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Keysight Technologies, Inc. (KEYS)·Q2 2025 Earnings Summary

Executive Summary

  • Q2 FY25 revenue was $1.306B and non-GAAP EPS was $1.70, both above the high end of guidance; GAAP EPS was $1.49. Orders grew 8% YoY to $1.316B, and free cash flow reached $457M .
  • Results beat Wall Street consensus: revenue $1.306B vs $1.282B estimate and non-GAAP EPS $1.70 vs $1.65 estimate; bold beats noted below. Values retrieved from S&P Global*.
  • Management raised FY25 outlook to the midpoint of its long-term 5–7% revenue growth target and expects FY25 EPS growth slightly above the long-term 10% target, despite tariff headwinds .
  • Segment performance was broad-based: CSG +9% YoY to $913M (wireline strength tied to AI data center build-outs), ADG +9% to $301M, and EISG +5% to $393M; software/services were ~36% of revenue and ARR ~28% .

What Went Well and What Went Wrong

What Went Well

  • Revenue and EPS exceeded guidance high end; pipeline/backlog support raised FY25 growth outlook (“midpoint of our long-term 5–7% target”) .
  • Wireline demand remained robust tied to AI data center expansion (400/800G deployments; R&D in 1.6T+), with an industry-first 448G per lane optical transmission demonstrated at OFC .
  • ADG momentum: notable NATO FORACS radar/EW contract win; ADG revenue +9% YoY and European orders up double digits .

What Went Wrong

  • New tariffs added ~$7M to cost of sales, compressing gross and operating margins by ~60 bps and reducing EPS by ~$0.04; the largest impact is expected in Q3 before full mitigation by year-end .
  • Automotive and energy within EISG declined; China remained mixed with softness in general electronics/manufacturing and automotive, even as Asia overall was strong .
  • Wireless smartphone supply chain remains soft; wireless stability is driven by infrastructure/Open RAN/early 6G, limiting upside near-term .

Financial Results

MetricQ4 2024Q1 2025Q2 2025
Revenue ($USD Billions)$1.287 $1.298 $1.306
GAAP Diluted EPS ($)$(0.42) $0.97 $1.49
Non-GAAP Diluted EPS ($)$1.65 $1.82 $1.70
Gross Margin (%)—65.8% 65.0%
Operating Margin (%)—27% 25% (up ~100 bps YoY)
SegmentQ2 2024 Revenue ($M)Q2 2025 Revenue ($M)YoY GrowthQ1 2025 Revenue ($M)Q2 2024 Op MarginQ2 2025 Op MarginQ1 2025 Op Margin
CSG$840 $913 +9% $883 27% 26% 27%
EISG$376 $393 +5% $415 19% 23% 27%
End Market RevenueQ2 2024 ($M)Q2 2025 ($M)YoY Growth
Aerospace, Defense & Government$277 $301 +9%
Commercial Communications$563 $612 +9%
Electronic Industrial$376 $393 +5%
Total$1,216 $1,306 +7%
KPIsQ4 2024Q1 2025Q2 2025
Orders ($USD Billions)$1.345 $1.263 $1.316
Free Cash Flow ($USD Millions)$328 $346 $457
Cash & Equivalents ($USD Billions)$1.796 $2.060 $3.118
Backlog ($USD Billions)—$2.3 $2.4
Software/Services Mix (%)—~40% ~36%
ARR Mix (%)—~31% ~28%
Weighted Diluted Shares (M)173 174 173

Vs Estimates (S&P Global*):

MetricEstimateActualSurprise
Q2 2025 Revenue ($USD Billions)$1.282$1.306 +$0.024B (bold beat)
Q2 2025 Non-GAAP EPS ($)$1.65$1.70 +$0.05 (bold beat)

Values retrieved from S&P Global*.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue Growth (YoY)FY 2025Low end of 5–7% long-term target Midpoint of 5–7% long-term target Raised
EPS Growth (YoY)FY 2025~10% long-term target Slightly above long-term 10% target Raised
Revenue ($USD Billions)Q3 2025—$1.305–$1.325 New
Non-GAAP Diluted EPS ($)Q3 2025—$1.63–$1.69; ~173M diluted shares New
Tariff AssumptionFY/Q3 2025—Current rates; largest impact in Q3, full mitigation by year-end Clarified

