Earnings Call Transcript - KEYS Q3 2025

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal Third Quarter 2025 Earnings Conference Call. My name is Regan, and I will be your lead operator today. This call is being recorded today, Tuesday, August 19, 2025, at 1:30 p.m. Pacific time. I would now like to hand the call over to Paulina Sims, Director of Investor Relations. Please go ahead, Ms. Sims.

Paulina Sims, Director of Investor Relations

Thank you, and welcome, everyone, to Keysight's third quarter earnings conference call for fiscal year 2025. Joining me are Keysight's President and CEO, Satish Dhanasekaran; our CFO, Neil Dougherty, and our Senior Vice President of Global Sales, Steve Yoon. The press release and information to supplement today's discussion are on our website at investor.keysight.com under Financial Information and Quarterly Reports. Today's comments will refer to non-GAAP financial measures. We will also make reference to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within the last 12 months. The most directly comparable GAAP financial metrics and reconciliations are on our website, and all comparisons are on a year-over-year basis unless otherwise noted. We will make forward-looking statements about the financial performance of the company on today's call. These statements are subject to risks and uncertainties and are only valid as of today. We assume no obligation to update them and encourage you to review our recent SEC filings for a more complete view of these risks and other factors. Lastly, management is scheduled to participate in upcoming investor conferences hosted by Deutsche Bank, Citibank, JPMorgan, and Goldman Sachs. And now I will turn the call over to Satish.

