Kailash Narayanan - President, Communications Solutions Group - Keysight 2023 Investor Day

Good morning everyone. My name is Kailash Narayanan. I lead the Communications Solutions Group. I've been with the company for over 26 years, and 18 of those years were spent in R&D roles. I spend a fair bit of time talking to customers, and what energizes me is my interactions with customers on their R&D workflows with the purpose of accelerating their innovation. My team and I were just in Mobile World Congress Barcelona last week, and it was great to see 88,000 people come together to drive innovation in our industry.

Now, prior to taking on the CSG role, I led our commercial Communications business as well as our wireless businesses. I'm really excited to be here, and I'd like to cover our growth strategy with you, the upcoming market opportunities, and you'll see why we're excited about that. My presentation is going to focus on four key themes: our track record, building on our strong track record of above-market performance and market leadership; second, how we enable innovation by focusing on the R&D workflows of our customers, capitalizing on the secular technology megatrends in our end markets; number three, how we expand our differentiated portfolio of solutions to capture above-market growth; and finally, operational excellence, driving unique synergies that exist within our business to enable margin expansion.

The business has delivered solid above-market growth over a multi-year period, and this is net of all of the geopolitical impact. FY22 was also a very strong year for us. Our focus on 5G R&D workflows, investment in high-performance networking and computing solutions, as well as steady progress we've made in aerospace and defense markets, have led to a SAM of about $15 billion, representing a $2 billion increase since our last Investor Day. We've grown 6% revenue CAGR and have increased our operating margin by over 500 basis points since 2019. So the above-market growth has really resulted from our differentiated portfolio of solutions that we have.

Let me unpack the business a little bit for you. CSG comprises of two diverse end markets: commercial Communications and aerospace defense, and they share significant synergies between them. Commercial Communications is a multi-layered ecosystem focusing on foundational IP companies that create foundational IP from the smallest silicon to large cloud networks, driving innovation in the wireless, wireline ecosystems, network infrastructure, telco providers, and cloud providers. The aerospace defense market is composed of multiple segments: we've got the defense supply chain, we've got direct government entities, the prime contractors that support government entities, and there's a new area which includes institutions and labs focused on government research. Satish touched on this earlier; there's a lot of investment going into new areas such as quantum, energy, cybersecurity, and 5G/6G technologies. These two markets bring us significant diversity while enabling synergies at the same time.

The long-term success of modern societies is inextricably linked to advances in computing technology and leadership in digital connectivity, and these are the fundamental drivers of our end markets. More than 60% of the solutions that we create have dual purpose and apply to both end markets, and we'll see some examples of this later in the presentation. As we outlined in the Investor Day in 2020, we have grown by capitalizing on the global 5G rollouts. We're enabling new applications such as O-RAN. We've expanded our portfolio to deliver over 125 solutions and have established an installed base of over 1,600 customers who continue to rely on us for core capabilities. As 5G scales and deployments progress, we continue to accelerate defense modernization efforts and are enabling new use cases in satellite communications. We've acquired new capabilities to expand our R&D workflow coverage, and this benefits both commercial Communications as well as aerospace defense markets. For example, Scalable Technologies, which we acquired about 15 months or so ago, is bringing us new digital twin capabilities to model networks and connectivity, and this benefits both commercial Communications as well as defense markets. We're continuing to extend these capabilities to enhance our portfolio differentiation.

We're excited about the long-term prospects of our growing end markets. This is our total SAM today. As Satish outlined, there are some near-term macro headwinds in the commercial Communications market, but when you look at the 7% CAGR growth in the information and communications technology market, when you look at the long-term technology megatrends which I'll talk about a little later, the multiple overlapping cycles of innovation, and our own extensive portfolio, it's pretty clear that there are plenty of opportunities ahead for us in this market. Aerospace defense has been a steady market for us for multiple decades, but based on the increasing defense spend around the world, research investment in new areas, as well as a total combined defense spend of over $1.5 trillion by allied nations, we're raising our long-term market growth rate to 3% to 4%. Our expectation is to outperform the market based on the strength of our differentiated portfolio as well as our deep customer engagements.

With that market backdrop, let me now outline our profitable growth strategy. Our strategy is to capitalize on the long-term secular trends as I outlined earlier in commercial Communications, driving innovation in wireless, wireline, networking, and computing. We will leverage our 5G market leadership position and maximize growth as 5G continues to scale and R&D investment shifts into 5G Advanced, 6G, and next-generation technologies. We're well positioned to accelerate defense communications and modernization efforts as countries around the globe increase their defense budgets to build future capabilities. Another trend is increasing software content in our customers' products, and this is another strong vector of growth for us as we look to expand our software mix and ARR, driving margin expansions. And finally, operational excellence is foundational to our profitable growth strategy. Now we'll unpack a little bit and go into the details of the growth strategy within each of these areas.

