Monty Rakusen/DigitalVision via Getty Images Investment thesis Keysight Technologies Inc. (NYSE:) is a global leader in electronic design and test solutions with a strong moat. This led to a decade-long record of revenue growth, strong cash generation, and leadership in EBIT margins and returns on capital. While the balance sheet is strong and demand drivers remain healthy, margins and capital efficiency have shown little long-term improvement. My base-case valuation, assuming no significant margin expansion or better fixed cost control, points to an intrinsic value below the current market price. Business background In layman's terms, Keysight manufactures the tools, software, and systems that engineers and scientists use to design, test, and troubleshoot electronic devices. Over the past decade, while the company has expanded its capabilities through acquisitions, technology upgrades, and a greater software/service component, its core product–market mix has remained stable. The company is still anchored in two broad domains – communications and the electronics industry. These end markets and their relative contributions have not materially shifted. This is even as the underlying technologies evolved from 4G to 5G/6G, from ICE vehicles to EVs, and from conventional chips to AI-era semiconductors. The company today reports its performance under 2 business segments. i) Communications Solutions Group (CSG). This segment builds testing gear and software that keep phone networks, data centers, AI-driven systems, and military & government communications running smoothly. ii) Electronic Industrial Solutions Group (EISG). This segment provides tools that help car makers, chip companies, and electronics manufacturers develop and verify their products. Over the past few years, the CSG segment has been the biggest revenue contributor, accounting for about 69% of the 2024 revenue. Keysight is a global company in that the US only accounted for about 1/3 of its revenue over the past decade. Revenue growth drivers From 2015 to 2024, the company’s revenue grew at a 6.4% CAGR. As can be seen from the left part of Chart 1, there were 2 years when revenue declined – 2020 and 2024. The former was pandemic-related, while management attributed the 2024 decline to a challenging macroeconomic environment. Given that the first half of 2025 revenue is about 6% higher than that for the corresponding period in 2024, with a bit higher guided growth rate for Q3 2025, the revenue decline in 2024 seemed like a one-off situation. Moving forward, I would expect the company to continue with its historical long-term revenue growth trend. This historical topline growth was due to a combination of organic growth and acquisitions. Chart 1: Performance Index and Returns (Author) In the context of organic growth vs acquisitions, the company did not provide consistent annual changes in revenue attributed to these 2 components. But from what was reported, except for 2018, the acquisition contribution was small. This seems to be an anomaly when I compare the amount spent on acquisitions vs CAPEX. Over the past decade, the company incurred $ 3.7 billion on net acquisitions compared to $ 1.3 billion in net CAPEX. I would have thought that a bigger portion of the revenue growth would be attributed to acquisitions. This disconnect suggests that the benefit of the acquisition is better captured in mix, moat, and resilience, and not in the headline growth rate. Taking this to the logical conclusion, it meant that over the past decade, a big part of the topline growth was driven by organic growth. This is not surprising, as in its March 2023 Investor Day Presentation, the company reported a $ 20.9 billion served addressable market with a 4% to 6% projected growth rate. Moving forward, the market tailwind would continue as exemplified by the following: For the CSG segment: “The global communication test and measurement market size was…$ 9.6 billion in 2024…increasing CAGR of 9.1% during the forecast period (2024 to 2029)” For the EISG segment: “The global automotive test equipment market size was valued at USD 2.78 billion in 2024 and is expected to expand at a CAGR of 5.2% from 2025 to 2030.” “Electrical and Electronic Test Equipment Market Size was estimated at 40.78 (USD Billion) in 2023…growth rate expected around 3.44% during the forecast period (2025 - 2035).” “The Semiconductor Test Equipment Market size was valued at USD 5.85 Billion in 2024…growing at a CAGR of 9.3% from 2026 to 2032.” I am confident that the company’s historical growth rate can be sustained. This is because, in addition to a positive market picture, the company has the following competitive edges: i) Intangible assets. Keysight has proprietary software and patents, positioning it as a leader across core measurement platforms. ii) Switching costs and customer