The following session is not open to the press. The following session is not open to the press. Okay. Okay. All right. Great. Thank you, everybody. Thank you, everybody, for joining us. My name is Mark Delaney, and I have the pleasure of covering Keysight for Goldman Sachs. Really pleased yet again this year to have with us from Keysight Satish Dhanasekaran, the CEO, and Neil Dougherty, the CFO. Really appreciate you both taking out the time yet again this year. Can't believe it's been a year. We're excited to be here. A lot of interesting things have been going on in the industry. I thought maybe first to start with a little bit of a higher-level question. Keysight, as many of you all know, is a provider of design, emulation, and test solutions. A large percentage of your over $5 billion of annual revenue is tied to customer R&D applications. What has allowed Keysight to be such a key part of customer workflows in markets like A&D, communications, auto, and industrial? Yeah, Mark, it's a great question. I think when we think about the company, since we have spun out of Agilent and have been an independent public company, it's been our consistent focus on taking a business that was largely hardware products-oriented and shifting our investment mix to go realize the bigger opportunity to be a software-centric solutions provider. Along that journey, we quickly also realized that the transformation that's underway is shifting the mix of the customers we cover from maybe more manufacturing-oriented, highly cyclical, to less cyclical, more R&D, cycler R&D-oriented opportunities. What makes us unique in that journey is the deep, rich technology stack we have that we have invested in over multiple decades in the company, both hardware and software, and just the culture of the company that is extremely collaborative that then orients us to go and engage in deep partnerships with our customers. We've sustained it now over a decade as an independent company. The more we see ourselves as enablers of our customers' innovation, the more opportunities that are open for us to make deeper contributions. That's a great starting point and a lot for us to dig more into during the next 30 to 35 minutes. I want to talk a little bit around markets, if I could. Keysight has had five consecutive quarters now of year-over-year order growth coming after what had been a recent downturn. When you look at your business overall, what should investors take away about where the company is in the cycle? Yeah, it's very important takeaways. One, since the company was formed as an independent company, we've been on an upswing of growth and expansion. How would the company perform in a downturn was always a question mark. I think we heard this from investors. Neil had put out at 2023 Investor Day, we started to see a downside model of negative 10%. A, we performed to that model, and the business performed to the model, and the business model and the operating model that we have held. Coming into the recovery this year in our markets, we saw a mixed market recovery as an outlook. We said, look, our markets might grow at the low end of our expectations this year, and I think it's largely held to our expectation. We have outperformed our markets yet again, as we would expect to, primarily because we were able to invest during the downturn in innovations that enable us to now go ahead and monetize in areas such as AI, where the market's been expanding and we're outgrowing the market. We're also beneficiaries of more stability in defense spending, some bounce in our wireless that has been better than expected. All of these are factored in. At the core of it, we serve our engineering customers, and everywhere I go talk to them, they're all trying to innovate faster. I think working with Keysight gives them an advantage to do so. This next question on tariffs really can be applicable to either of you. On the last earnings call, you provided an update on the steps the company is taking to mitigate some of the tariffs. I know that's been an evolving policy backdrop. Talk a little bit more on the steps, if you could please, that the company is taking to offset tariffs. Yeah, happy to do that. I think the first thing that we had to do was just realize that prior to Liberation Day in early April, we were operating in a world without tariffs, and things weren't optimized for the new reality. We made some pretty significant changes to the way we were moving material and inventory around Keysight to ultimately reduce the tariff exposure. I think now we're focused on a few things. We have a pretty diverse manufacturing footprint ourselves, primary manufacturing in Malaysia, second though would be in the U.S., and then we have other manufacturing locations around the world. Our big subcontractors obviously have global capabilities as well. Trying to find the right mix between tariff rates and how to use the capacity that exists in this ecosystem. In addition, there are potentially opportunities to work with customers, for example, in the defense industry that may be exempt from some of these tariffs or to accelerate the reclamation of some tariffs where you see things imported into the U.S. only to be re-exported. Those are all things that can help to minimize the exposure. Beyond that, we are taking action to pass the remaining costs onto our customers via surcharges and pricing, but really placing a priority on maintaining those long-term customer relationships. We're doing that on a prospective