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

Well, thank you to everybody for joining either in person or remotely. I'm very excited for today's conversation with Keysight Technologies. We have CFO, Neil Dougherty; and then Mark Wallace, who leads up Keysight's global sales. So thank you, gentlemen, for joining us today.

So I guess, to the new industrial investors listening in that might be new to the name or learning more about Keysight, can you just describe in your own words what the company does? And what value do you provide for your clients?

Yes. So Keysight -- I mean if you step back to the highest level what does Keysight do, we provide tools, hardware tools, software tools, solutions to the electrical engineering community. I mean that's the highest level, right? Primarily in the R&D lab, but it can also -- tools can also be used in a manufacturing environment or even in a post-installation optimization-type environment. And so we basically positioned ourselves as providing the fundamental capabilities to technologists that are developing technologies across a wide range of end markets, again, primarily in the R&D lab to enable their time to market. And so we serve industries, a wide range of industries, but we think about big themes around commercial communications, both wireless and wireline; aerospace, defense, primarily communications technologies in the aerospace. You can think of signal capture and signal jamming as 2 themes. And then in the electronic industrial space, it's semiconductor, it's next-generation auto, primarily driven by the electronification of the drivetrain, so EV and hybrid vehicles as well as the move towards autonomous driving. And then we have a broad, what we'd just call our general electronics business, which is kind of everything else. But when you think about the potential customer set, as anybody that's hiring electrical engineers, there's electronic content going into a wide range of industries, right? So that includes everything from IoT to health care to education to consumer goods manufacturing. It's a broad range of things that we do.

Appreciate that. The thing that really attracted me to Keysight when I was learning about the company was how the business is transforming to become increasingly secular, increasingly durable as a result. Could you just talk a little bit about since the company spun out from Agilent, what have you done to drive that transformation further align yourself with customer R&D budgets? And then kind of part two of the question is, looking forward, there's a lot of concern in the market from investors around the global economy. How have this -- how has this R&D spending trended kind of historically through market cycles?

Maybe I'll take that first part as far as how we've transformed and building out on what Neil said. We still supply these core tools, like a carpenter, an artist, whatever you have tools, and electrical engineers have tools. But one of the first things we did when we spun from Agilent 8 years ago, as we look forward into these segments that we were targeting and realized that the amount of change that was going to be occurring over the next 10 or 20 years is substantial. The complexity is increasing. And these engineers and these companies, the R&D function needs more complete solutions, which combines the hardware and the software and the services that provide more of an outcome to our customers. And that has been one of the biggest changes how we've reorganized to bring new complete solutions to market internally, how we're investing heavily in R&D and M&A to deliver those functionality beyond the physical layer, which is where HP and Agilent, when we were part of those companies, focused into the protocol stack and even more recently into the application layer and into the user interface, again, providing these more complete solutions. As Head of Sales, we have a large sales organization made up principally of engineers who are selling or engineers who are working collaboratively with our customers. And through this very early collaboration with industry-leading companies, we innovate and bring these total solutions to market. A great example is 5G. We began that journey in 2013. There was no standard. So we were innovating with the likes of Qualcomm, these are public collaborations, and a host of other companies early on to help enable and propel that standard. And then as the standard evolves, which it's doing today, we continue to upgrade and update our solutions to these key customers. So that's a big part of what's changed. We moved from product-centric to solution-centric. But we still serve over 30,000 customers a year. So we have a very broad footprint around the world, a variety of different end markets, which helps us to continuously deliver value and extract growth. And that's -- we've had a very good run here with those solutions.

And then maybe just to add on because the second part of your question was about increased durability of the model, right? And so Keysight's fundamentally different than the company that's spun out of Agilent 8 years ago today. Today, we have -- in excess of 60% of our sales are actually flowing into our customers' R&D labs rather than their manufacturing lines. We're about 30% manufacturing and 10% kind of post-deployment, installation, maintenance type of applications. We have a full 1/3 of our revenues that are coming from software and services, 20% of that's software. And so there's these aspects that have stickiness to them and recurring components. R&D budgets tend to be very stable and growing. The R&D budgets of our customers tend to be stable and growing over time. And so that change in the bias of the revenue streams towards the R&D lab, towards more software, towards more services has really served to make the business model overall more durable.

