Keysight Technologies (KEYS) Q3 2026 earnings call transcript

Ladies and gentlemen, and welcome to Keysight Technologies Fiscal Third Quarter 2026 Earnings Conference Call. My name is Hilary, and I will be your lead operator today. If at any time during the conference, you need to reach an operator, please press star zero. This call is being recorded today, Tuesday, August 18th, 2026 at 1.30 p. m. Pacific time.

I would now like to hand the call over to Liz Morale, Vice President of Investor Relations. Please go ahead, Ms. Morale. Good afternoon, and thank you for joining us for Keysight's Third Quarter Earnings Conference Call for Fiscal Year 2026. Joining me on today's call are Satish Danasekran, President and CEO, Neil Doherty, Executive Vice President and CFO, Kailash Narayanan, President of the Communication Solutions Group, Jason Carey, President of the Electronic Industrial Solutions Group, and Steve Yoon, Senior Vice President of Global Sales.

Following the prepared remarks from Satish and Neil, we will conduct a question and answer session. The press release and information to supplement today's discussion can be found on our Investor Relations website, investor. keysight. com.

During today's discussion, we will make forward-looking statements about the financial performance of the company. Actual results may differ materially from those mentioned in these forward-looking statements as a result of risks and uncertainties. Information about these risks and uncertainties can be found in our most recent forms 10K and 10Q filings with the SEC. We do not intend to update any forward-looking statements.

In addition, we will refer to non-GAP financial measures and reference core growth, which excludes the impact of acquisitions or divestitures completed within the last 12 months and currency movements. The most directly comparable GAP financial metrics and reconciliations can be found on our Investor Relations website, and all comparisons are on a year-over-year basis, unless otherwise noted. I'll now turn the call over to Satish.

Thank you, Liz. Good afternoon, and thank you, everyone, for joining us on today's earnings call. Keysight delivered another outstanding quarter with record results and broad-based growth across our markets. The outperformance was driven by strong execution by the team, and demand extending across Keysight's full suite of differentiated products and solutions.

Orders grew 56%, revenue grew 36%, and earnings per share grew 79%, alongside robust free cashflow generation. Given this momentum, we're raising our outlook for Q4 and for the full fiscal year. Customers are investing to solve increasingly complex engineering challenges across our end markets, such as AI infrastructure, advanced semiconductors, defense modernization, and next-generation communications. Our outperformance reflects the differentiation of Keysight's solution strategy and the increasing value we bring to customers across their innovation lifecycle.

We remain focused on executing our strategy for long-term value creation, starting with identifying and investing ahead of structural growth opportunities, engaging early and deeply with industry leaders and building differentiated capabilities to solve our customers' mission-critical applications. We remain confident in our ability to sustain our momentum and deliver long-term value now to the business segments. Communication solutions order grew for the ninth consecutive quarter, establishing a new record, and revenue grew 43% driven by compounding momentum in commercial communications and strength in aerospace defense and government. In commercial communications, we saw the momentum from the first half of the year continue into the second half driven by rapid scaling of the AI infrastructure ecosystem.

As a result, wireline delivered record orders more than doubling year over year. The four pillars of opportunity associated with this business, AI infrastructure scaling, speed transitions, silicon photonics, and system-level emulation, all continue to drive growth and pipeline expansion with our customers. The breadth of our portfolio and sustained engagements with customers across this ecosystem are enabling Keysight to participate across the AI innovation lifecycle from pre-silicon design through chip and component validation and system-level emulation of data center racks and clusters to highly value manufacturing.

The industry continues to scale, and we have seen a meaningful increase in the diversity of applications and a greater opportunity to expand with customers globally. Let me share a few examples of the diversity of our business.

First, silicon designers are adopting Keysight's recently introduced high-performance digital and RF solutions for the lab to validate new designs with system-level requirements to ensure interoperability, performance, and reliability. Second, interconnect manufacturers are using Keysight's high-fidelity analyzers to characterize the performance of high-speed backplanes to ensure signal integrity and manufacturing EO.

