Keysight (KEYS) Q2 2026 Earnings Transcript

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DATE

Tuesday, May 19, 2026 at 4:30 p.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — Satish Dhanasekaran
• Executive Vice President and Chief Financial Officer — Neil Dougherty
• President, Communication Solutions Group — Kailash Narayanan
• President, Electronic Industrial Solutions Group — Jason Carey
• Senior Vice President, Global Sales — Sung J. Yoon
• Vice President, Investor Relations — Liz Morali

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TAKEAWAYS

• Total Orders -- $2.05 billion, up 56%, with acquisitions contributing 700 basis points and currency 100 basis points; core order growth was 48%.
• Total Revenue -- $1.72 billion, up 31% reported and 24% core; adjusting for a $40 million tariff-related reduction, revenue was $1.76 billion, up 35%.
• EPS -- $2.87, up 69%; excluding one-time tariff impacts, EPS was $2.58, up 52%.
• Free Cash Flow -- Record $472 million generated.
• Gross Margin -- 72.3% reported; excluding the one-time benefit, 67.6%, up 300 basis points.
• Operating Margin -- 30.4% excluding tariff items, up 25 basis points, supported by 49% operating leverage.
• CSG Revenue -- $1.23 billion, up 35% reported and 27% core; commercial communications revenue was $858 million, up 40%, and aerospace/defense/government revenue was $373 million, up 24%.
• EISG Revenue -- $486 million, up 24% across general electronics, semiconductor, and automotive/energy markets.
• Software and Services Revenue -- Accounted for approximately 36% of total revenue; annual recurring revenue comprised 27% of the mix.
• AI-Related Business -- $500 million-$600 million in the first half, nearly matching all of last year, with sustained demand across R&D and manufacturing; both segments doubled.
• Guidance -- Q3 revenue expected in the range of $1.73 billion to $1.75 billion (29% growth at midpoint); Q3 EPS guidance is $2.43 to $2.49 (43% growth at midpoint).
• Outlook for Full Year -- Revenue growth now expected in the high-20s percent; management cited a strong pipeline and typical sequential Q4 uplift.
• Acquisition Impact -- $375 million in revenue expected from acquisitions with over $100 million in cost synergies for fiscal 2026; 80% of cost synergies targeted to be realized on a run-rate basis by year end.
• Share Repurchases -- 780,000 shares repurchased at an average price of $283, totaling $220 million.
• Capital Expenditures -- Forecast for fiscal 2026 increased to $200 million, up from prior guidance of $160 million, driven by accelerated ramp of new product introductions.
• Backlog Visibility -- Majority of business is booked and recognized within a six-month period with no changes to backlog policy.
• AI Business Mix -- Wireline business is approximately a 70-30 split between R&D and manufacturing, with variability by quarter.
• Non-Terrestrial Networks (NTN) and LEO Revenue -- Annualized contribution remains below 1% of total revenue, with early positioning for future scale.

SUMMARY

Management described the period as setting all-time company records for orders, revenue, and earnings per share. Shareholder value creation was attributed to broad-based growth across AI infrastructure, commercial communications, and aerospace/defense markets. Orders and customer engagement in AI, semiconductor, and defense spending led to a significant broadening of the customer base and robust bookings pipeline. Guidance signals sustained high-growth, with the business leveraging new products and acquisition synergies amidst ongoing capacity investments. The company noted strong customer urgency in AI testing solutions and reported progress on integration of acquired businesses, especially recurring-revenue software segments.

• CEO Dhanasekaran described the AI ecosystem as at an "early innings" stage, emphasizing a multi-year runway and expanding roles for both emulation and physical test solutions.
• Management confirmed that doubling in both R&D and manufacturing revenue in the wireline-AI business occurred during the first half.
• Gross margin durability at adjusted mid-67% levels was affirmed post-acquisition, excluding onetime tariff impacts.
• Vice President Yoon highlighted that funnel velocity and conversion rates are increasing, projecting a strong outlook into the second half.
• CFO Dougherty stated no material supply chain disruptions, with vertical integration mitigating risk, and described memory cost impacts as immaterial to cost of goods sold.

INDUSTRY GLOSSARY

• CSG (Communication Solutions Group): Keysight segment delivering electronic design automation, radio frequency and microwave test, and network test solutions.
• EISG (Electronic Industrial Solutions Group): Keysight segment focusing on electronics design, verification, and test solutions for industrial and semiconductor applications.
• NTN (Non-Terrestrial Networks): Networks utilizing satellite or airborne platforms, including low-Earth orbit (LEO) constellations, for communication services.
• PNT (Position, Navigation, and Timing): Technology segment providing signal validation for navigation and geolocation systems, often critical in defense and aerospace.
• SerDes: Serializer/Deserializer technology enabling high-speed data transfer via serial communication links, essential in networking and interconnects.
• MPI (Market Product Introduction): The phase when new products are released to market and scale from initial R&D to full production.

