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Keysight Technologies Inc  (NYSE:KEYS)
Q4 2018 Earnings Conference Call
Nov. 20, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal Fourth Quarter 2018 Earnings Conference Call. My name is Jessie and I will be your lead operator today. After the presentation, we will conduct a question-and-answer session. (Operator Instructions) Please note that this call is being recorded today, Tuesday, November 20, 2018, 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.

Jason Kary -- Vice President, Treasurer and Investor Relations

Thank you, and welcome, everyone, to Keysight's fourth quarter earnings conference call for fiscal year 2018. Joining me are Ron Nersesian, Keysight President and CEO; and Neil Dougherty, Keysight Senior Vice President and CFO. Joining us in the Q&A session will be Mark Wallace, Senior Vice President of Worldwide Sales; and Satish Dhanasekaran, President of the Communications Solutions Group.

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's segment results. Following this conference call, we will post a copy of the prepared remarks to the website.

Today's comments by Ron and Neil will refer to non-GAAP financial measures. We will also make references to core growth, which excludes the impact of currency movements as well as revenue from acquisitions or divestitures completed within the last 12 months. 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 on today's call. 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.

Note that management is scheduled to present at the Credit Suisse TMT Conference in Arizona on November 28, the Wells Fargo Tech Summit on December 4 in Park City, Utah and the Barclays TMT Conference on December 5 in San Francisco. We hope to see many of you there.

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

Ronald Nersesian -- Chief Executive Officer & President

Thank you, Jason, and thank you all for joining us. Keysight delivered a very strong finish through a difficult (ph) year with both revenue and earnings exceeding the high end of our guidance. Today, I'll focus my formal comments on three key headlines for the quarter. First, fourth quarter revenue grew 16% or 17% on a core basis to reach a record $1.1 billion. We achieved this growth while also delivering 42% year-over-year EPS growth.

Second, customers continued to make strong R&D investments in next-generation technologies and we continue to achieve broad based momentum across multiple end markets with our solutions. The investments we have made over the past several years in our technology, solutions, software and services are delivering results and have enabled Keysight to be at the forefront and capture the demand we see in the market.

And third, 2018 was an outstanding year for Keysight. Revenue grew 20% to reach a record $3.9 billion. We achieved 13% core revenue growth, which was above our expectation of 11% and we delivered 28% year-over-year EPS growth for 2018.

Now let's take a deeper look into our performance for the fourth quarter. We achieved $1.01 per share in earnings, which was $0.13 above the midpoint and $0.10 above the high end of our guidance. This represents 42% year-over-year earnings growth. We also delivered outstanding order growth this quarter. Orders grew 9% in total to surpass $1 billion. This represents our second consecutive quarter of orders above $1 billion. On a core basis, which excludes currency as well as acquisitions or divestitures completed within the last 12 months, orders grew 10%.

This was our fifth consecutive quarter of double-digit core order growth and the third quarter out of the last five with orders above $1 billion. Our continued strong order growth has translated into another quarter of record revenue, which was also above $1 billion for the second consecutive quarter.

Q4 revenue grew 16% or 17% on a core basis. We're delivering broad based growth across multiple dimensions of the business and across our major geographies, including China. As we mentioned last quarter, we are seeing some expected headwinds in China as a result of global trade tensions which we expect to continue in 2019. Despite this dynamic, the breadth of our product offering across a diverse set of end markets enabled strong revenue growth in China in Q4. In particular, we saw good growth in commercial communications where we have strong differentiation in 5G.

2018 was a record year for Keysight with total order growth up 20% or 12% on core growth. This brought our total orders for the year to over $4 billion, a new milestone for the Company. Total revenue grew 20% to a record $3.9 billion. On a core basis, revenue grew 13%, which was above our 11% expectation.

We achieved this growth while also delivering our targeted core operating margin incremental, which resulted in $618 million in net income, up 34% over last year. Our results through this year were driven by good demand trends and strong execution on the plan we implemented four years ago to innovate and be a leader in our selected markets, create value for our customers and deliver growth profitably.

At that time we made the commitment to deliver annual EPS growth between 8% and 10% on a 4% core revenue growth CAGR which we expected to achieve in three years to four years. Earlier this year, we increased that target to 10% or greater EPS growth. I am pleased to report to you today that within three years' time, we not only met that target, we exceeded it and delivered 28% EPS growth in 2018.

Creating value for our customers by providing leading-edge technology solutions and insights that help them to be at the forefront of innovation is the cornerstone of our strategy and the Keysight Leadership Model. The targeted investments we have made over the past several years in software and services and key areas of the market undergoing multiyear transformations are delivering results.

Let me share some data points with you that illustrate our growth in a few of our focus areas. Revenue for our software solutions grew strong double-digits in 2018 and represents greater than 15% of our total revenue. This growth was driven by strong demand for our 5G solutions, high frequency measurement application software, and digital and photonics application software, as well as the addition of ISG.