Third, switch designers are using Keysight's emulators to validate network performance across AI workloads and protocols. Fourth, transceiver manufacturers are rapidly scaling 800 gig and 1.6 tera optical transceivers using our industry-leading 224 gig digital communication analyzers. Investments in the optical component ecosystem continues to ramp and the key players are adopting a broad portfolio of lab products, including the industry's first 220 gigahertz light-wave component analyzer, which we introduced at OFC this year.

And finally, our strategic engagements with hyperscalers continue to deepen as they are integrating our pre-silicon emulation and workflow solutions into their development pipelines.

Looking ahead, the scaling challenges associated with AI data center deployments are driving a multi-year industry roadmap for new architectures, evolving technologies, and new standards. We're well positioned and continue to invest ahead of transitions to capture these opportunities.

Turning to wireless, orders grew significantly again this quarter with rising customer investment in next-generation connectivity and continued demand across the supply chain supporting AI infrastructure scaling. In June, the 3GPP plenary meeting in Singapore confirmed the timeline for 6G with the industry's first standard targeted for March 2029.

With that milestone, now set, customers are transitioning from exploratory research into funded development programs. Importantly, 6G is shaping up to be much more than the usual vectors of innovation around higher speeds and new spectrum. Three emerging technology areas are AI-RAN, integratus sensing and communication or ISAC and non-terrestrial networks or NTN. Each of these is expanding the ecosystem and creating opportunities for us to provide end-to-end solutions for these use cases building on our 5G solutions leadership.

We're engaged with customers across multiple applications such as evaluating AI-enabled beamforming, high-fidelity digital twins and network traffic steering and the traction for our solutions continue to build. Our solutions have been architected around a flexible platform that enables customers to validate various candidate technologies by providing insights from the radio channel, network, device and satellite emulators for early 6G use cases across terrestrial and non-terrestrial networks.

Keysight's comprehensive portfolio spanning the physical layer to emulation tools is helping us secure early winds with industry leaders. Turning to aerospace defense in government, orders were up double digits with growth across all regions driven by a heightened global focus on deterrence and defense modernization.

Modernization is raising the bar on performance across the market. In radar, the industry is accelerating its shift to advanced radar architectures.

These use cases require high-performance validation solutions leading to rapid adoption of our multi-channel RF solutions and next-generation oscilloscopes at prime contractors. New security architectures have also accelerated the adoption of lower-cost autonomous platforms from UAV to Leo satellite constellations that are increasingly delivered by venture-funded defense technology companies moving at commercial speed. We are recognizing the shift and are positioning ourselves to serve this new ecosystem.

Our engagements with defense startups and new primes is scaling and this year we achieved key winds across satellite, UAV and phased array radar applications. Resilient positioning, navigation and timing have become a greater priority as GPS disruption around conflict zones increasingly affects security systems. Demand accelerated for spirant's PNT solutions that emulate various multi-channel jamming and spoofing scenarios in the lab which enable customers to design and develop robust and resilient systems for these mission-critical environments.

As we integrate our teams and solutions portfolios we have a solid set of opportunities on which to build. With record budgets faster adoption of capabilities by customers and a portfolio that is purpose-built for mission-critical requirements we see a durable multi-year demand cycle ahead and we're well positioned to capture it.

Moving to electronic industrial solutions group we delivered another record quarter for both orders and revenue with revenue growth of 21% and a meaningful double-digit order growth across all three markets general electronics, semiconductors and automotive and energy. In general electronics growth was once again led by AI-related innovation and infrastructure investment. Test intensity continues to rise for high-performance components such as multi-layer PCBs and capacitors in support of next-generation compute. Higher frequencies, tighter tolerances and greater GPU and CPU density are increasing production complexity and quality requirements.

Our precision measurement solutions are being adopted to qualify these components in production. In addition digital health was up double digits with growth across variables and monitoring applications and the growth in education was supported by our semiconductor workforce development solutions but particularly in Asia.

In semiconductor we delivered another record quarter driven by ongoing capacity expansion for advanced nodes, high bandwidth memory and silicon photonics. Given the increasing adoption of optical interconnects, commercial production of silicon photonics is accelerating across leading foundries and IDMs. We also saw healthy demand for our semiconductor R&D solutions. Our engagement with industry leaders remains high and gives us good visibility into the air future requirements as we look into next year and beyond.