Full Conference Call Transcript

Satish Dhanasekaran, president and CEO Neil Dougherty, executive vice president and CFO Kailash Narayanan, president of the Communication Solutions Group, Jason Carey, president of the Electronic Industrial Solutions Group, and Sung J. Yoon, senior vice president of global sales. Following the prepared remarks from Satish and Neil, we will take your questions. The press release and information to supplement today's discussion can be found on our Investor Relations website investor.keysight.com. During today's discussion, we will make forward looking statements. About the financial performance of the company. Actual results may differ materially from those mentioned in these forward looking statements as a result of risks and uncertainties.

Information about these risks and uncertainties can be found in our most recent Forms 10-K and 10-Q filings with the SEC. We do not intend to update any forward looking statements. In addition, we will refer to non GAAP financial measures. and reference core growth, Which excludes the impact of acquisitions or divestitures completed within the last 12 months and currency movements. The most directly comparable GAAP financial metrics and reconciliations can be found on our Investor Relations website. And all comparisons are on a year over year basis unless otherwise noted. I will now turn the call over to Satish.

Satish Dhanasekaran: Thank you, Liz. Good afternoon, and thank you for joining us today. Keysight delivered the best quarter in company history capping off a record first half. Q2 orders grew 56% year over year surpassing $2 billion Revenue grew 31%, earnings per share grew 69%, and we generated a record $472 million in free cash flow. These results demonstrate the strength of Keysight's portfolio which has been built strategically to deliver first to market solutions enable innovations across our end markets including data centers, networking, defense, semiconductors, and general electronics. We are raising our growth expectations for fiscal 2026 driven by the solid start to the year, and the pipeline of opportunities we see in the second half.

We now expect revenue growth in the high-20s percent for the fiscal year as the underlying trends driving our business are expected to continue. These investments making in our comprehensive set of solutions and deep engagements with market defining customers, positions us well for sustained value creation. Moving to our results by business. Communication Solutions order growth significantly outpaced revenue growth of 35% year over year, with broad strength across both commercial communications and aerospace defense and government. This performance builds on the growth we saw in Q2 last year where CSG delivered 9% revenue growth. In commercial communications, we continue to see accelerating momentum in our wireline business driven by the ongoing AI data center expansions.

Wireline delivered record orders again this quarter with robust demand for both R&D and manufacturing solutions. In the 2026, our AI related business has already surpassed the levels achieved in all of 2025. As I mentioned in our Q1 earnings call, this momentum continues to be driven by 4 key pillars of opportunity that we expect to continue. AI infrastructure scaling, speed transitions, optical and photonics technologies, and system level emulations. First, the scaling challenge is intensifying as AI clusters integrate GPUs, CPUs, DPUs, switches, NICs, memory fabrics, and storage across multiple vendors and the networking technologies, including Ethernet, UALink, PCIe, NVMe, and CXL.

Customers are adopting Keysight solutions for end to end interoperability and system validation to ensure that these components function reliably together at scale. This quarter, Keysight announced new scale up validation solutions for performance characterization. As systems become more complex and expensive, additional investments in deeper manufacturing validation and production test coverage are needed to improve yields and reduce post deployment failures. We saw strong adoption for newly introduced ultra high interconnect solutions that enable rapid characterization of rack backplanes for next generation scale up networks. Second, the industry continues to navigate multiple overlapping speed transitions with continued 800-gig deployments accelerating adoption of 1.6-terabit architectures, and increased R&D activity around 3.2-terabit technologies.

The optical fiber conference and NVIDIA's GTC this quarter reinforced the accelerating importance of networking as a critical enabler of AI data center scaling. At OFC, Keysight demonstrated our 1.6-terabit physical layer solutions with over 20 industry leaders. We also showcased 1.6-terabit traffic emulation link reliability validation, and SerDes signal integrity solutions for switch, and system vendors. And we collaborated with Broadcom on the industry's first public interoperability demonstration of ultra Ethernet consortium specifications marking a major step towards production ready AI optimized Ethernet fabrics. Third, activity in silicon photonics and co packaged optics continues to expand. Our early engagements in co packaged optics positions Keysight well to capture value as the industry transitions to these architectures.

We are also seeing strong demand from next generation optical component and transceiver development and deployment driven by expansion in scale out networks. We recently expanded our optical portfolio with the industry first 220-gigahertz Lightwave component analyzer to support advanced transceiver and photonics designs. Building on our existing chiplet and photonic design solutions, our new 3D interconnect designer is also helping customers address the growing complexity of designing next generation 3D stack chip architectures. Finally, customers need system level emulation and benchmarking capabilities for data centers at scale. We saw strong adoption of our AI workload emulation solutions among hyperscalers as they work to improve utilization of GPU, power resources while addressing growing system and security complexity.

This quarter, we expanded Keysight's AI portfolio with the release of Keysight AI Inference Builder designed to support emerging inference applications. Together, these trends are driving increased demand for our solutions across multiple domains. The breadth of Keysight Solutions portfolio and ongoing R&D investments enable us to maintain a differentiated portfolio and an industry leading position. Turning to wireless. Orders saw robust growth in the quarter with activity in non terrestrial networks 6G research, and increased demand to support the supply chain associated with AI expansion. NGN is becoming an important layer of future wireless architectures with new LEO constellation scaling and the industry targeting direct to cell deployments in the next few quarters.

