Keysight Technologies : Second Quarter 2025 Prepared Remarks

Published: 2025-05-20 17:42:04 ET KEYS

Published on 05/20/2025 at 17:42

‌Keysight Technologies Second Quarter 2025 Earnings Conference Call Prepared Remarks

‌Thank you, and welcome everyone to Keysight's Second Quarter Earnings Conference Call for Fiscal Year 2025.

‌Joining me are Keysight's President and CEO, Satish Dhanasekaran, and our CFO, Neil Dougherty.

‌The press release and information to supplement today's discussion are on our website at investor.keysight.com under financial information and quarterly reports. Today's comments will refer to non-GAAP financial measures. We will also make reference to "core" growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last twelve months. The most directly comparable GAAP financial metrics and reconciliations are on our website, and all comparisons are on a year-over-year basis unless otherwise noted.

‌We will make forward-looking statements about the financial performance of the company on today's call. These statements are subject to risks and uncertainties and are only valid as of today. We assume no obligation to update them and encourage you to review our recent SEC filings for a more complete view of these risks and other factors.

‌Lastly, management is scheduled to participate in an upcoming investor conference hosted by Baird. And now I will turn the call over to Satish.‌

Good afternoon, everyone, and thank you for joining us today.

During the second quarter, Keysight delivered revenue of $1.3 billion and earnings per share of $1.70, both of which exceeded the high end of our guidance. This marks the second consecutive quarter of revenue growth, driven by continued momentum in CSG and return to growth in EISG.

The demand environment was solid in the quarter with orders growing 8% year-over-year and up 4 percent sequentially to $1.3 billion. Even as we are monitoring the overall macro environment, we enter the second half with a healthy pipeline of opportunities and strong customer engagement. Neil will have more details on the tariff impact in his remarks.

Overall, our results demonstrate the resilience of our business and the durability of our financial operating model, which is underpinned by a flexible cost structure, supply chain, and operating capabilities that allow us to quickly adapt to external dynamics. As a result of multi-year investments, we have a diversified global supply chain which is largely based in Southeast Asia with minimal exposure in China.

Despite the near-term uncertainty, we are confident in our market leadership, the strength of our operating model, and our ability to generate value for our stakeholders. Our capital allocation priorities have not changed. We are investing for the long term, while also pursuing a balanced return of capital, enabled by our strong free cash flow conversion. Over the past twelve quarters, we have returned over $1.7 billion, or roughly 50% of free cash flow, to investors via repurchases.

Turning to the business segments…

In CSG, commercial communications orders grew double-digits. Demand remains robust in wireline where the ongoing data center infrastructure expansion is driving order strength. We saw the continued deployment of 400 and 800 gig ethernet technologies in AI data center applications. R&D investment in 1.6 terabit electrical and optical technologies, as well as the expansion of new protocols in AI data center networks, are fueling demand as the entire industry is innovating and developing new applications and services.

This quarter at OFC, we demonstrated the industry's first solution for 448 gig per lane optical transmission, a key building block in the deployment of 1.6 and 3.2 terabit networks. The breadth and depth of Keysight's capabilities in the electrical, optical and wireline protocol stacks, positions us well to enable ongoing innovation in high-performance computing, memory, and networking.

Wireless orders grew in Q2. We saw a steady pace of R&D activity related to 5G Advanced and early 6G research, as well as investment in non-terrestrial networks. While smartphone supply chain activity remained stable, innovation and investment in R&D in radio access networks continued to grow.

Keysight's new digital twin and system emulation capabilities are enabling NTN applications, and expanding our customer engagements.

In aerospace, defense and government…

Orders grew this quarter driven by strength in the U.S. and Europe. Ongoing investment in spectrum operations and space applications drove growth. Although the U.S. will be operating under continuing resolution for most of the year, overall demand and the pipeline of opportunities remain robust with prime contractor backlogs at record levels. Investment in defense modernization remains a top priority for many countries as reflected in the increased budget proposals in the US, Europe, and Asia. Keysight is a trusted partner in this ecosystem, delivering advanced, high-fidelity test capabilities that simulate real world electronic threats in lab environments. This quarter, Keysight won a notable deal with a major defense agency in Europe to modernize its testing capabilities for antenna and radar applications, key to mission critical operations.

Our innovation pipeline is driving a steady cadence of new products and solutions, which this quarter included higher frequency extensions to our phase noise analyzer for defense applications, and a new digital communication analyzer for 224 gig transceiver test, enabling wireline and general-purpose use cases.

Turning to the Electronic Industrial Solutions Group…

The demand environment remains mixed, while revenue returned to growth after six quarters of decline.

In semi, demand for our wafer test solutions from large foundry and IDM customers remained strong. Leading-edge process node investment was augmented by rapid growth in high-bandwidth applications. Customer engagements for silicon photonics and co-packaged optics accelerated within the quarter as the industry works to address performance limitations across latency, bandwidth, and power in the AI data center.

In automotive, while orders and revenue were down, the business has largely stabilized. Engagement with OEM customers remains steady with investment in software-defined vehicle capabilities, including cyber security, radar scene emulation, and ADAS chipset development. This quarter we secured a key win with a major automotive OEM for the design and test of their home energy management systems.

