Earnings Call Transcript - KEYS Q2 2026

Operator, Operator

Good day, ladies and gentlemen, and welcome to Keysight Technologies Fiscal Second Quarter 2026 Earnings Conference Call. My name is Abby, and I will be your operator today. This call is being recorded today, Tuesday, May 19, 2026 at 01:30 p.m. Pacific time. I would now like to hand the call over to Liz Morali, Vice President of Investor Relations. Please go ahead, Ms. Morali.

Liz Morali, Vice President, Investor Relations

Good afternoon, and thank you for joining us for Keysight's Second Quarter Earnings Conference Call for Fiscal Year 2026. Joining me on today's call are Satish Dhanasekaran, President and CEO; Neil Dougherty, Executive Vice President and CFO; Kailash Narayanan, President of the Communication Solutions Group; Jason Carey, President of the Electronic Industrial Solutions Group; and Sung J. Yoon, Senior Vice President of Global Sales. Following the prepared remarks from Satish and Neil, we will take your questions. The press release and information to supplement today's discussion can be found on our Investor Relations website investor.keysight.com. During today's discussion, we will make forward-looking statements about the financial performance of the company. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties. Information about these risks and uncertainties can be found in our most recent Forms 10-K and 10-Q filings with the SEC. We do not intend to update any forward-looking statements. In addition, we will refer to non-GAAP financial measures and reference core growth, which excludes the impact of acquisitions or divestitures completed within the last 12 months and currency movements. The most directly comparable GAAP financial metrics and reconciliations can be found on our Investor Relations website. And all comparisons are on a year-over-year basis unless otherwise noted. I will now turn the call over to Satish.