The increasing complexity of LEO environments including speed, dynamic link conditions, and stringent positioning requirements is driving demand for Keysight's orbit emulation and Spirent's PNT solutions which together provide customers with a differentiated ability to validate next generation NTN systems. As the industry explores new use cases for 6G, such as integrated sensing and communication, energy efficient networks, and expanded coverage capabilities we are well positioned to intercept these opportunities through our portfolio of high fidelity tools, for design and emulation. This quarter, we expanded our collaboration with Qualcomm on RF digital twins and at Mobile World Congress conducted a joint demonstration with Samsung on AI RAN workflows.

Next month, Keysight will host the TGPP meeting in Singapore with a timeline for 6G standardization is being solidified. Further reflecting Keysight's leadership position as the ecosystem evolves towards commercialization. Turning to aerospace defense and government. We saw broad based global momentum led by Europe, supported by continued strength in Americas, as the global defense modernization priorities increasingly translate into new programs and investments in next generation systems. Demand was strongest across radar, electromagnetic spectrum operations as governments and prime contractors expanded capacity to support evolving operational requirements while activity in space satellite and autonomous systems remained healthy. This drove ongoing customer engagement and new wins for our recently introduced radar target generation solutions.

Keysight's ability to accurately simulate radar signals emulate threat environments is a key differentiator. Creating higher value system level opportunities with defense contractors and government agencies around the world. As contested spectrum environments drive a greater focus on radar's survivability and autonomous operations Customers are increasingly adopting Keysight solutions that include high fidelity emulation, signal analysis, PNT, and RF validation to accelerate their development and deployment. This quarter, we secured a key win with US Air Force to enable next generation operational flight line testing with more stringent requirements. Given the mission critical nature of this defense market, we also continue to see increased attach rate for our value added services to enable mission readiness and operations.

Moving to Electronic Industrial Solutions Group, we delivered a record quarter with all time highs for both orders and revenue, strong growth across all 3 EISG markets. General electronics, semiconductors, and automotive and energy. In general electronics, double-digit order and revenue growth was driven by ongoing momentum in AI related innovation and infrastructure investments. Customer capacity investment for high performance PCBs was again strong this quarter. Greater complexity increasing density interconnects, multilayer architectures, and higher speeds are driving customer engagement across multiple standards, and applications. Resulting in a higher test intensity for PCBs.

In education, we saw healthy demand from governments and universities around the globe in the development of next generation of semiconductor workforce talent through our tailored training modules. Our solutions are also facilitating leading edge university research in advanced technologies with key wins this quarter in quantum, photonics, semiconductor, and 6G. In our semiconductor markets, we saw continued momentum in the pace of innovation and customer investments. As the industry races to scale capacity through 2030. AI ecosystem demand further accelerated this quarter across advanced node memory, and silicon photonics. Our collaborations with leading foundries from R&D to production are enabling faster development and commercial ramp time lines for increasingly complex chip architectures and packaging.

This quarter, we had key wafer test solution wins in support of silicon photonics and advanced node programs across Asia, The US, and Europe, while our solutions for key lithography customers grew strongly as well. We expect this to be a sustainable contributor of growth for us over the next several years. Finally, in automotive and energy, orders grew for the 3rd consecutive quarter as the business has largely stabilized. Growth was across both software defined vehicles and EV charging solutions, with key wins for in vehicle network, cyber and over the air design and validation at OEMs, and test labs globally. We are leveraging our expertise and leadership in networking applications to develop solutions for the new mobility market.

In closing, the strong results we are delivering in fiscal 26 reflect the execution of our strategy we outlined at Investor Day in 2023. Centered around consistently identifying and investing in long term growth opportunities across technology trends, transforming industries, and global market dynamics. This framework has guided our disciplined organic and inorganic investments enabling us to build a differentiated portfolio aligned with some of the world's most important and fastest growing end markets. As we are focused on capitalizing on our early leadership in the AI data center infrastructure ecosystem, we are equally excited by the broader set of secular growth opportunities we are progressing, including defense technology, space, 6G, and quantum computing.

We believe our portfolio's technology leadership product pipeline, and deep customer relationships position us well to capitalize on these opportunities and continue creating long term value for our customers and shareholders. All of this value creation is enabled by the commitment of our team and the collaborative and innovative culture in the company. I want to acknowledge the entire Keysight team for their hard work and dedication to our success. I will now pass the call over to Neil to provide additional details on our financial performance and guidance. Neil?

Neil Dougherty: Thank you, Satish, and hello, everyone. We delivered outstanding results in fiscal Q2 setting new company records for orders, revenue and earnings per share. Our teams capitalized on the robust and dynamic demand environment resulting in strong double digit growth across all our business groups. Q2 orders of $2.05 billion were up 56% on a reported basis, with acquisitions adding 700 basis points and currency adding 100 basis points. On a core basis, excluding those items, orders grew 48%. Revenue of $1.72 billion was up 31% on a reported basis and up 24% on a core basis.