In services, we achieved all-time highs for both orders and revenue, as well as record double-digit order and revenue growth for the fourth quarter and for the full year. Services are an increasingly important element of our solutions-centric engagement model with customers. We are building momentum in services as we increase full solutions sale in key end markets such as automotive and 5G.

In automotive and energy, customer demand remains high and we delivered our eighth consecutive quarter of double-digit order growth with strong growth across multiple applications. During the quarter, growth from our top accounts was enhanced by wins with many new customers. In 5G, we are leading and delivering very strong growth in Q4, resulting in record 5G orders. Our broad portfolio of 5G solutions and engagement with leading market makers continues to strengthen Keysight's leading position in this fast growing market.

We continue to see major operator ecosystems embrace the Keysight platform. This quarter we received endorsements from China Telecom and SK Telecom. The scalability of our platform combined with Keysight's team's ability to keep pace with the fast evolving standards needs positions us for future success as 5G deployments scale.

Additionally, our Ixia Solutions Group secured important new 5G orders with leading mobile operators in Japan, Korea, China and the US. It is exciting to see ISG's recently launched 5G solutions gain momentum with these Tier 1 accounts. Our combined technologies enabled Keysight to deliver full end-to-end solutions across the total communications workflow, which we view as a significant differentiator as wireless and wireline technologies continue to converge and 5G moves into commercialization.

The contract manufacturing transition continues to take longer than we expected. That said, we have continued to make progress in optimizing the ISG business post integration and order strengthened in the quarter for both visibility and test. We are confident in the plan we have to create long-term shareholder value.

In summary, 2018 has been a year of great success, and strong revenue and earnings growth. As we look ahead, we believe Keysight is well positioned to expand our leadership as our markets evolve. We have built a robust innovation engine and a broad portfolio of solutions that span multiple segments. Our solutions-centric approach to the market builds deep customer relationships that fuel innovation and customer success. We will continue to focus our investments in these key areas to drive innovation, create even more value for our customers and outgrow the market.

Importantly, we have maintained our strong focus on financial discipline and operational excellence to drive earnings growth while investing in key areas of the business. Before I turn the call over to Neil, I would like to thank every member of Keysight's team for their dedication and hard work that made our record 2018 results possible.

I will now turn it over to Neil to discuss our financial performance and outlook in more detail.

Neil Dougherty -- Chief Financial Officer

Thank you, Ron, and hello everyone. Before I get started, I will note that all comparisons are on a year-over-year basis, unless specifically noted otherwise. As Ron mentioned, we delivered another strong quarter as we continued to execute on the demand we see in core areas of our business. For the fourth quarter of 2018, we delivered record non-GAAP revenue of $1.051 billion, which was above our guidance of $1 billion to $1.020 billion.

We also delivered $1.1 billion in orders in the quarter, which were up 9% in total and 10% on a core basis. Looking at our operational results for Q4, we reported gross margin of 61% and operating expenses of $408 million, resulting in operating margin of 22.3% which is the highest level in Keysight's history. We also achieved record net income of $193 million and delivered $1.01 in earnings per share, which was up 42%. Our weighted average share count for the quarter was 191 million shares.

GAAP net loss for the quarter was $114 million. In conjunction with our annual financial planning cycle and asset impairment review, we recorded a non-cash goodwill impairment charge of $700 million net of tax, primarily due to weaker-than-expected market dynamics experienced in the Ixia Solutions Group. While this is disappointing, the Ixia business is a valuable asset in the Keysight portfolio. We remain confident in the long-term opportunities created by combining Ixia's strength in networking and Keysight's strength in wireless and physical layer test.

Our combined technologies enable Keysight to deliver full end-to-end solutions across the total communications workflow, which we view as a significant differentiator as wireless and wireline technologies continue to converge and 5G moves into commercialization.

Moving to the performance of our segments, our Communications Solutions Group, or CSG, generated total revenue of $566 million, up 23% while delivering record gross margin of 63.7% and record operating margin of 27%. In Q4 , Commercial Communications delivered strong double-digit order growth and record revenue of $357 million, up 28%, driven by increased 5G R&D demand across the wireless ecosystem and growth in data center, next-generation 400-gigabit and high speed digital test.

Aerospace, defense and government grew 15% and generated revenue of $209 million. Aerospace, defense and government growth was driven by continued strong demand across the aerospace, defense supply chain including space, satellite, cyber security, radar and electronic warfare applications. For the year, CSG revenue grew 17% to reach a record $2 billion.

Our Electronic Industrial Solutions Group, or EISG, generated fourth quarter revenue of $249 million, up a record 21%, driven by strength across all of its markets, automotive and energy, semiconductor and general electronics. EISG reported gross margin of 60.6% and operating margin of 26%.

Our Ixia Solutions Group, or ISG, reported Q4 revenue of $115 million, gross margin of 70.5% and breakeven operating profit. ISG orders grew mid-single digits year-over-year and double-digit sequentially driven by 5G wins as well as increased 400-gigabit and visibility sales. We were encouraged to see another quarter of improved sales execution, but as Ron mentioned, the contract manufacturing transition is ongoing which impacted ISG's Q4 revenue and operating results. We remain confident in our ability to work through these challenges, grow the business and increase profitability.

