Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal First Quarter 2022 Earnings Conference Call. My name is Elliott, and I will be your lead operator today. [Operator Instructions] Today, Thursday, February 17, 2022, at 1:30 p.m. Pacific Time.

I would now like to hand the conference over to Jason Kary, Vice President, Treasurer and Investor Relations. Please go ahead, Mr. Kary.

Jason Kary - Vice President, Treasurer and Investor Relations

Thank you and welcome, everyone, to Keysight's first quarter earnings conference call for fiscal year 2022. 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. You can find the press release and information to supplement today's discussion on our website at investor.keysight.com. While there, please click on the link for quarterly reports under the Financial Information tab.

There, you will find an investor presentation along with Keysight's segment results. Following this conference call, we will post a copy of the prepared remarks to the website. Today's comments by Ron and Neil will refer to non-GAAP financial measures. We will also make references to core growth, which excludes the impact of currency movements 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 the company's recent SEC filings for a more complete picture of our risks and other factors. Lastly, I would note that management is scheduled to participate in upcoming investor conferences in March, hosted by Susquehanna, Morgan Stanley and Credit Suisse.

And now I will turn the call over to Ron.

Ron Nersesian - Chairman, President, and Chief Executive Officer

Thank you, Jason, and thank you all for joining us. Keysight delivered a strong start to the year. First quarter results are evidence that our broad-based portfolio of differentiated solutions is aligned with the market's most important design and test challenges. We are enabling our customers to address rapidly evolving technologies and market opportunities. Today, I'll focus my comments on three key headlines. First, we continue to see sustained robust demand with record orders again exceeding our expectations.

Growth in the quarter was broad-based and balanced across our diverse set of end markets and across all regions. Orders grew 22% year-over-year and were 31% higher than the first quarter of 2020, just prior to the initial impact of the COVID pandemic. Second, record first quarter revenue and earnings per share exceeded the high end of our guidance despite ongoing supply constraints. Our results and exceptional execution by the Keysight team continue to demonstrate the durability and resilience of our business. And third, Keysight solutions are aligned with the long-term secular trends fueled by ongoing innovation across multiple markets.

Our investments in growth initiatives and supply chain resiliency are paying off. We continue to expect to deliver 6% to 7% revenue growth for the year, and given the stronger-than-guided first quarter earnings, to achieve 12% earnings growth. We are confident in the strength of the company we built and our ability to drive above-market profitable growth over the long term. Accordingly, with the recent equity market volatility, we capitalized on the opportunity to create value for shareholders by accelerating our share repurchases in the past two quarters.

Now let's take a deeper look into our first quarter results. We delivered another quarter of record orders, which grew 22% to $1.5 billion. This outpaced record first quarter revenue, which grew 6% to $1.25 billion. We achieved gross margin of 66%, operating margin of 28% and EPS of $1.65, all of which were first quarter records. Although supply constraints continue to moderate revenue, Keysight's consistent execution and focus on growth initiatives across the 5G ecosystem, automotive and software position us well to capitalize on a robust demand environment. The Electronics Industrial Solutions Group delivered double-digit order and revenue growth for the sixth consecutive quarter.

Record orders were driven by strong demand for automotive and semiconductor solutions as well as broad general electronic applications. Our differentiated solutions position us well to win in the fast-expanding automotive market, where we achieved all-time record orders and record first quarter revenue. Orders grew well over 50% in the quarter and exceeded 50% growth over the past year. Manufacturing capacity continued to expand to meet pent-up demand, and the EV and AV technology investment accelerated. This happened particularly in Europe and China, where EV market share of total car sales in 2021 increased to 19% and 15%, respectively.

Demand remains strong from leading manufacturers for both EV and AV production test solutions, power semiconductors, automotive electronics and RF and millimeter wave wireless test. Keysight continues to engage with global industry leaders such as BMW, Sony Semiconductor Solutions and Proventia to enable next-generation technologies across the automotive R&D and production workflows. Strong demand for our semiconductor solutions drove double-digit order and revenue growth and resulted in record orders and record first quarter revenue.

Investments remain high in advanced semiconductor technologies and capacity expansion to serve a broad set of applications, including silicon-rich smartphones, high-performance computing, IoT and autos. In general electronics, we achieved record orders with double-digit growth across all regions driven by investment in manufacturing and device development for consumer and industrial IoT, digital health, connectivity and remote monitoring.