Satish C. Dhanasekaran, President and CEO

Good afternoon, everyone, and thank you for joining us today. In the third quarter, Keysight's strong execution resulted in an 11% year-over-year increase in revenue to $1.4 billion and earnings per share of $1.72, both of which exceeded the high end of our guidance. On the demand front, orders increased by 7% with growth across both the CSG and EISG segments. We saw sustained AI momentum, strong growth in aerospace, defense, government, and general electronics, with stability in wireless and automotive. We're executing our strategy and capitalizing on opportunities across our end markets. The ongoing pace of innovation is driving deeper collaboration with customers. Based on our solid pipeline of opportunities and customer engagements, we're once again raising our outlook for the full fiscal year. Turning to the business segments, the Communications Solutions Group delivered solid order and revenue growth year-over-year. In wireline, our early recognition of AI as a transformative technology shift led us to make strategic investments a few years ago to align our portfolio to the multiyear innovation roadmap we saw unfolding. As the industry accelerates investments in compute, memory, networking, and interconnect technologies, we're capitalizing today while investing to position Keysight for the long term. The emerging AI ecosystem is fueling massive growth in digital infrastructure, which in turn drives the need for rapid innovation across the technology stack. To meet this challenge, we're delivering advanced physical layer solutions and new silicon photonics capabilities that enhance R&D workflows and address customers' signal integrity and performance requirements. At the same time, networking technologies are advancing rapidly to keep pace with escalating performance needs. Our interconnect solutions are enabling this evolution, supporting scale-up and scale-out architectures with higher network speeds and more advanced switching capabilities. This quarter, we delivered the industry's first protocol layer solution for validating 1.6 terabit performance, a major milestone for next-generation networks. We also partnered with AMD to achieve early PCIe gen 6 compliance validation, laying the groundwork for the next wave of AI-ready, high-speed interfaces. With growing complexity in the data center at scale, it's critical to model and test not just individual devices and components, but their interactions at the system level. This prevents bottlenecks within the data center, optimizing system efficiency and performance for AI applications. We're working closely with industry leaders to model complex workloads, training environments, and intercluster interactions. Our software solutions enable emulation of real-world scenarios, exposing system-level challenges early in the design process. This quarter, we saw broader adoption of Keysight AI solutions as customers look to streamline integration and accelerate deployment of AI infrastructure. The wireless business remains stable. Current momentum in non-terrestrial networks and continued R&D activity in 5G-Advanced contributes to steady demand. We're actively partnering with industry leaders to support emerging applications like direct-to-cell connectivity and low earth orbit networks. While broader 6G commercialization is still years away, we're focused on leading the industry into the next generation of innovation. We're deeply engaged in progressing early 6G research and shaping the standards that will define its implementation. This quarter, we collaborated with NTT to demonstrate a breakthrough in sub-terahertz component characterization at ultra-high data rates. We're working with key customers on advancing new spectrum utilization, sensing, and next-generation MIMO technologies that will drive long-term transformation across wireless. Moving to aerospace, defense, and government, elevated defense spending globally and modernization priorities are driving robust demand, particularly in the U.S. and Europe. We secured key wins at EU prime contractors for radar and electromagnetic spectrum operation applications, leveraging our multi-decade experience in high-performance capabilities and complex system integration. Our differentiated platforms emulate complex 3D radio channel conditions and enable customers to model dynamic signals for satellite, vehicle, airborne, and terrain scenarios. Keysight is well positioned to capitalize on growing defense and government budgets around the world. Our enablement of sovereign research and innovation continued. This quarter, we collaborated with AIST in Japan to establish a 1,000-qubit platform. This sets a new benchmark for furthering quantum computing research and results from our commitment to long-term innovation and investments in advanced R&D. Turning to Electronic Industrial Solutions Group, orders and revenues grew both year-over-year and sequentially. In our broad general electronics business, orders grew strongly in the quarter and year-to-date. In consumer industrial, high performance requirements in AI data centers are translating into investment in high-speed PCBs and interconnects. Digital health continued to grow driven by advancements in the validation and production of medical devices. This momentum extended to ensuring compliance in wireless and wired connectivity for monitoring systems. Advanced research and education also grew this quarter driven by leading-edge semiconductor, 6G, and photonics initiatives with growth across EU and Asia Pacific regions. In automotive, demand improved sequentially and was stable year-over-year as we lapped higher comparisons. Our solutions are enabling OEMs and their partners to advance new software-defined architectures as well as advanced radar and sensing. Leveraging Keysight's broad portfolio, we're engaging with customers in the design and validation of in-vehicle network compliance and security applications. This quarter, we enabled NIO to validate the compliance of their smart electric vehicles with global wireless connectivity standards. In addition, our ESI and design engineering software renewal rates with major OEMs were strong across all regions. We also recently delivered and installed a state-of-the-art R&D battery test lab for a leading European OEM customer. Despite headwinds, these collaborations illustrate the industry's ongoing commitment to innovation as it transitions to smart connected vehicles. In semiconductor, robust demand for our wafer test solutions continued. Keysight's differentiation and customer focus is driving tighter engagement with leading foundries and IDMs. Our advanced node, high-bandwidth memory, and silicon photonics solutions are enabling customers to address increasing AI compute intensity and power efficiency requirements. Investment and growth expectations remain favorable, supported by sovereign priorities around the world. Moving to software and service, Keysight's simulation and emulation portfolio is unlocking faster and smarter innovation for our customers, helping them to achieve faster time to market, reduce risk, and superior product performance. This quarter, we saw healthy demand for our RF-EDA solutions, driven by increased government, aerospace, and defense spending as well as the need for high-speed digital simulation capabilities in the AI data center supply chain. Keysight's services business continues to grow, driven by the expansion of managed services and the value delivered through KeysightCare. This quarter, we saw strength in aerospace, defense, and government as well as data centers, markets where high-value services and maximum uptime are mission-critical to our customers' success. Our new products and solutions continue to accelerate customer innovation. At the International Microwave Symposium in June, Keysight showcased multiple high-performance products that address the needs of next-generation radio frequency and digital design. This includes the industry's first handheld millimeter wave signal analysis solution, advanced phased array antenna test capabilities, and phase noise measurement systems, all with applications across multiple end markets. In summary, Keysight is capitalizing on market opportunities and multiple waves of technology innovation underway. I'd like to thank our team for their relentless customer focus and collaboration, which positions us well for both near- and long-term value creation. We remain confident in our ability to navigate the evolving trade and tariff environment to deliver healthy margins and strong free cash flow with our financial model and operational flexibility, reinforcing our ability to invest, adapt, and lead. With that, I will turn it over to Neil to discuss our financial performance and outlook.

