# Keysight Technologies (KEYS) Financial Model Free Excel 3-statement financial model and company analysis for Keysight Technologies. - Canonical: https://finamodel.com/companies/keysight-technologies - Industry: Electronics - Downloadable model: Yes - Excel download: https://finamodel.com/company-models/KEYS.xlsx ## Model Purpose This model provides a comprehensive equity valuation and M&A scenario planning tool for an analyst covering Keysight Technologies, focusing on forecasting the company's transition toward higher-margin software and recurring revenue streams following its recent string of acquisitions. ## Company Overview - Keysight Technologies provides electronic design and test solutions, including hardware instruments, software, and related services used in the simulation, design, validation, and manufacture of electronic systems. - **Business segments:** Communications Solutions Group (CSG) (approximately 70% of revenue) and Electronic Industrial Solutions Group (EISG) (approximately 30% of revenue). - **Key geographies:** Americas (42%), Asia (38%), and Europe (20%). - **Business model type:** Transitioning from a traditional asset-heavy hardware manufacturer to a hybrid model with a growing mix of software and services (currently representing approximately 36% to 40% of total revenue, with $1.5 billion in Annual Recurring Revenue). - **Competitive position:** A market leader in electronic measurement, spun off from Agilent Technologies in 2014. Key competitors include Teradyne, Fortive, Teledyne Technologies, and Rohde & Schwarz. - **Recent major events:** In fiscal year 2025, Keysight deployed approximately $1.7 billion for strategic acquisitions, including Spirent Communications, Synopsys' Optical Solutions Group, and Ansys' PowerArtist business, significantly expanding its software portfolio. ## Revenue Deep Dive ### Communications Solutions Group (CSG) - **Segment name:** Communications Solutions Group (CSG) - **Revenue driver formula:** (Commercial Communications R&D Spend x Keysight Market Share) + (Aerospace, Defense & Government Modernisation Budgets x Keysight Win Rate) - **Historical growth rate:** 5% to 11% year-over-year growth in recent quarters. - **Key growth levers and headwinds:** Driven by AI data centre infrastructure investments, non-terrestrial network applications, and defense modernisation. Headwinds include cyclical slowdowns in traditional wireless telecom capex. - **Pricing dynamics:** High pricing power in first-to-market 6G and AI data centre testing solutions; highly competitive in legacy 5G testing. - **Revenue recognition notes:** Hardware recognised upon delivery; software and maintenance contracts recognised rateably over the contract term. - **Seasonality:** Fiscal Q4 (ending October 31) is typically the strongest quarter due to year-end budget flushes in the aerospace and defense sectors. ### Electronic Industrial Solutions Group (EISG) - **Segment name:** Electronic Industrial Solutions Group (EISG) - **Revenue driver formula:** (Semiconductor Wafer Starts x Test Intensity) + (Automotive/Energy R&D Spend x Keysight Market Share) + General Electronics Volume - **Historical growth rate:** 5% to 9% year-over-year growth recently, recovering from a cyclical trough in FY2024. - **Key growth levers and headwinds:** Growth is fueled by leading-edge semiconductor nodes, high-bandwidth memory, and silicon photonics. Automotive demand has been mixed but is stabilising. - **Pricing dynamics:** Value-based pricing tied to the complexity of the semiconductor node or EV battery testing requirement. - **Revenue recognition notes:** Similar to CSG, with a growing portion of software recognised over time. - **Seasonality:** Less pronounced than CSG, but generally follows semiconductor capital equipment ordering cycles. ## Cost Structure ### Variable Costs / COGS - **Line-by-line breakdown:** Direct materials for hardware instruments, manufacturing overhead, software hosting and delivery costs, and service personnel costs. - **Gross margin range:** 64% to 66% (expanding as software mix increases; recently acquired software businesses have gross margins exceeding 75%). - **Key input costs and commodity exposures:** Electronic components, semiconductor chips, and specialised metals for hardware manufacturing. - **How COGS scales with revenue:** Hardware COGS scales linearly with volume, while software COGS exhibits massive operating leverage. ### Operating Expenses - **R&D:** Critical driver of the business. Keysight invested approximately $1.0 billion in R&D in FY2025 (roughly 18% to 19% of revenue). - **SG&A:** Typically runs at 20% to 22% of revenue, driven by a highly technical direct sales force and corporate overhead. - **Depreciation & Amortisation:** Significant amortisation of acquired