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Sempra’s Q2 FY2025 adjusted EPS beat expectations, with strong margins and regulatory wins offsetting GAAP misses and cost pressures; guidance reaffirmed and asset sales remain key catalysts.

# Sempra Q2 FY2025: Adjusted EPS Beat and Regulatory Tailwinds Offset GAAP Miss

---

## Executive Summary

- **Sempra reported Q2 FY2025 revenue of $3.00B, essentially flat year-over-year, with GAAP EPS of $0.71 missing the $0.84 consensus.** However, **Adjusted EPS of $0.89 beat expectations by $0.05**, highlighting the company’s underlying operational strength despite headline misses.
- **Net margin remained robust at 23.8%**, reflecting effective cost management even as certain segments, notably Sempra Infrastructure, faced margin compression due to rising costs and higher CapEx (up to $2.30B from $1.90B YoY).
- **Management’s tone was constructive and forward-looking,** emphasizing disciplined capital allocation, a strategic shift toward a utility-centric model, and recent regulatory wins in Texas and California. Guidance for 2025 and 2026 Adjusted EPS was reaffirmed, signaling confidence in the company’s trajectory.
- **Key risks include persistent cost pressures from higher tax and interest expenses, as well as ongoing margin challenges in non-core segments.** However, regulatory developments and asset sales present meaningful upside not yet fully reflected in market expectations.
- **Catalyst watch:** Progress on asset sales, further regulatory clarity in Texas and California, and updates on CapEx deployment will be critical for Sempra’s near-term stock performance.

---

## Performance Snapshot

| Metric                | Reported | Consensus | Surprise | YoY Change |
|-----------------------|----------|-----------|----------|------------|
| Revenue               | $3.00B   | $3.01B    | -$0.01B  | Flat       |
| GAAP EPS              | $0.71    | $0.84     | -$0.13   | -          |
| Adjusted EPS          | $0.89    | $0.84     | +$0.05   | -          |
| Net Margin            | 23.8%    | —         | —        | +0.2pp     |
| CapEx                 | $2.30B   | —         | —        | +21%       |

*Additional KPIs: Sempra Infrastructure revenue up YoY, but segment margin down.*

---

## Earnings Quality

Sempra’s Q2 FY2025 results underscore a **stable revenue base** but highlight the importance of operational discipline. The company’s **net margin of 23.8%** demonstrates strong cost control, even as total CapEx increased significantly. The divergence between flat sales and improved adjusted profitability reflects effective management of core operations, though **GAAP EPS was pressured by higher tax and interest expenses**. Margin compression in Sempra Infrastructure, despite revenue growth, signals the need for continued focus on cost efficiencies in non-core segments.

---

## Management Commentary & Guidance

Management maintained a **positive and confident tone**, emphasizing the company’s strategic pivot toward regulated utilities and the benefits of recent regulatory wins in Texas and California. CEO Jeffrey W. Martin highlighted ongoing execution, disciplined capital deployment, and the importance of regulatory clarity. **Guidance for 2025 Adjusted EPS ($4.30–$4.70) and 2026 ($4.80–$5.30) was reaffirmed**, with assumptions reflecting current operational realities and anticipated regulatory and asset sale benefits.

---

## Key Risks

- **Cost inflation and higher financing costs** continue to pressure GAAP profitability.
- **Margin compression in Sempra Infrastructure** could persist if cost controls do not improve.
- **Regulatory or demand-side risks** remain, particularly if anticipated legislative or rate outcomes do not materialize as expected.

---

## Expected Market Reaction

Analysts and investors are likely to respond with **cautious optimism**. The **adjusted EPS beat and positive regulatory developments** provide support, but the GAAP miss and rising cost base may temper enthusiasm. The market may underappreciate Sempra’s strong net margin and the potential upside from regulatory wins, while overemphasizing the impact of non-operating expenses on GAAP results.

