管理層發言
Good day, ladies and gentlemen, and welcome to Keysight Technologies Fiscal Third Quarter 2026 Earnings Conference Call. My name is Hilary, and I will be your lead operator today. This call is being recorded today, Tuesday, August 18, 2026, at 1:30 p.m. Pacific Time. I would now like to hand the call over to Liz Morali, Vice President of Investor Relations. Please go ahead, Ms. Morali.
Good afternoon, and thank you for joining us for Keysight's Third Quarter Earnings Conference Call for Fiscal Year 2026. Joining me on today's call are Satish Dhanasekaran, President and CEO; Neil Dougherty, Executive Vice President and CFO; Kailash Narayanan, President of the Communications Solutions Group; Jason Kary, President of the Electronic Industrial Solutions Group; and Steve Yoon, Senior Vice President of Global Sales. Following the prepared remarks from Satish and Neil, we will conduct a question-and-answer session. The press release and information to supplement today's discussion can be found on our Investor Relations website, investor.keysight.com. During today's discussion, we will make forward-looking statements about the financial performance of the company. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties.
Information about these risks and uncertainties can be found in our most recent Forms 10-K and 10-Q filings with the SEC. We do not intend to update any forward-looking statements. In addition, we will refer to non-GAAP financial measures and reference core growth, which excludes the impact of acquisitions or divestitures completed within the last 12 months and currency movements. The most directly comparable GAAP financial metrics and reconciliations can be found on our Investor Relations website, and all comparisons are on a year-over-year basis, unless otherwise noted. I'll now turn the call over to Satish.
Thank you, Liz. Good afternoon, and thank you, everyone, for joining us on today's earnings call. Keysight delivered another outstanding quarter with record results and broad-based growth across our markets. The outperformance was driven by strong execution by the team and demand extending across Keysight's full suite of differentiated products and solutions. Orders grew 56%, revenue grew 36% and earnings per share grew 79% alongside robust free cash flow generation. Given this momentum, we're raising our outlook for Q4 and for the full fiscal year. Customers are investing to solve increasingly complex engineering challenges across our end markets, such as AI infrastructure, advanced semiconductors, defense modernization and next-generation communications. Our outperformance reflects the differentiation of Keysight's solutions strategy and the increasing value we bring to customers across their innovation life cycle.
We remain focused on executing our strategy for long-term value creation, starting with identifying and investing ahead of structural growth opportunities, engaging early and deeply with industry leaders and building differentiated capabilities to solve our customers' mission-critical applications. We remain confident in our ability to sustain our momentum and deliver long-term value. Now to the business segments. Communications Solutions orders grew for the ninth consecutive quarter, establishing a new record and revenue grew 43%, driven by compounding momentum in commercial communications and strength in aerospace, defense and government. In Commercial Communications, we saw the momentum from the first half of the year continue into the second half, driven by rapid scaling of the AI infrastructure ecosystem. As a result, wireline delivered record orders more than doubling year-over-year.
The four pillars of opportunity associated with this business—AI infrastructure scaling, speed transitions, silicon photonics and system-level emulation—all continue to drive growth and pipeline expansion with our customers. The breadth of our portfolio and sustained engagements with customers across this ecosystem are enabling Keysight to participate across the AI innovation life cycle from pre-silicon design through chip and component validation and system-level emulation of data center racks and clusters to high-value manufacturing. The industry continues to scale, and we have seen a meaningful increase in the diversity of applications and a greater opportunity to expand with customers globally. Let me share a few examples of the diversity of our business. First, silicon designers are adopting Keysight's recently introduced high-performance digital and RF solutions for the lab 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 emulators to validate network performance across AI workloads and protocols. Fourth, transceiver manufacturers are rapidly scaling 800-gig and 1.6 tera optical transceivers using our industry-leading 224-gig digital communication analyzers. Investments in the optical component ecosystem continue to ramp and the key players are adopting our broad portfolio of lab products, including the industry's first 220 gigahertz lightwave component analyzer, which we introduced at OFC this year. And finally, our strategic engagements with hyperscalers continue to deepen as they are integrating our pre-silicon emulation and workload solutions into their development pipelines.
