Keysight Technologies, Inc. (KEYS -0.20%) reported results for the second quarter of fiscal 2025 on May 20, 2025, delivering $1.31 billion in revenue and $1.70 in adjusted earnings per share, both above guidance. Orders increased 8% year-over-year and 4% sequentially, driven by double-digit growth in commercial communications and sustained demand in strategic R&D end markets. The company raised its full-year growth outlook for FY2025, highlighting strong operational execution, robust end-market demand, and effective capital allocation, while providing detailed updates regarding tariff impacts and mitigation strategies.

Robust Demand in High-Growth End Markets and Expanding Addressable Opportunities

Recent orders strength is being fueled by accelerating adoption of next-generation data center architectures, demand for advanced wireline and AI data center technologies, and expanding customer engagement in both electrical and optical domains. Software and services contributed approximately 36% of total sales, while annual recurring revenue reached 28% of the mix.

"R&D investments in 1.6 terabit electrical and optical technologies as well as expansion of new protocols in AI data center networks are fueling demand as the entire industry is innovating and developing new applications and services. This quarter at OFC, we demonstrated the industry's first solution for 448 gig per lane optical transmission, a key building block in the deployment of 1.6 and 3.2 terabite networks. The depth and breadth of Keysight's capabilities in the electrical and optical and wireline protocol stacks positions us well to enable ongoing innovation in high-performance computing memory and networking."
-- Satish Dhanasekaran, President and CEO

Keysight’s technological leadership and early product milestones in emerging wireline and data center standards position the company to gain share as customers accelerate digital infrastructure transition, supporting sustainable mid- to high-single-digit revenue growth.

Disciplined Tariff Mitigation and Operational Agility Ensure Margin Protection

Gross margin was 65%, with operating margin reaching 25% and expanding by 100 basis points year-over-year, despite incurring $7 million in new tariff-related costs, equivalent to a 60-basis-point margin drag (non-GAAP). Management has quantified annual gross tariff exposure at $75 million to $100 million, with less than 10% of total tariff exposure tied to US-China flows, and expects to fully mitigate these costs through a combination of supply chain actions, pricing strategies, and operational efficiencies by the end of fiscal year 2025.

"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. Our multi-pronged mitigation approach spans our global manufacturing footprint and sourcing strategies as well as pricing and cost actions. Based on actions taken to date, we estimate our gross annualized exposure at approximately $75 million to $100 million. We are working to further reduce this exposure and offset any remaining impact. Given the high priority that we place on maintaining our long-term customer relationships, our pricing actions were not applied to pre-tariff backlog. As a result, and assuming tariff rates remain at current levels, the most significant tariff impact is expected in Q3 FY2025, with full mitigation by the end of FY2025."
-- Neil Dougherty, CFO

Keysight’s proactive supply chain management and targeted pricing actions are set to contain the gross profit impact from tariffs.

Strategic Capital Deployment Underpins Recurring Revenue and Growth Platforms

The company generated $457 million in free cash flow, ending with $3.1 billion in cash and cash equivalents, and has returned over $1.7 billion to shareholders via repurchases over the past twelve quarters (roughly 50% of free cash flow). Acquisitions, including Spirent (pending closure in Q3) and two smaller software assets, are reinforced by organic investments—specifically targeting expansion in simulation and emulation software capabilities aligned to next-generation design and manufacturing trends.

Dhanasekaran also highlighted Keysight's double-digit growth in its simulation business in Q2 FY2025, by going down the acquisition route. The company benefited greatly from its acquisition of ESI, and is potentially looking at two more acquisitions as a result of the Synopsys-Ansys transaction. He believes this not only helps Keysight increase its software and services recurring revenue, but allows it to "engage with our customers earlier in the design cycle, which...fits our strategy of being a bigger player in the R&D parts of our market".

Keysight’s strategic focus on software-driven revenue and simulation tools enhances recurring revenue streams, diversifies its solutions portfolio, and deepens customer integration earlier in the R&D workflow—strengthening competitive moats and supporting long-cycle growth.

Looking Ahead

Management raised its FY2025 revenue growth expectations to the midpoint of its 5% to 7% long-term model and now expects annual non-GAAP EPS growth to slightly exceed the 10% target, anticipating revenue between $1.305 billion and $1.325 billion in Q3 FY2025, and non-GAAP EPS between $1.63 and $1.69 in Q3 FY2025, based on 173 million shares.

The full-year FY2025 guidance assumes tariffs remain at current levels, with the most substantial impact in Q3 FY2025 and full mitigation actions realized by fiscal year-end. Spirent’s acquisition is on track to close in Q3 FY2025, while additional software acquisitions are expected post-Synopsys-Ansys transaction.