basis. We're honoring outstanding quotes. We're not repricing backlog. It's going to take a little bit longer, a couple of quarters for us to fully realize those offsets, but we think we'll benefit in the long term via maintaining those long-term customer relationships. I think you said on the last earnings call, even with some of the more recent tariffs that have been put into effect, you thought you could fully mitigate them within the first half of this coming fiscal year? That's correct. That's correct. As you pass through cost at no extra markup, it can be just a mechanical drag to the margin%, even though there's not a hit to profit dollars. How impactful might this be to margins as you're seeing? Yeah, I mean, I think that's exactly right. We're going to get the tariffs offset on a dollars basis, which means there'll be no earnings or EPS impact. To the extent you're offsetting it with price, it is margin dilutive. You could see a% or more of gross margin dilution that comes from this over the longer term. I think Satish and I both continue to believe that there's gross margin upside in this business as the recovery progresses. We'll get more into the longer-term margins later in the discussion. I want to talk on the revenue outlook first for this year. The company is now expecting revenue to be at the higher end of its 5% to 7% target. Maybe double-click a little bit on that. How much is it from better business performance, and how much is maybe tariff pass-through? Tariff pass-throughs are small. I would just attribute most of it to outperformance in the business, strength of our portfolio, and our ability to capitalize on opportunities we see in markets such as wireline, where we see tremendous strength, and other end markets. I'm sure we'll talk about that. Okay. Now you talk about the business mix. In fiscal 2024, software and services was 39% of the company's total revenue, and recurring revenue was about 30% of the company's total. When you think long term, where do you think software and service and recurring revenue can get to as a percentage of the total company? Yeah, Mark, higher is the simple answer. At 2023 Investor Day, I talked about the next milestone for software being 30%. I think we have some ways to go, but we're tracking to that. We'll be continuing to drive that. Services, we see a really good opportunity to continue to expand our contribution to customers, especially as we do more system integration projects. They're so complex, our customers would naturally want us involved in supporting their installation. I think we have a good set of opportunities to execute too. Definitely higher. I think both software and services give us the opportunity to realize our strategy, and we're continuing to invest in it. I would just point out the recent acquisitions that we announced. Both of them have gross margins that are north of company average. I think that, again, continues to drive that gross margin up at the company level. When you talk about the recent acquisitions, you're talking about Spire, and you mean sort of the Ansys? All of them in aggregate, and each of them individually. Okay. As you think about the different parts of the Keysight portfolio, are there certain segments of the business that are more software and services oriented? I think I would say that innovation for the entire industry in commercial is really our commercial communications end market, where we are further along in progressing our R&D strategy, and therefore, by definition, also further along in terms of progressing the software-centric transformation. It's at the front end. That's where we invested first, and we're continuing to progress there. You will continue to see also a natural tendency for platforms of our customers moving to more software-centric architectures. The nature of design and test work is moving to more simulations, emulations in that end market. That's where it all starts, but it doesn't end there. Our aerospace defense industry is where we would say the services opportunity has still got many legs to run. Our industrial markets as well as we progress our strategy. Starting with commercial comms and then into aerospace defense and then into industrial. You spoke earlier around the business holding up in a downturn relative to your expectation. It is a cyclical industry, but at the same time, you're growing these more recurring parts of the business. As you look at the last downturn, how much more defensive were these more recurring parts of the business, and did they, in fact, end up holding up a bit better than some of the hardware and product parts of the business? Yeah, I'd say if you think of, you know, we tend to look at some of our peers and how they performed, and we look at our performance relative to them. We also look back and we say in prior cycles, our business was probably down 30%, 2008 being the most public one. Whereas you look at this particular cycle, we had sort of looked at a business model that would be at a negative 10%-ish, and that's where we ended up. We talked about a margin performance that's 300 basis points below our peak, and that's where we ended up. I'd say the performance of the company really validates the business model and the strategy that we've put in place. A big part of that is the stability from servicing a diverse set of industries, including the ability to grow our wireline business in 2024 when everything else was down. That provided an offset. The fact that we have software and services, which