Q2 2025 Keysight Technologies Inc Earnings Call

Tamiya: Good day, ladies and gentlemen, and welcome to Keysight Technologies' fiscal second quarter 2025 earnings conference call. My name is Tamiya and I will be your lead operator today. If at any time during the conference you need to reach an operator, please press star zero.

Good day, ladies and gentlemen, and welcome to <unk> technologies fiscal second quarter 2025 earnings Conference call. My name is to me and I will be your lead operator today.

Speaker Change: At any time during the conference you need to reach an operator. Please press star Zero. This call is being recorded today Tuesday may 20th 2025, and 130 P. M Pacific time, I would now like to hand, the call over to Pauline assumes director of Investor Relations. Please go ahead Miss them.

Tamiya: This call is being recorded today, Tuesday, May 20th, 2025 at 1.30 p.m. Pacific Time.

Paulina Sims: I would now like to hand the call over to Paulina Sims, Director of Investor Relations. Please go ahead, Ms. Sims. Thank you and welcome everyone to Keysight's second quarter earnings conference call for fiscal year 2025.

Speaker Change: Thank you and welcome everyone to key sites second quarter earnings conference call for fiscal year 2025, joining me our key sites President and C E O cities, <unk> and our CFO Neil Dougherty.

Paulina Sims: Joining me are Keysight's President and CEO, Satish Dhanasekaran, and our CFO, Neil Doerge. The press release and information to supplement today's discussion are on our website at investor.keysight.com under financial information and quarterly report. Today's comments will refer to non-GAAP financial... We will also make reference to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed over the last 12 months. The most directly comparable GAAP financial metrics and reconciliations are on our website, and all comparisons are on a year-over-year basis unless otherwise noted.

Speaker Change: The press release and information to supplement today's discussion on our website at Investor Dot Quayside Dot com under financial information and quarterly reports today's comments will refer to non-GAAP financial measures.

Speaker Change: We will also make reference to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed over the last 12 months.

Speaker Change: The most directly comparable GAAP financial metrics and reconciliations on our website and all comparisons are on a year over year basis, unless otherwise noted.

Paulina Sims: We will make forward-looking statements about the financial performance of the company on today's call. These statements are subject to risks and uncertainties and are only valid as of today. We assume no obligation to update them and encourage you to review our recent SEC filings for a more complete view of these risks and other factors.

Speaker Change: We will make forward looking statements about the financial performance of the company on today's call.

These statements are subject to risks and uncertainties and are only valid as of today, we assume no obligation to update them and encourage you to review our recent SEC filings for a more complete view of these risks and other factors Lastly management is scheduled to participate.

Paulina Sims: Lastly, management is scheduled to participate in an upcoming investor conference hosted by Baird.

Speaker Change: And an upcoming Investor conference hosted by Baird and now I will turn the call over to cities.

Satish Dhanasekaran: And now I will turn the call over to Satish. Good afternoon, everyone, and thank you for joining us today. During the second quarter, Keysight delivered revenue of $1.3 billion and earnings per share of $1.70, both of which exceeded the high end of our guidance. This marks the second consecutive quarter of revenue growth driven by continued momentum in CSG and return to growth in EISG. The demand environment was solid in the quarter with orders growing 8% year over year and 4% sequentially to $1.3 billion. Even as we are monitoring the overall macro environment, we enter the second half with a healthy pipeline of opportunity and strong customer engagement.

Speaker Change: Yeah.

Speaker Change: Good afternoon, everyone and thank you for joining us today.

Speaker Change: During the second quarter of Quayside delivered revenue of $1 3 billion and earnings per share of $1.70, both of which exceeded the high end of our guidance. This marks the second consecutive quarter of revenue growth driven by continued momentum in C. S. G and returned to growth in ESG.

Speaker Change: <unk>.

Speaker Change: The demand environment was solid in the quarter with orders growing 8% year over year, and 4% sequentially to $1 $3 billion.

Speaker Change: Even as we are monitoring the overall macro environment, we entered the second half with a healthy pipeline of opportunity and strong customer engagements.

Satish Dhanasekaran: Neil will have more details on the tariff impact in his remarks. Overall, our business results demonstrate the resilience of our business and the durability of our financial operating model, which is underpinned by a flexible cost structure, supply chain, and operating capabilities that allow us to quickly adapt to external dynamics. As a result of our multi-year investments, we have a diversified global supply chain, which is largely based in Southeast Asia, with minimal exposure in China. Despite the near-term uncertainty, we're confident in our market leadership, the strength of our operating model, and our ability to generate value for our stakeholders.

Speaker Change: Neil will have more details on the tariff impact in his remarks.

Speaker Change: Overall, our business results demonstrate the resilience of our business and the durability of our financial operating model, which is underpinned by a flexible cost structure supply chain and operating capabilities that allow us to quickly adapt to external dynamics as a result of our multiyear investments.

Speaker Change: We have a diversified global supply chain, which is largely based in southeast Asia with minimal exposure in China.

Speaker Change: Despite the near term uncertainty, we're confident in our market leadership, the strength of our operating model and our ability to generate value for our stakeholders. Our capital allocation priorities have not changed we are investing for the long term, while also pursuing a balanced return of capital enabled by our strong free.

Satish Dhanasekaran: Our capital allocation priorities have not changed. We're investing for the long term while also pursuing a balanced return of capital enabled by our strong free cash flow conversion. Over the past 12 quarters, we've returned over $1.7 billion or roughly 50% of free cash flow to investors via repurchase.

Speaker Change: Cash flow conversion over the past 12 quarters, we have returned over one 7 billion or roughly 50% of free cash flow to investors why our repurchases turning to business segments N C. S. G.

Satish Dhanasekaran: Turning to business segment. NCSG Commercial communications orders grew double digits. Demand remains robust in wireline, where the ongoing data center infrastructure expansion is driving order strength. We saw continued deployment of 400 and 800 gig Ethernet technologies in AI data center applications. R&D investments in 1.6 terabit electrical and optical technologies, as well as expansion of new protocols in AI data center networks, are fueling demand as the entire industry is innovating and developing new applications and services. This quarter at OFC, we demonstrated the industry's first solution for 448 gig per lane optical transmission, a key building block in the deployment of 1.6 and 3.2 terabit network.

Speaker Change: Commercial communications orders grew double digits demand remains robust in wireline, where the ongoing data center infrastructure expansion is driving or the strength. We saw continued deployment of 408 hundred gig Ethernet technologies in AI data center applications R&D investments in one.

Speaker Change: Six terabyte, electrical and optical technologies as well as expansion of new protocols in AI data center networks are fueling demand as the entire industry's innovating and developing new applications and services. This quarter at OFC, we demonstrated the industry's first solution for 400.

Speaker Change: 48 gig per lane optical transmission, a key building block in the deployment of 1.6 and 3.2 terabyte networks.

Satish Dhanasekaran: The depth and breadth of Keysight's capabilities in the electrical and optical and wireline protocol stacks positions us well to enable ongoing innovation in high-performance computing, memory, and networking.

Speaker Change: The depth and breadth of key sites capabilities in the electrical and optical and wireline protocol stacks positions us well to enable ongoing innovation and high performance computing memory and networking wireless orders grew in Q2, we saw a steady pace of R&D activity related to five <unk>.

Satish Dhanasekaran: Wireless orders grew in Q2. We saw a steady pace of R&D activity related to 5G advanced and early 6G research, as well as investments in non-terrestrial networks. While smartphone supply chain activity remains stable, innovation and investment in R&D in radio access networks continue to grow. Keysight's new digital twin and system emulation capabilities are enabling non-terrestrial applications and expanding our customer engagement.

Speaker Change: Advanced and early 60 research as well as investments and non terrestrial networks, while smartphone supply chain activity remains stable innovation and investment in R&D in radio access networks continue to grow key sites, new digital twin and system emulation capabilities are enabling noninterest tool applications in.

Speaker Change: Expanding our customer engagements.

Satish Dhanasekaran: In aerospace defense and government, orders grew this quarter driven by strength in the U.S. and Europe. Ongoing investment in spectrum operations and space applications drove growth. Although the U.S. will be operating under a continuing resolution for most of the year, overall demand and pipeline of opportunities remains robust with prime contractor backlogs at record levels. Investments in defense modernization remains a top priority for many countries, as reflected in the increased budget proposals in the U.S., Europe, and Asia. Keysight is a trusted partner in this ecosystem, delivering advanced high-fidelity test capabilities that simulate real-world electronic threats in lab environments.

Speaker Change: In Aerospace defense and government orders grew this quarter driven by strength in the U S and Europe ongoing investment in spectrum operations and space applications drove growth, although the U S will be operating under a continuing resolution for most of the year overall demand and pipeline of opportunities remains robust with prime.

Speaker Change: Contract backlog at record levels investments in defense modernization remains a top priority for many countries as reflected in the increased budget proposals in U S Europe and Asia.

Speaker Change: <unk> is a trusted partner in this ecosystem delivering advanced high fidelity test capabilities that simulate real world electronic threats in lab environments. This quarter key side. One notable deal with a major defense agency in Europe to modernize its testing capabilities for antenna.

