Keysight Technologies Inc Aktie

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.

Yes, certainly. So as you said, roughly 25% of the company's revenue software, about just under 40% of software and services. And so those 2 businesses have both -- each have significant recurring component. So we're approaching 30% recurring revenue. Obviously, that brings the stability to our business, and we also find that these businesses bring a -- bringing on significant margin benefit, right? The software business definitely skews heavier in the CSG side of the business than in the industrial side. We see that reflected in the gross margins of that business, which tend to be several points higher.

And so I think as we look forward, we continue to look to ways to expand the portfolio with some pending acquisitions, to expand that engineering software component of our business. I think we continue to see our customers. The entire industry talks about shifting left, right? Our customers want to do more work in simulation and in emulation in the software space before they build expensive prototypes and we're working to build the portfolio for us to essentially follow them on that shift left and enable them and then draw or enable migration from the simulation and emulation to the real world via our test and measurement tools and provide a migration path.

That's great. Any other questions from the audience? I'm going to move forward. Okay. Maybe just talk about some of those M&A deals. You've got a couple of things that are kind of pending closure. It would be great to just understand or refresh for folks kind of where those stand? And maybe just what those were, what those strategic rationale because the announcements were a couple of months behind us.

Yes, a few months now. So we have -- we actually have 3 pending acquisitions all tied up in kind of various levels of regulatory approval. The first one was Keysight's acquisition of Spirent. This is a business that's going to get us SAM expansion into live wireless networks as well as into precision location to precision GPS types of markets. We believe those precision GPS markets are going to be critical as we migrate into 6G. They're important for automotive markets as you think about autonomous driving. They're important for Aerospace Defense end market. So again, direct applicability into a number of the markets in which we play. That acquisition is -- as we said, it's migrating through various states of regulatory approval, the big outstanding element at this point is approval from China.

Those discussions are going well. And again, we expect to get that acquisition closed by the end of our current quarter. We have 2 businesses that we are buying as a result of the combination between Synopsys and Ansys, similarly tied up in regulatory approval. Both of those are -- will be an issue additions to our design and engineer portfolio. One is around optical simulation, the Optical Solutions Group out of Synopsys. Again, we have RF and Microwave, EDA business, we have Physical Layer Computer-Aided engineering business that we bought -- that we acquired when we bought ESI, and now you're getting optical modeling capabilities for your this business. And then the second one is Ansys' PowerArtist business, which essentially gets us power simulation and emulation capabilities. And so again, working to build out a more robust set of kind of multiphysics capabilities for simulation and emulation to enable our customers.

That's great. And so assuming those are closing, as you said, how should we think about capital fees for 2026, deleveraging -- return. Maybe talk a little bit about how you guys analyze what your opportunities are and what your goals are?

Yes, it's a great question. So first of all, these acquisitions are not going to stress us from a leverage perspective. We're still going to remain below our 2x leverage target going forward. And I think if there was one benefit that came out of the relatively prolonged regulatory approval process is that the underlying business is continuing to throw off large amounts of cash. And so we're not going to be in any way refrain from a capital allocation strategy position even as we close these acquisitions. So I think, first and foremost, we're going to be focused on making sure we capture value from these acquisitions that have been in process for a while. We want to get the integrations underway, get those value capture efforts before we move on to the next thing.

I think once we're off and running on that, I think the -- we really have the full suite opportunities in front of us. I think you'll see us continue to return capital via our buyback program, at least at the anti-dilutive level. And as you've seen from us over the past couple of years, we've tended to be significantly more aggressive than that. So we'll continue to strike the right balance, continue to look to ways to expand our end markets via M&A, while being proactive with returning capital, really no constraints from a capital allocation standpoint.

Great. All right. Any other questions? I take that as a no.

I need help [indiscernible] this [ framework ] relative to what we've seen in prior iterations. So [ that is my question ]. What are we needed for -- are we using 5G and up already. What is the timeframe?

Yes. Thank you for the question.

Can repeat the question just because it wasn't...

Yes. I guess the question is, how do you sort of frame the 6G opportunity? Have we -- do we not have enough 5G? When is 6G going to take off, I'm paraphrasing. So this -- the next generation 6G is nothing new from how the industry progresses. So every 10 years, there's a generation improvement in the wireless space, and this has been continuing since 1G. And we have -- we're right now between cycles 5G and 6G. 5G standard progression continues. The deployments continue. There is more -- some of these newer applications like Non-terrestrial Networks are giving it a boost, if you will. And let's not forget that even 4G is only about 70% of the world.

So 5G is a long way to go. We see research on any next-generation sort of pick up one or two years after the previous generation peaks. So we've seen 6G research occur over the last two years. It's largely been concentrated with the academia and institutions, but now we're seeing a shift commercial entities are starting to explore topics. The first 6G standards meeting occurred in Seoul in March. Many topics were discussed. But there are four key themes, right? One is Non-terrestrial Networks, satellite connectivity and terrestrial networks are going to have to coexist. So that's one.

Second thing is AI. AI in networks, AI in devices. So that's a topic that's getting a lot of attention and exploration. Third is spectrum, new spectrum. What's been code -- there's a code word here for new spectrum FR3, which is between FR1 and FR2, it's sort of the sweet spot to give you more bandwidth, but also practical from an implementation point of view. And then there's a fourth application integrated sensing and communications where communication signals are being used to send size shapes of objects, again, enabling robotics and automation types of applications.

So all of this is spurring even more research and development and what customers are likely to do, what the industry will do over the next couple of years, 2, 3 years is do a lot of pretrials and pre-standards development. The standard is expected to be formalized in March of 2029. And then commercialization, probably 1 year or 1.5 years after that. So you're looking at commercial -- commercialization by the end of the decade. But a lot of activities will build up to that, and we would expect to see some meaningful contribution and growth from 6G towards the second half of '27 and into '28.

Any other questions from the audience?

[indiscernible] comment on share gains at not all of your competitors or apples to apples pursuit but more of a system [indiscernible] that are in the public markets. What share do you think you gained in any [indiscernible].

The broader -- I don't know if I can comment on specific share gains relative to specific competitors. But I will say that we've had -- we have the broadest portfolio. We have the deepest portfolio. We -- on the wireless side, wireline side, Aerospace and Defense and some of the other markets as well. And as the -- and we have the deepest engagements with market-defining customers in all these areas, and you think about electrical -- physical layer technologies, electrical, digital, optical, we have that covered. From a stack, we cover everything from layer one, all the way to the application layer.

And with Aerospace and Defense, we're able to participate in different areas, defense monetization space satellite and government research types of things. So I think overall, we have a -- and we've been consistently spending more in R&D than any of our competitors, some of the revenues, we -- our R&D budgets exceed revenues of some of our competitors. So overall, I think it's positioned us well as the market has recovered. And as some of these secular trends have progressed, it's helped us pick up some share.

On [indiscernible] given [indiscernible] opportunities you see in [indiscernible] position layer, looking 5 years out, is there a basic target, we can start to envision, are they going to be more equal in size in terms of your best opportunities. Love to hear some comments.

You're talking about hardware versus software or protocol versus physical layer?

We -- you're going to have -- the physical layer business, you could say it's always there. It's steady. Everything finally needs to connect to the physical world. It's about digital, optical and microwave millimeter wave signals. But we do see more expansion in protocol and application layers. Application layers, particularly digital twins. I mean if you think about that, most of our customers, satellite customers, data center customers, they want to emulate things. They want to simulate things, not just at the component level, but they want to simulate that whole data center. How will an entire data center perform when you inject it with these types of AI workloads.

So those are driving new requirements and new capabilities that we're offering customers and will continue to offer customers and I'll see -- I do see that expanding as we move forward in addition to what we have in physical than protocol.

Well, thanks. I think we're out of time. Thank you, gentlemen, for sharing with us today, and attending our conference. We appreciate it as always. Thank you all for your questions.

Thank you.

