This week I review Keysight’s Q3 earnings. Note that this is Q2 of the Calendar Year but they do not align their Fiscal Calendar with the Annual Calendar. Revenue came in at $715M and Earnings at $0.53 per share. This was solid Revenue growth of 8% and good earnings growth of 29%. All of this is working from GAAP numbers. The primary contributor to growth was the Anite acquisition that was finalized last year. Without this, the company shrunk slightly.
I want to point out that Keysight generates in a Quarter more than Calix and Enphase do in a full year – combined. So, it is clearly a large company with products that are bought on a global basis. The company claims around 20% – 25% market share in the various segments that it competes. The Operating Profit runs between 15% and 20% on an ongoing basis. There are lots of “right” things about this company. And as I type the company is down almost 9% in after-hours trading. That seems extreme to me so I want to talk about why I think that is.
I want to shift the conversation to Keysight as an investment. They clearly have great products and run a good business. Why is that not reflected in a growing share price? Pretty simple. The last caller on the conference call talked about the Market Dynamics that Keysight is seeing. The Management Team talks about the “Headwinds” that it faces in many areas. The latest of these was BREXIT. What this means is that even though the company is good, the market it is in is not. Keysight faces what looks to be a market that is somewhere between slightly down and slightly up on a regular basis. The challenge is without significant market share gains, this means that Keysight will not be more profitable in the future. The company is pinning these market share gains on the next generation of their customer’s technology. The challenge is there is nothing that sounds like a game changer compared to their competitors. So, it looks to be a steady as it goes company.
What can a company do in these scenarios? There are 3 choices: Enter new businesses, Buy back the Stock, or Give a Dividend. The company can do any combination of these. The challenge with the Anite acquisition is that it has done well in a space that Keysight was already in. The next M&A deal needs to expand the Total Addressable Market of the company, not just fix a broken product roadmap. The other choices are more financial. I greatly prefer the Dividend option as I have said in the past.
Why a Dividend? The other alternatives are unclear on their investor ROI. If the company buys another firm, the acquisition could fail. If the company buys back its stock (and it has been), the price may not go up (and it hasn’t). A Dividend gives the money directly back to the shareholder. Keysight is making over $0.50 per quarter, so a $0.25 per share Dividend would be easy to swallow.
It’s hard to see why an investor would put money in Keysight when there are better return options out there until the Management Team focuses on the Shareholder instead of its internal issues.
Have a great day!
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