是德科技 (KEYS) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Keysight Technologies' FY16 second-quarter earnings conference call. My name is Connor, and I will be your lead operator today.

(Operator Instructions)

Please note that this call is being recorded today, Thursday, May 19, 2016 at 1:30 PM Pacific Time.

I would now like to hand the conference over to Jason Kary, Vice President, Treasurer and Investor Relations. Please go ahead, Mr. Kary.

Thank you, and welcome, everyone, to Keysight's second-quarter earnings conference call for FY16. With me are Ron Nersesian, Keysight President and CEO, and Neil Dougherty, Keysight Senior Vice President and CFO. Joining in the Q&A after Neil's comments will be Mike Gasparian, Senior Vice President of the Communications Solutions Group; Gooi Soon Chai, Senior Vice President of the Industrial Solutions Group; John Page, Senior Vice President of the Services Solutions Group; and Guys Sene, Senior Vice President of Worldwide Sales.

You can find the press release and information to supplement today's discussion on our website at investor.keysight.com. While there, please click on the link for quarterly reports under the Financial Information tab. There you will find an investor presentation along with Keysight segment results. We will also post a copy of the prepared remarks following this call.

Today's comments by Ron and Neil will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website.

We will make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties, and are only valid as of today. The Company assumes no obligation to update them. Please review the Company's recent SEC filings for a more complete picture of our risks and other factors.

I will also note that management is scheduled to present at the JPMorgan TMT conference on May 24 in Boston, the Stifel Technology Conference on June 6 in San Francisco, and the Credit Suisse Semiconductor Supply Chain Conference on June 15 in Boston. We hope to see many of you there.

And now I'd like to turn the call over to Ron.

Thank you Jason, and thank you all for joining us.

Keysight delivered strong second-quarter earnings as we continue to navigate a challenging market and execute on its initiatives to transform our business. We will focus today's discussion on three important headlines. First, our second-quarter financial results were strong, with earnings and revenue at the high end of our guidance. Second, we continue to make progress on our growth initiatives. And we are pleased with the momentum we are gaining in these areas. And third, consistent with our strategy to opportunistically return capital, we repurchased $42 million in common stock under the $200 million repurchase authorization we announced in February. This action is reflective of the confidence we have in our ability to achieve above market growth in the long term.

Now let's get started with an overview of Keysight's second-quarter performance. In Q2 we delivered $0.61 in earnings per share, which was at the high end of our guidance range. Revenue for the quarter was $735 million, representing a decline of 1%. On a core basis, which excludes revenue from acquisitions and the impact of currency, revenue declined 7%, primarily driven from the slowdown in wireless communications. As we expected, the market and spending environment continued to be soft; however, we are pleased with the execution in the quarter. We delivered revenue and EPS at the top end of our guidance range and achieved order growth on a core basis.

We continue to make measurable progress on our strategic initiatives to transform our business and position the Company for growth. Our momentum in these areas continue to build. First, in wireless we continue to expand our leadership in 5G. While off a small base, orders for our 5G solutions continue to accelerate, and more than doubled over last year. Growth was primarily driven by investment in millimeter wave development and modeling software. This past quarter 5G development was the headline at Mobile World Congress. At the event in February we demonstrated unique capabilities, such as our 5G channel sounding solution, which engineers used to evaluate how effectively a signal will travel between a base station and a cellphone in a real-world environment. We also showcased the system for massive MIMO 5G beam-forming calibration, as well as new design and test tools for 802.11 AD.

We also recently announced that we have joined China Mobile's newly formed 5G innovation center. Strategic relationships such as these are critical to our 5G leadership. We first engaged with China Mobile on their 5G research starting back in 2014. In this new collaboration, we are working with China Mobile and other industry partners to promote 5G innovation and to provide new 5G design and test solutions and support for the whole 5G ecosystem. This also includes solutions for channel measurement and modeling and massive MIMO over-the-air testing.

