Keysight Technologies'(KEYS) CEO Ronald Nersesian on Q4 2016 Results - Earnings Call Transcript

| About: Keysight Technologies (KEYS)

Keysight Technologies, Inc. (NYSE:KEYS)

Q4 2016 Earnings Conference Call

November 17, 2016 16:30 ET

Executives

Jason Kary - VP, Treasurer & Investor Relations

Ronald Nersesian – President and Chief Executive Officer

Neil Dougherty - SVP and Chief Financial Officer

Mike Gasparian - President, Communications Solutions Group

Soon Chai Gooi - President, Electronic Industrial Solutions Group

John Page - SVP & President, Services Solutions Group

Mark Wallace – SVP, Worldwide Sales

Analysts

Richard Eastman - Robert W. Baird

Brian Yuen - Deutsche Bank

Patrick Newton - Stifel Nicolaus

Brandon Couillard - Jefferies

Operator

Good day ladies and gentlemen. Welcome to the Keysight Technologies Fiscal Fourth Quarter 2016 earnings conference call. After the presentation, we will conduct a question and answer session. [Operator Instructions] Please note that this call is being recorded today, Thursday, November 17, 2016 at 1:30 p.m. Pacific Time.

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

Jason Kary

Welcome everyone to Keysight’s fourth quarter earnings conference call for Fiscal Year 2016. 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, President of Communications Solutions Group; Soon Chai Gooi, President of the Electronic Industrial Solutions Group; John Page, President of the Services Solutions Group; and Mark Wallace, 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’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. 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.

I would also note that we are scheduled to participate in the Credit Suisse Technology Conference in Scottsdale on December 1st and the Barclay’s Global Technology Conference in San Francisco on December 7th. We hope to see many of you there.

Now, I’d like to turn the call over to Ron.

Ronald Nersesian

Thank you, Jason, and thank you all for joining us. We will focus today’s discussion on three key topics. First, we delivered a strong fourth quarter with revenue at the high end of our guidance; achieved earnings of $0.64 per share; and generated $124 million in free cash flow. Second, customers continue to increase investment in next generation technologies and Keysight continues to innovate and expand its leadership in these important areas of the market. Third, during Fiscal Year 2016, the team executed well on its strategy to transform and position the company for growth, and we made measureable progress on our key growth initiatives.

Let’s begin with a brief overview of Keysight’s fourth quarter performance. We are pleased with our results and execution in the quarter. We achieved earnings of $0.64 per share, generated $124 million in free cash flow, or 17% of revenue, and delivered $751 million in revenue which was at the high end of our guidance. Additionally, orders grew 3% year-over-year to reach $806 million, which is the highest level we have seen in the past four years. Neil will provide you with further detail on our fourth quarter financial results in a few minutes.

Moving to our markets, overall the dynamic we saw in the quarter remained relatively consistent with our expectations. We continue to see softness in the broader communications market and in certain regions within Europe, while investments in the development of next generation technologies continued to grow.

More specifically, we saw increased investment in the areas of 5G, wireless LAN, high speed optical networks for data centers, automotive, alternative energy, and leading edge semiconductor process technologies. In 5G major players continued to accelerate development and timelines around the globe and we generated strong growth for our 5G solutions in the fourth quarter.

To highlight the growing momentum around 5G, I would like to note several recent industry announcements. NTT announced plans to begin its 5G trials in Japan as early as May, 2017. Just last week, Korea Telecom declared that it aims to be the first to commercialize 5G in 2019, which is one year ahead of its previously stated plans. China Mobile has deployed a wideband massive MIMO site on its network in Shanghai, and Verizon announced it is moving forward with its plans for 5G pilots beginning in 2017.

Utilizing spectrum at very high frequencies is a key tenet behind 5G as mobile providers look for ways to cope with expanding amounts of mobile traffic, proliferation of connected devices, and the Internet of Things as well as to improve its overall customer experience. For decades, engineers in a variety of industries have counted on Keysight for easier access to accurate repeatable measurements at even higher frequencies and wider bandwidths.

