Keysight Technologies Inc Aktie

Everybody can go ahead and please take their seats. We're going to go ahead and get started with the next session. Thanks, everyone, for joining us. For those of you who don't know me, I'm Matt Niknam, comm infrastructure networking and hardware analyst here at Truist. And we're very pleased to be joined by Keysight Technologies. We've got EVP and CFO, Neil Dougherty; as well as SVP and President of the Communications Solutions Group, Kailash Narayanan, joining us. Thank you for being here.

Thank you.

So maybe just to start from a high level, Keysight is the market leader in test and measurement. You've recently described yourself as a design enablement partner across the full innovation life cycle. So for investors who may be newer to the story, how would you define what Keysight actually does today from a high level?

Yes. Why don't I start, and I can let Kailash add on. I always joke, if I was describing it to my mother, I would say that at the highest level, Keysight provides tools, hardware and software tools and solutions to industries that employ electrical engineers. At a fundamental level, that's what we do. And so right now, that's being driven by the wireline ecosystems at the AI data center specifically, the migration soon right now from 5G to 5G Advanced, but soon to 6G, advancements in aerospace, defense, broader electronics ecosystems, autonomous driving and semiconductor advancement are kind of the big industries in which we serve.

And we serve those industries, again, primarily in the R&D lab, more than half of our revenues come from sales into our customers' R&D labs where we're enabling the design ecosystem from measurement of core physical layer measurements all the way up through protocol layer and application layer software solutions. And then also in solutions and manufacturing, testing electronics at the end of the manufacturing line for functionality and then a smaller portion of our business in kind of operational or post-deployment type applications. I don't know if you want to add anything to that, but...

We'll pivot to Kailash's domain. So Communication Solutions Group, it's about 3/4 of sales at Keysight -- two different businesses. You've got commercial comms -- you've also got aerospace, defense. Can you walk us through what sits under you, how the organization is structured and your top priorities as you head into fiscal '27?

Yes. Well, it's a good time for Keysight. It's a good time for the Communication Solutions Group business. So as you've identified, we have the commercial comms business and the aerospace and defense business. While it might sound like a different business, yes, they are serving 2 different end markets, but a lot of the solutions that we build is driven by common R&D and is applicable to both markets.

So I want to say that. I have -- these 2 business segments are externally reported. Within commercial communications, we break it down into wireless and wireline. We have organizations and multiple vice presidents running those entities. We serve customers from chipset players, both in the wireless and wireline space. Think about the -- think of the Intels and the Qualcomms and the NVIDIA and the Broadcoms and the Marvells and so on and so forth. You have device makers, think of the Samsungs and the Apples of the world. You have network equipment makers, the Ciscos, the Juniper, the Ericssons and the Nokias, the contract manufacturers, mobile network operators, hyperscalers, satellite network operators.

So this is sort of the business that commercial communications spans. Then we have -- within aerospace and defense, we have multiple segments, space, satellite, radar, threat emulation, general comms. So I've got multiple VPs covering that. My group is responsible for everything from technology investments, capital allocation that we need to make for core technology development as well as products. So we're responsible for coming up with the product strategy, the products and the solution road maps, how it intercepts market windows.

My team also leads the product engineering. So engineering sits under me. So all the launches we're responsible for to intercept the market windows of our key customers. And we have sales enablement and business development functions that work in concert with our global sales organization to take these products to market and serve our end markets.

And so maybe just to sort of broaden the question, in terms of top priorities for you both as you sort of close out fiscal '26 and head into fiscal '27, if you can maybe outline high-level priorities.

For me, the key things, obviously, we are looking to sustain the momentum that we have established over the last couple of years in AI, the speed transition to [ 1.6T ] to [ 3.2T ] is starting to occur. There's quite a bit of R&D activity in silicon photonics, co-packaged optics and so forth. So it will be important to sustain that. From a 6G and a wireless perspective, things will start to ramp towards the end of next year and into 2028, getting ready for that inflecting market is going to be important. That's a key priority. And of course, in aerospace and defense, we see expansion in EU. We see expansion in the Americas. We see this new emerging ecosystem of defense technology start-ups. So that's an exciting application and a market segment for us to capitalize on. So those are probably the key priorities for me.

Yes. I mean, as I think about it, I think about, particularly over the short horizon that you've talked about is how do we maximize our capture of the market opportunity that's in front of us. And so when I think about it through that lens, I think there are a number of things that we need to do. First of all, we need to continue to execute on our R&D programs, make sure that we get those products to market at a time that intersects the needs of our customers. Increasingly right now, it means that we're managing supply chain, both in terms of ramping up our own internal capacity as well as working with our suppliers to ensure the supply that we need to convert robust demand into revenue on a short horizon.

It's working with our sales force on tactical issues around, again, intersecting this market opportunity and making sure that we're selling high in the organization's VP to VP level connections at market-making customers that we're not missing any opportunities. So we're out there doing the hunting for opportunities and finding the opportunities. And so when you talk about that short horizon, I come down to core execution around intersecting this market opportunity and really maximizing our value capture over that short horizon.

So obviously, execution against a very strong market backdrop. You've had orders now that have grown 50%, roundabouts organically, the second straight quarter. You've discussed a still very robust pipeline. So can you help us think about how much of the improvement is Keysight specific in terms of new products, go-to-market changes relative to just the end markets that are simply spending more?

Yes. I mean I think both of those things are working in concert with another, right? Certainly, we're being aided by a very strong market. But if we weren't executing and we did not have a differentiated product portfolio, our ability to intersect that robust market demand would not be what it is today. And we are benefiting right now from decisions that were made 2, 3, 4 years ago when we first recognized this transition that was happening in the AI space and the investments that we made over that period of time to have the product portfolio, the solutions portfolio that we have today.

And so I think those 2 things go hand in hand. I think we have a very differentiated portfolio in the marketplace. I think we are doing our best to work at the same pace that our customers are working at and keeping in mind that these design inflections or these technology inflections, the time between them is compressing, right? And so there's a need to work at a very rapid and increasing pace, and I think we're succeeding in doing that. I don't know if you have anything to add.

Yes. Maybe just as an example of how those R&D investments are translating into key products that the market wants. The Data Center Builder is a product that we launched about 18 months ago. It's -- there is no precedent for that type of a product. And by engaging with these market-defining customers, we were able to identify an unmet need which was essentially to allow them to benchmark all of their AI infrastructure. It's a multi-vendor infrastructure that they're deploying in their data centers. And they need to benchmark. They need to see how many tokens per second are you able to deliver with a certain rack or with a certain cluster, what kind of network topologies work? What is the energy consumption of different types of hardware that they're implementing in their data centers. And this is a product that we came up with. There wasn't any in the market up until that point. And we're seeing a lot of traction for those types of products, right? So it's all the investments that we've made over the last several years. Non-terrestrial networks is another application. So pretty excited about where we are.

So why don't we go down the AI path? The wireline revenue exceeded wireless for the first time, I believe, this past quarter. And you framed the AI opportunity around 4 pillars. There's infrastructure scaling, speed transition, silicon photonics and system-level emulation. Which of the 4 pillars is maybe the most -- the largest, most material today? And how does this evolve over time?

I mean all of these 4 pillars are at the moment, generating revenue for us, generating business for us. But maybe before I get into that, at the highest level, our customers' innovation cadence is increasing. The number of product SKUs that our customers are building and developing is just -- it's unprecedented -- that innovation is driving a lot of investment in key solutions and products from us. The complexity of what our customers are doing is also increasing. Going from 100 gig to 200 gig per lane to 400 gig per lane drives enormous complexity in terms of the design considerations that customers have to factor. I mean you think about coupling interference, losses, signals are not traversing just PC board, multiple PC boards, interconnects, cable assemblies and so on and so forth. So all of this is driving complexity.

And our customers are deploying all of this at scale at the same time, right? So it's not just they're investing in R&D, but they're deploying it at scale, which is driving solutions in the manufacturing application. So if I look at those 4 things, the speed transitions, very important. It's playing out now. 1.6T is gaining a lot of traction. We're leading in that space, and we expect that to continue next year. And there's a 3.2T R&D that's already underway. And as you go into higher speeds, silicon photonics, there's quite a bit of R&D investment that's going on there. So that's occurring -- everything as -- when it comes to systems simulation, everything doesn't necessarily -- it's not only that it needs to be tested in isolation or validated in isolation, you have to look at how these data centers and these clusters work together.

So if you're trying to deploy a chip, it could be a network chip, it could be a GPU, it could be a computer, you're deploying into a data center, you need to see how it performs in the context of multiple racks and multiple data centers. So that's driving a lot of demand for our system-level emulation. And as I mentioned, all of this is getting deployed at scale, which is driving manufacturing. So at this point, I would say speed transitions and system emulation is driving a lot of today's business. And of course, the AI expansion, silicon photonics still in the R&D realm, and that's something that we would expect to scale over the next several years.

Yes. Got it. I want to hit on a little bit more in terms of AI and the wireline conversation. Hyperscalers today, I believe, were framed in terms of direct exposure, roughly 10% of sales, but there's a lot more that they drive downstream. And I think that was talked about a little bit on the last call. So with custom silicon proliferating, the stacks becoming a little bit more heterogeneous, how does that affect your business and your customer count? And maybe just secondarily to that, where do the frontier models and Neoclouds fit within that picture?

Yes. I mean that's -- it's a good question. The hyperscalers direct business is a small percent of total revenue. They do drive multiple times that in terms of downstream ecosystem business. Our business is very highly correlated to the CapEx that is being deployed. Each of these hyperscalers have their own ecosystem. So when you look at a particular hyperscaler, you might have heard of this terminology MSA. This is the multisource agreement. There's an alliance that's led by a hyperscaler or a leading chip vendor, and there is an ecosystem that's built around that. And they tend to specify the types of solutions that need to be used in the workflow. We engage our R&D teams, my engineering teams engage with hyperscaler engineering teams and every other member of that ecosystem directly in helping them drive that workflow.

So it's not just one ecosystem, it's multiple ecosystems that's driving this business driven by a central hyperscaler or a chip manufacturer. Neoclouds and these frontier model folks are part of that ecosystem. They could be part of multiple hyperscaler ecosystems. They could be part of a single hyperscaler ecosystem, but we've seen our business grow with them as well and the number of players that are part of this AI business continues to expand for us.

When you think through AI network emulation, high-speed digital validation, maybe just to play devil's advocate. What prevents a well-resourced hyperscaler from building that capability internally?

I mean that's sometimes -- that's always been the case, and it has happened in the past, and it still happens now in the margin. So our business that we have today and the growth that we have today is already factoring in and in the middle of those dynamics. But I will say that there's a couple of things. If it's completely -- if it's only software specific, it's probably a little easier. But with the speed grades going from 100 to 200 to 400 to 800, getting into silicon photonics and needing to emulate everything, not just simulate simulation, you can write a software program on PC and you can do some of that simulation. But when you need to -- when we talk about emulation, it's about doing it and emulating a hyperrealistic environment.

This is where we're differentiated. It requires a lot of hardware investment and then that's where it may not be worth somebody's time to really invest in that. And we have exposure to the entire market, multiple hyperscaler ecosystems. So we're able to bring in a rich set of insights that might not be available to one segment. So those are things that are differentiating. And I mean you also have to remember that it's in the hyperscalers' interest to enable an ecosystem.

And when they enable an ecosystem, if they're the ones that are building the test solutions and so forth, they're going to have to support it. They have to keep up with it. And all of that -- if it's 1 or 2 players, they can do it. But if it's multiple players, it gets prohibitively expensive and it's not core to what they're doing. So those are -- that's kind of where we have a unique offering and a differentiated play to the market.

Let's pivot to wireless. And I think if this were a decade or 15 years ago, we probably would have led with wireless, and we would have spent a lot more time. So it's nice to see sort of such a broadening in terms of end markets. But on wireless, so 3GPP has set, I believe, March of 2029 for the first 6G standard. You've said customers are moving from exploratory research into more funded development programs. Can you help map the revenue ramp for us from 6G in terms of when you start to see test spend inflecting and how the shape of that maybe ramp compares to the 5G cycle?

As you pointed out, we are seeing that funding transition from research institutes, universities into funded programs. Our customers are now involved in product research and early product development. And we're seeing traditional players, the network equipment makers, the device and the wireless modem makers all start to gear up for commercialization in late 2029 and into 2030. And our 6G wireless business has been growing steadily. It grew again this year. And we expect to see this inflect in the first half of 2028 in readiness for the Olympics, there may be some prestandard showcasing of 6G technologies.

Throughout next year, there's going to be a steady cadence of engagements and investments as well. So we're engaged with all of the leading customers. We're seeing new players from a non-terrestrial networks perspective. So I would expect the shape to be fairly similar to 5G. 5G was commercialized in 2019, 2020. So we're -- these generations happen once in 10 years. So that's -- and we're leading up to that. So that's sort of how I expect this to evolve. There are newer applications for sure, in addition to the traditional smartphone type of use case, you have integrated sensing and communications, you have non-terrestrial networks. So those might add some modulation to the shape of the market and how it evolves, but those are all net additive to us. That's sort of how we see it.

And so among -- you mentioned ISAC, you mentioned non-terrestrial networks. I think there's a mention of AI-RAN as well. Which of those -- I mean, is there any one of those that maybe expands your addressable content the most and maybe gives you a little bit more incremental opportunity? Like what gets you excited among those?

I mean all of them are unique and are pretty exciting. And all of those applications expand our opportunity. When you think about application of AI to help with the RAN network. I mean, this is about customers deploying AI algorithms and testing those algorithms for not just regular network and mobility functions, but energy efficiency, traffic steering, beamforming, scheduling, all of this. And we provide an emulated environment to help validate those algorithms. You also have to see how AI traffic and the regular network wireless traffic coexist, how it degrades the performance of the network. All of this requires a new validation, new emulation that customers have to perform in their lab.

So that's pretty exciting. Integrated sensing and communication, again, a new additive opportunity. You need to now all new devices outside of smartphones, whether they're flying objects or whatnot, have to be sensed. You have to be communicated with. They need to be controlled. They need to be maneuvered. They're going to be connected to satellites and base stations and other devices, again, creating more opportunities for us. Non-terrestrial networks is pretty exciting, number of constellations going up, number of frequency bands going up, number of use cases, broadband use cases, direct-to-cell connectivity going up. So that's expanding our opportunities as well. If I were to pick one that is driving -- we're generating business in all 3 of these use cases now, but something that's more commercial now is non-terrestrial networks. So that's driving business for us. And the rest, we expect to gain traction over the next few years.

Let's pivot to the other piece of CSG. On aerospace defense, and I'll open it up to both. That segment grew about 14% last quarter. It's about 1/4 of the CSG business. Can you talk about how much of the multiyear cycle that you've talked about is European sovereign budgets relative to U.S. modernization? Because it seems like there's a lot going on in terms of long-term tailwinds. Maybe we could just parse through some of the drivers you're seeing for that business.

Look at -- it's all of that, right? I mean our U.S. business has expanded at strong double digits. You -- it's a pretty big base. We're seeing the large primes continue to spend. The defense budgets obviously has gone up. The research and development portion of the defense budget is also going up. That drives a lot of business for us. EU is growing even faster, but it's on a smaller base, and we expect that to be a multiyear secular trend. We're building more capabilities over there to enable those applications. And then you have these defense technology start-ups that I alluded to earlier. It's a new emerging economy, if you will, within the aerospace and defense space.

They're not dependent. These companies are not dependent on government budgets. They're product companies, VC funded and they're moving kind of at the pace of Silicon Valley companies. So it's a new set of opportunities, and it's almost a slightly different pool of capital that we're able to tap into. So all of these are driving business. The LEO from an application point of view, it's new satellites, it's coexistence of commercial satellites versus custom purpose satellites for other purposes, general communication infrastructure, cybersecurity, threat simulation, the portfolio that we added from the Spirent acquisition, position, navigation, and timing, that is driving a whole set of new use cases. So we feel like not only are there tailwinds from a market point of view, but the portfolio that we have and the portfolio we've built is enabling us to capitalize on that growth.

As we sort of round out the business, Neil, if you can give us a small -- a quick update on what you're seeing across the EISG business across some of the key business lines.

Yes, absolutely. So I think, first of all, EISG is definitely benefiting from a halo effect from the broader data center build-out. We see that in the semiconductor portion of our business where high-bandwidth memory and advanced logic chips eventually destined for the data center, driving semiconductor volumes and then in turn, driving demand for Keysight semiconductor solutions as a growth driver. We have specific solutions in the semi space pointed at silicon photonics, which are finding a home in this market. I think in our general electronics business, again, a very broad set of exposures in terms of end markets. We see strength in markets like digital health and education, both in kind of teaching labs as well as advanced research.

But beyond that, in the manufacturing side, again, kind of basic electronic componentry, again, destined for the data center, manufacturing of transistors and capacitors and PC boards. These are all things that Jason and his business are helping to test either in the design lab or in manufacturing. And again, with the data center CapEx being as the ultimate driver of that demand. I think on the automotive side, that business also has grown nicely this year.

The demand there is coming from what we broadly define as the software-defined vehicles. This is in-car networks, in-car security, autonomous driving, in-car sensing that is driving growth in that space. And then we're pivoting some of our solutions there that have been focused more on the electric vehicle solution, looking at new market opportunities in grid, distributed grid, power generation types of applications. And so yes, seeing broad growth across that portfolio as well.

So I want to maybe dig in a little bit more to financials. And you've been pretty explicit that supply, not demand is the governor.

Currently. Yes.

Currently, right. So can we talk a little bit about how much revenue is effectively being pushed out? And I know, obviously, this is in light of supply chain constraints, Keysight and everybody else is experiencing. What does the fix look like? Is it incremental CapEx, second sourcing, product redesigns? And is there any visibility into when this stops being an effective limiter of revenue? Yes.

So Well, there's a lot in that question. So let me try and take those a little bit at a time. So first of all, maybe start by talking about the progress that we're making. I mean, if you look at the 4 quarters of this year, we started this year with $1.6 billion of revenue in Q1. We did a little north of $1.7 billion in Q2, almost [ $1.850 ] billion in Q3. We've guided to [ $1.940 ] billion in Q4. And so we are very successfully ramping our production and our supply chain to meet the demand. Is it going as fast as we would like? No. So are we still supply constrained relative to demand constrained? The answer to that question is yes. You're trying to get a sense of how much revenue is pushing out, and I can give you a lens with which to think about that.

We, generally speaking, have a 6-month order acceptance policy. So the overwhelming majority of our orders outside of software like time-based revenue convert from orders to revenue within 6 months. And so under that lens, if you looked and said, hey, we did just under -- just over [ $2.05 ] billion in orders in Q2, you would have expected that to flush to revenue by the fourth quarter. We've guided to [ 1.940 ] billion. So there's somewhere around $100 million of revenue, probably less when you take into account software and longer-dated portions of our business that is pushed out beyond the 6-month delivery window.

So that's one lens with which to think about it. But if you take that same lens and say -- and look at it differently, our second half revenues are in excess of our first half orders. So if you look at over just a little bit longer horizon, a half, we're keeping pace. So I'd quantify it as approaching $100 million. In terms of the solutions, I think it's a little bit of all of the above, right? We've added capacity. We've taken up our CapEx estimates for this year as we add internal capacity that's largely pointed at ramping new product introductions that have been immediately and very robustly accepted by this AI marketplace. And we're seeing kind of unprecedentedly fast ramps of products coming out of R&D. And so we're having to ramp that from kind of prototype and demo volumes to full-scale production faster than we typically have to do, and we're adding capacity to make that happen.

With our suppliers, we're entering into longer-term purchase agreements going out 18 months currently at this point in time. We are redesigning board layouts in certain cases. If you can't get Part A, but Part B is very similar and with a relatively minor board turn, you can qualify a more readily available part. We're doing that, qualifying second and third sources in some cases. And so I think one thing that's important to note is Keysight is a high mix, relatively low-volume manufacturer. I don't need 1 million of anything, right? We tend to talk in terms of thousands, maybe tens of thousands. Those are easier problems to solve, and I think we have a good track record of managing through these types of supply chain disruptions.

So in terms of time line, it's hard to know when you're in it. But I would think over the next several quarters, we'll continue to make progress much as we have over the last several quarters and eventually see supply and demand equalize. As we've said when Satish and I talk about, this is a good problem to have. The biggest problem is not so much that the supply side is that the demand forecast just keeps -- we keep having to increment it north. And it's those incremental increases that the supply chain is struggling with. They can still provide the base volumes, but it's the repeated upward revisions that they're struggling with. So that's a great problem to have.

Let's talk a little bit about profitability. So your operating margin last quarter was, I believe, around 33%. Revenue growth has obviously been very strong. It's a little bit ahead of where your long-term targets were, I believe, in the low 30s. You've talked about 40% incremental margins when growth exceeds 5%. So how are you thinking about the longer-term model? Is there timing around any updates to that long-term op margin outlook you've provided? And I guess, as you think about some of the incremental -- outpacing some of the faster growth that you're seeing, reinvesting some of that into higher R&D and capacity investment.

Again, I think a lot of those things are true. First of all, we're very pleased that we've met the long-term commitments that we outlined at our '23 Analyst Day as it relates to gross margin and operating margin, in fact, exceeding them for this fiscal year. So that's a great outcome. Very pleased to deliver that. I think as we look forward, we continue to see that the business has a strong ability to drive incrementals, certainly at these growth rates, which are well above 5% in excess of the 40% target that we've laid out there, and that gets back to the differentiation of our portfolio. But as you have just noted, competing in these AI ecosystems and maximizing the rev opportunity in front of us is expensive, right?

We're investing in sales resources. We're investing in R&D. We're investing in capacity. We're investing in inventory to make sure that we capitalize on the opportunity that's in front of us. And so I do remain bullish on our opportunity to continue to drive incrementals at or above that 40% level. We completed 3 acquisitions at the beginning of this fiscal year. We've got them meaningfully integrated at this point, which is going to provide an incremental roughly $50 million of cost synergies going into next year, which will help with the incrementals as well.

Great. So let's talk a little bit about capital allocation. You've ended the quarter, I believe, with $2.6 billion in cash, gross leverage under 2. You've done, I believe, about $500-plus million of buybacks year-to-date. How do you think about uses of excess cash between organic investment, maybe working capital to support some of the accelerating growth, M&A, buybacks? Maybe if you could just help us prioritize this.

So first of all, I'd say that we think of ourselves as, first and foremost, an organic growth company. So we're going to continue to invest in driving that organic growth. I've highlighted a couple of times today as the priority. We want to maximize the opportunity that's in front of us. And so you see us investing in our -- traditionally, that's meant R&D and sales investments. I think increasingly in this environment, it's capacity, it's supply chain investments to again make sure we do that short-term optimization. I think, as I just said, you'll see us continue to lean into R&D and to continue to build on this differentiated and broad portfolio that we have.

And then beyond that, we look to strike a balance between value-creating M&A and returning capital to shareholders. I think we have a robust funnel of opportunities, continue to look to ways to plug technology gaps in our portfolio or expand into adjacent -- nearly adjacent SAM, but to expand the sandbox in which we're playing. And then beyond that, we're committed to at a bare minimum, be anti-dilutive with our buyback. But if you look over the course of the last 5 years or so, you can see that we've been significantly more aggressive than that with our buyback program. So I think a balanced approach but focused on organic growth first.

So as we sort of come up on time, 2 questions. First one, open-ended question to both. What do you think the market most misunderstands about Keysight today?

I think the indispensable nature of the solutions that we offer, especially as technical complexity of what our customers are trying to do in various end markets go up. That is probably underappreciated. When you think of connecting a user to a satellite that's traveling at 27,000 kilometers an hour. And the connection between the user and the satellite doesn't last for more than a few minutes. The wireless infrastructure today is not designed for something like that. A whole host of conditions have to be designed for. They need to be emulated. They need to be put in the lab environment. You can't launch a satellite without enough design validation, testing, everything -- all of that needs to happen in the lab. And we provide capabilities to enable our customers to do that. That goes for non-terrestrial networks that goes for AI clusters, things like that. So I think the indispensable nature of what we provide, especially as technical complexity of our customers' activities goes up, probably is not appreciated as much. I don't know.

I mean I think that's a great answer. Maybe the only other thing that I would add to that would be the uniqueness of the breadth of our portfolio. There aren't any other companies in this space that have the breadth of solutions, physical layer, protocol layer, application layer across multiple ecosystems, wireless, wireline, aerospace, defense, automotive, semiconductor, we have a really unique portfolio. And I think it gives us a perspective on the end markets that our customers value and that we can -- that it further informs the decisions that we make and the solutions that we bring to market.

Great. And then last question. If we're sitting here 12 months from now, what would you point to as key milestones or accomplishments that would indicate successful execution of Keysight's strategy and business model?

I kind of talked about my priorities, sustaining the growth momentum in AI, capturing these next speed transitions, ensuring the industry has enablement for moving into optics. We've got many number of products in the pipeline that are about to be launched. We have internal milestones in terms of when to launch them, where to land them in terms of key customers. So I'd be looking at that. Some of that we may be able to communicate externally only after the fact, but that's kind of what I'm looking at. Many wins in these new defense technology startups, expansion in both Americas and EU from a defense application perspective.

Again, many new products that are coming out. 6G, as we talked about, is going to start to inflect towards the end of '27 and into '28, landing all of those key engagements with the key products that intercept markets. Those are probably the things that I'm going to look for. And you'll probably see it in our PRs and other things when they happen.

Okay. That's a great place to end it. All right.

Thank you so much, Matt. Appreciate it.

Thank you, Matt.

Okay. Great. Thank you, everybody, for joining us on the fourth and final day of our Communacopia and Technology Conference. My name is Mark Delaney. I have the pleasure of covering Keysight. And yet again, this year, I'm really happy to have Keysight with us at the conference. With us from Keysight, we have Satish Dhanasekaran, Keysight's President and CEO; and Neil Dougherty, the CFO. Thank you both for joining us.

Thanks for having us. Thank you.

Well, Keysight is a really fascinating company, provides design, emulation and test solutions across both hardware and software. And a large percent of the company's over $7 billion of annual revenue is tied to customer R&D applications. Maybe Satish, you could start. Talk a bit about what's allowed Keysight to be so successful and be a key part of customer workflows in end markets that include communications, aerospace, defense, auto and industrial.

Well, thank you, Mark. Now again, this is a case of a business that has been around for 80 years from HP and Agilent, but really got reinvented as we were able to spin out and be independent and invest in our future. And the core of the strategy has always been how do we take a business that was largely hardware-oriented business and a product business and transform it into a solutions business. Not an easy thing to do, but that's the journey we've been on.

And that involved protecting the core, right to win and right to play for your customer base, which has known you for the core measurement tools and the metrology, but also pursuing a smart diversification strategy to add into applications that are much more mission-critical and more valuable for our customers. And that invariably involved adding more software and solutions content and so going higher in the stack that you described, from physical layer to application layer and -- to protocol layer and application layer really allows us to provide that cohesive portfolio and where we really benefit from with the breadth we have is the ability to take that R&D investment that we make towards the portfolio and monetize it over multiple end markets because ultimately, we serve engineers -- electrical engineers are our customers around the world.

We've seen evidence of the success the company is having with the last few earnings reports. Last 2 quarters, orders have been over $2 billion in each quarter. Companies that order to grow sequentially again next quarter? What's driving that growth?

Yes. I mean we're seeing a confluence of end markets that are inflecting simultaneously. We start to see that first with the wireline parts of our market that was starting to grow with AI, defense technology is becoming a bigger priority in today's geopolitical environment, Europe investing in its own sovereign technology is a trend. And then our industrial end markets, which tend to, sort of, have a bigger exposure to manufacturing and PMI is also doing very well with all of the build-outs that are happening globally. So we're benefiting from a number of tailwinds. We invested to have the portfolio and the differentiation, and we're benefiting from having the right portfolio meeting great markets at this moment.

Neil, maybe one for you on this topic. As you think about the guidance you gave into the fourth quarter, some sequential growth, given how strong demand is, and we've been hearing all week around the data center market, in particular, being quite robust, and you guys have been seeing that, too. Is there a reason that orders shouldn't grow more than normal sequential seasonality in 4Q?

I guess my first response to that is you're already seeing that strength in the $2 billion quarters that we've just put up already in the year over growth -- year-over-year growth that we put up through the first 3 quarters of the year. So I think that strength continues. Do we see a further acceleration at this point? Maybe. But right now, our base case is that you're going to see the strength continue, which should result in a normal seasonal uplift as we move from Q3 to Q4.

And Neil, staying with you, as you think about modeling revenue, right? You had orders of $2 billion, that's a nicely positive book-to-bill. Should investors be anticipating, at some point next year, revenue hits that $2 billion level as well?

Yes. I think certainly that's the trajectory we're on. We're a little bit supply chain constrained at the current environment. We guided Q4 to $1.940 billion of revenue, which is up almost $100 million from where we were in Q3. So that's clearly the trajectory. Given the supply chain situation, things are a little bit nonlinear. We expect them to be a little bit nonlinear, so exactly when we burst through that $2 billion limit or $2 billion revenue per quarter threshold is a little uncertain, but certainly, that's the trajectory that we're on.

Yes. Satish, maybe talk a little bit more around the supply chain constraints. It was a topic on the last earnings call, but any color you can share on that?

Yes. I think we're executing very well is the headline. I do think that every time we plan for a certain supply level, the demand keeps coming in harder and that's a good problem to have. But when you look at the macro supply environment today, whether it's for PCBs or components, you're often in environments where larger players are sucking up big chunks of capacity from the supply chain.

And so the flexibility to respond in the short term is just is not there. So we're planning ahead. That's why I said on the earnings call, we're taking an 18-month view of supply and making some investments with our supply chain and in our own internal supply chain to be able to meet the demand across these markets. We feel really good about the portfolio as well. In through the 2023 and '24, we made some -- continue to make investments in R&D towards this future that we saw with wider bandwidths and more complex systems.

And so the portfolio that we have now starting to launch is meeting great customer demand. So the demand for our new introductions have been a lot stronger right out the gate, which also compounds the ability to ship revenue in the near term. But we're working through it, and I'm confident we'll -- in a couple of quarters, we'll get through it. And I hope the demand continues to be more challenging in a couple of quarters, and we'll continue to work on the supply side. It's a good problem to have.

Yes. Absolutely. Yes. So hope over the next few quarters, and then maybe one for you, Neil. Any way to quantify how much revenue maybe you're not able to meet at the moment given the supply situation?

Yes. So first and foremost, again, I think given our differentiation in the marketplace, what we're really talking about is delaying the recognition of revenue or our ability to ship, not that we're walking away from business, given the supply chain constraints. I think -- just as a way to think about it, we busted through the $2 billion order level in Q2 with -- approximately $2.050 billion. I think it was $1 million or $2 million above or below that. And generally, we have a 6-month order acceptance policy.

So normally, you'd expect that $2 billion plus of orders to ship by Q4, we've guided to $1.940 billion. You'd say, hey, maybe there's $100 million in there that's pushing out beyond our normal shipment window. Practicality is probably less than that because we have deferred revenue from software, some longer-dated programs, but I think $100 million is a way to, kind of, bound it at this point in time.

Okay. I know double ordering is hard to know when that's happening. And I remember one CEO said to me at CES. He said, it would be great if -- when orders came in, if there was a little memo saying this is a double order. And I know it doesn't really work that way. But I mean, how does Keysight assess the risk that some of this $2 billion is because of supply chain constraints and double ordering?

I mean it's hard to -- as you said, it's hard to really know, but we -- from the -- to the extent that we see -- we have line of sight to what our customers are needing our products for. And as I mentioned on the call as well, in some cases, we're also having line of sight to what the entire ecosystems need are from likes of NVIDIA to their supply chain to what the hyperscalers are ordering. So we feel like all of this is towards real demand that's going into the AI data center.

So there's not a lot of risk in -- you know, history in this business would also suggest that we have had very low cancellations historically. Our customers are needing our products out of the gate, and they will take them if we could ship more right now.

Yes. If I could add to that. We're not seeing broad supply chain problems across a broad section of the portfolio. It's pretty concentrated. 20, 30 SKUs focused on this data center ecosystem. And if you look at those 20 or 30 SKUs, they're very highly differentiated in the marketplace. So in some cases, there isn't really another equivalent alternative in the marketplace for them to double book if they wanted to.

Okay. Very helpful context. Well, some of this demand, of course, coming from market, but a lot of it has to do with everything that Keysight has been working on. And you mentioned, Satish, this transition to being a full solutions provider in so many ways you're helping customers solve their engineering problems. You see that in the financials. So software and services, 33% of revenue last quarter; recurring revenue, you guys estimated, was just under 1/4 of total sales. Do you think longer term, where could those ratios get to?

Definitely higher. And one of the things that we think about is how do we make our portfolio more valuable to our customers and differentiate it, and I even use the word unique in some cases. But when we have that type of portfolio and we can connect that and offer solutions to a customer, you're really helping them with your time to market. And when you have that dynamic, it allows you to also have a conversation about the value you're bringing to the equation.

And so you start to see our gross margins go up sequentially also this year and to record levels of 68%, which we're very happy with. We still see more opportunity to grow that. And equally, as we sell solutions, we're also able to service the customers over a longer period of time. And that's where the services attach rates are important and that's recurring revenue for us and the software parts of the portfolio are important. And what we're seeing this year is a little bit of more manufacturing business that we are winning in the AI data center so that numbers of the recurring revenue you quoted reflects the mix shift that you're seeing. But I think over the long term, we remain confident that we'll continue to grow that ARR and services as our solutions get more adopted.

On the theme of AI, I know it's driving a lot of the demand for your products, but do you see risk of AI disrupting any of the products you provide?

Not really. I think AI has really been a tailwind for us from a market -- AI data center market perspective. But even when we look broader, I think customers are changing the way they're thinking about the engineering workflow. And anytime there is change, I think there's an opportunity for us to be a consultant and partner with them and help them rethink how things get done, add more content to our own portfolio, which we are in the process of doing to make it easier so that it fits into their workflow pretty well. The simulation parts of our tools that we have are highly differentiated and they're very focused on providing the most complex physics capabilities, whether it's in RF or high-speed digital or photonics. And so we're not involved in any of the areas where we feel like that's a risk because of AI.

Okay. I think software is over 20% of your revenue overall. To what extent is that software running on equipment of other test companies?