Satish Dhanasekaran, President & CEO

Thank you, Liz. Good afternoon, and thank you for joining us today. Keysight delivered the best quarter in company history capping off a record first half. Q2 orders grew 56% year over year surpassing $2 billion. Revenue grew 31%, earnings per share grew 69%, and we generated a record $472 million in free cash flow. These results demonstrate the strength of Keysight's portfolio which has been built strategically to deliver first-to-market solutions and enable innovations across our end markets including data centers, networking, defense, semiconductors, and general electronics. We are raising our growth expectations for fiscal 2026 driven by the solid start to the year, and the pipeline of opportunities we see in the second half. We now expect revenue growth in the high-20s percent for the fiscal year as the underlying trends driving our business are expected to continue. These investments made in our comprehensive set of solutions and deep engagements with market-defining customers, positions us well for sustained value creation. Moving to our results by business. Communication Solutions order growth significantly outpaced revenue growth of 35% year over year, with broad strength across both commercial communications and aerospace, defense, and government. This performance builds on the growth we saw in Q2 last year where CSG delivered 9% revenue growth. In commercial communications, we continue to see accelerating momentum in our wireline business driven by the ongoing AI data center expansions. Wireline delivered record orders again this quarter with robust demand for both R&D and manufacturing solutions. In 2026, our AI-related business has already surpassed the levels achieved in all of 2025. As I mentioned in our Q1 earnings call, this momentum continues to be driven by four key pillars of opportunity that we expect to continue: AI infrastructure scaling, speed transitions, optical and photonics technologies, and system-level emulations. First, the scaling challenge is intensifying as AI clusters integrate GPUs, CPUs, DPUs, switches, NICs, memory fabrics, and storage across multiple vendors and the networking technologies, including Ethernet, uplink, 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. This quarter, Keysight announced new scale-up validation solutions for performance characterization. As systems become more complex and expensive, additional investments in deeper manufacturing validation and production test coverage are needed to improve yields and reduce post-deployment failures. We saw strong adoption for newly introduced ultra-high interconnect solutions that enable rapid characterization of rack backplanes for next-generation scale-up networks. Second, the industry continues to navigate multiple overlapping speed transitions with continued 800-gig deployments accelerating adoption of 1.6-terabit architectures, and increased R&D activity around 3.2-terabit technologies. The optical fiber conference and NVIDIA's GTC this quarter reinforced the accelerating importance of networking as a critical enabler of AI data center scaling. At OFC, Keysight demonstrated our 1.6-terabit physical layer solutions with over 20 industry leaders. We also showcased 1.6-terabit traffic emulation, link reliability validation, and SerDes signal integrity solutions for switch and system vendors. And we collaborated with Broadcom on the industry's first public interoperability demonstration of Ultra Ethernet Consortium specifications marking a major step towards production-ready AI-optimized Ethernet fabrics. Third, activity in silicon photonics and co-packaged optics continues to expand. Our early engagements in co-packaged optics position Keysight well to capture value as the industry transitions to these architectures. We are also seeing strong demand from next-generation optical component and transceiver development and deployment driven by expansion in scale-out networks. We recently expanded our optical portfolio with the industry-first 220-gigahertz Lightwave Component Analyzer to support advanced transceiver and photonics designs. Building on our existing chiplet and photonic design solutions, our new 3D interconnect designer is also helping customers address the growing complexity of designing next-generation 3D stack chip architectures. Finally, customers need system-level emulation and benchmarking capabilities for data centers at scale. We saw strong adoption of our AI workload emulation solutions among hyperscalers as they work to improve utilization of GPU and power resources while addressing growing system and security complexity. This quarter, we expanded Keysight's AI portfolio with the release of Keysight AI Inference Builder designed to support emerging inference applications. Together, these trends are driving increased demand for our solutions across multiple domains. The breadth of Keysight Solutions portfolio and ongoing R&D investments enable us to maintain a differentiated portfolio and an industry-leading position. Turning to wireless. Orders saw robust growth in the quarter with activity in non-terrestrial networks, 6G research, and increased demand to support the supply chain associated with AI expansion. NTN is becoming an important layer of future wireless architectures with new LEO constellation scaling and the industry targeting direct-to-cell deployments in the next few quarters. The increasing complexity of LEO environments including speed, dynamic link conditions, and stringent positioning requirements is driving demand for Keysight's orbit emulation and Spirent's PNT solutions which together provide customers with a differentiated ability to validate next-generation NTN systems. As the industry explores new use cases for 6G, such as integrated sensing and communication, energy-efficient networks, and expanded coverage capabilities we are well positioned to intercept these opportunities through our portfolio of high-fidelity tools for design and emulation. This quarter, we expanded our collaboration with Qualcomm on RF digital twins and at Mobile World Congress conducted a joint demonstration with Samsung on AI RAN workflows. Next month, Keysight will host the TGP meeting in Singapore with a timeline for 6G standardization being solidified, further reflecting Keysight's leadership position as the ecosystem evolves towards commercialization. Turning to aerospace, defense, and government. We saw broad-based global momentum led by Europe, supported by continued strength in the Americas, as the global defense modernization priorities increasingly translate into new programs and investments in next-generation systems. Demand was strongest across radar, electromagnetic spectrum operations as governments and prime contractors expanded capacity to support evolving operational requirements while activity in space, satellite and autonomous systems remained healthy. This drove ongoing customer engagement and new wins for our recently introduced radar target generation solutions. Keysight's ability to accurately simulate radar signals and emulate threat environments is a key differentiator, creating higher-value system-level opportunities with defense contractors and government agencies around the world. As contested spectrum environments drive a greater focus on radar survivability and autonomous operations, customers are increasingly adopting Keysight solutions that include high-fidelity emulation, signal analysis, PNT, and RF validation to accelerate their development and deployment. This quarter, we secured a key win with the U.S. Air Force to enable next-generation operational flight line testing with more stringent requirements. Given the mission-critical nature of this defense market, we also continue to see increased attach rate for our value-added services to enable mission readiness and operations. Moving to Electronic Industrial Solutions Group, we delivered a record quarter with all-time highs for both orders and revenue, strong growth across all three EISG markets: general electronics, semiconductors, and automotive and energy. In general electronics, double-digit order and revenue growth was driven by ongoing momentum in AI-related innovation and infrastructure investments. Customer capacity investment for high-performance PCBs was again strong this quarter. Greater complexity, increasing density interconnects, multilayer architectures, and higher speeds are driving customer engagement across multiple standards and applications, resulting in a higher test intensity for PCBs. In education, we saw healthy demand from governments and universities around the globe in the development of the next generation of semiconductor workforce talent through our tailored training modules. Our solutions are also facilitating leading-edge university research in advanced technologies with key wins this quarter in quantum, photonics, semiconductor, and 6G. In our semiconductor markets, we saw continued momentum in the pace of innovation and customer investments as the industry races to scale capacity through 2030. AI ecosystem demand further accelerated this quarter across advanced node memory and silicon photonics. Our collaborations with leading foundries from R&D to production are enabling faster development and commercial ramp timelines for increasingly complex chip architectures and packaging. This quarter, we had key wafer test solution wins in support of silicon photonics and advanced node programs across Asia, the U.S., and Europe, while our solutions for key lithography customers grew strongly as well. We expect this to be a sustainable contributor of growth for us over the next several years. Finally, in automotive and energy, orders grew for the third consecutive quarter as the business has largely stabilized. Growth was across both software-defined vehicles and EV charging solutions, with key wins for in-vehicle network, cyber and over-the-air design and validation at OEMs and test labs globally. We are leveraging our expertise and leadership in networking applications to develop solutions for the new mobility market. In closing, the strong results we are delivering in fiscal 26 reflect the execution of our strategy we outlined at Investor Day in 2023, centered around consistently identifying and investing in long-term growth opportunities across accelerating technology trends, transforming industries, and global market dynamics. This framework has guided our disciplined organic and inorganic investments enabling us to build a differentiated portfolio aligned with some of the world's most important and fastest-growing end markets. As we are focused on capitalizing on our early leadership in the AI data center infrastructure ecosystem, we are equally excited by the broader set of secular growth opportunities we are progressing, including defense technology, space, 6G, and quantum computing. We believe our portfolio's technology leadership, product pipeline, and deep customer relationships position us well to capitalize on these opportunities and continue creating long-term value for our customers and shareholders. All of this value creation is enabled by the commitment of our team and the collaborative and innovative culture in the company. I want to acknowledge the entire Keysight team for their hard work and dedication to our success. I will now pass the call over to Neil to provide additional details on our financial performance and guidance. Neil?

