Earnings Call Transcript - KEYS Q2 2025

Operator, Operator

Good day, ladies and gentlemen, and welcome to Keysight Technologies Fiscal Second Quarter 2025 Earnings Conference Call. My name is Tamiya and I will be your lead operator today. This call is being recorded today, Tuesday, May 20th, 2025 at 1:30 PM Pacific time. I would now like to hand the call over to Paulenier Sims, Director of Investor Relations. Please go ahead, Ms. Sims.

Paulenier Sims, Director of Investor Relations

Thank you and welcome everyone to Keysight's second quarter earnings conference call for fiscal year 2025. Joining me are Keysight's President and CEO, Satish Dhanasekaran and our CFO, Neil Dougherty. 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 over 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 an upcoming investor conference hosted by Baird. And now I will turn the call over to Satish.

Satish Dhanasekaran, President and CEO

Good afternoon, everyone, and thank you for joining us today. During the second quarter, Keysight delivered revenue of $1.3 billion and earnings per share of $1.70, both of which exceeded the high end of our guidance. This marks the second consecutive quarter of revenue growth driven by continued momentum in CSG and a return to growth in EISG. The demand environment was solid in the quarter with orders growing 8% year-over-year and 4% sequentially to $1.3 billion. Even as we monitor the overall macro environment, we enter the second half with a healthy pipeline of opportunity and strong customer engagements. Neil will have more details on the tariff impact in his remarks. Overall, our business results demonstrate the resilience of our business and the durability of our financial operating model, which is underpinned by a flexible cost structure, supply chain, and operating capabilities that allow us to quickly adapt to external dynamics. As a result of a multi-year investment, we have a diversified global supply chain, which is largely based in Southeast Asia with minimal exposure in China. Despite the near-term uncertainty, we're confident in our market leadership, the strength of our operating model, and our ability to generate value for our stakeholders. Our capital allocation priorities have not changed. We're investing for the long term while also pursuing a balanced return of capital enabled by a strong free cash flow conversion. Over the past 12 quarters, we have returned over $1.7 billion or roughly 50% of free cash flow to investors via repurchases. Turning to business segments, in CSG, commercial communications orders grew double digits. Demand remains robust in wireline, where the ongoing data center infrastructure expansion is driving order strength. We saw continued deployment of 400 and 800 gig Ethernet technologies in AI data center applications. R&D investments in 1.6 terabyte electrical and optical technologies, as well as expansion of new protocols in AI data center networks are fueling demand, as the entire industry is innovating and developing new applications and services. This quarter at OFC, we demonstrated the industry's first solution for 448 gig per lane optical transmission, a key building block in the deployment of 1.6 and 3.2 terabit networks. The depth and breadth of Keysight's capabilities in the electrical and optical and wireline protocol stacks positions us well to enable ongoing innovation in high-performance computing, memory, and networking. Wireless orders grew in Q2. We saw a steady pace of R&D activity related to 5G advanced and early 6G research, as well as investments in non-terrestrial networks. While smartphone supply chain activity remains stable, innovation and investment in R&D in radio access networks continue to grow. Keysight's new digital twin and system emulation capabilities are enabling non-terrestrial applications and expanding our customer engagements. In aerospace defense and government, orders grew this quarter driven by strength in the US and Europe. Ongoing investment in spectrum operations and space applications drove growth. Although the U.S. will be operating under a continuing resolution for most of the year, overall demand and pipeline of opportunities remain robust with prime contractor backlogs at record levels. Investments in defense modernization remain a top priority for many countries as reflected in the increased budget proposals in the US, Europe, and Asia. Keysight is a trusted partner in this ecosystem, delivering advanced high-fidelity test capabilities that simulate real-world electronic threats in lab environments. This quarter, Keysight won a notable deal with a major defense agency in Europe to modernize its testing capabilities for antenna and radar applications, which are key to mission-critical applications. Our innovation pipeline is driving a steady cadence of new products and solutions, which this quarter included a higher frequency extensions to our phase noise analyzer for defense applications and a new digital communications analyzer for 224 gig transceiver test enabling wireline and general purpose use cases. Turning to electronics industrial solutions group, the demand environment remains mixed while revenue returned to growth after six quarters of decline. In Semi, the demand for our wafer test solutions from large foundry and IDM customers remain strong. Leading edge process node investment was augmented by rapid growth in high bandwidth applications. Customer engagements for silicon photonics and co-packaged optics accelerated within the quarter as the industry works to address performance limitations across latency, bandwidth, and power in the AI data center. In automotive, while orders and revenues were down, the business has largely stabilized. Engagements with OEM customers remain steady with investments in software-defined vehicle capabilities including cybersecurity, radar scene emulation, and ADAS chipset development. This quarter, we secured a key win with a major automotive OEM for design and test of their home energy management systems. General electronics orders grew for the third consecutive quarter, although at a lower rate. Growth in multi-industrial and med-tech customers for both R&D and manufacturing solutions was partially offset by contraction in US education funding and continued normalization in the distribution channel. Moving to software, design engineering software orders grew double digits reflecting healthy demand for our RF EDA solutions. We're seeing growing interest from industrial customers looking to apply simulation and virtual prototyping in the mechanical domain. With respect to our recent ESI acquisition, we're enabling next-generation industrial design by delivering a panel forming solution to a large European auto OEM that will drive efficiencies through their manufacturing processes and optimize their production timelines. In closing, we're pleased with the recovery that's underway. Our end markets have largely performed in line with our expectations heading into this year. And I'm once again proud of the Keysight team's execution in this quarter in what remains a dynamic environment. Keysight's broad portfolio of differentiated solutions positions the company to outperform in a variety of market environments. We continue to make deliberate, multi-year investments aligned with long-term technology trends, creating opportunities now and into the future. As we move through the second half, we remain focused on executing on what we control and continuing to deliver value to our customers and stakeholders. With that, I'll turn it over to Neil to discuss our financial performance and outlook.

