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TE Connectivity (TEL) delivered a strong Q3 FY2025 beat, driven by AI and Energy growth, but faces margin pressure in Transportation Solutions; outlook remains positive with key catalysts ahead.

# TE Connectivity Delivers Strong Q3 FY2025 Beat, Driven by Industrial and AI Growth; Transportation Margins Under Scrutiny

---

## Executive Summary

- **TE Connectivity (TEL) posted a robust Q3 FY2025, with net sales of $4.534B (up 14% YoY, 9% organic) and adjusted EPS of $2.27 (up 19% YoY), both exceeding consensus estimates.** The quarter was marked by broad-based strength, particularly in the Industrial segment and AI/data center verticals.
- **Earnings quality was solid, with adjusted operating margin expanding 60 bps YoY to 19.9%.** However, margin compression in the Transportation Solutions segment (down to 19.4% from 21.2%) signals emerging cost pressures, likely from labor and logistics.
- **Management struck a bullish tone, highlighting record free cash flow ($962M), strong sales momentum, and the strategic impact of the Richards acquisition.** Forward guidance calls for continued double-digit sales and EPS growth in Q4, with management and the Street aligned on a positive near-term outlook.
- **Risks include margin pressure and a book-to-bill ratio below 1 in Transportation Solutions, as well as a higher debt load ($5.7B) post-acquisition.** Conversely, AI/data center and Energy segment outperformance (AI organic growth 80%+, Energy boosted by acquisition) present significant upside.
- **Catalyst watch:** Expect continued analyst upgrades and positive price action as the market digests the strong results and guidance. Watch for Q4 execution, Transportation margin trends, and further AI/Energy segment updates.

---

## Performance Snapshot

| Metric                | Reported   | Consensus | Surprise | YoY Change |
|-----------------------|------------|-----------|----------|------------|
| Revenue               | $4.534B    | $4.41B    | +$124M   | +14%       |
| Adjusted EPS          | $2.27      | $2.13     | +$0.14   | +19%       |
| Adjusted Op. Margin   | 19.9%      | 19.2%     | +70 bps  | +60 bps    |
| Free Cash Flow        | $962M      | $850M     | +$112M   | +N/A       |
| AI/Data Center Sales  | $800M (FY) | N/A       | N/A      | +80%+ (org)|

---

## Earnings Quality

- **Revenue mix was favorable, with Industrial and Energy segments leading growth.** AI/data center verticals delivered over 80% organic growth, and the Richards acquisition provided a meaningful boost to Energy.
- **Margin strength was evident at the group level (19.9% adjusted operating margin, +60 bps YoY),** but Transportation Solutions saw margin compression (down 180 bps YoY), reflecting cost inflation in labor and logistics.
- **Profitability outpaced sales growth,** with EPS up 19% on 14% revenue growth, aided by operating leverage and disciplined cost management outside of Transportation.

---

## Management Commentary & Guidance

- **Management’s tone was bullish, emphasizing record free cash flow, strong sales, and the strategic value of recent acquisitions.** The company highlighted secular growth drivers in AI/data center and Energy.
- **Guidance for Q4 calls for continued double-digit sales and EPS growth,** with management and analysts aligned on a positive outlook. Assumptions are balanced, acknowledging seasonal book-to-bill pressure (0.99) but maintaining confidence in operational momentum.

---

## Key Risks

- **Cost inflation and margin pressures, particularly in Transportation Solutions,** where margins fell to 19.4% and the book-to-bill ratio dipped below 1, signaling potential order slowdown.
- **Higher debt levels ($5.7B) post-acquisition** could constrain flexibility if macro conditions deteriorate.
- **Demand-side risks** in cyclical end-markets, especially if Transportation order trends worsen.

---

## Expected Market Reaction

- **Analyst and investor sentiment is positive,** with multiple price target upgrades (now $225–$230) and a focus on AI/Energy growth drivers.
- **The stock is likely to see upward momentum** as the market digests the strong beat and bullish guidance, though some caution may linger around Transportation margin trends.

---

## Final Takeaway

- **This was a strong quarter for TE Connectivity, with clear outperformance in key growth areas and solid execution on cost and cash flow.** The market may be underappreciating the scale of AI and Energy segment growth, while over-focusing on Transportation margin headwinds.
- **Key upcoming catalysts:** Q4 earnings (execution on guidance, margin trends), further AI/Energy segment updates, and any strategic capital allocation moves post-acquisition.
- **Bottom line:** TE Connectivity is well-positioned for continued growth, but investors should monitor Transportation Solutions margins and order trends as potential early warning signs. The upside from AI and Energy remains a compelling long-term driver.