Appreciate that. And really ever since I launched on the company back September 2020, the negative view has been relatively consistent. And that view is that 5G is being deployed, and Keysight is known as a 5G R&D company. I know that 5G isn't -- I mean, kind of our initiation was much more than 5G. But I guess that transformation and then also maybe just the nature of 5G relative to the other G cycles, has that -- what has allowed the company to continue kind of growing revenues despite maybe 5G being deployed?

Yes. So first of all, we understand that that's a thesis, and we largely disagree with that view. I think 5G is being deployed. That is true. But there is a lot of runway ahead of us in 5G. And again, with our bias towards the R&D streams, the market makers in 5G, there's not really a point where their R&D stops or takes a pause, right? It evolves over time, right? And so if you think about what they're doing today, Rev 15 is out there, Rev 16 is being deployed now. Rev 17 is coming later this year. Rev 18 is a year or more down the road. There'll be additional Revs of the standards beyond that. And then eventually, we're going to move into 6G. And so the players that are in that market today have a lot of evolution that they have to do. It's the migration from low frequency to high frequency. It's the other use cases beyond the cell phone, the Internet of Things, the CV to X for next-gen automobiles, the private networks, the aerospace/defense applications of 5G, all of this needs to be developed, and it's all going to roll out in these standards that follow. Eventually will get to something that's 5.5G just like we did with 3.5G and LTE Advanced. And so there's a lot of runway still there in the R&D lab and then eventually, our customers who are still incidentally doing 4G R&D today, right, they've got the crux in 5G and they're planting seeds for 6G R&D, they're starting on that. And it's just going to -- that's just going to evolve. And we view our opportunity is to follow that evolution with those customers that are going to -- that are going to continue to do R&D across the cycle.

In 5G, I mean, certainly relative to 4G, it feels like more of like a multiphase rollout. We have still millimeter wave, very early days there. I guess from your standpoint, at the upstream level, does it feel like these G cycles or just this upstream spending cycle has gotten maybe more blurred than it was when we go back to 4G?

Yes. Blurred or different, certainly more complex and longer and larger because if you went from 3G to 4G, it had to do with the mobile broadband application, people streaming videos on their device. And with each of these releases that Neil spoke about, they are there to enable new verticals and to enable new use cases around low latency, high reliability, obviously, higher bandwidth applications. And then as you pointed out, Chris, as we see the slow but continuing rollout of millimeter wave and C-band in the U.S. with the industry leaders, parts of Asia, those enable additional capabilities as well that we're engaged with. And Release 21 is 6G. So it's a continuation of this. Release 18 is kind of mid-cycle 5G. So this is less about something starting and stopping, certainly in the R&D environment, that's the case, and more about a continuous flow of new capabilities, which are more and more complex. Higher complexity, higher challenges are good for Keysight, more band combinations, higher frequency. That's what these 5G solutions that we've been deploying since 2013-plus are evolving to provide our customers. And then I think the last thing I'll say here is that first-mover advantage, given this scenario and this rollout of incremental functionality with broadening of use cases, really plays to our strengths because most of these upgrades are software. They're upgrades to the existing scalable platform that we invented back in 2013. There is hardware upgraded -- upgrades along the way as well for upgraded processors and so forth. But most of that is improving and upgrading the software, which is subscribed to. So there's some recurring element as well creating the stickiness. So yes, it's definitely still a lot of runway ahead. We're adding about 100 new 5G customers per quarter. Some of them are new to Keysight. Some of them are existing customers that are moving into this technology, and they are looking to us to help them get to market more quickly because of our presence with the rest of the ecosystem.

Yes, appreciate that. And I know there's a lot of focus on the upstream communication market. Coming from an industrial background, what I got very excited about was the downstream opportunity. And I think we're seeing that with the strength in the EISG segment, the Industrial Electronics segment. You mentioned new customer adds. Can you talk about that process of 5G filtering downstream, what it means for maybe all these like smaller industrial companies or auto, semi? And then ultimately, kind of how you see that, like is it expanding the total addressable market? Like what is that doing for the company?

