Keysight Technologies Shatters Records Across the Board as AI Infrastructure Boom Drives Best Quarter in Company History
Q2 Fiscal 2026 Earnings Call — May 19, 2026
Keysight Technologies left little room for debate about where the test and measurement industry stands today. The company reported its strongest quarter ever, with orders surpassing $2 billion for the first time, revenue up 31% year-over-year to $1.717 billion, and earnings per share climbing 69% to $2.87. Free cash flow hit a record $472 million. Management promptly raised full-year revenue growth guidance to the "high 20s percent" range, a meaningful step up from prior expectations, and signaled that the second half is expected to come in materially above the first half on revenues. The breadth of outperformance — spanning AI infrastructure, aerospace and defense, semiconductors, and general electronics — makes this difficult to dismiss as a one-cycle story.
The Tariff Noise: Setting the Record Straight on the Numbers
Investors should be aware of a significant one-time item distorting the headline figures. Following the U.S. Supreme Court's decision invalidating the IEEPA tariffs, Keysight recognized tariff refunds and associated surcharges collected from customers in Q2, resulting in a $40 million reduction to reported revenue and a $97 million reduction to costs and expenses. Stripping out these one-time impacts, revenue was $1.758 billion, up 35%, and EPS was $2.58, up 52%. Gross margin on an adjusted basis came in at 67.6%, up 300 basis points year-over-year. CFO Neil Dougherty confirmed that the mid-67% gross margin range is the right way to think about the business at current volumes, post-acquisition. Operating leverage on the core business ran at 49%, driving an adjusted operating margin of 30.4%, up 520 basis points. When growth is this high, fixed cost absorption does the heavy lifting, and Dougherty was candid that the company's long-standing 40% incremental margin framework was built for mid-single-digit growth environments — not what Keysight is experiencing today.
AI Infrastructure: The Engine Running Hot, and Getting Hotter
The single most important data point from this call is that Keysight's AI-related revenues in just the first half of fiscal 2026 have already surpassed the total achieved in all of fiscal 2025, with management sizing the first-half AI business in the $500 million to $600 million range. This is not a gradual ramp — it is an acceleration that is compressing timelines investors may have been using for long-term modeling. CEO Satish Dhanasekaran cited four structural pillars driving this: AI infrastructure scaling complexity, overlapping speed transitions from 800-gigabit to 1.6-terabit to nascent 3.2-terabit activity, silicon photonics and co-packaged optics, and system-level data center emulation.
On the complexity front, Dhanasekaran was specific: "AI clusters integrate GPUs, CPUs, DPUs, switches, NICs, memory fabrics, and storage across multiple vendors and the networking technologies, including Ethernet, UALink, PCIe, NVMe, and CXL. Customers are adopting Keysight solutions for end-to-end interoperability and system validation to ensure that these components function reliably together at scale." The increasingly heterogeneous nature of AI infrastructure — where the answer to almost every architectural question is "both" rather than "either/or" — plays directly to Keysight's broad portfolio. As Dhanasekaran put it, "It's no more is it optical or electrical? Well, it's optical and electrical. It's not just is it open standards or closed? It's both. And is it pluggable optics or integrated optics? It is both."
Wireline bookings set a record again this quarter. The manufacturing side of the wireline business is scaling rapidly with AI cluster deployments, while R&D demand remains dominant — management confirmed the R&D-to-manufacturing split in the wireline AI business remains roughly 70-30, with both segments doubling in the first half. Keysight also noted that the number of customers in the AI space doubled in the quarter, suggesting the addressable ecosystem is still broadening rather than concentrating.
Speed Transitions Creating a Multi-Year Revenue Tailwind
The industry's layered speed upgrade cycle is generating simultaneous demand across multiple generations of Keysight solutions. At the Optical Fiber Conference, Keysight demonstrated 1.6-terabit physical layer solutions alongside more than 20 industry leaders and collaborated with Broadcom on what management described as "the industry's first public interoperability demonstration of Ultra Ethernet Consortium specifications." Meanwhile, R&D activity around 3.2-terabit technologies is already beginning. These cycles are overlapping rather than sequential, which means Keysight is not waiting for one technology to fully deploy before the next wave of test spend begins. The company also introduced what it called the industry's first 220-gigahertz Lightwave Component Analyzer for advanced transceiver and photonics design, and a new 3D interconnect designer for next-generation stacked chip architectures.
