Keysight Technologies Inc (NYSE: KEYS), a provider of electronic design, simulation, and test equipment, reported fiscal third-quarter 2026 results (period ended July 31) after Tuesday's market close. The company's adjusted earnings per share and revenue both surpassed market expectations, driven by rapid AI data center expansion fueling demand for its software and testing tools. Management also raised its fourth-quarter and full-year guidance, sending shares up approximately 5% in after-hours trading.

Revenue for the quarter reached $1.85 billion, up 36.5% year-over-year and ahead of the analyst consensus of $1.75 billion. Adjusted earnings per share came in at $3.07, significantly exceeding the expected $2.48. On a GAAP basis, net income was $397 million, or $2.30 per share, compared to $191 million, or $1.10 per share, in the same period last year. Adjusted net income was approximately $531 million.

Orders totaled $2.09 billion in the third quarter, a 56% year-over-year increase, with core order growth at 52%, also well above the anticipated $1.86 billion. Gross margin stood at 69%, with operating expenses of $661 million and an operating margin of 33.2%, up 8.2 percentage points year-over-year and above the company's long-term target range of 31% to 32%. Operating cash flow for the quarter was $437 million, with free cash flow of $403 million.

Data center expansion momentum has continued to benefit Keysight over the past year. Its Communications Solutions Group, which accounts for two-thirds of total revenue and primarily produces components such as transceivers used in data centers, generated $1.345 billion in third-quarter revenue, up 43% year-over-year. Within this segment, commercial communications revenue exceeded $1 billion for the first time, reaching $1.006 billion, a 56% year-over-year surge. Wireline orders hit an all-time high, more than doubling year-over-year, and wireline revenue surpassed wireless for the first time. Aerospace, defense, and government revenue totaled $339 million, up 14% year-over-year.

The Electronic Industrial Solutions Group delivered $501 million in revenue, up 21% year-over-year, with growth across all three markets: semiconductors, general electronics, and automotive and energy. From a gross margin perspective, the Communications Solutions Group achieved approximately 71%, while the Electronic Industrial Solutions Group posted roughly 64%, both above expectations. Software and services revenue grew double-digits year-over-year and now represents about 33% of total revenue, with annual recurring revenue accounting for approximately 24% of total revenue.

Looking ahead, the company expects fourth-quarter adjusted earnings per share between $3.34 and $3.40, with revenue ranging from $1.93 billion to $1.95 billion. The midpoints of $3.37 (up about 76% year-over-year) and $1.94 billion (up approximately 37%) are well above market expectations of $2.68 and $1.83 billion. For the full fiscal 2026 year, the company projects revenue growth of approximately 32% and adjusted earnings per share growth of about 60%.

Keysight CEO Satish Dhanasekaran commented: "Our record third-quarter results and outlook reflect the increasing relevance of our strategy and portfolio, helping customers solve complex engineering challenges across end markets. We are confident in sustaining our momentum and delivering long-term value creation."

During the post-earnings conference call, management noted that AI data center buildouts continue to drive commercial communications demand, particularly in high-speed wireline orders. Strong demand is evident for 800G and 1.6T optical transceivers, silicon photonics technology, and pre-silicon validation from hyperscale customers. Additionally, a clear 6G standards timeline, defense modernization, and advanced semiconductor node expansion provide diversified growth support.

Management also revealed that acquisition integration efforts are largely complete, with expectations to achieve 80% to 90% of the $100 million cost synergy target by fiscal year-end, potentially generating an additional $50 million in incremental synergies in fiscal 2027. The company's sales pipeline is currently at historical highs, with fourth-quarter orders expected to exceed $2 billion for the third consecutive quarter. However, management cautioned that supply chain constraints remain a significant near-term factor in converting strong demand into revenue, though no abnormalities in demand or evidence of customers pulling forward orders have been observed.