TE Connectivity Ltd. Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Key Takeaways: Strong momentum with record sales, earnings, and free cash flow in uneven macro environment. Strategic portfolio positioning benefiting from secular growth trends. Operational resilience with global manufacturing strategy.
• Fiscal 2025 Results: Fourth quarter sales $4.75 billion (+17% reported, +11% organic), orders $4.7 billion (+22% YOY, +5% QOQ). Full year sales $17.3 billion (+9% reported, +6% organic). Adjusted earnings per share $8.76 (+16% YOY). Free cash flow over $3 billion.
• Fiscal 2026 Guidance: First quarter sales expected $4.5 billion (+17% reported, +11% organic), adjusted EPS around $2.53 (+23% YOY). Exclusion of intangible amortization expense from non-GAAP measures starting fiscal 2026.
• Investor Day: Upcoming Investor Day on November 20 in Philadelphia with product showcase, live webcast available.

Segment Performance

• Transportation: Fourth quarter auto sales grew 2% organically, with Asia up 11% and Western regions down 4%. Full year sales were strong with growth in Asia driving content from data connectivity and electrified powertrain. Adjusted operating margins were 20% for the full year.
• Industrial Solutions: Fourth quarter grew 34% overall and 24% organically. Digital Data Networks (DDN) grew 80% year-over-year, Energy grew 83% including the Richards acquisition, Automation and Connected Living grew 11% organically, Aerospace, Defense and Marine grew 7% organically, and Medical was roughly flat. Adjusted operating margins expanded by nearly 300 basis points to over 20%.

Guidance

• First quarter 2026 sales expected $4.5 billion, +17% reported, +11% organic.
• Adjusted EPS expected around $2.53, +23% YOY.
• Beginning fiscal 2026, exclude intangible amortization expense from non-GAAP financial measures.

Risks

• Uneven regional production and market conditions in Transportation, especially in North America for industrial transportation.
• Tariff pricing affecting margins in some business segments.

Question and Answer

Q: Congrats on a great year. I got to lead in on the AI stuff because it's just a giant tailwind for you, and you're doing a -- seem to be doing a great job of capturing those revenues. But last quarter, I think you were talking about $800 million. You did $900 million. I think last quarter, you said you thought maybe '26 was $1 billion. Can we mark-to-market that forecast? And just as importantly, where are you on kind of the scale impact there where you can get to or above kind of company average margins?

A: Yes. So no, great question, Scott. And you're right on with where we've seen the momentum all year. And in many cases, our customers, on the programs that we win, continue to want more and they want it faster, which is a key element of how you win in this market. And so you are right, we generated over $900 million of AI sales in '25. And remember, in '24, that was $300 million. And this is really the products that we do that go into AI with the GPUs and so forth. So we tripled our revenue in this product set, which I actually think shows the job the team has done to ramp to your question. As we look into '26, the estimates out there is for hyperscale CapEx to grow about 20%. And let's face it, we have strong orders. We have the momentum and we have the design win traction. So we grew $600 million this year alone in AI in dollars. I think that's probably the baseline you have going into next year from a level of dollar growth that you should be thinking about right now. The other thing I want to highlight is while we talk about AI, we also have a lot of growth that's happening outside of AI in our DDN business. And there is business we have that is cloud business that is not AI. That business is running about $500 million right now this year. That doubled versus last year. And then we also -- that's also a real momentum. And then outside of that, where we play in enterprise and telecom over the past 6 months, I would tell you, we have seen increased momentum there where those applications are growing double digit for us. So I know we spent a lot of time on AI and a lot of -- early thing was all the cloud CapEx went to AI. We've seen a broadening out of it. Certainly nice growth in the cloud side as well that is not AI, but also seeing nice growth rates. And all of that comes together to be that nice 80% growth we had this quarter, and we can see that growth momentum continuing.