Gross margin was 72.3% and operating expenses were $669 million We delivered net income of $497 million and earnings per share of $2.87 As noted in our earnings press release, following the U. S. Supreme Court decision validating the IEBA tariffs, in Q2, we recognized the impact of tariff refunds and the refund of associated surcharges collected from our customers. This resulted in a $40 million reduction in Q2 revenue and a $97 million reduction in costs and expenses. Excluding these onetime impacts, Q2 revenue was $1.76 billion up 35%. Gross margin was 67.6%, up 300 basis points, and EPS was $2.58, up 52%. Our Q2 investor presentation contains additional details on these adjustments, including impacts by operating segment.

Satish Dhanasekaran: These strong results were driven by acceleration in our organic business, which excluding 1 time tariff impacts, delivered operating margin of 30.4%, up 25 basis points year over year as a result of 49% operating leverage.

Neil Dougherty: Moving to the segments. The Communication Solutions Group generated revenue of $1.23 billion up 35% on a reported and up 27% on a core basis. CSG gross margin was 74.1% and operating margin was 33.4%. Within CSG, commercial communications business generated revenue of $858 million up 40% with robust growth in both wireless and wireline. Aerospace, defense, and government achieved revenue of $373 million an increase of 24%. The Electronic Industrial Solutions Group generated $486 million in revenue an increase of 24% with growth across all 3 end markets. General electronics, semiconductor, and automotive and energy. EISG delivered gross margin of 67.8%, and operating margin of 33.1%.

Software and services accounted for approximately 36% of Keysight revenue, while annual recurring revenue was 27% of total mix. Moving to the balance sheet and cash flow. We ended the quarter with $2.41 billion in cash and cash equivalents, generating record cash flow from operations of $501 million and record free cash flow of $472 million. This quarter, we repurchased approximately 780 thousand shares of Keysight stock at an average price of approximately $283 per share for a total consideration of $220 million Now turning to our outlook. For Q3 2026, we expect revenue in the range of $1.73 billion to $1.75 billion representing 29% year over year growth at the midpoint.

We expect Q3 earnings per share to be in the range of $2.43 to $2.49 representing 43% year over year growth at the midpoint. This guidance is based on a weighted diluted share count of approximately 173 million shares. Our acquisition integrations remain on track, and we continue to expect $375 million in FY 2026 revenue from the acquisitions and greater than $100 million in cost synergies and other operational efficiencies. As a reminder, we expect to have about 80% of those cost synergies realized on a run rate basis exiting this fiscal year.

As Satish mentioned, given the strong results we have delivered in the first half of the fiscal year, combined with our guidance for fiscal Q3, we are on track for revenue growth in the high-20s percent range for fiscal 2026. With the visibility we currently have, we would expect to see a historically typical sequential revenue increase into fiscal Q4. In addition, we are increasing investments to meet these higher growth levels and now expect FY 2026 capital expenditures to be in the range of $200 million. In summary, we delivered a record quarter driven by focused execution with robust growth across our businesses, improved operating leverage and record cash flow generation.

We are seeing accelerating market momentum underpinned by our differentiated portfolio of solutions and increased customer demand and believe we are well positioned to capture sustained investments over the near and medium term as we integrate our acquisitions, evolve our portfolio with new product introductions, and make focused R&D investments aligned to multiyear technology trends. With that, I will now turn the call over to Liz to begin the Q&A session.

Liz Morali: Thank you, Neil. Abby, will you please provide the instructions for the Q&A session?

Operator: Thank you. A question, please press 1. We ask that you please limit yourself to 1 and 1 follow-up. To withdraw your question, press 1 a second time. And our first question comes from the line of Mehdi Hosseini with SIG. Your line is open.

Analyst (Mehdi Hosseini): Yes. Thanks for taking my question. I have 2 for Neil, historically, your backlog had an age of 6 months. That is, the backlog would be shippable in 6 months. As your orders are trending at a faster rate, how should I think about the age of backlog? Would should I assume that, you have enough visibility to extend beyond 6 months. And then for Satish, I want to follow up to something I asked you last earnings conference call and it has to do with the with the opportunities in the wireline. Perhaps it will be helpful if you could tell us how opportunities in wireline are split between commercial comms and semis.

Satish Dhanasekaran: Yeah.

Neil Dougherty: Hi, Mehdi.

Satish Dhanasekaran: Let me take this and maybe Neil can chime in. So first and foremost, the opportunities that we size as our AI business which is, I think, really the heart of your question, finished the first half in the 500 to $600 million range. Almost in line with what we did the whole of last year. So quite pleased with the progression of the opportunity in the wireline business. And so, you know, the AI portion of our business as we size it for you is largely in the wireline segment. And then secondly, there is really no change there is no change to our backlog policy.

We still have majority of our business that we book and recognize in a quarter. You know, within a 6-month period of delivery.

Analyst (Mehdi Hosseini): Sure. Is there any way we could size the wireline or AI opportunity as it relates to components? Components for wireline and AI.

Satish Dhanasekaran: The reason I asked the question is, historically, you have had exposure to the entire stack. Including components. The components that go into wireline networking system. So at least 5 to 600 million how does the component size relative to the rest of the stack?