Neil Dougherty, CFO

Thank you, Satish, and hello, everyone. Second quarter revenue of $1.306 billion was above the high end of our guidance range, up 7% on a reported basis and 8% on a core basis. Orders of $1.316 billion were up 8% on both the reported and core basis. Looking at our operational results for Q2. We reported gross margin of 65%. Operating expenses were $516 million, up 4%. Q2 operating margin was 25% and increased 100 basis points over last year. Turning to earnings. We achieved $295 million of net income and delivered earnings per share of $1.70. Our weighted average share count for the quarter was 173 million shares. Our Q2 results included approximately $7 million of new tariff expenses in cost of sales, which had a 60 basis point unfavorable impact on both gross and operating margins and resulted in an approximately $0.04 reduction in earnings per share. Moving to the performance of our segments. The Communications Solutions Group generated second quarter revenue of $913 million, up 9% on a reported and core basis. Commercial Communications revenue of $612 million was up 9%, reflecting sustained strength in wireline and growth in wireless. Aerospace defense and government achieved revenue of $301 million, an increase of 9%. Altogether, CSG delivered 67% gross margin and 26% operating margin. The Electronic Industrial Solutions Group generated $393 million in revenue, an increase of 5% with growth in semiconductor and general electronics more than offsetting a decline in automotive and energy. EISG delivered 59% gross margin and 23% operating margin. Software and services accounted for approximately 36% of Keysight revenue, while annual recurring revenue was 28% of total mix. Moving to the balance sheet and cash flow. We ended the quarter with $3.118 billion in cash and cash equivalents generating cash flow from operations of $484 million and free cash flow of $457 million. In April, we issued senior notes for an aggregate principal amount of $750 million. We intend to use the net proceeds for general corporate purposes, which may include partially funding the previously announced acquisition of Spirent. With regard to pending acquisitions, the U.K. Competition and Markets Authority cleared the Spirent transaction in March. We are progressing through the review process with other regulatory agencies and expect the transaction to close in Keysight's third fiscal quarter. In addition, the acquisition of Optical Solutions Group and PowerArtist is anticipated to close shortly after the Synopsys to Ansys transaction is completed. Lastly, we repurchased 1,042,000 shares this quarter at an average price of approximately $144 for a total consideration of $150 million. Now turning to the current environment, tariffs and our outlook. We have a diversified global supply chain with minimal exposure to China and have already taken action across multiple factors to reduce the incremental impact of tariffs. Our multipronged mitigation approach spans our global manufacturing footprint and sourcing strategies, as well as pricing and cost actions. Based on actions taken to date, we estimate our annual exposure at approximately $75 million to $100 million. We are working to further reduce this exposure and offset any remaining impact. Given the high priority that we place on maintaining our long-term customer relationships, our pricing actions were not applied to pre-tariff backlog. As a result, and assuming tariff rates remain at the current levels, the most significant tariff impact is expected in Q3 with full mitigation by the end of the fiscal year. Keysight currently has $2.4 billion in backlog and enters Q3 with a solid scheduled shipment position. Despite the dynamics and uncertainty of the current macroeconomic environment. As Satish mentioned earlier, at this point, we have not seen any material adverse effects on demand from tariffs and are therefore raising our full year growth expectations. We now expect FY '25 revenue growth at the midpoint of our 5% to 7% long-term target and annual EPS growth slightly above our long-term 10% target. For the third quarter, we expect revenue in the range of $1.305 billion to $1.325 billion and Q3 earnings per share in the range of $1.63 to $1.69 based on a weighted diluted share count of approximately 173 million shares. Implied in this guidance is the assumption that tariffs remain at current levels for the year. With that, I will turn it back to Paulenier for the Q&A.