Lastly, Services Solutions Group, or SSG, revenue grew 10% in Q4 to reach a record $121 million, while delivering 40.9% gross margin and an operating margin of 13%. Q4 services revenue was driven by growth for calibration, remarketed solutions and repair. This brings SSG revenue for the year to $461 million, up 10% over last year as our pivot to an organic growth strategy takes hold.

As Ron highlighted, we are pleased with our performance and execution as a company for the 2018 fiscal year. Revenue for the year totaled $3.9 billion and gross margin improved 70 basis points to 60.7%. To fuel innovation and further strengthen our market position and strategic areas, we continue to invest while at the same time remain within our operating model. We achieved our core operating margin incremental target for the year and achieved 20% operating margin. This translated to strong 28% earnings growth and reported non-GAAP net income after taxes of $618 million or $3.24 per share for the full year.

Moving to the balance sheet and cash flow, we ended our fourth quarter with $913 million in cash and cash equivalents and reported cash flow from operations of $235 million and free cash flow of $201 million, which represents 19% of revenue. This brings our free cash flow for the year to $423 million or 11% of revenue, which includes the one-time $85 million accelerated funding of our US pension plan that we discussed last quarter.

Under our existing share repurchase authorization, during the quarter we acquired approximately 634,000 shares on the open market at an average price of $63.11 for a total consideration of $40 million. This brings our total repurchases for the year to approximately 2 million shares at an average price of $57.91 for a total consideration of $120 million.

Now turning to our outlook and guidance, we expect first quarter 2019 revenue to be in the range of $965 million to $985 million and Q1 earnings per share to be in the range of $0.76 to $0.82 based on a weighted diluted share count of approximately 190 million shares. For 2019 modeling purposes, I would like to remind you that the quarterly revenue seasonality in the first half of 2018 was heavily skewed toward Q2 as a result of the closure of our Santa Rosa facility due to last year's wildfires.

Historically, sequential revenue growth from Q1 to Q2 has averaged mid single-digits. With regard to our tax rate, based on our latest assessment of the benefits of tax reform, we are currently modeling a 12% non-GAAP effective tax rate for FY19, a reduction of 3 percentage points from our prior rate of 15%.

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

Jason Kary -- Vice President, Treasurer and Investor Relations

Thank you, Neil. Jessy, will you please give the instructions for the Q&A?

Questions and Answers:

Operator

(Operator Instructions) And the first question comes from the line of Brandon Couillard with Jefferies. Your line is open.

Brandon Couillard -- Jefferies -- Analyst

Thanks, good afternoon. Ron, if you look at the business in the fourth quarter, clearly quite a bit of momentum across the board. Where would you say were the biggest areas of surprise to the upside relative to your guidance and then as you look out to fiscal '19, any goalpost you can share with this relative to your 4% to 5% long-term top line growth target. I understand you are lapping pretty tough comps, but what areas of the business do you think get stronger versus those that might moderate a bit?

Ronald Nersesian -- Chief Executive Officer & President

Brandon, one of the good things is that a lot of our growth initiatives are hitting on all cylinders and continue to break records. 5G is the area that has grown triple-digits as we had talked about and it continues to be very strong and very strong around the world, and that feeds into our commercial communications business which is also very strong as we reported our revenue for -- overall for China. That was a bit of a surprise, how strong that was. But our services business, for instance, has grown double-digits throughout the year. On top of that, our automotive business has grown very strong. So when we look at, for instance, revenue growth of CSG of 23%, we see also EISG at 21%, SSG at 10%.

All of those are doing well. But EISG and SSG driven primarily from commercial communications and automotive seem to be strong. There's no doubt that we do have a tough compare compared to last year, which the performance was so much better than the year before, but we actually see upside to that 4% to 5%. And Neil, feel free to go in and to add some more color to that.

Neil Dougherty -- Chief Financial Officer

Yeah, I think, Ron, you hit it. I think we feel like we're at the front end of a number of secular themes that will continue to provide growth opportunities for us moving forward. As you mentioned, Brandon, the 2018 growth will provide some tougher comps for us, particularly in the back half of the year. We're weighing that with the strength we see in our growth initiatives with some potential headwinds in China as well as in semi. But all in all, we see some upside to the 4% to 5% long-term growth target that we put out there for the Company and we feel we have a broad portfolio of solutions and sell into a diverse set of end markets and believe we're well positioned across that entire space.

Ronald Nersesian -- Chief Executive Officer & President

And again, if you look at our growth initiatives, services, automotive and software, all grew double-digits in orders and the only exception was 5G, which grew triple-digits. So that momentum continues to be strong and that's why we're raising the outlook relative to Street consensus going forward for Q1.

Brandon Couillard -- Jefferies -- Analyst

Thanks, that's helpful. And then one more, Ron. With respect to Ixia, I wasn't quite clear that the contract manufacturing transition is still behind you. Should we still think about that as a headwind to the top line for that business segment in the first quarter and then with respect to the revenue synergy target of I think $50 million plus by year three. Is that still a relevant figure that is still intact in your mind?