All right. Let's get started. Welcome back to this final session of day 1 of Deutsche Bank's Technology Conference. I'm delighted to welcome Neil Dougherty from Keysight, CFO. I'm Rob Sanders, European tech hardware analyst. And Keysight, for those of you who don't know, is a leading test and measurement equipment company, but also shifting to software. So we're going to discuss the demand environment, tariffs. If you have any questions along the way, please raise your hand. And without further ado, maybe -- Neil, maybe just start by giving a little bit more of an intro than I just gave just to the company for those who don't know and then we can get into more of the questions.

Yes. So as you suggested, Keysight is the leading provider in the electronic design and test space. We have a broad portfolio of hardware and software solutions, which we essentially bring to market targeted at a number of different end markets, most notably commercial communications, focused on both wireless and wireline communications, aerospace defense, where we're benefiting now from increased commitments in terms of spending as a percentage of GDP from the NATO allies and now multiyear -- multiple years of increased U.S. aerospace defense budgets as well.

We have an industrial business that is focused on kind of next-generation automotive, including electrification of the drivetrain, move to more of a software-defined vehicle, which would include everything from autonomous driving to various levels of autonomous driving, software-defined vehicles -- excuse me, in-car infotainment systems and really all the in-car electronics and in-car networks that are part of a modern automobile.

We have a semiconductor business that is really now being driven by move to smaller process architectures, things like silicon photonics, high-bandwidth memory are drivers that kind of link back directly to the AI side of things. And then we have kind of a catch-all business in general electronics, which is kind of everything else that has electronic content in it. There are some submarkets in there, which we track separately. We pay attention to the education, advanced education research end markets, medtech, those areas are embedded in that as well.

And again, hardware and software, about approaching 40% of the revenues these days are coming from software and services, the balance coming from hardware, and that mix continues to shift in the direction of software and services. And maybe just lastly, the business is pretty heavily levered to our customers' R&D labs versus their manufacturing lines. You could think of it as high 50% R&D, maybe 30-ish percent manufacturing with the balance being kind of post-deployment, installation, maintenance types of applications.

Great. So you had your Q3 results last week, and you did have a beat and raise, which is congrats on that. You've raised your sales growth to 7%, as I understand, for the fiscal year 2025 from, I think, closer to 5%. So can you parse out the delta in your improved outlook between AI spend, perhaps upside to aerospace and defense and anything else?

Yes, absolutely. So as we entered this year, keep in mind, '24 is a down year for us, a cyclical down year, but we've started to see our end markets inflect driven most notably by wireline and the AI build-out. But we had -- we realized that all of these end markets, which I just walked through were not in phase with one another. Some of them were recovering or set to recover. Others we felt were still likely to be a headwind for us as we entered FY '25. And so our base case was at the low end of our long-term growth target of 5% to 7%. And so we were forecasting growth this year of 5%. And we've actually been able to increase that full year expectation each of the last 2 quarter ends.

So at the end of Q2, we took it from 5% to 6%. At the end of Q3, we took it from 6% to 7%. And so if you think about what has outperformed and what's kind of more performed in line with expectation this year, first of all, I'd say what's leading the growth charge for us is, in fact, our wireline business driven by AI. But I would say that growth has been largely in line with what we expected. We expected it to be strong. It has, in fact, been strong and again, largely in line with expectation. I think we've seen a little bit of upside on the aerospace defense side, driven, as I've mentioned, by budgets.

But I really think that opportunity is more in front of us than it is being realized currently because there is a long lag that occurs between the time a politician stands on television and makes a commitment to increasing defense spending to the point that it's actually in budgets, assigned to programs and then RFPs and other things have been conducted and it actually results in orders on a company like Keysight. Semiconductor, we expected to rebound. And in fact, we've seen a strong rebound, maybe slightly higher than expected. So I think there is some upside that we've seen in the semi space. The auto business, we expect it to be challenging and in fact, has been challenging.

So again, I think that's in line with expectation. And probably the single -- the area that has the single biggest area of outperformance for us has been in wireless. Wireless, our base case coming into the year was for our wireless business, which is a large business for us, well north of $1 billion, was for that business to be flat, stable this year. And in fact, we have seen some growth -- some nice growth in that business.

And so it's not growing as fast as it was a couple of years ago, but it's a big enough business, and we've seen enough growth that it's a significant contributor to us being able to take up our growth rate for the year for the entire portfolio. So it's been a good year. I think we've done a good job executing and converting that revenue growth to profitability. We've actually been able to take up our EPS growth expectations even as we've absorbed significant tariff headwinds. So it's been a good year so far and with 1 quarter to go.

Great. And you mentioned tariffs. There was a little bit of disappointment I'm sensing last week around some tariff discussion. Maybe you could just clarify how you're seeing the tariff situation impacting your product cost and margin? And where do you see the biggest impact today?

Yes. So obviously, we had now kind of 2 rounds of tariffs. There was the initial round of tariff announcements back in April, which is kind of baselined at 10% for a lot of countries. And then we saw those tariff rates increase most recently here in August. And I think right now, we're likely to settle in somewhere around the $40 million a quarter in terms of total tariff headwind as a result of the 2 waves of tariff announcements. I think the good news is we feel like we largely have it handled. We've taken a set of actions to mitigate this tariff exposure. It is going to take some time to fully be realized in our P&L.

It's a mix of cost action and operational efficiency actions and another set of actions that are focused on passing the remaining costs on to our customers via price increase. And it's those latter increases that really do take time, right? We have not made an attempt to reprice backlog. We've honored outstanding quotations to our customers largely. And so given our relatively large backlog, $2.4 million of backlog, it does take time for new quotes that include the pricing changes to turn into orders and then ultimately turn into revenue.

And so what we've said is we would have the April round of tariffs fully offset within Q1 and a second set of actions here in August, and we would expect to have the August tariff increases offset before the end of Q2. And so again, I feel pretty good about where we're at and feel like we've got a really robust plan to ultimately make these things earnings neutral to our P&L.

Okay. And then let's dive deeper a little bit on the end markets. So let's start with wireline. Obviously, I think investors, I'm guessing, seem to be looking at you as a potential AI play, but it's quite hard to parse out how much of your wireline story is to do with hyperscalers and how much is just general demand. So is there any way you can sort of quantify the AI contribution to that wireline growth you're seeing?

Well, let me start by quantifying our wireline business. So we have a commercial communications business that is in the vicinity of $2.5 billion and approaching 50% of that, we're getting very close on a quarterly run rate of having 50% of that business come from the wireline side of things. Obviously, the major underlying driver of our wireline growth over the last 18 to 24 months has been this rapid acceleration of investments in AI. And I think the good news -- there's a couple of bits of good news here. First, we're very bullish on the opportunity as we look forward into FY '26 and beyond, right?

What we are seeing is a shortening of the technology cycles as the industry looks to move to faster speeds from 100, 400 largely being 400 to 800, which is where most of the activity is right now, ultimately moving to 1.6 terabit, then 3.2 terabit, 6.4 terabit and even talking about 12.8 terabit at this point in time. And as those cycles shrink, you essentially need to redesign all of the equipment that makes these networks work, the network silicon, the connectivity, the optical transceivers, the network equipment and then ultimately -- and we have touch points with -- all of those aspects of the hardware build-out itself.

And then we actually have touch points with the hyperscalers themselves that are building out these data centers. And so you have a combination of multiple touch points between Keysight's technologies, both physical and protocol layer solutions to service this ecosystem and shortening design cycles as the industry works through various technology inflection points that give us confidence in the opportunity as we move forward. And so very exciting and again, a significant driver of growth for us as we look both backward over the last, say, 12 to 18 months and forward into the coming year.

Great. And would you call out anything in particular, like it sounded like it's mainly interconnect driven. Is it Ethernet? Is it PCIe? Is there perhaps a trend towards scaling out versus scaling up that you're seeing that could be an inflection for you guys? Or is it just, as you say, a shortening of the whole cycle overall that's driving your business?

