KEYS.US (KEYS.US) Q3 conference call: AI pushes cable business to “C position”, executives say supply can no longer keep up with demand

The Zhitong Finance App learned that electronic design, simulation and testing equipment supplier KEYS.US (KEYS.US) announced the results for the third fiscal quarter of fiscal year 2026 and held a financial conference call.

Company participants

Liz Morali — Head of Investor Relations

Satish Dhanasekaran — President, CEO and Director

Neil Dougherty — Executive Vice President and Chief Financial Officer

Kailash Narayanan — Senior Vice President and President of Communications Solutions Group

Sung Yoon — Senior Vice President of Global Sales

Jason Kary — Senior Vice President and President of Electronics Industry Solutions Group

Conference call participants

Aaron Rakers — Wells Fargo Securities LLC Research Division

Meta Marshall — Morgan Stanley Research Division

Mark Delaney — Goldman Sachs Group Research Division

Timothy Long — Barclays Research Division

Adrienne Colby — Citigroup Research Division

Andrew Spinola — UBS Investment Banking Research Division

Marc Vitenzon — J.P. Morgan Research Division

Matthew Niknam — Truist Securities Research Division

Quinn Fredrickson — Robert W Baird Research Division

Bastien Faucon-Morin — Susquehanna Financial Group Research Division

Conference content

conference operator

Hello, ladies and gentlemen, welcome to Keysight's financial conference call for the third quarter of fiscal year 2026. I'm Hilary and I'm the main operator today. [Operator Instructions] This conference call is being recorded today — Tuesday, August 18, 2026 at 1:30 p.m. Pacific Time.

I'm now forwarding the call to Liz Morali, VP of Investor Relations. Ms. Morali, please speak up.

Liz Morali

Head of Investor Relations

Good afternoon. Thank you all for attending Keysight Technology's financial conference call for the third quarter of fiscal year 2026. I was joined on the conference call today by Satish Dhanasekaran, President and CEO; Neil Dougherty, Executive Vice President and Chief Financial Officer; Kailash Narayanan, President of Communications Solutions Group; Jason Kary, President of Electronics Industry Solutions Group; and Steve Yoon, Senior Vice President of Global Sales.

Following the scheduled presentations by Satish and Neil, we will have a question and answer session. The press release and information supplementing today's discussion can be found on our investor relations site at investor.keysight.com.

In today's discussion, we'll be making forward-looking statements about the company's financial results. Actual results may differ materially from those mentioned in these forward-looking statements due to risk and uncertainty. For information on these risks and uncertainties, please review our most recent Form 10-K and Form 10-Q filed with the U.S. Securities and Exchange Commission (SEC). We do not intend to update any forward-looking statements.

Additionally, we will refer to non-GAAP financial measures and refer to core growth (core growth), which excludes the impact of acquisitions or divestitures completed within the past 12 months and the impact of exchange rate changes. The most directly comparable GAAP financial indicators and reconciliation tables can be found on our investor relations website. Unless otherwise specified, all comparisons are year-over-year comparisons.

Now I'll hand over the phone to Satish.

Satish Dhanasekaran

President, Chief Executive Officer and Director

Thanks Liz. Good afternoon, and thank you all for attending today's earnings conference call. It was another excellent quarter for German Technology, with record results and widespread growth in various markets. Excellent performance was due to the team's strong execution and expanded demand for Keysight's full range of differentiated products and solutions. Orders increased 56%, revenue increased 36%, and earnings per share increased 79%, while generating strong free cash flow. Based on this momentum, we raised our earnings outlook for the fourth quarter and the full fiscal year.

Customers are investing in solving increasingly complex engineering challenges in our end markets, such as artificial intelligence infrastructure, advanced semiconductors, defense modernization, and next-generation communications. Our outstanding performance reflects the differentiation of Keysight's solutions strategy and the growing value we bring to our customers throughout their innovation lifecycle. We continue to focus on implementing long-term value creation strategies, beginning with identifying structural growth opportunities and investing in advance, partnering deeply with industry leaders at an early stage, and building differentiated capabilities to address our customers' mission-critical applications. We are confident in maintaining our momentum and achieving long-term value.

Next, let's look at the business segment. Communications Solutions (Communications Solutions) orders rose for the ninth consecutive quarter, setting a new record, with revenue growth of 43%, thanks to the compound growth momentum of Commercial Communications (Commercial Communications) and strong performance in the Aerospace, Defense and Government (Aerospace, Defense and Government) businesses. In terms of commercial communications, we saw that the momentum of the first half of the year continued into the second half, mainly driven by the rapid expansion of the AI infrastructure ecosystem. As a result, orders for the cable business (wireline) hit a record and more than doubled year over year. The four pillars of opportunity associated with this business—AI infrastructure expansion, rate upgrades, silicon photonics, and system-level simulation—all continue to drive customer growth and pipeline expansion.

The breadth of our product portfolio and ongoing collaboration with customers across the entire ecosystem enables Keytech to participate in every aspect of the AI innovation lifecycle, from pre-chip design, to chip and component verification, to system-level simulation of data center racks and clusters, to high-value manufacturing. The industry continues to expand, and we are seeing a significant increase in application diversity and greater opportunities to expand cooperation with customers around the world.

