Keysight Technologies Q2 2025 Earnings Call Transcript

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Provided by Quartr
May 20, 2025
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Operator

Good day, ladies and gentlemen, and welcome to Keysight Technologies Fiscal Second Quarter twenty twenty five Earnings Conference Call. My name is Tamiya, and I will be your lead operator today. This call is being recorded today, Tuesday, 05/20/2025 at 01:30 p. M. Pacific Time.

Operator

I would now like to hand the call over to Paulina Sims, Director of Investor Relations. Please go ahead, Ms. Sims.

Paulenier Sims
Paulenier Sims
Director - IR at Keysight

Thank you, and welcome, everyone, to Keysight's second quarter earnings conference call for fiscal year twenty twenty five. Joining me are Keysight's President and CEO, Satish Dhanashekaran and our CFO, Neil Dougherty. The press release and information to supplement today's discussion are on our website at investor.keysight.com under Financial Information and Quarterly Reports. Today's comments will refer to non GAAP financial measures. We will also make reference to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed over the last twelve months.

Paulenier Sims
Paulenier Sims
Director - IR at Keysight

The most directly comparable GAAP financial metrics and reconciliations are on our website, and all comparisons are on a year over year basis unless otherwise noted. 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. We assume no obligation to update them and encourage you to review our recent SEC filings for a more complete view of these risks and other factors. Lastly, management is scheduled to participate in an upcoming investor conference hosted by Baird.

Paulenier Sims
Paulenier Sims
Director - IR at Keysight

And now I will turn the call over to Satish.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Good afternoon, everyone, and thank you for joining us today. During the second quarter, Keysight delivered revenue of $1,300,000,000 and earnings per share of $1.7 both of which exceeded the high end of our guidance. This marks the second consecutive quarter of revenue growth driven by continued momentum in CSG and return to growth in EISG. The demand environment was solid in the quarter with orders growing 8% year over year and 4% sequentially to $1,300,000,000 Even as we are monitoring the overall macro environment, we entered the second half with a healthy pipeline of opportunity and strong customer engagements. Neil will have more details on the tariff impact in his remarks.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Overall, our business results demonstrate the resilience of our business and the durability of our financial operating model, which is underpinned by a flexible cost structure, supply chain and operating capabilities that allow us to quickly adapt to external dynamics. As a result of our multiyear investments, we have a diversified global supply chain, which is largely based in Southeast Asia with minimal exposure in China. Despite the near term uncertainty, we're confident in our market leadership, the strength of our operating model and our ability to generate value for our stakeholders. Our capital allocation priorities have not changed. We are investing for the long term while also pursuing a balanced return of capital enabled by our strong free cash flow conversion.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Over the past twelve quarters, we have returned over $1,700,000,000 or roughly 50% of free cash flow to investors via repurchases. Turning to business segments. In CSG, Commercial Communications orders grew double digits. Demand remains robust in wireline where the ongoing data center infrastructure expansion is driving order strength. We saw continued deployment of 408 gig Ethernet technologies in AI data center applications.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

R and D investments in 1.6 terabit electrical and optical technologies as well as expansion of new protocols in AI data center networks are fueling demand as the entire industry is innovating and developing new applications and services. This quarter at OFC, we demonstrated the industry's first solution for four forty eight gig per lane optical transmission, a key building block in the deployment of one point six and three point two terabit networks. The depth and breadth of Keysight's capabilities in the electrical and optical and wireline protocol stacks positions us well to enable ongoing innovation in high performance computing, memory and networking. Wireless orders grew in Q2. We saw a steady pace of R and D activity related to five gs advanced and early six gs research as well as investments in non terrestrial networks.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

While smartphone supply chain activity remained stable, innovation and investment in R and D in radio access networks continued to grow. Keysight's new digital twin and system emulation capabilities are enabling non terrestrial applications and expanding our customer engagements. In aerospace defense and government, orders grew this quarter driven by strength in The U. S. And Europe.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Ongoing investment in spectrum operations and space applications drove growth. Although The U. S. Will be operating under a continuing resolution for most of the year, overall demand and pipeline of opportunities remains robust with prime contractor backlogs at record levels. Investments in defense modernization remains a top priority for many countries as reflected in the increased budget proposals in U.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