Paulenier Sims, Director of Investor Relations

Thank you, Neil. Operator, will you please give the instructions for the Q&A?

Operator, Operator

The first question comes from Tim Long with Barclays. You may proceed.

Satish Dhanasekaran, President and CEO

Hi, Tim.

Tim Long, Analyst

Hi. Maybe one and then a follow-up. Just if we could just go back to AI. I know you guys have been giving us examples of each quarter of where you guys are seeing traction. It seems like across the part of our ecosystem in emulation, simulation as well. Can you just kind of update us on what kind of new activity you are seeing there and how meaningful it is for the business? And then just on the follow-up, if you could just give a little bit more color on the orders and pipeline to get to the full year guidance. I think normally, we do see orders pick up towards the second half of the year. So I'm just curious what you are seeing in pipeline to get confidence in the second half? Thank you.

Satish Dhanasekaran, President and CEO

Thank you, Tim. Obviously, AI is a long-term secular trend with a clear multiyear road map that's forming and a great fit to our strategy of not only being a physical layer tool provider but also going up the stack with physical and protocol layer and offering more solutions to customers. The big megatrends are clear right? We all know the AI workloads are growing, and we are making contributions across a number of technology fronts, including in memory, compute, and networking, with new standards that are forming. Our broad portfolio is really in play as we engage with these customers, and where we see the industry right now is trying to solve a number of these scale-out challenges as they deploy this digital infrastructure. So that's the action or activity that's being driven, and we had another strong quarter. For the first half, last year, we said our wireline business was roughly $1 billion, over $1 billion, I should say, in sales. For the first half, it grew double digits. So we feel good about our position in this emerging space. We think it is a long-term growth opportunity for us that we are very excited about. With regard to the progression of orders and what's baked into our guidance, we have said before that despite all the uncertainty and chatter out there, customers are obviously paying attention to all the tariff talks and macro concerns, but we have not yet seen any material change in customer behavior with regard to their immediate plans. As we enter the quarter, we had a strong finish for Q2, and as we enter Q3, our pipeline is solid and supports our guidance. We had a strong uptick in pipeline activity in relation to the second half. So we feel good about the second half. Obviously, there are risks that we're monitoring, like everybody else, but we are focused on what we control and feel confident about where we stand today.

