First, it is important to fully understand Keysight Technologies' business model - not an easy task. In short, Keysight Technologies' business falls into two broad categories:

Communications Solutions Group - CSG, which consists of electronic design and test software, electronic measurement instruments, and related systems and services. These solutions are used in the simulation, design, validation, manufacturing, installation and optimization of electronic equipment and networks. The Electronic Industrial Solutions Group - EISG, which provides electronic measurement instruments, design and test software and systems, and related services used in the simulation, design, validation, manufacturing, installation and optimization of electronic equipment and networks, as well as in the development of new products.The company also provides automated test software that uses artificial intelligence and machine learning to automate the creation and execution of tests.

Keysight Technologies Products - MarketScreener

In other words - and to put it simply - Keysight Technologies provides services and solutions through a wide range of software and hardware offerings for a variety of advanced industries such as commercial communications, aerospace, defense, automotive, energy, and semiconductors.

Complete list of Keysight Technologies products and solutions.

Operating history

Keysight Technologies has experienced decent revenue growth over the past decade. Between 2012 and 2021, revenues have grown from just over $3.3 billion to $5.4 billion. In terms of Compound Annual Growth Rate - CAGR - this represents an increase of about 9.5% per year.

Related to profitability, the company has relatively stable operating margins - these have been stagnant at a high level of around 30% for the past 5 years. In contrast, net profitability in fiscal years 2016, 2017, and 2018 experienced many tumults - see chart below. This short-lived instability is mainly explained by poor cost management and a significant goodwill impairment in 2018.

Keysight Technologies Income Statement - MarketScreener

The revenue breakdown is also interesting. About 50% of revenues are for the digital communications sector (5G, O-RAN), 20% for the aerospace and defense industries (cybersecurity, satellites) and finally 30% are attributable to industrial electronic solutions (electric vehicles, semiconductors, IoT). The latter segment has seen its revenues grow by just over 20% over the year. This is well above the 10% growth in the "Commercial Comms" segment and the 4% YoY in the "Aerospace, Defense & Government" segment. A good part of the investment thesis is based on this high-growth segment, surfing on fast-growing sectors - i.e. electric vehicles or semiconductors

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Financial track record

On the balance sheet level, the American company is remarkable. Loaded with a little more than a billion in debt when it split with Agilent, Keysight Technologies has completely rid itself of its liabilities and now has a positive net cash position of 311 million. In addition to this very prudent financial policy, the generation of cash profits is excellent. Over the 2012-2022 period, Keysight Technologies has just over 6 billion in cumulative FCF. The real rub for the firm lies in the allocation of these cash profits. Of the $6 billion mentioned above, about half was used for acquisition projects, another quarter was used to reduce the company's debt, and the rest was used for share buyback programs. However, related to acquisitions, the ROI - return on investment - is not very attractive. Two scenarios are possible: either acquisitions are a "lifeline" and are more like maintenance CapEx, or acquisitions are truly value-destroying. Neither scenario is really good news, by the way.

Finally, related to share buybacks, these have been done at valuations between 15 and 20 times earnings. In other words, at relatively unattractive levels given the current valuation of the group. To be critical of management once again, the share buyback plans are in fact more akin to the "cost of doing business". In other words, the share buybacks are a way to counterbalance the dilution linked to the stock options and free shares distribution, which Keysight is abusing.

Despite these few negative points, we believe that this is a remarkable company from an operational standpoint, with many strengths and that it is evolving in several industries that we believe will be promising in the coming years. Keysight's poor capital allocation decisions can be rectified, and better yet, we believe they offer an attractive entry point into the stock - despite the group's current high valuation.