Ronald Nersesian -- Chief Executive Officer & President

Sure. Well, let me just start and say overall, although we had a record year, all is not perfect. The Ixia integration has become a bigger job than we had thought originally. We're making excellent progress, but it's taking longer than we originally thought. And we have a multifaceted plan to go after this.

One, we put new leadership in place with Mark Pierpoint lead that group and that's working out very well. We've completed our transition and integration to a new sales platform that will help make sales much more integrated and also share on the information to really accelerate our revenue synergies, which are starting to pop up with Satish in our General Communications Solutions Group.

We've seen improvements in our order flow and in our funnel conversion throughout the quarter and as we reported, we had mid single-digit growth for ISG in orders this past quarter and double-digit growth in orders sequentially. But we are consolidating the CM supply chain and we're transferring about 75 products and major products, I should say. And although they're not new products, it's a whole new process that we're putting into this CM.

And what it will do, it will improve the quality and lower the cost to provide great performance in the long term. So that's what's going on. We still a lot of confidence in the business and we recently introduced new solutions (inaudible) one solution for 400 gig. It is the densest solution to go ahead and to address this need. Compared to the competition, it's very strong. So, we're excited about that.

And now, I'll turn it over to Neil to talk a little bit about the guidance and the financials for Ixia.

Neil Dougherty -- Chief Financial Officer

Ron, I think you covered it pretty well. As Ron mentioned, the contract manufacturing transition has taken us longer than we expect, but we would point to the strong order growth rates that we saw in the quarter. And you mentioned, revenue synergies, I think we can point Ixia's success in China particularly at some of the bigger customers that have been strongholds for (inaudible) commercial communications business and the wins that we're getting there as evidence that we are getting revenue synergies in this business.

So, I think as we look forward we remain confident in our thesis and that is wireless -- as 5G rolls out and wireless and wireline converts, as the ability to provide end-to-end solutions across the communications ecosystem by bringing these businesses together in the end as a winning strategy.

Ronald Nersesian -- Chief Executive Officer & President

It may be worthwhile for Satish to add a point on what he's seeing in 5G and how it intersects with Ixia.

Satish Dhanasekaran -- Senior VP and President of the Communications Solutions Group

Thanks, Ron. Clearly, on one way you look at 5G as a wireless standards evolution, but it's really causing the entire communication block diagram to be reconstituted or transformed and that transformation is occurring end-to-end. You start with devices, the entire memory systems are changing and then you go into the cloud and the core network side, there is fundamental shifts occurring there. Our ability to sort of keep pace with the needs of the entire ecosystem is a big differentiator and you can see that in our continued momentum of 5G orders in the Company. We are in conversations with lead customers today because of the fact that we have the entire 5G stack end-to-end.

We don't have to look elsewhere, we can look inwards and provide the complete solution for the ecosystem. So I continue to believe that getting this entire capabilities together will keep the momentum for our 5G success going for some years to come. Thank you.

Brandon Couillard -- Jefferies -- Analyst

Okay, thank you.

Ronald Nersesian -- Chief Executive Officer & President

Thanks, Brandon.

Operator

Your next question comes from Vijay Bhagavath with Deutsche Bank. Please go ahead.

Vijay Bhagavath -- Deutsche Bank -- Analyst

Yeah, thanks. Hi, Ron, Neil, the mood at your Company should be party like it's 1999. I know it's a tough tape, still a question for you which get asked a lot from clients is, how should we think about the duration and the longevity of some of these secular growth drivers you mentioned. You could pick on, for example, 5G the aero, defense program complex, connected cars (inaudible) so that from a modeling point of view we get an understanding of the longevity and the duration of some of these growth cycles.

And I have a follow-on for Neil.

Ronald Nersesian -- Chief Executive Officer & President

Sure. Well, first of all, I just want to say, as you said people at the Company should be happy. We just said that a note that you know our employees have variable pay based on their performance and they are receiving record bonuses for this record performance during last year and there's nothing that makes me feel happier than to be able to share the success with all the employees that are working very hard.

Second, with regard to the growth initiatives, one of the things that we looked at what we set this up roughly four years ago was to look for a secular growth trend that last at least a decade and typically two plus and that's what we're seeing in 5G as well as in commercial comps and we're seeing at automotive with ADAS etcetera and these trends are going to go on for a long period of time before you see automotive get to level five and there is plenty of opportunity for us as this gets implemented and safety becomes extremely important and there are multiple technologies that are utilized.

5G, it's the same thing. Before that gets implemented around the world, a lot of times we forget and we think of how fast the US is moving or how fast, for instance, China is moving right now and other countries. The world is much bigger and nobody -- there's many many countries that will utilize this technology that will not see it for many years, but we're starting to see some countries that will be seeing their first rollouts very soon.