Looking ahead, the scaling challenges associated with AI data center deployments are driving a multiyear industry roadmap for new architectures, evolving technologies and new standards. We're well positioned and continue to invest ahead of transitions to capture these opportunities. Turning to wireless. Orders grew significantly again this quarter with rising customer investment in next-generation connectivity and continued demand across the supply chain supporting AI infrastructure scaling. In June, the 3GPP plenary meeting in Singapore confirmed the timeline for 6G with the industry's first standard targeted for March 2029. With that milestone now set, customers are transitioning from exploratory research into funded development programs. Importantly, 6G is shaping up to be much more than the usual vectors of innovation around higher speeds and new spectrum. Three emerging technology areas are AI-RAN, Integrated Sensing and Communication, or ISAC, and non-terrestrial networks, or NTN.
Each of these is expanding the ecosystem and creating opportunities for us to provide end-to-end solutions for these use cases, building on our 5G solutions leadership. We're engaged with customers across multiple applications such as evaluating AI-enabled beamforming, high-fidelity digital twins and network traffic steering, and the traction for our solutions continues to build. Our solutions have been architected around a flexible platform that enables customers to validate various candidate technologies by providing insights from the radio channel, network, device and satellite emulators for early 6G use cases across terrestrial and non-terrestrial networks. Keysight's comprehensive portfolio, spanning the physical layer to emulation tools, is helping us secure early wins with industry leaders. Turning to aerospace, defense and government. Orders were up double digits with growth across all regions driven by a heightened global focus on deterrence and defense modernization.
Modernization is raising the bar on performance across the market. In radar, the industry is accelerating its shift to advanced radar architectures. These use cases require high-performance validation solutions, leading to rapid adoption of our multichannel RF solutions and next-generation oscilloscopes at prime contractors. New security architectures have also accelerated the adoption of lower-cost autonomous platforms from UAV to LEO satellite constellations that are increasingly delivered by venture-funded defense technology companies moving at commercial speed. We are recognizing this shift and are positioning ourselves to serve this new ecosystem. Our engagements with defense start-ups and neo-primes are scaling. And this year, we achieved key wins across satellite, UAV and phased array radar applications. Resilient positioning, navigation and timing have become a greater priority as GPS disruption around conflict zones increasingly affects security systems.
Demand accelerated for Spirent's PNT solutions that emulate various multichannel jamming and spoofing scenarios in the lab, which enable customers to design and develop robust and resilient systems for these mission-critical environments. As we integrate our teams and solutions portfolios, we have a solid set of opportunities on which to build. With record budgets, faster adoption of capabilities by customers and a portfolio that is purpose-built for mission-critical requirements, we see a durable multiyear demand cycle ahead, and we are well positioned to capture it. Moving to the Electronic Industrial Solutions Group. We delivered another record quarter for both orders and revenue with revenue growth of 21% and a meaningful double-digit order growth across all three markets: general electronics, semiconductors and automotive and energy. In general electronics, growth was once again led by AI-related innovation and infrastructure investment.
Test intensity continues to rise for high-performance components such as multilayer PCBs and capacitors in support of next-generation compute. Higher frequencies, tighter tolerances and greater GPU and CPU density are increasing production complexity and quality requirements. Our precision measurement solutions are being adopted to qualify these components in production. In addition, digital health was up double digits with growth across wearables and monitoring applications. And the growth in education was supported by our semiconductor workforce development solutions, particularly in Asia. In semiconductor, we delivered another record quarter driven by ongoing capacity expansion for advanced nodes, high-bandwidth memory and silicon photonics. Given the increasing adoption of optical interconnects, commercial production of silicon photonics is accelerating across leading foundries and IDMs.
We also saw healthy demand for our semiconductor R&D solutions. Our engagement with industry leaders remains high and gives us good visibility into their future requirements as we look into next year and beyond. Finally, in automotive and energy, orders grew solid double digits. Investment remains focused on software-defined vehicle architectures with broad-based global demand for in-vehicle network and cybersecurity test, where our solutions provide verifiable compliance in support of new standards. Our energy and charging business also grew this quarter with engagements across both grid and automotive customers and spanning high-power charging, storage, compliance and infrastructure validation applications. In summary, this quarter's results reflect the strength and diversity of our business. Our portfolio is enabling the major waves of innovation shaping our markets: AI and accelerated compute today and 6G, defense modernization, grid and autonomous systems in the years ahead.
