Q3 2024 Summary
Published Jan 6, 2025, 8:15 PM UTC- TEL is experiencing strong momentum in its AI-related business, expecting over $250 million in AI revenue this year, which is anticipated to more than double in 2025. The company has secured design wins across multiple hyperscale customers and is confident in reaching $1 billion in AI revenue in the future.
- In the automotive segment, TEL expects content growth of 4% to 6% over market due to increased electrification and electronification of vehicles. The company is confident that the trends toward electric vehicles (EVs), hybrids, and advanced vehicle architectures will drive higher content per vehicle, boosting revenues.
- TEL is achieving strong margin expansion, with adjusted operating margins reaching 19.3%, a 200 basis points increase year-over-year, and record adjusted earnings per share. The company expects further margin improvement, particularly in the Industrial Solutions segment as destocking ends and the Communications segment benefits from high-margin AI applications.
- TE Connectivity's margin improvements have been driven by restructuring and cost-cutting efforts, which have been expensive ("it has not been cheap we're painless"), raising concerns about the sustainability of these improvements.
- The commercial transportation market is down from a top-line perspective, and ongoing weakness in industrial equipment markets could pressure TE's revenues.
- Potential delays in new vehicle launches, lower vehicle sales from key customers, and inventory corrections may hinder TE's ability to achieve its targeted 4-6% content growth in automotive revenues.
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AI Revenue Growth
Q: What's driving higher AI growth, and customer mix?
A: TE Connectivity is experiencing strong momentum in its AI-centric business, fueled by accelerating cloud CapEx from hyperscalers and design wins across multiple customers. This has led to AI revenue expectations increasing to $250 million this year, with confidence to at least double that to $500 million next year. With this trajectory, the $1 billion sales estimate may be achieved sooner. -
Margin Outlook
Q: What's the margin outlook, especially with AI growth and commodities?
A: TE is focused on margin expansion across segments. In Communications, incremental margins on AI-related revenue are expected to be in the 25% to 30% range. They've raised the floor on margins due to operational improvements and are confident in managing commodity price volatility. -
Automotive Content Growth
Q: Can TE achieve 4–6% automotive content growth amid market shifts?
A: TE is confident in achieving 4% to 6% content outperformance in Automotive , driven by electrification and electronification trends. EV production is up 20% this year , and TE benefits from increased content in electrified powertrains and advanced architectures, such as miniaturized and more complex connectors in zonal systems. -
CapEx and Cash Flow
Q: How will CapEx commitments change with AI revenue doubling?
A: TE's CapEx runs at about 5% of revenue , and they can support AI growth within this run rate without incremental pressure. Investments in AI applications are being absorbed through trade-offs and completed expansions in other areas. -
M&A Strategy
Q: What's TE's strategy on bolt-on M&A and opportunities?
A: TE remains focused on bolt-on M&A in markets they understand, aiming for strong financial returns. The pipeline, particularly in industrial spaces, is more robust than it has been in a very long time. -
Order Patterns and Destocking
Q: What are the current order patterns amid destocking?
A: While destocking has impacted revenue, TE is seeing strength as the appliance business returns to growth and signs that destocking in industrial equipment is starting to stabilize. -
Transportation Margins
Q: What are the expectations for transportation margins ahead?
A: TE has achieved 21% margins in Transportation , surpassing the 20% target. Incremental margins of about 30% are anticipated. There's potential for further margin improvement through recovery in commercial transportation and continued operational efficiencies.