Turning to the Communications Solutions Group. We delivered record first quarter orders and revenue with double-digit order growth across all regions. Commercial communications orders achieved the second-highest quarter on record with double-digit order and revenue growth in the Americas and Europe. We see continued strength in 400G and 800G Ethernet solutions for enterprise and service provider customers as well as increasing demand for terabit communication solutions. Driven by the ongoing investment in data center and cloud applications, orders for Keysight's differentiated, high-performance, real-time oscilloscopes grew triple digits this quarter.

Keysight's leadership in 5G Release 16 applications, broad test case coverage and our strategic role in O-RAN are enabling our expansion across the broad communications ecosystem. Our 5G customer base is growing as deployments begin to scale, and we are enabling disruptive technologies with key industry players, such as Qualcomm to demonstrate 3.5-gigabit uplink data throughput, Chunghwa Telecom in Taiwan to accelerate verification of O-RAN connectivity, KT Corporation in South Korea to verify advanced 5G new radio features and LG Electronics to demonstrate 6G radio frequencies.

Investments remain strong in 5G wireless R&D and manufacturing as well as networking as market expansion transitions to devices, network equipment and the aerospace, defense vertical. In aerospace, defense and government, double-digit order growth was driven by demand for signal monitoring, cyber, space and satellite as well as 5G and 6G applications. Demand was particularly strong in Asia Pacific and Europe. As design, test and measurement solutions grow in complexity, software and services are an increasingly more important differentiator for Keysight.

Combined, they represented more than 1/3 of total revenue this quarter, increasing recurring revenue and contributing to the resiliency and predictability of our business. In summary, demand remains strong for Keysight's software-centric portfolio of differentiated solutions across all of our end markets and regions. Since the pandemic began in 2020, Keysight has been focused on supporting our customers and delivering on our commitments. We have implemented new sourcing strategies and increased partner engagement to improve supply chain flexibility, diversification and resilience.

While fully focused on our near-term priorities, we continue to work towards a long-term sustainable vision for the company and for the communities in which we operate. The Keysight leadership model drives us to deliver business value through ethical, environmentally sustainable and socially responsible operations. Corporate social responsibility is an enabling value of the KLM, and we are proud to have been included in the Dow Jones Sustainability Index for the third year in a row. Keysight's inclusion exemplifies the company's continued commitment to building a better planet.

This includes ambitious targets that support several UN Sustainable Development Goals, such as our commitment to achieve net-zero emissions in our company operations by fiscal year 2040, 10 years ahead of the Paris Agreement goal of 2050. As we accelerate innovation to connect and secure the world, we are better positioned than ever to deliver value to our customers, shareholders and employees.

Now I will turn it over to Neil to discuss our financial performance and outlook in more detail.

Neil Dougherty - Senior Vice President, Chief Financial Officer

Thank you, Ron, and hello, everyone. Q1 was a great start to fiscal 2022, and our full year outlook exemplifies Keysight's ability to deliver on our commitments. In the first quarter of 2022, we delivered revenue of $1.250 billion, which was above the high end of our guidance range and grew 6% or 7% on a core basis. As expected, supply chain constraints continue to temper revenue results. We delivered a record $1.495 billion in orders, up 22% or 23% on a core basis. We ended the quarter with over $2.3 billion in backlog.

Turning to our operational results for Q1. We reported gross margin of 66% and operating expenses of $473 million, resulting in an operating margin of 28%. We achieved net income of $305 million and delivered $1.65 in earnings per share, which was above the high end of our guidance. Our weighted average share count for the quarter was 184 million shares.

Moving to the performance of our segments. Our Communications Solutions Group generated record revenue of $878 million, up 3% on both the reported and core basis. CSG delivered record gross margin of 67% and operating margin of 27%. In Q1, commercial communications generated revenue of $584 million, up 5%, with double-digit revenue growth in the Americas and Europe driven by continued investments in 5G, O-RAN adoption, 400-gigabit, 800-gigabit and terabit R&D and wireline applications. Aerospace, defense and government revenue of $294 million was flat versus a strong prior year compare.

Solid growth in Asia Pacific was offset by supply chain constraints that impacted revenue in the Americas and Europe. This was our fourth consecutive quarter of double-digit order growth in aerospace, defense and government, and the funnel remains strong for this end market. The Electronic Industrial Solutions Group generated first quarter revenue of $372 million, up 13% or 15% on a core basis, driven by strong revenue growth in semiconductor and automotive. EISG reported gross margin of 63% and operating margin of 31%.