Neil P. Dougherty, CFO

Thank you, Satish, and hello, everyone. Third quarter revenue of $1.352 billion was above the high end of our guidance range, up 11% on a reported basis or 9% on a core basis. Orders of $1.340 billion were up 7% on a reported basis or 6% on a core basis. Looking at our operational results for Q3, we reported gross margin of 64%, operating expenses of $526 million, and operating margin of 25%, an increase of 60 basis points over last year. Turning to earnings, we achieved $297 million of net income and delivered earnings per share of $1.72, which increased 9% year-over-year. Our weighted average share count for the quarter was 173 million shares. Keysight's Q3 tariffs were in line with the estimates that we provided last quarter. We are making progress on our mitigation strategies, which include supply chain optimization as well as pricing and efficiency actions. Accounting for the longer execution time required for certain strategies and our quote to revenue cycle time, we are factoring in a lag for these actions to be fully realized in our results. Moving to the performance of our segments, the Communications Solutions Group generated third quarter revenue of $940 million, up 11% on a reported basis or 10% on a core basis. Commercial communications revenue of $644 million was up 13% driven by double-digit growth in both wireline and wireless. Aerospace, defense, and government achieved revenue of $296 million, an increase of 8%. Altogether, CSG delivered 67% gross margin and 26% operating margin. The Electronic Industrial Solutions Group generated $412 million in revenue, an increase of 11% on a reported basis or 9% on a core basis with growth across automotive and energy, semiconductor, and general electronics. EISG delivered 57% gross margin and 22% operating margin. Software and services accounted for approximately 36% of Keysight's revenue, while annual recurring revenue was 28% of the total. Moving to the balance sheet and cash flow, in Q3, we generated cash flow from operations of $322 million and free cash flow of $291 million. Year-to-date free cash flow now stands at $1.1 billion. We ended the quarter with $2.636 billion in cash and cash equivalents. An additional $759 million is designated as short-term restricted cash, the vast majority of which is set aside for closing the Spirent acquisition. We repurchased approximately 300,000 shares this quarter at an average price of approximately $164 for a total consideration of $50 million. With regard to the pending acquisition of Spirent, the final regulatory review is progressing, and we now anticipate closing the transaction in our fiscal fourth quarter. The acquisitions of Synopsys' Optical Solutions Group and Ansys' PowerArtist are similarly advancing towards final regulatory approval. Turning to our outlook, let me start with a few comments on the tariff rates announced on August 1. We estimate the new tariff rates will increase our tariff exposure by approximately $75 million annually. As communicated last quarter, we are on track to fully mitigate the April tariffs by Q1. We initiated additional actions to address the August tariff increase, which we expect to have fully mitigated on a dollar basis within the first half of FY '26. As Satish noted, the demand environment has remained resilient despite an uncertain macroeconomic backdrop. We enter Q4 in a strong backlog position. Given our year-to-date outperformance and visibility into the coming quarter, we are raising our full year growth outlook once again. For the fourth quarter, we expect revenue in the range of $1.370 billion to $1.390 billion and Q4 earnings per share in the range of $1.79 to $1.85 based on a weighted diluted share count of approximately 173 million shares. This will result in a full year revenue growth of 7% and full year EPS growth of approximately 13% at the midpoint. This guidance factors in all tariff announcements to date and assumes tariffs remain at August levels. With that, I will now turn it back to Paulina for the Q&A.

Paulina Sims, Director of Investor Relations

Thanks, Neil. Regan, will you please give the instructions?

Operator, Operator

Our first question comes from the line of Mark Delaney of Goldman Sachs.

Mark Trevor Delaney, Analyst

Satish, on past calls, you'd characterize your expectation for a recovery in the end markets overall as gradual. I don't think I heard you use that word today. So maybe you can help investors to better understand your view of the end markets now and to what extent it's better than you'd previously expected.

Satish C. Dhanasekaran, President and CEO

Yes. Thank you, Mark. A strong quarter, clearly, and we're feeling good about the funnel and the customer activity despite the overhang from tariffs and the geopolitical environment we find ourselves in. And if you look at the performance of our order growth, again, has accelerated as we've gone through the year. So from that perspective, we're feeling good about how the year is progressing slightly even better than what we expected at the beginning of the year. However, if you look at the end markets and you look at the multiple dimensions of the end markets and you'd say, are all end markets up into the right? Not quite, right? I would say AI has clearly been a continuing theme of momentum. Aerospace, defense, as we expected that things would recover after the administration change and other factors manifesting themselves. And wireless is tracking slightly ahead of expectations. EISG is returning to growth. All in all, feeling good about the situation, although just the caution is that we still have challenges with the automotive and some end market dynamics.

