Keysight Technologies, Inc. KEYS

Keysight's early recognition of AI as a transformative technology led to strategic investments aligning its portfolio with the multi-year innovation roadmap. The emerging AI ecosystem is fueling massive growth in digital infrastructure, driving demand for rapid innovation across the technology stack. The company is delivering advanced physical layer solutions and silicon photonics capabilities to enhance R&D workflows and address signal integrity and performance requirements for AI applications. This quarter saw broader adoption of Keysight's AI solutions, streamlining integration and accelerating deployment of AI infrastructure.

The wireline business is experiencing strong double-digit growth, driven by underlying AI demand, and is expected to achieve record bookings this fiscal year. The nature of AI workloads, progressing from ChatGPT-type applications to more agentic workflows, is seen as a sustaining driver for the business, potentially extending into 2028 and 2030. The rapid refresh cycles in compute, memory, networking, and interconnect technologies, previously 2-4 years, are being pulled in, creating a steady roadmap for customer engagement and innovation.

Elevated defense spending globally, particularly in the U.S. and Europe, is driving robust demand in the aerospace, defense, and government segment. Keysight secured key wins with EU prime contractors for radar and electromagnetic spectrum operation applications. The company's differentiated platforms emulate complex 3D radio channel conditions for satellite, vehicle, airborne, and terrain scenarios. While government budgets dictate the pace, this segment is viewed as a steady value creator, with potential for increased contributions from European spend and NDAA priorities.

The EISG segment saw orders and revenues grow year-over-year and sequentially, with broad-based growth across automotive and energy, semiconductor, and general electronics. High-performance requirements in AI data centers are translating into investments in high-speed PCBs and interconnects within general electronics. Digital health continued to grow, driven by advancements in medical device validation and production. Advanced research and education also contributed to growth, particularly in EU and Asia Pac regions, fueled by leading-edge semiconductor, 6G, and photonics initiatives.

New tariff rates announced on August 1 are estimated to increase Keysight's annual tariff exposure by an additional $75 million, bringing the total annual impact to $150 million-$175 million. The company is on track to fully mitigate the April tariffs by Q1 FY26 and expects to mitigate the August tariff increase on a dollar basis within the first half of FY26. Mitigation strategies include supply chain optimization, potentially shifting manufacturing, leveraging existing capacity, and passing residual costs to customers through price increases and surcharges.

Keysight's software and services portfolio continues to drive innovation and value for customers. The simulation and emulation portfolio helps customers achieve faster time to market and superior product performance. Healthy demand was observed for RF-EDA solutions, driven by increased government, aerospace, and defense spending, as well as the need for high-speed digital simulation in the AI data center supply chain. The services business, particularly managed services and KeysightCare, saw strength in aerospace, defense, government, and data centers, where uptime is mission-critical.