Neil Dougherty, Executive Vice President & CFO

Thank you, Satish, and hello, everyone. We delivered outstanding results in fiscal Q2 setting new company records for orders, revenue and earnings per share. Our teams capitalized on the robust and dynamic demand environment resulting in strong double-digit growth across all our business groups. Q2 orders of $2.05 billion were up 56% on a reported basis, with acquisitions adding 700 basis points and currency adding 100 basis points. On a core basis, excluding those items, orders grew 48%. Revenue of $1.72 billion was up 31% on a reported basis and up 24% on a core basis. Gross margin was 72.3% and operating expenses were $669 million. We delivered net income of $497 million and earnings per share of $2.87. As noted in our earnings press release, following the U.S. Supreme Court decision validating the IEBA tariffs, in Q2, we recognized the impact of tariff refunds and the refund of associated surcharges collected from our customers. This resulted in a $40 million reduction in Q2 revenue and a $97 million reduction in costs and expenses. Excluding these one-time impacts, Q2 revenue was $1.76 billion, up 35%. Gross margin was 67.6%, up 300 basis points, and EPS was $2.58, up 52%. Our Q2 investor presentation contains additional details on these adjustments, including impacts by operating segment.

Satish Dhanasekaran, President & CEO

These strong results were driven by acceleration in our organic business, which excluding one-time tariff impacts, delivered operating margin of 30.4%, up 25 basis points year over year as a result of 49% operating leverage.

