KEYS Q2 2025: Raises FY guide to 5-7% despite $75M-$100M tariffs
- Strong Order Pipeline and Revised Guidance: Management highlighted a robust order intake with a strong funnel in Q2 and a solid pipeline into Q3, which supported raising full-year revenue guidance to the mid 5%-7% growth range and offered confidence in a seasonal uplift in Q4.
- Expanding AI and Emerging Technology Opportunities: Executives emphasized continued traction in AI testing and simulation, as well as investments in next-generation technologies like silicon photonics and co-packaged optics, positioning the company to benefit from long-term secular trends.
- Effective Tariff Mitigation and Diversified Global Exposure: The team underlined proactive measures to mitigate an annual tariff exposure of $75–$100 million through supply chain realignments and pricing actions, while maintaining a diversified global footprint that supports resilient business segments such as aerospace and defense.
- Tariff Exposure and Impact: The company faces a gross annualized tariff impact of $75 million to $100 million that could more than double in Q3 compared to Q2, potentially compressing margins if mitigation actions do not fully offset these costs.
- Macro Uncertainty and Continuing Resolution: Ongoing macroeconomic uncertainties and the continuing resolution in the U.S. may limit growth in new programs, particularly in aerospace defense, and could delay the full realization of upside in orders and cash flow performance.
- Demand and Supply Chain Disruptions: The mixed demand environment—evidenced by slowed manufacturing activity in certain regions (e.g., weak Chinese automotive and general electronics segments) coupled with potential supply chain realignments—raises risks of volatility and could adversely affect revenue growth and operating margins.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +7% | Total Revenue increased from $1,216 million in Q2 2024 to $1,306 million in Q2 2025, reflecting improved market conditions and stronger performance in key segments, building on earlier Q1 momentum where investments in next-generation technologies began to pay off. |
Communications Solutions Group | +9% | CSG revenue rose from $840 million to $913 million as robust demand in commercial communications and increased investments in high-speed network and AI-enabled solutions boosted performance, following a recovery trend seen in previous quarters. |
Products Revenue | +9% | Products revenue grew from $909 million to $988 million driven by stabilization in product demand and successful integration of acquisitions, which helped offset earlier pressures in segments like Electronic Industrial Solutions observed in prior periods. |
Asia Pacific Revenue | +15% | Asia Pacific revenue surged from $496 million to $573 million—a dramatic recovery compared to earlier declines (e.g., the 13%-14% drop in Q1 2024)—due to renewed customer spending, eased macroeconomic headwinds, and increased investments in emerging technologies. |
Net Income | +104% | Net income more than doubled from $126 million to $257 million as a result of significant margin expansion, effective cost controls, and lower tax provisions, reflecting a marked operational turnaround from previous periods. |
Earnings per Share (basic) | +104% | Basic EPS improved substantially from $0.73 to $1.49, driven by the higher net income along with a slight reduction in weighted average shares outstanding, underscoring the strong profitability and enhanced operational efficiency achieved in Q2 2025. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | Q3 2025 | $1.270B to $1.290B | $1.305B to $1.325B | raised |
EPS | Q3 2025 | $1.61 to $1.67 | $1.63 to $1.69 | raised |
Revenue Growth | FY 2025 | no prior guidance | midpoint of 5% to 7% long-term target | no prior guidance |
EPS Growth | FY 2025 | no prior guidance | slightly above 10% long-term target | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q2 2025 | $1.270B - $1.290B | $1.306B | Beat |
EPS | Q2 2025 | $1.61 - $1.67 | $1.49 | Miss |
Weighted Diluted Share Count | Q2 2025 | Approximately 174 million shares | 173 million | Met |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
AI and Emerging Technologies | Q1 2025: Described as a long‑term secular tailwind with initiatives like the AI data center builder, silicon photonics investments, and innovations in network and compute (e.g., ). Q3 2024: Emphasized AI’s impact in driving commercial communications, standardization efforts, and early engagements in 6G and Open RAN ( ). | Q2 2025: Reiterated as a long‑term secular trend with a multi‑year roadmap, expanded infrastructure focus (memory, compute, networking), strong simulation growth, and active customer engagements in design wins and software emulation ( ). | Consistently positive sentiment with a deepening integration across business segments as Keysight continues to innovate in both physical and software layers. |
