Keysight Technologies, Inc.

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

Keysight Technologies, Inc. is a global leader in providing electronic design and test solutions across various industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Keysight Technologies is a technology company that provides design and test solutions to a wide range of industries. It doesn’t focus on selling physical products but rather on enabling other companies to do cutting-edge research and development.

Business Overview

Keysight Technologies, Inc. (KEYS) is a company that provides electronic design and test solutions. Its offerings are categorized into two main segments: Communications Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG). The company’s products and services cater to a wide range of industries, including aerospace and defense, automotive, electronics, energy, government, semiconductor, and telecommunications.

Revenue Distribution

The majority of their revenue comes from the CSG segment. The latest Q3 2023 quarterly report shows a revenue split of about 70% coming from the Communication Solutions Group (CSG) and about 30% from the Electronic Industrial Solutions Group (EISG).

  • Communication Solutions Group (CSG): Focuses on solutions for communications, 5G, and internet and broadband infrastructure. It addresses technologies related to the internet and cloud, wireless communications, satellites and space applications, and consumer devices.
  • Electronic Industrial Solutions Group (EISG): This segment targets the industries of automation, automotive and energy by providing technologies and solutions for their hardware and manufacturing needs.
  • Continued Growth in Electronics and Communication: Continued growth is expected in semiconductor and wireless technology, while new technologies like AI will require more testing and validation.
  • Supply Chain Issues and Regionalization: A major ongoing trend in the industry are the supply chain bottlenecks that could affect the prices of semiconductor chips and electronic components. Many companies are trying to diversify their manufacturing to be close to key markets, as in, they are increasingly regionalizing their supply chains rather than centralizing everything.
  • Increased Demand for Customization: There is also demand for more customization, and product life cycles are getting shorter as customers want the latest and greatest features.
  • Focus on ROIC: In the tech sector, high returns on invested capital (ROIC) is key to attracting investors. Companies that can prove they can deploy more capital at attractive rates of return have more value over long periods.

Competitive Landscape

The competitive landscape includes a wide array of large and small companies. Keysight faces competition from manufacturers that offer standard products at lower price points and smaller firms that make custom products for their own clients.

The main competition in the industry are big companies like:

  • Tektronix (a subsidiary of Fortive) and Rohde & Schwarz: These two companies are among Keysight’s biggest competitors. Their primary strategy is to sell highly standardized test products.
  • Smaller, specialized firms that are often experts at a niche product and/or testing process: Some such smaller companies include Anritsu, Viavi, and Spirent.
  • Major players in other industries, such as the major semiconductor manufacturers: These compete by building their own in-house labs to validate their technologies.

What Makes Keysight Different?

What differentiates Keysight from the competition is its focus on innovation and R&D. This allows it to produce leading edge test and measurement products that are crucial in the development of cutting edge technologies like 6G.

  • Focus on R&D: Keysight focuses on providing state-of-the-art tools, instruments, and software solutions. It invests a significant portion of its revenues in research and development, keeping itself at the cutting edge of its fields.
  • Complex Solutions: They offer complete solutions that go beyond just selling test equipment. They have a large offering of complex solutions, often involving hardware, software, and consulting to make sure they can help their customers.
  • Customer Relationships: Keysight’s products are heavily reliant on the customer’s workflow and infrastructure, making it difficult for customers to switch to competitors. This makes their customer base very sticky.

Moat Analysis

Keysight’s moat can be best characterized as having moderate strength. Its moat is supported by:

  • Switching Costs: The high integration of Keysight’s solutions into their customer’s operations creates meaningful switching costs. It would take many man hours to change to a competitor and ensure the changeover is smooth.
  • Intangible Assets: The brand is also a contributor, because, in the complex industry of design and test, customers typically prefer well-known brands like Keysight.

These make Keysight able to charge higher prices than their competitors.

The company’s moat is rated as 3/5.

Risks to Moat and Business Resilience

  • High rate of technological change: This can impact Keysight, which might face disruption from new technologies and their related needs for testing equipment. Competitors can also take advantage of this to make Keysight’s offerings look obsolete.
  • Dependence on R&D: The company depends on continuing R&D investments to remain relevant and continue to produce new offerings. It might be hit hard if R&D is slashed for unforeseen reasons.
  • Cyclicality: The demand for Keysight products are heavily tied to the overall state of the economy, so, if the economy goes down, this might drastically affect the demand. The company’s profits also tend to fluctuate quite a bit, because when companies get a lot of money, they invest more into R&D and they spend less when the economy is doing poorly.
  • Competition: There is the threat of the company losing out to competitors that make standard products at low prices. Competitors can also win business from well-funded startups that are developing new tech that make the old standards irrelevant.
  • Supply chain issues: Ongoing global supply chain bottlenecks could make the raw materials of its products very expensive and thus increase the cost of its products and reduce demand.

Despite all these risks, the company is resilient.

The company has a loyal customer base that benefits a lot from switching costs. And the company is also focusing on areas like software and analytics, which reduces their dependence on just pure hardware sales.

A major part of Keysight’s competitive advantage lies in the long-term relationships they build with customers, as that creates a high switching cost.

Financials

Keysight has strong financials, with increasing revenues, but net income has seen some turbulence recently due to a variety of factors. They have a healthy balance sheet, with a manageable amount of debt and are well positioned to weather various economic shocks. The company’s R&D efforts, and acquisitions, should help growth and maintain revenue in the future.

  • Revenue Growth: The company has shown steady growth. The revenues have grown substantially from 2016 onwards. In the latest quarter report, Q3 2023, the revenue grew 5% compared to Q3 2022, showing the company’s ability to maintain growth.
  • Profitability: The company has positive margins, with a gross margin above 50% and operating margin above 20%. But, the net income has had some ups and downs recently, like in 2021 and 2022 due to changes in taxes, but is growing rapidly again.
  • Balance Sheet: They have $1 billion in cash and cash equivalents, and have a fairly manageable amount of total debt, with the debt-to-equity ratio at around 0.45. They have good financial liquidity. They are a mature company with little leverage.
  • Capital Allocation: The company has been investing heavily in R&D and has been doing acquisitions of different companies. These acquisitions could provide synergy and help with growth.

Given these, the company’s balance sheet health is given a 4 / 5 rating.

Recent Concerns and Management Outlook

  • Supply Chain Concerns: Management are aware about the supply chain issues and expect them to continue for the coming years.
  • Acquisitions: Management has been actively making acquisitions. But, they are doing it at a good price, so they should help growth without compromising on value.
  • Global presence: The company has made sure to be diversified internationally, so it won’t be affected by a downturn in a single country. The revenue is spread among many different regions.
  • Inflation: A major concern for a lot of companies is the ongoing inflation. But KEYS has been able to pass some of the increased costs on to the customers, so they are able to weather inflation effectively.
  • Cybersecurity: Management has also noted the importance of the growing trend in cyber security and the need for new ways to combat that risk. They have put in significant investment to develop solutions that tackle those issues.

Understandability

Keysight’s business model is quite simple to grasp. It is mostly a tech company that provides test and design solutions for other companies to build better electronics and communication systems. Even though the science behind their work is cutting edge, and there are some aspects of their work that are very complicated, the fundamentals of the business are easy to understand. You don’t need a deep understanding of the technical aspect to see how the business model works. The understandability rating is 4 / 5.