Today, we are the industry’s leading innovator in the commercialization of tools for millimeter wave simulation, test, and analysis. In October we extended our leadership with an industry leading breakthrough in spectrum and signal analysis at millimeter wave frequencies. Our new signal analyzer is the first to provide continuous frequency coverage from three hertz to 110 gigahertz and spans across access, front haul and back haul 5G applications in an integrated solution. These tools can also be used for satellite communication and automotive radar applications.

Moving to high speed optical networks for data centers, deployment of 100 gig optical technologies throughout the datacenter and efforts to reduce power are driving the need to measure signal quality and integrity. In the fourth quarter, we continued to win deals and see strong demand for our optical and high speed digital test products and growing interest in 400 gig development. Our customers in this market include chip, network equipment, optical transceiver vendors and hyper scale datacenter operators.

At the European Optical Show in September, Keysight showcased new and enhanced solutions to help R&D engineers master their 400 gig designs by making validation easier and speeding up the testing of components and systems.

In the automotive market, the electronic content of cars continues to increase with numerous traditional car manufacturers accelerating their investments in electrified vehicles and autonomous driving. Areas of investment and development include powertrain electrification, battery technology, the connected car, and radar technology. These activities are still in the R&D stage and are expected to be long term growth trends for this market.

Keysight recently demonstrated more than 50 automotive design and test solutions across various technology domains including radar, wireless, millimeter wave, high speed digital, and power and energy. We are leveraging our decade’s deep expertise in testing radar technologies for aerospace and defense applications to launch products that address the specific needs for the emerging autonomous driving market. We recently introduced a new radar target simulator to help automotive electronic manufacturers confidently simulate various realistic scenarios.

Moving onto our full year performance, the Keysight team executed well on its multiyear strategy to transform and position the company as a solutions leader in key next generation technologies. As a reminder, our ultimate goal is to drive above market growth in the long term and to create value for customers and shareholders.

In Fiscal 2016 we achieved 3% order growth and 2% revenue growth as we navigated a challenging market environment and executed on our strategy. We remain committed to our key growth initiatives and made measurable progress. First, in wireless our focus on positioning Keysight as the market leader in 5G is delivering results. With our technical breadth and expertise in strategic engagement with customers and partners around the globe, Keysight continues to have leading edge solutions for 5G applications available when needed, even as development schedules accelerate.

Throughout the year orders for our 5G solutions surpassed expectations resulting in triple digit growth. Second, in modular we achieved double digit order and revenue growth for our PXI and AXI modular business for the year. We introduced several new solutions for a variety of market applications and we received the Frost & Sullivan’s 2016 Growth Excellence Leadership Award in recognition of our strong momentum in PXI based instrumentation.

Third, in software, we also delivered double digit order and revenue growth led by our acquisition of Anite and high single digit growth for our market leading design and simulation software solutions. As part of our longer term strategy to expand our software innovation activities, earlier this year we announced a software design center in conjunction with the Georgia Institute of Technology in Atlanta and our staffing plan there is ahead of schedule.

Lastly, in services, while revenue was flat on a reported basis for the year, we generated 9% order growth for the year. Multivendor calibration services showed strong success with aerospace and defense customers. This is a key target market for Keysight and we believe we have gained share.

Overall, we are pleased with our execution Fiscal Year 2016. The strategic actions we have taken are strengthening our market position and creating new business opportunities. Investing in innovation, regardless of short term market challenges is a critical element to our future success as a company.

In Fiscal 2016, we increased our R&D investment by 11% while delivering industry leading non-GAAP operating margin of 19%. We believe our investments are delivering above-market results as we exit the fourth quarter. Our accomplishments speak to the focus, discipline, and commitment of the Keysight team to transform our company for growth and to create value for our customers and shareholders.

Moving forward, we will continue to innovate, invest for long term growth and expand our leadership. We are building on the moment we achieved in 2016 with a robust pipeline of new services and solutions that have been identified by our industry teams working closely with leading edge customers. While we expect continued headwinds in some of our markets, we believe we are well positioned to deliver above market results.

Now, I’ll turn the call over to Neil to provide more details on our Q4 financial results as well as our first quarter guides.

Neil Dougherty

Today we reported fourth quarter revenue of $751 million compared with $756 million in the same period last year. On a core basis, which excludes the impact of currency and acquisitions, revenue decreased 2%. Regionally, core revenue declined 7% in Europe, 1% in the Americas, 11% in Japan, and increased 1% in Asia excluding Japan. In China, we achieved our third consecutive quarter of double digit growth driven by strength in optical and semiconductor process solutions.