Every one of these technologies must be designed, validated and proven before reaching the market. Keysight, with its differentiated technology stack and consistent R&D investments, is well positioned to outperform the market over the long term. I want to acknowledge the entire Keysight team for their hard work and commitment to our customers' success. And with that, I'll pass the call over to Neil.
Thank you, Satish, and hello, everyone. Our momentum continued in fiscal Q3 as we delivered record results that exceeded the high end of our guidance range for both revenue and EPS. These results were driven by further acceleration in our Commercial Communications business and ongoing strength in Electronic Industrial Solutions and aerospace, defense and government. Our portfolio of highly differentiated solutions is resonating with customers, allowing us to expand margins year-over-year. In addition, our cash flow generation was robust, and we are on track to achieve record operating cash flow in fiscal 2026. Moving to the specifics for Q3. Orders of $2.091 billion were up 56% on a reported basis. Acquisitions represented 5 percentage points of growth and currency was a 1 percentage point headwind. On a core basis, excluding those items, orders grew 52%. Revenue of $1.846 billion was up 36% on a reported basis and up 31% on a core basis.
Gross margin was 69%, and operating expenses were $661 million. Operating margin was 33.2%, up 820 basis points year-over-year, and exceeded our long-term target range of 31% to 32%. We delivered net income of $531 million and earnings per share of $3.07. Our core business contributed substantially to these results with an operating margin of 34.7% and an operating margin incremental of 66%. From a segment perspective, the Communications Solutions Group generated revenue of $1.345 billion, up 43% on a reported basis and up 36% on a core basis. CSG gross margin was 70.8% and operating margin was 34%. Within CSG, the Commercial Communications business generated its first $1 billion quarter, with revenue of $1.006 billion, up 56% led by outstanding growth in wireline and supported by strong growth in wireless. Wireline revenue exceeded wireless revenue for the first time this quarter. Aerospace, defense and government achieved revenue of $339 million, an increase of 14%.
The Electronic Industrial Solutions Group generated a record $501 million in revenue, an increase of 21% with growth across all three markets: general electronics, semiconductor and automotive and energy. EISG gross margin was 64.1% and operating margin was 31%. Software and services both grew double digits, now representing approximately 33% of Keysight revenue, while annual recurring revenue was 24% of total mix. Moving to the balance sheet and cash flow. We ended the quarter with $2.605 billion in cash and cash equivalents, generating cash flow from operations of $437 million and free cash flow of $403 million. This quarter, we repurchased approximately 640,000 shares of Keysight's stock at an average price of approximately $326 per share for a total consideration of $210 million. Year-to-date in fiscal 2026, our share repurchases totaled $517 million. Before I turn to our outlook, I wanted to provide an update on our recent acquisitions.
Our integration efforts are now largely complete, including systems migrations, one quarter ahead of schedule. Given the faster-than-expected integration, our cost synergy realization will accelerate in Q4. We now expect to have 80% to 90% of the $100 million in cost synergies realized on a run rate basis exiting the fiscal year. Now turning to our outlook. For the fourth quarter of 2026, we expect revenue in the range of $1.930 billion to $1.950 billion, representing 37% year-over-year growth at the midpoint. We expect Q4 earnings per share to be in the range of $3.34 to $3.40, representing approximately 76% year-over-year growth at the midpoint. This will result in fiscal year 2026 revenue growth of 32% and EPS growth of approximately 60% at the midpoint. This guidance is based on a weighted diluted share count of approximately 172 million shares. In closing, fiscal 2026 thus far has been a remarkable year with exceptional performance across our business.
Our leading portfolio of solutions levered to multiple technology megatrends is driving significant growth and margin expansion. We remain focused on enabling our customers and helping them further accelerate technology innovation in turn, driving continued organic growth, profitability and ultimately, value creation for our shareholders. With that, I will turn the call over to Liz to begin the Q&A session.
Thank you, Neil. Hilary, can you please provide the instructions for the Q&A session?
分析師問答
Your first question comes from the line of Aaron Rakers from Wells Fargo.
