Keysight Technologies, Inc. (KEYS) | The Buildout — AI Infrastructure
The Verdict
Keysight is a global leader in electronic design and test solutions, manufacturing instruments, software, and systems that engineers use to validate high-speed interconnects, optical components, and semiconductors. In the AI infrastructure buildout, its tools ensure that the GPUs, switches, optical links, and memory fabrics inside hyperscale clusters work together reliably at ever-increasing speeds. The portfolio spans from physical-layer test to full-system emulation, making Keysight a broad enabler across the AI stack.
| Market Cap | — |
| Revenue (TTM) | $6.1B |
| Revenue Growth | +19.2% |
| EBITDA Margin (TTM) | 22.5% |
| Net Debt | $347M |
| Earnings Beats | 7 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- AI-related revenue reached $500–600M in the first half of FY2026, equal to the entire prior year, and the AI customer base doubled.
- Record orders of $2.05B (+56% YoY) produced a book-to-bill above 1.1x, providing multi-quarter revenue visibility.
- Adjusted gross margin expanded 300 bps to 67.6%, and incremental operating leverage hit 49%—well above the historic 40% target.
- Defense revenue grew 24% YoY and semiconductor wafer test wins added a second secular tailwind, reducing dependence on any single trend.
- Vertical integration and a $200M capex raise enable supply chain control and faster capacity expansion to meet AI product demand.
What We’re Watching
- AI spending could prove lumpy; Teradyne’s cautious H2 commentary and Arista’s supply de-commits signal potential for moderation.
- Hardware surge has driven software/services mix from 40% to 36%, pressuring valuation if recurring revenue share continues to shrink.
- New product introduction ramp—management flagged the ‘unprecedented ramp’ of AI products; revenue conversion may lag order growth.
- Long-term growth algorithm: management deflected on updating the 5–7% organic growth target, leaving normalized growth uncertain.
The thesis is strengthening. A structural AI-test super-cycle is visible in doubling AI revenue, record orders, and widening margins, with the defense and semiconductor tailwinds adding breadth. The key open question is whether the current pace of AI infrastructure spending can persist and whether production ramps can convert the record backlog quickly enough to sustain the raised guidance.
Earnings Beat
Keysight’s Q2 FY2026 revenue rose 31% reported (35% adjusted) to $1.72B, and adjusted gross margin expanded 300 bps to 67.6%. Orders surged 56% to a record $2.05B, driving the book-to-bill above 1.1.
| Metric | Q2 FY2026 | Q1 FY2026 | Q2 FY2025 | YoY |
|---|---|---|---|---|
| Revenue | $1.7B | $1.6B | $1.3B | +31.5% |
| Gross margin | 68.6% | 62.2% | 62.3% | +630bps |
| EBITDA | $489M | $286M | $275M | +77.8% |
| EPS | $2.02 | $1.62 | $1.49 | +35.8% |
| Orders | $2.051B | n/a | $1.315B | +56% |
Keysight delivered the best quarter in company history.— Satish Dhanasekaran, CEO, May 19, 2026
Management tone: Management’s tone shifted from optimistic to exuberant, with the CEO describing Q2 as the company’s best ever and the CFO calling results exceptional. They raised full-year guidance by a significant margin and announced a mid-year capex increase, signaling confidence in demand durability. They were direct on most questions but deflected on updating the long-term growth algorithm.
Management Guidance
For Q3 FY2026, management guided revenue of $1.730–1.750B, up 29% YoY at midpoint, and adjusted EPS of $2.43–2.49. Full-year FY2026 revenue growth is now expected in the high-20s percent range, raised from the prior ‘just above 20%’ view, and capex was increased to $200M. The Q4 is expected to see a historically typical sequential increase, implying the second half materially above the first half. Acquisition revenue is projected at $375M with over $100M in cost synergies, and 80% of synergies reaching run-rate by fiscal year-end.
Trajectory
From $1.3–1.4B per quarter in FY2025, revenue stepped to $1.6B in Q1 FY2026 and $1.72B in Q2, while adjusted gross margin jumped to 67.6% from the 61–63% range. The acceleration is driven by AI wireline test demand—both the R&D and manufacturing components doubled—and by broad-based strength in defense and semiconductor test.
The Model
The model projects FY+1 revenue of $6.9B and EBITDA of $1.79B (26.0% margin). FY+2 steps further to $8.25B in revenue and $2.38B in EBITDA, implying a 28.8% margin. The FY+1 estimate is anchored by management’s high-20s revenue growth guide and the strong order momentum; FY+2 incorporates continuing AI-driven test demand and margin expansion from operating leverage.
| Metric | FY2025 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $5.4B | $6.9B | $8.2B |
| YoY Growth | — | +28.4% | +19.6% |
| EBITDA | $1.2B | $1.8B | $2.4B |
| EBITDA Margin | 21.4% | 26.0% | 28.8% |
Projections are the median of 5 independent model runs. The model’s revenue sits 7.9% above analyst consensus.