Yes, I'll speak to that a little bit. So use auto as one example. The OEMs and the existing supply chain has been extensive for decades. I mean it's 120-plus years of the internal combustion engine, a lot of innovation around that electromechanical device. But in the last 20 years, and going forward for whatever, a couple more decades, the innovation is around the electrification and the connectivity of these vehicles. These are competencies these very large and capable companies don't have, whether it's the sensor technology that's being used to guide the car and communicate with other sensors, whether it's the C-V2X, which is based on 5G that communicates to the network, whether it's the charging infrastructure, whether it's the semiconductors, the computers, the batteries themselves, the power management systems, all of these changes are occurring at the same time, relatively speaking, and they're all crossing into areas of domain expertise of Keysight. So that's we're forming solutions to help them with this. And again, more or less, they're all derivatives of communication, whether it's high-speed optical communication within the vehicle, whether it's 5G wireless communication to the external environment or whether it's millimeter wave radar and LiDAR technology to help steer the vehicle. So that's an example. And I think the key for us is we're able to leverage years or decades of IP and experience and bring them from 1 segment like commercial comms into another segment like automotive.

Yes, absolutely. So I know it's been some time, the last time the company gave a growth framework, it was essentially 3% to 5% market growth, if I remember correctly, and about 1% or so of Keysight outgrowth. When we look back over the last 4 years, the company has been growing at an annual rate of about 10%, so well above the target. I think about that delta versus the 10 versus the 4 to 6, is that more so driven by stronger market growth? Or just an accelerating rate of Keysight share gains?

I think both of those things are true. I think the market has outperformed our market expectation, and we've clearly taken more than 1 point of share, I think, on an annualized basis over that period of time. I think if you look across these end markets that we serve, and over that horizon and even as you look out into the future, there have been these strong secular drivers pretty much across the board that are driving investment levels. And again, with our focus on the R&D lab increasing, you are -- kind of that thesis around increased durability, cyclicality is playing out. And so you're not seeing those -- the ups here being offset by downs to other places. So if you're thinking about those secular drivers, you're looking at 5G investment in R&D, the deployment of 5G. On the wireline side, going back in time, it was the 100 gigabit rollout, but now it's 400 gigabit that's being deployed, 800 gigabit and even terabit are happening and are being invested in an R&D. U.S. has had 6 consecutive aerospace defense budgets that have gone up, and the research development test and evaluation line item that we most care about has gone up even more than the budgets in total. So there's this alignment and the need to invest in defense technology. As we look forward, we're seeing the NATO allies talk about increasing their defense spend on a percent of GDP basis. So that bodes well as we look forward. You move into the electronic industrial section, and it's EV and AV investments, which again, that's a greenfield area for us. When you think about the internal combustion vehicle, that was a mechanical engineering device, and we help electrical engineers. So this is a new area that we really didn't service that industry previously, and we're in the process of building a very nice business. And then, of course, the semiconductor boom, driven not just by shortage -- chip shortages, but by move to smaller process architectures and the R&D associated with that. And now you've got this new kind of nationalistic element. The assurance of chip supply is critically important. It's leading to the re-onshoring of fabs, right? Fabs being built in the U.S., in Europe, in Japan, all these places. And as that -- because of that fab capacity, it takes a long time to bring on board, we're right now getting positive demand signals from our semiconductor customers into 2025. And so I think it's increased market growth for sure, but then it's this breadth of portfolio, it's the pivot that we've made towards complete solutions with the software content, with the services content. And what are we ultimately selling to our customers? We're selling them time-to-market advantages. And so we've done better at taking share than we had laid out.

Appreciate that. And when I think about all the secular drivers you just laid out or just kind of more broadly the structurally higher level of importance of electronics and connectivity in the industrial market. I don't think anyone really thinks those trends will go away. So I guess my question is given all these secular tailwinds, what is needed to kind of push down -- or what would be the driver? What should we look out for as we're thinking about, okay, when does this market actually kind of go back to that 3% to 5%?

