TE Connectivity Earnings Call Highlights AI-Fueled Surge

TE Connectivity Ltd. ((TEL)) has held its Q1 earnings call. Read on for the main highlights of the call.

TE Connectivity’s earnings call painted a picture of a company riding a powerful secular uptrend while carefully managing near‑term turbulence. Management emphasized record orders, double‑digit organic growth, sharply higher margins and strong cash generation, anchored by accelerating demand in AI‑driven data infrastructure and industrial markets. At the same time, they acknowledged headwinds from auto seasonality, metal cost inflation, restructuring charges and pockets of end‑market softness, but remained confident in achieving above‑cycle growth into fiscal 2026.

Top-Line Acceleration: Revenue Surges Past Guidance

TE Connectivity delivered a strong start to the year, posting Q1 revenue of $4.7 billion, up 22% on a reported basis and 15% organically versus a year ago. Growth was broad-based, with both major segments contributing and sales landing above the company’s own guidance. This performance underscores not only the strength of underlying demand across TE’s portfolio, but also the company’s ability to execute amid a mixed macro backdrop.

Record Orders and Healthy Book-to-Bill Signal Durability

Orders were a standout, reaching a record $5.1 billion, more than $1 billion higher than the prior year. That produced a book‑to‑bill of 1.1, indicating that demand continues to outstrip current shipments and providing solid visibility into future revenues. Management highlighted broad-based double‑digit organic order growth across regions, suggesting that the current cycle has depth, not just a short‑term spike in a single geography or end market.

Margin Expansion Drives Outstanding Earnings Power

Profitability moved sharply higher with record adjusted EPS of $2.72, up about 33% year over year. Adjusted operating margin reached 22.2%, expanding roughly 180 basis points, reflecting operating leverage on higher volumes and disciplined cost control. This margin performance is critical for equity investors, as it demonstrates that TE is converting its growth into earnings rather than relying solely on top‑line momentum.

Industrial Solutions Leads with outsized Growth and Margins

Industrial Solutions was the star performer, with sales up 38% year over year, or 26% organically. Adjusted operating margins in this segment expanded by more than 500 basis points to around 23%. Management attributed this outperformance to higher volumes and strong operational execution. The segment’s strength, especially in industrial and energy applications, positions TE as a key beneficiary of global infrastructure upgrades and automation trends.

AI and Digital Data Networks Provide a Powerful Secular Engine

TE’s Digital Data Networks business, closely tied to AI and cloud infrastructure, grew by roughly 70% year over year. Reflecting this momentum, management raised its fiscal 2026 AI revenue outlook by about $200 million compared with just 90 days ago and expects AI‑related revenues to ramp across all major hyperscale customers. This area has become a major strategic pillar, and TE is clearly leaning into what it sees as a multi‑year AI and high‑speed networking investment cycle.

Energy and Aerospace & Defense Add Diversified Growth

Beyond AI, the Energy and Aerospace, Defense & Marine (AD&M) businesses added to the growth story. Energy sales jumped 88%, boosted by the Richards acquisition and about 15% organic growth driven by grid hardening and renewable energy investments. AD&M delivered around 11% organic growth, underscoring sustained strength in aerospace and defense markets. These businesses provide diversification and exposure to long‑cycle infrastructure and defense budgets.

Transportation Shows Solid Growth and Content Gains

Transportation sales increased 10%, or 7% organically. Automotive grew 7% organically, with TE’s content per vehicle expanding at the high end of its 4–6 percentage-point range versus global production. Commercial transportation was even stronger, with 16% organic growth. These results signal that despite a maturing auto cycle, TE is still growing faster than the market by increasing its electronic content in vehicles and commercial platforms.

Robust Cash Generation Fuels Shareholder Returns

The company translated its growth and margin gains into strong cash flow. Cash from operations totaled $865 million in Q1, and free cash flow reached $608 million. Impressively, TE returned roughly 100% of that free cash flow to shareholders via share repurchases and dividends. Management reiterated its focus on maintaining strong cash conversion through fiscal 2026, which supports continued shareholder returns alongside investment in growth.

