Keysight Q3 Earnings Blunted by Tariff, Acquisition, R&D Costs
Keysight Technologies reported notable sales growth for its fiscal third quarter, partly helped by customer interest in artificial intelligence (AI).
But higher costs from newly escalated tariffs and resulting supply-chain shifts, plus the cost of acquiring a key product and greater development in AI and other technology swung otherwise year-over-year earnings growth into a decline for the Santa Rosa-based maker of electronic test and measurement equipment and software.
For the quarter ended July 31, Keysight posted revenue of $1.35 billion, up nearly 11% year over year, and earnings of $191 million ($1.10 a share), down by just over half from a year before. But net income excluding costs not considered part of business performance was $297 million, up 8% annually. The company achieved a quarterly gross margin of 64% but an operating margin of 25%.
Orders rose 7% compared to the prior year, with growth across both the Communications Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG).
“We saw sustained AI momentum, strong growth in aerospace, defense, government and general electronics, with stability in wireless and automotive,” said Satish Dhanasekaran, Keysight’s president and CEO, during the company earnings call Tuesday.
Dhanasekaran said later, in response to an analyst question, “We’re feeling good about how the year is progressing slightly, even better than what we expected at the beginning of the year. … AI has clearly been a continuing theme of momentum. Aerospace defense, as we expected that things would recover after the (presidential) administration change and other things manifested itself. And wireless is tracking slightly ahead of expectations.”
On the durability of AI-driven demand, Dhanasekaran said, “We’re well-positioned with momentum to capitalize on this long-term opportunity with AI. I’m probably more convinced now that this is going to play out — and (that) we’re well-positioned — than I was maybe 18 months ago when we started down this path.”
Keysight executives also addressed the impact of recent tariff increases, estimating that could amount to $150 million to $175 million annually, up about $75 million with the August increases.
The Trump administration has changed tariff policy and rates multiple times for various countries between April and August, when a number of postponed country-specific tariffs were put into place, according to the Budget Lab at Yale.
“We are making progress on our mitigation strategies, which include supply chain optimization as well as pricing and efficiency actions…. (W)e are factoring in a lag for these actions to be fully realized in our results,” Neil Dougherty, chief financial officer, said on the call.
Executives also discussed the company’s acquisition in the first half of this year of Pittsburgh-based Ansys’ PowerArtist computer chip design product, emphasizing the strategic fit and expected synergies in simulation and power efficiency. Regulators had directed Ansys to sell it before the company could be acquired by Sunnyvale-based Synopsys.
Keysight raised its full-year outlook, now expecting fiscal fourth-quarter revenue between $1.37 billion and $1.39 billion and earnings per share of $1.79 to $1.85.
The price of Keysight stock (NYSE: KEYS) was $158.51 a share at the close of trading Wednesday, down 3% from Tuesday.