Analyst (Mehdi Hosseini): Yeah.

Satish Dhanasekaran: I think I understand the opportunity. I think if you think about our entire business, it is pretty broad based. We service the computing marketplace, the networking marketplace, the transceivers and interconnects, and also the hyperscalers. Right? And we service pretty significant part of their workflow, you know, early R&D to early design to validation, conformance, compliance testing, into emulations. And as they deploy these large clusters, Particularly for this quarter, again, things move around in a given quarter. We also participated meaningfully in the scale out opportunity, which is where some of the transceiver related businesses fall in. Got it. Thank you.

Operator: Thank you. Our next question comes from the line of Andrew Spinola with UBS. Your line is open.

Analyst (Andrew Spanola): Thanks. I wanted to ask about the Q3 revenue guide. I guess, you gave the number pro forma for the tariff. And I guess the midpoint of the range would be kind of down slightly from Q2. And I am just wondering, is this was there anything sequential in any of the businesses that we should expect to decline? In Q3? Or what is driving that guidance?

Neil Dougherty: Yes. I mean, I think we take the same approach to guidance that we always take where we look at what is scheduled to ship beginning into the quarter, and we have pretty robust models looking at how in quarter orders are going to convert to revenue. And as you noted, the Q3 revenues are I would describe as in line with what we saw in Q2. Slightly down, but largely in line. I think it is as we look at on a half over half basis, given our more qualitative comments about Q4, we are expecting the second half of the year to be materially above the first half as we grow and yeah.

So expecting significant growth in the second half on a revenue basis. Yeah.

Satish Dhanasekaran: I also want to add this is Satish. I also want to add that the customer demand continues to be very strong. The pace of revenue conversion is influenced by the mix and some timings of some new product introductions how quickly we can ramp them. And particularly, I think we noted that we have a higher backlog in our AI business due to the strong demand in the first half. And we also have a strong pipeline of systems wins that we have in our backlog both in our semiconductor business aerospace defense business, which typically have a longer lead times.

Analyst (Andrew Spanola): Understood. I just wanted to ask, you know, the orders growth in the in the quarter was quite strong. I am just wondering, in general, are you seeing any change in the way your customers are buying? Or is it there any concerns on their part about, ensuring supply, or is this just organic growth from AI demand that we are seeing?

Satish Dhanasekaran: Yeah. The strength was thank you for asking. The strength, was an exceptional quarter. Bookings were very strong. Was record bookings for the company. And the strength was broad. If you think of the themes of the strength, AI was obviously the strong theme. Equally, aerospace defense and semiconductor were key contributors to that growth. And the growth came across all our businesses and across all of our sales regions, which we are very pleased by. And even with the strong finish, we expect we are entering the second half with a solid set of opportunities that we are very excited about. So I would say that, it is broad strength.

And, from a customer behavior probably the only thing that we have seen is that for the AI business, there was a stronger sense of urgency from our customers to convert. Which translates to a velocity in the pipeline where things or opportunities move faster But that is that is about it. There was no pull forwards that we can, that if any we that we can just discern from the data.

Analyst (Andrew Spanola): that is clear. Thank you.

Operator: Thank you. Our next question comes from the line of Aaron Rakers with Wells Fargo. Your line is open.

Analyst (Aaron Rakers): Congrats on the results. it is been a while, but there is been a lot of dynamics that have changed since you guys have provided a longer term you know, growth framework. I am curious, Satish, as you think about what evolved in the business, how you think about the growth algorithms, you know, looking forward, for the company. Is 5% to 7% still the right growth rate, or should we be thinking that this just the TAM itself seems with AI to have a stronger growth profile to it?

Satish Dhanasekaran: Thank you, Aaron. Yes. Thank you for noting. It was a great quarter. We are very excited also by the opportunities to have a strong year, this year. Would say from a value creation algorithm, fundamental is organic growth for us. And there were 3 pillars that I laid out. Right? This idea that innovation is only going to accelerate So creating a portfolio on a company that is built around the first to market capabilities is something we view sustainable. When we called out AI in 2023, you know, it was just about the time of the ChatGPD moment. And, but we felt really good about the long term opportunity. So we identified it. We invested in it.

And we are excited by not only AI, but also the other opportunities that we laid out as part of this accelerate accelerating technology trends. Equally, we continue to expand our customer footprint as different end markets become addressable. We talked about automotive, which has been okay. But space and satellite is 1 area that is emerging that we are very excited about right now. And into the future into 6G. And the third 1, it is very important, to be a resilient company is to be a company that navigates market dynamics and identifies opportunity. And I think 1 of the things that we called out was supply chain rebalancing or reshoring that was occurring globally.

And, this quarter and for the whole half, the investments that we made from a go to market perspective has enabled us to grow our Southeast Asia business significantly as the supply chains get reconfigured. So I feel very confident about our strategy as we look ahead. And the progress we have made in progressing each of our initiatives is, it is got a multiyear runway. As we as we think about it. We will update you on the long term, growth dynamics of the market and our ability to outperform I am very confident of our ability to outperform under a range of economic conditions.

