Q1 2025 Earnings Summary
- Keysight is experiencing strong growth and opportunities in AI-related businesses, including participation in the compute side with 2-nanometer technology, silicon photonics, and memory technologies like DDR6 and DDR7, as well as high-speed interconnects. They have launched the AI Data Center Builder, their first platform to emulate high-scale AI workloads, positioning them well to capitalize on long-term AI trends.
- Sales funnel is improving with better visibility and signs of gradual recovery, with new funnel intake increasing, customers making decisions faster, and an overall growth in the funnel. This supports their thesis of a gradual recovery during the year.
- Multiple quarters of growth in the parametric test business with a favorable outlook due to new fab opportunities coming online. They have built backlog over the last three quarters, indicating continued demand in semiconductor testing solutions.
- Softness in the automotive market, particularly in EV battery testing and development, is impacting the Electronic Industrial Solutions Group (EISG), and this weakness may continue in the near term.
- Geopolitical uncertainties and potential U.S. policy actions, including trade restrictions with China, could present headwinds to Keysight's business, impacting growth prospects.
- A decrease in gross margins due to unfavorable mix changes may pressure profitability going forward.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +3.1% (from $1,259M to $1,298M) | Modest revenue growth is driven by improvements in high-growth segments (notably Communications and Americas), which rebounded from prior declines observed in FY 2024, despite challenges such as supply cost pressures affecting margins. |
Communications Solutions Group revenue | +5.2% (from $839M to $883M) | Growth in CSG revenue is attributed to robust demand in commercial communications and AI-related investments, offsetting previous period weaknesses and building on earlier efforts to expand high-speed network and data center offerings. |
Americas Revenue | +7.2% (from $514M to $551M) | Americas regional performance improved through increased customer demand compared to the previous period’s underperformance driven by macroeconomic challenges, reflecting targeted regional strategies and a rebound in investments. |
Cost of Goods Sold | +7.2% (from $446M to $478M) | COGS rose proportionally with revenue volume due to higher input costs and increased production expenses, aligning with prior trends where rising costs pressured margins even as sales improved. |
R&D Expenses | +7.3% (from $232M to $249M) | R&D spending increased as the company continued to invest in innovation and new technologies, including incremental costs from integrating acquired businesses, a trend consistent with previous periods prioritizing long‑term growth. |
Operating Income | Slight decline (from $221M to $218M) | Operating income remained stable because the revenue increases were largely offset by higher operating costs such as COGS and R&D expenses, reflecting a careful balance between growth initiatives and cost pressures compared to the prior year. |
Net Income | Slight decline (from $172M to $169M) | Net income was broadly consistent with previous quarters as lower tax provisions and controlled operating expenses helped mitigate the impact of higher costs, preserving profitability relative to Q1 2024 despite minor declines. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | Q1 FY 2025 | $1.265 billion to $1.285 billion | no current guidance | no current guidance |
EPS | Q1 FY 2025 | $1.65 to $1.71 | no current guidance | no current guidance |
Weighted Diluted Share Count | Q1 FY 2025 | Approximately 174 million shares | no current guidance | no current guidance |
Revenue | Q2 2025 | no prior guidance | $1.270 billion to $1.290 billion | no prior guidance |
EPS | Q2 2025 | no prior guidance | $1.61 to $1.67 | no prior guidance |
Weighted Diluted Share Count | Q2 2025 | no prior guidance | Approximately 174 million shares | no prior guidance |
Revenue Growth | FY 2025 | Expected at the low end of the 5% to 7% long-term target | no current guidance | no current guidance |
Earnings Growth | FY 2025 | Expected in line with the 10% target | no current guidance | no current guidance |
Annual Interest Expense | FY 2025 | Approximately $70 million | no current guidance | no current guidance |
Capital Expenditures | FY 2025 | Approximately $150 million | no current guidance | no current guidance |
Non-GAAP Effective Tax Rate | FY 2025 | Modeled at 14% | no current guidance | no current guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q1 2025 | $1.265B - $1.285B | $1.298B | Beat |
EPS | Q1 2025 | $1.65 - $1.71 | $0.97 | Missed |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Artificial Intelligence (AI) Growth and Investment | In Q3 2024, AI was highlighted as a driver in wireline rearchitecture, manufacturing demand, and R&D (e.g., network performance, GPU applications) ; in Q2 2024, Keysight emphasized early AI test platforms and infrastructure solutions. | In Q1 2025, there is a strong focus on AI as a long‑term secular tailwind with a robust pipeline, advanced workload emulation, and AI-driven semiconductor demand. | Consistent focus with reinforced long‑term positive sentiment and deeper technical investments. |
Advanced Semiconductor Technologies | In Q3 2024, discussions centered on silicon photonics and high‑bandwidth memory driven by AI workloads. Q2 2024 did not mention this topic. | Q1 2025 reintroduces the topic with additional details on 2nm technology and DDR6/DDR7 alongside silicon photonics. | Recurring with new technical depth; the current period adds new elements to an already relevant topic. |
Semiconductor Testing and Parametric Business Performance | Q3 2024 mentioned sequential order growth and a cautious revenue backdrop ; Q2 2024 emphasized its contribution (about 10% of total revenue) and signs of stabilization. | Q1 2025 reported strong continuous order growth, robust backlog buildup, and positive demand for advanced test solutions. | Improved sentiment and performance with growing orders and backlog in the current period. |