Neil Dougherty, Executive Vice President & CFO

Moving to the segments. The Communication Solutions Group generated revenue of $1.23 billion up 35% on a reported and up 27% on a core basis. CSG gross margin was 74.1% and operating margin was 33.4%. Within CSG, commercial communications business generated revenue of $858 million up 40% with robust growth in both wireless and wireline. Aerospace, defense, and government achieved revenue of $373 million an increase of 24%. The Electronic Industrial Solutions Group generated $486 million in revenue an increase of 24% with growth across all three end markets: general electronics, semiconductor, and automotive and energy. EISG delivered gross margin of 67.8%, and operating margin of 33.1%. Software and services accounted for approximately 36% of Keysight revenue, while annual recurring revenue was 27% of total mix. Moving to the balance sheet and cash flow. We ended the quarter with $2.41 billion in cash and cash equivalents, generating record cash flow from operations of $501 million and record free cash flow of $472 million. This quarter, we repurchased approximately 780 thousand shares of Keysight stock at an average price of approximately $283 per share for a total consideration of $220 million. Now turning to our outlook. For Q3 2026, we expect revenue in the range of $1.73 billion to $1.75 billion representing 29% year over year growth at the midpoint. We expect Q3 earnings per share to be in the range of $2.43 to $2.49 representing 43% year over year growth at the midpoint. This guidance is based on a weighted diluted share count of approximately 173 million shares. Our acquisition integrations remain on track, and we continue to expect $375 million in FY 2026 revenue from the acquisitions and greater than $100 million in cost synergies and other operational efficiencies. As a reminder, we expect to have about 80% of those cost synergies realized on a run-rate basis exiting this fiscal year. As Satish mentioned, given the strong results we have delivered in the first half of the fiscal year, combined with our guidance for fiscal Q3, we are on track for revenue growth in the high-20s percent range for fiscal 2026. With the visibility we currently have, we would expect to see a historically typical sequential revenue increase into fiscal Q4. In addition, we are increasing investments to meet these higher growth levels and now expect FY 2026 capital expenditures to be in the range of $200 million. In summary, we delivered a record quarter driven by focused execution with robust growth across our businesses, improved operating leverage and record cash flow generation. We are seeing accelerating market momentum underpinned by our differentiated portfolio of solutions and increased customer demand and believe we are well positioned to capture sustained investments over the near and medium term as we integrate our acquisitions, evolve our portfolio with new product introductions, and make focused R&D investments aligned to multiyear technology trends. With that, I will now turn the call over to Liz to begin the Q&A session.

Liz Morali, Vice President, Investor Relations

Thank you, Neil. Abby, will you please provide the instructions for the Q&A session?

Operator, Operator

Thank you. To ask a question, please press 1. We ask that you please limit yourself to 1 question and 1 follow-up. To withdraw your question, press 1 a second time. And our first question comes from the line of Mehdi Hosseini with SIG. Your line is open.

Mehdi Hosseini, Analyst (SIG)

Yes. Thanks for taking my question. I have two for Neil. Historically, your backlog had an age of six months. That is, the backlog would be shippable in six months. As your orders are trending at a faster rate, how should I think about the age of backlog? Should I assume that you have enough visibility to extend beyond six months? And then for Satish, I want to follow up to something I asked you last earnings conference call and it has to do with the opportunities in the wireline. Perhaps it will be helpful if you could tell us how opportunities in wireline are split between commercial communications and semis.

Neil Dougherty, Executive Vice President & CFO

Hi, Mehdi.

Satish Dhanasekaran, President & CEO

Let me take this and maybe Neil can chime in. So first and foremost, the opportunities that we size as our AI business which is, I think, really the heart of your question, finished the first half in the $500 to $600 million range. Almost in line with what we did the whole of last year. So quite pleased with the progression of the opportunity in the wireline business. And so, you know, the AI portion of our business as we size it for you is largely in the wireline segment. And then secondly, there is really no change — there is no change to our backlog policy. We still have majority of our business that we book and recognize in a quarter within a six-month period of delivery.

Mehdi Hosseini, Analyst (SIG)

Sure. Is there any way we could size the wireline or AI opportunity as it relates to components? Components for wireline and AI.

Satish Dhanasekaran, President & CEO

The reason I asked the question is, historically, you have had exposure to the entire stack including components — the components that go into wireline networking systems. So at least $500 to $600 million, how does the component size relative to the rest of the stack?

Mehdi Hosseini, Analyst (SIG)

Yeah.

Satish Dhanasekaran, President & CEO

I think I understand the opportunity. If you think about our entire business, it is pretty broad-based. We service the computing marketplace, the networking marketplace, the transceivers and interconnects, and also the hyperscalers. We service a significant part of their workflow, from early R&D to early design to validation, conformance, compliance testing, and into emulations. As they deploy these large clusters, particularly for this quarter, things move around in a given quarter. We also participated meaningfully in the scale-out opportunity, which is where some of the transceiver-related businesses fall in.

Operator, Operator

Thank you. Our next question comes from the line of Andrew Spanola with UBS. Your line is open.

