TE Connectivity plc (TEL) Q1 2026 Earnings Call Transcript
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Overview
The earnings call summary and Q&A indicate strong financial performance with a 23% EPS growth, expected margin expansion, and positive guidance on AI and industrial segments. Despite slightly lower EPS guidance due to taxes and interest, the overall sentiment is optimistic with strong orders and growth across various sectors. The company's ability to pass through costs and maintain strong margins further supports a positive outlook. Given these factors, a positive stock price movement is expected over the next two weeks.
Key Financial Performance
Sales $4.7 billion, growing 22% on a reported basis and 15% organically year-over-year. Growth in both segments contributed to sales being above guidance.
Orders Record level of over $5 billion, an increase of over $1 billion versus the prior year. Growth driven by new program awards from customers.
Adjusted Earnings Per Share (EPS) $2.72, above guidance and increased over 30% versus the prior year due to strong execution by teams.
Adjusted Operating Margins 22%, an increase of 180 basis points over last year.
Free Cash Flow Above $600 million, with 100% of free cash flow returned to shareholders in the quarter.
Industrial Solutions Segment Sales Grew 38% in the quarter and 26% on an organic basis year-over-year. Digital data networks grew 70% year-over-year, AI revenue exceeded expectations, and energy business sales grew 88% (15% organically).
Industrial Solutions Segment Margins Adjusted operating margins expanded by over 500 basis points to 23%, driven by strong operational performance and higher volume.
Transportation Solutions Segment Sales Grew 10% in the quarter and 7% organically year-over-year. Auto sales grew 7% organically, and commercial transportation grew 16% organically year-over-year.
Transportation Solutions Segment Margins Adjusted operating margins above 21%, in line with expectations.
Cash from Operations $865 million.
Capital Expenditure (CapEx) Expected to be closer to 6% of sales this year, increased to support growing pipeline of customer awards for AI programs.
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Operating Highlights
AI Revenue: AI revenue exceeded expectations, with new program awards creating backlog into 2027. Fiscal 2026 AI revenues are expected to be a couple of hundred million dollars higher than previously estimated.
Digital Data Networks: The business grew 70% year-over-year, driven by strong demand and new program awards.
Energy Business: Sales grew 88%, including the Richards acquisition, with 15% organic growth driven by grid hardening and renewable applications.
Geographic Order Growth: Double-digit organic order growth in all regions year-over-year.
Commercial Transportation: Recovery in Asia and Europe markets, with 16% organic growth year-over-year.
Operating Margins: Adjusted operating margins reached 22%, a 180 basis point increase year-over-year.
Cash Flow: Free cash flow exceeded $600 million, with 100% returned to shareholders.
Localization Strategy: Improved operating resilience through supply chain localization.
Capital Expenditure: Increased to support AI program growth, now expected to be 6% of sales for fiscal 2026.
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Risk or Challenges
Macroeconomic Unevenness: The company acknowledges ongoing macroeconomic unevenness, which could impact operational resilience and financial performance.
Auto Seasonality Trends: The typical auto seasonality trends globally could partially offset growth in the Industrial Solutions segment.
Supply Chain Localization: While localization of the supply chain has improved resilience, it may still face challenges in maintaining efficiency and cost-effectiveness.
Commercial Transportation Market Recovery: The recovery in commercial transportation markets outside the U.S. is still in progress and could face setbacks.
Capital Expenditure Increase: The company plans to increase capital expenditure to support AI program growth, which could strain cash flow if not managed effectively.
Restructuring Charges: Expected restructuring charges of approximately $100 million in fiscal 2026 could impact profitability.
Auto Production Decline: Auto production is expected to decline slightly to 88 million units in fiscal 2026, which could affect the Transportation segment's growth.
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Guidance & Outlook
Second Quarter Sales: Expected to be $4.7 billion, reflecting an increase of 13% year-over-year on a reported basis and 6% organically.
Adjusted Earnings Per Share (EPS) for Q2: Expected to be around $2.65, representing 20% growth year-over-year.
Industrial Solutions Segment Growth: Expected sequential growth, partially offset by typical auto seasonality trends in the Transportation segment.
AI Revenue for Fiscal 2026: Now expected to be a couple of hundred million dollars higher than the previous view 90 days ago, with growth expected across every hyperscale customer.
General Industrial Markets Recovery: Expected to continue as the year progresses.
Energy Business Growth: Driven by increased investments by customers in grid hardening and renewable applications, with strong growth expected in the U.S. and Europe.
Auto Production in Fiscal 2026: Expected to remain consistent at roughly 88 million units, slightly down versus last year.
Commercial Transportation Market Recovery: Recovery expected in end markets outside the United States, benefiting from leading global position and content growth.
Capital Expenditures for Fiscal 2026: Expected to increase to closer to 6% of sales to support the growing pipeline of customer awards for AI programs.
Full-Year Sales Growth: Set to deliver growth ahead of the through-cycle growth target of 6 to 8 points of annual average growth.
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Shareholder Return Plan
Dividends: The company returned 100% of its free cash flow to shareholders in the quarter, which includes dividends.
Share Buybacks: The company returned 100% of its free cash flow to shareholders in the quarter, which includes share buybacks.
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Key Q&A
Q:Scott Davis asked about the scaling of AI revenues and the linkage between capacity adds and margin improvement.