Most of our software runs on our hardware, right. And I would, sort of, characterize it as there's a software that's an app that really enables our customers to drive insights in our physical layer and the emulation platforms that we have, have a higher software mix and they allow the customers to emulate real-world conditions in a lab, and that's another differentiated capability. And then we have the simulation business, which is all software. So I suppose it can run on any server.

Okay. Very helpful. I wanted to talk around your exposure to R&D relative to production test. Keysight's always been more on the R&D test side. But talk about where you are today, how that ratio may vary by end market?

Yes. We still think the majority or 50% plus of our business historically has been in the R&D labs, and that's been an intentional part of the strategy. We've also added some operational piece to the portfolio with the acquisitions of Ixia and some of the Spirent businesses that we have, building more differentiation as we go through our strategy. I think what we're seeing now with the AI data center ramping, simultaneous capacity ramps that are occurring in our prime contractors in our defense business, and also the China Plus One strategy that's occurring in Southeast Asia, there's a lot more manufacturing activity, and we're winning there.

It's a good margin business. We're winning. But we recognize that some of that is episodic, but over the long term, we continue to focus on growing that R&D parts of our portfolio because it builds more sustainability to our revenue stream.

As you were saying, you have some operational exposure, too. I mean, as manufacturing parts of these industries grow, I mean, you still participate. At least selectively, where you can get the right profit margins?

Absolutely. Yes, high-value manufacturing.

We spoke on emulation and simulation already. And I think those have been strategic initiatives to get even bigger there as you described at the last Investor Day. Maybe talk a little bit more around how those parts of the portfolio, perhaps, could grow in the longer term?

Yes. I mean, we're quite excited by -- even as we're winning in the physical layer of AI as infrastructure is getting rolled out, people are testing the physics associated with electrical and optical signals, and we're agnostic to that and from a portfolio, we're working to characterize how these AI data centers would behave under a range of conditions under different LLMs and other things. And those kinds of use cases are growing in today's world where customers are using a very heterogeneous stack of hardware and software capabilities.

So the ability to emulate how those would behave in the real world, how the data will flow, where the bottlenecks are. I think those are the kinds of things that we're working on right now, and we feel good about that part of the portfolio. And as 6G which is, again, the next generation of communication technology and wireless is going to ramp, that's going to be another tailwind to our emulation part of our portfolio.

On the simulation side of the business, we historically had just a small presence in the RF part of the portfolio. We've then built out high-speed digital simulations. On top of it, we've added multiphysics capabilities with acquisitions of ESI. And most recently, with the Optical, we've really built a nice set of portfolio of tools for our entire simulation business, which will exceed $0.5 billion this year for the first time and will be a high recurring revenue from that part of the portfolio.

We feel good about it. And as we bring those assets together, our ability to solve many more challenges for our customers just goes up because we now have the full stack there.

So the $0.5 billion number, that's just simulation or simulation and emulation?

It's just simulation.

Okay, simulation, Well, let's double-click on the Communications Solutions Group. Your biggest segment as a percentage of revenue, a little under half the total company typically on an annual basis. On the 2Q call, the company has said that in the first half of the year, AI revenue already has surpassed all of what had been done in fiscal '26. So in that $500 million to $600 million range. And then last quarter, you talked about AI accelerating even more. What specifically, from an AI standpoint, is driving that kind of strength in the CSG segment?

Yes. I mean we, sort of, referred to our AI exposure in our wireline business. Historically, if you look at our commercial communications segment, 2 components, wireless and wireline, wireless was slightly bigger than wireline and for the first time this year, I think we said wireline has actually exceeded wireless, and that shows you the demand in the AI parts of the business is just going up. And the first half was strong. And by all indications, the second half could be stronger than the first half from everything I see today.

And I would say the R&D part of that portfolio is growing nicely, equally, the manufacturing exposure that we have from all of the infrastructure build-outs ramping up and our portfolio being in a great place. So we're seeing more demand for both parts of the portfolio there for the AI data center.

As you think about the AI part of the business within CSG, can you help investors think about how much may be coming specifically from optical tests, so NPO and CPO type applications?

Yes, we have a broad exposure to different components and different customer types. So our breadth is really a source of strength and scale for the business. When we think about the interconnect part of the portfolio, if you -- it's a little over 1/4 of the total business from an interconnect point of view, and we do service both optical and electrical interconnects there. And what we're seeing is customers are working on some complex physics problems. And there's more scale to build for the optical side of things. Right now, copper is the predominant contributor to the business.

Okay. Well, I want to talk on the hyperscale part of the business, and Keysight's been growing its direct hyperscaler revenue stream. Can you share more what products Keysight is doing when it's going directly to hyperscalers?

Yes. I think it's some of the same set of tools and portfolio. I mean, one of the things we observed in the last 4, 5 years is an inflection in adoption of new technology driven by hyperscaler scale that they're bringing to wireline networks. The adoption rate from going from 10 to 20, 40, 80 to 100, to 400 now and 800. I mean, you look at those curves and what we're starting to see is those design cycles compress, customers are going faster, the next generation waves that are overlapping, really creating a nice tailwind for us to grow our contributions in this marketplace and more silicon designs coming out from the hyperscalers is another tailwind for our business, more customers to serve and more tools, which has also been another tailwind. I also think that even though our -- we size the AI exposure from a hyperscaler point of view, to be about 10% of the total mix this year, but I think that is a little bit underrepresented because of the influence downstream that the hyperscalers have with regard to their supply chain.

So that number is actually a lot bigger. So we're participating meaningfully in the physical layer opportunity. We're working with a number of hyperscalers in the emulation opportunity. We feel good about the runway that exists as we look ahead.

Very helpful. Maybe we can turn to the wireless part of the business. Obviously, there was a downturn post some of the 5G build-out that the whole industry saw, but wireless has been growing. It grew pretty significantly on the last -- in the last quarter and contributed to that $2 billion total. Can you talk a bit more about what's driving the wireless orders? Because I think 6G is a little bit out in time.

Yes. I think we're excited by the early start we're seeing in the 6G business. So that was one of the contributors. We also see the non-terrestrial network opportunity to be potentially bigger as we look ahead. But again, another contributor to growth for our wireline business -- for our wireless business. And third, I think the supply chain of wireless, again, driven by the activity around AI is -- was a key contributor to growth in that part of the portfolio.

And on 6G, talk a bit more about when you expect 6G to become more meaningful?

Yes. The reason I mentioned this on the call this time, Mark, was a lot of things started to click for us, and we started to see the standards start to make traction. We started to see more investments from our customer base, which is all in the R&D space in 6G, but from not just research investments, which we know from universities, which tends to be episodic, but more programmatic investments from commercial customers, from NEMs, from chipset companies in the 6G space. Conversations with operators have gotten -- have switched from, let's talk about 6G later to let's discuss 6G. So that was a big tone shift as the year progressed. So these 3 factors got us even more excited.

I think we've launched some industries' best channel emulators to model how channel conditions would behave in the context of 6G that's getting broader adoption. Our non-terrestrial network work that we have done is now starting to merge in with 6G, which is another area we're really excited about. So as I look at the landscape here over the next couple of years with 2028 being a key milestone for the industry with the U.S. Olympics that's coming up, I think that serves us a really nice landmark for the industry to shoot for, and there's going to be a lot more innovation in this space that we as Keysight are excited to participate in.

How different are the products that you need to deliver for 6G relative to what you did on 5G?

I think the physics is changing. The frequencies are going higher. The bandwidths are likely to be higher as well. Latency is a new dimension with 6G, especially as you start thinking about non-terrestrial network applications. I think ISAC, Integrated Sensing and Communication, for the infrastructure is a new application area. So we feel good about the physical layer opportunity, but equally a lot more emulation use cases for us to grow into as we think about the opportunity ahead.

And how confident are you that Keysight is going to be in a leadership position in 6G like you were in 5G?

We've invested ahead. We know -- we recognize that that's one of those things that we needed to do. So despite the downturn the wireless industry was in, in '22, we started some early investments, working with our clients, collaborating with them, building up our tech stack, and we feel good about where the execution is. We still have a long way to go, so we'll remain focused on it. But we feel good about our ability to bring that solutions approach that we're so successful in 5G and carry it on into 6G as the industry ramps.

And the last part of the wireless portfolio that's been seeing some strength and you touched on a little bit already has been satellite broadband. How big of the wireless portfolio is that piece of the business?

Yes, I might have cited on one of the calls, did I?

I don't think we've cited.

We have not cited, okay. Well, it's still a smaller part of the portfolio. But I would say, when I think about the multilayer communication networks of the future, it is likely to be whether a satellite service on its own competes with the terrestrial service. It remains to be seen. But I think when you start to build coverage and capacity together with satellite networks, that augmented model seems to be where the puck is moving to. It creates more opportunities for us to provide solutions. We did acquire Spirent, which gives us the best-in-class ability to simulate satellite constellations and how they behave in the real world under various fading in other profiles.

So we bring that in with our channel emulator, with our network emulator stacks, it's quite exciting. I think the view of -- I heard one of our customers describe satellites as base stations in the sky. And I think that's the way to think about it, then you can start to think about the handovers that occur every second, a lot more complexity and we love complexity.

Yes. Absolutely. Maybe we could shift gears a little bit, talk about aerospace and defense. That's a business where revenue has been up year-on-year for the last 7 quarters. How sustainable do you think that is? And what's driving it?

Yes. I mean, it's been, I would say, a business that we've been in for a long time. We think we understand it, it's a GDP-plus marketplace, as we have called it, and we've seen a pretty meaningful shift in demand. And I think there's multiple drivers there. One is, I think, a very positive development in this unfortunate geopolitical environment is Europe's spending on defense. And I don't know that, that's going to be a temporal thing. I think it sustains from every conversation we have with customers. I think they're investing, and it's not just a year or 2, I think it's going to be long-range investments they're making for sovereign technology.

The second one is our prime contractors today are investing in the short to medium term for capacity adds that are critical for today's situation of wars and other things.

And the third is our own investment in defense technology. And the Neo-primes have really changed the dynamic. What was once a, let's call it, a longer-term business opportunity where you would have to -- Primes would bid and the government would have to fund. And I think it's being supplemented with the Neo-primes that are growing faster. So those 3 are all happening at the same time, and we're really pleased to see the business grow at the levels it's growing, and we're continuing to invest in some unique applications, which will continue to keep us differentiated in that market.

It sounds like you're able to participate in the European build-out. I mean I think historically, U.S. DoD was half the A&D segment revenue roughly, if I...

The U.S. business was half. That included the DoD spend, but also included the Prime contractors.

Yes. I mean you -- I guess, you're able to participate though in the European spend, even though you're a U.S. company?

Well, absolutely. I mean we've had long-standing relationships in Europe. We have R&D teams there. We have our sales and application teams and customers. So yes.

From a growth perspective, Europe has actually been the star. I mean we've seen really strong growth in the U.S. and that strong growth in the U.S. has been outpaced by our growth in Europe this year.

Okay. Very helpful. Maybe let's talk on the last business segment, the EISG portfolio. There's general electronics, industrial, semiconductor fabs, there's auto business in there. So a lot of different pieces. You've been seeing some growth there. Is this, sort of, a onetime pickup? Or do you see some sustainability to the EISG growth?

Yes. Let me talk about the semiconductor, right? I think this is an area where even as early as 2023, we saw this big wave of silicon photonics, which again, now in the hindsight, you look back and say, it all makes sense, it's the AI data center is driving a lot of the optical activity for chips. But the silicon photonics work that we did has seen tremendous uptick with a lot of the fab -- the big fab providers.

And we expect that demand to continue to be strong as we look at some of the forecasts from these customers in that space. And then when I think about the advanced nodes and other tailwinds there, they feel good about that part of the portfolio. It's in a strong place. The second part of the business, which has been a bit of a surprise for us when we started the year, we didn't expect the auto business to be growing double digits. It's starting to recover and growing strongly as well.

And the third part of the business is really the general electronics part of the business where we're participating in all of the manufacturing build-outs that are occurring. One of the applications we call out was PCB manufacturing. I mean this was a small part of the business, but all of a sudden, PCB manufacturing, PCB is where the constraints are in the industry and people are scaling rapidly and we're participating in that meaningfully as well.

I think speaks to that long tail of data center demand pulling HVAC equipment and PCBs and connector and all sorts of different industrial products. On auto, I mean, when you're seeing the pickup, is it kind of more traditional auto companies? Or is it robo-taxis and you do battery test, which is also going into some energy infrastructure products, even in the support of data centers. So I mean, when you say auto, maybe you could just double click what actually is behind that?

Yes. In our Automotive and Energy segment, we do have an initiative around grid and the new batteries for the grid modernization and those allocations, that's a smaller part of the business. We did focus on this autonomous trend and take some of our IP that we use in commercial communications and provide solutions to that marketplace. That's doing well. There's also some pent-up demand in manufacturing for auto as well with a lot of these humanoid and other things in very early stages, but we're participating in those applications in that segment.

Great. We have 4 minutes left. I wanted to close with some financial questions. So Neil, let me bring you in here. Let's start on some margin topics with some of the recent M&A around Spirent. On the last earnings call, you talked about getting to 80% to 90% of the way there on your $100 million synergy target. You did that ahead of schedule. Put that into context, where could the recent acquisitions get to in terms of margins relative to the corporate average over time as you execute on these.

Yes, I mean we said at the time that we did those acquisitions that we expected them on a post-integration base to be operating essentially at the company average. And so we're still -- we did a big systems integration in Q3. So we still got a lot of dollars coming out here in Q4, but as we enter '27, we expect those acquisitions in the aggregate be contributing operating margins north of 30%. So we're well positioned to achieve those objectives.

And where were they last quarter roughly?

So the 2 acquisitions that came out of the Spirent-Ansys acquisition, those are software businesses pretty highly profitable. The Spirent business was operating, kind of, low single-digit operating margins as we bought it when we bought it 10 months ago now and has been, kind of, on a steady trajectory again towards this 30% objective, which is where we expect them to operate in fiscal '27.

Okay. So basically, next year, they'll be in that 30%?

Yes.

Okay. And that's, sort of, even towards the start of the year or is like by the end of the year, you guys...

No, I would think they're certainly going to be close at the start, but whether they're all the way there, but it's certainly very close at the start of the year.

And how should investors think about incremental margins more generally? I mean, I think the framework is, if I'm not mistaken, mid-single-digit growth gets you 40% incrementals?

Yes. And obviously, we're growing faster than that at the moment. So you've seen us deliver incrementals that are north of 50% in this environment. I did say on the call that if think of our business operationally, I expect us to exceed those 40% incrementals next year synergy capture being one of those things. Just an important note. I inserted that word operationally in there. We did have a onetime benefit from the Supreme Court decision invalidating the tariffs about $100 million of cost coming out in '26. So you need to normalize '26 for the onetime events and then apply the incremental going forward, but we'd expect it to be north of 40% in '27.

And as you're seeing some of the supply chain constraints because of how good demand has been and certain components are getting more costly. I mean it sounds like you feel like you could pass that on.

We do. Either pricing or again, a lot of these things that are constrained right now are -- they're not high dollar components for us. They're constrained components. And even if the costs were to, frankly, go up significantly on a percentage basis, it doesn't meaningfully move our total material cost, and I don't expect it to impact gross margins. That being said, we do have a differentiated portfolio. We're constantly reevaluating pricing in the marketplace, and I do think we have an ability if we do see cost pressures to pass those on to our customers.

Very helpful. Maybe I can close one out with one for you -- I close out with one for you, Satish, on capital allocation. I mean M&A has been part of how you built this company to what it is around solutions and helping customers solve these complex challenges. The deals are in a good spot on the integration side. Balance sheet is in good shape. What's your thoughts from here in terms of capital allocation, organic funding? Do you think about more inorganic activity?

Yes. I think first and foremost, we've always been an organic-first company. We believe in innovation. We take a lot of pride in having folks that have compounded learning and can be really specialized in their fields that can provide these solutions. And so we continue to invest in the organic growth of our business, and that's gaining traction.

The second one is, given the supply chain situation, we are considering looking at some of our smaller suppliers and saying maybe they -- that capability belongs in key sites. So that will become one of the areas we're considering for our own acquisitions, if you will, that's different than maybe what we have done in the past. And acquisitions, we tend to look at them through a lens of discipline.

As we've always done, we take a look at it. We have a healthy funnel of opportunities. While we always look and say, can we generate a return greater than WACC. And you've seen us be patient through cycle, and we -- I thought the timing on our Spirent acquisition relative to the 5G was a really good time to make acquisition of an asset that we long wanted to own and perfectly fit our portfolio. So we'll continue to be remain disciplined on the valuation front.

Unfortunately, we are out of time. Neil, Satish, thank you for joining.

Thank you.

Thank you.

Welcome to this webinar on 800 gig to 1.6T, Making AI Networks Work at Scale. My name is Linas Dauksa from Keysight Technologies. I'm joined by Jim from Dell; Ryan from Siemon; and Avik from Keysight.

Let's jump into the very first question here. AI infrastructure performance depends on the entire system. What fundamentally changes compared to traditional data center networks? Who'd like to take it?

Yes. Maybe I can start with it. So the traditional networking is more like optimizing for flexibility of traffic, more general purpose traffic, whereas the AI networking in today's world is more for optimizing those GPU to GPU elephant flows, the GPU to GPU training traffic, right? I mean, I can take an example of, let's say, TCP, right, our good old friend TCP, it backs off when there is congestion, right? It's good for general purpose traffic, good for web traffic, but maybe catastrophic for AI traffic, right? So that's why, in AI networking, we use technologies like PFC or DCQCN with RoCEv2 to do flow control, which is -- gives more network utilization with respect to GPU-to-GPU training traffic.

And when you say large elephant flows, you mean large flows that are difficult to load balance, correct?

That's exactly right. Large flows created by multiple GPUs talking at the same time, and they're hitting the switch all at the same time creates a microburst.

Jim, Ryan?

I was going to add something from the cabling perspective. Traditional networks are north-south traffic with a limited amount of connectivity and AI networks are east-west with a lot more connectivity, exponential more connectivity and things like power and price add up and just multiply with these new connections.

Absolutely. And let me pile on both of those, you're both spot on. But it's also interesting to see as we go to 1.6T how the heat, the thermals are rising dramatically to the point where the entire system design is altered. You go to the top end now, you absolutely have to go with a fully liquid cooled solution, and that affects the transceivers, the modules, servers, storage, networking, everybody has to take that into account. So it's a big part of the design now.

Great answers. Second question, what did it take to move from a theoretical 800-gig design to a working AI fabric? Jim, can you take a lead on that question?

That's a great question. And so many things behind the scenes. And at Dell, we own the entire stack, right? We're selling servers, huge amount of servers, networking that goes with that, storage, everything. And so again, just being able to take into account each part individually has to be examined for thermals, is it doing all right. You have 8-GPU server in there. Is it going to melt the rack? Or are we now handling as everything gets dramatically increase. So accounting for that, accounting for then the cooling also in the networking side. But not only kind of the thermal environmental information, but then also just the traffic flow. So actually, these are implemented using rail topologies. So you don't just have point-to-point 800-gig connections anymore. You really want to reduce the number of switches dramatically and improve the performance. You actually implement that as a bunch of 200 gigs. So the connectivity now become even more complicated, but you save a tremendous amount of overhead and NRE upfront because the number of switches drops by like 35%. That's dramatic.

No weak links. Ryan?

Yes. And there's also no redundancy either. So these models work. And if something goes wrong, you have to start over. So performance and just making sure that things work the way you expect it to is more important than ever before.

Yes. Getting back to those checkpoints, that's painful.

Yes. No, I think Jim covered it well. Only like one thing that I see working with all our partners who are building switches is like you have the silicon doing the plumbing for you. But then on top of that, you put your secret sauce, your load balancing algorithm that differentiates you from the other vendors, right? And this very critical component in building a switch, which is fit for the AI fabric.

Next question. How do you decide between DACs, active copper and fiber at 800 gig? And what trade-offs actually matter? Ryan?

That sounds like the perfect question for me. So DACs are the low-power, low-priced option. And when we're talking about AI at scale, there's lots of connections and the connections add up. So DACs are something that customers want to use, but they're limited by length. And so typically, the length is around 2 meters, 3 meters depending on speed. And then there's active copper. Active copper extends the length out -- for copper out to about 5 meters. It can go beyond that. And it also lowers the cable diameter. So you're able to extend the length and also make sure that it's not a beefy cable that you can't route, right? So you want to route these cables. Outside of that, customers are using transceivers, more transceivers than AOCs just because of serviceability at these higher speeds. They're working really hard and people want to use transceivers for scalability and then also serviceability.

I assume there's an airflow problem if you've got a lot of BC cables right in front of your switch, right? And then...

It really depends on the rack layout. So if you have like a really dense rack that has 18 servers in it or more, you can't route a cable horizontally. But if you have an air-cooled system, some of these air-cooled systems only have 4 servers inside of them. And when you have 4 servers, you can route horizontally outside of the cabinet and make at least a 3 to a 4 adjacent cabinet connection. And so you really don't want to have cables in the way of airflow. But depending on the rack layout, air cooled, there's ways of going horizontally. And then for high density, you have to go up and over and you usually get about 2 adjacent cabinets.

I would just throw in, I agree with everything you just said. And it's interesting, at Dell, we did, what, almost $2 billion of networking revenue last year and seeing these major deals how -- sometimes they can say everything is going to go with one type of optic, give me 100,000 of those or more, or they say, "Hey, for the close ones, we want to save power, we want to save money and for that case, give me the DAC cable." And so that is usually part of the equation. But as we move to 1.6T, the length is coming way down in terms of what's actually achievable. I mean there's the theoretical and then there's -- when you build a box, not every port can do the theoretical. You have a few ports typically that are going to have good range and then the rest have less. So it's a complex equation.

Yes. There's different ways of laying it out. I've seen even at Dell World last year, there was the middle of rack where the switch was in the middle of the rack, so that way you could use DAC cables going up or down or copper cables. And so there's lots of different ways of trying to utilize DACs because you can save a lot of money. Like I said, there's lots of connections happening and it adds up quickly. So anywhere you can find an application to use copper cable, you're going to get a great savings for it.

Power and heat as well, right?

Power and heat as well, yes. But price really does add up quickly. The DACs are a fraction of the price.

I mean I was thinking about a very interesting thing happening with the copper and the optics story. I mean it's not only about the connectivity and the Layer 1, Layer 2 connectivity. By physics, the optics is more error prone than copper, right? And as a result, people will believe that there will be packet drops and look at the other technologies which are evolving to recover from packet drops at link layer, right? Like, for example, the Ultra Ethernet, they have -- unlike recovering from packet drop at the transport layer, ultra Ethernet technology like LLR, recovering at a lower layer, is going to become more and more important as we see more optics in this scale up and scale out fabrics, right?

What about latency with DSP and non-DSP?

I think most of them are DSP. There are some LPOs as well and LPOs definitely have a benefit and reduced power that adds up over time. But DSP is popular and not all switches can do LPOs. I know that Dell Switch can do the LPO. I think that's with the Tomahawk chipset. LPOs add up with savings with power and heat, that's great benefit.

Yes. It's interesting, LPO, the DSP is the single most expensive component in that transceiver. It's the single most power-hungry component in that -- it's also the single most prone to fail of all the components in there. So it's a triple threat, but it's also the brain that makes it work in many circumstances, whether it's realigning packets or gearboxing or whatever. So if you can go to an LPO, you can save a lot of money and you have a better connection overall. That's what that demo was all about, which was great.

Okay. Next question, what do -- what does realistic AI workload emulation look like? And how close is it to production? I'm going to direct this question to Avik.

This is a very important question, and there are different angles of looking at it. I think we need to touch upon all these angles to answer this question properly. First one that I will talk about is the transport. The transport layer is fully stateful in case of AI fabric. What this means is that when the network sees congestion, it pushes back the traffic and the transmitter throttles the traffic. The next level is there is congestion control at even queue-pair level, right, much granular level congestion control pushes back granular level of flows. The ultimate level is doing packet spraying, right? When you packet spray, then, okay, you are increasing entropy in the network, but at the same time, you can see the receive NIC receiving packets out of order, right? So the receive side of the NICs will need to handle that. And finally, there could be retransmission in the network based on packet drop or whatever happening. But all of these creates a very stateful mix in the transport. So it's very important to emulate that from the stateful nature of the transport when we are emulating a transport.

The second part that I want to talk about is on top of this transport runs the collectives, right? And every collective has a different algorithm using which it does the data transfer, right? It's extremely important to emulate those GPU-to-GPU data transfer behavior, right? And finally, I think, Jim, you were talking about this a little bit earlier, is the topologies. The topologies for GPU-to-GPU data transfer, they favor something like a factory or maybe a rail-optimized topology, which are designed to reduce the number of hops or increase the bandwidth in those networks. So a realistic emulation, when we, as a Keysight, we build these realistic emulations, we take care of all of those angles to make sure there is fidelity in our emulation of AI workloads.

I think you nailed it.

Next question. What changes when you shift from testing components to validating a full AI system? Let's do a quick round robin on this. Who would like to take the lead?

I'll jump in on this one. So great question because we've kind of grown up used in the networking, being able to test individual devices and they're all interoperable in the field and pluggable and ours, yours, whatever it doesn't matter. In the AI world, especially as we get out to 1.6T, all of the features I just went through are now dependent on what NIC you have in there, what features are supported in the switch itself. And so individual component testing is just not going to get you there. You have to have end-to-end full complete testing in order to really guarantee that the performance is there, the bottlenecks are nonexistent and that everything is clean.

Yes, exactly. I mean when you are doing a component testing, you're looking at like pass/fail with respect to certain KPIs. But AI networking is all about tuning the fabric to get the best network utilization from it at a system level.

It's all about confidence in AI. So the more testing you do, the better. So I could do a Layer 1 test on my table. But if I work with you guys and do a system-level test, it just increases the confidence just so much more, and that's really what's needed in AI workloads.

I mean, the 1.6T spec isn't finalized yet, the 802.11dj. So as we're doing these interops through whether it's Ethernet or Ethernet Alliance or OIF, I'm seeing feedback back into the standard as a result of things that are being learned. So -- and my favorite line is no weak links in this process.

Absolutely.

Next question. As we move forward toward 1.6T, what lessons from 800 gig still apply and what must change?

I'll answer that one. So what still applies is industry standards, so industry standards, 802.3dj, for example, for 800 gig, 802.3ck. A lot of the MSAs carry over and those MSAs are being used at the higher speeds. But at 1.6T, it looks like there's going to be more proprietary type systems, things that are a little different than industry standard. There's early adopters where there's customers that are deploying things before the standards are actually finalized. And so 1.6T is still going to have industry standards, but there's a lot of different options now. It used to just be transceivers, but now it's a lot -- there's co-packaged optics. There's a lot of other options as well, and it's uncharted territory.

Yes. I mean, I think from a different lens, the load balancing still remains the same, but the pipe is which is getting fatter in this case. But the point that I was touching upon a little bit earlier about optics versus copper, it kind of applies here. With 1.6T, you get more complex optics, which is more error prone, more bit errors. And as a result, I think the recovery technologies at link layer are going to be more and more important like the LLR defined in the Ultra 800 standard.

Right. Yes. The robust nature has to be perpetuated as well as expanded and improved upon even more. For the first time, we're seeing optics with 2 ports on the transceiver, okay? Now they are ubiquitous. They're everywhere, right? So you have 800 gig, you generally see that deployed as 2x400, 2 MPU ports that plug into 1 transceiver. That didn't exist before 800. With 1.6T, that continues, right? We'll have 2 800-gig transceivers in there. And so that's something that we learned and has performed well, and we'll just continue to see what else -- what other innovations are going to come our way.

Yes. Dual ports continuing from 800 gig to 1.6T.

Well, let's do a lightning round. One minute each, one question for each of you. Jim, one design principle people should never compromise on?

One design principle. My first thought is quality, but I think really one design principle is the full end-to-end evaluation and there can be no compromise. You can't say, well, I'll just get that component. I'll get the next -- what's the cheapest NIC? No, you can't do that. You have to have a system that you have extreme and utter confidence in, end-to-end, soup-to-nuts, including the connectivity for every single link. If you have one part of the network that lags, then that introduces problems across the board. So having all of the link layer protocols and everything, the congestion management on the NIC, on the server, on the adapter, it's got to be there, and you have to know it's there. You can't assume it's going to be there. "Oh, well, those guys, it worked for them, so it must be good for me." Your case is going to be different by nature. So...

Ryan, one infrastructure mistake to avoid?

I think it's all about planning. So you want to plan for scalability. So there's entry level, then you might need more GPUs later and just making sure that that's a part of your plan is scalability and how you're going to grow your system.

Avik, one validation step people skip, but shouldn't?

Yes. When you are validating an AI fabric, do validate it with statefulness because if you are validating with stateless traffic and believing that it's going to work, it's not going to uncover the chokepoints, which is going to be in the real network.

Jim, Ryan, Avik, thanks for an excellent overview of what it takes to build and validate AI networks at 1.6T. We hope this gave everyone a practical takeaways to move faster and deploy with confidence from design all the way to proven results. What a great honor to have these 3 gentlemen here. I hope you learned something in the audience. I certainly did. Thanks for joining us.

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vice President of Investor Relations. Please go ahead, Ms. Morali.

Good afternoon, and thank you for joining us for Keysight's Third Quarter Earnings Conference Call for Fiscal Year 2026. Joining me on today's call are Satish Dhanasekaran, President and CEO, and Neil Dougherty, Executive Vice President and CFO; Kailash Narayanan, President of the Communications Solutions Group; Jason Kary, President of the Electronic Industrial Solutions Group; and Steve Yoon, Senior Vice President of Global Sales.

Following the prepared remarks from Satish and Neil, we will conduct a question-and-answer session. The press release and information to supplement today's discussion can be found on our Investor Relations website, investor.keysight.com. During today's discussion, we will make forward-looking statements about the financial performance of the company. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties.

Information about these risks and uncertainties can be found in our most recent Forms 10-K and 10-Q filings with the SEC. We do not intend to update any forward-looking statements. In addition, we will refer to non-GAAP financial measures and reference core growth, which excludes the impact of acquisitions or divestitures completed within the last 12 months and currency movements. The most directly comparable GAAP financial metrics and reconciliations can be found on our Investor Relations website, and all comparisons are on a year-over-year basis, unless otherwise noted. I'll now turn the call over to Satish.

Thank you, Liz. Good afternoon, and thank you, everyone, for joining us on today's earnings call. Keysight delivered another outstanding quarter with record results and broad-based growth across our markets. The outperformance was driven by strong execution by the team and demand extending across Keysight's full suite of differentiated products and solutions. Orders grew 56%. Revenue grew 36%

[Audio Gap]

customers globally. Let me share a few examples of the diversity of our business. First, silicon designers are adopting key sites recently introduced high-performance digital and RF solutions for the lab to validate new designs with system-level requirements to ensure interoperability, performance and reliability. Second, connect manufacturers are using Keysight's high-fidelity analyzers to characterize the performance of high-speed back lines to ensure signal integrity and manufacturing [indiscernible].

Third, switch designers are using Keysight's emulators to validate network. solutions into their development pipelines. Looking ahead, the scaling challenges associated with AI data center deployments are driving a multiyear industry road map for new architectures, evolving technologies and new standards. We're well positioned and continue to invest ahead of transitions to capture these opportunities.

Turning to wireless. Orders grew significantly again this quarter with rising customer investment in next-generation connectivity and continued demand across the supply chain supporting AI infrastructure scaling. In June, the 3GPP plenary meeting in Singapore confirm the. nation around higher speeds and new spectrum. The emerging technology areas our AI RAN, integrated sensing and communication or IAC and non-total networks or NTM.

Each of these is expanding the Solutions continue to build. Our solutions have been architected around a flexible platform that enables customers to validate various candidate technologies by providing insights from the radio channel, network, device and satellite emulators for early 6G use cases across terrestrial and non-total networks.

Keysight's comprehensive portfolio spanning the physical layer to emulation tools is helping us secure early wins with industry leaders.

Turning to aerospace, defense and government. Orders were up double digits with growth across all regions, driven by a heightened global focus on deterrent modernization is raising the bar on performance across the market.

In radar, the industry is accelerating its shift to advanced radar architectures. These use cases require high-performance validation solutions, leading to rapid adoption of our multichannel RF solutions and [Audio Gap] our engagement with industry leaders remains high and gives us good visibility into the future requirements as we look into next year and beyond.

Finally, in automotive and energy, orders grew solid double digits. Investment remains focused on software-defined vehicle architectures with broad-based global demand for in-vehicle network and cybersecurity test where our solutions provide verifiable compliance in support of new standards. Our energy and charging business also grew this quarter with engagements across both grid and automotive customers and spanning high-power charging, storage, compliance and infrastructure validation applications.

In summary, this quarter's results reflect the strength and diversity of our business. Our portfolio is enabling the major waves of innovation shaping our markets, AI and accelerated compute today and 6G defense modernization, grid and autonomous systems in the years ahead. Every one of these technologies must be designed, validated and proven before reaching the market. Keysight with its differentiated technology stack and consistent R&D investments, is well positioned to outperform the market over the long term. I want to acknowledge the entire Keysight team for their hard work and commitment to our customers' success. And with that, I'll pass the call over to Neil. Neil?

Thank you, Satish, and hello, everyone. Our momentum continued in fiscal Q3 as we delivered record results that exceeded the high end of our guidance range for both revenue and EPS. These results were driven by further acceleration in our commercial communications business and ongoing strength in Electronic Industrial Solutions and aerospace, defense and government. Our portfolio of highly differentiated solutions is resonating with customers, allowing us to expand margins year-over-year. In addition, our cash flow generation was robust, and we are on track to achieve record operating cash flow in fiscal 2026.

Moving to the specifics for Q3. Orders of $2.91 billion were up 56% on a reported basis. Acquisitions represented 5 percentage points of growth and currency was a 1 percentage point headwind. On a core basis, excluding those items, orders grew 52%. Revenue of $1.846 billion was up 36% on a reported basis and up 31% on a core basis. Gross margin was 69% and operating expenses were $661 million. Operating margin was 33.2%, up 820 basis points year-over-year and exceeded our long-term target range of 31% to 32%. We delivered net income of $531 million and earnings per share of $3.07. Our core business contributed substantially to these results with an operating margin of 34.7% and an operating margin incremental of 66%.