Moving to the balance sheet and cash flow. We ended our first quarter with $2 billion in cash and cash equivalents, generated cash flow from operations of $224 million and free cash flow of $182 million or 15% of revenue. Under the new share repurchase authorization announced in November of last year, we have acquired 1.13 million shares in the quarter at an average price of $182.19 for a total consideration of $206 million. Now turning to our outlook and guidance.

Demand remains strong for Keysight Solutions. However, supply constraints continue to moderate shipments. We expect second quarter 2022 revenue to be in the range of $1.290 billion to $1.310 billion and Q2 earnings per share to be in the range of $1.63 to $1.69 based on a weighted diluted share count of approximately 183 million shares. Assuming a loosening of the supply situation in the second half, we continue to expect full year revenue growth to be in the range of 6% to 7% while delivering 12% earnings growth.

The raised EPS growth expectation reflects ours higher-than-expected Q1 earnings. In closing, the demand environment remains strong across our end markets and regions. With a record backlog position and a strong track record of operational excellence, we are confident in our ability to meet our customer commitments and continue to deliver profitable above-market growth going forward.

With that, I will now turn it back to Jason for the Q&A.

Jason Kary - Vice President, Treasurer and Investor Relations

Thank you, Neil. Elliott, will you please go ahead and give the instructions for the Q&A?

Question & Answers

Operator

[Operator Instructions] And the first question comes from the line of Tim Long from Barclays. Your line is open.

Tim Long - Barclays - Analyst

Thank you. Yes. I was hoping you could talk a little bit more about the 5G end market maybe as it cuts across your business. Could you talk about kind of the revenue order momentum there and maybe touch on some of the newer areas? I think you mentioned O-RAN, but could you talk O-RAN private networks millimeter waves, some of the newer areas that are contributing to growth there?

Satish Dhanasekaran - Senior Vice President, Chief Operating Officer

Yes. Tim, this is Satish. We have another strong quarter in our commercial communications business driven by 5G and all the wireline evolutions. Specific to 5G, I think as I've stated before, we see near-term and medium-term catalysts that remain intact.

If you look at it more near term, I would say, the ongoing global deployments that are scaling continue to drive demand in both R&D and manufacturing offerings. Specific to R&D, the Release 16 is really aimed at some of these new use cases with industrial applications and private networks in particular.

Longer term, we remain bullish about millimeter wave and its adoption. But in the medium term, the applications such as O-RAN are really growing the ecosystem of opportunities for us. in We just added over 100 new customers into our 5G platform in the most recent quarter. So very strong growth in the 5G applications for sure across both R&D and manufacturing and deployments and across the globe. So broad strength.

Tim Long - Barclays - Analyst

Okay. I'm sorry, if I could just follow up. It sounds like you've already had a few 6G announcements. Can you talk a little bit about kind of the cadence of when you think that will start to impact this business? Is this still a few years out? Or are you starting to see some real traction with some of the larger players in the industry? Thank you.

Satish Dhanasekaran - Senior Vice President, Chief Operating Officer

Yes. We're still - if you look at it from a standards perspective, we're still in Release 16. Release 17 is just getting started, and you've got Release 18 being planned. So there's still considerable time to go with 5G evolution. That will continue for quite some time. But the industry is also looking at what's the next wave of innovations, 6G on the wireless side.

On the wireline side, terabit Ethernet is definitely an area where there's a lot of advanced research happening both on the wireless and wireline side. And Keysight, given our strong strategy of focus on building out the workflow for the communication cycle system, we're engaged in those advanced research discussions with multiple consortiums around the globe. And we've already started to get some early research business, which positions us for continued leadership over time.

Tim Long - Barclays - Analyst

Okay. Thank you very much.

Operator

Our next question comes from the line of Samik Chatterjee from JPMorgan. Your line is open.

Samik Chatterjee - JPMorgan - Analyst

Hey. Thanks for taking my questions. I guess I'm just trying to get some help in understanding the divergence here between the order growth and the revenue outlook. This is, I think, the fourth quarter where you've expanded orders by more than 20% year-on-year.

And when we look at the revenue outlook, obviously, that's materially below that. How should we think about it? Sort of is there more of unwind into the revenue or some realization of revenue or supply chain eases? Or is that - is the order strength driven by a lot of early ordering or sort of long-dated orders?

And in particular, if I can just ask one follow-up there. If - how are we thinking about the same divergence between ADG and UC remaining flat for the last couple of quarters versus what you talked about in terms of strong order increase? Thank you.

