Title

Presentation

Keysight Technologies, Inc. beats earnings expectations. Reported EPS is $1.82, expectations were $1.69.

Operator: Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal First Quarter 2025 Earnings Conference Call. My name is Joel and I will be your operator today. [Operator Instructions] This call is being recorded today, Tuesday, February 25th, 2025 at 1:30 PM Pacific Time. I’d now like to hand the call over to Harry Blount, Head of Investor Relations. Please go ahead, Ms. Blount.

Harry Blount: Thank you and welcome, everyone, to Keysight’s First Quarter Earnings Conference Call for Fiscal Year 2025. My name is Harry Blount. I have long admired Keysight as a market leader in accelerating innovation and I am delighted to join Keysight as Head of Inbestor Relations. Joining me are Keysight’s President and CEO, Satish Dhanasekaran; and our CFO, Neil Dougherty. In the Q&A section, we will be joined by Chief Customer Officer, Mark Wallace. The press release and information to supplement today’s discussion are on our website at investor.keysight.com under Financial Information and Quarterly Reports. Today’s comments will refer to non-GAAP financial measures. We will also make reference to core growth, which excludes the impact of currency movements and acquisitions or divestitures completed within 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. 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 in upcoming investor conferences hosted by Susquehanna Financial Group and Morgan Stanley. And now I will turn the call over to Satish.

Satish Dhanasekaran: Good afternoon, everyone, and thank you for joining us today. My comments will focus on three key headlines. First, Keysight delivered strong first quarter results, revenue of $1.3 billion, and earnings per share of $1.82, both exceeded the high-end of our guidance. Core revenues grew for the first time in six quarters, reflecting strength in the Communication Solutions Group and stabilization in our Electronic Industrial Solutions Group. Second, orders grew year-over-year for a second consecutive quarter, up 4% to $1.3 billion. We’re seeing incrementally positive signals in our sales funnel and customer engagements. Our view of 2025 remains unchanged. We continue to expect gradual recovery even as we monitor the policy changes contemplated by the new administration in the United States.

Third, we’re well-positioned for the future. The world’s most technologically advanced companies trust us to deliver market-leading products and solutions at the physical, protocol, and application layers. The underlying technological trends of more memory, faster processing, greater bandwidths and, with lower power remain intact. We are engaging with our customers earlier and more broadly, which gives us confidence in our ability to create value for our stakeholders. Now let’s begin with an overview of Keysight’s first quarter business performance. Communications Solutions Group revenue grew 5%, reflecting continued momentum in wireline, stability in wireless, and growth in aerospace, defense, and government. Orders grew for the third consecutive quarter, driven by growth in both wireline and wireless.

In wireline, demand remains strong for our physical layer and AI workload emulation solutions, and we saw record orders again this quarter. Keysight is enabling the expansion of the AI data center network and the design of electrical and optical technologies for higher speeds and bandwidth. We continue to see strong engagement from a broad ecosystem, chipset designers, network equipment manufacturers, and hyperscaler customers. At DesignCon, Keysight demonstrated an industry-leading 400 gig per lane test solution enabling 3.2 terabit speeds along with industry-leading low-power DDR6 memory compliance tests. We believe AI will be a long-term secular tailwind for the design of next-generation technologies in the network, data center, and communications ecosystem.

Our wireless business performed in line with expectations and consistent with the stability of the past two quarters with ongoing activity related to standards progression in 5G advanced non-terrestrial networks and research in early 6G. We saw relative strength in network infrastructure with ongoing innovation in radio access networks and early 6G, while demand remains muted in the smartphone supply chain. In Q1, we launched our flagship PNA-X pro network analyzer to enable the design of advanced components and modules for early 6G research, aerospace defense, and non-interestrial networks. This solution delivers high-performance capabilities and unmatched measurement speeds, while dramatically improving the efficiency of our customers’ design workflows.