From a segment perspective, the Communications Solutions Group generated revenue of $1.345 billion, up 43% on a reported basis and up 36% on a core basis. CSG gross margin was 70.8% and operating margin was 34%. Within CSG, the commercial communications business generated its first $1 billion quarter, with revenue of $1.06 billion, up 56% led by outstanding growth in wireline and supported by strong growth in wireless.

Wireline revenue exceeded wireless revenue for the first time this quarter. Aerospace defense and government achieved revenue of $339 million, an increase of 14%. The Electronic Industrial Solutions Group generated a record $501 million in revenue, an increase of 21% with growth across all 3 markets: general electronics, semiconductor and automotive and energy. EISG gross margin was 64.1% and operating margin was 31%. Software and services both grew double digits, now representing approximately 33% of Keysight revenue, while annual recurring revenue was 24% of total mix.

Moving to the balance sheet and cash flow. We ended the quarter with $2.605 billion in cash and cash equivalents, generating cash flow from operations of $437 million and free cash flow of $403 million, this quarter, we repurchased approximately 640,000 shares of Keysight's stock at an average price of approximately $326 per share for a total consideration of $210 million. Year-to-date in fiscal 2026, our share repurchases totaled $517 million.

Before I turn to our outlook, I wanted to provide an update on our recent acquisitions. Our integration efforts are now largely complete, including systems migrations, 1 quarter ahead of schedule. Given the faster-than-expected integration, our cost synergy realization will accelerate in Q4. We now expect to have 80% to 90% of the $100 million in cost synergies realized on a run rate basis exiting the fiscal year.

Now turning to our outlook. For the fourth quarter of 2026, we expect revenue in the range of $1.930 billion to $1.950 billion, representing 37% year-over-year growth at the midpoint. We expect Q4 earnings per share to be in the range of $3.34 to $3.40, representing approximately 76% year-over-year growth at the midpoint. This will result in fiscal year 2026 revenue growth of 32% and EPS growth of approximately 60% at the midpoint.

This guidance is based on a weighted diluted share count of approximately 172 million shares. In closing, fiscal 2026 thus far has been a remarkable year with exceptional performance across our business. Our leading portfolio of solutions levered to multiple technology megatrends is driving significant growth and margin expansion. We remain focused on enabling our customers and helping them further accelerate technology innovation in turn, driving continued organic growth, profitability and ultimately, value creation for our shareholders. With that, I will turn the call over to Liz to begin the Q&A session.

Thank you, Neil. Hillary, can you please provide the instructions for the Q&A session?

[Operator Instructions]

Your first question comes from the line of Aaron Rakers from Wells Fargo.

Congrats on the strong results here. I'm curious there was a lot of commentary around 6G and the setting forth kind of the standard path as we move forward. As we think about Keysight's participation in 6G, I'm curious of how you would characterize the opportunity relative to the 5G cycle that we saw several years ago. Any kind of framing of when we should expect to see some materializing revenue from a 6G cycle? And any thoughts on how you would frame that relative TAM opportunity versus, let's say, 5G several years ago? And I have a quick follow-up.

Yes. Thank you, Aaron. Yes, it's a great quarter. The team has been executing very well, and we're pleased with that. Relative to 6G, anytime you start a new generational cycle you always look for what's different [indiscernible].

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Great. Congrats on the quarter. You mentioned kind of a lot of different ways in which more there's more markets or more different types of technology to be testing as far as AI. But could you just give a sense of kind of how testing density has changed. So there's a lot of different more end markets, but just, kind of, how the overall content of testing has changed as, kind of, some of these technologies get a little bit more complex. And then, Neil, very [Audio Gap]

Traditional opportunity associated with CapEx investments that customers are making. But the opportunity set as we see it into the future, continues to grow and expand. And it's a function of this ecosystem over the last few years has largely been a homogeneous integrated vertical stack with a finance of opportunities that we have done extremely well. But by working early, we're also working with other players that are entering the space and the space is increasingly becoming more heterogeneous in nature, all the way from compute to racks and also protocols. I mean the -- we're seeing a growth in the number of protocols at all layers of the stack.

And the architectures increasingly involve GPUs, CPUs, DPUs mix. And it's not just for the sake of making things more complex. It's -- the reality is different customers have different strategies -- and based on the type of workload they're using, they're trying to pick the right architecture for them -- and our tools are increasingly doing very well with customers across the broader tail, which positions us well into the future. I don't know, Kailash, if you have any other comments to add?

Yes. Fundamentally, the design margins are shrinking, right? So with higher data rates, lower latency, AI needs to be lost less. And even if there is a limited amount of gap there, the models won't perform. So what our customers are seeing is they can no longer guarantee anything by design. They also need to test it in production as well. So this is increasing a lot of design emulation and test intensity. If you look at a computer or a switch trade these days, it's gone from tens to hundreds of high-speed pin-outs and that's more insertion points for us.

We have our [indiscernible] and soloscopes testing things at signal level. We introduced a new portfolio to test things at a bit level, and our AI workload emulators are testing things and emulating things at a protocol and packet level, you look at scaling, and things are going from monolithic chips to chiplet architectures. So the interoperability of chiplets need to get emulated and tested. Customers are asking when a chip is exercising a model, we emulate an environment for that chip to get stress-tested, and they want to see if the chip shuts down or gets overheated, they want to activate all of the cores and with higher power and higher speeds.

So all of these are creating additional opportunities for us and we're excited about the complete portfolio we have, electrical optical RF digital and protocol, we're bringing all of these capabilities to enable our customers, and we're seeing R&D as well as our manufacturing business grow significantly.

Yes, [indiscernible], to your second question, obviously, we saw -- we've seen really strong core operating leverage this quarter. And I think as we look forward, I continue, at least as it relates to '27 to feel confident in our ability to continue to outperform our 40% leverage target, particularly given the synergy realization that we'll see. I mentioned that we've largely completed our integration of the recently completed acquisitions. You put the question in the context of guardrails. The only thing I would just caution people to pay attention to is we did have the onetime tariff impacts this year that, kind of, artificially pulled up '26 profitability that won't repeat. So if you adjust for that and think about it on an operational basis, I would expect we'll continue to outperform the 40% metric.

Your next question comes from the line of Mark Delaney from Goldman Sachs.

Congratulations on the strong results. I was hoping to talk around demand sustainability to start. I think orders at over $2 billion for 2 quarters in a row now. And as you look into the fourth quarter of next year, do you think this level of demand is sustainable or even a level that Keysight can grow from?

Yes, Mark, we think it is. I'll just say our base case is orders slightly up from Q3 in line with seasonality and then following that seasonal trend into Q1 of '27. Steve, I know the pipeline, you may make some comments there.

Thanks, Satish. Well, let me start by saying it's great to be ahead of sales at Keysight right now. We had an outstanding Q3. We delivered highest quarter ever for the third consecutive quarter. And with the traditional uplift that we expect in Q4, we're confident in delivering another record quarter and surpassing $2 billion for the third consecutive quarter. Even more promising, despite these record quarter results, our pipeline has continued to grow throughout the year and now stands at an all-time high. I think this is proof that our go-to-market strategy and priorities are working.

Our top priority has been to really spend more time with customers as much as possible, identifying those new opportunities and find those unarticulated needs and capturing new logos. As a case in point, year-to-date, we've added nearly 3,000 new customers representing more than $100 million of incremental business. And we're also partnering closely with marketing to broaden our reach and get to those customers earlier in [Audio Gap] both areas. Southeast Asia is a good example. We've more than doubled our business and is our fastest-growing region for the quarter. Overall, we further accelerated our momentum this quarter, resulting in our highest ever monthly funnel intake just last month and our new record for rolling 12 months.

Very helpful context. My other question was on supply and the ability to meet this level of demand the company has seen. So can you double click a bit more on Keysight's ability to meet demand at these types of volumes, both in terms of the supply chain and the ability to get enough parts as well as your own ability from a manufacturing standpoint?

Thank you, Mark. As you heard from Steve, we're seeing broad-based strength in demand. I think one of the points that in addition to everything Steve said, is we're seeing demand across the globe and our portfolio is doing very well. Now from a supply chain perspective, our team has done a great job this year, continuing to scale with discipline, as you see from our gross margins at levels as well. And we're continuing to meet our customers' demand needs. [Audio Gap]

Your next question comes from the line of Tim Long from Barclays.

I'll ask one and then come back with my follow-up. I want to go back to commercial comms and the strong AI business on the wireline side. You talked about some of the applications and the use cases that are helping there. Curious if you can just give us a little update on how that business is looking from an R&D standpoint versus manufacturing? If you can give us a little update on any movement that you've seen in the AI-related business. And then I have a follow-up.

Yes. as it relates to R&D and manufacturing, we'll talk about it from the wireline side of things where we put out the numbers previously. Historically, this has been a business that's been amongst the most heavily levered towards R&D. We've talked about it at about 80-20. We've more recently said with the addition of manufacturing business and the support of the AI data center build-out, that, that shifted to more like 70-30. And I think if you looked at it over a shorter horizon over the last [Audio Gap].

Uncovering new opportunities such as with regard to emulating. [Audio Gap]

[Audio Gap].

It's Adrian on for Atif Malik. I was hoping you could talk a little bit more about the sequentially slower growth in Aerospace, Defense and Government segment. You described a lot of strong demand dynamics and double-digit order growth, but we did see a bit of a step down in the growth rate there?

Yes, Adrian, I've said this. You heard me state this on the call. Aerospace defense is a business I can easily call years out. very difficult to call in a given quarter just because it's got government budgets, it moves at its own pace. But this year, we're quite pleased with the growth and adoption of our solutions, including our newly acquired P&T offerings from Spirent. So Neil, any specific points?

Yes, I would just reiterate that we're still up double digits. There is some quarter-to-quarter perturbations in these end markets. My honest feeling is you're probably -- there's probably nothing to see there from that perspective.

And then just as a follow-up, could you comment on if the run rate that you were in a business within wireline consistent with last quarter?

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Yes, thank you, I just wanted to confirm or rather to ask, if the run rate of the business, the AI business within the wireline segment was consistent with what you were seeing last quarter? Or have you seen that expand at all?

It is expanded.

Your next question comes from the line of Andrew Spinola from UBS.

You reported another strong quarter in the EISG segment. I think you highlighted some of the strength in semi and general electronic. And I wonder if you could unpack that a little bit. You said last quarter you're seeing some of the demand from AI expand into some of these segments. I'm wondering if you're seeing that and if you think that there's a fairly meaningful expansion still ahead in those segments, and I'd also like you to comment on the operating margin, which was quite strong in the ISG in the quarter. And how you're thinking about the sustainability of that going forward?

Yes, Andrew, pleased with the double-digit growth we're seeing in our ISG business year-to-date recovery in auto is another key along with strengthen semi. But we have Jason here, and we'll touch upon those points.

Yes. Thank you, Andrew, for your question. And specifically, with regards to the AI tailwinds that we're seeing in the rest of the business, we've talked frequently about the leverage of our communications technologies and our key into end markets. We do have some specific technologies around semiconductor wafer test, where we're seeing significant capacity expansion there across multiple dimensions, including advanced nodes, memory silicon photonics. As far as looking forward, again, to the earlier question from Meta about test intensity. You're seeing a lot of that multilayer high-density heterogeneity that's coming through at the component level resulting in higher test intensity on the production side, which Elesh mentioned, we see that in some of our end markets in general electronics.

And again, that's moving from the board level to the component level where the tolerances are getting increasingly tighter as you look at higher frequency and higher data throughput and just expectations of high performance in small spaces.

So I think that's the challenge that customers face. And the beauty of our solutions is we address those all the way from R&D into production and so strong leverage there. On the operating margin side, yes, we're pleased with the progress that we're making there. I think historically, that business had suffered a little bit. And over the last 12 to 18 months, we've really focused on driving top line growth because that's where it always starts and then transforming pieces of the business. We're investing more in some of the software elements of the business with ESI and the Optical Solutions group. And there's been rationalization of certain pieces of the business where perhaps lower margin and at the same time, pursuing other opportunities that we've talked about related to digital health and the grid. So I think in summary, despite the different profile and composition of the businesses within EISG today, we're confident of our ability to continue to achieve higher levels of profitability as we move forward.

I appreciate that color, Jason. That's helpful. I just had one follow-up question for Neil. In prior commentary, you discussed potentially the synergies being $100 million plus from the acquisitions. And I'm wondering now that you've completed the integration. Is your estimate of those synergies potentially larger? And I'm just sort of thinking about what sort of contribution I can assume for Q4, Q1.

Yes, I would say that at this point, given where we're at, we certainly have direct line of sight to the $100 million. So I think that's -- to the extent there was risk in that, that substantially derisked and I think as this business now begins to operate more holistically within the Keysight framework, we'll continue to look for additional opportunities. So I don't have a quantification for you, but I think history would suggest that when the initial kind of wave of synergies come out that there is admittedly smaller dollars, but some additional follow-on efficiencies that tend to materialize.

If you think about it on an incremental basis, as you move from FY '26 to FY '27, I'd be thinking on the order of $50 million. I think we realized close to $40 million, again, ramping throughout the year as you thought about it from Q1 through Q4. And again, I expect that we're going to be kind of close to 90% of that $100 million realized as we enter next fiscal year.

Your next question comes from the line of Joseph Cardoso from JPMorgan.

This is Mark Vitanze on for Joseph Cardoso. I guess you guys have given us a lot of detail on the strength in AI-related wireline. So wanted to ask about traditional non-AI portion of wireline, how does growth look like in that business? And what are you seeing there?

Yes. I think we're seeing a convergence, I think, Mark, is what -- how I would characterize it. And I think that is to be expected as such a disruptive technology starts to intercept multiple end markets. I'll give you an example the wireless customer base historically maybe never had to think about AI. And now AI is entering the RAM. That's an example of an application. The wireless ecosystem has a known set of contract manufacturing companies that play into the telco market. Many of them have now started to invest in building their own racks for AI. That's another example of started the applications that are now emerging that we're well positioned to capitalize, given our strength and reputation in this ecosystem.

Got it. And then you guys mentioned that software and services was roughly 33% of revenue. I guess, I'm curious like where do you think that number eventually goes especially following the recent acquisitions?

Yes. I think, look, the strategy for the company is to become a solutions company. This has been what we worked hard to building and inherently, that implies providing more software-centric solutions and also offering differentiated services to build the life cycle value contributions. And we do it the pace of our markets and at the pace of our customers. It's all about our customers' needs, and so we're not trying to force a business model into the marketplace. And so yes, we've tried to run as high as 40% a year or so ago, and now we're at 33%. But I just want to say on a dollar basis, this is record levels for software and services, and we'll continue to keep innovating to stay differentiated in the marketplace.

I would also maybe just add that our software and services businesses are also growing double digits. We're just not growing as fast as the hardware business is at this point in time.

Your next question comes from the line of Matthew Niknam from Truist Securities.

Congrats on the results. Just if I could. First, on the 4Q revenue guide, so it's implied to only increase about 5% sequentially. I know that's pretty normal to the seasonality. But your book-to-bill has been north of 1.1 for 2 straight quarters. So I'm wondering if you can speak to any sort of supply constraints that are inhibiting or limiting that revenue guide for the fourth quarter? And if there's any color in terms of how much of the backlog that's been growing is going to ship next fiscal year. And then on a related note, I think in the last several years, you've given some initial color or framework in terms of next fiscal year on the third quarter call. I'm curious if there's any initial thoughts you're ready to provide, just given the momentum you're seeing across the business.

Maybe I'll take the 2027 commentary Neil, and then you could cover the remaining. It's a great question. Look, we have a snow doubt a strong setup as we enter our fiscal '27. Even as we remain cognizant of the outperformance you're seeing in 2026 on top of the growth here in '25. Supply chain will remain the governor of near-term revenue. I think I mentioned that earlier. But when I look at the broader end market, I just have to look at the technology trends and say, the complexity of these technologies are only growing. The intensity and the pace of which our customers are innovating across our end markets globally, it's relentless right now, then that intensity is matched with the investment and we're well positioned as a company to capitalize because of all the investments we made in the downturn in R&D that is now going to generate and as already started, a good refresh cycle for our new products, which are already being enthusiastically received by our customers.

So we're well positioned from that point of view. We also are taking a -- given this demand that is consistently now for a few quarters, and we're executing well on a quarterly basis, but we've taken a longer-term view 18-month-plus view of our supply chain planning, and we're working to create additional flexibility, but those come with a lag because I'll give you an example, we'll have to redesign some products on the margin to accommodate second sources and enter into some more longer-term agreements with our customers. So we're already starting to take those actions. And so I put it all together, we feel good about the setup. We will give you a more specific guidance for Q1 when we report in Q4. Neil?

Yes. I mean I think you said most of it. I think if I was just going to recap. Right now, supply is not the limiter, right -- excuse me, demand is not the limiter. We do have some supply chain limitations. It's a little bit of a mixed bag. I think if we think back 3 months to the biggest supply chain challenges we were facing, most of the more internally channel capacity related around ramping some NPIs that has seen kind of unprecedented early demand from the marketplace. We've made tremendous progress in that area. I think the the challenges have shifted more towards incoming parts, which are under high demand as demand has ramped and continues to ramp across the ecosystem, right?

You've got numerous players that are all competing for supply from a similar set of component suppliers. And so I just think that the supply situation is likely to be nonlinear and will likely be a governor of our ability to convert demand into revenue for the next 2 quarters.

If I can just add a couple of comments about 2027 outlook. You just had the biggest refresh of our core RF microwave in [indiscernible] digital products since we formed Keysight, and we reinforce this at our worldwide annual sales training event in June, where we trained our entire sales team on this portfolio as well as [indiscernible] products. So as these solutions are rolled out and introduced to more and more customers, I expect this to be a strong tailwind for us for many years -- many quarters to come.

And years.

Years.

Your next question comes from the line of Quinn Fredrickson from Baird.

I wanted to go back to the orders discussion. Good to see the $2 billion orders number again, but it's been unusual typically to see orders grow sequentially in the third quarter. So could you just unpack what the drivers were? And do you think you saw any tailwinds for possible future sovereign transceiver restrictions? Or are customers getting ahead of any other constraints or supply issues?

There was nothing unusual about the demand. In fact, we saw a conversion of the pipeline in a very orderly fashion, no pull-ins. We are looking for it. It is just an environment where the markets are stronger and Keysight's differentiated position in its core markets, starting within commercial comps, which really outperformed for us relative to our expectation even with AI. And equally, the demand from our prime contractors in aerospace defense remains strong as they're building out capacity, [indiscernible] investments in Europe is another tailwind for our defense business. And the EISG business is clearly outperforming with the semiconductor business doing exceptionally well. So strong broad-based demand, and we expect, as Steve mentioned before, we expect that to continue into Q4.

Thanks, Satish. And Neil, gross margin came at 6%. I think you had said mid 67% range. Was the difference just on incremental volume or mix? Just if you can unpack that -- and then any color on how to think about sustainability into 4Q or even 2?

Yes. I mean I think if you go back a quarter and adjust for the tariff thing, we were 68% last quarter were 69% this quarter. It's obviously volume is helping, but I think it gets to the differentiation of the solutions that we're bringing forward across end markets, whether that's early 6, AI, semiconductor, we have a highly differentiated set of solutions mix does. We do have a broad range of gross margins across the portfolio. So mix does matter. But I do think this upper 60s percent is a sustainable level for us.

Your final question comes from the line of [indiscernible] from SIG.

This is Sebastian filling in for Mehdi. [indiscernible] You saw some momentum in wireline with up 56% year-on-year. And you mentioned the mix going towards 70%, 30% production R&D from 80/20. Could you give us a breakdown on how you expect R&D and production to look like in revenues in the coming quarter?

Well, I would just say I'm asking. It's 1 of those things that move -- things move around on a quarterly basis. So we tend to look at it over a longer-term horizon because in a given quarter with our customer comes in and they're doing an expansion in production line that could dominate a certain part of the segment. But as I've called out, I think we said 2/3 in R&D, 1/3 in manufacturing. On the margin, we're seeing in our pipeline, greater activity as the customers are scaling. We're ramping production of 1.6 terabit as we speak right now, and the demand is very, very strong, right?

So in a given quarter like Q4, I can easily see that mix even trend more towards production, and we're meaningfully participating across the workflow. And that's the that's the important message is our R&D business is growing, as Kailash mentioned, we're very pleased with the diversity of that business, and we're also happy that we're participating in the volume part of the data center build-out as well.

Got it. Very helpful. And then as a follow-up, how should we think about the long-term mix of R&D versus production, given that the ramp and adoption of new transceivers are accelerating? Your volume is kind of ramping, but you also have more complexity when it comes to testing those new technologies. Is there a way to think about that long-term R&D and production mix as we're reaching higher deployments of Altice years?

Yes. I mean I would just say, look, our strategy as we have laid out, it's really to be an innovation accelerator for our customers. That's sort of our core purpose. We're focused on building our tech stacks, optical rice, both of them to be able to help our customers go through in R&D. And what we're seeing now is pretty unprecedented that the rate of adoption of these technology curves or technology waves, it's accelerating to a point where you're seeing concur interruption across many dimensions, right? 800 gig is still sort of the underlying technology, but 1.6% is scaling -- and typically, that would have been spaced out a little more. So it's really hard for us to make sense for how long this goes and how broad this goes. But I do know customers are already engaging us on 3.2. We did a demo at a conference earlier this year. So the intensity associated with technology change and the economics for companies to find the latest technology remains high, and we're participating in this, and I feel good about our position heading into '27.

That concludes our question-and-answer session for today. I would like to turn the call back to Liz Morali for any closing comments.

Thank you, Hilary, and thank you all for joining us today. A replay of today's call will be available on the Investor Relations website later today. And we appreciate your interest in Keysight.

Thank you for attending. This concludes today's call. You may now disconnect.

Good day, ladies and gentlemen, and welcome to Keysight Technologies Fiscal Second Quarter 2026 Earnings Conference Call. My name is Abby, and I will be your operator today. [Operator Instructions] This call is being recorded today, Tuesday, May 19, 2026 at 1:30 p.m. Pacific Time.

I would now like to hand the call over to Liz Morali, Vice President of Investor Relations. Please go ahead, Ms. Morali.

Good afternoon, and thank you for joining us for Keysight's Second Quarter Earnings Conference Call for Fiscal Year 2026. Joining me on today's call are Satish Dhanasekaran, President and CEO; Neil Dougherty, Executive Vice President and CFO; Kailash Narayanan, President of the Communications Solutions Group; Jason Kary, President of the Electronic Industrial Solutions Group; and Steve Yoon, Senior Vice President of Global Sales. Following the prepared remarks from Satish and Neil, we will take your questions. The press release and information to supplement today's discussion can be found on our Investor Relations website, investor.keysight.com.

During today's discussion, we will make forward-looking statements about the financial performance of the company. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties. Information about these risks and uncertainties can be found in our most recent Forms 10-K and 10-Q filings with the SEC. We do not intend to update any forward-looking statements.

In addition, we will refer to non-GAAP financial measures and reference core growth, which excludes the impact of acquisitions or divestitures completed within the last 12 months and currency movements. The most directly comparable GAAP financial metrics and reconciliations can be found on our Investor Relations website, and all comparisons are on a year-over-year basis unless otherwise noted.

I will now turn the call over to Satish.

Thank you, Liz. Good afternoon, and thank you for joining us today. Keysight delivered the best quarter in company history, capping off a record first half. Quarter 2 orders grew 56% year-over-year, surpassing $2 billion. Revenue grew 31%, earnings per share grew 69%, and we generated a record $472 million in free cash flow. These results demonstrate the strength of Keysight's portfolio, which has been built strategically to deliver first-to-market solutions that enable innovations across our end markets, including data centers, networking, defense, semiconductors and general electronics. We are raising our growth expectations for fiscal 2026, driven by the solid start to the year and the pipeline of opportunities we see in the second half. We now expect revenue growth in the high 20% for the fiscal year as the underlying trends driving our business are expected to continue. These investments we're making in our comprehensive set of solutions and deep engagements with market-defining customers positions us well for sustained value creation.

Moving to our results by business. Communication Solutions order growth significantly outpaced revenue growth of 35% year-over-year, with broad strength across both commercial communications and aerospace, defense and government. This performance builds on the growth we saw in quarter 2 last year, where CSG delivered 9% revenue growth.

In commercial communications, we continue to see accelerating momentum in our wireline business, driven by the ongoing AI data center expansions. Wireline delivered record orders again this quarter with robust demand for both R&D and manufacturing solutions. In the first half of fiscal 2026, our AI-related business has already surpassed the levels achieved in all of 2025. As I mentioned in our Q1 earnings call, this momentum continues to be driven by 4 key pillars of opportunity that we expect to continue. AI infrastructure scaling, speed transitions, optical and photonics technologies and system-level emulations.

First, the scaling challenges intensifying as AI clusters integrate GPUs, CPUs, DPUs, switches, nicks, memory fabrics and storage across multiple vendors and the networking technologies, including Ethernet, UA Link, PCIe, NVMe and CXL. Customers are adopting Keysight Solutions for end-to-end interoperability and system validation to ensure that these components function reliably together at scale.

This quarter, Keysight announced new scale-up validation solutions for performance characterization as systems become more complex and expensive, additional investments in deeper manufacturing validation and production test coverage are needed to improve yields and reduce post-deployment failures. We saw a strong adoption for newly introduced ultra high-density interconnect solutions that enable rapid characterization of rack back planes for next-generation scale-up networks.

Second, the industry continues to navigate multiple overlapping speed transitions with continued 800 gig deployments, accelerating adoption of 1.6 terabit architectures and increased R&D activity around 3.2 terabit technologies. The Optical Fiber Conference and NVDSGTC this quarter reinforced the accelerating importance of networking as a critical enabler of AI data center scaling.

At OFC, Keysight demonstrated our 1.6-terabit physical layer solutions with over 20 industry leaders. We also showcased 1.6-terabit traffic emulation, link reliability validation and signal integrity solutions for switch and system vendors. And we collaborated with Broadcom on the industry's first public interoperability demonstration of Ultra Ethernet consortium specifications marking a major step towards production-ready AI optimized Ethernet fabrics.

Third, activity in silicon photonics and co-packaged optics continues to expand. Our early engagements in co-packaged optics positions Keysight well to capture value as the industry transitions to these architectures. We're also seeing strong demand from next-generation optical component and transceiver development and deployment driven by expansion in scale-out networks. We recently expanded our optical portfolio with the industry's first 220 gigahertz Lightwave Component Analyzer to support advanced transceiver and photonics designs.

Building on our existing chiplet and photonic design solutions, our new 3D interconnect designer is also helping customers address the growing complexity of designing next-generation 3D stack chip architectures. Finally, customers need system-level emulation and benchmarking capabilities for data centers at scale. We saw strong adoption of our AI workload emulation solutions among hyperscalers as they work to improve utilization of GPU, power resources while addressing growing system and security complexity. This quarter, we expanded Keysight's AI portfolio with the release of Keysight AI inference builder designed to support emerging inference applications. Together, these trends are driving increased demand for our solutions across multiple domains. The breadth of Keysight solutions portfolio and ongoing R&D investments enable us to maintain a differentiated portfolio and an industry-leading position.

Turning to wireless, orders saw robust growth in the quarter with activity in nontrial networks, 6G research and increased demand to support the supply chain associated with AI expansion. NTN is becoming an important layer of future wars architectures with new LEO constellation scaling and the industry targeting direct-to-sell deployments in the next few quarters.

The increasing complexity of LEO environments, including speed, dynamic linked conditions and stringent positioning requirements is driving demand for Keysight's arbit emulation and Spirent's PNT solutions which together provide customers with a differentiated ability to validate next-generation NTN systems. As the industry explores new use cases for 6G, such as integrated sensing and communication, energy-efficient networks and expanded coverage capabilities, we are well positioned to intercept these opportunities through our portfolio of high fidelity tools for design and emulation. This quarter, we expanded our collaboration with Qualcomm on RF digital twists and at Mobile World Congress conducted a joint demonstration with Samsung on AI RAN workflows. Next month, Keysight will host the 3GPP meeting in Singapore, where the time line for 6G standardization is being solidified, further reflecting Keysight's leadership position as ecosystem evolves towards commercialization.

Turning to aerospace, defense and government. We saw a broad-based global momentum led by Europe supported by continued strength in Americas as the global defense modernization priorities increasingly translate into new programs and investments in next-generation systems. Demand was strongest across RADAR and ultra-magnetic spectrum operations as governments and prime contractors expanded capacity to support evolving operational requirements while activity in space satellite and autonomous systems remained healthy. This drove ongoing customer engagement and new wins for our recently introduced RADAR target generation solutions.

Keysight's ability to accurately simulate radar signals and emulate threat environment is a key differentiator, creating higher-value system-level opportunities with defense contractors and government agencies around the world. As contested spectrum environments drive a greater focus on RADAR survivability and autonomous operations, customers are increasingly adopting Keysight Solutions that include high-fidelity emulation, signal analysis, P&T and RF validation to accelerate their development and deployment. This quarter, we secured a key win with U.S. Air Force to enable next-generation operational flight line testing with more stringent requirements. Given the mission-critical nature of this defense market, we also continue to see increased attach rate for our value-added services to enable mission readiness and operations.

Moving to Electronic Industrial Solutions Group, we delivered a record quarter with all-time highs for both orders and revenue, with strong growth across all 3 EISG markets, general electronics, semiconductors and automotive and energy. In general electronics, double-digit order and revenue growth was driven by ongoing momentum in AI-related innovation and infrastructure investments. Customer capacity investment for high-performance PCBs was again strong this quarter.

Greater complexity, increasing density interconnects multilayer architectures and higher speeds are driving customer engagement across multiple standards and applications, resulting in a higher test intensity for PCBs. In education, we saw healthy demand from governments and universities around the globe, in the development of next generation of semiconductor workforce talent through our tailored training modules. Our solutions are also facilitating leading-edge university research in advanced technologies with key wins this quarter in Quantum, photonics, semiconductor and 6G.

In our semiconductor markets, we saw continued momentum in the pace of innovation and customer investments as the industry races to scale capacity through 2030. AI ecosystem demand further accelerated this quarter across advanced node, memory and silicon photonics. Our collaborations with leading foundries from R&D to production are enabling faster development and commercial ramp time lines for increasingly complex chip architectures and packaging. This quarter, we had key wafer test solution wins in support of silicon photonics and advanced node programs across Asia, the U.S. and Europe, while our solutions for key lithography customers grew strongly as well. We expect this to be a sustainable contributor of growth for us over the next several years.

Finally, in automotive and energy, orders grew for the third consecutive quarter as the business has largely stabilized. Growth was across both software-defined vehicles and EV charging solutions with key wins for in-vehicle network, cybersecurity and over-the-air design and validation at OEMs and test labs globally. We're leveraging our expertise and leadership in networking applications to develop solutions for the new mobility market.

In closing, the strong results we're delivering in fiscal 2026 reflect the execution of our strategy we outlined at Investor Day in 2023, centered around consistently identifying and investing in long-term growth opportunities across technology trends, transforming industries and global market dynamics. This framework has guided our disciplined organic and inorganic investments, enabling us to build a differentiated portfolio aligned with some of the world's most important and fastest-growing end markets.

As we are focused on capitalizing on our early leadership in the AI data center infrastructure ecosystem, we're equally excited by the broader set of secular growth opportunities were progressing, including defense technology, space, 6G and quantum computing. We believe our portfolio's technology leadership, product pipeline and deep customer relationships position us well to capitalize on these opportunities and continue creating long-term value for our customers and shareholders.

All of this value creation is enabled by the commitment of our team and the collaborative and innovative culture in the company, and want to acknowledge the entire Keysight team for their hard work and dedication to our success.

I'll now pass the call over to Neil to provide additional details on our financial performance and guidance. Neil?

Thank you, Satish, and hello, everyone. We delivered outstanding results in fiscal Q2, setting new company records for orders, revenue and earnings per share. Our teams capitalized on the robust and dynamic demand environment, resulting in strong double-digit growth across all our business groups.

Q2 orders of $2.051 billion were up 56% on a reported basis, with acquisitions adding 700 basis points and currency adding 100 basis points. On a core basis, excluding those items, orders grew 48%. Revenue of $1.717 billion was up 31% on a reported basis and up 24% on a core basis. Gross margin was 72.3% and operating expenses were $669 million. We delivered net income of $497 million and earnings per share of $2.87.

As noted in our earnings press release, following the U.S. Supreme Court decision invalidating the AIBA tariffs, in Q2, we recognized the impact of tariff refunds and the refund of associated surcharges collected from our customers. This resulted in a $40 million reduction in Q2 revenue and a $97 million reduction in costs and expenses. Excluding these onetime impacts, Q2 revenue was $1.758 billion, up 35%. Gross margin was 67.6%, up 300 basis points and EPS was $2.58, up 52%. Our Q2 investor presentation contains additional details on these adjustments, including impacts by operating segment.

These strong results were driven by acceleration in our organic business, which excluding onetime tariff impacts, delivered operating margin of 30.4%, up 520 basis points year-over-year as a result of 49% operating leverage.

Moving to the segments. The Communications Solutions Group generated revenue of $1.231 billion, up 35% on a reported basis and up 27% on a core basis. CSG gross margin was 74.1% and operating margin was 33.4%. Within CSG, the commercial communications business generated revenue of $858 million, up 40%, with robust growth in both wireless and wireline. Aerospace, defense and government achieved revenue of $373 million, an increase of 24%. The Electronic Industrial Solutions Group generated $486 million in revenue, an increase of 24% with growth across all three end markets, general electronics, semiconductor and automotive and energy. EISG delivered gross margin of 67.8% and operating margin of 33.1%. Software and services accounted for approximately 36% of Keysight revenue, while annual recurring revenue was 27% of total mix.

Moving to the balance sheet and cash flow. We ended the quarter with $2.412 billion in cash and cash equivalents, generating record cash flow from operations of $501 million and record free cash flow of $472 million. This quarter, we repurchased approximately 780,000 shares of Keysight stock at an average price of approximately $283 per share for a total consideration of $220 million.

