Executive Summary / Key Takeaways

• Keysight Technologies is demonstrating resilience and a return to growth, driven by its strategic focus on high-growth technology inflections like AI, 5G/6G, and defense modernization, supported by differentiated design and test solutions.
• Recent financial performance shows positive momentum, with Q2 FY25 revenue increasing 7% reported (8% core) year-over-year to $1.306 billion and diluted EPS jumping 107% to $1.49, reflecting higher revenue, derivative gains, and a lower tax provision.
• The company has raised its full-year FY25 outlook, now expecting revenue growth at the midpoint of its 5%-7% long-term target and EPS growth slightly above its 10% target, signaling confidence in a gradual recovery despite macroeconomic uncertainties and tariff impacts.
• Keysight's competitive moat is built on its deep technological expertise, comprehensive end-to-end solutions across the design and test lifecycle, strong customer relationships, and a growing software and services portfolio, which provides resilience and higher margins.
• Key risks include the pace of macroeconomic recovery, geopolitical tensions and associated tariffs (estimated $75M-$100M gross annual exposure with mitigation efforts underway), integration of recent acquisitions, and potential impacts from tax law changes or litigation.

Setting the Scene: Accelerating Innovation in a Complex World

Keysight Technologies stands at the intersection of innovation and commercialization in the computing, communications, and electronics markets. Born from the test and measurement legacy of Hewlett-Packard and Agilent Technologies, Keysight was incorporated in 2013 with a mission to accelerate innovation to connect and secure the world. The company provides a broad range of design and test solutions – spanning software, instrumentation, and systems – that address the critical challenges customers face in bringing complex products and services to market rapidly.

Keysight operates through two primary segments: the Communications Solutions Group (CSG) and the Electronic Industrial Solutions Group (EISG). CSG serves the commercial communications and aerospace, defense, and government markets, while EISG caters to automotive and energy, semiconductor, and general electronics customers. This diversified market exposure, coupled with a strategic emphasis on research and development and a growing software and services portfolio, forms the bedrock of Keysight's business model. The company's history reflects a consistent focus on aligning its capabilities with the most promising technological trends, a strategy that has proven vital in navigating dynamic market conditions and establishing a durable competitive position.

Technological Edge and Innovation: The Foundation of Keysight's Moat

At the core of Keysight's investment thesis is its differentiated technology, which provides customers with the high-precision measurement, simulation, and analysis capabilities required to push the boundaries of electronic design. This isn't merely about providing hardware; Keysight offers integrated solutions that span the entire product lifecycle, from early-stage R&D and design simulation through manufacturing and deployment.

Keysight's technological leadership is particularly evident in high-speed digital and radio frequency applications. In the wireline market, critical for modern data centers and AI infrastructure, Keysight's solutions enable the validation of technologies like 400G, 800G, 1.6T, and even early 3.2T Ethernet. The company has demonstrated industry-first solutions, such as 448 gig per lane optical transmission and new digital communications analyzers for 224 gig transceiver test, essential for next-generation electrical and optical interconnects. Their expertise extends to silicon photonics and co-packaged optics, areas seeing accelerated customer engagement to address performance limitations in AI data centers. Keysight's AI workload emulation solutions, like the new KAI Data Center Builder, provide critical insights into network architecture and host design performance under real-world AI training workloads.

In the wireless domain, Keysight is at the forefront of 5G advanced and early 6G research. Their PNA-X pro network analyzer supports testing in candidate 6G frequency bands (FR3) and offers unmatched measurement speeds for high-frequency component design. The company's digital twin and system emulation capabilities are enabling non-terrestrial network applications, and their Open RAN solutions are vital for testing and integration centers globally, supporting a growing ecosystem.

Aerospace, defense, and government markets rely on Keysight for advanced RF and microwave capabilities. Solutions for spectrum operations, radar, electronic support measures (ESM), and advanced threat simulation are key. Keysight recently secured a multi-hundred Cubed application win in Quantum computing and is involved in phased array and over-the-air antenna testing. Their new flagship performance network analyzer offers wide band, high dynamic range, and pre-selective receivers for faster S-parameter measurements, crucial for defense modernization efforts.

