Keysight Technologies Inc

NYSE:KEYS

Q4-2025 Earnings Call

[Operator]

Good day, ladies and gentlemen, and welcome to the Keysight Technologies Fiscal Fourth Quarter 2025 Earnings Conference Call. My name is Victoria, and I will be your lead operator today. [Operator Instructions] This call is being recorded today, Monday, November 24, 2025, at 1:30 p.m. Pacific Time.

I would now like to hand the call over to Paulina Sims, Director of Investor Relations. Please go ahead, Ms. Sims.

[Paulenier Sims, executive]

Thank you, and welcome, everyone, to Keysight's Fourth Quarter Earnings Conference Call for Fiscal Year 2025. Joining me are Satish Dhanasekaran, Keysight's President and CEO; and Neil Dougherty, our CFO. During the Q&A session, we will also be joined by Kailash Narayanan, President of the Communications Solutions Group; and Jason Kary, President of the Electronic Industrial Solutions Group.

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 UBS and Barclays. And now, I will turn the call over to Satish.

[Satish Dhanasekaran, executive]

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

Keysight delivered an outstanding fourth quarter results exceeding the high end of our guidance. Orders grew 14%, revenue increased 10% and EPS rose 16%. This was a strong finish to a year of building momentum. Full year orders and revenue rose 8% and EPS increased 14%, surpassing our expectations and our long-term model.

Keysight's leadership and differentiated solutions continue to drive demand across our markets. Our portfolio is enabling major innovation waves shaping our markets, AI and accelerated compute, nonterrestrial networks, 6G, next-gen semiconductors and defense modernization. We enter our fiscal 2026 with a strong solutions road map aligned to our customers' priorities, a healthy pipeline of sales opportunities across our end markets and a broader set of capabilities.

In Q4, we advanced our software-centric solution strategy with the acquisitions of Spirent, Synopsys Optical Solutions Group and Ansys Power Artist. We're excited about the talent, the technology and the expanded customer value we can bring to the marketplace. Our operating model continues to generate strong free cash flow providing us the flexibility to invest in the organic growth of the business, pursue select strategic acquisitions and return of capital to shareholders.

In fiscal '25, we achieved record free cash flow of $1.3 billion, while investing in R&D, completing 3 acquisitions and returning approximately $375 million through buybacks.

Since the start of 2023 we have repurchased over $1.5 billion of shares or approximately 45% of free cash flow. Today, I am pleased to announce that our Board has authorized an additional $1.5 billion share repurchase program supporting our ongoing capital return.

Turning to business segments. The Communications Solutions Group orders grew for the sixth straight quarter delivering double-digit order and high single-digit revenue growth for the full year.

Wireline orders and revenue grew double digits both in Q4 and for the full year, setting a new record for the business. AI infrastructure build-outs and rapid upgrades to the technology stack are driving greater design, emulation and test intensity across multiple vectors.

Our solutions span the entire workflow from silicon design to system validation and secure deployments. The rapid scaling of AI workloads is accelerating new designs across the technology stack from compute to networking, interconnect, memory and power. These transitions require redesigns across AI silicon, DSPs, switches and transceivers, all of which are enabled by Keysight solutions.

Optical speed refresh cycles are also gaining momentum, moving from the 400 gig to 800 gig to 1.6 tera. In Q4, we collaborated with Broadcom to validate next-gen 1.6-terabit networking silicon and custom AI accelerators. Keysight's silicon photonic solutions continue to drive advancements in CPO and LPO technologies of the future.

With the breadth of Keysight's portfolio spanning physical layer solutions and AI emulation solutions built on technologies acquired from Ixia, we're making a meaningful contribution to the entire ecosystem. We're also capitalizing on robust demand from the scaling AI supply chain, including rack and cluster components interconnects and AI accelerators.

Additionally, Keysight is actively involved with industry leaders and growing number of consortia shaping the future of AI infrastructure. At the Open Compute Project conference, we partnered with Meta to demonstrate large-scale validation of GPUs and networking prior to deployment into clusters. The recently launched Keysight AI data center builder won the Data Center Innovation Best Product Award at the European Conference on Connectivity in October of 2025.

Turning to wireless. Orders and revenue grew high single digits for the full year and outperformed expectations driven by ongoing standards evolutions, nonterrestrial networks and early 6G research. We saw steady 5G demand continue with releases 18 and 19 of the standard, which included enhanced uplink, advanced MIMO and energy efficiency applications.

Momentum increased in nonterrestrial networks where we are engaged with industry-leading players to advance direct-to cell connectivity and new LEO designs. Spirent's best-in-class precision location simulators expand Keysight's offering by providing the accuracy and the realism needed to enable the next generation of positioning, navigation and timing use cases.

