Investing.com -- S&P Global Ratings has revised its outlook on Keysight Technologies (NYSE: KEYS ) Inc. to positive from stable, citing the company’s sustained low leverage and improved business resilience. The rating agency also affirmed the ’BBB’ issuer credit rating and issue-level ratings on Keysight’s senior unsecured notes.

Over the years, Keysight Technologies has enhanced its business resilience by increasing its revenue mix from customers’ research and development (R&D) and operations activities to about 70%, and recurring software and services revenues to about 30%. The company has achieved this organically and through selective acquisitions while keeping S&P Global Ratings’ adjusted leverage below the 1.5x upside threshold.

The company’s acquisition activity has increased recently, including the planned purchases of Spirent (LON: SPT ) Communications, Synopsys’ Optical Solutions Group, and Ansys’ PowerArtist business. Despite these acquisitions, S&P Global Ratings expects the company’s leverage to rise only to about 1x this fiscal year, due to solid free operating cash flow (FOCF) and a relatively conservative financial policy.

The positive outlook reflects S&P Global Ratings’ expectation that Keysight will return to 3%-5% organic revenue growth in fiscal 2025, with support from AI data center investments in its commercial communications business. This growth is expected to be partly offset by a mixed demand environment in its other end markets. EBITDA margins of about 27% and reported FOCF of about $1 billion should allow it to fund its planned acquisitions while maintaining leverage below 1.5x.

Keysight’s conservative financial policy and robust FOCF generation have allowed it to rapidly reduce leverage well below 1.5x after the acquisition of Ixia in 2017 and maintain investments in its product portfolio. The company has consistently stayed well below its long-term management-defined gross leverage target of about 2x (1x-1.5x on an S&P Global Ratings’ adjusted basis) and maintained a sizable cash balance of at least $1.5 billion.

S&P Global Ratings expects the company’s leverage to remain well below 1.5x this fiscal year (ending Oct. 31, 2025) despite acquisitions, due to continued strong FOCF, helped by a growing software and services mix. The planned sale of Spirent’s high-speed ethernet and network security business to Viavi Solutions (NASDAQ: VIAV ) Inc. for an initial $410 million soon after the Spirent purchase closes (expected in April 2025) will also help reduce the leverage impact.

Despite uncertainties in the macroeconomic conditions that could affect other end markets in fiscal 2025, S&P Global Ratings expects increasing orders in the commercial communications business from continued robust spending on high-speed wireline connectivity in AI data centers and potential demand stability in the wireless business for advanced 5G standards and early 6G research. This is expected to support a return to revenue growth for the company this fiscal year and a slight improvement in EBITDA margins.

The agency could revise its outlook back to stable if Keysight experiences market share losses or weaker-than-expected operating performance due to operational missteps or a poor macroeconomic environment, or if the company adopts a financial policy that results in leverage maintained over 1.5x, including acquisitions and shareholder returns.

S&P Global Ratings could consider an upgrade over the next 12-24 months if Keysight maintains its strong competitive position, characterized by its market leadership and sustained market share gains, and if the company continues to maintain a conservative financial policy, including shareholder distributions and strategic acquisitions, which supports leverage staying below 1.5x after accounting for industry volatility.

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