Yes. I think it's an interesting question. I think we have the opportunity to benefit both from scale out and from scale up. But as I think of those 2 opportunities and keep in mind, as I've said, our business is significantly more levered to R&D. That's true at the Keysight level, and it's even more true within our wireline business, which is probably 70% R&D versus manufacturing.

And so given that emphasis in this space on R&D, I think of the scale-out play is more of a volume play, whereas the scale-up play is more of a technology play. And so as I think about those 2 things, I tend to think of the scale-up play is the bigger long-term opportunity for us because not just the move through various speeds, but if you think about the multiple developing alternatives to the NVIDIA ecosystem, whether that's Ethernet or UALink or PCIe-based solutions, there's a complete set of tools and equipment that need to be built out in support of each of these standards.

And again, we have touch points in silicon, connectivity, network appliance and with the hyperscalers that will ultimately deploy these technologies. And so kind of a little bit of a more the merrier standpoint when you're selling into the R&D lab, the more technologies that they're trying to bring to market, we're agnostic ultimately to winners and losers, but it creates a tremendous opportunity in the interim.

Great. And look, if anyone has any questions, please do raise your hand. Let's switch to wireless. Obviously, I think if you think historically, it was one of your larger businesses. It sounds like wireline is now bigger than wireless at the moment. How is AI influencing your test product development in wireless? I'm thinking of features like RF beamforming using AI [ for ] software innovation. How are you seeing that? And how can you monetize that?

Yes. So a couple of comments. First of all, just correct record. Wireline is -- wireless is still bigger, but the gap is closing, and we're very close to 50-50. So -- but wireless is still the larger business. We'll see when that transition happens and ultimately, wireline becomes bigger, which appears to be the trajectory that we're on. I think as it relates to AI, what we're seeing is within our customer set, primarily on the network side, and we're in the very early stages. So you can think of it as more research rather than development at this point in time. They're looking at how do they use AI to optimize these networks? How do they optimize for power efficiency?

How do they optimize for network traffic? How do they model the behavior of the actual user themselves so that they can better predict and ultimately shape the form of the beam to provide better connectivity for a mobile user? And so what Keysight does to enable these -- this AI learning within this wireless network ecosystem is we essentially have simulation/emulation tools that can essentially simulate very high-volume network traffic that can be used for these models to learn. And so we can simulate the traffic.

They can create a model that can learn and ultimately apply these AI algorithms to again model power efficiency or schedule -- call scheduling, these types of things. And then once the model has been built, you can use these same tools to test the efficacy of the actually AI-driven model itself. So it's a highly software-driven focus to actually enable the AI modeling and the learning of these AI algorithms for these ecosystems.

Got it. And -- sorry. Oh, there's a question? I can't see. Yes, go ahead.

[Technical Difficulty].

I don't necessarily know specifically about the transaction. But certainly, nonterrestrial networks are a significant driver of investment in our ecosystem today. And one of the areas -- I talked about earlier about one of the things that surprised us the upside was growth in wireless. A lot of that investment, one of the areas where we're seeing it is this investment in nonterrestrial networks. And so when you think about these nonterrestrial networks, the connectivity between an earth-based device and a satellite at the physical layer is not that much different than a terrestrial wireless connection.

And so we use similar tools, but you have added complexity, right? The satellite itself is moving at, what is it, 27,000 kilometers per hour or something like that. And so you have to -- you have the speed, you have the distance, you have the speed and you have the complexity of handoffs from one satellite to the next that need to be modeled. And so similarly to other industries, we have multiple touch points within these ecosystems, folks that are making components that go either into the satellite or to the ground station, subassemblies, things like antenna arrays that need to be developed and tested and then the actual satellite itself as well as the ground station and the communication channel, earth-to-satellite communication channel.

So we can provide, in this case, simulation capability to simulate these data links to test the ground station, to test the satellite and then a whole slew of both physical and protocol layer tools to test the components and subassemblies that make up these complex networks. So again, exciting for us because of the multiple touch points.

Great. Yes. And how is your positioning within the satellite space, I mean, relative to your position with the wireless -- in the wireless sort of classic wireless operator area? I mean, do you have a comparable share...

Yes. I mean I think the thing that is unique about Keysight relative to other players in the broader test space is the breadth of our portfolio. We've been in this business a very long time. We have, by far, the most complete set of tools, and we have for a long time. But even if you go back and look since the launch of Keysight and the spin-off from Agilent, at that time, we were very much focused on physical layer test. And what we did post spin is we wanted to expand our touch points with these marketplaces and move up the protocol stack. And so we moved into these protocol layers. We bought a company in 2015 called Anite, which got us protocol layer solutions for wireless.

In 2017, we bought a company called Ixia, which got us protocol level solutions for wireline. And so now as a result, we have a pretty unique portfolio, again, a complete set of physical layer tools coupled with protocol layer solutions for both wireless and wireline that's unique in the marketplace.

And what that allows us to do for our customers instead of just selling them tools and allowing them together to cobble together a solution by buying tools from multiple vendors, we have a better opportunity to understand the specific challenges of the industries we're facing and provide them a complete solution with hardware, with software, with services that addresses that and essentially accelerates their time to market, which is why the focus on R&D. What are we really selling? We're selling time to market to our customers. And it's a breadth of our portfolio that I think uniquely positions us in the marketplace to do that.

Got it. And then let's switch to Spirent, a company I used to cover. You're awaiting regulatory approval to acquire Spirent. You've had to make some concessions along the way. It sounds like you're going to close the deal by end of October, but there's still some approvals to go. So maybe you can just remind us where you are in terms of the approval process and which parts of the portfolio you'll be acquiring and you're looking forward to having part of [ Keysight ]?

Yes, absolutely. So there's kind of one step left and -- there's one big step left and then there's some kind of formality steps that we'll also need to go through. The big remaining step is we're waiting on approval from China SAMR. All I would say is our conversations with SAMR have been and continue to be constructive, and we're highly optimistic that we're going to get this transaction closed by the end of our fourth quarter, but we'll continue to work with them until those approvals are in hand, and we can close the transaction.

I think from a strategic viewpoint and why this transaction was important and why we're excited to have it be part of Keysight, there are a couple of SAM expansion portions of their business, which create a material expansion to our served addressable market. One is around precision location, kind of GPS precision location. This is probably the crown jewel from our perspective. It is something that we believe is going to be critical to 6G. It's critical in the aerospace defense sections. I just talked about how they're using AI to improve the beamforming as they model the likely behavior of a user with -- a mobile user with a cell phone, the more precise locationing you can get, the better off you're going to be able to do in modeling those types of things.

So I think it's a gap in our portfolio. We believe it's going to be integral to success in 6G, and it's something that we're excited to have on board. The second thing is more of a network monitoring thing. So we do a lot of stuff, again, in the R&D lab, in manufacturing, helping bring these communications ecosystems to market and getting them deployed. But we didn't have a lot of touch points with those ecosystems once the networks were deployed. And so this gives us a further extension of touch points with the ecosystem into deployed networks and yet another revenue stream. So excited to bring those things on board. Ultimately, we expect once we get the business integrated, it's going to be accretive to both gross and operating margins at the Keysight level. So a great opportunity for us to create value for shareholders.

Great. And that's a neat segue to aerospace and defense, given their positioning business. And I guess that could be relevant for robotaxis as well. But let's talk about aerospace and defense. There's been a lot of different policy announcements, the NATO spending increase, the Big Beautiful Bill, there's been DOGE. What have you seen at a net level? Have you -- you said it sounds like it's more ahead of you. But there are, I guess, potential headwinds you might have seen from government efficiency measures. So what have you seen so far?