Finally, in automotive and energy, orders grew solid double digits. Investment remains focused on software-defined vehicle architectures with broad-based global demand for in-vehicle network and cybersecurity test, where our solutions provide verifiable compliance in support of new standards. Our energy and charging business also grew this quarter with engagements across both grid and automotive customers and spanning high-power charging storage compliance and infrastructure validation applications.

In summary, this quarter's results reflect the strength and diversity of our business. Our portfolio is enabling the major waves of innovation shaping our markets. AI and accelerated compute today and 6G, defense modernization, grid and autonomous systems in the years ahead. Every one of these technologies must be designed, validated and proven before reaching the market. Keysight with its differentiated technology stack and consistent R&D investments is well positioned to outperform the market over the long term.

I want to acknowledge the entire Keysight team for their hard work and commitment to our customer success. And with that, I'll pass the call over to Neal.

Thank you, Satish and hello, everyone. Our momentum continued in fiscal Q3 as we delivered record results that exceeded the high end of our guidance range for both revenue and EPS. These results were driven by further acceleration in our commercial communications business and ongoing strength in electronic industrial solutions and aerospace defense in government. Our portfolio of highly differentiated solutions is resonating with customers, allowing us to expand margins year over year.

In addition, our cash flow generation was robust and we are on track to achieve record operating cash flow in fiscal 2026. Moving to the specifics for Q3, orders of $2 billion, $91 million were up 56% on a reported basis. Acquisitions represented 5% points of growth and currency was a 1% point headwind. On a core basis, excluding those items orders grew 52%. Revenue of $1,846 million was up 36% on a reported basis and up 31% on a core basis.

Gross margin was 69% and operating expenses were $661 million. Operating margin was 33.2% up 820 basis points year over year and exceeded our long-term target range of 31 to 32%. We delivered debt income of $531 million and earnings per share of $3.07. Our core business contributed substantially to these results with an operating margin of 34.7% and an operating margin incremental of 66%.

From a segment perspective, the communications solutions group generated revenue of $1,345 million up 43% on a reported basis and up 36% on a core basis. CSG gross margin was 70.8% and operating margin was 34%. Within CSG, the commercial communications business generated its first billion-dollar quarter with revenue of $1 billion, $6 million, up 56% led by outstanding growth in Wireline and supported by strong growth in Wireless.

Wireline revenue exceeded wireless revenue for the first time this quarter. Aerospace defense and government achieved revenue of $339 million in an increase of 14%. The electronic industrial solutions group generated a record $501 million in revenue an increase of 21% with growth across all three markets, general electronics, semiconductor, and automotive and energy. EISG gross margin was 64.1% and operating margin was 31%.

Software and services both grew double digits, now representing approximately 33% of Keysight revenue while annual recurring revenue was 24% of total mix.

Moving to the balance sheet and cash flow, we ended the quarter with $2,605 million in cash and cash equivalents, generating cash flow from operations of $437 million and free cash flow of $403 million. This quarter, we were purchased approximately 640,000 shares of Keysight stock at an average price of approximately $326 per share for total consideration of $210 million.

Year to date, in fiscal 2026, our share purchases total $517 million. Before I turned to our outlook, I wanted to provide an update on our recent acquisitions.

Our integration efforts are now largely complete, including systems migrations, one quarter ahead of schedule. Given the faster than expected integration, our cost energy realization will accelerate in Q4. We now expect to have 80 to 90% of the $100 million in cost energies realized on a run rate basis, exiting the fiscal year.

Now turning to our outlook. For the fourth quarter of 2026, we expect revenue in the range of $1,930 million to $1,950 million, representing 37% year over year growth at the midpoint. We expect Q4 earnings per share to be in the range of $3.34 to $3.40, representing approximately 76% year over year growth at the midpoint. This will result in fiscal year 2026 revenue growth of 32% and EPS growth of approximately 60% at the midpoint.

