Keysight Technologies, Inc. (KEYS) Q3 2025 Earnings Call Transcript

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Overview

The earnings call summary showed strong revenue and EPS guidance, and a positive outlook on AI and wireline growth. The Q&A section revealed optimism despite tariff impacts, with mitigation strategies in place. The company is cautiously optimistic about fiscal '26 and has raised revenue expectations. Positive drivers include AI demand, wireline growth, and defense market recovery. The lack of specifics on acquisitions and 6G timelines is a minor concern but does not outweigh the positive sentiment.

Key Financial Performance

Revenue $1.4 billion, an 11% year-over-year increase. This growth was attributed to strong execution, sustained AI momentum, and growth in aerospace, defense, government, and general electronics.

Earnings Per Share (EPS) $1.72, a 9% year-over-year increase. This exceeded the high end of guidance due to strong operational performance.

Orders $1.340 billion, a 7% year-over-year increase. Growth was driven by both the Communications Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG).

Gross Margin 64%, an increase compared to the previous year. This was supported by operational efficiencies and pricing strategies.

Operating Margin 25%, an increase of 60 basis points year-over-year. This improvement was due to cost management and revenue growth.

Net Income $297 million, a 9% year-over-year increase. This was driven by higher revenue and improved margins.

Communications Solutions Group Revenue $940 million, an 11% year-over-year increase. Growth was driven by double-digit increases in both wireline and wireless segments.

Electronic Industrial Solutions Group Revenue $412 million, an 11% year-over-year increase. Growth was seen across automotive, energy, semiconductor, and general electronics.

Free Cash Flow $291 million for the quarter, contributing to a year-to-date total of $1.1 billion. This was supported by strong operational cash generation.

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Operating Highlights

AI Solutions: Broader adoption of Keysight AI solutions to streamline integration and accelerate deployment of AI infrastructure.

Wireless Innovations: Demonstrated breakthrough in sub-terahertz component characterization and advanced next-generation MIMO technologies.

Automotive Solutions: Enabled NIO to validate compliance of smart electric vehicles with global wireless connectivity standards.

Quantum Computing: Collaborated with AIST in Japan to establish a 1,000-qubit platform for quantum computing research.

New Product Showcase: Introduced handheld millimeter wave signal analysis solution, advanced phased array antenna test capabilities, and phase noise measurement systems.

AI Ecosystem: Emerging AI ecosystem driving growth in digital infrastructure and innovation across the technology stack.

Aerospace and Defense: Elevated global defense spending and modernization priorities driving robust demand, especially in the U.S. and Europe.

Semiconductor Demand: Robust demand for wafer test solutions driven by AI compute intensity and power efficiency requirements.

Automotive Market: Stable demand year-over-year with ongoing transition to smart connected vehicles.

Revenue Growth: Achieved 11% year-over-year revenue growth to $1.4 billion, exceeding guidance.

Operational Margins: Reported gross margin of 64% and operating margin of 25%, with a 9% year-over-year increase in EPS.

Cash Flow: Generated $322 million in cash flow from operations and $291 million in free cash flow in Q3.

AI Investments: Strategic investments in AI technologies to align with multiyear innovation roadmap.

6G Research: Focused on early 6G research and shaping standards for next-generation wireless innovation.

Acquisitions: Progressing regulatory approvals for acquisitions of Spirent, Synopsys' Optical Solutions Group, and Ansys' PowerArtist.

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Risk or Challenges

Tariff Exposure: The company faces an increase in tariff exposure by approximately $75 million annually due to new tariff rates announced on August 1. Mitigation strategies are in progress but will take time to fully realize.

Supply Chain Optimization: Mitigation strategies for tariffs include supply chain optimization, pricing, and efficiency actions, but these require longer execution times and may impact financial performance in the short term.

Macroeconomic Uncertainty: Despite a resilient demand environment, the company acknowledges an uncertain macroeconomic backdrop, which could pose risks to future performance.

Regulatory Approvals: Pending acquisitions, including Spirent, Synopsys' Optical Solutions Group, and Ansys' PowerArtist, are subject to final regulatory approvals, which could delay strategic initiatives.

Defense and Government Budgets: While elevated defense spending is driving demand, reliance on government budgets introduces risks tied to geopolitical and budgetary changes.

Automotive Sector Stability: Demand in the automotive sector is stable but faces headwinds as the industry transitions to smart connected vehicles, requiring ongoing innovation and investment.

Data Center Complexity: Growing complexity in data center operations necessitates advanced modeling and testing solutions, posing challenges in maintaining system efficiency and performance.

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Guidance & Outlook

Full Year Revenue Growth: The company has raised its full-year revenue growth outlook to 7%.

Full Year EPS Growth: The company expects full-year EPS growth of approximately 13% at the midpoint.

Q4 Revenue: Revenue is expected to be in the range of $1.370 billion to $1.390 billion.

Q4 EPS: Earnings per share for Q4 are expected to be in the range of $1.79 to $1.85.

Tariff Mitigation: The company expects to fully mitigate the impact of the April tariffs by Q1 FY '26 and the August tariff increase by the first half of FY '26.

Demand Environment: The demand environment remains resilient despite an uncertain macroeconomic backdrop.

