth a little bit of extra cost to do ourselves. But right now, I think we're pretty happy with the overall structure. We're happy with our levels of investment in R&D. And we're continuing to expand our sales force. As you know, we're on a multiyear effort to double our direct sales force. We felt like we were leaving revenue on the table, and that [ there was ] opportunity to drive growth through expansion of our sales force, and we're continuing to do that. So there's always pruning that -- or fine-tuning that happens. But generally speaking, we feel like we're on the right trajectory.

And sort of on that subject of fine-tuning, if we do start to see a slower recovery in some of your end markets, maybe like in automotive or general electronics, how easy is it to shift sort of sales and operation and R&D towards the areas that are seeing better demand?

Yes. I think I'd answer that question 2 ways. I think particularly in terms of sales, we've shown in other cases that we have an ability to redirect sales. We saw that in China with some of the trade regulations that have happened, that we've repurposed sales force to other areas within China and have actually been able to continue to grow our China business over the course of the last several years, even in the face of these China trade restrictions. I think given the framing of your question though around market slowdowns in areas like automotive, I think we're going to be very cautious about making those changes. We're in those businesses for the long term. If you look at automotive, there's going to be a major overhaul of the auto industry in terms of a migration and a turning over of the installed base towards electric vehicles and vehicles with greater levels of autonomous driving capability. And that's going to be a transition that plays out over decades. So we're not going to want to put the long term at risk. We believe we've identified the right industries. We are constantly and currently now reevaluating all end R&D programs to make sure that we're focused on the right things that are going to drive our markets going forward. And if we see changes in what's going to drive those things over the longer term, we won't hesitate to change. But we're not going to change based on short-term market perturbations. As I said, we're going to keep our foot on the gas to make sure that we have the right solutions when those markets emerge from whatever downturn that they get into.

Got it. And then a question for you on free cash flow, that was a very -- almost -- pretty surprisingly strong in the second quarter at $275 million. Was there any sort of onetime-ish type of benefit to free cash flow in the second quarter? And could you talk through maybe the puts and takes you expect in the back half of the year?

Yes. I mean there were no onetime events that really impacted our cash flow within the quarter. We didn't do anything out of the ordinary. I do think we benefited from kind of favorable timing conditions if you look at what happened with COVID. If you think of Keysight as a company that has roughly 50 days of day sales outstanding, that's 1.5 months. And so the collections, if you will, for Q2 were really based on shipments that happened in the back half of the first quarter and in the first half of the second quarter, specifically the uninterrupted COVID period, right, if you look at it. We're definitely going to be in a different situation as you look forward to Q3 where the collections are going to be the back half of Q2 and the first half of the Q3, which are the ramp down and the ramp back up. And so from a collections standpoint, we had a very favorable window in the second quarter that really drove very strong collections. We did benefit from the fact that we didn't -- even though you do have some companies out there that are having difficult financial times, we did not see any significant degradation of the quality of our receivables. We did slow purchases during the quarter obviously. So you have lower outgoing purchases, but very strong collections based on the timing. So we do expect cash flows to dip here in the third quarter. But I think if you look at the profitability of the business, generating close to 20% operating margin even on reduced revenues, then you normalize for the timing changes, and we're going to continue to deliver really strong profit and cash profitability and cash flow even during this cycle.

Got it. And would -- if inventories decline in your fourth fiscal quarter, would that be a bit of a tailwind for you on free cash flow?

Potentially, potentially.

Got it. And then maybe we can shift over to China specifically. The government of China has announced a stimulus package, 25 billion roughly earmarked for 5G networks, 14 billion for Internet of Things and 12 billion for data centers. Is this something you think will be a meaningful driver for Keysight as you look forward into maybe fiscal '21?

Yes. It's hard for me to comment about the specifics about these particular investments. I'll maybe raise it up and just talk more generally that as a general thing, investment in next-gen technologies is good for Keysight. And to the extent that the large economies around the world are supporting the rollout of these technologies can only bode well. I think we have differentiated positions in these areas, 5G, 400 gigabit. And so if we see more broad scale adoption of these types of things, it should be very good for our business. As for obviously in any market that the electronics design and test is only a small portion of the overall opportunity, so it's hard for me to necessarily quantify direct impact from a specific program within China. But the overall commitment that they're making to things like Internet of Things, modernization of their data centers, 5G, aligns very well with where we're investing and should be good for -- given the differentiated positions that we have in those end markets.

And then there was a Department of Commerce regulation put out around certain equipment tied to defense. On the last earnings call, you sized that at 1% to 2% of revenue. Just wanted to see, you did a very good job navigating around the Huawei restrictions that were put in place about a year ago. Is this going to be more of a challenge, about the same? How do you think about these newer regulations from the Department of Commerce?