Yes. I think a couple of things. So first of all, we believe net additive, so certainly net additive at the macro level. We've actually seen less detraction from things like DOGE than you might have expected because, again, where we tend to play aerospace defense technology spending. And the DOGE was really more about efficiency gains rather than trying to reduce fundamental spending in core technologies as we move forward. I think one of the things we're benefiting from in the U.S. is there is -- does seem to be -- one of the few areas where there does seem to be some political alignment between the Democrats and the Republicans in terms of the need to invest, not just in defense, but in defense technology.

And I think that's been helpful. We've seen increasing defense budgets across both the Trump 1, Biden and now Trump 2 presidential administrations. And so that has been additive, and we would expect to continue to be additive. I think one of the big changes that we're starting to see now really in terms of picking up of activity is the increased commitment to spending -- defense spending as a percentage of GDP among the NATO allies. Again, this can take time to work its way through, but we are seeing increased activity, increased quoting activity, bidding activity on programs with our European defense customers. And again, these tend to be long-term commitments. And so it's something that we're excited about and [ has us ] very bullish on the aerospace defense opportunity as we look forward.

And what are the sort of priorities that excite you the most in the defense modernization? Or is this just a modernization process of bringing this existing equipment up to date? Or is it more these Germanies of this world that are stepping up for the first time?

Well, I think it's both. I mean I think as these NATO allies who maybe have been underspending for a period of time look to have dramatic increases in their spending. A certain percentage of that is going to go to things that we don't necessarily care about, boots and weapons and bullets. And then a certain percentage is going to go to things that we very much do care about, technology investment.

And that technology investment primarily centers around communications, signal capture, signal jamming, understanding the communications signature of the battlefield, if you will, electromagnetic spectrum operations, radars, these types of things are where we have the biggest contributions to make. And I think it's highly likely that as the NATO allies increase spending that a not insignificant percentage of that business, particularly as it relates to Keysight with a $1 billion-plus aerospace defense business is going to create significant opportunities for us moving forward.

Got it. Let's switch to automotive in the interest of time. So we've got this big change happening with both on the powertrains to EVs. There's been -- there's a change from the West to China, which looks like it's going to dominate. But at the same time, we've got this transition to software-defined vehicles, which China seems to be leading on. How are you positioned relatively given that China seems to be taking the lead in a lot of this innovation?

Yes. I mean I think -- I'd say 2 things. I think as it relates to the drivetrain and the move towards electric vehicles, China has been a significant disruptor, not unlike what happened in solar panels, there are lower cost Chinese batteries available that I think create real questions as to what level of investment is going to continue in the OEMs and the other big auto-producing countries around the world. And I think that's a question to be answered. I think if there is good news in there, I think it's that our EV business has been significantly derisked at this point. There's not a lot of downside. We'll see if those markets recover.

I think where the real opportunity lies for us is in the software-defined vehicle space, you can think about autonomous driving is probably the really big opportunity to play out over at least a decade, maybe a couple of decades if you think about true Level 5 autonomous driving, but also included in there would be infotainment systems, in-car networks, a lot of in-car electronics are also included in this space. And there, I do think you're going to see the broader global automotive ecosystem continue to develop and invest. And it goes beyond the car itself. You talk about vehicle to everything communications. You've got infrastructure elements and other things that are going to need to include these communications technologies.

And so when you think about autonomous driving, how does it ultimately get accomplished? It's through a confluence of multiple different communications technologies, things like 5G and 6G, but also WiFi, in-car LAN, radar, LiDAR systems. These are all areas where Keysight has core expertise. And so I think we're uniquely positioned to help the industry, particularly as things standardize, right? We love industries that have standards. I think the auto industry has resisted that in a lot of ways. You can think of that about charging, right?

The Tesla plug is different than the BMW plug as an example. But I think if you talk about getting to a true broad-scale autonomous, there's going to have to be some standardizations. These industries are going to have to come together, which creates interoperability challenges and all sorts of other things, which is good for Keysight. So as I said, to the -- where we are seeing strength in auto today is in that software-defined vehicle, and this is an area where we're very bullish as we look forward.

And if China does take the lead, would you -- is there a risk in 5 to 10 years that those guys switch from sort of best-in-class Western vendors to domestic vendors, even if they're inferior, maybe they're under pressure?

Right now, I think that's unlikely. I just think -- first of all, I think it's significantly more challenging technological problem than the battery problem where there has been some significant Chinese disruption. I also just think it's unlikely that these major auto OEMs around the world, you think about the big names in Japan and Korea and Europe are just going to seed these markets, right? And so I just think that there is going to continue to be development across the board and ample opportunity for Keysight to continue to compete and win.

Got it. And then you've got your semiconductor general electronics business. Obviously, there's a lot of design activity around AI chips, perhaps not actually that much volume relative to the overall semiconductor industry. But obviously, if you're playing into the R&D side, then presumably, you've seen quite a big uptick. And how is that affecting you so far today? And where are we in the kind of baseball innings of that?

You're talking about the use of AI and chip design.

The AI-related semiconductor demand, for example, custom silicon from hyperscalers, obviously, new potential customers. How have you seen that impact?

Yes. I mean if you -- our semiconductor business is pretty -- we have a couple of highly differentiated positions. We're not a broad semiconductor tools player. But within our semiconductor business, we make a tool called the parametric tester. It's essentially a wafer level test at the end of the manufacturing process. But we are definitely seeing AI-driven demand, right? You can point it back to high-bandwidth memory. You can point it back to the demand back to the migration towards smaller process architectures and an increasing focus on silicon photonics.

And all of those things directly link back to AI. And so we tend to be more agnostic to what the actual functionality of the chips itself. We're more of a wafer level test on the production processes, but we can tie the demand that we're seeing back to the underlying market drivers and AI is clearly one of those drivers that is driving demand across the semi ecosystem.

Got it. Last couple of questions, unless there's any from the audience. Just one more on China and one more on margins. So on China, it's about high teens percent of revenue, as I understand it. How has the sort of overall geopolitical backdrop affected that market? And what do you see going forward? You've touched a bit on it in terms of auto, but what about for your whole business?

Yes. I think there are puts and takes as it relates to China. So first of all, we've been dealing with now for 6 or 7 years, the kind of the ongoing evolution of trade sanctions on China. Obviously, it started with restrictions on selling at aerospace defense and then it was Huawei and then it was semiconductor. And this has been an ongoing headwind, which we've largely been able to kind of plow through and continue to grow our business.

I think with the escalation of the tariff environment and just kind of the prolonged nature of this, we're seeing an increased portion of the industry move to -- at least the China Plus One strategy, if not just an all-out move out of China. So while we have seen some pullback in some areas of demand in China, it's been offset by a corresponding increase in demand in Southeast Asia. And so kind of it gives in one area and takes away in the other. And I think the net benefit is that we continue to see growth across the broader Asia region as a result.

Got it. And just a last one on margins. Obviously, you've been transitioning to a greater portion of recurring revenue, a greater portion of software. How much more margin upside can you push through from that transition from here?

Yes. I mean I continue to think about the high-level operating model, which we have laid out for investors, which essentially calls for our business to grow at 5% to 7% on a sustained basis over the cycle on average. And when we grow at that level, we can deliver 40% operating leverage to the bottom line. And so you see that this year, we're actually slightly overdelivering to that metric ex tariffs and then the tariffs have obviously been a little bit of an exogenous shock to the system. But as our businesses continue to recover, we expect to continue to grow in line with those long-term averages and expect to continue to increase our overall profit margins by delivering to the strong incremental. That's the way we manage our business, and we believe we can continue to deliver to that model.

Well, great. Thanks very much. I really appreciate the time. And let's go to the drinks.

All right. Thank you, everybody.

Good day, ladies and gentlemen and welcome to the Keysight Technologies Fiscal Third Quarter 2025 Earnings Conference Call. My name is Reagan, and I will be your lead operator today. [Operator Instructions] This call is being recorded today, Tuesday, August 19, 2025 at 1:30 p.m. [indiscernible] 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 Third Quarter Earnings Conference Call for Fiscal Year 2025. Joining me are Keysight's President and CEO, Satish Dhanasekaran; our CFO, Neil Dougherty, and our Senior Vice President of Global Sales, Steve Yoon.