So, we're really excited that you'll see these growth initiatives and what we have going on for another decade at least and again we will also look as we continue to build those out to add more, but right now there is such a opportunity in a gold mine in these applications we're focusing and it's providing us the growth that we have promised and then some, as well as the earnings growth which is our ultimate job.

Vijay Bhagavath -- Deutsche Bank -- Analyst

It's very helpful, Ron. Neil, a question for you. Recently we've been kind of picking up on the tape here some design wins and success story with for example China Mobile and Korea Telecom and perhaps other places rest of world. So how should we think about gross margins and also sales OpEX versus those in the US, would they be roughly comparable, would they be meaningfully below the US counterparts? Thank you.

Neil Dougherty -- Chief Financial Officer

It's a great question. Thank you, Vijay. I think from a gross margin perspective, we do not see a big differentiation as we look to the different geographies around the world. The biggest differentiator we see on the gross margin line is whether or not we're selling into an R&D lab for an R&D solution or selling into manufacturing line once production has begun -- once volume production has begun.

Obviously, the overwhelming majority of our 5G sales at this point are still in the R&D phase. Satish did reference last quarter that we had gotten our first manufacturing order, but again that's really around the edges at this point. What was the second part of your question, I'm sorry?

Vijay Bhagavath -- Deutsche Bank -- Analyst

And the second part is also like the sales OpEx like (multiple speakers).

Neil Dougherty -- Chief Financial Officer

The sales OpEx, I would look to reference the initiative that Mark Wallace has to double our number of direct frontline sellers, that's a multi-year effort that we are undertaking to essentially increase the capacity of our sales force and ultimately drive the top line. I'll let Mark make additional comments. Obviously, there will be some additional expense associated with that but you can think of it as kind of continuing within the current operating model on a percentage basis to get a little leverage.

Mark Wallace -- Senior Vice President, Global Sales

Just a comment, the way we're deploying the resources or the -- where the growth in the opportunity, with the market inflections are occurring, so as there is a lot of growth occurring in Asia, in China and Korea and other locations like that, that's where we're focusing a lot of our increased capacity and capability. So we're really focusing on pretty surgical deployment to follow our growth strategy on increasing our capacity to support customers and grow the business wherever that may be.

Vijay Bhagavath -- Deutsche Bank -- Analyst

Congratulations once again.

Ronald Nersesian -- Chief Executive Officer & President

Thank you, Vijay.

Operator

Your next question comes from to Toshiya Hari with Goldman Sachs. Your line is open.

Toshiya Hari -- Goldman Sachs -- Analyst

Great, thank you very much for taking my question and congrats on the strong quarter and the year. In EISG, you guys delivered very nice acceleration in the quarter, 21% growth year-over-year. You guys talked about strength pretty much across the board, maybe outside of semiconductor test. But as you look out across the next 12 to 18 months, how should we think about sustainability of growth here. I know some of your sub-segments are a little more secular in nature. I know some of your businesses are a little bit more cyclical, so if you can help us with the modeling for the next year, that would be helpful.

Ronald Nersesian -- Chief Executive Officer & President

I'll let you take that one, Neil.

Neil Dougherty -- Chief Financial Officer

Yes, happy to do it. So just a couple of comments as it relates the sub-segments within EISG. As Ron has already indicated with regard to automotive, we really believe that we're in the front end of a multi-year rollout of next-generation auto. And so, we just don't see any reason to believe that the growth there is going to subside anytime soon. The two other segments in there are obviously semiconductor and general electronics. The general electronics business is a really extraordinarily diverse set of business. It's probably the most tightly linked to the overall macro environment. And so there is no one single driver in that business, but as long as the macro economy stays strong and electronics in general are doing well, we'll continue to generate strong revenues in our general electronics business.

And lastly, semiconductor, we've been cautious about semi for several quarters in a row. We did put up really strong revenue growth in the fourth quarter, but orders in the fourth quarter as we expected were down in the fourth quarter. And so we are expecting some softness in the semi piece of our business going into next year, but I would remind everybody that semi as a part of Keysight is substantially less than 10% of our overall revenue.

Mark Wallace -- Senior Vice President, Global Sales

And it's probably worthwhile to note that orders overall was greater than revenue and we built backlog again in Q4.

Toshiya Hari -- Goldman Sachs -- Analyst

Got it. Very helpful. And then as a quick follow-up, again, execution on the margin front was very strong as well. I think you're already in your long-term model range of 22% to 23% despite some of the near-term weakness at Ixia. How should we think about potential upside in margins as you think about your business over the next 12 to 18 months?

Neil Dougherty -- Chief Financial Officer

We're committed to doing two things, one, providing a 40% incremental and, two, reinvesting in the business for growth. So as long as we continue to see opportunities there as we see upside, you can count on a 40% incremental and you can count on us doing everything we can to grow the top line and bottom line even further.

Toshiya Hari -- Goldman Sachs -- Analyst

Got it. Thank you so much.

Operator

Your next question comes from Amir Rozwadowski with Barclays. Your line is open.

