KEYS Q3 Deep Dive: AI Momentum, Tariff Pressures, and Demand Diversification Shape Outlook

Electronic measurement provider Keysight (NYSE:KEYS) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, with sales up 11.1% year on year to $1.35 billion. Guidance for next quarter’s revenue was better than expected at $1.38 billion at the midpoint, 0.7% above analysts’ estimates. Its non-GAAP profit of $1.72 per share was 2.9% above analysts’ consensus estimates.

Is now the time to buy KEYS? Find out in our full research report (it’s free).

StockStory’s Take

Keysight’s second quarter saw revenue and adjusted profits exceed Wall Street expectations, driven by robust order growth across its core businesses. Management pointed to sustained momentum from artificial intelligence (AI) infrastructure investments, continued strength in aerospace and defense, and stable wireless demand as key contributors. CEO Satish Dhanasekaran credited “sustained AI momentum, strong growth in aerospace, defense, government and general electronics,” highlighting the company’s ability to capitalize on multiple technology cycles and customer segments this quarter.

Looking forward, Keysight’s guidance reflects confidence in its ability to navigate a complex environment shaped by tariffs, evolving technology demands, and ongoing macroeconomic uncertainties. Management emphasized a multipronged approach to mitigating tariff impacts—including supply chain optimization, pricing strategies, and efficiencies—that they expect to fully realize in the coming quarters. CFO Neil Dougherty stated, “We expect to have the tariff impact from April fully mitigated during Q1. We’ve taken incremental actions to mitigate the August increase and should have that mitigated on a dollars basis and on a run rate basis sometime during the first half of this fiscal year.”

Key Insights from Management’s Remarks

Management attributed the quarter’s outperformance to broad-based demand, successful positioning in AI infrastructure, and ongoing expansion in software and services.

• AI infrastructure demand: The company saw increased adoption of its solutions for next-generation data centers, with AI-related projects significantly boosting wireline business and driving double-digit growth in commercial communications.
• Aerospace and defense strength: Elevated global defense spending, especially in the U.S. and Europe, led to strong order activity for radar, electromagnetic spectrum operations, and quantum computing research; management expects these programs to support steady long-term growth.
• Tariff mitigation progress: Keysight faced higher tariffs but described a multipronged mitigation plan—optimizing supply chain, shifting production, and selective price increases—to lessen the financial impact and protect margins.
• Broadening customer base: Management noted an expansion beyond traditional customers, with increased activity from start-ups and new entrants in AI, wireless, and automotive, contributing to a more diversified and resilient revenue stream.
• Growth in software and services: The company reported healthy demand for its simulation and emulation software, as well as growth in managed services and support offerings, which are increasingly mission-critical for customers in aerospace, defense, and data center markets.

Drivers of Future Performance

Keysight’s outlook is shaped by the durability of AI-driven demand, continued defense spending, and its ability to offset tariff headwinds through operational strategies.

• Sustained AI ecosystem investments: Management expects AI infrastructure requirements to continue fueling demand for Keysight’s solutions in networking, memory, and interconnect technologies, underpinning growth in both wireline and semiconductor segments.
• Tariff exposure and mitigation: The company faces a total of $150 million to $175 million in annualized tariff costs. Management believes its ongoing mitigation efforts—including supply chain shifts and pricing actions—will help absorb these costs by mid-next year, but acknowledges some near-term margin pressure.
• End market recovery and diversification: While some end markets like automotive remain challenged, management highlighted improving trends in general electronics, semiconductors, and aerospace/defense. The company’s growing mix of software and services is expected to provide additional resilience against sector-specific volatility.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will be watching (1) progress on fully mitigating tariff impacts and restoring targeted margin levels, (2) continued adoption of Keysight’s AI-related solutions in both established and emerging customer segments, and (3) sustained demand in aerospace and defense as global government budgets evolve. The pace of new product rollouts and updates on M&A integration will also be key markers for execution.

Keysight currently trades at $160.20, down from $163.80 just before the earnings. In the wake of this quarter, is it a buy or sell? Find out in our full research report (it’s free).

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