This guidance is based on a weighted diluted share count of approximately 172 million shares. In closing, fiscal 2026 thus far has been a remarkable year with exceptional performance across our business. Our leading portfolio of solutions, leveraged to multiple technology mega trends, is driving significant growth and margin expansion. We remain focused on enabling our customers and helping them further accelerate technology innovation.

In turn, driving continued organic growth, profitability, and ultimately value creation for our shareholders. With that, I will turn the call over to Liz to begin the Q&A session.

Thank you, Neil. Hillary, will you please provide the instructions for the Q&A session?

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one to raise your hand. We ask that you limit yourself to one question and one follow-up. To withdraw your question, please press star one again. Please hold while we compile the Q&A roster.

And I have a quick follow-up. Yeah, thank you, Aaron. Yeah, it's a great quarter of the teams been executing very well and we're pleased with that. Relative to 6G, any time you start a new generational cycle, you always look for what's different versus the past. And it's often too, you can't wait too long to call it. And that's why we've had a focus on making this company about solutions and about first-to-market. And so we have been engaged with the industry the last couple of years. And so as I noted in my prepared remarks, we start to see the industry coalescing around early 6G standards in the 2029 time frame. There's the Olympics in the United States.

That's the other mile marker. And that's not new. I mean, anytime you've had wireless standards evolution, ironically, it involves a sporting event of some kind. And so that's another mile marker to draw historical parallels. But from a technological standpoint, traditionally, you see a new spectrum and support of higher speeds and feeds. It's sort of like the base case for any technology. And that is also going to be true in 6G.

But as we noted, we're also seeing other vectors of innovation, AI RAN being one of them, new use cases like ISAC, security infrastructure, and also bringing forward the tighter integration of non-terrestrial and industrial assets into a communication framework. And all of these are areas we've invested in. And we have the solutions portfolio, and we're working with industry leading customers. So our base case is the opportunity in 6G is greater than the opportunity that we saw in 5G. And we're well positioned to capitalize on it.

And then as a quick follow-up on the wire line side, I know you mentioned that this is the first quarter for which you saw a wire line to pass the wireless business. As we think about AI and just the continual expansion of the opportunity set around that, is there any way to help us think about how meaningful AI is to your business today, either within the wire line or an aggregate?

And how much of a growth driver that appears to continue to be as we look forward?

Yeah, I mean, we're really pleased with the wire line business and that the pickup we're seeing and the AI-related demand in that business as a primary, of course, as the opportunities increase, you will start to see secondary opportunities. But we're trying to frame it up for you in terms of our wire line business. Wire line was greater than wireless, not just this quarter, but even year to date. We have seen tremendous momentum in our wire line business.

So we're in the early stages of a long adoption of AI, not just in wire line and as things come together, we'll start to see a convergence with wireless and convergence with automotive and many other end markets that we're well positioned to capitalize over the long term. But in the near-term, very pleased with the traction of AI, we're seeing for our differentiated products and solutions, which is far exceeding our ability to supply at this point and customers are planning ahead. And we're doing very well with our AI business.

Thank you for your question.

Hi, Mita. Great. Thanks.

I know, Kailash, if you have any other comments to add. Yeah, fundamentally, the design margins are shrinking, right? So with higher data rates, lower latency, AI needs to be lossless. And even if there's a limited amount of gap there, the models won't perform. So what our customers are seeing is they can no longer guarantee anything by design. They also need to test it in production as well. So this is increasing a lot of design emulation and test intensity. If you look at a compute or a switch trade these days, it's gone from tens to hundreds of high speed panels.

And that's more insertion points for us. We have our B&As and oscilloscopes testing things at a signal level. We introduced a new portfolio to test things at a bit level. And our AI workload emulators are testing things and emulating things at a protocol and packet level. You look at scale and things are going from monolithic chips to chiplet architectures. So the interoperability of chiplets need to get emulated and tested. Customers are asking when a chip is exercising a model, we communicate an environment for that chip to get stress tested. And they want to see if the chip shuts down or gets overheated. They want to activate all of the cores with higher power and higher speeds.