provides tremendous stability, validates the direction, and we want to continue to accelerate it moving forward. That's very helpful. Emulation and simulation are areas where Keysight has expanded its capabilities. How much of your revenue today comes from those solutions, and how big is the opportunity longer term? Yeah, I'd say we've publicly said 60% to 70% of our revenue is still in the core business, the instrumentation business. By definition, that means roughly 30% to 35% is in these expansion areas that we have continued to build. We see more opportunity to expand in these areas because they're a green space for us in many areas as we engage. An example would be, you could say through the AI inflection in the wireline industry, there are physical layer tools that go servicing that industry as well. Equally, we're excited by the opportunity to get into benchmarking and emulations of these complex systems that our customers are putting in place and evaluating how the AI application runs on those systems. I mean, that's a new opportunity. We're only able to do that because of the capabilities we have. Okay. That's very helpful. Maybe we could dig more into some of the different end markets and starting with commercial communications. It's about 45% of Keysight's total revenue. In the third quarter, both wireline and wireless revenue grew double digits year on year. Some of that cyclical pickup you referred to earlier. Can you give us a sense of how the commercial communications business further splits out between wireless and wireline, especially given some of the recent wireline strength? Yeah, I mean, the commercial communications marketplace is very innovation-rich, and the intensity tends to be higher across the board. Customers are competing, and they're investing to get an advantage. I think as Keysight, we see our role as really providing them the solutions that give them a time-to-market advantage in R&D. If you look at the split of the business historically, it's been slightly more weighted towards wireless versus wireline. With the changes that have happened now, double-digit growth in our wireline business in 2024, double-digit growth this year, very likely to finish in that ballpark. We're going to set a record revenue for our wireline business this year, and we see more opportunities with AI progressing through. Our wireless business is following a very traditional S-curve pattern where once post-deployments, things tend to cycle down. The innovation intensity is a little bit lower. What we're now seeing is an increased intensity from our customers for the first time in a couple of years. We're seeing that customers are feeling the slightly higher sense of urgency, I should say, to adopt new innovations that are on the table. Especially non-terrestrial network is a great example. With some of the standards work that started in 6G, we're starting to sense that customers are starting to look forward. Again, it's a good sign of things to come with AI being, again, in the RAN context, becoming an important driver for them. More to come on this. It's still in the early days, but I feel we're good about the stability we've reached in wireless and the opportunity ahead in wireline. Maybe we could continue on the wireline theme. How important is AI for that part of your business? Oh, pretty significant driver, right? I mean, you go back to 2022 and you look at the state of the industry, obviously cloud and enterprise deployments of cloud and telco were large drivers for that entire wireline ecosystem that we serve, which is people that make chips to hyperscalers and so on and so forth, and network equipment manufacturers. Today, in the last couple of years, what we've seen is pretty significant investments from customers trying to innovate around the multiple dimensions: compute, memory, storage, system integration challenges that they face on the hardware side, but equally on the emulation side. The industry is really innovating, and that innovation shows up as multiple waves of technology evolutions that would take three to five years out are now being pulled in. That's where we see the intensity remains very high, and we're capitalizing on it. Okay. On the last earnings call, the company highlighted that it launched a protocol layer solution for validating 1.6 Tbps performance. When do you expect that technology to be deployed at customers? Yeah, I mean, customers are rapidly pulling technology and working on making it more industrial. I would say you think about the difference it took from 100G to 400G adoption, and we're seeing a faster climb for 800G and even a faster pull for 1.6 Tbps right now. We're still in the early days of 1.6 Tbps for our business in terms of R&D tools. We just had the industry's first announcement, and customers are already talking to us about 3.2. It's a very dynamic, innovation-rich industry. On the wireless side, you reported solid revenue growth last quarter. You also said it's more stable. You spoke about this a little bit already, non-terrestrial networks and some early 6G. As you think about the wireless part of your business, can you sustain these sorts of levels? I mean, how stable was this business prior to the 6G cycle? Yeah, you know, 6G and some of the new innovations will continue to be the driver of growth, and we feel good about 5G stability. I think there's still some legacy 4G business in the mix at much lower levels. I don't know if we will keep this double-digit growth. I'm not going