Congrats on the strong results here. I'm curious—there was a lot of commentary around 6G and the timeline as we move forward. As we think about Keysight's participation in 6G, I'm curious how you would characterize the opportunity relative to the 5G cycle that we saw several years ago. Any framing of when we should expect to see some materializing revenue from a 6G cycle? And any thoughts on how you would frame that relative TAM opportunity versus, say, 5G several years ago? And I have a quick follow-up.
Yes. Thank you, Aaron. Yes, it's a great quarter. The team has been executing very well, and we're pleased with that. Relative to 6G, any time you start a new generational cycle, you always look for what's different versus the past. And it's often too early—you can't wait too long to call it. That's why we've focused on making this company about solutions and about first to market. We have been engaged with the industry over the last couple of years. As I noted in my prepared remarks, we start to see the industry coalescing around early 6G standards in the 2029 time frame. There's the Olympics in the United States—that's another milestone. And that's not new; historically, wireless standards evolutions often align with a sporting event of some kind. From a technological standpoint, traditionally you see new spectrum in support of higher speeds and throughput. That base case will also be true in 6G. But as we noted, we're also seeing other vectors of innovation: AI-RAN, new use cases like ISAC, security infrastructure and tighter integration of non-terrestrial and terrestrial assets into a communication framework. All of these are areas we've invested in, and we have the solutions portfolio and are working with industry-leading customers. Our base case is the opportunity in 6G is greater than the opportunity we saw in 5G, and we're well positioned to capitalize on it.
Yes. And then as a quick follow-up on the wireline side: you mentioned this is the first quarter in which you saw wireline surpass the wireless business. As we think about AI and the continual expansion of the opportunity set around that, is there any way to help us think about how meaningful AI is to your business today, either within wireline or in aggregate? How much of a growth driver does that appear to be going forward?
Yes. We're very pleased with the wireline business and the pickup we're seeing in AI-related demand there. Wireline was greater than wireless not just this quarter, but year-to-date; we've seen tremendous momentum in our wireline business. Q3 was our strongest quarter for AI and wireline opportunities, and the pipeline continues to grow strongly for us. I see this as the early stages of a long adoption of AI—not just in wireline—and over time we'll see convergence with wireless, automotive and many other end markets that we're well positioned to capitalize on. In the near term, we're very pleased with traction for our differentiated products and solutions, which is exceeding our ability to supply at this point, and customers are planning ahead. We're doing very well with our AI business.
Your next question comes from the line of Meta Marshall from Morgan Stanley.
Congrats on the quarter. You mentioned a lot of different ways in which there are more markets and more types of technology to be testing as far as AI. Could you give a sense of how testing density has changed? There's more end markets, but how has the overall content of testing changed as some of these technologies get more complex? And then, Neil, very healthy incremental margins again this quarter. Any guardrails we should think about as we progress forward?
Yes, Meta. As the year has progressed, we're picking up not only traditional CapEx opportunities but the opportunity set continues to grow and expand. The ecosystem has been more homogeneous historically, but by working early we're also engaging with other players entering the space and it's becoming more heterogeneous—from compute to racks and protocols. We're seeing growth in the number of protocols at all layers of the stack. Architectures increasingly involve GPUs, CPUs and DPUs in different mixes based on workload. Our tools are performing well across this broader tail, which positions us well into the future. Kailash, any other comments?
Yes. Fundamentally, design margins are shrinking with higher data rates and lower latency. AI needs to be effectively lossless; even small gaps can degrade model performance. Customers can no longer guarantee everything by design; they also need to test in production. This increases design emulation and test intensity. If you look at a compute or switch tray today, pin counts have gone from tens to hundreds of high-speed pinouts—more insertion points for us. Our VNAs and oscilloscopes test at the signal level. We introduced a new portfolio to test at the bit level, and our AI workload emulators operate at protocol and packet levels. Scaling is moving from monolithic chips to chiplet architectures, so chiplet interoperability needs emulation and testing. Customers ask us to emulate environments when a chip is exercising a model to stress test thermal and power behaviors and core activation. All these trends create additional opportunities for us. We're excited about our complete portfolio—electrical, optical, RF, digital and protocol—and we're seeing both R&D and manufacturing businesses grow significantly.