Unidentified Participant -- -- Analyst

Hi, this is Peter (inaudible) on for Amir. Thanks for taking my question. I just want to circle back on China. When we last checked in, there was a little bit of headwind on the A&D side related to trade situation, trade restrictions. Is that continuing, has it sort of flat lined or improved at all?

Ronald Nersesian -- Chief Executive Officer & President

It's great question, Peter. The first thing is probably not apparent is that now what we see is our A&D business in China is a relatively small portion of overall China sales, it's less than 15%. So most of the business that we see there is commercial comps and we see some general purpose products, but -- so 85% has nothing to do with aerospace, defense, which sees the, let's say, the most short-term pressure. So that's the first answer and then I'll let Satish make some other comments about his aerospace, defense business.

Satish Dhanasekaran -- Senior VP and President of the Communications Solutions Group

Thanks, Ron. Overall, I'd say aerospace, defense had a record year, finishing the year at close to $800 million in revenue and sales. And as you pointed out, China is a small part of it. We saw some softness in China as anticipated, specific to the aerospace and defense applications, but it was more than made up for to the strengths we saw in our commercial comps business.

Unidentified Participant -- -- Analyst

Okay, great, that's very helpful. Thank you. And then just a quick follow-up specifically to China in the semi business, when we last checked in, there was substantially exposed to sort of the evolution and new geometries and more on the R&D side, has that -- is that still strong in the quarter?

Satish Dhanasekaran -- Senior VP and President of the Communications Solutions Group

Yeah, as I said, semi revenues were very strong in the quarter, but we did see a softening or a slowdown in the incoming order rate during the quarter. The two drivers as you mentioned were the move to smaller process architectures as well as the general fab buildout that's happening in China, but the semi orders were in fact soft during the quarter.

Ronald Nersesian -- Chief Executive Officer & President

We had a huge buildout last year when it about 17 different foundries in China were formed and that created a nice pace or let's say a healthy compare. But what's also interesting is that we built backlog in the semi business this year, we built it also last year. So things are pretty reasonable there.

Unidentified Participant -- -- Analyst

That's very helpful color. Thank you.

Ronald Nersesian -- Chief Executive Officer & President

Thank you.

Operator

Your next question comes from Jim Suva with Citigroup. Your line is open.

Jim Suva -- Citigroup -- Analyst

Hi, good afternoon and thank you. Your results are very stellar. So, I guess I'll focus a little bit on more of the opportunity. When we look at the revenues for services, up year over year nicely, margins down year-over-year. A lot of investors get concerned when they see those trends. It sounds like from your prepared comments you're investing in the sales force and such an increase in the number of (inaudible), is that the way to think about it and when we do that, is it like a 6-month, 9-month, how long the kind of sow before the harvest comes from those efforts? Thank you.

Ronald Nersesian -- Chief Executive Officer & President

I think Mark Wallace, Head of Sales, can give some initial comments and then Neil will follow it up with the financials.

Mark Wallace -- Senior Vice President, Global Sales

Sure. Thanks, Ron. Jim, we're deploying new resources continuously, it's about six months to bring resources on board, but you know it's happening over multiple phases across multiple parts of our business. Last year, at the beginning of our fiscal year, we deployed the first global services sales organization within Keysight. So we've had our first year of having a focused sales organization and as you heard from Ron's comments earlier, we delivered record high order growth during the year, 30% order growth in Q4, 22% growth for the entire year. So, it is working.

The other subtlety here is we're really putting a lot of focus across all of Keysight global sales on selling services, not just a dedicated sales team that sells value-added services. We put a lot of focus on upfront services sales. So that means when you sell a piece of equipment or a solution, we're selling more services upfront and that's really helping us to drive growth now and over time because a lot of this will be recurring and then across the board. Our services business for multi-vendor repair and cal is up, our remarketed equipment sales are up, and I think it's a direct result of us being successful with our organic services capability as well as deploying a sales organization that is capable of selling services.

Neil Dougherty -- Chief Financial Officer

If I was just going to add to your point on margin, if you look at it take Q4 financials, for example, what we saw was 30% order growth and 10% revenue growth and it's -- but we pay our commissions based on orders. And so we're very happy with the performance of our services business during the year and during the quarter. Right now, we've got expenses that are some extent leading revenue because of the outpaced order growth during the period.

Jim Suva -- Citigroup -- Analyst

Great. And then my follow-up question is, switching gears to your contract manufacturing challenges, I believe a quarter or two ago, maybe three ago, you mentioned some ERP issues. Are those completely independent of each other or those two somewhat related and if so the resolution of each of those, when should we think about it?

Neil Dougherty -- Chief Financial Officer

I would say at this point they're independent issues. We did the transition of Ixia on to the Keysight ERP as well as the transition to the new contract manufacturer. Both of those were executed during the Q2 timeframe. At this point, the ERP issues are largely behind us. We're continuing to obviously work to stabilize the contract manufacturing situation. As Ron mentioned, transferring 75 complex projects into the new CM, putting processes in place to improve quality, reduce cost. We're confident in our ability to get this done and to come out the other side, but it's taking longer than we expected.