Satish Dhanasekaran: This quarter, Keysight won a notable deal with a major defense agency in Europe to modernize its testing capabilities for antenna radar applications, which are key to mission-critical applications. Our innovation pipeline is driving a steady cadence of new products and solutions, which this quarter included a higher-frequency extension to our phase noise analyzer for defense applications and a new digital communications analyzer for 224-gig transceiver tests, enabling wireline and general-purpose use cases.

Speaker Change: <unk> applications, which are key to mission critical applications. Our innovation pipeline is driving a steady cadence of new products and solutions, which this quarter included a higher frequency extensions to our phase noise analyzer for defense applications and a new digital communications analyzer for 204 24 gig.

Speaker Change: Transceiver test, enabling wireline and general purpose use cases, turning to electronics industrial solutions group the demand environment remains mixed while the revenue returned to growth after six quarters of decline.

Satish Dhanasekaran: turning to electronics industrial solution. The demand environment remains mixed while the revenue returned to growth after six quarters of decline. In Semi, the demand for our wafer test solutions from large foundry and IDM customers remained strong. Leading-edge process node investment was augmented by rapid growth in high-bandwidth applications. Customer engagements for silicon photonics, co-packaged optics accelerated within the quarter as the industry works to address performance limitations across latency, bandwidth, and power in the AI data center. In automotive, while orders and revenues were down, the business has largely stabilized. Engagements with OEM customers remain steady with investments in software-defined vehicle capabilities, including cybersecurity, radar scene emulation, and ADAS chipset development.

Speaker Change: In semi the demand for our wafer test solutions from large foundry and IDM customers remained strong leading edge process node investment was augmented by rapid growth in high bandwidth applications customer engagements for silicon Photonics co packaged optics accelerated within the quarter as the.

Speaker Change: The industry works to address performance limitations across latency bandwidth and power in the AI data center in automotive while orders and revenues were down the business has largely stabilized engagements with OEM customers remained steady with investments in software defined vehicle capabilities, including cyber security.

Speaker Change: <unk> radar seen emulation and Adas chipset development.

Satish Dhanasekaran: This quarter, we secured a key win with a major automotive OEM for design and test of their home energy management. General Electronics orders grew for the third consecutive quarter, although at a lower rate. Growth in multi-industrial and medtech customers for both R&D and manufacturing solutions was partially offset by contraction in U.S. education funding and continued normalization in the distribution channel.

Speaker Change: This quarter, we secured a key win with a major automotive OEM for design and test of their home energy management systems gender.

Speaker Change: General Electronics orders grew for the third consecutive quarter, although at a lower rate growth in multi industrial and med tech customers for both R&D and manufacturing solutions was partially offset by contraction in U S education funding and continued normalization in the distribution channel moving to suffer.

Satish Dhanasekaran: Moving to software, design engineering software orders grew double digits, reflecting a healthy demand for our RFEDA solution. We're seeing growing interest from industrial customers looking to apply simulation and virtual prototyping in the mechanical domain. With respect to our recent ESI acquisition, we're enabling next generation industrial design by delivering a panel forming solution to a large European auto OEM that will drive efficiencies through their manufacturing processes and optimize their production timeline.

Speaker Change: Design Engineering software orders grew double digits, reflecting a healthy demand for our RF EDA solutions, we're seeing growing interest from industrial customers looking to apply simulation and virtual prototyping in the mechanical domain with respect to our recent ESI acquisition, we're enabling next generation.

Speaker Change: Industrial design by delivering a panel forming solution to a large European auto OEM that will drive efficiencies through their manufacturing processes and optimize their production timelines.

Satish Dhanasekaran: In closing, we're pleased with the recovery that's underway. Our end markets have largely performed in line with our expectations heading into this year, and I'm once again proud of the Keysight team's execution in this quarter in what remains a dynamic environment. Keysight's broad portfolio of differentiated solutions positions the company to outperform in a variety of market environments. We continue to make deliberate multi-year investments aligned with long-term technology trends, creating opportunities now and into the future. As we move through the second half, we remain focused on executing on what we control and continuing to deliver value to our customers and stakeholders.

Speaker Change: In closing we're pleased with the recovery that is underway our end markets have largely performed in line with our expectations heading into this year and I am once again proud of the key site teams execution.

Speaker Change: In this quarter in what remains a dynamic environment key sites broad portfolio of differentiated solutions positions. The company to outperform in a variety of market environments. We continue to make deliberate multiyear investments align with long term technology trends, creating opportunities now and into the future.

Speaker Change: As we move through the second half we remain focused on executing on what we control and continuing to deliver value to our customers and stakeholders with that I'll turn it over to Neil to discuss our financial performance and outlook.

Neil Doerge: With that, I'll turn it over to Neil to discuss our financial performance and outcomes. Thank you Satish and hello everyone. Second quarter revenue of $1,306,000,000 was above the high end of our guidance range of 7% on a reported basis and 8% on a core basis. orders of $1,316,000,000 were up 8% on both the reported and Looking at our operational results for Q2, we report a gross margin of 65%. Operating expenses were $516 million, up 4%. Q2 operating margin was 25% and increased 100 basis points over last year. Turning to earnings, we achieved $295 million of net income and delivered earnings per share of $1.70.

Neil: Thank you <unk> and Hello, everyone second quarter revenue of $1 $306 million was above the high end of our guidance range of 7% on a reported basis and 8% on a core basis orders of $1 $316 million were up 8% on both a reported and core basis.

Speaker Change: Yes.

Speaker Change: Looking at our operational results for Q2 reported gross margin of 65% operating expenses were $516 million up 4% Q2 operating margin was 25% and increased 100 basis points over last year.

Speaker Change: Turning to earnings we achieved $295 million of net income and delivered earnings per share of $1 70, our weighted average share count for the quarter was 173 million shares.

Neil Doerge: Our weighted average share count for the quarter was 173 million shares. Our Q2 results included approximately $7 million of new tariff expenses in cost of sales, which had a 60 basis point unfavorable impact on both gross and operating margins. and resulted in an approximately $0.04 reduction in earnings. Moving to the performance of our segments, the Communications Solutions Group generated second quarter revenue of $913 million, up 9% on a reported ANCOR Commercial communications revenue of $612 million was up 9%, reflecting sustained strength in wireline and growth in wireless. Aerospace Defense and Government achieved revenue of $301 million, an increase of 9%.

Speaker Change: Our Q2 results included approximately $7 million of new tariff expenses in cost of sales, which had a 60 basis point unfavorable impact on both gross and operating margins.

Speaker Change: And resulted in an approximately <unk> <unk> reduction in earnings per share.

Speaker Change: Moving to the performance of our segments, our communications solutions group generated second quarter revenue of $913 million up 9% on a reported and core basis.

Speaker Change: Commercial communications revenue of $612 million was up 9%, reflecting sustained strength in wireline AD growth in wireless.

Speaker Change: Aerospace defense and government achieved revenue of $301 million, an increase of 9% altogether CST delivered 67% gross margin and 26% operating margin.

Neil Doerge: Altogether, CSDE delivered 67% gross margin and 26% operating profit. The Electronic Industrial Solutions Group generated $393 million in revenue, an increase of 5%, with growth in semiconductor and general electronics more than offsetting a decline in automotive and energy. EISG delivered 59% gross margin and 23% operation. Software and Services accounted for approximately 36% of Keysight revenue, while annual recurring revenue was 28% of total revenue. Moving to the balance sheet and cash flow, we ended the quarter with $3,118,000,000 in cash and cash equivalents, generating cash flow from operations of $484,000,000 and free cash flow of $457,000,000. In April, we issued senior notes for an aggregate principal amount of $750 million.

Speaker Change: The electronic industrial solutions group generated $393 million in revenue and an increase of 5% with growth in semiconductor and general electronics more than offsetting a decline in automotive and energy.

Speaker Change: ISG delivered 59% gross margin and 23% operating margin.

Speaker Change: Software and services accounted for approximately 36% of key site revenue while annual recurring revenue was 28% of total mix.

Speaker Change: Moving to the balance sheet and cash flow, we ended the quarter with 3 billion $118 billion in cash and cash equivalents generating cash flow from operations of $484 million and free cash flow of $457 million.

Speaker Change: In April we issued senior notes for an aggregate principal amount of $750 million.

Neil Doerge: We intend to use the net proceeds for general corporate purposes, which may include partially funding the previously announced acquisition of Spire.

Speaker Change: We intend to use the net proceeds for general corporate purposes, which may include partially funding the previously announced acquisition of Spirent.

Speaker Change: With regard to pending acquisitions, the UK competition and markets authority cleared the Spirent transaction in March we are progressing through the review process with other regulatory agencies and expect the transaction to close in key sites third fiscal quarter.

Neil Doerge: With regard to pending acquisitions, the U.K. Competition and Markets Authority cleared the Spirant transaction in March. We are progressing through the review process with other regulatory agencies and expect the transaction to close in Keysight's third fiscal quarter. In addition, the acquisition of Optical Solutions Group and Power Artist is anticipated to close shortly after the Synopsys to Ansys transaction. Lastly, we have purchased 1,042,000 shares this quarter at an average price of approximately $144 for a total consideration of $150 million.