Andrew Spanola, Analyst (UBS)

Thanks. I wanted to ask about the Q3 revenue guide. I guess, you gave the number pro forma for the tariff. And I guess the midpoint of the range would be kind of down slightly from Q2. I am just wondering, is there anything sequential in any of the businesses that we should expect to decline in Q3? Or what is driving that guidance?

Neil Dougherty, Executive Vice President & CFO

Yes. I mean, I think we take the same approach to guidance that we always take where we look at what is scheduled to ship beginning into the quarter, and we have pretty robust models looking at how in-quarter orders are going to convert to revenue. And as you noted, the Q3 revenues are, I would describe as in line with what we saw in Q2 — slightly down, but largely in line. As we look on a half-over-half basis, given our more qualitative comments about Q4, we are expecting the second half of the year to be materially above the first half as we grow. So expecting significant growth in the second half on a revenue basis.

Satish Dhanasekaran, President & CEO

I also want to add that customer demand continues to be very strong. The pace of revenue conversion is influenced by the mix and some timings of some new product introductions — how quickly we can ramp them. Particularly, I think we noted that we have a higher backlog in our AI business due to the strong demand in the first half. And we also have a strong pipeline of systems wins that we have in our backlog both in our semiconductor business and aerospace defense business, which typically have longer lead times.

Andrew Spanola, Analyst (UBS)

Understood. I just wanted to ask, the orders growth in the quarter was quite strong. I am just wondering, in general, are you seeing any change in the way your customers are buying? Or is there any concerns on their part about ensuring supply, or is this just organic growth from AI demand that we are seeing?

Satish Dhanasekaran, President & CEO

The strength was — thank you for asking. The strength was an exceptional quarter. Bookings were very strong. It was record bookings for the company. The strength was broad. If you think of the themes of the strength, AI was obviously the strong theme. Equally, aerospace defense and semiconductor were key contributors to that growth. The growth came across all our businesses and across all of our sales regions, which we are very pleased by. And even with the strong finish, we expect we are entering the second half with a solid set of opportunities that we are very excited about. So I would say that it is broad strength. From a customer behavior standpoint, probably the only thing that we have seen is that for the AI business, there was a stronger sense of urgency from our customers to convert, which translates to a velocity in the pipeline where opportunities move faster. But that is about it. There was no pull-forward that we can discern from the data.

Operator, Operator

Thank you. Our next question comes from the line of Aaron Rakers with Wells Fargo. Your line is open.

Aaron Rakers, Analyst (Wells Fargo)

Congrats on the results. It's been a while, but there has been a lot of dynamics that have changed since you guys have provided a longer-term growth framework. I am curious, Satish, as you think about what evolved in the business, how you think about the growth algorithms looking forward for the company. Is 5% to 7% still the right growth rate, or should we be thinking that the TAM itself with AI has a stronger growth profile?

Satish Dhanasekaran, President & CEO

Thank you, Aaron. Yes. It was a great quarter. We are very excited by the opportunities to have a strong year this year. I would say from a value creation algorithm, fundamental is organic growth for us. There were three pillars that I laid out: innovation accelerating, expanding customer footprint, and being a resilient company that navigates market dynamics and identifies opportunities. When we called out AI in 2023, it was just about the time of the ChatGPT moment, and we felt really good about the long-term opportunity. So we identified it and we invested in it. We are excited by not only AI, but also the other opportunities that we laid out as part of these accelerating technology trends. Equally, we continue to expand our customer footprint as different end markets become addressable. We talked about automotive, which has been okay, but space and satellite is one area that is emerging that we are very excited about right now, and into 6G. The third is being a resilient company — navigating market dynamics like supply chain rebalancing or reshoring that is occurring globally. This quarter and for the whole half, the investments that we made from a go-to-market perspective have enabled us to grow our Southeast Asia business significantly as the supply chains get reconfigured. So I feel very confident about our strategy as we look ahead. The progress we have made in progressing each of our initiatives has a multiyear runway. As we think about it, we will update you on the long-term growth dynamics of the market and our ability to outperform. I am very confident of our ability to outperform under a range of economic conditions, but we will keep you updated on what that forecast should look like as we look ahead.

