Keysight (KEYS)

Electronic measurement provider Keysight (NYSE:KEYS) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 7.4% year on year to $1.31 billion. Guidance for next quarter’s revenue was better than expected at $1.32 billion at the midpoint, 1.4% above analysts’ estimates. Its non-GAAP profit of $1.70 per share was 3.3% 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).

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Keysight’s 4% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the industrials sector and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Keysight’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 4.4% annually. Keysight isn’t alone in its struggles as the Inspection Instruments industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

This quarter, Keysight reported year-on-year revenue growth of 7.4%, and its $1.31 billion of revenue exceeded Wall Street’s estimates by 1.8%. Company management is currently guiding for a 8.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.9% over the next 12 months. While this projection indicates its newer products and services will spur better top-line performance, it is still below the sector average.

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 63.1% gross margin over the last five years. Said differently, roughly $63.11 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

Keysight’s gross profit margin came in at 62.3% this quarter, in line with the same quarter last year. On a wider time horizon, Keysight’s full-year margin has been trending down over the past 12 months, decreasing by 1.7 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 a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

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 21.4%. 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 2.7 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 profit margin of 15.8%, up 1.3 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

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 an unimpressive 7.8% compounded annual growth rate over the last five years. This performance was better than its flat revenue but doesn’t tell us much about its business quality because its operating margin didn’t expand.

We can take a deeper look into Keysight’s earnings to better understand the drivers of its performance. A five-year view shows that Keysight has repurchased its stock, shrinking its share count by 8.5%. 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 more recent period because it can provide insight into an emerging theme or development for the business.

For Keysight, its two-year annual EPS declines of 9.8% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q1, Keysight reported EPS at $1.70, up from $1.41 in the same quarter last year. This print beat analysts’ estimates by 3.3%. Over the next 12 months, Wall Street expects Keysight’s full-year EPS of $6.74 to grow 8.2%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because 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 21.4% over the last five years.

Taking a step back, we can see that Keysight’s margin expanded by 2.7 percentage points during that time. This shows the company is heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Keysight’s free cash flow clocked in at $457 million in Q1, equivalent to a 35% margin. This result was good as its margin was 28.9 percentage points higher than in the same quarter last year, building on its favorable historical trend.

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 because of its poor top-line performance, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 22.9%, 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. Over the last few years, Keysight’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Keysight is a profitable, well-capitalized company with $3.12 billion of cash and $2.58 billion of debt on its balance sheet. This $540 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We enjoyed seeing Keysight beat analysts’ revenue and EPS expectations this quarter. We were also glad its revenue guidance for next quarter slightly exceeded Wall Street’s estimates. On the other hand, its EPS guidance for next quarter missed. Still, this print had some key positives. The stock traded up 3.4% to $168.03 immediately following the results.

Updated: May 21, 2025 at 11:02 PM EDT

Are you wondering whether to buy Keysight or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

We see the value of companies helping their customers, but in the case of Keysight, we’re out. For starters, 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 backlog declined.

Keysight’s P/E ratio based on the next 12 months is 22.3x. This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $181.47 on the company (compared to the current share price of $161.10).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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