In 6G, the industry is shifting from pure research to early prestandards designs. We are engaged with market-defining customers and are well positioned to intercept the industry's priorities. We doubled our 6G collaborations over the past year, partnering with customers on several new applications, including channel sounding, network modeling, using digital twins, FR3 spectrum and advanced MIMO phased antenna design.

In aerospace, defense and government, we generated record orders, while revenue increased by 8% for the year. In an increasingly competitive global security and defense landscape, we're seeing strong customer engagement for defense modernization, enhanced deterrence capabilities and operational readiness.

Opportunities are expanding for Keysight as a traditional primes direct government entities and a growing contingent of neo primes and defense technology companies invest in emerging technologies in space and satellite, autonomous systems and advanced antenna designs.

This quarter, we secured key wins with U.S. prime contractors to accelerate automated device verification. Our advanced component analysis capabilities are enabling fast phased array antenna over-the-air cartelization for space, radar and tactical communications.

We won a deal from a U.S. prime contractor for multiple solution spanning high-performance spectrum analysis, signal generation and network analysis for radar and air defense applications. In Europe, momentum remained strong as multiple primes invest in radar, MSO and space applications. Ministry of Defense in Allied Nations are leveraging our wideband signal recording capabilities to capture field data for lab analysis.

With decades of leadership across RF, digital and optical technologies, plus a new federal focus capabilities from Spirent, Keysight is well positioned to capture growing defense demand.

Now moving to Electronic Industrial Solutions Group. Orders and revenue both grew in Q4 and for the full year. In our General Electronics business, orders grew for the fifth consecutive quarter and were up high single digits in Q4 and double digit for the full year, led by strength in the broad electronics supply chain, digital health and education.

AI-related innovation and investment fuel demand for our differentiated solutions for high-speed PCB, interconnect and component test. In digital health, interoperability, connectivity and latency challenges in the medical device and systems workflow are driving investment. Advanced research spending in semiconductor, 6G, quantum and photonics initiatives is also continuing at a steady rate, particularly outside of the U.S. where we benefit from our global scale and local engagement.

In semiconductor, the pace of innovation and investment remains robust. Our semi business delivered solid order and revenue growth this quarter, driven by steady demand for wafer test and lithography solutions, as AI-driven capacity expanded for leading-edge nodes, high-bandwidth memory and silicon photonics.

As lithography and foundry customers expand their own advanced packaging offerings, we're enabling them to achieve unprecedented levels of precision and accuracy. Our deep collaboration with the world's leading foundries and integrated device manufacturers as well as the respective customers allows us to identify and address their end-to-end needs from early R&D to wafer fabrication.

This year, we saw a robust growth in silicon photonics. The investments that we initiated 2 years ago are allowing us to capture this inflection. While geopolitical and policy uncertainties remain, the outlook for semiconductor capacity and investment and new technology road map remains positive in 2026.

In automotive, despite mixed headlines, we continue to empower customer innovation and demand has largely stabilized. We're also expanding into new opportunities in grid modernization where our combination of physical layer power and protocol layer network expertise is a differentiator. Our portfolio of solution spans software-defined vehicles, EV, charging, grid and manufacturing.

In vehicle network compliance and security remain customers' priorities as well as the design and test of new sensing architectures and optical connectivity. The recent acquisition of the Optical Solutions Group expands our photonics portfolio as interconnect and photonics complexity increases across next generation of industrial and automotive applications.

We continue to advance our go-to-market and customer engagement model to deepen long-standing strategic relationships while acquiring new customers and opportunities as the global supplies change shift. Over the past year, our teams executed to over 150 strategic engagements with market-defining innovators while expanding our customer base with more than 3,000 new logos.

Our Keysight World events reached thousands of customers globally. We actively participated in industry events such as Mobile World Congress and European Microwave and over 30 standard bodies with industry leaders. We continue to maintain life cycle engagement with our customers through our growing services business, which has reached record revenue fueled by robust demand for Keysight Care premium offerings.

In summary, fiscal year '25 marks a return to growth. And as we look ahead, we're encouraged by the momentum in our business and end markets. The technologies reshaping our world directly match Keysight strength, and we're leaning in with our first-to-market solutions, customer collaborations and operational discipline. Even in an uncertain environment, we're confident in the fundamentals of our business model and in our ability to deliver long-term shareholder value.

I'll now turn it over to Neil to discuss our financial performance and outlook in more detail.

[Neil Dougherty, executive]

Thank you, Satish, and hello, everyone.

Fourth quarter revenue of $1.419 billion was above the high end of our guidance range, up 10% on a reported basis or 9% on a core basis. Orders of $1.533 billion were up 14% on a reported basis or 12% on a core basis. Fourth quarter results included $22 million in orders and $11 million of revenue from the recently completed acquisitions, while currency added $4 million to orders and $7 million to revenue.