Speaker Change: In addition, the acquisition of optical solutions group empower artists is anticipated to close shortly after the Synopsys to answers transaction is completed.

Speaker Change: Lastly, we repurchased 1.042 million shares this quarter at an average price of approximately $144 for a total consideration of $150 million.

Neil Doerge: Now turning to the current environment, tariffs and or outlays. We have a diversified global supply chain with minimal exposure to China and have already taken action across multiple factors to reduce the incremental impact of tariffs. Our multi-pronged mitigation approach spans our global manufacturing footprint and sourcing strategies, as well as pricing and cost action. Based on actions taken to date, we estimate our annual exposure at approximately $75-$100 million. We are working to further reduce this exposure and offset any remaining impact. Given the high priority that we place on maintaining our long-term customer relationship, Our pricing actions were not applied to pre-tariff backlogs.

Speaker Change: Now turning to the current environment tariffs and our outlook.

We are a diversified global supply chain with minimal exposure to China and have already taken action across multiple vectors to reduce the incremental impact of tariffs.

Speaker Change: Our multi pronged mitigation approach spans our global manufacturing footprint and sourcing strategies as well as pricing and cost actions.

Speaker Change: Based on actions taken to date, we estimate our annual exposure at approximately $75 million to $100 million.

Speaker Change: We are working to further reduce this exposure and offset any remaining impact.

Speaker Change: Given the high priority that we place on maintaining our long term customer relationships, our pricing actions were not applied to pre tariff backlog.

Neil Doerge: As a result, and assuming tariff rates remain at the current levels, the most significant tariff impact is expected in Q3 with full mitigation by the end of the fiscal year. Keysight currently has $2.4 billion in backlog and enters Q3 with a solid scheduled shipment position. Despite the dynamics and uncertainty of the current macroeconomic environment. As Satish mentioned earlier, at this point we have not seen any material adverse effects on demand from tariffs and are therefore raising our full year growth expectations. We now expect FY25 revenue growth at the midpoint of our 5-7% long-term target and annual EPS growth slightly above our long-term 10% target.

Speaker Change: As a result, and assuming tariff rates remain at the current levels. The most significant tariff impact is expected in Q3 with full mitigation by the end of the fiscal year.

Speaker Change: Key site currently has $2 $4 billion in backlog and entered Q3 with a solid scheduled shipment position, despite the dynamics and uncertainty of the current macroeconomic environment.

Speaker Change: <unk> mentioned earlier at this point, we have not seen any material adverse effects on demand from tariffs and are therefore, raising our full year growth expectations. We now expect FY 'twenty five revenue growth at the midpoint of our 5% to 7% long term target and annual EPS growth slightly above our long term 10%.

Speaker Change: <unk>.

Neil Doerge: For the third quarter, we expect revenue in the range of $1,305,000,000 to $1,325,000,000 and Q3 earnings per share in the range of $1.63 to $1.69. based on a weighted diluted share count of approximately 173 million shares. Applied in this guidance is the assumption that tariffs remain at current levels.

Speaker Change: For the third quarter, we expect revenue in the range of $1 $305 million to $1 billion and $325 million.

Speaker Change: In Q3 earnings per share in the range of $1 63 to $1 69.

Speaker Change: Based on a weighted diluted share count of approximately 173 million shares.

Speaker Change: Implied in this guidance is the assumption that tariffs remain at current levels for the year with that I will turn it back to paulino for the Q&A.

Paulina Sims: With that, I will turn it back to Paulina. Thank you, Neil.

Paulino: Thank you Neel operator will you please.

Tamiya: Operator, will you please have the instructions for the Q&A, please? Ladies and gentlemen, if you would like to ask a question, press star 1. We ask that you please limit yourself to one question and one follow up. To withdraw your question, please press star 2. Please hold while we compile the Q&A roster.

Speaker Change: <unk> for the Q&A.

Paulino: Yeah.

Speaker Change: Ladies and gentlemen, if you would like to ask a question press Star one we ask that you. Please limit yourself to one question and one follow up to withdraw your question. Please press star two please hold while we compile the Q&A roster.

Tim Long: The first question comes from Tim Long with Barclays, you may proceed. item.

Speaker Change: The first question comes from Tim Long with Barclays. You May proceed.

Tim Long: Hi, Tim.

Tim Long: Hi, maybe one and then a follow-up. Just if we could just go back to AI. I know you guys have been giving us examples each quarter of where you guys are seeing traction. It seems like across the hardware ecosystem and emulation simulation as well. Can you just kind of update us on what kind of new activity you're seeing there and how meaningful it is for the business? And then just on the follow-up, if you could just give a little bit more color on the orders and pipeline to get to the full year guidance. I think normally we do see orders pick up towards the second half of the year.

Speaker Change: Hi.

Speaker Change: Maybe one and then a follow up just.

Speaker Change: Go back to AI I know you guys have been given US example, each quarter.

Speaker Change: Where you guys are seeing traction it seems like across the hardware ecosystem in emulation and simulation as well could you just kind of update us on what kind of new activity Youre seeing there and how meaningful it is for the business and then just on the follow up if you could just give a little bit more color on the orders in the pipeline.

Speaker Change: <unk>.

Speaker Change: To get to the full year guidance I think normally we do see orders pick up towards the second half of the year. So just curious what youre seeing in pipelines to give confidence in the second half. Thank you.

Tim Long: So just curious what you're seeing in pipeline to get confidence in the second half.

Satish Dhanasekaran: Thank you. Thank you, Tim. Obviously, you know, AI, you know, we view it as a long term secular trend. And with a clear multi-year roadmap that's forming, and a great fit to our strategy of not only being a physical layer tool provider, but also going up the stack with physical and protocol layer and offering more solutions to customers. The big mega trends are clear, right? We all know the AI workloads are growing. And we're making contributions, around on a number of technology fronts, including in memory, compute, networking, with new standards that are forming. So our broad portfolio is really in play as we engage with these customers.

Speaker Change: Thank you, Tim obviously AI.

Speaker Change: We view it as a long term secular trend.

Speaker Change: And with a multiyear roadmap, that's forming and a great fit to our strategy.

Speaker Change: Not only being a physical layer tool provider, but also going up the stack with physical and protocol layer and offering more solutions to customers.

Speaker Change: Big Mega trends that are clear right. We all know the AI workloads are growing and we're making contributions around on a number of technology fronts, including in memory compute networking with new standards that are forming so our broad portfolio.

Speaker Change: It's really in play as we engage with these customers and what do we see the industry right. Now is trying to solve a number of the scale up that scale out challenges as they deploy this digital infrastructure right. So that's that's the action activity that's being driven.

Satish Dhanasekaran: And where we see the industry right now, is trying to solve a number of the scale up and scale out challenges, as they deploy this digital infrastructure, right? So that's, that's the action or activity that's being driven. And we had another strong quarter. So for the first half, you know, last year, we said our wireline business was roughly a billion dollars, or over a billion dollars, I should say, in, in sales. And for the first half, it grew double digits. So we feel good about our position in this emerging space. And we think it's a long term growth opportunity for us that we're very excited.

Speaker Change: And we had another strong quarter so for the first half.

Speaker Change: Last year, we said our wireline business was roughly a $1 billion to over $1 billion I should say in.

Speaker Change: And sales and for the first half it grew double digits. So we feel good about our position in this emerging space and we think it's a long term growth opportunity for us that we're pretty excited.

Satish Dhanasekaran: With regard to the progression of orders and what's baked into our guide, again, look, I think we've said this before, that we Despite all the uncertainty and chatter out there, and the customers are obviously paying attention to all the tariff talks and all the macro concerns, you know, we have not yet seen any material change in customer behavior with regard to their immediate plans. And so, you know, as we enter the quarter, we obviously had a strong finish for Q2. As we enter Q3, our pipeline is solid and supports our guide. And we had a pretty strong uptick in, you know, pipeline activity as it relates to the second quarter.

Speaker Change: With regard to the progression of orders and whats baked into our guide again look I think we've said this before that we.

Speaker Change: Despite all the uncertainty and chatter out there and the customer are obviously paying attention to all the tariff talks and all the macro concerns.

Speaker Change: We have not yet seen any material change in customer behavior with regard to their immediate plans and so.

Speaker Change: We entered the quarter.

Speaker Change: Obviously had a strong finish for Q2 as we enter Q3 our pipeline is.

Speaker Change: As solid and supports our guide and we had a pretty strong uptake and.

Speaker Change: Pipeline activity as it relates to the second half. So we feel good about the second half obviously there are risks that we're monitoring like everybody else.

Satish Dhanasekaran: So we feel good about the second half. Obviously, there are risks that we're monitoring like everybody else, but we're focused on what we control and feel confident about where we stand today.

Speaker Change: We're focused on what we control and feel confident about where we stand today.

Tim Long: Okay, thank you. Thank you.

Speaker Change: Okay. Thank you.