Neil Dougherty - Senior Vice President, Chief Financial Officer

Yes. So this is Neil. So I think, first of all, I would say that the order growth, we believe, is indicative of the highly - or the very strong demand environment we're seeing across the wide range of end markets, right? Within EISG, the semi auto market is very strong. The surge in manufacturing driving strength in general electronics.

In the communications side, we're seeing great strength in 5G, as Satish just talked about, but also 400 gigabit, 800 gigabit on the networking side as well. And so very strong demand, and I think that's reflected in the order strength and in the growth you're seeing in orders.

On the revenue side, obviously, we continue to work through significant supply chain challenges. Our revenue is significantly constrained by the supply environment, and we're working through that. We have said on prior calls that we have seen lead times to our customers extend by about a month, and that month extension has really happened over the course of the last two years, really from the onset of COVID back in the spring of 2020.

And I think the good news is that our customers have responded to that and are placing orders with Keysight a bit earlier so that they can still get product delivery on a time line that meets their needs.

And I think we're doing a good job getting product into the hands of our customers on those time lines. I think if you turn the lens forward, what you're going to see as the supply chain situation starts to improve, and we hope to see that beginning in the second half.

But certainly, we expect to see some supply chain constraints through 2023, that our lead times will slowly start to migrate back in over a number of quarters. And similarly, our customers will once again readjust their ordering patterns to, again, align them with their own need for delivery. Why don't I turn it back to Mark for some more comments on the demand side.

Mark Wallace - Senior Vice President, Global Sales

Yes. Thanks, Neil. I think you covered it well. I just would add that - reiterating the demand remains strong. It was very strong in Q1, very broad. We saw some earlier orders placed in distribution as an example, where the channel inventories are low because of the demand that we've seen there. So that's to be expected.

We also saw some early orders from semiconductor, which is typical. They have longer-term horizons, and we work with them in that fashion. But the headline is our strong double-digit order growth. It was not an outcome of advanced purchases.

And on the plus side, as Neil mentioned, we are now working with customers much earlier than we may have done in the past. We've always had deep relationships. But the outcome is we're getting better visibility to their forecast and their forward-looking plans, which I think will sustain for the long term.

Samik Chatterjee - JPMorgan - Analyst

Okay. Thanks.

Operator

Our next question comes from the line of Meta Marshall from Morgan Stanley. Your line is open.

Meta Marshall - Morgan Stanley - Analyst

Great. Thanks. Maybe following up on Samik's question. Just in terms of supply chain, would you say that conditions largely stayed the same in fiscal Q1 over fiscal Q4? Or was there any kind of material tightening that you saw kind of in any of the categories?

Just trying to get a sense of whether it remains constrained or whether you started to see some improvement or worsening. And then maybe second question. Obviously, we've seen some valuation rerating on the software side of stocks. And so just wondering if anything becomes more attractive from an M&A environment just as some of these valuations reset.

Neil Dougherty - Senior Vice President, Chief Financial Officer

Yes. So this is Neil, again. So first of all, with regard to the supply chain situation, I think it's safe to say that we didn't see things materially get better within the quarter. I don't think they got worse. I would call it largely the same.

I think we continue to look forward to some relaxation in the second half, and that's still our expectation. But we did not see any acceleration or early signs that that's happening. It's still our expectation, but largely unchanged within the quarter on the supply chain side.

Ron Nersesian - Chairman, President, and Chief Executive Officer

And Meta, this is Ron. With regard to software valuations, obviously, you're exactly correct. The IPE software companies, we've seen the valuations come down. But realistically, when we talk to companies and they've seen - when they see a pullback, they still view their old share price as the price that the company should get a premium to. It normally takes about a year. It depends company by company before they would go ahead and sell at a lesser value. But we're highly engaged at looking at opportunities, looking at things that make sense. And we have a very active funnel right now, including software.

Meta Marshall - Morgan Stanley - Analyst

Great. Thank you.

Ron Nersesian - Chairman, President, and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Mark Delaney from Goldman Sachs. Your line is open.

Mark Delaney - Goldman Sachs. - Analyst

Yes. Thanks very much for taking my question. I was hoping you could comment a little bit more on the P&L outlook for next quarter. Revenue guidance is up sequentially. EPS is relatively flattish quarter-on-quarter. So maybe you can bridge us from some higher revenue. And what's leading to the more flat quarter-on-quarter EPS?

Neil Dougherty - Senior Vice President, Chief Financial Officer

Yeah. So I'll take that one as well. So as we look forward into the second quarter, we do see, as you look at scheduled shipments, some unfavorable mix on a sequential basis as well as kind of continuing impact from other inflationary elements, most notably expediting fees and other things are continuing to impact gross margins.