Looking at our operational results, gross margin was 57.5%, a year-over-year decrease of 50 basis points due to product mix. For the quarter, operating expenses totaled $290 million, up 2.7% over last year and reflected higher sales cost given our strong order performance in the quarter. This resulted in fourth quarter operating margin of 18.9% compared with 20.7% last year. We reported net income of $110 million or $0.64 per share, which was at the midpoint of our guidance range.

Moving to the performance of our segments; our communications solutions group or CSG includes two primary end markets. First is a commercial communications end market that reported revenue of $254 million, up 3% compared with last year’s fourth quarter driven by growth from 5G and next generation datacenter technologies, offset by continued softness in the broader communications ecosystem.

CGS also includes our aerospace defense and government end markets which generated revenue of $188 million in Q4 compared with $206 million in the same quarter last year, reflecting ongoing weakness in Russia and China. This brought total CSG revenue for the quarter to $442 million, a 2% year-over-year decrease or 4% on a core basis. CSG reported gross margin of 60.3% and operating margin of 17.1%.

Our electronic industrial solutions group, or EISG generated fourth quarter revenue of $201 million, up 1% from last year or down 2% on a core basis driven by ongoing weakness for general electronic solutions, particularly in Europe which was partially offset by strong growth for leading edge semiconductor process technologies and our automotive applications. EISG reported gross margin of 59.6% and operating margin of 23.3%.

Lastly, the services solutions group or SSG generated record revenue of $108 million in Q4, a 5% year-over-year increase, or 3% on a core basis. Revenue growth for SSG was driven by an increase in sales for our remarketed solutions. Excluding the impact of three year warranty program revenue for this segment grew 8%. SSG reported gross margin of 42.2% and operating margin at 18.1%.

As Ron highlighted, overall we are pleased with our performance and execution as a company for the 2016 fiscal year. We achieved 3% order growth and 2% revenue growth as we navigated a challenging market environment and remain focused on the growth areas of our market.

Revenue for the year totaled $2.9 billion and gross margin improved 80 basis points to 57.7%. To fuel innovation and strength our market position in strategic areas, we continued to invest in research and development which grew by 11%. At the same time, we remained within our operating model delivering 18.6% operating margin and reporting non-GAAP net income after tax of $419 million or $2.43 per share.

Moving to the balance sheet and cash flow; we ended our fiscal year 2016 with $783 million in cash and cash equivalents, up $300 million when compared with $483 million at the end of fiscal 2015. We generated $416 million in cash flow from operations for the year, and consistent with our plan, we invested $91 million in capital purchases. This brings our free cash flow for the year to $325 million or 11% of revenue, an improvement of 120 basis points compared to last year.

As we are entering fiscal year 2017, please note a few items for modeling purposes. Annual salary increases are effective December 1, 2016. Additionally, as we mentioned last year cash flow is seasonally lower in Q1 due to the payout of variable compensation. Other operating income is projected to be $15 million in FY17. Interest expense for the year is expected to be $46 million. Pension and benefit expense for the year is projected to increase by approximately $20 million while cash contributions to our global pension plans are expected to be in line with 2016.

Lastly, we are committed to continue to opportunistically deploy capital through our share repurchase authorization, but are assuming a base case diluted share count of 175 million shares at year end. We remain committed to investing in the key growth areas of our markets to drive the long term growth of our business while at the same time staying consistent with our operating model. As a reminder, our operating model is structured to deliver high teens operating margins at current revenue levels.

Turning to our outlook and guidance for the first quarter; as Ron noted we are encouraged by the strong order growth we saw in the fourth quarter and while we are seeing increased investment in the development of next generation technologies, we continue to expect headwinds in the broader communications market. Balancing these factors, we currently expect Q1 revenue to be in the range of $706 million to $746 million with the midpoint in line with the first quarter of last year, but on a core basis representing a decline of 1% with the difference entirely due to currency.

We expect first quarter non-GAAP earnings per share to be in the range of $0.49 to $0.63 or $0.56 at the midpoint based on a weighted diluted share count of approximately 173 million shares. With that, I will now turn it back to Jason for the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Richard Eastman with Robert W. Baird.

