The paragraph introduces Keysight Technologies' Fiscal Second Quarter 2025 Earnings Conference Call. Tamiya, the lead operator, opens the call, and hands it over to Paulenier Sims, Director of Investor Relations. Sims introduces the company's President and CEO, Satish Dhanasekaran, and CFO, Neil Dougherty, who are present for the call. The discussion focuses on non-GAAP financial measures and core growth, and mentions that they will make forward-looking statements that come with risks and uncertainties. The company assumes no obligation to update these statements and advises reviewing recent SEC filings for detailed risks. Additionally, management will participate in an upcoming investor conference hosted by Baird. Satish Dhanasekaran reports that Keysight exceeded revenue and earnings expectations, achieving $1.3 billion in revenue and $1.70 in earnings per share in the second quarter.

The company reported its second consecutive quarter of revenue growth, driven by strong performance in CSG and a rebound in EISG. Orders increased by 8% year-over-year, reaching $1.3 billion, and the company is optimistic about future opportunities and customer engagements despite an uncertain macro environment. The business benefits from a flexible cost structure and a diversified supply chain primarily in Southeast Asia, minimizing exposure to China. The company remains committed to long-term investments and capital returns, having returned over $1.7 billion to investors in the past 12 quarters. In CSG, strong demand was noted in commercial communications and wireline sectors, fueled by data center infrastructure expansion, ethernet technology deployment, and R&D investments in advanced technologies.

In the recent quarter, Keysight Technologies demonstrated a groundbreaking 448 gig per lane optical transmission solution, aiding in the advancement of 1.6 and 3.2 terabit networks. The company continues to lead in high-performance computing and networking innovation, seeing growth in wireless orders, particularly in 5G and early 6G research, and investments in non-terrestrial networks. Keysight's new digital twin and system emulation capabilities are expanding customer engagement in various sectors. The aerospace, defense, and government sectors reported strong order growth in the US and Europe, fueled by investments in spectrum operations and space applications. Despite the US operating under a continuing resolution, global defense modernization efforts and increased budget proposals are driving demand, and Keysight remains a key player, recently securing a significant contract with a major European defense agency to enhance its testing capabilities for critical applications like antenna and radar systems.

The paragraph highlights the company's steady release of new products and solutions, including enhancements in phase noise analyzers for defense and new digital communications analyzers for transceivers. In the electronics sector, revenue has rebounded despite mixed demand, with strong demand from semiconductor and silicon photonics sectors. The automotive segment has stabilized with continued OEM engagements, securing a significant deal for home energy systems. General electronics orders have grown for the third straight quarter, though growth is slowing, influenced by multi-industrial and med-tech sectors, but affected by reduced US education funding. Additionally, software orders, particularly for RF EDA solutions, have increased, with industrial interest in simulation and virtual prototyping growing.

The paragraph discusses Keysight's recent achievements, including their ESI acquisition which enhances industrial design for a European auto OEM, improving efficiency and production timelines. The company is pleased with market recovery and their team's performance in a dynamic environment. Keysight's diverse solutions position them for success across market conditions, with ongoing strategic investments in long-term technology trends. As they enter the year's second half, the focus remains on executing control measures and delivering value. Financial figures for Q2 include $1.306 billion in revenue, a 7% increase, with net income of $295 million and earnings per share of $1.70. Despite $7 million in new tariff expenses affecting margins and earnings per share by $0.04, the company reported a gross margin of 65% and an operating margin of 25%. The segment performance detail is expected to follow.

In the second quarter, Keysight's Communications Solutions Group reported a 9% increase in revenues to $913 million, with strong performance in both commercial communications and aerospace sectors. The Electronic Industrial Solutions Group saw a 5% revenue rise to $393 million, with growth in semiconductor and electronics offsetting declines in automotive and energy. Overall, software and services made up 36% of total revenue, and the company ended the quarter with $3.118 billion in cash, generating $484 million in cash flow from operations. Keysight issued $750 million in senior notes, partly to fund the acquisition of Spirent, which is under regulatory review. The Optical Solutions Group and PowerArtist acquisitions are expected to close soon after another major industry transaction. Additionally, Keysight repurchased over a million shares at an average price of $144, totaling $150 million.