Yes. I think of it as a similar type of challenge. Just to be clear, the Department of Commerce put out some new regulations and licensing requirements around sales for defense end use applications within Venezuela, Russia and China. Venezuela and Russia are de minimis. They're nonissues for us. Obviously, China is a significant market. We do sell R&D tools into China. And so we do expect to be scaling back that portion of our business. And it's overall we've quantified it as a 1% to 2% point headwind as we look forward. That being said, we'll respond to this much in the same way that we responded to prior trade things in China. We'll get our sales force in China redeployed onto other markets, other accounts, and look to find offsets. I think it's a little bit too early to tell specifically in this case where our level of success will be. But in prior cases, even though we've talked about headwinds from Huawei, the tariffs were relatively small, but there've been other expansions within China to what they call the restricted party list. And through all of those things, we've been able to continue to grow our business in China. So I think the investments that you -- it kind of gets back to your original question, the investments that are happening within China around next-gen auto, around 5G, around data centers, align very well with the types of things that Keysight is focused on. So there's no shortage of market opportunities for us within the country. And certainly we're going to lose this opportunity, so we can't say there's 0 impact, but there is opportunity for us to find other business within China and continue our growth trajectory.

Got it. Okay. And then on software, so you've obviously made a lot of internal investments. Some of the acquisitions you've made, it's also -- you picked up some different software packages through M&A as well. I wanted to sort of see first on this transition to SaaS, how long do you think that transition could be? And one of the things we've seen in sort of industrial software settings is understandably a lot of these companies take time to change, right? If they're used to purchasing certain things in a certain way, they're a little bit more hesitant. So how many years are you sort of seeing that SaaS transition for your business?

Yes. It is hard to know. But -- and -- but I do -- I agree with your characterization. It's going to be a transition, right? We're going to have to work with our customers over time to migrate them to a subscription-based model. My instinct right now tells me it's probably a 3- to 4-year journey before -- probably longer than that in total, but then we can make significant progress in the course of the next 3 to 4 years. We have some mechanisms that we're going to use to try and navigate that change, most notably our development of the PathWave platform, which is still in early stages, but I think that will provide a catalyst for us to migrate our customers towards buying software from Keysight on a subscription basis, add significant incremental value to them by connecting their supply chain. And we can change the way we can sell access to our -- to the applications that run on our instruments via that PathWave platform. So we do have a plan, but we're not going to rush it. We want to continue to work effectively with our customers and take them on a manageable transition from their perspective.

Got it. And how do you think about more pure play acquisitions of pure software companies? I realize that the current time right now in COVID-19 has sort of put some pause on that. But I guess more as a framework, I mean, those tend to have higher valuations, but tend to have this recurring revenue software model that's very attractive. So how do you think about pure play software acquisitions?

That's a great question. And I'd start by saying that given our strong liquidity position with $1.8 billion in cash and an undrawn revolver and strong cash flow generation, that we still do have an appetite should we be able to find potential M&A targets at attractive prices even during this time. The question of will we be able to do that, that remains to be seen. As we said at our Analyst Day, our -- we have a strong M&A funnel development process. It does seem to be skewing towards at least targets that have high software content, if not assets that are that are purely software because we're looking for opportunities to be -- for targets that will be additive not only to our organic growth rate, but also to our gross margins. And so as our gross margins have approached mid-60s, you need that high software content to be -- to continue to move that northward. I think you raised additional potential benefits from us securing pure software businesses. They might have these more mature software selling models that we might be able to leverage back into our core software programs. The synergies go both ways in these types of transactions. We've seen that in prior transactions. There are things that we can bring to them, and there are things that they can bring to us. And so it's all about finding the right targets in near adjacent markets. We put an awful lot of opportunities in the top end of our funnel to get very few out the bottom. We remain very disciplined both with regard to our strategic hurdles and our financial hurdles, and we'll continue to do so. But this current environment might create some opportunities to find some things at attractive pricing.

And then maybe just following on, on that. Some of your competitors are in different end markets, right? Some are in medical, industrial automation, environmental testing. Is there an appetite for then Keysight to maybe add another end market to some of your core communications, aerospace defense and electronics?

Yes, I guess I think about that differently. I think about the types of solutions that we provide to the market and if -- which is -- at a broad brush, it's solutions for electrical engineers, right? I mean if you -- that's essentially what we do, we make tools for electrical engineers. If there are new markets for us to apply those toolkits -- and I think in some cases there are. We do sell into -- increasingly into health care markets and those types of things. We found auto. Next-gen auto is a relatively new market for us. We didn't have that much value to add in an internal combustion world. But as you start to think about EV and AV, it's a much more compelling value proposition that Keysight can bring to those markets. So we are always looking for new ways to apply our technologies to new markets, and we'll continue to do so as we go forward.