Speaker Change: Thank you. Thank you.

Matt Niknam: The next question comes from Matt Niknam with Deutsche Bank. You may proceed. Hey guys, thanks so much for taking the question. One question and then one follow up. I guess first on my main question, you obviously raise the top line outlook on average by about 100 bps relative to the prior 5%. So I'm curious, maybe where you're seeing a little bit of an incrementally improved view relative to three months ago? That's the first question. Second, just to follow up on cash flow from ops, that was meaningfully stronger. I'm just wondering maybe for Neil, anything unique on the working caps?

Speaker Change: The next question comes from Matt Knickman with Deutsche Bank You May proceed.

Matt Knickman: Hey, guys. Thanks, so much for taking the question one.

Matt Knickman: One question and then one follow up I guess first on my main question you, obviously raised the topline outlook I guess on average by about 100 bps relative to the prior.

Matt Knickman: 5%, so I'm curious, maybe where youre seeing a little bit of an incrementally improved view relative to three months ago. That's the first question second just to follow up on cash flow from ops. It was meaningfully stronger I'm just wondering maybe for Neil anything unique on the working cap side, and then maybe how to think about cash flow from ops and working cap.

Neil Doerge: And then maybe how to think about cash flow from ops and working cap over the duration of the fiscal year. Thanks. Thank you.

Matt Knickman: Over the duration of the fiscal year. Thanks.

Speaker Change: Thank you I think again as I mentioned before.

Neil Doerge: I think, again, as I mentioned before, we looked at the overperformance we've had in the first half. We take a look at our pipeline of opportunities we have, the strong backlog position we have, and we then, you know, have applied this to essentially raise the top line expectations for the full year. Again, there's a lot of macro risks and other things people are monitoring, but we have not seen any material change in customer behavior. And if you recall, at the beginning of the year, we said we thought this year would be a slow, gradual recovery in our markets.

Matt Knickman: We looked at.

Matt Knickman: The over performance we've had in the first half we take a look at our pipeline of opportunities. We have the strong backlog position, we have and we then.

Matt Knickman: We have applied this to essentially.

Matt Knickman: The race of topline expectations for for the full year.

Matt Knickman: Again, there is a lot of macro risks and other things people are monitoring, but we have not seen any material change in customer behavior and if you recall at the beginning of the year. We said we thought this year would be a slow gradual recovery.

Matt Knickman: Markets and we feel like that's exactly the trajectory we're on so.

Neil Doerge: And we feel like that's exactly the trajectory we're on. So that's where we find ourselves at the end of the first half and feel confident about where we are. But like everybody else, we continue to monitor.

Matt Knickman: That's where we find ourselves at the end of the first half and feel confident about where we are but like everybody else. We continue to monitor.

Neil Doerge: So the only thing I would add to that, that Satish just said with regard to our outlook for the year, as everybody knows, we tend to see a seasonal uplift in the fourth quarter. We're still expecting the fourth quarter to be our strongest quarter of the year. And that lends to that guidance increase.

Matt Knickman: The the risks due to tariffs and the geopolitical environment.

Speaker Change: So the only thing I would add to that the teacher said with regard to our outlook for the year as everybody knows we tend to see a seasonal uplift in the fourth quarter, we're still expecting the fourth quarter to be our strongest quarter of the year in that.

Matt Knickman: Lens to that guidance increase.

Neil Doerge: As it relates to cash flow, yeah, so obviously strong cash flow within the quarter. There are a couple of things in there. So first of all, that did include a little less, about $60 million worth of a gain on a hedging contract associated with the purchase price for Spirant. We had put a contract in place about a year ago, set to expire at the end of our first half, which was our original thought on the timing of the close of that transaction. So we closed out that transaction and essentially rolled it forward. But when we closed it out, we did recognize about a $60 million gain on that hedge.

Matt Knickman: As it relates to cash flow, yes, so obviously strong cash flow within the quarter. There are a couple of things in there. So first of all that did include a little less about $60 million worth of a gain on hedging contract associated with the purchase price for aspirant.

Matt Knickman: Put it in a contract in place about a year ago is set to expire at the end of our first half which was our original thought on the timing of the close of that transaction. So we've closed out that transaction essentially roll that forward, but when we closed it out we did recognize a.

Matt Knickman: About $60 million gain on on that hedge.

Neil Doerge: In addition, we did see some working capital improvements. Inventory days were down by about 10. DSO was down by about 3. So that contributed to the strong cash flow performance, as did significantly lower tax payments than in the year ago quarter. Thank you.

Matt Knickman: In addition, we did see some working capital improvements inventory days were down by about 10.

Matt Knickman: DSO was down by about three so that contributed to.

Matt Knickman: Two.

Matt Knickman: The strong cash flow performance as it significantly lower tax payments than in the year ago quarter.

Matt Knickman: Okay.

Matt Knickman: Thank you.

Mark Delaney: The next question comes from Mark Delaney with Goldman Sachs. You may proceed. Yes, good afternoon. Thank you very much for taking my question.

Speaker Change: The next question comes from Mark Delaney with Goldman Sachs. You May proceed.

Mark Delaney: Yes, good afternoon, and thank you very much for taking my question I was hoping to better understand that the tariff topic.

Mark Delaney: I was hoping to better understand the tariff topic. Maybe first one, just to level set everyone, including myself, the $75 to $100 million, is that the gross amount of exposure that you have and the net effect this year is maybe something less than that? Or is the $75 to $100 million what you expect to drag on profit? Yeah, so $75M to $100M is a gross annualized number. Obviously, you know, this thing went into effect in April, so we only have, you know, a little less than seven months of total impact. So $75M to $100M is the gross number.

Mark Delaney: Maybe first one just to level set everyone, including myself. The 75 to 100 million is that the gross amount of exposure that you have and the net effect. This year is maybe something less than that or is the $75 million to $100 million. What you expect the drag on profits to be for this year.

Mark Delaney: Yes, so 75 to $100 million to $100 million is a gross annualized number obviously.

Mark Delaney: This thing went into effect in April so we only have a little less than seven months of total impact so $75 million to $100 million is the gross number we are working to offset that although as we said in our previous remarks to the extent there are passing those costs onto customers. We've made no attempt to reprice backlog and given that we entered Q3.

Neil Doerge: We are working to offset that. Although, as we said in our previous remarks, to the extent that we're passing those costs on to customers, we've made no attempt to reprice backlog. And given that we entered Q3 with about $2.4 billion of backlog, it's going to take some time. For that, for those offsets to materialize. And so, you know, relatively little here in Q3, a little bit more in Q4. But by the time we get to Q1, we expect to have those tariff costs fully mitigated.

Mark Delaney: With about $2 $4 billion of backlog, it's going to take some time for that for those offsets to materialize and so relatively little here in Q3, a little bit more in Q4, but by the time, we get to Q1, we expect to have.

Mark Delaney: Those tariff costs.

Mark Delaney: Really mitigated.

Mark Delaney: Yeah.

Neil Doerge: Helpful, Neil. And that was what my follow up was on. You know, if you're not raising price on backlog, maybe you can help us better understand the mitigating actions that you are taking and your confidence Yeah, so I mean, I think as we think about tariffs, we think of kind of two opportunities. One, what are the actions that we can take to, to reduce our overall tariff exposure, leveraging our global supply chain, leveraging our manufacturing footprint, taking actions to actually reduce, reduce tariff costs. And then once we get to kind of, we've optimized the tariff costs side, the question is, you know, what can you do to further mitigate either by, by passing those costs on via price or surcharges of some sort, or reducing costs elsewhere in your P&L.

Mark Delaney: Helpful.

Mark Delaney: What my follow up was on <unk>.

Mark Delaney: Or not raising price on backlog, maybe you can help us better understand the mitigating actions that you are taking in your confidence in mitigating the tariffs as you exit the year. Thank you.

Mark Delaney: Yes, so I mean, I think as we think about tariffs, we think of kind of two opportunities. One what are the actions that we can take to reduce our overall tariff exposure leveraging our global supply chain leveraging our manufacturing footprint.

Mark Delaney: Taking actions to actually reduce reduce tariff costs and then once we get to kind of we've optimized the tariff cost side. The question is what can you do to further mitigate either by.

Mark Delaney: Passing those costs on via price or surcharges of some sort or reducing costs elsewhere in your P&L and so we have we have actions going on across all of those all of those work streams now when I said, we're not raising price on existing backlog right. So essentially we said hey, if you had orders that were already on our books.

Satish Dhanasekaran: And so we have, we have actions going on across all of those, all of those work streams. Now, when I said we're not raising price on existing backlog, right, so essentially, we said, hey, if you had orders that were already on our books, that we weren't going to go back and try and recover tariffs on those, but we have taken actions forward looking on new quotations starting in, you know, about mid April. Yeah, Mark, just to chime in, you know, we we have a pretty resilient supply chain operations that is agile, and we have a considerable amount of operational realignments that we can still work on, you know, because at this point, we're assuming 10% tariff sort of is the base case for us.

Mark Delaney: That we werent going to go back and try and recover tariffs on those but we have taken actions forward looking on new quotations starting in mid April.