S, Europe and Asia. Keysight is a trusted partner in this ecosystem delivering advanced high fidelity test capabilities that simulate real world electronic threats in lab environments. This quarter, Keysight won a notable deal with a major defense agency in Europe to modernize its testing capabilities for antenna, radar applications, which are key to mission critical applications. Our innovation pipeline is driving a steady cadence of new products and solutions, which this quarter included a higher frequency extensions to our phase noise analyzer for defense applications and a new digital communications analyzer for two twenty four gig transceiver test enabling wireline and general purpose use cases. Turning to Electronics Industrial Solutions Group, the demand environment remains mixed while the revenue returned to growth after six quarters of decline.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

In semi, the demand for our wafer test solutions from large foundry and IDM customers remained strong. Leading edge process node investment was augmented by rapid growth in high bandwidth applications. Customer engagements for silicon photonics co packaged optics accelerated within the quarter as the industry works to address performance limitations across latency, bandwidth and power in the AI data center. In automotive, while orders and revenues were down, the business has largely stabilized. Engagements with OEM customers remain steady with investments in software defined vehicle capabilities including cybersecurity, radar scene emulation and ADAS chipset development.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

This quarter, we secured a key win with a major automotive OEM for design and test of their home energy management systems. General electronics orders grew for the third consecutive quarter although at a lower rate. Growth in multi industrial and medtech customers for both R and D and manufacturing solutions was partially offset by contraction in U. S. Education funding and continued normalization in the distribution channel.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Moving to software. Design Engineering software orders grew double digits reflecting a healthy demand for our RF EDA solutions. We're seeing growing interest from industrial customers looking to apply simulation and virtual prototyping in the mechanical domain. With respect to our recent ESI acquisition, we're enabling next generation industrial design by delivering a panel forming solution to a large European auto OEM that will drive efficiencies through their manufacturing processes and optimize their production timelines. In closing, we're pleased with the recovery that's underway.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Our end markets have largely performed in line with our expectations heading into this year. And I'm once again proud of the Keysight team's execution this quarter in what remains a dynamic environment. Keysight's broad portfolio of differentiated solutions positions the company to outperform in a variety of market environments. We continue to make deliberate multiyear investments aligned with long term technology trends, creating opportunities now and into the future. As we move through the second half, we remain focused on executing on what we control and continuing to deliver value to our customers and stakeholders.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

With that, I'll turn it over to Neil to discuss our financial performance and outlook.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

Thank you, Satish, and hello everyone. Second quarter revenue of $1,306,000,000 was above the high end of our guidance range, up 7% on a reported basis and 8% on a core basis. Orders of $1,316,000,000 were up 8% on both the reported and core basis. Looking at our operational results for Q2, we reported gross margin of 65%. Operating expenses were $516,000,000 up 4%.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

Q2 operating margin was 25% and increased 100 basis points over last year. Turning to earnings. We achieved $295,000,000 of net income and delivered earnings per share of $1.7 Our weighted average share count for the quarter was 173,000,000 shares. Our Q2 results included approximately $7,000,000 of new tariff expenses in cost of sales, which had a 60 basis point unfavorable impact on both gross and operating margins and resulted in an approximately $04 reduction in earnings per share. Moving to the performance of our segments.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

The Communications Solutions Group generated second quarter revenue of $913,000,000 up 9% on a reported and core basis. Commercial Communications revenue of $612,000,000 was up 9%, reflecting sustained strength in wireline and growth in wireless. Aerospace, Defense and Government achieved revenue of $3.00 $1,000,000 an increase of 9%. Altogether, CSGE delivered 67% gross margin and 26% operating margin. The Electronic Industrial Solutions Group generated $393,000,000 in revenue, an increase of 5% with growth in semiconductor and general electronics more than offsetting a decline in automotive and energy.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

EISG delivered 59% gross margin and 23% operating margin. Software and services accounted for approximately 36% of Keysight revenue, while annual recurring revenue was 28% of total mix. Moving to the balance sheet and cash flow. We ended the quarter with $3,118,000,000 in cash and cash equivalents, generating cash flow from operations of four eighty four million dollars and free cash flow of $457,000,000 In April, we issued senior notes for an aggregate principal amount of $750,000,000 We intend to use the net proceeds for general corporate purposes, which may include partially funding the previously announced acquisition of Spirent. With regard to pending acquisitions, the U.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

K. Competition and Markets Authority cleared the Spirent transaction in March. We are progressing through the review process with other regulatory agencies and expect the transaction to close in Keysight's third fiscal quarter. In addition, the acquisition of Optical Solutions Group and Power Artist is anticipated to close shortly after the synopsis to ANSYS transaction is completed. Lastly, we repurchased 1,042,000 shares this quarter at an average price of approximately $144 for a total consideration of $150,000,000 Now turning to the current environment, tariffs and our outlook.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