Yes, Meta, to your second question: we've seen really strong core operating leverage this quarter. As we look forward into fiscal 2027, I remain confident in our ability to continue to outperform our 40% operating margin leverage target, particularly given the synergy realization we'll see. We largely completed integration of the recent acquisitions, and while there was a one-time tariff impact this year that pulled up '26 profitability, that won't repeat. If you adjust for that and think operationally, I expect we'll continue to outperform the 40% metric.
Your next question comes from the line of Mark Delaney from Goldman Sachs.
Congratulations on the strong results. I was hoping to talk about demand sustainability to start. Orders have been over $2 billion for two quarters in a row now. As you look into the fourth quarter and next year, do you think this level of demand is sustainable or even a level that Keysight can grow from?
Yes, Mark. We think it is. Our base case is orders slightly up from Q3, in line with seasonality and then following that seasonal trend into Q1 of '27. Steve, the pipeline is strong—any comments?
Thanks, Satish. It's great to be head of sales at Keysight right now. We had an outstanding Q3 and delivered our highest quarter ever for the third consecutive quarter. With the traditional uplift we expect in Q4, we're confident in delivering another record quarter and surpassing $2 billion for the third consecutive quarter. Even more promising, despite these record-quarter results, our pipeline has continued to grow throughout the year and now stands at an all-time high. This validates our go-to-market strategy and priorities. Our top priority has been to spend more time with customers, identifying new opportunities, finding unarticulated needs and capturing new logos. As a case in point, year-to-date we've added nearly 3,000 new customers, representing more than $100 million of incremental business. We're partnering closely with marketing to broaden our reach and engage customers earlier in their buying process.
We've elevated engagement with our top customers—our largest customers are performing at high double digits for the year, and we're expanding our reach across their ecosystem. We're also adding capacity in markets and high-growth areas; Southeast Asia is a good example where we've more than doubled our business and it's our fastest-growing region for the quarter and for the year. Overall, we further accelerated our momentum this quarter, resulting in our highest monthly funnel intake just last month and a new record for rolling 12-month funnel.
Very helpful context. My other question is on supply and the ability to meet this level of demand. Can you elaborate on Keysight's ability to meet demand at these volumes, both in terms of the supply chain and getting enough parts as well as manufacturing capacity?
Thank you, Mark. We're seeing broad-based strength in demand across the globe and our portfolio is doing very well. From a supply chain perspective, our team has done a great job this year continuing to scale with discipline, as reflected in our record gross margins. We're continuing to meet customer demand. The supply environment is less flexible today than a year ago, and we're working with our suppliers to deconstrain the supply chain, especially at these demand levels, and we remain confident in the Q4 guide we've laid out.
Your next question comes from the line of Tim Long from Barclays.
I'll ask one then come back with my follow-up. I want to go back to commercial communications and the strong AI business on the wireline side. You talked about some of the applications and the use cases that are helping there. Can you give a little update on how that business is looking from an R&D standpoint versus manufacturing? Any movements you've seen in the AI-related business? Then I have a follow-up.
As it relates to R&D and manufacturing for wireline: historically, this business has been heavily weighted toward R&D—around an 80-20 split. With the addition of manufacturing business supporting AI data center build-out, that's shifted closer to 70-30. Over the last couple of quarters, it might be nearer two-thirds R&D and one-third manufacturing. But the business still remains heavily levered towards R&D even as we service customers taking products from R&D into manufacturing and into the marketplace.
Okay, great. And my second question: you mentioned hyperscalers. How important are they as a customer cohort? Are there margin differences? Do they take more product? Is it mainly the four or five big ones, or do you see it spreading to the next level of neo-clouds and others?
The hyperscalers are very important. Our early engagement began about five years ago with our acquisition of Ixia, who had early relationships with them. Our relationship with hyperscalers is now both in the U.S. and with model companies that drive demand across the ecosystem. They are strategic because of the capital they deploy, and that investment moves downstream into the ecosystem. Many have disclosed in-house silicon efforts and are important customers for us. From a revenue concentration point of view, that cohort is roughly 10% of our business directly, but they have a significant downstream effect and influence. Importantly, as we win in R&D and manufacturing applications, we are uncovering new opportunities such as emulating workloads, where our emulation platforms are well positioned to help the industry uncover heterogeneous emulation of workloads required for AI given latency and scaling requirements.