Looking at our operational results for Q4. We reported gross margin of 64%, operating expenses of $539 million and operating margin of 26%. We generated $331 million of net income and delivered earnings per share of $1.91, which increased 16% year-over-year. Our weighted average share count for the quarter was 173 million shares.

For the full year, Keysight generated revenue of $5.375 billion, up 8% as reported or 7% on a core basis. Gross margin was 65% and operating margin was 26%. FY '25 earnings per share of $7.16 was up 14%. For the year, Keysight delivered core operating leverage of 39%, inclusive of tariff impacts.

Moving to the performance of our segments. The Communications Solutions Group generated fourth quarter revenue of $990 million, up 11% on a reported basis or 9% on a core basis. Commercial Communications revenue of $660 million was up 12%, driven by continued strength in wireline and growth in wireless. Aerospace Defense and Government achieved revenue of $330 million, an increase of 9%. Altogether, CSG delivered 66% gross margin and 27% operating margin.

The Electronic Industrial Solutions Group generated $429 million in revenue, an increase of 9% on a reported basis or 8% on a core basis, with growth in semiconductor and general electronics. EISC delivered 60% gross margin and 25% operating margin.

In FY '25, Software and Services accounted for approximately 37% of Keysight revenue, while annual recurring revenue was 29% of the total.

Moving to the balance sheet and cash flow. We ended the quarter with $1.9 billion in cash and cash equivalents, generating cash flow from operations of $225 million and free cash flow of $188 million. During the quarter, we deployed $1.7 billion for acquisitions. We also repurchased 595,000 shares at an average price of approximately $168 for a total consideration of $100 million. Full year share repurchases totaled $375 million or approximately 30% of the $1.3 billion in free cash flow generated this year.

Now turning to our outlook. For the first quarter of 2026, we expect revenue in the range of $1.530 billion to $1.550 billion, representing 19% year-over-year growth at the midpoint. Excluding the recent acquisitions, this guidance assumes 10% year-over-year revenue growth. We expect Q1 earnings per share to be in the range of $1.95 to $2.01 and based on a weighted diluted share count of approximately 173 million shares.

Keysight enters FY '26 with strong backlog and a robust sales funnel. As a result, we expect FY '26 revenue growth, excluding acquisitions, to be at or above the high end of our 5% to 7% long-term target.

The recently completed acquisitions of Spirent, the Optical Solutions Group and Power Artists are expected to contribute approximately $375 million of revenue in FY '26. We are working to realize in excess of $100 million of synergies and other operational efficiencies across Keysight, even as we sustain critical investment in R&D to ensure Keysight's expanded product portfolio intersects the growth opportunities in our markets.

The acquisitions are expected to be accretive to Keysight's earnings 12 months post close. While this implies some mild dilution in FY '26, we expect the strength of our core business to enable FY '26 EPS growth at or above our long-term 10% target.

Now a few additional modeling considerations for the year. As expected, Keysight enters FY '26 having fully mitigated the impact of tariffs implemented in April. We now expect the August tariff increase to be fully mitigated in Q1 1 quarter earlier than previously communicated. These expectations are reflected in our guidance.

At current debt levels, annual interest expense is expected to be approximately $110 million, capital expenditures are expected to be approximately $160 million and we are modeling a 14% non-GAAP effective tax rate for FY '26.

In closing, we ended our fiscal 2025 with outstanding results and expect the momentum to carry into 2026. Technology innovation is driving demand for high-performance solutions across a broad range of industries. With our differentiated portfolio, technology leadership and durable financial model, we are well positioned to deliver sustained revenue and earnings growth.

With that, I will now turn it back to Paulina for the Q&A.

[Paulenier Sims, executive]

Thank you, Neil. Victoria, will you please give the instructions for the Q&A?

[Operator]

Of course. [Operator Instructions] Our first question comes from the line of Mehdi Hosseini with SIG.

[Mehdi Hosseini, analyst]

Yes. Looking to the new fiscal year, Satish, how do you see the wireless trending? It has been kind of depressed for the past few years and I'm just wondering if there's any catalyst on the horizon that gets you excited or should we assume FY '26 will be similar to the last year, just trending slightly? And then I have a follow-up.

[Satish Dhanasekaran, executive]

Yes. Thank you, Mehdi. We're quite pleased with the results in '25 across all our segments and just this return to growth across all our regions that we saw this quarter. Specific to Commercial Communications, we're equally excited about the opportunities that we have in next-gen connectivity, compute, semiconductor.

And we see a plethora of these technologies that we can really make meaningful contributions and grow our portfolio. Specific to your question on wireless, obviously, wireless exceeded expectations this year, in part driven by stabilization in 5G, which is normalized and then some of the advanced technology areas that we have made investments in starting to show some early results even prior to 6G hitting inflection. So I would say we're optimistic about the wireless growth into 2026, but even ahead of the 6G inflections that may occur in later part of the decade.