Speaker Change: Yes, Mark I think just the city just to chime in we have a pretty resilient supply chain operations that is agile and.

Speaker Change: We have considerable amount of operational realignments that we can still work on.

Speaker Change: At this point, we're assuming 10%.

Speaker Change: Startup is the base case for us.

Satish Dhanasekaran: And should that materially change, we would be prepared to respond to those scenarios as well. You know, customer pricing and strategies, it's definitely a part of it. But it's also all the other operational alignments that we can make with our partners who we have a multi-year relationship with that can help us scale across geographies if needed.

Speaker Change: And should that materially change, we would be prepared to respond to those scenarios as well.

Speaker Change: Customer pricing and strategies, it's definitely a part of it but it's also all the other operational alignments that we could make with our partners, who we have a multiyear.

Speaker Change: Our relationship with that can help us scale across geographies if needed.

Speaker Change: Okay. Thank you very much I'll pass it on.

Tamiya: Thank you.

Speaker Change: Thank you. Thank you and as a quick reminder, if you'd like to ask a question. Please press star one please limit yourself to one question and one follow up only the next question comes from meta Marshall with Morgan Stanley You May proceed.

Tamiya: As a quick reminder, if you'd like to ask a question, please press star 1. Please limit yourself to one question and one follow up only.

Meta Marshall: The next question comes from Meta Marshall with Morgan Stanley. You may proceed. Great, thanks. A couple of questions for me. Just one, know that your aerospace and defense business is kind of relatively split between kind of U.S. and allies, but just wondering if you had seen any kind of pushback on, you know, ally orders that were aligned to U.S. programs or just kind of any commentary you could kind of give on aerospace and defense. And then just also kind of following up on that of noted that you said kind of minimal China impact, but just, you know, how much of that 75 to 100 of impact that you guys are talking about from a growth perspective is from shipping into China versus kind of shipping into the U.S.?

Meta Marshall: Great. Thanks.

Meta Marshall: A couple of questions for me just one.

Meta Marshall: No that your aerospace and defense business is kind of relatively split between kind of U S allies, but I'm. Just wondering if you had seen any kind of pushback on ally orders that were aligned to U S programs or just kind of any commentary you could kind of give an aerospace and defense and then.

Meta Marshall: Just also kind of following up on that.

Meta Marshall: Noted that you saw.

Meta Marshall: That kind of minimal China impact, but just.

Meta Marshall: How much of that 75 to 100.

Meta Marshall: <unk> impact that you guys are talking about from a growth perspective is from shipping into China versus kind of.

Meta Marshall: Shipping into the U S. Thanks.

Meta Marshall: Thank you, Meta.

Matt Knickman: Thank you Matt.

Satish Dhanasekaran: I'll take the aerospace defense and Neil can quantify the China impact. I'll just say that a strong quarter with growth in orders, as I mentioned, even under a continuing resolution that we've been operating under, and this is unprecedented that we're still under continuing resolution, maybe for the full year. And so that does limit growth in new programs and such, but we saw some good orders bookings again with our prime contractors in the US and actually had a double digit order growth in our European business. Just to give you some examples, we were awarded by NATO a FORAX contract, which is public, to modernize radar and electronic support measures.

I'll take the aerospace defense and Neil can quantify the China impact.

Speaker Change: I would just say that the strong quarter.

Speaker Change: With growth in orders as I mentioned, even under a continuing resolution.

Speaker Change: We've been operating under and this is unprecedented that we're still under a continuing resolution may be for the full year.

Speaker Change: And so that does limit growth in new programs and such but.

Speaker Change: We saw some good orders bookings again with our prime contractors in the U S and actually had a double digit order growth in our European business.

Speaker Change: Give you. Some examples we were awarded by NATO.

Speaker Change: <unk> contract, which is public to modernize radar and electronic support measures.

Satish Dhanasekaran: We also were selected by the U.S. Army for validating zero-trust security on the Unified Network. So the spend environment remains strong, especially with the prime contractor backlog. Again, this is a business, I want to remind you, it's always difficult to call on a quarterly basis, but easier to call on a longer term, because the trends are clear. And we look at it longer term and say, you know, the U.S. budget next year is likely to go up, European budgets for defense are likely to go up with the programs being put in place. And so and we feel good about our portfolio position in aerospace defense.

Speaker Change: We also were selected by the U S Army for.

Speaker Change: For validating.

Speaker Change: Zero Trust security on the unified network so.

The spend environment.

Speaker Change: <unk> remained strong, especially with the prime contractor backlog again. This is a business I want to remind you is always difficult to call on a quarterly basis, but easier to call on a longer term because the trends are clear and we look at it longer term and say you know the U S. Budget next year is likely to go up European budgets for defense are likely to go.

Speaker Change: With the programs being put in place.

Speaker Change: So and we feel good about our portfolio position in aerospace defense.

Neil Doerge: Yeah, I mean, and just to get to the question about China, so US, China, China, US, both directions is less than 10% of total tariff. Okay, great. Thank you.

Speaker Change: Yes, and just to get to the question about China. So U S. China, China U S. Both directions is less than 10% tariff exposure.

Speaker Change: Okay, great. Thank you.

Aaron Rakers: The following comes from Aaron Rakers with Wells Fargo. You may proceed. Yeah, thanks for taking the question. Two, if I can, I'll just ask him right away as well. So first, I think Neil, you know, as we as we talk about, you know, the guidance and getting up north of that 5% growth, or, you know, in that five to 7% range that you alluded to, can you just remind us again, of how we think about the incremental margin for the company? I think all the way back at the end of the day, you talked about anything north of 5% dropping through like a 40% incremental margin.

Speaker Change: Thank you.

Rakers: All of that comes from an rakers with Wells Fargo. You May proceed.

Speaker Change: Yes, thanks for taking the question.

Speaker Change: Two if I can I'll, just ask them right away as well.

Speaker Change: So first I think Neil as we've talk about the guidance and getting north of that 5% growth in there.

Speaker Change: That 5% to 7% range that you alluded to can you just remind us again of how we think about the incremental margin.

Speaker Change: The company I think all the way back at the Analyst day, you talked about anything north of 5% dropping through like a 40%.

Neil Doerge: And what I'm trying to get to is just the pace of how we can think back to, you know, getting off margin, you know, back above 30%.

Speaker Change: Rental margin and what I'm trying to get to is just the pace of.

Speaker Change: How we could think back to getting op margin back above 40% and then as a follow or is the second question. I should say is that can you talk a little bit about the wireless business that I think previously you've talked about is kind of think of that as being stable.

Neil Doerge: And then as a follow up, or as the second question I should say is that, you know, can you talk a little bit about the wireless business? You know, that I think previously talked about is kind of think of that as being stable. But it sounds like that's actually performing a little bit better. How do you think about the durability of that wireless business? Thank you. Yeah, so why not? I'll start with the first one here on the incremental. You're absolutely correct. What we've basically said is, you know, anytime our business is growing 5% or better that we would expect to drop through that growth at an operating incremental of about 40%.

Speaker Change: But it sounds like that that's actually performing a little bit better how do you think about the durability of that wireless.

Speaker Change: Thank you.

Speaker Change: So why don't I'll start with the first one here incrementally.

Speaker Change: Incrementally Youre absolutely correct, what we basically said is anytime a our business is growing 5% or better that we would expect to drop through that growth.

Speaker Change: Operating your incremental of about 40% I would point out that the tariffs are new and substantial incremental costs that are in the short run going to impact our ability to deliver on that incremental.

Satish Dhanasekaran: Now, I would point out that the tariffs are new and substantial incremental costs that are in the short run going to impact our ability to deliver on that and on the wireless business. Yeah, on the wireless business, you know, again, we're continuing I would say the headline is we're continuing to see stability, strength in the infrastructure side, still the smartphone related businesses, you know, some segments are so soft, especially especially in China. So still monitoring But stable, but soft, I would say the real strength is in the network infrastructure side with Open RAN, some of the latest standards releases with AI, and some early 60 research really driving some of the spend and customer engagements.

Speaker Change: Yes.

Speaker Change: And on the wireless business.

Speaker Change: Yes on the wireless business.

Speaker Change: Again.

Speaker Change: Continuing I would say the headline is we're continuing to see stability.

Speaker Change: Strength in the infrastructure side.

Speaker Change: Still the smartphone related businesses.

Speaker Change: Segments are so soft, especially especially in China, so still monitoring.

Speaker Change: Stable, but soft I would say the real strength is in the network infrastructure side with open ran some of the latest standards.

Speaker Change: Leases with AI, and similarly, 60 research really driving some of the spend and customer engagements, but we have a strong position in this space and we continue to invest for the longer longer term here to maintain our leadership and in this space.

Satish Dhanasekaran: But we have a strong position in the space and we continue to invest for the longer term here to maintain our leadership and in the space.

Unknown Executive: NASA Jet Propulsion Laboratory, California Institute of Technology Thank you.

Speaker Change: Thank you.