Order Pipeline and Revenue Guidance | Q1 2025: Highlighted strong order growth, improved pipeline visibility, and rising orders driven by new funnel intake and faster deal velocity ( ). Q3 2024: Noted signs of recovery with stable pipeline dynamics across segments, although overall recovery remained gradual in the cyclical environment ( ). | Q2 2025: Reported robust order growth (8% year‑over‑year, 4% sequentially) with a healthy funnel of opportunities and strong customer engagements supporting revenue guidance for upcoming quarters ( ). | Slightly improved sentiment and more confident outlook as order pipeline strength continues while cyclicality remains a factor. |
Automotive Sector Dynamics | Q1 2025: Characterized by challenging market conditions with muted activity in manufacturing and EV battery development but ongoing R&D in software‑defined and autonomous vehicles ( ). Q3 2024: Acknowledged weakness in the EV market with delays, yet noted growth in autonomous vehicle and software‑defined vehicle segments alongside opportunities from regulatory pressures ( ). | Q2 2025: Described as experiencing lower orders and revenues, with stabilization in customer engagements and key wins in areas like home energy management systems; weakness notably in China alongside general electronics ( ). | Mixed sentiment: Persistent headwinds in order volumes but continued strategic focus on evolving technologies (software‑defined capabilities) to address long‑term opportunities. |
Semiconductor Testing and Parametric Business | Q1 2025: Emphasized strong customer engagement driven by fab capacity investments, continued strong order growth for parametric wafer test solutions, and growing backlog with rapid revenue conversion ( ). Q3 2024: Noted sequential growth in semiconductor projects with a robust pipeline in memory and silicon photonics, though the logic segment remained mixed ( ). | Q2 2025: Reported strong demand for wafer test solutions from large foundry and IDM customers, accelerated engagements for silicon photonics and co‑packaged optics to address AI data center performance needs ( ). | Continuing growth, with demand strengthening especially in advanced nodes and related optical technologies, confirming sustained sector momentum. |
Tariff Exposure and Supply Chain Challenges | Q1 2025: Only indirect references via geopolitical trade restrictions and adaptation to post‑Huawei challenges were mentioned ( ). Q3 2024: No specific discussion on tariff exposure or supply chain issues was noted. | Q2 2025: Provided detailed disclosure with clear cost impact (additional $7 million expenses, 60 bps margin hit), an annualized exposure estimate ($75‑$100 million), and proactive mitigation via pricing, sourcing, and leveraging a diversified global supply chain ( ). | New and more granular focus: A more detailed and cautious sentiment with clear mitigation steps reflects growing external pressures yet active management of risks. |
Macroeconomic and Geopolitical Uncertainties | Q1 2025: Discussed a mixed macro environment with uncertainty from U.S. policy actions; also noted geopolitical trade restrictions affecting China and strategic adaptations ( ). Q3 2024: Similar cautious tone with stable market conditions overall but with noted uncertainties in defense spending and budget appropriations ( ). | Q2 2025: Continued monitoring of macroeconomic risks with an emphasis on gradual recovery; reiterated confidence as customer behavior remained stable despite geopolitical concerns, complemented by discussions around tariff impacts and diversified supply chain ( ). | Consistently cautious: Persistent uncertainties are acknowledged, yet Keysight maintains a measured, confident position leveraging resilient operations. |
Margin Pressure and Profitability Challenges | Q1 2025: Reported mix-driven margin pressures with Q1 gross margins down year‑over‑year due to less favorable product mix; operating margins remained stable though challenges in certain segments were noted ( ). Q3 2024: Demonstrated margin pressures with declining revenues offset partially by cost management, tax adjustments, and variable performance across groups ( ). | Q2 2025: Cited tangible pressures from new tariff expenses (reducing margins by 60 bps and impacting EPS) along with segmental challenges (e.g., automotive, energy, and China weaknesses), while actively implementing mitigation strategies ( ). | Steady pressure with tactical responses: While margins continue to be squeezed by external factors (tariffs, weak segments), management is taking proactive measures, though near-term challenges remain evident. |
Innovation and Strategic Investments | Q1 2025: Focused on robust innovation drivers in AI, demonstrated new test solutions (e.g., 400G per lane test), strategic partnerships in optical and network testing, and strong R&D commitments backed by increased software revenue ( ). Q3 2024: Emphasized strategic investments to enlarge the served available market, including developments in AI, 6G, quantum, and automotive digital key certification, as well as active M&A discussions ( ). | Q2 2025: Highlighted continued investments in AI-related infrastructures, simulation business growth bolstered by M&A (e.g., Spirent), innovation in defense and aerospace capabilities, critical product breakthroughs in optical transmission, and a balanced capital return strategy ( ). | Consistently bullish: Steady strategic investments and innovation initiatives underpin long‑term growth, reinforcing market leadership even amidst external challenges. |