Tim Long, Analyst

Okay, thank you.

Operator, Operator

Thank you. The next question comes from Matt Niknam with Deutsche Bank. You may proceed.

Matt Niknam, Analyst

Hi, guys. Thanks so much for taking the question. One question and then one follow-up. I guess, first on my main question, you obviously raised the top-line outlook, I guess, on average by about 100 bps relative to the prior of 5%, so I'm curious maybe where you're seeing a little bit of an incrementally improved view relative to three months ago? That's the first question. Second, just a follow-up on cash flow from ops, it was meaningfully stronger. I'm just wondering, maybe for Neil, anything unique on the working capital side? And then maybe how to think about cash flow from ops and working capital over the duration of the fiscal year. Thanks.

Satish Dhanasekaran, President and CEO

Thank you. I think, again, as I mentioned before, we looked at the overperformance we've had in the first half. We take a look at our pipeline of opportunities, the strong backlog position we have, and we then have applied this to essentially raise the top-line expectations for the full year. Again, there are a lot of macro risks and other factors people are monitoring, but we have not seen any material change in customer behavior. If you recall, at the beginning of the year, we said we thought this year would be a slow, gradual recovery in our markets. We feel like that is exactly the trajectory we're on. So that is where we find ourselves at the end of the first half, and we feel confident about where we are. But like everybody else, we continue to monitor the risk due to tariffs and the geopolitical environment.

Neil Dougherty, CFO

Yes. So the only thing I would add that Satish has said with regard to our outlook for the year, as everybody knows, we tend to see a seasonal uplift in the fourth quarter. We are still expecting the fourth quarter to be our strongest quarter of the year, and that's lending to that guidance increase. As it relates to cash flow, yes, so obviously, strong cash flow within the quarter. A couple of things contributed to that. First of all, that did include about $60 million worth of a gain on a hedging contract associated with the purchase price for Spirent. We had put a contract in place about a year ago set to expire at the end of our first half, which was our original thought on the timing of the close of that transaction. When we closed it out, we recognized about a $60 million gain on that hedge. In addition, we did see some working capital improvements. Inventory days were down by about 10%. DSO was down by about 3%. So that contributed to the strong cash flow performance, as did significantly lower tax payments than in the year-ago quarter.

Operator, Operator

Thank you. The next question comes from Mark Delaney with Goldman Sachs. You may proceed.

Mark Delaney, Analyst

Yes, good afternoon. Thank you very much for taking my question. I was hoping to better understand the tariff topic. Maybe first one, just to level set everyone, including myself, the $75 million to $100 million, is that the gross amount of exposure that you have and the net effect this year is maybe something less than that? Or is the $75 million to $100 million what you expect the drag on profits to be for this year?

Neil Dougherty, CFO

Yes. So $75 million to $100 million is a gross annualized number. Obviously, this went into effect in April, so we only have a little less than seven months of total impact. So $75 million to $100 million is the gross number. We are working to offset that, although, as we said in our previous remarks, to the extent that we are passing those costs on to customers, we made no attempt to reprice backlog, and given that we enter Q3 with about $2.4 billion of backlog, it's going to take some time for those offsets to materialize. So relatively little here in Q3, a little bit more in Q4. But by the time we get to Q1, we expect to have those tariff costs fully mitigated.

Mark Delaney, Analyst

Thank you, Neil. My follow-up question is regarding your approach to not raising prices on the backlog. Could you explain the actions you are taking to mitigate this situation and your confidence in managing the tariffs as we move towards the end of the year? Thank you.

Neil Dougherty, CFO

Yes. I mean, I think as we think about tariffs, we look at kind of two opportunities. One, what are the actions that we can take to reduce our overall tariff exposure, leveraging our global supply chain, leveraging our manufacturing footprint, taking actions to actually reduce tariff costs. And then once we've optimized the tariff cost side, the question is what can we do to further mitigate either by passing those costs on via price or surcharges or reducing costs elsewhere in our P&L. We have actions going on across all of those work streams. When I said we are not raising price on existing backlog, right? We said that if you had orders that were already on our books, we weren't going to go back and try and recover tariffs on those, but we have taken actions forward-looking on new quotations starting in about mid-April.