Your next question comes from the line of Adrienne Colby from Citi.
It's Adrienne for Atif Malik. I was hoping you could talk a little bit more about the sequentially slower growth in the aerospace, defense and government segment. You described strong demand dynamics and double-digit order growth, but we did see a step down in the growth rate there.
Adrienne, aerospace and defense is a business you can easily call years out; it's difficult to call quarter-to-quarter because it moves at the cadence of government budgets. This year, we're pleased with growth and adoption of our solutions, including our Spirent PNT offerings.
Yes, Adrienne, we're still up double digits. There are quarter-to-quarter perturbations in these end markets, so I don't think there's anything of concern to see there.
And then just as a follow-up—could you comment if the run rate in the AI business within the wireline segment is consistent with last quarter or if you've seen that expand at all?
It has expanded. Also note that we built backlog in the business, so if you look at revenue you could draw misleading conclusions due to supply chain timing. I would not read too much into one quarter's revenue profile.
Your next question comes from the line of Andrew Spinola from UBS.
You reported another strong quarter in the EISG segment. You highlighted strength in semiconductors and general electronics. Could you unpack that a little? You said last quarter you're seeing demand from AI expand into some of these segments—are you seeing that and do you think there's meaningful expansion still ahead? Also, comment on the operating margin, which was quite strong in EISG; how are you thinking about sustainability?
We're pleased with double-digit growth in EISG year-to-date. Recovery in automotive and strength in semiconductor are themes. Jason will add detail.
Thanks, Andrew. Specifically on AI tailwinds in the rest of the business: our communications technologies and IP have leverage into these end markets. We have specific technologies around semiconductor wafer test where we're seeing capacity expansion across advanced nodes, memory and silicon photonics. The forecast for wafer fab equipment and capital going into these markets continues to expand. In general electronics, test intensity at the component level is rising due to multilayer, high-density heterogeneity and tighter tolerances at higher frequencies and throughput. That increases production test intensity; customers need solutions from R&D into production. We're investing more in the software elements of the business and rationalizing lower-margin pieces while pursuing growth areas like digital health and grid. Given the composition of EISG today, we're confident in our ability to continue to achieve higher levels of profitability as we move forward.
That's helpful. A follow-up for Neil: in prior commentary you discussed synergies being $100 million plus from the acquisitions. Now that integration is complete, is your estimate of those synergies potentially larger? What contribution should we assume for Q4 and Q1?
At this point we have direct line of sight to the $100 million; that risk is substantially derisked. As the business operates more holistically within Keysight, we'll continue to look for additional opportunities, though I don't have a quantified number today. Historically, there's often follow-on efficiencies after the initial wave. If you think about the incremental benefit moving from FY '26 to FY '27, I'd be thinking on the order of $50 million; we realized close to $40 million ramping through the year and I expect we'll be close to 90% of the $100 million realized entering the next fiscal year.
Your next question comes from the line of Joseph Cardoso from JPMorgan.
This is Marc Vitenzon on for Joseph Cardoso. You gave a lot of detail on the strength in AI-related wireline. I wanted to ask about the traditional non-AI portion of wireline. How does growth look in that business, and what are you seeing?
I would characterize it as convergence. As a disruptive technology like AI intersects multiple end markets, you see traditional markets start to adopt AI capabilities. For example, the wireless ecosystem is now considering AI in the RAN, and contract manufacturers in the telco market are investing in building racks for AI. These emerging applications are areas we're well positioned to capitalize on given our strengths and reputation in the ecosystem.
Got it. Then you mentioned software and services were roughly 33% of revenue. Where do you think that number eventually goes, especially following the recent acquisitions?
Our strategy is to be a solutions company, which implies more software-centric solutions and differentiated services across the customer lifecycle. We progress at the pace of our markets and customers, not by forcing a model. We've trended as high as 40% a year or so ago and now at 33%, but in dollar terms this is a record level for software and services. We'll continue to innovate to stay differentiated.
I'll add that our software and services businesses are growing double digits; they're just not growing as fast as the hardware businesses at this point in time.
Your next question comes from the line of Matt Niknam from Truist Securities.
