Keysight Technologies, Inc. (KEYS) Earnings

Management highlights

- Overall Company Performance • Delivered a record all-time company quarter, capping a record first half of fiscal 2026: Q2 orders grew 56% YoY to over $2 billion, revenue grew 31% YoY, EPS grew 69% YoY, and free cash flow hit a record $472 million • Results are driven by strong demand across end markets including AI data centers, networking, defense, semiconductors, and general electronics, aligned with the company's long-term strategic growth framework established at 2023 Investor Day • Excluding one-time tariff impacts, organic operating margin reached 30.4%, up 25 basis points YoY, driven by 49% operating leverage - Communication Solutions Group (CSG) Updates • CSG order growth significantly outpaced revenue growth, with broad strength across commercial communications and aerospace/defense/government • Wireline commercial communications delivered record orders, with AI-related YTD 2026 business already surpassing full-year 2025 levels, driven by four key pillars: AI infrastructure scaling, overlapping speed transitions (800-gig to 1.6-terabit to 3.2-terabit), expanding silicon photonics/co-packaged optics activity, and growing demand for system-level emulation • Wireless saw robust order growth, driven by non-terrestrial network (NTN/LEO) scaling, 6G R&D activity, and AI-related supply chain demand; the company holds a differentiated end-to-end validation position for NTN systems via its combined Keysight orbit emulation and acquired Spirent PNT solutions • Aerospace, defense, and government saw broad-based global momentum led by Europe, with strong demand for radar, electromagnetic spectrum operations, and satellite/autonomous systems, driven by global defense modernization investments - Electronic Industrial Solutions Group (EISG) Updates • EISG achieved all-time record orders and revenue, with growth across all three end markets: general electronics, semiconductors, and automotive/energy • General electronics saw double-digit growth driven by AI-related innovation and high demand for high-performance PCB capacity investment, plus healthy education sector demand for semiconductor workforce development programs • Semiconductors saw accelerating demand driven by AI ecosystem scaling across advanced nodes, memory, and silicon photonics, with key wafer test solution wins across Asia, the US, and Europe • Automotive and energy grew orders for the third consecutive quarter, with strength across software-defined vehicle validation and EV charging solutions - Portfolio and Innovation Highlights • Expanded product portfolio across high-growth areas, including new scale-up validation solutions for AI networks, 220-gigahertz Lightwave component analyzer for photonics, 3D interconnect designer for 3D stacked chips, and Keysight AI Inference Builder for inference applications • Secured key industry collaborations and leadership positions, including an interoperability demonstration with Broadcom for Ultra Ethernet Consortium specifications, expanded 6G collaborations with Qualcomm and Samsung, and a key US Air Force next-generation flight testing win

Guidance

- For Q3 2026, management expects revenue in the range of $1.73 billion to $1.75 billion, representing 29% year-over-year growth at the midpoint, with EPS expected between $2.43 and $2.49 (43% YoY growth at the midpoint) - Full-year fiscal 2026 revenue guidance is raised from prior levels to high-20s percent year-over-year growth, driven by the strong first half performance and visible pipeline of opportunities in the second half - Management expects a historically typical sequential revenue increase for fiscal Q4 2026, with the second half of the year coming in materially above the first half - Fiscal 2026 capital expenditure guidance is increased to $200 million (up from $160 million) to support faster product ramping for high-demand AI solutions - The $375 million full-year 2026 revenue contribution from recent acquisitions is maintained, with greater than $100 million in expected cost synergies and operational efficiencies; ~80% of these cost synergies are expected to be realized on a run-rate basis by the end of fiscal 2026