Richard Eastman

Just a couple of questions. Let me just kind of start with the aerospace defense piece of the comm solutions group. Could you kind of just walk through a little bit on the quarter how did the US business do in A&D and any positive vibes here going forward maybe from an order perspective or anything from a front log perspective that suggest that the A&D business can be up low single digits or mid-single digits as we work our way through ’17.

Ronald Nersesian

I’m going to turn it over to Mike Gasparian. The other question that comes up is whether or not we see any change in aerospace defense spending based on the election results and our take is that aerospace defense spending will increase based on the US election results. I’ll turn it over to Mike who will tell you a little bit more about some of the questions you asked.

Mike Gasparian

Our view on aerospace defense is we still view it as a very stable segment going forward. We clearly have pockets of weakness in Russia and China which Mark Wallace will make some comments on when I’m done, but that’s offset by some really good growth opportunities in some of the other areas.

You asked for some color. In the Americas we have a really nice systems business as well as a great service opportunity with the prime contractors. Both the systems and the services play into the outsourcing trend that I’ve talked about before, so those are good opportunities for the company. Western Europe and India, both have good opportunities for services as well. Then we’ve got radar/satellite segments within those regions that are performing well.

Mark, do you want to maybe add some color about what we’re seeing in China and Russia?

Mark Wallace

In Russia spending declined in Q4 as demand remained soft. During the quarter we saw some delays to some deals and some budgets and it’s really all based on what we’ve seen for a while. It’s the US and European sanctions, low commodity pricing, weak currency, just altogether continue to make the environment challenging. It’s again, important to note that this is not a change from what we saw previously.

Then in China, it’s different it’s a weak government spending as we expected as we’re in the early part of China’s five year planning cycle. So, this is kind of normal seasonality as part of that process.

Richard Eastman

Just a follow up question, the other piece on the comm’s solutions business, I think you highlighted datacenter spend, optical spend, as being higher in the quarter. Even with that the commercial coms business kind of outperformed our expectations. How do you view this business going forward? You commented we’ll still see headwinds here on the more traditional LTE and 4G side, but again, do you start to look at this business as stable with upside potential or stable with maybe still downside exposure? How do you look at this overall collection of products and markets here geographically as well as by product for commercial comms going forward?

Ronald Nersesian

I’ll make a general worldwide comment and then I’ll turn it over to Mike for a little bit more of the detailed color. But, we don’t see any specific catalyst at this point. Budgets, outside of leading edge technologies, remains weak but we do of course see increased spending and focus on leading edge technologies such as 5G. We’ve been focused on that and we’ve brought a lot of new solutions to market and as a matter of fact, we mentioned really leap frogging the competition with our 110 gigahertz spectrum analyzer or signal analyzer.

So, the story remains the same, we see leading edge technologies where money is being spent. We see it being pulled in a little bit on 5G and we’re strong there. But outside of that we see things being weak such as 4G spending. We certainly have seen a roll off in that over the year.

Mike Gasparian

I’ll just add a little bit to Ron’s response. The whole wireless ecosystem just across the board has kind of a weak characteristic. We’re between 4G and 5G so kind of dealing with the trough right now. It almost doesn’t matter if you look at component suppliers, chipset companies, device makers, operator test labs, all of them are dealing with bringing some equilibrium to their supply chains, consolidation and restructuring and so the net effect of all of that is a very restrained CAPEX environment.

We do see, I would characterize it as some wide variations from company-to-company, but across the board despite these headwinds the leading companies continue to make investments in R&D in these next generation technologies. So, Ron highlighted 5G, all the wireless LAN areas 802.11 ad, ay, ax, 400 gigabyte, those are all big good growth areas for us going forward and I think we’re well positioned to capitalize on all those trends.

Ronald Nersesian

I’ll add if you take a look at our growth rate versus the competition, you can see that we’ll feel very good about our ability to gain share and our market position is much stronger than it was a year or two ago.

Operator

The next question comes from Brian Yuen with Deutsch Bank.

Brian Yuen

I’m curious to get your view on what you think the most important demand drivers for 2017 would be? I know you have a lot going on with growth autos, 5G module, and cloud so how should we sort of think about all these things coming together to impact topline from a modeling perspective in 2017?

