Keysight Technologies (KEYS.US) Q3 Earnings and Guidance Both Surpass Expectations: AI Data Center Demand Drives Orders Up 56% Year-on-Year, Commercial Communications Revenue Surpasses $1 Billion for the First Time

According to Zhitong Finance APP, Keysight Technologies (KEYS.US), a supplier of electronic design, simulation, and testing equipment, released its results for the third quarter of fiscal year 2026 (ending July 31) after the market closed on Tuesday. Thanks to the rapid expansion of AI data centers driving demand for its software and testing tools, the company’s adjusted earnings per share and revenue both exceeded market expectations, and it raised guidance for the fourth quarter and the full year. Boosted by this, the stock rose as much as 5% in after-hours trading.

The financial report shows that in the third quarter, the company achieved revenue of $1.85 billion, a year-on-year increase of 36.5%, higher than analysts’ expectations of $1.75 billion; adjusted earnings per share was $3.07, far ahead of the expected $2.48.

According to US GAAP, third quarter net profit was $397 million, or $2.30 per share, compared to $191 million or $1.10 per share in the same period last year. Adjusted net profit was about $531 million.

In terms of orders, third-quarter orders reached $2.09 billion, a year-on-year increase of 56%. Core orders increased 52%, also far exceeding the market expectation of $1.86 billion. Overall gross margin was 69%, operating expenses were $661 million, and operating margin was 33.2%, up 8.2 percentage points year-on-year, exceeding the company’s long-term target range of 31% to 32%. Operating cash flow this quarter was $437 million and free cash flow was $403 million.

The data center expansion boom continues, Commercial communications surpasses $1 billion for the first time

Over the past year, the AI-driven data center expansion boom has continued to benefit Keysight. Its Communications Solutions Group (which accounts for two-thirds of the company’s total revenue and mainly manufactures transceivers and other components used in data centers) recorded third-quarter revenue of $1.345 billion, up 43% year-on-year. Among them, commercial communications business grew particularly strongly, with revenue surpassing $1 billion for the first time, reaching $1.006 billion, a year-on-year increase of 56%; wireline business orders hit a record high, more than doubling year-on-year, and revenue surpassed wireless business for the first time. Aerospace, defense, and government business revenue was $339 million, up 14% year-on-year.

The Electronic Industrial Solutions Group revenue was $501 million, up 21% year-on-year, with growth in all three major markets: semiconductors, general electronics, and automotive and energy. In terms of gross margin, the Communications Solutions Group posted about 71%, and the Electronic Industrial Solutions Group about 64%, both exceeding market expectations.

Software and services revenue grew by double digits year-on-year and now accounts for about 33% of total revenue, with annual recurring revenue accounting for about 24% of total revenue.

Looking ahead, the company expects adjusted earnings per share for the fourth quarter to be between $3.34 and $3.40, and revenue to be between $1.93 billion and $1.95 billion. The midpoints are $3.37 (up about 76% year-on-year) and $1.94 billion (up about 37% year-on-year), both well above market expectations of $2.68 and $1.83 billion.

For the full year, the company expects fiscal 2026 total revenue to grow about 32%, and adjusted earnings per share to grow about 60%.

Keysight CEO Satish Dhanasekaran stated: “Our record third-quarter results and outlook reflect the increasing relevance of our strategy and product portfolio in helping customers solve complex engineering challenges in all end markets. We are confident in maintaining our momentum and creating long-term value.”

In the earnings call following the release of the financial results, the company said that AI data center construction continues to drive demand for commercial communications, especially for high-speed wireline business, with strong orders for 800G and 1.6T optical transceivers, silicon photonics technologies, and pre-silicon validation for hyperscale customers. In addition, a clear 6G standards roadmap, defense modernization, and advanced semiconductor node expansion also provide diversified growth support for the company.

Management also revealed that acquisition integration is largely complete, with the cost synergy target of $100 million expected to reach 80-90% by the end of the fiscal year, and an incremental synergy of about $50 million anticipated for fiscal 2027. The company’s sales pipeline is currently at a historical high, and fourth-quarter orders are expected to exceed $2 billion for the third consecutive quarter.

However, management also cautioned that supply chain constraints are still an important near-term limiting factor for converting strong demand into revenue, but there are no signs of abnormal demand or customers pulling orders forward.