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So, this was Keysight’s second quarterly report and like the call lurches a bit. It is not the fault of anyone, it is that people are just trying to get a sense of the issues in the business. In general, Revenue was down to $671M and Net Profit came in at $99M. These numbers were relatively flat with the same numbers a year prior. So, this is a firm that is large (between $2B and $2B in Revenue) and profitable (over $450M in profit). Which is good. The downside is that it is flat.
To be fair, there is this whole spin-out thing which I suspect is weighing the company down. Trying to untangle a piece of a company from its former parent is a fair bit of work and not to be underestimated. The reason that this is important is that the large cash that comes in every quarter has to go somewhere. Investors are not asking Keysight to manage their Savings Account. They want the cash that comes in to bring value to the stock. This is not a broad issue with the stock yet like it is with companies like Apple or Microsoft. There the money sits offshore for tax avoidance, but it still does little to help the shareholder.
Okay back to the flatness of the top and bottom line as a problem. The company says it expects to spend 13% of its revenue on R&D in a market that has a 3% growth rate. Now, the company expects to grow faster than the market and focus on what would hope to be a better than average margin product set. But you would really want the company to find a way into some higher growth markets. That kind of R&D spending needs to result in a gain of 10% per year (approximately) in Net Income to make a lot of sense. I have no view to whether that is where we are headed or not yet.
This brings us back to the cash. It either needs to come back to the shareholders as a dividend or the company needs a plan to invest the cash inorganically to improve earnings. In the short term, I would prefer a set of special dividends to burn off excess cash. I would not be encouraged by a major acquisition spree in the middle of untangling the company from its parent.
Well that is it for Earnings Season unless anyone out there has a request for me to review any other companies. If you do just let me know!
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