Yes, it's a good question. So I mean, certainly, we're out there watching all of the news, right? Jamie Dimon says we're in a hurricane. Goldman Sachs says there's not going to be a recession, right? There's a lot of competing news out there. I'll tell you what, we -- right now, we do not see a lot of kind of negative downward pressure on demand. The secular drivers I just outlined are pretty strong across these end markets. And so we continue to remain bullish. And I think the other big advantage that we have and maybe one of the positive outcomes of the supply chain situation we all find ourselves in, so we do have elevated backlog and that serves to derisk, say, for us because we don't put an order on the books that we don't believe is shippable within 6 months, certainly just derisks the next 6 months of revenue. And we have good visibility in the funnel to the next 6 months of orders, which will be revenue after that backlog has played out. And so I feel like we have a pretty good visibility out pushing 12 months at this point. And so we're watching the macro, for sure. But I think in the tail part of your question, you've got to it. It's -- again, we're tied to R&D budgets. And our customers, they want to invest through the cycle. Those R&D budgets tend to be very stable and growing. They're certainly much more stable than the manufacturing markets we were previously exposed to.

Appreciate that. And then I wanted to touch on the market share gain part of the question. And one thing that as I was learning about the company that really stood out is just the scale advantage you have versus your competitors. Our work kind of says, you guys -- roughly 4x kind of the closest competitor. Mark mentioned before the ability to kind of leverage R&D spend across verticals. So I guess my question is how -- you guys spun out from Agilent. You unseated a lot of competition. Now you're the incumbent. You have $800 million of R&D annual spend, over $1 billion of free cash. How does somebody come in and unseat Keysight and take these outsized market share gains back to the 100-or-so bps?

Well, let me speak to what we've done to prevent that from happening and then we can talk about anything else that could happen. So as you pointed out, Chris, we have -- we're the largest and we've scaled substantially, not only in R&D, but in go-to-market and sales. We've more than doubled our number of sellers in the last 5 years, and we're now ramping that sales productivity, which is helping us to reach more customers. I mean we faced some really heavy headwinds with Huawei in China, and we pivoted to other customers because we have a large sales force that's nimble and able to leverage our solutions to other customers and other industries. And that's just one example. The other thing I would say is we are selling more to our legacy installed base. As you pointed out, we've grown our software business and our services business faster than the rest of the core. One of the ways we're selling software is shifting left, moving up further into the customer's design process. While they're modeling and simulating effective next-generation designs, we're selling them stand-alone software to do that with our PathWave design and test portfolio. And because we're not a stand-alone software company, but we have that product and those solutions that link to our actual products and hardware solutions, they can move them into design verification and then ultimately conformance testing in a very seamless fashion. So by focusing on software and by delivering more complete solutions, the market share is realized by selling more different things to our existing customers while we're adding about 2,000 new logos every year to the overall set of customers that we have. And I think we're still pretty early on in the journey of expanding this part of our business. The services element is another key differentiator because it's very sticky. As we sell these solutions, some of our customers have hundreds or thousands of them that are being updated, maintained, improved. And through that, we are selling services to do that work, right, not only to calibrate them as the needs to happen on an annual basis or repair them when they need repair, but also consult with them, sell professional services. And as we convert more of those into contracts and enterprise-level agreements, that becomes a pretty tough barrier of entry. So I think the key for us is staying out in front, being first. We started out as first. We made that as a strategic declaration in 5G and in other markets. We just introduced this radar scene emulator to help the autonomous vehicle design work that couldn't be done before. We did that in January. We're getting orders for that now. So being first is very important, especially with these generational cycles, and we intend to stay first.

I totally agree with that, and I would just add that the $800 million in R&D is something that's -- because of our scale is something that others don't really have the ability to do. And we're deeply embedded at this point with the market makers across these industries. And so we have engineers in their labs every day. They're sharing road maps with us. It's informing our R&D investments and how we allocate that funding. We have, by far, the broadest portfolio of solutions and tools. And in order to build the complete solution, you have to have the building blocks. You have to have a broad set of building blocks. And so the fact that we have so many hardware and software and services capabilities that we can cobble together to solve and put together a complete solution for the wireline networks or the wireless customers or the auto customers, that toolkit is critical in our ability to do that. And again, it's a differentiating factor as we look forward.