Now turning to our outlook. For the third quarter of 2026, we expect revenue in the range of $1.730 billion to $1.750 billion, representing 29% year-over-year growth at the midpoint. We expect Q3 earnings per share to be in the range of $2.43 to $2.49 and representing 43% year-over-year growth at the midpoint. This guidance is based on a weighted diluted share count of approximately 173 million shares.

Our acquisition integrations remain on track, and we continue to expect $375 million in FY '26 revenue from the acquisitions and greater than $100 million in cost synergies and other operational efficiencies. As a reminder, we expect to have about 80% of those cost synergies realized on a run rate basis exiting this fiscal year.

As Satish mentioned, given the strong results we have delivered in the first half of the fiscal year, combined with our guidance for fiscal Q3, we are on track for revenue growth in the high 20s percent range for fiscal 2026. With the visibility we currently have, we would expect to see a historically typical sequential revenue increase into fiscal Q4. In addition, we are increasing investments to meet these higher growth levels and now expect FY '26 capital expenditures to be in the range of $200 million.

In summary, we delivered a record quarter, driven by focused execution with robust growth across our businesses, improved operating leverage and record cash flow generation. We are seeing accelerating market momentum underpinned by our differentiated portfolio of solutions and increased customer demand and believe we are well positioned to capture sustained investments over the near and medium term as we integrated acquisitions, evolve our portfolio with new product introductions and make focused R&D investments aligned to multiyear technology trends.

With that, I will now turn the call over to Liz to begin the Q&A session.

Thank you, Neil. Abby, will you please provide the instructions for the Q&A session? .

[Operator Instructions] And our first question comes from the line of Mehdi Hosseini with SIG.

I have to for Neil, historically, your backlog had the age of 6 months the backlog will be in 6 months. as your orders are trending at a faster rate, how should I think about the age of backlog? We should assume that you have enough visibility to extend beyond 6? And then for Satish, I want to follow up to something I asked you last earnings conference call has to do with the opportunities in the wireline. Perhaps it will be helpful if you could tell us how opportunities in wireline are split between commercial come and semis?

Mehdi, let me take this and maybe Neil can chime in. So first and foremost, the opportunities that we size us our AI business, which is, I think, really the heart of your question, finished the first half in the $500 million to $600 million range, almost in line with what we did the whole of last year. So quite pleased with the progression of the opportunity in the wireline business. And so the AI portion of our business as we size it for you, is largely in the wireline segment. And then there's really no change -- there's no change to our backlog policy. We still have majority of our business that we book and recognize in a quarter within a 6-month period of delivery.

Sure. Is there any way we could size the wireline or AI opportunity as it relates to components?

Components for?

For wireline and AI. The asked question is, historically, you've had exposure to the entire stack, including components, the components that go into wireline networking systems. So of this $500 million to $600 million, how does the component size relative to the rest of the stack?

Yes. I think I understand the opportunity. I think if you think about our entire business, it's pretty broad-based. We service the computing marketplace, the networking marketplace, the transceivers and interconnect and also the hyperscalers, right? And we service a pretty significant part of their workflow or the R&D to early design to validation, conformance compliance testing into emulations and as they deploy the clusters. Particularly for this quarter, again, things more around any given quarter. We also participated meaningfully in the scale-out opportunity, which is where some of the transceiver-related businesses fallen.

And our next question comes from the line of Andrew Spinola with UBS.

I wanted to ask about the Q3 revenue guide. I guess you gave the number pro forma for the tariff. And I guess the midpoint of the range would be kind of down slightly from Q2. I'm just wondering, was there anything sequential in any of the businesses that we should expect to decline in Q3? Or what's driving that guidance?

Yes. I mean, I think we take the same approach to guidance that we always take where we look at what's scheduled to ship beginning into the quarter, and we have pretty robust models looking at how the in-quarter orders are going to convert to revenue. And as you noted, the Q3 revenues are -- I would describe as in line with what we saw in Q2, slightly down, but largely in line. I think as we look at it on a half-over-half basis given our more qualitative comments about Q4, we are expecting the second half of the year to be materially above the first half as we grow. And -- yes. So expecting significant growth in the second half on a revenue basis.

Yes. I also want to add -- this is Satish. I also want to add that the customer demand continues to be very strong. The pace of revenue conversion is influenced by the mix and some timing of some new product introductions and how quickly we can ramp them. And particularly, I think we noted that we have a higher backlog in our AI business due to the strong demand in the first half. And we also have a strong pipeline of systems wins that we've -- in our backlog, both in our semiconductor business, aerospace defense business, which typically have a longer lead time.

Understood. I just wanted to ask, the order growth in the quarter was quite strong. And I'm just wondering, in general, are you seeing any change in the way your customers are buying or -- are there any concerns on their part about ensuring supply? Or is this just organic growth from AI demand that we're seeing?

Yes. The strength was -- thank you for asking. The strength was an exceptional quarter. Bookings were very strong. There was record bookings for the company. And the strength was broad. If you think of the themes of the strength, AI was obviously the strong theme, equally, aerospace, defense and semiconductor were key contributors to that growth. And the growth came across all our businesses and across all of our sales regions, which we are very pleased by. And even with the strong finish, we expect we are entering the second half with a solid set of opportunities that we're very excited about. So I'd say that it's broad strength. And from a customer behavior, probably the only thing that we've seen is that for the AI business, there was a stronger sense of urgency from our customers to convert, which translates to a velocity in the pipeline where things opportunities move faster, but that's about it. There was no pull forward that we can -- that any -- that we can discern from the data.

And our next question comes from the line of Aaron Rakers with Wells Fargo.

Congrats on the results. It's been a while, but there's been a lot of dynamics that have changed since you guys have provided a longer-term growth framework. I'm curious, Satish, as you think about what's evolved in the business, how you think about the growth algorithms looking forward for the company. Is 5% to 7% still the right growth rate? Or should we be thinking that just the TAM itself seems with AI to have a stronger growth profile to it?

Thank you, Aaron. Yes, thank you for noting. It was a great quarter. We're very excited also by the opportunities to have a strong year this year. I would say, from a value creation algorithm, fundamental is organic growth for us, and there were 3 pillars that I laid out, right? This idea that innovation is only going to accelerate, so creating a portfolio and a company that's built around the first-to-market capabilities is something we view sustainable. When we called out AI in 2023, it was just about the time of the ChatGPT moment, and -- but we felt really good about the long-term opportunities. So we identified it, we invested in it and we're excited by not only AI, but also the other opportunities that we laid out as part of this accelerating technology trends. Equally, we continue to expand our customer footprint as different end markets become addressable. We talked about automotive, which has been okay, but space and satellite is one area that's emerging that we're very excited right now and into the future into 6G.

And the third one, it's very important to be a resilient company is to be a company that navigates market dynamics and identifies opportunity. And I think one of the things that we called out was supply chain rebalancing or reshoring that was occurring globally. And this quarter and for the whole half, the investments that we made from a go-to-market perspective has enabled us to grow our Southeast Asia business significantly as the supply chains get reconfigured. So I feel very confident about our strategy as we look ahead and the progress we have made in progressing each of our initiatives has got a multiyear runway as we think about it. We'll update you on the long-term growth dynamics of the market and our ability to outperform. I'm very confident of our ability to outperform under a range of economic conditions. But we'll keep you updated on the -- what that forecast should look like as we look ahead.

Yes. Fair enough. And then as a quick follow-up, Neil, I'm curious -- when we think about the gross margin, I know there's some adjustments given the tariff refunds to consider in the reported results, but still very strong gross margin of 300 basis points. Can -- is there any kind of onetime items this quarter? Or is that a good durable level of gross margin that you think is something to consider going forward?

Yes. No, I think if you make the adjustments for the tariff and again, we provided a reconciliation in our presentation, you'll see gross margin, excluding the onetime items in the mid 67% range. I think post the acquisitions, which were accretive to our gross margins, I think that's the right level at these volumes.

And our next question comes from the line of Meta Marshall with Morgan Stanley.

Congrats on the quarter. Maybe, Neil, a question for you just in terms of the incremental margins moving close to 50%. Just wondering how you're thinking about incremental margins just given kind of prior commentary about kind of 40% being that level? Just trying to get a sense of whether the acquisitions have meaningfully changed that. And then maybe a second question, just in terms of as you guys see all of this AI and just other categories kind of accelerating just in terms of how you're thinking of the blend of the business between production and lab or how has that meaningfully changed at this point?

Yes. So I'll take the first question with regard to the incrementals. Obviously, we -- incremental this year or this quarter on a core basis was just under 59%. And if I'm remembering correctly, it was similar last quarter. I think it has less to do with the acquisitions than it does with the high rate of growth, right? So we've talked for a long time about 40% incrementals on mid-single-digit growth. I think that's the right way to think about our business when we're accruing at mid-single digits. But obviously, when you're growing at multiples of that, you have an opportunity with tightly managed -- tight expense management to outperform on the incremental, and that's what you're seeing from us. So again, we're pleased with the flow-through in this environment. And yes, I think that addresses the question.

With regard to the second part of the question, Meta, we're -- we feel like we have a very strong portfolio with a strong value proposition for the R&D customer and the manufacturing customer. It's really about their workflow, how do we enable them to innovate on the front end, but then carry that advantage of learnings into production where there is value, and that's what we have focused on. So this quarter, as an example, and even for the half, both R&D and manufacturing components of our business and portfolio doubled. If you look at our wireline business, still a very high percentage of R&D in the portfolio, but manufacturing is obviously up given the scaling that's occurring on the AI clusters.

And our next question comes from the line of Mark Delaney with Goldman Sachs.

This is Will on for Mark Delaney. So to start off, Satish, I believe you called out space as one of the pillars of growth. So maybe you can help us think about how large of a driver and opportunity non-terrestrial networks and LEOs are to the business? And maybe how big is it to be contributing to revenue today?

Yes, it's still a fairly smaller part of our entire revenue stream on an annualized basis sub-1% of the total revenue of the company, but especially as it relates to the wireless ecosystem and our participation there, but one we feel like positions us very well as that opportunity scales as more commercial satellites launch as this multilayered communication architecture of the future emerges. We obviously have a bigger business in space and satellite in the defense sector as well. And so we get to participate in the component part of the ecosystem and also as an expansion opportunity into the emulation side of things as things are getting more complicated from a spectrum perspective. So I feel very good about our early position also the growth potential looking into the future. Kailash, I don't know if you have any other comments to add on.

Yes, it's right, Satish. We're obviously excited by the number of Constellation scaling. Clearly, you've seen in the news about Amazon Global Star State AST space Mobile. This ecosystem is widening. We're happy to be in a position to contribute to the scaling of the constellations. The use cases are scaling as well. You have direct to sell, you have broadband, you have other applications like autonomous vehicles. The frequency bands are also expanding. You have EWKA,/KuQ, -- all of this is requiring more advanced capabilities. And we have the complete portfolio. We're able to emulate the network or able to emulate the device we're able to emulate now Orbitz as well with the Spirent acquisition and core network. So we're able to provide an end-to-end solution which customers find a very differentiated, and we're excited about the opportunities ahead.

And just for my follow-up, you all maintain that you expect the recent acquisitions to contribute the $375 million to revenue in fiscal '26. Is there any reason we haven't seen an uptick in the acquisition revenue expectations given the improved end market demand in your broader business?

No. I mean, I think a big chunk of that was the portions of that we got out of the -- Ansys acquisition, those are recurring revenue businesses, are those -- so the revenue tends to respond more slowly. I think on the Aspire in side, we've certainly seen a nice pickup in the P&T side of the business. And the network monitoring side of the business, that market is kind of in between cycles at this point in time. And I think we're pleased with the way the integration is going. It's very much on track. Well positioned to deliver both on the revenue and realize the synergies that we communicated.

And our next question comes from the line of Atif Malik with Citi.

It's Adrienne for Atif. We've been hearing more about the adoption of Quantum technology, particularly in the defense communities around precision clocks and sensors and the time line for computing seems to be pulling in. You did mention couple of times in your prepared remarks. So I'm interested in how you're seeing quantum shaping the future of test and measurement. Any color you can provide.

Yes. Let me take that one. Thanks for the question. Obviously, Quantum is a long-term trend, and we're pleased with the progress that we're making. This is an investment that we started to make several years ago. And at this point, we are enabling quantum computers, more than 1K quantum computers going into higher cubit range with multiple entities, government entities, research institutions. And it's a triple digit -- it's a steady triple-digit business for us. We also are excited about new opportunities where you get into this hybrid compute state where you have quantum computers, you have CPUs and use really driving the next generation of computer architectures, and we're excited to be playing in that long range theme. So pretty excited, and it's steady and we're enabling research in this area.

And our next question comes from the line of Matt Niknam with Truist.

Congrats on the quarter. I have two questions, somewhat related. First, on supply chain. I'm just wondering where you are with procuring enough supply to accommodate the robust demand you're seeing any sort of supplier delays or decommits that you've seen? And then just secondarily on memory. If you could just remind us how material some of the cost increases we've seen in memory are to your COGS or gross margins and the strategy to offset the cost increases here?

Yes. So with the first question with regard to the supply chain. I mean, I think it's a true statement that we're actively managing the supply chain more so than we were 6 months ago. But I think we're going to do a good job working with suppliers and don't have any major concerns from a supply perspective. I think as Satish mentioned earlier, we have a handful of new products that are enabling the -- these are NPIs from Keysight that are enabling the AI build out. They're seeing an unprecedented ramp following introduction. And so we're working really hard to ramp those products more quickly as they transition out of R&D into full-scale production. And as you noticed, we've raised our own CapEx spend expectation for the year by about 25% from $160 million to $200 million this quarter with the majority of that incremental investment going to aid in that ramp. I guess the last question comment that I would make is providing you that we are vertically integrated. And so while we do buy some chips and other things from outside parties, a significant portion of our highly specialized ships and assemblies are manufacturing in Houses, which gives us a unique level of control.

Remind me the second question, I apologize. It's...

Memory, in terms of like materiality to your COGS, gross margins and how you're offsetting the cost increases?

Yes. Memory is a pretty small portion of our overall BOM, if you will, and we have proportionately less exposure to the high-bandwidth leading-edge memory that is in the news these days.

And our final question comes from the line of Rob Mason with Baird.

Congrats again on the quarter as well. Just can you I was hoping you could contextualize the orders a little finer. I think coming into the quarter, the thought was maybe the book-to-bill would be closer to 1, and you clearly outperformed that. Just -- Satish, you also mentioned more systems orders. Are these -- I think we used to call them longer-dated orders, but we think larger orders, how are those contributing to orders in terms of percent of total now versus 6 months ago?

Tell you what, let me knock down the second part of that and the Will give the comment on the broader order picture. With regard to the systems orders, the systems orders at Satish, we're talking about in aerospace defense and in semi we're not the same as the long-dated orders we were talking about a few years back. These are just products that have lead times that are at the longer end of Keysight products. And we have everything from stuff that's talked on the shelves days kind of turns around up to things that have lead times that are 3 months or more. And I think in the given the nature of the way semi and aerospace defense ordering happens, those tend to be longer lead time products for us. So still largely within the 6-month order acceptance window of our standard product portfolio. I'll hand it off to the guys to take the other part.

On the -- I would just say the AI infrastructure, as I mentioned, we saw a stronger sense of customer urgency that manifested in stronger-than-expected bookings, equally, we're pleased by the doubling of the number of customers in the AI space. So the ecosystem is broadening and we're participating in it. On the aerospace and defense side, the program spend, the budget stability both in U.S. and in Europe, has been -- has resulted in also stronger bookings. As Neil mentioned, the systems part of it is only as an example to point out that there's a lot of contested threat environments that we're able to emulate and simulate for the security applications, which had -- which have considerable momentum in the quarter.

And finally, the semiconductor space has been very strong with advanced nodes, especially with regard to AI compute and the scaling that's occurring globally from a supply chain perspective, and we're capitalizing on all 3 this quarter. I'll let Steve make some comments on the pipeline and what we see as well from an order perspective.

Sure. Thank you, Satish. As you heard, our orders was a record quarter this quarter. Despite that, our funnel remains really, really strong. Our focus on engaging our customers, both new and existing customers and developing new strong collaborations is really showing up in the funnel metrics. So our funnel intake and our total overall pipeline remains very, very strong. On top of that, our formal velocity and conversion rates are increasing. So with that and our robust upcoming NPI pipeline for the second half, we're very confident in a strong quarter in Q3 and sustained momentum into the second half.

Excellent. Very good. Just a quick follow-up. Called the update, of course, for full year revenue growth. Was there any update to EPS growth expectation, I'm sure there was, but did you quantify that?

We didn't make any specific comments about EPS. I mean, I think I made a comment around kind of gross margin you know how we think about incremental margins on growth. I think we've given you enough information to get closed.

And our next question comes from the line of Andrew Spinola with UBS.

Satish, I wanted to ask you a very high-level question about your AI business if I'm thinking on a multiyear period, right now, I guess, ASPs are going up as we go from 800 gig to 1.6 We know that the demand for optics company is growing strongly from the hyperscalers -- and then I guess my understanding is the complexity grows and the amount of testing grows, so the need for testers grows. And so there's this very linear growth that seems to be happening. It looks like it appears to be baked in for the next couple of years probably beyond that at this point. But I'm wondering when I think about a technology market, I think things tend to evolve and customers can get more efficient and new technologies could maybe change then. So I'm wondering how do you think about the next couple of years, 3 years, in the AI business? And what are some of the things that you're looking at in terms of how it could change or how it could grow.

Yes. Thank you, Andrew. Very thoughtful question. I mean it is quite interesting, right? We're still in the very early innings in the overall AI landscape. And yet we've all seen multiple turns as this market has moved. And I would just say reflecting on what we have seen play out over the last couple of years even as the focus was only on training and models. And now you're moving from training to inference being the focus with the promise of agentic yet to come. And the AI clusters are scaling. And we know one thing for sure is that there's going to be a few hundred gigawatts of capacity that is going to come online through 2030.

And if you think of the big headline numbers people talk about the multi-hundred billion dollars of spend commitments being made it takes quite a bit of time for all of that to trickle through the ecosystem and the supply chain and manifest itself into demand that is actually implemented in a data center. And we all know constructions are still going on, et cetera. And this ecosystem is expanding as well. I would say the -- what was once a fully vertically integrated stack driven by the fact that now you're thinking about training, you're thinking about inference, there's a little bit more openness to more standards-based environments. And so the environment is becoming heterogene.

And so what does all this mean? It means that depending on the customer's particular situation, architectures, workloads that they're optimizing for the type of scale you're building, everything -- all sort of underlying technologies are turning into an end. It's no more is it optical electrical, Well, it's optical and electrical. It's not just is an open standards of close. It's both. And is it pluggable optics or integrated optics? It is both. And so this sort of heterogeneous environment really fits the kina portfolio that we have, the breadth we have, we're able to participate in it broadening. And this is primarily all the stuff I talked about is in the physics of the infrastructure. We're equally excited by some of the announcements we made around emulating data center infrastructures emulating inference infrastructure, that's still a very small part of the overall business. One, we're getting considerable traction from customers. So look, we look at where we stand, and we see this as a multiyear runway that's ahead of us because of all the discussions we're having with customers around their future plans; but we'll keep you posted as we go. We're continuing to invest in what we see unfolding.

I appreciate that color. I wanted to ask just one follow-up on that. Another question I get a lot is the difference between the growth in your manufacturing versus R&D businesses in AI. I think the assumption is the manufacturing piece is moving very quickly, but it sounds like from some of the things you highlighted, you've got some strong demand for the emulators as well. How do those compare? And any comments on what that breakdown is? Has it changed at all from when you indicated it was 70-30?

It's still for the wireline business, largely things move quarter-by-quarter, but I think it's largely -- we still -- it's in the 70-30 range. With both R&D, as I mentioned, in the AI space, both R&D and manufacturing doubling as we think about the first half business. So we're continuing to make traction in both. But clearly, in any given quarter, depending on what customers emphasize, you could see that number move a bit.

And that concludes our question-and-answer session for today. I would now like to turn the call back over to Liz Morali for any closing comments.

Thank you, Abby, and thank you all for joining us today. A replay of today's call will be available on the Investor Relations website later today, and we appreciate your interest in Keysight.

And ladies and gentlemen, thank you for your participation in today's conference. This concludes today's call, and you may now disconnect.

Good day, ladies and gentlemen, and welcome to Keysight Technologies Fiscal First Quarter 2026 Earnings Conference Call. My name is Victoria, and I will be your lead operator today. [Operator Instructions] This call is being recorded today, Monday, February 23, 2026 at 01:30 p.m. Pacific Time. I would now like to hand the call over to Liz Morali, Vice President of Investor Relations. Please go ahead, Ms. Morali.

Good afternoon, and thank you for joining us for Keysight's First Quarter Earnings Conference Call for Fiscal Year 2026. With me are Satish Dhanasekaran, President and CEO; and Neil Dougherty, Executive Vice President and CFO. Later, during the question-and-answer session, we will be joined by Kailash Narayanan, President of the Communications Solutions Group; and Steve Yoon, Senior Vice President of Global Sales.

The press release and information to supplement today's discussion can be found on our Investor Relations website, investor.keysight.com. During today's discussion, we will make forward-looking statements about the financial performance of the company. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties. Information about these risks and uncertainties can be found in our most recent Forms 10-K and 10-Q filings with the SEC. We do not intend to update any forward-looking statements.

In addition, we will refer to non-GAAP financial measures and reference core growth, which excludes the impact of acquisitions or divestitures completed within the last 12 months and currency movements. The most directly comparable GAAP financial metrics and reconciliations can be found on our Investor Relations website, and all comparisons are on a year-over-year basis, unless otherwise noted.

I will now turn the call over to Satish.

Thank you, Liz, and welcome to the Keysight team. You joined the company at an exciting time. Good afternoon to everyone listening in, and thank you for joining us today. Since our last earnings call, we have seen further acceleration in demand with robust growth across business segments and key regions. During the first quarter, Keysight delivered outstanding results with both revenue and earnings per share exceeding the high end of our guidance range. This performance reflects the execution of our strategic road map alongside the convergence of several secular tailwinds. These include AI-driven technology transformations, next-generation connectivity, rising semiconductor complexity and defense modernization.

Our differentiated portfolio of solutions is helping customers address increasing design complexity, accelerate innovation and move more quickly from concept to deployment. The investments we have made over the last 3 years have strengthened our portfolio, deepened our customer relationships and prepared us to capitalize on this unprecedented time. In Communication Solutions, we saw robust order growth outpacing revenue growth of 27% in the quarter driven by both commercial communications and aerospace defense and government markets.

First to commercial communications. Wireline delivered record orders surpassing wireless for the first time and was driven by demand for both R&D and manufacturing solutions. This momentum was broad-based across compute, memory, interconnect and networking technologies. This quarter marks the ninth consecutive quarter of wireline growth with 4 fundamental drivers shaping demand into the future: First, AI infrastructure is rapidly scaling. Hyperscalers and their respective ecosystems are investing in designing and deploying scale-up and scale-out architectures.

As these systems grow larger and more complex, there is an increasing need to validate performance across the entire infrastructure stack. Keysight's full stack portfolio across electrical, optical, RF and network protocol technologies enables this end-to-end validation from early design through deployment. We're engaging with all the hyperscalers and their ecosystems early in the development cycle to further breakthrough innovations in AI infrastructure. Second, the industry is moving to higher speeds and Ethernet-based AI networking. AI workloads are driving rapid data center build-outs with 800 gig and 1.6 tera optics, alongside accelerated development of 3.2 tera. The move to Ethernet-based AI fabrics for better interoperability is creating more test opportunities for Keysight. Our high-speed digital, optical and protocol solutions are helping customers design and validate next-generation switching silicon, [indiscernible] and interconnects, reducing risk and accelerating time to deployment.

In parallel, our arbitrary waveform generators and oscilloscopes are facilitating the move towards higher lane speeds such as 448 gig per lane to enable 3.2 tera speeds. Third, optical interconnects are increasing in importance. Rising bandwidth and power demands in AI data centers are accelerating the adoption of optical interconnects to supplement copper. Keysight is assisting optical transceiver and module suppliers to ramp and design their 800-gig and emerging 1.6 terabit modules with our recently introduced digital communication analyzer, Lightwave component analyzer products providing precision measurements for standards compliance prior to deployment.

Concurrently, customers are designing architectures around co-packaged optics optical circuit switching and silicon photonics. Our differentiated optical capabilities, including tunable laser sources and polarization synthesizers provide metrology-grade measurements for silicon photonics workflows.

Fourth, system-level validation and benchmarking are becoming essential. As AI clusters scale, our workload emulation solutions are assisting leading customers in solving their deployment challenges by emulating real AI workload and stress conditions. These 4 drivers create meaningful opportunities and sustained demand for our solutions as customers design, deploy and scale next-generation AI systems around the world. Keysight's thought leadership and partnerships with industry leaders will be on display at the upcoming design con and OFC events.

Turning to wireless. We saw healthy growth in the quarter driven by activity in nonterrestrial networks, 6G research, emerging AI at the edge applications and continued stability in 5G. We're seeing a broadening of nonterrestrial network ecosystem as new LEOs and direct to cell services gain traction. Keysight's 5G emulation platforms have expanded their coverage to non-terrestrial network system use cases. This quarter, we achieved a live NR NTN connection with Samsung in a 3G PP defined satellite frequency band furthering standardization. The Spirent PNT portfolio further enhances our ability to serve this market with industry-leading satellite emulation capabilities. Concurrently, we're seeing an uptick in activity across the wireless supply chain driven by AI edge devices and supply chain resilience priorities of manufacturers around the globe. Early 6G R&D engagements expanded as the industry prepares for large-scale technology demos at L.A. Olympics in 2028, solidifying our view of commercialization by 2030.

This quarter, Keysight, collaborated with MediaTek to progress standards around integrated sensing and communication use cases. In addition, we registered multiple wins for our newly launched Race SIM AI RAN offering, which makes possible the emulation of real-world network environments to train AI models for network functions. Keysight will be showcasing its end-to-end solutions portfolio for the wireless ecosystem at Mobile World Congress 2026 in Barcelona, along with a number of industry leaders.

Turning to aerospace, defense and government. We saw record quarter 1 orders and growth across all regions, driven by heightened global focus on deterrents and defense modernization priorities. Orders reflected a mix of program expansions, production automation and new system deployments across spectrum operations, space and satellite and radar applications. Keysight's high-precision and purpose-built RF and digital solutions and automation capabilities are ideally suited for these applications with stringent mission-critical performance requirements. U.S. primes continue to develop precision capabilities and ramped radar production in the quarter. We secured multiple wins in North America for Keysight's high-performance threat emulators to meet critical spectrum operation requirements.

Our digital transceiver module payload testing capability was chosen by a Canadian prime contractor for space and satellite applications. We continue to expand collaborations with defense technology start-ups and [indiscernible] primes as governments look to accelerate innovation around new applications in satellites, drones and autonomous systems.

We also saw a robust broad-based activity in Europe, supported by rising defense budgets and elevated national security priorities aimed at strengthening regional sovereignty. Keysight is actively engaged with multiple European primes and government agencies in the areas of signal detection and recording, radar phased array antenna characterization, over the air 5G field deployments and precision angle of arrival characterization applications.

Our newly acquired PNT portfolio had a solid quarter as aerospace defense organizations depend on technology to test anti-jam and anti-spoof avionics in contested environments. The increase in global defense spending represents a structural trade tailwind to our aerospace and defense business, and we're well positioned to capitalize on the sustained demand going forward.

Moving to Electronic Industrial Solutions Group, orders grew for the third consecutive quarter, and revenue was a record. Orders and revenue both grew double digits across all 3 EISG markets of general electronics, semiconductors and automotive and energy. In our General Electronics business, growth was driven by ongoing momentum in AI-related innovation and infrastructure investments across the global supply chain. In particular, the increasing complexity of high-performance PCBs with higher-density interconnects, multilayer architectures, faster speeds and tighter tolerances is driving greater test intensity. Keysight's solutions addresses customer needs across all major PCB design standards. By investing ahead of the curve, we're leading in both R&D and production with increasing speed and higher frequency measurement capabilities. Digital health, again, grew with wind spanning medical device manufacturing, R&D and biomedical research. In education and advanced research, lower funding in the U.S. was offset by strength in Asia as sovereign programs step up investments in semiconductor research and workforce development.

In our semiconductor business, the pace of investment accelerated. High-bandwidth memory and a broader AI-driven capacity expansion led to robust demand for our wafer level test and characterization solutions. Silicon photonics programs and production timelines across major foundry customers are picking up speed and intensity. Keysight's deep photonics and semiconductor expertise as well as our broad R&D and production portfolio make us the partner of choice.

The outlook for the year has reflected in our customers' latest technology road maps and capacity plans has improved sequentially. Lastly, in Automotive and Energy, the overall business environment was stable as orders grew for the second consecutive quarter. While the end market remains mixed, we had healthy annual renewals in our ESI simulation portfolio as well as key wins with leading EV and robo taxi customers in software-defined vehicle-related manufacturing. EV and charging R&D investment by OEMs and test labs was stable sequentially. We recently introduced 2 new megawatt charging solutions that enable customers to reduce design time and deliver reliable, high-power charging systems that meet the latest global and local standards.

In summary, we're pleased with the start to the year and have confidence in our ability to outperform grounded in our strong pipeline of solutions and go-to-market momentum. Keysight serves a diversified set of end markets, which allows us to capture growth wherever it emerges. As AI investment in flex, we're leveraging our strengths to capitalize on that momentum. Importantly, the same core strengths driving our success today are the ones that position us for future inflection points. As new growth opportunities develop, we're built to identify them, respond quickly and outperform. We see a broad and expanding set of opportunities ahead and remain confident in our ability to convert them into sustained growth and value creation. I'll now pass it on to Neil to provide additional details on our financial performance for Q1. Neil?

Thank you, Satish, and hello, everyone. We achieved record results in Q1, well above the high end of our guidance range fueled by strong growth across our businesses as we continue to meet increased customer demand for our portfolio of technology solutions. First quarter total company revenue of $1.600 billion was up 23% on a reported basis with acquisitions adding 8 points and currency 1 point. On a core basis, excluding those items, revenue grew 14%. Orders of $1.645 billion were up 30% on a reported basis and up 22% on a core basis. Gross margin was 66.7%, up 90 basis points, driven by favorable product mix, including the addition of higher gross margin revenues from our recent acquisitions.

Operating expenses were $628 million, in line with our expectations as we continued investments in next-generation R&D. Operating margin was 27.4%, up 20 basis points. We delivered net income of $376 million and earnings per share of $2.17, both up 19%. This result was driven by strength in our core business, which delivered operating margin of 28.9%, up 170 basis points year-over-year as a result of 41% core operating leverage.

Moving to the segments. The Communications Solutions Group generated revenue of $1.124 billion, up 27% on a reported basis and up 16% on a core basis with a gross margin of 68.5% and operating margin of 27.5%. Within CSG, the commercial communications business generated revenue of $758 million, up 33% with growth in wireless and wireline. Aerospace, defense and government achieved revenue of $366 million, an increase of 18%. The Electronic Industrial Solutions Group generated $476 million in revenue, an increase of 15% with growth across all 3 markets: general electronics, semiconductors and automotive. EISG delivered gross margin of 62.4% and operating margin of 27.2%. Software and services accounted for approximately 40% of Keysight revenue while annual recurring revenue was 29% of total mix.

Moving to the balance sheet and cash flow. We ended the quarter with approximately $2.200 billion in cash and cash equivalents generating cash flow from operations of $441 million and free cash flow of $407 million. This quarter, we repurchased approximately 420,000 shares of Keysight's stock at an average price of approximately $207 for a total consideration of $87 million.

Now turning to our outlook. Today's guidance does not contemplate any impact from the recently announced Supreme Court decision regarding tariffs, which we are still assessing. For the second quarter of 2026, we expect revenue in the range of $1.690 billion to $1.710 billion, representing 30% year-over-year growth at the midpoint. We expect Q2 earnings per share to be in the range of $2.27 to $2.33, representing 35% year-over-year growth at the midpoint.

This guidance is based on a weighted diluted share count of approximately 173 million shares. From an acquisition perspective, the integrations are on track, and we are excited about the expanded opportunities we have to serve customers. Our expectation for $375 million in acquisition-related revenue for fiscal '26 is unchanged. Our synergy target of more than $100 million in run rate cost synergies and other operational efficiencies also remains unchanged with realization heavily weighted to late in 2026, given our timeline for ERP migration.

As you heard from Satish, we are highly encouraged by the strength of our portfolio and the direction of our end markets. With the visibility we currently have, our base case for fiscal '26 has increased as we now expect total annual revenue and earnings growth just above 20%. In closing, we started fiscal 2026 with outstanding results, and we see solid momentum into Q2 as we contemplate the remainder of the year. With that, I will turn the call over to Liz to begin the Q&A session.

Thank you, Neil. Victoria, will you please provide the instructions for the Q&A session?

[Operator Instructions]

The first question comes from the line of Aaron Rakers with Wells Fargo.

Congrats on the quarter. I guess my first question, Satish, when you outlined the growth drivers, I think it was 4 of them predominantly driven by AI and what you're seeing around optical interconnect and such. With the wireline business now surpassing the wireless business, I'm curious if there's an ability to unpack how much those are contributing to the business, how much they're necessarily growing. Any color you can provide on what you're seeing there would be greatly appreciated.

Thank you, Aaron. Yes, we're very excited by the quarter. Broad strength is sort of the theme for the business and will impact a number of the drivers. But particular to your question, roughly, we sized our exposure last year in Q4 to be just about 10% of the company revenue. And on top of that, this quarter, on that run rate, I should say, we had robust order growth and significantly above company average. So the company average order growth was 30%. So significantly above that. And for the AI business inside of the wireline -- inside of the wireline parts of our operation. And the name of the game is really about broadening of demand across our customer base, right?

We've doubled the number of customers that represented that demand. If you look at the -- through the lens of customer concentration at the company level, our top customers, top 2 were still non-AI customers. So it again reflects the broadening of demand across the globe and across the applications that we have. And that's what we attempt to do on my earnings message is to really break out the various demand drivers and how Keysight is plugged in to those different parts of those workflows.

If you just look at it on an R&D and manufacturing basis, I mean, both R&D and manufacturing grew year-over-year. So we're quite pleased by the strength that we're seeing in the marketplace, and we think that strength continues into this year.

