TE Connectivity's AI Revenue Forecasts and Industrial Margin Outlook Clash in 2026 Earnings Call

Date of Call: Jan 21, 2026

Financials Results

• Revenue: $4.7B, up 22% reported and 15% organic YOY
• EPS: $2.72 per diluted share, up 33% YOY
• Operating Margin: 22.2%, up 180 basis points YOY

Guidance:

• Q2 sales expected to be $4.7B, up 13% reported and 6% organic YOY.
• Q2 adjusted EPS expected to be around $2.65, up 20% YOY.
• Industrial Solutions segment expected to grow sequentially; Transportation segment expected to decline due to auto seasonality.
• Full year sales growth expected to be ahead of through-cycle target of 6-8% annual average growth.
• AI revenue for fiscal 2026 now expected to be a couple of hundred million dollars higher than view 90 days ago.
• CapEx now expected to be closer to 6% of sales.
• Tax rate expected to be ~23% for full year.

Business Commentary:

Revenue Growth and AI Integration:

• TE Connectivity reported first-quarter sales of $4.7 billion, growing 22% on a reported basis and 15% organically year-over-year.
• The growth was driven by strong demand for AI-related products and services, particularly in the digital data networks business, which saw a 70% year-over-year increase in orders.

Industrial Segment Expansion:

• The Industrial Solutions segment grew 38% in the quarter, with 26% organic growth, led by a 70% increase in digital data networks and a 15% organic increase in energy sales.
• This expansion was fueled by new program awards from customers in AI, utility, and next-generation vehicle data connectivity.

Transportation Segment Performance:

• Transportation sales increased 10% in the quarter, with 7% organic growth, driven by a 16% organic increase in commercial transportation.
• Growth was supported by content increases in Asia and Europe, and a recovery in end markets outside the United States.

Order Momentum and Backlog:

• TE Connectivity saw orders increase to a record level of $5.1 billion, up over $1 billion from the prior year, with a book-to-bill ratio of 1.1.
• The increase in orders was supported by strong demand across segments and regions, particularly in digital data networks and energy.

Supply Chain and Localization Efforts:

• The company improved its operating resilience through the localization of its supply chain, contributing to a record adjusted operating margin of 22%.
• These efforts helped TE Connectivity maintain strong performance despite ongoing macroeconomic unevenness.

Sentiment Analysis:

Overall Tone: Positive

• Management described results as 'record adjusted operating margins and earnings per share,' 'strong cash generation,' and 'broadening of growth.' They stated they 'expect to deliver growth in fiscal 2026 that is ahead of this target' and are 'set up to deliver sales growth that is ahead of our through-cycle growth target, while expanding operating margins and very strong earnings per share growth.'

Q&A:

• Question from Scott Davis (Melius Research): Confirmation on AI forecast increase and linkage between capacity adds and scaling/margins.
  Response: AI revenue for FY26 is now $200M higher than 90 days ago, with growth across all hyperscalers. Scaling is ongoing with strong margins, benefiting from volume leverage and operational improvements in the segment.

• Question from Mark Delaney (Goldman Sachs): Double-click on order trends and implications for revenue by end market, especially given Q2 revenue guidance vs. record orders.
  Response: Orders were a record $5.1B with broad-based growth. Q2 revenue guide reflects typical auto production seasonality (down ~3M units) partially offsetting strong Industrial growth.

• Question from Amit Daryanani (Evercore): What is driving the uptick in AI revenue expectations and what investments are needed to meet demand?
  Response: Increase driven by new program awards and continued ramps across all hyperscalers. Investments involve specific tooling in existing facilities to support aggressive ramp schedules, increasing CapEx to ~6% of sales.

• Question from Wamsi Mohan (BofA): Granularity on AI programs (NVIDIA vs. TPU/ASIC-centric) and signal vs. power content split.
  Response: Programs are with hyperscalers but specifics not disclosed. Growth is broad across both data/power and signal connectivity for next-gen architectures.

• Question from Luke Junk (Baird): Trends within ACL and if strength is an incremental margin driver.
  Response: ACL orders are improving across all regions, driven by factory automation CapEx. It is a better profit pool, contributing to margin expansion, with both segments expected to maintain 30%+ incremental margins.

• Question from Joseph Spak (UBS): AI growth within DDN and whether run rate is constrained by capacity or conservatism.
  Response: AI programs grew sequentially. The $200M revenue increase is for programs ramping later in FY26 and into 2027; not constrained by capacity but by ramp timing.

• Question from Samik Chatterjee (JPMorgan): Supply chain tightness/inflation and why hyperscalers provide longer-dated orders.
  Response: Some metal inflation is being passed through. Long-dated orders are due to fast ramp requirements and specific program launches, not necessarily supply chain constraints.

• Question from Colin Langan (Wells Fargo): Impact of DRAM price increases and risk to auto production from memory supply issues.
  Response: No significant memory impact on supply chain; customer discussions show no slowdown related to memory, and growth-over-market in Transportation is strong.

• Question from Guy Hardwick (Barclays): Outlook for commercial transportation given strong Q1 and order momentum.
  Response: Growth benefited from easy comps. Recovery is seen outside the US (China, Europe, India), but North America remains a wildcard; global truck build expected up 200 bps for the year.

• Question from Asiya Merchant (Citigroup): EPS guide slightly down vs. flat sales and drivers for further incremental margin expansion.
  Response: Q2 EPS bridge includes higher tax and interest expense (~$0.04-$0.05). Incremental margins driven by volume and reduced fixed costs from operating footprint reduction, targeting 30%+.