General electronics orders grew for the third consecutive quarter, although at a lower rate. Growth in multi-industrial and MedTech customers for both R&D and manufacturing solutions was partially offset by contraction in U.S. education funding and continued normalization in the distribution channel.

Moving to software…

Design Engineering Software orders grew double digits, reflecting healthy demand for our RF EDA solutions. We're seeing growing interest from industrial customers looking to apply simulation and virtual prototyping in the mechanical domain. With our recent ESI acquisition, we are enabling next-generation industrial design by delivering a panel-forming solution to a large European auto OEM that will drive efficiencies through their manufacturing processes and optimize their production timelines.

In closing, we are pleased with the recovery that is underway. Our end markets have performed largely in line with our expectations heading into this year, and I'm once again proud of the Keysight team's execution this quarter in what remains a dynamic environment. Keysight's broad portfolio of differentiated solutions positions the company to outperform in a variety of market environments. We continue to make deliberate, multi-year investments aligned with long-term technology trends- creating opportunities now and in the future. As we move through the second half, we remain focused on executing on what we control and continuing to deliver value to our customers and stakeholders.

With that, I will turn it over to Neil to discuss our financial performance and outlook.

Thank you, Satish, and hello, everyone. Second quarter revenue of $1 billion 306 million was above the high end of our guidance range, up 7 percent on a reported basis and 8 percent on a core basis. Orders of $1 billion 316 million were up 8 percent on both a reported and core basis.

Looking at our operational results for Q2, we reported gross margin of 65 percent. Operating expenses were $516 million, up 4 percent. Q2 operating margin was 25 percent, and increased 100 basis points over last year.

Turning to earnings, we achieved $295 million of net income and delivered earnings per share of 1 dollar and 70 cents. Our weighted average share count for the quarter was 173 million shares. Our Q2 results included approximately $7 million of new tariff expenses in cost of sales, which had a 60 basis point unfavorable impact on both gross and operating margin, and resulted in an approximately 4 cent reduction in earnings per share.

Moving to the performance of our segments, the Communications Solutions Group generated second quarter revenue of $913 million, up 9 percent on a reported and core basis.

Commercial communications revenue of $612 million was up 9 percent, reflecting sustained strength in wireline and growth in wireless.

Aerospace, defense, and government achieved revenue of $301 million, an increase of 9 percent. Altogether, CSG delivered 67 percent gross margin and 26 percent operating margin.

The Electronic Industrial Solutions Group generated $393 million in revenue, an increase of 5%, with growth in semiconductor and general electronics more than offsetting a decline in automotive and energy. EISG delivered 59 percent gross margin and 23 percent operating margin.

Software and services accounted for approximately 36 percent of Keysight revenue, while annual recurring revenue was 28 percent of total mix.

Moving to the balance sheet and cash flow, we ended the quarter with $3 billion 118 million dollars in cash and cash equivalents, generating cash flow from operations of $484 million, and free cash flow of

$457 million. In April, we issued senior notes for an aggregate principal amount of $750 million. We

intend to use the net proceeds for general corporate purposes, which may include partially funding the previously announced acquisition of Spirent.

With regard to pending acquisitions, the U.K. Competition and Markets Authority cleared the Spirent transaction in March. We are progressing through the review process with other regulatory agencies and expect the transaction to close in Keysight's third fiscal quarter. In addition, the acquisition of Optical Solutions Group and PowerArtist is anticipated to close shortly after the Synopsys-Ansys transaction is completed.

Lastly, we repurchased 1 million 42 thousand shares this quarter at an average price of approximately

$144 for a total consideration of $150 million.

Now, turning to the current environment, tariffs and our outlook…

We have a diversified global supply chain with minimal exposure to China, and have already taken action across multiple vectors to reduce the incremental impact of tariffs. Our multipronged mitigation approach spans our global manufacturing footprint and sourcing strategies, as well as pricing and cost actions.

Based on actions taken to date, we estimate our annual exposure at approximately $75 to $100 million. We are working to further reduce this exposure and offset any remaining impact. Given the high priority that we place on maintaining our long-term customer relationships, our pricing actions were not applied to pre-tariff backlog. As a result, and assuming tariff rates remain at the current levels, the most significant tariff impact is expected in Q3, with full mitigation by the end of the fiscal year.

Keysight currently has $2.4 billion in backlog and enters Q3 with a solid scheduled shipment position, despite the dynamics and uncertainty of the current macroeconomic environment. As Satish mentioned earlier, at this point we have not seen any material adverse effects on demand from tariffs and are therefore raising our full-year growth expectations.

We now expect FY25 revenue growth at the midpoint of our 5-7% long-term target, and annual EPS growth slightly above our long-term 10% target. For the third quarter, we expect revenue in the range of $1 billion 305 million to $1 billion 325 million, and Q3 earnings per share in the range of 1 dollar 63 cents to 1 dollar 69 cents, based on a weighted diluted share count of approximately 173 million shares. Implied in this guidance is the assumption that tariffs remain at current levels for the year.

With that, I will turn it back to Paulenier for the Q&A.

Disclaimer

Keysight Technologies Inc. published this content on May 20, 2025, and is solely responsible for the information contained herein. Distributed via Public Technologies (PUBT), unedited and unaltered, on May 20, 2025 at 21:41 UTC.