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    TEL
    Earnings call· Mar 2025(Q2 FY25)

    TE Connectivity Q2 FY25 earnings call TEL

    Apr 23, 2025 Source

    Executive summary

    TE Connectivity Q2 FY25 — Strong Industrial Growth and AI Ramps Drive Record EPS

    TE Connectivity delivered strong Q2 FY25 results, exceeding sales and EPS guidance, primarily driven by robust growth in the Industrial segment, particularly from AI applications. The company is actively managing tariff impacts through sourcing changes and pricing actions, expecting no meaningful impact on Q3 earnings. While some end markets remain uneven, TE's localized manufacturing strategy and strong cash generation position it to navigate the dynamic global environment.

    Highlights

    5

    • Q2 sales of $4.1 billion exceeded guidance, growing 5% organically and 4% reported YoY.

    • Record adjusted EPS of $2.10, up 13% YoY and ahead of guidance.

    • Adjusted operating margins expanded 90 bps YoY to 19.4%, driven by strong operational performance.

    • Orders were $4.25 billion, up 6% YoY and sequentially, resulting in a book-to-bill of 1.02.

    • Free cash flow of $1.1 billion in H1 FY25, with $1 billion returned to shareholders and a 9% dividend increase.

    Concerns

    5

    • Transportation segment orders were flat YoY, with declines in Europe and North America auto markets.

    • Commercial Transportation sales declined 5% organically due to market weakness in Europe and North America.

    • Sensors business sales declined due to weakness in broader industrial markets in Europe and North America.

    • Medical business sales declined 14% in the quarter due to customer inventory normalization.

    • Higher adjusted effective tax rate expected at 24-25% for Q3 and H2, creating a $0.06 sequential EPS headwind.

    Guidance & targets

    19
    CategoryTargetConfidence
    Q3 FY25 Sales
    $4.3 billion
    high materiality
    High
    Q3 FY25 Organic Sales Growth
    up 5% organically
    high materiality
    High
    Q3 FY25 Adjusted EPS
    $2.06
    high materiality
    High
    Q3 FY25 Adjusted EPS Growth
    up 8% year-over-year
    high materiality
    High
    FY25 AI Applications Revenue
    above $700 million
    high materiality
    High
    FY25 Restructuring and Other Charges
    around $100 million
    medium materiality
    High
    Q3 FY25 Adjusted Effective Tax Rate
    24% to 25%
    medium materiality
    High
    H2 FY25 Adjusted Effective Tax Rate
    24% to 25%
    medium materiality
    High
    FY25 Adjusted Effective Tax Rate
    roughly 24%
    medium materiality
    High
    FY25 Free Cash Flow Conversion
    over 100%
    medium materiality
    High
    Q3 FY25 Richards Acquisition Sales Contribution
    roughly $70 million
    low materiality
    High
    Q3 FY25 Richards Acquisition Adjusted EPS Impact
    roughly neutral
    low materiality
    High
    Q3 FY25 Tariff Recovery Pricing Impact
    about 2 points of price
    medium materiality
    High
    FY25 Global Auto Production
    decline this year
    medium materiality
    High
    FY25 Hybrid and Electric Vehicle Production Growth
    20% growth
    medium materiality
    High
    H2 FY25 Global Content Growth (Auto)
    low end of our 4- to 6-point range
    medium materiality
    Medium
    Q3 FY25 Commercial Transportation Sales
    looking a lot like the second quarter
    low materiality
    Medium
    Q3 FY25 Automation & Connected Living Sales
    roughly flat to the second quarter
    low materiality
    Medium
    FY26 AI Applications Revenue
    closer to $1 billion
    high materiality
    Medium

