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Introduction & Market Context
Keysight Technologies Inc (NYSE:KEYS) reported second-quarter fiscal 2025 results on May 20, exceeding guidance and raising its full-year outlook on the strength of AI-related demand and recovery in key segments. The testing and measurement solutions provider saw its stock rise 4.58% in aftermarket trading to $170.25, reflecting positive investor sentiment toward the results.
The company reported its second consecutive quarter of revenue growth and third consecutive quarter of order growth, demonstrating momentum in its recovery trajectory. Keysight’s performance comes amid ongoing challenges in the global technology sector, including tariff concerns that the company is actively addressing through supply chain adjustments.
Quarterly Performance Highlights
Keysight delivered Q2 revenue of $1.3 billion, representing 7% year-over-year growth and exceeding the high end of its guidance range. Non-GAAP earnings per share reached $1.70, a 21% increase from the prior year. Orders grew 8% to $1.316 billion, driven by strong demand for AI solutions and healthy growth in the aerospace, defense, and government sectors.
As shown in the following quarterly financial highlights chart:
The company’s operating margin improved to 25.2%, representing a 100 basis point increase year-over-year. Core operating margin, which adjusts for acquisitions and currency impacts, reached 25.6%, up 140 basis points from the previous year. Keysight generated $457 million in free cash flow during the quarter, demonstrating strong cash conversion.
Software (ETR:SOWGn) and services continued to play an increasingly important role in Keysight’s business model, accounting for 36% of overall revenue in Q2, while recurring revenue represented 28% of the total. The company repurchased approximately 1 million shares for a total consideration of $150 million during the quarter.
Segment Analysis
Keysight’s business is divided into two main segments: Communications Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG). The following chart illustrates the revenue distribution by segment:
The Communications Solutions Group, which accounts for 70% of total revenue, delivered $913 million in Q2, growing 9% year-over-year. CSG’s operating margin was 25.9%, down 60 basis points from the previous year. Commercial Communications revenue grew for the third consecutive quarter with double-digit order growth, while the Aerospace, Defense & Government segment also saw revenue and order increases.
As shown in the CSG performance highlights:
The Electronic Industrial Solutions Group contributed 30% of total revenue, reaching $393 million in Q2, a 5% increase year-over-year. EISG’s operating margin improved significantly to 23.4%, up 430 basis points from the prior year. While the automotive segment saw declines in revenue and orders, Keysight noted that this business has largely stabilized. The semiconductor segment experienced growth in both revenue and orders, driven by strong demand from foundries and integrated device manufacturers.
The EISG performance is illustrated in the following chart:
End Market Performance
Breaking down revenue by end markets provides additional insight into Keysight’s performance drivers. Commercial Communications represented 47% of total revenue at $612 million, growing 9% year-over-year. Electronic Industrial Solutions accounted for 30% at $393 million (+5%), while Aerospace, Defense & Government contributed 23% at $301 million (+9%).
The following chart shows the revenue distribution by end market:
Regional Performance
Geographically, Keysight saw strong performance in Asia Pacific, which accounted for 44% of total revenue at $573 million, representing 16% year-over-year growth. The Americas region contributed 39% of revenue at $510 million, growing 4% year-over-year. Europe, which represented 17% of revenue at $223 million, experienced a 2% decline compared to the prior year.
The following highlights from the Q2 presentation illustrate the key achievements and challenges across Keysight’s business:
Guidance & Outlook
Based on strong first-half execution and healthy backlog heading into the second half of fiscal 2025, Keysight raised its full-year outlook. For the third quarter, the company expects revenue between $1.305 billion and $1.325 billion, with non-GAAP earnings per share in the range of $1.63 to $1.69.
For the full fiscal year 2025, Keysight now anticipates revenue growth at the midpoint of its 5-7% long-term target range, with non-GAAP EPS growth expected to be slightly above its 10% long-term target. The company projects capital expenditures of approximately $150 million for the fiscal year.
The guidance assumes a non-GAAP tax rate of 14% for both Q3 and the full fiscal year, with a weighted average diluted share count of approximately 173 million shares for Q3.
Tariff Impact & Mitigation
Keysight addressed the potential impact of tariffs on its business, noting that it is well-positioned to navigate the dynamic operating environment. The company highlighted its resilient global supply chain with minimal exposure to China and outlined actions underway to reduce incremental tariff impact.
The annual exposure to tariffs is estimated at approximately $75-$100 million given current actions and tariff levels. Keysight expects the majority of the tariff impact to occur in Q3, with full mitigation anticipated by the end of the fiscal year through supply chain adjustments and other strategic measures.
Forward-Looking Statements
Keysight’s Q2 results demonstrate continued momentum in its recovery trajectory, with strong performance across key segments and regions. The company’s focus on AI solutions and aerospace and defense markets is yielding positive results, while its software and services strategy continues to drive recurring revenue growth.
With a raised full-year outlook and clear strategies to mitigate tariff impacts, Keysight appears well-positioned to navigate the current market environment and deliver on its long-term growth targets. The positive aftermarket stock reaction suggests investors are encouraged by both the Q2 results and the company’s forward-looking guidance.
Full presentation:
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