to forecast this right now. We feel good about two things, right? We feel good that our customers are returning to focus on innovation and the pull right now. Even if it's in a few areas, the pull is becoming more real. That's number one. The second is through the downturn, given the business model we had with high recurring revenues associated with our emulation business and the profit profiles, we've been able to invest in what's coming next. That gives me confidence in our own roadmap that we have that will be more relevant to our customers in the future than we are today. When do you think 6G will become a meaningful part of the business? It's an interesting one. I'll let you know when it does. I would just say that, look, it's again a very familiar S-curve-ish. If you start to look at some breadcrumbs that are there around deployment and you say deployment is in the 2029-2030 timeframe, I think customers start to build up their stack, start to build up their IP. They're starting now. I think that forms a good runway for us to grow into. Maybe much more important than when exactly we're going to be able to have 6G phones and devices, let's talk about Keysight's positioning within that technology. You're a strong leader in 5G, so help us better understand the steps Keysight is taking to ensure it remains in that leadership position for 6G. Yeah, again, I'd say throughout 2023 and 2024, we kept investing on what's next, balancing supporting our install base in 5G with looking at what's coming next. Some of the areas that we had foreshadowed or we'd seen were around the spectrum moving to higher frequencies. I think the FR3 band, as we call it, I think having solutions for customers there. The channel emulation offerings that we have put in place already, we've started to get some bookings for. This customer is trying to model what the channel will look like under a various range of scenarios. We also see use cases such as integrated sensing and communication becoming part of the future infrastructure. We identified maybe a portfolio gap we had in terms of satellite simulations. We made the acquisition of Spire, and I think that's going to give us more ability to serve customers in that area. We feel good about where we are, the emulation capabilities we offered our customers in 5G. I think it's going to really help us also as 6G rolls out. It's still quite early innings, and there's a lot more work ahead from a standards perspective in the next year that will unfold. Given the rise of the commercial space and satellite industry, can you help investors better understand how big those markets are and what types of solutions Keysight delivers there? Yeah, I think our ability to emulate complex systems in a lab is really what the business is. It's one thing when you just have satellites in the sky and you're using it for 9/11 or any of those sort of position tracking. I think what's happening now is customers want to be connected all the time under various geographic conditions. I think having satellite as an overlay to traditional networks is a use case that T-Mobile has announced already some services on, and there's additional ARPU that some operators are looking at. This whole spectrum moves that have been announced recently is again synergistic to this position that people feel like, I think, augmenting satellite with ground coverage could provide a much more seamless experience for users. This is for mobile users today, but even for infrastructure in the future, I think that overlay will provide a very strong set of use cases for defense, security, and a whole bunch of applications that are to come. We see a good trajectory there. What we're working with customers on is emulating how their designs would behave in the midst of this sort of complex dynamic. Lots of innovation underway, and we feel we're well positioned there. Okay. Really interesting stuff. Maybe we could dig a bit more into the aerospace and defense part of your business. A&D revenue is up 7% year to date after being down last year. Can you comment on what's driving this growth? Yeah, I think we've talked about defense spending drivers, right? Even though this year in the U.S., we've been under continuing resolution and there was a U.S. administration change. In Q1, you remember I called out that we've had a slower start. Equally, I said, you know, I wouldn't be surprised if we had a stronger rebound in the later half because this is sort of the nature of this business. Harder to forecast every quarter, but quite easy to forecast if I look long range. I look back at this business in the last five years. We've grown at a 5% CAGR. Pretty consistent clip if you think of it because this tends to be programs that once you're specced in and you're working with, it's got a pretty good recurring business rate associated with it. We feel good about the areas we're engaged in. Electromagnetic spectrum operations is a key area where we're focused on building our stack up. Now we're building more complex racks for customers, which gives us more services capabilities as well that we can layer on as we monetize our capabilities. In general, innovation around defense modernization is seen as very critical to national security in the U.S. That was the U.S. being a driver. What we're now seeing with the push for NATO to take up defense spending is increased investments through the prime contractors in Europe, but also formation of new companies in Europe where Europe is feeling like they have