Mark Trevor Delaney, Analyst

Helpful overview. My second question was just trying to better understand orders and what you're seeing and putting that into context with the revenue outlook. I think orders were up high single digits, but the book-to-bill was just below 1, and then you guided 4Q revenue up sequentially. So maybe just help us better understand what's supporting that revenue outlook into 4Q. Is there turns business or backlog that supports it? Or maybe there's some pass-through tariff revenue that's coming in. And just any more framing of what's driving the revenue in the fourth quarter compared to the bookings would be helpful.

Neil P. Dougherty, CFO

Yes, I believe part of that is due to the timing of significant deals. We had a fairly large system integration deal where we received customer acceptance on the last day of Q3. This contributed to our strong performance in the third quarter but also took away from Q4, resulting in less typical sequential seasonality from Q3 to Q4. However, as we look ahead, we anticipate a more normal sequential seasonality in orders compared to revenue, again due to the timing of some of these large deals.

Operator, Operator

Our next question comes from the line of Aaron Rakers of Wells Fargo.

Aaron Christopher Rakers, Analyst

I do have a follow-up as well. I guess first, Neil, as we kind of think about the revenue growth and the recovery in the business, the order growth dynamics, I guess, appreciating that you're not giving guidance out into next year. But at the Analyst Day that you had hosted a while back, you talked about a 5% to 7% top line growth rate as kind of the long-term model. Is that how we should kind of think about the story playing out at this point as we look out into fiscal '26? Or is there an opportunity to maybe see the potential for revenue to grow still a little bit above that level?

Neil P. Dougherty, CFO

Yes, I think of this year as just the beginning. We started the year discussing a gradual recovery, and we're aiming for revenue growth at the lower end of the 5% to 7% range. As Satish mentioned, things have improved slightly more than we expected, allowing us to raise our revenue forecast for the year in each of the last two quarters. Many of our end markets are recovering, while others remain stable at lower levels. Generally, there's a positive sentiment as we look towards '26, with one important consideration regarding tariffs and macroeconomic factors. We're still in the early stages of this process, and the market hasn't fully adapted to the new tariff landscape. We'll have more insights about '26 in three months. For now, our focus is on executing and delivering Q4, but we are optimistic about what we see in our end markets.

Aaron Christopher Rakers, Analyst

Yes, I appreciate that, Neil. As a follow-up, Satish, investors often inquire about Keysight's AI narrative. You have discussed not only scaling out but also scaling up to 1.6T and so forth. Regarding the wireline business, I'm interested in how you address investor inquiries about the contribution AI makes to the Keysight story. Additionally, how do you view the sustainability of that strong demand moving forward?

Satish C. Dhanasekaran, President and CEO

I'll start by addressing your second question. We are in a strong position with momentum to take advantage of the long-term opportunities presented by AI. I feel more confident now that this potential will materialize, and we are well-prepared compared to about 18 months ago when we began this journey. First, regarding AI, it will contribute to various end markets over time, but the wireline sector is where we are seeing early demand, and we are noticing that shift. I anticipate that our wireline business will grow significantly this year, with strong double-digit growth, along with commercial communications, driven by underlying AI demand. It's important to note that differentiating unique AI demand is challenging because we have a well-established customer base, including NEMs, silicon designers, and hyperscalers, who have been loyal customers of Keysight for a long time. Their engagement with us is increasing, and AI is a driving factor for that growth. Additionally, as the year has progressed, we've seen an uptick in new customer activity, including new cloud providers entering the industry. Overall, I feel optimistic about our long-term growth potential, not just for a quarter or two, but looking ahead.

Operator, Operator

Our next question comes from the line of Meta Marshall of Morgan Stanley.

Meta A. Marshall, Analyst

I have a couple of questions. First, could you outline which parts of the tariffs are most significant for your company and whether your mitigation strategy involves adjusting production or pricing? My second question pertains to the aerospace and defense sector. There's clearly a lot of spending occurring in that market right now. Should we expect this market to keep accelerating, or is this a sustained level due to the lengthy timelines required for these programs to develop?