    Segment performance

    10
    SegmentRevenueYoYQoQMargin
    Transportation
    Adjusted operating margins remained above 20% in Q2, reflecting strong execution in a slow environment.
    		———above 20%
    Transportation - Auto
    Organic sales were flat, with strong Asia growth offsetting declines in Western regions. Asia sales outperformed car production, reinforcing strong regional position. Global content growth expected at low end of 4-6% range for H2.
    Asia growth: 16%Western regions decline: 11%Asia car production increase: 5%Content growth over market: ~2 points
    		—flat organically——
    Transportation - Commercial Transportation
    Organic decline was expected, driven by market weakness in Europe and North America, partially offset by Asia growth. Market expected to remain slow in Q3.
    		—5% organic decline——
    Transportation - Sensors
    Sales decline driven by weakness in broader industrial markets in Europe and North America.
    		—decline——
    Industrial Solutions
    Achieved very nice growth, with adjusted operating margins expanding 260 basis points due to strong sales volumes and operational execution.
    		—17%—17.9%
    Industrial Solutions - Digital Data Networks
    Growth driven by increasing ramps from hyperscale platforms, particularly in AI applications.
    		—nearly 80% organically——
    Industrial Solutions - Automation & Connected Living
    Returned to growth in the quarter, which was broad-based. Q3 sales expected to be roughly flat to Q2.
    		—2% organic growth——
    Industrial Solutions - Aerospace, Defense and Marine
    Growth driven by commercial aerospace, defense, and space applications, with favorable demand trends and ongoing supply chain recovery.
    		—11% organically——
    Industrial Solutions - Medical
    Decline due to customer inventory normalization, but saw double-digit sequential growth as expected. Inventory normalization is viewed as over.
    		—14% declinedouble-digit sequential growth—
    Industrial Solutions - Energy
    Growth driven by continued momentum in grid hardening and renewable applications, with strong growth in the United States. Richards acquisition strengthens position in North American utility market.
    US growth: double-digit
    		—8% organically——

    Operational metrics

    21
    Adjusted operating income
    $805 million
    Q2 FY25

    Reported for the quarter.

    GAAP operating income
    $748 million
    Q2 FY25

    Included $12 million of acquisition-related charges and $45 million of restructuring and other charges.

    GAAP EPS
    $0.04
    Q2 FY25

    Included a onetime noncash tax charge of $1.91 due to a change in tax law, as well as restructuring, acquisition and other charges of $0.14.

    Adjusted effective tax rate
    approximately 22%
    Q2 FY25

    Reported for Q2.

    Capital returned to shareholders
    $1 billion
    H1 FY25

    Returned through the first half of the fiscal year.

    Dividend increase
    9%
    Q2 FY25

    Announced in Q2.

    Transportation segment adjusted operating margin
    20% to 21%
    last several quarters

    Has been hovering in this range for the last several quarters.

    Tariff cost impact (as % of sales)
    approximately 3%
    Q3 FY25

    Estimated for products affected by enacted tariffs. About 1/3 mitigated by sourcing changes.

    Asia Transportation orders growth
    18%YoY
    Q2 FY25

    Offset by declines in Europe and North America.

    Industrial segment orders growth
    13%YoY
    Q2 FY25

    Reflects ongoing strength in AI applications, Energy, and AD&M businesses.

    Industrial segment orders growth
    4%sequential
    Q2 FY25

    Reflects ongoing strength in AI applications, Energy, and AD&M businesses.

    AI applications orders growth
    150%YoY
    Q2 FY25

    Significant increase in orders for AI-related products.

    Sales outside United States
    3/4
    current

    Reflects global nature of the business.

    Production localized within each region
    over 70%
    current

    Manufacturing strategy developed with customers to align with supply chains.

    Global auto production decline
    5%YoY
    FY25

    Expected for the full year.

    Western auto markets decline
    closer to 10%YoY
    Q2 FY25

    Expected trend for Western auto markets.

    Hybrid and electric vehicle production in Asia
    roughly 80%
    FY25

    Of the 20% global growth in hybrid and EV production.

    Medical business sequential growth
    20%sequential
    Q2 FY25

    Increase in the business, indicating inventory element is over.