intangible assets due to the serial acquisition strategy. - **Stock-Based Compensation:** Runs at approximately 3% to 4% of revenue, standard for a technology-focused engineering firm. - **Restructuring / one-time charges:** Frequent acquisition and integration costs related to M&A activity. ### Margin Profile - **Gross margin:** 64% to 66%. - **EBITDA margin:** 25% to 27%. - **Operating margin:** Non-GAAP operating margin is typically 25% to 27% (26.3% in Q4 FY2025). - **Margin trend:** Expanding slowly. Gross margin expansion from software is partially offset by continued heavy R&D investments to maintain first-to-market advantages. ## Balance Sheet Structure - **Total assets:** Approximately $9.0 billion to $10.0 billion. - **Key asset categories:** Cash and cash equivalents ($1.87 billion at FY2025 end), inventory, and a massive base of goodwill and intangibles. - **Goodwill & intangibles as % of total assets:** Very high (often exceeding 40% to 50% of total assets) due to the spin-off history and aggressive M&A strategy. - **Working capital profile:** - **Days Sales Outstanding (DSO):** 55 to 65 days. - **Days Inventory Outstanding (DIO):** 85 to 95 days (hardware requires significant component inventory). - **Days Payable Outstanding (DPO):** 40 to 50 days. - **Net working capital as % of revenue:** Typically 10% to 15%. - **Is working capital positive or negative?** Positive. The company consumes some cash for working capital as it grows hardware sales, but software growth mitigates this. - **PP&E:** Relatively light (asset-light manufacturing model), consisting of specialised testing facilities and corporate offices. - **Right-of-use assets / operating leases:** Material but manageable, primarily related to global office and lab space. ## Capital Expenditure & Investment - **Capex as % of revenue:** 2.5% to 3.5% (highly asset-light). - **Maintenance capex vs. growth capex:** Roughly 60% maintenance, 40% growth (lab equipment for R&D). - **Major capex programmes underway or planned:** Expansion of R&D testing facilities for 6G and silicon photonics. - **Capitalised software / development costs:** Material, as the company shifts toward software-centric solutions. - **M&A pattern:** Serial acquirer. Mix of bolt-on technologies and transformational software deals (e.g., Spirent). - **Typical acquisition multiple paid:** Often 4x to 6x revenue for high-margin software assets. ## Debt & Capital Structure - **Total debt and net debt:** Total debt is typically around $1.5 billion to $2.0 billion. The company often operates with near-zero or negative net debt due to high cash balances. - **Debt/EBITDA ratio:** Very conservative. Gross leverage peaked at 0.7x at the end of FY2025 and is expected to decline to 0.4x by the end of FY2026. Target is below 2.0x. - **Credit rating:** BBB+ (S&P). - **Key debt instruments:** Senior unsecured notes and a revolving credit facility. - **Maturity profile:** Well-laddered with no immediate liquidity cliffs. - **Interest rate profile:** Predominantly fixed-rate bonds. - **Covenants:** Standard investment-grade financial covenants (e.g., interest coverage and leverage maximums). - **Share repurchase programme:** Highly active. A new $1.5 billion authorisation was announced in November 2025. - **Dividend policy:** The company does not currently pay a regular dividend, preferring share repurchases and M&A. ## Cash Flow Characteristics - **Operating cash flow conversion:** Excellent. OCF was $1.41 billion in FY2025 on GAAP net income of $846 million (conversion well over 1.5x due to high non-cash amortisation). - **Free cash flow margin:** 23% to 25% ($1.28 billion FCF on $5.37 billion revenue in FY2025). - **Major non-cash items:** Amortisation of acquired intangibles, depreciation, stock-based compensation, and deferred tax adjustments. - **Working capital cash flow impact:** Mild use of cash during periods of rapid hardware growth. - **Capex intensity:** Very low, allowing for massive free cash flow generation. - **Cash tax rate vs. GAAP effective tax rate:** Cash taxes are generally lower than the statutory rate. The non-GAAP effective tax rate is managed around 14%, though GAAP rates can swing wildly (e.g., a massive hit in FY2024 due to a Singapore tax incentive change). ## Sheet Structure 1. **Assumptions:** Hardcoded drivers, macroeconomic inputs, and scenario toggles. 2. **Revenue Build:** Detailed build for CSG (Commercial Communications; Aerospace, Defense & Government) and EISG (Semiconductor; Automotive & Energy; General Electronics). 3. **Income Statement:** GAAP and Non-GAAP views, mirroring the 10-K structure. 4. **Balance Sheet:** Standard format, breaking out goodwill and intangibles explicitly. 5. **Cash Flow Statement:** Indirect method starting from GAAP Net Income. 