Keysight Technologies, Inc. (KEYS) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reflects strong financial performance with a 35% YoY revenue increase, robust demand across sectors, and solid gross margins. Despite slightly lower Q3 guidance, the anticipation of a stronger second half, combined with record orders and a positive AI business outlook, suggests a positive sentiment. The Q&A reveals no significant concerns, and the management's confidence in navigating market dynamics further supports a positive outlook. The lack of specific guidance on AI opportunities is a minor concern but does not significantly affect the overall positive sentiment.
Key Financial Performance
Orders $2.051 billion, up 56% year-over-year. Core growth excluding acquisitions and currency impacts was 48%. This growth was driven by robust demand across all business groups.
Revenue $1.717 billion, up 31% year-over-year. Excluding onetime tariff impacts, revenue was $1.758 billion, up 35%. Growth was attributed to strong performance across all segments and markets.
Earnings Per Share (EPS) $2.87, up 69% year-over-year. Excluding onetime tariff impacts, EPS was $2.58, up 52%. The increase was driven by strong revenue growth and improved operating leverage.
Free Cash Flow $472 million, a record high. This was driven by strong operational performance and cash flow generation.
Gross Margin 72.3%. Excluding onetime tariff impacts, gross margin was 67.6%, up 300 basis points year-over-year. The improvement was due to higher revenue and operational efficiencies.
Operating Margin 30.4% (excluding onetime tariff impacts), up 520 basis points year-over-year. This was driven by 49% operating leverage and strong organic business performance.
Communications Solutions Group Revenue $1.231 billion, up 35% year-over-year. Core growth was 27%. Growth was driven by robust demand in both wireless and wireline, as well as aerospace, defense, and government sectors.
Electronic Industrial Solutions Group Revenue $486 million, up 24% year-over-year. Growth was seen across general electronics, semiconductor, and automotive and energy markets.
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Operating Highlights
AI-related business: Surpassed 2025 levels in the first half of 2026, driven by AI infrastructure scaling, speed transitions, optical and photonics technologies, and system-level emulations.
Scale-up validation solutions: Introduced new solutions for performance characterization and manufacturing validation to improve yields and reduce failures.
1.6-terabit physical layer solutions: Demonstrated at Optical Fiber Conference with over 20 industry leaders, showcasing advancements in traffic emulation and link reliability validation.
220 GHz Lightwave Component Analyzer: Expanded optical portfolio to support advanced transceiver and photonics designs.
Keysight AI Inference Builder: Released to support emerging inference applications.
AI data center expansions: Accelerating momentum in wireline business with record orders for R&D and manufacturing solutions.
6G research and non-terrestrial networks: Robust growth in orders, with collaborations on RF digital twins and AI RAN workflows.
Defense modernization: Broad-based global momentum, particularly in radar and electromagnetic spectrum operations.
Semiconductor markets: Continued momentum with key wafer test solution wins and collaborations with leading foundries.
Revenue growth: Achieved 31% growth year-over-year in Q2 2026, with high 20s percent growth expected for fiscal 2026.
Free cash flow: Generated a record $472 million in Q2 2026.
Operational efficiencies: Expect $375 million in FY '26 revenue from acquisitions and over $100 million in cost synergies.
AI ecosystem leadership: Focused on capitalizing on early leadership in AI data center infrastructure ecosystem.
Defense technology and 6G: Progressing in defense technology, space, 6G, and quantum computing as part of long-term growth strategy.
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Risk or Challenges
AI Infrastructure Scaling: The scaling challenge is intensifying as AI clusters integrate multiple components across vendors, requiring end-to-end interoperability and system validation. This complexity increases the risk of system failures and higher costs for deeper manufacturing validation and production test coverage.
Speed Transitions in Networking: The industry is navigating multiple overlapping speed transitions, including 800-gig, 1.6-terabit, and 3.2-terabit technologies. This creates challenges in ensuring compatibility and reliability, which could delay deployments and increase costs.
Silicon Photonics and Co-Packaged Optics: The transition to co-packaged optics and silicon photonics introduces design and manufacturing complexities, posing risks of delays and higher costs in development and deployment.
Non-Terrestrial Networks (NTN): The increasing complexity of LEO environments, including dynamic link conditions and stringent positioning requirements, creates challenges in validating next-generation NTN systems, potentially delaying deployments.