[Mehdi Hosseini, analyst]

Okay. And a quick follow-up. As you look into the adoption of 1.6 terabit per second wireline, would there be an additional growth or growth acceleration for Keysight? Would there be any upgrade? And I'm asking the question because speed is to the of Keysight, and we get to those data rates, I wonder if there is any upgrade or pricing that would help with a higher growth rate? Any color would be great.

[Satish Dhanasekaran, executive]

I think we're really -- as you know, Mehdi, our strategy has been to develop first-to-market solutions, which offer our customers greater value and the higher technological complexity, I think it really plays to our strength. And with regard to the wireline, there's a plethora of inflecting technologies across the entire AI stack, including the networking one that you referenced, we're well positioned to continue the momentum into '26.

[Operator]

Our next question comes from the line of Samik Chatterjee with JPMorgan.

[Samik Chatterjee, analyst]

Congrats on the strong outlook here. Satish, you mentioned sort of the order acceleration through the year, but still, when I take out the acquired business and the contribution there, there was a significant acceleration quarter-over-quarter from July to October. Maybe if you can just sort of get into the details there a bit in terms of how much of that was attributable to maybe more wireline and specifically relative to production use cases relative to R&D?

And what's sort of the driver of the significant acceleration? Because seems like you're not only sort of confident about the order outlook here, but you also have a visibility into the pipeline of that remaining robust. And I have a quick follow-up.

[Satish Dhanasekaran, executive]

Thank you, Samik. Yes, very pleased with the results in quarter 4. And I may want to start by saying, clearly, the revenue performance was driven by the broad order strength that we saw with both our CSG and EISG businesses growing double digits this quarter. And we also are quite pleased with the broad nature of the strength.

All our regions grew, and it's pretty broad. And the areas that we have really been focusing on, on the portfolio with our growth initiatives have really kicked into early gear, is the way I would characterize this. And then when we look ahead at the pipeline, we see a very robust pipeline. Obviously, our visibility 60 to 90 days is pretty good and we see a robust set of pipeline that we can go execute.

And we're also seeing the underlying demand, whether it is the volume of the pipeline or the velocity of the pipeline or the conversion rate, the sort of metrics that we track, including the quality of the pipeline, they're all trending up. So we feel good about this, and we reflected that in our guide.

[Samik Chatterjee, analyst]

Okay. And maybe quickly just for Neil. Neil, you outlined the synergy expectation here. Can you just give us a bit more details in terms of how to think about what sort of required for the acquisitions to go from EPS-accretive to potentially the operating margins of those acquired businesses being similar to the corporate average or being operating margin-accretive in the future?

[Neil Dougherty, executive]

Yes, absolutely. So as I said in the prepared remarks, we're working to generate $100 million of run rate synergies and other operational efficiencies across Keysight. Certainly, the majority of that -- a large majority of that is coming from synergies as we integrate these acquisitions. Those of you that have covered Keysight for a while will know that our integrations are complete, and we do a thorough integration that tends to take us on the average 12 to 18 months to complete.

And a significant driver of cost synergies for us is when we get systems alignment, getting these acquisitions into our ERP environment is a big driver and that does take time. So I think as you think about FY '26, relatively low realized synergies in these first few quarters until we can get to that cut over a point and then later in the year, I think you'll see a step function improvement in terms of synergy realization with then a longer tail of smaller synergy realization into '27.

[Operator]

Our next question is from the line of Andrew Spinola with UBS.

[Andrew Spinola, analyst]

I wanted to ask a question on the wireline business. Generally, when we think about your R&D business, it sort of runs in front of the actual deployment of the hardware by a few years and we think about 6G coming in 2030, it needs to be spending in '27. So I'm wondering, how should we think about wireline [indiscernible] the hyperscaler build is going on pretty actively right now and really just starting to see your wireline business pick up in the last few quarters. So I'm wondering what is different about the timing on the wireline business with the hyperscalers? And what does that tell us about maybe the visibility on the longevity of the spend?

[Satish Dhanasekaran, executive]

Yes, I'd say there's a good question, Andrew, I'd say there's a couple of things going on. There's a couple of things going on. Obviously, the AI cluster and infrastructure build-outs are occurring, driven by the hyperscaler spend. So the entire supply chain is sort of locking in grid and trying to deconstrain a constrained supply environment. So there's some impact, positive impact to our business from that dynamic.

But the longer-term overarching theme is the underlying waves of technology across the entire stack all the way from compute to memory, to storage, to the infrastructure itself when it all comes together. I think we're making significantly bigger contributions and participating in that secular long-term trend from an R&D perspective. And so we feel good about both these opportunities in the short and in the medium term.

[Operator]

Our next question comes from the line of Atif Malik with Citi.

