Keysight’s Q1 Surpasses Expectations, but Concerns Surrounding Fiscal-Year Outlook; FVE Cut to $175

We are lowering our fair value estimate for wide-moat Keysight Technologies KEYS to $175 from $180, after it opened its fiscal year with a respectable quarter but provided disappointing guidance for the year based on a weakening demand environment. The outlook fell well short of our previous expectations on both a revenue and adjusted earnings basis along a book/bill ratio of 0.94. While we are disappointed with the outlook for the year, our long-term thesis remains intact as we see Keysight continuing its dominance in testing equipment for critical communications infrastructure and additional growth of its software portfolio to achieve more recurring revenue. Despite an 8% drop in the stock during afterhours trading, we view shares as fairly valued.

Fiscal first-quarter sales rose 11% year over year, slightly surpassing the top end of guidance and our own above-consensus expectations. Despite the sales growth, orders declined 13% year over year as a result of currency impact, its exit of business in Russia, and incremental China trade sanctions, which together represented a 6% headwind. This impact was most detrimental to its large commercial communications customers, who were affected by a demand decline in consumer electronics and computing segments. Overall, the commercial communications segment achieved 8% revenue growth year over year due to continued investments in ecosystems such as 5G deployments, open radio access network, or RAN, and data center networking. The electronic industrial solutions group segment, or EISG, was a bright spot, growing 19% year over year as sales of electric vehicles continue to increase and the ratio of electric vehicles to internal combustion engine, or ICE, vehicles continues to trend up. Our belief in a secular trend toward autonomous and electric vehicles remains unchanged and should be a tailwind for Keysight long-term.