Keysight (KEYS) Q2 2025: Orders Up 8% as AI, Wireline, and Software Expand Recurring Base
Keysight’s second quarter saw orders rise 8% year-over-year, underpinned by robust demand in AI-driven wireline, resilient software growth, and a stabilizing industrial segment. Management’s confidence in the pipeline and backlog supports a raised full-year outlook, even as tariffs introduce near-term margin pressure. The company’s strategic mix shift toward recurring software and advanced protocol testing is solidifying its long-term positioning in next-generation digital infrastructure.
Summary
- AI Infrastructure Drives Wireline Momentum: Ongoing data center upgrades and protocol innovation are fueling demand across Keysight’s core communications business.
- Tariff Headwinds Offset by Operational Agility: Management’s mitigation actions and supply chain diversification are cushioning near-term cost impacts.
- Recurring Revenue Base Expands: Software and services now comprise over a third of revenue, supporting margin resilience and long-term growth visibility.
Performance Analysis
Keysight delivered Q2 revenue and earnings above guidance, with both topline and orders up 8% year-over-year. The Communications Solutions Group (CSG), accounting for 70% of total revenue, led with 9% growth, reflecting sustained strength in wireline driven by AI data center buildouts and next-gen protocol deployments. Wireless also contributed, as R&D activity around 5G Advanced and early 6G research continued to expand.
Electronic Industrial Solutions Group (EISG) returned to growth after six quarters of decline, up 5% on the back of semiconductor and general electronics demand, offsetting ongoing softness in automotive and energy. Software and services represented 36% of total revenue, with annual recurring revenue at 28%—a critical buffer during market volatility. Gross margin held at 65%, though tariffs shaved 60 basis points off margins this quarter. Free cash flow conversion remained strong, aided by improved working capital and a one-time hedging gain.
- Wireline and Protocol Test Demand Surges: AI infrastructure rollouts and new standards drove double-digit growth in commercial communications.
- Recurring Revenue Mix Strengthens: Software and services climbed to 36% of revenue, supporting margin durability.
- Tariffs Introduce Transitory Margin Pressure: New tariffs reduced EPS by $0.04, with mitigation actions expected to fully offset by fiscal year-end.
While the macro remains dynamic, Keysight’s backlog of $2.4 billion and a robust pipeline underpin management’s confidence in sustained growth into the second half.
Executive Commentary
"The demand environment was solid in the quarter with orders growing 8% year-over-year and 4% sequentially to $1.3 billion. Even as we are monitoring the overall macro environment, we entered the second half with a healthy pipeline of opportunity and strong customer engagements."
Satish Dhanasekaran, President and CEO
"We have a diversified global supply chain with minimal exposure to China and have already taken action across multiple factors to reduce the incremental impact of tariffs. ... By the time we get to Q1, we expect to have those tariff costs fully mitigated."
Neil Woodcock, EVP and CFO
Strategic Positioning
1. AI-Driven Communications and Protocol Leadership
Keysight is capturing the secular shift to AI-centric digital infrastructure, with its test and measurement solutions enabling the deployment of 400G/800G Ethernet and emerging 1.6T/3.2T standards. The company’s deep bench in both electrical and optical protocol stacks positions it as a linchpin in the industry’s move toward ever-higher bandwidth and lower latency.
2. Software and Recurring Revenue Expansion
Software and services are now 36% of revenue, with annual recurring revenue at 28%, reflecting a deliberate strategy to build resilience and predictability. Double-digit growth in simulation and design software, bolstered by recent M&A (e.g., ESI acquisition), is enabling earlier customer engagement and deeper integration into R&D workflows.
3. Supply Chain Flexibility Mitigates Tariff Exposure
Keysight’s diversified global supply chain, centered in Southeast Asia, is enabling rapid adaptation to tariff shocks. Operational realignments, strategic pricing on new orders, and ongoing cost actions are expected to fully neutralize tariff impacts by fiscal Q1 2026, limiting long-term margin erosion.