Let me share a few examples of business diversity. First, silicon chip designers are using Keysight's recently launched high-performance digital and RF solutions for laboratories to validate new designs with system-level requirements to ensure interoperability, performance, and reliability. Second, interconnect manufacturers are using Keysight's high-fidelity analyzers to characterize the performance of high-speed backplanes to ensure signal integrity and manufacturing yield. Third, switch designers are using Keysight's simulators to verify network performance under AI workloads and protocols. Fourth, transceiver manufacturers are using our industry-leading 224G digital communication analyzer to rapidly expand the production capacity of 800G and 1.6T optical transceivers. Investments in the optical component ecosystem continue to increase, and key players are adopting our broad laboratory product portfolio, including the industry's first 220 GHz lightwave component analyzer, which we launched at OFC this year. Finally, our strategic partnerships with hyperscalers (hyperscalers) are deepening, and they are integrating our pre-chip simulation and workload solutions into their development processes.

Looking ahead, the expansion challenges brought about by AI data center deployments are driving a multi-year industry roadmap involving new architectures, evolving technologies, and new standards. We are well-positioned and continue to invest to seize these opportunities before technology transitions.

Switch to wireless services (wireless). Orders increased significantly again this quarter, customer investment in next-generation connectivity continued to increase, and supply chain demand to support the expansion of AI infrastructure continued. In June, the 6G schedule was confirmed at the 3GPP plenary meeting in Singapore, and the industry's first standard target is set for March 2029. As this milestone is established, clients are moving from exploratory research to funding development projects. Importantly, 6G is not just a traditional direction of innovation around higher speed and additional spectrum. The three emerging technology areas are AI-RAN, integrated sensing and communications (ISAC), and non-terrestrial networks (NTN). Each is expanding the ecosystem and providing us with an opportunity to provide end-to-end solutions for these use cases based on our leadership in 5G solutions. We work with customers in multiple application areas, such as evaluating AI-enabled beamforming, high-fidelity digital twins, and network traffic steering, and the traction of our solutions continues to grow.

Built around a flexible platform, our solutions enable customers to validate various candidate technologies and provide insight into early 6G use cases for terrestrial and non-terrestrial networks through wireless channels, networks, devices, and satellite simulators. Keysight's comprehensive product portfolio, from the physical layer to simulation tools, is helping us win early victories among industry leaders.

Switch to aerospace, defense, and government businesses. Orders achieved double-digit growth, with growth in all regions, thanks to the global emphasis placed on deterrence and defense modernization. Modernization has increased the performance requirements of the entire market. In the field of radar, the industry is accelerating its transformation to advanced radar architectures. These use cases require high-performance verification solutions to drive rapid adoption of our multi-channel RF solutions and next-generation oscilloscopes among major contractors. The new security architecture has also accelerated adoption of low-cost autonomous platforms (from drones to low-orbit satellite constellations), which are increasingly being delivered by venture-backed defense technology companies operating at commercial speed. We're recognizing this shift and positioning ourselves to serve this new ecosystem. Our partnerships with defense startups and new types of prime contractors (neo-primes) are expanding. This year, we achieved key victories in satellite, drone, and phased array radar applications. Flexible Positioning, Navigation, and Timing (PNT) has become a higher priority issue as GPS interference around conflict zones increasingly affects safety systems. Demand for Spirent (Spirent) PNT solutions, which simulate various multichannel interference and spoofing scenarios in the lab, are accelerating, enabling customers to design and develop robust and resilient systems for these mission-critical environments.

As we integrate our teams and solution portfolios, we have a solid range of opportunities to build. With record budgets, faster customer adoption of capabilities, and product portfolios built specifically for mission-critical needs, we've seen an enduring demand cycle for years to come, and we're fully prepared to seize it.

Switch to Electronic Industrial Solutions Group (EISG). We have once again achieved a record quarter of both orders and revenue, with revenue growth of 21%, and significant double-digit order growth in all three markets (general electronics, semiconductors, and automotive and energy). In general electronics, growth is once again being led by AI-related innovations and infrastructure investments. Testing intensity for high-performance components such as multi-layer PCBs and capacitors continues to rise to support next-generation computing. Higher frequencies, tighter tolerances, and higher GPU and CPU densities are increasing production complexity and quality requirements. Our precision measurement solutions are being used to qualify these components in production. Furthermore, the digital health business achieved double-digit growth, and both wearable devices and surveillance applications grew. The education business grew thanks to our semiconductor talent development solutions, particularly in Asia.

On the semiconductor side, we have once again had a record quarter, thanks to advanced manufacturing processes, high-bandwidth memory, and continued capacity expansion in silicon photonics. With the increasing popularity of optical interconnections, commercial production of silicon photons is being accelerated in leading foundries and integrated equipment manufacturers (IDM). We're also seeing a healthy demand for semiconductor R&D solutions. We maintain a high level of collaboration with industry leaders, giving us a clear insight into their future needs and looking forward to next year and beyond.