Robert Jamieson: The following comes from Robert Jamieson with Vertical Research. You may proceed. Hey, good afternoon. Thanks for taking my questions in the next quarter. Just quickly on software and services, just, you know, it's a growing part of the business, up to 36% of revenue and recurring down to 30% now. Are there any investments that you're making to further accelerate growth here, just given the margin profile of those businesses? Oh, thank you again, you know. But I think the long term, we still feel like there's more upside to driving the software as a percentage of revenue.

Robert Jameson: The follow up comes from Robert Jameson with vertical research you May proceed.

Robert Jameson: Hey, good afternoon, thanks for taking my questions and nice quarter.

Robert Jameson: Just quickly on software and services.

Robert Jameson: And part of the business.

Robert Jameson: 6% of revenue recurring from a 30% now.

Robert Jameson: Sure.

Robert Jameson: And to further accelerate growth.

Robert Jameson: Given the margin profile of those businesses.

Robert Jameson: Thank you again.

Robert Jameson: A big part of our strategy and if you look at the <unk>.

Robert Jameson: The business and how it performed in the downturn as you rightfully pointed out is a function of software and services because it's been such a big part of the company's resilience.

Robert Jameson: Especially even that's topline comes under some pressure. So this is clearly the area of focus across all our businesses we have.

Robert Jameson: Our strategy to grow the software and services.

Robert Jameson: One particular area really excited we saw double digit growth in our stimulation business. As an example, it's an area where we have placed a lot of M&A.

Robert Jameson: M&A.

Robert Jameson: And focus if you remember we acquired ESI.

Robert Jameson: And now we're also potentially a beneficiary of this.

Robert Jameson: Synopsys answers transaction, where we might get a couple more.

Robert Jameson: Acquisitions to bolster our presence in simulation space and it does two things right. It increases our software and recurring revenue, but equally it allows us to engage with our customers earlier in the design cycle, which again fits our strategy of being a bigger.

Robert Jameson: <unk> being a bigger player in.

Robert Jameson: In the R&D parts of our market and now as a recovery does happen.

Robert Jameson: The end markets you will see that number may be take a take back.

Robert Jameson: Can you give the total mix just a little because we are starting to see some of our core business recover but I think the long term, we still feel like theres more upside to driving the sulfur.

Robert Jameson: Percentage of revenue.

Satish Dhanasekaran: Great, thank you. And then just on AI, I mean, it's been consistent theme and growing nicely, but, you know, and maybe address this earlier, but beyond testing of like the high speed interconnection network infrastructure, you know, are there any other kind of test applications or demand that you're seeing from customers within that realm? Or is that kind of, you know, coming from some of the emulation software they mentioned on, you know, testing of how compute latency, etc, is working its way through the data centers as they are, you know, reconfiguring things for, you know, higher network speeds and things like that?

Robert Jameson: Alright, Thank you and then just on <unk>.

Robert Jameson: And growing nicely.

And maybe it's early but beyond testing like the high speed Interconnects.

Robert Jameson: Infrastructure.

Robert Jameson: The only other kind of test applications more demand that youre seeing from customers within that realm or is that kind of a.

Robert Jameson: Coming from some of the emulation software they mentioned on.

Robert Jameson: Testing of how compute latency et cetera is working its way through the data centers as they are.

Robert Jameson: Reconfiguring things for higher numbers.

Robert Jameson: Like that.

Satish Dhanasekaran: Yeah, I think it's important to characterize this not just as a cable test, but it's important to characterize it as the challenges in the digital infrastructure that's being put in place for AI are very different, right? When customers are trying to look at the scale up and scale out challenges they face, you know, what might be an interconnect really turns into a mission critical fail point if it's not performing right, and the cost of failure gets up pretty substantially. So, we're engaging with our customers on those mission critical needs that they have today, but equally from a strategic sense, we're looking at where's the industry going in five years, and I can tell you that the state of the art of the technology keeps growing.

Robert Jameson: Yes, I think it's important to characterize that it's not just us cable test, but it's important to characterize it as the challenges and the digital infrastructure, that's being put in place for AI are very different eight when customers are trying to look at the scale up and scale out challenges they face.

Robert Jameson: What might be interconnect it really turns into mission critical sailpoint, if its not performing right in the cost of failure gets gets up pretty substantially so we're engaging with our customers on those mission critical needs that they have today.

Robert Jameson: But equally from a strategic sense, we're looking at what is the industry going in five years and I can tell you that the state of the art on the technology keeps.

Robert Jameson: Keeps growing does this roadmap that's forming around multiple dimensions and we're participating in those.

Satish Dhanasekaran: There's this roadmap that's forming around multiple dimensions, and we're participating in those to enable it, so we're there for our customers. And what we see is a big trend of pulling in the timelines because of the rapid increase in the AI workload, right? So, all of this is pretty rich opportunity for us. We've also, along the way, have designed wins in the software emulation space, which allows customers to isolate their performance in the AI data center and say, where is the bottleneck to get the true performance? So, we're working with them on those as well.

Robert Jameson: To enable it so we're there for our customers and what we see.

Robert Jameson: Is a big trend of pulling in the timelines because of the.

Robert Jameson: The rapid increase in the AI workload right. So all of this is pretty rich opportunity for US. We've also along the way have design wins.

In the software emulation space, which allows customers to isolate.

Robert Jameson: Performance.

In the data center, let's say what is the bottleneck to get the to get the true performance. So we're working with them on those as well.

Satish Dhanasekaran: So, across the board, across physical and protocol layer, we're continuing to grow our contributions to this marketplace.

Robert Jameson: So across the board across physical and protocol layer, we're continuing to grow our contributions to this marketplace.

Tamiya: Okay, thank you very much. Thank you.

Robert Jameson: Great. Thank you very much.

Robert Jameson: Thank you. Thank you.

Rob Mason: The next comes from Rob Mason with Baird, you may proceed. Yes, good afternoon. Just a couple of questions.

Speaker Change: The next comes from Rob Mason with Baird You May proceed.

Rob Mason: Yes, good afternoon, just a couple of questions.

Rob Mason: On the general electronics business, I'm curious, just given all the realignment of supply chain activity, you know, maybe it's round two versus tariff the last time, as companies look at where their manufacturing footprints, you know, need to reside, can you just speak to maybe the impact on that business from a brand side? And again, I may be thinking more on the production test side, if that's an influence.

Rob Mason: On the general electronics business I'm curious just given all of the realignment of supply chain activity, maybe it's round two versus tariffs. The last time is this company to look at where their manufacturing footprints.

Speaker Change: Need to reside can.

Speaker Change: Can you just speak to maybe the impact on that business from a demand side again, maybe thinking more on the production test side. If that's an influence and then I'll. Just go ahead and ask my follow up Neil could.

Neil Doerge: And then I'll just go ahead and ask my follow up, you know, Neil could, just to think about the tariff impact in the third quarter, you know, is it is it kind of roughly a doubling of what you experienced in the second? Yeah, I'll take the second one first here. You know, I think it's it's likely a little bit more than that. We had about three weeks of, you know, tariff impact in April, versus obviously a full quarter. Now, we have already taken some mitigation mitigating actions that are having a positive impact. So I don't think you can extrapolate totally forward from from 8 million just based on the number of weeks, 7 million, sorry, 7 million.

Speaker Change: Just to think about the tariff impact in the third quarter is it does it kind of roughly a doubling of what you experienced in the second.

Speaker Change: Yes, I'll take the second one first year I think.

Speaker Change: It's likely a little bit more than that we had about three weeks of.

Speaker Change: Tariff impact in April.

Speaker Change: Versus obviously, a full quarter now we have already taken some mitigation mitigating actions that are having a positive impact. So I don't think you can extrapolate totally forward from from $8 million just based on the number of weeks seven sorry $7 million.

Neil Doerge: But but it is a little bit more than a doubling, it is more than a doubling of what we saw in Q2, just given the time involved.

Speaker Change: But it is a little bit more than a doubling it is more than a doubling of what we saw in Q2, just given the time involved.

Satish Dhanasekaran: Yeah, I think, you know, when you look at the general electronics business, you know, given it's it's a broad, it's a broad marketplace for us, in terms of the number of different types of applications that that, you know, that end market represents, we see no change in sort of the areas such as digital health, and, and research, because those are those tend to be durable in nature, and the manufacturing parts of it do move around. So on one hand, you know, China's still remains weak in that in that area. But I would say that there's a lot of recent conversations we're having with customers, because they're trying to diversify their manufacturing footprint.

Speaker Change: Yes, I think.

Speaker Change: When you look at the general electronics business given it's abroad.

Speaker Change: It's a broad marketplace for us.

Speaker Change: In terms of the number of different types of applications that that.

Speaker Change: At the end market presence.

Speaker Change: No change in sort of the areas such as digital health.

And and research because those are those tend to be durable in nature and the manufacturing parts of that do move around so on one hand, China's still remains weak in that in that area.

Speaker Change: But I would say that there is a lot of recent conversations we're having with customers because they are trying to diversify your manufacturing footprint now it's not materially.