At the upcoming Mobile World Congress, we will be demonstrating PNA-X pro along with other solutions addressing AI, 6G, open radio access networks, and satellite connectivity, many of which will be highlighted in collaboration with industry-leading customers. Turning to aerospace, defense, and government, revenues grew to a first-quarter record with strength in both the US and Asia. The funnel of opportunities remain strong in EMSO, secure communications, space and satellite, while orders were down in the quarter due to ongoing continuing resolutions. Keysight continues to develop differentiated RF and microwave capabilities for security applications such as radar, spectrum operations, and signal monitoring. This quarter, Keysight had a notable win with a European prime for advanced threat simulation solutions.

Turning to Electronic Industrial Solutions Group, revenue was down 1% and orders were stable, reflecting mixed demand across end-markets. In semiconductor, fab capacity investment and AI-driven demand for advanced node technologies, high-bandwidth memory, and silicon photonics continued to drive strong customer engagement. New fab projects are ramping, helping drive a third consecutive quarter of strong order growth for our parametric wafer test solutions. In automotive, market conditions remain challenged, reflecting muted activity in manufacturing and EV battery development. Despite the near-term headwinds, customer engagement and innovation remain high in R&D for software-defined applications and autonomous driving. Next-generation autos will require optical technologies for high-bandwidth data transfer and processing within the vehicle.

This quarter, Keysight partnered with fabulous semiconductor company to deliver a new multi-gigabit optical Ethernet test solution. In General Electronics, orders grew for the second consecutive quarter. Customer spending in our industrial end-markets was driven by high-speed PCB and connectivity applications and inventory normalization in the distribution channel. We also saw strong growth in advanced research, particularly in Europe and Asia. We have made strategic progress in growing software and services, which accounted for approximately 40% of Keysight revenue, while recurring revenue was approximately 31% of total revenue. We are seeing growing customer engagement in our Design Engineering Software solutions. And in ESI, we saw new demand in aerospace, defense, as well as industrial customers.

In closing, we’re pleased that we’ve returned the company to growth, our robust innovation pipeline, strategic customer relations, and strong operating and capital discipline position us well to create value for all our stakeholders. I’d like to sincerely thank our employees once again for all their outstanding contributions, commitment, and track record of execution. With that, I’ll turn it over to Neil to discuss our financial performance and outlook.

Neil Dougherty: Thank you, Satish, and hello, everyone. First-quarter revenue of $1,298 million was above the high-end of our guidance range and up 3% on a reported and core basis, while orders of $1,263 million were up 4% on a reported and core basis. Backlog finished the quarter at $2.3 billion. Looking at our operational results for Q1, we reported gross margin of 65.8%. Operating expenses of $500 million were up 2% year-over-year and Q1 operating margin was 27%. Turning to earnings. We achieved $317 million of net income and delivered earnings per share of $1.82. Our weighted average share count for the quarter was 174 million shares. Moving to the performance of our segments. The Communication Solutions Group generated first quarter revenue of $883 million, up 5% year-over-year on a reported and core basis.

Commercial Communications revenue of $572 million and aerospace, defense, and government revenue of $311 million, each increased 5%. Altogether, CSG delivered 68% gross margin and 27% operating margin. The Electronic Industrial Solutions Group generated revenue of $415 million, down 1% or flat on a core basis. EISG reported 61% gross margin and 27% operating margin, largely due to a higher mix of software. Moving to the balance sheet and cash flow. We ended the quarter with $2 billion in cash and cash equivalents, generating cash flow from operations of $378 million and free cash flow of $346 million. We repurchased 450,000 shares this quarter at an average price of approximately $167 for a total consideration of $75 million. Now turning to our outlook.

We expect second quarter revenue to be in the range of $1,270 million to $1,290 million and Q2 earnings per share in the range of $1.61 to $1.67 based on a weighted diluted share count of approximately 174 million shares. As a reminder, Keysight’s historical first to second quarter revenue seasonality will be muted by the cadence of the ESI business. Looking to the second half, the macro-environment is expected to continue to be mixed, including uncertainty stemming from potential US policy actions. Despite this, our base-case scenario for gradual recovery in FY 2025 remains unchanged with assumptions for revenue growth at the low end of our 5% to 7% long-term target and earnings growth consistent with our 10% target. In closing, we are executing well and capitalizing on the recovery as it evolves across our end markets.