Ronald Nersesian

We believe that we’re very well positioned in some of the high growth environments. In particular, we see more investment in R&D than we see in manufacturing and our strategy for years has been to really focus on R&D where we see higher margins and more stability in the business. The other thing is it really plays to our strength of being a leading edge technology player so as we bring out leading edge technologies that no one else can match, that gives us a real advantage in being able to grow and to gain market share.

The biggest thing that we see is 5G. There is no doubt about it that 5G has a very, very broad coverage all up and down throughout the communications ecosystem and it’s been playing very well for us. The other thing that’s a growth initiative that it’s not so much a market issue is services. We have had a focus on services and this past quarter we had very strong order growth and we also, for the year, had 9% order growth for services in our service business. We’ve had many successes that in our multivendor calibration service business.

So, overall 5G is one very, very big effort. I’ve already mentioned aerospace defense where with the new administration we anticipate there being a ramp up, although it will be probably slow in the beginning to the aerospace defense business, and then on top of it, our competitiveness not only in 5G, but across our electronic industrial market and our services business.

But, we do remain cautious on the overall market outlook because you can look at the rest of the players in the industry and some of the customers that we serve, how their business are going. But again, we have been focusing on the part that has been growing the most which is the R&D environment for leading edge technologies.

Brian Yuen

Maybe a quick follow up on the product roadmap. You noted the 50 automotive design wins, the 100 gigahertz spectrum analyzer and 5G, so for 2017 do you have any early indications of what products might be rolling out to address those growth areas? Anything you might be working on now or have plans to roll out in 2017.

Ronald Nersesian

We don’t comment on the future roadmap. If there is something that we want to comment on, we would go ahead and put it in a press release such as we announced previously that our breakthrough in high performance digital oscilloscope technology in getting to the 100 gigahertz mark with very, very strong signal integrity and high performance. So, that is one thing that we’ve commented on but other things we won’t comment on.

But, we feel very good about our solutions roadmap and their increased market position. We really see that we have gained share from the competition and from our efforts that are really starting to just take stride. We see over the next couple of years being able to create some moment.

Operator

The next question comes from Patrick Newton with Stifel Nicolaus.

Patrick Newton

Given that you’re well positioned to grow above the industry and you seem very confident in share gains, the key question seems to be what are your thoughts on the industry growth potential in FY17 and just given the choppy growth for the industry in general, do you anticipate collectively there will be growth in the industry next year?

Mike Gasparian

As Ron just said, we still remain cautious about the overall market outlook looking forward. Clearly, we’re seeing acceleration in next generation technologies, but there are other portions of the market that continue to remain under pressure. I think the important thing for us is that we have a business and an operating model that enables us to perform and delivery some profitability and cash flow under any market conditions.

We’re going to continue to be cautious, continue to execute on our plan, continue to transform our investments if you will, continue making investments in R&D and in the field to capture future growth. We’re funding those investments through increased efficiencies in our factories through improved gross margins. Our gross margins were up 80 basis points this year and increased efficiency in our administrative functions as well.

’17, these markets are notoriously difficult to call. We see no specific catalyst at this point and remain cautious as we enter 2017.

Patrick Newton

I’m just trying to understand the guidance a little bit. You have bookings up almost $30 million year-over-year but the midpoint of the guidance matches revenue from fiscal 1Q last year. I guess after a soft bookings quarter in 3Q is this kind of a backlog refill? Is there any change into maybe the timing of deliveries that’s embedded in the bookings or backlog, or any reason why we wouldn’t see a higher midpoint in the guidance?

Ronald Nersesian

First of all, you’re largely correct, we saw good bookings here in Q4 but had been in a relatively softer backlog position entering the quarter. So, first of all we keep the exact same process going into Q1 as we have used previously. We look at our existing backlog, that backlog is scheduled out from a shipment perspective so we know what portion of our backlog is shippable in Q1. We then look at our order funnel and make some assumptions about how incoming orders are going to convert to revenue within the quarter.