And I think the other thing is we are continuing to ramp kind of back into our targeted levels of R&D. We were actually sub-15% in Q4, approaching 16% here in Q1 as we look to kind of mid-16% of revenue is more the level. So I'd expect some further increase in that rate of investment in the R&D side of things as well, which is what's leading to the more or less flattish EPS.

Mark Delaney - Goldman Sachs. - Analyst

That's helpful. Thank you. And for my follow-up question was on the comms segment. The company is focused and done a very good job broadening out the exposure into various ways, right in terms of the type of tests you're doing but also the various parts of the industry. And 400 and 800, you guys have been going for some time. So maybe you can level set us on how big 400 and 800G is and how much data center is contributing to that comms segment at this point. Thank you.

Satish Dhanasekaran - Senior Vice President, Chief Operating Officer

Yeah. I'll take this. I think you're right. I mean our strategy to really connect the workflow across the communications ecosystem continues to play out, and our execution remains very strong. At the heart of it, we've been focused on connecting the workflow between the wireless and the wireline parts of the ecosystem. And we see that all of the data that comes through the networks through 5G, as an example, have to ultimately flow into a data center or cloud.

And so as we follow that trial end-to-end, we see significant upgrades happening across the entire communications design flow. And we're participating in a number of those technology trends associated with not only the speed because you referenced with 400, 800 and terabit but also the underlying infrastructure that's changing with the memories, the server technologies and the edge compute as well.

And we're also very pleased with the number of new chipset starts, the design starts that are occurring across the entire industry today. And all of this is contributing to strength, and we saw that reflected in our commercial communications business, where we maintain a good balance between the 5G growth and also the wireline evolutions growth.

Operator

Our next question comes from the line of Jim Suva from Citigroup. Your line is open.

Jim Suva - Citigroup - Analyst

Thank you and congratulations. I just have one question. There's been a lot of news about new building of semiconductor equipment factories and a lot more of like automobiles being more electronics. Given the large long supply chain, I'm just kind of curious, are those big orders already coming into your company?

Or since they have to pour concrete and walls, would those be much more long-dated and not even in your orders at this point? Because it seems like those are long-term multiyear products - projects that will actually extend much more beyond the typical horizon where people may think that we're kind of at the peak of orders right now, which I potentially could disagree with.

Mark Wallace - Senior Vice President, Global Sales

Yeah. Hi Jim, this is Mark. I'll take that. And you're exactly right. The strength that we're seeing today and have been seeing for the last many quarters is around new process technology development and matures technology scaling. But what you're referring to is the global expansion of new fabs in North America, in the United States, in parts of Asia and across Europe. These are multiyear, multibillion-dollar investments that the semiconductor leaders are making, and the vast majority of those investments are well in front of us.

Neil Dougherty - Senior Vice President, Chief Financial Officer

I'd just remind…

Jim Suva - Citigroup - Analyst

That's very clear. Thank you.

Neil Dougherty - Senior Vice President, Chief Financial Officer

…and then, I'd just remind everybody of our order acceptance policy. We generally don't put an order on the books unless it's shippable within a six-month period of time. And so those orders for those longer things - well, in some cases, those customers are giving us visibility to their needs for these future factories and fabs that are going into place. They are not reflected in orders as of today.

Mark Wallace - Senior Vice President, Global Sales

Yeah. I'll just follow-up just to emphasize that. We are talking to all of the semiconductor players and we are working through the planning and preparation for the future. But as Neil said, what we booked today is really based on demand that we can see going out six months.

Jim Suva - Citigroup - Analyst

Thank you so much for the detail. That's appreciated.

Mark Wallace - Senior Vice President, Global Sales

Thanks, Jim.

Operator

Our next question comes from the line of Chris Snyder from UBS. Your line is open.

Chris Snyder - UBS - Analyst

Thank you. I guess my first question is kind of bigger picture. Clearly, the industry is in the middle of a very strong period of demand. The orders were up against sequentially here, the slight negative seasonality. So I guess my question is kind of what pushes the industry back down towards that normalized 3% to 5% growth that Keysight has called out in the past? And is it fair to think that the industry kind of collectively can achieve outsized growth until 5G peaks?

Mark Wallace - Senior Vice President, Global Sales

So Chris, this is Mark. I'll take a stab at that. I think the success that we've achieved and the level of order growth is tied into a lot about what Satish has been talking about, which is connecting our customers' workflows, even goes back to the previous question as it pertains to the growth in semiconductor being fed into demands from multiple different industries all bringing more electronic content together. So that has this compounding effect.