    Pricing impact (total TE)
    neutral
    FY25

    Before tariffs hit, pricing was neutral at the total TE level.

    Pricing impact (Industrial segment)
    price positive
    FY25

    Price positive in the Industrial segment.

    Pricing impact (Transportation segment)
    a little negative
    FY25

    A little negative in the Transportation segment.

    Industry KPIs

    7
    MetricValueDetails
    M a contribution$70 millionUSD
    Orders book to bill1.02
    Segment revenue growth—
    Content per device per vehiclelow end of 4- to 6-point rangepoints
    Design wins product cycle ramps—
    End market revenue mix organic growth—
    Operating margin incremental leverage19.4%%

    Orderbook & backlog

    6
    Orders$4.25 billionQ2 FY25

    up 6% YoY and sequential

    Supports outlook for sequential growth into Q3.

    Book-to-bill1.02Q2 FY25

    Supports outlook for sequential growth into Q3.

    Transportation segment ordersflatQ2 FY25

    YoY

    Growth in Asia (18%) offset by declines in Europe and North America.

    Industrial segment ordersup 13%Q2 FY25

    YoY

    Reflects ongoing strength in AI applications, Energy, and AD&M businesses.

    Industrial segment ordersup 4%Q2 FY25

    sequential

    Reflects ongoing strength in AI applications, Energy, and AD&M businesses.

    Orders (first 3 weeks of April)stableApril 2025

    Book-to-bill greater than 1, further supports Q3 guidance.

    Deals & partnerships

    1
    RichardsAcquisition in the Industrial segment, specifically for the Energy business.$2.3 billion

    Closed in April. Deployed $2.3 billion of cash for the acquisition.

    Risks & headwinds

    7
    Dynamic global environment and trade dynamicsQ3 FY25

    Small percentage of sales impacted by current tariffs, more in Industrial segment than Transportation.

    Mitigation: Sourcing changes by TE and customers; price actions where sourcing changes are not possible. No meaningful impact on Q3 earnings expected from currently enacted tariffs.

    Uneven global auto marketFY25

    Global auto production expected to decline in FY25; Western regions down 11% in Q2, potentially closer to 10% for the year.

    Mitigation: Strong position in Asia (16% growth in Q2) helps offset Western declines. Electronification across powertrains and data connectivity are key drivers for content growth.

    Market weakness in Commercial TransportationQ3 FY25

    5% organic decline in Q2.

    Mitigation: Orders are stable, but market expected to remain slow. Future emission changes in North America could create an inflection point.

    Weakness in broader industrial markets (Sensors)near term

    Sales decline in Sensors business.

    Mitigation: Teams continue to execute well in a slow environment.

    Customer inventory normalization in Medical businessQ2 FY25

    14% decline in Q2 sales.

    Mitigation: Saw double-digit sequential growth in Q2, indicating inventory element is over. Expect second half sequential improvement.

    Higher adjusted effective tax rateQ3 FY25 and H2 FY25

    24-25% for Q3 and H2 FY25, resulting in a $0.06 sequential headwind to Q3 EPS.

    Mitigation: Primarily related to Pillar 2 global minimum tax and jurisdictional mix of earnings; cash tax rate anticipated to be well below adjusted ETR.

    Uncertainty in Automation & Connected Living (ACL) due to tariffsQ3 FY25

    Q3 sales expected to be roughly flat to Q2, despite orders picking up.

    Mitigation: Taking a conservative view due to tariff uncertainty and potential distraction for customers' CapEx plans. Orders did pick up in Q2.

    What to watch in Q3 FY25

    5

    Automation & Connected Living (ACL) sales momentum

    next quarter
    Current2% organic growth in Q2, Q3 sales expected flat to Q2
    TargetContinued sequential growth

    Why it matters

    ACL's return to growth was a positive, but Q3 guidance is conservative due to tariff uncertainty🌐. Sustained momentum would signal broader industrial recovery and effective tariff navigation.

