Release Date: May 20, 2025
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Keysight Technologies Inc (KEYS, Financial) delivered revenue of $1.3 billion and earnings per share of $1.70, both exceeding the high end of guidance.
- Orders grew 8% year over year and 4% sequentially, indicating strong demand.
- The company has a diversified global supply chain with minimal exposure to China, enhancing resilience.
- Commercial Communications orders grew double digits, driven by data center infrastructure expansion and new technology deployments.
- Aerospace, Defense & Government orders grew, with significant deals in Europe and ongoing investment in spectrum operations and space applications.
Negative Points
- The Electronic Industrial Solutions Group experienced mixed demand, with automotive orders and revenues down.
- The company faces a gross annualized tariff exposure of $75 to $100 million, impacting margins.
- Despite strong performance, the macroeconomic environment remains uncertain, with potential risks from tariffs and geopolitical tensions.
- The smartphone-related business remains soft, particularly in China.
- The company anticipates a significant tariff impact in Q3, with full mitigation expected by the end of the fiscal year.
Q & A Highlights
Q: Can you update us on the new AI activities and their significance for the business? Also, provide more color on the orders and pipeline to meet the full-year guidance.
A: AI is viewed as a long-term trend with a clear multi-year roadmap. Keysight is contributing to technology fronts like memory, compute, and networking. The industry is addressing scale-up and scale-out challenges in digital infrastructure, and Keysight had a strong quarter with double-digit growth in wireline business. The pipeline is solid, supporting the guidance, and there has been no material change in customer behavior despite macro concerns.
Q: You raised the top-line outlook by about 100 bps. Where are you seeing an incrementally improved view? Also, comment on the strong cash flow from operations.
A: The improved outlook is based on overperformance in the first half, a strong pipeline, and backlog position. Despite macro risks, there has been no material change in customer behavior. Cash flow was strong due to a $60 million gain on a hedging contract and improvements in working capital, including reduced inventory days and DSO.
Q: Can you clarify the $75 million to $100 million tariff exposure and the mitigating actions being taken?
A: The $75 million to $100 million is a gross annualized number. Actions are being taken to reduce exposure through global supply chain adjustments and pricing strategies. While existing backlog won't see price increases, new quotations have been adjusted since mid-April. Full mitigation of tariff costs is expected by Q1 of the next fiscal year.
Q: How is the Aerospace & Defense business performing, and what is the impact of tariffs on China-related operations?
A: Aerospace & Defense saw growth in orders, even under a continuing resolution. There were notable contracts with NATO and the US Army. The US-China tariff exposure is less than 10% of total tariff impact, indicating minimal direct impact from tariffs on China-related operations.
Q: Discuss the wireless business performance and its future outlook.
A: The wireless business is stable, with strength in network infrastructure and ongoing R&D in AI and early 6G research. While smartphone-related segments remain soft, especially in China, the company maintains a strong position and continues to invest for long-term leadership in the space.
Q: Are there any investments to accelerate growth in software and services, given their margin profile?
A: Software and services are a key focus, contributing to the company's resilience. There is double-digit growth in the simulation business, supported by strategic M&A. The company aims to engage customers earlier in the design cycle, aligning with its strategy to be a significant player in R&D markets.
Q: How is the wireline demand driven by R&D and production, and what are the implications for Keysight's business?
A: The wireline business is primarily R&D-focused, with a shift towards manufacturing due to digital infrastructure ramp-up. The portfolio includes a broad range of products, and the customer base is expanding, indicating a long-term growth opportunity. The company is well-positioned to support evolving standards and technology trends.
Q: With the shift from copper to optical connections, how does this affect Keysight's content and opportunities?
A: The shift involves a hybrid of electrical and optical solutions, where Keysight's capabilities in both areas provide a strong market position. As complexity increases, the company adds more value, supporting its long-term growth expectations. The focus is on early R&D, where the company can offer significant contributions.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