We have a diversified global supply chain with minimal exposure to China and have already taken action across multiple factors to reduce the incremental impact of tariffs. Our multipronged mitigation approach spans our global manufacturing footprint and sourcing strategies as well as pricing and cost actions. Based on actions taken to date, we estimate our annual exposure at approximately 75,000,000 to $100,000,000 We are working to further reduce this exposure and offset any remaining impact. Given the high priority that we place on maintaining our long term customer relationships, our pricing actions were not applied to pre tariff backlog. As a result, and assuming tariff rates remain at the current levels, the most significant tariff impact is expected in Q3 with full mitigation by the end of the fiscal year.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

Keysight currently has 2,400,000,000 in backlog and enters Q3 with a solid scheduled shipment position despite the dynamics and uncertainty of the current macroeconomic environment. As Satish mentioned earlier, at this point, we have not seen any material adverse effects on demand from tariffs and are therefore raising our full year growth expectations. We now expect FY twenty twenty five revenue growth at the midpoint of our 5% to 7% long term target and annual EPS growth slightly above our long term 10% target. For the third quarter, we expect revenue in the range of 1,305,000,000 to $1,325,000,000 and Q3 earnings per share in the range of $1.63 to $1.69 based on a weighted diluted share count of approximately 173,000,000 shares. Implied in this guidance is the assumption that tariffs remain at current levels for the year.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

With that, I will turn it back to Paulina for the Q and A.

Paulenier Sims
Paulenier Sims
Director - IR at Keysight

Thank you, Neil. Operator, will you please instructions for the Q and A, please?

Operator

The first question comes from Tim Long with Barclays. You may proceed.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Hi, Tim.

Tim long
Tim long
Managing Director at Barclays

Hi.

Tim long
Tim long
Managing Director at Barclays

Maybe one and then a follow-up. Just if we could just go back to AI, I know you guys have been giving us examples each quarter of where you guys are seeing traction, it seems like, across the hardware ecosystem and emulation simulation as well. Can you just kind of update us on what kind of new activity you're seeing there and how meaningful it is for the business? And then just on the follow-up, if you could just give a little bit more color on the orders and pipeline, to get to the full year guidance. I think normally we do see orders pick up towards the second half of the year.

Tim long
Tim long
Managing Director at Barclays

So just curious what you're seeing in pipeline to get confidence in the second half? Thank you.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Thank you, Tim. Obviously, AI, we view it as a long term secular trend. And with a clear multiyear roadmap that's forming and a great fit to our strategy of not only being a physical layer tool provider, but also going up the stack with physical and protocol layer and offering more solutions to customers. The big mega trends are clear, right? We all know the AI workloads are growing and we're making contributions around on a number of technology fronts including in memory, compute, networking with new standards that are forming.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

So our broad portfolio is really in play as we engage with these customers. And where we see the industry right now is trying to solve a number of the scale up and scale out challenges as they deploy this digital infrastructure, right? So that's the action or activity that's being driven and we had another strong quarter. So for the first half, last year we said our wireline business was roughly $1,000,000,000 or over $1,000,000,000 I should say in sales. And for the first half, it grew double digits.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

So we feel good about our position in this emerging space. And we think it's a long term growth opportunity for us that we're very excited. With regard to the progression of orders and what's baked into our guide, again, look, think we've said this before that we despite all the uncertainty and chatter out there and the customers are obviously paying attention to all the tariff talks and all the macro concerns, we have not yet seen any material change in customer behavior with regard to their immediate plans. And as we enter the quarter, we obviously had a strong finish for Q2. As we enter Q3, our pipeline is solid and supports our guide.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

And we had a pretty strong uptick in pipeline activity as it relates to the second half. So we feel good about the second half. Obviously, there are risks that we're monitoring like everybody else, but we're focused on what we control and feel confident about where we stand today.

Tim long
Tim long
Managing Director at Barclays

Okay. Thank you.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Thank you.

Operator

Thank you. The next question comes from Matt Niknam with Deutsche Bank. You may proceed.

Matt Niknam
Matt Niknam
Analyst at Deutsche Bank

Hey guys, thanks so much for taking the question. One question and then one follow-up. I guess first on my main question, you obviously raised the top line outlook, I guess on average by about 100 bps relative to the prior 5%. So I'm curious maybe where you're seeing a little bit of an incrementally improved view relative to three months ago? That's the first question.