We are actively involved with leading standards bodies and industry leaders in Asia, Europe, and the US as they begin the first phases of 5G standards development. 5G research is starting to move into early development, with major carriers announcing trials ahead of standards being adopted. The use of spectrum well above 6 gigahertz is one of several areas of investigation under the 5G umbrella. As frequencies move higher, the engineering challenges become increasingly complex. While 5G research at these frequencies is emerging, higher frequencies has in fact been supported by Keysight's commercial and aerospace, defense solutions for decades.

In addition to higher carrier frequencies, the higher data rates associated with 5G require wider frequency bands around the carriers, and these in turn require test equipment with wider analysis bandwidths. To meet these needs, in February, Keysight introduced the industry's first 50-gigahertz signal analyzer integrated with 1 gigahertz of analysis bandwidth.

Moving onto our modular initiative, or PXI and AXIe modular solutions again delivered solid double-digit order and revenue growth, with particular strength in aerospace, defense, and optical applications for 100-gigabit manufacturing. Additionally we are seeing momentum in wireless LAN, as our router and network access customers are performing more rigorous testing on their high-performance wireless LAN chipsets. We have a strong position in this market, and we further advanced our footprint in the second quarter by winning new modular solutions business with a leading network equipment vendor.

Moving onto our software growth initiative, we realized strong year-over-year revenue growth driven by Anite and our market-leading design and simulation solutions. Our integration of Anite remains on track, as we are beginning to realize top-line synergies by leveraging the Keysight sales channel. As an example, we won a multimillion dollar Anite solutions deal with a leading Keysight customer in the US. Additionally, we are building momentum with our recently launched Anite virtual drive testing solution that verifies mobile device performance in high-speed train scenarios.

As we have discussed previously, software solutions play an important role in our strategy to transform our business. We are committed to investing in this area and broadening our software portfolio. To accelerate these efforts and foster innovation, I'm excited to announce that we are creating a new software development center with the Georgia Institute of Technology in Atlanta. Georgia Tech is one of the best and largest engineering programs in the country. Its graduates bring with them skills and capabilities that will be a great asset to Keysight in developing next-generation technologies and solutions.

And lastly, looking at our services initiative, we delivered solid double-digit order growth in the second quarter. This was driven by ongoing success with our multi-vendor calibration services, new business in Europe and the US, along with follow-on deals with several large aerospace, defense customers. Our calibration and service capabilities can be an important factor in winning new design and test solutions business, especially as customers look for ways to assure system uptime. Our services solutions group and our sales team recently joined forces to win a multimillion dollar competitive modular opportunity. This customer needed a modular solution that delivered superior performance and on-site services for uptime assurance in their high-volume manufacturing environment.

Moving onto our markets. In line with our expectations as we discussed in February, macro factors continue to impact market growth. The most notable pullback continued to be in the communications area where wireless supply chain customers in North America and Asia paused spending due to lower components and smartphone shipments. Outside of communications, we delivered solid mid-single-digit core order growth with strength in aerospace defense and industrial markets. While the communications market outlook remains soft, our performance across other end markets was steady, and we are very pleased with the execution and leadership amidst this challenging backdrop.

Additionally, with our continued commitment to operational excellence and to maintain strong profitability through the cycle, we delivered 18.3% operating margin in the quarter and generated $89 million in free cash flow. Consistent with our strategy to opportunistically deploy capital, we repurchased $42 million in stock. This action reflects the confidence we have in our ability to achieve above market growth when the market stabilize and customers across our markets re-accelerate capital investments.

Our continued progress on our growth initiative demonstrates that we are investing in the right areas and are creating value for our customers and partners by bringing leading-edge solutions and services to market.

Now I will turn the call over to Neil to provide more details on our Q2 financial results as well as our third-quarter guidance.

Thank you Ron, and hello everyone.

Today we reported second-quarter non-GAAP revenue of $735 million, at the top end of our guidance range of $695 million to $735 million. On a year-over-year basis this represents an approximate 1% decline, or 7% decline on a core basis. Looking at our top-line performance by end market, communications revenue was $252 million and grew 2% year over year, including revenue from Anite. Excluding Anite, communications revenue decreased, as the market dynamics we highlighted last quarter continued, which included softness in the smartphone supply chain and restructuring and consolidation among some of our largest customers. These headwinds offset growth from 5G technologies as well as strength in data center business that was driven by optical 100-gigabit manufacturing.