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 Deutsche Bank, Citibank, JPMorgan and Goldman Sachs.

And now I will turn the call over to Satish.

Good afternoon, everyone, and thank you for joining us today. In the third quarter, Keysight's strong execution resulted in 11% year-over-year increase in revenue to $1.4 billion and earnings per share of $1.72, both of which exceeded the high end of our guidance.

On the demand front, orders increased by 7% with growth across both the CSG and EISG segments. We saw sustained AI momentum, strong growth in aerospace defense government and general electronics with stability in wireless and automotive. We're executing our strategy and capitalizing on opportunities across our end markets. The ongoing pace of innovation is driving deeper collaboration with customers based on our solid pipeline of opportunities and customer engagements, we're once again raising our outlook for the full fiscal year.

Turning to the business segments. The Communications Solutions Group delivered solid order and revenue growth year-over-year. In wireline, our early recognition of AI as a transformative technology shift led us to make strategic investments a few years ago to align our portfolio to the multiyear innovation road map we saw unfolding. As the industry accelerates investments in compute, memory, networking and interconnect technologies we're capitalizing today while investing to position Keysight for the long term. The emerging AI ecosystem is fueling massive growth in digital infrastructure, which in turn drives the need for rapid innovation across the technology stack. To meet this challenge, we're delivering advanced physical layer solutions and new silicon photonics capabilities that enhance R&D workflows and address customers' single integrity and performance requirements.

At the same time, networking technologies are advancing rapidly to keep pace with escalating performance needs. Our interconnect solutions are enabling this evolution, supporting scale up and scale-out architectures with higher network speeds and more advanced switching capabilities. This quarter, we delivered the industry's first protocol layer solution for validating 1.6 terabit performance a major milestone for next-generation networks. We also partnered with AMD to achieve early PCIe Gen 6 compliance validation, laying the groundwork for next wave of AI-ready high-speed interfaces.

With growing complexity in data center at scale, it's critical to model and test not just individual devices and components, but their interactions at the system level. This prevents bottlenecks within the data center, optimizing system efficiency and performance for AI applications. We're working closely with industry leaders to model complex workloads, training environments and intercluster interactions. Our software solutions enable emulation of real-world scenarios, exposing system-level challenges early in the design process.

This quarter, we saw a broader adoption of Keysight AI solutions as customers look to streamline integration, accelerate deployment of AI infrastructure. The wireless business remains stable. Current momentum in non-terrestrial networks and continued R&D activity in 5G advanced is contributing to steady demand. We're actively partnering with industry leaders to support emerging applications like direct-to cell connectivity and low earth orbit networks. While broader 6G commercialization is still years away, we're focused on leading the industry into next generation of innovation. We're deeply engaged in progressing early 6G research and shaping the standards that will define its implementation.

This quarter, we collaborated with NTT to demonstrate a breakthrough in sub terahertz component characterization at ultra high data rates. We're working with key customers on advancing new spectrum utilization, sensing and next-generation MIMO technologies that will drive long-term transformation across wireless.

Moving to aerospace, defense and government. Elevated defense spending globally and modernization priorities are driving robust demand, particularly in the U.S. and Europe. We secured key wins at EU prime contractors for RADAR and electromagnetic spectrum operation applications, leveraging our multi-decade experience in high-performance capabilities and complex system integration. Our differentiated platforms emulate complex 3D radio channel conditions and enable customers to model dynamic signals for satellite, vehicle, airborne and terrain scenarios. Keysight is well positioned to capitalize on growing defense and government budgets around the world. Our enablement of sovereign research and innovation continued. This quarter, we collaborated with AIST in Japan to establish a 1,000 cubic platform. This sets a new benchmark for furthering quantum computing research and results from our commitment to long-term innovation and investments in advanced R&D.

Turning to Electronic Industrial Solutions Group, orders and revenues grew both year-over-year and sequentially. In our broad general electronics business, orders grew strongly in the quarter and year-to-date. In consumer industrial, high performance requirements in AI data centers are translating into investment in high-speed PCBs and interconnect. Digital health continued to grow, driven by advancements in the validation and production of medical devices. This momentum extended to ensuring compliance in wireless and wired connectivity for monitoring systems. Advanced Research and Education also grew this quarter driven by leading-edge semiconductor 6G and photonics initiatives with growth across EU and Asia Pac regions. In automotive, demand improved sequentially and was stable year-over-year as we lapped higher compares. Our solutions are enabling OEMs and their partners to advance new software-defined architectures as well as advanced RADAR and sensing. Leveraging Keysight's broad portfolio, we're engaging with customers in the design and validation of in-vehicle network compliance and security applications.

This quarter, we enable Neo to validate the compliance of their smart electric vehicles with global wireless connectivity standards. In addition, our ESI and design engineering software renewal rates with major OEMs were strong across all regions. We also recently delivered and installed a state-of-the-art R&D battery test lab for a leading European OEM customer. Despite headwinds, these collaborations illustrate the industry's ongoing commitment to innovation as it transitions to smart connected vehicles. In semiconductor, robust demand for our wafer test solutions continued. Keysight's differentiation and customer focus is driving tighter engagement with leading foundries and IDMs. Our advanced node, high-bandwidth memory and silicon photonic solutions are enabling customers to address increasing AI compute intensity and power efficiency requirements. Investment and growth expectations remain favorable, supported by sovereign priorities around the world.

Moving to software and service. Keysight simulation and emulation portfolio is unlocking faster and smarter innovation for our customers, helping them to achieve faster time to market, reduce risk and superior product performance. This quarter, we saw a healthy demand for our RFEDA solutions, driven by increased government, aerospace and defense spending as well as the need for high-speed digital simulation capabilities in the AI data center supply chain. Keysight Services business continues to grow, driven by expansion of managed services and value delivered through Keysight Care. This quarter, we saw strength in aerospace, defense and government as well as data centers, markets where high-value services and maximum uptime are mission-critical to our customers' success. Our new products and solutions continue to accelerate customer innovation.

At the International Microwave Symposium in June, Keysight showcased multiple high-performance products that address the needs of next-generation radio frequency and digital design. This includes industry's first handheld millimeter wave signal analysis solution, advanced phased array antenna test capabilities and phase noise measurement systems, all with applications across multiple end markets.

In summary, Keysight is capitalizing on market opportunities and multiple waves of technology innovation underway. I'd like to thank our team for their relentless customer focus and collaboration, which positions us well both near- and long-term value creation. We remain confident in our ability to navigate the evolving trade and tariff environment to deliver healthy margins and strong free cash flow with our financial model and operational flexibility, reinforcing our ability to invest, adapt and lead.

With that, I will turn it over to Neil to discuss our financial performance and outlook.

Thank you, Satish, and hello, everyone. Third quarter revenue of $1.352 billion was above the high end of our guidance range, up 11% on a reported basis or 9% on a core basis. Orders of $1.340 billion were up 7% on a reported basis or 6% on a core basis. Looking at our operational results for Q3, we reported gross margin of 64%, operating expenses of $526 million and operating margin of 25%, an increase of 60 basis points over last year.

Turning to earnings. We achieved $297 million of net income and delivered earnings per share of $1.72, which increased 9% year-over-year. Our weighted average share count for the quarter was 173 million shares. Keysight's Q3 tariffs were in line with the estimates that we provided last quarter. We are making progress on our mitigation strategies, which include supply chain optimization as well as pricing and efficiency actions. Accounting for the longer execution time required for certain strategies and our quote to revenue cycle time, we are factoring in a lag for these actions to be fully realized in our results.