Our broad and diverse customer base, expanding solutions portfolio, deep customer engagements, and robust innovation pipeline provide a solid foundation for the year ahead. With that, I will turn it back to Harry for the Q&A.

Satish Dhanasekaran: Thank you, Neil. Operator, will you please give the instructions for Q&A?

Operator: Absolutely. [Operator Instructions] The first question is from the line of Samik Chatterjee with J.P. Morgan. Your line is now open.

Priyanka Thapa: Hi, Priyanka Thapa on for Samik Chatterjee. So my question is…

Satish Dhanasekaran: Hi, Priyanka.

Priyanka Thapa: What are the upsides from the Commercial Communications — hi, yes. So my question is on the Commercial Communications segment. And regarding upsides to that segment, could you provide what you anticipate that kind of breakdown between the contribution from wireline versus wireless will be since you had this quarter stability in what — wireless and you had a lot of strong growth in wireline due to the AI factors.

Satish Dhanasekaran: Yes, I think you characterized it very well. We saw stability in wireless and some uptick in our infrastructure portion of the wireless business as operator CapEx outlook is getting better. So the smartphone ecosystem continues to be muted in its recovery. So that’s the stability picture in wireless. But really the highlight was the strong growth in orders and demand that we saw for our wireline offerings driven by AI.

Priyanka Thapa: And what do you anticipate that trend to be in the future if anything? Do you think it’s still going to be wireline stable or do you expect an uptick if the smartphone ecosystem improves?

Satish Dhanasekaran: It’s — at least in our short term, we think the wireless continues to be stable. That’s sort of our base case thinking. There could be some upside as spending in infrastructure ramps in that area. But we feel very strongly that the innovation drivers in AI continue to be robust along with the investment outlook that our customers have shared with us today.

Operator: Thank you. The next question is from Meta Marshall with Morgan Stanley. Your line is now open.

Meta Marshall: [Technical Difficulty] Kind of noted continuing resolutions kind of as a reason for order weakness on aerospace and defense, but just kind of how you’re seeing kind of the current budget environment around federal? And then maybe as a second question, is there any way to kind of contextualize the order strength you saw in kind of wireline specifically that would kind of allow us to kind of contextualize some of the strength you’re talking about on AI? Thanks.

Satish Dhanasekaran: I will, Meta. So let me start with the aerospace defense and then we get to the other piece. I think, look, it’s a business I’ve said before, really difficult to call on every quarterly basis, but you take a long-term view, it’s probably one of our more stable businesses to call because the defense budgets keep going up with GDP and an increasing portion of that is towards technology modernization or what we call defense modernization. So no change to that long-term trend. If I look at the pipeline of opportunities where we have engaged in, continue to remain strong. I point you to some data points, right? The backlog of prime contractors is at a record level and the demand for solutions from our customers remains strong.

I think we’re just balancing typical continuing resolution issues in terms of timing of those deals combined with administration change. So any minor near-term perturbation typically tends to get worked out in a few quarters. That’s what we’re seeing. But again, we had a strong revenue growth this quarter from our aerospace and defense business as we delivered some of the solutions that we have booked last year as well. With regard to AI, I would say that the supply-chain environment for AI remains constrained as capital flows through and we’re seeing a strong uptick in manufacturing for these sorts of high-end capabilities and we’re well-positioned and we’re capitalizing on those at this point. But equally exciting for us is the longer-term opportunity coming in multiple dimensions for Keysight’s products and solutions.