Revenue from aerospace, defense was $160 million, up approximately 3% from last year's second quarter. Growth in Asia and steady US spending from our aerospace defense solutions contributed to the uplift in revenue. Second-quarter industrial, computer and semiconductor revenue was $323 million, a 4% decrease year over year, reflecting the challenging spending environment.

Regionally and on a core basis, revenue declined 14% in the Americas, 4% in Europe and 10% Japan. Revenue in Asia excluding Japan was flat compared with last year. The regional mix of total revenue was 35% from the Americas, 19% from Europe and 46% from Asia.

Our second-quarter operational results were strong, with gross margins increasing to 57.8%, a 70 basis point improvement year over year, largely a result of higher percentage of revenue from software and R&D solutions. Expenses were well managed while we continued to invest in R&D programs in support of our growth initiatives. And on a dollar basis, R&D expenses were in line with Q1.

Operating expenses totaled $290 million for the quarter, up 8% over last year, primarily due to the addition of Anite. This resulted in a second-quarter operating margin of 18.3% compared with 20.9% in the prior year. On a sequential basis, operating margin improved 50 basis points as we continue to proactively manage our cost structure. Non-GAAP net income after taxes was $106 million, or $0.61 per share, which was at the high end of our guidance range.

Moving to the results of our two operating segments. Measurement Solutions generated second-quarter revenue of $639 million, in line with last year including revenue from Anite. Gross margin improved 130 basis points to reach 60.6% as a result of increased revenue from software and R&D solutions. Expenses increased year over year with the acquisition of Anite, bringing our operating margin for Measurement Solutions to 19.5% compared with 21.3% in the second quarter of last year.

The Customer Support and Services Segment generated revenue of $96 million in Q2, a 5% year-over-year decrease, or 6% on a core basis. Excluding the impact of the three-year warranty program, revenue for this segment grew 1%. We reported an operating margin of 11.2% for our CSS segment. As a reminder, the services business has a higher fixed cost structure when compared to our Measurement Solutions business, and we have been making investments in additional capacity to expand our multi-vendor calibration and asset management services. We are confident these investments will help support our growth, and the profitability of the Services Segment over the cycle will be consistent with the overall business.

Moving to the balance sheet and cash flow. We ended the quarter with $620 million in cash and cash equivalents. In the quarter we generated $117 million in cash flow from operations. Capital purchases this quarter totaled $28 million, bringing our free cash flow to $89 million, or 12% of revenue.

Under the $200 million share repurchase authorization that we announced in February, we repurchased $42 million of our common stock, or 20% of the authorization. We repurchased 1.58 million shares in the open market at an average weighted cost of $26.27 per share. We will continue to opportunistically deploy capital under this repurchase program, as well as look to identify M&A opportunities that will help us achieve our growth objectives.

Stepping back from the details of the quarter, we are pleased with our operational discipline as a Company and with the ability of our operating model to deliver strong profitability under a variety of end market conditions. We continue to optimize all aspects of our business model, including pricing, sale strategies, cost management, and efficiency gains. For example, the costs associated with the software development center in Georgia will be managed within our existing cost envelope as we make trade-offs in other areas. In addition to our operational discipline, we remain focused on executing our strategy which includes continued investment in our growth initiatives, targeted M&A, and market expansion opportunities to ensure increasing value creation both in the short and long term.

Turning to our outlook and guidance for the third quarter. While we are seeing stabilization in some areas of our end markets, the communications market remains quite weak and macro indicators remain uncertain. In light of these market conditions and the traditional seasonality in our business, we remain cautious in our outlook for the third quarter. We expect Q3 non-GAAP revenue to be in the range of $697 million to $737 million, which at the midpoint reflects 8% growth year over year, or 2% on a core basis. In the third quarter, we expect to deliver operating profit in the high teens while continuing to invest in the growth areas of our business. Balancing these factors, we expect third-quarter non-GAAP earnings per share to be the range of $0.50 to $0.64 based on a weighted diluted share count of approximately 172 million shares.