Satish Dhanasekaran: Now, it's not maturely, yet reflected in our results, but could be an opportunity for us to engage in that we're working with our customers on. So it's still early days, but it's it's driven by the tariffs and what might happen. So there's a lot of scenario planning that's occurring, you know, and it'll be, it'll probably be playing out over the next 90 to 180 days. Thank you.

Speaker Change: Yet reflected in our results, but could be an opportunity for us.

Speaker Change: To engage in that we're working with our customers on so it's still early days, but it's driven by the tariffs and what might happen. So there's a lot of scenario planning that's occurring.

Speaker Change: And it'll be it'll probably be playing out over the next 90 to 180 days.

Speaker Change: Thank you.

Speaker Change: Thank you.

Adam Thalhimer: The following comes from Adam Thalhimer with Thomas Davis, you may proceed. Hey, good afternoon, guys. Great quarter.

Speaker Change: Following comes from Adam <unk> with Thomas Davis, You May proceed.

Adam: Hey, good afternoon, guys great quarter.

Speaker Change:

Adam Thalhimer: Thank you, Adam. Can you parse through orders a little bit? I'm curious if there was any, to what extent you saw pre-buy activity? ahead of any surcharges and what our expectations should be for border trends after the surcharges went into effect. Yeah, so I'd say just taking a look at the orders in Q2, you know, orders progressed fairly linearly in the quarter, the funnel conversion was what we expected. We had a strong intake in the funnel as well, which is what we reflected into Q3. And then I would say our April was strong, in part because it's the end of our first half for our compensation for our sales force.

Speaker Change: Thank you Adam can you can you parse through orders a little bit I am curious if there was any <unk> to what extent you saw pre buy activity.

Speaker Change: Ahead of any surcharges and what our expectation should be for.

Speaker Change: Order trends after the surcharges went into effect.

Speaker Change: Yeah. So I'd say, just taking a look at the orders in Q2.

Speaker Change: All this progress fairly linearly in the quarter.

Speaker Change: The funnel conversion was what we expected we had we had a strong intake and the funnel as well, which which is what we reflected into Q3 and then I would say April was strong.

Speaker Change: In part because it's the end of our first half.

Speaker Change: For our compensation for our sales force side. It does it does tend to have a strong strong April so no no real change.

Satish Dhanasekaran: So, you know, it does tend to have a strong, strong April. So no, no real change. You know, we didn't see any, any difference in pull in, pull out or cancellations or anything of that kind. And that's why we, you know, our position is, you know, while customers are watching the macro and evaluating the risk associated with it, we haven't seen any material change in customer behavior.

Speaker Change: We didn't see any any difference in Poland, pulao, some cancellations or anything of that kind and that's why we.

Speaker Change: Our position is while customers are watching the macro and evaluating the risk associated with it we haven't seen any material change in customer behavior.

Satish Dhanasekaran: Good to hear.

Speaker Change: Good to hear and then secondly, I wanted to ask about Asia revenue. There was really strong in the quarter and maybe you can just give some high level thoughts on China demand.

Satish Dhanasekaran: And then secondly, I wanted to ask about Asia, the revenue there was really strong in the quarter. And maybe you can just give some high level thoughts on China. Yeah, I would say, you know, Asia was strong. And again, you know, it's across all of our segments, really, commercial communications being the leader, semiconductors saw strong demand as new, new nodes and new technologies such as silicon photonics are being deployed. And general electronics also had some growth in Asia. I would just maybe make a comment about China. You know, orders were flattish. for the quarter in China, with strengths in a few sectors, but clearly the, as I mentioned before, the general electronics with the manufacturing exposure was weak, and automotive in China was also weak.

Speaker Change: Yes, I would say Asia was strong again.

Speaker Change: It's across all of our segments really commercial communications being the leader semiconductor saw strong demand as new new nodes and new technology suggests silicon photonics are being have been deployed.

Speaker Change: And John Electronics also had some growth in in Asia.

Speaker Change: I would just maybe make a comment about China.

Speaker Change: Orders were flattish.

Speaker Change: For the quarter in China.

Speaker Change: With strengths in a few sectors, but clearly the as I mentioned before the general electronics with the manufacturing exposure was weak and automotive in China was also weak we continue to monitor the Pos demand, although we have a very small indirect business. We continue to monitor that it seems largely in line. So.

Satish Dhanasekaran: We continue to monitor the POS demand, although we have a very small indirect business. We continue to monitor that. It seems largely in line. So, you know, China, I would say, continues to hold up well in this environment.

Speaker Change: China I would say continues to hold up hold up well in this environment.

Speaker Change: Thanks.

Satish Dhanasekaran: Thanks, Satish.

Tamiya: Thank you.

Speaker Change: Thank you.

Speaker Change: Thank you.

Samik Chatterjee: The next question comes from Samik Chatterjee with JP Morgan. You may proceed. Hi, thanks for taking my question. Satish, maybe if I can sort of try to, hi, hi, good to hear from you. So on the drivers of wiring demand, and Yeah, no, thank you. Drivers of wireline demand, I'm trying to sort of address that maybe in terms of how to think about sustainability. And your customers clearly are doing well on volume. But how should we think about the strength you're seeing driven by progress on R&D from your customers relative to maybe sort of what they're seeing on their volume outlook and driven by production.

Speaker Change: Next question comes from <unk> <unk> with Jpmorgan you May proceed.

Speaker Change: Hi, Thanks.

Speaker Change: Thanks for taking my question, so maybe if I can.

Speaker Change: Trying to hi, hi, good to hear from you.

Speaker Change: So on the drivers of why you think the Madden.

Speaker Change: Yes, no. Thank you Greg was a wireline demand and I'm trying to sort of address that maybe in terms of how to think about sustainability and your customers clearly are doing well on volume but.

Speaker Change: How should we think about the strength, you're seeing driven by progress on R&D premier customers relative to maybe sort of what we're seeing on the volume outlook and driven by production. So maybe if you can shed any color to vote. I know communications is very R&D align for you, but what does it look like for wireline and is the demand youre seeing there.

Samik Chatterjee: So maybe if you can share any color about I know communications is very R&D aligned for you, but what does it look like for wireline? And is the demand you're seeing there? Are you selling new testers when it comes to like, either silicon photonics or CPU support? Or are you just seeing more sort of customers buying just because their volume outlooks are stronger? Anything you can share on that front? And I have a follow up. No, good.

Speaker Change: Are you selling new test stores when it comes to like either Silicon Photonics, our CPO support.

Speaker Change: Or are you just seeing more sort of customers buying just because the volume outlook, so stronger or anything you can share on that front and I have a follow up thank you.

No. Good that's a great question I think I would just say when we looked at our wireline business.

Satish Dhanasekaran: That's a great question, Samik. I think, you know, I would just say, you know, when we looked at our wireline business, say a year or two ago, we've said the majority of the business R&D, and I would probably put it as 80-20-ish, roughly, as the ratio of R&D to manufacturing. Now, we've probably seen a 10 point swing in the manufacturing in that area, but that's sort of where we are still heavily R&D oriented. But we're clearly also benefiting from all of the manufacturing activity that's happening as the industry is trying to ramp for digital infrastructure.

Speaker Change: Say a year or two ago, we have said the majority of the business R&D.

Speaker Change: And I would probably put it as the 80 20 ish roughly as the ratio of R&D to manufacturing.

Speaker Change: Now, we've probably seen a 10 point swing in the manufacturing in that area, but that's sort of where we are still heavily R&D oriented.

Speaker Change: But we're clearly also benefiting from all of the manufacturing activity that's happening as the industry is trying to ramp for digital infrastructure.

Satish Dhanasekaran: But when I look at the portfolio of products that we we service, you know, all the way from early R&D, to call it mainstream or R&D or validation, through deployment, you know, whether it is with our AWGs, BIRDs, Scopes, Silicon Photonics, Wafer Test Systems. network analyzers, software with our AI benchmarking, and network speed emulators. So a pretty broad category of products that we're selling to. And actually, as I think about the whole first half, I would say the number of customers that participate in that has also grown for us, which is a good sign that the ecosystem is expanding as more companies are coming in, given that this is going to eventually be a longer-term opportunity.

Speaker Change: When I look at the portfolio of products that we service all the way from early R&D to call it mainstream or R&D or validation through deployment, whether it is with our <unk> birds.

Speaker Change: Copes Silicon Photonics wafer test systems.

Speaker Change: What kind of lasers software with our AI benchmarking networks fully eliminated so a pretty broad category of products that we're selling to and actually as we think about the whole first half I would say the number of customers that participated in that has also grown for us, which which is a good sign that.

Speaker Change: The ecosystem is expanding.

Speaker Change: As more companies are coming in driven given that this is going to eventually be a long longer term opportunity.

Satish Dhanasekaran: And when I look at some of the data trends that are going on and the standards progressions, it really bodes well for our R&D business. We'll have some times when we'll pick up manufacturing demand as well, because we have a portfolio, but strategically, the R&D business is more valuable to us.

Speaker Change: And when I look at the well look at some of the data trends that are going on in the standards progressions.

Speaker Change: Really bodes well for R&D business, we'll have some times when we will pick up manufacturing demand as well because we have a portfolio, but strategically R&D businesses is more valuable to us.