And I would say all the way from the accelerated adoption of technology standards such as PCIe Gen 7, you look at LPDDR6, you look at the 400 gig to 800 gig to — increased activity in R&D around the terabit speeds, all of that really creates a very robust pipeline of opportunities that really matches the areas that we had invested in last year and we’re able to capitalize on that. And we feel good about the growing number of collaborations we have in this space with customers because the challenges that they’re facing are quite complex as they start to put some of this CapEx to work and start implementing some of these high-speed AI clusters, I think we’re making a meaningful contribution, then that’s only going to grow with time.

Operator: Thank you. The next question is from Mehdi Hosseini with Susquehanna. Your line is now open.

Satish Dhanasekaran: Hi, Mehdi.

Mehdi Hosseini: Sorry. I had a hard time unmuting. Apologies there. A couple of follow-ups from me. One near-term, one short — longer-term. Let me start with the longer term. And Neil and Satish, when you’re looking at your R&D activity looking over the next — commercialization over the next several years, how should we think about the pros and cons of 5G plus or 6G versus satellite communication? Could we at some point in the latter part of this decade, reach a point where there would be more of a commercialization of the satellite comm and would that be some sort of an I don’t want to say substitution, but complementing the evolution of 5G? And I have a follow-up.

Neil Dougherty: Yes, I think that’s a fair characterization, Mehdi, that satellite communications, especially non-terrestrial networks and that ecosystem growing in its contribution both for security and for commercial applications, it’s an incremental opportunity for us if that’s the way you want to think about it for our wireless business in the medium-term. And then 6G clearly is the other major technology driver that we’re seeing increased R&D investments at this point, more R than D, but as things slow, eventually leads to standardization, leads to deploy — development and deployment also to come.

Mehdi Hosseini: Sure. But what’s the net impact on Keysight? Would that actually be incremental for Keysight, zeros — or is no neutral — net neutral for Keysight opportunities?

Satish Dhanasekaran: Yes, whenever you’re staring at a new generation of technology, I think it’s safe to say that one doesn’t see greatest resolution way ahead of time. But I can tell you just from looking back at history of every business, you go back to 3G, 4G, and 5G, and there is no doubt that the SAM, if you think of it over a longer period of time, has grown just because of growing complexity. And not to mention, we’re still quite early in our innings in terms of expanding our capabilities and really deploying the fullest extent of capabilities of the company. That’s been our focus. And I think you should take away that our ability to invest in the downturn last year is going to mean that we did not lose any steam. In fact, we continue to grow stronger in terms of our ability to say yes to our customers, participate in early pilots.

So I feel good about our position. Hard to really say exactly how big the SAM will be, but if history is any gauge, the R&D opportunity will definitely be bigger and we’re prepared to capitalize on that.

Operator: Thank you. The next question is from Adam Thalhimer with Thompson Davis. Your line is now open.

Adam Thalhimer: Hey, good afternoon, guys. Nice quarter.

Satish Dhanasekaran: Thanks, Adam.

Adam Thalhimer: Can you give a little more color? You talked about a positive sales funnel and encouraging customer engagements. Just curious if that’s an indicator that we might be closer to a mixed demand environment becoming a solid demand environment.

Mark Wallace: Yes, Adam. What I can say is that it’s incrementally improving since the last time we spoke three months ago, and it’s in-line with what we’ve been speaking about, which is the steady gradual improvement and recovery here in 2025. And we’ve spoken about our funnel, which goes out about six months and that six-month funnel is improving in multiple ways. The first is new funnel intake, which is the most important to me, that’s new business coming in through the pipeline and we see that improving and it’s solid as markets do begin to recover and increasing demand is occurring. The second is velocity. That means how fast customers are making decisions and that is improving and we look at that in terms of how much business is created and closed in a particular quarter.

And then obviously, the third part, which is the end goal is having a big funnel and the funnel is growing and our short-term funnel, meaning looking out three months is in support of our Q2 guide. So I think the summary is, we have better visibility than we did three months ago. Our signals are generally moving more positive incrementally and it supports our thesis of a gradual recovery during the year.