[Atif Malik, analyst]

I have a question for Satish. Satish, Nvidia announced $1 billion strategic investment in Nokia developing AI-powered networks for future 6G RAN infrastructure. And I hope you still say that the latest part of this decade versus 6G in terms of the adoption, like why wouldn't it be faster if the AI guys are supporting a faster adoption of 6G? Just kind of help us out. Has anything changed with respect to your view on the inflection in 6G?

[Satish Dhanasekaran, executive]

Yes. Atif, good question. I think when we think about any big technology role -- generational role, we start to look at where the standards are and that's often a good mile-marker for how deployments will occur. And so when we think about the standardization, we're thinking '28, '29-ish time frame when that process comes to some level of maturity before global deployments may occur.

But specific to our portfolio, we're quite excited by the new opportunities, the changing technology stack presents itself. And I'll have Kailash make a couple of comments on some of the collaborations that we're currently engaged in that we feel like will result in meaningful upside to the company.

[Kailash Narayanan, executive]

Thank you, Atif. See, we are working with operators, to your point, in helping them evaluate how GPUs and AI accelerators can be deployed in RAN environments. So we have a solution portfolio that we have launched recently that allows them to model concurrent RAN and AI workloads in partnership with NVIDIA and an ecosystem of U.S. operators.

Recently, we also launched a solution to bring the concurrent exploration of compute as well as connectivity infrastructure using some of our wireline as well as wireless portfolio. All of this is exciting, and we are enabling the industry further the 6G standard for.

[Operator]

Our next question comes from the line of Rob Mason with Baird.

[Robert Mason, analyst]

My first question was going to direct to Satish. I was Curious if you could just speak to the positioning business that you did acquire with the Spirent acquisition. It does look like that's really new capability that you bring into the portfolio. You made mention of it some in the aerospace defense commentary, but I'm just curious how you see that technology layering across the portfolio, applicability? And where do you think Keysight's relationships can add incremental value to that capability?

[Satish Dhanasekaran, executive]

Yes. Thank you, Rob. Great question. I'm very excited to answer it as you can probably sense. Positioning is a crown jewel, right, inside the Spirent portfolio, very unique capabilities with regard to positioning, navigation and time. And you might say, what does it do? What does the products really do?

Well, it simulates and emulates satellite environments in the lab. I used to be an engineer at Motorola and even dating back to my time as an engineer, I've used these tools, and I'm a big fan of these tools. Inside the Keysight environment, I think it takes a completely different upgraded opportunity set because of our different end market exposure.

I would just start with automotive being an example. You start to look at autonomous systems, integrated sensing and communication in the context of 6G, aerospace, defense, with jamming, spoofing and a whole bunch of new considerations that the security environment now requires quite excited by it.

It will take us some time to get it all plumbed together into our Solutions portfolio. But this has been a gap in our portfolio and one we feel really good about embracing. I was just meeting with the team a week ago and very excited, as I you can say.

And maybe Kailash can give you a little bit more color on some specific applications that we're already starting to build into our value proposition.

[Kailash Narayanan, executive]

Yes. Thanks, Satish. As the LEO and NTN application scale, we obviously see significant opportunities to offer additional value to our customer base. We're looking to bundling in some of these capabilities with our classics physical and protocol layer solutions. And clearly, this is an upside for us. Satish talked about NTN design activity gaining momentum. What this does is it enhances our portfolio that we already have from testing antennas on satellites to going into satellite constellation emulation, orbital emulation, channel emulation and so forth.

So plenty of applications here to bundle this capability into Keysight's portfolio that's going to drive business both in our aerospace defense as well as wireless markets.

[Robert Mason, analyst]

That's very helpful. And just as a follow-up, Neil, just going to see if you could provide a little help on the -- maybe the cadence of how the M&A revenue contribution folds in this year, just look like the first quarter guided contributions above the run rate? I know Spirent in particular, had more second half weighted -- calendar second half weighted revenue, but how should we think about the cadence for the year?

[Neil Dougherty, executive]

Yes. The revenue from the acquisitions, first all, rough estimates at this point, about 75% into CSG, about 25% into EISG. From a seasonality perspective, it does skew a little bit more heavily towards Q1 versus the remainder of the year. We have -- approaching 30% here in the first quarter. And then with the remaining 3 quarters more or less equal to one another.

Just with the small caveat, we're obviously basing that on how these businesses behaved in their prior environments and recognize that -- particularly as we bring people onto -- their sales forces onto our sales structures things are likely going to relatively quickly start to shift and start to align with Keysight. So we'll have to see how that plays out. But right now, we're modeling close to 30% in Q1 and relatively evenly thereafter.

[Operator]

Our next question comes from the line of David Ridley-Lane with Bank of America.

