TE Connectivity Plc Q1 FY2026 earnings call

Management Statement and Operational Highlights

• Reinforced strategy tenets of investing in growth drivers, co-creation engineering models, and margin expansion.
• First quarter sales grew over 20%, with record orders over $5 billion.
• Industrial segment saw strong growth in digital data networks, energy, automation, AD&M, and medical.
• Transportation segment grew in auto and commercial transportation.
• Strong cash generation with free cash flow above $600 million.

Segment Performance

• Industrial Solutions: Sales grew 38% in the quarter and 26% organically year-over-year. Digital data networks grew 70% year-over-year with AI revenue higher than expected. Automation and connected living grew 12% organically. Energy sales grew 88% (including Richards acquisition) with 15% organic growth. AD&M sales grew 11% organically. Medical grew 5% organically. Adjusted operating margins expanded to 23%.
• Transportation Solutions: Sales grew 10% in the quarter and 7% organically year-over-year. Auto sales grew 7% organically. Commercial transportation grew 16% organically. Adjusted operating margins above 21%.

Guidance

• Second quarter sales expected to be $4.7 billion, +13% reported, +6% organic.
• Adjusted EPS expected around $2.65, +20% year-over-year.
• Full year sales growth ahead of through-cycle target of 6-8% annual average growth.
• CapEx expected to be ~6% of sales.
• Full year tax rate expected to be ~23%.

Risks

• Inflationary pressures on metals, impacting procurement and pricing.
• North America truck market still negative as a wildcard.
• Supply chain complexities related to specific program ramps.

Q: Everything was pretty positive. And when you guys are spending more money, that's usually a good sign as well. But I just wanted to lead off with the AI stuff because again, it still is the elephant in the room. I mean it sounds like, if I heard you right, which I think I did, you're taking up your forecast by a couple of hundred million from where you were at Analyst Day. I just wanted to confirm that. But more importantly, I just wanted to address the scaling of those revenues. How is -- can you walk us through the kind of linkage between the capacity adds and the scaling and how you expect that to improve margins as that capacity seasons if you can't give specific numbers, just some reference points and historically when you've added capacity for growth like...

A: Yes. Sure, Scott, and happy new year, and I appreciate the question. And just so we're all aligned about what we said at Investor Day, we did talk about getting to a $3 billion of AI revenue out a couple of years. And we're certainly on track to achieve this and -- versus 90 days ago, when we shared the number, we do think the number for this year will be $200 million more than what we just shared. And what's nice is this year, we're going to have growth across all hyperscaler customers. And that's something that we all know with the CapEx trend that's happening in cloud CapEx to make that happen. The other thing is as we continue to build the momentum, the orders that we just talked about were very strong. And certainly, DDN played a part of that strength. And as I said in the comments, some of that is layered out later in the year. On the scaling, let's face it. We have been scaling. So when you look at the growth that we've had around where we positioned ourselves with our hyperscale customers, we've been scaling very nicely. Let's face it, these programs are big programs and that's the time base to scale. Some of the awards we got in the first quarter are for later this year into 2027, I feel that the teams will have it and continuing to be coming in with good margins on it like we have been doing. We have been improving the margins in IS across all the businesses. So it's not just AI, but certainly, we're benefiting from the volumes as we bring these in, and that's why you see some of the margin improvement that we're getting both from the benefit of the ramp of the AI volumes as well as all the businesses improving their margin going forward. And that you saw that strong growth that we talked about in the pre-read comments.

Q: I was hoping you could double-click on order trends, both sequentially and year-over-year and what that implies for revenue by end market going forward? And I ask in part to better understand the 2Q revenue guidance of about $4.7 billion compared to orders that were over $5.1 billion at a record high. And maybe if you can speak to the duration of orders and if that's changing at all?

A: Sure. Thanks, Mark. And like I said in the comments, our orders were a record at over $5 billion and that it was $1 billion of order growth. The one thing that's important is it was very broad-based. While we had very strong orders in DDN, if you exclude the DDN orders, our orders were up double digit across TE. So that's the broadened growth we talked about. And in Industrial, our orders were up in 4 of the 5 businesses, double digits as well. So we have seen strengthening of orders here. Now that is continued momentum in DDN for AI applications and also energy, which let's face it, they were big growth drivers for us last year. We're also continuing to see AD&M orders accelerate. And they are typically in aerospace and defense, a little bit longer lead time. And what was nice in the Industrial segment, and I know we've talked to all of you about it is we're continuing to see market improvement in our ACL business, and that was across all regions. Certainly, we're seeing more in factory automation applications, and we're going to continue to see growth as we go through the year in ACL. When you look at Transportation, and this comes into a little bit to the second part of your question, in Transportation, our orders are reflecting what we see in production patterns. So year-over-year orders were very strong. Clearly, our first quarter is the strongest auto production quarter of the year. But then we do have a 3 million unit production decline quarter 1 to quarter 2. And when we look at that, that's really when you look at the guide, you see that we're going to be up double digits in Industrial as we go quarter 1 to quarter 2, but there will be partially offset by auto production in the world, which will be down about 3 million units. So that's really when you look at the order momentum, which is very strong. We do have some automotive production changes that happen here that normally happen that you'll see reflected in our guide.