Yes, absolutely. And just kind of following up on some of the comments around software. Software is kind of all in the same vein of capacity to invest, capacity to stay ahead of your customers. Software businesses are expensive to develop and usually very expensive to buy as well. So is that this kind of the same dynamic that the test market, like many markets, is moving quickly towards software? Is that kind of a moat around your business, just again, capacity to invest stickiness of the installed base in addition to all the other good things software brings like growth accretive, margin accretive, all that?

Yes. Well, so I think there's the stand-alone software that's enabling the speed of early design work. And as Neil pointed out, it's all about getting to market first, so time to market. And we're moving that, evolving that to creating more of a digital twin environment, right? So that's the evolution of that. All of the solutions that we are providing that conform to a standard and even some other ones, but that's the easiest way to think about it, those standards, as they evolve, create more complexities, whether it's frequency or band combinations and certainly the protocol. So it's a necessity that we have, the stack and the application test and even the user interface test to help customers work through these required changes to that part of the business. And that's where we've seen a lot of growth is not only in the adoption of new solutions that utilize the software where a lot of our IP is. About 60% of all of our R&D engineers are software engineers. Many, if not most, of our customers' engineers are software engineers. This is where the IP is. And if you look at these different releases going back to 5G, again, most of it is software based. It's triggered through the evolution of the protocol. So we absolutely know that, that is what's required to get the outcomes that our customers are looking for. And then I think when you bring it back and add the services to this and look at what the outcomes we're trying to create, this is what differentiates us because, again, especially when you get into new verticals, these -- our customers used to have huge staffs of testing, who would have many, many engineers not designing any product, not adding anything to the top or bottom line, but they were testing. And we are now -- with the shortages of electrical engineers, combined with this increasing complexity of what problems they're trying to solve, it triangulates back to the total solution, which more and more is enabled through software. And then the last thing I'll say is we are pivoting our business model, how we license the software, moving more and more to a subscription-based, which is good for us because it creates a recurring nature of the business. But as these are updated not quarterly, not monthly, but weekly or even daily, because of the evolving nature of the technology, customers expect to have a subscription. That's the best way to get the technology.

Yes, appreciate that. And then, I guess, maybe pivoting from software to margins. I know software is a very material tailwind to company margins. Now if I look back over the last 3 years, the company has grown its operating margin by 900 basis points, a roughly 60% incremental margin over that period. I guess I understand maybe that level is not sustainable. I guess kind of two questions. One, was that level of growth very much driven by software, both organic growth and M&A? And then going forward, what should we expect for the margin outlook going forward?

Yes. I think it was driven by software, both directly and indirectly. Obviously, there's high margins associated with software, and software has been increasing as a mix of the overall portfolio. But as we've made this pivot from effectively selling tools to selling solutions, we're increasing -- of which software and services are value component, that we're increasing the value that we're delivering to customers. And obviously, we have a greater ability to monetize that value. So we find higher margins in that solution space, some of it directly attributed to the software. But some it's just attributed to the value that you're bringing to them, again, most commonly in the R&D lab, measured in terms of their own time to market. But if you peel the onion on the operating margin improvements and it's similar improvement by about 1,000 basis points, I think, actually on the gross margin lines, you're looking at -- it's leverage, leveraging growth, leveraging the G&A infrastructure, it's pricing. And Mark, he knows, we spend a lot of time working with the sales force getting them to sell the value, don't run to discounting, right? They get paid based on how well they negotiate as an example. It's working on the order fulfillment side to keep input costs under control and design in lower-cost parts, all of those types of things work in concert to drive this end result. It's no one thing.

I think the go-to-market is a part that's maybe overlooked. And it really is critical. For 5 years, we've been paying the frontline sellers to sell value. We're training them how to do that. We're giving them AI-based tools to do it better. So that's one thing. It's a very blunt instrument. You pay sellers to create the outcomes you look for. I would also say that as the mix of our revenue moves from products that are more comparable to solutions, which are less comparable, the value that is delivered is measured differently by our customers. And we've been successful with monetizing that. And the combination of creating and then capturing that value, you have to do both, is something that we're continuing to put a lot of attention on.

And the company as I have spoken to kind of -- again, incremental margin targets of roughly 40%. I guess, as we look out over the next 2, 3 years, is that still the target, what we should expect? And is that only on the organic business? Because I know the M&A track record is very software-focused as well, which is quite margin accretive.