Stepping Up CapEx to Capture AI and Program Growth

To support aggressive AI‑related program ramps and specialized tooling, TE plans to lift capital expenditures to around 6% of sales in fiscal 2026. Management emphasized that even with this higher investment, the balance sheet remains strong and the company retains flexibility for mergers and acquisitions. The increased CapEx underscores confidence in the durability of AI and connectivity trends, as TE invests now to secure long‑term revenue streams.

Near-Term Transportation Headwinds from Auto Seasonality

While the long‑term transportation story remains intact, TE cautioned that Q2 will reflect typical auto seasonality. The company expects a roughly 3 million unit decline in vehicle production from Q1 to Q2, contributing to a near-term dip in transportation revenue even as full‑year global auto production is projected at around 88 million units, slightly below last year. For investors, this signals normal cycle dynamics rather than a structural demand issue.

Metal Inflation Puts Pressure on Procurement

Management flagged increasing material cost inflation, especially in metals such as copper, which represent TE’s largest purchase category. The company plans to offset this through pricing actions and sourcing and leverage initiatives. While such input cost moves can compress margins in the short term, TE’s confidence in passing through prices and managing its supply base suggests that inflation should be a manageable, not structural, threat.

AI Revenue Ramps Skewed to the Back Half

TE noted that a portion of AI program revenue and related orders will be weighted toward the second half of the year and into fiscal 2027. This means that some of the AI upside investors are anticipating will be back‑end loaded rather than fully visible in the near term. The staggered ramp profile is typical for large infrastructure programs and may create some quarterly volatility even as the multi‑year trajectory remains positive.

Restructuring and Accounting Distinctions Between GAAP and Adjusted

The company’s GAAP operating income included acquisition-related items, restructuring charges and $57 million of amortization. Management expects about $100 million of restructuring costs in fiscal 2026, contributing to a gap between GAAP and adjusted EPS figures. For investors, it highlights the importance of understanding one‑time and non‑cash items when assessing underlying earnings power and valuation.

Pockets of End-Market Softness Temper the Upside

Despite the strong overall growth, TE acknowledged softness in certain areas. Sensor sales were flat, in line with expectations, and demand in residential HVAC and appliances remains weak in parts of its appliances, commercial and lighting portfolio, even as factory automation recovers. The North American commercial truck market also remains negative. These pockets of weakness provide some counterbalance to the more robust industrial and AI‑linked franchises.

Quarter-to-Quarter EPS Pressure from Taxes, Interest and FX

The company guided Q2 adjusted EPS to around $2.65, slightly below Q1 despite stable expected sales of about $4.7 billion. Management pointed to higher tax and interest expense, roughly a $0.04–$0.05 EPS headwind, and some quarter-to-quarter margin and incremental variation. Foreign exchange and timing effects can also introduce noise into margin comparisons, particularly in Transportation, potentially obscuring the underlying positive trajectory.

Guidance: Sustained Momentum and Double-Digit EPS Growth Ahead

Looking forward, TE expects momentum to carry through fiscal 2026. For Q2, the company is guiding to roughly $4.7 billion in sales, up about 13% reported and 6% organically year over year, and adjusted EPS of about $2.65, implying roughly 20% growth. Industrial Solutions is expected to grow sequentially, while Transportation will reflect normal auto seasonality. Management raised its AI revenue expectations for fiscal 2026 by around $200 million and reiterated a multi‑year AI target in the billions, is lifting CapEx toward 6% of sales to support these ramps, and anticipates an adjusted effective tax rate in the low‑20% range along with restructuring charges of about $100 million this year. Crucially, TE continues to target at least 100% free cash flow conversion and ongoing double‑digit EPS growth, reinforcing a bullish long‑term earnings outlook.

In sum, TE Connectivity’s earnings call combined powerful evidence of current execution with a compelling multi‑year growth narrative centered on AI, industrial electrification and rising content in transportation. While investors must navigate near-term headwinds from auto seasonality, metal inflation and restructuring, management’s confidence in sustaining above-cycle growth, expanding margins and strong cash returns suggests that TE remains well positioned for shareholders seeking exposure to structural connectivity and data infrastructure themes.