Q3 Guidance Sequentially Flat: New Product Ramps Are the Bottleneck, Not Demand
The Q3 revenue guide of $1.730 billion to $1.750 billion at the midpoint — roughly in line with Q2's adjusted figure — warrants some attention. Dougherty was straightforward: the company uses scheduled shipments and in-quarter order conversion models to build guidance, and Q3 reflects that discipline rather than any deterioration in demand. Dhanasekaran offered an important clarification, noting that several new AI-enabling products introduced by Keysight are seeing "an unprecedented ramp following introduction" and that the pace of revenue conversion is being influenced by the mix and timing of new product introductions. To support these ramps, Keysight raised its fiscal 2026 capital expenditure guidance by roughly 25%, from $160 million to $200 million, with the incremental spend directed primarily at production ramp capacity. The company also called out a higher backlog in the AI business and longer lead-time systems wins in semiconductor and aerospace and defense that will convert into revenue over time. Management guided for a "historically typical sequential revenue increase" into Q4, implying the back half will be materially above the front half.
Aerospace, Defense and Semiconductors: Broad-Based, Not One-Trick
While AI dominated the narrative, aerospace, defense and government revenue grew 24% to $373 million, with Europe leading and the Americas contributing sustained strength. Demand was strongest in radar and electromagnetic spectrum operations, and Keysight secured a new win with the U.S. Air Force for next-generation operational flightline testing. The company's radar target generation and threat environment emulation capabilities are increasingly differentiated as contested spectrum environments push defense contractors toward higher-value system-level solutions. Services attach rates are also increasing in this segment, which is structurally positive for recurring revenue.
The Electronic Industrial Solutions Group had its best quarter ever, with record orders and revenue and growth across all three end markets: general electronics, semiconductors, and automotive and energy. In semiconductors, Keysight won wafer test solution programs in silicon photonics and advanced node applications across Asia, the U.S., and Europe, and saw strong growth in lithography-related solutions. Management called out semiconductor as "a sustainable contributor of growth for us over the next several years." Automotive and energy orders grew for the third consecutive quarter, a tentative stabilization signal after a prolonged period of weakness.
Acquisitions on Track, But Spirent Still Mid-Cycle
Keysight maintained its guidance of $375 million in fiscal 2026 revenue from acquired businesses, with cost synergies expected to exceed $100 million and approximately 80% of those realized on a run-rate basis by fiscal year-end. When asked why acquisition revenue expectations had not been raised given the improved demand environment, Dougherty noted that the Synopsys-Ansys-related businesses are largely recurring revenue in nature and respond slowly to end-market improvement. On Spirent, he was candid: "The network monitoring side of the business is kind of in between cycles at this point." PNT solutions tied to nonterrestrial networks are seeing pickup, but Spirent's core market has not yet inflected. The integration itself is described as on track.
Nonterrestrial Networks and Quantum: Small Today, Optionality for Tomorrow
Keysight is positioning in nonterrestrial networks — LEO satellite constellations and direct-to-cell deployments — and sees growing demand for orbit emulation and positioning, navigation, and timing solutions as the ecosystem expands across Amazon, Globalstar, SpaceX, and AST SpaceMobile. NTN is currently sub-1% of total company revenue, so investors should treat this as optionality rather than a near-term driver. Kailash Narayanan, President of the Communications Solutions Group, highlighted the differentiation of Keysight's end-to-end NTN capability: "We're able to emulate the network. We're able to emulate the device. We're able to emulate orbits as well with the Spirent acquisition and core network."
Quantum computing testing is similarly early-stage but generating steady, triple-digit revenue, with Keysight enabling more than 1,000 quantum computers across government and research institutions. Narayanan noted growing interest in hybrid compute architectures combining quantum processors with conventional CPUs and GPUs — an area Keysight intends to address as it evolves.
Long-Term Growth Framework Under Review
Keysight's prior long-term growth algorithm of 5% to 7% is clearly stale given what the business is delivering in fiscal 2026. When pressed by Wells Fargo's Aaron Rakers on whether the algorithm should be revisited, Dhanasekaran acknowledged the question but declined to provide updated numbers on the call, saying the company would keep investors updated. What he did reaffirm is the three-pillar framework from the 2023 Investor Day — first-to-market innovation, expanding customer and market footprint, and resilient navigation of macro and supply chain dynamics — and expressed high confidence in Keysight's ability to outperform under a range of economic conditions. A formal update to the long-term model appears likely at a future investor event. For now, investors are left to extrapolate from a business that is growing revenues at 30%-plus and generating record cash flow, which is a substantially different starting point than the prior framework contemplated.