Finally, in terms of automobiles and energy, orders achieved steady double-digit growth. Investments remain focused on software-defined automotive architectures, in-vehicle networks and cybersecurity testing are in broad demand, and our solutions provide verifiable compliance support for new standards. Our energy and charging business also grew this quarter, covering power grid and automotive customers, involving high-power charging, energy storage, compliance, and infrastructure verification applications.

Overall, this quarter's results reflect the strength and diversity of our business. Our product portfolio is supporting the major waves of innovation that are shaping our market—now AI and accelerated computing, and 6G, defense modernization, power grids, and autonomous systems in the next few years. Each of these technologies must be designed, validated, and proven before they can be brought to market. With its differentiated technology stack and continuous investment in R&D, Keytech is well positioned to outperform the market for a long time. I would like to thank the entire Heide Technology team for their hard work and commitment to customer success. Now I'll hand over the phone to Neil. Neil?

Neil Dougherty

Executive Vice President and Chief Financial Officer

Thanks Satish and hello everyone. Our momentum continued in the third quarter of fiscal year 2026, where both revenue and earnings per share exceeded the upper limit of the guideline range, setting historic records. This performance was driven by further acceleration in commercial communications business, as well as continued strong electronics industry solutions and aerospace, defense, and government businesses. Our highly differentiated portfolio of solutions resonates with our customers, enabling us to expand our profit ratio over the same period. Additionally, we have solid cash flow generation and are expected to achieve record cash flow from operating activities in the 2026 fiscal year.

Next, let's look at the specific data for the third quarter. Orders were $2,091 million, up 56% year over year according to the reported caliber. The acquisition contributed 5 percent to the increase, while the exchange rate had a negative impact of 1 percentage point. According to the core caliber (excluding the above items), orders increased by 52%. Revenue was US$1,846 million, up 36% on the reporting scale and 31% on the core scale. Gross margin was 69%, and operating expenses were $661 million. The operating margin was 33.2%, an increase of 820 basis points over the previous year, exceeding our long-term target range of 31% to 32%. We achieved net profit of $531 million and earnings per share of $3.07. The core business contributed significantly to the performance. The core operating margin was 34.7%, and the operating margin increased by 66%.

Looking at the business sector, Communications Solutions Group (CSG) achieved revenue of US$1,345 billion, an increase of 43% according to the reporting scale and a 36% increase in the core caliber. CSG's gross margin was 70.8%, and operating margin was 34%. Within CSG, the commercial communications business achieved 1 billion US dollars for the first time in a single quarter, and revenue reached 1.06 billion US dollars, an increase of 56%. Among them, the excellent growth of the wired business led, and the wireless business also achieved strong growth. This quarter's wired business revenue surpassed wireless business for the first time. The aerospace, defense, and government business achieved revenue of US$339 million, an increase of 14%.

Electronics Industry Solutions Group (EISG) achieved a record revenue of $501 million, an increase of 21%, and growth in all three markets (general electronics, semiconductors, automotive, and energy). EISG's gross margin was 64.1% and operating margin was 31%.

Both software and services have achieved double-digit growth. Currently, they account for about 33% of Keysight's revenue, while annual recurring revenue (ARR) accounts for 24% of total revenue.

Next, let's look at the balance sheet and cash flow. At the end of the quarter, we held $2,605 million in cash and cash equivalents, operating cash flow of $437 million, and free cash flow of $403 million. This quarter, we bought back about 640,000 shares of German Technology shares at an average price of about $326 per share, with a total consideration of US$210 million. Since fiscal year 2026, the total share repurchase amount to $517 million.

Before looking ahead, I'd like to provide an update on recent acquisitions. Our consolidation work, including system migration, is now almost complete, one quarter ahead of schedule. As consolidation progressed faster than expected, the realization of cost synergy effects will accelerate in the fourth quarter. We now expect to achieve an operating rate of 80%-90% of the $100 million cost synergy when we exit this fiscal year.

Now let's look at our outlook. For the fourth quarter of 2026, we expect revenue to be between $1,930 million and $1.95 billion, with the midpoint representing a 37% year-over-year increase. We expect fourth-quarter earnings of $3.34 to $3.40 per share, up about 76% year over year at midpoint. This will bring the 2026 revenue growth rate to 32%, and the earnings per share growth rate of about 60% (all at midpoint). The guidelines are based on a weighted diluted share count of approximately 172 million shares.

Finally, FY2026 has been an extraordinary year since then, with outstanding performance in all businesses. Our leading solution portfolio is linked to multiple technology megatrends and is driving significant growth and margin expansion. We continue to focus on empowering our customers to further accelerate technological innovation, thereby driving continued endogenous growth, profitability, and ultimately creating value for shareholders.

At this point, I'll hand over the phone to Liz to begin the Q&A session.

Liz Morali

Head of Investor Relations

Thanks Neil. Hilary, please provide guidance for the Q&A session.

Q&A session

conference operator

[Operator Instructions] The first question came from Wells Fargo's Aaron Rakers.

Aaron Rakers

Wells Fargo Securities LLC Research Division

Congratulations on the strong results. I'm curious. You have a lot of comments about 6G and standard path settings. How do we think about German Technology's opportunities to participate in 6G? How would you describe this opportunity compared to the 5G cycle we saw a few years ago? When should we expect the 6G cycle to generate substantial revenue? And how do you frame Total Addressable Market (TAM) opportunities relative to 5G? I have a quick follow-up question.

