Today I will go over the next company in my usual list to analyze for quarterly results: Keysight. The raw numbers are that Revenue was $753M up from $731M a year ago. Non-GaaP Net Income was $0.64 compared to $0.61 a year ago. These are reasonably level results on a year over year basis, given that a tiny amount of Ixia is included in these numbers.
I want to point out what looks to be the strategy here, based up on the acquisition of Anite and now Ixia. This looks to be a form of a roll-up. Keysight is acquiring some smaller companies that are specialists in technologies that are adjacent to markets that Keysight is strong in. To be clear, these markets are sub-markets of larger market segments. So think of this as Keysight buying much of its future product development. Anite has replaced the revenue of some of the more troubled parts of Keysight’s business. Ixia will bolster Keysight in other markets.
The question for you: “What does this mean for the future of Keysight?”. That is hard to say. Remember both Ixia and Anite were bought with cash. That means that the value of this cash was removed from the shareholders and given to the shareholders of Anite and Ixia. In the case of Ixia, the cash given to them was 45% above the closing price at the time of the deal. When the deal was announced there was a bit of run in the stock. This culminated in the announcement of the results. The stock did really well in after hours the night of the quarterly conference call. If you ignore this bump, the stock has been on a flat to slightly downward trend for a few days.
The company itself is large and profitable. What we are discussing is how the company uses the cash that it makes. There are 2 basic alternatives. First, the company can keep the cash. At the level that Keysight has it (or Google or Apple or Microsoft for example), it is not a service to shareholders. Keeps more cash than is required means that your investment is in a CD or a Checking account under the control of the company. The second alternative is to return the cash to the shareholder as a dividend. This allows the shareholder to invest this cash in other, hopefully successful, places. I favor this last, because the market that Keysight is addressing is slow growth but high technology. It means there will be struggles in increasing share price until there is some rationalization in Product Development. If you need to “buy” your future, then that means your current R&D is not being productive. The right thing to do is to cut back on older products and focus on the growth areas. The problem with is that you likely will be laying off current employees and replacing them with those from the company that you just bought.
I hope this helps you and have a great day!
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