Satish Dhanasekaran, President and CEO

Yes, Mark, this is Satish. Just to chime in. We have a pretty resilient supply chain operations that are agile, and we have a considerable amount of operational realignments that we can still work on because at this point, we are assuming that a 10% tariff is the base case for us. Should that materially change, we would be prepared to respond to those scenarios as well. Customer pricing and strategies is definitely part of it, but it's also all the other operational alignments that we can make with our partners who we have a multi-year relationship with that can help us scale across geographies if needed.

Mark Delaney, Analyst

Great. Thank you very much. I’ll pass it on.

Operator, Operator

The next question comes from Meta Marshall with Morgan Stanley. You may proceed.

Meta Marshall, Analyst

Great. Thanks. A couple of questions for me. Just one, I know that your Aerospace and Defense business is kind of relatively split between U.S. and Allies. But just wondering if you had seen any kind of pushback on Allied orders that were aligned to U.S. programs? Or just kind of any commentary you could give on Aerospace and Defense. And then just also kind of following up on that of noted that you said kind of minimal China impact. But just how much of that $75 million to $100 million of impact that you guys are talking about from a growth perspective is from shipping into China versus kind of shipping into the U.S. Thanks.

Satish Dhanasekaran, President and CEO

Thank you, Meta. I'll address the Aerospace Defense question, and Neil can provide details on the impact from China. We had a strong quarter with order growth, even while operating under a continuing resolution, which is unprecedented and could limit new program growth this year. However, we saw significant order bookings from our prime contractors in the U.S., and we experienced double-digit order growth in our European business. For instance, we were awarded a NATO contract to modernize radar and electronic support measures and selected by the U.S. Army to validate Zero Trust Security on the unified network. The spending environment is robust, particularly with the backlog of prime contractors. I want to emphasize that while it’s challenging to predict on a quarterly basis, the long-term trends are more apparent. Looking ahead, we anticipate an increase in the U.S. budget next year, and European defense budgets are also expected to rise due to new initiatives. We feel positive about our position in the Aerospace Defense sector.

Neil Dougherty, CFO

Yes, Meta, and just to get to the question about China. So shipments to and from China account for less than 10% of total tariff exposure.

Meta Marshall, Analyst

Okay, great. Thank you.

Operator, Operator

Thank you. The following comes from Aaron Rakers with Wells Fargo. You may proceed.

Aaron Rakers, Analyst

Yes. Thanks for taking the questions. Two, if I can, I'll just ask them right away as well. So first, I think, Neil, as we talk about the guidance and getting north of that 5% growth in that 5% to 7% range that you alluded to, can you just remind us again of how we think about the incremental margin for the company? I think all the way back at the Analyst Day, you talked about anything north of 5% dropping through like a 40% incremental margin. What I'm trying to get to is just the pace of how we could think back to getting op margin back above 30%. And then as a follow-up — or as the second question, I should say, is that can you talk a little bit about the wireless business? That I think, previously talked about as being stable, but it sounds like that's actually performing a little bit better. How do you think about the durability of that wireless business? Thank you.

Neil Dougherty, CFO

Yes. So why don't I start with the first one here on the incremental. You're absolutely correct. Anytime our business is growing at 5% or better, we would expect to drop through that growth at an operating incremental of about 40%. I would point out that the tariffs are new and substantial incremental costs that are in the short run going to impact our ability to deliver on that incremental.

Satish Dhanasekaran, President and CEO

Yes. In the wireless business, we are seeing ongoing stability and strength in infrastructure, although the smartphone-related segments, particularly in China, are experiencing some softness. We continue to assess the situation, noting that while things are stable, they are still soft. The significant strength lies in network infrastructure, particularly with Open RAN and the latest standards releases involving AI and early 6G research that are driving spending and customer engagements. We maintain a strong position in this area and are committed to long-term investment to uphold our leadership.