Moving to the performance of our segments. The Communications Solutions Group generated third quarter revenue of $940 million, up 11% on a reported basis or 10% on a core basis. Commercial communications revenue of $644 million was up 13%, driven by double-digit growth in both wireline and wireless. Aerospace, Defense and Government achieved revenue of $296 million, an increase of 8%. Altogether, CSG delivered 67% gross margin and 26% operating margin. The Electronic Industrial Solutions Group generated $412 million in revenue, an increase of 11% on a reported basis or 9% on a core basis with growth across automotive and energy, semiconductor and general electronics. EIC delivered 57% gross margin and 22% operating margin. Software and Services accounted for approximately 36% of Keysight revenue, while annual recurring revenue was 28% of the total.

Moving to the balance sheet and cash flow. In Q3, we generated cash flow from operations of $322 million and free cash flow of $291 million. Year-to-date free cash flow now stands at $1.1 billion. We ended the quarter with $2.636 billion in cash and cash equivalents, an additional $759 million is designated as short-term restricted cash the vast majority of which is set aside for closing the Spirent acquisition. We repurchased approximately 300,000 shares this quarter at an average price of approximately $164 for a total consideration of $50 million.

With regard to the pending acquisition of Spirent, the final regulatory review is progressing, and we now anticipate closing the transaction in our fiscal fourth quarter. The acquisitions of Synopsys' Optical Solutions Group and Ansys' PowerArtist are similarly advancing towards final regulatory approval.

Turning to our outlook. Let me start with a few comments on the tariff rates announced on August 1. We estimate the new tariff rates will increase our tariff exposure by approximately $75 million annually. As communicated last quarter, we are on track to fully mitigate the April tariffs by Q1. We initiated additional actions to address the August tariff increase, which we expect to have fully mitigated on a dollars basis within the first half of FY '26. As Satish noted, the demand environment has remained resilient despite an uncertain macroeconomic backdrop. We enter Q4 in a strong backlog position. Given our year-to-date outperformance and visibility into the coming quarter, we are raising our full year growth outlook once again.

For the fourth quarter, we expect revenue in the range of $1.370 billion to $1.390 billion and Q4 earnings per share in the range of $1.79 to $1.85 based on a weighted diluted share count of approximately 173 million shares. This will result in a full year revenue growth of 7% and full year EPS growth of approximately 13% at the midpoint. This guidance factors in all tariff announcements to date and assumes tariffs remain at August levels.

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

Thank you. Reagan, will you please give the instructions.

[Operator Instructions] Our first question comes from the line of Mark Delaney of Goldman Sachs.

Satish on past calls, you characterized your expectation for a recovery in the end markets overall is gradual. I don't think I heard you use that word today. So maybe you can help investors to better understand your view of the end markets now and to what extent it's better than you'd previously expected.

Yes. Thank you, Mark. A strong quarter, clearly, and we're feeling good about the funnel and the customer activity despite the overhang from tariffs and the sort of geopolitical environment we find ourselves in. And if you look at the performance of our order growth, again, has accelerated as we've gone through the year. So from that perspective, we're feeling good about how the year is progressing slightly even better than what we expected at the beginning of the year. However, if you look at the end markets and you look at the multiple dimensions of the end markets and you'd say are all end markets up into the right, not quite, right? I would say AI has clearly been a continuing team of momentum. Aerospace, defense, as we expected that things would recover after the administration change and other things manifest itself, and wireless is tracking slightly ahead of expectations, EISG are going to growth.

All in all, feeling good about the situation, although just the caution is that we still have challenges with the automotive and some end market dynamics.

Helpful overview. My second question was just trying to better understand orders and what you're seeing and putting that into context with the revenue outlook. I think orders were up high single digits, but the book-to-bill was just below 1, and then you guided for revenue up sequentially. So maybe just help us better understand what's supporting that revenue outlook into 4Q? Is there turns business or backlog that supports it? Or maybe there's some pass-through tariff revenue that's coming in? And just any more framing of what's driving revenue in the fourth quarter compared to the bookings would be helpful.

Yes. I think some of that is a function of kind of the timing of big deals. We actually had a reasonably large system integration deal. We got customer acceptance literally on the last day of Q3. So that elevated and drove some of the outperformance in the third quarter and obviously pulled that out of Q4 and muted the quarter -- the sequential seasonality from Q3 to Q4 versus what we would typically see. But I think as we look forward, we expect more normal sequential seasonality on the order front than we're going to see on the revenue front again, because of the timing of some of these big deals.

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

I do have a follow-up as well. I guess first, Neil, as we kind of think about the revenue growth and the recovery in the business, the order growth dynamics, I guess appreciating that you're not giving guidance out into next year. But at the Analyst Day that you had hosted a while back, you talked about a 5% to 7% top line growth rate is kind of the long-term model. Is that how we should kind of think about the story playing out at this point as we look out into fiscal '26? Or is there an opportunity to maybe see the potential for revenue to grow still a little bit above that level?

Yes. I mean I think looking to this year is maybe just a start, we started the year talking about the gradual recovery and we're looking for revenue growth this year at the low end of that 5% to 7% range. And as Satish has just indicated, things have unfolded slightly better than our expectation, and we've been able to raise that revenue expectation for the full year, each of the last 2 quarters. I think as again, as Satish just mentioned, numerous of our end markets are in recovery and others are still kind of more stable at lower levels. But I think, generally speaking, the feeling around the building is that we're bullish going into '26 with one big caveat around tariffs and macroeconomic, right? We're still pretty early into this process, and I don't think the market is fully absorbed the impact of this new tariff environment. And so I think we'll have more to say on '26 in 3 months. But right now, we're really focused on executing and delivering Q4 that are generally positive on what we're seeing in our end markets.

Yes. I appreciate that, Neil. And then just as a quick follow-up. Satish, we've talked a lot -- a lot of investors often ask me like Keysight, the AI story. You've talked about not just scale out but also now scale up 1.6t and so on and so forth. So the wireline business, I'm just -- I'm curious how do you respond to investors kind of asking what's the mix of the contribution that really AI drives to the Keysight story? And how do you see the durability of that strong demand looking forward?

Well, first, I'll answer your second question. We're well positioned with momentum to capitalize on this long-term opportunity with AI. I'm probably more convinced now that this is going to play out, and we're well positioned than I was maybe 18 months ago when we started down this path. So that's point number one.

The second thing I would say is when you think about AI, it's going to have contribution across multiple end markets over time. But clearly, one is the area where we start to see the early demand and we are picking up on that inflection I expect to finish wireline business up double digit, strong double digits this year. Commercial comps up double digits and it's a function of the underlying AI demand. And I would say that the AI demand, in particular, one of the things that it's really hard to sort of tease that out as unique adman because you have this sort of entrenched ecosystem of customers, whether it is NEMs or silicon designers or hyperscalers that have been customers of Keysight's capabilities for a long time. But clearly, their business with us is growing and has continued to grow through this period and AI has been the incremental driver there. But equally, as this year has progressed, we've added new customer start-up activity in this industry is picking up and Neocloud providers.

So all in all, feeling good about our ability to grow and not just a quarter or 2, but over the long term as well.

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

Great. A couple of questions for me. Maybe just first, if you could just kind of outline where the tariffs are kind of -- or like which part of the tariffs are most substantial for you guys? And then just if the mitigation is that you plan on doing is kind of moving around production or pricing?

And then just a second question for me. Just on aerospace and defense, just clearly, a lot of spending happening in that market right now. Is this something where we should see this market kind of continue to accelerate? Or is this kind of a good level because it just takes years for these programs to kind of get into place?

Yes. Thanks, Meta. Why don't I take the tariff question and then I'll let Satish address the aerospace defense question. So with regard to the tariffs, we have a largely Southeast Asia-based supply chain. As you know, most of our largest plant from a finished goods manufacturing standpoint is in Malaysia but we have other significant manufacturing -- offshore manufacturing operations in the EU as well as in Japan.