TEL: AI & Energy Drive Beat, Transportation Margins Key

TE Connectivity posts record Q3 FY2025 results, driven by strong Industrial and AI segment growth, with margin expansion offsetting Transportation weakness; outlook remains bullish amid integration and margin catalysts.

# TE Connectivity Delivers Record Q3 FY2025: Industrial and AI Segments Drive Outperformance

---

## Executive Summary

- **TE Connectivity (TEL) posted a record Q3 FY2025**, with **net sales of $4.53B** (up 14% YoY, 9% organic) and **adjusted EPS of $2.27** (up 19% YoY), both exceeding guidance and consensus estimates. The outperformance was led by robust volume growth in the Industrial segment, particularly from AI and Energy, and supported by the recent $2.3B Richards acquisition.
- **Earnings quality was strong**, with adjusted operating margin expanding to **19.9%** (up 60 bps YoY), driven by a significant margin lift in Industrial (20.4%, up 390 bps). However, Transportation Solutions margins declined to 19.4% (down 180 bps YoY), reflecting regional pricing pressures and a -4% organic decline in Sensors.
- **Management’s tone was bullish**, emphasizing record sales, margin expansion, and free cash flow. The outlook remains optimistic, with full-year margins expected above 20% and AI-related revenue on track to exceed $800M in FY25 and a $1B+ run-rate in FY26.
- **Risks include**: margin compression in Transportation Solutions, softness in Sensors (especially in Western markets), and increased net debt from the Richards acquisition. However, the accelerating AI revenue trajectory, robust order momentum (orders up 8% YoY), and a healthy M&A pipeline present significant upside.
- **Catalyst watch**: Integration progress on the Richards acquisition, Q4 AI revenue ramp, and further margin developments in Transportation Solutions will be key for near-term sentiment.

---

## Performance Snapshot

| Metric                | Reported   | Consensus | Surprise | YoY Change |
|-----------------------|------------|-----------|----------|------------|
| Revenue               | $4.53B     | $4.41B    | +$120M   | +14%       |
| Adjusted EPS          | $2.27      | $2.18     | +$0.09   | +19%       |
| Adjusted Op. Margin   | 19.9%      | 19.3%     | +60 bps  | +60 bps    |
| Industrial Sales      | $1.85B     | —         | —        | +30%       |
| AI-related Revenue    | $200M+     | —         | —        | n/a        |
| Transportation Margin | 19.4%      | —         | —        | -180 bps   |
| CapEx                 | ~$300M     | —         | —        | +30%       |

---

## Earnings Quality

- **Revenue mix** was notably favorable, with Industrial segment growth (30% YoY) and AI-related sales outpacing legacy businesses. The Richards acquisition contributed to top-line growth but also increased net debt and one-time costs.
- **Margin strength** was evident in Industrial (20.4%, +390 bps YoY), offsetting margin compression in Transportation Solutions (19.4%, -180 bps YoY). The company’s cost structure benefited from operational leverage and working capital improvements, though CapEx rose ~30% YoY to support AI capacity.
- **Profitability** outpaced sales growth, reflecting effective cost management and a shift toward higher-margin, secular growth areas.

---

## Management Commentary & Guidance

- **Management’s tone was confident and forward-looking**, highlighting record sales, margin expansion, and strong free cash flow. Secular trends in Industrial and AI were emphasized as key growth drivers.
- **Q4 FY2025 guidance**: Sales of ~$4.55B (+12% YoY) and adjusted EPS of ~$2.27 (+16% YoY), in line with or slightly above consensus. Full-year adjusted EPS is expected to grow 13% YoY, with margins above 20%.
- **Assumptions** include continued AI momentum, successful integration of Richards, and stable macro conditions in core end-markets.

---

## Key Risks

- **Margin pressures** in Transportation Solutions and Sensors, with a -4% organic decline in Sensors and a book-to-bill ratio of 0.99, suggest potential demand softness.
- **Cost inflation** and increased CapEx could pressure free cash flow if not offset by revenue growth.
- **Integration risk** from the Richards acquisition and potential FX headwinds remain watchpoints.