[David Ridley-Lane, analyst]

I wanted to dive into that sort of commentary that you'll have 10-plus percent adjusted EPS growth even with the dilution. Are we right in sort of thinking we're not talking about significant EPS dilution? Any way to sort of put some parameters on that?

[Neil Dougherty, executive]

Yes. I mean, I described it in the prepared remarks at mild. So I think you could think of it on a percentage basis is low single digits.

[David Ridley-Lane, analyst]

And then the other question I had just on the contribution is that core commentary that you were talking about in terms of the organic revenue growth sort of fit with the historical sort of 40-ish-plus percent incremental margins? Or how should we think about the contribution of the M&A synergy benefit versus your core incrementals as we're framing up the entire fiscal year?

[Neil Dougherty, executive]

Yes. So obviously, Spirent is a public company, so you could go look. Those businesses were -- as we inherited them, we're operating at profit levels that were significantly lower than Keysight's, but we have committed that on a post-integration basis, we expect an accretive to Keysight operating margin. So over that 12- to 18-month period of time, we're going to make a pretty significant increase in driving improved profitability in those businesses via this $100 million synergy and other efficiency capture.

In the core businesses, I think 40% incremental is the right way to continue to think about our business. The one thing that you need to factor in is tariffs, which, again, we're still lapping they're still not fully in our run rate. But as you saw this year, we came very close to delivering to the 40% core incremental while absorbing tariffs in the second half. So it's the right way to think about our business, but the tariffs do provide a marginal incremental headwind.

[Operator]

Our next question comes from the line of Mark Delaney with Goldman Sachs.

[Mark Delaney, analyst]

In your prepared remarks, you said that for the full year, you'd expect your revenue growth to be at or above the high end of the 5% to 7% target model. As you think about some of the different businesses, A&D, wireline, wireless, EISG, can you give us a better sense of which one do you think will grow at that level or above? And any end markets that might grow a little bit slower and build up to that consolidated view that you provided?

[Neil Dougherty, executive]

Yes, I mean I think Satish has already provided you some color on the markets. I think as you think about wireline, we're clearly benefiting from the investment wave in AI. I think we would think that AI is positioned to be a significant growth driver for the company going forward. I think if you think about wireless, Satish has already commented, but I think we do see growth from where we are at these levels.

So you could think about wireless growing in line with our targeted growth levels for commercial comps, which was 4% to 6%. I think in the industrial businesses, I think you've got -- I think the 4% to 6% is probably the right way to think about it with strength in semi and gems being offset by kind of some continued questions in automotive is the way I would think about it.

[Mark Delaney, analyst]

My follow-up was on tariffs. Neil, you said you expect to fully offset the August tariffs sooner than you previously expected. Can you just provide some more context as to what's allowing Keysight to achieve that so much sooner?

[Neil Dougherty, executive]

Yes. I mean a couple of things. So first of all, last quarter, we guided you to -- if you took our comments from May out of a number of comments from August, we guided to an annualized tariff range of $150 million to $175 million and now it looks like we're trending towards the lower end of that range. So I think that's a benefit. And then with the strength of our business, our pricing and surcharging mitigations are ramping a little faster than expected, and we're going to be able to offset those tariffs again on a dollars basis, 1 quarter ahead of what was previously communicated.

[Satish Dhanasekaran, executive]

The other part that I would add, Mark, is also we decided intentionally to honor all outstanding orders pre-tariff that was in our backlog. So effectively, we've been -- some of the shipments have all gone out. And so our forward-looking exposure at 0 tariffs, if you will, is much smaller now.

[Operator]

Our next question comes from the line of Aaron Rakers with Wells Fargo.

[Aaron Rakers, analyst]

Yes. Congrats on the results. Neil, I wanted to ask you about the operating margin. I know this feels like a long time ago, but back at the Analyst Day in 2023, you talked about attaining a 31% to 32% operating margin. I think the initial target was by fiscal '26. Given the operating incremental leverage that you're seeing in the model, layering in the acquisitions that you're doing and driving accretion over time from that.

How are you thinking about the achievement of getting to that 31% to 32%. Is that something that you think we could see in fiscal '26? Or do you think that might still be a little bit further out? And I have a quick follow-up.

[Neil Dougherty, executive]

Yes. No, I definitely think it's further out. In fact, it was -- we took '26 essentially off the table when our business went into the downturn over the '23 to '24 period. Obviously, that was not something that we had contemplated when we made that commitment. Our business was operating at 29% operating margin when we made the 31% to 32% -- when we put that number out there. .

Since that time, obviously, we've seen a correction in our business as we -- as evidenced this year, business is returning to growth. We're back to delivering strong incrementals. We have an incremental opportunity here with these acquisitions that we brought in as we realize value capture from those. I think all of those things will enable us to deliver a strong -- strong growth and profitability and earnings over the time frame. But it will take us a while to climb back from these current 26% levels to the levels we were contemplating when we were at 29% back in fiscal '23.