Neil P. Dougherty, CFO

Thank you for your question. I'll address the tariff issue first before handing it over to Satish for the aerospace and defense topic. Regarding tariffs, our supply chain is primarily based in Southeast Asia, with our largest manufacturing facility for finished goods located in Malaysia. We also have significant operations in the EU and Japan, as well as notable manufacturing capabilities in the U.S., where we handle a lot of ICE fabrication and produce some high-end aerospace and defense solutions. Many of our new high-end products are initially manufactured in the U.S. before scaling up production elsewhere. This diverse geographical footprint allows us to tackle tariff challenges effectively. We are implementing a multi-faceted strategy to mitigate these tariffs, including exploring various supply chain options and focusing on optimizing our existing manufacturing capacity rather than making drastic changes. We'll monitor how this situation evolves. We're also considering supplier relationships and cost efficiencies, and where necessary, we'll pass on some costs to customers through price increases and tariff surcharges for our U.S. clients. We anticipate that the tariff impact from April will be fully managed by Q1. We have initiated actions to address the tariff increase from August, aiming to manage that financially within the first half of this fiscal year. Overall, we are confident in how we are handling the situation.

Satish C. Dhanasekaran, President and CEO

So Meta, I think I reiterate the point number one is we're confident in our ability to mitigate the tariff situation and that we've started to make good progress organizationally towards that. With regard to aerospace, defense, first and foremost, I would say the starting point for the year was slower given the administration change and continuing resolutions. And now being on this call, I sort of foreshadowed that I wouldn't be surprised if some of the demand comes back in the second half, and it's exactly the way it's played out. But again, what we're seeing now is ongoing programs or existing programs that were in the pipeline that are flushing out. The backlog for some of the prime contractors continues to be robust and strengthening, which is again foreshadowing a positive environment subject to budgets. I think the U.S. situation is pretty well understood. And typically, it's a majority part of our business. So we factor that into our growth rates. I think what's a new dynamic, frankly, which is hard to quantify just yet, is the impact of the European spend that could have on to this over the long term, right? And that's where we started to see some healthy business this quarter. And I think some of these programs will continue to play out as we move forward. But we remain confident in some of the capabilities we bring in terms of radar, EW, space satellite. And as we think about some of the NDAA priorities that have emerged, we have multiple places where we make contributions. The Golden Dome of the United States that's been announced, should that be funded, will also give us additional opportunities to make contributions. So overall, feeling good about the contributions we're making, and we feel like we can keep increasing it. Now again, this is a function of government budgets. So maybe the pace of acceleration of growth may not be as quick as some of the commercial markets we experience, but it's one of the more steadier value creators for the company.

Operator, Operator

Our next question comes from the line of Tim Long of Barclays.

Timothy Patrick Long, Analyst

I have 2 as well, maybe one for Satish and one for Neil. Satish, maybe just go back to wireless. You talked about it being stable, but it sounded like double-digit growth in the quarter. Was that largely just the compares? Or maybe if you can just walk us through some of the areas that are kind of keeping the wireless-related businesses afloat. And then Neil, I'll just give it to you now. Could you just touch on kind of moving parts around this incremental margin of 40% that you talk about? It seems like you might come in a little bit below this year. But when we start looking into the future, maybe walk us through the moving parts around how we should think about that incremental margin number.

Satish C. Dhanasekaran, President and CEO

Tim, thank you. Yes, we had a strong revenue quarter. Again, it's a function of recovering market conditions in wireless that have remained depressed for so long. And year-to-date, we're slightly ahead of what we expected in terms of order growth. And really, the story is of standard progression, Release 18, more R&D spend, and some increasing activity we see as AI starts to move to the edge and there's more activity on AI applications on mobile devices. There's a lot more standards-driven capabilities that are being promoted that creates some opportunity for us. The non-terrestrial network activity with satellite operators and mobile operators that are partnering, I think that's continuing to grow, and then some early 6G research activities around the globe where customers are starting to put pen to paper and starting to design their systems. So all of these have been things we've been discussing. And while the smartphone supply chain still remains subdued.