AI Ecosystem Growth: The emerging AI ecosystem is fueling massive growth in digital infrastructure, driving innovation across the technology stack.

6G Research and Standards: The company is progressing early 6G research and shaping the standards for its implementation.

Defense and Government Budgets: Keysight is well-positioned to capitalize on growing defense and government budgets globally.

Semiconductor Demand: Robust demand for wafer test solutions continues, supported by sovereign priorities worldwide.

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Shareholder Return Plan

Share Repurchase: We repurchased approximately 300,000 shares this quarter at an average price of approximately $164 for a total consideration of $50 million.

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Key Q&A

Q:What is the current view on end markets and their recovery?

A:Satish C. Dhanasekaran stated that the company is feeling good about the funnel and customer activity despite challenges like tariffs and geopolitical issues. Order growth has accelerated, and the year is progressing slightly better than expected. However, not all end markets are performing equally well. AI and aerospace/defense are showing momentum, wireless is slightly ahead of expectations, and EISG is returning to growth. Challenges remain in the automotive sector and some end market dynamics.

Q:What is supporting the revenue outlook for Q4 despite a book-to-bill ratio below 1?

A:Neil P. Dougherty explained that the timing of big deals, such as a large system integration deal finalized at the end of Q3, contributed to Q3 outperformance but muted Q4 sequential seasonality. The company expects more normal sequential seasonality on the order front moving forward.

Q:How should investors think about long-term revenue growth, particularly into fiscal '26?

A:Neil P. Dougherty mentioned that the company started the year with a gradual recovery expectation and is now looking at revenue growth at the low end of the 5%-7% range. The company has raised revenue expectations for the full year in the last two quarters. While bullish on fiscal '26, there is caution around tariffs and macroeconomic factors.

Q:What is the contribution of AI to Keysight's business, particularly in the wireline segment?

A:Satish C. Dhanasekaran stated that AI is contributing across multiple end markets, with wireline showing early demand. The wireline business is expected to finish the year with strong double-digit growth, driven by AI demand. The company has seen growth from existing customers and new start-ups, and AI is viewed as a long-term growth driver.

Q:What are the impacts of tariffs on the company, and how is Keysight mitigating them?

A:Neil P. Dougherty explained that tariffs are impacting the company, particularly in the U.S. The company is mitigating the impact through supply chain strategies, capacity utilization, supplier relationships, cost efficiencies, and passing costs to customers via price increases and tariff surcharges. The company expects to fully mitigate the April tariff impact by Q1 and the August increase by the first half of the fiscal year.

Q:What is the outlook for the aerospace and defense market?

A:Satish C. Dhanasekaran noted that the aerospace and defense market started the year slow but has picked up in the second half. Ongoing programs and robust backlogs for prime contractors are positive indicators. European spending is also contributing, and the company is confident in its capabilities in radar, EW, and space satellite technologies. Growth may be steadier compared to commercial markets.

Q:What is driving growth in the wireless business?

A:Satish C. Dhanasekaran attributed growth to recovering market conditions, standard progression (e.g., Release 18), AI applications on mobile devices, nonterrestrial network activity, and early 6G research. The smartphone supply chain remains subdued, but other areas are driving growth.

Q:What are the moving parts around the incremental margin of 40%?

A:Neil P. Dougherty stated that the 40% incremental margin is still a long-term target. Tariffs have impacted the ability to achieve this in the short term, but the company has been able to raise EPS growth estimates. Once tariffs are included in the baseline, the company expects to return to achieving the 40% incremental margin.

Q:What is the sustainability of wireline orders and their contribution to revenue?

A:Satish C. Dhanasekaran explained that wireline orders are driven by data center CapEx investments and AI workloads. The company expects sustained growth in wireline due to accelerated innovation cycles and a steady roadmap for customer engagement. Wireline is expected to finish the year with record bookings.

Q:What is the impact of tariffs on orders?

A:Neil P. Dougherty and Satish C. Dhanasekaran stated that there has been no material change to the demand profile or pull-in of orders due to tariffs.

Q:What are the customer segments in the data center business?

A:Satish C. Dhanasekaran noted that the data center business includes hyperscalers, semiconductors, and integrators/assemblers. The majority of demand is for R&D tools and capabilities.

Q:What is the outlook for 6G research and its revenue contribution?

A:Satish C. Dhanasekaran stated that 6G research is in the early stages, with customers exploring IP development. The company expects R&D activity to grow over time, but 6G rollout is still years away.

Q:Why is the semiconductor business less volatile compared to the front-end semicap space?

A:Satish C. Dhanasekaran explained that the semiconductor business benefits from wafer starts, sovereign trends, advanced nodes, new memory topologies, and silicon photonics. The business experienced a decline in '24 but is now seeing increased activity and AI-driven demand.

Q:What is the mix between R&D test and production test in the wireline business?

A:Satish C. Dhanasekaran stated that the wireline business remains predominantly R&D-oriented, but there is an increasing mix of manufacturing exposure due to supply chain unlocking and new customer activity.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the size or magnitude of the Synopsys and Ansys acquisitions, directing questions to Synopsys instead. Additionally, they did not provide a clear breakdown of customer segments in the data center business or specific timelines for 6G revenue contributions.

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Earnings Word Cloud

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