The company has a diversified global supply chain with minimal reliance on China and is taking steps to mitigate the impact of tariffs. They have implemented various strategies, including adjustments in manufacturing, sourcing, pricing, and costs, to handle an annual exposure estimated between $75 million and $100 million. While maintaining customer relationships, pre-tariff backlog pricing wasn't altered. The company expects the most significant tariff impact in Q3 but plans for full mitigation by the end of the fiscal year. They report a $2.4 billion backlog entering Q3, with no notable adverse demand effects from tariffs, leading to raised growth expectations. They forecast FY '25 revenue growth at 5% to 7% and EPS growth slightly above 10%. Q3 revenue is expected between $1.305 billion to $1.325 billion, with earnings per share projected at $1.63 to $1.69, assuming current tariff levels persist. The paragraph ends with instructions for the Q&A session, starting with Tim Long from Barclays.

The paragraph discusses the impact of AI on the company's business, highlighting AI as a long-term growth opportunity aligned with their strategy to provide both physical and protocol layer solutions. The company is actively engaged with customers in addressing challenges related to AI workloads, such as in memory, compute, and networking, with new standards forming. They have had a strong quarter, with their wireline business growing by double digits in the first half, reinforcing their positive position in this emerging space and bolstering their confidence in achieving their full-year guidance.

The paragraph discusses the company's positive outlook despite uncertainties such as tariffs and macroeconomic concerns. Although there's no significant change in customer behavior, the company had a strong finish in Q2 and forecasts a solid Q3, supported by an increase in pipeline activity for the second half of the year. In response to questions from Matt Niknam of Deutsche Bank, it's noted that the company has revised its top-line growth expectations upwards by about 100 basis points, due to overperformance in the first half and a robust pipeline and backlog. Cash flow from operations was stronger than expected, and the company is monitoring risks while focusing on controllable factors.

The paragraph discusses a company's financial performance and outlook amid macroeconomic risks like tariffs and geopolitical issues. The company has not seen significant changes in customer behavior and anticipates a gradual market recovery, aligning with earlier predictions. They expect the fourth quarter to show seasonal strength, supporting their guidance increase. Cash flow has been strong, aided by a $60 million gain from a hedging contract related to a purchase, along with improvements in working capital, inventory, and lower tax payments. The paragraph ends with Mark Delaney from Goldman Sachs preparing to ask a question about tariffs.

In the paragraph, Neil Dougherty addresses a question about a $75 million to $100 million tariff exposure, clarifying that this figure is a gross annualized amount. Since the tariffs became effective in April, their impact will only cover a little less than seven months this year. The company aims to offset these costs progressively, with significant mitigation expected by Q1 next year. Without raising prices on backlogged orders, they are exploring various strategies to reduce overall tariff exposure, utilize their global supply chain, and either pass costs to customers through pricing strategies or cut costs in other areas. Dougherty highlights ongoing initiatives across these strategies to manage and mitigate tariff-related costs effectively.

In this excerpt from an investor call, the speakers discuss tariff-related strategies and impacts on their business. Satish Dhanasekaran mentions their resilient supply chain and operational adaptability, stating they are prepared for a 10% base tariff scenario and can adjust their operations and pricing strategies accordingly. Meta Marshall from Morgan Stanley queries the impact on the company's Aerospace and Defense sector, particularly concerning orders aligned with U.S. programs and the minimal impact from China. Dhanasekaran responds that he'll address the Aerospace and Defense inquiries, while Neil will handle the China impact quantification.

The paragraph discusses a strong quarter of growth in orders for a company, despite being limited by a continuing resolution that restricts new program growth. The company experienced double-digit order growth in Europe and received notable contracts, such as one from NATO to modernize radar systems and another from the U.S. Army for Zero Trust Security validation. The spending environment is robust, especially with a backlog from prime contractors. The company is optimistic about future opportunities, anticipating increased U.S. and European defense budgets. Additionally, it mentions limited tariff exposure related to U.S.-China relations. The paragraph ends with Aaron Rakers from Wells Fargo asking about the company's guidance for growth and incremental margins, referring to expectations set during an Analyst Day discussion.

The paragraph discusses the company's efforts to improve operating margins and the performance of their wireless business. Neil Dougherty mentions that while they expect business growth of 5% or more to result in a 40% increase in operating margin, new tariffs are a short-term challenge. Satish Dhanasekaran highlights stability and strength in the wireless business, particularly in network infrastructure and advancements like Open RAN and early 6G research. Although smartphone-related segments remain soft, especially in China, the company is investing for long-term leadership in wireless technologies. Additionally, the operator mentions that software and services have grown to account for 36% of the company's revenue, with recurring revenue nearing 30%.