Neil P. Dougherty, CFO

Yes. Regarding your second question about thinking of incrementals, I believe that over the long term, a 40% incremental is the correct perspective for the business. This quarter and this year experienced a significant shock due to tariffs that were not previously accounted for in our model. Once these are factored into the baseline and we surpass them by this time next year, we will be able to return to a point where they are included in the baseline, allowing for continued mid-single-digit growth or better, which would yield that 40% incremental. It's worth noting that in Q2, Q3, and the guidance for Q4, we achieved a mid-single-digit growth rate and, when excluding the tariff impact, we are actually exceeding the 40% incremental. We are monitoring this closely. This year, we are absorbing the new and unexpected tariff costs while still managing to raise our EPS growth estimates for the year. There is definitely a continued emphasis on efficiencies and cost management. I believe that the 40% incremental is the right long-term approach for the business, although the tariffs will limit our ability to achieve it until they are included in the baseline.

Operator, Operator

Our next question comes from Mehdi Hosseini of SIG.

Mehdi Hosseini, Analyst

It's actually Mehdi Hosseini. I also have 2 multipart questions. It was 9 months ago, you guys were talking about wireline business bringing in more than $2 billion of orders. And the commentary over the past couple of quarters suggests that order activity for wireline has remained strong. So my question is, can you put some color around the dollar value of orders or business revenue that is coming in assuming that you had more than $2 billion of orders 9 months ago? And in that context, how should we think about sustainability of wireline orders? And I have a follow-up.

Satish C. Dhanasekaran, President and CEO

Yes, Mehdi, while I may not recall the exact size, I can say that historically, our commercial communications business had a larger proportion of wireless compared to wireline. Since then, wireless has stabilized after peaking at 5G levels in 2022, while wireline has continued to grow. I anticipate we will finish this year with record bookings and a strong pipeline of opportunities heading into next year. You might wonder what is driving this activity, particularly with the known data center CapEx investments. The core question is about the sustainability of this growth. As we consider the evolution of AI workloads, they are moving beyond simple ChatGPT applications toward more complex workflows, which should significantly enhance productivity for both businesses and individuals. This trend, along with the economics of adopting new technology and the pressure to innovate, suggests a sustainable growth driver extending into 2028 and 2030. Early insights from our customer engagements about memory enhancements, computing improvements, and networking speed upgrades indicate that what used to be a 2- to 4-year refresh cycle is being shortened. This creates a consistent roadmap for collaboration with our customers. Therefore, I am optimistic about the market opportunity and confident in Keysight's ability to capitalize on it and outperform.

Mehdi Hosseini, Analyst

Okay. And then the second question maybe is for Neil. I see both CSG and EISG revenues were up 11% each on a year-over-year basis. But CSG had kind of flattish operating margin, but EISG had more than 200 basis points of increase in operating margin. And my question is, is CSG where most of the tariffs are being felt? And is there also a mix that is favoring EISG with the margin expansion on a year-over-year basis?

Neil P. Dougherty, CFO

Yes. I think the second part of that is definitely true that we've talked about in the past how there's a greater disparity of gross margins within the EISG portfolio. So they have the ability to benefit from mix shifts. With regard to the tariffs, I mean, certainly, tariffs are impacting both of our businesses. There might be a slight skew there within CSG, but I think that's reasonably equally spread across the 2 portfolios.

Mehdi Hosseini, Analyst

Okay. And with EISG, that's where software and services mix is richer, and that's where you get a margin uplift. That's the mix that you are referring to, correct?

Neil P. Dougherty, CFO

CSG has a higher proportion of software compared to EISG due to the nature of the software used in the communications portfolio. Looking at EISG's hardware portfolio, it includes some of our highest-margin products, but it also encompasses more distribution-level projects and lower-end technology, which typically come with lower gross margins. Therefore, within the hardware portfolio, there is a wider range of margins. While there is some skew in the tariff portfolio towards CSG, it is not significant.

Operator, Operator

Our next question comes from David Ridley-Lane of Bank of America.

David Ridley-Lane, Analyst

I want to ensure we understand the tariffs correctly. It was $75 million before August, which adds another $75 million. To clarify, were you anticipating about $25 million net this quarter, or 80 basis points? Is that what you observed? What is the expectation factored into the fourth quarter guidance? How much are we looking at in total, and what does that include?