Congrats on the results. Two questions. First, on the Q4 revenue guide—it's implied to increase about 5% sequentially, which is normal seasonality, but your book-to-bill is north of 1.1 for two straight quarters. Can you speak to any supply constraints that are limiting the revenue guide for Q4? How much of the growing backlog is going to ship next fiscal year? Second, you often give initial color for the next fiscal year on the third-quarter call—any initial thoughts given the momentum?
Good question. We have a strong setup entering fiscal 2027, even as we acknowledge the outperformance in 2026 on top of growth in '25. Supply chain will remain a near-term governor of revenue. We've taken a longer-term 18-month-plus view of supply chain planning and are working to create additional flexibility, which comes with a lag. For example, redesigning products for second sources or entering longer-term supplier agreements takes time. Overall, I feel good about the setup and we'll provide more specific guidance for Q1 when we report in Q4.
To recap: demand is not the limiter—supply has some limitations. Three months ago the biggest supply challenges were internal capacity-related around ramping NPIs with unprecedented early demand. We've made tremendous progress there. Now the challenges have shifted toward incoming parts that are in high demand across many players competing for similar components. The supply situation is likely to be nonlinear and will likely be a governor of our ability to convert demand into revenue for the next several quarters.
If I can add a couple of comments about 2027 outlook: we just had the biggest refresh of our core RF microwave and high-speed digital products since Keysight was formed. We reinforced this at our worldwide annual sales training event in June, where we trained our entire sales team on this portfolio as well as Spirent products. As these solutions are rolled out and introduced to more customers, I expect this to be a strong tailwind for many quarters and years to come.
And years.
Your next question comes from the line of Quinn Fredrickson from Baird.
Good to see the $2 billion orders again. It's unusual to see orders grow sequentially in the third quarter—could you unpack the drivers? Did you see any tailwinds such as customers getting ahead of possible sovereign transceiver restrictions or pulling in orders ahead of supply issues?
There was nothing unusual about the demand; we saw orderly conversion of pipeline with no pull-ins. The markets are stronger and Keysight's differentiated position in core markets drove outperformance, especially in commercial communications. Demand from prime contractors in aerospace and defense remains strong. Sovereign investments in Europe are a tailwind for defense. EISG is outperforming with semiconductors doing exceptionally well. The strength is broad-based and we expect it to continue into Q4.
Neil, gross margin came in at 69%; you had said mid-67% range. Was the difference all incremental volume or mix? Any color on sustainability into Q4 or FY '27?
If you go back a quarter and adjust for the tariff impact, we were at 68% last quarter and 69% this quarter. Volume is helping, and the differentiation of our solutions across end markets is contributing. Mix matters because we have a range of gross margins across the portfolio. I think the upper-60s percent is a sustainable level for us.
Your final question comes from the line of Bastien Faucon-Morin from SIG.
This is Bastien filling in for Mehdi. You saw momentum in wireline—up 56% year-over-year. You mentioned the mix moving towards 70% R&D and 30% production from 80-20. Could you give a breakdown of how you expect R&D and production to look in revenues in the coming quarter?
That's something that moves around quarter-to-quarter, so we look at it over longer horizons. Over time we've said about two-thirds R&D and one-third manufacturing. Right now we're seeing high activity as customers scale production of 1.6 terabit transceivers and demand is very strong. In a given quarter like Q4, the mix could trend more towards production, and we're participating across the full workflow from R&D into production.
How should we think about the long-term mix of R&D versus production given accelerating adoption of new transceivers? Is there a way to think about the long-term mix as deployments of optical transceivers grow?
Our strategy is to be an innovation accelerator for customers. We focus on building tech stacks—optical and electrical—to help customers through R&D. The rate of adoption is accelerating and adoption is occurring concurrently across multiple dimensions like 800 gig, 1.6 and now customers are engaging us on 3.2 tera. It's hard to precisely forecast how long and how broad this goes, but customer engagement is already happening and we feel good about our position heading into '27.
That concludes our question-and-answer session for today. I would like to turn the call back to Liz Morali for any closing comments.
Thank you, Hilary, and thank you all for joining us today. A replay of today's call will be available on the Investor Relations website later today, and we appreciate your interest in Keysight.
Thank you for attending. This concludes today's call. You may now disconnect.