So all of these are creating additional opportunities for us. And we're excited about the complete portfolio. We have electrical, optical, RF, digital, and protocol. We're bringing all of these capabilities to enable our customers. And we're seeing R&D as well as our manufacturing business grow significantly.

Yeah, I made it to your second question. Obviously, we've seen really strong core operating leverages quarter. And I think as we look forward, I continue, at least as it relates to 27, to feel confident in our ability to continue to outperform our 40% leverage target, particularly given the synergy realization that we'll see. I mentioned that we've largely competed our integration of the recently completed acquisitions.

You put the question, the context of guardrails. The only thing I would just caution people to pay attention to is we did have the one-time tariff impacts this year that kind of artificially pulled up 26 profitability that won't repeat. So if you adjust for that and think about it on an operational basis, I would expect we'll continue to outperform the 40% metric.

Thank you.

Yeah, Mark. I mean, we think it is. I'll just say our base case is, you know, orders slightly up from Q3 in line with seasonality and then following that seasonal trend into Q1 of 27. Steve, I know the pipeline.

You may make some comments there. Thanks, Satish. Well, let me start by saying it's great to be head of sales at Keysight right now. We had an outstanding Q3. We deliver highest quarter ever for the third consecutive quarter. And with the traditional uplift that we're expecting Q4, we're confident in delivering another record quarter and surpassing two billion for the third consecutive quarter. Even more promising, despite these record order results, our pipeline has continued to grow throughout the year and now stands at an all-time high.

I think this is proof that our quarter market strategy and priorities are working. Our top priority has been to really spend more time with customers as much as possible, identifying those new opportunities and find those unarticulated needs and capturing new logos. As the case in point here today, we've added nearly 3,000 new customers representing more than $100 million of incremental business. And we're also partnering closely with marketing in addition, one of our focus has been to elevate our engagement with our customers.

So our largest customers are doing well performing up high double digits for the year. And more importantly, we're really expanding our reach across their entire ecosystem.

We're also adding capacity in markets and high growth areas. Southeast Asia is a good example. We've more than doubled our business and is our fastest growing region for the quarter and for the year. So all in all, we further accelerate our momentum, this quarter resulting in our highest ever monthly funnel intake just last month, and our new record for rolling 12 months.

Thank you, Mark. As you heard from Steve, we're seeing broad based front in demand. I think one of the points that in addition to everything Steve said is we're seeing demand across the globe and our portfolio is doing very well. Now, from a supply chain perspective, our team has done a great job this year continuing to scale with discipline, as you see from our gross margins at record levels as well.

And we're continuing to meet our customers' demand needs as we go through the year. It's also true that the supply environment is less flexible today than let's say a year ago. And so we're working with our suppliers to to deconstrain the supply chain, especially at these levels of demand. And we remain confident in the guide that we have laid out for Q4.

Thank you. Thank you.

I want to go back to commercial comms and the strong AI business on the water line side. You talked about some of the, you know, applications and the use cases that are helping there. Chris, who can just, you know, give us a little update on how that business is looking from a, you know, R&D standpoint versus manufacturing, if he didn't give us a little update on any movements that you've seen in the AI-related business, then I have a follow up. Yeah. You know, it is related to R&D and manufacturing, and we'll talk about it from a wire line side of things where we put out the numbers previously. You know, historically, this has been a business that's been amongst the most heavily levered towards R&D.

We've talked about it at about 80-20. We've more recently said with the, you know, the addition of manufacturing business business in the support of the AI data center build out that that shifted to more like 70-30. And I think if you looked at over a shorter horizon, over the last couple of quarters, it's probably more like two thirds, one third. But we're still heavily levered towards R&D within wire line, even as we're servicing this entire ecosystem and servicing based customers as they take products out of R&D into manufacturing and ultimately deploy them into the marketplace.

Yeah, I would say, Tim, you know, the hyperscalers and our early engagements started about five years ago with our acquisition of XIA, who had more of a relationship with them. In the early days, right now, I would say our relationship with hyperscalers not only is in the U. S. , but I also would add some of the model companies that are driving a lot of the demand for the ecosystem. So it is strategic, in that sense, because of the tremendous capital that they're deploying, and that sort of moves downstream into the ecosystem. So understanding their needs are important. Also, many of them, I think, publicly disclose their own silicon, in-house silicon, and efforts to make their own ships.