Aaron Rakers, Analyst (Wells Fargo)

Fair enough. And then as a quick follow-up, Neil, I am curious when we think about the gross margin — I know there is some adjustments given the tariff refunds to consider in the reported results. But still very strong gross margin up 300 basis points. Is there any kind of one-time items this quarter? Or is that a good durable level of gross margin that you think is something to consider going forward?

Neil Dougherty, Executive Vice President & CFO

Thank you. Yes. No, I think if you make the adjustments for the tariff — and again, we provided a reconciliation in our presentation — you will see gross margin excluding the one-time items in the mid-67 range. I think post the acquisitions, which were accretive to our gross margins, I think the right level at these volumes is that range.

Operator, Operator

Thank you. Our next question comes from the line of Meta Marshall with Morgan Stanley. Your line is open.

Meta Marshall, Analyst (Morgan Stanley)

Great. Thanks so much for the question and congrats on the quarter. Neil, a question for you just in terms of the incremental margins moving close to 50%. Just wondering how you are thinking about incremental margins given prior commentary about kind of 40% being that level, trying to get a sense of whether the acquisitions have meaningfully changed that. And then maybe a second question in terms of how you are thinking of the business between production and lab — has that meaningfully changed at this point?

Neil Dougherty, Executive Vice President & CFO

I'll take the first question with regard to the incrementals. Our incremental this quarter on a core basis was just under 50%. And I think it has less to do with the acquisitions than it does with the high rate of growth. We have talked for a long time about 40% incrementals on mid-single-digit growth. I think that is the right way to think about our business when we are growing at mid-single-digits. But when you are growing at multiples of that, you have an opportunity with tightly managed expenses to outperform on the incremental, and that is what you are seeing from us. We are pleased with the flow-through in this environment.

Satish Dhanasekaran, President & CEO

With regard to the second part of the question, Meta, we feel like we have a very strong portfolio with a strong value proposition for the R&D customer and the manufacturing customer. It's really about their workflow — how we enable them to innovate on the front end, but then carry the advantages and learnings into production where there is value. This quarter, for example, both R&D and manufacturing components of our business and portfolio doubled. If you look at our wireline business, it is still a very high percentage R&D in the portfolio, but manufacturing is obviously up given the scaling that is occurring on the AI clusters.

Operator, Operator

Thank you. Our next question comes from the line of Mark Delaney with Goldman Sachs. Your line is open.

Will (for Mark Delaney), Analyst (Goldman Sachs)

This is Will on for Mark Delaney, and thank you for taking our question. To start off, Satish, I believe you called out space as one of the pillars of growth. Maybe you can help us think about how large of a driver and opportunity non-terrestrial networks and LEOs are to the business and how big is it contributing to revenue today?

Satish Dhanasekaran, President & CEO

Yes. It is still a fairly smaller part of our entire revenue stream. On an annualized basis, sub-1% of total revenue of the company. But especially as it relates to the wireless ecosystem and our participation there, we feel it positions us very well as that opportunity scales — as more commercial satellites launch and this multilayered communication architecture of the future emerges. We obviously have a bigger business in space and satellite in the defense sector as well, so we get to participate in the component part of the ecosystem as an expansion opportunity into the emulation side of things as things get more complicated from a spectrum perspective. We feel very good about our early position and the growth potential looking into the future. Kailash, I don't know if you have any other comments to add on.

Kailash Narayanan, President, Communication Solutions Group

That is right, Satish. We are obviously excited by the number of constellations scaling. Clearly, you have seen in the news about Amazon, Globalstar, SpaceX, AST, SpaceMobile — this ecosystem is widening. We are happy to be in a position to contribute to the scaling of the constellations. The use cases are scaling as well: direct-to-cell, broadband, and other applications like autonomous vehicles. The frequency bands are also expanding — L, S, C, Ka, Ku, K. All of this is requiring more advanced capabilities and we have the complete portfolio. We are able to emulate the network, we are able to emulate the device, we are able to emulate orbits as well with Spirent's acquisition and core networks. So we are able to provide an end-to-end solution that customers find very differentiated, and we are excited about the opportunities ahead.

Will (for Mark Delaney), Analyst (Goldman Sachs)

Thank you for all the color. And just for my follow-up, you all maintain that you expect the recent acquisitions to contribute the $375 million to revenue in fiscal 2026. Is there any reason we have not seen an uptick in the acquisition revenue versus expectations given the improved end market demand in your broader business?