4. Industrial and Automotive Stabilization
While industrial and automotive segments remain mixed, semiconductor test (wafer and photonics) and general electronics are stabilizing EISG. Automotive is still soft, particularly in China, but investments in software-defined vehicles and home energy management systems provide a path to medium-term recovery.
5. Defense and Aerospace Remain Durable
Defense orders grew, with U.S. and European budgets supporting modernization projects, even amidst continuing resolution constraints. Keysight’s role as a trusted partner for spectrum operations and radar test solutions is further reinforced by marquee contract wins with NATO and U.S. Army.
Key Considerations
This quarter’s results reflect Keysight’s ability to pivot across end-markets and technologies, leveraging a broad portfolio and recurring revenue to buffer macro headwinds. The company’s focus on high-value R&D test, early engagement in emerging protocols, and operational agility are all central to its sustained outperformance.
Key Considerations:
- AI Infrastructure Investment Cycle: The shift to AI-centric data centers is accelerating demand for high-speed protocol and optical test, expanding Keysight’s addressable market.
- Recurring Revenue Outpaces Cyclicality: A growing base of software and services revenue is smoothing earnings volatility and supporting margin stability.
- Tariff Mitigation Actions: Management’s proactive supply chain and pricing strategies are expected to neutralize tariff impacts by next fiscal year.
- Industrial and Automotive Recovery Pace: While stabilization is underway, full recovery in these segments will depend on broader macro and supply chain realignment trends.
- Pipeline and Backlog Visibility: A $2.4 billion backlog and healthy pipeline underpin management’s confidence in second-half growth, despite macro and geopolitical risks.
Risks
Tariff-related margin pressure will persist through Q3, with mitigation actions not fully realized until fiscal Q1 2026. Macro uncertainty, particularly around geopolitical tensions and potential customer pullbacks, remains a watchpoint. Automotive and China-exposed segments are still soft, and further deterioration could challenge near-term growth and mix.
Forward Outlook
For Q3 2025, Keysight guided to:
- Revenue of $1.305 billion to $1.325 billion
- EPS of $1.63 to $1.69
For full-year 2025, management raised guidance:
- Revenue growth at the midpoint of the 5% to 7% long-term target
- Annual EPS growth slightly above the 10% long-term target
Management highlighted healthy pipeline activity, a robust backlog, and seasonal uplift in Q4 as key drivers of their raised outlook, while cautioning that tariff mitigation will be staged through the remainder of the year.
- Tariff impact expected to peak in Q3, with full mitigation by Q1 2026
- Fourth quarter anticipated to be strongest of the year, consistent with historical seasonality
Takeaways
Keysight’s Q2 results reinforce its ability to capture secular growth in AI-driven communications and recurring software, even as short-term margin pressure from tariffs weighs on profitability. The company’s operational agility, supply chain resilience, and robust backlog underpin its raised full-year outlook.
- Secular AI and Protocol Tailwinds: Continued strength in wireline and protocol testing is supporting above-market growth and expanding Keysight’s strategic relevance in next-gen digital infrastructure.
- Margin Resilience from Recurring Revenue: The rising mix of software and services is buffering cyclicality and supporting long-term margin expansion, despite near-term tariff headwinds.
- Watch for Tariff and Segment Recovery Dynamics: Investors should monitor the pace of tariff mitigation and the stabilization of industrial and automotive segments for signals on margin and topline trajectory into 2026.
Conclusion
Keysight’s Q2 performance demonstrates a strong alignment with secular technology trends, leveraging its protocol and software portfolio to drive resilient growth. While tariffs will pressure margins in the near term, the company’s mitigation strategies and robust recurring base position it well for sustained value creation.
Industry Read-Through
Keysight’s results underscore a broad-based acceleration in AI data center infrastructure investment, with implications for both networking and semiconductor test peers. The company’s success in expanding recurring software revenue highlights a sector-wide shift toward subscription and services models to buffer cyclicality. Tariff mitigation strategies and supply chain diversification will be key themes for all test and measurement and industrial technology companies navigating a volatile geopolitical landscape. The stabilization of industrial and automotive demand, albeit gradual, signals that supply chain realignment and energy transition investments are slowly gaining traction, but remain vulnerable to macro shocks.