I certainly think that as we get to the maturity with some of these technologies, the capacities will meet certain levels so we can see some of that begin to - the growth begin to turn more to more long-term models that we've been seeing. But as we do so, we look forward to the next generation. And as also we mentioned earlier, the early research that's occurring around 6G and the participation that we have given our leadership position in the market gives us opportunities to continue to drive this high secular growth that we've been delivering for several quarters.

Ron Nersesian - Chairman, President, and Chief Executive Officer

And the - Chris, the 3% to 5% that you're talking about that's for the market, we have clearly done a pretty good job of growing faster than the market quarter after quarter, and we intend to do so going forward. But look at the convergence in semiconductors and how more and more functions are being integrated into semiconductors and everything, whether you're talking about IoT or any of these other apps that we talk about, that demand we're going to see for a long period of time.

Look at automotive. We're not talking about things that will grow for a year or two. Even though we talk about 19% and 15% of the total market being effectively EV in Europe and Asia, I mean, that's going to go up close to 100%. And then we have the Americas, too which is behind. 5G has a ton of runway. And then following that, where we're starting to see early investments in talking is 6G that will follow it.

On top of that, you put quantum. So the use of high-performance electronics is not rolling over, and we don't see that at all in any short- or medium-term situation. And whatever the market growth rate, Keysight's aspirations, goals and results have always been to outgrow the market.

Chris Snyder - UBS - Analyst

Yes. No, I appreciate that. It just feels like so many of the drivers here are secular. That's what I was trying to kind of figure out what pushes this back down to mid-single-digit growth. And you kind of touched on my follow-up. The company has significantly outgrew the market and taken a lot of share ever really since you spun out, but it feels like it's kind of accelerated here. Is there anything that could cause that to compress?

Ron Nersesian - Chairman, President, and Chief Executive Officer

If we were at 65%, 70% share, you could say, “Oh, will it start to flatten out?” We're at roughly 25% market share in total. We have so much headroom. I mean the market is 4 times the size of Keysight, and we're gaining share. We're investing as much as that's needed. We're investing more than anyone else in the industry. We're investing earlier in the cycles for new developments, and we have the credibility with these players to be the chosen partner. And now that we've expanded beyond hardware to hardware to software and services, we provide complete solutions which makes our customers' lives easier. And we help them accelerate their innovation time line. So I'm very bullish on this, and I know the whole team is also.

Chris Snyder - UBS - Analyst

If I just - really quickly on that last point, has the - the industry has accelerated towards software. Do you think that has been a driver of maybe accelerate share gains for Keysight just given your capacity to invest in whether it's organic or M&A relative to a lot of your smaller competitors?

Ron Nersesian - Chairman, President, and Chief Executive Officer

No. I think there is opportunity for us to grow software, and we are. And we've seen that since we launched the company more than double that business, and there's a lot more headroom there. But we see it in a lot of the technologies that are also down in the physical layer where you need both. You need the ability to acquire the signal in a very high-fidelity way at very, very high performance when we're talking millimeter wave and up to terabit, plus you need the analysis capability that's in firmware and then software.

And these are complex problems. You need service and support from people that are qualified to put this all together. And Keysight has all of that. And that's been a real, real advantage for us, and we continue to see that as we continue to expand our investments and our programs in each of these areas.

Chris Snyder - UBS - Analyst

Appreciate all that. Thank you for time.

Neil Dougherty - Senior Vice President, Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Matt Niknam from Deutsche Bank. Your line is open.

Matt Niknam - Deutsche Bank - Analyst

Hi. Thank you for taking the question. Just two, if I could. First, on the U.S. Maybe if you can talk about what drove the sequential downtick in U.S. - or Americas revenue this quarter. I think you'd called out the softness in aerospace, defense. Just curious if that was more tied to supply chain or demand-related. And then we think CSG, gross margins are actually improved about 120 bps sequentially, even though revenues actually were down sequentially. And I think last quarter, you had messaged some initial expectations that there would be more of a negative mix shift in this fiscal quarter. So I'm just wondering maybe what drove some of the outperformance there. Thanks

Ron Nersesian - Chairman, President, and Chief Executive Officer

Yes. Thanks, Matt. I think if you really want to figure out what's going on in the marketplace, orders is the best indicator. And I know some companies don't report orders with as much detail, but we want to give you as much insight as we can. So if you look at the revenue numbers. Sales may not be commensurate with what's going on in the market. In the Americas, for instance, we were up 23%.

