Keysight Technologies, Inc. KEYS

Keysight views AI as a significant long-term secular tailwind, driving demand for next-generation technologies in networking, data centers, and communications. The company is actively engaged with chipset designers, network equipment manufacturers, and hyperscalers, enabling the expansion of AI data center networks and the design of high-speed electrical and optical technologies. Keysight highlighted its 400 gig per lane test solution for 3.2 terabit speeds and low-power DDR6 memory compliance tests, demonstrating its participation across the AI technology stack from compute to memory and networking.

Management reiterated its expectation for a gradual market recovery in 2025, with incrementally positive signals observed in the sales funnel and customer engagements. The 6-month sales funnel is improving in terms of new intake, velocity of customer decisions, and overall size. This enhanced visibility supports the company's thesis of a steady recovery throughout the year, despite ongoing macroeconomic uncertainties and potential US policy changes.

The Aerospace, Defense & Government segment achieved record Q1 revenue, driven by strong demand in the U.S. and Asia. While orders were down due to continuing resolutions, the long-term outlook remains strong, supported by record backlog levels at prime contractors and increasing global defense budgets. Keysight continues to develop differentiated RF and Microwave capabilities for security applications and expects to capitalize on technology modernization trends in this sector.

EISG revenue was down 1% (flat on a core basis), reflecting mixed demand. The semiconductor business saw strong order growth for parametric wafer test solutions for the third consecutive quarter, driven by new fab projects and AI-driven demand for advanced nodes, HBM, and silicon photonics. However, the automotive market, particularly EV battery development and manufacturing, remained challenged. General Electronics orders grew for the second consecutive quarter, supported by high-speed PCB and connectivity applications, inventory normalization, and advanced research.

Software and services now account for approximately 40% of Keysight's revenue, with recurring revenue at about 31% of total revenue, reflecting strategic progress in this area. The company is seeing growing customer engagement in design engineering software solutions and new demand in aerospace defense and industrial customers. Keysight also noted two pending acquisitions from the Synopsys-Ansys deal (Optical Solutions Group and power integrity software), which are contingent on the larger transaction and are expected to complement Keysight's design engineering software portfolio.

Operating expenses were up 2% year-over-year. Management expects a sequential increase in OpEx from Q1 to Q2 due to a full quarter of salary increases and lower PTO usage. The company aims for 40% incremental margins on 5% or better revenue growth. Gross margin was 65.8%, down year-over-year primarily due to mix, but was the highest in the last four quarters. The EISG gross margin is expected to remain mix-dependent, with a broader dispersion of margins within its portfolio.