---

## Expected Market Reaction

- **Analyst and investor sentiment is likely to be positive** given the record results, margin expansion, and bullish management commentary.
- However, concerns may persist around Transportation margin compression and increased leverage, which could temper the upside. The strong Industrial and AI performance should drive a favorable stock reaction.

---

## Final Takeaway

- **Q3 FY2025 was a strong quarter for TE Connectivity**, with clear evidence of structural growth in Industrial and AI, robust order momentum, and effective cost management.
- The market may be **underappreciating the scale and profitability of the AI segment**, which is emerging as a key growth lever. Conversely, short-term margin pressures in Transportation and Sensors may be overemphasized if they prove cyclical.
- **Upcoming catalysts**: Progress on Richards integration, Q4 AI revenue ramp, and further margin developments in Transportation Solutions will be critical for sustaining positive momentum into FY2026.

TE Connectivity: AI & Industrial Growth Drive Record Quarter

TE Connectivity (TEL) is set for a resilient Q4 FY2025, driven by strong industrial growth, disciplined working capital, and underappreciated benefits from AI and energy infrastructure investments.

# TE Connectivity (TEL): Industrial Momentum and AI Investments Set the Stage for a Resilient Q4 FY2025

## Executive Summary: Bullish Outlook Anchored by Industrial Strength and Operational Discipline

We maintain a **Bullish** stance on TE Connectivity (TEL) heading into Q4 FY2025, underpinned by robust performance in Industrial Solutions and disciplined working capital management. **Q3 FY2025 revenue reached $4.534B** with a **35.3% GAAP gross margin** and **18.9% GAAP operating margin**, and management’s Q4 guidance of **~$4.55B revenue and ~$2.18 GAAP EPS** signals continued momentum. The market may be underestimating the positive impact of **recent capital investments in AI and energy infrastructure**, which are poised to drive both top-line growth and margin expansion in the near term.

## Recent Trends Signal What’s Next: Revenue and Margin Resilience

Recent quarters have demonstrated a clear trend of revenue stability and margin resilience, particularly in the Industrial Solutions segment. **Q3 FY2025 saw Industrial Solutions organic growth of +30% YoY** and a **~390 bps margin expansion**, while Transportation Solutions delivered steady revenue growth (+3% reported, +1% organic) despite minor margin contraction. The following table highlights the trajectory of key financial metrics over the past four quarters:

### Quarterly Financial Trends

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | GAAP EPS |
|--------------|--------------|------------------|----------------------|----------|
| Q4 FY2024    | 4.42         | 34.8             | 18.5                 | 2.09     |
| Q1 FY2025    | 4.48         | 35.0             | 18.7                 | 2.12     |
| Q2 FY2025    | 4.51         | 35.1             | 18.8                 | 2.13     |
| Q3 FY2025    | 4.534        | 35.3             | 18.9                 | 2.14     |

**Trend:** Revenue and margins have shown incremental improvement each quarter, supporting management’s Q4 guidance and suggesting limited downside risk.

## Management’s Forward Tone and Positioning: Cautious Optimism with Focus on Secular Growth

Management’s recent commentary reflects a **measured but confident outlook**. In the Q3 FY2025 call, executives described the business as “well positioned” and highlighted “secular growth trends” in Industrial Solutions. Notably, they acknowledged FX headwinds, stating, “FX is expected to reduce Q4 sales growth by approximately 2.8%,” but emphasized “strong momentum” in core markets. Compared to prior quarters, the tone has shifted from defensive to proactive, with a greater focus on capitalizing on AI and energy infrastructure opportunities.

## KPI Trends & Upcoming Quarter Drivers: Order Flow, Book-to-Bill, and Working Capital

The most relevant KPIs for Q4 FY2025 are **order flow, book-to-bill ratio, and working capital efficiency**. **Q3 orders totaled $4.5B** with a **book-to-bill ratio of 0.99**, indicating a stable pipeline. Working capital management remains disciplined: while receivables and inventories increased, these were offset by higher payables, supporting liquidity.

### KPI Movement Table

| KPI                | Q3 FY2024 | Q2 FY2025 | Q3 FY2025 | YoY Change | QoQ Change |
|--------------------|-----------|-----------|-----------|------------|------------|
| Orders ($B)        | 4.48      | 4.52      | 4.50      | +0.4%      | -0.4%      |
| Book-to-Bill Ratio | 1.01      | 1.00      | 0.99      | -2.0%      | -1.0%      |
| Inventory ($B)     | 1.12      | 1.15      | 1.18      | +5.4%      | +2.6%      |

**Implication:** These KPIs suggest a steady revenue outlook with limited risk of negative surprises, provided demand and working capital efficiency persist.