Jim Suva -- Citigroup -- Analyst

And what is the duration or end of it that we anticipate?

Neil Dougherty -- Chief Financial Officer

We haven't put a timeline on it. We're continuing to work to resolve issues. We're making progress every quarter. We expect that progress to continue and we'll keep working at it.

Jim Suva -- Citigroup -- Analyst

Thank you so much for the details and clarifications, gentlemen. It's greatly appreciated.

Ronald Nersesian -- Chief Executive Officer & President

You're welcome, thank you.

Operator

Your next question comes from Adam Thalhimer with Thompson Davis. Your line is open.

Adam Thalhimer -- Thompson Davis -- Analyst

Hi, good afternoon guys. Great quarter.

Ronald Nersesian -- Chief Executive Officer & President

Thanks, Adam.

Adam Thalhimer -- Thompson Davis -- Analyst

Ron, you really caught my attention when you talked about the auto orders. You emphasized many new customers, just curious if you can give us some more color there.

Ronald Nersesian -- Chief Executive Officer & President

Sure, I'll let Mark talk in some of the information we can tell you and other stuff we're restricted to share, but Mark will be able to share what we can at this point.

Mark Wallace -- Senior Vice President, Global Sales

Sure. Adam, I think we've been talking about new customer acquisition for several quarters now and we have acquired several thousand new customers overall during the course of the last 12 months, during our last fiscal year. There is an explicit focus across the board, including automotive. One of the vehicles, no pun intended, we're using to find and capturing new customers is putting customer solution centers where the customers are located.

A year ago we opened up our solution center right outside Detroit. It's been very successful. We have regular interaction with both new and existing customers there and just last month or back in October, I should say, we opened up another new center in Shanghai, China and that complements our capabilities that exist today in Bochum, Germany in the Bay Area and other locations. So we're going to continue to deploy this strategy. It brings customers and innovators within Keysight together and it's really working very well.

The other comment I'll make is that the additive function of Scienlab to our portfolio is making a big difference in terms of finding new customers, especially on the Tier 1 OEM side where we have new solutions for that particular set of customers.

Adam Thalhimer -- Thompson Davis -- Analyst

Got it. And then follow-up I wanted to ask about Ixia margins. At one point, I think you talked about upper teens, next couple of quarters just curious whether that's still possible.

Neil Dougherty -- Chief Financial Officer

Well, we obviously took a step backwards here during the fourth quarter but we are singularly focused on improving both the top line and bottom line in this business. Ron mentioned that we have a multifaceted plan of attack and so that is still the objective, is to get this business into the teens level of operating margins as soon as practically possible.

Adam Thalhimer -- Thompson Davis -- Analyst

Okay, thank you.

Ronald Nersesian -- Chief Executive Officer & President

Thank you very much, Adam.

Operator

Your next question comes from John Marchetti with Stifel. Your line is open.

John Marchetti -- Stifel -- Analyst

Great, thanks very much. I wanted to touch a little bit on the goodwill impairment, Neil, and just maybe walk through a little bit of how you guys looked at it, where you think you are in sort of that now and if we should expect sort of any more of that as we continue to move forward here, if these kind of taken that down to bare bones at this point.

Neil Dougherty -- Chief Financial Officer

Well, I'd start by saying that obviously the non-cash goodwill impairment charges does not change our confidence in ISG and the business in our strategy about bringing networking and wireless together within Keysight. We view ISG as a very valuable asset within our portfolio. That said, in conjunction with our annual financial planning processes and our annual review of our asset base, we did take the goodwill impairment charge, really driven by two primary factors.

The first is that the test and visibility markets have really seen moderated growth rates since the time of the acquisition relative to our expectations and at least as we look forward, we expect those moderated growth rates to continue for at least a period of time. Second factor is one that we've talked about in the past. Obviously, we did have a bit of a disruption to our revenues in the second quarter of this year as part of this contract manufacturer transition and as we've talked about that, that transition is still ongoing.

To answer the second part of your question, we don't believe that you're going to face any additional impairment because we have again the multifaceted plan in place to improve this business. We are getting traction in the marketplace. Ron talked about the increasing sales velocity. We talked about the driving orders for the new 400-gigabit Ethernet solution, the new 5G solution. We've got a new Wi-Fi solution coming out in the spring.

And so, as we get these new technologies to market and we have the opportunity to combine the capabilities of Keysight and Ixia together, we believe that we can generate value of this asset.

Ronald Nersesian -- Chief Executive Officer & President

And John, we don't expect there to be another one. We looked at that and we feel very confident there will not be another.

John Marchetti -- Stifel -- Analyst

Okay, thank you. And then just maybe following up a little bit on that CM issue, in terms of maybe what was left on the table, is it specific product areas or opportunities there that have been left behind and given what you're talking about now with some opportunities in 400-gig, in 5G and then you just mentioned WiFi as well coming, are those new enough opportunities to where those were transitioned first or at least those sort of near-term growth opportunities, you know, at least all the way transferred over where we shouldn't expect that opportunity to be disrupted in any way?