And I would also note that we do significant manufacturing in the U.S. You know that we do IC fabrication here, a lot. We do manufacturing for some of our high-end aerospace defense solutions and then a lot of our high-end new product introductions actually start with U.S.-based manufacturing before moving to a higher volume location. And so we do have a geographically diverse manufacturing footprint, which gets to the second part of your question and the actions that we're taking to mitigate the tariffs. And it really is a multipronged approach looking at various supply chain strategies up to and including potentially shifting manufacturing, probably more focused on making sure right now that we are appropriately utilizing capacity that's already in place rather than dramatically shifting capacity from one location to another, but we'll see how that develops our time.

Obviously, looking at supplier relationships, cost efficiencies. And then to the extent that there's residual amounts looking to pass those costs on to our customers to protect our financial results. via both price increases and tariff surcharges for our U.S. customers. So it's a multi-pond approach. And again, I would just say that just reiterate the points that we made in our prepared remarks, that we expect to have the tariff impact from April fully mitigated during Q1. We've taken incremental actions to mitigate the August increase and should have that mitigated on a dollars basis and on again on our run rate basis sometime during the first half of this fiscal year. So we feel like we've got it well handled.

So Meta, I think I reiterate the point number one is we're confident that ability to mitigate the tariff situation, and we've started to make good progress organizationally towards that.

With regard to aerospace defense, first and foremost, I would say, the starting point for the year was slower given the administration change and continuing the solution and now being on this call, I sort of foreshadowed that I wouldn't be surprised if some of the demand comes back in the second half, and it's exactly the way it's played out. But again, what we're seeing now is sort of ongoing programs or existing programs that were in the pipeline that are flushing out the backlog for some of the prime contractors continues to be robust in strengthening, which is again, foreshadowing positive environment subject to budgets.

I think the U.S. situation is pretty well understood. And typically, it's a majority part of our business, so we factor that into our growth rates. I think what's a new dynamic, frankly, which is hard to quantify just yet, is the impact of the European spend that could have on to this over the long term, right? And that's where we started to see some LTE business this quarter. And I think some of these programs will continue to play out as we move forward. But we remain confident in some of the capabilities we bring in terms of radar, EW, space satellite. And as we think about some of the NDA priorities that have emerged, we have multiple places where we make contributions. The golden dome of the United States has been announced should that be funded will also be give us additional opportunities to make contribution.

So overall, feeling good about the contributions we're making and we feel like we can keep increasing it. Now again, this is a function of government budgets. So maybe the pace of acceleration of growth may not be as quick as some of the commercial markets we experienced, but it's one of the more steadier value creators for the company.

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

I have 2 as well, maybe one for Satish, and one for Neil. Satish, maybe just go back to wireless. You talked about it being stable, but it sounded like double-digit growth in the quarter. Was that largely just the compares? Or maybe if you can just walk us through some of the areas that are kind of keeping the wireless-related businesses afloat?

And then Neil, I'll just give it to you now. Could you just touch on kind of moving parts around this incremental margin of 40% that you talked about. It seems like you might come in a little bit below this year, but when we start looking into the future, maybe walk us through the moving parts around how we should think about that incremental margin number?

Tim, thank you. Yes, we had a strong revenue quarter. Again, it's a function of recovering market conditions in wireless that have remained depressed for so long. And year-to-date, we're slightly ahead of what we expected in terms of order growth. And really, the story is of standard progression release '18, more R&D spend and some increasing activity we see as AI starts to move to the edge, and there is more activity on AI applications on mobile type devices. There's a lot more standards-driven capabilities that are being promoted that creates some opportunity for us. The non-terrestrial network activity with satellite operators and mobile operators that are partnering. I think that's continuing to grow. And then some early 6G research activities around the globe where customers are starting to put pen to paper and starting to design their systems. So all of these are -- have been things we've been discussing. And while the supply chain typical smartphone supply chain still remains subdued.

Yes. And Tim, to your second question about how to think about the incrementals, I still think that going forward, over the longer term, the 40% incremental is the right way to think about the business. Obviously, there was a big kind of shock to the system this quarter with -- or the year with the tariffs, which had not previously been considered in our model. Once those, however, are included in the baseline and we lap them this time next year, you kind of get back to the point where they're in the baseline and you're able to continue to grow your -- as you grow your business mid-single digits or better, you would deliver that 40% incremental.

I would point out that if you look Q2, Q3 and our guide for Q4, the 3 quarters where we've achieved that mid-single-digit growth rate and you strip out the tariff impact, we actually are overachieving that 40% incremental. So it's still something that we're tracking. And again, we're absorbing the tariffs this year, which are again new and unexpected and at the same time, have been able to raise our EPS growth, EPS growth estimates for the year. So definitely a continued focus on efficiencies and cost management. And again, I think that 40% incremental is the right way to think about the business long term but the tariffs will limit our ability to deliver it until we get them into the baseline.

Our next question comes from Mehdi Hosseini of SIG.

Yes. It's actually Mehdi Hosseini. I also have 2 multiple questions. It was 9 months ago, you guys were talking about wireline business, bringing in more than $2 billion of orders. And the commentary over the past couple of quarters suggest that order activity for wireline has remained strong. So my question is, can you put some color around the dollar value of orders or business revenue that is coming in assuming that you had more than $2 billion of orders 9 months ago. And in that context, how should we think about sustainability of wireline orders? And I have a follow-up.

Yes, maybe, I would say that I don't remember sizing it, but let me maybe take a step back and say that if you go back in time and you look at our commercial communications business, I would say that a bigger chunk of the business was wireless and wireline was a smaller part of the business. And what is still -- what is since [indiscernible] is wireless has normalized since the 2022 peak 5G levels and is pretty stable, while wireline has continued to grow. And this year, I expect to finish the business with a record bookings and a solid pipeline of opportunities as we go into next year.

So you might say, well, what's really driving all this activity if we have -- because there's the obviously, the data center CapEx investments that we all know about and so you're really asking at the core of it, how sustainable are these. But if you think about the nature of the AI workload and the progression of it, it's going from just these ChatGPT type applications, into more Agentic workflows and is poised to, I think, make substantial contributions to productivity for both companies and individuals. And as that plays out, the underlying economics of adopting the latest technology and the pressure to accelerate innovation. We continue to see that as a probably a sustaining driver looking as far out into '28 and '30 even some of the early look that we're getting engaging with our customers on memory, topology enhancements, compute enhancements, networking, speeds, and interconnect, what used to be a 2, 3, 4-year sort of refresh cycle is being pulled in, which really creates a steady road map for us to keep working with our customers and engage.

So a, I feel good about the market opportunity be. I also feel good about Keysight's ability to intercept that and outperform.

Okay. And then the second question maybe is for Neil. I see both CSG and EISG revenues were up 11% each on a year-over-year basis. But CSG had kind of flattish operating margin, but EISG has more than 200 basis points of increase in operating margin. And my question is, is CSG where most of the tariffs are being felt? And is there also a mix that is favoring ESG with the margin expansion on a year-over-year basis.

Yes. I think the second part of that is definitely true that we've talked about in the past how there's a greater disparity of gross margins within the EIC portfolio. They have the ability to benefit from mix shifts. With regard to the tariffs, I mean, certainly, tariffs are impacting both of our businesses. There might be a slight skew there within with towards CSG, but I think that's reasonably equally spread across the 2 portfolios.

Okay. And with EISG, that's where software and services mix is richer, and that's where you get a margin uplift. That's the mix that you are referring to correct?

No, CSG has a higher mix of software, certainly than EISG given the kind of the use of software within that communications portfolio. I think if you look at the hardware portfolio within EISG, EISG they have some of our highest margin products but then they also have more of our distribution level projects, lower end level technology, which tend to have lower gross margins associated with them. So it's a bit of a -- within the hardware portfolio, it's a broader dispersion. Again, there is a skew within the tariff portfolio towards CSG, but it's not huge.