Yes. So the 40% incremental, when we grow mid-single digits or better, that's an organic target. And obviously, depending on what we do in the M&A space, we apply an appropriate model. But you're correct that our acquisition's backward-looking, and our funnel forward-looking tend to have a software bias to them. I think you mentioned the 3-year period. I certainly think that's the right long-term model with which to be thinking about Keysight. I think in the current environment, at the margin, does the inflationary environment make that easier or harder? No doubt, it makes it harder, right? And so we're continuing to work towards it, but there are challenges. And then the other thing which I've talked about over the last couple of quarters is we are going to see some of the costs that went away with COVID starting to return into the P&L, most notably facilities costs as our employees return back into the office and travel costs, right? And so we expect that to start happening at the beginning of this fiscal year. Then Omicron happened, and we, for the third time, delayed return to the office. But we're now really starting to turn that back on in earnest. And I think that, that will be a slight headwind to this for, say, a 12-month period of time once it gets going.

Appreciate that. So for the last kind of few quarters now, the book-to-bills have been running solidly above where they are at historically. Obviously, it's giving the company a backlog. The commentary, and correct me if this is wrong, it always seems like the bottleneck to revenue really is chip allotment or maybe supply chains more broadly. Last quarter, it seemed to pick up. You guys kind of -- it seemed like there are some Keysight maybe active management going on kind of freed up capacity. Can you just maybe talk about that bottleneck? I guess, from an industry perspective, is the expectation that's going to get better? And then also some of the self-help type initiatives you did, and I would presume those would continue like that sort of practices you're learning.

That's right. Yes. So supply chain clearly, clearly a challenge. I guess I would start by saying, we see basically a wholesale disconnect between the demand signals that are measured right now in the incoming order rate. And what you see in revenue is really a function of what's showing up on the supply side of our -- the receiving dock of our factories, right? That's a function of what's going out. That's what really drives what's going out the door. And there's a pretty significant disconnect between those two things. I think hard for us to say at this point that the supply chain -- we had originally said we expected some supply chain improvement in the second half of this year. And our fiscal second half just began in May. We're no longer saying that. I mean I think it's -- we have a hard time with the China shutdowns around COVID point to any improvement that we've seen at this point in time. That being said, we've continued to ramp revenue. We're continuing to work with our suppliers to get the supply that we need. I think we have not immunity, but some maybe increased resiliency relative to others because we're vertically integrated. We have our own fab. We do our own packaging technology. So for a lot of our custom ICs, of which there are a lot, given the performance levels that are required in test and measurement, we control that supply chain, and it's not an issue for us. I think -- but it continues to remain a challenge, and I think we'll continue to manage it. And then I think the second part is like what are the things that -- what are some of the things that we've done? I think the biggest thing that's starting to have an impact is rewind 6 or 9 months, we've pivoted a portion of our R&D resources from kind of product development to manufacturing optimization and working in conjunction with our fulfillment teams to say, hey, this particular product has got lead times that are now 52 weeks or 75 weeks or whatever it is. And what are the other alternatives that are out there? How do we redesign -- we relay out boards, qualify second sources, find some other alternative to this part that we can't get that we can get in a reasonable period of time. And we're doing that across a reasonably large number of insertion points, and it is starting to have an impact. And again, it's not a supply chain improvement, but it's starting to unlock our ability to ship product. And I think -- again, I step back at the highest level, I think we've done a good job managing through this and getting product into the hands of our customers. You hear a lot of these kind of disaster scenarios about lead times pushing out a year and other things. Over this whole thing, we've seen our kind of average lead times push out about a month. I mean -- and so that's not a catastrophic extension in the eyes of our customers, particularly in the R&D lab, right? They can plan for that. They can adjust their ordering patterns and still get stuff on a time line that's acceptable to us.

And just kind of following up on that, is that why the company is confident that the backlog will be realized? I know this is -- investors across really all of my coverage, there's a lot of maybe skepticism around backlogs. People are worried about things, like double ordering. Is it just the fact that you haven't given customers a reason to double order because, again, 1 month isn't 75 weeks?