Commercial Communications and Wireline Business | Q1 2025: Reported strong results in Commercial Communications driven by wireline business growth from AI factors, despite mixed recovery in wireless; expectations of stable infrastructure investments were outlined ( ). Q3 2024: Noted low‑double‑digit orders growth primarily propelled by wireline, despite an overall revenue decline year‑over‑year; partnerships and standardization efforts were highlighted ( ). | Q2 2025: Delivered robust growth with Commercial Communications revenue up 9% YoY, driven by double‑digit growth in wireline, supported by investments in high‑speed data center networks and breakthrough solutions like 448G optical transmission ( ). | Steady and robust performance: Wireline business remains a key growth engine with consistent AI demand and technological advancements bolstering Commercial Communications. |
Advanced Semiconductor Process Technologies | Q1 2025: Emphasized strong customer engagement through fab capacity investments, order growth in new fab projects, and a healthy backlog for parametric testing ( ). Q3 2024: Pointed out sequential growth in memory and silicon photonics segments driven by AI, while noting mixed outcomes in the logic sector ( ). | Q2 2025: Continued strong demand as large foundry and IDM customers pushed investments in leading‑edge process nodes, with rapidly growing high‑bandwidth applications and accelerated engagements in silicon photonics and co‑packaged optics ( ). | Sustained momentum: Consistent demand in advanced processes driven by AI requirements, with evolving technology trends further spurring test solution growth. |
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FY Margin Outlook
Q: Is operating margin flattish FY ’25?
A: Management expects margins to remain largely range-bound—with a seasonal uplift in Q4—but overall, FY ’25 margins should be flattish compared to FY ’24 despite near-term tariff impacts, reflecting tight guidance and incremental flow-through. -
Guidance/Cash Flow
Q: Why raise guidance amid strong cash flow?
A: The guidance was raised based on robust first‐half results, a strong order pipeline, and notable working capital improvements that bolstered cash flow, demonstrating operational resilience. -
Tariff Exposure & Mitigation
Q: How should the $75–$100M tariff exposure be viewed?
A: This figure is a gross annualized number reflecting tariff costs over roughly seven months; management is actively mitigating these expenses by passing on future costs while leaving existing backlog untouched. -
Margin Increment & Wireless
Q: What margins arise from growth over 5%?
A: They expect any growth above 5% to bring roughly 40% incremental operating margin, although tariffs temporarily add costs; meanwhile, the wireless segment remains stable and bolstered by strong network infrastructure demand. -
AI & Orders
Q: What’s new in AI activity and orders?
A: Management noted steady, secular growth in AI-related technologies with a solid pipeline and increasing customer engagement across multiple applications, reinforcing long-term demand. -
Wireline Demand Drivers
Q: What’s driving wireline demand growth?
A: Wireline demand remains predominantly R&D-driven, with a strong double-digit performance spurred by innovation investments, even as manufacturing gains ground. -
Silicon Photonics
Q: How is silicon photonics reshaping testing?
A: They are blending electrical and optical testing capabilities to address silicon photonics and co-packaged optics opportunities, positioning the company well amid shifting technology trends. -
Asia & China Demand
Q: How did Asia and China perform this quarter?
A: Asia showed strength across segments while China’s orders were mostly flat, with softness in automotive and manufacturing balanced by other stable sectors. -
Prebuy Effects
Q: Were order trends affected by prebuy behavior?
A: Order activity progressed linearly without noticeable pull-ins or cancellations despite surcharge concerns, indicating steady customer behavior. -
Gen. Electronics Demand and Tariff Impact
Q: How is general electronics being affected?
A: Despite ongoing supply chain realignments and tariff considerations, durable segments in general electronics remain stable even as weak manufacturing exposure in China is noted. -
A&D & China Tariff
Q: Any pushback in aerospace defense or China tariffs?
A: The aerospace and defense segment maintained robust orders with strong backlogs, and tariff impacts from China shipments are minimal—less than 10% of total exposure. -
Software/Services Growth
Q: How will software and services accelerate growth?
A: Investment in simulation and digital tools is set to further boost recurring revenues and deepen customer engagement, underpinning long-term resilience. -
AI Testing Demand
Q: Are there new AI testing applications emerging?
A: Beyond high-speed interconnects, customers are increasingly seeking integrated AI testing solutions to identify data center performance bottlenecks, signaling evolving demand. -
Optical Migration Impact
Q: Will optical migration boost content value?
A: Management envisions a hybrid future where both electrical and optical solutions deliver added value as networks shift to higher speeds, enhancing overall testing content.
Research analysts covering Keysight Technologies.