Satish Dhanasekaran

President, Chief Executive Officer and Director

Yes. Thanks Aaron. Yes, it's been an excellent quarter. The team executed very well and we are happy with that. When it comes to 6G, every time you start a new intergenerational cycle, you always focus on differences from the past. Usually you can't wait too long to make a decision. That's why we've been focusing on making this company a solutions company and first-to-market (first-to-market) company. As a result, we've been interacting with the industry over the past few years. As I indicated in my scheduled statement, we are beginning to see the industry coalesce around 2029 around early 6G standards. The US Olympics is another milestone. This isn't new — every time wireless standards evolve, coincidentally, they often involve some kind of sporting event. So that was another milestone in historical comparison. But from a technical perspective, you'll traditionally see new spectrum to support higher speed and bandwidth, which is the foundation of almost any technology, and so will 6G. But as we pointed out, we're also seeing other innovative directions, and AI-RAN is one of them, with new uses such as ISAC, security infrastructure, and the tighter integration of non-terrestrial and terrestrial assets into communications frameworks. We have invested in all of these areas, have a portfolio of solutions, and work with industry-leading clients. Therefore, our basic judgment is that 6G's opportunity will be greater than what we've seen in 5G, and we're fully prepared to seize it.

Aaron Rakers

Wells Fargo Securities LLC Research Division

OK. Then quickly follow up on a cable business issue. I know you mentioned that this is the first time that the wired business has surpassed the wireless business in the quarter. Regarding AI and the continuing expansion of the set of opportunities, can you help us understand the importance of AI to your business (whether it's an intranet business or overall)? And looking ahead, how much will this driver of growth continue?

Satish Dhanasekaran

President, Chief Executive Officer and Director

Yes. We are very satisfied with the growth in the cable business and AI-related demand, which is the main driver. Of course, as opportunities increase, we'll also see secondary opportunities, but let's try to illustrate this using the cable business as a framework. The cable business not only surpassed wireless in this quarter, but we have also seen tremendous momentum in the cable business since the beginning of the year. We are very satisfied. The third quarter was the quarter with the strongest AI and cable business opportunities, and the channel pipeline (pipeline) continued to grow strongly.

As a result, I think we are in the early stages of long-term AI adoption, not only in the wired sector, but as various factors converge, we will begin to see integration with wireless, automotive, and many other terminal markets where we are well-positioned. However, in the short term, we are very satisfied with the traction gained by differentiated products and solutions. Currently, supply capacity is far from keeping up with demand, customers are planning ahead, and our AI business is performing very well.

conference operator

The next question comes from Morgan Stanley's Meta Marshall.

Meta Marshall

Morgan Stanley Research Division

Congratulations on this quarter's results. You mentioned a lot about how more markets or more different types of technology need to be tested. But can you talk about how the test density has changed? Although the terminal market is more diverse, how does the overall testing content change as these technologies become more complex? Also, Neil, incremental profit margins for this quarter are very healthy. How should we view the scope of future guidance?

Satish Dhanasekaran

President, Chief Executive Officer and Director

Yes, Meta, as you've noticed, as the year progresses, not only are we reaping the opportunities traditionally associated with customer capital expenditure investments, but the pool of future opportunities continues to grow and expand. This is because over the past few years, this ecosystem has largely been a homogenous vertical integration stack, with a limited set of opportunities, but we've done a great job. However, through early intervention, we are also collaborating with other players entering the field, which is becoming increasingly heterogeneous, covering every aspect from computing to racks to protocols. We're seeing an increase in the number of protocols at every layer. Architectures increasingly involve a combination of GPU, CPU, and DPU. This isn't just about complication; the reality is that different customers have different strategies, and they're trying to choose the architecture that's right for them based on their workload type. Our tools are performing better and better with a wider range of customers, which lays a good foundation for our future. Kailash, do you have more to add?

Kailash Narayanan

Senior Vice President and President of Communications Solutions Group

Yes. Fundamentally speaking, the design margin is shrinking, right? With higher data rates and lower latency, AI needs no packet loss. Even with a few gaps, the model doesn't work properly. As a result, our customers see that they can no longer guarantee everything through design; they also need to test in production. This greatly increases the intensity of design simulation and testing. Now look at a compute or switch tray, which has grown from dozens of high-speed pins to hundreds, which gives us more insertion points. Our VNAs and oscilloscopes are tested at the signal level. We've introduced a new combination to test bit-level signals, and our AI workload simulators test and simulate at the protocol and package level. Looking at extensions, from single-chip architectures to small-chip architectures, the interoperability of small chips requires simulation and testing. Customers require that when the chip runs the model, we stress test the chip simulation environment. They want to see if the chip is shutting down or overheating, and they want to activate all the cores, along with higher power and higher speed. All of this creates additional opportunities for us. We're excited about the complete combination—electrical, optical, RF, digital, and protocols—we integrate all of our capabilities to empower our customers. We are seeing significant growth in both R&D and manufacturing businesses.