Adam Thalhimer: All right. Good color, Mark. And then just also can you comment on how EV sales are trending? What the expectations are there?

Mark Wallace: How — which part?

Satish Dhanasekaran: How easy are sales?

Mark Wallace: How easy are sales?

Adam Thalhimer: EV.

Mark Wallace: Oh EV, electric. Yes. So automotive in general is — yes, so the EV sales, which in our focus is really around R&D for battery development has remained constrained. We see activity in e-mobility overall. So as the hardware and software architectures in the automobiles begin to disaggregate in terms of software-defined vehicles and communication speeds increase, we are seeing an uptick in that focus and investment from our customers. But right now, as far as what we’re seeing in the last quarter and what our funnel tells us is that EV and battery test remains soft.

Neil Dougherty: Auto manufacturing as well remains soft.

Operator: Thank you. The next question is from David Ridley-Lane with Bank of America. Your line is now open.

David Ridley-Lane: Good afternoon. Can we get an update on sort of the performance of the ESI Group sort of following on that — question is, is the software aspect also facing budget constraints and so forth? And how are you progressing on sort of your margin targets for that acquisition?

Neil Dougherty: Yes. So I would say the acquisition remains on-track from a target perspective and kind of a realization of synergy perspective, as you know, it’s a high recurring revenue business and I think we saw renewal rates in the quarter were consistent with expectations. I do think the relative softness in the auto markets that Mark just talked about did unfavorably impact our upsell to those auto customers within the quarter, but that was then offset as we said in our prepared remarks as we started to get traction with aerospace, defense and industrial customers, kind of newer markets for the ESI product portfolio.

David Ridley-Lane: Thank you. And then you have two pending acquisitions coming out of the Ansys and Synopsys deal, right? You have the Optical Solutions Group from Synopsys. And then on the other side of the house, you have a PowerArtist software from Ansys. Are these deals contingent on Ansys going through? And how meaningful are these two on a combined basis just in terms of revenue earnings or some way of quantifying what’s in the pipe?

Satish Dhanasekaran: Yes. The two transactions are contingent on the closure of the Synopsys, Ansys transaction and to this point, we have not sized those two transactions, but they were excited to add them to our design engineering software portfolio. We have business in both power management as well as optical, and so they’re complementary to the physical air tools that we currently have inside our portfolio.

Operator: The next question is from Mark Delaney with Goldman Sachs. Your line is now open.

Mark Delaney: Yes, good afternoon. Thanks for taking the questions. Mark, let me give you my best and wish you well in your upcoming retirement. And Harry, congratulations on the new role with Keysight.

Mark Wallace: Well, thank you, Mark. Appreciate it.

Mark Delaney: And a couple on the financials, if I could, maybe on operating expenses. I know the company spoke on the last earnings call that as revenue comes back, you’d expect some incremental investments in the business as well as some of the variable cost structure that you have. When I look at OpEx in the quarter, it was only up, I think, about 1% year-on-year. And I think I was looking for a bit more and as I was thinking about fiscal 2025, I’ve been looking for mid single-digit OpEx growth this year based on some of your comments on incrementals from the last call. Maybe you can help us understand a bit more what you’re doing from an OpEx perspective. Should we still expect some investments over the course of the year? And if so, how much?

Neil Dougherty: Yes. So I show total OpEx up about 2% on a year-over-year basis Q1 versus Q1. I think what you see, one of the reasons maybe that was a little bit more muted than you expected. Obviously, we were in a bit of a cost reduction mode last year. All of those were not realized in Q1. And so, we kind of made progress through the year on reductions. And then as we rolled here into Q2, not only we have seen our variable pay expense ratchet up, we’d be the salary administration as we always do in the first quarter of the year, midway through the quarter. So as you think about what’s implied in our Q2 guide, we do expect a sequential increase in OpEx as you move from Q1 to Q2. We have a full quarter of those salary increases.