Yes. Very helpful. And Neil, as a quick follow-up, I'm curious, in these last 2 quarters, you've driven a significant amount of incremental operating leverage to the model? I know it's a little bit dated, but going back to the Investor Day, you had talked about like a low in 31%, 32% operating margin target. I'm curious, as we progress through this year with 20% growth, how you view the current kind of operating -- incremental operating margin leverage in the P&L from here?

Yes. I guess I would point you back to statements that we've made publicly. We've designed our business model about delivering 40% core leverage on growth that's in the mid-single digits or better. In fact, this quarter, we delivered 41% leverage, obviously, on significantly higher growth, core growth but keeping in mind there were new tariffs in the base period, right? So you're delivering that 40% incremental leverage while absorbing the impact of tariffs. I think as we think about the full fiscal year, again, pointing you to that 40% core growth is kind of the starting point. And then we have noted the acquisitions as we inherited them we're operating at a significantly lower operating margin. So they're dilutive to operating margin here in this first year. But once we get that $100 million of cost and other synergies out we expect them to be accretive to Key's overall operating margin. So we're certainly moving in that direction, but executing on those acquisition synergies will be a key driver as we look forward.

Our next question comes from the line of Meta Marshall with Morgan Stanley.

Great. Congrats on the quarter. I guess just as you see kind of strength in the AI orders? Trying to get a sense of is that customers same customers expanding their implementations with you are kind of finding more use cases? Or just kind of are you finding a broadening of the customer base, like with some of these neo clouds or kind of other cloud builders coming into the market, are they kind of adding to the growth. Just trying to get more of like a same-store sales versus kind of expanding customer base there would be helpful.

I mean if you think about the customer base, silicon companies, anyone that's designing chips that go into data centers are obviously core customers of ours. The contributions we're making to them is growing. And then you look at manufacturing ecosystem that feeds these companies also largely known customer base but where we are able to leverage our channel and really expand the contributions we're making to them. We've had a focus on hyperscalers that's also expanding. And I think the last customer set is a newer one, which is the new clouds that you referenced and it's smaller part of the -- it's a smaller part of the business today, but growing.

What's also interesting, as we look at the customer base to the lens of our regional footprint is if you went back a year ago, probably a lot more of the business in the U.S. And as we start to think about the business this quarter, especially more business internationally as well, including in Southeast Asia, where a lot of the manufacturing installed base is.

Great. And as a follow-up, just on the aerospace and defense. We've been hearing about kind of budgets stepping up for a while. This is kind of the -- we're starting to really see it an acceleration in your [ guidance ] numbers. Do you view this as kind of the beginning of our trajectory or this could be kind of a new run rate for this business?

That's a great question. I think there's two parts to the answer. One is what happened in the quarter and what we are looking as we look over the horizon could be the case. As far as this quarter is concerned, we started to see the effects of last year where we had an administration change, and coupled with some budget uncertainties that delayed spend and all of that started to -- most of these programs start to come in -- through the end of the year spend, if you will. And so that reflects the upside and the demand side of the -- for our aerospace defense business. But as we look ahead into the pipeline and even further out, what we're seeing is increasing defense spending in Europe, and we also saw a very strong European defense spend this quarter and we expect that to continue.

We're also seeing prime contractors in the U.S. investing more in organic R&D and also investing more in capacity adds. So I think that's another and the lever that is different than in the past. And with the best of the portfolio we had around MSO and space and satellite radar. Now combined with our P&T business from Spirent, we can make a broader impact to these customers. And we think the budgets are very supportive in this business, and we're well positioned there.

Our next question comes from the line of Tim Long with Barclays.

Two, if I could, as well. Maybe Satish, for you. Obviously, a lot of traction in AI. You covered a lot of the key use cases. You mentioned some of the emerging ones, CPL, LTO, SiFi, 448 per lane, you could probably also throw more scale-up Ethernet. You mentioned Ethernet's good, maybe more scale across Ethernet. So when you look at kind of this next phase here, are you seeing some of these newer use cases and technologies as being fully additive to what's going on. So maybe if you can just talk about some of the emerging ones and how meaningful they can be to that bucket?

And then second, maybe, Neil, one for you. appreciate the incremental margin conversation, 40% software services in the quarter. I know there was some probably ESI in there, a good quarter. But maybe just talk higher level about that trend and how you see that contributing as the company gets more recurring in the model and some of these software pieces that you're adding what do you think that does to gross margins or operating margins as the model moves forward?

Thank you, Tim. I'll just make some broad remarks, and I'll have Kailash make some specific comments on what he's seeing in the business. I think at the high level, what we're seeing is concurrent parallel technology wave sort of coming at pretty much an unprecedented rate, what was a well-defined 2-, 3-year long technology refresh cycles, I mean now are happening concurrently. And I think that pace of innovation when you combine that with the complexity of the technologies, and some of them are competing, right? You can look at electrical versus optical.

And so the race is on. And I think the economic value that can be unlocked from having a technology that goes faster to lower power is there. So there is an economic value for the AI clusters that can be unlocked. And so it really plays to the strength that Keysight has had. And so when we started our strategic focus that I called out at the Investor Day in 2023. This is what we were shooting for. And given the full stack offerings we have, the physical layer tools and the emulation capabilities, we're now able to bring that to bear to new emerging use cases in a way that would be difficult for a product-driven organizations, which may have products here and there. But I think having that breadth of portfolio and the technology to go provide solutions is a huge differentiator for us, one, I believe, is sustainable as we look into the future.

Yes. At a broader level, what we're doing is enabling these new AI racks and clusters. And what we see is hundreds of components are getting -- new components are getting designed and invented that are going into these racks and clusters. And with our physical layer portfolio, we're able to help in early R&D all the way to manufacturing of these components and with our protocol layer portfolio, we're able to emulate these clusters and racks at scale even before deployment live deployments happen. So that's one dimension of this. Satish talked about the overlapping technology waves, the acceleration of the speed of these technology cycles. And the reason that's happening is you talked about a bunch of technology, silicon photonics, there's parallel innovation going on in optics and electrical transmission. There is also innovation from a long-haul, short-haul perspective, scale up, scale out networks and new components are getting designed, right? So we're attracting not just the regular customers where we're deepening our engagements with start-up companies and other players, neo clouds. They're coming in and they're inventing for power, speed and density.

All of this is sort of layering on existing typical cycles that we would see in a wireline type of an IT type of dynamic. We're seeing a lot more of that go on concurrently, and that's driving a lot of growth. We're excited to showcase many of these innovations this week at DesignCon and in a month from now at the OFC as well in mid-March.

Yes. And -- so this is Neil, just with regard to your comments on software and services. As you know, we've looked to grow the proportion of our business coming from software organically. That mix shift towards software happens relatively slowly, and we've looked to supplement that with acquisitions. We made the acquisition of ESI a few years back. And obviously, recently, we just completed not just Spirent but the optical design and power artist businesses. Together, those acquisitions have above-average software mix added about 3 points to the overall [ software ] for Keysight. The interesting thing, if you think about the organic side is right now, the hardware portions of our businesses are growing quite aggressively. So I think that slows some of that mix shift. I think from a margin perspective, though, we have a highly differentiated portfolio that's aligned to these secular themes around AI and data center and soon to be 6G, which should, in the end, be gross margin positive as well.

Our next question comes from the line of Mark Delaney with Goldman Sachs.

First question, I was hoping to better understand the company's expectations for the second half of the year. I think Neil, you spoke about a little over 20% top line growth as your new expectation for fiscal '26. I think that's all not organic. Please correct me if I'm wrong. But it does seem to imply that there's a little bit of ...

That's correct. Yes.

Okay. And it seems to it might be a little bit of a moderation in the second half. And I realize it's coming off of a very robust 1Q and 2Q guidance. But if you could speak a bit more on what you're trying to assume in your second half guidance and how much visibility you might have because the orders are strong, it seems like the end markets are generally doing well, but they're just trying to reconcile that with what might be implied in your comments for full year revenue.

Yes, I mean I guess we've talked at length over the years about how we manage our business and that we generally have really strong visibility 1 quarter out, pretty decent visibility 2 quarters out, and then it falls off beyond that. So I think here we are, we obviously had very strong order and revenue growth here in Q1. We have a strong funnel here as we enter Q2. So we feel really good about the guidance that we put out for the second quarter. That fund of visibility extends now out into Q3. And then with again, a little bit less clarity as it relates to the back half -- to Q4.

So I think looking to put guardrails on it, we believe that, again, on an all-in basis, we can grow the business 20%, a little over 20% this year. Is there opportunity for upside if we sustain the same level of momentum that we see in Q1 and Q2, absolutely. But our base case is at this point for organic growth that is substantially above our long-term model even in the back half of the year and we'll see how it develops as we move through the year.

Okay. No, helpful context. The other question was on supply chain, just given how strong the business is running in terms of demand and volumes, maybe you think about your ability to get enough supply overall, but if you could also speak specifically to getting enough here on in memory because that's an area that's been somewhat tight in particular.

Yes. Thank you, Mark. We've prepared for sort of the scale of the business, given the conversations we're having from the customers last year. I think of -- I think I made a comment that 2025 was a year of building momentum for us. And I think that's really helped us prepare for this compounding momentum that's now upon us and our team is doing a great job scaling but also in a disciplined manner as we look forward. As far as memory is concerned, we're not -- we don't have volume usage for these high-end demand, high bandwidth kind of memories that are used in AI and other areas.

And so given that we're not necessarily exposed to that. Now there is some on the margin, prices are going up on memories. So we factored that into our outlook and guide. And we keep monitoring this, but we feel good about our ability to execute in the next couple of quarters and then we'll keep planning that way.

Our next question comes from the line of Andrew Spinola with UBS.

I wanted to ask a high-level question about the competitive landscape in your AI business. Just given the strength of the demand there, what does the pricing look like in that market? Are you able to see any price ups, any improvements in pricing or is the size of the customers affected. And can you also talk about just how the market is, given how quickly it's moving, how many competitors are you against in a lot of these end markets, how competitive are they just given the -- how fast this market is moving.

Yes, Andrew, thank you. I'd just say Keysight's competitive advantage is that we are designed to be a solutions-oriented company. While there are a lot of product base competitors that play into the marketplace in general with tools, our strength is enhanced because we have our own in-house tech stack that gives us the differentiation, especially in advanced technologies when you start to think about 1.6T and beyond, as an example, or you're looking at new optical and electrical technologies converging, speed is very important for the ecosystem.

As you noted, customers are racing with -- for innovation and our ability to keep pace with them with the products and solutions they need is key. We also participate in a number of standards bodies across the globe, and that gives us a very unique vantage point to not just provide products, but be really staying ahead of our customers. And that's what they appreciate.

Having said that, we don't take that for granted. We work hard to make sure our customers in the ecosystem are supported supported, and we have teams around the world that work with our customers every day. And with regard to new technologies as our new products come out, our goal is to design things that are competitive, but also have the ability to grow our gross margins, and we feel good about the value creation associated with our business in AI and actually the entire portfolio.

Got it. And then you had mentioned on the prior call last quarter that you're operating in a constrained environment. I'm just wondering if any of the acceleration in top line in Q2 is a representation of some of those constraints coming off? Or is this just general continued improvement in demand?

I think largely improvements in demand for [indiscernible]. And as the AI infrastructure is starting to get deployed at scale. We're starting to see that scale build, right, and people are manufacturing more with confidence, maybe on the front end of it, people are trying to get their designs correct and trying to deploy things that have high quality. And now I think the conference is improving and therefore, the scale is building.

Our next question comes from the line of Atif Malik with Citigroup.

Congrats on the results. Satish, you spoke about NTN ecosystem and new LEOs. I'm curious if you have some sort of a TAM number for these new kind of projects.

Yes. Thank you, Atif. It's been an exciting year for wireless already. We started the year having returned the business to growth last year, high single-digit growth. And this year, we're off to a robust start, surpassing our expectations even for -- since the beginning of the year. And one of the legs of that is really this non-terrestrial networks, the use of satellite technologies for commercial direct-to-device type of applications. But if you take a big picture view, we see networks are getting multidimensional, right, and integrating terrestrial airborne, satellite communications more seamlessly and with the infrastructure also with sensing and other technologies is going to be part of this vision for 6G. And so the early work that we've done with standards is positioned us well, and we've had a couple of wins even this quarter that sustains the momentum in this business. It's a little bit too early to sort of size that as a TAM, but we feel good about our ability to grow our wireless business this year based on NTN but also eventually 6G and other applications.

Great. As a follow-up for Neil. Can you talk about the linearity of the orders in Q1? And are you expecting orders to outpace revenues in Q2?

Yes. I mean I think we saw pretty strong demand from the outset in Q1, and that was sustained throughout the quarter. So not a whole lot to be gleaned from the lane area within the quarter rather than broad strength. I think as we think about the second quarter, obviously, you can see through our guide of $1.7 billion of revenue that the timing of some bigger deals going to be shipping in Q2 that I think is likely going to kind of bring orders and revenue to close together either side of one, I would call it.

Our next question comes from the line of Mehdi Hosseini with SIG.

Two follow-ups for me. Neil, in the past, you have defined your overall business by a mix of software and hardware. R&D and high-volume manufacturing all acquisitions over the past 2 years. Where are we with those 2 mixes? And I have a follow-up.

Yes. So the software and services was 40% within the quarter. Software specifically is above 25%, so 26%, 27% in that range. If -- on the software, hardware mix, I think we are seeing a little bit of -- a little bit more manufacturing opportunity here in the wireline space with the data center build-out. But we've talked about that kind of being 60 [indiscernible] 10 over the long term, and we're probably a little bit below 60 R&D at the moment in the current environment.

Okay. Great. And my follow-up is for the team. As we -- you've had a number of sequential growth, a number of quarters with sequential growth in wireline. I'm under the impression that most of it is driven by a scale out. If I'm correct with that assumption, when do you see opportunities in the scale-out would materialize? And can you help us understand the size of the TAM or market opportunities. Scale [indiscernible] versus scale up.

Maybe yes, let me take that question. This is Kailash. We're seeing opportunities in scale up as well as scale out. So clearly, as these clusters and racks are put together, there is an expansion we're capitalizing on that scale. But not just that, to your earlier question about R&D, there is quite a bit of activity at this moment going on from the perspective of 1.6 terabit R&D as well as 448 gig per lane and 3.2 tera R&D. We are seeing expansion in those areas as well. So scale up and scale out our opportunities for us in both R&D and manufacturing.

Our next question comes from the line of Samik Chatterjee with JPMorgan.

Samik, your volume is very low.

Like if you're using -- if you're using AirPods or anything, please disconnect and your hand phone.

Okay. Sorry about that. But maybe just talking of, I mean, the $100 million increase in revenue from -- in the guide that you're incorporating, that's very high end relative to when even if I go back and look at Keysight historically, I know you spoke a lot about the drivers, but wondering if you can sort of share your views about -- how much of that is the confluence of different technology sort of inflections that are happening at the same time relative to Keysight may be participating a lot more in manufacturing and a lot more relevant in the manufacturing based on both organic as well as inorganic development. Just trying to parse out, I mean, we've seen you go through multiple sort of cycles before. but the magnitude of the increase here in revenue seems a bit unprecedented. So just break that down for us, if you can. And I have a follow-up.

Yes. Thank you. So Samik, Neil may have some comments on sequential math. But I'll just say, at the highest level, we see this compounding momentum this year. And this is because a number of these tailwinds that we have have been sort of the underpinnings of our growth strategy, whether it be next-gen semi or connectivity with wireless or semiconductor defense modernization and AI in the wireline sector, right? So all of these are coming together and one where we are perfectly in a great position to capitalize to the differentiation of our solutions we have. We feel really good about the fundamentals in the business, and the team is executing very well. Maybe I have Steve make some comments on the pipeline and sort of the volume and the quality of how the pipeline is progressing as we see it. And that'll maybe give you some additional color.

Thanks, Satish. Well, let me start by saying it's a great time to be in Keysight sales organization right now. This was the highest quarter ever and excluding acquisitions, our second highest on record, which is unprecedented for quarter 1 for Keysight. This was also our seventh consecutive quarter of year-over-year order growth. But I think this momentum that we're seeing now started building about a year ago when we delivered 8% growth year-over-year in Q2. Our focus throughout has been to broaden engagement across our key customer base, strengthening our partnerships and gaining that early visibility into strategic programs where we can shape their requirements and capture key technology inflections. And I think we're doing that, just the evidence is there and is showing up in our funnel dynamics as Satish was alluding to.

In my 36 years with the company, this is one of the strongest funnels I've ever seen across the 4 dimensions that I track which is short-term funnel, long-term funnel intake and funnel velocity. Both our total funnel and new funnel intake are at all-time highs, and our late-stage funnel is up high double digits. This really provides a strong near-term visibility for this quarter, which gives us great confidence going into the second half as well. I'm also excited about our robust NPI pipeline as well as new synergistic opportunities we have now with our recent acquisitions, especially Spirent, Together, they position us with the right solutions at the right time and engaging with the right customers and white market makers and their ecosystem to capture these opportunities ahead.

Okay. Got it. For my follow-up, Satish, I've received this question from a couple of investors. So I thought I'll ask you directly in terms of get your thoughts on this. A few investors have asked about sort of your software business and how we should think about the disruption fears from AI itself to the software capabilities that you offer your customers, both sort of on-box and off-box. Is it attached to the hardware as well as what you offer a stand-alone software, how to think about the AI disruption risk relative to those software solutions.

Thank you, Samik. I think, look, we've been very clear since the launch of the company that we're a software-centric but a solutions company. As a solutions company, our focus has always been on our customers' toughest problems and solving them better than they can solve it internally or better than they can solve it with anybody else. And this has been the work that we have been doing, and it's work in progress and we continue to deepen our relationship with our customers. I would really welcome you to join us at DesignCon or Mobile World Congress or OFC, where you can see the work we're doing with industry to really progress standardization and progress technology. And it's a collaborative model, one where having the tech stack that's differentiated, gives our customers an advantage. So I don't look at our business as sort of like a software business or a hardware business. It's a solutions business where software is part of the value proposition.

Now there is a section of our business where we have design tools, where we're unique in those design tools where we enable our customers to simulate, but underlying the competitive advantage there is not some workflow enabler, but it's really deep physics, deep physics that has been built over decades, right? Even the optical business that we just acquired from Synopsys has been around for multiple decades. And it's not as simple as Maxwell's equation, right? It is a whole bunch of deep physics that enables people to model the real world. And we'll have to stay on top of it. Obviously, we're investing to keep building new capabilities and expanding into new use cases.

So I would not go as far as saying we're not looking at AI. We are, in fact, embedding more AI into those tools to make them easier for our customers to use and for them to simulate more complex things. So that's the path we're currently on.

Our next question comes from the line of Rob Mason with Baird.

Again, congrats on the good results. Satish, number of times, you again talked about how quickly the pace of innovation is moving these design cycles compressing. And I guess there's nowhere -- that's more evident in your wireline business. As you think about moving from 800 gig to 1.6 and now 3.2 on the research side. Can you just frame for us how much recapitalization versus upgrade type activity that mix is involved there. And I'm just curious, just given the pace that it's on, does that -- is that spend cycle change from what it typically -- or what you have experienced in the past?

Yes. I think this has always been the question that's on people's minds. So when 100 gig was done and we were moving to 400 gig, obviously, there's a little bit of customers moving to 400 gig, so they buy more 400-gig tools and they buy a little less 100-gig tools, and it's always the case. But what we're currently seeing is concurrent designs where the 800 gig is being ramped and 1.6 is being accelerated in R&D and customers are talking about how do they get to 3.2 as well, right? So it is -- the next couple of years, we see this concurrency continuing just because all this content ultimately has to go into the AI clusters where you're really having to have the right networking fabric to match with the compute that's there in these clusters. So it's not good enough to have a great compute chip but maybe not an equal and throughput on the networking side.

So it's really the system-level problem, and we feel good about not just one portfolio that addresses that, but we feel good about our portfolio that were -- that we have for the wireline ecosystem. It's highly differentiated.

That's helpful. Just as a follow-up, I know you've only owned the Spirent businesses, OSG, I guess, as well as short time. But can you give us a feel for, at least within the the first half of this year, maybe how those businesses are tracking on a pro forma basis from a growth standpoint?

Yes. I would just say, as I said last quarter, we took a pretty conservative approach in terms of how we plan those businesses this year from a growth perspective, given the broad scale integration activity that's going to be going ongoing and the acquisitions right now are right in line with our own expectations. We remain on track to deliver the $375 million of revenue that we communicated last year, and our synergy realization is also tracking to plan.

We'll take our last couple of questions, please.

Our next question comes from the line of Rob Jamieson with Vertical Research Partners.

Just wanted to touch base on AI, just quickly in the expansion of the customer base that you're talking about. We've heard you talk about prior like -- and what you saw in 5G, where sort of a handful of customers to 100. I guess what I'm trying to ask as like where are we on that path today like, is this still early innings? And really, what I'm trying to do here is try to pair some of the comments from a couple of quarters ago when you all talked about some of the trends you were seeing in the AI ecosystem and how they were sustainable all the way out to 2028 and beyond, especially as we move from the data center to edge and access layers. So just would love to kind of understand where you think we are in that customer expansion base and that this is still like early innings compared to like your prior cycles like 5G.

Yes. I think Rob, it's -- from everything we can see, there's one thing we can take away is AI is going to have a material impact to the rate of innovation across our end markets. And so when we think about it through that lens, yes, you can always say, well, things ebb and flow, where you take a long-term view. I think there's acceleration that we see in adoption of technology is going to continue, and we're in a great position to enable the leading innovators around the world. And even with the expansion that we've seen in customers to date, we still are largely servicing, call it, the U.S.-based -- U.S. hyperscaler based demand. And we're starting to hear about more sovereign investments around the globe that are yet to come and use cases where AI starts to intersect with some of our other businesses as well. So those are still largely ahead of us, and we feel good about our position today, and we continue to invest to realize future opportunities.

Perfect. And then just really strong free cash flow performance, Neil. How are you thinking about priorities -- prioritization between M&A, organic reinvestment and buybacks for year '26. Just what does the current pipeline look like? Any changes in valuation environment? And any color on the types of assets you'd be looking to kind of add to the portfolio would be helpful.

Yes. I mean, I don't think our priorities have changed. Our #1 priority by far is still to invest in the organic growth of our business, obviously, participating in these AI rapidly moving AR markets takes a lot of investment. And as Satish mentioned, the investments that we've made over the last 2 to 3 years are really enabling our success today. We're similarly going to be making some investments to scale capacity and make sure that we are capturing all the opportunities that are here in front of us. I think beyond that, we continue to look to strike a balance between return of capital to investors and adding value through M&A. Our immediate focus in the M&A side is on capturing value for the 3 acquisitions that we've just closed, and we're hard at work on that. But at the same time, we're starting to rebuild the funnel of opportunities across our end markets that can potentially create value into the future.

Yes. I want to also add, our Board has authorized a $1.5 billion stock buyback authorization that we have as well as a way of returning capital.

Our next question comes from the line of David Ridley-Lane with Bank of America.

So I'll just ask a simple one just to make sure that we're hearing the message that you're delivering. Why now, right? And what I think I've heard over the course of this call is that manufacturing kicked in. But tell me if I'm wrong on that and just why are the orders all of a sudden hitting right now?

Yes. David, I would say that the 2025 was a year we built momentum in the business. And now what we're experiencing is a broad-based demand across all our businesses and across our regions as well. So it's broad-based. Yes, for the AI business, if you look at it, there's continuing demand in R&D and manufacturing is becoming important to customers. So obviously, that's the case. But if you take our Aerospace and Defense business, that's got nothing to do with manufacturing in the same way you think about it in the wireline side of things. And our wireless business was up. Our EISG business was up.

That concludes our Q&A session for today. I would like to turn the call back over to Liz Morali for any closing remarks.

Thank you, Victoria, and thank you all for joining us today. A replay of today's call will be available on the Investor Relations website later today, and we appreciate your interest in Keysight.

Thank you, ladies and gentlemen, for your participation in today's conference. This concludes today's call. You may now disconnect. Have a wonderful day.

We'll start it off. Maybe, Neil, I'll start with you. Maybe just give us a little -- it's been a pretty good run of recent. So maybe just high-level kind of what were some of the positive factors in '25 and what's informing the pretty good outlook you gave for next year?

Yes. That's a great question. As I look back on '25, the first thing that comes to mind is building momentum, right? We had started the recovery as we were entering '25, but we really were talking about a mixed demand environment. Some of our businesses up, some of them still a bit soft. And we've really built momentum as we move throughout the year. We started with growth expectations for '25 that were at the low end of our long-term range, 5%. We took it to 6% after half, 7% after 3 quarters. We finished at 8%. And then we've guided to 10% growth here in Q1.

So we really have built momentum as this recovery has happened and as our end markets strengthened. And so I think as we enter '26, we had a great order book in Q4. We have a strong funnel, strong backlog going into the quarter. And maybe more importantly, we've got these big technological themes that are aligning positively for Keysight.

I think number one among those is the impact that AI is having on our wireline business in commercial communications. But in addition to that, our wireless business returned to growth in '25, and we see that growth sustained into '26, driven by things like nonterrestrial networks, early 6G research, Open RAN, these types of things.

Semi is rebounding, some of that driven by AI, but also looking for assurance of supply in the semi markets. And then, of course, aerospace, defense, we're also bullish there where not only are U.S. defense budgets up and talking about things like the Golden Dome and those types of things, but you've got your European allies committing to spend on defense at a higher percentage of GDP.

So we are -- we've given a soft guide for '26 that we expect the growth rates to be at or above the high end of our long-term model. We expect to deliver 10% or more EPS growth. And so we're well positioned here as we enter '26.

Okay. Great. Yes, it's a good starting part. We'll dig down on a lot of the topics you talked about. Kailash, maybe we'll get you involved early here. Last quarter, you did give us a little more color on kind of AI influence on the wireline business, about half of it related to AI.

So -- maybe if you could start off by just walking through kind of the key use cases that you guys are addressing in the AI world. And I'd love your sense. We know the wireline business has been outgrowing wireless. So if you could just touch on like the impact that AI specifically is having on the growth in that business?

Yes. We're -- we've talked about accelerating technology megatrends. And clearly, AI over the last 2.5 years has been a big growth driver for all of Keysight, definitely commercial comms business. So as the industry has sort of gone from experimenting with AI and deploying this at scale, you think about every design that goes in compute, networking, memory, interconnect and power, all of the products, all of the systems that need to be designed to enable those dimensions, get tested, emulated and designed with Keysight solutions.

You talk about high-speed switches. You talk about interconnects, chip interfaces, custom silicon, DSP. Majority of these products are being enabled by Keysight solutions. So we're helping lead customers from the chipset folks to help them test these interfaces at high speeds. We enable component makers that get deployed in data centers in these scale-up and scale-out networks with our capabilities. We're able to emulate optical signals, electrical signals that they would be -- that those components would be faced with in a data center environment. We enable them to test fidelity, power, these types of parameters.

Then you kind of go up the stack, you have these switch makers. You think about the Aristas of the World, you think about the Juniper networks of the World, we're enabling them with emulating AI traffic as they design their products in the lab environment because that's what they're going to be seeing -- their products are going to be seeing in the AI data center infrastructure. So we help them there.

We have contract manufacturers and others who are building these accelerator cards, AI offload accelerator cards, GPU cards, and we're helping with a lot of our basic products to help in that production and the manufacturing flow.

And finally, we have hyperscalers, and they're doing a lot of different things, obviously, at the top, they're emulating workload traffic. They're training models. When these models get trained, you have workloads that move across AI racks, servers and clusters. They move at different speeds, 400G, 800G, 1.6 tera and beyond. They're also looking for how well their GPUs are utilized; how much time it takes to train a model. What is the benchmarking? How does it compare using this type of a rack or that type of a component, we're helping hyperscalers in their ecosystem with the new solutions that can actually emulate workloads as these models get trained.

So those are some new capabilities that we introduced in beta form last year. And in this year, we made formal shipments of those -- some of those products, the Keysight AI data center builder in particular, has received a lot of industry awards. It's one of a kind, and we're leading the industry with that capability and helping hyperscalers and their ecosystems with some of those needs.

So if you pull back up, I mean, we've got the broadest stack all the way from physical layer solutions to these application layer solutions, allowing benchmarks of -- benchmarking of AI workloads, and we're able to cover everybody from chipset players to component makers to subsystem makers like the switch makers, the ODM, CMs and the hyperscalers. And that's also leading to a widening of the entire customer base as more and more companies, just the traditional players, but also a lot of start-up companies entering the fray.

Right, right. Yes, it's just a lot of different vectors you guys are participating there. So just curious what you kind of see moving forward, like if we sat here 3, 4 years ago, I probably barely knew what a back-end network was. Now it's huge. Now we're talking a lot of scale up. We're talking scale across. So are you still at the phase where you think a lot of your customer base will be still expanding with new companies and new use cases that are going to develop over the next few years to further supplement the growth here?

Yes. You think about the gigawatts that are getting deployed, right? There's another 10, 15 gigawatts that are going to get deployed potentially in '26. That's the projection and then another 100 gigawatts of capacity over the next 5 years.

Scale up, these are things that happen inside a rack. These racks are going from 10 kilowatts to 100 kilowatts. There's more complex networking, switching, routing that goes on. And then there are protocols that define how the workload needs to move across the different GPUs and servers. So that's an expansion. Some of that is not quite standardized, but there are new standards coming in, which means that for the scale and the standardization, you need to have interoperability type of capabilities. So you can say, okay, we deploy this component and then that switch, things still work in a rack. So those are additional opportunities for us in the scale-up space.

But then there's also the scale, right? I mean you've got to deploy all of these racks. So we participate in that, too. You go to scale out, that's all about networking and connecting these racks inside an AI cluster. Some of these clusters are hundreds of thousands of GPUs and other compute capabilities. Again, there are new protocols like Ultra Ethernet Consortium Alliance is coming up with on scale-out networks. You have transceivers that need to get built at different speeds. So that's an opportunity.

Scale across, again, as data centers get disaggregated, distributed. And as the data centers move closer to the edge, that's an additional opportunity. So we're pretty excited about all of these vectors. But as with anything that's sort of ramping this way, there are periods of capacity digestion that's likely to happen, but I do believe that this is a secular trend.

Okay. Yes. Maybe the last one on this topic. You mentioned that maybe, Neil, you can jump in the emulation and simulation software type of solutions seems to be growing really well. You've obviously made some acquisitions and built some of it yourself. Maybe, Neil, talk about the importance of maybe transforming the model. I think you're close to 40% now software and services. Just kind of update us on how you see the move to software and some of these newer services impacting the model going forward.

Yes. I mean I think this has been a multiyear journey for Keysight, really starting from around the time of our spin, maybe even before increasing the value delivery via software. We made some great inroads and then there was a big push to move towards more recurring models. And I think we still have work to do there, but we've made a lot of progress. Our business is about 30% recurring revenue today, as you noticed, about high 30s percent software and services. We do believe that the acquisitions that we just completed add about 3 points to that. So we should be in that 40% range here on a go-forward basis.

And then I think as Kailash has mentioned, we continue to find new ways to deliver value through software. And so I think organically, that mix shift tends to be relatively slow because our other businesses are growing as well, right? So -- but then there are opportunities for us to accelerate that mix shift via acquisitions, not just the ones that we just did a couple of years ago was ESI. That was a pure software business. The years before that, it was Eggplant.

And so there has tended to be a software bias towards our -- to our M&A efforts, which is helping us to accelerate that shift. And you see it in our gross margins now in the mid-60s, whereas 10 years ago, we were in the high 50s. And so certainly contributing to the overall profitability of the business as well as the stability with the recurring revenue components.

Okay. Great. Maybe if we transition to wireless, obviously, that was a big driver for Keysight several years ago when we had the massive 5G deployments and R&D phase. You mentioned nonterrestrial networks and O-RAN and early 6G. But could you just kind of frame that how should we think of the time line of the wireless business? Because at some point, we're going to really be inflecting on 6G, I would think...

Yes.

Like we've seen in prior cycles. It's obviously been a little bit more delayed than prior cycles. I think maybe 5G didn't do what the operators needed. So it's a little slower. But walk us through kind of how you see the next few years and when we could see more of an inflection in that business?

So you look at 5G CapEx peaked in '22. Obviously, there's been a little bit of a reset in the industry. Now all of the companies that's part of the wireless ecosystem have started to post better financials. There's smartphone subscriptions have gone up for the first time. It started late last year, and it's continuing. There's some excitement about how AI models can drive new devices, but also existing devices like the smartphones with better applications and so forth.

So there's some excitement building. And the better financials are just allowing our baseline of customers to invest in ongoing 5G standards, right? So Release 18 and 19 are underway. I mean that's all called the 5G advanced umbrella. So triggered mobility, which drives power efficiencies, enhanced uplink where now these devices are generating a lot of data. It needs to get into the edge or the cloud. So some of these capabilities have to be installed, which means that there is ongoing R&D with these standards.

We also see ongoing fixed wireless access networks deployment on the network side. Clearly, Verizon has been doing that. Now you also saw T-Mobile talk about that. So there is ongoing activity from a network rollout perspective. So all of this is sort of leading to a recovery in the base business.

And when subscriptions go up and stuff, you have these component makers also benefit and they have to design new components, whether it's for power efficiency or getting deployed in a newer band or a newer form factor, they have to use our capabilities, both in the design workflow as well as deployment validation. So there's that aspect.

The second aspect is NTN. NTN nonterrestrial networks, it started out as a direct-to-sell sort of service for emergency purposes, but now it's starting to become a mainstream application or there's work that's going on to make it a mainstream application.

The number of LEO constellations are growing. And if you kind of think about that, each satellite costs north of $700,000 and sometimes over $1 million. So the amount of design, emulation and test that needs to go into building that capability is driving R&D investment as well as manufacturing deployment investment from our customers.

We have a very complete portfolio [indiscernible] we're able to -- and satellites are not just satellites, you have to ensure that it's communicating with the ground infrastructure. So there's investment going on in ground infrastructure. There's investment going on in customer handsets. There's investment going on in that communication over the channel and the constellations themselves with -- and Keysight has the broadest and deepest portfolio to enable that application.