Matt Niknam
Matt Niknam
Analyst at Deutsche Bank

Second, just a follow-up on cash flow from ops. It was meaningfully stronger. I'm just wondering maybe for Neil, unique on the working cap side? And then maybe how to think about cash flow from ops and working cap over the duration of the fiscal year? Thanks.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Thank you. I think again as I mentioned before, we looked at the over performance we've had in the first half. We take a look at our pipeline of opportunities we have, the strong backlog position we have and we then have applied this to essentially raise the top line expectations for the full year. Again, there's a lot of macro risks and other things people are monitoring, but we have not seen any material change in customer behavior. And if you recall, at the beginning of the year, we said we thought this year would be a slow gradual recovery in our markets.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

And we feel like that's exactly the trajectory we're on. So that's where we find ourselves at the end of the first half and feel confident about where we are. But like everybody else, we continue to monitor the risk due to tariffs and the geopolitical environment. Yes.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

So the only thing I would add to that Satish just said with regard to our outlook for the year, as everybody knows, we tend to see a seasonal uplift in the fourth quarter. We're still expecting the fourth quarter to be our strongest quarter of the year and that lends to that guidance increase. As it relates to cash flow, yes, so obviously strong cash flow within the quarter. There are a couple of things in there. First of all, that did include a little less about $60,000,000 worth of a gain on a hedging contract associated with the purchase price for Spirent.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

We had put a contract in place about a year ago set to expire at the end of our first half, which was our original thought on the timing of the close of that transaction. So we closed out that transaction and essentially rolled it forward. But when we closed it out, we did recognize about a $60,000,000 gain on that hedge. In addition, we did see some working capital improvements. Inventory days were down by about 10,000,000 DSO was down by about 3,000,000 so that contributed to the strong cash flow performance as did significantly lower tax payments than in the year ago quarter.

Operator

Thank you. The next question comes from Mark Delaney with Goldman Sachs. You may proceed.

Mark Delaney
Mark Delaney
Analyst at Goldman Sachs

Yes, good afternoon. Thank you very much for taking my question. I was hoping to better understand the tariff topic. Maybe first one, just to level set everyone, including myself, the 75,000,000 to $100,000,000 is that the gross amount of exposure that you have? And the net effect this year is maybe something less than that?

Mark Delaney
Mark Delaney
Analyst at Goldman Sachs

Or is the 75,000,000 to $100,000,000 what you expect the drag on profit to be for this year?

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

Yes. So 75,000,000 to $100,000,000 is a gross annualized number. Obviously, this thing went into effect in April, so we only have a little less than seven months of total impact. So 75,000,000 to $100,000,000 is the gross number. We are working to offset that.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

Although as we said in our previous remarks, to the extent that we're passing those costs on to customers, we've made no attempt to reprice backlog. And given that we entered Q3 with about $2,400,000,000 backlog, it's going to take some time for that for those offsets to materialize. And so relatively little here in Q3, a little bit more in Q4, but by the time we get to Q1, we expect to have those tariff costs fully mitigated.

Mark Delaney
Mark Delaney
Analyst at Goldman Sachs

Helpful, Neil. And that what my follow-up was on. If you're not raising price on backlog, maybe you can help us better understand the mitigating actions that you are taking and your confidence in mitigating the tariffs as you exit the year? Thank you.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

Yes. So I mean, I think as we think about tariffs, we think of kind of two opportunities. One, what are the actions that we can take to reduce our overall tariff exposure, leveraging our global supply chain, leveraging our manufacturing footprint, taking actions to actually reduce tariff costs. And then once we get to kind of we've optimized the tariff cost side, the question is what can you do to further mitigate either by passing those costs on via price or surcharges of some sort or reducing costs elsewhere in your P and L. And so we have actions going on across all of those work streams.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

Now when I said we're not raising price on existing backlog, right, so essentially we said, hey, if you had orders that were already on our books, that we weren't going to go back and try and recover tariffs on those. But we had taken actions forward looking on new quotations starting in about mid April.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Yes. Mark, this is Satish. Just to chime in, we have a pretty resilient supply chain operations that is agile and we have a considerable amount of operational realignments that we can still work on. Because at this point, we're assuming 10% tariff sort of is the base case for us. And should that materially change, we would be prepared to respond to those scenarios as well.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Customer pricing and strategies, it's definitely a part of it, but it's also all the other operational alignments that we can make with our partners who we have a multiyear relationship with that can help us scale across geographies if needed.

Mark Delaney
Mark Delaney
Analyst at Goldman Sachs

Thank you very much. I'll pass it on.

Operator

Thank you.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Thank you.

Operator

The next question comes from Meta Marshall with Morgan Stanley. You may proceed.

