Keysight Technologies Inc (KEYS.US) Q3 earnings report and guidance both exceeded expectations: Demand from AI data centers drove a year-on-year order surge of 56%, and commercial communications revenue broke $1 billion for the first time.

Electronic design, simulation, and testing equipment supplier Keysight Technologies Inc (KEYS.US) announced its fiscal third-quarter results for 2026 (ending July 31) after the market closed on Tuesday. Benefiting from the rapid expansion of artificial intelligence (AI) data centers, which has driven demand for its software and testing tools, the company reported adjusted earnings per share and revenue both exceeding market expectations, and it raised its outlook for the fourth quarter and the full year. As a result, the stock rose approximately 5% in after-hours trading. According to the financial report, the company achieved revenue of $1.85 billion in the third quarter, a year-over-year increase of 36.5%, surpassing analyst expectations of $1.75 billion. The adjusted earnings per share came in at $3.07, significantly higher than the anticipated $2.48. Under U.S. Generally Accepted Accounting Principles (GAAP), the net profit for the third quarter was $397 million, or $2.30 per share, compared to $191 million, or $1.10 per share, in the same period last year. The adjusted net profit was approximately $531 million. In terms of orders, the order volume for the third quarter reached $2.09 billion, a year-over-year increase of 56%, with core orders growing by 52%, also far exceeding market expectations of $1.86 billion. The overall gross margin was 69%, operating expenses were $661 million, and the operating profit margin was 33.2%, an increase of 8.2 percentage points year-over-year, surpassing the company's long-term target range of 31% to 32%. The operating cash flow for the quarter was $437 million, and free cash flow was $403 million. The expansion boom in data centers continues, with commercial communications exceeding $1 billion for the first time. Over the past year, the data center expansion driven by AI has continued to benefit Keysight Technologies Inc. Its Communications Solutions Group (which accounts for two-thirds of the company's total revenue and primarily produces components like transceivers used in data centers) achieved revenue of $1.345 billion in the third quarter, a year-over-year increase of 43%. Among them, the commercial communications business saw particularly strong growth, with revenue surpassing $1 billion for the first time, reaching $1.006 billion, a year-over-year increase of 56%. Wireline business orders reached a historical high, more than doubling year-over-year, while revenue for this segment first exceeded that of wireless. The Aerospace, Defense & Government business generated revenue of $339 million, a year-over-year increase of 14%. The Electronic Industrial Solutions Group reported revenue of $501 million, a year-over-year increase of 21%, with growth in the semiconductor, general electronics, and automotive & energy markets. In terms of gross margin, the gross margin for the Communications Solutions Group was approximately 71%, while the Electronic Industrial Solutions Group had a gross margin of approximately 64%, both exceeding market expectations. Revenue from software and services grew by double digits year-over-year, now accounting for about 33% of total revenue, with annual recurring revenue making up approximately 24% of total revenue. Looking ahead, the company projects adjusted earnings per share for the fourth quarter to be between $3.34 and $3.40, and revenue between $1.93 billion and $1.95 billion, with midpoints of $3.37 (year-over-year growth of approximately 76%) and $1.94 billion (year-over-year growth of approximately 37%). This guidance is significantly above market expectations of $2.68 and $1.83 billion. For the full fiscal year, the company anticipates a revenue growth of approximately 32% for 2026 and adjusted earnings per share growth of about 60%. Keysight CEO Satish Dhanasekaran stated, "The record third-quarter performance and outlook reflect the increasing relevance of our strategy and product portfolio in helping customers navigate complex engineering challenges across various end markets. We are confident in maintaining this momentum and creating long-term value." During the earnings call following the financial report, the company indicated that the construction of AI data centers continues to drive demand in commercial communications, especially with robust orders for high-speed wireline business, including strong demand for 800G and 1.6T optical transceivers, silicon photonics technology, and pre-silicon validation for large-scale customers. Additionally, the clear timeline for 6G standards, defense modernization, and the expansion of advanced semiconductor nodes provide diverse growth support for the company. Management also revealed that integration of acquisitions has largely been completed, with expectations to achieve 80% to 90% of the $100 million cost synergy target by the end of the fiscal year, with about $50 million in incremental synergies expected by fiscal year 2027. The company's sales pipeline is currently at a historic high, with expectations that fourth-quarter orders will exceed $2 billion for the third consecutive quarter. However, management also cautioned that supply chain constraints remain a significant limiting factor in converting robust demand into revenue in the near term, although there have been no signs of abnormal demand or early order pulls from customers.