And now with the acquisition of Spirent, we get satellite constellation emulators, and we're excited about augmenting our current portfolio with that. So this is an application that will grow over the next several years.

And then 6G, we started to see an inflection. It's small dollars, but it's moving from pure research to prestandards development and activity. Verizon announced an innovation forum, a 6G innovation forum with all of the traditional wireless players like Nokia, Ericsson and Qualcomm, Samsung, but there are also new players like Meta that are being part of that consortium, and there's some activity going on towards that LA 2028 event.

There was -- in Prague, the 3GPP standards meeting was held. They talked about 10 different focus areas for 6G. So all of this is driving some prestandard activities. And what we do is we allow customers to test and build and design these capabilities to see what works, what is going to work during commercialization. We help them test that in advance in their labs, so that they can shape the standards. So all of this is going to drive some activity in 6G.

That's still towards the end of the decade, but we expect a steady ramp towards that. So those are sort of the vectors, the traditional device space with AI in networks and AI in devices sort of driving activity, ongoing standards, nonterrestrial networks and then these prestandard 6G activities kind of driving our wireless business.

Okay. Great. Maybe if we shift to kind of the defense side, defense automation. Neil, you touched on it in the beginning. Maybe just start with like kind of what have been the impacts of whether it's a shutdown or DOGE, like have you guys been impacted by that?

And then on the go-forward basis, you have not just a heightened focus by the U.S., but a lot of the European nations as well investing more in defense. So maybe walk us through kind of your view of how that business is positioned over the next few years?

Yes. Maybe I'll start and then I'll let Kailash comment a little bit more. I mean I think we look back at '25 and say this -- our aerospace defense business put up record orders in the face of a number of challenges, right?

So first of all, any time you have a presidential administration change, you tend to see pauses in those markets. And then you had DOGE. We would characterize the DOGE impact as relatively small, but not 0. And you had continuing resolution and most recently, this government shutdown, which, again, not huge impacts, but not 0 impacts either.

And so I think the fact that we went through '25 in the face of all that and still deliver record orders is a very positive sign. I think as we look forward, the trends are pretty clear. I think there tends to be broad political alignment in the U.S. on the need to invest in defense technology. We've seen that now reflected in defense budgets going back to the start of the first Trump administration. So that's across presidential administrations of both political parties. And then more recently, you've seen our European NATO allies commit to spend on defense at a higher percentage of GDP.

So I think all of those present potential tailwinds for us as we look forward, and I'll let Kailash potentially provide some more specifics.

Yes. The defense modernization trends and strengthening deterrence trends, it's just -- it's ramping. We have clearly the traditional primes that are investing in Europe and U.S. But there are new programs like Golden Dome, like the GCAP program, which is a sixth-generation fighter program.

There are areas in space where LEO is used, and coexistence of LEO and GEO satellites have to be thought about. There are those new applications, drones and radar, these types of applications are driving business. We saw strong growth in Europe.

And when you kind of think about what capabilities we offer, I mean, it spans a wide variety of use cases, right? We allow -- we provide capabilities to test phased array antenna arrays, help with the design and test of that. That goes into satellites, that goes into many ground type of capabilities.

We have solutions that emulate radar target generators. These are new capabilities that we've been able to build, combining many capabilities that we've already had for new use cases, and this is helping us win new awards. We're able to provide capabilities for tactical communications. These are handset type of communications. We're able to help customers design and test those.

We have -- we're also moving up the stack. It was an event, Cyber Quest '25, where we provided -- we tested the resilience of the U.S. Army communication infrastructure by emulating millions of concurrent users to see if the network would be resilient to security vulnerabilities and things like that.

So we're able to integrate some of our Ixia acquired capabilities, some of the capabilities that we use in AI data center infrastructure, combined with our physical layer portfolio to enable solving some of these problems. Cybersecurity, threat emulation, multiple use cases here that are addressing many of these use cases, we're seeing defense technology start-ups also join the fray and there are about 1,400-plus defense technology start-ups around the world. And they're involved in software-only digital twin type of modeling of command and control, but then there are also companies that are making hardware gear that need our capabilities. So that's actually another driver. So Europe is a driver.

I mean, if you think about U.S., it has always been a driver over $1 trillion of defense budget next year. The RDT&E line item, which is the R&D test equipment line item is growing 20-plus percent. So that's there. And then you have Europe. And then you have these new defense technology start-ups and new programs coming online. So it's always a business that's hard to call on a quarter-by-quarter basis, but it does present a secular tailwind for us as we go into the next.

Okay. Great. I do want to follow-up on the semi comments before. Maybe just talk a little bit about that business. I think there's obviously a different set of competitors that you may come across in the semi test side. Talk a little bit about the trends you're seeing there and what is Keysight's differentiation on the semi side?

Yes. So if you -- when you talk about our wafer test capabilities, so we test the capacitive dielectric properties of every -- is the wafer really suitable for making a chip is what we do, right? And we're able to deal with multiple -- think about things over 25-nanometer all the way down to 3, 2-nanometer and each is a new SKU, new update that our customers need to procure. And clearly, with an inflection in AI, we're able to capitalize on that.

Silicon photonics is another area where more and more optics are getting plugged into a wafer level capability. So that's a new set of challenges that our customers have. You have to test and design for electrical to optical transitions. Are you having any signal loss? All of this needs to be evaluated way upfront before a chip can be made. So we're seeing activity there.

We're also -- we also have software. I mean, you're talking about semi, but we have -- all of these have to be modeled from a software point of view, and we're -- we've launched capabilities to model all of this photonic integrated circuits, how do you model this from a design perspective? So we've got that, and now we're getting some capabilities from the Synopsys divestiture of Optical Solutions Group. So we've got that capability. We also launched a wireless Pro solution, again, to model and test things at the silicon level. So we have our classic wafer test solutions, but we've got augmentation with our software simulation tools as well that's helping from an overall semi point of view.

Great. Neil, maybe we'll go back to you with more of a financial question for you. I think you mentioned earlier the good growth rate outlook and this 40% incremental op margin. I know there's moving parts with the M&A this year. But just walk us through kind of how you view operating margin potential as the acquisitions are integrated. And if there's more success on the top line, how should we think about ability to pull that to the bottom line?

Yes, absolutely. So I appreciate the way you answered the question and kind of distinguishing between our core business and what we have going on in the M&A space. I think both present exciting opportunities for us. I think as we think about our core business, we put out a model, which we've managed to over time, which is in our business is growing mid-single digits or better. We look to deliver 40% operating leverage essentially. And so obviously, to the extent that growth is outpaced as a result of either a snapback or accelerated growth in AI, there's potentially opportunities to outperform that 40% incremental leverage.

On top of that, we just completed 3 acquisitions in the month of October, and we're working very hard to get those integrated. As we inherit them, they're operating at operating margin levels that are significantly lower than Keysight's high 20% operating margin level, but we expect over the next 12 to 18 months, we're going to get them to the point where they're going to be accretive to Keysight operating margin.

And so we put out a cost efficiency target of $100 million. The vast majority of that is synergies from these acquisitions, although there is a portion of that, that comes from other efficiencies that we're looking to drive across the Keysight portion of the portfolio. And again, I think that's going to offer us an opportunity to drive exciting leverage over the next couple of years.

We did say that we expect these acquisitions to be mildly dilutive here in '26, but accretive to earnings in '27. And even with that dilution, we still expect to deliver EPS growth that's at or above our 10% target here in '26. So we'll overcome it based on the strength of our core business and some of the market opportunities that we've already talked about here today.

Okay. We've got a minute. So I think we'll wrap it there. I appreciate the overview here. I'm always taken it back by how many different technologies and use cases you guys are involved in. It's pretty amazing how broad the technology is at the company. So it's nice to see it being rewarded lately. But thank you.

Yes. Thank you, Tim. I think -- we're excited about the future and the opportunity ahead of us over the next couple of years.

Excellent.

Thank you.

Thank you, everybody.

Good afternoon, everyone. This is the Keysight presentation at this year's UBS Technology Conference. I'm Andrew Spinola. I cover Keysight for UBS. On stage with me is Satish Dhanasekaran, CEO of Keysight; and Neil Dougherty, CFO. So, thank you. Welcome.

Thank you.

Thank you.

As we were talking a little bit earlier today, Satish, I want to start with something really high level. As we initiated relatively recently, so I've had a lot of introductory calls with clients that are looking at Keysight for the first time. One of the questions that is more challenging to answer is sort of your competitive moat and differentiation. I can see it on the slide in your deck that shows all of the OEMs and how you've got almost near unanimous share across all of your end markets with all the major OEMs. But what I don't understand is how you win that? Is it your technology, speed to market, services, base of engineers that are just comfortable with Keysight technology. What is it that drives that moat and drives the share gains that you build into your long-term model that we'll talk about later?

All right. Thank you. Well, it's great to be here, and thank you for covering us. You did a great job with your first write-up. It was very good.

So I'd just say Keysight is a business that's been around for multiple decades. And as an engineer, I graduated out of grad school and went to work for Motorola. And one of the things that excited me about working at Motorola was I got to play hands-on with a lot of equipment and stuff. So being a grad student and a researcher, becoming an engineer, and had an opportunity to work with a lot of the tools that is Keysight today.

So what creates that moat is engineers need tools to characterize their designs. And the trust that is so integral to any characterization of a device or a technology that this trust has been built over multiple decades. And we're so embedded in the clients' workflow through all the times and the changes that happen in the technology world that by itself creates a moat of -- for the company is I start with the client. But then what enables that to be continued is the ongoing pace of change of technology that occurs across all our end markets. And driven by that change, Keysight has to stay on the cutting edge and has to have its own technology that keeps evolving faster than the rate of external change. And this group has done it for decades as part of HP and then as part of Agilent.

What's different about Keysight is the speed aspect to it. We realized that just by providing tools, we were capturing a portion of the marketplace. But by offering solutions to customers' problems, we could actually expand the pie, create a bigger value for them and capitalize on it and capture it. And so by offering solutions, we became -- we furthered our advantage with our clients by becoming more of the trusted adviser and a partner, leveraging the trusted position we had with them for decades, but being there for them ahead of when they needed us, was a big change that we made in our operating DNA and we call it our first-to-market commitment. Because when we are first to market, there is a level of abstraction that you have to get the business to operate with and because things are not as concrete at the front end of any design cycle, but that's where the opportunity to partner is.

And I'm very proud of the partnership -- the scaling of partnerships we have with our customers today. And the pull on that is at an all-time high across all our end markets and across all the globe where we serve our customers. But at the heart of it is our ongoing commitment to technology in-house because we have to be looking out further and making calls sooner to be able to be there for our customers. And that's where the technological moat starts.

Got it. And that plays into sort of the results we saw for fiscal Q4 recently, obviously. Kind of want to ask you to sort of maybe relay some of the highlights that you took from those results, maybe some of the things you've heard from investors, things that they've understood or not and kind of play that into the last 3 years. I think with my initiation, I talked about an inflection, it's a very overused word, but it feels like the stock has gone sideways. The business has been hit with a number of headwinds for the last 3 years. This quarter, things really seem to turn around. So maybe you could kind of detail the quarter and your thoughts on that.

Yes. Well, since Keysight's independence, I'd say, in 2014, when we spun out as an independent company, we really set out to transform a business that was captive inside of the Agilent organization and was largely a product-focused company. We said we need to transform to be more solutions oriented for our customers. And we -- in order to do that, we have to look at our contributions, not just through the lens of hardware, but through the lens of software-centric changes that are happening in the universe. And I think those changes resulted in strong performance over a period of 5 to 7 years, that culminated in 2022, post the COVID effects of supply chain where we saw peak demand, we obviously capitalized on it.

But then what transpired in '23 and '24 was the normalization from that peak because customers had, what we now know, had pulled forward spend because there were supply chain challenges and people were ordering ahead. And so they had all the tools and solutions they needed for a period of time. So we had to wait that out. But I'm very proud of the way the company responded because we took a longer-term view again and sort of reinvented the portfolio around relevant themes for our industry, such as 6G and connectivity. AI, which was not even a business in 2022, we've established a strong position there in defense technology.

So we sort of retooled our portfolio to be more relevant to our customers in a downturn and took advantage of opportunities to also add to the portfolio via select M&A that we have done. And so we emerge out of all of this phase of normalization in '25 by growing the business, but also with momentum as we look ahead.

Got it. And that momentum to a certain degree, is coming from AI demand in your wireline business. Can you maybe talk about how big that business is? I think you gave a little color on the call, where you're seeing the growth and what that growth looks like right now?

Yes, the wireline ecosystem, I mean, you look at our commercial communications business, roughly 45% of the company's revenue today. I mean, it is the leading edge business in that, it works with the leading innovators across 2 industries. One is the wireless ecosystem and the other is the wireline ecosystem. And what we consider wireline ecosystem has customers that design silicon, the hyperscalers, there's the whole supply chain and now increasingly the neocloud providers that are actually installing a lot of these AI clusters.

So we have a business that -- when we first started, we were working with the market makers in the space. And so it was small, but the business rapidly expanded in '23, followed on in '24 also grew. And this year, we finished at a record year and -- in our wireline business, which now is a little under 50% of the commercial communications business, very profitable business. It largely is still very R&D and lab oriented. So we think it's sustainable because of the rate of change in the AI cluster technologies that are happening, and that ecosystem is expanding for us. We see more forward-looking momentum. And about 50% of that business today is exposed to this AI effects that we referenced and we think it continues to grow as we look ahead.

Got it. And I think one of the things investors have tried to do is understand what specific aspects of the demand is maybe more or less relevant to you, whether it's on the switching side, the optical side. Is there any way that you can sort of help us think through the relative importance of the different technologies and vendors and products that maybe matter more to Keysight? Or is this part of your competitive moat, right, that you're touching everything?

I think the breadth is so important, right? You can't go to an AI cluster customer and say, well, I'll just do this one piece. So we may have competitors that can do one thing. But our ability to really look at the whole system and work through all the critical pieces of that system all the way from compute to interconnects, to memory, to storage, to servers, and then look at how these systems and networking and how these systems really interact with applications and help our customers solve those problems. I mean, that's at the heart of the value proposition is you have a company that's focused on system level, complex problem solving with a set of tools and solutions that we offer to the space.

Got it. And specifically on the hyperscalers. On your wireless side, I think the service providers tend to be the smallest of the customers, maybe one of the most important because of just their importance in the ecosystem...

Strategically.

Yes. Are you selling more direct to the hyperscales directly on the wireline side than your traditional wireless business. Is the customer make up any different?

Yes. We think in the wireline business, it's diversified. And the silicon folks that design silicon are obviously on the front end of it, and they tend to consume a lot of our tools. But the hyperscalers is also a pretty important customer base, much higher in concentration than our service providers on the wireless side. And for a couple of reasons. One is the hyperscalers all have in-house silicon programs. They are actually not just specifying, they're also operating their own data centers and they have in-house engineering teams that make decisions on what goes inside these systems. And in many cases, they're driving the road map for -- and the architecture for their data centers.

Got it. And then one of the things I wanted to ask is sort of specifically to -- we've gotten a lot of questions. I think you used the phrase that you -- one of the things that's driving the growth that we've seen sort of double-digit growth here is that you're helping -- you're trying to help deconstrain the supply issues for the hyperscalers and this AI build out. And I think that is one thing that raises a concern that maybe there's a lot of spending right now inefficiently because it's such a quick moving market, and they're just throwing so many assets that -- or resources of the product to move forward. Is there anything onetime to this growth? Or do you think looking at the visibility that you have, that it's -- it's not a concern?

Yes. We're not concerned at this point. I would just say there is a mix change that we have reflected. It's a long term, our wireline business, 80% R&D, 20% in the manufacturing. Right now the business is growing on both R&D and manufacturing and maybe manufacturing is growing slightly faster. And maybe, so right now, the mix is 70-30 between the 2.

So there is a swing there, but the nature of the AI clusters is such that if you have a weakest link in the cluster, that's going to prevent you from taking billions of dollars of investment and realizing the productivity from an AI application perspective. So the test intensity there is higher as well contributing to that growth. So it's not as much as excess capacity being put in place, it's the extra levels of diligence and testing that our customers are performing so that the value-added cluster does deliver to the KPIs of their clients.

I see. Another question just in terms of the customer base. I think the AI evolution is going in a couple of different directions, depending on how the hyperscalers are moving in terms of what chips they choose, and there are these ecosystems that seem to be developing, one side, it's one group of companies and on another side, is another group of companies depending on which technologies win, which accelerator wins, which large language model wins. Does that affect you in any way?

We're sort of agnostic. I think if you look at it in wireless, we were really agnostic to the underlying technologies. And it's the same on the wireline side as well. We're really agnostic. And part of the reason is we've intentionally designed our platforms to be more software defined. So we can work with multiple standards revisions and enable our customers to try out and prototype multiple standards and see what works best for them because we recognize that the nature of innovation involves a fair amount of experimentation, and some with small scale and some with larger scale experimentation and learning. And so providing our customers that flexibility in our platforms is important.

So we participate in over 30 standards bodies. We have PhDs that sit on these bodies. They enable -- they think about what our customers think about, and bring back that IP and put it in our platform so that we can enable our customers to be more productive.

Got it. Got it. And maybe just to sort of tie this all back to the financial model. I think orders were up 12% this year -- this fourth quarter, first quarter revenue growth, I think it's 10% organically. What is your visibility towards -- I mean, I know you only got up to 1 quarter, but sort of how should we think about the growth in the wireline business kind of going forward from here? Is it ramping? Is it -- what can you -- what color can you give us?

I think the demand signals continue to be strong. I mean, despite all the talk about AI bubble and all the stuff people are hearing, the fundamentals of -- fundamental drivers of innovation that we hear from our customers remain strong. And we look at it in terms of acceleration of multiple waves of technology or you just pick networking, right? I mean in the past, we would have 400-gig, let's say, and people would go into R&D and then that would go into production. And then that would sort of about and then 800 gig would start in R&D.

I think what we're seeing now is pretty unprecedented that our customers are investing time, attention, energy and money to basically parallel track these things knowing that the design cycles are compressing. And you might say, why are they doing that? Well, they're doing that because they recognize that whatever be the next vintage of the AI cluster, the economics of that cluster can be significantly improved if you have better performing networking, if you have better performing memory, if you have better performing versions of compute because it's coming. And the models are getting better and the consumption from consumers is growing with AI payloads growing.

And so there is a sustainable level of demand as we see it and our customers are continuing to invest time and attention. And we're also seeing the business grow from not just a few customers that it was when I described it as constrained to a broader set of customers, not only in the United States, but globally as well.

And you're not seeing anything affecting your business like supply shortages on your end or lead times extending. It hasn't gotten that -- that strong yet?

Nothing -- nothing material -- nothing material. We're working with our supply chain to stay ahead.

Got it. And sort of shifting to the financial model because I think coming from the initiation, one of the things I think that was underappreciated is you've got -- you've had a number of tailwinds that reverse now in the next year and then really, in my opinion, pretty strongly in 2027, some drivers on the gross margin side because of the tariffs. So maybe can you walk us through sort of the known things that are impacting your margins in '26, '27 from the -- sorry, the tariffs, the dilution from the acquisitions and then the synergies and how we should think about margins improving from here?

Yes, absolutely. So you mentioned tariffs, so we'll start with that. Obviously, tariffs implemented in April, increased in August. At this point, as we enter Q1, we believe we've got the April round of tariffs fully offset on a dollars basis, and we're in a position to offset the August increase here by the end of this coming quarter. So we'll be more or less neutral going forward here at the end of the quarter. And so that should take that more or less off the table. I think we continue to -- we've committed, obviously, to growing at the high end of our long-term 5% to 7% range. And we've committed also to delivering 10% EPS growth this year, and that includes the acquisitions, we just recently completed 3 acquisitions. We do expect them to be mildly dilutive to earnings here in fiscal '26, but accretive to earnings in fiscal '27.

So while we expect to deliver the 10% or better EPS growth this year, as you look forward to '27 and you take those acquisitions from being mildly dilutive to accretive, our core business continues to improve, that should provide an incremental earnings boost or incremental leverage as we enter next fiscal year, right? So we're well positioned here for a couple of years of, at least as far as we can see of strong earnings growth.

Right. And can we dig a little into those synergies? I think you've said $100 million, I think, and that's on a cost base of about $250 million based on my math from the filings from Spirent and OSG. That -- I tend to think when I do my estimates and what I did for Keysight was in the 20%, 25% range of OpEx as sort of realizable. How -- what makes you so confident that you could do 40%. Is this consistent with what you've done in the past? Or is there something unique to Spirent?

Yes. I think in the case of Spirent, these are -- it's a portfolio and it's a set of technologies that are relatively close to home for us. And so there's opportunities for us to pretty significantly leverage our go-to-market infrastructure. We have over 1,500 salespeople in our sales force, and we're inheriting a great sales force from Spirent, but there's no reason that the sales forces can't be trained up to sell the entire bag across those portfolio. The technologies are very similar. We do -- as you know, when we do acquisitions like this, we do a pretty complete integration. It tends to take us 12 to 18 months. We'll move to a single ERP, Keysight single ERP entrants. And since once we do that, we can leverage our administrative costs, they can take on the incremental volume with relatively minimal -- minimal incrementals.

And so we have great ability to drive synergies across the G&A infrastructure, the sales and marketing infrastructure as well. And so really good opportunities for us to improve the profitability of this business. And we're talking about taking this business, which is currently, as we inherited, operating well below Keysight levels of profitability, getting to the point where it's accretive to Keysight's currently -- current high 20% operating margins and doing that in a relatively short period of time.

Right. It's also important, Andrew, just on the margin expansion point that you made. I want to assure everyone that the fundamentals of our value creation algorithm are intact. It starts with having a differentiated portfolio that's focused on more sustainable complex challenges of our customers across our end markets. And outperforming our markets, which tend to grow at 4% to 6% on average, outperforming them by a point or 2. That's sort of where the starting point is.

And because of the differentiation, we're able to then capture the value in the gross margin expansion. And I feel really good about the pipeline of new products that we have coming out in the next 18 months. That's well in our control. Those were investments we started in '22, '23. So I feel good about the differentiation of them. And in many cases, where we referenced customer collaborations, give us an early proof point that indeed the value that we saw when we started those programs are indeed real, because we're engaging with customers along the way. So we feel good about that.

So as these products launch, we'll start to see more positive accretion to gross margin. So we're not done. We've taken a business that was high 50s gross margin and we're in the mid-60s. I don't see that as a floor. I think there's more upside to gross margin. One of the reasons, as we talked about the acquisitions of about $350 million -- $375 million of revenue, the gross margin of that mix is north of the company average today. It's over 70%. So I think we have more gross margin tailwind, and we'll continue to run the company with a 40% incremental in the way we invest. We'll stay disciplined, which should lead to profit accretion and EPS expansion.

Right. If I flip the question about Spirent on its head, one of the things that's interesting to me about this acquisition is that this was a consolidation in the industry, right? Some of the other acquisitions are sort of newer markets or different solutions. But Spirent is a direct competitor. That led to an extensive regulatory review and a disposition of some of the businesses. But what's interesting to me is that, that we were a very successful competitor, but couldn't really break above 10% op margins. You guys also look at this business and can take a lot of expenses out. And I think what that tells me is that it's very difficult to compete in this industry because there's a fairly substantial R&D component that's required to be competitive. That's what those pieces tell me.

Well, it's true because you have to stay and one of the things we learned is we have to stay on the cutting edge of technology. You think about AI, well, it becomes material as our customers come in and say, we want solutions in 2023. You can't make the products that they need at that point. We started some early work on AI in 2019. We started our 6G program at a company in 2022.

So often, it takes that kind of investment. So the scale that Keysight today has now with this expanded capabilities is a huge advantage for the firm.

Right. Does the regulatory scrutiny change how you think about M&A going forward? What -- how are you going to use that lever to grow?

Yes. I think we've been very select in our M&A strategy. We looked at over 300, 350 opportunities, and we've only done about 25 since the company. And in all cases, number one, we think about our customers first and say, does this make our customers' life easier. In many cases, like Spirent, the positioning technology was a piece of unique technology that was missing in our portfolio, that we could apply to all our end markets. Our aerospace defense customers needed for spoofing and jamming applications. Our wireless customers are looking for better accuracy in the next-generation connectivity.

So across the portfolio, by adding these tools in, we can complete more of the solution for our customers. That's what we look at. And as we think about the future, we laid out some markets that were interesting to us. We'll continue to look at those markets. But obviously, for the next 6 to 9 months, we're pretty focused on making these acquisitions, integrating them and realizing the value from that integration.

Right. Maybe in the last 5 minutes, we should really touch on your wireless business. It's still your biggest. It's a little bit bigger than wireline and aerospace and defense. They're all kind of getting pretty close. But that business has been slow since post 5G, right, in that '22-'23 time frame when things slowed down. Would love to hear your thoughts on kind of the near and medium term. It does seem like it's picking up, maybe it's mostly easy comps. But then also if you can kind of sort of parlay that into what are your thoughts on wireless as a part of AI longer term, seems like that would be kind of the home run, right? AI and wireline margin expansion with synergies and then potentially the wireless business picking back up.

Yes, the wireless industry, I have a background on this. I ran our wireless business before becoming President of the group. But I just say this, it's a very dynamic industry, lots of technological change and innovation always happening. There are some lulls between cycles such as what we saw. But out of this comes an innovative thinking. And right now, what's driving wireless has become much clearer, a series of micro inflections, I call them leading to 6G. One, around use of spectrum; second, around connecting tightly satellite communications with terrestrial communications for better coverage and better experiences; and third, it's around use of AI to make networks more efficient from an energy perspective and utilize spectrum better.

I think these -- this is sort of the trifecta that's sort of 3 tracks that are forming in the wireless industry and there's going to be a series of micro inflections between now and when a 6G standard gets rationalized. So nobody is waiting for the 6G to pop and one, people are starting in waiting and we're participating in all 3, and we're building stronger positions every day. So I'm very excited by the opportunities in wireless as well.

Interesting. When do you think that, that -- what would be the -- is there a possible inflection related to AI in that business? Would it be the 6G spend? Or I guess what I was specifically thinking about is what if the model -- as the models move closer and everything moves out to the edge, there might need to be the type of investments in wireless networks like there is now in the fiber networks and the scale across networks, et cetera.

I think that's sort of what we're hearing from customers, although we're not seeing a huge inflection. We did grow the business this year. We take it for that. We think we can grow it in '26 as well from these levels. And should there be an inflection, we'll capture it. We're working with customers. But the AI thing is becoming more real as we speak.

Got it. And how about -- sorry, I sort of skipped over your semiconductor business. Obviously, that's -- it's wafer fab, it's lithography, it's not the interfaces, which are in your other parts of your business. But is that business benefiting from AI as well? And what are the trends in semis right now?

I think silicon photonics was a trend we would not have caught if we didn't have a small presence in -- with semiconductor. We've had a wafer test position. And when clients asked us to engage with them in '22, '23, we got involved in silicon photonics. And now more fabs are getting seriously interested in deploying silicon photonics, and that business is growing because of that.

Got it. Actually, it reminds me of a question I wanted to ask you, Neil. Is there -- when we're thinking about your gross margin trend through '26, how are you positioned on the memory side? Is that something that has affected you with some of the price increases they're seeing there? Is that anything that's been an issue for you in the past?

No, I don't think so. I think as you look across our portfolio, we have differentiated positions in a lot of areas, semi being one of them; commercial communications, a highly differentiated position. I think if you look at Jason's business, the industrial business more broadly, it does tend to have more of a manufacturing bias to it, which can be a slightly lower gross margin and maybe a little bit more of a distribution bias to it, which can be a little bit lower gross margin. So if you think about the differential within the portfolio of gross margins, we see a broader range within EISG because of those manufacturing and distribution components. Then we see in the commercial communications side of things where we have these cutting-edge technologies that are really driving in a more heavily focused R&D portfolio.

Got it. Got it. And maybe just one last question on the balance sheet. You issued some debt to do the acquisitions. Remind us what your leverage is. I don't think you have any need or priority to delever. But what are your priorities for your...

Yes. I mean we're below 2x gross leverage. We're below 1x net leverage. If there was a benefit that came from having the prolonged approval process for these acquisitions is that by the time they were completed, our balance sheet is very strong, again, approaching $2 billion in cash, low leverage. And so we maintain great flexibility to either pursue further M&A once we're done with the integration of these transactions that we just announced, a new $1.5 billion share buyback authorization. So I think you'll continue to see a balanced approach to deploying capital from Keysight.

Sure. Well, this has been great. Thank you both.

Thank you. Appreciate it.

Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal Fourth Quarter 2025 Earnings Conference Call. My name is Victoria, and I will be your lead operator today. [Operator Instructions] This call is being recorded today, Monday, November 24, 2025, at 1:30 p.m. Pacific Time.

I would now like to hand the call over to Paulina Sims, Director of Investor Relations. Please go ahead, Ms. Sims.

Thank you, and welcome, everyone, to Keysight's Fourth Quarter Earnings Conference Call for Fiscal Year 2025. Joining me are Satish Dhanasekaran, Keysight's President and CEO; and Neil Dougherty, our CFO. During the Q&A session, we will also be joined by Kailash Narayanan, President of the Communications Solutions Group; and Jason Kary, President of the Electronic Industrial Solutions Group.

The press release and information to supplement today's discussion are on our website at investor.keysight.com under Financial Information and Quarterly Reports.

Today's comments will refer to non-GAAP financial measures. We will also make reference to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months. The most directly comparable GAAP financial metrics and reconciliations are on our website, and all comparisons are on a year-over-year basis unless otherwise noted.

We will make forward-looking statements about the financial performance of the company on today's call. These statements are subject to risks and uncertainties and are only valid as of today. We assume no obligation to update them and encourage you to review our recent SEC filings for a more complete view of these risks and other factors.

Lastly, management is scheduled to participate in upcoming investor conferences hosted by UBS and Barclays. And now, I will turn the call over to Satish.

Good afternoon, everyone, and thank you for joining us today.

Keysight delivered an outstanding fourth quarter results exceeding the high end of our guidance. Orders grew 14%, revenue increased 10% and EPS rose 16%. This was a strong finish to a year of building momentum. Full year orders and revenue rose 8% and EPS increased 14%, surpassing our expectations and our long-term model.

Keysight's leadership and differentiated solutions continue to drive demand across our markets. Our portfolio is enabling major innovation waves shaping our markets, AI and accelerated compute, nonterrestrial networks, 6G, next-gen semiconductors and defense modernization. We enter our fiscal 2026 with a strong solutions road map aligned to our customers' priorities, a healthy pipeline of sales opportunities across our end markets and a broader set of capabilities.

In Q4, we advanced our software-centric solution strategy with the acquisitions of Spirent, Synopsys Optical Solutions Group and Ansys Power Artist. We're excited about the talent, the technology and the expanded customer value we can bring to the marketplace. Our operating model continues to generate strong free cash flow providing us the flexibility to invest in the organic growth of the business, pursue select strategic acquisitions and return of capital to shareholders.

In fiscal '25, we achieved record free cash flow of $1.3 billion, while investing in R&D, completing 3 acquisitions and returning approximately $375 million through buybacks.

Since the start of 2023 we have repurchased over $1.5 billion of shares or approximately 45% of free cash flow. Today, I am pleased to announce that our Board has authorized an additional $1.5 billion share repurchase program supporting our ongoing capital return.

Turning to business segments. The Communications Solutions Group orders grew for the sixth straight quarter delivering double-digit order and high single-digit revenue growth for the full year.

Wireline orders and revenue grew double digits both in Q4 and for the full year, setting a new record for the business. AI infrastructure build-outs and rapid upgrades to the technology stack are driving greater design, emulation and test intensity across multiple vectors.

Our solutions span the entire workflow from silicon design to system validation and secure deployments. The rapid scaling of AI workloads is accelerating new designs across the technology stack from compute to networking, interconnect, memory and power. These transitions require redesigns across AI silicon, DSPs, switches and transceivers, all of which are enabled by Keysight solutions.

Optical speed refresh cycles are also gaining momentum, moving from the 400 gig to 800 gig to 1.6 tera. In Q4, we collaborated with Broadcom to validate next-gen 1.6-terabit networking silicon and custom AI accelerators. Keysight's silicon photonic solutions continue to drive advancements in CPO and LPO technologies of the future.

With the breadth of Keysight's portfolio spanning physical layer solutions and AI emulation solutions built on technologies acquired from Ixia, we're making a meaningful contribution to the entire ecosystem. We're also capitalizing on robust demand from the scaling AI supply chain, including rack and cluster components interconnects and AI accelerators.

Additionally, Keysight is actively involved with industry leaders and growing number of consortia shaping the future of AI infrastructure. At the Open Compute Project conference, we partnered with Meta to demonstrate large-scale validation of GPUs and networking prior to deployment into clusters. The recently launched Keysight AI data center builder won the Data Center Innovation Best Product Award at the European Conference on Connectivity in October of 2025.

Turning to wireless. Orders and revenue grew high single digits for the full year and outperformed expectations driven by ongoing standards evolutions, nonterrestrial networks and early 6G research. We saw steady 5G demand continue with releases 18 and 19 of the standard, which included enhanced uplink, advanced MIMO and energy efficiency applications.

Momentum increased in nonterrestrial networks where we are engaged with industry-leading players to advance direct-to cell connectivity and new LEO designs. Spirent's best-in-class precision location simulators expand Keysight's offering by providing the accuracy and the realism needed to enable the next generation of positioning, navigation and timing use cases.

In 6G, the industry is shifting from pure research to early prestandards designs. We are engaged with market-defining customers and are well positioned to intercept the industry's priorities. We doubled our 6G collaborations over the past year, partnering with customers on several new applications, including channel sounding, network modeling, using digital twins, FR3 spectrum and advanced MIMO phased antenna design.

In aerospace, defense and government, we generated record orders, while revenue increased by 8% for the year. In an increasingly competitive global security and defense landscape, we're seeing strong customer engagement for defense modernization, enhanced deterrence capabilities and operational readiness.

Opportunities are expanding for Keysight as a traditional primes direct government entities and a growing contingent of neo primes and defense technology companies invest in emerging technologies in space and satellite, autonomous systems and advanced antenna designs.

This quarter, we secured key wins with U.S. prime contractors to accelerate automated device verification. Our advanced component analysis capabilities are enabling fast phased array antenna over-the-air cartelization for space, radar and tactical communications.