[Satish Dhanasekaran, executive]

Aaron, just to add to what Neil said, the fundamental tenants of our value creation that I laid out in terms of our business model and operating model remain intact, including the downside performance that we delivered during the downturn. So those fundamentals remain intact. Equally excited about the opportunities for driving growth and capturing upside in the market, including the value creation incrementals we can deliver from the acquisitions post integration.

[Aaron Rakers, analyst]

Yes. Yes, very clear. And then as a quick follow-up and just maybe more thematically, we talk a lot about 800 to 1.6 [indiscernible] Starting to hear you guys talk a bit more about pervasively about silicon photonics. And I'm curious of what your thoughts are with regard to that. When do we expect to see the volume deployments from the market, appreciating here on the R&D side. I'm just curious on how you see that because there's a lot of discussion around scale up, scale across networking and AI and obviously, you're at the tip of the spirit of some of those architecture shifts?

[Satish Dhanasekaran, executive]

Yes, I'll have Kailash make some comments and then maybe Jason can follow up on the silicon photonics as well. .

[Kailash Narayanan, executive]

Yes. Thank you, Satish. Clearly, there is a scale element to it. Right now, the demand is up for high-speed silicon, optics, interconnects, accelerators, custom silicon and so forth, and this is driving both design and R&D activity that we're enabling as well as validating many of these RACs that have lots of GPUs, complex cabling, interconnect and networking, we're participating and validating those as well. So there is a scale element.

And your question about the speeds, clearly, we're seeing a design refresh that is occurring throughout the network. And this is occurring at a faster pace. We are seeing concurrent activity in 400G, 800G and 1.6 tera. The 1.6 terabit wave is still ahead of us. We demonstrated this year, solutions to enable 1.6, 3.2. As we outlined in our prepared remarks, we enabled Broadcom with their 1.6 terabit silicon and what's interesting is there are multiple challenges that the industry is facing right now.

Some customers are pushing speed. Other customers are pushing decrease in power at the same speed, yet another group of customers are working on improving density at the same speed. And all of this is occurring concurrently that's driving a lot of R&D activity and design emulation intensity.

[Jason Kary, executive]

[indiscernible] has been happening on the front end of this year. We've sold double-digit number of systems to foundry customers on the silicon photonics side. I would say it's still early days, and we expect continued growth next year from silicon photonics as capacity continues to expand and move, like you said, from R&D to commercial production.

[Operator]

Our next question comes from the line of Meta Marshall with Morgan Stanley.

[Meta Marshall, analyst]

A couple of questions for me. Just in terms of the strength that you saw in Aerospace and Defense. Could you speak to is this kind of the broadening of budgets that you have been expecting out of some of kind of the allies? Is this new program? Just kind of a little bit of where you saw that strength? And then maybe as a follow-up, noted kind of the positive uptick in the auto orders year-over-year and so just wondering where you're starting to see some green shoots on the auto side?

[Satish Dhanasekaran, executive]

Yes, we'll answer that, Meta. I was expecting you to ask me to size my AI business, but I was ready to do that. But since you didn't ask me, I'm going to skip forward to the Aerospace and Defense business. So record bookings this year builds backlog again. And I think it's a year where with considerable noise in the system, I would just say in the quarter 1, we had this entire situation with administration change, which we knew that was going to be a challenging situation for our U.S. business.

And I also predicted that things would improve as the year went by, and it did. And then as we look at Q4, we had the situation with continuing resolution, spending environment from a direct government, which was a bit more moderated. But our prime contractor business was good, and I also -- we saw strength in Europe, in particular.

I think this whole deference and the associated technologies, our portfolio is well positioned with that. And then defense technology in general with NEO, primes and others coming up with faster, more nimbler platforms are adopting Keysight solutions as well. So we feel good about our portfolio and the future focus.

As we have said before, this is one of those businesses that is quite easier sort of to call on a long-term basis. and really tough to call on a quarterly basis. But our pipeline looks solid as we go into '26. I'll have Jason make some comments on automotive.

[Jason Kary, executive]

Meta, thanks for the question. Yes, so as we move through this year, we saw our automotive and energy business reach some level of stability at current levels. While orders were still down for the full year as we expected, they did grow year-over-year in Q4. We benefited, frankly, from a fairly soft compare last year in Q4, but it was great to see that all subsegments of the business grew across software-defined vehicle, our electric vehicle, ESI and even on the manufacturing side, a small amount of growth.

So investment is happening more in the software-defined vehicle space and vehicle network, advanced connectivity, advanced sensing and radar as well as continued healthy chip design software renewals within the quarter were healthy, and we're seeing on the EV and grid side charging and grid simulation activity and solutions are really customer priorities and then giving them the manufacturing some capacity investments side to software-defined vehicle electronics and a few new customers within the quarter.