Neil P. Dougherty, CFO

Yes. To summarize the figures, we previously indicated an annual range of $75 million to $100 million, with an additional $75 million from the increases in August. This brings us to a total range of $150 million to $175 million. Our impact in the third quarter aligned with these figures we just shared. In the fourth quarter, we anticipate a rise in tariff expenses due to the tariff increases. However, we are beginning to see the effects of our mitigation efforts ramping up. While we will still experience an unfavorable impact in dollar terms in the fourth quarter, it is only slightly greater than what we saw in the third quarter. So, you will notice an increase in tariff expenses alongside the ramping up of mitigation actions.

Satish C. Dhanasekaran, President and CEO

I think I can address that. From a strategic point of view, we see a good alignment with our simulation portfolio. We've discussed this before. For any questions regarding timing or specifics, it would be best to reach out to the Synopsys team. Even though they have finalized the deal with Ansys, there are still regulatory processes in progress that will take some time to complete. Thus, it would be more appropriate to direct such inquiries to Synopsys for now.

Operator, Operator

Our next question comes from Rob Jamieson of Vertical Research Partners.

Robert Gregor Jamieson, Analyst

Just to follow up with David's question on PowerArtist and optical solutions. Just kind of back to some of the comments you made on simulation software and software demand on the AI side. What are these 2 assets going to bring into the EDA side of your portfolio? And like how does this enhance your offering going forward?

Satish C. Dhanasekaran, President and CEO

Yes. I think if you think about our RF-EDA, the simplest way to think about it is we're leaders in RF and high-speed digital simulations and part of those workflows. I think the optical is a really good complement to that. And in general, power and power efficiency is becoming so important to customers. And so some of the critical IP being part of the portfolio is a good thing because they fit our long-term direction and our ability to sort of create more synergies with these capabilities inside the company.

Robert Gregor Jamieson, Analyst

Okay. And then just with the comments on the 6G research initiatives gaining some traction. Can you provide us a little thought on customer engagement timelines and when 6G might become a more meaningful revenue contributor? And how are you thinking about balancing continued 5G optimization versus 6G investment priorities as we look ahead?

Satish C. Dhanasekaran, President and CEO

That's a great question. At the latest 3GPP plenary meeting in Prague, discussions began to finalize what Release 20 or the initial version of 6G could entail. One key takeaway for me was the reinforcement of industry alignment from 5G to 6G, which I see as a positive trend since it indicates continuity rather than a break. This aligns with our ongoing work with customers on various themes, including reducing latency for AI applications, enhancing energy efficiency, and integrating satellite connectivity with terrestrial networks. These factors support our strengths in 5G. We are considering our platforms and architectures with this perspective, and it's encouraging to see this alignment in standardization. We're noticing customers beginning to explore different aspects of 6G, though it's still uncertain which spectrum or topology will emerge. However, we are starting to see some activity as customers work on their intellectual property in preparation for a future 6G rollout. This is where the activity is currently focused. As stated in my prepared remarks, we remain several years away from a rollout, but I believe R&D efforts will continue to intensify as we progress.

Operator, Operator

Our next question comes from Rob Mason of Baird.

Robert W. Mason, Analyst

Your semiconductor business grew double digits in the quarter. You sound quite pleased with the results. It has been a choppier environment for some in the front-end semicap space. And I'm just curious, maybe walk through or remind us why you're not maybe seeing as much volatility in that business. And I just kind of wanted to confirm as well just your outlook is for growth here in the fourth quarter as well.

Satish C. Dhanasekaran, President and CEO

Yes. Our semiconductor business is currently focused on the wafer stage. As wafer starts are occurring globally, we benefit from several sovereign trends, with some people even characterizing wafers before production begins. This provides an additional boost for the business. Furthermore, we are seeing advantages from advanced nodes, new memory architectures, high bandwidth memories, and a recent surge in customer interest in silicon photonics, which we consider positive factors for our semiconductor operations. However, it's important to note that the business experienced a decline in 2024 due to the normalization of demand, indicating it was not insulated from that trend. Nevertheless, the increased activity along with the rise in AI-driven demand has positively impacted this sector.