Neil Dougherty

Executive Vice President and Chief Financial Officer

Yes. Meta, regarding your second question, it's clear that our core operating leverage this quarter was very strong. Looking ahead, at least as far as 2027 is concerned, I am confident in my ability to continue surpassing the 40% leverage target, especially given the synergy we will achieve. I mentioned that we have almost completed the consolidation of our recent acquisitions. You mentioned the scope of the guidelines. The only thing I need to remind everyone to note is that we had a one-time tariff impact this year, artificially increasing profitability in 2026, and this will not be repeated. So if this factor is adjusted and considered on an operational basis, I expect we will continue to exceed the 40% target.

conference operator

The next question comes from Goldman Sachs's Mark Delaney.

Mark Delaney

Goldman Sachs Group Research Division

Congratulations on the strong results. First, I'd like to discuss demand sustainability. I think orders have surpassed $2 billion for two consecutive quarters. Looking ahead to the fourth quarter and next year, do you think this level of demand is sustainable, or can Deutsche even grow on this basis?

Satish Dhanasekaran

President, Chief Executive Officer and Director

Yes, Mark, we think so. I just want to say that our basic judgment is that orders are slightly above Q3, in line with the seasonality, and then follow the seasonal trend into FY2027 Q1. Steve, I know what's going on with the pipeline, you might have some comments.

Sung Yoon

Senior Vice President of Global Sales

Thanks Satish. First, I'd like to say that now is a good time to be the head of sales at Keytech. We performed well in the third quarter, achieving our highest quarterly performance in history for the third consecutive quarter. Given the traditional seasonal growth we anticipate in Q4, we are confident of another record quarter and surpassing $2 billion for the third consecutive quarter. What's even more encouraging is that despite our record quarterly results, our sales pipeline (sales pipeline) continued to grow throughout the year and is currently at an all-time high. I think it's proof that our marketing strategies and priorities are working. Our priority has always been to spend as much time with our customers as possible, identify new opportunities, uncover unexpressed needs, and acquire new customers (new logos). For example, since the beginning of the year, we have added nearly 3,000 new customers, bringing in over $100 million in incremental business. We are also working closely with marketing departments to expand our reach and reach customers earlier in the buying process. Additionally, one of our priorities is to increase the level of interaction with top customers. As a result, our largest customer performed well and achieved high double-digit growth this year. More importantly, we're expanding its reach to their entire ecosystem. We are also increasing production capacity in high-growth regions and markets. Southeast Asia is a great example. Our business has more than doubled and is the fastest growing region this quarter and year round. All in all, we have further accelerated our momentum this quarter. Our monthly funnel intake (funnel intake) reached a record high last month, and the 12-month rolling channel also set a new record.

Mark Delaney

Goldman Sachs Group Research Division

Very helpful background. My other question is about supply and the ability to meet this level of demand. Can you talk in more detail about the ability of German Technology to meet these needs, including the supply chain and the perspective of obtaining sufficient parts, as well as its own manufacturing capabilities?

Satish Dhanasekaran

President, Chief Executive Officer and Director

Yes. Thanks Mark. As Steve said, we're seeing widespread growth in demand. I think in addition to everything Steve said, we're seeing demand globally and our product portfolio is performing well. From a supply chain perspective, our team did a great job this year and continued to expand with discipline, as we can see from record levels of gross margins. We continue to meet customer needs. It's also true that the current supply environment is less flexible than it was a year ago. As a result, we are working with suppliers to lift supply chain restrictions, especially at this level of demand, and we remain confident in the Q4 guidance.

conference operator

The next question comes from Barclays Tim Long.

Timothy Long

Barclays Research Division

I asked a question first and then came back to ask. I want to go back to the strong AI business in commercial communications and cable businesses. You mentioned some apps and use cases that help with this. I'm curious if you can update this business on the ratio change between R&D and manufacturing? And what are the developments in AI-related businesses? Then I have a follow-up question.

Neil Dougherty

Executive Vice President and Chief Financial Officer

Yes. Regarding R&D and manufacturing, I will talk about it from the perspective of the cable business described above. Historically, this business has always been one of the businesses with the highest share of R&D. We have talked about 80% R&D and 20% manufacturing. Recently, we mentioned that with the increase in manufacturing businesses supporting the construction of AI data centers, this ratio has shifted to about 70% R&D and 30% manufacturing. If you look at the past few quarters in a shorter period, it's probably more like two-thirds or one-third. But even though we serve the entire ecosystem and help customers take products from R&D to manufacturing and final deployment to market, the cable business is still highly R&D biased.

Timothy Long

Barclays Research Division

OK. Very good. Then my second question, the follow-up question, you mentioned hyperscale customers. I'm curious if you can talk about the importance of this customer group at a high level? Are they — is there a difference in profit margins? Are they buying more products because they are involved in multiple technologies? Are you referring to just four or five major customers, or are you also seeing this trend spread to the next tier of cloud service providers and other players?