Supply chain is being actively managed but Dougherty characterized the situation as under control, aided meaningfully by Keysight's vertical integration in highly specialized chips and assemblies. Memory costs are a minimal COGS exposure given Keysight's limited reliance on high-bandwidth memory. The balance sheet ended the quarter with $2.412 billion in cash after $220 million of share repurchases at an average price of approximately $283 per share.
Keysight Technologies Deep Dive
The Business Model: From Hardware Heritage to Software-Centric Test Engine
Keysight Technologies operates at the absolute genesis of technological innovation. Spun out from Agilent in 2014, but tracing its roots back to the original Hewlett-Packard test and measurement division, Keysight provides the electronic design and test solutions that engineers rely upon to simulate, validate, and manufacture modern technologies. The company’s business model has undergone a profound transformation over the last decade, migrating from a transactional purveyor of standalone hardware instruments—such as oscilloscopes, spectrum analyzers, and signal generators—into a holistic, software-centric platforms provider. Today, Keysight monetizes the entire product lifecycle of its customers, beginning with early-stage software simulation, moving into physical research and development prototyping, and culminating in high-volume manufacturing test and network optimization.
The operational architecture is bisected into two primary segments. The Communications Solutions Group, representing roughly 65% of total revenue, serves the commercial communications ecosystem and the aerospace, defense, and government sectors. This segment provides the critical testing apparatus required for advanced networking, including wireless protocols and high-speed data center interconnects. The remaining 35% of revenue is generated by the Electronic Industrial Solutions Group, which targets semiconductor capital equipment, automotive electrification, and general electronics. Crucially, Keysight has deliberately increased its mix of recurring software and services revenue, which now comprises approximately 30% of the aggregate top line. This is primarily delivered through PathWave, an integrated software platform that ties together simulation, test, and data analytics. By embedding its software into the daily workflows of engineering teams, Keysight creates a recurring revenue stream that materially dampens the historic cyclicality associated with hardware capital expenditure budgets, while elevating corporate gross margins toward an impressive 67%.
Ecosystem, Customers, and the Competitive Vanguard
Keysight serves a highly diversified, blue-chip customer base, with no single client accounting for more than 10% of total revenue. In the commercial communications arena, the company equips leading telecommunications operators like AT&T and network infrastructure heavyweights such as Cisco and Arista Networks. In the semiconductor and computing verticals, Keysight’s validation tools are mission-critical for silicon architects like Nvidia, Intel, and Apple as they push the physical boundaries of processing power. Furthermore, prime contractors such as Lockheed Martin and Boeing rely heavily on Keysight for electronic warfare simulation, radar validation, and secure communications testing.
The electronic test and measurement market is highly consolidated, with Keysight commanding an estimated 30% market share globally. Its competitive positioning is formidable but nuanced depending on the specific end-market. In the wireless communications and defense sectors, its primary rival is the privately held German juggernaut Rohde & Schwarz, which fiercely competes in radio frequency and microwave testing. In the Asian telecommunications sphere, Japan’s Anritsu remains a persistent competitor. When expanding into semiconductor automated test equipment and modular instrumentation, Keysight brushes up against Teradyne, Advantest, and Emerson-owned National Instruments. Fortive’s Tektronix subsidiary also remains a legacy competitor in the oscilloscope market. Despite this capable roster of rivals, Keysight consistently outmaneuvers the competition by offering a unified design-to-test workflow, whereas many competitors remain siloed in either pure software design simulation or end-of-line manufacturing test. This end-to-end integration remains Keysight's definitive competitive wedge.
The Wide Moat: R&D Scale, Standard-Setting, and Switching Costs
Keysight’s economic moat is exceptionally wide, anchored by a self-reinforcing flywheel of deep research and development investment and early engagement with global standard-setting bodies. The company aggressively participates in organizations such as the 3GPP, the IEEE, and the PCI-SIG. By co-authoring the fundamental specifications for future technologies—whether that is the next iteration of 6G cellular, PCIe Gen 7 architectures, or USB protocols—Keysight ensures that its test equipment is the first to market. Consequently, when an Nvidia or a Cisco begins developing next-generation hardware, Keysight is often the only vendor with a commercially viable test solution ready. This first-mover advantage creates a localized monopoly during the most lucrative, high-margin research phase of a new technology cycle.
