Keysight Technologies: A Beacon of Growth in 5G and AI Infrastructure

Keysight Technologies (KEYS) delivered a standout Q2 2025 performance, with revenue surging 8% to $1.31 billion and free cash flow soaring to $457 million. Beneath the headline numbers lies a compelling story of strategic positioning: the company is capitalizing on structural demand for 5G infrastructure, advanced semiconductor testing, and AI-driven network innovation. With margin resilience intact and long-term growth targets raised, KEYS is primed to outperform in a fragmented tech landscape. Here’s why investors should take notice.

Why Keysight’s Q2 Was a Turning Point

Keysight’s Communications Solutions Group (CSG), which fuels 67% of its revenue, grew 9% year-over-year, driven by surging demand in 5G Advanced, aerospace/defense, and non-terrestrial networks (NTN). The segment’s 26% operating margin highlights its profitability, while software and services now account for 36% of total revenue, a recurring revenue stream that insulates margins from volatility.

Meanwhile, the Electronic Industrial Solutions Group (EISG) rebounded with 5% growth, ending six quarters of declines. Semiconductor and general electronics demand offset softness in automotive and energy, underscoring the company’s diversification. CEO Satish Dhanasekaran noted, “Our long-term strategy is paying off—customer engagement and innovation are driving share gains in core markets.”

The Margin Resilience Play

Despite $7 million in tariff-related headwinds in Q2—a $0.04 EPS hit—Keysight maintained a 25% operating margin, up 100 basis points year-over-year. Management’s mitigation playbook is robust:
- Supply Chain Agility: Shifting manufacturing to Southeast Asia reduced China-linked tariff exposure to <10%.
- Pricing Power: New contracts now include surcharges to offset tariffs, with non-backlog orders repriced.
- Cost Discipline: Operational efficiencies and a $150 million Q2 share buyback kept free cash flow at record levels.

By Q4 2025, management expects margin pressures to normalize. The 23% operating margin in EISG, paired with CSG’s 26%, suggests a path to long-term targets of >30% operating margins, a key catalyst for EPS growth.

Structural Demand Drivers in 5G and AI

Keysight’s $2.4 billion order backlog entering Q3 reflects a pipeline fueled by:
1. 5G and 6G Testing: Telecom giants are ramping up R&D for next-gen networks, with Keysight’s tools critical for validating millimeter-wave and NTN deployments.
2. AI Infrastructure: Data center operators and cloud providers are upgrading networks to handle AI/ML workloads, requiring advanced signal integrity and latency testing.
3. Semiconductor Innovation: Foundries are racing to 3nm and 2nm nodes, where Keysight’s semiconductor test solutions are indispensable for chip validation.

The $750 million acquisition of Spirent (expected Q3) will further amplify this moat, adding network security and 6G testing capabilities.

Risks to Consider

• Sector Softness: Automotive and energy dragged EISG growth, but these represent only 20% of total revenue.
• Geopolitical Tensions: U.S.-China trade frictions could disrupt supply chains, though Keysight’s Southeast Asia pivot limits exposure.
• Tariff Volatility: While mitigated, ongoing trade disputes may require further pricing adjustments.

Why Now is the Time to Buy

Keysight has deleveraged significantly post-2023 debt issuance, with $3.1 billion in cash and a net cash position. With free cash flow up 528% year-over-year, the company can fund growth (Spirent, R&D) while rewarding shareholders.

The raised 5-7% long-term growth target, now midpoint-focused, is achievable given:
- 5G/6G rollout: Global spending on telecom infrastructure is projected to hit $400 billion by 2027 (Dell’Oro).
- AI Testing Demand: Gartner estimates the AI infrastructure market will grow at 20% CAGR through 2027, with Keysight’s tools at the core.

Conclusion: KEYS is a Buy for Tech Infrastructure Plays

Keysight’s Q2 results are no fluke. The company is a rare blend of cash-generative resilience and strategic foresight, with structural tailwinds in 5G, AI, and semiconductor testing. At 18x forward EV/EBITDA—below its 5-year average—and with a 2.5% dividend yield, KEYS offers a compelling risk/reward. Investors seeking exposure to the next wave of tech infrastructure should act now: the margin expansion and growth trajectory are just getting started.

Rating: Buy
Price Target: $145 (30% upside from current levels)