Q1 2025 Summary
Published Feb 7, 2025, 7:58 PM UTC- Strong Growth in AI and Data Connectivity Applications: TE Connectivity is experiencing significant orders growth in artificial intelligence applications, with AI orders growing nicely in the quarter. They now expect revenue from AI applications to be above $600 million in fiscal 2025 , and have secured a major design win exceeding $1 billion with a leading Chinese auto OEM for next-generation platforms focused on data connectivity in cars. This momentum positions TE for strong future growth as they capitalize on the increasing demand for high-speed connectivity solutions.
- Margin Expansion and Operational Leverage: The company is optimizing its cost structure through footprint consolidation and restructuring, moving production to lower-cost regions like Eastern Europe and Morocco. This strategy is reflected in the record adjusted operating margin of 19.4% in the first quarter. TE Connectivity expects continued margin expansion, particularly in the Industrial segment, driven by strong operational performance and the benefits of past restructuring initiatives.
- Strong Cash Flow Facilitating Strategic M&A: TE Connectivity generated record first-quarter free cash flow of $674 million , providing optionality for capital deployment. The company is actively pursuing M&A opportunities, focusing on bolt-on acquisitions but open to larger deals that are close to their core areas. Leveraging favorable market conditions, TE Connectivity aims to enhance growth and deliver additional value to shareholders through strategic acquisitions.
- Continued weakness in European markets, particularly in the automotive, industrial, and heavy-truck sectors, may negatively impact TE Connectivity's performance in these regions.
- Potential new tariffs could pose a risk to TE Connectivity's cost structure, and although the company has a playbook to mitigate such impacts, tariffs could still negatively affect margins if not fully recovered or mitigated.
- The need for significant upfront investment in the Digital Data Networks business to support AI growth, combined with potential lumpiness in program ramps, could lead to margin variability, potentially impacting overall profitability of the Industrial segment.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Adjusted Effective Tax Rate | FY 2025 | 23% to 24% | 23% to 24% | no change |
Currency Exchange Headwinds | FY 2025 | no prior guidance | expected to exceed $300M | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Sales | Q1 2025 | $3.9 billion | $3.836 billion | Missed |
EPS (Diluted) | Q1 2025 | $1.88 | $1.75 | Missed |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Sustained AI revenue momentum | ● Q4 2024: AI revenue hit $300M, set to double in FY25. <br>● Q3 2024: Raised FY24 AI projection to $250M; aims for $500M in FY25. <br>● Q2 2024: Expected $200M in FY24, doubling to $400M in FY25. | AI revenue doubled vs. prior year; projected to exceed $600M; orders remain strongly layered; expecting margin lift as volumes grow. | Consistent increases each quarter; sentiment remains bullish with broad-based customer demand. |
Automotive data connectivity and EV content growth | ● Q4 2024: Focus on data connectivity, zonal compute, EV production up in Asia, mid-teens sales growth in Asia. <br>● Q3 2024: Highlighted 4–6% auto outgrowth, data needs driving content. <br>● Q2 2024: 4–6% above production, 1.5× content on hybrids, 2× on full EV. | Emphasized software-defined architectures, landed $1B design win in China, projecting EV/hybrid growth with 80% in Asia. | Continued positive outlook, strong pipeline of design wins, Asia remains key growth driver. |
Margin expansion and operational leverage | ● Q4 2024: Achieved 18.9% FY margin, up 220 bps; robust margins in Communications. <br>● Q3 2024: 19.3% margin, up 200 bps; operational levers, footprint optimization. <br>● Q2 2024: Expanded 250 bps to 18.5%, sustained by cost controls. | Record 19.4% operating margin; Transportation >20% margin; restructuring and operational gains drive improvement. | Ongoing margin gains quarter over quarter; focus on optimizing footprint and leveraging volume. |
Industrial segment challenges (softness, destocking) | ● Q4 2024: Softness in factory/building automation and destocking, especially in Europe. <br>● Q3 2024: Destocking drove 24% decline in industrial equipment. <br>● Q2 2024: Industrial equipment down 28% on destocking, expected normalization by year-end. | Factory automation down 5%, medical off 25% on inventory correction, but seeing stabilization in industrial orders. | Weakness persists but some stabilization emerging, particularly in Asia. |
Geographic focus on China for automotive expansion | ● Q4 2024: China worth $2B in auto revenue; local OEMs hold 2/3 of the market. <br>● Q3 2024: Double-digit auto growth in China offset EU/NA declines; 70% of EVs in Asia. <br>● Q2 2024: Strong China presence cushioned production weaknesses elsewhere. | 80% of hybrid/EV growth in Asia; secured $1B in new design wins with Chinese OEM; strong production activity. | Strategic emphasis on China continues, driven by robust EV adoption. |
European market weakness | ● Q4 2024: Ongoing softness in factory/building automation, commercial transportation, and auto production. <br>● Q3 2024: European commercial transportation decline, offset by China. <br>● Q2 2024: Weakness in commercial transportation, utilities inventory cuts. | Highlighted weakness in European factory automation, auto production down ~10%, commercial transportation also softer. | Persistently weak European demand across industrial and transportation. |