So good to see things stabilize from here. We're not calling an inflection, but we'll see how things progress here going into FY '26.

[Operator]

Our next question comes from the line of Tim Long with Barclays.

[Timothy Long, analyst]

Satish, I wasn't going to ask about scaling the AI business, but it sounds like you'll answer it. So let's start with that one. If you don't mind, maybe just give us an idea of when you look at wireline and semis and kind of the overall business, kind of what you're doing for you?

And then secondly, if you could just talk about Software and Services, 37% on the year. I think in the slide show, it says going up another 300 basis points with the M&A. So it gets you to 40%, a pretty healthy number. What's the outlook for moving that with the M&A and kind of the way things are going in AI and software overall, are you thinking that we'll see a continued move upward in kind of the complexion of the business coming from the Software and Services side?

[Satish Dhanasekaran, executive]

Thank you, Tim. First, I would say that our wireline business had a record year, growing double digits this year. And if you look at the plethora of contributions that we're making towards next-gen technologies, that are attributable to this entire AI ecosystem and AI clusters and the additional infrastructure that's being built, I would say it's roughly half of our wireline business is seeing that impact because it's -- again, it's a broad set of portfolio of tools that we bring across physical and protocol layers of emulation.

So -- and the wireline business of Keysight is -- if you look at the commercial communications, it's a little under half of the business with wireless still being a little over half, so that sort of gets you to see it. And that part of the business is growing strongly with robust adoption from customers across those -- the entire tech stack that we referenced before.

The second part of the question is really about Software and Services, and this has been a focused area of strategy for us for a long period of time, and there's more upside for us as we move forward. Obviously, the addition of the Optical Solutions Group and Spirent and the PowerArtist give us a meaningful uplift right away, but also the ability to continue to add more content and create life cycle value for customers and capture that value for the P&L. So we're quite excited by that as we look forward.

[Operator]

Our next question comes from the line of Rob Jamieson with Vertical Research Partners.

[Robert Jamieson, analyst]

Congrats on the quarter. So just wanted to touch on R&D and just some of the investment, just approaching 19% of sales this year. Can you first just talk a little bit about where where you're investing the most heavily, whether that's AI and data center or some of the 5G advanced stuff that we talked about last quarter?

And then as we look ahead, how should we think about R&D intensity going forward just with Optical Solutions Group and PowerArtist, just given the software nature there and wanting to keep your competitive advantage, just how should we think about prioritization going forward?

[Satish Dhanasekaran, executive]

Yes. Thank you. Well, first, I would say that when we look at the entire portfolio, we have a cohesive portfolio of physical layer protocol emulations and into applications such as in the design space. And we see opportunities in the physical layer to refresh our portfolio of offerings as the new technologies come in and customers are ready for adoption.

So we're in between that refresh phase of investment right now and over the next 18 months, feel really good about the new product introductions that are -- that we have -- that we're continuing to work on. And so you're seeing that not only in the traditional wireless but also in defense technology and in AI. So you're seeing a little bit of increase in R&D spending associated with that.

But I do believe that each of these products and solutions are going to help us outperform our markets under a range of conditions and that's why we're doing it. With regard to -- yes, your point is well taken with regard to the software assets, they typically run north of our company average. And so I'll let Neil sort of help you with the modeling of it.

[Neil Dougherty, executive]

Yes. I mean I think as we think about integration, as we said in some of our prior comments, the primary areas of focus are on leveraging our go-to-market, leveraging our back office. That being said, there may be some opportunities as we bring into the portfolio to align and share some costs. But primarily, we're looking for leverage in other parts of the P&L.

[Robert Jamieson, analyst]

Okay. That's helpful. And then just free cash flow, just solid again this quarter. Anything to call out in terms of some of the drivers or levers there. And then as we look into '26, just how should we think about conversion for the full year? I know you've probably got some acquisition-related cash expenses, but would you still expect to be above that 90-plus percent long-term conversion rates that you're targeting?

[Neil Dougherty, executive]

Yes. I mean I think we expect -- continue to expect good conversion of non-GAAP net income into profitability or into free cash flow. That's how we track it. As you know, we do -- we will see some additional integration-related expenses that will put some pressure on free cash flow conversion during the during the year.

But again, I think if we step back and think about it from the grand scheme of things, relatively a small proportion of the overall total, and therefore, we'd still expect strong free cash flow conversion next year.

[Operator]

That concludes our question-and-answer session for today. I would like to turn the call back to Paulina Sims for any closing remarks.

[Paulenier Sims, executive]

Thank you, Victoria, and thank you all for joining us today. Have a good day.

[Operator]

That concludes our conference call. You may now disconnect your lines.