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.
Yeah.
So, it'd be great to talk about what were some of the contributing factors, what's working and driving sort of that better-than-expected performance?
Yeah, absolutely. It's nice. We've been able to take up our growth expectation for our fiscal 2025 here, two 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, you know, 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 markets this fiscal year. Not only have we seen that, it's maybe been a little bit more robust than we had forecast.
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. In actuality, we've gotten some nice growth. It's not growing at the same rates 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, you know, things this year have been better than expected.
I feel like as we enter FY 2026, you know, those secular themes are aligning pretty well for us with maybe just a little bit of caution around tariffs and the fact that, you know, we're still only four months or so removed from Liberation D ay, if you will, four or five months removed from Liberation D ay. I don't yet know that we've achieved a market equilibrium. Yeah, 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 2026 just at a high level?
Yeah, I mean, I think we continue to see momentum on the Wireline side of things. I think, you know, these transitions between the various speeds, 400, 800, 1.6, those things are shrinking. The industry's working to find alternatives to the proprietary NVIDIA standard. And so, all of those things are driving robust investment in research and development that it's benefiting Keysight and we would expect to into FY 2026. I think Aerospace Defense is another area we expect to be strong, not just based on you know, 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.
You know, we do, 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, that's the one area where I think we continue to be cautious as we enter FY 2026.
Got it. Thank you for that. 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. 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 buildout. 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'd be helpful.
You bet. Yeah, over 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. When 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 characterize 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. 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 going at these speeds to enable those interconnects. And we help 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. Think of the Ciscos and the Juniper Networks of the world. 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 these security vulnerabilities. Then right up at the top of the food chain, you have the hyperscalers. The hyperscalers, that's been a new addition as AI has progressed. They're putting data centers and these AI racks and clusters. They need to emulate these AI racks and clusters in their labs. They need to test for performance, you know, 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're 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 startup companies come in, as well. And that's been a pretty positive growth driver for us.
Great. Thank you. Sticking with the Wireline business, and we talk about sort of the business case, you know, the market is transitioning to higher speeds. We were at sort of 400, sort of 800 now at the sweet spot, and then we're moving to 1.6 Tb. What portion, 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 as the growth opportunity as people move to kind of 1.6 and beyond?
Yeah, the bulk of the business today is in 400G. The deployments are largely occurring in 400G. That opportunity has not peaked yet. And to Neil's point, these design cycles are getting compressed. So there is an 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 Tb R&D. So all of these are sort of happening in parallel, right? I'd say 400G deployments, that's bulk of the business, 800G deployments be starting, a lot of R&D on 800G and early R&D activities on 1.6 Tb.
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 it, 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, O-RAN? 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?
Yeah, 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, you know, 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's a new ecosystem that's brewing, satellite network operators, you know, 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, or you know, 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 more development for pre-trials, so that's something that's occurring that's helped the business grow as well.
Great. Thank you for that. I'm going to switch gears and move away from networking, but maybe I'll just ask the audience if there's any questions around this piece of the business. All right. We'll take that as a no. Maybe move into 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.
Yeah, we're excited about this business. It doesn't get a lot of airtime, 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 four different applications. One is defense commoditization 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 design and test these solutions, you also need to see how it would operate in a theater, in a forward-looking field theater.
You need to ensure that your system is not jammed by an enemy signal, things like that. We help customers design those systems in the lab, in their labs. That's something that we do. We also enable space and satellite applications. This is something we built, a common core technology in our comms group and we leverage that into aerospace and defense. All of the technologies are for dual purpose, dual use. 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, you know, defense satellite systems, where that might be applicable. That's another category. We also are in field 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.
Thanks for that. In terms of the strength financially you're seeing, how much of this is just the playing out of your existing backlog versus, you know, we've seen a lot about the rearmament of Europe and kind of expanded budgets going forward. Like maybe talk about, maybe Neil's a question for you, but just kind of the mix of that demand around aerospace and defense and kind of where it's coming from in the immediate term and then kind of over the more medium term.
Yeah, I mean, we've said that our business is historically, you know, a little bit more than 50% U.S. and a little bit less than 50% ex-U.S. is the rough geographic split. I mean, I think, you know, on the positive side now we've seen about eight or nine 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.
They're going to layer into those spend rates over the course of the next decade, you know, but these are prolonged commitments. I think that opportunity is really more in front of us. I think we're starting to see the, you know, early engagements with the big aerospace defense contractors in Europe. These are companies with which we've had, you know, longstanding relationships, but it takes a while, right? From budgets to programs to proposals to quotes to orders and ultimately to revenue when 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, 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?
Yeah, I'll start and then I don't know if Kailash might have some things to add. You know, I think I'd say two kind of themes. Well, first of all, we you know, the semi market had been kind of down for a prolonged period of time and we'd expected a bounce back in semi that we've in fact gotten. You know, things like high bandwidth memory, silicon photonics, the move to smaller process architectures are drivers there. And certainly there is a correlation between you know, 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, you know, less sexy, if you will, but underlying things, things like PC boards and interconnects and cables 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, you know, manufacturers that are making that stuff and they're benefiting from the volume impacts of the buildout of these data center environments. And so we're seeing that same, you know, we're seeing similar uplift from these Wireline in advanced research as well, which is also often in the education environments, which are in that general electronics market.