But we will we will keep you updated on the what that forecast should look like as we look ahead. Yep.

Analyst (Aaron Rakers): Fair enough. And then as a quick follow-up, you know, Neil, I am curious when we think about the gross margin, I know there is some adjustments given the tariff refunds to consider in the reported results. But still very strong gross margin up 300 basis points. Is there any kind of onetime items this quarter? Or is that a good durable level of gross margin that you think is something to consider going forward?

Neil Dougherty: Thank you. Yes. No, I think if you make the adjustments for the tariff, and again, we provided a reconciliation in our presentation, you will see gross margin excluding the onetime items in the mid-67 range. I think post the acquisitions, which were accretive to our gross margins, I think the right level at these volumes. Yep.

Operator: Thank you. Thank you. And our next question comes from the line of Meta Marshall with Morgan Stanley. Your line is open.

Analyst (Meta Marshall): Great. Thanks so much for the question and congrats on the quarter. Neil, a question for you just in terms of the incremental margins moving close to 50%. Just wondering how you are thinking about incremental margins just given kind of prior commentary about kind of 40% being that level, just trying to get a sense of whether the acquisitions have meaningfully changed that. And then maybe a second question. Just in terms of you know, as you guys see all of this AI and just other categories, accelerating just in terms of how you are thinking of the business between production and lab? Or has that meaningfully changed at this point?

Neil Dougherty: Yeah. So I will take the first question with regard to the incrementals. We incremental this year or this quarter on a core basis was just under 5.06 thousand%. And if I am remembering correctly, it was similar last quarter. I think it has less to do with the acquisitions than it does with the high rate of growth, right? So we have talked for a long time about 40% incrementals on mid single digit growth. Think that is the right way to think about our business when we are growing at mid single digits.

But when you are growing at multiples of that, you have an opportunity with tightly managed tight expense management to outperform on the incremental, and that is what you are seeing from us. So again, we are pleased with the flow through in this environment. And, yeah. I think that I think that addressed the question.

Satish Dhanasekaran: With regard to the second part of the question, Meta, we are we are you know, we feel like we have a very strong portfolio with a strong value proposition for the R&D customer and the manufacturing customer. it is really about their workflow How do we enable them to innovate on the front end, but then carry the advantages and learnings into production? Where there is value. And that is what we have focused on. So this quarter, as an example, and even for the half, both R&D and manufacturing components of our business and portfolio, doubled. You look at our wireline business, still a very high percentage of R&D. In the portfolio.

Manufacturing is obviously up given the scaling that is occurring on the AI clusters.

Analyst (Meta Marshall): Great. Thanks.

Operator: Thank you. And our next question comes from the line of Mark Delaney with Goldman Sachs. Your line is open.

Analyst (Mark Delaney): This is Will on for Mark Delaney, and thank you for taking our question. So to start off, Satish, I believe you called out space as 1 of the pillars of growth. So maybe you can help us think about how large of a driver and opportunity non nontarrestrial networks and LEOs are to the business and maybe how big is it to the contributing to revenue today?

Satish Dhanasekaran: Yes. it is still a fairly smaller part of our entire revenue stream. On an annualized basis, sub-1 percent. The total revenue of the company. But especially as it relates to the wireless ecosystem and our participation there. But 1, we feel it positions us very well as that opportunity scales is more commercial satellites launch, as this multilayered communication architecture of the future emerges. We obviously have a bigger business in space and satellite in the defense sector. As well. And so we get to participate in the component part of the ecosystem also as an expansion opportunity into the emulation side of things as things are getting more complicated from a spectrum perspective.

So feel very good about our early position, also the growth potential looking into the future. Kailash, I do not know if you have any other comments to add on. Yeah.

Kailash Narayanan: that is right, Satish. We are obviously excited by the number of constellations scaling Clearly, you have seen in the news about Amazon Globalstar, SpaceX, AST, SpaceMobile. This ecosystem is widening. We are happy to be in a position to contribute to the scaling of the constellations. The use cases are scaling as well. You have direct to cell. You have broadband. You have other applications like autonomous vehicles. The frequency bands are also expanding. You have L, S, C, Ka, Ku, K. All of this is requiring more advanced capabilities And we have the complete portfolio. We are able to emulate the network. We are able to emulate the device.

We are able to emulate now orbits as well with Spirent's acquisition and core networks. So we are able to provide an end to end solution that customers find very differentiated. And we are excited about the opportunities ahead.

Analyst (Mark Delaney): Thank you for all the color. And just for my follow-up, you all maintain that you expect the recent acquisitions to contribute the $375 million to revenue in fiscal 2026. Is there any reason we have not seen an uptick in the acquisition revenue as we expectations given the improved end market demand in your broader business?

Neil Dougherty: Thank you. No. I mean, I think a big chunk of that was the portions of that we got out of the Ansys acquisition, those are recurring revenue businesses. Those so the revenue tends to respond more slowly. I think on the Aspirin side, we have certainly seen nice pickup in the PNT side of the business and the network monitoring side of the you know, that market is, you know, kind of in between cycles at this point in time. And I think we are pleased with the we are pleased with the way the integration is going. it is very much on track. Well positioned to deliver both on the revenue and realize the synergies. That we communicated.