Operator, Operator

Thank you. The following comes from Robert Jamieson with Vertical Research. You may proceed.

Robert Jamieson, Analyst

Hi, good afternoon. Thank you for taking my questions and nice quarter. Just quickly on software and services. It's a growing part of the business, up to 36% of revenue, recurring to almost 30% now. Are there any investments that you're making to further accelerate growth here, just given the margin profile of those businesses?

Satish Dhanasekaran, President and CEO

No. Thank you. Again, a big part of our strategy. If you look at the business and how we performed in a downturn, as you rightly pointed out, it has been a function of software and services because it's been such a big part of the company's resilience, especially even as the top line comes under some pressure. This is clearly an area of focus across all our businesses; we have a strategy to grow the software and services. One particular area where we're really excited we saw double-digit growth in our simulation business. It is an area where we've placed a lot of M&A dollars and focus. If you remember, we acquired ESI, and now we are also potentially beneficiaries of the Synopsys, Ansys transaction, where we might get a couple more acquisitions to bolster our presence in the simulation space. This not only increases our software and recurring revenue but equally allows us to engage with our customers earlier in the design cycle, which again fits our strategy of being a bigger player in the R&D parts of our market. As recovery happens in our end markets, you'll see that number maybe take back as a percentage of the total mix just a little because we are starting to see some of our core business recover. But we feel like there are more upside opportunities to driving the software as a percentage of revenue.

Robert Jamieson, Analyst

Sure. Thank you. And then just on AI, I mean, it's been consistent and growing nicely. But — and maybe you addressed this earlier, but beyond testing like the high-speed interconnection and network infrastructure — are there any other kind of test applications or demand that we are seeing from customers within that realm? Or is that coming from some of the emulation stuff that you mentioned on testing of how compute latency, etc. is working its way through the data centers as they are reconfiguring things for higher network speeds?

Satish Dhanasekaran, President and CEO

Yes. I think it's important to characterize this not just as cable test, but it's important to characterize it as — the challenges in the digital infrastructure that's being put in place for AI are very different. When customers are trying to look at the scale-up and scale-out challenges they face, what might be an interconnect really turns into a mission-critical fail point. If it’s not performing right, the cost of failure goes up substantially. So we are engaging with our customers on those mission-critical needs they have today. But equally, from a strategic sense, we are looking at where the industry is going in 5 years. The state of the art on technology keeps growing. There’s this roadmap forming around multiple dimensions, and we are participating in those to enable it. So we're there for our customers. What we see is a big trend of pulling in the timelines because of the rapid increase in AI workload. All of this is a rich opportunity for us. We've also had design wins in the software emulation space, which allows customers to isolate their performance in the AI data center and identify where the bottleneck is occurring to get true performance. So we continue to grow our contributions across the physical and protocol layer.

Robert Jamieson, Analyst

Okay, thank you very much.

Operator, Operator

Thank you. The next question comes from Rob Mason with Baird. You may proceed.

Rob Mason, Analyst

Hi, yes. Good afternoon. Just a couple of questions. On the general electronics business, I'm curious just given all the realignment of supply chain activity, maybe around 2% versus tariffs the last time. As companies look at where their manufacturing footprints need to reside — can you just speak to maybe the impact on that business from a demand side? And again, I'm thinking more on the production test side, if that's an influence. And then I'll just go ahead and ask my follow-up. Neil, could you just help us think about the tariff impact in the third quarter? Is it roughly a doubling of what you experienced in the second?

Neil Dougherty, CFO

Yes, I'll take the second one first here. I think it's likely a little bit more than that. We had about three weeks of tariff impact in April versus obviously a full quarter. We have already taken mitigating actions that are having a positive impact. So I don't think you can extrapolate totally forward from $7 million, but it is a little bit more than a doubling. It is more than a doubling of what we saw in Q2, just given the time involved.