There are massive secular technology trends driving innovation in the ICT industry. This has huge implications to multiple end market verticals, and it was great to see examples of this in Mobile World Congress in Barcelona last week. I'll just highlight a few of these megatrends. The number of 5G subscribers is going to grow 5x over the next few years, and as the number of subscribers grow, there will be ongoing R&D investment to deliver new capabilities, to deliver the desired network performance and quality of service. You already have Release 17 and 18 of the standard pushing expansion of use cases in different end market verticals, including automotive, industrial, and enterprise networks. The number of frequency bands for use in communications continue to increase, expanding design, validation, and deployment efforts. There's new investment in non-terrestrial networks, propelling satellite communications and cellular industries to invest more to address use cases beyond GPS-based location. Thousands of satellites are expected to be launched in the next several years, driving investment in these industries. And in wireline networks, data traffic continues to increase. Everybody's heard of ChatGPT, and AI/ML is only in the beginning stages and has the potential to disruptively benefit multiple end market verticals. Now, seamless operation of AI/ML requires significant investment in advanced computing technologies, CPU/GPU technologies, and high-performance networking that includes 800G, terabit, low-latency data center technologies, and integrated silicon photonics, and of course, advanced wireless connectivity that includes 5G, 6G, and beyond. We're well positioned to capitalize and drive the innovation vectors in the ICT industry.

Now, not all of these technologies are going to achieve scale for large commercial deployments; however, they all have to be researched, prototyped, validated, and sometimes trialed on a limited scale, and all of this requires our tools, and that's what creates secular long-term opportunities for us. This slide shows a high-level technology roadmap that the industry must navigate over the next several years. I know I come from an R&D background, but I'm not going to go into the details of these tracks, but suffice to say that in wireless, you're going to need significant advances in 5G/6G and RAN technology to deliver an order of magnitude improvement in bandwidth, latency, and new use cases. In wireline, the increasing network traffic and AI/ML workloads are continuing to drive higher data rates, lower power consumption requirements, and new emulation requirements. ChatGPT that we referenced earlier requires seven times more network compute load in data centers relative to plain search. And then high-performance computing continues to demand new sub-5-nanometer node sizes for ultra-miniaturization, higher density, as well as lower power per FLOP. You can see that the industry has significant challenges ahead in terms of time to feasibility as well as time to market, and along multiple dimensions: power, speed, density, bandwidth, use cases, and so forth. And all of this requires solutions across the workflow from simulation through deployment. You see about 16 or 17 vectors here, and all of these innovation vectors progress in an iterative fashion, and they progress in an overlapping fashion as well. For example, 400G could be in deployment while 800G is in development and 1.6 terabit might be in the research phase. The key takeaway here is these overlapping technology trends foster secular investment trends in our industry, creating opportunities for us, and our solution set continues to expand all the way from the physical layer into protocol and the application layer to address and capture these opportunities. We're really excited to enable this future digital infrastructure, and that's really the purpose of our commercial Communications business.

Our strategy to win really starts with deep customer engagements, and this includes consortia. For instance, we hosted the first-of-its-kind O-RAN conference in Santa Rosa, in our headquarters in Santa Rosa, last year. It was attended by delegates from over 65 companies. We get rich insights from these deep customer engagements, and that drives our innovation and investment priorities, and that leads to first-to-market solutions. An example of such a first-to-market solution is our silicon photonic solution that came from deep customer engagements, and that's now going to generate and drive key advances in data center and terabit networks. Next, our differentiated portfolio based on our core products covering the physical layer of the technology stack, combined with capabilities that we've acquired through acquisitions in the protocol layer, is broadening our solution set, and that allows us to address new use cases and new applications. And finally, we win by expanding coverage of the customer workflow with new system-level emulation capabilities in the application layer, and that's allowing us to address new use cases such as non-terrestrial networks. See, the four-pillar strategy that I've outlined here sets up a virtuous cycle: with a broader portfolio, we're able to engage earlier in the life cycle with our customers, unlocking more insights, which leads to more first-to-market solutions, which leads to expanding the coverage of our customers' innovation workflow.