A:Terrence Curtin confirmed that the company is on track to achieve $3 billion in AI revenue in a few years, with a $200 million increase in forecasted revenue for this year compared to 90 days ago. He highlighted strong growth across hyperscaler customers and noted that scaling has been progressing well, with some programs extending into 2027. Margin improvements are being driven by AI volumes and overall business improvements.
Q:Mark Delaney inquired about order trends, revenue guidance, and the duration of orders.
A:Terrence Curtin stated that orders reached a record $5 billion, with broad-based growth across TE. Industrial orders were up in 4 of 5 businesses, and AD&M orders are accelerating. He noted that automotive production is expected to decline by 3 million units from Q1 to Q2, which impacts revenue guidance.
Q:Amit Daryanani asked about the drivers of the AI revenue uptick and the investments required to meet demand.
A:Terrence Curtin attributed the AI revenue uptick to new program awards and growth across hyperscalers, with significant ramp-ups expected in Q3 and Q4. Heath Mitts explained that increased CapEx investments are needed to support production, primarily in Asia and North America, and emphasized that these investments are tied to revenue and profits.
Q:Wamsi Mohan asked if the AI programs are NVIDIA-centric or focused on other architectures, and about the content split between signal and power.
A:Terrence Curtin declined to discuss specific customers but confirmed that the programs are hyperscaler-driven and involve both power and data/signal components. He emphasized the broad momentum with hyperscale customers.
Q:Luke Junk asked about trends in ACL and Industrial Solutions, and their impact on incremental margins.
A:Terrence Curtin noted improvements in ACL and industrial transportation businesses, with growth across all regions in ACL. He highlighted strong orders and recovery in profit pools, which benefit margins. Heath Mitts confirmed that incremental margins are expected to be 30% or higher, with volume growth contributing to leverage.
Q:Joe Spak asked about DDN growth and whether AI revenue is constrained by capacity or conservatism.
A:Terrence Curtin clarified that AI programs grew sequentially and are expected to ramp significantly in Q3 and Q4. He stated that capacity constraints are not an issue and highlighted strong DDN orders, which were up 70% year-over-year.
Q:Samik Chatterjee asked about supply chain tightness, inflation, and the drivers of longer-dated orders.
A:Terrence Curtin stated that the supply chain is functioning well, with inflation in metals being passed through pricing. He attributed longer-dated orders to the complexity of specific programs and the need to reserve capacity for fast ramps.
Q:Colin Langan asked about the impact of DRAM price increases on the company and auto production.
A:Terrence Curtin stated that DRAM price increases do not impact the company significantly and that there are no indications of memory-related slowdowns affecting auto production.
Q:Guy Hardwick asked about the strength in the commercial transportation business and its outlook.
A:Terrence Curtin attributed the strength to easier year-over-year comparisons and improved truck and construction equipment builds in China, Europe, and India. He noted that North America remains a wildcard but expects global truck builds to grow by 2%.
Q:Asiya Merchant asked about the EPS guidance being slightly down versus sales and drivers for incremental margin expansion.
A:Heath Mitts explained that higher taxes and interest expenses account for the EPS guidance. He emphasized that incremental margins are expected to remain strong, supported by volume growth and reduced fixed costs.
Q:Joe Giordano asked about the impact of rising metal prices on procurement and customer acceptance of cost pass-throughs.
A:Heath Mitts acknowledged inflationary pressures in metals but stated that costs are being passed through pricing mechanisms. He emphasized that the company does not expect these pressures to impact margins or flow-through math.
Q:Steven Fox asked about the timeline for passing through higher metal costs and the company's capacity to meet growing demand.
A:Heath Mitts confirmed that the company has improved its agility in passing through costs. Terrence Curtin stated that capacity is sufficient to meet demand, with ongoing investments in energy and aerospace to support growth.
Q:Christopher Glynn asked about energy growth and its alignment with long-term outlooks.
A:Terrence Curtin stated that energy momentum remains strong, with growth in grid hardening and capacity expansion. He expects double-digit organic growth this year, supported by inorganic contributions.
Q:William Stein asked about the March quarter guidance being below normal seasonality and its relation to auto production.
A:Terrence Curtin explained that the guidance reflects a 3 million unit decline in auto production from Q1 to Q2, which is slightly worse than average. He noted that Q1 was higher than seasonal due to strong industrial trends.
Q:Shreyas Patil asked about incremental margins in Q1 and their outlook for the year.
A:Heath Mitts stated that both segments are expected to achieve 30% or higher incremental margins for the year. He noted that Transportation was impacted by foreign exchange noise in Q1 but expects strong flow-through for the full year.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing whether AI programs are NVIDIA-centric or focused on other architectures, citing confidentiality. They also did not provide specific details on the content split between signal and power, using broad language to describe the programs.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Asia Europe
Executive
Industrial Solutions
Investor Day
Slide result
TE
Terrence
acquisition
amortization expense
application
automation living
award
basis point
business order
cash generation
charge amortization
content
engineering
generation model
increase basis
investment
line expectation
message
momentum
need power
order business
overview
power connectivity
press release
record
restructuring
sale Transportation
supply chain
tax rate
team
transportation
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The earnings call summary and Q&A indicate strong financial performance with a 23% EPS growth, expected margin expansion, and positive guidance on AI and industrial segments. Despite slightly lower EPS guidance due to taxes and interest, the overall sentiment is optimistic with strong orders and growth across various sectors. The company's ability to pass through costs and maintain strong margins further supports a positive outlook. Given these factors, a positive stock price movement is expected over the next two weeks.
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