Obviously, with the Christmas holidays as well as the Chinese New Year holidays falling as Q1, what significantly lower PTO usage in the quarter, which also puts upper pressure on OpEx. I think as you think about investments and Satish already alluded to this, our ability to continue to keep core programs on-track during the downturn and now potentially as the business returns to growth, start to fund some incremental dollars into things like 6G, quantum computing and capturing this AI market opportunity for us is something that we’re excited about and there’s no shortage of opportunities for us to continue to layer on incremental investment.

Mark Delaney: Thank you, Neil. In about 40% incremental margins, is that the right framework if you guys grow the top line mid single-digits for the year?

Neil Dougherty: Yes. I would say on average for quarters where we’re growing 5% or better, you can think about that 40% incremental.

Mark Delaney: Okay. And then my other question was just around gross margins. I think it was down a little bit year-on-year. Maybe you could speak a bit on what was driving that in terms of factors like price cost and mix? Thank you.

Neil Dougherty: Yes, it’s mostly mix related. If you go back and look at the trend lines, we were still to some extent benefiting from the sale of backlog even into Q1 of last year. And then we saw a pretty significant step function down in the Q2, Q3, Q4 of FY 2024. So this was our last really tough compare from a gross margin standpoint. The gross margin performance that we just put up in Q1 is the highest gross margin performance we’ve had in the last four quarters was aided a little bit by the incremental ESI revenue. But again relative to the past three quarter some favorable mix, but compared to a year ago, the mix was less favorable.

Satish Dhanasekaran: I think just to add a little bit more color, you look at the businesses, which are a lot more R&D indexed, Mark, and the company in CSG, the gross margins are 68%. In the EISG business, as we’ve talked about, there’s a wide dispersion between the manufacturing and R&D businesses and that’s work that Jason’s this new role is going to continue to do. But if you look at that portfolio last year, that was at 65%, just the mix was so much more favorable leading to this compare at the company-level. But longer-term, we feel-good about the opportunity to continue to bear on more R&D contributions to our customers and create greater value for them and ability to that value as we roll these solutions out.

Operator: Thank you. The next question is from Matt Niknam with Deutsche Bank. Your line is now open.

Matt Niknam: Hey, guys. Thanks so much for taking the question. Just two if I could. First on orders, maybe, Neil, if there’s any framework in terms of how to think about fiscal 2Q orders sequentially just in light of a gradual recovery in the business, but some moving parts with ESI. And then secondly, on the aerospace defense front, you referenced some softness in orders tied to ongoing continuing resolutions. I’m wondering if — maybe Satish, if you can help frame any conversations, just any sort of sizing in terms of potential risk from those in terms of just government efficiency and what’s been going on in DC with the new administration on your business? Thanks so much.

Neil Dougherty: Thank you. So why don’t I go first and I’ll deal with the sequential question. If you think about this business historically, we would tend to think about Q1 to Q2 seasonal, this is excluding ESI is kind of up mid-single digits sequentially and then that would be offset then by a pullback in ESI that recognizes close to 50% of their orders in the first quarter and Keysight’s first quarter with the remaining 50% to 55% spread relatively evenly over the remainder of the fiscal year. So — and I think that is a fair way to think about it going forward.

Satish Dhanasekaran: With regard to the aerospace and defense, I would say that many of our customers continue to believe that the programs that are already in their backlog from our prime contractor customers is at record levels and there’s unlikely to be a big change to that picture. So those things that are already likely to continue on, and that’s a pretty big at a record level as I mentioned. So that’s number one. And what you look at the global picture in Europe and Asia and you start to see a scenario which is likely to emerge where given the geopolitical realities, their defense spending as a percentage of GDP is likely to go up. As a matter of fact, if you just watch today, UK confirmed taking up the defense spending just today as well.