    For the third quarter, we are expecting sales to be roughly flat to the second quarter in our ACL business. And this is one of the markets where when we talk about impacted by tariffs, you do have a lot of supply chain crossover that happens because of the fragmentation here. So we've probably taken a more conservative view than the orders we saw, but it is something right now, hopefully💬, we can tell you next quarter, we continue to see momentum in the orders from what we saw just this last quarter.

    Q&A highlights

    6

    How do tariffs affect pricing in auto contracts, and is there an anti-American sentiment impacting TE's business given its U.S. executive leadership?

    Tariff impact is primarily in the Industrial segment, not auto, due to TE's localized manufacturing. Pricing actions will be taken where sourcing changes aren't possible. TE's local teams and manufacturing strategy mitigate anti-American sentiment, as customers perceive TE as a local entity in various regions. The company has not observed anti-American sentiment impacting its operations.

    “We have not seen anti-American sentiment around what we do, but it is certainly something we always keep in front of us. And it's something that we've run locally for a long time, and that's why that tariff amount is as low as it is because we've always said we want to be tied to the design center locally as well as to the supply chain locally.”

    asked by Scott Davis · answered by Terrence Curtin

    2 min read6 chapters

    Detailed Narrative

    01

    Tariff Impact and Mitigation Strategy

    TE Connectivity is addressing recent tariff announcements, noting that three-quarters of its sales are outside the U.S. and over 70% of production is localized within regions. This strategy limits the impact of current tariffs to a small percentage of sales, primarily affecting the Industrial segment. Mitigation actions include sourcing changes by TE and its customers, and price actions where sourcing changes are not feasible. Management does not expect tariffs to have a meaningful impact on Q3 earnings based on currently enacted policies.

    02

    Strong Q2 Performance and Operational Execution

    The company reported Q2 sales of $4.1 billion, exceeding guidance with 5% organic growth, and record adjusted EPS of $2.10, up 13% YoY. Adjusted operating margins reached 19.4%, expanding 90 basis points, driven by strong operational performance across both segments, particularly a 260 basis point increase in the Industrial segment. Orders of $4.25 billion, up 6% YoY and sequentially, support the positive outlook for Q3.

    03

    AI Momentum and Digital Data Networks

    The Digital Data Networks (DDN) business grew nearly 80% organically, driven by increasing ramps from hyperscale platforms. The company now expects AI applications revenue to exceed $700 million in FY25, an increase from the previous $600 million estimate, reflecting strong program ramps and leadership in multiple hyperscale AI platforms. Orders for AI-related products increased 150% in Q2, indicating real momentum and program wins.

    04

    Transportation Segment Dynamics

    The Transportation segment experienced flat organic auto business, with 16% growth in Asia offset by 11% declines in Western regions. Global auto production is expected to decline this year, with Western markets potentially down closer to 10%. Commercial Transportation saw a 5% organic decline due to market weakness🌐 in Europe and North America, with sales expected to remain slow. Sensors also declined due to broader industrial market weakness🌐.

    05

    Industrial Segment Growth Drivers

    The Industrial Solutions segment achieved 17% growth, with DDN leading at nearly 80% organic growth. Automation & Connected Living returned to growth with 2% organic increase, driven by inflecting orders in Europe and Asia. Aerospace, Defense and Marine grew 11% organically, benefiting from favorable demand and supply chain recovery. Energy sales were up 8% organically, supported by grid hardening and renewables, further bolstered by the Richards acquisition.

    06

    Capital Allocation and Balance Sheet Strength

    TE Connectivity generated $1.1 billion in free cash flow in the first half of FY25 and returned approximately $1 billion to shareholders, including a 9% dividend increase. The company deployed $2.3 billion for the Richards acquisition in April, demonstrating its strong balance sheet and confidence in its cash generation model. Management plans a balanced approach to capital deployment, including M&A and share buybacks, with a focus on bolt-on acquisitions.

    AI-generated summary of the company’s earnings call. Not investment advice.