So I think, you know, those themes, you know, are constant across both of our businesses and certainly helping us on the Electronics 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.
Yeah.
Roughly or so, and so it'd be great to talk kind of how you use it, the various flavors it comes in, where's 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 the shareholders, but kind of the value drivers and for customers as well.
Do you want to take that or?
Yeah, so when you think about the software, right, we have a 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 semi-annual basis.
Actually, we rev it multiple times a year, but they, you know, 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, you know, 5G Advanced, Release 19 and so on and so forth. If it's non-terrestrial network, we may have to update the software stack to change the communication signal and latency requirements, et cetera. So all of that drives ARR and software content on the Wireless stack. Similarly, on the Wireline stack, there's a number of networking protocols. It's ethernet, but if you look at scale-up architectures within a rack, you have extreme short reach, you have medium reach, you have very short reach, you have, you know, PCIe, CXL, types of standards, you know, 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. Then you have our simulation portfolio, which is standalone software. And that's used largely by chip designers and component designers to model electrical conditions, thermal conditions, multiphysics types of simulations, but that's at the component level. So I mean, that's sort of how that pyramid gets built. You've got a large physical layer portfolio with core measurement capabilities. Then you have the protocol layer, which is pretty heavy in software that can turn. Then you have a standalone software portfolio, which is also an ARR subscription-based business.
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. Yeah.
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.
Yeah, certainly. So, as you said, you know, roughly 25% of the company's revenue is Software, about just under 40% of Software and Services. And so those two businesses both have significant recurring components. So we're approaching 30% recurring revenue. Obviously, that brings a stability to our business. And we also find that these businesses bring a non-insignificant 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, you know, 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'd be great to just understand or refresh for folks kind of where those stand and maybe just what those were, what their strategic rationales, because the announcements were a couple of months behind us.
Yeah, a few months now. So we have, we actually have three pending acquisitions all tied up in kind of various levels of regulatory approval. The first one was Keysight's acquisition of Spirent. You know, 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 markets. 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.
Again, we expect to get that acquisition closed by the end of our current quarter. Then we have two businesses that we are buying as a result of the combination between Synopsys and Ansys, similarly tied up in regulatory approval. Both of those will be additions to our design engineering software portfolio. One is around optical simulation, the optical solutions group out of Synopsys. Again, you know, we have RF microwave EDA business. We have physical layer computer-aided engineering business that we acquired when we bought ESI. And now you are getting optical modeling capabilities via this business. Then the second one is Ansys's 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, those are closing, as you said, how should we think about capital priorities for 2026? Deleveraging.
Yeah.
Capital to return. Maybe talk a little bit about how you guys analyze what your opportunities are and what your goals are.
Yeah, it's a great question. So, you know, first of all, you know, these acquisitions, you know, are not going to stress us from a leverage perspective. We're still going to remain below our two turns 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 has continued to throw off large amounts of cash. And so we're not going to be in any way restrained from a capital allocation strategy, you know, 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.
Want to get the integrations underway, get those value capture efforts underway before we move on to the next thing. But I think once, you know, we're off and running on that, I think we really have the full suite of 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, from the audience? Take that as no. Oh, yes. Go ahead.
All right here.
How can you help the Germans with this framework relative to what we've seen in prior iterations? So what was the question? What do we need it for? But are we using 5G enough already? And what is the timeframe?
Yeah. Thank you. Thank you for the question.
Repeat the question just because it wasn't on the.
Yeah. 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? If 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'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 you know, 5G has 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. The 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 coded, 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 sense 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, two, three years is do a lot of pre-trials and pre-standards development. The standard is expected to be formalized in March of 2029. And then commercialization probably a year, or a year and a half after that. So you're looking at commercialization by the end of the decade, but a lot of activities will build up to that.
We would expect to see some meaningful contribution and growth from 6G towards the second half of 2027 and into 2028.
Any other questions from the audience?
Here's what you comment on: share being at, not all your competitors or apples to apples per se, but in your ecosystem, but then some of the ones that are in the public markets. What share do you think you've gained in any standout business segments?
You know, we have the broadest. I don't know if I can comment on specific share gains relative to specific competitors, but I will say that we've had a 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 we have the deepest engagements with market defining customers in all these areas. And you think about electrical, you know, physical layer technologies, electrical, digital, optical. You know, we have that covered from a stack point of view. 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 modernization, space, satellite, and government research types of things.
I think overall we've been consistently spending, you know, more in R&D than any of our competitors. Some of the revenues, our R&D budgets exceed the revenues of some of our competitors. 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 that shift, given your sort of M&A target opportunities for Keysight and the physical and application layer looking five years out, is there a mix target we can start to envision? Are they going to be more equal in size in terms of your business opportunities? Love to hear some comments about the term.
Are you talking about hardware versus software or protocol versus physical layer?
We, you know, 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, 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 the whole data center. How will an entire data center perform, you know, 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, you know, what we have in physical and protocol. Yeah.
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.