Q2 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- Strong Growth in AI Applications: TE Connectivity expects to double its AI revenues from $200 million this year to $400 million next year and aims to achieve annual revenues of roughly $1 billion in the following few years. They are one of three companies with meaningful content in AI applications, positioning them strongly in this attractive category.
- Continued Content Growth in Electric and Hybrid Vehicles: Despite market shifts, TE Connectivity remains confident in achieving 4% to 6% content growth above automotive production. Their content per vehicle is 1.5x higher on hybrids and 2x higher on full electric vehicles compared to internal combustion engines. Global EV and hybrid production are both expected to increase by 24% this fiscal year, driving significant content growth for TE.
- Improved Order Patterns Indicating Market Stability: TE Connectivity has seen orders above $4 billion with a book-to-bill ratio above 1 for the first time in 1.5 years, suggesting improved market health. Destocking is over in the Communications segment, which is expected to return to year-over-year growth in the third quarter. The company is also starting to see stabilization in the Industrial Equipment business, pointing to potential normalization later this fiscal year.
- Ongoing destocking and weakness in the Industrial Equipment segment: TE Connectivity is experiencing a "cloudy" demand environment in its Industrial Equipment business, with destocking expected to persist for a couple more quarters, particularly in Europe. This continued weakness could impact near-term performance. ,
- Underperformance in the Automotive segment: The company's auto segment growth was only 1%, falling short of its long-term target of 4% to 6% organic growth. This underperformance raises concerns about the company's ability to achieve its growth objectives in the automotive market. ,
- Intense competition in the AI connectivity market: TE Connectivity faces high competition in the AI hardware connectivity space, being one of three main companies with significant content. This competitive landscape may limit the company's ability to capitalize fully on AI growth opportunities and could pressure margins. ,
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AI Growth Outlook
Q: What is TE's outlook for AI-related revenue growth?
A: TE expects to generate about $200 million in AI application revenue this year, with 60% in the back half. They anticipate this doubling to $400 million next year and see a path to $1 billion annually in a few years. Their design win momentum is strong, and they are investing in engineering and operations to support growth across the entire AI ecosystem. -
Destocking Ending
Q: What are current order patterns and destocking status?
A: For the first time in six quarters, orders are above $4 billion with a book-to-bill over 1. Destocking is over in the Communications segment, and they expect it to return to growth next quarter. Industrial Equipment destocking continues but is expected to bottom out in a couple of quarters, providing a tailwind into '25. -
Fiscal '25 Outlook
Q: How is fiscal '25 shaping up for growth and margins?
A: TE expects growth drivers like EVs, AI, renewables, and medical to continue into '25. With destocking ending, they anticipate a positive impact on growth. Margin improvements are expected across segments, aiming for operating margins in the high teens to 20% range. -
Auto Outlook
Q: What underpins TE's positive view on auto growth?
A: Despite EV industry deceleration, TE sees global auto production slightly up at around 86 million vehicles this year. EVs, plug-in hybrids, and hybrids represent 30% of vehicles, growing about 24% this year. TE remains confident in their 4% to 6% outperformance above auto production due to increased content per vehicle. -
Pricing and Margins
Q: How will pricing normalization affect margins into fiscal '25?
A: TE recovered from prior inflation and expects pricing to be neutral this year. They are implementing targeted price increases where needed due to material cost inflation. They do not anticipate margins declining in a different pricing environment. -
AI Competitive Position
Q: How does TE view competition in AI connectivity solutions?
A: TE is among three companies with significant capability in high-speed applications required for AI. The company expects to maintain a share similar to what it had in cloud applications, leveraging technical innovation in high-speed connectivity. -
Capacity Investments
Q: What's the lead time on capacity investments in AI?
A: TE has been investing in expanded operations in Mexico and the Philippines over the past few years to support AI growth. These sites offer geopolitical options desired by customers, and investments are synchronized with customer programs. -
Industrial Equipment Outlook
Q: What's the outlook for Industrial Equipment amid destocking?
A: Destocking in Industrial Equipment is expected to continue for a couple more quarters. Signs of stabilization are emerging, with order patterns starting to move sideways. TE anticipates a return to growth in this segment as destocking concludes. -
Energy Markets
Q: How is TE's energy market within Industrial performing?
A: TE remains positive on energy markets, with strong performance in the U.S. and global renewables. Some softness is noted in European utilities, but overall, the company expects continued growth. -
Commercial Vehicle Market
Q: What's the outlook for the commercial vehicle platform?
A: The global commercial transportation market is expected to be down about 5% this year. Weakness in Americas and Europe is offset by recovery in China and Asia. TE anticipates a more constructive environment early next year.