6. **Working Capital Schedule:** DSO, DIO, DPO calculations and cash flow bridging. 7. **Depreciation & Amortisation Schedule:** Waterfall for existing PP&E, existing intangibles, and newly acquired intangibles. 8. **Debt Schedule:** Tranche-by-tranche bond maturity schedule and revolver mechanics. 9. **M&A Schedule:** Pro-forma revenue additions, integration costs, and acquired intangible asset calculations for recent deals like Spirent. 10. **Valuation (DCF):** Unlevered free cash flow build, WACC calculation, and terminal value. ## Key Financial Relationships 1. `CSG Revenue = Commercial Communications Revenue + Aerospace, Defense & Government Revenue` 2. `EISG Revenue = Semiconductor Revenue + Automotive & Energy Revenue + General Electronics Revenue` 3. `Total Revenue = CSG Revenue + EISG Revenue` 4. `Software & Services Revenue = Total Revenue x Software Mix % (Targeting >40%)` 5. `Non-GAAP Gross Profit = Total Revenue - (GAAP COGS - Amortisation of Acquired Intangibles in COGS - Share-Based Comp in COGS)` 6. `R&D Expense = Total Revenue x R&D Margin (Historical average 18.5%)` 7. `Non-GAAP Operating Income = Non-GAAP Gross Profit - Non-GAAP R&D - Non-GAAP SG&A` 8. `Amortisation Expense = Base Amortisation + (New M&A Spend x % Allocated to Intangibles / Useful Life)` 9. `Free Cash Flow = Cash Flow from Operations - Capital Expenditures` 10. `Ending Shares Outstanding = Beginning Shares - (Share Repurchase Spend / Average Share Price) + Options Dilution` ## Cross-Sheet Dependencies - The **M&A Schedule** is the critical chain. It feeds pro-forma revenue into the **Revenue Build**, adds new amortisation to the **Depreciation & Amortisation Schedule**, and reduces cash (or increases debt) on the **Balance Sheet**. - The **Revenue Build** feeds the top line of the **Income Statement** and drives the **Working Capital Schedule** (Accounts Receivable, Inventory). - The **Debt Schedule** calculates interest expense, which flows to the **Income Statement** and impacts net income, which then flows to the **Cash Flow Statement** and updates the cash balance on the **Balance Sheet**. Circularity can occur here if interest expense is calculated on average debt balances; a circularity toggle must be included. ## Sign Convention - Revenue and asset balances are entered as positive numbers. - Expenses (COGS, R&D, SG&A) are entered as positive numbers and subtracted in subtotals. - On the Cash Flow Statement, cash inflows are positive, and cash outflows (including capex and share repurchases) are negative. - Debt paydowns are negative; debt issuances are positive. ## Things Most Likely to Go Wrong - **Non-GAAP vs GAAP Tax Rates:** Keysight uses a 14% non-GAAP tax rate. The GAAP rate is highly volatile (e.g., the $315 million tax expense in FY2024 related to Singapore). The model must explicitly separate GAAP and non-GAAP tax calculations. - **M&A Stub Periods:** The Spirent and Synopsys OSG acquisitions closed mid-year in FY2025. Annualising these revenues incorrectly will overstate organic growth in FY2026. - **Amortisation Distortion:** Because Keysight is a serial acquirer, GAAP operating margins look artificially depressed due to massive intangible amortisation. Valuation must be based on Non-GAAP or Cash metrics. - **Software Capitalisation:** Changes in software capitalisation rules can swing operating cash flow relative to true free cash flow. - **Share Count Reductions:** The $1.5 billion buyback will significantly reduce share count. Failing to dynamically link the share count to the buyback schedule will understate EPS. - **Segment Reclassifications:** Keysight occasionally shifts end-markets between CSG and EISG. Historical data must be aligned to the current reporting structure. - **Currency Fluctuations:** Keysight reports a "Core Revenue" metric that strips out FX and M&A. The model should include a constant-currency toggle to accurately assess organic growth. - **Inventory Build:** Hardware requires physical components. If EISG revenue spikes, the model must accurately forecast the corresponding cash drain in the Working Capital schedule to build inventory. ## Validation Checks - "Non-GAAP Operating Margin should remain between 25.0% and 28.0%; flag if outside this band." - "Gross leverage (Total Debt / EBITDA) should not exceed 2.0x per management's stated financial policy." - "Free Cash Flow conversion (FCF / Non-GAAP Net Income) should consistently be >1.0x." - "R&D as a percentage of revenue must not drop below 17%, as this would violate the company's first-to-market innovation strategy." - "Balance sheet must balance: Total Assets = Total Liabilities + Equity in every period." - "Capex as a percentage of revenue should remain between 2.0% and 4.0%." - "Software and Services as a percentage of total revenue should trend upwards