to also invest in their own sovereign capabilities. I feel in this geopolitical environment, you know, we're well positioned to provide the tools as these local capabilities manifest itself in each of these regions. As you think about that European and allied nation spending and some of these announcements that have come out over the last 6 to 12 months or so, how well positioned do you think Keysight is to be able to address those? I mean, you're headquartered in the U.S. I think U.S. DOD has been a very material part of this business in the past. No, it has been. It's roughly, you know, I'd say 50% of our business is in the U.S. The rest has been international. A big part of it is in all of, you know, probably we have sizable R&D presence in Europe and in different countries in Europe. We have local integration capabilities in Europe as well. We're well positioned already with infrastructure, with the credibility of delivering to customers and strong relationships there. As and when we see an inflection in the defense spending manifest in programs there, we're having conversations with customers today that indicate that it's coming. It's not yet reflected in our business yet. It's upside as you're going forward. There's more upside internationally. I know we just talked about how the business has grown pretty well year to date now, and you've seen some recovery, but DOGE was quite the effort from the administration. We got a lot of questions from the investment community about whether or not that would affect companies like Keysight. Did you guys see any real hit to your business and anything that we should be aware of on that front? No, we didn't expect to see it, and we haven't seen it yet. In fact, as you think about 2026, we're going to have a defense spending budget that's highest ever and an RDT&E budget that's also double-digit growth in RDT&E. I think it should be a good environment for customers to push their programs through. Those DOE efforts were really about rooting out inefficiency, not about clipping investment in defense technology, which is where we play. Yeah, no, it makes a lot of sense. Maybe we could speak on the EISG segment that makes up about 30% of Keysight's total revenue. You've got exposure there, of course, to general electronics, semiconductors, as well as automotive. Maybe starting with your semiconductor business, you called out robust demand for wafer test solutions recently, and you've also said that this part of your business could be a beneficiary from AI. Maybe talk a little bit about the AI piece, excuse me, the semi-piece of EISG. Yeah, the semi-piece of EISG is roughly 10% of company revenues, right? When you think about the mix of the business, the wafer test is the highly profitable part of our business, highly differentiated, and it's on the front end of what customers need to characterize their wafers. Especially when there's new node sizes or there's new technology inflections, it tends to be a rich beneficiary, and that's what's playing out. If you look at what's driving this change, AI, you have high bandwidth memory from a memory perspective, the push to 2 nanometers, and also customers and fabs looking at silicon photonics as a viable technology. I think all these three are creating a strong foundation for the business results this year, and we also think it gives us a strong foundation as we look ahead. Sticking with the EISG segment, you highlighted that general electronics end market grew year over year for the second consecutive quarter. Maybe help us better understand what this business encompasses, because I think it could touch a lot of different areas. Yeah, so exactly. It really is a broad business, consumer electronics, education end markets, digital healthcare are all in there. I think within this broad envelope, there are a number of different submarkets we track, and they were all positive in the most recent quarter, including those education end markets where a lot of it is advanced research. Similarly, the med tech markets were up. You just mentioned earlier that there was a little bit of a halo effect from AI into semi. I think we're seeing a similar impact in the general electronics business. When you think about things like cables and connectors and PC boards and stuff, that would be more general electronics manufacturing, but definitely related to this scale-out of the data center, you're getting some uplift from that. Okay, very interesting. That would suggest it might be sustainable then. It's not just sort of an inventory restock or something like that. Yep. Okay. The other area within EISG had been somewhat softer, although last quarter you said you'd seen some stability on a year-over-year basis, sequentially more stable. What's contributing to that relative improvement within the auto part of the business? We think the manufacturing, you know, auto, obviously it's much more R&D than manufacturing, but we've had a manufacturing component that's bottomed out in the last couple of years. There is not much downside risk there. What's really holding the business and customer interest is this move for software-defined vehicles, right? Companies are looking to invent more of the stack in-house versus outsource it. I think all those are creating opportunities for us to supply them the basic set of tools that they need. I see maybe some early signs of stability in this business. The large EV, which drove a lot of the investment, has also bottomed out because there used to be a lot of