Yes. So I think there's a couple of things. And Mark, I'll let you comment here. But first of all, we don't put an order on the books and let's ship well within 6 months. So we have a relatively short duration backlog compared to others. Second of all, one of the things that happens in other places, they placed an order on company A and an order ongoing on company B and see who gets there first. Well, as we've just talked about, a lot of what we're doing is in the solutioning space, highly differentiated product. They don't really have another place to go to get the same kind of capability. And then we're selling into the R&D lab. We're not selling into the manufacturing line. We're not selling components that go into some other product. We're selling the tools that they need. And we can go back and track buying patterns and communications over a long period of time. And I'll let Mark talk about it, but we have a high degree of confidence in the quality of our backlog.

Yes, not much to add other than this is really an enhancement to this collaborative customer interface that we've been creating since spin. And that means that we're involved actively with customers in their projects and in their design cycles. And if anything, this has opened up the door to go deeper into the future. We're not taking orders beyond 6 months, but we're having conversations because everyone knows what's happening. This isn't something that's happening. The Keysight is not something that's happening to our customers, it's happening to the world. So we don't have to spend any time wondering why we're having conversations. And I would say in the last, I would say, 4 to 5 months, I've spent 2 or 3x the amount of my personal time with customers looking over the horizon, so that we stay in sync. And we track this. We have metrics. We look at what customers ask for and we look what we can deliver. And as our deliveries get longer, their ask for goes up because we're staying in sync. We're not surprising each other. So that's a silver lining. And then we always obviously track cancellations, and we're running well below our long-term historical average going back many quarters, certainly as long as the supply chain crunch has been in place, again, showing us that there is continuing solid demand. And I see no evidence of any double bookings. And the last thing is because it's not commoditized parts or even products, more of it's more complete solutions, it's just not practical to double buy, so...

Yes. No, appreciate that. Can you talk a little bit about the business with the U.S. government? It sounded like there was some softness in the last fiscal quarter. The budgeting process, obviously, a little bit prolonged with a lot going on in the world. Can you just maybe talk about the outlook there, kind of have things kind of got back going again? What should we expect with that business?

Yes. It's real simple. So about half of our aerospace defense business is from the U.S. and all of that, one way or another, is tied to the budgeting process and the approval of the defense spend which happened late. We had continuing resolution until March, which took half of the government's fiscal year. So once that's approved, then it goes from the Pentagon and Congress to eventually the departments who own the programs. And then they decide, prioritize within the programs, which ones go first. And then that ultimately either is deployed through direct government interaction with Keysight or through the prime contractors. And typically, it's more through the prime contractor. So when we -- our fiscal Q2 ended at the end of April, we were 6 weeks into this process, it takes longer. So that's what's going on. As Neil mentioned, the defense budget and the RDT&E line item, in particular, is higher. Every part of our thesis and our investments on the long-term trends around defense modernization are solid, not only in the U.S. but in Western Europe and other friendly nation states. And we're -- I'm very optimistic about where we're going. We have a strong funnel, and we'll see what happens over the coming months.

I appreciate that. It's only 1 minute left. I want to finish with this. This is a question I often get from investors. I think investors have some trouble modeling out Keysight maybe over multiple years. And essentially, if a company sells components into, say, production, they'll say, okay, well, I know where auto production is going -- I think it's going to be, and I kind of model it with that. Keysight, it's more of a capacity play. And just more on the hardware side, obviously, than software service, which has the recurring nature. And kind of the view is, well, how do we know that they -- more capacity is needed 2 to 3 months from now? Clearly, customers have been buying a lot of capacity over the last kind of year. I guess, kind of what gives you confidence that more hardware capacity is needed?

Yes. I guess I'd just point you back to the kind of discussion we had about R&D budgets, right? And our customers continue to invest in new technologies. Technologies continue to advance. Those budgets are stable and growing over time. They're far more stable than other things in times of macroeconomic turmoil. And we have, I guess, great confidence in technology moving forward and the solutions that we're bringing to help enable customers to bring technology to market.

Yes. Well, I appreciate that. Well, we're up on time. But thank you, Neil. Thank you, Mark. Really appreciate the time. I know every time I speak to you guys, I learn more about the business, so I'm hoping it's the same for everyone in the audience. So thank you, both.

Thanks, Chris. Thanks for having us.