---

## Final Takeaway

**Sempra delivered a resilient quarter, with underlying operational strength masked by headline GAAP misses.** The market may be underpricing the company’s margin discipline and regulatory momentum, while over-focusing on non-operating cost pressures. **Key upcoming catalysts** include progress on asset sales, further regulatory clarity in Texas and California, and updates on CapEx efficiency. Overall, Sempra’s Q2 FY2025 results reinforce its position as a stable, utility-focused operator with meaningful upside potential if execution remains strong.

Sempra (SRE): Regulatory Tailwinds Drive Adjusted EPS Beat

Sempra (SRE) is set for steady growth and resilient margins next quarter, driven by regulatory tailwinds and strong demand, but faces timing risks on asset sales and potential regulatory delays in Texas.

# Sempra’s Next Quarter: Regulatory Tailwinds, Demand Signals, and the Real Margin Story

## Executive Summary

We are **Neutral-to-Bullish** on Sempra (SRE) for the upcoming quarter, expecting **steady revenue growth** and **resilient margins** driven by regulatory rate increases in California and disciplined cost management. **Q1 FY2025 revenue rose 4.5% YoY to $3.802B**, with net margins at **23.8%**, both above industry averages. Management’s tone is increasingly confident, underpinned by robust demand signals (e.g., **Oncor’s 35% YoY rise in interconnection requests**). However, the market may be underestimating the **timing risk of asset sale proceeds** and the potential for regulatory delays in Texas, which could temper near-term EPS upside.

## Recent Trends Signal What’s Next

Sempra’s last two quarters highlight a **positive revenue trajectory** and **margin resilience**. Q1 FY2025 revenue grew **4.5% YoY** to $3.802B, with gross and net margins expanding due to lower fuel costs and regulatory cost recovery. Sempra California continues to outperform, while Sempra Texas Utilities faces regulatory lag and inflationary headwinds.

### Revenue, Margin, and EPS Trend Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|---------------|---------|
| Q2 FY2024    | 3.62         | 41.2             | 24.0                 | 22.1          | 1.38    |
| Q3 FY2024    | 3.70         | 41.5             | 23.8                 | 22.5          | 1.41    |
| Q4 FY2024    | 3.74         | 42.0             | 23.9                 | 23.0          | 1.43    |
| Q1 FY2025    | 3.80         | 42.5             | 24.2                 | 23.8          | 1.45    |

**Trend:** Revenue and margins have shown **sequential improvement** each quarter, with EPS tracking upward in line with margin gains.

## Management’s Forward Tone and Positioning

Management’s commentary has shifted to a **more confident and constructive tone**. In the Q1 FY2025 call, the CEO stated, **“We’re seeing robust demand and disciplined execution across our core markets.”** This contrasts with the prior quarter’s more cautious language around regulatory risk and inflation. The CFO emphasized, **“We remain well positioned to deliver on our FY2025 EPS guidance of $4.30–$4.70,”** signaling confidence in hitting full-year targets. The focus on “accretive initiatives” and “cost discipline” suggests management expects **steady execution** but is not guiding for material upside surprises absent further regulatory wins.

## KPI Trends & Upcoming Quarter Drivers

The most relevant KPIs for the next quarter are **interconnection requests, utility meter growth, and capex deployment**.

### KPI Movement Table

| KPI                        | Q1 FY2024 | Q1 FY2025 | YoY Change | QoQ Change |
|----------------------------|-----------|-----------|------------|------------|
| Oncor Interconnection Req. | 815       | 1,100     | +35%       | +8%        |
| Sempra CA Gas Meters (M)   | 7.05      | 7.12      | +1.0%      | +0.3%      |
| Capex ($B)                 | 1.93      | 2.34      | +20.9%     | +5.2%      |

- **Oncor’s interconnection requests** (+35% YoY) indicate a **strong demand pipeline** that will support future revenue, though the impact is likely to be gradual.
- **Utility meter growth** in California is steady, supporting base revenue.
- **Capex surge** (+20.9% YoY) in renewables and infrastructure may pressure near-term free cash flow but positions Sempra for **longer-term margin and revenue expansion**.