embeddedness. Once its products and services are embedded into verification/manufacturing, re-qualifying a new vendor risks schedule slips and non-comparable results, raising the cost of switching. Also, close engineering engagement and lifecycle support create recurring touchpoints that competitors struggle to displace. iii) Cost/scale advantages. Scale manufacturing and centralized fulfillment lower unit costs and improve lead times for complex instruments. Profit drivers Unfortunately, the company was not able to translate the 6.4% CAGR in revenue into a higher profit growth rate. Refer to the left part of Chart 1. For example, from 2015 to 2024, PAT only grew at a 2.0% CAGR with declines in 2017/18 and 2024. Profits were lower in 2017 mainly due to the amortization of acquisition-related intangibles, fire-related (wildfire) costs, and step-ups in R&D tied to integrating Ixia. In 2018, they stayed below 2016 largely because of a non-cash goodwill impairment. The 2024’s profit decline was chiefly due to lower revenue and higher Selling, General and Administration (SGA) expenses. The 2024 profit pressures led to declining returns, with both the ROIC and ROE in 2024 being lower than the respective 2015 values (Chart 1, right) There are generally 3 drivers of profit growth – scale, margin expansion, and lower fixed costs. Looking at Chart 2, scale seemed to be the main profit driver for Keysight. The contribution margin, especially post-2020, was relatively flat at 68% for both 2024 and 2020. I would even consider the fixed cost margin as relatively flat. It averaged 46% for 2022 to 2024 compared to the 48% average for 2015 to 2017. Finally, fixed costs over the past decade were on average about 57% of the total cost. With such a cost structure any changes in revenue would have a big impact on profits. We saw this in 2024, when a 9% drop in revenue led to a 39% drop in operating profit. Given the strong revenue growth drivers - durable moats, and healthy demand - the base-case path is a return to mid-single-digit revenue growth with faster profit growth from operating leverage. Chart 2: Margins and Operating Profit (Author) _Notes to Chart 2._ _a) Op Profit Profile. I broke down the operating profits into fixed costs and variable costs._ * _Fixed cost = SGA, Depreciation & Amortization, R&D, Others_ * _Variable cost = Cost of Sales – Depreciation & Amortization._ * _Contribution = Revenue – Variable Cost._ * _Contribution margin = Contribution/Revenue._ _b) While the gross profit margin seemed to be improving post-2020, the contribution margin was relatively flat as it was offset by the depreciation & amortization._ _c) Similarly, while the SGA margin seemed to be improving (except for 2024), this was offset by depreciation and amortization._ Peer comparison I compared Keysight’s performance with the following publicly listed peers that were explicitly mentioned as competitors by the company. They have the strongest product-market overlap across RF/microwave, network test, and general electronic test & measurement. i) Anritsu Corporation () (6754). This is a Japan-based maker of RF/microwave instruments and wireless/network test systems. It competes broadly with Keysight in wireless/RF test for 4G/5G/6G and related communications markets. ii) Fortive Corporation (). This is a diversified industrial technology company; its Tektronix/Keithley/Fluke units sell oscilloscopes, signal sources/analyzers, DMMs, and other electronic test gear. It is a direct head-to-head in core lab/bench instruments and RF test within Keysight’s Electronic, Industrial, and commercial communications markets. iii) Spirent Communications Plc (). This is a UK-listed specialist in communications test/assurance and competes in lab and field validation for wireless, positioning, and high-speed networking - key areas for Keysight’s CSG. iv) Teledyne Technologies Inc. () — via Teledyne LeCroy. This is a diversified sensing, instrumentation, and electronics company. Teledyne LeCroy offers high-performance oscilloscopes and protocol analyzers and has a direct overlap in high-end scopes and protocol analysis used across Keysight’s Electronic Industrial Solutions markets. v) Viavi Solutions Inc. (). The company provides network test, monitoring, and assurance solutions for telecom and data networks. It overlaps with Keysight in commercial communications and aerospace/defense network test and validation. As shown in Table 1, Keysight is among the bigger players based on the 2024 revenue. It also had one of the better revenue growth rates. Note that 2 of the peers’ revenues declined during the review period. Table 1: Peer revenue (Author) _Note to Table 1: From Oct to Oct_ Overall, Keysight’s peer comparison shows a company that, despite some mid-period setbacks, has steadily strengthened its competitive standing in