Ronald Nersesian -- Chief Executive Officer & President

No, we feel very good about where we are. Would we have liked it had more output? Yes, there is no doubt about that. There was some component shortages that did not help at all. But overall what we have forecasted and what we have guided, as you know, we beat our guidance, met or beat our guidance 16 out of 16 quarters and that includes everything that we see at Ixia. So we feel pretty good about that.

And Satish, it may be worthwhile to say another comment or two with regards to Ixia and what you're seeing again.

Satish Dhanasekaran -- Senior VP and President of the Communications Solutions Group

Ron, thanks. One of the things that we're we seeing is as we are engaging with customers on 5G, you talked about our triple-digit growth, what might be worth highlighting is the diverse nature of that growth. We see growth across the comps ecosystem. We've seen strong order and adoption of our 5G platform from chipset providers, device makers, NEMs and operators. Especially when we work with operators, the challenges they face in deploying 5G go beyond just wireless and go into the aspects of the core network, it's all about the end-to-end equation and our ability to have the right expertise, the right talent and have the right technology stack in the Company is a big deal and a differentiator that I believe will play out in the next few years as 5G becomes a more -- becomes real across the globe.

Ronald Nersesian -- Chief Executive Officer & President

And the only other point that I'll add, John, is that we have spurred like most companies manufacturing facilities over time for thousands and thousands of products. So we know how to do it just in certain cases, with working with some CMs and due to the current situation. It's just taken a little longer. So this is no different and this will be fixed and then you will see earnings growth improve.

John Marchetti -- Stifel -- Analyst

Thanks very much.

Ronald Nersesian -- Chief Executive Officer & President

Thank you.

Operator

Your next question comes from Richard Eastman with Baird. Your line is open.

Richard Eastman -- Baird -- Analyst

Hi, good afternoon. Just, as a last-second follow-up on Ixia, is the margin profile of that business the same or will it be the same here, post CM transitions and the investments that you're making in there, as it was prior to your acquisition, in other words mid-70s gross margin and 20% plus type of EBIT?

Ronald Nersesian -- Chief Executive Officer & President

Yes, we're seeing upper 70s gross margin and operating margin around 20% is where we're planning to get it back to and of course we're looking for ways to go even further than that, but that's where we plan to get it to and we're looking for all types of ways to continue to improve the quality and to lower the cost, but first we're just making sure we get the flow right and making those other improvements in parallel.

Richard Eastman -- Baird -- Analyst

And is it a reasonable assumption that Ixia shows low single-digit growth, mid-single digit growth in '19 here with the order growth that you referenced?

Ronald Nersesian -- Chief Executive Officer & President

Neil, I'll leave the guidance to you.

Neil Dougherty -- Chief Financial Officer

We don't guide our businesses specifically, but particularly at the Keysight level, we have obviously difficult comps, but at the (inaudible) level, we have some easier comps and we expect to exceed to be a growth business for us in FY19.

Richard Eastman -- Baird -- Analyst

Okay, fair enough. And then also on the Aerospace, Defense side, I may have missed this, but in the fourth quarter, was there an order number and did you again build backlog on the A&D side of the business in the fourth quarter?

Satish Dhanasekaran -- Senior VP and President of the Communications Solutions Group

Yes. We built backlog for that business in the fourth quarter. As you know, the revenues for aerospace, defense were up 15%. And while the orders were down for the quarter, it was down over what was the highest quarter ever for that business in Q4 2017. So the orders this quarter for this year were the second largest since we've been tracking this business. So the growth drivers are strong. Our focus on electronic warfares, (inaudible) monitoring, radar, satellite and space are all continuing to gain momentum with customers and we anticipate growth for that business looking ahead.

Richard Eastman -- Baird -- Analyst

Okay, very good. Thank you.

Ronald Nersesian -- Chief Executive Officer & President

Thank you, Rick.

Operator

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

Jason Kary -- Vice President, Treasurer and Investor Relations

Thank you. Jessie, and thank you all for joining us today. We look forward to seeing many of you at our upcoming conferences and wish you a good day. Thank you.

Operator

This concludes our conference call. You may now disconnect.

Duration: 56 minutes

Call participants:

Jason Kary -- Vice President, Treasurer and Investor Relations

Ronald Nersesian -- Chief Executive Officer & President

Neil Dougherty -- Chief Financial Officer

Brandon Couillard -- Jefferies -- Analyst

Satish Dhanasekaran -- Senior VP and President of the Communications Solutions Group

Vijay Bhagavath -- Deutsche Bank -- Analyst

Mark Wallace -- Senior Vice President, Global Sales

Toshiya Hari -- Goldman Sachs -- Analyst

Unidentified Participant -- -- Analyst

Jim Suva -- Citigroup -- Analyst

Adam Thalhimer -- Thompson Davis -- Analyst

John Marchetti -- Stifel -- Analyst

Richard Eastman -- Baird -- Analyst

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