Neil Dougherty, Executive Vice President & CFO

No. I mean, I think a big chunk of that was the portions that we got out of the Ansys acquisition — those are recurring-revenue businesses, so the revenue tends to respond more slowly. On the Spirent side, we have certainly seen nice pickup in the PNT side of the business and the network monitoring side of the market is kind of in between cycles at this point in time. We are pleased with the way the integration is going. It is very much on track and well positioned to deliver both on the revenue and realize the synergies that we communicated.

Operator, Operator

Thank you. Our next question comes from the line of Atif Malik with Citi.

Adrian (for Atif Malik), Analyst (Citi)

Hi. It's Adrian for Atif. Thank you for taking the question. We have been hearing more about the adoption of quantum technology, particularly in the defense communities around precision clocks and sensors, and the timeline for quantum computing seems to be pulling in. You did mention quantum a couple of times in your prepared remarks. I am interested in how you are seeing quantum shaping the future of test and measurement.

Kailash Narayanan, President, Communication Solutions Group

Let me take that one. Obviously, it is a long-term trend and we are pleased with the progress we are making. This is an investment that we started to make several years ago, and at this point, we are enabling quantum computing research — more than 1,000 quantum computers going into higher qubit range with multiple entities, government entities and research institutions. It is a steady triple-digit business for us. We are also excited about new opportunities in hybrid compute where you have quantum computers alongside CPUs and GPUs driving the next generation of computer architectures, and we are excited to be playing in that long-range theme.

Satish Dhanasekaran, President & CEO

Pretty excited. It is steady and we are enabling research in this area.

Operator, Operator

Do you have a follow-up? I do not. Thank you. Thank you. And our next question comes from the line of Matt Niknam with Truist. Your line is open.

Matt Niknam, Analyst (Truist)

Hey, thanks so much for taking the question and congrats on the quarter. I had two questions, somewhat related. First, on the supply chain, I am just wondering where you are with procuring enough supply to accommodate the robust demand you are seeing. Any sort of supplier delays or decommits that you have seen? Then secondarily on memory, could you remind us how material some of the cost increases we have seen in memory are to your COGS or gross margins, and the strategy to offset the cost increases here? Thanks.

Neil Dougherty, Executive Vice President & CFO

With regard to the supply chain, we are actively managing the supply chain more so than we were a few months ago, but we are doing a good job working with suppliers and do not have any major concerns from a supply perspective. We have a handful of new products that are seeing an unprecedented ramp following introduction, and we are working really hard to ramp those products more quickly as they transition out of R&D into full-scale production. As you noticed, we have raised our own CapEx spend expectation for the year about 25% from $160 million to $200 million this quarter with the majority of that incremental investment going to aid in that ramp. We are vertically integrated, so while we do buy some chips and other components from outside parties, a significant portion of our highly specialized chips and assemblies are manufactured in-house by Keysight, which gives us a unique level of control. On the memory question, memory is a pretty small portion of our overall BOM and we have proportionally less exposure to the high-bandwidth, leading-edge memory that is in the news these days.

Operator, Operator

Thank you. And our final question comes from the line of Robert Mason with Baird. Your line is open.

Rob Mason, Analyst (Baird)

Congrats again on the quarter. Just hoping you could contextualize the orders a little finer. I think coming into the quarter, the thought was maybe the book-to-bill would be closer to 1 and you clearly outperformed that. Satish, you also mentioned more systems orders. Are these — I think we used to call them longer-dated orders — larger orders? How are those contributing to orders in terms of percent of total now versus six months ago?

Neil Dougherty, Executive Vice President & CFO

Let me knock down the second part of that and then let the others give a broader comment on the order picture. With regard to the systems orders, the systems orders that Satish were talking about in aerospace defense and in semi were not the same as the long-dated orders we were talking about a few years back. These are products that have lead times at the longer end of Keysight products. We have everything from stocked items with days turns to things that have lead times of three months or more. Given the nature of the way semi and aerospace defense ordering happens, those tend to be longer lead-time products for us. They are still largely within the six-month order acceptance window of our standard product portfolio.