Segment performance

Communication Solutions Group (CSG): Total revenue of $1.23 billion, up 35% year-over-year on a reported basis (27% core basis). CSG represents 71.5% of total company revenue. Within CSG, commercial communications generated $858 million in revenue (up 40% YoY), and aerospace, defense, and government generated $373 million in revenue (up 24% YoY). CSG gross margin was 74.1% and operating margin was 33.4%. Electronic Industrial Solutions Group (EISG): Total revenue of $486 million, up 24% YoY, with growth across all three end markets. EISG represents 28.2% of total company revenue. EISG delivered gross margin of 67.8% and operating margin of 33.1%. Overall company: Q2 2026 reported revenue of $1.72 billion, up 31% YoY; excluding one-time tariff impacts, adjusted revenue was $1.76 billion, up 35% YoY. Software and services accounted for ~36% of total revenue, and annual recurring revenue was 27% of total revenue mix.

Risks & headwinds

- Forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially, with detailed risk factors available in the company's recent SEC 10-K and 10-Q filings - Unprecedented ramp rates for new AI-focused products require active supply chain management to meet elevated demand, though management reports no major current supply concerns - The long-term growth trajectory of AI infrastructure depends on continued customer investment and deployment timelines, which are subject to broader macroeconomic and industry dynamics

Analyst Q&A

• Q: Backlog delivery timelines have historically averaged 6 months with strong current order growth, what is the current split of AI wireline opportunities across the business stack? /

  A: Most AI-related opportunity sits in the CSG wireline segment, with first half 2026 AI revenue already in the $500-$600 million range, matching full-year 2025 total. No change to the company's backlog policy: the majority of orders are still delivered and recognized within 6 months of booking. Keysight serves the full AI stack from early R&D through production, with meaningful participation across computing, networking, transceivers/interconnects, and hyperscaler deployments including current scale-out transceiver opportunities.

• Q: The Q3 guidance midpoint is slightly down sequentially from Q2 revenue. What is driving this, and is customer buying behavior changing amid strong AI demand? /

  A: Q3 revenue is largely in line with Q2, with the slight sequential drop reflecting normal scheduling and product ramp timing, not weakening demand. Customer demand remains very strong across all businesses and regions, with AI, aerospace defense, and semiconductors all contributing to record Q2 bookings. The only notable change in customer behavior is increased urgency for AI-related orders that accelerates pipeline conversion, with no evidence of widespread order pull-forward.

• Q: Given strong AI-driven TAM expansion, is the prior 5-7% long-term annual growth framework still appropriate for the company? /

  A: The three core pillars of the company's long-term strategy remain intact: accelerating technological innovation that expands first-to-market opportunities, expanding the addressable customer footprint in emerging growth areas like space/automotive/6G, and capturing growth from global supply chain reconfiguration. The company remains confident in its ability to outperform across economic environments, and will update long-term growth forecasts as market dynamics evolve. Current gross margin excluding one-time tariff adjustments sits in the mid-67% range, a durable level post-acquisition that is accretive to margins.

• Q: How large is the current non-terrestrial network/LEO space opportunity for Keysight today, and what is the long-term outlook? /

  A: NTN/LEO currently contributes less than 1% of total annual company revenue, but the company holds an early differentiated end-to-end position that positions it well for future scaling. Keysight already has a larger established space and satellite business in the defense sector, and growing demand from commercial LEO constellations across use cases like direct-to-cell and broadband is expanding the addressable market. The company's complete portfolio (including orbit emulation and PNT capabilities from the Spirent acquisition) provides a unique, differentiated value proposition for customers developing new NTN systems.

• Q: Over the multiyear AI runway, how do you see demand evolving, and what is the current R&D vs manufacturing split for AI wireline? /

  A: The AI market is still in early innings, with multi-hundred-gigawatts of planned data center capacity coming online through 2030 that will gradually trickle through the ecosystem. The shift to heterogeneous, open, mixed architectures (combining optical/electrical, pluggable/integrated optics) broadens the opportunity for Keysight's full portfolio, with additional emerging growth in AI workload emulation. The R&D:manufacturing split for AI wireline remains ~70:30, and both segments have doubled in the first half of 2026, with only minor quarterly variation to this split.