Across the EISG segment, Keysight's technology addresses diverse industrial needs. In semiconductors, their parametric wafer test solutions are seeing strong demand driven by advanced nodes, high-bandwidth memory (HBM), and silicon photonics. They've introduced innovative solutions like a single pass 3 kilowatt high voltage wafer test solution. In automotive, while manufacturing and EV battery development face headwinds, R&D engagement remains high for software-defined vehicles and autonomous driving, supported by Keysight's cybersecurity, radar scene emulation, and new multi-gigabit optical Ethernet test solutions. Their software portfolio, including Design Engineering Software (RF EDA, simulation, virtual prototyping), Eggplant test automation, and recent additions from acquisitions like ESI (simulation, visualization) and potential divestitures from the Synopsys (SNPS)/Ansys (ANSS) transaction (optical design, power analysis), further enhances their ability to engage customers earlier in the design cycle and provides higher-margin recurring revenue.

The "so what" for investors is clear: Keysight's continuous investment in leading-edge technology creates a powerful competitive moat. By enabling customers to achieve higher performance, faster time-to-market, and greater efficiency in complex electronic systems, Keysight becomes an indispensable partner. This technological leadership supports premium pricing, drives R&D spending (19% of revenue in H1 FY25), and positions the company to capture demand in the most dynamic and critical technology markets, contributing directly to its profitability and long-term growth potential.

Competitive Landscape and Strategic Positioning

The electronic design and test solutions market is highly competitive, featuring a mix of large diversified players and specialized niche providers. Keysight competes directly with companies like Fortive (FTV) (particularly Tektronix), Emerson Electric (EMR) (through National Instruments), Viavi Solutions (VIAV), and Teradyne (TER), as well as indirect competitors offering software-only or cloud-based solutions.

Keysight differentiates itself through the breadth and depth of its end-to-end solutions and its focus on complex, high-performance applications. While competitors like FTV and EMR offer strong product portfolios, Keysight's integrated hardware-software ecosystem and deep expertise in areas like high-frequency RF, high-speed digital, and complex protocol testing provide a distinct advantage, enabling customers to tackle challenges that require sophisticated, tightly coupled tools. For instance, Keysight's solutions often offer superior accuracy (e.g., 30% higher in parametric testing) and faster measurement speeds (e.g., up to 20% faster in signal analysis) compared to some rivals, although this can come at a higher upfront cost.

Financially, Keysight generally exhibits stronger profitability metrics compared to many direct competitors. Its TTM gross profit margin of 62.47% and operating profit margin of 16.84% (25% non-GAAP in Q2 FY25) are competitive, and its TTM net profit margin of 14.53% and ROIC of 15% demonstrate effective capital deployment and profitability, often surpassing competitors like FTV (Net Margin ~13%, ROIC ~11%), EMR (Net Margin ~11%, ROIC ~10%), and VIAV (Net Margin ~-3%, ROIC ~1%). While some competitors like TER in semiconductor test show comparable profitability and ROIC, Keysight's broader market exposure provides diversification.

Keysight's strategic positioning leverages its technological moats to target premium segments in high-growth markets. The company's significant R&D investment (19% of revenue in H1 FY25) is higher than many competitors, fueling continuous innovation and maintaining its leadership in emerging technologies. The increasing contribution from software and services (36% of Q2 FY25 revenue, 28% ARR) is a key strategic pillar, enhancing resilience and margins, and allowing Keysight to engage earlier in the customer design cycle, a competitive advantage over hardware-centric rivals. Acquisitions like ESI and the planned Spirent transaction are aimed at expanding this software and simulation capability, further solidifying its end-to-end offering and addressing competitive pressures from software-focused players.