Once Keysight’s instruments and software are embedded into a customer's R&D laboratory, the switching costs become prohibitive. Engineers spend years mastering Keysight’s proprietary interfaces and PathWave software environments. Transitioning to a rival platform requires not only the repurchasing of million-dollar equipment but, more punitively, the retraining of highly compensated engineering talent and the rewriting of complex automated test scripts. This operational stickiness grants Keysight immense pricing power, which is fundamentally reflected in its mid-20% operating margins. Furthermore, the sheer scale of Keysight’s global calibration and metrology service network provides an insurmountable barrier for smaller entrants who cannot guarantee the uptime and precision required by multinational semiconductor and aerospace corporations.
Industry Dynamics: AI Infrastructure Megatrends vs. Cyclical Headwinds
The prevailing industry dynamics for Keysight are currently characterized by an explosive secular tailwind in artificial intelligence infrastructure, which is actively overriding residual cyclical weakness in legacy telecommunications. The rapid scaling of AI data centers requires a fundamental rewiring of internal network architectures. As hyperscalers cluster tens of thousands of GPUs together, the operational bottleneck shifts from compute generation to data transfer speeds. This is driving a massive industry transition from 400G Ethernet toward 800G, 1.6-Terabit, and eventually 3.2-Terabit architectures. Keysight operates as a toll collector on this speed transition. Validating these ultra-high-speed optical and electrical interconnects requires Keysight's most advanced, highest-margin oscilloscopes and network analyzers. The momentum is undeniable; in the first half of fiscal 2026 alone, Keysight’s AI-related business eclipsed the total volume achieved in all of fiscal 2025.
However, the industry is not without its systemic threats. The electronic test and measurement sector has historically been sensitive to macroeconomic cyclicality, particularly capital expenditure downcycles in the telecommunications and semiconductor manufacturing industries. While AI networking is booming, traditional 5G base station deployments have plateaued globally, placing pressure on pure-play wireless test revenues. Additionally, the geopolitical landscape presents a persistent threat vector. Escalating US-China trade tensions and strict export controls on advanced semiconductor testing equipment cap Keysight's total addressable market in China, while simultaneously incentivizing the Chinese government to aggressively fund domestic test and measurement competitors. While Chinese entrants currently lack the precision and software maturity to compete at the bleeding edge, they are beginning to commoditize the lower-end, general-purpose instrument market, forcing Keysight to continuously innovate up the value chain to protect its premium margin profile.
Catalysts and Emerging Technologies
Keysight is actively incubating several emerging technologies that will serve as the next generation of revenue growth drivers. The company's $1.46 billion acquisition of Spirent Communications, completed in late 2025, represents a massive operational catalyst. The integration of Spirent immediately vaults Keysight into a leadership position in network cybersecurity assurance, software-based positioning, and satellite emulation. As the aerospace sector increasingly relies on Low Earth Orbit satellite constellations and non-terrestrial networks, the combined Keysight-Spirent portfolio is uniquely positioned to dominate the testing of space-based broadband architectures. Furthermore, this acquisition significantly accelerates Keysight’s pivot toward higher-margin software and automated network testing, moving the company beyond the physical layer of testing and into Layer 2 through Layer 7 network protocols.
Beyond network automation, Keysight is heavily investing in digital twin technologies and automotive electrification solutions. Through its highly strategic acquisition of ESI Group, Keysight is building system-level emulation platforms that allow automotive engineers to create virtual replicas of autonomous driving systems and electric vehicle battery networks. This empowers automotive original equipment manufacturers to test thousands of edge-case scenarios entirely in software before a physical prototype is ever built, drastically reducing time-to-market and R&D expenditures. Additionally, Keysight is developing dedicated AI inference testing platforms and advanced silicon photonics validation tools, ensuring it captures the physical validation spend as data center architectures transition from electrical copper to optical light transmission.