## Missed by the Street

A subtle but important risk is the **timing of asset sale proceeds**. In the Q1 call, management noted, **“Approvals for the Ecogas México sale are expected within 12–18 months.”** This suggests that any EPS uplift from these transactions is **unlikely to materialize in the next quarter**, contrary to some bullish expectations. Additionally, footnotes in the 10-Q highlight that **tariff-related cost pressures could impact 2–3% of planned capex**, a risk not fully reflected in consensus margin estimates.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($B) | Adjusted EPS | Operating Margin (%) | Key Assumptions                                         |
|----------|--------------|--------------|----------------------|---------------------------------------------------------|
| Bull     | 3.95         | 1.55         | 25                   | Regulatory wins in CA, cost efficiencies, demand growth |
| Base     | 3.85         | 1.45         | 24                   | Steady CA demand, modest macro headwinds                |
| Bear     | 3.80         | 1.40         | 23                   | Regulatory delays in TX, inflation/tariff pressures     |

**Most Likely:** The **Base case** is most probable, given current regulatory momentum in California, stable demand, and management’s disciplined execution, but with offsetting risks from Texas and macro cost pressures.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | EPS ($) | Net Margin (%) | Operating Margin (%) |
|--------------|--------------|---------|----------------|----------------------|
| Q2 FY2024    | 3.62         | 1.38    | 22.1           | 24.0                 |
| Q3 FY2024    | 3.70         | 1.41    | 22.5           | 23.8                 |
| Q4 FY2024    | 3.74         | 1.43    | 23.0           | 23.9                 |
| Q1 FY2025    | 3.80         | 1.45    | 23.8           | 24.2                 |

### KPI Movement Table

| KPI                        | Q1 FY2024 | Q1 FY2025 | YoY Change | QoQ Change |
|----------------------------|-----------|-----------|------------|------------|
| Oncor Interconnection Req. | 815       | 1,100     | +35%       | +8%        |
| Sempra CA Gas Meters (M)   | 7.05      | 7.12      | +1.0%      | +0.3%      |
| Capex ($B)                 | 1.93      | 2.34      | +20.9%     | +5.2%      |

### Key Management Quotes

1. **“We’re seeing robust demand and disciplined execution across our core markets.”**  
   *Q1 FY2025 Earnings Call*  
   *Signals confidence in demand and operational delivery.*

2. **“We remain well positioned to deliver on our FY2025 EPS guidance of $4.30–$4.70.”**  
   *Q1 FY2025 Earnings Call*  
   *Reaffirms management’s confidence in meeting full-year targets.*

3. **“Approvals for the Ecogas México sale are expected within 12–18 months.”**  
   *Q1 FY2025 Q&A*  
   *Implies delayed realization of asset sale benefits.*

4. **“We continue to see inflationary pressures, particularly in Texas, impacting our cost base.”**  
   *Q1 FY2025 Earnings Call*  
   *Highlights ongoing cost headwinds in Texas.*

5. **“Our Fit for 2025 program is driving meaningful cost efficiencies.”**  
   *Q1 FY2025 Earnings Call*  
   *Points to ongoing margin improvement initiatives.*

6. **“Tariff-related cost escalation could impact 2–3% of our planned capex.”**  
   *Q1 FY2025 10-Q Filing*  
   *Warns of potential margin pressure from tariffs.*

7. **“We are focused on disciplined capital deployment in renewables and infrastructure.”**  
   *Q1 FY2025 Earnings Call*  
   *Indicates strategic investment focus for long-term growth.*

---

**Bottom Line:** Sempra’s next quarter is likely to deliver **steady, slightly above-trend results**—with upside tied to regulatory outcomes in California and downside risk from Texas and macro cost pressures. The market should watch for timing on asset sales and the impact of inflation/tariffs on margins.

Sempra (SRE): Regulatory Upside, Asset Sale Timing Risk