Customer relationships are deep, particularly with leading innovators in communications, defense, and semiconductors. While no single customer accounts for more than 10% of revenue, strategic engagements with hyperscalers, prime defense contractors, and leading semiconductor foundries are critical. The company's diversified global supply chain, primarily based in Southeast Asia with minimal China exposure, provides operational flexibility, a key advantage in the current geopolitical climate compared to competitors with more concentrated manufacturing footprints. Keysight's ability to pivot sales resources and support customers' "go global" strategies in response to trade restrictions demonstrates agility in navigating complex market dynamics.

Financial Performance and Operational Resilience

Keysight's financial performance in the first half of fiscal year 2025 signals a positive shift following a challenging fiscal year 2024. For the three months ended April 30, 2025 (Q2 FY25), the company reported total revenue of $1.306 billion, a 7% increase year-over-year (8% on a core basis). This marks the second consecutive quarter of revenue growth, driven by momentum in CSG and a return to growth in EISG. Net income for the quarter surged 104% year-over-year to $257 million, resulting in diluted earnings per share of $1.49, a 107% increase. This strong bottom-line performance was primarily attributed to higher revenue, significant gains on derivative instruments ($115M and $47M for the three and six months ended April 30, 2025, respectively), and a lower provision for income taxes, partially offset by unfavorable mix and higher R&D expenses.

For the first six months of fiscal year 2025, revenue totaled $2.604 billion, up 5% compared to the same period last year. Net income for the six months was $426 million, a 43% increase, with diluted EPS of $2.45, up 44%. Operating margin for Q2 FY25 was 15.9%, a 100 basis point increase year-over-year, and 16.3% for the first six months, up 20 basis points, primarily driven by lower operating expenses as a percentage of revenue despite a slight decline in gross margin for the six-month period. Gross margin for Q2 FY25 was 62.4%, flat year-over-year, while the six-month gross margin decreased 1 percentage point to 62.7%, impacted by unfavorable mix, higher material costs, and tariffs, partially offset by pricing and volume.

Segment performance highlights the drivers of growth. CSG revenue increased 9% in Q2 FY25 and 7% in H1 FY25, fueled by strong growth across all regions and end markets, particularly high-speed networks for AI and aerospace/defense solutions. EISG revenue returned to growth in Q2 FY25, increasing 5%, and was up 1% in H1 FY25, reflecting mixed demand with increases in semiconductor and general electronics offsetting declines in automotive and energy. EISG operating margin saw a notable 4 percentage point increase in Q2 FY25 to 23.4%, driven by lower operating expenses and gross margin gains.

Keysight's operational resilience is evident in its ability to manage costs and generate strong cash flow. Selling, general, and administrative expenses remained relatively flat in H1 FY25, as lower infrastructure costs and amortization were offset by higher acquisition and integration costs and travel. R&D expenses increased 10% in Q2 FY25 and 8% in H1 FY25, reflecting continued strategic investments.

The company maintains a healthy liquidity position, with cash and cash equivalents totaling $3.118 billion as of April 30, 2025. Cash flow from operations was robust at $484 million in Q2 FY25 and $862 million in H1 FY25, significantly higher than the prior year ($438M in H1 FY24). Free cash flow was $457 million in Q2 FY25 and $803 million in H1 FY25. Keysight actively manages its capital structure, issuing $750 million in senior notes in April 2025 to support the planned Spirent acquisition and repurchasing 1.04 million shares for $150 million in Q2 FY25. The company has returned over $1.7 billion, or roughly 50% of free cash flow, to investors via repurchases over the past 12 quarters.

Outlook and Growth Drivers: Riding the AI Wave

Keysight's management is optimistic about the trajectory for fiscal year 2025, raising their full-year guidance based on the strong first-half performance and a solid pipeline. They now expect FY25 revenue growth at the midpoint of their long-term target of 5% to 7% and annual EPS growth slightly above their long-term target of 10%. For the third quarter of fiscal year 2025, Keysight anticipates revenue in the range of $1.305 billion to $1.325 billion and earnings per share in the range of $1.63 to $1.69.