So I think that’s likely to be the trend. And given our technology and capabilities, I think we’ll continue to be in a good position to capitalize on those opportunities. With regard to the direct government spending, the RDT&E line item is something that we’re watching for and will remain [Technical Difficulty] But it’s unlikely that we see a scenario where there is a significant cut to technology advancement with regard to security and defense. But that’s our base case thinking. That’s sort of what our customers are telling us as well, but no one really knows until these things play out. So we’re continuing to monitor that.

Matt Niknam: I’m clear in kind of what you’re saying. On EISG, do you — are — as we see some recovery in that business, do you think that we can consider our gross margin back into that mid 60% range? And then, Neil, on operating margin, I know that you had outlined 31% to 32%. I think that target all the way back in 2023 at the Analyst Day. If we continue to see kind of a 5% growth profile or growth in that range of 5% to 7%, do you think it’s conceivable that we can still see that targeted gross margin of 31% or 32% looking into 2026?

Neil Dougherty: Yes. Okay. Why don’t I explain address both those questions. So I think as it relates to EISG, it’s going to be mix dependent. I do think it’s likely that we take a little bit of time, again, excluding ESI to climb back to the operating — to the gross margin levels that we were putting up in fiscal 2023, which — prior to the addition of ESI running north of 60%. We’ll see it’s very mix dependent as Satish alluded to and we’ve talked about many times, it has a broader dispersion of gross margins within that portfolio. So it really depends on what the nature of this recovery is and which businesses are up relative to others. With regard to your — remind me your second question real quick. Yes, here it is.

Matt Niknam: I was just…

Neil Dougherty: With regard to operating margin and the 2026 targets, I’ve said previously that we have not lost sight of that 31% to 32% operating margin targets. That still remains our goal. We are likely going to slip on the FY 2026 achievement of that, particularly if the scenario you lay out plays out, which is 5% growth for multiple years. In that case, you could think about 5% growth, 40% incrementals and do rough math on how long it takes to get back. I think we’re optimistic that at some point, we get a little bit more of a bounce-back that allows us to accelerate that momentum. And then certainly, while not contemplated at the time, but the closure of pending acquisitions and ability to realize synergies on these high gross margin businesses may ultimately help us to achieve those objectives.

Satish Dhanasekaran: Yes, the other thing worth highlighting to Neil’s point is, while there are gross margin differences fundamentally between the two groups, we have tremendous organizational synergies between — with the work we do for our customers. And so you will see even this quarter, even with the gross margin differences, the operating profit between the two groups were spot on, so 27%, so.

Operator: Thank you. The next question is from Tim Long with Barclays. Your line is now open.

Tim Long: Thank you. Satish, I was hoping we could go back to the AI business. If you could just maybe double-click on that a little bit. I think in the past, you’ve talked — I know you can’t really quantify kind of the scale of that business currently, but I was hoping you could kind of walk us through the top three or four use cases and kind of where you are with customer base and increasing new use cases, just trying to get a sense of what the tail will look like for the AI business? And then the follow-up would be on software and services. It looks like we got to about 40%. It’s been a pretty steady climb for recurring revenues, the 30% or 31%. Could you talk a little bit about how we should think about that transition going-forward? Should still be this kind of slow and steady up and to the right or is there something that would accelerate that transition? Thank you.

Satish Dhanasekaran: Well, let me take the first one. While there’s a lot of puts and takes in the near term and I’ll just say you take a future state here and say, look, we have about 11,000 data centers today in the world consuming 55 gigawatts of power. And in the next few years, there is an additional 63 gigawatts projected of data centers that are going to go online. Just let’s think about that as a fact. Then you overlay on top of it, this difference between training and inferencing and therefore, all of the edge and inferencing applications that’s going to grow. We’re already seeing signs of increased processor designs, AI accelerated cards, and then you layer on reasoning and inferencing applications. So the long-term picture here is pretty robust for us and we see that picture.