Satish Dhanasekaran, President and CEO

Yes. I think when you look at the general electronics business, given it's a broad marketplace for us in terms of the number of different types of applications that end market represents. We see no change in sort of the areas such as digital health and research because those tend to be durable in nature. The manufacturing parts do move around. So on one hand, China still remains weak in that area. However, there's a lot of recent conversations we are having with customers because they are trying to diversify their manufacturing footprint. It's not yet materially reflected in our results but could be an opportunity for us to engage in, and we are working with our customers on. It's still early days, but it's driven by the tariffs and what might happen. A lot of scenario planning is occurring, and it will probably play out over the next 90 to 180 days.

Rob Mason, Analyst

I see. Thank you.

Operator, Operator

The following comes from Adam Thalhimer with Thompson, Davis. You may proceed.

Adam Thalhimer, Analyst

Hi, good afternoon, guys. Great quarter. Can you parse through orders a little bit? I'm curious if there was any — to what extent you saw pre-buy activity ahead of any surcharges and what our expectation should be for order trends after the surcharges went into effect?

Satish Dhanasekaran, President and CEO

Yes. I would say, just taking a look at the orders in Q2, orders progressed fairly linearly in the quarter. The funnel conversion was what we expected. We had a strong intake in the funnel as well, which is what we reflected into Q3. April was strong, in part because it's the end of our first half for our compensation for our sales force, which tends to create strong Aprils. We didn't see any difference in pull-ins, pull-outs or cancellations. Our position is that, while customers are watching the macro and evaluating the risk associated with it, we haven't seen any material change in customer behavior.

Adam Thalhimer, Analyst

Good to hear. And then secondly, I wanted to ask about Asia. The revenue there was really strong in the quarter. Maybe you can just give some high-level thoughts on China demand?

Satish Dhanasekaran, President and CEO

Yes, I would say Asia was strong. It is across all of our segments really, with commercial communications being the leader. Semiconductors saw strong demand as new nodes and technologies such as silicon photonics are being deployed. General electronics also had some growth in Asia. I just want to make a comment about China. Orders were flattish for the quarter in China with strength in a few sectors. As I mentioned before, the general electronics business with its manufacturing exposure remains weak, and automotive in China was also weak. We continue to monitor the point of sale demand, although we have a very small indirect business. It seems largely in line. So China, I would say, continues to hold up well in this environment.

Adam Thalhimer, Analyst

Thanks, Satish.

Operator, Operator

The next question comes from Samik Chatterjee with JPMorgan. You may proceed.

Samik Chatterjee, Analyst

Hi, thanks for taking my question. Satish, maybe if I can or try to — good to hear from you. So on the drivers of wireline demand, I'm trying to sort of address that maybe in terms of sustainability and your customers clearly are doing well on volume. But how should we think about the strength you see being driven by progress on R&D from your customers relative to what they are seeing on their volume outlook, driven by production? So maybe if you can share any color about — I know communications is very R&D aligned for you, but what does it look like for wireline? Are you selling new testers when it comes to either silicon photonics or CPO support? Or are you just seeing more customers buying just because their volume outlooks are stronger? Anything you can share on that front? And I have a follow-up. Thank you.

Satish Dhanasekaran, President and CEO

That's a great question, Samik. I would just say, when we looked at our wireline business a year or two ago, we said the majority of the business was R&D. I would put the ratio at roughly 80-20 in favor of R&D. Now we've probably seen a 10-point swing in manufacturing in that area. Still, we are heavily R&D-oriented, but we are benefiting from the manufacturing activity that's ramping up for digital infrastructure. When I look at the portfolio of products that we service all the way from early R&D to mainstream R&D or validation through deployment, whether it's with our Arbitrary Waveform Generators (AWG), scopes, silicon photonics wafer test systems, network analyzers, and software with our AI benchmarking and network speed emulators, we have a pretty broad category of products that we're selling. I would say, we've seen an increase in the number of customers participating in this area, which indicates that the ecosystem is expanding as more companies are coming in, given that this is a long-term opportunity. We're still in a position of strength in this emerging wireline space.