programs for EV with China's batteries coming online. It's almost like the solar type of a situation. The prices of batteries have fallen so dramatically. I think that's sort of cratered out. I think the focus now for every automaker is on reinventing their technology stack and moving forward. I think those innovations look to be more sustainable as we look ahead. How should we think about the geographic distribution of your customer set within auto? We're seeing a lot of growth out of the Chinese auto OEMs. They're not even just selling in China. They're expanding internationally, including in Europe. How much of your business is tied to some of those companies versus Western OEMs? We have a diversified business, but largely, I would say if there's any concentration, it would be on the European OEMs, right, where our auto business is headquartered in Europe, and we've had a foothold there for quite some time. We did just recently announce an engagement or progress with NIO. We are playing in the Chinese markets as well as the other big auto ecosystems around the world. If it skews any direction, it's towards Europe. Okay. As you think about the other bigger Chinese auto companies, are they customers of yours? Just small, or do you not have much of a presence as you think of some of these other Chinese auto OEMs? I would say small. Small. On a relative basis, yeah. Okay. Curious as well, I mean, you spoke a little bit around some of the trends on the EV part of the auto business. Is there any opportunity for additional downside there as you think about it, or do you think that that's pretty stable at this point? I think as he said, it's pretty de-risked. I think we're largely bouncing along the bottom, but I think certainly any downward moves are likely to be small and probably not really measurable at the Keysight level. Again, where we're seeing strength is in the software-defined vehicles, autonomous driving, infotainment systems, all of these types of things. Yeah, even with this, what Neil said, you know, when we think about the large bookings we've had in 2023, the customers have largely stuck with those system integration projects. We haven't seen them pull back despite all this. We're still going to execute those projects out. As we look ahead, maybe the future looks like more in the grid as we start to think about grid applications for batteries. We'll be pivoting to that and redirecting our pursuits as we look ahead. Okay. Just a couple of financial ones, if I could, in the remaining few minutes. Maybe just starting with how you think about the portfolio and organic versus inorganic investment. You've got some potential deals that you've announced. Maybe just talk a little bit more generally around what you're most excited about adding to your portfolio and how you think about deploying capital. Yeah, I would say first and foremost, I think every year we've said this before, organic growth remains our top priority by far. I think the investments that we've made in 2023 and 2024 through this downturn really position us well with a strong portfolio as we look ahead. Even the announcements we made to acquire companies in the downturn actually gave us relatively better valuations and come out of research that we had done about capabilities that could position the portfolio looking ahead, such as the satellite simulator from Spire is an example of that. As we scan the software market, I think the ability to acquire Ansys Power Artist and the Synopsys Optical Solutions was great complements to what we already do and grow our software as a percentage of the total mix at relatively, I'd say, attractive valuations. Very excited by this. We're in the final phases of approvals with the Chinese regulator, and things have been, as we've said, constructive. There's a lot of constructive engagement, and we hope to get these transactions closed this quarter. I do want to speak about margins to wrap up for you, Neil. At your 2023 Investor Day, you laid out a target to hit a 31% to 32% operating margin. In light of the industry backdrop, as well as as you think about tariffs and having to deal with that cost, is that still a good level at some point that investors have in mind? Yeah, so you know, first of all, we've talked a lot about operating leverage in the business and delivering 40% operating leverage when our business is growing mid-single digits or better. I still think that's the right way to think about our business. The tariffs in the short term are going to be a headwind to executing on that. For example, since tariffs have been announced in April, if you strip that out, we've actually exceeded that 40% operating leverage commitment. We obviously have a few more quarters to go to kind of get that into the baseline. I think about the business on a 40% operating leverage basis. I think we still, when Satish and I talk, I think we still believe that ultimately we can get to those 2023 analyst day targets. I think our first step is to get back to where we were, right? Let's get back into the high 20% to 30% range. We're going to do that by growing this business, by continuing to deliver that operating leverage and, you know, grow our software business, grow our recurring revenue, grow our solutions portfolio so we can continue to keep gross margins moving northward. I think it's the right long-term target, but immediate goal is to get back to where we were. Great. This has been very informative. Thank you both for taking out the time. Thank you, Mark.