Operator: Thank you. Thank you. And our next question comes from the line of Atif Malik with Citi.

Analyst (Atif Malik): Hi. it is Adrian for Atif. Thank you for the question. We have been hearing more about the adoption of quantum technology, particularly in the defense communities around precision clocks and sensors and the timeline for quantum computing seems to be pulling in. You did mention quantum a couple of times in your prepared remarks. So I am interested in how you are seeing quantum shaping the future of test and measurement.

Satish Dhanasekaran: Any color you can provide?

Kailash Narayanan: Yeah, let me take that 1. Thanks for the question. Obviously, it is a long term trend and we are pleased with the progress we are making. This is an investment that we started to make several years ago. And at this point, we are enabling quantum computers more than 1 thousand quantum computers going into higher qubit range with multiple entities, government entities, research institutions, And it is a steady triple digit business for us. We also are excited about new opportunities where you get into this hybrid compute state, where you have quantum computers, you have CPUs and GPUs. Really driving the next generation of computer architectures and we are excited to be playing in that long-range theme.

Satish Dhanasekaran: So pretty excited. And it is it is steady and we are enabling research in this area.

Operator: Do you have a follow-up, Adrian? I do not. Thank you. Thank you. And our next question comes from the line of Matt Niknam with Truist. Your line is open.

Analyst: Hey, thanks so much for taking the question and congrats on the quarter. I had 2 questions, somewhat related. First, on the supply chain. I am just wondering, where you are with procuring enough supply to accommodate the robust demand you are seeing. Any sort of supplier delays or decommits that you have seen, then just secondarily on memory, if you could just remind us how material some of the cost increases we have seen in memory are to your, COGS or gross margins, and the strategy to offset the cost increases here. Thanks.

Neil Dougherty: Yeah. So with the first question with regard to the supply chain, I mean, I think it is a true statement that we are actively managing the supply chain more so than we were a few months ago. But I think we are doing a good job working with suppliers and do not have any major concerns from a supply perspective. Think, as Satish mentioned earlier, we have a handful of new products that are enabling the--these are MPIs from Keysight that are enabling the AI build out that are seeing an unprecedented ramp following introduction, and so we are working really hard to ramp those products more quickly as they transition out of R&D into full scale production.

And as you noticed, we have raised our own CapEx spend expectation for the year about 25% from $160 million to $200 million this quarter with the majority of that incremental investment. Going to aid in that ramp. I guess the last question and comment that I would make is providing you that we are, vertically integrated. And so while we do buy some chips and other things from, you know, from outside parties. A significant portion of our highly specialized chips and assemblies are manufactured in house by Keysight, which gives us a unique level of control.

Satish Dhanasekaran: Hey.

Neil Dougherty: Remind me the second question. I apologize. it is Memory in terms of, like, materiality to your COGS gross margins, and how you are offsetting the cost increases. Yeah. That Memory is a pretty small portion of our overall, BOM. If you will, and we have proportionally less exposure to you know, the high bandwidth, you know, leading edge memory that is in the news. These days.

Operator: Thank you. And our final question comes from the line of Robert Mason with Baird.

Analyst (Rob Mason): Congrats again on the quarter as well. Just hoping you could contextualize the orders a little finer. I think coming into the quarter, the thought was maybe the book to bill would be closer to 1 and you clearly outperformed that Just Satish, you also mentioned more systems orders. Are these I think we used to call them longer dated orders, but we think larger orders How are those contributing to orders in terms of percent of total now? Versus 6 months ago?

Neil Dougherty: Let me tell you what. Let me let me knock down the second part of that, and we will let these guys give a broader comment on the broader order picture. With regard to the systems orders, the systems orders that Satish were talking about in aerospace defense and in semi, were not the same as the long dated orders we were talking about a few years back. These are just, products that have lead times that are at the longer end of, of Keysight products.

And we have everything from you know, stuff that is stocked on the shelves days, kinds of turns around, up to things that have you know, lead times that, you know, are, you know, 3 months or more. And I think in the given the nature of the way semi and aerospace defense ordering happens, those tend to be longer lead time products for us. So still with still largely within the 6-month order acceptance window of our standard product portfolio.

Satish Dhanasekaran: I will hand it off to the guys to take the other part on the I will just say the AI infrastructure as I mentioned, we saw a stronger sense of customer urgency that manifested in stronger than expected bookings. Equally, we are pleased by the doubling of the number of customers in the AI space. So the ecosystem is broadening. And we are participating in it.

On the aerospace and defense side, the program spend, the budget stability both in US and in Europe, has resulted in also stronger bookings as Neil mentioned, The systems part of it is only, as an example, to point out that there is a lot of contested threat environments that we are able to emulate and simulate for the security applications which had considerable momentum in the quarter. And finally, the semiconductor space has been very strong. With advanced nodes, especially with regard to AI compute and the scaling that is occurring globally from a supply chain perspective, and we are capitalizing on all 3 this quarter.

I will just let Steve make some comments on the pipeline and what we see as well from an order perspective.