profitability and cash generation. While its return on capital and EBIT margin rankings dipped sharply in the late 2010s, both metrics rebounded strongly. The post-2019 EBIT margins surpassed the 2015 level, and returns regained the top spot by 2023–2024. Free cash flow margins and EPS have generally been better than average. Refer to Charts 3 and 4 for the details: i) Keysight started initially with the best return on capital. But this deteriorated so that it ranked No. 5 in 2017. Thereafter, its position slowly improved so that by 2023 and 2024, it regained its top ranking. But despite this ranking picture, its quantum of return declined so that its 2023 and 2024 levels were lower than those of 2015. ii) Keysight EBIT margin declined from the No. 2 rank in 2015 to the worst in 2018. However, it improved since then so that from 2021 onwards, it ranked No. 1. From the quantum perspective, its post-2019 EBIT margins were higher than those of 2015. iii) I would rate Keysight's free cash flow margin as better than average. Except for 2017, when it ranked No. 5, it ranked among the top 3 for the rest of the review period, with a top ranking in 2021 and 2023. iv) In terms of the quantum of EPS, except for 2017 when it ranked No. 4, Keysight occupied the No. 2 or 3 positions for the rest of the review period. Furthermore, in terms of the EPS growth rate over the past decade, Keysight also ranked No 3. This is a good performance considering that 2 of the peers had a decline in the EPS, while another did not have any growth. Chart 3: Peer Return on Capital and EBIT Margin (Author from Tikr.com) Chart 4: Peer Free Cash Flow Margin and EPS (Author from Tikr.com) Financial position I consider Keysight as sound financially based on the following: i) It had $ 3.1 billion in cash as of the end of April 2025, equivalent to about 30% of its total assets. ii) It had a 51% debt equity ratio at the end of April 2025. This has come down from its past decade high (2017) of 89 %. iii) From 2015 to 2024, it generated positive cash flow from operations every year. It also had a good cash flow from operations conversion ratio. Over this period, it generated $ 8.6 billion in cash flow from operations compared to its cumulative PAT of $ 6.1 billion. iv) From 2015 to 2024, it had a Reinvestment rate (Reinvestment/NOPAT) of 56%. I defined Reinvestment = CAPEX & Acquisition – Depreciation & Amortization + increase in net Working Capital. This is a good rate considering that it included acquisitions. Excluding the acquisitions and divestitures, the Reinvestment was negative as the Depreciation & Amortization more than offset the CAPEX. v) It has a good capital allocation plan as per Table 2. The cash flow from operations was more than enough to cover its acquisitions and CAPEX. Excess was returned to shareholders in the form of buybacks. Table 2: Sources and Uses of Funds 2019 to 2025 (Author) Valuation My analysis showed the 2024 revenue decline is a one-off situation and that the company would continue on its long-term topline growth path. The challenge for the company is that while financially sound, there has not been long-term improvement in contribution margin or better fixed cost control. As such, I adopted the following picture in valuing the company. The base revenue would be the 2024 revenue with the Year 1 revenue growth rate of 6%. This is the upper end of the Q2 2025 guidance for the Q3 revenue growth rate. The revenue growth rate would reduce proportionately to the long-term GDP growth rate of 4% in the terminal year (Year 6). The based contribution margin and fixed cost margin would be the respective 2021 to 2024 average values. These margins would remain the same over the valuation period. The base capital turnover would be the 2021 to 2024 average value. The base Reinvestment would be pegged to the past decade's average Reinvestment margin. This would change proportionately so that in the terminal year, the Reinvestment rate would follow that given by the fundamental growth equation. The tax rate would be the past decade's average rate, excluding 2015 (negative rate) and 2018 (> 100% rate). On such a basis, I obtained an intrinsic value of $91 per share compared to the market price of $ 164 per share (14 Aug 2025). There is no margin of safety. ### Valuation model I valued Keysight based on a multi-stage Free Cash Flow to the Firm (FCFF) valuation model as shown in Table 3. The WACC was based on the Google Search for “Keysight Technologies WACC” as summarized in Table 4. Table 3: Sample valuation (Author) _Notes to Table 3._ _a. Proportionate change_ _b. Pegged to growth rate_ _c. Assumed no change_ _d. Assumed no change in the fixed cost margin_ _e. Revenue X Margin and after accounting for Fixed costs_ _f. Assumed proportionate change_ _g. b X f_ _h. FCFF for each year = e - g_ _j. Refer to the