In the paragraph, Satish Dhanasekaran discusses the company's strategy to accelerate growth by focusing on software and services, which have proven resilient during downturns. The company sees significant growth potential in the simulation business, highlighted by double-digit growth and recent acquisitions like ESI. These efforts aim to enhance their presence in the simulation space and increase software and recurring revenue while engaging with customers earlier in the design cycle. Additionally, as core business markets recover, the company anticipates potential shifts in revenue mix but remains confident in the long-term potential of software. Robert Jamieson then inquires about other test applications or demands within AI, beyond just high-speed interconnection and network infrastructure.

In the paragraph, Satish Dhanasekaran discusses the evolving challenges and opportunities in digital infrastructure for AI, particularly focusing on the importance of reliable interconnects and the rising costs of failures. He mentions that they're working closely with clients on mission-critical needs while also planning for future industry developments over the next five years. The rapid increase in AI workloads is creating a significant opportunity, and the company has made design wins in software emulation to help customers identify performance bottlenecks in AI data centers. Overall, they are expanding their contributions across physical and protocol layers.

The paragraph discusses the impact of supply chain realignment and tariffs on the general electronics business. There are ongoing discussions with customers about diversifying manufacturing locations to mitigate tariff effects. Neil Dougherty mentions that the tariff impact in the third quarter is more than double that of the second quarter, despite some mitigating actions. Satish Dhanasekaran notes that while areas like digital health and research remain stable, there is weakness in China. However, the shift in manufacturing footprints presents potential opportunities, although these are not yet significantly reflected in company results.

In a discussion involving Rob Mason, Satish Dhanasekaran, and Adam Thalhimer, the conversation focused on order trends and regional performance. Satish Dhanasekaran described Q2 as having steady order progression with strong funnel intake, particularly noting a robust April due to sales force compensation cycles. No significant changes in customer behavior were noted despite macroeconomic considerations. In terms of regional performance, Asia, including China, showed strong revenue, driven by commercial communications and semiconductor demand, though China's orders remained flat with strengths in certain sectors.

The paragraph features a Q&A exchange between Samik Chatterjee from JPMorgan and Satish Dhanasekaran about the drivers of wireline demand. Samik inquires about the sustainability of wireline demand and how it relates to customer R&D progress and volume outlook. Satish responds by highlighting that their wireline business is primarily R&D-focused, with approximately 80% attributed to R&D and 20% to manufacturing.

The paragraph discusses the growth and diversification in the company's portfolio, highlighting a significant shift in manufacturing while maintaining a strong R&D focus. It emphasizes the broad range of products offered, from early R&D to deployment, including tools like AWG, silicon photonics, and software for AI benchmarking. The company notes an increase in the number of customers, indicating an expanding ecosystem and a long-term opportunity. The R&D business is deemed more strategically valuable, though manufacturing demand is also anticipated to rise. Samik Chatterjee then inquires about wireline demand, specifically regarding CPU and silicon photonics technologies, hinting at a trend towards more semiconductor-level testing and questioning how the company is positioned to handle advancements from 400 gig to 800 gig and address related complexities.

The paragraph involves a discussion between Satish Dhanasekaran and analysts regarding the company's strategic shift towards optical technology and semiconductor testing. Dhanasekaran emphasizes the company's investment in silicon photonics and the integration of optical and electrical capabilities to meet growing market demands. They have showcased advancements in co-packaged optics and high-speed transmission capabilities, such as 448-gigabit transmission, which are critical for increasing data rates. Dhanasekaran believes they have a strong foundation to capitalize on this technological shift and anticipates that their market content and value will increase as they transition from copper to optical solutions, moving from 800 gig to 1.2 terabytes.

In the paragraph, Satish Dhanasekaran discusses the increasing content in system-level tests and semiconductors, highlighting that some applications favor electrical solutions for better economics, while others require optical solutions for performance. He emphasizes a hybrid approach as necessary and beneficial given the company's capabilities across various technologies such as memory, compute, and networking. As technology complexity rises, the company's value add to customers also increases, although market volume may shift as technologies mature. Overall, this overlapping of technological waves supports the company's long-term growth expectations in the range of 5% to 7%. Mehdi Hosseini asks Neil Dougherty a follow-up question about the company's fiscal year '25 revenue guidance and operating margin, suggesting that margins might decline slightly from April to July but would stabilize by October, leading to relatively flat operating margins compared to fiscal year '24.

In the paragraph, the speaker anticipates that market conditions will remain within a narrow range, with an expected seasonal increase as they transition from the third to the fourth quarter. The expectation is for strong incremental growth, assuming there are no tariffs affecting the flow. Mehdi Hosseini acknowledges the comment, and the operator then concludes the Q&A session, handing over to Paulenier Sims for closing remarks. Sims thanks the participants and the call ends.

This summary was generated with AI and may contain some inaccuracies.