Defense Modernization: Global defense modernization priorities require advanced systems, but the complexity of radar and electromagnetic spectrum operations poses risks in meeting stringent requirements and timelines.
Semiconductor Scaling: The race to scale semiconductor capacity through 2030 introduces risks related to advanced node and silicon photonics development, including potential delays and increased costs in R&D and production.
Automotive and Energy: Growth in software-defined vehicles and EV charging solutions requires robust cybersecurity and over-the-air validation, posing risks of system vulnerabilities and delays in deployment.
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Guidance & Outlook
Revenue Growth: Keysight has raised its growth expectations for fiscal 2026, now projecting revenue growth in the high 20s percent for the fiscal year, driven by strong performance in the first half and a robust pipeline for the second half.
AI-Related Business: The AI-related business has already surpassed 2025 levels in the first half of fiscal 2026. Keysight expects continued momentum driven by AI infrastructure scaling, speed transitions, optical and photonics technologies, and system-level emulations.
AI Data Center Scaling: Keysight anticipates sustained demand for its solutions in AI data center scaling, including 800-gig and 1.6-terabit architectures, with R&D activity expanding into 3.2-terabit technologies.
6G Research and Wireless: Keysight is positioned to capitalize on 6G opportunities, including integrated sensing and communication, energy-efficient networks, and expanded coverage capabilities. The company is also advancing in non-terrestrial networks (NTN) and expects direct-to-cell deployments in the coming quarters.
Defense and Aerospace: Keysight expects continued growth in defense and aerospace markets, driven by global defense modernization, radar and electromagnetic spectrum operations, and next-generation systems. The company anticipates increased demand for radar survivability and autonomous operations solutions.
Semiconductor Market: Keysight projects sustained growth in the semiconductor market through 2030, driven by AI ecosystem demand, advanced node programs, and silicon photonics. Collaborations with leading foundries are expected to accelerate development and commercial ramp timelines.
Automotive and Energy: The automotive and energy segment has stabilized, with growth expected in software-defined vehicles and EV charging solutions. Keysight anticipates continued demand for in-vehicle network, cybersecurity, and over-the-air design and validation solutions.
Capital Expenditures: Keysight has increased its fiscal 2026 capital expenditure forecast to $200 million to support higher growth levels.
Q3 2026 Guidance: For Q3 2026, Keysight expects revenue between $1.730 billion and $1.750 billion, representing 29% year-over-year growth at the midpoint. Earnings per share are projected to range from $2.43 to $2.49, reflecting 43% year-over-year growth at the midpoint.
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Shareholder Return Plan
Share Repurchase: This quarter, we repurchased approximately 780,000 shares of Keysight stock at an average price of approximately $283 per share for a total consideration of $220 million.
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Key Q&A
Q:How should we think about the age of backlog given the faster rate of orders?
A:The backlog policy remains unchanged, with the majority of business booked and recognized within a 6-month period of delivery.
Q:Can you size the wireline or AI opportunity as it relates to components?
A:The AI business is broad-based, servicing computing, networking, transceivers, interconnects, and hyperscalers. The company participates in early R&D, design, validation, compliance testing, and emulations, particularly in scale-out opportunities.
Q:What is driving the Q3 revenue guidance, which is slightly down from Q2?
A:Q3 revenues are largely in line with Q2, slightly down. The second half of the year is expected to be materially above the first half due to strong customer demand, mix, timing of new product introductions, and a higher backlog in the AI business.
Q:Are there any changes in customer buying behavior or concerns about ensuring supply?
A:There is broad strength in bookings, with record bookings for the company. AI demand showed a stronger sense of urgency, translating to faster pipeline velocity. No pull-forwards were discerned from the data.
Q:How do you think about the growth algorithms for the company given the evolving business dynamics?
A:The company focuses on organic growth, innovation, expanding customer footprint, and navigating market dynamics. AI, automotive, space, satellite, and 6G are key growth areas. The company is confident in its ability to outperform under various economic conditions.
Q:Is the strong gross margin this quarter durable going forward?
A:Gross margin, excluding one-time items, is in the mid-67% range. Post-acquisitions, this is considered the right level at current volumes.
Q:How are incremental margins evolving, and have acquisitions impacted them?
A:Incremental margins this quarter were just under 59%, driven by high growth rates. Acquisitions have not significantly changed the incremental margin dynamics.