Sung J. Yoon: Sure. Thank you, Satish. As you heard, our orders was a record quarter this quarter. Despite that, our funnel remains really, really strong. Our focus on engaging our customers both new and existing customers, and developing new strong collaborations is really showing up in the funnel metrics So our funnel intake and our total overall pipeline remains very, very strong. On top of that, our funnel velocity and conversion rates are increasing. So with that and our robust upcoming NPI pipeline, for the second half, we are very confident in a strong quarter in Q3, sustained momentum in the second half.

Analyst (Rob Mason): Excellent. Very good. Just a quick follow-up. Caught the update, of course, for full year revenue growth. Was there any update to EPS growth expectation? I am sure there was, but you quantify that?

Neil Dougherty: We did not make any specific comments about EPS. I mean, I think I made a comment around kinda gross margin. You know how we think about incremental margins on growth. I think we have given you enough information to get close.

Analyst (Rob Mason): Very good. Thank you.

Operator: And our next question comes from the line of Andrew Spinola with UBS. Your line is open. And, Andrew, your line is live. Please check your mute button.

Analyst (Andrew Spanola): Very sorry about that. Thank you for taking the follow-up. Satish, I wanted to ask you a very high level question about your AI business. If I am thinking on a multiyear period, right now, I guess, ASPs are going up as we go from 800-gig to 1.6T. You know, we know that the demand for optics is growing strongly from the hyperscalers. And then I guess my understanding is the complexity grows and the amount of testing grows so that the need for testers grows. So, there is this very linear growth that is seems to be happening. It looks like it appears to be baked in for the next couple of years probably beyond that at this point.

I am wondering, you know, when I think about a technology market, I think things tend to evolve and customers can get more efficient, and new technologies could maybe change things. I am wondering how you think about the next couple of years, 3 years in the AI business. And what are some of the things you are looking at in terms of how it could change or how it could grow?

Satish Dhanasekaran: Yeah. Thank you, Andrew. Very, very thoughtful question. I mean, it is quite interesting. Right? We are still in the very early innings in the overall AI landscape. Yet, we have all seen multiple turns as this market has moved. And I would just say, reflecting on what we have seen play out over the last couple of years even, is the focus was only on training and models. And now you are you are moving from training to inference being the focus with the promise of agentic AI yet to come. And, and the AI clusters are scaling.

And we know 1 thing for sure is that there is gonna be a few hundred gigawatts of capacity that is going to come online through 2030. And if you think of the big headline numbers people talk about, the multi $100 billion of spend commitments being made. It takes quite a bit of time for all of that to trickle through the ecosystem and the supply chain manifest itself into demand, is actually implemented in a data center. And, yeah, and we all know constructions are still going on, etcetera. And this ecosystem is expanding as well.

I would say the what was once a fully vertically integrated stack driven by the fact that now you are thinking about training, you are thinking about inference, there is a little bit more openness to more standards based environments. And so the environment's becoming heterogeneous. And so what does all this mean? It means that depending on the customer's particular situation, architectures, workloads that they are optimizing for, the type of scale they are building, a plethora of underlying technologies are turning into an end. it is no more, is it optical or electrical. Well, it is optical and electrical. it is not just is it open standards or closed. it is both.

And is it, is it pluggable optics or integrated optics? It is both. And so this sort of heterogeneous environment really fits the kind of portfolio that we have, the breadth we have. We are able to participate in a broadening. And this is primarily all the stuff I talked about is in the physics of the AI infrastructure. We are equally excited by some of the announcements we made around emulating data center infrastructures emulating inference infrastructures. that is still a very small part of the overall business, and 1 we are getting considerable traction from customers.

So look, I know, we look at where we stand, and we see this as a multi multiyear runway, that is ahead of us. Because of all the discussions we are having with customers, you know, around their future plans. But we will keep you posted as we go. We are continuing to invest in what we see unfolding.

Analyst (Andrew Spanola): I appreciate that color. I wanted to just 1 follow-up on that. Another question I get a lot is the difference between the growth in your manufacturing versus R&D businesses in AI. I think the assumption is the manufacturing piece is moving very quickly, but it sounds like from some of the things you highlighted, you have got some strong demand for the emulators as well. So how do those compare? And any comment on you know, what that breakdown is? Has it changed at all from when you indicated it was 30?

Satish Dhanasekaran: it is still it is still for the wireline business. Largely, things move quarter by quarter, but I think it is largely we still it is in the 70-30 range. With both R and D, as I mentioned, the AI space, both R&D and manufacturing doubling as we think about the first half business. So we are continuing to make traction in both. But clearly, in any given quarter, depending on what customers emphasize, you could see that number move a bit.

Analyst (Andrew Spanola): Makes sense. Thank you very much.

Operator: Thank you. And that concludes our question and answer session for today. I would now like to turn the call back over to Liz Morali for any closing comments. Thank you, Abby, and thank you all for joining us today.

Liz Morali: A replay of today's call will be available on the Investor Relations website later today. We appreciate your interest in Keysight.

Operator: And ladies and gentlemen, thank you for your participation in today's conference. This concludes today's call, and you may now disconnect.

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