So they are a very important customer base for us. From a revenue concentration point of view, they're actually the smaller of the entire, you'd say, roughly 10% of our business is from that cohort of companies directly, but they do have a lot of downstream effect and influence across the ecosystem. So it's very important. What's also important is to recognize that even as we're winning today, in R&D and in manufacturing applications, where industry scaling, we're also uncovering new opportunities, such as with regard to emulating the workloads, because that's where the future is going to be, and we're in a very good position with our emulation platforms, to be able to help the industry to uncover the various heterogeneous emulation workloads associated with AI, because as Kailash mentioned earlier, that is going to be critical, especially given the latency requirements of AI and the scaling data across the AI network.

Thank you.

You described a lot of strong demand dynamics and W's order growth, but we did see a bit of a step down in the growth right there. Yeah, Adrian, you know, I've said this, you've heard me say this on the call, aerospace defense is a business I can easily call years out, very difficult to call in a given quarter, just because it's got government budgets, it moves at its own pace.

But this year, we're quite pleased with the growth and adoption of our solutions, including our newly acquired P and T offerings from Spiren. So nearly any specific ones.

Yeah, I would just reiterate that, you know, we're still up double digits. There is some quarter to quarter perturbations in these end markets. I, my honest feeling is you're probably, there's probably nothing to see there from that perspective.

Oh, yeah, please. Yeah, let me just make one more comment that we built backlog in the business. So if you're looking at revenue and drawing that conclusion, that's a function of supply and supply chain. So I would not read too much into it.

As Neil mentioned, please go ahead. Can you repeat your follow on question? Thank you.

Thank you.

Thank you.

Yeah, Andrew, please, with the double digit growth, we're seeing in our EISG business here today. Recovery in auto is another team along with strength in semi.

But we have Jason here, and he'll touch upon those points. Yeah, thank you, Andrew, for your question. And specifically with regards to the AI tailwinds that we're seeing, you know, in the rest of the business, we've talked frequently about the leverage of our communications technologies and our IP, you know, into end markets. We do have some specific technologies around semiconductor wafer test, where we're seeing significant capacity expansion there across multiple dimensions, including advanced nodes, memory, silicon photonics, you know, as far as looking forward, you know, the forecasts around wafer fab equipment, and capital going into those markets continues to expand. And so that that is robust. And the general electronics space, what you're seeing is, again, to the earlier question from META about test intensity, you're seeing a lot of that multi-layer high density heterogeneity that's coming through at the component level, resulting in higher test intensity on the production side, which I last mentioned, we see that in some of our end markets in general electronics.

And again, that's moving from, you know, the board level to the component level, where the tolerances are getting increasingly tighter as you look at higher frequency and higher data throughput and just expectations of high performance in small spaces. So I think that's the challenge that customers face. And the beauty of our solutions is we address those all the way from R&D into production, so strong leverage there.

On the operating margin side, yes, we're pleased with the progress that we're making there. I think historically that business had suffered a little bit. And over the last 12 to 18 months, we've really focused on driving top line growth, because that's where it always starts. And then transforming pieces of the business, we're investing more in some of the software elements of the business with ESI and the optical solutions group. And there's been rationalization of certain pieces of the business where, you know, perhaps, you know, lower margin. And at the same time, pursuing other opportunities that we've talked about related to digital health and the grid. So I think, you know, in summary, despite the different profile and composition of the businesses with any ISG today, we're confident in our ability to continue to achieve higher levels of profitability as we move forward.

Prior commentary, you discussed potentially the synergies being 100 million plus from the acquisitions. And I'm wondering now that you've completed the integration. Is your estimate of those synergies potentially larger? And I'm just sort of thinking about, you know, what sort of contribution I can assume for Q4, Q1? Thanks. Yeah, I would say that, you know, at this point, given where we're at, we certainly have direct line of sight to the 100. So I think that's to the extent there was risk in that that's substantially de-risk.