Now if per chance, because we're not shipping everything and we're building backlog, which is an incredible position at almost $2.4 billion, that just means we're going to produce a lot more profit later when we clear that out. But the market performance is very strong. And as we continue to improve the supply chain, you'll see the revenue get a chance to work that backlog out over time.

Satish Dhanasekaran - Senior Vice President, Chief Operating Officer

Yes, with regards to the gross margin, you're right, we had a higher software mix this quarter as we continue to progress our strategy of software-centric solutions. And from the aerospace and defense perspective, while the defense budget has been cut in the Americas - in the U.S., we are waiting on the consortiums through the appropriations process that's currently underway, which is expected to occur somewhere between March and April time frame. That should allow for increased program spend for rest of the year and the following year. But if you look at just the aerospace and defense order growth, to the point that Ron made, continues to grow strongly and our multiyear programs remain intact.

Matt Niknam - Deutsche Bank - Analyst

That's great. Thank you both.

Ron Nersesian - Chairman, President, and Chief Executive Officer

You're welcome.

Operator

Our next question comes from the line of Adam Thalhimer from Thompson, Davis. Your line is open.

Adam Thalhimer - Thompson - Analyst

Hi, good afternoon, guys. Congrats on another strong quarter. First question, I wanted to ask about just at a high level, what kind of inflation are you seeing? And then how is the pricing environment? How does the - how does that paradigm work for Keysight?

Neil Dougherty - Senior Vice President, Chief Financial Officer

Yes. So sorry, turn on my microphone, it would help. We are seeing inflation across a number of different areas within the supply chain - or within the cost structure. I think as we noted last quarter, certainly, labor is one of those. We had our largest salary increase cycle in the fall in our seven-year history as an independent company. Certainly, in certain aspects of the supply chain, we are seeing various levels of price increases. Freight and logistics, clearly an area where we're seeing costs go up. Even those companies that maybe aren't raising prices as aggressively are sometimes paying or charging for expedited shipments or to get your spot in line.

And so we're seeing it in a number of different places. And I think as far as our own pricing, I think we're constantly trying to balance our competitive situation with what we're seeing on the cost side and working to maintain margins as much as possible. And I think we've done a good job of doing that so far and would expect to going forward.

Ron Nersesian - Chairman, President, and Chief Executive Officer

When we - if you take a look at this when we launched the company, we were at roughly 56% gross margin, and now we're talking 66% from software, from our hardware differentiation, from leadership positions in 5G, which gives us the opportunity to do a little bit of value pricing. And we're going to continue to work to drive that higher.

Adam Thalhimer - Thompson - Analyst

And then, Ron, just real quickly, you mentioned that orders came in above expectations. Can you give a little color as to what was stronger?

Mark Wallace - Senior Vice President, Global Sales

Yes. Adam, this is Mark. The strengths, as we said before, are really broad-based. All regions were double-digit order growth. two of the four regions - or two of the three regions were record high. We saw double-digit order growth across all of the end segments as well. We added just over 500 new customers to Keysight during the quarter. We've done that every quarter, adding hundreds of new customers across all the different end markets around all the geographies. That's really important to us.

That helps us diversify our business and grow our base, and our business to the base is up very strong double digits as well. So we are really working hard, as I mentioned before, to align our plans with our market-leading customers where we've done very well. And we're also adding new customers and growing the long tail of small- and medium-sized businesses as well. So very, very broad strengths around all the regions and all the end segments.

Adam Thalhimer - Thompson - Analyst

Good color. Thanks, Mark.

Mark Wallace - Senior Vice President, Global Sales

You're welcome.

Operator

Our next question comes from the line of David Ridley-Lane from Bank of America. Your line is open.

David Ridley-Lane - Bank of America - Analyst

Thank you. As supply chain issues ease, how much of a margin benefit could there be? I imagine in addition to the higher freight costs and so on you're carrying now, there's also some manufacturing inefficiencies just related to the component shortages.

Neil Dougherty - Senior Vice President, Chief Financial Officer

It's not obvious to me that there's going to be a margin benefit other than volume that comes from a relaxation of the supply chain environment. I think our factories are continuing to run pretty efficiently. I think we'll need to take a wait-and-see approach, but it's not obvious to me that it's going to be a big margin benefit other than the benefits of volume.

