It has been about a month since the last earnings report for Keysight (KEYS Quick QuoteKEYS - Free Report) . Shares have added about 5.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Keysight due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Keysight Q2 Earnings & Revenues Beat Estimates

Keysight Technologies reported second-quarter fiscal 2021 non-GAAP earnings of $1.44 per share, outpacing the Zacks Consensus Estimate by 7.5%. Moreover, the bottom line surged 84.6% from the year-ago quarter’s figure.

Revenues increased 36% year over year to $1.22 billion, surpassing the Zacks Consensus Estimate by 1.3%. The upside can be attributed to double-digit growth across segments as well as geographies served.

Core revenues (excluding the impact of currency and revenues from acquisitions in a year’s time) rose 33% on a year-over-year basis to $1.194 billion.

Improving aerospace and defense vertical, uptick in 5G test solutions on accelerated 5G deployment as well as continued investment in 400G and 800G Ethernet for data centers led to better-than-expected results.

Quarter in Detail

Orders increased 22% on a year-over-year basis to $1.332 billion during the reported quarter. Notably, core orders (excluding the impact of currency and revenues from acquisitions in a year’s time) moved up 19%.

Beginning first-quarter fiscal 2020, the company’s financial reporting comprises two segments — Electronic Industrial Solutions Group (EISG) and Communications Solutions Group (“CSG”).  Ixia Solutions Group (ISG) segment’s reporting has been aligned with the CGS segment.

CSG includes commercial communications (“CC”) and aerospace, defense & government (“ADG”) end markets. CSG revenues of $877 million increased 34% year over year and 32% on a core basis. CSG contributed 72% to total revenues in the fiscal second quarter.

CC revenues of $606 million were up 30% year over year due to accelerated 5G deployments and higher investments in 400G/ 800G ethernet for data centers. Keysight also announced that it had collaborated with the likes of NEC, Fujitsu and MediaTek.

Moreover, expansion of investments in O-RAN (or Open Radio Access Network) and virtualization technologies contributed to recovery. The company’s latest portfolio of O-RAN end-to-end solutions will assist O-RAN vendors and mobile operators to test security, performance and conformance of multi-vendor 5G networks that are based on O-RAN standard interfaces.

In the quarter under review, Keysight purchased Quantum Benchmark to expand its Quantum solutions portfolio.     

ADG revenues of $271 million increased 46% year over year, on higher spending and momentum in investments aimed at defense technology modernization across all main regions. Keysight is poised to gain as economies increasingly focus on electro-magnetic spectrum operations, space and advanced commercial technologies that include 5G and early 6G research.

EISG revenues increased 42% year over year and 37% on a core basis to $344 million. Solid demand for the company’s solutions in next-generation process node technology testing in semiconductor end-market and strength in general electronics sector drove growth. EISG contributed 28% to revenues in second-quarter fiscal 2021.

Keysight stated that the recovering automotive end market led to robust orders for the company’s automotive solutions in the quarter under review. The company’s portfolio now comprises latest solutions like power semiconductor technology, AC power emulation, millimeter wave radar, automotive ethernet, C-V2X and cyber security software systems

Also, robust software test automation capabilities are fueling growth in Software and services revenues. In the quarter under review, software and services reported double-digit revenue growth.

Revenue Breakup by Geography

Americas, Europe and Asia Pacific contributed 40%, 16% and 44%, respectively, to revenues in the reported quarter.

Revenues from Americas were $484 million, up 47% (up 44% on a core basis) year over year on robust order demand in the CSG and EISG segments.
Revenues from Europe of $199 million increased 36% (up 29% on a core basis) on a year-over-year basis. Solid order demand in CC and ADG vertical drove growth.

Revenues from Asia Pacific of $538 million increased 28% (up 26% on a core basis) on a year-over-year basis. Strength in order demand across ADG and Commercial Communications domains drove growth.

Margin Highlights

Keysight reported non-GAAP gross margin of 64.5% expanded 170 basis points (bps) during the reported quarter. CSG gross margin of 64.7% expanded 160 bps, while EISG’s gross margin of 64% expanded 200 bps on a year-over-year basis.

Non-GAAP operating expenses were $467 million in the fiscal second quarter of 2021 compared with $389 million reported in the year-ago quarter
Consequently, non-GAAP operating margin expanded 680 bps to 26.2%.

Balance Sheet & Cash Flow

As of Apr 30, 2021, Keysight had cash & cash equivalents of $1.993 billion compared with $1.887 billion as of Jan 31, 2021.

As on Apr 30, 2021, the company reported long-term debt of $1.79 billion compared with $1.79 billion as of Jan 31, 2021.

Cash flow from operations during the quarter was $402 million compared with $295 million reported in the prior quarter.

Free cash flow was $369 million compared with the previous quarter’s $267 million.

In second-quarter fiscal 2021, the company acquired approximately 1.59 million shares on the open market at an average price of $138.36, totaling $220 million.

Q3 Guidance

For third-quarter fiscal 2021, the company anticipates revenues in the range of $1.205-$1.225 billion, suggesting year-over-year growth in the range of 19-21%.

Non-GAAP earnings per share are projected to be $1.39-$1.45.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

Currently, Keysight has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Keysight has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.