Satish Dhanasekaran
President and Chief Executive Officer at Keysight Technologies
Good afternoon, everyone, and thank you for joining us today. My comments will focus on three key headlines. First, Keysight executed well by delivering revenue and earnings above the high end of our guidance in market conditions that were stable and consistent with our expectations. Second, orders of $1.25 billion was slightly above expectations and in line with prior year and growing low single digits sequentially. In a mixed demand environment, we continue to see stability and pockets of growth, particularly in commercial communications. The funnel of opportunities supports our outlook for second half orders to be above first half orders followed by a more gradual recovery in 2025, barring any further macroeconomic degradation.
Third, we remain confident in the strength of our business model and are intently focused on value creation for both customers and our shareholders. Our capital allocation priorities have not changed. First, we're strategically investing to deliver leading-edge capabilities as new technologies inflect and to return the company to our long-term growth trajectory. Second, we're expanding our SAM and growth opportunities through disciplined M&A. And third, we are committed to returning capital through share repurchases. In fact, we returned over $715 million or 78% of free cash flow over the past four quarters.
Now let's begin with a brief overview of Keysight's third quarter performance. Revenue of $1.2 billion and earnings per share of $1.57, above our expectations. And for the second consecutive quarter, we saw relative stability in both orders and revenue. Turning to our business segments. CSG returned to order growth in Q3. While revenue declined 8% year-over-year, we saw some modest improvement sequentially. Commercial Communications orders grew low double digits. Strong growth in wireline driven by AI, more than offset the year-over-year decline in a sequentially stable wireless business. Wireline orders grew for a third consecutive quarter, driven by robust investment in the re-architecture of data center networks for 400-gig, 800-gig and terabit data rates, AI model training and network performance. We're benefiting from the investments we have made to position Keysight ahead of this technology inflection.
In R&D, we're enablers with our design and emulation solutions across the technology stack for key applications, including GPU servers, AI workload emulation and performance benchmarking. In manufacturing, AI cluster and switching deployments drove capacity demand this quarter, and we secured key wins in GPU rack connectivity applications with market-leading customers. Keysight also collaborated with Cisco and [Indecipherable] to demonstrate interconnect technologies in AI cluster networks to reduce power consumption. We're also actively engaged with customers in the ultra-ethernet consortium to define future network architectures for AI and high-performance workloads.
In wireless, demand has been stable for the past three quarters, albeit at a lower level on a year-over-year basis. While customer spending remains cautious, the breadth of our solutions portfolio is enabling us to capture ongoing R&D investment in non-terrestrial networks, open radio access network deployments and release 18 of the 3GPP standard. Customers are also investing in scaling 5G and evaluating next-generation technologies. For example, at the recent IEEE International Conference and Communications, Keysight showcased early 6G technology together with Ericsson. Government incentives, particularly in U.S., Europe and Japan are driving development of a robust ecosystem to commercialize open radio access networks. This quarter, Keysight's open radio access network solutions enable state-of-the-art open testing and integration centers across the globe from Europe, to North America to Asia.
Turning to aerospace, defense and government. Revenue and orders were down year-over-year, sequentially flat. The prolonged U.S. budget approval process has caused delays in appropriation of funding for new projects, which we expect to filter through over the next few quarters. In the interim, spending on defense modernization remains steady with healthy demand from U.S. primes and allied governments. Keysight recently expanded its engagement with U.S. government through joint cyber defense collaborative to enhance cybersecurity resiliency. In the quarter, we secured key wins with U.S. and European primes for spectrum operation applications. We also expanded our Quantum footprint with a multi-hundred Cubed application win with a key government customer. Turning to Electronic Industrial Solutions Group, revenue continued to normalize from a strong prior year declining double digits as expected. Customer spending and market conditions remain muted, but we saw relative stability in orders and revenue on a sequential basis.
In semiconductor, revenue was also down year-over-year versus an all-time high Q3 last year. Orders increased low single digits and were up strongly on a sequential basis. While certain segments of the market continue to work through excess inventory, higher performance requirements for AI workloads drove spending in advanced nodes, high-bandwidth memory and silicon photonics technologies. The investments that we have made specific to these market opportunities resulted in increased demand from foundry and memory customers for our parametric wafer test solutions. In automotive, orders and revenue declined double digits. Lower auto manufacturing activity remains a headwind in the near term.
In new mobility, EV orders were lower as demand for some battery test and charging infrastructure investments were delayed, while AV orders grew mid-single digits on a sequential basis. The opportunities in R&D continue to grow as customer engagement in transition to software-defined vehicles ramps. As an example, Riscure successfully completed the first car connectivity consortium digital key certification in conjunction with NXP. This certification strengthens trust in security of next-generation vehicles. It also further expands Keysight's security evaluation offering for the automotive industry. In general electronics, customer spending remains constrained, particularly in manufacturing, China and the distribution channel. There were pockets of growth in digital health and advanced research, where orders grew low double digits.
Software and services revenues are resilient and grew this quarter while accounting for 39% of total Keysight revenue. Annual recurring revenue from software and services also increased year-over-year and in Q3 accounted for roughly 29% of overall Keysight. Our Eggplant software test automation platform is expanding with multiple consecutive quarters of double-digit growth. We're also gaining early traction in sales channel leverage between ESI and Keysight to expand into select accounts and geographies. The collaboration resulted in a key win in the satellite communication space. Lastly, Keysight's design engineering software platform continues to grow. This quarter, we launched new releases for virtual prototyping and simulation capabilities, which address high-performance use cases across our communications, aerospace and defense and automotive end markets.
In summary, the strength and differentiation of Keysight's business model is enabling us to outperform in a variety of economic conditions. We're well positioned to capitalize on technology inflections ahead of us and remain laser-focused on value creation for both customers and shareholders.
With that, I'll turn it over to Neil to discuss our financial performance and outlook.