David Ridley-Lane - Bank of America - Analyst

Got it. And are there any data points you can give us around sort of the internal initiatives you've got, new sourcing partners, other things that you're doing to remove some of the supply chain bottlenecks? And just to check, it doesn't sound like Omicron had much of an impact to you incrementally in the quarter?

Satish Dhanasekaran - Senior Vice President, Chief Operating Officer

Yes. So, no incremental impact. Obviously, the constraints in the supply chain are broad, and I think you're hearing this across multiple industries as well, and we feel that. But with regard to the actions that we're taking to maximize, those include internal value engineering activities to find multiple sources for products, looking for alternate sourcing from the open markets. We have strong collaborations with a number of our strategic silicon or semiconductor suppliers and our customers, too.

So when we look at the end-markets demand for Keysight products around 5G, automotive and semiconductor, we have strong engagements with customers and our supply chain so that we're able to coordinate this. And at this point, as Neil mentioned earlier, that we're able to meet our customers' needs a very high percentage of the time. So we're very confident on our ability to process this backlog and convert it into revenue in future quarters. And pending upside from any improvement in the supply chain, we could further accelerate

David Ridley-Lane - Bank of America - Analyst

Thank you very much.

Operator

Our final question comes from the line of Rob Mason from Baird. Your line is open.

Rob Mason - Baird - Analyst

Yes. Good evening. I just wanted to ask about the automotive market. A number of comments around how strong that has been for you and the long runway that exists there. Question is how do you view that market's growth rate over the next few years? And then since it is that the EV and ADAS elements of that market are newer for test and measurement - high-end test and measurement, I'm curious how you think about your mix evolving into that market between R&D and production test or manufacturing tests.

Satish Dhanasekaran - Senior Vice President, Chief Operating Officer

Yes. So I'd say that when we look at the automotive market, as Ron referenced in his script that we see a real inflection in adoption of EV and then a subsequent simultaneous adoption for AV as well, really driving the needs of the automotive market. At a simplistic level, we see a number of new lab activities that are starting in R&D across the globe, where automotive customers traditionally outsourced a lot of the R&D work, but they are now starting to build new facilities for research and development, hiring of electrical engineering talent, hiring of software talent is increasing, and that's really reflected in our R&D business that continues to grow strongly. We see this continuing to be a secular growth driver for us.

With regard to the manufacturing expansion, as you saw the number of EV starts to increase, our manufacturing business in this market also continues to grow. So at this point, I would say the opportunities for us - for Keysight is to expand with a number of new lab starts as the hiring of electrical engineers growth in the automotive market will continue to grow. But we also have the opportunity to increase our solutions content in display. And some of the acquisitions that we have made enables us to play strongly into the battery test and charging arena.

And so, we're positioning ourselves there, along with the C-V2 times stack that we've invested in with our 5G portfolio that allows us to get into this marketplace. In the most recent quarter, we've basically announced at CES the radar scene emulator solution, which again, got a lot of active interest from our customers. So automotive continues to be the area of investment for us. And it's really hard to predict the growth rate, but we're quite pleased with the very strong results we're seeing so far. I'll just hand it off to Mark to make some comments on the funnel.

Mark Wallace - Senior Vice President, Global Sales

Yes. I was going to mention the radar scene emulator. You got that Satish. The funnel is very strong. It's growing. We're seeing a lot of customers look out to Keysight for both EV and AV expertise. You think about all of the changes that are occurring within the customer base as well as the new entrants coming in, dealing with millimeter wave, dealing with high-power semiconductors, charging infrastructure, all of this stuff that we are providing leading solutions to.

So that funnel is growing substantially. The other indicator that I think is very positive is the adoption of our services, which again is another indicator that customers are looking for help in innovating and getting these tough jobs done. So we're attaching a lot more services to our solutions, especially in the EV and the AV space.

Rob Mason - Baird - Analyst

Perfect. That's very helpful. Thank you.

Operator

Thank you, Rob. That concludes our question-and-answer session for today. I would now like to turn the conference back to Jason Kary for any closing comments.

Jason Kary - Vice President, Treasurer and Investor Relations

Thanks, Elliott. Now I'll turn it over to Ron to wrap this up for today. Thank you for joining.

Ron Nersesian - Chairman, President, and Chief Executive Officer

Thank you, everyone, for joining us today. As you can probably tell, we are very pleased with what our team has done to produce consistently excellent results. But I would also love to add that we are very optimistic for Keysight not only in the short term but with the position that we are in for long-term shareholder value creation. Thank you very much, and have a great day.

Operator

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KEYSIGHT TECHNOLOGIES INC

Q1 2022

Earnings Transcript

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