Got it. [Operator Instructions] One of the things that COVID-19 showed is perhaps a little bit of weakness in the corporate data center markets, so not the hyperscalers, AWS in the world, but more on the corporate networks. We've seen some early signs that companies might have to invest, particularly to support a greater percentage of their workforce going work from home. Is that an area of opportunity? And what have you been seeing more broadly in the -- sort of on the data center side?

Yes. So I'd say a couple of things. First of all with regard to work from home, it's certainly something that we're watching carefully, right? That was a hypothesis that came up pretty early in the COVID situation. I think it's too early to tell. As I've said, we have seen customers get a little bit cautious here with regard to investment in the early months. But as you start to think about work from home potentially being a more prolonged situation for some of us, I think that could create an opportunity for us as we look forward. We've already made tools available to the -- we have this Innovate Anywhere program where we made some of our software tools available to R&D engineers that were in a work-from-home environment, to give them a way to sample Keysight's productivity tools and ultimately hopefully turn them into paying customers. So we are looking at that. I think if you look at the data center more broadly, in addition to the kind of the 400-gig upgrades, which are kind of starting now although they've been -- they've kind of been delayed at a number of different points given some technical hurdles, the next big catalyst that we're looking at in the data center side of things is the true commercial deployment and broad scale commercial deployment of 5G, right? That is going to drive a tremendous amount of increased data traffic over the wired networks and really cause -- force a reconfiguration and a complete overhaul of those wired networks. That's -- that was a primary thesis for our acquisition of Ixia, positioning Keysight as the one company that can service the entire communications ecosystem end to end, wireless to wireline, and up and down the stack from the physical layer where Keysight has historically been strong, up to the protocol layers. We got protocol layer test for wireless through our acquisition of Anite in 2015. And then we went and acquired protocol layer test solutions for the wired networks via the Ixia acquisition in 2017. So all of that was done with an eye towards 5G deployment. And we still look very favorably upon that trend, which is getting closer in time as we speak.

Sure. And have you seen -- and this would be more you gazing into your customers' behavior, but -- so have you seen a significant delay around COVID-19, around how companies are planning their 5G deployments, particularly the telco companies?

Within 5G, no. Right now, we have seen no meaningful shift out in terms of what we believe the 5G deployment schedule is likely to be. The one area where there's been some small delays with the next -- the [ full-on rels ] of the standards [ Rel-16 and 17, ] they could push out 3 to 6 months, something along those lines. I don't view that as having a terribly significant market impact. I think as time progresses, people get better and better view as to what's in those standards anyway, even prior to their release. And so I think that's a minor perturbation at best. But no, we don't see any significant shift out in 5G time lines due to COVID. And we saw that -- and again it's impossible to know what would have been for scenarios that didn't play out, but we saw strong double-digit growth in our 5G orders, even within the most recent quarter. So demand continued to be very strong even in the face of the COVID slowdown.

And I guess I'll ask you this kind of still the #1 question I get on Keysight, which is where do you think we stand in the 5G cycle?

So I've gotten this question a lot over the last week to 10 days. And a lot of people frame it in terms of baseball and what inning are we in, and just for consistency, I'll use that same framework. I'd guess that we're in the third, maybe the fourth inning in terms of the overall rollout. These are very long cycles. They're at least -- the 3G, 4G, 5G, they're at least 10-year cycles. And I think in the case of 5G, there is significant reason to believe the 5G cycle is longer than previous cycles. You have the complexity that's brought up by nonstand-alone and stand-alone versions of the technology by the sub-6 gigahertz and high-frequency deployments. And the fact that countries and service providers are likely go through multiple implementations as they maybe they start with a nonstand-alone sub-6 gigahertz deployment, but over time they want to work to a stand-alone high-frequency deployment to get the true performance advantages, so I mean in individual countries, there are going to be multiple rollouts of 5G. And then you have the other use cases, right, which it's going to be the cell phone that drives the build-out of the network. But once the networks are deployed, you'll have these other industries, automotive, aerospace defense, industrial, IoT that will look to leverage the low latency and high data rates capabilities of the 5G networks. And so that should serve to elongate the cycle. So I still think we're clearly in the early days. Again, I think third inning is a reasonable representation of where we might be at this point in time. But there's still a lot of investment that needs to happen to see broad scale adoption of 5G, particularly at the higher frequencies.

Perfect. And with that, I think we're right at the end of the time. So I want to thank you again for attending and for the great answers to the questions. So thank you very much.

Thank you.