Satish Dhanasekaran

President, Chief Executive Officer and Director

Yes, Tim, I'd say hyperscale customers and our early collaboration began with the acquisition of Ixia about 5 years ago, when Ixia had more relationships in the early days. Currently, I think our relationships with hyperscale customers aren't just in the US; I'd like to complement some model companies that drive ecosystem demand. Strategically, this is important because they have deployed huge amounts of capital, which is transmitted downstream to the entire ecosystem. So it's important to understand their needs. Additionally, many companies have publicly disclosed their silicon chips — self-developed chips and efforts. So they're an important customer base for us. In terms of revenue concentration, they actually account for a relatively small share of about 10% of our business revenue from direct contributions from these companies, but they do have a lot of downstream influence and influence on the ecosystem. So it's very important. Equally important, even when it comes to R&D and manufacturing applications, we are discovering new opportunities as the industry expands, such as workload simulation, because that will be the future direction. We are in a very good position in terms of simulation platforms that can help the industry discover various heterogeneous workload simulations related to AI, because as Kailash mentioned earlier, this will be key, given the latency requirements of AI and the challenges of expanding data on AI networks.

conference operator

The next question comes from Citi's Adrienne Colby.

Adrienne Colby

Citigroup Research Division

I'm Adrienne, representing Atif Malik. I would like to ask about the slowdown in month-on-month growth in the aerospace, defense, and government business sectors. You described strong demand dynamics and double-digit order growth, but we did see a decline in the growth rate there.

Satish Dhanasekaran

President, Chief Executive Officer and Director

Yes, Adrienne, I said, and you've heard me say on the phone, that aerospace and defense is a business I can easily predict for years, but it's hard to predict a single quarter, because it involves a government budget and has its own pace. But this year, we were very pleased with the growth and adoption of the solution, including the newly acquired Spirellant PNT product. Neil, do you have specific comments?

Neil Dougherty

Executive Vice President and Chief Financial Officer

Yes, I just want to reiterate that we are still growing in double digits. These terminal markets do fluctuate from quarter to quarter. My real feeling is that there's probably nothing to see.

Adrienne Colby

Citigroup Research Division

Then as a follow-up question, can you comment on whether the AI business's operating rate in the cable business is in line with last quarter?

Satish Dhanasekaran

President, Chief Executive Officer and Director

Yes. Let me add that we have established a backlog of orders in this business. So if you look at revenue and come to some conclusion, it's a function of supply and supply chain. So I wouldn't recommend overinterpreting it, as Neil said. Please continue.

Neil Dougherty

Executive Vice President and Chief Financial Officer

Can you repeat your follow-up questions?

Adrienne Colby

Citigroup Research Division

Yes. I just wanted to confirm or ask if the operating rate of the AI business in the cable business segment is in line with the previous quarter, or are you seeing an expansion?

Satish Dhanasekaran

President, Chief Executive Officer and Director

It has been expanded.

conference operator

The next question comes from UBS's Andrew Spinola.

Andrew Spinola

UBS Investment Banking Research Division

You reported another strong quarter in the EISG section. I think you've highlighted some of the strengths of semiconductors and general electronics. I was wondering if you could disassemble it in more detail. You mentioned last quarter that you're seeing some signs of AI demand expanding into these sectors. I'm wondering if you're seeing this happening and do you think these sections will still have quite a meaningful expansion? I'd also like you to comment on EISG's very strong operating margin this quarter and how you see its future sustainability.

Satish Dhanasekaran

President, Chief Executive Officer and Director

Yes, Andrew, pleased with the YTD double-digit growth in EISG's business. The recovery of the automotive business is another theme, while the semiconductor business is also strong. But we have Jason here and he's going to talk about that.

Jason Kary

Senior Vice President and President of Electronics Industry Solutions Group

Yes. Thank you Andrew for the question. Specifically, when it comes to the smooth flow of AI to other parts of the business that we have seen, we have talked many times about the leveraging of communication technology and IP to the terminal market. We do have some specific technologies in semiconductor wafer testing, and we are seeing significant capacity expansion in these areas, involving multiple dimensions, including advanced manufacturing, storage, and silicon photonics. Looking ahead, predictions for wafer fab equipment (WFE) and capital expenditure to enter these markets continue to expand and are therefore steady. In the field of general electronics, what you see is also related to Meta's previous question about test strength — multi-layer, high-density heterogeneity appears at the component level, leading to an increase in production-side testing intensity. Kailash mentioned that we have seen this in some general electronics end markets. Again, this is moving from board level to component level, and tolerances are getting tighter due to higher frequencies, higher data throughput, and expectations for high performance in a small space. I think that's the customer's challenge. The advantage of our solution is that we cover the entire process from R&D to production, so the leverage effect is strong. Regarding operating margins, yes, we are happy with the progress we have made. Historically, the business has been somewhat damaged. Over the past 12 to 18 months, we've really focused on driving revenue growth because that is always the starting point while transforming parts of the business. We are investing more in software elements such as ESI and Optical Solutions Group. At the same time, we have rationalized some parts of our business, which may have lower profit margins, while also pursuing other opportunities such as digital health and power grids. All in all, despite the differences in the composition and characteristics of each business within EISG, we are confident in our ability to continue to achieve higher levels of profitability in the future.

Andrew Spinola

UBS Investment Banking Research Division

Thanks Jason for the details, that was very helpful. I have a follow-up question for Neil. In a previous review, you discussed the possible synergy of over $100 million from the acquisition. Now that the integration is complete, are your estimates of these synergy likely to be greater? I want to know how much contribution I can assume in Q4 and Q1?

