Satish Dhanasekaran
President and Chief Executive Officer at Keysight Technologies
Good afternoon everyone and thank you for joining us today. My comments will focus on three key headlines. First, Keysight delivered revenue of $1.3 billion and earnings per share of $1.63, both of which exceeded the high end of our guidance. Given the current market conditions these results reflect the Keysight team's strong execution and resilience of our financial model. Second, orders were $1.2 billion as the demand environment remains constrained. As certain markets continue to normalize from post pandemic spending levels, our aerospace, defense and government and network and data center businesses grew, highlighting the benefit of our diverse end market exposure.
Customer engagement and collaborations on next generation themes remain strong. The adoption of new use cases such as AI is driving new activity and investment across the ecosystem. However, we're not factoring in a strong recovery this fiscal year. Our base case scenario is for a modest first half to second half improvement in orders and revenue. Third, Keysight continues to be well positioned for outperformance into a market recovery. We are investing to enhance our market leadership and expand our broad portfolio of leading solutions. We are also pleased to have completed the acquisition of ESI ahead of schedule and extend a warm welcome to the team.
Along with our existing EDA business the addition of ESI further expands our software solutions for simulation and emulation, a market with favorable growth attributes as the virtualization of design and prototyping increases. Now, let's begin with a brief overview of Keysight's first quarter performance. Market conditions were largely unchanged from the prior quarter. Across our end markets, investment in R&D remained steady, while manufacturing and overall economic activity in Asia continued to moderate. First quarter orders were $1.2 billion, revenue $1.3 billion and earnings per share of $1.63 were above our guidance and we generated strong cash flow.
Gross margins across the business were strong and including ESI, we achieved a record 67%, demonstrating the differentiation of our solutions. Operating margin was 28%, reflecting expense, discipline and cost actions that we have taken over the past quarter and last year. Turning to our business segments. Communications Solutions Group revenue declined relative to a strong compared to last year, which was driven by robust backlog conversion.
Quarter one gross margin was a record 68%, reflecting a greater mix of software and higher-value solutions. Orders were in line with expectations with strength in aerospace, defense and government, and the wireline business, while wireless continues to normalize. Aerospace, defense and government revenue declined while orders grew year-over-year. Spending levels remain elevated as governments around the world prioritize investments in defense modernization, space and satellite applications. We are scaling our threat emulation offerings to a broader set of customers for electromagnetic spectrum operation applications in the US and Europe, resulting in key wins at large primes. Our space and satellite solutions drove businesses this quarter for new space modules and low earth orbit applications.
Leveraging our protocol and digital twin capabilities, we've partnered with Lockheed Martin and a broad set of technology leaders to successfully demonstrate a secure 5G and data link network that integrates land, air and space operations. In commercial communications, customer spending remains cautious. While we're not seeing a market recovery yet, industry inventories are slowly returning to normalized levels. For example, smartphone sales in the fourth quarter of 2023 grew meaningfully for the first time since mid-2021.
In our wireless business customer engagements remain high with ongoing R&D activity in advanced technologies. This results in software and service upgrades that contributed to higher gross margins in the quarter. 5G standards continue to progress and are driving a wide range of new use cases and features for ongoing network deployment. New band combinations are expected to be added to the 3GPP standard this year, driving certification needs. This quarter, we hosted Global Certification Forum that bought together industry leaders across a broad array of sectors to collaborate on certification requirements for network and device interoperability and performance.
Next week at Mobile World Congress, we will be demonstrating over a dozen solutions for 5G, Open-RAN, satellite connectivity, AI and early 6G capabilities, many of which will be showcased in partnership with industry-leading customers moving to our wireline business, we saw order growth for our data center solutions. Orders for 400 gig and 800 gig solutions, both in R&D and manufacturing grew double-digits. We also achieved a key milestone in partnership with Marvell by enabling test and verification of their new ultra-high-speed networking chip design for next-generation AI-driven cloud applications.
The adoption of AI is clearly lifting activity across the entire data center ecosystem. As the industry deploys AI infrastructure at scale, we expect the demand for high-speed networking and computing capabilities to grow. Turning to the Electronic Industrial Solutions Group, revenue was down, reflecting ongoing normalization from outsized demand in the prior year. Customer spending remains cautious as market conditions particularly in manufacturing and regionally in China were weaker. Underneath the macro headlines, we see pockets of growth where customers are leaning in and investing to address new use cases and emerging technologies across multiple end markets.
In semiconductor, the market environment is mixed. Despite the improved industry outlook for overall fab investments, foundry customers continued to push out large projects due to delays in construction and production timelines. At the same time, we saw strong demand for Keysight's proprietary interferometer system, driven by industry progression in EUV technology. Next-generation performance requirements for new AI-driven data center and ADAS use cases are also driving investments and we saw some improvement this quarter in memory-related demand as well as mature process capacity in China.
In automotive, the funnel of EV opportunities continues to be strong. Competition amongst OEMs upcoming regulatory requirements and support from government subsidies are incentivizing investments in R&D for new battery technology and charging infrastructure. During the quarter, we secured a key win that marks the expansion of our European battery test footprint into France. As we have noted before, EV funnel is healthy, but the timing and the size of the system-level and longer-dated engagements are expected to vary from quarter to quarter.
In general electronics, market conditions were unchanged from last quarter. Ongoing capacity normalization and cautious spending continued to weigh on the consumer electronics and manufacturing portions of the market. We saw steady demand for our solutions in digital health, industrial automation, and advanced research. This quarter, we secured key wins in digital health applications for medical imaging and scanning as well as test automation. Consistent with our software-centric solutions strategy, the value that our customers derive from software and service offerings is enabling business resilience in the current market conditions. Software and services orders and revenue continued to outperform the broader business this quarter and were greater than 35% of total Keysight even excluding ESI.
ESI further enhances our design engineering software portfolio and expands our addressable market in automotive, avionics, smart manufacturing, and human workflows. We were pleased to complete the acquisition ahead of schedule, and ESI's results were also ahead of expectations for the quarter. In summary, our market leadership and the strength of our solutions portfolio gives us confidence in our ability to capitalize on the multiple waves of technology innovations and long-term secular growth trends of our markets.
Our team's relentless customer focus and sustained customer collaborations also position us well for long-term value creation. In addition, the strength of our financial model continues to generate healthy margins and cash flow. With that, I will turn it over to Neil to discuss our financial performance and outlook.