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2024, Q1 2025)Current Period (Q2 2025)Trend
AI/data center wirelineQ4: AI-related investment drove CSG growth; outlook constructive . Q1: wireline orders record; strong 400G lane, DDR6; PNA-X Pro launch .Continued robust wireline demand (400/800G deployments; R&D in 1.6T/3.2T; 448G per lane demo at OFC) .Strengthening, expanding ecosystem.
Tariffs/supply chainQ4: No tariff discussion; steady execution . Q1: Monitoring policy actions; gradual recovery baseline .~$7M cost; 60 bps margin hit; ~$0.04 EPS impact; diversified SE Asia-centric supply chain; largest impact in Q3, mitigation by YE .New headwind; mitigation underway.
WirelessQ4: Mixed; smartphone soft . Q1: Stable; infra/Open RAN/early 6G activity .Stability continues; infra/Open RAN and early 6G drive; smartphone soft, esp. China .Stable with infra bias.
ADGQ4: ADG -6% vs record prior year; pipeline strong . Q1: Record revenue; orders soft on continuing resolutions .ADG revenue +9% YoY; European orders double digit; NATO FORACS contract .Improving activity.
EISG & auto/industrialQ4: EISG -6%; manufacturing constrained . Q1: EISG -1% YoY; semi parametric test strong; auto/EV soft; general electronics normalization .EISG +5% YoY; growth in semi & general electronics; automotive/energy declined .Gradual recovery, auto still soft.
Software/ARRQ4: Not disclosed . Q1: ~40% software/services; ARR ~31% .~36% software/services; ARR ~28% .Mix moderates as hardware recovers.
Regional trendsQ4: Not emphasized . Q1: Europe/Asia research strong; China pivoting .Asia strong; China flattish overall; auto/manufacturing in China weak .Mixed; China cautious.

Management Commentary

  • “Keysight delivered strong second quarter results with revenue and earnings per share above the high end of guidance… we continue to see a healthy funnel of opportunities and are raising full-year growth expectations to the midpoint of our long-term 5–7% target.” — CEO Satish Dhanasekaran .
  • “We reported gross margin of 65%… operating margin was 25%… Our Q2 results included approximately $7M of new tariff expenses… ~60 bps unfavorable impact… ~ $0.04 reduction in EPS.” — CFO Neil Dougherty .
  • “Software and services accounted for ~36% of revenue, while annual recurring revenue was 28% of total mix.” — CFO Neil Dougherty .
  • “We demonstrated the industry's first solution for 448 gig per lane optical transmission, a key building block in the deployment of 1.6 and 3.2 terabit networks.” — CEO Satish Dhanasekaran .
  • “We currently have $2.4B in backlog… largest tariff impact is expected in Q3 with full mitigation by the end of the fiscal year.” — CFO Neil Dougherty .

Q&A Highlights

  • AI traction: Broadening engagements across memory/compute/networking; emulation software to diagnose AI data center bottlenecks; wireline mix shifting ~10 pts toward manufacturing while remaining R&D-heavy .
  • Tariff impact and mitigation: $75–$100M gross annualized exposure; no price changes on existing backlog; mitigation via supply chain/manufacturing footprint, pricing on new quotes, and cost actions; full mitigation expected by Q1 FY26 .
  • ADG demand: European orders double digits; NATO FORACS win; U.S. Army zero trust validation; budgets in U.S./Europe/Asia trending upward .
  • Regional dynamics: Asia strong across segments; China flattish with weakness in general electronics manufacturing and automotive .
  • Mix and margins: Incremental margin framework (~40% above 5% growth) tempered near-term by tariffs; operating margin range-bound near-term with seasonal uplift in Q4 .

Estimates Context

  • The company beat consensus in Q2 on both revenue and EPS: $1.306B vs $1.282B estimate and $1.70 vs $1.65 estimate. Guidance for Q3 revenue $1.305–$1.325B and EPS $1.63–$1.69 brackets consensus ($1.318B, $1.67) implying neutral-to-slightly conservative posture given tariff timing. Values retrieved from S&P Global*.
PeriodRevenue Estimate ($B)Revenue Actual ($B)EPS Estimate ($)EPS Actual ($)
Q1 20251.276*1.298 1.69*1.82
Q2 20251.282*1.306 1.65*1.70
Q3 2025 (guide vs est)1.318*1.305–1.325 (guide) 1.67*1.63–1.69 (guide)
FY 20255.335*—7.07*—

Values retrieved from S&P Global*.

Key Takeaways for Investors

  • Keysight’s AI-driven wireline cycle is the primary growth engine (CSG +9% YoY), with tangible differentiation at the physical/optical/protocol layers (e.g., 448G per lane) supporting sustained momentum into higher-terabit networks .
  • Tariffs are a transitory margin headwind with the largest impact in Q3 and full mitigation targeted by year-end; near-term operating margin is range-bound, but the long-term incremental margin framework remains intact once tariffs normalize .
  • ADG is reaccelerating with strong European demand and strategic wins (NATO FORACS), offering portfolio resilience amid macro uncertainty .
  • Software/services and ARR mix moderated as hardware recovered, but management continues investing in simulation/design software (ESI, potential optical/power additions post Synopsys–Ansys) to deepen recurring exposure and earlier-cycle engagement .
  • Balance sheet flexibility (cash $3.118B; recent $750M notes) supports M&A (Spirent close expected in Q3) and buybacks, enabling continued capital returns while funding growth initiatives .
  • Trading setup: Beat/raise quarter with tariff overhang shifting to Q3 suggests watching margin trajectory and mitigation cadence; AI wireline orders and OFC demos provide catalysts; segment mix (EISG vs CSG) will drive margin variability near term .

Footnote: Values retrieved from S&P Global*.