• Growing demand in aerospace, defense, and government sectors: Keysight anticipates growth in these areas due to increased investments in defense modernization, space, and satellite applications, with bipartisan support for defense budgets in the U.S. and elevated spending in Europe and other countries facing geopolitical situations. -
• Positive signs in the order pipeline indicating potential recovery: The company is observing improvements in its six-month order funnel, with modest increases in funnel intake and faster funnel velocity as customers begin to move more quickly, suggesting potential for higher orders and revenue in the second half of the year. -
• Robust software and services business contributing to resilience: Software and services represent roughly 40% of total order revenue, with annual recurring revenue up double digits, demonstrating strong performance and contributing to favorable gross margins even in challenging market conditions. -

• Keysight expects lower operating margins in Q2, anticipating a 600-700 basis points year-over-year decline due to unfavorable mix and higher operating expenses, particularly in SG&A. -
• Automotive manufacturing and supply chain spend are down, with unit volumes dropping for both conventional and EV demand, impacting revenue from the automotive sector. -
• Weakness in Asia continues, affecting the Electronic Industrial Solutions Group (EISG) and parts of the wireless business, potentially hindering revenue growth in those regions. -

1. Second Half Recovery Expectations
   Q: What's driving expectation for recovery in 2H? Any end-market specifics?
   A: Management stated that their base case does not include a meaningful second-half recovery - - . They anticipate modestly higher orders and revenue due to seasonal uptick, particularly into Q4, which is typically stronger. - Market conditions remain largely unchanged, with no specific customer or end-market factors driving a recovery. - They are prepared to capitalize if a broader recovery occurs. -

2. Impact of AI on Wireline Business
   Q: How much revenue is benefiting from AI, and outlook?
   A: AI is an emerging opportunity, with significant impact seen this quarter as parts of the wireline business inflect. - Growth is driven by 400G and 800G transceiver manufacturing scaling up and increased focus on terabit research. - Collaborations with companies like Marvell and NVIDIA are helping address AI-related opportunities. - While not fully reflected in forecasts yet, they are investing to capitalize on AI-driven demand. -

3. Margin Targets and Revenue Growth
   Q: What revenue is needed to reach EBIT margin target by FY'26?
   A: It's premature to specify, but returning to growth is the main driver. - Despite declining revenues, strong gross margins are maintained due to software and services content. - Management believes they can get back to their growth model by leveraging trends in wireless, wireline, next-gen silicon, aerospace defense, and semiconductors. -

4. Areas of Weakness and China Challenges
   Q: Are there places where demand is worsening?
   A: Asia, particularly China, remains challenging, affecting EISG and wireless businesses - - . Manufacturing is also challenging, and wireless customers are working through issues. - Despite headwinds, there are positive indicators in China, such as growth in 400G and 800G R&D for data center upgrades and demand for 5G private networks. -

5. Backlog and Revenue Timing
   Q: When will excess backlog convert to revenue?
   A: The company believes they've worked through the excess backlog. - Longer-dated orders, which have increased to about 8% of incoming orders, are starting to contribute to revenue. - By Q4, revenue from these longer-dated programs is expected to be about 8% of total revenue. -

6. Operating Margins and Cost Actions
   Q: Is margin decline in Q2 expected, or is something impacting it?
   A: The margin decline aligns with their downside model, which anticipates 300–400 basis points of operating margin decline for a 10% revenue drop. - They've taken significant cost actions and expect total OpEx to be down about 3%, primarily through SG&A reductions while maintaining R&D investment. -

7. Wireless Business Outlook and Technologies
   Q: How are wireless technologies influencing the business?
   A: The business is normalizing after peak demand in '21–'22. - Customers are upgrading release libraries (e.g., Release 15/16 to 17), with future roadmap including Releases 18–20 leading toward 6G. - Integration of satellite communications and new device form factors are opening new opportunities. - Management is confident of returning to growth even prior to 6G. -

8. ESI Business Opportunities
   Q: Any changes you can make to ESI business earlier than expected?
   A: Management is positive about growing ESI within Keysight, leveraging their technology and simulation capabilities. - ESI's hybrid AI capability is unique and will be leveraged across the company. - They saw a strong start in the first quarter for ESI. -

9. Longer-Dated Backlog and Revenue Impact
   Q: Update on longer-dated backlog? Impact on revenue?
   A: Longer-dated backlog is around $400–$500 million, consisting of large, lumpy deals in aerospace, defense, auto, and semi sectors. - These are starting to flow into revenue, expected to be about 8% of revenue by year-end. -

10. Q2 Guidance and Wireless Expectations
    Q: Any sequential improvement in Q2? Wireless outlook?
    A: No significant sequential improvements anticipated in Q2; modest pressure is expected across the board. - In wireless, they expect stability and moderation as it normalizes over the next few quarters. - Aerospace defense and wireline continue to provide growth opportunities. -

11. Optical Wireline R&D and Software
    Q: Outlook beyond 400G/800G? Update on software businesses?
    A: Engaged in current deployments of 100G and 400G, with roadmap scaling to 1.6 terabits and beyond. - The Ixia software business is stable due to higher services and software content. - They're adapting traffic generation capabilities to address emerging AI use cases. -

12. Positioning in AI Networking
    Q: Is Keysight focused on Ethernet over InfiniBand for AI networking?
    A: Keysight doesn't pick winners among technologies; multiple standards like CXL and PCIe Gen 7 are emerging. - They service various technologies through their platforms, often using the same underlying platforms. - Software and services represent about 40% of total order revenue, with ARR up double digits. -

13. Organic Revenue Change Sequentially
    Q: Is organic revenue decline sequentially only 1–2%?
    A: ESI revenue was $67–68 million in Q1, and the core business revenue decline from Q1 to Q2 is just over 1%. -

14. ESI Contribution and Comparison Challenges
    Q: Is ESI making comparisons difficult?
    A: Yes, ESI performed 10% or more above expectations in Q1. - The expected sequential decline in ESI due to renewal schedules makes comparisons more challenging when analyzing the combined entity. -

15. Overall Expectations and Pipeline
    Q: How have expectations changed vs. 90 days ago?
    A: Expectations haven't significantly changed; market conditions remain largely unchanged. - The pipeline supports the base case of modestly higher orders and revenue in the second half. -

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