Satish Dhanasekaran, President & CEO

I will just say the AI infrastructure as I mentioned saw a stronger sense of customer urgency that manifested in stronger-than-expected bookings. Equally, we are pleased by the doubling of the number of customers in the AI space — the ecosystem is broadening and we are participating in it. On the aerospace and defense side, program spend and budget stability both in the U.S. and in Europe has resulted in stronger bookings, as Neil mentioned. The systems part of it includes a lot of contested threat environments that we are able to emulate and simulate for security applications which had considerable momentum in the quarter. Finally, the semiconductor space has been very strong with advanced nodes, especially with regard to AI compute and the scaling that is occurring globally from a supply chain perspective. We are capitalizing on all three this quarter.

Sung J. Yoon, Senior Vice President, Global Sales

Sure. Thank you, Satish. As you heard, our orders were a record quarter. Despite that, our funnel remains really, really strong. Our focus on engaging our customers — both new and existing — and developing new collaborations is showing up in the funnel metrics. Our funnel intake and total overall pipeline remains very strong. On top of that, our funnel velocity and conversion rates are increasing. With that and our robust upcoming NPI pipeline for the second half, we are very confident in a strong Q3 and sustained momentum in the second half.

Rob Mason, Analyst (Baird)

Excellent. Just a quick follow-up. You updated full-year revenue growth. Was there any update to EPS growth expectation? I am sure there was, but did you quantify that?

Neil Dougherty, Executive Vice President & CFO

We did not make any specific comments about EPS. I did make a comment around how we think about gross margin and incremental margins on growth. I think we have given you enough information to get close.

Operator, Operator

And our next question comes from the line of Andrew Spanola with UBS. Your line is open. Andrew, your line is live. Please check your mute button.

Andrew Spanola, Analyst (UBS)

Very sorry about that. Thank you for taking the follow-up. Satish, I wanted to ask a very high-level question about your AI business. If I think on a multiyear period, right now ASPs are going up as we go from 800-gig to 1.6T. Demand for optics is growing strongly from hyperscalers. Complexity grows and the amount of testing grows so the need for testers grows. It looks linear for the next couple years. I am wondering how you think about the next two to three years in the AI business and what could change or what you are looking at in terms of how it could grow or change?

Satish Dhanasekaran, President & CEO

Thank you, Andrew. Very thoughtful question. We are still in the very early innings in the overall AI landscape, yet we have seen multiple turns as this market has moved. Reflecting on the last couple of years, the focus was largely on training and models, and now we are moving from training to inference being the focus with the promise of agentic AI yet to come. AI clusters are scaling and one thing we know is there will be a few hundred gigawatts of capacity coming online through 2030. The multi-hundred-billion-dollar spend commitments being made take time to trickle through the ecosystem and manifest into implemented data center demand, and constructions are still ongoing. The ecosystem is expanding: what was once a fully vertically integrated stack is now more heterogeneous with more standards-based environments. Depending on the customer's situation, architectures, and workloads, a plethora of underlying technologies are being used — optical and electrical, open standards and closed, pluggable optics and integrated optics. This heterogeneous environment fits the kind of portfolio we have and the breadth we offer. We are able to participate in a broadening market and this looks like a multi-year runway based on discussions with customers and our investments. We will continue to invest in what we see unfolding and keep you posted.

Andrew Spanola, Analyst (UBS)

I appreciate that color. One follow-up: another question I get a lot is the difference between the growth in manufacturing versus R&D businesses in AI. I think the assumption is the manufacturing piece is moving very quickly, but it sounds like you have strong demand for the emulators as well. How do those compare and has that breakdown changed at all from when you indicated it was about 70/30?

Satish Dhanasekaran, President & CEO

It is still largely in the 70/30 range for wireline — roughly 70% R&D and 30% manufacturing — though things move quarter by quarter. For the AI space both R&D and manufacturing doubled in the first half. We are continuing to make traction in both, but in any given quarter depending on what customers emphasize you could see that number move a bit.

Operator, Operator

Thank you. And that concludes our question and answer session for today. I would now like to turn the call back over to Liz Morali for any closing comments.

Liz Morali, Vice President, Investor Relations

Thank you, Abby, and thank you all for joining us today. A replay of today's call will be available on the Investor Relations website later today. We appreciate your interest in Keysight.

Operator, Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's call, and you may now disconnect.