Keysight: Key Player in Communications Testing (NYSE:KEYS) | Panda Anku

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Keysight Technologies (NYSE: KEY) is a leader in testing and measurement.

The company offers vendor-agnostic solutions that are flexible enough to span multiple markets, platforms, and workflow tasks. This speeds up the time-to-market for its customers products and services of customers.

Despite its heavy investment in R&D, KEYS has still achieved very favorable profit margins compared to its competitors.

The company’s focus on the 5G segment should benefit greatly from this industry’s long-term tailwind.

To achieve even greater profitability, the company is increasingly transitioning its products and services to a subscription model. This transformation is likely to succeed as it is a proven forward-thinking business model that other companies have benefited from.

The company is currently undervalued, which makes it a great long-term investment opportunity.

company overview

Even before companies launch their communication products and services like 5G communication, IoT, gigabit-to-the-home broadband devices and other cloud services, they have to go through a thorough testing period to ensure the high quality of these products and services. When done properly and effectively, organizations achieve a timely TTM (Time to Market) that reaps the benefits of first-mover advantages such as increased market share and revenue. As a leader in testing and measurement, this is the most important value proposition that KEYS offers its customers.

From the company’s presentation during its 2020 Investor Day, KEYS’ mission is to help customers deliver “best-in-class, software-centric solutions” that comply with industry standards and specifications.

From the company’s most recent quarterly and annual reports, we can identify two reportable business segments which represent the company’s principal business segments.

  1. communication solution group – This offers test solutions for the segments “Wireless and Wired Communication”, “Network Applications and Security” and “Aerospace, Defense, and Government”.
  2. Electronic Industrial Solutions Group – This provides test solutions for the segments “Next Generation Automotive and Energy”, “IoT”, Consumer, Education and Medical Electronics, Semiconductor Design and Manufacturing.

Vendor-independent solutions with DENT open source technology

DENT is a network operating system (NOS) based on Linux open source technology. By leveraging DENT technology, KEYS benefits from providing solutions in a vendor-independent manner. This puts KEYS in a position to design solutions from “the largest selection of hardware”. This flexibility greatly simplified the process to keep up with customers’ changing needs.

As mentioned in the cover of Investors Day 2020, the company offers a very wide range of communications testing solutions spanning:

  1. Several platforms of hardware, software and services
  2. Several markets from “commercial” communications to “government-related” aerospace defense.
  3. Several tasks in a test workflow that includes initial stages of simulations through final stages of optimization.

Company solutions

Company Solutions (Investor Day 2020)

This comprehensive portfolio of end-to-end agnostic complete testing solutions enables customers to significantly reduce the time to market for their new products, giving the company a very strong competitive advantage in the marketplace.

Growth through R&D investments and acquisitions

The company is one of the key players in the field of communication tests. This is attributed to the high investments in research and development to achieve organic growth. Clever acquisitions by strategic players in wireless communications, networking and automobiles further contribute to its inorganic growth.

R&D investments and acquisitions

R&D Investments and Acquisitions (Investor Day 2020)

This combination of organic and inorganic growth provides KEYS with a very broad portfolio of testing solutions compared to other alternatives on the market.

Switch to 5G testing

KEYS “predicts” that its move to 5G testing is likely to boost the company’s profitability:

Technology predictions from an electronics design and test think tank

Technology predictions from an electronics design and test think tank (company website)

In fact, the company is already an experienced global player in this field:

5G solutions

5G solutions (enterprise solutions)

According to Grand View Research, the global 5G test equipment market size is expected to grow at a CAGR of 8.8% from 2020 to 2027, and KEYS is already one of the major players.

As an existing key player in the 5G testing space, the company’s focus on the 5G testing market in terms of increased R&D investment is expected to benefit greatly from this global tailwind.

Strategic shift to subscription business model

In general, a subscription business model is superior to providing customers with “permanent access” to a company’s software services. According to McKinsey:

Not only can the subscription model drive higher average spend, create a virtuous cycle of leveraging data to better meet consumer needs, and inspire loyalty, it provides value to consumers who value convenience, novelty, and curated experiences.

According to the company’s latest annual report, KEYS is gradually converting its business to such a superior subscription model:

Benefits of the subscription model

Benefits of the subscription model (McKinsey website)

We have reason to believe that the company will benefit from this transition in the same way other companies have benefited from the subscription model.

Financial comparison with competitors

These are the companies that compete with KEYS, according to the company’s annual report:

  • National Instruments Corporation (NATI)
  • Fortive Corporation (FTV)
  • Viavi Solutions Inc. (VIAV)

We’ve extracted some key financial data from Seeking Alpha for comparison.

financial figures

Financial Metrics (Seeking Alpha)

We can observe that:

  1. KEYS is the largest player in the comparison list in terms of market capitalization.
  2. In a long-term multi-year period of 3 to 5 years, KEYS is able to increase its sales faster than all other providers in the comparison list.
  3. It is superior in most of its bottom line results of net income and operating cash flow. In the comparison list, only KEYS and FTV have a double-digit FCF margin.
  4. When comparing the company’s debt to its cash flow, KEYS has the lowest debt profile.
  5. With the highest power ratio, the company has the most assets to liabilities ratio in the comparison list.
  6. We’ve already discussed that continued R&D spending gives KEYS a competitive edge. From the comparison list we can observe that he is far higher than all other players in the comparison list.

Growth companies with high costs usually have to sacrifice profit margins. This is not the case with KEYS. Not only is it able to make heavy R&D investments to gain and maintain its competitive advantage, but it is also able to do so while maintaining remarkably profitable profit margins compared to its peers.


We calculate the intrinsic value of the company using the discounted free cash flow model over a 20-year period with the following assumptions and values:

  • The most recently reported total number of common shares outstanding is 180.1 million.
  • The latest reported “Total Cash & ST Investments” is $1,886.0 million.
  • The last reported “total debt” is 2,008 million.
  • The last free cash flow during the TTM period is 939 million.
  • The discount rate is estimated at 7.51% based on the WACC value.
  • The company has increased its FCF/share by about 30% per year for the last 5 years. We assume that this growth can be maintained for at least the next 5 years.

Author's calculation of FCF growth

Author’s calculation of FCF growth (Seeking Alpha)

  • Growth for the next 5 years is assumed to be 10.7%, which is the average growth of the S&P 500 since its inception in 1957.
  • The company is believed to have grown at the “median” US GDP growth rate of 6.37% over the past 10 years.

Intrinsic value through discounted free cash flow

Intrinsic value by discounted free cash flow (author’s calculation)

Based on the above inputs, the present value (“PV”) of projected free cash flow per share for KEYS is $273.84.

Intrinsic value through discounted free cash flow

Intrinsic value by discounted free cash flow (author’s calculation)

Taking into account all of the debt and cash held by the company, the final intrinsic value is approximately $273.16.

The KEYS share price is currently at the current price of 169.6 undervalued and sale at a discount of -37.91% (169.6/273.16-1).


Even as an established key player in the “Communication Test and Measurement (CT&M) market”, KEYS does not sit on its laurels, but invests heavily in organic growth and strategic acquisitions in order to expand its leading position in the CT&M market.

Such investments have been observed to provide convincing returns, reflected in superior profit margins compared to competitors. This is achieved despite higher investments in R&D compared to other competitors.

The move to 5G testing is expected to allow the company to benefit from the tailwinds coming from the growth and deployment of 5G infrastructure.

The company’s transition to a subscription business model is expected to boost the company’s profitability, as has been the case for other companies.

The stock is currently undervalued, making it a great long-term investment opportunity.

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