Q:Has the blend of business between production and lab changed with AI and other categories accelerating?
A:Both R&D and manufacturing components of the business doubled in the first half. The wireline business still has a high percentage of R&D, with manufacturing increasing due to AI cluster scaling.
Q:How significant is the space and satellite opportunity to the business?
A:Space and satellite currently contribute less than 1% of total revenue but are seen as a growth area with emerging opportunities in commercial satellites and multilayered communication architectures.
Q:Why haven't acquisition revenue expectations increased despite improved end-market demand?
A:Recurring revenue businesses from acquisitions respond more slowly. Integration is on track, and the company is well-positioned to deliver on revenue and synergies.
Q:How is quantum technology shaping the future of test and measurement?
A:Quantum is a long-term trend, with steady triple-digit business enabling quantum computers and hybrid compute states. The company is excited about its role in this evolving area.
Q:What is the status of supply chain management and its impact on the business?
A:The supply chain is actively managed, with no major concerns. The company is vertically integrated, manufacturing many specialized chips in-house. CapEx spend has been increased to support product ramp-ups.
Q:How material are memory cost increases to COGS or gross margins?
A:Memory is a small portion of the overall BOM, with proportionately less exposure to high-bandwidth, leading-edge memory.
Q:What contributed to the record orders this quarter?
A:Record orders were driven by AI infrastructure, aerospace and defense program spend, and semiconductor demand. The pipeline remains strong, with increased funnel velocity and conversion rates.
Q:What is the multiyear outlook for the AI business?
A:The AI business has a multiyear runway, with scaling AI clusters and broadening ecosystems. The company is investing in both physics and emulation aspects of AI infrastructure.
Q:How does the growth in manufacturing compare to R&D in the AI business?
A:The wireline business remains in the 70-30 range (R&D to manufacturing), with both components doubling in the first half.
Q:Review of Unclear Management Responses
A:Management avoided directly answering the question about the size of the wireline or AI opportunity as it relates to components, providing a broad description of the business instead of specific figures.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Ethernet
LEO
NTN
PCBs
PNT
Relations website
Vice President
architecture
automotive energy
basis Satish
capacity
coverage
demonstration
development deployment
expansion
fabric
fidelity
impact margin
investment portfolio
level emulation
market electronics
market momentum
midpoint share
opportunity defense
order basis
order share
percent
portfolio industry
position
record cash
record order
reduction
refund
requirement
scale network
scaling
semiconductor automotive
signal
solution ability
solution characterization
speed transition
switch
system level
technology trend
university
vendor
KEYS Transcript
Keysight Technologies, Inc. (KEYS) Q2 2026 Earnings Call Transcript
Positive5-19
The earnings call reflects strong financial performance with a 35% YoY revenue increase, robust demand across sectors, and solid gross margins. Despite slightly lower Q3 guidance, the anticipation of a stronger second half, combined with record orders and a positive AI business outlook, suggests a positive sentiment. The Q&A reveals no significant concerns, and the management's confidence in navigating market dynamics further supports a positive outlook. The lack of specific guidance on AI opportunities is a minor concern but does not significantly affect the overall positive sentiment.
Keysight Technologies, Inc. (KEYS) Q1 2026 Earnings Call Transcript
Positive2-23
The earnings call presents several positive indicators: strong revenue growth guidance, successful acquisitions contributing to revenue, and robust demand in AI and defense sectors. The Q&A section highlights broadening customer base and increased demand, particularly in AI. Although there are some uncertainties regarding TAM sizing, the overall sentiment remains positive due to the strategic tailwinds and solid financial metrics. The market is likely to react positively to these developments.
Keysight Technologies, Inc. (KEYS) Presents at Barclays 23rd Annual Global Technology Conference Transcript
Neutral12-10
Keysight Technologies, Inc. (KEYS) Presents at UBS Global Technology and AI Conference 2025 Transcript
Neutral12-3
KEYS Slides
Keysight Q1 FY2026 slides: record revenue, 23% growth beat forecasts2026-02-23
Keysight Q4 2025 slides: 10% revenue growth fueled by AI and semiconductor demand2025-11-24
Keysight Q3 2025 slides: Revenue jumps 11%, company raises full-year outlook2025-08-19
Keysight Q2 2025 slides: Revenue up 7%, company raises full-year outlook2025-05-20
KEYS Report
Frequently Asked Questions
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