Neil Dougherty

Executive Vice President and Chief Financial Officer

Yes. I'd like to say that right now, given where we are, we clearly have a direct eye on $100 million. So I think — if there were risks before, then now they've been drastically reduced. As this business begins to operate more fully within the framework of Keysight Technologies, we will continue to look for additional opportunities. So I can't give a specific number, but history shows that when the first wave of synergy effects occurs, there will usually be smaller amounts but additional subsequent efficiency. If you think about it from an incremental perspective, from fiscal year 2026 to fiscal year 2027, I'm considering the order of 50 million dollars. I think we achieved close to $40 million this year, and again, gradually increasing from Q1 to Q4. I expect we will be close to achieving 90% of this $100 million as we enter the next fiscal year.

conference operator

The next question comes from J.P. Morgan's Joseph Cardoso (actual speaker is Marc Vitenzon).

Marc Vitenzon

J.P. Morgan Research Division

I'm Marc Vitenzon, representing Joseph Cardoso. I think you've given us a lot of details about AI-related cables. So I'd like to inquire about the traditional non-AI part of the wired business. How is this business growing? What did you guys see there?

Satish Dhanasekaran

President, Chief Executive Officer and Director

Yes. I think we're seeing convergence, and I think Marc could sum it up like this. I think this is to be expected as this disruptive technology begins to penetrate multiple terminal markets. Let me give you an example. The wireless customer base may have never had to think about AI in history, but now AI is entering the RAN. Here's an example of an app. The wireless ecosystem has a number of known contract manufacturers serving the telecommunications market. Many of them have now begun investing in building their own AI racks. This is another emerging application, and we're well-positioned because of our strength and reputation within this ecosystem.

Marc Vitenzon

J.P. Morgan Research Division

Understood. Then you mentioned that software and services account for about 33% of revenue. I'm wondering where you think this number will eventually go, especially considering recent acquisitions?

Satish Dhanasekaran

President, Chief Executive Officer and Director

Yes. I think the company's strategy is to become a solutions company. This is the direction we've been working hard to build. Essentially, this means providing more software-centric solutions and providing differentiated services to build lifetime value contributions. We do it at the speed of the market and the customer. Everything revolves around customer needs. So we're not trying to impose a business model on the market. Yes, we reached 40% about a year ago, and now we're back to 33%. But I'd say software and services are currently at record levels in dollar terms, and we'll continue to innovate to keep the market differentiated.

Neil Dougherty

Executive Vice President and Chief Financial Officer

I'd also like to add that our software and services business is also growing in double digits, but currently it's not growing as fast as the hardware business.

conference operator

The next question comes from Matt Niknam of Truist Securities.

Matthew Niknam

Truist Securities Research Division

Congratulations on the results. I have two questions. First, with regard to revenue guidance for the fourth quarter, the month-on-month increase was only about 5%. I know this is normal seasonally, but your book-to-bill ratio (book-to-bill) has been over 1.1 for two consecutive quarters. So I'm wondering if supply restrictions have dampened fourth-quarter revenue guidance? And how much of the growing backlog of orders will be shipped in the next fiscal year? Second, over the past few years, you've usually given an initial framework for the next fiscal year on a third-quarter conference call. I was wondering if you would be prepared to provide any initial ideas given the strong momentum in your business?

Satish Dhanasekaran

President, Chief Executive Officer and Director

Maybe I'll answer the 2027 review, Neil, and you can add the rest. That's a great question. Undoubtedly, we are on a strong footing as we enter the 2027 fiscal year, although we are still aware that 2026 will continue to perform excellently, building on the growth of 2025. The supply chain will continue to be a revenue constraint in the near future. I've mentioned that before. But when I look at the broader end market, I only need to look at technology trends; the complexity of these technologies only increases. The intensity and speed of customer innovation in our global end markets is currently endless, and this intensity matches their investments. As a company, we are well positioned because our investment in R&D in the downturn cycle will now pay off, and we have begun a good replacement cycle for new products, which have been warmly welcomed by our customers. Seen from this perspective, we are in a good position. Given that demand has continued for several quarters and we have been performing well every quarter, we have taken a longer-term perspective (over 18 months) to plan our supply chain and are working to increase flexibility, but these are lagging, such as we will marginally redesign certain products to suit secondary suppliers and sign some longer-term agreements with customers. So we've begun to take these actions. Overall, I feel good about the basics. We will provide more specific guidance for the first quarter in our fourth quarter report. Neil?

Neil Dougherty

Executive Vice President and Chief Financial Officer

Yes. I think you've said most of it. If I were to sum it up, supply isn't currently the limiting factor — sorry, demand isn't the limiting factor. We do have some supply chain restrictions. The situation is a bit complicated. If you think back to three months ago, most of the biggest supply chain challenges we faced were related to internal production capacity. Production capacity climbed around the introduction of some new products (NPI), and these products were in unprecedented early demand in the market. We have made tremendous progress in this area. I think the challenge has turned to imported components as demand has risen and continues to rise across the ecosystem — many players are competing for supply from similar component suppliers. As a result, I think the supply situation may be non-linear and may be a limiting factor for us to turn demand into revenue in the next few quarters.

