ESI is a company that’s been around for 50 years and has been involved in some of the most complex simulations associated with crash testing and other areas. And I think with the — by coming into Keysight and what’s exciting is the combination of that can now not only provide go-to-market capabilities that can further accelerate growth but also engage with customers in new applications in aerospace, defense and other end-markets leveraging the deep technology expertise of ESI. So very excited by this transaction as we announced it. Thank you.
Aaron Rakers: Thanks.
Operator: Our next question is from David Ridley-Lane with Bank of America. Your line is now open.
David Ridley-Lane: Thank you. Wondering if the shift to the longer-term orders is that driven by things that you’re doing internally or is this just a function of the demand that you’re seeing from these large aerospace and defense and auto OEMs?
Satish Dhanasekaran: Yes. I think some of it is the implementation of our solutions approach to what was otherwise markets that we had maybe sort of purely through the lens of products historically. I think of aerospace, defense, David, as an industry, where we largely sold instrumentation tools. And over the past few years, we’ve put focused effort to adding more value to the customer base by integrating the instruments, but also layering on software and creating more services opportunities. So some of it is a function of the go-to-market push that we’ve had, but also equally the acceleration in demand we see in specific areas such as automotive. And I’ll have Mark maybe give you a couple of more examples to make a drill.
Mark Wallace: Well, it might be just better — just to lay it out, because it’s hard to imagine these. But these are very strategic, very complex engagements with customers. So if we think about an EV or a battery test lab, you’re talking about multiple racks of equipment for testing cells and modules and packs, there’s battery cyclers, there’s low voltage interfaces for communication, there’s a chiller to cool the batteries, then there’s environmental chambers, their safety aspects, fixturing software, project management, installation, site prepping very, very complex business. And then the other thing that’s really exciting for us is, this gets us deeper into the customer’s business. As we announced in Q2 we won two new OEM sites, in Q2, we won another one in Q3.
And over that last three months, we have now through the deeper visibility engagement across the R&D labs have uncovered many other opportunities within those customers and across the ecosystem. So it also has an additive effect in terms of finding new opportunities to contribute. So that’s a typical example of why it takes longer.
David Ridley-Lane: Thank you. Thank you for that. And then just on the fourth-quarter guidance, I think the kind of implied incremental margin is quite high. Is there something unusual about the margins in the fourth quarter this year?
Neil Dougherty: No, I mean, I think, obviously as I’ve got the Q4 numbers in front of me. We typically see some uptick in OpEx as we move from Q3 to Q4, various factors. But I’d start with the fact that in Q3, significant portions of population on summer holiday, spending less money as a result, and as they come back here into the fourth quarter, we tend to see a pickup. We do expect a little bit of a sequential decline in gross margin and a lot of that driven by the implied volume reduction as well as kind of how we’re getting to the numbers.
David Ridley-Lane: Got it, okay. Thank you very much.
Satish Dhanasekaran: Thank you.
Operator: Our next question is from Matthew Niknam with Deutsche Bank. Your line is now open.
Matthew Niknam: Hey, guys. Thank you for taking the question. So, A, I guess, I wanted to just figure out relative to the order level we’re at now, I know it sounds like we’re going to get a maybe lower than seasonal bump in fiscal 4Q. But it sounded as though this may persist for a couple of quarters, at least based on current visibility. And so, what I’m wondering is, if we sort of stay at this $1.25 billion $1.3 billion range and we work through excess backlog, is it — and I don’t want to jump the gun on fiscal 2024. But what I’m effectively getting at is, I don’t think it’s hard to see a pathway to maybe more negative or slightly negative growth next year. So I just want to make sure that — if that maybe sounds reasonable.
And then just maybe, secondly, as we think about the EPS growth outlook, obviously you’re facing a pretty sizable headwind it seems like from tax rate. And so, I’m curious just if there’s any color you can add in terms of the margin structure and your ability to maybe effectively flux some of the margin upside that you’ve showcased in the past around COVID in the times of topline pressure. So, long-winded question, but any color you can provide would be helpful. Thanks.
Neil Dougherty: Yes. So, obviously, we’ll give you more color on FY 2024 here in three months. But obviously, we spent a fair amount of time thinking through it ourselves. And as you noted and as I’ve noted, through the first three quarters of FY 2023, we were able to drive revenue at a level that was significantly above the incoming order rate. As a result, we’re going to have some difficult revenue comps as we enter 2024. As I’m thinking about the transition from Q4 into Q1, at least right now, I’m thinking about kind of the typical seasonal decline that we would see on the revenue line as we move from one period to the next. And then I think as we look forward beyond that right now, we don’t see a catalyst right now that is going to drive a significant market recovery in the first half of the year.