Samik Chatterjee, Analyst

Okay, got it. And for my follow-up, if I can stay with the wireline demand, but more sort of when we think about adoption of technologies like CPU and silicon photonics, I'm imagining visualizing it as more of the test demand moves towards semiconductor-level testing. So anything you can share there in terms of how you see the competitive landscape? Does it change from what you've had in sort of 400 gig, 800 gig? Do you think you have the entire stack to address some of those complexities? Or is there something you need to add to your portfolio to address when the overall technology moves closer to semiconductor testing?

Satish Dhanasekaran, President and CEO

You are very astute to pick up the change between electrical to optical or that conversion. It's been an area of emphasis and investment for us, especially as things progress into silicon. This is why we invested about 18 months ago to intercept the demand from silicon photonics. We talked about this on a call as well. We are now benefiting from that. This requires bringing together our optical capabilities with our electrical capabilities and probing with complex metrology. We find ourselves in a really good position across the stack, as you pointed out, from memory, compute, to networking. Co-packaged optics is another great example of what we saw from customers, and I think that is accelerating as well. If we need more capabilities, we can acquire talent, but I think we have a strong foundation to start with today. At OFC, we showcased multiple first-in-class innovations in this area, including 448 gig transmission, a key enabler of 3.2 terabits and more. We had about 50 demonstrations, and we expect this trend to continue growing, as it’s the direction the market is moving.

Samik Chatterjee, Analyst

Okay, great. Thank you. Thanks for taking my questions.

Operator, Operator

Thank you. We have a question from Mehdi Hosseini with SIG. You may proceed.

Mehdi Hosseini, Analyst

Yes. Thanks for allowing me to ask a question. I want to follow up on the wireline. Satish, I just want to look at the big picture. You talked about the connection moving from copper to actually moving towards optical. When you look at the entire market for both networking test as well as the testing occurring as the component migrates to optical, would it be fair to say that your content would increase as you migrate from 800 gig to 1.2 terabits? If content increases, including both system-level tests and semiconductor, what is the magnitude of the increase? Or can you help us qualitatively or quantitatively? And I have a follow-up.

Satish Dhanasekaran, President and CEO

Look, I don't know that I would say that from what we see, it's either going to be electrical or optical. I think it's electrical for some applications where you obviously have better economics, and optical where you need performance—this is where the puck is moving. So I think this hybrid is where we need solutions. Being a company that has both technologies, we find ourselves in a good position across the stack. Typically, as the complexity goes up, the types of solutions customers need especially in early R&D tend to become more complex, and therefore, we're adding more value to our customers as we advance. As those technologies mature, the next phase tends to pick up, and therefore, the volume may drop on the previous technology. It will always be the case that happens, but the net effect of these overlapping waves of technology supports our long-term growth expectations for the company that we set to be in the 5% to 7% range.

Mehdi Hosseini, Analyst

Okay. And then a follow-up for Neil. If I just take the midpoint of your revenue guide for fiscal year '25, assuming that the sequential growth is stronger in October versus July and embedding the tariff impact into your margin profile, would it be fair to say that there is a slight decline in operating margin from April to July, and that it would go kind of sideways from July to October? So your fiscal year '25 operating margin would be kind of flattish compared to fiscal year '24?

Neil Dougherty, CFO

One second. Yes. I mean, as we look forward, I would say we're kind of range-bound. We expect to see a seasonal uplift as we move from Q3 to Q4. But absent tariffs, we would continue to drive strong incremental growth.

Mehdi Hosseini, Analyst

Okay. Thank you.

Operator, Operator

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

Paulenier Sims, Director of Investor Relations

Thank you, Tamiya, and thank you all for joining us today. Have a great rest of your day.

Operator, Operator

This concludes our conference call. You may now disconnect.