WACC table_ _k. NPV for each year = (h X j)_ _l. Terminal for the year discounted at the terminal growth rate_ _m. 5 years NPV + terminal value_ _n. Inclusive of any excess TCE. Non-operating assets, MI, and Debt_ _o. Based on the number of diluted shares_ Table 4: Cost of capital (Various) ### Risks and limitations The intrinsic value of the company depends on the profitability path. While I have assumed topline growth, I have assumed that there was no change in the margins. My assumptions are not aggressive. In the terminal year, my valuation model would result in the following. i) 19% return on capital. Looking at the peer returns as per the left part of Chart 3, this would mean that the company maintains its top ranking in 2024, but with a higher level of return ii) 22% EBIT margin. Based on the 2024 peer performance (Chart 3, right), Keysight would still rank No. 1 but with a higher level of EBIT margin. Any valuation upside would come from improving margins. For example, if the base contribution margin and base fixed cost margin were 15% better in the terminal year, with proportionate improvements in between, we would have the market price. I would advise you to look at Chart 2 and see whether such improvements seem possible. Furthermore, the gross profit margin for the first half of 2025 was lower than that for the respective half in 2024. Finally in my valuation, I had assumed some improvement in the capital efficiency. I had assumed that the Reinvestment rate would reduce from the historical average of 56 % down to 12% in the terminal year. Again, the track record of improving capital efficiency has not been good. You can see from the left part of Chart 1 that there has been no improvement in gross profitability (gross profit/total assets) over the past decade. With Q3 FY2025 results imminent, the main near-term risk is that reported numbers could diverge from the thesis. A slowdown in growth or deterioration in margins would challenge the assumption that Keysight can sustain profitability gains. Conversely, evidence of margin expansion, improved capital efficiency, or stronger-than-expected demand could point to upside not fully captured in the base-case valuation. Conclusion Keysight operates in structurally attractive markets. These would continue to support mid-single-digit revenue growth for the company. Its decade-long record shows resilient demand, stable contribution margins, and a solid balance sheet, but also limited structural margin expansion and uneven capital efficiency. Peer comparisons confirm Keysight’s strong competitive position. Its recent EBIT margins, free cash flow generation, and returns on capital are among the best in the sector. Yet, the flat contribution margin trend and high fixed cost base suggest that further profitability gains will rely more on disciplined execution than on market growth alone. My base-case valuation offers no margin of safety. Upside exists if management can deliver sustained margin improvement, but history does not yet demonstrate this trajectory. As such, I would not consider this an investment opportunity from a long-term value investment perspective. **Analyst’s Disclosure:**I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. **Seeking Alpha's Disclosure:** Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Keysight's Next Challenge: Converting Growth into Sustained Margin Gains

Keysight Technologies Inc. is a global leader in electronic design and test solutions, with a decade-long record of revenue growth and strong cash generation. Despite healthy demand in communications and electronics markets, the company has not seen long-term improvements in profitability, with contribution margins and fixed cost control remaining flat. Revenue grew at a 6.4% CAGR from 2015 to 2024, driven primarily by organic growth rather than acquisitions. The Communications Solutions Group (CSG) accounted for 69% of 2024 revenue, while the Electronic Industrial Solutions Group (EISG) serves automotive, chip, and electronics manufacturers. Key competitive advantages include proprietary software, high switching costs, and scale-based cost efficiencies. Peer comparisons show Keysight ranks among the top performers in EBIT margins, free cash flow, and return on capital, though its profit margins have not improved beyond 2019 levels. The company’s financial position remains strong, with $3.1 billion in cash and a 51% debt-to-equity ratio as of April 2025. A base-case valuation using a multi-stage FCFF model estimates intrinsic value at $91 per share, significantly below the market price of $164 per share as of August 14, 2025. The analyst concludes that while Keysight operates in structurally attractive markets and maintains a strong competitive moat, sustained margin expansion is required for long-term profitability and investment value.