This week I review the earnings of Keysight Technologies. The company reported $751M in Revenue and $0.64 per share earnings. This is approximately flat results from a year ago. Since the call the stock has been up a bit but has started giving back the gains that it had from the call.
Here is a direct quote from the call (courtesy of Seeking Alpha): “Lastly, we are committed to continue to opportunistically deploy capital through our share repurchase authorization, but are assuming a base case diluted share count of 175 million shares at year end. We remain committed to investing in the key growth areas of our markets to drive the long-term growth of our business while at the same time staying consistent with our operating model. As a reminder, our operating model is structured to deliver high-teens operating margins at current revenue levels.”
Okay, that’s great. They are getting quite a lot of money out of the business. Essentially, they are making very good money. But the shareholders are not seeing the benefits of this on a return into the share price. The quote here says that they do not think that they have lots of excess cash to spend on stock. This is true even though the gain about $40M per quarter, are paying down their debt, and the operations are generating, even more, cash. This is a good sized company with meaningfully profitable results.
But the situation reminds me of a movie called “Other People’s Money” that starred Danny Devito. It was the story of a company that was about to be taken over in the 80s but done as a comedy. There is a scene in the movie where he talks about the reason he does what he does and says that he wants people to invest their money where it makes them money. And that is my commentary on management. The goal of your investment is to grow the share price or to find some way to spend the money that it returns it to shareholders. Another quote from the conference call via Seeking Alpha: “We’re very, very pleased with the progress that we’re making and again, as you know, when you invest in R&D sometimes it’s a 24 to 36 month investment before the product even hits the market and then a product ramps from there and has to go through a customer’s buying cycle so you don’t always see it in the quarter or even the fiscal year in the actual result. But, we are very pleased with the path that we’re on and the results that we’re getting in at this point.”
They have upped the R&D spend but not the value of the stock. If you can not meaningfully impact the share price, consider giving the cash to the owners via a dividend. Let them invest in areas that have a great potential for growth and help them get a return on that $40+M a quarter you get to put in the bank. The cash is doing nobody any good there.
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