With that, I will now turn it back to Jason for the Q&A.

Thank you, Neil. Operator, could you please give the instructions for the Q&A?

(Operator Instructions)

Brandon Couillard, Jefferies.

Thanks. Good afternoon. Ron, would be curious to get your thoughts, your granularity thoughts, on just where you saw greater strength in the business. And would be curious if you could speak to perhaps the linearity of orders in the communications business coming out of the January air pocket. Seems like the general tone just perhaps a little better than where we were three months ago.

Yes. Hi, Brandon. Thanks for the question. The aerospace, defense business, especially in the US, was relatively steady. It's been steady for a while, and we obviously like the fact that the continuing resolutions are gone and the fact that the budgets have been steady for a couple of years. So that's a market that we feel pretty good about. Guy also would add a couple of comments, please.

Brandon, what I want to say is you remember when at last call we had announced a significant slowdown in the second half of January. Well, the quarter started similar but our market stabilized over Q2. We kept executing on our plans, and really delivered (inaudible) over last year. As Ron said earlier, the most notable pullback continued to be in communication. And our performance over the other end markets were steady outside of this comm market. We delivered solid mid-single-digit order growth with the strength in aerospace, defense that Ron was mentioning and also in the industrials.

Thanks. And then one for Neil. Could you remind us, do you lap they warranty change this period? And then with respect to the CSS operating margins, even the revs were flattish sequentially, the operating margin declined a little bit. Should we expect this to be a low watermark and a bounce-back in a second half?

Yes. First of all with regard to the three-year warranty, we are now at the point where we have bled off all of the deferred revenue from the prior sales of extended warranties that are now covered under our standard warranty program. But they will be in our compares through the first quarter of next year. So from a year-over-year compare basis, we won't have lapped that until we get to that point.

From an operating margin standpoint, as you noted, the operating margins are down versus where they had been last year. And I think essentially what you are seeing is that deferred revenue from this extended warranty sales coming out of the revenue base that was very higher-margin warranty. And we need to grow the business and replace that warranty and get the revenues for this business up where they are over $100 million per quarter, and we will see margins recover. We are highly confident in the investments and capacity that we are making and the ability of this business to generate profitability that's in line with the broader business moving forward.

Perfect, thank you.

Brandon, I will just add one other comment with regard to our strength. If you looked at orders in China, we had double-digit order growth. And I know everybody's concerned with what's going on in China. We have had a strategic focus of moving our business from manufacturing to R&D for years. And I think that helps us with the results that we've seen that were pretty strong.

Thank you.

Vijay Bhagavath, Deutsche Bank.

Yes. Hi, Ron, Neil. You had some good results here. It's clearly better than [feared]. Actually given many of your peers were noting fairly weak demand trends near terms. So you've clearly bucked the trend here. Question for you in terms of, help us understand anyway you can qualitative color on the communication end markets heading into the back half? How should we look in terms of R&D spending into the back half from your customers? And also what are your customers telling you it terms of their buying habits for (inaudible) equipment? Would they primarily be buying more of modular equipment? Would they buying kind of the broader portfolio? Are there any pockets of use cases of strength you see in the communication end market? Thank you.

Sure, I will start with just answering the modular question, and then I'll turn it over to Mike Gasparian who heads up our Communications Solutions Group. With regard to modular we saw double-digit growth for orders and double-digit growth for revenue. So we were very pleased with the strength. Aerospace, defense, and optical in particular, were strong. But it is very good to see continued double-digit order and revenue growth in modular.

Hi, Vijay. This is Mike Gasparian. Maybe I will start out with a couple of macro comments about the communications industry. As Ron indicated in his opening comments, probably the biggest event during this previous quarter was the contraction in the overall supply chain associated with the devices and chipsets and component manufacturers. But we also saw a pretty big contraction in the R&D part of the communications market. A lot of the major accounts that operate in that ecosystem were still going through consolidation and restructuring, and that's putting a real damper on their capital equipment spend. So that's I think the color commentary I can make there.