And I think, you know, as this business now begins to operate more holistically within the key site framework, we'll continue to look for additional opportunities. So not the quantification for you, but I think history would suggest that when the initial kind of wave of synergies come out, that there is admittedly smaller dollars with some additional follow-on efficiencies they tend to materialize. So think about it on an incremental basis. As you move from FY26 to FY27, I'd be thinking on the order of 50 million. I think we realized, you know, close to 40 million, again, ramping throughout the year as you thought about it from Q1 through Q4. And again, I expect that we're going to be kind of close to 90% of that 100 million realized as we enter next fiscal year.

Thank you.

Thank you for taking my question. I guess you guys have given us a lot of detail on the strength and AI-related wire line. So I wanted to ask about traditional non-AI portion of wire line. How does growth look like in that business? And what are you seeing there? Yeah, I think we're seeing a convergence. I think Mark is what, how I would characterize it. And I think that is to be expected as such a disruptive technology starts to intercept multiple end markets. I'll give you an example.

The wireless customer base, historically, maybe never had to think about AI. And now AI is entering the RAM. That's an example of an application. The wireless ecosystem has a known set of contract manufacturing companies that play into the telecom market. Many of them have now started to invest in building their own racks for AI. That's another example of sort of the applications that are now emerging that were well positioned to capitalize given our strength and reputation in this ecosystem.

And then you guys mentioned that software and services was roughly 33% of revenue. I guess I'm curious, where do you think that number eventually goes, especially following the recent acquisitions? Thank you. Yeah, I think you know, look, the strategy for the companies to become a solutions company. This has been what we worked hard to building. And inherently, that implies providing more software-centric solutions. And also offering differentiated services to build the lifecycle value contributions. And we do it at the pace of our markets and at the pace of our customers. It's all about our customers' needs. And so we're not trying to force a business model into the marketplace. And so, yeah, we've tried to do it as high as 40% a year or so ago.

And now we're at 33. But I just want to say, on a dollar basis, this is record levels for software and services. And we'll continue to keep innovating to stay differentiated in the marketplace.

I would also maybe just add that our software and services businesses are also growing double digits. They're just not growing as fast as the hardware businesses at this point in time.

Your next question comes to the your line is open. Please go ahead.

Look, we have a no doubt a strong setup as we enter fiscal 27, even as we remain cognizant of the old performance you're seeing in 2026 on top of the road here in 25. So, if I chain will remain the governor of near term revenue. I think I mentioned that earlier. But when I look at the broader end market, I just have to look at the technology trends and say the complexity of these technologies are only growing. The intensity and the pace of which our customers are innovating across our end markets globally, it's relentless right now. And that intensity is matched with their investment.

And we're well positioned as a company to capitalize because of all the investments we made in the downturn in R&D that is now going to generate, and has already started, a good refresh cycle for new products, which are already being enthusiastically received by our customers, so we're well positioned from that point of view. We also are taking even this demand that is consistently now for a few quarters. And we're executing well on a quarterly basis, but we've taken a longer term view, 18 months plus view of our supply chain planning.

And we're working to create additional flexibility, but those come with a lag, because I'll give you an example. We'll have to redesign some products on the margin to accommodate second sources and enter into some more longer term agreements with our customers. So, we're already set up. We'll give you more specific guidance for Q1 when we report in Q4.

Yeah, I mean, I think you said most of it. I think if I was just going to recap, right now supply is not the limiter, right? Excuse me, demand is not the limiter. We do have some supply chain limitations. It's a little bit of a mixed bag. I think if we think back three months to the biggest supply chain challenges we were facing, most of the more internal capacity related around ramping some NPIs that had seen kind of unprecedented early demand from the marketplace, we've made tremendous progress in that area. I think the challenges have shifted more towards incoming parts, which are under high demand as demand has ramped and continues to ramp across the ecosystem, right?

You've got numerous players who are all competing for supply from a similar set of components suppliers. And so, I just think that the supply situation is likely to be non-linear and will likely be a governor of our ability to convert demand to revenue for the next several quarters.

