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Why Is Keysight (KEYS) Down 7% Since Last Earnings Report?

It has been about a month since the last earnings report for Keysight (KEYS). Shares have lost about 7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Keysight due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Keysight Q2 Earnings Beat Estimate Despite Lower Revenues

Keysight reported relatively healthy second-quarter fiscal 2024 results, with the bottom and the top lines surpassing the respective Zacks Consensus Estimate. However, the company reported a top-line decline year over year. Weakness in multiple end markets including conumser electronincs, semiconductor impeded the net sales growth.

Healthy momentum in electric vehicles, AI data center, software and services partially cushioned the top line. Growing spending for defense modernization in the United States and Europe are tailwinds. The company has completed the acquisition of Riscure. The buyout expanded Keysight's automated security assessment capabilities for semiconductors, embedded systems and connected devices.

Net Income

Net income on a GAAP basis was $126 million or 72 cents per share, down from $283 million or $1.58 per share in the year-ago quarter. The decline was primarily attributed to top-line contraction year over year.

Non-GAAP net income in the reported quarter was $247 million or $1.41 per share compared with $380 million or $2.12 per share in the prior-year quarter. The bottom line surpassed the Zacks Consensus Estimate by 2 cents.

Revenues

Quarterly net sales were $1.22 billion compared with $1.39 billion recorded in the year-ago quarter. Total orders declined 8% year over year to $1.21 billion. Weak demand in multiple end markets hindered revenue growth. However, the top line beat the Zacks Consensus Estimate by $17 million.

Communication Solutions Group (CSG) generated $840 million in revenues, down 10% year over year. The company witnessed net sales decline year over year in the Aerospace, Defense & Government end markets. However, healthy demand from the U.S. Government and primes backed by accelerated defense modernization efforts in radar and spectrum operations, space and satellite, and signal monitoring partially reversed this trend. Demand for electromagnetic spectrum operation applications also remained strong.

Despite weakness in some end markets, the company witnessed order growth in the commercial communications segment. Robust demand for AI data center solutions and growing investments in 5G, Open Radio Access Networks and non-terrestrial networks supported the top line. The top line beat our revenue estimate of $795.6 million.

The Electronic Industrial Solutions Group (EISG) segment’s revenues dropped to $376 million from $453 million in the prior-year quarter. Soft demand trends in consumer electronics, manufacturing and distribution channels affected revenues from this vertical. Despite improvement in the industry outlook, project delays and inventory corrections continued to impede net sales in the semiconductor sector, impacting the top line. However, healthy demand for Keysight’s proprietary interferometry systems partially reversed this trend.

Demand for EV solutions remained strong. Healthy traction in the software and services portfolio is supporting the top line. The top line fell short of our revenue estimate of $405.2 million.

Region-wise, Asia-Pacific revenues aggregated $496 million compared with $644 million in the prior-year quarter. Declining trends in all end markets led to a 23% year-over-year drop. The company reported a 5% year-over-year decline in the Americas to $493 million. Revenues from Europe were $227 million, down 1% from the year-ago quarter's levels.

Other Details

During the quarter, the company’s non-GAAP gross profit totaled $790 million compared with $927 million in the year-ago quarter, with gross margins of 65% and 66.7%, respectively. The non-GAAP operating margin was 24.2%, down from 30.4% in the prior-year quarter.

CSG reported a non-GAAP operating margin of 26.5%, down 190 basis points (bps) year over year. EISG reported a non-GAAP operating margin of 19%, down 1,550 bps year over year.

Cash Flow & Liquidity

In the six months ended Apr 30, Keysight generated $438 million in cash from operating activities compared with $789 million a year ago. As of Apr 30, 2024, the company had $1.66 billion in cash and cash equivalents, with $1.2 billion of long-term debt.

Outlook

For the third quarter of fiscal 2024, Keysight expects revenues in the range of $1.180-$1.200 billion. Non-GAAP earnings are estimated between $1.30 and $1.36 per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -8.29% due to these changes.

VGM Scores

Currently, Keysight has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Keysight has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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