• Question from Joseph Giordano (TD Cowen): Implications of exploding metal prices on procurement, cost pass-through, and customer acceptance.
  Response: Inflationary pressure on metals is being managed via scale investments and pricing mechanisms; agile in passing costs through to customers with minimal time lapse.

• Question from Steven Fox (Fox Advisors): Ability to pass metal cost increases and capacity sufficiency given broadening demand.
  Response: Improved agility in passing pricing. Capacity is sufficient with specific AI program ramps and expansions in energy/aerospace; no major constraints expected.

• Question from Christopher Glynn (Oppenheimer): Growth in energy segment with steeper H2 comps and new applications phasing in.
  Response: Momentum remains strong with growth in Europe and across grid hardening/renewables. Expect to meet double-digit organic growth target for FY26.

• Question from William Stein (Truist Securities): Reconciling Q2 guidance with record bookings and auto production trends.
  Response: Q2 guide reflects typical auto production decline (~3M units) and strong Industrial growth; overall momentum supports confidence for the year.

• Question from Shreyas Patil (Wolfe Research): Expectation for segment incremental margins to converge towards 30%+ figure.
  Response: Both segments expected to meet or exceed 30%+ incremental margin for FY26; Industrial may remain stronger due to volume leverage, but Transportation impacted by FX noise in Q1.

Contradiction Point 1

AI Revenue Forecast and Growth Outlook

Inconsistent guidance on the growth trajectory and drivers of AI revenue.

How does capacity addition relate to AI revenue growth, and how will margins improve as capacity matures? - Scott Davis (Melius Research LLC)

2026Q1: AI revenue for fiscal 2026 is now expected to be $200 million higher than the view from 90 days ago... The company is on track to reach $3 billion in AI revenue in a couple of years. - Terrence Curtin(CEO)

Can the AI revenue forecast (previously $800M, now $900M, $1B expected for 2026) be updated? How is scale impacting progress toward company average margins? - Scott Davis (Melius Research LLC)

2025Q4: For '26, hyperscale CapEx is expected to grow ~20%, providing a baseline for continued dollar growth. - Terrence Curtin(CEO)

Contradiction Point 2

The Driver of Longer-Dated Orders

Contradicts the reason behind customers placing longer-dated orders.

Are component tightness and inflation in the supply chain driving longer-dated orders from hyperscalers? - Samik Chatterjee (JPMorgan Chase & Co)

2026Q1: The longer-dated orders are due to fast ramps required on specific programs and customers reserving capacity, not due to generic component shortages or complexity. - Terrence Curtin(CEO)

What are the demand trends by end market excluding DDN over the past 90 days and early fiscal 2026 outlook? - Mark Delaney (Goldman Sachs Group, Inc.)

2025Q4: Transportation orders grew year-over-year and sequentially in auto, with expectations for more balanced regional content growth. Industrial... shows improvement in factory automation but weakness in HVAC/appliances. - Terrence Curtin(CEO)

Contradiction Point 3

AI Revenue Growth and Scaling Timeline

Inconsistent timeline for reaching significant AI revenue milestones.

How do capacity additions drive AI revenue scaling, and how will margins improve as the capacity matures? - Scott Davis (Melius Research LLC)

2026Q1: AI revenue for fiscal 2026 is now expected to be $200 million higher... The company is on track to reach $3 billion in AI revenue in a couple of years. - Terrence Curtin(CEO)

Is the AI business now fully ramped, scaled, and profitable at or above company levels, and how do you view this? - Scott Reed Davis (Melius Research)

2025Q3: AI revenue grew from $300 million last year to over $800 million this fiscal year, with run rates expected to exceed $1 billion next year. - Terrence R. Curtin(CEO)

Contradiction Point 4

Industrial Segment Incremental Margin Expectations

Contradictory statements on whether incremental margins will remain above 30%.

What are the key trends in Automation & Connected Living, particularly in industrial segments, and are they driving incremental margin growth? - Luke Junk (Robert W. Baird & Co. Incorporated)

2026Q1: In Industrial Solutions, volume leverage is a key driver, with some quarters exceeding that rate. - Heath Mitts(CFO)

Given 20% EBIT margins in both segments and restructuring savings, how should we think about the margin trajectory, and are there strategic investments that may offset incremental margins? - Shreyas Patil (Wolfe Research)

2025Q3: A useful modeling benchmark is ~30% incremental flow-through on organic growth. Margins can be pressured by low-volume cycles... - Heath A. Mitts(CFO)

Contradiction Point 5

Energy Segment Growth Outlook

Contradiction on the growth driver for Energy segment's strong performance.

With steep H2 organic growth comparisons and new applications phasing in, will there be a growth adjustment period or a transition to the long-term outlook? - Christopher Glynn (Oppenheimer & Co. Inc.)

2026Q1: Momentum in energy remains very strong... Organic growth is expected to be double-digit for the year, aligning with the Investor Day outlook. - Terrence Curtin(CEO)

What is the relationship between renewable energy and grid hardening in Energy segment growth, and is Richards contributing to cross-sell potential with structural growth rates? - Christopher D. Glynn (Oppenheimer)

2025Q3: Organic growth in Energy (20% organically) is supported by strong trends in both grid hardening and renewables. Future opportunities include repurposing Richards products for renewables... - Terrence R. Curtin(CEO)