Automotive Sector Dynamics | In Q3 2024, weaknesses in the EV market and modest AV growth were noted, along with emerging opportunities in software‐defined vehicles ; Q2 2024 observed steady EV and AV demand with strategic simulation partnerships. | In Q1 2025, challenges persist in EV and battery development while customer engagement in software-defined and autonomous driving remains optimistic. | Mixed sentiment – persistent challenges in traditional EV areas but continued optimism in the software and autonomous segments. |
Strategic Acquisitions and M&A Integration | Q2 2024 detailed acquisitions (e.g., Spirent, Riscure) and selective M&A strategy to expand network analytics. Q3 2024 did not specifically address M&A activity. | In Q1 2025, pending acquisitions (Synopsys and Ansys) and the continued integration of the ESI acquisition are noted, expanding the design engineering portfolio. | Resurgence of the topic with renewed M&A activity focused on strategic expansion, especially in network analytics and design support. |
Geopolitical and Trade Uncertainty Risks | Q3 2024 touched on positive geopolitical trends for the aerospace, defense, and government segment with bipartisan defense support ; Q2 2024 did not mention this risk. | Q1 2025 highlights trade restrictions (e.g., post-Huawei) and concerns over U.S. policy uncertainty alongside steady defense order backlogs. | Shift from a geopolitically positive tone to increased caution regarding trade restrictions and policy risks. |
Revenue Recovery, Sales Funnel Improvement, and Long-Term Growth Outlook | In Q3 2024, gradual revenue recovery was expected with a stronger, faster sales funnel and reaffirmation of long‑term revenue growth targets ; Q2 2024 reiterated stable revenue trends and improvements in the sales pipeline, underpinning a long‑term target of 5‑7% growth. | Q1 2025 reported core revenue growth for the first time in six quarters, additional gains in funnel intake and velocity, and maintained long‑term growth targets in the low end of their 5‑7% range. | Consistent improvement with a more positive near‑term recovery outlook and ongoing long‑term growth confidence. |
Cost Management, Margin Pressure, and Inventory Challenges | Q2 2024 emphasized a flexible cost structure with OpEx reductions (down ~3%), stable gross and operating margins amid revenue declines, and signs of inventory normalization. Q3 2024 focused on cost flexibility with SG&A reductions and solid margin performance. | Q1 2025 experienced a slight rise in OpEx (attributed to variable pay and salary increases) even as it posted its highest gross margins in four quarters, with some continued mix pressure and selective inventory normalization in certain segments. | Mixed perspective – while margins are strong, rising operating expenses suggest a more cautious cost environment in the current period. |
Innovation, R&D Investments, and Expansion into Software/Services | Q2 2024 underlined robust R&D investments (e.g., new simulation and quantum solutions) and expanding software/services contributions (~39% of revenue) along with strategic acquisitions ; Q3 2024 continued this focus with growing software revenue and enhancements in simulation platforms. | Q1 2025 maintains strong investments in AI, 6G, and next‑gen technologies, with expansion into software and services (accounting for ~40% of revenue) bolstered by pending acquisitions to enhance their design engineering portfolio. | Consistent commitment with sustained investments and incremental expansion in software/services, reinforcing the growth strategy. |
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AI Business Opportunities
Q: Can you detail the AI business outlook and use cases?
A: We see a robust long-term opportunity in AI, participating across compute, memory, and networking. We're engaging in high-speed interconnect testing, silicon photonics, and emulation platforms for AI workloads. This positions us well in both the short and medium term to capitalize on the growing AI market. -
Margin Outlook
Q: Are you on track to achieve your operating margin targets?
A: While our goal remains a 31%-32% operating margin, achieving this by FY26 may slip if growth stays at 5% per year. However, we expect to improve margins through a combination of growth acceleration and synergies from pending acquisitions. -
Orders and Sales Funnel Improvement
Q: Is the improving sales funnel indicating demand recovery?
A: Our sales funnel is incrementally improving, with better new business intake and faster customer decision-making. This supports our Q3 guidance and aligns with our expectation of gradual recovery in 2025. -
ESI Group Performance
Q: How is the ESI acquisition performing amid auto market softness?
A: The acquisition remains on track, with renewal rates meeting expectations. Although auto market softness impacted upsells, we're gaining traction with aerospace, defense, and industrial customers, offsetting the auto weakness. -
Pending Acquisitions Impact
Q: What's the status and impact of the Synopsys and Ansys deals?
A: These acquisitions are contingent on the Synopsys-Ansys transaction closing. While we haven't sized them yet, they will enhance our design engineering portfolio in power management and optical solutions. -
Gross Margin Trends
Q: What's driving gross margin changes year-over-year?
A: The gross margin decrease is mainly due to mix. Last year's Q1 benefited from backlog sales; this quarter's gross margin is the highest in the past four quarters, aided by incremental ESI revenue. -
Aerospace and Defense Outlook
Q: Any risks from government budget resolutions affecting A&D?
A: We expect minimal impact as prime contractors have record backlogs, and global defense spending is likely to increase. We're well-positioned to capitalize on opportunities despite any near-term timing issues. -
China Business Trends
Q: How is your business performing in China amidst tensions?
A: Our customer relationships remain strong. We've adjusted to a 1-2 point headwind post-Huawei and focus on customers we can transact with. We're also supporting Chinese customers' global strategies, including manufacturing relocation. -
EV Sales and Trends
Q: What's the outlook for EV-related sales?
A: EV and battery test demand remains soft. However, we see increased focus on e-mobility, software-defined vehicles, and higher communication speeds, signaling future opportunities as investments pick up. -
Semiconductor Test Business
Q: Are you building backlog in semiconductor test?
A: Yes, we've had multiple quarters of growth in parametric test and have built backlog over the last three quarters. Given our six-month order window, revenue conversion is relatively short-term.