Robert W. Mason, Analyst

I see. That's helpful. Satish, if we could just shift over to the wireline business. Last quarter, you shed a little more light just on the mix between the R&D test and production test that's occurring in that business. And it shifted a little bit towards production test just as that's such a high-growth area. I'm just curious as that mix has shifted, has your visibility changed at all? Is it giving you more visibility, less visibility? Just how we should think about that evolution there.

Satish C. Dhanasekaran, President and CEO

Yes. That's a good question. I mean I think when we started to think about it last year, let's say, at this earnings call, I would have called the environment constrained and, again, constrained from a supply chain perspective. And what's really played out over the last few quarters is that the unlocking of the supply chain through investments that are coming. And I think that's a process that's still to play out, and we're clearly benefiting from that. So that's probably skewed our mix of traditionally predominant R&D business to include a bit more manufacturing exposure. But we're nowhere close to the company exposure from a manufacturing standpoint in this business. It's still R&D oriented. And what we also see, which is favorable, which speaks to the visibility comment is, again, last year, this time, I would have said this is a highly concentrated business for us because we had a few customers driving the action. And what's playing out is the broadening of the business even in the wireline ecosystem with new customers and start-up activity. But even across the company, as you think about the general electronics and semiconductor getting some of the tailwinds from the AI trend, it's again a positive dynamic for the business.

Operator, Operator

Our next question comes from Samik Chatterjee of JPMorgan.

Priyanka Thapa, Analyst

Priyanka on for Samik. I have a couple of questions. Starting off with the AI story. For wireline optics, how much of the R&D investment is already on 1.6T, 3.2T and beyond compared to legacy speeds like 100 gig or 800 gig?

Satish C. Dhanasekaran, President and CEO

I think for wireline, I would say broad comment with different exposures. But I'd say the 100 gig is fairly stable. It's sort of a run-rate business. The 400, 800 gig are the ones where the majority of the volumes are, and 1.6 and beyond is still in research and early deployment. So that probably directionally gets you there.

Priyanka Thapa, Analyst

All right. Can you also shed a little bit of light on the customer segments in your data center business? For example, how big hyperscalers are versus semiconductors and then integrators and assemblers?

Satish C. Dhanasekaran, President and CEO

Yes, I think we haven't quite divided the business in the way you've requested. However, I believe the activity in the supply chain remains strong as it begins to alleviate supply constraints. That's an important factor. Furthermore, looking at the R&D expenditure is probably a better way to assess where we see the majority of demand for the wide range of tools and capabilities that Keysight offers.

Operator, Operator

Our next question comes from Adam Thalhimer of Thompson, Davis.

Adam Robert Thalhimer, Analyst

Congrats on the beat and raise. I wanted to ask about the impact of tariffs on orders. Do you think that net-net, tariffs have pulled forward some orders or pushed them out?

Sung J. Yoon, Analyst

Thanks for that question. At this point, throughout the quarter, we did not see any material pull-in of orders due to the tariff changes that were going to happen in August.

Satish C. Dhanasekaran, President and CEO

We have not seen any material change to the demand profile from the tariffs just yet.

Operator, Operator

Great. And then, Satish, I wanted to follow up. You talked about AI impacting other markets besides wireline. What do you think the next market is? And when do you think you could see material orders from that?

Satish C. Dhanasekaran, President and CEO

Yes. We have observed some impact in the general electronics and semiconductor sectors. It seems likely that the trend towards silicon photonics and co-optics will continue. We are particularly attentive to the general electronics business because it encompasses a wider range of manufacturing and related factors. I believe this area is still in the early stages of development. However, looking ahead, there are significant opportunities for AI to influence our customers' engineering workflows and applications in defense, security, automotive, and wireless sectors. Currently, there is more enthusiasm than tangible activity, but we are beginning to engage with customers and discuss how Keysight can support their success.

Operator, Operator

Thank you. That will conclude our question-and-answer session for today. I would like to turn the call back over to Paulina Sims for any closing comments.

Paulina Sims, Director of Investor Relations

Thank you, Regan, and thank you all for joining us today. Have an awesome day.

Operator, Operator

Thank you. That will conclude today's call. Thank you for your participation. You may now disconnect your line.