For Q3 FY2026, management guided revenue of $1.730–1.750B, up 29% YoY at midpoint, and adjusted EPS of $2.43–2.49. Full-year FY2026 revenue growth is now expected in the high-20s percent range, raised from the prior ‘just above 20%’ view, and capex was increased to $200M. The Q4 is expected to see a historically typical sequential increase, implying the second half materially above the first half. Acquisition revenue is projected at $375M with over $100M in cost synergies, and 80% of synergies reaching run-rate by fiscal year-end.
What Could Go Right — and Wrong
- Sustained AI infrastructure build-out through 2030 pushes revenue growth above 30% for multiple years, with incremental margins remaining above 40%.
- Open standard adoption (UEC, co-packaged optics) solidifies Keysight’s early design wins and widens the addressable market.
- Rapid scaling of new product introductions converts the record backlog faster than expected, lifting FY+2 revenue beyond $8.5B.
- Defense and semiconductor tailwinds accelerate, providing additional uncorrelated growth and diversifying the revenue base.
- Software and services mix recovers as emulation and design automation products ramp, restoring recurring revenue to above 40%.
- AI spending cycle peaks; hyperscalers digest capacity, causing order growth to revert to single digits and revenue to miss model projections.
- NPI ramp delays or supply chain bottlenecks prevent conversion of the $2B+ orders, pushing revenue into later quarters or causing cancellations.
- Hardware-heavy mix persists, with software/services below 35%, leading to multiple compression as investors discount recurring revenue quality.
- Customer concentration increases if a single hyperscaler dominates the AI backlog, introducing contractual liability risk and pricing pressure.
- Competitive technology shift (e.g., integrated test platforms from rivals) erodes Keysight’s full-stack advantage and market share.
Looking Ahead
Over the next 12 months, Keysight’s trajectory will be shaped by the ramp of new AI test products, the pace of hyperscaler capital spending, and the integration of the VPIphotonics acquisition. The Q3 earnings call will be the next checkpoint for guidance and backlog conversion, while industry events like the 3GPP 6G standardization timeline and NTN direct-to-cell deployments could open additional demand channels.
- Late August 2026Q3 FY2026 earnings call — Tests whether management can convert the record backlog and sustain high-20s growth guidance.
- H2 FY2026NPI ramp milestones — Production scaling of AI Inference Builder and scale-up validation products; revenue conversion pace becomes visible.
- Next few quartersNTN direct-to-cell deployments — Could generate PNT/wireless test demand, leveraging Spirent acquisition.
- FY2027 onward3GPP 6G standardization — Timeline solidification may catalyze early 6G test orders.
- OngoingHyperscaler capex decisions — Primary driver of AI test demand; news flow from NVDA, AVGO, and cloud providers will directly impact order funnel.
Financials
Annual Summary
| Metric | FY2025 | TTM |
|---|---|---|
| Revenue | $5.4B | $6.1B |
| Gross Margin | 62.1% | 63.7% |
| EBITDA | $1.2B | $2.5B |
| EBITDA Margin | 21.4% | 22.5% |
| Net Income | $846M | $1.1B |
| Free Cash Flow | $1.4B | $2.8B |
| Net Cash | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)63.7%
- EBITDA Margin (TTM)22.5%
- Net Margin (TTM)17.2%
- ROIC13.1%
- FCF Conversion105.9%
- SBC / Revenue3.3%
The Company
Keysight Technologies is a global leader in electronic design and test solutions, making instruments, software, and systems that engineers use in R&D, validation, and manufacturing. Its tools validate high-speed interconnects, optical components, and semiconductors that power AI data centers, defense systems, and wireless networks. The portfolio spans from physical-layer test to system-level emulation, making it essential for ensuring the interoperability of components driving the AI infrastructure build-out.
The company is vertically integrated, producing many of its own specialized chips and assemblies in-house. Its largest manufacturing hub is in Penang, Malaysia, with additional major sites in Santa Rosa, California; Colorado Springs, Colorado; and Boeblingen, Germany. Keysight reports two segments: the Communications Solutions Group (CSG), which covers commercial communications and aerospace/defense, and the Electronic Industrial Solutions Group (EISG), serving automotive, semiconductor, and general electronics. Recent acquisitions of Synopsys’ optical design business, Spirent Communications, and VPIphotonics have added photonics and emulation capabilities.
Business Segments
Competitive Landscape
Keysight’s portfolio breadth—electrical, optical, software, and emulation—creates a competitive moat, as no single rival covers the full AI test stack. Core order growth of 48% suggests market share gains. Two named competitors, Teradyne and Viavi, compete in semiconductor ATE and network test, respectively.
- TeradyneKey rival in semiconductor automated test equipment (ATE); launched a co-packaged optics test platform. H2 guidance widened with caution on compute digestion, a potential headwind if AI test demand softens.
- ViaviCompetes in network test and monitoring; NSE revenue +54% and CPO test ramping, directly corroborating Keysight’s optical/wireline strength.
Supply Chain
Keysight sits at the center of the AI test value chain, supplying instrument and emulation platforms to hyperscalers, network vendors, and semiconductor foundries. Its vertical integration provides some supply chain control, while it depends on external suppliers for key components.
More on KEYS: Earnings preview