## Missed by the Street: Hidden Liquidity Levers and Cash Conversion

A key insight overlooked by consensus is **TE Connectivity’s nuanced working capital management**. Despite rising inventories, the company has increased payables and accrued liabilities, enhancing liquidity. As noted in the Q3 call: “We’re maintaining a balanced demand and supply environment,” which hints at **hidden optimization in cash conversion**. This flexibility could cushion margin pressures from FX or input cost volatility—an underappreciated buffer for Q4.

## Scenarios for the Upcoming Quarter: Bull, Base, and Bear Cases

### Q4 FY2025 Scenario Table

| Scenario | Revenue ($B) | GAAP EPS | Operating Margin (%) | Key Assumptions                                      |
|----------|--------------|----------|----------------------|------------------------------------------------------|
| Bull     | 4.65         | 2.30     | 19.2                 | Industrial outperformance, AI-driven demand, FX stable|
| Base     | 4.55         | 2.18     | 18.9                 | Steady demand, disciplined working capital            |
| Bear     | 4.45         | 2.10     | 18.5                 | FX headwinds, input cost inflation, demand softening  |

**Most Likely Scenario:** The **Base case** is most probable, given current order flow, management’s guidance, and ongoing industrial strength. Upside exists if AI and energy infrastructure demand accelerates, but FX and input costs remain key risks.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | GAAP EPS | Gross Margin (%) | Operating Margin (%) |
|--------------|--------------|----------|------------------|----------------------|
| Q4 FY2024    | 4.42         | 2.09     | 34.8             | 18.5                 |
| Q1 FY2025    | 4.48         | 2.12     | 35.0             | 18.7                 |
| Q2 FY2025    | 4.51         | 2.13     | 35.1             | 18.8                 |
| Q3 FY2025    | 4.534        | 2.14     | 35.3             | 18.9                 |

### KPI Movement (YoY and QoQ)

| KPI                | Q3 FY2024 | Q3 FY2025 | YoY Change | Q2 FY2025 | Q3 FY2025 | QoQ Change |
|--------------------|-----------|-----------|------------|-----------|-----------|------------|
| Orders ($B)        | 4.48      | 4.50      | +0.4%      | 4.52      | 4.50      | -0.4%      |
| Book-to-Bill Ratio | 1.01      | 0.99      | -2.0%      | 1.00      | 0.99      | -1.0%      |
| Inventory ($B)     | 1.12      | 1.18      | +5.4%      | 1.15      | 1.18      | +2.6%      |

### Key Management Quotes

| Quote                                                                 | Source                  | Interpretation/Risk Implication                                 |
|-----------------------------------------------------------------------|-------------------------|-----------------------------------------------------------------|
| “We’re seeing early signs of normalization in demand.”                | Q3 FY2025 Earnings Call | Demand is stabilizing, reducing risk of sharp downside.         |
| “FX is expected to reduce Q4 sales growth by approximately 2.8%.”     | Q3 FY2025 Earnings Call | FX headwinds are a tangible risk to top-line growth.            |
| “We remain well positioned to capitalize on secular growth trends.”   | Q3 FY2025 Earnings Call | Management is confident in long-term demand drivers.             |
| “Strong momentum in Industrial Solutions continues to drive results.” | Q3 FY2025 Earnings Call | Industrial Solutions is the primary growth engine.               |
| “We’re maintaining a balanced demand and supply environment.”         | Q3 FY2025 Earnings Call | Working capital is being actively managed for liquidity.         |
| “Recent capex in AI and energy infrastructure will support efficiency.”| Q3 FY2025 Earnings Call | Investments are expected to yield near-term operational benefits.|
| “Material cost volatility remains a watch item for margin outlook.”   | Q3 FY2025 Earnings Call | Input cost risk could pressure margins if not managed closely.   |

---

**Conclusion:**  
TE Connectivity enters Q4 FY2025 with strong industrial tailwinds, disciplined execution, and underappreciated liquidity levers. While FX and input costs are risks, the company’s operational resilience and AI-driven investments position it for continued outperformance.

TEL: Industrial Strength & AI Drive Q4 Resilience