I'll talk about a few examples on what we're doing with respect to these technology trends, and we'll start with 5G and 6G. Now, we've seen the first wave of 5G network deployments. We've seen hundreds of devices that have been launched, and that's largely been around the smartphone use case. 5G continues to scale; you've got a billion subscribers now, and there are many new use cases that are yet to ramp. The industry continues to progress through challenges in terms of network readiness, coverage, and quality issues still persist. We also have issues in terms of ecosystem readiness in terms of new use cases. So it's clear that even basic things like uplink, which represents the connection for the phone to the network, needs significant improvements. Our strategy is pretty clear: we need to progress and help the industry navigate through these challenges, and we intend to do that by progressing our standards through Release 16, 17, and beyond. This is expected to drive hardware and software upgrades to our installed base. Next, the number of network deployments is expected to increase 3x over the next several years, and that's based on many regional deployments such as what's going on in India right now, driving a new ecosystem. New use cases such as energy efficiencies will become more important as deployments scale. In private networks, quality of service benchmarking and security use cases become more important. Automotive applications, which Christian will talk about next, millimeter wave, and expansion of the spectrum into 5G unlicensed bands will require more design and validation challenges. And all of this requires our tools. We're well positioned to capture these opportunities based on the strength of our portfolio and leading market position. And when we're talking about 5G, 6G research is already underway in sub-terahertz frequencies. These are extremely high frequencies, and we're enabling it with first-to-market 6G testbeds, and you'll see some examples of this outside. We're partnering with the Innovative Wireless and Optical Network forum, and this forum does some foundational work related to 6G. Mark will discuss this a little later. Many regions are forming to advance 6G, and we're excited to be a member of all of those forums, partnering with the industry to move 6G forward. So in summary, I'm really excited about maximizing growth as 5G scales and excited to be partnering with the industry to move 6G forward.

Let me point out to another example that shows our expansion into the protocol and application layer. O-RAN is driving network virtualization as well as disaggregation. Virtualization just means that more software is used to implement the network functionality. Now, an integrated base station of the past is now able to be put together with multiple hardware and software blocks from different vendors, driving interoperability as well as compliance requirements. O-RAN has not achieved maturity yet, but the ecosystem is expanding. We launched an end-to-end solution, Keysight Open RAN Architect, covering the industry needs from silicon to cloud by combining our core product capabilities with capabilities from acquisitions such as Prisma, Ixia, and Sanjole. The ecosystem is expanding; we're capitalizing on it into cloud providers, software companies, and we've extended our installed base to over 125 customers in just over two years. Now, with O-RAN, there are other use cases like security and energy efficiency. Operators care significantly about energy efficiency on their network. We demonstrated energy savings on an O-RAN network in partnership with Vodafone, and this was in display at MWC last week, and you'll see examples of this outside today.

Let me now shift to talk about some examples in the wireline networks. Obviously, data traffic is increasing, and as Satish talked about, AI/ML and other use cases are driving a lot of innovation and steep demand for networking and computing resources. Keysight is the only company that provides a comprehensive set of solutions from physical characterization of the device in the network through functional validation of the protocol stack. We're partnering with leading industry companies, including optical component makers, chipset players, and companies that deploy large AI clusters and data networks. You'll see an example of this industry-leading capability outside that we've launched in partnership with Nokia to drive 224 gigabit per second speeds, enabling 1.6 terabit networks. The requirements are pretty massive and complicated when you think about a data center upgrade. With each data center upgrade cycle, the entire infrastructure that includes the protocol stack, network switches, to each individual component needs upgrades, and all of this drives investment projects in the ecosystem. It's worth double-clicking a little bit on AI/ML that we referenced earlier. AI/ML is about connecting data and intelligence that's distributed across the network, aggregating it, harmonizing it, and delivering it to the user, augmented capabilities to the user in the form of applications like ChatGPT. Now, we're excited to be enabling this new application. Now, what is the challenge for our industry in terms of implementing AI/ML? Well, companies have to model movement of data sets in their data centers and in the network, and they have to run training algorithms. It's extremely cost-prohibitive to implement and deploy a network and find out that you're not getting the performance in terms of latency and so forth. So all of this modeling of AI/ML workloads and performance have to be done in the digital domain in software prior to deployment. We're engaging with cloud providers and hyperscalers to provide them system-level emulation capabilities. This is another example of expanding in the application layer to allow them to benchmark and model AI/ML workloads prior to deployment. So we're really excited about what the future holds here and excited to be participating in this new innovation.