We see our customers moving towards that picture and we’re in a great position to be able to intercept that and enable their innovation. And I would say, in the near term, we’re participating meaningfully in the compute side of things. The 2-nanometer push that’s happening, our semi business had a strong quarter again. And we’re also working with customers on silicon photonics, which is a very promising technology to come. This is an investment we made about 18 months ago to work with customers. We noted it on a call and it’s proving out to be one of the good bets that we’ve made that positions us well to participate meaningfully in the compute side of things. If you look at the memory, HBMs, again, DDR6, DDR7, again, areas that we participate today.

You look at networking, this move to higher speeds is clearly a factor. And let’s not forget, all of those interconnects that are going at a rapid pace from 112 to 224 to 448, I mean, requires a lot of high-precision testing because of the cost of failure of these interconnects is very-high when you put it in an AI cluster. And again, that’s an area we’re meaningfully participating. On the emulation side, we’re — we’ve launched this AI data center builder, which is our first platform to emulate high scale AI workloads that allows customers to get a meaningful insight into the time utilization, latency and cost to train AI model. So we’re participating up and down the stack. Again, congruent with our strategy, we feel like we’re well positioned in the short and medium-term and really see this long-term bigger opportunity that I’m very excited about.

And then with regard to the second question, we’ve always from the starting of the company felt like as a solutions company, we’re really focused on this software centric transformation as we call-it, that’s core part of our transformation. We identify areas where we can add meaningful contribution to help our customers in a sustainable way. And obviously, we see 40% as a milestone in that journey and we’re not done by any means. I think there is this organic capabilities that we’ll continue to launch more new product introductions. I look at our hardware introductions to software introductions ratio or software introductions far outpaced our hardware introductions because it does take longer to launch hardware than software. So that’s feeling good.

And then as Neil alluded to earlier, as we start to bring in new capabilities that some of them we’ve announced with the Synopsys and Ansys to be played out still, we will start to expand our contributions in the design space, will continue to contribute to higher recurring revenue.

Operator: Thank you. The last question is from Rob Mason with Baird. Your line is now open.

Rob Mason: Yes, good evening. Thanks for taking the question. Satish, even in your last response, you mentioned your participation where you’re participating in semiconductor. And I think earlier you talked about third consecutive quarter of good parametric test orders. I’m just, I’m curious if you’re starting to build some backlog in that business and if that’s the case, if you have, what’s your visibility on revenue conversion for that?

Satish Dhanasekaran: Yes. I mean, so we — as you noted, multiple quarters of growth here in the parametric test side of this business and continue to have a favorable outlook on that opportunity as we look forward, given some of these new fab opportunities that are coming online. We have built some backlog over the last three quarters, obviously and that will — but again, reminding you of our primary order acceptance window is this — is that we’re accepting opportunities that are shippable within six months. So the conversion of those orders into revenue is relatively short.

Rob Mason: Understood. And just as a follow-up, just could you touch on your business within China in general, what you saw, how your business trend during the quarter, obviously it’s geopolitical volatility probably. I know in the past when things have emerged, obstacles have emerged, you’ve been able to pivot to new opportunities. I’m just curious if you’re finding yourself needing to pivot in the current environment and if so, what are you leaning into?

Satish Dhanasekaran: First and foremost, I would say I was just in China a few months ago. The strength of our customer relationships continues to be strong. With the geopolitical and trade restrictions, we’ve sort of used to a 1 to 2 headwind post Huawei, which happened a few years ago on a continuous basis. And so that’s sort of the pivoting of — when you call-it pivoting of our focus to customers that we can transact business with. It’s also probably not a huge surprise to learn that many of China customers have a go global strategy and that’s something that we’re through the relationships we have with them, we’re supporting their go global efforts, whether it is relocating their manufacturing to Southeast Asia or parts of the North America. So I mean at the end of the day, I think it is a shifting landscape, but there is no doubt that technology innovations are key to all our customers globally and we’re well positioned as a company.

Operator: Thank you. That concludes our question and — sorry. That concludes our question-and-answer session for today. I would like to turn the call back to Harry Blount for any closing comments.

Harry Blount: Thank you, operator, and thank you for joining us today on the call. Have a great day.

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