Keysight (KEYS)

Electronic measurement provider Keysight (NYSE:KEYS) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 10.3% year on year to $1.42 billion. On top of that, next quarter’s revenue guidance ($1.54 billion at the midpoint) was surprisingly good and 7.9% above what analysts were expecting. Its non-GAAP profit of $1.91 per share was 4.2% above analysts’ consensus estimates.

Company Overview

Spun off from Hewlett-Packard in 2014, Keysight (NYSE:KEYS) offers electronic measurement products for use in various sectors.

Measurement and inspection instrument companies may enjoy more steady demand because products such as water meters are non-discretionary and mandated for replacement at predictable intervals. In the last decade, digitization and data collection have driven innovation in the space, leading to incremental sales. But like the broader industrials sector, measurement and inspection instrument companies are at the whim of economic cycles. Interest rates, for example, can greatly impact civil, commercial, and residential construction projects that drive demand.

Competitors offering similar products include Tektronix (NASDAQ:TEK), National Instruments (NASDAQ:NATI), and Teradyne (NASDAQ:TER).

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Keysight grew its sales at a tepid 5% compounded annual growth rate. This fell short of our benchmark for the industrials sector and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Keysight’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

This quarter, Keysight reported year-on-year revenue growth of 10.3%, and its $1.42 billion of revenue exceeded Wall Street’s estimates by 2.5%. Company management is currently guiding for a 18.6% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 9% over the next 12 months, an improvement versus the last two years. This projection is healthy and implies its newer products and services will fuel better top-line performance.

Keysight has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 63.2% gross margin over the last five years. Said differently, roughly $63.25 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

In Q3, Keysight produced a 61.2% gross profit margin, down 1.1 percentage points year on year. Keysight’s full-year margin has also been trending down over the past 12 months, decreasing by 1.1 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Keysight has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 20.9%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Keysight’s operating margin decreased by 5.6 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Keysight generated an operating margin profit margin of 15.3%, down 2.6 percentage points year on year. Since Keysight’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Keysight’s EPS grew at a decent 8.1% compounded annual growth rate over the last five years, higher than its 5% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t improve.

Diving into Keysight’s quality of earnings can give us a better understanding of its performance. A five-year view shows that Keysight has repurchased its stock, shrinking its share count by 8%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Keysight, its two-year annual EPS declines of 7.3% mark a reversal from its five-year trend. We hope Keysight can return to earnings growth in the future.

In Q3, Keysight reported adjusted EPS of $1.91, up from $1.65 in the same quarter last year. This print beat analysts’ estimates by 4.2%. Over the next 12 months, Wall Street expects Keysight’s full-year EPS of $7.15 to grow 9.1%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Keysight has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 21% over the last five years.

Keysight’s free cash flow clocked in at $187 million in Q3, equivalent to a 13.2% margin. The company’s cash profitability regressed as it was 11.8 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Keysight hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 22%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Keysight’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Keysight reported $1.87 billion of cash and $2.59 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.52 billion of EBITDA over the last 12 months, we view Keysight’s 0.5× net-debt-to-EBITDA ratio as safe. We also see its $6 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by Keysight’s optimistic revenue guidance for next quarter, which blew past analysts’ expectations. We were also glad its EPS guidance for next quarter exceeded Wall Street’s estimates. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 10.7% to $197.26 immediately after reporting.

Updated: December 4, 2025 at 9:14 PM EST

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Keysight, you should also grasp the company’s longer-term business quality and valuation.

Keysight’s business quality ultimately falls short of our standards. First off, its revenue growth was uninspiring over the last five years. And while its admirable gross margins indicate the mission-critical nature of its offerings, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its declining operating margin shows the business has become less efficient.

Keysight’s P/E ratio based on the next 12 months is 25.6x. This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $214.92 on the company (compared to the current share price of $209.06).