Meta Marshall
Meta Marshall
Analyst at Morgan Stanley

Great, thanks. A couple of questions for me. Just one, know that your aerospace and defense business is kind of relatively split between kind of U. S. And allies.

Meta Marshall
Meta Marshall
Analyst at Morgan Stanley

But just wondering if you had seen any kind of pushback ally orders that were aligned to U. S. Programs or just kind of any commentary you could kind of give on aerospace and defense? And then just also kind of following up on that of noted that you said kind of minimal China impact, but just how much of that 75,000,000 to $100,000,000 of impact that you guys are talking about from a growth perspective is from shipping into China versus kind of shipping into The U. S? Thanks.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Thank you, Meta. I'll take the Aerospace Defense and Neil can quantify the China impact. I'll just say that strong quarter with growth in orders as I mentioned even under a continuing resolution that we've been operating under. And this is unprecedented that we're still under continuing resolution maybe for the full year. And so that does limit growth in new programs and such.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

But we saw some good orders bookings again with our prime contractors in The U. S. And actually had a double digit order growth in our European business. Just to give you some examples, we were awarded by NATO, four acts contract, which is public to modernize radar and electronic support measures. We also were selected by the U.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

S. Army for validating Zero Trust security on the unified network. So the spend environment remains strong, especially with the prime contractor backlog. Again, is a business I want to remind you, it's always difficult to call on a quarterly basis, but easier to call on a longer term because the trends are clear. And we look at it longer term and say, The U.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

S. Budget next year is likely to go up. European budgets for defense are likely to go up with the programs being put in place. And so and we feel good about our portfolio position in aerospace defense.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

Yes, Meta. And just to get to the question about China. So U. S.-China, China U. S.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

Both directions is less than 10% of total tariff exposure.

Meta Marshall
Meta Marshall
Analyst at Morgan Stanley

Okay, great. Thank you.

Operator

Thank you. The following comes from Aaron Rakers with Wells Fargo. You may proceed.

Aaron Rakers
Aaron Rakers
Managing Director & Technology Analyst at Wells Fargo

Yes. Thanks for taking the question. Two, if I can. I'll just ask them right away as well. So first, I think, Neil, as we talk about the guidance and getting north of that 5% growth or in that 5% to 7% range that you alluded to.

Aaron Rakers
Aaron Rakers
Managing Director & Technology Analyst at Wells Fargo

Can you just remind us again of how we think about the incremental margin for the company? I think all the way back at the Analyst Day, talked about anything north of 5% dropping through like a 40% incremental margin. And what I'm trying to get to is just the pace of how we could think back to getting op margin back above 30%. And then as a follow-up or as a second question, I should say, is that can you talk a little bit about the wireless business? That, I think, previously you've talked about is kind of think of that as being stable.

Aaron Rakers
Aaron Rakers
Managing Director & Technology Analyst at Wells Fargo

But it sounds like that's actually performing a little bit better. How do you think about the durability of that wireless business?

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

Yes. So why don't I'll start with the first one here on the incremental. You're absolutely correct. What we've basically said is anytime our business is growing 5% or better that we would expect to drop through that growth at an operating incremental of about 40%. I would point out that the tariffs are new and substantial incremental costs that are in the short run going to impact our ability to deliver on that incremental.

Aaron Rakers
Aaron Rakers
Managing Director & Technology Analyst at Wells Fargo

Yes. And on the wireless business?

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Yes. On the wireless business, again, we're continuing I would say the headline is we're continuing to see stability, strength in the infrastructure side, still the smartphone related businesses, some segments are so soft, especially in China. So still monitoring, but stable, but soft. I would say the real strength is in the network infrastructure side with Open RAN, some of the latest standards releases with AI and some early six gs research really driving some of the spend and customer engagements. But we have a strong position in this space and we continue to invest for the longer term here to maintain our leadership in this space.

Operator

Thank you. The following comes from Robert Jameson with Vertical Research. You may proceed.

Robert Jamieson
VP - Industrial Technology at Vertical Research Partners

Hey, good afternoon.

Robert Jamieson
VP - Industrial Technology at Vertical Research Partners

Thanks for taking my questions and nice quarter. Just quickly on Software and Services. Just it's a growing part of the business, up to 36% of revenue, recurring is almost 30% now. Are there any like investments that you're making to further accelerate growth here, just given the margin profile of those businesses?