toward 40%." ## Key Assumptions (Default Values) | Assumption | Default Value | Unit | Rationale | |---|---|---|---| | CSG Revenue Growth (FY26) | 9.0 | % | Midpoint of recent strong AI and defense order momentum. | | EISG Revenue Growth (FY26) | 7.0 | % | Recovery in semiconductor and general electronics markets. | | Non-GAAP Gross Margin | 65.5 | % | Blended rate reflecting increasing software mix. | | R&D as % of Revenue | 18.5 | % | Historical average required to maintain technology leadership. | | SG&A as % of Revenue | 21.0 | % | Consistent with historical operating leverage targets. | | Non-GAAP Effective Tax Rate | 14.0 | % | Management's guided non-GAAP tax rate for FY25/FY26. | | Days Sales Outstanding (DSO) | 60 | Days | Based on historical average of accounts receivable turnover. | | Days Inventory Outstanding (DIO) | 90 | Days | Reflects supply chain requirements for hardware components. | | Days Payable Outstanding (DPO) | 45 | Days | Based on historical vendor payment terms. | | Capex as % of Revenue | 3.0 | % | Historical average for this asset-light business model. | | Annual Share Repurchases | 750 | $ Millions | Assumes the new $1.5B authorisation is deployed over two years. | | WACC | 8.5 | % | Standard discount rate for a BBB+ rated, low-beta technology firm. | | Terminal Growth Rate | 3.0 | % | Aligns with long-term global GDP and technology capex growth. | ## Data Sources & Benchmarks - **Filings:** SEC EDGAR (Keysight Technologies, Inc. CIK: 0001601046), Keysight Investor Relations website (investor.keysight.com). - **Key Peers for Benchmarking:** Teradyne (TER), Fortive (FTV), Teledyne Technologies (TDY), National Instruments (recently acquired, but historicals are useful). - **Industry Data Sources:** Semiconductor Industry Association (SIA) for wafer start data; Gartner for IT and AI data centre infrastructure spend. - **Consensus Estimates:** FactSet or Bloomberg for forward-looking EPS and revenue consensus to validate model outputs. ## Sources - Keysight Technologies FY2024 and FY2025 Form 10-K filings. - Keysight Technologies Q4 FY2025 Earnings Press Release and Investor Presentation (November 2025). - Keysight Technologies Q1 FY2026 Earnings Guidance. - S&P Global Ratings Research Update on Keysight Technologies (March 2026). - Keysight Investor Relations: "CSG and EISG Segment Overviews". --- ## Frequently asked questions ### What does Keysight Technologies do? Keysight Technologies provides electronic design and test solutions, including hardware instruments, software, and related services. These solutions are used in the simulation, design, validation, and manufacture of electronic systems across various industries. ### What are Keysight Technologies' primary revenue drivers? Keysight's revenue is primarily driven by its Communications Solutions Group and Electronic Industrial Solutions Group, with a significant portion coming from the Americas and Asia regions. The company is also increasingly focusing on higher-margin software and recurring revenue streams, which are growing drivers. ### What is Keysight Technologies' capital expenditure strategy? Keysight Technologies maintains a relatively asset-light manufacturing model, with capital expenditure typically ranging from 2.5% to 3.5% of revenue. This capex is split approximately 60% for maintenance and 40% for growth, often directed towards expanding R&D testing facilities for new technologies like 6G and silicon photonics. ### How does Keysight Technologies' M&A strategy impact its financial model? Keysight's aggressive M&A strategy, characterized by serial acquisitions of both bolt-on technologies and transformational software deals, significantly impacts its balance sheet with a massive base of goodwill and intangibles. These acquisitions, such as Spirent Communications, are central to the company's shift towards higher-margin software and recurring revenue streams, influencing future growth and profitability assumptions. ### Can I download a financial model for Keysight Technologies? Yes, a comprehensive Excel financial model for Keysight Technologies is available for download. This model serves as an equity valuation and M&A scenario planning tool, offering forecasts for the company's performance from FY2026 through FY2030. ### How is Keysight Technologies transitioning its business model? Keysight Technologies is actively transitioning from a traditional asset-heavy hardware manufacturer to a hybrid model that incorporates a growing mix of higher-margin software and services. Software and services currently represent approximately 36% to 40% of total revenue, with $1.5 billion in Annual Recurring Revenue, reflecting this strategic shift. [Interactive forecast calculator](https://finamodel.com/companies/keysight-technologies/forecast)