Q: Maybe just to follow on, I mean, you talked about some of the high-speed interconnect and data center. I was wondering if there's also a power element related to AI that's going to help you in '26. And then just for CapEx in '26, like you've been close to mid-5 sales this year to help build out that support. Should we expect similar levels next year to help support that continued growth? Or has most of that investment already been made?

A: No. Thanks, Joe. So first off, let me get into the product sets a little bit that when we talk about our DDN business. Clearly, the bigger driver is what you get around high speed. But we have -- our growth has also been happening around what happens on the power interconnects, certainly, what we do in helping that power be more efficient from liquid busbars and things like that, that we do with our customers. And then also where we do cable connectivity that goes between racks and so forth. So the numbers I quoted to Scott include all of that in those categories, Joe. And we have momentum across all of them because all of them are key building blocks of how this architecture comes together, where you need lower power, no latency, higher speeds, all happening at once. So all of those products are there. I don't think one inflects at a higher point than the other as we continue. I think you're just going to continue to get that good momentum that we've had this year with the ramps that we have going and the program wins that we have. Heath, why don't you take the capital side of it.

Q: I was hoping you can help us better understand trends by end market beyond DDN, including how demand trends have changed over the last 90 days? And any early views you can share for fiscal '26?

A: No. Thanks, Mark. And like we've done already in the script, there's going to be some of this we're going to say, please come to Investor Day, but I'll tell you what we've seen and changed over the past 90 days. Let's build on the orders that we talked about, and you can see the slide. I think one of the things that is a positive is you saw the order growth both year-over-year and sequentially in both segments. So I do think the environment does feel better than 90 days ago. But let me click down a little bit by the segments. First of all, just taking Transportation, orders were up both year-over-year and sequentially in auto. And it is one of the things all in 2025, we dealt with a world where Asia production grew, Western production declined. We do actually think what we're seeing is some stability that they're probably going to be more even between regions, even though auto production is going to stay in that 87 million to 88 million unit range, which is flattish. We also think we're going to continue to deliver content growth over market of 4% to 6% because when you think about what's happening with data needed in the car, what's happening with further comfort things that we all want that drives more electronification in the car as well as just the nonending growth of electrified powertrains in Asia, all of that continue to give us confidence on the 4% to 6%. When you look at industrial transportation versus 90 days ago, Mark, honestly, there hasn't been much change, unfortunately. We continue to see Europe and Asia have growth and North America still having declines in the truck and bus and the agricultural area. So I would say that's one that continues to be uneven that we're actually really looking for signs when can we get a little bit of a North America pickup, but we are not seeing any trends that see that right now. So that's one, unfortunately, probably still feels muddled. And then in the Industrial segment, I will jump over DDN like you asked. But you look across our end markets there, we're seeing consistent growth across them. In Energy, we have -- you saw the organic growth this quarter of 20% with where we position ourselves in North America and what's happening in grid investment in the T&D side by utilities, the hardening, getting it up to current trends and everything, that continues to be very good order momentum there, and we're also benefiting from utility scale renewables like solar. AD&M just continues, I would say, the market continues to move along. You've seen airframers talk about where they're getting their build rates to, and it feels the supply chain continuing to show improvement, which is good signs. And then the one that I know we've been pretty hesitant on in our ACL business, which has general industrial, has a little bit of things that touch the consumer. What I could tell you, the factory automation side, which is the bigger piece of it, we are seeing growth in orders across all regions. The business grew sequentially. The areas where we see weakness is where we have things that go into HVAC, things that go into appliances, that's where we see some weakness there. So it does feel the industrial piece of that, the business side has improved. Certainly, the residential or consumer side has gotten a little weaker. But we did have nice growth. You saw that, and we think the momentum on the more of the industrial side continues to get more traction. So that's a little bit of going around the horn as we think about entering '26. Certainly, you see that in our guide with 17% overall growth and 11% organic growth here in the first quarter. The Industrial segment is still in very good momentum, and it feels like we're getting some stability across the Transportation segment and a couple of markets with questions.