Disruption on the Fringes: The Modular and Software-Defined Threat
While Keysight dominates the traditional standalone instrument market, credible disruptive threats are emerging from the modular and software-defined test paradigms. National Instruments, now backed by the massive balance sheet of Emerson, has long championed the PXI modular architecture. Instead of buying a single, expensive box from Keysight, the PXI approach allows engineers to slot modular, interchangeable measurement cards into a standardized chassis, controlled entirely by software environments like LabVIEW. This modular approach offers superior flexibility and often a lower total cost of ownership for automated manufacturing lines. Keysight has recognized this threat and successfully built its own robust PXI portfolio to defend its market share, but Emerson’s deep industrial reach will undoubtedly intensify the battle for factory-floor test automation.
Further down the disruption curve are agile new entrants pioneering entirely software-defined hardware, such as Liquid Instruments. These startups utilize Field Programmable Gate Arrays to create highly adaptable test equipment where a single piece of hardware can become an oscilloscope, a spectrum analyzer, or a waveform generator simply by downloading a new software image. While these software-defined platforms currently lack the extreme dynamic range, bandwidth, and metrology-grade precision required for bleeding-edge R&D—Keysight’s absolute stronghold—they are highly disruptive in university laboratories, general electronics testing, and mid-tier manufacturing applications. If these field-programmable architectures manage to scale their performance capabilities, they could threaten Keysight’s pricing power in the mid-market, forcing the company to rely even more heavily on the stickiness of its proprietary PathWave software ecosystem to retain customer loyalty.
Management Track Record: Astute Navigation and Capital Allocation
Under the stewardship of CEO Satish Dhanasekaran, who took the helm in 2022, management’s track record has been exemplary, blending operational rigor with aggressive, yet disciplined, capital allocation. Dhanasekaran inherited a fundamentally sound business but was immediately tasked with navigating the post-pandemic supply chain crisis and the subsequent cyclical downturn in semiconductor and telecommunications spending in 2024. Management’s response was clinical: they defended margins by pivoting the enterprise sales motion toward software and services, structurally elevating the company’s profitability floor. This strategic maneuvering set the stage for Keysight's explosive fundamental performance in early 2026. In the second quarter of fiscal 2026, the company reported a staggering 56% year-over-year growth in orders, surpassing $2 billion for the quarter, alongside a record $472 million in free cash flow generation.
From a capital allocation perspective, the executive team, anchored by CFO Neil Dougherty, has executed flawlessly. They have maintained a pristine balance sheet with leverage well below 1.5x, a financial discipline recently recognized by an S&P credit rating upgrade to BBB+. Management has utilized this balance sheet flexibility to execute highly synergistic M&A. The acquisitions of Spirent Communications, ESI Group, and Synopsys’ Optical Solutions Group were not merely revenue-grabbing exercises, but highly targeted maneuvers designed to expand Keysight’s total addressable market into software emulation and network security. By systematically deploying capital to acquire high-margin software businesses while aggressively repurchasing shares, Dhanasekaran and his team have proven themselves as premier stewards of institutional capital within the industrial technology sector.
The Scorecard
Keysight Technologies stands as a premier tollbooth on the highway of technological progress. Its ongoing evolution from a legacy hardware manufacturer into a software-centric platforms provider has structurally improved the company’s margin profile and revenue durability. The economic moat, built upon early standard-setting participation, profound R&D scale, and punitive switching costs, is among the most robust in the industrial technology landscape. As the global economy rapidly transitions toward 1.6-Terabit AI data center architectures, advanced aerospace defense systems, and digital twin simulation, Keysight is perfectly positioned to capture the ensuing wave of highly complex research and development spending. Furthermore, the recent integration of Spirent Communications materially deepens Keysight's footprint into network automation and software, solidifying its competitive posture against modular and software-defined disruptors.
While macroeconomic cyclicality and geopolitical export controls in Asia remain enduring structural risks, Keysight’s management has proven highly adept at navigating market turbulence while actively compounding shareholder value. The record order growth witnessed in the first half of fiscal 2026 confirms that the company is currently entering a powerful fundamental upswing driven by AI infrastructure scaling. For institutional capital, Keysight offers a uniquely compelling profile: the secular growth characteristics of an elite semiconductor and software entity, married to the robust free cash flow generation and defensive moat of a legacy industrial powerhouse. The enterprise remains a formidable vehicle for capturing the physical layer investments underpinning the global artificial intelligence and telecommunications revolutions.