In regards to pockets of strength, we really do have a unique competitive advantage when you look at the data centers and what's going on there with the 100-gigabit roll-out, and an as well as the 400-gigabit R&D spend, more in the research phase. We are very well positioned from a portfolio standpoint. We've got a variety of high-speed digital products that are (inaudible) testers, arbitrary waveform generators. And in fact in the area of digital communication analyzers, we just introduced a new family of sampling scopes, from 1 to 4 channels, very compact form factor, low noise, and really designed for high throughput in a manufacturing setting. So I think we will continue to benefit from that 100-gigabit build-out.

In the area of 5G, that's probably the other area to highlight. And I will go back to, again, some of Ron's comments about Mobile World Congress. Several of us were there and met with a lot of customers. And going into Mobile World Congress, I think our general consensus was that we would see an initial deployment in the 6-gigahertz range. But what's happened since then, it is very clear that there will be at least a dual deployment and a much higher frequency band. 28 gigahertz seems to be the sweet spot of a secondary implementation. That really plays well into the product portfolio that we have, and have had for decades on the aerospace, defense side of the house.

And so in fact we've had something called a 5G test bed that we put out, which is a way for customers to upgrade their labs to have test equipment that's more compatible with the testing requirements of millimeter wave frequencies. We have seen that test bed be very well accepted in the market. And sales have far exceeded our expectations. And that's the primary driver behind our 5G strength right now. So hopefully that helps give you a little bit of perspective.

Yes. Yes, it's really helpful. A quick follow-up is around gross margins and OpEx through the rest of the year. Any guidelines you can give us for modeling? Thanks.

Yes. First of all with regard to gross margin, our gross margins are really driven more by product mix than anything else. So I think as we look forward, we don't really see any fundamental drivers that would change -- would drive a meaningful shift in gross margins moving forward. With regard to OpEx, you'll notice that our OpEx has been reasonably stable through the first half of this year since the addition of Anite. And from a modeling perspective, I'd look to that moving forward.

Excellent, yes. Congratulations. Thanks.

Thank you.

Patrick Newton, Stifel.

Good afternoon, Neil and Ron. Thank you for taking my questions. I guess jumping right in, Neil, when you provided guidance, and I'm sorry if I missed this, did you speak to a targeted core growth rate in the July quarter?

I did, yes. The core growth rate is 2% and the absolute growth rate is 8%.

Okay, great. Then if we were to take into account kind of the communications weakness, is there any way you could comment on what a core excluding communications would be?

No. No, the only comments that I can say is that we do continue to be very cautious around the communications space moving forward. We've taken the same approach that we always take to preparing our guidance, looking at incoming order rates, strength of our funnel, and the quality of our backlog. So our approach to guidance this quarter was entirely consistent with prior quarters. The only thing that I would note is in the current quarter, in our second quarter, we did post solid single-digit growth rate outside of the comms area.

Okay, great. I guess maybe dovetailing off that, one of those areas that you touched on was industrial, which I guess is kind of surprising that that was cited as an area of strength. Was that more just a rebound off of very depressed levels in the early calendar Q1 timeframe that we've seen a snap-back from a lot of customers, or is it's something fundamentally that's re-accelerated in the industrial end market?

Yes. I think from an industrial orders perspective, we had a reasonably strong quarter. But I would note that it was against a pretty soft compare from Q2 of last year. So we were certainly happy with the order results in industrial. If I was to provide you with a little bit of commentary, it was driven -- the orders in the industrial side were stronger than the comm and semi side. But again, just noting the soft compare from Q2 a year ago.

Great. And then I guess for either Ron or Mike, to extrapolate on your commentary on optical communications test. Can you help us understand the potential duration of this 100-gig strength, just seeing this is historically a very volatile and cyclical end market? Then any way to help us understand or size this market opportunity or contribution to revenue, given that there really is some very explosive growth opportunities there?

Yes, I will let Neil comment about can we quantify that, the magnitude of it. I can comment a little bit on the duration. We are seeing a very broad, widespread uptake in this whole 100-gigabit ethernet build-out in the manufacturing space.