Speaker Change: Okay got it got it.

Samik Chatterjee: And for my follow up, if I can sort of stay with the wireline demand, but more sort of when we think about adoption of technologies like CPU and silicon photonics, I'm imagining sort of visualizing it as more of the test demand moves towards a bit more sort of semiconductor level testing. So anything you can share there in terms of how you see the competitive landscape, does it change from what you've had in sort of 400 gig, 800 gig? And do you think you have the sort of entire stack to address some of those complexities? Or is there something that you need to add to the portfolio to address sort of when the overall sort of technology moves more closer to semiconductor?

Speaker Change: A follow up if I can.

Speaker Change: Steve with the wireline demand, but more.

Speaker Change: When we think about it.

Speaker Change: Adoption of technologies like CPU in Silicon Photonics.

Speaker Change: Imagine instead of visualizing it as more of the test demand moves towards a bit more sort of semiconductor level testing. So anything you can share there in terms of how you see the competitive landscape.

Speaker Change: Does it change from what you've had historically.

Speaker Change: 400 gig 800 gig.

Speaker Change: Do you think you have the sort of entire stack to address some of those complexities or is there something that you need to add to the portfolio to address sort of win the overall sort of technology moves closer to semiconductor testing.

Satish Dhanasekaran: You're very astute to pick up the change, right, between electrical to optical, that conversion. It's been an area of emphasis and investment for us, especially as things go into silicon. This is why we invested about 18 months ago to intercept the demand from silicon photonics. We talked about this on a call as well, and we're now benefiting from that. That requires bringing together optical capabilities with our electrical capabilities and probing. So really in our wheelhouse as a company to go after this opportunity. Co-packaged optics is another great example of what I saw from customers. I think that's accelerating as well.

Speaker Change: No you're very astute to pick up the change right between electrical and optical that conversion.

Speaker Change: It's been an area of emphasis and investment for us.

Speaker Change: Especially as it thinks going to Silicon. This is why we invested about 18 months ago two to intercept the demand from Silicon Photonics, we talked about this on the call.

Speaker Change: As well and we're now benefiting from that that requires bringing together optical capabilities with our.

Speaker Change: With our electrical capabilities and probing and.

Speaker Change: Complex metrology, so really in our wheelhouse as a company to go go after this opportunity.

Speaker Change: Co packaged opex is another great example of what I saw from customers. So I think that's accelerating as well and if we need more capabilities. We can acquire talent, but I think we have a strong foundation to start with today that we actually at OFC, we showcased multiple.

Mehdi Hosseini: And if we need more capabilities, we can acquire talent. But I think we have a strong foundation to start with today that we actually at OFC, we showcased multiple, first in this area, 448 gig transmission, key-enabled 3.2 terabits, and so on and so forth. So we had about 50 demonstrations. So, you know, it will continue to grow. But you're right, this is where the puck is moving to. And we find ourselves having a strong foundation to intercept. Great, great. Thank you. Thanks for taking my questions. Thank you.

Speaker Change: And this area of 448 gig transmission key enabler three two terabits and so on so forth. So we had about 50 demonstrations so.

We will continue to grow but you are right. This is where the puck is moving too and we find ourselves having a strong foundation to intercept this.

Speaker Change: Okay, great great. Thank you thanks for taking my questions.

Speaker Change: Yeah.

Speaker Change: Thank you we have a question from Mitra <unk> with <unk> you May proceed.

Mehdi Hosseini: We have a question from Mehdi Hosseini with FIG. You may proceed. Yes, thanks for letting me ask the question. One follow-up on the wireline. Satish, I just want to look at the big picture. You talked about the connection is moving from copper to actually moving towards optical. And when you look at the entire market for both networking tests as well as the testing that happens with the component and component migrating to optical, would it be fair to say that your content would increase as you migrate from 800 gig to 1.2 terabytes? And if the content increases, including both system-level tests and semiconductor, what is the magnitude of the increase?

Speaker Change: Yes.

Speaker Change: Thanks for letting me ask the question.

Speaker Change: Follow up on the wireline side.

Speaker Change: I just wanted to look at the Big picture you talked about.

Speaker Change: The connection is moving from copper too.

Speaker Change: Actually moving towards optical and when you look at the entire market for both networking as well as the testing to help us with the component or component migrated to optical would it be fair to say that your content.

Speaker Change: Would increase as you migrate from.

Speaker Change: 800 gig to one point.

Speaker Change: Two terabyte content increases.

Speaker Change: Including both system level test semiconductor.

Speaker Change: What is the magnitude of the increase.

Mehdi Hosseini: Or you can either help us qualitatively or quantitatively. And I have a follow-up.

All the.

Speaker Change: Help us qualitatively or quantitatively or quantitatively kind of a follow up.

Satish Dhanasekaran: No, that's a look, I think I don't know that I would say that from what we see that it's either going to be electrical or optical. I think it's it's electrical for some applications, where you obviously have a better sort of economics and then optical where you need the performance. And it's where the puck is moving to. So I think this sort of hybrid is where the solutions are needed. And I think being a company that has both technologies, we find ourselves in a really good position. across the stack, as you pointed out, memory, compute, networking, so on and so forth.

No.

Speaker Change: Look I think I don't know that I would say that from what we see that it's either going to be electrical and optical I think it's it's electric.

Speaker Change: Electrical for some applications.

Speaker Change: You, obviously have a better sort of economics, and then optical where you need the performance and with where the puck is moving to so I think this sort of hybrid is where the solutions are needed and I think being a company that has both technologies, we find ourselves in a really good position across the stack is <unk>.

Speaker Change: Hinted out memory compute networking so on and so forth now with regard to the magnitude of the opportunity typically as the complexity goes up we would see the.

Satish Dhanasekaran: Now, with regard to the magnitude of the opportunity, typically, as the complexity goes up, we would see the types of solutions that customers need, especially in early R&D, tend to be more complex. And therefore, we're adding more value to our customers as we get there. Now, as those technologies mature, obviously, the puck moves to the next one. And therefore, the volume may drop, on the previous technology, it's always the case that that happens.

Speaker Change: The types of solutions that customers need, especially in early R&D tend to be more complex and therefore, we're adding more value to our customers as we get there now as those technologies mature obviously the moves to the next one and then therefore the volume drop on the previous technology. It's always the case that that happens, but the <unk>.

Mehdi Hosseini: But the net effect of these overlapping waves of technology is it's, you know, it really supports our long term growth growth expectations for the company that we have set to be in the 5 to 7 Okay.

Speaker Change: Net effect of these overlapping waves of technology is.

Speaker Change: No. It really supports our long term growth growth expectations for the company that we have set to be in the 5% to 7% rate.

Neil Doerge: And then a follow-up for Neil. If I just take a midpoint of your review guide for fiscal year 25, assuming that the sequential growth is stronger in October versus July, and in embedding the tariff impact into your margin profile, would you prefer to say that there is a slight decline in operating margin from April to July, and it would go kind of sideways from July to October, so your fiscal year 25 operating margin would be kind of flabby compared to fiscal year 24? One second. Yeah, I mean, I think as, as we look forward here, I think we're, we're kind of range bound, I would say, you know, in a pretty tight range, obviously, we're going to see, we would expect to see a seasonal uplift here as we move from Q3 to Q4.

Speaker Change: Okay.

Speaker Change: Then a follow up for Neil if I just take the midpoint of your revenue got booked fiscal year 'twenty five assuming that the sequential growth is further in October versus July.

Speaker Change: Embedding the tariff impact into your margin profile will be fair to say that.

Speaker Change: As it.

Speaker Change: A slight decline in operating margin from April to July and it would go sideways from July to October. So your fiscal year 'twenty five operating margin would be kind of flattish compared to fiscal year 'twenty four.

Speaker Change: <unk>.

Speaker Change: Yes.

Speaker Change: Yes, I mean I think as.

Speaker Change: As we look forward here I think we're kind of range bound I would say.

Speaker Change: And in a pretty tight range, obviously, we're going to see.

Speaker Change: We would expect to see a seasonal uplift here as we move from Q3 to Q4.

Speaker Change:

Speaker Change: But.

Neil Doerge: But, and, and as always, we would expect the absent tariffs to continue to drive a strong incremental on that, on that flow through.

Speaker Change: And as always we would expect absent tariffs to continue to drive the strong incremental on that.

Speaker Change: On that.

Speaker Change: On that flow through.

Tamiya: Okay, thank you. Yeah.

Speaker Change: Okay. Thanks.

Speaker Change: Yeah.

Paulina Sims: That concludes our question and answer session for today.

Speaker Change: That concludes our question and answer session for today I would like to turn the call back to Paulina assumes for any closing comments.

Paulina Sims: I would like to turn the call back to Paulina Sims for any closing comments. Thank you, Tamia, and thank you all for joining us today. Have a great rest of your day.

Speaker Change: Thank you Tony and thank you all for joining us today have a great rest enabled.

Tamiya: This concludes our conference call. You may now disconnect.

Speaker Change: This concludes our conference call you may now disconnect.