This positive outlook is underpinned by several key growth drivers. The most prominent is the continued expansion of AI data center infrastructure, which is fueling demand for Keysight's high-speed wireline and semiconductor test solutions. R&D investments in next-generation technologies like 5G advanced, early 6G, high-speed networking (1.6T/3.2T), satellite networks, industrial IoT, and advanced semiconductor processes are expected to drive ongoing demand. Defense modernization efforts globally, particularly in the U.S. and Europe, continue to present robust opportunities, despite potential near-term timing delays from budget processes. The automotive market, while currently mixed, offers long-term growth potential in R&D for software-defined vehicles and autonomous driving.

Management's base case assumes a gradual recovery throughout the year, not an immediate, in-phase inflection across all markets. They are actively monitoring the macroeconomic environment, including potential U.S. policy changes and the impact of tariffs. The company estimates a gross annual tariff exposure of $75 million to $100 million based on current rates, with mitigation actions underway, expecting the most significant impact in Q3 FY25 and full mitigation by year-end.

Strategic initiatives, including the expansion of the software and services portfolio (organically and through acquisitions) and investments in a flexible global supply chain, are expected to support this growth trajectory and enhance operational efficiency.

Risks and Challenges: Navigating Headwinds

Despite the positive momentum and outlook, Keysight faces several risks and challenges that could impact its performance. Macroeconomic uncertainty, including inflation, potential recession, and volatility in financial markets, could lead to reduced customer spending, delayed or canceled orders, and increased price pressure. Geopolitical tensions and trade restrictions, such as tariffs and export controls, can disrupt supply chains, increase costs, and limit access to certain markets or customers, as evidenced by the estimated tariff exposure. Regional conflicts also pose risks to international operations and market stability.

The cyclical and seasonal nature of some end markets, particularly consumer electronics and certain manufacturing sectors, can lead to fluctuations in revenue and make forecasting difficult. Dependence on key customers and the stability of their industries presents concentration risk. The rapid pace of technological change requires continuous, significant R&D investment; failure to introduce successful new solutions in a timely manner could lead to obsolescence and loss of competitive position.

Integrating acquired businesses, such as ESI and the planned Spirent acquisition, carries execution risks and may not yield anticipated synergies. The company's debt levels, while currently manageable, could be impacted by rising interest rates or adverse financial conditions. Fluctuations in foreign currency exchange rates can affect reported revenues and expenses.

Tax risks, including the outcome of the GILTI tax lawsuit seeking a $107 million refund, the impact of Pillar Two minimum taxes, and the potential expiration of tax incentives in key jurisdictions like Malaysia (October 2025) and Singapore (July 2029), could significantly impact the effective tax rate and profitability. Litigation, including ongoing patent infringement lawsuits, could result in substantial costs or restrictions on business operations. Cybersecurity attacks and IT disruptions pose risks to operations, data security, and reputation. Finally, achieving ambitious environmental commitments, such as net zero emissions targets, may require significant investment and operational changes.

Conclusion

Keysight Technologies has demonstrated notable resilience and a return to growth in the first half of fiscal year 2025, successfully navigating a mixed demand environment while capitalizing on strategic opportunities. The company's core investment thesis is firmly rooted in its technological leadership and its ability to provide essential design and test solutions for the world's most complex electronic systems. Keysight's deep expertise in high-speed digital, RF, and simulation technologies, coupled with a growing software and services portfolio, creates a robust competitive moat that positions it favorably in high-growth markets like AI, 6G, and defense modernization.

While macroeconomic uncertainty, geopolitical tensions, and specific market headwinds in areas like automotive manufacturing persist, Keysight's diversified business model, flexible operations, and disciplined cost management have enabled it to maintain profitability and generate strong free cash flow. The raised full-year outlook reflects management's confidence in the ongoing gradual recovery and the company's ability to execute on its strategic priorities. Investors should monitor the pace of market recovery, the successful integration of acquisitions, the impact and mitigation of tariffs, and the progression of key technology cycles as indicators of Keysight's continued performance and ability to deliver on its long-term growth targets. Keysight appears well-positioned to test the limits of technological innovation and translate that into value for its stakeholders.