We won a deal from a U.S. prime contractor for multiple solution spanning high-performance spectrum analysis, signal generation and network analysis for radar and air defense applications. In Europe, momentum remained strong as multiple primes invest in radar, MSO and space applications. Ministry of Defense in Allied Nations are leveraging our wideband signal recording capabilities to capture field data for lab analysis.

With decades of leadership across RF, digital and optical technologies, plus a new federal focus capabilities from Spirent, Keysight is well positioned to capture growing defense demand.

Now moving to Electronic Industrial Solutions Group. Orders and revenue both grew in Q4 and for the full year. In our General Electronics business, orders grew for the fifth consecutive quarter and were up high single digits in Q4 and double digit for the full year, led by strength in the broad electronics supply chain, digital health and education.

AI-related innovation and investment fuel demand for our differentiated solutions for high-speed PCB, interconnect and component test. In digital health, interoperability, connectivity and latency challenges in the medical device and systems workflow are driving investment. Advanced research spending in semiconductor, 6G, quantum and photonics initiatives is also continuing at a steady rate, particularly outside of the U.S. where we benefit from our global scale and local engagement.

In semiconductor, the pace of innovation and investment remains robust. Our semi business delivered solid order and revenue growth this quarter, driven by steady demand for wafer test and lithography solutions, as AI-driven capacity expanded for leading-edge nodes, high-bandwidth memory and silicon photonics.

As lithography and foundry customers expand their own advanced packaging offerings, we're enabling them to achieve unprecedented levels of precision and accuracy. Our deep collaboration with the world's leading foundries and integrated device manufacturers as well as the respective customers allows us to identify and address their end-to-end needs from early R&D to wafer fabrication.

This year, we saw a robust growth in silicon photonics. The investments that we initiated 2 years ago are allowing us to capture this inflection. While geopolitical and policy uncertainties remain, the outlook for semiconductor capacity and investment and new technology road map remains positive in 2026.

In automotive, despite mixed headlines, we continue to empower customer innovation and demand has largely stabilized. We're also expanding into new opportunities in grid modernization where our combination of physical layer power and protocol layer network expertise is a differentiator. Our portfolio of solution spans software-defined vehicles, EV, charging, grid and manufacturing.

In vehicle network compliance and security remain customers' priorities as well as the design and test of new sensing architectures and optical connectivity. The recent acquisition of the Optical Solutions Group expands our photonics portfolio as interconnect and photonics complexity increases across next generation of industrial and automotive applications.

We continue to advance our go-to-market and customer engagement model to deepen long-standing strategic relationships while acquiring new customers and opportunities as the global supplies change shift. Over the past year, our teams executed to over 150 strategic engagements with market-defining innovators while expanding our customer base with more than 3,000 new logos.

Our Keysight World events reached thousands of customers globally. We actively participated in industry events such as Mobile World Congress and European Microwave and over 30 standard bodies with industry leaders. We continue to maintain life cycle engagement with our customers through our growing services business, which has reached record revenue fueled by robust demand for Keysight Care premium offerings.

In summary, fiscal year '25 marks a return to growth. And as we look ahead, we're encouraged by the momentum in our business and end markets. The technologies reshaping our world directly match Keysight strength, and we're leaning in with our first-to-market solutions, customer collaborations and operational discipline. Even in an uncertain environment, we're confident in the fundamentals of our business model and in our ability to deliver long-term shareholder value.

I'll now turn it over to Neil to discuss our financial performance and outlook in more detail.

Thank you, Satish, and hello, everyone.

Fourth quarter revenue of $1.419 billion was above the high end of our guidance range, up 10% on a reported basis or 9% on a core basis. Orders of $1.533 billion were up 14% on a reported basis or 12% on a core basis. Fourth quarter results included $22 million in orders and $11 million of revenue from the recently completed acquisitions, while currency added $4 million to orders and $7 million to revenue.

Looking at our operational results for Q4. We reported gross margin of 64%, operating expenses of $539 million and operating margin of 26%. We generated $331 million of net income and delivered earnings per share of $1.91, which increased 16% year-over-year. Our weighted average share count for the quarter was 173 million shares.

For the full year, Keysight generated revenue of $5.375 billion, up 8% as reported or 7% on a core basis. Gross margin was 65% and operating margin was 26%. FY '25 earnings per share of $7.16 was up 14%. For the year, Keysight delivered core operating leverage of 39%, inclusive of tariff impacts.

Moving to the performance of our segments. The Communications Solutions Group generated fourth quarter revenue of $990 million, up 11% on a reported basis or 9% on a core basis. Commercial Communications revenue of $660 million was up 12%, driven by continued strength in wireline and growth in wireless. Aerospace Defense and Government achieved revenue of $330 million, an increase of 9%. Altogether, CSG delivered 66% gross margin and 27% operating margin.

The Electronic Industrial Solutions Group generated $429 million in revenue, an increase of 9% on a reported basis or 8% on a core basis, with growth in semiconductor and general electronics. EISC delivered 60% gross margin and 25% operating margin.

In FY '25, Software and Services accounted for approximately 37% of Keysight revenue, while annual recurring revenue was 29% of the total.

Moving to the balance sheet and cash flow. We ended the quarter with $1.9 billion in cash and cash equivalents, generating cash flow from operations of $225 million and free cash flow of $188 million. During the quarter, we deployed $1.7 billion for acquisitions. We also repurchased 595,000 shares at an average price of approximately $168 for a total consideration of $100 million. Full year share repurchases totaled $375 million or approximately 30% of the $1.3 billion in free cash flow generated this year.

Now turning to our outlook. For the first quarter of 2026, we expect revenue in the range of $1.530 billion to $1.550 billion, representing 19% year-over-year growth at the midpoint. Excluding the recent acquisitions, this guidance assumes 10% year-over-year revenue growth. We expect Q1 earnings per share to be in the range of $1.95 to $2.01 and based on a weighted diluted share count of approximately 173 million shares.

Keysight enters FY '26 with strong backlog and a robust sales funnel. As a result, we expect FY '26 revenue growth, excluding acquisitions, to be at or above the high end of our 5% to 7% long-term target.

The recently completed acquisitions of Spirent, the Optical Solutions Group and Power Artists are expected to contribute approximately $375 million of revenue in FY '26. We are working to realize in excess of $100 million of synergies and other operational efficiencies across Keysight, even as we sustain critical investment in R&D to ensure Keysight's expanded product portfolio intersects the growth opportunities in our markets.

The acquisitions are expected to be accretive to Keysight's earnings 12 months post close. While this implies some mild dilution in FY '26, we expect the strength of our core business to enable FY '26 EPS growth at or above our long-term 10% target.

Now a few additional modeling considerations for the year. As expected, Keysight enters FY '26 having fully mitigated the impact of tariffs implemented in April. We now expect the August tariff increase to be fully mitigated in Q1 1 quarter earlier than previously communicated. These expectations are reflected in our guidance.

At current debt levels, annual interest expense is expected to be approximately $110 million, capital expenditures are expected to be approximately $160 million and we are modeling a 14% non-GAAP effective tax rate for FY '26.

In closing, we ended our fiscal 2025 with outstanding results and expect the momentum to carry into 2026. Technology innovation is driving demand for high-performance solutions across a broad range of industries. With our differentiated portfolio, technology leadership and durable financial model, we are well positioned to deliver sustained revenue and earnings growth.

With that, I will now turn it back to Paulina for the Q&A.

Thank you, Neil. Victoria, will you please give the instructions for the Q&A?

Of course. [Operator Instructions] Our first question comes from the line of Mehdi Hosseini with SIG.

Yes. Looking to the new fiscal year, Satish, how do you see the wireless trending? It has been kind of depressed for the past few years and I'm just wondering if there's any catalyst on the horizon that gets you excited or should we assume FY '26 will be similar to the last year, just trending slightly? And then I have a follow-up.

Yes. Thank you, Mehdi. We're quite pleased with the results in '25 across all our segments and just this return to growth across all our regions that we saw this quarter. Specific to Commercial Communications, we're equally excited about the opportunities that we have in next-gen connectivity, compute, semiconductor.

And we see a plethora of these technologies that we can really make meaningful contributions and grow our portfolio. Specific to your question on wireless, obviously, wireless exceeded expectations this year, in part driven by stabilization in 5G, which is normalized and then some of the advanced technology areas that we have made investments in starting to show some early results even prior to 6G hitting inflection. So I would say we're optimistic about the wireless growth into 2026, but even ahead of the 6G inflections that may occur in later part of the decade.

Okay. And a quick follow-up. As you look into the adoption of 1.6 terabit per second wireline, would there be an additional growth or growth acceleration for Keysight? Would there be any upgrade? And I'm asking the question because speed is to the of Keysight, and we get to those data rates, I wonder if there is any upgrade or pricing that would help with a higher growth rate? Any color would be great.

I think we're really -- as you know, Mehdi, our strategy has been to develop first-to-market solutions, which offer our customers greater value and the higher technological complexity, I think it really plays to our strength. And with regard to the wireline, there's a plethora of inflecting technologies across the entire AI stack, including the networking one that you referenced, we're well positioned to continue the momentum into '26.

Our next question comes from the line of Samik Chatterjee with JPMorgan.

Congrats on the strong outlook here. Satish, you mentioned sort of the order acceleration through the year, but still, when I take out the acquired business and the contribution there, there was a significant acceleration quarter-over-quarter from July to October. Maybe if you can just sort of get into the details there a bit in terms of how much of that was attributable to maybe more wireline and specifically relative to production use cases relative to R&D?

And what's sort of the driver of the significant acceleration? Because seems like you're not only sort of confident about the order outlook here, but you also have a visibility into the pipeline of that remaining robust. And I have a quick follow-up.

Thank you, Samik. Yes, very pleased with the results in quarter 4. And I may want to start by saying, clearly, the revenue performance was driven by the broad order strength that we saw with both our CSG and EISG businesses growing double digits this quarter. And we also are quite pleased with the broad nature of the strength.

All our regions grew, and it's pretty broad. And the areas that we have really been focusing on, on the portfolio with our growth initiatives have really kicked into early gear, is the way I would characterize this. And then when we look ahead at the pipeline, we see a very robust pipeline. Obviously, our visibility 60 to 90 days is pretty good and we see a robust set of pipeline that we can go execute.

And we're also seeing the underlying demand, whether it is the volume of the pipeline or the velocity of the pipeline or the conversion rate, the sort of metrics that we track, including the quality of the pipeline, they're all trending up. So we feel good about this, and we reflected that in our guide.

Okay. And maybe quickly just for Neil. Neil, you outlined the synergy expectation here. Can you just give us a bit more details in terms of how to think about what sort of required for the acquisitions to go from EPS-accretive to potentially the operating margins of those acquired businesses being similar to the corporate average or being operating margin-accretive in the future?

Yes, absolutely. So as I said in the prepared remarks, we're working to generate $100 million of run rate synergies and other operational efficiencies across Keysight. Certainly, the majority of that -- a large majority of that is coming from synergies as we integrate these acquisitions. Those of you that have covered Keysight for a while will know that our integrations are complete, and we do a thorough integration that tends to take us on the average 12 to 18 months to complete.

And a significant driver of cost synergies for us is when we get systems alignment, getting these acquisitions into our ERP environment is a big driver and that does take time. So I think as you think about FY '26, relatively low realized synergies in these first few quarters until we can get to that cut over a point and then later in the year, I think you'll see a step function improvement in terms of synergy realization with then a longer tail of smaller synergy realization into '27.

Our next question is from the line of Andrew Spinola with UBS.

I wanted to ask a question on the wireline business. Generally, when we think about your R&D business, it sort of runs in front of the actual deployment of the hardware by a few years and we think about 6G coming in 2030, it needs to be spending in '27. So I'm wondering, how should we think about wireline [indiscernible] the hyperscaler build is going on pretty actively right now and really just starting to see your wireline business pick up in the last few quarters. So I'm wondering what is different about the timing on the wireline business with the hyperscalers? And what does that tell us about maybe the visibility on the longevity of the spend?

Yes, I'd say there's a good question, Andrew, I'd say there's a couple of things going on. There's a couple of things going on. Obviously, the AI cluster and infrastructure build-outs are occurring, driven by the hyperscaler spend. So the entire supply chain is sort of locking in grid and trying to deconstrain a constrained supply environment. So there's some impact, positive impact to our business from that dynamic.

But the longer-term overarching theme is the underlying waves of technology across the entire stack all the way from compute to memory, to storage, to the infrastructure itself when it all comes together. I think we're making significantly bigger contributions and participating in that secular long-term trend from an R&D perspective. And so we feel good about both these opportunities in the short and in the medium term.

Our next question comes from the line of Atif Malik with Citi.

I have a question for Satish. Satish, Nvidia announced $1 billion strategic investment in Nokia developing AI-powered networks for future 6G RAN infrastructure. And I hope you still say that the latest part of this decade versus 6G in terms of the adoption, like why wouldn't it be faster if the AI guys are supporting a faster adoption of 6G? Just kind of help us out. Has anything changed with respect to your view on the inflection in 6G?

Yes. Atif, good question. I think when we think about any big technology role -- generational role, we start to look at where the standards are and that's often a good mile-marker for how deployments will occur. And so when we think about the standardization, we're thinking '28, '29-ish time frame when that process comes to some level of maturity before global deployments may occur.

But specific to our portfolio, we're quite excited by the new opportunities, the changing technology stack presents itself. And I'll have Kailash make a couple of comments on some of the collaborations that we're currently engaged in that we feel like will result in meaningful upside to the company.

Thank you, Atif. See, we are working with operators, to your point, in helping them evaluate how GPUs and AI accelerators can be deployed in RAN environments. So we have a solution portfolio that we have launched recently that allows them to model concurrent RAN and AI workloads in partnership with NVIDIA and an ecosystem of U.S. operators.

Recently, we also launched a solution to bring the concurrent exploration of compute as well as connectivity infrastructure using some of our wireline as well as wireless portfolio. All of this is exciting, and we are enabling the industry further the 6G standard for.

Our next question comes from the line of Rob Mason with Baird.

My first question was going to direct to Satish. I was Curious if you could just speak to the positioning business that you did acquire with the Spirent acquisition. It does look like that's really new capability that you bring into the portfolio. You made mention of it some in the aerospace defense commentary, but I'm just curious how you see that technology layering across the portfolio, applicability? And where do you think Keysight's relationships can add incremental value to that capability?

Yes. Thank you, Rob. Great question. I'm very excited to answer it as you can probably sense. Positioning is a crown jewel, right, inside the Spirent portfolio, very unique capabilities with regard to positioning, navigation and time. And you might say, what does it do? What does the products really do?

Well, it simulates and emulates satellite environments in the lab. I used to be an engineer at Motorola and even dating back to my time as an engineer, I've used these tools, and I'm a big fan of these tools. Inside the Keysight environment, I think it takes a completely different upgraded opportunity set because of our different end market exposure.

I would just start with automotive being an example. You start to look at autonomous systems, integrated sensing and communication in the context of 6G, aerospace, defense, with jamming, spoofing and a whole bunch of new considerations that the security environment now requires quite excited by it.

It will take us some time to get it all plumbed together into our Solutions portfolio. But this has been a gap in our portfolio and one we feel really good about embracing. I was just meeting with the team a week ago and very excited, as I you can say.

And maybe Kailash can give you a little bit more color on some specific applications that we're already starting to build into our value proposition.

Yes. Thanks, Satish. As the LEO and NTN application scale, we obviously see significant opportunities to offer additional value to our customer base. We're looking to bundling in some of these capabilities with our classics physical and protocol layer solutions. And clearly, this is an upside for us. Satish talked about NTN design activity gaining momentum. What this does is it enhances our portfolio that we already have from testing antennas on satellites to going into satellite constellation emulation, orbital emulation, channel emulation and so forth.

So plenty of applications here to bundle this capability into Keysight's portfolio that's going to drive business both in our aerospace defense as well as wireless markets.

That's very helpful. And just as a follow-up, Neil, just going to see if you could provide a little help on the -- maybe the cadence of how the M&A revenue contribution folds in this year, just look like the first quarter guided contributions above the run rate? I know Spirent in particular, had more second half weighted -- calendar second half weighted revenue, but how should we think about the cadence for the year?

Yes. The revenue from the acquisitions, first all, rough estimates at this point, about 75% into CSG, about 25% into EISG. From a seasonality perspective, it does skew a little bit more heavily towards Q1 versus the remainder of the year. We have -- approaching 30% here in the first quarter. And then with the remaining 3 quarters more or less equal to one another.

Just with the small caveat, we're obviously basing that on how these businesses behaved in their prior environments and recognize that -- particularly as we bring people onto -- their sales forces onto our sales structures things are likely going to relatively quickly start to shift and start to align with Keysight. So we'll have to see how that plays out. But right now, we're modeling close to 30% in Q1 and relatively evenly thereafter.

Our next question comes from the line of David Ridley-Lane with Bank of America.

I wanted to dive into that sort of commentary that you'll have 10-plus percent adjusted EPS growth even with the dilution. Are we right in sort of thinking we're not talking about significant EPS dilution? Any way to sort of put some parameters on that?

Yes. I mean, I described it in the prepared remarks at mild. So I think you could think of it on a percentage basis is low single digits.

And then the other question I had just on the contribution is that core commentary that you were talking about in terms of the organic revenue growth sort of fit with the historical sort of 40-ish-plus percent incremental margins? Or how should we think about the contribution of the M&A synergy benefit versus your core incrementals as we're framing up the entire fiscal year?

Yes. So obviously, Spirent is a public company, so you could go look. Those businesses were -- as we inherited them, we're operating at profit levels that were significantly lower than Keysight's, but we have committed that on a post-integration basis, we expect an accretive to Keysight operating margin. So over that 12- to 18-month period of time, we're going to make a pretty significant increase in driving improved profitability in those businesses via this $100 million synergy and other efficiency capture.

In the core businesses, I think 40% incremental is the right way to continue to think about our business. The one thing that you need to factor in is tariffs, which, again, we're still lapping they're still not fully in our run rate. But as you saw this year, we came very close to delivering to the 40% core incremental while absorbing tariffs in the second half. So it's the right way to think about our business, but the tariffs do provide a marginal incremental headwind.

Our next question comes from the line of Mark Delaney with Goldman Sachs.

In your prepared remarks, you said that for the full year, you'd expect your revenue growth to be at or above the high end of the 5% to 7% target model. As you think about some of the different businesses, A&D, wireline, wireless, EISG, can you give us a better sense of which one do you think will grow at that level or above? And any end markets that might grow a little bit slower and build up to that consolidated view that you provided?

Yes, I mean I think Satish has already provided you some color on the markets. I think as you think about wireline, we're clearly benefiting from the investment wave in AI. I think we would think that AI is positioned to be a significant growth driver for the company going forward. I think if you think about wireless, Satish has already commented, but I think we do see growth from where we are at these levels.

So you could think about wireless growing in line with our targeted growth levels for commercial comps, which was 4% to 6%. I think in the industrial businesses, I think you've got -- I think the 4% to 6% is probably the right way to think about it with strength in semi and gems being offset by kind of some continued questions in automotive is the way I would think about it.

My follow-up was on tariffs. Neil, you said you expect to fully offset the August tariffs sooner than you previously expected. Can you just provide some more context as to what's allowing Keysight to achieve that so much sooner?

Yes. I mean a couple of things. So first of all, last quarter, we guided you to -- if you took our comments from May out of a number of comments from August, we guided to an annualized tariff range of $150 million to $175 million and now it looks like we're trending towards the lower end of that range. So I think that's a benefit. And then with the strength of our business, our pricing and surcharging mitigations are ramping a little faster than expected, and we're going to be able to offset those tariffs again on a dollars basis, 1 quarter ahead of what was previously communicated.

The other part that I would add, Mark, is also we decided intentionally to honor all outstanding orders pre-tariff that was in our backlog. So effectively, we've been -- some of the shipments have all gone out. And so our forward-looking exposure at 0 tariffs, if you will, is much smaller now.

Our next question comes from the line of Aaron Rakers with Wells Fargo.

Yes. Congrats on the results. Neil, I wanted to ask you about the operating margin. I know this feels like a long time ago, but back at the Analyst Day in 2023, you talked about attaining a 31% to 32% operating margin. I think the initial target was by fiscal '26. Given the operating incremental leverage that you're seeing in the model, layering in the acquisitions that you're doing and driving accretion over time from that.

How are you thinking about the achievement of getting to that 31% to 32%. Is that something that you think we could see in fiscal '26? Or do you think that might still be a little bit further out? And I have a quick follow-up.

Yes. No, I definitely think it's further out. In fact, it was -- we took '26 essentially off the table when our business went into the downturn over the '23 to '24 period. Obviously, that was not something that we had contemplated when we made that commitment. Our business was operating at 29% operating margin when we made the 31% to 32% -- when we put that number out there. .

Since that time, obviously, we've seen a correction in our business as we -- as evidenced this year, business is returning to growth. We're back to delivering strong incrementals. We have an incremental opportunity here with these acquisitions that we brought in as we realize value capture from those. I think all of those things will enable us to deliver a strong -- strong growth and profitability and earnings over the time frame. But it will take us a while to climb back from these current 26% levels to the levels we were contemplating when we were at 29% back in fiscal '23.

Aaron, just to add to what Neil said, the fundamental tenants of our value creation that I laid out in terms of our business model and operating model remain intact, including the downside performance that we delivered during the downturn. So those fundamentals remain intact. Equally excited about the opportunities for driving growth and capturing upside in the market, including the value creation incrementals we can deliver from the acquisitions post integration.

Yes. Yes, very clear. And then as a quick follow-up and just maybe more thematically, we talk a lot about 800 to 1.6 [indiscernible] Starting to hear you guys talk a bit more about pervasively about silicon photonics. And I'm curious of what your thoughts are with regard to that. When do we expect to see the volume deployments from the market, appreciating here on the R&D side. I'm just curious on how you see that because there's a lot of discussion around scale up, scale across networking and AI and obviously, you're at the tip of the spirit of some of those architecture shifts?

Yes, I'll have Kailash make some comments and then maybe Jason can follow up on the silicon photonics as well. .

Yes. Thank you, Satish. Clearly, there is a scale element to it. Right now, the demand is up for high-speed silicon, optics, interconnects, accelerators, custom silicon and so forth, and this is driving both design and R&D activity that we're enabling as well as validating many of these RACs that have lots of GPUs, complex cabling, interconnect and networking, we're participating and validating those as well. So there is a scale element.

And your question about the speeds, clearly, we're seeing a design refresh that is occurring throughout the network. And this is occurring at a faster pace. We are seeing concurrent activity in 400G, 800G and 1.6 tera. The 1.6 terabit wave is still ahead of us. We demonstrated this year, solutions to enable 1.6, 3.2. As we outlined in our prepared remarks, we enabled Broadcom with their 1.6 terabit silicon and what's interesting is there are multiple challenges that the industry is facing right now.

Some customers are pushing speed. Other customers are pushing decrease in power at the same speed, yet another group of customers are working on improving density at the same speed. And all of this is occurring concurrently that's driving a lot of R&D activity and design emulation intensity.

[indiscernible] has been happening on the front end of this year. We've sold double-digit number of systems to foundry customers on the silicon photonics side. I would say it's still early days, and we expect continued growth next year from silicon photonics as capacity continues to expand and move, like you said, from R&D to commercial production.

Our next question comes from the line of Meta Marshall with Morgan Stanley.

A couple of questions for me. Just in terms of the strength that you saw in Aerospace and Defense. Could you speak to is this kind of the broadening of budgets that you have been expecting out of some of kind of the allies? Is this new program? Just kind of a little bit of where you saw that strength? And then maybe as a follow-up, noted kind of the positive uptick in the auto orders year-over-year and so just wondering where you're starting to see some green shoots on the auto side?

Yes, we'll answer that, Meta. I was expecting you to ask me to size my AI business, but I was ready to do that. But since you didn't ask me, I'm going to skip forward to the Aerospace and Defense business. So record bookings this year builds backlog again. And I think it's a year where with considerable noise in the system, I would just say in the quarter 1, we had this entire situation with administration change, which we knew that was going to be a challenging situation for our U.S. business.

And I also predicted that things would improve as the year went by, and it did. And then as we look at Q4, we had the situation with continuing resolution, spending environment from a direct government, which was a bit more moderated. But our prime contractor business was good, and I also -- we saw strength in Europe, in particular.

I think this whole deference and the associated technologies, our portfolio is well positioned with that. And then defense technology in general with NEO, primes and others coming up with faster, more nimbler platforms are adopting Keysight solutions as well. So we feel good about our portfolio and the future focus.

As we have said before, this is one of those businesses that is quite easier sort of to call on a long-term basis. and really tough to call on a quarterly basis. But our pipeline looks solid as we go into '26. I'll have Jason make some comments on automotive.

Meta, thanks for the question. Yes, so as we move through this year, we saw our automotive and energy business reach some level of stability at current levels. While orders were still down for the full year as we expected, they did grow year-over-year in Q4. We benefited, frankly, from a fairly soft compare last year in Q4, but it was great to see that all subsegments of the business grew across software-defined vehicle, our electric vehicle, ESI and even on the manufacturing side, a small amount of growth.

So investment is happening more in the software-defined vehicle space and vehicle network, advanced connectivity, advanced sensing and radar as well as continued healthy chip design software renewals within the quarter were healthy, and we're seeing on the EV and grid side charging and grid simulation activity and solutions are really customer priorities and then giving them the manufacturing some capacity investments side to software-defined vehicle electronics and a few new customers within the quarter.

So good to see things stabilize from here. We're not calling an inflection, but we'll see how things progress here going into FY '26.

Our next question comes from the line of Tim Long with Barclays.

Satish, I wasn't going to ask about scaling the AI business, but it sounds like you'll answer it. So let's start with that one. If you don't mind, maybe just give us an idea of when you look at wireline and semis and kind of the overall business, kind of what you're doing for you?

And then secondly, if you could just talk about Software and Services, 37% on the year. I think in the slide show, it says going up another 300 basis points with the M&A. So it gets you to 40%, a pretty healthy number. What's the outlook for moving that with the M&A and kind of the way things are going in AI and software overall, are you thinking that we'll see a continued move upward in kind of the complexion of the business coming from the Software and Services side?

Thank you, Tim. First, I would say that our wireline business had a record year, growing double digits this year. And if you look at the plethora of contributions that we're making towards next-gen technologies, that are attributable to this entire AI ecosystem and AI clusters and the additional infrastructure that's being built, I would say it's roughly half of our wireline business is seeing that impact because it's -- again, it's a broad set of portfolio of tools that we bring across physical and protocol layers of emulation.

So -- and the wireline business of Keysight is -- if you look at the commercial communications, it's a little under half of the business with wireless still being a little over half, so that sort of gets you to see it. And that part of the business is growing strongly with robust adoption from customers across those -- the entire tech stack that we referenced before.

The second part of the question is really about Software and Services, and this has been a focused area of strategy for us for a long period of time, and there's more upside for us as we move forward. Obviously, the addition of the Optical Solutions Group and Spirent and the PowerArtist give us a meaningful uplift right away, but also the ability to continue to add more content and create life cycle value for customers and capture that value for the P&L. So we're quite excited by that as we look forward.

Our next question comes from the line of Rob Jamieson with Vertical Research Partners.

Congrats on the quarter. So just wanted to touch on R&D and just some of the investment, just approaching 19% of sales this year. Can you first just talk a little bit about where where you're investing the most heavily, whether that's AI and data center or some of the 5G advanced stuff that we talked about last quarter?

And then as we look ahead, how should we think about R&D intensity going forward just with Optical Solutions Group and PowerArtist, just given the software nature there and wanting to keep your competitive advantage, just how should we think about prioritization going forward?

Yes. Thank you. Well, first, I would say that when we look at the entire portfolio, we have a cohesive portfolio of physical layer protocol emulations and into applications such as in the design space. And we see opportunities in the physical layer to refresh our portfolio of offerings as the new technologies come in and customers are ready for adoption.

So we're in between that refresh phase of investment right now and over the next 18 months, feel really good about the new product introductions that are -- that we have -- that we're continuing to work on. And so you're seeing that not only in the traditional wireless but also in defense technology and in AI. So you're seeing a little bit of increase in R&D spending associated with that.

But I do believe that each of these products and solutions are going to help us outperform our markets under a range of conditions and that's why we're doing it. With regard to -- yes, your point is well taken with regard to the software assets, they typically run north of our company average. And so I'll let Neil sort of help you with the modeling of it.

Yes. I mean I think as we think about integration, as we said in some of our prior comments, the primary areas of focus are on leveraging our go-to-market, leveraging our back office. That being said, there may be some opportunities as we bring into the portfolio to align and share some costs. But primarily, we're looking for leverage in other parts of the P&L.

Okay. That's helpful. And then just free cash flow, just solid again this quarter. Anything to call out in terms of some of the drivers or levers there. And then as we look into '26, just how should we think about conversion for the full year? I know you've probably got some acquisition-related cash expenses, but would you still expect to be above that 90-plus percent long-term conversion rates that you're targeting?

Yes. I mean I think we expect -- continue to expect good conversion of non-GAAP net income into profitability or into free cash flow. That's how we track it. As you know, we do -- we will see some additional integration-related expenses that will put some pressure on free cash flow conversion during the during the year.

But again, I think if we step back and think about it from the grand scheme of things, relatively a small proportion of the overall total, and therefore, we'd still expect strong free cash flow conversion next year.

That concludes our question-and-answer session for today. I would like to turn the call back to Paulina Sims for any closing remarks.

Thank you, Victoria, and thank you all for joining us today. Have a good day.

That concludes our conference call. You may now disconnect your lines.

Okay. Great. Well, thank you, everybody, for joining us. My name is Mark Delaney, and I have the pleasure of covering Keysight for Goldman Sachs. Really pleased yet again this year to have with us from Keysight Satish Dhanasekaran, the CEO; and Neil Dougherty, the CFO. I really appreciate you both taking out the time again this year.

Can't believe it's been a year. So very excited to be here.

Well, a lot of interesting things that have been going on in the industry. And I thought maybe first to start with a little bit of a higher level question, Keysight, as many of you all know is a provider of design, emulation and test solutions. And a large percentage of your over $5 billion of annual revenue is tied to customer R&D applications. What has allowed Keysight to be such a key part of customer workflows in markets like A&D, Communications, auto and industrial?

Yes, Mark, it's a great question. I think when we think about the company since we have spun out of Agilent and have been an independent public company. It's been our consistent focus on taking a business that was largely hardware products oriented and shifting our investment mix to go realize the bigger opportunity to be a software-centric solutions provider. And along that journey, we quickly also realized that the transformation that's underway is shifting the mix of our -- the customers we cover from maybe more manufacturing oriented, highly cyclical to less cyclical, more R&D, secular R&D-oriented opportunities.

So what makes us unique in that journey is the deep rich technology stack we have that we have invested in over multiple decades in the company, both hardware and software and just the culture of the company that is extremely collaborative that then orients us to go and engage in deep partnerships with our customers. And we have sustained it now over a decade as an independent company. And so the more we see ourselves as enablers of our customers' innovation the more opportunities that are open for us to make deeper contributions.

That's a great starting point and a lot for us to dig more into during the next 30 to 35 minutes. I want to talk a little bit around markets, if I could. Keysight has had 5 consecutive quarters now of year-over-year order growth coming after what had been a recent downturn you look at your business overall, what should investors take away about where the company is in the cycle?

Yes, it's very important takeaways. One, since the company was formed as an independent company, we've been on an upswing of growth and expansion. And so how would the company perform in a downturn was always a question mark. I think we heard this from investors. Neil had put out at 2023 Investor Day, we started to see a downside model of negative 10%. So a, we performed to that model and the business performed to the model and the business model and the operating model that we have held. So coming into the recovery this year in our markets, we saw a mixed market recovery as an outlook. And we said, look, our markets might grow at the low end of our expectations this year, and I think it's largely held to our expectation. But we have outperformed our markets yet again as we would expect to, primarily because we were able to invest during the downturn in innovations that enable us to now go ahead and monetize in areas such as AI where the market has been expanding and we're outgrowing the market.

We're also beneficiaries of more stability in defense spending, some bounce in our wireless that has been better than expected. So all of these are factored in. But at the core of it, we serve our engineering customers. And everywhere I go talk to them, they're all trying to innovate faster. And I think working with Keysight gives them an advantage to do so.

This next question on tariffs really can be applicable to either of you. But on the last earnings call, you provided an update on the steps the company is taking to mitigate some of the tariffs. And I know that's been an evolving policy backdrop. But talk a little bit more on the steps, if you could please with the company is taking to offset tariffs?

Yes, happy to do that. I think the first thing that we had to do was just realized that prior to Liberation Day in early April, we were operating in a world without tariffs and things weren't optimized for the new reality. And so we made some pretty significant changes to the way we were moving material and inventory around Keysight to ultimately reduce the tariff exposure. I think now we're focused on a few things, right? We have a pretty diverse manufacturing footprint ourselves, primary manufacturing in Malaysia; second, though, it would be in the U.S. and then we have other manufacturing locations around the world.

And then our big subcontractors, obviously have global capabilities as well. So trying to find the right mix between tariff rates and how to use the capacity that exists in this ecosystem. In addition, there are potentially opportunities to work with customers, for example, in the defense industry that may be exempt from some of these tariffs or to accelerate the reclamation of some tariffs where you see things imported into the U.S. only to be reexported, -- those are all things that can help to minimize the exposure. And then beyond that, we are taking action to pass the remaining costs on to our customers via surcharge and pricing and -- but really placing a priority on maintaining those long-term customer relationships.

So we're doing that on a prospective basis, we're honoring outstanding quotes. We're not repricing backlog. So it's going to take a little bit longer, a couple of quarters for us to fully realize those offsets, but we think we'll benefit in the long-term maintaining those long-term via maintaining those long-term customer relationships.

And I think on the last earnings call, even with some of the more recent tariffs that have been put into effect, you thought you could fully mitigate them within the first half of this coming fiscal year?

That's correct.

Yes.

That's correct.

And obviously, as you pass through cost at no extra markup, it can be just a mechanical drag to the margin percentage even though there's not a hit to profit dollars. How impactful might this be to margins as you're seeing...