The one other factor, which is a change from this year, in fiscal 2016 Chinese New Year fell at the beginning of Q2 which quite frankly is a little bit better timing from a business perspective than where it falls here in FY17 at the very tail end of our Q1. So, we’ve certainly factored that in to our guidance, although I will say it is another factor that impacts predictability for the quarter. So, we’re highly confident in our ability to fall within our range, but that timing of Chinese New Year, depending on how shipments move, there’s very little time to recover if things happen differently than we’ve modeled them.

Patrick Newton

On modular I think you gave us the data point that you had double digit growth in orders for both the AXL and PXL side of the business. I’m just curious, I think you gave us a data point last year of kind of where your analyzed orders were and any update you can give us currently?

Ronald Nersesian

We’re not giving any new specific guidance or I would say information except that year-over-year we did see double digit order and revenue growth for modular.

Patrick Newton

Anite is fully integrated. I would just love your thoughts on your appetite for M&A or if you’re more focused now on more organic initiatives?

Ronald Nersesian

We have a blend. There’s no doubt that what we’re doing is we’re focusing on getting our organic growth up like we mentioned at the end of last year and that continues to be a real focus for us. We’re doing that obviously by shifting more of our expense to R&D and to direct feet on the street to sell and we’re very pleased with our progress. But also, we’re looking at market segments that are adjacent that could actually be something where we could create value for our shareholders and increase our overall growth rate.

So, we’re looking at both organic and inorganic but ROIC is clearly one very, very strong measure that use to make sure that we can get a great return on anything we do that’s inorganic.

Operator

The next question comes from Brandon Couillard with Jefferies.

Brandon Couillard

I’m just curious in general are you satisfied, are you happy with the returns you’re seeing on the stepped up R&D investment and at this point do you have any appetite to perhaps take that another 100 basis points further?

Ronald Nersesian

We’re very, very pleased with the progress that we’re making and again, as you know, when you invest in R&D sometimes it’s a 24 to 36 month investment before the product even hits the market and then a product ramps from there and has to go through a customer’s buying cycle so you don’t always see it in the quarter or even the fiscal year in the actual result. But, we are very pleased with the path that we’re on and the results that we’re getting in at this point.

As far as taking it further, right now we’ll be talking a little bit more about modeling but we are slowly making sure that we can get the right returns on the investments that we have before we’re going ahead and trying to invest even more heavily.

Neil Dougherty

Let me make a couple of extra comments. We’re very pleased with the results that we’re getting from our R&D and the positioning that we’re having in the leading edge technologies referencing again, 5G and our relative position in 5G relative to where we were in prior generation. So, I think you will continue to see us make investments for growth both in R&D and in the field and as we’ve said previously we look to fund those investments in the current revenue levels through efficiencies elsewhere in the P&L reminding you the business model is set up to deliver high teen s operating margins at current revenue levels.

We’re investing in R&D in the field to drive growth when markets recover and we can get this business growing at a 4% sustained rate, we can deliver our 40% incremental when we get to those growth rates. Right now it’s about transitioning the investments we’re making to be more growth oriented so that when markets recover we’re positioned to capture them.

Ronald Nersesian

As you look at our year numbers, we delivered 19% operating margin while increasing our R&D spend by going ahead and being more efficient in our manufacturing by increasing our gross margin as well making other tradeoffs in the OPEX lines.

Brandon Couillard

In the fourth quarter revenues came in at the high end of the range, EPS more towards the midpoint low end, was that just a surprise on the mix in gross margins? Then, did you say $15 million of other operating income in fiscal 17 and what exactly is that tied to? Is that Agilent related?

Neil Dougherty

First all, with regard to kind of revenue in Q4 coming in at the high end of the range and EPS more in the middle, really there were two factors that fully explain that. One was product mix. We’ve been working on kind of a long term trend to increase the proportion of our business that comes from R&D versus manufacturing solutions and that’s still a trend line that we’re comfortably on. But relative to the past couple of quarters, our mix in Q4 of manufacturing based solutions was slightly higher and that drove a lower overall gross margin.

Then the second thing was a direct result of the higher order levels. Obviously, our commissions climb with the higher order levels and that obviously will yield a benefit in coming quarters.

The second part of the question was with regard to other income and yes, that is a direct relation to the kind of the landlord tenant relationship that exists with Agilent where we essentially own facilities and are leasing space back to our prior parent.

Operator

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

Jason Kary

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

Operator

This concludes our conference call. You may now disconnect.

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