If I can just add a couple comments about 2.7 outlook. You just had the biggest refresher of our core RF microwave and high speed digital products since we formed key site. And we reinforced this at our worldwide annual sales training event in June, where we trained our entire sales team on this portfolio, as well as aspiring products. So, as these solutions are rolled out and introduced to more and more customers, I expect this to be a strong tailwind for us for many years, many course to come.

It could use unpack what the drivers were and you think you saw any tailwinds from possible future sovereign transceiver restrictions or customers getting ahead of any other constraints or supply issues? Oh, there was nothing unusual about the demand.

In fact, we saw a conversion of the pipeline in a very orderly fashion. No pullings. We are looking for it. It is just an environment where the markets are stronger and key sites differentiated position in its core markets, starting with commercial comms, which really outperformed for us to our expectation even with AI. And equally, the demand from our prime contractors in aerospace defense remains strong as they're building out capacity. Sovereign investments in Europe is another tailwind for our defense business. And the EISG business is clearly performing with the semiconductor business doing exceptionally well. So strong broad base demand. And we expect, as Steve mentioned before, we expect that to continue into Q4.

Thanks, Steve.

Yeah, I mean, I think if you go back a quarter and adjust for the tariff thing, we were 68% last quarter, we're 69% this quarter. It's obviously volume is helping. But I think it gets to the differentiation of the solutions that we're bringing forward across and markets, whether that's early 6G, AI, semiconductor, we have a highly differentiated set of solutions.

You know, mixed does we do have a wide range of gross margins across the portfolio. So mixed does matter. But I do think this upper 60s percent is a sustainable level for us.

Thank you for your question.

You saw some momentum in Warline. It was up 56% year on year. And you mentioned the mix going towards 70, 30% production R&D from 80, 20. Could you give us a breakdown on how you expect R&D in production to look like in revenues in the coming quarter? Well, I should say it's about it. It's one of those things that move things move around on a quarterly basis. So we tend to look at it over a longer term horizon because in a given in a given quarter if a customer comes in and they're doing an expansion in production line that could dominate a certain part of the segment. But as I've called out, I think we said two thirds in R&D, one thirds in manufacturing.

On the margin, we're seeing in our pipeline a greater activity as the customers are scaling. The ramping production of 1.6 terabit as we speak right now. And the demand is very, very strong, right? So in a given quarter like you four, I can easily see that mix even trend more towards production. And we're meaningfully participating across the workflow. And that's the important messages are R&D businesses growing, as Kailash mentioned. We're very pleased with the diversity of that business and that we're also happy that we're participating in the volume part of the data center build out as well.

And then as I follow up, I actually think about the long term next of R&D versus production. Given that the ramp and adoption of new transceiver is actually reading, you know, your volume is kind of ramping, but you also have more complexity when it comes to testing those new technologies. You know, is there a way to think about that long term R&D and production mix as we're reaching higher deployments of optics here? Yeah, I mean, I would just say, look, our strategy, as we have laid out, it's really to be an innovation accelerator for our customers. That sort of our core purpose, we're focused on building our tech stacks, optical electrical, all of them to be able to help our customers go through in R&D.

And what we're seeing now is pretty unprecedented that the rate of adoption of these technology curves or technology waves, it's accelerating to a point where you're seeing concurrent interruption across many dimensions, right? 800 gig is still sort of the underlying technology, but 1.6 is scaling. And typically, that would have been spaced out a little more. So it's really hard for us to make sense for how long this goes and how broad this goes. But I do know customers are already engaging us on 3.2 era. We did a demo at a conference earlier this year.

So, you know, the intensity associated with technology change and the economics for companies to find the latest technology remains high and we're participating in this. And I feel good about our position heading into 27.

Thank you for your questions. That concludes our question and answer session for today.

I would like to turn the call back to Liz Morale for any closing comments. Thank you, Hilary. And thank you all for joining us today. A replay of today's call will be available on the investor relations website later today. And we appreciate your interesting key site.

Thank you for attending. This concludes today's call. You may now disconnect.