So I don't think that's a trend that's going to disappear overnight. In parallel with that, right on the heels we have the 400-gigabit wave that's coming. And there's quite a bit of research going on in that phase. And the manufacturing deployment of that will likely be in late 2017. So I think we've got a pretty good trend to play to here over the next year or two.

With regard to size, and we just don't provide granularity at that level to individual portions of our product platform. The only think I would reiterate was the statements that Mike had made about we feel like we have a strong hand to play here. And as he just said, we think it is one that's a little bit of legs.

Great. And then if I can get one more in on 5G, the 5G sales doubling again in the quarter year over year. Last quarter you give us a sequential growth rate a 50%. If you could provide us with the sequential growth rate, that would be helpful.

And then could you also help us understand how we should think about 5G deployments moving out of the research phase and development into deployments with infrastructure in handset over the next several years? Just how this wave, obviously it's a very long tail. But just any type of though process of X amount of years down the road is when we should start to see the hand-off from one portion of your market to the next?

I will take the first part of that question and then I will hand off to Guy for the second part, which is we're not going to provide granularity on the sequential gain at this point in time. The more than doubling year over year is all that we can give you.

Yes, Patrick. On the ramp, it's very difficult to call it this moment. You've been at Mobile World Congress. There is no doubt that it has shown acceleration currently in the market and with some customers. But I would say it is too early to call when the ramp-up is really going to happen.

Great. Thank you for taking my questions. Good luck.

Thank you, Patrick.

Richard Eastman, Robert W. Baird.

Sure. Great, and very nice quarter. Just, Rob, or maybe -- could you just kind of speak for a minute or two, and maybe reconcile the service double-digit growth rate in orders with the sales growth rate here? Without deferred it was up 1 percentage point. And maybe are these multi-year orders? How do you reconcile those two? And when does the sales growth rate start to approach that double-digit order number? I'm sorry, Ron, if maybe that's directed to you.

I'm going to let John Page, who is the Head of our Services Organization, get a chance to talk.

I'm glad to answer that question. There are a number of factors going on. So yes, there are multi-year contracts in there. Some of the contracts come in in a lumpy fashion. But I think the real underlying story here is that Services is composed of two major components. One is our repair and calibration services business and that showed strong consistent growth. The other part of the equation is that we have a used equipment business that is also included in our Services numbers and that's very lumpy and goes up and down depending on our demo inventory that's available for sale as well as general product trends. The underlying growth area, the repair and cal was very strong. And the used equipment continues to be a little bit lumpy.

I see. Okay. And then just also could you just provide a little bit of color, maybe on the end markets that are captured in the Americas 8% decline? I'm just curious how comms, gen purpose and A&D did in the Americas?

We don't quantify the individual market segments by region, but I can let Guy see if he has any qualitative points that might be able to assist you.

This is Guy. The thing I can say is that in the Americas we did see, as expected, growth in aerospace, defense. And this is true for the DoD and for the (inaudible). But clearly comms was slow, especially with the large accounts. And this comes back to the comment we did at the beginning of the call, still linked to the overall situation in the wireless industry.

Because again, my math might be off a bit here, but it looks like if I pull Anite out of the numbers, the comms business was down high teens. And your commentary around Asia, I believe, seemed to maybe suggest the comms business did better there. But was the Americas comms business down more than 20%? And was that a comp issue?

We cannot quantify that for you. Sorry.

Okay, okay. Just one last observation. If I look at the revenue that you generated this quarter, the conversion out of last quarter's orders to this quarter's revenue looks very seasonal. I would make the same general argument about this quarter's orders. If we get a typical conversion quarter to quarter, it looks like you are almost at the midpoint of your guide. So I guess, Ron, do you kind of view the business here as returning to maybe a more normal seasonal pattern off of this lower base?

We guide one quarter out. Obviously there is a lot of -- there are a lot of dynamics that happen within the marketplace. We very glad that we have seen aerospace, defense business be steady. We are very glad that we see China being steady. We are glad that we see Russia return to growth this quarter and last quarter in orders versus last year when we saw a lot of solid declines.