As you can see, there's a ton going on in commercial Communications that I'm super excited about, but as excited as I am about commercial Communications, I'm equally excited about what's going on in aerospace defense. So we'll talk about that in the next couple of slides. This is a steady business for us; it has been for many decades. But in addition to traditional business drivers around defense modernization and modernization of communication technologies in defense, the new dimension here is really advanced digital transformation. There is a push for advanced digital transformation in aerospace defense, and there is new research going on in areas such as quantum, AI/ML, electrification, and so forth. Now, the timing of these investment dollars are a little hard to predict, but digital engineering and defense modernization are stated U.S. DOD objectives for a multi-year period, expected to create opportunities for us. We expect U.S. DOD facilities needing modernization, and this includes use cases in spectrum operations, radar, and radio technologies. Not only that, we're seeing defense budgets around the world increase, and in places like South Korea, Japan, and Europe. Japan's defense budget went up 26% year-over-year to record high levels. And as I mentioned earlier, there's new investment in space and satellite, and this market is expected to grow at a 10% CAGR through 2030. And another vector of growth opportunity for us in aerospace defense is in the government enterprise networks around cybersecurity use cases. We've got our network visibility portfolio that can help in that regard. The rich market insights that we get by closely collaborating with the aerospace defense ecosystem has allowed us to leverage our high-performance core product portfolio that we've had for decades and to win in this market. Now, we've got new capabilities from Ixia, Sanjole, and Scalable Technologies acquisitions, automated test capabilities for make-before-break, all of this gives us an extended portfolio to provide broader coverage and capture above-market growth.

An example of an area in aerospace defense that's having a renaissance period is satellites. Tremendous innovation in the satellite communication industry. It was great to see this in Mobile World Congress, where commercial communication customers and aerospace defense customers are collaborating to advance the next-generation satellite networks. There are a number of low-Earth orbit constellations that have already been launched: OneWeb, Starlink, and soon Amazon Kuiper, and there are dozens that are being planned. There are plenty of new applications for space and satellite, and we're excited to be participating in this market. We've had a strong portfolio of solutions to address this, SATCOM, space, for decades, and now we're happy to be augmenting that with our 5G portfolio to address these new use cases. Our portfolio is pretty broad; we have solutions for phased array antenna characterization, and this new ecosystem is expanding. It's got ground terminals, user terminals, regenerative repeaters, links, and satellites. We're engaging with chipset players to emulate direct satellite-to-phone links in their labs. And Satish talked about our channel emulation capabilities; you'll see an example of this outside. It allows you to model satellite link effects on radio signals, and our network solutions that we acquired from Ixia can simulate IP traffic. So all of these satellite networks can be tested and troubleshot prior to deployment.

I touched on government research. One of the areas where significant government research is happening is quantum computing. This represents a generational opportunity for countries as well as industry players to really gain a technological advantage in a new domain. The number of qubits, which represents the processing power of a quantum computer, is expected to grow three orders of magnitude in the next decade. That requires new simulation and system-level emulation capabilities, ability to control qubits, and ability to characterize errors. Now, we provide our core product portfolio to control qubits, and the most recent acquisition that we did in this space, Quantum Benchmark, is aimed at error characterization. Now, this business is small for us today, but we continue to incubate this opportunity, and I've already extended our partnership to over 100 players in industry and academia.

Now, shift to software. Satish talked about the increasing software content in our customers' products, and this represents a stronger growth opportunity for us going forward. The megatrends that I talked about in both of our end markets is creating an expansion in software content. Customer innovation workflows are becoming more software-centric. Be it digital twins, network functions, new use cases in the application layer, all require new capabilities from simulation to model scenarios and designs prior to prototyping and deployment. So what have we done? We've acquired Scalable Technologies, which gives us digital twin capabilities that can be integrated into our EDA portfolio to enhance our modeling and simulation offerings. I touched on O-RAN earlier, and that's enabling network virtualization, and the software content of that portfolio is over 50%. And then when we look at use cases in the application layer, they're predominantly software-based. That includes quality of service metrics, analytics, and live network assessments. To deal with this increasing software content in our customers' products, we engage with them very closely and deliver software at a pretty steady cadence, capturing value and monetizing the entire life cycle with additional software and services. Mark will touch on that a little later. CSG's software revenue CAGR outpaced our total revenue growth over the last three years.

We have a few levers focused on operational excellence. Number one, I talked about the common R&D that we leverage across the two end markets. We continue to get the best return on our investment by delivering more dual-purpose solutions that address both of our end markets. Number two, with increasing software content in our portfolio, we continue to improve the cadence of software deliveries to improve customer experience and quality, and we're looking to scale that across the entire portfolio. And finally, you've all heard about the pricing increases that we've had in our supply chain over the last 18 months, and we're working very diligently on to unwind a lot of that to expand our margins.

In conclusion, I'd like to leave you with four key takeaways. We're well positioned to capitalize on the secular, steady investments in the technology trends across our end markets. The deep customer engagements that we have is unlocking rich insights and enabling breakthrough innovations and first-to-market solutions. And our differentiated, industry-leading portfolio continues to broaden with long-term organic investments and complementary acquisitions, and we're building on this portfolio to unlock more software-based solutions to drive margin expansion.