Potential new tariffs | ● Q4 2024, Q3 2024, Q2 2024: No mention in these periods. | Preparing with localized footprint (~80% in-region) and a proven 2017 cost pass-through playbook; no immediate impact yet. | Newly introduced topic this quarter; company confident it can mitigate. |
Cash flow strength and strategic M&A | ● Q4 2024: $2.8B FCF, 17% y/y increase, bullish on M&A. <br>● Q3 2024: $2B FCF (36% y/y), ~$350M in acquisitions. <br>● Q2 2024: $1.1B FCF in first half, continued bolt-on strategy. | Record free cash flow of $674M, improved 18% y/y; deployed $325M on bolt-on deals; active M&A pipeline. | Consistent strong cash generation, ongoing bolt-on M&A approach. |
Sensors business exit | ● Q4 2024: Exiting lower-margin areas (~$50M) by FY25; portfolio focus on key markets. <br>● Q3 2024: Portfolio pruning to improve margins. <br>● Q2 2024: Organic exits in lower-margin lines. | No exit mention; only reported sales decline from industrial weakness, expecting demand recovery. | Focused on internal weakness in Q1 2025; exit plan was prominent in prior quarters. |
Flat revenue concerns | ● Q4 2024: FY sales ~$15.8B, flat organically, strong margin focus. <br>● Q3 2024: Acknowledged flattish volume; offset by margin expansion. <br>● Q2 2024: Emphasized 4–6% long-term growth, but near term is muted. | Flat at ~$3.84B y/y, offset by currency headwinds; orders improved, supporting sequential sales growth outlook. | Still flat but improved order flow hints gradual top-line rebound. |
Commodity price and inflation risk | ● Q4 2024: No mention.<br>● Q3 2024: Hedges metals, prepared to offset inflation with pricing. <br>● Q2 2024: Recovered from inflation wave, sees pricing as mostly neutral. | No mention in Q1 2025. | Declining relevance; not discussed this quarter. |
Energy business softness in Europe | ● Q4 2024: Energy was up in Europe; strong renewables. <br>● Q3 2024: Experienced 3% organic growth; not cited as soft. <br>● Q2 2024: Temporary softness in European utilities. | No mention of softness in Q1 2025. | Not raised this quarter; prior softness viewed as temporary or offset by renewables. |
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AI Revenue Growth
Q: What is driving the strength in AI revenues exceeding the $600 million target?
A: TE's AI revenue doubled in the quarter, and they're now expecting to surpass the over $600 million target for the year. The growth is broad-based among hyperscalers, driven by multiple programs and sustained momentum. Their market share remains steady at 30–35%, demonstrating the significant opportunity in connecting AI technology. -
Transportation Margins
Q: How do you view incremental leverage in Transportation Segment margins upon recovery?
A: TE has improved Transportation Segment margins, comfortably maintaining them at 20% or better. As the Commercial Transportation business recovers, they expect significant leverage due to previously reduced fixed costs, particularly in Western Europe. This could lead to outsized increments when volume returns, potentially around 2026. -
Order Trends and Outlook
Q: Can you provide more color on order trends and how they inform guidance?
A: Orders came in stronger than expected, with the Industrial segment's orders growing 10% year-over-year and 7% sequentially without AI orders. There's broad strength in Asia, while Europe shows weakness, especially in auto and industrial markets. Stabilization in the automation and control space is a positive sign for potential improvement later in the year. -
Tariff Mitigation Strategies
Q: How will you manage if tariffs are implemented?
A: TE's manufacturing is 80% localized, reducing exposure to tariffs. They have experience from 2017, when they managed $300 million in tariff costs by working with customers, adjusting supply chains, and passing costs via price when necessary. They are prepared to employ similar strategies if new tariffs arise. -
M&A Strategy
Q: Are you open to larger deals given strong cash flow?
A: With record free cash flow, TE is active in M&A and considers both small and larger "bolt-on" acquisitions close to their core businesses. The M&A pipeline has increased, and they have enhanced resources to pursue these opportunities. -
Industrial Market Stabilization
Q: Is the industrial automation market stabilizing, and what is the outlook?
A: Stabilization is now evident, with orders improving particularly in Japan and China. U.S. demand is sideways but better than before, while Europe continues to show weakness. This stabilization serves as a foundation for potential improvement as the year progresses. -
Automotive Production and Content
Q: How is auto production outlook affecting growth over market?
A: Auto production is expected to decline by 1–2% this year, with Europe down 10% in the first quarter. TE expects to be at the low end of 4–6% growth over market due to high content per vehicle in Europe and significant content growth in Asia from electrification and electronification trends. -
AI Margins and Investment
Q: How will AI growth impact margins given the investment required?
A: TE is investing ahead to support AI program ramps, which may cause some margin variability in the Industrial segment. As volumes increase, they expect margin benefits similar to their cloud products. -
Cross-Licensing Impact
Q: How does cross-licensing affect revenue and margins?
A: Cross-licensing is common in the connector industry to ensure supply security during ramps. It allows partners to meet high-volume demands, facilitating growth without significantly impacting revenue or margins. -
Data Connectivity in Vehicles
Q: What is the opportunity around data in vehicles?
A: TE is capitalizing on the shift to software-defined architectures, especially in Asia. Their product set for data connectivity and Ethernet in cars is growing to $600 million this year, adding another lever for 4–6% growth over market.