So outside of comms, the backdrop is reasonable. But when you integrate comms, it is still a little uncertain. However, there is one thing that we are very, very confident in. We have a very good business model. We know how to turn that into cash at the end of the day and produce the results that you have seen.

So we will keep at it. And we think our relative position and our growth relative to the competition was pretty strong. And I remember talking about two years ago about how we want to -- wanted to return to market growth. And you can assess how we did relative to the other players in the industry. And very pleased with our posted revenue growth and our profit growth, as well as our 9% order growth for the quarter.

If you trend out, Ron, and I'm curious. If you trend out and you are looking at fiscal third quarter and fourth, you trend off seasonally, it might suggest that your business is up overall, Keysight's core growth would be up low single digits. A prime competitor in Japan gave their FY17 March outlook and put industry growth for test and measurement at 0 flat. So just trying, again, maybe reconcile the growth rates here. Do you feel at this point in time that Keysight in fact is outgrowing the industry? Or do you feel that as the industry growth rate, low single digits, is it flat or just put that in context for us?

Clearly the macro is still very uncertain, as you can see. You could look -- you can also look at all the competitors and see what they posted during the last quarter relative to what we posted. But at this point Japan still is soft, and we seem the comp semi business to be not so strong.

China, clearly they're making some significant investments in semiconductor. But the question is, is how long or what will happen at the end of the year. So it is still a very uncertain background. But as we have guided the last almost nine quarters, independently from Agilent from the first quarters before we split until now, we have met our guidance every single quarter. Hopefully that gives you some confidence.

Okay, very good. Thank you.

Thanks, Richard.

Toshiya Hari, Goldman Sachs.

Hi. This is Alex actually on for Toshiya. First of all, congratulations on the strong quarter. I have a quick question on capital allocation. You obviously repurchased the shares through this last quarter. Any updated thoughts here, specifically around the M&A environment, how you all look at repurchases?

Yes. So obviously we have instituted the share repurchase program last quarter. We executed about 20% of it during Q2. And that's really designed to be an opportunistic program that -- and you can read into the fact that we executed a significant portion of that that we have confidence in our ability to perform in a variety of market conditions.

Our stated strategic priorities have not changed. We continue to look for M&A opportunities that will help us to achieve our longer-term growth objectives. But at the same time, when the opportunities present itself we will continue to execute on the share repurchase program as well, although we don't give any particular color as to what our plans are with regard to that execution.

Got it. And then on the defense business, you all saw good growth here. Commented on the next quarter looking similar. I guess just a question here on how lumpy this business is and how strong of a line of sight you have moving into the back half of this year?

Our aerospace defense business, Alex, has been very steady. It modulated down a bit when there were continuing resolutions going on. But overall, if you look at a trend line of that business for 16 years since we split from Hewlett-Packard, not Agilent, it is pretty darn steady compared to any of our other businesses. And again, we are the prime player in the United States.

The United States is the largest spender in the world by a large amount. We believe in the long term that they will be bringing in new programs to strengthen our ability to deal with new types of threats. And we are very pleased with the position that's there. We don't expect any instantaneous sharp turns up or sharp turns down. But we feel very comfortable with our position.

It is also worthwhile to note that our aerospace, defense business is not only in the US, that it is also overseas. And although it's somewhere around one-third of our business, a lot of the business for the International countries are sold through US prime. So in total, a higher percentage of our business goes to international countries, approaching 50%. So we are very well balanced with US and with other countries. We've had a very steady business in that area. And we are looking forward to capitalize on any gains in any defense spending around the world.

I think we can also say that with the relative stability in the US budget situation over the past couple of years, we do expect aerospace, defense spending to return to typical norms as you think about government fiscal year end in September.

Correct. Got it. Thanks again, and congrats on the quarter.

Thank you very much, Alex.

Thank you. That concludes our question-and-answer session for today. I would like to turn the conference back to Jason Kary.

Thank you, and thank you all for joining us today. We look forward to seeing you at that upcoming investor conferences that I mentioned at the top of the call. And have a great day.

This concludes our conference call. You may now disconnect.