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

Thank you. Just want to make sure that we're on the same page for the tariffs. So it was $75 million before August at another $75 million. And just to clarify, I think you were expecting about $25 million net this quarter or 80 basis points, that's what you saw? And what is the expectation baked into the fourth quarter guide? So just how much are we looking at in total? And what's in the...

Yes. Just to review the numbers. So what we said a quarter ago, $75 million to $100 million annually and the incremental $75 million as a result of the August increases. So that takes you to 150 to 175 is the range that we're looking at. Our impact in Q3 was in line with those numbers that we just communicated. In Q4, we'll see tariff, the tariff expense go up as a result of the tariff increases. But luckily, our tariff mitigations are starting to ramp as well. So while we will continue to see on a dollars basis, an unfavorable impact from Q4, it's only slightly larger than what's in Q3. You see an increase in tariff expense but a ramping of the mediation actions.

Got it. Perfect. And then I guess one kind of question around the 2. Now that the Synopsys and Ansys acquisition is actually complete. Is there any color that you can give us in terms of size or magnitude for the 2 businesses that you'll be wearing out of that?

I think let me take that. I think from a strategic perspective, we really like the fit to our simulation portfolio. We've talked about that. At this point, any questions with regard to timing or details are better directed to the Synopsys team because even though they have closed the deal with Ansys, the regulatory -- there's still some regulatory process that's underway that would take some time for us to conclude. And so any questions on that regard might be better directed to Synopsys at this time.

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

Just a follow-up with David's question on PowerArtist and Optical Solutions. Just [indiscernible] it back to some of the comments you made on the simulation software and software demand on the AI side. What are these 2 assets going to bring into the EDA side of your portfolio? And like how does this enhance your offering going forward?

Yes. I think if you think about our RFEDA, the simplest way to think about it is we're leaders in RF and high-speed digital kind of simulations and part of those workflows, think the Optical is a really good complement to that. And in general, power and power efficiency is becoming so important to customers and saw some of the critical IP being part of the portfolio is a good thing because they fit our long-term direction and our ability to sort of create more synergies with these capabilities inside the company.

Okay. And then just with the comments on the 6G research initiatives gaining some traction. Can you provide us a little thought on customer engagement time lines and when 6G might become a more meaningful revenue contributor? And how are you thinking about balancing continued 5G optimization versus 6G investment priorities as we look ahead?

That's a really good question. In the most recent 3GPP plenary meeting in [ Prague ], started to finalize what release 20 or the early version of 6G might look like. And one of the things that might take away was it reinforced the industry alignment for -- from 5G bands to 6G, which I think is a really good trend for us because of the -- it's not a break and it's an evolution and a flow on some of the themes that we have been working with customers on, whether it is to lower latency for AI applications, increased energy efficiency or non-terrestrial networks and integrate satellite connectivity with terrestrial networks.

So all those teams play out and our strength in 5G. And so we're thinking about our platforms and architectures from this perspective, and it's glad to see that being reinforced from a standardization. We start to see customers exploring various facets of 6G because it's not clear yet which spectrum or what topology will be generated, but we start to see some activity with customers related to building up their IP for an eventual 6-year rollout, right? So that's where the action to date is occurring. As I said in my prepared remarks, we're still years away from rollout, but I think the R&D activity will only continue to grow as we move forward.

Our next question comes from Rob Mason of Baird.

Your semiconductor business grew double digits in the quarter. You sounded quite pleased with the results. It has been a choppier environment for some in the semi front-end semi cap space. And I'm just curious, maybe walk through or remind us why you're not maybe seeing so much volatility in that business. And I just kind of wanted to confirm as well just your outlook is for growth here in the fourth quarter as well.

Yes. As you know, our semiconductor business is the wafer stage and so as wafer starts are occurring globally it does benefit from some of the sovereign trends. People are characterizing wafers even ahead of production. So that's another sort of tailwind for the business. And also, it's a business which benefits from some of the advanced nodes, new memory topologies, HBMs and recent increased customer interest on silicon photonics review of favorable drivers for our semi business.

So just to also be clear, the business did experience a decline in '24 driven by some of these -- the normalization of demand, so it was not immune to that. So it's getting some lift from the increased activity plus some of these advanced AI-driven demand that's favorably that's a favorable driver for this business.

I see. That's helpful. Satish if we could just shift over to the wireline business. Last quarter, you shed a little more light just on the mix between the R&D test and production tests that's occurring in that business. And it shifted a little bit towards production tests just as that's such a high-growth area. I'm just curious as that mix has shifted. Has your visibility changed at all? Is it giving you more visibility, less visibility? Just how we should think about that evolution there.

Yes, that's a good question. I mean, I think when we started to think about it last year, let's say, at this earnings call, I call the environment constrained and, again, constrained from a supply chain perspective. And what's really played out over the last quarters is that the unlocking of the supply chain through investments that are coming. And I think that's a process that's still to play out, and we're clearly benefiting from that. So that's probably skewed our mix of traditionally predominant R&D business to include a bit more of manufacturing exposure but we're nowhere close to the company exposure around a manufacturing standpoint in this business, it's still R&D oriented.

And what we also see, which is favorable, which speaks to the visibility comment is, again, last year, this time, I would have said this is a highly concentrated business for us because we had a few customers driving the action and what's playing out is the broadening of the business even in the wireline ecosystem with new customers and start-up activity but even across the company, as you think about the general electronics and semiconductor getting some of the tailwinds from the AI trend, it's again a positive dynamic for the business.

Our next question comes from Samik Chatterjee of JPMorgan.

Priyanka on for Samik. I have a couple of questions. Starting off with the AI story. For wireline optics, how much of the R&D investment is already on 1.6t, 3.2t and beyond compared to the legacy speeds like 100 gig or 800 gig?

I think for wireline, I would say broad comment with different exposures. But I'd say the 100 gig is fairly stable. It's sort of a run rate business. The 400, 800 gig are the ones where the majority of the volumes are, and 1.6 and beyond is still in research deployment. So that's probably directionally gets you there.

All right. Can you also shed a little bit of light on the customer segments and your data center business? For example, how big hyperscalers are versus semiconductors and then integrators and assemblers?

Yes. I think as we -- I don't know that we've split up the business quite the way you've asked us to, but I think you think of the activity in the supply chain remains strong as it's starting to unlock supply constraints so that's a factor. And then the R&D spend is probably the better way to look at it is where the majority of the demand that we see for brand set of tools and capabilities that Keysight provides.

Our next question comes from Adam Thalhimer of Thompson, Davis.

Congrats on the beat and raise. I wanted to ask about the impact of tariffs on orders. Do you think that net-net tariffs have pulled forward some orders or pushed them out?

Thanks for that question. At this point, throughout the quarter, we did not see any material pull-in orders due to the tariff changes that was going to happen in August.

And then we have not seen any -- we have not seen any -- also following up. We have not seen any material change to the demand profile from the tariffs just yet.

Okay. Great. And then, Satish, I wanted to follow up. You talked about AI impacting other markets besides wireline. What do you think the next market is? And when do you think you could see material orders from that?

Yes, I think we said we started to see some impact in the general electronics and in semiconductors. I think semiconductor of feels like that going to happen given the trend of embracing silicon photonics and co-optics and other things. It just seems logical that, that's going to flow. I think the thing we're watching for is the general electronics business because it tends to be a broader business with manufacturing exposure and other things. And so I still think that's still in the early innings, that's playing out. But then longer term, you think about the possibilities of how AI discepts our customers' engineering workflow or possibilities of how AI could intercept defense applications or security applications or in automotive or in our wireless business even. So there's a lot more excitement there than there is activity right now, which -- but we're starting to engage customers and have discussions with them about what Keysight can do to enable their success.

Thank you. That will conclude our question-and-answer session for today. I would like to turn the call back over to Paulina Sims for any closing comments.

Thank you, Reagan, and thank you all for joining us today. Have an awesome day.

Thank you. That concludes today's call. Thank you for your participation. You may now disconnect your lines.