Keysight Technologies: Interesting Play On The Innovation Economy (NYSE:KEYS) | Seeking Alpha

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In order for the modern technology age to continue improving, technological innovation is necessary. Many companies tackle the issue of innovation on their own. But sometimes, it can be helpful to outsource some of these activities to another provider. One company dedicated to providing these types of services on both the hardware and software side of things is Keysight Technologies (NYSE:KEYS). With a solid track record of growth under its belt, both on its top line and its bottom line, the company is doing incredibly well. Recent financial performance suggests that its fundamental condition is continuing to improve. However, shares of the company are looking a bit pricey on an absolute basis. This does not change the fact that they are perhaps slightly undervalued compared to some other firms. But for investors of a value orientation, this is not a great prospect at this point in time. Instead, those who are focused on long-term growth and who don’t mind paying for it, may find this to be an enterprising prospect.

An innovative business

According to the management team at Keysight Technologies, the company helps its customers, including for-profit organizations and government entities, accelerate their innovation in order to connect and secure the world. The company’s services are vast, touching on everything from providing electronic design and test solutions that are used in simulation, design, validation, and other activities, to providing customization, consulting and optimization services, and more. As part of these activities, the company provides customers with a wide variety of devices such as oscilloscopes, spectrum analyzers, digital multimeters, and more. Last year alone, the company boasted over 17,500 direct customers for its solutions, plus it had over 32,000 customers if you include those in indirect channels.

To best understand the firm, we should touch on some of the specific solutions that it offers. First and foremost, is the PathWave platform that it provides. Management describes this as an open, scalable, and predictive software platform that enables fast and efficient data processing, sharing, and analysis of data at every stage in the product development workflow. The ultimate goal of this platform is to fuel engineering and business operation improvements so that customers can increase design, testing, and other activities in order to achieve optimal electronic products.

The company also has something called its Eggplant software test automation suite. This is a platform that utilizes artificial intelligence and machine learning to automate test creation and test execution, as well as to provide other related services, all for its customers. The firm also offers subscription-based software solutions such as its KeysightCare Technical Support for software and other offerings. In truth, we really could spend an entire article dedicated just to the various other solutions company provides, such as its wireless communication measurement solutions, its automotive design and measurement solutions, its network applications, its quantum computing activities, and more. At the end of the day, what’s most important is to understand that the enterprise is essentially a business-to-business firm that acts in a consulting and services capacity aimed at helping technology-oriented firms achieve their goals.

Author – SEC EDGAR Data

This interesting and sophisticated business model has proven instrumental in helping the company to grow over the past few years. Revenue has expanded in four of the past five years, climbing from $3.19 billion in 2017 to $4.94 billion in 2021. The increase from 2020 to 2021 was particularly robust, with revenue skyrocketing by 17.1% as companies began investing more in research and development activities. That growth has, so far, continued into the 2022 fiscal year. For the first half of the year, revenue came in at $2.60 billion. That represents an increase of 8.3% compared to the $2.40 billion generated just one year earlier. Management attributed this increase to strength across both of the company’s core segments. The first of these is the Communications Solutions Group, which provides solutions involving electronic design and test software, electronic measurement instruments, systems, and related services for customers in the commercial communications, aerospace, defense and government categories, and more. The other segment is called the Electronic Industrial Solutions Group which provides test and measurement solutions and other services for a wide variety of electronic industrial end markets.

Author – SEC EDGAR Data

With the increase in revenue, we have also seen a rise in profitability. Now income rose from $102 million in 2017 to $894 million last year. Other profitability metrics also followed suit. Operating cash flow, for instance, skyrocketed from $328 million to $1.32 billion. Meanwhile, EBITDA grew from $423 million to $1.38 billion over that same window of time. Once again, the growth in revenue for 2022 also had a positive impact on profitability so far this year. Net income, for instance, came in during the first half of the year at $487 million. This compares favorably to the $358 million generated just one year earlier. Operating cash flow did decline, dropping from $697 million down to $522 million. But if we adjust for changes in working capital, it would have risen from $613 million to $724 million. And over that same window of time, EBITDA for the company also expanded, growing from $612 million to $737 million.

When it comes to the 2022 fiscal year as a whole, management expects revenue to rise by nearly 8%. The results experienced so far for the first half of the year definitely point in that direction. If this comes to fruition, it would translate to revenue of no more than $5.34 billion. On the profitability side, the company now anticipates earnings per share, on an adjusted basis, that is between 14% and 15% higher than what the company generated last year. This should translate to net income of roughly $984.9 million. No other guidance was given when it came to profitability. But if we assume that those metrics will increase at the same rate the net income should, we should anticipate operating cash flow of $1.46 billion and EBITDA of roughly $1.52 billion.

Author – SEC EDGAR Data

If this comes to fruition, it will mean that shares are currently trading at a forward price to earnings multiple of 31. This is down from the 34.1 reading that we get using 2021 results. The price to operating cash flow multiple should decline from 23.1 using last year’s results to 21 using this year’s results. And the EV to EBITDA multiple should decline from 22 to 20. To put this in perspective, I compared the company to five other similar firms. On a price-to-earnings basis, these companies ranged from a low of 28.2 to a high of 37.3. And when it comes to the EV to EBITDA approach, the range was from 17.6 to 24.1. Using our 2021 results, we find that two of the five companies were cheaper than Keysight Technologies. Meanwhile, using the price to operating cash flow approach, the range was from 23.8 to 40.2. In this case, Keysight Technologies is the cheapest of the group.

Company Price / Earnings Price / Operating Cash Flow EV / EBITDA
Keysight Technologies 34.1 23.1 22.0
Hexagon AB (OTCPK:HXGBY) 36.8 23.8 22.8
Teledyne Technologies (TDY) 28.2 40.2 18.4
Zebra Technologies (ZBRA) 37.3 26.3 17.6
Trimble (TRMB) 35.0 33.9 24.1
Cognex (CGNX) 33.0 39.3 24.1

In my opinion, Keysight Technologies has a really interesting business model. I like how the company focuses on improving innovation for its customer base. Long term, I view this as an attractive avenue to be in. Management has also demonstrated the ability to continue to grow the company at a nice clip. Profitability growth has been particularly appealing. And absent any major changes, I expect that trend to continue. However, this does not mean that shares necessarily make sense to buy into. For those focused on the long haul, I think the risk of losing money is fairly small. This is especially when you consider that the company has cash in excess of debt in the amount of $94 million. But on top of that, shares just aren’t that expensive to warrant significant downside. Instead, I think a more likely outcome is that the company will, for the foreseeable future, generate performance that more or less matches the broader market. But for those patients enough to hold on for the long run, it could make for a sensible investment. As a value investor myself, however, shares aren’t quite cheap enough to pull the trigger on.