Keysight Technologies Q2 FY25 earnings call KEYS

Keysight continues to see strong demand in wireline, driven by ongoing data center infrastructure expansion and AI applications. The company noted continued deployment of 400 and 800-gig Ethernet technologies, with R&D investments in 1.6 terabit electrical and optical technologies fueling demand. Keysight's broad portfolio, spanning physical and protocol layers, positions it well for innovation in high-performance computing, memory, and networking. The wireline business, which was over $1 billion in sales last year, grew double digits in the first half of FY25, with a growing number of customers participating in the expanding ecosystem.

Orders in Aerospace, Defense & Government grew this quarter, primarily driven by strength in the U.S. and Europe. Despite the U.S. operating under a continuing resolution for most of the year, overall demand and the pipeline of opportunities remain robust, supported by record backlogs at prime contractors. Keysight secured a notable deal with a major European defense agency for antenna radar applications and was awarded a NATO FORACS contract. The company expects U.S. and European defense budgets to increase in the long term, reinforcing its strong portfolio position.

The EISG segment returned to revenue growth after six quarters of decline, driven by strong demand in semiconductor and general electronics. Wafer test solutions for large foundry and IDM customers remained strong, with leading-edge process node investments and rapid growth in high-bandwidth applications. Customer engagements for silicon photonics and co-packaged optics accelerated. While automotive orders and revenues were down, the business has largely stabilized, with steady OEM engagements in software-defined vehicles and home energy management systems.

Software and services accounted for approximately 36% of Keysight's revenue, with annual recurring revenue at 28% of the total mix. The company is actively investing to accelerate growth in this area, particularly in simulation. Design engineering software orders grew double digits, reflecting healthy demand for RF-EDA solutions and growing interest from industrial customers for virtual prototyping. The recent ESI acquisition is enabling next-generation industrial design, and potential future acquisitions from the Synopsys-Ansys transaction could further bolster Keysight's simulation presence, increasing recurring revenue and enabling earlier customer engagement in the design cycle.

Keysight reported a $7 million impact from new tariffs in Q2, affecting gross and operating margins by 60 basis points and EPS by $0.04. The annualized gross exposure is estimated at $75 million to $100 million. The company has a diversified global supply chain with minimal China exposure and is implementing a multipronged mitigation approach, including manufacturing footprint adjustments, sourcing strategies, and pricing actions on new quotations. While the most significant tariff impact^🌐 is expected in Q3, Keysight anticipates full mitigation by Q1 FY26, as pricing actions were not applied to pre-tariff backlog.

Keysight's financial operating model demonstrated resilience, supported by a flexible cost structure and supply chain. The company generated $484 million in operating cash flow and $457 million in free cash flow in Q2. Capital allocation priorities remain unchanged, focusing on long-term investments and balanced return of capital. Over the past 12 quarters, Keysight has returned over $1.7 billion, or approximately 50% of free cash flow, to investors through share repurchases, including $150 million in Q2.