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Thank you. Again, a big part of our strategy and if you look at the business and how it performed in a downturn, as you rightfully point out, is a function of software and services because it's been such a big part of the company's resilience especially even as top line comes under some pressure. So this is clearly the area of focus across all our businesses. We have a strategy to grow the software and services. But one particular area really excited, we saw double digit growth in our simulation business as an example.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

It's an area where we have placed a lot of M and A dollars and focus. If you remember, we acquired ESI and now we're also potentially beneficiaries of this of the Synopsys and SYS transaction where we might get a couple more acquisitions to bolster our presence in simulation space. And it does two things, right? It increases our software and recurring revenue, but equally it allows us to engage with our customers earlier in the design cycle, which again fits our strategy of being a bigger player in the R and D parts of our market. And now as recovery does happen in our end markets, you will see that number maybe take back as a percentage of the total mix just a little because we're starting to see some of our core business recover.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

But I think the long term we still feel like there's more upside to driving the software as a percentage of revenue.

Robert Jamieson
VP - Industrial Technology at Vertical Research Partners

Great. Thank you. And then just on AI, I mean, it's been consistent theme and growing nicely. But I maybe addressed this earlier, but beyond testing, like the high speed interconnection network infrastructure, You know, are there any other kind of test applications, or demand that you're seeing from customers within that realm? Or is that kind of, you know, coming from some of the emulation software they mentioned on, you know, testing of how compute, latency, etcetera, is working its way through the data centers as they are reconfiguring things for higher network speeds and things like that.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Yes. I think it's important to characterize this not just as cable test, but it's important to characterize it as the challenges in the digital infrastructure that's being put in place for AI are very different. When customers are trying to look at the scale up and scale out challenges they face, what might be an interconnect really turns into a mission critical fail point if it's not performing right and the cost of failure gets up pretty substantially. So we're engaging with our customers on those mission critical needs that they have today. But equally from a strategic sense, we're looking at where is the industry going in five years.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

And I can tell you that the state of the art of the technology keeps growing. There's this roadmap that's forming around multiple dimensions and we're participating in those to enable it. So we're there for our customers. And what we see is a big trend of pulling in the timelines because of the rapid increase in the AI workload, right? So all of this is pretty rich opportunity for us.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

We've also along the way have design wins in the software emulation space, which allows customers to isolate their performance in the AI data center and say where is the bottleneck to get the true performance. So we're working with them on those as well. So across the board, across physical and protocol layer, we're continuing to grow our contributions to this marketplace.

Robert Jamieson
VP - Industrial Technology at Vertical Research Partners

Great. Thank you very much.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Thank you.

Operator

Thank you. The next comes from Rob Mason with Baird. You may proceed.

Robert Mason
Senior Research Analyst at Robert W. Baird & Co

Yes. Good afternoon. Just a couple of questions. The on the General Electronics business, I'm curious just given all the realignment of supply chain activity, maybe it's round two versus tariffs the last time. As companies look at where their manufacturing footprints need to reside, can you just speak to maybe the impact on that business from a demand side?

Robert Mason
Senior Research Analyst at Robert W. Baird & Co

And again, I'm maybe thinking more on the production test side if that's an influence. And then I'll just go ahead and ask my follow-up. Neil, could, just to think about the tariff impact in the third quarter, is it kind of roughly a doubling of what you experienced in the second?

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

Yes. I'll take the second one first here. I think it's likely a little bit more than that. We had about three weeks of tariff impact in April versus obviously a full quarter. Now we have already taken some mitigating actions that are having a positive impact.

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

So I don't think you can extrapolate totally forward from $8,000,000 just based on the number of weeks, $7,000,000 sorry, 7,000,000. But it is a little bit more than a doubling. It is more than a doubling of what we saw in Q2 just given the time involved.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Yes. I think when you look at the General Electronics business, given it's a broad marketplace for us in terms of the number of different types of applications that end market represents, we see no change in sort of the areas such as digital health and research because those tend to be durable in nature. And the manufacturing parts of it do move around. So on one hand, China still remains weak in that area. But I would say that there's a lot of recent conversations we're having with customers because they're trying to diversify their manufacturing footprint.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Now it's not materially yet reflected in our results, but could be an opportunity for us to engage in that we're working with our customers on. So it's still early days, but it's driven by the tariffs and what might happen. So there's a lot of scenario planning that's occurring and it will be will probably be playing out over the next ninety to one hundred eighty days.

Robert Mason
Senior Research Analyst at Robert W. Baird & Co

I see. Thank you.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Thank you.

Operator

The following comes from Adam Thalhimer with Thomas Davis. You may proceed.

Adam Thalhimer
Director of Research at Thompson Davis & Co

Hey, good afternoon guys. Great quarter.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Thank you, Adam.