Sung Yoon

Senior Vice President of Global Sales

If I could add a few points about the 2027 outlook. We've just completed our biggest core RF microwave and high-speed digital product update since the company was founded. We reinforced this at our annual global sales training event in June, when we trained the entire sales team on this portfolio and Spirent products. As these solutions are rolled out and introduced to more and more customers, I expect this will provide us with a strong tailwind for many quarters and years to come.

Satish Dhanasekaran

President, Chief Executive Officer and Director

And it's been years, Steve.

Sung Yoon

Senior Vice President of Global Sales

For many years.

conference operator

The next question comes from Baird's Quinn Fredrickson.

Quinn Fredrickson

Robert W Baird Corporation Research Division

I'd like to get back to the order discussion. It's nice to see the $2 billion order figure again, but the month-on-month increase in orders in the third quarter was generally unusual. So can you break down what the drivers are? Do you think you might be seeing a smooth ride from future sovereign transceiver restrictions or that customers are dealing with other restrictions or supply issues ahead of time?

Satish Dhanasekaran

President, Chief Executive Officer and Director

There are no abnormalities in demand. In fact, we saw that the pipeline transformation was very orderly, with no early pull-ins (pull-ins). We are also paying attention, but it's just that the market environment is stronger, and it is German Technology's differentiated position in the core market. Starting with commercial communications, it has exceeded our expectations even outside of AI. Similarly, demand for capacity building from major contractors in the aerospace and defense sector remains strong. Sovereign investment in Europe is another smooth wind for the defense business. The EISG business clearly outperformed, and the semiconductor business was unusually outstanding. As a result, demand is widespread and strong, and we expect to continue into Q4, as Steve said before.

Quinn Fredrickson

Robert W Baird Corporation Research Division

Neil's gross margin reached 69%. I remember you mentioned a median value of around 67.5% earlier. Is the difference solely due to incremental sales or product mix? Can you disassemble it? And how do you see sustainability in Q4 or even 2027?

Neil Dougherty

Executive Vice President and Chief Financial Officer

Yes. I think if you look back at one quarter and adjust the tariff factors, the previous quarter was 68%, and the current quarter was 69%. Obviously sales helped, but this was also due to the differentiation of the solutions we launched across terminal markets. Whether it's early 6G, AI, or semiconductors, we have a highly differentiated solution portfolio. The product portfolio is really important because we have a wide range of gross margins across our product portfolio. But I do think the top half of 67%-69% is a level we can sustain.

conference operator

The last question came from SIG's Bastien Faucon-Morin.

Bastien Faucon-Morin

Susquehanna Financial Group Research Division

I'm Bastien, representing Mehdi. You're seeing some momentum in the cable business, growing 56% year over year. You mentioned a shift in the portfolio from 80% R&D and 20% production to 70% and 30%. Can you provide a segmented forecast for the share of R&D and production revenue for the coming quarter?

Satish Dhanasekaran

President, Chief Executive Officer and Director

I should say that, Bastien, this is a quarterly thing. Therefore, we tend to look at a longer period of time, because in a certain quarter, if the customer expands the production line, it may dominate a part of this segment. But as I pointed out, we said that about two-thirds are in R&D and one-third are in manufacturing. On the marginal side, as customers expand and activity increases in our pipeline, they are stepping up production of 1.6T products, and demand is very strong. So in a quarter like Q4, I can easily see that the combination is more production-oriented, and we are significantly involved in the entire workflow. The important message is that our R&D business is growing. As Kailash said, we are very satisfied with the diversity of our business, and we are happy to participate in the mass production part of data center construction.

Bastien Faucon-Morin

Susquehanna Financial Group Research Division

Got it, very helpful. Then as a follow-up, considering the accelerated introduction and adoption of new transceivers, how should we view the combination of long-term R&D and production? Your volume is growing, but so is the complexity of testing these new technologies. When optical transceiver deployment reaches a higher level, is there a way to think about long-term R&D and production combinations?

Satish Dhanasekaran

President, Chief Executive Officer and Director

Yes. I'd like to say that our strategy is to be an innovation accelerator for customers, which is our core mission. We focus on building technology stacks — optical, electrical — to help customers advance in R&D. What we're seeing now is unprecedented, and the pace of adoption of these technology curves or technology waves is accelerating, to the point where you're seeing multiple dimensions of adoption simultaneously. 800G is still the underlying technology, but 1.6T is expanding. Usually this will be a little more spaced. So it's hard to tell how long this will last or how far it will expand. But I know customers are already discussing 3.2T with us, and we demonstrated it at a conference earlier this year. As a result, the intensity of technological change and the company's economic drive to find the latest technology is still very high. We are involved and satisfied with our position as we enter 2027.

conference operator

This concludes today's Q&A session. I'd like to return the phone to Liz Morali for a concluding statement.

Liz Morali

Head of Investor Relations

Thank you Hilary, and thank you all for attending today. The replay of today's conference call will be launched on the Investor Relations website later. Thank you for your interest in Keysight Technology.

conference operator

Thank you for attending the conference. That concludes today's conference call. You can hang up now.