Yes. I mean I think that's exactly right. We're going to get the tariffs offset on a dollars basis, which means there'll be no earnings or EPS impact. But to the extent you're offsetting it with price, it is margin dilutive. So you could see 1% or more of gross margin dilution that comes from this over the longer-term. And -- but I think Satish and I both continue to believe that there's gross margin upside in this business as the recovery progresses.

We'll get more into the longer-term margins later in the discussion. I wanted to talk on the revenue outlook first. For this year, the company's now expecting revenue to be at the higher end of its 5% to 7% target. Maybe double click a little bit on that. How much is it from better business performance and how much is maybe tariff pass-through?

Yes. Tariff pass-throughs are small. I would just attribute most of it to outperformance in the business, strength of our portfolio and our ability to capitalize on opportunities we see in markets such as wireline where we see tremendous strength and other end markets. I'm sure we'll talk about that, yes.

Okay. When you talk about the business mix. In fiscal '24, software and services was 39% of the company's total revenue and recurring revenue was about 30% of the company's total. When you think long-term, where do you think software and service and recurring revenue can get to as a percentage of the total company?

Yes, Mark, higher is the simple answer. But at the 2023 Investor Day, I talked about the next milestone for software being 30%. And I think we're -- we have some ways to go, but we're tracking to that. We'll be continuing to drive that. Services, we see a really good opportunity to continue to expand our contribution to customers, especially as we do more system integration projects. They are so complex, our customers would naturally want us involved in that -- in supporting their installation. So I think we have a good set of opportunities to execute to. So definitely higher.

And I think both software and services gives us the opportunity to realize our strategy, and so we're continuing to invest in it. The recent -- I would just point out the recent acquisitions that we announced, both of them have gross margins that are north of company average right? And I think that, again, continues to drive that gross margin up at the company level.

Just when you talked about the recent acquisition or talking about Spirent and means for the Ansys' PowerArtist?

All of them in aggregate and each of them individually, yes.

Okay. And as you think about the different parts of the Keysight portfolio, are there certain segments of the business that are more software and services oriented?

I think I would say that innovation for the entire industry in commercial is really our commercial communications end market, where we are further along in progressing our R&D strategy and therefore, by definition, also further along in terms of progressing the software-centric transformation. It's at the front end, that's where we invested first, and so we're continuing to progress there. So you will continue to see also a natural tenancy for platforms of our customers moving to more software-centric architecture. So the nature of design and test work moving to more simulations, emulations in that end market.

So that's -- that's where it all starts, but it doesn't end there. Our aerospace defense industry is where we would say the services opportunity is still got many legs to run and our industrial markets as well as we progress our strategy. So starting with commercial comps and then into AD and then into industrial.

You spoke earlier around the business holding up in a downturn relative to your expectation? I mean it is a cyclical industry, but at the same time, you're growing these more recurring parts of the business. And so as you look at the last downturn, how much more defensive were these more recurring parts of the business? And did they impact end up holding up a bit better than some of the hardware and product parts of the business?

Yes. I'd say, if you think of -- we tend to look at some of our peers and how they've performed and we look at our performance relative to them and also we look back and we say, in prior cycles, our business was probably down 30%. 2008 being the most public one. But as you look at this particular cycle, we we've sort of looked at a business model that would be at a negative 10%-ish, and that's where we ended up. And then we talked about a margin performance is 300, 400 bps below our peak, and that's where we ended up.

So I'd say the performance of the company really validates the business model and the strategy that we've put in place. And a big part of that is the stability from servicing diverse set of industries including the ability to grow our wireline business in '24 when everything else was down. So that provided an offset. And the fact that we have software and services, which provides tremendous stability. So it validates the direction and we want to continue to accelerate it moving forward.

That's very helpful. Emulation and simulation are areas where Keysight has expanded its capabilities. How much of your revenue today comes from those solutions? And how big is the opportunity longer-term?

Yes, I'd say we've publicly said 60% to 70% of our revenue is still in the core business, the instrumentation business. By definition, that means roughly 30% to 35% is in these expansion areas that we have continued to build and we see more opportunity to expand in these areas because they're a green space for us in many areas as we engage. An example would be, you could say, through the AI inflection in the wireline industry there are physical layer tools that go servicing that industry as well. But equally, we're excited by the opportunity to get into benchmarking and emulations of these complex systems that our customers are putting in place and evaluating how the AI application runs on those systems. I mean that's a new opportunity. We're only able to do that because of the capabilities we have.

Okay. That's very helpful. Maybe we could dig more into some of the different end markets and starting with commercial communications. It's about 45% of Keysight's total revenue. In the third quarter, both wireline and wireless revenue grew double digits year-on-year. So some of that cyclical pickup you referred to earlier. Can you give us a sense of how the commercial communications business further splits out between wireless and wireline, especially given some of the recent wireline strengths?

Yes. I mean the commercial communications marketplace is very innovation rate, and the intensity tends to be higher across the board. Customers are competing and they're investing to get an advantage. And I think as Keysight, we see our role as really providing them the solutions that give them a time-to-market advantage in R&D. And so if you look at the split of the business, historically, it's been slightly more weighted towards wireless versus wireline. But with the changes that have happened now, double-digit growth in our wireline business in '24, double-digit growth this year, very likely to finish in that ballpark. We're going to set a record revenue for our wireline business this year, and we see more opportunities with AI progressing through.

Our wireless business is following a very traditional S-curve pattern where once post deployments, things tend to cycle down, the innovation intensity is a little bit lower. And what we're now seeing is an increased intensity from our customers for the first time in a couple of years, right? We're seeing that customers are feeling the slightly higher sense of urgency, I should say, to adopt new innovations are on the table, especially non-terrestrial network is a great example. And then with some of the standards work that started in 6G, we're starting to sense that customers are trying to look forward. And again, it's a good sign of things to come with AI being, again, in the RAN context becoming an important driver for them.

So more to come on this. It's still in the early days, but I feel good about the stability we've reached in wireless and the opportunity ahead with in wireline.

Maybe we could continue on the wireline theme. How important is AI for that part of your business?

Pretty significant driver, right? I mean you go back to 2022, and you look at the state of the industry, obviously, cloud and enterprise deployments of cloud and telco were large drivers for that entire wireline ecosystem that we serve, which is people that make chips to hyperscalers and so on and so forth and network equipment manufacturers. Today, in the last couple of years, what we've seen is pretty significant investments from customers trying to innovate around the multiple dimensions, compute, memory, storage, system integration challenges that they face on the hardware side, but equally on the emulation side. So the industry is really innovating and that innovation shows up as multiple ways of technology evolutions that would take 3, 5 years out are now being pulled in. And that's where we see the intensity remains very high, and we're capitalizing on it.

Okay. On the last earnings call, the company highlighted that it launched a protocol layer solution for validating 1.6T performance. When do you expect that technology to be deployed to customers?

Yes. I mean, customers are rapidly pulling technology and working on making it more industrial, I would say, -- you think about the difference it took from 100 gig to 400 gig adoption. And we're seeing a faster climb for 800 gig and even a faster pull for 1.6 terabit right now. And we're still in the early days of 1.6 terabit for our business in terms of R&D tools. So we just had the industry's first announcement. And customers are already talking to us about 3.2 terabit. So it's a very dynamic innovation rich industry.

On the wireless side, you reported solid revenue growth last quarter. You also said it's more stable. You spoke about this a little bit already, non-terrestrial networks and some early 6G. But as you think about the wireless part of your business, -- can you sustain these sorts of levels? I mean, how stable is this business prior to the 6G cycle?

Yes. 6G and some of the new innovations will continue to be the driver of growth. And we feel good about 5G stability. I think there's still some legacy 4G business in the mix at much lower levels. So I don't know if we will keep this double-digit growth. I'm not going to forecast this right now. But we feel good about 2 things, right? We feel good that our customers are returning to focus on innovation and the pull right now, even if it's in a few areas, the pull is becoming more real. That's #1.

And the second is through the downturn, given the business model we had with high recurring revenues associated with our emulation business and the profit profiles, we've been able to invest in what's coming next. That gives me confidence in our own road map that we have that will be more relevant to our customers in the future than we are today.

When do you think 6G will become a meaningful part of the business?

It's an interesting one. I'll let you know when it does. But I would just say that, look, it's again, a very familiar S-curve-ish. And so if you start to look at some bread crumbs that are there around deployment and you say, well, deployment is in the '29, '30 time frame, I think customers start to build up their stacks, start to build up their IP. They're starting now. And so I think that forms a good runway for us to grow into.

Maybe much more important than when exactly we're going to be able to have 6G phones and devices. Let's talk about Keysight's positioning within that technology and your strong leader in 5G. So help us better understand the steps Keysight is taking to ensure it remains in that leadership position for 6G?

Yes. Again, I'd say throughout '23 and '24, we kept investing on what's next, balancing, supporting our installed base in 5G with looking at what's coming next and some of the areas that we had foreshadowed or we'd seen were around the spectrum moving to higher frequencies, I think the FR3 band, as we call it, I think having solutions for customers there. The channel emulation offerings that we have put in place already, we've started to get some bookings for is customers trying to model what the channel will look like under various range of scenarios.

We also see use cases such as integrated sensing and communication becoming part of the future infrastructure. And we identified maybe a portfolio gap we had in terms of satellite simulations. And so we've made the acquisition of Spirent. I think that's going to give us more ability to serve customers in that area. So we feel good about where we are, the emulation capabilities we offer our customers in 5G, I think, is going to really help us also as 6G rolls out. And -- but it's still quite early innings and there's a lot more work ahead from a standards perspective in the next year that will unfold.

Given the rise of the commercial space and satellite industry, can you help investors better understand how big those markets are and what types of solutions Keysight delivers there?

Yes. I think our ability to emulate complex systems in the lab is really what the business is. And it's one thing when you just have satellites in the sky and you're using it for 9/11 or any of those sort of position tracking. But I think what's happening now is customers want to be connected all the time under various geographic conditions. And I think having satellite as an overlay to traditional networks is a use case that T-Mobile has announced already some services on and there's additional ARPU that some operators are looking at. And this whole spectrum moves that have been announced recently is again, synergistic to this position that people feel like, I think, augmenting satellite with ground coverage could provide a much more seamless experience for users.

And this is for mobile users today, but even for infrastructure in the future, I think that overlay will provide a very strong sort of use cases for defense, security and a whole bunch of applications that are to come. So we see a good trajectory there. And what we're working with customers on is emulating how their designs would behave in the midst of this sort of complex dynamic. And lots of innovation underway and we feel we're well positioned there.

Okay. Really interesting stuff. Maybe we could dig a bit more into the aerospace and defense part of your business. A&D revenue is up 7% year-to-date after being down last year. Can you comment on what's driving this growth?

Yes. I think we've talked about defense spending drivers, right? The -- even though this year in the U.S., we've been under continuing resolution, and there was a U.S. administration change. In Q1, you remember I called out that we've had a slower start -- but equally, I said, I wouldn't be surprised if we had a stronger rebound in the later half because this is such of the nature of this business. Harder to forecast every quarter, but quite easy to forecast if I look long range. I look back at this business in the last 5 years, we've grown at a 5% CAGR, a pretty consistent clip, if you think of it, because there tends to be programs that once you're spec-ed in and you're working with, it's got a pretty good recurring business rate associated with it.

So we feel good about the areas we're engaged in electromagnetic spectrum operations is a key area. We're focused on building our stack up, and now we're building more complex racks for customers, which gives us more services capabilities as well that we can layer on as we monetize our capabilities. But in general, innovation around defense modernization is seen as very critical to national security in the U.S. And so that was the U.S. being a driver. And what we're now seeing with the push for NATO to take up defense spending is increased investments through the prime contractors in Europe, but also formation of new companies in Europe that are -- that where Europe is feeling like they have to also invest in their own sovereign capabilities. So I feel in this geopolitical environment, we're well positioned to provide the tools as these local capabilities become -- manifest itself in each of these regions.

As you think about that European and Allied Nation spending and some of these announcements that have come out over the last 6 to 12 months or so, how well positioned do you think Keysight is to be able to address those? I mean you're headquartered in the U.S. I think U.S. DoD has been a very material part of this business in the past.

No, it has been. It's roughly, I'd say, 50% of our business is in the U.S., the rest has been international. And a big part of it is in all of our -- probably we have sizable R&D presence in Europe and in different countries in Europe. We have local integration capabilities in Europe as well. So we're well positioned already with infrastructure with the credibility of delivering to customers and strong relationships there. So as and when we see an inflection in the defense spending, manifest in programs there, we're having conversations with customers today that indicate that it's coming. It's not yet reflected in our business yet. So it's upside is...

Just more upside directionally. And I know we just talked about how the business has grown pretty well year-to-date now, and you've seen some recovery, but DOGE was quite the effort from the administration. We got a lot of questions from the investment community about whether or not that would affect companies like Keysight. Did you guys see any real hit to your business? And anything that we should be aware of on that front?

No, we didn't expect to see it, and I mean, we haven't seen it yet. And in fact, as you think about 2026, it's -- we're going to have a defense spending budget that's highest ever. And in RDT&E budget that's also double-digit growth in RDT&E. So I think it should be -- it should be a good environment for customers to push their programs through.

Because those DOGE efforts were really about rooting out inefficiency, not about clipping investment in defense innovation, which is where we play.

Yes. No, it makes a lot of sense. Maybe we could speak on the EISG segment that makes up about 30% of Keysight's total revenue. You've got exposure there, of course, to general electronics, semiconductors as well as automotive. Maybe starting with your semiconductor business. You called out robust demand for wafer test solutions recently. And you've also said that this part of your business could be a beneficiary from AI. So maybe talk a little bit about the AI -- excuse me, the semi piece of EISG?

Yes, the semi piece of EISG is roughly 10% of company revenues, right? And when you think about the mix of the business, the wafer test is a highly profitable part of our business, highly differentiated and it's on the front end of what customers need to characterize their wafers especially when there's new node sizes or there's new technology inflections, it tends to be a rich beneficiary, and that's what's playing out. If you look at what's driving this change, AI, you have high bandwidth memory from a memory perspective, to push to 2 nanometers and also customers and fabs looking at silicon photonics as a viable technology.

I think all these 3 are creating a strong foundation for the business results this year. And we also think it will -- it gives us a strong foundation as we look ahead.

Sticking with the EISG segment. You highlighted that general electronics end market grew year-over-year for the second consecutive quarter. Maybe help us better understand what this business encompasses because I think it can touch a lot of different areas.

Yes. So exactly. It really is a broad business, consumer electronics, education end markets, digital health care are all in there. I think within this broad envelope, there are a number of different submarkets we track, and they were all positive in the most recent quarter, including those education end markets where a lot of it is advanced research. Similarly, the med tech markets were up. But you just mentioned earlier that there was a little bit of a halo effect from AI into semi. I think we're seeing a similar impact in the general electronics business, when you think about things like cables and connectors and PC boards and stuff that will be more for general electronics manufacturing, but definitely related to this scale out of the data center, you're getting some uplift from that.

Okay, very interesting. I mean that would suggest it might be sustainable, then is not just sort of an inventory restock or something like that.

Yes.

Okay. And then auto, the other area within EISG, had been somewhat softer, although last quarter, you said you'd seen some stability on a year-over-year basis, sequentially more stable? What's contributing to that relative improvement within the auto part of the business?

We think the manufacturing auto, obviously, it's much more R&D than manufacturing, but we've had a manufacturing component that's bottomed out in the last couple of years. So there is not much downside risk there. And what's really holding the business and customer interest is this move for software-defined vehicles, right? And companies are looking to invent more of the stack in-house versus outsource it. I think all those are creating opportunities for us to supply them the basic set of tools that they need.

And I see maybe some early signs of stability in this business. The large EV, which drove a lot of the investment has also bottomed out because there used to be a lot of programs for EV with China's batteries coming online. It's almost like the solar type of a situation. The prices of batteries have fallen so dramatically. So I think that's sort of cratered out. I think the focus now on for every automaker is on reinventing their technology stack and moving forward. So I think those innovations look to be more sustainable as we look ahead.

How should we think about the geographic distribution of your customer set within auto, right? We're seeing a lot of growth out of the Chinese auto OEMs. They're not even just selling in China. They're expanding internationally, including in Europe. How much of your business is tied to some of those companies versus Western OEMs?

We have a diversified business, but largely, I would say if there's any concentration will be on the European OEMs, right, where we have -- our auto business is headquartered in Europe. And so we've had a foothold there for quite some time.

We did just recently announce an engagement or progress with NIO. So we are playing in the Chinese markets as well as the other big auto ecosystems around the world. But if it skews any direction, it's towards Europe.

Okay. And as you think about the other bigger Chinese auto companies, are they customers of yours just small? Or do you not have much of a presence as you think of some of these other Chinese auto OEMs?

I would say small on a relative basis, yes.

Okay. Curious as well, I mean you spoke a little bit around some of the trends on the EV part of the auto business. Is there any opportunity for additional downside there as you think about it? Or do you think that's pretty stable at this point...

Again, I think you said it's pretty derisked. I think we're largely bouncing along the bottom. But I think certainly, any downward moves are likely to be small and probably not really measurable at the Keysight level. And again, where we're seeing strength is in the software-defined vehicles, autonomous driving, infotainment systems, all of these types of things.

Yes, even with this, what Neil said, when we think about the large bookings we've had in '23, the customers have largely stuck with those system integration projects. So we haven't seen them pull back despite all this. So we're still going to execute those projects out. And as we look ahead, maybe the future looks like more in the grid as we start to think about grid applications for batteries. So we'll be pivoting to that and redirecting our pursuits as we look ahead.

Okay. There's a couple of financial ones. If I could, in the remaining few minutes. Maybe just starting with how you're thinking about the portfolio and organic versus inorganic investment. You've got some potential deals that you've announced. Maybe just talk a little bit more generally around what you're most excited about adding to your portfolio and how you think about deploying capital?

Yes, I would say, first and foremost, I think every year, we've said this before, organic growth remains our top priority by far. And I think the investments that we've made in '23 and '24 through this downturn really position us well with a strong portfolio as we look ahead. Even the announcements we made to acquire companies in the downturn actually gave us relatively better valuations and were come out of research that we have done about capabilities that could position the portfolio looking ahead, such as the satellite simulator from Spirent is an example of that.

And as we scan the software market, I think, I believe to acquire Ansys' PowerArtist and the Synopsys' Optical Solutions was great complements to what we already do and grow our software as a percentage of the total mix at relatively, let's say, attractive valuation. So very excited by this. We're in the final phases of approvals with the Chinese regulator and things have been, as we've said, constructively, there's a lot of constructive engagement, and we hope to get these transactions close this quarter.

I do want to speak about margins to wrap up for you, Neil. At your 2023 Investor Day, you laid out a target to hit a 31% to 32% operating margin. In light of the industry backdrop as well as you think about tariffs and having to deal with that cost. Is that still a good level at some point that investors have in mind?

Yes. So first of all, we've talked a lot about operating leverage in the business and delivering 40% operating leverage with our business is growing mid-single digits or better. I still think that's the right way to think about our business. The tariffs in the short-term are going to be a headwind to executing on that. But for example, since tariffs have been announced in April, if you strip that out, we've actually exceeded that 40% operating leverage commitment. So we obviously have a few more quarters to go to kind of get that into the baseline. And then again, I think about the business on a 40% operating leverage basis.

I think we still -- when Satish and I talk, I think we still believe that ultimately, we can get to those '23 Analyst Day targets. But I think our first step is to get back to where we were, right? Let's get back into the high 20s, 30% range. We're going to do that by growing this business by continuing to deliver that operating leverage and grow our software business, grow recurring revenue, grow our solutions portfolio, so we can continue to keep gross margins moving northward. And so Again, I think it's the right long-term target, but immediate goal is to get back to where we were.

Great. Well, this has been very informative. Thank you both for taking up the time.

Thank you, Mark.

Thanks for joining us for the Keysight fireside chat. I'm joined by Kailash and Neil from Keysight. We will do a couple of questions here, and then we'll take questions from the audience if folks have them.

But maybe I'll kick off, Neil, with you. Just maybe for folks, just kind of level set on your last earnings call, full year guidance was kind of at the higher end of your long-term average. So it would be great to talk about what were some of the contributing factors, what's working in driving sort of that better-than-expected performance?

Yes, absolutely. It's nice. We've been able to take up our growth expectation for our fiscal '25 here 2 quarters in a row. We started the year last November, thinking things would be at the lower end of our long-term growth range, 5%. And then we increased that to 6% at the end of the second quarter and then to 7% here at the end of the third quarter. And I think a number of factors at play. I think some of the areas that we expected to be strong most notably wireline have been even stronger than expected. I think we expected a rebound in the semiconductor market this fiscal year, not only we've seen that, it's maybe been a little bit more robust than we had forecast. .

And then the one area that maybe is directionally different than we expected is wireless, where I think our base case coming into the year was that after a couple of down years that this business would stabilize at a lower level and be more or less flat. And in actuality, we've gotten some nice growth. It's not growing at the same rate as it was a couple of years ago, but it's growing. It's a big business for us, north of $1 billion and enough to move the needle on growth rate for Keysight as an entire company.

So generally speaking, I feel like things this year have been better than expected. I feel like as we enter FY '26 those secular themes are aligning pretty well for us with maybe just a little bit of caution around tariffs and the fact that we're still only 4 months or so remove from liberation day a few or 5 months removed from liberation today. And I don't yet know that we've achieved a market equilibrium. So we'll see.

And so when you think about next year, you think about that range, where do you see the pockets of outperformance, underperformance for sort of '26 just at a high level?

Yes. I mean, I think we continue to see momentum on the wireline side of things, I think these -- the transitions between the various speeds, 400 to 800, 1.6 those things are shrinking. The industry is working to find alternatives to the proprietary NVIDIA standard. And so all of those things are driving robust investments in research and development that's benefiting Keysight and we would expect that into FY '26. I think Aerospace Defense is another area we expect to be strong, not just based on the size of the U.S. budget, but based on the increasing spending commitments of our NATO allies in Europe, and so that tends to bode well. I think the area of caution continues to be auto. We are seeing investment in the software-defined vehicle side of that. So that's autonomous driving, infotainment systems, in-car electronics, but the EV side, the manufacturing side continues to be challenging. So that's one area where I think we continue to be cautious as we enter FY '26.

Got it. So Kailash -- for those who don't know, Kailash runs the largest segment for Keysight, approximately 70% of kind of the overall business, which includes kind of the commercial communications business as well as the Aerospace Defense business. So I wanted to dig in a little bit more and kind of build on what Neil was saying. Maybe let's talk a little bit about wireline and the AI build-out. And if we could just get into some of the detail around the specific applications, what kinds of customers are deploying what kinds of technologies that's driving some of the outside growth? So just putting a little bit more specificity around that, that would be helpful.

You bet. Yes, just over the last 18 months, 24 months, AI-driven acceleration is really propelling our wireline business to growth, right? And we've put up some strong double-digit growth numbers this year. You step back and look at this customer base, you have the chipset folks, people that are making the AI chips, GPU makers and so forth. They're using our capabilities in their R&D labs to high-speed interfaces. If it's silicon photonics, they're testing and validating designs of integrating optics into wafer packages and so forth.

So there's a lot of business that we get from the chipset makers as you go and drive the different speed grades from 100G to 400G to 800G. And then when you kind of move up one level, all these chips go into components. On every end of an optical cable, you have transceivers converting optical -- electrical signal into optical signal and vice versa on the other side, enabling these data center interconnects, right?

The data centers are kind of getting distributed. It's going into areas where you have energy and power, that's the constraint now. And all of these data centers are interconnected through optical cabling and you need switches and transceivers to -- going at these speeds to enable those interconnects. And we help with those component designers with verifying their power, amplitude, many different KPI for -- again, for different speed grades and standards. Then you go one level up from components. You have these functional subsystems. You have the routers and the switches. These are large-scale network functioning blocks that go inside the data centers and think of the Ciscos and the Juniper Networks of the world.

And we're enabling them with emulation capabilities. We emulate Ethernet traffic, but we're also emulating AI workloads and traffic for them. We're emulating security constraints and considerations for them so that if you're a firewall maker, you're testing and validating and designing your solutions to be vulnerable to not have any of the security vulnerabilities. And then right up at the top of the food chain, you have the hyperscalers. And the hyperscalers, that's been a new addition as AI has progressed. They're putting data centers in these AI racks and clusters they need to emulate these AI racks and clusters in their labs and they need to test for performance, latency of models, how long does it take to train models, how long -- what kind of energy consumption is -- how much energy is consumed when you train these models.

Those kinds of experiments they do, and they have to do this to ensure that whatever configuration AI data center configuration they are coming up with is all solid and optimized they test for GPU utilization. So we've actually added more capabilities to our core product portfolio, to our wireline protocol product portfolio to enable hyperscalers with these new capabilities. So all in all, we're kind of expanding the ecosystem, we see a lot of start-up companies come in as well, and that's been a pretty positive growth driver for us.

Great. Thank you. Sticking with the wireline business when we talk about sort of the business case, market is transitioning to higher speeds. We were at sort of 400, sort of 800 now the sweet spot and then we're moving to 1.6 terabits. What portion -- where we are, where are we in the life cycle of that? How much of the business today is kind of focused on certain speeds? And what do you see is the growth opportunity as people move to kind of 1.6 and beyond?

Yes. The bulk of the business today is in 4G, the deployments are occurring in 400G. That opportunity has not peaked yet. And to Neil's point, these design cycles are getting compressed in overlapping effect. So as 400G deployments are growing, we see 800G deployments also growing on a smaller scale. At this point, there is enough activity on 800G R&D and early 1.6 tera R&D. So all of these are sort of happening in parallel. I'd say 400G deployments, that's bulk of the business, 800G deployments starting a lot of R&D on 800G and early R&D activities on 1.6 tera.

Got it. Maybe let's switch to the wireless business, if we can. And Neil kind of referenced this I think most people realize 5G is kind of largely behind us, but it has been kind of a period of strength recently. What are the sort of pockets of growth, whether it's kind of satellite, Orin? What are the areas you're seeing that are kind of continuing to allow this market to kind of hang in there while we kind of bide our time for a 6G world.

Yes. I don't know if I would say the 5G business is behind us. The strong growth rates -- growth years are probably behind us. So what we -- we're obviously between cycles between the 5G and the 6G cycle, the business, obviously, over the last couple of years, has experienced double-digit decline. So we're coming off of those lows. There is ongoing evolution of the 5G standard. That's contributing to R&D activity in our customers' labs. Also, for the first time last year, smartphone subscriptions started to grow, and that elevates activity in the whole supply chain. You might be aware that we also enable component makers, whether you're designing antennas for smartphones or other integrated circuits that go into a smartphone. Those all get a refresh when subscriptions go up.

So there's been an elevation of activity in the supply chain. So that's kind of number one, ongoing research in 5G that's going on. But NTN Non-terrestrial Network application has been a key focus area for many, many customers. There is a new ecosystem that's brewing satellite network operators, the big companies that are involved in putting up satellites. And that requires a lot of R&D activity. And the margin for error there for a designer is very, very, very, very small. You just can't go take a prototype and put it up in the sky and then see if it works or not. All of these scenarios have to be emulated in your lab.

And we're enabling that R&D workflow phased array antenna design, telemetry systems that go into satellites, camera modules, transmit receive systems, we emulate customers' orbits. We emulate satellites. We emulate ground stations, the communication links back and forth. So that's been a positive area, and it's likely to continue as you move into the 6G space.

And finally, 6G research itself has started to pick up, and we see customers transitioning from pure research into a more development for pre-trials. So that's something that's occurring, that's helped the business grow as well.

Great. I'm going to switch gears and move away from networking, but maybe I'll just ask the audience, any questions around this piece of the business? All right. we'll take that as a no. Maybe moving to the Aerospace Defense business and Neil touched on some of the kind of resilience you're seeing in that business and growth in that business. But maybe talk a little bit about the core applications, getting one level deeper in terms of where your differentiation is? And then maybe kind of what you're seeing in the overall demand environment for that?

Yes. We're excited about this business. It doesn't get a lot of air type. But it's been a pretty steady business for Keysight for decades. We've enabled key technologies and products of various defense departments and MODs through engagement with prime contractors, right? This has been going on for multiple years. What we do there is you could think of our applications, our products serving 4 different applications. One is defense monetization investment in electromagnetic spectrum operations. If you're building a next-generation system, it's got communication systems. It's got jamming, anti-jamming systems. It needs to withstand signals in different directions. It's got radar. So not only do you need to -- these solutions, you also need to see how it would operate in a theater in a forward looking -- in a field theater, and you need to ensure that your system is not jammed by an enemy signals things like that.

So we help customers design those systems in the lab -- in their labs. So that's something that we do. We also enable space and satellite applications. So this is something we built a common core technology in our comms group, and we parlay that. We leverage that into Aerospace and Defense, all of the technologies are for dual-purpose dual-use. So here, we're enabling next generation of GPS satellites. We're enabling new LEO satellite constellations. We're enabling interoperability between commercial satellite systems as well as defense satellite systems, where that might be applicable. So that's another category.

We also are in -- I can feel the operations in a forward-looking area, if you need to construct a network, there is gear that you need to use to ensure that those networks are viable and operational so we participate in that space. And finally, one of the things that's gaining a lot more interest is government research and funding into areas like cybersecurity you have applications like Quantum. So these are probably the big category areas that we serve with our portfolio.

In terms of the strength, financially you're seeing. How much of this is just the playing out of your existing backlog versus we've seen a lot about the rearmament of Europe and kind of expanded budgets going forward? Like maybe talk about -- maybe Neil this is a question for you, but just kind of the mix of that demand around Aerospace and Defense and kind of where it's coming for in the immediate term and then kind of over the the more medium term.

We've said that our business is historically a little more than 50% U.S. and a little bit less than 50% ex U.S., is the rough geographic split. I mean I think on the positive side now, we've seen about 8 or 9 consecutive years of increasing U.S. defense budgets across presidents of two -- both political parties. So there's been a nice stability on the U.S. side, and a recognition of the need to continue to invest, particularly in defense technology. And so that stability has been helpful. I think the change that's coming, as I mentioned earlier, is this increased commitment from NATO allies, primarily in Europe to spend on defense at a greater percentage of GDP, and they're going to layer into those spend rates over the course of the next decade, but these are prolonged commitments.

And I think that opportunity is really more in front of us. I think we're starting to see the early engagements with the big Aerospace Defense contractors in Europe. These are companies with which we've had long-standing relationships. But it takes a while, right, from budgets to programs, to proposals, to quotes, to orders, and ultimately to revenue. And we're engaging in that process. But I do think this is an opportunity that's very much in front of us and should be a catalyst to hopefully enable increased growth in this portion of our business.

Great. Maybe turning to the other side of the business, the electronics and industrial side. It's been a pretty stable business kind of growing quite nicely over the last couple of quarters. What have been sort of the big drivers of growth there? And then do you expect this robustness to kind of continue going forward?

Yes, I'll start and I don't know if Kailash might have some things to add. I think I'd say two kind of themes. Well, first of all, we -- the semi market had been kind of down for a long period of time, and we'd expect a bounce back in semi that we have, in fact, gotten things like high-bandwidth memory, silicon photonics, the move to smaller process architectures are drivers there. And certainly, there is a correlation between those catalysts and what's happening in the AI space in commercial comms.

And I think we're seeing a similar halo effect from kind of AI and wireline also into this general electronics business, where a lot of the less s***, if you will, but underlying things, things like PC boards and the interconnects and that kind of stuff that maybe doesn't draw attention from Kailash and his team, but there's a broad set of largely Asia-based manufacturers sort of making that stuff and they're benefiting from the volume impacts of the build-out of these data center environments. And so -- and we're seeing that same -- we're seeing similar uplift from these wireline in advanced research as well, which is also often in the education environments where in that general electronics market. So I think those themes are onset across both of our businesses and certainly helping us on the electronic industrial side.

Great. And then let's talk a little bit about your software business and kind of what you've done to grow it. It's now a $1 billion business.

Yes.

Roughly or so. And so it would be great to talk kind of how you use it, the various flavors that comes in, where is it adding value? And just sort of educating us all a little bit more about kind of the value, both -- certainly provides value financially to Keysight and its shareholders, but kind of the value drivers for customers as well.

Do you want to take that or...

Yes. So when you think about the software, right, we have software that's built into our core products. We call that instrument firmware, it's needed to operate the instrument. There are some measurements that -- KPI and measurements that you provide. Obviously, we monetize that aspect as part of our physical layer portfolio. But then where the software really kicks in is in our protocol layer portfolio, where we emulate a wireless stack or a wireline stack. The software content in those solutions are a lot -- it's significantly higher relative to our physical layer portfolio. And they can also turn independently, meaning we provide a solution to our customer with software, and that software gets revved on a semiannual basis.

Actually, we rev it multiple times a year. We have support and renewal contracts just on the software because you have to now keep up with all of the standards, whether it's in wireless, it's about 5G Advanced, Release 19 and so on and so forth. If it's a Non-terrestrial Network, we may have to update the software stack to change the communication signal latency requirements, et cetera. So all of that drives ARR and software content on the wireless stack.

Similarly, on the wireline stack, there is a number of networking protocols. It's Ethernet. But if you look at the scale-up architectures within a rack, you have extreme short reach, you have a medium reach, you have very short reach. You have PCIe CXL types of memory to memory, memory to controller, GPU to GPU, all of these component communications are governed by protocols, which again, are largely software driven.

So we enable our customers by providing those capabilities and refreshing those capabilities, keeping up with those standards. And then you have our simulation portfolio, which is stand-alone software. And that's used largely by chip designers and component designers to model electrical conditions, thermal conditions, multiphysics types of simulations. That's at the component level. So that's sort of how that pyramid gets built. You've got a large physical layer portfolio with core measurement capabilities, and then you have the protocol layer, which is pretty heavy in software that can turn and then you have a stand-alone software portfolio, which is also an ARR subscription-based business.

And is there synergy across the various stacks and different portfolios that allow you to drive greater customer impact then also greater financial impact.

There's definitely R&D -- internal R&D synergy that we drive, especially between our simulation software and the physical layer portfolio. And there's also some level of customer synergy, but this is something that we're exploring on an ongoing basis.

And then, Neil, for you, when you think about this software business, talk about obviously the financial benefits and then where it can help you from a margin perspective.