Adam Thalhimer
Director of Research at Thompson Davis & Co

Can you parse through orders a little bit? I'm curious if there was any to what extent you saw pre buy activity ahead of any surcharges and what our expectation should be for order trends after the surcharges went into effect?

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Yes. So I'd say just taking a look at the orders in Q2, orders progressed fairly linearly in the quarter. The funnel conversion was what we expected. We had a strong intake in the funnel as well, which is what we reflected into Q3. And then I would say, our April was strong in part because it's the end of our first half for our compensation for our sales force.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

So it does tend to have a strong April. So no real change. We didn't see any difference in pull in, outs or cancellations or anything of that kind. And that's why we our position is, while customers are watching the macro and evaluating the risk associated with it, we haven't seen any material change in customer behavior.

Adam Thalhimer
Director of Research at Thompson Davis & Co

Good to hear. And then secondly, I wanted to ask about Asia. The revenue there was really strong in the quarter. And maybe you can just give some high level thoughts on China demand.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Yes. Would say Asia was strong. And again, it's across all of our segments really, commercial communications being the leader, semiconductor saw strong demand as new nodes and new technologies such as silicon photonics are being deployed. And general electronics also had some growth in Asia. I would just maybe make a comment about China.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Orders were flattish for the quarter in China with strengths in a few sectors. But clearly, as I mentioned before, the general electronics with the manufacturing exposure was weak and automotive in China was also weak. We continue to monitor the POS demand although we have a very small indirect business. We continue to monitor that. It seems largely in line.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

So China, I would say continues to hold up well in this environment.

Adam Thalhimer
Director of Research at Thompson Davis & Co

Thanks Satish.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Thank you.

Operator

Thank you. The next question comes from Samik Chatterjee with JPMorgan. You may proceed.

Samik Chatterjee
Samik Chatterjee
Managing Director at JP Morgan

Yes, no, thank you. Drivers of wireline demand, I'm trying to sort of address that maybe in terms of how to think about sustainability and your customers clearly are doing well on volume. But how should we think about the strength you're seeing driven by progress on R and D from your customers relative to maybe sort of what they're seeing on their volume outlook and driven by production? So maybe if you can share any color about I know communications is very R and D aligned for you, but what does it look like for wireline? And is the demand you're seeing there, are you selling new testers when it comes to like either silicon photonics or CPU support?

Samik Chatterjee
Samik Chatterjee
Managing Director at JP Morgan

Or are you just seeing more sort of customers buying just because their volume outlook looks so stronger? Anything you can share on that front? And I have a follow-up. Thank you.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Good. That's a great question, Samik. I think I would just say when we looked at our wireline business, say a year or two ago, we have said the majority of the business R and D and I would probably put it as eighty-twenty ish roughly as the ratio of R and D to manufacturing. Now we've probably seen a 10 swing in the manufacturing in that area, but that's sort of where we are still heavily R and D oriented. But we're clearly also benefiting from all of the manufacturing activity that's happening as the industry is trying to ramp for digital infrastructure.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

But when I look at the portfolio of products that we service all the way from early R and D to call it mainstream or R and D or validation through deployment, whether it is with our AWGs, BERTS, scopes, our silicon photonics, wafer test systems, network analyzers, software with our AI benchmarking and network speed emulators. So a pretty broad category of products that we're selling to. And actually, as we as I think about the whole first half, I would say the number of customers that participated in that has also grown for us, which is a good sign that the ecosystem is expanding as more companies are coming in driven given that this is going to eventually be a longer term opportunity. And when I look at the we'll look at some of the data trends that are going on and the standards progressions, really bodes well for R and D business. We'll have some times when we'll pick up manufacturing demand as well because we have a portfolio.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

But strategically the R and D business is more valuable to us.

Samik Chatterjee
Samik Chatterjee
Managing Director at JP Morgan

Okay. Got And for my follow-up, if I can, sort of stay with the wireline demand, but more, sort of when we think about adoption of technologies like CPU and silicon photonics, I'm imagining sort of visualizing it as more of the test demand moves towards a bit more sort of semiconductor level testing. So anything you can share there in terms of how you see the competitive landscape? Does it change from what you've had in sort of 400 gig, 800 gig? And do you think you have the sort of entire stack to address some of those complexities?

Samik Chatterjee
Samik Chatterjee
Managing Director at JP Morgan

Or is there something that you need to add to the portfolio to address sort of when the overall sort of technology moves more closer to semiconductor testing?

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

No. You're very astute to pick up the change right between electrical to optical or that conversion. It's been an area of emphasis and investment for us, especially as things go into silicon. This is why we invested about eighteen months ago to intercept the demand from silicon photonics. We talked about this on a call as well.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

And we're now benefiting from that. That requires bringing together optical capabilities with our electrical capabilities and probing and complex metrology. So really in our wheelhouse as a company to go after this opportunity, co packaged optics is another great example of what I saw from customers. I think that's accelerating as well. And if we need more capabilities, can acquire talent.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

But I think we have a strong foundation to start with today that we actually at OFC, we showcased multiple first in this area four forty eight gig transmission, key enabler of 3.2 terabits and so on and so forth. So we had about 50 demonstrations. So it will continue to grow. But you're right, this is where the puck is moving to and we find ourselves having a strong foundation to intercept this.

Samik Chatterjee
Samik Chatterjee
Managing Director at JP Morgan

Okay, great. Thank you. Thanks for taking my questions.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

Thank you.

Operator

Thank you. We have a question from Mehdi Hosseini with SIG. You may proceed.

Mehdi Hosseini
Analyst at SIG

Yes. Thanks for letting me ask the question. I want to follow-up on the wireline. And Satish, I just want to look at the big picture. You talked about the connection is moving from copper to actually moving towards optical.

Mehdi Hosseini
Analyst at SIG

And when you look at the entire market for both networking tests as well as the testing that happens with the component and component migrating to optical, would it be fair to say that your content would increase as you migrate from 800 gig to 1.2 terabyte? And if content increases, including both system level test and semiconductor, what is the magnitude of the increase? Or you can are they help us qualitatively or quantitatively? And I have a follow-up.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

No, that's a look, I think I don't know that I would say that from what we see that it's either going to be electrical or optical. I think it's electrical for some applications where you obviously have a better sort of economics and then optical where you need the performance and it's where the puck is moving to. So I think this sort of hybrid is where the solutions are needed. And I think being a company that has both technologies, we find ourselves in a really good position across the stack, as you pointed out, memory, compute, networking, so on and so forth. Now with regard to the magnitude of the opportunity, typically as the complexity goes up, we would see the types of solutions that customers need, especially in early R and D, tend to be more complex.

Satish Dhanasekaran
Satish Dhanasekaran
President and CEO at Keysight

And therefore, we're adding more value to our customers as we get there. Now as those technologies mature, obviously, the puck moves to the next one. And therefore, the volume may drop on the previous technology. It's always the case that, that happens. But the net effect of these overlapping waves of technology is it's it really supports our long term growth expectations for the company that we have set to be in the 5% to 7% range.

Mehdi Hosseini
Analyst at SIG

Okay. And then a follow-up for Neil. If I just take a midpoint of your revenue guide for fiscal year twenty twenty five, assuming that the sequential growth is stronger in October versus July And embedding the tariff impact into your margin profile, would it be fair to say that there is a slight decline in operating margin from April to July and it would go kind of sideways from July to October. So your fiscal year twenty five operating margin would be kind of flattish compared to fiscal year twenty four?

Neil Dougherty
Neil Dougherty
Executive VP & CFO at Keysight

One second. Yeah. I mean, think as we look forward here, I think we're kind of range bound, I would say, in a pretty tight range. Obviously, we're going to see we would expect to see a seasonal uplift here as we move from Q3 to Q4. But and as always, we would expect the apps and tariffs to continue to drive a strong incremental on that flow through.

Operator

That concludes our question and answer session for today. I would like to turn the call back to Paulina Sims for any closing comments.

Paulenier Sims
Paulenier Sims
Director - IR at Keysight

Thank you, Tamiya, and thank you all for joining us today. Have a great rest of your day.

Operator

This concludes our conference call. You may now disconnect.

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Key Takeaways

  • Keysight reported Q2 revenue of $1.306 B and EPS of $1.70, beating the high end of guidance with 8% order growth and a 65% gross margin.
  • The Commercial Communications Group grew 9% on robust wireline demand for 400 Gb–terabit networks and continued 5G/6G R&D momentum, while Aerospace & Defense orders rose on U.S. and European program funding.
  • Electronics Industrial Solutions Group revenue increased 5%, driven by semiconductor wafer-test strength and improved general electronics, offsetting a decline in automotive.
  • Tariff costs of $7 M in Q2 (annualized $75–100 M) will be fully mitigated by year-end through supply-chain diversification and targeted pricing actions.
  • Full-year guidance was raised to the midpoint of the 5–7% revenue growth target with EPS growth now expected above the 10% long-term goal, supported by $457 M free cash flow and $150 M in share repurchases.
AI Generated. May Contain Errors.
Earnings Conference Call
Keysight Technologies Q2 2025
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